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Legal Update

US Securities and Exchange Commission Proposes to Revisit and Revise Rule 3a-7 Investment Company Exemption for Asset-Backed Securities (ABS) Issuers

15 September 2011
Mayer Brown Legal Update

On August 31, 2011, the United States Securities and Exchange Commission (SEC), in Release No. IC-29779 (Release) provides advance notice of a proposed rulemaking for proposed amendments to Rule 3a-7 under the Investment Company Act of 1940 (ICA or 40 Act). Simultaneously, the SEC proposed to withdraw its earlier 2008 proposal to amend Rule 3a-7, which was published at 73 FR 40124 (July 11, 2008). The revisions were proposed, at least in part, to satisfy Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which generally requires that references to credit ratings in the SEC’s rules and regulations be reviewed by the SEC and, if practicable, replaced with substitute standards of creditworthiness.

In the Release, the SEC seeks public comments on its proposal to amend Rule 3a-7 to remove the current conditions requiring specified credit ratings and to replace these conditions with other requirements. However, the Release notes that these conditions were not directed at assuring creditworthiness of related securities, but instead were regarded as effective means to ensure that the issuer had been structured in a manner to address appropriate investor protection under the 40 Act. The Release poses over 55 specific questions on which the SEC requests public comment.

Perhaps the most controversial of the SEC’s proposals is the concept of “independent evaluator” that would undertake an “independent review of the structure and intended operations” of the ABS issuer and determine the sufficiency of cash flows to service expected payments on the related securities. The Release suggests that such an independent evaluator might also be required to provide a certification to such effect and possibly be named as an “expert” in any registration statement and, accordingly, be subject to potential liability under Section 11 of the Securities Act of 1933, as amended.

Comments on the proposal are due on or before November 7, 2011.

If you have any questions regarding this Legal Update, contact at +1 312 701 7366, at +1 212 506 2390 or at +1 202 263 3263.

Learn more about our Structured Finance practice.


  • J. Paul Forrester
    T +1 312 701 7366
  • T +1 212 506 2706

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