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Grant Lincoln Comment On Regulatory Notice 22-08

Grant Lincoln

Complex products (ex: leveraged ETFs) are already limited in several wise ways. Limiting the leverage available to 3x is a good policy. However, completely gatekeeping who can access these products would simply increase inequality and unnecessarily increase costs for consumers. Gatekeeping access to all these complex opportunities would be akin to providing the unearned rent seeking through regulation that tax preparers enjoy now. To reduce inequality and increase prosperity for consumers, we need less unnecessary certification requirements, not less. This is a widespread problem in the US noted in industries from hairdressers to accountants. Specifically regarding leveraged ETFs, what is the true risk to current consumers? A seminal work on the long run trend of leveraged indexes, "Alpha Generation and Risk Smoothing using Managed Volatility" Cooper 2010, finds that 2x is the ideal long run leverage for major indices based on historical returns. Relatedly, 3x leverage provides nearly identical returns to 1x leverage in the long run as that's point where increased volatility decay balances with the increased returns. And now, we already limit the max leverage on such ETFs to 3x! We already ensure that the riskiest products are only as risky in a long run sense to the standard 1x products widely available to retail investors. While the volatility is clearly higher, it does not appear at all that they represent a greater risk of a permanent loss of capital. Given the already sensible guardrails in place, I implore regulators to not lock out consumers from these incredibly powerful investment tools. Please do not increase the cost of accessing them through misguided regulations solving a non-existent problem. Inequality is high enough in the US - the last thing we need is yet another corner of the economy with special regulations providing rent seeking to a specialized corner of an industry. Please prioritize consumers and consider the certain risk of doing harm by increasing costs and thereby diminishing consumer's returns. Allow consumers to fully benefit from the massive increases in automation and understanding of passive investment practices.