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Exchange-Traded Funds Face SEC Scrutiny

Exchange-traded funds (ETFs) are the latest investment product to find themselves in the hot seat with the Securities and Exchange Commission (SEC). At a Senate Banking subcommittee hearing held today, the SEC announced that it was launching a sweeping review of exchange-traded funds.

Among other things, the SEC says it will be looking at investor disclosures, the transparency of the underlying instruments in which ETFs invest, liquidity levels, fair valuations, and the potential impact of ETFs on market volatility.

The SEC’s review also entails “gathering and analyzing detailed information about specific products,” said SEC Investment Management Director Eileen Rominger.

Recent scrutiny of exchange-traded products has been fueled, in part, by the growth of more complex exchange-traded products that many experts contend are far too complex and confusing for the average retail investor. In particular, regulators are concerned about leveraged and inverse ETFs – funds designed to amplify short-term returns by using debt and derivatives.

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