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Cadwalader Clients & Friends Memo: SEC Seeks Public Comment On Treatment of Asset-Backed Issuers under the Investment Company Act

The Securities and Exchange Commission (the "SEC") recently issued an advance notice of proposed rulemaking (the "ANPR") requesting public comment on the treatment of asset-backed issuers under Rule 3a-7 under the Investment Company Act of 1940 (the "Investment Company Act").

Specifically, the SEC is requesting public comment on the following, among other things:

  • Ratings requirements: whether the credit rating requirements in Rule 3a-7 should be removed;
  • Independent review of the structure and operations of asset-backed issuers: whether the rating condition currently contained in Rule 3a-7 should be replaced with conditions that would require: (i) an independent review of the asset-backed issuer and its intended operations prior to the sale of the fixed-income securities; and (ii) either (A) an opinion of an independent evaluator as to the sufficiency of the cash flow to service expected payments on the fixed-income securities or (B) a similar certification from the issuer rendered after considering the views of an independent evaluator;
  • New prescriptive conditions concerning the structure and operation of assetbacked issuers: whether the SEC should add new conditions to Rule 3a-7 imposing specific requirements or limitations on the structure and operations of an asset-backed issuer or take a less prescriptive and more principles-based approach by requiring an issuer's organizational documents to set out parameters of the issuer's structure and operation;
  • New conditions concerning safekeeping of eligible assets and cash flows: whether any changes should be made to the conditions in Rule 3a-7 designed to address the safekeeping of the asset-backed issuer's eligible assets and the cash flow derived from such assets;
  • Other SEC rules and regulations: whether other SEC rules and regulations can replace the references to ratings in Rule 3a-7 or can be used as a basis for meeting the rule's conditions;
  • Use of Section 3(c)(5) by asset-backed issuers: whether Section 3(c)(5) under the Investment Company Act should not be available to asset-backed issuers; and
  • Holders of an asset-backed issuer's securities: whether asset-backed issuers that are exempt from the Investment Company Act under Rule 3a-7 should be treated as "investment companies" for the limited purpose of determining whether an entity investing in such issuers is itself an "investment company" under the Investment Company Act.

In the ANPR, the SEC has not proposed any specific rules; rather it is soliciting comment on concepts the SEC is considering for proposed rulemaking on these topics.

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