IM Guidance Update

MARCH 2017 | No. 2017-03

HOLDING COMPANIES AND THE APPLICATION OF RULE 3a-2 UNDER THE 

INVESTMENT COMPANY ACT

Summary

An operating company may find that, upon the occurrence of an extraordinary event, 

it meets the definition of an investment company under the Investment Company Act 

of 1940, as amended (the “1940 Act”), even though it intends to remain in such status 

only temporarily. Absent an exclusion or exemption from this definition, the operating 

company may be required to register under the 1940 Act and be subject to the 1940 

Act’s requirements. Rule 3a-2 under the 1940 Act, however, provides a one-year safe 

harbor for such transient investment companies if certain conditions are satisfied.

The staff of the Division of Investment Management has received inquiries regarding the 

commencement of the one-year safe harbor as it applies to holding companies that are 

engaged in various operating businesses through wholly-owned and majority-owned 

subsidiaries, where neither the holding companies nor their subsidiaries are regulated as 

investment companies (“Holding Companies”). The guidance addresses those inquiries 

by clarifying the application of rule 3a-2 with respect to Holding Companies, and 

furthers the Commission’s mission to facilitate capital formation.

In particular, Holding Companies may experience “extraordinary events” in their life 

cycle, some of which facilitate capital formation. This guidance clarifies that the oneyear safe harbor period does not begin until the occurrence of an extraordinary event 

causes a Holding Company to have certain characteristics of an investment company. 

It is the staff’s view that when adopting rule 3a-2, the Commission did not intend to 

limit the circumstances under which an issuer could rely on the rule in such a way that 

Holding Companies are treated differently than other issuers because of the Holding 

Companies’ organizational structures. 

US Securities and Exchange Commission

 Division of Investment Management
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Background

Section 3(a)(1) of the 1940 Act defines the term “investment company.” Specifically, 

Section 3(a)(1)(A) of the 1940 Act defines “investment company” to mean “any issuer 

which is or holds itself out as being engaged primarily, or proposes to engage primarily, 

in the business of investing, reinvesting, or trading in securities.” Section 3(a)(1)(C) 

of the 1940 Act defines “investment company” to mean any issuer that is engaged 

or proposes to engage in the business of investing, reinvesting, owning, holding, or 

trading in securities, and owns or proposes to acquire investment securities1 having a 

value exceeding 40% of the value of such issuer’s total assets (exclusive of Government 

securities and cash items) on an unconsolidated basis. 

Rule 3a-2 under the 1940 Act provides a temporary exclusion from the 1940 Act’s 

provisions to certain issuers that are in transition to a non-investment company 

business.2 Specifically, rule 3a-2 deems an issuer that meets the definition of investment 

company in section 3(a)(1)(A) or 3(a)(1)(C) of the 1940 Act not to be an investment 

company for a period not to exceed one year, provided that the conditions of the rule 

are satisfied.3 The one-year period begins on the earlier of:

(i) the date on which an issuer owns securities and/or cash having a value exceeding 

50% of the value of such issuer’s total assets on either a consolidated or 

unconsolidated basis (“50% Threshold”);4 or 

(i) the date on which an issuer owns or proposes to acquire investment securities 

having a value exceeding 40% of the value of such issuer’s total assets 

(exclusive of Government securities and cash items) on an unconsolidated basis 

(“40% Threshold” and together with the 50% Threshold, the “Thresholds”).5

The Thresholds set forth objective tests that permit an issuer to determine readily, by 

reviewing the composition of its assets, the starting date of the one-year period. 

Issue

A Holding Company may own securities other than equity securities of its majority- or 

wholly-owned subsidiaries (“Securities Interests”). There are various events that may 

result in a Holding Company’s ownership of a significant amount of Securities Interests, 

including, for example: investing its offering proceeds in securities while arranging to 

acquire a new majority- or wholly-owned subsidiary; selling a large operating division 

and investing the proceeds in securities pending acquisition of a new majority- or 

wholly-owned subsidiary; and making a tender offer to stockholders of a non-
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investment company and failing to obtain a majority of the target company’s stock 

(these events, collectively, referred to as “extraordinary events”).6 Such events may help 

to facilitate capital formation. The occurrence of an extraordinary event may temporarily 

alter the composition of the Holding Company’s total assets such that securities other 

than the equity securities of its majority- or wholly-owned subsidiaries now comprise 

a significant portion of the Holding Company’s total assets. Consequently, a Holding 

Company may find that it meets the definition of an “investment company,” even 

though it intends to remain in such status only transiently.7 If an extraordinary event 

causes the Holding Company’s investment securities to have a value in excess of 40% of 

its total assets, the Holding Company may be deemed an “investment company” under 

section 3(a)(1)(C). 

