SEC Seeks Public Comment on Novel ETFs

Who may be interested: Registered Investment Companies; Directors of Registered Investment Companies; Investment Advisers  Registered Investment Companies; Directors of Registered Investment Companies; Investment Advisers; Hedge Funds  

Quick Take: Recently, the SEC issued a request for public comment (the “Request”) on ETFs regulated under the Investment Company Act of 1940, that seek to invest in innovative asset classes or engage in novel investment strategies ("Novel ETFs”). The SEC is seeking input on whether certain Novel ETFs qualify as investment companies under the 1940 Act, whether the existing ETF regulatory framework remains appropriate for these products, and whether changes to the registration process for Novel ETFs may be warranted. The Request does not address exchange-traded products (“ETPs”) that are not registered as investment companies and are instead regulated solely under the Securities Act of 1933 and the Securities Exchange Act of 1934, such as grantor trusts holding spot non-security assets or commodity pools investing in futures contracts.  

The Request asks whether the current regulatory framework adequately addresses these products while continuing to support innovation, investor protection, efficient markets and capital formation. The Request has three principal topics: (1) whether certain Novel ETFs qualify as investment companies eligible to register with the SEC as ETFs; (2) whether Rule 6c-11 appropriately addresses these emerging ETF strategies and asset classes; and (3) whether the registration process for Novel ETFs should be modified, including whether changes to the disclosure regime should be considered to address special concerns with Novel ETFs.

The SEC asks whether Novel ETFs that invest primarily in assets that may not constitute securities under the 1940 Act should nevertheless be treated as investment companies. The SEC questions the application of the 1940 Act’s traditional tests under Section 3(a) for investment company status,¹ and the continued relevance of the five-factor Tonopah analysis.² The SEC wants to know whether different or additional factors should be used to assess investment company status of Novel ETFs.

The SEC also asks why sponsors choose the registered investment company structure rather than alternative exchange-traded product (ETP) structures, and how investments through wholly owned subsidiaries should factor into the investment company status analysis.

2. Novel ETFs and Rule 6c-11

The SEC also seeks comment on whether Rule 6c‑11 should be amended to address novel investment strategies and asset classes. Although Rule 6c‑11 imposes structural requirements intended to support ETF arbitrage and secondary market trading, it generally does not restrict the types of investment strategies an ETF may use.

Accordingly, the SEC asks whether Novel ETFs raise unique concerns relating to ETF arbitrage, investor protection, market integrity, market surveillance, or operational risks. The SEC also asks whether Rule 6c‑11 should include portfolio-related requirements, such as minimum securities holdings, diversification requirements, concentration limits, issuer-specific restrictions, or limitations on particular asset classes or strategies.³ In addition, the SEC queries whether there is investor confusion concerning Novel ETFs, the use of ETF-related terminology by non-investment company ETPs, and whether amendments to Rule 6c‑11 could better balance innovation, investor protection, and exchange-listing considerations.

3. Registration Process and Rule 485

The SEC is also evaluating whether the current registration process provides sufficient staff time to review Novel ETFs. Under Rule 485, post-effective amendments that register new ETF series of an existing registered series trust generally become automatically effective after prescribed waiting periods – 60 days for a material change to an existing ETF series or 75 days for a new ETF series. The SEC notes that Novel ETFs may present legal, regulatory and operational issues that are difficult to evaluate within those timeframes and seeks comment on whether the current effectiveness framework should be modified.

The SEC is asking questions that appear to be an effort to clean up its ETF regulatory regime to prevent abuse of process by or unfair competitive advantages accruing to Novel ETF sponsors. The main topics under the Novel ETF registration process and Rule 485 heading are:

• Is the timing of automatic effectiveness (60 or 75 days) too short for staff review;
• What happens when a sponsor fails to respond to staff comments;
• Whether to allow the SEC to delay Novel ETF effectiveness and a parallel question of whether the SEC staff can cause suspensions of effectiveness or suspend a sponsor’s ability to file for Novel ETFs at all;
• Whether the SEC should allow effectiveness before an asset class is investable;
• Should the staff develop an early engagement model for sponsors to interact with staff pre-filing, which scheme would be comparable to emerging growth company and confidential draft registration statement submission process already existing for novel ETPs with the staff of the Division of Corporation Finance;
• What should be done by the SEC with ETFs that never launch;
• What should happen when there are unresolved Staff comments at time of automatic effectiveness;
• How should the staff deal with last minute material changes to disclosures, either immediately before or after effectiveness but before Novel ETF launch; and
• Whether additional disclosures are needed for Novel ETFs.

Comments must be received on or before August 31, 2026.

The SEC’s request for comment can be accessed here.

¹ Under Section 3(a)(1)(A) and (C) of the 1940 Act, an issuer must satisfy one of two tests to qualify as an investment company. The subjective test provides that an issuer is an investment company if it holds itself out as engaging in the business of investing, reinvesting, or trading in securities. The objective test provides that an issuer is an investment company if it engages in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 percent of such issuer’s total assets (exclusive of Government securities and cash items) on an unconsolidated basis.

² The Tonopah factors used to evaluate investment company status under Section 3(a)(1)(A) include a company’s historical development, public representations of policy, activities of officers/directors, nature of present assets and sources of present income (In the Matter of Tonopah Mining Co., 26 S.E.C. 426 (July 21, 1947)).

³ Other sections of the 1940 Act and regulations thereunder impose substantive restrictions in these areas.