The US Securities and Exchange Commission (SEC) has issued a notice of intent to grant Eaton Vance and related parties an exemption from certain provisions of the Investment Company Act of 1940 to permit the offering of exchange-traded managed funds.
Eaton Vance filed for exemptive relief to offer exchange-traded managed funds on 27 March 2013. The order would apply to 18 initial exchange-traded managed funds for which Eaton Vance filed registration statements on 30 July 2014 and future funds managed by Eaton Vance and its affiliates that comply with the terms and conditions of the order.
Aspects of the operation of exchange-traded managed funds are protected intellectual property held by an Eaton Vance affiliate, Navigate Fund Solutions. Navigate intends to enter into license and services agreements with Eaton Vance and other registered investment advisers (licensed advisers) to permit the offering of exchange-traded managed funds. The Eaton Vance exemptive application provides that other licensed advisers may file requests for exemptive relief that incorporate by reference the terms and conditions of the prder.
Concurrent with today’s SEC action, Navigate is announcing NextShares as the branding of exchange-traded managed funds to be offered by Eaton Vance and other licensed advisers.
As a further condition for the introduction of NextShares, the SEC must approve the listing and trading of NextShares on a national securities exchange. The NASDAQ Stock Market has filed for approval of a rule governing the listing and trading of NextShares, which request the SEC is expected to act upon by 7 November. Also prior to the launch of NextShares, the SEC must declare effective the registration statements of individual funds and approve fund-specific rules to permit exchange listing and trading.
“Today’s action by the SEC is a major milestone in the development of NextShares,” says Thomas E Faust Jr, chairman and chief executive officer of Eaton Vance. “With the introduction of NextShares, investors will, for the first time, be able to access active strategies through a structure that provides the cost and tax efficiencies of an exchange-traded fund, while protecting the confidentiality of fund trading information.”
NextShares are a new type of open-end fund that will list and trade their 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 (for example, -USD0.01, +USD0.02) that is determined in the market. All bids and offers for shares are quoted as a premium or discount to NAV, and trading prices may be above, at or below NAV. Because NextShares will provide market makers with opportunities to earn reliable, low-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 holdings disclosure. Because the trading cost to buy and sell NextShares (premium or discount to NAV) is always explicitly stated, NextShares will provide investors with transparency of entry and exit costs unparalleled among exchange-traded products.
Sponsors of actively managed funds have to date largely avoided introducing their leading strategies as ETFs because the required daily holdings disclosures can facilitate front-running of portfolio trades and enable other investors to replicate the fund’s portfolio positioning and exploit its research insights. 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 investor benefits of an exchange-traded fund (ETF).
“NextShares have the potential to change the delivery of active strategies in the same way that ETFs have transformed index investing,” says Stephen W Clarke, president of Navigate. “We view NextShares as an important next step in the evolution of fund investing.”