[Federal Register Volume 75, Number 201 (Tuesday, October 19, 2010)]
[Proposed Rules]
[Pages 64182-64197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-26172]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229, 230, 240, and 249
[Release Nos. 33-9150, 34-63091; File No. S7-26-10]
RIN 3235-AK76
Issuer Review of Assets in Offerings of Asset-Backed Securities
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We are proposing new requirements in order to implement
Section 945 and a portion of Section 932 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (the ``Act''). First, we are
proposing a new rule under the Securities Act of 1933 to require any
issuer registering the offer and sale of an asset-backed security
(``ABS'') to perform a review of the assets underlying the ABS. We also
are proposing amendments to Item 1111 of Regulation AB that would
require an ABS issuer to disclose the nature of its review of the
assets and the findings and conclusions of the issuer's review of the
assets. If the issuer has engaged a third party for purposes of
reviewing the assets, we propose to require that the issuer disclose
the third-party's findings and conclusions. We also are proposing to
require that an issuer or underwriter of an ABS offering file a new
form to include certain disclosure relating to third-party due
diligence providers, to implement Section 15E(s)(4)(A) of the
Securities Exchange Act of 1934, a new provision added by Section 932
of the Act.
DATES: Comments should be received on or before November 15, 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); or
Send an e-mail to [email protected]. Please include
File Number S7-26-10 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-26-10. 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 printing 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.
[[Page 64183]]
FOR FURTHER INFORMATION CONTACT: Eduardo Aleman, Special Counsel,
Division of Corporation Finance, at (202) 551-3430, U.S. Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are proposing amendments to Item 1111 \1\
of Regulation AB \2\ (a subpart of Regulation S-K). We also are
proposing to add Rule 193 \3\ under the Securities Act of 1933 \4\ (the
``Securities Act'') and Rule 15Ga-2 \5\ and Form ABS-15G \6\ under the
Securities Exchange Act of 1934 (the ``Exchange Act'').\7\
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\1\ 17 CFR 229.1111.
\2\ 17 CFR 229.1100 through 17 CFR 229.1123.
\3\ 17 CFR 230.193.
\4\ 15 U.S.C. 77a et seq.
\5\ 17 CFR 240.15Ga-2.
\6\ 17 CFR 249.ABS-15G.
\7\ 15 U.S.C. 78a et seq.
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I. Background
This release is one of several we are required to issue to
implement provisions of the Act.\8\ This release proposes a new rule
and certain amendments to implement Section 7(d) of the Securities
Act,\9\ which was added by Section 945 of the Act. In addition, we are
proposing a new rule and form to implement Section 15E(s)(4)(A) of the
Exchange Act,\10\ which was added by Section 932 of the Act.
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\8\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
\9\ 15 U.S.C. 77g(d).
\10\ 15 U.S.C. 78o-7(s)(4)(A).
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Section 945 of the Act amends Section 7 of the Securities Act to
require the Commission to issue rules relating to the registration
statement required to be filed by an issuer of ABS. Pursuant to new
Section 7(d), the Commission must issue rules to require that an issuer
of an ABS perform a review of the assets underlying the ABS, and
disclose the nature of such review.\11\ Section 7(d) requires that we
adopt these rules not later than 180 days after enactment.
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\11\ We note that recently adopted amendments to a safe harbor
rule by the Federal Deposit Insurance Corporation require, in
residential mortgage-backed securities offerings, sponsors to
disclose a third-party diligence report on compliance with
origination standards and the representations and warranties made
with respect to the assets. See 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 September 30, 2010, Final
Rule, Federal Deposit Insurance Corporation, (Sept. 27, 2010).
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Section 932 of the Act adds new Section 15E(s)(4)(A) of the
Exchange Act, which also relates to the review of assets underlying an
ABS. Section 15E(s)(4)(A) requires an issuer or underwriter of any ABS
to make publicly available the findings and conclusions of any third-
party due diligence report obtained by the issuer or underwriter.\12\
Because the substance of new Section 7(d) of the Securities Act is
related to new Section 15E(s)(4)(A) of the Exchange Act, we are
considering both provisions added by the Act together.
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\12\ We will propose rules to implement the rest of Section
15E(s)(4) at a later date. Section 15E(s)(4)(B) requires a provider
of third-party due diligence services to provide a certification to
any nationally recognized statistical rating organization
(``NRSRO'') rating the transaction. Section 15E(s)(4)(C) requires
the Commission to establish the form and content of such
certification, and Section 15E(s)(4)(D) requires the Commission to
adopt rules requiring an NRSRO to disclose the certification to the
public. The Act requires that final regulations under Section
15E(s)(4) be adopted not later than one year after enactment.
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II. Proposed Rules
A. Proposed Requirement That an ABS Issuer Perform a Review of the
Assets
We are proposing new Rule 193 under the Securities Act to require
issuers of ABS to perform a review of the assets underlying registered
ABS offerings.\13\ This rule would implement Securities Act Section
7(d)(1),\14\ as added by Section 945 of the Act.
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\13\ The requirement under this proposal to perform a review
should not be confused with, and is not intended to change, 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)]. Our
proposed rule is designed to require a review of the underlying
assets by the issuer and to provide disclosure of the nature,
findings and conclusions of such review.
\14\ 15 U.S.C. 77g(d)(1).
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1. Application of the Proposed Rule
Section 7(d)(1) relates to an asset-backed security, as defined in
new Section 3(a)(77) of the Exchange Act.\15\ This new statutory
definition (``Exchange Act-ABS'') is broader than the definition of
``asset-backed security'' in Regulation AB \16\ and includes securities
typically offered and sold in private transactions. Nevertheless, we
have concluded that the review requirements mandated by Section 7(d)(1)
apply only to registered offerings of ABS because Section 7(d)(1)
requires the Commission to issue rules ``relating to the registration
statement.'' Therefore, the rule we are proposing today that would
require an ABS issuer to perform a review of the assets applies to
issuers of ABS in registered offerings and not issuers of ABS in
unregistered offerings.
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\15\ 15 U.S.C. 78c(a)(77). This definition was added by Section
941(a) of the Act.
\16\ See Item 1101(c)(1) of Regulation AB [17 CFR
229.1101(c)(1)].
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2. New Securities Act Rule 193
Rule 193 would require an issuer to perform a review of the assets
underlying an ABS in a transaction that will be registered under the
Securities Act. Rule 193 would not specify the level or type of review
an issuer is required to perform.\17\ We expect that the issuer's level
and type of review of the assets may vary depending on the
circumstances. For example, the level or type of review may vary among
different asset classes. While proposed Rule 193 would not require a
particular level or type of review, we note that, if adopted, required
responsive disclosure would describe the level and type of review. We
believe the disclosure requirements below will give investors an
ability to evaluate the level and adequacy of the issuer's review of
the assets.
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\17\ We understand that various levels and types of review may
be performed in a securitization. For example, commentators on a
recent proposing release on asset-backed securities have identified
that the type of review conducted by a sponsor of a securitization
of sub-prime mortgage loans typically falls into three general
categories. First, a credit review examines the sample loans to
ascertain whether they have been originated in accordance with the
originator's underwriting guidelines. This would include a review of
whether the loan characteristics reported by the originator are
accurate and whether the credit profile of the loans is acceptable
to the sponsor. A second type of review could be a compliance review
which examines whether the loans have been originated in compliance
with applicable laws, including predatory lending and Truth in
Lending statutes. Third, a valuation review entails a review of the
accuracy of the property values reported by the originators for the
underlying collateral. This could include a review of each original
appraisal to assess whether it appeared to comply with the
originator's appraisal guidelines, and the appropriateness of the
comparables used in the original appraisal process. See comment
letter from The Commonwealth of Massachusetts Office of the Attorney
General (``Massachusetts AG comment letter'') on Asset-Backed
Securities, SEC Release No. 33-9117 (April 7, 2010) [75 FR 23328]
(the ``2010 ABS Proposing Release''). The comment letters are
available at http://www.sec.gov/comments/s7-08-10/s70810.shtml.
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Rule 193 would not specify the type or level of review an issuer is
required to perform or require that a review be designed in any
particular manner, although as set out below, we are requesting comment
on whether and, if so, how the Commission should specify the nature of
the review.\18\ We believe that the nature of review may vary depending
on numerous circumstances and factors which could include, for example,
the nature of the assets being securitized and the degree of continuing
involvement by the sponsor. For
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example, in offerings of residential mortgage-backed securities
(``RMBS''), where the asset pool consists of a large group of loans, it
may be appropriate, depending on all the facts, to review a sample of
loans large enough to be representative of the pool, and then conduct
further review if the initial review indicates that further review is
warranted. By contrast, for ABS where a significant portion of the cash
flow will be derived from a single obligor or a small group of
obligors, such as ABS backed by a small number of commercial loans
(``CMBS''), it may be appropriate for the review to include every pool
asset. Moreover, in ABS transactions where the asset pool composition
turns over rapidly because it contains revolving assets, such as credit
card receivables or dealer floorplan receivables, a different type of
review may be warranted than in ABS transactions involving term
receivables, such as mortgage or auto loans.
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\18\ Given the 180-day statutory deadline prescribed by the Act,
we have not attempted to describe a type of review that may be
appropriate for various different asset classes; we believe that
devising various levels of review applicable to each different asset
class would require a more extensive undertaking than is feasible in
the time provided.
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While proposed Rule 193 would not specify a particular type or
level of review, we note that under our proposal, prospectus disclosure
of the nature of review would be required. We believe the disclosure
requirements described below will give investors an ability to evaluate
the level and adequacy of the issuer's review of the assets. We request
comment below on whether disclosure, without mandating the nature of
the review to be conducted, is sufficient.
While we are not proposing the nature of the review that would be
required, we note that some of the data points proposed in the 2010 ABS
Proposing Release describe the type of review items that may be
relevant to the review that must be performed to comply with Rule
193.\19\ In our proposals requiring enhanced disclosure for an ABS
offering, we proposed to require prospectuses for public offerings of
ABS and ongoing Exchange Act reports to contain specified asset-level
information about each of the assets in the pool.\20\ The asset-level
information would be provided according to proposed standards and in a
tagged data format.\21\
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\19\ Our proposal for asset-level data points in our 2010 ABS
Proposing Release, which remains outstanding, provides examples of
the kind of information that the issuer could undertake to review in
order to comply with proposed Rule 193. For example, in the case of
RMBS, the Commission proposed requiring, for each loan in the pool,
standardized disclosure of, among others, credit score, employment
status, and income of the obligor and how that information was
verified. Some specific data points that were proposed include:
The appraised value used to approve the loan, original property
valuation type, and most recent appraised value, as well as the
property valuation method, date of valuation, and valuation
confidence scores;
Combined and original loan-to-value ratios and the calculation
date;
Obligor and co-obligor's length of employment, whether they are
self-employed and the level of verification (e.g., not verified,
stated and not verified, or direct independent verification with a
third-party of the obligor's current employment); and
Obligor and co-obligor's wage and other income and a code that
describes the level of verification.
