The Securities Industry and Financial Markets Association has published guidance ahead of what is widely expected to be the Securities and Exchange Commission's granting of exemptive relief that would enable asset managers to have funds that offer both mutual fund and ETF share classes, which may impact the way investors interact with the municipal market.
"Historically, investors have gained exposure to the municipal bond market through actively managed mutual funds," said Todd Rosenbluth, head of research at TMX VettaFi, who added, however, that if the SEC grants exemptive relief to firms seeking to offer a multi-class structure, "we will see more ETFs of actively managed municipal bond strategies."
Rosenbluth expects the SEC to begin approving the exemptive relief applications in the fourth quarter on a case-by-case basis. More than 70 firms have filed applications for relief that would allow a fund to offer both mutual fund and ETF share classes, he said.
"Many of those firms have municipal bond products," Rosenbluth said. "I don't know if those would be the products they would offer [an ETF] share class for and if those would be among the ones they would do in the early stages."
SIFMA issued an Aug. 25
"The purpose of the paper is to provide information for intermediaries and fund sponsors to understand potential operational factors related to share class structures," said Stephen Byron, managing director and head of technology, operations and business continuity at SIFMA, adding that SIFMA developed the guidance "to help firms evaluate their readiness for these operational challenges, regardless of the ultimate scale of implementation."
Back in 2000, the SEC granted an exemptive order to the Vanguard Group, allowing it to offer certain index-based open-end funds with both mutual fund classes and exchange-traded classes. Vanguard's patent relating to the unique structure expired in May 2023.
Like Rosenbluth, Bryan Armour, director of ETF and passive strategies research for North America at Morningstar Research Services LLC, a Morningstar subsidiary, also expects that the SEC will grant relief that would enable a mutual fund to offer an ETF share class.
"I originally expected it to come in August or September based on the apparent progress made when asset managers revised their filings," Armour said.
From what he's heard, asset managers are preparing as if the relief could be granted at any time, Armour said, adding, however, that he doesn't think that necessarily means they expect it "in the coming days."
In its paper, SIFMA said that though there are "many facets to ETF share class administration and operations, this voluntary operational framework concentrates specifically on share class exchanges, particularly the initial transitions from mutual fund to ETF classes, recognizing that other aspects fall outside its current scope."
Asked whether SIFMA was anticipating that SEC approval of the exemptive relief applications could trigger a rush of fund investors seeking to swap their mutual fund shares for ETF shares, Byron responded by saying that SIFMA's paper "addresses potential operational scenarios."
"The frameworks, from manual processing to potential automated solutions, are designed to help firms handle various demand levels, whether high or low," he said.
SIFMA's white paper "maintains that the decision to pursue exemptive relief, including its timing and structure, is made independently by each firm," Byron said.
"Our role is to ensure that whatever regulatory framework emerges, the industry has the operational tools and guidance needed to serve investors effectively while maintaining market integrity," he said.
Whether investors will rush to swap out of a fund's mutual fund shares and into its ETF shares should they become available, "depends on the fund," Armour said.
"If the ETF share class is cheaper or more flexible, then I would expect some investors to switch," he said. "If considerable assets sit in retirement share classes, then I don't expect money to move because the ETF won't be available in the retirement plan. The ETF's tax efficiency would apply to the full fund structure, so it shouldn't play a role in an investor's decision."
Armour said that adding an ETF share class can improve tax efficiency for a mutual fund.
"That's not of particular importance for muni funds, so I wouldn't expect them to be the first funds to launch an ETF share class," he said.
A fund's underlying strategy also needs to fit the ETF vehicle, Armour said.
"High-yield muni bond funds could potentially run into capacity issues, and a fund with an ETF share class can't close to new investors to offset that risk," he said.
