Four asset management firms requested exemptive relief to operate exchange-traded funds ("ETFs") without providing full daily transparency of their portfolios ("non-transparent ETFs") as required by the Investment Company Act of 1940. While the SEC stated that it intends to grant relief, two SEC Commissioners expressed concern regarding the characteristics of non-transparent ETFs.

On November 14, 2019, the SEC made public four separate requests (see here, here, here and here) for no-action relief concerning non-transparent ETFs. If approved, the asset management firms would not have to disclose their portfolio holdings on a daily basis. According to the applicants, the exemption is necessary because the funds would be susceptible to theft of intellectual property (e.g., "front running" and "free riding") if they were operated as "fully-transparent actively managed ETFs." All of the applicants stated that the request is similar to the SEC's prior approval of a non-transparent ETF in May 2019 (Precidian ETF Trust II (May 22, 2019)).

In a statement, SEC Commissioners Robert J. Jackson Jr. and Allison Herren Lee expressed concern regarding the four requests and urged the SEC to consider requiring additional guardrails for such non-transparent ETFs going forward. While the Commissioners voted to approve the publication of the four requests, Mr. Jackson stated that he did so largely because, as a competitive matter, it would not have been appropriate to deny them in light of the SEC's prior approval of another non-transparent ETF.

According to the Commissioners, there is a risk that investors would not be able to sell their shares at fair prices in times of stress due to the lack of transparency. Additionally, the Commissioners questioned the applicants' reliance on the no-action relief granted to Precidian ETF Trust II, saying that the case was fundamentally different from the current four applications.

Although the applicants have attempted to address concerns regarding liquidity by focusing on largely liquid assets and adopting guardrails, the Commissioners asked for further action. Specifically, the Commissioners asked the agency to consider whether additional risk disclosures and increased board oversight of the efficiency of the ETFs should be required.

Primary Sources

  1. SEC Public Statement, Robert J. Jackson Jr and Allison Herren Lee, Remarks on Non-Transparent Exchange-Traded Funds
  2. Notice of an Application for Exemptive Relief: T. Rowe Price Associates, Inc. and T. Rowe Price Equity Series, Inc.
  3. Notice of an Application for Exemptive Relief: Natixis ETF Trust II, et al.
  4. Notice of an Application for Exemptive Relief: Fidelity Beach Street Trust, et al.
  5. Notice of an Application for Exemptive Relief: Blue Tractor ETF Trust and Blue Tractor Group, LLC