Regulators Push to Let Mutual Funds Trade Like ETFs, Reshaping the Industry

The U.S. Securities and Exchange Commission (SEC) is nearing final approval for a significant regulatory change that would allow mutual funds to offer exchange-traded fund (ETF) share classes, marking a pivotal shift in the asset management industry. The move is expected to enable dozens of firms with trillions in assets to launch new products and enhance their offerings to investors. Assistant Director Katilyn Bottock of the SEC’s investment management division stated that the agency is “at the one yard line” in its approval process, as confirmed during a recent event hosted by the Investment Company Institute in Nashville.

This development has been under consideration for several years, with the potential to reshape the structure and efficiency of fund offerings. The proposed change would allow registered open-end mutual funds to offer ETF-style share classes, which trade on exchanges and can be bought and sold throughout the trading day. This would contrast with traditional mutual fund shares, which are priced once daily after market close. If implemented, the move could lead to more competitive pricing, improved liquidity, and reduced operational costs for both fund sponsors and investors.

Legal experts in the asset management sector have highlighted the potential benefits of the proposed rule change. Attorneys from Ropes & Gray noted that permitting mutual funds to offer ETF share classes could result in cost savings through economies of scale and more efficient portfolio management. They also emphasized that such a shift may reduce shareholder transaction costs and provide significant tax advantages. These potential benefits underscore the industry’s anticipation for the SEC’s final decision, as firms prepare to adapt their product strategies accordingly.

The regulatory development is part of a broader trend of innovation and modernization within the financial services industry, where efficiency and investor flexibility are increasingly prioritized. With the number of firms seeking to launch ETF share classes rising to 65–70, the market is clearly positioning itself for a major transformation in fund structure and delivery. This could lead to increased competition among asset managers and potentially greater access to diversified investment vehicles for a wider range of investors.

Analysts are closely watching how this change will be implemented and whether it will be accompanied by additional safeguards to protect market integrity and investor interests. While the SEC has not yet published a formal rulemaking or definitive timeline for implementation, the regulatory momentum appears to be strong, with key officials expressing confidence in the near-term prospects for approval. As the agency moves closer to finalizing its decision, the asset management industry is preparing for a shift that could redefine how mutual funds operate in the U.S. market.