ETFs in large part are regulated by a single statute, the Investment Company Act of 1940 (1940 Act). While most agree that the statute over the many years of its existence has done an admirable job of regulating ETFs (and mutual funds) and protecting their shareholders, it nevertheless contains a number of surprising provisions including how it regulates valuing the securities and other assets held by an ETF.  In no uncertain terms, it assigns that task to the ETF’s board of directors.

For the most part, valuation of an ETF’s assets is an easy task:  one merely takes the closing market price of each security and multiply it by the number of shares of that security owned by the ETF, add up all of the products of these calculations, add cash, subtract liabilities and divide by the number of shares outstanding.  If market prices are not available, use the median of the last bid/ask price.  If neither are available, use the price supplied by a pricing vendor. If a vendor’s price is unavailable or it seems off, that’s when the 1940 Act’s mandate is surprising:  the board of directors has to value the security.

One can envision a group of men and women rolling up their sleeves while sitting around a board table trying to figure out the fair value of a long list of securities for multiple funds. Thankfully for directors, in practice it works differently. Guidance in the form of a hodgepodge of SEC legal and accounting pronouncements issued over the years allows the board to delegate the fair valuation process to the adviser of the ETF, which can elicit the support of certain ETF service providers. Advisers and ETF service providers have developed an evolving set of methodologies, often complex, to fair value ETF portfolio securities. The Board then gives its blessings (or not) to the fair valuations at is next monthly or quarterly board meeting, recognizing the conflict of interest the adviser has to overvalue securities because its advisory fee is based on the assets of the ETF.

On February 21, 2020, the SEC proposed to consolidate the hodgepodge of guidance on fair valuation into a single rule:  Rule 2a-5 under the 1940 Act. While the aim of the SEC is laudable, the agency badly missed its mark based on the opinions expressed in an avalanche of comment letters it recently received from the industry. While the proposed rule keeps in place the delegation concept by permitting a board to assign fair valuation of securities to the adviser, it introduces highly prescriptive board requirements around the establishment and application of fair valuation methodologies, testing of fair valuation methodologies, and evaluation of pricing services. If adopted as proposed, ETF boards may actually end up around a table with a stack of formulas, spreadsheets and test results and remain there until they have come up with legally defensible conclusions that their valuation process meets the technical requirements of the rule.

Below is an overview of the most significant conditions of proposed Rule 2a-5 followed by critiques of the proposal voiced by the industry.

Boards must establish and apply fair valuation methodologies, taking into account the fund’s valuation risks.

This condition of proposed Rule 2a-5 drew the most heat as it would require the Board in the SEC own words to “select and apply in a consistent manner an appropriate methodology or methodologies for determining (and calculating) the fair value of fund investments, including specifying: (i) the key inputs and assumptions specific to each asset class or portfolio holding; and (ii) which methodologies apply to new types of fund investments in which a fund intends to invest.”  Commenters read this requirement to not only require a board to select the methodologies in advance (e.g., private equity investments are valued using a discounted cash flow model, options are valued using the Black-Scholes model and so forth) but questioned whether to comply with the Rule boards would have to dig deeper into the models.  For example, will boards to avoid liability have to request the specific qualitative and quantitative factors to be considered, the sources of the methodology’s inputs and assumptions, and a description of how the calculations are to be performed. Commenters urged a less prescriptive approach that would be more consistent with other duties of directors that are grounded in state laws of duty of loyalty and care.  Boards as long as they are full informed and acting in good faith should have more flexibility in carrying out their fair value duties, recognizing that fair value approaches generally cannot be scripted in advance but will vary, depending on the nature of the particular ETF, the context in which the board must fair value price, and the pricing procedures adopted by the board.  Most notably, an ETF’s investment in complex instruments typically involves various inputs or alternative approaches based on the facts and circumstances, and it is unrealistic to expect that the board is in the position to foresee and document all of these in advance.

Boards must test fair valuation methodologies.

Many commenters failed to see much value from testing fair valuation methodologies and to the extent such testing had value, it would be outweighed by the costs of the tests.  They pointed out that routine testing of a set of methodologies would be of little benefit if other methodologies were used because market conditions or portfolio conditions changed.  Such testing might become rote and the results along with other data fair valuation methodology data proposed by Rule 2a-5 likely would lead to voluminous disclosure to boards, which may obscure material, more important valuation matters.

Boards must evaluate pricing services.

