ICI Warns of Complex Readiness Demands as ETF Share-Class Conversions Near Regulatory Green Light
The Investment Company Institute (ICI) has issued a new paper detailing the operational and regulatory challenges facing asset managers preparing to launch exchange-traded fund (ETF) share classes within existing mutual fund portfolios—an innovation the organization described as one of the most transformative structural changes to hit the fund industry in decades.
The report, titled “ETF Share Class Operational Considerations,” comes shortly after the U.S. Securities and Exchange Commission (SEC) signaled its intent on September 29 to grant exemptive relief that would allow funds to issue both mutual fund and ETF share classes under a single portfolio. The ICI noted that more than 75 firms have already submitted filings seeking approval for this structure.
While the ICI described the development as a modernization milestone that could enhance efficiency and investor access, it cautioned that the dual-share-class model will introduce significant complexity for fund sponsors, intermediaries, and service providers. Key areas of concern include technology integration, Regulation Best Interest (Reg BI) compliance, and potential shifts in revenue models as ETF share classes typically lack traditional mutual fund distribution and servicing fees.
To address the emerging challenges, the ICI convened industry working groups earlier this year—comprising asset managers, intermediaries, and service providers—to explore five key focus areas: intermediary readiness, investor experience, reporting requirements, exchange mechanics, and technology infrastructure. These discussions revealed that most current platforms are not yet equipped to manage both share classes for a single fund, with automated exchange functionality expected no sooner than mid-2026.
From a compliance standpoint, the ICI warned that broker/dealers will face heightened Reg BI obligations to evaluate the comparative costs, features, and suitability of mutual fund versus ETF classes when recommending investments to clients.
Financially, the paper highlighted that asset managers and intermediaries must reassess their revenue structures, given that ETFs do not typically carry 12b-1 marketing or sub-transfer agent fees. This shift could affect intermediary economics and incentivize changes in fund distribution models.
The report also outlined new reporting and governance expectations under the proposed SEC framework, requiring initial and annual advisor reports to fund boards. These reports must assess cost savings, transactional impacts, and conflicts of interest arising from share class coexistence—issues the SEC has flagged as central to investor protection.
While the ICI refrained from making prescriptive recommendations, it emphasized that each firm must independently determine its readiness and approach, calling the paper a “comprehensive overview” of the considerations involved in adapting to the new dual-class landscape.
