Exchange fund

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An Exchange Fund or Swap Fund is a mechanism specific to the U.S., first introduced in 1999 that allows holders of large amount of a single stock to diversify into a basket of other stocks without directly selling their stock.

The purpose of this arrangement is to diversify their holdings without triggering a "taxable event". Note that the tax is not avoided, just postponed, when the diversified holdings are eventually sold tax will be due on the difference between the sales price and the original cost basis of the contributed stock.

1 Criticism
2 Providers
3 Detailed Structure
4 Legal basis
5 References

[edit] Criticism

The U.S. Securities and Exchange Commission is investigating the use of these arrangements with reference to the potential for market abuse by directors not disclosing their efffective divestment in stocks for which they are privy to sensitive market information.^[1]

In addition there is general critcism that tax revenue that might otherwise have been generated is avoided. Many holders of these positions may elect to hold the concentrated position and borrow against it rather than sell and pay the associated capital gains tax.

[edit] Providers

Many of the large brokerage houses have periodic "openings" for these funds. Example institutions are Goldman Sachs, Morgan Stanley etc.

[edit] Detailed Structure

Fund holding requirements: The fund needs to have at least 20% of its assets in "non-publicly traded" securities or real-estate.
At least 7 years have to elapse between when an investor deposits their stock and when the basket of stocks is available for them to sell.
Liquidity: These funds are generally not marginable.

(Source:^[2]).