SEC Scrutinizes ETF Industry, Mulls New Rules

In response to the so-called flash crash that triggered wide oscillations in the exchange traded fund market, the Securities and Exchange Commission is reviewing the investment vehicle and considering potential rules to obviate trading and pricing disruptions.

SEC Chairman Mary Jo White said the SEC is examining the full life cycle of ETFs, particularly Wall Street market makers’ role in creating and selling ETF shares to the secondary market, reports Dave Michaels for the Wall Street Journal.

“Despite the popularity and broad success of these funds, their history is not without some turbulence,” White said in a speech. “Further regulatory steps beyond additional disclosures may be needed to address some of these issues.”

Specifically, ETFs experienced extreme bouts of volatility last August when steep price swings led to trading halts in over 300 ETFs, which spurred the SEC to examine “these events and any broader implications they may have for how we regulate ETFs,” White added.

Related: ETF Mini Flash Crash Causes SEC To Rethink New Rules

White revealed the agency is analyzing the role of market makers in keeping the price of ETF shares in line with their underlying portfolios. Authorized Participants or market makers help create or redeem shares of ETFs to keep an ETF’s price in line with that of its underlying net asset value. The arbitrage process helps make sure investors do not buy or sell ETF shares at prices that deviate too far away from the fair value of the fund’s underlying assets.

However, on August 24, 2015, some ETFs traded at steep discounts to their NAV. SEC economists have blamed the volatility on a perfect combination of heightened trading volume and a withdrawal of liquidity by market makers.