United States: SEC Grants Section 3(C)(5)(C) Relief To Depositor Of Mortgage Securitization Trusts

Last Updated: February 28 2018
Article by Barry N Hurwitz and Charles A Sweet

The US Securities and Exchange Commission staff has confirmed that a depositor of mortgage securitization trusts may rely on the exclusion from registration provided by Section 3(c)(5)(C) of the Investment Company Act of 1940, a signal that the staff recognizes that a company engaged in the real estate finance business might, as a result of its operations, hold assets other than those specified in Section 3(c)(5)(C).

In a recent no-action letter issued to Great Ajax Funding, LLC,[1] the staff of the US Securities and Exchange Commission (SEC) agreed that a depositor into multiple mortgage securitization trusts was engaged primarily in the real estate finance business for purposes of Section 3(c)(5)(C) under the Investment Company Act of 1940. The depositor's securitization trusts were formed to finance mortgages and real estate interests, and the depositor's assets consisted of subordinated securities and residual interests issued by the securitization trusts, in addition to mortgages and interests in real estate.

The Section 3(c)(5)(C) Exclusion

The definition of "investment company" under Section 3(a)(1) of the Investment Company Act includes an issuer that is, or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities; or is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire "investment securities" having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis. The definition of "investment securities" is quite broad and can include mortgage loans and other real estate–related investments.

Traditionally, real estate investment trusts (REITs) and many other real estate investment and finance companies have relied on an exclusion from the definition of "investment company" under Section 3(c)(5)(C) of the Investment Company Act. Section 3(c)(5)(C), in relevant part, applies to issuers that are primarily engaged in the business of "purchasing or otherwise acquiring mortgages and other liens on and interests in real estate."

Historically, the SEC staff has long taken the position that the "primarily engaged" requirement of Section 3(c)(5)(C) will be satisfied if at least 55% of an entity's total assets consist of "mortgages and other liens on and interests in real estate" (so-called "qualifying interests") and at least 25% of its assets consist of other real estate–related assets. The 25% requirement for real estate–related assets is reduced to the extent that qualifying interests exceed 55%.

Direct ownership interests in real estate and loans that are fully secured by real estate have been considered to be qualifying interests. The SEC staff has looked at various other types of assets through the lens of whether they are the functional equivalent of the types of real estate interests more commonly accepted as qualifying interests. These include so-called "whole pool certificates,"[2] which represent the entire beneficial interest in a pool of mortgage assets. In contrast, the staff has taken the position that "partial pool certificates," which represent less than the entire beneficial ownership interest in a mortgage pool (and which constitute the majority of mortgage-backed securities issued), and residual interests in mortgage-backed securities transactions are not the functional equivalent of real estate interests and thus are not qualifying interests.

Great Ajax Funding No-Action Letter

In the Great Ajax Funding no-action letter, the staff gave no-action advice in respect of a subsidiary of the operating partnership of a mortgage REIT. That entity serves as the depositor of multiple securitization trusts, which are used as vehicles to securitize pools of whole mortgage loans from the portfolio of the operating partnership. Each securitization trust issues senior notes to investors, which are secured by the mortgage loans in the transferred pool and are paid out of the cash flows from those mortgages. In exchange for the pool assets contributed to a securitization trust, the depositor receives subordinated securities issued by the trust and the residual interest in the trust.

As noted above, partial pool certificates and residual interests generally have not been considered to be qualifying interests by the SEC staff. In the Great Ajax Funding no-action letter, however, the SEC staff 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. The staff recognized that a company engaged in the real estate finance business might, as a result of its operations, hold assets other than those specified in Section 3(c)(5)(C).

Rather than focusing solely on the assets held by the depositor in question, the staff used what appears to be a more principles-based approach. The staff expressed the view that factors such as a company's assets, sources of income, historical development, and public representations of its policy, and the activities of its officers, directors, and employees, as well as other relevant factors, may indicate that the company is primarily engaged in the real estate finance business, even if it does not necessarily satisfy the 55%/25% asset test. The staff concludes that the depositor could treat as qualifying interests any securities issued by a securitization trust that are acquired as a direct result of being engaged in the business of purchasing or otherwise acquiring whole mortgage loans.

Other Implications

The Great Ajax Funding no-action letter may be helpful for many depositors of mortgage-backed securitization trusts, as it points to a potentially useful exclusion from categorization as an investment company that may not have been previously considered. In addition, the rationale of the letter may be equally applicable to depositors of securitization trusts that issue securities backed by receivables that relate to the purchase or sale of specific merchandise, insurance, or services under Section 3(c)(5)(A) or (B).

In 2011, the SEC issued a concept release regarding Section 3(c)(5)(C), which cast some doubt on the future of the 55%/25% asset test.[3] According to the concept release, the SEC was concerned that existing staff guidance was not sufficient, and that while some may have been interpret the scope of Section 3(c)(5)(C) too broadly, others may have been interpreting it too narrowly. The Great Ajax Funding letter demonstrates that the staff remains open to looking at Section 3(c)(5)(C) in new ways if the facts other than an entity's asset composition demonstrate that it is primarily engaged in the real estate finance business.

Despite the SEC staff's historical position that partial pool certificates and residual interests are not qualifying assets, some mortgage REITs and others have taken the view that consecutive subordinate classes of mortgage-backed securities transactions may be treated as qualifying assets if they include, among other things, special servicing rights (i.e., the right to deal with the pool loans if the deal fails to perform as expected, including foreclosures and loan modifications). This position is based, in part, on prior SEC staff guidance that joint ventures or partnerships and loan participations may be qualifying assets if they are the functional equivalent of owning the underlying real estate loans, and if they carry with them the right to foreclose. The Great Ajax Funding letter does not specifically address this position, but the staff notes that its position does not encompass asset-backed securities "that are acquired in a different manner (e.g., from an unaffiliated third party) because acquiring such assets in this manner could be more consistent with the issuer being engaged in an investment activity rather than a financing activity."


[1] Great Ajax Funding LLC, SEC No-Action Letter (Feb. 12, 2018).

[2] The staff's express view has been limited to whole pool certificates issued or guaranteed by government-sponsored enterprises such as Ginnie Mae, Fannie Mae, and Freddie Mac, though in the view of some there is no principled reason to distinguish other types of whole pool certificates.

[3] Companies Engaged in the Business of Acquiring Mortgages and Mortgage-Related Instruments, SEC Rel. No. IC-29778 (Aug. 31, 2011); see also Morgan Lewis LawFlash, SEC Issues Concept Release Regarding Mortgage REITs and Section 3(c)(5)(C) of the Investment Company Act (Sept. 9, 2011).

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Morrison & Foerster LLP
Cadwalader, Wickersham & Taft LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Morrison & Foerster LLP
Cadwalader, Wickersham & Taft LLP
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions