[Federal Register: January 7, 2005 (Volume 70, Number 5)]
[Rules and Regulations]
[Page 1505-1631]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ja05-22]
[[Page 1505]]
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Part II
Securities and Exchange Commission
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17 CFR Parts 210, 228, et al.
Asset-Backed Securities; Final Rule
[[Page 1506]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 228, 229, 230, 232, 239, 240, 242, 245 and 249
[Release Nos. 33-8518; 34-50905; File No. S7-21-04]
RIN 3235-AF74
Asset-Backed Securities
AGENCY: Securities and Exchange Commission.
ACTION: Final rule; request for comment.
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SUMMARY: We are adopting new and amended rules and forms to address
comprehensively the registration, disclosure and reporting requirements
for asset-backed securities under the Securities Act of 1933 and the
Securities Exchange Act of 1934. The final rules and forms accomplish
the following: update and clarify the Securities Act registration
requirements for asset-backed securities offerings, including expanding
the types of asset-backed securities that may be offered in delayed
primary offerings on Form S-3; consolidate and codify existing
interpretive positions that allow modified Exchange Act reporting that
is more tailored and relevant to asset-backed securities; provide
tailored disclosure guidance and requirements for Securities Act and
Exchange Act filings involving asset-backed securities; and streamline
and codify existing interpretive positions that permit the use of
written communications in a registered offering of asset-backed
securities in addition to the statutory registration statement
prospectus. We also request additional comment regarding the
appropriate treatment of certain structured securities that do not meet
our definition of ``asset-backed security.''
DATES: Effective Date: March 8, 2005.
Comment Date: Comments regarding the request for comment in Section
III.A.2.a. of this document and the Form 12b-25 ``collection of
information'' requirement, within the meaning of the Paperwork
Reduction Act of 1995, should be received on or before March 8, 2005.
Compliance Dates: Any registered offering of asset-backed
securities commencing with an initial bona fide offer after December
31, 2005, and the asset-backed securities that are the subject of that
registered offering, must comply with the new rules and forms. For any
such offerings that rely on Securities Act Rule 415(a)(1)(x),
Securities Act registration statements filed after August 31, 2005
related to such offerings must be pre-effectively or post-effectively
amended, as applicable, to make the prospectus included in Part I of
the registration statement compliant and to make any required
undertakings or other changes for Part II of the registration
statement. For Securities Act registration statements that were filed
on or before August 31, 2005, the prospectus and prospectus supplement,
taken together, relating to such offerings that rely on Rule
415(a)(1)(x) must comply, provided, that, (1) the Securities Act
registration statement will need to be post-effectively amended if any
new undertakings are required to be made with respect to such offerings
in Part II of the registration statement; and (2) the Securities Act
registration statement will need to be post-effectively amended to make
the prospectus included in Part I of the registration statement
compliant, as well as to make changes, if any, to Part II of the
registration statement with respect to any registered offering of
asset-backed securities under such registration statement commencing
with an initial bona fide offer after March 31, 2006.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/final.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-21-04 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number S7-21-04. This file
number should be included on the subject line if e-mail is used. To
help us process and review your comments more efficiently, please use
only one method. The Commission will post all comments on the
Commission's Internet Web site (http://www.sec.gov/rules/final.shtml).
Comments are also available for public inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, NW., Washington,
DC 20549. All comments received will be posted without change; we do
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Jeffrey J. Minton, Special Counsel, or
Jennifer G. Williams, Attorney-Advisor, at (202) 942-2910, in the
Office of Rulemaking, Division of Corporation Finance, U.S. Securities
and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are adopting: amendments to Rules 1-02,
2-01, 2-02 and 2-07 \1\ of Regulation S-X \2\ under the Securities Act
of 1933 (the ``Securities Act''); \3\ amendments to Items 10, 308, 401
and 406 \4\ of Regulation S-B \5\ under the Securities Act; amendments
to Items 10, 202, 308, 401, 406, 501, 503, 512, 601 and 701 \6\ of
Regulation S-K \7\ under the Securities Act; a new subpart of
Regulation S-K, the 1100 series (``Regulation AB''); \8\ amendments to
Rules 411 and 434 \9\ under the Securities Act; new Rules 139a, 167,
190, 191 and 426 \10\ under the Securities Act; amendments to Rule 311
\11\ of Regulation S-T; \12\ new Rule 312 \13\ of Regulation S-T;
amendments to Forms S-1, S-2, S-3, S-11, F-1, F-2 and F-3 \14\ under
the Securities Act; amendments to Rules 10A-3, 12b-2, 12b-15, 12b-25,
13a-10, 13a-11, 13a-13, 13a-14, 13a-15, 13a-16, 15c2-8, 15d-10, 15d-11,
15d-13, 15d-14, 15d-15 and 15d-16 \15\ under the Securities Exchange
Act of 1934 (the ``Exchange Act''); \16\ new Rules 3a12-12, 3b-19, 13a-
17, 13a-18, 15d-17, 15d-18, 15d-22 and 15d-23 \17\ under the Exchange
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Act; amendments to Rule 100 \18\ of Regulation M \19\ under the
Exchange Act; amendments to Rule 101 \20\ of Regulation BTR \21\ under
the Sarbanes-Oxley Act of 2002 (the ``Sarbanes-Oxley Act''); \22\
amendments to Forms 20-F, 40-F, 8-K, 10-K, 10-KSB and 12b-25 \23\ under
the Exchange Act; and new Form 10-D \24\ under the Exchange Act.
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\1\ 17 CFR 210.1-02; 17 CFR 210.2-01; 17 CFR 210.2-02; and 17
CFR 210.2-07.
\2\ 17 CFR 210.1-01 et seq.
\3\ 15 U.S.C. 77a et seq.
\4\ 17 CFR 228.10; 17 CFR 228.308; 17 CFR 228.401; and 17 CFR
228.406.
\5\ 17 CFR 228.10 et seq.
\6\ 17 CFR 229.10; 17 CFR 229.202; 17 CFR 229.308; 17 CFR
229.401; 17 CFR 229.406; 17 CFR 229.501; 17 CFR 229.503; 17 CFR
229.512; 17 CFR 229.601; and 17 CFR 229.701.
\7\ 17 CFR 229.10 et seq.
\8\ 17 CFR 229.1100 through 1123.
\9\ 17 CFR 230.411 and 17 CFR 230.434.
\10\ 17 CFR 230.139a; 17 CFR 230.167; 17 CFR 230.190; 17 CFR
230.191; and 17 CFR 230.426.
\11\ 17 CFR 232.311.
\12\ 17 CFR 232.10 et seq.
\13\ 17 CFR 232.312.
\14\ 17 CFR 239.11; 17 CFR 239.12; 17 CFR 239.13; 17 CFR 239.18;
17 CFR 239.31; 17 CFR 239.32; and 17 CFR 239.33.
\15\ 17 CFR 240.10A-3; 17 CFR 240.12b-2; 17 CFR 240.12b-15; 17
CFR 240.12b-25; 17 CFR 240.13a-10; 17 CFR 240.13a-11; 17 CFR
240.13a-13; 17 CFR 240.13a-14; 17 CFR 240.13a-15; 17 CFR 240.13a-16;
17 CFR 240.15c2-8; 17 CFR 240.15d-10; 17 CFR 240.15d-11; 17 CFR
240.15d-13; 17 CFR 240.15d-14; 17 CFR 240.15d-15; and 17 CFR
240.15d-16.
\16\ 15 U.S.C. 78a et seq.
\17\ 17 CFR 240.3a12-12; 17 CFR 240.3b-19; 17 CFR 240.13a-17; 17
CFR 240.13a-18; 17 CFR 240.15d-17; 17 CFR 240.15d-18; 17 CFR
240.15d-22; and 17 CFR 240.15d-23.
\18\ 17 CFR 242.100.
\19\ 17 CFR 242.100 through 105.
\20\ 17 CFR 245.101.
\21\ 17 CFR 245.101 through 104.
\22\ 15 U.S.C. 7201 et seq.
\23\ 17 CFR 249.220f; 17 CFR 249.240f; 17 CFR 249.308; 17 CFR
249.310; 17 CFR 249.310b; and 17 CFR 249.322.
\24\ 17 CFR 249.312.
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Table of Contents
I. Overview
A. What are Asset-Backed Securities?
B. Securities Act Registration
C. Disclosure
D. Communications During the Offering Process
E. Ongoing Reporting Under the Exchange Act
F. Other Miscellaneous Amendments
II. Background and Development of ABS and Regulatory Treatment
III. Discussion of the Amendments
A. Securities Act Registration
1. Current Requirements
2. Definition of Asset-Backed Security
a. Approach and Supplemental Request for Comment for Other
Structured Securities
b. Basic Definition
c. Nature of the Issuing Entity
d. Delinquent and Non-Performing Pool Assets
e. Lease-Backed Securitizations and Residual Values
f. Exceptions to the ``Discrete'' Requirement
3. Securities Act Registration Statements
a. Form Types
b. Presentation of Disclosure in Base Prospectuses and
Prospectus Supplements
c. Form S-3 Eligibility Requirements for ABS
d. Determining the ``Issuer'' and Required Signatures
4. Foreign ABS
5. Exclusion From Exchange Act Rule 15c2-8(b) for Form S-3 ABS
6. Registration of Underlying Pool Assets
a. Current Requirements
b. When Registration Is Required
c. Exceptions From Disclosure and Delivery Conditions and Form
S-3 Eligibility Requirements
7. Market-Making Transactions
B. Disclosure
1. Regulation AB
2. Forepart of Registration Statement and Prospectus
3. Transaction Parties
a. Sponsor
b. Depositor
c. Issuing Entity and Transfer of Asset Pool
d. Servicers
e. Trustees
f. Originators
g. Other Transaction Parties and Scope of Disclosure
4. Static Pool Information
a. Disclosure Required
b. Method of Presentation
5. Pool Assets
a. Pool Composition
b. Sources of Pool Cash Flow
c. Changes to the Asset Pool
d. Rights and Claims Regarding the Pool Assets
6. Transaction Structure
7. Significant Obligors
8. Credit Enhancement and Other Support
9. Other Basic Disclosure Items
a. Tax Matters
b. Legal Proceedings
c. Affiliations and Certain Relationships and Related
Transactions
d. Ratings
e. Reports and Additional Information
10. Alternatives to Present Third Party Financial Information
a. Incorporation by Reference
b. Reference Information
C. Communications During the Offering Process
1. ABS Informational and Computational Material
a. Current Requirements
b. Exemptive Rule
c. Definition of ABS Informational and Computational Material
d. Conditions for Use
e. Filing Requirements
2. Research Reports
a. Current Requirements
b. ABS Research Report Safe Harbor
3. Other Communications During the Offering Process
D. Ongoing Reporting Under the Exchange Act
1. Current Requirements
2. Determining the ``Issuer'' and Operation of the Section 15(d)
Reporting Obligation
3. Reporting on EDGAR
4. Distribution Reports on Form 10-D
a. New Form 10-D and Deadline for Filing
b. Signatures
c. Content
5. Annual Reports on Form 10-K
6. Certifications under Section 302 of the Sarbanes-Oxley Act
7. Report on Assessment of Compliance with Servicing Criteria
and Accountant's Attestation
a. Background
b. Our Proposal and Overview of Revised Approach
c. Assessment and Attestation of Servicing Compliance
d. Attestation Report on Assessment of Compliance
8. Current Reporting on Form 8-K
a. Items Requiring Current Disclosure
b. Clarifying Amendments to Existing Items
c. New Items
d. Safe Harbor and Eligibility To Use Form S-3
9. Other Exchange Act Reporting Amendments
a. Exclusion From Form 10-Q
b. Exemptions From Section 16
c. Transition Reports
E. Other Miscellaneous Amendments
F. Transition Period
IV. Paperwork Reduction Act
V. Cost-Benefit Analysis
VI. Consideration of Burden on Competition and Promotion of
Efficiency, Competition and Capital Formation
VII. Regulatory Flexibility Analysis Certification
VIII.Statutory Authority and Text of Rule and Form Amendments
I. Overview
A. What Are Asset-Backed Securities?
On May 3, 2004, we issued proposals to address comprehensively the
registration, disclosure and reporting requirements for asset-backed
securities, or ABS, under the Securities Act and the Exchange Act.\25\
We received over 50 comments in response to our proposals.\26\
Commenters expressed overall support for our proposals to establish a
separate framework for the registration and reporting of asset-backed
securities due to differences between asset-backed securities and other
securities.\27\ The final rule and form amendments we adopt today have
been revised, as discussed in this
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release, to incorporate a number of changes recommended by commenters.
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\25\ See Release No. 33-8419 (May 3, 2004) [69 FR 26650] (the
``Proposing Release'').
\26\ The public comments we received and a summary of the
comments prepared by our staff (the ``Comment Summary'') are
available for inspection in our Public Reference Room at 450 Fifth
Street, NW., Washington, DC 20549 in File No. S7-21-04, or may be
viewed at http://www.sec.gov/rules/proposed/s72104.shtml.
\27\ See, e.g., Letters of AIG Credit Corp. (``AIG''); Allen &
Overy (``A&O''); American Bar Association (``ABA''); American
Financial Services Association (``AFSA''); American Institute of
Certified Public Accountants (``AICPA''); American Bankers
Association (``Am. Bankers''); American Society of Corporate
Secretaries (``ASCS''); American Securitization Forum (``ASF'');
Australian Securitisation Forum (``Aus. SF''); Joint letter of
American Honda Finance Corporation, DaimlerChrysler Services North
America LLC, Ford Motor Credit Company, General Motors Acceptance
Corporation, and Navistar Financial Corporation (``Auto Group'');
Bond Market Association (``BMA''); Bank of America Corporation
(``BOA''); Capital One Financial Corporation (``Capital One''); CFA
Institute (``CFAI''); Citigroup Global Markets, Inc. (``CGMI'');
Citigroup Inc. (``Citigroup''); Commercial Mortgage Securities
Association (``CMSA''); Ernst & Young LLP (``E&Y''); European
Securisation Forum (``ESF''); Fidelity Management & Research Company
(``FMR''); First Marblehead Corporation (``First Marblehead'');
Financial Services Roundtable (``FSR''); Investment Company
Institute (``ICI''); Jones Day; JPMorganChase & Co.
(``JPMorganChase); Kutak Rock LLP (``Kutak''); Mortgage Bankers
Association (``MBA''); MBNA Corporation (``MBNA''); Metropolitan
Life Insurance Company (``MetLife''); Moody's Investors Service
(``Moody's''); PriceWaterhouseCoopers LLP (``PWC''); Joint letter of
Sallie Mae., Inc. and Nelnet, Inc. (``Sallie Mae''); State Street
Global Advisors (``State Street''); Toyota Motor Credit Corporation
(``TMCC''); UBS Securities LLC (``UBS''); U.S. Bank National
Association (``US Bank''); and Wells Fargo Bank, National
Association (``Wells Fargo'').
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Asset-backed securities are securities that are backed by a
discrete pool of self-liquidating financial assets. Asset-backed
securitization is a financing technique in which financial assets, in
many cases themselves less liquid, are pooled and converted into
instruments that may be offered and sold in the capital markets.\28\ In
a basic securitization structure, an entity, often a financial
institution and commonly known as a ``sponsor,'' originates or
otherwise acquires a pool of financial assets, such as mortgage loans,
either directly or through an affiliate. It then sells the financial
assets, again either directly or through an affiliate, to a specially
created investment vehicle that issues securities ``backed'' or
supported by those financial assets, which securities are ``asset-
backed securities.'' Payment on the asset-backed securities depends
primarily on the cash flows generated by the assets in the underlying
pool and other rights designed to assure timely payment, such as
liquidity facilities, guarantees or other features generally known as
credit enhancements. The structure of asset-backed securities is
intended, among other things, to insulate ABS investors from the
corporate credit risk of the sponsor that originated or acquired the
financial assets.
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\28\ ``Securitization'' is a commonly used term to describe this
financing technique, although other terms, such as ``asset-backed
financing,'' also are used.
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The ABS market is fairly young and has rapidly become an important
part of the U.S. capital markets. One source estimates that U.S. public
non-agency ABS issuance grew from $46.8 billion in 1990 to $416 billion
in 2003.\29\ Another source estimates 2003 new issuance closer to $800
billion.\30\ ABS issuance is on pace to exceed corporate debt issuance
in 2004.\31\ While residential mortgages were the first financial
assets to be securitized, non-mortgage related securitizations have
grown to include many other types of financial assets, such as credit
card receivables, auto loans and student loans. Before the Proposing
Release, the Commission had not previously addressed on a comprehensive
basis the regulatory treatment of asset-backed securities under the
Securities Act or the Exchange Act.
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\29\ See Bank One Capital Markets, Inc., 2004 Structured Debt
Yearbook.
\30\ See Asset Securitization Report (pub. by Thomson Media
Inc). See also Asset-Backed Alert (pub. by Harrison Scott
Publications). The four primary asset classes currently securitized
are residential mortgages, automobile receivables, credit card
receivables and student loans, which represented approximately 52%,
19%, 16% and 9% of 2003 new issuance, respectively.
\31\ See, e.g., Jennifer Hughes and David Wells, ``Asset-Backed
Bonds Hit Record,'' Financial Times, Nov. 11, 2004, at 17; Aaron
Lucchetti, ``Indebted Consumers Reshape the Bond Market--Betting on
Americans' Ability To Pay Their Bills May Pose Risks If Interest
Rates Move Higher,'' Wall St. J., Sep. 14, 2004, at C1; and
Christine Richard, ``US Asset-Backeds: No Slowdown As Consumers
Borrow,'' Dow Jones Capital Markets Report, Sep. 17, 2004. See also
The Bond Market Association, Bond Market Research Quarterly,
November 2004.
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Asset-backed securities and ABS issuers differ from corporate
securities and operating companies. In offering ABS, there is generally
no business or management to describe. Instead, information about the
transaction structure and the characteristics and quality of the asset
pool and servicing is often what is most important to investors. Many
of the Commission's existing disclosure and reporting requirements,
which are designed primarily for corporate issuers and their
securities, do not elicit relevant information for most asset-backed
securities transactions. Over time, Commission staff, through no-action
letters and the filing review process, have developed a framework to
address the different nature of asset-backed securities while being
cognizant of developments in market practice.
With a few exceptions, our proposals were designed to consolidate
and codify current staff positions and industry practice. After
carefully evaluating the public comment received, we are adopting new
rules and amendments to address the four primary regulatory areas
affecting asset-backed securities that were the subject of the
proposal: Securities Act registration; disclosure; communications
during the offering process; and ongoing reporting under the Exchange
Act.
B. Securities Act Registration
We are adopting a principles-based definition of asset-backed
security, substantially as proposed, to demarcate the securities and
offerings to which the new rules apply. The definition consolidates
several staff positions regarding the definition of asset-backed
security, including those regarding delinquent and non-performing pool
assets, with several revisions to the proposal in response to comment.
The definition we are adopting today also allows more lease-backed
transactions to be included in the definition of asset-backed security
and permits the use of master trusts and revolving periods for more
asset classes. As we explained in the Proposing Release, these changes
are designed to remove regulatory uncertainty and reduce regulatory
obstacles and costs of securitization.
In 1992, the Commission amended Form S-3 to allow registration of
offerings of investment grade asset-backed securities on a delayed, or
``shelf,'' basis.\32\ As proposed, we are requiring that all registered
offerings of asset-backed securities be registered either on Form S-1
or Form S-3, and we are specifying in those forms which disclosure
items are required. In addition, we are expanding the types of
investment grade asset-backed securities that qualify for shelf
registration.
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\32\ See Release No. 33-6964 (Oct. 22, 1992) [57 FR 48970] (the
``1992 Release'').
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Consistent with existing staff positions and our proposal, we are
not adding a reporting history requirement for Form S-3 eligibility.
However, we are codifying a staff position, as modified from the
Proposing Release in response to comment, that Exchange Act reporting
obligations regarding other ABS of the same asset class established by
the depositor or an affiliate of the depositor must have been satisfied
to maintain Form S-3 eligibility for new registration statements. Also
consistent with existing staff positions, and pending consideration of
our broader proposals recently issued for all Securities Act
offerings,\33\ we are excluding offerings of asset-backed securities
eligible for Form S-3 registration from the requirements of Exchange
Act Rule 15c2-8(b) to deliver a preliminary prospectus prior to
delivery of a confirmation of sale.
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\33\ See Release No. 33-8501 (Nov. 3, 2004) [69 FR 67392] (the
``Offering Process Release'').
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We also are adopting proposals to alleviate impediments to the
shelf registration of offerings of asset-backed securities by foreign
issuers or backed by foreign financial assets. We are adopting
proposals that consolidate and streamline existing staff positions
regarding when and how the offering of underlying securities must be
concurrently registered with an offering of asset-backed securities
backed by those underlying securities. Finally, we are revisiting staff
interpretations regarding the registration of market-making
transactions in the ABS context in response to comment. In particular,
we will no longer require registration or delivery of a prospectus for
market-making transactions for asset-backed securities.
C. Disclosure
Before today, there were no disclosure items tailored specifically
to asset-backed securities. We are adopting, with modifications in
response to comment, a new principles-based set of disclosure items,
``Regulation AB,'' that will form
[[Page 1509]]
the basis for disclosure in both Securities Act registration statements
and Exchange Act reports. Although the few comments we received on this
point were mixed, we still do not believe it would be practical or
effective to draft detailed disclosure guides for each asset type that
may be securitized. Instead, and as proposed, we have attempted to
identify the disclosure concept required and provide several
illustrative examples, while understanding and emphasizing, as we did
in the Proposing Release, that the application of the particular
concept must be tailored to the particular transaction and asset type
involved and resulting determinations as to the materiality of
information.
As we explained in the Proposing Release, the new disclosure items
are for the most part based on the market-driven disclosures that
appear today. However, with a codification of a universal set of
disclosure items, we do seek, as we stated in the Proposing Release, a
reevaluation by transaction participants of the manner and content of
presented disclosure, including the elimination of unnecessary
boilerplate and a de-emphasis on unnecessary legal recitations of
terms. We also understand, and the comment process confirmed, that
existing disclosure standards may not adequately capture certain
categories of information that may be material to an asset-backed
securities transaction, such as the background, experience, performance
and roles of various transaction parties, including the sponsor, the
servicing entity that administers or services the financial assets and
the trustee. Our new disclosure items relating to these entities are
designed to elicit additional information in these areas to the extent
material, and we have made several revisions to the proposed disclosure
items in response to comment.
Consistent with our proposal, we also are requiring for the first
time that certain statistical information on a ``static pool'' basis be
provided if material to the transaction. The final rules relating to
the provision of this information have been revised from the Proposing
Release in response to comment. The requirement to provide static pool
data is still based upon the materiality of the data, although we are
providing additional guidance on the scope of the data covered by the
requirement. In addition, the guidance for static pool data under the
final rules includes not only delinquency and loss data, but also
prepayment data, if material. We also are providing flexibility in the
manner of making the static pool data available. The final rules permit
issuers to provide data that would be included in the prospectus but
provided through a Web site under certain specified conditions.
Consistent with current practice and our proposals, we are not
requiring audited financial statements regarding the issuing entity for
the asset-backed securities in Securities Act or Exchange Act filings.
However, we are adopting proposals, revised in response to comment,
that consolidate and codify current staff positions on when financial
or other descriptive information is required regarding certain other
third parties, such as obligors of financial assets that reach pool
concentration levels or providers of significant credit enhancement or
other cash flow support for the asset-backed securities. In particular,
we have revised our proposals regarding the provision of such
information with respect to certain derivative counterparties to use an
alternate measure for determining significance. We also are
streamlining and codifying current staff positions, substantially as
proposed, on when financial information regarding third parties may be
incorporated by reference or referred to in an asset-backed securities
filing in lieu of actually including the information in the filing.
D. Communications During the Offering Process
In the mid 1990's, Commission staff issued a series of no-action
letters permitting the use of various written materials in addition to
the statutory prospectus in an offering of asset-backed securities.\34\
These materials provide data about the potential payouts of the
financial assets and the asset-backed securities using various
prepayment and other assumptions as well as disclose information about
the structure of the offering or about the underlying asset pool.
Pending consideration of our broader communications proposals in the
recently-issued Offering Process Release, we are here codifying and
simplifying, as proposed, the current staff positions on when these
materials can be used and when they must be publicly filed with the
Commission. We are clarifying our intention stated in the Proposing
Release that the communications allowed under our final rules mirror
those allowed under the staff no-action letters. We also are
reiterating clarifications regarding several interpretive issues
involving the use of these materials given market developments over the
decade since the letters were issued. In this regard and given advances
made to EDGAR (our electronic data gathering, analysis and retrieval
system), we also are eliminating as proposed the current exemption from
electronic filing for these materials.
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\34\ See Greenwood Trust Co., Discover Master Card Trust I (Apr.
5, 1996); Public Securities Ass'n (Mar. 9, 1995); Public Securities
Ass'n (Feb. 17, 1995); Public Securities Ass'n (May 27, 1994); and
Kidder Peabody Acceptance Corporation I (May 20, 1994). The
``statutory prospectus'' refers to the full prospectus required by
Section 10 of the Securities Act (15 U.S.C. 77j).
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Shortly after the no-action letters referred to above were issued,
Commission staff also issued a no-action letter regarding the
publication of research reports by brokers or dealers proximate to an
offering of asset-backed securities registered or to be registered on
Form S-3.\35\ The Commission had previously adopted several rules that
provided safe harbors under which the publication of research reports
would not be deemed a violation of the communications restrictions of
Section 5 of the Securities Act.\36\ However, several of the conditions
in those rules were not relevant or practical for asset-backed
securities. Again, pending consideration of any further changes to the
research report safe harbors as a result of the Offering Process
Release, we are codifying here, as proposed, the modified conditions in
the staff no-action letter that provide a similar safe harbor for
research reports as they relate to registered offerings of asset-backed
securities on Form S-3.
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\35\ See Public Securities Ass'n (Feb. 7, 1997).
\36\ 15 U.S.C. 77e. See Securities Act Rules 137, 138 and 139
(17 CFR 230.137; 17 CFR 230.138; and 17 CFR 230.139).
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E. Ongoing Reporting Under the Exchange Act
As with registration, the ongoing periodic and current reporting
requirements under the Exchange Act applicable to operating companies
do not elicit information that would be most relevant for asset-backed
securities. First through a series of exemptive orders, and then
primarily through the issuance of scores of no-action letters and other
interpretations, Commission staff has allowed modified Exchange Act
reporting by ABS issuers. In lieu of quarterly reports on Form 10-
Q,\37\ ABS issuers today generally file under cover of Form 8-K the
distribution reports required to be prepared under the transaction
agreements that detail the payments and performance of the financial
assets in the asset pool and payments on the securities backed by that
pool. Current reporting on Form 8-K for certain extraordinary events
also is required
[[Page 1510]]
regarding asset-backed securities, but historically only for a narrow
subset of events. A modified annual report on Form 10-K is required
with two items being most important: a servicer's statement of
compliance with its servicing obligations; and a report by an
independent public accountant regarding compliance with particular
servicing criteria. Financial statements of the issuing entity are not
required. An asset-backed issuer is required to include a certification
under Section 302 of the Sarbanes-Oxley Act \38\ with its Form 10-K,
and, as provided by the Commission's rules governing certification, the
staff has previously provided a special form of certification for ABS
issuers to use.\39\ ABS issuers are exempt from the rules implementing
Section 404 of the Sarbanes-Oxley Act \40\ regarding reporting on
internal control over financial reporting.\41\
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\37\ 17 CFR 249.308a.
\38\ 15 U.S.C. 7241.
\39\ See Exchange Act Rules 13a-14 and 15d-14; Release No. 33-
8124 (Aug. 28, 2003) [67 FR 57276]; and Division of Corporation
Finance, ``Revised Statement: Compliance by Asset-Backed Issuers
with Exchange Act Rules 13a-14 and 15d-14'' (Feb. 21, 2003). See
also Merrill Lynch Depositor, Inc. (Mar. 28, 2003) and Mitsubishi
Motors Credit of America, Inc. (Mar. 27, 2003).
\40\ 15 U.S.C. 7262.
\41\ See Exchange Act Rules 13a-15 and 15d-15.
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We are codifying as proposed the basic modified reporting system
for asset-backed securities. To distinguish periodic reporting
regarding distributions from disclosure of important events that
appropriately call for current reporting, we are adopting our proposal
for one new form type, Form 10-D, to act as the report for the periodic
distribution information currently provided under cover of Form 8-K. We
also are adopting instructions, substantially as proposed, that specify
which of the Commission's recently adopted Form 8-K events will be
applicable to asset-backed securities, and we are adding a few
additional events specific to asset-backed securities, again with
certain modifications from the proposal. Consistent with the modified
reporting no-action letters, we are adopting our proposals to expressly
exclude ABS from quarterly reporting on Form 10-Q and exempt ABS from
Section 16 of the Exchange Act.\42\ We also are adopting proposed
amendments to clarify how transition reports are to be filed regarding
a change in fiscal year.
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\42\ 15 U.S.C. 78p.
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We are adopting instructions, substantially as proposed, that
specify the disclosure requirements applicable for annual reports on
Form 10-K regarding asset-backed securities, which also are drawn from
Regulation AB, and we are codifying the form of certification to be
used under Section 302 of the Sarbanes-Oxley Act for asset-backed
securities. As proposed, we are retaining the longstanding requirements
relating to servicer compliance statements and reports by an
independent public accountant as to compliance with particular
servicing criteria. Regarding servicing criteria, we explained in the
Proposing Release that there are very few existing criteria for
evaluating compliance, the most widely used of which currently is the
Uniform Single Attestation Program, or USAP, promulgated by the
Mortgage Bankers Association. However, the USAP's ``minimum servicing
standards'' are designed to be applicable only to servicing of
residential mortgages and do not necessarily represent the full
spectrum of servicing activities that may be material to an asset-
backed securities transaction. We are adopting, with modifications, the
proposed disclosure-based servicing criteria that will form the basis
for an assessment and assertion as to material compliance with such
criteria (or disclosure as to non-compliance). We also continue the
practice of accountant involvement in assessing compliance with
servicing criteria by adopting a requirement that a registered public
accounting firm attest to the assertion of compliance. We are revising
our proposal, however, to permit separate reports from each party that
performs the actual servicing or administration functions. Both the
reports containing the assertion of compliance and the accountant's
attestation reports will be required to be filed with the report on
Form 10-K. We also are revising the form of the Sarbanes-Oxley Section
302 certification to include an express statement by the certifying
party as to whether reports have been filed covering the entire
servicing function.
As with the Securities Act, we are adopting our proposed
specification that the depositor is the ``issuer'' for purposes of
Exchange Act reporting regarding asset-backed securities. We also are
specifying who may sign the various Exchange Act reports. As proposed,
either the depositor or the servicer may sign the reports on Form 10-K,
Form 10-D and Form 8-K. A designated officer of that same party also
must sign the Sarbanes-Oxley Section 302 certification. We also are
clarifying how filings regarding asset-backed securities are to be
filed on EDGAR and the operation of the reporting obligation for asset-
backed securities under Section 15(d) of the Exchange Act,\43\
including codifying as proposed several interpretive positions as to
when the obligation starts and when it may be suspended.
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\43\ 15 U.S.C. 78o(d).
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F. Other Miscellaneous Amendments
Finally, as discussed in the Proposing Release, we are making
several miscellaneous and technical amendments to our rules and forms
to accommodate the new rules and to update references regarding asset-
backed securities.
II. Background and Development of ABS and Regulatory Treatment
As noted above, the ABS market rapidly has developed into an
important part of the U.S. capital markets.\44\ The modern
securitization market originated in the 1970's with the securitization
of residential mortgages.\45\ Since the mid-1980's, the techniques
pioneered in the mortgage-backed securities, or MBS, market have been
used to securitize other asset types. Most asset types that have been
securitized have homogenous characteristics, including similar terms,
structures and credit characteristics, with proven histories of
performance, which in turn facilitate modeling of future payments and
thus analysis of yield and credit risks.
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\44\ See note 31 above. See also Gary Silverman et al., ``A $2.5
Trillion Market You Hardly Know,'' Business Week, Oct. 26, 1998
(``Securitization is one of the most important and abiding
innovations to emerge in the financial markets since the 1930s'
(quoting Leon T. Kendall)).
\45\ The modern ABS market can be traced to 1970 when the
Government National Mortgage Association (Ginnie Mae), a wholly
owned federal government corporation, first guaranteed a pool of
mortgage loans. The Federal Home Loan Mortgage Corporation (Freddie
Mac) in 1971 issued its first mortgage-backed participation
certificates. For a number of years, mortgage-backed securities were
almost exclusively a product of government-sponsored entities
(GSE's), such as Freddie Mac and the Federal National Mortgage
Association (Fannie Mae), and Ginnie Mae. MBS issued by these GSE's
and Ginnie Mae have been and continue to be exempt from registration
under the Securities Act and most provisions of the federal
securities laws. For example, Ginnie Mae guarantees are exempt
securities under Section 3(a)(2) of the Securities Act (15 U.S.C.
77c(a)(2)) and Section 3(a)(12) of the Exchange Act (15 U.S.C.
78c(a)(12)). The chartering legislation for Fannie Mae and Freddie
Mac contain exemptions with respect to those entities. See 12 U.S.C.
1723c and 12 U.S.C. 1455g. As a result, only non-GSE ABS, or so
called ``private label'' ABS, will be required to comply with the
new rules. For more information regarding the GSE's and Ginnie Mae,
see Task Force on Mortgage-Backed Securities Disclosure, ``Staff
Report: Enhancing Disclosure in the Mortgage-Backed Securities
Markets'' (Jan. 2003) (hereinafter, the ``2003 MBS Disclosure
Report''). This report is available on our Web site at http:
http://www.sec.gov.
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There are several distinguishing features between asset-backed
securities and other fixed-income securities. For example, ABS
investors are generally
[[Page 1511]]
interested in the characteristics and quality of the underlying assets,
the standards for their servicing, the timing and receipt of cash flows
from those assets and the structure for distribution of those cash
flows. As a general matter, there is essentially no business or
management (and therefore no management's discussion and analysis of
financial performance and condition) of the issuing entity, which is
designed to be a solely passive entity. GAAP financial information
about the issuing entity generally does not provide useful information
to investors. Information regarding characteristics and quality of the
assets is important for investors in assessing how a pool will perform.
Information relating to the quality of servicing of the underlying
assets also is relevant to assessing how the asset pool is expected to
perform and the reliability of the allocation and distribution
functions. Another focus is the legal and structural nature of the
issuing entity and the transfer of the assets to the issuing entity to
assess legal and credit separation from third parties. ABS investors
also analyze the impact and quality of any credit enhancements and
other support designed to provide additional protection against losses
and ensure timely payments.
A sponsor typically initiates a securitization transaction by
selling or pledging to a specially created issuing entity a group of
financial assets that the sponsor either has originated itself or has
purchased in the secondary market.\46\ Sponsors of asset-backed
securities often include banks, mortgage companies, finance companies,
investment banks and other entities that originate or acquire and
package financial assets for resale as ABS. In some instances, the
transfer of assets is a two-step process: the financial assets are
transferred by the sponsor first to an intermediate entity, often a
limited purpose entity created by the sponsor for a securitization
program and commonly called a depositor, and then the depositor will
transfer the assets to the issuing entity for the particular asset-
backed transaction.\47\
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\46\ While ``sponsor'' is a commonly used term for the entity
that initiates the asset-backed securities transaction, the terms
``seller'' or ``originator'' also are often used in the market.
However, as noted in the text, in some instances the sponsor is not
the originator of the financial assets but has purchased them in the
secondary market. Hence, we use the term ``sponsor.''
\47\ Where there is not a two-step transfer, the terms
``sponsor'' and ``depositor'' are commonly used interchangeably in
the market.
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The issuing entity, most often a trust with an independent trustee,
then issues asset-backed securities to investors that are either backed
by or represent interests in the assets transferred to it. The proceeds
of the sale of the asset-backed securities are used to pay for the
assets that were transferred to the trust. Because the issuing entity
is designed to be a passive entity, one or more ``servicers,'' often
affiliated with the sponsor, are generally necessary to collect
payments from obligors of the pool assets, carry out the other
important functions involved in administering the assets and to
calculate and pay the amounts net of fees due to the investors that
hold the asset-backed securities to the trustee, which actually makes
the payments to investors.
The predominant purchasers of asset-backed securities today are
institutional investors, including financial institutions, pension
funds, insurance companies, mutual funds and money managers.\48\
Generally, ABS are not marketed to retail investors. However,
securitizations of one fairly unique asset type--transactions that pool
and securitize outstanding debt securities of other issuers--often are
marketed to retail investors and are listed on a national securities
exchange.\49\
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\48\ See 2003 MBS Disclosure Report.
\49\ A ``national securities exchange'' is an exchange
registered as such under Section 6 of the Exchange Act (15 U.S.C.
78f).
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While some ABS transactions consist of simple pass-through
certificates representing a pro rata share of the cash flows from the
underlying asset pool, ABS transactions often involve multiple classes
of securities, or tranches, with complex formulas for the calculation
and distribution of the cash flows. In addition to creating internal
credit enhancement or support for more senior classes, these structures
allow the cash flows from the asset pool to be packaged into securities
designed to provide returns with specific risk and timing
characteristics.
Transaction agreements specify the structure of an ABS transaction.
A common form of such an agreement is a ``pooling and servicing
agreement'' often among the sponsor, the trustee and the servicer. A
pooling and servicing agreement often governs the transfer of the
assets from the sponsor to the issuing entity and sets forth the rights
and responsibilities of participants. Typically, the agreement also
will detail how cash flows generated by the asset pool will be divided,
commonly referred to as the ``flow of funds'' or ``waterfall.'' The
flow of funds specifies the allocation and order of cash flows,
including interest, principal and other payments on the various classes
of securities, as well as any fees and expenses, such as servicing
fees, trustee fees or amounts to maintain credit enhancement or other
support. Cash flows also may be directed into various accounts, such as
reserve accounts to provide support against potential future
shortfalls. The agreement also specifies the type and content of
reports that will be provided to investors regarding ongoing
performance of the transaction.
In addition to any internally provided credit enhancement or
support, the sponsor or other third parties may provide external credit
enhancements or other support for the asset-backed securities.\50\ For
example, third party insurance may be obtained to reimburse losses on
the pool assets or the asset-backed securities themselves. In addition,
the issuing parties may arrange with a counterparty for an interest
rate swap or similar swap transaction to provide incidental changes to
cash-flow and return, such as where a floating-rate interest is to be
paid on ABS backed by financial assets that pay a fixed rate of
interest.
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\50\ A guarantee of a security would be a separate ``security''
under Section 2(a)(1) of the Securities Act (15 U.S.C. 77b(a)(1)).
---------------------------------------------------------------------------
Credit rating agencies play a large role in most ABS transactions.
As with a traditional corporate debt security, a rating on an asset-
backed security is designed only to reflect credit risk. The rating
generally does not address other market risks that may result from
changes in interest rates or from prepayments on the underlying asset
pool.
Before the Proposing Release, there had been few Commission
initiatives directly related to ABS. In connection with the passage of
the Secondary Mortgage Market Enhancement Act of 1984 (SMMEA),\51\ the
Commission permitted shelf registration to SMMEA eligible
securities.\52\ In 1992, the Commission extended shelf registration to
non-mortgage investment grade ABS.\53\ That same year, the Commission
also adopted a rule under the Investment Company Act of 1940 \54\ to
exclude ABS transactions under specific conditions from the definition
of an investment company.\55\ More recently,
[[Page 1512]]
the Commission tailored rules for asset-backed securities in its
implementing rulemakings under the Sarbanes-Oxley Act, including
exempting asset-backed securities from the reporting and attestation
requirements relating to internal control over financial reporting
established by Section 404 of the Sarbanes-Oxley Act.\56\ The
Commission followed this approach in contemplation of current staff
practice and this rulemaking initiative where applicable objectives
underlying the Sarbanes-Oxley Act, including requirements suitable to
ABS transactions, could be evaluated.
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\51\ Pub. L. No. 98-440, 98 Stat. 1689. See also Section II.C.1.
of the 2003 MBS Disclosure Report.
\52\ See Release No. 33-6499 (Nov. 17, 1983) [48 FR 52889] and
Securities Act Rule 415(a)(1)(vii) (17 CFR 230.415(a)(1)(vii)).
\53\ See note 32 above.
\54\ 15 U.S.C. 80a-1 et seq.
\55\ See Release No. IC-19105 (Nov. 19, 1992) [57 FR 56248] and
Investment Company Act Rule 3a-7 (17 CFR 270.3a-7). See also Release
No. IC-18736 (May 29, 1992) [57 FR 23980] (proposing Investment
Company Act Rule 3a-7 and explaining the application of the
Investment Company Act to ABS transactions). As we stated in the
Proposing Release, the application of the Investment Company Act to
ABS transactions is beyond the scope of this release. We note,
however, that an ABS transaction that relies on Rule 3a-7 must
comply with the conditions of that rule regardless of whether the
issuer may register the offering of its asset-backed securities on
Form S-3 or S-1. We encourage pre-filing conferences with the staff
to discuss, as appropriate, questions or issues that may arise
regarding the availability of Rule 3a-7, or any other applicable
exemption, under the Investment Company Act to an ABS transaction.
\56\ See, e.g., Release No. 33-8238 (Jun. 5, 2003) [68 FR 36636]
(Management's report on internal control over financial reporting
and certification of disclosure in Exchange Act reports); Release
No. 33-8220 (Apr. 9, 2003) [68 FR 18788] (Standards relating to
listed company audit committees); Release No. 33-8183 (Jan. 28,
2003) [68 FR 6006] (Commission requirements regarding auditor
independence); and Release No. 33-8177 (Jan. 23, 2003) [68 FR 5110]
(Disclosure required by Sections 406 and 407 of the Sarbanes-Oxley
Act of 2002).
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As we stated in the Proposing Release, we recognize that
securitization is playing an increasingly important role in the
evolution of the fixed income financial markets. Our staff has
attempted to accommodate the different nature of ABS and evolving
business practices, while reducing unnecessary or impractical
compliance burdens, through its numerous no-action and interpretive
positions. However, the accumulated informal guidance, while helpful to
some ABS transactions, has diminished the transparency of applicable
requirements because an ABS registrant or investor seeking to
understand the applicable requirements must review and assimilate a
large body of no-action letters and other staff positions. This time-
consuming practice decreases efficiency and transparency and leads to
uncertainty and common problems. Even before we issued the proposals,
many issuers, investors and other market participants had requested a
defined set of regulatory requirements for guidance.\57\ Commenters on
the proposals expressed universal support for a separate framework for
the registration and reporting of ABS.\58\ Staff reviews of filings
provide further evidence that many compliance issues may be mitigated
and potential issues avoided through clearer and more transparent
regulatory requirements. Recent market events involving distressed
transactions also have highlighted the need for improved disclosures as
well as a renewed attention on servicing practices.\59\
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\57\ See, e.g., Letter from the Association for Investment
Management and Research (``AIMR'') to Brian J. Lane, Director,
Division of Corporation Finance, ``Recommendations for a Disclosure
Regime for Asset-Backed Securities'' (Sep. 30, 1996); Letter from
ICI to Michael H. Mitchell, Special Counsel, Division of Corporation
Finance, ``Asset-Backed Securities Offerings'' (Oct. 29, 1996);
Letter from BMA to Brian Lane, Director, Division of Corporation
Finance, ``Response to Staff Request for Suggestions Concerning
Possible Reforms of Disclosure and Reporting Rules for Mortgage and
Asset-Backed Securities'' (Nov. 5, 1996); Letter from BMA to
Jonathan G. Katz, Secretary, Securities and Exchange Commission,
``Securities Acts Concepts and Their Effects on Capital Formation
(Release No. 33-7314) (File No. S7-19-96)'' (Nov. 8, 1996); Letter
from MBA to Brian J. Lane, Director, Division of Corporation Finance
(Feb. 18, 1997); Letter from The Association of the Bar of the City
of New York to Jonathan G. Katz, Secretary, Securities and Exchange
Commission, ``Securities Act Release No. 33-7606A File No. S7-30-
98'' (Apr. 5, 1999); Letter from ABA to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, ``The Regulation of Securities
Offerings (File No. S7-30-98)'' (Jun. 29, 1999); Letter from ICI to
Jonathan G. Katz, Secretary, Securities and Exchange Commission,
``The Regulation of Securities Offerings (File No. S7-30-98)'' (Jun.
29, 1999); Letter from MBA to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, ``The Regulation of Securities
Offerings (File No. S7-30-98)'' (Jun. 30, 1999); Letter from Merrill
Lynch & Co., Inc. to Securities and Exchange Commission, ``The
Regulation of Securities Offerings (File No. S7-30-98)'' (Jun. 30,
1999); Letter from Residential Funding Corporation to Securities and
Exchange Commission, ``File No. S7-30-98--The `Aircraft Carrier
Release' '' (Jun. 30, 1999); Letter from BMA to David B.H. Martin,
Director, Division of Corporation Finance, ``Securities Act Reform''
(Nov. 30, 2001); and Letter from BMA to Alan L. Beller, Director,
Division of Corporation Finance, ``Prior Correspondence Regarding
Asset-Backed Securities Reform'' (Apr. 23, 2002).
\58\ See note 27 above.
\59\ See, e.g., notes 201, 229, and 235 below. See, also, ``If
Issuers Can Steal, Where's the Deal Cop,'' Asset Securitization
Report, Feb. 17, 2003, at 6; Christine Richard; ``Moody's Trustees
Don't See Eye-to-Eye on Trustee Role,'' Dow Jones Newswires, Feb. 4,
2003; and ``SEC Filings Reveal Little ABS Reporting Consistency,''
Asset Securitization Report, Sep. 23, 2002, at 10.
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Against this background, we issued the proposals to clarify the
regulatory requirements for asset-backed securities in order to
increase market efficiency and transparency and provide more certainty
for the overall ABS market and its investors and other participants.
After carefully evaluating the comments received on the proposals, we
are adopting these new regulatory requirements, as discussed further
below.
III. Discussion of the Amendments
A. Securities Act Registration
1. Current Requirements
The 1992 Release, as part of a broad effort to expand access to
shelf registration, allowed shelf registration for offerings of
investment grade \60\ asset-backed securities without a reporting
history requirement for the issuing entity.\61\ As a result, a sponsor
or depositor may register asset-backed securities to be offered on a
delayed basis in the future through one or more offerings, or
``takedowns,'' of securities off of the shelf registration statement.
Since the 1992 Release, shelf registration on Form S-3 has become the
predominant method of registration for public offerings of asset-backed
securities. Offerings generally are only registered on another form,
most likely Form S-1 and less frequently Form S-11, if for some reason
the securities technically do not meet the definition of ``asset-backed
security'' in General Instruction I.B.5 of Form S-3 or an
interpretation of that definition.
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\60\ ``Investment grade'' is defined in General Instruction
I.B.2 of Form S-3 to mean that, at the time of sale, at least one
nationally recognized statistical rating organization (as that term
is used in Exchange Act Rule 15c3-1(c)(2)(vi)(F) (17 CFR 240.15c3-
1(c)(2)(vi)(F))) has rated the security in one of its generic rating
categories which signifies investment grade. Typically, the four
highest rating categories (within which there may be sub-categories
or gradations indicating relative standing) signify investment
grade.
\61\ Securities Act Rule 415 (17 CFR 230.415) permits
registration of offerings of securities on a delayed or continuous
basis, and paragraph (a)(1)(x) of that rule permits such
registration with respect to offerings registered (or qualified to
be registered) on Form S-3. The 1992 Release, among other things,
added General Instruction I.B.5 to Form S-3, which permits
registration of offerings of investment grade asset-backed
securities. Certain mortgage related securities, as defined in
Section 3(a)(41) of the Exchange Act (15 U.S.C. 78c(a)(41)), are
permitted to be offered on a delayed basis under Securities Act Rule
415(a)(1)(vii). See note 52 above. Our actions today do not affect
the continued availability of Rule 415(a)(1)(vii) for shelf
registration of mortgage related securities, as defined, even if
they do not meet the requirements of Form S-3. However, consistent
with our movement of all asset-backed securities offerings to Form
S-1 or Form S-3, to the exclusion of Form S-11, mortgage related
securities offerings should use Form S-1 in lieu of Form S-11 for
future transactions. Just like prior practice on Form S-11, an
offering meeting the requirements of Rule 415(a)(1)(vii) could be a
continuous or delayed offering on Form S-1.
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For offerings registered on a shelf basis on Form S-3, the
prospectus disclosure in the registration statement is often presented
through the use of two primary documents: the ``base'' or ``core''
prospectus and the prospectus supplement. The base prospectus outlines
the parameters of the various types of ABS offerings that may be
[[Page 1513]]
conducted in the future, including asset types that may be securitized,
the types of security structures that may be used and possible credit
enhancements or other forms of support. The registration statement at
the time of effectiveness also contains one or more forms of prospectus
supplement, which outline the format of deal-specific information that
will be disclosed at the time of each takedown. At the time of a
takedown, a final prospectus supplement is prepared which describes the
specific terms of the takedown, and the base prospectus and the final
prospectus supplement together form the final prospectus which is filed
with the Commission pursuant to Securities Act Rule 424(b).\62\
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\62\ 17 CFR 230.424(b).
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2. Definition of Asset-Backed Security
a. Approach and Supplemental Request for Comment for Other Structured
Securities
As we explained in the Proposing Release, the term ``asset-backed
security'' currently is defined only for purposes of Form S-3. As many
of our amendments relate to the treatment of asset-backed securities
regardless of the form on which their offering is initially registered,
we are moving the definition of ``asset-backed security,'' as proposed,
to the definition section of Regulation AB, our new sub-part in
Regulation S-K for asset-backed securities (discussed more fully in
Section III.B). Under this new format, a security that meets the
general definition of ``asset-backed security'' will be subject to the
disclosure and other requirements of the new rules, regardless of the
Form used for registration. Any additional conditions appropriate for
Form S-3 eligibility, such as an investment grade requirement, will be
retained in General Instruction I.B.5 of Form S-3, as discussed in
Section III.A.3.c.
As we explained in the Proposing Release, after more than ten years
of experience with the definition of ``asset-backed security,'' we
believe that the core definition is still sound. The definition is
principles-based and allows broad flexibility as to asset types and
structures that we believe should be subject to the alternative
disclosure and regulatory regime that exists for asset-backed
securities. As the Commission stated in the 1992 Release, the
definition does not distinguish between pass-through and pay-through
asset-backed securities nor does it limit application to a list of
``eligible'' assets that can be securitized, so long as such assets
meet the general principle that they are a discrete pool of financial
assets that by their terms convert into cash within a finite time
period.\63\ We continue to believe, conversely, that the regime we have
specifically designed for asset-backed securities is not necessarily
appropriate for securities that do not meet these principles.
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\63\ For example, common stock and similar equity instruments do
not meet this general principle. Our view would not be altered if
the equity security was subject to a separate liquidity or
repurchase agreement or other arrangement. However, limited life
equity securities, such as trust preferred securities, that
themselves have a finite life and a mandatory redemption, could
satisfy the general principle.
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As we explained in the Proposing Release, experience with the
definition has resulted in several interpretations since its adoption.
These interpretations clarify the principles in the definition or, in
some instances, permit limited exceptions to one or more of those
principles where appropriate and consistent with overall application of
the ABS regulatory regime. These interpretations have developed
primarily through staff processing of ABS registration statements and,
in a few instances, through staff no-action letters. As such, these
interpretations may not always have been transparent, and we proposed
codifying them with several expansions to allow additional asset types
and transaction features to be considered an ``asset-backed security,''
including for purposes of shelf registration if the asset-backed
securities meet the additional criteria for registration on Form S-3,
such as the investment grade requirement.
Commenters were mixed on our proposed approach. On the one hand,
commenters representing investors expressed reticence in expanding
access to the ABS regulatory regime out of concern that it could have
certain unintended consequences, such as investment decisions on these
additional transactions being made under more compressed time frames
and with less access to information through shelf registration.\64\ On
the other hand, commenters representing primarily issuers and their
representatives would have preferred, in lieu of our proposed approach
of codifying limited exceptions to the existing definition's core
principles, abandoning many of the core principles themselves to allow
additional securities to receive the benefits of the proposed regime,
such as immediate shelf registration and the ability to use ABS
informational and computational material.\65\ For example, most of
these commenters would have preferred deleting the ``discrete pool''
requirement from the existing 1992 definition, hence rendering the
proposed expansions to the existing interpretive exceptions from that
requirement, such as those relating to master trusts, prefunding
periods and revolving periods, unnecessary and thereby permitting
unlimited use of those concepts. These commenters generally argued that
such requirements would restrict innovation and were unnecessary to
protect the universe of mostly institutional investors. According to
the view of these commenters, any concerns with abandoning these and
several other existing principles in the definition, such as the
proposed delinquency and non-performing interpretations designed to
uphold the principle that the ABS are primarily dependent on a pool of
assets that self-liquidate instead of on the ability of the entity
managing and foreclosing on the assets, could be addressed through
disclosure.
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\64\ See, e.g., Letter of ICI.
\65\ See, e.g., Letters of ABA; ASF; Auto Group; ESF; and FSR.
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We continue to believe that the ABS regime is at bottom not
designed for transactions that depart significantly from the principles
behind the definition. The alternative regime for asset-backed
securities represents the codification of a very different
registration, disclosure and reporting regime from that applicable to
other securities, including other structured securities. We continue to
believe that the current and proposed definition of ``asset-backed
security'' reflects the core principles for securities that should be
subject to this alternative regime, while still providing great
flexibility and room for development. We continue to believe that
emphasis on certain core principles is appropriate for these purposes,
such as that the securities are primarily backed by a pool of assets,
that there is a discrete pool with a general absence of active pool
management, and an emphasis on the self-liquidating nature of pool
assets that by their own terms convert into cash.
We do recognize, as have the staff in their prior interpretations,
that there are instances where some limited exceptions to these general
principles would be appropriate and consistent with access to the
alternate regulatory regime, and these are reflected in the
interpretations and exceptions discussed below. However, necessarily
there is a point where application of the alternate regime is no longer
appropriate. The further the security deviates from the core
principles, the more acute concerns, such as those expressed by
investors, become, which are not just disclosure concerns, that the
security should not be treated necessarily the same as other securities
[[Page 1514]]
that meet our definition of ``asset-backed security.'' In those
instances, additional or different disclosures and/or registration and
reporting treatment may be more appropriate.
