The SEC recently granted amended exemptive relief for Blue Tractor, a sponsor of semi-transparent ETFs (ST ETFs), to permit ST ETFs that rely on Blue Tractor’s relief to create and redeem creation units with authorized participants (APs) in exchange for “custom baskets” (Amended Relief). This relief is similar to amended relief granted by the SEC last month to Invesco and Natixis with respect to their ST ETFs. ST ETFs are ETFs that generally do not disclose their full portfolio holdings each day before trading begins on the stock exchange where they are listed. The Amended Relief relates to “proxy portfolio” ST ETFs. Rather than disclosing its entire portfolio, a proxy portfolio ST ETF discloses a portfolio of other securities and assets that are intended to be highly correlated with the ST ETF’s portfolio securities.
Creation baskets are portions of an ETF’s assets that are exchanged with APs for creation units of the ETF. For ETFs that rely on Rule 6c-11 under the 1940 Act, creation baskets normally generally consist of a pro rata portion of the ETF’s portfolio. These ETFs are permitted to use “custom baskets” in certain circumstances that do not consist of a pro rata portion of the ETF’s portfolio securities in order to assist with the ETF’s portfolio management process, subject to certain recordkeeping requirements and compliance policies and procedures.
In the case of an ST ETF that follows a proxy portfolio model, the assets included in the proxy portfolio constitute the creation basket. The Amended Relief allows ST ETFs that use Blue Tractor’s proxy portfolio model to use creation baskets that are different from the applicable ST ETF’s proxy portfolio, subject to the corresponding requirements in Rule 6c-11 with respect to custom baskets and an additional representation that the adviser or subadviser must determine that the deviation from the proxy portfolio should not result in front-running or free-riding.
The Amended Relief aligns the regulatory framework for ST ETFs closer to that which applies to ETFs that rely on Rule 6c-11, and it provides a precedent for other ST ETF sponsors that have already received ST ETF exemptive relief to apply for similar relief in the future. Blue Tractor’s application and the SEC’s order granting the application are available at the links below.