SEC Division of Investment Management staff letter: Greenwich Capital Acceptance Inc.

BROWN WOOD
ONE WORLD TRADE CENTER
555 CALIFORNIA STREET NEW YORK N.Y 0048-0557 95 CONNECrCIji AVENUC.N.W SAN FRANCISCO CA 9410417I5 WASHINGTON D.C 20006-4004 TELEPHONE 415-399-3909 21-639-5300 TELEPHONE 202-223-0220 FACSIMILE 415-397-4621 C51M 295599 ACSlMILE 2022230495 0900 WILSH IRE SOULEVARO SLACKWELL MOUSE LOS ANGELES CA 90024-6532 OUILOHALL YARD TELEPHONE 213-209-4343 LONDON EC2V lAB FAcSIMILE 3-209-5740 TELEPHONE 071-606-1969 rAC5IMILE 07 1-796-1607 Investment Company Act of 1940
Section
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Office of Chief Counsel
Division of Investment Managexnen1
Securities and Exchange Commissi
450 Fifth Street N.W
Judiciary Plaza
Washington D.C 20549
Ladies and Gentlemen
We are writing on behalf of Greenwich Capital Acceptance Inc the Company in connection with its establishment of certain trusts the Trusts whose assets consist primarily of loans secured by ownership interests in cooperative housing the Coop Loans The Coop Loans were acquired from the Resolution Trust Corporation the RTC to facilitate the RTCs disposition of assets as means of resolving the savings and loan crisis This letter hereby amends and restates our prior request dated March 1991 that you confirm that the Division of Investment Management the Division will not recommend that the Securities and Exchange Commission the Commission take any enforcement action under the Investment Company Act of 1940 the Investment Company Act if the Trusts offer passthrough certificates the Certificates evidencing undivided interests in the assets of the Trusts without registration as investment companies in reliance on Section 3c5 of the Investment Company Act This amendment and restatement is intended primarily to update certain information discussed in our prior letter and to provide certain additional information requested by August 1991

Julia Ulstrup of the Division in conversation with Brian Kaplowitz of this firm FACTS The Company as sponsor of the Trust has purchased through affiliates the RTCs interest in approximately $700 million principal amount of existing Coop Loans The Company has formed several Trusts and has sold Certificates representing interests therein in reliance on Section 3c1 of the Investment Company Act Section 3c1 generally provides an exception from the definition of an investment company to any issuer whose outstanding securities other than short-term paper are beneficially owned by not more than one hundred persons and which is not making and does not presently propose to make public offering of its securities The Company wishes contingent upon receipt of the no-action position that we request to be permitted to sell Certificates and facilitate the sale and resale of Certificates in the secondary market without being subject to the constraints of that Section In particular the Company wishes to permit the sale and transfer of existing Certificates without being subject to the 100 beneficial owner limitation Each Coop Loan is purchase money loan secured fully and exclusively by shares of stock the Shares in coopera tive housing corporation and proprietary lease the Lease accompanying the Shares and entitling the owner of the Shares to reside in the subject apartment described below The Coop Loans were originated by Empire of America Federal Savings Bank predecessor of Empire Federal Savings Bank of America to finance or refinance the purchase of cooperative apartments the Coop Apartments and represent in effect first liens on the Shares and Leases The Trusts were formed pursuant to pooling and servicing agreements similar to those commonly used in the formation of trusts that publicly offer mortgage-backed pass-through certificates The Coop Loans have been contributed by the Company to such Trusts As contributor of the Coop Loans the Company received all of the Certificates issued by the Trusts in exchange for the contribution of the Coop Loans The Company has been successful in privately placing certain of the Certificates with sophisticated investors and with the exception of relatively small amount of subordinated Certificates which it

