The U.S. Securities & Exchange Commission (SEC) has raised red flags regarding the first broad private credit market exchange-traded fund (ETF), the SPDR SSGA Apollo IG Public & Private Credit ETF. In a letter posted on its website Thursday, just hours after the ETF began trading, the SEC highlighted “significant outstanding issues” that need to be addressed.

Unprecedented Regulatory Scrutiny

Brent Fields, associate director of the SEC’s division of investment management, formally requested State Street Global Advisors to resolve concerns surrounding the ETF’s compliance with regulatory standards. This move is considered highly unusual by industry analysts, given that regulatory queries of this magnitude are typically addressed before an ETF’s launch.

State Street acknowledged the SEC’s letter and confirmed that it will respond accordingly but declined to provide further comments.

Concerns Over Liquidity and Compliance

The SEC’s primary concern revolves around the ETF’s liquidity and its adherence to SEC valuation rules. According to Bloomberg News, regulators have questioned whether State Street can ensure compliance, particularly regarding the fund’s reliance on private credit instruments.

Additionally, the SEC requested the removal of “Apollo Global Management” from the ETF’s name, citing that its inclusion could mislead investors regarding Apollo’s level of involvement in the fund.

“Nothing in the contents of the letter surprised me; we have been monitoring these concerns,” stated Amrita Nandakumar, president of Vident Asset Management. “However, the timing of the letter was astonishing.”

Potential Market Implications

This ETF is the first to provide exposure to the private credit sector through a portfolio of privately issued bonds and loans. Under SEC rules, ETFs are restricted to holding no more than 15% of assets in illiquid securities. However, State Street disclosed that it might allocate up to 35% of assets in such instruments, relying on a liquidity commitment from Apollo Global Investors.

According to Morningstar ETF analyst Bryan Armour, this regulatory challenge could impact other asset managers planning to launch similar private credit ETFs. Armour also noted that while the SEC has the authority to halt trading of the ETF, it has not specified any immediate penalties should State Street fail to address the concerns.

With increasing investor interest in private credit ETFs, this development underscores the regulatory hurdles asset managers must navigate to ensure compliance and transparency. The coming weeks will be critical as State Street responds to the SEC’s demands and seeks to stabilize investor confidence in the burgeoning private credit ETF market.