The SEC is getting closer to a decision on whether it will allow investment companies to offer ETF share classes to investors in existing mutual funds.
“We are finalizing our process,” Kaitlin Bottock, assistant director of the SEC Division of Investment Management (DIM), said at an industry conference in Nashville, Tenn.
“We’re at the one-yard line,” she said during a Sept. 10 panel on navigating the regulatory landscape during the Investment Company Institute’s (ICI) ETF Conference in Nashville, Tenn.
Bottock said she was expressing her own opinion about the issue, which has attracted a huge amount of attention from asset managers hoping to take advantage of a model that was available only to Vanguard funds until the patent expired two years ago.
Hybrid-model investment funds fit with the deregulatory approach of the SEC under Paul Atkins, who has backed efforts to allow public funds greater access to private-market assets, shifted into high gear the SEC’s effort to create a regulatory framework for cryptocurrencies and made the ability of asset managers to attract investors at the top of the agency’s policy agenda.
There is no clear indication of when the SEC will make a policy decision on ETF share classes, but attorneys involved in the process told Fund Directions they expect to see approvals begin to flow out of the SEC within the next few weeks.
Asset-management firms have been lining up for permission to offer hybrid share classes since March, when SEC commissioner Mark Uyeda hinted during another industry conference that the agency might look favorably on such arrangements.
The new model would give mutual funds the chance to retain investors by offering an option with higher levels of tax efficiency and a broader investment portfolio. Between 65 and 70 asset management firms are currently waiting for approval to offer hybrid share classes.
The option is fantastically popular among both mutual-fund and ETF sponsors, according to a survey released in March by Cerulli Associates that found interest in the model among 74% of active ETFs and 26% of passive mutual funds.
Dual-share classes could provide lower portfolio transaction costs, better tax efficiency, additional distribution channels and economies of scale, according to Cerulli analyst Sally Jin.
It would also make it possible for fund sponsors to clone ETF or mutual-fund strategies into the opposite fund category, increasing the range of products those funds could offer and the range of investors they could potentially address.
“Half of asset management respondents to Cerulli’s survey remain positive about the possibility of future approval for the dual-share-class structure, though the timeline for such approval remains uncertain,” Jin said as part of her analysis in the March report.
