On August 27, 2014, the Securities and Exchange Commission (the “SEC”) voted 5-0 to adopt the long-awaited comprehensive amendments to Regulation AB and other rules affecting the offering process for asset-backed securities, commonly known as “Regulation AB II.”
At the same meeting, the SEC voted 3-2 to adopt a variety of rules related to nationally recognized statistical rating organizations (“NRSROs”), as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including rules implementing Section 15E(s)(4)(A) of the Securities Exchange Act of 1934 (the “Exchange Act”). This statutory provision requires an issuer or underwriter of “asset-backed securities,” as broadly defined under the Exchange Act (“Exchange Act ABS”), to make publicly available the findings and conclusions of any “third-party due diligence report” obtained by the issuer or underwriter. It also requires that whenever any “third-party due diligence services” are provided to an NRSRO, an issuer or an underwriter, the due diligence services provider must provide to any NRSRO rating any Exchange Act ABS to which those services “relate” a written certification in a format to be prescribed by rule.
Regulation AB II was first proposed in April 2010, and was partially re-proposed in July 2011. The adoption of Regulation AB II originally was set to be considered at an SEC meeting in February of this year, but action was deferred to allow further consideration of certain privacy-related aspects of the proposal. The following highlights of Regulation AB II are based on the comments of the SEC commissioners and staff at today’s meeting, and the SEC’s press releases and fact sheets regarding these rules. As of the time of writing, the text of the new rules and the associated commentary had yet to be released.
As proposed, Regulation AB II would have required that in any private offering of “structured finance products” made in reliance on Rule 144A under the Securities Act of 1933, investors have the right to obtain all of the same initial and ongoing information as if the offering were SEC-registered. The SEC did not adopt this controversial requirement.
As proposed, Regulation AB II would have required that investors be provided with a complete, standardized set of asset-level data regarding the underlying pool assets, both in the prospectus and in ongoing periodic reports. As adopted, these required disclosures will at this time extend only to public offerings of residential mortgage-backed securities, commercial mortgage-backed securities, securitizations of automobile loans or leases, and securitizations of debt securities (including resecuritizations). All asset-level data will be required to be filed on EDGAR in eXtensible Mark-up Language, or XML. In response to many concerns that commenters expressed regarding potential privacy concerns, the SEC worked with the Consumer Financial Protection Bureau to narrow the scope of the required asset-level disclosures.
As proposed, Regulation AB II would have required, in a shelf offering of asset-backed securities, that a preliminary prospectus be filed with the SEC at least five business days before any securities are sold. As adopted, the preliminary prospectus will be required to be filed with the SEC at least three business days before the first sale of securities in the offering, though it will be permissible to highlight material changes from the preliminary prospectus in a separate supplement 48 hours prior to first sale.
As proposed, Regulation AB II would have eliminated the investment-grade rating requirement for shelf eligibility and imposed new requirements, including:
- A certification filed at the time of each takedown by the chief executive officer of the depositor or executive officer in charge of securitization of the depositor, addressing the prospectus disclosure and the design of the securitization;
- Transaction document provisions requiring that the trustee appoint a credit risk manager which would review assets when certain trigger events occur, and mandating dispute resolution for failure to comply with requests to repurchase assets;
- Transaction document provisions requiring the inclusion in distribution reports on Form 10-D of requests by investors to communicate with other investors; and
- An annual evaluation of compliance with these requirements.
The SEC also proposed a variety of other modifications to the shelf registration process for asset-backed securities, including new registration forms SF-1 (for stand-alone registrations of asset-backed securities) and SF-3 (for shelf offerings of asset-backed securities), changes to the required disclosure of static pool information, additional disclosures regarding certain transaction parties, pay-as-you-go filing fees for shelf offerings of asset-backed securities, an integrated prospectus requirement for shelf offerings of asset-backed securities (rather than a base prospectus and prospectus supplement, as is the current practice), and a requirement to file the final transaction documents by the time the final prospectus is required to be filed. Most of the changes to the shelf eligibility requirements and the offering process appear to have been adopted substantially as proposed, with modifications to reflect comments received by the SEC, with the possible exception of the new deadline for final transaction documents. The SEC’s fact sheet indicates that this requirement was in the proposal being voted upon, while Commissioner Aguilar’s statement at the meeting indicated that this requirement was yet to be adopted, so this issue awaits clarification in the final rule release.
The SEC’s fact sheet indicates the Regulation AB II will become effective 60 days after publication in the Federal Register. Form SF-1 and Form SF-3 registrants will be required to comply with the new offering rules, forms and disclosures no later than one year after the rules’ publication in the Federal Register, with asset-level disclosure requirements taking effect two years after publication, and Forms 10-D and 10-K being required to comply with new rules and disclosures (other than asset-level disclosures) if filed one year or more after publication.
As proposed, a “third-party due diligence report” would have been any report containing findings and conclusions of “due diligence services,” which in turn were defined as a review of the pool assets for the purposes of making findings with respect to the integrity of the asset data; determining whether the assets conformed to stated underwriting standards; making findings with respect to asset value; making findings with respect to legal compliance by the originator; and making findings with respect to any other factor material to the likelihood that the issuer will pay interest and principal timely. The SEC proposed that an issuer or underwriter receiving such a report, whether for a registered or an unregistered offering of Exchange Act ABS, be required to furnish, on EDGAR, a Form ABS-15G, disclosing the findings and conclusions of the report. The proposed rules also set forth a form of certification that providers of third-party due diligence services were to be required to deliver to each NRSRO producing a credit rating to which those due diligence services “relate,” on new Form ABS Due Diligence-15E.
There was very limited discussion of the third-party due diligence provisions of the new NRSRO rules at today’s meeting or in the SEC’s press release and fact sheet. How closely the final rules conform to the SEC’s proposals remains to be seen, after review of the text of the final rules and associated commentary. The fact sheet indicates that compliance with these rules will be required nine months after the rules’ publication in the Federal Register.