State Street -- under protest -- caves to SEC pressure to nix 'misleading' 'Apollo' name from its freshly minted alts ETF, among many issues cited in stern regulatory letter

It was immediate, intense and utterly predictable, analysts said, and indeed the SEC wasted no time calling out State Street's ‘Apollo’ ETF launch for blowing off staff questions and comments.

Apparently, the first casualty is “Apollo” being removed from the financial product's name.

Morningstar and others noted in an article RIABiz published in October that Apollo/SSGA's pledge to buy alts in a pinch to guarantee their liquidity – in essence becoming the originator, seller and buyer – could provoke an adverse Securities and Exchange Commission (SEC) reaction. See: Apollo partners with State Street Global Advisors for ultimate moonshot -- making alts liquid with ETFs -- but Apollo may make liquidity function at a premium untenable for investors, never mind the SEC

But the SEC went further yesterday with a sternly worded letter, scolding Apollo and State Street for moving forward with the ETF "without resolution of [requested] staff comments” related to a post-effective amendment (PEA) to its registration statement.

The PEA “went effective” on Wednesday (Feb. 26), the same day the ETF – the SPDR State Street Global Advisors Apollo Public & Private Credit ETF (PRIV) – went live. 

The revolutionary Apollo/State Street ETF will now need to be fixed quickly – or else -- in flight. 

“This is a big screw-up,” says Seth Adam Stuart, an investment product and strategy consultant with expertise in alternative investments.

“It could have been worse, had the SEC issued a cease-and-desist order – something perhaps tipped by the more forgiving Trump administration regulatory atmosphere," he adds. 

"This isn't a new story… They just didn't want to do anything about it."

Acid test

Risking the SEC's ire by not responding to requests is rare and risky, according to Ken McGuire, president of Aditum Alternatives, in a LinkedIn post responding to a Stuart post on the topic.

“I was shocked when this ETF went effective yesterday,” he writes. "I assumed it meant the SEC staff's issues had been resolved. 

"Normally, when the registrant – via their counsel, Morgan & Bockius LLP in this case – would file an amendment to delay.

He adds: “Only a large player like State Street (with Apollo Global Management behind them) has the kind of political and financial capital to push the envelope this way.”

“This will be a test for how far the rules may be stretched under the Trump SEC.”

By late today, (Friday, Feb. 28) State Street had already caved on one key point – what the fund will be named. It did not reveal the new name, according to Bloomberg.

The SEC admonished State Street for using “Apollo” in the fund’s name and called it “misleading” given that Apollo holds no official position with the fund.

“Apollo is not a sponsor, distributor, promoter, or investment adviser to the Fund,” the SEC noted.

Still, State Street let its displeasure with the SEC be known, in the ETF's filing.

“The registrant continues to disagree the use of ‘Apollo’ is misleading,” State Street wrote. “[But] … will revise the name of the fund as soon as practicable.”

Missteps

The SEC letter could create liability for Apollo and State Street, if anything went wrong with the ETF. Investors would be able to sue “like crazy” based on the SEC's findings, according to a source. 

In effect, this is an unapproved launch, though there is no such thing as an ironclad “approval" from the SEC.

In theory, Fidelity or Schwab could refuse to trade it because it is too toxic, the source adds. 

The SEC letter, signed by Brent J. Fields, associate director of the SEC's division of investment management, lists five “significant remaining outstanding issues.” 

The first was the “bid” being redacted “to such an extent that the material terms of the agreement are not public.” But the commission saved its gravest concerns for points four and five. 

It questioned how the fund advisors plan to deal with potential liquidity issues that could arise from having an implicitly liquid ETF with private credit holdings that are typically illiquid.

“We have worked with Apollo to provide a liquidity solution within PRIV and PRIV continues the mission of democratizing access to private markets,” Anna Paglia, chief business officer at State Street Global Advisors, said in the release accompanying the launch.

The fifth concern is that the ETF does not seem to address how it would even value the illiquid holdings were it forced to liquidate. 

“The board or its designee is required to determine fair value in good faith by carrying out the functions specified under the rules,” the SEC wrote.

State Street has offered fresh assurances that “the fund’s illiquid products will not be exclusively tied to Apollo," based on the late filing. And other broker-dealers can bid for the private debt, according to Bloomberg.  

Murky role

The SEC also noted that the filing was done by a back channel that skipped Edgar, hence public scrutiny – demanding a redo.

“Please refile your response letters on EDGAR to include your responses to staff comments, which will be made public consistent with the filing review process,” the SEC wrote.

In the letter, regulators said the Boston asset manager needed to make corrections that range from “rookie” mistakes -- as one analyst framed it -- like not using Edgar to transition files, to using the Apollo name in the brand when it's not the subadvisor.

The larger issues, however, involve sufficient third-party input into valuation and what provisions were made to ensure liquidity – since the fund gets its revolutionary oomph from its 15% holding of illiquid private credit.

State Street told Bloomberg it is addressing the issues.

Apollo added to Bloomberg.: “We saw a significant volume of shares traded yesterday and remain confident in the value the convergence of public and private markets can offer to investors,” it stated. 

Running a red light – like responses to written concerns –  is hard to understand, Stuart says, especially given warnings by the SEC, analysts, including Morningstar, and other industry experts.

Investment grade

These concerns were flagged several months ago by – among others -- Brian Moriarity, Morningstar associate director, fixed-income strategies, and Ryan Jackson, a manager research analyst, passive strategies.

They expressed some concerns that Apollo wears too many hats in the valuation process.

"Apollo appears to be the valuation provider, originator, buyer, and seller of the fund’s private credit investments, which may constitute the bulk of this ETF’s portfolio," they noted. 

“[SSGA] is relying on Apollo, not only to sell private credit instruments to the fund but also to … [enable] these normally illiquid investments to meet the SEC’s definition of liquid holdings.

"[But] swaths of the portfolio deemed liquid could become illiquid if Apollo fails to provide the bids,” they added.

So, does the late-Friday detente between State Street and the SEC mean that it'll be smooth sailing from here?

“Yes and no,” says Stuart. “Valuations and 15% are still a potential challenge.  But they addressed a good number of concerns to keep moving the ball forward to design a dynamic and innovative strategy to add alpha.”