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SEC-NYU Dialogue on Exchange-Traded Products

Commissioner Kara M. Stein

Washington D.C.

Sept. 8, 2017

Thank you, Jason [Zweig], for the introduction.

I have the pleasure today of wrapping up what has been an interesting and valuable dialogue.  As such, I would like to start by thanking all of the panelists.  Thank you.  Both your time and your insights are much appreciated. 

I also want to thank everyone who is watching both here and on the webcast.  Exchange-traded products are one of the most significant financial developments in the last three decades.  And their growth and evolution are likely to continue at the same remarkable pace for the foreseeable future.  This means that today’s conversation, and your participation, are incredibly important.  Thank you for taking the time to be here or tune in and for staying engaged.

The panels today focused on three topics: how ETPs affect financial markets; how ETPs affect investors; and the future of ETPs.  I would like to focus my very brief remarks on a fourth topic that is closely related to these: what role should the SEC play in 2017 and beyond?

To answer that, let me start by turning back to the beginning.  If you look at the Investment Company Act, you will find principles governing several different types of funds: open-end funds, closed-end funds, even unit investment trusts.  You will not, however, find a complete blueprint for exchange-traded funds.  Likewise, 25 years ago, there were no listing rules to permit the trading of ETFs.  These were not products familiar to the drafters of the 1934 and 1940 Acts.  So, if they weren’t specifically written into the law, how did they come to exist?  Part of the answer is that the Commission, working with industry, used its general exemptive authority to allow the creation and trading of these innovative securities.  The first ETF couldn’t exist without the first ETF exemptive order. 

Developing that first order presented a challenge, too.  It required anticipating the effects of weaving new strands into a complex web of market interactions and rules.  From the very beginning, the story of ETPs was about business innovation, but it was also about how the SEC can engage new ideas within its larger mission and framework.

Flip forward to this decade, and many new chapters have been added to the ETP story.  Children born the year the first ETP launched have graduated from college and may have children of their own.  We now see a market of impressive scale and breadth that has arguably reached maturity.  That means we have a new range of questions to confront, many of which you heard about on the panels today.  What do the scale and trading volume of today’s ETPs mean for the markets?  What do we make of the interplay between the liquidity of funds and the liquidity of their underlying investments?  How should the Commission respond to new product ideas when they offer a different tradeoff between investor protection and variety?  As we all know, the pressing questions in the life of a 24-year old are very different from those of a younger child.

The challenge for the SEC in 2017 is to ensure that its approach to ETPs matures along with the market.  Where does this start?  It starts with rigor.  In 1993, there were no data on ETPs.  Today, there are decades of data and observations.  This information can help us answer key questions about ETP trading, volatility, transparency, and investor protection.  To that end, we need more high quality research to help us sort the data and develop an analytical framework.  These are big questions that now touch on significant parts of the economy.

With data-driven answers to difficult questions, the Commission will be more equipped to respond to novel ETP requests.  This means improving our ability to anticipate which developments complement the SEC’s mission – investor protection, capital formation, and fair and efficient markets – and which may not.  We will also be in a better position to understand and respond to disruptions that may occur as the result of market stress and, I hope, help set rules that are better at preventing them.

In developing these analyses, we also need to avoid thinking about ETPs as a monolith.  This umbrella term now encompasses a range of products that are very unlike each other.  For example, an ETP promising a highly leveraged return, and an ETP tracking an established index, are more different than they are alike.  That should be consistently reflected in how we talk about these products, to whom they are sold, and the rules that apply.

The coming years are likely to showcase many new developments in ETPs.  Everyone here has a role to play in helping sort out the developments that may improve outcomes for investors and markets, from those that will not.  I look forward to your contributions to this ongoing dialogue and want to thank everyone again for your participation today.