SEC Seeks Comment on ‘Novel’ ETFs After Bitcoin ETP Approvals

On June 30 the Securities and Exchange Commission asked for public comment on what it calls “novel” exchange-traded funds. The request follows the agency’s approvals of spot Bitcoin exchange-traded products earlier in 2024.

The SEC defined novel ETFs as funds that invest in new asset classes or use new strategies, listing crypto assets, commodity-focused instruments, single-stock strategies, heightened leverage, blockchain-enabled opportunities, private assets and event contracts as examples.

The request asks whether existing rules need new portfolio limits, strategy restrictions or exclusions. The SEC described the inquiry as exploratory and will seek public feedback before proposing any formal rule changes.

The agency noted some spot Bitcoin products are structured as exchange-traded products rather than funds governed by the Investment Company Act of 1940. The request asks whether ETPs outside the investment-company framework should use the labels “ETF” or “fund.”

The SEC identified several structural issues for review. Funds that rely on assets trading on different schedules from U.S. equity markets can show fragmented liquidity and raise custody and pricing questions. Leverage, concentrated positions, chains of derivatives and hybrid structures can affect valuation and trading when markets are stressed.

The agency listed potential regulatory responses including new disclosure requirements, limits on portfolio concentrations, restrictions on leverage or derivatives use, and clearer labeling standards. No formal rules have been proposed; the SEC is collecting input to inform any future proposals.

Issuers have sought to distribute crypto exposure through ETF-style wrappers because those vehicles can be held in retirement accounts, advisory platforms and retail brokerage portfolios. Regulators will consider whether wider distribution changes how investors access or understand the underlying assets.

In its earlier statement approving spot Bitcoin ETPs, the SEC emphasized that approval did not amount to an endorsement of Bitcoin. The June 30 request shifts the focus from market access to product structure and marketing.

The public comment period will inform whether the SEC recommends changes to rules governing exchange-traded products and how any such changes might be drafted.