Key facts
- Market participants have voiced concerns to the SEC about its proposed 'novel ETF' label.
- Asset managers and exchanges argue that a broad definition of 'novel' could hinder innovation.
- Concerns exist that a new regulatory process for 'novel ETFs' could negatively impact the $12 trillion U.S. ETF market.
- Nasdaq suggested focusing on structural characteristics for regulation rather than asset-class labels.
- Some filings advocated for treating ETFs tied to prediction markets like any other ETF.
Market participants have voiced significant concerns to the U.S. Securities and Exchange Commission (SEC) regarding its proposal to label a wide range of exchange-traded funds (ETFs) as 'novel ETFs.' According to a Reuters review of letters filed with the regulator, asset managers, exchanges, and brokerage firms argue that such a broad classification could stifle innovation and create regulatory hurdles.
Rafferty Asset Management, through its Direxion business, stated in its submission that a definition keyed to current new asset classes would quickly become obsolete, penalizing future innovations. Similarly, issuers and exchanges expressed worries that introducing a separate regulatory process for 'novel ETFs' could jeopardize the growth of the substantial $12 trillion U.S. ETF market.
Mike Khouw, a strategist at YieldMax, noted that lumping diverse products together is "painting with too broad a brush." Nasdaq, represented by Senior Vice President Jeffrey Davis, acknowledged that some recent ETF filings have tested boundaries but urged the SEC to focus on "structural characteristics that meaningfully affect investor protection and market integrity" rather than asset-class labels.
Only a few comment letters specifically addressed ETFs tied to prediction markets. Douglas Crescenzi, COO of Adjacent Markets, advocated for treating them like any other ETF. However, Ben Schiffrin from the advocacy group Better Markets argued that these funds should not be considered equivalent to traditional ETFs invested in securities.