SEC CHAIRMAN DISCUSSES ASSET-BACKED INSURERS AND MORTGAGE-RELATED POOLS

The following is an excerpt from the SEC website. The following is from a speech given by Chairman Mary Schapiro of the SEC: Chairman Mary Schapiro U.S. Securities and Exchange Commission Washington, D.C. August 31, 2011 The next item on our agenda involves two companion releases requesting public comment on the treatment of asset-backed issuers and the treatment of real estate investment trusts and other mortgage-related pools under the Investment Company Act. Treatment of Asset-Backed Issuers Under the Investment Company Act The first of these companion releases is an advance notice of proposed rulemaking regarding Rule 3a-7. That rule, adopted in 1992, provides an exclusion from the definition of “investment company” for certain asset-backed securities issuers. This is important because an entity that is excluded from this definition is exempt from the requirements of the Investment Company Act. To rely on this exclusion, ABS issuers must meet conditions designed to appropriately distinguish these vehicles from mutual funds and other registered investment companies. In addition, the rule contains conditions designed to provide for the safekeeping of assets and some level of independent oversight – both of which are traditional concerns under the Investment Company Act. Also, among the conditions of the rule, are several references to credit rating requirements. We have been examining Rule 3a-7 in the context of the mandate under the Dodd-Frank Act to review and remove credit ratings from our rules and substitute other appropriate standards of creditworthiness. Unlike our other rules, Rule 3a-7 does not use credit ratings to serve as standards of creditworthiness. Instead, the ratings review by the ratings agencies was intended to serve as a type of proxy for addressing traditional investor protection concerns under the Investment Company Act. Our review therefore has focused on substitutes to enhance investor protections, as opposed to substitutes for creditworthiness. In addition, given that the rule is nearly 20 years old, that the asset-backed securities market has experienced tremendous upheaval, and that the primary regulatory regime for asset backed securities is being substantially revised by the Dodd-Frank Act and SEC rulemaking, we are inviting public comment on Rule 3a-7. Among other things, we are requesting comment on ways to update and improve the conditions applicable to the exception for certain asset-backed issuers under the Investment Company Act. We want to assure that our investor protection concerns are appropriately addressed by the rule’s conditions, taking into account various other regulations that are applicable to ABS issuers, including Regulation AB. Among the ideas we discuss is requiring an ABS issuer to undergo an independent review to protect investors in asset-backed securities from self-dealing and overreaching by insiders, in lieu of the credit rating requirement currently in the rule. Treatment of Mortgage-Related Pools Under the Investment Company Act In a companion concept release, we also are requesting public comment on ways to update our interpretation of section 3(c)(5)(C) of the Investment Company Act. That provision is relied upon by some real estate investment trusts, known as REITs, and other mortgage-related pools engaged in the business of acquiring mortgages and mortgage-related instruments. However, certain asset-backed issuers, particularly those backed by mortgages also potentially rely on this provision. So it is helpful and instructive for the Commission to request comment on the treatment of asset-backed issuers and mortgage companies in tandem. In addition, the exception for REITs and other mortgage-related pools under the Investment Company Act is an area of the law that has not received significant focus from the Commission over the years. Indeed, the last time the Commission issued a formal interpretation in this area was in 1960, upon the emergence of REITs. Needless to say, tremendous changes have occurred in the mortgage markets, the securities markets, and the regulatory environment in the intervening five decades. As a result, we are taking this opportunity to seek public input on whether Commission guidance, and the few staff interpretations regarding the status of mortgage-related pools under the Investment Company Act, should be updated or made more clear and comprehensive. We do this with a view that, in some cases, certain REITs and potentially other mortgage-related pools relying on the exclusion can to some investors – particularly retail investors – look very much like traditional investment companies. I look forward to public comments on the nature of the REIT and mortgage markets as well as input on the clarity, scope and even the relevance of our existing guidance.”

SEC CHAIRMAN SPEECH CONSIDERING SOLICITING PUBLIC COMMENT ON ISSUES RELATIVE TO THE INVESTMENT COMPANY ACT OF 1940

The following speech was given by SEC Chairman Mary Schapiro Chairman Mary Schapiro U.S. Securities and Exchange Commission Washington, D.C. August 31, 2011 Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on August 31, 2011. Today we will consider whether to issue three separate releases soliciting public comment on issues arising under the Investment Company Act of 1940. The first relates to the use of derivatives by mutual funds and other investment companies regulated under that Act. The next two are companion releases regarding who is considered to be – and not to be – an “investment company” as that term is defined under the Act. In particular, we focus on asset-backed securities issuers and issuers that are in the business of acquiring mortgages and mortgage-related instruments. The derivatives, asset-backed and mortgage markets have undergone significant changes in recent years. And the Commission is taking this opportunity to seek public comment in order to help ensure that our regulatory approach and interpretations under the Investment Company Act remain current, relevant, and consistent with investor protection. Concept Release on Mutual Funds’ Use of Derivatives The first item on the agenda involves the use of derivatives by funds. In March 2010, the Commission announced a staff review of the use of derivatives by mutual funds, exchange traded funds, and other investment companies regulated under the Investment Company Act. That review focuses on the growing use of derivatives by funds and on whether the regulatory guidance surrounding that use can be improved. The concept release we are considering today would inform our review and help us determine whether we should update the regulatory regime for the benefit of fund investors. Background We face this issue today because in 1940, when the Investment Company Act was adopted, derivatives as we now know them did not exist. The Act imposes important leverage, valuation, diversification, and industry concentration requirements to help protect fund investors. However, those limitations were written with stocks and bonds in mind, not complex financial derivatives. As a result, fund investments in derivatives are not always wholly captured by the statutory limitations and requirements. Or if captured, the measures may not be quite right. The controls in place to address fund investments in traditional securities can lose their effectiveness when applied to derivatives. This is particularly the case because a relatively small investment in a derivative instrument can expose a fund to a potentially substantial gain or loss – or outsized exposure to an individual counterparty. The Commission’s approach to the regulation of funds’ use of derivatives has developed on an ad hoc basis as new derivative instruments were introduced and new derivative hedging strategies gained popularity. Current Review of Funds’ Use of Derivatives The current derivatives review gives us the opportunity to re-think our approach to regulating funds’ use of derivatives. We are engaging in this review with a holistic perspective, in the wake of the financial crisis, and in light of the new comprehensive regulatory regime for swaps being developed under the Dodd-Frank Act. But we want public input to help us get it right – input from those who use derivatives, input from those who invest in funds, and input from those who manage funds with derivatives strategies. I very much look forward to commenter input as we continue our in-depth review of the role of derivatives in fund portfolios and improvements that can be made to the regulatory regime.”