The US Securities and Exchange Commission (SEC) has sent warning letters to several exchange-traded fund (ETF) companies.
These letters tell the companies to stop plans for products that would give investors more than double exposure to their underlying assets.
Direxion, ProShares, and Tidal were among the firms that received the letters. The SEC cited the Investment Company Act of 1940, which limits the leverage a fund can take on.
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Under this law, an investment fund cannot exceed 200% of its value-at-risk compared to its base holdings.
This limit is measured using what the SEC calls a “reference portfolio”. The portfolio represents an unleveraged version of the assets or benchmark indexes that the fund tracks. The agency explained:
The fund’s designated reference portfolio provides the unleveraged baseline against which to compare the fund’s leveraged portfolio for purposes of identifying the fund’s leverage risk under the rule.
The SEC told ETF issuers that they must lower their proposed leverage levels before their applications would be reviewed.
This step effectively slows efforts to launch highly leveraged crypto ETFs in the United States, including those seeking 3 to 5 times exposure to digital assets.
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