March 29, 2019

A Tale of Two (Legal) Opinions: Customary Opinion Practice Regarding Status Under the Investment Company Act and Compliance with Margin Regulations

Among the closing opinions often requested in connection with lending transactions and securities issuances are those regarding the status of the borrower or issuer under the Investment Company Act of 1940 and the absence of violations with the Federal Reserve Board’s margin regulations (administered by the Securities and Exchange Commission) as a result of the borrower’s or issuer’s obligations entry into and performance under the transaction documents.  Violations of the Investment Company Act or the margin regulations can render a contract void or voidable and may expose offending parties (and other transaction participants) to fines and other regulatory sanctions. This program will discuss how these closing opinions are typically phrased, what they mean and the work required to support them.

For the portion dealing with investment company status opinions, the program will discuss the two key definitions of “investment company,” the special meanings given to many terms used in the statute and related regulations, how to determine whether a borrower or issuer is an “inadvertent investment company,” and some of the most common exceptions to the definition of “investment company” used by parties to avoid the requirement to register under the Investment Company Act. These exceptions will include the exception in Section 3(c)(7), relied upon by private equity funds and hedge funds, among other companies, and the requirements that should be met before securities issued by 3(c)97) entities can be cleared and settled in book-entry form. We will also discuss the important role SEC no-action letters have played in establishing customary practice with respect to the investment company status opinion, and the form and content of certificates as to factual matters on which the opinion is based.

Margin regulation compliance opinions are requested less frequently, but even when this opinion is not requested, it is routinely covered by borrower representations. Even though the opinion is often routine and not difficult to give, issues may arise where some or all of the collateral for a loan includes securities.  The program will discuss the general scope of Regulations T, U and X, key concepts and definitions under the margin regulations, the potential problem of “indirect security” for a loan in the form of margin stock and when lenders must obtain “purpose statements” to ensure compliance with the margin regulations.

Premium Content For:
  • Business Law Section
  • CL1903SPR - 2019 Business Law Section Spring Meeting