Subject: Comment on Proposed Rule 18f-4 Impacting Leveraged & Inverse ETFs (s7-24-15)
From: Ron Delegge

March 10, 2020

Under the proposed rule 18f-4, investors will be required to provide extensive personal financial and related data to their broker or advisor, before being allowed to buy leveraged and inverse funds. This same rule was originally proposed in 2015, but got abandoned. Clearly, the original rule, like the current re-proposed one has serious flaws. Why was it ever allowed to be resurrected?

With all due respect, let’s examine a few reasons why the SEC’s re-regulation of geared ETFs is completely unnecessary.

New rule misses a big problem. A lack of uniformity in the names of leveraged and inverse performing ETFs is a big problem. Not only is it contributing to investors’ confusion, but the SEC’s proposed rule says nothing about it. For example, certain geared ETFs include the amount of daily leverage (2x or 3x daily) in their actual fund names while other ETFs that provide similar leveraged exposure don’t. Why has the SEC allowed these inconsistencies to exist and why don’t they fix them before proposing new rules?

Re-regulating registered products is overkill. ETFs are already heavily regulated products that requiring a prospectus, many disclosures and many legal filings before ever reaching publicly traded markets. Adding another layer of regulation via cumbersome paperwork would be an entirely new terrain for registered products that would restrict unfettered access to publicly traded securities.

Onerous cost of compliance. It’s been said the principal job of any good police force is to protect the city, not to destroy it. Unfortunately, rule 18f-4 destroys the city because it’s going to cost a massive $2.4 billion plus another $450 million annually for the ETF industry to comply, according to the SEC Division of Economic and Risk Analysis. The unintended consequences of these higher compliance costs will be absorbed by investors, the very group the SEC is trying to protect!

Investor complaints are declining. Are customer complaints against leveraged and inverse ETFs rising? Not according to a July 2019 survey by the North American Securities Administrators Association. The group, which is made up of state regulators in the U.S., found that “the number of customer complaints, regulatory actions, and arbitration awards or civil judgements regarding leveraged and or inverse ETFs in recent years was low.” Why is the SEC aggressively pursuing the re-regulation of ETF products with declining levels of customer complaints? Shouldn’t regulatory attention be centered on products and in markets where complaints are rising?

Many years ago, a veteran securities attorney once told me “Financial markets are over-regulated and under-policed.” Could this be, yet another case, in which the SEC is over-regulating? Having worked in the ETF industry since 2003, I’ve been around long enough to see that clearly it is.

Enforcing existing securities rules that govern geared ETFs should be the SEC’s priority versus creating new rules.

Should regulators turn the proposed ETF rule 18f-4 into law, it will create a series of negative unintended consequences that will damage the financial services industry and the investing public it serves.


Ron DeLegge

ETFguide, LLC