SEC Proposing to block leveraged ETF!

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TeeDee
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SEC Proposing to block leveraged ETF!

Post by TeeDee »

Just received this from ProShare

Dear ProShares Shareholder,
I am writing to let you know about an unprecedented proposal from the Securities and Exchange Commission (“SEC”) that would make it more burdensome to buy, or even prevent you from buying, leveraged and inverse funds, such as the ones offered by ProShares. You have the right to offer your view on these proposed regulations, which you can do by submitting comments to the SEC through www.fundcomments.com.
The Proposed Regulations
Under the proposed regulations, you would be required to provide extensive personal financial and other information and be evaluated to determine if you will be allowed to buy leveraged and inverse funds. This would be the case even if you make your own investment decisions or you have engaged a financial professional to make those decisions for you.
We strongly believe the proposed regulations are:
1. Bad for Investors. If the proposal is adopted, some investors who could benefit from the enhanced return and portfolio protection potential of leveraged and inverse funds could be prevented from buying them by an overly burdensome qualification process. Brokerage firms could even stop offering these funds altogether due to the difficulty of implementing the regulations.
2. Unnecessary. The SEC has not shown there is a problem that needs to be solved with respect to leveraged and inverse funds. They fail to show why these funds should be treated differently than tens of thousands of other public securities, each with their own characteristics and risks.
3. A Dangerous Precedent. Requiring you to qualify to purchase a security in the public markets would be an unjustified break with how the SEC’s regulation of the sale of securities in the public markets has worked for nearly 90 years. The proposal would be at odds with our long-standing system that gives investors and their advisors the freedom to make their own investment decisions.
What You Can Do
You have the right to voice your view by submitting comments on this proposal. The SEC is required to take your comments into consideration in deciding whether to go forward with the rule as proposed.
If you would like to let your views be known, you can submit comments to the SEC through www.fundcomments.com. The deadline to make comments is March 24, 2020, so consider acting now.
(continued on reverse)

We encourage you to submit your views on the proposed regulations, including, if you agree, that:
• Leveraged and inverse funds are important to you, and they allow you to seek enhanced returns or help you protect your portfolio.
• You are capable of understanding leveraged and inverse funds and their performance characteristics, and you don’t want a third party evaluating your capability to do so and potentially preventing you from buying them.
• You want to preserve the long-standing free public markets where investors and their advisors have the freedom to buy public securities without additional government-imposed limitations on investor choice.
***
Having spoken with ProShares shareholders over the last 13 years, I believe it is likely you value leveraged and inverse funds. I hope you will join me in telling the SEC you want to maintain your current access to these funds.
For more information about the proposal, visit www.sec.gov/rules/proposed.shtml and go to Release No. 34-87607, dated November 25, 2019. If you have questions for us regarding this matter or how to submit comments, please contact our investor line at 888-776-3898, or email us at secproposal@proshares.com.
As always, thank you for having made the decision to be a ProShares shareholder. We look forward to continuing to provide exchange-traded funds that empower you to pursue your financial objectives.
Sincerely,
Michael L. Sapir Chairman
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JoMoney
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Re: SEC Proposing to block leveraged ETF!

Post by JoMoney »

Sounds like the SEC is just proposing additional disclosure requirements, and that brokerages that choose to sell these instruments will be required to do more due diligence before deciding the suitability for their clients.
Good on 'em

Brokerages already have to vet clients for trading in derivatives like options, makes sense to me that they should also be vetting clients using ETF's that are derivative of derivatives...
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quantAndHold
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Re: SEC Proposing to block leveraged ETF!

Post by quantAndHold »

It wasn’t that long ago that the SEC was considering banning leveraged and inverse ETF’s altogether. Apparently a nonzero number of people shoot themselves in the foot financially because they don’t understand what they’re speculating in.

Can’t say i would be too upset. These have their place, but they get misused a lot by people who think they’re a long term investment.
Yes, I’m really that pedantic.
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whodidntante
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Re: SEC Proposing to block leveraged ETF!

Post by whodidntante »

This sounds like a bogus journey.
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JoMoney
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Re: SEC Proposing to block leveraged ETF!

Post by JoMoney »

whodidntante wrote: Wed Jan 29, 2020 8:39 pm This sounds like a bogus journey.
Still just a proposal, we'll see if those on the "Excellent Adventure" ever "Face the Music"
Last edited by JoMoney on Wed Jan 29, 2020 8:47 pm, edited 1 time in total.
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ARoseByAnyOtherName
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Re: SEC Proposing to block leveraged ETF!

Post by ARoseByAnyOtherName »

I hear the SEC refers to this internally as the “HEDGEFUNDIE HAIRCUT”
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Phineas J. Whoopee
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Re: SEC Proposing to block leveraged ETF!

Post by Phineas J. Whoopee »

Superceded downthread.
Last edited by Phineas J. Whoopee on Wed Jan 29, 2020 9:07 pm, edited 1 time in total.
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Re: SEC Proposing to block leveraged ETF!

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Ferdinand2014
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Re: SEC Proposing to block leveraged ETF!

Post by Ferdinand2014 »

This is good news. Thank you for letting us know.
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Re: SEC Proposing to block leveraged ETF!

Post by oldcomputerguy »

Just to note, this is a proposed regulation by the SEC (as opposed to proposed legislation from Congress), and it has been published for public comment, and so discussion of this topic is allowed under Bogleheads forum policy:
Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.
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Re: SEC Proposing to block leveraged ETF!

