March 4, 2024



Over the past 20 years, this patent has given Vanguard Group an edge over competitors—and helped its clients attract more than $100 billion The value of the extra investment income – due today.

Rival fund managers are now free to copy the unique but controversial fund structure created in 2001 by the company founded by Jack Bogle, which allows mutual funds to generate returns for investors like exchange-traded funds while minimizing taxes .

It’s unclear whether the expiration marks a small footnote in history, or a pivotal moment for fund managers to find new edge in an increasingly brutal market. The answer depends largely on the SEC and the stance it takes. Just because it allowed Vanguard to start using that strategy 20 years ago doesn’t mean it will allow others to do the same now.

“The SEC is obviously the key here,” said Nate Geraci, president of The ETF Store, a consultancy. “If they approve this structure, I expect many traditional mutual fund houses to seriously explore using it.”

Regulators need to grant companies an exemption from the current rules, allowing them to use the well-known fund structure that effectively puts mutual funds into tax efficiency ETFs.

“The SEC is under no obligation to grant the requested relief,” said Jeremy Senderowicz, a shareholder in the Vedder Price law firm. “Since there is no formal requirement for the SEC to respond to an application for waiver relief even within a given time period, there is no guarantee that the SEC will respond at any particular time. There will be feedback within the scope.”

So far, only PGIA, the US arm of Australian asset manager Perpetual, has ask The SEC added ETFs to the stock class of its actively managed mutual funds. This differs slightly from Vanguard, which has only used this structure in index-tracking funds.

“It’s constructive,” said PGIA Chief Operating Officer Robert Kenyon, adding that the SEC had asked for a few extra days to review the filing. He expects to hear the regulator’s response in August.

The SEC declined to comment.

To be sure, before today, issuers that agreed to a licensing agreement with Vanguard and received an SEC waiver could use the ETF structure within a mutual fund. But no other fund manager has succeeded.Van Eck archive An exemption to offer the stock class of index ETFs was applied for in 2012 and before 2015, but was never approved.

Given the explosive growth of the ETF industry, it’s unclear how much the new structure will ultimately be needed. In 2022, the gap between money flowing out of mutual funds and money flowing into ETFs has widened to Record $1.5 trillion, according to data compiled by Bloomberg.

Most major fund issuers now offer ETFs, which are popular with investors because of their ease of access and often lower transaction costs.In a recent trend, billions of dollars in mutual fund assets have been convert Get into ETFs.

Still, Douglas Yoonnes, head of exchange-traded products at the NYSE, said several other asset managers are planning to apply to the SEC for a license to create exchange-traded funds as a share class in mutual funds.

“In some cases, we’re having exploratory conversations with asset managers just discussing what a multi-share class ETF would look like,” said Yones, who helps managers with complex or novel filings that require SEC approval.

In recent years, U.S. regulators have introduced comprehensive rule To make the launch of ETFs easier, the SEC has intentionally reserved the need for issuers to apply for an exemption if they want to pursue ETFs in multiple share class structures.

“If the SEC doesn’t allow more asset managers to use this structure, then there are real questions that will be raised as to whether the SEC has passed this expiration by allowing only the already dominant Vanguard alone,” Geraci said. patents to perpetuate an unfair playing field,” .

—with the help of Sam Potter.