On July 27, 2026, the staff of the SEC’s Division of Investment Management issued a no-action letter that allows an ETF to accept certain types of creation baskets during a passive exceedance of its disclosed industry concentration policy (i.e., an exceedance due to changes in market values of the ETF’s investments or other factors external to the ETF’s management, rather than due to an investment decision by the ETF’s investment manager). The relief facilitates ETF creation basket activity that does not result in increased concentration in the relevant industry and helps to minimize portfolio management disruption during passive exceedances. The staff confirmed that the relief equally applies to both index-based and actively-managed ETFs.
Specifically, the staff stated that it would not recommend enforcement action against an ETF under Sections 13(a)(3) or 34(b) of the Investment Company Act of 1940 if, during a passive exceedance of its disclosed industry concentration policy, the ETF:
- receives a pro rata creation basket that includes one or more investments in the relevant industry;
- uses cash received in lieu of a creation basket component in the relevant industry to purchase the component security up to an amount consistent with a pro rata creation basket; or
- receives a non-pro rata creation basket where the weighting of the relevant industry is consistent with the weighting that would have applied in a pro rata creation basket.
The Investment Company Act requires a registered fund, including an ETF, to disclose in its registration statement its policy with respect to concentrating its investments (defined as investing more than 25% of its net assets) in a particular industry or group of industries. For example, a fund may adopt a policy not to concentrate in any one industry. A fund generally may not deviate from its industry concentration policy without shareholder approval. However, under current SEC staff guidance, a fund experiencing a passive exceedance of a policy not to concentrate in a certain industry is not required to sell investments in order to eliminate the exceedance, but it may not make further investments in that industry while such exceedance exists. As noted in the letter requesting the relief (the incoming letter), this guidance was developed in the context of traditional mutual funds that generally accept subscriptions in cash and does not address how ETFs should treat in-kind creation baskets during passive exceedances. The incoming letter further explains that because an ETF generally cannot control the timing of creation orders, the acceptance of an in-kind creation basket may increase the ETF’s holdings in an industry during a passive concentration policy exceedance with respect to that industry. In this circumstance, the exceedance is due to external factors (i.e., market movements and the submission of a creation order), rather than a portfolio management decision to invest additional assets in the industry.
The incoming letter notes that, in each circumstance for which relief is requested, the acceptance of the creation basket would not increase the proportion of the ETF’s portfolio invested in the relevant industry and therefore would not increase the ETF’s level of concentration in that industry. The incoming letter further notes that, absent the requested relief, an ETF experiencing a passive exceedance may need to take certain actions that may disadvantage shareholders—such as excluding from a creation basket securities in the relevant industry or substituting cash-in-lieu and investing the cash in a non-pro rata manner to avoid further investment in the relevant industry—or may need to seek shareholder approval to change its concentration policy, which could impose significant costs.
The July 27, 2026 no-action letter is available here.
