Article by Paul Forrester , Paul A. Jorissen , Jason H.P. Kravitt , Stuart Litwin , George A. Pecoulas , Elizabeth A. Raymond , Angela M. Ulum and Jon D. Van Gorp

Originally published April 21, 2010

Keywords: SEC, ABS rule change proposal, ABS, proposals, existing rules, risk retention requirement, shelf offerings

The US Securities and Exchange Commission (the Commission) has released an important and voluminous notice of proposed rulemaking1 (the NPR) relating to asset-backed securities (ABS). Comments on the NPR will be due 90 days after the NPR is published in the Federal Register. The Commission currently expects that the new requirements would apply only to ABS issued after the implementation date(s) for the changes that are ultimately adopted, which may be up to one year after the final rules are adopted.

The NPR is important not only as a component of the Commission's overall response2 to the financial and market crises of the last two years, but also as an important piece of the overall US governmental response. The Commission proposes to implement several important pieces of the Obama administration's proposals on financial regulatory reform,3 including ideas that also have been proposed in legislation and/or in the advanced notice of proposed rulemaking released by the Federal Deposit Insurance Corporation (FDIC) relating to the FDIC's securitization safe harbor.4 The NPR includes specific proposals on some important points that were addressed at a more conceptual level by the FDIC, and the Commission staff clearly reviewed at least some of the comment letters submitted to the FDIC.5

The NPR proposes substantial changes to the public offering process for ABS and related periodic reporting requirements. It also proposes to require public-style disclosure in Rule 144A and Regulation D offerings and periodic reporting in Rule 144A offerings for the first time. The NPR includes dozens of proposals to change existing rules and forms or to introduce new ones. We begin by highlighting the five changes with the greatest overall impact on issuers and financial intermediaries. We then summarize the balance of the changes under the following headings:

  • Changes to the Marketing Process (beginning at p. 4)
  • Changes to Deal Terms (beginning at p. 5)
  • Changes to Disclosure Requirements (beginning at p. 6)
  • Changes to the Registration Process (beginning at p. 8)
  • Changes to Periodic Reporting Requirements (beginning at p. 9)

For those who wish to review the discussion in the NPR, we have generally provided page references. We have also provided a link6 to a copy of the table of contents for the NPR, with page numbers for most sections filled in and additional detail on the location of proposed regulatory text.

The Five Most Significant Proposals

In terms of overall impact on issuers and financial intermediaries involved in ABS offerings, the five most significant proposals contained in the NPR are the following.

Requiring risk retention in shelf offerings (NPR, pp. 42-63). A recurring, and quite controversial, proposal in response to the financial and market crises has been a requirement that sponsors or other entities maintain a significant financial stake in securitizations.7 The NPR weighs in on this issue with a proposal to require risk retention by sponsors (or their affiliates8) in shelf offerings. Risk retention would not be required for other parties or for other registered (on proposed new Form SF-1) or unregistered offerings. However, disclosure would be required in those transactions as to the extent (or absence) of risk retention (and the lack of legal requirements for sponsors to maintain any interests initially retained).

For all but one asset class, the required retention would take the form of a 5 percent "vertical slice," meaning the sponsor would have to hold at least 5 percent of each tranche of ABS issued in the transaction. For credit and charge card (collectively, card) receivable ABS an alternative form of risk retention is permitted, in the form a traditional "transferor interest" equal to at least 5 percent of the receivables in the supporting pool. The extent of a sponsor's retained interests is determined net of any hedging, meaning that the sponsor must hold at least 5 percent of each tranche in naked, unhedged positions. However, sponsors are permitted to hedge interest rate and currency exchange risks relating to their retained positions.

Requiring loan-level data, both in offering disclosure and ongoing reports (NPR, pp. 108-61). Loan-level data would be required for all ABS offerings, except where the underlying assets are card receivables (in which case "grouped account data"9 will be required in lieu of loan-level, given the unworkably large number of accounts in card securitizations) or stranded costs (where the Commission does not view loan-level data as relevant). The required data for offering disclosure would be filed on EDGAR in XML format as an Asset Data File, which would be incorporated by reference into the related prospectus. Specific data fields have been proposed for all subject assets generally, as well as particular additional data fields for each of the following asset classes: residential mortgages, commercial mortgages, auto loans and leases, floorplan, student loans, equipment loans and leases, repackagings of corporate debt and resecuritizations.

