Skip to main content

Stradley Ronon Stevens & Young, LLP

June 24, 2019

Investment Company Act of 1940 - Sections 5(b), 13(a)(1) and 34(b)

June 24, 2019

RESPONSE OF THE CHIEF COUNSEL’S OFFICE
DIVISION OF INVESTMENT MANAGEMENT

Your letter dated June 24, 2019 requests our assurance that we will not recommend that the U.S. Securities and Exchange Commission (the “Commission”) take enforcement action under Sections 13(a)(1) and 34(b) of the Investment Company Act of 1940, as amended (the “1940 Act”), against an index-based fund[1] that exceeds the limits for a diversified company, as defined in Section 5(b)(1) of the 1940 Act, with respect to investments in an issuer or several issuers to the extent necessary to approximate the composition of the fund’s target broad-based index,[2] updates its registration statement to reflect the fund’s ability to exceed such limits and associated risks, and provides notice of the fund’s updated diversification policy to shareholders, as further described in your letter.

You state that during the past year, a few constituents of certain large cap U.S. equity growth broad-based indices (each an “Affected Index” and collectively, the “Affected Indices”)[3] have grown to each represent more than 5% of the Affected Index and, in the aggregate, close to or, in some cases, more than 25% of the Affected Index at certain times. As a result of the foregoing, index-based funds that track an Affected Index and hold themselves out as diversified companies, as defined in Section 5(b)(1) of the 1940 Act, may become non-diversified companies, as defined in Section 5(b)(2) of the 1940 Act. You represent that each Affected Index was created by an index provider that is not an affiliated person of the index-based fund, its investment adviser or principal underwriter, or an affiliated person of such persons, and was not created solely for the index-based fund or its affiliated persons.

You note the concern that an index-based fund, solely as a result of tracking its target broad-based index, would cease to be a diversified company as a result of a change in relative market capitalization or index weighting of one or more constituents of the index. You believe your requested relief is consistent with the expectations of investors in an index-based fund, will minimize portfolio disruption and unnecessary costs, and will provide appropriate investor protections, including disclosure.

Based on the facts and representations in your letter, we would not recommend enforcement action to the Commission under Sections 13(a)(1) or 34(b) of the 1940 Act against an index-based fund that exceeds the limits for a diversified company, as defined in Section 5(b)(1) of the 1940 Act, as described above. The statements in this letter represent the views of the Division of Investment Management. This letter is not a rule, regulation or statement of the Commission, and the Commission has neither approved nor disapproved its content.

Erin Loomis Moore
Senior Counsel


[1] As used in your letter, an “index-based fund” means a registered open-end fund or exchange-traded fund that seeks to track the performance of an unaffiliated target broad-based index by investing all or substantially all of its assets in securities that comprise the index in approximately the same proportion as such securities’ weighting in the index.

[2] See, e.g., Disclosure of Mutual Fund Performance and Portfolio Managers, Investment Company Act Rel. No. 19382 (Apr. 6, 1993), at fn 21 (describing the characteristics of a broad-based index).

[3] You state that examples of the Affected Indices include the S&P 500 Growth Index, Russell 1000 Growth Index, MSCI USA Large Cap Growth Index, MSCI Prime Market Growth Index, CRSP US Large Cap Growth Index and CRSP US Mega Cap Growth Index.

Return to Top