The SEC’s Bizarre Letter to State Street About PRIV

Wait…you launched what now?

The Securities and Exchange Commission fired off a sternly worded letter to State Street about its much-anticipated private credit ETF — which packages both private and public credit into an indexed product — just hours after the fund started trading last week. The agency listed a number of concerns about the first-of-its-kind product surrounding liquidity, valuations, and even its name, in the letter posted to its website last Thursday. State Street said it addressed the issues in a filing just a day later. It’s a bizarre, and exceedingly rare, if not unprecedented, case of a fund undergoing regulator scrutiny after its official debut. 

“There are several nuances with this fund structure,” said Aniket Ullal, head of ETF research and analytics at CFRA. “There will be more clarity on these issues, but only after it has been operational for days or weeks.”

What’s in a Name?

The underlying issue is an SEC mandate that allows just 15% of an ETF’s assets to be held in illiquid securities, like private investments. State Street sidestepped the rule by pulling in Apollo to act as a guaranteed buyer or seller of the private loans. It’s a framework that could present some pretty obvious conflicts of interest. Namely, Ullal said, what type of pricing will the fund offer to investors if Apollo is the primary counterparty for both buying and selling the holdings? Or what happens if trading volume exceeds what Apollo can provide?

While the agency is not expected to pull the plug on the fund, the review highlights the difficulty in bringing private assets into traditional public fund structures. Other areas of concern included:

• Fairly pricing the underlying assets inside the ETF on a regular-enough basis for investors to redeem securities throughout the trading day.
• Using Apollo in the name of the ETF, which the SEC said might mislead investors into thinking the alternative asset manager is actually the issuer. 

State Street said it addressed the concerns, will amend the name of the fund, and that SEC lawyers were happy with its responses, according to Bloomberg. 

Turn Me Private. Private credit has become one of the fastest-growing segments over the past 15 years, and the addressable market could now top $30 trillion in the US alone, according to McKinsey.

“You can’t take three steps in our industry without hearing the phrase ‘democratization of private markets,’” said Jen Wing, chief investment officer at GeoWealth, adding that the opportunity in equity markets has shifted substantially over the past 20 years. “Investors in a traditional stock and bond portfolio may benefit from new sources of growth and diversification that private markets may bring.”

Now, if the SEC can just stay on top of those pesky filings.