[Federal Register Volume 75, Number 84 (Monday, May 3, 2010)]
[Proposed Rules]
[Pages 23328-23514]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-8282]
[[Page 23327]]
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Part II
Securities and Exchange Commission
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17 CFR Parts 200, 229, 230 et al.
Asset-Backed Securities; Proposed Rule
Federal Register / Vol. 75 , No. 84 / Monday, May 3, 2010 / Proposed
Rules
[[Page 23328]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 229, 230, 232, 239, 240, 243, and 249
[Release Nos. 33-9117; 34-61858; File No. S7-08-10]
RIN 3235-AK37
Asset-Backed Securities
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We are proposing significant revisions to Regulation AB and
other rules regarding the offering process, disclosure and reporting
for asset-backed securities. Our proposals would revise filing
deadlines for ABS offerings to provide investors with more time to
consider transaction-specific information, including information about
the pool assets. Our proposals also would repeal the current credit
ratings references in shelf eligibility criteria for asset-backed
issuers and establish new shelf eligibility criteria that would
include, among other things, a requirement that the sponsor retain a
portion of each tranche of the securities that are sold and a
requirement that the issuer undertake to file Exchange Act reports on
an ongoing basis so long as its public securities are outstanding. We
also are proposing to require that, with some exceptions, prospectuses
for public offerings of asset-backed securities and ongoing Exchange
Act reports contain specified asset-level information about each of the
assets in the pool. The asset-level information would be provided
according to proposed standards and in a tagged data format using
extensible Markup Language (XML). In addition, we are proposing to
require, along with the prospectus filing, the filing of a computer
program of the contractual cash flow provisions expressed as
downloadable source code in Python, a commonly used open source
interpretive programming language. We are proposing new information
requirements for the safe harbors for exempt offerings and resales of
asset-backed securities and are also proposing a number of other
revisions to our rules applicable to asset-backed securities.
DATES: Comments should be received on or before August 2, 2010.
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/proposed.shtml);
Send an e-mail to [email protected]. Please include
File Number S7-08-10 on the subject line; or
Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-08-10. 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/proposed.shtml). Comments
are also available for Web site viewing and copying in the Commission's
Public Reference Room, 100 F Street, NE., Washington, DC 20549, on
official business days between the hours of 10 a.m. and 3 p.m. 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: Katherine Hsu, Senior Special Counsel
in the Office of Rulemaking, at (202) 551-3430, and Rolaine Bancroft,
Special Counsel in the Office of Structured Finance, Transportation and
Leisure, at (202) 551-3313, Division of Corporation Finance, U.S.
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-3628.
SUPPLEMENTARY INFORMATION: We are proposing amendments to Rule 30-1 \1\
of the Commission's Rules of General Organization,\2\ Items 512 \3\ and
601 \4\ of Regulation S-K; \5\ Items 1100, 1101, 1102, 1103, 1104,
1106, 1110, 1111, 1121, and 1122 \6\ of Regulation AB \7\ (a subpart of
Regulation S-K); Rules 139a, 144, 144A, 167, 190, 401, 405, 415, 424,
430B, 430C, 433, 456, 457, 502 and 503 \8\ and Forms S-1, S-3 and D \9\
under the Securities Act of 1933 (``Securities Act''); \10\ Rules 11,
101, 201, 202, 305, and 312 \11\ of Regulation S-T,\12\ and Rules 15c2-
8 and 15d-22 \13\ and Forms 8-K, 10-D, and 10-K \14\ under the
Securities Exchange Act of 1934 (``Exchange Act'') \15\ and Rule 103
\16\ of Regulation FD.\17\ We also are proposing to add Items 1111A and
1121A \18\ to Regulation AB and Rule 192,\19\ Rule 430D,\20\ Form SF-
1,\21\ Form SF-3 \22\ and Form 144A-SF \23\ under the Securities Act.
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\1\ 17 CFR 200.30-1.
\2\ 17 CFR 200.1 et al.
\3\ 17 CFR 229.512.
\4\ 17 CFR 229.601.
\5\ 17 CFR 229.10 et al.
\6\ 17 CFR 229.1100, 17 CFR 229.1101, 17 CFR 229.1102, 17 CFR
229.1103, 17 CFR 229.1104, 17 CFR 229.1106, 17 CFR 229.1110, 17 CFR
229.1111, 17 CFR 229.1121 and 17 CFR 229.1122.
\7\ 17 CFR 229.1100 through 17 CFR 229.1123.
\8\ 17 CFR 230.139a, 17 CFR 230.144, 17 CFR 230.144A, 17 CFR
230.167, 17 CFR 230.190, 17 CFR 230.401, 17 CFR 405; 17 CFR 230.415,
17 CFR 230.424, 17 CFR 230.430B, 17 CFR 230.430C, 17 CFR 230.433, 17
CFR 230.456. 17 CFR 230.457, 17 CFR 230.502, and 17 CFR 230.503.
\9\ 17 CFR 239.11, 17 CFR 239.13 and 17 CFR 239.500.
\10\ 15 U.S.C. 77a et seq.
\11\ 17 CFR 232.11, 17 CFR 232.101, 17 CFR 232.201, 17 CFR
232.202, 17 CFR 232.305 and 17 CFR 232.312.
\12\ 17 CFR 232.10 et seq.
\13\ 17 CFR 240.15c2-8 and 17 CFR 240.15d-22.
\14\ 17 CFR 249.308, 17 CFR 249.310, and 17 CFR 249.312.
\15\ 15 U.S.C. 78a et seq.
\16\ 17 CFR 243.103.
\17\ 17 CFR 243.100 et. seq.
\18\ 17 CFR 229.1111A and 17.CFR 229.1121A.
\19\ 17 CFR 230.192.
\20\ 17 CFR 230.430D.
\21\ 17 CFR 239.44.
\22\ 17 CFR 239.45.
\23\ 17 CFR 239.144A.
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Table of Contents
I. Executive Summary
A. Background
B. Securities Act Registration
C. Disclosure
D. Privately-Issued Structured Finance Products
II. Securities Act Registration
A. History of ABS Shelf Offerings
B. New Registration Procedures and Forms for Asset-Backed
Securities
1. New Shelf Registration Procedures
(a) Rule 424(h) Filing
(b) New Rule 430D
2. Proposed Forms SF-1 and SF-3
3. Shelf Eligibility for Delayed Offerings
(a) Risk Retention
(b) Third Party Review of Repurchase Obligations
(c) Certification of the Depositor's Chief Executive Officer
(d) Undertaking To File Ongoing Reports
(e) Other Proposed Form SF-3 Requirements
(i) Registrant Requirements To Be Met for Filing a Form SF-3
(ii) Evaluation of Form SF-3 Eligibility in Lieu of Section
10(a)(3) Update
(iii) Quarterly Evaluation of Eligibility To Use Effective Form
SF-3 for Takedowns
(A) Risk Retention
(B) Transaction Agreements and Officer Certification
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(C) Undertaking To File Exchange Act Reports
4. Continuous Offerings
5. Mortgage Related Securities
C. Exchange Act Rule 15c2-8(b)
D. Including Information in the Form of Prospectus in the
Registration Statement
1. Presentation of Disclosure in Prospectuses
2. Adding New Structural Features or Credit Enhancements
E. Pay-as-You-Go Registration Fees
F. Signature Pages
III. Disclosure Requirements
A. Pool Assets
1. Asset-Level Information in Prospectus
(a) When Asset-Level Data Would Be Required in the Prospectus
(b) Proposed Disclosure Requirements and Exemptions
(i) Proposed Coded Responses
(ii) Proposed General Disclosure Requirements
(iii) Asset Specific Data Points
(iv) Proposed Exemptions
(c) Residential Mortgage-Backed Securities
(d) Commercial Mortgage-Backed Securities
(e) Other Asset Classes
(i) Automobiles
(ii) Equipment
(iii) Student Loans
(iv) Floorplan Financings
(v) Corporate Debt
(vi) Resecuritizations
2. Asset-Level Ongoing Reporting Requirements
(a) Proposed Disclosure Requirements
(b) Proposed Exemptions
(c) Residential Mortgage-Backed Securities
(d) Commercial Mortgage-Backed Securities
(e) Other Asset Classes
(i) Automobiles
(ii) Equipment
(iii) Student Loans
(iv) Floorplan Financings
(v) Resecuritizations
3. Grouped Account Data for Credit Card Pools
(a) When Credit Card Pool Information Would Be Required
(b) Proposed Disclosure Requirements
4. Asset Data File and XML
(a) Filing the Asset Data File and EDGAR
(b) Hardship Exemptions
(c) Technical Specifications
5. Pool-Level Information
B. Flow of Funds
1. Waterfall Computer Program
(a) Proposed Disclosure Requirements
(b) Proposed Exemptions
(c) When the Waterfall Computer Program Would Be Required
(d) Filing the Waterfall Computer Program and Python
(e) Hardship Exemptions
2. Presentation of the Narrative Description of the Waterfall
C. Transaction Parties
1. Identification of Originator
2. Obligation To Repurchase Assets
(a) History of Asset Repurchases
(b) Financial Information Regarding Party Obligated To
Repurchase Assets
3. Economic Interest in the Transaction
4. Servicer
D. Prospectus Summary
E. Static Pool Information
1. Disclosure Required
2. Amortizing Asset Pools
3. Revolving Asset Master Trusts
4. Filing Static Pool Data
F. Exhibit Filing Requirements
G. Other Disclosure Requirements That Rely on Credit Ratings
IV. Definition of an Asset-Backed Security
V. Exchange Act Reporting Proposals
A. Distribution Reports on Form 10-D
B. Servicer's Assessment of Compliance With Servicing Criteria
C. Form 8-K
1. Item 6.05
2. Change in Sponsor's Interest in the Securities
D. Central Index Key Numbers for Depositor, Sponsor and Issuing
Entity
VI. Privately-Issued Structured Finance Products
A. Rule 144A and Regulation D
B. Proposed Information Requirements for Structured Finance
Products
1. General
2. Application of Proposals
3. Information Requirements
4. Proposed Rule 144 Revisions
5. New Rule 192 of the Securities Act
C. Notice of Initial Placement of Securities Eligible for Sale
Under Rule 144A and Revisions to Form D
VII. Codification of Staff Interpretations Relating to Securities
Act Registration
A. Fee Requirements for Collateral Certificates or Special Units
of Beneficial Interest
B. Incorporating by Reference Subsequently Filed Periodic
Reports
VIII. Transition Period
IX. General Request for Comment
X. Paperwork Reduction Act
A. Background
B. Revisions to PRA Reporting and Cost Burden Estimates
1. Form S-3 and Form SF-3
2. Form S-1 and Form SF-1
3. Form 10-K
4. Form 10-D
5. Form 8-K
6. Regulation S-K and Regulation S-T
7. Asset Data File
8. Waterfall Computer Program
9. Form 144A-SF and Form D
10. Privately-Issued Structured Finance Product Disclosure
11. Summary of Proposed Changes to Annual Burden Compliance in
Collection of Information
12. Solicitation of Comments
XI. Benefit-Cost Analysis
A. Background
B. Benefits
1. Securities Act Registration
2. Disclosure
3. Privately-Issued Structured Finance Products
C. Costs
1. Securities Act Registration
2. Disclosure
3. Privately-Issued Structured Finance Products
D. Request for Comment
XII. Consideration of Burden on Competition and Promotion of
Efficiency, Competition and Capital Formation
A. Shelf Registration Requirement
1. Risk Retention
2. Representations and Warranties in Pooling and Servicing
Agreements
3. Depositor's Chief Executive Officer Certification
4. Ongoing Exchange Act Reporting
5. Eliminate Ratings Requirement
B. Five-Business Day Filing and Prospectus Delivery Requirements
C. Disclosure
1. Asset Data File and Waterfall Computer Program
2. Pay-As-You-Go Registration and Revisions to Registration
Process
3. Restrictions on Use of Regulation AB
D. Safe Harbors for Privately-Issued Structured Finance Products
E. Combined Effect of Proposals
XIII. Small Business Regulatory Enforcement Fairness Act
XIV. Regulatory Flexibility Act Certification
XV. Statutory Authority and Text of Proposed Rule and Form
Amendments
I. Executive Summary
A. Background
The recent financial crisis highlighted that investors and other
participants in the securitization market did not have the necessary
tools to be able to fully understand the risk underlying those
securities and did not value those securities properly or accurately.
The severity of this lack of understanding and the extent to which it
pervaded the market and impacted the U.S. and worldwide economy calls
into question the efficacy of several aspects of our regulation of
asset-backed securities. In light of the problems exposed by the
financial crisis, we are proposing significant revisions to our rules
governing offers, sales and reporting with respect to asset-backed
securities. These proposals are designed to improve investor protection
and promote more efficient asset-backed markets.
Securitization generally is a financing technique in which
financial assets, in many cases illiquid, are pooled and converted into
instruments that are offered and sold in the capital markets as
securities. This financing technique makes it easier for lenders to
exchange payment streams coming from the loans for cash so that they
can make additional loans or credit available to a wide range of
borrowers and companies seeking financing. Some of the types of assets
that are financed today through securitization include residential and
commercial mortgages, agricultural equipment leases, automobile loans
and leases, student loans and credit card receivables. Throughout this
release, we refer to the securities sold through such
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vehicles as asset-backed securities, ABS, or structured finance
products.
At its inception, securitization primarily served as a vehicle for
mortgage financing. Since then, asset-backed securities have played a
significant role in both the U.S. and global economy. At the end of
2007, there were more than $7 trillion of both agency and non-agency
\24\ mortgage-backed securities and nearly $2.5 trillion of asset-
backed securities outstanding.\25\ Securitization can provide liquidity
to nearly all major sectors of the economy including the residential
and commercial real estate industry, the automobile industry, the
consumer credit industry, the leasing industry, and the commercial
lending and credit markets.\26\
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\24\ Agency securities are securities issued by the government-
sponsored enterprises, Ginnie Mae, Fannie Mae or Freddie Mac.
\25\ See American Securitization Forum, Study on the Impact of
Securitization on Consumers, Investors, Financial Institutions and
the Capital Markets (June 17, 2009), at 16 (citing to statistics on
outstanding residential mortgage-backed securities and outstanding
U.S. ABS collected by the Securities Industry and Financial Markets
Association), available at http://www.americansecuritization.com/uploadedFiles/ASF_NERA_Report.pdf.
\26\ See testimony of Micah Green, President of the Bond Market
Association, Before the Senate Basel Committee on Banking
Supervision, A Review of the New Basel Capital Accord, (June 13,
2003), available at http://banking.senate.gov/.
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Many of the problems giving rise to the financial crisis involved
structured finance products, including mortgage-backed securities.\27\
Many of these mortgage-backed securities were used to collateralize
other debt obligations such as collateralized debt obligations and
collateralized loan obligations (CDOs or CLOs), types of asset-backed
securities that are sold in private placements.\28\ As the default rate
for subprime and other mortgages soared, such securities, including
those with high credit ratings, lost their value.\29\ CDOs were noted,
in particular, to have contributed to the collapse in liquidity during
the financial crisis.\30\ As the crisis unfolded, investors
increasingly became unwilling to purchase these securities, and today,
this sentiment remains, as new issuances of asset-backed securities,
except for government-sponsored issuances, have recently dramatically
decreased.\31\ The absence of this financing option has negatively
impacted the availability of credit.\32\
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\27\ A report by the U.S. Government Accountability Office (GAO)
notes that 75% of subprime loans were packaged into securities in
2006. See U.S. Government Accountability Office, Financial
Regulation: A Framework for Crafting and Assessing Proposals to
Modernize the Outdated U.S. Financial Regulatory System (Jan. 2009)
at 26.
\28\ CDOs are typically sold as a private placement to an
initial purchaser followed by resales of the securities to
``qualified institutional buyers'' pursuant to Rule 144A. Pools
comprising the CDOs may consist of various types of underlying
assets including subprime mortgage-backed securities and
derivatives, such as credit default swaps referencing subprime
mortgage-backed securities, and even tranches of other CDOs. CLOs
are similar to CDOs except that they hold corporate loans, loan
participations or credit default swaps tied to corporate
liabilities.
\29\ See, e.g., The President's Working Group on Financial
Markets, Policy Statement on Financial Market Developments, March
2008 (the ``PWG March 2008 Report'') at 9 (discussing subprime
mortgages and the write-down of AAA-rated and super-senior tranches
of CDOs as contributing factors to the financial crisis).
\30\ See, e.g., The Report of the Counterparty Risk Management
Policy Group III (``CRMPG III''), Containing Systemic Risk: The Road
to Reform, August 6, 2008 (the ``2008 CRMPG III Report''), at 53
(noting that lack of comprehension of CDO and related instruments
resulted in the display of price depreciation and volatility far in
excess of levels previously associated with comparably rated
securities, causing both a collapse of confidence in a very broad
range of structured product ratings and a collapse in liquidity for
such products). Another type of asset-backed security that is
privately offered is asset-backed commercial paper (ABCP), which was
increasingly collateralized by CDOs and RMBS from 2004 through 2007.
The ABCP market severely contracted during the crisis. See PWG March
2008 Report at 8.
\31\ See, e.g., David Adler, ``A Flat Dow for 10 Years? Why it
Could Happen,'' Barrons (Dec. 28, 2009) (noting that new
securitization issuances, except those sponsored by the government,
have largely come to a halt). In 2008 through the end of September,
annualized issuance volumes for overall global securitized and
structured credit issuance were approximately $2.4 trillion less
than in 2006. See Global Joint Initiative to Restore Confidence in
the Securitization Market, Restoring Confidence in the
Securitization Markets (Dec. 3, 2008) at 6.
\32\ Id.
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The financial crisis highlighted a number of concerns with the
operation of our rules in the securitization market. Certain
regulations for asset-backed securities rely on the ratings for those
securities provided by the ratings agencies, and much has been written
about the failures of those ratings accurately to measure and describe
the risks associated with certain of those products that were realized
during the financial crisis.\33\ In addition, investors have expressed
concern regarding a lack of time to analyze securitization transactions
and make investment decisions.\34\ While the Commission historically
has not built minimum time periods into its registration process to
deliberately slow down the market,\35\ and instead has believed
investors can insist on adequate time to analyze securities (and refuse
to invest if not provided sufficient time), we have been told that this
is not generally possible in this market, particularly in an active
market.\36\ In addition, market participants have expressed a desire
for expanded disclosure relating to the assets underlying
securitizations.\37\ Investors have complained that the mechanisms for
enforcing the representations and warranties contained in
securitization transaction documents are weak, and thus are not
confident that even strong representations and warranties provide them
with adequate protection. In the private market, we believe that, in
many cases, investors did not have the information necessary to
understand and properly analyze structured products, such as CDOs, that
were sold in transactions in reliance on exemptions from
registration.\38\ As a result of these and other factors, the financial
crisis resulted in an absence of confidence in much of the
securitization market.
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\33\ See, e.g., The PWG March 2008 Report at 2, 8 (noting that
the performance of credit rating agencies, particularly their
ratings of mortgage-backed securities and other asset-backed
securities, contributed significantly to the financial crisis).
\34\ See discussion in Section II.B.1 below.
\35\ See, e.g., Section IV.A. of Securities Offering Reform,
Release No. 33-8591 (Jul. 19, 2005) [70 FR 44722] (release adopting
significant revisions to registration, communications and offering
process under the Securities Act) (the ``Offering Reform Release'')
(stating that Rule 159 would not result in a speed bump or otherwise
slow down the offering process).
\36\ See discussion in Section II.B.1 below.
\37\ See also discussion in Section III.A.1 below.
\38\ The assumption that sophisticated investors are able to
fend for themselves in a private asset-backed securities transaction
has also been questioned. Cf. Financial Services Authority, The
Turner Review: A Regulatory Response to the Global Banking Crisis,
March 2009 (the ``Turner Review''), at 39 (finding that ``the crisis
also raises important questions about the intellectual assumptions
on which previous regulatory approaches have largely been built'').
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We are proposing a number of changes to the offering process,
disclosure, and reporting for asset-backed securities, which are
designed to enhance investor protection in this market.\39\ The
proposals are intended to provide investors with timely and sufficient
information, including information in and about the private market for
asset-backed securities, reduce the likelihood of undue reliance on
credit ratings, and help restore investor confidence in the
representations and warranties regarding the assets. Although these
revisions are comprehensive and therefore would impose new burdens, if
adopted, we believe they would protect investors and promote efficient
capital
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formation. The proposals cover the following areas:
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\39\ Our proposals, if adopted, would not affect the
applicability of the Investment Company Act (15 U.S.C. 80a-1 et
seq.) to ABS issuers, including the availability of exclusions from
such Act. See, e.g., Section 3(c)(1) or Section 3(c)(7) (15 U.S.C.
80a-3(c)(1) and 80a-3(c)(7)) (for private transactions); Rule 3a-7
[17 CFR 270.3a-7] (for public and private transactions). Our
proposals are not intended to affect the application of the
Investment Company Act, including the availability of these
exclusions, to ABS issuers.
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Revisions to the shelf offering process and criteria and
prospectus delivery requirements;
Securities Act and Exchange Act disclosure requirements,
including new requirements to disclose standardized asset-level
information or grouped asset data and a computer program that gives
effect to the cash flow provisions of the transaction agreement (often
referred to as the ``waterfall''); and
Changes to the Securities Act safe harbors for exempt
offerings and exempt resales for asset-backed securities.
In addition, we are proposing clarifying, technical and other
changes to the current rules. The proposals are designed to address
issues that contributed to or arose from the financial crisis. These
proposals are also designed to be forward looking; some of these
proposals are designed to improve areas that have the potential to
raise issues similar to the ones highlighted in the financial crisis.
Our proposals are generally consistent with global initiatives that
seek to improve practices in the securitization market.\40\ These
initiatives include calls by international organizations to require
greater disclosure by issuers of securitized products, including
initial and ongoing information about underlying asset pool
performance.\41\ Our focus on both the public and private markets for
securitized products is supported by recommendations from international
regulators about the type of disclosure that should be provided to
investors in the private markets.\42\
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\40\ See Improving Financial Regulation--Report of the Financial
Stability Board to G20 Leaders, (Sept. 25, 2009) (``The official
sector must provide the framework that ensures discipline in the
securitisation market as it revives.'').
\41\ Id.
\42\ International Organization of Securities Commissions, Final
Report of the Task Force on the Subprime Crisis (May 2008)
(discussing the types of disclosure that, following the model
offered by the types of disclosure mandated in the public markets,
private investors may want issuers to provide).
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B. Securities Act Registration
Securities Act shelf registration provides important timing and
flexibility benefits to issuers. An issuer with an effective shelf
registration statement can conduct delayed offerings ``off the shelf''
under Securities Act Rule 415 without further staff clearance. Under
our current rules, asset-backed securities may be registered on a Form
S-3 registration statement and later offered ``off the shelf'' if, in
addition to meeting other specified criteria,\43\ the securities are
rated investment grade by a nationally recognized statistical rating
organization (NRSRO). As described in detail in Section II.B.3. below,
we are proposing to repeal that criterion and establish other criteria
for shelf eligibility. We are also proposing changes to the Securities
Act rules and forms for issuances of asset-backed securities.
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\43\ See discussion of other criteria in fn. 70 below.
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We have undertaken a Commission-wide effort to consider whether
references to NRSRO credit ratings in all the Commission's regulations
are necessary or appropriate and whether they could cause investors to
unduly rely on ratings.\44\ In this release, we are proposing to
eliminate the current means of establishing shelf eligibility for an
ABS transaction based on the credit ratings of the securities to be
issued.\45\ Instead, we are proposing to require for shelf eligibility
the following:
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\44\ See References to Ratings of Nationally Recognized
Statistical Rating Organizations, Exchange Act Release No. 58070
(July 1, 2008) [73 FR 40088] (proposing amendments to rules and
forms under the Securities Exchange Act); References to Ratings of
Nationally Recognized Statistical Ratings Organizations, Investment
Company Act Release No. 28327 (July 1, 2008) [73 FR 40124]
(proposing amendments to rules under the Investment Company Act and
the Investment Advisers Act); Security Ratings, Securities Act
Release No. 8940 (July 1, 2008) [73 FR 40106] (proposing amendments
to rules and forms under the Securities Act and the Securities
Exchange Act) (``2008 Proposing Release'').
\45\ As part of the Commission-wide effort to consider whether
references to NRSRO credit ratings are necessary, we proposed to
replace the ratings requirement in the shelf eligibility criteria in
the 2008 Proposing Release. See also Section II.A. below. We
reopened the comment period in October 2009. References to Ratings
of Nationally Statistical Rating Organizations, Release No. 33-9069
(Oct. 5, 2009) [74 FR 52374]. After considering comments, we are
withdrawing this part of the proposals in the 2008 Proposing
Release, and we are proposing different ABS shelf eligibility
requirements to replace the investment grade ratings requirement.
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A certification filed at the time of each offering off of
a shelf registration statement, or takedown, by the chief executive
officer of the depositor \46\ that the assets in the pool have
characteristics that provide a reasonable basis to believe that they
will produce, taking into account internal credit enhancements, cash
flows to service any payments due and payable on the securities as
described in the prospectus;
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\46\ We use the term ``depositor'' to mean the depositor who
receives or purchases and transfers or sells the pool assets to the
issuing entity. For ABS transactions where there is not an
intermediate transfer of the assets from the sponsor to the issuing
entity, the term depositor refers to the sponsor. For ABS
transactions where the person transferring or selling the pool
assets is itself a trust, the depositor of the issuing entity is the
depositor of that trust. See Item 1101(e) of Regulation AB.
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Retention by the sponsor of a specified amount of each
tranche of the securitization,\47\ net of the sponsor's hedging (also
known as ``risk retention'' or ``skin-in-the-game'');
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\47\ We use the term ``sponsor'' to mean 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. See Item
1101(l) of Regulation AB.
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A provision in the pooling and servicing agreement that
requires the party obligated to repurchase the assets for breach of
representations and warranties to periodically furnish an opinion of an
independent third party regarding whether the obligated party acted
consistently with the terms of the pooling and servicing agreement with
respect to any loans that the trustee put back to the obligated party
for violation of representations and warranties and which were not
repurchased; and
An undertaking by the issuer to file Exchange Act reports
so long as non-affiliates of the depositor hold any securities that
were sold in registered transactions backed by the same pool of assets.
We also are proposing to replace Forms S-1 and S-3 with new forms
for registered ABS offerings--proposed Forms SF-1 and SF-3--and to
revise the shelf offering structure for those securities. Form SF-3
would be the form used for ABS shelf offerings.
Given many ABS investors' stated desire for more time to consider
the transaction and for more detailed information regarding the pool
assets,\48\ we are proposing to revise the filing deadlines in shelf
offerings to provide investors with additional time to analyze
transaction-specific information prior to making an investment
decision. These changes are designed to promote independent analysis of
ABS by investors rather than reliance on credit ratings. Under the
proposed ABS shelf procedures, an ABS issuer would be required to file
a preliminary prospectus with the Commission for each takedown off of
the proposed new shelf registration form for ABS (Form SF-3) at least
five business days prior to the first sale in the offering.\49\ Under
the
[[Page 23332]]
proposal, issuers would use one prospectus for each transaction and the
current practice of using core or base prospectuses plus supplements
would be eliminated for ABS.
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\48\ See discussion in Section III.A.1 below regarding our
proposals relating to asset-level information.
\49\ Pursuant to Exchange Act Rule 15c2-8(b) [17 CFR 240.15c2-
8(b)], with respect to ABS, a broker-dealer is exempt from the
requirement that a preliminary prospectus be delivered to
prospective investors at least 48 hours prior to sending a
confirmation of sale if the issuer of the securities has not
previously been required to file reports pursuant to Sections 13(a)
or 15(d) of the Exchange Act (15 U.S.C. 78m or 15 U.S.C. 28o). We
also are proposing to repeal this exception from Rule 15c2-8(b) such
that a broker-dealer would be required to deliver a preliminary
prospectus at least 48 hours prior to sending a confirmation of sale
in connection with an issuance of ABS, including those issued by ABS
issuers exempted from the requirement to file reports pursuant to
Section 12(h) of the Exchange Act.
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C. Disclosure
In 2004, we adopted a new set of rules prescribing the disclosure
requirements for asset-backed issuers.\50\ Many disclosure requirements
of Regulation AB are principles-based. Regulation AB currently requires
that material, aggregate information about the composition and
characteristics of the asset pool be filed with the Commission and
provided to investors. As described in detail in Sections III, IV and V
below, we are proposing additional, and, in some cases, revised
disclosure requirements for ABS offerings and ongoing reporting.
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\50\ See the 2004 ABS Adopting Release.
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For each loan or asset in the asset pool, we are proposing to
require disclosure of specified data relating to the terms of the
asset, obligor characteristics, and underwriting of the asset. Such
data would be provided in a machine-readable, standardized format so
that it is most useful to investors and the markets. Under our
proposal, issuers would be required to provide the asset-level data or
grouped account data at the time of securitization, when new assets are
added to the pool underlying the securities, and on an ongoing basis.
We are proposing to require the filing of a computer program (the
``waterfall computer program,'' as defined in the proposed rule) of the
contractual cash flow provisions of the securities in the form of
downloadable source code in Python, a commonly used computer
programming language that is open source and interpretive. The computer
program would be tagged in XML and required to be filed with the
Commission as an exhibit. Under our proposal, the filed source code for
the computer program, when downloaded and run (by loading it into an
open ``Python'' session on the investor's computer), would be required
to allow the user to programmatically input information from the asset
data file that we are proposing to require as described above. We
believe that, with the waterfall computer program and the asset data
file, investors would be better able to conduct their own evaluations
of ABS and may be less likely to be dependent on the opinions of credit
rating agencies.
We also are proposing additional requirements to refine current
disclosure requirements for asset-backed securities. Among other
things, we are proposing to require:
Aggregated and loan-level data relating to the type and
amount of assets that do not meet the underwriting criteria that is
specified in the prospectus;
For certain identified originators, information relating
to the amount of the originator's publicly securitized assets that, in
the last three years, has been the subject of a demand to repurchase or
replace;
For the sponsor, information relating to the amount of
publicly securitized assets sold by the sponsor that, in the last three
years, has been the subject of a demand to repurchase or replace;
Additional information regarding originators and sponsors;
Descriptions relating to static pool information, such as
a description of the methodology used in determining or calculating the
characteristics of the pool performance as well as any terms or
abbreviations used;
That static pool information for amortizing asset pools
comply with the Item 1100(b) requirements for the presentation of
historical delinquency and loss information; and
The filing of Form 8-K for a one percent or more change in
any material pool characteristic from what is described in the
prospectus (rather than for a five percent or more change, as currently
required).
We also are proposing to limit some of the existing exceptions to the
discrete pool requirement in the definition of an asset-backed
security. This is intended to not only address recent concerns arising
out of the financial crisis but also serve to protect against future
practices of participants along the chain of securitization that could
result in the addition of assets into a securitization pool without a
clear understanding of their quality.
D. Privately-Issued Structured Finance Products
A significant portion of securities transactions, including the
offer and sale of all CDOs and ABCP, is conducted in the exempt private
placement market, which includes both offerings eligible for Rule 144A
resales and other private placements.\51\ CDOs are typically sold by
the issuer in a private placement to one or more initial purchaser or
purchasers in reliance upon the Section 4(2) private offering exemption
in the Securities Act, which is available only to the issuer, followed
by resales of the securities to ``qualified institutional buyers'' in
reliance upon Rule 144A.\52\ Subsequent resales may also be made in
reliance upon Rule 144A. Rule 144A provides a safe harbor for resellers
from being deemed an underwriter within the meaning of Sections
2(a)(11) and 4(1) of the Securities Act \53\ for the sale of securities
to qualified institutional buyers. If the conditions of the Rule 144A
safe harbor are satisfied, sellers may rely on the exemption from
Securities Act registration provided by Section 4(1) for transactions
by persons other than issuers, underwriters or dealers.\54\
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\51\ CDOs often permit the active management of their pool
assets, which could include engaging in activities the primary
purpose of which is to protect or enhance the returns of their
equity holders. Such CDOs typically would not meet the requirements
of Rule 3a-7 under the Investment Company Act because that rule
includes conditions that are intended to permit an issuer to engage
only in limited activities that do not in any sense parallel typical
`management' of registered investment company portfolios.
Accordingly, these CDOs usually rely on one of the private
investment company exclusions, both of which condition the exclusion
in part on the issuer not making a public offering. See fn. 39
above.
\52\ In general, a qualified institutional buyer is any entity
included within one of the categories of ``accredited investor''
defined in Rule 501 of Regulation D, acting for its own account or
the accounts of other qualified institutional buyers, that in the
aggregate owns and invests on a discretionary basis at least $100
million in securities of issuers not affiliated with the entity (or
$10 million for a broker-dealer).
\53\ 15 U.S.C. 77b(a)(11) and 15 U.S.C. 77d(1).
\54\ See Section II.A. of the Resale of Restricted Securities,
Release No. 33-6862 (Apr. 30, 1990) [55 FR 17933] (the ``Rule 144A
Adopting Release'').
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Some have concluded that the events of the financial crisis have
demonstrated that a lack of understanding of CDOs and other privately
offered structured finance products by investors, rating agencies and
other market participants may have significant consequences to the
entire financial system.\55\ For example, the ratings of these products
proved inaccurate, which significantly contributed to the financial
crisis.\56\ This lack of understanding by credit rating agencies,
investors, and other market participants indicates that the offering
processes and disclosure
[[Page 23333]]
available in the public and private market were inadequate to provide
appropriate investor protection. Further, these securities are issued
by special purpose vehicles whose only purpose is holding financial
assets, with numerous parties involved in the securitization
process.\57\ As a result, information about those assets and the
structure of the vehicle is critical to an informed investment
decision.
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\55\ See, e.g., The PWG March 2008 Report (noting that
originators, underwriters, asset managers, credit rating agencies
and investors failed to obtain sufficient information or conduct
comprehensive risk assessments on instruments that were often quite
complex and also noting that downgrades were even more frequent and
severe for CDOs of ABS with subprime mortgage loans as the
underlying collateral). See also the Turner Review, at 20 (finding
that ``the financial innovations of structured credit resulted in
the creation of products--e.g, the lower credit tranches of CDOs or
even more so CDO-squareds--which had very high and imperfectly
understood embedded leverage.'').
\56\ See id.
\57\ See also discussion in Section VI. below.
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The safe harbors of Rule 144A and Regulation D that provide the
ability to rely on an exemption from registration do not impose
specific requirements on the disclosures provided to investors if those
investors meet certain size requirements. However, the financial crisis
has called into question the ability of our rules, as they relate to
the private market for asset-backed securities, to ensure that
investors had access to, and had sufficient time and incentives to
adequately consider, appropriate information regarding these
securities.\58\
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\58\ An assessment of whether the protections of the Act are
needed often focuses on whether the purchasers of securities can
``fend for themselves.'' SEC v. Ralston Purina Co., 346 U.S. 119,
125 (1953). Historically, whether this test is met turned on whether
information necessary or appropriate to make informed decisions is
realistically available to the purchasers. See id. The Supreme Court
also noted that ``We agree that some employee offerings may come
within Sec. 4(1), e.g., one made to executive personnel who because
of their position have access to the same kind of information that
the Act would make available in the form of a registration
statement.'' Id. at 125. See also Lawler v. Gilliam, 569 F.2d 1283
(4th Cir. 1978) (discussing the Supreme Court's observation in
Ralston that an offering to those who are shown to be able to fend
for themselves is a transaction `not involving any public offering'
and the ruling that an essential requirement is access to the kind
of information that registration would disclose).
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We are proposing to require enhanced disclosure by asset-backed
issuers who wish to take advantage of the safe harbor provisions for
these privately-issued securities.\59\ In addition, in order to provide
additional transparency with respect to the private market for these
securities, we are proposing amendments to Rule 144A to require a
structured finance product issuer to file a public notice on EDGAR of
the initial placement of structured finance products that are eligible
for resale under Rule 144A. As we believe that the Commission may
benefit from the availability of more information about private
placements of structured finance products, we are proposing to require
that in submitting such notice, the issuer undertakes to provide
offering materials to the Commission upon written request.
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\59\ We are also proposing to make conforming changes to
Regulation D, Form D and Rule 144.
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All of our proposals, if adopted, would apply to new issuances of
asset-backed securities. Therefore, the proposed rules, if adopted,
would not impose new requirements on outstanding asset-backed
securities.
II. Securities Act Registration
We are proposing a number of changes to the Securities Act
registration process for the offer and sale of asset-backed securities.
These changes include proposed new eligibility criteria for shelf
offerings and changes to the shelf offering process.
A. History of ABS Shelf Offerings
In 1984, mortgage related securities, a subset of asset-backed
securities, were first permitted to be offered on a ``shelf'' basis.
Contemporaneous with the enactment of Secondary Mortgage Market
Enhancement Act of 1984 (SMMEA),\60\ which added the definition of
``mortgage related security'' to the Exchange Act, we amended
Securities Act Rule 415 to permit mortgage related securities to be
offered on a delayed basis, regardless of which form is utilized for
registration of the offering.\61\ SMMEA defined a mortgage related
security to include a security that has a high investment grade credit
rating.\62\
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\60\ Public Law 98-440, 98 Stat. 1689.
\61\ See Shelf Registration, Release No. 33-6499 (Nov. 17, 1983)
[48 FR 5289]. Mortgage related securities, including such securities
as mortgage-backed debt and mortgage participation or pass through
certificates, may be offered on a delayed basis under Rule 415. See
17 CFR 230.415(a)(1)(vii). SMMEA was enacted by Congress to increase
the flow of funds to the housing market by removing regulatory
impediments to the creation and sale of private mortgage-backed
securities. An early version of the legislation contained a
provision that specifically would have required the Commission to
create a permanent procedure for shelf registration of mortgage
related securities. The provision was removed from the final version
of the legislation, however, as a result of the Commission's
decision to adopt Rule 415, implementing a shelf registration
procedure for mortgage related securities. See H.R. Rep. No. 994,
98th Cong., 2d Sess. 14, reprinted in 1984 U.S. Code Cong. & Admin.
News 2827; see also Release No. 33-6499 (Nov. 17, 1983) [48 FR
52889], at n. 30 (noting that mortgage related securities were the
subject of pending legislation).
\62\ The term, ``mortgage related security'' is defined to
include ``a security that is rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization.'' 15 U.S.C. 78c(a)(41).
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In 1992, in order to facilitate registered offerings of asset-
backed securities and eliminate differences in treatment under our
registration rules between mortgage related asset-backed securities
(which could be registered on a delayed basis) and other asset-backed
securities of comparable character and quality (which could not), we
expanded the ability to use ``shelf offerings'' to other asset-backed
securities.\63\ Under the 1992 amendments, offerings of asset-backed
securities rated investment grade by an NRSRO \64\ could be registered
on Form S-3.\65\ The eligibility requirement's definition of
``investment grade'' was largely based on the definition in the
existing eligibility requirement for non-convertible corporate debt
securities.\66\
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\63\ See Simplification of Registration Procedures for Primary
Securities Offerings, Release No. 33-6964 (Oct. 22, 1992) [57 FR
32461].
\64\ The security is an ``investment grade security'' for
purposes of form eligibility if, at the time of sale, at least one
NRSRO has rated the security in one of its generic rating categories
which signifies investment grade, typically one of the four highest
categories. See General Instructions I.B.2 and I.B.5 of Form S-3.
\65\ Under Securities Act Rule 415, securities registered on
Form S-3 or Form F-3 may be offered on a continuous or delayed
basis. See 17 CFR 230.415(a)(1)(x).
\66\ See Release No. 33-6964.
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The 1992 amendments did not prescribe specific disclosure
requirements for ABS offerings; disclosure in ABS offerings was based
largely on market practices and SEC staff guidance.\67\ At the end of
2004, the Commission adopted new rules and amendments under the
Securities Act and the Exchange Act addressing the registration,
disclosure and reporting requirements for asset-backed securities.\68\
In the 2004 amendments (``2004 ABS Adopting Release''), we prescribed
specific ABS disclosure requirements for the first time, which are
largely principles-based. In addition, under the 2004 amendments, we
retained the investment grade ratings condition to ABS Form S-3
eligibility \69\ and added additional shelf eligibility conditions.\70\
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\67\ See id. The 1992 release explained that the Commission did
not intend to change the character or quality of the disclosure that
is customary in these offerings and explained generally the type of
disclosure that was expected for ABS offerings.
\68\ See 2004 ABS Adopting Release. In 2003, we raised the
question whether to eliminate ratings reliance from our shelf
eligibility requirements in a concept release where we requested
comment on alternatives to the investment grade ratings component of
Form S-3 eligibility for ABS and debt offerings. See Rating Agencies
and the Use of Credit Ratings under the Federal Securities Laws,
Release No. 33-8236 (Jun. 4, 2003) [68 FR 35258].
\69\ We noted in 2004, however, that the Commission was engaged
in a broad review of the role of credit ratings agencies in the
securities markets and the use of credit ratings for regulatory
purposes. See Section II.A.3.c of the 2004 ABS Adopting Release.
