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1940 Act

The Investment Company Act of 1940 is a pillar of US financial law which regulates open-end mutual funds, unit investment trusts and closed-end funds. However, the law lays out in plain language a broad exclusion through which many publicly-traded REITs are exempt from regulation as an “investment company.”

In 2011, the Securities and Exchange Commission (SEC), which is tasked with enforcing and regulating the act, issued a concept release soliciting comments regarding mortgage companies exclusion from registration as investment companies.

NAREIT strongly opposes proposed changes to the 1940 Act that would redefine REITs as investment companies.

REITs are already extensively regulated in ways very similar to the 1940 Act. Both public REITs and registered investment companies offer their securities through registration statements filed with the SEC under the Securities Act of 1933, and both types of issuers provide their investors with shareholder reports required under the Securities Exchange Act of 1934. These shareholder reports contain financial statements complying with the SEC’s accounting regulations, audited by independent auditors. These reports, further, must meet the requirements of the Sarbanes-Oxley Act. Publicly traded mortgage REITs also comply with the corporate governance rules of the exchanges on which they list; these rules impose independence requirements on the boards and audit committees in a manner comparable to that imposed on investment company boards and audit committees under the 1940 Act.

The regulatory differences between publicly traded mortgage REITs and registered investment companies is not significant enough to justify the unnecessary and unfounded disruption that changes to the interpretation of the 1940 Act would cause.

STATUS: NAREIT sent a comment letter to the SEC in November 2011.

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