SEC’s Approval of Dimensional’s Latest Regulatory Request could Lead to ETFs Being Classified as Another Share Class

ing chair Mark Uyeda emphasized the importance of addressing the backlog of applications for exemption within the Securities and Exchange Commission. This focus on clearing the backlog aligns with Dimensional’s recent move to file an amended application for exemptive relief, allowing the firm to offer ETF share classes of its traditional mutual funds.

Currently, Vanguard is the only manager able to provide a multi-class share structure, but with pending applications from all major asset managers, the landscape may soon see a shift. The new exemption would permit managers to offer dual share classes of both mutual funds and ETFs, opening up a host of options for investors. Dimensional’s co-CEO and co-CIO, Gerard O’Reilly, believes this move could revolutionize the ETF and mutual fund marketplace.

Offering both mutual fund and ETF share classes in certain funds could lead to lower transaction costs, increased tax efficiencies, and benefits of scale for all shareholders, as stated by O’Reilly. This broader acceptance of ETF share classes could provide investors with a wider array of fund groups and strategies to choose from, fostering competition that would drive funds to operate more efficiently and keep fees and expenses low.

In response to concerns raised by SEC staff during discussions, Dimensional has updated its filing with additional conditions. These include an annual evaluation by the fund’s board of directors for funds with a multi-class structure and the establishment of a monitoring process by the asset manager to address any issues that may arise. By addressing these concerns, Dimensional hopes to gain approval for its revised application.

Adding ETFs to the application opens up the possibility for Dimensional to offer traditional mutual fund share classes for its existing ETF lineup, a move that has been mirrored by other firms in recent applications for exemptive relief. By doing so, Dimensional aims to set a precedent for others seeking similar exemptions.

A Cerulli report from December hinted at a trend among ETF issuers to offer dual-class share structures in the future, further increasing options for investors. With the revised application, Dimensional seeks to contribute to this trend and provide investors with greater choice in how they access both mutual funds and ETFs. As the SEC focuses on clearing the backlog of exemption applications, the landscape of the mutual fund and ETF markets may see significant changes in the near future.