Tracking Stock Means Separate Issuer?


In Comdisco No Action Letter, the Staff Says “Maybe”

By John M. Baker, Esq.

The SEC‘s Division of Investment Management recently issued a no-action letter on when the issuance of tracking stock may indicate the existence of a separate issuer under section 2(a)(22) of the 1940 Act. Comdisco, Inc. (Oct. 25, 2000).

Comdisco sought a no-action position on its proposal to issue two new series of tracking stock, arguing that Comdisco is not an investment company, that the issuance of the tracking stocks does not create a “fund” or other “issuer,” and that holders will have interests in Comdisco as a whole and not in any separate business or assets.

The SEC staff noted that if it were to view Comdisco Ventures instead of Comdisco as the “issuer” of the Comdisco Ventures tracking stock, Comdisco Ventures could be subject to regulation as an investment company, depending on the nature of its activities and assets. The staff stated that it is appropriate to assess the existence of a separate issuer within an operating company based on the elements articulated in Prudential Insurance Company of America v. SEC, 326 F.2d 383 (3d Cir.), cert. denied, 377 U.S. 953 (1964).

Under this test, a separate issuer may exist within an operating company if (i) the operating company causes interests to be issued in a pool of assets that is legally separated from the company’s other assets, (ii) the assets in the pool are held primarily for the benefit of the interest holders as the sole measure of their investment participation, and (iii) the interests in the pool do not confer significant rights in other assets of the operating company.

Applying these tests, the staff concluded that the three elements of the Prudential test are not present in Comdisco’s tracking stock structure. The staff stated that, having stated its views on when the issuance of tracking stock may indicate the existence of a separate issuer, it will not respond to inquiries about whether particular tracking stock structures establish separate issuers unless the inquiries present novel or unusual issues.

I have placed the Comdisco letter on the eGroups web site, and it can be accessed from

Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, To subscribe to FundLaw, send a blank e-mail to

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.

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