SEC Set to Approve New Exchange-Traded Fund Structure

Investment management firm Eaton Vance says it has won approval to offer “exchange-traded mutual funds” that deliver nontransparent actively managed investment strategies as exchange-traded funds (ETFs).

A number of media outlets are reporting that regulators at the Securities and Exchange Commission (SEC) have agreed to allow investment management firm Eaton Vance to launch the new style of actively managed ETFs, which will be structured in a way that allows investment managers to keep their holdings secret for months at a time. 

Eaton Vance put out a statement confirming the SEC’s approval. The firm says it received a “notice of intent” from the SEC, saying the commission will grant a series of necessary exemptions from the Investment Company Act of 1940, as amended, to permit the offering of a new line of exchange-traded managed funds (ETMF). Eaton Vance says it plans to offer ETMFs under the brand name “NextShares,” explaining that ETMFs will function basically as a hybrid between traditional mutual funds and exchange-traded funds.

Consistent with customary SEC practices, interested persons may request a hearing on the matter by contacting the SEC on or before December 1, 2014. An order granting the requested relief will be issued unless the SEC orders a hearing, Eaton Vance notes.

As the firm explains, aspects of the ETMFs will be protected intellectual property held by an Eaton Vance affiliate called Navigate Fund Solutions LLC. The Eaton Vance exemptive application to the SEC provides that other licensed advisers may file requests for similar exemptive relief that “incorporates by reference the terms and conditions” of the original order granting exemptions to Eaton Vance.

The SEC’s approval of ETMFs could signal an important entry point for active managers looking to utilize exchange-traded fund structures for their clients. This is because many active managers fear that the increased transparency associated with ETFs could allow others to preempt their trades and thereby compromise the general strategic positions of actively managed funds—a problem that would be circumvented by NextShares and similar products.

“By removing the requirement for daily holdings disclosures, NextShares can potentially enable investors to access a broad range of active strategies in a structure that provides the investors benefits of an ETF,” the firm says.

Eaton Vance says that as a further condition for the introduction of NextShares, the SEC must approve the listing and trading of NextShares on a national securities exchange. Eaton Vance says it expects imminent action and approval from the SEC on this step, as the NASDAQ Stock Market LLC has filed for approval of a rule governing the listing and trading of NextShares.

Thomas Faust Jr., chairman and CEO of Eaton Vance, says the NextShares ETMFs will allow investors to access active strategies “through a structure that provides the cost and tax efficiencies of an exchange-traded fund, while protecting confidentiality of fund trading information.”

Eaton Vance says NextShares can be thought of as a new type of open-ended fund that will list and trade shares on a national securities exchange at prices directly linked to the fund’s next-determined daily net asset value (NAV), using a new trading protocol called “NAV-based trading.” In NAV-based trading, all orders to buy and sell shares are executed at NAV plus or minus a trading cost that is determined in the market. All bids and offers for shares are quoted as a premium or discount to the NAV, the firm explains, meaning trading prices may come in above, at, or below NAV.

Eaton Vance adds that, because NextShares will provide market makers with opportunities to earn reliable, lower-risk profits without intraday hedging of their fund positions, NextShares can be expected to trade at prices that are consistently close to NAV in the absence of daily portfolio holding disclosures.

Eaton Vance’s statement on the SEC’s move to approve NextShares is available for download on the firm’s website.