MFDF Insights: ETF Share Class Relief
MFDF recently hosted a webinar titled: Board Oversight of ETF Share Classes. Michael Mundt and Brian Murphy, partners at Stradley Ronon and part of the team that received the first SEC Order for ETF share class relief, joined MFDF to share their expertise.
The following questions represent a sample of the topics covered during the webinar.
Q: What should boards be doing now in anticipation of ETF share class relief?
A: Independent directors overseeing funds that are seeking ETF share class relief may wish to consider the following steps prior to the launch of an ETF share class:
Assess how fast the adviser would like to move in this space and inquire whether the operational and compliance infrastructure is in place to support a dual class structure;
Communicate with the adviser about the type and frequency of communications the board would like to receive in advance of an ETF share class launch, such as educational opportunities, meetings with the adviser, and/or ongoing updates;
Inquire whether ongoing monitoring costs will be borne by the adviser through the unitary fee or through the fund’s contracts with data providers; and
Review the proposed initial adviser report carefully and request what data the adviser expects to use for the report and what key assumptions it reflects.
Q: How can directors assess whether there are issues with cross-subsidization between an ETF and a mutual fund share class?
A: The relief requires an initial adviser report that includes information about costs and benefits, and these should be reviewed in the aggregate to determine whether the exemptive relief is in the best interest of each class individually and the fund as a whole. The ‘best interest’ assessment should measure the impact over time on each share class, and directors should note that the impact on each share class can change over time. In their assessment, directors may reach different conclusions for different funds.
Q: What data can directors consider when evaluating whether the relief is in the best interest of each share class and the fund as a whole?
A: Directors may review any data that the adviser has available to inform this decision. If a fund has been in existence for quite some time, existing fund data relating to relevant costs and benefits can be examined to see if it is useful and reliable in this context. Some data may be initially difficult to obtain, for example, cash inflows by class and transaction costs to invest may reside on different operational systems. Fund operational infrastructure may need to be modified to assess impacts in a scalable way, and it could take time for advisers to build systems that can accommodate these requirements.
Q: How should boards think about the potential for future exception reporting relating to ETF share class relief requirements?
A: If an adviser report reflects that a fund has exceeded an established numerical threshold, the adviser must provide the board with a written assessment of the cause and what remedial steps it will take. Directors may wish to ask what solutions an adviser would recommend if needed and assess the feasibility of those options.
Click here to watch the webinar archived video.
Click here to access the presentation slide from the webinar.