Optimism is building that a game-changing fund design that will help asset managers shrink clients’ tax bills and grow their ETF businesses will soon be approved by the U.S. securities regulator.

This week, at least seven firms including JPMorgan and Pacific Investment Management Co. filed amendments to their applications to create funds that have both ETF and mutual fund share classes. The filings update initial applications — some of which sat idle for months — with more details about the fund structure, and suggest the U.S. Securities and Exchange Commission has engaged in constructive discussions with a growing number of applicants, according to industry lawyers.

“The SEC signaling is clear. These amendments really constitute the SEC prioritizing ETF share class relief,” said Aisha Hunt, a principal at Kelley Hunt law firm, which is working with F/m Investments on its application. 

The latest round of filings, which also include Charles Schwab and T. Rowe Price, are serving as yet another sign that the SEC is fast-tracking its decision process on multi-share class funds, after F/m Investments and Dimensional Fund Advisors filed amendments earlier in April. DFA’s amendment included more details around fund board reporting and the board’s responsibilities to monitor the fairness of the new structure for each shareholder.

Brian Murphy, a partner at Stradley Ronon, the firm handling DFA’s filing, said other fund managers are receiving feedback and amending applications.

“We understand that the SEC staff is telling other asset managers to follow the DFA model as well,” said Murphy, who is also a former Vanguard lawyer and SEC counsel.

At stake is a novel fund model where one share class of a mutual fund would be exchange-traded. It was patented by Vanguard over two decades ago, and helped the money manager save its clients billions on taxes. The blueprint ports the tax advantages of the ETF onto the mutual fund, and is a tantalizing prospect for asset managers that are seeing outflows and looking to break into the growing ETF industry. 

After Vanguard’s patent on the design expired in 2023, over 50 other asset managers asked the SEC for so-called “exemptive relief” to use the fund design. But it wasn’t until earlier this year, when SEC acting chair Mark Uyeda said the regulator should prioritize the applications, that it was clear the SEC would be interested in allowing other fund firms to use the model.

According to Hunt, the regulator has signaled that it will first approve a small subset of the applicants. 

‘Work to be done’

To be sure, an approval doesn’t mean that an issuer will be able to immediately begin using the fund blueprint. Because ETFs trade during market hours, they require different infrastructure than mutual funds, so firms that currently only have the latter structure will need to hire staff and form relationships with ETF market makers before they implement the dual-share class model. 

“Dimensional has sort of set the template for what that language looks like in the context of these filings. And by extension cleared the way for approval, which feels imminent now,” said Morningstar Inc.’s Ben Johnson. “But then once we arrive at approval, there’s still going to be work to be done.”

Mutual fund firms will need to prepare for shareholders who want to convert, tax-free, into the ETF share class, which would require some “plumbing” and structural changes, said Johnson.

Another point to consider is that mutual funds that have significant outflows may not be ripe for ETF share classes, as that could result in a tax hit, according to research from Bloomberg Intelligence. In 2009, a Vanguard multishare class fund was hit with a 14% capital-gains distribution after a massive shareholder redeemed its shares in the fund. Fund outflows can bring about a tax event when a mutual fund has to sell underlying holdings to meet redemptions. 

Mutual funds have largely bled assets in recent years as ETFs have grown in popularity. As a result, legacy asset managers have found themselves battling for a slice of the increasingly saturated ETF market, which now boasts over 4,000 U.S.-listed ETFs. SEC approval of the dual-share design could open the floodgates to thousands more funds. 

Clients are relocating from Massachusetts to lower-tax states, according to a new report from the Massachusetts Society of CPAs.

For the report, MassCPAs surveyed nearly 200 CPAs representing around 4,600 high-income clients earning over $1 million and found 70% of the respondents reported that clients changed their tax domicile in 2024. The main reasons cited were lower taxes (47%) and cost of living (17%). States including Florida, New Hampshire, Texas and South Carolina are the main ones attracting these clients due to their tax-friendly policies.

Business clients who have remained in the state for now are contemplating a move, with 27% of CPAs’ business clients reconsidering their presence in Massachusetts, up from 22% in 2023 in the annual survey. The top barriers to growth include the “sting tax” (30%), the individual income tax rate (27%) and the estate tax threshold (23%). The sting tax is an entity-level tax of approximately 2% on S corporations with gross receipts between $6 million and $9 million, with an additional 2.9% tax on S corps with gross receipts over $9 million. MassCPAs has been advocating for eliminating or at least reforming the sting tax, which dates back to the 1980s, viewing it as a deterrent to business growth and investment in the Commonwealth.

The survey found that 49% of the respondents believe Massachusetts is becoming less competitive than other states, while only 6% believe it is more competitive. 

To deal with the talent shortage, 42% of the CPA respondents’ clients have increased their focus on retention of talent to maintain a competitive edge in a tight labor market, while 21% of those surveyed are also turning to contractors and gig workers, reflecting a growing preference for flexible staffing models. However, economic uncertainty has led only 5% of them to implement hiring freezes or layoffs as they navigate financial pressures. Massachusetts’ own efforts, such as the Internship Tax Credit, aim to strengthen the talent pipeline but need to be expanded to counter ongoing workforce shortages, according to the report.

In terms of their overall economic outlook, 33% of respondents remain neutral or cautiously optimistic, while 18% express a pessimistic economic outlook due to inflation, interest rates and market uncertainty. However, nearly half (49%) of the CPAs surveyed believe Massachusetts is becoming less competitive than other states, and only 6% see the state as significantly more competitive.

“This year’s survey echoes what we hear regularly from firms and financial leaders across the state: Massachusetts is losing its competitive edge,” said MassCPAs president and CEO Zach Donah in a statement Wednesday. “While the findings in this report are concerning, what’s even more troubling is what’s not captured, the individuals and businesses who won’t ever consider Massachusetts because of policies that make us an outlier. State leaders have a real opportunity to build on the momentum from the 2023 tax reform initiative to position Massachusetts for long-term success.”    

The report offers a number of recommendations, in addition to eliminating or reforming the sting tax on S corporations. Other suggestions include decoupling from the Section 163(j) business interest expense limitation to support capital investment and raising the estate tax threshold to $5 million. 

With federal tax policy changes on the horizon and signs of continued economic volatility, the report urges state leaders to act now to help Massachusetts avoid further outmigration, stabilize revenue and position itself as a leading destination for innovation and opportunity.

The Public Company Accounting Oversight Board posted videos on its new quality control standard.

The staff presentation videos aim to help firms implement the four components of QC 1000, A Firm’s System of Quality Control. The four topics are acceptance and continuance, engagement performance, governance and leadership, and information and communication.

The acceptance and continuance video addresses the processes when considering whether to accept or continue an engagement. Engagement performance includes firm personnel activities throughout all phases of the design and execution of an engagement. The governance and leadership video addresses the environment that enables the oversight and operation of the QC system and directs the firm’s culture, decision-making processes, organizational structure and leadership. Finally, the information and communication video addresses a firm’s processes for obtaining, generating and using information to enable the design, implementation and operation of the QC system and its engagements’ performance, and for communicating information within the firm and to external parties. 

More QC implementation-related videos, resources and tools can be found on the Implementation Resources for PCAOB Standards and Rules page.