proposes to retain would like to place the balance of the Certificates with third party investors The Trusts are passive entities and with the exception of reinvesting distributions on the Coop Loans in narrowly defined list of permitted investments perform no investment functions The assets of each Trust consist of separate fixed pool of Coop Loans The existing Trusts will not acquire new Coop Loans except in substitution for existing Coop Loans where the documentation for such Coop Loans may be deemed defective or where breach of warranty concerning such Coop Loans is found to exist.2 Documents would be deemed to be defective for example where it is determined that there was insufficient documentation for conveyance of ownership of the Coop Loans breach of warranty may exist where certain material representations made in such documentation prove to be false The Coop Loans in each Trust are serviced by an independent third party servicer The servicer collects all payments due under the Coop Loans sends and receives any notices required or permitted under the terms of the Coop Loans and generally takes any other servicing actions required under the terms of the Coop Loans All of the income of the Trusts net of fees paid to the servicer and other similar expenses of the Trusts are distributed periodically to the Certificateholders The Certificates of each series have been issued on both senior and subordinated basis There are different classes Such permitted investments consist generally of U.S government and U.S government agency obligations short term money market instruments and obligations rated in the highest rating category by nationally recognized statistical rating agency or whose rating will not adversely affect the ratings assigned any rated Certificates The Company may acquire new Coop Loans in the future and establish additional trusts in reliance on any noaction position taken by the Division on this letter or on any applicable statutory exception under the Investment Company Act or exception or exemption created by any rule thereunder

within series with varying levels of seniority The more senior Certificates have been rated in one of the top two rating categories by at least one nationally recognized statistical rating organization Subordinated Certificates are unrated or rated in lower than one of the two top rating categories II LEGAL ANALYSIS
Section 3a of the Investment Company Act defines an in
vestment company as
Any issuer which -- is or holds itself out as being engaged primarily or proposes to engage primarily in the business of investing reinvesting or trading in securities is engaged or proposes to engage in the business of investing reinvesting owning holding or trading in securities and owns or proposes to acquire investment securities having value exceeding 40 per centum of the value of such issuers total assets exclusive of Government securities and cash items on an unconsolidated basis Investment securities are defined as All securities except Government securities securities issued by employees securities companies and securities issued by majority-owned subsidiaries of the owner which are not investment companies The Trusts may be viewed as investment companies within the meaning of Section 3a since the Trusts have issued securities in the form of the Certificates and have assets that consist primarily of securities to the extent that the Coop Loans may be considered securities We believe however that the Trusts may rely on the exception from the definition of an investment com pany provided by Section 3c5 of the Investment Company Act
Section 3c5 excepts from the definition of an investment
company person who is not engaged in the business of

issuing redeemable securities face-amount certificates of the installment type or periodic payment plan certificates and who is primarily engaged in one or more of the following businesses purchasing or otherwise acquiring notes drafts acceptances open accounts receivable and other obligations representing part or all of the sales price of merchandise insurance and ser vices and purchasing or otherwise acquiring mortgages and other liens on and interests in real estate It is our opinion that the Trusts fall within Subsection or alterna tively within Subsection of Section 3c5 it is our further opinion that if the Trusts are viewed as holding combination of assets falling under both Subsections the Trusts may nevertheless be viewed as excepted under Section 3c5 Citytrust available December 19 1990 In that regard we note that the Section extends to issuers engaged primarily in one or more of the specified businesses We would like the Division to confirm our view that the Coop Loans are the types of assets intended to be covered by Section 3c5 qualifying assets The Certificates do not constitute any of the proscribed types of securities i.e they are neither redeemable securities periodic payment plan certificates or face amount certificates Further if Coop Loans are considered to be qualifying assets the Trusts maintain sufficient percentage of such assets so as to be deemed to be engaged primarily in one of the excepted businesses Thus at least 80% of the assets of each Trust consists of Coop Loans The most recent Division no-action positions under Section 3c5C generally require that at least 55% of the issuers assets consist of real estate fee interests or loans secured exclusively by real estate and at least 25% of the issuers assets consist of real estate related investments subject to reduction to the extent that assets described in exceed 55% e.g NAB Asset Corporation available June 20 1991 United Bankers Inc available March 23 1988 For purposes of our analysis we will discuss Subsection separately from Subsection We will begin with Subsec tion given that the Coop Loans are for most practical pur poses identical to mortgage loans i.e they both involve liens on what is commonly viewed as real estate in the present case the interests in the Coop Apartments Subsection remains important since if the Coop Apartments are not considered real estate they may be considered merchandise and thus the Coop

