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. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
  2. Marginal Analysis

    An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
  3. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  4. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  5. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
  6. Class Action

    An action where an individual represents a group in a court claim. The judgment from the suit is for all the members of the group (class).
Trading Center