The Division of Investment Management (Division) of the Securities and Exchange Commission took an unprecedented action on Wednesday in issuing a preliminary denial to two exemptive relief applications under the Investment Company Act of 1940 for the operation of a non-transparent active exchange-traded fund (ETF). The exemptive relief applications, filed by Precidian Investments (Precidian) for Precidian ETFs Trust and BlackRock Fund Advisors for Spruce ETF Trust, relied upon a patented methodology developed by Precidian. Applications for non-transparent active ETFs filed by other managers that use different methodologies remain pending before the Division.
Precidian’s non-transparent active ETF methodology relied upon authorized participant arbitrage between the published indicative intraday value per share of a fund’s underlying assets and the current trading price of that fund’s shares. Authorized participants could then create and redeem shares through a blind trust to preserve the identity of the non-transparent portfolio holdings.
The Division’s releases noted specific issues related to the methodology, particularly in respect of the proposed arbitrage mechanism. Unless the SEC grants a request for a public hearing to discuss the issues, the Division’s denial of the two applications is expected to stand.