Loans would be obligations representing part or all of the sales price of merchandise within the meaning of that Subsection
Section 3c
To provide better understanding of our analysis under
Section 3c5C it may be helpful to first provide more
complete explanation of the nature of the Coop Apartments Cooperative housing has arisen as means of exercising control over ones neighbors and in order to enable the cooperative to retain the benefits of existing favorable financing upon conversion of rental apartment building and the subsequent sale of such building to cooperative corporation the coop corporation As sununarized in relatively recent request for no-action advice ownership of any cooperative housing unit including the Coop Apartments is essentially real estate interest represented by proprietary lease entitling the owner to reside in the unit When prospective purchaser is considering the purchase of an apartment he would view cooperative housing unit in largely the same manner as he would view the purchase of house or condominium which is undeniably real estate interest including in New York the requirement for coop owners to pay real property transfer taxes documentary stamps on deeds and real property taxes See D.BG Property Investors Inc available December 29 1986 The shares of stock attributable to ownership of coopera tive housing unit are essentially technical addition to real estate ownership and do not have the characteristics generally attributable to conventional shares of stock The cooperative shares are not freely transferable except in connection with the sale and delivery of lease corresponding to such shares and only upon the approval of the coop corporations board of directors The cooperative shares do not pay dividends The shares may generally be pledged only with the above board of directors approval which is usually provided in connection with loan for the purchase of the housing unit relating to such shares or refinancing of such loan Real property taxes and mortgage payments with respect to the cooperative building are paid proportionately by each tenant/shareholder to the coop corporation in the form of maintenance payments Each tenant/shareholder would likewise pay its proportionate share of the costs of repairs and capital improvements to the building Finally as with any homeowner or condominium owner the owner of

the shares and proprietary lease would be entitled to his proportionate share of the equity in the building represented by the net proceeds of sale of the building or condemnation award Inasmuch as the Trusts succeed to the rights of the original lender in the Coop Loans it is also useful to consider the rights of lenders in those and similar loans including their rights upon default and the rights and obligations of borrowers under such loans Related to this discussion is the relationship between the lender and the coop corporation and its board of directors We will refer to New York practice for purposes of this discussion since at the time the Trusts were created in excess of 99% of the principal amount of Coop Loans related to Coop Apartments located in New York Each loan for the purchase of cooperative housing unit is secured by pledge of the borrowers interest in the stock of the coop corporation and the proprietary lease Thus the lenders rights are determined not only by its agreement with the borrower but also by the borrowers status as tenant of and shareholder in the coop corporation In that regard the lender stands in much the same position as mortgagee in leasehold mortgage which is mortgage on real estate When the proprietary lease contains no specific provisions permitting financing the borrowers pledge of the stock and lease is generally acknowledged by the coop corporation pursuant to document known as the Recognition Agreement The Recognition Agreement sets forth the terms of the relationship between the lender and the coop corporation providing what may generally be regarded as the basic financing provisions which would be required by any leasehold mortgagee providing financing on real property Specifically pursuant to the Recognition Agreement the lenders interest in its collateral is protected by the coop corporations obligation to provide notice of its intention to terminate any proprietary lease by reason of the default of the tenant/shareholder and to accept cure of such defaults by the lender or allow the lender to cause the tenant shareholder to so cure and ii refrain from selling or subletting the Coop Apartment without the lenders consent unless the net proceeds thereof are sufficient to pay of the loan Further even if lender does not cure monetary defaults under the lease the coop corporation agrees to recognize lenders rights as lienor upon