As an example, we noted in the Proposing Release that, given the
existing concept in the definition of a discrete pool of financial
assets that by their terms convert into cash within a finite time
period, so-called ``synthetic'' securitizations are not included in
Regulation AB's basic definition of ABS for purposes of determining
whether the security qualifies for the particularized registration,
disclosure and reporting regime under the Securities Act and Exchange
Act we are adopting today. Synthetic securitizations are designed to
create exposure to an asset that is not transferred to or otherwise
part of the asset pool. These synthetic transactions are generally
effectuated through the use of derivatives such as a credit default
swap or total return swap. The assets that are to constitute the actual
``pool'' under which the return on the ABS is primarily based are only
referenced through the credit derivative.
Some commenters representing primarily issuers and underwriters
objected to not making accommodations in the definition of asset-backed
security for synthetic securitizations.\66\ These commenters generally
argued that while these securities may not necessarily meet all of the
core principles in the existing definition, they are still structured
securities that should be treated under the Securities Act and the
Exchange Act in the same manner and with access to the same benefits as
an asset-backed security. The commenters also expressed concern that
not addressing the appropriate treatment of synthetic securities would
make it more difficult for market participants to develop such products
without continued discussions with the staff, as they do today, for
this developing submarket.
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\66\ See, e.g., ASF; BMA; and CGMI.
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As we explained in the Proposing Release, for purposes of
determining whether a security qualifies for the particularized
regulation regime of Regulation AB, we believe the requirement that
performance is primarily tied to a discrete pool of financial assets
that by their terms convert into cash entails that the performance is
primarily by reference to the assets in the pool. Synthetic
securitizations do not meet the basic concepts embodied in our
definition of asset-backed security for several reasons. Payments on
the securities in a synthetic securitization can primarily or entirely
comprise or include payments based on the value of a reference asset
which is unrelated to the value of or payments on any actual assets in
the pool. Payment is therefore by reference to an asset not in the pool
instead of primarily from the performance of a discrete pool of
financial assets that by their terms convert into cash and are
transferred to a separate issuing entity.
An example of a synthetic exposure would be a transaction where the
asset pool consists of securities coupled with a swap or other
derivative under which payments are made based on the value of an
equity or commodity or other index such that the payments on the
security comprise or include payments based primarily on the
performance of the external index and not by the performance of the
actual securities in the pool. Because payments in synthetic
securitizations are primarily based on the performance of assets or
indices not included in the pool, we do not believe such a
securitization should fall into the Regulation AB registration,
disclosure and reporting regime. Payments on ABS must be based
primarily on the performance of the financial assets in the pool.\67\
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\67\ Our view that securities resulting from synthetic
securitizations are not within the definition of ``asset-backed
security'' is not altered by the fact that payments on the swap or
other derivative based on the value of assets or indices not related
to the assets in the pool held by the issuer are conditioned on
performance of the assets in the pool held by the issuer. In
addition, the derivative does not act as credit enhancement on
existing pool assets or as rights or other assets designed to ensure
timely servicing or distribution, because it does not relate to the
value of any pool asset but instead relates to an external asset in
order to bring the risk of that asset into the pool synthetically.
Further, in a synthetic securitization, if a credit event occurs
there may be a transfer of assets that would no longer make the pool
discrete.
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Synthetic securitization transactions also differ from ABS
transactions where swaps or other derivatives are used either to reduce
or alter risk resulting from assets contained in the pool held by the
issuer. For example, the existence of an interest rate or currency swap
covering either or both of the principal or interest payments on assets
in the pool held by the issuer are designed to reduce or alter risk
resulting from those assets and fall within the definition of asset-
backed security. The return on the ABS is still based primarily on the
performance of the financial assets in the pool.\68\ We believe there
is a principles-based difference between structures that use an
interest rate or currency swap but whose performance is still primarily
based on the performance of the financial assets in the pool and
structures that use a swap or other derivative such that the
performance of the security is no longer primarily related to the
performance of the pool. Because certain interest rate and currency
swaps have been permitted consistent with this principle does not lead
to the conclusion that there is no such principle or that the principle
should be abandoned. Instead, the difference as to application in many
instances necessarily depends on the particular nature and structure of
the transaction in question.
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\68\ As another example of a swap or other derivative
permissible in an ABS transaction, a credit derivative such as a
credit default swap could be used to provide viable credit
enhancement for asset-backed securities. For example, a credit
default swap may be used to reference assets actually in the asset
pool, which would be analogous to buying protection against losses
on those pool assets. The issuing entity would pay premiums to the
counterparty (as opposed to the counterparty paying the premiums to
the issuing entity). If a credit event occurred with respect to a
referenced pool asset, the counterparty would be required to make
settlement payments regarding the pool asset or purchase the asset
to provide recovery against losses.
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As we explained in the Proposing Release, the basic definition of
``asset-backed security'' and its interpretations are intended to
establish parameters for the types of securities that are appropriate
for the alternate disclosure and regulatory regime we are adopting
today. This approach is based on the history and development of the
traditional ABS market such that a definable set of criteria and
requirements can be established. The definition does not mean or imply
in any way that public offerings of securities outside of these
parameters, such as synthetic securitizations, may not be registered
with the Commission, but only that the alternate regulatory regime we
are adopting today is not designed for those securities. The definition
does mean that such securities must rely on non-ABS form eligibility
for registration, including shelf registration.\69\
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\69\ As is the case today, Form S-1 is the default form for
registration for which no other form is authorized or prescribed.
See General Instruction I. to Form S-1.
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Some commenters were concerned that if such structured securities
were left outside the definition, issuers of those securities would be
forced to provide potentially misleading disclosures under Regulation
S-K if they were not included in Regulation AB. Structured securities
outside of the definition have been registered before the adoption of
Regulation AB, and the staff has worked with issuers to develop
appropriate disclosures for such securities under our existing
disclosure regime. As is the case today, we encourage issuers that are
[[Page 1515]]
contemplating structured securities outside of the Regulation AB
definition to have pre-filing conferences with the staff to discuss the
proposed transaction and the appropriate approach.
At the same time, we recognize that while it is pragmatic and
feasible to establish Regulation AB at this time for an appropriately
definable group of asset-backed securities, we also want to foster a
system that is most efficient and consistent with investor protection
for other structured securities, particularly for those that may
develop in the future but may not be contemplated in Regulation AB. We
understand that a default application of the existing disclosure regime
might not be most appropriate for these structured securities, but we
also believe that neither would it be appropriate for such securities
to be treated the same as ``asset-backed securities'' as we are
defining that term under Regulation AB. Depending on the structure of
the transaction and the terms of the securities, some disclosure
aspects of Regulation AB may be applicable, but aspects from the
traditional disclosure regime also may be applicable. In some
instances, a third approach might be more appropriate.
We seek additional comment on whether we should consider an
alternative scheme for these kinds of securities. We will evaluate
comments received in determining whether it is appropriate to issue
additional proposals or take other additional action, as appropriate.
In providing comments, please be as specific as possible.
Request for Comment
Apart from the traditional approach of addressing hybrid
securities as they arise, are there definable categories of securities
where neither the existing regime nor Regulation AB would be
appropriate, but a specifiable alternative regime would be? What would
be the advantages and disadvantages of such an approach? Is the
existing approach of addressing these securities more practical if and
until a market for that particular type of security matures such that
establishing a separate regime is appropriate? Are there additional
alternatives that should be considered? How are these securities
offered and sold today? Who offers and purchases these securities?
If an alternative regime should be established, how would
these securities be defined? Why should they be treated differently?
What would be appropriate for this alternative regime with
respect to registration, disclosure and ongoing reporting? What
flexibility should be permitted under the existing regime and what
additional or alternate requirements should be imposed?
While the Investment Company Act considerations are beyond
the scope of this release for ABS, we also would seek comment as to the
treatment of such securities, including synthetic securitizations,
under Rule 3a-7 under that Act or other exemptive provisions of that
Act or rules thereunder.
Regarding synthetic securitizations where the return on
the securities is not primarily dependent on the performance of the
pool, what additional disclosures would be appropriate? For example,
for other entities that offer securities and have derivatives or
contingent obligations, there is required disclosure of financial
intricacies, such as disclosures under FIN No. 45,\70\ FIN No. 46,\71\
SFAS No. 5 \72\ and SFAS No. 133,\73\ and off-balance sheet and MD&A
disclosure.\74\ Would some or all of these disclosures be appropriate
in synthetic securitizations? If not, why not? Please note these are
non-exclusive examples.
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\70\ See FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (Nov. 2002).
\71\ See FASB Interpretation No. 46R, Consolidation of Variable
Interest Entities (Dec. 2003).
\72\ See FASB Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies (Mar. 1975).
\73\ See FASB Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities
(Jun. 1998).
\74\ See Item 303 of Regulation S-K.
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Would financial statements be necessary to fully
understand the risks and potential performance of these securities?
Should some form of off-balance sheet disclosure be required when
performance is tied to such instruments? Should market valuations of
assets and liabilities be required?
Where performance of the security is primarily tied to the
performance of a derivative rather than the performance of the pool
assets, what additional disclosure should be required regarding the
derivative counterparty? Should financial statements for the derivative
counterparty always be required?
Where performance is by reference to an unrelated entity
or assets, what information should be required about the referenced
entity or assets?
b. Basic Definition
We are retaining the same basic definition of asset-backed security
that has existed since 1992, with the addition of the one modification
we proposed with respect to leases, discussed below. Under Regulation
AB, the basic definition of ``asset-backed security'' is ``a security
that is primarily serviced by the cash flows of a discrete pool of
receivables or other financial assets, either fixed or revolving, that
by their terms convert into cash within a finite time period, plus any
rights or other assets designed to assure the servicing or timely
distributions of proceeds to the securityholders; provided that in the
case of financial assets that are leases, those assets may convert to
cash partially by the cash proceeds from the disposition of the
physical property underlying such leases.'' \75\ We also are codifying,
with modifications and expansions in response to specific comment, the
several clarifying interpretations we proposed to the definition that
recognize and build upon the operational and structural distinctions
between ABS and non-ABS transactions. Each of these interpretations is
discussed below in a separate subsection.
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\75\ The reference to ``financial assets that are leases'' is
meant to clarify the application of the definition with respect to
leases and is not meant to affect the accounting treatment of the
lease.
---------------------------------------------------------------------------
As we stated in the 1992 Release and the Proposing Release, the
basic definition is sufficiently broad to encompass any self-
liquidating asset which by its terms converts into cash payments within
a finite time period. There are no substantive requirements as to the
timing of the cash flows under the definition, such as that they must
be constant and uninterrupted. For example, so-called ``balloon'' loans
that have large payments at maturity that differ from other payments
during the term of the loan would be included.\76\
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\76\ We understand that in some jurisdictions, balloon loans for
motor vehicles are structured to be similar to leases. At maturity
of the loan, the obligor may return the vehicle to the lender to
satisfy the balloon payment. In such instances, if the cash flows
that are to back the asset-backed securities are to include the
balloon payment, the limits on the portion of the securitized pool
balance attributable to residual values of the pool assets,
discussed in Section III.A.2.d., should apply to such securities the
same as if they were backed by leases and disclosure similar to that
described in Section III.B.5.b. should be provided. If the pool
includes a mixture of leases and balloon loans, they should be
treated together for purposes of those calculations.
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c. Nature of the Issuing Entity
The first set of interpretations we are codifying relates to the
nature of the issuing entity in whose name the asset-backed securities
are issued. As we explained in the Proposing Release, we believe that
two interpretations always have been implied, and, as proposed, we are
codifying both as additional
[[Page 1516]]
conditions to the definition of ``asset-backed security.''
The first condition is that neither the depositor nor the issuing
entity is an investment company under the Investment Company Act, nor
will either become one as a result of the asset-backed securities
transaction. If either was the case, we continue to believe that the
regime for asset-backed securities that we are adopting today would not
be appropriate.
The second condition relates to the passive nature of the issuing
entity in that its activities must be restricted to the asset-backed
securities transaction. In particular, the activities of the issuing
entity must be limited to passively owning or holding the pool of
assets, issuing the asset-backed securities supported or serviced by
those assets, and other activities reasonably incidental thereto. As we
stated in the proposing release for the 1992 amendments, the legal
nature of the issuing entity--whether a trust, limited purpose
subsidiary or other legal person--is not necessarily relevant.\77\
However, we believe the limited function and permissible activities of
the issuing entity are fundamental to the notion of a security that is
to be backed solely by a pool of assets.
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\77\ See Release No. 33-6943 (July 16, 1992) [57 FR 32461].
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Commenters generally agreed with this principle, although several
expressed concern with the wording of the condition that the issuing
entity's activities are limited to ``passively'' owning or holding the
pool assets, issuing the ABS and other reasonably incidental
activities.\78\ This formulation already exists in Exchange Act Rule
10A-3 to exclude similar securities from the mandated requirements for
national securities exchanges and national securities associations to
impose audit committee listing requirements for such issuers.\79\ We
are retaining the term in the final condition for the definition of
``asset-backed security.'' We believe the use of this term neither
imposes a new requirement, nor is inconsistent with existing practice,
but instead is confirmatory of one of the fundamental premises of
asset-backed securitization that the issuing entity is intended to be
passive in nature and its activities limited to the asset-backed
securities transaction.
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\78\ See, e.g., Letters of ABA; ASF; and MBA.
\79\ See 17 CFR 240.10A-3(c)(7).
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In the Proposing Release, we also specified that in connection with
this condition, securities issued out of so-called ``series trusts'' do
not qualify as asset-backed securities under the definition. Under the
concept of a series trust, the same trust will conduct wholly separate
ABS transactions out of the same trust. The trust will hold separate
pools of assets with separate classes of securities for each pool.
Securities backed by one pool do not have rights to the other pools. As
we described in the Proposing Release, the issuing entity in this
instance is not limited to owning and holding one asset pool and
issuing securities backed by that pool.
Several commenters representing issuers, underwriters and their
representatives wished to relax this existing principle, arguing that
series trusts may reduce the costs of creating multiple issuing
entities by having multiple unrelated transactions under one
entity.\80\ However, the more fundamental issue with the use of
multiple, separate and unrelated transactions under one issuing entity
for asset-backed securities is that it raises concerns that deviate
from the core principle that investors of a particular asset-backed
security should look solely to the related pool of assets for primary
repayment. With a series trust structure, instead of only analyzing the
particular pool, an investor also may need to analyze any effect on its
security, including bankruptcy remoteness issues, if problems were to
arise in another wholly separate and unrelated transaction in the same
issuing entity. These concerns are exacerbated if new unrelated
transactions are created after the original transaction involving the
investor. No commenter indicated that series trusts as described above
have been commonly used for issuing asset-backed securities.
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\80\ See, e.g., Letters of ABA; ASF; and BMA.
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Other commenters requested clarification as to the scope of what is
considered in the concept of a ``series trust.'' As we explained in the
Proposing Release, the concept of a series trust, with multiple,
separate and unrelated transactions in one issuing entity, is different
from a master trust structure typical in credit card ABS and discussed
later where all securities, although issued at different times, are
backed by one pool. In addition, we explained that an ABS transaction
with one asset pool could divide allocations of the cash flows from the
pool among separate classes of securities and still qualify as an
``asset-backed security.'' \81\ This could include allocating cash
flows from various defined subpools within the larger pool to support
particular classes but not others, regardless of whether there is any
cross-cashflow support or collateralization. In these instances, there
is still only one ultimate pool held by the issuing entity with
securities backed by that single pool.
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\81\ Further, both the condition relating to the passive nature
of the issuing entity and the concept of a series trust are
unrelated to the tax treatment of the transaction, such as REMIC
elections.
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We also explained in the Proposing Release that some ABS
transactions are structured such that the asset pool consists of one or
more financial assets that represent an interest in or the right to the
payments or cash flows of another asset pool solely in order to
facilitate the asset-backed issuance. For example, some older credit
card master trust structures have added an ``issuance trust'' structure
to provide additional flexibility in the types of ABS that may be
offered. An issuance trust generally receives a collateral certificate
from the master trust representing an interest in the master trust
asset pool. The master trust often may have issued its own ABS backed
by the same pool. The issuance trust then issues its own ABS backed by
the collateral certificate, and hence indirectly by the whole master
trust pool. This structure would be consistent with the definition of
``asset-backed security.'' \82\
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\82\ However, using the issuance trust for subsequent unrelated
transactions in the manner discussed in the text with respect to
series trusts would not be consistent with the definition.
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Another structure we referenced in the Proposing Release relates to
one used in some auto lease transactions where the auto leases and car
titles often are originated in the name of a separate trust, sometimes
called an ``origination'' or ``titling'' trust, to avoid administrative
expenses in retitling the physical property underlying the leases. The
origination trust will issue to the issuing entity for the ABS a
certificate, often called a ``special unit of beneficial interest'' or
SUBI, representing a beneficial interest in a pool of leases and
automobiles in the origination trust which is to constitute the asset
pool. The ABS issuing entity will issue ABS backed by the SUBI
certificate, and hence indirectly by the assets underlying the SUBI.
For the next transaction, the origination trust will issue a separate
SUBI representing a separate pool of leases and automobiles in the
origination trust which is to constitute the asset pool for the next
transaction. This SUBI will be transferred to a newly created issuing
entity for the next transaction which will issue ABS backed by the
second SUBI. In each instance, although the same origination trust will
issue multiple SUBIs representing multiple pools in the trust, there is
a separate
[[Page 1517]]
issuing entity for each ABS issuance whose ``pool'' consists of a
separate SUBI, and hence indirectly a separate underlying group of
assets. In our proposals and in our final rules we recognize this
unique structure that developed under current practice before the
codification of the new ABS regulatory regime, but, as proposed, we do
not extend the origination trust structure to other asset classes that
do not use it currently.
d. Delinquent and Non-Performing Pool Assets
In 1997, Commission staff issued a no-action letter clarifying that
an asset pool having total delinquencies of up to 20% at the time of
the proposed offering may still be considered an ``asset-backed
security.'' \83\ In addition, there also exists a longstanding staff
interpretive position that no non-performing assets may be included as
part of the asset pool at the time of the proposed offering. We are
codifying these interpretations, with modifications from our original
proposal.
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\83\ See Bond Market Ass'n (Oct. 8, 1997).
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The issue in either case is that such assets may no longer be (or
in the case of non-performing assets, are not) converting into cash
within a finite time period, as required by the definition of asset-
backed security, given that such assets are not performing in
accordance with their terms and management or other action may be
needed to convert them to cash. While as discussed above some
commenters requested relaxing these clarifications, we believe the
principle that the ABS should be primarily dependent on a pool of
assets that self-liquidate instead of on the ability of the entity
performing collection services is an important principle that should be
retained. Further, we believe the conditions we are codifying regarding
delinquent and non-performing assets, as revised in response to comment
and discussed below, are appropriate in achieving this principle.
i. How To Calculate Delinquency and Non-Performing Levels
Several commenters requested clarification regarding when
delinquency and non-performance levels should be measured.\84\ In the
Proposing Release, we reiterated the standard in the 1997 no-action
letter that the cut-off date (i.e., the date on and after which
collections on the pool assets accrue for the benefit of the ABS
holders) may be employed to establish delinquency and non-performance
levels. The commenters requested further specificity regarding this
standard, as well as clarity regarding application to master trusts. In
response to commenters' suggestions, we are adding an instruction
specifying that the measurement date for the delinquency and non-
performing thresholds is to be the cut-off date for the transaction, if
applicable, or, in the case of master trusts, the date as of which
delinquency and loss information is presented in the prospectus for the
securities.\85\
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\84\ See, e.g., Letters of ABA; ASF; and Kutak.
\85\ Also in response to commenters' concerns, we have
eliminated the word ``original'' from the proposed reference to the
asset pool as unnecessary under the revised formulation.
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Additional commenters requested clarification regarding
transactions that include non-performing or delinquent assets as part
of a pool but not as part of the funded portion and not as part of cash
flow calculations for the asset-backed securities.\86\ In other words,
some transactions permit non-performing or delinquent loans to be
included, although the proceeds of the asset-backed securities are not
used to fund or purchase those assets for the pool and those assets are
not considered in cash flow calculations. As another example, a master
trust may contemplate that a pool asset that becomes non-performing may
remain designated to the pool after being charged-off, with the asset
being assigned a zero balance and not considered in cash flow
calculations. We are including an instruction clarifying that non-
performing and delinquent assets that are not funded or purchased by
proceeds from the asset-backed securities and that are not considered
in cash flow calculations for the asset-backed securities need not be
considered as part of the asset pool for purposes of determining non-
performing and delinquency thresholds.\87\
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\86\ See, e.g., Letters of ASF; Capital One; and MBNA.
\87\ Of course, in such instances clear disclosure should be
provided to investors of these features and the manner, composition,
treatment and effect of those assets.
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Some commenters also requested clarification as to calculating the
thresholds for master trusts given that the same asset pool supports
different series of ABS over time.\88\ We are adding an additional
instruction clarifying that the thresholds are to be measured against
the entire pool whose cash flows support the asset-backed securities
and not just against any new assets that are added as a result of the
new issuance. Otherwise, issuers could effectively avoid the
requirements by conducting the transaction through a multi-step master
trust transaction instead of through a single transaction.\89\
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\88\ See, e.g., Letters of A&O; ASF; and MBNA.
\89\ Some of these commenters expressed concern regarding master
trusts with assets that were originally performing for a previous
issuance but that subsequently become non-performing. This situation
for subsequent ABS issuances can be addressed by the codification of
existing practice that such assets be assigned a zero pool balance
and no longer be considered in cash flow transactions as part of the
securitized pool.
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ii. Non-Performing Pool Assets
Regarding non-performing pool assets, we are codifying as proposed
the longstanding requirement that no non-performing assets may be part
of the asset pool, determined as of the measurement date discussed
above. We are not persuaded by commenters' requests that the position
should be relaxed.\90\
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\90\ See, e.g., Letters of ABA and Jones Day.
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As we discussed in the Proposing Release, part of the difficulty
for issuers in complying with the existing interpretive position is
that there has been no uniform definition of what is a ``non-performing
asset.'' As commenters confirmed to us, the point at which a financial
asset is considered ``non-performing'' is often dependent upon asset
type, with some financial assets being considered non-performing before
other types of financial assets would.\91\ However, we continue to
believe the point at which the financial asset should be charged-off is
a consistent reference point, even if the point at which that event
would occur may vary. Accordingly, we are defining ``non-performing''
to be a pool asset if any of the following is true:
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\91\ See, e.g., Letters of ABA; Auto Group; MBA; and MBNA.
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The pool asset would be treated as wholly or partially
charged-off under the requirements in the transaction agreements for
the asset-backed securities;
The pool asset would be treated as wholly or partially
charged-off under the charge-off policies of the sponsor, an affiliate
of the sponsor that originates the pool asset or a servicer that
services the pool asset; or
The pool asset would be treated as wholly or partially
charged-off under the charge-off policies applicable to such pool asset
established by the primary safety and soundness regulator of any entity
listed above or the program or regulatory entity that oversees the
program under which the pool asset was originated.\92\
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\92\ As a result, the charge-off requirement that is most
restrictive will govern. Of course, under the definition as proposed
and as adopted, a pool asset that changes payment status in
accordance with its terms (e.g., a student loan that is in ``in-
school,'' grace, deferment or forbearance status) does not make the
asset ``non-performing,'' unless the asset also meets a charge-off
policy identified in the definition of ``non-performing.''
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[[Page 1518]]
We believe this definition provides flexibility for different asset
classes while still ensuring that no assets are included in the
securitized pool balance that would otherwise be considered to be non-
performing and thus charged-off under an objective standard. Commenters
generally supported this approach.\93\ This definition differs from our
original proposal in two principal ways. First, the definition has been
revised in response to a commenter's request to include references not
only to the sponsor's charge-off policies, but also to the policies of
any affiliated originator or the servicer of the pool asset.\94\
Second, the definition also includes a reference to the charge-off
policies applicable to such pool asset established by either the
primary safety and soundness regulator of the sponsor, an originating
affiliate or the servicer, or the program or regulatory entity that
oversees the program under which the pool asset was originated, as
applicable. Several commenters indicated that, depending on the loan
type, these regulators also have requirements for recognizing
delinquencies and losses.\95\
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\93\ See, e.g., Letters of ABA; Auto Group; and MBA.
\94\ See Letter of ABA.
\95\ See, e.g., Letters of ASF and MBNA.
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As we described in the Proposing Release, we also are adopting
requirements for disclosure of the relevant charge-off policies in
Regulation AB, discussed more fully in Section III.B. Commenters
representing investors in particular strongly supported such
disclosure.\96\
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\96\ See, e.g., Letters of MetLife and State Street.
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iii. Delinquent Pool Assets
In addition to the non-performing limitation, we also are codifying
a delinquency concentration limit in a manner consistent with the 1997
staff no-action letter. As we stated in the Proposing Release, because
we are creating a general definition of ``asset-backed security''
regardless of eligibility for shelf registration, we are adopting two
separate delinquency concentration limits. We are adopting the
percentage limits as proposed. For the general definition (e.g., for
offerings that could be registered on a non-shelf basis on Form S-1),
delinquent assets may not constitute 50% or more, as measured by dollar
volume, of the asset pool as of the measurement date described above.
As we noted in the Proposing Release, we believe concentrations above
that threshold begin to raise serious doubt that the transaction should
be characterized as an ``asset-backed security'' as the payments on the
securities in such transactions would appear to depend more on the
ability of the entity or entities that provide collection services for
the delinquent assets than on the self-liquidating nature of the
underlying assets. For shelf registration eligibility, we are retaining
the existing 20% delinquency concentration level in the no-action
letter, as proposed.
For purposes of determining whether a pool asset is delinquent
under either threshold, we proposed to define a pool asset as
``delinquent'' if any portion of a contractually required payment on
the asset is 30 days or more past due. The proposed definition was
based on the existing standard in the staff no-action letter.\97\
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\97\ See note 83 above.
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Several commenters requested more flexibility for the definition.
In particular, several commenters noted that some sponsors do not
consider an obligor delinquent when any portion of a contractually
required payment is late, but instead only when less than some
percentage (e.g., 90%) or amount of a payment is received.\98\ Changing
their systems for purposes of the proposed requirement, these
commenters argued, would be burdensome. Others argued that sponsors use
different reporting methodologies in determining delinquency, such as
the Office of Thrift Supervision method or the Mortgage Bankers
Association of America method.\99\
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\98\ See, e.g., Letters of ABA; ASFA; Auto Group; Citigroup;
MBA; and TMCC.
\99\ See, e.g., Letters of ABA; MBA; and Metlife. See also
Fitch, Inc., ``Residential Mortgage Delinquency Reporting Methods''
(Nov. 13, 2003).
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We noted in the Proposing Release that, with regard to determining
delinquency, one potential area of concern is improper re-aging or
restructuring of delinquent accounts, such as declaring an asset with
multiple past-due payments as current even if only the last payment was
made. We proposed clarifying in the definition of ``delinquent'' that a
pool asset that was more than one payment past due could not be
characterized as not delinquent if only partial payment on the total
past due amount had been made, unless the obligor had contractually
agreed to restructure the obligation, such as part of a workout plan.
While not all agreed, commenters generally objected to this approach,
arguing that servicers sometimes restructure obligations without
contractually amending the pool asset documents.\100\
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\100\ Compare, e.g., Letters of ABA; ASFA; ASF; and TMCC; with
Letter of State Street.
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As an alternative to the proposed definition of ``delinquent,''
some of these commenters suggested an approach similar to the
definition of ``non-performing'' that looks to the provisions specified
in the relevant transaction agreements or the policies of the sponsor
in determining delinquency, so long as these provisions and policies
are disclosed. As commenters confirmed to us, policies relating to
delinquency vary somewhat across asset types and sponsors, similar to
charge-off policies. However, we continue to believe a standard linked
to the longstanding 1997 no-action letter should be retained to clarify
the degree of flexibility permitted.
Accordingly, we are defining a pool asset as ``delinquent'' if a
pool asset is more than 30 or 31 days or a single payment cycle, as
applicable, past due from the contractual due date, as determined in
accordance with any of the following:
The transaction agreements for the asset-backed
securities;
The delinquency recognition policies of the sponsor, any
affiliate of the sponsor that originated the pool asset or the servicer
of the pool asset; or
The delinquency recognition policies applicable to such
pool asset established by the primary safety and soundness regulator of
any entity listed above or the program or regulatory entity that
oversees the program under which the pool asset was originated.\101\
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\101\ Similar to the ``non-performing'' definition, the
delinquency requirement that is most restrictive will govern. In
addition and as similar to the ``non-performing'' definition, a pool
asset that changes payment status in accordance with its terms
(e.g., a student loan that is in ``in-school,'' grace, deferment or
forbearance status) does not make the asset ``delinquent,'' unless
the asset also meets a delinquency policy identified in the
definition of ``delinquent.''
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With an approach that relies more on a party's delinquency
recognition policies, we believe appropriate disclosure of the policies
and their application becomes even more important.\102\ As a result and
as referenced in the Proposing Release, in adopting delinquency limits,
we also are adopting disclosure requirements, discussed more fully in
Section III.B., of policies regarding grace periods, re-aging,
restructures, partial payments considered current or other such
practices on delinquencies. We also are adopting disclosure
requirements for
[[Page 1519]]
on-going reporting, discussed more fully in Section III.D., regarding
material modifications, extensions or waivers to pool asset terms,
fees, penalties or payments. We also are requiring disclosure of any
material changes to delinquency recognition policies. Given this
disclosure-based approach, we are not adopting the proposed requirement
permitting only contractual-based re-agings.
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\102\ See, e.g., Moody's Investors Service, Inc., ``Loan
Modifications and Forbearance Plans Impact on Home Equity
Securitizations'' (Sep. 24, 2004).
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e. Lease-Backed Securitizations and Residual Values
As discussed above, the one change we proposed making to the basic
definition of ``asset-backed security'' is to expand the definition to
include securitizations backed by leases where part of the cash flows
backing the securities is to come from the disposal of the residual
asset underlying the lease (e.g., selling an automobile at the end of
an automobile lease). In that instance, the asset-backed securities are
not backed solely by financial assets that ``by their terms convert
into cash,'' because the transaction also involves a physical asset
that must be sold in order to obtain cash. As a result, securitizations
where a portion of the cash flow to repay the securities is anticipated
to come from the residual value of the physical property do not fall
within the current definition of ``asset-backed security'' in Form S-3
and thus are often registered on a non-shelf basis on Form S-1.
As we explained in the Proposing Release, lease-backed ABS have
grown into a common and recognized segment of the overall ABS
market.\103\ We received support from commenters for adding lease-
backed ABS to the definition of ``asset-backed security,'' and
therefore eligibility for shelf-registration if the requirements of
Form S-3 are met.\104\ However, as we explained in the Proposing
Release, even though we are recognizing the growth in lease-backed ABS
that include securitizations of residual value, such securitizations
are subject to additional factors that are not present in
securitizations backed solely by financial assets that convert into
cash. Residual value is often determined at the inception of a lease
contract and represents an estimate of the leased property's resale
value at the end of the lease. Assumptions and modeling are necessary
to determine the amount of the residual value. In addition, the
transaction is not simply dependent on the servicing and amortization
of the pool assets, but also on the capability and performance of the
party that will be used to convert the physical property into cash and
thus realize the residual values.
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\103\ See, e.g., Fitch, Inc., ``Under the Hood: Automobile Lease
ABS Uncovered'' (Jun. 14, 2000).
\104\ See, e.g., Letter of Auto Group.
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The higher the percentage of cash flows that are to come from
residual values, the more important these other factors become and the
less the transaction resembles a traditional securitization of
financial assets for which our regime for asset-backed securities is
designed. Although some commenters did not believe we should have any
limits on residual values,\105\ we continue to believe, as discussed
above, that the core principle that an asset-backed security should be
primarily serviced by financial assets that by their terms convert into
cash should be retained. At the same time, we believe a defined limited
exception to this general principle is appropriate and consistent for
access to the alternate regulatory regime for certain lease-backed ABS.
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\105\ See, e.g., Letters of ABA; American Honda Finance
Corporation (``AHFC''); ASF; Auto Group; and TMCC.
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As we explained in the Proposing Release, we are addressing
concerns with the deviation from the core principle in two principal
ways. First, we are adopting disclosures, discussed more fully in
Section III.B., on how residual values are estimated and derived,
statistical information on historical realization rates and disclosure
of the manner and process in which residual values will be realized,
including disclosure about the entity that will convert the residual
values into cash. Second, we are establishing limits on the percentage
of the securitized pool balance attributable to residual values in
order to be considered an ``asset-backed security.'' We believe these
changes will expand eligibility of lease-backed transactions for shelf
registration and appropriately permit lease-backed transactions under
our new rules while continuing to apply the core principles underlying
the definition of ``asset-backed security.''
As we noted in the Proposing Release, market practice regarding
lease-backed securitizations varies on the typical percentage of the
securitized pool balance attributable to residual values. For example,
motor vehicle lease securitizations often have higher residual value
percentages than equipment lease securitizations due to the higher
resale values that often exist between motor vehicles and other
equipment. Accordingly, after reviewing residual value percentages for
typical lease-backed securitizations, we proposed that the portion of
the cash flow to repay the securities anticipated to come from the
residual value of the physical property underlying the leases could not
constitute:
For automobile leases, 60% or more, as measured by dollar
volume, of the original asset pool at the time of issuance of the
asset-backed securities; and
For all other leases, 50% or more, as measured by dollar
volume, of the original asset pool at the time of issuance of the
asset-backed securities.
In addition, we proposed a more stringent limitation for cash flow
from residual values for offerings of securities backed by leases other
than motor vehicle leases that may be registered on Form S-3 and thus
eligible for shelf registration. For Form S-3 eligibility of ABS backed
by such leases, we proposed that the portion of the cash flow
anticipated to come from residual values could not constitute 20% or
more, as measured by dollar volume, of the original asset pool at the
time of issuance of the asset-backed securities.
Commenters raised several concerns with our proposal if percentage
limitations were to be maintained. First, commenters believed the
proposal did not provide enough clarity on how to make the necessary
calculations.\106\ In particular, commenters were concerned with the
proposed choice of language for the calculation, which was phrased in
reference to ``the portion of the cash flow anticipated to come from
residual values.'' We note that filings for lease-backed ABS today
typically disclose the portion of the securitized pool balance
attributable to residual values and the method of determining such
figures. Our intention had been and is to codify that practice in
connection with complying with the residual value percentages. To
clarify this intention, we are revising the language in the requirement
to more closely track language used in lease-backed ABS filings to
refer to the portion of the securitized pool balance attributable to
residual values, as determined as of the measurement date in accordance
with the transaction agreements for the asset-backed securities. We
note that the residual value itself is often calculated at the
inception of the lease, but the portion of the securitized pool balance
attributable to it (e.g., vis a vis lease payments) is a percentage
determined at the time of the transaction. Similar to our final rules
with respect to determining delinquency and non-performance thresholds,
we are
[[Page 1520]]
clarifying in an instruction that the ``measurement date'' is the cut-
off date for the transaction, if applicable, or, in the case of master
trusts, the date as of which securitized pool balance information is
presented in the prospectus for the securities.
---------------------------------------------------------------------------
\106\ See, e.g., Letters of ABA; ASF; Auto Group; and TMCC.
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Second, commenters believed the proposed percentages were too
stringent to permit all motor vehicle lease-backed ABS transactions
that have been conducted.\107\ A threshold set against market practice
may not encompass every transaction conducted before the threshold was
set. However, we do seek to codify percentages that are based upon
current market practice. Based on further review of lease-backed ABS
transactions during the past five years, including the examples
provided by commenters, we are raising the percentage for motor vehicle
lease-backed ABS from 60% to 65%.
---------------------------------------------------------------------------
\107\ See, e.g., Letters of ABA; AHFC; ASF; Auto Group; and
TMCC.
---------------------------------------------------------------------------
Finally, commenters believed that if residual value limitations are
retained, an exception should be made to the extent there is a residual
value guarantee, residual value insurance or where the lessee is
obligated to cover any residual losses.\108\ In each instance, these
commenters argued, the credit risk for the residual loss is with a
separate obligated party. We are providing an instruction that residual
values need not be included in measuring against the limitation to the
extent a separate party is obligated for such amount. However, we note
that, depending on the extent of the separate party's obligation for
such amounts, such obligation may result in that party constituting a
significant provider of credit enhancement or other support or, when
the lessee is obligated to cover any residual losses, a significant
obligor. In that instance, as described in Sections III.B.7 and 8,
additional disclosures, including financial disclosures, may be
required.
---------------------------------------------------------------------------
\108\ See, e.g., Letters of ABA; ASF; and Auto Group.
---------------------------------------------------------------------------
In addition to other technical changes,\109\ we are adopting as
proposed the limits for non-motor vehicle leases. For the basic
definition, the portion of the securitized pool balance attributable to
residual values for such leases may not constitute 50% or more, as
measured by dollar volume. For Form S-3 eligibility, the portion of the
securitized pool balance attributable to residual values for such
leases may not constitute 20% or more, as measured by dollar
volume.\110\
---------------------------------------------------------------------------
\109\ For example, in response to comment we are clarifying the
reference from ``automobile'' lease to ``motor vehicle'' lease.
Motor vehicle leases for this purpose includes leases for
automobiles (which includes light duty trucks, sport utility
vehicles and vans), motorcycles, trucks and buses. As proposed,
motor vehicle lease would not include leases for leisure craft such
as watercraft or snowmobiles.
\110\ Securitizations backed solely from the payment on the
leases and not including the residual value of the underlying
physical property would not, of course, need to comply with the
thresholds.
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f. Exceptions to the ``Discrete'' Requirement
The last set of interpretations we are codifying relates to
exceptions to the requirement in the definition of ``asset-backed
security'' that the asset pool be ``discrete.'' As discussed above, the
existence of the ``discrete'' requirement is to prevent a level of
portfolio management that is not contemplated by the definition of
``asset-backed security'' or consistent with this registration and
reporting regime. In addition, the lack of a ``discrete'' requirement
would make it difficult for an investor to make an informed investment
decision when the composition of the pool is unknown or could change
over time.
However, as we explained in the Proposing Release, ever since the
original definition of ``asset-backed security'' was adopted, there has
been some confusion over the meaning of the term ``discrete'' in the
definition, particularly with respect to language in the definition
that specifies the asset pool must be a ``discrete pool of receivables
or other financial assets, either fixed or revolving.'' The 1992
Release specified that the phrase ``fixed or revolving'' was added ``in
order to make clear that the definition covers `revolving' credit
arrangements, such as credit card and short-term trade receivables,
home equity loans and automotive dealer floorplan financings, where
account or loan balances revolve due to periodic payments, charge-offs
and closings of the receivables.''\111\ Thus, the basic principle was
that the balance of a pool asset may revolve, but not the asset pool
itself.\112\
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\111\ See note 32 above. The 1992 Release also explained that,
``In credit card financings, for example, the securities are backed
by current and future receivables generated by specified credit card
accounts. The balances of the pool assets fluctuate as new
receivables are generated and existing amounts are paid or charged
off as a default. If the accounts do not generate sufficient cash
flow to support the securities, the sponsor may be required to
assign additional receivables from other accounts to the public
security holders' interest in the pool.''
\112\ As we indicated in the Proposing Release, there are
additional instances when the asset pool may change under the
current definition without infringing the ``discrete pool''
requirement. For example, often the depositor or other seller of the
pool assets will make standard representations and warranties
regarding the pool assets, such as to their principal balance and
status at the time of transfer to the trust. If an asset fails to
meet the requirements of those representations or warranties, there
may be obligations for the depositor to repurchase or substitute
that asset for assets that do comply with the representations or
warranties. These pool composition changes are permissible under the
current definition as ``rights or other assets designed to assure
the servicing or timely distribution of proceeds to
securityholders.'' There is thus no need to specify a separate
exception from the ``discrete'' requirement for such instances.
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Nevertheless, in response to market developments, the staff has
allowed certain exceptions, with limits, to the discrete pool
requirement. These exceptions relate to master trusts, prefunding
periods and revolving periods. In a master trust, the ABS transaction
contemplates future issuances of asset-backed securities backed by the
same, but expanded, asset pool. Pre-existing securities also would
therefore be backed by the same expanded asset pool. In a prefunding
period, a limited portion of the proceeds of the offering is set aside
for the future acquisition of additional pool assets within a specified
period of time after the issuance of the asset-backed securities. In a
revolving period, cash flows from the asset pool may be recycled for a
specified period to acquire new pool assets instead of being applied to
payments on the asset-backed securities.\113\
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\113\ The period after the revolving period when cash flows are
applied to payments on the asset-backed securities is often called
the ``amortization'' or ``pay-down'' period.
---------------------------------------------------------------------------
The staff's interpretive history in this area has resulted in
limits on which asset classes may use these structures and still be
considered an ``asset-backed security.''\114\ As discussed above, we
are codifying these three exceptions and also expanding them so that
they are applicable to all asset types.\115\ As we noted in the
Proposing Release, a transaction can employ one or more of these
features and still qualify as an ``asset-backed security.''\116\ We
believe these expansions will result in increased flexibility in
structuring transactions to meet market demands.
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\114\ For example, nearly all asset classes might employ a
limited prefunding period. However, only a limited subset of asset
classes were permitted to have revolving periods. Not all of these
interpretations have been transparent.
\115\ But see note 179 and the accompanying text regarding other
factors that may limit the use of these features where the
distribution of the underlying pool assets may need to be separately
registered.
\116\ For example, an offering may be set up as a master trust
with a prefunding period for a portion of the proceeds of the
issuance and a revolving period.
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As in the case of our treatment of lease-backed ABS that involve
residual values, we believe a large part of the concern relating to
these structures can be appropriately addressed through disclosure,
both at the time of issuance
[[Page 1521]]
of the asset-backed securities as well as on an ongoing basis through
disclosure of how the asset pool is materially changing. As such, we
are adopting, with certain modifications, our proposed requirements for
more detailed disclosures in Regulation AB, discussed more fully in
Sections III.B. and III.D., regarding the operation of such structures
and changes to the asset pool over time.
We also are adopting limits, as discussed below, on the amount and
duration of prefunding and certain revolving periods to limit the
amount of changes to the asset pool, while still allowing flexibility
to accommodate market demands. As noted in the Proposing Release, these
limits are designed to establish parameters for the types of securities
that should be subject to the ABS regulatory regime. As with lease-
backed ABS, we believe these proposals will expand eligibility of these
structures while continuing to apply the core principles underlying the
definition of ``asset-backed security.''
i. Master Trusts
As proposed, master trust structures will be allowed to meet the
definition of ``asset-backed security'' without any pre-determined
limits.\117\ Commenters supported expanding access to master
trusts.\118\ However, several commenters noted that most master trusts
permit, and in some cases require, the depositor to make additional
asset additions to the asset pool from time to time, regardless of when
ABS are issued.\119\ In particular, commenters expressed concern that
the proposed wording of the exception for master trusts, which was
limited to asset additions in connection with future issuances of
asset-backed securities, would not allow for additions of pool assets
in current master trust structures that are necessary to maintain
minimum pool balances, such as the depositor's interest in the trust.
As the commenters explained, permitting such additions is an essential
means for these current structures of assuring an adequate pool balance
for master trusts with revolving assets. To maintain existing practice,
we are modifying the exception for master trusts to clarify that the
offering related to the securities may contemplate both adding
additional assets to the pool in contemplation of future issuances of
asset-backed securities backed by such pool as well as, for master
trusts with revolving periods or receivables or other financial assets
that arise under revolving accounts, additions to the asset pool in
connection with maintaining minimum pool balances in accordance with
the transaction agreements.\120\
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\117\ Of course, each additional issuance of securities backed
by the same pool and the additional pool assets would need to be
consistent with the requirements for an ``asset-backed security.''
\118\ See, e.g., Letters of ABA; AFSA; AIG; Capital One; MBNA;
and State Street.
\119\ See, e.g., Letters of AFSA, Capital One; and MBNA.
\120\ Note that the limit on revolving periods for securities
backed by receivables or other financial assets that do not arise
under revolving accounts is co-extensive with this provision for
master trusts. Hence, if a master trust for such pool assets uses a
revolving period, including to maintain minimum pool balances, the
revolving period for each series would be limited to a three-year
period. We have included clarifying language regarding this point in
the ``discrete'' pool exception for master trusts.
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ii. Prefunding Periods
For prefunding periods, we proposed separate limits for shelf and
non-shelf offerings similar to our proposals for lease-backed ABS. For
the general definition of ``asset-backed security,'' we proposed that
the amount of proceeds that may be used for a prefunding period could
be up to 50% of offering proceeds and the length of the prefunding
account could last up to one year from the date of issuance of the
asset-backed securities. As we stated in the Proposing Release, we
believe prefunding periods above these thresholds begin to raise
serious doubt that the transaction should be characterized as an
``asset-backed security.'' For Form S-3 eligibility, we proposed that
the amount of proceeds that may be used for a prefunding period could
be up to 25% of offering proceeds over a similar one-year period.
Commenters were mixed on our proposals. One commenter representing
an ABS investor supported the proposed limits.\121\ Several other
commenters representing primarily issuers and their representatives
noted that although the proposed Form S-3 level was consistent with the
requirements in the staff's no-action letter regarding relief from Rule
15c2-8(b), they believed the staff has permitted higher limits and
requested eliminating or expanding the tests to provide increased
flexibility.\122\
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\121\ See Letter of State Street. In addition, the commenter
suggested further limiting prefunding such that it is applicable
only to financially secure sponsors with a track record of
securitizations with the same asset type.
\122\ See, e.g., Letters of ASFA; ASF; Auto Group; BMA; Capital
One; FSR; and TMCC.
---------------------------------------------------------------------------
As discussed above, we continue to believe a limit on prefunding is
appropriate. However, after evaluating the comment received, we no
longer believe it is necessary to have separate limits for Form S-3
shelf registration. Therefore, we are only codifying the proposal with
respect to the basic definition. In addition and in response to
comment, we are clarifying application of the prefunding limitation
with respect to master trusts.\123\ Under the final rule, regardless of
the form on which the offering was registered, a prefunding period is
permitted for up to one year from the date of issuance of the asset-
backed securities and the prefunded amount may consist of up to 50% of
offering proceeds or, in the case of master trusts, up to 50% of the
aggregate principal balance of the total asset pool whose cash flows
support the asset-backed securities.
---------------------------------------------------------------------------
\123\ See, e.g., Letter of ASF.
---------------------------------------------------------------------------
iii. Revolving Periods
Our proposals for revolving periods recognized the nature of the
asset being securitized (i.e., whether it itself is fixed or
revolving). We proposed that for receivables or other financial assets
that by their nature revolve (e.g., credit cards, dealer floorplan
financings or home equity lines of credit), there would as today be no
limit on the number of assets that may revolve nor a limit on the
duration of the revolving period. For fixed receivables or other
financial assets (e.g., standard residential mortgages, auto loans and
leases), we proposed limits similar to prefunding periods; that is, the
basic definition of ``asset-backed security'' would specify that the
additional assets that may be acquired in the revolving period may
constitute up to 50% of the proceeds of the offering and the duration
of the revolving period may last for up to one year from the date of
issuance of the asset-backed securities. For Form S-3 eligibility, the
revolving period would be limited to 25% of proceeds over a one-year
period.
Several commenters urged eliminating any restrictions on revolving
periods, regardless of the type of asset or the form of
registration.\124\ Revolving periods, these commenters argued, allow
issuers flexibility to create ABS with longer or different maturities
and weighted average lives than the underlying pool assets. Revolving
periods were argued to be particularly necessary in the case of
shorter-term assets to create ABS with meaningful maturities. As with
the other proposed exceptions to the definition of asset-backed
security, these commenters believed concerns about increased revolving
periods were mitigated by the proposed increased disclosure regarding
[[Page 1522]]
such periods and changes to the asset pool over time.
---------------------------------------------------------------------------
\124\ See, e.g., Letters of ABA; AIG; ASF; Auto Group; ESF; and
TMCC.
---------------------------------------------------------------------------
Revolving periods have long been permitted under staff practice for
assets that by their nature revolve, as discussed above. There is thus
an established record of experience with revolving periods for such
asset classes. For other assets, while we recognize the commenters'
arguments regarding the benefit of revolving periods in structuring
asset-backed securities, we also recognize the management aspects that
arise and are thus not prepared at this point to eliminate all
restrictions on revolving periods for purposes of which securities
should qualify as an ``asset-backed security'' subject to Regulation
AB. However, after evaluating the comments and their arguments
regarding the market reality of the use of revolving periods, we are
expanding the exception from that proposed for those asset classes. We
also are making technical changes to the proposal in response to
comment to clarify the types of assets subject to the requirement.
Accordingly, under the final rules there will remain no
restrictions on revolving periods for securities backed by receivables
or other financial assets that arise under revolving accounts. For
securities backed by receivables or other financial assets that do not
arise under revolving accounts, an unlimited revolving period will be
permitted for up to three years, so long as the new pool assets that
are added are of the same general character as the original pool
assets. One group of commenters who suggested such an alternative
believed a three year revolving period would improve efficiency in
structuring transactions.\125\ As with prefunding accounts, we are not
establishing a more stringent revolving limitation for Form S-3
eligibility. These expansions from the proposal allow issuers
substantially increased flexibility over current staff practice to
structure asset-backed securities.
---------------------------------------------------------------------------
\125\ See Letter of Auto Group.
---------------------------------------------------------------------------
3. Securities Act Registration Statements
a. Form Types
As we noted in the Proposing Release, we are not creating a new
registration statement form for ABS offerings. We believe the existing
form structure is sufficient, provided there are appropriate
instructions in the applicable forms as to their use for ABS offerings.
As proposed, we are limiting registration of asset-backed securities
offerings to two forms: Form S-1 or Form S-3.\126\ As is currently the
case, Form S-3 will retain the requirements that will qualify an
offering for delayed shelf registration on that form pursuant to Rule
415(a)(1)(x).\127\ Form S-1 will be the form for all other offerings
that meet the definition of an ``asset-backed security'' but do not
meet the additional eligibility requirements for Form S-3 (e.g.,
investment grade and additional limits on lease-backed ABS and
delinquent pool assets). We received support from commenters for this
approach.\128\ As proposed, we are amending our other Securities Act
registration statement forms for primary offerings to exclude
explicitly their use for ABS offerings.\129\ Since as discussed below
we are not establishing a separate disclosure regime or requirements
for foreign ABS, we continue to believe it is unnecessary to provide
separate form types for foreign ABS offerings. These offerings also
will be registered on Forms S-1 or S-3, as applicable.
---------------------------------------------------------------------------
\126\ As is the case today, Form S-4 also will remain available
with respect to transactions, such as exchange offers, authorized by
that Form. The disclosure required will remain consistent with that
for a primary offering on Form S-1 or S-3, as applicable.
\127\ 17 CFR 230.415(a)(1)(x). In the Offering Process Release,
we proposed several changes to the operation of the shelf
registration system under the Securities Act. We encourage ABS
market participants to comment specifically on those proposals.
\128\ See, e.g., Letter of ABA.
\129\ See amendments to Form S-2, S-11, F-1, F-2 and F-3. Any
offerings meeting the definition of asset-backed security that
previously used one of these forms for registration, such as Form S-
11, in lieu of Form S-3 must henceforth be registered on Form S-1
instead. As discussed in Section III.E., we also are clarifying that
ABS issuers do not qualify as a ``small business issuer.''
Therefore, ABS offerings are ineligible for Forms SB-1 and SB-2
(referenced in 17 CFR 239.9 and 17 CFR 239.10). For mortgage related
securities that are relying on Rule 415(a)(1)(vii), see note 61
above.
---------------------------------------------------------------------------
As we noted in the Proposing Release, while Form S-3 currently
specifies eligibility for ABS offerings, neither it nor any other form
clarifies how the form is to be prepared for such an offering.
Therefore, we are adopting our proposal for separate general
instructions for both Form S-1 and Form S-3 to specify use for ABS
offerings.
New General Instruction VI. to Form S-1 clarifies how that form is
to be prepared for an ABS offering. In particular, the instruction
clarifies who is to sign the registration statement (discussed more
fully in Section III.A.3.d.) as well as the menu of required disclosure
items. As to the latter, the instruction identifies the existing items
in the form that may be omitted as well as substitute core disclosure
items from Regulation AB that will be required. As discussed in Section
III.B., Items 1102-1120 of Regulation AB represent the basic disclosure
package for registered ABS offerings. Any other applicable items
specified in Form S-1, such as the description of the securities and
the offering, will continue to be required.\130\ Under the final rules,
the application of the disclosure items for Form S-1 will be as
follows:
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\130\ As is the case today, unless otherwise specified, no
reference need be made in the prospectus to inapplicable items. See
Securities Act Rule 404(c) (17 CFR 230.404(c)).
Disclosure for Form S-1 for Registered ABS Offerings
------------------------------------------------------------------------
Required if May be
Existing form items applicable omitted
------------------------------------------------------------------------
Item 1. Forepart of Registration Statement ............
and Outside Front Cover Page of Prospectus.
Item 2. Inside Front and Outside Back Cover ............
Pages of Prospectus........................
Item 3. Summary Information, Risk Factors ............
and Ratio of Earnings to Fixed Charges.....
Item 4. Use of Proceeds..................... ............
Item 5. Determination of Offering Price..... ............
Item 6. Dilution............................ ............
Item 7. Selling Security Holders............ ............
Item 8. Plan of Distribution................ ............
Item 9. Description of Securities to be ............
Registered.................................
Item 10. Interests of Named Experts and ............
Counsel....................................
Item 11. Information with Respect to the ............
Registrant.................................
Item 12. Disclosure of Commission Position ............
on Indemnification for Securities Act
Liabilities................................
Item 13. Other Expenses of Issuance and ............
Distribution...............................
Item 14. Indemnification of Directors and ............
Officers...................................
[[Page 1523]]
Item 15. Recent Sales of Unregistered ............
Securities.................................
Item 16. Exhibits and Financial Statement ............
Schedules..................................
Item 17. Undertakings....................... ............
Additional Disclosure Items from Regulation
AB:
Items 1102-1120 of Regulation AB........ ............
------------------------------------------------------------------------
New General Instruction V. to Form S-3 performs a similar function
for that form. As we explained in the Proposing Release, unlike current
practice on Form S-1, non-ABS offerings on Form S-3 rely predominately
on incorporation by reference of Exchange Act reports for disclosure
unrelated to the offering. As a result, existing Form S-3 does not set
forth a detailed menu of disclosure items apart from disclosure about
the offering. However, because a reporting history is not required for
ABS for Form S-3 eligibility, investment grade ABS offerings registered
on that form often must present most of their disclosure in the base
prospectus and prospectus supplement in lieu of incorporating
information by reference. Accordingly, the new Form S-3 instruction for
ABS, as proposed, does not specify any existing items that may be
omitted, but rather specifies the addition of the same basic disclosure
package from Regulation AB. The other disclosure items required by Form
S-3, such as the description of the securities and the offering, will
continue to be required as applicable. Therefore, as shown in the
following table, the effect of the new instruction is to add the basic
disclosure package of Items 1102-1120 of Regulation AB:
Disclosure for Form S-3 for Registered ABS Offerings
------------------------------------------------------------------------
Required if May be
Existing form items applicable omitted
------------------------------------------------------------------------
Item 1. Forepart of Registration Statement ............
and Outside Front Cover Page of Prospectus.
