SEC Grants First Non-Transparent ETF Exemptive Order

November 6, 2014

The SEC approved the first non-transparent actively managed exchange-traded fund to be offered by Eaton Vance. The SEC’s Division of Trading and Markets approved a request by Nasdaq to adopt a new rule governing the listing and trading of a new fund structure called the exchange-traded managed fund (ETMF). The ETMF would not be required to disclose its holdings on a daily basis. ETMFs would be listed on an exchange like an ETF and trade using a new trading protocol called “NAV-based trading.” The SEC’s Division of Investment Management also issued a notice stating its intent to grant Eaton Vance exemptive relief from certain provisions of the 1940 Act to permit the offering of ETMFs. These two divisions of the SEC must grant permission to fund managers to create non-transparent ETFs, as well as approve an exchange's proposed rule change to list such funds.

The new NAV-based trading method was key for Eaton Vance receiving SEC relief because the SEC, as discussed below, denied other ETF sponsors exemptive relief using different approaches. All orders to buy and sell shares in the NAV-based trading method will be executed at NAV plus or minus a trading cost.  All bids and offers for shares are quoted as a premium or discount to NAV, and trading prices may be above, at or below NAV. The SEC found that ETMFs will provide market makers with opportunities to earn reliable, low-risk profits without intraday hedging of their fund positions, and thus ETMFs can be expected to trade at prices that are consistently close to NAV in the absence of daily portfolio holdings disclosure. Furthermore, the trading cost to buy and sell ETMFs (premium or discount to NAV) will always be explicitly stated, resulting in ETMFs providing investors with transparency of entry and exit costs.

In separate actions, the SEC rejected a proposal from BATS Global Markets and BlackRock involving actively managed exchange-traded funds that would not have to have disclosed their holdings on a daily basis. The SEC believed that the proposal did not provide an adequate substitution for such transparency. As a result, in the SEC’s view, market prices of ETF shares may deviate materially from their NAV and cause disruption.

Click for the notice of the Eaton Vance Management application.

Click to access the rejection of the proposed ETF.


Investment Advisers, Investment Companies