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100 F Street, NE Washington, DC 20549-1090 March 24, 2020 Via Electronic Submission: [email protected] Ms. Vanessa Countryman Secretary U.S. Securities and Exchange Commission 100 F Street, NE Washington, DC 20549-1090 Re: File No. S7-24-15 Dear Ms. Countryman: ProShare Advisors LLC (together with its affiliated entities, “ProShares”) appreciates the opportunity to submit its comments to the Securities and Exchange Commission (the “Commission” or the “SEC”) on the above-referenced rule-making and supports the Commission’s general desire to provide an updated and more comprehensive approach to funds’ use of derivatives, within the limits of the Commission’s statutory authority. For the reasons described below, however, ProShares strongly opposes the unprecedented, unnecessary and harmful restrictions on investor choice that would result from the Commission’s proposed “sales practice” rules for transactions in leveraged and inverse exchange-traded funds (“ETFs”) and mutual funds (collectively, “Leveraged and Inverse Funds”). I. Background: ProShares and the Use of Leveraged and Inverse Funds A. ProShares ProShares is a leading provider of ETFs and mutual funds. Founded in 1997, ProShares today manages more than 250 funds with approximately $38 billion in assets under management. ProShares is the world’s largest provider of Leveraged and Inverse Funds, managing more than 170 such funds with approximately $26 billion in assets under management. - 1 - B. History of Leveraged and Inverse Funds First introduced in the United States in 1993 as mutual funds and launched as ETFs in 2006, Leveraged and Inverse Funds have been widely embraced by investors and have a long history of successful operation, including during periods of significant market volatility. Leveraged and Inverse Funds are available in the United States, Canada, eleven European nations, and five countries in Asia. Globally, more than $87 billion is invested in Leveraged and Inverse Funds, with approximately $52 billion invested in the United States. Investors use Leveraged and Inverse Funds in a variety of beneficial ways, including to manage risk in volatile markets and to magnify gains more cost-effectively and efficiently than may be possible with other strategies. Leveraged and Inverse Funds operate based on clear daily investment objectives that are well understood by investors, who may responsibly choose to hold them for a single day or some longer period as part of their investment strategy. ProShares’ disclosure describing how Leveraged and Inverse Funds operate is extensive and robust and has been proven effective over time. Typical disclosures for Leveraged and Inverse Funds set forth the target leverage amount and daily objective in clear and concise terms and in a manner that allows investors and financial advisers to understand the distinct characteristics of Leveraged and Inverse Funds, including the effect of holding such funds for longer than a single day, so that they can make informed investment decisions. ProShares prominently discloses this information, along with each fund’s principal investment strategies and risks, at the very beginning of each fund’s prospectus. In addition, ProShares and other Leveraged and Inverse Fund sponsors have made significant efforts to publish and distribute materials designed to educate investors about the operation of Leveraged and Inverse Funds and to help investors and their financial advisers better understand the potential benefits and risks associated with the use of such funds as part of an overall investment portfolio. II. The Proposed Rules for Leveraged and Inverse Funds Represent a Radical and Unmerited Departure from Longstanding Commission Policy and Would Harm Investors A. The proposed rules establish a novel and unprecedented burden on individual investors to prove their capability to purchase a publicly traded security The proposed rules applicable to Leveraged and Inverse Funds, despite their label, do not regulate a “sales practice” (or even “leverage”), but instead impose a “qualification” requirement on investors. Rather than address how products are sold to investors by an intermediary, they establish standards that investors must meet in order to buy them.1 1 Use of Derivatives by Registered Investment Companies and Business Development Companies; Required Due Diligence by Broker-Dealers and Registered Investment Advisers Regarding Retail Customers’ Transactions in Certain Leveraged/Inverse Investment Vehicles, Exchange Act Release No. 87,607, Advisers Act Release No. 5413, Investment Company Act Release No. 33,704, 85 Fed. Reg. 4446 (Jan. 24, 2020) (the “Release”). - 2 - In marked contrast to the FINRA options rules cited in the Release, the proposal is not merely a restriction on “recommendations” or