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(Article from Registered Funds Regulatory Update, July 2026)

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The SEC recently requested public comments on exchange-traded funds that invest in innovative asset classes or pursue novel investment strategies. The SEC framed the request as part of a broader effort to support ETF innovation while protecting investors, promoting fair, orderly, and efficient markets, and facilitating capital formation. Among other things, the request seeks public comment as to whether:

• certain novel ETFs should be treated as “investment companies” as defined under the 1940 Act when their principal investment strategy involves assets that may not be securities. In particular, the SEC asks whether a novel ETF would satisfy the 1940 Act’s “subjective test,” which examines whether an issuer is, holds itself out as, or proposes to be engaged primarily in the business of investing, reinvesting, or trading in securities. The SEC also asks whether it should continue applying the Tonopah factors, a five-factor test that the SEC developed for purposes of the subjective test, in this analysis, which are: (i) the issuer’s historical development; (ii) its public representations of policy; (iii) the activities of officers and directors; (iv) the nature of present assets; and (v) the sources of its present income. The SEC also asks why a product principally investing in non-security assets would seek registration as an investment company rather than using another exchange-traded product structure.
• Rule 6c-11 under the 1940 Act, which permits ETFs meeting specified conditions to operate without obtaining individual exemptive relief,should be amended for novel ETFs, including whether new portfolio requirements, diversification or concentration limits, issuer-specific limits, asset-class exclusions, or strategy restrictions may be appropriate. The request ties these questions to the functioning of the ETF arbitrage mechanism, secondary market trading, investor protection, market surveillance, and broader structural or operational issues.
• the registration process under Securities Act Rule 485 should be modified for novel ETFs, including whether the current 75-day and 60-day automatic effectiveness periods should be extended, tolled, or subject to Commission-initiated delay.

Public comments for the request are due August 31, 2026.

SEC Request for Comment, Request for Comment on Novel ETFs, SEC Release No. 33-11426; 34-105808; IC-36228 (June 30, 2026), available at: https://www.sec.gov/files/rules/other/2026/33-11426.pdf.