SEC Issues Investor Warning Related to Single-Stock ETFs

Posted on July 26th, 2022 at 3:32 PM
SEC Issues Investor Warning Related to Single-Stock ETFs

From the Desk of Jim Eccleston at Eccleston Law:

While the Securities and Exchange Commission (SEC) has regularly updated its regulatory framework to address the introduction of complex exchange-traded products (ETPs), the SEC now is warning investors about single-stock exchange-traded funds (ETFs), which are set to soon hit the market. 

Single-stock ETFs offer leveraged, inverse or other complex exposure to one single security rather than a portfolio of diversified securities. The SEC is concerned about the risks single-stock ETFs pose to retail investors and the market as a whole. In 2019, the SEC adopted Rule 6c-11 under the Investment Company Act of 1940, which promulgated a framework enabling ETFs to meet certain conditions to come directly to market without initially obtaining SEC permission. While Rule 6c-11 fails to mention single-stock ETFs, issuers are planning to utilize the rule to bring the products to market. 

Similar to most leveraged and inverse products, the single-stock ETFs will rebalance on a daily basis, which may cause ETF returns to substantially diverge from the performance of one underlying stock. In essence, investors may generate lower-than-expected returns in comparison to the performance of the underlying stock if the products are held over a longer period of time. According to the SEC, it would be difficult for an investment advisor to recommend this type of product to a retail investor without violating his or her fiduciary obligations under Regulation Best Interest (Reg BI). While single-stock ETFs may be a useful tool to certain investors, the products pose a substantial risk to numerous retail investors and the market as a whole. 

Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, regulatory and disciplinary matters.

Tags: eccleston, eccleston law, SEC, ETFs

Return to Archive

TESTIMONIALS

Previous
Next

Hiring Eccleston Law has been one of the best career decisions I have made and this "investment" to maintain my sterling regulatory record has been returned many times over.  If you are in a situation where you've been unfairly accused, don't hesitate to talk with Eccleston Law. They are the best.

Thomas C.

LATEST NEWS AND ARTICLES

June 23, 2025
FINRA Fines AAG Capital for RILA Exchange Violations

The Financial Industry Regulatory Authority (“FINRA”) has fined AAG Capital $100,000 and ordered the firm to pay nearly $39,000 in restitution after finding it violated Regulation Best Interest (“Reg BI”) by recommending costly registered index-linked annuities (“RILAs") to retail clients in unsuitable product excha...

June 19, 2025
SEC Charges Former Real Estate CEO in $46 Million Investment Fraud Scheme

The Securities and Exchange Commission (“SEC”) has charged Kenneth Mattson, former CEO of LeFever Mattson, with orchestrating a $46 million investment fraud scheme that targeted approximately 200 investors, many of them retired senior citizens
from his church community in California.

June 18, 2025
Audit Firms Agree to $46 Million Settlement in GPB Capital Fraud Case

In a significant development in the GPB Capital fraud litigation, several audit firms have agreed to pay a combined $46 million to settle claims tied to their alleged involvement in the $1.8 billion scheme that impacted roughly 15,000 investors, as reported by DI Wire.