On April 8, 2019, the SEC issued a notice of its intent to grant exemptive relief from certain provisions of the Investment Company Act of 1940 allowing Precidian Funds LLC to introduce a new type of actively-managed ETF that would not be required to publicly disclose its portfolio holdings on a daily basis. On May 20, 2019, the SEC formally granted the requested exemptive relief to Precidian, subject to the conditions described below.
Traditional ETFs operate pursuant to exemptions from the 1940 Act that allow the creation and redemption of large baskets of shares at net asset value, and the secondary trading of shares at negotiated prices. This structure creates arbitrage opportunities for certain authorized participants and facilitates the secondary market trading of shares at prices reflective of the ETF’s net asset value. However, as a condition to the exemptive relief, ETFs are required to publicly disclose portfolio investments on a daily basis. Precidian stated that it believes active managers are reluctant to use a traditional ETF structure because the daily disclosure of portfolio holdings would create opportunities to front run the ETF’s trades, replicate or free ride the ETF’s portfolio or reverse engineer the ETF’s trading strategies.
Instead of daily portfolio disclosures, Precidian will calculate and publish a verified intraday indicative value (VIIV) every second throughout the trading day. This is intended to allow retail investors to make informed decisions about whether to buy or sell shares and to provide authorized participants with information necessary to determine whether arbitrage opportunities exist. Instead of publicly disclosing the identities and quantities of securities that comprise a creation basket, each authorized participant will maintain an unaffiliated brokerage account to which Precidian will confidentially disclose the investments that comprise a creation basket on a daily basis. Under the new structure, authorized participants will monitor the VIIV and, if arbitrage opportunities exist, order the unaffiliated broker to create or redeem shares without the authorized participant ever knowing the identities or quantities of investments that comprise a creation basket. These features are intended to protect actively-managed ETFs from other market participants front-running the ETF’s trades, replicating the ETF’s portfolio and reverse engineering the ETF’s investment process.
As a condition to the exemptive relief, Precidian has agreed to provide certain public disclosure about how the new ETF structure differs from traditional ETFs. Such disclosure includes: (1) that the lack of portfolio transparency may increase bid-ask spreads or cause the ETF’s shares to trade at a premium or discount to NAV; (2) that market participants may attempt to reverse engineer the ETF’s trading strategies; and (3) a legend on the outside cover of the ETF’s prospectus highlighting the differences between the ETF and a traditional ETF. In addition, Precidian has agreed to comply with the requirements of Regulation FD, to take any remedial actions necessary if the ETF does not function as anticipated and to provide the SEC with other information necessary to facilitate the SEC staff’s ongoing monitoring of the ETF.
Precidian’s application for exemptive relief is available at: https://www.sec.gov/Archives/edgar/ data/1499655/000114420419018151/tv518160_40-appa.htm
The order granting exemptive relief is available at: https://www.sec.gov/rules/ic/2019/ic-33477.pdf