Yesterday, pursuant to Section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the U.S. Securities and Exchange Commission (SEC) proposed rules that would require additional disclosures regarding the use of representations and warranties in transaction documents for asset-backed securities (ABS) offerings. In accordance with the Dodd-Frank mandate, the proposed rules would require the following:
- securitizers would be required to “disclose fulfilled and unfulfilled repurchase requests across all transactions” by filing a new proposed Form ABS-15G; and
- nationally recognized statistical rating organizations (NRSROs) would be required to (i) include information “regarding the representations, warranties and enforcement mechanisms available to investors” in an ABS transaction in any report accompanying a credit rating issued in connection with such transaction (including any preliminary credit rating) and (ii) to provide disclosure describing how such representations, warranties, and enforcement mechanisms differ from similar issuances.
Under the transaction documents for an ABS transaction, a sponsor or originator typically will make certain representations and warranties "relating to the pool assets and their origination, including about the quality of the pool assets," fraud or compliance with state and federal laws. A breach of a representation or warranty, pursuant to the underlying transaction documents, usually requires the "obligated party" to "repurchase the asset or substitute a different asset that complies with the representations and warranties for the non-compliant asset." The SEC noted, however, that the effectiveness of these contractual provisions have "been questioned and lack of responsiveness by sponsors to potential breaches of the representations and warranties relating to the pool assets has been the subject of investor complaint."
In April 2010, the SEC issued proposed rules (Regulation AB II Proposal) that seek to substantially modify the current regulatory framework in place for ABS by enhancing current offering, disclosure and reporting requirements for publicly offered ABS and imposing significant disclosure requirements on certain private offerings of structured finance products. The Regulation AB II Proposal also includes a disclosure requirement with respect to repurchase requests. The SEC in its rule proposal published yesterday, among other items, “re-propose[d] the disclosure requirements with respect to repurchase requests in Regulation AB in order to conform the disclosures to those required by Section 943 of the Act.”
The proposed rulemaking is one of several that the SEC is required to issue to pursuant to Article IX of the Dodd-Frank Act.