ICI Highlights Dual Share Class ETF Challenges

The Investment Company Institute ("ICI") outlined operational considerations for launching an exchange-traded fund ("ETF") share class within an existing mutual fund portfolio.

In a whitepaper, the ICI said that, in September 2025, the SEC signaled its intent to grant exemptive relief permitting dual share class structures—an important development following the 2023 expiration of the patent that had previously limited such arrangements. The ICI said that this would mark a significant modernization of the asset management industry, with more than 75 firms seeking approval to offer both ETF and mutual fund share classes under a single portfolio. The ICI stated that its working groups—comprising asset managers, intermediaries, service providers, and the Depository Trust & Clearing Corporation—reviewed the operational requirements for such structures. 

The ICI highlighted the following considerations for implementing the dual share class structure:

1. Regulatory and Compliance Framework. The ICI emphasized that a robust compliance program is critical to addressing the SEC’s concerns about potential cross-subsidization between mutual fund and ETF share classes. The ICI proposed a three-part reporting framework: (i) an Initial Adviser Report to assess expected benefits, costs, and conflicts before launch; (ii) an Ongoing Adviser Report, delivered annually to confirm the structure remains in each class’s best interest; and (iii) a Monitoring Process with board-approved thresholds to track disparities in trading costs, taxes, and cash management between classes.
2. Interclass Exchange Mechanics. The ICI outlined the steps needed to facilitate mutual fund–to–ETF share exchanges, a defining feature of the dual-share model. The ICI recommended a manual workflow at launch that would require coordination among asset managers, intermediaries, and transfer agents. The ICI noted that the Depository Trust & Clearing Corporation is developing an automated Fund/SERV solution, expected by mid-2026, to streamline exchanges and reduce operational risk once exemptive relief is finalized.
3. Operational and Strategic Considerations. The ICI urged firms to conduct thorough due diligence before offering an ETF share class, including assessing investment strategy capacity, daily transparency obligations under ICA Rule 6c-11 ("Exchange traded funds"), and operational impacts such as technology upgrades and Reg BI compliance. The ICI encouraged greater service provider integration to align custody, accounting, and transfer agency systems historically separated between mutual fund and ETF operations.
4. Investor Experience. The ICI cautioned that investors will encounter meaningful differences under the dual structure. The ICI explained that direct-held mutual fund shareholders will need brokerage accounts to hold ETF shares and may lose features such as automatic investment plans, rights of accumulation, and letters of intent. The ICI also noted that the exchange process could leave investors with fractional mutual fund shares requiring special handling, disclosure, and tax treatment.
5. Additional Considerations. The ICI identified several open regulatory and operational issues, including uncertainty over state "blue sky" registration exemptions for ETF share classes and challenges meeting daily portfolio holdings disclosure under Rule 6c-11 due to data timing from omnibus intermediaries. The ICI urged continued industry collaboration to refine these processes as exemptive relief is implemented.