Post by LadyGeek »

I removed an off-topic comment. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.
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ltdshred
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Re: SEC Proposing to block leveraged ETF!

Post by ltdshred »

This sucks because the lack of clarity on the rule and I am upset
ChrisBenn
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Re: SEC Proposing to block leveraged ETF!

Post by ChrisBenn »

Looks like "due diligence" requirements similar to options approval - so could be a non issue or a roadblock, depending on how (or really if) brokerages implement it. I suspect places like fidelity, ameritrade, etc. would be fine. I wonder about M1 though - and their ability to roll out a "new feature" (when sometimes - software and support wise - they can't seem to get out of their own way).

BIG EDIT: Okay, that's what I get for skimming. -- in looking at the document it's actually about formalizing risk limits, and reporting on any fund that uses derivates. While they call out daily reset, it doesn't look like it only applies to that (from my second read it looks like this might apply to, say, NTSX and PSLDX as well). None of the requirements look unreasonable to a non professional, but I don't really have a good understanding of what it means on the fund side to limit leverage based on a VaR test (reference index or absolute) - I get what the component parts are, but not on the implications (does this make existing funds more expensive, just more annoying to administer, or non viable). That impact is what I would like to see from pro shares, et. Al.
Last edited by ChrisBenn on Wed Jan 29, 2020 9:53 pm, edited 1 time in total.
Stump909
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Re: SEC Proposing to block leveraged ETF!

Post by Stump909 »

The SEC has been monitoring these app brokerages for awhile, and their horrible compliance standards. For example Robinhood's unapproved "FDIC" protected savings account and their repeated unlimited leverage glitches. Fidelity made me sign a disclosure before allowing me to buy any leveraged fund, so I'd wager there's a batch a brokerages not adhereing to standard practices.
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Re: SEC Proposing to block leveraged ETF!

Post by ChrisBenn »

A fund would satisfy the proposed relative VaR test if the VaR of its entire portfolio does define a “designated reference index” as an unleveraged index that is selected by the derivatives not exceed 150% of the VaR of its designated reference index. The proposed rule would risk manager, and that reflects the markets or asset classes in which the fund invests.
(pg 98)

Again, caveat in that I may be misunderstanding things, but if you have something that does straight leverage on the underlying - i.e. UPRO / SPY (close enough), then I think this limits the leverage to ~1.5x.

(VaR parameters are 99% confidence with 20 trading day window)
Last edited by ChrisBenn on Wed Jan 29, 2020 10:24 pm, edited 1 time in total.
caklim00
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Re: SEC Proposing to block leveraged ETF!

Post by caklim00 »

Looks like this has been out there since at least 2016: https://www.sec.gov/comments/s7-24-15/s72415.shtml
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Re: SEC Proposing to block leveraged ETF!

Post by ChrisBenn »

Yeah, the new sec doc is basically re-proposing that (the 2015 version) with amendments / updates.

From page 294
Existing leveraged/inverse ETFs rely on exemptive relief, which the Commission has not granted to a leveraged/inverse ETF sponsor since 2009.
Interesting - and then seems to imply that, say, NTSX is not considered a "leveraged" etf under their rules (even though it trades in derivatives) - so it's unclear if it would be subject to their VaR rule.

They definitely are focused on daily reset and inverse funds in almost all their discussion - but I don't see anything that limits their definition to those.

From page 322
A fund that meets the definition of a “leveraged/inverse investment vehicle” in the proposed sales practices rules would not have to comply with the VaR-based leverage risk limit under proposed rule 18f-4, provided the fund limits the investment results it seeks to 300% of the return (or inverse of the return) of the underlying index and discloses in its prospectus that it is not subject to the proposed limits.
So basically a fund just has to identify itself as this type of fund and it is exempt from the VaR test.

I'm back to not understanding what is really then different for, say, UPRO (3x SP500) now vs. under this proposed rule set.
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Re: SEC Proposing to block leveraged ETF!

Post by willthrill81 »

I'm none too pleased about this and have voiced my concern to the SEC already. I don't need the SEC or anyone else to determine whether I am capable for deciding for myself whether I should own a leveraged ETF.
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Re: SEC Proposing to block leveraged ETF!

Post by AlphaLess »

JoMoney wrote: Wed Jan 29, 2020 8:21 pm Sounds like the SEC is just proposing additional disclosure requirements, and that brokerages that choose to sell these instruments will be required to do more due diligence before deciding the suitability for their clients.
Good on 'em

Brokerages already have to vet clients for trading in derivatives like options, makes sense to me that they should also be vetting clients using ETF's that are derivative of derivatives...
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Re: SEC Proposing to block leveraged ETF!

Post by dave_k »

Fidelity already required me to accept the risks before trading leveraged ETFs. This regulation could add enough of a burden that Fidelity and other brokerages decide to drop them altogether, or put them out of reach of ordinary investors. I don't need a more intrusive and possibly impenetrable barrier to buying these funds.

Investors shouldn't buy any fund, even VTI, without understanding the risks, and this should be no different for leveraged funds like UPRO. Should we have to go through something like this to buy any fund?
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JoMoney
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Re: SEC Proposing to block leveraged ETF!

