Canada: SEC's Shelf Eligibility Re-Proposal: Still A Long Way To Go

In April, 2010 the SEC proposed a number of rules relating to shelf eligibility and various disclosure requirements in respect of asset-backed securities (the April 2010 Proposals). Among other proposals, the April 2010 Proposals contained certain eligibility requirements for use of a shelf prospectus including:

  • A specified minimum amount of risk retention;
  • A covenant to periodically furnish an opinion of an independent third party regarding instances in which securitized assets were not repurchased following a demand for repurchase based on an alleged breach of representations or warranty; and
  • A certification by the chief executive officer of the depositor as to the adequacy of the cash flows generated by the securitized pool assets.

On July 26, 2011, the SEC issued a proposing release entitled Re-Proposal of Shelf Eligibility Conditions for Asset Backed Securities and other Additional Requests for Comment (the July 2011 Re-Proposals) in which it addressed each of the foregoing eligibility requirements as well as certain of its proposals relating to disclosure.

As expected, the risk retention proposal has been dropped. In July 2010, the Dodd Frank Wall Street Reform and Consumer Protection Act (the Dodd Frank Act) was signed into law. Under the Dodd Frank Act, a number of federal regulators, including the SEC, were tasked with jointly prescribing rules relating to risk retention requirements. On March 31, 2011 these regulators issued detailed proposals on the topic. The SEC's decision to drop its own version of risk retention rules resulted from its view that "disparate risk retention requirements could be confusing and impose unnecessary burdens on the ABS market."

In a previous posting, we commented upon the practical difficulties associated with the proposed requirement to obtain an opinion relating to repurchase requests and indicated that we felt that the alternative suggested by the Securities Industry and Financial Markets Association (SIFMA) would be a more workable, albeit costly, one. Apparently the SEC was also swayed by the SIFMA suggestion. Accordingly, the new shelf eligibility condition requires that the underlying transaction documents appoint a credit risk manager to review the underlying assets upon the occurrence of certain trigger events and provide its report to the trustee of the findings and conclusions of the review of assets. In addition, the documents are to contain certain provisions relating to the resolution of repurchase requests. While the new proposal does avoid a number of the pitfalls associated with the old one, we do not believe that the added complexity and cost involved in implementing the new proposal are warranted in the Canadian market which has not experienced the sort of problems relating to the enforcement of buy-back provisions which precipitated the regulatory response in the U.S.

In another posting we also discussed the certification requirement which, we argued, would have in essence required the issuer's CEO to conduct a credit review of the ABS transaction and to assume an uncertain degree of securities law liability for such review. We concurred in the view expressed by many commentators that such a requirement would be inappropriate. A number of commentators were also concerned that the certification could be construed as a guarantee of the assets' performance or be taken to cover classes of securities not offered, but described, in the prospectus. In response to these and other criticisms, the SEC has now modified the requirements relating to certification. Perhaps most notably, the certification relating to the adequacy of cash flow has been modified to state that "the structure of the securitization, including internal credit enhancements, designed to produce, but is not guaranteed by this certification to produce, cash flows at times and in amounts sufficient to service expected payments on the asset-backed securities offered and sold pursuant to the registration statement". While such a reformulation addresses certain of the criticisms levelled against the April 2010 Proposals, in our view it still fails to address the fundamental issue regarding the appropriateness of requiring certification relating to asset credit quality in any form whatsoever. In addition, while the re-proposal tightened the certification in certain respects, it expanded it in others relating to the certifying officer's familiarity with the prospectus disclosure, the structure of the securitization, the relevant transaction documents, the underlying assets and the risks of ownership of the ABS.

As a final note on the shelf eligibility requirements, the SEC is now proposing a new one in keeping with its focus on the enforcement of rights contained in the transaction documents. According to this requirement, the documents must include a provision that requires the issuer to provide a notice in a public filing that an investor requests to communicate with other investors. The SEC believes that this will facilitate investors in directing the trustee to take certain actions on their behalf.

The SEC has not, at this time, revised the April 2010 Proposals relating to asset level disclosure. It may be recalled from a previous posting that these were the subject of much criticism from commentators. That emanating from the auto sector was especially strong, complaining that the enormous burden of such disclosure, in a sector where the individual assets in a pool could number in the thousands, dwarfed the meagre benefits that could be gained by investors since the assets in the pool would be largely homogenous. As in the past, the SEC has found cover for its approach in the Dodd Frank Act, in this case, the requirement imposed on the SEC to establish rules relating to asset level disclosure. However, the specific wording of the statute only requires the disclosure of asset-level data "if such data are necessary for investors to independently perform due diligence" which, in our view, is not an adequate answer to the foregoing criticism.  Nevertheless, at this time the SEC has chosen in the July 2011 Proposals to merely request additional comments relating to the substantive coverage and format of the previously proposed disclosure requirements.

In contrast, the SEC has indicated that it is reconsidering when, and how much, asset level data disclosure should be required for privately issued structured products. In the April 2010 Proposals, the SEC required that an issuer deliver, to any investor who requested it, the same information required under the prospectus disclosure requirements which, of course, would now include asset-level data. Several commentators pointed out that the April 2010 Proposals do not specify clear information requirements for certain types of ABS that are not typically offered under Regulation AB, such as CDOs, CLOs, asset-backed commercial paper or synthetic ABS. Commentators also expressed concerns that any novel asset type or structure would face uncertainty regarding their disclosure obligations. In light of these and other comments, the SEC is considering limiting asset level data disclosure in private placements to assets of an asset class for which there are asset level reporting requirements in Regulation AB, namely RMBS, CMBS, automobile loans or leases, equipment loans or leases, student loans, floorplan financings, and resecuritizations.

One of the more contentious elements of the April 2010 Proposals was that requiring most ABS issuers to file a computer program that would permit investors to run various assumptions through the securitization's flow of funds to analyze prospective performance in connection with evaluating an investment decision and to monitor actual performance of the ABS after issuance. Market participants, including the author, expressed many concerns with respect to this proposal including the fact that such a program would be inherently imperfect and incomplete, the potential for liability under federal securities laws based on the performance of the waterfall program under any set of variables supplied by investors and the expected cost burden on issuers. In light of the weight of commentary on this issue, the SEC has indicated that it plans to re-propose the waterfall computer program separately at a later date.

It should be apparent, given the range and the significance of the issues still at play, that there is a long way to go yet before we can expect any respite from regulatory uncertainty in this market.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions