Release No. 34-9865

November 17, 1972

ADOPTION OF RULE 3a-12-1 UNDER THE SECURITIES EXCHANGE ACT OF 1934

The Securities and Exchange Commission today announced the adoption of Rule 3a-12-1 under the Securities Exchange Act of 1934.  Under the new rule mortgages and interests in mortgages (as defined in Section 302(d) of the Emergency Home Finance Act of 1970) sold by the Federal Home Loan Mortgage Corporation ¹ (hereinafter referred to as "FHLMC") will become "exempt securities" under section 3(a)(12) of the Securities Exchange Act.

The Emergency Home Finance Act of 1970 was enacted by Congress after determining that the nation needed more capital in mortgages and that this could be best accomplished by the establishment of a liquid market in residential mortgages.  FHLMC was established by this Act with the power "to make and enforce such by-laws, rules and regulations as may be necessary or appropriate to carry out the purposes or provisions of this title." ²

FHLMC has designed and is ready to implement at this time two programs ("group programs" and "whole loan programs") to expand the secondary market in conventional (not guaranteed or insured by a Federal or State agency) mortgages on residential property.  In both programs FHLMC will purchase mortgages that have been originated by a financial institution whose deposits or accounts are insured by an agency of the United States, and which meet generally the purchase standards imposed by private institutional mortgage investors. ³  These mortgages will then be sold by FHLMC according to one of the two programs.  FHLMC contemplates that under both these programs a minimum purchase of $100,000.00 will be required so that the buyers will tend to be institutional investors, such as pension funds and insurance companies.

The "group programs" would involve the formation by FHLMC of groups of the mortgages, and then the sale by FHLMC of undivided interests in these groups.  The minimum size group would contain mortgages with an initial aggregate unpaid principal balance of $5,000,000.  The mortgages in each group would be serviced by the originators, although FHLMC would supervise the servicing and would collect from the servicers and remit to the purchaser all principal and interest payments on the mortgages (less servicing costs) in the group, and would also act as transfer agent.

Under the "whole loan programs" the mortgages would not be grouped but, rather, sold on a whole loan basis.  These programs would be designed for institutional investors with particular requirements.

The Commission has decided to adopt Rule 3a-12-1, in view of the Congressionally determined public need for more capital in mortgages, FHLMC's abilities and desire to regulate this field to the extent necessary and the probable lack of small investor participation.  The principal impact of the new rule is that broker-dealers dealing solely in these mortgages and other exempt securities will not be subject to the registration and net capital requirements and other provisions of the Securities Exchange Act of 1934 which are not by their terms applicable to "exempt securities".

It should be borne in mind that transactions in the securities exempted by Section 3(a)(12) or Commission rules adopted under that section are still subject to the antifraud provisions of the Act and implementing Commission rules under those provisions.

The new rule was adopted pursuant to authority conferred on the Securities and Exchange Commission by the Securities Exchange Act of 1934, particularly Sections 3(a)(12) and 23(a) thereof.

Because the effect of the above described amendment would be to relax certain of the requirements of the Securities Exchange Act of 1934, the Commission finds that, for good cause the notice and procedure specified in the Administrative Procedure Act, 5 U. S. C. 553, is unnecessary, and accordingly it adopts Rule 3a-12-1 effective November 17, 1972.

[Text of rule omitted]

Sec. 3(a)(12), 48 Stat. 882, 15 U. S. C. 78(c).

By the Commission.

¹  FHLMC was established by Title III of the Emergency Home Finance Act of 1970, cited as the "Federal Home Loan Mortgage Corporation Act," Public Law 91-351, 84 Stat. 451-458, 12 U. S. C. §1451-1459.  Its capital stock consists solely of non-voting common stock held by the twelve Federal Home Loan Banks and its Board of Directors is composed of the three members of the Federal Home Loan Bank Board.  It is an integral part of the Federal Home Loan Bank system.

²  12 U. S. C. §1452(b)(3).

³  Section 305(a)(1) of the Federal Home Loan Mortgage Corporation Act states that FHLMC can purchase only those mortgages that meet both requirements.  FHLMC has determined that the private institutional mortgage investors standards at this time include the requirement that the originator warrant to FHLMC and to subsequent purchasers that the mortgages are valid first mortgages not in default.