In all cases, the loan-level data would include a unique identifying number for each loan, to enable market participants to track performance at the individual loan level. Initial data must be provided at the same time that the new 424(h) prospectus is required to be filed (see "Changes to the Marketing Process," below), with updates (if any) in connection with the final prospectus.

Updated loan-level data (or grouped account data for card transactions) would be required with regular periodic reports on Form 10-D, as well as reports on Form 8-K if particular triggering events occur. Unlike the risk retention proposal described above, Asset Data File disclosure will be required in all registered ABS offerings, whether off of shelf registration statements or not. It will also be required in Rule 144A and Regulation D ABS offerings due to the general disclosure changes proposed for those offerings, as described below.

The asset-level data requirements for resecuritizations appear to be somewhat onerous, including some basic wholesale-level information about each underlying ABS (similar to the information required for corporate debt when it is repackaged) but also the same information about each receivable underlying each such ABS as would have been required for the offering of that ABS (and for periodic reporting on the underlying ABS).10 The new disclosure and other rules would apply to resecuritizations completed after the implementation date, regardless of when the underlying ABS was issued.

Changing the prospectus format for ABS shelf takedowns (NPR, pp. 95-102). Traditionally, the prospectus for an ABS shelf takedown has had two parts: a base prospectus that provides general information about all of the offerings that may be made off the shelf; and a prospectus supplement that provides details as to the specific offering at hand. The Commission has proposed to require ABS shelf takedowns to instead use a single integrated prospectus, out of concern that the traditional format leads to "unwieldy documents with excessive and inapplicable disclosure that is not useful to investors."11

To accommodate the flexibility currently provided by the options set out in a base prospectus, the Commission suggests increased use of bracketed alternatives in the form of prospectus included in the registration statement at the time of effectiveness. In related changes, the Commission has proposed permitting only one depositor, one form of prospectus and one asset class per registration statement. To the extent that this requires some sponsors to maintain more separate registration statements than they currently do, the Commission's proposed new "pay as you go" filing fees for ABS shelves should mitigate concerns about coordinating capacity.

A post-effective amendment would be required in order to change the asset class or add a different type of credit enhancement or new "structural feature." We are concerned that the term "structural feature" is both too broad and too vague to use as a trigger for a post-effective amendment requirement. While some new structural features are important enough to justify that step, the term could also be read as encompassing some minor adjustments that clearly would not have required a post-effective amendment under the current standard.

Requiring public-style disclosure and ongoing reporting for private offerings of "structured finance products" (NPR, pp. 269-291). Noting the important role that collateralized debt obligations (CDOs) issued in unregistered offerings are viewed as having played in bringing about the recent crises, the Commission is proposing significant new disclosure requirements on unregistered offerings of "structured finance products" that rely on three of the Commission's safe harbors: Rule 144A, Regulation D and Rule 144. "Structured finance products" will be a newly defined category that includes ABS but is broader, primarily in that it includes transactions (like most CDOs) with more portfolio management than is permitted by the Regulation AB definition of "asset-backed security."12

In order to qualify for the safe harbor in Rule 144A, Regulation D or Rule 144, an offering and sale of a structured finance product would have to satisfy several new requirements:

  • One of the transaction agreements (such as an indenture or servicing agreement) must require the issuer to provide the information described below to any purchaser (and also, in the case of Rule 144A, any security holder or prospective purchaser designated by the security holder) that requests it. Also, the issuer must represent that it will provide such information upon request.
  • If the offering relies on Rule 144A (or Rule 144), investors must be entitled to receive upon request information equivalent to what would be required in a registration statement on proposed new form SF-1 (see p. 8 below) if the offered securities are ABS or a registration statement on form S-1 for other structured finance products.13 In addition, the issuer must provide periodic reports similar to what is required for ABS sold in registered offerings.
  • If the offering relies on Regulation D, the same requirements apply as to information of the type required by Form SF-1 or S-1, but there is no ongoing reporting requirement.
  • In offerings under Rule 144A or Regulation D, a notice filing with the Commission will be required, which will include information regarding major participants in the securitization, the date of the offering and initial sale, the type of securities being offered, the basic structure of the securitization, the assets in the underlying pool, and the principal amount of the securities being offered.

