SEC Provides No-Action Relief for Index-Based Funds to Exceed Diversification Limits without Obtaining Shareholder Approval

The Staff of the SEC’s Division of Investment Management (Staff) has issued a no-action letter permitting registered open-end and exchange-traded index-based funds to exceed the limits of a “diversified company,” as defined in the Investment Company Act of 1940, in certain circumstances, without obtaining shareholder approval.1 As described below, this relief relates to situations where, due to changes in relative market capitalization and weightings of certain issuers in a fund’s benchmark index, the fund would exceed the investment limits for a diversified company if it continued to track the composition of its benchmark index. In addition, in order to rely on this relief, a fund must: (i) update its registration statement to reflect the fund’s ability to exceed such diversification limits and the associated risks; and (ii) provide notice to its shareholders regarding the fund’s updated diversification policy.

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