similar sales activities by a broker-dealer.2 Instead, the Commission’s proposal would prohibit transactions in Leveraged and Inverse Funds unless an investor can demonstrate the requisite level of “knowledge and experience” even when making self-directed investment decisions.3 That critical distinction makes all the difference. There is no precedent under the federal securities laws for imposing this type of “drivers test” on investor access to publicly traded securities. On the contrary, this form of merit regulation is inconsistent with the entire history of the federal securities laws, which were founded on the principle that the disclosure of accurate information is the strongest form of investor protection. Indeed, from the earliest years of federal securities regulation, it has been clear that the Commission’s mission is not to protect investors from themselves, but rather to promote informed decision-making based on full and accurate disclosures to investors.4 The proposed restriction on investors’ ability to purchase Leveraged and Inverse Funds also runs directly counter to the Commission’s efforts to broaden retail investors’ access to investment products.5 The proposal would instead create a new barrier denying retail investors access to these securities, even though they have long shown the capability to use them for their intended purposes. Even more remarkably, the proposed rules would disrupt the relationship of investment advisers and their clients. Specifically, the proposal would also prohibit investors from acquiring the products through an expert investment adviser if they do not personally have the requisite “knowledge and experience” – entirely defeating the very purpose of retaining an adviser in the first place. In other words, the rules would require the investor to pass the “driver’s test” even when they have hired an Uber driver to get them to their destination. 2 See Release at 4493. 3 The FINRA options rules upon which the Commission relies require a customer to meet a “knowledge and experience” test only in cases where broker-dealers make “recommendations” – i.e., the FINRA rules, unlike the Commission’s proposed rules, in fact impose requirements solely on a “sales practice.” They do not require FINRA members to block access to a publicly traded security. FINRA Rule 2360(b)(19)(B). Moreover, given the very different role and authority of self-regulatory organizations under the federal securities laws, the rules of those organizations cannot be viewed as a reliable precedent upon which to base Commission regulation of broker-dealers (much less the imposition of new and unprecedented obligations on investment advisers). 4 Harvey L. Pitt, Chairman, U.S. SEC, Testimony Concerning Financial Literacy (Feb. 5, 2002), available at 2002 WL 198062, at *2 (“Ours is a disclosure-based system. And it is our job to promote clear, accurate, and timely disclosures—proactively.”); Statement of David Schenker, Chief Counsel, SEC, Investment Trusts and Investment Companies: Hearings Before the Subcomm. on Sec. & Exch. of the S. Comm. on Banking & Currency, 76th Cong. 266 (1940) (““If [a fund is] going to be a speculative investment trust, and they disclose that fact to their investors, and the investors want to invest in that type of investment company, who are we to say, ‘No, you shall not invest in that type of company?’”). 5 For example, even in the absence of the disclosure protections available for registered securities offerings, the Commission in December 2019 proposed to amend the definition of “Accredited Investor” to “allow more investors to participate in private offerings.” See SEC Press Release, SEC Proposes to Update Accredited Investor Definition to Increase Access to Investments (Dec. 18, 2019). - 3 - More generally, this radical departure from traditional regulatory policy highlights how the proposal – by rigidly singling out one product to meet a novel qualification requirement – is at odds with the Commission’s efforts to establish more general requirements under Regulation Best Interest and its interpretation of the fiduciary standard for reviewing and assessing client needs. Further, if the proposed restrictions are imposed for these products, the Commission will inevitably find itself being asked to consider why it has not adopted similar rules for other products in the future – driving it toward a form of case-by-case evaluation of securities products outside its statutory mandate and inconsistent with its institutional role and capabilities. B. The proposed rules are unnecessary – a solution in search of a problem The Commission has presented no evidence that traditional disclosure is inadequate to meet the needs of investors in Leveraged and Inverse Funds. As noted above, existing disclosure
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