Also, a proposed new Rule 192 would give the Commission an enforcement mechanism in case an issuer fails to comply with the new information requirements.

Though not specifically listed in the definition of structured finance product, asset-backed commercial paper (ABCP) is clearly included in that category.14 However, the proposed new requirements would not apply to securities offered and sold in reliance on a statutory exemption from registration, without relying on Rule 144A or Regulation D (or Rule 144). As the Commission notes in the NPR, ABCP is often sold in reliance on the private placement statutory exemption and the so-called Section "4(1-1/2)" exemption for private resales.15 ABCP or other securities sold on those bases would not be subject to the new requirements.

Eliminating the "de-listing" option for ABS offered under shelf registrations (NPR, pp. 74-81). Section 15(d) of the Securities Exchange Act (the Exchange Act) imposes periodic reporting obligations on any issuer (including an ABS issuer) with an effective Securities Act registration statement. However, that obligation is automatically suspended after the first year if the securities of each class to which the registration statement relates are held of record by less than 300 persons. In connection with the adoption of Regulation AB, the Commission customized these reporting requirements considerably for ABS issuers, but retained the statutory suspension. Since few classes of ABS are held by more than 300 persons, most ABS issuers (other than some master trusts) take advantage of the automatic suspension and only file periodic Exchange Act reports for the portion of their first fiscal year following issuance of the ABS. The Commission has now proposed to change this for ABS issued under a shelf registration statement by requiring a new undertaking from shelf registrants to the effect that they will continue filing periodic reports relating to each series of ABS for as long as that series is outstanding.

Changes to the Marketing Process

In addition to proposing a change to the basic prospectus format for ABS shelf offerings (as described on p. 2 above), requiring public-style disclosures to be available in Rule 144A and Regulation D offerings of structured finance products (as described on p. 3 above), and proposing numerous changes to the required line items for ABS disclosure (discussed under "Changes to Disclosure Requirements," below), the Commission has proposed several other important changes to the ABS marketing process.

Red herrings to be filed at least five business days prior to pricing (NPR, pp. 28-31). In response to concerns that the traditional ABS marketing process does not give investors enough time for independent diligence and credit review, and thus encouraged excessive reliance on credit ratings, the Commission has proposed to require ABS shelf issuers to file a preliminary prospectus for each takedown at least five business days prior to the first sale (or, if earlier, two business days after first use). This filing would be made pursuant to a new paragraph (h) of Rule 424 and would take the place of the traditional 424(b) filing of the preliminary prospectus. The Commission acknowledges that this long minimum marketing period may impair issuers' ability to hit market windows, but it believes that cost is justified by the benefit of giving investors more time. The Commission specifically requested comment as to whether this proposed requirement would drive issuers away from registered offerings and, if so, whether the Commission should add more requirements to Rule 144A to counteract any such tendency.

The 424(h) prospectus will be required to include complete and final disclosure about the subject ABS, except for matters that are dependent on the offering price. The 424(h) prospectus will be treated as part of the registration statement for liability purposes from the date of filing or, if earlier, from the date of first use. In addition, an Asset Data File providing all required loan level data is subject to the same filing deadline as the 424(h) prospectus, as is the downloadable computer model of the transaction's cash flow waterfall, which we discuss next. A material change in the data disclosed in the 424(h) prospectus would require a new 424(h) filing and restart the five-day clock, though the NPR is inconsistent as to whether the new time period would be five calendar days or business days.16

The Commission confirmed that ABS issuers will retain their current flexibility to use free-writing prospectuses and ABS informational and computational materials, but only a preliminary prospectus satisfying the requirements of Rule 424(h) will start the five-business day clock running. Also, ABS issuers would still be required to file a final prospectus under Rule 424(b), which will trigger a new effective date of the related registration statement for purposes of liability under Section 11 of the Securities Act.

Filing waterfall computer programs (NPR, pp. 205-219). For all asset classes other than stranded costs, issuers in registered ABS offerings will be required to file computer models (in the Python language) of the transaction cash-flow waterfall for each registered ABS offering. These programs would be filed as exhibits to Form 8-K and would form part of the related registration statement and preliminary and final prospectuses. The waterfall computer program must work in conjunction with any related Asset Data File, and it must include a sample expected output for each ABS tranche based on sample inputs provided by the issuer. To help investors find the waterfall program relating to a particular offering, the prospectus must provide a CIK and file number for the Form 8-K filing with the program.

