Invesco Capital Management LLC (Invesco) recently received exemptive relief from the SEC to launch semi-transparent, actively-managed ETFs registered under the 1940 Act (ST ETFs) that follow a “proxy portfolio” model. ST ETFs are ETFs that generally do not disclose their full portfolio holdings each day before the open of trading. ST ETFs currently come in two varieties: proxy portfolio ETFs (which each disclose a portfolio of securities and cash that is not the same as the ST ETF’s portfolio, but the performance of which is expected to be highly correlated with the ST ETF’s portfolio securities) and “blind trust” ST ETFs (under one model of which each ST ETF discloses other information, such as a verified indicative intraday value, about its portfolio and also imposes confidentiality requirements on the creation and redemption process). Invesco’s order represents yet another model for providing alternative information to facilitate arbitrage in an ST ETF’s shares and is the first new model approved by the SEC since it issued orders for similar exemptive relief to Blue Tractor, Fidelity, Natixis and T. Rowe Price in December 2019. ST ETFs are required to obtain exemptive relief to launch because they cannot rely on Rule 6c-11 under the 1940 Act.
Invesco’s order contains conditions that are substantially similar to those included in other proxy portfolio orders. Under Invesco’s proxy portfolio model (Model), an Invesco ST ETF would be required to disclose a “substitute basket” in lieu of the ST ETF’s actual holdings listing between 70% and 95% of the ST ETF’s actual holdings. This substitute basket would be disclosed with the actual percentage weight overlap with an ST ETF’s portfolio and may include actual holdings with weightings that have been modified to protect the ST ETF’s strategy from being reverse engineered or subject to being “front run.” An Invesco ST ETF would also calculate net asset value (NAV) more than once per day, which enables authorized participants to create and redeem ST ETF shares more than once per day as creations and redemptions are effected at NAV. Consistent with prior ST ETF relief, Invesco’s order permits other ST ETF providers with a licensing relationship with Invesco to file a short-form application for an exemptive order.
Invesco’s order is significant in that it demonstrates the SEC’s willingness to consider and provide relief for alternative proxy portfolio based models. However, the ST ETF applications that the SEC has granted to date have represented that the sponsor has intellectual property rights over certain aspects of the models described in those applications. Therefore, any future potential ST ETF sponsor applicant should consider any applicable intellectual property issues before seeking relief for an alternative model.
Currently, ST ETFs are also required to receive separate SEC approval of an application under Rule 19b-4 under the 1934 Act in order to list on an exchange. Invesco listed two ETFs on the Cboe BZX Exchange using the Model earlier this month after receiving the SEC’s approval of its 19b-4 application.
Invesco’s application for exemptive relief under the 1940 Act, and the SEC’s orders granting this relief and the related 19b-4 application are available at the links below: