Canada: CSA Proposed Securitized Products Rules - Continuous Disclosure

As briefly discussed in prior blog posts, the securitized product rules published by the Canadian Securities Administrators (CSA) propose to significantly expand the continuous and periodic disclosure regime applicable to issuers of securitized markets in both the public and private markets. This is a significant departure from the current regulatory regime in the exempt market.

While National Instrument 51-102 Continuous Disclosure Requirements will continue to apply, the newly proposed National Instrument 51-106 Continuous Disclosure Requirements for Securitized Products (NI 41-106) would impose a number of new, additional disclosure requirements specific to issuers of any securitized product that is not a "covered bond" or a non-debt security of a "mortgage investment entity". These disclosure requirements are largely based on the requirements of Reg AB and certain of the proposed rules from the SEC of April, 2010 relating to ABS and other structured finance products and, therefore, for our readers already familiar with the existing disclosure obligations in force under Reg AB the following summary will be strikingly similar to the disclosure regime that has been in effect for a number of years in the U.S.

First in the array of new disclosure documents proposed by the CSA in NI 51-106 is Form 51-106F1 Payment and Performance Report for Securitized Products. This report would be required to be filed within 15 days after each payment date for each series or class of securitized products to which NI 51-106 applies. Generally, Form 51-106F1 would contain information regarding payment distribution and pool performance during the most recent reporting/payment period. This new disclosure requirement is largely derived from the SEC's Form 10-D. If the reporting issuer concludes that none of the disclosure in Form 51-106F1 is applicable due to the attributes of the subject securitized product or the structure in question, the reporting issuer can file an alternate report that contains all information that would be material to an investor regarding payment distribution and performance of the subject series or class of securitized products.

Second is Form 51-106F2 Timely Disclosure of Significant Events, a form which would be required to be immediately filed (along with a news release) no later than 2 business days after the occurrence of an enumerated event. The list of events that would give rise to such a filing would be contained in Section 5(2) of NI 51-106, including, among others, (i) a failure to make a payment, (ii) a change of servicer, (iii) modification or termination of any material credit enhancement arrangement, (iv) a bankruptcy, (v) a change in credit rating and (vi) any other event that results in a material modification to rights of investors, payments or pool performance. The enumerated events above are, according to the CSA, largely derived from the SEC's Form 8-K.

The third new requirement is the Annual Servicer Report (Section 6 and Appendix A to NI 51-106), which each servicer whose servicing activities relate to more than 5% of the pool assets must file. This form, which must be audited, would require such servicers to assess their compliance with a set of servicing standards listed in Appendix A to NI 51-106. Going hand in hand with this is a new requirement for an annual servicer certificate, signed by an authorized officer of the servicer, stating that the officer has (i) supervised a review of the servicer's activities and performance under the applicable servicing agreement during the reporting issuer's most recently completed financial year and (ii) to the best of the officer's knowledge, based on such review, the servicer has fulfilled all of its obligations under the applicable servicing agreement in all material respects during the financial year, or if not, states the nature and status of each such failure. This certificate must be filed by the reporting issuer along with its annual information form, financial statements and annual managements' discussion and analysis in respect of any servicer to which items 1.7(a), (b) or (c) of the new Form 41-103F1 applies (essentially any master servicer, affiliated servicer or servicer servicing 10% or more of the pool assets).

Additionally, while NI 51-106 only applies to reporting issuers, certain proposed amendments to National Instrument 45-106 Prospectus and Registration Exemptions would apply the requirements in respect of Form 51-106F1 and Form 51-106F2 to issuers of non short-term securitized products in the exempt market. Vis a vis the issuance of non short-term securitized products by issuers that are not reporting issuers, the proposed rules would provide that the continuous disclosure obligations generally apply as if the issuer were a reporting issuer subject to certain modifications. Specifically, such issuers would be subject to the same requirements described above: that Forms 51-106F1 and 51-106F2 be completed, filed with the OSC, posted to a website and, in the case of Form 51-106F2 only, delivered to each holder of the affected series of securitized product.

For short-term securitized products, the CSA is proposing amendments to NI 45-106 that would require issuers in the exempt market to prepare a monthly report using the new Form 45-106F8 Periodic Disclosure Report for Short-Term Securitized Products Distributed Under An Exemption From The Prospectus Requirement, which would need to be filed with the OSC and posted to a website no later than 15 days after the end of each calendar month. The content of Form 45-106F8 is generally analogous to the quarterly disclosure requirements applicable to reporting issuers in respect of pool, program and asset information. The CSA suggests that this Form 45-106F8 was developed by reviewing, among other things, monthly reports already produced by ABCP dealers and credit rating organizations, comment letters on the SEC's April 2010 proposed ABS and structured finance rules and comment letters on the October 2008 CSA ABCP consultation paper.

Short-term private issuers would also be required to prepare, file with the OSC and post to a website, a timely disclosure report disclosing any (i) change to the information in the most recent Form 45-106F8 report or information memorandum or (ii) event that affects payment distribution or performance of the pool, within 2 business days after the date of the event.

As can be seen, these proposals significantly expand the disclosure required by issuers of public securitized products, as well as essentially extend the requirements of the "reporting issuer" regime to private issuers of securitized products. These amendments would make issuers of securitized products into the exempt market the only Canadian issuers with substantive periodic and timely mandated disclosure obligations. It appears that the CSA has posited that exempt purchasers of securitized products need protections in the form of periodic and prescribed continuous disclosure not otherwise afforded to private purchasers of other debt and equity securities in Canada.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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