Asset Managers, Exchanges Oppose SEC's Proposed 'Novel ETF' Label

Asset managers, exchanges, and other market participants are raising significant concerns over a U.S. Securities and Exchange Commission (SEC) proposal to classify certain exchange-traded funds as "novel ETFs." In a series of comment letters filed with the regulator, firms argued the label is poorly defined and could disrupt the fund launch process, according to a Reuters review.

An 'Obsolete on Arrival' Definition

The central argument from the industry is that the term "novel" is too ambiguous and subjective to be a useful regulatory category. Opponents fear that a broad, ill-defined label would create uncertainty and could penalize financial innovation.

"We believe that ’Novel ETFs’ cannot be effectively defined," wrote Angela Brickl, chief operating officer and general counsel of Rafferty Asset Management, which operates the Direxion ETF brand. In the firm's submission, she argued that a definition based on today's new asset classes would be "obsolete on arrival" as future innovations would fall outside of it.

This sentiment was echoed by others, including Mike Khouw, a strategist at YieldMax, which uses complex options strategies in its funds. While YieldMax did not file a letter, Khouw stated that "lumping together all of these products is painting with too broad a brush."

Risk to Market Growth

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A key concern for the industry is the potential disruption to the current fund approval framework. Most new ETFs can currently launch automatically 75 days after filing, a process that has facilitated the expansion of the $12 trillion U.S. ETF market.

Issuers and exchanges warned the SEC that creating a separate, potentially more arduous approval track for "novel" funds could jeopardize this growth. In his letter, Jeffrey Davis, senior vice president of Nasdaq, acknowledged that some recent ETF filings have "tested the boundaries" of current rules. However, he urged the SEC to focus on "structural characteristics that meaningfully affect investor protection and market integrity" rather than creating broad asset-class labels.

Prediction Market Funds Spark Debate

The SEC's review was prompted by several asset managers attempting to launch ETFs tied to prediction markets. These products have drawn divergent opinions on how they should be regulated.

Douglas Crescenzi of Adjacent Markets, which builds indexes tied to such event contracts, argued they should be treated like any other ETF. In contrast, Ben Schiffrin of the advocacy group Better Markets contended there was "no reason for the SEC to treat these funds as equivalent to ETFs that invest in securities."