Representations and Warranties
On January 20, 2011, the SEC adopted final rules implementing Section 943 of Dodd-Frank, which requires the SEC to prescribe regulations on the use of representations and warranties in the market for asset-backed securities (ABS).
The final rules require ABS issuers to file with the SEC, in tabular format, the history of the requests they received and repurchases they made relating to their outstanding ABS. Specifically, issuers are required to disclose the last three years of repurchase history in an initial filing on EDGAR due by February 14, 2012. After the initial filing, the ABS issuer is required to file updated information on a quarterly basis. The disclosure requirements will apply to issuers of registered and unregistered ABS.
The final rules also require issuers in a registered ABS offering to include in the body of a prospectus repurchase history for the last three years for ABS of the same asset class as the securities being registered. This information must be included in registered offerings in a phase-in period commencing on February 14, 2012.
As required by Section 943(1) of Dodd-Frank, the final rules also require Nationally Recognized Statistical Rating Organizations (NRSROs) to provide a description of the representations, warranties and enforcement mechanisms available to investors in an ABS offering. NRSROs will be required to disclose how the representations, warranties and enforcement mechanisms differ from those of similar ABS. NRSROs will be required to make the disclosures in any report accompanying a credit rating.
Review of Assets
The SEC also adopted final rules implementing Section 945 of Dodd-Frank, which requires the SEC to adopt rules regarding the review of assets, such as loans, underlying ABS.
The final rules require issuers of ABS registered under the Securities Act to conduct a review of the assets underlying the ABS. Under the final rules, the review must, at a minimum, be designed and effected to provide reasonable assurance that the prospectus disclosure about the assets is accurate in all material respects.
The final rules permit issuers to perform the review themselves or hire third parties to perform the review. If an issuer obtains assistance from a third party for purposes of performing the review, and attributes, in the prospectus, the findings and conclusions of the review to the third party, the issuer may rely on the third-party’s review to satisfy the requirement provided the third party is named in the registration statement and consents to being named as an “expert” under the federal securities laws.
Issuers of ABS will be required to disclose the nature of the review performed to satisfy the review requirements, as well as the findings and conclusions of the review.
Any registered offering of ABS commencing with an initial offer after December 31, 2011, must comply with the new rules.