Yahoo Requests Fund Exemption

WASHINGTON — Yahoo Inc. wants the Securities and Exchange Commission to exempt the company from regulation as a mutual fund, in a request that could set a precedent for other Web businesses.

Yahoo, which at first glance doesn’t have much in common with fund managers such as Fidelity Investments, has stock holdings in other Web companies that have soared to such values that they represent at least three-quarters of Yahoo’s total assets. For this and other reasons, Yahoo risks falling under the legal definition of a mutual fund.

That’s a prospect no regular operating company wants. Mutual funds must live with different regulatory restrictions, such as limits on debt they can incur and a ban on issuing employee stock options. And if companies don’t register as mutual funds when they should, they can face sanctions such as being barred by the SEC from selling securities or engaging in interstate commerce.

Yahoo and other Internet companies that have made successful investments in new Web businesses face regulatory questions because the 1940 Investment Company Act, which governs fund managers such as Fidelity and Vanguard Group, defines a mutual fund as a company with at least 40% of its assets in investments rather than operating businesses.

Yahoo requested the exemption from the SEC after a single holding--its 34% stake in the Yahoo Japan Corp. venture with Softbank Corp.--grew to 75% of Santa Clara, Calif.-based Yahoo’s assets at the end of 1999’s third quarter. Yahoo Japan’s stock has almost tripled since then. Its shares have soared more than fiftyfold since the beginning of 1999 and still trade for more than $520,000 apiece after a 2-for-1 stock split this week.

Under the investment company law, investments are defined as marketable securities and non-controlling stakes in other companies.

Yahoo’s bid for an exemption from mutual fund rules could affect other Web firms because Yahoo argues it primarily has “strategic” stock holdings made to cement relationships with business partners, expand its offerings and develop products or services. Those types of holdings are different from mutual fund investments aimed at generating profit for fund investors and therefore shouldn’t be counted against the 40% threshold, it says.