On July 26, 2011, the U.S. Securities and Exchange Commission (the “Commission”) re-proposed for public comment rules that seek to enhance the disclosure, reporting and shelf eligibility requirements for issuers of asset-backed securities (ABS). The re-proposed rules are part of a comprehensive rulemaking package that was initially proposed in April 2010 (the “2010 ABS Proposing Release”).1 In July 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”).2 Title XI, Subtitle D of the Act is intended to enhance the transparency and disclosure obligations of ABS issuers and seeks to reduce certain perceived risks associated with ABS transactions.3
In light of the Act, the Commission has further revised its proposed rules on shelf registration eligibility requirements for ABS issuers and has requested additional comment on certain proposed rules that were part of the 2010 ABS Proposing Release. During the open meeting, the Commission noted that rules proposed in the 2010 ABS Proposing Release that are not addressed in the re-proposal still remain subject to the Commission’s review and consideration. Chairman Shapiro in her opening remarks emphasized that feedback from ABS issuers, investors and other ABS stakeholders is crucial to the rulemaking process.4
The Commission also voted unanimously at the open meeting to adopt final rules that remove credit ratings as eligibility criteria from issuers seeking to use “short form” registration (e.g., Form S-3 and F-3) when registering securities publicly. A summary of these final rules are the subject of a separate Alston & Bird advisory entitled “SEC Adopts New Short Form Criteria to Replace “Investment Grade” Eligibility Criteria”.5
- Shelf Eligibility Transaction Requirements
Currently, an ABS issuer may use a Form S-3 if it meets the registrant requirements and one of the six transaction requirements set forth in the instructions to the form. An ABS issuer may meet one of the transaction requirements if the securities issued are rated “investment grade” by at least one nationally recognized statistical rating organization. Use of the Form S-3 allows ABS issuers to access the capital markets and investors in real time.6
In the 2010 ABS Proposing Release, the Commission proposed to create two new registration statement forms: Form SF-1 and Form SF-3. The new forms would be used for any sale of security that meets the definition of an asset-backed security as defined in Item 1101 of Regulation AB. The Commission also proposed new conditions on offerings of ABS on a delayed or “shelf” basis on new Form SF-3. In order to reduce the Commission’s reliance on ratings provided by credit rating agencies, the Commission proposed that the current ratings condition be replaced by four new shelf eligibility transaction requirements.7
In light of the Act and public comments received from investors, issuers and ABS market participants, the Commission has revised and re-proposed the shelf eligibility transaction requirements to be included in the instructions to Form SF-3.
The shelf eligibility transaction requirements as re-proposed would require an ABS issuer to:
- at the time of each offering off of a shelf registration statement, file a certification by the chief executive officer of the depositor or executive officer in charge of securitization of the depositor relating to the disclosure contained in the prospectus and the design of the securitization;
- include provisions in the underlying transaction documents requiring (i) the appointment of a credit risk manager to review the underlying assets upon the occurrence of certain trigger events and (ii) repurchase request dispute resolution; and
- include a provision in an underlying transaction document requiring the ABS issuer to include in ongoing distribution reports on Form 10-D notice of any requests by an investor to communicate with other investors. 8
The Commission has noted that at this time, the other parts of the proposed Form SF-3 as outlined in the 2010 ABS Proposing Release remain unchanged.
A. Officer Certification as to the Disclosure in the Prospectus and the Design of the Securitization.
Pursuant to the the Commission’s re-proposal, at the time of each offering of securities off an effective shelf registration statement, the chief executive officer of the depositor or the executive officer in charge of securitization of the depositor must provide a certification relating to the disclosure in the prospectus and the design of the securitization.
The certification would require the executive officer to attest to the structure of the securitization, including, without limitation, the (i) characteristics of the securitized assets underlying the offering; (ii) terms of any internal credit enhancements; and (iii) material terms of all contracts and other arrangements entered in to effect the securitization.