Item 2. Inside Front and Outside Back Cover ............
Pages of Prospectus........................
Item 3. Summary Information, Risk Factors ............
and Ratio of Earnings to Fixed Charges.....
Item 4. Use of Proceeds..................... ............
Item 5. Determination of Offering Price..... ............
Item 6. Dilution............................ ............
Item 7. Selling Security Holders............ ............
Item 8. Plan of Distribution................ ............
Item 9. Description of Securities to be ............
Registered.................................
Item 10. Interests of Named Experts and ............
Counsel....................................
Item 11. Material Changes................... ............
Item 12. Incorporation of Certain ............
Information by Reference...................
Item 13. Disclosure of Commission Position ............
on Indemnification for Securities Act
Liabilities................................
Item 14. Other Expenses of Issuance and ............
Distribution...............................
Item 15. Indemnification of Directors and ............
Officers...................................
Item 16. Exhibits........................... ............
Item 17. Undertakings....................... ............
Additional Disclosure Items from Regulation
AB:
Items 1102--1120 of Regulation AB....... ............
------------------------------------------------------------------------
b. Presentation of Disclosure in Base Prospectuses and Prospectus
Supplements
As we noted in the Proposing Release, by specifying the menu of
disclosure items applicable for ABS offerings eligible for Form S-3,
and thus shelf registration, we do not intend to change the current
practice or ability to present such disclosure in a separate base
prospectus and prospectus supplement, a practice also available for
non-ABS offerings.\131\ Items in the basic disclosure package that are
known or reasonably available should continue to be described in the
base prospectus, while disclosure dependent on the final terms of the
particular takedown can still be provided in the prospectus
supplement.\132\ If this approach is followed, a form of prospectus
supplement is required to accompany the base prospectus in the
registration statement at the time of effectiveness that outlines the
format of deal-specific information that will be disclosed at the time
of each takedown.\133\
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\131\ However, as stated in the 1992 Release and as currently
applicable to all shelf offerings, registrants are reminded that
disclosure in the registration statement at the time of
effectiveness should accurately reflect the registrant's current
plans and arrangements with respect to the distribution of its
securities. If a registrant plans to conduct a prompt takedown of
asset-backed securities, the registration statement at the time of
effectiveness must currently include all available information
regarding the offering, including information about the asset pool,
subject to any omissions permitted by Securities Act Rule 430A (17
CFR 230.430A), including a completed prospectus supplement and not
just a form of prospectus supplement. Tax and legality opinions
reflecting the takedown and related consents also would need to be
filed pre-effectively with respect to any proposed offering
contemplated to occur promptly. The Commission has proposed to
eliminate this restriction on the use of so called ``convenience
shelf.'' See the Offering Process Release. This proposed general
change, if adopted, would also apply to ABS.
\132\ For example, the base prospectus should likely contain
risk factors applicable to the transaction as a whole or the nature
of the securities to be issued. The base prospectus also should
include a discussion of the material federal income tax consequences
from investing in asset-backed securities. Of course, the prospectus
supplement would include any additional risk factors or more
specific disclosure as to tax consequences applicable to the
particular structure and securities to be offered.
\133\ In addition, consistent with the longstanding requirements
for all registered offerings, required opinions of counsel regarding
tax consequences and the legality of the securities being registered
must be filed prior to effectiveness of the registration statement.
See Items 601(b)(5) and 601(b)(8) of Regulation S-K. Note that these
requirements exist independently from any contractual requirements
of the transaction to deliver opinions at the closing of the asset-
backed securities transaction. Where a prompt offering under the
registration statement is not contemplated, opinions filed as of
effectiveness may be appropriately conditioned or qualified pending
the actual issuance of securities in the future. However, the
opinions filed as of the time of effectiveness must still be signed
opinions, not unsigned or draft forms of opinion. For each takedown
that occurs, as with other exhibits representing the final terms of
the takedown, amended or final opinions without such conditions or
qualifications must be filed, either as an exhibit to the
registration statement (See Securities Act Rule 462(d) (17 CFR
230.462(d) which provides for immediate effectiveness of a post-
effective amendment filed solely to add exhibits), or under cover of
Form 8-K and incorporated by reference into the registration
statement.
We also are adding a clarifying instruction to General
Instruction V.A.2. of Form S-3 that when a preliminary prospectus is
required under Form S-3 pursuant to new Securities Act Rule
190(b)(7), the information to be included in the base prospectus and
prospectus supplement is to be substantially similar to that which
would be included if the preliminary prospectus was required under
Form S-1 pursuant to such rules.
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[[Page 1524]]
As referenced in the 1992 Release, the type or category of asset to
be securitized must be fully described in the registration statement at
the time of effectiveness. The structural features contemplated also
should be disclosed, as well as identification of the types or
categories of securities that may be offered, such as interest-weighted
or principal-weighted classes (including IO or PO securities), planned
amortization or companion classes or residual or subordinated
interests. In addition, risks associated with changes in interest rates
or prepayment levels should be fully disclosed. The various scenarios
under which payments on the asset-backed securities could be impaired
also should be discussed.
In the Proposing Release, we explained the longstanding position
that when presenting disclosure in base prospectuses and prospectus
supplements, the base prospectus must describe the types of offerings
contemplated by the registration statement. A takedown off of a shelf
that involves assets, structural features, credit enhancement or other
features that were not described as contemplated in the base prospectus
will usually require either a new registration statement (e.g., to
include additional assets) or a post-effective amendment (e.g., to
include new structural features or credit enhancement) rather than
simply describing them in the final prospectus filed with the
Commission pursuant to Securities Act Rule 424. Registrants should
exercise discretion, however, in describing only the material asset
types or features reasonably contemplated to be included in an actual
takedown.
As proposed, we are specifying in the general instruction to Form
S-3 the existing requirement to prepare separate base prospectuses and
forms of prospectus supplements when multiple asset types may be
securitized in discrete pools in takedowns under that registration
statement. As stated in the 1992 Release, a registration statement may
not merely identify several alternative types of assets that may be
securitized. A separate base prospectus and form of prospectus
supplement must be presented for each asset class that may be
securitized in a discrete pool in a takedown under that registration
statement. We also are adopting as proposed a similar requirement for
takedowns involving pools of foreign assets where the assets originate
in separate countries or the property securing the pool assets is
located in separate countries.
Commenters raised several questions about the proposed instruction,
particularly regarding the proposed requirement for a separate base and
form of supplement for takedowns involving separate jurisdictions.\134\
We wish to clarify a potential misconception regarding these
requirements. A separate base and form of supplement only is required
for asset types or jurisdictions that may be securitized in a discrete
pool in separate takedowns under the registration statement. If pool
assets of different asset types or different jurisdictions are to be
pooled together in a single transaction (e.g., an offering with a
multi-jurisdictional pool or an offering with a pool of 45% residential
mortgages and 55% commercial mortgages), a single base and form of
prospectus supplement would be permitted, so long as the appropriate
disclosures for each asset type or jurisdiction were included.
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\134\ See, e.g., Letters of A&O; ABA; ASF; Association of the
Bar of the City of New York (``NYCBA''); Aus. SF; CMSA; and ESF.
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Similarly, several commenters pointed out that the staff has
permitted the use of a single base and form of supplement for
transactions that principally consist of a particular asset class, but
which also describes one or more potential additional asset classes, so
long as the pool assets for the additional classes in the aggregate are
limited to 10% of the pool for any particular takedown. We also are
clarifying this position in the instruction and applying it to both
separate asset classes and separate jurisdictions.
We noted in the Proposing Release that an additional issue that
often results in staff comment is the inclusion of language in
registration statements that investors should rely on the information
in the prospectus supplement if the terms of a particular series of
securities conflict or vary between the base prospectus and the
accompanying prospectus supplement. As is currently the case today,
disclosure in prospectus supplements regarding the transaction may
enhance disclosure in the base prospectus regarding contemplated
transactions, but should not contradict it. Similarly, including
language to the effect of ``Except as otherwise provided in the
prospectus supplement'' will permit some supplemental or modified terms
of transactions, but should not be construed as creating the ability to
add asset types or structural features in a takedown that were not
otherwise contemplated by and described in the base prospectus.
c. Form S-3 Eligibility Requirements for ABS
As proposed, we are maintaining the existing requirement for ABS
Form S-3 eligibility that the asset-backed securities must be rated
``investment grade'' by a nationally recognized statistical rating
organization, or NRSRO, at the time of offer and sale to the
public.\135\ The definition of ``investment grade'' will remain the
same as for other investment grade securities that may be registered on
Form S-3.\136\ As we explained in the Proposing Release, the
``investment grade'' requirement has existed for over ten years with
respect to asset-backed securities and for over twenty years with
respect to other non-convertible securities. The Commission is engaged
in a broad review of the role of credit rating agencies in the
operation of the securities markets, including whether credit ratings
should continue to be used for regulatory purposes under the federal
securities laws.\137\ We received comment in response to the Proposing
[[Page 1525]]
Release on possible alternatives to using an investment-grade
requirement for ABS Form S-3 eligibility purposes.\138\ However,
pending the outcome of our review of credit rating agencies, we are
maintaining the same rules and standards currently used for purposes of
Form S-3 eligibility.
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\135\ NRSRO continues to have the same meaning as used in 17 CFR
240.15c3-1(c)(2)(vi)(F).
\136\ See General Instruction I.B.2 of Form S-3 and note 60
above.
\137\ See Release No. 33-8236 (Jun. 4, 2003) [68 FR 35258]. For
a detailed discussion on credit rating agencies and the Commission's
use of credit ratings under the federal securities laws, see the
U.S. Securities and Exchange Commission, ``Report on the Role and
Function of Credit Rating Agencies in the Operation of the
Securities Markets, As Required by Section 702(b) of the Sarbanes-
Oxley Act of 2002'' (Jan. 2003). The Report is available on our Web
site.
\138\ See, e.g., Letters of ABA; Kutak; Moody's; and State
Street.
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As discussed more fully in Section III.A.2. above, we are adding
two additional conditions regarding the types of asset-backed
securities that would qualify for Form S-3 eligibility. First, we are
codifying the current position that delinquent assets may not
constitute 20% or more, as measured by dollar volume, of the asset
pool. Second, for securities backed by leases other than motor vehicle
leases, the portion of the securitized pool balance attributable to
residual values may not constitute 20% or more, as measured by dollar
volume. As referenced in Section III.A.2.f., we are not adopting the
proposed additional restrictions for prefunding accounts and revolving
periods for Form S-3 eligibility.
Consistent with existing requirements, we did not propose to add an
issuer Exchange Act reporting history requirement for ABS Form S-3
eligibility. However, we did propose codifying that Exchange Act
reporting obligations regarding other asset-backed securities
transactions established by the sponsor and the depositor must have
been complied with for the prior 12 months for continued Form S-3
eligibility for new registration statements.\139\ This proposal would
not have required that there be a reporting history with respect to any
prior transactions, only that any existing or prior requirements during
the past year had been met. As explained in the Proposing Release, we
did not believe it would be appropriate to continue to allow the
benefits of shelf registration to new registration statements
established by sponsors or depositors that have not complied with
ongoing reporting obligations involving previous asset-backed
securities transactions.
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\139\ The proposal with regard to the depositor was consistent
with existing staff policy.
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Comments from issuers and their representatives objected to the
proposals as generally being more restrictive than necessary to
encourage better Exchange Act reporting compliance.\140\ Commenters
also thought the proposed formulation linked to the sponsor was
potentially ambiguous as to which depositors were affected. While some
suggested alternatives, some commenters objected to conditioning form
eligibility on any reporting history. Commenters also thought any
disqualification should be limited to depositors of the same asset
class, arguing that securitizations of separate asset classes are often
separately managed business units within a sponsor and to penalize all
of the sponsor's programs for the reporting noncompliance of one would
be too burdensome. Several commenters also believed that Form S-3
eligibility for asset-backed securities should be treated differently
from the requirements for non-ABS securities in that eligibility should
not be impaired by good faith, immaterial, inadvertent or involuntary
failures in Exchange Act reporting, particularly if the untimely
reporting was the result of the inability to obtain information from an
unaffiliated third party.
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\140\ See, e.g., Letters of ABA; ASF; BMA; BOA; CGMI; Citigroup;
CMSA; FSR; MBA; NYSBA; and UBS.
---------------------------------------------------------------------------
Compliance with Exchange Act reporting by ABS issuers under the
existing modified reporting no-action letters has been unacceptable.
While this may be partially attributable to a lack of widely understood
requirements due to reduced transparency in the current process, which
these final rules are intended to help remedy, the concerns in this
area are more broad-based than minor inadvertent or unintentional
failures to file. Instead, reporting issues in the ABS market include
widespread instances of untimely, deficient and sometimes even complete
lapses in reporting.
As a resultant responsibility from registering a public offering of
securities under the Securities Act, the Exchange Act specifically
requires that the obligation to provide information does not stop with
the final prospectus, but continues afterwards, at least for a period
of time.\141\ For asset-backed securities in particular, commenters
representing investors have expressed a clear preference for required
Exchange Act reporting, regardless of whether the issuer also elects to
provide the information voluntarily.\142\ Given past deficiencies in
Exchange Act reporting compliance in the ABS sector, we continue to
believe that issuers that fail to comply with their responsibilities
under the Exchange Act for prior transactions should not continue to
receive the benefits of shelf registration for new registration
statements. Nor do we believe that the current practice of being able
to form a new special purpose depositor to avoid the consequences of
reporting noncompliance creates appropriate incentives for reporting
compliance. Several commenters also recognized the need to fix this
current problem.\143\ Further, the ability for investment grade ABS
offerings to have immediate access to Form S-3 without a reporting
history requirement for the newly created issuing entity separates ABS
from most non-ABS issuers such that a linkage to affiliated entities is
appropriate.
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\141\ See, e.g., Section 15(d) of the Exchange Act.
\142\ See, e.g., Letters of FMR and ICI.
\143\ See, e.g., Letters of ASF and BMA.
---------------------------------------------------------------------------
Accordingly, we believe it is appropriate to continue to link Form
S-3 eligibility requirements to Exchange Act reporting compliance for
prior transactions. In response to several commenter suggestions,\144\
we are revising the proposal to focus not on any transactions
established directly or indirectly by a sponsor, but instead on
transactions established by affiliated depositors involving the same
asset class. We think this approach addresses many commenter concerns
about the potential breadth of the proposed application across asset
classes and tying the requirements to the sponsor definition.\145\
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\144\ See, e.g., Letters of ASF; BMA; CMSA; FSR; NYCBA; and UBS.
\145\ Commenters were particularly concerned that tying to
common sponsors could inadvertently link a person's Form S-3
eligibility to an unrelated entity's reporting history in the
``rent-a-shelf'' context. We are persuaded that tying the
requirements to a common depositor avoids this problem while still
ensuring related sponsors are covered because all depositors of a
given sponsor would be considered affiliates.
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Under the final rules, to the extent the depositor for an ABS
offering or any issuing entity previously established, directly or
indirectly, by the depositor or any affiliate of the depositor are or
were during the previous twelve calendar months and any portion of a
month immediately preceding the filing of the Form S-3 registration
statement subject to Exchange Act reporting requirements with respect
to asset-backed securities involving the same asset class, such
depositor and each such issuing entity must have timely complied with
its Exchange Act reporting requirements.\146\ This would include all
prior Exchange Act reporting obligations for such asset-backed
securities during the preceding year, even if and only up until those
obligations were suspended at some point during the year pursuant to
Section 15(d) of the Exchange Act.''\147\
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\146\ As discussed subsequently, compliance with Form 8-K
requirements for certain Items of that Form is limited to whether
such filings are current, instead of timely and current, as of the
filing of the registration statement.
\147\ An ``affiliate'' of, or a person ``affiliated'' with, a
specified person, is defined in Commission rules to mean ``a person
that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the
person specified.'' See, e.g., Securities Act Rule 405 and Exchange
Act Rule 12b-2. The term ``control'' also is defined in those rules
as ``the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a person,
whether through the ownership of voting securities, by contract, or
otherwise.''
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[[Page 1526]]
In response to comment, we are adopting one exception to the
requirement. Some comments requested an exception for depositors of
other parties that are acquired in a good faith business combination
transaction, arguing that prior noncompliance by the acquired
depositors should not affect pare-existing depositors of the acquirer,
so long as the acquisition is not part of a plan or scheme to evade the
reporting requirements.\148\ We are providing an exception that,
regarding an affiliated depositor that became an affiliate as a result
of a business combination transaction during the twelve month period
before the filing of the registration statement, the filing of any
material prior to the business combination transaction relating to
asset-backed securities of an issuing entity previously established,
directly or indirectly, by such affiliated depositor is excluded,
provided such business combination transaction was not part of a plan
or scheme to evade the requirements of the Securities Act or the
Exchange Act.
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\148\ See, e.g., Letters of ABA; ASF; and Citigroup.
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With respect to imposing a reporting compliance requirement, some
commenters expressed concern that an untimely Exchange Act filing would
have an immediate effect on the ability to conduct offers and sales
under previously filed registration statements.\149\ We wish to clarify
that Securities Act Form eligibility requirements for ABS issuers are
determined at the time of filing of the registration statement.\150\
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\149\ See, e.g., Letters of ABA; ASF; BMA; BOA; CMSA; FSR;
Sallie Mae; and TMCC.
\150\ In the Offering Process Release, the Commission has
proposed that a new Form S-3 shelf registration statement would be
required after three years, at which time form eligibility
requirements would be reassessed.
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In the Proposing Release, we proposed to add one of our proposed
new Form 8-K items for ABS--Item 6.03, Change in Credit Enhancement or
Other External Support--to the list of Form 8-K Items where failure to
file such Items timely would not result in Form S-3 ineligibility.\151\
One commenter believed two other ABS Form 8-K Items--Item 6.01, ABS
Informational and Computational Material, and Item 6.05, Securities Act
Updating Disclosure--should be added to the list because they relate to
offerings for specific transactions and not to ongoing reporting.\152\
We are adding Items 6.01 and 6.05 along with Item 6.03 to the Form 8-K
Item list for Form S-3 eligibility purposes. However, we do not believe
it is appropriate to include Items 6.01 and 6.05 in the list of Form 8-
K items for the Rule 10b-5 safe harbor for failure to file such items.
As discussed in Section III.D.8.d., we are only adding Item 6.03 to
that safe harbor, as proposed.
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\151\ All required Form 8-K filings, however, must be current as
of the date of filing.
\152\ See Letter of ASF.
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We do not underestimate the effects of linking reporting compliance
with continued Form S-3 eligibility. Non-ABS issuers have long dealt
with the consequences of reporting compliance for Form S-3 eligibility,
and we appreciate the consequences of losing access to shelf
registration. There are several accommodations, both in the amendments
we are adopting today and under existing Commission rules, which should
assist ABS issuers. Most notably, we are providing an extensive
transition period to allow issuers to improve their reporting processes
from the present state. As noted above, we also are expanding the
number of Form 8-K Items that need only be current and not timely for
ABS Form S-3 eligibility purposes. As discussed in Section III.D.4.a.,
we are extending Rule 12b-25 to provide filing extensions for Form 10-D
reports. We also are modifying several of the proposed Regulation AB
disclosure requirements, discussed more fully in Section III.D., that
could potentially require third party information, such as information
about unaffiliated servicers.\153\
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\153\ Finally, we note that the need to rely on third party
information certainly is not unique to ABS reporting, although we
realize the extent of third party information that may be material
for an ABS offering may be different from a non-ABS issuer. We also
understand that informational and other aspects of ABS transactions
are uniquely contractually based and that the long transition period
should allow for contractual arrangements consistent with our
adopted requirements.
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d. Determining the ``Issuer'' and Required Signatures
We are clarifying as proposed which entity is considered the
``issuer'' under the Securities Act with respect to an offering of
asset-backed securities. The Securities Act defines the term ``issuer''
in part to include every person who issues or proposes to issue any
security, except that with respect to certificates of deposit, voting-
trust certificates, or collateral trust certificates, or with respect
to certificates of interest or shares in an unincorporated investment
trust not having a board of directors (or persons performing similar
functions), the term issuer means the person or persons performing the
acts and assuming the duties of depositor or manager pursuant to the
provision of the trust or other agreement or instrument under which the
securities are issued.\154\ Under current staff positions, the
depositor must sign the Securities Act registration statement for an
ABS offering.
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\154\ See Section 2(a)(4) of the Securities Act (15 U.S.C.
77b(a)(4)).
---------------------------------------------------------------------------
We are clarifying that the depositor for the asset-backed
securities, acting solely in its capacity as depositor to the issuing
entity, is the ``issuer'' for purposes of the asset-backed securities
of that issuing entity.\155\ Further, our new rule specifies that the
person acting in its capacity as the depositor for the issuing entity
of an asset-backed security is a different ``issuer'' from that same
person acting as a depositor for any other issuing entity or for
purposes of that person's own securities. As the definition of asset-
backed security requires the issuing entity to be a restricted special
purpose investment vehicle, the new rule will apply regardless of the
issuing entity's form of organization.
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\155\ See Securities Act Rule 191 (17 CFR 230.191). We are
adopting an identical rule for purposes of the Exchange Act. See
Exchange Act Rule 3b-19 (17 CFR 240.3b-19) and Section III.D.2. As
noted in Section III.B.3.b., we are defining ``depositor'' as the
depositor who receives or purchases and transfers or sells the pool
assets to the issuing entity. For asset-backed securities where
there is not an intermediate transfer of the assets from the sponsor
to the issuing entity, the term ``depositor'' refers to the sponsor.
See Item 1101(e) of Regulation AB. It should be noted that the
definition of ``issuer'' under the Investment Company Act is
different from the definitions in the Securities Act and the
Exchange Act. See 15 U.S.C. 80a-2(a)(22). Our final rules do not
affect that definition.
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By clarifying that the person acting as the depositor in its
capacity as depositor to the issuing entity is a different ``issuer''
from that person in respect of its own securities, we are making clear
our longstanding position that any applicable exemptions from
registration that person may have with respect to its own securities
are not applicable to the asset-backed securities.\156\ Similarly, the
reporting history with respect to a particular class of asset-backed
securities does not affect Form S-3 eligibility with respect to the
depositor's
[[Page 1527]]
or sponsor's own securities, although as discussed above we are
requiring that the reporting history with respect to certain prior ABS
transactions can affect continued Form S-3 eligibility for future ABS
registration statements.
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\156\ For example, in an ABS transaction where there is not an
intermediate transfer of the pool assets from the sponsor to the
issuing entity and the sponsor is a bank, the rule does not mean
that because the bank is acting as depositor, the asset-backed
security is then a ``security issued * * * by a bank'' and thus
exempt from registration under Section 3(a)(2) of the Securities Act
(15 U.S.C. 77c(a)(2)). See, e.g., Bank of America National Trust &
Savings Ass'n (May 19, 1977).
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Consistent with our proposal, we also are codifying in the general
instructions for Forms S-1 and S-3 that the registration statement must
be signed, as is currently the case, by the depositor, the depositor's
principal executive officer or officers, principal financial officer
and controller or principal accounting officer, and by at least a
majority of the depositor's board of directors or persons performing
similar functions. As proposed, we are not requiring the issuing entity
to sign if formed prior to effectiveness as such a requirement would be
superfluous.
4. Foreign ABS
As we described in the Proposing Release, while not as prevalent as
in the U.S., securitization by foreign issuers has been developing
rapidly.\157\ However, asset-backed securities issued by a foreign
issuer \158\ or that are backed by foreign assets raise special issues
due to potential differences in the legal and regulatory regime of the
relevant home jurisdiction. Differing laws and practices regarding
banking regulation, accounting, bankruptcy, property rights, secured
transactions, ``true sale,'' tax, asset servicing, consumer protection
and other matters may alter fundamentally the basic principles
underlying an ``asset-backed security.'' Also, given the early stage of
securitization in some foreign markets, ABS may be used not just as an
alternative funding source, but more for capital management, including
efforts to ``prune'' a lender's portfolio by off-loading poorly
performing assets.\159\
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\157\ For example, one source estimates that non-U.S. ABS
issuance grew from $93 billion in 2000 to $185 billion in 2003. See
Asset-Backed Alert (pub. by Harrison Scott Publications).
\158\ The term ``foreign issuer'' is defined in Securities Act
Rule 405 (17 CFR 230.405) as ``any issuer which is a foreign
government, a national of any foreign country or a corporation or
other organization incorporated or organized under the laws of any
foreign country.''
\159\ See, e.g., Brian Bremner et al., ``An Exit Plan for
Japan?'' Business Week, Oct. 26, 1998. Our separate limits on
delinquency concentrations and non-performing assets act somewhat as
a limiter on such transactions qualifying as an ``asset-backed
security.'' For example, the standard for non-performing assets
includes linkage to the charge-off policies of the sponsor and the
safety and soundness regulator, regardless of whether those policies
are enforced by the sponsor or any relevant regulatory authority.
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As a result of these concerns, the staff historically has required
additional conditions for the processing of Form S-3 registration
statements involving foreign ABS offerings. These conditions have
included first requiring one or more registered offerings on a non-
shelf basis on Form S-1 or S-11 that is fully reviewed by the staff, as
well as other steps or conditions to help assure that novel or unique
questions can be addressed by the staff. As experience with a
particular issuer, asset type and laws related to asset-backed issues
in the home jurisdiction increases, the requirements decrease.
Nevertheless, while designed to address the concerns noted above, these
additional steps and conditions can result in delays and possible
impediments to access to the U.S. public capital markets through shelf
registration for foreign ABS, even if the other requirements for shelf
registration, such as an investment grade rating, can be met.
As proposed, to address the foreign and legal and regulatory issues
while appropriately treating foreign ABS transactions, we are not
establishing a different disclosure or regulatory regime for foreign
ABS, with the one exception discussed below. Foreign ABS will be
registered on the same Securities Act registration forms as domestic
ABS, and with the exception of the disclosure discussed below, foreign
ABS will be subject to the same disclosure requirements in Regulation
AB. Foreign ABS offerings registered on Form S-3 also will be eligible
for our new rules regarding use of ABS informational and computational
material and ABS research reports discussed in Section III.C.
As discussed in the Proposing Release, we believe that many of the
concerns relating to foreign ABS can be appropriately addressed through
adequate disclosure. Commenters supported this approach.\160\ As such,
we are adopting as proposed an additional general instruction in
Regulation AB focused on foreign ABS. This instruction provides that if
asset-backed securities are issued by a foreign issuer, are backed by
foreign assets, or are affected by credit enhancement or other support
provided by a foreign entity, then in providing the disclosures
required, the filing also must describe any pertinent governmental,
legal or regulatory or administrative matters and any pertinent tax
matters, exchange controls, currency restrictions or other economic,
fiscal, monetary or potential factors in the applicable home
jurisdiction that could materially affect payments on, the performance
of, or other matters relating to, the assets contained in the pool or
the asset-backed securities.\161\ This disclosure should particularly
address the material items and legal and regulatory or administrative
factors discussed above.
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\160\ See, e.g., Letters of A&O; ABA; ASF; Aus. SF; ESF; Jones
Day; and MBA.
\161\ See Item 1100(e) of Regulation AB. Information specified
in Item 101(g) of Regulation S-K and Instruction 2 to Item 202 of
Regulation S-K also are required by Item 1100(e).
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We expect that at the time of filing, the registration statement
will include fully developed disclosure clearly articulating the
material aspects and effects of the applicable home jurisdiction legal
and regulatory regime. In this regard, we also encourage pre-filing
conferences with the staff where appropriate to discuss the applicable
home jurisdiction legal and regulatory environment, the proposed
transaction and the relevant disclosures that will be required.\162\
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\162\ Registrants also should consider building additional time
into their planning schedules given the possibility for staff review
of the disclosure. The review of these disclosures could include,
for example, statistical disclosure regarding a hypothetical
portfolio of financial assets that would be securitized in a
takedown under the registration statement.
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As proposed, we also are not creating a different Exchange Act
reporting structure for foreign ABS. We believe periodic disclosure of
distribution and pool performance information, reports regarding
servicing compliance (including the requirements regarding assessment
and attestation of compliance with servicing criteria) and current
disclosure of significant events are equally relevant and applicable
for foreign ABS as they are for domestic ABS. Thus, like domestic ABS,
foreign ABS will be required to report on Forms 10-D, 10-K and 8-K. In
addition, ongoing disclosures will be required in Forms 10-D and 10-K,
as proposed, regarding any material impact caused by foreign legal and
regulatory developments during the period covered by the report which
had not been previously described.
5. Exclusion From Exchange Act Rule 15c2-8(b) for Form S-3 ABS
Through a series of staff no-action letters dating back to 1995,
broker-dealers, in connection with offerings of asset-backed securities
eligible for registration on Form S-3, are not required under Exchange
Act Rule 15c2-8(b) to deliver a copy of a preliminary prospectus to any
person who is expected to receive a confirmation of sale at least 48
hours prior to the sending of such confirmation.\163\ Without these no-
[[Page 1528]]
action letters, most broker-dealers would be required to deliver a
preliminary prospectus in ABS offerings because Rule 15c2-8(b) requires
such delivery if the issuer has not previously been required to file
reports with the Commission pursuant to Section 13(a)\164\ or 15(d) of
the Exchange Act. Most ABS issuers at the time of the ABS offering are
not so required to report.
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\163\ See Bond Market Ass'n (Dec. 15, 2000); Bond Market Ass'n
(Dec. 15, 1999); Bond Market Ass'n (Nov. 20, 1998); PSA The Bond
Market Ass'n (Sep. 26, 1997); and Public Securities Ass'n (Dec. 15,
1995).
\164\ 15 U.S.C. 78m(a).
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Given the more than eight years of experience with the staff no-
action letters, we proposed codifying the basic concept in those
letters as a formal exclusion from Exchange Act Rule 15c2-8(b).\165\
However, we expressed concern in the Proposing Release with statements
from investors in previous communications to the staff that a
combination of factors, including the introduction of shelf
registration for ABS, relief from Rule 15c2-8(b) and the ability to use
term sheets and computational material, has reduced the amount of time
and information investors have to make informed investment
decisions.\166\ We requested comment on these concerns.
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\165\ The original no-action relief for Rule 15c2-8(b) included
a condition that the ABS offering would not contemplate a prefunding
account in excess of 25% of the principal balance of the offered
securities, which was consistent with staff practice regarding
prefunding periods at the time. Otherwise, the relief from Rule
15c2-8(b) would not have been available. As discussed in Section
III.A.2.f., we are now addressing limitations on prefunding periods
in the definition of ``asset-backed security'' in lieu of in Rule
15c2-8(b). Because the definition of ``asset-backed security'' will
permit a prefunding period of up to 50%, we are not codifying the
25% restriction on prefunding periods for the exclusion from Rule
15c2-8(b).
\166\ See, e.g., Letter from ICI to Michael H. Mitchell, Special
Counsel, Division of Corporation Finance, ``Asset-Backed Securities
Offerings'' (Oct. 29, 1996); and Letter from AIMR to Brian J. Lane,
Director, Division of Corporation Finance, ``Recommendations for a
Disclosure Regime for Asset-Backed Securities'' (Sep. 30, 1996).
These letters also questioned the premise that there are ongoing
dialogues with investors regarding structuring publicly offered ABS
classes.
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Commenters were split on our proposal to codify the exclusion from
Rule 15c2-8(b). Commenters representing primarily issuers and their
representatives supported the codification of the existing staff
positions and requested it be expanded to all ABS offerings, not just
those eligible to use Form S-3.\167\ One commenter noted that Rule
15c2-8(b) was originally designed to take into account new and
speculative offerings.\168\ Some of the commenters discounted concerns
that investors do not have adequate information to make informed
investment decisions. Also, one commenter believed most ABS investors
are institutional investors and can refrain from purchasing if they
believe they do not have sufficient information.\169\ In light of the
fact that most investors continue to purchase ABS under the current no-
action letter relief, the commenter argued, it would appear most
investors believe they have sufficient information.
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\167\ See, e.g., Letters from ABA; ASF; and NYCBA.
\168\ See, e.g., Letter of ASF.
\169\ See, e.g., Letter of ABA.
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Commenters representing investors disagreed.\170\ These commenters
believed there are problems and inconsistencies with the absence of
material information at the time investment decisions are made,
especially given the complexity of ABS and the need to properly assess
risk. In addition, in order for investors to receive the full benefits
of the proposed new disclosure requirements, the commenters argued it
is critical that investors receive the information for investment
decisions. These commenters generally did not support excluding any ABS
from Rule 15c2-8(b). The commenters also recommended requiring, such as
a condition to shelf registration, ABS informational and computational
material in a reasonable time frame prior to effecting sales, either as
an addition to or as an alternative to delivery of a preliminary
prospectus under Rule 15c2-8(b).
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\170\ See, e.g., Letters of CFAI; FMR; ICI; and MetLife.
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On November 3, 2004, we issued proposals to revise the Securities
Act regulatory process for securities offerings in the Offering Process
Release. As noted in that release, we agree with investors that
materially accurate and complete information regarding an offering
should be available to investors at the time they make an investment
decision, and we issued an interpretation and proposed an interpretive
rule to support that unassailable proposition. Under that
interpretation and proposed rule, in determining whether there is a
material misstatement or material omission necessary to make the
statements made at the time of contract of sale not misleading under
Securities Act Sections 12(a)(2) and 17(a)(2), information conveyed
only after that time would not be taken into account. We believe
concerns about the availability of adequate information for ABS
offerings raise the same issues as those discussed in the Offering
Process Release for all offerings and are best addressed through those
proposals.
We also agree with issuers that Form S-3 ABS offerings differ from
the offerings that were the focus of Rule 15c2-8(b) when it was
originally adopted. In light of our proposals to address the
information disparity issue for all offerings in the Offering Process
Release, we have determined to continue our proposed approach here with
respect to the existing staff no-action position regarding Rule 15c2-
8(b). Accordingly, we are codifying, as proposed, an exclusion from
Rule 15c2-8(b) for Form S-3 ABS.\171\
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\171\ We also are making an unrelated technical correction to
paragraph (a) of Rule 15c2-8 to correct references to other
paragraphs of the rule.
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We will evaluate the comments we received regarding the
availability of information in ABS offerings in connection with the
Offering Process Release. We also encourage ABS market participants to
comment specifically on the proposals in that release to address
information availability issues. We will consider whether additional
action is necessary or appropriate with respect to ABS offerings in
connection with those proposals.
As we stated in the Proposing Release, although we are codifying
the basic concept of the staff position regarding Rule 15c2-8(b), the
codification does not affect any other obligation in that rule nor any
other prospectus delivery obligation that may be applicable. Also, as
proposed, the exclusion only is available, as it is today, with respect
to registered offerings of investment grade asset-backed securities
that meet the requirements of General Instruction I.B.5 of Form S-3.
Although some commenters representing issuers and their representatives
requested expanding the exclusion to other asset-backed securities, we
continue to believe that such securities should remain subject to Rule
15c2-8(b). As we noted in the Proposing Release, because a separate
registration statement is prepared for each Form S-1 offering, the
impact of continued compliance with Rule 15c2-8(b) is less significant.
6. Registration of Underlying Pool Assets
a. Current Requirements
The 1992 Release included a statement that the definition of
``asset-backed security'' does not encompass securities issued in
structured financings backed by assets of one obligor or group of
related obligors. It also stated that asset-backed offerings with a
significant asset concentration--that is, a significant concentration
of obligations of one obligor or related obligors--may involve one or
more co-
[[Page 1529]]
issuers under Securities Act Rule 140.\172\ In interpreting these
provisions, the staff has focused on ensuring that an ABS offering does
not constitute an unregistered distribution of underlying securities
and that non-S-3 eligible registrants do not circumvent Form S-3
eligibility requirements by attempting to structure their offering as
an asset-backed offering. One of the basic premises underlying ABS
offerings is that an investor is buying participation in the assets.
Therefore, if the assets being securitized are themselves securities
under the Securities Act, the offering of those securities also must be
registered or exempt from registration from the Securities Act.\173\
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\172\ 17 CFR 230.140. Securities Act Rule 140 states, in
pertinent part, as follows:
``A person, the chief part of whose business consists of the
purchase of the securities of one issuer, or of two or more
affiliated issuers, and the sale of its own securities, * * * to
furnish the proceeds with which to acquire the securities of such
issuer or affiliated issuers, is to be regarded as engaged in the
distribution of the securities of such issuer or affiliated issuers
within the meaning of section 2(a)(11) of the [Securities] Act.''
\173\ Similarly, if a loan participation were securitized, that
would be viewed as a public distribution of the loan participation
and the loan participation would therefore be a security, the offer
and sale of which, unless exempt, would be subject to the
registration requirements of the Securities Act. See, e.g., Pollack
v. Laidlaw Holdings, 27 F.3d 808 (2nd Cir. 1994).
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As we explained in the Proposing Release, in considering whether
the distribution of the underlying assets must be registered, the basic
proposition is that where the underlying securities themselves are not
exempt from registration, the depositor must be free to publicly resell
the underlying securities without registration. Otherwise, their
distribution must be registered. If registration of the underlying
securities distribution is required, certain conditions and disclosures
have developed through the staff comment process and industry practice
regarding the method and manner of such registration. These conditions
are designed to provide clear disclosure to investors of the different
distributions involved, the relationships between the distributions and
investor rights with respect to each distribution.
The nature of the distribution of the underlying securities is the
important factor in determining whether concurrent registration is
required, not necessarily their concentration in the pool. For example,
if a $100 million asset pool included $5 million of securities that
were not freely resalable by the depositor without registration, then
the distribution of those $5 million of securities through the ABS
distribution also would need to be registered, even though such
securities only constituted 5% of the asset pool. Similarly, if a
depositor obtained $100 million of freely resalable securities of one
obligor from the secondary market, the offering of ABS backed by those
securities would not require concurrent registration of the
distribution of the underlying securities, even though one obligor
represented 100% of the pool, because the securities were not purchased
from the issuer or underwriter but rather were purchased in the
secondary market. In that case, additional disclosure would be required
regarding the concentrated obligor, including financial information
about the obligor, but the concentration itself would not trigger a
separate registration requirement.\174\ As a result, the definition of
``asset-backed security'' may encompass securities issued in structured
financings backed by assets of one obligor or group of related
obligors, so long as any required disclosure about the underlying
obligor is provided and any distribution of the underlying securities
is registered if required.
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\174\ See Sections III.B.7 and 8. See also Section III.B.10.
regarding alternative methods that may be available to present
information regarding the concentrated obligor, such as through
incorporation by reference or by including a reference to the
obligor's Commission filings.
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b. When Registration Is Required
To provide further clarification and regulatory certainty regarding
this topic, we are adopting in substantial part our proposal that would
codify existing staff positions in this area.\175\ First, we are
adopting conditions when registration of the distribution of the
underlying security will not be required. As noted in the Proposing
Release, most asset types that are securitized today, including
residential mortgages, student loans, auto loans and credit card
receivables, meet these conditions and thus will not be affected. Under
our final rule, in an ABS offering where the asset pool includes
securities of another issuer, unless the underlying securities are
exempt from registration under the Securities Act, the offering of the
underlying securities itself must be registered as a primary offering
of such securities, unless all of the following are true:
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\175\ See Securities Act Rule 190 (17 CFR 230.190).
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The depositor would be free to publicly resell the
underlying securities without registration under the Act;
Neither the issuer of the underlying securities nor any of
its affiliates has a direct or indirect agreement, arrangement,
relationship or understanding, written or otherwise, relating to the
underlying securities and the asset-backed securities transaction; and
Neither the issuer of the underlying securities nor any of
its affiliates is an affiliate of the sponsor, depositor, issuing
entity or underwriter of the asset-backed securities transaction.
The first condition states the basic proposition that the
securities of the underlying issuer must be freely resalable without
registration. Consistent with our proposal and existing staff practice,
we are including two examples in the final rule to clarify this
condition. First, the underlying securities may not include restricted
securities (e.g., privately placed securities) that do not meet the
conditions for resale under the safe harbor of Securities Act Rule
144(k) (e.g., a two-year holding period by non-affiliates).\176\
Second, the offering of the asset-backed security cannot constitute
part of a distribution of the underlying securities. Underlying
securities which at the time of their purchase for the asset pool are
part of a subscription or unsold allotment will be considered a
distribution of the underlying securities.
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\176\ 17 CFR 230.144(k). The term ``restricted securities'' is
defined in Securities Act Rule 144(a)(3) (17 CFR 230.144(a)(3)).
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We also are codifying as proposed the staff's interpretive position
where the ABS offering involves a sponsor, depositor or underwriter
that was an underwriter or an affiliate of an underwriter in a
registered offering of the underlying securities.\177\ As proposed, the
distribution of the asset-backed securities will not constitute part of
a distribution of the underlying securities if the underlying
securities were purchased at arm's length in the secondary market at
least three months after the last sale of any unsold allotment or
subscription by the affiliated underwriter that participated in the
registered offering of the underlying securities.\178\ As we stated in
the Proposing Release, in this instance we believe three months
provides sufficient certainty that the purchase was not part of the
original distribution.
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\177\ See, e.g., Section VIII.B.3.b.i. of the Division of
Corporation Finance's ``Current Issues and Rulemaking Projects''
(Nov. 14, 2000).
\178\ If an underwriter or dealer transfers an unsold allotment
to an investment account or an affiliate, that does not turn the
allotment into anything other than an unsold allotment. Rule 144 is
not available to underwriters or dealers with unsold allotments.
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The second and third conditions clarify that if the issuer of the
underlying securities is engaged in the distribution of its securities
through the asset-backed securities or is affiliated with the sponsor,
depositor, issuing entity or any underwriter for the ABS
[[Page 1530]]
offering, then registration of the underlying distribution is required
along with registration of the ABS offering.
If any of the three conditions discussed above are not met, the
offering of the relevant underlying securities itself must be
separately registered as a primary offering of such securities. As
proposed, such registration must be conducted in accordance with the
following conditions: \179\
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\179\ As noted in the Proposing Release, because of the
conditions, a prefunding or revolving period cannot be used to
purchase unidentified securities whose distribution needs to be
registered.
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If the ABS offering is registered on Form S-3, the
offering of the underlying securities itself must be eligible to be
registered under Form S-3 or F-3 as a primary offering of such
securities;\180\
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\180\ This condition ensures that an offering of underlying
securities that itself would not be eligible for shelf registration
could not be conducted through the distribution of an ABS offering
that was shelf eligible.
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The plan of distribution in the registration statement for
the offering of the underlying securities contemplates this type of
distribution at the time of the commencement of the ABS offering;\181\
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\181\ For underlying securities that have already been
registered under a previous shelf registration statement, this may
require a post-effective amendment to that registration statement to
incorporate this type of distribution into the plan of distribution
description. Consistent with current practice, no additional filing
fee is required for the underlying securities if they have already
been registered under a previous registration statement. If adopted,
the proposals in the Offering Process Release would allow a plan of
distribution to be amended by supplement.
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The prospectus for the ABS offering describes the plan of
distribution for both the underlying securities and the asset-backed
securities;
The prospectus relating to the offering of the underlying
securities is delivered simultaneously with delivery of the prospectus
relating to the ABS offering, and the prospectus for the ABS offering
includes disclosure that the prospectus for the offering of the
underlying securities will be delivered with it or is combined with
it;\182\
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\182\ The two prospectuses can be combined in a single
prospectus that is filed pursuant to Rule 424 for each offering.
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The prospectus for the ABS offering identifies the issuing
entity, depositor, sponsor and each underwriter for the ABS offering as
an underwriter for the offering of the underlying securities;
Neither prospectus disclaims or limits responsibility by
the issuing entity, sponsor, depositor, trustee or any underwriter for
information regarding the underlying securities; and
If the ABS offering and the underlying securities offering
are not made on a firm commitment basis, the issuing entity or the
underwriters for the ABS offering must distribute a preliminary
prospectus for both the underlying securities offering and the ABS
offering that identifies the issuer of the underlying securities and
the expected amount of the issuer's underlying securities that is to be
included in the asset pool to any person who is expected to receive a
confirmation of sale of the ABS at least 48 hours prior to sending such
confirmation.\183\
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\183\ In this instance, this condition would therefore overrule
the exclusion from Exchange Act Rule 15c2-8(b). As noted above, the
prospectuses may be combined into a single prospectus. See also note
133 above.
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c. Exceptions from Disclosure and Delivery Conditions and Form S-3
Eligibility Requirements
As discussed in Section III.A.2., some ABS transactions, such as
credit card issuance trusts and motor vehicle lease transactions, are
structured such that the asset pool consists of one or more financial
assets that represent an interest in or the right to the payments or
cash flows of another asset pool solely in order to facilitate the
asset-backed issuance and not in order to re-securitize other
securities. In each instance, these structures are solely designed to
facilitate the ABS transaction. The ABS will be primarily serviced by
cash flows from the underlying pool assets.\184\ However, the deposit
of the certificate of interest regarding the other pool would likely
fail to satisfy our proposed conditions to avoid registration of its
distribution. In fact, the deposit of the certificate of interest is
concurrently registered today in connection with ABS offerings
involving these structures.
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\184\ See Section III.B.3.g. regarding the general instruction
we are adopting for Regulation AB regarding the scope of disclosure
that is required regarding these structures. In addition, any
additional material risks regarding these structures should be
clearly described.
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As we noted in the Proposing Release, while these certificates do
trigger additional registration obligations, they do not raise the same
issues discussed above regarding the resecuritization of other
underlying securities because they are merely facilitating structural
devices.\185\ Accordingly, although the distribution of the underlying
financial asset in connection with the ABS offering must still be
separately registered, we are excluding such transactions as proposed
from the disclosure and delivery conditions discussed above with
respect to other resecuritizations, if the following conditions are
met:
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\185\ These other resecuritizations are subject to the
requirements in the previous section on the method and manner of
registering the distribution of the underlying securities.
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Both the issuing entity for the asset-backed securities
and the entity issuing the underlying financial asset have been
established under the direction of the same sponsor and depositor;
The financial asset was created solely to satisfy legal
requirements or otherwise facilitate the structuring of the ABS
transaction;
The financial asset is not part of a scheme to avoid
registration or the resecuritization requirements discussed in the
previous section; and
The financial asset is held by the issuing entity and is a
part of the asset pool for the asset-backed securities.
In the Proposing Release, we indicated that any separate
registration of the distribution of the underlying financial asset
would need to be on a form eligible for such distribution. Commenters
requested relaxing Form S-3 eligibility requirements for such
registration, arguing that the underlying financial asset being used to
structure the transaction is not likely to otherwise be Form S-3
eligible.\186\ If the underlying financial asset was required to be
registered on Form S-1, the benefits of shelf registration for the ABS
registered on Form S-3 would be lost. In response to these concerns, we
are revising General Instruction I.B.5 to Form S-3 to permit the
registration of the underlying financial asset on that form if it meets
the same conditions outlined above.\187\ As we indicated in the
Proposing Release, the issuer of the underlying financial asset would
need to sign the registration statement and any intervening transferors
of the asset to the ABS issuing entity would need to be named as an
underwriter.
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\186\ See, e.g., Letters of ABA and Citigroup.
\187\ The registration of the asset-backed securities and the
underlying financial asset can be included on a combined Form S-3
registration statement.
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7. Market-Making Transactions
In the Proposing Release, we briefly noted the requirements for
keeping an ABS prospectus current for market-making or remarketing
transactions. In non-ABS transactions, the Form S-3 registration
statement is kept current by the incorporation by reference of
subsequent Exchange Act reports. In a Form S-3 ABS transaction, the
incorporation by reference of subsequent Exchange Act reports also
would be important, although the information in those reports would not
include the disclosure required in the registration statement regarding
the
[[Page 1531]]
asset pool, such as the pool composition tables. Consistent with staff
interpretations, this information would have been required to be kept
current for use in ABS market-making and remarketing transactions.
Many commenters argued that the basic policy of when registration
of market-making transactions is required for ABS transactions was
neither appropriate nor comparable to the requirements for non-ABS
issuers.\188\ One of the basic principles requiring registration of
market-making transactions is that a broker-dealer affiliated with the
issuer does not meet the definition of ``dealer'' in Section 2(a)(12)
of the Securities Act,\189\ and therefore the exemption from
registration in Section 4(3) of the Securities Act \190\ is not
available for the market-making transaction, and it must be registered.
Given the structure of ABS offerings, the staff has interpreted the
requirement for ABS as instead relating to an affiliation between the
broker-dealer and the servicer.
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\188\ See, e.g., Letters of ABA; ASF; BMA; BOA; CGMI; CMSA; FSR;
JPMorganChase; and NYCBA.
\189\ 15 U.S.C. 77b(a)(12).
\190\ 15 U.S.C. 77d(3).
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Commenters argued that this market-making registration paradigm is
not appropriate to ABS transactions.\191\ Unlike the relationship of an
affiliated broker-dealer to a corporation, these commenters argued that
a broker-dealer's affiliation with the servicer does not involve the
same level of relationship to the issuer, the transaction and the
securities as that of a broker-dealer affiliated with a corporate
issuer. In addition, these commenters argued that other adequate
safeguards exist under the federal securities laws, such as the general
anti-fraud provisions, to prevent a broker-dealer from misusing any
material non-public information it might obtain through its affiliated
servicer.\192\ We are sufficiently persuaded by these comments such
that we no longer will require registration and delivery of a
prospectus for market-making transactions for asset-backed
securities.\193\
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\191\ See, e.g., Letter of ABA.
\192\ See, e.g., Letter of BMA.
\193\ There remain a few situations where the prospectus must be
kept evergreen or updated such as in a delayed or continuous selling
shareholder offering, a registered remarketing transaction or a
resecuritization of asset-backed securities where the underlying
asset-backed securities constitute a significant obligor. In those
situations our position on updating remains the same. A number of
commenters requested clarification that merely incorporating by
reference subsequent Exchange Act reports was sufficient for
updating. A few commenters suggested that even if the issuer had
suspended its reporting obligation, the prospectus could be used if
it was accompanied by a copy of the most recent distribution report.
We continue to believe that investors are entitled to the
information required to be included in the prospectus when making an
investment decision for a transaction covered by the registration
statement. Therefore, to the extent information in the prospectus is
not updated through incorporation of Exchange Act filings, which is
typically not the case for much of the information about the
composition of the asset pool, then the prospectus would need to be
updated. This could be done either through filing and incorporating
by reference a Form 8-K containing the information or by actually
updating the prospectus.
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B. Disclosure
1. Regulation AB
As we explained in the Proposing Release, no disclosure items have
previously existed that were tailored specifically to asset-backed
securities. While some disclosure items in Regulation S-K are relevant
to ABS, such as a description of the security, most items do not elicit
useful disclosure for ABS investors. For ABS, there is generally no
business or management to describe; rather, information about the pool
assets, servicing, transaction structure, flow of funds and
enhancements is more relevant. Analysis regarding the characteristics
of the pool assets is necessary to determine the timing and amount of
expected payments on the assets and thus payments on the ABS. In
addition, the legal and often complex flow of funds of the transaction
and the impact of any credit enhancement or other support must be
analyzed. Through the staff comment process and industry practice,
informal disclosure practices have developed. These practices, however,
may not have been fully transparent to issuers and investors.
As proposed, we are adopting a new principles-based set of
disclosure items in one central location in a subpart of Regulation S-
K, called Regulation AB.\194\ These disclosure items, based on existing
disclosure practices and revised from the proposal in response to
comment, will form the basis for disclosure in both Securities Act
registration statements and Exchange Act reports for asset-backed
securities. As noted in Sections III.A. and D., specific disclosure
requirements in ABS registration statements and forms will be keyed to
items in Regulation AB in a manner consistent with the integrated
disclosure system applicable to other issuers.
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\194\ See Items 1100-1123 of Regulation AB.
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While not all commenters agreed, the majority of commenters
supported our proposal for principles-based disclosure rules in lieu of
detailed disclosure guides for each securitized asset class.\195\ For
example, one commenter representing ABS investors believed proposed
Regulation AB represents a major step in improving disclosures provided
to investors and includes many of the items investors have previously
recommended as critical to investors.\196\ We continue to believe a
principles-based approach provides the best framework for disclosure in
the context of asset-backed securities. We believe it would be
impractical to provide an exhaustive list of disclosure items required
for each asset class. Not only do we believe this approach would be
impractical due to the many existing asset classes that are securitized
today, it would not provide any effective guidance with respect to new
asset classes that may be securitized in the future. Due to the dynamic
nature of the ABS market, any such list would likely become outdated
quickly.
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\195\ Compare, e.g., Letters of AICPA; PWC; and State Street;
with Letters of ABA; ASCS; ASF; FSR; ICI; MBA; MBNA; and MetLife.
\196\ See Letter of ICI. See also Letter of CFAI.
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Under our principles-based approach, in many instances we identify
the disclosure concept or objective required and provide one or more
illustrative examples. Some commenters objected to our providing
illustrative examples, expressing concern that the mere identification
of an item in the list could suggest that the item is required,
regardless of its applicability or materiality to the particular asset
class or transaction involved.\197\ This concern is misplaced and
would, if accepted, lead to a rules-based regime that would be both
inflexible and subject to evasion. As we stressed in the Proposing
Release, application of the particular concept or objective needs to be
tailored in preparing and presenting the disclosure to the information
material to the particular transaction and asset type involved. We have
made several revisions to the proposed disclosure items where
illustrative lists are used to clarify this point.
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\197\ See, e.g., Letters of ASF; ASFA; Capital One; MBA; and
MBNA.
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The balance we are striving to achieve through this approach is to
provide enough clarity so that the disclosure concept or objective is
understood and can be applied on a consistent basis, while not
providing too much detail that could obscure or override the concept or
objective or that would result in disclosure that would be immaterial
or inapplicable. We believe using illustrative lists, with a reference
that the actual disclosure must be tailored based on the material
aspects of the transaction involved, helps to identify the types of
disclosures that may be
[[Page 1532]]
applicable in response to the identified disclosure concept. Issuers
must assess the materiality to investors of the information that is
identified by the particular concept or objective, or that would result
from employing the example given, in the case of the particular
transaction and asset type involved. We believe this approach fosters
transparency and comparability without being overly rigid and reduces
the risk that the disclosure requirements will become out-of-date. We
also note that in some instances an item may not be material and
therefore no disclosure would be required. We also direct issuers to
longstanding Commission rules that state that, unless specified
otherwise, no reference need be made in the prospectus to inapplicable
disclosure items.\198\
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\198\ See, e.g., Securities Act Rule 404(c).