Changing the static pool filing requirement (NPR, pp. 231-3). Since it began requiring disclosure of static pool data (where material), the Commission has given issuers the option of satisfying the requirement by posting the required data on the Internet, rather than on EDGAR. The Commission has now proposed to repeal that accommodation and require that static pool data be filed on EDGAR. Filing in the form of a portable document file (PDF) would be permitted as an alternative to ASCII or HTML formats. The Commission encourages issuers to continue also posting on their web sites and providing additional granularity and functionality as they deem appropriate. Among other reasons, the Commission sees the EDGAR system as a more reliable long-term repository of this data, which would not be affected by factors such as sponsors going out of business. In another change relating to static pool information, the Commission would permit the information filed on EDGAR (under Form 8-K) to be incorporated by reference in the prospectus. See p. 7 below for proposed changes in the content of static pool disclosure.

Reinstituting the 48 hour rule (NPR, pp. 90-95). In initial public offerings (IPOs), Exchange Act Rule 15c2-8(b) generally requires broker-dealers to deliver a copy of the preliminary prospectus to any person who is expected to receive a confirmation of sale at least 48 hours before sending the confirmation. Although most offerings of ABS (other than master trusts after their first offering) are similar to IPOs, the Commission has long provided an exception to 15c2-8(b) for ABS. The Commission has proposed eliminating that exception, so the 48-hour rule would apply to ABS (including master trusts making subsequent offerings).

New deadline for filing final transaction documents (NPR, p. 247). For some time, there has been tension between Commission staff views and market practice in terms of when final transaction documents relating to registered offerings should be filed on EDGAR. The Commission has proposed a rule on this point, which would require filing no later than the date that the final prospectus is required to be filed.

Changes to Deal Terms

Most market participants will consider the proposed risk retention requirements for ABS shelf issuers (as described on p. 2 above) to be the most significant proposed change to deal terms in the NPR. In addition to the risk retention proposal, the Commission also has proposed changes to the permitted use of master trusts, revolving periods and pre-funding in registered ABS offerings (NPR, pp. 250-254). These changes will also impact the Rule 144A and Regulation D markets given the proposal to require that public-style disclosure be available (on request) to investors in those markets.

The proposed master trust, revolving period and pre-funding changes are all meant to tighten up the definition of "asset-backed security" in Regulation AB, which is the gateway to the use of the specialized disclosure and reporting regime in Regulation AB and related rules and forms. As a result, transactions with features in violation of the tightened standards could still be offered in registered (or Rule 144A or Regulation D) transactions, but they would be treated as "structured finance products" that are not ABS and would be subject to different disclosure requirements, which start from the standard corporate disclosure regime but are varied through consultation with the staff.

The discussions of master trusts, revolving periods and pre-funding periods in the definition of "asset-backed security" all constitute exceptions to the basic requirement that ABS are to be backed by a discrete pool of financial assets.

  • Master trusts. For master trusts, the discrete pool requirement is currently relaxed in two ways: additional assets may be added to the pool (i) in connection with future issuances of ABS backed by the pool and (ii) in order to maintain minimum pool balances in accordance with the transaction agreements, but the maintenance exception only applies to master trusts with revolving periods or receivables or other financial assets that arise under revolving accounts. The Commission has proposed to limit the master trust exceptions so that both of them apply only where the underlying receivables arise under revolving accounts. In our experience, this would mostly affect UK-based mortgage master trusts that wish to access the US market.
  • Revolving periods. Revolving periods are currently permitted, with a maximum length of three years for receivables not arising in revolving accounts (and no duration limit for receivables that do arise in revolving accounts). The Commission has proposed to reduce the maximum duration to one year for non-revolving assets.
  • Pre-funding. Pre-funding periods of up to one year are permitted, subject to size limits of 50 percent of the offering proceeds for non-master trust offerings and 50 percent of the underling asset pool for master trust offerings. The Commission has proposed changing the limit to 10 percent in both cases.

