U.S. SEC Seeks Public Comment on ‘Novel ETFs’ Amid Prediction Market ETF Approval Delays

The U.S. Securities and Exchange Commission (SEC) is seeking public comment on novel exchange-traded funds (ETFs) in relation to how to regulate these funds. This comes as the Commission decides on the prediction market ETFs, which it has yet to approve, over concerns about the appropriate regulatory framework for these funds.

SEC Requests Feedback On Novel ETFs

In a press release, the Commission announced that it has issued a request for public comment on ETFs seeking to invest in innovative asset classes or engage in novel investment strategies. It added that the request focuses on ways to facilitate innovation in the ETF space while protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.

Notably, in the request for comment, the SEC noted that market participants have raised questions about whether Novel ETFs with an investment strategy to invest in assets that are not securities are investment companies under the Investment Company Act. This has, in turn, raised the question about whether such funds should register as investment companies or even be regulated by the Act.

The Commission further highlighted the ‘Subjective Test’ and questioned whether these funds would meet the criteria, particularly given that their investment strategy may focus on assets that are not securities. Meanwhile, the SEC is also questioning whether the generic listing standards can apply to these funds, whereby their registration statement goes into effect after 75 days.

The request for comment on Novel ETFs comes amid the delay in approving the prediction market ETFs. Asset managers such as Roundhill, Bitwise, and GraniteShares have applied for ETFs that will track markets on top prediction market platforms like Polymarket.

Comment On Competitive Pressures

The SEC  is also requesting comments on competitive pressures and first-mover incentives. The Commission asked if market participants have concerns about competitive pressures that may incentivize sponsors to submit filings for Novel ETFs quickly and in rapid succession.

Furthermore, the regulator questioned whether such competitive pressures could result in rushed or incomplete filings or the filing of many ETFs that never launch. To curb this, the SEC asked whether it should amend its rules to require a minimum registration fee that could be offset by redemptions.

It also floated the idea of allowing filings to remain nonpublic for part of the 75-day period before they become effective to promote innovation and reduce imitative filings. This request for comment comes just days after the SEC and CFTC also requested comment on a harmonized framework for crypto perpetuals.

At the same time, the Commission is also weighing rules for tokenized securities. The regulator earlier delayed the release of guidance on how these assets will operate due to concerns about the regulatory framework.