SEC Seeks Comment on Novel ETFs: Crypto Asset Classes in Focus

The SEC's Division of Investment Management issued a request for comment in early 2025 asking whether existing ETF rules under Rule 6c-11 of the Investment Company Act of 1940 adequately address "novel" fund structures holding crypto assets, commodities, and other non-traditional holdings. That request, combined with the January 2024 approval of spot Bitcoin ETFs under the Securities Exchange Act of 1934 (not the '40 Act), has created a two-track regulatory environment that fund sponsors, issuers, and their counsel are still untangling. The comment window matters: positions staked now will shape the rulemaking that governs digital asset ETFs for the next decade.

TL;DR

• The SEC is actively soliciting public comment on whether Rule 6c-11 and related '40 Act exemptions need updating for crypto and other novel asset classes.
• Spot Bitcoin and Ether ETFs approved in 2024 operate as commodity-based trust shares under the Exchange Act, not as registered investment companies — a structural distinction with major compliance implications.
• Fund sponsors considering '40 Act-registered crypto ETFs face unresolved questions on custody, valuation, and in-kind redemption mechanics.
• Comment submissions are a strategic tool: firms that engage now influence the final rule text.
• Failure to track the comment docket risks being blindsided by rule amendments that alter your fund's operational or registration requirements.

What This Regulation Actually Requires

Rule 6c-11 and Its Current Scope

Rule 6c-11, adopted in September 2019, allows ETFs organized as open-end funds to operate without individual exemptive relief, provided they meet specific conditions: custom baskets must be governed by written policies, the fund must publish its portfolio holdings daily, and in-kind creation/redemption must be available to authorized participants. The rule was designed with equity and fixed-income ETFs in mind. Crypto assets weren't part of the drafting conversation.

The SEC's comment request asks whether the rule's arbitrage mechanism assumptions hold when the underlying asset trades on fragmented, 24/7 global markets with no consolidated tape. That's not a rhetorical question. It's a signal that staff believe the current framework may be structurally inadequate.

The Exchange Act vs. '40 Act Divide

Spot Bitcoin ETFs approved in January 2024 — including products from BlackRock, Fidelity, and others — are listed under Section 19(b) of the Securities Exchange Act of 1934 as commodity-based trust shares. They are not registered investment companies. That means they don't carry the investor protections embedded in the Investment Company Act: no board oversight requirements, no affiliated transaction restrictions under Section 17, no leverage limits under Section 18.

The SEC's comment request implicitly asks: should crypto ETFs eventually migrate into the '40 Act framework, and if so, what modifications are necessary? The custody question alone is thorny. Section 17(f) of the '40 Act requires fund assets to be held by a qualified custodian. The SEC's 2023 Staff Bulletin on crypto asset custody raised serious doubts about whether most digital asset custodians currently meet that standard, particularly given the treatment of crypto assets on custodians' balance sheets under SAB 121 (now partially revised by SAB 122).

SAB 122 and the Custody Shift

Staff Accounting Bulletin 122, issued in January 2025, rescinded the controversial SAB 121 guidance that required custodians to record customer crypto assets as both an asset and a liability on their own balance sheets. SAB 121 had effectively made bank custody of crypto economically unworkable. SAB 122's rescission removes that barrier, but it doesn't automatically qualify bank custodians as "qualified custodians" under Rule 206(4)-2 or Section 17(f). The comment request asks whether the SEC should issue formal guidance clarifying custodian eligibility for '40 Act-registered crypto funds.

Valuation Under Rule 2a-5

Rule 2a-5, the fair value rule that took effect September 2022, requires fund boards to designate a valuation designee and establish policies for determining fair value in good faith. For crypto assets, the rule's requirements around "readily available market quotations" are ambiguous. Bitcoin has deep spot market liquidity; a mid-cap altcoin does not. The comment request specifically asks how funds should handle assets where price discovery is fragmented across centralized and decentralized exchanges, and whether the SEC should issue asset-class-specific guidance under 2a-5.

In-Kind Redemption Mechanics

One of the more operationally complex issues: spot Bitcoin ETFs currently use cash creation and redemption, not in-kind. The SEC required this structure in 2024 because broker-dealers — the typical authorized participants — aren't licensed to handle crypto directly. The comment request asks whether rule changes or no-action relief could enable in-kind creation/redemption for crypto ETFs, which would improve tax efficiency and reduce tracking error. This is a live issue for fund sponsors modeling the economics of future products.

What This Means for Your Company

If you're a fund sponsor or issuer: The comment period is your opportunity to shape the operational requirements that will govern your next product. Firms that submitted detailed comment letters during the 2019 ETF Rule rulemaking saw their operational concerns reflected in the final rule text. Silence is a strategic error.

If you're an authorized participant or market maker: The in-kind redemption question directly affects your operational model. If the SEC moves toward permitting in-kind crypto ETF transactions, you'll need custody infrastructure and potentially new licensing. Start the infrastructure assessment now, not after the rule drops.

If you're a digital asset custodian: SAB 122 removed one barrier, but '40 Act qualification remains unresolved. A comment letter articulating your custody controls, insurance arrangements, and segregation practices could influence whether the SEC issues favorable guidance on custodian eligibility.

If you're fund counsel: Clients will ask whether their existing exemptive orders cover novel crypto structures. The honest answer is: probably not without amendment. The comment request signals that the SEC is considering whether to grandfather existing exemptive relief or require new applications for crypto-holding funds.

The broader strategic point: the SEC under its current composition has shown more openness to crypto fund structures than at any point since 2013, when the first Bitcoin ETF application was filed. That window won't stay open indefinitely.

How to Operationalize

Step 1 — Monitor the docket. The SEC's EDGAR comment system and the Federal Register notice for this rulemaking are your primary sources. Set up alerts for the specific release number associated with the comment request. Docket numbers matter; generic "SEC crypto" searches miss targeted filings.