Proposed Rule 2a-5 would require the Board to scrutinize pricing services including reviewing “(1) the qualifications, experience, and history of the pricing service; (2) the valuation methods or techniques, inputs, and assumptions used by the pricing service for different classes of holdings, and how they are affected as market conditions change; (3) the pricing service’s process for considering price “challenges,” including how the pricing service incorporates information received from pricing challenges into its pricing information; (4) the pricing service’s potential conflicts of interest and the steps the pricing service takes to mitigate such conflicts; and (5) the testing processes used by the pricing service.”  Commenters again noted that these requirements were too granular, especially with respect to price challenges.  Some believed that the price challenge requirement would lead to the development of a wide variety of objective thresholds to determine when pricing challenges should be initiated. They saw no need to disrupt the current give-and-take practices between advisers and pricing services, which has worked well to date in large part because it is adaptable to particular circumstances.

Boards must receive quarterly reports about the fund’s fair valuing processes and prompt reports on matters that could materially affect a fair valuation.

Proposed Rule 2a-5 would require an adviser report to the board in writing: “(1) a quarterly report containing an assessment of the adequacy and effectiveness of the adviser’s process for determining the fair value of the assigned portfolio of investments and (2) promptly (but in no event later than three business days after the adviser becomes aware of the matter) on matters associated with the adviser’s process that materially affect or could have materially affected the fair value of the assigned portfolio of investments.”

Most commenters did not object to quarterly board reporting but many expressed deep concerns with the “prompt” reporting requirement. A common comment was that proposed Rule 2a-5 is vague when it comes to what event or situation would trigger prompt reporting is vague and too uncertain under the Rule.  In part, because of this vagueness, boards could be burdened with voluminous, detailed fair value determination-related information between board meetings, which would impose significant costs on ETF advisers with little benefit to the ETF.

Boards must “periodically” assess valuation risks of the funds.

Boards routinely asses all of the risks that a given ETF poses for investors, but not continuously. With input from the ETF’s chief compliance office, Boards perform their valuation and other risk oversights annually unless a significant valuation risk arises between annual reviews.  Commenters urged the SEC to make  clear that  valuation risk assessment should be performed annually like all ETF risk assessments within the framework of Rule 38a-1 under the 1940 Act, the SEC compliance rule.

Specified records about the valuation process must be maintained.

Proposed Rule 2a-5 requires documentation to support fair value determinations, including information regarding the specific methodologies applied and the assumptions and inputs considered when making fair value determinations, as well as any necessary or appropriate adjustments in methodologies. Commenters urged the SEC to scale back certain of these recordkeeping requirements. They expressed the concern that the task would be monumental for many advisers to fixed-income ETFs and funds including those that invest in thousands or tens of thousands of such securities. As proposed, the Rule would require the documents to be generated for virtually all of these securities since pricing services provide prices for them each business day.

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In the chess game of rulemaking, the next move will be by the SEC.  A reasonable approach would be for the SEC to eliminate a number of the prescriptive conditions of the rule, while providing a safe harbor to directors for those that remain.  This safe harbor would provide that a board would be shielded from liability with respect to a given fair value rule condition if it acted in good faith with the actions it took. The recent string of rulemaking from the SEC’s Division of Investment Management, which regulates ETFs, has been well-received by the industry and consumer advocates.  It is likely this streak will continue after the Division continues to grapples with its challenging rulemaking assignment.

COVID Accelerating Digital Distribution Trends

By Richard Keary and Justin Meise, co-founders of ETF BILD | July 16, 2020

The ETF industry was built on a spirit of innovation – and in the time of COVID, ETF leaders are once again proving how adept the industry is at developing new solutions to challenges … and challenges there are aplenty. Despite the great technology and thought leadership platforms many firms have leveraged for years, sales remains a high touch, very personal process.  So how are ETF firms large and small engaging with clients and – even harder – forging new relationships in an environment where very few people are traveling, conferences are on hold and a paucity of people are ready to meet in person anytime soon? We sought out a range of industry experts to tackle these questions. As discussed below, ETF firms are adapting their approaches to their clients and attracting new clients by re-emphasizing sales fundamentals and taking advantage of new or previously underutilized technologies to deliver high quality content tailored to the needs of their clients.

ETF firms have substantially ramped up their digital engagement. In fact, one firm we spoke with indicates that sales meetings online or via conference calls pre- COVID were a few hundred a month and post-COVID are in the thousands. A pervasive theme from ETF shops is that COVID didn’t spark a sudden digital transformation, which had begun years before, but that it has greatly accelerated the digital trend. Two examples of trends that have been accelerated are ETF firms shifting to using more technology tools for engagement and recruiting for professionals with stronger digital skills.