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Of course, as we stated in the Proposing Release, in some instances
we believe we must and therefore do set forth certain disclosure items
with greater specificity. Further, we are codifying several existing
percentage tests, with several revisions from our proposal in response
to comment, that provide requirements as to when particular disclosure
is required, particularly regarding concentrated obligors or
significant credit enhancement or other support. As we stated in the
Proposing Release, we believe such breakpoints provide consistency,
comparability and clarity.
The structure of Regulation AB is as follows:
Item 1100 sets forth items of general applicability for
the whole subpart, such as guidance regarding the presentation of
delinquency and loss information when it is required, alternative
methods for presenting third party financial information (discussed
further in Section III.B.10.) and guidance regarding disclosures
related to foreign ABS (previously discussed in Section III.A.4.).
Item 1101 sets forth definitions applicable to asset-
backed securities.
Items 1102--1120 constitute the basic disclosure package
for Securities Act registration statements for ABS offerings. In
addition, several of the items will be required on an ongoing basis in
Exchange Act reports, such as updated financial information regarding
certain third parties and disclosure regarding legal proceedings.
Item 1121 identifies disclosure for distribution reports
on Form 10-D regarding cash flows and performance of the asset pool and
the allocation of cash flows and distribution of payments on the ABS.
This item is discussed more fully in Section III.D.4.
Items 1122 and 1123 address two longstanding requirements
for the annual Form 10-K report based on market practice and the
modified reporting system. Item 1122 addresses assessments of
compliance with servicing criteria and the filing of attestation
reports by registered public accounting firms on such assessments. This
item, as revised from the proposal, is discussed more fully in Section
III.D.7. Item 1123 specifies the form of the separate servicer
compliance statement. This compliance statement pertains to the
servicer's compliance with the particular servicing agreement for the
transaction, as opposed to an attested assertion of compliance against
a general set of servicing criteria. This item is discussed more fully
in Section III.D.5.
As we stated in the Proposing Release, many of our disclosure items
are based on the market-driven disclosures that appear in filings
today. Commenters, although suggesting comment on some individual
items, generally agreed with this assessment.\199\ In addition, as we
explained in more detail in the Proposing Release, our consideration of
the disclosure items was informed by the staff review process as well
as the staff's participation in the 2003 MBS Disclosure Report.
Commenters on the proposals also provided additional examples and
suggestions to improve the disclosure items.
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\199\ See, e.g., Letters of ABA; ASF; and MetLife.
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As we stated in the Proposing Release, however, we remain concerned
that current disclosure practice has resulted in the inclusion of undue
boilerplate language in ABS filings, particularly prospectuses and
registration statements, and a disproportionate emphasis on legal
recitations of transaction terms. Further, as disclosure practice may
have been driven primarily by the staff review process and by observing
and conforming to filings for other transactions, disclosures may have
been included from other filings or retained from prior filings without
necessarily considering their applicability or continued applicability
with respect to the transaction in question. The cumulative effect of
these practices is to diminish in some cases the usefulness of the
disclosure documents through the accumulation of unnecessary detail,
duplicative or uninformative disclosure and legalistic recitations of
transaction terms that obscures material information. Efforts to revise
disclosure documents in response to our ``plain English'' initiative
have certainly helped by demonstrating that even the most complex
structures can be described clearly and accurately without resorting to
overly legalistic presentations.\200\
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\200\ See, e.g., Release No. 33-7497 (Jan. 28, 1998) [63 FR
6370]. See also Division of Corporation Finance Staff Legal Bulletin
No. 7A, ``Plain English Disclosure'' (Jun. 7, 1999) and Office of
Investor Education and Analysis, ``A Plain English Handbook: How to
Create Clear SEC Disclosure Documents'' (Aug. 1998). All of these
documents are available on our Web site at http://www.sec.gov.
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Therefore, in connection with our codification of a universal set
of disclosure items, we continue to seek a reevaluation by transaction
participants of the manner and content of presented disclosure,
including the elimination of unnecessary boilerplate legal recitations
of immaterial terms. Transaction participants should view this
rulemaking initiative and the pre-compliance period for the new rules
as an opportunity to evaluate whether there is information that has
been included in registration statements and prospectuses that is not
required, not material and not useful to investors, and therefore
should be reduced or omitted. Transaction participants should similarly
consider whether disclosure should be revised so that its relevance to
the transaction in question is more apparent and is presented in a
manner that is more focused on providing clear and understandable
disclosure for investors. Transaction participants also should continue
to be mindful of the plain English disclosure principles to avoid
legalistic or overly complex presentations and recitations that make
the substance of the disclosure difficult to understand. Transaction
participants should continue to focus on the use of tabular
presentations, flow charts and other design elements that aid
understanding and analysis, and we have included, as proposed, several
reminders and suggestions of these principles in various Items of
Regulation AB where they may be particularly appropriate.
In addition to the manner and presentation of disclosures, we also
stated in the Proposing Release and remain concerned that existing
disclosure standards have not adequately captured certain categories of
information in respect of an asset-backed securities transaction, such
as the background, experience, performance and roles of various
transaction parties, including the sponsor, the servicer and the
trustee, that may be material and should be disclosed when they are
material. While asset-backed securities are designed not to be direct
obligations of these entities,
[[Page 1533]]
it seems apparent from recent market events that their roles often can
be as important to the performance of an ABS transaction as the
transaction structure or its governing documents.\201\ As a result, we
proposed specific disclosure line items relating to these entities
designed to elicit additional information in these areas to the extent
material. While we received comment on the particularities of these
disclosure items, we received overall support for increasing disclosure
in this area beyond current market practice.\202\ Accordingly, we have
adopted these new disclosure items, with revisions in response to
comment, discussed in more detail below.
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\201\ See, e.g., Moody's Investors Service, Inc., ``Rating
Agency Will Launch Assessments of ABS, RMBS Governance'' (Oct. 6,
2004); Standard & Poor's, ``Operating Risk Analysis Strengthens Ties
Between Structured Finance and Corporate Finance Sectors' (Sep. 15,
2004); Michael Gregory, ``Lessons of Risk in AAA-rated ABS: In the
Rare Bankruptcy, It's Servicers, Not Collateral, That Are the
Problem,'' Investment Dealers Digest, Mar. 15, 2004; Luis Araneda,
``Distress in Credit Card ABS,'' Asset Securitization Report, Mar.
3, 2003, at 8; Moody's Investors Service, Inc., ``Securitizations
that Dodge Bankruptcy ``Bullet'' Rest on Qualitative Strengths''
(Sep. 16, 2002); ``Integrity Analysis to the Forefront: Is Issuer
Quality More Important Than Structure,'' Asset Securitization
Report, Oct. 14, 2002, at 4; Moody's Investors Service, Inc., ``Two
Key Components of Mortgage Servicer Ratings Are Technical Ability
and Financial Stability'' (Dec. 2, 2002); Moody's Investors Service,
Inc., ``Evaluating Seller/Servicer Risk Concentrations in Structured
Transactions Wrapped by Financial Guarantors' (Jan. 30, 1998); and
Securitization of Financial Assets Sec. 8.08 (2nd ed. 1996).
\202\ See, e.g., Letters of ABA; ASF; CFAI; ICI; and State
Street.
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We also note that several commenters speaking for investors
expressed concerns that certain information is provided to rating
agencies but is not otherwise disclosed or shared with investors, even
upon request.\203\ This practice, to the extent it exists, controverts
in part issuer comments that such information is not available or that
disclosure would be costly. If an issuer concludes that it need not
disclose information in response to a particular disclosure line item
because the issuer determines that the information is not material, but
agrees to provide the information to credit rating agencies, the issuer
should consider its determination regarding materiality in the context
of the decision to provide the information to rating agencies.
---------------------------------------------------------------------------
\203\ See, e.g., Letters of ICI and State Street.
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Finally, consistent with current practice and our proposal, we are
not requiring audited financial statements for the issuing entity in
either Securities Act or Exchange Act filings. Commenters overall
agreed that audited financial statements prepared in accordance with
generally accepted accounting principles would not provide material
information to investors.\204\ Often a new issuing entity is created
for each transaction, so prior financial information about that entity
would likely be of little use. On an ongoing basis, while an annual
audit could provide benefits in providing some assurance with respect
to controls over the administration of the transaction and the pool
assets, we believe our amendments to require registered public
accounting firm attestation reports as to assessments of compliance
with particular servicing criteria, discussed in Section III.D.7., are
a more direct and targeted approach to achieve such objectives.
Similarly, we believe that one of the other objectives for financial
statements--to present results of financial activity during a period--
can be addressed more particularly by our disclosure requirements
regarding distributions on the asset-backed securities.
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\204\ See, e.g., Letters of ABA; AICPA; ASF; E&Y; NYCBA; PWC;
and Wells Fargo.
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2. Forepart of Registration Statement and Prospectus
Existing Items 501-503 of Regulation S-K will still provide the
basic disclosure requirements for the forepart of Securities Act
registration statements and registration statement prospectuses, which
cover items such as the cover page of the prospectus, the prospectus
summary and risk factors. As proposed, new Items 1102 and 1103 of
Regulation AB amplify those requirements by providing guidance on
preparing those sections for ABS offerings consistent with current
practice. In particular, they clarify information that is to appear on
the cover page of the prospectus, as well as inform the type and manner
of presentation for ABS-specific disclosure items for the prospectus
summary.
As with prospectuses for all registered offerings, disclosure on
the cover page is to be limited and brief. For example, credit
enhancement disclosure for the cover page should consist of only brief
identifying statements, such as bond insurance provided by the
particular named insurer. We proposed that certain class-specific
information appear on the cover page. However, some commenters noted
that in some transactions, given the number of classes in the offering,
it is difficult and sometimes impractical to provide such class-
specific information on the cover page.\205\ As suggested by these
commenters, we are clarifying that if the information regarding
multiple classes cannot appear on the cover page due to space
limitations, the information is to be included in the summary or in an
immediately preceding separate table.
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\205\ See, e.g., Letters of ABA and ASF.
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Consistent with common ABS-specific items such as a summary of the
flow of funds and credit enhancement, disclosure specified for the
summary includes disclosure of the classes offered by the prospectus
and classes issued in the same transaction or residual or equity
interests in the transaction not being offered by the prospectus.\206\
Also required is a summary of any prefunding or revolving periods, such
as the length and amount of such periods and the requirements for
assets that may be added.\207\ A summary of the amount or formula for
calculating the servicing fee, including the source of payment of those
fees and their distribution priority, also is separately required for
the prospectus summary.
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\206\ A particular issuance of asset-backed securities often
involves one or more publicly offered classes (e.g., classes rated
investment grade) as well as one or more privately placed classes
(e.g., non-investment grade subordinated classes). In most
instances, the subordinated classes act as structural credit
enhancement for the publicly offered senior classes by receiving
payments after, and therefore absorbing losses before, the senior
classes. Cash flows from the pool assets back both the senior
classes and the subordinate classes, and thus allocation of the cash
flows to the subordinate classes could affect directly or indirectly
the publicly offered classes. For example, while historically the
servicing fee is near the top of the flow of funds, if the servicing
fee in the flow of funds is subordinated below payments to the
subordinated classes, and there are insufficient funds to pay the
servicing fee in full after distribution to the subordinated
classes, then the drop in the level of funds to the servicer could
impact overall servicing, which could affect cash flows to senior
classes. Identification of all classes and their impact on the
transaction is thus relevant to the offering of the publicly offered
classes. So long as the description of the non-offered classes is
presented in a comparable manner, that description alone in the
prospectus would not raise general solicitation issues with respect
to the private placement of the subordinated classes.
\207\ Similar disclosure is required for other instances when
pool assets could be added, removed or substituted (for example,
non-compliance with representations and warranties regarding pool
assets). Like all of the disclosure items, reference to particular
activities do not imply that limits that exist elsewhere regarding
such activities (e.g., the requirement that the asset pool be
``discrete'') can be disregarded.
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As proposed, we are not providing a representative list of risk
factors that may be common to many ABS transactions. The comment we
received on this point supported this decision.\208\ We remain
concerned that any such list would result in boilerplate and generic
disclosures in all prospectuses even if not applicable to the
particular transaction. Registrants should take care in analyzing the
most significant factors that make the ABS offering speculative and
risky, and explain briefly yet
[[Page 1534]]
particularly how those risks affect investors. We are clarifying, as
proposed, that in identifying risk factors, registrants are to identify
any risks that may be different for investors in any offered class of
asset-backed securities (such as subordinated classes or principal-
weighted or interest-weighted classes), and if so, identify such
classes and describe such differences.
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\208\ See, e.g., Letter of ABA.
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3. Transaction Parties
a. Sponsor
We are adopting our proposed definition of ``sponsor'' as the
person who organizes and initiates an asset-backed securities
transaction by selling or transferring assets, either directly or
indirectly, including through an affiliate, to the issuing entity.
While some commenters supported the definition for purposes of
disclosure,\209\ others expressed various concerns about the
definition, particularly given that the proposed definition also was to
be used in our proposed Form S-3 filing eligibility condition relating
to Exchange Act reporting compliance.\210\ As discussed in Section
III.A.3.c., we are adopting a revised formulation of the reporting
compliance condition that is no longer linked to the sponsor
definition.
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\209\ See, e.g., Letter of ABA.
\210\ See, e.g., Letter of ASF.
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In addition, commenters who questioned the proposed sponsor
definition appeared to construe the proposed definition beyond its
plain language. In particular, the commenters questioned application of
the definition to so-called aggregator or consolidator transactions
where the sponsor acquires loans from many other unaffiliated sellers
before securitization by the sponsor. We do not believe in these
typical situations that each of the underlying sellers, who did not
take part in the organization or initiation of the securitization
transaction, would meet the plain language of the definition of
``sponsor.'' We do recognize that the facts and circumstances of the
particular transaction may result in a sponsor that is unaffiliated
with the depositor (e.g., a ``rent-a-shelf'' transaction) or that there
may even be more than one unaffiliated sponsor. We also believe that
where pool assets are transferred through one or more affiliates of the
sponsor before transfer to the depositor and the issuing entity, it
will be clear in nearly all instances as to which party was in the
position of organizing and initiating the securitization transaction
and thus is the sponsor.
We also are adopting, with minor revisions in response to comment,
our proposed disclosure item for the sponsor.\211\ Commenters
representing investors particularly supported the disclosure discussed
in the Proposing Release.\212\ In addition to basic identifying
information about the sponsor, a description of the sponsor's
securitization program will be required. The purpose of the description
is to provide context within which to analyze the asset-backed
securities and the characteristics and quality of the asset pool. Such
a description is to consist, to the extent material, of both a general
discussion of the sponsor's experience in securitizing assets of any
type, as well as a more detailed discussion of the sponsor's experience
in and overall procedures for originating or acquiring and securitizing
assets of the type to be included in the current transaction.
Information is to be included, to the extent material, regarding the
size, composition and growth of the sponsor's portfolio of assets of
the type to be securitized, as well as information or factors related
to the sponsor that may be materially relevant to an analysis of the
origination or performance of the pool assets, such as whether any
prior securitizations organized by the sponsor have defaulted or
experienced an early amortization or other performance triggering
event. Another example would be any action taken outside the ordinary
performance of a transaction to prevent such an occurrence.
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\211\ See Item 1104 of Regulation AB. We discuss the disclosure
requirement for static pool information separately in Section
III.B.4.
\212\ See, e.g., Letters of ICI and State Street.
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As we stated in the Proposing Release, other relevant information
for the description, to the extent material, would include the
sponsor's credit-granting or underwriting criteria for the asset types
being securitized (and the extent to which they have changed), the
extent to which the sponsor outsources to third parties any of its
origination or purchasing functions and the extent to which the sponsor
relies on securitization as a material funding source. A description of
the sponsor's material roles and responsibilities in its securitization
program and the sponsor's participation in structuring the transaction
also is required, including whether the sponsor or an affiliate is
responsible for the selection of the pool assets.
b. Depositor
We are adopting our proposed definition of ``depositor'' as the
person who receives or purchases and transfers or sells the pool assets
to the issuing entity. For asset-backed securities transactions where
there is not an intermediate transfer of assets from the sponsor to the
issuing entity, the sponsor is the depositor.\213\
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\213\ As noted in Section III.A.2.c., some ABS transactions,
such as issuance trusts, are structured such that the asset pool
consists of one or more financial assets that represent an interest
in or the right to the payments or cash flows of another asset pool.
In an issuance trust structure, the collateral trust certificate
that is deposited into the asset pool comes from the master trust.
For ABS transactions where the person transferring or selling the
pool assets is itself a trust, we are specifying, as proposed, that
the ``depositor'' of the issuing entity is the depositor of that
trust.
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Consistent with our proposal, if the depositor was not the same
entity as the sponsor, separate identifying information about the
depositor will be required, including information on the ownership
structure of the depositor and the general character of any activities
of the depositor other than securitizing assets.\214\ In addition, if
material and materially different from the sponsor, information similar
to that discussed above regarding the depositor's securitization
program and its experience would be required. Finally, disclosure will
be required regarding any continuing duties of the depositor after
issuance of the asset-backed securities with respect to the asset-
backed securities or the pool assets.
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\214\ See Item 1106 of Regulation AB.
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c. Issuing Entity and Transfer of Asset Pool
As we explained in the Proposing Release, the nature of the issuing
entity and the transfer of the pool assets is elemental to the concept
of securitization. We are adopting our proposed definition of ``issuing
entity'' as the trust or other entity created at the direction of the
sponsor or depositor that owns or holds the pool assets and in whose
name the asset-backed securities supported or serviced by the pool
assets are issued.
Consistent with our proposal, disclosure will be required regarding
both the nature of the issuing entity and the sale or transfer of the
pool assets.\215\ Information about the issuing entity itself will
include a description of its permissible activities, restrictions on
activities and capitalization. If the issuing entity has its own
executive officers, board of directors or persons performing similar
functions, disclosure required by Items 401, 402, 403 and 404 of
Regulation S-K will be required.
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\215\ See Item 1107 of Regulation AB.
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[[Page 1535]]
The governing documents of the issuing entity will need to be filed
as an exhibit.\216\ This is consistent with the requirement in Item 601
of Regulation S-K of filing all governing documents and material
agreements for the offering, which for ABS includes, among other things
and as applicable depending on the transaction's structure, the pooling
and servicing agreement, the indenture and related documents. The
management or administration agreement for the issuing entity also must
be filed in addition to describing its material terms in the
prospectus.\217\
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\216\ Item 1100(f) of Regulation AB specifies that where
agreements or other documents are specified by Regulation AB to be
filed as exhibits to a Securities Act registration statement, such
final agreements or other documents, if applicable, may be
incorporated by reference as an exhibit to the registration
statement, such as by filing a Form 8-K in the case of offerings
registered on Form S-3.
\217\ Any such description should avoid legal boilerplate and
include the specific material duties imposed on the parties and not
generic descriptions such as ``various administrative services.''
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In addition to a material narrative description of the sale or
transfer of the pool assets, such information also should be provided
graphically or in a flow chart if it will aid understanding. The
discussion also must describe the creation (and perfection and priority
status) of any security interests for the benefit of the transaction.
Disclosure also is required regarding any expenses incurred in
connection with the selection and acquisition of the pool to be payable
from offering proceeds.
Several commenters objected to our proposed disclosure requirement
of the amount paid or to be paid for the pool assets, arguing that such
information, particularly for pool assets that are not securities, is
proprietary or in some instances not a meaningful concept.\218\ We are
limiting disclosure to instances when the pool assets are securities,
as defined under the Securities Act, and requiring disclosure of the
market price of the securities and the basis on which the market price
was determined. We continue to support disclosure of such information
in those securitizations, such as corporate debt securitizations or ABS
repackagings.
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\218\ See, e.g., Letters ABA; AHFC; ASF; BMA; JPMorganChase;
MBA; and TMCC.
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We also are adopting our proposed requirements for disclosure, to
the extent material, regarding any provisions or arrangements included
to address any one or more of the following issues:\219\
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\219\ As proposed, if applicable law prohibits the issuing
entity from holding the pool assets directly (for example, an
``eligible lender'' trustee must hold student loans originated under
the Federal Family Education Loan Program of the Higher Education
Act of 1965 (20 U.S.C. 1001 et seq.)), a description would be
required of any arrangements to hold the pool assets on behalf of
the issuing entity. Disclosure would need to be included regarding
steps taken regarding bankruptcy separation and remoteness, as
applicable, with respect to any such additional entity.
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Whether any security interests granted in connection with
the transaction are perfected, maintained and enforced;
Whether a declaration of bankruptcy, receivership or
similar proceeding with respect to the issuing entity can occur;
Whether in the event of a bankruptcy, receivership or
similar proceeding with respect to the sponsor, originator, depositor
or other seller of the pool assets, the issuing entity's assets will
become part of the bankruptcy estate or subject to the bankruptcy
control of a third party; and
Whether in the event of a bankruptcy, receivership or
similar proceeding with respect to the issuing entity, the issuing
entity's assets will become subject to the bankruptcy control of a
third party.
We continue to believe such disclosure, where material, is appropriate
to provide transparency to investors regarding the legal and structural
complexities of ABS transactions. In addition, any material risks
related to the above must be discussed in the risk factors section of
the prospectus. Consistent with current practice and our proposal, we
are not mandating the filing of any report or opinion of an expert or
counsel regarding any of the above items, although registrants may
elect to file such items voluntarily, subject to any applicable consent
requirements.\220\
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\220\ See, e.g., Securities Act Rule 436 (17 CFR 230.436).
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d. Servicers
As we explained in the Proposing Release, the role of the servicer
is often not limited to administration and collection of the pool
assets. The servicer often also is the primary party responsible for
calculating the flow of funds for the transaction, preparing
distribution reports and disbursing funds to the trustee who in turn
uses the allocations provided by the servicer to distribute funds to
security holders. We also recognize that in many transactions, multiple
entities are used to perform different servicing functions. For
example, while the particular division of responsibilities may vary by
transaction or asset class, an ABS transaction may involve one or more
entities, sometimes called ``master servicers,'' that oversee the
actions of other servicers and may perform the allocation and
distribution functions. Different servicers, sometimes called ``primary
servicers,'' may be responsible for primary contact with obligors and
collection efforts. In addition, one or more other servicers, sometimes
called ``special servicers,'' may exist for specific servicing
functions, such as borrower work-out or foreclosure functions. The
allocation and distribution functions may be with a separate entity,
sometimes called an ``administrator.'' While some servicers may be
affiliated with the sponsor, other non-affiliated sub-servicers may be
employed.
We are adopting as proposed a unified definition of ``servicer'' to
mean any person responsible for the management or collection of the
pool assets or making allocations or distributions to holders of the
asset-backed securities. As we stated in the Proposing Release, our
definition of ``servicer'' is designed to capture the entire spectrum
of activity to include both collection and asset maintenance activities
as well as cash flow allocation and distribution functions for the ABS.
This includes parties often referred to as ``administrators.'' However,
given that some of these functions may be performed by the trustee in
certain transactions, the definition clarifies that the term
``servicer'' does not include a trustee for the issuing entity or the
asset-backed securities that makes allocations or distributions to
holders of the asset-backed securities, if the trustee receives such
allocations or distributions from a servicer and the trustee does not
otherwise perform the functions of a servicer.
We are not persuaded by some commenter suggestions that we should
create separate definitions for different aspects of the servicing
function.\221\ These commenters suggested various additional
definitions, including master servicer, administrator, primary
servicer, special servicer, affiliated servicer and unaffiliated
servicer. Similar to our concerns about creating asset-specific
disclosure guides, there is not a uniform differentiation of servicing
functions consistent across all asset classes or even within the same
asset class. Nor do we think it is appropriate to establish rigid
definitions that may not encompass future changes to market practice
involving servicing. Our definition of servicer is a principles-based
definition for any entity that performs any one or more of the
servicing functions.
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\221\ See, e.g., Letters of ABA; ASF; JPMorganChase; MBA; Sallie
Mae; and Wells Fargo.
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[[Page 1536]]
Some of these commenters were concerned that applying the servicer
disclosure item to an entity that performs only a limited aspect of the
servicing function would compel inapplicable or immaterial disclosure.
As stated above, this does not reflect an accurate understanding of how
Commission disclosure items are to be applied. We have made several
additional modifications to the servicer disclosure item to make clear
that disclosure is required based on materiality.\222\ If an entity's
role is limited to one or more of the servicing or administrative
functions such that an aspect of the disclosure item is not applicable
or material, it is not required. For example, if a trustee also
calculated the flow of funds for the transaction, information about the
size, composition and growth of its serviced asset portfolio may not be
material. However, even if a party performs only one function, if that
function is material, such as calculation of the flow of funds for the
transaction, material disclosure with respect to that function would of
course be required.
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\222\ See Item 1108 of Regulation AB.
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Understanding the material aspects of the entire servicing function
is important to understanding how servicing may impact expected
performance. As proposed, the disclosure item requires information
regarding the entire servicing function, including a clear introductory
description of the roles, responsibilities and oversight requirements
of the entire servicing process and the parties involved.\223\ This
will include identifying, as applicable:
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\223\ In addition to an appropriate narrative discussion of the
allocation of servicing responsibilities, registrants also should
consider presenting the information graphically if doing so will aid
understanding.
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Each master servicer;
Each affiliated servicer;
Each unaffiliated servicer (such as primary servicers)
that services 10% or more of the pool assets; and
Any other material servicer responsible for calculating or
making distributions to holders of the asset-backed securities,
performing work-outs or foreclosures, or other aspect of the servicing
of the pool assets or the asset-backed securities upon which the
performance of the pool assets or the asset-backed securities is
materially dependent.
In addition, additional information, discussed further below, will
be required about each servicer identified in the first, second and
fourth bullets above, as well as each unaffiliated servicer identified
in the third bullet above that services 20% or more of the pool assets.
We are not limiting disclosure, as suggested by some commenters,
only to those in actual contractual privity with the issuing
entity.\224\ We received support for disclosure of underlying servicers
and all entities with a role in the servicing function that may
materially impact performance of the pool assets and thus the asset-
backed securities.\225\ As proposed, disclosure will be required for
such entities, to the extent material. In addition, we are maintaining
our proposed approach of requiring disclosure regarding all affiliated
servicers.
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\224\ See, e.g., Letters of ABA; ASF; BMA; CMSA; and Sallie Mae.
\225\ See, e.g., Letters of ICI; MetLife; and Wells Fargo.
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We have revised our percentage breakpoints for determining servicer
disclosure for unaffiliated servicers, such as primary servicers, that
service individual pool assets. While not all commenters agreed,
several commenters believed the 10% threshold we originally proposed
was too low.\226\ To lessen potential disclosure burdens, many of these
commenters suggested, alternatively, limited disclosure for
unaffiliated servicers that service at least 10% of the pool assets,
but less than some higher threshold, such as 20%.\227\ As noted above,
the final disclosure item will require identification of each
unaffiliated servicer that services 10% or more of the pool assets. The
more detailed disclosure discussed below will only be required for such
servicers that service 20% or more of the pool assets. As noted in the
Proposing Release, we believe 10% and 20% breakpoints provide
consistency and clarity in determining a triggering event for
disclosure, and are consistent with many other longstanding standards
used for our existing disclosure requirements.\228\
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\226\ Compare, e.g., Letters of ABA; ASF; BMA; MBA; and NYCBA;
with Letter of MetLife.
\227\ See, e.g., Letters of ABA; ASF; JPMorganChase; MBA; and
NYCBA.
\228\ See, e.g., Items 101(c)(1)(vii), 503(d), 601(b)(4)(ii) and
911(c)(5) of Regulation S-K (17 CFR 229.101(c)(7), 17 CFR
229.503(d), 17 CFR 229.601(b)(4)(ii) and 17 CFR 229.911(c)(5));
Instruction 2 to Item 103 of Regulation S-K (17 CFR 229.103); and
Topic 1.I. to Release No. SAB-103.
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As to those servicers where more detailed information is required,
we explained in the Proposing Release that given the increasing
realization of the importance of the role of the servicer in ABS
transactions, the disclosure item is designed to elicit additional
material information regarding the servicer's function, experience and
servicing practices.\229\ Commenters were mixed over our proposed
disclosure requirements for these servicers. Commenters representing
investors in particular supported additional disclosure regarding
servicers,\230\ while those representing primarily issuers and their
representatives suggested reductions for disclosure that is not
typically provided today.\231\ In most instances, the objections from
this latter group of commenters centered around concerns that aspects
of the disclosure item may not be material in all instances. As we
specified above, we are making additional revisions to the disclosure
item to clarify that disclosure is required based upon materiality. We
also are making a few other minor changes to individual aspects of the
disclosure item in response to comment, discussed in further detail
below.
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\229\ See also, e.g., Fitch, Inc., ``Rating ABS Seller/
Servicers: Credit Where Credit is Due'' (Sep. 14, 2004); and Fitch,
Inc., ``Seller/Servicer Risk Trumps Trustee's Role in U.S. ABS''
(Mar. 4, 2003).
\230\ See, e.g., Letter of ICI.
\231\ See, e.g., Letter of ABA; ASF; Auto Group; JPMorganChase;
and MBA.
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The information to be provided, to the extent material, can be
categorized into three general categories: basic information and
experience; the agreement with the servicer and servicing practices;
and back-up servicing. Basic information and experience regarding the
servicer includes disclosing how long it has been servicing assets. As
with the sponsor, the servicer disclosure is to include, to the extent
material, both a general discussion of the servicer's experience in
servicing assets of any type, as well as a more detailed discussion of
the servicer's experience in, and procedures for, servicing assets of
the type included in the current transaction.
We also are retaining disclosure of any material changes to the
servicer's policies or procedures in servicing assets of the same type
during the past three years in order to demonstrate recent trends
involving the servicer. Some commenters expressed concern that the
disclosure required about servicing policies and procedures and their
changes could result in excessive disclosure or inappropriate
disclosure of competitively sensitive information.\232\ The description
contemplated is limited to that which a reasonable investor would find
material in considering an investment in the asset-backed securities
and the servicing and administration of the pool assets and the ABS, as
the case may be. Further, we believe this will not encompass
[[Page 1537]]
inappropriate disclosure of information that would cause competitive
harm.
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\232\ See, e.g., Letters of JPMorganChase and MBA.
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Other information specified in the disclosure item includes, to the
extent material, information regarding the size, composition and growth
of the servicer's portfolio of serviced assets of the type to be
securitized and information on factors related to the servicer that may
be material to an analysis of the servicing of the assets or the asset-
backed securities, as applicable. Other information that may be
material could include whether any prior securitizations of the same
asset type involving the servicer have defaulted or experienced an
early amortization or other performance triggering event because of
servicing, the extent of outsourcing the servicer utilizes or if there
has been previous disclosure of material noncompliance with servicing
criteria with respect to other securitizations involving the servicer.
As proposed, information regarding the servicer's financial
condition will continue to be required in some situations. In response
to comments, we have revised this requirement to clarify information
regarding the servicer's financial condition may be required to the
extent that there is a material risk that the effect on one or more
aspects of servicing resulting from such financial condition could have
a material impact on pool performance or performance of the asset-
backed securities. As we stated in the Proposing Release, general
financial information is not required. We are seeking particular
information when there is a material risk the financial condition could
have a material impact as described.
Regarding the second category of disclosure, the material terms of
the servicing agreement will need to be described, as well as the
servicer's duties regarding the asset-backed securities transaction. As
proposed, the servicing agreement will be required to be filed as an
exhibit.\233\ A description of the servicer's servicing practices also
will be required to the extent material and applicable to the
servicer's role in the transaction. The disclosure item identifies the
following types of information: \234\
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\233\ We note that in certain limited instances, a registrant
may request confidential treatment regarding information that
otherwise would be required to be disclosed, such as commercial
information obtained from a person and that is privileged or
confidential. See, e.g., Securities Act Rule 406 (17 CFR 230.406);
Exchange Act Rule 24b-2 (17 CFR 240.24b-2); and Division of
Corporation Finance Staff Legal Bulletins Nos. 1 (Feb. 28, 1997) and
1A (Jul. 11, 2001).
\234\ Note that while this is a list for disclosure purposes,
there may exist other applicable requirements regarding these items
as well. For example, Investment Company Act Rule 3a-7(a)(4)(iii)
has requirements for segregating funds.
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The manner in which collections on the assets will be
maintained, including the extent of commingling of funds.
Terms or arrangements regarding advances of funds
regarding cash flows, including interest or other fees charged and
terms of recovery. As proposed, statistical information regarding past
advance activity will be required, if material.
The servicer's process for handling delinquencies and
losses.
Any material ability to waive or modify any terms, fees,
penalties or payments on the assets.
Custodial requirements regarding the assets.
As the ABS market has matured, another aspect of such transactions
that has increased in importance is the role of servicer transition
arrangements, or back-up servicing.\235\ An efficient transition from
one servicer to another can be essential to prevent portfolio
deterioration and possible losses. However, depending on the nature of
the assets and the availability of alternative servicers, the process
of transferring servicing can be complex. In particular, if the
existing servicing fee in a transaction is insufficient to attract a
replacement servicer, delays may occur that could affect portfolio
performance, and any additional fees required by a replacement servicer
could affect cash flows that otherwise would be available to security
holders.
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\235\ See, e.g., note 229 above; ``Trustees Seek to Reinforce
Loan Servicing,'' Asset-Backed Alert, Jul. 18, 2003; and Moody's
Investors Service, Inc., ``Warming Up to Backup Servicing: Moody's
Approach'' (Aug. 8, 1997).
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As a result, the scrutiny of back-up servicing arrangements has
increased, including the level of arrangements with a particular back-
up servicer, often referred to in market practice as how ``warm'' the
back-up servicer is. We are adopting our proposed disclosure
requirements regarding any terms regarding a servicer's removal,
replacement, resignation or transfer, including arrangements regarding,
and any qualifications required for, a successor servicer. Material
information on the process for transferring servicing will need to be
described, as well as any provisions for the payment of expenses
associated with a servicing transfer or any additional fees that may be
charged by a successor servicer.\236\
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\236\ We note that a trustee's prospective role as a servicer
``of last resort'' would not alone make that trustee a ``servicer''
as defined in Regulation AB.
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e. Trustees
An ABS transaction may involve one or more trustees. For example,
there may be a separate trustee for the issuing entity and for the ABS
indenture. Commenters overall supported the proposed disclosure item
regarding trustees.\237\ We did not propose a separate definition of
trustee, and, based on the comments received, we do not believe it is
necessary to provide one.
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\237\ See, e.g., Letters of ABA; Am. Bankers; and MetLife.
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As proposed, in addition to basic identifying information about any
trustee, disclosure will be required regarding the trustee's prior
experience in similar ABS transactions (if applicable), indemnification
provisions, limitations on liability and removal or replacement
provisions.\238\ In addition, as we explained in the Proposing Release,
there has been debate in the market on the nature and role of the
trustee in ABS transactions, in particular the trustee's level of
oversight regarding the transaction.\239\ To help provide transparency
to this topic, we are adopting our proposal for explicit disclosure of
the trustee's duties and responsibilities regarding the asset-backed
securities under the governing documents and under applicable law. In
providing this information, the description should address material
factors, as applicable, such as the extent to which the trustee
independently verifies distribution calculations, access to and
activity in transaction accounts, compliance with transaction
covenants, use of credit enhancement, the addition, substitution or
removal of pool assets, and the underlying data used for such
determinations.
---------------------------------------------------------------------------
\238\ See Item 1109 of Regulation AB.
\239\ Compare, e.g., Moody's Investors Service, Inc., ``Moody's
Re-examines Trustee's Role in ABS and RMBS'' (Feb. 4, 2003); with
the American Bankers Association, ``The Trustee's Role in Asset-
Backed Securities'' (Mar. 10, 2003). See also ``Moody's Unearths
Trustee Failures,'' Asset-Backed Alert, Jun. 27, 2003; ``Trustee
Role Seen as `Minimal' at ASF Gathering,'' Asset Securitization
Report, Jun. 16, 2003, at 12; and Paul Beckett, ``Asset-Backed Deals
Draw Scrutiny--Trustees Must Administer and Oversee, Moody's Says,
or Downgrades are Likely,'' Wall St. J., Feb. 5, 2003, at C13.
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In addition, the trustee disclosure item requires disclosure of any
actions required by the trustee, including whether notice is required
to investors, rating agencies or other third parties, upon an event of
default, potential event of default (and how defined) or other breach
of a transaction covenant. The required percentage of a class or
classes of asset-backed securities needed to require the trustee to
take action also must be described.
[[Page 1538]]
Finally, in response to comment regarding transactions with
multiple trustees,\240\ we are adding a clarifying instruction to the
disclosure item that if multiple trustees are involved in the
transaction, a description should be provided of the roles and
responsibilities of each trustee.
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\240\ See, e.g., Letters of ABA; ASF; and CMSA.
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f. Originators
Some ABS transactions involve pool assets that were not originated
by the sponsor. The sponsor may have acquired the pool assets from a
separate originator or through one or more intermediaries in the
secondary market before securitizing them. If the pool assets from a
single originator or group of affiliated originators reach a certain
concentration threshold, information regarding that originator and its
own origination program may become relevant.
We are adopting our proposed disclosure item for originators, but
with revised percentage breakpoints for when disclosure is
required.\241\ The breakpoints we are adopting are similar to those
being adopted for servicers. Like our proposed 10% threshold for
servicers, some commenters believed the more detailed disclosure we
proposed for originators should only be provided for originators that
meet a higher percentage threshold, although again not all commenters
agreed.\242\
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\241\ See Item 1110 of Regulation AB.
\242\ Compare, e.g., Letters of ABA and ASF; with Letter of
MetLife.
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Under the final disclosure item, each originator, apart from the
sponsor or its affiliates, that has originated, or is expected to
originate, 10% or more of the pool assets must be identified. In
addition, for any originator where the percentage is 20% or more,
additional information regarding the originator's origination program
must be provided, including, if material, information regarding the
size and composition of the originator's origination portfolio, as well
as information material to an analysis of the performance of the pool
assets, such as the originator's credit-granting or underwriting
criteria. As with trustees, we do not believe it is necessary to
provide a separate definition for originators.
g. Other Transaction Parties and Scope of Disclosure
As we explained in the Proposing Release, ABS transactions may
involve additional or intermediate parties other than the typical ones
identified above, such as intermediate transferors. As proposed, we are
clarifying in the general applicability section of Regulation AB that
if the ABS transaction involves such a party, information is required
to the extent material regarding that party and its role, function and
experience in relation to the asset-backed securities and the asset
pool.\243\ The material terms of any agreement with such party will
need to be described, and the agreement with that party will need to be
filed as an exhibit.
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\243\ See Item 1100(d) of Regulation AB.
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In addition, as noted in Section III.A.2.c., some ABS transactions
are structured such that the asset pool consists of one or more
financial assets that represent an interest in or the right to the
payments or cash flows of another asset pool, such as in the case of a
credit card issuance trust and an origination trust in a motor vehicle
lease transaction. In many cases, such structures are established under
the direction of the same sponsor or depositor and are designed solely
to facilitate the ABS transaction. The actual source of the cash flows
that are to be used to service the asset-backed securities is the asset
pool underlying the intermediate financial asset. Consistent with
current practice, we are clarifying as proposed that, in such an
instance, references to the asset pool and the pool assets of the
issuing entity also include the other asset pool.\244\ As such,
required disclosure regarding the composition of the asset pool,
including servicers and significant originators and obligors, will
include disclosure of the composition of the underlying asset pool, to
the extent material. In addition, the requirements regarding
assessments of compliance with servicing criteria and servicer
compliance statements, discussed in Section III.D., encompass the
assets underlying the intermediate financial asset.
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\244\ Id.
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4. Static Pool Information
In the Proposing Release, we noted the development of static pool
information as an increasingly valuable tool in analyzing
performance.\245\ Such information indicates how the performance of
groups, or static pools, of assets, such as those originated at
different intervals, are performing over time. By presenting
comparisons between originations at similar points in the assets'
lives, such data allow the detection of patterns that may not be
evident from overall portfolio numbers and thus may reveal a more
informative picture of material elements of portfolio performance and
risk. We had previously received requests that disclosure of such data
should be required because investors view static pool data regarding
delinquency and loss experience as important information in evaluating
an investment in asset-backed securities.\246\
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\245\ See also, e.g., Moody's Investors Service, Inc.,
``Undisclosed Truths: Are ABS Investors Being Left in the Dark? ''
(May 23, 1996) and Letter from AIMR to Brian J. Lane, Director,
Division of Corporation Finance, ``Recommendations for a Disclosure
Regime for Asset-Backed Securities'' (Sep. 30, 1996).
\246\ See, e.g., note 166 above.
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We proposed to require disclosure of static pool data if material
to the transaction. In particular, we proposed to require static pool
data with respect to the delinquency and loss experience of the
sponsor's overall portfolio for the past three years, or such shorter
period that the sponsor had been making originations or purchases, and
that such data be presented in increments (e.g., monthly or quarterly)
material to the asset type being securitized. In addition to the
sponsor's overall portfolio, static pool data also was proposed to be
required, if material, on a pool level basis with respect to prior
securitized pools involving the same asset type established by the
sponsor during the period. We separately proposed requiring static pool
data for the offered asset pool itself, to the extent material, such as
in the case of securitizations involving seasoned assets.
Our proposals relating to static pool information generated
considerable comment. Investors uniformly supported the proposals,
emphasizing the importance of the information to them in making
informed investment decisions.\247\ Commenters representing issuers and
their representatives generally expressed reticence about, and in some
cases even opposition to, the proposed requirement, primarily because
static pool data is not typically provided to investors today.\248\
While this was in fact one of the primary reasons for our proposal,
issuers nevertheless expressed concern about the lack of existing
market practice for gauging materiality of the data.
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\247\ See, e.g., Letters of ASF; FMR; ICI; MetLife; and State
Street. Please note that the ASF submitted a separate comment
letter, dated July 30, 2004, on our static pool disclosure proposal.
In general, references in this section to the ASF letter are to that
separate letter.
\248\ See, e.g., Letters of ABA; AFSA; ASF; Auto Group;
Citigroup; Capital One; JPMorganChase; MBA; and UBS.
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Some of these commenters argued that because static pool data is
not provided today, issuers have determined that such data is not and
never would be material. However, as set out in the leading cases on
the
[[Page 1539]]
subject, TSC Industries, Inc. v. Northway, Inc.\249\ and Basic, Inc. v.
Levinson,\250\ materiality is judged from the standpoint of a
reasonable investor and whether there is a substantial likelihood that
a reasonable investor would consider the information important in
making an investment decision.\251\ The argument by commenters against
the materiality of the data is to some extent belied by the universal
and sustained comment we have received from investors that they would
find the information very important in making their investment
decisions.
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\249\ 426 U.S. 438 (1976).
\250\ 485 U.S. 224 (1988).
\251\ See TSC Industries, Inc. v. Northway, Inc., at 449; and
Basic, Inc. v. Levinson, at 231. See also the definition of
``material'' in Securities Act Rule 405, which states: The term
``material,'' when used to qualify a requirement for the furnishing
of information as to any subject, limits the information required to
those matters to which there is a substantial likelihood that a
reasonable investor would attach importance in determining whether
to purchase the security registered.
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A new line item disclosure requirement represents our judgment that
an item is or has become material. It is not, in and of itself, a
judgment about past disclosure practices or requirements.\252\ This is
particularly true in the ABS context, where there have not previously
been explicit Commission disclosure requirements. Disclosures for ABS
offerings have developed informally over time through the staff review
process. However, the basic disclosure framework was developed with the
staff nearly two decades ago when the registered ABS market was in its
relative infancy. The market has matured since that time, as has
sophistication of investors in analyzing ABS. In addition, the growth
of technology and the attendant ability to analyze more information
means that information that may have not been considered material in
the past may now have become material. The fact that we are now
requiring static pool information as a disclosure item represents a
judgment by us today that there are cases where the data is material
and should be disclosed in such cases.
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\252\ See, e.g., Securities Act Rule 408; Securities Act
Sections 11, 12(a)(2) and 17(a); Exchange Act Section 10(b);
Exchange Act Rule 10b-5; and Exchange Act Rule 12b-20.
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Some commenters, instead of arguing that static pool data would
never be material, argued alternatively that the lack of additional
guidance from the Commission regarding the scope of the proposed
requirement could lead issuers to conclude that static pool information
is required in all cases, which could, among other things, lead to
unnecessary, excessive and expensive disclosure without corresponding
benefits to investors. We stressed in the Proposing Release that in all
instances disclosure was conditioned on what would be material for the
particular asset class, sponsor and asset pool involved, and that
disclosure for groups or factors that would not be material was not
required. We recognize that under both our proposal and our final
rules, there may be transactions where static pool information is not
material. At the same time, and similar to many other disclosure
requirements under the Federal securities laws, materiality
determinations are necessary to determine appropriate levels of
disclosure. Finally, we do not believe it is appropriate to exclude
particular asset classes or transactions from the requirement in their
entirety in lieu of requiring issuers and other offering participants
to make materiality determinations.
Other commenters not taking blanket positions against the inclusion
of static pool data instead requested more specific guidance as to the
scope of the requirement, as well as additional flexibility in
presenting the information that would be provided in response to the
requirement. After careful consideration of all comments, we continue
to believe that a requirement to provide static pool information based
on the materiality of the information is appropriate to provide greater
transparency to investors. As with our approach for Regulation AB
overall, we do not believe it is practical or effective to prescribe
specific disclosure by asset class. However, in response to comment, we
are making several revisions to the proposal to provide more guidance
on the scope of information contemplated by the requirement, as well as
to provide alternative means to present the information. Both issuers
and investors strongly support using electronic communications and Web
site availability to present static pool information. We believe these
changes should address many of the commenters' concerns as to the
potential breadth and burdens of the proposal.
a. Disclosure Required
Several commenters expressed concern over the breadth of the
proposals to require data for several different data groups, including
the sponsor's overall portfolio, prior securitized pools and the asset
pool itself.\253\ These commenters believed that without additional
direction regarding the appropriate starting point and parameters of
the disclosure, uncertainty may promote excessive or redundant
disclosures for all data groups. While not all commenters agreed, most
believed the starting point for disclosure should be information for a
single data group, with that data group being dependent on the type of
ABS transaction being offered.\254\ In particular, commenters suggested
that the starting point could be different depending on whether the
transaction involved an amortizing asset pool, such as residential
mortgages, or a revolving asset master trust, such as a credit card
master trust. For transactions involving amortizing asset pools, the
starting point for disclosure also could be different depending on the
sponsor's ``seasoning'' (e.g., the amount of experience the sponsor has
had securitizing assets of the same asset class). Using such starting
points for disclosure also could promote comparability of information
across issuers within particular asset types.
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\253\ See note 248 above.
\254\ See, e.g., Letters of ABA; ASF; and BMA. But see, e.g.,
Letter of FMR.
---------------------------------------------------------------------------
To provide further clarity in determining the material information
to disclose, we are adopting this framework in the final rules.\255\ We
provide separate starting points for disclosure depending on whether
the ABS transaction involves an amortizing asset pool or a revolving
asset master trust. For amortizing asset pools, we further specify
suggested starting points based on the sponsor's experience with
securitizing assets of the type to be included in the offered asset
pool.
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\255\ See Item 1105 of Regulation AB.
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In addition, while we proposed requiring material static pool
information with respect to delinquency and loss experience, several
commenters recommended expanding the requirement to also include
prepayment experience, to the extent material for the particular asset
class.\256\ Prepayments typically include both voluntary prepayments
and liquidations after defaults or charge-offs. For some asset types,
such as home equity loans, prepayments also could refer to the
liquidation rate of a portfolio, where such rate is a combination of
scheduled payments, prepayments and charge-offs.
---------------------------------------------------------------------------
\256\ See, e.g., Letters of ABA and ASF. While some commenters
suggested cumulative prepayment information, investors also
expressed a preference for period prepayment information.
---------------------------------------------------------------------------
Under our final rules, the scope of the static pool requirement
will encompass, to the extent material, static pool
[[Page 1540]]
information regarding delinquencies, cumulative losses and prepayments,
as applicable for the respective asset type.\257\ As with prepayments,
we also recognize that the particular metrics that would be material
for delinquencies and cumulative losses may vary by asset class. For
example, metrics for student loans, depending on the program, could
include not only current period delinquency and cumulative net loss
information, but also payment status information (e.g., forbearance and
deferment percentages) and claims reject information. For leases,
metrics could include credit losses and residual losses.
---------------------------------------------------------------------------
\257\ As discussed in Section III.B.4.a.ii., additional
variables were suggested and are included for revolving asset master
trusts.
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i. Amortizing Asset Pools
Several commenters believed that in the context of amortizing asset
pools, static pool data for prior securitized pools would be a better
starting point for disclosure over information about the sponsor's
overall portfolio, particularly as the sponsor's experience in
securitizing prior pools increases.\258\ These commenters argued that
sponsor portfolio data by year, sometimes called ``vintage data,'' is
less ``static'' than prior securitized pools because new loans are
continually added to the portfolio over the course of that year's
vintage. In addition, the sponsor's retained portfolio may include
assets not eligible for securitization. As such, these commenters
argued, static pool data for prior securitized pools would typically be
more readily comparable to the current securitization transaction.
However, to the extent the sponsor's experience with prior securitized
pools is limited, vintage data on the sponsor's portfolio could be more
appropriate as a starting point for static pool disclosure.
---------------------------------------------------------------------------
\258\ See., e.g., Letters of ABA; ASF; and BMA.
---------------------------------------------------------------------------
We are adopting this suggested approach for amortizing asset pools.
Unless the registrant determines that such information is not material,
the starting point for disclosure is static pool information, to the
extent material, regarding delinquencies, cumulative losses and
prepayments, if applicable, for prior securitized pools of the sponsor
for that asset type. For unreasoned sponsors--sponsors lacking three
years of securitization experience with the same asset type--
consideration should be given to instead using as a starting point
static pool information, to the extent material, regarding
delinquencies, cumulative losses and prepayments, if applicable, by
vintage origination years of originations or purchases by the sponsor,
as applicable, for that asset type. A vintage origination year
represents assets originated during the same year.
We proposed three years of static pool data (or such shorter period
of time as the sponsor had been making originations or purchases).
However, some commenters indicated that the amount of pool experience
necessary for a meaningful evaluation of trends varies by asset type
and three years may not be sufficient.\259\ Our final rules call for
information, to the extent material, for a minimum of five years (or
such shorter period the sponsor has been either securitizing assets of
the same asset type (in the case of seasoned sponsors) or making
originations or purchases of assets of the same type (in the case of
unseasoned sponsors)).
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\259\ See, e.g., Letters of ASF and MetLife.
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Consistent with our proposal, delinquency, cumulative loss and
prepayment data for each prior securitized pool or vintage origination
year, as applicable, is to be presented in periodic increments (e.g.,
monthly or quarterly), to the extent material, over the life of the
prior securitized pool or vintage origination year. We also are
establishing a requirement regarding the age of the most recent
periodic increment to ensure the currency of the data. Under the final
rule, the most recent periodic increment for the data must be as of a
date no later than 135 days of first use of the prospectus. For data
based on quarterly increments, this allows 45 days from the end of the
most recent quarter to include the data. The 135-day standard is
consistent with our updating rules for interim financial information
for non-ABS issuers that are not ``accelerated filers.'' \260\
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\260\ See, e.g., Rule 3-01 of Regulation S-X (17 CFR 210.3-01)
and Rule 3-12 of Regulation S-X (17 CFR 210.3-12).
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Several commenters also believed that selected material
characteristics for the prior securitized pools or vintage origination
years should be provided along with the data to facilitate review and
to assess comparability.\261\ We are including in the requirement that
summary information is to be provided for the original characteristics
of the prior securitized pools or vintage origination years, as
applicable and material. Commenters provided several examples of
metrics that could be provided based on the relevant asset type. The
final rule specifies that while the material summary characteristics
may vary, these characteristics may include, among other things, the
following: the number of pool assets; original pool balance; weighted
average initial pool balance; weighted average interest or note rate;
weighted average original term; weighted average remaining term,
weighted average and minimum and maximum standardized credit scores or
other applicable measure of obligor credit quality; product type; loan
purpose; loan-to-value information; distribution of assets by loan or
note rate; and geographic distribution information.
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\261\ See, e.g., Letters of ABA; ASF; and Auto Group.
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Based on the comment received, we are not adopting for amortizing
asset pools our proposal to include a line-item disclosure requirement
for static pool information for the offered pool itself. However, as we
discuss more fully in Section III.B.4.a.iii., while we are not
including a specific disclosure requirement for such information, we
note there may be instances where failure to provide such information
would make the data that is presented misleading.\262\ For example, for
a pool with a material concentration of seasoned assets, disclosure of
static pool data about the pool itself may be necessary depending on
whether such data would reveal a trend or pattern concerning one or
more elements of pool performance and risk that is material and not
evident from data relating to asset performance otherwise presented and
such omission makes the information presented misleading.\263\
ii. Revolving Asset Master Trusts
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\262\ See note 252 above.
\263\ See Section III.B.3.a. of the Proposing Release.
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We received comment that an alternative starting point would be
more suitable for revolving asset master trusts, such as credit card
master trusts.\264\ In particular, these commenters argued there could
be even more concerns about the ``static'' nature of the pool due to
changes in the master trust revolving asset pool over time and the
relationship between the sponsor's retained portfolio or other
securitized pools previously established by the sponsor and the master
trust asset pool. Instead, additional incremental performance
information based on asset age for the master trust revolving asset
pool itself was suggested as a more appropriate starting point. The
additional disclosure, where material, would allow an investor to
distinguish performance of newer accounts comprising the master trust
asset pool from those of more seasoned accounts. Investors also
suggested presenting static age-related data for payment rate, yield
and standardized credit scores or
[[Page 1541]]
other applicable measure of obligor credit quality in addition to
delinquency and loss data, if applicable.\265\
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\264\ See, e.g., Letter of ASF.
\265\ Id.
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For such transactions, we are clarifying that, unless the
registrant determines that such information is not material, the
starting point for disclosure is data, to the extent material,
regarding delinquencies, cumulative losses, prepayments, payment rate,
yield and standardized credit scores or other applicable measure of
obligor credit quality, as applicable, in separate increments based on
the date of origination of the pool assets. While the material
increments for presenting the performance data may vary, we are
suggesting, based on comment, that issuers consider presenting such
data at a minimum in 12-month increments through the first five years
of the account's life (e.g., 0-12 months, 13-24 months, 25-36 months,
37-48 months, 49-60 months and 61 months or more). However, as noted
above for amortizing asset pools, performance data for longer periods,
in shorter increments or for different pool characteristics may be more
appropriate depending on the asset class involved.
iii. Alternative Presentations or Other Disclosure
We have attempted to identify above characteristics that may
suggest to issuers the appropriate starting point for static pool
disclosure. However, we recognize that materiality considerations may
dictate that these starting points may not always be suitable to the
particular sponsor, asset pool and transaction involved. For example, a
sponsor may have three years of experience securitizing a particular
asset type, but the sponsor's experience may have been sporadic, there
may have been a significant gap in the experience, or the sponsor's
origination or acquisition program may have materially changed to the
point such that information about the sponsor's vintage portfolio, as
well as any explanatory disclosure, may be more appropriate in lieu of
or in addition to prior pool information. Similarly, for takedowns
involving a new revolving asset master trust, information about prior
master trusts by the sponsor or information about the sponsor's vintage
portfolio, in addition to other explanatory disclosure, may also be
appropriate in addition to or in lieu of age-related information about
the offered master trust pool. Also, as we are expanding the ability to
use master trusts to new asset classes, the same may be true for
additional asset classes that may be securitized in the future. We
noted above as well that in some instances static pool data about the
pool itself may be more appropriate for amortizing asset pools.