The certification would also require the executive officer to attest to the materiality of the disclosure in the prospectus and other information in the registration statement.9 The statements, however, would be qualified by knowledge.
The Commission notes that the intent of the certification is to “encourage better oversight by an executive officer of the securitization process.”10 The proposed certification, however, will not be required for ABS that are part of the same transaction and offered privately. The Commission expects that the officer providing the certification will rely in part on the review of the assets underlying the ABS that an issuer must undergo in order to meet the requirements of recently adopted Rule 193.11
B. Appointment of a Credit Risk Manager and Dispute Resolution Provisions.
In the 2010 ABS Proposing Release, the Commission proposed a rule that would require an ABS issuer to include a provision in the pooling and servicing agreement obligating the selling party to periodically furnish an opinion of an independent third party. The opinion would address “whether the obligated party acted consistently with the terms of the pooling and servicing agreement with respect to any loans that the trustee put back to the obligated party for violation of representations and warranties and which were not repurchased.”12
In lieu of the initial proposal, the Commission’s proposed rule will require an ABS issuer to include in the underlying securitization document a provision requiring the trustee of the issuing entity to appoint a credit risk manager to (i) review the underlying assets upon the occurrence of certain trigger events and (ii) provide its report to the trustee of the findings and conclusions of the review of the assets.13
- Trigger Events
As proposed, the securitization documents must, at a minimum, trigger credit risk manager review (i) when the credit enhancement requirements specified in the underlying transaction documents are not met (e.g., required reserve account amounts or overcollateralization percentages), and (ii) at the direction of the investors pursuant to the framework set forth in the transaction documents and disclosed in the prospectus.
To avoid potential conflicts of interest, the credit risk manager appointed by the trustee must not be affiliated with the sponsor, depositor or servicer. The credit risk manager must also have access to copies of the underlying loan documents relating to the pool assets.
After receiving the report of the credit risk manager, the trustee must use the report to determine whether a repurchase request is deemed the appropriate course of action pursuant to the terms of the securitization documents. Although the Commission has not offered any guidance on the contents and form of the report at this time, the Commission has requested public comment on whether specifying the format of the report is necessary.
- Required Disclosure
The Commission has also proposed that the ABS issuer include disclosure about the credit risk manager in prospectuses and ongoing reports (e.g., Form 10-D).
Pursuant to the proposed rules, an ABS issuer would be required to disclose in the prospectus certain information about the credit risk manager, including (i) the name of the credit risk manager, (ii) its form of organization and (iii) the extent of its experience as a credit risk manager for ABS transactions involving similar pool assets.
In addition, an ABS issuer would be required to disclose in a Form 10-D or exhibit thereto (i) any events that triggered a credit risk manager review; (ii) any report by a credit risk manager detailing the findings and conclusions of its review of assets that is provided to the trustee, to be filed as an exhibit to the Form 10-D; and (iii) any change in the credit risk manager (resignation, removal, replacement, substitution or appointment) and the date such event occurred and the circumstances relating to the change.
- Dispute Resolutions Procedures
In order to ensure timely enforcement of repurchase requests, the Commission has also proposed that the underlying securitization documents include a repurchase request dispute resolution mechanism. Pursuant to the proposal, the securitization documents would be required to include a provision that if any asset subject to a repurchase request, and is not repurchased within 180 days, then the party submitting the repurchase request shall have the right to refer the matter, to mediation or third-party arbitration. The provision must provide that the 180-day period commences upon receipt of notice of the repurchase request.
C. Investor Communications.
In response to investor concerns highlighting certain issues in identifying common investors, the Commission has proposed a rule that would require an ABS issuer to include, in a transaction agreement relating to the securitization, a provision requiring the party responsible for making periodic filings on Form 10-D to disclose any investor request to communicate with another investor during the reporting period. Specifically, the disclosure on the Form 10-D would include (i) name of the investor making the request, (ii) the date the request was received and (iii) a description of the method by which other investors may contact the requesting investor.
