Foreign Regulators Issue Warnings about Exchange Traded Funds (ETFs)

 

The United Kingdom’s Serious Fraud Office, which prosecutes white collar crime, the Financial Services Authority, and the Bank of England’s Financial Policy Committee have issued warnings about the risks of exchange traded funds, which include (i) lack of transparency in the exchange traded funds market, (ii) failure of exchange traded funds to track underlying indexes, (iii) risk of a exchange traded funds providers going bankrupt, and (iv) exchange traded funds’ vulnerability to short-selling, according to an InvestmentNews article entitled “Coming to America? U.K. probe casts light on dark side of ETFs.”

Exchange traded funds are exchange-listed products linked to indexes, commodities, bonds and currencies and allow investors to buy and sell them like stocks. Their growing popularity is due in part to lower fees, lower initial investment requirements, continuous trading, and coverage of most indexes.

The complexity of exchange traded funds combined with investors’ appetite for them and lack of understanding of them has the potential to damage entire markets. The mixture of “people buying things they don’t understand, complex structures, synthetic structures with counterparty risk, and huge short selling without enough assets in the underlying ETF” to meet demand makes the products sound like “something that we’ve been through before,” one London-based broker’s CEO warned, referring to the 2008 financial meltdown.

The Serious Fraud Office wants to be prepared in the event that there is a crisis involving the exchange traded funds market, according to the article. The SFO is looking more closely at exchange traded funds because they have similar characteristics to the collateralized debt obligations that fueled the financial meltdown in 2008, according to the article. Like CDOs, the quality of the underlying assets in synthetic exchange traded funds are often unclear and regulators are concerned about firms improperly selling assets that are being heavily short sold.
The SFO wants legislation imposing criminal liability on companies or banks that commit fraud involving exchange traded funds.

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in cases involving exchange traded funds. For further information, please contact us.