SEC to Reject BlackRock Inc. Proposal for Nontransparent Exchange-Traded Fund

In a preliminary ruling, The U.S. Securities and Exchange Commission said it expects to reject BlackRock Inc.’s (BLK) proposal to put out a nontransparent exchange-traded fund. BlackRock sought permission to sell the ETF from the regulator in 2011.

The fund wants to keep its investments secret, which go against SEC rules. BlackRock proposed using a blind trust to manage the securities of a portfolio without revealing the contents. It sought exemption from the agency’s rules, which mandate that disclosure be provided daily. Instead, BlackRock would have disclosed its holdings with the nontransparent ETF on a quarterly basis. One reason that certain fund managers are pushing for less frequent disclosure is their worry that daily disclosures could allow investors to imitate the trades.

Now, however, the SEC is saying that without portfolio transparency such as a plan does not guarantee that that the ETF would trade consistently or near net asset value. The regulator said that the proposed structure sets up substantive risk that ETF share market prices might materially deviate from the ETF’s NAV/share, especially during stressful periods in the market. This could “inflict substantial cost on investors,” noted the Commission.

Meantime, the SEC is considering other nontransparent ETF products. Others firms are also looking offer similar ETFs than the one BlackRock proposed, including Precidian Investments, which filed its own proposal last year. The SEC said it was unlikely to approve that one also. PowerShares, which is an Invesco Ltd. Unit, and Capital Group Cos. are other firms in favor of nontransparent ETFs. The SEC has opened the floor to public comments through mid-November.

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SEC to Keep Veil Open on ETFs, The Wall Street Journal, October 23, 2014

Money managers to redraw battle plans after SEC nixes batch of nontransparent ETFs, InvestmentNews, October 22, 2014

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