For income of the obligor, the issuer would be required, if
adopted, under our 2010 ABS Proposing Release to indicate what level
of review of the income was conducted. One possible level of review
would be that income was verified by previous W-2 forms or tax
returns and year-to-date pay stubs, if the obligor was salaried.
Another possibility would be that the income was verified for the
last 24 months through W-2 forms, pay stubs, bank statements, and/or
tax returns. As noted, we are not proposing specific standards for
the review required by proposed Rule 193. While the Commission
believes these data points may be relevant, they are intended to
serve only as examples of items that we anticipate an issuer would
consider reviewing in order to comply with proposed Rule 193. These
proposals remain outstanding as we consider comments received on the
2010 ABS Proposing Release.
\20\ Some asset classes such as credit card receivables and
stranded costs would be exempt from this rule; however, credit card
ABS would be required to provide grouped account data.
\21\ In addition, Section 942 of the Act adds new Section 7(c)
to the Securities Act requiring the Commission to adopt regulations
requiring each issuer of an asset-backed security to disclose, for
each tranche or class of security, standardized information
regarding the assets backing that security.
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Proposed Rule 193 would require that the asset review be conducted
by the issuer of the ABS.\22\ The issuer, for purposes of this rule,
would be the depositor or sponsor of the securitization. A sponsor
typically initiates a securitization transaction by selling or pledging
to a specially-created issuing entity a group of financial assets that
the sponsor either has originated itself or has purchased in the
secondary market.\23\ In some instances, the transfer of assets is a
two-step process: the financial assets are transferred by the sponsor
first to an intermediate entity, the depositor or the issuer, and then
the depositor transfers the assets to the issuing entity for the
particular asset-backed transaction. The issuing entity is typically a
statutory trust.\24\ In cases where the originator and sponsor may be
different, including in transactions involving a so-called
``aggregator,'' the review may be performed by the sponsor, but we
propose that a review performed by an unaffiliated originator would not
satisfy proposed Rule 193. The originator may have different interests
in the securitization, especially if the securitization involves many
originators where each originator may have contributed a very small
part of the assets in the entire pool, and may have differing
approaches to the review.\25\
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\22\ Under Securities Act Rule 191 (17 CFR 230.191), 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.
``Depositor'' means the depositor who receives or purchases and
transfers or sells the pool assets to the issuing entity. See Item
1101 of Regulation AB. For asset-backed securities 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 asset-backed securities 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
id.
\23\ As defined in Item 1101 of Regulation AB, the ``sponsor''
means the person who organizes and initiates an ABS transaction by
selling or transferring assets, either directly or indirectly,
including through an affiliate, to the issuing entity. See 17 CFR
229.1101(1). Where there is not a two-step transfer, the term
``depositor'' refers to the sponsor.
\24\ See Asset-Backed Securities, Release No. 33-8518 (Dec. 22,
2004) [70 FR 1506] (``2004 Regulation AB Adopting Release'') at
Section III.B.3. The issuing entity is designed to be a passive
entity, and in order to meet the definition of ABS issuer in
Regulation AB its activities must be limited to passively owning or
holding the pool of assets, issuing the ABS supported or serviced by
those assets, and other activities reasonably incidental thereto.
\25\ In the case of so-called aggregators, the sponsor acquires
loans from many other unaffiliated sellers before securitization.
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If an issuer engages a third party for purposes of reviewing the
pool assets, then an issuer may rely on the third-party's review to
satisfy its obligations under proposed Rule 193 provided the third
party is named in the registration statement and consents to being
named as an ``expert'' in accordance with Section 7 of the Securities
Act and Rule 436 under the Securities Act.\26\ We are aware that, at
least with respect to RMBS, there is a specialized industry of third-
party due diligence firms.\27\ These firms typically are retained to
review, for example, the accuracy of loan level data.\28\ Allowing
issuers to contract with a third-party due diligence provider \29\ is
consistent with Section 15E(s)(4) of the
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Exchange Act which, as discussed further below, requires the issuer or
underwriter of an ABS to make publicly available the findings and
conclusions of a third-party due diligence report and requires a third-
party due diligence provider that is employed by a nationally
recognized statistical rating organization (``NRSRO''), an issuer or an
underwriter to provide a written certification to the NRSRO that
produces a credit rating. Under Section 15E(s)(4) of the Exchange Act,
the Commission is required to establish the appropriate format and
content for the certifications ``to ensure that providers of due
diligence services have conducted a thorough review of data,
documentation, and other relevant information necessary for a
nationally recognized statistical rating organization to provide an
accurate rating.''\30\ We believe that a ``third party engaged for
purposes of performing a review'' is a broad category that would
include any third party on which the issuer relies to review assets in
the pool. We believe that the third party engaged by the issuer to
perform a review of the assets for purposes of complying with Rule 193
likely would be the same third-party due diligence providers whose
reports must be made publicly available by an issuer or underwriter for
purposes of Section 15E(s)(4)(A), although we seek comment on whether
that is appropriate.
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\26\ Section 7 of the Securities Act requires the consent of any
person whose profession gives authority to a statement made by him,
is named as having prepared or certified any part of the
registration statement, or is named as having prepared or certified
a report or valuation for use in connection with the registration
statement. The third-party's findings and conclusions must also be
disclosed in a registration statement and a consent from the third
party must be obtained in accordance with Section 7.
\27\ See Testimony of Vicki Beal, Senior Vice President Clayton
Holdings, Before the Financial Crisis Inquiry Commission (Sept. 23,
2010), available at http://www.fcic.gov/hearings/pdfs/2010-0923-Beal.pdf.
\28\ See, e.g., Vikas Bajaj and Jenny Anderson, Inquiry Focuses
on Withholding of Data on Loans, N.Y. Times, January 12, 2008; E.
Scott Reckard, Sub-prime Mortgage Watchdogs Kept on Leash; Loan
Checkers Say Their Warnings of Risk Were Met with Indifference, Los
Angeles Times, March 17, 2008, at C1.
\29\ In this release, we refer to third parties engaged for
purposes of reviewing the assets also as third-party due diligence
providers.
\30\ As noted above, we will address these requirements in a
subsequent rulemaking.
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Request for Comment
1. Does our proposed rule to require the issuer of ABS in a
registered transaction to perform a review of the assets adequately
address Section 7(d)(1) of the Securities Act, as added by Section 945
of the Act? Is this proposal, coupled with the proposed disclosure
requirements described below, sufficient to carry out the purposes of
Section 7(d)(1) of the Act? Can investors evaluate for themselves the
sufficiency of the review undertaken by the issuer? Will issuers
undertake a meaningful review absent a minimum review standard?
2. Should we instead mandate a minimum level of review that must be
performed on the pool of assets? Would requiring a minimum level of
review better carry out the mandate of Securities Act Section 7(d)(1),
which imposes a new review requirement, separate from the disclosure
requirement in Section 7(d)(2)?\31\ If so, what level of review would
be appropriate? For instance, should we require that the review, at a
minimum, provide reasonable assurance that the disclosure in the
prospectus regarding the assets is accurate in all material
respects?\32\ We note that the federal securities laws currently
require that disclosure in the prospectus not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements not
misleading.\33\ Therefore, we would expect that issuers are currently
performing some level of review in order to provide them sufficient
comfort to believe that the prospectus disclosure is accurate. A
reasonable assurance level would be similar to the standard that
companies use in designing and maintaining disclosure controls and
procedures required under Exchange Act Rule 13a-15.\34\ Our rules
generally ``require an issuer to maintain disclosure controls and
procedures to provide reasonable assurance that the issuer is able to
record, process, summarize and report the information required in the
issuer's Exchange Act reports'' within appropriate time frames, and
companies have been subject to these requirements for many years.\35\
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\31\ We note that this section is not limited to requiring
disclosure; the section imposes an obligation to conduct a review
and to disclose the nature of the review. In other contexts, we have
previously adopted rules pursuant to a legislative mandate that
required issuers or other parties to take (or not take) particular
action. See e.g., Management's Report on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange Act
Periodic Reports, Release No. 33-8238 (June 5, 2003) (adopting rules
requiring management of companies subject to the Exchange Act's
reporting requirements to establish and maintain adequate internal
control over financial reporting for the company as directed by
Section 404 of the Sarbanes-Oxley Act of 2002); See also Insider
Trades During Pension Fund Blackout Periods, Release No. 34-47225
(Jan. 22, 2003) (adopting rules to give effect to Section 306(a) of
the Sarbanes-Oxley Act of 2002), which prohibits directors or
executive officers of any issuer of an equity security from
conducting transactions in the issuer's securities during a pension
plan blackout period. The Act also imposes other substantive
requirements, such as requiring securitizers to retain 5% risk. See
Section 941 of the Act.
\32\ Thus, for example, if the prospectus disclosed that the
loans are limited to borrowers with a specified minimum credit
score, or certain income level, the review, as designed, would be
required to provide reasonable assurance that the loans in the pool
met this criterion.
\33\ See Securities Act Section 11 [15 U.S.C. 77k] and
Securities Act Sections 12 [12 U.S.C. 77l]. See also Securities Act
Section 17 [15 U.S.C. 77q], Exchange Act Section 10(b) [15 U.S.C.
78j] and Rule 10b-5 under the Exchange Act [17 CFR 240.10b-5].
\34\ See Exchange Act Rule 13a-15 [17 CFR 240.13a-15].
\35\ See Management's Report on Internal Control over Financial
Reporting and Certification of Disclosure in Exchange Act Periodic
Reports, at Section F.4, Release No. 33-8238 (June 5, 2003). See
also Certification of Disclosure in Companies' Quarterly and Annual
Reports, Release No. 34-8124 (June 14, 2002). ABS issuers must
provide in Form 10-K an assessment by each party participating in
the servicing function regarding its compliance with specified
servicing criteria set forth in Item 1122 of Regulation AB. See 17
CFR 229.1122. A registered public accounting firm must issue an
attestation report on such party's assessment of compliance. See id.