Post by JoMoney »

dave_k wrote: Thu Jan 30, 2020 12:56 am... Should we have to go through something like this to buy any fund?
Yes.
https://www.finra.org/investors/learn-t ... -need-know
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Re: SEC Proposing to block leveraged ETF!

Post by dave_k »

JoMoney wrote: Thu Jan 30, 2020 1:11 am
dave_k wrote: Thu Jan 30, 2020 12:56 am... Should we have to go through something like this to buy any fund?
Yes.
https://www.finra.org/investors/learn-t ... -need-know
That page appears to be aimed at financial advisers that are recommending funds. I am referring to investors making trades themselves, typically through an online brokerage interface or app. And by"something like this" I was referring to the requirement to "provide extensive personal financial and other information and be evaluated to determine if you will be allowed to buy" (from OP/ProShares). Do you really think that should be necessary for VTI?

If we can be trusted to educate ourselves before trading VTI, or an individual stock, we should also be able to do the same for a leveraged fund. In fact, individual stocks may carry more risk than a 3x leveraged index fund like UPRO, yet we're not required to prove we're worthy before trading those.
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JoMoney
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Re: SEC Proposing to block leveraged ETF!

Post by JoMoney »

dave_k wrote: Thu Jan 30, 2020 1:41 am
JoMoney wrote: Thu Jan 30, 2020 1:11 am
dave_k wrote: Thu Jan 30, 2020 12:56 am... Should we have to go through something like this to buy any fund?
Yes.
https://www.finra.org/investors/learn-t ... -need-know
That page appears to be aimed at financial advisers that are recommending funds. I am referring to investors making trades themselves, typically through an online brokerage interface or app. And by"something like this" I was referring to the requirement to "provide extensive personal financial and other information and be evaluated to determine if you will be allowed to buy" (from OP/ProShares). Do you really think that should be necessary for VTI?

If we can be trusted to educate ourselves before trading VTI, or an individual stock, we should also be able to do the same for a leveraged fund. In fact, individual stocks may carry more risk than a 3x leveraged index fund like UPRO, yet we're not required to prove we're worthy before trading those.
Nobody said you can't be trusted to educate yourself on the suitability of buying leveraged ETF's
But your broker has some responsibility to, as they do with VTI and other securities.
What brokerage are you with that didn't provide you with information on trading stocks and gather information from you before opening an account that let you trade them? These inverse/leveraged ETFs are not like other stocks, or funds of stocks, and should have additional suitability checks.
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ohai
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Re: SEC Proposing to block leveraged ETF!

Post by ohai »

I've just read part of the document so far. It seems that some of the risk management proposals are targeted at a specific kind of settlement risk that applies to some funds, but maybe not the SSO, UPRO sort of variety. SEC seems mostly concerned with repos, options, and other kinds of fixed maturity derivatives, as they cause some kind of asset crunch that might cause liquidation. Or something like that.

SEC also wants every fund company to have an official risk management division that satisfies some kind of stringent rules. What ProShares and other companies are probably concerned with is the potential new bureaucracy and compliance costs related to these new rules. New funds will be more difficult to bring to market and customers will be harder to onboard. Maybe expense ratios will increase for all shareholders.

Anyway, I'm still reading it, so hopefully will develop a better understanding later. However, I am not getting the impression that SSO, UPRO sort of stuff is in danger of extinction.

Regarding suitability in general - I understand the need for this, but at the same time, think it's a bit unfair that extremely volatile normal stocks are exempt from the requirements imposed on relatively benign derivatives using funds. Regulators just don't like complex stuff.
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Re: SEC Proposing to block leveraged ETF!

Post by typical.investor »

JoMoney wrote: Thu Jan 30, 2020 1:51 am
dave_k wrote: Thu Jan 30, 2020 1:41 am
JoMoney wrote: Thu Jan 30, 2020 1:11 am
dave_k wrote: Thu Jan 30, 2020 12:56 am... Should we have to go through something like this to buy any fund?
Yes.
https://www.finra.org/investors/learn-t ... -need-know
That page appears to be aimed at financial advisers that are recommending funds. I am referring to investors making trades themselves, typically through an online brokerage interface or app. And by"something like this" I was referring to the requirement to "provide extensive personal financial and other information and be evaluated to determine if you will be allowed to buy" (from OP/ProShares). Do you really think that should be necessary for VTI?

If we can be trusted to educate ourselves before trading VTI, or an individual stock, we should also be able to do the same for a leveraged fund. In fact, individual stocks may carry more risk than a 3x leveraged index fund like UPRO, yet we're not required to prove we're worthy before trading those.
Nobody said you can't be trusted to educate yourself on the suitability of buying leveraged ETF's
But your broker has some responsibility to, as they do with VTI and other securities.
What brokerage are you with that didn't provide you with information on trading stocks and gather information from you before opening an account that let you trade them? These inverse/leveraged ETFs are not like other stocks, or funds of stocks, and should have additional suitability checks.
In that case, everyone who has a mortgage should also be subject to additional suitability checks. I mean why should it be easier to get a big mortgage and buy a normal mutual fund. If the market crashes and they lose their job, they could suffer big losses having to sell to cover their payment.

If investing via borrowed money requires additional suitability checks so be it, but so be it for everyone in all cases.
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Re: SEC Proposing to block leveraged ETF!

