The asset-management industry suffered a setback when regulators
rejected a proposal by BlackRock Inc. to launch an exchange-traded
fund that would have kept its holdings hidden from investors.
The product, known as a "nontransparent ETF," is a key part of
the industry's attempt to broaden its customer base beyond
traditional index-tracking investments by selling more funds that
are actively managed.
BlackRock, the world's biggest fund manager with $4.32 trillion
in assets, had filed with the Securities and Exchange Commission in
September 2011 for permission to sell the ETF. Precidian
Investments had filed a proposal of its own in January 2013. Firms
that had planned to offer similar ETFs include Invesco Ltd.'s
PowerShares unit and Capital Group Cos., which runs American
Funds.
Most funds in the nearly $2 trillion ETF market track indexes
such as the S&P 500. Some actively managed ETFs, in which a
manager or team makes decisions about asset allocation, have gotten
the green light from the SEC. But in a twist New York-based
BlackRock, led by CEO Laurence Fink, had proposed keeping the
fund's investments secret, which is against the agency's rules.
"It doesn't shut the door completely, but it came across very
clearly that the lack of transparency was going to cause undue risk
for investors that the SEC was uncomfortable with," said Todd
Rosenbluth, director of ETF and mutual-fund research at S&P
Capital IQ. "The message that seems to be coming from the SEC is
that lack of intraday clarity is not in the public interest."
Daniel McCabe, chief executive at Precidian, said his firm plans
to pursue approval of nontransparent ETFs. "It's evolutionary and
necessary for the actively managed community to have products that
can be traded on an exchange that will allow them to compete
head-to-head with passively managed ETFs," said Mr. McCabe, whose
firm is based in Bedminster, N.J.
BlackRock declined to comment.
Much of the growth in ETFs has come at the expense of
traditional mutual funds managed by stock or bond pickers. Through
the first nine months of the year, traditional mutual funds that
own stocks from developed economies took in $53 billion in assets,
a figure dwarfed by the $127 billion that flowed into passive ETFs,
according to S&P Capital IQ.
Some fund providers, including Fidelity Investments and Pacific
Investment Management Co., have launched actively managed ETFs that
make their holdings public daily.
BlackRock and Precidian proposed an ETF that used a blind trust,
among other mechanisms, to manage a portfolio's securities without
disclosing the contents. It asked for an exemption from rules
requiring daily disclosure and would have revealed holdings on a
quarterly basis. Many active fund managers feared that daily
disclosure would allow other investors to copy their trades.
Precidian was the designer of the structure that BlackRock put
before the SEC, and Precidian later went ahead with a filing of its
own and appeared much closer to launching funds.
In a notice published Wednesday, the SEC said that without
portfolio transparency, the plan failed to guarantee that the ETF
would consistently trade at or close to the total value of the
assets held, known as net asset value.
The proposed structure "presents a significant risk that the
market prices of ETF shares may materially deviate from the NAV per
share of the ETF, particularly in times of market stress when the
need for verifiable pricing information becomes more acute," the
SEC said.
The agency said it intends to deny the petition absent a request
for a hearing, which interested parties may request by Nov. 14,
according to the notice.
Ben Johnson, a director of research firm Morningstar Inc.,
called the SEC move a setback, but added, "I wouldn't view it as
the death knell for some type of nontransparent exchange-traded
product." The SEC's concerns "led them not to say never, but to
say, frankly, just not now," he said.
The SEC routinely puts the brakes on the introduction of some
new types of investment products. Mr. Johnson said the agency for a
period held up the launch of some new ETFs making use of
derivatives but then eased that stance.
Of the $1.87 trillion in U.S. assets held in ETFs at the end of
September, $17.05 billion, or less than 1%, was in actively managed
ETFs, most of them focused on the bond market, according to
Morningstar. That compares with $3.01 billion, or 0.3%, in actively
managed ETFs at the end of 2010.
There are other nontransparent, actively managed ETF products
under consideration by the SEC, most notably a proposal for a
mutual fund from Navigate Fund Solutions, part of Eaton Vance
Corp., he said. A decision on that proposal is expected from the
SEC by Nov. 7, he said.
"It's really tough to imply anything on the Precidian as it
pertains to other structures, most notably the Eaton Vance
[exchange-traded mutual fund] structure," Mr. Johnson said. "It's a
different beast and would likely have different concerns."
Chris Dieterich contributed to this article.
Write to Daisy Maxey at daisy.maxey@wsj.com
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