Asset managers are generally optimistic about the possibility of a future approval of the dual-class share structure. Most ETFs issuers stated that they expect active mutual funds (74% of applicants) and passive mutual funds (26%) to incorporate ETF share classes for approval.
Furthermore, 93% of active applicants requested such an exemption in their applications as of December 2024, according to the latest report by consulting firm Cerulli Edge—U.S. Product Development Edition.
The appeal of the dual-class share structure makes sense from a product development perspective, as such approval would greatly benefit both financial advisors and end investors by expanding investment options and simplifying the process for those seeking greater exposure through their preferred structure.
According to Cerulli’s survey, 69% of ETFs issuers indicated that they have already submitted exemption requests, while 29% are planning to apply at a later date or are considering a dual-class share structure initiative and monitoring developments (29%).
SEC filings from various applicants clearly list advantages such as “lower portfolio transaction costs,” “greater tax efficiency,” and an “additional distribution channel for asset growth and economies of scale” concerning ETF share classes in mutual funds, as well as “efficient portfolio rebalancing” and “greater basket flexibility” for mutual fund share classes in ETFs, noted Sally Jin, an analyst at Cerulli.
“Other arguments in favor of the dual-class share structure point to ongoing initiatives that offer similar benefits—such as cloning mutual fund strategies in ETFs and converting mutual funds to ETFs—which simultaneously respond to investor demand and pose fiduciary challenges that the dual-class share structure might be better suited to address,” she added.
However, significant regulatory and distribution challenges persist, and it remains to be seen whether the SEC will approve these measures and, if so, what they will entail exactly, according to the Boston-based consulting firm.
The SEC has raised numerous concerns, including excessive leverage, conflicts of interest, investor confusion, the risk of cross-subsidies, discrepancies in cash redemptions and fund expense payments, and unequal voting power.
Regarding distribution, ETF managers cited the main obstacles as brokerage firms’ reluctance to approve or make ETF share classes available on platforms (54%), the operational complexity of managing mutual fund and ETFs share classes (43%), and asset managers’ reluctance to provide transparency into mutual fund strategies (29%).
Additionally, 69% of ETF asset managers agreed that adopting the dual-class share structure would be more significant for registered independent advisor (RIA) channels, compared to 42% of firms that expressed the same view regarding central offices.
“Despite these obstacles, half of the asset managers who responded to Cerulli’s survey remain optimistic about the possibility of future approval of the dual-class share structure, although the timeline for such approval remains uncertain,” Jin stated. “The growing number of applicants, who make up a significant portion of the investment sector, could be a decisive factor,” she concluded.
