The House Financial Services Committee approved new bi-partisan legislation which would allow broker-dealers to publish ETF research reports. Current regulation has various provisions which effectively bar broker-dealers from issuing ETF research. The new legislation now goes to the full House of Representatives for a vote.
H.R. 2356, the Fair Access to Investment Research Act was introduced by French Hill, a freshman Republican congressman from Arkansas, and Congressman John Carney, a Democrat from Delaware. The bill would direct the Securities and Exchange Commission (SEC) to provide a safe harbor for ETF research reports so that the reports would not be considered “offers” under the Securities Act of 1933.
There are currently a few different regulations forestalling brokers from producing ETF research and the legislation directs the SEC to provide a safe harbor encompassing all the regulation.
Non-broker dealers which currently publish ETF Research, such as Morningstar, Alta Vista and Market Realist, have a safe harbor under the Publisher’s Exemption, which exempts publishers of generalized investment advice from registration under the Investment Advisers Act of 1940.
The ETF market has experienced double-digit annual growth over the past few years and, as of the end of April, included 1,496 funds with $2.1 trillion in assets, according to figures from Morningstar Inc.
ETFGI, an ETF research firm, recently reported that ETF/ETP assets are growing faster than hedge fund assets, and should exceed them this quarter.
Our Take
On the surface, the legislation is bad news for independent providers of ETF research, which currently have the field to themselves. However, it is not clear that broker-dealers will leap into producing ETF research. While there is some institutional trading in ETFs, it is not highly research-driven being mostly hedging and short-term trading. The interest would mainly be from the wealth management groups within broker-dealers which have limited research resources.
It is telling that Deborah Fuhr, the founder of ETFGI, started out at broker-dealer Morgan Stanley, where she developed ETF research for trading desks, helping traders understand which ETFs are the best trading instruments for particular hedging and trading strategies. She left Morgan Stanley, taking her research team with her to Barclays Global Investors (which became Blackrock), before starting up her independent firm.
Nevertheless, the legislation will open the doors to more competition among ETF research providers. The dramatic growth and diversity of ETFs can easily support more ETF research, which is still relatively nascent.