\70\ In addition to investment grade rated securities, an ABS
offering is eligible for Form S-3 registration only if the following
conditions are met: (i) Delinquent assets must not constitute 20% or
more, as measured by dollar volume, of the asset pool as of the
measurement date; and (ii) with respect to securities that are
backed by leases other than motor vehicle leases, the portion of the
securitized pool balance attributable to the residual value of the
physical property underlying the leases, as determined in accordance
with the transaction agreements for the securities, does not
constitute 20% or more, as measured by dollar volume, of the
securitized pool balance as of the measurement date. See General
Instruction I.B.5 of Form S-3. Moreover, to the extent the depositor
or any issuing entity previously established, directly or
indirectly, by the depositor or any affiliate of the depositor are
or were at any time during the twelve calendar months and any
portion of a month immediately preceding the filing of the
registration statement on Form S-3 subject to the requirements of
Section 12 or 15(d) of the Exchange Act (15 U.S.C. 78l or 78o(d))
with respect to a class of asset-backed securities involving the
same asset class, such depositor and each such issuing entity must
have filed all material required to be filed regarding such asset-
backed securities pursuant to Section 13, 14 or 15(d) of the
Exchange Act (15 U.S.C. 78m, 78n or 78o(d)) for such period (or such
shorter period that each such entity was required to file such
materials). Such material (except for certain enumerated items) must
have been filed in a timely manner. See General Instruction I.A.4 of
Form S-3. We are not proposing changes to these other eligibility
conditions.
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[[Page 23334]]
In 2008, we proposed several changes to our rules and form
requirements that reference investment grade ratings (the ``2008
Proposing Release''), including a proposal to revise shelf eligibility
criteria for ABS offerings and primary offerings of non-convertible
debt by replacing the investment grade ratings component.\71\ Our
proposal would have replaced investment grade ratings with a
requirement that sales registered on Form S-3 be made in minimum
denominations and only to qualified institutional buyers, as defined in
Rule 144A. We reopened comment on the 2008 Proposing Release on October
5, 2009.\72\
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\71\ See the 2008 Proposing Release.
\72\ See Release No. 33-9069. We also held a Credit Rating
Agency Roundtable on April 15, 2009 to consider further information
on ratings and rating agencies. Materials related to the roundtable,
including an archived webcast and a transcript of the roundtable,
are available at http://www.sec.gov/spotlight/cra-oversight-roundtable.htm.
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We received comment letters from 35 commenters on the 2008
Proposing Release. Commenters generally opposed the proposed amendments
that would have replaced investment grade ratings references in certain
rules and the shelf eligibility criteria.\73\ Some commenters on the
proposed amendments to ABS shelf eligibility noted that the proposed
eligibility requirements would result in many ABS issuers registering
offerings on Form S-1 \74\ or selling the securities privately.\75\
After considering comments, we are withdrawing this part of the 2008
proposal and are proposing different replacements to the ratings
requirement in the shelf eligibility criteria for ABS issuers that we
believe are better measures of quality, and therefore, are more
appropriate eligibility criteria. We are also proposing several changes
to restructure the registered ABS offering process.
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\73\ See comment letters from American Bar Association (ABA);
American Electric Power, American Securitization Forum (ASF),
Arizona Public Service Company, Boeing Capital Corporation (Boeing),
Cadwalader Wickersham & Taft LLP (Cadwalader), Charles Schwab,
Constance Curnow, Davis Polk & Wardwell (Davis Polk), Debevoise &
Plimpton (Debevoise), Dewey & LeBoeuf, Dominion Resources, Inc.,
Edison Electric Institute, Incapital, LLC, Manulife Financial
Corporation, Mayer Brown LLP (Mayer), Merrill Lynch Depositor, Inc.,
Mortgage Bankers Association, PNM Resources, Inc., Securities
Industry and Financial Markets Association, Southern Company, WGL
Holdings, Inc., and Wisconsin Energy Corporation. The public
comments are available at http://www.sec.gov/comments/s7-18-08/s71808.shtml.
\74\ 17 CFR 239.11.
\75\ See, e.g., comment letters from ABA dated September 12,
2009; ASF; Boeing; Cadwalader; Davis Polk; Debevoise; and Mayer. As
the proposal in the 2008 Proposing Release did not add requirements
to the safe harbors for privately-issued asset-backed securities,
these commenters did not assess whether additional requirements
would have changed the result.
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B. New Registration Procedures and Forms for Asset-Backed Securities
1. New Shelf Registration Procedures
Under existing rules, as with offerings of other types of
securities registered on Form S-3 and Form F-3, the shelf registration
statement for an offering of asset-backed securities will often be
effective before a takedown is contemplated. Pursuant to existing
Securities Act Rules 409 and 430B,\76\ the prospectus in the
registration statement may omit the specific terms of a takedown if
that information is unknown or not reasonably available to the issuer
when the registration statement is made effective.\77\ For ABS
offerings off the shelf, because assets for a pool backing the
securities will not be identified until the time of an offering,
information regarding the actual assets in the pool and the material
terms of the transaction are sometimes only included in a prospectus or
prospectus supplement that is filed with the Commission the second
business day after first use.\78\ This information includes information
about the pool, underwriting criteria for the assets and exceptions
made to the underwriting criteria, identification of the originators of
the assets and other information that is keyed off the identification
of specific assets for the pool.
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\76\ 17 CFR 230.409 and 17 CFR 230.430B.
\77\ The prospectus disclosure in the registration statement is
often presented through a ``base'' or ``core'' prospectus and a
prospectus supplement. We are proposing to eliminate this type of
presentation for asset-backed issuers. See Section II.D.1. below.
\78\ An instruction to Rule 424(b) requires that a form of
prospectus or prospectus supplement relating to a delayed offering
of mortgage-backed securities or an offering of asset-backed
securities be filed no later than the second business day following
the date it is first used after effectiveness in connection with a
public offering or sales, or transmitted by a means reasonably
calculated to result in filing with the Commission by that date.
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We recognize that asset-backed issuers have expressed the need to
use shelf registration to access the capital markets quickly.\79\ We
understand that the creation of an asset pool to support securitized
products is a dynamic and ongoing process in which changes can take
place up until pricing. As a result, our proposals today generally
maintain the fundamental framework of shelf registration for ABS
offerings.
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\79\ Notably, according to EDGAR, in 2006 and 2007, only three
ABS issuers filed registration statements on Form S-1 that went
effective.
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However, we also recognize that it is important for investor
protection that ABS investors have not just adequate information to
make an investment decision, but also adequate time to analyze the
information and the potential investment. For the most part, each ABS
offering off of a shelf registration statement involves securities
backed by different assets, so that, in essence, from an investor point
of view, each offering is like an initial public offering with respect
to the ABS issuer. Information regarding the assets is an important
piece of information for investors to use to conduct an analysis of the
ability of those underlying assets to generate sufficient funds to make
payments on the securities. Furthermore, some have noted the lack of
time to review transaction-specific information as hindering the
investors' ability to conduct adequate analysis of the securities.\80\
We believe that a more orderly process for asset-backed securities
offerings with improved investor protections, where investors and
underwriters have additional time to assist their review of offerings,
may be needed, even if issuers may not always be able to time their
offering in a way that takes advantage of short term price peaks.
Therefore, we are proposing rules designed to increase the amount of
time that investors have to review information regarding a particular
shelf takedown and promote analysis of asset-
[[Page 23335]]
backed securities in lieu of undue reliance on security ratings for
shelf offerings.
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\80\ See, e.g., Section I.B. of CFA Institute Centre for
Financial Market Integrity and Council of Institutional Investors,
U.S. Financial Regulatory Reform: The Investor's Perspective, July
2009 (noting that securitized products are sold before investors
have access to a comprehensive and accurate prospectus, noting that
each ABS offering involves a new and unique security, and
recommending that the Commission adopt rules to improve the
timeliness of disclosures to investors); Dr. William W. Irving's
testimony concerning ``Securitization of Assets: Problems and
Solutions'' Before the Senate Banking, Housing and Urban Affairs
Subcommittee on Securities, Insurance, and Investment (Oct. 7,
2009), at 11 (recommending that there be ample time before a deal is
priced for investors to review and analyze a full prospectus and not
just a term sheet). The testimony is available at http://banking.senate.gov/public/.
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(a) Rule 424(h) Filing
We are proposing to require an asset-backed issuer using a shelf
registration statement on proposed Form SF-3 to file a preliminary
prospectus containing transaction-specific information at least five
business days in advance of the first sale of securities in the
offering. This requirement, if adopted, would allow investors
additional time to analyze the specific structure, assets, and
contractual rights regarding each transaction. Requiring that such
information be filed at least five business days before the first sale
of securities in the offering is designed to balance the interest of
ABS issuers in quick access to the capital markets and the need of
investors to have more time to consider transaction-specific
information. We considered whether a longer minimum time period than
five business days would be more appropriate.\81\ However, we are
proposing five business days, because we preliminarily believe that the
proposals discussed below that require the filing of standardized and
tagged loan-level information and a computer program that gives effect
to the cash flow provisions of the transaction agreement could reduce
the amount of time required by investors to consider transaction
specific information. Our requests for comment on the proposed new
procedures below include questions about the appropriate amount of time
investors need to consider transaction specific information.
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\81\ Some have suggested that investors be provided with up to
two weeks to analyze asset information. See, e.g., Joshua Rosner,
Securitization: Taming the Wild West, Roosevelt Institute's Make
Markets be Markets (Mar. 3, 2010), at 73.
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Under our proposal, with respect to any takedown of securities in a
shelf offering of asset-backed securities where information is omitted
from an effective registration statement in reliance on newly proposed
Rule 430D, a form of prospectus meeting certain requirements must be
filed with the Commission by a means reasonably calculated to result in
filing in accordance with proposed Rule 424(h) (the ``Rule 424(h)
filing'' or ``Rule 424(h) prospectus'') at least five business days
prior to the first sale of securities in the offering.\82\ If the
preliminary prospectus is used earlier than such five business days to
offer the securities, then it must be filed by the second business day
after first use.
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\82\ Sale includes ``contract of sale.'' See fn. 31 and
accompanying text of the Offering Reform Release.
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As discussed below, we are proposing new Rule 430D to provide the
framework for shelf registration of ABS offerings. The proposed rule
explains what information may be omitted from the prospectus filed with
the effective registration statement and what information must be
contained in the Rule 424(h) filing. Under new Rule 430D, as proposed,
the Rule 424(h) filing must contain substantially all the information
for the specific ABS takedown previously omitted from the prospectus
filed as part of an effective registration statement,\83\ except for
the information with respect to the offering price, underwriting
discounts or commissions, discounts or commissions to dealers, amount
of proceeds or other matters dependent upon the offering price. The
information required to be filed pursuant to proposed Rule 424(h) would
include, among other things, information about the specific asset pool
that is backing the securities in the takedown and the waterfall
computer program discussed in Section III below. Proposed Rule 430D
would provide that a material change in the information provided in the
Rule 424(h) filing, other than offering price, would require a new Rule
424(h) filing and therefore, a new five business-day waiting
period.\84\ The new Rule 424(h) filing would be required to reflect the
change and contain substantially all the information required to be in
the prospectus, except for pricing information. For example, if a
credit enhancement (that was contemplated in the registration
statement) is added to the transaction after a Rule 424(h) filing is
filed, we would expect the issuer to file a new Rule 424(h) filing that
reflects the credit enhancement and wait an additional five business
days before the first sale in the offering. This is designed to provide
investors with information and time sufficient to conduct a thorough
analysis of new information relating to the offering.
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\83\ For example, the Rule 424(h) filing would include the
waterfall computer program that we are proposing to require, as
discussed in Section III.B.1 of this release. We believe that
investors need adequate time to run the waterfall computer program
using the asset data filed with the Rule 424(h) filing.
\84\ Whether a change is material for purposes of the proposed
requirement would depend on the facts and circumstances. See TSC
Industries, Inc. v.Northway, Inc., 426 U.S. 438, 448-449 (1976). See
also Basic v. Levinson, 485 U.S. 224, 231 (1988).
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So long as a form of prospectus has been filed in accordance with
Rule 430D, ABS issuers could continue to utilize a free writing
prospectus or ABS informational and computational materials in
accordance with existing rules.\85\ However, because we believe that
investors should have access to a comprehensive prospectus that
contains substantially all of the required information, a free writing
prospectus or ABS informational and computational materials could not
be used for the purpose of meeting the requirements of proposed Rule
424(h). For liability purposes, a Rule 424(h) filing would be deemed
part of the registration statement on the date such form of prospectus
is filed with the Commission, or if the preliminary prospectus is used
earlier than five business days in advance of the first sale of
securities in the offering, then the date of first use.\86\ A final
prospectus for ABS offerings would continue to be filed pursuant to
Rule 424(b). Consistent with Rule 430B for shelf offerings of corporate
issuers, under proposed Rule 430D the filing of the final prospectus
under Rule 424(b) would trigger a new effective date for the
registration statement relating to the securities to which such form of
prospectus relates for purposes of liability under Section 11 of the
Securities Act.\87\
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\85\ ABS informational and computational materials, as defined
in Item 1101 of Regulation AB [17 CFR 229.1101], may be used in
accordance with Securities Act Rules 167 and 426 [17 CFR 230.167 and
17 CFR 230.426]. Materials that constitute a free writing
prospectus, as defined in Securities Act Rule 405 [17 CFR 230.405]
may be used in accordance with Securities Act Rules 164 and 433 [17
CFR 230.164 and 17 CFR 230.433].
\86\ This is consistent with the existing provisions for other
preliminary prospectuses. See Rule 430B(e). We also propose in this
release to repeal the exception to the prospectus delivery
requirement in Exchange Act Rule 15c2-8(b) for shelf-eligible asset-
backed securities. See Section II.C. below.
\87\ 15 U.S.C. 77k. The proposed rule does not change the
treatment of ABS offerings for purposes of Rule 159 [17 CFR
230.159]. Rule 159 provides the following:
(a) For purposes of section 12(a)(2) of the Securities Act only,
and without affecting any other rights a purchaser may have, for
purposes of determining whether a prospectus or oral statement
included an untrue statement of a material fact or omitted to state
a material fact necessary in order to make the statements, in the
light of the circumstances under which they were made, not
misleading at the time of sale (including, without limitation, a
contract of sale), any information conveyed to the purchaser only
after such time of sale (including such contract of sale) will not
be taken into account.
(b) For purposes of section 17(a)(2) of the Act only, and
without affecting any other rights the Commission may have to
enforce that section, for purposes of determining whether a
statement includes or represents any untrue statement of a material
fact or any omission to state a material fact necessary in order to
make the statements made, in light of the circumstances under which
they were made, not misleading at the time of sale (including,
without limitation, a contract of sale), any information conveyed to
the purchaser only after such time of sale (including such contract
of sale) will not be taken into account.
(c) For purposes of section 12(a)(2) of the Act only, knowing of
such untruth or omission in respect of a sale (including, without
limitation, a contract of sale), means knowing at the time of such
sale (including such contract of sale).
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[[Page 23336]]
(b) New Rule 430D
Currently, the framework for ABS shelf offerings, along with shelf
offerings for other securities, is outlined in Rule 430B of the
Securities Act. Rule 430B describes the type of information that
primary shelf eligible and automatic shelf issuers may omit from a base
prospectus in a Rule 415 offering \88\ and include instead in a
prospectus supplement, Exchange Act report incorporated by reference,
or a post-effective amendment.\89\ We are proposing new Rule 430D to
provide the framework for delayed shelf offerings of asset-backed
securities pursuant to Rule 415(a)(1)(vii), as proposed to be revised.
If we adopt Rule 430D, existing Rule 430B would no longer apply to ABS
offerings.
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\88\ Under Rule 430B, a form of prospectus filed as part of a
registration statement for offerings of asset-backed securities may
omit information unknown or not reasonably available pursuant to
Rule 409.
\89\ See also Section V.B.1.b of the Offering Reform Release.
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Proposed Rule 430D would require that with respect to each
offering, substantially all the information previously omitted from the
prospectus filed as part of an effective registration statement, except
for the omission of information with respect to the offering price,
underwriting discounts or commissions, discounts or commissions to
dealers, amount of proceeds or other matters dependent upon the
offering price, be filed at least five business days in advance of the
first sale of securities in the offering in accordance with Rule
424(h). Thus, an issuer may not omit such information (other than
offering price, underwriting discounts or commissions, discounts or
commissions to dealers, amount of proceeds or other matters dependent
upon the offering price) from the Rule 424(h) filing.
We are proposing conforming revisions to the undertakings that are
required by Item 512 of Regulation S-K \90\ in connection with a shelf
registration statement. For the most part, ABS issuers would continue
to provide the same undertakings that are currently required of ABS
issuers conducting shelf offerings. We are proposing a conforming
revision to the undertakings relating to the determination of liability
under the Securities Act as to any purchaser in the offering. It would
require an undertaking that each prospectus filed by the registrant
pursuant to Rule 424(h) would be deemed part of the registration
statement as of the date the prospectus was deemed part of, and
included in, the registration statement (i.e., the date it was filed
with the Commission, or, if the prospectus was used and filed earlier,
the second business day after first use).\91\ Also, under our proposed
revision to Item 512 of Regulation S-K, an issuer would be required to
undertake to file the information required to be contained in a Rule
424(h) filing with respect to any offering of securities.
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\90\ 17 CFR 229.512.
\91\ This is consistent with the existing undertaking in Item
512 for prospectuses that are filed pursuant to Rule 424(b)(3). See
Item 512(a)(5)(i)(A) of Regulation S-K [17 CFR 229.512(a)(5)(i)(A)].
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Request for Comment
We request comment on our proposal to establish a minimum
period of time available to investors to review registered ABS offering
prospectuses. Are we correct that investors need additional time? Would
the proposed timeline for filing the proposed preliminary prospectus at
least five business days prior to the date of first sale pose problems
for market participants? If so, how could we address those concerns
while still providing investors with sufficient time to analyze the
securities?
Is the proposed five business days sufficient time for
investors? Should the required minimum number of days that the Rule
424(h) filing must be filed before the first sale be longer (e.g., six,
seven, eight, or ten business days) or shorter than what we are
proposing (e.g., two or four business days)? Given the increased amount
of information that would be made available to investors under this
proposal, would investors need more time to consider transaction
specific information? Is our belief that the filing of standardized and
tagged asset-level information and a computer program that gives effect
to the cash flow provisions of the transaction agreement could reduce
the amount of time investors need to consider transaction-specific
information correct?
We are cognizant that having a transaction exposed to the
markets for some period of time causes concerns to some issuers and
underwriters in some instances. However, we also note situations in
which transaction-specific information regarding ABS is provided to
other deal participants for a longer period prior to selling the
securities seemingly with no or minimal effect on the issuer's ability
to sell securities. We note, in particular, that the Federal Reserve
Board requires information to be provided to it regarding the assets
pledged to the Term Asset-Backed Securities Loan Facility (TALF) at
least three weeks prior to the subscription date.\92\ Similarly, rating
agencies receive information prior to rating transactions.\93\ If there
are issues raised by exposing the transaction publicly to the markets,
please provide us with specific information about the concerns and ways
we can revise the proposal to address them.
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\92\ Each issuer wishing to bring a TALF-eligible ABS
transaction to market is required to provide, at least three weeks
prior to the subscription date, information to the Federal Reserve
Bank of New York including, but not limited to, all data on the
transaction the issuer has provided to any NRSRO.
\93\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, Release No. 34-59342 (Feb. 2,
2009) [74 FR 6456].
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Under our proposal, the Rule 424(h) filing would not be
required to include information dependent on pricing. Is that
appropriate? If not, what information should be required to be included
and how would an issuer have access to the information in the timeframe
that we are proposing?
Under our proposal, if a material change to the disclosure
other than to pricing information occurs, the issuer would be required
to file a new Rule 424(h) prospectus with updated information. Is this
requirement specific enough? Should we, instead or in addition, specify
particular changes that would trigger a filing, or conversely, that
would not trigger a filing? Should we, for example, provide that a new
Rule 424(h) filing would be required if the asset pool has changed by a
certain amount? If so, what should that amount be (e.g., 1%, 5%, or 10%
of the final asset pool)? How would other changes be described, such as
changes to the waterfall? Would it be appropriate to allow a material
change without requiring a new Rule 424(h) filing and a new five-day
waiting period? Should the new Rule 424(h) filing be required as
proposed to reflect the change and contain substantially all the
information required to be in the prospectus, except for pricing
information? Should we only require that the change be reflected in a
supplement?
The requirement to file a new Rule 424(h) filing would
trigger another five-day waiting period before the first sale. Is this
approach appropriate and workable? If the issuer is required to re-file
the preliminary prospectus, as proposed, should the issuer be required
to wait another five business days before the first sale, as proposed?
If not, how long should the issuer be required to wait?
[[Page 23337]]
Are there any aspects of the Rule 424(h) filing that we
should specify must be substantially set at the time it is required to
be filed?
Are there any changes, other than the ones we are
proposing, to the Item 512 undertaking that should be made? Is our
proposed change to incorporate the Rule 424(h) filing in the
undertakings relating to liability so that the Rule 424(h) filing shall
be deemed part of the registration statement as of the date the filed
prospectus was deemed part of and included in the registration
statement appropriate?
We have designed the proposed process for ABS shelf
registration to strike a balance between facilitating registered ABS
offerings and providing investors a meaningful opportunity to analyze
the securities. Would our proposal to require that the Rule 424(h)
prospectus be filed at least five business days before the first sale
make shelf registration sufficiently less attractive to issuers that
they would avoid the registered market? If so, are there ways to
address this concern? Below, we are proposing to require more
disclosure for private offerings of asset-backed securities that rely
on the Commission's safe harbors that allow issuers to rely on an
exemption from registration. Should we impose even more restrictions on
private offerings of asset-backed securities than what is proposed
below? For example, should we condition reliance on Rule 506 of
Regulation D on a limitation of the total number of purchasers in an
ABS offering, even for offerings to accredited investors or qualified
institutional buyers? Alternatively, should we impose fewer
restrictions on private offerings of asset-backed securities?
Should we also require, or require instead, that the
initial purchaser or investor hold the securities for a period of time
prior to resales in reliance on Rule 144A to better ensure that such
resales of asset-backed securities are not a distribution? Could that
better ensure that the public registered ABS market operates
appropriately and that the existing safe harbors do not inappropriately
erode the public markets? If we were to add these additional
restrictions on private offerings, what would be the impact on the
broader market for structured securities? Would requiring a holding
period discourage investors from purchasing ABS in exempt private
placements? Would these offerings all be done as public deals, or would
these offerings cease to be conducted at all? Should we provide for
fewer restrictions--for example, should we require a subset of loan-
level disclosures in the context of an exempt private offering? Should
issuers or sponsors have the option of providing only certain
information? Or would these rules reduce the aggregate amount of
transactions? What would be the economic effect?
2. Proposed Forms SF-1 and SF-3
In order to distinguish the ABS registration system from the
registration system for other securities, we are proposing to add new
registration forms that would be used for any sales of a security that
meets the definition of an asset-backed security, as defined in Item
1101 of Regulation AB.\94\ These new forms, which would be named Form
SF-1 and Form SF-3,\95\ would require all the items applicable to ABS
offerings that are currently required in Form S-1 and Form S-3 as
modified by the proposed amendments noted below. Offerings that qualify
for delayed shelf registration \96\ would be registered on proposed
Form SF-3, and all other offerings would be registered on Form SF-
1.\97\
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\94\ 17 CFR 229.1101(c).
\95\ The proposed forms would be referenced in 17 CFR 239.44 and
17 CFR 239.45.
\96\ In this release, we also refer to such offerings as shelf
offerings.
\97\ We also propose to make conforming changes throughout our
rules to refer to the new forms, as appropriate. See, e.g., proposed
revisions to Securities Act Rules 167 and 190(b)(1) and the exhibit
table in Item 601 of Regulation S-K.
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Proposed Form SF-1 would not contain all the items that are
currently required by Form S-1. Specifically, the proposed form would
not include the instructions as to summary prospectuses, as we do not
believe that the summary prospectus instructions are relevant for ABS
offerings. Also, we are proposing to substitute the item in existing
Form S-1 permitting incorporation by reference by reporting companies
of previously filed Exchange Act reports and documents with an item
that is more tailored to asset-backed securities on proposed Form SF-1.
As discussed in Section I.D.1 below, we are proposing that ABS issuers
file a single prospectus for each takedown with all of the information
required by Regulation AB because we believe ABS offerings are more
closely akin to initial public offerings. Therefore, we are proposing
to limit incorporation by reference to certain disclosures. In
particular, as discussed below,\98\ we are proposing to permit an ABS
issuer to incorporate by reference into proposed Form SF-1 information
by the time of effectiveness of the registration statement the
information that is required to satisfy certain disclosure requirements
(i.e., static pool information filed pursuant to Item 6.08 of Form 8-K,
asset data filed pursuant to Item 6.06 of Form 8-K, and the waterfall
computer program filed pursuant to Item 6.07 of Form 8-K).\99\ We also
are proposing to permit ABS issuers structured as revolving asset
master trusts to incorporate by reference certain asset-level
disclosures that would have been provided in previously filed Form 10-
Ds.\100\
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\98\ See Sections III.A.4., III.B.1.d., and III.E.4. below.
\99\ See General Instruction IV. and Item 10 of proposed Form
SF-1 and Item 11 of proposed Form SF-3.
\100\ We are proposing to require ABS backed by floorplan
receivables to include the performance information of assets that
were part of the pool prior to the current offering. See Section
III.A.1.e.iv. below.
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We are proposing to revise some disclosure requirements that are
currently located in Form S-3 but would be moved to proposed Form SF-3.
As discussed in the sections immediately following this discussion, we
are proposing changes to shelf eligibility for ABS issuers, which will
now become the eligibility criteria for proposed Form SF-3. In
addition, we are proposing to change an eligibility requirement in
existing Form S-3 relating to delinquent filings of the depositor or an
affiliate of the depositor for purposes of proposed Form SF-3. For Form
S-3, an issuer is not eligible for registration on the form if the
depositor or an affiliate of the depositor, with respect to a class of
asset-backed securities involving the same asset class, has not filed
the Exchange Act reports required to be filed or has not filed such
reports in a timely manner for a period of twelve months prior to the
filing of the registration statement.\101\ However, for certain
specified reports, including reports on Form 8-K pursuant to Item 6.05,
untimely filing does not result in loss of eligibility.\102\ We are
proposing to repeal the existing exception from the filing timeliness
requirement for Item 6.05 Form 8-K reports. Item 6.05 Form 8-K reports,
which we discuss in further detail below, are required to be filed if
there is a change in the asset pool characteristics from the
description of the asset pool provided in the final prospectus and
thereby provide important information regarding the composition of the
assets. Under proposed Form SF-3, the untimely filing of an Item 6.05
Form 8-K report by the depositor or affiliate of the depositor, with
respect to a class of asset-backed securities involving the same asset
class, during the twelve
[[Page 23338]]
calendar months and any portion of a month immediately preceding the
filing of the registration statement would result in the loss of form
eligibility for up to twelve months from the time the report was
due.\103\ As discussed in Section V.C.1 below, we also are proposing to
lower the threshold amount of change that would trigger a filing
requirement for Item 6.05 Form 8-K reports from five percent of any
material pool characteristic to one percent.
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\101\ General Instruction I.A.4 of Form S-3.
\102\ Id.
\103\ We are also proposing to amend Rule 415 to require a
quarterly evaluation of form eligibility on proposed Form SF-3. See
Section II.B.3.e. below.
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Request for Comment
We request comment on our proposal to move the
registration statement item requirements for ABS offerings into new
forms that would apply only to asset-backed issuers. Would the proposed
new forms create any difficulties? If so, please specify.
We are proposing to move the items applicable to asset-
backed securities from Forms S-1 and S-3 to proposed Forms SF-1 and SF-
3, with some exceptions noted. Do the proposed forms omit any
requirement for asset-backed issuers that should be included? Do any of
the requirements need further revisions?
The proposed Form SF-1 would not include the instructions
as to summary prospectuses that are included in Form S-1. Is there any
reason we should provide these instructions in proposed Form SF-1 for
ABS issuers?
Are our proposed instructions for incorporation by
reference appropriate?
Should we repeal the existing carve-out for the untimely
filing of an Item 6.05 Form 8-K, as we are proposing to do? Why or why
not?
3. Shelf Eligibility for Delayed Offerings
We are proposing to eliminate the ability of ABS issuers to
establish shelf eligibility in part by means of an investment grade
credit rating. This is part of our broad ongoing effort to remove
references to NRSRO credit ratings from our rules in order to reduce
the risk of undue ratings reliance and eliminate the appearance of an
imprimatur that such references may create.\104\ In place of credit
ratings, we are proposing to establish four shelf eligibility criteria
that would apply to mortgage related securities and other asset-backed
securities alike. These proposed requirements, along with the other
current requirements,\105\ would determine an asset-backed issuer's
eligibility to register for a delayed shelf offering. Similar to the
existing requirement that the securities must be investment grade, the
proposed requirements are designed to provide for a certain quality and
character for asset-backed securities that are eligible for delayed
shelf registrations.
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\104\ See Release No. 33-9069.
\105\ See fn. 70 above.
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(a) Risk Retention
Risk retention requirements have been discussed by some market
participants as one potential way to improve the quality of asset-
backed securities by better aligning the incentives of the sponsors and
originators of the pool assets with investors' incentives. A chain of
securitization may involve multiple participants that may serve the
function of originator, sponsor, servicer, or trustee.\106\ One concern
that has been debated is whether the model of securitization where loan
originators do not hold the loans they originate but instead repackage
and sell them as securities may create a misalignment of incentives
between the originator of the assets and the investors in the
securities, which misalignment may have contributed to lower quality
assets being included in securitizations that did not have continuing
sponsor exposure to the assets in the pool.\107\ The theory underlying
a risk retention requirement is that if a sponsor retains exposure to
the risks of the assets, the sponsor is more likely to have greater
incentives to include higher quality assets in the pool. Because we
believe that securitizations with sponsors that have continuing risk
exposure would likely be higher quality than those without, we are
proposing, among other things, to replace the investment grade ratings
requirement in the ABS shelf eligibility conditions with a condition
that the sponsor of any securitization retain risk in each tranche of
the securitization on an ongoing basis. Such a requirement has
colloquially been referred to as ``risk retention,'' or ``skin in the
game.'' We believe that the proposed risk retention requirement for
shelf eligibility would distinguish the types of securities that are of
a sufficient quality and character to be shelf eligible while avoiding
the possibility of undue reliance on ratings.
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\106\ Under Regulation AB, ``servicer'' means any person
responsible for the management or collection of the pool assets or
making allocations or distributions to holders of the asset-backed
securities. 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. See Item 1101(j) of Regulation AB. In some cases, one
party may act in two or more different roles, such as when a bank
and/or affiliated party of the bank serves in all three functions of
originator, sponsor, and servicer of an ABS offering. In contrast,
in the case of so-called aggregators, the sponsor acquires loans
from many other unaffiliated sellers before securitization.
\107\ See, e.g., European Central Bank, The Incentive Structure
of the `Originate to Distribute Model,' December 2008, at 5 (noting
that securitization is fundamentally vulnerable to certain adverse
behavior since agents seek to maximize their benefits while
principals cannot fully observe and control the agents' actions);
Amiyatosh Purnanandam, ``Originate-to-Distribute Model and the
Subprime Crisis'' (Apr. 27, 2009), available at http://ssrn.com/abstract=1167786.
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Risk retention requirements are being considered in the U.S. and
internationally. In the U.S., proposals with such requirements have
come in several different forms.\108\ Risk retention requirements have
recently garnered support.\109\ On the other hand, some are
[[Page 23339]]
concerned that mandatory risk retention will not necessarily result in
improved asset quality, may not be calibrated to reflect the risk in
any given pool and across different asset classes, and may conflict
with various other goals and purposes of securitization.\110\
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\108\ The Federal Deposit Insurance Corporation (``FDIC'')
recently solicited public comments regarding proposed amendments to
a ``safe harbor'' rule from the FDIC's statutory authority to
disaffirm or repudiate contracts of an insured depository
institution (``IDI'') with respect to transfers of financial assets
by an IDI in connection with a securitization or a participation
(the ``FDIC Securitization Proposal''). The FDIC Securitization
Proposal also includes risk retention requirements for purposes of
providing a safe harbor for IDIs, although in a different context
from our proposal which would require risk retention as a condition
to shelf eligibility. See Federal Deposit Insurance Corporation,
Advance Notice of Proposed Rulemaking Regarding Treatment by the
Federal Deposit Insurance Corporation as Conservator or Receiver of
Financial Assets Transferred by an Insured Depository Institution in
Connection With a Securitization or Participation After March 31,
2010 (Jan. 7, 2010) [75 FR 934]. The comment letters are available
at http://www.fdic.gov/regulations/laws/federal/2010/10comAD55.html.
See also H.R. 4173, 111th Cong., (bill that would require a creditor
or securitizer to retain five percent of the credit risk on any loan
that is transferred, sold, or conveyed); Senate proposal, 111th
Congress, ``Restoring American Financial Stability Act of 2010''
(bill that would require five percent risk retention). The Senate
bill contemplates joint rulemaking regarding the risk retention
requirement with the SEC, the FDIC and the Office of Comptroller
Currency and the House bill contemplates joint rulemaking with the
SEC, the National Credit Union Administration Board, the Board of
Governors of the Federal Reserve system, the Office of the
Comptroller of the Currency, the Office of Thrift Supervisors and
the FDIC.
\109\ See, e.g., CFA Institute Centre for Financial Market
Integrity and Council of Institutional Investors, ``U.S. Financial
Regulatory Reform: The Investor's Perspective,'' July 2009
(recommending that ABS sponsors should be required to retain a
meaningful residual interest in their securitized products). See,
e.g., U.S. Department of Treasury, A New Foundation: Rebuilding
Financial Supervision and Regulation, June 17, 2009; H.R. 1728,
111th Cong. Sec. 213 (2009). In addition, risk retention by
originating lenders has been a component of several guaranteed loan
programs administered by the United States Department of Agriculture
(USDA) since 1972, when amendments to the Consolidated Farm and
Rural Development Act (7 USC 1921 et seq.) expanded the USDA's
lending authority to include guarantees of farm and rural
development loans issued by commercial lenders. For example, under
its guaranteed farm loan program, the Farm Service Agency can
guarantee up to 90% of a loan issued by a commercial lender to an
eligible farmer, but that lender must retain the full amount of the
unguaranteed portion in its portfolio for the life of the loan. See
7 CFR 762.160. Similar conditions are required for guaranteed loan
programs administered by the USDA's Rural Housing Service. See,
e.g., 7 CFR 3575.4. See also comment letter from MetLife on the FDIC
Securitization Proposal (``MetLife FDIC Letter'') (generally
supporting credit risk retention because it aligns interests with
investors and noting that retention should represent a vertical pro
rata slice of all securitization obligations, as long as retaining
the interest does not cause unintended consolidation issues for the
issuer) and comment letter from Consumers Union on the FDIC
Securitization Proposal (supporting retention of ten percent of an
economic interest because it would create stronger incentives for
accurate underwriting).
\110\ See, e.g., comment letter from American Securitization
Forum and comment letter from American Bar Association on the FDIC
Securitization Proposal.
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In addition, in its January 2009 framework, a working group on
financial reform in the Group of Thirty recommended that regulated
financial institutions be required to retain a meaningful portion of
the credit risk of the financial assets they are packaging into
securitized and other structured credit products.\111\ On May 6, 2009,
the European Union adopted an amendment to the Capital Requirements
Directive, which sets out the rules for Basel II implementation in
Europe, that will, upon effectiveness, prohibit a credit institution
from investing in a securitization unless there is disclosure from the
originator, sponsor, or original lender that one of them will retain,
on an ongoing basis, a net economic interest in the securitized credit
risk of at least five percent.
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\111\ See Group of Thirty, Financial Reform: A Framework for
Financial Stability (Jan. 15, 2009), at 51. The Group of Thirty,
established in 1978, is a private, nonprofit, international
organization composed of representatives of private and public
institutions.
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We are proposing to make risk retention a part of the shelf
eligibility conditions for asset-backed issuers. Under our proposal,
Form SF-3 would require that, as a condition to shelf eligibility, the
sponsor or an affiliate of the sponsor retain a net economic interest
in each securitization in one of the two following manners:
Retention of a minimum of five percent of the nominal
amount of each of the tranches sold or transferred to investors, net of
hedge positions directly related to the securities or exposures taken
by such sponsor or affiliate; \112\ or
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\112\ Under the proposed condition, no sponsor may purchase or
sell a security, derivative, or other financial product or enter
into an agreement with any third party, in which the terms or
payments (or lack of payment) of any of the loans or other assets
that underlie the ABS are a material term of that financial product
or agreement, if the financial product or agreement in any way
reduces or limits the financial exposure of the sponsor to less than
five percent of the nominal amount of the ABS. Thus, hedges of
market interest or currency exchange rates, would not be taken into
account in the calculation of the sponsor's risk retention for
purposes of the net five percent risk retention requirement. Hedges
tied to securities similar to the ABS also would not be taken into
account in the calculation of the sponsor's risk retention. For
instance, holding a security tied to the return of a subprime ABX.HE
index would not be a hedge on a particular tranche of a subprime
RMBS sold by the sponsor unless that tranche itself was in the
index.
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In the case of revolving asset master trusts, retention of
the originator's interest of a minimum of five percent of the nominal
amount of the securitized exposures, net of hedge positions directly
related to the securities or exposures taken by such sponsor or
affiliate, provided that the originator's interest and securities held
by investors are collectively backed by the same pool of receivables,
and payments of the originator's interest are not less than five
percent of payments of the securities held by investors
collectively.\113\
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\113\ Currently, credit card ABS structures typically include an
originator's interest, which is pari passu with the investors'
interest in the pool of receivables.
Under the proposed eligibility requirement, the net economic interest
required to be retained to be shelf eligible would be measured at
issuance (or at origination in the case of originator's interest), and
then maintained on an ongoing basis.\114\ Also, proposed Form SF-3
would require disclosure relating to the interest that is retained by
the sponsor.\115\ Retention of five percent net economic interest is
intended to align incentives of sponsors with investors, such that the
quality of the assets in the pool or other aspects of the offering is
likely to be higher than for a securitization without risk retention,
and, thus, should be an appropriate partial substitute for the existing
investment grade ratings requirement in the ABS shelf eligibility
conditions. If we adopt a risk retention condition to shelf
eligibility, we preliminarily believe that five percent is an
appropriate amount of risk to require sponsors to retain and balances
our goal of requiring some exposure to risk without overburdening the
capital structure of sponsors.\116\
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\114\ In 2009, the EU Commission called on Committee of European
Banking Supervisors (CEBS) to provide technical advice on the
amendment to the Capital Requirements Directive (i.e., Article 122a
of the EU Capital Requirements Directive) which will prohibit a
credit institution from investing in a securitization unless there
is disclosure from the originator or sponsor that it has retained
risk. Among other things, the EU Commission requested the CEBS
consider the adequacy of the minimum 5% retention requirement to
meet the goal of avoiding misaligned incentives and of mitigating
systemic risks from securitization markets. See publication of the
Committee of European Banking Supervisors, ``CEBS today received a
call for technical advice-second part on article 122a of the amended
CRD,'' available at http://www.c-ebs.org/Publications/Calls-for-
Advice/2009/CEBS-today-received-a-call-for-technical-advice_s.aspx
and Committee of European Banking Supervisors, ``Call for Technical
Advice on the Effectiveness of a Minimum Retention Requirement for
Securitisations,'' Oct. 30, 2009.
\115\ See discussion of proposed requirement relating to
sponsor's interest in Section III.C.3. below.
\116\ See H.R. 4173, 111th Cong., (bill requiring five percent
risk retention); Senate proposal, 111th Congress, ``Restoring
American Financial Stability Act of 2010'' (bill requiring five
percent risk retention).
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In constructing the risk retention shelf eligibility condition, we
also considered, but are not proposing, an option of retaining risk
through the retention of randomly selected exposures for purposes of
meeting shelf eligibility conditions. If issuers retain randomly
selected exposures, we believe the economic effects, including
incentive alignment, should be approximately the same as retaining a
fixed percentage of the nominal amount of each tranche, if the
randomization is properly implemented. However, we believe that it
would be both difficult and potentially costly for investors and
regulators to verify that exposures were indeed selected randomly,
rather than in a manner that favored the sponsor.
We believe that the proposed two different ways that a sponsor
could retain risk to satisfy the risk retention shelf eligibility
condition would likely result in better incentive alignment, and,
consequently higher quality securities, than retention of only the
residual interest in a securitization.\117\ ``Horizontal risk
retention'' in the form of retention of the equity or residual interest
could lead to skewed incentive structures, because the holder of only
the residual interest of a securitization may have different interests
from the holders of other tranches in the securitization and, thus, not
necessarily
[[Page 23340]]
result in higher quality securities. The proposed ways that a sponsor
could satisfy the risk retention shelf eligibility condition--either by
retaining a ``vertical'' slice of the securitization, by which we mean
taking a portion of the economic risk in each class of security that is
being offered, or, in the case of revolving exposures, the originator's
interest, would create a direct, shared interest with all the investors
in the performance of the underlying assets.
