Jan. 30, 2020
Comments on S7-24-15, Release No. 34-87607 I am an individual investor with 30 years of experience in investing, and an MBA degree. I am very familiar with leveraged and inverse ETFs and ETNs and have used them in my portfolio continually for years, to great benefit to me. I oppose creating new criteria for restricting or limiting the use of such tools, especially including investor suitability requirements, and value at risk standards. I have both long and short positions in such instruments to make directional trades, and to hedge my overall portfolio. My portfolio is distributed across four stock brokerages in several different accounts. What’s critical for the SEC to understand is that the brokerages themselves already restrict trading in such instruments based upon their internal standards of risk. Many of the aggressive ETF/ETNs are not permitted to be traded at all in some firms. And others, have different levels of marginability for those securities, so that the consequences of using them are more or less costly for me to trade them. Therefore, these securities have economic risk management built into them. That is, the market value of the position, will have a larger effective consumption of the equity in my account, depending upon how the brokerage assesses each one. The brokerages already restrict risk by pricing it. Additionally, the brokerages change the effective consumption of equity dynamically according to market conditions. Brokerages reassess risk, and limit my use of such securities, as they see how those securities behave under market conditions. Therefore, I observe that the protections your rule making intends to create are already being done by the brokerages, and in a far more market-based and responsive, dynamic manner than your rule making proposes. In other words, in my experience, they’ve got it covered. The value at risk proposal the SEC is considering is particularly detrimental because I make a point of distributing my portfolio across several brokerages as I wrote above. So, in one account, I may have a larger position in an ETF/ETN because I am using it to hedge an overall exposure across my portfolio. The brokerage that holds such a position for me doesn’t know about the rest of my portfolio. And, none of the accounts I use have an oversized share of my wealth. So a position I hold in one brokerage account may not appear to be balanced, because I’m using it in the context of a vastly larger portfolio beyond that account. By the way, I use several different brokerages because they offer different services, and because I’ve found that during market distress, it’s not uncommon for a brokerage’s computer system to get overwhelmed and crash, and I then lose the ability to trade. In my experience, the brokerages are well aware of the risks of ETF/ETNs: leveraged, inverse, and long/short, and they have crafted very exacting practices for the use of them. These practices include restricting outright certain securities, not allowing them to be shorted, and also continually adjusting the equity consumed by such securities according to their risk. Your proposed rules would reduce market efficiency and hurt my success by establishing crude criteria that cannot be individually managed by any one firm given that they don’t know my portfolio across several brokerages. Thank you for your consideration of my opinions. Sincerely, [redacted]