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Clifford Chance

Clifford Chance


SEC Issues 3(c)(5)(C) Concept Release: Clifford Chance Does Not Anticipate Material Changes to Mortgage REIT Exemptions

22 September 2011


On August 31, 2011, the U.S. Securities and Exchange Commission (the "Commission") issued a concept release (the "Concept Release") seeking public comment regarding the status under the Investment Company Act of 1940 (the "1940 Act") of companies engaged in the business of acquiring mortgages and mortgage-related instruments, such as real estate investment trusts ("REITs"), many of which rely on Section 3(c)(5)(C) for their exemption from registration under the 1940 Act. Section 3(c)(5)(C) excludes from the definition of investment company "persons primarily engaged in . . . purchasing or otherwise acquiring mortgages and other liens on and interests in real estate."

The Concept Release has generated some (but not universal) negative reaction due to the inclusion in the release of a handful of questions and commentary which can be read to suggest that the Commission is considering changes in the existing Section 3(c)(5)(C) guidance that could materially limit the manner in which mortgage REITs conduct their businesses. However, for the reasons developed below, we do not expect the Commission's review of the 3(c)(5)(C) exemption will result in this outcome.

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