New website supports Section 351 ETF conversions

As financial advisors and their clients learn more about the potential tax advantages of a Section 351 ETF conversion, a new website aims to connect issuers with investors.

351conversion.com founder Matt Bucklin “cannot make money” through “transaction fees or anything like that” by providing advisors, investors and ETF issuers with informational resources and possible products to use in an increasingly popular asset migration method named for a provision of the Tax Code enabling exchanges of similar products. Securities and Exchange Commission rules from 2019 and 2020 for active management of ETFs, along with the development of financial technology, have led to a bumper crop of products offering tax deferral for investors with low-basis stocks and separately managed accounts.

“It could be a great time to diversify out of certain highly appreciated securities,” Bucklin said in an interview. He promised not to “bombard” people who sign up on his website with emails but simply “put them in touch with the ETF issuer” if a new product fitting their preferences is coming to market. “I have done a lot of online marketing, ecommerce and things, and I’ve never put up a website that gets ranked organically on Google,” Bucklin added.

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Bucklin came up with the idea for the site when he was speaking with Wes Gray, the founder of technology and asset management firm ETF Architect and an innovator in the approach. An influx of new products may obscure how the tool for deferring, rather than avoiding, capital gains distributions could create “a little bit more tricky scenario” if the issuer is, for example, not using sophisticated management of the tax lots in an ETF based on the differing needs of seed and second-day investors or ensuring their choice to do the conversion is “in line with how you expect your funds to be managed on the forward,” said Brittany Christensen, the senior vice president of business development for ETF service and technology firm Tidal Financial Group.

“Everyone wants the easy, ‘I’m out of all my Nvidia, and I don’t have to pay taxes on it,'” she said. “There are also other factors to consider before really making the decision to go down that path. The solicited transactions are a relatively new phenomenon and might be hitting some people’s inboxes with these marketing campaigns.”

The rules carry requirements about the level of stock concentration in the incoming assets and the need for the strategies to be the same on both sides of the transition. 

So far, the website links investors to just one product, but more are on the way, Bucklin noted. The fact that the SEC “has never gone after anyone for doing a 351 conversion yet” and the availability of “insurance protection from tax liability” show that advisors and clients who abide by the guidelines are taking a relatively low risk of regulatory pushback against the exchange, he said, crediting Gray with championing the strategy. New ETFs frequently must overcome a classic catch-22 in which they need to attract $50 million in investments to access large wealth management firms’ menus but struggle to find that seeding without being on the giant platforms.

“A lot of ETFs have launched with nothing and just hoped to gather assets, and it’s just really tough to get to $50 million,” Bucklin said. “I’ve seen some great strategies that just get stuck.”

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As more products hit the shelf, advisors and clients should keep in mind that they “could have contributions with exposure to double tax” if the issuer and their service providers fail to account for distributions affecting early and later investors, Christensen noted. She finds that “very few people” grasp that difficulty and the need to work with an outside firm to avoid it, she said. Otherwise, they may not be able to tap into the full benefits of a 351 conversion.

“I’m probably a little nervous right now with what’s going on in the ETF space if I’m not actively trying to get into that world,” she said. “It’s a win-win for everyone and allows a newcomer to start with a ‘bring your own assets’ type of strategy. Their clients are already comfortable with how they’re investing their money.”