SEC Staff Grants No-Action Relief To Treat Government Mortgage-Backed Securities And Private Mortgage-Backed Securities As Part Of The Same Industry For Purposes Of Registered Funds’ Industry Concentration Policies

Edited by: Eric R. Fischer, Jackson B.R. Galloway and Elizabeth Shea Fries

The staff of the SEC's Division of Investment Management (the "Staff") granted no-action relief permitting two registered investment companies, via separate requests for relief, to treat mortgage-backed securities ("MBS") issued or guaranteed by U.S. federal agencies or government-related guarantors ("Government MBS") as being part of the same industry together with private mortgage-backed securities ("Private MBS") for purposes of each company's fundamental industry concentration policy ("Concentration Policy") adopted in accordance with Section 8(b)(1) of the Investment Company Act of 1940, as amended (the "1940 Act").

Concentration Policy Requirements

Section 8(b)(1) of the 1940 Act requires a registered fund to state in its registration statement whether it reserves the freedom to concentrate investments in a particular industry or group of industries. If such freedom is reserved, Section 8(b)(1) requires the fund to include in its registration statement a statement briefly indicating, in so far as practicable, the extent to which the fund intends to concentrate its investments, i.e., the fund must state its Concentration Policy. Section 13(a)(3) of the 1940 Act requires a fund to obtain shareholder approval to change its Concentration Policy.

Neither the 1940 Act nor the registration forms for open-end and closed-end funds specify how to define an "industry" for purposes of a fund's Concentration Policy. Former Guide 19 to Form N-1A provides that a fund may select its own industry classification; however, such classification must be (1) reasonable and (2) should not be so broad that the primary economic characteristics of the companies in a single class are materially different.

Closed-End Fund Request for No-Action Relief

A new closed-end investment company in the process of registering under the 1940 Act (the "Closed-End Fund") planned to invest 80% of its assets in fixed-income securities and proposed to implement a Concentration Policy to invest "at least 25% of its total assets in mortgage related securities," including both Government MBS and Private MBS. The Closed-End Fund represented that it had included narrative disclosure accompanying its fundamental investment restrictions to clarify that notwithstanding its general policy of excluding securities of the U.S. Government and its agencies or instrumentalities when measuring industry concentration...