| NEW YORK, March 8
NEW YORK, March 8 U.S. regulators are advancing
rules this week to tighten standards on the ballooning
exchange-traded fund industry over the objections of asset
managers including BlackRock Inc and Invesco Ltd
The U.S. Securities and Exchange Commission last year pushed
the three main ETF trading venues to draft rules that explicitly
require the funds to continually pass a number of tests or face
the possibility of being shut down, according to three people
with knowledge of the matter and the regulator's filings.
The regulator approved the second of the three proposals in
a notice posted on Wednesday and could rule on the third in
The latest regulatory actions highlight concerns over the
potential for trading abuses affecting ETFs, especially those
tracking indexes that include assets that are not traded often.
ETF managers including BlackRock and Invesco have sent
letters to the SEC arguing that the rules are unnecessary and
could force some ETFs to be declared out of compliance or shut
down even if the fund itself is not at risk.
The funds have remained one of the fastest growing parts of
the market despite concerns over their durability during periods
of market stress, for instance after a "flash crash" that
pummeled some ETFs on Aug. 24, 2015.
ETFs will be required to meet requirements detailed in 314
pages of exchange filings unless they are granted an exception.
For instance, a stock index fund needs to track a benchmark with
a minimum number of equities that meet a target market value and
"There is a lot of concern about manipulation," said James
Simpson, president of ETP Resources LLC, a consulting and data
company, and a former American Stock Exchange official, who said
the listing standards for ETFs are "problematic" and "outdated."
The SEC backs the rules on the belief they could prevent
market rigging, for instance, if an ETF tracks a group of rarely
traded stocks whose prices could easily be manipulated,
according to a person familiar with the SEC's reasoning and the
agency's disclosures on the topic.
A SEC spokeswoman declined to comment.
ETFs have grown at double-digit percentages every year this
century, allowing investors to buy commodities such as gold,
companies in an entire industry sector or vast swaths of the
bond market as easily as trading single stock. Assets in the
funds reached a record near-$3.7 trillion in January, according
to industry researcher ETFGI.
Rules answering the SEC's concerns drafted by CBOE Holdings
Inc's Bats exchange were approved in the notice posted
on Wednesday, and a verdict could come soon on a proposal by the
Intercontinental Exchange Inc's NYSE Arca exchange, the
largest listing venue for ETFs. Nasdaq Inc's revised
listing standards have already been approved.
ETFs already have to meet requirements to be listed. But the
latest changes specify the funds must meet those standards not
just when they launch but as long as they are trading.
The rules also bolster restrictions on trading firms or fund
managers for setting the rules determining what stocks are in an
index and calculating what the index is worth.
But even one of the exchanges has reservations about the new
"The continuing listing standards in their current proposed
form may cause undue costs for fund managers as well as a
negative impact for investors, without offering additional
protections for the shareholders of the ETF," said Doug Yones,
NYSE's head of exchange-traded products, in a statement to
Nasdaq and Bats declined to comment.
In its notice, the SEC dismissed industry concerns, writing
that the absence of ongoing standards is a "gap" in regulation.
The agency, which in 1992 first approved exceptions to U.S. law
that allowed ETFs to trade, has been conducting a broad review
of the industry.
The rules are aimed at achieving the same goals as the
requirements applied before funds start trading, including
ensuring the products "are not susceptible to manipulation and
maintaining fair and orderly markets," the SEC wrote.
An ETF could violate the rules if it tracks an index holding
stocks falling below a certain trading volume, even if the ETF
does not hold that stock, ETF managers and an industry group
argued. They said it is not clear how the proposals address
concerns about market manipulation.
"This would introduce monitoring and oversight for something
that we don't control," the funds' indexes, said Chuck Thomas,
head of U.S. ETF capital markets at Vanguard Group. He said the
impact on Vanguard funds would be minimal.
BlackRock and Invesco declined interview requests.
(Reporting by Trevor Hunnicutt; Editing by Jennifer Ablan and