On August 27, the Securities and Exchange Commission (“SEC”) adopted long-awaited revisions to Regulation AB and other rules applicable to the offering of publicly issued asset-backed securities (“ABS”). These revisions reflect the initial implementation of the SEC’s proposed changes referred to as “Regulation AB II,” as well as certain aspects of the Dodd-Frank Act.
The revisions will become effective 60 days from the date the revisions are published in the Federal Register, and must be complied with beginning one year after their effective date – except the asset level disclosure revisions, which will not become effective for a period of 60 days plus two years following publication in the Federal Register.
Enhanced Disclosure Requirements for Certain Classes of ABS Issuers of ABS backed by residential mortgages, commercial mortgages, auto loans and leases, and debt securities (including resecuritizations) will now be required to provide computer-readable, loan-level information about the underlying assets both in the prospectus and on an ongoing basis.
New Rules for ABS Shelf Eligibility The investment grade rating requirement for ABS shelf eligibility will be replaced with new transaction requirements:
- Certification by Chief Executive Officer. The chief executive officer of the depositor must certify at the time of each offering as to accuracy of the information described in the prospectus with respect to the characteristics of the asset pool underlying the ABS, the payment and rights allocations, the distribution priorities, and other structural features of the transaction.
- Asset Review Trigger. The transaction documents must provide for a review of the underlying assets for compliance with the representations and warranties if a specified percentage of deficiencies occurs in the underlying pool, and the investors elect for the review to take place.
- Dispute-Resolution Mechanism for Repurchase Requests. The transaction documents must include a mechanism for resolution of disputed repurchase requests that are not addressed within 180 days of the initial request.
- Investors’ Requests to Communicate. Investors’ requests to communicate with other investors must be included in ongoing distribution reports on Form 10-D.
- Annual Compliance with Reporting Requirements. For an ABS shelf registration to remain effective, the depositor and its issuing entities and any affiliates of the depositor must have timely filed all required Exchange Act reports and information (subject to certain exceptions) and, to the extent such depositor or issuing entity has issued securities under Form SF-3, the additional asset-level information, transaction documents and certifications prescribed by Regulation AB II for the preceding 12-month period. Failure to timely file the required CEO certification or asset-level information when required can be cured; however, no ABS issuances can be made from the shelf until the 90th day following such cure.
Increased Investor Review Periods
- Filing of Preliminary Prospectus. ABS issuers using a shelf registration statement will be required to file a preliminary prospectus at least three business days in advance of the first sale of securities in the offering. Material changes in the information provided in a preliminary prospectus will not require a new preliminary prospectus or restart of the waiting period; however, any material changes from the preliminary prospectus must be filed in a supplement to the prospectus at least 48 hours before the date and time of the first sale.
- Delivery of Preliminary Prospectus by Broker-Dealers. The exemption in Rule 15c2-8(b) for shelf-eligible ABS is eliminated, so broker-dealers will now be required to deliver a preliminary prospectus at least 48 hours before sending a sale confirmation.
- Filing of Transaction Documents. Final transaction documents must be filed in connection with shelf takedowns no later than the date the final prospectus is required to be filed.
New Registration Statement Forms New forms SF-1 and SF-3 for ABS issuers will replace the current Forms S-1 and S-3 in order to distinguish ABS filers from corporate filers and tailor requirements for ABS offerings. The new Form SF-3 requires a single prospectus to be filed for each ABS shelf takedown. A separate base prospectus and prospectus supplement for each takedown will no longer be accepted. (Prospectus supplements can still be used to supplement information in a preliminary prospectus, as described above.)
Disclosures Regarding Risk Retention Amendments to Items 1104, 1108, and 1110 of Regulation AB will require disclosure regarding the sponsor’s, a servicer’s, or a 20 percent originator’s interest retained in the transaction, including the amount and nature of that interest. The SEC noted that with respect to asset-level risk retention, it did not believe additional asset-level disclosure was needed for investors to independently conduct due diligence. However, the SEC intends to review the credit risk retention rules, issued jointly by the Commission and other agencies, implementing section 941 of the Dodd-Frank Act to determine whether additional asset-level or other disclosure requirements, if any, are appropriate.
Definition of “Asset-Backed Security” The prefunding period exception in the definition of “asset-backed security” will see the prefunding limit decrease from 50 percent to 25 percent of offering proceeds.
Pay-as-you-go Registration Fees for ABS Shelf Issuers ABS issuers using Form SF-3 will have the option to delay payment of all or a portion of the required registration fees until securities are offered off the shelf.
More to Follow?
A number of previously proposed changes that were not adopted in the Regulation AB II adopting release remain outstanding, including requiring issuers to provide the same disclosure for Rule 144A offerings as is required for registered offerings, and making general asset-level requirements applicable to all asset classes and asset class specific requirements for equipment loans and leases, student loans, and floorplan financings. The SEC did not indicate when it would be addressing the “open” proposed rules.