Non-Transparent Actively Managed ETFs
Non-transparent actively managed exchange-traded funds (non-transparent ETFs) have the potential to transform the ETF landscape. Regulatory approval, however, has been elusive and ETF sponsors continue to face significant challenges in obtaining the exemptive relief needed to launch these products.
Historically, the primary concern of the Securities and Exchange Commission (SEC) in granting ETF sponsors the necessary relief to launch ETFs has been the ETF arbitrage process, which ensures that ETF shares trade in the marketplace at or close to NAV. The SEC has considered portfolio transparency to be critical to the effective functioning of the arbitrage process and, as a result, full portfolio transparency has been a condition of all exemptive orders for actively managed ETFs issued by the SEC to date.
In evaluating applications for exemptive relief for non-transparent ETFs, the SEC has focused on whether the applicant has proposed an effective substitute for portfolio transparency to keep market prices of ETF shares at or close to NAV. As a result, applicants for non-transparent ETF relief (applicants) have the burden of proving to the SEC that the nature and scope of the information the applicant intends to disseminate to the marketplace (the Methodology) will be an effective substitute for portfolio transparency, without any actual trading experience under the Methodology to point to. Given the task it has assigned itself, the SEC also has a significant challenge. It must evaluate on a case-by-case basis the methodology proposed by an applicant and make subjective judgments as to the efficacy of that Methodology without any actual trading data to analyze (at best the SEC may be provided backtested hypothetical data).