On July 26, 2011 the Securities and Exchange Commission (the “SEC”) issued a release1 (the “Proposing Release”) revising and re-proposing certain rules (the “Proposed Rules”) initially proposed in April 20102 related to asset-backed securities in light of the provisions added by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and comments received on the 2010 ABS Proposals. Among other things, the 2010 ABS Proposals propose amendments to the safe harbor for exempt offerings and resales for “structured finance products”3 in reliance on Securities Act Rule 144A, which would include many Insurance-Linked Securities (“ILS”) such as CAT bonds. Under the Proposing Release, the SEC has requested additional comment on these proposals relating to exempt offerings.

Background:

The 2010 ABS Proposals would require an issuer of a “structured finance product” to grant any purchaser, holder, and any prospective purchaser designated by a holder the right to obtain information that would be required if the offering were registered on Form S-1 or proposed Form SF-1 under the Securities Act and any ongoing information that would be required by Section 15(d) of the Exchange Act, if reporting were required under that section. The SEC staff has taken the position that ILS is a “structured finance product”.

The 2010 ABS Proposal would also require such issuers to provide, upon request, asset-level disclosures in a standardized format. While asset-level disclosures are prescribed in Regulation AB for certain asset classes (i.e., residential mortgage backed securities; commercial mortgage backed securities; automobiles loans or leases; equipment loans or leases; student loans; floorplan financings; corporate debt; and resecuritizations) it is unclear how this requirement would apply to, or be satisfied in, ILS transactions, which are typically collateralized by treasury money market funds or a “repo” arrangement.

The Effect of the Proposed Rules on ILS Transactions:

The Proposing Release would require the issuer of a “structured finance product” to meet the disclosure requirements of the 2010 ABS Proposals. For more information about the 2010 ABS Proposal disclosure requirements, please see our memorandum of June 23, 2010 “Regulation AB Proposals and Cat Bond Market” (attached as Annex A).  

The Proposing Release makes specific requests for comment on the applicability of requirements for asset-level disclosures for issuers of “structured finance products” that are not collateralized by an asset class subject to prescribed asset-level reporting requirements in Regulation AB. ILS meets such criteria. These requests for comment are summarized below.

SEC Requests for Comment:

  • Should asset-level disclosures only be required where the “structured finance product” being sold in reliance on Rule 144A or Rule 506 of Regulation D is backed by or collateralized by assets of an asset class for which there are prescribed asset-level reporting requirements in Regulation AB (which would exempt structured finance products such as ILS, typically).  
  • For securities that fall outside the Regulation AB definition of “asset-backed securities,” how can the SEC address commentators’ concern that those securities would be subject to a hybrid of the corporate and Regulation AB disclosure requirements?  
  • If the SEC does not require asset-level disclosures for certain “structured finance products” or “novel asset types or structures” that fall outside the Regulation AB definition of “asset-backed securities,” are there other types of disclosure that we should require the issuer to provide to investors or prospective purchasers? How should “novel asset types or structures” be defined? Is there any guidance that the SEC should provide for structured finance products that fall outside of Regulation AB’s definition of ABS?  

Comments on the Proposed Rules will be due on or before sixty days from the date of publication in the Federal Register.

Click here for Annex A