SEC Halts Review of Leveraged ETF Applications

The U.S. Securities and Exchange Commission has halted its review of applications for highly leveraged exchange-traded funds, including those tied to cryptocurrencies and volatile stocks, citing risks that exceed regulatory limits. The agency issued warning letters on Tuesday to nine ETF issuers, such as ProShares, Direxion, Tidal Financial, and Volatility Shares, requiring them to address compliance issues before proceeding.

The letters focused on proposals for funds offering three times or five times the daily performance of underlying assets, levels that regulators determined violate Rule 18f-4 of the Investment Company Act of 1940. This rule limits a fund's value-at-risk exposure to 200 percent of its unleveraged benchmark, a threshold designed to manage leverage through derivatives without amplifying losses beyond acceptable bounds. Several filings, including those linked to Bitcoin, Ethereum, Solana, Nvidia, and Tesla, used reference portfolios that the SEC said understated the true volatility of the assets, potentially exposing investors to outsized risks in unfavorable markets.

In response, ProShares withdrew several applications by Wednesday for 3x leveraged ETFs...