On February 12, 2018, in no-action relief granted to a mortgage REIT, the Staff of the SEC acknowledged that the real estate finance business has evolved substantially since the enactment of the Investment Company Act, with the creation and use of new debt financing techniques and mortgage-related products. In the relief, the Staff indicates that a particular mortgage REIT’s assets, sources of income, historical development, and public representations of its policy, and the activities of its officers, directors, and employees (and other relevant factors), may evidence that the mortgage REIT is primarily engaged in the real estate finance business and, therefore, should be able to rely on the Section 3(c)(5)(C) exemption.
The Section 3(c)(5)(C) exemption generally excludes from the definition of “investment company” any entity primarily engaged in, among other things, purchasing or otherwise acquiring mortgages and other interests in real estate. In order to qualify for this exemption, a mortgage REIT must comply with strict asset tests, including having at least 55% of its assets consist of mortgages and other liens on, or interests in, real estate that are the functional equivalent of mortgage loans (including certain mortgage-backed securities), referred to as “qualifying assets,” and at least 80% of its assets consist of qualifying assets and real estate-related assets. Over time, the Staff has provided guidance to mortgage REITs in the form of no-action letters regarding the types of securities that it deems to be qualifying assets.
However, in this new principles-based grant of relief, the Staff focuses on the business activities of the particular issuer, instead of whether a particular asset is a qualifying asset, in determining the availability of the Section 3(c)(5)(C) exemption. Mortgage REITs should consider obtaining confirmation from the SEC Staff regarding their own particular business activities in order to avoid any potential future uncertainty with respect to any securities held as part of the mortgage REIT’s portfolio.