SEC Moves Quickly To Confirm A Familiar Exchange Act ABS Test—Data Centers Are Just The Latest Application

In certain data center securitizations, the data center itself is owned by an issuing entity that issues securities payable from net operating income derived from the data center, rather than from one or more loans or other financial assets originated by a third party and transferred to an issuing entity. In no-action guidance issued on July 29, 2026 (the “No-Action Letter”),¹ the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) endorsed the view that securities issued in data center securitizations structured in this manner are not “asset-backed securities” within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The analysis revolves around the question of whether the assets held by the issuing entity are “self-liquidating financial assets” as that term is used in the definition of “asset-backed security” under the Exchange Act, and whether payments on the securities depend primarily on cash flow from those assets. Understood this way, the No-Action Letter lends further support to a self-liquidating financial asset analysis that has for years applied to financings of a broad range of assets, though important line-drawing questions remain.

I. The No-Action Letter

The fact pattern is a familiar one. A securities issuer owns, through a wholly-owned subsidiary, a data center and all of its physical components, together with related customer contracts (including any tenant leases). The issuer hires a data center operator under a management agreement to run the facility. The issuer is structured as a master trust, permitting the acquisition of additional data center assets and the issuance of subsequent securities collateralized by them. The issuer then issues securities payable from the data centers’ net operating income.² 

The definition of “asset-backed security” (“Exchange Act ABS”) under Section 3(a)(79) of the Exchange Act provides that an asset-backed security is a security “collateralized by any type of self-liquidating financial asset (including a loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset.”³ The SEC considers a “self-liquidating financial asset” to be “a self-liquidating asset which by its terms converts into cash payments within a finite time period.”⁴ Unlike a CMBS data center financing transaction, the asset of the master trust is the building and its physical components, rather than a loan made to a property owner and secured by the real property. However, because the property owner’s revenues may be derived in part from lease income, the question is whether this is “primarily” dependent enough to turn the transaction into an Exchange Act ABS. The practical effect of such a determination would be that the transaction would have to comply with federal regulations including U.S. credit risk retention rules (requiring securitizers to maintain exposure to certain credit risk in the transaction),⁵ Form ABS-15G filing obligations (including Rule 15Ga-1, regarding repurchase claims, and Rule 15Ga-2, regarding third-party due diligence reports)⁶ and conflict of interest rules under Rule 192.⁷ 

As is typical, the No-Action Letter itself does not set out the Staff’s reasoning for its concurrence. The analysis in the Incoming Letter is nonetheless instructive: a data center facility is a tangible, physical asset that continues to exist, and may even appreciate in value, long after the securities it collateralizes have been repaid.⁸ It does not, by its terms, convert into cash within a finite period the way a loan amortizes or a lease runs to its scheduled expiration. It is therefore not a “self-liquidating financial asset,” regardless of how the securities backed by it happen to be issued. Although certain assets held by the issuing entity, such as customer contracts and, in some cases, leases, are themselves financial in character, the revenue they generate is reduced by the operating expenses of running the facility (taxes, insurance, utilities, repairs, security and the like), and the residual cash flow depends on the manager’s success in maximizing revenue and controlling costs. The amounts payable on the securities therefore do not “depend primarily on cash flow from the [self-liquidating financial] asset”—they depend on the ongoing operation of a business, and the manager’s ability to operate a successful going concern.⁹

II. The Self-Liquidating Financial Asset Test Is the Common Thread

The reasoning underlying the Incoming Letter is not new or unique to data center securitizations; a parallel self-liquidating financial asset analysis has been developed over many years across a range of asset classes. Commercial real estate is a familiar example: numerous transactions have financed real property owned at the issuer level, with the issuer retaining ownership of the property and financing it through securities payable from net operating income, rather than through a mortgage loan that itself constitutes the collateral. Single-family rental note financings present a further variation on the same theme: notes secured by portfolios of rental homes have been structured so that repayment depends primarily on the residual value of the properties that can be realized through disposition or refinancing, rather than on the short-term, revolving portfolio of leases in place with residential tenants. For lease-backed financings, the same self-liquidating financial asset question often turns on whether repayment depends mainly on scheduled lease payments or instead on the manager’s success disposing of or re-leasing the underlying asset, with the latter looking more like an operating business investment outside the scope of the Exchange Act ABS definition. Whole business securitizations (backed by cash flows from an operating business), IP securitizations (backed by royalty income), fiber securitizations (backed by long-term service contracts), collateralized fund obligations (“CFOs”) and rated note feeders (each backed by interests in private funds) and other asset classes have also been identified as candidates for this type of structure. 

