On October 4, 2010, the US Securities and Exchange Commission released proposed new rules required by section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). The release is one of several that the Commission will be required to issue in order to implement the Act. Section 943 of the Act gave the Commission 180 days to adopt regulations on the use of representations and warranties in the market for asset-backed securities. Specifically, these regulations must:
- Require any securitizer to disclose fulfilled and unfulfilled repurchase requests across all trusts aggregated by said securitizer, so that investors may identify asset originators with clear underwriting deficiencies.
- Require each nationally recognized statistical rating organization to include, in any report accompanying a credit rating for an asset-backed securities offering, a description of (i) the representations, warranties and enforcement mechanisms available to investors and (ii) how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities.
The proposed rules address both of these elements in a relatively straightforward manner, using language that closely tracks the Act. However, the Commission has requested comments on numerous aspects of the proposal, with a comment deadline of November 15, 2010.
As proposed, the reports by securitizers will be required regardless of whether the related securities offering had been registered or had relied on Rule 144A, or any other specified safe harbor, for unregistered offerings. In other words, statutory private placements, and off shore transactions by US issuers, will be subject to the requirements, as will securities issued by governmental entities (such as municipalities) or guaranteed by governmental entities or instrumentalities. Transactions by non-US issuers will also be covered if securities are offered or sold in the United States or if they otherwise come within the Commission’s jurisdiction, though the Commission has requested comment on this point. In each case, the requirements apply only to asset-backed securities, as defined in a new section of the Securities Exchange Act added by the Act, which is broader than the Regulation AB definition.
Reporting will be required both in new periodic reports to be filed with the Commission for outstanding securities (including securities issued prior to adoption of the rules but still outstanding, with a five year look back requirement) and in the offering documents for new offerings. The proposed disclosure requirements relating to offering documents are a reissuance of related proposals included in the Commission’s April 2010 release relating to changes in Regulation AB and related rules and forms.
The definition of “securitizer” for this purpose would generally include both sponsors and depositors. However, the proposed rules would forgive affiliated depositors from their reporting obligations so long as the sponsor had made the required disclosures. Transactions that did not include repurchase mechanisms would be excluded from the reports.