In a new report, Moody’s said that the decision “opens the prospect of broader adoption of multi-share-class ETF structures, which could significantly enhance operational efficiency across the U.S. fund industry.” That would be a positive for the industry from a credit perspective, it noted.
“Use of the multi-share-class structure allows fund sponsors to streamline operations, eliminating duplicative costs from managing identical strategies across separate asset pools,” it said.
Additionally, the structure may allow fund firms to tap new distribution channels, which could particularly benefit “firms with limited ETF offerings,” Moody’s said.
Previously, the SEC had concerns about the risk of cross-subsidization between share classes in this kind of structure — which could harm investors by inflicting costs generated by one class on investors in another class. And, it had only allowed multi-class structures for certain index funds.
“To mitigate these risks, DFA proposed a framework centred on robust board oversight,” Moody’s said.
The firm also adopted a methodology for allocating income and expenses among share classes that aims to ensure that “annualized returns across classes differ only by their respective expense ratios, consistent with existing regulations,” it said.
The report noted that there are about 80 other fund firms seeking similar relief, which the SEC is expected to continue granting, although the ongoing government shutdown may delay those approvals.
While the SEC could develop policy to enshrine the relief in its rules, that process “would be time-consuming and inconsistent with the current administration’s regulatory stance,” Moody’s noted.