Exchange traded funds have become an important investment tool in the industry but they do not have special legislation when it come to regulations. In 2008 the SEC proposed ETF-targeted legislation, but after the credit crisis and subsequent market meltdown it was placed on the back burner.

“It is clear that ETFs are here to stay and, going forward, will be an increasingly important segment of the investment industry. Therefore, it makes sense for exchange-traded products to have their own dedicated rules and regulations. As it stands today, the major industry regulators, such as the Securities and Exchange Commission, still don’t have a dedicated ETF division,” John Gabriel, Morningstar ETF Strategist, said. [Why ETF Assets Could Explode in the Second Half of 2012]

To date, investment legislation is anchored by the investment acts put together in 1933, 1934 and 1940, so-called Depression-era legislation that is governing digital age technology and investing, Gabriel reported from the recent Morningstar ETF conference. There is an entire exemption and manufacture process that providers must adhere to before bringing a product to market.

Two ETF executives agreed on the importance of providing incentives to market makers. The market makers are key to effective trade execution and keeping spreads tight, and these traits can help an ETF gain traction with investors. [How ETF Assets Could Break into 401(k) Plans]

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