Shareholder Advocacy Forum joined a coalition of free-market organizations to encourage the Securities and Exchange Commission to withdraw its proposed rule to regulate the use of certain financial products and implement additional sales-practice rules in the financial market.
The SEC plans to re-introduce a 2015 Obama era regulation that will inherently restrict investors ability to purchase a specific type of Exchange Traded Fund. Known as “geared” ETFs, these products are “leveraged”, meaning they typically offer investors the opportunity to earn two – three times the daily rate of return of a benchmark like the S&P 500. Like any investment product, they carry some form of risk, paired with the opportunity to earn higher returns. If the SEC moves forward with the proposed rule in its current form, investors will be restricted from purchasing certain financial products that could earn higher returns to meet their investment goals.
Under the proposed rule, in order for investors to purchase these products, they will be forced to disclose sensitive financial information to broker-dealers. Once collected, the broker-dealers will have the discretion to approve or reject clients’ ability to invest in geared ETF’s if the broker-dealer feels they do not meet their financial literacy standards. If the broker-dealer does move forward with the purchase of the geared ETF on behalf of their client, they will be exposed to regulatory scrutiny if for any reason their client is not satisfied. To avoid any regulatory uncertainty, broker-dealers will stop offering these products all together.
The heightened regulatory standards for broker-dealers and their clients appears duplicative in nature after the SEC has already implemented Regulation Best Interest, which requires broker-dealers to recommend products that are in the best interests of their clients. Before moving forward with this proposed rule, the SEC should consider whether “Reg. B.I.” already protects investors who purchase geared ETF’s. If investors are protected, the SEC should withdraw this Obama era rule completely.