Publications

Shawn Hendricks:

Hello and welcome back to the Stradley Ronon, Talking Investment Management podcast. I'm Shawn Hendricks and I'm joined today by my colleagues and partners, Mark Greer and Brian Murphy, the latter of whom is a former SEC lawyer in the Division of Investment Management with particular experience advising on ETF related matters.

Brian Murphy:

Thanks, Shawn. I appreciate you having me.

Mark Greer:

Hey, Shawn. It's great to be here.

Shawn Hendricks:

With ICI's 2026 ETF conference right around the corner, we thought this would be a good time to bring this group together to talk through some of the themes we expect to be front and center at the upcoming conference. Let's start with what we expect to be one of the most talked about topics of the conference, ETF Share Class Relief. Brian, at a high level, where do things stand on ETF Share Class Relief heading into the conference?

Brian Murphy:

ETF share class relief continues to be a major focus because it's shaping how market participants think about product structure and product strategy. And it's important to note that the decision to leverage the ETF share class structure isn't a one-and-done decision or project. Rather, asset managers will have to build and implement an ongoing compliance process throughout the lifecycle of a fund. So implementing the structure will take some intentional focus. Shawn, as you know, Stradley worked with DFA to finalize the ETF share class model relief, which serves as the foundation for all ETF share class relief provided by the SEC. This process took years as we worked with the SEC staff to create the final contours of the relief.

Since approving the DFA model relief, the SEC has approved almost a hundred other applications. Mike Mundt, Mark Greer and I will be discussing this relief during the upcoming ICI ETF conference, so feel free to grab us in the halls and say hello. On June 9th, Mike will be focusing on the contours of the relief and provide helpful context within which these contours were crafted. This will be extremely helpful to asset managers as they wrap their heads around ETF share class requirements. On June 8th, Mark and I will focus on key implementation issues in launching ETF share class structure. Many of our clients are in the process of implementation and we'll share with you some of the key themes that we're seeing in this process.

Shawn Hendricks:

All great points. So Brian, what does the relief require?

Brian Murphy:

Yeah, thanks, Shawn. The relief has three key components. The initial evaluation and approval, the ongoing monitoring process, and the ongoing board approval. The initial evaluation and approval requires the advisor to provide what is called an initial advisor report to the board. And the board must find that the multiple-class plan is in the best interests of each class individually and the fund as a whole. The ongoing monitoring process requires the advisor to recommend and the board to approve a framework for ongoing monitoring of certain numerical thresholds intended to assist the board with ongoing oversight of the structure. The ongoing board approval requires the advisor to annually provide the board with an ongoing advisor report and the board must find that the multiple class plan continues to be in the best interest of each share class and the fund as a whole. Back to you, Shawn.

Shawn Hendricks:

Thanks, Brian. All very helpful. How would you say this all translates when you move from framework to real world execution?

Brian Murphy:

Well, many asset managers are in this process now and discovering that although the framework is conceptually clear, the practical implication of the framework takes thoughtful focus. Clients are thinking through how to implement their framework in an efficient and scalable manner over time. There's the initial work forming project teams to assess which funds can leverage the structure. And then there's the longer term work to build the compliance program necessary to implement the three components I just mentioned as well as launch the fund. As clients begin this process, we typically hear some version of, okay, we understand the concept, what does this look like in practice for us? For example, as a threshold matter, product management teams are focused on how to craft the initial advisor report, which requires one to estimate the benefits and costs of the ETF share class.

Legal and compliance teams are focused on how to build a compliance program encompassing the monitoring process and what needs to happen to actually launch the ETF . And everyone's focused on what to do if their initial and ongoing assessments of the benefits and the costs evolve over time. The answer to these questions tends to depend on the funded question. For example, how competitive is the fund's management fee in the ETF arena? What is the fund's distribution strategy? These can be helpful inputs into assessing benefits. In addition, you might want to consider the fund's historical cash flows, underlying asset class and proposed basket construction process when assessing costs.

And finally, as estimated costs and benefits become actual benefits and costs over time, you'll want to think through what actions you'll take to maximize benefits and minimize costs. The specific action will largely depend on the nuances applicable to the funds, such as the root cause of the heightened cost. And then of course, you'll want to think through the nuances of your share class compliance program, AKA the ongoing monitoring process. What will you measure over what time period and what bright lines, if any, do you plan to draw? Heading into the conference, you may want to think about where you are in the implementation process and what work you need to do given your internal project deadline. And we'll facilitate some polling during the Stradley panel on ETF share classes to help you benchmark against your peers, which will be interesting. Back to you, Shawn.

Shawn Hendricks:

All sound like fantastic takeaways that everyone in the industry is mulling over. Another area we're hearing more about and that's quickly evolving is digital assets, crypto and tokenization all in relation to ETFs. Given how fast this space is moving, we'll frame the discussion based on what we're monitoring as of this recording and recognizing that there may be developments after this episode. Mark, when you think about digital assets intersecting with ETFs, what feels most relevant heading into the conference?

Mark Greer:

Thanks, Shawn. I think if we take a look at this from the macro perspective, over the last several years, there have been two major themes really emerging in the crypto and digital asset space. The first is the regulatory landscape and the second perhaps just as important, if not more so, is the commercial landscape. In other words, what is the market even trying to build here? The regulatory landscape over the last few years has been marked by enormous uncertainty and asset managers have been struggling with this in a world that sometimes relates in more questions than answers. For example, what are digital assets and how should they be regulated? Are they securities or commodities and what aspects of them may decide that question? Can they change their status over time? How do they fit within the existing securities laws and what new rules or amendments to existing rules would be necessary to regulate these assets and investments within the current ecosystem?

