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U.S. SEC’s Stein sees dangerous cracks in laws for mutual funds, ETFs

Publisher: Reuters

The rise of complex mutual and exchange-traded funds has exposed weaknesses in the outdated regulatory regime for the sector and could be putting retail investors at risk, a top U.S. regulator said Monday.

“I am concerned that we are starting to see some cracks in the foundation,” Securities and Exchange Commission Democratic member Kara Stein said at a Brookings Institution event. At issue, she said, are mutual funds and exchange-traded products that utilize large amounts of leverage, invest in illiquid securities or execute strategies similar to those used by hedge funds. Although there are rules on the books to limit these activities, Stein said she is concerned too many funds have been able to avoid some of these restrictions, in some cases by relying on exemptions granted by SEC staff.

Stein’s comments come at a time when the SEC and other federal regulators have been more closely scrutinizing the asset management sector amid questions about whether certain products or activities could pose risks. SEC Chair Mary Jo White late last year outlined a series of reforms she plans to enact, including requiring mutual funds and advisers to report additional data, imposing new risk controls on mutual fund and ETFs, and requiring funds to draft plans for how they would unwind and transfer client assets.

Just last week, the SEC sought public comment on exchange-traded products, such as ETFs, with an eye toward determining how they are marketed to and traded by retail investors.

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