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If we required that the review, at a minimum, provide
reasonable assurance that the disclosure in the prospectus regarding
the assets is accurate in all material respects, would issuers and
their advisers be familiar with this reasonable assurance level and
understand how that level would apply in the context of a review of
assets underlying ABS?\36\
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\36\ Although ABS issuers are not subject to Rule 13a-15, ABS
issuers that also issue corporate securities are familiar with it.
We previously have recognized that, because the information ABS
issuers are required to provide differs significantly from that
provided by other issuers, and because of the structure of ABS
issuers as typically passive pools of assets, the certification
requirements should be tailored specifically for ABS issuers. See
Certification of Disclosure in Companies' Quarterly and Annual
Reports, Release No. 34-8124; See also Revised Statement: Compliance
by Asset-Backed Issuers with Exchange Act Rules 13a-14 and 15d-14,
Statement by the Staff of the Division of Corporation Finance (Feb.
21, 2003), available at http://www.sec.gov/divisions/corpfin/8124cert.htm.
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Would a different level of assurance that the disclosure
in the prospectus regarding the assets is accurate in all material
respects be appropriate? If so, what level and why?
Should a minimum standard require that the review be not
just designed but also effected to provide reasonable assurance that
the disclosure was accurate?
Is there a minimum level of review that would be more
appropriate or useful to investors without imposing impracticable
burdens and costs on issuers?
How, if at all, should any such standard of review affect
current law regarding antifraud liability? How, if at all, should any
such standard of review affect the due diligence defense against
liability under Securities Act Section 11 \37\ and the reasonable care
defense against liability under Securities Act Section 12(a)(2)? \38\
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\37\ 15 U.S.C. 77k.
\38\ 15 U.S.C. 77l(a)(2).
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Should the rule further specify the types of matters--
e.g., credit--that should be covered by the review?
In addition, should the rule further specify the level of
review? For example, should it set out parameters to determine whether
sampling is appropriate?
3. We note that in the 2010 ABS Proposing Release, we proposed
requiring that the underlying transaction agreement in a transaction
relying on certain Commission safe harbors for an exemption from the
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Securities Act contain a provision requiring the issuer to provide to
any initial purchaser, security holder, and designated prospective
purchaser the same information as would be required in a registered
transaction.\39\ Similar to the approach in the 2010 ABS Proposing
Release, should we condition the safe harbors for an exemption from
registration provided in Regulation D and Securities Act Rule 144A on a
requirement that the underlying transaction agreement for the ABS
contain a representation that the issuer performed a review that
complies with proposed Rule 193? Alternatively, if we adopt Rule 193
with some minimum standard of review, should we condition the safe
harbors for an exemption from registration provided in Regulation D and
Securities Act Rule 144A simply on a requirement that the issuer
perform a review of the underlying assets? If so, should we also
require that the issuer represent in the transaction agreement that it
will certify such review or provide disclosure regarding the nature of
the issuer's review and findings and conclusions?
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\39\ See discussion in Section VI of the 2010 ABS Proposing
Release.
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4. Should we specify the types of review that should be performed?
For example, should we require that the review verify the accuracy of
the data entry of loan information into the loan tape, containing data
about the loans in the pool (e.g., loan-to-value ratio, debt-to-income
ratio)? Should the rule establish a standard requiring a review
sufficient to determine whether the underlying assets meet the
underwriting criteria? Should any required review entail reviewing
borrowers' income levels to determine borrowers' ability to repay the
underlying loans? Should the rule establish a standard for reviewing
whether the loans have been originated in compliance with applicable
laws, including predatory lending and Truth in Lending statutes? Should
we establish standards for a review of the accuracy of the property
values reported by the originators for the underlying collateral? \40\
Could each such type of review be conducted across all asset classes
(e.g., residential mortgages, commercial mortgages, credit card
receivables, resecuritizations)? What standards would be appropriate
for each asset class or across all asset classes of asset-backed
securities?
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\40\ See, e.g., joint comment letter from American Society of
Appraisals, American Society of Farm Managers and Rural Appraisers,
and National Association of Independent Fee Appraisers on the 2010
ABS Proposing Release (recommending standards of appraisal).
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5. Should we explore devising review standards for each particular
asset class and consider proposing more detailed standards for the
nature of review at a later date? If so, how?
6. Should our rules, as proposed, permit issuers to rely on a third
party that was hired by the issuer to perform the required review of
the assets under Rule 193? Should we, as proposed, condition the
ability to rely on a third party for this purpose on the third-party's
review satisfying the requirements of Rule 193? When we adopt rules in
the future to establish the appropriate format and content for the
certifications required pursuant to Exchange Act Section 15E(s)(4)(B),
we will be required to do so in a manner ``to ensure that providers of
due diligence services have conducted a thorough review of data,
documentation, and other relevant information necessary for a
nationally recognized statistical rating organization to provide an
accurate rating.'' \41\ Should we condition reliance on third parties
for purposes of Rule 193 upon satisfaction of that standard? How else
could the proposal better effectuate Exchange Act Section 15E(s)(4)?
\42\
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\41\ Section 15E(s)(4)(C) of the Exchange Act.
\42\ Section 15E(s)(4)(A) of the Exchange Act requires issuers
to make publicly available the findings and conclusions of ``any
third-party due diligence report.''
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7. If an originator performs a review of the assets and provides
the findings and conclusions of its review to the issuer and the
originator is not affiliated with the sponsor of the securitization,
should we allow an issuer to rely on the originator's review of the
assets in order to satisfy the issuer's review requirements? If so,
should the information relating to the originator's review be treated
similarly to third-party reviews? As described above, under our
proposal, an issuer would be permitted to rely on a third party to
conduct the Rule 193 review provided the review satisfied the
requirements of Rule 193 and the third party is named in the
registration statement and consents to being named as an expert in
accordance with Section 7 of the Securities Act and Rule 436 under the
Securities Act.\43\ If we allow such reviews to satisfy Rule 193,
should the findings and conclusions of third-party originators who
conduct Rule 193 reviews likewise be subject to expert liability?
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\43\ If an issuer relies on a third party to perform the review
of the assets, the third party would be an expert under Securities
Act Section 11 [15 U.S.C. 77k] and its consent must be included as
an exhibit to the registration statement. See Section 7 of the
Securities Act.
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8. Is there any other party that an issuer should be allowed to
rely upon in order to satisfy the review required by proposed Rule 193?
For example, should an issuer be permitted to rely upon the underwriter
of the offering? If so, how should we treat the findings and
conclusions of that party? Should that party's findings and conclusions
be subject to expert liability? If not, how can we ensure that such
parties would take appropriate responsibility for any findings included
in the issuer's registration statement?
9. We propose to permit an issuer to rely upon a third party that
is engaged for purposes of performing a review of the assets to satisfy
Rule 193. Is ``third party engaged for purposes of performing a review
of the pool assets'' an appropriate description? If not, what is a more
appropriate description? What entities should be considered a ``third
party engaged for purposes of performing a review''? Should such third-
party reviewers include accountants who, for example, perform reviews
and prepare reports pursuant to agreed-upon procedures? Should such
third-party reviewers include attorneys who, for example, provide
opinions as to the perfection of the security interest in the
collateral? \44\ Are there policy reasons why a particular type of
third-party reviewer should be excluded from this requirement? We note
that the issuer would remain responsible for its disclosure under the
federal securities laws, including disclosure regarding pool assets,
even if it engages a third party to perform the review required by Rule
193. Should the proposed rule be revised to clarify this point?
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\44\ See, e.g., John Arnholz & Edward E. Gainor, Offerings of
Asset-Backed Securities Sec. 6.06 (2007 Supplement).
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10. It appears that the scope of third-party due diligence
providers is broad enough to include appraisers and engineers for
purposes of Section 15E(s)(4). Is there a basis for a different
approach? Should this vary among different asset classes? For example,
should the requirements differ depending on whether the asset class for
the securities is commercial mortgages or residential mortgages? We are
aware that for certain types of ABS offerings (e.g., CMBS offerings) an
issuer may receive numerous reports from appraisers and engineers
regarding the property underlying the loan.
11. As discussed below, Exchange Act Section 15E(s)(4)(A) requires
an issuer or underwriter of ABS to make publicly available the findings
and conclusions of any third-party due diligence report obtained by the
issuer or underwriter.
[[Page 64187]]
How does new Exchange Act Section 15E(s)(4)(A) impact the analysis
here? Should the third parties whose findings and conclusions must be
made publicly available under Exchange Act Section 15E(s)(4)(A) be the
same group of third parties that are engaged for the review of the
assets for purposes of proposed Rule 193? If not, how can we
appropriately differentiate between the groups of third-party due
diligence providers? In other words, how should the rule describe the
nature of the work performed by third parties subject to Section
15E(s)(4)(A) versus the nature of the work performed by third parties
employed by an issuer whose findings and conclusions should be required
to be disclosed in a registration statement if such parties should be
different?
12. We have previously noted the potential conflict of interest
arising from the ``issuer pays'' model for NRSROs in which an NRSRO is
paid by the arranger of a structured finance product to rate the
product.\45\ Are third-party due diligence firms subject to the same
type of potential conflicts of interest as credit rating agencies
operating under the ``issuer pays'' model? If so, is there a way to
mitigate this potential conflict?
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\45\ See, e.g., Proposed Rules for Nationally Recognized
Statistical Rating Organizations, Release No. 34-57967 (June 16,
2008) [73 FR 36212].
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13. Are there other potential conflicts relating to a third-party
due diligence provider that we should address? How should we encourage
the quality of third-party reviews? Should a third party be required to
be independent if the review will be used to satisfy Rule 193? If so,
do we need to define ``independent''? How should we define it? Should
we require disclosure relating to the affiliations of the third party?
Item 1119 of Regulation AB \46\ requires disclosure of affiliations
among participants in the securitization. Should we revise Item 1119 to
require disclosure regarding affiliations between a third-party due
diligence provider and the parties listed in Item 1119?
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\46\ 17 CFR 229.1119.
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B. Proposed Disclosure Requirements
1. Registered Offerings
Item 1111 of Regulation AB \47\ outlines several aspects of the
pool that the prospectus disclosure for ABS should cover. We are
proposing amendments to Item 1111 to require disclosure regarding the
nature of the issuer's review of the assets under proposed Rule 193 and
the findings and conclusions of the review. In addition, we are re-
proposing amendments from our 2010 ABS Proposing Release to require
disclosure regarding the composition of the pool as it relates to
assets that do not meet disclosed underwriting standards, as we believe
this information would promote a better understanding of the impact of
the review on the composition of the pool assets.
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\47\ 17 CFR 229.1111.
