At an Open Meeting held on August 31, 2011, the U.S. Securities and Exchange Commission unanimously approved the issuance of three releases seeking public comment on certain issues arising under the Investment Company Act of 1940, as amended. The first is a concept release relating to the use of derivatives by mutual funds, exchange-traded funds and other investment companies regulated under the Investment Company Act. The second is an advance notice of proposed rulemaking relating to the treatment of asset-backed issuers under the Investment Company Act and possible amendments to Rule 3a-7 under the Investment Company Act, which provides an exclusion for issuers of asset-backed securities from the definition of “investment company” under the Investment Company Act. The third is a concept release relating to the status under the Investment Company Act of companies engaged in the business of acquiring mortgages and mortgage-related instruments, with respect to the exception from the definition of “investment company” contained in Section 3(c)(5)(C) of the Investment Company Act. The Rule 3a-7 advance notice of proposed rulemaking and Section 3(c)(5)(C) concept release will be issued as companion releases.
Derivatives Concept Release
The derivatives concept release is part of an ongoing review by the SEC, announced in March 2010, to evaluate the use of derivatives by investment companies regulated under the Investment Company Act. The review was prompted by the concern that the investor protections in place under the current regulatory framework, which did not contemplate the use of derivatives, may not be adequate to address the increasing use of complex derivative instruments by investment companies.
The release will seek public comment to assist the SEC in determining whether and what regulatory initiatives or guidance may be needed. The primary focus of the concept release will be the senior securities restrictions imposed by Section 18 of the Investment Company Act. The release will review the current segregated account approach and seek input on potential alternatives to this approach. The release will also address diversification requirements, concentration limitations, securities-related business considerations and valuation.
Rule 3a-7 Advance Notice of Proposed Rulemaking
The SEC has been examining Rule 3a-7 in connection with the Dodd-Frank Act’s mandate to remove references to credit ratings in the SEC’s rules, and is issuing the advance notice of proposed rulemaking to seek public comment on possible amendments to the Rule. In particular, the SEC will request comment on whether the credit rating requirements for securities issued by asset-backed issuers, which were intended to serve as a proxy to achieve the investor protection policies of the Investment Company Act, adequately fulfill that role. The release will also seek comment on whether asset-backed securities issued in reliance on Rule 3a-7 should be considered investment company securities for other purposes under the Investment Company Act. The release will also address and seek comment on whether asset-backed issuers should continue to be permitted to rely on the exception from the definition of “investment company” contained in Section 3(c)(5)(C) of the Investment Company Act.
Section 3(c)(5)(C) Concept Release
The SEC approved issuance of a concept release to solicit comment relating to companies engaged in the business of acquiring mortgages and mortgage-related instruments in reliance on the exception from the definition of “investment company” contained in Section 3(c)(5)(C) of the Investment Company Act. In particular, the SEC will seek information about the companies that rely on this provision to better understand the current application of the exception and any difficulties encountered in the application of the exception.
Bingham will continue to monitor the issues raised by these releases and will provide more detailed alerts on the releases.
For assistance, please contact the following lawyers in the Financial Services Area:
Investment Management Partners:
Marion Giliberti Barish
David C. Boch
Lea Anne Copenhefer
Steven M. Giordano
Richard A. Goldman
Thomas John Holton
Barry N. Hurwitz
Roger P. Joseph, Practice Group Leader; Co-chair, Financial Services Area
Amy Natterson Kroll
Michael P. O’Brien
Nancy M. Persechino
Paul B. Raymond
Toby R. Serkin
L. Kevin Sheridan Jr.
Edwin E. Smith, Co-chair, Financial Services Area
Joshua B. Sterling
Stephen C. Tirrell
Structured Transactions Partners:
Reed D. Auerbach, Practice Group Leader, Structured Transactions
Michael P. Braun
Robert J. Gross
Laurence B. Isaacson
firstname.lastname@example.org, +852.3182.1781 (Hong Kong), 212.705.7501 (New York)
Jeffrey R. Johnson
Matthew P. Joseph
Charles A. Sweet, Corporate, M&A and Securities