Third-party review of repurchase obligations relating to ABS shelf offerings (NPR, pp. 63-68). Responding to concerns about the effectiveness of traditional repurchase remedies in transaction documents and a reported lack of responsiveness by some sponsors to alleged breaches of representations and warranties, the Commission has proposed some mandatory contractual provisions as a requirement to shelf eligibility. The proposed provisions would be triggered when any party that is obligated to repurchase a noncompliant asset asserts that the asset did not breach any applicable representation or warranty. In that case, that party would be required to furnish an opinion or certificate to the trustee, at least each quarter, from a non-affiliated third party as to the third party's assessment of the asset's compliance or non-compliance with the applicable representations and warranties.

Eliminating the investment grade requirement for ABS shelf offerings (NPR, p. 41). In line with the Commission's and the Obama administration's efforts to reduce references to credit ratings in the Commission's rules and forms, the Commission has also proposed eliminating the investment grade minimum rating requirement for ABS shelf offerings.17 This makes it theoretically possible to issue non-investment grade ABS under a shelf registration statement. For most asset classes, it seems unlikely that this new flexibility will be used to a significant extent. However, to the extent the market returns for non-investment grade tranches, issuers who previously made non-registered offerings of non-investment grade tranches simultaneously with registered offerings of investment grade tranches backed by the same pool might18 be able to offer the non-investment grade tranches publicly.

Changes to Disclosure Requirements

Besides the new Asset Data Files (as described on p. 2 above) and waterfall computer programs (as described on p. 4 above), the NPR proposes several other additions to the disclosure line items for ABS prospectuses.

Pool-level information (NPR, pp. 199-205; Item 1111 of Regulation AB). The newly required loan-level data in Asset Data files is meant to supplement, not replace, current pool-level disclosure, and the Commission has proposed several additions to pool-level disclosure. The proposed changes would:

  • Clarify what disclosure is required with respect to deviations from disclosed underwriting standards. Such disclosure would have to be accompanied by specific data about the amount and characteristics of assets that did not meet the disclosed standards. To the extent that disclosure is provided regarding compensating or other factors that were used to determine that the assets should be included in the pool, despite not having met the disclosed underwriting standards, the issuer would be required to specify the factors that were used and provide data on the amount of assets in the pool that are represented as meeting those factors.
  • Require disclosure on steps taken by the originator(s) to verify information used in the solicitation, credit-granting or underwriting of the pool assets.
  • Require more detailed and specific disclosure concerning the provisions in the transaction agreements governing modification of the assets and how modification may affect cash flows either from the assets or to the ABS.
  • Require disclosure of whether the representations and warranties in the transaction documents address fraud with respect to the underlying assets.

Also, while the Commission believes that Item 1111(b) of Regulation AB already requires disclosure of the manner and extent to which multiple non-traditional features of a loan are bundled into one instrument (so-called "risk layering"), the NPR specifically requests comment as to whether this is clear enough.

Flow of funds (NPR, pp. 219-220). Besides requiring the new waterfall computer programs to be filed, the Commission has also proposed a new requirement that the narrative description of the waterfall be in a single place in the prospectus (including related defined terms).

Originators (NPR, pp. 220-221). Existing Item 1110(a) of Regulation AB requires identification of originators apart from the sponsor or its affiliates only if the originator has originated, or expects to originate, 10 percent of more of the pool assets. The Commission has proposed to also require disclosure of the identity of originators below that threshold if the total share of pooled assets not originated by the sponsor and its affiliates is greater than 10 percent.

Asset repurchases (NPR, pp. 221-226). Responding to controversies that arose with respect to warranty repurchase remedies in connection with the sub-prime mortgage crisis, the Commission has proposed to require disclosure about sponsor's or other 20 percent or higher originators' track record with respect to repurchases. This would include disclosure on the following matters:

  • Amount of securitized assets subject to a repurchase demand over the preceding three years and whether assets subject to such a demand were in fact repurchased or, if not, whether a third party affirmed compliance.
  • Financial information about entities with repurchase obligations (if such entities originated more than 20 percent of the pooled assets and there is a material risk that their financial condition could have a material impact on the origination of the originator's assets in the pool or on its ability to comply with provisions relating to the repurchase obligations for those assets). Financial information relating to sponsors would also be required in similar circumstances. We are concerned that the materiality determination will be difficult, leading to a bias towards including financial information about parties that is otherwise not relevant to the transaction. Information of this type has traditionally been viewed as possibly confusing to investors, since ABS investors do not generally have recourse to these parties for credit losses.

