REITs May Lose 50-Year Exemptions Under SEC Rule

Publicly traded real estate companies, commonly known as Real Estate Investment Trusts (REITs), could see their industry fall under new rules and regulations if a new rule-making proposal sees approval by the ""Securities and Exchange Commission"":http://sec.gov/ (SEC). The federal commission voted Wednesday to investigate whether these companies meet definitions under the Company Investment Act.

Marking a sweeping change for the industry, the new rule would reverse a 50-year exemption under the Investment Act for REITs, according to the ""_Wall Street Journal_"":http://online.wsj.com/article/BT-CO-20110901-712539.html.

""The SEC is concerned that mortgage-related pools potentially are making judgments about their status under the Investment Company Act without sufficient SEC guidance on the interpretive issues that arise under that provision,"" the federal authority said in a summary release, adding it ""recognized that many of the problems giving rise to the recent financial crisis involved structured finance.""

Commenting on the review, Mary Schapiro, chairman of the SEC, said in a separate ""statement"":http://sec.gov/news/press/2011/2011-176.htm that the agency is ""inviting public comment in light of the significant developments in the asset-backed and mortgage markets. We want to assure that our regulatory approach is updated to reflect the current market environment while still meeting our investor protection goals.""

According to the _Journal_, subjecting REITs to the Investment Act could slash returns on mortgage-backed securities for the companies, which rely heavily leverage derived from high-dividend yields.

The _Journal_ quoted Daniel Furtado, an analyst with ""Jeffries & Co."":http://www.jefferies.com/, as saying that the revised law would suck ""the leverage out of the system"" while making returns on equity decline.

Stocks for major REITs fell Thursday in response to concerns that the companies would lose their exemptions from the Investment Act. Stocks for ""CYS Investments"":http://www.cysinvest.com/ plunged by 4.79 percent, with shares tying off at $12.71, even as shares for ""Annaly Capital Management"":http://www.annaly.com/site/default.aspx closed at $17.42 after a 3.92-percent decline.

Other companies fared better. ""Hatteras Financial Corp."":http://www.hatfin.com/ saw its stocks drop by 3.51 percent and its shares close at $26.64, while ""Boston Properties Inc."":http://www.bostonproperties.com/site/index.aspx ended the day at $102.44 per share after a 1.77-percent dip.

As with other federal rules, the SEC must wait out a 60-day period in which it receives commentary from interested members of the public.