Market participants have voiced significant concerns over the U.S. Securities and Exchange Commission's (SEC) proposal to broadly label certain exchange-traded funds (ETFs) as "novel ETFs." This initiative, prompted by attempts to launch funds tied to prediction markets, has drawn criticism from asset managers, exchanges, brokerage firms, and clearing houses, who argue against a sweeping reclassification.
Many in the industry, including Rafferty Asset Management's Angela Brickl, contend that "Novel ETFs" cannot be effectively defined, warning that any such definition would quickly become obsolete and stifle innovation. Issuers and exchanges are keen to avoid changes that could disrupt the current process, which allows most new ETFs to launch automatically 75 days after filing, fearing it could jeopardize growth in the $12 trillion U.S. ETF market. Nasdaq's Jeffrey Davis urged the SEC to focus on structural characteristics affecting investor protection and market integrity, rather than creating new asset-class labels.
Crypto industry players, including Grayscale, a16z, and the Crypto Council for Innovation (CCI), specifically urged the SEC to avoid blanket restrictions on "novel" exchange-traded products. They advocate for evaluating products based on their individual risk parameters and underlying characteristics, rather than grouping them into a single category. They also called for better coordination between fund-registration and exchange-listing reviews, and for preserving existing classification rules, with some suggesting optional confidential pre-filing processes.
There was disagreement on some fronts, such as the exact definition of an ETF, with a16z suggesting it be reserved for funds under the Investment Company Act of 1940, while Grayscale believes it should describe economic characteristics regardless of the legal wrapper. While some, like Adjacent Markets' Douglas Crescenzi and prediction market Kalshi, advocated for treating event contract ETFs like any other ETF, advocacy groups such as Better Markets and Public Citizen expressed strong opposition. They warned that event-contract ETFs could expose retail investors to gambling-like products, which they may not understand behave differently from traditional diversified index funds.
The SEC must now decide whether to implement a common regulatory framework for these products or to develop separate rules based on their unique structures and risks. The strong pushback highlights the complexity of regulating new financial instruments while trying to foster innovation and protect investors.
