Vanguard's One-of-a-Kind Fund Design Is About to Get Some Competition

Technically, the ETF-within-a-mutual-fund structure has always available for other issuers — provided they agreed a licensing arrangement with Vanguard alongside gaining exemptive relief from the SEC. Yet no managers appear to have implemented it, suggesting they failed on one or both steps.

“One reason is that it could be difficult to secure use of the patent from Vanguard,” Nick Elward, head of Institutional Product and ETFs at Natixis Investment Managers. “The other reason could be that there’s a question as to whether the SEC would ever approve this for active.”

Vanguard’s current exemptive relief only applies to share class ETFs in passive form. The asset management giant itself filed for exemptive relief to use the structure in active strategies in 2015, but failed to get approval from the SEC.

In a bitter twist for would-be Vanguard imitators, it’s not only active funds that concern the SEC. Since the exemptive relief was given to the Malvern, Pennsylvania-based firm all those years ago, the regulator has developed worries relating to conflicts of interest among share classes.

Through 2012 and 2015, VanEck filed for exemptive relief to offer index ETF share classes, but it was never granted. And in sweeping rule changes introduced in 2019 to make launching ETFs easier, the SEC deliberately retained the need for issuers to apply for an exemption if they wanted to pursue ETFs in a multiple share class structure.

“The SEC has no obligation to grant the requested relief,” said Jeremy Senderowicz, shareholder at law firm Vedder Price. “The fact that this application has been filed does not mean the SEC is going to grant it.”

In one section of its filing, PGIA attempts to address “concerns expressed by the Commission and its staff.” This includes ensuring that any costs incurred by one class of a fund are only allocated to that class, rather than transferring or spreading the burden across all the classes.

“I would be very surprised if we see traction on this, especially for the next few months while the SEC staff reviews it,” said Michael Barolsky, head of regulatory services at US Bank Global Fund Services. “But either way, it could bring some helpful certainty to the industry about the future role of share class ETFs.”