SEC Allows 401(k) Plan as Qualified Investor

SEC Allows 401(k) Plan as Qualified Investor

Staff changes view on status of certain plans for investment company exemption

By John M. Baker, Esq.

Section 3(c)(1) of the Investment Company Act of 1940 generally excludes from the definition of “investment company” any issuer whose securities are owned by not more than 100 persons, and section 3(c)(7) of the 1940 Act generally excludes any issuer whose securities are owned exclusively by “qualified purchasers.”

Qualified purchasers generally are individuals with at least $5 million in investments and companies with at least $25 million in investments, a standard clearly intended to keep out the riff-raff. The SEC stated in 1997 that a 3(c)(7) fund must “look through” a 401(k) plan to its investors to determine qualified purchaser status, unless the plan does not permit participants to decide whether or how much to invest in particular investment alternatives.

The SEC directed its staff to consider whether a self-directed employee benefit plan could be considered to be a single investor for purposes of section 3(c)(7), and to reconsider its existing position that such a plan could be considered a single investor for purposes of section 3(c)(1), if the plan operates in a manner resembling that of a defined benefit plan. Release No. IC-22597, 62 Fed. Reg. 17512, 17519 n.79 (Apr. 3, 1997).

The SEC staff has now reaffirmed its view that a 401(k) plan may be counted as a single investor for purposes of section 3(c)(1) and as a qualified purchaser for purposes of section 3(c)(7) if the plan participants have the investment discretion to allocate their accounts among a number of investment options, each of which has an identified generic investment objective, and certain other requirements are met. H.E.B. Investment and Retirement Plan, SEC No-Action Letter (May 18, 2001).

The H.E.B. letter reaffirms and expands upon the staff’s views in The Standish Ayer & Wood, Inc. Stable Value Group Trust (Dec. 28, 1995). I have placed in H.E.B. letter on the FundLaw web site in Word 97 format, and it may be accessed from

Copyright 2001, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, To subscribe to FundLaw, send a blank e-mail to

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.