Back in October, the SEC denied Precidian Investments' filing for its flavor of nontransparent active management in an ETF wrapper—ActiveShares. Now, Precidian has refiled its exemptive relief application, with some significant changes that seem tailor-made to address SEC concerns about the structure.
Blind Trusts For Everyone
Under the new filing, each individual authorized participant will establish an individual blind trust. That blind trust will be the entity that actually does all creation and redemption activity, and will have full knowledge of portfolio holdings and all of the relevant information to calculate fair value.
If the AP wants to create new shares, it informs the blind trust. The blind trust in turn goes out, acquires all the needed securities, delivers them to the ActiveShares, and then returns the new ETF shares back to the AP.
The structure should theoretically let the AP make markets as efficiently as they do now, assuming the blind trust will be able to tell the AP precisely what the fair value of each ETF is in real time—a function most APs currently handle internally.
Long Live VIIV
The filing also introduced a new acronym to the ETF.com lexicon: verified intraday indicative value (VIIV). VIIV will be very similar to the current iNAV system, in that it will be distributed every 15 seconds. The main difference is that VIIV will be calculated not based on the last sale of underlying securities, but on the currently quoted bid/ask midpoint, and will include all assets and liabilities accrued to the ETF. The intent is to create a "super iNAV" that is both more reliable and a better indication of true fair value for market makers to use to benchmark their pricing activity. All of the inputs into VIIV will also be given to each blind trust so they can calculate their own real-time statistics to support creation and redemption.
A Finish In Sight?
The playing field for nontransparent active ETFs is starting to take shape, with Eaton Vance’s “ETMF” structure approved in November, although there’s no update on when the first funds using their structure might launch. Assuming that the new Precidian filing is sufficient to address the SEC’s previous concerns, that will be good news to a significant portion of the industry: To date, BlackRock, State Street, Invesco Powershares, Cohen & Steers and American Funds are all waiting in the wings, having licensed the Precidian IP for their future active ETF filings.