IM Guidance Update

OCTOBER 2015 | No. 2015-04

EMPLOYEES’ SECURITIES COMPANIES AND ESCHEATMENT

The Division understands that the operation of State1 escheatment statutes has 

resulted in States owning Employees’ Securities Companies’ (“ESC”) securities. A 

question has been raised as to what effect a transfer of an ESC’s securities to a State by

operation of the State’s escheatment law would have on the ESC’s compliance with the

Investment Company Act of 1940 (“1940 Act”) or ability to rely on its exemptive order.

This guidance shares the Division’s view on this question.

Employees’ Securities Companies

ESCs are employer-sponsored investment companies, the beneficial owners of which, 

by definition, generally include only current and former employees and employer 

retainers.2 In recognition of the unique nature of ESCs, Congress specifically authorized 

the Commission to exempt them from the provisions of the 1940 Act to the extent 

consistent with the protection of investors.3 The Commission has exercised this 

authority and, consistent with the protection of investors, has exempted ESCs from 

many of the restrictions to which publicly owned registered investment companies are 

subject under the 1940 Act.4

The Commission has also issued exemptive orders permitting ESC securities to be held 

by certain extended family members of, and trusts established by, eligible holders.5

The Commission has not, however, permitted ESC securities to be offered to, or held 

by, persons not reasonably related to the categories of eligible holders included in the 

statutory definition.

Escheatment

Escheatment is the process by which abandoned property is remitted to a State after 

the expiration of a certain period of time dictated by the State’s laws.6 We understand 

that generally the missing owners may later reclaim the abandoned property or 

the proceeds generated by its sale or redemption. As noted, the operation of state 

US Securities and Exchange Commission

Division of Investment Management
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escheatment laws has raised a question as to the ability of an ESC to rely on its 

exemptive order because such laws may result in ESC securities being held by a State.

The Division’s View

The Division believes that the special treatment of ESCs under the 1940 Act based 

on the nature of ESCs as employer-sponsored investment companies would not be 

undermined if States hold ESC securities escheated to them. Accordingly, the Division 

would not object if an ESC continued to rely on its exemptive order under the 1940 Act 

if securities issued to eligible holders consistent with the ESC’s relevant exemptive order 

are remitted to, and held by, a State, by operation of the State’s escheatment law.

Our position is limited to the remittance of ESC securities to a State under the State’s 

escheatment law, and does not extend to any other transfers.

Endnotes

1 For purposes of this guidance, “State” means any state under the United States 

Constitution or any comparable governmental entity.

2 States are not permitted owners of ESC securities under the definition of ESC 

set forth in section 2(a)(13) of the 1940 Act. Section 2(a)(13) defines ‘‘employees’ 

securities company’’ as any investment company or similar issuer all of the 

outstanding securities of which (other than short-term paper) are beneficially 

owned (A) by the employees or persons on retainer of a single employer or of 

two or more employers each of which is an affiliated company of the other, 

(B) by former employees of such employer or employers, (C) by members of the 

immediate family of such employees, persons on retainer, or former employees, 

(D) by any two or more of the foregoing classes of persons, or (E) by such 

employer or employers together with any one or more of the foregoing classes 

of persons. See generally T. Lemke, G. Lins, A. Smith III, Regulation of Investment 

Companies, Vol. I, 3 79, 80 (2014). 

3 Section 6(b) of the 1940 Act. See Hearings on S. 3580 Before a Subcomm. of 

the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. 196-97 (1940) 

(stating that the Commission is authorized to grant exemptions to ESCs that are 

“virtually an eleemosynary institution, which the investment company sets up 

as a sort of savings plan for his employees”). See also G.E. Employees Securities 

Corporation, Investment Company Act Rel. No. 271 (Dec. 1, 1941).

4 See, e.g., G.E. Employees Securities Corporation, supra n.3; Kohlberg Kravis Roberts 

& Co. L.P., et al., Investment Company Act Rel. Nos. 31070 (June 3, 2014) (notice) 

and 31141 (July 1, 2014) (order); BlackRock, Inc., Investment Company Act Rel. 
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Nos. 31341 (Nov. 20, 2014) (notice) and 31376 (Dec. 16, 2014) (order) (granting an 

exemption from all provisions of the 1940 Act, except sections 9, 17, 30, 36 through 

53; with respect to sections 17(a), (d), (e), (f), (g) and (j) and 30(a), (b), (e) and 

(h) of the 1940 Act, and rule 38a-1, granting a limited exemption).

5 See, e.g., Elfun Trusts, et al., Investment Company Act Rel. Nos. 24782 (Dec. 1, 

2000) (notice) and 24803 (Dec. 27, 2000) (order); Kiewit Investment Fund LLLP, 

Investment Company Act Rel. Nos. 28047 (Nov. 15, 2007) (notice) and 28076 

(Dec. 11, 2007) (order).

6 See Lost Securityholders and Unresponsive Payees, Exchange Act Rel. No. 68668 

(Jan. 16, 2013) (Generally, after expiration of a certain period of time, which varies 

from state to state but is usually three to seven years, an issuer or its transfer 

agent will remit abandoned property (e.g., securities and funds of lost 

securityholders) to a state’s unclaimed property administrator pursuant to the 

state’s escheatment laws). 

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 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:

Steven I. Amchan

Chief Counsel’s Office

Phone: 202.551.6825

Email: IMOCC@sec.gov