To avoid meeting the definition of an investment company, a Holding Company 

may seek to rely on the safe harbor in rule 3a-2. However, a literal reading of rule 

3a-2 suggests that a Holding Company may be unable to rely on the rule in certain 

circumstances. As discussed above, the text of rule 3a-2 provides that an issuer may 

rely upon the rule for one year from the earlier of the date it triggered either the 50% 

Threshold or the 40% Threshold. The 50% Threshold may be problematic for a Holding 

Company because the threshold is based on the cash and securities it holds, not 

simply its investment securities. The securities may include U.S. government securities, 

as well as equity securities issued by majority- and wholly-owned subsidiaries, all of 

which are excluded from the definition of “investment securities.” In addition, as the 

50% Threshold applies on either a consolidated or unconsolidated basis, a Holding 

Company is unable to look through its equity securities of majority- and wholly-owned 

subsidiaries on a consolidated basis to analyze its combined assets. Because a Holding 

Company may, by its nature, continuously hold equity securities of its subsidiaries 

that amount to more than 50% of its total assets at all times, it could be viewed as 

continuously satisfying the requirements of the 50% Threshold. As a result, a Holding 

Company could run out the clock on its one-year period before ever needing to rely 

upon rule 3a-2.

Concerns have been raised that the relief afforded by the rule therefore never is 

available to these Holding Companies, and that, had these Holding Companies operated 

the same businesses at the parent level instead, the relief afforded by rule 3a-2 would 

have been available.

Discussion

The purpose of rule 3a-2 is to temporarily relieve certain issuers that are in transition 

to a non-investment company business from the registration and other requirements 

of the 1940 Act.8 For instance, the Commission has recognized that a company that 
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has sold substantial operating assets and intends to invest the proceeds pending 

the acquisition of new operating assets may own or propose to acquire investment 

securities representing greater than 40% of the issuer’s total assets.9 The Commission 

explained:

Frequently, such issuers have a bona fide intent to change their operations 

or assets within a short period of time so that they would no longer meet the 

statutory definition of an investment company. In many such instances, the 

issuer may argue that it is not in the “business” of investing, reinvesting, owning, 

holding or trading in securities for purposes of determining whether it is an 

investment company. Moreover, it may not be appropriate to require an issuer 

to effect for only an interim period the significant operational modifications 

– including modifications to its capital structure – which may be necessary to 

comply with the [1940] Act.10

Furthermore, the 3a-2 Adopting Release noted that “the one-year period should be 

measured from the time an issuer has the characteristics which would cause it to be 

defined as an investment company.” The Thresholds attempt to pinpoint the time that 

an issuer would have the characteristics of an investment company.11

The staff believes that a Holding Company may not have the characteristics12 of an 

investment company until it fails the 40% Threshold.13 Accordingly, the staff believes 

that, generally, rule 3a-2’s one-year safe harbor should not begin until the occurrence 

of an extraordinary event and thus when the Holding Company may seek to rely on the 

rule. In this regard, the staff believes that the one-year period for transient investment 

companies should be available to issuers that have a bona fide intent to be engaged 

primarily in a non-investment company business, regardless of whether they operate 

directly or through a holding company structure.14

Endnotes

1 Section 3(a)(2) of the 1940 Act defines “investment securities” to include all 

securities except (A) Government securities, (B) securities issued by employees’ 

securities companies, and (C) securities issued by majority-owned subsidiaries which 

(i) are not investment companies and (ii) are not relying on the exception from the 

definition of investment company in section 3(c)(1) or 3(c)(7) of the 1940 Act.