The shared pattern across these structures is that the issuing entity deploys the proceeds the way an operating company would, and the credit risk of the securities tracks the management and operation of a real asset, not the performance of a financial asset secured by one. In short, the issuer looks more like the borrower of a loan than a lender; it is simply using the capital markets, rather than a bank loan, to finance the asset itself. Because repayment depends on the successful operation and management of a durable, non-liquidating asset rather than the income generated by a discrete pool of financial assets, the securities fall outside the Exchange Act ABS definition.

III. What’s Next?

We would not characterize the No-Action Letter as a doctrinal milestone, but rather as Staff validation of a self-liquidating financial asset analysis that market participants in data center securitizations, single-family rental note financings, whole business securitizations, IP securitizations, fiber securitizations, CFOs, rated note feeders and other similarly structured financings have applied for years. In substance, the No-Action Letter is simply a reiteration of the Exchange Act ABS definition itself: assets which do not by their terms convert into cash within a finite period of time, and whose related securities depend primarily on the successful operation and management of those assets rather than the income generated by financial assets, fall outside the Exchange Act ABS definition. More striking than the substance of the No-Action Letter is the dispatch with which it was granted; the Staff responded by publishing the No-Action Letter just six days after its receipt of the Incoming Letter. The swiftness of the response, and the Staff’s evident willingness to weigh in formally at all (rather than to leave market participants to rely on counsel opinions, as has been the practice for other similar securitizations) suggests that facilitating data center financing is a live institutional priority for the Staff.

Each Exchange Act ABS analysis is fact-specific, and will not always point as clearly toward non-Exchange Act ABS treatment as it did in the No-Action Letter. The securitization industry is therefore left with many of the same line-drawing questions that existed before. Structures in which the issuing entity’s revenue is derived primarily from long-dated leases with minimal management discretion are more likely to be considered Exchange Act ABS. By contrast, structures in which the issuer’s cash flow depends heavily on an operator’s ongoing efforts, for example, sourcing new customers, renegotiating or replacing contracts, and containing costs, are less problematic because the return to investors depends on the continued success of an operating business rather than the income generated by financial assets. A similar line of analysis exists for certain types of CFOs and rated note feeders. In determining whether a security is an Exchange Act ABS, the core legal questions remain the same regardless of asset class: are the assets held by the issuing entity self-liquidating financial assets, and does payment on the securities depend primarily on cash flow from them? The answers depend on the specific assets owned by the issuing entity, the contracts relating to them, and the cash flow mechanics of the transaction. Each transaction presents different facts and calls for the same measure of careful, fact-intensive legal analysis. At Dechert, we are prepared to leverage our history advising clients on these structures to find new financing opportunities and strategies across a variety of asset classes—not just data center securitizations.

Footnotes

1. SEC, Office of Structured Finance, Division of Corporation Finance, Response to Latham & Watkins LLP (July 29, 2026).

2. Letter from Latham & Watkins LLP to SEC, Office of Structured Finance, Division of Corporation Finance, Request for Interpretive Guidance Regarding Certain Data Center Securitizations (July 23, 2026) (the “Incoming Letter”), at 2–4.

3. Exchange Act § 3(a)(79), 15 U.S.C. § 78c(a)(79).

4. Asset-Backed Securities, Securities Act Release No. 33-8518, 70 FR 1506, 1515 (Jan. 7, 2005); see also Simplification of Registration Procedures for Primary Securities Offerings, Securities Act Release No. 33-6965, 57 FR 48970, 48973 (Oct. 29, 1992).

5. 17 C.F.R. Part 246 et al. (Regulation RR).

6. 17 C.F.R. § 240.15Ga-1; 17 C.F.R. § 240.15Ga-2.

7. 17 C.F.R. § 230.192.

8. See Incoming Letter at 4.

9. See Incoming Letter at 4-5 (comparing a data center securitization to an investment in a real estate investment company, and distinguishing it from a single-asset, single-borrower CMBS transaction in which the mortgage loan self-liquidates upon repayment).