Section 3(c)(5)(C) of the Investment Company Act of 1940 provides an exclusion from the definition of investment company for any person who is "primarily engaged in...[the business of] purchasing or otherwise acquiring mortgages and other liens on and interests in real estate."1 This exclusion is available to issuers if they are able to satisfy the "Asset Composition Test," which consists of a series of asset classification metrics that must be satisfied.2 In the SEC's recent no-action guidance, Redwood Trust, Inc., through its wholly owned subsidiaries (Redwood), acquires, among other assets, securities that are designed to transfer to institutional investors a portion of the credit risk of certain mortgage pools owned by Fannie Mae or Freddie Mac (Credit Risk Transfer Securities).3 Redwood requested guidance from the SEC that such Credit Risk Transfer Securities could be treated as "real estate-type interests" for purposes of utilizing the Section 3(c)(5)(C) exclusion. Based on the facts and representations presented, the Staff of the SEC confirmed they would not recommend enforcement action if Redwood treated such Credit Risk Transfer Securities as real estate interests for purposes of the Asset Composition Test in utilizing the Section 3(c)(5)(C) exclusion.
For a copy of the No-Action Letter, click here.
 See, e.g., Redwood Trust, Inc., SEC Staff No-Action Letter (October 16, 2017).
 Id. For example, two key metrics require that 55% of the issuer's assets consist of "mortgages and other liens on and interests in real estate," and the remaining 45% of its assets consist primarily of "real estate-type interests."
 Id. The No-Action Letter identifies certain commonalities of credit risk transfer securities that are relevant to the analysis.