How will they be regulated even going forward? We've seen a seismic shift in terms of the regulatory perspective on digital assets in the past two years under the current presidential administration. The focus on interagency working groups, crypto task forces, agency staff guidance, and discussions about jurisdictional boundaries, in particular the interplay between the SEC and the CFTC. This has served to fuel interest and excitement of these new novel projects, but there's some open questions still. One key development as we head into the ETF conference is people's close focus on the status of the CLARITY Act and the broader efforts to create clear rules of the road. The CLARITY Act would define clear jurisdictional boundaries between the CFTC and the SEC with a goal of dividing the world into crypto assets of digital commodities and investment contract assets. The former, the digital commodities would be granted exclusive jurisdiction to the CFTC.

The latter investment contract assets would be for the SEC. But this active legislation has been stalled for the better part of a year. It was passed in the House. It is languished in the Senate Banking Committee for quite some time and only in the last two weeks in about mid-May at the time of this recording has advanced outside the Senate Banking Committee, but there's still a lot of hurdles that need to be made. It has to be reconciliated with other similar committee-based commodity acts within the Senate. It would then have to be reconciliated with the House Act and ultimately moved on to the president for approval. So while there's a lot of open questions, it does signal an industry shift and more focus within the government on how to regulate these assets. And against this backdrop, the commercial landscape forges forward. Issuers and platforms are always exploring what comes next.

What vehicles can they provide to investors to obtain new exposure to these asset classes? How can these investments fit within the existing 40 Act construct? Where do we go from here? How do we build a better mousetrap? Stradley has been on the forefront of this for the past half decade. If we think back just to 2021, we were still just trying to get futures contracts on Bitcoin into products. Since then, we seen an explosion in this space, all sorts of exchange traded products. Stradley in particular was at the forefront to help some of the first Bitcoin-based ETPs be issued. We've since helped clients release other products based on Ethereum and Solana. In the market now we see multi-asset coin-based products.

We've seen just the past year developments in generic listing standards, in kind redemptions and staking guidance. So there's a lot of new product development out there and the new regulatory landscape will only facilitate that. We've had a lot of experience helping clients consider these types of new and innovative products and excited to see where the future goes with that. But in addition to this, a closer related topic to these innovations, the digital space are also innovations in how ETFs themselves are distributed in the digital world. So looking at that, Shawn, we're also seeing an increased focus on the concept of tokenization within ETFs. What does that mean for ETF sponsors and fund managers?

Shawn Hendricks:

Thanks, Mark. You raised the point about what's next and tokenization is definitely next and it is here. We have seen in recent years, many issuers tokenizing their money market funds for distribution, and now the industry is making a bigger shift into tokenizing ETFs as well. The question becomes, what does that mean for fund managers and sponsors? Tokenization is all about representing exposure to assets or interest in those assets in a digital format that can operate on various platforms, including blockchains. Many of you may be familiar with the terms TradFi and DeFi, short for traditional finance and decentralized finance. Traditional finance represents the legacy industry structure of physical ledgers to process transactions, whereas DeFi is the innovated solution where all of this occurs digitally on the blockchain. Where tokenization comes into place is the ability to transfer record of ownership of these securities such as ETF securities.

This push to tokenization has left a lot of issuers and industry participants with many questions. Should we be exploring this? What happens if third parties tokenize our products without our permission? What are the legal and operational implications? The short answer is tokenization is here and it will be integral to the industry going forward. The likes of DTC and NASDAQ have already announced their initiatives to integrate tokenization into our typical ETF ecosystem. And the central question that all issuers and anyone looking to engage in tokenized assets need to ask themselves, is the token a custodial representation of ownership in a security, or does it take the form of a derivative representation of another security? Regardless of the format, the federal securities laws still apply and need to be considered when engaging in these assets. That brings us to the end of today's conversation. We've covered a lot of ground, but before we wrap up, are there any other ETF topics that you all expect to come up at the conference or any areas you plan to focus on?

Brian Murphy:

Yeah, Shawn, I'll jump in. One topic that jumps out to me is leveraged ETFs. The SEC recently expressed concern with certain leveraged ETFs and I'll be interested to hear more about these concerns and how asset managers are addressing them during the conference.

Mark Greer:

I would also add to that, how is AI impacting the ETF lifecycle? AI is everywhere these days, everywhere you go, and it's in every part of mutual fund ecosystem in general, but in particular, it has the ability to impact all different parts of the ETF from stock picking to distribution. How are asset managers grappling with this? What are the policies and purchasers are thinking about? What are the questions they're getting from their boards? It will be continuing to be a pervasive issue in the industry for the next few years and I'm interested to see how people are thinking about this.

Shawn Hendricks:

All seem like great points of consideration. We look forward to continuing the conversation at the ICI ETF Conference in Nashville and would welcome the opportunity to connect with you all there. In the meantime, if you'd like to learn more, you can visit us at stradley.com. Thank you.

End:

From obtaining industry-first exemptive and no-action relief to assisting in the development of novel products, we have helped our clients become and remain industry leaders. We touch trillions worth of assets as counsel to more than half of the top 20 U.S. fund firms. Serve as council to independent directors to more than 100 fund groups and represent more than 40 fund sponsors. Learn more about us at stradley.com.