Ropes & Gray Releases White Paper on ETF Share Class Issues

With over 50 applications pending at the Securities and Exchange Commission (SEC) for exchange-traded fund (ETF) share class exemptive relief, Ropes & Gray published a white paper outlining how fund groups can prepare for anticipated SEC exemptive relief. The paper notes several considerations fund complexes should consider prior to launching, which include, the fund board’s “best interest determination,” operational hurdles, and service provider requirements. According to the white paper, the “best interest determination” could include:

• Comparing features and fee structures of the classes;
• Potential for cross-subsidization;
• Tax impact; and
• Whether the wrapper is appropriate for the fund’s strategy, among other considerations.

After the launch, the share class relief would require ongoing monitoring by the fund’s board of directors to analyze data on flows and trading volume, cash drag, bid-ask spreads, brokerage and trading costs, among other information. Depending on the outcome of those conversations, the board may determine one of the share classes may be at a disadvantage and require corrective action. Correct actions may include restructuring, examining fees, modifying the fund’s strategy, or other action. The paper also notes that some sponsors who do not already offer an ETF product may want to familiarize themselves with “the various legal and operational nuances of operating a registered fund whose securities trade on a securities exchange.”

Click here to read the Ropes & Gray white paper “Preparing for ETFs as a Share Class.”
Click here to watch an archived video of the Ropes webinar “Preparing for ETFs as a Share Class.”