Investment Company Act
The recent financial crisis and the performance of asset-backed securities (“ABS”) in certain sectors has caused the SEC to engage in various regulatory initiatives under the Investment Company Act of 1940, as amended (the “40 Act”), to address concerns relating to the ability of certain ABS issuers to be excluded from the definition of “investment company” and the risk exposures borne by money market funds in their portfolios of ABS. Furthermore, the SEC has responded to the mandate in Dodd-Frank to review certain rules under the ’40 Act that use credit ratings as an assessment of creditworthiness of ABS and has undertaken several regulatory initiatives intended to replace those credit ratings provisions with alternative determinatives of credit quality.
Two of the most significant initiatives under the 40 Act undertaken by the SEC with respect to securitizations are:
The SEC solicited public comment as to the appropriateness of certain exclusions from the definition of “investment company” in light of the significant developments in the asset-backed and mortgage markets. In particular, the SEC requested comments regarding potential revisions to Rule 3a-7and Section 3(c)(5)(C).
The SEC also proposed amendments to Rule 2a-7, which are designed to increase the diversification of the portfolios of money market funds. Because money market funds are significant investors in ABS, including asset-backed commercial paper, the proposed amendments will impact the securitization market.