Partner reflections after advising on ‘dual-access’ ETF structure
After advising on a significant deal involving listing active “dual-access” exchange-traded funds (ETFs) on the ASX and working with teams in both the US and the UK, these K&L Gates partners reflected on challenges they faced working on this deal and the future implications of it.
DFA Australia Limited recently launched three dual-access active ETFs on the ASX – a first for the company, marking its entry into the Australian market.
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Dimensional is a subsidiary of US-based asset management giant Dimensional Fund Advisors LP. The Dimensional group manages more than $900 billion for investors globally, including more than $38 billion for clients in Australia and New Zealand.
The three ETFs are the first DFA Australia Limited (Dimensional) launched in the Australian market and were available to trade on the ASX beginning 13 November 2023. These are the Dimensional Australian Core Equity Trust (Managed Fund) (DACE), the Dimensional Global Core Equity Trust (Managed Fund) – Unhedged class (DGCE) and the Dimensional Global Core Equity Trust (Managed Fund) – AUD Hedged class (DFGH). The ETFs were listed with a “dual-access” structure – meaning investors can access a fund through listed and unlisted distribution channels.
The K&L Gates team that advised Dimensional was led by Sydney-based asset management and investment funds partners Lisa Lautier and Matthew Watts, supported by partners James Lonie and Stuart Broadfoot, lawyers Dhivya Kalyanakumar, Rebecca Mangos and Alexander Lalor and Melbourne-based partner Daniel Knight.
“The three dual-access ETFs essentially allow investors to acquire units on the ASX or directly from Dimensional and also dispose of those same units either via the ASX or directly with Dimensional, regardless of how they were acquired,” Mr Watts said.
“Dimensional is one of only a small number of issuers in the Australian market that offer this ’dual-access’ ETF structure.”
The ETF industry in Australia is growing rapidly, with a number of ASX-listed companies rolling out actively managed ETFs, which provide investors with better access to managed fund products.
In addition to Dimensional, JPMorgan Asset Management, UK-based asset manager Abrdn, and Macquarie Group have all entered Australia’s active ETF market in recent months.
The K&L Gates team worked closely with Dimensional’s team in the US, as well as with the Australian Securities and Investments Commission (ASIC), to enable the funds to be offered under the dual-access model. According to the firm, one significant aspect of the project was assisting Dimensional transition the funds to a different form of disclosure document under different regulations. These aspects were important to ensure specific features of the dual-access model were appropriately disclosed and investors were notified of the ETF launch.
“We had to work closely with the ASX through the application process and help demonstrate to them that the funds comply with all regulatory and governance requirements of the ASX Operating Rules,” Ms Lautier explained.
“Advising representatives situated in both the US and locally on the conditions necessary for this relief and subsequently preparing the relief instrument for ASIC’s review and prior approval was an ongoing process and critical to success.”
The deal also involved assistance from the K&L Gates team in London to advise on technical and regulatory aspects of certain securities listed on the London Stock Exchange – which further assisted in engaging with ASIC.
“Interestingly, since engaging with ASIC on certain regulatory aspects of ASIC relief, ASIC has released a consultation paper proposing certain changes to an existing class order. ASIC is proposing to extend relief to all types of quoted ETFs,” Mr Watts added.
“These modifications will be a welcome change for legal professionals looking to advise clients on the launch of actively managed ETFs in 2024 and beyond. We expect this will reduce launch time and relief application fees.
“Our advice to the ASX enabled us to deliver on the ETF launch timetable, which was important for our client. It was a truly global effort from the K&L Gates Asset Management and Investment Funds team to achieve this successful outcome for the client.”