the net proceeds of sale or subletting of the apartment after reimbursement of the coop corporation of any sums outstanding under the lease In addition the lenders right to dispossess the borrower as permitted by law or realize upon its security in accordance with the Recognition Agreement is expressly set forth in the Recognition Agreement subject to the coop corporations right of approval transfer of of the the transfer shares and of the shares and the lease i.e proprietary lease whether to the lender or third party requires consent of the coop corporation in the same manner as would any sale of the cooperative housing unit With by tenant/shareholder pursuant to the terms of the lease respect to these rights of the lender vis-a-vis the coop corporation it should be noted that the lender upon acquisition of the shares and lease will be in exactly the same position as though it foreclosed on mortgage on any other leasehold property it will replace the tenant/shareholder under the proprietary lease As is evident from the foregoing the relative rights of the lender and coop corporation are primarily that of leasehold mortgagee and fee owner respectively Indeed although lenders in New York do not typically place mortgages on cooperative apartment leases the opening sentence of the form of Recognition Agreement most commonly in use contains statement by the lender that it has been requested to make loan to be secured by pledge security interest mortgage and/or assignment of shares of your Corporation and of the Proprietary Lease contemplating that mortgage interest may be so granted It is interesting to note in this regard that although pledge of stock would ordinarily be perfected merely by possession of such stock New York has required pursuant to legislation adopted in 1988 that the pledge of stock in cooperative corporation may be perfected only by filing UCC-l Financing Statement in the land records where mortgages would be so recorded and that like mortgages such filings shall be effective until terminated if they so state The filing requirement however does not change the nature of the lenders interest which remains security interest enforceable pursuant to the Uniform Commercial Code rather than true mortgage As consequence the procedures pursuant to which the lender can realize upon its collateral will differ from those in mortgage foreclosure Nevertheless the end result is the same i.e in

either case the lender acquires the collateral being in this instance the shares and the proprietary lease While the security interest held by lenders in Coop Loans is not technically mortgage we believe that it falls under the rubric of other liens on and interests in real estate within the meaning of Section 3c5C given the nature of the Coop Apartments and the rights of the various parties as described above We reach this Conclusion based on the treatment of cooperative housing in the context of other Federal legislation decisions of the Supreme Court and of the lower Federal courts and state courts and on positions previously taken by the Division It bears repeating that while much of that authority focuses primarily on the share ownership aspect of cooperative housing the proprietary lease aspect especially reveals the real estate nature thereof The lease effectively provides the owner of such shares with residence and is clearly to use the words of Section 3c5c an interest in real estate Two pieces of legislation in particular reflect Congress view of loans for cooperative housing as the equivalent of mortgage loans secured by residential real estate In the Secondary Mortgage Market Enhancement Act of 1984 SMNEA Pub No 98440 98 Stat 1689 1984 Congress amended several of the Federal securities laws to encourage the development of private secondary market in mortgages as means of addressing the nations housing needs In connection with that legislation Section 3a41 of the Securities Exchange Act of 1934 was enacted to define the type of security that would receive the special securities law treatment afforded by SMNEA Section 3a41 thus sets forth the term mortgage related security which specifically includes certain notes and participation certificates that are directly secured by first lien on single parcel of real estate including stock allocated to dwelling unit in residential cooperative housing corporation emphasis added Similarly in amendments to the Internal Revenue Code regarding the tax treatment of real estate mortgage investment conduits loan secured by stock in cooperative housing corporation is treated as qualified mortgage i.e is specifically considered as being secured by an interest in real property See I.R.C 860Gc3A It is also worth mentioning that the Internal Revenue Code treats payments under loan for the purchase of shares in cooperative housing as equivalent to payments on mortgage loan for purposes of the deductibility of interest See I.R.C 163h