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\117\ A particular issuance of asset-backed securities often
involves one or more publicly offered classes as well as one or more
privately placed classes. In most instances, the subordinated
classes, or residual interests, which are typically privately
placed, 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 subordinated
classes could affect directly or indirectly the publicly offered
classes.
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We recognize that there are differing views on the effectiveness of
risk retention policies as a means to align the incentives of
securitization transaction parties with the interests of investors,
both as an intrinsic matter and as compared with other alternatives, as
well as concerns about the collateral consequences on the
securitization markets associated with conditioning shelf eligibility
on risk retention. Some note that originators and other financial
institutions active in the mortgage securitization chain suffered
massive losses in the financial crisis as a result of their direct and
indirect exposure to asset underperformance and, therefore, risk
retention exposes financial institutions who are sponsors to too much
risk.\118\ Another criticism of risk retention posits that different
forms of risk retention, such as retention of the equity piece, may
lead issuers to screen assets that go into the pool differently.\119\
One industry group has asserted that other forms of requiring potential
loss exposure, such as more stringent representations and warranties
regarding the assets in the pool, may be preferable to outright
retention of an economic interest in the securities.\120\ Nevertheless,
we believe it appropriate at this time to propose the risk retention
requirement detailed herein, balancing various considerations that will
need to be accounted for before reaching any final determination as to
the best way to proceed.
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\118\ See Committee on Capital Markets Regulation, The Global
Financial Crisis: A Plan for Regulatory Reform, May 2009
(``Committee on Capital Markets Regulation Financial Crisis
Report''), at 130.
\119\ See, e.g., Ingo Fender and Janet Mitchell, ``The future of
securitisation: How to align incentives?'' BIS Quarterly Review,
Sept. 2009 available at http://www.bis.org/publ/qtrpdf/r_qt0909e.pdf (study that claimed to show having the originator or
arranger retain the equity tranche of a securitization may lead to
lower screening effort than other retention schemes and that
recommended regulators focus on disclosure of the scale and nature
of risk retention).
\120\ For example, the ASF has proposed model representations
and warranties designed to enhance the alignment of incentives of
mortgage originators with those of investors in mortgage loans. See
American Securitization Forum Press Release, ``ASF Proposes Risk
Retention and Issues Final RMBS Disclosure and Reporting Packages,''
July 15, 2009, available at http://www.americansecuritization.com/story.aspx?id=3460.
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Although sponsors in the past may have initially held a portion of
the securitization, such retention often had different motivations and
different effects than retention as we propose it. In many cases,
sponsors held small portions. These portions were often a small
horizontal slice of the securitization and, therefore, would have been
unlikely to have driven the sponsor to focus on the quality of the
loans or other underlying assets in order to protect that interest.
Also, retention of that small portion of those securities may have been
due to an inability or lack of incentive to sell those securities. This
was often because the securities had a lower return or carried lower
spread, and thus were of little interest to investors seeking yield,
while the higher returning securities were sold. Many of the retained
securities were securities backed by similarly ranked tranches of ABS,
which magnified rather than diversified risk. It may be the case that
originators and/or underwriters underestimated the risk of both higher
(senior) and lower (subordinated) tranches, but their retention
practices did not result in the sort of overall risk assessment that
our proposal would entail.\121\ Thus, retaining risk in that manner
would have been unlikely to have the same impact on loan originations,
risk analysis, or underwriting--and the resultant asset quality--as the
risk retention requirement that we are proposing for ABS shelf
eligibility.
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\121\ See Gillian Tett, Fool's Gold (2009); International
Monetary Fund, Global Financial Stability Report: Navigating the
Financial Challenges Ahead (Oct. 2009) at 25 (noting that retention
of the senior tranche was motivated mainly by difficulties placing
them), available at http://www.imf.org/external/pubs/ft/gfsr/2009/02/pdf/text.pdf.
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In keeping with our belief that incentives are best aligned and
quality of assets most significantly impacted if the sponsor retains an
equal proportion of all tranches or the economic equivalent, we are
proposing to require that, if sponsors select the second risk retention
option, they retain a claim whose cash flows are at least five percent
of those paid to investors, at all times and in all scenarios. This
requirement means that the originator's interest must ultimately be a
claim to the same pool of assets as the securities held by investors
and must be equivalent in seniority to these securities. The
originator's interest would, therefore, be the economic equivalent of
retaining a fixed proportion of the nominal amount of all tranches held
by investors. We understand that it is a typical practice for credit
card ABS to retain an originator's interest in the pool.
For both options, we are proposing to require risk retention net of
hedge positions directly related to the securities or exposures taken
by the sponsor or its affiliate. This would mean that sponsors would
not be able to simply ``resell'' the specific risks related to the
retained securities or asset pool underlying them and remain shelf
eligible. The purpose of risk retention is to align the sponsor's
incentives with the investors' incentives by exposing each of them to
the same risks which thereby promotes higher quality securities in ABS
shelf offerings than without risk retention by the sponsor. However, we
are primarily concerned with the risks that are under the direct or
indirect control of the sponsor (such as the quality of the
originator's underwriting standards and the extent of the review
undertaken to verify the information regarding the assets). Therefore,
hedge positions that are not directly related to the securities or
exposures taken by the sponsor or affiliate would not be required to be
netted under our proposal. Such positions would include hedges related
to overall market movements, such as movements of market interest
rates, currency exchange rates, or of the overall value of a particular
broad category of asset-backed securities.
As noted above, the proposed risk retention shelf eligibility
condition would apply to the sponsor or affiliate of the sponsor. Our
proposal is intended to provide an incentive for the sponsor to take
additional steps to consider the quality of the assets that are
securitized by exposing sponsors to the same credit risk that investors
will be exposed to. We believe that there may be reasons to impose
these risk retention requirements on the sponsor rather than the
originator. Where a non-affiliated aggregator acts as the sponsor of a
transaction,\122\ the costs of monitoring risk retention born by an
originator rather than the sponsor may be disproportionately high
because the securitization may include many originators where each
originator may have contributed a very small part of the assets in the
entire pool. In addition, if risk retention were imposed on each
originator rather than the sponsor, the amount of risk held by each
originator may be small. As such, the incentives afforded through risk
retention may be
[[Page 23341]]
diminished or rendered less effective. With risk retention imposed on
sponsors, we believe that sponsors would have the appropriate
incentives and mechanisms to ensure that originators' lending standards
are consistent with the quality and character of the ABS to be offered
off of the shelf. Therefore, we believe it is more appropriate to
impose risk retention requirements on the sponsor than the non-
affiliated originator.\123\
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\122\ See discussion in fn. 106 regarding aggregators.
\123\ As discussed in Section III.C.3 below, we also propose to
add requirements for disclosure of any interest in the securities
that is retained by the sponsor or originator.
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Under our proposal, a sponsor may still conduct a public offering
without risk retention. However, such offering would be required to be
registered on proposed Form SF-1 rather than proposed Form SF-3. Those
offerings would not be eligible for delayed shelf registration, which
would subject them to a longer period before they could be completed
since a new registration statement would need to be filed and become
effective before an offering could be completed. This would allow
additional time for the investors to analyze the offering.\124\
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\124\ As we are proposing to require in Section III.C.3 below,
if the offering does not include risk retention by the sponsor, an
issuer should provide clear disclosure that the sponsor of the
offering is not required by law to retain any risk in the securities
and may sell any interest initially retained at any time, as
applicable.
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We have also considered other ancillary impacts of our proposed
risk retention shelf eligibility condition. For example, we considered
the impact of the shelf eligibility condition on financial reporting.
We note that the Financial Accounting Standards Board's newly-issued
Statements of Financial Accounting Standards No. 166 and 167, contained
in FASB's Accounting Standards Codification, Topic 860, Transfers and
Servicing, and Topic 810, Consolidation, respectively, change the
accounting for transfers of financial assets and the criteria for
consolidation of variable interest entities. Substantially all types of
special-purpose entities used in asset-backed securitization
transactions are, for accounting purposes, variable interest entities.
The accounting guidance for consolidation requires a party to
consolidate a variable interest entity if it has a variable interest in
the securitization that is a controlling financial interest in the
variable interest entity. The accounting guidance specifies that a
party has a controlling financial interest if it has variable interests
with both of the following characteristics: (a) The power to direct the
activities of a variable interest entity that most significantly impact
the variable interest entity's economic performance, and (b) the
obligation to absorb losses of the variable interest entity (or the
right to receive benefits from the variable interest entity) that could
potentially be significant to the variable interest entity. Only one
party, if any, is expected to have a controlling financial interest in
a variable interest entity.
A sponsor that retains an economic interest in each tranche of
securities, as we are proposing to require as a condition for shelf
eligibility, generally will have a variable interest in the asset-
backed securitization entity. However, satisfaction of the proposed
risk retention condition would not, by itself, be determinative as to
whether a sponsor's variable interests would be a controlling financial
interest resulting in consolidation. This is the case because each
sponsor will need to evaluate the facts and circumstances related to
each particular transaction in light of the FASB's newly-issued
guidance, including whether the sponsor has the power to direct the
activities that most significantly impact the variable interest
entity's economic performance. In some cases, the economic performance
of the variable interest entity is most significantly impacted by the
performance of the assets that back the securities. In those cases, the
activity that most significantly impacts the performance of the assets
could be, for example, management of asset delinquencies and defaults
or, as another example, selecting, monitoring, and disposing of
collateral securities.
We expect the effect of the FASB's newly-issued guidance, together
with the effect of satisfaction of our proposed risk retention
condition for shelf eligibility (or retention of risk for other
reasons), to generally increase the instances in which financial assets
(and corresponding financial obligations) continue to be reported in
the financial statements of the reporting entity that transfers the
financial assets. However, the accounting and consolidation
determinations for any particular transaction will depend on judgments
about the related facts and circumstances.
We understand that the isolation of the assets comprising the pool
from claims of other creditors is important to ABS investors.\125\
Currently, credit card issuers typically retain an originator's
interest in the pool, so our proposed risk retention shelf eligibility
condition should not impact those issuers. Our proposed shelf
eligibility requirement of retaining a vertical slice of the securities
offered is not intended to have an impact on the isolation of the
underlying assets, and we are not aware of any reason to believe it
would. The proposed shelf eligibility condition would be to hold an
interest in all the securities sold to investors and not the underlying
assets directly nor the residual interest. True sale opinions are
typically required on the transfer of assets from the originator to the
depositor. This proposed shelf eligibility condition would apply to the
sponsor, which may not necessarily be the originator. Thus, we believe
the shelf eligibility condition should not impact whether there has
been a true sale at law of the assets and therefore not change the
analysis in the event of bankruptcy, insolvency, receivership or
conservatorship of the originator or the sponsor.
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\125\ See The Bond Market Association, International Swaps &
Derivatives Association, and Securities Industry Association,
``Special Purpose Entities (SPEs) and the Securitization Markets,''
(Feb. 1, 2002) available at http://www.isda.org/speeches/pdf/SPV-Discussion-Piece-Final-Feb01.pdf (noting that securitizations would
not take place without the ability to establish SPEs, as investors
do not want to take on any risk associated with the seller).
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Request for Comment
Should we continue to condition shelf eligibility on
requirements that are related to the quality of an ABS offering? Should
we, as proposed, replace references to investment grade credit ratings
with a risk retention requirement and/or the other criteria discussed
below, which are intended to increase the likelihood of higher quality
securities than securities that are not required to meet such criteria?
Is there a possibility that, by establishing a risk retention
requirement or any other criteria based on quality, investors may
unduly rely on an appearance that incentives are aligned or that the
security has greater quality and consequently be less inclined to
expend effort to perform their own analyses creating a similar
situation that over-reliance on ratings created? Do the policy bases
for shelf eligibility suggest eligibility criteria based on quality of
securities are appropriate? Conversely, are expedited offerings
inconsistent with an attempt to promote independent analysis of asset-
backed securities and reduce the likelihood of undue reliance by
investors on credit ratings and therefore, should we not allow ABS
offerings to be shelf registered? Should we continue to allow short-
form registration for asset-backed securities? Given that each asset-
backed security
[[Page 23342]]
offering off the shelf is akin to an initial public offering with
respect to the particular issuer, is the premise of most other short
form registration (i.e., that an eligible issuer enjoys a widespread
market following) applicable to issuers of asset-backed securities?
We request comment on risk retention as a condition to
eligibility for a delayed ABS shelf offering. Would the proposed risk
retention condition address concerns relating to the misalignment of
incentives and lead to higher quality securities in registered ABS
shelf offerings? Is this an appropriate condition for shelf
eligibility? Would the requirement incentivize sponsors to consider the
quality of the assets being underwritten and sold into the
securitization vehicle?
Is five percent an appropriate amount of risk for the
sponsor to retain in order for the offering to be shelf eligible?
Should it be higher (e.g., ten or 15%)? Should it be lower (e.g., one
or three percent)? Should the amount of required risk retention be tied
to another measure?
Should the risk retention condition require retention of
risk by sponsors (as proposed) or by originators?
Are there other better ways to address alignment of
incentives, and thus quality of the securities, in the aggregator
situation? Should we require in that situation that all originators and
the sponsor retain some risk?
Should sponsors be permitted to satisfy the risk retention
condition through a different form of risk retention than what is
proposed (e.g., retention of first loss position or retention of first
loss position in conjunction with retention of some form of vertical
slice of the securitization)? Should the risk retention condition
relate to retention of the mezzanine tranche? Should the risk retention
condition depend on the type and quality of the assets, the structure
of the securities and expected economic condition? How could we
structure a shelf eligibility condition to take those variables into
account?
We considered but are not proposing an alternative way to
satisfy the risk retention shelf eligibility condition based on
retention of randomly-selected exposures. We are concerned about the
ability to subsequently demonstrate the randomness of the random
selection process, including for purposes of monitoring or auditing.
Should we include this alternative? Are there any mechanisms that we
could adopt that would ensure adequate monitoring of the randomization
process if such an alternative were permitted? For example, would our
concerns be addressed if the sponsor was required to provide a third
party opinion that the selection process has been random and that
retained exposures are equivalent (i.e., share a similar risk profile)
to the securitized exposures? Would this be sufficient? Would this
opinion resemble a credit rating, raising the same issues that rule
reliance on credit ratings has had? If this approach were taken, should
we impose any requirements on the characteristics of such a third
party? Should that third party be considered an expert for purposes of
the registration statement?
If we adopted a random selection alternative, should we
require the same disclosure regarding the securitized exposures that
are subject to risk retention that is required for the assets in the
pool at the time of securitization and on an ongoing basis? Should the
shelf eligibility condition require that the retained exposures be
subject to the same servicing as the securitized exposures?
Instead of requiring risk retention as a condition for
shelf eligibility, should risk retention be made voluntary for shelf-
eligible offerings and issuers only be required to add specified
disclosure on the interest that the sponsor or other transaction
participants retain? In other words, instead of mandating a certain
amount of risk retention, should the requirement be that issuers
disclose the percentage of risk retained and in what form? As discussed
in greater detail in section III.C.3 of the release, we are also
proposing to revise Items 1104, 1108 and 1110 of Regulation AB to
require disclosure regarding the sponsor's, a servicer's or a 20%
originator's interest retained in the transaction, including amount and
nature of that interest. This information would be required for both
shelf and non-shelf offerings. If those proposed risk retention
disclosure requirements were adopted, would there be a need for or a
significant incremental benefit from mandating specific minimum risk
retention as a condition of shelf eligibility? Could this incremental
benefit be achieved strictly through a market-based mechanism--for
example, through fully-disclosed ABS covenants in which the sponsor
pre-commits to retain a minimum percentage of the risk of the deal, as
opposed to a regulatory requirement? Is the disclosure proposed to be
required below sufficient to achieve such a benefit, and if not, what
additional disclosures should we require? Would disclosure of the risk
retention be a sufficient indicator of shelf-eligible offerings? Should
we condition shelf eligibility on requiring the sponsor to covenant
that it would maintain a minimum percentage of risk retention? If so,
should we provide any limitations on the covenant (e.g., what
percentage of tranche or assets must be retained, manner of sponsor's
retention, no hedging)? What are the limitations to a market-based
mechanism for risk retention? Would such a transaction covenant be
credible and enforceable? Would requiring this transaction covenant,
along with disclosure of risk retention pursuant to the covenant,
sufficiently distinguish those offerings that should be made shelf
eligible from those that should not?
Should net economic interest be measured at the time of
origination/issuance as proposed? Would a different measurement date be
more appropriate (e.g., the securitization cut-off date)? If the
interest were measured at the time of securitization cut-off date,
could this cause issuers to change various terms? Is the amount of
retention that is required to be retained on an ongoing basis
appropriate? Why or why not?
Should revolving asset master trusts be permitted to
satisfy the shelf eligibility requirement by retaining the originator's
interest, as proposed? In those cases, should we require as proposed
that the originator's interest and securities held by investors are
collectively backed by the same pool of receivables, and payments of
the originator's interest are not less than five percent of payments of
the securities held by investors collectively? Is that typical in
credit card issuances?
Are the proposed netting provisions appropriate? Do we
need to provide more guidance on what kind of hedges would be netted
against the retained risk? Is the proposed ``directly related''
standard appropriate? Is it sufficiently clear what type of hedges
would be allowed? Are there certain forms of hedges that we should
indicate would not be netted against the retained risk? Is there any
concern that sponsors may inadvertently hedge the economic risk
required to be retained? If so, do we need to address that and what is
the best way for us to address it? Should we expand the proposed
netting provisions to other types of hedging? Should we narrow the
proposed netting provisions in any way?
Should the sponsor be allowed to sell off the retained
interest after a certain point in time while non-affiliates of the
depositor still hold securities and still remain shelf eligible? If so,
when? Would that undermine the purpose of the condition? If not, why
not?
Should there be an alternate condition to the risk
retention shelf eligibility condition? For instance, should risk
retention apply to RMBS
[[Page 23343]]
that are backed by mortgages that are not qualified mortgages, as
defined H.R. 1728,\126\ a recent legislative proposal? \127\ Would it
be appropriate to require risk retention unless full documentation has
been provided for the assets, the borrower meets a certain minimum
credit score, or the terms of the loan do not involve balloon payments?
Would such requirements for the mortgages in the pool be a better
condition to shelf eligibility than the proposed risk retention shelf
eligibility condition? Would such a shelf eligibility condition be
difficult to implement? Should we instead condition shelf eligibility
on risk retention for loans with an annual percentage rate that exceeds
the average prime offer rate for a comparable transaction as of the
date the interest rate is set by 1.5 or more percentage points for
loans secured by a first lien on a dwelling, or by 3.5 or more
percentage points for loans secured by a subordinate lien on a
dwelling? \128\ How would we structure a condition that relates to
specified characteristics of the assets for other asset classes that
may not have those variables or those industry standards or have
different underwriting standards? What would be the appropriate
categories and thresholds? Do those appropriate categories and
thresholds differ for different classes? If so, how? Are there
securitized asset classes that have no clear or established standards
that could demarcate assets meriting shelf eligibility and those that
do not?
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\126\ See, e.g., Mortgage Reform and Anti-Predatory Lending Act,
H.R. 1728, 111th Congress.
\127\ At Sec. 203 in H.R. 1728, a qualified mortgage is defined
as a mortgage:
(i) That does not allow a consumer to defer repayment of
principal or interest, or is not otherwise deemed a `non-traditional
mortgage' under guidance, advisories, or regulations prescribed by
the Federal Banking Agencies;
(ii) That does not provide for a repayment schedule that results
in negative amortization at any time;
(iii) For which the terms are fully amortizing and which does
not result in a balloon payment, where a `balloon payment' is a
scheduled payment that is more than twice as large as the average of
earlier scheduled payments;
(iv) Which has an annual percentage rate that does not exceed
the average prime offer rate for a comparable transaction, as of the
date the interest rate is set--
(I) By 1.5 or more percentage points, in the case of a first
lien residential mortgage loan having an original principal
obligation amount that is equal to or less than the amount of the
maximum limitation on the original principal obligation of mortgage
in effect for a residence of the applicable size, as of the date of
such interest rate set, pursuant to the sixth sentence of section
305(a)(2) the Federal Home Loan Mortgage Corporation Act (12 U.S.C.
1454(a)(2));
(II) By 2.5 or more percentage points, in the case of a first
lien residential mortgage loan having an original principal
obligation amount that is more than the amount of the maximum
limitation on the original principal obligation of mortgage in
effect for a residence of the applicable size, as of the date of
such interest rate set, pursuant to the sixth sentence of section
305(a)(2) the Federal Home Loan Mortgage Corporation Act (12 U.S.C.
1454(a)(2)); and
(III) By 3.5 or more percentage points, in the case of a
subordinate lien residential mortgage loan;
(v) For which the income and financial resources relied upon to
qualify the obligors on the loan are verified and documented
(vi) In the case of a fixed rate loan, for which the
underwriting process is based on a payment schedule that fully
amortizes the loan over the loan term and takes into account all
applicable taxes, insurance, and assessments;
(vii) In the case of an adjustable rate loan, for which the
underwriting is based on the maximum rate permitted under the loan
during the first seven years, and a payment schedule that fully
amortizes the loan over the loan term and takes into account all
applicable taxes, insurance, and assessments;
(viii) That does not cause the consumer's total monthly debts,
including amounts under the loan, to exceed a percentage established
by regulation of the consumer's monthly gross income or such other
maximum percentage of such income as may be prescribed by regulation
under paragraph (4), and such rules shall also take into
consideration the consumer's income available to pay regular
expenses after payment of all installment and revolving debt;
(ix) For which the total points and fees payable in connection
with the loan do not exceed 2 percent of the total loan amount,
where `points and fees' means points and fees as defined by Section
103(aa)(4) of the Truth in Lending Act (15 U.S.C. 1602(aa)(4)); and
(x) For which the term of the loan does not exceed 30 years,
except as such term may be extended under paragraph (4).
\128\ See definition of ``higher-priced mortgage loans'' in 12
CFR 226.35(a) and Truth in Lending, Federal Reserve System, 73 FR
44522 (July 30, 2008).
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The residual interest of a commercial mortgage
securitization is typically sold to a third party purchaser, also known
as the ``B-piece buyer,'' before the issuance of the securities. In
light of this practice, should we permit third party retention of a
portion of the securitization to fulfill the shelf eligibility
condition? How can we ensure that incentives between the sponsor and
investors are aligned in a manner that results in higher quality if the
sponsor is permitted to sell off its risk to a third party? For
example, should such a shelf eligibility condition require that if a
third party will retain the credit risk, the third party purchaser must
retain a higher percentage (e.g., ten or 15%) of the risk, rather than
five percent? If we allow this approach, should we condition shelf
eligibility on a requirement that the third party separately examine
the assets in the pool and/or not sell or hedge its holdings? Are there
reasons we should, or should not, permit a third party to retain risk
in order to satisfy the proposed risk retention condition? \129\
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\129\ In recent years, it was not uncommon for the
securitization residual or equity interests to be repackaged into
CDOs and sold in the private markets.
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Should any asset classes or types of securities be exempt
from the proposed risk retention shelf eligibility condition or have
different risk retention requirements apply? Because of the unique
nature of residential mortgages in the financial markets, should risk
retention apply to shelf offerings of residential mortgage-backed
securities (RMBS) but not offerings of other ABS? If so, what would be
an appropriate partial substitute for investment grade rating for shelf
eligibility for those other asset classes?
How would the proposed risk retention shelf eligibility
condition impact how sellers account for the transfer of assets in a
securitization transaction? Is it desirable to revise the proposal to
lessen that impact and if so, how?
Would the proposal have an impact on the true sale at law
of the assets or on the rights of ABS investors as a result of
conservatorship, receivership or bankruptcy of the originator or
sponsor? If so, how can we revise the proposed risk retention condition
to require risk retention without jeopardizing the transfer of assets
as a true sale at law or the remoteness of those assets in the event of
any bankruptcy, conservatorship, or receivership of the sponsor or
originator?
We note that FINRA Rule 5130 (Restrictions on the Purchase
and Sale of IPOs of Equity Securities) generally prohibits FINRA
members from selling initial public offerings to broker dealers and
their affiliates. The rule is designed to protect the integrity of the
public offering process by ensuring that: (1) Members make bona fide
public offerings of securities at the offering price; (2) members do
not withhold securities in a public offering for their own benefit or
use securities to reward persons who can give them future business; and
(3) industry insiders do not take advantage of their insider position
to purchase IPOs for their own benefit at the expense of the
public.\130\ Under FINRA's rules, if an ABS is an equity security, it
is excluded from the application of the rule if the security is sold
pursuant to an exemption under the Securities Act or if it is an
offering of investment grade rated ABS. Will this rule have any
significant impact on the ability to retain risk as a requirement for
shelf eligibility? While our rule changes would eliminate references to
credit ratings, sponsors may still obtain ratings, which would
potentially qualify
[[Page 23344]]
the offering for this exemption. Alternatively, FINRA could change its
rule to provide the exemption to shelf-eligible ABS rather than
investment grade rated ABS. Are there any other regulations or rules
that may impact the retention of risk?
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\130\ NASD notice to Members 03-79 (March 23, 2004) Initial
Public Offerings.
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(b) Third Party Review of Repurchase Obligations
In the underlying transaction agreements for an asset
securitization, sponsors or originators typically make representations
and warranties relating to the pool assets and their origination,
including about the quality of the pool assets. For instance, in the
case of residential mortgage-backed securities, one such representation
and warranty is that each of the loans has complied with applicable
federal, state and local laws, including truth-in-lending, consumer
credit protection, predatory and abusive laws and disclosure laws.
Another representation that may be included is that no fraud has taken
place in connection with the origination of the assets on the part of
the originator or any party involved in the origination of the assets.
Upon discovery that a pool asset does not comply with the
representation or warranty, under transaction covenants, an obligated
party, typically the sponsor, must repurchase the asset or substitute
the non-compliant asset with a different asset that complies with the
representations and warranties.
The effectiveness of these contractual provisions has been
questioned and lack of responsiveness by sponsors to potential breaches
of the representations and warranties relating to the pool assets has
been the subject of investor complaint.\131\ Transaction agreements
typically have not included specific mechanisms to identify breaches of
representations and warranties or to resolve a question as to whether a
breach of the representations and warranties has occurred.\132\ Thus,
these contractual agreements have frequently been ineffective because
without access to documents relating to each pool asset, it can be
difficult for the trustee, which typically notifies the sponsor of an
alleged breach, to determine whether or not a representation or
warranty relating to a pool asset has been breached. Investors and
trustees must rely on the sponsor to provide the necessary
documentation about the assets in question. Without further safeguards,
the protective quality of the representations and warranties can be
compromised.
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\131\ See the Committee on Capital Markets Regulation Financial
Crisis Report, at 135 (noting that contractual provisions have
proven to be of little practical value to investors during the
crisis); see also Investors Proceeding with Countrywide Lawsuit,
Mortgage Servicing News, Feb. 1, 2009 (describing class action
investor suit against Countrywide in which investors claim that
language in the pooling and servicing agreements requires the
seller/servicer to repurchase loans that were originated with
``predatory'' or abusive lending practices) and American
Securitization Forum, ASF Releases Model Representations and
Warranties to Bolster Risk Retention and Transparency in Mortgage
Securitizations, (Dec. 15, 2009), available at http://www.americansecuritization.com/. Only large investors of ABS such as
Fannie Mae and Freddie Mac have been able to exercise repurchase
demands. See Aparajita Saha-Bubna, ``Repurchased Loans Putting Banks
in Hole,'' Wall Street Journal (Mar. 8, 2010) (noting that most
mortgages bouncing back to lenders are coming from Fannie Mae and
Freddie Mac).
\132\ See also Moody's Investors Service, Inc., Special Report:
Moody's Criteria for Evaluating Representations and Warranties in
U.S. Residential Mortgage Backed Securitizations (RMBS), November
24, 2008 (noting that historically RMBS have not incorporated
mechanisms and procedures to identify breaches of representations
and warranties and recommending that post-securitization forensic
reviews be conducted by an independent third party for delinquent
loans).
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We are proposing to require as a condition to shelf eligibility,
that the pooling and servicing agreement or other transaction agreement
for the securitization, which is required to be filed with the
Commission,\133\ contain a specified provision to enhance the
protective nature of the representations and warranties. The specified
provision would require the obligated party (i.e. the representing and
warranting party) to furnish a third party's opinion relating to any
asset for which the trustee has asserted a breach of any representation
or warranty and for which the asset was not repurchased or replaced by
the obligated party on the basis of an assertion that the asset met the
representations and warranties contained in the pooling and servicing
or other agreement.\134\ The third party opinion would confirm that the
asset did not violate a representation or warranty contained in the
pooling and servicing agreement or other transaction agreement. Because
we believe that annual review of the assets is not sufficient to
address investors' concerns regarding the enforceability of these
provisions in the underlying transaction documents, the opinion would
be required to be furnished to the trustee at least quarterly.
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\133\ ABS issuers are currently required to file these
agreements as an exhibit to the registration statement.
\134\ See proposed General Instruction I.B.1(b) of proposed Form
SF-3. Under existing rules, the transaction agreement is required to
be filed as an exhibit to the registration statement. See Item 601
of Regulation S-K [17 CFR 229.601].
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To better ensure that the opinion is impartial, we are proposing to
require that the third party providing the opinion not be an affiliate
of the obligated party. This proposed third party loan review condition
to shelf eligibility is designed to help ensure that representations
and warranties about the assets provide meaningful protection to
investors, which should encourage sponsors to include higher quality
assets in the asset pool.\135\ As a result, we believe that this
proposed condition is an appropriate partial substitute for the
investment grade ratings requirement.
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\135\ As described below, we also propose to add a disclosure
requirement to Exchange Act Form 10-D that would require disclosure
of the number of loans that have been presented for repurchase to
the party obligated to repurchase the assets under the transaction
agreements and the number of those assets that have not been
repurchased or replaced.
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Request for Comment
Is this proposed condition an appropriate shelf
eligibility condition for ABS offerings?
Would this proposed condition, which would only require an
undertaking from the issuer, have a measurable benefit to investors?
Should we require more assurance that third party opinions have been
provided to investors as a condition to shelf eligibility? For example,
should we instead condition eligibility on receipt of a certification
from the trustee in offerings of the same asset class by the depositor
or its affiliates to the effect that all required opinions have been
obtained? Should we condition eligibility on a requirement that the
trustee provide notice if required third party opinions are not
obtained, along with an absence of a notice from the trustee to the
effect that there was a failure to provide required opinions?
Should we provide more guidelines in this shelf
eligibility condition regarding the specifics of the provision that
would be required to be included in the pooling and servicing or other
agreement? If so, what should be detailed?
Should the proposed condition provide any further
specification of the terms of the third party opinion provision?
Is it appropriate to require, as proposed, the third party
to be non-affiliated with the obligated party? Should we specify
further any requirements relating to providers of the third party
opinion? Should we specify that the third party opinion provider must
be an independent expert, similar to what is required in Section
314(d)(1) \136\ of the Trust Indenture Act of 1939? \137\
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\136\ 15 U.S.C. 77nnn(d)(1).
\137\ 15 U.S.C. 77aaa et seq.
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[[Page 23345]]
Should we specify who should provide the third party
opinion or who should not be permitted to provide the opinion? Should
diligence firms that provide third party pre-securitization review of a
random sample of assets be allowed to provide this opinion? Should we
specify that it must be a legal opinion? Would attorneys or law firms
be willing to provide this opinion? Why or why not? Would it be
appropriate to allow a sponsor's in-house counsel to provide the
opinion? If a law firm provides the opinion, should we prohibit the law
firm that assisted in the offering from providing such an opinion?
Based on existing attestation standards of either the
PCAOB or AICPA, we do not believe that the proposed opinion could be
provided by a public accountant. Would a public accountant be able to
provide the proposed opinion under existing attestation standards? If
so, which standard or standards should be applied, what level of
assurance should be provided and how should the third party opinion be
reported?
Should we provide that the third party opinion must cover
all of the representations and warranties in the agreement related to
the assets, as proposed? Instead, are there certain representations and
warranties that are the most significant that the opinion should cover?
Are there types of representations and warranties that the third party
opinion should not be required to opine on? For example, are there
certain representations and warranties that an attorney or a law firm
would not be able to opine on? If so, why?
Are there any other types of limitations that a third
party opinion provider would or should place on the required opinion?
In general, what type of exam, assessment or evaluation would a third
party opinion provider need to make in order to provide the required
opinion?
How costly or burdensome would it be for an issuer to be
required to have a third party provide an opinion to satisfy the
proposed shelf eligibility condition? Would this impose too much burden
on ABS issuers? Are there ways to lessen the cost?
Should the third party opinion be required to be furnished
annually rather than quarterly, as proposed?
Should we require that the third party opinion also be
filed as an exhibit to an Exchange Act report?
We are aware of some insurance providers that have offered
to insure in the context of mergers and acquisitions any breach of the
representations and warranties in the transaction agreement. As an
alternative to conditioning ABS shelf eligibility on an undertaking in
the transaction agreement that the issuer furnish a third party opinion
on assets not repurchased (or instead of the proposed condition),
should we allow the issuer to purchase insurance to insure a minimum
amount or percentage of the sponsor or originator's obligations under
the transaction agreement? If so, what kind of disclosure should we
require about the insurance provider? How can we ensure that this
alternative method of meeting shelf eligibility adequately improves the
incentive structure and therefore the quality of the securities?
(c) Certification of the Depositor's Chief Executive Officer
We also are proposing to establish a requirement that, as a
condition to ABS shelf eligibility to replace investment grade ratings
criteria, the issuer provide a certification signed by the chief
executive officer of the depositor of the securitization regarding the
assets underlying the securities for each offering.\138\ The
certification would require the depositor's chief executive officer to
certify that to his or her knowledge, the assets have characteristics
that provide a reasonable basis to believe they will produce, taking
into account internal credit enhancements, cash flows at times and in
amounts necessary to service payments on the securities as described in
the prospectus. This officer would also certify that he or she has
reviewed the prospectus and the necessary documents for this
certification.\139\
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\138\ See proposed General Instruction I.B.1(c) to proposed Form
SF-3.
\139\ This condition is similar to the current disclosure
requirements for asset-backed issuers in the European Union. Annex
VIII, Disclosure Requirements for the Asset-Backed Securities
Additional Building Block, Section 2.1 (European Commission
Regulation (EC) No. 809/2004 (April 29, 2004). The EU requires
asset-backed issuers to disclose in each prospectus that the
securitized assets backing the issue have characteristics that
demonstrate capacity to produce funds to service any payments due
and payable on the securities. Similarly, under the North American
Securities Administrator's Association (NASAA)'s guidelines for
registration of asset-backed securities, sponsors are required to
demonstrate that for securities without an investment grade rating,
based on eligibility criteria or specifically identified assets, the
eligible assets being pooled will generate sufficient cash flow to
make all scheduled payments on the asset-backed securities after
taking certain allowed expenses into consideration. The guidelines
are available at www.nasaa.org.
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Because we would frame this ABS shelf eligibility condition as a
certification requirement instead of a disclosure requirement, we are
using slightly different language than a similar EU disclosure
requirement in order to more precisely outline what the officer is
certifying to. We are proposing a certification rather than a
disclosure requirement because we preliminarily believe the potential
focus on the transaction and the disclosure that may result from an
individual providing a certification should lead to enhanced quality of
the securitization.\140\ We believe, as we did when we proposed the
certification for Exchange Act periodic reports, that a certification
may cause these officials to review more carefully the disclosure, and
in this case, the transaction, and to participate more extensively in
the oversight of the transaction.\141\
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\140\ For instance, a depositor's chief executive officer may
conclude that in order to provide the certification, he or she must
analyze a structural review of the securitization. Rating agencies
would also conduct a structural review of the securitization when
issuing a rating on the securities.
\141\ See Certification of Disclosure in Companies' Quarterly
and Annual Reports, Release No. 34-46079 June 14, 2002. See also
Testimony Concerning Implementation of the Sarbanes-Oxley Act of
2002 by William H. Donaldson, Chairman U.S. Securities and Exchange
Commission Before the Senate Committee on Banking, Housing and Urban
Affairs (September 9, 2003) (noting that a consequence of ``the
combination of the certification requirements and the requirement to
establish and maintain disclosure controls and procedures has been
to focus appropriate increased senior executive attention on
disclosure responsibilities and has had a very significant impact to
date in improving financial reporting and other disclosure'').
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We are proposing that the statements required in the certification
would be made based on the knowledge of the certifying officer. As
signatories to the registration statement, we would expect that chief
executive officers of depositors would have reviewed the necessary
documents regarding the assets, transactions and disclosures. Under
current requirements, the registration statement for an ABS offering is
required to include a description of the material characteristics of
the asset pool,\142\ as well as information about the flow of funds for
the transaction, including the 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.\143\
The proposed certification would be an explicit representation by the
chief executive officer of the depositor of what is already implicit in
this disclosure
[[Page 23346]]
contained in the registration statement.\144\ This is similar to the
certifications of Exchange Act periodic reports required by Exchange
Act Rules 13a-14 and 15d-14,\145\ which also refer to the disclosure.
As with the certifications required by these rules, the language of the
proposed certification could not be altered. Instead, any issues in
providing the certification would need to be addressed through
disclosure in the prospectus.\146\ For instance, if the prospectus
describes the risk of non-payment, or probability of non-payment, or
other risks that such cash flows will not be produced or such payments
will not be made, then those disclosures would be taken into
consideration in signing the certification.
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\142\ See Item 1111 of Regulation AB [17 CFR 229.1111].
\143\ See Item 202 of Regulation S-K [17 CFR 229.202] and Item
1113 of Regulation AB [17 CFR 229.1113].
\144\ This approach is somewhat similar to the approach we took
with Regulation AC, which requires certifications from analysts. We
noted there that Regulation AC makes explicit the representations
that are already implicit when an analyst publishes his or her
views--that the analysis of a security published by the analyst
reflects the analyst's honestly held views. Section II of Regulation
Analyst Certification, Release No. 33-8193 (Feb. 23, 2003) [68 FR
9482].
\145\ 17 CFR 240.13a-14 and 17 CFR 240.15d-14.
\146\ See Section III.D.6 of the 2004 ABS Adopting Release.
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The chief executive officer of the depositor is already responsible
as signatory of the registration statement for the issuer's disclosure
in the prospectus and can be liable for material misstatements or
omissions under the federal securities laws.\147\ An officer providing
a false certification potentially could be subject to Commission action
for violating Securities Act Section 17.\148\ The certification would
be a statement of what is known by the signatory at the time of the
offering and would not serve as a guarantee of payment of the
securities.
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\147\ See Securities Act Section 11 (15 U.S.C. 77k(a)) and
Exchange Act Section 10(b) (15 U.S.C. 78j(b)).
\148\ 15 U.S.C. 77q(a).
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Under our proposal, this certification would be an additional
exhibit requirement for the shelf registration statement that would not
be applicable to the non-shelf registration statement, Form SF-1, and
that would be required to be filed by the time the final prospectus is
required to be filed under Rule 424.\149\ We believe that requiring the
chief executive officer of the depositor to sign the certification is
consistent with other signature requirements for asset-backed
securities.\150\
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\149\ See proposed revision to Item 601(b) of Regulation S-K.
\150\ See, e.g., Item 601(b)(31)(ii) of Regulation S-K (exhibit
requirement for ABS regarding certification required by Exchange Act
Rules 13a-14(d) and 15d-14(d)).
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Request for Comment
Is our proposal to require certification appropriate as a
condition to shelf eligibility? Would investors find the certification
valuable?
Is the proposed language for the certification requirement
appropriate? Should we revise it in any way? Should we require that the
officer certify that he has a reasonable basis to believe that the
assets will produce cash flows at times and in amounts necessary to
service payments on the securities as described in the prospectus
(rather than certify that the assets have characteristics that provide
a reasonable basis to believe that the assets will produce cash flows
at times and amounts necessary to service payments as described)?
Should we identify the level of inquiry required by the
executive officer? Should we specify which documents (other than the
prospectus) would need to be reviewed for purposes of the
certification, and, if so, which ones should we specify?
Under the proposal, the certifying officer could take into
account internal credit enhancements for purposes of evaluating whether
the assets have characteristics that provide a reasonable basis to
believe they will produce cash flows at times and in amounts necessary
to service payments on the securities as described in the prospectus.
Should we also permit the certifying officer to also take into account
external credit enhancements that may be utilized in the
securitization? \151\
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\151\ Examples of external credit enhancement may include third
party insurance to reimburse losses on the pool assets or the
securities or an interest rate swap or similar swap transaction to
provide incidental changes to cash-flow and return.
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Are there concerns that it is not possible for any
individual to be in a position to certify that the assets in the pool
have characteristics that provide a reasonable basis to believe they
will produce, taking into account internal credit enhancements, cash
flows at times and in amounts necessary to service payments on the
securities as described in the prospectus? If so, how can we address
those concerns or are there steps we should take to ensure that the
level of uncertainty in the structure and assets is clear to investors?