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a. Nature of Review
We are proposing new Item 1111(a)(7) of Regulation AB to require
that an issuer of ABS disclose the nature of the review it conducts to
satisfy proposed Rule 193. This would include whether the issuer has
hired a third-party firm for the purpose of reviewing the assets. In
either case, we expect that this would include a description of the
scope of the review, such as whether the issuer or a third party
conducted a review of a sample of the assets or what kind of sampling
technique was employed (i.e., random or adverse). This proposed
requirement would implement Securities Act Section 7(d)(2),\48\ as
added by the Act.
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\48\ 15. U.S.C. 77g(d)(2).
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b. Findings and Conclusions
In order to harmonize this provision with the language used in
Exchange Act Section 15E(s)(4)(A), under proposed Item 1111(a)(7), the
issuer would be required to disclose the findings and conclusions of
any review performed by the issuer or by a third party engaged for
purposes of reviewing the assets. Although Section 7(d) of the
Securities Act does not require our rules to mandate that the issuer
disclose the findings and conclusions of a review in its registration
statement, we believe this information is important for investors to
consider along with the information in the registration statement
relating to the nature of the issuer's review and the findings and
conclusions of third-party due diligence providers, as required to be
publicly disclosed by Securities Act Section 7(d) and Exchange Act
Section 15E(s)(4)(A). We believe that disclosure of the findings and
conclusions of the review would provide investors with a better picture
of the assets than only the nature of the review and a better ability
to evaluate the review.
As noted above, Section 15E(s)(4)(A) of the Exchange Act requires
an issuer or underwriter of any ABS to make publicly available the
findings and conclusions of any third-party due diligence report
obtained by an issuer or underwriter. Exchange Act Section 15E(s)(4)(A)
does not apply to an issuer who itself performs the review of the
underlying assets. We believe that it is important to consider these
two provisions together to minimize the difference in the required
disclosure based merely on whether the issuer performs the review, or
instead hires a third party to perform the review.\49\ Consequently, as
noted above, for registered offerings of ABS, proposed Item 1111(a)(7)
would require disclosure of the findings and conclusions of the issuer
or a third-party reviewer. We believe this approach would avoid
incentives for ``regulatory arbitrage'' based merely on whether the
review of assets was performed internally by the issuer, or whether
instead the issuer hired a third party to perform the review. We are
concerned that the intent of Exchange Act Section 15E(s)(4)(A) may be
frustrated, and investor protection may not be served, if issuers who
hired third-party loan review firms to perform a review of the assets
were required to make publicly available the findings and conclusions
of a review of pool assets, but issuers who performed the review
themselves were not, because it could create an incentive for issuers
to conduct the review themselves to avoid making publicly available the
findings and conclusions of any review of the assets underlying the
ABS.
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\49\ As one commentator has noted, the issuer or underwriter
``may decide that it is easier not to retain such an outside firm
than to have to describe its procedures and the information it
reviewed and then provide a certification to the ratings agency * *
*. In short, given the choice, issuers and underwriters might prefer
the easier course of doing nothing.'' Examining Proposals to Enhance
the Regulation of Credit Rating Agencies: Testimony before the U.S.
Senate Committee on Banking, Housing, and Urban Affairs, 111th
Congress, 1st session, p. 6 (2009) (Testimony of John Coffee).
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c. Disclosure Regarding Exception Loans
We also are re-proposing additional requirements that we had
previously proposed in the 2010 ABS Proposing Release. In the 2010 ABS
Proposing Release, we proposed to 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
proposed to require that disclosure regarding the inclusion in the pool
of assets that deviate from the disclosed underwriting criteria be
accompanied by specific data about the amount and characteristics of
those assets that did not meet the disclosed standards. We also
proposed to require disclosure of what compensating or other factors,
if any, were used to determine that the asset should be included in the
pool, despite not having met the originator's specified underwriting
standards. The
[[Page 64188]]
commentators that submitted comments on these proposed requirements in
the 2010 ABS Proposing Release were generally supportive.\50\
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\50\ See, e.g., comment letters from Mortgage Bankers
Association, Community Mortgage Banking Project, Realpoint, LLC, CFA
Institute, and American Securitization Forum; but see comment letter
from IPFS Corporation.
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We are re-proposing an amendment to Item 1111 in this release to
require similar disclosure.\51\ As re-proposed, Item 1111(a)(8) of
Regulation AB would require issuers to disclose how the assets in the
pool deviate from the disclosed underwriting criteria and include data
on the amount and characteristics of those assets that did not meet the
disclosed standards. Issuers would be required to disclose the entity
(e.g., sponsor, originator, or underwriter) who determined that such
assets should be included in the pool, despite not having met the
disclosed underwriting standards, and what factors were used to make
the determination. For example, this could include compensating factors
or a determination that the exception was not material. If compensating
or other factors were used, issuers would be required to provide data
on the amount of assets in the pool that are represented as meeting
each factor and the amount of assets that do not meet those factors. As
discussed in the 2010 ABS Proposing Release, we believe that these
revisions would 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 and help elicit important
information in areas that became problematic in the recent financial
crisis. We also believe that this information would help provide
investors with a fuller understanding of the quality and extent of the
issuer's review of the assets (through hiring a third-party or
otherwise) and how that relates to a determination to either include a
loan in the pool or exclude it from the pool.
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\51\ See proposed Item 1111(a)(8) of Regulation AB.
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The requirements proposed here are substantially similar to what we
proposed in the 2010 ABS Proposing Release. However, we are proposing
an additional requirement, consistent with one commentator's
suggestion, that the issuer disclose the entity (e.g., sponsor,
originator or underwriter) who determined that such assets would be
included in the pool, despite not having met the disclosed underwriting
standards.\52\ We believe that this additional requirement would assist
investors in understanding the entities along the securitization chain
that may be directing decisions to include exception loans in the pool.
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\52\ See Massachusetts AG comment letter.
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2. Exchange Act Section 15E(s)(4)(A) and New Form ABS-15G
As noted above, Section 932 of the Act amends Exchange Act Section
15E by adding, among other things, a new Section 15E(s)(4)(A) which
sets forth the requirement that the issuer or underwriter of any ABS
make publicly available the findings and conclusions of any third-party
due diligence report obtained by the issuer or underwriter. Unlike
Securities Act Section 7(d), which is expressly limited to registered
ABS offerings, we believe that the requirements of Exchange Act Section
15E(s)(4)(A) were intended to apply to issuers and underwriters of both
registered and unregistered offerings of ABS.\53\ In this regard, we
note that Section 941 of the Act amends Section 3(a) of the Exchange
Act to add a definition of ``asset-backed security'' and that this
definition includes asset-backed securities typically offered and sold
in unregistered transactions. Further, unlike Section 945 of the Act,
Section 932 does not refer to Section 7 of the Securities Act or
registration statements filed under the Securities Act.
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\53\ We note that ``underwriter'' is a term that is more
typically used in connection with registered offerings, and the
parties performing similar functions in unregistered transactions
are typically referred to as placement agents or initial purchasers.
We use the term ``underwriter'' here to describe all those persons.
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For registered ABS offerings, this disclosure, with respect to
reports obtained by issuers, would be required to be provided in the
prospectus as described above. In order to implement the disclosure
requirement for unregistered offerings we are proposing new Rule 15Ga-2
under the Exchange Act. Proposed Rule 15Ga-2 would require an issuer of
Exchange Act-ABS to file a new Form ABS-15G to disclose the findings
and conclusions of any third party engaged for purposes of performing a
review obtained by an issuer with respect to unregistered
transactions.\54\ Rule 15Ga-2 also would require an underwriter of
Exchange Act-ABS to file Form ABS-15G with the same information for
reports obtained by an underwriter in registered and unregistered
transactions. Proposed Form ABS-15G would be filed with the Commission
on EDGAR.
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\54\ In a separate release implementing Section 943 of the Act,
we are proposing new Form ABS-15G which would be required to be
filed by any securitizer that offers asset-backed securities that
would be subject to the federal securities laws. See Disclosure for
Asset-Backed Securities Required by Section 943 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010, Release No.
33-9148 (Oct. 4, 2010) (the ``Section 943 Release''). The term
``securitizer'' is defined in Section 15G of the Exchange Act, as
added by the Act. Section 15E(s)(4)(B)-(D) also would require that
when third-party due diligence services are employed by an NRSRO, an
issuer or an underwriter, the person providing the services give a
certification to any NRSRO that produces a rating. Section 15E(s)(4)
also requires the Commission to issue rules regarding the format,
content and disclosure of the certification. As noted above, the
Commission will propose and adopt rules to address the other
provisions of Section 15E(s)(4) not later than one year after the
date of the Act's enactment.
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We are proposing that Form ABS-15G be required to be filed five
business days prior to the first sale of the offering. This
requirement, if adopted, would allow investors and NRSROs time to
consider the disclosure about a third-party's findings and conclusions
regarding its review of the pool assets.\55\
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\55\ This five-day time period is intended to be consistent with
the proposal in the 2010 ABS Proposing Release that would require
that an ABS issuer using a shelf registration statement on proposed
Form SF-3 file a preliminary prospectus containing transaction-
specific information at least five business days in advance of the
first sale of securities in the offering. Commentators' reactions to
the proposed five-day requirement in the 2010 ABS Proposing Release
were mixed, with some commentators suggesting that five days was
longer than investors needed to consider the information in the
prospectus (e.g., comment letters from American Bar Association,
Bank of America), while other commentators were supportive of the
proposed five-day requirement (e.g., comment letter from MetLife,
Inc.).
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We recognize that public disclosure of information relating to an
unregistered offering could raise concerns regarding an issuer's or
underwriter's reliance on the private offering exemptions and safe
harbors under the Securities Act.\56\ We intend for Form ABS-15G to be
used for both registered and unregistered ABS transactions (although as
we note below, if the information has already been provided in a
prospectus for a registered transaction, it need not be provided again
in Form ABS-15G). We are of the view that issuers and underwriters can
disclose information required by Rule 15Ga-2 without jeopardizing
reliance on those exemptions and safe harbors, provided that the only
information made publicly available is that which is required by the
proposed rule, and the issuer does not otherwise use Form ABS-15G to
offer or sell securities or in a manner that conditions the market for
offers or sales of its securities.\57\
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\56\ See 15 U.S.C. 77d(2), 17 CFR 230.144A, 17 CFR 230.501-508.