To clarify this point, we are expressly providing in the final rule
that if the information that would otherwise be required by the
directed starting point is not material, but alternative static pool
information (e.g., prior pools, portfolio vintage or asset pool) would
provide material disclosure, such alternative information is to be
provided instead. Further, as we stated in the Proposing Release,
registrants may and are encouraged to provide other explanatory
information, including disclosure explaining the absence of data.\266\
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\266\ As we stated in the Proposing Release, in some instances
such additional information may be required. See note 252 above.
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Several commenters also expressed concern as to application of the
disclosure requirement in transactions, such as ``rent-a-shelf'' \267\
and aggregator transactions, where one or more entities transfer the
pool assets to an unaffiliated depositor.\268\ In particular, these
commenters argued that in some instances static pool information for
one or more entities other than the sponsor may be more appropriate
than information about the sponsor. In response, we are clarifying that
static pool information regarding a party or parties other than the
sponsor may be provided in addition to or in lieu of the contemplated
information regarding the sponsor if appropriate to provide material
disclosure.
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\267\ A typical ABS ``rent-a-shelf'' transaction is one where
the sponsor of the transaction transfers the pool assets to an
unaffiliated depositor for a takedown off of a registration
statement filed by the unaffiliated depositor, usually for a fee.
\268\ See, e.g., Letters of ASF and BMA.
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We are not including in the final rule the proposed general
instruction to present static pool data separately based on other pool
variables. Although as with the rest of our proposal this instruction
was conditioned on materiality, the majority of commenters objected to
including the language, arguing that the potential breadth of the
disclosure that would be required would be too burdensome for
prospectus disclosure.\269\ Several of these commenters also believed
the alternative approach we are adopting of requiring material summary
characteristics for prior securitized pools or vintage origination
years deemphasized the need for such data stratifications.
---------------------------------------------------------------------------
\269\ See, e.g., Letters of A&O; ABA; ASF; BMA; MBA; Sallie Mae;
and TMCC.
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b. Method of Presentation
Many commenters, including those representing investors, requested
flexibility in the presentation of required static pool
information.\270\ In particular, such commenters universally argued for
the ability to provide such information electronically through an
Internet Web site. Even under the revised disclosure framework
suggested by commenters that we are adopting, commenters believed the
resulting disclosure could nevertheless involve a significant amount of
statistical information for some issuers with features that would be
difficult to file electronically on EDGAR as it exists today and
difficult for investors to use in that format. Commenters noted that
several issuers already provide performance data through their Web
sites, although it may not be freely accessible by all investors. In
addition, a Web site-based approach, these commenters argued, could
provide greater dynamic functionality and utility both for the ability
of issuers to present the information and the ability of investors to
access and analyze the information, including interactive facilities
for organizing and viewing the information. Moreover, given that much
of the information for prior securitized pools or the sponsor's
portfolio would be similar from one transaction to the next, providing
flexibility to allow the information to be presented in one place for
multiple prospectuses would reduce the burdens of repeating the data
for each prospectus. In addition, allowing a single place for
presentation of the information would provide efficiencies for keeping
the data updated and current for future transactions.
---------------------------------------------------------------------------
\270\ See, e.g., Letters of ABA; ASF; Auto Group; BMA;
Citigroup; JPMorganChase; NYCBA; and TMCC.
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We wish to encourage efficient means of providing information to
investors. Advances in technology, particularly the Internet, have
greatly increased efficiencies in the ability to gather, process,
present and analyze information of this type.\271\ Both issuers and
investors have expressed a preference for Web site disclosure of such
information. Accordingly, we are providing issuers with alternatives
for providing the required information for inclusion in the prospectus,
as discussed below.
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\271\ See also, e.g., the Offering Process Release.
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First, as is the case today, the issuer could physically include
the information in the prospectus or, for ABS offerings on Form S-3,
incorporate the information by reference from a filed Exchange Act
report. Some commenters
[[Page 1542]]
also suggested flexibility to provide the information in an electronic
format together with the prospectus, such as a CD-ROM delivered with
the prospectus. We have previously provided guidance on the use of such
electronic media in providing prospectus disclosure.\272\ This guidance
continues to apply. However, as discussed below, we also are providing
separate and specific guidance for providing the information through a
Web site.
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\272\ See Release No. 33-7233 (Oct. 6, 1995) [60 FR 53458];
Release No. 33-7288 (May 9, 1996) [61 FR 24644]; Release No. 33-7856
(Apr. 28, 2000) [65 FR 25843]; and Rule 304 of Regulation S-T (17
CFR 232.304).
---------------------------------------------------------------------------
The second alternative for providing static pool information
involves a temporary filing accommodation under our rules governing
EDGAR filing that applies until December 31, 2009 and permits the
posting of the information on an Internet Web site, subject to the
following conditions.\273\ As discussed further below, if these
conditions are met, the information will be deemed to be included in
the prospectus and need not be physically repeated in the prospectus or
in a Form 8-K report incorporated by reference into the prospectus and
registration statement. It will therefore be subject to all liability
provisions applicable to prospectuses and registration statements,
including Section 11 of the Securities Act.\274\
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\273\ See Rule 312 of Regulation S-T.
\274\ 15 U.S.C. 77k.
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First, the prospectus at effectiveness shall disclose the intention
to provide the information through a Web site and the final prospectus
shall provide the specific Internet address where the information is
posted.\275\ This alerts investors to the location of the information.
The specificity of the Internet address should be directly to the
information that is to be deemed part of the prospectus.\276\ The Web
site used for disclosure of the information need not be a Web site
maintained by the issuer, although, as noted below, there are
conditions for the retention and availability of the information and
the information provided through the Web site will be deemed part of
the prospectus included in the registration statement.
---------------------------------------------------------------------------
\275\ Note that the EDGAR System prohibits the use of active
HTML hypertext links to external Web sites other than the SEC Web
site. See Rule 105(b) of Regulation S-T (17 CFR 232.105(b)).
Accordingly, the reference to the Internet address should be
presented in the EDGAR submission as an inactive textual reference
to avoid a suspension of the submission. Further, because new Rule
312 of Regulation S-T specifically provides for the availability of
this accommodation to satisfy the disclosure requirement under
identified conditions, which includes, among other conditions, an
identification in the filing of an Internet address (which will not
be an HTML hypertext link), Rule 105(c) of Regulation S-T (which
prohibits satisfying reporting obligations through an external HTML
hypertext link) is not implicated. Rule 105(c) of Regulation S-T
continues to prohibit a filer from satisfying its disclosure
requirements through impermissible hypertext links or references to
external Web sites. However, like Rule 105(c) of Regulation S-T and
as further explained in the text, the inclusion of the address in
response to Rule 312 of Regulation S-T will cause the filer to be
subject to the civil liability and anti-fraud provisions of the
federal securities laws with reference to the information contained
in the Internet address.
\276\ See also the subsequent discussion in notes 281, 282 and
their accompanying text. Our final rules are designed to provide
issuers flexibility regarding the methods of presenting the
information through a Web site.
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Second, the information shall be provided through the designated
Web site unrestricted as to access and free of charge. As we have
stated in our other releases regarding Web site posting,\277\ the
medium to access the information must not be so burdensome that the
intended users cannot effectively access the information provided. In
addition, as the information provided through the Web site will be
deemed a portion of the prospectus no different than if the information
was physically included in the prospectus itself and available on
EDGAR, we do not believe it would be appropriate to require prior user
registration to access the Web site information.
---------------------------------------------------------------------------
\277\ See, e.g., Release No. 33-7233, at n. 24 and the
accompanying text; Release No. 33-8128 (Sep. 16, 2002) [67 FR 58480]
and Release No. 33-8230 (May 7, 2003) [68 FR 25788].
---------------------------------------------------------------------------
Third, the information shall remain available on the Web site for a
period of not less than five years. If a subsequent update or change is
made to the information, the date of such update or change shall be
clearly indicated on the Web site and the registrant shall undertake to
provide to any person without charge, upon request, a copy of the
information as of the date of the prospectus. In addition, the
registrant shall retain all versions of the information posted through
the Web site address for a period of not less than five years in a form
that permits delivery to an investor or the Commission, and the
registrant shall furnish to the Commission or its staff upon request a
copy of any or all information retained pursuant to this requirement.
The five-year period shall commence from the filing date of the
prospectus, or the date of first use of the prospectus, whichever is
earlier. These record retention provisions are consistent with record
retention requirements for information retained by the issuer regarding
Securities Act registration statements.\278\ The requirement to keep
the information posted ensures that, no different than if the
information was physically included in the prospectus, an investor has
access to the information at all times during such period.
---------------------------------------------------------------------------
\278\ See, e.g., Securities Act Rule 428 (17 CFR 230.428); and
Rule 304 of Regulation S-T (17 CFR 232.304).
---------------------------------------------------------------------------
Fourth, the registration statement shall contain an undertaking
that, except as discussed below regarding certain information relating
to periods before the compliance date of the new disclosure
requirement, the information provided through the specified Internet
address is deemed to be a part of the prospectus included in the
registration statement for the asset-backed securities.\279\ As the
information will be deemed to be included in that prospectus no
different than if the information was physically included in the
prospectus, disclaimers of liability or responsibility for the
information are not appropriate.\280\
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\279\ See also amendments to Item 512(l) of Regulation S-K (17
CFR 229.512(l)).
\280\ For more information regarding inappropriate disclaimers
or legends, see Section III.C.1.d.
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The information that will be deemed to be part of the prospectus
included in the registration statement as a result of the undertaking
is limited to the information provided through the specified Web site
address.\281\ The reference to the specified Web site address would not
mean, standing alone, that other information, including additional
static pool information, available elsewhere on the Web site but not
available through the Web site address would automatically be deemed to
be a part of that prospectus.\282\ As such, issuers electing the Web
site disclosure option should ensure that the portion of the Web site
used to disclose the information that is to be included as part of the
prospectus does not contain references or hyperlinks to other portions
of the Web site not to be included as part of the prospectus (for
example, to the general corporate home page of the sponsor). However,
for purposes of this requirement, we believe the Internet address to be
disclosed in the prospectus would not necessarily be required to be to
a separate address for each address that is a ``cul-de-sac.'' There may
be circumstances where the
[[Page 1543]]
reference could be to a general index or introduction page for static
pool data for multiple offerings with links on that page clearly
indicating the information to be provided for each prospectus.\283\
Unless the registrant or another offering participant otherwise acts to
include the other static pool information as part of the prospectus
included in the registration statement, the reference to the other
information on the index or introduction page will not, by itself, make
that information part of that prospectus or an offer for the respective
asset-backed securities.\284\
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\281\ The static pool information could be provided through an
address to a webpage that provides links or access to additional
webpages that together constitutes the required information. All
such information would be deemed a part of the prospectus.
\282\ For additional interpretive guidance regarding the
treatment of other Web site information during a registered offering
and issuer responsibility for hyperlinked information, see Release
No. 33-7856. For recent proposals in this area and a discussion of
when other information by an issuer is considered an offering
communication, see the Offering Process Release.
\283\ Such an index or introduction page is a possible example
of how the information might under appropriate circumstances be
provided through a Web site. If market participants need additional
guidance regarding the operation of the Web site disclosure option
for other considered alternatives, please feel free to contact the
staff.
\284\ Note that if an offering participant is otherwise using
the information as part of the offering process, such information
might be considered an ``offer'' and a ``prospectus,'' regardless of
whether it is deemed to be part of the prospectus included in the
registration statement discussed in the text. For more information,
see the Offering Process Release.
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While recognizing the desire to provide a potentially more cost-
effective and useful method of providing static pool information
through Web sites, nevertheless we continue to believe at some point
for future transactions the information should also be submitted with
the Commission in some fashion, provided this does not result in
investors not receiving the information in the form they have
requested. Accordingly, we are providing that the filing accommodation
will apply with respect to filings filed on or before December 31,
2009. We are directing our staff to consult with the EDGAR contractor,
EDGAR filing agents, issuers, investors and other market participants
to consider how such information can be filed so it is also with the
Commission in a cost-effective manner without undue burden or expense
and without affecting the result we achieve today that realizes the
overriding objective of allowing issuers to be able to provide the data
in the form expressed as most desirable by commenters. We wish to
assure market participants that any such filing mechanism to replace or
supplement the temporary accommodation for filings after December 31,
2009 will not undercut these objectives. As a result, this could
include, if necessary, extending the accommodation or, if it appears
that an EDGAR solution would not be feasible in that timeframe,
alternative methods of having the information submitted to the
Commission.
Several commenters expressed concern over applying Securities Act
liability standards \285\ to static pool information, arguing instead
for application of only general antifraud liability.\286\ We note that
investors expressed uniform support for the value of static pool
information in making informed investment decisions.\287\ We believe it
is appropriate for such information used as part of the offering
process to be subject to Securities Act liability requirements for the
accuracy and reliability of the information, regardless of the medium
in which the information is presented. Similarly, just because the
information also may be prepared and used for additional corporate
purposes does not mean that it should be treated differently from other
offering information when used in connection with the offering.
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\285\ See Sections 11, 12(a)(2) and 17(a) of the Securities Act.
\286\ See, e.g., Letters of ABA; ASF; BMA; and NYCBA.
\287\ See note 247 above.
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Some of these commenters, due to concerns about issuer
responsibility for materiality judgments, also requested a liability
safe harbor for the selection of static pool information similar to
that provided for forward-looking information.\288\ However, many
disclosure requirements under the Federal securities laws are based on
a materiality standard without such a safe harbor.\289\ Further, unlike
forward-looking information relating to subjective events that may
occur in the future, static pool information is by definition
historical performance information. We also are not persuaded that the
lack of existing market practice for the disclosure of static pool
information justifies excluding such disclosure from Securities Act
liability requirements. We note from the comments received that issuers
already are developing standards for static pool disclosure for various
asset classes. We are, however, providing accommodations, discussed
below, for data regarding certain historical transactions and periods
before the compliance date of the disclosure requirement.
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\288\ See, e.g., Letters of ABA; ASF; and BMA.
\289\ In particular, see Item 303 of Regulation S-K (17 CFR
229.303) regarding Management's Discussion and Analysis of Results
of Operations.
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As discussed further in Section III.F., we are providing an
extended transition period for compliance with the disclosure
requirements in Regulation AB, including the static pool disclosure
requirements. This extended period allows issuers time to implement
policies, processes and procedures to adapt to the new disclosure
requirements. For offerings covered by the new rules and forms,
material static pool information will be required for the time periods
identified above (e.g., previous five years). We believe this approach
minimizes the amount of time before investors can begin to incorporate
the information into their investment decisions. Of course, registrants
voluntarily may comply with the new disclosure requirement before the
compliance date, and we encourage them to do so if practicable.
However, we recognize that issuers may not have been collecting the
necessary data for periods before the implementation date of the new
rules. Even if they had been collecting the necessary information, the
information may not have been collected under processes and controls
with a view toward disclosure in a prospectus. Similarly, several
commenters expressed concern regarding historical data before the
implementation date of the rules that may not exist or cannot be
provided without unreasonable effort or expense.\290\
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\290\ See, e.g., Letters of ABA; ASF; and BMA.
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Given that we are establishing a requirement for disclosure of
material static pool information as well as an extended transition
period to prepare for such disclosure, we believe many commenter
concerns regarding availability and access to the data on a going
forward basis will not be applicable. However, we are addressing
commenter concerns in two ways to address the following static pool
information:
For static pool information regarding prior securitized
pools of the sponsor that do not include the currently offered pool,
information regarding prior securitized pools that were established
before January 1, 2006; and
For static pool information regarding the currently
offered pool, information about the pool for periods before January 1,
2006.
First, we are providing in the Item that if any of such information is
unknown and not available to the registrant without unreasonable effort
or expense, such information may be omitted, provided the registrant
provides the information on the subject it possesses or can acquire
without unreasonable effort or expense, and the registrant includes a
statement showing that unreasonable effort or expense would be involved
in obtaining the omitted information.
Second, even for such information that is available or accessible
without
[[Page 1544]]
unreasonable effort of expense, given concerns about proper due
diligence regarding such information, we are specifying that the pre-
January 1, 2006 information identified above provided in response to
the static pool information disclosure requirement will not be deemed
to be a prospectus or part of a prospectus for the asset-backed
securities, nor shall such information be deemed to be part of the
registration statement for the asset-backed securities. Of course, such
information will remain subject to the general antifraud provisions of
the Securities Act and Exchange Act.\291\ In addition, the prospectus
must disclose that such information is not deemed to be part of that
prospectus or the registration statement for the asset-backed
securities in order to alert investors.
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\291\ See 15 U.S.C. 77q(a) and 78j(b) and Exchange Act Rule 10b-
5.
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5. Pool Assets
Information about the composition and characteristics of the asset
pool is a cornerstone of the disclosure necessary to make an informed
investment decision regarding an asset-backed security. As noted above,
we are not establishing detailed industry guides for each asset type to
be securitized. However, while the material characteristics will vary
depending on the nature of the pool assets, we continue to believe, as
proposed, that there are certain broad categories of disclosure and
examples of common characteristics that can be identified. Of course,
the actual disclosure to be provided must be tailored to the asset type
and asset pool involved for the particular offering and resulting
determinations as to the materiality of information.
a. Pool Composition
As proposed, certain general information regarding the asset pool
will be required, including a brief description of the asset type to be
securitized and a general description of the material terms of the pool
assets.\292\ In addition, the solicitation, credit-granting or
underwriting criteria used to originate or purchase the pool assets
must be described. The selection criteria for the asset pool also must
be described, as well as the cut-off date or similar date for
establishing pool composition. Finally, the effects of any legal or
regulatory provisions are to be described, such as any bankruptcy,
consumer protection, predatory lending, privacy, property rights or
foreclosure laws or regulations, to the extent they may materially
affect pool asset performance or payments or expected payments on the
asset-backed securities.\293\
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\292\ See Item 1111 of Regulation AB.
\293\ As proposed, an instruction to the Item would specify that
unless a material concentration of assets exists, it is not
necessary to provide details of the laws in each jurisdiction. Even
in that case, a legalistic description or recitation of the laws or
regulations in a particular jurisdiction is not required.
---------------------------------------------------------------------------
As information about the asset pool necessarily includes
statistical information, the need for clear presentations emphasizing
material information is important. Appropriate introductory and
explanatory information is to be provided to introduce characteristics,
the methodology used in determining or calculating the characteristics
and any terms or abbreviations used. For example, this would include
explaining the definitions and methodologies for various categories
provided (e.g., documentation guidelines for each loan documentation
type), the components and method of calculating variables (e.g., loan-
to-value or debt-to-income ratios) and the date used for determining
statistical data (e.g., if not the cut-off date), as applicable. As is
the case today, statistical information is to be presented in tabular
or graphical format, if it will aid understanding. Statistical
information also is to be presented in appropriate distributional
groups or incremental ranges material to an analysis of the
information, in addition to presenting appropriate overall pool totals,
averages and weighted averages.\294\
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\294\ As noted in the Item, in making any calculations regarding
overall pool balances, any funds set aside for a prefunding account
are to be disregarded.
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Currently, statistical disclosures by distribution groups or ranges
often present just the number, amount and percentage of pool assets for
each group or range. If material, statistical information for each
group or range also should be presented by other material variables,
such as, average balance, weighted average coupon, average age and
remaining term, average loan-to-value or similar ratio, and weighted
average standardized credit score or other applicable measure of
obligor credit quality. Similarly, when presenting averages on an
aggregate basis and within each group or range, registrants should
consider providing minimums and maximums underlying the averages. As is
often the case today, historical data presented regarding pool assets
is to be provided, as appropriate, such as the lesser of three years or
the time such assets have existed, to allow a material evaluation of
the pool data.
As discussed above, we have made several technical and clarifying
revisions in response to comment to the proposed list of pool
characteristics. While again recognizing that the characteristics that
are material will vary depending on the nature of the pool assets,
examples of illustrative characteristics in the disclosure item
include:
Number of each type of pool assets.
Asset size, such as original balance and outstanding
balance as of a designated cut-off date.
Interest rate or rate of return, including type of
interest rate if the pool includes different types, such as fixed and
floating rates.
Capitalized or uncapitalized accrued interest.
Age, maturity, remaining term, average life (based on
different prepayment assumptions), current payment/prepayment speeds
and pool factors, as applicable.
Servicer distribution, if different servicers service
different pool assets.
If a loan or similar receivable: Amortization period; loan
purpose; loan status; loan-to-value (LTV) ratios and debt service
coverage ratios (DSCR); and type and/or use of underlying property,
product or collateral.
If a receivable or other financial asset that arises under
a revolving account, such as a credit card receivable: Monthly payment
rate; maximum credit lines; average account balance; yield percentages;
type of asset; finance charges, fees and other income earned; balance
reductions granted for refunds, returns, fraudulent charges or other
reasons; and percentage of full-balance and minimum payments made.
Whether the pool asset is secured or unsecured, and if
secured, the type(s) of collateral.
Billing and payment procedures, including frequency of
payment, payment options, fees, charges and origination or payment
incentives.
Information about the origination channel and origination
process for the pool assets, such as originator information (and how
acquired) and level of origination documentation required, as
applicable.
In addition to the above, we are retaining a reference in the
disclosure list to standardized credit scores of obligors and other
information regarding obligor credit quality. While disclosure of
standardized credit scores is typical today for several consumer asset
classes, commenters representing issuers from other consumer asset
classes that do not typically disclose such information, although
generally agreeing that material information surrounding the
[[Page 1545]]
credit underwriting process and data used to determine suitability and
extension of credit should be disclosed, nevertheless expressed
reticence to the proposed reference to standardized credit scores.\295\
However, comment from investors uniformly emphasized the importance of
such data as an indicator of potential performance, similar to other
variables such as loan-to-value and geographic origination, even though
the data may not have been, like these other variables, the primary
basis for the initial credit decision.\296\ Accordingly, we are
retaining the reference to standardized credit scores.\297\
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\295\ See, e.g., Letters of ASF; AHFC; MBNA; and TMCC.
\296\ See, e.g., Letter of ASF.
\297\ As proposed, the reference is to standardized credit
scores, not proprietary internally-derived credit scores of the
originator. However, as discussed above, a description of the
material solicitation, credit-granting and underwriting criteria
used to originate or purchases the pool assets is to be described.
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Our proposed disclosure item also included disclosure about the
geographic distribution of the pool assets, such as by state or other
material geographic region. This aspect of the proposal caused some
confusion among commenters as to the extent of disclosure that would be
required.\298\ We are clarifying this aspect of the disclosure
item.\299\ We are retaining a requirement for disclosure regarding the
geographic distribution of the pool assets.\300\ In addition, we are
retaining the aspect of the proposal, which is typical for transactions
today, that if 10% or more of the pool assets are or will be located in
any one state or other geographic region, information is to be provided
regarding any economic or other factors specific to such state or
region that may materially impact the pool assets or pool asset cash
flows. To avoid confusion, we are not adopting the other part of our
proposed disclosure item that suggested separate statistical data
should be provided for each 10% geographic concentration according to
the factors or variables listed above for the entire asset pool.
However, if additional material information about the geographic
concentration would be necessary to make the disclosure otherwise
provided not misleading, such disclosure would be required.\301\ In
addition to geographic concentrations, the disclosure requirement also
references other concentrations material to the asset type (e.g.,
school type for student loans), with information regarding such
concentrations similar to that provided for geographic concentrations.
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\298\ See, e.g., Letters of ABA; AFSA; ASF; Citigroup; and TMCC.
\299\ As proposed, an instruction to this Item specifies that
for most assets, such as credit card accounts, automobile leases,
trade receivables and student loans, the location of the asset is
the underlying obligor's billing address. For assets involving real
estate, such as mortgages, the location of the asset is where the
physical property underlying the asset is located.
\300\ See, e.g., Kevin Donovan, ``Zimmerman Outlines Risks in
HELs,'' Asset Securitization Report (Sep. 20, 2004).
\301\ See note 252 above.
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Consistent with existing practice, delinquency and loss information
for the pool also will be required. As proposed, an item of general
applicability for Regulation AB will provide guidance regarding the
presentation of such information.\302\ We received comment on the
proposed minimum distributional groupings, or ``buckets,'' that are to
be used in presenting delinquency information in addition to overall
delinquency percentages.\303\ We are clarifying that, at a minimum,
delinquency experience is to be presented in 30 or 31 day increments,
as applicable, beginning at least with assets that are 30 or 31 days
delinquent, as applicable, through the point that assets are written
off or charged off as uncollectable. Such information is to be
presented at a minimum by number of accounts and dollar amount.
Disclosure also will be required, as proposed, on how delinquencies,
charge-offs and uncollectable accounts are defined or determined,
addressing the effect of any grace period, re-aging, restructure,
partial payments considered current or other practices on delinquency
experience.\304\ We believe this would include separate information on
the amount of pool assets that had been previously re-aged, if
material.
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\302\ See Item 1100(b) of Regulation AB.
\303\ See, e.g., Letters of ABA; ASF; Auto Group; MBA; and
MetLife.
\304\ Such disclosure should include the policies being used for
purposes of the non-performing and delinquency thresholds in the
definition of ``asset-backed security.''
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In a commercial mortgage-backed securitization, given the
importance of the underlying properties, we proposed a separate list of
illustrative disclosure items for these assets. The proposed disclosure
was consistent with similar disclosure required by existing Form S-11
for the registration of offerings of securities for certain real estate
companies. We received additional comment to tailor the disclosure
further for CMBS transactions, particularly for significant loans in
the pool.\305\ Under the final rule, the following is to be provided,
to the extent material.\306\ For all commercial mortgages:
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\305\ See, e.g., Letter of CMSA.
\306\ Similar to Form S-11, an instruction to the disclosure
item specifies that what is required under the item is information
material to an investor's understanding of the asset-backed
securities. Detailed descriptions of the physical characteristics of
individual properties or legal descriptions by metes and bounds are
not required.
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Location and present use of each mortgaged property;
Net operating income and net cash flow information, as
well as the components of such items, for each mortgaged property;
Current occupancy rates for each mortgaged property;
Identity, square feet occupied by and lease expiration
dates for the three largest tenants at each mortgaged property; and
The nature and amount of all other material mortgages,
liens or encumbrances against such properties and their priority.
In addition, the following additional information is to be provided
for each commercial mortgage that represents, by dollar value, 10% or
more of the asset pool, as measured as of the cut-off date:
Proposed renovation, improvement or development programs.
Competitive conditions.
Management of the properties, historical occupancy rates
and property uses.
Further information about material tenants and lease
terms.
b. Sources of Pool Cash Flow
As we explained in the Proposing Release, cash flows to support the
asset-backed securities in some transactions come from more than one
source, such as in lease-backed transactions that include separate cash
flows from lease payments and from the sale of the residual asset at
the termination of the lease. In such instances, disclosure will be
required, as proposed, of the specific sources of funds and their uses,
including, if applicable, the relative amount and percentage of funds
that are to be derived from each source. Any assumptions, data, models
and methodology used to derive such amounts also must be described.
As discussed in Section III.A.2.e., we are adopting our proposed
requirements for additional specific disclosures in lease backed ABS if
a portion of the securitized pool balance is attributable to the
residual values of the physical property underlying the leases. Such
disclosure includes information on how residual values are estimated
and derived, statistical information regarding estimated residual
values and historical statistics on turn-in rates and
[[Page 1546]]
residual value realization rates. Information also will be required
regarding the manner and process in which residual values are to be
realized, including disclosure of the entity that will convert the
residual values into cash and the experience of such entity. Finally,
disclosure will be required of the effects if not enough proceeds are
received from the realization of residual values, whether there exists
any provisions to address such a contingency, as well as how any cash
flow greater than that necessary to repay security holders will be
allocated.
c. Changes to the Asset Pool
As discussed in Section III.A.2.f., we are adopting, as proposed,
more detailed disclosures on when and how the composition of an asset
pool may change, such as through a prefunding or revolving period. Such
disclosure includes:
The term or duration of any prefunding or revolving
period.
Aggregate amounts and percentages involved in the
prefunding or revolving period, if applicable.
Triggers that would limit or terminate such periods.
When and how new pool assets may be added, removed or
substituted, and the acquisition or underwriting criteria for
additional pool assets, and the party that makes determinations on such
changes.
Any minimum requirements to add or remove pool assets.
Temporary investment of funds pending use.
Whether, and if so, how, investors will be notified of any
changes to the asset pool.
d. Rights and Claims Regarding the Pool Assets
When pool assets are transferred to the issuing entity, the
sponsor, transferor or other party often makes certain representations
and warranties concerning the pool assets, such as to their principal
balance and status at the time of transfer. If an asset fails to meet
the requirements of those representations or warranties, there may be
obligations for the depositor to repurchase or substitute assets that
do comply with the representations and warranties for that non-
complying asset. As proposed, and consistent with current practice,
disclosure of these rights and remedies will be required, as well as
disclosure regarding any material direct or contingent claims that
parties other than the holders of the asset-backed securities have on
any pool assets, such as prior mortgages, liens or encumbrances.
6. Transaction Structure
As proposed, existing Item 202 of Regulation S-K will continue to
provide the core disclosure requirements for describing the securities
being offered, and new Item 1113 of Regulation AB will provide
additional guidance consistent with existing practice for preparing
this disclosure for asset-backed securities. For example, the item
clarifies that an explanation is to be given of the types or categories
of securities that may be offered, such as interest-weighted or
principal-weighted classes or planned amortization or companion
classes, as well has how principal and interest on each class of
securities is calculated and payable. Other specified items include
amortization, performance or similar triggers or events (and their
effects on the transaction if triggered), overcollateralization or
undercollateralization information, cross-default or cross-
collateralization provisions, voting requirements to amend the
transaction documents and any minimum standards, restrictions or
suitability requirements regarding ownership of the securities.
A clear description of the flow of funds for the transaction is
required. Such a description is to include payment allocations, rights
and distribution priorities among all classes of the issuing entity's
securities, and within each class, with respect to cash flows, credit
enhancement and any other structural features in the transaction. Any
requirements directing cash flows are to be described, such as to
reserve accounts, along with a description of the purpose and operation
of those requirements. In addition to an appropriate narrative
description, the flow of funds should be presented graphically if doing
so would aid understanding.
There has been increased emphasis in the market on the level of
fees and expenses involved in an ABS transaction.\307\ To provide
increased transparency of this information in a single location, we are
adopting our proposal for a separate table with an itemized list of all
estimated fees and expenses to be paid or payable out of the cash flows
for the transaction. As proposed, the fee and expense table is to
indicate for each item the amount of the fee or expense, its general
purpose, the party receiving such fees or expenses, the source of funds
for such fees or expenses (if different from other fees or expenses or
if such fees or expenses are to be paid from a specified portion of the
cash flows) and the distribution priority of such expenses. If the
amount of a fee or expense is not fixed, the formula or method of
calculation used to determine the fee or expense is to be provided. The
tabular presentation should be accompanied by footnotes or other
accompanying narrative disclosure to the extent necessary for an
understanding of the timing or amount of such fees and expenses, such
as any restrictions or limits on fees or whether the estimate may
change in certain instances, such as in the event of an event of
default (and how the fees would change in such an instance or the
factors that would affect the change). In addition, through footnote or
other accompanying narrative disclosure, disclosure is required of any,
and if so how, fees or expenses could be changed without notice to, or
approval by, security holders and any restrictions on the ability to
change a fee or expense amount, such as due to a change in transaction
party.
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\307\ See, e.g., notes 229 and 239 above. See also Fitch, Inc.,
``Credit Card ABS Servicing Fee Adequacy and Priority'' (Sep. 15,
2004).
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Other disclosures regarding the transaction structure include
information on the frequency of distribution dates and collection
periods for the pool assets and arrangements for cash held pending use,
including identification of the parties with access to cash balances
and the authority to make decisions regarding their investment and use.
We also are retaining information on the ownership of any residual or
retained interests to the cash flows, as well as the disposition of
excess cash flow, although we are making revisions in response to
comment.\308\ In particular regarding residual ownership, the identity
of the residual holder must be disclosed only if the residual holder is
an affiliated party or if the residual holder has rights that may alter
the transaction structure beyond receipt of residual or excess cash
flows. Finally, disclosure will be required of any requirements to
maintain a minimum amount of excess cash flow or spread from, or
retained interest in, the transaction, and effects on the transaction
if the requirements were not met.
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\308\ See, e.g., Letters of ABA; ASF; BMA; JPMorganChase; and
MetLife.
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As with any fixed-income security, optional or mandatory redemption
or termination provisions are to be described, including any ``clean
up'' calls if the principal balance of the pool assets reaches a
specified minimum level, with minor revisions to our
[[Page 1547]]
proposal in response to comment.\309\ Many ABS transactions include
``clean up'' calls whereby the securities are called and the trust
terminated before its stated termination date when the administrative
costs no longer justify the limited outstanding life.\310\ They are
typically conducted only when less than 10% of the outstanding pool
balance is outstanding. As proposed, we are codifying the existing
staff position that the title of any class of securities with an
optional redemption or termination feature that may be exercised when
25% or more of the original principal balance of the pool assets is
still outstanding must include the word ``callable.''\311\ This is to
alert investors that the callable feature is greater than a typical ABS
``clean up'' call. In addition, in response to comment,\312\ we are
clarifying that in the case of a master trust, a title of a class of
securities must include the word ``callable'' when an optional
redemption or termination feature may be exercised when 25% or more of
the original principal balance of the particular series in which the
class was issued is still outstanding, in lieu of the original
principal balance of the entire master trust asset pool.
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\309\ See, e.g., Letter of ABA.
\310\ See Frank J. Fabozzi et al., The Handbook of Nonagency
Mortgage-Backed Securities, at 165 (1997).
\311\ In response to comment, we are not including a mandatory
redemption or termination features in this requirement. See, e.g.,
Letter of ABA. However, structuring a redemption or termination
feature as ``mandatory,'' but with the ability to waive or opt-out
of the redemption or termination will still constitute an optional
redemption or termination feature subject to the ``callable''
titling requirement.
\312\ See, e.g., Letters of ASF and Capital One.
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As proposed, we are adopting additional disclosure requirements if
the transaction structure involves a master trust. For example,
information will be required, to the extent material, regarding any
additional securities already outstanding or that may be issued in the
future that are backed by the same asset pool, including:
The relative priority of those additional securities to
the securities being offered and their respective rights to the
underlying pool assets and cash flows;
Allocations of cash flow from the asset pool and any
expenses or losses among the various series or classes;
Terms under which additional series or classes may be
issued and pool assets increased or changed;
The terms of any security holder approval or notification
of any additional issuance; and
Which party has the authority to determine whether
additional securities may be issued.
In addition, if there are conditions to such additional issuance,
whether or not there will be an independent verification of such
person's exercise of authority or determinations.\313\
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\313\ This final bullet was included to conform to the similar
disclosure for the other ``discrete'' pool exceptions (prefunding
and revolving periods).
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In describing generally the scope of disclosure expected in ABS
registration statements, the 1992 Release specifically referenced
disclosure regarding prepayment, maturity and yield considerations that
may be material to ABS. As proposed, a description is required of any
material models, including material assumptions and limitations, used
as a means to identify cash flow patterns with respect to the pool
assets. Similarly, the disclosure must, to the extent material, explain
the degree to which each class of securities is sensitive to changes in
the rate of payment on the pool assets, and describe the consequences
of such changing rate of payment.\314\ Consistent with market practice,
statistical information of such effects is to be provided, such as the
effect of prepayments on yield and weighted average life at one or more
given prepayment speeds. Any special allocations of prepayment risks
among the classes of securities must be described, as well as whether
any class protects other classes from the effects of the uncertain
timing of cash flow.
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\314\ This includes, for example, information on interest rate
sensitivity.
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7. Significant Obligors
As we explained in the Proposing Release, a securitized asset pool
typically represents obligations of a large enough number of separate
obligors such that information on any individual obligor may not be
material. However, as discussed in Section III.A.6., as concentration
with a particular obligor or group of related obligors increases,
additional disclosures regarding that obligor or group of related
obligors, including financial information, is required. Analogizing to
the standards in Topic 1.I of Staff Accounting Bulletin No. 103,
current staff and market practice is to require additional disclosures
regarding a particular obligor or group of related obligors when
concentration reaches 10%, with more particular disclosures at
20%.\315\ Commenters supported our proposals to codify these
longstanding practices.\316\
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\315\ Topic 1.I. to Release No. SAB-103.
\316\ See, e.g., Letters of ABA; CMSA; and MetLife.
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As proposed, we define a ``significant obligor'' that would trigger
additional disclosures as any of the following:
An obligor or a group of affiliated obligors on any pool
asset or group of pool assets if such pool asset or group of pool
assets represents 10% or more of the asset pool;
A single property or group of related properties securing
a pool asset or a group of pool assets if such pool asset or group of
pool assets represents 10% or more of the asset pool; or
A lessee or group of affiliated lessees if the related
lease or group of leases represents 10% or more of the asset pool.
Instructions to the definition clarify that if separate pool
assets, or properties underlying pool assets, are cross-defaulted and/
or cross-collateralized, such pool assets are to be aggregated and
considered together in determining concentration levels. With respect
to lessees, the concentration calculation must focus on the leases
whose cash flow supports the asset-backed securities directly or
indirectly, regardless of whether the asset pool contains the leases
themselves, mortgages on properties that are the subject of the leases
or other assets related to the leases. Finally, if the pool asset is a
mortgage or lease relating to real estate and non-recourse to the
obligor, and the obligor does not manage the property or does not own
other assets and has no other operations, then the obligor need not be
considered a separate significant obligor from the real estate.
Otherwise, if any of the 10% tests were met, the obligor would be a
separate significant obligor for which disclosure would be required.
For each significant obligor, both descriptive and financial
information is required, consistent with existing practice and our
proposal.\317\ Descriptive information includes the identity of the
significant obligor, its organizational form, the general character of
its business, the nature of the concentration and the material terms of
the pool assets and the agreements with the obligor involving the pool
assets.
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\317\ See Item 1112 of Regulation AB.
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Also consistent with current practice and our proposal, different
levels of financial information will be required depending upon the
level of concentration.\318\ If the pool assets relating to a
significant obligor represent 10% or more, but less than 20%, of the
asset pool, selected financial data required by Item 301 of Regulation
S-
[[Page 1548]]
K must be provided.\319\ If the pool assets relating to the significant
obligor represent 20% or more of the asset pool, audited financial
statements meeting the requirements of Regulation S-X are
required.\320\ As we noted in the Proposing Release, both thresholds
represent longstanding breakpoints in Commission and staff requirements
for determining the level of required financial disclosure.\321\
Section III.B.10. discusses alternative methods that may be available,
subject to conditions, to present this disclosure, such as through
incorporation by reference or by including a reference to the obligor's
Commission filings.
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\318\ See, e.g., Section VIII.B.3.a.ii. of the Division of
Corporation Finance's ``Current Issues and Rulemaking Projects''
(Nov. 14, 2000).
\319\ 17 CFR 229.301. We also are clarifying in response to
comment that for a significant obligor under Item 1100(k)(2) of
Regulation AB, only net operating income for the most recent fiscal
year and interim period is required. We also are providing a
separate instruction if the significant obligor is a foreign
business clarifying how the requirements may be complied with for
such entities.
\320\ Existing practices regarding financial statements that
meet the requirements of Regulation S-X, including applicability of
requirements for real estate properties, will continue to apply.
See, e.g., Rule 3-14 of Regulation S-X (17 CFR 210.3-14).
\321\ See, e.g., note 315 above.
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As proposed, we are adopting instructions to address exceptions to
the requirement to provide financial information regarding a
significant obligor. For example, no financial information is required
if the obligations of the significant obligor as they relate to the
pool assets are backed by the full faith and credit of the United
States. Similarly, no financial information is required if the
obligations of the significant obligor as they relate to the pool
assets are backed by the full faith and credit of a foreign government,
if the pool assets are investment grade securities. Otherwise,
information required by paragraph (5) of Schedule B of the Securities
Act \322\ regarding the foreign government can be incorporated by
reference from a Commission filing.\323\ If the significant obligor was
an asset-backed issuer and the pool assets relating to the significant
obligor were asset-backed securities, rather than financial information
disclosure is required pursuant to Items 1104-1115, 1117 and 1119 of
Regulation AB regarding such asset-backed securities. However, if the
disclosure about the asset-backed securities is required in a Form 10-K
or Form 10-D, the information required by General Instruction J. of
Form 10-K regarding such asset-backed securities is to be provided
instead for the period for which the last Form 10-K of the asset-backed
securities was due (or would have been due if such asset-backed
securities are not subject to Exchange Act reporting requirements).
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\322\ 15 U.S.C. 77aa.
\323\ For example, a Form 18-K (17 CFR 249.318) or a Securities
Act registration statement or filed prospectus.
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8. Credit Enhancement and Other Support
The definition of asset-backed security contemplates the inclusion
of ``rights or other assets designed to assure the servicing or timely
distribution of proceeds to security holders.'' Credit enhancement or
other support for asset-backed securities can be provided in a variety
of ways, including features internally structured into the transaction
to provide support as well as externally provided enhancement or
support.
We proposed a unified disclosure item for all such methods of
enhancement and support, to the extent material, regardless of form. As
we noted in the Proposing Release, our disclosure requirements were
intended to cover all providers of external credit or liquidity
enhancement, including insurance or guarantees, counterparties to swap
or hedging arrangements, interest rate exchange arrangements, interest
rate cap or floor arrangements, currency exchange arrangements or
similar arrangements, and any other parties providing external credit
enhancement or other support for payments on the asset-backed
securities. Enhancement may support payment on the pool assets or
payments on the asset-backed securities themselves.
In addition, similar to significant obligors and consistent with
existing practice, we proposed that if the enhancement or other support
by a particular entity or group of affiliated entities reached a
certain level of concentration, additional disclosures, including
financial disclosures, would be required. We also proposed a unified
method for determining concentration based on whether the enhancement
or support provider was liable or contingently liable to provide
payments regarding cash flows supporting any offered class of asset-
backed securities. Similar to significant obligors and existing
practice, we proposed 10% and 20% breakpoints for determining the level
of financial information that would be required.
We received substantial comment on our proposed unified approach.
While generally agreeing with the proposal for most forms of
enhancement or support, such as guarantees and bond insurance, many
commenters believed the proposed approach was not appropriate for
determining financial significance for all forms of such enhancement or
support, in particular for counterparties of certain derivative
instruments such as interest rate and currency swaps.\324\ According to
the commenters, this is because for some swaps, such as uncapped
interest rate or currency swaps, a test based on contingent liability
would require a measurement against maximum potential exposure, which
would always result in financial disclosures regarding the swap
counterparties. Such a result, the commenters argued, was against
prevailing market practice and would be burdensome.
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\324\ See, e.g., ABA; ASFA; ASF; Auto Group; BMA; Capital One;
ESF; JPMorganChase; MBNA; NYCBA; Sallie Mae; and TMCC.
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Several commenters suggested treating such derivative instruments
differently from other forms of enhancement or support and suggested
alternatives, such as using alternate tests for significance or
alternate disclosures in lieu of any significance test. After
evaluating the comments, we are separating the treatment and method of
determining disclosure for such counterparties from other providers of
enhancement or support for the ABS.\325\ Derivatives, such as interest
rate and currency swaps, that are used to alter the payment
characteristics of the cashflows from the issuing entity and whose
primary purpose is not to provide credit enhancement related to the
pool assets or the ABS will have their own disclosure item and
disclosure breakpoints. As noted in Section III.A.2.a., however, there
are certain derivative instruments that could be structured such that
their primary purpose is to provide credit enhancement for asset-backed
securities.\326\ These derivatives will continue to be treated the same
as other forms of enhancement or support, as proposed.\327\
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\325\ As with significant obligors, however, if the same party,
or its affiliate, is providing multiple forms of enhancement or
support, the exposure is to be aggregated and considered together in
determining significance levels.
\326\ See, e.g., note 68 above.
\327\ As discussed in Section III.A.2.a., synthetic
securitization transactions do not qualify for the ABS regime we
adopt today. If a registration and disclosure framework is developed
for synthetic securitizations, the approach for valuing and
disclosure required regarding a swap or a derivative in that
transaction may differ from either of these two approaches.
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i. Forms of Enhancement and Support Other Than Certain Derivative
Instruments
Accordingly, with the exception of the derivative instruments as
discussed above, we are adopting our proposed disclosure item for other
methods of enhancement or support substantially as
[[Page 1549]]
proposed.\328\ As proposed, the final item will encompass disclosure,
to the extent material, regarding any of the following: \329\
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\328\ See Item 1114 of Regulation AB.
\329\ As we stated in the Proposing Release, in addition to the
level of disclosure required, credit enhancement may raise questions
as to whether a separate security is involved that needs to be
separately registered. For example, a guarantee of a security,
rather than on the underlying assets, would be a separate
``security'' under Section 2(a)(1) of the Securities Act (15 U.S.C.
77b(a)(1)) and must be covered by a Securities Act registration
statement filed by the guarantor, as issuer, unless exempt from
registration.
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Any external credit enhancement designed to ensure that
the asset-backed securities or pool assets will pay in accordance with
their terms, such as bond insurance, letters of credit or guarantees;
Any mechanisms to ensure that payments on the asset-backed
securities are timely, such as liquidity facilities, lending
facilities, guaranteed investment contracts and minimum principal
payment agreements;
Any derivatives whose primary purpose is to provide credit
enhancement related to pool assets or the asset-backed securities;
\330\ and
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\330\ Instruction to both Item 1114(a) and Item 1115 of
Regulation AB provide that those items should not be construed as
allowing anything other than an asset-backed security whose payment
is based primarily by reference to the performance of the
receivables or other financial assets in the asset pool. Derivatives
that are not related to the financial assets, such as credit default
swaps or other derivatives designed to create a synthetic exposure
to an external asset or index, are not permitted under the
definition of ``asset-backed security.'' See, e.g., note 67 and the
accompanying text.
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Any internal credit enhancement structured into the
transaction to increase the likelihood that one or more classes of
asset-backed securities will pay in accordance with their terms, such
as subordination provisions, overcollateralization, reserve accounts,
cash collateral accounts or spread accounts.
Disclosure of the material terms of the agreement to provide such
enhancement or support is required, including any limits on the timing
or amount of the enhancement or any conditions that must be met before
the enhancement can be accessed. Provisions regarding substitution of
enhancement also must be disclosed. The agreement relating to the
material enhancement or support must be filed as an exhibit to the
filing.
If an entity or group of affiliated entities providing enhancement
or other support as listed above is liable or contingently liable to
provide payments representing 10% or more of the cash flow supporting
any offered class of asset-backed securities, additional information,
both descriptive and financial, will be required. In addition to the
identity of the enhancement provider, the descriptive information
includes its organizational form and the general character of its
business.
Regarding the level of financial information required, we are
adopting the proposed 10% and 20% breakpoints currently used. In
particular, if any entity or group of affiliated entities that provided
enhancement or other support for the asset-backed securities is liable
or contingently liable to provide payments representing 10% or more,
but less than 20%, of the cash flow supporting any offered class of the
asset-backed securities, selected financial data required by Item 301
of Regulation S-K must be provided. If the entity or group of
affiliated entities is liable or contingently liable to provide
payments representing 20% or more of the cash flow supporting any
offered class of the asset-backed securities, audited financial
statements meeting the requirements of Regulation S-X are required. As
with financial disclosure regarding significant obligors, Section
III.B.10. discusses alternative methods that may be available to
incorporate the information by reference. We also are adopting similar
instructions if the obligations of the enhancement provider are backed
by the full faith and credit of the United States or certain foreign
governments.\331\
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\331\ We also are providing separate instructions in Items 1114
and 1115, similar to the instruction for significant obligors, if
the enhancement provider is a foreign business.
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In response to comment, we also are adopting an instruction if the
enhancement provider is a guarantee agency under the Higher Education
Act of 1965 for student loans under the Federal Family Education Loan
Program (FFELP).\332\ Due to the structure of the FFELP program,
including reinsurance by the U.S. Department of Education, alternate
statistical information about a significant guarantee agency has been
permitted by the staff in lieu of the financial information discussed
above. Accordingly, the instruction provides that if the pool assets
are FFELP student loans and the enhancement provider for the pool
assets is a guarantee agency under the Higher Education Act, the
following information may be provided instead: \333\
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\332\ See, e.g., Letter of Sallie Mae.
\333\ Of course, as with other parties, to the extent disclosure
of additional information about the guarantee agency would be
necessary to make the required disclosure, in the light of the
circumstances under which they are made, not misleading, such
disclosure also would be required. See note 252 above.
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The number of pool assets and aggregate outstanding
principal balance of pool assets guaranteed by the guarantee agency
(both by number and percentage of the asset pool as of the cut-off date
or other applicable date).
Disclosure of the following with respect to the guarantee
agency, as applicable, including a brief description regarding the
method of calculation, covering at least five federal fiscal years:
Aggregate principle amount of all student loans
guaranteed.
Reserve ratio.
Recovery rate.
Loss rate.
Claims rate.
ii. Derivative Instruments Whose Primary Purpose Is Not To Provide
Credit Enhancement
As discussed above, we are adopting a separate disclosure item for
derivatives, such as interest rate and currency swaps, that are used to
alter the payment characteristics of the cashflows from the issuing
entity and whose primary purpose is not to provide credit
enhancement.\334\ For all such instruments, basic information about the
derivative counterparty is required, including the name of the
counterparty, its organizational form and the general character of its
business. Disclosure of the material terms of the instrument is
required, including any limits on the timing or amount of payments or
any conditions to payments. Provisions regarding substitution of the
instrument also must be disclosed. The agreement relating to derivative
instrument must be filed as an exhibit.
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\334\ See Item 1115 of Regulation AB.
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With respect to determining whether additional financial
information is required regarding the derivative counterparty, several
commenters noted that participants in the derivatives markets routinely
evaluate the maximum probable exposure of a counterparty, such as in
order to make a credit decision as to counterparty risk or set required
collateral levels.\335\ These commenters believed that a similar
approach should be used for measuring the financial significance of
derivatives subject to our new disclosure item. Such an approach, these
commenters argued, would be more consistent with how the market
estimates the significance of such instruments.
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\335\ See, e.g., Letter of ABA; ASF; and BMA.
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We are adopting this approach. The measurement of the significance
of the derivative is to be determined based on a reasonable good-faith
estimate of maximum probable exposure, made in substantially the same
manner as that
[[Page 1550]]
used in the sponsor's internal risk management process in respect of
similar instruments. The resulting estimate is to be measured against
the aggregate principal balance of the pool assets. However, if the
derivative only relates to one or more ABS classes, the estimate is to
be measured against the aggregate principal balance of those classes.
For all such instruments, disclosure will be required regarding
this significance measurement. At a minimum, disclosure is required as
to whether the resulting significance percentage is less than 10%, at
least 10% but less than 20%, or 20% or more. Further, if the
significance percentage is 10% or more, we continue to believe that
additional financial information should be provided, consistent with
the approach for other third parties that may provide support for the
ABS cashflows. In particular, if the significance percentage is at
least 10%, but less than 20%, selected financial data required by Item
301 of Regulation S-K must be provided. If the significance percentage
is 20% or more, audited financial statements meeting the requirements
of Regulation S-X are required. As with disclosure for enhancement
providers, alternative methods discussed in Section III.B.10. may be
available to incorporate the information by reference.
9. Other Basic Disclosure Items
a. Tax Matters
Consistent with our proposal and existing practice, a brief, clear
and understandable summary will be required of: \336\
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\336\ See Item 1116 of Regulation AB.
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The tax treatment of the asset-backed securities
transaction under federal income tax laws.
The material federal income tax consequences of
purchasing, owning and selling the asset-backed securities. In
addition, if any of the material federal income tax consequences are
not expected to be the same for investors in all classes offered by the
registration statement, the material differences must be described.
The substance of counsel's tax opinion, including
identification of the material consequences upon which counsel has not
been asked, or is unable, to opine.
As we explained in the Proposing Release, the filing and disclosure of
tax opinions is a frequent topic of staff comment. The requirements
with respect to tax opinions in ABS transactions have long been
generally consistent with the requirements for non-ABS
transactions.\337\ For example, when using a ``short form'' tax opinion
where disclosure in the prospectus or prospectus supplement is to
constitute counsel's opinion, the tax opinion filed as an exhibit to
the registration statement or filed on a Form 8-K and incorporated by
reference must confirm or adopt the statements in the prospectus
discussion as counsel's opinion. It is not sufficient for the tax
opinion to merely state that the disclosure in the prospectus is
accurate in all material respects. Registrants and their counsel should
take care in preparing and describing tax opinions consistent with
practices required for Securities Act registration statements.\338\
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\337\ See also note 133.
\338\ See Item 601(b)(8) of Regulation S-K.
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b. Legal Proceedings
In lieu of Item 103 of Regulation S-K, we are adopting,
substantially as proposed, a more tailored disclosure item for material
legal proceedings with respect to asset-backed securities.\339\ Under
the final disclosure item, a brief description will be required
regarding any legal proceedings pending against the sponsor, depositor,
trustee, issuing entity, servicer meeting the thresholds of Item
1108(a)(3) of Regulation AB \340\ or 20% or more originator, or of
which any property of the foregoing is the subject, that is material to
security holders. Consistent with longstanding requirements under
existing Item 103 of Regulation S-K, similar information will be
required as to any such proceedings known to be contemplated by
governmental authorities.
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\339\ See Item 1117 of Regulation AB.
\340\ I.e., master servicer, each affiliated servicer, each
unaffiliated servicer that services 20% or more of the pool assets
and any other servicer that performs a material aspect of the
servicing of the pool assets.
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c. Affiliations and Certain Relationships and Related Transactions
As we explained in the Proposing Release, there often can be
several affiliations between parties in an ABS transaction. For
example, the servicer is often an affiliate of the sponsor. We are
adopting as proposed a requirement to describe whether, and if so, how,
the sponsor, depositor or issuing entity is an affiliate of any of the
following parties: Servicer meeting the thresholds of Item 1108(a)(3)
of Regulation AB, trustee, originator of at least 10% of the pool
assets, significant obligor, significant provider of enhancement or
other support or other material party identified with respect to the
transaction. Disclosure also will be required, to the extent known and
material, of any affiliate relationships among any of the parties
listed above.\341\
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\341\ For the definition of affiliate, see note 147 above and
accompanying text.