Federal courts also have addressed the nature of instruments such as the Leases and Shares The Supreme Court in holding that the purchase of stock representing an interest in government subsidized cooperative housing corporation does not constitute the purchase of security stated that such trans action involves the purchase of housing United Housing Founda tion Inc Forman 421 U.s 837 1975 The Forman principles have been applied by the lower Federal courts e.a Grenader Spitz 537 F2d 612 2d Cir 1976 cert denied 429 U.S 1009 1976 Malken U.S Dept of Treasury I.R.S Supp 229 231 S.D.N.y 1986 Echotree Associates Limited Partnership et al 1990 U.S Dist Lexis 7732 E.D Penn June 20 1990 State courts also often treat the interests created by cooperative apartment leases and shares in the same manner as realty although the result may differ depending on the context Div e.g Presten Sailer 542 A.2d N.J Super Ct App 1988 Generas Hotel Des Artjstes Inc 117 A.D.2d 563 1st Dept 1986 app den 68 N.Y.2d 606 498 N.E.2d 150 506 N.Y.S.2d 1030 1986 Moloney Weingarten 118 A.D 2d 836 2d Dept 1986 ap den 69 N.Y.2d 608 1987 Chiang Chang 137 A.D2d 371 1st Dept 1988 also Note Legal Characterization of the Individuals Interest in Cooperative Apartment Realty or Persona1ty 73 Column Rev 250 1973 But see e.g State Tax Commission Shor 43 N.Y.2d 151 1977 Silverman Alcoa Plaza Associates 37 A.D.2d 166 1st Dept 1971 Moreover state courts in New York have predominately viewed the landlord/tenant relationship created between cooperative corporations and shareholders and their tenants in the same manner as owners and occupants of other residential properties Southridge Cooperative Section No Inc Menendez 535 N.Y.S.2d 299 N.Y City Civ Ct 1988 Linden Hill No Cooperative Corp Kleiner 478 N.Y.S.2d 519 N.Y City Civ Ct 1984 See also Star 308 Owners Corp 130 Misc.2d 732 497 N.Y.S.2d 282 N.Y City Civ Ct 1985 in which the court recognized the shareholder of cooperative apartment to be responsible as an owner with respect to the non-purchasing tenant residing in it and McMunn Steppingstone Management Corp 131 Misc.2d 340 500 N.Y.S.2d 219 N.Y City Civ Ct 1986 in which the court acknowledged that proprietary leasehold provisions placing responsibilities of an owner on the tenant/shareholder are enforceable Further other statutory provisions governing real property such as N.Y Real Prop Action S721 regarding the right to bring summary dispossess

action and N.Y Real Prop Law S235b regarding the warranty of habitability have been found applicable in the cooperative setting Curtis Le May 186 Misc.2d 853 60 N.Y.S.2d 768 1945 Suarez Rivercross Tenants Corp 107 Misc.2d 135 Sup 438 N.Y.S.2d 164 1st Dept 1981 and Minton Doinb 63 A.D.2d 36 406 N.Y.S.2d 772 1st Dept 1978 Section 5206 of the Civil Practice Law and Rules of New York the homestead exemption is also applicable to cooperative apartments In this regard we note that the Division in construing Section 3c5C has in the past often looked to state law as relevant in determining whether note or other debt instrument may be considered to be secured by real estate under the Section e.g Apache Petroleum Co available April 30 1982 Great American Management and Investment Inc available September 27 1982 The Division has previously recognized the real estate nature of cooperative housing in the context of the Investment Company Act Specifically in the D.B.G letter supra page the Division took no-action position with respect to partnership that wished to invest the proceeds of public offering in condominium units and occupied cooperative residential apartments by purchasing the shares of stock and proprietary leases attributable thereto without registering under the Investment Company Act While the Division did not express its rationale the letter requesting such position focused primarily on the argument that the proposed investments constituted investments in real estate In addition the Division has recognized other types of leasehold interests as real estate for purposes of Section 3c5C See e.g NAB Asset Corporation available June 20 1991 Health Facility Credit Corp available February 1985 It is logical corollary to those positions to say that the Coop Loans which are purchase money or refinancing loans secured by Coop Apartments constitute liens on and other interests in real estate thus falling plainly under the Section We do not believe that the earlier letter of PB Realty Development Corp available December 1985 the PB Realty letter leads to different conclusion In that letter the Division took no-action position with respect to partnership that wished to invest at least 55% of its assets in debt secured by mortgages and in fee interests and up to 45% of its assets in debt secured by shares in cooperative apartments together with assignments of proprietary leases To the extent that the

