SEC Commissioner and Director Warn of Risks of Leveraged/Inverse Single-Stock ETFs
Commentary by Steven Lofchie
SEC Commissioner Caroline A. Crenshaw and SEC Director of the Office of Investor Education and Advocacy Lori J. Schock warned investors of the risks associated with single-stock exchange traded funds ("ETFs").
In a statement, Ms. Crenshaw cautioned that leveraged and single-stock ETFs present a greater risk to investors than a diversified ETF. She stated that investors may be drawn to single-stock ETFs because they are "uniquely accessible and convenient" for self-directed retail investors. To protect investors, Ms. Crenshaw called for additional rulemaking under the authority of the Investment Company Act asserting that Rule 6c-11 ("Exchange-traded funds") does not expressly address single-stock ETFs.
Ms. Schock warned investors of risks posed by single-stock ETFs, which do not have the benefit of diversification.
Commentary
It is notable that SEC Commissioner Crenshaw refers to "self-directed investors," indicating that she would seek to limit the ability of self-directed investors to make investments, even in publicly traded securities. She also indicates support for a FINRA proposal that would likewise limit the authority of self-directed investors to make their own investment decisions. Her position raises a question as to whether the SEC intends to go beyond its historical role as an agency whose job it is to require disclosure, and to arrogate to itself the authority to vet individuals' investment decisions, even in situations where the individual investor is mentally fit and is not acting on the basis of a recommendation.