Tuesday afternoon I will be a panelist in a session about regulatory reform. Our "homework" assignment was to think about what, if regulated, would be a very bad thing. This could include unintended consequences or any other negative outcome.
My initial reaction is a rather boring one because of how obvious it is. The worst possible thing would be anything that disrupts or otherwise impedes investor access to plain vanilla equity index products. My idea of plain vanilla is any fund that simply owns equities either by completely tracking an index or via some sort of sampling, but under the hood all that is there is: stocks.
The other part of the homework was to decide what needs regulation the most. This is tougher for me. To paraphrase someone else -- guns don't kill people, people kill people (what would you expect someone from Arizona to say?). If someone is dumb enough to put too much of their money in a 3X levered fund I tend not to have a lot of sympathy. People interested in the "most dangerous" funds tend not to read what they need to read to understand this stuff, I am talking about the most complex of ETPs.
I sort of participated in a conversation last night with the cigar chomping brains behind a couple of very controversial ETPs. He said that when someone interviews him he always says "well, when you read the prospectus..." and of course the reporter did not read it. I talk a lot about ETPs creating easy access but there are no shortcuts where the due diligence is concerned. If you don't want to read the prospectus of some complex fund then don't, but then you should not buy the fund either. There are plenty of products I don't write about and the reason is that I don't want to try to wade through all the nuance when I know I will never own the product. Not reading is fine, the problem is the not reading but still buying, that is where people get into trouble.