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 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
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

    Mondaq.com (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 www.mondaq.com

    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 Mondaq.com’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.

    Disclaimer

    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.

    Registration

    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 unsubscribe@mondaq.com 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.

    Cookies

    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.

    Links

    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.

    Mail-A-Friend

    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.

    Emails

    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 .

    Security

    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 webmaster@mondaq.com.

    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 EditorialAdvisor@mondaq.com.

    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 enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com 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