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Step-by-Step Guide: Unlocking the Power of Section 351 Conversions

November 10, 2025

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How can fund sponsors and investment advisers transform unregistered products into Investment Company Act of 1940-compliant funds? A conversion under Section 351 of the Internal Revenue Code allows for the transfer of these product lineups — including private funds and separately managed accounts (SMAs) — into a wrapper such as an exchange-traded fund (ETF) without triggering capital gains taxes.

Process for Section 351 Conversions

Our firm guides fund sponsors and investment advisers through each stage of the Section 351 conversion process — from initial assessment to post-conversion compliance.

Step 1: Evaluate the Existing Product

  • Evaluate the strategy, holdings and investor base to determine whether a Section 351 conversion is available and advisable for the product.
  • Consider certain preliminary matters, including the level of assets proposed to be transferred to the registered fund, the way in which the unregistered product was managed relative to the proposal for the new registered fund, whether the unregistered product complied with certain tax and securities laws that would be applicable to the registered fund, the purpose for which the unregistered product was created, and the way in which the unregistered product’s assets were valued.

Step 2: Confirm Tax Viability of the Conversion

  • Assess the ability to rely on Section 351 to do the conversion on a tax-free basis.
  • Evaluate how the unregistered product was managed and the proposal for the new registered fund.

Step 3: Select the Optimal Wrapper

  • Determine the optimal wrapper for the registered product post-conversion, whether it be an ETF, interval fund, tender offer fund or mutual fund. Different wrappers may be appropriate depending upon the objectives:
  • ETFs: Consider converting an unregistered product to an ETF if looking for additional tax efficiencies provided by the ETF structure.
  • Mutual Funds: Consider a mutual fund if looking for distribution within certain networks, such as retirement accounts.
  • Interval Funds and Tender Offer Funds: Consider an interval or tender offer fund if the unregistered product holds illiquid or less liquid assets. The decision between an interval fund and tender offer fund may be based on distribution needs or considerations related to the liquidity of the investment product.

Step 4: Prepare, Coordinate and Close

  • Draft all necessary documents to accomplish the conversion, including relevant agreements, the registration statement, and board materials.
  • Ensure the fund board’s approvals comply with the requirements of applicable U.S. Securities and Exchange Commission (SEC) guidance.
  • If the conversion involves a private fund, review the private fund’s documents and prepare any related consents or other documents necessary to facilitate the conversion.

Step 5: Port the Performance Track Record

  • Under certain circumstances, the registered fund will be able to adopt the performance of the unregistered account, facilitating quicker access to platforms and distribution networks.
  • If the conversion involves the registered fund’s adoption of the unregistered account’s performance, the necessary disclosures will need to be drafted to ensure compliance with applicable SEC guidance.

Step 6: Ongoing Compliance

  • Ensure post-conversion compliance under the federal securities and tax laws. Failure to appropriately comply with the tax laws could result in unfavorable tax treatment after the completion of the conversion, which would negatively impact the investors of the unregistered account that provided the capital necessary to launch the registered fund.

How We Can Help

We are well-versed in federal securities and tax laws and can provide guidance to help you avoid unintended consequences and potential pitfalls conducting a Section 351 conversion.

For more information and assistance, contact Joel Corriero or Dean Krishna.

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