“We didn’t change strategy, we changed tactics,” said Susan Thompson, EVP and Head of Americas Distribution for SPDR ETFs at State Street Global Advisors, an ETF provider that has seen strong flows during the pandemic. Thompson said that all of their teams have been working from home since mid-March- a move she describes as seamless.  “We’re finding people are very productive at home,” she says, adding, “Clients have begun to enjoy the webinar style setup – we’ll continue to see more of that.”

Ed Rosenberg, SVP and Head of Exchange Traded Funds at American Century, agrees, adding: “We were already doing conference calls and webinars throughout, and I don’t think the meetings themselves have changed or the pace of the meetings. What has changed is the interaction space – instead of having live meetings, we have ramped up and replaced them with virtual meetings.”

New efficiencies in the sales process has been an unexpected and welcomed benefit from COVID. Jillian DelSignore, Principal at Lakefront Advisory, points out that virtual teams are doing more meetings due to the simple efficiency of eliminating travel as well as smarter targeting. As the virtual sales process has risen in importance, it re-emphasized the need by ETF firms for more and better quality of data. “Data from a host of different sources including home offices is like gold,” she says, citing the ability to approach an advisor with a product you know will be relevant. “Data makes you a more informed salesperson and therefore a more valued partner.”

State Street’s investment in data science and data scientists has paid off. According to Thompson, State Street data scientists closely examine actions and derive conclusions, which ultimately enhances lead scoring. “We are getting past what the advisors are saying and getting to what they actually want, and it has increased our win rate substantially.”

Pre- and post COVID, having a great story and a message that resonates is a critical starting point for ETF firms. While this has always been true, financial advisors who use ETF products appear to be looking for more thoughtful discussions in virtual interactions that add value to their business. Rosenberg points out that, “If you’re known as the guy who just parties and takes people out to a hockey game or a really nice dinner – there’s not much value there. If that’s how you built your relationships in the past and that’s what your reputation is, it’s going to be really hard for you to build anything in this environment today.” Conversely, he suggests that if a salesperson has built the relationship on credibility, providing insights or information that helps advisors solve a client problem and grow, then fighting for time in this environment won’t be that difficult.

Having a story to tell is especially true for distribution efforts at smaller shops, which do not have the benefit of a well-recognized brand. Andrew Chanin, co-founder and CEO of Procure, which recently launched the UFO ETF, advises that smaller, thematic shops need to find ways to plug into trending topics to be relevant. “This summer, we’ll be doing more webinars with thought leaders in the space industry and not just talking about UFO or what the space industry is doing, but also showing how relevant space is to our everyday lives.” He points out the excitement around the Space X launch and the role space has played during the pandemic through technology like 5G which is delivered by satellite.

Of course, firms do not always have a product that is timely or one that captures investors’ imaginations. Many great products are complex, laden with financial jargon. For those products, sales teams need to simplify the story. DelSignore says that “the most successful products are often the ones with the simplest stories, which can be easier for the sales team to sell. The story can be more memorable for the financial advisor.” She adds, “ideally, you need to sum up three main points that can be delivered in a 30 second elevator pitch. If you can’t, it can be a problem for commercialization.”

Transforming ETF distribution by relying more on technology, data and content is not a new theme in the industry. As we listened to the professionals on the front lines, their description and solutions for the challenges of relationship building and prospecting have been heard before; content is king, technology will drive it, clients want a clear and concise story. The difference in these conversations is the urgency to make these changes. Prior to COVID, there was an evolutionary process in place. Now, it is all hands-on deck to innovate and create the change needed to move the industry forward through the COVID crisis.

How Covid-19 Will Change the Conference Model and ETF Marketing, Maybe Forever

Co-founders Justin Meise and Bibb Strench discuss the potential effects Covid-19 will have on the conference model and ETF marketing in their featured ETF Trends article:

The ETF industry has seen its share of crisis in its relatively short history, yet Covid-19 certainly presents unique challenges and will test the industry’s ability to adapt and innovate. Among the challenges, how does an industry that relies so heavily on a sales and marketing model based on personal interactions and education through conferences and events adapt to the current Covid-19 environment and post Covid-19 world?

Social distancing and health concerns are going to keep professionals from traveling and congregating in large numbers for the foreseeable future. John Swolfs, CEO of InsideETFs, said his team is hopeful for a “normal” InsideETFs in 2021, but they are prepared for the near-term reality of virtual conferences.  The challenge he says is to identify the best ways to adapt or consolidate four days of content into perhaps four hours of content and give advisors and other conference participants the choice of tuning into the sessions in real time or later at a time more convenient for them. “Even if some advisors can’t take three days out of the office, maybe you can give them an ability to pop in and pick and choose the session they want to see.”

