As described in a number of previous posts (see my posts of October 21, October 28 and November 4), in October, the SEC published two proposals for rules mandated by the Dodd Frank Act: (i) those related to representations and warranties in ABS securities offerings; and (ii) those requiring any issuer of registered ABS to perform a review of the assets underlying the ABS.
The final rules have now been published.
Representations and Warranties
This rule requires
(1) any securitizer to disclose fulfilled and unfulfilled repurchase requests across all trusts aggregated by the securitizer, so that investors may identify asset originators with clear underwriting deficiencies; and
(2) each NRSRO to include, in any report accompanying a credit rating for an ABS offering, a description of (A) the representations, warranties and enforcement mechanisms available to investors; and (B) how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities”.
The important points to understand about the new rule relating to securitizers are:
- They apply in respect of all registered and non-registered issuances of ABS.
- The initial proposal has been amended to require a three-year look-back period ending December 31, 2011 (as opposed to the originally proposed five year period). Whereas the initial proposal was to be triggered upon the first issuance of an ABS containing a repurchase obligation after the implementation of the rule, the final rules will require disclosure by “any securitizer that issued an Exchange Act-ABS during the three year period ended December 31, 2011, that includes a covenant to repurchase or replace an underlying asset for breach of a representation and warranty.”
- The initial filing will be required to be made on EDGAR by February 14, 2012 and is to be made in the prescribed tabular form setting out, for instance, the names of originators.
- A provision was introduced to permit a securitizer to omit information that is unknown or not reasonably available without unreasonable effort or expense.
- After the initial disclosure, periodic disclosure of demand, repurchase and replacement history will be required to be made on a quarterly basis (as opposed to monthly as originally proposed).
- A securitizer who has not been presented with a repurchase demand in any particular period may, in lieu of providing the required disclosure in tabular form, merely check a box indicating that it has received no demands for the period in question and thereafter may suspend quarterly filings until such time as there is a change in the demand, repurchase or replacement activity, although annual filings will still be required.
- If no ABS are held by non-affiliates as of the end of the period in question, then disclosure may be terminated upon the filing of a notice to that effect.
- Similar disclosure will also be required in prospectuses registered under Reg AB although repurchase history disclosure can be limited to those repurchases involving the same asset class and the look-back period will be phased in over the next three years.
Of particular interest to Canadian securitizers, these requirements will apply to any who issued a tranche of ABS in a private or public transaction into the U.S. during the three-year period ending December 31, 2011 and which are still outstanding on such date. Of course, it will also apply to any Canadian securitizer issuing such ABS into the U.S. in the future. Whether the inconvenience associated with this requirement will temper the appetite for involving U.S. investors in Canadian-based deals remains to be seen.
The NRSRO disclosure rule was adopted as proposed. As noted in our original piece on the proposed rule, it should be anticipated that rating agencies, in an attempt to make their obligations more manageable, will be motivated to try and introduce a degree of uniformity on the representations and warranties contained in transactions involving “similar securities” (whatever these might be as no guidance is provided in the rule).
Review of Assets
The second rule requires issuers of registered ABS to perform a review of the underlying assets that, at a minimum, must be designed and effected to provide reasonable assurances that the disclosure regarding the pool assets in the prospectus is accurate in all material respects. If a third party is employed to perform this review and the review is attributed to it in the prospectus then the third party must consent to being named as an “expert” and thus potentially attract expert liability. In an attempt to address concerns that this would scare off third parties willing to perform these reviews, the SEC has indicated that the issuer can avoid this issue by adopting the findings and conclusions of the third-party review as its own.
In addition, disclosure will need to be made in the prospectus regarding:
- The nature of the review;
- The findings and conclusions of the review; and
- Any assets in the pool that do not meet the underwriting standards, who determined that the assets should nevertheless be included in the pool and the factors that were considered in making the determination.
Why a rule was necessary to require an issuer to conduct due diligence in order to ensure that the disclosure in the prospectus was accurate is somewhat mystifying, at least to me.
The other aspect of the proposed rule, that which would require the pre-filing of third-party due diligence reports obtained by an issuer or an underwriter in connection with any registered or unregistered ABS offering, has been postponed until a later date so that it can be integrated with other related rule changes.