In what’s been called “highly unconventional” and a “no holds barred” move, Eaton Vance has publicized the regulatory setback of a competitor, using information obtained via the Freedom of Information Act. The unusual story shows the intensely competitive struggle to be first to market in the “nontransparent ETF” space.
When Eaton Vance’s proposal for an “exchange-traded managed fund” structure, branded NextShares, was approved by the Securities and Exchange Commission last year, it wasn’t the only firm vying for a foothold in the emerging niche. Other industry leaders such as Fidelity and T. Rowe Price had and still have their own proposals for nontransparent but exchange-traded funds, which would be allowed to operate without the daily disclosure of holdings required of traditional ETFs, but none of Eaton Vance’s would-be competitors have yet to have their proposals greenlighted by the SEC.
Precidian is another firm seeking SEC approval for its brand of nontransparent ETFs, known as ActiveShares, which have the support of industry heavyweights BlackRock, State Street and American Funds. The SEC denied Precidian’s initial request for exemptive relief in October 2014, a month before Eaton Vance’s NextShares were approved. Precidian filed a second request in December, to which the SEC responded by saying it would be denied if it wasn’t withdrawn – but Precidian chose not to disclose the SEC’s response when it was issued in April.
Meanwhile, Eaton Vance has had a monopoly over the ETMF/nontransparent ETF space, signing up several asset managers such as Principal, Gabelli Funds and Ivy Funds as licensees of their own NextShares products. The problem: Eaton Vance has been unable to convince broker-dealers to accommodate NextShares ETMFs, which would require technological upgrades, even though the firm has offered to subsidize these efforts. This has weighed on Eaton Vance’s publicly traded share price, especially with the specter of Precidian’s ActiveShares receiving SEC approval and presenting a competitive threat to the NextShares monopoly.
Eaton Vance’s Bold Move
These are the conditions under which Eaton Vance made a Freedom of Information Act request for documents related to ActiveShares’ application for exemptive relief. Upon receiving the April letter from the SEC effectively denying Precidian’s second request for approval, Eaton Vance issued a press release on July 27 announcing their competitors’ setback and scheduling a conference call for later that morning. Interested parties can hear a replay of the conference call through August 2 by calling (877) 201-0168 in the U.S. or (647) 788-4901 internationally. A webcast version can be viewed at NextShares.com.
Eaton Vance CEO told analysts and reporters that he called the conference call to remove any perception that there was a competing structure “possibly on the verge of approval.” Later that same day, he told Barron’s that his expectation was that fund companies would have three choices for actively managed products: 1) Mutual funds, 2) Fully transparent ETFs, or 3) NextShares.
In response, Precidian CEO Daniel McCabe told Barron’s that the SEC’s problems with ActiveShares weren’t insurmountable, and that his firm planned on addressing those concerns in filing a third application. “We want to take our time and make sure that the application is being done appropriately, and that we’re being crystal clear in what we are proposing,” he said.
For more information, visit NextShares.com.