US regulators question new private credit ETF

The US Securities & Exchange Commission (SEC) sounded the alarm about aspects of the first broad private credit market exchange-traded fund, in a letter posted on its website on Thursday, hours after the ETF began trading.

In what analysts and other asset management firms described as a highly unusual move, Brent Fields, associate director of the SEC's division of investment management, asked State Street Global Advisors to address what it described as “significant outstanding issues” involving the SPDR SSGA Apollo IG Public & Private Credit ETF.

Fields declined to comment further. A spokesperson for the SEC declined to comment on questions involving any specific issuer.

State Street said it will be responding to the SEC’s letter but had no further comment at present.

“This is a very unusual event,” said Todd Sohn, ETF analyst at Strategas. “It’s also very odd timing, given that the ETF has already launched and is trading.”

Typically, sweeping questions of the kind raised in the letter are resolved before an ETF launches.

As reported earlier by Bloomberg News, the SEC raised concerns about the fund’s liquidity and State Street’s ability to comply with SEC valuation rules. Regulators also asked State Street to remove the name of Apollo Global Management from the name of the ETF as including it is “misleading” in context of Apollo's involvement.

“Nothing in the contents of the letter surprised me; we have been watching the questions they cited,” said Amrita Nandakumar, president of Vident Asset Management. “The date on the letter was astonishing, however.”

The SEC’s letter said State Street had not yet addressed its concerns about liquidity. The ETF is the first to offer exposure to the private credit space via an array of privately issued bonds and loans.

SEC rules cap holdings of illiquid securities in ETFs to 15% of assets, but State Street said it may hold as much as 35% of assets in these instruments. To do that, it relied on a liquidity commitment from Apollo Global Investors.

Bryan Armour, ETF analyst at Morningstar, said this is the most significant issue raised by the SEC, given that other asset managers are hoping to launch their own private credit ETFs. Nor, Armour said, did the SEC cite any possible penalties if State Street does not act promptly to resolve its concerns.

“It’s within the SEC’s rights to order the ETF to stop trading,” Armour said.

Reuters