Start of single-stock ETF trading exposes rift between US SEC Democrats

12 July 2022 22:12 by Neil Roland


The imminent trading of 18 potentially risky single-stock exchange-traded funds has elicited unusual public criticism by a Democratic US Securities and Exchange Commission member about the pace of agency rulemaking, which is determined by Democratic Chair Gary Gensler.

Commissioner Caroline Crenshaw expressed disappointment yesterday that the SEC hasn’t moved more quickly to create a “comprehensive and consistent” approach to reviewing complex exchange-traded products to protect investors and markets.

Homing in on single-stock ETFs, a form of derivatives, she also voiced disappointment that the SEC has failed to use the tools it already has “to grapple with the question of whether these products are appropriate in the public interest and consistent with the protection of investors.”

“I strongly encourage my colleagues to consider rulemaking in this case,” Crenshaw added.

An SEC spokesman declined comment.

Gensler, as chairman, controls the SEC agenda. Last October, Gensler said he had asked staff to review complex exchange-traded products with an eye toward recommending possible rules for the commission to consider.


Also yesterday, the head of an office that reports to Gensler urged ordinary investors to consider the risks of single-stock ETFs carefully before deciding to invest.

“Though these products will be listed and traded on an exchange, they are not right for every investor,” said Lori Schock, head of the SEC’s investor education and advocacy office.

Both Crenshaw and Schock pointed out that these complex funds are unusually risky because their performance fluctuates with that of a single underlying stock, rather than a portfolio of diversified stocks, as most ETFs do.

In addition, they aim to provide returns over extremely short time periods – in some cases even a single day. Investors who hold them for longer than that face additional risks.


The two SEC officials were reacting to a prospectus filed yesterday by 18 single-stock ETFs declaring their intent to list and trade primarily on Nasdaq. The stocks include Tesla, Nvidia, ConocoPhillips, Pfizer, Salesforce, Nike, Boeing, Paypal, and Wells Fargo.

The prospectus cautioned that the funds “are not suitable for all investors and are designed to be utilized only by sophisticated investors who understand the risks associated with the use of derivatives, are willing to assume a high degree of risk, and intend to actively monitor and manage their investments in the Fund.”

It added that the funds “are very different from most mutual funds and exchange-traded funds.”

Under SEC rules, ETFs meeting certain criteria can come directly to market without first obtaining explicit commission approval.

Crenshaw said the rule shows no indication of applying to single-stock ETFs.

An investor advocacy group backed Crenshaw’s concerns.

Micah Hauptman, investor protection chief for the Consumer Federation of America, expressed disappointment that the SEC “has not prioritized taking a fresh look at how it can update the regulatory framework to better address the risks that these products pose to investors and markets.”

Hauptman used to work for Crenshaw at the commission.

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