September 28, 2011
To the SEC:
As a private, non-professional investor, I am perplexed by the decision to revisit the regulatory approach to mortgage REITS, especially at this uncertain time. The Federal Reserve has aggressively lowered short term interest rates to direct investors towards 'riskier assets'. To simultaneously increase the risk of these key alternative income producing assets by undermining their basic business model through regulatory uncertainty seems a form of 'gotcha' inappropriate for a regulatory agency focused on protecting investors. Brokerage firms have downgraded these investments based upon this proposed rulemaking rather than the underlying fundamentals of the businesses.
This uncertainty, 100% due to government action, is terribly frustrating to individual investors (clear from other comments) since it is artificial and defies analysis.
If you want to address a specific issue with these investments, I refer to the paragraph (in quotation marks) below, from your notice in the Federal Register...
"Other mortgage-related pools have few, if any, employees and instead rely on separate advisory entities for the day-to-day operations of the companies. These advisory entities often are the mortgage-related pools sponsor (typically, a real estate investment firm, an investment management firm, a private equity manager or other similar company that sponsors REITs, hedge funds and/or private equity funds) or an affiliate of the sponsor. An adviser of an externally managed mortgage-related pool is compensated by the company through a variety of different compensation schemes, which may include a performance or incentive fee."
It would be valuable for individual investors to have more transparency in these relationships between REITS with "few, if any, employees" and their sponsors. It seems to me that there is a potential for conflicts of interest in these relationships that would benefit from greater transparency.
In sum, please focus on fixing any disclosure or transparency problems, and leave the basic business model alone. It has proven its value over time (at least some of these companies weathered the 2008 crisis rather well) and serves a compelling need, especially in this low interest rate environment.
The sooner you can resolve this SEC induced uncertainty, the better.