By Suzanne McGee
PROVIDENCE, Rhode Island, Sept 1 (Reuters) - Market participants raised concerns over the U.S. Securities and Exchange Commission's proposal to label a broad swathe of exchange-traded funds as "novel ETFs," according to a Reuters review of letters filed with the Wall Street regulator by asset managers, exchanges, brokerage firms, clearing houses and others.
The SEC's decision to launch a broad-based review and solicit industry comment followed several asset managers attempting to roll
out funds tied to prediction markets. The sweeping nature of the regulator's questions and the lack of a precise definition of "novel" may make it difficult for regulators trying to chart a path forward, analysts and issuers said.
"We believe that 'Novel ETFs' cannot be effectively defined," wrote Angela Brickl, chief operating officer and general counsel of Rafferty Asset Management, whose Direxion business offers a wide array of leveraged single-stock and leveraged index ETFs, in the firm's submission to the SEC.
"A definition keyed to today's list of new asset classes will be obsolete on arrival, because tomorrow's innovations will fall outside of it," Brickl said. That limitation will penalize every new idea or product modification, she said.
The SEC did not immediately respond to a request for comment.
Many issuers and exchanges said they want to avoid sweeping changes to the SEC process that allows issuers to launch most new ETFs automatically 75 days after filing. If the SEC opted to introduce a different process for novel ETFs, there is a risk it would jeopardize growth in the $12 trillion U.S. ETF market, they said.
Mike Khouw, a strategist at YieldMax, said the asset management firm has directly benefited from the current rules and argues that "lumping together all of these products is painting with too broad a brush." YieldMax did not file a comment with the SEC but is watching how it handles novel ETFs because the firm frequently uses complex options strategies in building ETFs.
Jeffrey Davis, senior vice president of Nasdaq, said in his letter that he recognizes some recent ETF filings have "tested the boundaries" of current rules. Still, he urged the SEC to avoid any asset-class labels when considering how to regulate these products and instead focus on "structural characteristics that meaningfully affect investor protection and market integrity."
Only a handful of those who filed comment letters as of Monday's deadline addressed the question of how to treat ETFs tied to prediction markets. Douglas Crescenzi, chief operating officer of Adjacent Markets, which builds indexes tied to event contracts, urged regulators to treat them like any other ETF.
Ben Schiffrin, director of securities policy at Better Markets, an advocacy group, said there was "no reason for the SEC to treat these funds as equivalent to ETFs that invest in securities and in which millions of Americans invest."
(Reporting by Suzanne McGee, Editing by Megan Davies and Rod Nickel)