As the world moves towards normality, he foresees a hybrid model where some participants attend a physical event and others can experience portions digitally. “People are getting more comfortable with digital and embracing it,” he says, acknowledging there will be some trial and error on how best for conference providers to facilitate networking in a virtual program.

Al Neubert, Executive Managing Director and Chairman of MCC Forums, one of the largest producers of Indexing events, says that organizations that delivered the highest quality content prior to Covid-19 can carry over that success to virtual conferences. His formula in either environment is to use his firm’s know-how and deep industry relationships to assemble a panel of top experts, such as leading academics, who in turn attract high quality attendees, which makes it more appealing for sponsors despite their tightening marketing budgets.  In his view, events with organizers without such capabilities may be the first to vanish. He adds that “the trick is can I get an audience engaged and keep them in a virtual setting. If you deliver good value, cater to the audience, provide great experts, execute effectively, you will have an audience and therefore sponsors.”

Tom Lydon, ETF Trends founder and President of Global Trends Investments, agrees that quality of content is paramount. Lydon argues that after the financial crisis and the run up for ETFs, particularly index ETFs, the portfolio management responsibilities shifted to advisors. “Advisors are looking for guidance like everyone else – do I rebalance? How do I deal with clients while working from home? What ETF should I consider for volatile times? It’s all on the advisor, they feel it more than ever, and they want to know what other advisors are doing.”

ETF Trends has seen a 4x increase in traffic over last quarter and a 2x increase in the number of webcasts, and he credits that to their ability to tailor content to advisors. Lydon said traffic data they capture from the ETF Database side of the house provides them with the type of information advisors are seeking, enabling them to precisely tailor content to their audience, nearly in real time, and share that with issuer partners. “We typically saw 600-700 registrants for webcasts. Now, we are getting over 1,000 registrants, about half watching live and the rest on demand.”

But information access is just part of the conference equation. There’s also the technological challenges of enabling virtual networking. All agreed that while Zoom, Microsoft Teams Rooms, Cisco WebEx and similar virtual conference offerings are good, they need to be significantly enhanced to be effective medium for large virtual conferences.

No doubt that the greatest challenge is addressing one of the main reasons for attending conferences: the opportunity to bond with colleagues and prospects. Will participants be as likely to meet virtually?

Swolfs thinks so. He said that his firm is talking with numerous technology providers that are working on solving the digital networking challenge. InsideETFs attendees are likely familiar with Brella, which Swolfs said participants used to set up over 1,000 meetings this year at the conference.

“Those InsideETFs attendees who embraced Brella gave feedback that they got plenty of meetings and each year the number of attendees taking advantage of Brella has gone up,” adds Swolfs.

Lydon agrees on the value of connecting virtually and sees too many failing to take advantage of the opportunity. “Most people are opting out of video conference calls [to just use voice], it’s a mistake. You see someone face-to-face, you commiserate about not having a haircut for six weeks. You connect on a more personal level than before, and you will be better off coming out of this for it.” His colleague Dave Nadig recently offered more detailed advice for how to up your video conferencing game – definitely worth a look.

So, does this all spell the end of conferences as we know it? Not so fast.

Neubert sees a Darwinian impact on conferences, the result of too many events that aren’t top quality. “We’ll see a huge shakeout because of the expansion of events,” he adds.

Swolfs agrees that many events will disappear but expects the largest, most popular events to endure. He says that while quality content can be delivered effectively in a virtual model and expects that to be part of the conference model moving forward, he points out that in-person conferences provide different content and an overall experience. “People love to watch sports on TV but being at a game is a very different experience.”

Digital delivery and virtual events were already growing in popularity, and the impact of Covid-19 is accelerating the trend. For marketers, the lessons here are clear; accept the challenge by applying and adapting classic marketing and strategic communication principles to the new virtual medium; take the time to understand your audience and what they need; and craft quality content that will resonate by addressing an educational or informational needs. And then, embrace digital and innovate around delivery. Conference organizers that learn these lessons will not only weather Covid-19 but after that storm clears end up with a virtual conference business that compliments their traditional in-person events.

