Daily ETF Watch: Precidian Rethinks Active

Precidian Funds, the New Jersey-based firm that has spearheaded an effort to gain regulatory approval for nontransparent active ETFs, last week filed regulatory paperwork withdrawing its current petition in order to redraft it and better address regulator concerns with the initial request.

The Securities and Exchange Commission in October rejected Precidian’s idea, but didn’t definitively shut the door on the concept, which has been licensed to a number of other money management firms. Those firms include the mutual fund company American Funds as well as some of the biggest ETF sponsors, such as BlackRock’s iShares, State Street Global Advisors and Invesco PowerShares.

“We’ve decided to withdraw the petition, and we’ll review the issues that have been put before us by the SEC,” Dan McCabe, chief executive officer of Precidian, said in an interview with ETF.com. McCabe declined to specify when his firm would file new “exemptive relief” paperwork seeking approval. That said, industry sources say it’s likely to be before the end of the year.

The fact that the Precidian concept has so many prestigious adherents makes the significance of the endeavor much greater. It’s not that the SEC will necessarily feel pressured to approve the idea because of the influential firms backing it, but their interest almost guarantees that Precidian’s efforts to gain approval will continue apace. Indeed, many industry sources believe that the SEC will ultimately approve the petition, though the timing of any such approval is anyone’s guess.

The idea is that nontransparent active ETFs could be a way for portfolio managers to protect their best ideas and also to protect against the predatory front-running that can occur when transparent index ETFs make big portfolio changes. Existing active ETFs are “transparent,” which means they have to disclose their portfolio holdings daily.

Moreover, ETF's have distinct tax advantages over mutual funds, even for active portfolios, meaning investors who favor active management could reap those tax efficiencies in nontransparent active ETFs like those proposed by Precidian.

A Lengthy Process

The entire effort to bring nontransparent ETFs to market began unofficially in 2008, when the first formal paperwork requesting permission to offer nontransparent ETFs was filed in 2011 by BlackRock.

Unlike transparent active ETFs already on the market from the likes of AdvisorShares and PIMCO, the Precidian nontransparent idea stipulates quarterly portfolio disclosure such as is required for active open-end mutual funds. It’s also quite unlike the nontransparent ETFs the mutual fund company Eaton Vance gained approval to market earlier this month. Those so-called exchange-traded managed funds are more similar to mutual funds in that they will price just once a day.

At the center of Predician’s plan is a blind trust working on behalf of the authorized participant that would keep disclosure of portfolio holdings under wraps until regulators require it. Existing mutual funds must disclose holdings every three months with a lag, and Precidian’s plan, if it’s ultimately approved by the SEC, would include disclosure requirements similar to those in place for mutual funds.

It’s not totally clear how the new Precidian exemptive relief petition will differ, but it was clear that the SEC, in its decision to reject the initial petition, had clear issues with the reliability of using intraday indicative value to establish a fund’s net asset value.