SEC Tentatively OKs New Fund Structure

November 06, 2014

Eaton Vance’s dream of nontransparent active exchange-traded products is coming true.

The U.S. Securities and Exchange Commission on Thursday gave a tentative thumbs-up to Eaton Vance’s proposed "Exchange-Traded Mutual Fund" structure, one of many competing structures looking to deliver nontransparent actively managed investment strategies in an ETF wrapper.

It is the first such structure to receive a positive indication from the SEC, and follows by about two weeks the regulatory agency’s initial rejection of another, quite different, nontransparent active structure.

Eaton Vance said in a press release that the commission issued a “Notice of Intent” to grant exemptive relief to allow the novel structure.  The company, which previously filed registration statements detailing several investment strategies in an ETMF structure, said in the press release it would market the funds under the brand name “NextShares.”

Anyone who objects may request a hearing by Dec. 1, 2014, and the order granting the relief will be issued unless the SEC orders a hearing.

The ETMF structure combines aspects of traditional exchange-traded funds and traditional mutual funds in an attempt to deliver some of the key benefits of the ETF structure without the requirement of offering full transparency into the holdings of the fund. Some active managers have avoided entering the ETF market because they don’t want to disclose what’s held in their portfolios, fearing that others will front-run their trades.

So Far, Transparency Required

The SEC has so far ruled that transparency is a requirement for actively managed ETFs, expressing its belief that portfolio transparency is critical to assuring that the market is able to keep the price of the ETF trading in line with its true fair value.

As noted above, the SEC recently denied exemptive relief to Precidian for a structure that used a “blind trust” to shield the fund’s holdings, citing concerns about trading.

The ETMF structure avoids this issue because it doesn’t trade like an ETF.  Rather than trading intraday, ETMFs trade once per day at the end of the day, just like traditional mutual funds. Investors looking to buy the funds will enter orders to pay the net asset value of the fund plus or minus a trading fee, i.e., “NAV + $0.02” or “NAV - $0.02.”

It’s critical to note that the SEC has not yet approved the rules governing these kinds of trades. The Nasdaq exchange filed for such a rule and expects to hear from the SEC by Friday, Nov. 7.

Additional regulatory steps will follow before any fund is launched.

While ETMFs don’t carry the intraday trading capabilities most people associate with ETFs, they do share some of their other advantages; namely, they should be more efficient—and therefore cost less—than traditional mutual funds, and more tax efficient, as well.

Eaton Vance plans to offer its own funds under the ETMF structure and also to license the structure to other providers.



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