\57\ Filing proposed Form ABS-15G would not foreclose the
reliance of an issuer on the private offering exemption in the
Securities Act and the safe harbor for offshore transactions from
the registration provisions in Section 5 [15 U.S.C. 77e]. However,
the inclusion of information beyond that required in proposed Rule
15Ga-2, may jeopardize such reliance by constituting a public
offering or conditioning the market for the ABS being offered under
an exemption.
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[[Page 64189]]
Under our proposal, Form ABS-15G would be signed by the senior
officer in charge of securitization of the depositor, if the form were
filed to include the findings and conclusions of a third party hired by
the issuer. We believe that requiring the senior officer in charge of
securitization of the depositor to sign the form is consistent with
other signature requirements for filings relating to asset-backed
securities.\58\ If the form included the findings and conclusions of a
third party engaged by the underwriter, then the form would be signed
by a duly authorized officer of the underwriter. We believe that
requiring Form ABS-15G to be signed by a duly authorized officer of the
underwriter would provide an incentive for the person who signs the
form to review it for accuracy.
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\58\ See, e.g., signature requirement for Form 10-K (17 CFR
249.312). It is also consistent with our proposed signature
requirements for the registration statement for ABS in the 2010 ABS
Proposing Release.
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As discussed above, because we are proposing that, for registered
offerings, the findings and conclusions of the report of a third party
that is engaged by the issuer for purposes of asset review would be
required to be included in a prospectus that is required to be filed
with the Commission,\59\ an issuer that has filed such information on
EDGAR would satisfy the Exchange Act Section 15E(s)(4)(A) requirement
to make publicly available a third-party report obtained by an ABS
issuer. Thus, an ABS issuer that has disclosed the findings and
conclusions of a third-party due diligence provider in the first
prospectus that is required to be filed under Rule 424 of the
Securities Act \60\ and filed in accordance with Rule 424 would not be
required to file a Form ABS-15G with the same information. However, any
underwriter that has hired a third-party due diligence provider for the
registered offering would still be required to file Form ABS-15G with
the findings and conclusions of that third-party due diligence
provider.
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\59\ In the 2010 ABS Proposing Release, we proposed to require
that an asset-backed issuer that offers securities off of a shelf
registration statement file a preliminary prospectus at least five
business days before first sale. We anticipate that this information
would be required to be included in such preliminary prospectus,
should we adopt that proposal.
\60\ 17 CFR 230.424.
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The market for Exchange Act-ABS is global.\61\ Securitizers in the
United States may sell ABS to offshore purchasers as part of a
registered or unregistered offering. As proposed, these transactions
would be subject to the requirements of proposed Rule 15Ga-2. In
addition, U.S. investors may participate in offerings of ABS that are
primarily offered by foreign securitizers to purchasers outside the
United States. For example, a small proportion of a primarily offshore
offering of ABS may be made available to U.S. investors pursuant to
Section 4(2) of the Securities Act or Rule 144A under that Act.
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\61\ Indeed, the International Organization of Securities
Commissions (IOSCO) cites the recent crisis in the subprime markets,
stemming from defaulted mortgage loans in the United States and
affected by issues related to liquidity and transparency, as
evidence of the interrelation of today's global markets. See Report
on the Subprime Crisis--Final Report, Report of the Technical
Committee of IOSCO, May 2008, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD273.pdf.
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We recognize that Exchange Act Section 15E(s)(4)(A) does not
specify how its requirements apply to offshore transactions. As noted,
consistent with Section 15E(s)(4)(A), proposed Rule 15Ga-2 would
require issuers and underwriters to disclose information about
unregistered transactions, including those sold in unregistered
transactions outside the United States. Securities that are sold in
foreign markets and assets originated in foreign jurisdictions may be
subject to different laws, regulations, customs and practices which can
raise questions as to the appropriateness of the disclosures called for
under Form ABS-15G. Although our proposed rules are required by the
Act, and we believe the added protections of our rules would benefit
investors who purchase securities in these offerings, we are mindful
that the imposition of a filing requirement in connection with private
placements of ABS in the United States may result in foreign issuers
seeking to avoid the filing requirement by excluding U.S. investors
from purchasing portions of ABS primarily offered outside the United
States, thus depriving U.S. investors of diversification and related
investment opportunities.
Request for Comment
14. Are our disclosure proposals appropriate? Should we provide
more specific requirements regarding the information that must be
provided about the nature and scope of the review? If so, what should
we require?
15. Should we consider Securities Act Section 7(d) and Exchange Act
Section 15E(s)(4)(A) together and require disclosure of the findings
and conclusions of the issuer's or third party's review of the assets,
as proposed? Should we, instead, implement Section 15E(s)(4)(A) as part
of the later rulemaking under Section 15E?
16. Should we require, as proposed, disclosure relating to assets
that deviate from the disclosed origination underwriting criteria?
17. Should we require, as proposed, disclosure of the entity who
determined that assets that did not meet the disclosed criteria should
be included in the pool, despite not having met the disclosed
underwriting criteria? Should issuers be required to disclose, as
proposed, what factors were used to make the determination? Would this
provide useful information for investors?
18. Is requiring the filing of information regarding the findings
and conclusions of the third-party due diligence provider's report on
proposed Form ABS-15G on EDGAR an appropriate way for issuers in
unregistered offerings and for underwriters in registered and
unregistered offerings to make this information publicly available?
Should we allow Web site posting of the information instead? If so, how
can we ensure the materials remain public? What advantages does Web
site posting have over requiring that the information be filed on
EDGAR? How do we ensure that investors and market participants have
access to such information? What would be the liability implications of
allowing the information to be posted on a Web site as an alternative
to filing on EDGAR? Are there other appropriate means of making the
findings and conclusions ``publicly available''?
19. As discussed in request for comment number 10 above, we are
aware that for certain types of ABS offerings an issuer may receive
numerous reports from appraisers and engineers regarding the property
underlying the loan. To what extent do the findings and conclusions of
these reports help the issuer in performing its review? We are aware
that CMBS issuers often provide the results of such reports to the ``B-
piece purchaser'' to the extent that the findings of those reports
differ from the representations and warranties regarding the assets in
the underlying transaction agreements. Should we require that the
issuer disclose all of the findings and conclusions provided to a B-
piece buyer for purposes of the required disclosure in the registration
statement? To what extent do the findings and conclusions of these
reports assist rating agencies rating ABS? Should we require, for
purposes of Section 15E(s)(4)(A), the findings and conclusions of such
reports to be disclosed only to the extent that those findings and
conclusions differ from the
[[Page 64190]]
representations and warranties or the complete list of findings and
conclusions provided to a B-piece buyer?
20. Should we provide a temporary hardship exemption from
electronic submission of Form ABS-15G with the Commission for filers
who experience unanticipated technical difficulties that prevent timely
preparation and submission of an electronic filing? Are there any
reasons that ABS issuers and underwriters would not be able to submit
Form ABS-15G on EDGAR in a timely fashion? If so, what would be an
appropriate format for the filing? Would a paper filing be useful to
investors and other market participants? Is timely availability of an
electronic filing of this information important? If so, should we
instead require that the information be posted on a Web site on the
same day it was due to be filed on EDGAR, but require that the filer
submit a confirming electronic copy of the information within a
prescribed number of business days (e.g., six) of filing the
information in paper? \62\
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\62\ See Rule 201 of Regulation S-T [17 CFR 232.201].
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21. Is there any reason Exchange Act Section 15E(s)(4)(A) should
not apply to both registered and unregistered ABS transactions? If the
requirement applies to both registered and unregistered transactions,
should the universe of ABS offerings that are subject to the
requirement be defined, as proposed, as an offering of asset-backed
securities, as that term is defined in Section 3(a)(77) of the Exchange
Act? Should the requirement be instead applicable to some other
subcategory of asset-backed securities? For example, existing Exchange
Act Section 15E(i) refers to a security or money market instrument
issued by an asset pool or as part of any asset-backed or mortgage-
backed securities transaction. Should our rule refer to this
description of an asset-backed security instead of the proposed
reference to Exchange Act Section 3(a)(77)? \63\
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\63\ Rules relating to NRSROs have used this terminology, and we
have said that this refers to a ``broad category of financial
instrument that includes, but is not limited to, asset-backed
securities such as residential mortgage-backed securities and to
other types of structured debt instruments such as collateralized
debt obligations, including synthetic and hybrid CDOs, or
collateralized loan obligations.'' See, e.g., fn. 3 of Amendments to
Rules for Nationally Recognized Statistical Rating Organizations,
Release No. 34-61050 (Nov. 23, 2009)[74 FR 63832].
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22. Should we exempt any issuers, underwriters or other parties
from this requirement? Should we exempt issuers and underwriters of ABS
that are not rated by an NRSRO from having to make publicly available
the findings and conclusions of third-party due diligence reports? \64\
As proposed, Rule 15Ga-2 would apply to issuers and underwriters of ABS
that are exempted securities as defined in Section 3(a)(12) of the
Exchange Act, including government securities and municipal securities.
Should such exempted securities be exempt from this provision? \65\
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\64\ For example, Fannie Mae and Freddie Mac are government
sponsored enterprises (``GSEs'') 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
Exchange Act. These securities have not been, and are not currently,
rated by a credit rating agency.
\65\ Exchange Act ``exempted securities'' include government
securities and municipal securities, as defined under the Exchange
Act. For example, MBS issued by the Government National Mortgage
Association are fully modified pass-through securities guaranteed by
the full faith and credit of the United States government. See
http://www.ginniemae.gov/.
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23. Would the proposed requirement that Form ABS-15G be filed five
business days prior to first sale provide investors with sufficient
time to review the findings and conclusions contained therein? Would it
provide NRSROs with sufficient time to take the included information
into account in determining a rating? If not, what would be a more
appropriate filing deadline and why? Are five business days also
appropriate in unregistered offerings? Is there reason to require a
different number of days in unregistered offerings?
24. Is our proposed signature requirement for Form ABS-15G
appropriate? Is it necessary? Conversely, are there other appropriate
individuals that are better suited to sign the form?
25. Should issuers of registered ABS offerings be required to
provide notice on Form ABS-15G that they have provided information
relating to the third-party due diligence report obtained by the issuer
in a prospectus that is filed with the Commission?
26. Where an issuer, underwriter or NRSRO employs a third-party due
diligence provider, Section 15E(s)(4)(B) of the Exchange Act also
requires that the person providing the due diligence services provide
to the NRSRO a written certification in the format and containing
content to be determined by the Commission. The Commission is required
to prescribe this form and content not later than one year after
enactment of the Act. Although we are not proposing to implement this
requirement in this release, we request comment on the appropriate
format and content for this certification and how we can appropriately
coordinate the rules and requirements proposed in this release with
that statutory requirement.