Post by nisiprius »

I don't see how this is "blocking" anything, "preventing" anything, causing anyone to "lose your ability" to do anything. Nor do I see how it amounts to "the SEC or anyone else [determining] whether I am capable for deciding for myself whether I should own a leveraged ETF."

It's requiring brokerages and advisors to document that investors know what they're doing. It's red tape, yes. It sounds like the red tape needed to trade options or buy stocks on margin. I think I even needed to sign my name to answers to some probing questions just to open a regular brokerage account.

The Investment Company Act of 1940 puts many restrictions on what you can buy in mutual fund or ETF form. These include liquidity requirements, diversification requirements, and limits on leverage. If you don't want these limitations, buy hedge funds. Understandably, some mutual fund companies are forever trying to push the envelope. Interval funds (apparently exploding in popularity) push the envelope on liquidity. Leveraged ETFs push the boundaries on leverage. Understandably the SEC is forever pushing back.

I don't think this is about sophisticated individual investors using multiple LETFs as tools as part of a strategy. I don't even think it's about the poster who asked
if we are betting long term, with the set it and forget it method, why not utilize leveraged ETF's? Such as SSO? I understand the expense ration[sic] is higher than the target, but the 2X return should easily cancel that out.
because at least this poster took the time to ask.

But (contrary to what Sapir said) the proposal does give evidence of a problem:
FINRA has sanctioned a number of brokerage firms for making unsuitable sales of leveraged/inverse ETFs. More recently, the Commission has brought enforcement actions against investment advisers for, among other things, soliciting advisory clients to purchase leveraged/inverse ETFs for their retirement accounts with long-term time horizons, and holding those securities in the client accounts for months or years.
Brokerages and advisers!
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Wiggums
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Re: SEC Proposing to block leveraged ETF!

Post by Wiggums »

Leveraged and inverse ETFs typically are designed to achieve their stated performance objectives on a daily basis. Some investors might invest in these ETFs with the expectation that the ETFs may meet their stated daily performance objectives over the long term as well. Investors should be aware that performance of these ETFs over a period longer than one day can differ significantly from their stated daily performance objectives.

I don’t have the information to know why this issue has come up many years later. I’m personally not against an additional step to have this type of investment available to me. I didn’t read anything to indicate that this investment type was being blocked.
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Re: SEC Proposing to block leveraged ETF!

Post by snailderby »

PluckyDucky wrote: Wed Jan 29, 2020 9:00 pm SEC Proposal here: https://www.sec.gov/rules/proposed/2019/34-87607.pdf
:beer Thanks for linking to the actual proposed rule. A few excerpts:
The proposed sales practices rules would require broker-dealers and investment
advisers to exercise due diligence on retail investors before approving retail investor accounts to
invest in leveraged/inverse investment vehicles.
Under both of the proposed sales practices rules, a
firm could approve the retail investor’s account to buy or sell shares of leveraged/inverse
investment vehicles only if the firm had a reasonable basis to believe that the investor is capable
of evaluating the risks associated with these products.
The approval and due diligence requirements under the proposed rules are modeled after
current FINRA options account approval requirements for broker-dealers.
The proposed due diligence requirement provides that a firm must exercise due diligence
to ascertain the essential facts relative to the retail investor, his or her financial situation, and
investment objectives. A firm must seek to obtain, at a minimum, certain information about its
retail investor’s:
• investment objectives (e.g., safety of principal, income, growth, trading profits,
speculation) and time horizon;
• employment status (name of employer, self-employed or retired);
• estimated annual income from all sources;
• estimated net worth (exclusive of family residence);
• estimated liquid net worth (cash, liquid securities, other);
• percentage of the retail investor’s liquid net worth that he or she intends to invest in
leveraged/inverse investment vehicles; and
• investment experience and knowledge (e.g., number of years, size, frequency and type of
transactions) regarding leveraged/inverse investment vehicles, options, stocks and bonds,
commodities, and other financial instruments.
Based on its evaluation of this information, the firm would be required specifically to approve or
disapprove the retail investor’s account for buying or selling shares of leveraged/inverse
investment vehicles.
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Re: SEC Proposing to block leveraged ETF!

Post by snailderby »

And concerning the definition of leveraged funds, the SEC is specifically requesting comment on that:
The proposed sales practices rules would define a “leveraged/inverse investment vehicle” to mean a registered investment company or an exchange-listed commodity- or currency-based trust or fund (a “listed commodity pool”), that seeks, directly or indirectly, to provide investment returns that correspond to the performance of a market index by a specified multiple, or to provide investment returns that have an inverse relationship to the performance of a market index, over a predetermined period of time.
We request comment on the definition of the term “leveraged/inverse investment vehicle” in the proposed sales practices rules. . . . Should the definition instead only include an inverse fund that seeks investment returns that exceed the inverse performance of a market index by a specified multiple (e.g., -1.5 or lower)? . . . . Generally, the extent to which a fund’s performance can be expected to deviate from the multiple or inverse multiple of the performance of its index when held over longer periods is larger for funds that track a multiple or inverse multiple of the performance of an index over shorter time intervals, as those funds typically rebalance their portfolios more frequently. Should we specify a time period in the definition and, if so, what time period would be appropriate? For example, should the definition only include a fund that seeks investment returns that correspond to a multiple or inverse multiple of an index over a fixed period of time that is less than a year, a quarter, or a month?
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JoMoney
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Re: SEC Proposing to block leveraged ETF!

