SEC Nears Approval Of Dual-Share Class Funds

The U.S. Securities and Exchange Commission (SEC) appears to be moving toward approving a long-anticipated fund structure that could significantly reduce investors’ tax burdens and accelerate the growth of the exchange-traded fund (ETF) market.

At least seven major asset managers—including JPMorgan, Pacific Investment Management Co. (PIMCO), Charles Schwab, and T. Rowe Price—filed amendments this week to their applications to launch funds featuring both mutual fund and ETF share classes. The flurry of updates, some to applications that had remained dormant for months, signals an intensifying dialogue between the SEC and fund sponsors, according to legal experts.

“The SEC signaling is clear. These amendments really constitute the SEC prioritizing ETF share class relief,” said Aisha Hunt, principal at Kelley Hunt law firm, which is representing F/m Investments in its application.

The recent submissions follow similar amendments earlier in April from F/m Investments and Dimensional Fund Advisors (DFA). DFA’s update included detailed disclosures on fund board oversight and fairness protocols for shareholders—a model that is reportedly guiding other applicants.

“We understand that the SEC staff is telling other asset managers to follow the DFA model as well,” said Brian Murphy, a partner at Stradley Ronon and former Vanguard and SEC counsel.

A Game-Changing Structure

At the center of the momentum is a unique multi-share class fund model—patented by Vanguard in the early 2000s—that enables a single fund to offer both mutual fund and ETF share classes. The design carries significant tax advantages, allowing asset managers to offer mutual fund investors exposure to ETFs’ tax-efficient structures.

Vanguard’s patent expired in 2023, unleashing a wave of interest. More than 50 asset managers have since filed for “exemptive relief” with the SEC to implement the structure. Yet regulatory uncertainty loomed until earlier this year, when SEC Commissioner Mark Uyeda emphasized the importance of advancing the applications.

Hunt indicated the SEC plans to begin by approving a small number of applicants as a first step.

Implementation Challenges Remain

However, approval from the SEC will not immediately translate to market readiness. Converting or launching dual-share class funds will require significant operational changes, particularly for managers currently lacking ETF infrastructure. Unlike mutual funds, ETFs trade throughout the day and require coordination with authorized participants and market makers.

“Dimensional has sort of set the template for what that language looks like in the context of these filings. And by extension cleared the way for approval, which feels imminent now,” said Ben Johnson, director of global ETF research at Morningstar. “But then once we arrive at approval, there’s still going to be work to be done.”

Johnson noted that mutual fund providers will need to prepare for investors converting their holdings into ETF shares without triggering taxable events. This will require backend changes to accommodate such conversions seamlessly.

Another key concern is liquidity. Mutual funds experiencing substantial outflows may not be good candidates for ETF share classes, according to Bloomberg Intelligence research. In one notable case, a Vanguard multi-share class fund saw a 14% capital gains distribution in 2009 after a large redemption forced the fund to sell underlying assets.

A Turning Point for the ETF Industry

The dual-share class model represents a crucial opportunity for legacy mutual fund firms struggling with years of outflows. As ETFs have surged in popularity—now totaling more than 4,000 U.S.-listed funds—traditional asset managers are seeking ways to stay competitive in a rapidly evolving investment landscape.

If the SEC gives the green light, the floodgates could open for hundreds, potentially thousands, of new ETF offerings built on this dual-share architecture. The move would mark a significant inflection point in the democratization of ETF benefits for a broader class of investors.