Will the SEC Force Changes in the SSGA Apollo Private Credit ETF?

The SPDR SSGA Apollo IG Public & Private Credit ETF PRIV is off to a bumpy start.

The SEC responded to State Street Global Advisors’ seismic private-credit exchange-traded fund rollout with a strongly worded letter on Feb. 27, 2025. That letter came as a surprise given that the agency didn’t stop the firm from launching the fund a day earlier.

There may be no precedent for what’s happening right now. It was once unthinkable that a fund with a novel and untested model would be allowed to launch without having undergone extensive scrutiny from the SEC. And it’s nearly as astounding to see the SEC offering that scrutiny now that the fund is already trading. A major breakdown in communication between SSGA and the SEC seems likely.

The SEC’s letter suggested as much when it noted that the ETF launched “without resolution of staff comments.” While SEC comments are sometimes hashed out between the regulator and advisors following a fund’s launch, the specifics in this case appear to challenge the ETF’s fundamental proposition. State Street has since filed responses that appear to address some—but not all—of the regulator’s concerns. We reached out to SSGA for comment on Feb. 26 but have yet to speak with the firm.

The Liquidity Mismatch

As Morningstar has pointed out, SSGA’s liquidity arrangement with Apollo appeared to be a creative but improbable way around SEC rules, which cap illiquid holdings at 15% of a fund’s net assets. In this arrangement, Apollo agreed to provide bids for private-credit holdings, which would ostensibly allow the ETF to classify them as liquid and therefore not subject to the 15% illiquid assets cap.

Until recently, we interpreted the ETF’s launch as a tacit indication the SEC had accepted SSGA’s reasoning, but the regulator’s Feb. 27 letter calls that into question. “We do not believe … that it would be sufficient … to rely solely on bids from Apollo under the Agreement to find an AOS Investment [a holding sourced for the portfolio by Apollo] not to be illiquid,” the letter said.

SSGA responded the following day but sidestepped the issue. The firm laid out an example in which an Apollo price quote would come in the same or higher as its own independently designated valuation, arguing that the pairing would be sufficient to avoid an “illiquid” label, further noting that, “As a result, the Registrant confirms that it is not classifying AOS Investments as liquid based solely on bids from Apollo under the Agreement.”

SSGA’s narrative mixes apples and oranges, though, referring to its own valuation process in the same breath as Apollo’s “price quote,” implying that they carry equal relevance. They don’t. “Price quote” is shorthand for a firm price quote, which SSGA argues is evidence of a ready buyer and, therefore, liquid. By contrast, a daily valuation for pricing holdings does not guarantee there’s a ready buyer. In other words, SSGA left unaddressed whether or how it might still classify a holding as liquid in the absence of a firm bid from Apollo.

SSGA has also emphasized Apollo’s function as a nonexclusive service provider, and the SEC’s comments argued that using Apollo in the fund’s name could be misleading given the limited nature of that relationship. SSGA then filed updates to its Feb. 26 prospectus with the SEC in early March, eliminating references to Apollo from its section on Liquidity Risk and removing it from the fund’s name.

That upends the entire apple cart. The arrangement with Apollo as originally presented by SSGA raised plenty of concerns but at least formed the logical basis for an argument that the fund’s private-credit assets could avoid being labeled illiquid.

SSGA’s latest responses and updated prospectus language appear to set aside that original proposition. Next to the illiquid label, the SEC rule’s most flexible label is “less liquid,” which can be used for holdings a firm believes could be sold within seven calendar days without generating a significant change in price. That typically covers assets like broadly syndicated bank loans, some high-yield corporates, and niche structured credit. But while SSGA says it wouldn’t rely solely on an Apollo price quote to label something as liquid (or less liquid), it doesn’t explain anywhere in its prospectuses or comment letters what other factors it might use, or how it will substantiate liquidity in the absence of an Apollo quote. The only other plausible option would seem to involve getting firm bids from other parties, and SSGA hasn’t provided any reason to believe it can consistently rely on receiving them for private-credit holdings.

In the absence of any such reference in its filings—or the provision of some substantive support for reporting its private-credit holdings as liquid assets without bids from Apollo—SSGA’s launch and operation of the fund could in practice circumvent rule 22e-4, the SEC’s rule on liquidity risk management.

If the SEC objects, it could force the ETF to operate inside the illiquid asset cap of 15%. That would make it no different from any other ETF or mutual fund, except perhaps in its willingness to use that 15% bucket.

