SEC Signals Approval of Dual Share Class Application

On September 29, the Securities and Exchange Commission (SEC) signaled through a notice of application its intent to green light approval of dual-share class offerings under the Investment Company Act of 1940. This notice comes after the third amended application by Dimensional Fund Advisors (DFA) on September 26, which added a discussion of declaring dividend payments and barring secondary market transactions in the mutual fund share class.

The application provides for a three-part governance framework for advisers and fund boards:

1. An “initial written report” from the adviser to the board with an overview of the expected costs, how those costs will be managed, whether the fund’s investment strategy is suited to a multi-class structure, and any potential material conflicts of interest.
2. In an “ongoing monitoring process,” the adviser will need board approval, including numerical thresholds, to track and manage costs, cash levels, and capital gains distributions. The adviser will need to notify the board within 30 days if a threshold is exceeded and recommend any remedial action that may be necessary.
3. In “ongoing board approval” the board must determine at least annually whether the multi-class structure remains in the best interests of each class and the fund. The adviser will provide an “ongoing adviser report” detailing any observed cost savings, material conflicts of interest, negative impacts to any classes due to the multi-class structure, and any additional information the board may request.

Click here to read the SEC’s notice of application for dual share class relief to Dimensional Fund Advisors LP and its affiliates.
Click here to read a client alert from Dechert covering the latest developments in dual share class relief.