The Division of Investment Management (Division) of the Securities and Exchange Commission took an unprecedented action on Wednesday in issuing a preliminary denial to two exemptive relief applications under the Investment Company Act of 1940 for the operation of a non-transparent active exchange-traded fund (ETF). The exemptive relief applications, filed by Precidian Investments (Precidian) for Precidian ETFs Trust and BlackRock Fund Advisors for Spruce ETF Trust, relied upon a patented methodology developed by Precidian. Applications for non-transparent active ETFs filed by other managers that use different methodologies remain pending before the Division. 

Precidian’s non-transparent active ETF methodology relied upon authorized participant arbitrage between the published indicative intraday value per share of a fund’s underlying assets and the current trading price of that fund’s shares. Authorized participants could then create and redeem shares through a blind trust to preserve the identity of the non-transparent portfolio holdings. 

The Division’s releases noted specific issues related to the methodology, particularly in respect of the proposed arbitrage mechanism. Unless the SEC grants a request for a public hearing to discuss the issues, the Division’s denial of the two applications is expected to stand.

SEC Release on Precidian ETFs Trust, et al.

SEC Release on Spruce ETF Trust, et al.