Step 2 — Conduct an internal gap analysis. Map your current fund structure against the open questions in the comment request: custody arrangements, valuation policies under 2a-5, creation/redemption mechanics, and portfolio disclosure practices. Document where your current policies are silent or ambiguous on crypto-specific scenarios.

Step 3 — Draft a comment letter. Effective comment letters are specific. Reference the exact questions posed in the release, provide data where available (e.g., bid-ask spreads, custody costs, operational timelines), and propose concrete rule text or guidance language. Generic support letters carry little weight with staff.

Step 4 — Coordinate with trade associations. The Investment Company Institute, the Managed Funds Association, and the Chamber of Digital Commerce have all been active in this space. Coordinating your letter with industry positions amplifies impact without requiring you to lead the effort.

Step 5 — Update your exemptive application strategy. If you're planning a '40 Act-registered crypto fund, don't wait for the final rule. File a pre-application meeting request with the Division of Investment Management to understand current staff views on custody and valuation for your specific structure.

Step 6 — Review your SAB 122 impact analysis. If your fund uses a bank custodian that previously declined crypto custody due to SAB 121, re-engage. The economics changed in January 2025.

Step 7 — Calendar the comment deadline. Comment periods on significant SEC releases typically run 60 days from Federal Register publication. Missing the deadline doesn't bar you from submitting, but late comments receive less weight in the staff's analysis.

Common Mistakes and How to Avoid Them

Treating the Exchange Act approval as a '40 Act green light. It isn't. The January 2024 spot Bitcoin ETF approvals were Exchange Act actions. They say nothing about whether a '40 Act-registered fund holding Bitcoin would satisfy Section 17(f) custody requirements or Rule 2a-5 valuation standards. Conflating the two frameworks is the most common error fund counsel make when advising new entrants.

Assuming SAB 122 resolved the custody problem. SAB 122 fixed an accounting issue. It didn't amend Rule 17f-1, Rule 17f-2, or the qualified custodian definition under the Advisers Act. Your custodian still needs to satisfy those standards independently.

Filing a comment letter that reads like a press release. Staff attorneys read hundreds of comment letters. Letters that lead with company background and end with vague support for "innovation" are filed and forgotten. Lead with the specific question number from the release, state your position in the first sentence, and support it with operational data or legal analysis.

Ignoring state-level implications. Several states have their own investment company registration requirements or blue sky rules that may apply to crypto ETFs sold to retail investors. A federal comment letter strategy doesn't substitute for a state law analysis.

Waiting for the final rule to update fund documents. If the SEC issues a final rule amending 6c-11 or related exemptions, funds will face compliance deadlines that may be shorter than the time needed to amend prospectuses, update SAIs, and retrain operations staff. Build the compliance infrastructure before the rule is final.

FAQ

Q: Does the SEC comment request create any immediate compliance obligations?

No. A request for comment is a pre-rulemaking step. It creates no new legal requirements. The obligation arises only when a final rule is published in the Federal Register with an effective date. That said, the comment record shapes the final rule, so engagement now has practical importance.

Q: Can a '40 Act-registered fund hold spot Bitcoin today?

Technically, there's no categorical prohibition. But no fund has successfully registered under the '40 Act with spot Bitcoin as a primary holding, because the SEC has not confirmed that available custody arrangements satisfy Section 17(f). The comment request is partly aimed at resolving this ambiguity.

Q: How does the Ether ETF approval in May 2024 affect the analysis?

The SEC approved spot Ether ETFs in May 2024 under the same Exchange Act framework as Bitcoin ETFs. The approval didn't resolve the '40 Act custody or valuation questions. It did, however, establish that the SEC views Ether as a commodity for Exchange Act listing purposes — a position with implications for how Ether-holding '40 Act funds might eventually be treated.

Q: What's the significance of in-kind redemption for crypto ETFs?

In-kind redemption allows authorized participants to exchange a basket of the underlying asset directly for ETF shares, rather than going through a cash intermediary. It's more tax-efficient and typically produces tighter tracking. The current cash-only model for crypto ETFs was a regulatory accommodation, not a permanent policy choice. If the SEC permits in-kind mechanics, it changes the economics of crypto ETF sponsorship significantly.

Q: Should smaller fund sponsors bother filing comment letters?

Yes. The SEC's comment process is not weighted by AUM. A technically precise letter from a smaller firm addressing a specific operational question — say, the mechanics of valuing illiquid altcoins under 2a-5 — can carry more weight than a generic letter from a large institution. Staff are looking for data and analysis, not lobbying.

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Sources

• U.S. Securities and Exchange Commission, Investment Company Act Release No. 34084, Rule 6c-11 (Exchange-Traded Funds), September 2019
• U.S. Securities and Exchange Commission, Staff Accounting Bulletin No. 122, January 2025
• U.S. Securities and Exchange Commission, Investment Company Act Release No. 34084, Rule 2a-5 (Good Faith Determinations of Fair Value), effective September 2022
• U.S. Securities and Exchange Commission, Order Granting Accelerated Approval of Proposed Rule Changes to List and Trade Shares of Spot Bitcoin Exchange-Traded Products, January 2024 (Securities Exchange Act Release Nos. 34-99306 et al.)

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Disclaimer

This article is provided for general informational and educational purposes only. It does not constitute legal, regulatory, tax, or investment advice, and does not create an attorney-client relationship. The regulatory landscape described herein is subject to change; readers should verify current requirements with qualified legal counsel before taking any action. BizLegal-AI Intelligence Desk makes no representations as to the completeness or accuracy of information derived from third-party regulatory sources. Nothing in this article should be relied upon as a substitute for professional advice tailored to your specific circumstances.