Sept 24 (Reuters) - The Aug. 24 failure of rules designed to ensure orderly trading in equities, which triggered a halt in trading in 455 stocks and exchange-traded funds, may cause the Securities and Exchange Commission to slow the approval of new ETFs, industry attorneys warned on Thursday.
Currently, when a firm wants to launch a new kind of exchange-traded fund it has to get “exemptive relief,” from the SEC. Typically, the agency approves new ETF applications within six months.
However, the events on Aug 24, when panic over the health of the Chinese economy triggered a record intraday drop in the Dow Jones Industrial Average, may cause the SEC to take longer to approve new ETFs, said Michael Mundt, a partner at Stradley Ronon.
“When things go wrong, it can affect exemptive orders,” Mundt, who used to work at the SEC, said Thursday morning while speaking on a panel at ETF Trends’ ETF Bootcamp in New York.
The SEC is pouring through the trading data from Aug. 24 to get a better idea of what could be done to address the volatility ETFs saw on that day, a source told Reuters earlier this month.
An SEC spokesman declined to comment.
The agency has slowed its approval process of new ETFs in the past as a result of market issues, the attorneys said.
After the 2010 flash crash, when around $1 trillion in paper value was temporarily wiped from U.S. stock markets within minutes, the SEC all but stopped approving new ETFs over concerns about that incident and whether ETFs caused it, the attorneys on the panel said.
It’s not just market events that can give the SEC pause, said John McGuire, a partner at Morgan Lewis & Bockius, who works with ETFs. A few years ago, when there were news reports about how leveraged and inverse ETFs were harmful to investors, the SEC slowed down its process of approving new ETFs, he said.
The events of Aug. 24 may also hurt efforts to introduce non-transparent actively managed exchange-traded funds, said Kathleen Moriarty, a partner in the New York office of law firm Kaye Scholer, in an interview with Reuters following the panel.
In July, the SEC denied the second application from Precidian Investments to launch non-transparent active ETFs .
“The thing is the SEC does not get credit for an ETF if it is good for investors, but they do get the blame if they approve an ETF and investors get hurt,” she said. (Reporting By Jessica Toonkel; Editing by Alan Crosby)