SEC Quashes Non-Transparent ETFs
The SEC has indicated that it intends to deny requested relief for exchange-traded funds that do not provide portfolio transparency. The SEC explains that previous exemptive relief has relied on intraday and daily portfolio transparency to minimize arbitrage between trading prices and the published NAV. Applicants object to such transparency because it allows third parties to front-run portfolio purchases. Instead, applicants would rely on “Indicative Intraday Value” as a valuation proxy to reduce arbitrage opportunities. The SEC does not believe that IIV is an adequate proxy for full transparency because of timing and information limitations especially during stressed markets.
OUR TAKE: Although the SEC allowed actively-managed ETFs, it has drawn the innovation line at non-transparency. Perhaps, the applicants can address the SEC’s concerns, but they will have a tough row to hoe now that the SEC has expressed its public intention to deny the applications.