This thread explains the difference between 351 diversification and RIC diversification rules for ETFs. 351 rules check at launch that the top 5 contributors are under 50%, while RIC rules check at quarter-end that no single position over 5% exceeds 50%. ETFs can pass 351 at launch but fail RIC initially, so it’s best to plan ahead and stay compliant from the start to avoid last-minute issues.
Lots of confusion out there on the 351 diversification test vs. RIC diversification rules. Let’s clear it up. If you see bad info, let us know.
🚨 Disclaimer: This is not tax or legal advice. Consult a qualified professional before making tax-related decisions.
🧵👇
1️⃣ 351 Diversification (IRC §368(a)(2)(F))
Governs contributions to an ETF (or any RIC).
Rule: The top 5 contributors must be <50% of total asset value.
This test only applies at the moment of contribution.
🔗
Key distinction:
✅ ETF can pass 351 diversification test at launch
❌ But fail RIC diversification on Day 1
Good news: RIC compliance is only checked at quarter-end.
Example:
Launch ETF via 351 on Jan 1
Portfolio fails RIC diversification on Day 1
Not the end of the world: We have until 3/31 to get in compliance. That said—do you really want to bottom tick and scramble? Probably not.
Best practice = aggregate 351 portfolio contributions should already comply with RIC rules at launch.
If you build it right from the start, you avoid unnecessary risk.
Lots of confusion out there on the 351 diversification test vs. RIC diversification rules. Let’s clear it up. If you see bad info, let us know.
🚨 Disclaimer: This is not tax or legal advice. Consult a qualified professional before making tax-related decisions.
🧵👇1️⃣ 351 Diversification (IRC §368(a)(2)(F))
Governs contributions to an ETF (or any RIC).
Rule: The top 5 contributors must be <50% of total asset value.
This test only applies at the moment of contribution.
🔗2️⃣ RIC Diversification (IRC §851(b)(3))
Governs ETF tax status under Subchapter M.
Rule: The sum of positions ≥5% can’t exceed 50% of assets.
This test is only measured at quarter-end.
🔗Key distinction:
✅ ETF can pass 351 diversification test at launch
❌ But fail RIC diversification on Day 1
Good news: RIC compliance is only checked at quarter-end.Example:
Launch ETF via 351 on Jan 1
Portfolio fails RIC diversification on Day 1
Not the end of the world: We have until 3/31 to get in compliance. That said—do you really want to bottom tick and scramble? Probably not.Best practice = aggregate 351 portfolio contributions should already comply with RIC rules at launch.
If you build it right from the start, you avoid unnecessary risk.
Lots of confusion out there on the 351 diversification test vs. RIC diversification rules. Let’s clear it up. If you see bad info, let us know.
Disclaimer: This is not tax or legal advice. Consult a qualified professional before making tax-related decisions.
🧵 ... 1️⃣ 351 Diversification (IRC §368(a)(2)(F))
Governs contributions to an ETF (or any RIC).
Rule: The top 5 contributors must be <50% of total asset value.
This test only applies at the moment of contribution. ... 2️⃣ RIC Diversification (IRC §851(b)(3))
Governs ETF tax status under Subchapter M.
Rule: The sum of positions ≥5% can’t exceed 50% of assets.
This test is only measured at quarter-end. ... Key distinction:
ETF can pass 351 diversification test at launch
But fail RIC diversification on Day 1
Good news: RIC compliance is only checked at quarter-end. ... Example:
Launch ETF via 351 on Jan 1
Portfolio fails RIC diversification on Day 1
Not the end of the world: We have until 3/31 to get in compliance. That said—do you really want to bottom tick and scramble? Probably not. ... Best practice = aggregate 351 portfolio contributions should already comply with RIC rules at launch.
If you build it right from the start, you avoid unnecessary risk.
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