The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations recently announced its priorities for 2016. The OCIE conducts examinations of the securities industry with the goal of improving the integrity of the capital and securities markets. The OCIE focuses on improving compliance, preventing fraud, monitoring risk and advising the full Commission on policy.

One of the OCIE’s priorities for 2016 is to closely examine exchange-traded funds, known as ETFs. An ETF is similar to a mutual fund, in that it gives investors the opportunity to own shares in a combination of assets held together. So one share in an ETF gives you an opportunity to invest simultaneously in stocks, bonds, futures, commodities, and foreign currency (although when you own an ETF share, you don’t have a direct ownership interest in any of the underlying assets). And like a mutual fund, a share in an ETF is a marketable security that you buy and sell.

But ETFs differ from mutual funds in significant ways. Most importantly, ETFs may be bought and sold throughout the trading day, and not just after market close, as with mutual funds. And because ETFs are traded like stocks, you can do things with them you can’t do with mutual funds, including writing options against them, shorting them and buying them on margin.

You must buy and sell ETF shares directly through a broker that is an Authorized Participant. The broker purchases a large block of ETF shares from fund and then sells smaller blocks to individual investors. By contrast, mutual funds can only be bought and sold through the mutual fund investment company.

ETFs comprise a growing portion of the global securities markets. According to the Investment Company Institute–a global association of regulated funds–there were more than 1,400 ETFs in the United States at the end of 2014, with more than $2 trillion in assets, U.S-based ETFs accounted for 73 percent of the $2.7 trillion invested in ETFs worldwide at the end of 2014.

One significant risk to investors in owning shares of an ETF is the brokerage fees and commissions incurred when the ETF shares are bought and sold. Investors don’t pay brokerage fees when buying and selling mutual funds. Another risk is in specialty ETFs that do more than simply track the value of the underlying assets.

In 2009, the SEC issued an alert to investors about leveraged and inverse ETFs. Leveraged ETFs seek to deliver multiples of the performance of the index it tracks (like an ETF that tracks the S&P 500). Inverse ETFs seek to deliver the opposite performance than the underlying index, like shorting a stock. Most inverse and leveraged ETFs reset daily, meaning that they seek to achieve their performance goals each day and start over the next day. This approach can have significant downside for long-term investors. The SEC warned investors to be careful before purchasing shares in leveraged and inverse ETFs.

If you have information about fraud or misconduct in an ETF, or in the trading of ETF shares, please contact us for a free consultation.