Economic interests in transaction (NPR, pp. 226-7). Besides requiring a minimum risk retention by sponsors in shelf offerings, the Commission has proposed new required disclosures about the nature and extent of the sponsor's, each servicer's and each 20 percent-originator's retained economic interests in the ABS. This would apply in all registered offerings (not just shelves) and indirectly to Rule 144A and Regulation D offerings. To the extent that a sponsor is retaining an interest pursuant to the shelf eligibility requirements, the interest and its amount and scope would have to be clearly delineated. In other offerings, the issuer would be required to disclose that the sponsor is not required by law to retain any interest in the ABS and may sell any interest initially retained at any time.

Prospectus summaries (NPR, pp. NPR, pp. 230-1). The Commission has proposed a new instruction for issuers to provide statistical information regarding the types of underwriting or origination programs, exceptions to underwriting or origination criteria and, if applicable, modifications made to the pool assets after origination in the summary section of the prospectus.

Static pool information (NPR, pp. 231-46). Besides adding a requirement that static pool information be filed on EDGAR (as described above on p. 4), the Commission has also proposed several changes concerning the content of the information. For all ABS offerings, the Commission has proposed the following incremental disclosures:

  • Narrative description of the static pool information presented (e.g., for a pool of residential mortgage loans, the disclosure would note the number of assets, the types of mortgages and the number of loans that were exceptions to standardized underwriting criteria);
  • Description of the methodology used in determining or calculating the characteristics and explanations of terms and abbreviations used;
  • Description of how the assets in the static pool differ from the pool assets underlying the ABS being offered; and
  • If static pool information has not been disclosed, explanation why it has not been disclosed or why alternative information has been provided.

The Commission also proposed additional disclosure solely for ABS backed by amortizing assets, including requirements to (i) present static pool information related to delinquencies and losses in accordance with the guidelines outlined in Item 1100(b) for amortizing asset pools and (ii) provide graphical presentations of delinquency, losses and prepayments for amortizing asset pools. The Commission did not propose any additional disclosure specifically for revolving asset master trusts but noted with approval the common practice of aggregating presentation in tables or graphs.

Limiting required incorporation by reference (NPR, pp. 294-295). The Commission has proposed codifying existing staff positions that limit (to reports on Form 8-K) the types of subsequent Exchange Act reports that must be incorporated by reference into ABS prospectuses.

Changes to the Registration Process

The NPR proposes substantial changes to the process for registering offers and sales of ABS under the Securities Act, especially shelf registrations. These changes include the following.

New forms (NPR, pp. 38-41). Traditionally, ABS have been registered on the same forms (S-1 and S-3) as conventional stock and bond offerings, though the actual content of ABS registration statements varied substantially from those for conventional securities. The Commission has now proposed entirely separate forms for ABS: Form SF-1 (paralleling the conventional Form S-1 and to be used for non-shelf registrations) and Form SF-3 (paralleling Form S-3 and to be used for shelves). The form change will not, in and of itself, change the substance and contents of registration statements, though the disclosure changes discussed above will.

Changes to shelf eligibility (NPR, pp. 41-87). As we described above (see p. 6), the Commission has proposed eliminating the minimum rating requirement for ABS offered in shelf takedowns. The Commission has proposed (i) the risk retention requirement (as described on p. 1 above), (ii) the new contractual terms relating to third party review of repurchase obligations (as described on p. 6 above), (iii) the requirement to continue periodic Exchange Act reporting (as described on p. 3 above) and (iv) another new quality-oriented requirement to replace the minimum rating. The additional quality-oriented requirement is a certification by the registrant's chief executive officer (CEO) that the pooled assets supporting ABS offered under the shelf have characteristics that provide a reasonable basis to believe they will produce, taking into account internal credit enhancements, cash flows at times and in amounts necessary to service payments on the securities as described in the prospectus (NPR, pp. 69-74). Each of those four new requirements apply on a transactional basis to each takedown from the shelf, and compliance with the requirements over the past twelve calendar months will be registrant requirements when a new shelf is filed.

