Seward & Kissel Advises Guinness Atkinson on the Submission of an Application to Offer ETF Share Classes of its Existing Mutual Funds

Who may be interested: Registered Investment Companies; Boards of Directors; Investment Advisers

Quick Take: Guinness Atkinson Funds, with the counsel of Seward & Kissel, has submitted an application seeking an exemptive order from the SEC allowing it to offer exchange-traded shares as a separate share class of funds offering traditional mutual fund share classes. 


For over two decades, Vanguard has been the only fund complex with the ability to offer ETF shares as separate classes of mutual funds. Vanguard first secured exemptive relief permitting this structure in 2001 and claimed that a patent protected the structure. Vanguard used this relief for over 70 index funds but never obtained this relief for actively managed funds. By using this multiple class structure, Vanguard has been able to reduce distributable capital gains to nearly zero for most of the participating funds, even during periods of significant share price growth. Vanguard’s claimed patent expired in May 2023, and since then, multiple fund complexes have filed for exemptive relief to allow them to offer ETF shares as separate share classes of actively-managed mutual funds. A number of these applications have noted that it’s time for the SEC to “level the playing field” in this area and give other managers an opportunity to use the structure.

When the SEC adopted Rule 6c-11 to standardize ETF relief, it specifically rejected calls to add share class relief, asserting that the relief is not standard (because only Vanguard had it), and because the unique characteristics of each fund complex could require specific review and conditions. As a result, funds offering both ETF and mutual fund shares in a single pool must obtain exemptive relief to cover the traditional ETF relief plus relief under Section 18 and Rule 18f-3 (the “multiple class” structure).

Guinness Atkinson Funds’ application requests relief for existing and future series, which include 11 existing, actively-managed series, six of which currently operate as mutual funds and five of which currently operate as ETFs under the SmartETFs brand. The application includes an exchange privilege that would permit mutual fund shareholders to exchange their shares for ETF shares of the same fund.

Offering ETF shares and mutual fund shares in the same fund can provide funds, fund shareholders and fund managers a number of benefits. Aside from the benefits of scale, which can impact all aspects of a fund’s operations, ETF shares that are created or redeemed on an in-kind basis permits a fund to better manage capital gains, often resulting in lower capital gain distributions to shareholders than would otherwise be the case if the fund offered only mutual fund shares. Further, the cash flows from purchases and redemptions of mutual fund shares permits fund managers to more easily rebalance a fund’s portfolio without incurring gain recognition events. Most importantly, the multiple class structure allows investors to choose how they want to gain exposure to an investment thesis, and they can select a share class based on the characteristics that are most important to them. The multiple class structure also allows fund managers more flexibility in offering their investment strategies without having to take on additional administrative and operational expenses involved in creating new funds or effectuating fund conversions.

Guinness Atkinson Funds’ application is available here.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.