ETF Share Class Relief: A Major Step Forward, and Making Sense of What’s Next
The SEC’s move toward allowing mutual funds and ETFs to operate as share classes in a single portfolio marks a significant shift for the industry. ICI’s new white paper, ETF Share Class Operational Considerations, lays out useful considerations for asset managers evaluating and implementing these dual share class structures—a change ICI has long supported.
Dual share class structures may provide significant benefits, including economies of scale, tax-efficient transitions between product wrappers, and access to different liquidity profiles within a single investment strategy. But balancing these potential benefits with operational complexities will require careful analysis.
From advocating for this innovation through implementation, ICI has been standing alongside our members, and the investors they serve, every step of the way.
Advocacy That Moved the Needle
ICI’s push for ETF share class relief reflects a sustained, strategic effort. After numerous asset managers filed exemptive applications, ICI convened an ETF share class working group in 2024 to educate members on the relevant issues and develop strategies for moving the relief forward.
Progress accelerated in 2025. In March, ICI published Reimagining the 1940 Act, a policy outline that called for new approaches to fund regulation that serves everyday investors. This put the issue squarely on the regulatory agenda.
That same month, then Acting SEC Chairman Mark Uyeda announced at ICI’s Investment Management Conference that he had directed Commission staff to prioritize their review of share class relief, acknowledging that more than two years had passed since the most recent set of applications had been filed.
When Chairman Paul Atkins took the helm at the SEC, ICI presented a series of recommendations, including ETFs as a share class. He clearly took them seriously—at ICI’s inaugural ETF Conference in September, Kaitlin Bottock of the SEC’s Division of Investment Management told attendees the regulator was “at the one-yard line,” signaling that relief was near. Then, in late September, the SEC published a notice indicating that it intends to grant exemptive relief allowing mutual funds and ETFs to operate as share classes within the same portfolio, a success for ICI and the industry.
Preparing While Advocating
Even while advocating for regulatory change, ICI recognized the operational challenges to implementing dual share class structures effectively. ICI held an educational webinar on ETF fundamentals that drew more than 700 participants and convened five specialized working groups comprising asset managers, intermediaries, service providers, and representatives from the Depository Trust and Clearing Corporation (DTCC).
ICI’s approach differed from other industry efforts by taking a comprehensive view of the entire life cycle of an ETF share class launch. Participants represented the full industry ecosystem, including operations, compliance, legal, and product development teams. Members could choose which working groups matched their interests, while a sixth information-sharing group provided monthly updates to those tracking progress without participating in detailed discussions.
These working groups spent months identifying operational challenges, developing practical solutions, and constructing efficient implementation approaches that resulted in the white paper.
A Comprehensive Set of Operational Considerations
The white paper provides a detailed overview of the complex operational issues asset managers, intermediaries, and service providers will face when implementing dual share class portfolios. Rather than prescribing a single approach, the paper identifies key decision points that each organization can adapt to its specific business model, including:
-
Regulatory approval processes, including board considerations and exemptive relief requirements;
-
Product selection considerations for determining which funds may be suitable for the dual share class structure;
-
Service provider models and the integration challenges of supporting both ETF and mutual fund share classes;
-
Intermediary impacts, from trading platform limitations to regulatory compliance considerations under Regulation Best Interest;
-
Reporting and monitoring frameworks to address SEC concerns about cross-subsidization, including methodologies for assessing trading costs impacts, tax drag, and cash drag;
-
Interclass exchange mechanics, with detailed workflows for both manual and automated processes; and
-
Investor experience considerations, particularly for direct-held accounts seeking to invest in the dual share class structure.
The Path Forward
The SEC’s movement toward ETF and mutual fund share classes of the same fund represents a meaningful evolution for the industry, but the work doesn’t stop with regulatory approval. ICI is planning a three-part webinar series covering the regulatory framework and key changes to applications, strategic considerations for asset managers, and specific issues facing intermediaries. ICI will also update the white paper as needed and develop additional resources as questions arise during implementation and regulations evolve.
ICI remains committed to guiding members through implementation, ensuring operational challenges are addressed, and helping investors benefit from these innovations. Through advocacy, education, and practical guidance, ICI ensures innovation benefits both the industry and the investors it serves.