SEC Halts Review of Ultra-Leveraged ETFs, Citing Risk Limits
From the desk of Jim Eccleston at Eccleston Law
The U.S. Securities and Exchange Commission (SEC) has stepped in to curb the expansion of ultra-leveraged exchange-traded funds, issuing a series of warning letters that effectively block proposed products designed to deliver three- and five-times the daily returns of stocks, commodities, and cryptocurrencies.
ThinkAdvisor reports that in nine nearly identical letters, the SEC told ETF sponsors including Direxion, ProShares, and Tidal that it would not proceed with registration reviews unless the firms addressed fundamental concerns about risk exposure. According to ThinkAdvisor, the regulator focused on whether the proposed funds exceed longstanding limits on how much leverage an ETF can assume relative to its assets. The letters instruct issuers to revise their strategies or withdraw their filings altogether. ProShares has already withdrawn applications for several proposed 3x products, including leveraged cryptocurrency ETFs.
ThinkAdvisor reports that the SEC made its position clear. In each letter, the agency wrote that it had concerns about registering ETFs that seek to provide more than 200percent leveraged exposure to an underlying index or security. Existing rules have long capped leverage at that level, and no 3x or 5x single-stock ETF currently operates in the U.S. market.
As reported by ThinkAdvisor, leveraged ETFs rely heavily on derivatives to magnify daily returns. Investors have flocked to these products in recent years, drawn by the potential for rapid gains in fast-moving markets. Assets in leveraged ETFs have surged since the pandemic, even as critics continue to warn that these products carry outsized risk and complexity that many retail investors may not fully understand. Outside the U.S., regulators have already taken action against similar products, including the closure of a 3x short single-stock ETF in Europe after a sharp market move wiped out its value.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
Tags: eccleston, eccleston law, sec
