Elements of a Regulatory Framework for Exchange-Traded Funds

This event is co-organised by the UCL Centre for Ethics and Law and Durham Law School

Speaker

Henry T. C. Hu (Allan Shivers Chair in the Law of Banking and Finance, University of Texas at Austin – School of Law)

About this event

Despite the importance of ETFs and the distinctive risks they pose, the United States does not have a dedicated system of ETF regulation or even a workable, comprehensive definition of what an ETF is. In March 2018, the first academic work (“ETF-I,” cited below) to show the need for, or to present, a comprehensive regulatory framework for all ETFs was offered. On June 28, 2018, the SEC issued a proposal to change the way it regulates certain types of ETFs. A forthcoming 2019 article (“ETF-II,” cited below) analyzes the SEC proposal and a May 2019 SEC order allowing non-transparent actively-managed ETFs in the context of ETF-I’s proposed framework, and also refines the framework. ETF-II commends the SEC for addressing some of the key issues. However, ETF-II suggests that, on the substantive side of regulation, the SEC proposal does not deal with a number of longstanding problems and important types of ETFs. On the disclosure side, the SEC proposal is far more incremental in nature. Here, some fundamental issues are unresolved, especially in relation to the arbitrage mechanism.

This October 2019 presentation is based in part on ETF-I and ETF-II. See, e.g., (1) Henry Hu, The $5tn ETF market balances precariously on outdated rules, Financial Times, April 23, 2018, https://www.ft.com/content/08cc83b8-38e0-11e8-b161-65936015ebc3; (2) ETF-I: Henry T. C. Hu and John D. Morley, A Regulatory Framework for Exchange-Traded Funds, 91 Southern California Law Review 839-941 (2018), http://ssrn.com/abstract=3137918; and (3) ETF-II: Henry T. C. Hu and John D. Morley, The SEC and Regulation of Exchange-Traded Funds: A Commendable Start and a Welcome Invitation, 92 Southern California Law Review – (forthcoming 2019) (draft of Aug. 28, 2019), http://ssrn.com/abstract=3444976

About the speaker

Professor Hu holds the Allan Shivers Chair in the Law of Banking and Finance at the University of Texas Law School. Hu’s writings and public service relate to the law and finance of capital markets and corporate governance. The writings have appeared in law reviews (e.g., Columbia Law Review, University of Pennsylvania Law Review, and Yale Law Journal), finance and specialist journals (e.g., Annual Review of Financial Economics, European Financial Management, and Risk), and newspapers (e.g., Financial Times, New York Times, and Wall Street Journal).

A 1993 article was the first work to show how certain factors could cause major financial institutions make mistakes as to derivatives and other complex innovations. A series of articles (2006-2019) offered and refined the first systematic analysis of debt and equity “decoupling,” and coined terms that have come into worldwide use (e.g., “empty creditor” and “empty voter”). A 2018 article is the first academic work to show the need for, or to offer, a regulatory framework for ETFs. Hu was the founding Director of the SEC's Division of Economic and Risk Analysis (2009-11), the first new Division in 37 years.

He has been a member of the Legal Advisory Board of the NASD (now FINRA), the NASDAQ Market Regulation Committee, and the Board of Trustees of the Center for American and International Law. In 2010, the National Association of Corporate Directors named him as one of the 100 most influential people in corporate governance. He has testified before Congress as an academic and on behalf of the SEC. He has consulted for U.S. and non-U.S. law firms and governmental authorities on seminal matters. Hu teaches corporate law, modern finance and governance, and securities regulation, and has also taught them at Harvard Law School. He holds a B.S. (Molecular Biophysics and Biochemistry), M.A. (Economics), and J.D., all from Yale.

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