For many asset managers entering the ETF world for the first time, the question of control is front and center.
Who actually owns the fund? Can I be replaced? What decisions can I make? What am I liable for?
These concerns often arise from a lack of clarity around how ETFs are structured under the Investment Company Act of 1940 (‘40 Act).
There’s often an assumption that launching an ETF through a white-label platform means relinquishing control, or that more control inherently means a better outcome.
The reality is more nuanced: control is directly tied to fiduciary responsibility and regulatory risk.
Understanding the true structure of a ’40 Act fund is essential to navigating the ETF space with confidence. Control is available, but it’s earned through oversight and obligation.
What Is the ’40 Act?
The Investment Company Act of 1940 governs registered investment companies like mutual funds and ETFs. Its core objective is to protect investors through strict rules around governance, disclosure, risk management, and fiduciary duty.
Funds created under the ’40 Act are required to have a defined governance structure that includes a Board of Trustees, an Investment Adviser, and, where applicable, a Sub-Adviser. This framework creates a layered structure of oversight, with each role assigned specific responsibilities, risks, and controls.
Many new entrants are surprised to learn that their role in the product, whether sub-adviser, adviser, or sponsor, determines their influence and exposure, not whether they were the originator of the fund idea.
Understanding the Fiduciary Hierarchy
The ’40 Act structure is built around a fiduciary hierarchy, where levels of control correspond directly with levels of compliance and legal responsibility.
1. Board of Trustees – At the Top of the Pyramid
The Board of Trustees represents the highest fiduciary layer in a ’40 Act fund. Trustees are responsible for protecting the interests of shareholders above all else. Their job is to provide independent oversight of fund operations, monitor conflicts of interest, and ensure that investment strategies remain aligned with the fund’s prospectus and regulatory obligations.
This role carries the greatest legal liability and insurance burden. Trustees are generally the first to be scrutinized if something goes wrong, such as strategy drift, operational noncompliance, or failure to meet board reporting standards, to name a few.
Trustees play a critical role in overseeing material changes to a fund. Any proposed change to the adviser, sub-adviser, investment strategy, or trust structure must be reviewed and approved by the Board before being submitted to shareholders for a vote. While they are not the final authority on such matters, Trustees serve as active stewards of governance, ensuring all proposed changes align with a fund’s fiduciary duty to shareholders.
2. Investment Adviser – Operational and Regulatory Oversight
The Investment Adviser is the operational and regulatory nerve center of the fund. While the Trustees set the guardrails, the Adviser is responsible for ensuring everything runs inside those parameters on an ongoing basis.
Such parameters include, but are not limited to, diversification testing, monitoring derivatives exposure (e.g., under Rule 18f-4), overseeing liquidity classifications, managing board communications, and coordinating with fund service providers such as the custodian, administrator, fund accountant, and auditor.
Crucially, the adviser is the primary point of accountability if the fund fails to meet regulatory or board-level standards. In Tidal’s white-label structure, Tidal typically acts as the Investment Adviser, carrying the regulatory burden so that managers can focus on investment strategy and distribution.
This is the most resource-intensive and compliance-heavy role, which is why many emerging or niche managers may choose to offload it.
3. Sub-Adviser – Portfolio Strategist
The sub-adviser’s role is generally focused on portfolio strategy execution. The sub-adviser generally makes day-to-day investment decisions within the parameters laid out in the prospectus and enforced by the adviser. However, the sub-adviser is typically not involved in fund-level operations, compliance, or regulatory interaction.
This role generally comes with lower fiduciary risk compared to the adviser and is particularly well-suited for hedge fund managers, SMA managers, or first-time ETF entrants. It allows an asset manager to access the ETF structure without needing to build a full ’40 Act governance framework. That said, sub-advisers are still required to maintain a compliance infrastructure appropriate to their investment activities and fiduciary role that complies with the ‘40 Act and Advisers Act of 1940.
Despite not holding formal control, sub-advisers are not locked out of governance.
They can propose changes to service providers, fund structure, or governance if those changes serve shareholder interests. Such proposals are reviewed by the adviser and, if reasonable and compliant, are typically brought forward to the Trustees.
The Sponsor: Not in the Fiduciary Chain
The Sponsor is often misunderstood as a controlling party, but in reality, they are not part of the legal or fiduciary structure.
The sponsor’s role is strictly economic: they fund the initial costs of the fund (legal, marketing, admin) and receive the net revenue once the fund reaches profitability.
The sponsor holds no compliance responsibilities, no regulatory exposure, and no decision-making authority under the ’40 Act. However, they do play a critical role in the fund’s long-term viability and brand direction.
In Tidal’s platform, many clients act as both Sponsor and Sub-Adviser, giving them full control over investment strategy and fund economics, while delegating certain compliance and operations obligations to Tidal in the adviser role. This structure allows them to bring their vision to life without assuming burdensome regulatory risk.
Tidal offers flexibility in our models to larger, more established asset managers with existing 40’Act infrastructure or resources, we spend a significant portion of time with prospective ETF issuers helping guide them to the right outcome and leverage Tidal’s services where they would like our ETF experience to assist them in the venture.
Control Comes with Cost
Control within a ’40 Act structure is directly tied to responsibility. If a manager wants to take on more influence over fund operations, service provider decisions, or structural governance, they can, but they must also take on the regulatory and legal exposure that comes with those decisions.
Tidal’s models are intentionally designed to give managers flexibility. Many taking the role as sub-advisers and sponsors, with the option to evolve into the adviser role or even launch their own trust as they grow. The structure supports the entire spectrum of control, from fully managed to fully owned, depending on the manager’s appetite for compliance and oversight.
Ready to Understand Where You Fit?
Tidal has created detailed internal maps and operational frameworks that define every layer of responsibility, from daily compliance checks to long-term governance planning.
If you’re considering launching an ETF and want to explore what level of control makes sense for your goals, we’re here to walk you through it.