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We also are adopting disclosure requirements regarding material
related party transactions between the sponsor, depositor or issuing
entity and the above-referenced entities.\342\ As under the proposal,
two aspects of disclosure in this area are required. First, disclosure
is required regarding whether there is, and if so, the general
character of, any business relationship, agreement, arrangement,
transaction or understanding entered into outside the ordinary course
of business or on terms other than would be obtained in an arm's length
transaction with an unrelated third party, apart from the asset-backed
securities transaction, between the sponsor, depositor or issuing
entity and any of the above referenced parties that either currently
exists or that existed during the past two years that is material to an
investor's understanding of the asset-backed securities. An instruction
to the item clarifies that what is required is information material to
an investor's understanding of the asset-backed securities, not a
detailed description or itemized listing of all commercial
relationships among the parties. Instead, the disclosure should
indicate whether any relationships outside of the asset-backed
securities transaction do exist that meet the specified standard,
including materiality to an understanding of the asset-backed
securities, and the general character of those relationships.
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\342\ See Item 1119 of Regulation AB.
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We have revised the disclosure item to clarify further the second
aspect of the related party disclosure that we proposed and that will
be required under the Item, which is disclosure regarding specific
material relationships involving or related to the current ABS
transaction and the pool assets. Unlike non-ABS or pool asset specific
relationships the general character of which only need be described if
outside the ordinary course of business or not on arm's length terms,
there is no such limiter for relationships specific to the transaction,
other than materiality. An ABS or pool asset specific transaction with
a related party may still be material even if made in the ordinary
course of business or on arm's length terms. For any ABS or pool asset
specific transaction, the material terms and approximate dollar amount
involved
[[Page 1551]]
will need to be described, to the extent material.\343\
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\343\ Some of these relationships may be disclosed already under
other Regulation AB items. Duplicate disclosure is not required.
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We are not including a reference to underwriters in this disclosure
item, including the proposed example of material credit arrangements
relating to the pool assets provided by an underwriter, because
existing Item 508 of Regulation S-K \344\ already requires disclosure
of material relationships with such parties.\345\ We would expect
comparable disclosure of relationships and transactions between the
sponsor, depositor and issuing entity and an underwriter, where
material, in connection with that information.
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\344\ 17 CFR 229.508.
\345\ We note that the requirement in Item 508 of Regulation S-K
for material relationships is also not limited to transactions
outside the ordinary course or not on arm's length terms. Where
material, such relationships are to be described.
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d. Ratings
We are adopting our disclosure Item regarding ratings as
proposed.\346\ As proposed, the Item codifies current industry practice
by requiring disclosure of whether the issuance or sale of any class of
the offered securities is conditioned on the assignment of a rating by
one or more rating agencies, whether or not NRSROs.\347\ If so, each
rating agency must be identified as well as the minimum rating that
must be assigned. A description regarding any arrangements to have such
rating monitored while the securities are outstanding also is required.
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\346\ See Item 1120 of Regulation AB. For additional information
regarding the Commission's current review of the role of credit
rating agencies in the operation of the securities markets,
including whether credit ratings should continue to be used for
regulatory purposes under the federal securities laws, see note 137
above and accompanying text.
\347\ As proposed, we are not codifying one of the items
specified for disclosure in the 1992 Release, which was an
explanation of what an NRSRO rating addresses and the
characteristics the rating does not address. We believe this issue
no longer requires general clarification with respect to the ABS
market.
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e. Reports and Additional Information
Post-issuance reporting of information regarding an ABS transaction
is important to an understanding of transaction performance and, hence,
investment decisions, including whether existing holders should sell
their securities and whether prospective buyers should purchase them.
Such disclosures in the ABS context generally involve both updated
information about pool performance as well as information on
allocations and distributions of cash flows to holders of the
securities and other third parties according to the flow of funds.
Investors necessarily consider the availability and quality of
transaction reporting in determining whether, and at what level, to
invest in such securities.
In addition to disclosure regarding reports to be filed with the
Commission, we are adopting our proposed requirement for disclosure of
the reporting investors can expect to receive and be able to
access.\348\ This disclosure is to include a description of the reports
or other documents required under the transaction agreements, including
the information to be included in the reports, the schedule and manner
of their distribution or availability and who will prepare the reports.
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\348\ See Item 1118 of Regulation AB.
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We also are adopting our proposed requirement to disclose whether
Web site access will be provided to Commission and transaction
reports.\349\ Commenters supported this proposal.\350\ Disclosure is to
be provided in the prospectus regarding whether the issuing entity's
annual reports on Form 10-K, distribution reports on Form 10-D, current
reports on Form 8-K and amendments to those reports filed or furnished
with the Commission will be made available on the Web site of a
specified transaction party (e.g., sponsor, depositor, servicer,
issuing entity or trustee) as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the Commission.
As the Commission specified in its release adopting similar disclosure
for accelerated filers, we interpret the ``as soon as reasonably
practicable'' standard to mean that the report would be available,
barring unforeseen circumstances, on the same day as filing.\351\ In
addition, disclosure will be required regarding:
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\349\ ``Accelerated filers,'' as defined in 17 CFR 240.12b-2,
already are required to include similar disclosure in their annual
reports on Form 10-K. See Item 101(e)(4) of Regulation S-K.
\350\ See, e.g., Letter of ABA.
\351\ See Release No. 33-8128 (Sep. 5, 2002) [67 FR 58480].
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Whether other reports to security holders or information
about the asset-backed securities will be made available in this
manner;
If filings and other reports will be made available in
this manner, the Web site address where such filings may be found; and
If filings and other reports will not be made available in
this manner, the reasons why they will not and whether an identified
transaction party voluntarily will provide electronic or paper copies
of those filings and other reports free of charge upon request.
The guidance provided in the Commission's release adopting similar
disclosure for accelerated filers, such as how the Web site access can
be provided, will be equally applicable to this disclosure.\352\ In
addition, the inclusion of the Web site address in response to the
disclosure requirement will not, by itself, include or incorporate by
reference the information on the site into the prospectus or
registration statement, unless the registrant otherwise acts to
incorporate the information by reference.\353\ Similarly, the
disclosure requirement is not designed to create new duties under the
antifraud provisions of the federal securities laws or in private
rights of action or to alter any existing liability provisions. For
example, the new disclosure will not separately create or otherwise
affect any duty to update prior statements.
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\352\ Id.
\353\ In Release No. 33-7856 (Apr. 28, 2000) [65 FR 25843], we
provided interpretive guidance on the effect of including a Web site
address in other situations. We are not changing that guidance for
those other situations. See also Section III.B.4. and note 282
above.
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10. Alternatives to Present Third Party Financial Information
As discussed in Sections III.B.7. and 8., there are instances both
today and under our final rules when additional financial information
regarding third parties is required in ABS filings, including financial
information about significant obligors and significant providers of
enhancement or other support. Over time, through several no-action
letters and interpretations, the staff has permitted alternative
methods to present or refer to this information if it exists in other
Commission filings of the third party. The first alternative allows
incorporation by reference of the third party's financial information
into the ABS filing. The second alternative, available only with
respect to certain unrelated significant obligors, allows an ABS filing
to reference the significant obligor's Exchange Act reports on file
with the Commission in lieu of providing the information. We proposed
codifying both of these alternatives.
Commenters expressed support for the flexibility provided by these
proposed alternatives,\354\ and we are adopting both substantially as
proposed. As stated in the Proposing Release, both alternatives relate
only to the presentation of financial information regarding the third
party. Information specific to the asset-backed securities transaction,
such as the material terms of the pool assets in the case of
[[Page 1552]]
significant obligors or the enhancement in the case of an enhancement
provider, will still be required as is the case today.
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\354\ See, e.g., Letters of ABA and BMA.
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a. Incorporation by Reference
The first alternative is derived from several staff no-action
letters that permit the incorporation by reference of financial
information regarding certain bond insurers from their or their
affiliated entities' Exchange Act reports.\355\ We are codifying an
expansion of these positions substantially as proposed to permit
incorporation by reference (by means of a statement in the ABS filing
to that effect) of the required financial information of any
enhancement provider from its Exchange Act reports (or the reports of
the entity that consolidates such party), if the following conditions
are met: \356\
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\355\ See Financial Security Assurance, Inc. (Jul. 16, 1993);
MBIA Insurance Corp. (Sep. 6, 1996); and AMBAC Indemnity Corp. (Dec.
19, 1996).
\356\ If the conditions are not met, the required information
will need to be provided in the filing.
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The third party or entity that consolidates the third
party in its financial statements is subject to the Exchange Act
reporting requirements;
The third party or entity that consolidates the third
party in its financial statements is current with its Exchange Act
reporting for the past twelve months (or such shorter period that it
has been required to file reports); \357\
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\357\ An instruction provides that, if neither the third party
nor any of its affiliates has had a direct or indirect agreement,
arrangement, relationship or understanding, written or otherwise,
relating to the ABS transaction, and neither the third party nor any
of its affiliates is an affiliate of the sponsor, depositor, issuing
entity or underwriter of the ABS transaction, then this condition is
qualified by the knowledge of the ABS registrant.
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The reports to be incorporated by reference include (or
properly incorporate by reference) the financial statements of the
third party; and \358\
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\358\ An instruction provides that, if incorporation by
reference is being used with respect to information about a
significant obligor that is an asset-backed issuer and the pool
assets relating to the significant obligor are asset-backed
securities, then the term ``financial statements'' means the
information about the asset-backed securities discussed in Section
III.B.7 (e.g., Item 3.(a) of Item 1112 of Regulation AB for a
registration statement or Rule 424 prospectus, and Item 3.(b) of
Item 1112 of Regulation AB for a Form 10-K or 10-D). The instruction
also provides that information required by Instruction 3.a. of Item
1112 may be incorporated by reference from a prospectus included in
an effective Securities Act registration statement or filed pursuant
to Rule 424.
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If incorporated by reference into in a prospectus or
registration statement, the prospectus also states that all documents
subsequently filed by such third party, or the entity that consolidates
the third party, prior to the termination of the offering also will be
deemed to be incorporated by reference into the prospectus.
As proposed, this option also is available under the same conditions to
include the information required of any significant obligor.
Because we are expanding the basic definition of asset-backed
security to registered offerings on Form S-1, we also are permitting
incorporation by reference of third party financial information for ABS
offerings registered on that form, as proposed. In addition, several
amendments to our existing incorporation by reference and updating
rules are necessary to reflect incorporation by reference of
information of third party filings in Securities Act registration
statements.\359\ For example, if the registrant is relying on the
incorporation by reference alternative for third party financial
information, it will need to make an undertaking in its registration
statement, similar to that required for existing registration
statements that rely on incorporation of subsequent Exchange Act
reports of the registrant,\360\ that, for purposes of determining any
liability under the Securities Act, each filing of the annual report of
the third party that is incorporated by reference in the registration
statement will be deemed to be a new registration statement relating to
the securities offered by that registration statement, and the offering
of such securities at that time will be deemed to be the initial bona
fide offering thereof.
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\359\ See, e.g., amendments to Items 10 and 512 of Regulation S-
K and Securities Act Rule 411.
\360\ See, e.g., Item 512(c) of Regulation S-K.
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As proposed, we also are adding three instructions to remind
registrants of our other existing incorporation by reference and
updating requirements. The first instruction reminds ABS issuers that
in addition to the conditions above, any information incorporated by
reference must comply with any other applicable Commission rules
pertaining to incorporation by reference.\361\ The second instruction
reminds issuers that any applicable requirements under the Securities
Act or our rules and regulations regarding the filing of a written
consent for the use of incorporated material also applies to the
material incorporated by reference.\362\ These consent requirements
reflect the application of longstanding requirements under the
Securities Act.\363\ The third instruction reminds issuers that any
undertakings set forth in Item 512 of Regulation S-K apply to any
material incorporated by reference in a registration statement or
prospectus.
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\361\ Other such rules include Rule 10(d) of Regulation S-K;
Rule 303 of Regulation S-T (17 CFR 232.303); Rule 411 of Regulation
C; and Exchange Act Rules 12b-23 and 12b-32 (17 CFR 240.12b-23 and
17 CFR 240.12b-32).
\362\ See, e.g., Securities Act Rule 439 (17 CFR 230.439).
\363\ See, e.g., Section 7 of the Securities Act (15 U.S.C.
77g).
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b. Reference Information
The second alternative to presenting third party financial
information is derived from several staff no-action letters and
interpretive positions that permit reference to the Exchange Act
reports of a significant obligor in lieu of inclusion of the obligor's
financial information in the filing or incorporating them by
reference.\364\ In particular, these positions recognize the practical
difficulties that may be involved in obtaining the required information
or the necessary consent to use the information, or the ability to
evaluate the information, from an unaffiliated significant obligor
whose securities have been securitized without any obligor involvement
in the ABS transaction. A common example of such a situation is a
sponsor that acquires outstanding corporate debt securities of other
issuers in purely secondary market transactions (i.e., there is no
relationship to the issuer or the issuer's distribution) and
securitizes them in a transaction where one or more of these issuers is
a significant obligor.
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\364\ See, e.g., Morgan Stanley & Co., Inc. (Jun. 24, 1996).
This letter related to non-ABS rather than ABS, but the concept has
been subsequently extended to ABS by the staff. See Section
VIII.B.3.b.i. of the Division of Corporation Finance's ``Current
Issues and Rulemaking Projects'' (Nov. 14, 2000).
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Under our final rules, an ABS filing may include a reference to a
significant obligor's Exchange Act reports (which would include a
statement of how those reports may be accessed, including the third
party's name and Commission file number) in lieu of providing the
required financial information in the filing, if the following
conditions are met: \365\
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\365\ Like the incorporation by reference alternative, the
reference alternative will be available to ABS offerings registered
on Form S-1.
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Neither the significant obligor nor any of its affiliates
has had a direct or indirect agreement, arrangement, relationship or
understanding, written or otherwise, relating to the asset-backed
securities transaction, and neither the third party nor any of its
affiliates is an affiliate of the sponsor, depositor, issuing entity or
underwriter
[[Page 1553]]
of the asset-backed securities transaction; \366\ and
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\366\ See Section III.A.6. as to registration and resulting
disclosure issues if the ABS transaction also comprises a
distribution of underlying securities. These registration and
disclosure issues are not dependent on whether the issuer of the
underlying securities is a significant obligor. The reference
alternative is not available with respect to information about the
issuer of the underlying securities if registration is required
pursuant to Securities Act Rule 190.
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To the knowledge of the registrant, the significant
obligor meets at least one of the eligibility categories discussed
below.
The first condition clarifies that the significant obligor must be
unaffiliated and otherwise not involved with the ABS transaction.\367\
While some commenters suggested expanding existing practice to allow
the reference alternative for all third parties, regardless of their
affiliation or involvement with the transaction, we are not persuaded
that it is appropriate at this time to expand existing practice.\368\
As we explained in the Proposing Release, if the obligor was affiliated
or involved with or participating in the ABS transaction, the policy
argument to permit reference to the third party's reports in lieu of
presenting the information or incorporating it by reference because of
the potential impracticality in obtaining it is not present. As a
result, the reference alternative will continue to be unavailable for
financial information regarding such parties, including significant
enhancement providers due to their involvement in the transaction.
Instead, the information must either be included in the filing or, if
the conditions in Section III.B.10.a. are met, incorporated by
reference.
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\367\ Of course, if the registrant is in possession of material
nonpublic information about the third party being referenced, such
information must be disclosed. The absence of such material
nonpublic information was a determining factor in the original staff
no-action letters on this topic.
\368\ See, e.g., Letters of ABA and NYCBA.
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The second condition refers to the categories of significant
obligors eligible for the reference alternative. Consistent with
existing staff positions and market practice, the eligible categories
relate to the existing Form S-3 eligibility requirements of the
significant obligor. For example, the first category is a significant
obligor eligible to use Form S-3 or F-3 for a primary offering of non-
investment grade securities pursuant to General Instruction I.B.1 of
such forms, which requires a $75 million public float.\369\ A second
category is a significant obligor eligible to register the related pool
assets under General Instruction I.B.2 of Form S-3 or F-3 (i.e., the
pool assets relating to the significant obligor are non-convertible
investment grade securities). A third and fourth category relate to
pool assets guaranteed by a parent or subsidiary of the significant
obligor where both the information requirements under Rule 3-10 of
Regulation S-X \370\ and applicable Form S-3 or Form F-3 eligibility
requirements (such as General Instruction I.C.3 of Form S-3) are met.
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\369\ Public float is the aggregate market value of a company's
outstanding voting and non-voting common equity (i.e., market
capitalization) minus the value of common equity held by affiliates
of the company. See General Instruction I.B.1 to Form S-3.
\370\ 17 CFR 210.3-10.
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A fifth category relates to significant obligors that are U.S.
government-sponsored enterprises. Several GSE's historically have not
been subject to Exchange Act reporting requirements. The staff has made
accommodations for securitizations of the securities issued or
guaranteed by these entities so long as the GSE's have outstanding
securities held by non-affiliates with a market value of $75 million or
more and publicly make available audited financial statements prepared
in accordance with generally accepted accounting principles and
extensive business information. As proposed, the final Item clarifies
the meaning of this requirement by permitting reference if the GSE had
$75 million outstanding of securities held by non-affiliates and the
GSE makes information publicly available on an annual and quarterly
basis, including audited financial statements prepared in accordance
with generally accepted accounting principles covering the same periods
that would be required for audited financial statements under
Regulation S-X and non-financial information consistent with that
required by Regulation S-K.
A final category relates to significant obligors where the pool
assets in question are themselves asset-backed securities. As proposed,
reference is permitted in this instance if the significant obligor is
filing Exchange Act reports and is current in such reporting for at
least twelve calendar months and any portion of a month immediately
preceding the filing referencing the obligor's reports (or such shorter
period that the obligor was required to file such materials). We also
are adding an instruction that if the reference alternative is being
used for purposes of a registration statement under the Securities Act
or the Exchange Act or a prospectus to be filed pursuant to Rule 424, a
reference also must be included to the final prospectus or effective
registration statement for the third party asset-backed securities that
contains the information about the asset-backed securities discussed in
Section III.B.7.\371\
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\371\ E.g., the information required by Item 3.(a) of Item 1112
of Regulation AB.
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As we noted in the Proposing Release, because of the possibility
that corporate debt issuers can suspend their Exchange Act reporting
requirements, the staff has acceded to the requests of ABS issuers
securitizing such debt to include a provision that, if an ABS issuer is
unable or unwilling to provide the significant obligor's financial
information, the transaction, or the portion of the transaction, will
terminate, such as by distributing the pool assets to investors or
selling the pool assets and liquidating the asset-backed securities.
This option to terminate the transaction was suggested by market
participants who believed that the alternative of including the
necessary information in the ABS filing might become impractical or
impossible. Consistent with this practice, our proposal would have
allowed termination as an alternative to providing the information.
Several commenters objected to codifying this position.\372\
However, many of these commenters appeared to be under the belief that
the existing option to terminate the transaction was a staff
requirement that was proposed to be codified. The underlying
requirement has been and remains that because of the concentration of
the significant obligor in the asset pool, financial information about
that significant obligor is required. The reference alternative, like
the incorporation by reference alternative, represents an alternative
that may be available to present that disclosure. Each alternative is
subject to conditions, including that the third party is reporting
under the Exchange Act. If the third party ceases to report, the
reference or incorporation by reference alternative will no longer be
available because the obligor will no longer file reports with the
Commission, but the requirement to provide the financial information
about the significant obligor remains.\373\ Through the course of
reviews of registration statements by the staff, ABS issuers decided to
include termination provisions in their transaction
[[Page 1554]]
structures to address their unwillingness to provide the information if
the reference alternative was no longer available.
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\372\ See, e.g., Letters of ABA; ASF; BMA; and NYCBA.
\373\ For example, if the information is available from another
source (e.g., a Web site), while the incorporation by reference or
reference alternative would not be available, the ABS issuer could
physically include the information in its Exchange Act report.
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To avoid confusion, we are not codifying the proposed undertaking
that references the termination option in lieu of providing the
information if the reference alternative is not available. As before,
issuers can still structure their securities to provide for termination
if they are unwilling or unable to provide the required financial
information.\374\ However, we are not providing an exception to the
requirement to provide the required financial information if the
underlying issuer ceases reporting. The need for the information about
the underlying issuer in the reports for the asset-backed securities
does not change due to a change in the reporting status of the
underlying issuer.
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\374\ Disclosure of such provisions should be made clear to
investors. In addition, as we stated in the Proposing Release, if
the termination option was elected, the transaction, or that portion
of the transaction, must terminate before updated information
regarding the third party would be required. Provisions that the
transaction would terminate ``in a reasonable time'' or after a
given period of time would not be an alternative to providing the
required information, just as such delays would not be available
with respect to providing the required information itself.
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C. Communications During the Offering Process
1. ABS Informational and Computational Material
a. Current Requirements
As we explained in the Proposing Release, the Securities Act
currently restricts the types of offering communications that a
registrant or other parties subject to the Act's provisions (such as
underwriters) may use during a registered public offering.\375\ The
nature of the restrictions depends on the period during which the
communications are to occur. Before the registration statement is
filed, all offers, in whatever form, are prohibited.\376\ Between the
filing of the registration statement and its effectiveness, offers made
in writing (including by e-mail or Internet), by radio or by television
are limited to a ``statutory prospectus'' that conforms to the
information requirements of Section 10 of the Securities Act.\377\ As a
result, the only written material that is permitted in connection with
the offering of the securities during this period is a preliminary
prospectus meeting the requirements of Section 10, which must be filed
with the Commission.\378\ Even after the registration statement is
declared effective, offering participants may still make written offers
only through a statutory prospectus, except that they may use
additional written offering materials, if a final prospectus that meets
the requirements of Section 10(a) of the Securities Act precedes or
accompanies those materials.\379\
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\375\ See Section 5 of the Securities Act (15 U.S.C. 77e). For
more information on the background and current operation of
Securities Act communication requirements, as well as our recent
proposals in this area, see the Offering Process Release.
\376\ See Section 5(c) of the Securities Act (15 U.S.C. 77e(c)).
\377\ 15 U.S.C. 77j. See Section 5(b)(1) of the Securities Act
(15 U.S.C. 77e(b)(1)).
\378\ Oral offers are allowed during this period and do not have
to satisfy the informational requirements of Section 10. See note
375 above.
\379\ 15 U.S.C. 77j(a). See Section 2(a)(10) (15 U.S.C.
77b(a)(10)) and Section 5(b)(1) of the Securities Act.
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The structuring of various classes of ABS can be quite complex
involving a detailed analysis of the asset pool and a complicated
allocation of pool asset cash flows. These factors may vary from
transaction to transaction. Given the important focus on tranching and
pool characteristics, including potential cash flow patterns, sponsors
or underwriters may wish to provide to potential investors
computational materials and term sheets identifying the structure and
underlying assets prior to finalizing the deal structure and printing
the final prospectus. These materials may help investors understand the
proposed transaction and analyze prepayment assumptions and other
issues affecting yield and flow of funds. This information, which often
includes detailed statistical and tabular data, would be impractical to
provide orally. Historically, few investors had the computer resources
to prepare these analytics themselves.
Following a series of staff no-action letters from the mid-1990's,
issuers of Form S-3 ABS have been permitted to use term sheets and
computational material after the effectiveness of a registration
statement but before availability and delivery of a final Section 10(a)
prospectus.\380\ Under these no-action letters, three basic types of
materials can be used: Structural term sheets; collateral term sheets;
and computational materials. Structural term sheets identify the
proposed structure of the securities being offered, such as the
parameters of the various types of classes offered. Collateral term
sheets provide information regarding the proposed underlying assets.
Computational materials contain statistical data displaying for a
particular class of asset-backed securities the yield, average life,
expected maturity, interest rate sensitivity, cash flow characteristics
or other such information under specified prepayment, interest rate,
loss or related scenarios.
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\380\ See note 34 above.
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All of the existing staff no-action letters contain filing
requirements for the use of these materials, and provide that no
confirmations of sale can be sent until the filing requirements are
met. The filing requirements vary depending upon the type of material
used and how it is used. Subject to various conditions, any collateral
term sheet used before the final prospectus is delivered that
represents a substantive change from a prior collateral term sheet must
be filed on Form 8-K within two business days after first use and
incorporated by reference into the registration statement for the
offering.
Under slightly more complex conditions, structural term sheets and
computational materials used before the final prospectus is available
must be filed on Form 8-K prior to or with the filing of the final
prospectus and incorporated by reference into the registration
statement. If the materials are provided after the final prospectus is
available but before it is delivered, they must be filed as soon as
possible but not later than two business days after first use.
Materials that relate to abandoned structures or that are furnished
before the structure of the entire issue is finalized to investors
which have not indicated their intention to purchase the ABS need not
be filed.
Commenters confirmed our understanding that where they are used,
term sheets and computational material often represent the primary, if
not the only, written materials that currently are used to offer asset-
backed securities.\381\ As we stated in the Proposing Release, we also
understand that advances in technology over the decade since the first
no-action action letter was issued have raised several interpretive
issues regarding the scope and application of the letters. For example,
an increasing number of investors possess or have access to the
analytical capacity to perform their own models and scenarios on pool
data and therefore may request data at the individual pool asset level,
or ``loan level'' data, instead of summarized charts and tables.\382\
There had been some concern over whether the existing no-action letters
would have permitted disclosure at this level of granularity. In
addition, various third party services have developed over the past
decade that allow issuers and underwriters to import collateral and
[[Continued on page 1555]]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
]
[[pp. 1555-1604]] Asset-Backed Securities
[[Continued from page 1554]]
[[Page 1555]]
structural data about a proposed transaction into a format that allows
investors to conduct their own analytics and computations with self-
selected assumptions and estimates in lieu of relying on underwriters
to perform these functions for them. This had raised questions over
what information should be filed with the Commission under the no-
action letters where such services are used.
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\381\ See, e.g., Letter of ABA.
\382\ See, e.g., ``Investors Gain Clout, Urge Specifics,''
Asset-Backed Alert, Jun. 6, 2003.
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b. Exemptive Rule
We proposed to codify the concept in the staff no-action letters
that permits the use of ABS informational and computational material
after the effectiveness of a Form S-3 registration statement for an
offering of asset-backed securities but before delivery of the final
Section 10(a) prospectus. Commenters overall supported the proposals,
although several commenters representing primarily issuers and their
representatives requested several expansions beyond the existing no-
action letter positions.\383\ For example, these commenters requested
expanding the type of materials that may be used, expanding the ability
to use materials to Form S-1 ABS offerings, allowing the use of
materials before effectiveness of the registration statement and
excluding underwriter-prepared material from filing and Securities Act
liability requirements.
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\383\ See, e.g., Letters of ABA; ASF; BMA; FSR; and NYCBA.
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As discussed previously, we recently issued expansive proposals to
revise the Securities Act regulatory process for all securities
offerings.\384\ These proposals directly address matters such as the
appropriate use, filing and liability requirements for communications
during the offering process, including whether communications prepared
by separate parties should be treated differently. As we indicated in
the Proposing Release, requests for further relaxation of the
communications restrictions in the ABS context raise broad issues that
also are implicated by the proposals in the Offering Process Release.
Given the current evaluation of these broader issues in that release,
we do not think it would be appropriate at this time to make
substantial changes to our proposed approach with respect to ABS
communications. The existing staff no-action letters already permit ABS
Form S-3 offerings to use significantly more material outside of the
statutory prospectus than non-ABS Form S-3 offerings. We plan to
address the issue of whether additional accommodations to the
communications restrictions would be appropriate, including for ABS
offerings, in connection with the Offering Process Release. Therefore,
our approach here remains codifying the longstanding existing allowance
for additional materials in the ABS context. We will evaluate the
comments we received regarding ABS communications in connection with
the Offering Process Release. We also encourage ABS market participants
to comment specifically on the proposals in that release.
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\384\ See note 33 above.
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Accordingly, today we are adopting, as proposed, an exemption from
Section 5(b)(1) of the Securities Act for the use of ABS informational
and computational materials in offerings of Form S-3 ABS after the
effectiveness of a registration statement but before delivery of the
final Section 10(a) prospectus.\385\ As we stated in the Proposing
Release, given the current use of these materials in providing an
increased flow of information to investors, the flexibility to tailor
materials to specifically identified investor needs, and the liability
for false and misleading statements or omissions, we believe permitting
the use of ABS informational and computational material for Form S-3
ABS during such period is appropriate in the public interest and
consistent with the protection of investors under the conditions
discussed below, including the filing conditions.\386\ However, as we
stated in the Proposing Release and similar to our existing
communications exemptions regarding business combination transactions,
the rule makes clear that the exemption is not available to
communications that may technically comply with the rule, but have the
primary purpose or effect of conditioning the market for another
transaction or are part of a plan or scheme to evade the requirements
of Section 5 of the Securities Act.\387\
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\385\ See Securities Act Rule 167. Similar to our existing rules
that allow communications in business combination transactions
outside of the Section 10 prospectus, for ABS informational and
computational material we are adopting a general Securities Act Rule
that sets forth the basic exemption and its conditions (Securities
Act Rule 167) and a rule under Regulation C (17 CFR 230.401 through
230.498) that sets forth the filing requirements for such
communications (Securities Act Rule 426). For more on our exemptive
rules in the business combination context, see Release No. 33-7760
(Oct. 22, 1999) [64 FR 61408].
\386\ As is the case under the existing no-action letters, such
material can be used regardless of whether a preliminary prospectus
is prepared and used.
\387\ For similar provisions, see Securities Act Rules 165 and
166 (17 CFR 230.165 and 17 CFR 230.166). We also proposed similar
provisions in the Offering Process Release.
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As proposed, the exemption continues to include filing requirements
for such material and only will be available with respect to registered
offerings of investment grade asset-backed securities that meet the
requirements of General Instruction I.B.5 of Form S-3, which is
consistent with the existing staff no-action letters. As discussed
above, we do not believe it is appropriate at this time to either
expand the exemption to additional offerings or alter the basic filing
requirements under the letters, except as discussed below regarding
consolidating those requirements, as proposed.
c. Definition of ABS Informational and Computational Material
We explained in the Proposing Release that there is an overlap in
the existing no-action letters between the descriptions of structural
term sheets, collateral term sheets and computational materials. There
also are differences regarding which and how materials are to be filed
depending on the type of materials used. These differences can create
uncertainty as to when material must be filed given the overlapping
descriptions.
We proposed consolidating the descriptions of the materials that
may be used under a single definition of ``ABS informational and
computational material.'' Although we were proposing to consolidate the
descriptions, we specifically noted that we were not intending to
change the scope of materials that may be used. Nevertheless, several
commenters were concerned that the proposed consolidated definition
could possibly be read as somehow more restrictive than the no-action
letters and suggested revisions to more closely track the descriptions
of such material in the existing no-action letters to avoid any
confusion.\388\
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\388\ See, e.g., Letters of ABA; ASF; BMA; CMSA; FSR; and NYCBA.
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We believe many of the examples provided by commenters of
information used today were already covered by the proposed
consolidated definition. However, in response to these comments and to
clarify further that we are not intending to change current practice,
we are revising the definition of ``ABS informational and computational
material'' to more closely track the descriptions in the existing staff
no-action letters. We also are adding several non-exclusive examples
provided by commenters of information provided today that may not have
been otherwise clear from the descriptions of the materials in the no-
action letters, such as information on key parties to the transaction,
to clarify the scope of
[[Page 1556]]
materials that can be used. Finally, we are expanding the scope of the
definition in response to comment to include certain basic factual
information about the offering process.\389\
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\389\ Note we also proposed to add these items to Rule 134 in
the Offering Process Release.
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As a result, ABS informational and computational material will be
defined as a written communication consisting solely of one or some
combination of the following:
Factual information regarding the asset-backed securities
being offered and the structure and basic parameters of the securities,
such as the number of classes, seniority, payment priorities, terms of
payment, the tax, ERISA and other legal conclusions of counsel, and
descriptive information relating to each class (e.g., principal amount,
coupon, minimum denomination, anticipated price, yield, weighted
average life, credit enhancements, anticipated ratings, and other
similar information relating to the proposed structure of the
offering);
Factual information regarding the pool assets underlying
the asset-backed securities,\390\ including origination, acquisition
and pool selection criteria, information regarding any prefunding or
revolving period applicable to the offering, information regarding
significant obligors, data regarding the contractual and related
characteristics of the underlying pool assets (e.g., weighted average
coupon, weighted average maturity, delinquency and loss information and
geographic distribution) and other factual information concerning the
parameters of the asset pool appropriate to the nature of the
underlying assets, such as the type of assets comprising the pool and
the programs under which the loans were originated;
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\390\ We note this may include graphical material regarding the
pool assets, such as photographs, maps and site plans in CMBS
transactions.
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Identification of key parties to the transaction, such as
servicers, trustees, depositors, sponsors, originators and providers of
credit enhancement or other support, including a brief description of
each such party's roles, responsibilities, background and experience;
Static pool data, as discussed previously, such as for the
sponsor's and/or servicer's portfolio, prior transactions or the asset
pool itself; \391\
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\391\ Such information could be provided through a Web site
address for inclusion in the ABS informational and computational
material under the same conditions specified in Section III.B.4.b.
In addition, disclosure required by Item 1105(e) of Regulation AB is
to be provided in ABS informational and computational material, if
applicable.
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Statistical information displaying for a particular class
of asset-backed securities the yield, average life, expected maturity,
interest rate sensitivity, cash flow characteristics, total rate of
return, option adjusted spread or other financial or statistical
information relating to the class or classes under specified
prepayment, interest rate, loss or other hypothetical scenarios.
Examples of such information under the definition include:
Statistical results of interest rate sensitivity analyses
regarding the impact on yield or other financial characteristics of a
class of securities from changes in interest rates at one or more
assumed prepayment speeds;
Statistical information showing the cash flows that would
be associated with a particular class of asset-backed securities at a
specified prepayment speed; and
Statistical information reflecting the financial impact of
losses based on a variety of loss or default experience, prepayment,
interest rate and related assumptions.
The names of underwriters participating in the offering of
the securities, and their additional roles, if any, within the
underwriting syndicate;
The anticipated schedule for the offering (including the
approximate date upon which the proposed sale to the public will begin)
and a description of marketing events (including the dates, times,
locations and procedures for attending or otherwise accessing them);
and
A description of the procedures by which the underwriters
will conduct the offering and the procedures for transactions in
connection with the offering with an underwriter or participating
dealer (including procedures regarding account-opening and submitting
indications of interest and conditional offers to buy).
As we stated in the Proposing Release, the definition of ABS
informational and computational material is intended to include
existing structural term sheets, collateral term sheets and
computational materials and also to clarify that several additional
items are permitted, such as static pool data and basic information
about the offering process. Consistent with the unified filing rule we
are adopting for these materials discussed below, ABS informational and
computational material may be used that includes one or more of these
basic types of materials in one set of materials without concern over
the characterization of the material or differing standards regarding
when it must be filed.\392\
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\392\ As a result, the definition subsumes the concept of
``Series Term Sheets'' addressed in the Greenwood Trust Company no-
action letter where a Series Term Sheet was defined as a combined
collateral and structural term sheet. See note 34 above.
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We also are reiterating several clarifications from the Proposing
Release regarding the scope of the materials. First, and as noted
above, some had been concerned whether the existing no-action letters
would permit ``loan level'' information to be provided. We believe
providing data at the individual pool asset level was already
consistent with the no-action letters and is permitted under the
exemptive rule. However, we again note, as we did in the Proposing
Release, that in providing such detail issuers and underwriters should
be mindful of any privacy, consumer protection or other regulatory
requirements regarding the disclosure of individual information, such
as including Social Security Numbers, especially given that in most
cases the data must be publicly filed with the Commission.
Second, questions had arisen over what information should be
considered ABS informational and computational material and filed with
the Commission under the no-action letters, and by extension our
exemptive rule, regarding investor analytics or other third party
services that allow issuers and underwriters to import into a system or
otherwise provide data regarding structure or underlying assets that
investors can then use to conduct their own analytics and computations.
As we stated in the Proposing Release, in the case of third party
services, a particular relationship with the individual third party
service may affect the analysis, such as whether the issuer or the
underwriter are affiliates with the service provider or how the
compensation is structured with the third party. Otherwise, if the
investor analytics or third party service simply allow an investor to
perform its own calculations based on collateral and structural inputs
and models provided by the issuer or underwriter, only the inputs,
models and other information provided by the issuer or underwriter
would constitute ABS informational and computational material for
purposes of the exemptive rule.\393\
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\393\ Any subsequent modification or updates to the information
provided by the issuer or an underwriter would be considered new ABS
informational and computational material no different than if a
separate set of materials were prepared. As was the case under the
no-action letters, under the final rule, data presented in ABS
informational and computational material that are to be filed may be
aggregated and filed in consolidated form, so long as any such
aggregation does not result in the omission of any information that
should have been filed or makes the information misleading.
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[[Page 1557]]
Some also had questioned the format in which the material must be
filed, as the third party service may employ a unique file format for
the data inputs. Consistent with an allowance that already existed in
the no-action letters and which will continue in the exemptive rule,
discussed below, issuers and underwriters may aggregate data presented
in ABS informational and computational material that are to be filed
and file such data in consolidated form, so long as any such
aggregation does not result in the omission of any information that
should have been filed or makes the information misleading. As we
stated in the Proposing Release, presentation of the information should
be in an understandable form. While the preference is to file material
using the same presentation used for investors, just as with other
documents that contain computer instructions or formatting code,
executable code used by a program to read the information is not to be
filed.\394\ As is the case today, issuers and underwriters should
contact the staff with any specific questions regarding the filing of
particular materials.
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\394\ See, e.g., Rule 106 of Regulation S-T (17 CFR 232.106).
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d. Conditions for Use
As proposed, the final rule requires two conditions for ABS
informational and computational material, both of which are consistent
with the existing no-action letters:
The communications shall be filed to the extent required
under new Rule 426 (discussed in Section III.C.1.e.); and
The communication shall include prominently on the cover
page:
The issuing entity's name and depositor's name;
The Commission file number for the related registration
statement;
A statement that the communication is ABS informational
and computational material used in reliance on the exemptive rule; and
A legend that urges investors to read the relevant
documents filed or to be filed with the Commission because they contain
important information. The legend also shall explain to investors that
they can get the documents for free at the Commission's Web site and
describe which documents are available free from the issuer or an
underwriter.
As we stated in the Proposing Release, we are not conditioning use
on providing additional legends from the no-action letters that the
information contained in the material supercedes all prior ABS
informational and computational material for the offering or will be
superseded by the description of the offering contained in the Section
10(a) prospectus.\395\ Instead, the legend we are adopting is designed
to alert investors of the documents filed or to be filed with the
Commission. We also are not requiring the condition in the no-action
letters that any required filings must be made before an Exchange Act
Rule 10b-10 confirmation of sale may be sent.\396\ As we explained in
the Proposing Release, the filing requirement discussed below is a
separate condition under Commission rules, and thus conditioning the
exemption on filing before sending of the Rule 10b-10 confirmation does
not appear to be warranted as an additional incentive for filing.
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\395\ As we stated in the Proposing Release, one of the reasons
such statements do not appear applicable is that not all of the
information--particularly the computational material--is included or
updated in subsequent materials or the final prospectus. In
addition, and as discussed subsequently in the text, there are
additional problems with such statements. For more information, see
the Offering Process Release.
\396\ See 17 CFR 240.10b-10.
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We also explained in the Proposing Release that, in addition to the
legends discussed above, some issuers and other users of these
materials have been including legends or disclaimers in the materials
that are inappropriate. As discussed more fully below, the materials
are considered prospectuses and in many instances also must be filed
with the Commission and incorporated by reference into the registration
statement. Thus, as we stated in the Proposing Release, disclaimers of
responsibility or liability that are not appropriate for a prospectus
or registration statement also are not appropriate for these materials.
Examples of inappropriate legends or disclaimers that we identified
include disclaimers regarding accuracy or completeness and statements
requiring investors to read or acknowledge that they have read any
disclaimers or legends or the registration statement.\397\ Language
indicating that the communication is neither a prospectus nor an offer
to sell or a solicitation or an offer to buy also is inappropriate.
Finally, as the information in many instances must be publicly filed,
statements that the information is privileged, confidential or
otherwise restricted as to use or reliance are inappropriate.
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\397\ Such disclaimers of responsibility by the issuer are also
inappropriate.
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Several commenters indicated that they wish to include additional
legends in their materials and requested an instruction clarifying that
the prescribed legend in the exemptive rule is not exclusive and other
legends may be included.\398\ We do not believe such an instruction is
necessary. However, some of the legends suggested by commenters also
would be inappropriate. For example, as explained in the Offering
Process Release, we interpret Section 12(a)(2) and Section 17(a)(2) as
not taking into account information conveyed only after the date of
sale, which includes the date of a contract for sale (e.g., the date of
the investment decision). As such, it would be inappropriate to include
a legend that information contained in ABS informational and
computational material will be superceded or changed by the final
prospectus, even if limited to the extent the information was included
in the final prospectus, if the final prospectus is not delivered until
after the date of the contract for sale.
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\398\ See, e.g., Letters of ASF; BMA; and FSR.
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Apart from the two conditions for the exemption, we also are
clarifying, as proposed and consistent with a similar provision in our
communications exemptions for business combination transactions,\399\
that the exemption for ABS informational and computational material is
applicable not only to the offeror of the asset-backed securities, but
also to any other party to the asset-backed securities transaction and
any persons authorized to act on their behalf that may need to rely on
and complies with the rule in communicating about the transaction. As
we explained in the Proposing Release, this ensures that affiliates,
underwriters, dealers and others acting on behalf of the parties to the
transaction are permitted to rely on the exemption if necessary. While
we realize that in many circumstances the exemptions will not be
necessary for persons other than the parties to the transaction or the
parties making the offer, we do not want to chill the appropriate free
flow of the information where it would be helpful to investors and
efficient capital formation.
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\399\ See, e.g., Securities Act Rule 165(d) (17 CFR 230.165(d)).
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We also are codifying as requested a provision in the existing no-
action letters that failure by a particular underwriter to cause the
filing of materials in connection with an offering will not affect the
ability of any other underwriter who has complied with the procedures
to rely on the exemption.
[[Page 1558]]
While this position was mentioned in the text of the Proposing Release,
several commenters wished to codify the provision to avoid any
potential confusion.\400\ We are including it in the final rule as it
appears in the existing no-action letters.
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\400\ See, e.g., Letters of ABA; ASF; FSR; and NYCBA.
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We are adding another provision in response to comment that
currently exists in the communications exemptions for business
combination transactions \401\ that an immaterial or unintentional
failure to file or delay in meeting the filing requirements will not
result in a loss of protection under the exemption, so long as a good
faith and reasonable effort was made to comply with the filing
requirement and the material is filed as soon as practicable after
discovery of the failure to file.\402\ Several commenters believed that
the absence of this provision in the existing no-action letters, which
were issued before the communications exemptions for business
combination transactions were adopted, has had a chilling effect on the
use of materials due to concerns over filing errors and the harsh
consequences of a potential Section 5 violation as a result.\403\
Commenters particularly stressed the need for such a provision if
underwriter communications continue to be included in the filing
requirements. As discussed in our adopting release for the business
combination communication exemptions, this provision is similar to the
good faith standard in Rule 508(a) of Regulation D.\404\ Although an
immaterial or unintentional failure to file or delay in filing is a
violation of the filing requirement, it will not render the exemption
unavailable.
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\401\ See, e.g., Securities Act Rule 165(e) (17 CFR 230.165(e)).
\402\ A similar provision has been proposed in connection with
written communications in the Offering Process Release.
\403\ See, e.g., Letters of ABA and ASF.
\404\ 17 CFR 230.508(a).
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e. Filing Requirements
As noted above, there are multiple filing requirements under the
staff no-action letters depending on the type of materials used and the
circumstances in which they are used. As proposed, we are streamlining
these requirements into a unified filing rule that applies regardless
of the type of materials used. We believe a unified filing requirement
will result in a more consistent approach and ease compliance without a
significant drop in investor protection.
As proposed, under new Rule 426 the following ABS informational and
computational material must be filed:
If a prospective investor has indicated to the issuer or
an underwriter that it will purchase all or a portion of the class of
asset-backed securities to which such materials relate, all materials
relating to such class that are or have been provided to such
prospective investor; \405\ and
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\405\ This provision applies regardless of whether the
indication to purchase is given before or after the final terms have
been established for all classes of the offering.
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For any other prospective investor, all materials provided
to that prospective investor after the final terms have been
established for all classes of the offering.
As under the existing no-action letters, these materials must be filed
on Form 8-K (under new Item 6.01 of that Form), and thereby
incorporated by reference into the registration statement, by the later
of the due date for filing the final prospectus or two business days
after first use.
The cover page of the Form 8-K must disclose the Commission file
number of the related registration statement for the asset-backed
securities. Consistent with the no-action letters, ABS informational
and computational material that relate to abandoned structures or that
are furnished to a prospective investor prior to the time the final
terms have been established for all classes of the offering where such
prospective investor has not indicated to the issuer or an underwriter
its intention to purchase the asset-backed securities need not be
filed.
The final rule clarifies, as did the letters and our proposal, that
ABS informational and computational material that does not contain new
or different information from that which was previously filed need not
be filed. In addition, the issuer may aggregate data presented in ABS
informational and computational material that are to be filed and file
such data in consolidated form, so long as any such aggregation does
not result in the omission of any information that should have been
filed or makes the information misleading. Finally, the filing rule
clarifies that certain communications allowed under other Commission
rules, though they may technically fall into the definition of ABS
informational and computational material, need not be filed under this
filing rule, such as limited notices of the offering meeting the
requirements of Securities Act Rules 134, 135 and 135c,\406\ Exchange
Act Rule 10b-10 \407\ confirmations, prospectuses filed under
Securities Act Rule 424 and research reports relying on one of our safe
harbors discussed below.\408\
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\406\ 17 CFR 230.134; 17 CFR 230.135; and 17 CFR 230.135c.
\407\ 17 CFR 240.10b-10.
\408\ Similar clarifying provisions exist in our existing
communications exemptions for business combination transactions.
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Under the final rule, as was the case under the existing no-action
letters, multiple ABS informational and computational material for an
offering may need to be filed. For example, if an underwriter provides
a set of materials to an investor, and the investor then asks for and
the underwriter provides an additional set of materials with the same
pool and structure but with different modeling assumptions (e.g.,
different expectations of future interest rates or prepayment speeds),
then both sets of materials would need to be filed if the offering was
completed with that same structure or the investor had indicated an
intention to purchase. Similarly, if multiple investors requested
different analytics on the same structure but with different
assumptions, each set of materials would need to be filed under the
same circumstances.
Consistent with the no-action letters and the Proposing Release,
ABS informational and computational material are not being excluded
from the definition of ``offer,'' ``offer to sell,'' ``offer for sale''
or ``prospectus'' under the Securities Act.\409\ We continue to believe
the Securities Act standard of liability is appropriate for materials
that are used to offer the asset-backed securities. The flexibility to
use offering materials outside the statutory prospectus does not mean
that the materials should not have liability as offering materials.
Accordingly and as proposed, to the extent these communications
constitute offers, they will continue to be subject to liability under
Section 12(a)(2) of the Securities Act, as is the case today with oral
offers and statutory prospectuses.\410\ In addition, the final rule
specifies, as proposed, that material used in reliance on the exemption
will be considered ``prospectuses'' and thus subject to Section
12(a)(2) liability, even if not filed. Further, consistent with the
existing no-action letters and our proposal, the materials that are
filed on Form 8-K will be incorporated by reference into the
registration statement, which is subject to liability under Section 11
of the Securities Act.
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\409\ See 15 U.S.C. 77b(a)(3) and 15 U.S.C. 77b(a)(10).
\410\ 15 U.S.C. 77l(a)(2). Such information also will remain
subject to the general antifraud provisions of the Securities Act
and Exchange Act. See Section 17(a) of the Securities Act; Section
10(b) of the Exchange Act and Exchange Act Rule 10b-5.
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As we explained in the Proposing Release, the staff no-action
letters were
[[Page 1559]]
issued when electronic filing on EDGAR was still in its relative
infancy. At that time, EDGAR only accepted submissions in ASCII format,
and ABS market participants argued that data included in computational
material, which could be extensive, were in formats that were
impractical to convert into ASCII format for electronic filing. In
response, we amended our EDGAR filing rules to exempt computational
materials filed as an exhibit to Form 8-K from electronic filing.\411\
Instead, such materials can currently be filed in paper under cover of
a Form SE.\412\
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\411\ See Rule 311(j) of Regulation S-T (17 CFR 232.311(j)).
\412\ 17 CFR 239.64.
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We proposed eliminating the electronic filing exemption. There have
been many advances to EDGAR since the original staff no-action letters.
In particular, EDGAR now accepts HTML documents in addition to ASCII
documents and also accepts filings made over the Internet. Even non-ABS
registrants now routinely include detailed statistical and tabular data
in their EDGAR filings.
Two commenters suggested delaying electronic filing until the
ability to file material in additional formats, such as PDF, is
allowed.\413\ However, we continue to believe that even under the
current system, the filing of ABS informational and computational
material no longer needs an electronic filing exemption. As we stated
in the Proposing Release, filing in paper form is of little practical
use to investors as the material cannot be retrieved electronically. By
treating these materials consistently with nearly all other material
filed with the Commission, we seek to realize the same investor
benefits and efficiencies in information transmission, dissemination,
retrieval and analysis achieved since we began mandating EDGAR filing
in 1993. Accordingly, as proposed, we are eliminating the electronic
filing exemption.\414\
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\413\ See, e.g., Letters of ASF and BMA.
\414\ As electronically filed documents, ABS informational and
computational material are eligible for any applicable hardship
exemptions similar to other filings that must be made
electronically, such as the temporary hardship exemption in Rule 201
of Regulation S-T (17 CFR 232.201). However, the practice that
existed prior to adoption of the electronic filing exemption in Rule
311(j) of Regulation S-T of seeking a continued hardship exemption
for the filing of these materials is not appropriate except in the
rarest of circumstances. See Rule 202 of Regulation S T (17 CFR
232.202). We do not believe that the routine filing of such material
qualifies for a continued hardship exemption.
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2. Research Reports
a. Current Requirements
The publication or distribution by a broker or dealer of
information, opinions or recommendations with respect to an issuer or
its securities around the time of a registered offering can present
issues under the communications restrictions of the Securities Act,
especially if the broker is or will be a participant in the
distribution of the securities.\415\ In particular, such a report may
constitute an offer to sell the securities and thus constitute an
illegal offer if published or distributed before a registration
statement is filed, or it may constitute an illegal written offer to
sell securities that does not meet the information requirements of
Section 10 of the Securities Act if published or distributed after the
registration statement is filed.
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\415\ For more information about research reports and recent
Commission proposals in this area, see the Offering Process Release.
The Commission's existing Securities Act safe harbors in this area
(Rules 137, 138 and 139) refer to the publication by a broker or
dealer of information, an opinion or a recommendation with respect
to a registrant's securities or in some instances the registrant
itself. For sake of simplicity, we refer to these publications in
this release as ``research reports.'' By using this convention, we
do not mean necessarily to encompass in this release the separate
definition of ``research report'' in Section 15D of the Exchange Act
(15 U.S.C. 78o-6) added by the Sarbanes-Oxley Act. Nor does our new
safe harbor in new Rule 139a affect in any way the applicability of
that Section, any of our other rules with respect to research
reports or any applicable SRO rules or other requirements regarding
research reports. For more information, again see the Offering
Process Release.
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To recognize the potential benefits of research reports while
limiting their potential misuse to promote a securities offering, the
Commission has previously issued Securities Act Rules 137, 138 and 139.
These rules create safe harbors that describe circumstances under which
brokers or dealers may publish or distribute research reports in and
around a registered offering without fear of violating Section 5 of the
Securities Act through making an illegal offer or using a non-
conforming prospectus. The existing rules look to the broker's
participation in an offering, differences between the securities
offered and those covered in the research report and the size and
reporting history of the issuer.
As we explained in the Proposing Release, the conditions in those
rules do not correspond well to ABS offerings. For example, several of
the requirements in the research rules, particularly Rule 139, require
issuer size and reporting history requirements, neither of which are
applicable to most asset-backed securities.
In response, the staff of the Division of Corporation Finance
issued a no-action letter in 1997 to provide a separate safe harbor for
the publication of research reports by brokers or dealers in and around
offerings of asset-backed securities registered or to be registered on
Form S-3.\416\ The no-action letter contained conditions for the safe
harbor adapted from Rules 137, 138 and 139 and modified for ABS. We
proposed codifying this safe harbor with several minor adjustments to
add it to our existing research report safe harbors.
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\416\ See note 35 above.
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b. ABS Research Report Safe Harbor
Commenters were mixed about our proposal to codify the no-action
letter. One commenter believed the 1997 no-action letter provides a
workable compromise to address the issues discussed above.\417\
However, this commenter and several others also suggested extending the
proposal in several ways beyond the current no-action letter, such as
extending the safe harbor to Form S-1 ABS, eliminating one or more of
the letter's conditions or suggesting alternative sets of conditions
that would have the same practical effect of eliminating conditions in
the letter.\418\
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\417\ See Letter of ABA.
\418\ See, e.g., Letters of ABA; ASF; BMA; and NYCBA.
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However, another commenter objected to codifying the no-action
letter and instead urged a 30-day quiet period on research for ABS
offerings.\419\ This commenter believed permitting research during this
period is unlikely to provide any benefits to the institutional
investors which make up most of the market but could have a harmful
impact if retail investors take a more active role. The commenter also
thought permitting research could lead to structures designated as ABS
but that are, in effect, equity securities to avoid other research
rules.
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\419\ See Letter of CFAI.
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After evaluating these comments, we are adopting the safe harbor
along the lines of the existing no-action letter as proposed.\420\ We
are not persuaded that one or more of the existing conditions in the
no-action letter should be relaxed to expand the safe harbor beyond its
current contours. The reasons expressed for the expansions do not
sufficiently relate to whether the proposed research is separate enough
from offering
[[Page 1560]]
material such that it should be excluded from the definition of
``offer'' in its entirety.
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\420\ See Securities Act Rule 139a. As we noted in the Proposing
Release, the safe harbor is a non-exclusive safe-harbor the same as
existing Rules 137, 138 and 139. In addition, each of the existing
safe harbors in Rules 137, 138 and 139 remain available with respect
to asset-backed securities if the conditions for the particular safe
harbor are met.
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In addition, consistent with our proposal and the existing no-
action letter, the safe harbor will be available only with respect to
ABS offerings registered on Form S-3. That is, it is only available
with respect to offerings of investment grade asset-backed securities
that meet the requirements of General Instruction I.B.5 of Form S-3.
