Ryan Smith, Caprock Director of Public Markets, shares thoughts with FA Magazine
Section 351 exchanges are a powerful investment tool that are multifaceted in terms of their investment rationale and applicable use cases. However, they are not appropriate for all high-net-worth investors, given the relatively stringent requirements around allowable securities and diversification.
People who hold a single concentrated stock as part of their work compensation and with little outside public equity exposure are unlikely to qualify. This is because cash contributions are not permitted and other assets may not be accepted.
Ideal candidates for 351 exchanges are those with multiple equity line items, such as individual stocks, ETFs, or SMAs. These investors often have seasoned portfolios with embedded gains that make rebalancing difficult. As Ryan Smith notes, “A helpful mental model is that a 351 exchange is a ‘diversified to diversified’ transaction rather than a ‘concentrated to diversified’ transaction.”
In a recent article published by FA Magazine, Smith emphasizes the importance of diligence and infrastructure when executing a 351 exchange. Providers with proper prescreening tools can help prevent violations of diversification rules and support smoother conversions to an ETF structure. During the contribution process, advisors should also be aware of the temporary transfer of custodial assets, which can affect client reporting and should be addressed in advance.
Diversification remains central to how Caprock approaches public markets. It is critical to help clients understand the financial and psychological risks of maintaining a large position in a single stock. Section 351 exchanges, along with strategies such as charitable donations, may be used together as part of a broader, holistic approach to managing concentrated equity exposure.
Read more considerations in the full FA Magazine article here.
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