The Mutual Fund Directors Forum has asked the Securities and Exchange Commission to prohibit funds not regulated by the Investment Company Act of 1940 from using the exchange-traded fund title. The request was filed in response to a public comment period on novel strategies and would impact more than $530 billion in US ETF assets, representing 3.4% of all such funds' net assets.
The SEC initiated the comment process in June to solicit views on emerging investment structures, including products resembling event contracts or gambling. More than 80 letters have been received from lawyers, industry associations, and individual investors, most seeking greater regulatory clarity. MFDF's submission distinguishes itself by targeting the nomenclature of products that lack '40 Act oversight.
Carolyn McPhillips, president of MFDF, stated that the rapid evolution of ETF structures in recent years has raised questions about whether all current offerings belong in that wrapper. The group argues that the ETF designation implies specific regulatory oversight, particularly by an independent board of directors, which is not present in many of the newer product types.
This debate centers significantly on spot crypto products. Because digital assets like bitcoin and ether are treated as commodities under current US law rather than securities, most spot crypto ETFs are not regulated by the '40 Act. Spot crypto exchange-traded products have been available since early 2024, with funds such as iShares' Bitcoin Trust ETF (IBIT) and Fidelity's Wise Origin Bitcoin Fund (FBTC) reporting record activity since their launch.
MFDF contends that these funds should be excluded from the ETF name to avoid misleading investors about the level of governance involved. McPhillips noted that calling a product an ETF suggests a certain amount of regulatory oversight that is not necessarily true for commodity-based digital asset funds.
Other filers have expressed parallel concerns about the boundaries of the ETF structure. The long-term investing nonprofit FCLTGlobal argued that event contracts-based and prediction market ETFs should not be permitted to use the format. Similarly, Better Markets submitted a letter asserting that sports futures funds are too distinct from traditional '40 Act products to qualify for the ETF label.
The SEC previously denied spot crypto product applications due to concerns over market manipulation and inadequate investor protection. Reversing years of approvals to enforce stricter naming conventions would be a significant undertaking for the agency. This potential regulatory shift comes amid recent proposals that could allow certain crypto assets to fall outside securities law. McPhillips indicated that these broader legal classifications are beside the point for the forum, asserting that having a clear distinction between regulated and unregulated exchange-traded products is important for shareholders.