When deciding to enter the mutual fund or exchange-traded fund (ETF) space, one of the first critical decisions you’ll have to make is whether or not to establish your own trust or use an existing one. This significant decision should be carefully thought through, as it will affect many areas throughout the life of your fund.
There are three options to consider:
- Establish your own trust
- Purchase an existing fund/funds/trust
- Use a sponsored Multiple Series Trust
1. Establish a Trust
Establishing your own trust is a legal process. You and your attorneys will draft the trust documents and file an initial registration statement with the Securities and Exchange Commission (SEC). This step does not exist in either of the other two options. Once filed, the approval process can take several months. Concurrently, the registration statement and trust documents can be fine tuned. The registration statement will be the main tool investors will use to understand the fund’s strategy, goals, fees, management, etc.
While the registration statement and trust documents are being drafted, your team will be busy identifying who will support the trust, and underlying fund(s), day to day.
2. Purchase an Existing Trust
Purchasing an existing product or set of products within an existing trust is an interesting option that is gaining traction, but it’s often the least likely of the three scenarios. This would involve finding and negotiating an agreement with an existing manager who perhaps wants to exit the business or simply no longer wants to manage their established fund or funds. When exploring this option, it is likely the trust will have at least one fund established within.
In this scenario, there will be existing service provider relationships that can either remain, be renegotiated or be outright replaced.
3. Use a Multiple Series Trust (MST)
Using a sponsored series trust is the third option. In the first two options, you as the adviser, would likely serve as the trust sponsor in a management capacity, deciding on board composition, service providers, distribution programs, alignment with the regulated fund ecosystem, etc. Conversely, in an MST those decisions (with few exceptions) have already been made. In the MST scenario, you are charged with designing your product, managing the portfolio and sourcing investors.
How to Begin Making Your Trust Decision
Following are a few questions you should consider with your internal team when contemplating your options:
- How familiar are you with the Investment Company Act of 1940?
- How important is it to decide who will be servicing your new fund?
- Is your long-term strategy to build a large regulated investment company (RIC) practice, or is this a limited-scope project to establish one or two?
While there is certainly no right answer, taking the time to understand your options, think about the future and leverage your strengths will be time well spent.
Contact Camille Clemons at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.