(Bloomberg) — A little-known document Morgan Stanley filed with the U.S. Securities and Exchange Commission last week could help shake up trillions of dollars in fund assets — and may even prove to be a better year for Wall Street than the hype The arrival of Bitcoin is even more important. ETF.
The firm is the latest to seek to replicate the fund structure adopted by Vanguard Group alone, which has given the giant founded by Jack Bogle the tax-minimizing advantage it has enjoyed in the industry for two decades.
Morgan Stanley wants permission to add an ETF share class to its existing mutual funds, joining a growing number of fund managers looking to recreate Vanguard Group’s unique blueprint despite a patent banning imitators. Expires in May. The SEC has not yet approved hybrid structures for other issuers, a move that would allow them to transfer the tax efficiencies of exchange-traded funds to potentially trillions of dollars in mutual fund assets.
“SEC approvals – one or more – will be the biggest news of 2024 and, frankly, could be one of the most meaningful events in the asset management industry in years,” the firm said. Superintendent Ben Johnson said. Morningstar Customer Solutions.
The filing comes as the gap between mutual fund outflows and ETF inflows continues to widen. Mutual funds lost about $656 billion in 2023, while ETFs lost $578 billion, according to Investment Company Institute data compiled by Bloomberg. The ETF industry’s $8.3 trillion in assets still pales in comparison to the more than $20 trillion U.S. mutual fund market.
Fund design in which a share class of a mutual fund exists in the form of an ETF, Help Vanguard minimize taxes Efficiently transfer taxable capital gains accumulated in mutual funds by using the ETF portion.
Since the Malvern, Pa.-based fund giant patented the structure be expired Last May, six asset managers submitted applications to recreate the model. First Trust Holdings, the sixth largest ETF issuer in the United States submit on January 24, just days before Morgan Stanley.
Ryan Issakainen, senior vice president at First Trust, said the document “increases the possibility of having funds that are better suited to a certain type of platform.” “For example, think about some 401k and retirement accounts. ETFs can be implemented on these platforms in a variety of ways, but they are better suited to traditional mutual funds.”
Morgan Stanley declined to comment.
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Although the SEC allowed Vanguard to use the fund design more than two decades ago, there’s no guarantee it would allow others to do so.
Regulators have since raised concerns about conflicts of interest among mutual fund and ETF investors, and in an overhaul of ETF rules in 2019, regulators specifically retained the requirement that issuers need to apply for an exemption if they want to issue an ETF in multiple shares. Provisions. class structure.
Meanwhile, while Vanguard received approval for the structure in its passive form, a proposal a few years later to apply it to actively managed funds did not win regulatory approval.
Stacy Fuller, a partner at K&L Gates LLP, said the U.S. Securities and Exchange Commission may want to finalize a regulation on the so-called ” swing pricing — Liquidity mechanisms based on the fund’s structure and objectives — before acting on these applications.
“According to the SEC, volatility pricing rules will impose the cost of mutual fund purchases and redemptions on the investors behind them,” she wrote in an email. “This will largely eliminate The possibility of one fund class cross-subsidising another fund class, a situation the SEC said hinders its approval of multi-class ETFs.”
For now, the fund industry is awaiting any word from the SEC – which is under no obligation to respond to any approval.
Gerard O’Reilly, co-chief executive and co-chief investment officer of Dimensional, said: “We hope that the SEC will prioritize this area because it has the potential to bring substantial benefits to U.S. investors. ” Apply for exemption In July, assets exceeded $670 billion.
“Many mutual funds have lower brokerage costs, lower levels of uninvested cash, and are tax efficient, making them good candidates for ETF share classes,” he added. “The ability to offer ETF share classes to such funds This can provide investors with greater choice and bring economies of scale to all fund shareholders.”