The Commission has requested comment as to whether the new CEO certification requirement should also take into account external credit enhancements. We believe that the certification should be permitted to at least take into account cash flows from any interest rate and currency exchange hedges. We hope that the Commission will clarify this point.

Currently, a registrant's eligibility to use an ABS shelf is only measured at the time that a new shelf is filed. The Commission has proposed to change that by requiring an annual check on the registrant's compliance with Exchange Act periodic reporting requirements19 and quarterly checks on the registrant's compliance with the four new eligibility requirements discussed above. A registrant would not be permitted to use an existing shelf in a particular fiscal year or quarter if it had failed to comply with the checked items during the prior corresponding period.

Other changes to ABS self registration. The Commission has also proposed the following additional changes to the shelf registration process:

  • Adding a new Rule 430D, which clarifies what information can be excluded from the prospectus included in an ABS shelf registration statement at the time it is declared effective (NPR, pp. 32-38).
  • Establishing a "pay as you go" system for filing fees for ABS shelves, meaning that registration fees could be paid at the time of each takedown from a shelf (at the rate then in effect) rather than before the shelf is declared effective; registrant's would not have to specify a maximum aggregate amount that could be offered under a pay as you go shelf (NPR, pp. 102-104).
  • Prohibiting truly continuous offerings of ABS (which are unusual); only "all or none" takedowns (where the transaction is only completed if all of the offered securities are sold) would be permitted (NPR, pp. 87-88).
  • Amending Rule 415 to eliminate a separate route currently available for continuous offerings of mortgage-backed securities.

No separate filing fee for collateral certificates or SUBIs (NPR, pp. 292-294). Affecting both shelf and non-shelf registrations, the Commission has proposed codifying an existing staff position that when so-called collateral certificates (common in credit card master trusts) and special units of beneficial interest (common in auto lease transactions) are registered concurrently with ABS backed by such items, no separate filing fee is required for the underlying collateral certificate or SUBI.

Changes to Periodic Reporting Requirements

Besides requiring shelf registrants to continue periodic Exchange Act reporting notwithstanding the automatic suspension of the statutory reporting requirement (as described on p. 3 above), the Commission has proposed several changes to the contents of the periodic reports.

Form 10-D (NPR, pp. 255-259). The Commission has proposed changes requiring that:

  • Issuers show the name and phone number of a contact person on the cover sheet of these reports;
  • Delinquency and loss information be presented in accordance with Item 1100(b) of Regulation AB;
  • Issuers report on warranty repurchase claims, including the amount of repurchase demands made during the reporting period, the percentage of such demands where the subject assets were not repurchased or replaced and, in those cases, whether a third party opinion about compliance of the assets with applicable representations and warranties was obtained; and
  • If required information is excluded because it has been previously disclosed, issuers help investors find that information by providing the CIK, file number and date of the filing that contains the information.

Servicer's assessment of compliance (exhibit to Form 10-K) (NPR, pp. 259-64). The Commission has proposed the following changes:

  • If there are material instances of noncompliance with servicing criteria, the body of the annual report must disclose whether the identified instance of noncompliance involved the servicing of the assets backing the ABS covered in the particular Form 10-K report (necessary because of platform-level reports);
  • Require that the body of the annual report discuss any steps taken to remedy a material previously identified instance of noncompliance (whether or not the instance of non-compliance involved the servicing of assets backing the ABS covered in the particular Form 10-K);
  • Add a new servicing criterion to Item 1122 of Regulation AB relating specifically to conveyance of information to other parties; and
  • Codify some existing staff interpretations relating to the definition of a servicing platform for purposes of these assessments.

Form 8-K (NPR, pp. 265-268). The Commission has proposed (i) lowering from 5 percent to 1 percent the threshold for changes in material pool characteristics that require a filing under Item 6.05, (ii) when such item is triggered, requiring a description of the changes that were made, including the number of assets substituted or added and (iii) adding the following new items to the form:

  • 6.06 (for filing of Asset Data Files and related information);
  • 6.07 (for filing waterfall computer programs and related documents);
  • 6.08 (for filing static pool information); and
  • 6.09 (for reporting any material change in the sponsor's interest in the subject ABS).

