United States: SEC Adopts Regulation AB II Final Rules

Last Updated: September 12 2014

On August 27, 2014, the U.S. Securities and Exchange Commission (SEC) adopted long-awaited revisions to Regulation AB governing the disclosure, reporting, and offering process for asset-backed securities (ABS) to enhance transparency, better protect investors, and facilitate capital formation in the securitization market.

The new rules, among other things, require extensive loan-level disclosure for certain assets, such as residential and commercial mortgages, automobile loans and leases, debt securities and resecuritizations of such assets. The new rules also provide more time for investors to review and consider a securitization offering, revise the eligibility criteria for publicly-registered "shelf offerings," and implement important revisions to reporting requirements.

According to remarks by SEC Chairman Mary Jo White at the SEC's August 27 open meeting, the SEC is adopting the new rules to ensure that ABS investors "have full information, the tools and the time to understand potential investments and the nature and extent of associated risks."

Highlights of Regulation AB II Final Rules

Private Offerings Exempted

  • Reg AB II will apply only to transactions sold in a registered public offering and will not apply to transactions exempt from registration under Rule 144A or otherwise.
  • Unlike the proposed rules, the final rules do not require that exempt offerings under Rule 144A include all disclosure and reporting required under Reg AB II.

Asset Level Data Requirements

  • Reg AB II contains extensive new standardized asset-level data disclosure and reporting requirements set forth in Schedule AL, but only for residential mortgages (270 data points for each loan), commercial mortgages (152 data points for each loan), auto loans (72 data points for each loan), auto leases (66 data points for each lease) and debt securities, including resecuritizations (60 data points for each security).
  • The final rules do not impose such asset-level data disclosure requirements for other asset classes such as equipment loans and leases, student loans or floorplan financings, but the SEC will continue to evaluate the best approach for requiring disclosure of information on these asset classes.
  • All asset-level data required under Reg AB II must be filed via EDGAR, in eXtensible Mark-up Language (XML) format, on a new Form ABS-EE both at the time of offering and with each Form 10-D report. The data is incorporated by reference into the offering prospectus and each Form 10-D report, respectively.
  • Asset-level data will generally include information about (i) the credit quality of obligors, (ii) the underlying collateral, and (iii) cash flows related to a particular asset, such as the terms, expected payment amounts and whether and how payment terms may change over time.
  • Consumer privacy concerns were addressed by omitting or modifying certain asset-level disclosures for RMBS and Auto ABS (including geographic identifiers) to reduce the potential risk that obligors could be re-identified.

Prospectus Filing Requirements

  • In order to provide investors with sufficient time to review and consider an investment in an ABS offering, the issuer must file a complete preliminary prospectus under Rule 424(h) of the Securities Act at least three (rather than five, as initially proposed) business days prior to the date of the first sale in the offering.

Transactional Requirements for Shelf Eligibility (including CEO Certification)

The new rules for ABS shelf eligibility replace the prior "investment grade" rating requirements with the following requirements:

  • At the time of each offering, the CEO of the depositor must certify as to the accuracy and adequacy of disclosure contained in the prospectus and that, "taking into account all material aspects of the characteristics of the securitized assets, the structure of the securitization, and the related risks as described in the prospectus, there is a reasonable basis to conclude that the securitization is structured to produce, but is not guaranteed by this certification to produce, expected cash flows at times and in amounts to service scheduled payments of interest and ultimate repayment of principal on the securities . . . in accordance with their terms."
  • The underlying transaction agreements must include provisions for (i) a mandatory pool level review of assets by a third party "asset representation reviewer" for compliance with representations and warranties upon the occurrence of certain trigger events, including pool-wide delinquency triggers and investor voting triggers, (ii) mandatory dispute resolution mechanism (mediation or arbitration) for repurchase requests that are not resolved within 180 days, and (iii) facilitation of communications among investors through Form 10-D reporting.

The new rules also implement changes to the procedures and forms related to registered shelf offerings, including:

  • "Pay as you go" registration fees – ABS issuers may pay registration fees at the time of filing the preliminary prospectus rather than paying them up-front at the time of filing a registration statement.
  • New Forms SF-1 and SF-3 for ABS issuers – to replace current Forms S-1 and S-3 in order to distinguish ABS filers from corporate filers and tailor requirements for ABS offerings.
  • Single prospectus filed for each takedown – rather than a separate base prospectus and prospectus supplement.
  • Material changes from the preliminary prospectus must be highlighted in a separate supplement to the preliminary prospectus supplement, which must be filed no later than 48 hours prior to the first sale.
  • Final transaction agreements must be filed by the time of filing the final prospectus.

Other Revisions to Regulation AB

  • Definition of "asset-backed security" – excludes managed pools such as CLOs as well as synthetic transactions.
  • The percentage of offering proceeds (or, for master trusts, the percentage of the total asset pool) that may be placed in a pre-funding account is reduced from 50% to 25%.
  • Standardization of certain static pool disclosure – more explanatory language about static pool disclosures and standardized delinquency presentation and, for static pool filings on Form 8-K, a new separate Form 8-K item and exhibit number.
  • Prospectus must include a description of the provisions in the transaction agreements regarding modification of the terms of the underlying assets.
  • Prospectus must disclose (on an aggregate basis) the type and amount of assets that do not satisfy the underwriting criteria that is described in the prospectus.
  • Changes to Form 10-D, 10-K and 8-K, including a requirement for explanatory disclosure in Form 10-K with regard to identified material instances of noncompliance with existing Reg AB servicing criteria.

Effective Date

  • The new rules will become effective 60 days after publication in the Federal Register (anticipated effective date is in November 2014).
  • Issuers must comply with all new requirements of Regulation AB II, other than the asset-level data disclosure requirements, in connection with all publicly-offered ABS commencing with an initial bona fide public offering one year after the effective date.
  • The new asset-level data disclosure and reporting requirements apply to all publicly offered ABS backed by the asset types referenced above, commencing with an initial bona fide public offering two years after the effective date.

The structured finance and securitization practice group of Andrews Kurth LLP will continue to monitor new developments in connection with the implementation of Reg AB II and the much-anticipated final SEC rules regarding retention of credit risk by ABS issuers as mandated by the Dodd-Frank Act, which are expected to follow Reg AB II.

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.

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