Cboe Files to List ETF Share Classes of Mutual Funds

Cboe Global Markets is seeking Securities and Exchange Commission (SEC) approval to become the first asset exchange to enable fund issuers to create exchange-traded funds from existing mutual funds, according to a Thursday filing with the agency. 

Cboe's filing imposes a 240-day deadline on the SEC to decide on the highly anticipated rule change that would upend decades of standard procedure and could add billions in assets to ETFs. If the agency approves the change, ETF issuers would be able to issue the so-called multi-share class structure immediately on the exchange. 

Morgan Stanley, Dimensional Fund Advisors, and Fidelity have already filed with the SEC for exemptive relief to list ETF share classes of mutual funds, although those filings did not impose a deadline for an agency decision. The issuers have said that rule change would allow asset managers to offer mutual fund investors the tax efficiency of an ETF without the process of starting an entirely new fund. 

“With our latest filing, we aim to support issuers in pursuing exemptive relief for multi-share class capability,” said Rob Marrocco, global head of ETP listings at CBOE Global Markets in a statement. “If approved by the SEC, we believe this advancement will offer numerous benefits, such as enhanced portfolio management efficiency, improved opportunities for secondary market trading, and increased cost efficiencies for investors.”

The share class filings have been a highly watched regulatory topic among investors and analysts, but the SEC previously had no deadline to decide on the rule change.

Vanguard Patent

The multi-share class structure was previously exclusively available to Vanguard for two decades. The SEC gave the asset management behemoth exemptive relief from rules in the Investment Company Act of 1940 in 2000, and the firm patented the structure in 2003. The move added about $100 billion in gains to Vanguard shareholders, according to Bloomberg. Vanguard's patent expired last May, which triggered new firms entering the arena to see if the beneficial structure could be expanded across the industry.

Yet the SEC may not be willing to grant the relief again because the move could force ETF investors to subsidize mutual fund investors by making ETF customers pay the higher capital gains associated with mutual funds, according to Morningstar ETF analyst Bryan Armour.

The proposed rule change could serve as a lifeline for legacy mutual fund asset managers, who have witnessed significant flows of capital into ETFs due to their liquidity and lower fees. One of the primary advantages for asset managers is the ability to offer ETF share classes of mutual funds within retirement plans, such as employer-sponsored 401k plans, which are primarily structured to hold mutual funds.

Contact Lucy Brewster at [email protected].