Perpetual US Services filed an exemptive application with the Securities and Exchange Commission seeking an order to allow it and its affiliated U.S. investment advisers to offer actively managed exchange-traded fund share classes of their open-end mutual funds.
Perpetual, also known as PGIA, made the announcement on Thursday just months ahead of the expiration of a patent held by Vanguard Group.
"We think that what we're proposing is advantageous for the entire investment management ecosystem," Rob Kenyon, PGIA's chief operating officer, said in an interview Thursday, adding that the proposal would benefit both investors as well as other fund stakeholders.
"It offers the ease of choice to investors; it eliminates the need for dual trusts and oversight (and) reduces complexity in the marketplace by providing an efficient vehicle to offer both traditional mutual funds and ETFs," Mr. Kenyon said.
The application's filing capped a two-year effort during which PGIA worked collaboratively with a group of different firms with subject matter expertise in certain areas, according to a PGIA news release.
Specifically, Chapman and Cutler assisted PGIA in the preparation of its application when it came to legal aspects, while Cohen & Company provided help regarding auditing, the release said. SEI Investments helped regarding fund accounting, fund administration and distribution, the release said.
Having an ETF share class would also eliminate any "imperative" to convert a mutual fund to an ETF, the release said.
PGIA's application, filed Wednesday, cited precedent for its requested relief. Starting in 2000, Vanguard began operating index-based ETFs as share classes of its index-based mutual funds under an SEC order that is similar to the one PGIA is seeking, the filing said.
"The countdown clock on Vanguard's patent on its unique ETF-as-a-share-class structure is fast approaching zero," Ben Johnson, head of client solutions at Morningstar, said Friday, adding that Vanguard's patent expires in May.
For years there's been speculation that a slew of asset managers would capitalize on that moment by bolting ETF share classes onto their mutual funds, he said.
"I've long doubted that this would happen," said Mr. Johnson, who by way of explanation pointed to comments he posted on Twitter Thursday. In those comments, he said that offering an ETF share class of a mutual fund creates a risk of "tax contagion" for investors.
"If the mutual fund share classes are in outflows, and more gains are realized than can be offset, ETF share class owners will absorb their pro rata share of taxable capital gains," Mr. Johnson said in his tweet.
Bolting an ETF share class onto an existing mutual fund is likely to be the last option on many asset managers' list, Mr. Johnson said Friday.
"Most asset managers have chosen to launch clones or near clones of existing strategies as standalone fully-transparent ETFs, to convert existing mutual funds to fully-transparent active ETFs or to launch active non-transparent ETFs," he said.
PGIA's parent company is Sydney, Australia-based Perpetual, which provides asset management, private wealth and trustee services to local and international clients, Perpetual's website says. Perpetual had about A$200 billion ($135.8 billion) in total assets under management as of Dec. 31.
