This case study walks an illustrative §3(c)(5)(C) mortgage fund through a qualifying-interest test failure on the measurement date, the auditor finding against the exemption framework, and the asset-rebalancing cycle that restored the fund to compliance. The facts are illustrative and run against a composite of recurring §3(c)(5)(C) compliance frameworks.

The fund

A private mortgage fund runs against the §3(c)(5)(C) framework on the fund’s SEC counsel discipline. The fund runs an unlimited beneficial-owner base against Reg D Rule 506(c) general-solicitation offering and runs the offering framework against accredited investors. The fund runs a portfolio framework of whole mortgage loans, B-notes, mezzanine loans, and agency MBS positions across the fund’s acquisition cycle.

The portfolio drift

The fund runs an aggressive B-note and mezzanine acquisition framework across the second and third quarters. The fund runs the B-note framework against a defined yield-and-risk framework — subordinate positions on senior-mortgage-secured deals — and runs the mezzanine framework against a defined real-estate-sponsor framework. The fund runs the qualifying-interest classification on internal aggregate framework against the SEC no-action position framework. By the third-quarter measurement date, the fund’s qualifying-interest ratio runs against the fifty-five-percent floor on a thin framework.

The third-quarter test result

The fund’s SEC counsel runs the third-quarter §3(c)(5)(C) test against the fund’s balance sheet on the measurement date. The classification framework runs against the SEC no-action position framework — B-notes and mezzanine loans run as real-estate-related rather than qualifying. The reclassification runs the qualifying-interest ratio below the fifty-five-percent floor on the measurement date. The real-estate-related ratio runs at the eighty-percent floor on the measurement date. The fund runs the first-tier test into a §3(c)(5)(C) exemption framework violation.

The corrective-action framework

The fund’s SEC counsel runs the corrective-action framework against the asset-rebalancing cycle. The framework runs against four cycles. First, the fund runs the new-acquisition framework against whole mortgage loans on senior-secured first-position instruments. Second, the fund runs the divestiture framework against a defined B-note and mezzanine portfolio against a secondary-market sale framework. Third, the fund runs the documentation framework against the reclassification cycle and runs the rationale against the SEC no-action position framework. Fourth, the fund runs the auditor and SEC counsel independent-review framework against the corrective-action result on the cure-period framework. The fund runs the cure period on a sixty-day framework against the asset-rebalancing cycle.

The fourth-quarter result

The fund runs the fourth-quarter §3(c)(5)(C) test against the rebalanced balance sheet. The whole-mortgage-loan and fee-interest framework runs the qualifying-interest ratio above the fifty-five-percent floor on the measurement date. The real-estate-related framework runs the second-tier ratio above the eighty-percent floor on the measurement date. The fund runs the corrective documentation framework against the auditor and SEC counsel. The fund runs the §3(c)(5)(C) exemption framework against the fund’s rebalanced asset framework.

The recurring lessons

Three lessons run against the fund’s framework. First, the qualifying-interest framework runs against the SEC no-action position framework on each asset class — internal aggregate framework runs against the no-action framework on a thin discipline. Second, the B-note and mezzanine framework runs the real-estate-related classification against the eighty-percent floor — the qualifying-interest floor runs against the whole-mortgage-loan and fee-interest framework on the discipline. Third, the cure-period framework runs against a documented asset-rebalancing cycle — the thirty- to sixty-day cure framework runs against the fund’s SEC counsel discipline on the corrective cycle.

Related Topics

This article is educational and does not constitute legal advice. The §3(c)(5)(C) framework runs under the Investment Company Act of 1940 against an entity primarily engaged in the business of purchasing or acquiring mortgages and other liens on and interests in real estate. The qualifying-interest classification runs against the SEC no-action position framework. Consult qualified SEC counsel on the specific asset-classification and operational framework against any private mortgage fund.

Sources