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June 8, 1989
TO: MARKETING COMMITTEE NO. 17-89
RE: ASSET-BACKED SECURITIES BACKED BY PERSONAL PROPERTY
__________________________________________________________
There appears to be a proliferation of offerings of what
have been collectively referred to as asset-backed securities.
The Institute has been examining these offerings, particularly
those backed by credit card loans and other types of personal
property, to determine whether they should be considered
investment companies and therefore subject to registration under
the Investment Company Act of 1940. The Institute believes that
there are strong legal grounds for arguing that these offerings
should be registered under the Act.
However, we are uncertain as to whether our members have a
business concern in this area. There appear to be only slight
differences, for example, between a closed-end fund or unit
investment trust investing in a portfolio of GNMA (asset-backed)
securities and a trust invested in a portfolio of consumer
revolving credit card accounts or consumer auto loans. Several
of these latter trusts have been offered to the retail markets in
$1,000 units.
The purpose of this memorandum is to ask the members of the
Marketing Committee for their evaluation of the potential
competitive effects of the sale of products backed by credit card
loans and other types of personal property on sales of shares of
traditional investment companies, so that the Institute can
determine whether or not to take legal action. These issues will
be discussed at the Committee's upcoming meeting on Friday, June
23.
Asset-Backed Securities
Asset-backed securities (sometimes referred to as
structured financings) generally are nonredeemable debt
obligations issued by a trust that represent a fractional,
undivided interest in, or are secured by, a pool of financial
assets, nonpublicly traded debt securities or publicly traded
mortgage certificates. The most popular type of asset-backed
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security is the collateralized mortgage obligation (CMO), which
is a corporate bond backed by mortgage notes or mortgage-backed
securities, such as GNMA, FNMA and FHLMC certificates. A recent
report by Moody's Investors Service indicates that $72 billion in
CMOs had been issued by the end of 1988.
Other asset-backed securities are backed by various types
of personal property. The two largest classes of these
securities as of the end of 1988 were automobile loan issues
($20.5 billion) and credit card loan issues ($11 billion).
Citicorp recently began a $500 million offering that involves the
packaging of credit card loans from its Visa and MasterCard
holders. According to the attached Wall Street Journal article,
previous Citicorp credit card-backed securities were offered
primarily to institutional investors, but this current offering
is specifically targeted to the small investor and involves
$1,000 certificates. Sears has made similar offerings involving
credit card receivables and auto loans. Prospectus summaries
concerning these offerings are attached. Other categories of
asset-backed securities include those backed by boat loans,
computer leases, tax-exempt leases, and open accounts receivable.
Issuers of Asset-Backed Securities as Investment Companies
To the extent that they offer interests in pools of
securities, issuers of asset-backed securities would fall within
the definition of an investment company under the Act unless they
could qualify under one of the Act's exceptions from the
definition.
Under the current position of the SEC, some issuers of
asset-backed securities are excepted from the definition under a
provision that states that an issuer will not be considered an
investment company if it (1) does not issue redeemable
securities, and (2) is engaged in certain businesses. One of
these businesses is the purchasing or otherwise acquiring of
mortgages and other liens on and interests in real estate.
Another is the business of purchasing or acquiring credit card
and other receivables.
The Institute believes that the SEC's position is
vulnerable to legal attack because it goes far beyond what
Congress intended in including this exception in the 1940 Act.
According to a well-recognized academic expert on the 1940 Act,
the provisions on which the SEC relies in excepting asset-backed
securities were meant only to except companies engaged in active
businesses, like factors and mortgage bankers, and not passive
pools that simply contain the assets listed in the exception.
The Institute is therefore considering whether to take action to
obtain a judicial determination of the scope of these exceptions.
Information to Be Provided By the Marketing Committee
As noted above, the Institute has concluded that there is a
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legal basis for challenging the SEC's treatment of securities
backed by credit card loans and other types of personal property.
Earlier this year, the Institute asked a group of members
from the SEC Rules and Unit Investment Trust Committees whether
they felt that the Institute should challenge the SEC's treatment
of asset-backed securities. Their preliminary reaction was that
collateralized mortgage obligation (CMO) offerings generally do
not create a competitive problem; securities backed by credit
card loans and other receivables would create a competitive
problem, but to their knowledge these types of securities were
not being offered to small investors. (As set forth above, these
types of securities are now being offered to small investors.)
The Institute needs the Marketing Committee's views on
whether these investments are viable competitors to traditional
investment companies, in order to help the Institute determine
whether or not to take legal action.
James S. Riepe
Chairman,
Marketing Committee
Attachments