ETF Prime: FINRA’s “complex” proposal, Vanguard patents and leveraged shares


In this week’s ETF Prime, host Nate Geraci talks to ETF Trends Editor-in-Chief Lara Crigger about the Financial Industry Regulatory Authority’s (FINRA) proposal for “complex” products and the SEC’s investigation into ETF revenue sharing practices. Later, Geraci is joined by Ben Slavin, Global Head of ETF Asset Management at BNY Mellon, to discuss the Vanguard stock class patent, the conversion of mutual funds to ETFs, and crypto ETFs. The podcast ends with Oktay Kavrak, Principal at Leverage Shares, talking about the company’s ETP range of leveraged and inverse offerings currently trading in Europe.

The conversation opens with the proposal from FINRA, the brokerage regulator, that would require investors to pass a test before they can invest in what FINRA considers “complex” products. Geraci explains that the ETF industry’s concern with this proposal is how FINRA will choose to define a fund as complex, whether it’s products such as inverse or leverage or simply anything beyond the very vanilla benchmark funds, and the gate-control potentials that could arise as well as if brokerages were to even test their investors.

FINRA is calling for comments on two different areas, both the complex products proposal and the proposal for more regulation of options trading, Crigger explains.

“FINRA wants to define complex products, and the way they’ve done that, the net that their proposal casts, stretches so far that almost any ETF that’s not a pure indexed, market beta product, could potentially fall into that net,” Crigger says.

The proposal means that retail investors would have to prove to FINRA that they understand the products they are looking to invest in and the risks. It’s a proposal that Crigger says ultimately goes beyond FINRA’s scope and would be the first time a regulator has taken a publicly traded security and essentially locked it to a portion of investors.

“FINRA’s jurisdiction does not extend to retail investors, so why should retail investors be required to get special approval from FINRA members to do whatever they want with their own money?” asks Crigger.

The two also discuss the SEC’s investigation into ETF revenue sharing practices in what has become a sort of “pay-to-play” atmosphere for ETF issuers seeking to list their funds on platforms, a postponement of the same practice with mutual funds, as well as the suspension Barclay ETN.

Vanguard patents and leveraged ETPs

Ben Slavin, Global Head of ETF Asset Management at BNY Mellon, is next and talks about FINRA from an issuer perspective and industry concerns. Talk then pivots to the Vanguard patent which allows Vanguard to offer ETFs as a share class of their mutual funds, thereby granting certain benefits, the patent’s upcoming expiration next year and the interest of pursue the patent by other issuers.

“I don’t expect it to go mainstream,” says Slavin, describing other transmitters trying to reclaim the patent. “We’ll probably see more bitcoin ETF filings still pending compared to those filings for share classes, but really once those patents expire, other companies won’t need to deal with Vanguard anymore, but they will have to deal with the SEC, and that’s where the problem lies at this point.

Slavin and Geraci also discuss mutual fund-to-ETF conversions and wide-ranging implications, including the traditional use of mutual funds in 401(k) and bitcoin and crypto funds and deposits with the SEC and the use of crypto overseas.

Last up is Oktay Kavrak, Principal at Leverage Shares, to discuss their funds that trade in Europe; all are physically backed, meaning they are fully collateralized by the actual underlying equity. The range contains 144 ETPs, and the most popular offerings focus on single stocks such as Tesla, Nio, Alibaba and others and offer long and short options with various leverage multiples.

“When it comes to regulations and regulators in Europe, I think they have a greater emphasis on disclosure versus, I would say, the more paternalistic U.S. investor protection mentality of the SEC,” says Kavrak, explaining why leveraged funds are only available in Europe at the moment.

Listen to the full ETF Prime episode with Lara Crigger:

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.