Instead of, or in addition to, requiring a certification,
should we require the sponsor to disclose its estimates of default
probability for all tranches in the transaction, default probability of
loans in the pool, and/or the expected recovery rate on the loans
conditional on default? Such estimates would be expected to be
consistent with assumptions used in sponsors' internal modeling. Would
this disclosure potentially provide investors useful insights into the
sponsor's view of the creditworthiness of pool assets and the
securitization overall? Would it convey information similar to that
contained in credit ratings, which also have, historically, reflected
beliefs about default probabilities and expected recovery rates? Do
sponsors currently have internal models, or make internal assumptions
for valuation purposes, that could be used to readily produce these
numbers? If so, should we require that disclosed estimates be
consistent with those used in sponsors' internal models? Should we
indicate whether or not such disclosures constitute forward-looking
statements?
Should the chief executive officer of the depositor, as
proposed, be required to sign the certification, or should an
individual in a different position be required to certify? Which
individual should be required to sign the certification? Should we
instead require that the certification be signed by the senior officer
of the depositor in charge of securitization, consistent with other
signature requirements for ABS? Given that the depositor is often a
special purpose subsidiary of the sponsor, would it be more appropriate
to have an officer of the sponsor sign the certification? If so, should
it be the senior officer in charge of securitization or some other
officer of the sponsor?
Is it appropriate to require the certification be filed as
an exhibit to the registration statement at the time of the final
prospectus by means of a Form 8-K?
(d) Undertaking To File Ongoing Reports
Our last proposed new shelf eligibility criterion replacing the
investment grade ratings requirement is a requirement that the issuer
provide an undertaking to file Exchange Act reports with the Commission
on an ongoing basis. Exchange Act Section 15(d) requires an issuer with
an effective Securities Act registration statement to file ongoing
reports with the Commission. However, the statute also provides that
for issuers that do not also have a class of securities registered
under the Exchange Act the duty to file ongoing reports is
automatically suspended after the first year if the securities of each
class to which the registration statement relates are held of record by
less than three hundred persons. As a result, typically the reporting
obligations of all asset-
[[Page 23347]]
backed issuers,\152\ other than those with master trust
structures,\153\ are suspended after they have filed one annual report
on Form 10-K because the number of record holders falls below, often
significantly below, the 300 record holder threshold.\154\
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\152\ Under Rule 3b-19 under the Exchange Act [17 CFR 240.3b-
19], an issuer is defined in relation to asset-backed securities in
the following way:
(a) 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.
(b) The person acting in the capacity as the depositor specified
in paragraph (a) is a different ``issuer'' from that same person
acting as a depositor for another issuing entity or for purposes of
that person's own securities.
\153\ In a securitization using a master trust structure, the
ABS transaction contemplates future issuances of asset-backed
securities backed by the same, but expanded, asset pool that
consists of revolving assets. Pre-existing securities also would
therefore be backed by the same expanded asset pool.
\154\ One source noted that in a survey of 100 randomly selected
asset-backed transactions, the number of record holders provided in
reports on Form 15 ranged from two to more than 70. The survey did
not consider beneficial owner numbers. See Committee on Capital
Markets Regulation Financial Crisis Report, at fn. 349.
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In the proposing release for Regulation AB, we requested comment on
whether the ability to suspend reporting under Section 15(d) should be
revisited.\155\ One investor group 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 Form 10-
D.\156\ While in 2004 we did not adopt rules that would create ongoing
reporting obligations for asset-backed issuers, we did note that the
concerns raised by investors 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.\157\
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\155\ See Section III.D.2 of Asset-Backed Securities, Release
No. 33-8419 (May 3, 2004) [69 FR 26650].
\156\ See comment letter from Investment Company Institute
(ICI).
\157\ See Section III.A.3.d of the 2004 ABS Adopting Release. We
noted that modifying the reporting obligation would raise broad
issues about the treatment of other non-ABS issuers that do not have
public common equity. We believe our ABS shelf eligibility proposal
is sufficiently distinguishable from the treatment of non-ABS
issuers.
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We are proposing to require as a condition to ABS shelf eligibility
that the issuer undertake to file with the Commission reports to
provide disclosure as would be required pursuant to Exchange Act
Section 15(d) and the rules thereunder, if the issuer were required to
report under that section.\158\ The issuer's reporting obligation under
the undertaking would extend as long as non-affiliates of the depositor
hold any of the issuer's securities that were sold in registered
transactions.\159\ We believe that ongoing reporting of an asset-backed
issuer would provide investors and the markets with transparency
regarding many aspects about the ongoing performance of the securities
and servicer in its compliance with servicing criteria, among other
things. We believe this transparency is important for investors and the
market and that it is appropriate to encourage ABS issuers to provide
ongoing reports by conditioning shelf eligibility on an undertaking to
do so. Thus, we believe this requirement is a reasonable additional
condition to shelf eligibility. In conjunction with our proposal to
require asset-level information, it may prove even more useful to
investors.\160\
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\158\ See proposed Item 512(a)(7)(ii) of Regulation S-K.
\159\ We also are proposing to add a checkbox to the cover page
of Forms 10-K, 10-D, and 8-K where the issuer would be required to
indicate whether the report is being filed pursuant to the proposed
undertaking.
\160\ See the Committee on Capital Markets Regulation Financial
Crisis Report, at 151-152 (noting that loan-level data is not useful
if issuers can opt out of periodic reporting and recommending that
the Commission consider whether Section 15(d) of the Exchange Act
should apply to the typical RMBS issuance); Statement of Paul Schott
Stevens President and CEO, ICI, for SEC Roundtable on Oversight of
Credit Rating Agencies, April 15, 2009, available at http://www.sec.gov/comments/4-579/4579-15.pdf (recommending that the
Commission require disclosure under Regulation AB be required to be
made on an ongoing basis in spite of Section 15(d)).
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In connection with this shelf eligibility condition, we are
proposing to require disclosure in the prospectus that is filed as part
of the registration statement that the issuer has undertaken and will
file with the Commission the reports as would be required pursuant to
Exchange Act Section 15(d) and the rules thereunder if the issuer were
required to report under that section. Such disclosure would be subject
to the same liability as other disclosure in the prospectus.
Also, we are proposing to add a disclosure requirement to Item 1106
of Regulation AB \161\ that would require disclosure in a prospectus of
any failure in the last year of an issuing entity established by the
depositor or any affiliate of the depositor to file, or file in a
timely manner, an Exchange Act report that was required either by rule
or by virtue of an undertaking. We are proposing further changes to ABS
shelf eligibility requirements in connection with the proposed
condition, as discussed in the following section.
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\161\ 17 CFR 229.1106.
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Request for Comment
We request comment on our proposal to require ABS issuers
who wish to conduct delayed shelf offerings to undertake to file
reports that would be required under Section 15(d) of the Exchange Act
for as long as non-affiliates of the depositor hold any securities that
were sold in registered transactions. Should we impose such a
requirement? Should ABS issuers who use shelf registration be permitted
to terminate their reporting obligations at an earlier period in time
under shelf eligibility conditions? If so, when?
Should we require, as proposed, the disclosure of any
failure in the last year of an issuing entity established by the
depositor or any affiliate of the depositor to file, or file in a
timely manner, an Exchange Act report that was required either by rule
or by virtue of the proposed undertaking?
We request comment on all of the four new proposed shelf
eligibility conditions in general. Are the proposed shelf eligibility
conditions appropriate alternatives to the existing investment grade
ratings requirement? If one or more of these proposed criteria are not
adopted, should an investment grade rating continue to determine
whether or not an ABS issuer is eligible for shelf registration? Or
should we prohibit ABS issuers from using shelf registration
altogether? What would the impact be if ABS issuers were prohibited
from utilizing shelf registration? Do the proposed changes to the shelf
registration procedures described above, coupled with the proposed
shelf eligibility conditions, mitigate concerns about ABS issuers using
shelf registration?
Should our proposed shelf eligibility conditions (or some
subset of them) be used in addition to the existing investment grade
ratings requirement rather than replace it?
What is the aggregate effect of the proposed revisions to
shelf eligibility criteria and the shelf registration process for ABS
offerings? If these revisions are adopted, would this make using non-
shelf registration (Form SF-1) more attractive to an ABS issuer? How
would this change the costs and benefits analysis for using shelf
registration for ABS issuers? Would this change cause shelf
registration to be less attractive or become uneconomic?
If we continue to condition shelf eligibility, in part, on
characteristics of the securities that relate to quality, should we
establish shelf eligibility based on different criteria than the four
[[Page 23348]]
proposed criteria? Should shelf eligibility be conditioned on a
limitation of the capital structure of ABS offerings? For instance,
should shelf offerings not be allowed to include leveraged tranches or
should we limit the number of tranches? If so, how many (e.g., five,
six, or seven)? Should we put restrictions on the size of each tranche?
If so, how should we do that? Should we limit ABS shelf eligibility to
offerings backed by assets that are seasoned for some period of time?
If so, how much time for each asset class (e.g., six months, one year,
or two years)? Are there certain standardized structures that we should
use as a requirement for shelf offering?
(e) Other Proposed Form SF-3 Requirements
We are proposing other amendments to Rule 401 and the instructions
in proposed Form SF-3 relating to form eligibility. Currently, to be
eligible to use Form S-3, the existing form for ABS shelf registration,
an issuer must meet the form's registrant requirements, which generally
pertain for ABS issuers to reporting history under the Exchange Act of
the depositor and affiliates of the depositor with respect to the same
asset class, and at least one of the form's transaction requirements.
One of the current ABS transaction requirements for use of Form S-3 is
that the securities are investment grade securities, and above we have
described our proposals for four new transaction requirements for use
of Form SF-3 that would replace the investment grade ratings
requirement (i.e., risk retention, third party opinion review of
repurchase demands, certification, and the undertaking to file Exchange
Act reports). We are proposing to add new registrant requirements that
pertain to compliance with the four proposed transaction requirements.
These registrant requirements would be new shelf eligibility conditions
to registration on proposed Form SF-3, and would also serve as the new
eligibility conditions to be evaluated prior to conducting an offering
off an effective Form SF-3 shelf registration statement.
(i) Registrant Requirements To Be Met for Filing a Form SF-3
In order to be eligible to file a registration statement on
proposed Form SF-3, we are proposing that the registrant meet the
following new requirements. First, we are proposing to require that to
the extent the sponsor or an affiliate of the sponsor of the ABS
transaction being registered was required to retain risk with respect
to a previous ABS offering involving the same asset class, then, at the
time of filing the registration statement, such sponsor or affiliate
must be holding the required risk.
Second, we are proposing that to the extent the depositor or an
issuing entity previously established, directly or indirectly, by the
depositor or any affiliate of the depositor were at any time during the
twelve calendar months and any portion of a month immediately preceding
the filing of the registration statement required to comply with the
other transaction requirements of Form SF-3 (``twelve-month look-back
period''), with respect to a previous offering of securities involving
the same asset class, the following requirements would apply:
Such depositor and each such issuing entity must have
timely filed all the transaction agreements that contained the required
provision relating to the third party opinion review of repurchase
demands; \162\
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\162\ Under our proposal discussed in Section III.F below, we
are proposing to revise Item 1100(f) to require that exhibits be
filed no later than the date of filing the final prospectus.
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Such depositor and each such issuing entity must have
timely filed all the required certifications of the depositor's chief
executive officer; and
Such depositor and each such issuing entity must have
filed all the reports that they had undertaken to file during the
previous twelve months (or such shorter period during which the
depositor or issuing entity had undertaken to file reports) as would be
required under the Section 15(d) of Exchange Act if they were subject
to the reporting requirements of that section.
Third, as proposed, there must be disclosure in the registration
statement on Form SF-3 stating that these proposed registrant
requirements have been complied with.
These proposed new registrant requirements are, in many respects,
consistent with the existing Form S-3 registrant requirement relating
to Exchange Act reporting.\163\ As with the existing Form S-3 Exchange
Act reporting registrant requirement, which we are retaining for
proposed Form SF-3, the proposed new registrant requirements would
require specified compliance with respect to previous offerings of the
depositor or its affiliates. The proposed twelve-month look-back period
(except for the requirement relating to risk retention) is also
consistent with the existing Form S-3 Exchange Act reporting registrant
requirement. The proposed new registrant requirement relating to risk
retention requires an issuer to measure its risk retention as of the
date of filing the registration statement, which we believe is a
reasonable requirement. As described in more detail below, we are not
proposing to require the sponsor or an affiliate of the sponsor to
ensure that all risk was retained at all times during the previous
twelve calendar months, for purposes of shelf eligibility, out of a
concern that it may be overly burdensome.
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\163\ Under existing Form S-3, prior to filing a registration
statement, to the extent the depositor or any issuing entity
previously established by the depositor or an affiliate of the
depositor are or were at any time during the twelve calendar months
and any portion of a month immediately preceding the filing of the
Form S-3 required to file Exchange Act reports, with respect to a
class of asset-backed securities involving the same asset class,
such depositor and each such issuing entity must have filed all
material required to be filed during the twelve months (or shorter
period that the entity was required to have filed such materials).
Also, such material, other than certain specified reports on Form 8-
K, must have been filed in a timely manner. See General Instruction
I.A.4 to Form S-3.
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(ii) Evaluation of Form SF-3 Eligibility in Lieu of Section 10(a)(3)
Update
Form S-3 eligibility under the current rules is determined at the
time of filing the registration statement and at the time of updating
that registration statement under Securities Act Section 10(a)(3) \164\
by filing audited financial statements. Because ABS registration
statements do not contain financial statements of the issuer, a
periodic determination of whether the issuer can continue to use the
shelf would be specified by rule.\165\ Such an evaluation would also
provide a means for the Commission and its staff to better oversee
compliance with the proposed new Form SF-3 eligibility conditions that
would replace the existing investment grade ratings requirement.
Therefore, in lieu of Section 10(a)(3) updating, we are proposing to
revise Rule 401 to require, as a condition to conducting an offering
off an effective shelf registration statement, an annual evaluation of
whether the Exchange Act reporting registrant requirements have been
satisfied. Under the proposal, an ABS issuer wishing to conduct a
takedown off an effective shelf registration statement must evaluate
whether affiliated issuers that were required to report under Sections
13(a) or 15(d) of the Exchange Act during the previous twelve months,
have filed such reports on a timely basis, as of ninety
[[Page 23349]]
days after the end of the depositor's fiscal year end.\166\
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\164\ 15 U.S.C. 77j(a)(3).
\165\ See Securities Act Rule 401(b) [17 CFR 230.401(b)].
\166\ Under this proposal, the related registration statement
could not be utilized for subsequent offerings for at least one year
from the date the issuer that had failed to file Exchange Act
reports then became current in its Exchange Act reports (and the
other requirements had been met).
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(iii) Quarterly Evaluation of Eligibility To Use Effective Form SF-3
for Takedowns
We also are proposing to require a quarterly evaluation of whether
the ABS issuer has satisfied the proposed new registrant requirements
relating to risk retention, third party opinions, the depositor's chief
executive officer certification, and the undertaking to file ongoing
reports. Under our proposal, an ABS issuer wishing to conduct a
takedown off an effective shelf registration statement must evaluate
its compliance with the proposed new registrant requirements as of the
last day of the most recent fiscal quarter.
(A) Risk Retention
Accordingly, if the interest that a sponsor was required under the
proposed risk retention shelf eligibility condition to retain during
the previous twelve months (or shorter period as applicable), with
respect to a previous offering of securities off a Form SF-3
registration statement involving the same asset class, was sold off or
hedged as of the last day of the most recent fiscal quarter, the
related shelf registration statement could not be utilized for
subsequent offerings until the fiscal quarter after the sponsor has re-
acquired the risk that was required to be retained (e.g., by removing
the disqualifying hedge or open market purchases of the securities) and
such risk was on the sponsor's books as of the end of the fiscal
quarter. We have provided for quarterly testing because we are
concerned that more frequent testing could be unnecessarily costly. By
requiring an evaluation of risk retention at the end of the quarter, we
are not suggesting that a sponsor could permissibly sell or hedge the
required risk. Such activities would be inconsistent with the risk
retention shelf eligibility condition, with the disclosure relating to
a sponsor's interest in the transaction that we are proposing to
require in the registration statement, and would be subject to our
proposed periodic reporting disclosure requirements related to the
sponsor's interest described in Section III.C.3. below. At the same
time, we are concerned that there may be circumstances where a sponsor
or its affiliates undertake transactions that inadvertently hedge a
required risk retention interest, and discover this after a take-down
off the shelf by an affiliated ABS issuer. We are not proposing that
this would necessarily cause the new offering to be deemed not to have
been registered on the appropriate form. However, we believe that it is
important that our requirements take into consideration a practicable
testing schedule that promotes compliance with the proposed shelf
eligibility criteria without creating undue burdens or uncertainty for
issuers, and we are proposing requirements that would require at least
quarterly testing to achieve that goal. Similarly, with respect to our
proposed registrant requirement relating to risk retention, we are
proposing that an issuer evaluate whether the sponsor has retained
required risk at the time of filing the registration statement.
(B) Transaction Agreements and Officer Certification
An ABS issuer must also evaluate whether, during the previous
twelve months, the depositor or it affiliates had filed the transaction
agreements required to contain the third party opinion provision and
the depositor's chief executive officer certifications on a timely
basis as of the end of the quarter. If they had not, then the depositor
could not utilize the registration statement or file new registration
statement on Form SF-3 until one year after the required filings were
filed.
(C) Undertaking To File Exchange Act Reports
Finally, under this proposal, an issuer must evaluate whether
Exchange Act reports, with respect to previous takedowns off an
effective registration statement of the depositor or affiliate of the
depositor, where the issuer had undertaken to file such reports during
the prior twelve months had, in fact, been filed as of the last day of
the most recent fiscal quarter. In this way, the reports required under
Section 13(a) or 15(d) must continue to be timely for shelf eligibility
but reports required pursuant to the undertaking must be current as of
the end of the quarter. As such, the ABS issuer would need to confirm
once a quarter that it continued to be eligible to use the effective
registration statement for takedowns.
Request for Comment
Should we add, as proposed, registrant requirements that
would require, as a condition to form eligibility, affiliated issuers
of the depositor that had offered securities of the same asset class
that were registered on Form SF-3 to have complied with the risk
retention, third party opinion, certification and ongoing reporting
shelf eligibility conditions that replace the investment grade ratings
requirement? Will these requirements lead to better compliance by ABS
issuers with the new shelf eligibility conditions that we are
proposing?
Should we require disclosure, as proposed, in the
registration statement that the registrant requirements have been
complied with? Should we specify a location in the registration
statement for such disclosure?
In our proposed registrant requirements for Form SF-3, we
are proposing to require that sponsors of affiliated issuers have
retained the required risk at the time of filing the registration
statement. Is that appropriate? Should we require continued monitoring
of risk retention compliance instead? Should we provide the loss of
shelf eligibility if the sponsor of a previously established affiliated
issuer has not retained at any time during the previous twelve months
all of the risk that it was required to retain during that time? Or
would such a requirement be overly burdensome?
Is it appropriate to require, as proposed, that the
certifications and the transaction agreement containing the required
third party opinion provision that are required to be filed pursuant to
our proposed shelf eligibility conditions be filed on a timely basis?
Why or why not?
We are proposing to require an affiliated issuer that has
undertaken to file Exchange Act reports in the last twelve months to
have filed such reports as required pursuant to the Exchange Act rules.
Is this an appropriate additional registrant requirement for proposed
Form SF-3? Should we also specify that such reports must have been
filed on a timely basis?
Should we revise Rule 401, as proposed, to require that as
a condition to continued use of an existing shelf registration
statement for takedowns, an issuer conduct a periodic evaluation of
form eligibility? Why or why not? If not, how should we address the
concern that ABS issuers do not file amendments for purposes of Section
10(a)(3)?
Should we require, as proposed, that an issuer test for
sponsor's compliance with risk retention requirements as of the end of
the fiscal quarter? Could there be situations where a sponsor or its
affiliates undertake transactions that inadvertently hedge a required
risk retention interest? Alternatively, because the testing for
compliance would occur at predictable
[[Page 23350]]
intervals, are there concerns that the quarterly test for risk
retention compliance could allow a sponsor to hold less than the
required risk in between testing intervals? Should our requirements
provide for testing that is made at different intervals (e.g., once a
month, once a distribution period, twice a quarter, at minimum number
of random intervals)?
Should we require that the evaluation of whether Exchange
Act reports of affiliated issuers have been filed on a timely basis be
made as of the 90 days after the depositor's fiscal year, as proposed?
Should the evaluation be made on a different timeframe, such as the
last day of the most recent fiscal quarter, consistent with our other
proposals here?
Should we require, as proposed, that the evaluation of
whether the registrant requirements relating to risk retention, third
party opinions, certification, and the issuer's undertaking to file
ongoing reports be made as the last day of the most recent fiscal
quarter? Should that evaluation be made at different periods, such as
monthly or annually?
4. Continuous Offerings
We also are proposing to amend Rule 415 to limit the registration
of continuous offerings for ABS offerings to ``all or none'' offerings.
While we have not encountered particular problems with respect to
continuous ABS offerings to date (and we believe that ABS offerings are
not typically continuous), we believe that our proposal would help
ensure that ABS investors receive sufficient information relating to
the pool assets, if an issuer registered an ABS offering to be
conducted as a continuous offering. We believe that this would close a
potential gap in our regulations for ABS offerings.
In an all or none offering, the transaction is only completed if
all of the securities are sold. However, in a best-efforts or ``mini-
max'' offering, a variable amount of securities may be sold. In those
latter cases, because the size of the offering would be unknown,
investors would not have the transaction-specific information and, in
particular, would not know the specific assets to be included in the
transaction. Thus, Item 1111, either in its existing form or as
proposed to be amended, could not be complied with.\167\ Under our
proposal, the continuous offering must be commenced promptly and must
be made on the condition that all of the consideration paid for such
security will be promptly refunded to the purchaser unless (A) all of
the securities being offered are sold at a specified price within a
specified time, and (B) the total amount due to the seller is received
by the seller by a specified date.\168\
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\167\ The staff has advised us that they believe that neither
best efforts offerings nor any continuous offerings have been
utilized in the past for public offerings of asset-backed
securities.
\168\ All or none offerings are described in Exchange Act Rule
10b-9 [17 CFR 240.10b-9] in the same manner.
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Request for Comment
Is our proposed amendment to Rule 415 relating to
continuous offerings of ABS appropriate?
Should we restrict the duration of a continuous offering
of ABS? If so, how long should the offering be permitted to continue?
5. Mortgage Related Securities
As noted above, mortgage related securities, as that term is
defined in Section 3(a)(41) of the Exchange Act, currently are eligible
for shelf registration regardless of form eligibility. This was a
provision that was added to Rule 415 contemporaneous with the enactment
of SMMEA.\169\ As a result, an offering of mortgage related securities
that does not meet the requirements of Form S-3 can be registered on a
delayed basis on Form S-1.\170\
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\169\ See Section II.A. and fn. 61 above.
\170\ See fn. 61 of 2004 ABS Adopting Release.
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We believe that mortgage related securities should meet all the
requirements we are proposing for shelf eligibility in order to be
eligible for registration on a delayed basis since these securities
present the same complexities and concerns as other asset-backed
securities. To achieve this goal and to better coordinate shelf
registration for all types of asset-backed securities, we are proposing
to amend Rule 415 to eliminate the provision for shelf eligibility for
mortgage related securities regardless of the form that can be used for
registration of the securities.\171\ Under the proposal, offerings of
mortgage related securities will only be eligible for shelf
registration on a delayed basis if, like other asset-backed securities,
they meet the criteria for eligibility for shelf registration that we
are proposing today. Thus, as proposed, delayed shelf offerings of
mortgage related securities must be registered on new proposed Form SF-
3, and accordingly, must meet the eligibility requirements of Form SF-
3.
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\171\ As proposed, Rule 415(a)(1)(vii) would enumerate the
provision that permits delayed offerings for all asset-backed
securities that are eligible to register on the proposed new Form
SF-3. This provision would include offerings of eligible mortgage
related securities.
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Request for Comment
We request comment on the proposed amendment for mortgage
related securities. Should we instead treat mortgage related securities
differently from other asset-backed securities by continuing to
condition the ability to conduct a delayed offering of mortgage related
securities on their credit ratings by an NRSRO?
We are proposing to require that delayed offerings of
mortgage related securities be registered on proposed Form SF-3, the
same registration form for delayed offerings of other asset-backed
securities. Is there any reason to permit delayed offerings of mortgage
related securities on either proposed Form SF-1 or proposed Form SF-3?
C. Exchange Act Rule 15c2-8(b)
Except for securities issued under master trust structures, shelf-
eligible ABS issuers generally are not reporting issuers at the time of
issuance. Under Exchange Act Rule 15c2-8(b),\172\ with respect to an
issue of securities where the issuer has not been previously required
to file reports pursuant to Sections 13(a) and 15(d) of the Exchange
Act, unless the issuer has been exempted from the requirement to file
reports thereunder pursuant to Section 12(h) of the Exchange Act, a
broker or dealer is required to deliver a copy of the 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 (``48-
hour preliminary prospectus delivery requirement''). The rule contains
an exception to the 48-hour preliminary prospectus delivery requirement
for offerings of asset-backed securities eligible for registration on
Form S-3. An exception to the 48-hour preliminary prospectus delivery
requirement was first provided in 1995 by staff no-action
position.\173\ This staff position was later codified in 2004.\174\
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\172\ 17 CFR 240.15c2-8(b).
\173\ See fn. 163 of the 2004 ABS Adopting Release and
accompanying text (discussing staff no-action letters providing
relief to ABS issuers from Rule 15c2-8(b)).
\174\ In the 2004 ABS Adopting Release, we noted some concerns
that investors did not have sufficient time to consider ABS offering
information. However, we determined to codify the staff position in
light of other proposals that we were considering at the time that
sought to address information disparity in the offering process.
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In light of recent economic events and to make this rule consistent
with our other proposed revisions, we are proposing to eliminate this
exception so that a broker or dealer would be
[[Page 23351]]
required to deliver a preliminary prospectus at least 48 hours before
sending a confirmation of sale for all offerings of asset-backed
securities, including those involving master trusts. Because each pool
of assets in an ABS offering is unique, we believe that an ABS offering
is akin to an initial public offering, and therefore we believe the 48-
hour preliminary prospectus delivery requirement in Rule 15c2-8(b)
should apply. Even with subsequent offerings of a master trust, the
offerings are more similar to an initial public offering given that the
mix of assets changes and is different for each offering. Moreover,
requiring that a broker or dealer provide an investor with a
preliminary prospectus at least 48 hours before sending a confirmation
of sale should be feasible and made easier to implement as a result of
our proposal that a form of preliminary prospectus be filed with the
Commission at least five business days in advance of the first sale in
a shelf offering. We, therefore, are proposing to amend Rule 15c2-8(b)
by repealing the exception for shelf-eligible asset-backed securities
from the 48-hour preliminary prospectus delivery requirement.\175\
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\175\ Because of the other changes we are proposing, we are also
proposing to repeal Rule 190(b)(7). Rule 190(b)(7) provides that if
securities in the underlying asset pool of asset-backed securities
are being registered, and the offering of the asset-backed
securities and the underlying securities is not made on a firm
commitment basis, the issuing entity must distribute a preliminary
prospectus for both the underlying securities and the expected
amount of the issuer's securities that is to be included in the
asset pool to any person who is expected to receive a confirmation
of sale of the asset-backed securities at least 48 hours prior to
sending such confirmation. Rule 190(b)(7) effectively overrules the
exclusion in Rule 15c2-8 for ABS issuers from the 48-hour
preliminary prospectus delivery requirement for particular types of
ABS offerings. Because we are proposing to repeal the Rule 15c2-8
exclusion for ABS issuers, and because our proposed disclosure
requirements regarding the underlying securities for
resecuritizations would require significantly more information than
what is required in Rule 190(b)(7) to be provided in the preliminary
prospectus, we are proposing to delete Rule 190(b)(7).
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Under the proposed amendment, a broker or dealer would be required
to comply with the 48-hour preliminary prospectus delivery requirement
with respect to the sale of securities by each ABS issuer, regardless
of whether the issuer has previously been required to file reports
pursuant to Sections 13(a) or 15(d) of the Exchange Act.\176\ In
addition, the 48-hour preliminary prospectus delivery requirement would
also apply to ABS issuers utilizing master trust structures that are
exempt from the reporting requirements pursuant to Section 12(h) of the
Exchange Act. In a master trust securitization, assets may be added to
the pool in connection with future issuances of the securities backed
by the pool.\177\ Although ABS issuers utilizing master trust
structures may be reporting under the Exchange Act at the time of a
``follow-on'' or subsequent offering of securities, additional assets
are added to the entire pool backing the trust in connection with a
subsequent offering of securities. Additional assets are added to the
pool also in connection with a subsequent offering by an issuer
utilizing a master trust structure that is exempt from reporting under
Section 12(h) or the rules thereunder. Requiring a broker-dealer to
deliver a preliminary prospectus at least 48 hours before sending a
confirmation of sale of ABS involving master trust structures issued by
a reporting ABS issuer could afford investors more time to consider
information about the assets that is not provided in Exchange Act
reports.\178\
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\176\ See definition of issuer in relation to asset-backed
securities in Exchange Act Rule 3b-19.
\177\ The typical master trust securitization is backed by
assets arising out of revolving accounts such as credit card
receivables or dealer floorplan financings.
\178\ We note that many such issuers currently often provide
preliminary prospectuses to investors for each offering. Therefore,
we do not believe our proposal would be overly burdensome on such
issuers.
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We are also proposing a correcting amendment to Rule 15c2-8(j).
Paragraph (j) states that the terms ``preliminary prospectus'' and
``final prospectus'' include terms that are defined in a Rule 434. In
1995, at the same time we adopted Rule 434, we added paragraph (j) to
expand the use of the terms ``preliminary prospectus'' and ``final
prospectus'' to reflect the terminology used in Rule 434.\179\ Rule
434, however, was later repealed in 2005.\180\ Accordingly, we are
proposing to delete paragraph (j), which is no longer applicable.
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\179\ See Section II.B.4.a of Prospectus Delivery; Securities
Transactions Settlement, Release No. 33-7168 (May 11, 1995) [60 FR
26604].
\180\ Rule 434 was repealed in the Offering Reform Release.
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Request for Comment
Should we adopt a 48-hour preliminary prospectus delivery
requirement for all ABS issuers, as proposed? Should we instead provide
a different application of the 48-hour preliminary prospectus delivery
requirement for ABS issuers? Should a broker or dealer be required to
deliver a preliminary prospectus for an ABS offering at a different
time from initial public offerings, such as 48 hours before the first
sale in the offering (instead of 48 hours before confirmation)?
Does our proposal to require filing of a preliminary
prospectus pursuant to proposed Rule 424(h) at least five business days
before the first sale in the offering make the proposed changes to Rule
15c2-8(b) unnecessary? Or is delivery of the preliminary prospectus, as
contemplated by Rule 15c2-8(b), important? Would the proposed amendment
to 15c2-8(b) provide a meaningful change in the information and time
that investors are given to consider offering materials? \181\
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\181\ The 48-hour preliminary prospectus delivery requirement is
triggered by when a broker-dealer sends a confirmation of sale.
Under Exchange Act Rule 10b-10 [17 CFR 240.10b-10], the Commission's
confirmation rule, broker-dealers must send confirmations to their
customers at or before completion of a securities transaction. Given
the industry practice of a lengthy time to complete an ABS
transaction, a customer may not receive a preliminary prospectus
until well after he or she has made an investment decision. See also
Exchange Act Rule 15c1-1 [17 CFR 240.15c1-1] (defining ``completion
of the transaction'').
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How should the prospectus delivery requirement apply to
master trust structures? Is our proposal appropriate with respect to
master trusts? Should we instead amend the rule to apply the 48-hour
preliminary prospectus delivery requirement to master trusts only if
the pool assets have changed by a specified level? If so, what should
that level be (e.g., a change in five, ten, or 20% of pool assets, a
change in a specified percentage such as five, ten, or 20% of the
dollar value of the pool assets as measured by the principal balance, a
significant change in the pool assets)? Are there other ways of
measuring change in pool assets? Should this be determined by asset
class, and if so, which asset classes should be subject to what
standards? For example, should a change in pool assets for purposes of
Rule 15c2-8 be measured differently for credit card ABS than for dealer
floorplan ABS?
As proposed, there are no specific disclosure requirements
applicable to the 48-hour preliminary prospectus. Do we need to specify
further how much asset or other information should be contained in the
48-hour preliminary prospectus? Or is that unnecessary in light of
proposed Rule 430D and the proposed Rule 424(h) filing requirements?
D. Including Information in the Form of Prospectus in the Registration
Statement
1. Presentation of Disclosure in Prospectuses
As currently permitted, asset-backed offerings registered on a
shelf basis typically present disclosure through the use of two primary
documents: the ``base'' or ``core'' prospectus and the
[[Page 23352]]
prospectus supplement.\182\ The base prospectus filed prior to
effectiveness of the registration statement outlines the parameters of
the various types of ABS offerings that may be 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 transaction-specific information that will
be disclosed at the time of each takedown.\183\ At the time of a
takedown, a final prospectus supplement is used which describes the
specific terms of the securities being offered.\184\ 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).\185\
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\182\ The Form S-3 requirements adopted in 2004 incorporated the
existing practice of using a base and supplement format. In Section
III.A.3.b. of the 2004 ABS Adopting Release, we noted that we did
not intend to change existing practices of asset-backed issuers.
\183\ Rule 430B describes the type of information that primary
shelf eligible issuers and automatic shelf issuers may omit from a
base prospectus in a Rule 415 offering and include instead in a
prospectus supplement, Exchange Act report incorporated by
reference, or a post-effective amendment. Under Rule 430B a base
prospectus in a shelf registration statement must comply with the
applicable form requirements, but can omit information that is
unknown or not reasonably available to the registrant pursuant to
Rule 409. See Section V.B.1.b.i.(A) of the Offering Reform Release.
\184\ We note that currently stand alone trust issuers do not
usually provide preliminary prospectuses to investors.
\185\ See Section III.A.3.b of the 2004 ABS Adopting Release and
Section V.B.1.b.i.(A) of the Offering Reform Release.
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This practice has also been utilized by non-ABS issuers. However,
for typical corporate issuers, their base prospectus is substantially
shorter than in an ABS offering as the bulk of the information is
incorporated by reference into the prospectus from the issuer's
Exchange Act reports.
In the 2004 ABS Adopting Release, we explained that when presenting
disclosure in base prospectuses and prospectus supplements, the base
prospectus must describe the types of offerings contemplated by the
registration statement.\186\ We also noted that 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. However, we admonished
registrants to exercise discretion and describe only those material
asset types and features reasonably contemplated to be included in an
actual takedown in order to make the information easily accessible to
investors.\187\
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\186\ See Securities Act Rule 409 [17 CFR 230.409] and Section
III.A.3.b. of the 2004 ABS Adopting Release.
\187\ See Section III.A.3.b of the 2004 ABS Adopting Release.
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Today, we also remind issuers of the importance of providing
disclosure in compliance with our plain English rules. Under Securities
Act Rule 421,\188\ information in a prospectus must be presented in a
clear, concise and understandable manner. The note to Rule 421(b)
states that issuers should avoid copying complex information directly
from legal documents without any clear and concise explanation of the
provisions. The rule also cautions against using boilerplate disclosure
and repeating disclosure in different sections of the document because
it increases the size of the document and it does not enhance the
quality of information.\189\
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\188\ 17 CFR 230.421. See also A Plain English Handbook: How to
Create Clear SEC Disclosure Documents, available at http://www.sec.gov/pdf/handbook.pdf.
\189\ See 17 CFR 230.421(b).
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Notwithstanding the discussion in the 2004 ABS Adopting Release and
the provisions of Rule 421, we are concerned that the base and
supplement format has resulted in unwieldy documents with excessive and
inapplicable disclosure that is not useful to investors. Many ABS
prospectuses in this format often include boilerplate disclosure and
complex information that appears to be imported directly from forms of
transaction agreements. Some issuers file a base prospectus that
contemplates multiple asset types, security structures and possible
types of enhancement and support that are never actually utilized in a
takedown. Moreover, the length of a disclosure document for an ABS
offering, as a result of the base and prospectus supplement format, is
often overwhelming and is burdensome for investors to navigate.
Another problem that has arisen under current practices is that in
some instances, issuers have filed with the Commission at the time of
takedown only the prospectus supplement and not the base prospectus
that was included in the registration statement. Since the base and the
prospectus supplement together form the final prospectus, when an ABS
issuer excludes the base prospectus from the EDGAR filing at the time
of takedown, an investor needs to locate the base prospectus filed with
the initial effective registration statement on Form S-3 on EDGAR.
Given that a shelf registration statement is available for three
years,\190\ it can be unclear what information from the base prospectus
is applicable to the current offering or is superseded by the
supplement.
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\190\ See Securities Act Rule 415(a)(5).
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The current format has the unintended effect of encouraging a
drafting approach that builds in the largest possible flexibility for
as many differing transactions as possible, although with the negative
effect that an investor bears the burden of determining which
disclosures are relevant to a particular transaction. The current rule
benefits issuers but may not be as useful for investors, when the
registration statement is primarily for the benefit of investors. We
believe we should facilitate investor understanding and access to
prospectuses for ABS and eliminate unnecessary disclosures given to
investors. Investors must be able to readily access and understand the
information for a specific offering. Consequently, we are proposing to
eliminate the practice of providing a base prospectus and a prospectus
supplement for ABS issuers. To accomplish this, we are proposing to add
a provision in new Rule 430D and an instruction to proposed Form SF-3
that would require ABS issuers to file a form of prospectus at the time
of effectiveness of the proposed Form SF-3 and to file a single
prospectus for each takedown, which would require that all of the
information required by Regulation AB be included in the
prospectus.\191\ We believe our proposal will help issuers comply with
our plain English requirements, help reduce the size of the offering
documents, and eliminate the need to review inapplicable disclosure.
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\191\ Disclosure may still be incorporated by reference as
allowed by proposed Rule 430D and the applicable Form requirements.
Proposed Rule 430D(c) would provide that information omitted from a
form of prospectus that is part of an effective registration
statement in reliance on Rule 430D(a) that is subsequently included
in the prospectus that is part of a registration statement must
contain all of the information that is required to be included in
the prospectus pursuant to the requirements of the registration
statement with respect to the offering. Under this proposed
requirement, an ABS issuer would not be permitted to include
information on the offering in a prospectus base and supplement
format. We discuss this proposal in more depth in Section II.B.1.b.
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Other than the proposed limitation of one depositor and asset class
per registration statement discussed below,
[[Page 23353]]
we believe requiring only one form of prospectus with the registration
statement would not limit the flexibility of the issuer to vary its
structural features from takedown to takedown. As is the case today,
assets, structuring and other features may be presented in brackets in
the form of prospectus filed with the registration statement. Under the
proposal, issuers could include the same bracketed information in the
form of prospectus filed with the registration statement. At the time
of the offering, only the disclosure applicable to the transaction at
hand would be included in the prospectus provided to investors and
filed with the Commission.
Currently, some sponsors create a separate depositor for each of
its various loan programs, and each depositor files its own shelf
registration statement. Other issuers have included multiple
depositors,\192\ multiple base prospectuses and multiple prospectus
supplements all in one registration statement.\193\ Under our proposal,
each depositor would be required to file a separate registration
statement for each form of prospectus. Each registration statement
would cover offerings by one depositor securitizing only one asset
class.\194\ Although this would change current practice for asset-
backed issuers, we believe such a change would make disclosure for
investors much more accessible and useful.
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\192\ With respect to registration statements with multiple
depositors, each depositor is an issuer of each takedown of
securities off of a shelf. See Securities Act Rule 191 [17 CFR
230.191].
\193\ Also, the current instructions to Form S-3 state that a
registration statement may not merely identify several alternative
types of assets that may be securitized. Under current requirements,
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. See General
Instruction V.A.2 of Form S-3 and Section III.A.3.b. of the 2004 ABS
Adopting Release.
\194\ For instance, resecuritization transactions of mortgage-
backed securities would be considered a separate asset class from
mortgage-backed securities and, thus, require a separate
registration statement, even if the depositor would be the same. As
we currently require for offerings registered on Form S-3, a
separate registration statement would be required 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. In cases where an underlying security
such as a special unit of beneficial interest (SUBI) or collateral
certificate is also registered, the depositor of the underlying SUBI
or collateral certificate would also be included in the same
registration statement. Collateral certificates and SUBIs are
discussed further in Section VII.A. below.
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Request for Comment
Is the proposed change to presentation of disclosure in
the prospectus appropriate? Would investors benefit from the proposed
change? Would it be unduly burdensome for issuers to prepare the
disclosure in a single document? If so, how can we better mandate clear
and concise documents so that investors are able and encouraged to
analyze the investment?
Is our proposal to require a depositor to file a separate
registration statement for each form of prospectus appropriate?
Are there any particular asset classes that should retain
the base and form of prospectus supplement format? If so, why?
Should issuers be able to file more than one form of
prospectus with a registration statement? If so, why? If issuers were
permitted to do so, what other steps could be taken to help market
participants understand the transaction?
Are there other changes we should make to the format and
form of the prospectus to assist investors in analyzing the potential
investment?
