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Rominger Testimony at Senate Banking ETF Hearing

Yesterday, Eileen Rominger, the Director of Division of Investment Management, testified in front of the Senate Banking Subcommittee on Securities, Insurance, and Investment at a hearing entitled: "Market Microstructure: Examination of Exchange-Traded Funds (ETFs)." Ms. Rominger discussed the SEC's current efforts with respect to ETFs, including the following: 


  • The SEC staff has determined not to issue any additional exemptive relief for ETFs seeking to make significant use of derivatives pending the broader review of the use of derivatives by all funds. The SEC recently issued a concept release on mutual funds' use of derivatives, with comments due November 7. 
  • The SEC staff is currently engaged in a review of actively-managed ETFs that primarily invest in instruments that raise concerns with respect to liquidity and transparency, including emerging market debt securities and high-yield debt securities. The SEC's review is focused on determining whether these instruments meet minimum liquidity and other thresholds, for purposes of transparency, fair valuation and efficiency in the arbitrage process (the arbitrage process is the process by which authorized broker-dealers keep the ETF market price close to the value of the ETF's underlying instruments). 
  • The SEC staff is examining the dynamics of ETF trading and the linkages between ETFs and the market as a whole. Ms. Rominger specifically mentioned concerns about (1) ETFs that invest in illiquid and over-the-counter securities, where a temporary imbalance in supply and demand might result in the price of the ETF decoupling from the value of the ETF's underlying instruments and (2) the tracking performance of leveraged and inverse leveraged ETFs, which promise daily returns equal to the multiple or inverse multiple of the performance of an underlying index, but that may not track the stated index over extended periods of time.