SEC Commissioner Hester Peirce criticized the agency for limiting investors’ access to new types of investment products. The Commissioner described very slow progress in formalizing and standardizing the treatment of relief for exchange-traded funds (“ETFs”).
In remarks at the ETFs Global Markets Roundtable, Ms. Peirce highlighted the benefits of ETFs in general, saying that they (i) provide investors with a range of investment options, (ii) are easy to enter and exit with low transaction fees and (iii) offer lower operating expenses relative to those of comparable mutual funds. Ms. Peirce observed that the SEC exercises caution with respect to approving new types of ETFs. She noted that the SEC just authorized its first non-fully transparent actively managed ETF after eight years of thinking about it.
Ms. Peirce urged the SEC to move forward with more speed on other requests for exemptive relief for projects. She criticized SEC “indecision” in the treatment of leveraged and inverse ETFs. Ms. Peirce said that after issuing several orders granting two sponsors permissions to operate as leveraged and inverse ETFs, the agency got “cold feet” and has not issued any other permissions. Ms. Peirce added that the agency’s reluctance to permit more competitors to offer geared ETFs is another instance of its curtailing access to an investment product that would be helpful to some investors.
In addition, Ms. Peirce proposed that the Division of Investment Management explore the marketplace’s interest in acquiring exposure to bitcoin and other cryptocurrencies through a registered investment company. She noted that although there is interest from investors and sponsors, the SEC has not yet granted an exemptive application for an ETF or approved a rule permitting the operation of crypto ETFs or other exchange-traded products. She emphasized that she did not believe such ETFs were necessarily a good investment, but added that it ought to be for the market and not the regulators to decide.
Commissioner Peirce highlights fundamental questions that financial regulators must confront. Where should the line be drawn between protecting investors (effectively prohibiting them from buying a variety of risky products) and allowing investors to make their own decisions? This is not a binary decision; it is a line-drawing exercise.
Regulators tend to move toward protection rather than toward allowing investors to make their own decisions based on mandated disclosures. There is a fair amount of empirical evidence to suggest that such protectionism may be a good way to go, at least in the overall and aggregate scheme of things. This is, perhaps, even more true as holders of wealth age and become less capable of making sound decisions.
Yet depriving individuals of economic freedom has aspects that are worrisome. By way of managed ETFs, for example, the government may be depriving investors of choices that might be good for them. Should regulators discourage investors from taking such risk? Should riskier investments not be funded? Is society better or worse off?
Bigger picture, if adults cannot be trusted to make economic decisions, even on the basis of full disclosure, on what basis should they be trusted to make other decisions? By what logic are people who cannot be allowed to make reasonable economic decisions to be trusted to elect political decision makers? Where the line should be drawn is debatable, but permitting failure has to be an option.