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The SEC provided notice today that it intends to allow Dimensional's mutual funds to offer ETF share classes. Dimensional initially sought SEC approval two years ago. Vanguard's patent for mutual fund ETF share classes which applied only to index funds expired May 2023. It may take time before these new ETF share classes from Dimensional (and other firms that filed for exemptive relief) come to market.
Vanguard's patent for mutual fund ETF share classes — which applied only to index funds
It applied only to index funds when the patent was approved because there were only index ETFs in 2003. But the patent was generally applicable to all funds, index or not.
Not that any of this matters now that the patent is expired.
Claim 1 of the patent is a method to create a fund with both (a) share class(es) bought and sold at NAV and (b) share class(es) bought and sold on an exchange, i.e. ETFs. Claims 11 and 12 said that this invention (claim 1) could be applied to index funds (claim 11) and to actively managed funds (claim 12).
11. The method of claim 1 wherein the single investment company has an investment objective of tracking a specific benchmark index of securities. 12. The method of claim 1 wherein the single investment company is actively managed by an investment advisor.
The detailed description section of the patent talks about what types of investment companies (funds) an ETF share class could be added to:
The investment company could be an open-end fund (e.g., open-end mutual fund), a closed-end fund (e.g., closed-end mutual fund), or a UIT. The ETSs issued by the investment company are publicly listed and traded on a national stock exchange, such as the American Stock Exchange (AMEX). The investment company could have an investment objective of tracking a specific target index of securities (i.e., an index fund). Alternatively, the investment company could be actively managed by an investment advisor in a manner that does not attempt to track a target index.
I didn't realize Vanguard's patent also applied to actively managed funds. I recall previously reading that it only applied to index funds. Thanks for the correction!
According to ETF.com, Vanguard did apply for an ETF class for an active fund around 2015, but it was rejected by SEC. Don't know what the reasons were.
"When Vanguard let that patent expire in May 2023, the filings to mimic the unique structure started piling up at the SEC, which has been mum on the topic since denying Vanguard’s request to extend the ETF share classes to actively managed mutual funds nine years ago." https://www.etf.com/sections/news/whats-holdup-etf-share-classes
FWIW, Vanguard now also has filings for ETF classes of its active funds. SEC chose DFA filing to be the model for others to follow to this time, not Vanguard (actually, VG didn't share/license its previous patent (now expired) with ANYONE).
A little more detail: Prior to SEC Rule 6c-11 in 2019, every ETF had to apply to the SEC for "exemptive relief" because ETFs don't follow every single rule governing OEFs. Even now, Rule 6c-11 still requires funds that want to offer an ETF share class (as opposed to a pure ETF fund) to seek exemptive relief.
Vanguard originally sought that relief first for nine specific funds, then in separate applications, relief for its domestic index funds generally, its global index funds generally, and its index bond funds generally. These applications were granted. The SEC did not grant relief in 2015 when Vanguard applied for relief for its actively managed funds. AFAIK it never gave an explanation. So yogi's not the only one who doesn't know what the reasons were. Here's that 2015 application for relief.
Many companies, including DFA, filed exemption applications in 2023. Vanguard filed its application just three months ago. So it's no surprise and likely not meaningful that the SEC acted first on some of those early applications.
break[s] down the history of the sought-after relief, the potential advantages to such a structure for mutual fund sponsors and shareholders, and share their insights into the SEC’s reluctance to grant such relief, while ultimately arguing that the approval of these applications is the proper step for the SEC to take.
Comments
It applied only to index funds when the patent was approved because there were only index ETFs in 2003. But the patent was generally applicable to all funds, index or not.
Not that any of this matters now that the patent is expired.
Claim 1 of the patent is a method to create a fund with both (a) share class(es) bought and sold at NAV and (b) share class(es) bought and sold on an exchange, i.e. ETFs. Claims 11 and 12 said that this invention (claim 1) could be applied to index funds (claim 11) and to actively managed funds (claim 12). The detailed description section of the patent talks about what types of investment companies (funds) an ETF share class could be added to: https://patents.google.com/patent/US6879964B2/en
I didn't realize Vanguard's patent also applied to actively managed funds.
I recall previously reading that it only applied to index funds.
Thanks for the correction!
"When Vanguard let that patent expire in May 2023, the filings to mimic the unique structure started piling up at the SEC, which has been mum on the topic since denying Vanguard’s request to extend the ETF share classes to actively managed mutual funds nine years ago."
https://www.etf.com/sections/news/whats-holdup-etf-share-classes
FWIW, Vanguard now also has filings for ETF classes of its active funds. SEC chose DFA filing to be the model for others to follow to this time, not Vanguard (actually, VG didn't share/license its previous patent (now expired) with ANYONE).
Vanguard originally sought that relief first for nine specific funds, then in separate applications, relief for its domestic index funds generally, its global index funds generally, and its index bond funds generally. These applications were granted. The SEC did not grant relief in 2015 when Vanguard applied for relief for its actively managed funds. AFAIK it never gave an explanation. So yogi's not the only one who doesn't know what the reasons were
Many companies, including DFA, filed exemption applications in 2023. Vanguard filed its application just three months ago. So it's no surprise and likely not meaningful that the SEC acted first on some of those early applications.
Finally, here's A Deep Dive Into the ETF Share Class Exemptive Relief Applications. The pdf it links to