Post by JoMoney »

typical.investor wrote: Thu Jan 30, 2020 4:04 am...
In that case, everyone who has a mortgage should also be subject to additional suitability checks. I mean why should it be easier to get a big mortgage and buy a normal mutual fund. If the market crashes and they lose their job, they could suffer big losses having to sell to cover their payment.

If investing via borrowed money requires additional suitability checks so be it, but so be it for everyone in all cases.
Traditional stock mutual funds and a home mortgage are different instruments with different risks, but they do have their own form of suitability checks and additional disclosures. Have you ever applied for a mortgage and signed mortgage documents? I seriously doubt whatever this process will involve will be anywhere near as intrusive in your personal information or require as many disclosures.
The information about this so far suggests a framework similar to adding the ability to trade options in a brokerage account - which is a relatively trivial process - but at least it makes the clients stop for a moment and realizing there is something different here that they should be paying attention to.
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privatefarmer
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Re: SEC Proposing to block leveraged ETF!

Post by privatefarmer »

Appreciate all the anaslysis. About a week ago interactive brokers had me fill out an online form/questionnaire detailing my years of experience trading options etc in order to continue to trade leveraged ETFs. I am hoping that this is all that will be required.

What is the general consensus then amongst those who have read the proposal? Does it seem like a few simple questions/signed waiver of liability by the investor is going to do the trick or do you think the SEC is either going to completely block these products from being traded or will require very strenuous requirements on the brokerages/investors to qualify to trade products?

I feel I fully understand the risks involved with leveraged ETFs but I am just an average personal investor. Not an accredited investor and not a professional. Anyhow I hope I’m able to continue to trade leveraged ETFs as a part of my portfolio
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JoMoney
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Re: SEC Proposing to block leveraged ETF!

Post by JoMoney »

There are multiple aspects to this, but it looks to me as much to protect the brokerages/industry as it is to protect the clients (search "lawyer leveraged etf" and the tons of results you'll see are an indication of what I'm talking about")

This snip from the proposal doesn't look any different than requesting an account to trade options:
https://www.sec.gov/rules/proposed/2019/34-87607.pdf

... The proposed due diligence requirement provides that a firm must exercise due diligence
to ascertain the essential facts relative to the retail investor, his or her financial situation, and
investment objectives. A firm must seek to obtain, at a minimum, certain information about its
retail investor’s:
• investment objectives (e.g., safety of principal, income, growth, trading profits,
speculation) and time horizon;
• employment status (name of employer, self-employed or retired);
• estimated annual income from all sources;
• estimated net worth (exclusive of family residence);
• estimated liquid net worth (cash, liquid securities, other);
• percentage of the retail investor’s liquid net worth that he or she intends to invest in
leveraged/inverse investment vehicles; and
• investment experience and knowledge (e.g., number of years, size, frequency and type of
transactions) regarding leveraged/inverse investment vehicles, options, stocks and bonds,
commodities, and other financial instruments

Based on its evaluation of this information, the firm would be required specifically to approve or
disapprove the retail investor’s account for buying or selling shares of leveraged/inverse
investment vehicles. If the firm approves the account, the approval must be in writing...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: SEC Proposing to block leveraged ETF!

Post by Texanbybirth »

Wiggums wrote: Thu Jan 30, 2020 8:38 am Leveraged and inverse ETFs typically are designed to achieve their stated performance objectives on a daily basis. Some investors might invest in these ETFs with the expectation that the ETFs may meet their stated daily performance objectives over the long term as well. Investors should be aware that performance of these ETFs over a period longer than one day can differ significantly from their stated daily performance objectives.
But, e.g., that information is listed in page 2 of the UPRO (Summary) Prospectus I received the first time I bought the shares, and that I agreed that I had read and understood by attesting to Fidelity before I could even purchase the shares.

This is an interesting proposal. I suppose I can see both sides of this issue, and I wouldn't be totally uncomfortable with giving the information to Fidelity that poster "snailderby" so nicely summarized for us. I think, after review, I would still be qualified to make these investments, and that this process wouldn't make me shy away from making these investments. I am well-educated and in my right mind about the risks, and not just because I read a thread on BH.
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Re: SEC Proposing to block leveraged ETF!

Post by watchnerd »

typical.investor wrote: Thu Jan 30, 2020 4:04 am
In that case, everyone who has a mortgage should also be subject to additional suitability checks. I mean why should it be easier to get a big mortgage and buy a normal mutual fund. If the market crashes and they lose their job, they could suffer big losses having to sell to cover their payment.

If investing via borrowed money requires additional suitability checks so be it, but so be it for everyone in all cases.
How is this proposal in any way comparable to the paperwork required to get a mortgage?

I don't mean semi-fake 'online pre-approval'....I mean the actual 10-20 pages of stuff you have to initial/sign.
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Re: SEC Proposing to block leveraged ETF!

Post by Dottie57 »

dave_k wrote: Thu Jan 30, 2020 1:41 am
JoMoney wrote: Thu Jan 30, 2020 1:11 am
dave_k wrote: Thu Jan 30, 2020 12:56 am... Should we have to go through something like this to buy any fund?
Yes.
https://www.finra.org/investors/learn-t ... -need-know
That page appears to be aimed at financial advisers that are recommending funds. I am referring to investors making trades themselves, typically through an online brokerage interface or app. And by"something like this" I was referring to the requirement to "provide extensive personal financial and other information and be evaluated to determine if you will be allowed to buy" (from OP/ProShares). Do you really think that should be necessary for VTI?

