Investment Company Act of 1940 - Section 30 and Rule 30a-2, 30a-3
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
Our Ref. No. 200312231123
Your letter dated November 24, 2004 requests our assurance that we would not recommend enforcement action to the Commission against College and University Facility Loan Trust One ("Trust One") and College and University Facility Loan Trust Two ("Trust Two") (collectively, the "Trusts") under Section 30 of the Investment Company Act of 1940 (the "Investment Company Act"), and Rule 30a-2 thereunder, if the Trusts file certain modified certifications and exhibits on Form N-CSR and Form N-Q under the Investment Company Act. In addition, you request our assurance that we would not recommend enforcement action to the Commission against the Trusts under Rule 30a-3 under the Investment Company Act if, as described in your letter, the Trusts do not comply with the requirements of Rule 30a-3.
You state that Trust One and Trust Two were established as Massachusetts business trusts pursuant to declarations of trust on September 10, 1987 and March 11, 1988, respectively. You state that each Trust is registered with the Commission as a closed-end management investment company.
You state that each Trust was formed under a trust indenture for the sole purpose of raising funds through the issuance of certain sequential pay bonds ("Bonds"). You represent that the Trusts are single purpose, passive entities that do not engage in any business or activity other than holding a portfolio of loans that were made by the United States Department of Education to various U.S. post-secondary educational institutions ("Loans"). You state that the assets of the Trusts consist of the Loans and proceeds from the Loans.
You state that all payments on the Bonds are made from the proceeds from the Loans and any earnings thereon. You indicate that the Trusts receive cash payments throughout the year from the Loans. You state that the Loans are administered by a third-party servicer under a servicing agreement, and that collections are paid by the servicer to a bond trustee ("Bond Trustee"). You state that the Trusts are parties to servicing agreements that require, among other things, a servicing report that is submitted to the Bond Trustee and to an owner trustee ("Owner Trustee"). You state that the Owner Trustee pays all of the expenses of the Trusts and distributes cash dividends on a semi-annual basis to the owners of certificates of beneficial interest of the Trusts ("Certificates") that were issued by the Trusts. You represent that the Trusts will hold the Loans to maturity, and that the Trusts are prohibited by their indentures from selling the Loans, or issuing new Bonds or other debt securities. You indicate that each Trust shall continue in existence until all principal of and interest on all of the Bonds shall have been paid in full, at which time any remaining Trust property, net of appropriate expenses, will be distributed to the owners of the Certificates.
You state that the Trusts have each requested and received exemptive relief from certain provisions of the Investment Company Act that apply to closed-end management investment companies because of each Trust's unique nature.1 For instance, you state that the orders exempt the Trusts from having a board of directors. You further state that the Trusts do not have principal executive officers or principal financial officers.
You state that the Trusts are similar to issuers of asset-backed securities. You represent that each Trust qualifies for an exclusion from the definition of investment company because it meets the conditions for issuers of asset-backed securities set forth in Rule 3a-7 under the Investment Company Act. You state that, nevertheless, each Trust is registered as a closed-end management investment company under the Investment Company Act because Rule 3a-7 was adopted after the creation of the Trusts.2 You also represent that each Trust meets the definition of an issuer of asset-backed securities as set forth under Rule 13a-14(g) and Rule 15d-14(g) under the Securities Exchange Act of 1934 ("Exchange Act"), which govern the certification of disclosure in annual and quarterly reports for issuers of asset-backed securities.3 You note that the regulatory regime for issuers of asset-backed securities differs from the regulatory regime for registered investment companies, for instance with respect to the certification requirements.
You contend, in essence, that the Commission's regulatory regime for improving the quality of financial reporting by public companies should apply to the Trusts as if they were issuers of asset-backed securities, and not as registered management investment companies, based on the similarities between the Trusts and issuers of asset-backed securities. Accordingly, you request relief from the requirements of Rule 30a-2 and Rule 30a-3 under the Investment Company Act.
Section 30 of the Investment Company Act generally requires any registered investment company to file with the Commission such information, documents and reports that the Commission may require by rule. Rule 30a-2 under the Investment Company Act generally requires any registered management investment company to include in its reports on Form N-CSR and Form N-Q under the Investment Company Act particular certifications of each principal executive officer and principal financial officer of the company ("primary officers").4 The certifications relate to the accuracy of the investment company's shareholder reports and financial statements, and the design and evaluation of the company's controls and procedures adopted under Rule 30a-3 under the Investment Company Act.
Rule 30a-3 requires any registered management investment company to maintain disclosure controls and procedures5 and internal control over financial reporting6 (collectively, "internal controls"). Under Rule 30a-3, an investment company's primary officers must evaluate the company's disclosure controls and procedures, and design or supervise the company's internal control over financial reporting. The Commission adopted Rule 30a-2 and Rule 30a-3 to improve the quality of an investment company's public disclosures regarding its financial condition.7 Those rules implement the requirements of Section 302 of the Sarbanes-Oxley Act of 2002 ("SOX") concerning the certification of financial statements and internal controls relating to financial statements that are filed with the Commission.8
You essentially contend that the certification requirements and the requirements to maintain internal controls that the Commission adopted pursuant to SOX should generally apply to the Trusts as if they were issuers of asset-backed securities, rather than registered management investment companies. You note that the Commission has implemented modified certification requirements for issuers of asset-backed securities and does not require asset-backed issuers to maintain internal controls, in recognition of the unique nature of those issuers.9 You represent that each Trust meets the definition of an issuer of asset-backed securities as set forth in Rule 13a-14(g) and Rule15d-14(g) under the Exchange Act, and could rely on Rule 3a-7 under the Investment Company Act.
In particular, each Trust proposes to file certifications on Form N-CSR and Form N-Q that include elements of the certification required for registered management investment companies and elements of the certification allowed for issuers of asset-backed securities.10 Each Trust would file on Form N-CSR the following certifications:11
I, [identify the certifying individual], certify that:12
Each Trust proposes to include the same certifications on Form N-Q, except that the first certification would state, "I have reviewed this report on Form N-Q of [identify registrant];" and certification 3 would state:
Based on my knowledge, the schedules of investments included in this report fairly present in all material respects the investments of the registrant as of the end of the fiscal quarter for which the report is filed.
In addition, each Trust proposes to include as exhibits to the Trust's Form N-CSR and Form N-Q that are filed with the Commission: (1) copies of all servicing or distribution reports required by the pooling and servicing, or similar agreement with respect to the period covered by the Form N-CSR or Form N-Q;14 (2) a statement from the servicer as to compliance with its obligations under the pooling and servicing, or similar, agreement; and (3) a report from the independent public accountant as to compliance by the servicer with the Uniform Single Attestation Program for Mortgage Bankers.15
You also request relief from the requirements of Rule 30a-3. In support of your request, you specifically note that issuers of asset-backed securities are not required to maintain any internal controls.16 In addition, you note that the Trusts have no primary officers who could administer internal controls.
On the basis of the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission against the Trusts under Section 30 of the Investment Company Act, and Rule 30a-2 and Rule 30a-3 thereunder, if each Trust includes the certifications and exhibits described above in its Form N-CSR and Form N-Q,17 and does not comply with the requirements of Rule 30a-3. This conclusion is based in particular on your representations that each Trust:
This response expresses our views on enforcement action only and does not express any legal conclusions on the questions presented. Because our position is based on the facts and representations in your letter, you should note that any different facts or representations may require a different conclusion.18
Kenneth C. Fang
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