ETF Share Class Toolkit: Preparing for Changes to the Registered Fund Marketplace

As the government shutdown concludes, it is expected the SEC will promptly issue an exemptive order for Dimensional Fund Advisors LP to offer open-end funds with one class of exchange-traded fund shares and one or more classes of mutual fund shares. With upwards of 80 other applicants in the queue, it is expected that the SEC and its Staff will start to promptly process and issue notices and exemptive orders to those having filed “substantially identical” applications. This development could greatly alter the US registered funds marketplace for investors, intermediaries, fund managers, fund boards, listing exchanges, market makers, and fund service providers.

To help interested parties navigate this new dual share class structure, Morgan Lewis has developed an ETF Share Class Toolkit, which includes resources that will help fund managers efficiently prepare exemptive applications, provide their boards with the information necessary to support requisite board findings, and educate their boards, investors, intermediaries, and sales teams on this new structure.

BACKGROUND

Since early 2023, applicants have been lining up to ask the US Securities and Exchange Commission for permission to create ETF share classes of existing mutual funds (or vice versa), [1] a phenomenon that started shortly after the expiration of a patent that was long-held by a large registered fund manager.

On September 29, 2025, the SEC published a notice of its intent to grant an exemptive order (the Order) to Dimensional Fund Advisors LP (DFA), allowing DFA to offer open-end funds with one class of exchange-traded fund shares and one or more classes of mutual fund shares (Dual Share Class Funds).

The DFA notice was issued following the filing of DFA’s third amended and restated exemptive application (the DFA Application) on September 26. [2] The SEC was expected to issue the Order as early as mid-October, but was delayed by the government shutdown. Now that the SEC is back, it is anticipated that the Order will be issued imminently.

Also on September 29, the SEC Staff held a conference call with interested parties whereat the Staff indicated that an applicant seeking similar relief that files an amended (or initial) exemptive application “substantially identical” [3] to the DFA Application will receive the most favorable timing with respect to receiving a notice and order.

In the days and weeks following the conference call, most applicants with pending applications filed “substantially identical” applications (or amended applications) and it is expected that similar notices and orders will be issued to such applicants in the near future.

The Order will be subject to certain conditions being met:

• Initial and periodic reports from a fund manager to the Dual Share Class Fund’s board of trustees
• Board findings, both initially and periodically thereafter, that the dual share class structure is in the best interest of each share class and the Dual Share Class Fund as a whole
• Board approval and implementation of an ongoing monitoring process to assist in identifying issues related to the dual share class structure
• Certain disclosure requirements

NEXT STEPS AND RELATED ISSUES

At a high level, the following are some of the issues that interested parties may be focused on at this time with respect to Dual Share Class Funds:

Fund Managers

If they have not already, fund managers with pending applications should file amended applications that are “substantially identical” to the DFA Application to receive the most favorable timing with respect to receiving a notice and order. After filing an amended application, it is expected a notice will be issued in the near future and an order shortly thereafter. Fund managers who have not yet filed applications should be assessing whether to make filings, if for no other reason than to at least have the structure available to them for future competitive purposes.

Fund managers should continue to work with their operations, legal, and sales teams, as well as their boards of trustees, to understand the issues related to introducing a Dual Share Class Fund. These managers should also begin revising their registration statements and liaising with listing exchanges where the issuance of Dual Share Class Funds is a more imminent business objective.

Fund Boards

Prior to introducing a Dual Share Class Fund, a fund’s board will need to make the findings required by the Order. Boards should become familiar with their oversight and monitoring responsibilities related to the operation of a Dual Share Class Fund. Substantial information will have to be prepared for boards to support their findings. Accordingly, boards and fund management should be in an ongoing and evolving dialogue about these new products and the related compliance, operational, shareholder, and business implications.

Authorized Participants

Authorized participants (APs) should prepare for a potential surge in ETF offerings and forming new relationships with registrants that do not currently offer ETFs. In addition to the negotiation of new AP agreements, APs may need to amend their current AP agreements, after considering the impact of dual share classes on their operations. In particular, irrevocable proxy provisions pertaining to ETF voting matters included in most AP agreements should be evaluated for their applicability to Dual Share Class Fund structures.

Fund Administrators

Fund administrators will likely be the most substantially impacted by this development and have been hard at work to build out their infrastructure. To the extent not already in process, fund administrators should consider how dual share classes may require the restructuring of accounting and compliance systems. Fund administrators should also prepare for the initial wave of mutual fund class shares being exchanged for ETF class shares, which may require substantial manual processing, and consider ways to automate such exchanges going forward.

Investors and Investor-Facing Intermediaries

Overall, investors will face a change to the universe of available investment products, which will increase the need for investor education around ETFs. Investors who currently hold shares in a fund that transitions to a Dual Share Class Fund will, in most cases, have the opportunity to exchange their current mutual fund shares for ETF shares, which will require investor education.

Investor-facing intermediaries should consider how Dual Share Class Funds will impact investor suitability determinations and other obligations under Regulation Best Interest or as fiduciaries. Disclosure enhancements and point-of-sale practices will be paramount to limited downstream liability associated with customer complaints and regulatory examinations and enforcement.

Additionally, intermediaries should consider the impact of dual share classes on compensation structures, such as Rule 12b-1 payments and revenue sharing agreements. Lastly, intermediaries should consider how to incorporate Dual Share Class Funds into their product lineup on their platforms.

ETF SHARE CLASS TOOLKIT

Through our work with all facets of the ETF market—ETF managers, boards, intermediaries, and APs—Morgan Lewis is well positioned to help industry participants navigate Dual Share Class Funds and the panoply of related issues. To assist interested parties, we have created an ETF Share Class Toolkit to help with the evolving Dual Share Class Fund landscape efficiently and effectively.

The ETF Share Class Toolkit includes:

• A streamlined exemptive application modeled after DFA’s third amended and restated exemptive application that can be used to quickly draft and file an initial or amended ETF Share Class exemptive application;
• An ETF Share Class presentation that can be easily tailored to a particular fund complex to help educate various interested parties about Dual Share Class Funds, the exemptive relief, the required conditions, and related issues and challenges; and
• Form memoranda for use with fund boards that focus on the requisite board findings and can be efficiently customized to the relevant facts of a particular fund complex and its manager.

HOW WE CAN HELP

Things are likely to move quickly. If you have any questions about Dual Share Class Funds or would like more information about the resources available in our ETF Share Class Toolkit, please contact the authors or any Morgan Lewis registered funds partner.