The SEC is considering limiting the exemptions from the Investment Company Act for mortgage and asset-backed pools.  In a Notice of Proposed Rulemaking and a companion Concept Release, the SEC seeks comments on whether it should curtail both Rule 3a-7 (exemption for asset-backed issuers) and the use of Section 3(c)(5)(C) (mortgage-backed pools).  Specifically, the SEC questions whether to replace the rating requirements in Rule 3a-7 with an "independent review" to protect investors from "self-dealing and overreaching by insiders."  The SEC also questions whether Section 3(c)(5)(C), which was initially intended to cover mortgage banking, should be available to mortgage-backed issuers that "look like traditional investment companies."

 

OUR TAKE:  This is just bad news for the securitization market.  Subjecting mortgage and asset-backed pools to 1940 Act regulation would increase costs and slow product development.