The second SEC release in response to the requirements of the Dodd Frank Act deals with the requirement of issuers to perform a review of the assets underlying an ABS and to disclose the nature of the review. It too may have a dampening effect on private placements into the U.S.
One interesting aspect of this release is the apparent willingness of the SEC to interpret the statute narrowly when given the opportunity, in this case, the Act’s requirement that the SEC issue rules “relating to the registration statement”. The SEC seized upon this to conclude that these rules were meant to apply to registered offerings only and not to unregistered offerings.
Under the new proposal an issuer of ABS in a registered transaction is required to perform a review of the underlying assets. The SEC does not specify the level or type of review an issuer is required to perform. It indicates that the nature of the review may vary depending on numerous circumstances and factors, including the nature and number of the assets being securitized. An issuer may rely on a third party’s review to satisfy its obligation provided the third party is named in the registration statement and consents to being named as an expert. In either case, the issuer must disclose the findings and conclusions of the review as well as details relating to any asset in the pool which deviates from the disclosed underwriting criteria, including who determined that such assets be included in the pool.
In contrast, the second part of the relevant Dodd-Frank provision, which requires the issuer or underwriter (interpreted broadly to include initial purchasers and placement agents) to publicly disclose, at least five days prior to the first sale, the findings and conclusions of any third party due diligence report obtained by the issuer or underwriter, does not contain the saving language. Accordingly, in keeping with its interpretation of the intended scope of the provisions regarding representations and warranties, the SEC felt that it had no discretion but to apply the provision to all Exchange Act-ABS, that is all registered and all unregistered ABS.
Again, as was the case in the release in respect of representations and warranties, the rule would apply to offshore offerings by U.S. securitizers and to all foreign offerings into the U.S. As it said then, they “are mindful that the imposition of a filing requirement in connection with private placements of ABS in the United States may result in foreign issuers seeking to avoid the filing requirement by excluding U.S. investors”. Alternatively, the new rule “may indirectly result in discouraging issuers and underwriters from obtaining third party reviews in unregistered offerings”.
This latter alternative would seem, however, to run counter to a trend, in certain types of transactions, by underwriters and agents to obtain third party reviews in order to bolster their own due diligence defences. Given that the issuer in a private transaction is not likely to want the details of its portfolio disclosed publicly, the result may well be to virtually eliminate participation by U.S. investors in these types of Canadian transactions.