If we can be trusted to educate ourselves before trading VTI, or an individual stock, we should also be able to do the same for a leveraged fund. In fact, individual stocks may carry more risk than a 3x leveraged index fund like UPRO, yet we're not required to prove we're worthy before trading those.
Not the same thing. Leverage is a different animal. Discussions on leverage here on the forum leave me a bit dizzy with the the implications. A plain basic investor may think they understand but really don’t. And that person doesn’t understand what they don’t understand.
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Re: SEC Proposing to block leveraged ETF!

Post by samsdad »

<snip>...
• employment status (name of employer, self-employed or retired);
• estimated annual income from all sources;
• estimated net worth (exclusive of family residence);
• estimated liquid net worth (cash, liquid securities, other);
• percentage of the retail investor’s liquid net worth that he or she intends to invest in
leveraged/inverse investment vehicles; and
• investment experience and knowledge (e.g., number of years, size, frequency and type of
transactions) regarding leveraged/inverse investment vehicles, options, stocks and bonds, commodities, and other financial instruments.
Based on its evaluation of this information, the firm would be required specifically to approve or disapprove the retail investor’s account for buying or selling shares of leveraged/inverse
investment vehicles.
The first 4 of these 6 items have exactly zero correlation to investing savvy. For example, there are many people who are winners of the so-called sperm lottery that would ostensibly fulfill the first 4 items in spite of themselves; hence the phrase “more money than brains.” You read about these “fortunate sons” from time to time in the news. There’s simply no legitimate reason why these items are here, other than to pick winners and losers—those that can participate in these investments and those that can’t. If I have a net worth of $100 and want to invest the $50 bill I found on the sidewalk on the way to the unemployment office in a leveraged ETF, do you think there should be a law basically prohibiting this, in the United States of America?

Next, how are they gonna monitor some of these items? Is this a one-time check? I own a small business that I can count toward my net worth. Am I going to be required to get it appraised? Every year? Every time there’s a market crash? What if the market goes on a huge bull run, but my business’ sales dwindle? Will I be prohibited from buying more, or rebalancing from UPRO to TMF quarterly? Will I be forced to sell my positions?

Moreover, how do we count my personal “human capital” as a middle-aged licensed attorney towards my net worth? Who’s gonna tell me what I’m “worth” with a law license? Would it be different if I was whitecoatinvestor?

But here’s my real beef: item no. 6. I guess there are some folks who truly believe that they know more than others, and that some people are just plain ignorant—and therefore need to be taken care of not just for their own good but for the collective good. This stuff smells like that sort of presumptuous position. This slippery slope proposed regulation could be applied to individual stocks as well as someone noted above. Are we really in favor of preventing people with low net-worths or spotty employment from investing in anything but index funds? What about college students? Should newly-minted physicians, who oftentimes have a very negative net worth due to student loans, be prevented from investing in these vehicles until later on in life? Here, in the “land of opportunity”?

Wouldn’t it be simpler to just let people take the “assumption of the risk” these investments have on their own? Wouldn’t a simple BIG WARNING DISCLAIMER like we already have inform them well enough?
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Re: SEC Proposing to block leveraged ETF!

Post by celerity »

privatefarmer wrote: Thu Jan 30, 2020 9:25 am Appreciate all the anaslysis. About a week ago interactive brokers had me fill out an online form/questionnaire detailing my years of experience trading options etc in order to continue to trade leveraged ETFs. I am hoping that this is all that will be required.
That’s the case in the EU. Perfectly reasonable. However, I wonder what this regulation will mean for us non-US residents who invest in US domiciled ETFs.
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Re: SEC Proposing to block leveraged ETF!

Post by watchnerd »

samsdad wrote: Thu Jan 30, 2020 12:52 pm
<snip>...
• employment status (name of employer, self-employed or retired);
• estimated annual income from all sources;
• estimated net worth (exclusive of family residence);
• estimated liquid net worth (cash, liquid securities, other);
• percentage of the retail investor’s liquid net worth that he or she intends to invest in
leveraged/inverse investment vehicles; and
• investment experience and knowledge (e.g., number of years, size, frequency and type of
transactions) regarding leveraged/inverse investment vehicles, options, stocks and bonds, commodities, and other financial instruments.
Based on its evaluation of this information, the firm would be required specifically to approve or disapprove the retail investor’s account for buying or selling shares of leveraged/inverse
investment vehicles.
The first 4 of these 6 items have exactly zero correlation to investing savvy. For example, there are many people who are winners of the so-called sperm lottery that would ostensibly fulfill the first 4 items in spite of themselves; hence the phrase “more money than brains.” You read about these “fortunate sons” from time to time in the news. There’s simply no legitimate reason why these items are here, other than to pick winners and losers—those that can participate in these investments and those that can’t. If I have a net worth of $100 and want to invest the $50 bill I found on the sidewalk on the way to the unemployment office in a leveraged ETF, do you think there should be a law basically prohibiting this, in the United States of America?

Next, how are they gonna monitor some of these items? Is this a one-time check? I own a small business that I can count toward my net worth. Am I going to be required to get it appraised? Every year? Every time there’s a market crash? What if the market goes on a huge bull run, but my business’ sales dwindle? Will I be prohibited from buying more, or rebalancing from UPRO to TMF quarterly? Will I be forced to sell my positions?

