United States: Privacy Concerns And The Proposed Reg AB II Revisions Relating To Asset Level Data

In February 2014, the Securities and Exchange Commission (SEC) once again re-opened the comment period with respect to proposed revisions to Regulation AB relating to the disclosure of asset-level data after receiving many public comments relating to privacy law compliance issues. On the same date, the SEC released a memorandum (the "Memo") outlining an alternative means for disseminating asset-level data in an attempt to address such concerns. Regulation AB governs the offering, disclosure and reporting process for asset-backed securities ("ABS"). In 2010, as a result of the financial crisis and the perceived role that securitization played in it, the SEC released a series of proposed revisions to Regulation AB ("Reg AB II"). In 2011, the SEC re-proposed portions of its Reg AB II proposal to take into account the passage of the Dodd-Frank Act and other developments since the date of the initial proposal. This most recent comment period closed on April 28 with many commenters feeling that the memorandum falls short of resolving the myriad of privacy concerns expressed by industry participants and consumer protection advocates.

In an effort to provide greater transparency to ABS investors, and subsequently to comply with Section 942 of the Dodd-Frank Act that requires asset-level disclosure "necessary for investors to independently perform due diligence," the SEC Reg AB II proposal and re-proposal contain a schedule of asset-level data points that issuers would be required to disclose to both investors and potential investors. Although the few data examples set forth in the Dodd-Frank Act relate to originator data, the Reg AB II proposals require issuers to provide an extensive amount of borrower data via the SEC's EDGAR website. Despite an outpouring of comments relating to such data disclosure after the Reg AB II proposal was released, the re-proposal did not revise the data requirements. Rather, it included a number of questions relating to the privacy concerns raised by industry groups, market participants, and consumer protection groups. Similarly, the Memo does not revise the borrower information required or address concerns raised about privacy law compliance; instead it offers an alternative approach for disseminating the most sensitive borrower information: a website established and maintained by the issuer. The Memo sets forth a two-step approach for providing information to investors and potential investors. Issuers would be required to file non-sensitive information with the SEC via EDGAR and to make available all required information on a secure website maintained by the issuer (with a copy of such information provided to the SEC on a confidential basis).

The Memo highlights the SEC's difficulty trying to balance investor demands for more asset information with concerns over privacy law compliance. Throughout the Memo, the SEC cites numerous comments and concerns from both sides of the debate and notes that little feedback was received that offered alternative solutions for providing such data. Ultimately, the SEC concludes in the Memo that the issuers are in the best position to determine compliance requirements and disseminate sensitive data accordingly. However, the Memo does not provide a proposed final list of data points that will be required for each asset class, any guidance to issuers on how to comply with the myriad of existing privacy laws, any proposed safe harbors for issuers who establish data websites, or any interpretative guidance with respect to the applicability of certain federal privacy laws or materiality under federal securities laws. It also does not address consumer advocate concerns over borrower identity theft resulting from dissemination of such sensitive data. As a result, the comment letters submitted to the SEC in response to the Memo suggest that much more discussion is needed before a workable final rule can be issued and failure to adequately address these concerns will hinder the return of the securitization markets as issuers decide to either turn to alternative funding sources or spend additional time and money examining potential legal and regulatory costs and liabilities associated with meeting their obligations under the new disclosure regime.

Based on the general nature of the Memo and the comments submitted in response to it, the following points will need further attention prior to implementing a final rule:

Materiality: Does the SEC view all of the asset-level data that has been proposed to be provided under Reg AB II to be "material" information for investors, or necessary for purposes of section 942 of the Dodd-Frank Act?

  • If no, are there certain data points that the SEC is willing to eliminate, or will the SEC permit issuers to provide the most sensitive data in an aggregated format or by some other means to alleviate privacy law compliance concerns?
  • If yes, will an issuer have securities law liability for not disclosing such information to an investor or potential investor that refuses to agree to the terms of access posted on the website?

Although the SEC's approach seems to suggest that investors' need for this data outweighs the costs and compliance issues that issuers will face when providing such data, the Memo does not address the materiality of the information. Nor does the Memo state that the asset-level information that the SEC is proposing be disclosed is necessary to meet the requirements of section 942 of the Dodd-Frank Act.

Privacy Laws – Applicability and Compliance: Will the SEC collaborate with other federal agencies to provide issuers with interpretative guidance with respect to the applicability of, and compliance with, existing federal privacy laws and the potential liability associated with non-compliance?

