Subject: File No. S7-34-11
From: Karthik R Narayanan
Affiliation: Bradford Marzec, LLC

September 8, 2011

Comments on File No. S7-34-11
The SEC issued a concept release questioning REITs exclusion from the Investment Act of 1940 on August 31.

REITS that acquire mortgage interests in the form of securities are meaningful participants in the mortgage market. The participation of REITs in the mortgage market, particularly in the Agency MBS market, provides liquidity to the market, provides an important conduit for the transmission of short term policy driven rates to the longer-term mortgage rate, and allows for an important linkage between established, well-regulated, and transparent equity market to the mortgage rate.

The Section 3c5c exemption allows REITs to utilize leverage which exceeds that allowed for a closed-end bond fund subject to the 40 act. This additional leverage strengthens the virtuous effects described in the previous paragraph. This leverage is also more economically appropriate given the nature of how a REIT portfolio is managed vis a vis a traditional closed end bond fund. REITs do not employ active trading strategies. AFS accounting treatment, investor expectations of a stable-income-oriented investment strategy, and IRS limitations of trading gains all act to discourage active trading by REITs. Closed end bond funds, on the other hand, are typically actively managed which results in more meaningful trading volumes. The lack of active trading by REITs deduces the impact of their higher leverage on the markets in which they participate.

REITs own about $200Bn of agency MBS and their presence in the market in their current form benefits a wide segment of society including homeowners, MBS market participants, and equity investors. A dramatic reduction in REIT leverage and the subsequent delivering would have an adverse impact on these groups and would be very disruptive to the market for MBS and create a headwind to housing policy in the US.

I urge cautious and circumspect handling of this matter in order to preserve the beneficial role of mortgage REITs in the economy.