ETF News

UPDATE 1-SEC to reject second application by Precidian for non-transparent ETFs

(Adds comment from Precidian, details from letter)

July 27 (Reuters) - The Securities and Exchange Commission is denying a second application from Precidian Investments to launch non-transparent active exchange-traded funds, according to a letter from the SEC disclosed Monday.

However, Precidian is not giving up, Daniel McCabe, chief executive officer at the firm, said in an interview.

“This is a normal part of the ETF application process. They ask questions, you answer, and they ask more questions,” McCabe said.

Eaton Vance Corp, which has received SEC approval to launch similar funds, called exchange-traded managed funds, disclosed the SEC’s plans to deny Precidian’s applications Monday morning.

The Boston-based firm got the letter from the SEC to Precidian’s attorney through a Freedom of Information Act request to the agency, Eaton Vance said.

ETFs hold a basket of securities, such as equities 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 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.

In October, the SEC issued a notice stating it planned to deny Precidian’s first application for active non-transparent ETFs over concerns that the proposed “blind trust” structure, by which a market maker or authorized participant could execute orders, would not enable market makers to effectively arbitrage the proposed ETFs.

Bedford, New Jersey-based Precidian amended its application in December to state that market makers would receive a full portfolio of each ETF, according to the letter.

But in its letter, dated April 17, the agency wrote it believes that the second application poses a new set of regulatory concerns by allowing market makers to have non-public information before other market participants, according to the letter.

“Accordingly, we are unwilling to support the request for exemptive relief in the new application,” the agency wrote in the letter.

Precidian may withdraw the application and refile a new proposal, which Precidian is working on, McCabe said.

“I am glad to see that Eaton Vance is so focused on us, while we focus on doing our business,” he said.

Reporting By Jessica Toonkel; Editing by Cynthia Osterman