July 16, 1992
TO: SEC RULES COMMITTEE NO. 47-92
RE: DRAFT INSTITUTE LETTER ON PROPOSED EXEMPTIVE RULE FOR
ASSET-BACKED ARRANGEMENTS
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As we previously informed you, the SEC has proposed Rule
3a-7 under the Investment Company Act of 1940, which would
establish an exception from the definition of "investment
company" for certain asset-backed arrangements or structured
financings. (See Memorandum to SEC Rules Committee No. 39-92,
dated June 4, 1992.) Attached is a draft of the Institute’s
letter on the proposed rule.
The first part of the Institute’s letter argues that asset-
backed arrangements are classic investment companies and,
therefore, should be subject to regulation under the Act, with
the Act modified to accommodate their unique characteristics.
The remainder of the Institute’s letter focuses on the
specific provisions of the proposed rule, in recognition of the
fact that it appears inevitable that some type of exemptive rule
will be adopted by the SEC.
Specifically, the letter emphasizes the need for tighter
controls on portfolio management, noting that under the proposal,
it appears that some asset-backed arrangements could be managed
to virtually the same extent as mutual funds, yet be free from
the provisions of the 1940 Act (e.g., restrictions on affiliated
transactions.) The letter suggests that many of the investor
protection concerns presented by asset-backed arrangements would
be minimized if their portfolios were kept relatively fixed
(allowing for substitutions only under very limited
circumstances).
The letter also expresses concerns about the condition in
the proposed rule that the securities sold to the public be
highly rated, since such reliance on the rating agencies will
cause them to become de facto regulators. The letter states
that if this provision is included in the final rule, it will be
necessary for the SEC to assume a far greater degree of
regulatory oversight of rating agencies. Alternatively, the
letter suggests replacing the rating condition with a provision
that would limit investments in asset-backed arrangements to
"accredited investors", as defined under Regulation D. However,
the letter notes that these steps may not be as necessary if the
Institute’s recommendations for tighter controls on portfolio
management are adopted.
Finally, the letter recommends that, in connection with the
adoption of the exemptive rule, the SEC seek legislation to
narrow the scope of Section 3(c)(5) of the 1940 Act, under which
many asset-backed arrangements have claimed exemptions from the
Act.
* * *
The comment period for this proposal expires on August 4,
1992. Please call either me or Amy Lancellotta with your
comments by July 27th.
Craig S. Tyle
Vice President -Securities
Attachment