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Speaker 1: You're listening to Taking Stock with Kathleen Hayes and Pim

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Speaker 1: Fox on Bloomberg Radio very special show. Today. We're broadcasting

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Speaker 1: live from B and Y Melon's E t F Exchange

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Speaker 1: sixteen here in Dana Point, California. Or people are looking

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Speaker 1: at ideas, innovation interaction, and they're certainly looking at the

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Speaker 1: regulatory landscape for e t F s. Turning up the heat.

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Speaker 1: That was one of the kickoff panels opening up this

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Speaker 1: conference today and joining us now is one of the

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Speaker 1: panelists herself, Kathleen Moriarty. She's a partner at Case Shoulder

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Speaker 1: l LP. Welcome back to the show. Thank you. I'm

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Speaker 1: allotted to be here. So it was interesting when I've

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Speaker 1: been reading different reports about e t S two, you know,

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Speaker 1: kind of get caught up more on the latest, but

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Speaker 1: a lot of the literature I've read people are thrilled

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Speaker 1: with the growth in the industry, but there's more and

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Speaker 1: more regulatory scrutiny and steps being taken, and I think

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Speaker 1: some feel, yes, we need it. On the other hand,

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Speaker 1: it's maybe going to make some difference in the way

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Speaker 1: e t S can grow. What's what's kind of the

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Speaker 1: big thing right now? When it comes to regulation. Actually

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Speaker 1: there too. One is um the liquidity proposal that the

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Speaker 1: SEC has put it forward about a year ago, and

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Speaker 1: it will require m portfolio managers, including e t s

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Speaker 1: to um start managing their portfolio in terms of how

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Speaker 1: liquid the portfolio is. So instead of just paying attention

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Speaker 1: to an index or strategy, they'll also have to pay

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Speaker 1: attention to how liquid their portfolio is. They'll have to

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Speaker 1: assign different buckets of time frames to each of their

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Speaker 1: portfolio securities, and they'll have to manage their portfolio so

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Speaker 1: that they have a certain minimum of two to three

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Speaker 1: day liquidity, which means almost instantaneous liquidity, and it will

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Speaker 1: start to um alter the way managers manage a portfolio

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Speaker 1: because instead of paying attention to the strategy alone, now

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Speaker 1: they'll also have to pay attention to this liquidity proposal. Now,

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Speaker 1: it hasn't been adopted yet, so we don't know whether

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Speaker 1: it's going to be adopted in the form it is,

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Speaker 1: or whether it's going to be changed, or whether it's

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Speaker 1: going to be adopted at all, but it's certainly if

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Speaker 1: it is adopted in the form that it's in, it

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Speaker 1: certainly will change how people manage portfolios, and that will

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Speaker 1: that will have an effect on And one of the

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Speaker 1: questions is, um, how will that work with an index

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Speaker 1: CTF for example, or an index mutual form for instance.

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Speaker 1: If you're following the SMP I five hundred, let's say,

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Speaker 1: and it turns out that your liquidity portfolio doesn't have

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Speaker 1: the minimum requirement, you're going to have to make some

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Speaker 1: changes in order to fulfill your liquidity requirement. But that

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Speaker 1: may mean you're not following the SMP properly. So what

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Speaker 1: does that What does that really do? Because you've told

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Speaker 1: your investors that what you're aiming for is to replicate

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Speaker 1: or to replicate the performance of the SMP five hundred.

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Speaker 1: But if you start having to change things around in

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Speaker 1: order to make liquidity requirements, you may not make that performance.

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Speaker 1: So there's some discussion as to whether this is even

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Speaker 1: going to be applicable to index UH funds are not,

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Speaker 1: and I don't think the jury is out on that

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Speaker 1: as well. So that's the kind of thing that will

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Speaker 1: alter to some degree how people manage I don't want

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Speaker 1: to go down the rabbit hole with liquidity, but but

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Speaker 1: I think you raise a very interesting UH point because

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Speaker 1: liquidity works both ways. You can look at it in

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Speaker 1: the past in order to gain some understanding of the future.

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Speaker 1: But the very nature of liquidity is that it can

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Speaker 1: surprise you, particularly when it dries up. What are some

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Speaker 1: of the other going to be penalties as a result

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Speaker 1: of this? I mean, if you make a good faith effort,

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Speaker 1: and you know department of labor other rules have to

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Speaker 1: do with fiduciary responsibility. If you make that effort, but

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Speaker 1: it doesn't turn out that way, what are the consequences?

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Speaker 1: We don't know. That's exactly right. We don't know. So

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Speaker 1: there's one we when we don't know. It'spetricluseau Wold have said,

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Speaker 1: I do not know what I do not know, but

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Speaker 1: that's hanging everybody's head. I want to ask you a

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Speaker 1: bit too about bitcoin, blockchain, ETCETERA year ago, that's what

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Speaker 1: WE is discussed and you have been involved with UH

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Speaker 1: working on setting up various kinds of companies, etcetera. So

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Speaker 1: you know a lot about this. In the E t

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Speaker 1: F world, Where does that stand now? There are two

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Speaker 1: UM E t F products that are in progress right now,

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Speaker 1: and they're both at the same stage, which is to say,

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Speaker 1: they are both in the process of of having their

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Speaker 1: listing rule um adopted or not adopted as the case maybe,

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Speaker 1: and without that they can't trade. So the Exchange and

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Speaker 1: Exchange has to have a listing rule for every every

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Speaker 1: product that it lists, and there are many many products

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Speaker 1: that fit into a kind of a generic thing, like

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Speaker 1: if you want to listen equity security, there's a standard

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Speaker 1: equity listing rule. You don't have to go and get

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Speaker 1: a special rule. But when you're talking about a new product,

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Speaker 1: you often have to have to get your own in

