SEC Delivers Breakthrough Regulation

This fall, the SEC granted approval to Dimensional Fund Advisors to add ETF share classes to 13 mutual funds, a turning point for the $30 trillion U.S. mutual fund industry.

As the first such decision since Vanguard’s patent on ETF share classes expired in 2023, it reopens an opportunity that had been closed to the rest of the industry. Following the Dimensional decision, more than 85 other investment firms are now seeking similar approvals.

For investors, the potential is transformative: access to existing mutual fund strategies with ETF-style intraday liquidity, transparency and potential tax advantages. SEC Commissioner Mark T. Uyeda has noted that the structure “allows a single fund to offer both exchange-traded and traditional mutual fund shares, providing flexibility while preserving investor protections.”

The development comes on top of the growth in active ETF strategies. “In terms of flow, they’re up about 40% so far this year,” said Justin Fay, Investment Product Lead and Distribution, BNY Pershing. “This year, we’re getting more into active equity products in these particular solutions, as opposed to fixed income.”

But there are also challenges. “With the tailwinds associated with ETFs, there are more and more underlying asset types being put into the ETF wrapper,” said Jeff English, Head of Equity Sales, Global Markets Trading, BNY. “In certain circumstances, that creates challenges from an authorized participant perspective, making it difficult to source liquidity from some of these ETFs, for example.”

Strong Operational Foundation Builds Stability

Beyond the growing demand lies a more complex challenge: operational readiness. ETF share classes require unprecedented coordination across custody, accounting, fund administration, trading, and tax reporting.

“Clients are taking a thoughtful approach because there's so much to think about from an operational perspective.” said Jim Holleran, Head of ETF product, Asset Servicing, BNY. “The real risk isn’t being late to market,” he added. “It’s launching before you have a stable operating model. This structure won’t be turnkey from day one.”

A key enabler will be the Depository Trust & Clearing Corporation (DTCC), which is upgrading its Fund/SERV platform to support non-taxable share-class exchanges between mutual funds and ETFs. Industry testing is scheduled through late 2025 and early 2026, with full rollout expected in the middle of next year.

The initiative would allow investors to convert mutual fund shares into ETF shares seamlessly, without triggering capital gains events, a key factor in driving widespread adoption.

Another development is the voluntary exchange, the ability for advisors to move clients from mutual funds to ETF share classes automatically. Getting that right at the industry level is crucial.

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