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SEC Defers Action on Application to List “Managed Portfolio Shares,” a Type of Non-Transparent, Actively Managed ETF

On July 28, 2017, the SEC issued a release (the Release) designating a longer period for SEC action on a proposed rule change to permit the listing and trading of “Managed Portfolio Shares” on Bats BZX Exchange, Inc. (Bats).  Managed Portfolio Shares are shares of a proposed type of non-transparent, actively managed exchangetraded fund (a Fund) that, as compared to actively managed ETFs approved to date, have the following principal distinguishing features:

1.  Fund investments will be restricted primarily to long and/or short positions in U.S.-listed securities, shares issued by other U.S.-listed ETFs and cash and cash equivalents;

2.  Portfolio holdings will be publicly disclosed on a quarterly basis, rather than on a daily basis;

3.  Purchases and redemptions of creation units of Fund shares will be limited to transactions by or through an Authorized Participant (AP) transacting through its own separate confidential brokerage account (Confidential Account) held with a “Trusted Agent,” a bank or broker-dealer, for the benefit of the AP, without disclosing the identity of such securities to the AP;

4.  Prior to the commencement of trading on each business day, each Trusted Agent will be given both the holdings of a Fund and their relative weightings for that day, to permit an AP, or other market participant that has established a Confidential Account with a Trusted Agent (a Non-Authorized Participant Market Maker), to instruct the Trusted Agent to buy and sell positions in the portfolio securities and to permit arbitrage activity;

5.  The “Verified Intraday Indicative Value” (VIIV) of a Managed Portfolio Share, based on the “consolidated midpoint of the bid ask spread” of the Fund’s holdings as of the close of business on the prior business day, will be widely disseminated by one or more major market data vendors in at least one second intervals during regular trading hours and subject to validation by a pricing verification agent; and

6.  A Fund will rely on dissemination of VIIVs and transactions by APs and Non-Authorized Participant Market Makers through Confidential Accounts, rather than daily holdings disclosures and transactions directly by APs, as the primary basis for seeking to ensure Fund shares’ secondary market trading efficiency.  

Bats’ proposed rule change was published for comment in the Federal Register on June 19, 2017.  As explained in the Release, Section 19(b)(2) of the Exchange Act provides that, within 45 days of the publication of a notice of the filing of a proposed rule change by a self-regulatory organization, or within a longer period up to 90 days as the SEC may designate if it finds a longer period to be appropriate and publishes its reasons for so finding or as to which the applicable self-regulatory organization consents, the SEC will either approve the proposed rule change, disapprove the proposed rule change or institute proceedings to determine whether the proposed rule change should be disapproved.  Noting that the 45th day after publication of the notice for this proposed rule change is August 3, 2017, the SEC announced that it is extending the 45-day period to September 17, 2017, in order to have “sufficient time to consider the proposed rule change and comment letters.”

© 2017 Vedder Price

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Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...

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