SEC Sends Mixed Signals About Cutting Edge ETFs

May 24, 2017

The Securities and Exchange Commission has been sending some mixed messages to the ETF market lately, reminding folks involved with this industry that regulatory risk is real.

First, the commission turned down all efforts to bring to market the bitcoin ETFs earlier this year—some of which had been in the pipeline for three years—just to have that rejection reopened for review in an appeal. That appeal is still ongoing.

The SEC then approved a request proposing the launch of a pair of ForceShares 4x leveraged and inverse ETFs for the first time, just to have that approval roadblocked pending additional review.

The regulatory guidance has been confusing, to say the least, generating a barrage of headlines. It has also cast a shadow onto the perception that the SEC, under the current administration, was going to be more flexible and open to innovation.

Flip-Flopping Decisions

Although there’s been no official statement to that effect regarding ETFs specifically, regulators have suggested flexibility would be an underlying theme with the commission going forward. So what’s with the flip-flopping regarding ETFs that attempt to go where none has gone before? (SEC declined to comment for this story.)

The truth is we don’t really know. And we don’t know if reviewing these recent decisions will eventually mean bitcoin ETFs will come to market and 4x leveraged funds will be stashed away for good.

But we can at least try to clarify some key points with the help of industry experts.

Bitcoin ETFs: The Rare Official Denial And Appeal

It’s rare to see the SEC actually issue an order rejecting a change request or exemptive relief as it did for bitcoin ETFs in registration, according to Jeremy Senderowicz, partner at Dechert—a law firm highly involved with the ETF industry. Appeals on those decisions are even rarer.

Typically, when regulators are going to say no to an ETF petition, the SEC tends to informally communicate with those making the petitions, and the involved parties pull the application before it’s formally turned down.

What happened to the bitcoin ETFs is rare, and it could suggest that a decision on these ETFs really came down to the wire. Perhaps there was not a lot of time for informal conversations.

If the commission was that conflicted with the idea of bitcoins in ETF wrappers in the first place, it may be difficult to imagine it will find enough peace to reverse its ruling a second time around.

But those involved with these ETF requests are hopeful, and the bitcoin market has been rallying un-phased.

“We’d like the SEC to show more flexibility with bitcoin, and we didn’t think the SEC’s rejection was justified,” said Senderowicz, whose firm is involved with the SolidX Partners’ bitcoin ETF efforts. “On what they are going to do, however, we don’t have any information.”


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