Similar to our rules for ABS informational and computational material
and existing Rule 139, we believe offerings of securities meeting the
requirements for Form S-3 registration represent the appropriate
categories of offerings for the safe harbor.
Under the safe harbor, the publication or distribution by a broker
or dealer of a research report with respect to investment grade asset-
backed securities meeting the criteria of General Instruction I.B.5 of
Form S-3 will not be deemed to constitute an offer for sale or offer to
sell such asset-backed securities registered or proposed to be
registered, even if the broker or dealer is or will be a participant in
the registered offering, if the following conditions are met:\421\
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\421\ Consistent with the existing no-action letter, in the case
of a multi-tranche registered offering of asset-backed securities,
each tranche is to be treated as a different security.
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The broker or dealer shall have previously published or
distributed with reasonable regularity information, opinions or
recommendations relating to Form S-3 ABS backed directly (or, with
respect to securitizations of other securities, indirectly) by
substantially similar collateral as that directly or indirectly backing
Form S-3 ABS that is the subject of the information, opinion or
recommendation that is proposed to be published or distributed.
If the securities for the registered offering are proposed
to be offered, offered or part of an unsold allotment or subscription,
the information, opinion or recommendation shall not:
Identify those securities;
Give greater prominence to specific structural or
collateral-related attributes of those securities than it gives to the
same attributes of other ABS that it mentions; \422\ or
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\422\ Consistent with the staff no-action letter, this condition
does not by itself prevent the dissemination of research material
that focuses on a single topic (e.g., a single collateral attribute,
asset type (but not a particular obligor), structural attribute or
market sector).
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Contain any ABS informational and computational material
relating to those securities.
If the material identifies specific ABS of a specific
issuer and specifically recommends that such ABS be purchased, sold or
held by persons receiving such material, then a recommendation as
favorable or more favorable as to such ABS shall have been published by
the broker or dealer in the last publication of such broker or dealer
addressing such ABS prior to the commencement of its participation in
the distribution of the securities whose offering is being registered.
Sufficient information is available from one or more
public sources to provide a reasonable basis for the view expressed by
the broker or dealer with respect to the ABS that are the subject of
the information, opinion or recommendation.
If the material published by the broker or dealer
identifies other ABS backed directly or indirectly by substantially
similar collateral as that directly or indirectly backing the
securities whose offering is being registered and specifically
recommends that such ABS be preferred over other ABS backed by
different types of collateral, then the material shall explain in
reasonable detail the reasons for such preference.
As proposed, not included in the list is a condition in the existing
no-action letter that the research material must refer as required by
law or applicable rules to any relationship that may exist between the
issuer of the information, opinion or recommendation and any
participant of the offering. A footnote in the incoming request for the
no-action letter stated that the condition ``contemplates statutory
provisions such as Section 17(b) of the [Securities] Act or relevant
SRO standards requiring disclosure of possible sources of bias.'' As we
explained in the Proposing Release, because these types of disclosures
already are themselves separate regulatory requirements, we do not
believe this additional condition is necessary for the safe harbor.
Further, no similar condition exists in Rules 137, 138 or 139 even
though the situation is analogous. However, our decision not to retain
this condition to the safe harbor does not affect any other requirement
that would require disclosure of such relationships.
As part of the Offering Process Release, we proposed revisions to
the existing research report safe harbors of Rules 137, 138 and
139.\423\ To the extent these existing safe harbors are modified, we
also will consider similar modifications to the ABS safe harbor. We
also encourage ABS market participants to comment specifically on the
proposals in that release regarding any appropriate changes to the
existing safe harbors or the ABS safe harbor.
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\423\ For example, we proposed to remove a similar prohibition
in existing Rule 139 on a broker or dealer making a more favorable
recommendation than the one it made in the last publication.
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3. Other Communications During the Offering Process
In response to a request for comment, several commenters
recommended revising Securities Act Rule 134 \424\ to provide
additional items for purposes of ABS offerings.\425\ Rule 134 deems
certain limited communications announcing an offering (often called
``tombstone'' announcements) not a prospectus so long as the
communication is limited to the items specified in that rule. In the
Offering Process Release, we proposed several expansions to Rule 134
that would address in part these commenters' requests. Some of the
remaining items requested by commenters may be beyond the proper scope
of Rule 134.\426\ As we stated in the Offering Process Release, we have
not proposed to amend Rule 134 in a manner that would permit detailed
term sheets for offerings under the rule, which is consistent with Rule
134 for offerings generally. We encourage ABS market participants to
comment specifically on the proposals in that release. In the meantime,
we note that the scope of the detailed items requested by commenters
for Rule 134 are generally subsumed already within the scope of
permitted ABS informational and computational material.
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\424\ 17 CFR 230.134.
\425\ See, e.g., Letters of ABA; ASF; BMA; and FSR.
\426\ E.g., more detailed class or pool level information, even
if on a summary characteristic basis, such as LTV ratio, weighted
average FICO, grace and forbearance percentages, delinquencies,
losses and asset concentrations.
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Finally, one commenter requested clarification regarding issuer or
underwriter involvement with pre-sale reports by rating agencies.\427\
Whether information prepared and distributed by third parties that are
not offering participants is attributable to an issuer or underwriter
depends upon whether the issuer or underwriter has involved itself in
the preparation of the information or explicitly or implicitly endorsed
or approved the information. The courts and we have referred to the
first line of inquiry as the ``entanglement'' theory and the second as
the ``adoption'' theory.\428\ We think these theories are equally
applicable with respect to ABS issuer or
[[Page 1561]]
underwriter involvement regarding rating agency pre-sale reports. For
example, if an issuer or underwriter distributed the pre-sale report in
connection with an offering of the securities, it would be appropriate
to conclude that such party has adopted that report and should be
liable for its contents. Liability under the ``entanglement'' theory
depends upon the level of pre-publication involvement in the
preparation of the information.
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\427\ See Letter of ABA.
\428\ For a fuller discussion of these theories, see Release No.
33-7856 (Apr. 28, 2000) [65 FR 24843], at fn. 48 and accompanying
text.
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D. Ongoing Reporting Under the Exchange Act
1. Current Requirements
As discussed previously, post-issuance reporting regarding an
asset-backed security is important to monitoring and understanding the
performance of both the asset pool and transaction parties.\429\
Issuers of asset-backed securities are not exempt from Exchange Act
reporting requirements. In particular, if asset-backed securities are
to be listed on a national securities exchange, they must be registered
pursuant to Section 12 of the Exchange Act \430\ and file reports
pursuant to Section 13(a) of the Exchange Act.\431\ Even without a
listing, an offering of asset-backed securities pursuant to an
effective Securities Act registration statement triggers a reporting
obligation under Section 15(d) of the Exchange Act with respect to
those securities, at least for a period of time. This obligation
automatically suspends as to any fiscal year, other than the fiscal
year within which the registration statement became effective, if, at
the beginning of such fiscal year, the securities of each class to
which the registration statement relates are held of record by less
than 300 persons.\432\
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\429\ See Section III.B.9.e. See also Hema B. Oza,
``Surveillance--The Truth * * * Told by Investors,'' Asset
Securitization Report, Sep. 27, 2004.
\430\ 15 U.S.C. 78l.
\431\ See Section 12(b) of the Exchange Act (15 U.S.C. 78l(b)).
In addition, asset-backed securities that constitute equity
securities also may need to register under Section 12(g) of the
Exchange Act (15 U.S.C. 78l(g)) if they meet certain size and
ownership requirements. Voluntarily registration of such securities
also is permitted under Section 12(g). Whether registered under
Section 12(b) or 12(g), reporting under Section 13(a) is required.
\432\ If the duty to report is suspended, a Form 15 is required
to be filed 30 days after the beginning of the first fiscal year it
is suspended. See Exchange Act Rule 15d-6 (17 CFR 240.15d-6). See
also Exchange Act Rule 12h-3 (17 CFR 240.12h-3). Our rules do not
affect Form 15 filing requirements. In addition, we are not
addressing at this time the definition of ``held of record,'' as
defined in Exchange Act Rule 12g5-1 (17 CFR 240.12g5-1).
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As most asset-backed securities are not presently listed and are
held by less than three hundred record holders, most publicly offered
asset-backed securities cease reporting with the Commission once they
qualify for the automatic suspension. In the context of shelf
registration statements where a new issuing entity is used for the
issuance of each separate series of securities, a new reporting
obligation is incurred with respect to those securities. Reporting
regarding the asset-backed securities by that issuing entity may
suspend if those securities subsequently meet the requirements of
Section 15(d) of the Exchange Act (e.g., held of record by less than
300 persons at the beginning of any fiscal year other than the fiscal
year in which the takedown occurred), notwithstanding that separate
issuing entities of the same sponsor may issue additional asset-backed
securities during the fiscal year.
Regardless of an ability to suspend reporting under the Exchange
Act, ABS transaction agreements often require continued reporting of
information to security holders. More and more issuers also are making
such information available through their Web sites, although some still
require registration and pre-approval before permitting access to such
important information. Third party services continue to evolve to
provide post-issuance performance data, although again such services
often charge a fee and coverage may not be uniform.
Even though asset-backed securities are subject to an Exchange Act
reporting obligation, the type and frequency of disclosure required
under the Exchange Act with respect to operating companies generally is
not relevant with respect to asset-backed securities. As a result,
issuers of asset-backed securities have requested and received, first
through Commission exemptive orders under the Exchange Act and later
through scores of staff no-action letters, permission to modify the
reports they may file to fulfill their reporting obligation.\433\
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\433\ As examples of the many actions in this area, see, e.g.,
Release No. 34-16520 (Jan. 23, 1980) (order granting application
pursuant to Section 12(h) of Home Savings and Loan Association);
Release No. 34-14446 (Feb. 6, 1978) (order granting application
pursuant to Section 12(h) of Bank of America National Trust and
Savings Association); CWMBS, Inc. (Feb. 3, 1994); and Bank One Auto
Trust 1995-A (Aug. 16, 1995). Such relief generally includes
language stating that similar relief will apply to subsequent
issuances of substantially similar securities representing ownership
interests in a trust whose principal assets are substantially
similar to the assets covered by the no-action letter. After many
years of issuing modified reporting no-action letters, the staff
ceased requiring each new registrant to obtain a new no-action
letter and has instead instructed new ABS issuers they could look to
an existing modified reporting no-action letter granted with respect
to another issuer which has substantially similar characteristics to
the new asset-backed securities for requirements of Exchange Act
reporting. If the specified requirements in a particular exemptive
order or no-action letter are not satisfied, the relief is not
available.
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Under the modified reporting system, in lieu of quarterly reports
on Form 10-Q, reports on Form 8-K typically are filed based on the
frequency of distributions on the asset-backed securities
(predominantly monthly), which in turn generally match the payment
frequency of the underlying pool assets. These filings include a copy
of the servicing or distribution report required by the ABS transaction
agreements that contains unaudited information about the performance of
the assets, payments on the asset-backed securities and any other
material developments that affect the transaction. It also is a
longstanding requirement under the modified reporting system that
disclosure that otherwise would be required by certain items of Form
10-Q, such as legal proceedings, material uncured defaults and matters
submitted to a vote of security holders, also are required for the Form
8-K distribution report for the period in which such events occurred.
In addition to these ``periodic'' filings on Form 8-K, current reports
on Form 8-K also are required, but only for a narrow list of events.
Insider reporting under Section 16 also is generally not required.
An annual report on Form 10-K is still required, but the
information required is reduced and modified. Audited financial
statements for the issuing entity are not generally required. In lieu
of audited financial statements, the ABS issuer must file as exhibits
to the Form 10-K a servicer compliance statement and a reporting by an
independent public accountant. The servicer compliance statement
addresses compliance by the servicer with its obligations under the
servicing agreement for the reporting period. The accountant's report
generally relates to the report required under the transaction
agreements from an independent public accountant attesting to an
assertion of compliance regarding particular servicing criteria.
As a result of implementation of the Sarbanes-Oxley Act, and in
consideration of the existing requirement in the modified reporting
system for an accountant attestation as to an assertion of compliance
with servicing criteria, the Commission exempted asset-backed issuers
from the reporting requirements regarding internal control over
financial reporting.\434\ However, asset-backed issuers must include a
certification
[[Page 1562]]
required by Section 302 of that Act with their annual report on Form
10-K. In a staff statement originally published on August 29, 2002 and
subsequently revised on February 21, 2003, the staff provided a
tailored form of certification for use with ABS annual reports to
address the realities of their structure as well as to address the
information included in their reports under the modified reporting
system.\435\ In addition, the staff statement provided alternatives
with respect to who can sign the certification given the lack of a
traditional CEO or CFO. Under the staff statement, a designated officer
of the depositor, servicer or trustee may sign the certification, and
alternate language for the certification is permitted depending on
which entity's officer is making the certification.
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\434\ See note 41 above.
\435\ See Division of Corporation Finance, ``Statement:
Compliance by Asset-Backed Issuers with Exchange Act Rules 13a-14
and 15d-14'' (Aug. 29, 2002); and Division of Corporation Finance,
``Revised Statement: Compliance by Asset-Backed Issuers with
Exchange Act Rules 13a-14 and 15d-14'' (Feb. 21, 2003). In addition,
the staff subsequently issued two no-action letters to address
resecuritizations (Merrill Lynch Depositor, Inc. (Mar. 28, 2003))
and auto lease and similar securitizations (Mitsubishi Motors Credit
of America, Inc. (Mar. 27, 2003)).
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Commenters supported our proposal to codify the basic modified
reporting system for asset-backed securities.\436\ We describe the
final rules and forms with respect to the system, as modified in
response to comment, in more detail below. In addition and as noted in
Section III.A.4., we are not creating a separate Exchange Act reporting
system for foreign ABS. As a result, foreign ABS will report on Forms
10-K, 10-D and 8-K, the same as domestic ABS. Commenters also supported
this approach.\437\
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\436\ See, e.g., Letters of ABA; ASF; FSR; and ICI.
\437\ See, e.g. Letter of A&O.
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2. Determining the ``Issuer'' and Operation of the Section 15(d)
Reporting Obligation
First, we are adopting our proposed definition of ``issuer'' with
respect to the reporting obligation and the nature and operation of the
Section 15(d) reporting obligation with respect to asset-backed
securities. The relevant aspects of the statutory definition of
``issuer'' under the Exchange Act are identical to the Securities Act
definition.\438\ Accordingly, we are adopting a corollary Exchange Act
rule for clarifying the definition of ``issuer'' for ABS similar to our
new rule discussed in Section III.A.3.d. regarding the Securities Act.
In particular, the Exchange Act rule clarifies that the depositor for
the asset-backed securities, acting solely in its capacity as depositor
to the issuing entity, is the ``issuer'' for purposes of the asset-
backed securities of that issuing entity.\439\ Like our similar
definition for the Securities Act, the Exchange Act definition
specifies that the person acting in its capacity as depositor for the
issuing entity of an asset-backed security is a different ``issuer''
from that same person acting as a depositor for any other issuing
entity or for purposes of that person's own securities. For example,
the depositor for a particular issuing entity created for the first
takedown under a shelf registration statement will be deemed to be a
different ``issuer'' than that depositor acting as depositor for a
subsequent issuing entity created for a subsequent takedown under the
same registration statement.\440\ Like our Securities Act rule, our
Exchange Act rule will apply regardless of the issuing entity's form of
organization.
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\438\ See Section 3(a)(8) of the Exchange Act (15 U.S.C.
77c(a)(8)).
\439\ See Exchange Act Rule 3b-19 (17 CFR 240.3b-19). The rule
in the Exchange Act is identical to Securities Act Rule 191. See
Section III.A.3.d. As proposed, we also are defining the term
``asset-backed issuer'' as an issuer whose reporting obligation
results from either the registration of an offering of asset-backed
securities under the Securities Act, or the registration of a class
of asset-backed securities under Section 12 of the Exchange Act.
\440\ Likewise, any applicable exemptions from reporting that
the person acting as depositor may have with respect to its own
securities will not be applicable to the asset-backed securities.
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This approach addresses the reality of ABS offerings that offerings
by different issuing entities registered on the same shelf registration
statement are not related. Furthermore, it places responsibility for
Exchange Act reporting with the party most able to oversee the
reporting requirements. Finally, this approach differentiates reporting
with respect to each issuing entity, and thus each ABS transaction, and
does not require continuous reporting with respect to transactions that
would otherwise be able to suspend reporting.
Consistent with this new definition, we are identifying who must
sign Exchange Act reports. The particular signature requirements for
each Exchange Act report are discussed below in connection with the
discussions of the requirements for each report. However, our basic
principle remains the same as in the Proposing Release that the
depositor is to sign Exchange Act reports, although an authorized
representative of the servicer will be permitted to sign on behalf of
the issuing entity as an alternative.
As discussed in more detail in the next section, a takedown of
asset-backed securities by a new issuing entity triggers a new
reporting obligation under Exchange Act Section 15(d). Separate EDGAR
access codes need to be established for the new issuing entity created
at the time of each takedown to ensure that Exchange Act reports
related to these ABS are filed under a separate file number from other
ABS or from the depositor's or sponsor's own securities. As proposed
and consistent with longstanding staff and prevalent industry practice,
issuers should not ``combine'' reporting regarding multiple
transactions in one report or with a report for the depositor's or
sponsor's own securities.
In addition to clarifying who is the ``issuer,'' we are clarifying,
as proposed, several interpretive positions regarding the operation of
the Section 15(d) reporting obligation with respect to asset-backed
securities, which commenters supported.\441\ The first position relates
to the time when any reporting obligation begins. Where an aggregate
amount of asset-backed securities to be offered on a delayed basis is
registered on Form S-3, until the first takedown of securities under
the registration statement, there is no asset pool or securities to
report about and no Exchange Act reporting requirement. It is only when
the first takedown occurs and ABS are issued that ongoing reporting
becomes relevant. Accordingly, we are codifying the longstanding
interpretive position that no annual or other reports need be filed
pursuant to Section 15(d) for ABS until the first bona fide sale in a
takedown of securities under the registration statement.\442\ For
example, if an ABS Form S-3 shelf registration statement was declared
effective on October 1, 2004 but no takedown occurred until February 1,
2005, no reports will need to be filed until after the first takedown.
The first reporting obligation is triggered by the first takedown of
asset-backed securities.\443\
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\441\ See, e.g., Letters of ABA and ASF. As proposed, these new
rules only are applicable with respect to reporting obligations
under Section 15(d). They are not meant to affect any reporting
obligation that may exist as to any class of asset-backed securities
registered under Section 12 of the Exchange Act. For example, a
Section 15(d) reporting obligation is automatically suspended while
a class of securities is registered under Section 12 and reporting
pursuant to Section 13(a) of the Exchange Act. See Exchange Act
Section 15(d). Hence, any discussion regarding suspension of the
Section 15(d) reporting obligation is not applicable while a class
of securities is reporting pursuant to Section 13(a).
\442\ See Exchange Act Rule 15d-22(a).
\443\ A few modified reporting no-action letters permitted the
filing of no reports, including a Form 10-K, if the takedown
occurred near the end of a fiscal year and no distribution had
occurred prior to the end of the fiscal year. See, e.g., Fleet
Finance Home Equity Trust 1990-1 (Apr. 9, 1991); AIC Premium Finance
Loan Master Trust (Apr. 3, 1995); and Toyota Auto Receivables 1995-A
Grantor Trust (Dec. 19, 1995). While not all commenters agreed (See,
e.g., Letters of Am. Bankers and ASF), we continue to believe that,
even if the period is short, information regarding the servicing and
administration of the asset pool for the period (particularly the
servicer compliance statement and assessment of compliance with
servicing criteria) is still important information to provide to
investors in an annual report, even if no distributions were made to
investors prior to the fiscal year end. For example, such
information is not otherwise required to be part of or filed in
connection with the filing of the final prospectus. Accordingly, as
proposed, the accommodation in those letters will no longer be
available.
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[[Page 1563]]
We also are codifying the current position that the starting and
suspension dates for any reporting obligation with respect to a
takedown of asset-backed securities is determined separately for each
takedown.\444\ For example, if takedowns involving different issuing
entities occurred in 2004 and 2005, the reporting obligation related to
the issuing entity created with respect to the 2004 takedown is
separate from the reporting obligation related to a different issuing
entity created with respect to the 2005 takedown. If at the beginning
of the 2005 fiscal year the securities in the 2004 takedown were held
of record by less than 300 holders, the reporting obligation related to
the issuing entity for the 2004 takedown will be suspended.\445\ Of
course, the suspension of that reporting obligation has no effect on
any separate reporting obligation related to the issuing entity with
respect to the 2005 takedown or related to issuing entities created
with respect to any other takedown.
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\444\ See Exchange Act Rule 15d-22(b).
\445\ An annual report on Form 10-K for the 2004 fiscal period
with respect to the classes in the 2004 takedown will still be
required, although the report is not required until 90 days after
the end of the 2004 fiscal period.
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We requested comment on whether the ability to suspend reporting
under Section 15(d) should be revisited. For example, we requested
comment on whether it should be a condition or required undertaking for
registration statement form eligibility or for any of our other
proposals that Exchange Act reporting must continue for the life of the
security. One commenter primarily representing investors recommended
conditioning ABS shelf registration upon an issuer agreeing either to
continue filing reports under Section 15(d) or to make publicly
available on their Web sites copies of reports that contain the
information required by proposed Form 10-D.\446\ Under the current
system, the commenter argued, most investors remain dependent on
sponsors voluntarily providing ongoing disclosures after the Section
15(d) suspension, and some issuers refuse to issue ongoing disclosures
after their Exchange Act reporting obligation has been suspended.
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\446\ See, e.g., Letter of ICI.
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Many other commenters did not believe the ability to suspend the
Section 15(d) reporting obligation should be revised.\447\ These
commenters generally argued that there is no reason to treat ABS
issuers differently from other securities that can suspend reporting
under Section 15(d). In addition, such a change would be costly and the
commenters believed ABS investors, which are mostly institutional,
already have sufficient access to information through proprietary and
third party Web sites.
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\447\ See, e.g., Letters of ABA; Am. Bankers; ASF; Capital One;
CMSA; and Wells Fargo.
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We are not at this time revisiting the statutory framework of
Section 15(d) regarding the suspension of reporting obligations.
Modifying the obligation would raise broad issues regarding the
treatment of other non-ABS issuers that do not have public common
equity. However, the concerns raised by investors do confirm the
importance to investors of post-issuance reporting of information
regarding an ABS transaction in understanding transaction performance
and in making ongoing investment decisions.
Finally, we are adopting a separate rule, as proposed, to address
the separate Section 15(d) reporting obligation that may be involved in
ABS transactions where the issuing entity holds a pool asset that
represents the interest in or the right to the payments or cash flows
of another asset pool.\448\ As discussed in Section III.A., some credit
card and auto lease ABS transactions are structured such that the
issuing entity's asset pool consists of one or more of such
intermediate financial assets. For example, in an issuance trust
structure, the asset pool of the issuing entity for the ABS consists of
a collateral certificate representing an interest in the asset pool of
the credit card master trust. In many instances, the deposit of the
collateral certificate into the issuing entity's asset pool must be
separately registered along with the registration of the offering of
the issuing entity's asset-backed securities, thereby triggering a
separate reporting obligation under Section 15(d) with respect to the
collateral certificate.
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\448\ See Exchange Act Rule 15d-23. This rule is not applicable
with respect to underlying securities that do not meet its
conditions, such as the securitization of outstanding corporate debt
securities or other ABS the offering of which must be separately
registered under the Securities Act.
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Recognizing that these structures are designed solely to facilitate
the structuring of the transaction, separate reports regarding the
intermediate financial asset would provide no additional information to
investors. Accordingly, we are providing that no separate annual and
other reports need be filed with respect to the intermediate financial
asset's reporting obligation, if the following conditions are met:
\449\
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\449\ As with note 441 above, these amendments are only
applicable with respect to the reports filed pursuant to Section
15(d) for the intermediate financial asset. They do not affect any
other reporting obligation that may exist with respect to the issuer
of the intermediate financial asset, such as other securities by
that entity.
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Both the issuing entity for the asset-backed securities
and the entity that issued the financial asset were established under
the direction of the same sponsor and depositor;
The financial asset was created solely to satisfy legal
requirements or otherwise facilitate the structuring of the ABS
transaction;
The financial asset is not part of a scheme to avoid
registration or reporting requirements of the Act;
The financial asset is held by the issuing entity and is a
part of the asset pool for the asset-backed securities; and
The offering of the asset-backed securities and the
offering of the financial asset were both registered under the
Securities Act.
As proposed, the new rule does not affect any reporting obligation
applicable with respect to the asset-backed securities, nor does it
affect any obligation to provide information regarding the financial
asset or the underlying asset pool in the ABS reports.\450\
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\450\ See Item 1100(d) of Regulation AB.
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3. Reporting on EDGAR
Registration statements and annual and other periodic and current
reports are filed in electronic format on EDGAR.\451\ As proposed, we
are not fundamentally changing how documents regarding asset-backed
securities are to be filed on EDGAR. However, there have been and
continue to be inconsistencies by ABS issuers with respect to filing of
registration statements and reports on EDGAR, thus making it difficult
and time-consuming for investors and others to locate documents related
to particular asset-backed securities. As such, we are reiterating the
following guidance from the Proposing Release on how to submit
[[Page 1564]]
documents on EDGAR that will enable investors and others to locate
material information about particular asset-backed securities more
efficiently.
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\451\ See Rule 101 of Regulation S-T (17 CFR 232.101).
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This guidance clarifies existing practice regarding how documents
are to be submitted on EDGAR. In addition, we are planning programming
changes to the EDGAR system to permit the generation of new EDGAR
access codes for an issuing entity before the Securities Act Rule
424(b) prospectus is filed. We believe such changes should
significantly reduce some of the technical and compliance issues
involved in establishing new transactions under the EDGAR system. We or
the staff will issue additional instructive guidance once these
programming changes are made to update and clarify further EDGAR
reporting processes for ABS.
Under our EDGAR system, each entity that makes an EDGAR submission
is assigned a Central Index Key code, or ``CIK'' code. For submissions
to appear under the correct entity, the correct CIK code must be
included in the EDGAR submission header.
Because typically no issuing entity exists at the time of filing,
the depositor initially submits the registration statement registering
the offering of an aggregate amount of asset-backed securities on EDGAR
under its own CIK code. With each takedown of asset-backed securities
by a new entity off the registration statement, a new reporting
obligation under Exchange Act Section 15(d) is created. The EDGAR
system will automatically generate a new CIK code and an Exchange Act
reporting file number for the new entity when the depositor includes a
``serial'' tag in the header of the prospectus filed under Securities
Act Rule 424(b) to report the takedown.\452\ The depositor must include
the complete name of the new entity as part of the serial tag.\453\
Subsequent takedowns from the same registration statement that create
new reporting entities should follow the same approach for obtaining
separate CIK codes and file numbers through serial tags.\454\
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\452\ As we explained in the Proposing Release, there are
instances when materials relating to a particular ABS transaction
may be filed before the filing of the final Rule 424 prospectus that
generates the new CIK code and Exchange Act reporting file number
for the new issuing entity. For example, with respect to one or more
classes of asset-backed securities that are to be listed on a
national securities exchange, an Exchange Act registration
statement, such as a Form 8-A (17 CFR 249.208a), often must be filed
before the final Rule 424(b) prospectus is filed. In addition, under
the existing no-action letters and our proposals regarding ABS
informational and computational material, such material could be
voluntarily filed on Form 8-K before the final Rule 424(b)
prospectus is filed. Until the programming changes discussed in the
text are made, such materials should be filed under the CIK code for
which the Securities Act registration statement was filed, which is
usually the depositor's CIK code. Note that if a new CIK code and
Exchange Act reporting file number for the new issuing entity had
been previously generated (e.g., a preliminary prospectus with
respect to the offering had been filed), these materials should be
filed under the CIK code of the issuing entity. In either case, to
insure increased efficiencies in the filing and processing of such
material, we encourage the depositor to list the name of the issuing
entity on the cover page of the material. For example, to ensure
that the certifications that we receive from the exchanges may be
properly matched against the Form 8-A's on file, the Form 8-A should
identify the specific issuing entity. Where the Form 8-A calls for
the name of the registrant, depositors should list their name but
include a notation that they are filing on behalf of the issuing
entity and name the issuing entity.
\453\ In the past, issuing entity names have been truncated in
order to comply with EDGAR requirements regarding the permissible
length of a company name. These abbreviations, historically assigned
by SEC staff, sometimes were not consistently applied. A recent
upgrade to the EDGAR system now permits company names of up to 150
characters in length. See Release No. 33-8409 (Apr. 19, 2004). The
staff believes this revision will alleviate the problems we have
seen in the past regarding inconsistent abbreviation of names.
\454\ For example, if a depositor completes five takedowns from
a shelf registration statement and creates five separate issuing
entities, then each separate issuing entity should have its own CIK
code. After obtaining a CIK code for the issuing entity, the
depositor must obtain additional EDGAR codes from the Commission for
the issuing entity to enable it to file additional documents under
the CIK code. See Release No. 33-8410 (Apr. 21, 2004). As noted in
the text, we are considering EDGAR programming changes to streamline
this process for ABS.
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When these procedures are followed, the Rule 424(b) prospectus will
appear under both the depositor's and the new issuing entity's CIK
codes. The issuer in its capacity as depositor for newly created
entities should prepare separate annual, periodic and other reports for
each issuing entity and file such reports under the separate CIK code
for each issuing entity.\455\ To make these subsequent filings under
the newly created issuing entities, the sponsor will have to obtain
additional access codes by creating and submitting Form IDs to the SEC
using the SEC's Web site.
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\455\ Once the issuing entity's CIK code is generated,
subsequent filings relating to the transaction relating to that
issuing entity should be filed under that CIK code. The filing of
documents under the issuing entity's CIK code under cover of Form 8-
K, such as unqualified legality and tax opinions, does not affect
the incorporation by reference of these documents into the
registration statement originally filed under the depositor's CIK
code.
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As we explained in the Proposing Release, the creation of new
issuing entities by identifying the serial tag in the Rule 424 filing
header effectively identifies the reporting obligation of the depositor
from that of the new entities. While not all commenters agreed,\456\ we
continue to believe that filing separate annual, periodic and other
reports for each issuing entity provides easier access to information
on a particular issuing entity and its asset-backed securities, which
increases transparency of such information for investors as well as the
market for these securities. Also, submitting separate Exchange Act
reports under the issuing entity's CIK code will facilitate tracking of
the respective issuing entity's reporting obligation, as well as when
such reporting obligation may be suspended under Section 15(d) of the
Exchange Act, if applicable.
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\456\ See, e.g., Letters of ASF and Sallie Mae.
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Conversely, we continue to believe that providing required
information for multiple issuing entities in a ``combined'' annual or
periodic report containing information regarding multiple issuing
entities of a single sponsor or depositor is inconsistent with these
objectives.\457\ Combined reporting contributes to confusion on the
part of investors attempting to locate a report on EDGAR relating to
the securities that are relevant to that investor. Combined reporting
forces investors and other users to wade through superfluous
information in order to retrieve information that is relevant to them.
Further, combined reports create inefficiencies in the storage,
retrieval, and analysis of information on EDGAR, which impedes market
access and staff review.
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\457\ We understand the staff in a few isolated instances has
previously allowed combined reporting for a limited number of
trusts. See, e.g., TMS Home Equity Trust 1992-D-I; TMS Home Equity
Trust 1992-D-II (Mar. 22, 1993) and The Money Story, Inc.; TMS Home
Equity Trust 1993-A-I (Aug. 4, 1993) (allowing combined reporting
with respect to two trusts). The staff believes these rare
exceptions have led to the current practice of a few registrants
combining in some instances information on dozens of issuing
entities into a lengthy combined report. The result is filings that
can run for hundreds of pages that are unfriendly to the user.
Combined reporting is not the prevalent industry practice, even for
issuers that frequently access the public securitization market, and
the position in these letters is no longer applicable.
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4. Distribution Reports on Form 10-D
a. New Form 10-D and Deadline for Filing
Under the modified reporting system, periodic distribution and pool
performance information is generally filed on Form 8-K in lieu of
filing quarterly reports on Form 10-Q. However, investors are not able
to easily distinguish these Form 8-K reports from other reporting on
Form 8-K, such as the reporting of extraordinary events or the filing
of transaction agreements.
Form 8-K is not designed to be a report filed on a periodic basis.
Accordingly, we are adopting our
[[Page 1565]]
proposal for one new form type for asset-backed securities, Form 10-D,
to act as the report for the periodic distribution and pool performance
information.\458\ Commenters supported a new form type for such
reports.\459\ Under the final rule, every asset-backed issuer subject
to Exchange Act reporting requirements will be required to make such
reports on Form 10-D.\460\
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\458\ See 17 CFR 249.312. Like our other Exchange Act reports,
Form 10-D will be subject to all applicable requirements of the
general rules and regulations under the Exchange Act for the
preparation, signing and filing of Exchange Act reports, including
Regulation 12B (17 CFR 240.12b-1 et seq.); Regulation 13A (17 CFR
240.13a-1 et seq.); and Regulation 15D (17 CFR 240.15d-1 et seq.).
In addition, the report will be required to be submitted in
electronic form in accordance with the EDGAR rules set forth in
Regulation S-T.
\459\ See, e.g., ABA; ASF; Aus. SF; ICI; JPMorganChase; MBNA;
and Wells Fargo.
\460\ See Exchange Act Rules 13a-17 and 15d-17.
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Consistent with our proposal and the existing modified reporting
system, these reports will be required to be filed within 15 days after
each required distribution date on the asset-backed securities, as
specified in the governing documents for such securities. Commenters
generally supported codifying the existing deadline.\461\ As proposed,
a report will be required regardless of whether the required
distribution was actually made or whether a distribution report was in
fact prepared or delivered under the governing documents.
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\461\ See, e.g., Letters of ABA; ASF; JPMorganChase; MBNA; and
Wells Fargo.
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We also are providing the ability to obtain a five calendar day
filing extension under Exchange Act Rule 12b-25 for Form 10-D filings,
similar to the process available today for Form 10-Q filings by non-ABS
issuers.\462\ Commenters supported extending Rule 12b-25 to Form 10-D
filings, particularly if we continued an approach that linked Exchange
Act reporting compliance with Form S-3 eligibility requirements.\463\
Under Rule 12b-25, the issuer must file a Form 12b-25 no later than one
business day after the due date for the Form 10-D filing if all or any
portion of the Form 10-D report is not filed in a timely manner. To
obtain the filing extension, the Form 12b-25 must contain certain
representations by the registrant, including why the inability to file
timely could not be eliminated without unreasonable effort or expense
and that the subject Form 10-D filing will be made not later than the
fifth calendar day following its original due date. The related Form
10-D filing must then be made not later than five calendar days after
its original due date.\464\ If the issuer timely provides the proper
notice on Form 12b-25 filing and subsequently makes the related Form
10-D filing within the required five calendar day period, the Form 10-D
filing will be deemed to be filed on its original due date, including
for purposes of Form S-3 eligibility.\465\
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\462\ A 15 calendar day filing extension for Form 10-K already
exists under Exchange Act Rule 12b-25.
\463\ See, e.g., Letters of ABA; ASF; Capital One; CMSA;
JPMorganChase; and U.S. Bank.
\464\ The filing extension procedure in Rule 12b-25 is not
available more than once for any particular Form 10-D filing.
\465\ Note, however, that Exchange Act Rule 12b-25(d) provides
that ``a registrant will not be eligible to use any registration
statement form under the Securities Act of 1933 the use of which is
predicated on timely filed reports until the subject report is
actually filed'' pursuant to Rule 12b-25.
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b. Signatures
As we stated in the Proposing Release, it is our understanding that
in many ABS transactions, the trustee is the recipient and not
necessarily the preparer of the Form 10-D information, and the
depositor or the servicer is thus in a better position with respect to
possession, responsibility and awareness of the information that would
need to be reported. Our proposed signature requirements for Form 10-D
reflected this understanding by proposing that the report must be
signed by either the depositor, or in the alternative, on behalf of the
issuing entity by a duly authorized representative of the servicer (or
master servicer if multiple servicers were involved). We did not
propose to permit the trustee to sign the report as an alternative to
the depositor or the servicer.
Commenters were mixed on these proposals. While some commenters
supported the proposals,\466\ others believed additional parties should
be able to sign, including the trustee.\467\ Some of these commenters
believed any party should be permitted to sign an Exchange Act report
for asset-backed securities, if the transaction parties so agreed.
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\466\ See, e.g., Letters of JPMorganChase and Wells Fargo.
\467\ See, e.g., Letters of ABA; Am. Bankers; ASF; BMA; and U.S.
Bank.
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We are not persuaded that additional parties should be permitted to
sign the Form 10-D. While the final rule will result in a change in
practice for some issuers from the inconsistent practice under the
modified reporting system, we continue to believe it is more
appropriate for the reports to be signed by either the depositor, or
the servicer in the alternative. In the various scenarios presented by
commenters who argued for the ability of additional parties to sign, in
each case either the depositor or the servicer would still be in a
position to sign. We also do not believe it is appropriate to permit
any transaction party to sign a required report under the Exchange
Act.\468\ Accordingly, we are adopting our signature requirements as
proposed.\469\
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\468\ This approach is consistent with non-ABS, including other
structured securities.
\469\ Several commenters requested clarification on the use of a
power of attorney to sign Exchange Act reports. See, e.g., Letters
of ASF; BMA; JPMorganChase; and U.S. Bank. Existing Item 601(b)(24)
of Regulation S-K addresses the procedural requirements for the use
of a power of attorney if any name is signed to an Exchange Act
report pursuant to a power of attorney. Manually signed copies of
such power of attorney must be filed. In addition, if the name of
any officer signing on behalf of the registrant (e.g., for ABS,
either the officer of the depositor signing on behalf of the
depositor or the officer of the servicer signing on behalf of the
issuing entity by the servicer) is signed pursuant to a power of
attorney, certified copies of a resolution of the registrant's board
of directors authorizing such signature shall also be filed (e.g.,
by the depositor's board of directors). A power of attorney filed
relating to an Exchange Act report must relate to a specific filing
or amendment. A power of attorney that confers general authority
shall not be filed. A power of attorney is to be for an individual
person. Note that a power of attorney cannot be used for signing a
certification pursuant to Exchange Act Rule 13a-14 or 15d-14. See
Exchange Act Rule 13a-14(c) and 15d-14(c). In addition, even in
instances where a power of attorney may be used, the use of the
power of attorney does not affect the responsibility of the
principal whose signature is being signed pursuant to the power of
attorney.
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c. Content
Consistent with our proposal and the longstanding requirements
under the modified reporting system, the disclosure content for Form
10-D will consist of both the distribution and pool performance
information for the distribution period, and certain non-financial
disclosures, similar to those required by Part II of Form 10-Q, that
occurred during the period. Some commenters requested a change from
this longstanding practice by limiting the Form 10-D to only
distribution and pool performance information and moving the other
disclosures from the modified reporting system to Form 8-K disclosure
requirements, albeit with longer deadlines than current Form 8-K
requirements.\470\ Given our other amendments to Form 8-K disclosure
requirements for ABS, discussed below, we do not believe it is
necessary at this time to deviate further from the established
requirements of the ABS modified reporting system.
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\470\ See, e.g., Am. Bankers; ASF; CMSA; and Sallie Mae.
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The menu of disclosure items for Form 10-D is presented in the
following table:
[[Page 1566]]
Disclosure for Form 10-D
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Form items and source of disclosure required
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Item 1. Distribution and Pool Performance Information (Item 1121 of
Regulation AB).
Item 2. Legal Proceedings (Item 1117 of Regulation AB).
Item 3. Sales of Securities and Use of Proceeds (Item 2 of Part II of
Form 10-Q).
Item 4. Defaults Upon Senior Securities (Item 3 of Part II of Form 10-
Q).
Item 5. Submission of Matters to a Vote of Security Holders (Item 4 of
Part II of Form 10-Q).
Item 6. Significant Obligors of Pool Assets (Item 1112(b) of Regulation
AB).
Item 7. Significant Enhancement Provider Information (Items 1114(b)(2)
and 1115(b) of Regulation AB).
Item 8. Other Information.
Item 9. Exhibits (Item 601 of Regulation S-K).
------------------------------------------------------------------------
The requirement with respect to distribution and pool performance
information requires the registrant to provide the information required
by Item 1121 of Regulation AB and to attach as an exhibit to the Form
10-D the distribution report delivered to the trustee or security
holders, as the case may be, pursuant to the transaction agreements for
the related distribution date. Recognizing that the distribution report
specified under the transaction agreements will likely contain most, if
not all, of the disclosures about the distribution and pool performance
that will be required by Item 1121 of Regulation AB, any information
required by that Item that was included in the attached distribution
report need not be repeated in the Form 10-D.\471\ As a result, and as
is typically the case today with distribution reports filed under Form
8-K, no additional information may be required in the Form 10-D with
respect to distribution or pool performance if all of the required
information is included in the attached distribution report. However,
taken together, the attached distribution report and the information
provided in the Form 10-D must contain the information required by Item
1121 of Regulation AB.
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\471\ While we make this point specifically in Item 1 of Form
10-D with respect to distribution and pool performance information,
the same is true regarding any of the other Items of Form 10-D. See,
e.g., General Instruction D. of Form 10-D. In addition, any item
which is inapplicable or to which the answer is negative may be
omitted and no reference need be made in the report. If
substantially the same information had been previously reported by
the asset-backed issuer, an additional report of the information on
Form 10-D need not be made. See General Instructions C.3 an C.4 of
Form 10-D and the definition of ``previously reported'' in Exchange
Act Rule 12b-2.
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Item 1121 of Regulation AB, as proposed, requires a description of
the distribution and the performance of the asset pool during the
distribution period. Recognizing the variety of asset types that can be
securitized and the variety of transaction structures that can be used,
we did not propose and we are not adopting a standardized format for
the presentation of either the information required by Item 1121 of
Regulation AB or the distribution report prepared under the transaction
agreements. Commenters overall supported this decision.\472\ However,
while the material characteristics will vary depending on the nature of
the transaction, we continue to believe that, similar to asset pool
disclosure for the registration statement prospectus, there are certain
broad categories of disclosure and examples of common characteristics
that can be identified as illustrative examples. Therefore, Item 1121
of Regulation AB continues to set forth non-exclusive examples of such
information, as revised in response to comment. As we stressed in the
Proposing Release, and consistent with our discussion above regarding
prospectus disclosure, the actual disclosure to be provided will need
to be tailored to the material characteristics of the asset pool and
transaction involved. As with the item for prospectus asset pool
disclosure, we recognize that not all of the characteristics identified
will be applicable or material to the particular asset class and
transaction involved. As proposed, appropriate introductory and
explanatory information should be provided to introduce material terms,
parties and abbreviations used (or a cross-reference to a Commission
filing where such information may be found), and statistical
information should be presented in tabular and graphical formats, if
such presentations will aid understanding.
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\472\ See, e.g., Letter of ABA; ASF; and PWC.
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Commenters representing investors in particular supported our
proposed disclosure for the distribution and pool performance
information.\473\ As adopted, examples of illustrative characteristics
in Item 1121 of Regulation AB include:
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\473\ See, e.g., Letters of CFAI and ICI.
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Applicable record dates, accrual dates, determination
dates and distribution dates.
Cash flows received and their sources (including portfolio
yield, if applicable).
Calculated amounts and distribution of the flow of funds
for the period itemized by type and priority of payment, including fees
and expenses, payments with respect to enhancement, distributions to
security holders and excess cash flow and disposition of excess cash
flow.\474\
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\474\ For example, excess cash flow released to the residual
holder or other disposition, such as deposit into a transaction
account.
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Interest rates applicable to the assets and the asset-
backed securities, as applicable. Registrants should consider providing
interest rate information for pool assets in appropriate distributional
groups or incremental ranges.
Beginning and ending principal balances of the asset-
backed securities.
Beginning and ending balances of transaction accounts,
such as reserve accounts, and material account activity during the
period.
Amounts drawn on any credit enhancement or other support,
as applicable,\475\ and amounts still available, if known and
applicable.
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\475\ For example, for internal credit enhancement or other
support, this would not include application of subordination among
classes, but would include use of reserve accounts.
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Updated pool composition information for the period, such
as the number and amount of pool assets at the beginning and ending of
each period, weighted average coupon, weighted average life, weighted
average remaining term, pool factors and prepayment amounts.\476\
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\476\ For asset-backed securities backed by leases where a
portion of the securitized pool balance is attributable to the
residual value of the physical property underlying the leases, this
information also would include turn-in rates and residual value
realization rates.
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Delinquency and loss information for the period.\477\
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\477\ This item, like the other listed items in Item 1121(a) of
Regulation AB, is based on materiality. We have deleted the
reference in this item to Item 1100(b) of Regulation AB. We included
the reference as general guidance on presenting delinquency and loss
information. We understand that such information in distribution
reports typically is less expansive than the full delinquency and
loss information presented in the final Rule 424 prospectus for the
offering. However, we would expect any material changes to how
delinquencies, charge-offs and uncollectable accounts are defined or
determined, including re-aging policies, would be disclosed in the
Form 10-D report.
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The amount, terms and general purpose of any advances made
or reimbursed during the period.
Material modifications, extensions or waivers to pool
asset terms, fees, penalties or payments during the distribution period
or that have cumulatively become material over time.
Material breaches of pool asset representations or
warranties or transaction covenants.
Information on ratio, coverage or other tests used for
determining any early amortization, liquidation or other
[[Page 1567]]
performance trigger and whether the trigger was met.
As explained in the Proposing Release, in part because we are
expanding the availability of prefunding periods, revolving periods and
master trusts, we also are expanding related periodic disclosure to
include information regarding any new issuance of asset-backed
securities backed by the same asset pool and any pool asset changes
(other than in connection with a pool asset converting into cash in
accordance with its terms), such as additions or removals in connection
with a prefunding or revolving period and pool asset substitutions and
repurchases. Such information includes any material changes in
solicitation, credit-granting, underwriting, origination, acquisition
or pool selection criteria or procedures. While comments on this aspect
of the proposal were mixed between investors who desired such
information and issuers and their representatives who generally
objected to providing information that is not already provided
today,\478\ we continue to believe it is important to provide
transparency in those instances where the pool is changing not as a
result of the assets converting into cash in accordance with their
terms, but instead through external administration via an exception to
the basic principle that the asset pool is discrete.
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\478\ Compare, e.g., Letters of CFAI and ICI; with Letters of
ABA and ASF.
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In addition, we proposed that if the addition, substitution or
removal of pool assets had materially changed the composition of the
asset pool as a whole, full updated pool composition information
required by Items 1110, 1111 and 1112 of Regulation AB would be
required to the extent such information had not been provided
previously. Several commenters representing primarily issuers and their
representatives objected to the proposal, generally arguing that
disclosure of the parameters of the possible pool changes in the
prospectus should be sufficient and updated pool disclosure reflecting
actual changes, even if the pool has materially changed, should not be
required because such disclosure is not publicly provided today.\479\
We continue to believe that, with respect to changes to the asset pool
that occur not as a result of the assets converting into cash in
accordance with their terms but rather as a result of external
administration, updated disclosure about the effects of such external
changes should be required. We understand that the proposal, which
would have triggered new pool composition information at any time a
material change in pool composition occurred, could create
administrative burdens in assessing on an ongoing basis whether the
pool composition has materially changed. To ease these burdens and
difficulties associated with the proposal, our final requirement will
require such updated pool composition information at set times, but
only where a prefunding or revolving period is in effect or new
issuances have occurred from a master trust and, in each instance, only
if the information has materially changed from that previously
provided.
---------------------------------------------------------------------------
\479\ See, e.g., Letters of ABA; ASF; BMA; and Wells Fargo.
---------------------------------------------------------------------------
Under the final requirement, during a prefunding or revolving
period (including for asset classes where an unlimited revolving period
is permitted), or if there has been a new issuance of ABS backed by the
same pool under a master trust during the fiscal year of the issuing
entity, updated pool composition information will be required in the
Form 10-D report for the last required distribution of the fiscal year
of the issuing entity. In addition, such updated pool composition
information also will be required in the first Form 10-D report filed
for the period in which the prefunding or revolving period ends (if
applicable).\480\ Consistent with the proposal, such updated pool
composition information will include information required by Items
1110, 1111 and 1112 of Regulation AB applied taking the revised pool
composition into account.\481\
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\480\ In most instances, due to the fact most ABS issuers
suspend reporting obligations under Section 15(d) after the end of
their first fiscal year after the takedown occurs, the operation of
these requirements will most likely result in the disclosure being
provided once, if applicable.
\481\ See Item 1121(b) of Regulation AB. The original proposal
also would have required information required by Item 1108 of
Regulation AB (proposed Item 1107) to address new servicers not
previously described. However, as new servicer disclosure already
will be covered by Item 6.02 of Form 8-K, we are not including it
separately with this disclosure requirement.
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Consistent with our proposal, no information will be required,
however, if the information has not materially changed from that
provided previously in an Exchange Act report, an effective
registration statement under the Securities Act or a prospectus timely
filed pursuant to Securities Act Rule 424 under the same CIK code
regarding a subsequent issuance of asset-backed securities backed by
the same pool. For example, if a takedown related to an ABS transaction
with a revolving period occurred in October and the revised pool as of
the end of the issuing entity's fiscal year in December while the
revolving period was still in effect had not materially changed from
the pool described in the prospectus supplement for the takedown,
updated pool composition information would not be required. Similarly,
if a new issuance from a master trust occurred in October and the
revised pool as of the end of the issuing entity's fiscal year in
December was substantially similar to the pool described in the
prospectus supplement for the takedown, updated pool composition
information would not be required.
Regarding the other disclosure items for Form 10-D, the
requirements regarding disclosure of legal proceedings, sales of
securities, use of proceeds, submission of matters to a vote of
security holders, defaults on senior securities and other information
are consistent with the longstanding non-financial disclosures in Form
10-Q required under the modified reporting system.\482\ For legal
proceedings, we reference as proposed the tailored ABS disclosure in
Item 1117 of Regulation AB. As with legal proceedings disclosure in
Form 10-Q, a proceeding only will need to be reported for the
distribution period in which it first became a reportable event and in
subsequent periods where there have been material developments. The
other disclosure items contain cross-references to similar items in
Form 10-Q. For disclosure regarding the issuance of additional
securities, we are providing, in response to comment, that information
regarding consideration required by Item 701(c) of Regulation S-K \483\
need not be provided with respect to securities that were not
registered under the Securities Act.\484\
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\482\ See Release No. 33-8400 (Mar. 16, 2004) [69 FR 15594] (the
``Form 8-K Release'') regarding recent changes to these items of
Form 10-Q that are incorporated into the similar disclosure required
for Form 10-D.
\483\ 17 CFR 229.701(c).
\484\ See, e.g., Letter of ASF.
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As proposed, Items 6 and 7 of Form 10-D will require updated
financial information about significant obligors and providers of
enhancement, to the extent updated information is required. As has long
been the case under the modified reporting system and consistent with
the practice for non-ABS issuers, we continue to believe that such
information should be provided on an ongoing basis in addition to in
the initial prospectus while the asset-backed securities are reporting
under the Exchange Act. As proposed, such information only will need to
be included in the first distribution report for the period in which
updated
[[Page 1568]]
financial information regarding the third party is required under
Regulation S-X. As discussed in Section III.B.10., alternative methods
may be available, subject to conditions, to present information
regarding the third party, such as through incorporation by reference
or by including a reference to the third party's Commission filings.
Regarding providing updated financial information for third
parties, several commenters requested clarification as to when the
percentage concentration tests should be measured for determining
significant obligors.\485\ The suggestions by commenters were mixed.
Some commenters believed determinations should be made at closing and
not change over time as a result of pool fluctuations, arguing that to
monitor changes on an ongoing basis would be burdensome.\486\ In
addition, some of these commenters argued that it is typical to
contract with known significant obligors at closing that additional
information is to be provided for securitization reporting, and new
significant obligors that arise as the pool pays down would not have
such provisions negotiated into their agreements. Other commenters,
however, thought the tests should be recalculated with pool
fluctuations.\487\ One commenter believed the tests should be measured
as of the date the significant obligor is initially added to the
transaction, but not change as the pool pays down.\488\
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\485\ We are adopting our proposed Form 8-K requirement for the
addition and loss of material providers of credit enhancement or
other support. Therefore, we do not believe separate accommodations
are necessary for such entities.
\486\ See, e.g., Letters of ASF and CMSA.
\487\ See, e.g., Letter of NYCBA.
\488\ See, e.g., Letter of ABA.
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We are clarifying in an instruction to the definition of
significant obligor that the determination of significant obligors is
to be made as of the designated cut-off date for the transaction,
provided, that, in the case of master trusts, the determination is to
be made as of the cut-off date (or issuance date if there is not a cut-
off date) for each issuance of asset-backed securities backed by the
same asset pool.\489\ We also are noting, however, that if the
percentage concentration drops below 10% subsequent to the dates
discussed above, then the entity no longer need be considered a
significant obligor.
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\489\ As noted in Section III.D.8.c., we also are clarifying
that separate determinations of significant obligors must be made
for disclosure required by Item 6.05 of Form 8-K if the actual asset
pool differs materially from that described in the prospectus.
Separate determinations also must be made if disclosure is required
by Item 1121(b) of Regulation AB. See note 481 above and
accompanying text.
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Similar to recent revisions to Form 10-Q, we are requiring, as
proposed, that if any event occurs that required the filing of a Form
8-K during the period covered by the particular distribution report,
but was not disclosed on Form 8-K, the Form 10-D must include the
disclosure prescribed by the relevant Form 8-K item for the period
during which that event occurred.\490\ Like Form 10-Q, this requirement
applies to all Form 8-K items, including those covered by the recently
enacted Form 8-K safe harbor from liability under Exchange Act Section
10(b) or Rule 10b-5 for failure to timely file certain Form 8-K
reports.\491\ With respect to the Form 8-K items covered by the safe
harbor, the safe harbor extends only until the due date of the next
report of the issuer for the relevant periodic period in which the Form
8-K was not timely filed. As with similar disclosure now required in
Forms 10-Q and 10-K, failure to make such disclosure would subject the
issuer to potential liability under Section 10(b) and Rule 10b-5, in
addition to potential liability under Section 13(a) or 15(d).
---------------------------------------------------------------------------
\490\ See also Section III.D.8.d.
\491\ As discussed more fully in Section III.D.8., this safe
harbor only applies to a failure to file a report on Form 8-K for
certain specified items. Material misstatements or omissions in a
Form 8-K will continue to be subject to Section 10(b) and Rule 10b-5
liability. In addition, the safe harbor does not apply to liability
under Section 13(a) or 15(d) or with respect to any failure to
satisfy any other separate disclosure obligation that may exist.