Realty letter may appear inconsistent with the position that loans such as the Coop Loans are Section 3c5C qualifying assets the letter apparently was superseded by the D.B.G letter Moreover the Division was not asked in the PB Realty letter to address the nature of the shares or leases complete evaluation of the nature of those instruments was not necessary to reaching conclusion under the Section
Section 3c
Even if one were to conclude that the Coop Loans are not qualifying assets under Section we submit that the Trusts could rely upon Section 3c5A The only alternative to considering the Shares and Leases comprising the Coop Apart ments to be real estate is to consider them to be form of merchandise Thus the Trusts would be primarily engaged in the business of purchasing or otherwise acquiring .. obligations representing part or all of the sales price merchandise.. within the meaning of that Subsection In this regard we note that for example the courts in the Shor and Silverman cases cited above supra at page 10 treated similar shares and leases as goods falling under the ambit of the Uniform Commercial Code The Division has previously taken no-action positions with respect to pools of leases e.g State of New Jersey available May 21 1984 U.S Municipal Lease Acceptance Corn available April 11 1983 City National Bank available March 1984 Woodside Group available April 14 1982 The Leases in the instant case should be treated no differently and the Shares even more closely resemble merchandise as that term is commonly understood We also make particular reference to the no-action position under Section 3c5A taken by the Division in Ziegler Mortgage Securities Inc available October 1984 Ziegler Ziegler involved company formed to issue debt securities secured by portfolio of GNNA certificates which in turn were to be backed by installment sale contracts creating security interests in manufactured homes The Trusts in the instant case have much closer nexus to the underlying merchandise than did the company in Ziegler.3 In addition the Division has taken the position that refinancing loans are qualifying assets under
Section 3c5A e.g State of Israel available
continued..

The Divisions emphasis under Section 3c5A has been placed primarily on whether the notes or other obligations repre senting the sales price of merchandise were tied to sales finan cing See e.g Raymond James Associates available July 14 1988 Australian Industry Development Corporation available August 11 1980 The Coop Loans meet that test since they were made to finance or refinance the purchase of the Coop Apartments Policy Considerations While we firmly believe that the Trusts may rely upon Sec tion 3c5 as matter of proper legal interpretation we would be remiss if we failed to point out that there are profound policy considerations in support of the noaction position that we request The activities of the Trusts and of their sponsor the Company are in furtherance of the goals of the RTC Congress established the RTC as means of addressing the savings and loan crisis.4 Specifically the RTC is authorized by law to resolve that crisis through the orderly disposition of assets which are held by failed savings and loan associations H.R Rep No 10154I 101st Cong 1st Sess 308 1989 Among the RTCs primary objectives in liquidating the assets under its jurisdiction the RTC is required to maximize the returns on the disposed assets minimize the adverse effects of its activities on local markets and make efficient use of the continued August 17 1988 Republic of Turkey available November 1988 Hashemite Kingdom of Jordan available November 21 1988 Islamic Republic of Pakistan available January 18 1989 and Hellenic Republic available January 10 1991 refinancing loans made in connection with the sale of military equipment and services The RTC was established by S5011 of the Financial Institutions Reform Recovery and Enforcement Act FIRREA of 1989 which amended the Federal Home Loan Bank Act by adding Section 21A

funds which it receives from the proceeds of sale H.R Conf Rep No 101222 101st Cong 1st Sess 411 1989 To achieve these goals the drafters of FIRREA expressly authorized the RTC to enter into business arrangements for the sale of assets with nongovernment entities H.R Rep No 101-54I 101st Cong 1st Sess 441 1989 The private firms with which the RTC was authorized to enter into contractual relationships are expected to demonstrate level of expertise in the marketplace when assisting the RTC in disposing of its assets The RTC is thus encouraged to examine the usefulness of public/private part nerships and risksharing arrangements among mortgage origina tors credit intermediaries and federally chartered secondary market entity at 447 Programs should then be designed between the RTC and private companies to dispose of assets through secondary mortgage market products at 447 The Company was formed for the very purpose of and is engaged exclusively in the sponsoring of secondary mortgage market products and its affiliates have expertise in the marketplace described above Moreover the transactions described above resulting in the RTCs disposal of the Coop Loans serve the goals of the drafters of FIRREA By buying the assets from the RTC at fair value and then selling them through the Trusts the Company serves useful function in maximizing the returns which the RTC will realize from the sale of similar assets and minimizing the adverse effects on local markets Similarly the RTC will indirectly benefit from the enhanced liquidity of securities such as the Certificates derived from the ability of the initial purchasers of such securities to sell them without regard to the 100 beneficial owner limitation of Section 3c1 Conversely effectively precluding the sale or resale of Certificates by requiring registration of the Trusts under the Investment Company Act would frustrate the will of Congress

