(Adds context and details on ETFs)
By Ashley Lau
NEW YORK May 19 BlackRock Inc, the
largest U.S. provider of exchange-traded funds, has moved a step
further toward launching a new breed of ETFs that would be
allowed to keep holdings under wraps for months, instead of the
daily disclosure now required.
A filing late on Friday from BATS Global Markets, which
seeks approval from the U.S. Securities and Exchange Commission
to list and trade shares of some funds, is tied to a trust that
BlackRock plans to use to launch these so-called
"non-transparent" active ETFs.
The funds in the BATS filing include 13 potential BlackRock
iShares non-transparent active ETFs, mainly large and mid-cap
equity funds. Such funds, if approved, would be allowed to
report their holdings on a quarterly basis, putting them on par
with traditional mutual funds.
The BATS filing, known as a Form 19b-4, is required in order
for such actively managed funds to be listed on an exchange. It
follows an earlier proposal submitted in September 2011 by
BlackRock asking the SEC to allow them to build such funds. For
BlackRock to be able to launch non-transparent active ETFs, both
proposals would need to be approved.
BlackRock and BATS declined to comment on the filing.
ETFs hold a basket of securities, such as equities,
commodities or bonds, and can be traded on exchanges like
stocks. Most "passive" ETFs seek to mirror the holdings of
rules-based indexes, while "active" ETFs have holdings that can
be actively selected by managers.
Currently, all ETFs, both active and passive, are required
to disclose their holdings daily. This allows the funds' market
makers to make trades that keep the fund's share price in line
with the value of its underlying assets. But for actively
managed funds, which often gain a reputation based on a
manager's winning investment philosophy, daily transparency
could allow others to "front-run" the active manager.
Firms say non-transparent ETFs will allow them to use
sophisticated investment strategies without having to reveal the
fund manager's secret sauce.
The BlackRock proposal, for example, includes a "blind
trust" through which a market maker or authorized participant
could execute orders, so that the manager would not have to
disclose the fund's holdings daily.
The model is based on a concept created by Bedminster, New
Jersey-based Precidian Investments, which also has a proposal in
front of the SEC.
"We're very encouraged by the recent filing," said Stuart
Thomas, a principal at Precidian, noting that the increase in
activity in the non-transparent active ETF space "would seem to
mean that people have a lot more confidence today" about the
funds eventually coming to market.
Several other large asset managers, including State Street
Corp and Eaton Vance Corp, have also asked the SEC to
let them market such actively managed ETFs.
So far, none of the proposals have won SEC approval.
(Reporting by Ashley Lau in New York; Editing by Tom Brown and