Dual Share Classes Are Here, But There’s an ‘Apollo 13’ Problem

Core Viewpoint - The approval of dual share classes represents a significant change in the fund industry, but it faces challenges due to incompatible settlement processes established at different times [1][2][3]. Group 1: Dual Share Classes Approval - The Securities and Exchange Commission has approved dual share classes for Dimensional Fund Advisors, with other companies likely to follow suit [4]. - This approval allows some mutual funds to add ETF share classes, enabling investors to exchange shares between the two types [4]. Group 2: Settlement Process Challenges - The settlement processes for mutual funds and ETFs were not designed to work together, complicating trades for intermediaries [2][3]. - An analogy is drawn to the Apollo 13 mission, highlighting the difficulties of integrating systems built by different manufacturers [2][3]. Group 3: Considerations for Intermediaries - Intermediaries must consider how dual share classes will impact investor suitability and fiduciary responsibilities under Regulation Best Interest [4]. - There are implications for compensation structures, including revenue sharing and 12b-1 payments, as well as the integration of dual share class funds into product lineups [4].