SEC Commissioner urges close scrutiny of ETFs due to 'risks'

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

WASHINGTON, D.C. (Reuters) - Exchange-traded funds present risks that investors may not always understand or anticipate, and the U.S. Securities and Exchange Commission should take a deep look at how best to regulate them, said Commissioner Kara Stein on Friday.

“These products are not traditional equity securities,” she said at a meeting of lawyers in Washington.

“They do not always behave in the same manner as equity securities. The attempt to fit such non-equity products into the rules designed for traditional equity securities has left potential gaps in investor protection and also raised questions about market integrity.”

Stein laid out a long list of questions and areas of concern for ETFs, funds that trade like stocks on exchanges and frequently track an index.

Interest in ETFs has exploded in recent years, especially in the United States, and Stein said the $2 trillion that U.S. funds had under management in 2014 represented 73 percent of the global assets of the funds that year.

She said that on Aug. 24 when the U.S. stock market was whipsawed by trading shocks, “many ETFs behaved in an unpredictable and volatile manner.”

“As a class, ETFs experienced greater increases in volume and more severe volatility than corporate stocks,” she said.

Stein urged a “holistic look” at the funds, their transparency and how they interact with capital markets, and a review of the roles of authorized participants and market makers.

The SEC and other organizations should “look at how these products are being marketed and by whom. We should assess whether certain products are even suitable for buy-and-hold investors,” she said.

Reporting by Lisa Lambert; Editing by Bernadette Baum