It would be the latest setback for a rule change that many in the industry see as a game changer for the ETF market.

The U.S. Securities and Exchange Commission late on Tuesday issued a notice on two of the proposals, from Precidian Investments and BlackRock Inc (>> BlackRock, Inc.), noting for each that it "preliminarily intends to deny the application." The proposals seek permission to create actively managed ETFs that would not be required to disclose their holdings on a daily basis.

Currently, all active ETFs are required to disclose their holdings on a daily basis. These funds often gain a reputation based on a manager's winning investment philosophy, and daily transparency could allow others to "front-run" the active manager.

Firms say these so-called "non-transparent" ETFs will allow them to use sophisticated investment strategies without revealing the fund manager's moves. [ID:nL2N0JJ18U]

At the heart of the SEC's issue with the proposals is a concern over the ability of market makers to be able to effectively arbitrage the proposed non-transparent ETFs with the lack of disclosure provided.

That could result in wide bid-ask spreads and cause the funds' intraday market prices to significantly deviate from their net asset values. Such a condition "may be exacerbated during times of market stress," the SEC noted.

"Absent a request for a hearing that is granted by the Commission, the Commission intends to issue an order under the Act denying the application," the notice said.

The Precidian and BlackRock filings are two among a handful of proposals for non-transparent active ETFs currently before the SEC. But the potential denial of the proposals could be a setback for the others still awaiting a decision, said Jane Kanter, a former partner at Dechert LLP, who now runs compliance for New York-based ETF shop Ark Investment Management.

"I think it's going to have a dampening effect on the other proposals," she said.

Other firms that are also seeking SEC permission include Eaton Vance Corp (>> Eaton Vance Corp), State Street Corp (>> State Street Corporation), Invesco Ltd's (>> Invesco Ltd.) PowerShares and most recently, Fidelity Investments.

Still, it is a positive that the SEC did not flat out deny the proposals, but instead published its reasons for wanting to deny the order and give the applicants an opportunity to request a hearing, said John McGuire, a partner at Bingham McCutchen LLP and co-chair of the firm's global investment management practice group.

"I think that people will be able to use this information to go back and tweak their own filings to try and address some of the issues," McGuire said.

(Reporting by Ashley Lau in New York; Editing by Tim McLaughlin and Paul Simao)

By Ashley Lau