As proposed, an investor could only contractually obligate an ABS issuer to disclose in the Form 10-D such investor’s desire to communicate with other investors for purposes of exercising certain remedies and rights as provided under of the transaction documents. Further, an ABS issuer would only be required to disclose a request for an investor to communicate with other investors only if the transaction was a registered shelf offering.
II. Revised and Re-Proposed Shelf Requirements
In light of the revisions and re-proposed amendments to the shelf eligibility transaction requirements noted above, the Commission has made conforming changes to the shelf registrant registration requirements.
Specifically, the Commission has proposed to require that the depositor, or any issuing entity previously established by the depositor or an affiliate of the depositor, that is or was at any time during the 12-month look-back period required to comply with the proposed transaction requirements set forth in the instructions to Form SF-3, has also timely filed (i) all the required certifications of the depositor’s chief executive officer or the depositor’s executive officer in charge of the securitization, (ii) all the transaction agreements that contain the required provisions relating to the credit risk manager and repurchase request disputes and (iii) all the transaction agreements that contain the required provisions relating to investor communications.
In the 2010 ABS Proposing Release, the Commission proposed that a registrant must evaluate on an annual and quarterly basis their compliance with the registrant requirement for ABS eligibility. In response to public comment, the Commission has revised and re-proposed for public comment its initial proposal and has limited issuer review to an annual evaluation. Pursuant to the re-proposal, an ABS issuer wishing to conduct a takedown off an effective shelf registration statement must evaluate whether the depositor and any affiliated issuing entity of such depositor (required to report under Sections 13(a) and 15(d) of the Exchange during the previous 12 months) have filed such reports on a timely basis as of 90 days after the end of the depositor’s fiscal year end. Further, the depositor and any affiliated issuing entity of such depositor would also be required to have met the proposed shelf eligibility transaction requirements as a condition to conducting a takedown off an effective shelf registration statement.
As re-proposed, a depositor and issuing entity that has failed to meet the transaction requirements or has failed to file the required certification or transaction agreements at the required time could, for purposes of shelf eligibility, cure the deficiency, if it subsequently files the information that was required and waits 90 days. This cure provision is applicable to both the use of an existing shelf registration statement, for which as noted above, eligibility must be tested annually, and for the filing of a new shelf registration statement, for which eligibility must be tested as of the date of filing.
III. Proposed Updated Exhibit Filing Deadlines
In the 2010 ABS Proposing Release, the Commission proposed to require ABS issuers to give investors a longer period of time to review the underlying offering documents or impose a “speed bump” before any sales could be made.
The Commission has re-proposed Item 1100(f) of Regulation AB to require that an ABS issuer file the securitization documents in substantially final form and make them a part of the registration statement by the date the Rule 424(h) prospectus, often referred to as the preliminary and/or “red” prospectus, is required to be filed. Pursuant to the re-proposal if the exhibits filed with the Rule 424(h) prospectus remain unchanged at the time the prospectus under Rule 424(b) is filed, then an ABS issuer would not be required to re-file the same exhibits.
IV. Request for Comment on Outstanding Commission Proposals
The re-proposal also requests comment on the following 2010 ABS Proposing Release proposed rules:
- asset-level disclosure for ABS backed by residential mortgages, commercial mortgages, automobile loans or leases, equipment loans or leases, student loans, floorplan financings, corporate debt and resecuritizations;
- grouped account data for ABS backed by credit and charge card receivables;
- reporting asset-level data disclosure on proposed Schedule L;
- privately issued structured finance products;
- waterfall computer program; and
- implementation and transition period of final rules.
The proposed rules have not yet been published in the Federal Register, but the Commission has posted the text of its release on its website at http://www.sec.gov/rules/proposed/2011/33-9244.pdf. Once the proposed rules have been published in the Federal Register, they will be subject to a 60-day public comment.