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Precidian Takes Second Shot at Non-Transparent ETFs

Precidian Investments filed a revised exemptive application with the SEC that, if granted, would allow it to offer non-transparent active ETFs. The SEC rejected the applications of Precidian and Blackrock for similar products in October 2014 over concerns that the proposed products would not give market makers sufficient information to properly hedge portfolios and could increase spreads between the NAV and the market price of the ETF, potentially harming retail investors.

The revised application retains the lack of transparency found in the original – Precidian proposes to only publicly disclose holdings quarterly like other open-end funds.  In order to address the SEC’s concerns, the application proposes the creation of a blind trust for each authorized participant, which would be supplied with the contents and weightings of the portfolio prior to each trading day. Precidian argues that because the blind trust will have all information necessary to independently calculate a real-time intraday indicative value and can in turn provide this information to authorized participants, “[a]uthorized [p]articipants will have the same pricing information they have with current index-based and actively managed ETFs.” The application also argues that the blind trust would allow the authorized participant to effectively hedge and perform arbitrage through the blind trust.

The application also suggests the use of a “verified intraday indicative value” (VIIV) publicly disseminated every 15 seconds, which would represent the value of holdings of the fund including “all accrued income and expenses,” divided by the total shares outstanding. The value of the portfolio securities would be based on the NBBO midpoint in an attempt to provide less stale pricing for less active portfolio securities. Precidian argues that the VIIV is “far more reliable than the IIVs of other ETFs”