2. Adding New Structural Features or Credit Enhancements
We are also proposing to restrict the ability of ABS issuers to
file a prospectus under Rule 424(b) for the purpose of adding certain
types of information to the form of prospectus. Under the existing Rule
430B, ABS issuers and other issuers are permitted to provide the
information omitted from the prospectus that is part of a registration
statement at the time of the offering as a prospectus supplement, a
post-effective amendment, or where permitted as described below,
through its Exchange Act filings that are incorporated by reference
into the registration statement and prospectus that is part of the
registration statement and identified in a prospectus supplement.\195\
In the 2004 ABS Adopting Release, we stated our longstanding position
that the type or category of asset to be securitized must be fully
described in the registration statement at the time of
effectiveness.\196\ We further explained 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.\197\ We stated that a takedown off of a shelf
that involves assets, structural features, credit enhancements 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.\198\ Although, with
Offering Reform, we adopted Rule 430B,\199\ which provides all issuers
on Form S-3 with the alternative to include information previously
omitted in a prospectus filed pursuant to 424(b) or by incorporating
periodic and current Exchange Act reports and the staff has continued
to apply our position articulated in the 2004 ABS Adopting Release. We
confirm that position by proposing to codify our statement regarding
when a post-effective amendment would be required in Rule 430D.\200\
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\195\ See Securities Act Rule 430B(d) and Offering Reform
Release Section V.B.1.b.i.(B).
\196\ See Section III.A.3.b. of the 2004 ABS Adopting Release.
\197\ See id.
\198\ See id.
\199\ See Securities Act Rule 430B(d) and Section V.B.1.b.i.(B)
of the Offering Reform Release.
\200\ See proposed Securities Act Rule 430D(d)(2).
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We are proposing to require that when the issuer desires to add
information that relates to new structural features or credit
enhancement, the issuer must file that information by post-effective
amendment. As a result of this proposal, the staff would have the
opportunity to review new structural features or credit enhancements
that would be contemplated for future offerings. With respect to new
assets, we believe that if the issuer intends to offer securities that
are backed by assets that are not contemplated in the form of
prospectus that is filed as part of the registration statement, a new
registration statement should be filed.\201\
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\201\ If the asset pool includes securities, registration would
be required under Securities Act Rule 190.
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Request for Comment
Is our proposal to require issuers to file a post-
effective amendment to reflect new structural features or credit
enhancements and provide a related undertaking appropriate?
E. Pay-as-You-Go Registration Fees
In 2005, we first adopted pay-as-you-go rules \202\ to allow well-
known seasoned issuers using automatic shelf registration statements to
pay filing fees at the time of a securities offering.\203\ To
[[Page 23354]]
alleviate some of the burden of managing multiple registration
statements among ABS issuers, we are proposing to allow, but not
require, asset-backed issuers eligible to use Form SF-3 to pay filing
fees as securities are offered off of a shelf registration statement.
If this approach, commonly known as ``pay-as-you-go,'' is adopted for
ABS issuers, no filing fees would need to be paid at the time of filing
a registration statement on Form SF-3. A dollar amount or a specific
number of securities would not be required to be included in the
calculation of the registration fee table in the registration
statement, unless a fee based on an amount of securities is paid at the
time of filing.\204\ However, under our proposal the fee table on the
cover of the registration statement must list the securities or class
of securities registered and must indicate if the filing fee will be
paid on a pay-as-you-go basis.\205\
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\202\ See Securities Act Rules 456(b) [17 CFR 230.456(b)] and
457(r) [17 CFR 230.457(r)].
\203\ See Section V.B.2.b.(D) of the Offering Reform Release.
Under the current pay-as-you-go procedure for WKSIs, an issuer can
pay any filing fee, in whole or in part, in advance of takedown or
at the time of takedown providing flexibility in the timing of the
fee payment. Issuers using pay-as-you-go can still deposit monies in
an account for payment of filing fees when due. The fee rules
applicable to the use of such account, also referred to as the
``lockbox account,'' apply. The amount of the fee is calculated
based on the fee schedule in effect when the money is withdrawn from
the lockbox account. This flexibility had been provided so issuers
may determine the fee payment approach most appropriate for them.
See fn. 529 of the Offering Reform Release.
\204\ See proposed Securities Act Rule 457(s).
\205\ In the case of ABS, the fee table on the registration
statement would typically list the offering of certificates and
notes as separate classes of securities. Each class (or tranche) of
those certificates and notes offered would not need to be separately
listed on the fee table. However, if the ABS is a resecuritization,
where registration of the underlying securities would be required
under Rule 190 and the underlying security was not listed on the fee
table of the Form SF-3 registration statement, the offering would
require a new registration statement. Likewise, if a servicer or
trustee invests cash collections in other instruments which may be
securities under the Securities Act, such as guarantees or debt
instruments of an affiliate, under Rule 190 those underlying
securities would also need to be registered concurrently with the
asset-backed offering. If those underlying securities were not
listed on the fee table of the registration statement, a new
registration statement would be required.
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Under our proposal, the triggering event for a fee payment would be
the filing of a preliminary prospectus under proposed Rule 424(h).\206\
At the time of filing a Rule 424(h) prospectus,\207\ the asset-backed
issuer would include a calculation of registration fee table on the
cover page of the prospectus and would be required to pay the
appropriate fee calculated in accordance with Securities Act Rule
457.\208\
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\206\ See proposed Securities Act Rule 456(c). Unlike the pay-
as-you-go rules for WKSIs, we do not believe that a cure period is
necessary for ABS issuers because we are proposing to require ABS
issuers to pay the required fee at the time the preliminary
prospectus is filed under Rule 424(h). The timing of the fee payment
for ABS would not give rise to the same effective date and
registration concerns that arise with WKSIs. Section V.B.2.b.(D) of
the Offering Reform Release.
\207\ If an issuer is filing a Rule 424(h) filing solely in
order to update the fee table and pay additional fees, the 424(h)
filing would not trigger a new five business day waiting period.
\208\ The amount of the filing fee is calculated based on the
fee schedule in effect at the time of payment (upon filing in
advance, or at the time of an offering) in accordance with the
provisions of Rule 457. Thus the fee amount may be different
depending on the time of payment. Also, as provided in Rule 457(p),
if all or a portion of the securities offered under a registration
statement remain unsold after the offering's completion or
termination, or withdrawal of the registration statement, the
aggregate total dollar amount of the filing fee associated with
those unsold securities may be offset against the total filing fee
due for a subsequent registration statement. Currently, if an ABS
offering is not completed after the fee is paid, the fee could be
applied to future registration statements by the same depositor or
affiliates of the depositor.
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Request for Comment
Is our proposal for a pay-as-you go fee alternative for
ABS issuers appropriate? Should ABS issuers be able to register
offerings of an unspecified amount of securities on Form SF-3?
Would this help with the management of multiple shelves
for asset-backed issuers? Are there other steps we could take to help
sponsors and depositors manage shelves for ABS?
Should we revise Rule 457(p), as proposed, to clarify that
if an ABS offering is not completed after the fee is paid, the fee
could be applied to future registration statements by the same
depositor or affiliates of the depositor across asset classes?
F. Signature Pages
We also are proposing to revise the signature pages for
registration statements of asset-backed issuers. Securities Act Section
6 \209\ requires that the registration statement be signed by the
issuer, its principal executive officer or officers, its principal
financial officer, its comptroller or principal accounting officer, and
the majority of its board of directors or persons performing similar
functions. In 2004, we clarified that the depositor is the issuer for
purposes of ABS.\210\ We codified in the general instructions to Forms
S-1 and S-3 that the registration statement must be signed 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.\211\
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\209\ 15 U.S.C. 77f(a).
\210\ Securities Act Rule 191 and Exchange Act Rule 3b-19 state
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.
These rules also provide that the person acting in the capacity as
such depositor is a different ``issuer'' from that same person
acting as a depositor for another issuing entity or for purposes of
that person's own securities.
\211\ See General Instruction VI.C of Form S-1 and General
Instruction V.B. of Form S-3.
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Asset-backed issuers are not required to file financial statements
of the issuer under our rules or pursuant to their governing documents,
and these issuers do not employ a principal accounting officer or
controller. Thus, because such signatures appear to serve no purpose,
we are proposing to exempt asset-backed issuers from the requirement
that the depositor's principal accounting officer or controller sign
the registration statement.
The Form 10-K report for ABS issuers 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. In addition, the
certifications for ABS issuers that are required under Section 302 of
the Sarbanes-Oxley Act \212\ must be signed either on behalf of the
depositor by the senior officer in charge of securitization of the
depositor if the depositor is signing the Form 10-K report, or on
behalf of the issuing entity by the senior officer in charge of the
servicing function of the servicer if the servicer is signing the Form
10-K report. We are now proposing to require that the senior officer in
charge of securitization of the depositor sign the registration
statement (either on Form SF-1 or Form SF-3) for ABS issuers. We
believe that requiring such individual to sign the registration
statement is more meaningful in the context of ABS offerings because it
is more consistent with our other signature requirements for ABS
issuers.
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\212\ 15 U.S.C. 7241.
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Request for Comment
Is our proposed amendment to the registration statement
signature requirements appropriate? Is there any reason we should not
exempt, as we are proposing to do, ABS issuers from the requirement
that the depositor's principal accounting officer or comptroller sign
the registration statement?
Is our proposal to require the senior officer in charge of
securitization of the depositor to sign the registration statement for
ABS issuers appropriate?
III. Disclosure Requirements
In addition to reformatting how prospectuses are presented in ABS
[[Page 23355]]
offerings, we are proposing several changes to the disclosure
requirements in Regulation AB for asset-backed securities. Three of our
proposals involve significant changes from our current requirements.
First, subject to certain exceptions, we are proposing to require
asset-level information regarding each asset in the pool backing the
securities. Second, we are proposing that issuers of ABS backed by
credit card pools provide standardized grouped account data regarding
the underlying asset pool. Third, we are proposing to require that most
issuers provide the flow of funds, or waterfall, in a waterfall
computer program. In addition, we are proposing changes that refine
other disclosure requirements, including those relating to pool-level
disclosure, the prospectus summary, transaction parties, and static
pool information.
A. Pool Assets
We are proposing to increase the required disclosure regarding the
assets underlying the ABS. We are proposing that in most ABS offerings
asset-level data be required in the prospectus at the time of offering
and in Exchange Act reports. For credit card ABS issuers, we are
proposing that issuers provide grouped account data. In order to
facilitate investors' use of asset data files, we are proposing that
the data be filed on EDGAR in Extensible Mark-Up Language (XML). We
also are proposing revisions to our pool-level disclosure requirements
designed to enhance the information available to analyze the pool.
While Regulation AB does not restrict the type or quality of assets
that may be included in the asset pool, our rules under the Securities
Act are designed to assure that a prospectus contains disclosure
regarding the assets that facilitates informed investment
decisions.\213\ We believe access to robust information concerning the
pool assets is important to investors' ability to make informed
investment decisions about asset-backed securities.\214\ We also
believe disclosure about the pool should be as multi-faceted as
necessary to provide a full picture of the composition and
characteristics of the pool assets. In addition, it is critical that
the pool asset information be presented in a comprehensible and clear
fashion.\215\
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\213\ Item 1111 of Regulation AB contains our disclosure
requirements regarding the pool assets. Item 1111 requires
disclosure of the material aspects of the composition of the asset
pool, sources of pool cash flow, changes to the asset pool, and
rights and claims regarding the pool assets. See Section III.B.5. of
the 2004 ABS Adopting Release.
\214\ See also Section III.B.5 of the 2004 ABS Adopting Release.
\215\ See id.
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1. Asset-Level Information in Prospectus
To augment our current principles-based pool-level disclosure
requirements, we are proposing a new requirement to disclose asset-
level information. Investors, market participants, policy makers and
others have increasingly noted that asset-level information is
essential to evaluating an asset-backed security.\216\ Some have said
that there is a need and investor appetite for increased asset-level
disclosures.\217\ We have heard that understanding a borrower's ability
to repay may be more important than the features of the underlying
loan, or even the collateral, on an asset-level basis.\218\ Others have
stated that having access only to pool data (and not asset-level data)
has made it difficult to discern whether the riskiest loans were to the
most creditworthy borrowers or to the least creditworthy borrowers in
the asset pool.\219\
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\216\ See, e.g., ``Restoring Confidence in the Securitization
Markets,'' Global Joint Initiative Report, Dec. 3, 2008, at 11.
\217\ See Committee on Capital Markets Regulation Financial
Crisis Report, at 147 (noting that a survey of data fields provided
to investors did not include 21 data fields considered essential by
all investors surveyed). See also Joshua Rosner, Securitization:
Taming the Wild West, Roosevelt Institute Project on Global Finance,
Make Markets Be Markets (Mar. 2010) at 75 (noting investors need for
timely loan-level performance data in order to accurately price
securities).
\218\ See Committee on Capital Markets Regulation Financial
Crisis Report, at 151 (recommending that standard, granular, loan-
level data be provided sufficient to allow investors to complete
their own credit analysis). See also Rosner, at 77 (noting that the
lack of clear definitions interferes with investors' ability to
compare performance of various deals, issuers, and underlying
collateral).
\219\ Testimony of Patricia A. McCoy, Hearing on
``Securitization of Assets: Problems and Solutions'' before the U.S.
Senate Banking Housing and Urban Affairs Subcommittee on Securities,
Insurance and Investment, Oct. 7, 2009.
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The public availability of asset-level information has been
limited. In the past, some transaction agreements for securitizations
required issuers to provide investors with asset-level information, or
information on each asset in the pool backing the securities.\220\ Such
loan schedules provided to an investor are sometimes filed as part of
the pooling and servicing agreement or as a free writing prospectus. We
believe that all investors and market participants should have access
to the information necessary to assess the credit quality of the assets
underlying a securitization transaction at inception and over the life
of the transaction.\221\
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\220\ This usually includes information such as the principal
balance at the time of origination, the date of origination, the
original interest rate, the type of loan (e.g., fixed, ARM, hybrid),
the borrower's debt to income ratio, the documentation level for
origination of the loan, and the loan-to-value ratio.
\221\ Others have noted the importance of loan-level data to
investors. See U.S. Department of Treasury, A New Foundation:
Rebuilding Financial Supervision and Regulation, June 17, 2009;
(noting in particular, that issuers of ABS should be required to
disclose loan-level data); Federal Deposit Insurance Corporation,
Supervisory Insights: Enhancing Transparency in the Structured
Finance Market, available at http://www.fdic.gov/regulations/examinations/supervisory/insights/sisum08/article01_transparency.html (stating that a lack of complete and public
dissemination of a securitization's loan-level data reduces
transparency and hampers the investor's ability to fully assess risk
and assign value).
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For most investors, the usefulness of asset-level data is generally
limited unless the individual data points are standardized.
Standardizing the information facilitates the ability to compare and
analyze the underlying asset-level data of a particular asset pool as
well as compare them with other pools.\222\ Standardized and easily
accessible data points also may facilitate stronger independent
evaluations of ABS by market participants.
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\222\ See Statement of Former Federal Reserve Governor Randall
S. Kroszner at the Federal Reserve System Conference on Housing and
Mortgage Markets, Washington, DC, Dec. 4, 2008 (stating that a
necessary condition for the potential of private-label MBS to be
realized going forward is for comprehensive and standardized loan-
level data covering the entire pool of loans backing MBS be made
available and easily accessible so that the underlying credit
quality can be rigorously analyzed by market participants).
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Prior to today, the Commission had not proposed to require asset-
level data or proposed standards for such information. We are aware
that some standards have already been developed for registered and
unregistered offerings of commercial mortgage-backed securities and
residential mortgage-backed securities.\223\ The CRE Finance Council
(formerly Commercial Mortgage Securities Association)'s \224\ Investor
Reporting Package includes data fields on loan, property and bond-level
information for commercial mortgage-backed securities at issuance and
while the securities are outstanding.\225\ The American Securitization
Forum (ASF) \226\ recently published disclosure
[[Page 23356]]
and reporting packages for residential mortgage-backed securities that
included standardized definitions for loan or asset-level
information.\227\ The package is part of the group's Project on
Residential Securitization Transparency and Reporting (``Project
RESTART''). The ASF has proposed implementation dates involving new
issuance loans under the Disclosure Package of February 1, 2010.\228\
Other organizations, such as Mortgage Electronic Registration Systems,
Inc. (MERS),\229\ have developed reporting packages to capture and
report data at different times during the life of the underlying
residential or commercial loan. Sellers of mortgage loans to Fannie Mae
and Freddie Mac \230\ are required to deliver loan-level data in a
standardized electronic form.\231\ Other federal agencies, such as the
Office of the Comptroller of the Currency (OCC), and the Office of
Thrift Supervision (OTS) also collect certain loan-level data on
mortgages. The OCC and the OTS gather mortgage performance data from
national banks and thrifts.\232\ We are unaware of any publicly
available data standards for other asset classes and currently there is
no mandatory requirement that issuers follow any of these standards for
reporting to investors in asset-backed securities.
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\223\ The collection of standardized disclosure given to
investors is generally called a reporting package.
\224\ The CRE Finance Council (formerly Commercial Mortgage
Securities Association) is a trade organization for the commercial
real estate finance industry.
\225\ Materials related to the CRE Finance Council Investor
Reporting Package are available at: http://www.crefc.org/.
\226\ ASF is a securitization industry group that represents
issuers, investors, financial intermediaries, rating agencies, legal
and accounting firms, trustees, servicers, guarantors, and other
market participants.
\227\ See American Securitization Forum RMBS Disclosure and
Reporting Package Final Release (July 15, 2009), available at http://www.americansecuritization.com/.
\228\ Implementation dates for ongoing monthly reporting under
the Reporting Package are set for August 1, 2010 on a trial basis
and November 1, 2010 on a permanent basis.
\229\ MERS is affiliated with the Mortgage Industry Standards
Maintenance Organization (MISMO), a not-for profit subsidiary of the
Mortgage Bankers Association.
\230\ Fannie Mae and Freddie Mac are government sponsored
enterprises (GSE's) that purchase mortgage loans and issue or
guarantee mortgage-backed securities (MBS). MBS issued or guaranteed
by these GSEs have been and continue to be exempt from registration
under the Securities Act and reporting under the Securities Exchange
Act. 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 GSEs, see Task Force on Mortgage-Backed
Securities Disclosure, ``Staff Report: Enhancing Disclosure in the
Mortgage-Backed Securities Markets'' (Jan. 2003) available on our
Web site at http://www.sec.gov/news/studies/mortgagebacked.htm.
\231\ See Fannie Mae Loan Delivery Data requirements at https://www.efanniemae.com/sf/refmaterials/prodmortcodes/index.jsp. See also
Freddie Mac Product Delivery requirements at http://www.freddiemac.com/singlefamily/sell/delivery/.
\232\ The results are collected and published in a quarterly
Mortgage Metrics Report. The reports are available at http://www.occ.gov/mortgage_report/MortgageMetrics.htm or at http://www.ots.treas.gov/?p=Mortgage%20Metrics%20Report. See Joint Press
Release of the Office of the Comptroller of the Currency and the
Office of Thrift Supervision, ``OCC and OTS Expand Data Collection
on Mortgage Performance,'' February 13, 2009, available at http://www.occ.treas.gov/ftp/release/2009-9.htm. (attaching Web site link
to the data dictionary).
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Because we believe that issuers should provide transparent and
comparable data, we are proposing to require asset-level information in
a standardized format to be included in the prospectus and periodic
reports and filed on EDGAR. Our proposal specifies and defines each
item that must be disclosed for each asset in the pool. In our
discussion below, we refer to each individual item requirement as an
asset-level data point. Some of the asset-level data points that we are
proposing are indicator fields. Indicator fields will require an answer
of ``yes'' or ``no,'' and are designed to facilitate investor review of
the data.\233\ We are also proposing an instruction to Schedule L that
will contain definitions for some of the terms that we use throughout
the schedule. Because we believe that asset-level data should be
provided to investors and all market participants in a form that
facilitates data analysis, we are also proposing to require that asset-
level data be filed on EDGAR in XML format. These proposals would be in
addition to the disclosure currently required about the composition and
characteristics of the pool of assets taken as a whole. We believe the
pool-level disclosure currently required by Regulation AB is still
important to investment decisions and can facilitate an investor's
understanding of the overall investment opportunity.
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\233\ For example, we are proposing an asset-level data point to
disclose whether the asset has been modified. The response would be
either yes or no. If the answer is no, a preparer or user of the
data would then know that asset-level data points related to
modifications would not be applicable to that particular asset.
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Request for Comment
Is our proposal to require asset-level disclosure with
data points identified in our rules appropriate?
Is a different approach to asset-level disclosure
preferable, such as requiring it generally, but relying on industry to
set standards or requirements? If so, how would data be disclosed for
all the asset classes for which no industry standard exists or for
which multiple standards may exist? To the extent multiple standards
exist, how would investors be able to compare pools? Please be detailed
in your response.
We note that there are several different standards under
which asset-level data is already required. Would our requirements
impose undue burdens on ABS issuers?
Should we instead amend our current requirements regarding
pool-level disclosure by requiring issuers to present certain pool-
level tables in a standardized manner? For instance, should we specify
how statistical data should be presented by defining the groups or
incremental ranges that must be presented? What would those appropriate
groups or incremental ranges be for an individual table? For instance,
what would be the appropriate range for obligor income and why? Please
be specific in your response.
Are the definitions of terms in the proposed instruction
to Schedule L appropriate? Are there any other terms that should be
included in the instruction?
(a) When Asset-Level Data Would Be Required in the Prospectus
Today we are proposing new Item 1111(h) and Schedule L of
Regulation AB which enumerate all of the data points that must be
provided for each asset in the asset pool at the time of the offering.
Schedule L data would be an integral part of the prospectus, and in
order to facilitate investor analysis prior to the time of sale, we are
proposing to require issuers to provide Schedule L data as of a recent
practicable date that we define as the ``measurement date'' at the time
of a Rule 424(h) prospectus. So that investors receive a data file with
final pool information at the time of the offering, we also are
proposing that an updated Schedule L, as of the cut-off date for the
securitization, be provided with the final prospectus under Rule
424(b).\234\ Likewise, if issuers are required to report changes to the
pool under Item 6.05 of Form 8-K, updated Schedule L data would be
required.\235\ As we discuss in Section III.A.3, we are proposing a new
Item 6.06 to Form 8-K for issuers to file the XML data file.
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\234\ The cut-off date would be the date specified in the
instruments governing the transaction (i.e., the date on and after
which collections on the pool assets accrue for the benefit of the
asset-backed security holders).
\235\ If a new asset is added to the pool during the reporting
period, an issuer would be required to provide the asset-level
information for each additional asset as required by our proposed
revisions to Item 1111 and Item 6.05 on Form 8-K.
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Request for Comment
Is the proposed requirement to provide Schedule L data
with the proposed Rule 424(h) prospectus, the final prospectus under
424(b) and for changes under Item 6.05 of Form 8-K appropriate? Should
Schedule L data be required at any other time? If so, please tell us
when and why.
Are the proposed measurement dates appropriate? Are there
any data fields that would be inappropriate or too
[[Page 23357]]
burdensome to supply as of two different measurement dates (i.e., the
measurement date and the cut-off date)? If so, please specify the data
field and provide a detailed explanation.
Should we provide further guidance about what would be a
recent practicable date for purposes of determining the measurement
date?
(b) Proposed Disclosure Requirements and Exemptions
We are proposing that issuers of ABS of most asset classes must
provide the standardized data points enumerated in Schedule L. The
proposed standardized data points would serve to indicate the payment
stream related to a particular asset, such as the terms, expected
payment amounts, indices and whether and how payment terms change over
time. Such data points would be important in order to analyze the
future payments on the asset-backed securities. To perform better
prepayment analysis or credit analysis, we are proposing data points
that indicate the quality of the obligor or the asset origination
process. For instance, in the case of residential mortgages, data
points we are proposing to require, among others, are credit score of
the obligors, employment status, income, and how that information was
verified. To perform analysis of the collateral related to the asset in
the pool, we are proposing data points related to each property. For
instance, in the case of loans or leases secured by automobiles,
issuers would need to provide data points related to the type and model
of car and the value of the car.
Except with respect to certain asset classes (as described below),
we are proposing that every issuer must provide the data points listed
under Item 1. General described below. We are proposing to subdivide
Schedule L based on the asset class. We believe the general data points
are consistent with the principles-based definition of an asset-backed
security and apply to almost every asset class underlying a transaction
that has been registered in the past, and should also apply to any new
asset classes that may be included in a registered offering in the
future. We also propose asset class specific data point requirements
for eleven specific asset classes: Residential mortgages, commercial
mortgages, auto loans, auto leases, equipment loans, equipment leases,
student loans, floorplan financings, corporate debt and
resecuritizations. We are proposing item requirements for these asset
classes because, based on our experience with registered offerings for
these types of asset classes, we believe these data points are among
those that represent the more useful information for investors.
(i) Proposed Coded Responses
Consistent with our efforts to standardize asset-level disclosure,
we are proposing that issuers provide responses to the asset-level
disclosure requirements as a date, a number, text or a coded response.
The required coded responses will be contained in the EDGAR Technical
Specifications. Attached at the end of this release we provide an
appendix which contains a table for the proposed general item
requirements as well as asset class specific item requirements. Each
table lists the proposed item number, the title of the proposed data
field, the proposed definition, the proposed response type and codes,
if applicable, and proposed category of information. The proposed
category of information designates the type of information we are
proposing so that users will know when the data point is applicable.
We are sensitive to the possibility that certain asset-level
disclosure may raise concerns about the personal privacy of the
underlying obligors. In particular, we are aware that data points
requiring disclosure about the geographic location of the obligor or
the collateralized property, credit scores, income and debt may raise
privacy concerns. As we stated in the 2004 ABS Adopting Release,
issuers and underwriters should be mindful of any privacy, consumer
protection or other regulatory requirements when providing loan-level
information, especially given that in most cases, the information would
be publicly filed on EDGAR.\236\ However, as we noted above,
information about credit scores, employment status and income would
permit investors to perform better credit analysis of the underlying
assets. In light of privacy concerns, instead of requiring issuers to
disclose a specific location, credit score, or exact income and debt
amounts, we are proposing ranges, or categories of coded responses.
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\236\ See Section III.C.1.c. of the 2004 ABS Adopting Release.
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For instance, to designate geographic location of an obligor who is
a person, instead of requiring, city, state or zip code of the
property, we are proposing that issuers provide the broader geographic
delineations of Metropolitan or Micropolitan Statistical Areas.\237\
Metropolitan and Micropolitan Statistical Areas are geographic areas,
designated by a five-digit number, defined by the U.S. Office of
Management and Budget (OMB) for use by Federal statistical agencies in
collecting, tabulating, and publishing Federal statistics.\238\ A
Metropolitan Statistical Area may also contain a subdivision, called a
Metropolitan Division.\239\ As an example, if the underlying property
that serves as collateral to a mortgage is located in Alexandria,
Virginia, the issuer would need to designate the geographic location as
47894--Washington-Arlington-Alexandria, DC-VA-MD-WV, the appropriate
Metropolitan Division.
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\237\ Current lists and definitions of Metropolitan and
Micropolitan Statistical Areas are available at http://www.census.gov/population/www/metroareas/metrodef.html.
\238\ A Metropolitan Statistical Area contains a core urban area
of 50,000 or more population, and a Micropolitan Area contains an
urban core of at least 10,000 (but less than 50,000) population.
Each Metro or Micro area consists of one or more counties and
includes the counties containing the core urban area, as well as any
adjacent counties that have a high degree of social and economic
integration (as measured by commuting to work) with the urban core.
The OMB also further subdivides and designates New England City and
Town Areas. The OMB may also combine two or more of the above
designations and identify it as a Combined Statistical Area.
\239\ For example, 47900 designates the Washington-Arlington-
Alexandria, DC-VA-MD-WV Metropolitan Statistical Area. 47900
contains two subdivisions. One is 13644 Bethesda-Frederick-
Rockville, MD Metropolitan Division which includes Frederick County
and Montgomery County. The other is 47894 Washington-Arlington-
Alexandria, DC-VA-MD-WV Metropolitan Division which contains the
District of Columbia, DC; Calvert County, MD; Charles County, MD;
Prince George's County, MD; Arlington County, VA; Clarke County, VA;
Fairfax County, VA; Fauquier County, VA; Loudoun County, VA; Prince
William County, VA; Spotsylvania County, VA; Stafford County, VA;
Warren County, VA; Alexandria City, VA; Fairfax City, VA; Falls
Church City, VA; Fredericksburg City, VA; Manassas City, VA;
Manassas Park City, VA; and Jefferson County, WV. See OMB Bulletin
No. 09-01, ``Update of Statistical Area Definitions and Guidance on
Their Uses,'' List 3, November 2008.
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For asset-level disclosure data points that require disclosure of
obligor credit scores, we are proposing coded responses that represent
ranges of credit scores. The ranges are based on the ranges that some
issuers already provide in pool-level disclosure. For monthly income
and debt ranges, we developed the ranges based on a review of
statistical reporting by other governmental agencies.
We also realize that a situation may arise where an appropriate
code for disclosure may not be currently available in the technical
specifications. To accommodate those situations, our proposals provide
a coded response for ``not applicable,'' ``unknown'' or ``other.''
However, ``not applicable,'' ``unknown'' or ``other'' would not be
appropriate responses to a significant number of data points and
registrants should be mindful of their responsibilities to
[[Page 23358]]
provide all of the disclosures required in the prospectus and other
reports.\240\ Additionally, a situation may arise where an issuer would
like to disclose other data not already defined in our proposed
disclosure requirements.\241\ In these cases, registrants should
provide appropriate explanatory disclosure. As we discuss in more
detail below, we are proposing that issuers file explanatory disclosure
and or definitions of additional data points as another exhibit to Form
8-K at the same time the asset-level data file is required to be filed
on Form 8-K. The Form 8-K and each of these exhibits would be
incorporated by reference into the prospectus.\242\
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\240\ See Securities Act Rule 409 [17 CFR 230.409] and Exchange
Act Rule 12b-21 [17 CFR 240.12b-21].
\241\ See our discussion regarding adding tags to our XML schema
in Section III.A.4. below.
\242\ See Section III.A.4. below, proposed Item 6.06 to Form 8-K
and proposed Item 601(b)(103) of Regulation S-K.
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Request for Comment
Are the proposed coded responses contained in the attached
tables appropriate? Please be specific in your responses by commenting
on specific proposed line items and codes.
The combination of certain asset-level data disclosures
may raise privacy concerns. Are there particular asset-level data
points that give rise to privacy concerns, in addition to the ones
noted above and why? Are there other ways we could provide investors
with similar information and lessen privacy concerns? Which information
raises the most significant privacy concerns?
Which data points, or combination of data points would be
the most important to an investor's analysis? For instance, if we do
not adopt any requirement to disclose geographic location, would the
coded range of FICO score, coded range of income, and sales price still
be useful to investors? If we do not adopt a requirement to disclose
geographic location, a coded range of FICO score and coded range of
income, would the sales price alone still be useful to investors?
Please be specific in your response.
Is our approach to geographic location appropriate? Does
the use of the Metropolitan or Micropolitan Statistical Area, or
Metropolitan Division provide investors with meaningful disclosure?
Should we require only Metropolitan and Micropolitan Statistical Area
which would be a broader description? For example, for a property in
Alexandria, Virginia, 47900-Washington-Arlington-Alexandria, DC-VA-MD-
WV Metropolitan Statistical Area would be the appropriate designation
that would be a larger geographic area than Metropolitan Division.
Would disclosure by state or zip code be appropriate? If a particular
geographic area is experiencing a low volume of real estate
transactions, would the low volume of transactions make it easier to
identify the underlying obligor using other publicly available
resources? Are there other ways to designate geographic location that
would provide investors meaningful disclosure while also addressing
privacy concerns? For instance, instead of requiring geographic
location at the asset-level, should we proscribe requirements for a
pool-level table that presents the geographic concentration of the pool
subdivided by state, size of loan and number of loans? In using such a
pool-level disclosure approach would it also be necessary to subdivide
by income, credit score and sales price?
Is our approach to credit scores, income and debt
appropriate? Does our approach appropriately balance investor need for
the information while addressing privacy concerns? Do the categories
provide meaningful ranges for investor analysis? If not, please be
specific in your response. Should we instead require asset-level
disclosure of the specific credit score, amount of income and amount of
debt of an obligor?
Are there other privacy issues that arise for issuers of
ABS backed by foreign assets? How do the privacy laws of foreign
jurisdictions differ from U.S. privacy laws? If the privacy laws of
foreign jurisdictions are more restrictive regarding the disclosure of
information, how should we accommodate issuers of ABS backed by foreign
assets? Is there substitute information that could be provided to
investors? Please be specific in your response.
(ii) Proposed General Disclosure Requirements
With respect to each asset in the pool, the issuer would be
required to provide the disclosure described below. A description of
the 28 proposed data points is provided in Table 1 of the Appendix. We
believe the proposed general item requirements are basic
characteristics of assets that would be useful to investors in ABS
across asset classes.
1. A unique asset number applicable only to that asset and the
source of the number. We are aware that identifiers for each asset may
be generated in many ways. These identification numbers may have been
generated at origination or at different times through the
securitization process. An asset number is necessary so that investors
and other market participants may follow the performance of a loan
through ongoing periodic reporting. We do not propose a specific naming
or numbering convention; however, we are proposing an instruction to
clarify what type of asset numbers would satisfy this requirement and
an instruction to clarify that the same asset number should be used to
identify the asset for all reports required of an issuer under Section
13(a) or 15(d) of the Exchange Act. For instance, asset number types
that would satisfy the requirements could be generated by CUSIP Global
Services (CUSIP); \243\ the American Securitization Forum (ASF
Universal Link); MERS (Mortgage Identification Number); by the
registrant; \244\ or by using the convention ``[CIK-number]-[Sequential
asset number]''; \245\
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\243\ A CUSIP number would be appropriate if the asset being
securitized itself is a security.
\244\ For instance, if a registrant uses its own unique
numbering to track the asset throughout its life, disclosure of that
number would satisfy this proposed item requirement.
\245\ For instance, if a registrant used the ``[CIK-number]-
[Sequential asset number]'' format, the number would first list the
10-digit CIK of the issuing entity and the second half would be a
number for the pool, e.g, ``0000350001-000001.''
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2. Whether the asset is designated to a particular collateral
group. Some asset pools designate assets to particular groups in order
to determine how cash flows will be passed on to investors;
3. Information regarding origination, such as origination date,
original amount of the loan or contract, original term of the asset in
number of months;
4. The asset maturity date, which is the month the final payment on
the asset is scheduled to be made;
5. The original amortization term, which is the number of months in
which the asset would be retired if the amortizing principal and
interest were to be paid each month;
6. Information regarding interest rate, such as the original
interest rate, amortization type which means whether the interest rate
is fixed or adjustable;
7. If the asset has an interest only term, the number of months in
which the obligor is permitted to pay only interest on the asset;
8. Whether the interest calculation is simple or actuarial. A
simple interest calculation is always based on the original principal,
thus interest on interest is not included. An actuarial calculation is
based on principal plus accrued interest;
9. The identity of the primary servicer that has the right to
service the asset, either by name or by the MERS organization number
(in the case of RMBS);
[[Page 23359]]
10. The servicing fees, either expressed as a percentage of the
asset amount or as a flat-dollar amount, as applicable;
11. The servicing advance methodology by indicating the code that
best describes the manner in which principal and/or interest are to be
advanced by the servicer;
12. Whether the loan or asset was an exception to defined or
standardized underwriting criteria; and
13. The measurement date, which would be the date the asset-level
data is provided in accordance with proposed Item 1111(h)(1).\246\
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\246\ As discussed above, proposed Item 1111(h)(1) would require
issuers provide Schedule L data at the time of a Rule 424(h)
prospectus as of a recent practicable date.
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As discussed above, proposed Item 1111(h)(2) would also require
issuers to provide Schedule L data as part of a final prospectus filed
in accordance with Rule 424(b), as of the cut-off date for the
securitization.\247\ The cut-off date would be the date specified in
the instruments governing the transaction (i.e., the date on and after
which collections on the pool assets accrue for the benefit of the
asset-backed security holders). In addition, we are proposing the
following data points to update for activity that could occur during
the period between the time the asset-level data would have been
previously provided in the proposed Rule 424(h) prospectus and the cut-
off date.
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\247\ We note that the proposed requirement to file Schedule L
data with the final prospectus does not address the timing and
adequacy of information available to the investor at the time the
investment decision is made. Under Securities Act Rule 159,
information conveyed after the time of the contract of sale (e.g., a
final prospectus) is not taken into account in evaluating the
adequacy of information available to the investor at the time the
investment decision was made.
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1. The current asset balance, current interest rate, and current
payment amount due.
2. The number of days the obligor is delinquent and the number of
payments the obligor is past due as of the cut-off date.
3. If the obligor has not made the full scheduled payment, the
number of days between the scheduled payment date and the cut-off
date.\248\ We are proposing this item requirement so that investors
will receive comparable data about the payment performance of an
asset.\249\ We note that the disclosure provided in response to this
proposed requirement may differ from other asset-level or pool-level
delinquency disclosure due to the various delinquency recognition
policies across issuers and asset classes.\250\
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\248\ For example, if the scheduled payment date is December 25,
and the full payment due is not received by the cut-off date for the
report, December 31, the appropriate response to this item would be
6 days. We note that some delinquency recognition policies may not
consider the payment delinquent at the same point in time.
\249\ We are also proposing that issuers be required to report
the number of days a full scheduled payment is past due in each Form
10-D. See discussion in Section III.A.2.a.
\250\ We are proposing this item instead of proposing to define
delinquency for all issuers. In the 2004 ABS Adopting Release we
stated that delinquency should be 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. We adopted that definition because commenters
requested flexibility since policies relating to delinquency vary
somewhat across asset types and sponsors. The approach we adopted
gave consideration to a party's delinquency recognition policies and
we emphasized robust disclosure about those policies. For instance,
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 or amount of a payment is received. See
Section III.A.d.iii. of the 2004 ABS Adopting Release. In the
context of standardized asset-level data, we believe the disclosure
of the number of days from the scheduled payment due date and the
cut-off date allows flexibility for the definition of delinquent
while allowing for analysis and comparability of asset-level data.
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4. Remaining term to maturity, which would be the number of months
between the cut-off date and asset maturity date.
Request for Comment
Are the general data points that would apply to all
securitizations (other than credit cards, charge cards and stranded
costs) appropriate? Should any be deleted or made applicable only to
certain asset classes? If so, what data points? Are there any other
data points that should apply to all asset classes? Please provide a
detailed explanation of the reasons why or why not.
Is the approach to asset number identifier workable?
Should we only require or permit one type of asset number for all asset
classes? If so, which one would be most useful? It appears that our
proposed naming convention of ``[CIK-number]-[Sequential asset
number]'' would be applicable to all asset classes. Does the use of an
asset number alleviate potential privacy issues for the underlying
obligor? Why or why not? What issues arise if the asset number is
determined by the registrant? Would there be any issues with investors
being able to specifically identify each asset and follow its
performance through periodic reporting?
Should we require a data point to disclose the CIK number
of the sponsor? Would all sponsors have a CIK number? If not, in what
other ways could we require standardized disclosure of the identity of
sponsors?
Should we define delinquency in order to provide
comparable delinquency disclosure across issuers and asset classes? If
so, how should it be defined and why? Would market participants be able
to make changes to their current systems to capture information to
satisfy a standardized delinquency disclosure requirement? Would such a
requirement be burdensome? Is there another way to provide comparable
delinquency disclosure across issuers and asset classes? Please be
detailed in your response.
The response to some data points requires the
identification of a party (e.g., originator or servicer) or the MERS
generated number of the organization. Is this approach to
identification workable? Do any issues arise with allowing a text
response to these types of data points? What alternatives would
alleviate such issues? What if the organization does not have a MERS
number?
(iii) Asset Specific Data Points
As discussed in detail below, we are proposing to further subdivide
the Schedule L data points so that issuers can determine whether or not
the data field applies to their transaction. For instance, if the asset
pool contains only residential mortgages, then issuers would only need
to provide those data points designated under proposed Items 1 and 2 of
Schedule L. Similarly, if the asset pool contains only student loans,
the issuer would only need to provide those data points designated
under proposed Items 1 and 8. If the asset pool contains assets for
which we have not proposed asset class specific data points, the issuer
would only need to provide those general data points designated under
proposed Item 1. Further, if the asset pool of residential mortgages
consists only of fixed-rate mortgages, all of the data points related
to adjustable rate mortgages \251\ need not be included in the data
file. Likewise, in a pool of student loans, if the asset pool comprised
only loans issued under a federal student loan program, such as the
Federal Family Education Loan Program (FFELP),\252\ information related
[[Page 23360]]
to private label student loan programs need not be included in the data
file.\253\ The issuer, however, may need to provide data in the
appropriate indicator field, which is a ``yes'' or ``no'' answer to
whether the characteristic is present. This approach is designed to
facilitate investor review of the asset-level data.
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\251\ Item 2(a)(16) of proposed Schedule L.
\252\ FFELP loans are generally based on need, instead of credit
quality of the underlying obligor. For more information, see the
U.S. Department of Education Web site at http://www2.ed.gov/programs/ffel/index.html.
\253\ Item 8(c) of proposed Schedule L.
