In the last week of August, the SEC issued in final form the new and wholly revised Regulation AB, which relates to the issuance of asset-backed securities.
The new Reg AB (often referred to as Reg AB II) has been in the works for a long time. It was initially proposed in 2010. Shortly thereafter, the Dodd-Frank Act was enacted, including some provisions that covered similar subject matter. In light of those statutory provisions, the SEC made changes to the proposal and reproposed Reg AB II in 2011. A further proposal regarding certain aspects of the expected requirements – those relating to the disclosure of asset-level information – was released earlier this year. Each of these proposals and reproposals garnered numerous comments from industry and legal professionals. The resulting final rule reflects reactions to these comments.
The final rule is as interesting for what it does not do, as for what it does do.
- It does not apply to private placements (under Rule 506 or Rule 144A). The earlier proposals would have required asset-level disclosures even for private deals, and that idea does not appear in the final regulation.
- It does not apply to managed pools, such as CLOs, or synthetic securitizations.
- It does not require that the sponsor file a computer program that embodies the cash flow waterfall in the transaction. The SEC has, however, indicated that it will address this idea separately. Presumably, though, there will be a comment opportunity if such a separate regulation is developed.
- It does not include a requirement for the sponsor to retain an interest in the asset pool. This concept will be dealt with in the so-called risk retention rule that is mandated by the Dodd-Frank Act and is to be promulgated in a multiagency rulemaking.
- It does not require that the final form of the transaction agreements be filed with the preliminary prospectus. It does, however, require that the final transaction agreements be filed by the time of the filing of the final prospectus.
- It does not prescribe loan-level data points for student loans, equipment leases and loans, floor plan financings and other securitized asset types other than the types for which detailed data points are prescribed. It does, however, demand loan-level data points (as many as 270 of them!) for the following asset types: residential mortgage loans, commercial mortgage loans, auto loans, auto leases, and debt securities.
- The loan-level data points for residential mortgage loans and auto loans and leases do not include detailed geographical identification, in deference to privacy concerns that were the subject of many comment letters submitted to the SEC.
Other noteworthy elements of the new rule are:
- A complete preliminary prospectus must be filed pursuant to Rule 424(h) under the Securities Act at least three business days before the first sale in the offering. (This was shortened from five business days in the proposed regulation.)
- A single prospectus must be used for each issuance, rather than a base prospectus with a prospectus supplement.
- Differences between the preliminary and the final prospectus must be highlighted in a separate supplement document, and that must be on file with the SEC no later than 48 hours before the first sale.
- Loan-level data must be filed on EDGAR using the XML computer format, using new Form ABS-EE, both at the time of the offering and with each report on Form 10-D.
- At the time of the offering, the CEO of the depositor must certify (i) the accuracy and adequacy of the prospectus disclosure, and (ii) that the offering is structured so as to produce expected cash flow amounts sufficient to make scheduled payments of interest and ultimate payments of principal in accordance with the terms of the securities issued.
The new regulation will be effective 60 days after publication in the Federal Register, which is expected imminently. So the effective date should be in November 2014. Full compliance with most of the rules will be required one year after the effective date. Full compliance with the loan-level data disclosure and reporting elements will be required two years after the effective date.