Asset-Backed Securities and Companies in Mortgage-Related Businesses under the Investment Company Act: SEC Issues Advance Notice of Proposed Rulemaking to Amend Rule 3a-7 under the Investment Company Act and Concept Release on Section 3(c)(5)(C) of the Investment Company Act

Sullivan & Cromwell LLP - September 19, 2011
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On August 31, 2011, the Securities and Exchange Commission addressed two key exclusions from the definition of investment company in the Investment Company Act of 1940 that are relied upon by issuers of asset-backed securities (ABS) and companies in mortgage-related businesses. In an Advance Notice of Proposed Rulemaking (ANPR), the SEC is asking for public comment on possible new conditions for the exclusion available to certain ABS issuers under Rule 3a-7. The conditions for reliance on Rule 3a-7 include, among other things, that the issuer’s publicly offered fixed-income ABS be rated investment grade, that acquisitions and dispositions of assets by issuers relying on the rule not result in a downgrading of those ABS and that issuers of ABS (other than asset-backed commercial paper) must take action necessary for their cash flows to be deposited in a segregated account maintained or controlled by an independent trustee. Areas of particular interest to the SEC include the structure and operation of the asset-backed issuer, the possible review by an independent evaluator of the issuer and its intended operations and the preservation and safekeeping of the issuer’s assets and cash flow. The SEC is also soliciting comment on whether securities of ABS issuers that are currently excluded from the definition of investment company under Rule 3a-7 should instead be treated by other issuers as securities issued by investment companies in determining their own status as investment companies for purposes of the 40% test in Section 3(a)(1)(C) of the Investment Company Act.