Cracking the Code: How DFA's Filing May Open the ETF Share Class Floodgates

Why DFA’s Amendment Matters

At the core of the SEC’s concerns is how fund costs are distributed across share classes. Specifically, the agency raised questions about whether ETF shareholders could be unfairly impacted by cash flows or redemptions tied to mutual fund classes—potentially triggering brokerage costs, capital gains distributions, or cash drag.

DFA’s fix? Ongoing monitoring and an annual evaluation process built into the fund’s structure to ensure equitable treatment across classes. This thoughtful addition appears to have satisfied regulators—at least for now.

That said, while DFA’s solution introduces monitoring and annual evaluation as a safeguard, it’s worth noting that this doesn’t solve the structural issue outright. Instead, it surfaces the problem more transparently—placing the burden back on asset managers to address any imbalances as they arise. Transparency is a step forward, but the market will need to determine whether it’s enough.

Scale and Infrastructure Will Be Key

If the SEC indeed moves forward with broad approvals, the industry will face a wave of structural, operational, and capital markets implications. Firms that want to participate will need to be prepared:

• Market Makers and APs will need to manage balance sheet usage more carefully, ensuring any new share class doesn’t sit idle and consume capital without scale or trading interest.
• Lead Market Makers (LMMs) will play a crucial role in providing spreads and liquidity for these hybrid structures—especially early in their lifecycle. Selecting the right LMM is critical: issuers must work with partners who will actively market, support, and grow the product, rather than passively carry a listing that ties up valuable balance sheet and limits opportunity for growth.
• Custodians and Fund Admins must be ready for the operational nuances of servicing multi-class funds with both open-end and ETF flows.
• Fund Managers will need to assess whether the strategy itself can scale within both wrapper formats—and determine how to market the ETF share class to avoid cannibalizing mutual fund assets.

This is where experienced capital markets professionals will play a key role—helping issuers evaluate the right mix of partners, navigate operational trade-offs, and ensure successful go-to-market execution.

A Long-Awaited Catalyst

Since Vanguard’s patent expired in May 2023, over 50 asset managers have filed for ETF share class exemptions. Yet none had been approved—until now, potentially. Acting SEC Chairman Mark Uyeda has signaled that ETF share class review is a priority, and his office appears to be following through.

This shift marks more than just a regulatory green light. It’s a signal that the ETF industry may be entering a new phase—where wrapper choice becomes even more customizable, and operational alignment across platforms is no longer optional but essential.

Is your team ready for the next wave of ETF innovation?

Source: Tania Mitra, "SEC tells fund shops to follow DFA's amended ETF share class application," Citywire, April 9, 2025.

About the Author

Nicholas Phillips | President of ETF Capital Markets Advisors LLC
With over 25 years of experience in ETF market making and capital markets, Nicholas Phillips is recognized as a subject matter expert in the ETF industry. He started his career spending the first ten years as a lead market maker for SIG and Goldman Sachs.

At the helm of MCAP LLC's ETF Desk, Nicholas built and scaled the division, enhancing its operations through innovative pricing and risk models, and robust relationships with market makers and issuers. His tenure at VanEck Associates as Director of ETF Capital Markets further solidified his expertise, managing critical facets of operations and deepening connections within the trading community.

Beyond market making, Nicholas is an avid content creator, sharing insights that demystify complex market dynamics. He is keen on exploring board member roles that benefit from his extensive background and forward-thinking approach to ETF strategies. His dual US/Ireland citizenship complements his global perspective, enriching his professional endeavors in diverse markets.

Disclaimer

Please note that this article reflects the author's personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.