investor protection when ETF manager is in trouble

  1. After the bond insurer’s problems, I started wondering what happens when a ETF manager (like SSGA or BGI or Claymore) is in trouble. The underlying ETF may be in good shape (such as technology), but if the manager’s going concern is questionable, is the ETF investor in trouble? 2) On the same note when a discount broker goes bust, how will a retail customer get his/her assets back? Will they be automatically transferred to another broker or what happens? More than being paranoid, I am trying to understand how the system works in extreme cases.

Would anyone shed some light please…

how would they be in trouble unless the manager lied about the assets? The investor has a claim on them, nobody else can touch them. Someone else will just manage the fund and continue screwing over the investors for the management fee.

  1. It’s an involved question - in particularly, ETF’s can have a variety of different legal structures and levels of manager involvement. In general an ETF owner does not take on any credit risk from the manager. 2) This is tougher - If your broker goes under and there is something missing from your account, you can have a problem. If your broker is a member of SIPC, you will almost certainly be made whole fairly quickly. If not, you have some pretty serious hassles ahead. I would never keep significant assets with a broker I thought was not financially sound. Also - as for trasnferring your assets - it’s unlikely that your broker will just go away in the middle of the night and leave chaos. Usually, these kinds of things are done in an orderly way and you would just transfer your whole account (easy).

This is what I was talking about in March… ========= State Street Falls on Concerns That Bond Holdings Will Suffer By Matthew Keenan Sept. 18 (Bloomberg) – State Street Corp. fell the most since at least 1984 on concerns that the seizing-up of short- term credit markets this week will lead to increased losses on bond holdings. State Street dropped $11.05, or 17 percent, to $53.70 at 11:41 a.m. in New York Stock Exchange composite trading, after falling as low as $50.16 earlier in the day. Merrill Lynch & Co. analyst Brian Bedell wrote in a report yesterday that investors ``may remain concerned about credit risks’’ in investments held by the Boston-based company. To contact the reporter on this story: Matthew Keenan in Boston at Last Updated: September 18, 2008 11:45 EDT

Do you mean what happens to the $10T (or whatever) that STT holds for other people if they go bust? Big mess, but nobody is supposed to get hurt.

I am not 100% sure, but I believe ETFs should be safe, because the assets are segregated. If the company goes under, the ETF may stop trading and the assets disbursed to the shareholders. I’m pretty sure the legal structure prevents ETF shareholders from having their assets liquidated to pay the debts of the manager. Now the manager might be able to find a way to shift some extra costs of the whole organization onto the ETF, so the performance fee might be impacted somewhat. Also, if assets are being disbursed to shareholders, and those shareholders promptly sell, then asset values might go down. ETNs are a different story. There are no underlying assets there, just a promise by the issuer to come up with money to pay the return that the ETN tracks. The advantage is that you get pretty much zero tracking error. The disadvantage is that if the manager gets into trouble, they might default on their obligation - there are not necessarily any assets as collateral.

In the annual conference at Vancouver, there was a question posed to SSGA on this ETN/ETF topic. The company guy looked into the sky and asked us back 'why would SS get into trouble?"

In canada I believe investors are protected upto $ 60,000