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Request for Comment
Is the proposed subdivision of Schedule L appropriate?
Would this approach facilitate investor review of the asset-level data?
(iv) Proposed Exemptions
We are proposing to exclude ABS backed by credit cards, charge
cards, and stranded costs from the requirement to provide asset-level
data. Based on staff reviews of credit card and charge card asset
pools, it appears that some may contain as many as 20 to 45 million
accounts. Based on the overwhelming volume of data in these types of
asset classes, we do not believe that granular asset-level information
would be as useful for investors and the provision of asset-level data
may be cost-prohibitive for issuers. We have also heard anecdotally
that investors in credit card or charge card ABS do not have a desire
for asset-level data. For these asset classes, we are proposing that
credit card ABS issuers provide grouped account data that we discuss
below.\254\
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\254\ See Section III.A.3.
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For ABS backed by stranded costs, the underlying asset is
transition property or system restoration property. Stranded costs are
the costs associated with a decline in the value of electricity-
generating assets due to restructuring of the industry, and the
underlying property is called transition property.\255\ System
restoration property is a similar underlying asset, but provides for
recovery of system restoration costs incurred by electric utilities as
a result of hurricanes, tropical storms, ice or snow storms, floods and
other weather-related events and natural disasters. These types of
property are usually created by the action of a state legislature or
other designated authority.\256\ The property generally includes a
right and interest to impose, collect and receive charges payable by
electric customers in a particular territory. Also, this right usually
provides that the designated state authority may periodically adjust
the charges billed to customers in order to recover the stranded costs
in the event all collections are not made. Because transition property
is not originated on a customer-by-customer basis, and is instead the
right to impose charges on customers based on electrical usage, we
preliminarily do not believe it is appropriate to require asset-level
data be provided for stranded cost ABS.
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\255\ When the electricity industry deregulated, prices for
electricity were expected to decline as competition was introduced
into the market. With prices projected to fall more than production
costs, utilities would earn less and the value of their assets would
shrink. Thus, with falling prices eroding the value of the
utilities' assets, some of their costs would be unrecoverable, or
stranded. See Electric Utilities: Deregulation and Stranded Costs,
Congressional Budget Office, October 1998.
\256\ See, e.g., Public Utility Regulatory Act, TEX. UTIL. CODE
ANN. Sec. Sec. 39.001-.463.
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Request for Comment
Should asset-level data be provided by credit card, charge
card or stranded cost issuers? If so, please explain why and what
asset-level data should be provided.
Would requiring asset-level data for these asset classes,
rather than grouped asset data, as proposed below, be useful for
investors? Is the volume of data in these types of asset classes a
concern to investors? If so, are there ways to address this, for
example, by facilitating the presentation of the data, to make it more
useful to investors?
Are there any other asset classes that should be exempt
from the requirement to provide asset-level data and why?
In light of the proposal not to set forth asset-level data
for these assets, is there any pool-level data that should be provided
by credit card, charge card, or stranded cost issuers? If so, please
identify the pool-level data that we should require and explain why.
Should we specify standardized definitions for pool-level
data? For instance, for credit cards or charge cards, should we define
terms such as modification, excess spread and charge-off? How are
issuers currently defining these various terms?
Should pool-level data for credit cards and charge cards
be provided at the same time that we propose for other issuers to
provide Schedule L data (i.e., with the proposed Rule 424(h)
prospectus, the final prospectus under 424(b) and for changes under
Item 6.05 of Form 8-K)? Should it also be provided at any other time,
such as in periodic reports? If so, please tell us when and why.
Should we revise Item 1111 to require pool-level
disclosure in a standardized format for ABS backed by credit cards or
charge cards? Current Item 1111 requires issuers to present pool-level
statistical information in appropriate distributional groups or
incremental ranges in addition to presenting appropriate overall pool
totals, averages and weighted averages, if such presentation will aid
in the understanding of the data. In the case of credit cards and
charge cards, should we proscribe the distributional groups or
incremental ranges for material pool characteristics such as credit
scores, credit limit, account balance, account age, geographic location
or annual percentage rate (APR)? \257\ For instance, in the case of
FICO credit scores, should the distributional groups be similar to the
coded response ranges for asset-level data in proposed Item 2(c)(3) of
Schedule L? \258\ What other types of credit scores are used by credit
card issuers, if any? Are any proprietary? What distributional groups
would be useful for disclosure of other types of credit scores?
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\257\ In the FDIC Securitization Proposal, the FDIC also
solicited comments on specific questions of disclosure related to
securitizations. We note the suggestions of one commenter regarding
the disclosure that should be provided by issuers of ABS backed by
credit cards. See comment letter from MetLife on the FDIC
Securitization Proposal (``MetLife FDIC Letter''), available at
http://www.fdic.gov/regulations/laws/federal/2010/10comAD55.html.
\258\ See Table 2 of the Appendix to this release.
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[cir] In the case of credit limit and account balance, should we
proscribe the following distributional groups for disclosure with
respect to credit card and charge card pools: (1) <$1,000; (2) $1,000-
$5,000; (3) $5,000-$10,000; (4) $10,000-$20,000; (5) $20,000-$30,000;
(6) $30,000-$40,000; (7) $40,000-$50,000; and (8) greater than $50,000?
Would using these distribution groups lead to useful disclosure?
[cir] In the case of account age, should we proscribe the following
distributional groups for disclosure with respect to credit card and
charge card pools: (1) 12 months or less; (2) 12-24 months; (3) 24-36
months; (4) 36-48 months; (5) 48-60 months; (6) 60-84 months; (7) 84-
120 months; and (8) over 120 months? Would using these distribution
groups lead to useful disclosure?
[cir] In the case of geographic location, should we require
disclosure by state or by Metropolitan Statistical Area for credit card
and charge card pools? \259\ Which would be more useful? Should issuers
be required to disclose all states or Metropolitan Statistical Areas
for the entire pool, or only the top 10, 20 or some other number?
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\259\ See discussion in Section III. A.1.b.i. above.
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[cir] In the case of interest rate or APR, what would be the
appropriate
[[Page 23361]]
distributional groups? For example, would the following distributional
groups be appropriate: (1) 0 to 1.99%; (2) 2.00% to 4.99%; (3) 5.00% to
9.99%; (4) 10.00% to 14.99%; (5) 15.00% to 19.99%; (6) 20.00% to
24.99%; (7) 25.00% to 29.99%; (8) 30.00% to 34.99%; (9) 35.00% to
39.99%; and (10) over 40.00%? Are there other characteristics that
should be included in the same statistical table of information, such
as how many accounts are currently deferring interest, deferring
interest/principal, or other types of promotions?
[cir] Should we require issuers of ABS backed by credit cards and
charge cards to provide statistical tables to disclose the amount of
credit that is available for purchases? If so, should we proscribe the
following distributional groups: (1) <$1,000; (2) $1,000-$5,000; (3)
$5,000-$10,000; (4) $10,000-$20,000; (5) $20,000-$30,000; (6) $30,000-
$40,000; (7) $40,000-$50,000; and (8) greater than $50,000? Would using
these distribution groups lead to useful disclosure? Would this
information be useful to investors and why?
[cir] Should we require issuers of ABS backed by credit cards and
charge cards to provide statistical tables to disclose the type of
products in the pool? For instance, credit card products could include
affinity,\260\ co-branded cards,\261\ merchant cards, partner cards,
and reward cards. Would this information be useful to investors and
why?
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\260\ Affinity card programs are offered by organizations such
as universities, alumni associations, sports teams, professional
associations and others.
\261\ A co-branded credit card generally is a credit card
jointly sponsored by a bank and retail merchant, such as a
department store.
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[cir] Should we require issuers of ABS backed by credit cards and
charge cards to provide statistical tables to disclose whether there
any accounts in the pool are under a debt management program, have
redefaulted, are diluted or whether the account has been closed? Would
this information be useful to investors and why?
[cir] Should we require issuers of ABS backed by credit cards and
charge cards to provide statistical tables to disclose payment habits
of the obligors, such as the number of accounts, or percentage of the
pool that make minimum payments, pays balances in full, or other
payment types? Are there any other categories of payment behavior that
would be useful to investors?
[cir] Should we require issuers of ABS backed by credit cards and
charge cards to provide statistical tables to disclose whether the
obligors are homeowners, mortgage holders or renters? Would this
information be useful to investors and why? Do issuers have this
information? Because credit card securitizations are usually structured
as master trusts, how would issuers be able to provide updated
information at the time of each takedown?
[cir] Should we require issuers of ABS backed by credit cards and
charge cards to provide statistical tables to disclose whether the
obligors are employed and if so, the type of employment? Should we
specify the categories for this type of information, such as: (1)
Professional; (2) technical; (3) managerial; (4) clerical; (5) sales;
(6) service; (7) agricultural; (8) laborers; (9) military; (10)
student; (11) retired; (12) unemployed; and (13) unknown? Would this
information be useful to investors and why?
[cir] Should we require issuers of ABS backed by credit cards and
charge cards provide statistical tables to disclose the level of
education of the obligors? Should we specify the categories for this
type of information such as: (1) Graduate; (2) college-4 year; (3)
college-2 year; (4) high school or (5) unknown? Would this information
be useful to investors and why?
[cir] Should we require issuers of ABS backed by credit cards and
charge cards to provide statistical tables to disclose the debt-to-
income ratio of the obligors? Would this information be useful to
investors and why? Should the debt-to-income ratio be defined and
calculated in the same manner as required in Schedule L? \262\ What
would the appropriate distributional categories be? For example, would
the following distributional groups be appropriate: (1) 0 to 4.99%; (2)
5.00% to 9.99%; (3) 10.00% to 14.99%; (4) 15.00% to 19.99%; (5) 20.00%
to 24.99%; (6) 25.00% to 29.99%; (7) 30.00% to 34.99%; (8) 35.00% to
39.99%; (9) 40.00% to 44.99%; (10) 45.00% to 49.99%; (11) 50.00% to
54.99%; (12) 55.00% to 59.99%; (13) 60.00% to 64.99%; (14) 65.00 to
69.99%; (15) 70.00% to 74.99%; (16) over 75.00%?
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\262\ See proposed Items 2(a)(21)(iv) and 2(a)(20)(v) of
Schedule L.
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[cir] Because credit card securitizations are usually structured as
master trusts, how would issuers be able to provide updated information
described in the previous four bullet points at the time of each
takedown?
[cir] Should we specify the data that should be presented for each
distributional group in the above requests for comment? For instance,
for each distributional group of credit scores, issuers typically
provide a table detailing the number of accounts, dollar amount and
percentage of the pool. Should we also require that issuers provide the
following information for each credit score distributional group in the
same table: (1) Weighted average credit limit; (2) weighted average
utilization rate; (3) weighted average account age; (4) percentage of
obligors that pay in full; (5) percentage of obligors that make minimum
payments; (6) weighted average credit score; (7) weighted average APR;
(8) portfolio yield; (9) amount of interchange; (10) amount of fees;
(11) amount of gross charge-offs; (12) amount of recoveries; (13)
amount of prepayments; (14) dollar amount of accounts that are over 30
days delinquent; (15) number of accounts that are over 30 days
delinquent; and (16) weighted average excess spread? \263\ Is there any
other information that would be useful for investors in this format?
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\263\ See, e.g., Appendix A, Attachment I of the MetLife FDIC
Letter.
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Should we require aggregated asset-level data in a
machine-readable form for issuers of ABS backed by stranded costs so
that investors may download the data and input it into a waterfall
computer program? If so, please specify the characteristics, the
appropriate distributional groups and related definitions and formulas,
if applicable.
(c) Residential Mortgage-Backed Securities
We are proposing 137 data points for ABS backed by residential
mortgages. The staff has surveyed the data and definitions provided by
the organizations mentioned above, as well as other industry sources.
We are proposing to require additional data fields that relate to
residential mortgages that are based mainly on information already
typically provided by sellers to Fannie Mae and Freddie Mac or likely
to be collected by participants in Project RESTART.
Some of the Fannie Mae, Freddie Mac and Project RESTART data points
appear in the general section (Item 1), because we believe those data
points would apply to all types of asset-backed securities. We did not,
however, include every data point included in those loan-level
packages. We believe that there are numerous ways to capture the same
data, and after reviewing other loan-level data dictionaries, our
definitions may have minor differences from those in Fannie Mae,
Freddie Mac and Project RESTART because we wanted to make sure that we
captured disclosure that may be provided to other organizations. For
instance, we believe that many of the points are also consistent with
the data dictionary developed by
[[Page 23362]]
MISMO.\264\ We also reviewed other data definitions currently used by
banks for reporting to the OCC and OTS.\265\ As noted above, we also
are proposing several indicator fields that usually require a ``yes''
or ``no'' answer in order to facilitate investor review of the data.
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\264\ As noted above, MISMO is an affiliate of MERS. The MISMO
data dictionary is available at http://www.mismo.org/pages/Residential%20Specifications.aspx.
\265\ See ``OCC/OTS Mortgage Metrics--Loan Level Data
Collection: Field Definitions,'' January 7, 2009, available at
http://www.occ.treas.gov/ftp/release/2009-9a.pdf.
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With respect to each mortgage in the pool, the issuer would be
required to disclose the information described below. A complete
description of each proposed data point is provided in Table 2 of the
Appendix to this release.
1. A code that describes the loan purpose.
2. The lien position of the loan.
3. Whether the obligor is subject to any prepayment penalties, a
code that describes the type of penalty, the term of penalty and a code
that describes how the penalty is calculated.
4. The origination channel and whether a broker took the
application.
5. The Nationwide Mortgage Licensing System (NMLS) loan originator
number and loan origination company number.\266\
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\266\ In 2008, Congress passed The Secure and Fair Enforcement
for Mortgage Licensing Act of 2008 (the SAFE Act) which required the
creation of a Nationwide Mortgage Licensing System and Registry. The
SAFE Act is designed to enhance consumer protection and reduce fraud
by encouraging states to establish minimum standards for the
licensing and registration of state-licensed mortgage loan
originators and for the Conference of State Bank Supervisors (CSBS)
and the American Association of Residential Mortgage Regulators
(AARMR) to establish and maintain a nationwide mortgage licensing
system and registry for the residential mortgage industry. The SAFE
Act was enacted as part of the Housing and Economic Recovery Act of
2008, Public Law 110-289, Division A, Title V, sections 1501-1517,
122 Stat. 2654, 2810-2824 (July 30, 2008), codified at 12 U.S.C.
5101-5116. The Federal Housing Finance Agency will require that
mortgages purchased by Freddie Mac and Fannie Mae include loan-level
identifiers of the loan originator and loan origination company for
mortgage applications taken on or after July 1, 2010. The original
date of compliance was January 1, 2010; however, this has been
extended to July 1, 2010. See Federal Housing Finance Agency News
Release, ``FHFA Announces New Mortgage Data Requirements,'' January
15, 2009, available at http://www.fhfa.gov/webfiles/400/LoanOrigIDS11509.pdf. See also Freddie Mac Bulletin 2009-27,
December 4, 2009, available at http://www.freddiemac.com/sell/guide/bulletins/pdf/bll0927.pdf and Fannie Mae Selling Notice ``Mortgage
Loan Data Requirements--Update,'' October 6, 2009, available at
https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2009/ntce100609.pdf. The NMLS maintains the following Web site: http://mortgage.nationwidelicensingsystem.org/Pages/default.aspx.
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6. Whether the loan allows for negative amortization and
information regarding the negative amortization terms which would
include:
a. The maximum dollar amount and the number of months negative
amortization amount allowed;
b. The initial and subsequent number of months an obligor can
initially pay the minimum payment before a new payment is determined;
c. The current negative amortization amount that has accumulated;
d. The number of months the payment is fixed and the initial and
subsequent limits on payment increases and decreases;
e. The length of the initial and any subsequent recast periods in
number of months; and
f. The current minimum payment amount.
7. Whether the loan has been modified. If so:
a. The number of modifications;
b. A code that describes the reason for modification;
c. The effective date of the modification;
d. Updated debt-to-income ratios of the obligor;
e. The total amount added to the principal balance of the loan due
to the modification or capitalized amount;
f. Any deferred amount that is non-interest bearing; and
g. The pre-modification interest rate, the pre-modification payment
amount, and the forgiven principal and interest amounts.
8. Whether the loan documents require a lump-sum payment of
principal at maturity, otherwise known as a balloon loan.
9. In the case of a refinance transaction, the amount of cash the
obligor received.
10. The number of months a buydown period would be in effect. A
buydown period is when a lump sum payment is made to the creditor by
the obligor or by a third party to reduce the amount of some or all of
the obligor's periodic payments.
11. The date through which interest is paid with the current
payment, which is the date from which interest will be calculated for
the application of the next payment.
12. The number of days after which a servicer can stop advancing
funds on a delinquent loan.
13. Amount of any junior mortgages on the property and if the loan
in the pool is a junior loan, information on the senior loan such as
origination date, amount, loan type, hybrid period, and negative
amortization limit.
14. If the loan is an adjustable rate mortgage:
a. The index on which the adjustable rate is based;
b. The margin, which is the number of percentage points added to
the index to establish the new rate;
c. The fully indexed rate, which is the index rate plus the margin;
d. If the interest rate is initially fixed for a period of time,
the number of months between the first payment date and the first
interest adjustment date;
e. The maximum percentage by which a mortgage rate may increase or
decrease, initially, at subsequent points in time, and over the
lifetime of the loan;
f. The number of months between interest rate reset periods;
g. The number of days prior to an interest rate effective date
which is used to determine the appropriate index rate or lookback;
h. The date of the next interest rate adjustment;
i. The method of rounding and the rounding percentage;
j. Whether the loan is an option ARM, that is whether the obligor
can choose payment options;
k. A code that describes the means of computing the lowest monthly
payment available to the obligor after recast. When the loan is recast,
a new minimum payment is calculated to fully amortize the loan over the
remaining term of the loan;
l. The initial minimum payment an obligor is required to make; and
m. Whether the loan is convertible to a fixed interest rate.
15. Whether the loan is a home equity line of credit, or HELOC, and
the related period in which the obligor may draw funds against the
HELOC account.
With respect to each mortgage loan in the pool, the issuer would be
required to disclose the information on the property securing the loan
described below.
1. Geographic location of the property, designated by Metropolitan
Statistical Area, Micropolitan Statistical Area, or Metropolitan
Division, as applicable.
2. A code that describes the property type and occupancy status of
the property.
3. Sales price.
4. The appraised value used to approve the loan and most recent
appraised value, the property valuation method, date of valuation,
valuation scores and types of scores.
5. Combined and original loan-to-value ratios and the calculation
date.
6. If the obligor pledged financial assets to the lender instead of
making a down payment, the total value of assets pledged as collateral
for the loan at the time of origination.
If the loans in the pool relate to manufactured housing, the issuer
would
[[Page 23363]]
be required to disclose the information described below.
1. A code that describes the interest of others in the real estate.
2. A code that describes the community ownership structure.
3. The name of manufacturer and model name, the year the home was
manufactured and whether it was constructed in accordance with the 1976
HUD Code.
4. Gross and net invoice price of the home.
5. Loan to invoice ratios, whether the loan was made by a lender
related to the community, and whether the securitized property is
considered chattel or real estate.
6. The source of the obligor's down payment.
With respect to each mortgage in the pool, the issuer would be
required to disclose the information on the obligor described below.
1. Obligor and co-obligor's credit scores and types of scores.
2. Obligor and co-obligor's wage and other income and a code that
describes the level of verification.
3. A code that describes the level of verification of assets of the
obligor and co-obligor.
4. Obligor and co-obligor's length of employment, whether they are
self-employed and a code that describes the level of verification.
5. The dollar amount of verified liquid/cash reserves after the
closing of the mortgage loan.
6. The total number of properties owned by the obligor that
currently secure mortgages.
7. The amount of the obligor's other monthly debt.
8. The obligor's debt to income ratio used by the originator to
qualify the loan.
9. A code that describes the type of payment used to qualify the
obligor for the loan, such as the payment under the starting interest
rate, the first year cap rate, the interest only amount, the fully
indexed rate or the minimum payment.
10. The percentage of down payment from obligor's own funds other
than any gift or borrowed funds.
11. The number of obligors on the loan.
12. Any other monthly payment due on the property other than
principal and interest.
13. The number of months since any obligor bankruptcy or
foreclosure.
14. The obligor and co-obligor's wage income, other income and all
income.
With regard to mortgage insurance, the issuer would be required to
disclose the information below.
1. Whether mortgage insurance is required.
2. The name of the mortgage insurance company, coverage plan type,
certificate number, and insurance coverage percentage.
3. Whether the insurance is lender or borrower paid.
4. If there is pool insurance, the name of pool insurance provider
and pool insurance stop loss percentage.
Request for Comment
Are all of the RMBS data points appropriate? Are there
other data points that should be required for all RMBS issuers? Are any
data points not necessary or overly burdensome to obtain? Please
specify the proposed data points and provide a detailed explanation of
the reasons why or why not.
Some data points request the results of calculations, such
as debt-to-income ratios. Can these ratios otherwise be calculated from
data provided by the other asset-level data points? If so, can users of
the information independently calculate these data points? And should
we not require these data points to be included in the asset-level data
file?
Should we include a data point to require what effort an
originator or sponsor made to see if there are other loans secured by
the same property? If we were to code the response, what code
descriptions should we provide?
Are the proposed type of responses and coded responses
appropriate? Are there additional codes that should be included? Please
provide a detailed explanation of the reasons why or why not.
What privacy concerns arise if we require issuers to
disclose the sales price of the property, if any? Would rounding the
sales price to the nearest thousandth alleviate privacy concerns? If
not, what would be the appropriate rounding method? If we instead
required the disclosure of sales price be provided by a coded range of
dollar amounts, would that alleviate privacy concerns? What would be
the appropriate ranges of dollar amounts? Would the above mentioned
options have an effect on an investor's ability to analyze the asset-
level data or use the waterfall computer program? If so, please be
specific in your response. In what other ways could we require the
disclosure of sales price so that investors receive useful information
and also address any privacy concerns?
(d) Commercial Mortgage-Backed Securities
We are proposing 61 data points for ABS backed by commercial
mortgages. The data points we are proposing to require are primarily
based on the definitions included in the CRE Finance Council Investor
Reporting Package, current Regulation AB requirements and staff review
of current disclosure. The CRE Finance Council disclosure package
standardizes bond, loan and property level information for commercial
mortgage-backed securities.\267\ We are not proposing, however, to
include every data point included in the CRE Finance Council reporting
package. Some of the data points already appear in the general section
(Item 1), because we believe those data points would apply to all types
of asset-backed securities. We did not include others because we did
not believe the level of detail was necessary for investor analysis as
we believe that the most important data points for CMBS are those that
relate to the loan term and the property. With respect to each
commercial mortgage loan in the pool, the issuer would be required to
disclose the information described below. A description of each
proposed data point and related response is provided in Table 3 to the
Appendix to this release.
---------------------------------------------------------------------------
\267\ According to the CRE Finance Council, transaction
disclosure should be updated and provided monthly. See http://www.crefc.org/.
---------------------------------------------------------------------------
1. A code that describes the loan structure, including the
seniority of participated mortgage loan components.
2. The current remaining term of the loan.
3. A code that describes the payment method, the amount of the
periodic principal and interest payment, and frequency of payment for
the loan, frequency that the payment will be adjusted, and grace days
allowed.
4. The number of properties that serve as mortgage collateral for
the loan;
5. The hyper-amortizing date, which is the current anticipated
repayment date after which principal and interest may amortize at an
accelerated rate, and/or interest to the mortgagor increases
substantially.
6. Whether the loan is interest only or requires a balloon payment.
7. Whether the obligor is subject to prepayment penalties, the
effective date after which the lender allows prepayment of a loan, the
date after which yield maintenance prepayment penalties are no longer
effective and the date after which prepayment premiums are no longer
effective.
8. If the loan permits negative amortization, the maximum
percentage and amount of the original loan balance that can be added to
the original loan balance as a result of negative amortization.
9. If the loan is an adjustable rate mortgage:
[[Page 23364]]
a. The index on which the adjustable rate is based;
b. The first rate adjustment date;
c. The first payment adjustment date;
d. The number of percentage points that are added to the current
index rate to establish the new note rate each interest adjustment
date;
e. The maximum percentage by which a mortgage rate may increase or
decrease, initially, at subsequent points in time, and over the
lifetime of the loan;
f. A code describing the frequency with which the periodic mortgage
rate is reset and a code describing the frequency with which the
periodic mortgage payment will be adjusted; and
g. The number of days prior to an interest rate effective date
which is used to determine the appropriate index rate or lookback.
10. Whether the loan had been modified from its terms at the time
of origination.
The issuer also would be required to provide information on each of
the properties collateralizing the loan. This would include:
1. The property name, geographic location, designated by zip code,
as applicable, and the year that the property was built;
2. A code describing the current use of the property, including net
rentable square feet of a property, number of units/beds/rooms, and
percentage of rentable space occupied by tenants;
3. The valuation amount of the property as of a valuation date and
source of valuation;
4. The total underwritten revenues from all sources for a property
and total underwritten operating expenses (including real estate taxes,
insurance, management fees, utilities, and repairs and maintenance);
\268\
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\268\ For this purpose ``underwritten'' means the amount of
revenues or expenses adjusted based on a number of assumptions made
by the mortgage originator or seller. We believe issuers should
include narrative disclosure about the assumptions used in the
prospectus.
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5. The date when the defeasance option becomes available. A
defeasance option is when an obligor may substitute other income-
producing property for the real property without pre-paying the
existing loan; \269\
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\269\ See Mary Stuart Freydberg and Mary MacNeill, ``Defeasance
by Design: Frequently Asked Questions,'' CMBS World, March 1999,
available at http://www.cmsaglobal.org/cmbsworld/cmbsworld_toc.aspx?folderid=31374.
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6. Net operating income and net cash flow, including a code
describing how operating income and net cash flow were calculated
(i.e., using the CMSA standard, using a definition in the pooling and
servicing agreement, or using the underwriting method);
7. The ratio of underwritten net operating income to debt service,
the ratio of underwritten net cash flow to debt service, and an
indicator showing how the debt service coverage ratio was calculated;
\270\ and
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\270\ For this purpose, ``underwritten'' means that the amount
disclosed is adjusted based on a number of assumptions made by the
mortgage originator or seller. We believe issuers should include
narrative disclosure about the assumptions used in the prospectus.
Such an indicator would consider whether the servicer allocates debt
service only to properties where financial statements are received,
whether all properties are reported on one rolled up financial
statement from the borrower, whether all financial statements were
collected for all properties, whether no financial statements were
received, whether not all properties received financial statements
and the servicer leaves empty, or whether or not all properties
received financial statements and the servicer allocates 100% of
debt service to all properties where financial statements are
received.
---------------------------------------------------------------------------
8. The three largest tenants (based on square feet), including
square feet leased by the tenant and lease expiration dates of the
tenant.
We note that some of the data points that we are proposing to
include in Schedule L are currently required on a loan-level basis
under existing Item 1111(b)(9)(i) of Regulation AB.\271\ Such items are
described in the list above and relate to: the location and use of each
property; net operating income and net cash flow information, as well
as the components of net operating income and net cash flow, for each
mortgaged property; current occupancy rates for each mortgaged property
and the identity, square feet occupied by and lease expiration dates
for the three largest tenants at each mortgaged property. Issuers of
ABS backed by CMBS would be required to continue to provide the
information required by Item 1111(b)(9)(i) in the prospectus in a
narrative form.
---------------------------------------------------------------------------
\271\ Specifically, we are proposing to include the requirements
of Item 1111(b)(9)(i)(A), (B), (C), and (D) in Schedule L.
---------------------------------------------------------------------------
Request for Comment
Are all of the CMBS data points appropriate? Is there any
reason not to incorporate any of the requirements for commercial
mortgage-backed securities into Schedule L? Are there any additional
fields we should include? Are there any changes we should make for
specific types of commercial properties?
Should we include the current Item 1111(b)(9)(i) asset-
level disclosure requirement for CMBS in Schedule L, as proposed?
Should we eliminate the requirement to provide the asset-level
information in narrative form? If so, would any material information
relating to a commercial mortgage be lost?
We are proposing to require an indicator that shows how
net operating income and net cash flow were calculated for commercial
mortgages. The code options for this indicator would show whether these
items were calculated using a CMSA standard, using a definition in the
pooling and servicing agreement, or using an underwriting method. Are
these appropriate codes? Are there any additional codes that should be
included?
We are proposing to require an indicator that shows how
the debt service coverage ratio was calculated for commercial
mortgages. The code options for this indicator would be: (1) Average--
not all properties received financial statements, and the servicer
allocates debt service only to properties where financial statements
are received; (2) Consolidated--all properties reported on one ``rolled
up'' financial statement from the borrower, (3) Full--all financial
statements collected for all properties, (4) None Collected--no
financial statements were received; (5) Partial--not all properties
received financial statements and servicer to leave empty; and (6)
``Worst Case''--not all properties received financial statements, and
servicer allocates 100% of debt service to all properties where
financial statements are received. Are these codes appropriate? Are
there additional codes that should be included?
We currently require disclosure of the three largest
tenants that occupy the underlying property in the prospectus. Should
we also require issuers to disclose whether the named tenants are
affiliated with the obligor as a data point in Schedule L and in
narrative form in the prospectus? Should we require a description of
the relation in narrative form?
Should we continue to require Item 1111(b)(9)(i) data in
the prospectus, as proposed, or is the proposed asset-level data
sufficient?
(e) Other Asset Classes
We are unaware of any other organization that has standardized data
points for asset classes other than mortgages for investor
reporting.\272\ As we explain above, standardized data points provide
disclosure to investors about the payment stream and amount of payments
related to individual assets;
[[Page 23365]]
make it possible for users to perform prepayment and credit analysis on
an individual asset, and evaluate the collateral, if any, that secures
the individual asset.\273\ Consequently, in order to make the asset-
level information useful to investors, we are proposing data points
derived from the aggregate pool-level disclosure that is commonly
provided in prospectuses for the following asset classes: Automobile
loans and leases; equipment loans and leases; student loans; floorplan
financing; repackagings of corporate debt and resecuritizations. We are
also proposing to add several data points related to obligor and co-
obligor income, assets, employment, and credit scoring. These data
points mirror the definitions proposed for RMBS in an effort to provide
more robust disclosure about obligor credit quality. We solicit comment
on all of our proposed asset specific data points and have specific
questions on certain asset classes.
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\272\ We note that the ASF contemplates expanding Project
RESTART to other major asset classes, such as student loans, credit
cards and automobile securitizations. See American Securitization
Forum RMBS Disclosure and Reporting Package Final Release (July 15,
2009) at 29, available at http://www.americansecuritization.com/.
\273\ See Section III.A.1.b.
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Request for Comment
Are there any organizations that have produced
standardized data definitions for other asset classes? If so, would
these definitions be appropriate for the proposed asset specific data
points?
Are the asset specific data points appropriate? What other
data points should be required by all issuers of that asset class?
Please provide a detailed explanation of the reasons why or why not.
(i) Automobiles
Asset-backed securities may be backed by a pool of automobile loans
or automobile leases. We are proposing to require 31 additional data
fields that relate to ABS backed by loans for the purchase of
automobiles and 33 data fields that relate to ABS backed by automobile
leases. With respect to each loan or lease in the pool, the issuer
would be required to disclose the information described below. A
description of each proposed data point is provided in the Appendix to
the release in Table 4 for automobile loans and Table 5 for automobile
leases.
1. Whether payments are required monthly or a balloon payment is
due;
2. Whether a form of subsidy was received by the borrower, such as
an incentive or rebate;
3. Geographic location of the dealer by zip code;
4. The vehicle manufacturer, model, model year, vehicle type and
whether it is new or used;
5. The vehicle value and source of vehicle value at the time of
origination;
6. For leases, base residual value and source of residual value;
7. The obligor and co-obligor's credit scores and credit score
type;
8. The obligor and co-obligor's wage and other income and a code
that describes the level of verification;
9. A code that describes the level of verification of assets of the
obligor and co-obligor;
10. The obligor and co-obligor's length of employment and a code
that describes the level of verification; and
11. The geographic location of the obligor by Metropolitan
Statistical Area, Micropolitan Statistical Area, or Metropolitan
Division, as applicable.
Request for Comment
Are all of the automobile data points appropriate? What
other data points should be required by all issuers of ABS backed by
automobile loans or leases? Please provide a detailed explanation of
the reasons why or why not.
For ABS backed by automobile leases, should we require a
field indicating whether the lessor or lessee is responsible for
selling the vehicle at the end of the lease? If so, please explain why.
We are proposing to require an indicator for the source of
the vehicle value. The code options for this indicator would be: (1)
Invoice price; (2) Sales Price; (3) Kelly Blue Book; and (98) Other.
Are these codes appropriate? Are there additional codes that should be
included?
We are proposing to require an indicator for the source of
a vehicle's residual value. The code options for this indicator would
be: (1) Black Book; (2) Automotive Lease Guide; and (98) Other. Are
these codes appropriate? Are there additional codes that should be
included?
(ii) Equipment
We are proposing to require five additional data fields that relate
to ABS backed by equipment loans and eight that relate to equipment
leases. With respect to each equipment loan or lease in the pool, the
issuer would be required to disclose the information described below. A
description of each proposed data point is provided in the Appendix to
the release in Table 6 for equipment loans and Table 7 for equipment
leases.
1. The frequency of payments, such as whether payments are due
monthly, quarterly, semiannually, or annually.
2. The type of equipment financed and whether it is new or used.
3. The obligor industry and geographic location as indicated by zip
code.
4. For leases, whether the lease type is a true lease or a finance
lease.
5. For leases, the residual value of the equipment and source of
residual value.
Request for Comment
Are all of the equipment data points appropriate? What
other data points should be required by all issuers of ABS backed by
equipment loans or leases? Please provide a detailed explanation of the
reasons why or why not.
Should we require data points on the obligor's ability to
pay the equipment loan or lease? If so, please provide a detailed
explanation of the types of data points and what code descriptions
should be provided.
Should we require a data point to disclose whether the
equipment that serves as collateral is the subject of certain
provisions of the U.S. Bankruptcy Code? For instance, section 1110 of
the Bankruptcy Code \274\ applies to financiers of aircraft, aircraft
engines, and other defined equipment. If so, please provide a detailed
explanation of what the data point should be and what code descriptions
should be provided.
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\274\ 11 U.S.C. 1110.
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We are proposing to require an indicator for equipment
type. The code options for this indicator would be: (1) Construction;
(2) Furniture and Fixtures; (3) General Office Equipment/Copiers; (4)
Industrial; (5) Maritime; (6) Printing Presses; (7) Technology; (8)
Telecommunications; (9) Transportation; and (98) Other. Are these codes
appropriate? Are there additional codes that should be included?
We are proposing to require an indicator for the obligor
industry. The code options for this indicator would be: (1) Agriculture
and Resources; (2) Communications and Utilities; (3) Construction; (4)
Distribution/Wholesale; (5) Electronics; (6) Financial Services; (7)
Forestry and Fishing; (8) Healthcare; (9) Manufacturing; (10) Mining;
(11) Printing and Publishing; (12) Public Administration; (13) Retail;
(14) Services; (15) Transportation; and (98) Other. Are these codes
appropriate? Is code ``(15) Transportation'' too broad? If so, what
codes would be more useful? Are there additional codes that should be
included?
We are proposing to require an indicator for the source of
the equipment residual value. The code options for this indicator would
be: (1) Internal; (2) External Consultant; and (3) Other. Are these
codes appropriate? Are
[[Page 23366]]
there additional codes that should be included? Are there any published
guides to equipment residual values?
(iii) Student Loans
We are proposing to require 28 additional data fields that relate
to ABS backed by student loans. With respect to each loan in the pool,
the issuer would be required to disclose the information described
below. A description of each proposed data point is provided in the
Appendix to the release in Table 8.
1. Whether payments on the loan are subsidized through a federal
program.
2. A code describing the repayment terms and the current number of
years in repayment.
3. The name of any guarantee agency.
4. The date the loan was disbursed to the obligor.
5. Whether the obligor payment status is in-school, grace period,
deferral, forbearance or repayment.
6. Geographic location of the obligor by Metropolitan Statistical
Area, Micropolitan Statistical Area, or Metropolitan Division, as
applicable.
7. A code describing the type of school or program. Code options
for this data point would be continuing education, graduate, K-12,
medical, or undergraduate.
8. If the loan was not issued under a federally funded program, the
following additional disclosure would be required:
a. The obligor and co-obligor's credit scores and credit score
type;
b. The obligor and co-obligor's wage and other income and a code
that describes the level of verification;
c. A code that describes the level of verification of assets of the
obligor and co-obligor; and
d. The obligor and co-obligor's length of employment and a code
that describes the level of verification.
Request for Comment
Are all of the student loan data points appropriate? What
other data points should be required by all issuers of ABS backed by
student loans? Please provide a detailed explanation of the reasons why
or why not.
We are proposing to require an indicator for repayment
type. The code options for this indicator would be: (1) Level; (2)
Graduated Repayment; (3) Income-sensitive or (4) Interest Only Period.
Are these codes appropriate? Are there additional codes that should be
included?
We are proposing to require an indicator for school type.
The code options for this indicator would be: (1) Continuing Education;
(2) Graduate; (3) K-12; (4) Medical; or (5) Undergraduate. Are these
codes appropriate? Are there additional codes that should be included?
(iv) Floorplan Financings
Asset-backed securities may be backed by a pool of floorplan
receivables. Floorplan receivables are used by wholesalers and
retailers to finance purchases of inventory, for instance, an
automobile dealership will finance purchases of the vehicles available
for sale in its inventory. Floorplan receivables are usually revolving
in nature and are commonly structured as revolving asset master trusts.
Payment terms may vary, but usually payment is due when the underlying
collateral is sold. Generally, when new inventory is purchased, a new
receivable is created; therefore, we are proposing that the asset-level
data be provided for each receivable, instead of each account.
We are proposing to require six additional data fields that relate
to ABS backed by floorplan financings. With respect to each receivable
in the pool, the issuer would be required to disclose the information
described below. A description of each proposed data point is provided
in the Appendix to the release in Table 9.
1. The account origination date.
2. The type of inventory product line.
3. Whether the property financed is new or used.
4. Information related to the obligor such as geographic location
by zip code, and credit score and type.
5. If the issuing entity is structured as a master trust that has
previously issued securities, the information required by Items 1 and 9
of Schedule L-D for assets that were part of the asset pool prior to
the current offering.\275\
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\275\ We believe prior performance information of pre-existing
assets would be useful for investor analysis of the asset pool. If
the information was previously reported, issuers would be able to
incorporate by reference the previously filed Form 10-D.
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Request for Comment
Since floorplan financings are usually structured as
master trusts, we are proposing to require asset-level data based on
each receivable in the pool. Should the data be provided by account?
Which is more appropriate and why?
Are all of the proposed floorplan financing data points
appropriate? What other data points should be required by all issuers
of ABS backed by floorplan financings? Please provide a detailed
explanation of the reasons why or why not.
We are proposing to require an indicator for product line
type. The code options for this indicator would be: (1) Accounts
Receivable; \276\ (2) Consumer Electronics and Appliances; (3)
Industrial; (4) Lawn and Garden; (5) Manufactured Housing; (6) Marine;
(7) Motorcycles; (8) Musical Instruments; (9) Power Sports; (10)
Recreational Vehicles; (11) Technology; (12) Transportation and (98)
Other. Are these codes appropriate? Are there additional codes that
should be included?
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\276\ With respect to accounts receivable, an originator
generally makes loans that are secured by accounts receivable owed
to the dealer, manufacturer, distributor or other commercial
customer against which an extension of credit was made and, in
limited cases, by other personal property, mortgages on real estate,
assignments of certificates of deposit or letters of credit. The
accounts receivable which are pledged to an originator as collateral
may or may not be secured by collateral. In the case of a loan
facility secured by accounts receivable, the lender usually has
discretion as to whether to make advances to the borrower under that
facility.
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Is our proposal to require the information in Item 1 and
Item 9 of Schedule L-D for pre-existing assets in master trusts
appropriate?
(v) Corporate Debt
Asset-backed securities may be backed by corporate debt securities.
Asset-backed securities backed by corporate debt securities are
typically issued in smaller denominations than the underlying security
and the ABS are registered under Section 12(b) of the Exchange Act for
trading on an exchange. Additionally, a pooling and servicing agreement
may also permit a servicer or trustee to invest cash collections in
corporate debt instruments which may be securities under the Securities
Act.\277\ We are proposing nine additional data fields for ABS backed
by corporate debt. We believe the data points in Item 1. General are
appropriate because items such as origination date, maturity date,
amortization term, etc. would also apply to corporate debt. A
description of each proposed data point is provided in the Appendix to
this release in Table 10.
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\277\ An asset pool of an issuing entity includes all other
instruments provided as credit enhancement or which support the
underlying assets of the pool. If those instruments are securities
under the Securities Act, they must be registered or exempt from
registration if included in the asset pool as provided in Securities
Act Rule 190, regardless of their concentration in the pool. See
Securities Act Rule 190(a) and (b). See also Section III.A.6.a. of
the 2004 ABS Adopting Release.
