SEC Staff Issues No-Action Letter on ETFs Accepting Creation Baskets

The staff of the SEC's Division of Investment Management issued a no-action letter stating that it would not recommend enforcement action under Sections 13(a)(3) or 34(b) of the Investment Company Act against an exchange-traded fund ("ETF") that accepts creation baskets containing securities in an industry in which the ETF is experiencing a passive exceedance of its disclosed concentration policy.

The letter, dated July 27, 2026, responds to a request submitted by Dechert LLP on behalf of the Investment Company Institute ("ICI").

A registered fund is required to disclose its policy on concentration in a particular industry or group of industries and, under Section 13(a)(3), may not deviate from that policy without authorization by a vote of a majority of its outstanding voting securities. Generally, concentration means investing more than 25 percent of a fund's net assets in a particular industry or group of industries. ICI represented that market movements can push a fund above that level even where its policy is not to concentrate, and that such an exceedance is passive, resulting from factors outside the manager's control.

Under longstanding staff guidance, a traditional fund experiencing such an exceedance may not make further investments in the affected industry but is not required to sell down the excess. ICI noted that the releases underlying that guidance have been rescinded, though practitioners continue to look to them. That guidance did not address how an ETF experiencing an exceedance should treat in-kind creation baskets that include securities in the affected industry. Based on the facts and representations in the request, the staff said it would not recommend enforcement action where, during a passive exceedance, an ETF (i) accepts a pro rata creation basket that includes securities in the affected industry, (ii) uses cash received in lieu of a basket component representing an investment in that industry to purchase that security up to an amount consistent with a pro rata creation basket, or (iii) accepts a non-pro rata creation basket where the weighting of that industry is consistent with the weighting it would have in a pro rata creation basket. The position applies to both actively managed and index-based ETFs.

In support, ICI argued that accepting a pro rata basket does not reflect an investment decision by the manager and leaves proportional industry exposure unchanged from a shareholder's perspective, and that requiring an ETF to strip the affected industry from its basket could increase exposure to other industries at times the manager considers undesirable. The staff recited these representations without independently endorsing them.