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SEC Approves Issuance of Releases Relating to Use of Derivatives by Investment Companies Regulated Under the Investment Company Act, Treatment of Asset-Backed Issuers Under the Investment Company Act

Aug. 31, 2011

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
marion.barish@bingham.com, 617.951.8801

David C. Boch
david.boch@bingham.com, 617.951.8485

Lea Anne Copenhefer
leaanne.copenhefer@bingham.com, 617.951.8515

Steven M. Giordano
steven.giordano@bingham.com, 617.951.8205

Michael Glazer
michael.glazer@bingham.com, 213.680.6646

Anne-Marie Godfrey
anne-marie.godfrey@bingham.com, +852.3182.1705

Richard A. Goldman
rich.goldman@bingham.com, 617.951.8851

Thomas John Holton
john.holton@bingham.com, 617.951.8587

Barry N. Hurwitz
barry.hurwitz@bingham.com, 617.951.8267

Roger P. Joseph, Practice Group Leader; Co-chair, Financial Services Area
roger.joseph@bingham.com, 617.951.8247

Amy Natterson Kroll
amy.kroll@bingham.com, 202.373.6118

Michael P. O’Brien
michael.obrien@bingham.com, 617.951.8302

Nancy M. Persechino
nancy.persechino@bingham.com, 202.373.6185

Paul B. Raymond
paul.raymond@bingham.com, 617.951.8567

Toby R. Serkin
toby.serkin@bingham.com, 617.951.8760

L. Kevin Sheridan Jr.
kevin.sheridan@bingham.com, 212.705.7738

Edwin E. Smith, Co-chair, Financial Services Area
edwin.smith@bingham.com, 617.951.8615

Joshua B. Sterling
joshua.sterling@bingham.com, 202.373.6556

Stephen C. Tirrell
stephen.tirrell@bingham.com, 617.951.8833

Structured Transactions Partners:

John Arnholz
john.arnholz@bingham.com, 202.373.6538

Reed D. Auerbach, Practice Group Leader, Structured Transactions
reed.auerbach@bingham.com, 212.705.7400

Michael P. Braun
michael.braun@bingham.com, 212.705.7540

Robert J. Gross
robert.gross@bingham.com, 202.373.6106

Laurence B. Isaacson
laurence.isaacson@bingham.com, +852.3182.1781 (Hong Kong), 212.705.7501 (New York)

Jeffrey R. Johnson
jeffrey.johnson@bingham.com, 212.373.6626

Matthew P. Joseph
matthew.joseph@bingham.com, 212.705.7333

Steve Levitan
steve.levitan@bingham.com, 212.705.7325

Edmond Seferi
edmond.seferi@bingham.com, 212.705.7329

Vincent Sum
vincent.sum@bingham.com, +852.3182.1756

Charles A. Sweet, Corporate, M&A and Securities
charles.sweet@bingham.com, 202.373.6777

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