Fund Advisor Files for Exemptive Relief for ETF Share Class

Dimensional Fund Advisors filed an application with the Securities and Exchange Commission (SEC) to permit the Advisor’s mutual funds to offer an ETF share class. Under the Investment Company Act of 1940, Rule 6c-11 does not provide relief from Sections 18(f)(1) or 18(i) of the ‘40 Act, nor does Rule 6c-11 expand the scope of Rule 18f-3’s multi-class relief to permit an ETF class of a mutual fund to operate. Therefore, advisers that wish to offer an ETF as a share class of a fund need to seek exemptive relief from the Commission.

In granting such relief, the Commission staff have presented concerns that a mutual fund with an ETF share class that transacts in-kind with authorized participants may give rise to differing transaction costs to shareholders of the different classes; and, absent a mechanism for allocating costs to the appropriate class, every shareholder would bear the cost. In a client alert from Ropes & Gray, the authors highlight that Dimensional’s application would “rely on a fund’s board of directors to assess, both initially and periodically, whether the multi-class structure is in the best interests of each mutual fund class and ETF class individually and of the fund as a whole, as well as whether the multi-class structure is operating effectively.” This review would include data on transaction costs, conflicts, tax consequences, and the board would continue to receive and review reports on the operation of the ETF class. The team at Ropes observes that the application presents a robust board-centered review and oversight structure, but that if the SEC’s open-end fund swing pricing proposal advanced as proposed, Dimensional would need to address any issues raised by the different treatment of ETFs.

Click here to read a client alert from Ropes & Gray covering Dimensional’s application and ETF share class relief.