Back to General Resources

SEC IAC Meeting

Securities and Exchange Commission

Investor Advisory Committee Meeting

Panel Discussion Regarding Single-Stock ETFs

Thursday, December 8, 2022

Topline

  • The witnesses highlighted the benefits of traditional ETFs, the importance of recent updates to Rule 6c-11, challenges posed by single-stock ETFs, and the impact that the rule has had on these products.
  • Farnin focused on the harms and risks associated with Rule 6c-11 being made available to complex products such as single-stock ETFs.

Panel Discussion Regarding Single-Stock ETFs

The panel focused on the recent rise of single-stock ETFs and discussed how SEC Rule 6c-11 in 2019 made it much easier for single-stock ETFs to come to market and the risks that are associated with them that many retail investors may not be aware of. Finally, the panelists discussed what the SEC should consider doing in response.

Moderator

  • Andrew Park, IAC Market Structure Subcommittee Chair; Senior Policy Analyst, Americans for Financial Reform

Panelists

  • Patrick Cleary, Chief Executive Officer, ETF Architect
  • Jillian DelSignore, Head of ETFs & Indexing, FLX Networks
  • Bob Elliott, Chief Investment Officer, Unlimited Funds
  • Scott Farnin, Legal Counsel, Better Markets

Panel Discussion

In her testimony, DelSignore noted the significant increase in ETF markets in recent years. She said that, while not the only reason for this increase, Rule 6c-11 has alleviated pressure points in bringing products to market, lowered barriers to entry, and allowed for increased innovation and choice. She argued that “generally speaking” the rule is a good thing for investors. DelSignore closed by stating single-stock ETFs are a new innovation that need to be observed in terms of investor protection and asked whether the ETF or the brokerage firm should be responsible for educating investors.

In his testimony, Elliott stated that the current ETF structure is transparent and helpful for consumers. He said that 6c-11 codified key disclosure requirements that are necessary for ETFs, also noting that his company would not have been able to bring its product to market last year without the rule. Elliot continued, saying that regulatory adjustments around derivates and risk pair well with Rule 6c-11 to create a regulatory framework. As it relates to single-stock ETFs, Elliot argued that “their proliferation is inconsistent with the generalized goal and vision of ETFs to bring diversified, low-cost liquid solutions to investors.” The two main problems, in his opinion, are volatility decay and high fees. He concluded by noting that next steps should address the need for more education on the actual exposure and risk.

In his testimony, Cleary said the reforms of Rule 6c-11 have facilitated lower cost, enhanced competition, and increased access and inclusion for new entrants. He noted that these advancements have helped his business personally, since almost every aspect of the ETF value chain has become more transparent and equitable. He also said that single-stock ETFs run entirely counter to the spirit of ETFs today. While ETFs are supposed to be lower cost, tax efficient, and transparent, single-stocks are high cost, tax inefficient, and opaque. He concluded that these products give rise to concern.

In his testimony, Farnin said the 2019 6c-11 final rule allowed complex leveraged and inversed ETFs that hold derivative instruments to utilize the same listing process as traditional ETFs. According to Farnin, this is a policy mistake, as making the Rule 6c-11 available to complex products (including single-stock ETFs) is not in the public interest. He also noted that these are some of the most volatile products in the global markets. To address these issues, Farnin suggested requiring sales practices rules and customer due diligence for broker dealers before accounts can be approved. He also said that it is worth exploring whether the term ETF should even be allowed in the name of single-stock ETFs because of how different they are.

Question and Answer

Moderator Andrew Park asked panelists how to protect investors. DelSignore noted that there is no specific intended target that ETFs are marketed to and that some products are not advertised without first seeking and considering organizations that are of a certain size. Elliott followed by stating that he does not understand why these platforms do not have forced pop-ups that explain exactly what investors are and are not getting. DelSignore agreed and restated that investors need to know what they are buying.

Park also asked panelists how to address the deficiencies in the regulatory framework to protect investors. Cleary shared the concern and said that the SEC must attack the issue from multiple sides. All panelists agreed.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.