Precidian Investments takes a second shot at regulatory approval for active ETFs

A proposal backed by major active mutual fund managers gets rebooted.

Precidian Investments has revived a once-rejected plan that fund managers hope will help them bring active management to the fast-growing ETF market.

In a filing with securities regulators Monday, the firm recast its ActiveShares proposal — with support from fund managers including BlackRock Inc., Capital Research and Management Co. (the American Funds owner) and State Street Corp. — for an exchange-traded fund structure that would not have to disclose its underlying holdings. No such product trades on exchanges at the moment, an obstacle for fund managers.

In October, the Securities and Exchange Commission snubbed the Precidian’s previous proposal in a 60-page ruling in which it said the proposal was not in the public interest and could “inflict substantial costs on investors, disrupt orderly trading and damage market confidence in … trading of ETFs.”
Shortly after indicating it would deny that proposal, the SEC blessed a competing proposal for actively managed funds that can trade on exchanges without disclosing their holdings. The backer of that proposal — Eaton Vance Corp. — plans to release its own “NextShares” funds next year. It hasn’t yet announced a deal to license the technology to its peers. (The firm is not allowed to advertise the funds as “ETFs” because of their unique qualities.)

The new Precidian proposal attempts to deal with concerns regulators voiced about the ability of institutional investors to trade the products effectively. Only a small set of institutional traders can buy ETFs directly from the issuer, and they are relied upon to keep those products trading in line with the value of their underlying securities. To do so effectively, they need to estimate and “hedge” their risks. The SEC has required transparency of underlying holdings in part to facilitate that hedging, particularly in times of market stress.

The new proposal relies on a blind trust that knows the holdings of the portfolio but keeps that information private.

The SEC said the Eaton Vance proposal did not pose the same concerns to institutional traders and market stability because it did not rely on traders hedging those risks.

Some have argued the ETF has inherent benefits over mutual funds in terms of cost and tradability. The Precidian proposal is important because some managers may be resistant to use a structure owned by a competitor and awaiting the blessing of broker-dealers, according to Dave Nadig, chief investment officer at ETF.com.

But other industry watchers have said the proposals are a solution in search of a problem. Officials from Precidian were not available for comment.

In October, Precidian chief executive Daniel J. McCabe said he was optimistic that any outstanding issues could be resolved.

“These are things that can be worked though,” said Mr. McCabe at the time. “It’s not a process that I enjoy, but when you do novel things, it takes longer than if you do standard things.”

ETFs have been the most successful asset management product over the last several years. There was nearly $1.7 trillion in U.S. ETFs at the end of 2013, up more than 1,000% from $151 billion in 2003, according to the Investment Company Institute, a Washington-based industry trade group.