  • If the asset-level data is "personally identifiable information" ("PII") under the Fair Credit Reporting Act, Gramm-Leach-Bliley Act, the FTC Act, and state privacy and information security laws, will issuers be expected to comply with consumer notices or opt-out requirements? Will the issuer have to comply with all requirements under such laws?
  • By disclosing information, issuers may be deemed "consumer reporting agencies" ("CRAs") under the Fair Credit Reporting Act. If issuers are deemed CRAs, how will issuers comply with all CRA requirements, such as the requirements to allow consumers to inspect and dispute information that is on file with the issuer? And, how will investors comply with the duties of "users" of consumer reports?
  • For issuers or servicers that may be deemed "debt collectors" under the Fair Debt Collections Practices Act, will the issuer's disclosure of such information be in violation of the prohibition on communicating with unauthorized third parties "in connection with the collection of any debt"?
  • Will issuers be liable under existing privacy laws for dissemination of information if done in compliance with Reg AB II? Will issuers be liable for improper use or dissemination by investors or potential investors who access the issuer website?
  • Even if the SEC was inclined to issue interpretations or make rules for issuers and investors under the Fair Credit Reporting Act and other relevant privacy laws, would it have the authority to do so?

Although large financial institutions may have experience with federal privacy laws and related compliance, many issuers will find this new requirement greatly increases the costs and risks of structuring an ABS deal. Legal and regulatory research and compliance costs up-front and on an ongoing basis could be cost-prohibitive, especially with the uncertain additional legal liabilities and reputational risk if the issuer fails to consider or comply with each applicable law.

Privacy Laws – Non-U.S. Issuers: Has the SEC compared the myriad of U.S. privacy laws against international privacy laws, such as the E.U. Data Protective Directive?

  • If no, will the SEC conduct a review of such privacy laws? And how will the SEC address conflicts with such laws?
  • Will non-U.S. issuers who are unable to comply with Reg AB II disclosure requirements due to home jurisdiction laws be closed out of the U.S. market? Or will non-U.S. issuers have different disclosure requirements? Is the SEC concerned that such differences could create an un-level playing field for issuers?
  • If a U.S. issuer issues securities in both the U.S. and in Europe, the U.S. issuer will have to provide two different setoff disclosures. A non-U.S. issuer may have to provide U.S. investors with both Reg AB II required disclosures and those required in their home jurisdiction. Is the SEC concerned that investors in different jurisdictions may receive different data?

In a global financial market, issuers need certainty when structuring deals in other jurisdictions. If there are differences between privacy law requirements or prohibitions across jurisdictions, which jurisdiction will govern?

Issuer Safe Harbors: Will the SEC include any compliance safe harbors in Reg AB II?

  • Website access restrictions: If an issuer maintains a website but certain investors or potential investors do not gain access to the website, will the issuer be protected from federal securities law liability?
  • Privacy law compliance: If the issuer has certain policies, controls and restrictions in place to comply with existing privacy laws, and as a result determines that certain Reg AB II disclosures cannot be made, will the issuer have liability for non-compliance with Reg AB II?

Ultimately, the Reg AB II privacy debate from the SEC's standpoint is a debate over disclosure versus privacy. While investors will always want the most complete information available when analyzing investment decisions, a balance must be struck that adequately addresses the concerns of all involved. In light of the concerns above, the SEC needs to determine if the incremental value of requiring issuers to provide all data at the borrower level is worth the additional issuer costs and risk exposures (legal, regulatory, reputational and otherwise) and the additional borrower risks relating to privacy rights and identity theft. Although not discussed in detail in the Reg AB II proposals, the Memo, or even in the comment letters, the SEC and industry groups may want to consider if other alternative solutions would resolve the privacy concerns while still providing needed disclosure. Such alternatives that have been mentioned include further de-identification of sensitive data, aggregation of sensitive data, creation of a centralized depository where independent, licensed and regulated analysts could run scenarios for investors (rather than provide them with the data) or where investors could run such scenarios themselves, or limit data distribution to investors based on risk of investment and require those investors receiving the most sensitive data to first sign a non-disclosure agreement. Although none of these alternatives may address the concerns of all parties involved, one thing is certain: failure to address such risks puts millions of borrowers at potential risk for identity theft and violations of privacy, and will further hinder the return of a robust securitization market in the U.S.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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.

Authors
Melissa D. Beck Mitchum
Jerry R. Marlatt
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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