Racing to Keep Up With Dual Share Class Applications

One might say progress toward the much-anticipated dual share class structure has been a bit one-dimensional.

That’s because a single company, Dimensional Fund Advisors, has been chosen by the Securities and Exchange Commission as an example for others. That firm, which is in the front of the line for dual share class approval, filed a second amended application late last week that will likely serve as a template for the rest of the industry. The SEC has reached out to other companies in the queue, telling them to use Dimensional’s application for exemptive relief under Section 6(c) of the Investment Company Act of 1940 to offer ETF share classes as the basis for their own. The latest revisions in the application are heightened oversight by fund boards in deciding whether to add ETF or mutual fund share classes to products as well as more disclosure for fund investors.

“The changes in the amended filing are generally consistent with the spirit of the last dual share class exemptive application amendment filings,” said Aisha Hunt, principal at law firm Kelley Hunt. “The structure and exemptive relief framework remain largely intact, with most conditions tracking closely to prior versions.”

Jump in the Line

Numerous fund companies have applied with the SEC for dual share classes or amended their existing applications over the past few weeks. “The SEC essentially told firms to replicate the Dimensional filing as the blueprint,” said Craig Kilgallen, relationship manager at Fuse Research Network. “Now, the firms feel like it’s on the horizon. They’re starting to get in line.” More than 60 fund companies have requested the SEC’s blessing for multiple share classes. Since the agency explained its stance on the Dimensional blueprint in April, at least 43 of them have filed amended applications to account for that, public records show. 

Among those filing:

• BlackRock, State Street, Charles Schwab, JPMorgan, Pimco, Morgan Stanley, and others submitted first-amended applications.
• Nine companies turned in new applications: Goldman Sachs; Tweedy, Browne; Harbor Funds; Columbia Management; Exchange Traded Concepts; Tortoise Capital Advisors; Baron Investment Funds; Advisors Preferred; and New Age Alpha. 

Boarded Up: Dimensional’s application appears to have been shaped by the SEC’s assessments of numerous requests by different asset managers. A common thread has been that fund boards would assess products’ fit for the addition of either an ETF or mutual fund share class, as not all funds lend themselves to both. “What’s more pronounced in this amended filing is the emphasis on board oversight,” Hunt said, citing explicit requirements for board approval of monitoring funds to identify issues, including conflicts of interest between share classes. “The amendment also includes enhanced disclosure intended to help investors better understand the dual share class structure and the potential for conflicts between share classes, reinforcing the importance of transparency for these hybrid models.”