27. Are there any extra or special considerations relating to
offshore sales of ABS that we should take into account in our rules?
Should our rules permit issuers or underwriters to exclude information
from Form ABS-15G with respect to assets underlying ``foreign-offered
ABS,'' and if so, should foreign-offered ABS be defined to include
Exchange Act-ABS that were initially offered and sold solely in
accordance with Regulation S, the payments to holders of which are in
non-U.S. currency, that are governed by non-U.S. law, and have foreign
assets (i.e., assets that are not originated in the United States) that
comprise at least a majority of the value of the asset pool? For this
purpose, should the foreign asset composition threshold be higher or
lower (e.g., 40%, 60%, or 80%)? Would another definition be more
appropriate?
28. Should our rules require issuers that are foreign private
issuers \66\ to provide information on Form ABS-15G for those Exchange
Act-ABS that are to be offered and sold in the United States pursuant
to an exemption in an unregistered offering, as proposed? Instead,
should our rules only require disclosure about Exchange Act-ABS as to
which more than a certain percentage (e.g., 5%, 10% or 20%) of any
class of such ABS is sold to U.S. persons?
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\66\ 17 CFR 240.3b-4.
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29. Should we include requirements tailored to revolving asset
master trusts? For example, should we include a disclosure requirement
in Exchange Act Form 8-K requiring that the issuer provide updated
disclosure on its review or due diligence with respect to accounts or
assets that are added to the pool after the offering transaction has
been completed? Should this be a requirement for each Form 10-D or
should it be provided on a quarterly basis instead?
III. General Request for Comment
We request comment on the specific issues we discuss in this
release, and on any other approaches or issues that we should consider
in connection with the proposed amendments. We seek comment from any
interested persons, including investors, asset-backed issuers,
sponsors, originators, servicers, trustees, disseminators of EDGAR
data, industry analysts, EDGAR filing agents, and any other members of
the public.
IV. Paperwork Reduction Act
Certain provisions of the proposed rule amendments contain
``collection of information'' requirements within the
[[Page 64191]]
meaning of the Paperwork Reduction Act of 1995 (PRA).\67\ The
Commission is submitting these proposed amendments and proposed rules
to the Office of Management and Budget (OMB) for review in accordance
with the PRA.\68\ An agency may not conduct or sponsor, and a person is
not required to comply with, a collection of information unless it
displays a currently valid control number. The titles for the
collections of information are: \69\
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\67\ 44 U.S.C. 3501 et seq.
\68\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
\69\ The paperwork burden from Regulation S-K is imposed through
the forms that are subject to the requirements in those regulations
and is reflected in the analysis of those forms. To avoid a
Paperwork Reduction Act inventory reflecting duplicative burdens and
for administrative convenience, we assign a one-hour burden to
Regulation S-K.
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(1) ``Form ABS-15G'' (a proposed new collection of information);
(2) ``Form S-1'' (OMB Control No. 3235-0065);
(3) ``Form S-3'' (OMB Control No. 3235-0073); and
(4) ``Regulation S-K'' (OMB Control No. 3235-0071).
Compliance with the proposed amendments would be mandatory.
Responses to the information collections would not be kept confidential
and there would be no mandatory retention period for proposed
collection of information.
Our PRA burden estimates for the proposed amendments are based on
information that we receive on entities assigned to Standard Industrial
Classification Code 6189, the code used with respect to ABS, as well as
information from outside sources.\70\ When possible, we base our
estimates on an average of the data that we have available for the
years 2004 through 2009.
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\70\ We rely on two outside sources of ABS issuance data. We use
the ABS issuance data from Asset-Backed Alert on the initial terms
of offerings, and we supplement that data with information from
Securities Data Corporation (SDC).
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1. Form ABS-15G
Form ABS-15G is a new collection of information that relates to
proposed disclosure requirements for issuers or underwriters of any
ABS. Under the proposed amendments, issuers or underwriters would be
required to make publicly available the findings and conclusions of any
third party engaged by the issuer or underwriter for the purposes of
performing a review of the underlying assets. The burden assigned to
Form ABS-15G reflects the cost of preparing and filing the form on
EDGAR. The proposed Form ABS-15G would be filed by issuers of
unregistered offerings of ABS, and underwriters of registered and
unregistered offerings of ABS. During 2004 through 2009, there was an
average of 958 registered offerings of ABS per year. We assume for
purposes of this PRA that third-party due diligence reports typically
are obtained only in RMBS and CMBS transactions. This assumption is
based on our belief that the smaller the average loan in the pool of
assets and the higher the frequency with which the pool loans revolve
the less likely it is that there will be a third-party due diligence
report. We estimate that RMBS and CMBS comprised 54% (or 517) of the
registered offerings during the above time frame.\71\ We assume that
not all offerings of RMBS and CMBS will involve a third-party due
diligence report. We estimate that 75% of RMBS and CMBS offerings would
involve a third-party due diligence report. Thus, we estimate that 388
of all registered offerings (958 x 0.54 x 0.75) involve the hiring of a
third-party due diligence provider by an underwriter. Because issuers
would include the findings and conclusions of any third-party due
diligence report in a prospectus in registered offerings, only
underwriters would file a Form ABS-15G in registered ABS offerings.
---------------------------------------------------------------------------
\71\ This estimate is based on data from Securities Data
Corporation (SDC).
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In addition, over the period 2004 through 2009, the average number
of Rule 144A ABS offerings per year was 716.\72\ Because there may be
additional ABS offerings that would have been subject to the
requirement to file Form ABS-15G (e.g., offerings of asset-backed
securities that relied upon Section 4(2) for an exemption from
registration), we assume that there would be a total of 800 offerings
of asset-backed securities that could be subject to our proposed Form
ABS-15G filing requirement. Using the same assumptions and percentage
estimates as above, we estimate that 324 (800 x 0.54 x 0.75) of all
unregistered ABS offerings involve the hiring of a third-party due
diligence provider by the issuer and underwriter or placement agent.
Therefore, we estimate that approximately 712 (388 + 324) Forms ABS-15G
would be filed annually. Our burden estimate is based on the assumption
that the issuer's or underwriter's costs would be limited since Rule
15Ga-2 only requires that issuers or underwriters make publicly
available the findings and conclusions they obtained from a third-
party. We estimate that the burden to an issuer or underwriter of
making the findings and conclusions of a third-party publicly available
will be approximately 5 hours to prepare, review and file the Form ABS-
15G. This would amount to 3,560 burden hours (5 hours x 712 forms). We
allocate 75%, or 2,670 (0.75 x 3,560), of those hours to internal
burden hours and 25% for professional costs at $400 per hour for total
outside costs of $356,000 ($400 x 0.25 x 3,560).
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\72\ This is based on ABS issuance data from Asset-Backed Alert
and information from SDC.
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2. Rule 15Ga-2
Rule 15Ga-2 contains the requirements for disclosure that an issuer
must provide in Form ABS-15G filings described above. The collection of
information requirements, however, are reflected in the burden hours
estimated for Form ABS-15G. Therefore, Rule 15Ga-2 does not impose any
separate burden.
3. Forms S-1 and S-3
We are proposing amendments to Item 1111 of Regulation AB to
increase the disclosure that would be required in offerings of ABS
registered on either Forms S-1 or S-3. The disclosure required under
Item 1111 would include disclosure that otherwise would be required by
proposed Exchange Act Rule 15Ga-2 (which implements Section
15E(s)(4)(A) of the Exchange Act), as well as additional information
about issuer reviews not required by proposed Rule 15Ga-2. The
amendment to Item 1111 would require issuers to disclose how the assets
in the pool deviate from the disclosed underwriting criteria, and
include data on the amount and characteristics of those assets that did
not meet the disclosed standards. Issuers would be required to disclose
the entity who determined that such assets should be included in the
pool and what factors were used to make the determination. Under
proposed Rule 193, if an issuer employs a third party to perform the
review, the third party must be named in the registration statement and
consent to being named as an expert in accordance with Securities Act
Rule 436. Thus, we anticipate that issuers will incur a burden in
obtaining a consent from the third party.
We believe that the proposed requirements would increase the annual
incremental burden to issuers by 30 hours per form.\73\ For
registration statements, we estimate that 25% of the burden of
preparation is carried by the company internally and that 75% of the
burden is carried by outside
[[Page 64192]]
professionals retained by the registrant at an average cost of $400 per
hour. From 2004 through 2009, an estimated average of four offerings
was registered annually on Form S-1 by ABS issuers. We believe that the
proposed requirements would result in an increase to the internal
burden to prepare Form S-1 of 30 burden hours (0.25 x 30 x 4) and an
increase in outside costs of $36,000 ($400 x 0.75 x 30 x 4). During
2004 through 2009, we estimate an annual average of 929 offerings of
ABS registered on Form S-3. Therefore, we believe that the proposed
requirements would result in an increase to the internal burden to
prepare Form S-3 filings of 6,968 burden hours (0.25 x 30 x 929) and a
total cost of $8,361,000 (400 x 0.75 x 30 x 929).
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\73\ This does not reflect burdens associated with the review
that would be required as a result of proposed Rule 193, which we
believe does not impose a collection of information requirement for
purposes of our PRA analysis.
---------------------------------------------------------------------------
Regulation S-K
Regulation S-K includes the item requirements in Regulation AB and
contains the disclosure requirements for filings under both the
Securities Act and the Exchange Act. In 2004, we noted that the
collection of information requirements associated with Regulation S-K
as it applies to ABS issuers are included in Form S-1 and Form S-3.\74\
The proposed changes would revise Regulation S-K. The collection of
information requirements, however, are reflected in the burden hours
estimated for the various Securities Act and Exchange Act forms related
to ABS issuers. The rules in Regulation S-K do not impose any separate
burden. Consistent with historical practice, we have retained an
estimate of one burden hour for Regulation S-K for administrative
convenience.
