Frequently asked questions
The following section addresses key questions regarding Section 351 exchanges into ETFs. For further clarification, please contact our team.
What is a 351 ETF Conversion?
A 351 ETF conversion allows investors to transfer assets into an ETF in exchange for shares without triggering a taxable event. This tax-related mechanism is specifically under U.S. tax law Section 351 of the Internal Revenue Code. Investors can contribute a portfolio of investments and, in return, receive a diversified ETF.
Why Convert SMAs to ETFs via Section 351?
Does the Cost Basis of the Assets Reset?
Is There a Lock up Period After Conversion?
Can You Ever Not Sell an ETF?
No, ETF’s always have a Lead Market Maker (LMM) that works to manage the spread between the value of the ETF and the underlying securities at all times, essentially guaranteeing liquidity.
What are Important Considerations for a 351 Conversion?
There are several logistical factors that need to be considered before a 351 conversion. Making a plan to tackle these issues can help to ensure the process is smooth and allows for the success of the ETF after the conversion is complete.
What are the Diversification Requirements for a 351 Conversion?
For a transfer to satisfy the Section 351 requirements, each transferor’s portfolio must have its largest holding represent less than 25% of the total portfolio of that transferor. The ETF must meet IRS diversification standards to ensure no single asset exceeds 25% of the portfolio and that assets exceeding 5% collectively remain under 50%.
What are Common Mistakes to Avoid in a 351 Conversion?
It is important to plan and execute a 351 conversion carefully to avoid mistakes. Experienced tax counsel, securities counsel, and a meticulous team are needed.
Who Can Contribute to a 351 Conversion?
An existing LP can easily be converted into an ETF. Non-profits and foundations are always ok. Trusts are typically allowed to contribute as well. Corporations are trickier.
Can I Contribute to an Existing ETF?
No, it is not possible to exchange securities for shares in an existing ETF that is already trading. There is just one opportunity before the ETF launches to participate in a 351 conversion of assets.