Three Things to Know About Cboe’s ETF Share Class Filing

By: Stacy L. Fuller, Kevin R. Gustafson, Christine Mikhael and Crystal Liu

On 15 April 2024, Cboe BZX Exchange, Inc. (Cboe) filed an application pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission (SEC), to amend its exchange-traded funds (ETFs) listing standards to permit ETF share classes issued by open-end investment companies that offer mutual fund share classes pursuant to any exemptive relief to be granted by the SEC.

The ETF Share Class Structure is Not a New Concept

Vanguard Group, Inc. (Vanguard) received exemptive relief from the SEC in 2000 and patented this ETF-as-share-class structure, resulting in Vanguard being the only fund sponsor to offer it. With the patent’s expiration in May 2023 and the growing popularity of ETFs, other fund sponsors are seeking SEC exemptive relief to offer the same structure on their mutual funds (ETF Class Relief), which is not included within the general provisions of Rule 6c-11 under the Investment Company Act of 1940, as amended (ETF Rule).

Cboe’s Application Focuses on the Product’s Listing

When a new ETF product falls outside the ETF Rule’s general provisions, fund sponsors must apply for SEC exemptive relief, and intended listing exchanges must file a parallel filing under Rule 19b-4 to list the fund under its approved listing rules.

Cboe’s proactive approach, being the first exchange to file its request for a listing rule change before any fund sponsors receive ETF Class Relief, appears to aim to prevent listing process delays following the fund sponsors’ receipt of SEC approval.

Cboe’s Application May Accelerate the Timing of the SEC’s Review

Fund sponsor applications do not require the SEC’s review or approval process to be completed by a certain time, but Cboe’s application for a listing rule change does (although the SEC retains some ability to delay it). Having the SEC staff work in parallel through the ETF share class considerations with Cboe may help address substantive concerns identified in connection with fund sponsor applications.