MBS issuers have long enjoyed an exemption from onerous provisions of the Investment Company Act (ICA) since the start of mortgage securitization in the early 1980s, but all that could change under a new proposal being weighed by the Securities and Exchange Commission (SEC).

The commission is revisiting the broad exemption known as 'Section 3(c)(5)' in "light of the role that MBS issuers played in the financial crisis," the SEC said.  

The agency is seeking comment on whether to limit the Section 3(c)(5) exemption and possibly require MBS issuers to use a narrower ICA exemption known as Rule 3a-7.

Rule 3a-7 revisions would place more conditions on issuers and provide additional protections for MBS investors.

The SEC is asking what impact such changes would have on MBS issuers, the securitization market, and capital formation. 

The commissioners recently approved an advanced notice of proposed rulemaking, issuing it for a 60-day comment period.   

"My concern is that they are going to create a lot of uncertainty,” said Jordan Schwartz, a partner at the Cadwalader, Wickersham & Taft (CWT) law firm. “It will make it hard to get the private-label MBS market up and running again.”

The CWT securities attorney noted the ICA was designed to regulate mutual fund companies — not the mortgage securitization business.

Rule 3a-7 currently requires credit ratings on asset-backed securities.  But the SEC is considering eliminating that requirement to comply with the Dodd-Frank Act. "We are considering whether to replace the rating condition currently contained in Rule 3a-7, in part, with a condition that would provide for an independent review of the asset-backed issuer and its operations prior to the sale of fixed-income securities," the SEC proposal said.  

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