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SEC Moves Toward Approval of Non-Transparent ETFs

The SEC advanced Precidian Funds’ application to introduce an actively managed ETF that would not be required to disclose its portfolio holdings to the wider market on a daily basis. The SEC previously balked at such instruments because of their lack of transparency and the change marks a significant shift for the industry, according to the Wall Street Journal. Precidian will disclose the ActiveShares ETFs’ daily holdings to a group of professional traders who are responsible for exchanging baskets of the underlying assets to create or redeem shares of the ETF. In its notice, the SEC wrote that because the ActiveShares ETFs and their alternative arbitrage mechanism will be new to the market, Precidian has agreed to comply with certain conditions in addition to those included in prior ETF exemptive orders, including that ActiveShares ETFs will provide certain public disclosures to explain to investors how they differ from traditional ETFs and inform investors that the ETFs’ bid-ask spreads and premiums/discounts may be larger than those for traditional ETFs due to the lack of transparency, thus making trading in the ActiveShares ETFs’ Shares more expensive. ActiveShares ETFs will also disclose that market participants may attempt to reverse engineer an ActiveShares ETF’s trading strategy, which, if successful, could increase opportunities for trading practices that may disadvantage the ActiveShares ETF and its shareholders. The SEC has not yet approved the application and can order a Commission hearing until May 3, 2019.

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