If the SEC remains silent, it may set a precedent that could undermine the liquidity rule, opening the door to any fund to own more than 15% in illiquid assets. We called this ETF’s launch seismic, but such a precedent would be a much greater, and potentially negative, one for investors.

The Daily Limit

The SEC had also chastised SSGA for shielding terms of the liquidity agreement with Apollo, including definitions and sections relating to bid mechanics, from public view. SSGA acquiesced and filed those details unredacted in its March 5 submission. Most importantly, SSGA revealed previously undefined details about Apollo’s commitments under the liquidity agreement. Those details stipulate that Apollo has committed to offer executable price quotes for up to “twenty-five percent (25%) of the Fund’s holdings in an AOS Investment as measured by the prior day’s end of day net asset value and subject to a rolling weekly cap equal to fifty percent (50%) of the end of day net asset value from five Trading Days prior.”

This 25% is the most that SSGA can demand from Apollo in terms of daily liquidity. Apollo can offer more than that on any given day if it wants to, but SSGA would still be limited in what it can sell back to Apollo by the 50% rolling weekly cap. This arrangement seems reasonable, and it’s very plausible the fund could thrive even as it grows if redemptions stay under the limits.

Ironically, though, it could become a victim of its own success. It’s possible that the fund could get large enough that if it experiences net redemptions, the sheer volume would put strain on the liquidity arrangement, highlighting the risk of relying heavily on a single party to provide liquidity. This could put the portfolio upside down, with an ever-growing allocation to private credit as it sells its liquid public assets to meet redemptions. In a worst-case scenario, Apollo may be unable or unwilling to satisfy the fund’s liquidity needs, and in such a scenario, there may be no one else to step in and fill the void.

A Practical Example

Consider a scenario in which the fund holds 35% in AOS Investments, which SSGA has signaled as the higher end of their expected range, and needs to start selling those assets. Assuming Apollo does not choose to purchase more than the 25% daily limit, it would take seven or eight trading days to reduce that allocation to the illiquid asset cap of 15%. Seven days if the reduction is front-loaded, though this means a few days during this period in which SSGA could not sell to Apollo, and eight days if the reductions are made up to the maximum allowable amount without ever hitting the 50% cap. If Apollo chooses to purchase the full 50% amount in a single day, SSGA would be unable to sell more to Apollo until four more trading days pass and the rolling weekly amount drops back to 0%. This all assumes there are no changes to the rest of the portfolio, which is naive but keeps the math simple.

Can It Work?

There are scenarios in which this ETF could function smoothly despite the concerns expressed by Morningstar and others. There are at least a few factors that could help.

One would be the persistence of enough trading liquidity in the ETF’s shares such that the portfolio only rarely experiences enough net selling to drive the price to a meaningful, persistent discount from NAV. That’s normally a nonissue for a run-of-the-mill fund invested in liquid markets given that the ETF structure is designed to incentivize a fund’s authorized participants to actively shrink its discount. After purchasing shares in the open market, APs can hand them to the fund’s manager in exchange for their underlying assets and sell those assets at prices consistent with the fund’s higher NAV. The goal is for the AP to take profits from the difference, and in sufficient volume as to get the fund’s market price back in line with its NAV.

There’s also a narrative in the industry that investors will be tolerant of more persistent discounts for this fund even if the private-credit sector’s challenges mean that APs can’t prevent some discounts from persisting, in effect making them socially acceptable given the high demand for and idiosyncratic nature of the private-credit market.

That may well be the case, but it would still depend on a measure of market confidence that the fund’s NAV represents a reasonable estimate. However unlikely, a change in that sentiment is conceivable given the opacity of private assets.

Still, there’s a lot of optimism for the potential growth of secondary trading in private credit. While the ETF is small, as it is now, Apollo’s liquidity facility should be large enough to accommodate any net redemptions. And if secondary trading in private credit becomes more established, it would take pressure off Apollo. Combined with the hoped-for ample liquidity in trading of the ETF’s own shares, the demands that net redemptions place on Apollo could be minimal.

What Does This Mean for Investors?

Morningstar and others voiced many of the same concerns as the SEC, especially around liquidity and valuation, when State Street first filed for the ETF in September 2024. That these questions remained unanswered more than 170 days later, and that the ETF was allowed to launch without sufficiently addressing them, is disconcerting.

Because the ETF is already trading, it seems unlikely the SEC would order it to be pulled from the market. But it does seem possible that some core selling points of the fund could change depending on how SSGA resolves the regulator’s remaining concerns, and given the current scrutiny, SSGA may not push the liquidity limit too hard.