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Yahoo
7 days ago
- Business
- Yahoo
Racing to Keep Up With Dual Share Class Applications
One might say progress toward the much-anticipated dual share class structure has been a bit one-dimensional. That's because a single company, Dimensional Fund Advisors, has been chosen by the Securities and Exchange Commission as an example for others. That firm, which is in the front of the line for dual share class approval, filed a second amended application late last week that will likely serve as a template for the rest of the industry. The SEC has reached out to other companies in the queue, telling them to use Dimensional's application for exemptive relief under Section 6(c) of the Investment Company Act of 1940 to offer ETF share classes as the basis for their own. The latest revisions in the application are heightened oversight by fund boards in deciding whether to add ETF or mutual fund share classes to products as well as more disclosure for fund investors. 'The changes in the amended filing are generally consistent with the spirit of the last dual share class exemptive application amendment filings,' said Aisha Hunt, principal at law firm Kelley Hunt. 'The structure and exemptive relief framework remain largely intact, with most conditions tracking closely to prior versions.' READ ALSO: Investors Turn to Defined Outcome ETFs Amid Market Turmoil and Not Taking Single-Stock ETFs for Granite Numerous fund companies have applied with the SEC for dual share classes or amended their existing applications over the past few weeks. 'The SEC essentially told firms to replicate the Dimensional filing as the blueprint,' said Craig Kilgallen, relationship manager at Fuse Research Network. 'Now, the firms feel like it's on the horizon. They're starting to get in line.' More than 60 fund companies have requested the SEC's blessing for multiple share classes. Since the agency explained its stance on the Dimensional blueprint in April, at least 43 of them have filed amended applications to account for that, public records show. Among those filing: BlackRock, State Street, Charles Schwab, JPMorgan, Pimco, Morgan Stanley, and others submitted first-amended applications. Nine companies turned in new applications: Goldman Sachs; Tweedy, Browne; Harbor Funds; Columbia Management; Exchange Traded Concepts; Tortoise Capital Advisors; Baron Investment Funds; Advisors Preferred; and New Age Alpha. Boarded Up: Dimensional's application appears to have been shaped by the SEC's assessments of numerous requests by different asset managers. A common thread has been that fund boards would assess products' fit for the addition of either an ETF or mutual fund share class, as not all funds lend themselves to both. 'What's more pronounced in this amended filing is the emphasis on board oversight,' Hunt said, citing explicit requirements for board approval of monitoring funds to identify issues, including conflicts of interest between share classes. 'The amendment also includes enhanced disclosure intended to help investors better understand the dual share class structure and the potential for conflicts between share classes, reinforcing the importance of transparency for these hybrid models.' This post first appeared on The Daily Upside. To receive exclusive news and analysis of the rapidly evolving ETF landscape, built for advisors and capital allocators, subscribe to our free ETF Upside newsletter.
Yahoo
17-04-2025
- Business
- Yahoo
Pimco, T. Rowe Bet on SEC Prioritizing Tax-Savvy Funds
(Bloomberg) -- Optimism is building that a game-changing fund design that will help asset managers shrink clients' tax bills and grow their ETF businesses will soon be approved by the US securities regulator. Trump Signs Executive Orders on Federal Purchasing, Office Space DOGE Places Entire Staff of Federal Homelessness Agency on Leave How Did This Suburb Figure Out Mass Transit? Why the Best Bike Lanes Always Get Blamed Nashville's $3 Billion Transit Plan Brings a Call for Zoning Reform This week, at least seven firms including JPMorgan and Pacific Investment Management Co. filed amendments to their applications to create funds that have both ETF and mutual fund share classes. The filings update initial applications — some of which sat idle for months — with more details about the fund structure, and suggest the US Securities and Exchange Commission has engaged in constructive discussions with a growing number of applicants, according to industry lawyers. 'The SEC signaling is clear. These amendments really constitute the SEC prioritizing ETF share class relief,' said Aisha Hunt, a principal at Kelley Hunt law firm, which is working with F/m Investments on its application. The latest round of filings, which also include Charles Schwab and T. Rowe Price, are serving as yet another sign that the SEC is fast-tracking its decision process on multi-share class funds, after F/m Investments and Dimensional Fund Advisors filed amendments earlier in April. DFA's amendment included more details around fund board reporting and the board's responsibilities to monitor the fairness of the new structure for each shareholder. Brian Murphy, a partner at Stradley Ronon, the firm handling DFA's filing, said other fund managers are receiving feedback and amending applications. 'We understand that the SEC staff is telling other asset managers to follow the DFA model as well,' said Murphy, who is also a former Vanguard lawyer and SEC counsel. At stake is a novel fund model where one share class of a mutual fund would be exchange-traded. It was patented by Vanguard over two decades ago, and helped the money manager save its clients billions on taxes. The blueprint ports the tax advantages of the ETF onto the mutual fund, and is a tantalizing prospect for asset managers that are seeing outflows and looking to break into the growing ETF industry. After Vanguard's patent on the design expired in 2023, over 50 other asset managers asked the SEC for so-called 'exemptive relief' to use the fund design. But it wasn't until earlier this year, when SEC acting chair Mark Uyeda said the regulator should prioritize the applications, that it was clear the SEC would be interested in allowing other fund firms to use the model. According to Hunt, the regulator has signaled that it will first approve a small subset of the applicants. 'Work to be Done' To be sure, an approval doesn't mean that an issuer will be able to immediately begin using the fund blueprint. Because ETFs trade during market hours, they require different infrastructure than mutual funds, so firms that currently only have the latter structure will need to hire staff and form relationships with ETF market makers before they implement the dual-share class model. 'Dimensional has sort of set the template for what that language looks like in the context of these filings. And by extension cleared the way for approval, which feels imminent now,' said Morningstar Inc.'s Ben Johnson. 'But then once we arrive at approval, there's still going to be work to be done.' Mutual fund firms will need to prepare for shareholders who want to convert, tax-free, into the ETF share class, which would require some 'plumbing' and structural changes, said Johnson. Another point to consider is that mutual funds that have significant outflows may not be ripe for ETF share classes, as that could result in a tax hit, according to research from Bloomberg Intelligence. In 2009, a Vanguard multi-share class fund was hit with a 14% capital-gains distribution after a massive shareholder redeemed its shares in the fund. Fund outflows can bring about a tax event when a mutual fund has to sell underlying holdings to meet redemptions. Mutual funds have largely bled assets in recent years as ETFs have grown in popularity. As a result, legacy asset managers have found themselves battling for a slice of the increasingly saturated ETF market, which now boasts over 4,000 US-listed ETFs. SEC approval of the dual-share design could open the floodgates to thousands more funds. (Updates to add details on DFA's amended filing in the fourth paragraph. Earlier version corrected fifth paragraph to clarify that Brian Murphy is not on DFA's filing. His firm Stradley Ronon is handling the filing.) Trade Tensions With China Clear Path for Salt-Powered Batteries GM's Mary Barra Has to Make a $35 Billion EV Bet Work in Trump's America How Mar-a-Lago Memberships Explain Trump's Tariff Obsession Trump Is Firing the Wrong People, on Purpose The Monastery Where Founders Meditate on Code and Profit ©2025 Bloomberg L.P. Sign in to access your portfolio