---------------------------------------------------------------------------
\74\ See 2004 Regulation AB Adopting Release.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current Proposed Current Increase Proposed Current Increase in Proposed
Form annual annual burden in burden burden professional professional professional
responses responses hours hours hours costs costs costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
S-1......................................... 1,168 1,168 247,982 30 248,012 $297,578,400 $36,000 $297,614,400
S-3......................................... 2,065 2,065 236,959 6,968 243,927 284,350,500 8,361,000 292,711,500
Form ABS-15G................................ .......... 712 .......... 2,670 2,670 .............. 356,000 356,000
-----------------------------------------------------------------------------------------------------------
Total................................... .......... .......... .......... 9,668 .......... .............. 8,753,000 ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
Request for Comment
We request comments in order to evaluate (1) Whether the proposed
collection of information is necessary for the proper functioning of
the agency, including whether the information would have practical
utility; (2) the accuracy of our estimate of the burden of the proposed
collection of information; (3) whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; and
(4) whether there are ways to minimize the burden of the collection of
information on those who are to respond, including through the use of
automated collection techniques or other forms of information
technology.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct the comments to the Office of
Management and Budget, Attention: Desk Officer for the Securities and
Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and should send a copy to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, with reference to File No. S7-26-10. Request
for materials submitted to OMB by the Commission with regard to these
collections of information should be in writing, refer to File No. S7-
26-10, and be submitted to the Securities and Exchange Commission,
Office of Investor Education and Advocacy, 100 F Street, NE.,
Washington, DC 20549-0213. OMB is required to make a decision
concerning the collection of information between 30 and 60 days after
publication of this release. Consequently, a comment to OMB is best
assured of having its full effect if OMB receives it within 30 days of
publication.
V. Benefit-Cost Analysis
The proposed amendments to our regulations for ABS relate to
requiring an issuer of an ABS to perform a review of the assets
underlying the security. We are proposing rules that are intended to
implement the requirements under new Section 7(d) of the Securities
Act. We also are proposing rules that are intended to implement part of
new Section 15E(s)(4) of the Exchange Act. First, we are proposing a
new Securities Act rule to require issuers of registered offerings of
asset-backed securities to perform a review of the assets underlying
the asset-backed securities. Second, we also are proposing new
requirements in Regulation AB to require disclosure regarding:
The nature of the review of assets conducted by an ABS
issuer;
The findings and conclusions of a review of assets
conducted by an issuer or third party;
Data on assets in the pool that do not meet the
underwriting standards; and
Disclosure regarding which entity determined that the
assets should be included in the pool, despite not having met the
underwriting standards and what factors were considered in making this
determination.
We also are proposing to require that an issuer or underwriter of any
Exchange Act-ABS be required to file the findings and conclusions of a
third-party due diligence report on a new form filed on EDGAR.
A. Benefits
The proposed amendments are designed to increase investor
protection by implementing the requirement on issuers to perform a
review of the underlying assets and disclose the nature of the review.
This should lead to enhanced transparency in offerings of ABS, and
result in an increase in investors' understanding of the underlying
pool of assets. We believe that the proposal to require the issuer to
perform a review of the assets underlying an ABS is likely to result in
an improvement in the quality of securitized loan pools to the extent
that these reviews are able to identify non-compliant or otherwise low-
quality assets. It also will allow the public to determine the adequacy
and level of due diligence services provided by a third party which is
consistent with the purposes of Section 932 of the Act.\75\ We
[[Page 64193]]
expect that requiring a review of the assets will result in loan pools
of higher quality.
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\75\ See S. Rep. No. 111-176, at 121 (2010).
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Further, the description of the nature of the review and disclosure
of findings and conclusions should encourage more rigorous asset
reviews, whether by issuers or third parties engaged to perform the
asset reviews. These disclosures would complement the requirement to
perform a review by improving their quality. We also believe that the
proposal to make publicly available on EDGAR the findings and
conclusions of third-party due diligence reports in ABS offerings will
allow the public to better assess and more easily determine the
adequacy and level of due diligence services provided by a third party.
This benefit of the proposed rule is consistent with the purposes of
Section 932 of the Act as indicated in the legislative history of the
Act which states that ``many analysts point to the decline of due
diligence as a factor that contributed to the poor performance of
asset-backed securities during the crisis.'' \76\ We also note the
reference in the Act's legislative history to a need to address the
lack of due diligence regarding information on which ratings are
based.\77\ Finally, although issuers in registered offerings would not
be required to use a third party to satisfy the review requirement, as
a condition to such use, a third party would be required to consent to
being named in the registration statement and thereby accept potential
expert liability, which should increase the quality of that review. In
registered offerings, the potential expert liability for the findings
of third-party reviews provides accountability and creates stronger
incentives to perform high-quality reviews that protect investors. The
resulting disclosures reduce the information risk of investing in these
securities. Our proposal to require disclosure by the issuer of the
nature, findings and conclusions of its review could result in improved
asset review practices. Moreover, this could be useful to investors if
they prefer investing in securities about which there is disclosure
indicating a more robust review over investing in securities about
which the disclosure indicates a less robust review.
---------------------------------------------------------------------------
\76\ See id.
\77\ See id.
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The proposed requirement to disclose exception loans should provide
important information to investors regarding the characteristics of the
pool that may otherwise not be publicly known. For those issuers that
currently provide asset-level information about the pool, an investor
might be able to determine some information about the number of
exception loans; however, even where this could be determined, the
proposals would reduce investors' cost of information production by
reducing duplicative efforts on their part to gather such data on their
own or purchase it through data intermediaries. We also are proposing
to require more information about the entities that have determined
that an asset that deviates from underwriting standards should,
nonetheless, be included in the pool. Because third-party asset review
providers typically work for sponsors, there is potentially a conflict
of interest when a sponsor can waive or overrule the third-party's
conclusions that insufficient compensating factors exist to allow
inclusion of an asset that does not meet the underwriting standards
governing the pool.\78\ We expect that information about which entity
made the determination to include an asset in the pool despite not
having met the underwriting standards will provide investors with
information to gauge whether the decision to accept such loans
otherwise may be subject to a conflict of interest. We also expect this
will reduce the cost of information asymmetry and could be useful
information to investors because investors may be able to price a
securitization of a pool of assets more accurately, and to credit
rating agencies in assigning more informed credit ratings.
---------------------------------------------------------------------------
\78\ See e.g., comment letter from Massachusetts AG.
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Our proposal to require disclosure of the nature of the review, as
well as the findings and conclusions of any such review, may increase
investor confidence in the market for ABS. This proposal, in
conjunction with the proposal to require that issuers perform a review,
could allow investors to better understand the information about the
asset pool and credit risk of the asset pool including whether the
asset pool consists of loans to borrowers without the ability to repay
the loans, or is composed of loans made to creditworthy borrowers.
In addition, Section 15E(s)(4)(A) of the Exchange Act, as added by
Section 932 of the Act, which requires issuers and underwriters to make
the findings and conclusions of third-party due diligence reports
publicly available, is aimed at improving the quality of information
received by rating agencies issuing ratings on asset-backed securities
in registered and unregistered offerings.\79\ We have proposed to make
this information publicly available on EDGAR. By requiring the proposed
Form ABS-15G to be filed on EDGAR, the information that would be
required would be housed in a central repository that would preserve
continuous access to the information.
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\79\ See id.
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B. Costs
The proposed rule would implement the requirement that all issuers
of registered ABS offerings perform a review of the underlying assets
and that those issuers disclose the nature of their review. Although
some issuers of ABS may currently perform a review of the underlying
assets, ABS issuers in registered offerings may incur additional costs
to perform more extensive reviews, whether the issuer performs the
review itself, or hires a third-party to perform the review. It is
possible that by not establishing a minimum level of review and leaving
the determination of the appropriate level of review to each individual
issuer, a lack of a uniform standard could result in investors having
difficulty comparing the level of review and the disclosures about the
review among various issuers and asset classes.
It is possible that by not establishing a minimum level of review
and leaving the determination of the appropriate level of review to
each individual issuer, some issuers who otherwise may have performed a
more thorough review to meet a proposed minimum level of review may
design their reviews to accomplish no more than what is required by the
rule.
As proposed, Rule 193 permits an issuer to rely on a third party to
perform the required review, provided the review satisfies the standard
in Rule 193 and the third party consents to be named in the
registration statement. Some asset classes may not have third-party due
diligence providers available to be engaged to conduct a review. In
instances where an issuer must conduct the review, we believe that the
costs of conducting these reviews will not exceed the costs of engaging
third parties to conduct the reviews. Third-party due diligence
providers are not registered with the Commission and some may not be
subject to professional standards. Further, it is possible that third-
party providers may lack sufficient capabilities to provide the review
for which they are retained. However, our rules would subject third-
party due diligence providers in registered transactions to potential
expert liability for the disclosure regarding the findings and
conclusions of their review of the assets. For certain firms, however,
in particular smaller due diligence entities
[[Page 64194]]
that may lack the financial resources to cover their potential
liabilities, expert liability may not be a significant deterrent
because these firms have less financial resources exposed to potential
liability and may not be as concerned about losing potential claims
compared to firms that have more financial resources exposed to
liability. This may create a burden on both qualified providers of due
diligence and the securitizers that hire them.
We acknowledge that this requirement would impose costs on issuers
and third-party due diligence providers, and they may be required to
adjust their practices (and prices in the case of third parties) to
account for this new requirement.
Finally, for unregistered offerings, the disclosure of the results
of an asset review is required only for third-party reviews. This may
indirectly result in discouraging issuers and underwriters from
obtaining third-party reviews in unregistered offerings.
Our proposals requiring issuers to disclose the nature of the
review as well as the findings and conclusions of such review will
impose a disclosure burden. In addition, filers will make the
information proposed to be required available on EDGAR, which requires
obtaining authorization codes and adherence to formatting instructions.
For purposes of the PRA, we estimate that the new disclosure would
cause an increase in the total cost of preparing Forms S-1 and S-3 of
$13,995,000. In addition, for purposes of the PRA, we estimate that the
cost for including third-party findings in Form ABS-15G would be
$356,000.
Request for Comment
We seek comments and empirical data on all aspects of this Benefit-
Cost Analysis including identification and quantification of any
additional costs and benefits. Specifically, we ask the following:
What would be the costs to an issuer of performing a
review of the underlying assets? How would this compare to the cost of
hiring a third-party provider to perform the review?
What would be the additional costs arising from the
application of expert's liability to third-parties performing reviews
for issuers?
VI. Consideration of Burden on Competition and Promotion of Efficiency,
Competition and Capital Formation
Section 23(a) of the Exchange Act \80\ requires the Commission,
when making rules and regulations under the Exchange Act, to consider
the impact a new rule would have on competition. Section 23(a)(2)
prohibits the Commission from adopting any rule that would impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act. Section 2(b) of the Securities Act
\81\ and Section 3(f) of the Exchange Act \82\ require the Commission,
when engaging in rulemaking that requires it to consider whether an
action is necessary or appropriate in the public interest, to consider,
in addition to the protection of investors, whether the action would
promote efficiency, competition, and capital formation. Below, we
address these issues for each of the proposed, substantive changes to
offerings of ABS.