Moreover, how do we count my personal “human capital” as a middle-aged licensed attorney towards my net worth? Who’s gonna tell me what I’m “worth” with a law license? Would it be different if I was whitecoatinvestor?

But here’s my real beef: item no. 6. I guess there are some folks who truly believe that they know more than others, and that some people are just plain ignorant—and therefore need to be taken care of not just for their own good but for the collective good. This stuff smells like that sort of presumptuous position. This slippery slope proposed regulation could be applied to individual stocks as well as someone noted above. Are we really in favor of preventing people with low net-worths or spotty employment from investing in anything but index funds? What about college students? Should newly-minted physicians, who oftentimes have a very negative net worth due to student loans, be prevented from investing in these vehicles until later on in life? Here, in the “land of opportunity”?

Wouldn’t it be simpler to just let people take the “assumption of the risk” these investments have on their own? Wouldn’t a simple BIG WARNING DISCLAIMER like we already have inform them well enough?
This is the same type of stuff I have to disclose for "qualified investor" offerings like private equity or pre-IPO.

It's boilerplate CYA legal stuff to protect the trustees and issuers from being sued.

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Re: SEC Proposing to block leveraged ETF!

Post by dave_k »

typical.investor wrote: Thu Jan 30, 2020 4:04 am
JoMoney wrote: Thu Jan 30, 2020 1:51 am
dave_k wrote: Thu Jan 30, 2020 1:41 am
JoMoney wrote: Thu Jan 30, 2020 1:11 am
dave_k wrote: Thu Jan 30, 2020 12:56 am... Should we have to go through something like this to buy any fund?
Yes.
https://www.finra.org/investors/learn-t ... -need-know
That page appears to be aimed at financial advisers that are recommending funds. I am referring to investors making trades themselves, typically through an online brokerage interface or app. And by"something like this" I was referring to the requirement to "provide extensive personal financial and other information and be evaluated to determine if you will be allowed to buy" (from OP/ProShares). Do you really think that should be necessary for VTI?

If we can be trusted to educate ourselves before trading VTI, or an individual stock, we should also be able to do the same for a leveraged fund. In fact, individual stocks may carry more risk than a 3x leveraged index fund like UPRO, yet we're not required to prove we're worthy before trading those.
Nobody said you can't be trusted to educate yourself on the suitability of buying leveraged ETF's
But your broker has some responsibility to, as they do with VTI and other securities.
What brokerage are you with that didn't provide you with information on trading stocks and gather information from you before opening an account that let you trade them? These inverse/leveraged ETFs are not like other stocks, or funds of stocks, and should have additional suitability checks.
In that case, everyone who has a mortgage should also be subject to additional suitability checks. I mean why should it be easier to get a big mortgage and buy a normal mutual fund. If the market crashes and they lose their job, they could suffer big losses having to sell to cover their payment.

If investing via borrowed money requires additional suitability checks so be it, but so be it for everyone in all cases.
At least with an ETF - leveraged, inverse, or otherwise - you can't lose more than what you paid for it.

JoMoney: As I mentioned above, I used Fidelity, and they did make me acknowledge a disclosure about the additional risks of leveraged funds. That's fine, and maybe it should be required, but the proposed regulations could apparently be much more obtrusive than that. Fidelity could decide that it's not even worth offering them any more, or they could deny people who fully understand the risk and have a long horizon but not a lot to invest yet. I think samsdad summed it up pretty well.

I have had to disclose my finances to show I'm an accredited investor for certain real estate investments, but that's understandable because the risks are particularly high, there are typically high minimums and often high fees, and the investments are much more difficult to get out of.
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Re: SEC Proposing to block leveraged ETF!

Post by willthrill81 »

Trying to protect people from themselves is a very slippery slope that basically says 'I know what you need better than you do.'
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Re: SEC Proposing to block leveraged ETF!

Post by JonnyB »

willthrill81 wrote: Thu Jan 30, 2020 5:35 pm Trying to protect people from themselves is a very slippery slope that basically says 'I know what you need better than you do.'
Unregulated leverage was a major contributor to the Great Recession which resulted in immense harm to millions of people who had nothing to do with the leverage. It would seem that regulating leverage would be in the public interest. Where you draw the lines for regulation is debatable, but having no regulation seems insupportable.
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Re: SEC Proposing to block leveraged ETF!

Post by dave_k »

JonnyB wrote: Thu Jan 30, 2020 5:54 pm
willthrill81 wrote: Thu Jan 30, 2020 5:35 pm Trying to protect people from themselves is a very slippery slope that basically says 'I know what you need better than you do.'
Unregulated leverage was a major contributor to the Great Recession which resulted in immense harm to millions of people who had nothing to do with the leverage. It would seem that regulating leverage would be in the public interest. Where you draw the lines for regulation is debatable, but having no regulation seems insupportable.
I assume you are referring to the leverage of mortgages. Of course people's finances should be vetted to qualify for mortgages, and not doing that thoroughly and not assessing the risk of bundled mortgages appropriately was the main cause of the problem. But that's very different than leveraged ETFs where you can only lose what you put in, and you're not making what's likely the largest purchase of your life with ETFs and living in them.
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Re: SEC Proposing to block leveraged ETF!