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1. Title of the underlying security or agreement, denomination, and
currency.
2. The payment frequency of the security or agreement.
3. Whether the security or agreement is callable.
[[Page 23367]]
4. Name of trustee.
5. Underlying SEC file number and CIK number.
6. Whether the security is a zero-coupon, that is whether it bears
interest by means of periodic payments or by means of purchase at a
discount and full price repayment at maturity.
Request for Comment
Should asset-level disclosure be required for ABS backed
by corporate debt? Are all of the corporate debt data points
appropriate? What other data points should be required by all issuers
of ABS backed by corporate debt? Please provide a detailed explanation
of the reasons why or why not.
Should we require asset-level disclosure of credit
enhancements related to the underlying security? If so, how would we
define the data point(s) and the related responses?
(vi) Resecuritizations
In a resecuritization ABS, the asset pool is comprised of one or
more asset-backed securities. We are proposing that issuers provide the
same Schedule L data as required for corporate debt-backed securities,
for each asset-backed security in the asset pool because the same
information about the underlying asset-backed security, such as the
title of the security, payment frequency, whether it is callable, the
name of trustee and the underlying SEC file number and CIK number would
be useful to an investor. In addition, we are proposing that issuers
provide Schedule L data for assets underlying those securities.\278\
For instance, in an offering where the asset pool is comprised of
several RMBS, then the data points in Item 1 and Item 10 of Schedule L
would be required for every RMBS security in the asset pool, as well as
the data points in Item 1 and Item 2 for each loan underlying each RMBS
security. Also, under current rules, if the assets that will be
securitized are themselves securities under the Securities Act, the
offering of those securities must be registered or exempt from
registration under the Securities Act, and all disclosures for a
registered offering is required.\279\
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\278\ The waterfall computer program would also be required for
each underlying security. See our proposed changes to Item 1113 (h)
of Regulation AB discussed in Section III.B.1 below.
\279\ Due to the exposure created in the underlying instrument
through the asset-backed offering, under current rules, information
related to any underlying instrument is required to be disclosed in
accordance with offering disclosure requirements of current Forms S-
1and S-3. For example, updated and current information includes
updated pool data, static pool, risk factors, performance
information, how the underlying securities were acquired, and
whether and when the underlying securities experienced any trigger
events or rating downgrades. As we stated in the 2004 ABS Adopting
Release, not all items of disclosure required at the time of
offering the resecuritization ABS are available through
incorporation by reference of Exchange Act reports. See Section
III.A.7. and footnote 193 of the 2004 ABS Adopting Release.
Furthermore, under our proposal requiring one prospectus for each
ABS offering, all of the information must be contained in the
prospectus.
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Request for Comment
Is our proposal for resecuritizations appropriate? What
other data points should be required by all issuers of that asset
class? Please provide a detailed explanation of the reasons why or why
not.
Should we require disclosure of the ratings of the
resecuritized securities in Schedule L?
Should we require Schedule L data for the asset pool only,
i.e. only the data points in Item 1 and Item 9 of Schedule L?
Would issuers of the resecuritization ABS be able to
obtain the asset-level data for the pool of assets underlying the
resecuritized ABS? Should we phase in the requirement? We note that
Project RESTART recommends that issuers provide the loan-level
reporting package for outstanding RMBS,\280\ although we note that the
ASF recommendation may only serve to provide information similar to our
proposed requirements for periodic reports, and may not include all the
information required at the time of an offering.
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\280\ See American Securitization Forum RMBS Disclosure and
Reporting Package Final Release (July 15, 2009) at 21, available at
http://www.americansecuritization.com/.
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2. Asset-Level Ongoing Reporting Requirements
In addition to asset-level information at the time of the offering,
we are proposing to require asset-level performance information in a
standardized format filed on EDGAR in periodic reports required under
Sections 13 and 15(d) of the Exchange Act, including those required
pursuant to the new undertaking to continue reporting described above.
The proposed asset-level performance data in periodic reports would
differ from information that would be required at the time of the
offering. We believe that in periodic reports, some of the most
important information focuses on whether an obligor is making payments
as scheduled, the efforts by the servicer to collect amounts past due,
and the losses that may pass on to the investors.
Currently, issuers report performance information in periodic
reports on an aggregate basis; however, we believe that it would be
most useful for investors to receive information regarding whether an
individual obligor is making payments as scheduled, the efforts by the
servicer to collect amounts past due, and the loss that may pass on to
the investors on an asset-level basis. That way, an investor may use
the asset-level information to conduct his or her own valuation of the
credit quality of a particular asset and its effect on the pool
throughout the life of the investment. We also believe that regulators
could find this information useful. Like asset-level data at the time
of the offering, we are proposing to require asset-level performance
data to be filed on EDGAR in XML in order to facilitate data analysis.
The proposed disclosure requirements are contained in proposed Item
1121(d) and Schedule L-D.
As we discussed earlier, in to order facilitate comparison of
information across securities, we believe that asset-level data should
be standardized, and some organizations have already developed data
points for ongoing reporting of information for registered and
unregistered commercial mortgage-backed securities and residential
mortgage-backed securities.\281\ In our proposed periodic reporting
requirements, we have utilized such standardization where feasible.
Like our proposal for asset-level data at the time of the offering, our
proposed periodic reporting requirements specify and define each item
that must be disclosed for each asset in the pool. We are also
proposing an instruction to Schedule L-D that will contain definitions
for some of the terms that we use throughout the schedule. Attached at
the end of this release we provide an appendix which contains a table
of the proposed general item requirements as well as asset class
specific item requirements. Each table lists the proposed item number,
the title of the proposed data field, the proposed definition, the
proposed response type and codes, if applicable, and proposed category
of information. The proposed category of information designates the
type of information we are proposing so that users will know when the
data point is applicable.
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\281\ Materials related to the CRE Finance Council Investor
Reporting Package are available at: http://www.crefc.org/Industry_Standards/CMSA-Investor_Reporting_Package/CRE_Finance_Council_IRP/. See American Securitization Forum RMBS Disclosure and
Reporting Package Final Release (July 15, 2009), available at http://www.americansecuritization.com/.
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Proposed Item 1121(d) and Schedule L-D disclosure would be required
at the time of each Form 10-D. Periodic
[[Page 23368]]
reports on Form 10-D are 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.\282\ If assets are
added to the pool during the reporting period, either through
prefunding periods, revolving periods or substitution, disclosure would
be required under our proposed revisions to Item 6.05 on Form 8-K
discussed in Section V.C.1. Similarly, the Schedule L data contained in
proposed Item 1111A would need to be provided.
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\282\ See General Instruction A.2 to Form 10-D.
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Request for Comment
Are the definitions of terms in the proposed instruction
to Schedule L appropriate? Are there any other terms that should be
included in the instruction?
Are the proposed coded responses contained in the attached
tables appropriate? Does our approach to responses provide investors
with meaningful disclosure while also addressing any privacy concerns?
Please be specific in your response by commenting on specific proposed
line items and codes.
Is the proposed requirement to provide Schedule L-D data
with Form 10-D appropriate? Should Schedule L-D data be required at any
other time, such as daily or monthly for all asset classes? Please tell
us why.
(a) Proposed Disclosure Requirements
We are proposing that the same asset classes, subject to the
requirement to provide asset-level data at the time of the offering,
would also be required to provide the standardized data points
enumerated in Schedule L-D. Like the proposed asset-level information
at the time of the offering, we are proposing that most issuers must
provide the 46 data points listed under Item 1. General of Schedule L-
D. We believe these data points are generic and consistent across asset
classes, and should also apply to any new asset classes that may be
included in a registered offering. In addition, we also propose asset
class specific data points that will be discussed further below.
With respect to each asset in the pool, we are proposing to require
the following disclosure with each Form 10-D. A description of the 46
data points is provided in Table 11 of the Appendix.
1. The unique asset number and a description of the type of number.
The asset number and type of asset number should be the same values
assigned at the time of the offering that would appear in Schedule L.
2. Whether the asset is designated to a particular collateral
group.
3. The beginning and ending dates of the reporting period.
4. The actual total amount paid during the reporting period, the
amount of interest collected, the amount of principal collected and
other amounts collected.
5. Any other principal and interest adjustments.
6. The current asset balance and scheduled asset balance.
7. Amounts that were scheduled to be collected during the reporting
period, which would be the scheduled payment amount, scheduled interest
payment amount, and scheduled principal amount.
8. A code that describes the current delinquency status and current
payment status.
9. A code that describes the payment history over the most recent
12 months.
10. The next due date, next interest rate and remaining term to
maturity.
11. Information related to servicing which would be:
a. The current servicer and the dollar amount of the fee earned by
the current servicer for administering the loan for the reporting
period;
b. If the loan's servicing has been transferred, the effective date
of the servicing transfer;
c. Any amounts advanced by the servicer during the reporting
period, and the cumulative outstanding amount;
d. A code that describes the manner in which principal and/or
interest are advanced by the servicer;
e. The date a servicer stopped advancing payment; and
f. Other fees earned by the servicer and other fees assessed by the
servicer related to the asset.
12. Whether the asset terms have been modified.
13. Whether a notice to repurchase the asset has been received,
whether the asset has been repurchased, the repurchase date, name of
the repurchaser, and the reason for repurchase.
14. Whether the asset has been liquidated.
15. Whether the asset has been charged-off and the charged-off
principal and interest amounts.
16. Whether the asset has been paid-off, and if so, whether any
prepayment penalties were paid or waived. If waived, a code indicating
the reason why.
Request for Comment
Are the general data points appropriate for Form 10-D?
What other data points would apply to all asset classes? Please provide
a detailed explanation of the reasons why or why not.
(b) Proposed Exemptions
We are proposing to exclude ABS backed by credit cards, charge
cards and stranded costs from the requirement to provide ongoing asset-
level data in periodic reports. Like the proposed asset-level data at
the time of the offering, because of the volume of accounts in a credit
card or charge card securitization we believe that granular asset-level
information would not be as useful to investors and would be very
costly for issuers, depending on the level of automation of the
issuer's information processing and delivery system. For these asset
classes, we are proposing that issuers provide grouped account data
that we discuss in Section III.A.3. below. As explained earlier,
because transition property is not a receivable, nor a pool of
receivables, we do not propose asset-level data be provided for
stranded cost ABS for periodic reports.
Request for Comment
Is there any asset-level data that should be provided in
periodic reports by credit card, charge card or stranded cost issuers?
If so, please explain why.
Is there any pool-level data that should be provided in
periodic reports by credit card, charge card, or stranded cost issuers?
Should any pool-level data be standardized for these asset classes? If
so, please explain why. For instance, we request comment above about
whether we should require issuers of ABS backed by credit cards and
charge cards to provide specific types of pool-level disclosure in a
standardized manner at the time of an offering.\283\ Should any of that
pool-level information be required with each periodic report on Form
10-D? For instance, should we use the same distributional groups for
account balance, account age, APR, credit available for purchase, types
of products, and accounts under a debt management program?
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\283\ See Section III. A.1.b.iv. above.
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Are there any other asset classes that should be exempt
from the asset-level disclosure requirement in periodic reports and
why?
(c) Residential Mortgage-Backed Securities
We are proposing 151 data points for periodic reports for ABS
backed by residential mortgages. Similar to the RMBS data points we are
proposing for
[[Page 23369]]
Schedule L, much of the proposed data and definitions are based on
fields developed by organizations doing work in the area of RMBS, as
well as government agencies.\284\ Many of the data points we are
proposing relate to loan modifications and loss mitigation activities
by the servicer. We describe the additional proposed data points below.
A description of each proposed data point and related response is
provided in Table 12 of the Appendix to this release.
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\284\ See Section III.A.1.c. above.
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1. Information related to delinquent loans, such as a code
describing the reason for non-payment and codes describing the status
of the non-payment;
2. If the loan is an adjustable rate mortgage, the rate at the next
reset date, the next interest reset date, the payment at the next reset
date, the next payment reset date, whether the loan is an option ARM,
and whether the borrower exercised an option to convert an ARM loan to
a fixed loan;
3. If the obligor has filed for bankruptcy:
a. The date of filing and case number;
b. The date on which the next payment is due under the terms of the
bankruptcy plan;
c. If the bankruptcy has been released, the code that describes the
reason for the release and the date of the release;
d. The actual due date of the loan had the bankruptcy not been
filed; and
e. Whether the debt was reaffirmed and whether the trustee handles
post-petition payments.
4. With respect to delinquent loans, whether the servicer is
pursuing loss mitigation and the type of loss mitigation with the loan,
borrower or property;
5. Information related to loan modifications:
a. The date of first payment due post modification;
b. The loan balance as of the modification effective payment date;
c. The amount added to the principal balance of the loan;
d. Pre- and post-modification interest rates;
e. Post-modification margin, which is the number of percentage
points added to the index to establish the new rate;
f. Pre- and post-modification principal and interest scheduled
payment amount;
g. Post-modification interest rate ceilings and floors;
h. Pre- and post-modification initial and subsequent limitations on
interest rate increases and decreases;
i. Pre- and post-modification limitations on payment amount
increases and decreases;
j. Pre- and post-modification maturity dates;
k. The number of months of the interest reset period, pre- and
post- modification;
l. Updated debt-to-income ratios used to qualify the modification;
m. Pre- and post-modification interest only period;
n. Cumulative and current forgiven interest and principal amounts;
o. The due date on which the next payment adjustment is scheduled
to occur for an ARM loan;
p. Whether the loan remains an ARM loan post-modification;
q. Whether the terms of the modification agreement call for the
interest rate to step up over time, the maximum interest rate to which
the loan may step up and the date the maximum interest rate will be
reached;
r. Cumulative and current principal amount deferred by the
modification that are not subject to interest accrual as well as any
amounts collected from the obligor during the current period;
s. Cumulative and current interest and fees deferred by the
modification that are not subject to interest accrual as well as any
amounts collected from the obligor during the current period;
t. The total amount of expenses that have been waived or forgiven
and reimbursable to the servicer;
u. The total amount of escrow and corporate advances made by the
servicer at the time of the modification. Corporate advances are
amounts paid by the servicer which may include foreclosure expenses,
attorney fees, bankruptcy fees, and insurance, among others;
v. The total amount of servicing fees for delinquent payments that
has been advanced by the servicer at the time of the modification;
w. Whether the loan has been modified under the terms of the Home-
Affordable Modification Plan (HAMP).\285\ If so, information regarding
participation end dates, amounts paid and payable under the program,
whether the mortgage holder has or will receive the incentive amount
under the program, and actual and scheduled balance of the loan plus
any deferred amounts.
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\285\ HAMP is a federal loan modification program. Further
details are available at http://makinghomeaffordable.gov/ and
https://www.hmpadmin.com/portal/index.html.
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6. If a forbearance plan is in effect, the start date and end date
of the plan. A forbearance plan is a period during which no payment or
a payment amount less than the contractual obligation is required by
the obligor;
7. If a repayment plan is in effect, the start and end date of the
plan, and the date the obligor ceased complying with the terms of the
plan. A repayment plan refers to a period during which an obligor has
agreed to make monthly mortgage payments greater than the contractual
installment in an effort to bring a delinquent loan current;
8. If the type of loss mitigation is Deed-In-Lieu, the date on
which a title was transferred to the servicer pursuant to a deed-in-
lieu-of-foreclosure arrangement. Deed-In-Lieu refers to the transfer of
title from an obligor to the lender to satisfy the mortgage debt and
avoid foreclosure;
9. If the type of loss mitigation is a short sale, the amount
accepted for a short sale. Short sale refers to the process in which a
servicer works with a delinquent obligor to sell the property prior to
the foreclosure sale;
10. If the loan has exited loss mitigation efforts, whether the
plan was completed or satisfied, cancelled or failed, or denied and the
date of exit;
11. If the loan is in the foreclosure process:
a. The date the loan was referred to a foreclosure attorney and the
date on which foreclosure action was taken;
b. The expected date of the foreclosure sale, the date set for the
foreclosure sale by the court or the trustee, and the actual date it
occurs;
c. A code that describes the reason for delay in the foreclosure
process;
d. If state law provides for a period for confirmation,
ratification, redemption or upset period, the date of the end of the
period;
e. The amount bid by the servicer at the foreclosure sale; \286\
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\286\ The servicer will usually place an opening bid, on behalf
of the issuing entity, at the foreclosure auction that is usually
equal to the outstanding loan balance, interest accrued, and any
additional fees and attorney fees associated with the trustee sale.
If there are no bids higher than the opening bid, the property will
be owned by the issuing entity and be considered real estate owned
(REO). This typically would occur because the market value of the
property is less than the total amount owed on the loan.
---------------------------------------------------------------------------
f. If the loan exited foreclosure, the date and the code that
describes the reason the proceedings ended;
g. If the property was sold to a third-party, the sale amount of
the property;
h. In a judicial foreclosure state, if a judgment on the
foreclosure has occurred, the date on which a court granted the
judgment in favor of the creditor;
i. The date on which the publication of the trustee's sale
information is published in the appropriate venue; and
[[Page 23370]]
j. The date on which the servicer sent a notice of intent to the
obligor informing the obligor of the acceleration of the loan and
pending initiation of foreclosure action.
12. If the property is now owned by the issuing entity due to an
unsuccessful sale at the foreclosure auction, the asset is considered
real estate owned (REO).\287\ Information should be provided on the
following:
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\287\ Servicing agreements will usually require the servicer to
promptly sell the property.
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a. The most recent listing date and price;
b. If an offer has been accepted, the amount and the date of
acceptance;
c. The original list date and list price for the property;
d. If an REO sale has closed, the closing date, the gross proceeds,
and the net proceeds;
e. The cumulative monthly and total loss amount passed on to the
issuing entity;
f. Any amount recovered during the current period;
g. The start and end date of an eviction process, if applicable;
and
h. If the loan exited REO during the current period, provide the
date and a code describing the reason.
13. Information related to loss claims:
a. The unpaid principal balance at the time of liquidation;
b. Amounts advanced by the servicer and to be reimbursed such as
interest, servicing fees, attorney fees, attorney costs, property
taxes, property maintenance, insurance premiums, utility expenses,
appraisal expenses, property inspections, any pre-securitization
advances and other miscellaneous expenses;
c. If the loan is in REO, the amount of REO management fees;
d. The amount of the payment to the obligor or tenants in exchange
for vacating the property; and
e. Any incentive payment to servicer for carrying out a deed-in-
lieu or short sale.
14. Information related to loss recoveries:
a. The escrow balance and the suspense balance;
b. Proceeds collected from hazard claims, pool insurance, mortgage
insurance, property tax refunds, and insurance premium refunds; and
c. The amount of any realized loss resulting from bankruptcy or
special hazard.
15. If a mortgage insurance claim has been submitted to the primary
mortgage insurance company for reimbursement, the following information
would be required:
a. The date the claim was filed and the date it was paid;
b. The amount claimed and the amount paid;
c. The date the claim was denied or rescinded; and
d. If the property was conveyed to the insurance company, the date
of conveyance.
Request for Comment
Are all of the RMBS data points appropriate for periodic
reports? What other data points should be required by all RMBS issuers?
Are any data points not necessary or overly burdensome to obtain?
Please provide a detailed explanation of the reasons why or why not.
Some data points request the results of calculations, such as debt-to-
income ratios. Can those data points be calculated from information
already provided by the other asset-level data points? If so, can users
of the information independently calculate these data points? Should we
not require these data points to be included in the asset-level data
file for periodic reports?
Should we add a data point to require the amount of any
loss as a result of intentional misstatement, misrepresentation, or
omission by an applicant or other interested parties, relied on by a
lender or underwriter to provide funding for, to purchase, or to insure
a mortgage loan? If so, how would the issuer be able to verify the
information? Is this information currently disclosed?
Should we require updated information about the obligor,
such as updated credit scoring information? If so, why? Would issuers
be able to obtain updated credit scores?
We are proposing several data points to capture activity
specifically related to the HAMP program. Are more generic data points
appropriate that would capture activity if other types of government
programs are or become available? If so, please provide us with the
data points that would be more appropriate and the related definition.
We are proposing, in the case of a foreclosure, that
registrants provide the expected date of the foreclosure sale, the date
on which the foreclosure sale has been set by the court or the trustee,
and the date on which the foreclosure sale occurs. Are all three data
points necessary?
We are proposing, in the case of a delayed foreclosure,
that registrants provide a code describing the reason for the delay.
Should we specify the number of days that would constitute a delay for
this item requirement? If so, what would be the appropriate number of
days and why?
(d) Commercial Mortgage-Backed Securities
We are proposing to require 47 additional data points for periodic
reports that relate to commercial mortgages. Similar to the proposed
Schedule L data points for commercial mortgage-backed securities, the
data points we are proposing to require below are primarily based on
the definitions provided by the CMSA. With respect to each commercial
mortgage loan in the pool, the issuer would be required to disclose the
information described below. A description of each proposed data point
is provided in Table 13 to the Appendix to this release.
1. The remaining term, number of properties that collateralize the
loan and the current hyper-amortizing date. The hyper-amortizing date
is the current anticipated repayment date, after which principal and
interest may amortize at an accelerated rate, and/or interest to the
mortgagor increases substantially.
2. If the loan is an adjustable rate mortgage, the rate at the next
reset date, the next date the rate is scheduled to change, the amount
of the payment at next reset, and next payment change date.
3. If the loan permits negative amortization, the cumulative
deferred interest, and deferred interest collected.
4. A code describing any workout strategy.
5. Information related to modifications, such as the date of the
last modification, a code that describes the type of loan modification,
the new modified note rate, payment amount, maturity date and
amortization period.
6. Information related to each property such as property name,
geographic location, as represented by zip code, property type, net
rentable square footage, number of units, year built, valuation
amounts, physical occupancy, property status and a code that describes
the defeasance status. A defeasance option is when an obligor may
substitute other income-producing property for the real property
without pre-paying the existing loan.
7. Financial information related to the properties including:
a. Financial reporting beginning and end dates;
b. Revenues, operating expenses, net operating income, and net cash
flow;
c. A code describing how net operating income and net cash flow
were calculated; and
d. The ratio of underwritten net operating income to debt service,
the ratio of underwritten net cash flow to
[[Page 23371]]
debt service and a code describing how the ratio was calculated.\288\
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\288\ For this purpose, ``underwritten'' means the adjusted
amount based on a number of assumptions made by the mortgage
originator or seller. We believe issuers will have had to include
narrative disclosure about the assumptions used in the prospectus
for the transaction.
---------------------------------------------------------------------------
Request for Comment
Are all of the CMBS data points for periodic reports
appropriate? What other data points should be required by all CMBS
issuers? Please provide a detailed explanation of the reasons why or
why not.
Should we require more data points relating to foreclosure
in CMBS, like we propose for RMBS? If so, please be specific as to
which data points should be required and why.
We are proposing data points for information related to
the properties collateralizing each asset in Item 3(d) of Schedule L-D
because we note that issuers that currently provide the disclosure in
accordance with the CMSA Investor Reporting Package provide property
information on a periodic basis. Some of this information is the same
disclosure that would have been provided at the time of the offering by
proposed Schedule L. Is it appropriate to include all of the data
points in proposed Item 3(d) with each Form 10-D filing? In particular,
is it useful for investors to receive the Item 3(d)(1) Property name,
Item 3(d)(2) Property geographic location, Item 3(d)(3) Property type
and Item 3(d)(6) Year built with each Form 10-D filing? Please tell us
why or why not.
(e) Other Asset Classes
As discussed above, because we are unaware of any other
organizations attempting to standardize data points for asset classes
other than mortgages, we are proposing data points for periodic reports
derived from the aggregate pool-level disclosure that is already
provided in periodic reports for the following asset classes:
Automobile loans and leases; equipment loans and leases; student loans;
and resecuritizations. We do not propose any asset specific data points
related to repackagings of corporate debt for periodic reports. We
believe the data points required under proposed Item 1. General of
Schedule L-D will provide the appropriate asset-level performance
disclosure for those assets to investors.
Request for Comment
Should we propose asset specific data points related to
repackaging of corporate debt for periodic reports? If so, what would
those be and what would be the appropriate form of disclosure?
(i) Automobiles
We are proposing to require five additional data fields for
periodic reports that relate to ABS backed by automobiles loans and
nine for ABS backed by automobile leases. With respect to each loan or
lease in the pool, the issuer would be required to disclose the
information described below. A description of each proposed data point
is provided in the Appendix to the release in Table 14 for automobile
loans and Table 15 for automobile leases.
1. Whether a form of subsidy is received on the loan, such as an
incentive or rebate.
2. Any recovery of amounts previously charged-off.
3. Whether the vehicle was repossessed and related proceeds and
fees.
4. For automobile leases, the updated residual value, source of
residual value, whether the lease has been terminated and the reason
why, any excess wear and tear or mileage charges, sales proceeds of the
vehicle, or extension of lease term.
Request for Comment
Are all of the automobile data points appropriate for
periodic reports? What other data points should be required by all
issuers of ABS backed by automobile loans or leases? Please provide a
detailed explanation of the reasons why or why not.
We are proposing to require an indicator for the reason
for automobile lease termination. The code options for this indicator
would be: (1) Scheduled termination; (2) Early termination due to
bankruptcy; (3) Involuntary repossession; (4) Voluntary repossession;
(5) Insurance payoff; (6) Customer payoff; (7) Dealer purchase; and (8)
Other. Are these codes appropriate? Are there additional codes that
should be included?
(ii) Equipment
We are proposing to require two additional data fields for periodic
reports that relate to ABS backed by equipment loans and five that
relate to equipment leases. With respect to each loan or lease in the
pool, the issuer would be required to disclose the information
described below. A description of each proposed data point is provided
in the Appendix to the release in Table 16 for equipment loans and
Table 17 for equipment leases.
1. Liquidation proceeds and any recovery of amounts previously
charged-off; and
2. For equipment leases, the updated residual value, source of
residual value, and whether the lease has been terminated and the
reason why.
Request for Comment
Are all of the equipment data points appropriate for
periodic reports? What other data points should be required by all
issuers of ABS backed by equipment loans or leases? Please provide a
detailed explanation of the reasons why or why not.
We are proposing to require an indicator for the reason
for equipment lease termination. The code options for this indicator
would be: (1) Scheduled termination; (2) Early termination due to
bankruptcy; (3) Involuntary repossession; (4) Voluntary repossession;
(5) Insurance payoff; (6) Customer payoff; (7) Dealer purchase and (98)
Other. Are these codes appropriate? Are there additional codes that
should be included?
(iii) Student Loans
We are proposing to require six additional data fields for periodic
reports that relate to ABS backed by student loans. With respect to
each loan in the pool, the issuer would be required to disclose the
information described below. A description of each proposed data point
is provided in the Appendix to the release in Table 18.
1. A code that describes the current obligor payment status.
2. The amount of capitalized interest during the reporting period.
3. If there is activity related to any guarantor during the
reporting period, principal and interest received from the guarantor,
whether a claim is in process and the outcome of the claim.
Request for Comment
Are all of the student loan data points appropriate for
periodic reports? What other data points should be required by all
issuers of ABS backed by student loans? Please provide a detailed
explanation of the reasons why or why not.
(iv) Floorplan Financings
We are proposing to require five additional data fields for
periodic reports that relate to ABS backed by floorplan financings.
With respect to each loan in the pool, the issuer would be required to
disclose the information described below. A description of each
proposed data point is provided in the Appendix to the release in Table
19.
1. The liquidation proceeds and any recovery of amounts previously
charged-off.
2. Updated credit score and type.
[[Page 23372]]
Request for Comment
Are all of the proposed floorplan financing data points
appropriate for periodic reports? What other data points should be
required by all issuers of ABS backed by floorplan financings? Please
provide a detailed explanation of the reasons why or why not.
(v) Resecuritizations
As discussed earlier, at the time of the offering, we are proposing
to require underlying asset-level data disclosure for resecuritization
ABS.\289\ Therefore, for periodic reporting, in addition to the asset-
level data that would be required of the underlying securities as
outlined in Item 1. General of Schedule L-D, we also propose that
issuers of resecuritization ABS provide Schedule L-D data for the asset
pool of the underlying securities. For example, if the ABS is comprised
of several RMBS, then the data points in Item 1 of Schedule L-D would
be required with respect to each RMBS security in the asset pool. In
addition, the data points in Items 1 and 2 of Schedule L-D would be
required for each loan underlying each RMBS security.\290\ If the
issuer of the underlying security suspends its reporting obligation and
stops reporting, the issuer of the resecuritization ABS would still
have to provide the required Schedule L-D data for each loan underlying
each RMBS security because we believe that investors in the
resecuritization ABS would need the underlying asset-level information
to evaluate the performance of the resecuritization ABS.
---------------------------------------------------------------------------
\289\ Where the underlying securities were required to be
registered pursuant to Rule 190 [17 CFR 230.190], the issuer of
those underlying securities is subject to the requirements of
Section 13(a) or 15(d) of the Exchange Act, as applicable.
\290\ However, asset-level data would not be required if the
asset class is exempt from the requirements of Item 1121(d) of
Regulation AB. For instance, if the asset pool is comprised of
stranded cost ABS, then Schedule L-D for the underlying pool would
not be required because they are exempt from the requirements of
Item 1121(d).
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Request for Comment
Is our proposal for asset-level reporting for
resecuritizations appropriate?
Would issuers of the resecuritization ABS be able to
obtain the asset-level data for the pool of assets underlying the
resecuritized ABS? Should we phase in the requirement? We note that
Project RESTART recommends that issuers provide the loan-level
reporting package for outstanding RMBS.\291\
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\291\ See American Securitization Forum RMBS Disclosure and
Reporting Package Final Release (July 15, 2009) at 21, available at
http://www.americansecuritization.com/.
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3. Grouped Account Data for Credit Card Pools
As we discussed above, we are proposing to exclude ABS backed by
credit cards \292\ from the requirement to provide asset-level data
because we believe that level of information would result in an
overwhelming volume of data that may not be useful to investors and
providing the data may be cost-prohibitive for issuers. However, as we
also noted above, we believe that investors and market participants
should have access to the information necessary to assess the credit
quality of the assets underlying a securitization transaction at
inception and over the life of the transaction. Instead of providing
asset-level data, we are proposing that issuers of ABS backed by credit
cards provide disclosure more granular than pool-level disclosure by
creating ``grouped account data.'' As we explain in more detail below,
grouped account data would be created by compressing the underlying
asset-level data into combinations of standardized distributional
groups using asset-level characteristics and providing specified data
about these groups. Like our proposals for other asset classes
discussed above, we are proposing to require the grouped account data
be provided in XML and filed as an Asset Data File in order to
facilitate data analysis.\293\ Our proposal for grouped account data
would be in addition to the disclosure currently required about the
composition and characteristics of the pool of assets taken as a whole.
---------------------------------------------------------------------------
\292\ For purposes of this discussion, we refer to both credit
card and charge cards as ``credit cards.''
\293\ See Section III.A.4.
---------------------------------------------------------------------------
Request for Comment
Is our proposal to require grouped account data disclosure
with standardized groupings appropriate?
Do investors in ABS backed by credit cards need enhanced
information about assets, or are our current disclosure requirements
sufficient?
Is our proposal to require grouped account data in XML
appropriate? Why or why not?
(a) When Credit Card Pool Information Would Be Required
Today we are proposing new Item 1111(i) and Schedule CC of
Regulation AB that describe the standardized distributional groups and
the information that would be provided for each group. Consistent with
the proposed asset-level disclosure requirements for other asset
classes, Schedule CC data would be an integral part of the prospectus,
and in order to facilitate investor analysis prior to the time of sale,
we are proposing to require issuers to provide Schedule CC data as of a
recent practicable date that we define as the ``measurement date'' at
the time of a Rule 424(h) prospectus and at the time of the final
prospectus under Rule 424(b). Likewise, if issuers are required to
report changes to the pool under Item 6.05 of Form 8-K, updated
Schedule CC data would be required.\294\ Updated Schedule CC would also
be required if an issuer is required to report changes to the waterfall
under proposed Item 6.07 to Form 8-K.\295\ As we discuss in Section
III.A.4, we are proposing a new Item 6.06 to Form 8-K for issuers to
file the XML data file.
---------------------------------------------------------------------------
\294\ Under our proposed revisions to Item 6.05 of Form 8-K, a
narrative description of the changes that were made to the asset
pool, including the number of assets substituted or added to the
asset pool, would be included in the body of the report.
\295\ See Section III.B. below.
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In addition, because credit card ABS are typically structured as
master trusts, accounts may be added or withdrawn.\296\ Unlike
amortizing asset pools, the composition of the underlying asset pool
varies over time and we believe investors and market participants would
benefit from receiving information about the underlying asset pool as
the pool evolves. Therefore, we are proposing that an updated Schedule
CC be filed with each periodic report on Form 10-D.
---------------------------------------------------------------------------
\296\ See fn. 177 above and accompanying text.
---------------------------------------------------------------------------
Request for Comment
Is the proposed requirement to provide Schedule CC data
with the proposed Rule 424(h) prospectus, the final prospectus under
424(b) and for changes under Item 6.05 of Form 8-K appropriate?
Is the proposed measurement date appropriate? Should we
provide further guidance about what would be a recent practicable date
for purposes of determining the measurement date? For example, should
we specify that it be prepared as of a date that is five business days
prior to filing?
Would the proposed Schedule CC contained in the most
recent Form 10-D provide investors with sufficiently current
information at the time of making an investment decision? In this
regard, we note the result could be that the most recent Schedule CC
data could be as old as 45 days.
Is our proposal to require that updated Schedule CC data
be provided with Form 10-D appropriate? Should Schedule CC data be
required at any other time, such as daily, weekly or
[[Page 23373]]
monthly? If so, please tell us when and why.
Is our proposal to require that updated Schedule CC data
be provided when changes to the waterfall are reported under proposed
Item 6.07 appropriate? Please tell us why or why not.
(b) Proposed Disclosure Requirements
We are proposing that issuers group the underlying pool into
grouped account data lines. Proposed Schedule CC sets forth the
standardized groups and the information requirements that would be
required for credit card pools. Grouped account data lines are created
by grouping the underlying accounts by several characteristics. We
further designate the groupings for each characteristic. This way,
investors may receive more granular information about the underlying
asset pool in order to perform better analysis of future payments on
the asset-backed securities.\297\
---------------------------------------------------------------------------
\297\ We base our groupings on a comment letter received from an
investor in response to the FDIC Securitization Proposal. See fn.
257 above.
---------------------------------------------------------------------------
We are proposing that data be grouped by a combination of the
following characteristics:
1. Credit score. If the credit score used is FICO, the proposed
groupings would be: (1) Less than 500; (2) 500-549; (3) 550-599; (4)
600-649; (5) 650-699; (6) 700-749; (7) 750-799; (8) 800 and over; and
(9) unknown. We are proposing that issuers provide the most recent
credit score available and accompanying disclosure would be required to
explain the age of the credit score or the policy for updating the
credit score from the time of account origination.\298\ If the credit
score used is not FICO, an issuer would designate similar groupings and
provide explanatory disclosure. We are proposing a group of
``unknown;'' however, as we discuss above, registrants should be
mindful of their responsibilities to provide all of the disclosures
required in the prospectus and other reports.\299\
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\298\ See further discussion regarding explanatory disclosure
for asset data files in Section III.A.4. and proposed Item 6.06(b)
to Form 8-K.
\299\ See Securities Act Rule 409 [17 CFR 230.409] and Exchange
Act Rule 12b-21 [17 CFR 240.12b-21].
---------------------------------------------------------------------------
2. Number of Days Past Due. The proposed groupings would be
accounts that are: (1) Current; (2) less than 30 days; (3) 30-59 days;
(4) 60-89 days; (5) 90-119 days; (6) 120-149 days; (7) 150-179 days;
and (8) 180 days and over.\300\
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\300\ See fn. 260 above. As we discuss above, our rules do not
currently provide a definition of delinquent because of various
delinquency policies across issuers. Instead of proposing to define
delinquency, we believe disclosure of the number of days past due
allows for analysis and comparability of the data.
---------------------------------------------------------------------------
3. Account age. The proposed groupings would be accounts that are:
(1) Less than 12 months; (2) 12 to 24 months; (3) 24 to 36 months; (4)
36 to 48 months; (5) 48 to 60 months; and (6) over 60 months.
4. State. The proposed groupings would be the top 10 states for
aggregate account balance. The remaining accounts would be grouped into
the category ``other.''
5. Adjustable rate index. The proposed groupings for the adjustable
rate indexes would be: (1) Fixed; (2) prime; and (3) other.
In order to create a grouped account data line, each group based on
each of these characteristics should be combined with all groups for
all other characteristics. All possible combinations would result in
14,256 grouped account data lines. The table below illustrates how the
distributional groups and the information requirements relate to each
other. For example, grouped account data line 2 in the table below
presents the information required by columns (b)(1) through (b)(5) by
combining all the credit card accounts in the underlying pool that fall
within the 500-549 credit score group (column (a)(1)), payments are
less than 30 days past due (column (a)(2)), account age of 12 to 24
months (column (a)(3)), with obligors located in the state of Alabama
(column (a)(4)), where the adjustable rate index is based on a floating
percentage (column (a)(5)). For each grouped account data line, we are
proposing that issuers provide the following information: The aggregate
credit limit; aggregate account balance; number of accounts; weighted
average annual percentage rate; and weighted average net annual
percentage rate.\301\
---------------------------------------------------------------------------
\301\ The weighted average net annual percentage rate would be
the weighted average of the annual percentage rate less any
servicing fees related to the account.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Aggregate Aggregate Number of Weighted Weighted
Grouped account data line Credit score Days payment is Account age Top 10 State Adjustable rate credit account accounts average APR average
number past due index limit ($) balance ($) () (%) net APR (%)
(a)(1)............ (a)(2)........... (a)(3)........... (a)(4)........... (a)(5)........... (b)(1) (b)(2) (b)(3) (b)(4) (b)(5)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1.............................. less than 500..... Current.......... Less than 12 AK............... Fixed............
months.
2.............................. 500-549........... < 30 days........ 12-24 months..... AL............... Prime............
3.............................. 550-599........... 30-59 days....... 24-36 months..... AR............... Other............
4.............................. 600-649........... 60-89 days....... 36-48 months..... AZ............... Fixed............
5.............................. 650-699........... 90-119 days...... 48-60 months..... CA............... Prime............
6.............................. 700-749........... 120-149 days..... Over 60 months... CO............... Other............
7.............................. 750-799........... 150-179 days..... Less than 12 CT............... Fixed............
months.
8.............................. 800 and over...... 180+ days........ 12-24 months..... DE............... Prime............
9.............................. less than 500..... < 30 days........ 24-36 months..... DC............... Other............
10............................. 500-549........... 30-59 days....... 36-48 months..... FL............... Fixed............
11............................. 550-599........... 60-89 days....... 48-60 months..... Other............ Prime............
12............................. 600-649........... 90-119 days...... Over 60 months... AK............... Other............
13............................. 650-699........... 120-149 days..... Less than 12 AL............... Fixed............
months.
14............................. 700-749........... 150-179 days..... 12-24 months..... AR............... Prime............
15............................. 750-799........... 180+ days........ 24-36 months..... AZ............... Other............
16............................. 800 and over...... Current.......... 36-48 months..... CA............... Fixed............
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Request for Comment
Are the proposed standardized distributional groups
appropriate? Are there any other distributional groups that we should
specify? Are there any that should not be required?
Would credit card ABS issuers be able to provide this
information in this
[[Page 23374]]
format on a cost-effective basis? Would it raise competitive concerns?
We understand that most credit card ABS issuers currently
provide disclosure about the FICO credit score distribution of the
underlying pool. Rather than allowing the issuer to use a credit score
that is not FICO, should we require that all issuers provide disclosure
of FICO credit scores by distributional groups? Are there other types
of credit scores with respect to which we should require disclosure by
distributional group? If so, what would be the appropriate
distributional groups?
Should we provide a definition for delinquency? If so, how
should it be defined?
Are the distributional groups for adjustable rate index
appropriate? Are there any other commonly used indexes that we should
specify?
Would issuers already have information about all of the
states in order to prepare the groupings for the top 10 states by
aggregate account balance and other? If so, should we require that
issuers provide groupings by every state? Please tell us why or why
not.
Are the proposed informational requirements appropriate
for the grouped account data (i.e., aggregate credit limit, aggregate
account balance, number of accounts, weighted average APR and weighted
average net APR)? What other types of information should issuers
provide about their accounts in the grouped account data format?
Are credit cards ever securitized using structures that
are not master trusts? If so, should we require asset-level disclosure
for non-master trust credit card ABS issuers because the pool would be
fixed and contain a smaller number of accounts?
4. Asset Data File and XML
We are proposing to require asset-level information \302\ and
grouped account data (with respect to credit cards) related to an
offering and ongoing periodic reporting be filed on EDGAR in XML
(extensible Markup Language) as an asset data file. By proposing to
require the asset-level data file in XML, a machine-readable language,
we anticipate that users of the data will be able to download the
disclosure directly into spreadsheets and databases, analyze it using
commercial off-the-shelf software, or use it within their own models in
other software formats.
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\302\ As defined in proposed Schedule L [17 CFR 229.1111A] and
Schedule L-D [17 CFR 229.1121A].
