September 2, 2011
SEC Issues Concept Release Regarding Mortgages and the 1940 Act
As NAREIT reported to its members in several articles in NAREIT's NewsBrief, at the request of the SEC, NAREIT and its Mortgage REIT Council have conducted an informational dialogue with SEC staff over the past two years related to the mortgage exception to the Investment Company Act of 1940.
As an outgrowth of these discussions, on August 31, the SEC authorized the release for public comment of a "concept release" regarding the appropriateness of the SEC to issue formal guidance with respect to the exception for mortgages contained in the Investment Company Act of 1940. An archive of the SEC's open meeting on this issue, which NAREIT attended with outside counsel, is available on the SEC's website.
Since 1940, the Investment Company Act has excluded mortgages as well as direct real estate interests. However, the SEC has never issued formal rules as to when a mortgage crosses over to become a security or the percentage of mortgages an entity must own to qualify for the 1940 Act mortgage exception. The current regulatory regime with respect to mortgages relies on a series of "no-action" letters issued by the SEC over the years. Given the growth of the RMBS and CMBS markets over the years, this is an issue of increasing interest to the SEC.
Because the Act clearly excludes real estate interests, the concept release does not address or apply to equity REITs, and is focused on mortgage REITs, among other mortgage investment platforms.
A concept release is the most preliminary statement that the SEC can issue and represents only the first phase of an inquiry, which might not even result in a formal draft public proposal (which could take the form of a draft interpretive release or a draft rule).
On August 31, the SEC Commissioners did not pose any questions to the SEC staff regarding the concept release and indicated that they looked forward to receiving input from the public as to whether they should take any further action and, if so, what action is recommended. Comments on the concept release are due 60 days after it will be published in the Federal Register.
NAREIT will work closely with its Mortgage REIT Council to submit comments and to continue its ongoing dialogue with SEC officials.
If you have any comments or questions, please contact Tony Edwards, NAREIT's Executive Vice President and General Counsel, at email@example.com.