Post by dave_k »

beehivehave wrote: Thu Jan 30, 2020 6:37 pm
willthrill81 wrote: Thu Jan 30, 2020 5:35 pm Trying to protect people from themselves is a very slippery slope that basically says 'I know what you need better than you do.'
So let's outlaw auto air bags and not discourage smoking. Sometimes people don't know what is best for them. And slippery slope arguments are always silly.
Have there been studies that show a lot of people are experiencing significant damage that could be avoided by preventing them from buying leveraged or inverse ETFs? If it's a serious and widespread problem then I could understand, but I'm skeptical without seeing the evidence. If the evidence exists, please point us to it. And if so, should the solution be prevention/barriers, or better education/disclosures?
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Re: SEC Proposing to block leveraged ETF!

Post by JonnyB »

Leverage in the stock market was a big factor in the dotcom bubble and recession.
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Re: SEC Proposing to block leveraged ETF!

Post by LadyGeek »

I removed a few off-topic posts. Please stay focused on the investing aspects.
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Re: SEC Proposing to block leveraged ETF!

Post by AHTFY »

[OT comment removed by admin LadyGeek] it does make sense that the same regulations and requirements should apply to leveraged and inverse ETFs as to margin accounts. Technically, margin accounts have more risk since someone could lose more than 100%, but the risks are close enough.

But the solution seems fairly simple to me: Only margin accounts are allowed to purchased leveraged and inverse ETFs.
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Re: SEC Proposing to block leveraged ETF!

Post by dave_k »

AHTFY wrote: Thu Jan 30, 2020 9:44 pm [OT comment removed by admin LadyGeek] it does make sense that the same regulations and requirements should apply to leveraged and inverse ETFs as to margin accounts. Technically, margin accounts have more risk since someone could lose more than 100%, but the risks are close enough.

But the solution seems fairly simple to me: Only margin accounts are allowed to purchased leveraged and inverse ETFs.
[OT comment removed by admin LadyGeek] but the main problem I see with your solution is it wouldn't allow trading leveraged or inverse ETFs in IRAs (my understanding is that an IRA can't be a margin account, correct me if I'm wrong). Without the tax advantages of an IRA, some leverage strategies would perform much worse because of tax drag and taxes on gains when rebalancing. For example, "HEDGEFUNDIE's excellent adventure" (see thread of that title), which I'm doing with part of my IRA, wouldn't work as well in a taxable account.

I think the loss limiting to 100% is a significant enough difference that it deserves different treatment. In that regard, it's not much different than an individual stock. Fidelity already handles it reasonably by requiring a special disclosure to be signed acknowledging the risks of leveraged and inverse funds. If there are brokerages that don't do this, maybe they should be required to.
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Re: SEC Proposing to block leveraged ETF!

Post by LadyGeek »

I removed a few off-topic comments. As a reminder, see: Politics and Religion
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Re: SEC Proposing to block leveraged ETF!

Post by AHTFY »

dave_k wrote: Thu Jan 30, 2020 10:21 pm
AHTFY wrote: Thu Jan 30, 2020 9:44 pm [OT comment removed by admin LadyGeek] it does make sense that the same regulations and requirements should apply to leveraged and inverse ETFs as to margin accounts. Technically, margin accounts have more risk since someone could lose more than 100%, but the risks are close enough.

But the solution seems fairly simple to me: Only margin accounts are allowed to purchased leveraged and inverse ETFs.
[OT comment removed by admin LadyGeek] but the main problem I see with your solution is it wouldn't allow trading leveraged or inverse ETFs in IRAs (my understanding is that an IRA can't be a margin account, correct me if I'm wrong). Without the tax advantages of an IRA, some leverage strategies would perform much worse because of tax drag and taxes on gains when rebalancing. For example, "HEDGEFUNDIE's excellent adventure" (see thread of that title), which I'm doing with part of my IRA, wouldn't work as well in a taxable account.

I think the loss limiting to 100% is a significant enough difference that it deserves different treatment. In that regard, it's not much different than an individual stock. Fidelity already handles it reasonably by requiring a special disclosure to be signed acknowledging the risks of leveraged and inverse funds. If there are brokerages that don't do this, maybe they should be required to.
So then the SEC can simply require the same agreement(s) on IRAs as it does with margin accounts. It shouldn't be that difficult to implement or too restrictive.
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Re: SEC Proposing to block leveraged ETF!

Post by ltdshred »

dave_k wrote: Thu Jan 30, 2020 6:44 pm
beehivehave wrote: Thu Jan 30, 2020 6:37 pm
willthrill81 wrote: Thu Jan 30, 2020 5:35 pm Trying to protect people from themselves is a very slippery slope that basically says 'I know what you need better than you do.'
So let's outlaw auto air bags and not discourage smoking. Sometimes people don't know what is best for them. And slippery slope arguments are always silly.
Have there been studies that show a lot of people are experiencing significant damage that could be avoided by preventing them from buying leveraged or inverse ETFs? If it's a serious and widespread problem then I could understand, but I'm skeptical without seeing the evidence. If the evidence exists, please point us to it. And if so, should the solution be prevention/barriers, or better education/disclosures?
It's because the evidence doesn't exist and is a massive overreach by the SEC. I got off the phone with ProShares, and they know 2 of the voting members are already adamantly opposed against this new rule.
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