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Asset-backed filers currently are required to file their
registration statements, current and periodic reports in ASCII
(American Standard Code for Information Interchange) or HTML (HyperText
Markup Language).\303\ Our electronic filing system also uses other
formats for reporting related to corporate issuers, such as XML, to
process reports of beneficial ownership of equity securities on Forms
3, 4, and 5 under Section 16(a) of the Exchange Act,\304\ and a form of
XML known as XBRL to provide financial statement data.\305\ As we
explained in the XBRL Adopting Release, electronic formats such as HTML
and XML are open standards \306\ that define or ``tag'' data using
standard definitions. The tags establish a consistent structure of
identity and context. This consistent structure can be recognized and
processed by a variety of different software applications. In the case
of HTML, the standardized tags enable Web browsers to present Web
sites' embedded text and information in a predictable format so that
they are human readable. In the case of XML and XBRL, software
applications, such as databases, financial reporting systems, and
spreadsheets recognize and process tagged information. For asset-backed
issuers, we believe that XML is the appropriate format to provide
standardized asset data disclosure. As we discuss earlier, some issuers
already file loan schedules on EDGAR as part of the pooling and
servicing exhibit or a free writing prospectus. However, the data is
currently filed on EDGAR in ASCII or HTML, both of which do not
facilitate data analysis. XBRL allows issuers to capture the rich
complexity of financial information presented in accordance with U.S.
GAAP.\307\ In contrast, the proposed asset data file will present
relatively simpler characteristics of the underlying loan, obligor,
underwriting criteria and collateral among other items that are well
suited for XML. We are proposing XML, rather than XBRL, because there
are many commercial products that can be used with XML including
parsers that would allow investors to insert data into a relational
database for analysis, data extensions available in XBRL are not
applicable to this data set, the nature of the repetitive data lends
itself to an XML format and the schema could be easily updated.
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\303\ Rule 301 under Regulation S-T [17 CFR 232.301] requires
electronic filings to comply with the EDGAR Filer Manual, and
Section 5.1 of the Filer Manual requires that electronic filings be
in ASCII or HTML format. Rule 104 under Regulation S-T [17 CFR
232.104] permits filers to submit voluntarily as an adjunct to their
official filings in ASCII or HTML unofficial PDF copies of filed
documents.
\304\ 15 U.S.C. 78p(a).
\305\ See Interactive Data to Improve Financial Reporting,
Release No. 33-9002 (Feb. 10, 2009) (``the XBRL Adopting Release)
\306\ The term ``open standard'' is generally applied to
technological specifications that are widely available to the
public, royalty-free, at minimal or no cost.
\307\ As part of its process of developing proposed Accounting
Standards Updates, the FASB identifies and seeks comment on proposed
changes to tags in the U.S. GAAP XBRL Taxonomy. When the FASB
publishes final Accounting Standards Updates, it includes in the
final document proposed changes to the U.S. GAAP XBRL taxonomy as a
result of the amendments in the Accounting Standards Update being
issued. FASB Accounting Standards Updates, which include proposed
updates to the U.S. GAAP XBRL taxonomy and are used to update the
FASB Accounting Standards Codification. The FASB Accounting
Standards Codification is available at www.fasb.org.
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We understand that most of this information is data collected at
the time of origination and ongoing performance information is
maintained on servicing systems. The CRE Finance Council (formerly
CMSA) is already moving towards requiring issuers to provide its
Investor Reporting Package in XML.\308\ The use of XML will enable
investors to use standard commercial off-the-shelf software for
analysis of underlying loan-level data.\309\ This software may also
permit investors to insert the data into a database to identify
individual data points. Then the data can be aggregated, compared and
analyzed. Data can also be subjected to further waterfall analysis.
Since XML data can be visualized in internet browsers, investors can
develop a style sheet if viewing data is important in their
analysis.\310\
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\308\ See CRE Finance Council Investor Reporting Package X
Version 6.0 Working Exposure Draft 1'' available at http://www.crefc.org/Industry_Standards/CMSA-Investor_Reporting_Package/CRE_Finance_Council_IRP/.
\309\ Off-the-shelf software includes computer products that are
ready-made and available for sale, lease, or license to the general
public.
\310\ A style sheet is a text file that provides instructions
for formatting and displaying the information in XML documents in a
human-readable format.
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Prior to requiring the asset data file in XML, technical
specifications that describe the schema, which would include each data
point described in Schedules L, L-D, and CC are necessary.\311\ Also,
extension data would not be permitted in the asset-level data file
because we believe it would defeat the purpose of standardizing the
data elements.\312\ Instead, we are proposing to include a limited
number of ``blank'' data tags in
[[Page 23375]]
our XML schema. In order to reduce complexity for users we are
proposing to limit the number to ten blank data tags. These blank data
tags would give issuers the ability to present additional asset-level
data not required by proposed Schedule L or L-D. For example, if
servicers were required to comply with a new modification program, and
related tagged information would be material to investors, it may be
appropriate to use a blank data tag. Additionally, if an issuer
registers ABS backed by an asset class that has not been previously
registered, so that no asset class specific schema exists at the time,
that issuer could use the available blank data tags. Issuers, however,
would need to provide a narrative explanation of the definitions or
formulas for the additional tagged data and file it as another exhibit
on Form 8-K or Form 10-D.\313\ Issuers could also file other
explanatory disclosure regarding the asset-level data in an exhibit, if
necessary.\314\
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\311\ A schema is a set of custom tags and attributes that
defines the tagging structure for an XML document.
\312\ Extension data would allow issuers to add their own data
elements to our defined data elements.
\313\ See proposed Item 601(b)(103)(i) of Regulation S-K.
\314\ See proposed Item 601(b)(103)(ii) of Regulation S-K.
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(a) Filing the Asset Data File and EDGAR
We are proposing that the new asset data file in XML be filed as an
exhibit to the filings. Therefore, we are proposing changes to Item 601
of Regulation S-K, Rules 11, 201, and 202 of Regulation S-T and Form 8-
K to accommodate the filing of asset data files. We are proposing to
define the XML file required by proposed Schedules L, L-D, and CC as an
``Asset Data File'' in Regulation S-T and make corresponding changes to
Rule 101 of Regulation S-T mandating electronic submission.\315\ As we
discuss above, we are proposing that the asset data be filed as an
exhibit to the appropriate Form 8-K (in the case of an offering) or to
the appropriate Form 10-D (in the case of a periodic distribution
report).\316\ As we note above, we realize that registrants may want to
provide investors with additional asset information not defined in
Schedule L or L-D, or that issuers of new asset classes may want to
provide investors with other data points. As such, we also propose an
additional exhibit, an asset related document, for registrants to
disclose the definitions or formulas for the additional data points or
to provide further explanatory disclosure regarding the asset data
file.\317\
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\315\ See proposed definition to Rule 11 of Regulation S-T.
\316\ See proposed exhibit table in Item 601(a) of Regulation S-
K.
\317\ See proposed Item 601(b)(103) of Regulation S-K.
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We also propose to add Item 6.06 to Form 8-K. Regardless of whether
the issuer is registering the offering on Form SF-1 or SF-3, we are
proposing to require all asset data files to be filed on Form 8-K so
that investors may easily locate asset-level data disclosure on EDGAR.
The proposed item explains that the asset data file must be filed with
the Form 8-K on the same date of the filing of a prospectus filed in
accordance with proposed Rule 424(h), a final prospectus meeting the
requirements of section 10(a) of the Securities Act filed in accordance
with Rule 424(b), and a report filed in accordance with Item 6.05 of
Form 8-K (Securities Act Updating Disclosure). The proposed item also
requires that any asset data related document \318\ be filed at the
same time the asset data file is filed on EDGAR. We have also included
proposed instructions to Item 6.06 to refer to the proposed exhibit
requirements in Item 601 of Regulation S-K and to the incorporation by
reference item requirements on proposed Forms SF-1 and SF-3.
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\318\ Id.
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(b) Hardship Exemptions
We are proposing a self-executing temporary hardship exemption for
filing the asset data file; however, we are proposing to exclude the
asset data file from the continuing hardship exemption. Rule 201 under
Regulation S-T generally provides for a temporary hardship exemption
from electronic submission of information, without staff or Commission
action, when a filer experiences unanticipated technical difficulties
that prevent timely preparation and submission of an electronic filing.
The temporary hardship exemption permits the filer to initially submit
the information in paper, but requires the filer to submit a confirming
electronic copy of the information within six business days of filing
the information in paper.\319\ Failure to file the confirming
electronic copy by the end of that period results in short form
ineligibility. Because the disclosure requirement for an asset data
file is inherently electronic, and the information would not be useful
if provided in paper, we are proposing an alternative approach to the
temporary hardship exemption. Under our proposal, if the registrant
experiences unanticipated technical difficulties preventing the timely
preparation and submission of an asset data file, a registrant will
still be considered timely if the asset data is posted on a Web site on
the same day it was due to be filed on EDGAR, the Web site address is
specified in the required exhibit, a legend is provided in the
appropriate exhibit claiming the hardship exemption, and the asset data
file is filed on EDGAR within six business days. We believe that
posting the asset data on a Web site is preferable to a paper filing in
this circumstance. By requiring the asset data file posting on a Web
site, investors would have access to the disclosures and would not
experience any delay in accessing the asset data in XML format.
Consistent with our current temporary accommodation rules, under our
proposed accommodation, the asset data file must be filed on EDGAR
within six business days and failure to file the asset data file within
that period will result in the loss of Form SF-3 eligibility. We
believe it is important that the disclosure be filed with the
Commission on EDGAR to preserve continuous access to the information.
As we discuss below, our experience with the temporary accommodation
for static pool disclosure raises concern that access to the
information on Web sites may be lost due to the distress in the market
or the fact that certain sponsors may cease operations.\320\
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\319\ See Rule 201 of Regulation S-T [17 CFR 232.201].
\320\ See Section III.E.4.
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We are proposing to exclude asset data files from the continuing
hardship exemption under Rule 202 of Regulation S-T. Rule 202 generally
allows a registrant to apply for a continuing hardship if it cannot
file all or part of a filing without undue burden or expense. In
contrast to the self-executing temporary hardship exemption process, a
filer may obtain a continuing hardship exemption only by submitting a
written application, upon which the Commission staff must then act
under delegated authority.
We do not believe a continuing hardship exemption is appropriate
with respect to an asset data file because we believe the proposed
asset data file would be an integral part of the prospectus and
periodic performance reporting. We believe that, for ABS issuers, the
information in machine readable format is generally already collected
and stored on a servicer's systems. Therefore, we do not believe it
would be appropriate for issuers to receive a continuing hardship
exemption for the asset data file. We believe investors should receive
all of the disclosures specified in Schedules L
[[Page 23376]]
and L-D and in a format that will allow them to effectively utilize the
information.\321\
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\321\ We recognize that our rules provide for a continuing
hardship for registrants required to file Interactive Data Files in
XBRL. Interactive Data Files in XBRL contain data that is already
disclosed in the prospectus. In contrast, asset data files will
contain disclosure that is not otherwise provided in the related
prospectus or report. See the XBRL Adopting Release.
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(c) Technical Specifications
We are proposing to add detailed information on submitting an asset
data file to the EDGAR Technical Specification. As discussed above and
as specified in the Appendix to this release, there are several data
points contained in Schedule L and Schedule L-D that require issuers to
provide a coded response. These codes would be enumerated in the EDGAR
Technical Specification. We expect that the technical specifications
would be available as early as possible prior to any required
compliance date. The manual would be published on the SEC's Web site on
the ``Information for EDGAR Filers'' webpage.\322\
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\322\ The Web site address is http://www.sec.gov/info/edgar.shtml.
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Request for Comment
Is it appropriate to require the asset data file in XML
format? Does XML format most easily facilitate the analysis of the
securities and their underlying assets for all market participants?
In what format do issuers currently provide asset data
information to investors (as may be required, for example, under
transaction agreements)? Do any market participants currently provide
asset data in accordance with a technical specification or schema
commonly used across a particular asset class? If so, would our data
points cause divergence from current practice? Please tell us which
specific proposed data points would be of concern and why. How can we
address those concerns? Is another format preferable, such as XBRL?
Should we adopt the proposed changes to Item 601 of
Regulation S-K, Regulation S-T and Form 8-K?
We are not proposing changes to Rule 305 of Regulation S-T
to exempt the asset data file from the restrictions on the number of
characters per line that may be filed on EDGAR in order to prevent
issuers from filing the tagged data in one continuous string. We
believe the restriction on the number of characters per line will help
preparers and validators with their review of the asset data file.
Should we exempt the asset data file from Rule 305 of Regulation S-T?
If so, why?
Are the proposed blank data tags appropriate? Is ten blank
data tags the appropriate number? Should the number be more or less?
Would more blank data tags create undue complexity for investors? Are
there other ways we could provide for additional disclosure and have
that disclosure be standardized?
Is the proposed temporary hardship exemption, including
the required Web site posting, appropriate? Should we allow a
continuing hardship exemption for filing the asset data file on EDGAR?
We propose to use existing submission types in order to
enable filers to attach the asset data file as an exhibit. Tagging
specifications that explain the requirements of the XML schema would be
included in the proposed technical specifications. Are there other
specifications that would be helpful that should be provided in the
EDGAR Filer Manual for asset data files that are not currently included
in other Technical Specifications? Please be specific in your response.
Should we provide a transition period prior to the
required compliance date that would allow filers to submit only test
filings? Please be specific in your response.
The technical specification will outline in detail the
required format of each data point. Are there other validation checks
that need to be in place to check compliance? Please be specific in
your response.
4. Pool-Level Information
By at least 2006, an increasing number of residential mortgages
were generated in the United States through loosened underwriting
standards.\323\ In addition, originators engaged in practices such as
the bundling of non-traditional features into a single loan product,
known as ``risk-layering.'' \324\ The loosening of underwriting
standards for subprime mortgages has been cited as one of the principal
causes of the recent turmoil in the financial markets.\325\ In
addition, compliance with the disclosure guidelines set forth in our
rules by some ABS issuers was not consistent.
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\323\ The PWG March 2008 Report states that there was a dramatic
weakening of underwriting standards for U.S. subprime mortgages,
beginning in late 2004 and extending into early 2007.
\324\ For a discussion of the increase in looser underwriting
standards and risk layering practices, see, e.g., Speech by Federal
Reserve Chairman Ben S. Bernanke At the Federal Reserve Bank of
Chicago's 43rd Annual Conference on Bank Structure and Competition,
Chicago, Illinois, available at http://www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm; Report by the Global Joint
Initiative of Securities Industry and Financial Markets Association,
the American Securitization Forum, the European Securitisation
Forum, and the Australian Securitisation Forum, ``Restoring
Confidence in the Securitization Markets,'' (Global Joint Initiative
Report) Dec. 3, 2008, at 4; and United States Government
Accountability Report to Congressional Requesters: Home Mortgages:
Provisions in a 2007 Mortgage Reform Bill (H.R. 3915) Would
Strengthen Borrower's Protections But Views on Their Long Term
Impact Differ (July 2009) at 19, available at http://www.gao.gov/new.items/d09741.pdf.
\325\ See The PWG March 2008 Report and The President's Working
Group, Progress Update on March Policy Statement on Financial Market
Developments, October 2008 (both reports noting that the breakdown
in underwriting standards for subprime mortgages as one of a list of
principal causes of the turmoil in the financial markets).
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Item 1111 of Regulation AB \326\ outlines several aspects of the
pool that the prospectus disclosure should cover.\327\ Item 1111
explicitly provides that exceptions to origination criteria must be
disclosed.\328\ We are proposing revisions to the pool-level disclosure
requirements in Item 1111 to further detail and clarify the type of
disclosure that is required to be provided for ABS offerings with
respect to deviations from disclosed underwriting standards. We also
are proposing revisions related to the originator's diligence with
respect to the information used to underwrite the assets, and the
remedies related to the pool assets that are available to investors
that are provided in underlying transaction agreements.
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\326\ 17 CFR 229.1111.
\327\ Item 1111 requires this disclosure on the assets, as
material, whether or not the sponsor is also the originator of the
assets or the sponsor acts as an aggregator or consolidator of
loans.
\328\ Item 1111(a)(3) requires a description of the
solicitation, credit-granting or underwriting criteria used to
originate or purchase the pool assets, including, to the extent
known, any changes in such criteria and the extent to which policies
and criteria are or could be overridden.
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First, we are proposing to amend Item 1111 to specify that
disclosure regarding the underwriting of assets that deviate from the
disclosed origination standards must be accompanied by specific data
about the amount and characteristics of those assets that did not meet
the disclosed standards. To the extent that disclosure is provided
regarding compensating or other factors, if any, that were used to
determine that the assets should be included in the pool, despite not
having met the disclosed underwriting standards, the issuer would be
required to specify the factors that were used and provide data on the
amount of assets in the pool that are represented as meeting those
factors. Thus, data would be required on the number of assets not
meeting the underwriting criteria, the number of such assets meeting
particular compensating factors (if those factors are disclosed), and
the number of such assets not meeting such factors.
[[Page 23377]]
Second, we are proposing to require disclosure of what steps were
undertaken by the originator or originators to verify the information
used in the solicitation, credit-granting or underwriting of the pool
assets.\329\ Such information could include how the originator
documented various criteria such as, for example, debt-to-income
ratios, loan-to-value ratios or documentation type.\330\ We believe
that this information should provide helpful insight to investors
regarding the underwriting of the pool assets.
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\329\ See proposed revision to Item 1111(a).
\330\ The requirement under this proposal to disclose these
steps should not be confused with the due diligence defense against
liability under Securities Act Section 11 (15 U.S.C. 77k) or the
reasonable care defense against liability under Securities Act
Section 12(a)(2) (15 U.S.C. 77l(a)(2)). Instead, our proposed
amendment is designed to provide disclosure of information relating
to the originator's diligence to verify the information used to
underwrite the assets.
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Third, we are proposing amendments that would elicit more
disclosure regarding certain remedies available to investors in the
transaction agreements. As discussed above, most transaction agreements
for ABS offerings contain representations and warranties by the sponsor
or originator about the quality, legal compliance and other aspects of
the pool assets. Typically, investors are entitled to recover through
provisions that require the repurchase of assets from the securitized
pool by an obligated party. The obligated party, typically the sponsor,
would be obligated to repurchase the assets if the representations and
warranties have been breached. Item 1111(e) currently requires summary
disclosure regarding any representations and warranties made concerning
the pool assets by the sponsor, transferor, originator or other party
to the transaction. The item also requires disclosure of the remedies
available if those representations and warranties are breached, such as
repurchase obligations. In addition, many transaction agreements may
provide for the repurchase of assets if the servicer has modified the
terms of an asset in the pool in a manner or to a degree that is
prohibited under the transaction agreements.
To help ensure that issuers provide meaningful disclosure in an
area that has become increasingly important for investors, we are
proposing to replace Item 1108(c)(6) with a more detailed and specific
disclosure requirement in Item 1111.\331\ Item 1108(c)(6) currently
requires disclosure to the extent material of any ability of the
servicer to waive or modify any terms, fees, penalties or payments on
the assets and the effect of any such ability, if material, on the
potential cash flows from the assets. Our proposal would replace Item
1108(c)(6) with a more detailed and specific disclosure requirement in
Item 1111. As proposed to be revised, Item 1111 would require a
description of the provisions in the transaction agreements governing
modification of the assets. We also are proposing to require disclosure
regarding how modification may affect cash flows from the assets or to
the securities.
---------------------------------------------------------------------------
\331\ 17 CFR 229.1108(c)(6).
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We also are proposing to require disclosure of whether or not a
fraud representation is included among the representations and
warranties. Under the proposal, the issuer would provide disclosure
regarding whether a representation was made that no fraud has taken
place in connection with the origination of the assets on the part of
the originator or any party involved in the origination of the assets.
We believe that it is important to highlight this representation to
investors, although we do not intend to diminish the importance of
other representations and warranties regarding the pool assets that are
provided.
Existing Item 1111 requires the disclosure of statistical
information about the pool in appropriate distributional groups or
incremental ranges, among other things. The rule also requires that
statistical information for each group or range also should be
presented by 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.\332\ Because we
believe that existing Item 1111 calls for statistical information in
the prospectus regarding an originator's ``risk-layering practices''
that demonstrates the manner and extent to which multiple non-
traditional features of a loan are bundled into one instrument, issuers
should already be providing this disclosure.\333\ However, to the
extent there is ambiguity or lack of clarity in Item 1111 regarding
what disclosure with respect to risk-layering practices is required to
be provided, we request comment on how to make changes to Regulation AB
to require the appropriate disclosure on risk-layering practices.
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\332\ See also Section III.B.5.a. of the 2004 ABS Adopting
Release.
\333\ We believe that this would include risks relating to the
geographic location of the property.
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Request for Comment
Above we noted that disclosure regarding risk layering
practices is required under existing Item 1111. Is the application of
Item 1111 to risk-layering practices clear? Is there some way we can
make Item 1111 clearer in that regard? Should we revise any other rule
in that regard?
Should we require, as proposed, disclosure on assets that
deviate from the disclosed origination underwriting standards that must
be accompanied by disclosure of specific data about the amount and
characteristics of those assets that did not meet the standards? Should
we require, as proposed, that if disclosure is provided regarding
compensating or other factors, if any, that were used to determine that
the assets should be included in the pool, despite not having met the
disclosed underwriting standards, disclosure is required that would
describe those factors and provide data on the amount of assets in the
pool that are represented as meeting those factors and the amount of
assets that do not meet those factors? Should we require any other
disclosure with respect to exceptions to or deviations from disclosed
origination underwriting standards? Should issuers be required to
identify each exception loan by a loan identifier that will be
disclosed in the proposed Schedule L discussed above?
Are the proposed amendments relating to disclosure
concerning representations and warranties and modification provisions
in the transaction agreements appropriate?
Are there other kinds of disclosure relating to
representations and warranties and enforcement mechanisms of those
representations and warranties that should be required to be provided?
If so, please describe in detail.
A repurchase obligation also may be imposed under other
circumstances.\334\ Should the rules require prospectus disclosure of
other types of repurchase obligations?
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\334\ For example, there may be obligation to repurchase a loan
that goes into payment default within a short period of time after
closing.
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We are proposing to require disclosure of whether the
transaction agreements include a fraud representation. Is this
appropriate? Are there other types of representations and warranties
that the prospectus should highlight?
Should we delete Item 1108(c)(6), as proposed? Is there
any type of disclosure that will be omitted if we delete Item
1108(c)(6) in lieu of our proposed revision to Item 1111?
[[Page 23378]]
B. Flow of Funds
1. Waterfall Computer Program
We are proposing to require that most ABS issuers file a computer
program that gives effect to the flow of funds, or ``waterfall,''
provisions of the transaction. We are proposing that the computer
program be filed on EDGAR in the form of downloadable source code in
Python. Python, as we will discuss further below, is an open source
interpreted programming language.\335\ Under our proposal, an investor
would be able to download the source code for the waterfall computer
program and run the program on the investor's own computer (properly
configured with a Python interpreter).\336\ The waterfall computer
program would be required to allow use of the asset data files that we
are also proposing today.\337\ This proposed requirement is designed to
make it easier for an investor to conduct a thorough investment
analysis of the ABS offering at the time of its initial investment
decision. In addition, an investor may monitor ongoing performance of
purchased ABS by updating its investment analysis from time to time to
reflect updated asset performance.\338\ In this way, market
participants would be able to conduct their own evaluations of ABS and
may be less dependent on the analysis of third parties such as credit
rating agencies.
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\335\ Open source means that the source code is available to all
users (as opposed to proprietary source code that can be viewed only
by the owner/developers of the program). An interpreted programming
language is one that requires an interpreter in the target computer
for program execution. See Section III.B.1.d. below.
\336\ An interpreter is a programming language translator that
translates and runs the program at the same time. It converts one
program statement into machine language, executes it, and then
proceeds to the next statement. This differs from regular executable
programs that are presented to the computer as binary-coded
instructions. Interpreted programs remain in the source language the
programmer wrote it in, which is human readable text.
\337\ See Sections III.A.1., III.A.2. and III.A.3 above.
\338\ Updated asset performance data would be required under
proposed Item 1121(d) and (e) for Regulation AB. See Sections
III.A.2. and III.A.3.
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The waterfall is a critical component of an ABS. Currently
investors receive only a textual description of this information in the
prospectus, which may make it difficult for them to perform a rigorous
quantitative analysis of the ABS.\339\ In a typical ABS, the waterfall
governs the application of cash collected on pool assets. Using the
waterfall, cash collections are applied to distributions to the holders
of various classes of ABS backed by the pool assets. Depending on the
level of prepayments, defaults and losses-given-default \340\ that
occur on the pool assets, the waterfall may redirect the application of
cash to or away from a particular class of securities; may allocate
cash to a reserve account or require the release of reserve account
cash; \341\ may change the allocation of cash to the classes in an ABS
transaction from sequential pay to pro rata pay,\342\ and vice versa;
or may accelerate or defer the application of principal prepayments to
a particular tranche. As a result, the calculation of the probable
amount and timing of cash distributions to an investor on a particular
ABS, an essential element of valuing or pricing the security, can be
complex.
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\339\ See Item 1113 of Regulation AB [17 CFR 229.1113]. The
waterfall computer program is a necessary but not a sufficient tool
for carrying out quantitative analysis of an ABS. We recognize that
investors will still have to build or acquire from a vendor other
elements of a complete cash flow and valuation model. However,
requiring the issuer to supply the waterfall computer program should
make the investor's task easier, and is an appropriate subject of a
filing requirement as it consists of information that is specific to
the particular ABS being offered.
\340\ By losses-given-default we mean the amount of unrecovered
principal on a defaulted asset after realization of all amounts
available.
\341\ A reserve account is a form of internal credit enhancement
created to cover losses on the pool assets.
\342\ Sequential pay means that from the inception of the
transaction, a single designated class receives all available
principal payments until it is retired; only then does a second
designated class begin to receive principal; and so on. Pro rata pay
means that all classes receive their proportionate shares of
principal payments during the life of the securities.
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Institutional sellers and buyers of ABS typically rely on computer
simulation of the results of applying the cash flows on the pool assets
to the waterfall under different interest rate, prepayment, default and
loss-given-default assumptions to determine the likely amount and
timing of cash distributions on, and therefore the value of, the ABS. A
common approach to this task is to: (a) Run many separate simulations,
or projections, of the cash flows for the pool assets (using randomly
generated assumed interest rates, prepayment speeds, default rates and
loss-given-default rates--a simulation process referred to as the Monte
Carlo method); (b) pass these simulated cash flows through the
waterfall structure of the ABS; and (c) observe the resulting cash
flows for each separate ABS tranche. To conduct this analysis, a market
participant requires:
Loan-level information, or grouped account data, about the
assets, including such fields as their coupon rates, balances, loan-to-
value ratios, maturity dates, and the borrowers' credit scores, among
others;
A computer program that calculates the contractual cash
flows for each tranche of the ABS based on the presumed cash flows of
the underlying pool assets;
Additional computer models that generate inputs for the
computer simulation (such as interest rate, prepayment, loss and loss-
given-default models); and
A computer system that combines the three elements above
into a model that allows investors to calculate the values of ABS
tranches based on their own assumptions about the behavior of the
underlying pool assets combined with the waterfall of the ABS, and the
current state and performance of the underlying pool assets.
Without these tools, market participants must rely on third party
vendors to provide quantitative analysis of the asset-backed security
\343\ or must rely on computational materials provided by the issuer,
without the opportunity to test the model or vary the assumptions used
by the issuer.\344\
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\343\ Our proposed requirement to file the waterfall computer
program is intended to have same functionality as a ``deal'' in a
``deal library'' that has been coded or programmed from an
authoritative statement of the waterfall, such as a pooling and
servicing agreement. Deal and deal library are terms used by
commercial vendors of quantitative valuation analysis services and
their customers. The process of coding or programming the waterfall
for an ABS is referred to by vendors as ``scripting'' a deal.
\344\ 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. See Item
1101(a) of Regulation AB [17 CFR 229.1101(a)] and Section III.C. of
the 2004 ABS Adopting Release.
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The ABS issuer or the underwriter generally will have a computer
model of the waterfall. However, the issuer or underwriter currently
has no obligation to share the computer model with actual or potential
ABS investors. Because prospective investors in ABS typically do not
have access to the ABS issuer's computer models, under current
conditions, an investor must create its own computer program. It does
this by taking the priority of payment rules stated in the trust
agreement, pooling and servicing agreement, indenture, or other
operative document for the ABS and described in the prospectus,
converting the English language statement of those provisions into one
or more algorithms, and then expressing the algorithms as computer code
in a programming language. As a practical matter, it is often not
possible to complete these steps before making an investment decision.
This is particularly onerous for smaller institutional
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investors, for whom it may not be feasible to acquire the financial and
technological expertise necessary to develop a computer program of the
waterfall. Thus, investment decisions with respect to ABS may be made
without the benefit of the investor performing its own quantitative
valuation analysis. This may encourage undue reliance on the
determinations of credit rating agencies. Further, there is the
possibility that some investors will program the waterfall erroneously,
leading to inaccurate ABS valuations.
We believe that the proposed requirement to file the waterfall
computer program would convey information to investors in a form that
is both more accurate and more useful to them for data analysis than a
textual description of the waterfall. By running the waterfall computer
program in combination with other internally-developed or commercially
available vendor interest rate, prepayment, default and loss-given-
default models, cash flow engines, or computational services, investors
should be able to promptly run cash flow simulations and generate
present value estimates for ABS tranches. An investor should also be
able to more effectively monitor the ongoing performance of the ABS by
using the proposed updated asset-level performance information to be
filed with each periodic distribution report on Form 10-D.
(a) Proposed Disclosure Requirements
We are proposing to require, for offerings of asset-backed
securities backed by most asset classes, that issuers file the
waterfall computer program in the form of downloadable source code in
the Python programming language.\345\ We define the disclosure
requirements of the waterfall computer program in proposed Item
1113(h)(1). We are proposing that the waterfall computer program give
effect to the priority of payment provisions in the transaction
agreements that determine the funds available for payments or
distributions to the holders of each class of securities,\346\ and each
other person or account entitled to payments or distributions, from the
pool assets, pool cash flows, credit enhancement or other support, and
the timing and amount of such payments or distributions.\347\
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\345\ When we refer to a waterfall computer program for an
asset-backed security, we refer to the whole offering of asset-
backed securities backed by a particular pool of assets; in other
words, the deal, not to a single class or tranche of the deal.
\346\ For this purpose, a subclass or tranche would be a
separate class.
\347\ See proposed Item 1113(h)(1)(i) of Regulation AB.
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Under the proposed requirement, the filed source code, when
downloaded and run by an investor, must provide the user with the
ability to programmatically input the user's own assumptions regarding
the future performance and cash flows from the pool assets, including
but not limited to assumptions about future interest rates, default
rates, prepayment speeds, loss-given-default rates, and any other
necessary assumptions required to be described under Item 1113 of
Regulation AB. The waterfall computer program must also allow the use
of the proposed asset-level data file that will be filed at the time of
the offering and on a periodic basis thereafter.\348\
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\348\ See proposed Items 1111A and 1121A of Regulation AB.
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We also propose to require that the waterfall computer program
produce a programmatic output, in machine-readable form, of all
resulting cash flows associated with the ABS, including the amount and
timing of principal and interest payments payable or distributable to a
holder of each class of securities, and each other person or account
entitled to payments or distributions in connection with the
securities, until the final legal maturity date, as a function of the
inputs into the waterfall computer program.
We are also proposing an instruction to the item requirement to
make clear that the provisions captured in the waterfall computer
program should include, but not be limited to, provisions that set
forth the priorities of payments or distributions (and any
contingencies affecting such priorities) to the holders of each class
of securities and any other persons or accounts entitled to payments or
distributions, and any related provisions necessary to determine the
quantitative results of such provisions (including certain provisions
required to be described in Item 1113 of Regulation AB). Item 1113 of
Regulation AB currently requires disclosure of a plain English
description of the structure of the waterfall and we believe that the
provisions given effect in the proposed waterfall computer program
should largely be the same as those provisions required to be described
under current Item 1113. But in the event that there are any provisions
that are not required to be described under Item 1113 because they are
not material to the description of the waterfall in the prospectus, but
those provisions are used to determine the value of the inputs to the
waterfall computer program, the waterfall computer program would be
required to give effect to the provisions by which those inputs are
determined.
In addition, we are proposing to require that the issuer file as
part of the waterfall computer program a sample expected output for
each ABS tranche based on sample inputs provided by the issuer. By
using the sample inputs to run the program, the investor will be able
to confirm that the program is working correctly by matching the actual
outputs produced against the sample expected output provided by the
issuer.\349\
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\349\ We note that the sample inputs and outputs we propose to
require are intended to confirm that the program is functioning, and
would not serve to make any representations about the actual
expected performance of the deal.
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Lastly, so that investors may easily locate the waterfall computer
program, we are proposing that the prospectus include a statement that
the information provided in response to proposed Item 1113(h) is
provided as a downloadable source code in the Python programming
language filed on the SEC Web site. Issuers would also need to disclose
the CIK and file number of the related filing.
(b) Proposed Exemptions
We are proposing to exclude issuers of ABS backed by stranded costs
from the requirement to provide the waterfall computer program. As we
discuss above, we are not proposing to require such issuers to file an
asset data file at the time of the offering or on a periodic
basis,\350\ and therefore, we do not believe investors would have the
necessary inputs to run the waterfall computer program.
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\350\ See Sections III.A.1.b.iii. and III.A.2.b.
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(c) When the Waterfall Computer Program Would Be Required
Like the asset data file, the waterfall computer program would be
an integral part of the prospectus so that issuers would be required to
provide the waterfall computer program at the time of filing the Rule
424(h) prospectus as of the date of the filing. Similarly, as a
prospectus requirement, the waterfall computer program would be filed
with the final prospectus under Rule 424(b) as of the date of the
filing.
In addition, we are proposing to require credit card master trusts
to report changes to the waterfall computer program on Form 8-K and
file the updated waterfall computer program as an exhibit to the
report. Furthermore, we are also proposing to require that registrants
provide updated Schedule CC grouped account data at the same time the
updated waterfall computer program is filed so that investors may
evaluate the effect of the change in the
[[Page 23380]]
flow of funds using updated underlying pool information.
(d) Filing the Waterfall Computer Program and Python
We are proposing that the waterfall computer program be filed as an
exhibit in accordance with Item 6.07 of Form 8-K. The Form 8-K would
then also be incorporated by reference into the registration statement.
Therefore, we are proposing changes to Item 601 of Regulation S-K,
Rules 101, 201, 202 and 305 of Regulation S-T, new Rule 314 of
Regulation S-T and changes to Form 8-K to accommodate the filing of the
waterfall computer program. We realize that registrants may want to
provide more program functionality in the waterfall computer program
than would be required by proposed Item 1113(h). For example,
additional program functionality could include features designed to
allow interoperability with other ABS quantitative analysis software.
As such, we also propose to permit the filing of an additional exhibit,
a waterfall computer program related document, for registrants to
disclose the additional program functionality.
We are proposing new Rule 314 of Regulation S-T to require that the
waterfall computer program be written in the Python programming
language and be filed as source code that is able to be downloaded and
run on a local computer properly configured with a Python interpreter.
As we note above, Python is an open source interpreted programming
language. Open source means that the source code is available to all
users (as opposed to proprietary source code that can be viewed only by
the owner or developer of the program). An interpreted language is a
programming language that requires an interpreter in the target
computer for program execution.\351\ We prohibit the inclusion of
executable code in electronic submissions on EDGAR because of the
computer security risks posed by accepting executable code for
filing.\352\ Executable code results from separately compiling a
computer program prior to running it.\353\ Since Python is an
interpreted language that does not need to be compiled prior to running
it, executable code would not need to be published on EDGAR, and we
would not require EDGAR to establish facilities to host, run, or
operate any computer program. The waterfall computer program source
code would be required to be submitted as tagged XML data. The EDGAR
Technical Specification would contain detailed information on how to
file the waterfall computer program.
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\351\ An interpreter is a programming language translator that
translates and runs the program at the same time. It converts one
program statement into machine language, executes it, and then
proceeds to the next statement. This differs from regular executable
programs that are presented to the computer as binary-coded
instructions. Interpreted programs remain in the source language the
programmer wrote it in, which is human readable text.
\352\ See Securities Act Rule 106 to Regulation S-T [17 CFR
239.106].
\353\ We define executable code in Rule 11 of Regulation S-T [17
CFR 239.11] as instructions to a computer to carry out operations
that use features beyond the viewer's, reader's, or Internet
browser's native ability to interpret and display HTML, PDF, and
static graphic files. Such code may be in binary (machine language)
or in script form. Executable code includes disruptive code.
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Additionally, we are proposing a change to Rule 305 of Regulation
S-T to exempt the waterfall computer program from number and character
per line requirements on EDGAR.
(e) Hardship Exemptions
We are proposing a self-executing temporary hardship exemption for
filing the waterfall computer program; however, we are proposing to
exclude the waterfall computer program from the continuing hardship
exemption under Rule 202 of Regulation S-T.\354\ We are proposing the
same approach to the temporary hardship exemption for the waterfall
computer program as we propose for the asset-level data file. Because
the disclosure requirement for the waterfall computer program is
inherently electronic, the information would not be useful if provided
on paper. Under our proposal, if the registrant experiences
unanticipated technical difficulties preventing the timely preparation
and submission of the waterfall computer program, a registrant would be
considered to have made a timely filing if the waterfall computer
program is posted on a Web site on the same day it was due to be filed
on EDGAR, the Web site address is specified in the required exhibit, a
legend is provided in the appropriate exhibit claiming the hardship
exemption, and the waterfall computer program is filed on EDGAR within
six business days.
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\354\ We explain the hardship exemptions in further detail above
in Section III.A.4.b.
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We are also proposing to exclude the waterfall computer program
from the continuing hardship exemption under Rule 202 of Regulation S-
T. This is the same approach for the waterfall computer program that we
are proposing for asset-level data files. We do not believe a
continuing hardship exemption is appropriate with respect to the
waterfall computer program because, as we discuss above, the waterfall
computer program will be an integral part of the prospectus. Therefore,
we do not believe it would be appropriate for issuers to receive a
continuing hardship exemption for the waterfall computer program.
Request for Comment
Is it appropriate for us to require most ABS issuers to
file the waterfall computer program? Is there an alternative form of
required information filing that would be more useful to investors,
subject to the limitation that executable code may not be filed on
EDGAR?
Should we require, as proposed, that the Rule 424(h)
filing include the waterfall computer program?
Does access to the waterfall computer program decrease the
amount of time needed to analyze the information in a prospectus? If we
adopt the waterfall computer program filing requirement, would less
time be needed for investors to review transaction-specific
information? If so, how much time would be needed after the waterfall
computer program is filed? Four days? Two days? Does analysis of the
waterfall computer program require more time than what we allow as
proposed so that we should increase the time period for the Rule 424(h)
filing?
Is it appropriate to require issuers to submit the
waterfall computer program in a single programming language, such as
Python, to give investors the benefit of a standardized process? If so,
is Python the best choice or are there other open source programming
language alternatives (such as PERL) that would be better suited for
these purposes?
Should more than one programming language be allowed? If
so, which ones and why?
Should we restrict ourselves to only open source
programming languages or allow fully commercial or partly-commercial
languages (such as C-Sharp or Java) to be used? If so, what factors
should be considered?
Are there other requirements we should impose on the
possible computer programming languages that are used to satisfy this
requirement, other than that such languages be open source and
interpreted?
Under our proposal, issuers would be required to file the
waterfall computer program in the form of downloadable source code on
EDGAR. Prior to filing, the code would not be tested by the Commission.
Would downloading the code onto a local computer give rise to any
significant risks for investors? If so, please identify those risks and
what steps or measures
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we should take to address the risks, if any.
Are the proposed input and output requirements for the
waterfall computer program appropriate? If not, what type of output and
tests should be required for the waterfall computer program? Should the
outputs of the waterfall computer program be specified in detail by
rule, or broadly defined to afford flexibility to ABS issuers?
Should we require comments in the code that explain what
each line does? Is this necessary given the narrative disclosure of the
waterfall in the prospectus? If it is appropriate, are there any
specific explanations we should require?
Is it appropriate to exempt issuers of ABS backed by
stranded costs from the requirement to provide a waterfall computer
program? If not, what types of inputs would be necessary to run the
waterfall computer program? How would issuers obtain these inputs?
Is our proposal to require credit card master trusts to
report changes to the waterfall computer program on Form 8-K and file
the updated waterfall computer program as an exhibit appropriate? Would
the flow of funds, and thus the waterfall computer program, change over
time? If so, how and why would it change? Should we require the
waterfall computer program be filed at any other time? Should we
require it be filed with each Form 10-D?
Is the proposed requirement to provide the waterfall
computer program with the proposed Rule 424(h) prospectus as of the
date of filing and a final prospectus under Rule 424(b) as of the date
of filing appropriate? Should the waterfall computer program be
required to be filed at any other time? If so, please tell us why. As
we discuss above in Section II.B.1.a., under our proposal, for material
changes in information, other than offering price, which would include
material changes to the waterfall computer program, a new Rule 424(h)
filing would be required as well as a new five business-day waiting
period.