(Bloomberg) — The U.S. Securities and Exchange Commission rejected plans by BlackRock Inc. and Precidian Investments to open a new type of exchange-traded fund that wouldnt disclose holdings daily, setting back efforts to bring more actively managed ETFs to market.
TheSEC, in preliminary decisions announced yesterday, denied BlackRocks September 2011 and Precidians January 2013 requests for exemptive relief from the Investment Company Act of 1940. The move puts on hold plans by the firms to start the first non-transparent ETFs.
The Precidian proposal falls far short of providing a suitable alternative to the arbitrage activity in ETF shares that is crucial to helping keep the market price of current ETF shares at or close to its net asset value, Kevin ONeill, a deputy secretary at theSEC, wrote in the letter.
The ruling hinders plans by asset managers to sell funds run by traditional stock-picking managers in an ETF package. Firms including Capital Group Cos. have asked for similar regulatory approval as they seek to expand offerings in the fastest-growing product in the asset-management industry.
Money managers have been discouraged from introducing active ETFs, which combine security selection with the intraday trading and some of the cost-saving features of traditional ETFs, because the SECs requirement for daily disclosure of holdings would make it easy for competitors to copy, and traders to anticipate, a managers portfolio changes.
Not Surprised
We want to work with theSEC— we believe its part of the process, Daniel McCabe, Precidians chief executive officer, said in a telephone interview. Were not surprised by the fact that they have questions, but questions can be answered.
ETF providers must disclose holdings every day to enable market makers to execute trades that keep the share price in line with the underlying value of the funds assets. Firms including BlackRock, Precidian and Guggenheim Partners LLC proposed structures that they say would allow the funds to remain priced in line with assets, without revealing specific positions.
T. Rowe Price Group Inc. in Baltimore and Bostons Eaton Vance Corp. are also among fund firms seekingSECapproval for non-transparent active ETFs. None of the applications has been approved.
We are still pursuing our own proposal to offer non- transparent active ETFs, Heather McDonold, a spokeswoman for T. Rowe, said in a telephone interview.
Commercial Opportunity
Melissa Garville, a spokeswoman for New York-based BlackRock, and Ivy McLemore, a spokesman for Guggenheim, declined to comment. Robyn Tice, a spokeswoman for Eaton Vance, and Elizabeth Bartlett for State Street Corp. didnt immediately respond to an e-mail and telephone messages seeking comment.
BlackRock was one of the first U.S. fund managers to ask theSECfor approval, after spending three years crafting the product. Their leading role in seeking approval for a non- transparent active ETF has spurred excitement within asset management for the products prospects, according to Todd Rosenbluth, director of mutual-fund and ETF research at S&P Capital IQ in New York.
Mark Wiedman, BlackRocks global head of its iShares ETF unit, said in May that the firm was confident the products would work, but we dont actually think it will be much of a commercial opportunity.
Any Impact
Capital Group is studying the SECs ruling to see the impact, if any, it might have on our application that is currently before theSEC, Chuck Freadhoff, a spokesman for the Los Angeles-based company, said today in a telephone interview.
Actively managed ETFs account for less than 1 percent of U.S. ETF assets and are dominated by products that invest in bonds. Transparency is less of an issue on the fixed-income side, where the opacity and negotiated nature of transactions in the over-the-counter bond market protect managers.
ETFs have attracted regulatory scrutiny as assets surged more than 10-fold in the U.S. over the past decade to $1.7 trillion as of the end of 2013, according to the Investment Company Institute. The products are bundles of securities that trade on an exchange, like stocks. Investors in most mutual funds can buy or sell shares once a day, typically after markets close, and only directly with the fund.
Damaging Confidence
Any breakdown in the pricing or the ability to price the proposed ETF may result in damage to market confidence in secondary trading of ETFs — not just in the proposed product, but in ETFs generally, theSECsaid in the letter.
TheSECmet with market makers who expressed some skepticism that the proposed ETF structure could send adequate pricing signals, so they would have to charge wider price spreads, resulting in market prices that deviate further from NAV, which would be contrary to the foundational principle that shareholders are treated equitably, according to the letter.
