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UPDATE 1-BlackRock advances in pursuit of ETFs with non-daily disclosure
May 19, 2014 / 7:05 PM / in 4 years

UPDATE 1-BlackRock advances in pursuit of ETFs with non-daily disclosure

(Adds context and details on ETFs)

By Ashley Lau

NEW YORK, May 19 (Reuters) - 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 Andrew Hay)

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