Private Credit ETF From State Street, Apollo Raises SEC Concern

The Securities and Exchange Commission (SEC) has expressed concerns over a new private credit exchange-traded fund (ETF) proposed by State Street Global Advisors (SSGA) and Apollo Global Management. The ETF, SPDR SSGA Apollo IG Public & Private Credit ETF (PRIV), aims to invest in a mix of public and private credit securities, with private credit investments ranging between 10% and 35% of the fund's total portfolio. However, the SEC has raised concerns about the ETF's liquidity risk management program and potential conflicts of interest.

The SEC's concerns stem from the ETF's exposure to illiquid assets, which could pose challenges during market stress. The ETF's investment in private credit securities, which are typically less liquid than publicly traded assets, raises questions about the fund's ability to meet redemption demands from investors. The SEC has noted that the ETF's liquidity risk management program may not be sufficient to address these concerns.

Additionally, the SEC has raised concerns about potential conflicts of interest between State Street and Apollo. The two firms have a longstanding relationship, with State Street owning approximately $1.2 billion in Apollo stock as of May 2024. This relationship could create conflicts if Apollo does not provide liquidity for the ETF during times of market stress, benefiting State Street at the expense of ETF investors.

To address these concerns, the SEC has urged the ETF's sponsors to scrutinize the filing carefully and ensure compliance with the Investment Company Act. The SEC has also encouraged investors to be cautious when considering investments in private credit ETFs, given the potential risks and uncertainties associated with these products.

The proposed ETF is not the first to face scrutiny from the SEC regarding its liquidity risk management program. In 2021, the SEC issued a no-action response to a similar ETF proposal, noting that the fund's liquidity risk management program may not be sufficient to address redemption demands during market stress.

As the private credit market continues to grow and attract more investors, regulators and investors alike must remain vigilant to the potential risks and challenges associated with these investments. The SEC's concerns over the State Street-Apollo ETF serve as a reminder that the liquidity and valuation of private credit assets can be complex and challenging to manage, particularly in a fund structure designed for daily trading.

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