2 See Transient Investment Companies, Investment Company Act Release No. 

10943 (Nov. 16, 1979) (“3a-2 Proposing Release”). See also Transient Investment 

Companies, Investment Company Act Release No. 11552 (Jan. 14, 1981) (“3a-2 

Adopting Release”). 
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3 The issuer must have a bona fide intent to be engaged primarily, as soon as is 

reasonably possible (in any event by the termination of such one-year period), 

in a business other than that of investing, reinvesting, owning, holding or trading 

in securities. Intent may be evidenced by the issuer’s business activities and an 

appropriate resolution of the issuer’s board of directors (or by appropriate action of 

person(s) performing similar functions for any issuer without a board of directors), 

which has been recorded contemporaneously in its minute books or comparable 

documents. See rule 3a-2(a). In addition, the rule may be relied on only once during 

any three-year period. See rule 3a-2(c).

4 Rule 3a-2(b)(1).

5 Rule 3a-2(b)(2).

6 See 3a-2 Proposing Release. Rule 3a-2 does not specify the kinds of events that 

would allow an issuer to rely on the rule. The staff believes that, consistent with the 

wording of rule 3a-2, the Commission intended only to provide examples of why 

an issuer would need to rely on rule 3a-2 drawn from the staff no-action letters 

that had preceded the adoption of the rule. The staff further believes that the 

Commission did not intend to limit the circumstances under which an issuer could 

rely on rule 3a-2 to the examples in the releases proposing and adopting the rule.

7 See Id. 

8 See Id. 

9 See 3a-2 Adopting Release.

10 See 3a-2 Proposing Release.

11 The Commission has also recognized that a start-up enterprise may temporarily be 

engaged in investment activities prior to the launch of its operating business and 

may own securities and/or cash having a value in excess of 50% of the value of such 

issuer’s total assets. See 3a-2 Adopting Release. While the 3a-2 Adopting Release 

did not address the impact of an extraordinary event on a Holding Company, we 

believe that the Commission did not intend to limit the circumstances under which 

an issuer could rely on rule 3a-2.
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12 See OnePoint Communications Corp., SEC Staff No-Action Letter (June 12, 

1998) (stating that the staff would not recommend enforcement action to the 

Commission under section 7 of the 1940 Act if OnePoint Communications Corp. 

(“OnePoint”) relies on the safe harbor afforded by rule 3a-2 for one year from the 

date that it no longer qualifies to be excluded from the definition of investment 

company under 3(c)(1), even though prior to that date, one of its wholly-owned 

subsidiaries owned interests in two companies that would cause OnePoint to be 

viewed as an investment company if not for its reliance on section 3(c)(1)).

13 The staff recognizes that some Holding Companies engaged in a business other 

than that of investing, reinvesting, owning, holding, or trading in securities through 

wholly-owned subsidiaries may be able to rely on section 3(b)(1) in certain 

circumstances.

14 The staff notes that the Commission has recognized in other contexts that issuers 

that operate primarily through subsidiaries should not be treated differently based 

on the structure of their operations. See, e.g., Investment Company Act Release 

No. 12679 (Sept. 22, 1982) (proposing rule 3a-5 which is designed to enable an 

operating company to engage in the same type of financing activities through a 

finance subsidiary that it could engage in directly, without becoming subject to the 

1940 Act); Investment Company Act Release No. 14275 (Dec. 14, 1984) (adopting 

rule 3a-5). 

IM Guidance Updates are recurring publications that summarize the staff’s views regarding 

various requirements of the federal securities laws. The Division generally issues IM 

Guidance Updates as a result of emerging asset management industry trends, discussions 

with industry participants, reviews of registrant disclosures, and no-action and interpretive 

requests.

The statements in this IM Guidance Update represent the views of the Division of 

Investment Management. This guidance is not a rule, regulation or statement of the 

Securities and Exchange Commission. Further, the Commission has neither approved 

nor disapproved its content. Future changes in rules, regulations, and/or staff no-action 

and interpretive positions may supersede some or all of the guidance in a particular IM 

Guidance Update.

The mission of the Securities and Exchange Commission is to protect investors; maintain fair, 

orderly, and efficient markets; and facilitate capital formation.

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

ELIZABETH G. MILLER

Chief Counsel’s Office/Public Inquiry

Phone: 202.551.6825

Email: IMOCC@sec.gov