For the most part the CSA's proposed prospectus disclosure
rules escaped substantive comment although we and
a few others did provide some technical comments. This is not
surprising in as much as they by and large are a copy of the
existing rules under Reg AB Among the few items which did attract
attention were those requiring the disclosure of financial
information in respect of significant obligors, credit enhancers
and counterparties and that requiring disclosure of any material
conflict of interest between participants in a transaction and
In respect of the first item, several commentators pointed out
that, where the obligor or credit enhancer is a private company,
imposing an obligation on an issuer to obtain the financial
information and to disclose it would be unfair and may preclude a
seller from accessing the market due to a refusal of the obligor,
etc. to provide such information. Most of these commentators
recommended that it should be sufficient to direct the reader to
publicly available information, if any, and not require disclosure
of private and/or confidential information.
The conflict of interest disclosure is a more benign version of
the Dodd‑Frank prohibition on transactions where a
material conflict of interest exists. Several commentators(including the author)
pointed out that a broad interpretation of the proposed rule
relating to conflicts of interest could also catch many activities
essential to securitizations such as hedging, servicing and
market-making and recommended that the proposal be tailored to
specifically target the types of transactions in connection with
which the abuse arose. These of course are the
well‑publicized occasions where financial firms that had
designed certain highly complex synthetic CDOs and sold them to
their customers then entered into transactions whereby they would
profit from the failure of the original transaction.
Later developments on this front are illustrative of the danger
in following along in the slip‑stream of the U.S.
proposals, at least until the final rules are published. On
September 19, 2011, the SEC released for comment a
proposed rule under the Dodd‑Frank prohibition against
conflicts of interest wherein they essentially adopted precisely
the approach described above.
In so doing the SEC indicated that they were "not aware
of any basis in the legislative history ... to conclude that [the
Dodd‑Frank provision]was expected to alter or curtail the
legitimate functioning of securitization markets, as opposed to
targeting and eliminating specific types of improper conflict.
Moreover, as a preliminary matter, we believe that certain
conflicts of interest are inherent in the securitization process
and accordingly [the Dodd‑Frank Act]and our proposed rule
should be construed in a manner that does not unnecessarily
prohibit or restrict the structuring and offering of an
Therefore, the SEC has proposed for comment a rule that
specifically targets "short transactions" or transactions
in which the securitization participant (or third party enabled by
it) would benefit directly or indirectly from the actual,
anticipated or potential adverse performance of the asset pool or
the loss, default, early amortization or decline in market value of
the ABS. In order to ensure that even this rule not limit certain
bona fide activities, the SEC also provided specific
exemptions relating to risk-mitigating hedging activities,
liquidity commitment's and bona fide 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 Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The British Columbia Court of Appeal has recently considered whether the doctrine of unconscionability can be invoked to set aside a contractual clause providing for the payment by one party to the other...
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).