Conclusion
We believe that based on the above-cited legislative his tory case law and no-action positions the Trusts may correctly rely upon the exception from the definition of an investment company provided by Section 3c We request that the Division confirm our views in that regard In light of the importance of the outcome of this request to our client we respectfully request response to this letter as soon as practi cable If you have any questions concerning the Trusts or the issues raised in this letter please do not hesitate to contact Brian Kaplowitz at 212 8395370 or Edward Fine at 212 8395864 Very truly yours

f1111i1
Our Ref No 91-377-CC
Greenwich Capital
RESPONSE OF THE OFFICE OF CHIEF COUNSEL Acceptance Inc DIVISION OF INVESTMENT MANAGEMENT File No 812-6934 Your letter dated August 1991 requests our assurance that we would not recommend that the Commission take any enforcement action if certain trusts the Trusts established by Greenwich Capital Acceptance Inc the Company and whose assets consist primarily of loans secured by ownership interests in cooperative housing the Coop Loans offer pass-through certificates the Certificates 2/ evidencing undivided interests in the assets of the Trusts without registering as investment companies in reliance on Section 3c5C or in the alternative Section 3c5A of the Investment Company Act of 1940 the 1940 Act ..J You have indicated that the Company formed the Trusts under pooling and servicing agreements similar to those commonly used in the formation of trusts that publicly offer mortgage-backed pass-through certificates The Company contributed the Coop Loans it acquired from the Resolution Trust Corporation the RTC j/ to the Trusts in exchange for all of the .3/ The Trusts are passive entities and with the exception of reinvesting distributions on the Coop Loans in the list of permitted investments described in your letter are fixed 2/ You state that the Certificates are neither redeemable securities periodic payment plan certificates or face amount certificates
Section 3c5 of the 1940 Act in part excepts from the
definition of an investment company any person that is not engaged in the business of issuing redeemable securities face-amount certificates of the installment type or periodic payment plan certificates and is primarily engaged in one or more of the following businesses purchasing or otherwise acquiring obligations representing part or all of the sales price of merchandise insurance and services .. and purchasing or otherwise acquiring mortgages and other liens on and interests in real estate j/ The Company as sponsor of the Trusts purchased through affiliates the RTCs interest in approximately $700 million in principal amount of existing Coop Loans

Certificates You represent that at least 80% of the assets of each Trust consist of Coop Loans and that the Coop Loans in each Trust are serviced by an independent third party servicer Moreover the assets of each Trust consist of separate fixed pool of Coop Loans 2/ The Company has already sold Certificates representing interests in several of the Trusts in reliance on Section 3cl of the 1940 Act However you have stated that the Company You state that the Company may acquire new Coop Loans in the future and establish additional Trusts in reliance on any no-action position taken by the Division in response to your incoming letter or on any applicable statutory exception under the 1940 Act or exception or exemption created by any rule thereunder We take the view that with respect to issuing noaction letters under Section 3c5C company is not excepted under Section 3c5C unless at least 55% of its assets consist of mortgages and other liens on and interests in real estate 55% test and the remaining 45% of its assets consist primarily of real estatetype interests 45% test See eq NAB Asset Corporation pub avail June 20 1991 Citytrust pub avail Dec 19 1990 PrudentialBache Securities Inc pub avail Aug 19 1985 Salomon Brothers Inc pub avail June 17 1985 To meet the 45% test company must invest at least 25% of its total assets in real estate-type interests subject to reduction to the extent that it invests more than 55% of its total assets in assets meeting the 55% test and may invest no more than 20% of its total assets in miscellaneous investments e.g NAB Asset Corporation Citytrust United Bankers Inc pub avail March 23 1988 La Quinta Motor Inns Inc pub avail Jan 1989 21 The existing Trusts will not acquire new Coop Loans except as substitute for existing Coop Loans where the documentation for such Coop Loans may be deemed defective or where breach of warranty concerning such Coop Loans is found to exist
Section 3c1 of the 1940 Act provides an exception to the
definition of an investment company for any issuer whose outstanding securities other than shortterm paper are beneficially owned by not more than one hundred persons and which is not making and does not presently propose to make public offering of its securities

