SEC Issues Leverage Warnings to ETF Sponsors

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The US Securities and Exchange Commission has dispatched cautionary letters to a number of exchange-traded fund sponsors. This action has paused applications for leveraged ETFs seeking to provide exposure beyond 200% of an asset’s value.

Firms including Direxion, ProShares, and Tidal were recipients of these communications. The SEC invoked specific sections of the Investment Company Act of 1940 in its letters.

Existing regulation limits a fund’s exposure to 200% of its value-at-risk, measured against an unleveraged reference portfolio. The SEC clarified that this reference portfolio establishes the baseline for assessing a fund’s leverage risk under the rule.

The regulator instructed issuers to scale back leverage to comply with the law before their applications could proceed. This move directly impacts proposals for highly leveraged cryptocurrency ETFs in the US, some of which proposed three-to-five times leverage.