June 4, 1992
TO: BOARD OF GOVERNORS NO. 41-92
SEC RULES COMMITTEE NO. 39-92
UNIT INVESTMENT TRUST COMMITTEE NO. 31-92
RE: SEC PROPOSES CONDITIONAL EXEMPTION FROM 1940 ACT FOR
STRUCTURED FINANCINGS
__________________________________________________________
In its first formal action on the recommendations contained
in the Division of Investment Management’s recently issued report
on investment company regulation, the SEC last Friday unanimously
voted to issue for public comment proposed Rule 3a-7 under the
Investment Company Act of 1940 ("Act"). The rule would exempt
issuers of asset-backed securities (also referred to as
structured financings) from the definition of investment company
in Section 3(a) of the Act, provided certain conditions were met.
A copy of the release proposing Rule 3a-7 is attached.
Proposed Rule 3a-7 is intended to remove barriers that
exist to the public offering of certain types of structured
financings because they are unable to operate in compliance with
all of the requirements of the Act. Specifically, proposed Rule
3a-7 would exempt an issuer that (a) is engaged in purchasing or
otherwise acquiring or holding "eligible assets" (essentially,
assets requiring scheduled cash payments and other assets, such
as letters of credit and guarantees, that serve solely to support
the credit of the issuer), and (b) does not issue redeemable
securities or debt securities with demand features allowing
payment within 14 days, from the definition of an investment
company if the following four conditions are met:
(1) the issuer primarily issues fixed-income securities or
other securities with similar characteristics;
(2) securities offered or sold to any person other than a
Rule 144A "qualified institutional buyer" or an affiliate of the
issuer must be fixed-income securities that are rated in one of
the top two rating categories by at least one nationally
recognized statistical rating organization ("NRSRO") that is not
affiliated with the issuer;
(3) the issuer holds all pooled assets to maturity, with
certain exceptions, including the ability to substitute assets of
the same type and similar or higher credit quality, to substitute
government securities for eligible assets under certain
circumstances, to acquire additional eligible assets if this will
not cause a downgrading of the issuer’s outstanding fixed-income
securities and to dispose of assets in connection with the
issuer’s termination; and
(4) eligible assets and related cash flow, as well as any
other assets of the issuer not needed for the operation of the
issuer’s business must be held in a segregated account by an
unaffiliated trustee meeting the requirements of Section 26(a)(1)
of the Act.
As you may recall, in comments responding to the staff’s
concept release on reform of investment company regulation, the
Institute recommended that structured financings (and all other
pooled securities vehicles offered to the public) be covered
under the Act, subject to appropriate exemptions to accommodate
features that cannot comply with particular provisions of the
Act. In contrast, proposed Rule 3a-7 would exempt structured
financings from the Act, but impose certain conditions in the
case of public offerings.
Comments on the proposal must be filed within 60 days. If
there are issues you would like the Institute to consider
including in a comment letter, please contact me at (202) 955-
3514 by Friday, June 26.
Frances M. Stadler
Assistant Counsel
Attachment