Monday, May 07, 2012

Corp Fin Issues Note to Trust Indenture Act C&DI

The SEC’s Division of Corporation Finance has issued a note to Trust Indenture Act C&DI 202.01 stating that the division is considering the impact of a recent court decision. This C&DI provides that certificates (issued under a Securities Act registration statement) representing beneficial ownership in a trust, with assets that include pooled mortgage loans with multiple obligors and a third-party guarantee of partial payment of the certificates, are exempt under Trust Indenture Act Section 304(a)(2) and (7). In Retirement Board of the Policemen's Annuity and Benefit Fund of the City of Chicago, et al. v. The Bank of New York Mellon, U.S. District Court, S.D. New York, Fed. Sec. L. Rep. ¶96,783, (Apr. 3, 2012), the court held, in the context of denying a motion to dismiss, that the Trust Indenture Act applies to asset-backed securities in the form of certificates.

The parties in the case agreed that the Trust indenture Act applied to mortgage-backed notes, but disagreed whether the Act applied to certificates issued by certain trusts. In support of its claim that the certificates were equity securities and not debt securities, The Bank of New York Mellon relied on various treatises and C&DI 202.01. The court declined to defer to the SEC staff’s interpretive guidance and instead, based on Internal Revenue Service authority and other court decisions, determined that the certificates were debt securities subject to the Trust Indenture Act.

The division issued the note to Trust Indenture Act C&DI 202.01 on May 3, 2012.

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