SEC provides relief for holding company requirements

The Securities and Exchange Commission has eliminated a threshold triggering a 12-month registration exemption period for holding companies, as part of a guidance update.

In a memo released March 15, the SEC reaffirmed its belief that this one-year period under which holding companies are exempt from registering as investment companies under the Investment Company Act of 1940 should be delayed until an extraordinary event transforms a holding company to look more like an investment company.

Under the 1940 Act, Rule 3a-2 allows a temporary exemption for holding companies from having to go through the process of registering as an investment company with the regulator. The exemption would be triggered for 12 months once it passes either a threshold for owning securities and/or cash worth more than 50 percent of the value of the entire entity’s total assets; or another threshold where the entity has or proposes to buy investment securities worth more than 40 percent of its total assets.

But certain extraordinary events, such as investing the capital it raised in securities while looking to acquire a subsidiary, might temporarily make the holding company look like it has passed those thresholds, according to the memo.

The agency adds that, until now, a literal reading of Rule 3a-2 suggested that a holding company may not be able to use that exemption rule in certain cases. For example, the 50 percent threshold could be problematic because it’s based on general securities – such as US government securities or equity securities in subsidiaries – and cash, and not limited to investment securities. 

Because a holding company could always own more than 50 percent of its assets in general securities and cash, it could be meeting one of the two thresholds triggering the 12-month exemption period earlier than it would want to, and run out of time to rely on Rule 3a-2 without actually needing to use that rule.

The regulator reiterated in the memo that the purpose of this rule is to temporarily relieve certain entities from registrations and other requirements under the 1940 Act, and stood by the 40 percent threshold, but not the 50 percent one.

As long as there is “a bona fide intent” to be mainly a non-investment holding company, the one-year exemption period should be available and not triggered until an extraordinary event, the SEC wrote, expressing its continued desire to support capital formation in markets. 

The SEC was not available to comment.