The nature of the custody system makes part of a proposal from the Securities and Exchange Commission on exchange-traded fund redemptions thorny, according to a group of global broker/dealers. Morgan Stanley, JPMorgan Chase, Merrill Lynch and Goldman Sachs last month wrote a joint letter to the regulator expressing concern over the proposal that would require brokers to confirm that a redemption from an ETF by an institutional investor does not make up more than 3% of the ETF's shares.
The B/Ds state that the fund itself would know more about holdings than they would, considering shares are typically custodied at third-party custodial banks. "Requiring broker/dealers, who have far less information about a fund's portfolio than the fund itself, to know each fund's ownership status before submitting a redemption order and to obtain representations from each fund imposes an unfair regulatory burden on the authorized participants and could potentially frustrate otherwise legitimate redemption activity," they stated in the filing.
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