By BNY Mellon
Following the US Security and Exchange Commission’s (SEC) approval of Precidian’s ActiveShares™ model in May, proxy-based semi-transparent ETF structures have now been given notice of approval by the SEC. These new ETF structures could represent a world of new opportunities for investors.
On November 14th, the SEC’s Investment Management division noticed four new proxy-based semi-transparent active ETF structures filed by the New York Stock Exchange/Natixis, Blue Tractor Group, Fidelity, and T. Rowe Price. These new structures are additions to the Precidian ActiveShares™ structure approved earlier this year and discussed in our blog – “The Next Evolution of Actively Managed ETFs”. With these approvals the SEC is putting the decision in the hands of the investment manager in determining the model best suitable for their active investment strategy within an ETF wrapper.
Since the launch of the first active ETF in 2008, daily transparency has been a consistent requirement. This requirement has left many active managers on the sidelines due to concerns about transparency impacting their strategy. As a result, active ETFs in the U.S. continue to be small in comparison to their mutual fund counterparts. Through the end of October 2019, active ETFs held $94 billion in assets under management across 305 listings1. This represents just 2% of total U.S. ETF AUM.
How are these models different from ActiveShares™ and existing active ETFs today?
To mask daily transparency while facilitating price discovery, semi-transparent ETFs are going to rely on a proxy basket that represents the ETFs’ holdings. Using a proxy basket, the models are believed to provide enough transparency to allow liquidity participants such as Authorized Participants and Market Makers the ability to create markets, manage their exposure and at the same time alleviate concerns by portfolio managers of reverse engineering the investment strategy which can lead to front-running.
Proxy based or semi-transparent models will only be allowed to hold U.S. listed equity securities, American Depository Receipts (ADR), or non U.S. listed common stocks that trade contemporaneously with the U.S. 2 BNY Mellon has been working closely with the industry to refine these operating models in heading towards final approval. To assist our colleagues within the asset management industry in their decision making process, below is a comparison chart of the models highlighting both differences and similarities. With a full suite of services available to ETF issuers, BNY Mellon is prepared to help investment managers navigate these new models in order to best determine what makes sense based on their investment strategies.
Comparison of New Structures 
Can I launch under one of these models today?
A few hurdles need to be cleared before these new product structures can be brought to market. While SEC notices were received, formal approval from the Investment Management division is expected December 9th, at the earliest. Since ETFs are listed on a national stock exchange, additional listing approval is required from the SEC’s division of Trading and Markets which can take up to 240 days. To get a sense of how long approval may take, we have been tracking the approval for the first ActiveShares™ listing. On September 23rd, Trading and Markets instituted proceedings to either approve or disapprove the rule change on CBOE, known as 14.11(k) which seeks public commentary on the rule change. As of November 25, there has been no further updates to the rule proposal by the division of Trading and Markets.
1 ETFGI.com; October 2019 Market Landscape
2 BNYM internal research, November 2019
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