On August 27, 2014 the SEC unanimously voted to adopt rules that would significantly alter the registration process for asset-backed securities under the Securities Act of 1933, as amended, and expand the disclosure requirements applicable to registered offerings.1 The rules were proposed initially by the SEC in April 20102 and re-proposed in July 2011.3
Participants in the structured finance industry should be aware of the following key aspects of the new rules:
- Compliance Date:
- Issuers must comply with the rules, other than the asset-level disclosure requirements, no later than the date that is one year and 60 days after the date on which the rules are published in the Federal Register.
- Issuers must comply with the asset-level disclosure rules no later than the date that is two years and 60 days after the date on which the rules are published in the Federal Register.
- Form SF-3 Requires a Single Integrated Disclosure Document:
- Form S-3 is replaced by Form SF-3, which is specifically tailored for issuers of asset-backed securities.
- Form SF-3 requires a single integrated prospectus for each offering of asset-backed securities rather than a base prospectus and prospectus supplement.
- Investment Grade Ratings are no Longer Required for Registered Shelf Offerings: Form SF-3 does not include a requirement that the related asset-backed securities receive an investment grade credit rating from a nationally recognized statistical rating organization (“NRSRO”).
- Depositor Certification for Registered Shelf Offerings:
- In connection with each takedown off of a registration statement filed on Form SF-3, the rules require a certification from the chief executive officer of the depositor with respect to the disclosure contained in the prospectus and the structure of the securitization.
- The form of the certification is similar, but not identical, to the form that was previously proposed in July 2011.
- Asset Review Provision for Registered Shelf Offerings:
- The transaction agreements related to securities registered on Form SF-3 are required to include provisions for the selection and appointment of an “asset representations reviewer” that will review the pool assets for compliance with the asset-level representations and warranties.
- At a minimum, the asset representations reviewer must be required to review all pool assets that are 60 days or more delinquent if (i) a threshold of delinquent pool assets, as specified in the transaction agreements, has been reached or exceeded and (ii) the requisite percentage of investors specified in the transaction agreements (which percentage shall not be greater than a simple majority of those interests casting a vote) votes to direct such review.
- Dispute Resolution Provision for Registered Shelf Offerings: The transaction agreements related to securities registered on Form SF-3 are required to include a provision that if a repurchase demand is not resolved within 180 days following receipt of the repurchase demand, then the party submitting the repurchase demand will have the right to refer the matter, at its discretion, to either mediation or third-party arbitration, and the party obligated to repurchase must agree to the selected resolution method.
- Three Business Day Waiting Period for Registered Shelf Offerings:
- Issuers of securities registered on Form SF-3 are required to use a preliminary prospectus, which must be filed with the SEC at least three business days prior to the first sale of securities in the offering.
- Any material changes to that prospectus must be included in a supplement that is filed with the SEC at least forty-eight hours prior to the first sale.
- Asset-Level Disclosure for Registered Offerings:
- For asset-backed securities that are backed by residential mortgages, commercial mortgages, auto loans, auto leases and debt securities (and resecuritizations of those types of asset-backed securities), there are specific and extensive reporting requirements with respect to asset-level data.
- Asset-level data must be provided in connection with the offering of the asset-backed securities and in periodic reports.
- The data fields differ from the data fields included in the proposed rules but include many data fields that have not been disclosed previously by most issuers in those asset classes.
- The asset-level data must be filed on EDGAR in an interactive data format, specifically XML (eXtensible Mark-up Language).
- Filing of Transaction Agreements: The rules require transaction agreements to be filed with the SEC by the date of the final prospectus rather than at the time of the filing of the preliminary prospectus as previously proposed (but the SEC notes that this proposal remains under consideration).
- Transaction Party Financial Information: The rules require disclosure of financial information with respect to any sponsor or 20% originator that has an obligation to repurchase assets pursuant to the terms of the transaction agreements “to the extent that there is a material risk that the effect on its ability to comply with the provisions in the transaction agreements relating to the repurchase obligations for those assets resulting from such financial condition could have a material impact on pool performance or performance of the asset-backed securities.” This financial information is not required to be audited.
The rules do not address the following matters, among others, which remain outstanding:
- Private Placements: The prior proposals would have conditioned reliance on the Rule 144A and Regulation D safe harbors for private placements of “structured finance products,” including asset-backed securities, on the transaction agreements requiring the issuer to provide investors, upon request, with the same information that would be required in a registered offering.
- Waterfall Computer Program: The prior proposals would have required the preparation and filing of a waterfall computer program that would allow investors to input assumptions regarding the cash flows from the pool assets to determine the effect on payments to the asset-backed securities.
Separately, as part of the rule-making required under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC adopted rules with respect to NRSROs and third-party due diligence services provided in connection with registered and private asset-backed securities to which NRSROs assign ratings.
For registered and private asset-backed securities, effective nine months after the publication of the rules in the Federal Register, the new rules require:
- an issuer or underwriter of an asset-backed security that will be rated by an NRSRO to “furnish” on Form ABS-15G, at least five business days prior to the first sale in the offering, the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter;
- providers of third-party due diligence services to an NRSRO, issuer, or underwriter to deliver a written certification on new Form ABS Due Diligence-15E to any NRSRO that produces a credit rating to which the services relate; and
- NRSROs to disclose:
- any certification on Form ABS Due Diligence-15E received from a third-party due diligence provider in a report accompanying each rating action to which the certification relates; and
- to what extent the NRSRO used due diligence services of a third party in taking the rating action.
The new rules also address NRSRO internal controls and conflicts of interest as well as transparency of ratings methodologies, which include new disclosure requirements for NRSROs at the time of any rating action.