As reported earlier, on July 26, 2011 the SEC issued for comment a proposing release entitled "Re-Proposal of Shelf Eligibility for Asset-Backed Securities and Other Additional Requests" (the Re-Proposal). The Re-Proposal put forward modifications to the proposals originally issued in April 2010 relating to those Shelf Eligibility Conditions dealing with certification and asset repurchases. The comment period for these re-proposals expired on October 4.
As expected, the most contentious element of the Re-Proposal was that portion of the certification dealing with expected cash flow from the securitized assets. It may be recalled that the original proposal required the chief executive officer of the issuer to certify that "the securitized assets backing the issue have characteristics that provide a reasonable basis to believe that they will produce, taking into account internal credit enhancements, cash flows at times and in amounts necessary to service any payments of the securities as described in the prospectus". While the Re-Proposal purports to address some of the criticisms levelled against the original proposal, it continues to address, in somewhat modified form, the ultimate performance of the offered securities. As argued earlier in this space, commentators continue to insist that "certification should only address the disclosure included in the prospectus, rather than a belief as to the future cash flows from the pool assets or the quality of the ABS".
Others also observed that what is being proposed is fundamentally a forward-looking statement but without the requisite cautioning statements that otherwise accompany and provide a safe harbour for forward-looking statements.
Commentators generally indicated that such a requirement is beyond the ability of the certifying officer, fundamentally unfair and would have a chilling affect on the use of, if not a complete barrier to, shelf registration.
Even the investor members of ASF and the Securities Industry and Financial Markets Association (SIFMA) derived no comfort from such a certification as they recognized that it was of little value as a substitute for the credit analysis provided by rating agencies since the necessary analysis by the officer is likely to be beyond his expertise as well as being inherently conflicted. As indicatedby the Asset Management Group of SIFMA,
The other shelf eligibility re-proposal, relating to the appointment of a credit risk manager, garnered a mixture of general support for the concept and criticism of certain of the constituent elements; specifically the two minimum conditions under which asset review would be required: first, if "the credit enhancement requirements, as specified in the underlying transaction agreements, are not met", and second, "at the direction of investors pursuant to the processes provided in the transaction agreement and disclosed in the prospectus".
The ASF argued that it was a mistake to attempt to mandate a one-size-fits-all minimum objective test which may, in fact, not even be applicable in respect of certain transactions. It proposed that this test be replaced by a requirement that the transaction documents provide for a review of the pool assets upon the occurrence of a trigger based on objective factors as specified in the transaction documents and disclosed in the prospectus.
The second trigger also attracted its fair share of criticism, most persuasively on the grounds that it would be subject to abuse, as it represents a riskless and cost-free option for investors and would create the potential for conflict among investors within the same ABS transactions. Accordingly, it was suggested that a minimum percentage of investors should be needed to invoke the trigger and frivolous claims should be discouraged by requiring unsuccessful claimants to pay the costs of review.
Although the Re-Proposal did not alter the original proposal relating to asset-level disclosure, but merely requested additional comments on certain specific features of that proposal, certain commentators (including, most vehemently, the Vehicle ABS sponsors) took the occasion to reiterate their strident opposition to requiring asset-level disclosure for all asset groups by pointing out that Congress had already addressed this point in the Senate Report on Dodd-Frank: "The Committee does not expect that disclosure of data about individual borrowers would be required in cases such as securitizations of credit cards or automobile loans or leases, where asset pools typically include many thousands of credit agreements, where individual loan data would not be useful to investors, and whose disclosure might raise privacy concerns."
Finally, certain commentators took the opportunity to weigh in once again on the private placement proposals. According to SIFMA,
The comments on the Re-Proposal illustrate the continuing lack of consensus among market participants and regulators over the proper scope of governmental regulation of the securitization industry. Although not in detail applicable to the current Canadian process, the general principles expressed above should also resonate north of the border.
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