Footnotes

1. Available at http://sec.gov/rules/proposed/2010/33-9117.pdf.

2. The Commission has already finalized rule changes relating to the regulation of nationally recognized statistical rating organizations (see our update at http://www.mayerbrown.com/publications/article.asp?id=8757&nid=6) and money market funds (see our update at http://www.mayerbrown.com/publications/article.asp?id=8820&nid=6).

3. See our update on Financial Regulation Reform and Securitization, at http://www.mayerbrown.com/publications/article.asp?id=7191&nid=6.

4. See our related update at http://www.mayerbrown.com/publications/article.asp?id=8345&nid=6.

5. See, e.g., footnotes 109, 110 and 257 of the NPR, which refer to statements made in particular comment letters. Also, an attachment to one such comment letter was included as an appendix to the NPR as initially released, though it apparently will not be included in the Federal Register copy.

6. The referenced copy of the table of contents is available at http://www.mayerbrown.com/public_docs/9252959_2.pdf.

7. Fn. 108 in the NPR discusses some of the prior proposals.

8. For ease of reference, we will refer to retention just by the sponsor, but each such reference would also permit holding through an affiliate of the sponsor.

9. The NPR (p. 183) explains that "grouped account data would be created by compressing the underlying asset-level data into combinations of standardized distributional groups using asset-level characteristics and providing specified data about these groups."

10. A cash flow waterfall program for each underlying ABS would also have to be filed.

11. NPR, p. 97.

12. The proposed definition of "structured finance product" appears in a new paragraph (a)(8) that would be added to Rule 144A (NPR, p. 467) and reads: "For purposes of this section, a 'structured finance product' means (i) a synthetic asset-backed security; or (ii) a fixed-income or other security collateralized by any pool of self liquidating financial assets, such as loans, leases, mortgages, and secured or unsecured receivables, which entitles the security holders to receive payments that depend on the cash flow from the assets, including (A) an asset-backed security as used in Item 1101(c) of Regulation AB (§229.1101(c)), (B) a collateralized mortgage obligation, (C) a collateralized debt obligation, (D) a collateralized bond obligation, (E) a collateralized debt obligation of asset-backed securities, (F) a collateralized debt obligation of collateralized debt obligations; or (G) a security that at the time of the offering is commonly known as an asset-backed security or a structured finance product."

13. This creates a special challenge for structured finance products like CDOs, for which there are no specific disclosure line items in the Commission's rules and no registered offering precedents. The NPR (p. 278) addresses this gap to some extent by providing the following guidance: "the issuer would be required to provide information required under Regulation AB regarding the assets and parties as well as additional information required under Regulation S-K. For a managed CDO offering, we would expect disclosure regarding the asset and collateral managers, including fees and related party transaction information, their objectives and strategies, any interest that they have retained in the transaction or underlying assets, and substitution, reinvestment and management parameters. For a synthetic CDO offering, we would expect, among other things, disclosure of the differences between the spreads on synthetic assets and the market prices for the assets, the process for obtaining the credit default swap or other synthetic assets, and the internal rate of return to equity if that was a consideration in the structuring of the transaction." (footnotes omitted)

14. NPR, fn. 467.

15. NPR, fn. 455.

16. The draft of the regulatory text attached to the NPR does not refer to "business days" here (NPR, p. 475), but the discussion of this point in the NPR preamble does (NPR, p. 30).

17. Similarly, the Commission has proposed to eliminate rating references from Items 1112 and 1114 of Regulation AB, which relate to disclosure requirements for significant obligors or credit enhancers, respectively. Currently, the amount of required disclosure is reduced if the subject party's obligations are backed by a foreign government, and the ABS are rated investment grade. The proposed change would eliminate this reduction.

18. One issue would be whether the registrant's chief executive officer would be able to make the required new certification discussed on p. 8 of this update with respect to non-investment grade ABS.

19. We are referring here to an existing requirement that a registrant and certain of its affiliates must have made all required filings of periodic Exchange Act reports during the twelve months prior to filing a new shelf and that, with certain exceptions, those filings must have been made on a timely basis. The Commission has also proposed removing one of the exceptions to the timeliness requirement, relating to reports required by Item 6.05 (updated prospectus pool information) of Form 8-K (NPR, p. 40) and decreasing the threshold for a change in pool information necessary to trigger an Item 6.05 filing (NPR, pp. 265-266).

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