November 23, 1992
TO: BOARD OF GOVERNORS NO. 83-92
SEC RULES MEMBERS NO. 63-92
UNIT INVESTMENT TRUST MEMBERS NO. 60-92
CLOSED-END FUND MEMBERS NO. 48-92
RE: SEC ADOPTS 1940 ACT EXEMPTION FOR ASSET-BACKED ARRANGEMENTS
__________________________________________________________
The Securities and Exchange Commission has adopted a new
rule, Rule 3a-7, under the Investment Company Act of 1940, which
excludes from the definition of "investment company" asset-backed
arrangements meeting certain conditions. In its comment letter
on the proposed rule, the Institute had urged the Commission to
narrow the conditions that an issuer satisfy under the exemption,
particularly with respect to the degree of portfolio management
that would be permitted. However, the Commission has adopted a
more liberal rule than initially proposed. The Rule will become
effective upon publication in the Federal Register. A copy of
the Commission’s release is attached.
As adopted, Rule 3a-7 excludes from the Act an issuer who
is engaged in the business of acquiring and holding "eligible
assets", as defined under the Rule, and who does not issue
redeemable securities. In addition, the Rule imposes the
following conditions:
(1) issuers must issue fixed-income securities or other
securities that entitle their holders to receive payments
that depend primarily on the cash flow from eligible
assets, including interest-only ("IOs") and principal-only
("POs") securities;
(2) only fixed-income securities that, at the time the
security is sold by the issuer, have been rated "investment
grade" (in one of the four highest long-term rating
categories) or an equivalent short-term rating by at least
one rating agency may be sold to the public without
restriction; fixed-income securities that are not rated or
are rated below "investment grade" may be sold only to
"accredited investors", as defined under the Securities Act
of 1933, and to entities in which all of the equity owners
qualify as such investors; all other securities, such as residual
interests, may be sold only to "qualified institutional buyers",
as defined in Rule 144A under the Securities Act, and to persons
involved in the organization or operation of the issuer and their
affiliates;
(3) issuers may acquire additional assets or dispose of
eligible assets only if that action (a) complies with the
terms and conditions set forth in the agreements,
indentures, or other instruments pursuant to which the
issuer’s securities are issued; (b) does not result in a
downgrading of the rating of the issuer’s outstanding
fixed-income securities; and (c) is not done primarily for
the purpose of recognizing gains or preventing losses
resulting from market value changes; and
(4) except with respect to asset-backed commercial paper
programs, (a) the issuer cannot appoint a trustee that is
affiliated with the issuer or with any person involved in
the organization or operation of the issuer; (b) the
trustee must execute an agreement stating that it will not
resign until the arrangement has been completely liquidated
or until a successor trustee has been designated; and (c)
the issuer must take reasonable steps to cause the trustee
to have a perfected security interest or ownership interest
valid against third parties in eligible assets that
principally generate the cash flow needed for payment on
the fixed-income securities.
On a related matter, the Commission has decided not to
pursue any legislative changes to Section 3(c)(5) under the
Investment Company Act, which has been interpreted to exempt from
the Act a number of structured financings, including most
mortgage-backed arrangements.
Amy B.R. Lancellotta
Associate Counsel
Attachment