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Speaker 1: the sting rule. So both of these products are in

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Speaker 1: that stage, and UM it could be as long as

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Speaker 1: another six months or so before the Commission will make

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Speaker 1: its mind up one way or the other. It's also

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Speaker 1: hard to predict now because the political situation in the

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Speaker 1: election year, the fact that the Commission is not fully

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Speaker 1: you know, UM staffed if you will. So it's it's

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Speaker 1: hard to know exactly what's going to happen. But it's

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Speaker 1: in train. It's the best way I can the best

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Speaker 1: way I can put it. Bitcoin is money, Well it is,

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Speaker 1: and it isn't. Well well the US judge says it

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Speaker 1: says it is correct. US judge just just well, I

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Speaker 1: don't really know the whole background because I only found

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Speaker 1: out about it today, But apparently there was a UM

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Speaker 1: A Federal court judge who held that bitcoin in the

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Speaker 1: context of the case was money. On the other hand,

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Speaker 1: a couple of weeks ago there was a Florida court

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Speaker 1: judge who held the bitcoin wasn't money. So it's UM.

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Speaker 1: It pretty much has pays your bitcoin and it takes

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Speaker 1: your exactly. It's still an open question UM in America

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Speaker 1: UM as to whether it is or it isn't. Is

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Speaker 1: there an area of the E t F world that

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Speaker 1: you would say, as an attorney, UH is overregulated at

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Speaker 1: this point, because I know there are some people who

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Speaker 1: are always a little bit concerned about people perhaps not

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Speaker 1: understanding all the risks of ETFs and how they're structured.

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Speaker 1: Is there an area where you would say, if you

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Speaker 1: were at the SEC or something, you'd be looking at it. Well,

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Speaker 1: I tell you the truth, I think the liquidity thing

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Speaker 1: is an over overrestrictive It is it is, I don't

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Speaker 1: I don't know what prompted this necessarily, there's some thought

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Speaker 1: that the banking regulators either directly suggested it or that

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Speaker 1: the SEC and Defense is trying to keep the banking

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Speaker 1: regulators from moving into SEC territory. But does it indicate

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Speaker 1: that maybe they're worried about liquidity that they think or

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Speaker 1: they know something that we do not are not privy

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Speaker 1: to who knows. I think sometimes they're always being accused

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Speaker 1: of doing things in a reaction. So I think this

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Speaker 1: is sort of one of those things that they think

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Speaker 1: that we can do this ahead of time. We can,

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Speaker 1: we haven't had a liquidity problem, so let's make sure

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Speaker 1: we don't have a liquidity problem. But I think that

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Speaker 1: it's not I think it's overly restrictive the way it's right.

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Speaker 1: And but the liquidity issue is not confined just to

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Speaker 1: exchange traded funds. Because October the fourteenth we get a

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Speaker 1: big change in money market funds as a result of

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Speaker 1: what happened in two thousand and eight, and you may experience,

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Speaker 1: if you own a money market fund, the net asset

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Speaker 1: value going below one dollar or share, and in times

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Speaker 1: of stress, you may not be able to actually get

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Speaker 1: the money out of the money market fun That goes

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Speaker 1: back to that liquidity issue. So what are your thoughts

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Speaker 1: on on that change in the money market fund rules.

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Speaker 1: I'm not sure. I think I've just sort of accepted it. Um.

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Speaker 1: I was sort of maddened by it when it first

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Speaker 1: came out, but I think I've just gotten used to it.

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Speaker 1: You know, after a certain point, you see so many

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Speaker 1: regulations and you figure pick your battle. So that battle

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Speaker 1: I didn't pick, all right, what battle would would you pick?

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Speaker 1: Right now? I would pick the derivative rule to detail now,

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Speaker 1: the detail, it's too complicated to give it all the details.

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Speaker 1: But basically, in a nutshell, basically, what it's trying to

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Speaker 1: do is extremely limit uh, the use of derivatives. And

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Speaker 1: this goes back a long way. This, this concern respect

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Speaker 1: a long way, and I think again it's kind of

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Speaker 1: like looking using a sledgehammer to deal with the problem.

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Speaker 1: That's not to say there are no problems with derivatives.

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Speaker 1: There are no problems with portfolio managers. But to sort of,

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Speaker 1: you know, create a one size fits all regulation that

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Speaker 1: will prevent problems from happening is almost bound to cause

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Speaker 1: problems in the long run. So what would you do instead?

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Speaker 1: I don't know. I think I would be even more

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Speaker 1: selective about it. I would think I would. I wouldn't

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Speaker 1: necessarily regulated by percentage or what have you. I'd have

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Speaker 1: more actually where they do in in a liquidity situation,

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Speaker 1: which is to say, set your own boundaries, you know how,

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Speaker 1: a justification for them, and then followed them. I think

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Speaker 1: that would make more sense than to try to do

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Speaker 1: these you know, overweening. And in this context, we're talking

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Speaker 1: about things everything from let's say a triple leveraged exchange

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Speaker 1: traded fund to one that's using futures or anything. Almost

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Speaker 1: anything that's not a stock of rabon, almost anything is

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Speaker 1: a is a derivative. Well, this is going to have

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Speaker 1: an effect also on the kind of e t F

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Speaker 1: that are produced and the response to that, because we

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Speaker 1: know they'll would be a way to try to get

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Speaker 1: around it. Of course, yes, that's my job. That's why

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Speaker 1: we love having Kathleen Moriarty, partner at k Shoulder, telling

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Speaker 1: us all about regulations, et f s and bitcoins. Thank

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Speaker 1: you very much. We are broadcasting from the b n

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Speaker 1: Y Melon et F Symposium in Data Point, California. This

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Speaker 1: is Bloomberg