One proposal is to allow ETF applicants to keep their filings confidential during SEC review, reducing the risk of copycat filings as firms race to be first.
In a public comment request issued Tuesday, the SEC is seeking input on whether new conditions should allow it to halt an ETF's registration or take action after it has been approved. This consultation may lead to a broader regulatory framework, as the agency asks for opinions on whether it possesses sufficient authority to monitor a market that is both more complex and expanding rapidly.
Currently, the SEC neither officially approves nor denies ETF applications; its main enforcement power is essentially confined to stopping the sale of ETF shares.
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"We really only have one tool to regulate an ETF that we're not happy with," said Brian Daly, the SEC's Division of Investment Management director, during a Bloomberg News interview.
Currently, all ETF applications are publicly accessible, allowing rival firms to quickly submit similar proposals. In Daly's words, "The process can at times seem 'ferocious' as issuers race to capture first-mover advantages." He noted, for instance, that the SEC's 2024 rollout of crypto-related ETFs faced difficulties because firms competed fiercely to be first, expecting early inflows.
"In a 'first mover wins' environment, it is essential that sponsors have comfort that the process will not penalize thoughtful pre-effectiveness collaboration with the SEC staff," he said.
The move comes after SEC Chairman Paul Atkins in May instructed staff to seek public input on prediction market ETFs, vehicles that would allow investors to wager on the outcomes of events ranging from elections to economic data releases. Such funds - if launched - would represent the latest frontier within the growing industry and would test the boundaries of what can be packaged into an easy-to-trade vehicle.
The ETF industry's expansion into novel assets like cryptocurrencies and prediction markets has tested the SEC's traditional review framework. During the 2024 crypto ETF wave, multiple issuers filed nearly identical proposals within days of each other, creating administrative strain and raising fairness concerns. Prediction-market ETFs, which could track event outcomes, would mark a significant departure from conventional funds and require the SEC to evaluate whether such products align with investor protection mandates.
Daly explained that issuing requests for comment does not guarantee eventual rule changes, but it provides the SEC with a flexible path to address concerns through other mechanisms such as exemptive relief or staff no-action letters.
"This RFC is about process, not about any particular ETF fund structure or asset class. In fact, our goal is to ensure that our review process can handle today's novel exposures and structures - as well as strategies yet to be invented," Daly said.
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