ETF Managers Group (ETFMG) is being sued by Nasdaq for allegedly fabricating reasons to justify taking control of a number of ETFs, including the $1.1 billion fund now known as the ETFMG Prime Cyber Security ETF (NYSE Arca: HACK).
Nasdaq became embroiled in the dispute after ETFMG replaced ISE, a Nasdaq-owned company, as the index provider for the ETFs.
ETFMG is already being sued by PureFunds, the original issuer of the ETFs. Until July this year, the ETFs tracked indices provided by International Stock Exchange (ISE), which was acquired by Nasdaq in 2016. When ETFMG split from PureFunds to take control of the ETFs, it also dropped ISE as the index provider, which is when Nasdaq stepped into the legal battle.
The affair started in May this year, when ETFMG cut HACK’s fee from 0.75% to 0.60%, a move that was not agreed by PureFunds and caused the issuer to commence legal proceedings against ETFMG.
Then in July, ETFMG surprised the industry by announcing it was terminating its agreement with PureFunds, alleging the firm had violated existing agreements. ETFMG subsequently took sole control of the funds and switched index providers from ISE to Prime Indexes.
Typically, in a white-label ETF agreement, one party will develop the investment idea and index, and will take responsibility for marketing the fund, while the white-label provider will set up the ETF and handle all administration and operations duties relating to running the fund.
Usually the income from the fund will be split between the two parties, although surprisingly in this case, ETFMG alleges that there was no formal requirement under the terms of the agreement with PureFunds and ISE for it to distribute any of HACK’s profits with either of the other firms.
Nevertheless, ETFMG states in a letter dated to May this year that it continued to pay ISE a portion of the fund’s profits as part of an ‘informal and evolving arrangement that then existed with ISE’ under the impression that ISE had an agreement to pass some or all of that on to PureFunds.
The income the firms are fighting for is substantial – at its current level of assets, HACK alone brings in over $7 million a year in management fees.
Nasdaq is seeking compensation and punitive damages in addition to barring ETFMG from all involvement with the fund.