A new sheriff is coming to town and the ETF industry can’t wait.
David Grim, the top official in charge of approving new financial products at the Securities and Exchange Commission, is stepping down next month, the agency said Thursday. The move is spurring speculation that innovative funds may find it easier to gain approval, and those that have struggled could get a second look under a different regime.
Critics worry that retail investors could be at risk from more creative strategies, so the SEC has taken a relatively conservative approach to approving ETFs, even as the products explode in popularity and variety.
The regulator rejected a bitcoin ETF proposed by Tyler and Cameron Winklevoss in March, causing the virtual currency’s value to plummet 18 percent. And it has dragged its feet on an active structure championed by Precidian Investments, among others, that would keep assets hidden.
All that could now change.
“If the new director is more of an activist you could see a bigger push toward getting new things done,” said Kathleen Moriarty, a partner at Arnold & Porter Kaye Scholer who helped start the first U.S. ETF.
NEW CHIEF
Grim joined the SEC division of investment management 22 years ago and has worked there since, most recently as its director, the agency said in its release. The division oversees the $70 trillion asset management industry, including ETFs, mutual funds and closed-end funds.
Dalia Blass, a former member of the division who departed in 2016 for law firm Ropes & Gray, is said to be in line to take over, according to a person familiar with the matter. Blass, whose firm advised the Winklevoss twins on their most recent bid for SEC approval, is an ETF specialist.
Blass, who if she took the job would likely have to recuse herself from specific matters she worked on as a private lawyer, didn’t respond to a request for comment on whether she’ll take over the role. The SEC declined to comment.
Since Grim joined the SEC, ETFs have exploded into a $3 trillion industry of more than 2,000 products used by everyone from mom-and-pop investors to the world’s largest institutional managers. That’s proved a challenge for the agency, which oversees ETFs under asset management rules adopted in 1940.
“What the division really needs is leadership,” Stacy Fuller, a partner at K&L Gates, said at an industry conference in June. “It’s not so much education, but someone needs to be willing to take the risk that they’re going to end up on the front page.”
RULES ROLLBACK
Grim’s departure is part of a wholesale change at the SEC as Jay Clayton, the agency’s new head, contemplates a review of many regulations put in place after the financial crisis.
Since taking over as chairman in May, Clayton has picked William Hinman, who recently retired as a partner at Simpson Thacher & Bartlett, to lead the corporation finance unit. He’s also tapped Steven Peikin, a former colleague of his from Sullivan & Cromwell, and Stephanie Avakian as co-directors of the agency’s enforcement division.
The upheaval could stall any immediate rush to approve new ETF proposals, according to Spencer Mindlin, an analyst at Aite Group.
“In terms of appetite for new untested, unvetted stuff, that might slow things down,” he said. “You have two competing forces here: the political administration’s promise of regulatory relief and a complete change of guard at the SEC.”
Clayton himself has yet to weigh in specifically on the prospects for easing the framework for ETFs. The agency’s regulatory agenda did, however, mention a rule that was proposed almost a decade ago and would “facilitate greater competition and innovation among ETFs,” according to a description of the plan from 2008.
Norm Champ, a partner at Kirkland & Ellis who ran the division from 2012 to 2015, with Grim as his deputy for a chunk of time, said the outgoing director did a “great job” running the unit. But he added that it’s not surprising he’d step down after more than two decades at the agency and with new leadership coming in.
“You’re going to see more of an emphasis on products that help capital formation,” Champ said. “You’ll see a lot more of an attempt to try to increase investor choice.”
