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What is a billionaire, corporate executive to do when all of his eggs are held in one basket? Mr. Anderson was seeking a solution to just that question. With his balance sheet concentrated in one asset - company stock - calling it an "overly concentrated equity position" was certainly putting it mildly. Mr. Anderson needed to diversify his portfolio more quickly than he was able to under SEC Rule 144 restrictions, which only allow "insiders" to sell company stock in limited amounts each quarter.
What Strategies Could Help?
The first step was for Mr. Anderson to establish a Blind Trust, which allows executives to diversify their investments through the sale of restricted stock, without limiting the timing of the sales. With this type of trust, the investor gives a trustee sole authority to decide on the timing of sales. However, Mr. Anderson wished to further expedite the diversification of his portfolio. In came the strategy of investing the trust in an Exchange Fund. The goal of an Exchange Fund is to allow an investor to shift from a concentrated position to a diversified position, without triggering capital gains tax. In an Exchange Fund, investors effectively exchange their stock for a proportional ownership of all the securities in the fund.
Although Exchange Funds were the perfect fit for Mr. Anderson's situation, finding one is not always an easy task. His trustee pursued an Exchange Fund that would accept Mr. Anderson and succeeded. Within three months, he received immediate equity diversification that could have taken a minimum of two years without the Blind Trust.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.