ICI Urges SEC to Mind Investment Company Act's Regulation of Exchange-Traded Products
The Investment Company Institute ("ICI") provided the SEC with market feedback on the listing and trading of exchange-traded products ("ETPs") on national securities exchanges. The ICI provided comments on the following areas in which it had "available data and particular insights": (i) the arbitrage and market pricing of exchange-traded funds ("ETFs"); (ii) the activities of authorized participants ("APs"); (iii) the need for enhancements to the SEC process for approving exchanges' listing standards; and (iv) ETF closures and liquidations.
The ICI stated that "arbitrage in bond ETF shares is, at most, a minor contributor to, and certainly not a primary driver of, price changes in the underlying bond markets," given the "negligible share of trading attributable to primary market activity in U.S. government, corporate and municipal bond ETFs."
The ICI emphasized that "generally speaking, an AP trades with the ETF if there is an opportunity for arbitrage," and that "it is important to note that APs that are registered market makers are not the only entities that provide liquidity in the trading of ETF shares in the secondary market."
The ICI urged the SEC to "revisit the ETF rule first proposed in 2008 that would allow most ETFs to begin operating without obtaining from the SEC individual exemptive orders under the Investment Company Act." The ICI added that the review and approval of many individual applications "would help eliminate the current disparate array of exemptive orders that permits some ETF sponsors more flexibility in product offerings" than others.
The ICI stated its belief that "ETFs can add liquidity to the marketplace and can be a means for price discovery when the markets for their underlying securities become dislocated."
See: ICI's Response to SEC's Request for Comments on Exchange-Traded Products.Related news: SEC Requests Comments on Exchange-Traded Products (Fed. Reg.) (June 17, 2015); SEC Requests Comment on Exchange-Traded Products (with Lofchie Comment) (June 12, 2015).