Tags: Wall Street | Watchdog | ETFs | Loans

Wall Street Watchdog to Target 'Smart' ETFs, Loans in 2015 Examinations

Tuesday, 06 Jan 2015 11:50 AM

Sales of so-called "smart beta" funds, the fastest-growing segment of the exchange-traded fund market, are among the issues Wall Street's private watchdog will review in its 2015 examinations of U.S. brokerages, the regulator said on Tuesday.

The Financial Industry Regulatory Authority is concerned about how market swings affect indices tied to the funds' performance, the regulator, known as FINRA, said in its annual list of "examination priorities."

It is also looking at a growing number of loan products offered by brokerages that require investors to put their securities up as collateral.

FINRA routinely examines the industry's more than 4,100 securities firms to gauge their compliance with securities industry rules. Smart beta funds, which are sold as index funds but are actively traded portfolios that can often fail to deliver the outsized returns their issuers promote, are making their debut on FINRA's annual list.

ETFs generally track slow-changing traditional indexes, with component stocks represented in proportion to the size of their market capitalization. Smart-beta indexes, in contrast, are weighted by alternative criteria and typically created via algorithms designed for their ability to cherry-pick winning stocks.

Over the last one- and three-year periods, they have on average lagged their plain-vanilla counterparts in almost every highly competitive category, according to an analysis performed for Reuters by ETF.com, a research firm. Yet they pulling in 60 cents of every dollar flowing to ETFs over the last two years, according to Morningstar.

Among other issues FINRA will examine this year: firms' marketing practices for a growing number of loan products that require investors to use their securities as collateral. Investors typically use the loan proceeds to buy second homes, luxury items or pay expenses, FINRA said.

Lending is a key source of revenue in the brokerage business as near-zero interest rates weigh on the returns that brokerages can earn from investing client deposits in securities. Making more loans can help them bridge that gap, analysts say.

FINRA's exam priorities list also includes numerous existing concerns of the regulator, such as firms' cybersecurity practices and abusive trading algorithms that can manipulate financial markets.

© 2017 Thomson/Reuters. All rights reserved.

 
1Like our page
2Share
Personal-Finance
Sales of so-called smart beta funds, the fastest-growing segment of the exchange-traded fund market, are among the issues Wall Street's private watchdog will review in its 2015 examinations of U.S. brokerages, the regulator said on Tuesday.
Wall Street, Watchdog, ETFs, Loans
347
2015-50-06
Tuesday, 06 Jan 2015 11:50 AM
Newsmax Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved