Section 12D-1 Limit

Definition of 'Section 12D-1 Limit'


A rule added to the Investment Company Act in 1964 to provide registered investment companies with conditional exemptions from provisions of the Act's Section 12 (d)(3). The provisions prohibit a registered investment company from purchasing or acquiring a security or business interest from someone who is a broker, dealer, underwriter, investment company adviser or investment adviser registered under the Investment Advisers Act of 1940.

The 12D-1 limit allows registered investment companies, on a case-by-case basis, to acquire securities from companies that are directly or indirectly involved in business activities referred to in Section 12 (d)(3). Securities may only be purchased for portfolios, and only from companies which derived no more than 15% of their total gross revenues over the previous three fiscal years from the specified businesses. In addition, the registered investment company and all affiliated companies cannot own more than 10% of the total outstanding voting stock of the portfolio company immediately following the securities acquisition.

Investopedia explains 'Section 12D-1 Limit'


Basically, the original rule was meant to prevent investment companies from investing in each other or otherwise merging. The 12D-1 limit allows investment for the purpose of adding the security to a portfolio. It limits the percentages that can be acquired to prevent the investment from becoming a subtle merger or takeover.

A registered investment company that claims the 12D-1 limit exemption must review its portfolio on a semi-annual basis to ensure its holdings are within compliance. If not, the company must sell or otherwise dispose of the security within 90 days. Section 12(d)(3) of the Investment Company Act exempts all investments by registered investment companies in certain businesses including small loan, factoring and finance companies.



comments powered by Disqus
Hot Definitions
  1. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.
  2. Oil Reserves

    An estimate of the amount of crude oil located in a particular economic region. Oil reserves must have the potential of being extracted under current technological constraints. For example, if oil pools are located at unattainable depths, they would not be considered part of the nation's reserves.
  3. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  4. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
  5. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
  6. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family's assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership's holdings.
Trading Center