The US Securities and Exchange Commission (SEC) recently published a "no action letter" in response to a request for advice from Royal Bank of Canada (RBC) in connection with RBC's plan to offer and sell covered bonds in the United States in a public offering registered on SEC Form F-3 (the RBC No Action Letter).

US Offering by Foreign Issuers of Covered Bonds

The offer and sale of covered bonds by "foreign private issuers" in the US is relatively common. However, previous offerings have all been conducted pursuant to an exemption from the registration requirements of the US Securities Act of 1933, as amended (the Securities Act). This offering would be the first offering by a foreign private issuer of a US covered bond program publicly registered with the SEC.

The issuance of securities in the US must either be registered with the SEC under the Securities Act or subject to an exemption from the registration requirements. The most common exemption generally is that provided in Rule 144A of the Securities Act (Rule 144A). Rule 144A applies a safe harbor from registration of permitted resales of certain eligible securities to "qualified institutional buyers" (QIBs).

Securities sold in reliance upon Rule 144A are considered "restricted securities" as defined in the Securities Act and therefore may not be resold publicly in the US for a stipulated period of time unless pursuant to an effective registration statement or registration exemption available under the Securities Act. As the securities are offered under a private offering exemption there are more onerous communication and offering rules that apply. These and other limitations may result in the market for such securities being more limited than if the securities were offered pursuant to a registered public offering.

Securities issued pursuant to an effective registration statement such as under Form F-3, as that proposed by RBC in its request, would not be restricted or subject to transfer restrictions and therefore could be resold more easily and to a wider pool of potential investors. The registration statement can provide for an offering on a delayed or "shelf" basis that allows for a subsequent "take-down" that can be executed quickly in response to market conditions.

RBC No Action Letter

The request for advice has a number of points that may be relevant for other issuers considering covered bond programs in the US, in particular other foreign private issuers:

  • Covered bonds not considered asset-backed securities: The request noted that RBC did not believe that covered bonds were asset-backed securities but that the SEC Regulation AB ("Reg AB") disclosure regime did provide appropriate guidance. It is not clear from the RBC No Action letter whether the reference to "asset-backed securities" is with reference to that term as defined in Reg AB or the more broad definition under the Securities and Exchange Act of 1934, as amended (the Exchange Act). Although not clear from the RBC No Action Letter, it may be Iimplicit in the SEC's acceptance of RBC's proposed program that covered bonds are not subject to:
    • Rule 193 of the Securities Act regarding an issuers review of assets,
    • Rule 15Ga-1 of the Securities Act regarding disclosure of representations and warranties, and
    • when implemented, the rules related to risk retention proposed with respect to Section 15G of the Exchange Act.
  • Non-foreign private issuer eligible co-registrant guarantor: An issuer must satisfy a number of eligibility requirements in order to register securities on Form F-3. RBC relies on its status as a "foreign private issuer" as defined in Rule 405 under the Securities Act to support its eligibility. However, as is common in many covered bond programs, RBC's covered bonds are guaranteed by an affiliate that holds title to the cover pool assets, in this case residential mortgage loans, and that guarantor would not be an eligible issuer under the relevant definition of foreign private issuer as set forth in Rule 405 of the Securities Act and consequently the Form F-3 requirements. RBC contended that the guarantee and related disclosure (see below) by the guarantor provided additional protection to investors, and therefore the guarantor should be allowed to act as co-registrant despite not satisfying the eligibility requirements as a foreign private issuer and consequently the requirements of Form F-3 in connection with the offer and sale of the covered bonds and the guarantee.
  • Loan level disclosure: RBC stated that asset level disclosure regarding the cover pool similar to that used by revolving master trusts is appropriate and that assertion would seem to suggest that no loan level disclosure would be required. RBC made no specific mention of loan level disclosure requirements, for example in reference to those proposed in Regulation AB II (Reg AB II) or the analogous eligibility requirement for the Bank of England or European Central Bank open market operations programs.Cover Pool disclosure: RBC further stated that it would comply with the disclosure regime set forth in Reg AB, despite covered bonds not being a securitization subject to Reg AB and Form F-3 being not meant for an offering of asset-backed securities. RBC stated that it would, at a minimum, include the following:
    • information regarding repurchases and replacements in the cover pool, in accordance with Item 1104(e) of Reg AB;
    • static pool information regarding assets in the cover pool, in accordance with Item 1105(b) of Reg AB;
    • information regarding the servicing of the assets in the cover pool by the bank, in accordance with Item 1108 of Reg AB (including filing the servicing agreement as an exhibit);
    • information regarding the originator of the assets in the cover pool, in accordance with Item 1110 of Reg AB;
    • information regarding the assets in the cover pool, in accordance with Item 1111 of Reg AB;
    • information regarding significant obligors of assets in the cover pool, in accordance with Item 1112 of Reg AB;
    • information regarding certain derivative instruments in the cover pool, in accordance with Item 1115 of Reg AB;
    • information regarding reports and additional information in accordance with Item 1118 of Reg AB;
    • distribution and pool performance information for the cover pool, in accordance with Item 1121 of Reg AB, including any additional information that is provided in monthly investor reports provided regarding the cover pool (to be included in reports filed on Form 10-D);
    • information regarding compliance with applicable servicing criteria in accordance with Item 1122 of Reg AB (to be included in an annual report on Form 10K); and
    • a servicer compliance statement in accordance with Item 1123 of Reg AB (to be included in an annual report on Form 10-K).

The RBC No Action Letter confirmed without elaboration that the SEC would not recommend enforcement action based on the facts presented in the request. Not all covered bond programs will fit within the fact pattern described in the request. It is not clear from the No Action Letter if all public covered bond programs will be required by the RBC SEC to comply with Reg AB, or Regulation AB II, if and when it comes into effect. If Regulation AB II is adopted and applies to Rule 144A exempt offerings, it will need to be considered whether or not the SEC will also extend it to covered bonds issued in reliance upon Rule 144A.

Links to the incoming request and SEC Response are available here:

Response of the Office of Capital Markets Trends Division of Corporation Finance

Incoming Letter from RBC request for Staff Interpretation

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.