The SEC Division of Investment Management (the "Division") granted no-action relief to a real estate investment trust from enforcement action in relation to certain subsidiaries utilizing the Investment Company Act Section 3(c)(5)(c) registration exclusion.
Section 3(c)(5)(c) provides an exclusion from the definition of an investment company (and related registration requirements) if an entity is primarily engaged in "purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." The Division takes the position that the exclusion in Section 3(c)(5)(C) is available to an issuer if (i) at least 55% of its assets consist of mortgages and other liens on and interests in real estate ("qualifying interests"), (ii) the remaining 45% of assets consist of "real estate-type interests," (iii) at least 80% of assets consist of qualifying interests and real estate-type interests, and (iv) no more than 20% of assets consist of assets that have no relation to real estate (these factors together, the "Asset Composition Test").
Redwood Trust, Inc. requested that certain credit risk transfer securities be treated as real estate-type interests for the purposes of the Asset Composition Test. According to Redwood, the subsidiaries "effectively transfer to individuals a portion of the credit risk of mortgage pools that are owned by Fannie Mae or Freddie Mac." The Division agreed to grant Redwood's request based on its representations, including the fact that the credit transfer risk securities "share similar characteristics with agency partial pool certificates," which the SEC said can be treated as real estate-type interests.
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