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Control Of $1.4B ‘HACK’ ETF Changes | ETF.com

Control Of $1.4B ‘HACK’ ETF Changes

July 01, 2020

ETF Managers Group is ceding control of two exchange-traded funds that have been embroiled in a years-long legal battle.

At stake is control of the $1.4 billion ETFMG Prime Cyber Security ETF (HACK) and the ETFMG Prime Mobile Payments ETF (IPAY), which has about $703 million in assets. Both funds will be reorganized under Exchange Traded Concepts, a private-label ETF firm that manages about $3 billion assets.

Tough Hurdle

The changes must be approved by fund shareholders. Approval requires what’s called a “1940 Act Majority,” which can be an onerous hurdle to clear, because many shareholders toss unexamined investor information directly into the recycling bin.

More than half of all shareholders must vote in favor—a burdensome proposition since there can be thousands of shareholders who hold only a handful of shares. Or, if more than 50% of shareholders cast a ballot, the reorganization must win two-thirds of the votes cast.

Ballots In The Mail

Information will be mailed to HACK and IPAY shareholders in early August. To ensure success, a proxy firm will contact thousands of shareholders to encourage them to vote. Investors may receive phone calls or additional reminders by mail.

If approved, the reorganization will end a legal dispute that has entangled HACK and IPAY since ETF Managers Group seized control of the funds three years ago, pushing out former partners including Nasdaq. (Read: Nasdaq Settles ETF Legal Fight Over 'HACK')

Event Timeline

Nasdaq sued in October 2017 in the U.S. District Court for the Southern District of New York. In December 2019, Federal Judge Paul Engelmayer ruled that ETF Managers Group had breached its contracts with Nasdaq and misappropriated millions of dollars in fund management fees.

The judge ordered ETF Managers Group to pay $80 million, but did not grant Nasdaq’s request to take day-to-day management of the funds away from ETF Managers Group.

Last month, Nasdaq and ETF Managers Group announced a settlement. Financial terms were not disclosed. The settlement also encompasses a separate lawsuit that was pending in the New Jersey Superior Court, which had been brought by PureShares, a New Jersey ETF firm that was also a business partner in the funds.

Not A Taxable Event

The reorganization of the funds will not be a taxable event for investors. If approved, the funds will be renamed, and will revert to the same Nasdaq indexes they followed before ETF Managers Group replaced the index provider in 2017.

The Nasdaq indexes are broadly similar to the benchmarks now used by HACK and IPAY, and track the same industries. The tickers will remain the same. Day-to-day management and oversight of the funds will be transferred to Exchange Traded Concepts.

HACK and IPAY were the largest of the disputed funds. The other three funds will remain under the control of ETF Managers Group.

Those ETFs are the ETFMG Prime Junior Silver Miners ETF (SILJ), with about $244 million in assets under management; the Wedbush ETFMG Video Game Tech ETF (GAMR), with about $97 million in assets; and the fund now known as the Wedbush ETFMG Global Cloud Technology ETF (IVES), which has about $42 million in assets and formerly traded under the ticker IFLY.

Asjylyn Loder is an ETF.com contributor. She can be reached at asjylyn@gmail.com.

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