wishes to sell Certificates and facilitate the sale and resale of Certificates in the secondary market without being subject to the constraints of that Section in particular the 100 beneficial owner limitation ./ Each Coop Loan is purchase money loan secured fully and exclusively by the borrowers interest in cooperative apartment Coop Apartment which interest consists of shares of stock the Shares in cooperative housing corporation and proprietary lease the Lease accompanying the Shares and entitling the owner of the Shares to reside in Coop Apartment The Coop Loans were originated to finance or refinance the purchase of Coop Apartments and according to your letter represent in effect first liens on the Shares and Leases IQ/ You state that while the security interest held by lender in Coop Loan is not technically mortgage it falls under the rubric of other liens on and interests in real estate within the meaning of Section 3c5C You note that the treatment of cooperative housing in Federal legislation jJj Supreme Court lower Federal court and state court decisions 3.j and The Certificates of each series have been issued on both senior and subordinated basis Your letter states that with the exception of relatively small amount of subordinated Certificates which it proposes to retain the Company intends to place the balance of the Certificates with third party investors jQJ Although the state law under which lender in Coop Loan can realize upon its collateral in the event of default may differ from that in mortgage foreclosure you maintain that at least with respect to New York law the end result is the same in either case the lender acquires the collateral We note that in your discussion of the lenders rights in Coop Loan you refer to New York practice because at the time the Trusts were created more than 99% of the principal amount of the Coop Loans related to Coop Apartments located in New York flj Section 3a41 of the Securities Exchange Act of 1934 the 1934 Act and Sections 860Gc and 163h of the Internal Revenue Code In United Housing Foundation Inc Forinan 421 U.S 837 1975 the Supreme Court held that shares of stock held in government subsidized cooperative housing project in New York City did not constitute securities within the purview of the Securities Act of 1933 the 1933 Act and the 1934 Act In deciding that the transaction in question was not continued..

Division noaction responses support considering Coop Loans to be within Section 3c5C While much of your cited authority focuses primarily on the share ownership aspect of cooperative housing you emphasize that the proprietary lease aspect reveals the real estate nature of cooperative housing 4J You maintain that the shares of stock attributable to ownership of cooperative housing unit are essentially technical addition to such real estate ownership Finally you assert that the Division previously recognized the real estate nature of cooperative housing in the context of the 1940 Act in D.B.G Property Investors Inc pub avail Dec 29 1986 In that letter the staff stated that it would not recommend any enforcement action to the Commission under the 1940 Act if without registering under that act the proposed partnership made public offering of its securities and invested the proceeds thereof in condominium units and occupied cooperative and residential apartments On the basis of the facts and representations made to us in your letter and without necessarily agreeing with your legal analysis we would not recommend any enforcement action to the Commission if the Trusts offer the Certificates without registering as investment companies under the 1940 Act in reliance on Section 3c5C Because this response is based on representations made to the Division you should note that any .continued within the scope of the 1933 Act or the 1934 Act the Court noted that the purchasers were interested in acquiring housing rather than making an investment for profit.. You represent that state courts often treat the interests created by cooperative apartment leases and shares in the same manner as realty although the result may differ depending on the context In particular you note that state courts in New York have found certain statutory provisions governing real property to apply to cooperative housing .jJ The staff has recognized other types of leasehold interests as real estate for purposes of Section 3c5C in prior no-action letters e.g NAB Asset Corporation Health Facility Credit Corp pub avail Feb 1985

different facts or circumstances might require different conclusion Further this response expresses only the enforcement position of the Division and does not purport to express any legal conclusions on the questions presented UJ0 Julia Ulstrup Attorney