Justin Meise and Bibb Strench are two of the co-founders of ETF Bild, an ETF industry think tank. Justin is also Founder & President of Buttonwood Communications Group, a financial services PR firm, and Bibb is a Partner at Thompson Hine’s Corporate Transactions & Securities practice group where he focuses on exchange-traded funds (ETFs), closed-end funds, mutual funds and investment advisers.

This article originally appeared on ETF Trends:

Is it time for ETF Innovation to Shift from Products to Product Distribution?

The ETF industry is celebrating its latest impressive innovation: The non-transparent active ETF structure. The concept is so novel and has so many applications that the providers lined up to offer this product have not yet standardized the name for them. They have been referred to as non-transparent or semi-transparent, actively managed ETFs; active shares; and even ANTS (Active Non-Transparent ETFs). Whatever you call them, celebration is well-deserved because of the five plus year regulatory slog that it took to obtain SEC approval of this product.

Certainly, there is a strong possibility that the roll out of the non-transparent active ETF structure will be the next major milestone in the ETF industry. But what may be even more significant is the absence of the 28 year old ETF industry chatter about the next great product innovation. Has the ETF product run its course in terms of innovation similar to the mutual fund, closed-end fund and unit investment trust?

The lack of next blockbuster ETF product should not be viewed as a negative, but rather a reality. In fact, it is likely healthier for the industry to pivot from trying to develop the next newfangled ETF product to pouring its energy and resources into figuring out how existing ETF products can better be distributed to and used by investors. Much like many maturing industries, innovation naturally will shift from production to distribution. For ETFs, innovation on the distribution front is long overdue as the ETF industry has struggled to replicate the historic mutual fund distribution model that still successfully relies upon charging the investor a purchase price (i.e., a load) for mutual fund shares and dipping into the mutual fund’s actual assets (via a Rule 12b-1 fee) to incentivized financial intermediaries to sell fund shares. Because ETF shares trade on exchanges, this model is not available to ETF providers and they are left with reaching into their own pocket to use legitimate profits from the advisory fee to compensate intermediaries who sell shares of their ETF shares. Furthermore, it is often difficult for the ETF provider to know who to pay. On the one hand, mutual fund shareholder accounts are often held directly at the fund’s transfer agent and since these shareholders are easily identifiable, they become customers who receive direct marketing from the fund provider. ETF providers on the other hand remain in the dark about who their shareholders are, making it difficult for such shareholders to morph into their customers.

As products based on the non-transparent active ETF structure gain regulatory approval and begin to launch, the ETF industry must innovate ways to distribute these and traditional ETF products. Such innovation is especially critical for small- and mid-sized ETF sponsors that swim in the same ecosystem as three goliath ETF providers that have garnered over 80% of ETF assets under management. If a firm is not one of these goliaths, it must further contend with the fact that the best avenue for distribution leads to a handful of brokerage firms control the largest ETF distribution platforms, all with close ties to the goliaths. 

ETF BILD’s outlook for 2020 showcases the opportunity to identify the ETF distribution challenges and stimulating ideas, and thoughtful approaches to how best the lineup of ETF products can be distributed, especially by the small- and mid-sized ETF providers. New technologies, interface demands from Gen Xs, Ys and Zs and other trends may be indicators to what types of distribution innovations are necessary to ensure that ETFs, in whatever shape and form, continue to thrive.

As ETF BILD remains devoted to providing education to the industry, its founders will continue to seek out the knowledge and experience of thought leaders, providing an engaging platform to share their views and ideas. Comments are welcomed below, should you be interested in sharing your thoughts on this topic.

A Guide for Inside ETFs

The annual trek to sunny South Florida is once again upon the ETF industry; a time to reflect, prognosticate and network with our colleagues at the Inside ETFs Conference. It is an interesting time in the industry; change continues to be the only constant, but it feels like it is developing more rapidly these days. Recent regulatory rulings, fee announcements, consolidation, assets flowing into fixed income products, and perhaps fundamental shifts in operational strategies can all pose challenges for the industry in the coming year.

The big three ETF providers remain in complete control of the assets in the industry but there continues to be sizeable pockets of opportunity for the more niche players. As assets continue to flow into ETFs, there remains a significant amount of revenue opportunity in the not fully developed areas such as the alternative/thematic investment themes.

Issuers need to adapt to take advantage of the many opportunities the changes will bring as they come into focus in 2020. These include the use of technology, applying regulatory easing to their advantage, investors’ need for performance driven products in a changing market environment, and reaching distribution channels digitally to name a few.

The Inside ETFs Conference will showcase many of these points during the impressive panel discussions featuring prominent speakers. However, it’s the conversations in the hallways, at the dinner tables, the cocktail hours, and of course, the hotel pool cabanas that may be more informative.

