The Securities and Exchange Commission warned in its 2026 exam priorities that a number of exchange-traded funds would be on its radar this year.
Complex investments — for example, ETF wrappers on less liquid underlying strategies, option-based ETFs, and leveraged and/or inverse ETFs — will come under closer scrutiny.
In particular, exams will focus on:
- ETFs that invest in illiquid assets such as private equity or private credit
- ETFs utilizing artificial intelligence or claiming to do so
- leveraged/inverse ETFs
- digital asset ETFs (whether spot or otherwise)
- single-stock ETFs
- illiquid ETFs
In December, the SEC blocked ETFs designed to deliver three and even five times the daily returns of stocks, commodities and cryptocurrencies, Bloomberg reported. The SEC's concern "is that the funds' risk exposures may exceed SEC limits on how much risk a fund can take on relative to its assets," Bloomberg said.
The Financial Industry Regulatory Authority has already taken aim this year against a broker-dealer for lacking leveraged ETF policies.
The SEC will continue its focus on complex ETFs, according to Amy Lynch, president and founder of FrontLine Compliance. This includes "structures that include leverage, inverse, crypto or other digital assets."
The SEC has "expressed concern around how leveraged and inverse ETFs are used in retail since these products are not meant to be held long term," Lynch relayed. "They were created for institutional managers to use as a short-term hedge in their portfolios, but then they started appearing in retail accounts. Many retail investors suffered big losses by holding the products too long and sometimes that was due to lack of liquidity for these products in a retail setting."
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