IM Guidance Update

December 2013 | No. 2013-14

US Securities and Exchange Commission

 Division of Investment Management

INVESTMENT FUNDS MAINTAINED BY CHARITABLE ORGANIZATIONS

An investment fund maintained by a charitable organization for the collective investment of certain assets of charitable organizations (Charitable Investment Fund) that 

is organized and operated exclusively for religious, educational, benevolent, fraternal, 

charitable, or reformatory purposes (Permitted Purposes) generally is excluded from 

regulation under the Investment Company Act of 1940 (1940 Act) pursuant to Section 

3(c)(10) of the 1940 Act. The staff recently was asked to clarify that the exclusion may 

be available to a Charitable Investment Fund that is a legal entity separate from the 

charitable organization that maintains it and that is organized and operated for the purpose of earning investment returns for the investing charitable organizations, to be used 

exclusively for Permitted Purposes. The staff believes that the exclusion may be available 

to such a Charitable Investment Fund, subject to the conditions of Section 3(c)(10) and 

the staff’s existing no-action positions addressing Section 3(c)(10).

Background 

A Charitable Investment Fund may meet the definition of investment company in Section 

3(a)(1) of the 1940 Act. Charitable Investment Funds, however, typically rely on the conditional exclusion from regulation under the 1940 Act set forth in Section 3(c)(10)(A)(ii). 

That exclusion is available to a certain type of fund “organized and operated exclusively 

for [Permitted Purposes]” that is maintained by a charitable organization “exclusively 

for the collective investment and reinvestment of [assets set forth in Section 3(c)(10)(B) 

of the 1940 Act (Permitted Assets)].” The Permitted Assets include, among others, 

assets of the general endowment fund or other funds of one or more charitable organizations. A “charitable organization” is defined in Section 3(c)(10)(D)(iii) to include an 

organization described in Section 501(c)(3) of the Internal Revenue Code of 1986 (Code) 

(Section 501(c)(3) entity). 
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Charitable Investment Fund That Is a Separate Legal Entity Organized 

and Operated for Investment Purposes

A Charitable Investment Fund might be formed as a separate legal entity to protect it 

against any liabilities of the charitable organization that maintains it. Although the investing charitable organizations would use the proceeds from such a Charitable Investment 

Fund solely for Permitted Purposes, the Charitable Investment Fund technically might 

not be “organized and operated exclusively for [Permitted Purposes],” but for the purpose of producing investment returns for the investing charitable organizations. In all 

other respects, the Charitable Investment Fund will satisfy the requirements set forth 

in Section 3(c)(10)(A)(ii) as well as the relevant representations on which the staff has 

based a number of prior no-action letters addressing other Charitable Investment Funds 

under Section 3(c)(10).1

The staff believes that such a Charitable Investment Fund is not the type of entity 

intended by Congress to be regulated under the 1940 Act. Rather, the staff believes that 

it is the type of entity that Congress intended to be excluded pursuant to Section 3(c)(10) 

because it will be used solely for the investment of Permitted Assets of charitable organizations that, in turn, will use the proceeds from the Charitable Investment Fund solely 

for Permitted Purposes.2

ENDNOTES

1 See, e.g., Sisters of Mercy of the Americas, Inc., SEC No-Action Letter (Oct. 1, 2009); 

Mercy Investment Program, Inc., SEC No-Action Letter (June 12, 2003); Daughters 

of Charity National Health System, Inc., SEC No-Action Letter (Apr. 3, 1998). Such 

representations include the following, among others: (i) no part of the Charitable 

Organization Fund’s net earnings will inure to the benefit of a private shareholder 

or individual; (ii) each investing charitable organization will be a Section 501(c)(3) 

entity; (iii) each investing charitable organization will invest only moneys over which 

it has immediate, unrestricted, and exclusive use, benefit and enjoyment, and will 

not invest assets that are attributable to a retirement plan providing for employee 

contributions or variable benefits; and (iv) on an annual basis, each investing charitable organization will receive a written report on the financial condition and results 

of operation of the Charitable Organization Fund, including audited financial statements, prepared by an independent certified public accountant. Although many 

of the staff no-action letters address Charitable Investment Funds that are Section 

501(c)(3) entities, the staff on at least one occasion has addressed Charitable 

Investment Funds that held assets of multiple Section 501(c)(3) entities but which 

were not themselves Section 501(c)(3) entities. See American Heart Association, 

SEC No-Action Letter (Feb. 26, 1993).
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2 Section 3(c)(10), enacted in 1940 as Section 3(c)(12) and renumbered pursuant 

to the 1970 Amendments to the 1940 Act, originally excluded from the definition 

of investment company “[a]ny company organized and operated exclusively for 

religious, educational, benevolent, fraternal, charitable or reformatory purposes, 

no part of the net earnings of which inures to the benefit of any private shareholder 

or individual.” The Section 3(c)(10) exclusion generally was premised on the social 

benefits provided by charitable organizations and Congress’s belief that the operations of non-profit charitable organizations are unlikely to raise investor protection 

concerns of the type addressed by the federal securities laws. See, e.g., The 

Philanthropy Protection Act of 1995: Hearings on H.R. 2519 Before the Subcomm. 

on Telecommunications and Finance of the House Comm. on Commerce, 104th

Cong. 1st Sess. 5, 7 (1995) (statement of Barry P. Barbash, Director of the Division of 

Investment Management, SEC). Congress amended Section 3(c)(10) as part of the 

Philanthropy Protection Act of 1995 to clarify that charities that are or maintain 

certain types of investment funds are also excluded from the definition of investment company under the 1940 Act. Pub. L. No. 104-62, 109 Stat. 682 (1995). The 

Philanthropy Protection Act added Sections 3(c)(10)(A)(ii), (B), (C) and (D) to the 

1940 Act. The Philanthropy Protection Act similarly amended the Securities Act 

of 1933 and the Securities Exchange Act of 1934.

This IM Guidance Update summarizes the views of the Division of Investment Management 

regarding various requirements of the federal securities laws. Future changes in laws or 

regulations may supersede some of the discussion or issues raised herein. This IM Guidance 

Update is not a rule, regulation or statement of the Commission, and the Commission has 

neither approved nor disapproved of this IM Guidance Update.

The Investment Management Division works to:

s protect investors

s promote informed investment decisions and 

s facilitate appropriate innovation in investment products and services 

through regulating the asset management industry.

If you have any questions about this IM Guidance Update, please contact:

Rochelle Kauffman Plesset

Chief Counsel’s Office/Public Inquiry

Phone: 202.551.6825

Email: IMOCC@sec.gov