SEC Approves NASDAQ Rule 5713; SEC Commissioner Stein Dissents (with Lofchie Comment)
The SEC approved a rule change filed by the NASDAQ Stock Market LLC ("NASDAQ") which adopts new NASDAQ Rule 5713 and new listing standards for "Paired Class Shares." The rule change allows list and trade in such shares issued by seven new AccuShares exchange-traded funds ("ETFs") on a national exchange. Each pair of shares is intended to provide a return based either on an upward or a downward movement in a particular index or asset.
SEC Commissioner Stein issued a dissenting statement regarding the SEC's approval of the rule change in which she said that the record and analysis presented to date "support neither investor protection nor the public interest."
According to Commissioner Stein, the products are complex and seek to test an "unproven arbitrage mechanism" on the market that "has the potential of harming investors." She also said that the "historical record" raises concerns about the way such products interact with the market, since a similarly structured product, consisting of paired up and down shares, was launched for listing and trading in 2006 and "promptly imploded."
Lofchie Comment: Commissioner Stein posits a number of reasons why the products might not work as planned. This raises an interesting question of how the products might be tested. For example, is it possible to run simulations of some kind (or is that too sci-fi)? Even if that can't be done, is it possible to predict in detail how the paired shares might react in specific and unusual market conditions, and then see whether the predictions are fulfilled when the conditions arise?