We anticipate the following to be key topics discussed inside and outside the conference that will influence the decisions we make as industry professionals.

   ETF BILD welcomes all comments and suggestions.

ETF BILD Represented at Industry Conference

At ETF Global’s fall ETP Forum, co-founders John Jacobs and Bibb Strench participated in a panel discussion on regulatory, industry and legal issues in the ETF industry. The discussion included developments surrounding product approval process, custom baskets, nontransparent ETFs, and the SEC’s “ETF Rule.”

ETP Forum is a comprehensive one day program that has been built upon the premise of allowing Advisors & Institutions the opportunity to take a deep dive into the most relevant investment themes this year. ETF Global  (ETFG®) is a leading, independent provider of data, research, investment decision support applications, proprietary risk analytics and investment models for Exchange-Traded-Products.

A full look at the ETF Changing Legal & Compliance Landscape Panel can be found here:

ETF BILD Participates in Thompson Hine ETF & Alts Conference

ETF BILD Co-Founders Bibb Strench, John Jacobs, Richard Keary, and Justin Meise discussed converting mutual funds to ETFs and its implication on the industry at the Thompson Hine ETF & Alts Conference in New York City on September 18, 2019.

Other conference participants included NYSE, Natixis, JMP Securities, CBOE, and FS Investments.

Regulatory, Operational Headwinds Slowing But Not Stopping ETF Innovation

The recent conversation from the SEC referencing the competitiveness of the ETF industry points a finger at some of the challenges the industry faces but there remains plenty of opportunity. The large firms have scale, thus access to larger concentration of AUM; however, the smaller players have the entrepreneurial spirit and the strength of innovation, which built this industry and continues to live in its DNA. Innovation will keep the upstart ETF managers in this business and give them the potential to thrive.

Interesting products continue to come to the market exploring such investment opportunities as space, crypto, blockchain, robotics, clean energy and others. Advancements in index creation technology are building efficiencies and refinement in the production of dynamic indexes, long/shorts, multi-asset, multi-factor and other innovative strategies. The process in which a manager can launch an ETF today as compared to 5 years is much faster and cheaper.

But product differentiation by itself will not attract assets. Seed capital and distribution continue to haunt these nascent ETF managers in growing AUM.  Finding solutions for these problems plagues the industry. The solutions will not come from the larger ETF providers, but from the nimbler and more inspired firms. They must find a way or languish with missed opportunities.

The SEC Division of Investment Management’s approval of Precidian’s ActiveShares and expected approval of additional non-transparent actively managed structures, should open additional doors of opportunity by making available a product that combines mutual fund actively managed capability with ETF tax efficiencies; in other words, a killer app.  These long-anticipated products will bring new users and issuers to the ETF market.  It won’t be an overnight success but a platform to continue to provide solutions for investors.

Another concept that may occur soon when certain regulatory and operational issues are solved is the conversions of Mutual Funds to ETFs. This is a significant opportunity for the ETF industry; a potential game changer, especially when combined with actively-managed, non-transparent ETFs. ETF BILD is taking a deeper look at this development and will provide an in-depth analysis in upcoming content pieces.

Despite all these exciting industry developments the structural challenges that the SEC is investigating still exist. Market structure for low liquidity products, costs and approval process for access to wire-house distribution channels, systemic risks of concentration in custodians and indexers and seed capital to name a few that need to be addressed.

ETF BILD applauds the SEC’s initiatives, including its new outreach initiative targeted at small and mid-sized mutual fund and ETF sponsors. We believe strongly that the smaller and mid-sized ETF providers need a voice in SEC/FINRA rule making process for ETFs. We are also aware of the challenges of having a government regulatory organization interfere in the competitive landscape of an industry. The big ETF providers (iShares, Vanguard, State Street) built this industry and thus have first mover advantage and were the first to build scale into their operations. They should not be punished for that but there also needs to be a proper environment for growth.

Innovation does not just come in the form of new investing themes but in looking at the challenges the industry faces and to find the solutions the industry needs to keep creating opportunities. There are solutions for these challenges, but they won’t all be discovered by the large ETF providers without the input of the more inventive, entrepreneurial and innovative ETF industry participants.  Those whose businesses are in jeopardy because of the challenges of raising AUM.

Changes to the ETF industry either through regulation or in best practices can ensure that growth opportunities for small and mid-sized fund companies exist is a critical discussion. We welcome all comments and policy suggestions from our readers.