SEC

’40 Act Leeway for Mortgage REITS and Others

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The SEC Investment Management Division published a no-action letter on August 15 addressed to Redwood Trust that provides a certain degree of Section 3(c)(5)(C) compliance leeway for mortgage REITs and mortgage bankers. The Redwood letter is a recognition by the staff that the ebb and flow of mortgage loans into and out of a mortgage banking business, and the retention of cash proceeds from time to time, is an integral part of the business, as is the retention of the right to service loans to facilitate both loan sales and securitizations.

Specifically, the staff concluded that there would be no objection to Redwood treating certain MSRs and cash proceeds in the manner described below for purposes of the Section 3(c)(5)(C) exclusion from the registration requirements of the Investment Company Act of 1940. Redwood Trust No-Action Letter – 2019

  • MSRs created when mortgage loans are sold or securitized can be treated as “qualifying interests” under Section 3(c)(5)(C), and
  • Cash proceeds from mortgage principal amortizations, interest payments and payoffs in connection with real estate-related assets, as well as from the sale of such assets, including to securitization trusts, can retain the characterization of the assets from which the cash proceeds were derived for purposes of Section 3(c)(5)(C), subject to the time limitations indicated in the letter; e.g. sell whole loans and treat the cash proceeds of the sale as “qualifying interests” (subject to such time limitations).

As we stated in our April 12, 2019, letter to the SEC staff on behalf of Redwood, these cash proceeds are “integral parts of and directly related to and arising from Redwood’s mortgage banking activities” and, likewise, created MSRs “are acquired as a direct result of Redwood’s mortgage banking activities”. Our letter references the staff’s Great Ajax no-action letter of February 12, 2018, in which the staff said that it “would be willing to entertain other no-action requests to treat as qualifying interests certain other mortgage-related assets if they are acquired by an issuer as a direct result of the issuer being engaged in the business of purchasing or otherwise acquiring whole mortgage loans (e.g., certain “A-Notes” and servicing rights)”. Orrick Letter to SEC, April 12, 2019

(Redwood also obtained a no-action letter in 2017 relating to the treatment of credit risk transfer securities as “real estate-type interests” under Section 3(c)(5)(C). In the Orrick letter to the staff, we noted, among other things, that credit risk transfer securities share similar characteristics with, and have the same economic substance as, agency partial pool certificates, which are treated as “real estate-type interests” under Section 3(c)(5)(C). In its letter, the staff recognized the similarities between credit risk transfer securities and agency partial pool certificates and concluded that the credit risk transfer securities described could be treated as “real estate-type interests”.  Redwood Trust No-Action Letter – 2017 ; Orrick Letter to SEC, September 5, 2017)

SEC Staff Observation from Examinations of Investment Advisers

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On July 23, the Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) published a Risk Alert on its “Observations from Examinations of Investment Advisers: Compliance, Supervision, and Disclosure of Conflicts of Interest.” The purpose of this Risk Alert is to raise awareness of certain compliance issues that OCIE observed by sharing the Staff’s observations from these examinations. The Risk Alert provides a good summary of the Staff’s observations across a broad range of compliance topics, but emphasized its specific observations relating to employees or prospective employees with disciplinary histories. As stated by the Staff: “the key takeaway is that OCIE encourages advisers, when designing and implementing their compliance and supervision frameworks, to consider the risks presented by hiring and employing supervised persons with disciplinary histories and adopt policies and procedures to address those risks.” Risk Alert.

SEC Adopts Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships with Financial Professionals

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The U.S. Securities and Exchange Commission (SEC) adopted and clarified a number of rules intended to improve the relationships between retail investors, investor advisers and broker-investors, while also maintaining retail investors’ access to investment services and products. Under Regulation Best Interest, broker-dealers must act in the best interest of a retail customer when recommending any securities transaction or investment strategy. The Form CRS Relationship Summary requires registered investment advisers and broker-dealers to provide retail investors with easily comprehensible information about their relationship with their financial professional. Lastly, the SEC clarified investment advisers’ fiduciary duties and the activities that trigger a broker-dealer to be considered an investor adviser under the Advisers Act. Press Release. For further detail on the subject, read an analysis from Orrick’s Securities Litigation team here.

SEC Obtains Emergency Order Halting Alleged Diamond-Related ICO Scheme Targeting Hundreds of Investors

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On May 21, the Securities and Exchange Commission (SEC) announced that it obtained a court order halting an ongoing $30 million Ponzi Scheme. The SEC complaint charged a cryptocurrency business and its principal with using investor funds to run a Ponzi Scheme. Release.

SEC Modifies Timing for Filing of Non-Public Form N-PORT Data

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On February 27, the Securities Exchange Commission (SEC) modified the submission deadlines for registered investment companies filing non-public monthly reports on Form N-PORT. Form N-PORT is a new form for reporting both public and non-public fund portfolio holdings to the Commission in a structured data format. As a result of today’s changes, rather than filing non-public monthly reports with the Commission within 30 days after each month-end, funds will be required to maintain the relevant information in their records and file all three monthly reports with the Commission no later than 60 days after the end of each fiscal quarter. Release.

SEC Adopts Final Rules for Disclosure of Hedging Policies

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On December 18, “[t]he Securities and Exchange Commission (“SEC”) [] approved final rules to require companies to disclose in proxy or information statements for the election of directors any practices or policies regarding the ability of employees or directors to engage in certain hedging transactions with respect to company equity securities.” Release.

SEC Adopts Rule of Practice 194

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On December 19, the Securities and Exchange Commission (“SEC”) published its adoption of Rule of Practice 194, which, generally speaking, “creates a transparent, efficient, and comprehensive process for a registered security-based swap dealer or major security-based swap participant, collectively known as SBS Entities, to apply to the Commission for relief from the statutory disqualification prohibition found in Exchange Act Section 15F(b)(6).” Release.