As was reported last week, on October 4 the SEC issued a release
to implement the provisions of the Dodd-Frank Act
(the Act) relating to representations and warranties. In addition
to the disclosure requirements imposed on securitizers, the Act
also requires each nationally recognized statistical rating
organization (NRSRO) to include in any report accompanying a credit
rating with respect to an Exchange Act -
ABS a description of (i) the representations, warranties and
enforcement mechanisms available to investors, and (ii) how they
differ from the representations, warranties and enforcement
mechanisms of similar securities.
A few definitional points to begin with: First, this provision
applies to all Exchange Act - ABS which, as we have seen,
is very broad and applies to all private as well as public ABS.
Second, it "applies to any report accompanying a credit rating
for an ABS transaction, regardless of when or in which context such
reports and credit ratings are issued". Third, a "credit
rating" includes any expected or preliminary credit rating
issued by an NRSRO. This would include a pre-sale report.
The SEC believes that "the proposed disclosures will
enhance the comparability of information across issuers in a
relatively efficient manner by centralizing this disclosure in
NRSRO reports. As a result, these disclosures will possibly expand
the information available to investors and improve transparency
regarding the use of representations and warranties in ABS
transactions". In addition, "the required comparisons of
the representations, warranties and enforcement measures in a given
ABS transaction to those available in similar transactions may
provide an impetus to the development of more standardized
representations, warranties and enforcement mechanisms across the
ABS markets, which is likely to benefit the efficiency of these
The SEC admits that, while rating agencies often issue pre-sale
reports that include a summary of important features of a
transaction, "they do not usually provide disclosure of how
representations and warranties would differ from other similar
securities". It anticipates that the rating agencies will
establish "benchmarks" for various types of securities
although it is "not prescribing how an NRSRO must fulfill its
responsibility to compare the terms of a deal to those of similar
It is not surprising that the SEC makes no such prescriptions.
It seems that this release raises more questions than it answers.
For instance, what is a similar security? An ABS backed by assets
of the same asset class? How material must differences be before
they are disclosed? In the same release it explicitly excluded a
materiality threshold that it had previously proposed for the
reason that the Act included no such standard. Similarly, why is
there no discussion of the implications for off-shore sales of
Exchange Act – ABS as in the other part of the
release? Is there likely to be any spill-over in purely Canadian
The task facing the NRSROs in light of these and other as yet
not contemplated questions is a rather daunting one. In order to
prevent it from becoming overwhelming, it seems almost inevitable
that they will bring tremendous pressure upon issuers to conform
representations, warranties and enforcement mechanisms to some
uniform standard. Issuers of course have negotiated and settled the
forms of these provisions individually to suit their own
priorities, circumstances and positions and will be loathe to
deviate from them. The transition to uniform provisions promises to
be a gruelling process.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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