(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.
Most Read from Bloomberg
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.
