Precidian’s non-transparent ETF structure gains SEC approval

Apr 9th, 2019 | By | Category: ETF and Index News

The US Securities and Exchange Commission has granted conditional approval for the creation of a new kind of actively managed ETF which avoids disclosing portfolio holdings.

Thomas K. Hoops, Head of Business Development for Legg Mason.

Designed by Precidian Investments, a minority investment of Legg Mason, the ‘ActiveShares’ structure was first presented to regulators back in 2014.

While most passive and active ETFs today require daily portfolio disclosure, which exposes active managers’ investment ideas to other investors, the ActiveShares approach masks an ETF’s holdings by inserting a blind trust, known as a ‘confidential account’, between the fund and its authorized participants.

These trusted agents are privy to portfolio holdings and perform creations and redemptions on behalf of authorized participants.

ActiveShares ETFs will provide a live verified intraday indicative value (VIIV) every second which is more regular than traditional ETFs which currently publish their NAVs every 15 seconds.

ActiveShares was previously rejected by the SEC due to concerns over whether the price of an ActiveShares ETF would accurately reflect its holdings; however, following several amendments by Precidian, the regulator has finally given the green light. The new structure is set to be launched unless SEC commissioners decide to order a hearing.

Daniel J. McCabe, Chief Executive Officer of Precidian, commented, “We are very appreciative of the SEC’s engagement with us to thoroughly vet and address a process that we believe will help the industry better serve investors. We applaud the vision of the Commissioners in making this a reality. For the first time, investors will be able to access actively managed ETFs that do not disclose their holdings on a daily basis but trade and operate in a similar manner to other ETFs.”

Thomas K. Hoops, Head of Business Development for Legg Mason, added, “This is a truly exciting new product that can revolutionize the way that investors approach ETFs and allows asset managers the ability to bring their best active strategies to market. We are proud to partner with Precidian to build upon the significant interest from fund sponsors and market participants to more efficiently and effectively serve investor need.”

By approving ActiveShares, the SEC may have paved the way for a surge in new actively managed ETF products with the likes of Legg Mason, BlackRock, Capital Group, JP Morgan, Nationwide, Gabelli, Columbia, American Century, and Nuveen having all signed up to license the new vehicle.

Precidian also believes ActiveShares will provide the investor with several benefits including lower costs, greater efficiency, and a more diverse ETF market.

“Investors are seeking another pooled investment option with lower cost, tax efficiency, liquidity, and some degree of transparency,” McCabe said. “We are confident that the SEC’s approval of Precidian’s ActiveShares model will allow us to help investors meet all these objectives.”

If met with support by investors, ActiveShares may result in another blow being struck to the mutual fund industry which has suffered outflows in recent years as investors have switched to lower-cost, passive products.

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