SEC clears fund structure combining ETF and mutual fund classes

The US Securities and Exchange Commission has granted regulatory relief allowing Northern Lights Fund Trust and Ocean Park Asset Management to operate a fund structure containing both an exchange-traded fund share class and one or more conventional mutual-fund share class.

The order, issued on September 9, provides exemptions from several provisions of the Investment Company Act of 1940 and Rule 22c-1. The relief permits an open-end management investment company to offer one class of exchange-traded shares operating as an ETF alongside non-exchange-traded mutual-fund classes.

The application was originally filed in July and subsequently went through the SEC’s notice process. No hearing was requested and the Commission concluded that granting the exemptions was appropriate in the public interest and consistent with investor protection and the objectives of the legislation. The relief takes effect immediately, subject to conditions contained in the application.

The decision is significant because it brings two distribution formats into the same fund structure. ETFs have continued to gain ground among investors because of their exchange trading, transparency and typically lower operating costs, while conventional mutual funds retain an important role in retirement platforms, adviser channels and other investment arrangements.

For asset managers, the ability to offer both formats within a single fund could reduce the need to operate completely separate vehicles for different investor groups. It may also allow managers to develop a common investment strategy while adapting the distribution mechanism to the requirements of different channels.

The SEC describes the relief as covering two broad areas: the exemptions required for standard ETF operations under Rule 6c-11 and the additional relief necessary to combine an ETF class with one or more mutual-fund classes.

The development fits a broader trend towards convergence in fund structures as managers look for ways to reach institutional, intermediary and wealth investors through increasingly flexible product formats.

For fund administrators, transfer agents, distributors and other infrastructure providers, greater use of multi-class structures could also create operational requirements around dealing, settlement, shareholder servicing, reporting and fee allocation.

The immediate order applies to the applicants, rather than representing a blanket rule change. However, its approval provides another example of regulators accommodating product structures that blur the traditional distinction between ETFs and mutual funds — an area likely to remain important as asset managers seek more flexible routes to market.