---------------------------------------------------------------------------
5. Annual Reports on Form 10-K
Similar to our new general instructions for Forms S-1 and S-3, we
are adopting a separate general instruction for Form 10-K to specify
how that form is to be used for an annual report with respect to asset-
backed securities.\492\ As proposed, under the instruction the
depositor's name and sponsor's name also will need to be listed on the
cover page of the Form 10-K.\493\
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\492\ See General Instruction J. to Form 10-K. We also are
codifying as proposed the existing staff position that General
Instruction I. to Form 10-K (Omission of Information by Certain
Wholly-Owned Subsidiaries) is not applicable with respect to asset-
backed issuers.
\493\ While we are requiring the identification of these
additional parties on the cover page, the report should still be
filed on EDGAR only under the issuing entity's CIK code. See Section
III.D.3.
---------------------------------------------------------------------------
The instruction also clarifies who is to sign the Form 10-K.
Consistent with our proposal and the existing requirements for who must
sign the Sarbanes-Oxley Section 302 certification, the report must be
signed either on behalf of the depositor by the senior officer in
charge of securitization of the depositor, or on behalf of the issuing
entity by the senior officer in charge of the servicing function of the
servicer. If a servicer is to sign the report on behalf of the issuing
entity and multiple servicers are involved in the servicing of the pool
assets, the senior officer in charge of the servicing function of the
master servicer (or entity performing the equivalent function) must
sign. For the same reasons as the Form 10-D, we are not persuaded that
additional parties, such as the trustee, should be permitted to sign
the report as an alternative to the depositor or the servicer.\494\
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\494\ Regarding the potential use of a power of attorney, see
note 469 above.
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Substantially as proposed, the general instruction identifies the
existing items in the form that may be omitted as well as substitute
items from Regulation AB that are required. Any other applicable items
specified in Form 10-K will continue to be required.\495\ As we
explained in the Proposing Release, the requirements specified are
consistent with the modified reporting system, and commenters overall
agreed.\496\ The application of the disclosure items for Form 10-K is
presented in the following table: \497\
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\495\ As is the case today for Form 10-K, if any item is
inapplicable or the answer thereto is in the negative, an
appropriate statement to that effect shall be made. See Exchange Act
Rule 12b-13 (17 CFR 240.12b-13).
\496\ See, e.g., Letters of ABA and ASF.
\497\ In response to comment and given our revisions to the
assessment and attestation proposal, we have moved Items 5 and 9 of
Form 10-K to the list of Items that may be omitted. See, e.g.,
Letters of ABA and ASF.
Disclosure for Form 10-K for ABS
------------------------------------------------------------------------
Required if May be
Existing form items applicable omitted
------------------------------------------------------------------------
Item 1. Business............................ ............
Item 2. Properties.......................... ............
Item 3. Legal Proceedings................... ............
[[Page 1569]]
Item 4. Submission of Matters to a Vote of ............
Security Holders...........................
Item 5. Market for Registrant's Common ............
Equity and Related Stockholder Matters.....
Item 6. Selected Financial Data............. ............
Item 7. Management's Discussion and Analysis ............
of Financial Condition and Results of
Operations.................................
Item 7A. Quantitative and Qualitative ............
Disclosure About Market Risk...............
Item 8. Financial Statements and ............
Supplementary Data.........................
Item 9. Changes in and Disagreements with ............
Accountants on Accounting and Financial
Disclosure.................................
Item 9A. Controls and Procedures............ ............
Item 9B. Other Information.................. ............
Item 10. Directors and Executive Officers of ............ \1\
the Registrant.............................
Item 11. Executive Compensation............. ............ \1\
Item 12. Security Ownership of Certain ............ \1\
Beneficial Owners and Management...........
Item 13. Certain Relationships and Related ............ \1\
Transactions...............................
Item 14. Principal Accountant Fees and ............
Services...................................
Item 15. Exhibits and Financial Statement ............
Schedules..................................
Additional Disclosure Items from Regulation
AB:
Item 1112(b) of Regulation AB, Significant ............
Obligor Financial Information..............
Items 1114(b)(2) and 1115(b) of Regulation ............
AB, Significant Enhancement Provider
Financial Information......................
Item 1117 of Regulation AB, Legal ............
Proceedings................................
Item 1119 of Regulation AB, Affiliations and ............
Certain Relationships and Related
Transactions...............................
Item 1122 of Regulation AB, Compliance with ............
Applicable Servicing Criteria..............
Item 1123 of Regulation AB, Servicer ............
Compliance Statement.......................
------------------------------------------------------------------------
\1\ If the issuing entity does not have any executive officers or
directors.
As noted in the table above, if the issuing entity has its own
executive officers, board of directors or persons performing similar
functions, Items 401, 402, 403 and 404 of Regulation S-K, will be
required.\498\ As discussed in Section III.B.1., we are not requiring
audited financial statements for the issuing entity, nor are we adding
reporting requirements regarding internal control over financial
reporting.
---------------------------------------------------------------------------
\498\ Otherwise, all of Item 403 of Regulation S-K, including
Item 403(a) of Regulation S-K, may be omitted.
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Regarding the items to be included from Regulation AB, information
about legal proceedings required by Item 1117 of Regulation AB will
need to be provided, as well as information on affiliate relationships
and related party transactions required by Item 1119 of Regulation AB.
Regarding the latter, no information will be required, however, if
substantially the same information had been provided previously in an
annual report on Form 10-K for the asset-backed securities or in an
effective registration statement under the Securities Act or prospectus
timely filed pursuant to Securities Act Rule 424 under the same CIK
code as the current annual report on Form 10-K. Updated financial
information regarding significant obligors and enhancement providers
also will be required,\499\ although alternative methods may be
available, subject to conditions, to present the information, such as
through incorporation by reference or by including a reference to their
Commission filings. The reporting requirement regarding an assessment
of compliance with servicing criteria is discussed in Section III.D.7.
---------------------------------------------------------------------------
\499\ See text accompanying note 489 above regarding when
determinations of significant obligors must be made.
---------------------------------------------------------------------------
As proposed, we are codifying the longstanding requirement in the
modified reporting system that a servicer compliance statement must be
filed as an exhibit to the Form 10-K.\500\ The servicer compliance
statement requires a statement of compliance regarding the servicer's
obligations under the particular servicing agreement for the ABS
transaction. This is different from both the assessment of and
attestation regarding compliance with servicing criteria, which is
against a single set of criteria applicable to all ABS transactions,
and the Section 302 certification, which is related to disclosure in
Commission reports.
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\500\ See Item 1123 of Regulation AB. Amendments to Item 601 of
Regulation S-K specify that servicer compliance statements are to be
filed as Exhibit 35 to the Form 10-K.
---------------------------------------------------------------------------
Like the existing requirement under the modified reporting system,
the servicer compliance statement is a statement, signed by an
authorized officer of the servicer, to the effect that a review of the
activities of the servicer and its performance under the servicing
agreement had been made under the officer's supervision, and that to
the best of the officer's knowledge and except as otherwise disclosed,
the servicer has fulfilled its obligations under the agreement in all
material respects throughout the reporting period. If multiple
servicers are involved in servicing the pool assets, separate
compliance statements are required from each servicer that meets the
criteria in Item 1108(a)(2)(i) through (iii) of Regulation AB (i.e.,
master servicer, each affiliated servicer and each unaffiliated
servicer that services 10% or more of the pool assets). As we explained
in the Proposing Release, we believe this is consistent with general
practice and should result in coverage of the material aspects of the
primary servicing function.
6. Certifications Under Section 302 of the Sarbanes-Oxley Act
In June 2003, the Commission adopted amendments to its general
rules relating to certifications required by the Sarbanes-Oxley Act,
including providing the form of the Section 302 certification in the
exhibit requirements in Item 601 of Regulation S-K.\501\ As proposed,
we are amending Item 601 of Regulation S-K to add the specific form and
content of the required ABS Section 302 certification to the exhibit
filing requirements.\502\
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\501\ See Release No. 33-8238 (Jun. 5, 2003) [68 FR 36636].
\502\ See amendments to Item 601 of Regulation S-K and Exchange
Act Rules 13a-14 and 15d-14. Under Exchange Act Rules 13a-14 and
15d-14, the requirements relating to the ABS Section 302
certification are specified in paragraph (d) of those Rules. The
amendments to Item 601 of Regulation S-K segregate the separate
forms of Section 302 certifications for non-ABS issuers (required by
paragraph (a) of Exchange Act Rules 13a-14 and 15d-14) from those
for ABS filings (required by paragraph (d) of Exchange Act Rules
13a-14 and 15d-14). In both instances, Section 302 certifications
still must be filed under Exhibit 31. We also are revising Exchange
Act Rules 13a-14(d) and 15d-14(d) as proposed to delete from those
paragraphs the detailed description of the contents of the ABS
Section 302 certifications. We are making several other technical
amendments to the rules regarding certifications, as proposed,
including amendments to Exchange Act Rule 12b-15 and paragraph (c)
of Exchange Act Rules 13a-14 and 15d-14 to confirm the Commission's
intention that those provisions also apply with respect to ABS
Section 302 certifications required by paragraph (d) of Exchange Act
Rules 13a-14 and 15d-14.
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[[Page 1570]]
As we explained in the Proposing Release, in specifying the form of
the ABS Section 302 certification, we are making several amendments to
the form provided in the revised staff statement to reflect our other
substantive Exchange Act amendments.\503\ Other changes reflect the
approach, as proposed and consistent with the approach for non-ABS
issuers, that the language of the certification must not be revised in
providing the certification apart from the alternatives specified.
Instead, any issues should be addressed through disclosure in the
reports. Commenters generally agreed with our proposed revisions to the
form of the certification.\504\ The new form of certification, as
modified from the proposal, is as follows: \505\
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\503\ We believe the combination of these and other amendments
render the two staff no-action letters issued subsequent to the
revised staff statement no longer necessary. See Merrill Lynch
Depositor, Inc. (Mar. 28, 2003) and Mitsubishi Motors Credit of
America, Inc. (Mar. 27, 2003).
\504\ See, e.g., Letters of ABA and ASF.
\505\ Unlike Section 302 certifications, certifications required
by Section 906 of the Sarbanes-Oxley Act are required only in
periodic reports that contain financial statements filed by the
issuer. See 15 U.S.C. 1350. We are not requiring that ABS reports on
Form 10-K must contain the ABS issuer's financial statements. Thus,
a Section 906 certification requirement will not be triggered.
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Certifications
I, [identify the certifying individual], certify that:
1. I have reviewed this report on Form 10-K and all reports on Form
10-D required to be filed in respect of the period covered by this
report on Form 10-K of [identify the issuing entity] (the ``Exchange
Act periodic reports'');
2. Based on my knowledge, the Exchange Act periodic reports, taken
as a whole, do not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, all of the distribution, servicing and
other information required to be provided under Form 10-D for the
period covered by this report is included in the Exchange Act periodic
reports;
4. [I am responsible for reviewing the activities performed by the
servicer(s) and based on my knowledge and the compliance review(s)
conducted in preparing the servicer compliance statement(s) required in
this report under Item 1123 of Regulation AB, and except as disclosed
in the Exchange Act periodic reports, the servicer(s) [has/have]
fulfilled [its/their] obligations under the servicing agreement(s);
and]
[Based on my knowledge and the servicer compliance statement(s)
required in this report under Item 1123 of Regulation AB, and except as
disclosed in the Exchange Act periodic reports, the servicer(s) [has/
have] fulfilled [its/their] obligations under the servicing
agreement(s); and]
5. All of the reports on assessment of compliance with servicing
criteria for asset-backed securities and their related attestation
reports on assessment of compliance with servicing criteria for asset-
backed securities required to be included in this report in accordance
with Item 1122 of Regulation AB and Exchange Act Rules 13a-18 and 15d-
18 have been included as an exhibit to this report, except as otherwise
disclosed in this report. Any material instances of noncompliance
described in such reports have been disclosed in this report on Form
10-K.
[In giving the certifications above, I have reasonably relied on
information provided to me by the following unaffiliated parties [name
of servicer, sub-servicer, co-servicer, depositor or trustee].]
Date:-----------------------------------------------------------------
-----------------------------------------------------------------------
[Signature]
[Title]
As we explained in the Proposing Release, paragraphs 1 and 3 have
been changed from the revised staff statement to reflect the addition
of Form 10-D and the fact that the certification covers the information
filed in those distribution reports rather than Form 8-K.\506\
Paragraph 4 refers to the servicer compliance statement explicitly
required by our rules. In addition and consistent with the revised
staff statement, two alternatives are provided for paragraph 4
depending on who is signing the Form 10-K report. The first version is
to be used when the servicer signs the report on behalf of the issuing
entity. The second version is to be used when the depositor is signing
the report. Paragraph 5 of the certification has been amended from the
revised staff statement and our proposal to refer specifically to our
revised requirements regarding assessment of compliance with servicing
criteria, discussed more fully in Section III.D.7.
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\506\ In addition, we are making conforming revisions to
paragraph 2 of the certification to track similar changes made in
the June 2003 certification release, which was issued after the
revised staff statement.
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Because asset-backed issuers do not typically have a principal
executive officer or principal financial officer, the signature
requirements for the ABS certifications differ from other issuers.
Consistent with our proposal and the revised staff statement, the final
rules specify who must sign the certification. The certification must
be signed by either the senior officer in charge of securitization of
the depositor if the depositor is signing the Form 10-K report, or the
senior officer in charge of the servicing function of the servicer if
the servicer is signing the Form 10-K report on behalf of the issuing
entity.\507\ If multiple servicers are involved in servicing the pool
assets, the senior officer in charge of the servicing function of the
master servicer (or entity performing the equivalent function) must
sign if a representative of the servicer is to sign, and references in
the certification relate to the master servicer. As is the case today
for all Section 302 certifications, a natural person must sign the
certification in his or her individual capacity, although the title of
that person in the organization of which he or she is an officer may be
included under the title.
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\507\ See amendments to paragraph (e) of Exchange Act Rules 13a-
14 and 15d-14.
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As proposed, these signature requirements are consistent with our
final rules for who must sign the Form 10-K. The same person that signs
the Form 10-K must sign the Section 302 certification. Although
comments in this area were mixed, we are not persuaded that a
representative of the trustee should be permitted to sign the Section
302 certification, especially given that the trustee is not the party
signing the report itself.\508\
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\508\ Compare, e.g., Letters of Aus. SF and Wells Fargo; with
Letters of ABA; ASF; and BMA.
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Consistent with our proposal and the revised staff statement, we
are including an instruction to the certification to clarify that
because the signer of the certification must rely in certain
circumstances on information provided by unaffiliated parties outside
of the signer's control, the signer in such situation may reasonably
rely on information that unaffiliated trustees, depositors, servicers,
sub-servicers or
[[Page 1571]]
co-servicers have provided. As is the case today, if the signer does
so, it must provide an additional statement in the certification
identifying the unaffiliated parties on which the signer reasonably
relied. Commenters supported retaining this instruction.\509\ Like the
revised staff statement, we are not specifying the manner in which
reasonable reliance may be established. As proposed, the reasonable
reliance instruction for the Section 302 certification is not
applicable with respect to affiliated parties, nor is it applicable
with respect to information from any registered public accounting firm
or firms performing an attestation on an assessment of compliance with
servicing criteria for an affiliated party.
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\509\ See, e.g., Letters of ABA and ASF.
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7. Report on Assessment of Compliance With Servicing Criteria and
Accountant's Attestation
a. Background
As noted above, the modified reporting system has not required
audited financial statements for the issuing entity in the annual
report on Form 10-K, but has instead generally required an assertion by
the servicer and an attestation by an independent public accountant
regarding compliance with servicing criteria. This longstanding
framework was developed based on the recognition that one of the most
important elements affecting an investor's assessment of a particular
asset-backed security is the performance of the servicer and that an
independent third party checking some aspect of the servicing function
provides a certain level of assurance and transparency regarding the
servicer's performance.
However, the types of assessments and attestations, and the
criteria that servicing compliance was assessed against, historically
have varied significantly. The most common example involves an
assertion on and disclosure regarding compliance with criteria set
forth in the Uniform Single Attestation Program for Mortgage Bankers,
or USAP, developed by the Mortgage Bankers Association.\510\ The
accountant's report attesting to the assertion under the USAP is
prepared in accordance with SSAE No. 10.\511\ The servicer's assertion
as to compliance and the accompanying accountant's report are commonly
referred to as a ``USAP Report.''
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\510\ Mortgage Bankers Association of America, Uniform Single
Attestation Program for Mortgage Bankers (last rev. 1995).
\511\ Statements on Standards for Attestation Engagements No. 10
(SSAE No. 10), Attestation Standards: Revision and Recodification
(Jan. 2001). Specifically, Chapters 1 and 6 of SSAE No. 10 set forth
the standards that accountants are required to follow in attesting
to an entity's compliance with specified requirements. As set forth
in paragraph 1.23, ``the practitioner shall perform the engagement
only if he or she has reason to believe that the subject matter is
capable of evaluation against criteria that are suitable and
available to users.'' The USAP has generally been accepted by
practitioners as meeting that requirement. See paragraphs 1.24
through 1.34 of SSAE No. 10.
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As we noted in the Proposing Release, the USAP was created early in
the development of securitization as a mortgage financing technique to
provide uniform minimum criteria against which the servicing of
mortgage-backed securities could be assessed. It was created at a time
when most securitizations consisted of either simple pass-through or
pay-through structures of simple pools of residential mortgages. As
new, more-complex ABS transactions were introduced into the marketplace
and additional asset types were securitized, the USAP, in the absence
of any other well-recognized criteria, continued to be used as the
default criteria for assessment and disclosure of servicer performance.
The USAP describes uniform minimum servicing criteria against which
a servicing entity is to assess material compliance. In general, the
servicer's management makes a written assertion about compliance with
the USAP minimum criteria for a particular period (usually a year). The
accountant engaged to perform the examination engagement evaluates the
servicer's assertion regarding compliance with the minimum servicing
criteria.\512\
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\512\ SSAE No. 10, paragraph 6.54, provides two methods of
reporting: (a) Directly on an entity's compliance or (b) on a
responsible party's written assertion regarding compliance. However,
SSAE No. 10, paragraph 6.64, states that ``when an examination of an
entity's compliance with specified requirements discloses
noncompliance with the applicable requirements that the practitioner
believes have a material effect on the entity's compliance, the
practitioner should modify the report and, to most effectively
communicate with the reader of the report, should state his or her
opinion on the entity's specified compliance requirements, not on
the responsible party's assertion.''
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While the USAP has by default become the dominant criteria to
assess servicing compliance for purposes of fulfilling the accountant
report requirement of the modified reporting system, it has significant
limitations in the context of ABS reporting. The USAP was originally
written to address compliance criteria related to residential mortgage
loan servicing. Over time, it has been extended to other ABS
transactions, such as those involving auto loans. However, the USAP's
minimum servicing criteria may not adequately capture the needs of
investors in ABS transactions other than mortgage-backed securities.
Some of the USAP criteria may not be applicable to these other asset
types (e.g., criteria regarding property tax escrow accounts) and are
often specifically excluded from the assertion of compliance and the
related accountant's report. There does not appear to be any
consistency as to which USAP criteria are applied to a particular asset
type outside of residential mortgage loans, so the list of exceptions
varies from issuer to issuer, even in the same asset class. In
addition, rarely are substitute criteria included that would be
relevant to that asset class, further diminishing the scope and
relevance of the final report for other asset classes.
Another difficulty with the current criteria is that they do not
clearly address the totality of activities and parties involved in
servicing an ABS transaction, even for mortgage-backed securities. The
USAP does not completely address the full spectrum of servicing
functions, including allocation and distribution functions, that may be
important in an ABS transaction, particularly as the complexity of flow
of funds calculations has increased. In addition, the current system
does not contemplate the fact that multiple unaffiliated parties may be
involved in servicing an asset-backed security. As a result, the
current system potentially leaves gaps in servicing compliance
reporting.
b. Our Proposal and Overview of Revised Approach
Our proposal sought to retain the assessment and attestation
approach as well as improve and add consistency to the approach by
providing a specified manner for making assertions and associated
attestations. These improvements were largely facilitated by the
introduction of a single uniform set of servicing criteria that covers
all aspects of the servicing function and that could be used in the
context of multiple asset classes.
We continue to believe that for asset-backed securities, an
assessment and attestation regarding servicing compliance provides
material information to investors in monitoring transactions and thus
their investments more directly and efficiently than an audit of
financial statements or reporting on internal control over financial
reporting. As we stated in the Proposing Release, the performance of
the servicing function is of material importance to the performance of
an ABS transaction. Recent events in both the ABS and non-ABS markets
have highlighted the need for appropriate controls and processes and
mechanisms
[[Page 1572]]
to assess compliance with controls and processes.\513\ A disclosure-
based assessment and attestation system identifies for investors those
aspects of the standard servicing criteria that are in material
compliance. Investors will thus be better able to evaluate servicing
responsibilities and performance and the reliability of the information
they receive. Additionally, the assessment should help to identify
potential weaknesses that may adversely affect security holders.
---------------------------------------------------------------------------
\513\ See, e.g., note 59 above.
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As we noted in the Proposing Release, the current modified
reporting system does not provide complete transparency as to what is
expected of issuers, servicers, accountants and other parties. While
the varying no-action letters on this subject need uniform
codification, the principal weakness in the current system is the lack
of suitable servicing criteria on which reporting can be based. The
result has been significant inconsistencies in the type of reporting
provided, diminishing its usefulness, relevance and comparability.\514\
---------------------------------------------------------------------------
\514\ See, e.g., ``SEC Filings Reveal Little ABS Reporting
Consistency,'' Asset Securitization Report, Sep. 23, 2002, at 10.
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Accordingly, we are retaining the basic approach set forth in our
original proposal, although we are making certain modifications,
discussed in more detail below. Specifically, we are modifying our
original proposal to remove the requirement for a single responsible
party to make an assertion regarding servicing compliance covering the
entire servicing function, which was the primary area of comment on the
proposals.\515\ Instead, we are adopting a revised approach suggested
by many commenters that will require reports on assessments of
compliance with servicing criteria from each party participating in the
servicing function as specified, with associated attestation reports
from registered public accountants, to be filed as exhibits to the Form
10-K report.\516\ As an additional aspect of this revised approach, we
are revising paragraph 5 of the ABS Section 302 certification, as
discussed further below in response to comment, to require a
certification that, except as otherwise disclosed, required reports
from all parties participating in the servicing function as specified
have been included as an exhibit to the Form 10-K report.
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\515\ See, e.g., Letters of ABA; AICPA; ASF; BMA; CMSA; Dewey
Ballantine (``Dewey); E&Y; JPMorganChase; MBA; MBNA; U.S. Bank; and
Wells Fargo.
\516\ See, e.g., Letters of AICPA; ASF; BMA; CMSA; E&Y;
JPMorganChase; MBA; and Wells Fargo.
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As proposed, a material instance of noncompliance identified in the
reports will not by itself have regulatory restrictions on market
access, such as an effect on continued form eligibility under the
Securities Act for additional ABS transactions.\517\ Rather, the
assessment and reporting on the criteria is designed to operate within
a disclosure-based framework.
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\517\ However one of the proposed criteria relates to reporting
with the Commission. If reports are not filed in accordance with our
reporting rules, this may have an effect on continued form
eligibility. See Section III.A.3.
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c. Assessment and Attestation of Servicing Compliance
As discussed above, our revised approach will require that the
annual report on Form 10-K must include as exhibits reports from each
party participating in the servicing function that assesses compliance
with the servicing criteria that we are adopting in Item 1122 of
Regulation AB.\518\ Item 1122 of Regulation AB also specifies the
format for each of the assessment reports and requires them to include:
\519\
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\518\ See Exchange Act Rules 13a-18 and 15d-18. Item 601 of
Regulation S-K specifies that the assessment reports will need to be
filed under Exhibit 33 to the Form 10-K.
\519\ See Item 1122(a) of Regulation AB.
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A statement of the party's responsibility for assessing
compliance with the servicing criteria applicable to it.
A statement that the party used the servicing criteria to
assess compliance with the applicable servicing criteria.
The party's assessment of compliance with the applicable
servicing criteria as of and for the period ending the end of the
fiscal year covered by the Form 10-K report. The report must include
disclosure of any material instance of noncompliance identified by the
party.
A statement that a registered public accounting firm has
issued an attestation report on the party's assessment of compliance
with the applicable servicing criteria as of and for the period ending
the end of the fiscal year covered by the report on Form 10-K.
As discussed further in Section III.D.7.d, our revised approach
also requires the attestation report of a registered public accounting
firm to be filed as an exhibit to the Form 10-K report.\520\
i. Responsible Party
---------------------------------------------------------------------------
\520\ See Item 1122(b) of Regulation AB. Item 601 of Regulation
S-K specifies that each attestation report of a registered public
accounting firm will need to be filed under Exhibit 34 to the Form
10-K. As proposed, the substitution of another type of accountant's
report or opinion, such as a USAP report or an agreed-upon
procedures report, will not satisfy the reporting requirement. Of
course, ABS transaction agreements may continue to require a
separate accountant engagement, such as a USAP engagement or an
agreed-upon procedures engagement, in addition to the report called
for by this rule.
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Our proposal contemplated that a single ``responsible party,''
defined as either the depositor if the depositor signs the report on
Form 10-K, or the servicer if the servicer signs the report on behalf
of the issuing entity, would make an assertion regarding compliance
with the servicing criteria. The proposal contemplated that the
responsible party's assertion would cover the entire servicing function
and that the responsible party would, in certain instances, have to
place reasonable reliance upon third parties in making its assertion.
As discussed above, this was the primary focus of comment on our
assessment and attestation proposals. Many of the commenters, in
responding to our specific requests for comment on this point, believed
that instead of a single ``responsible party,'' there should be
separate assessments of compliance by each entity responsible for the
particular criteria and separate accompanying auditor
attestations.\521\ These commenters believed the responsibility for
assessing compliance with the criteria should be placed solely, in each
case, with the individual party whose servicing activities are being
evaluated. As stated by one of these commenters, individual assessments
can be performed by each party at a platform level consistent with the
proposal and these reports could be filed as exhibits to the Form 10-K
report along with the responsible party's assessment of its own
servicing compliance, as applicable.\522\ Several commenters also
supported as an addition to this alternative a requirement that a
single party would either confirm that an assessment and attestation
covering each unaffiliated party with material servicing or
administration responsibilities has been received, or disclose that an
entity with such responsibilities has failed to deliver its required
assessment and attestation.\523\
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\521\ See note 515 above.
\522\ See Letter of ASF.
\523\ See, e.g., Letters of AICPA; ASF; BMA; CMSA; E&Y;
JPMorganChase; MBA; and Wells Fargo.
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These alternatives still achieve our proposed objective of covering
the entire servicing function. We continue to believe it is important
that the investor receives notice as to whether reports evidencing all
aspects of the servicing function are in fact provided. As discussed in
Section III.B.3.d., the
[[Page 1573]]
delegation of servicing and administration functions in an ABS
transaction can vary significantly among different parties, even in the
same asset class. The investor likely will not be in the best position
to determine whether the reports that are ultimately attached to the
Form 10-K report collectively cover all aspects of the servicing
criteria.
Thus, we are adopting a revised approach in response to these
comments that does not require an assertion by a single responsible
party, but instead requires that the person that signs the Section 302
certification certify in paragraph 5 of the certification that
assertions prepared by all parties participating in the servicing
function as specified, and associated attestation reports from
registered public accountants, have been included as exhibits to the
report on Form 10-K, except as otherwise disclosed in the report.\524\
In addition, the certifying person must certify that all material
instances of noncompliance with the servicing criteria described in the
reports have been disclosed in the report on Form 10-K. In order to
make this certification, reports will need to be accumulated from all
parties participating in the servicing function as specified, along
with associated attestation reports from registered public accounting
firms, and filed as exhibits. Disclosure will be required in the Form
10-K if any of those reports are missing, along with an associated
explanation, and disclosure also will be required of material instances
of noncompliance described in the reports, if any.
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\524\ See Item 601(b)(31)(ii) of Regulation S-K; Item 1122 of
Regulation AB; and Exchange Act Rules 13a-18 and 15d-18.
---------------------------------------------------------------------------
The revised approach we are adopting requires coordination among
the various parties participating in the servicing function to be able
to comply with the filing requirements; however, we believe that the
amount of required coordination is reduced from our original proposal
and, as discussed above, meets the regulatory objective of providing
investors insight into the operation of the entire servicing function.
We expect that such coordination is possible and, as confirmed to us by
commenters, issuers can obtain the reports that must be filed as
exhibits.
ii. Scope: Period Covered
We proposed that the assessment of the servicing function would be
for a full fiscal period, rather than just at a point in time. We
continue to believe that an assessment and attestation for the entire
period covered by the report on Form 10-K is the appropriate approach
in this context, and commenters generally agreed.\525\ This approach is
consistent with the USAP approach commonly followed today. Accordingly,
we are adopting this approach without modification.
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\525\ Compare, e.g., Letters of ASF and E&Y; with Letter of ABA.
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iii. Scope: Level of Reporting
In light of current practice and servicers' focus on overall
compliance with standards at the platform level, we proposed to accept
a ``platform'' level assessment for purposes of assessing servicing
compliance. This means an assessment of compliance with respect to all
asset-backed securities transactions involving the asserting party that
are backed by assets of the type backing the asset-backed securities
covered by the Form 10-K report. This ``platform'' level assessment was
proposed to permit a single assessment and assertion regarding
compliance for entities involved in multiple ABS transactions, as
compared to requiring separate assessments for each individual
transaction, which would be more costly and might be administratively
burdensome. Commenters generally supported an assessment at the
platform, rather than transaction, level.\526\ We are adopting this
approach as we continue to believe a platform level assessment provides
an appropriate level of information to investors and does not result in
substantial increased cost to issuers. As commenters confirmed to us,
we believe that platform level assessments can be performed by all
parties participating in the servicing function to allow an issuer to
meet its requirements to file the resulting assessment and related
attestation reports as exhibits to the Form 10-K report.
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\526\ See, e.g., Letters of AICPA; ASF; E&Y; MBNA; PWC; and
Wells Fargo.
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iv. Scope: Entire Servicing Function
As we explained in the Proposing Release, the servicing of an
asset-backed security consists of many functions, including: collecting
principal, interest and other payments from obligors; paying taxes and
insurance from escrowed funds; monitoring and accounting for
delinquencies; executing foreclosure if necessary; temporarily
investing funds pending distribution; remitting fees and payments to
enhancement providers, trustees and others providing services; and
allocating and remitting distributions to security holders. Each of
these functions can represent a material element of ABS performance.
In addition, the entire servicing function may be performed by a
single party or different aspects may be performed by multiple parties
(e.g., primary servicers, master servicers, trustees, etc.). For
example, in some instances, one party may perform the servicing
functions that relate to administration of the pool assets while
another party may perform the servicing functions that relate to
calculating payments to security holders. Currently, when multiple
parties are involved in the servicing function, sometimes only one
report on servicing compliance by one servicer is filed with the Form
10-K report covering only a limited subset of the servicing function.
As we explained in the Proposing Release, this approach provides no
assurance with respect to other aspects of the servicing function. In
other instances, multiple reports may be filed, one from each party
involved in the servicing function covering only those steps that are
applicable for the standards impacted by their work. This approach may
lead to fragmented reporting that potentially results in certain
aspects of the servicing function not being addressed by the reports at
all or requiring an investor to ascertain if all aspects have been
covered.
To address these concerns, we proposed that the responsible party
would assess material compliance with the servicing criteria covering
the entire servicing function, based on reasonable reliance upon third-
parties where necessary. We continue to believe that the entire
servicing function should be subject to an assessment of compliance. As
noted above, we believe the revised approach we are adopting requiring
separate reports regarding compliance by each party participating in
the servicing function as specified also achieves this objective while
eliminating many of the concerns or potential complexities raised by
commenters regarding a single ``responsible party'' approach.
Some commenters thought that, in the event that we pursued a
multiple report approach, we should set a specific threshold for which
reports should be required as some parties may be providing servicing
activities for only a minor portion of the assets included in a
transaction.\527\ Other commenters thought that providing a threshold
for reporting may result in very few reports being included in
instances where there
[[Page 1574]]
are multiple parties each servicing a minor portion of the assets
included in the transaction, such as may be the case in residential
mortgage ABS transactions.\528\
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\527\ See, e.g., Letters of AICPA; ASF; BMA; Dewey; and E&Y.
\528\ See, e.g., Letter of Wells Fargo.
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To address this issue, we are specifying that reports will be
required by any ``party participating in the servicing function,''
which is defined as any entity that is performing activities that
address the servicing criteria, unless such entity's activities relate
only to 5% or less of the pool assets. For example, if a party is
servicing individual pool assets that comprise only 4% of the pool, a
report from that party will not be required. However, some servicing
functions cover all assets included in a transaction. For example, a
single party, such as a trustee or an administrator, may calculate the
amount due to investors in a transaction. In those cases, an assessment
from that party and a related attestation report from a registered
public accounting firm will be required to be filed as an exhibit to
the Form 10-K for the transaction.
As proposed, the revised approach we are adopting does not
distinguish which parties should file reports based on the respective
role played by the party in the servicing function. Any party
participating in the servicing function, including trustees, may be
required to provide an assessment and related attestation report to the
extent that the assets covered by their activities relates to more than
5% of the pool assets. However, the fact that a party, such as a
trustee, may perform an aspect of the servicing function covered by the
criteria for purposes of requiring an assessment and attestation report
does not mean that the party is included in the definition of
``servicer'' in Regulation AB for purposes of other requirements, such
as disclosure regarding servicers and servicer compliance statements.
v. Servicing Criteria
As we explained in the Proposing Release, the only generally used
criteria for assessing and reporting on servicing compliance is the
USAP. However, as previously discussed, the USAP was not designed for
the breadth of asset classes included in ABS offerings. It also does
not address aspects of the servicing function that may be important in
servicing asset-backed securities.
In the absence of other suitable criteria, we proposed to establish
disclosure-based servicing criteria to be used by those making an
assertion regarding servicing compliance and by registered public
accounting firms in assessing servicing compliance. Our proposal
illustrated our belief that a single set of servicing criteria that is
publicly available would enhance the quality of the assessment of
compliance, promote the comparability of reports of different issuers,
and provide value in establishing market-wide benchmarks with respect
to assessing the servicing function.
Most commenters commended the initiative to enunciate a consistent
set of criteria.\529\ As explained by one of these commenters,
substantial modifications to the existing criteria under the USAP were
in order and the proposed modifications were appropriate.\530\
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\529\ See, e.g., Letters of ASF; CMSA; MBA; U.S. Bank; and Steve
Walls. One of these commenters noted that while market participants
could develop suitable uniform criteria if given enough time, the
proposed criteria, if revised to give effect to the commenter's
comments on specific items, would be an acceptable set of criteria
that could be applied across asset types. See Letter of ASF.
\530\ See Letter of Steve Walls.
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With certain minor clarifying revisions in response to comment, we
are adopting the uniform set of servicing criteria substantially in the
form proposed. As we explained in the Proposing Release, no other set
of uniform servicing criteria exists for purposes of this type of
compliance assessment today, nor are we aware of any that are under
development in the market. A few commenters believed that our final
rules should permit the use of criteria established by a private body
or group that followed due-process procedures.\531\ If other sets of
criteria were developed by market participants in the future that were
subject to appropriate due process, we would be willing to consider, at
that time, their applicability in a separate rulemaking action. As we
explained in the Proposing Release, in order for a set of servicing
criteria to be considered in the future, the criteria would need to: be
established by a group or body that has followed due process
procedures; be free from bias; permit reasonably consistent qualitative
and quantitative measurements; be sufficiently complete so that
relevant factors that would alter a conclusion about the subject matter
were not omitted; and be relevant to the subject matter.\532\ In
addition, the set of criteria would need to address all material
aspects of the servicing function with respect to an asset-backed
securities transaction.
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\531\ See, e.g., Letters of AICPA; E&Y; and PWC.
\532\ See AT Sec. 101, paragraph 24.
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As proposed, the disclosure-based servicing criteria we are
adopting are designed to be incremental to the current criteria in the
USAP. Accordingly, and as commenters confirmed to us, many of the
criteria are not new.\533\ Criteria that we proposed that included
specific timeframes, such as two business days, mirrored for the most
part the current criteria in the USAP. The servicing criteria we
proposed that were incremental to the USAP criteria were developed
based on staff study and experience with ABS transactions, including
experience gained through the filing review process and the 2003 MBS
Disclosure Report. Commenters suggested several minor clarifying
revisions to the proposed criteria, and as discussed above we have made
clarifying revisions to the final criteria in response.
---------------------------------------------------------------------------
\533\ See, e.g., Letter of MBA.
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While certain of the proposed servicing criteria referred to
specific timeframes as adapted from the USAP, others relied upon
transaction agreements to set forth specific details regarding that
aspect of the servicing function. The few commenters that commented on
this aspect of the proposal were mixed. One commenter preferred more
reliance on transaction agreements instead of specific timeframes to
provide flexibility, while another commenter preferred specific
timeframes in the criteria instead of reliance on transaction
agreements to promote consistency.\534\ To balance these objectives, we
are maintaining our proposed references to specific timeframes in the
criteria, which as noted above were adapted from the current USAP.
However, we are also providing in those criteria that transaction
agreements can expressly provide an alternate timeframe. Under this
approach, the specific timeframes in the criteria will continue to
apply in the event that the transaction agreements happen to be silent
on those timeframes. We believe this approach appropriately leaves the
responsibility for determining the details of the servicing functions
with investors and ABS issuers while still providing default benchmarks
that are generally consistent with the existing USAP. Further, as ABS
transaction agreements are required to be filed with the Commission,
disclosure of these details for individual transactions will be readily
available.
---------------------------------------------------------------------------
\534\ Compare the Letter of ABA with the Letter of MBA.
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Regarding another commenter's concern that the assessment and
related attestation regarding servicing compliance will be performed at
the platform level while the servicing criteria refer to transaction
[[Page 1575]]
agreements,\535\ in many instances we do not expect this will be a
major issue because it is our understanding that many transaction
agreements, particularly in the same asset class, contain the same or
nearly the same specific servicing-related requirements.
---------------------------------------------------------------------------
\535\ See Letter of Wells Fargo.
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The criteria, as proposed, consist of four broad categories:
general servicing considerations; cash collection and administration;
investor remittances and reporting; and pool asset administration. As
we explained in the Proposing Release, these categories describe major
components of the servicing function, and each category contains
servicing criteria that have been designed to have general
applicability to the servicing of all asset-backed securities. The
complete criteria are set forth in the text of paragraph (d) of Item
1122 of Regulation AB. As noted in Section III.D.7.c.vi., some
servicing criteria may be more or less applicable depending on the type
of asset underlying the ABS transactions.
The servicing criteria are summarized as follows:
General servicing considerations. The general servicing
considerations are designed to provide disclosure on whether the
servicer or other relevant party has instituted policies and procedures
for structural monitoring of the ABS securities (e.g., triggers or
events of default) and performed other general administrative tasks
during the period covered by the report as set forth in the transaction
agreements, such as monitoring the activities of third parties to which
material servicing activities have been outsourced, maintaining a back-
up servicer and maintaining certain insurance coverages in force, if
applicable. As we explained in the Proposing Release, with the
exception of the criterion regarding the maintenance of certain
insurance coverages in force, these criteria are not addressed in the
current USAP. We continue to believe they are appropriately included
given their importance to an ABS transaction.
Cash collection and administration. These servicing criteria are
designed to provide disclosure on whether the servicer or other
relevant party has administered the collection of cash from obligors,
segregated (as applicable) and reconciled such cash for investors and
maintained transaction accounts as set forth in the transaction
agreements. As we explained in the Proposing Release, the servicing
criteria included within this section are comparable to those set forth
in the USAP, although the USAP does not have specific criteria to
address the maintenance of transaction accounts. We continue to believe
disclosure of whether the servicer complies with maintenance of
transaction accounts is information investors may need to confirm the
ABS transaction is functioning as originally planned.
Investor remittances and reporting. These servicing criteria are
designed to provide disclosure on whether the servicer or other
relevant party is calculating amounts due to investors and reporting
such amounts to investors in accordance with the flow of funds in the
transaction agreements. These servicing criteria also are designed to
provide disclosure on whether the servicer or other relevant party has
allocated and remitted distributions to investors in accordance with
the transaction agreements and filed information with the Commission as
required by its rules and regulations. As we explained in the Proposing
Release, while certain elements of these criteria are presently
included in the USAP, an explicit assessment of compliance with the
flow of funds calculations may be incremental to what is currently
performed in satisfying the current USAP criteria. It remains our
understanding that oversight of the flow of funds calculations can be
critical for proper distributions to investors.
Pool asset administration. These servicing criteria are designed to
provide disclosure on whether the servicer or other relevant party is
maintaining the pool assets as set forth in the transaction agreements,
including:
Maintaining specified collateral;
Administering changes to the asset pool;
Posting payments and other changes regarding pool assets;
Instituting loss mitigation or recovery actions;
Administering funds held in trust for an obligor, if
required for the pool assets; and
Maintaining external credit enhancement or other support.
As we explained in the Proposing Release, these servicing criteria,
mostly included within the USAP, have been incrementally enhanced to
encompass more aspects of pool asset maintenance. For example, the USAP
does not address external credit enhancement or other support.
vi. Identification of Inapplicable Criteria
Because of the unique and fluid nature of the ABS market, our
proposal provided discretion to the responsible party to exclude those
servicing criteria that were inapplicable to the servicing of a
particular asset class, so long as the excluded criteria were
identified in the responsible party's and the registered public
accounting firm's reports. We also requested comment on an alternative
approach that would allow for a party to voluntarily determine which
specific servicing criteria to exclude from its assessment (even if
they were otherwise applicable to the particular asset class), so long
as any excluded criteria were disclosed and the reason for their
exclusion was also disclosed.
One commenter thought it critical to permit exclusion of criteria
that was inapplicable to the asset class and did not object to
requiring each assessing party to identify either all of the
inapplicable criteria, or, alternatively, only the criteria that were
applicable.\536\ One commenter supported our alternative approach and
believed a servicer should be able to exclude any particular criterion,
even if it cannot conclude that the criterion is not applicable to the
asset class, as long as it discloses the exclusion in the assessment
(e.g., the criterion is not required by the transaction
documents).\537\
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\536\ See, e.g., Letter of ASF.
\537\ See, e.g., Letter of TMCC.
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As noted above, we continue to believe all applicable servicing
criteria should be covered. However, with our revised approach
requiring reports from multiple parties that participate in the
servicing function, we also recognize that it may be necessary for a
particular party to exclude a particular criterion from its assessment
not because it is inapplicable to the asset class, but because that
particular party does not perform it. As a result, we are revising our
proposal to allow for the exclusion in a party's assessment report of
those specific servicing criteria that are not applicable to the
asserting party based on the activities it performs with respect to
asset-backed securities transactions taken as a whole involving such
party and that are backed by the same asset type backing the class of
asset-backed securities. For example, a servicer may exclude a
particular criterion either because in its servicing platform it does
not participate in that element of the servicing function or the
criterion is broadly inapplicable in the context of the asset class
being serviced. However, a party may not voluntarily select to exclude
specific servicing criteria if they are otherwise applicable to that
party.
In the event that servicing criteria are excluded for those reasons
that are permitted, the inapplicability of the criteria must be
disclosed in both the asserting party's assertion and the
[[Page 1576]]
related registered public accounting firm's report. However, while the
individual asserting parties will be permitted to exclude criteria they
do not perform, it will be incumbent on the person making the Section
302 certification to certify whether all required reports covering the
entire servicing function, including all the criteria applicable to the
asset class, are included with the Form 10-K report.
One commenter requested the ability to exclude certain servicing
criteria that are inapplicable in certain foreign jurisdictions, as
some of the proposed criteria do not apply to non-U.S. issuers given
there is not a corresponding concept in the home jurisdiction.\538\ We
do not believe it is necessary to create a separate ability to exclude
certain criteria for foreign ABS transactions. The approach we have
adopted provides those parties who participate in servicing foreign ABS
transactions the ability to exclude certain criteria if those criteria
are not applicable to the asserting party based on the activities it
performs. For example, if there are certain activities that are
necessary for the servicing of a mortgage loan in the U.S. that are not
applicable for the servicing of a mortgage loan in a foreign
jurisdiction because of regulatory or other structural reasons, the
approach we have adopted would permit the inapplicable criteria for the
foreign asset class to be excluded from the assertion and related
attestation with appropriate disclosure in each of those reports.
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\538\ See, e.g., Letter of A&O.
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vii. Disclosure of Material Instances of Non-Compliance
Our proposal contemplated that the responsible party's report on an
assessment of compliance with servicing criteria would identify any
material instance of noncompliance with the criteria, and that the same
party would be required to disclose in the report on Form 10-K any
material impacts or effects as a result of the material instances of
noncompliance that have affected or that may reasonably be likely to
affect pool asset performance, servicing of the pool assets or payments
or expected payments on the asset-backed securities. We continue to
believe it is important for material instances of noncompliance that
are reported in each of the reports prepared by parties participating
in the servicing function to be identified by the person preparing the
Form 10-K in the report on Form 10-K.
However, we are not adopting a specific line item requirement to
disclose any material impacts or effects as a result of the material
instances of noncompliance. Commenters were mixed on whether and to
what extent there should be such a specific disclosure
requirement.\539\ Even in the absence of a specific line item
disclosure requirement, whether any such disclosure is required will
depend on the particular facts and circumstances.\540\
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\539\ Compare, e.g., Letter of ASF; with Letters of AICPA; E&Y;
and Wells Fargo.
\540\ See note 252 above.
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Consistent with our proposal, the period to be covered by the
report on Form 10-K is consistent with the common practice today under
the USAP of assessing compliance as of and for the period ending on a
particular date. As we explained in the Proposing Release, this is
different from reporting regarding internal control over financial
reporting under Section 404 of the Sarbanes-Oxley Act, which speaks as
of a particular date only. Thus, consistent with our proposal and
general practice today, disclosure will be required of material
instances of noncompliance during the reporting period, even if such
noncompliance was subsequently corrected in the period. We continue to
believe this approach is consistent with our approach not to require
interim evaluations and reporting of compliance or disclosures of
changes in reports (i.e., Form 10-D reports) during the Form 10-K
reporting period.
d. Attestation Report on Assessment of Compliance
We proposed that a registered public accounting firm would be
required to attest to, and report on, the assessment of compliance made
by the single responsible party through performance of an examination
engagement. As our proposal would be in lieu of audited financial
statements and Sarbanes-Oxley Section 404 reporting, we believed that
requiring a registered public accounting firm to provide the
attestation is important to help assure independence and objectivity
for the attestation function, similar to that required with respect to
an audit of financial statements, and thereby increase investor
confidence in the reliability of the compliance assessment.
Our revised approach does not require an assertion by a single
responsible party covering the entire servicing function, but instead
contemplates that assertions will be made by each party participating
in the servicing function as specified and that each party will be
responsible for having an attestation engagement performed by a
registered public accounting firm. The attestation would not cover
servicing criteria properly excluded by the servicing party and
disclosed as described above. Further, the revised approach requires
that each registered public accounting firm's report be filed as an
exhibit to the report on Form 10-K.\541\ As proposed, the attestation
examination must be made in accordance with standards for attestation
engagements issued or adopted by the Public Company Accounting
Oversight Board (PCAOB). On April 25, 2003, the Commission approved the
PCAOB's adoption of the auditing and attestation standards in existence
as of April 16, 2003 as interim auditing and attestation
standards.\542\ The Attestation Standards for Compliance Attestation
(AT Sec. 601) in those interim auditing and attestation standards
should be used in performing this examination engagement.
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\541\ As is currently the case under the modified reporting
system, to the extent the Form 10-K is incorporated by reference
into a Securities Act registration statement, a consent would need
to be filed with respect to the accountant's report. See Securities
Act Rule 439.
\542\ See Release No. 33-8222 (Apr. 25, 2003) [68 FR 23335]. See
also Release No. 34-50495 (Oct. 5, 2004) [69 FR 60913] (Notice of
Filing of Proposed Rules on Conforming Amendments to PCAOB Interim
Standards Resulting from the Adoption of PCAOB Auditing Standard No.
2, ``An Audit Of Internal Control Over Financial Reporting Performed
In Conjunction With An Audit of Financial Statements''); and Release
No. 34-50688 (Nov. 17, 2004) [69 FR 68434] (Order Approving Proposed
Conforming Amendments to PCAOB Interim Standards Resulting from the
Adoption of PCAOB Auditing Standard No. 2, ``An Audit Of Internal
Control Over Financial Reporting Performed In Conjunction With An
Audit of Financial Statements'').
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We are adopting conforming amendments to Regulation S-X,
substantially as proposed, to reflect the attestation report that will
be prepared by a registered public accounting firm and to require an
ABS issuer to file the attestation report with the report on Form 10-K.
Under these amendments, a new ``Attestation report on assessment of
compliance with servicing criteria for asset-backed securities'' is
defined as a report in which a registered public accounting firm
expresses an opinion, or states that an opinion cannot be expressed,
concerning an asserting party's assessment of compliance with servicing
criteria, as required under the revised approach, in accordance with
standards on attestation engagements.\543\ When an overall opinion
cannot be expressed, the registered public accounting firm must state
why it was unable to express such an opinion. As proposed, the report
must be dated, signed manually, identify the period covered by the
report and clearly state the opinion of the accountant as to
[[Page 1577]]
whether the party's assessment of compliance with the servicing
criteria was fairly stated in all material respects, or must include an
opinion to the effect that an overall opinion cannot be expressed.\544\
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\543\ See Rule 1-02(a)(3) of Regulation S-X.
\544\ See Rule 2-02(g) of Regulation S-X.
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Consistent with our proposal, the report issued by the registered
public accounting firm must be available for general use and not
contain restricted use language. We believe that the servicing criteria
we have adopted as part of Item 1122 of Regulation AB are suitable
criteria, as that term is defined in the SSAE No. 10, and are available
to enable a registered public accounting firm to issue a report on a
party's assertion without restricted use language.
8. Current Reporting on Form 8-K
On March 11, 2004, the Commission adopted amendments to expand the
number of events that are reportable on Form 8-K.\545\ The amendments
also shortened the Form 8-K filing deadline for most items to four
business days after the occurrence of an event requiring disclosure
under the form. These amendments were responsive to the ``real time
disclosure'' mandate in Section 409 of the Sarbanes-Oxley Act and were
intended to provide investors with better and faster disclosure of
important events.\546\ As we stated in the Proposing Release, we
believe the objectives of those amendments are equally applicable with
respect to asset-backed securities. Accordingly, we are clarifying
application of the Form 8-K reporting items for asset-backed
securities. As proposed, the result of the existing amendments and our
clarifying amendments will mean that the number of reportable events
under Form 8-K with respect to asset-backed securities will increase
from current modified reporting requirements.
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\545\ See the Form 8-K Release.
\546\ Section 409 of the Sarbanes-Oxley Act added paragraph (l)
to Section 13 of the Exchange Act (15 U.S.C. 78m(l)), which provides
that ``each issuer reporting under section 13(a) or 15(d) shall
disclose to the public on a rapid and current basis such additional
information concerning material changes in the financial condition
or operations of the issuer, in plain English, which may include
trend and qualitative information and graphic presentations, as the
Commission determines, by rule, is necessary or useful for the
protection of investors and in the public interest.''
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a. Items Requiring Current Disclosure
Similar to Form 10-K, we are adding a new general instruction to
Form 8-K to specify how the form is to be used with respect to asset-
backed securities. Like the Form 10-D, the instruction permits either
the depositor or the servicer to sign Form 8-K reports. The depositor's
name and sponsor's name will need to be listed on the cover page of the
Form 8-K.\547+\ As proposed, the instruction also identifies which of
the existing items may be omitted. Any other applicable items specified
in Form 8-K will continue to be applicable under the new reporting
deadlines adopted in the Form 8-K Release. While some commenters did
not agree, we continue to believe the same Form 8-K reporting deadlines
that apply to non-ABS issuers should apply to ABS issuers.\548\ We also
are adopting several proposed ABS-specific items under Section 6 of
Form 8-K, with modifications in response to comment, which are
discussed further below.
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\547\ See note 493 above.
\548\ See, e.g., Letters of Am. Bankers; JPMorganChase; and
Wells Fargo.
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The resulting application of the Form 8-K items for ABS is
presented in the following table: \549\
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\549\ In response to comment and given our revisions to the
assessment and attestation proposal, we have moved Items 2.02 and
4.01 of Form 8-K to the list of Items that may be omitted. See,
e.g., Letters of ABA and ASF.
Disclosure for Form 8-K for ABS
------------------------------------------------------------------------
Required if May be
Existing form items applicable omitted
------------------------------------------------------------------------
Item 1.01. Entry into a Material Definitive ............
Agreement..................................
Item 1.02. Termination of a Material ............
Definitive Agreement.......................
Item 1.03. Bankruptcy or Receivership....... ............
Item 2.01. Completion of Acquisition or ............
Disposition of Assets......................
Item 2.02. Results of Operations and ............
Financial Condition........................
Item 2.03. Creation of a Direct Financial ............
Obligation or an Obligation under an Off-
Balance Sheet Arrangement of a Registrant..
Item 2.04. Triggering Events That Accelerate ............
or Increase a Direct Financial Obligation
or an Obligation under an Off-Balance Sheet
Arrangement................................
Item 2.05. Costs Associated with Exit or ............
Disposal Activities........................
Item 2.06. Material Impairments............. ............
Item 3.01. Notice of Delisting or Failure to ............
Satisfy a Continued Listing Rule or
Standard; Transfer of Listing..............
Item 3.02. Unregistered Sales of Equity ............
Securities.................................
Item 3.03. Material Modifications to Rights ............
of Security Holders........................
Item 4.01. Changes in Registrant's ............
Certifying Accountant......................
Item 4.02. Non-Reliance on Previously Issued ............
Financial Statements or a Related Audit
Report or Completed Interim Review.........
Item 5.01. Changes in Control of Registrant. ............
Item 5.02. Departure of Directors or ............
Principal Officers. Election of Directors.
Appointment of Principal Officers..........
Item 5.03. Amendments to Articles of ............
Incorporation or Bylaws. Change in Fiscal
Year.......................................
Item 5.04. Temporary Suspension of Trading ............
Under Registrant's Employee Benefit Plans..
Item 5.05. Amendments to the Registrant's ............
Code of Ethics, or Waiver of a Provision of
the Code of Ethics.........................
Item 7.01. Regulation FD Disclosure......... ............
Item 8.01. Other Events..................... ............
Item 9.01. Financial Statements and Exhibits ............
Additional Items added to Form 8-K for ABS:
Item 6.01. ABS Informational and ............
Computational Material.................
Item 6.02. Change of Servicer or Trustee ............
Item 6.03. Change in Credit Enhancement