The Senate Banking Securities Subcommittee held a hearing today on Exchange-Traded Funds (ETF), focusing on their potential impact on market volatility, systemic risk, trading practices and small-business capital formation.  This examination of ETFs follows the FSB’s exploratory ETF review (see FSM Report ETF) and the FSB’s decision last week to target them for possible regulation (see Client Report SYSTEMIC47).  Chairman Reed (D-RI) supported new rules for ETFs that prevent retail investors from holding complex structures, noting that the FSOC is assessing certain ETF structures as a form of systemic risk (a point noted also when Secretary Geithner gave his FSOC report, as analyzed in Client Report FSOC5).  The SEC is currently updating its regulatory scheme for investment companies, including ETF sponsors.  This report analyzes today’s session, which also touched on the role of custody banks in this sector.

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