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SEC Rejects Non-Transparent ETFs

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The U.S. Securities and Exchange Commission rejected plans by BlackRock Inc. and Precidian Investments to open a new type of exchange-traded fund that wouldn’t disclose holdings daily, setting back efforts by money managers to bring more actively managed ETFs to market.

The SEC issued a preliminary decision on BlackRock’s September 2011 and Precidian’s January 2013 requests for exemptive relief from the Investment Company Act of 1940, according to letters dated Tuesday. The decision puts on hold plans by the firms to start the first non-transparent ETFs.

The Precidian proposal falls “far short of providing a suitable alternative to the arbitrage activity in ETF shares that is crucial to helping keep the market price of current ETF shares at or close” to its net asset value, Kevin O’Neill, a deputy secretary at the SEC, wrote in the letter.

The ruling sets back plans by money managers to sell funds run by traditional stock-picking managers in an ETF package. Firms including Capital Group Cos. have asked for similar regulatory approval as they seek to expand offerings in the fastest-growing product in the asset-management industry.

Money managers have been discouraged from introducing active ETFs, which combine security selection with the intraday trading and some of the cost-saving features of traditional ETFs, because the SEC’s requirement for daily disclosure of holdings would make it easy for competitors to copy, and traders to anticipate, a manager’s portfolio changes.

‘Not Surprised’

“We want to work with the SEC — we believe it’s part of the process,” Daniel McCabe, Precidian’s chief executive officer, said in a telephone interview. “We’re not surprised by the fact that they have questions but questions can be answered.”

Melissa Garville, a spokeswoman for New York-based BlackRock, didn’t immediately provide comment.

Actively managed ETFs account for less than 1% of U.S. ETF assets and are dominated by products that invest in bonds. Transparency is less of an issue on the fixed-income side, where the opacity and negotiated nature of transactions in the over-the-counter bond market protect managers.

ETFs have attracted regulatory scrutiny as assets surged more than tenfold over the past decade to $1.7 trillion in the U.S. as of the end of 2013, according to the Investment Company Institute.

“Any breakdown in the pricing or the ability to price the proposed ETF may result in damage to market confidence in secondary trading of ETFs — not just in the proposed product, but in ETFs generally,” the SEC said in the letter.

–With assistance from Christopher Condon and Miles Weiss in Washington and Eric Balchunas in Princeton.

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