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\80\ 15 U.S.C. 78w(a).
\81\ 15 U.S.C. 77b(b).
\82\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
As a result of the financial crisis and subsequent events, the
market for securitization has declined due, in part, to perceived
uncertainty about the accuracy of information about the pools backing
the ABS and perceived problems in the securitization process that
affected investors' willingness to participate in these offerings.\83\
Greater transparency of the review performed on the underlying assets
would decrease the uncertainty about pool information and, thus, should
help investors price these products more accurately. The proposed
requirements are likely to positively affect pricing, efficiency, and
capital allocation in ABS capital markets.
---------------------------------------------------------------------------
\83\ See, e.g., David Adler, A Flat Dow for 10 Years? Why it
Could Happen, Barrons (Dec. 28, 2009).
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Finally, the introduction of expert liability on the third-party
review providers may have consequences for the competition in this
market. The possibility of expert liability may provide an incentive
for due diligence providers to improve the quality of their reviews.
Thus, one possible market outcome is for reviewers to compete on the
quality of their services, because competing on price accompanied by
lower quality may cease to be economically viable given the potential
liability.
On the other hand, the possibility of expert liability may not be a
significant deterrent for smaller due diligence providers that do not
have the financial resources to cover their potential liabilities. This
may adversely affect competition in both the market for the provision
of due diligence and the market for ABS. Diligent providers of asset
reviews may be pressured to decrease their standards, their prices or
both. In addition, ABS with reviews obtained from such parties may
affect the pricing of competing securities. Alternatively, the
possibility of expert liability could be an incentive for due diligence
providers to improve their capabilities.
In summary, taken together the proposed amendments and regulations
implement Congress' mandate under the Act and are designed to improve
investor protection, improve the quality of the assets underlying an
ABS, and increase transparency to market participants. We believe that
the proposals also would improve investors' confidence in asset-backed
securities and help recovery in the asset-backed securities market with
attendant positive effects on efficiency, competition and capital
formation.
We request comment on our proposed amendments. We request comment
on whether our proposals would promote efficiency, competition, and
capital formation. Commentators are requested to provide empirical data
and other factual support for their views, if possible.
VII. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\84\ a rule is ``major'' if it has resulted, or is likely
to result in:
---------------------------------------------------------------------------
\84\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------
An annual effect on the U.S. economy of $100 million or
more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
We request comment on whether our proposed amendments would be a
``major rule'' for purposes of the Small Business Regulatory
Enforcement Fairness Act. We solicit comment and empirical data on:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment, or
innovation.
VIII. Regulatory Flexibility Act Certification
The Commission hereby certifies pursuant to 5 U.S.C. 605(b) that
the proposals contained in this release, if adopted, would not have a
significant economic impact on a substantial number of small entities.
The proposals relate to the registration, disclosure and reporting
requirements for asset-backed
[[Page 64195]]
securities under the Act, the Securities Act and the Exchange Act.
Securities Act Rule 157 \85\ and Exchange Act Rule 0-10(a) \86\ defines
an issuer, other than an investment company, to be a ``small business''
or ``small organization'' if it had total assets of $5 million or less
on the last day of its most recent fiscal year. As the depositor and
issuing entity are most often limited purpose entities in an ABS
transaction, we focused on the sponsor in analyzing the potential
impact of the proposals under the Regulatory Flexibility Act. Based on
our data, we only found one sponsor that could meet the definition of a
small broker-dealer for purposes of the Regulatory Flexibility Act.\87\
In addition, we do not believe that any underwriter of ABS would meet
the definition of a small entity for purposes of the Regulatory
Flexibility Act.\88\ Accordingly, the Commission does not believe that
the proposals, if adopted, would have a significant economic impact on
a substantial number of small entities.
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\85\ 17 CFR 230.157.
\86\ 17 CFR 240.0-10(a).
\87\ This is based on data from Asset-Backed Alert.
\88\ This is based on data from Asset-Backed Alert.
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IX. Statutory Authority and Text of Proposed Rule and Form Amendments
We are proposing the new rules and amendments contained in this
document under the authority set forth in Sections 6, 7, 10, 19(a), and
28 of the Securities Act, and Sections 3(b), 15E, 15G, 23(a), 35A and
36 of the Exchange Act.
List of Subjects in 17 CFR Parts 229, 230, 240, and 249
Advertising, Reporting and recordkeeping requirements, Securities.
For the reasons set out above, Title 17, Chapter II of the Code of
Federal Regulations is proposed to be amended as follows:
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
1. The authority citation for part 229 continues to read in part as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 777iii,
77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w,
78ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37,
80a-38(a), 80a-39, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350,
unless otherwise noted.
* * * * *
2. Amend Sec. 229.1111 by:
a. Revising the introductory text to paragraph (a):
b. Adding paragraphs (a)(7) and (a)(8).
The revision and additions read as follows:
Sec. 229.1111 (Item 1111) Pool assets.
* * * * *
(a) Information regarding pool asset types and selection criteria.
Provide the following information:
* * * * *
(7)(i) The nature of a review of the assets performed by an issuer
or sponsor (required by Sec. 230.193), including whether the issuer of
any asset-backed security engaged a third party for purposes of
performing a review of the pool assets underlying an asset-backed
security; and
(ii) The findings and conclusions of the review of the assets by
the issuer, sponsor, or third party described in paragraph (a)(7)(i) of
this section.
Instruction to Item 1111(a)(7): If the issuer has engaged a third
party for purposes of performing the review of assets, the issuer must
provide the name of the third-party reviewer and comply with the
requirements of Sec. 230.436 of this chapter.
(8) If any assets in the pool deviate from the disclosed
underwriting criteria, disclose how those assets deviate from the
disclosed underwriting criteria and include data on the amount and
characteristics of those assets that did not meet the disclosed
standards. Disclose which entity (e.g., sponsor, originator, or
underwriter) determined that those assets should be included in the
pool, despite not having met the disclosed underwriting standards, and
what factors were used to make the determination, such as compensating
factors or a determination that the exception was not material. If
compensating or other factors were used, provide data on the amount of
assets in the pool that are represented as meeting each such factor and
the amount of assets that do not meet those factors.
* * * * *
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
3. The authority citation for part 230 continues to read in part as
follows:
Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r,
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w,
78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37,
unless otherwise noted.
* * * * *
Section 230.193 is also issued under sec. 943, Pub. L. 111-203,
124 Stat. 1376.
* * * * *
4. Add Sec. 230.193 to read as follows:
Sec. 230.193 Review of underlying assets in asset-backed securities
transactions.
An issuer of an ``asset-backed security'', as that term is defined
in Section 3(a)(77) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(77)), offering and selling such a security pursuant to a
registration statement shall perform a review of the pool assets
underlying the asset-backed security. The issuer may conduct the review
or an issuer may employ a third party engaged for purposes of
performing the review provided the third party is named in the
registration statement and consents to being named as an expert in
accordance with Sec. 230.436 of this chapter.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
5. The authority citation for part 240 is amended by adding
authority for Sec. 240.15Ga-2 to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 80a- 20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4,
80b-11, and 7201 et seq.; and 18 U.S.C. 1350 and 12 U.S.C.
5221(e)(3), unless otherwise noted.
* * * * *
Section 240.15Ga-2 is also issued under sec. 943, Pub. L. 111-
203, 124 Stat. 1376.
* * * * *
6. Add Sec. 240.15Ga-2 to read as follows:
Sec. 240.15Ga-2 Findings and conclusions of third-party due diligence
reports.
(a) The issuer or underwriter of any ``asset-backed security'' (as
that term is defined in Section 3(a)(77) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)(77)) shall file Form ABS-15G (17 CFR
249.1400) containing the findings and conclusions of any report of a
third party engaged for purposes of performing a review of the pool
assets obtained by the issuer or underwriter five business days prior
to the first sale in the offering.
(b) If the issuer in a registered offering of asset-backed
securities has included the information required by paragraph (a) of
this section in the first prospectus that is required to be filed under
17 CFR 230.424 for that offering and filed in
[[Page 64196]]
accordance with 17 CFR 230.424, then the issuer is not required to file
Form ABS-15G (17 CFR 249.1400) to include the same information.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
7. The authority citation for part 249 is amended by adding an
authority for Sec. 249.1400 to read as follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18
U.S.C. 1350, unless otherwise noted.
* * * * *
Section 249.1400 is also issued under sec. 943, Pub. L. 111-203,
124 Stat. 1376.
* * * * *
8. Revise Subpart O, as proposed at 75 FR 62736, October 13, 2010,
to read as follows:
Subpart O--Forms for Securitizers of Asset-Backed Securities
Sec. 249.1400 Form ABS-15G, Asset-backed securitizer report pursuant
to Section 15G of the Securities Exchange Act of 1934.
This form shall be used for reports of information required by Rule
15Ga-1 (Sec. 240.15Ga-1 of this chapter) and Rule 15Ga-2 (Sec.
240.15Ga-2 of this chapter).
Note: The text of Form ABS-15G does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM ABS-15G
ASSET-BACKED SECURITIZER REPORT PURSUANT TO SECTION 15G OF THE
SECURITIES EXCHANGE ACT OF 1934
Check the appropriate box to indicate the filing obligation to
which this form is intended to satisfy:
-------- Rule 15Ga-1 under the Exchange Act (17 CFR 240.15Ga-1)
-------- Rule 15Ga-2 under the Exchange Act (17 CFR 240.15Ga-2)
Date of Report (Date of earliest event reported)-----------------------
Commission File Number of securitizer:---------------------------------
-----------------------------------------------------------------------
Central Index Key Number of securitizer:-------------------------------
-----------------------------------------------------------------------
Name and telephone number, including area code, of the person to
contact in connection with this filing
For filings under Rule 15Ga-2, also provide the following
information:
Central Index Key Number of depositor:---------------------------------
Commission File Number of depositor (if applicable):-------------------
-----------------------------------------------------------------------
(Exact name of issuing entity as specified in its charter)
Central Index Key Number of issuing entity (if applicable):------------
Commission File Number of issuing entity (if applicable):--------------
Central Index Key Number of underwriter (if applicable):---------------
Commission File Number of underwriter (if applicable):-----------------
GENERAL INSTRUCTIONS
A. Rule as to Use of Form ABS-15G.
This form shall be used to comply with the requirements of Rules
15Ga-1 and 15Ga-2 under the Exchange Act (17 CFR 240.15Ga-1 and 17 CFR
240.15Ga-2).
B. Events To Be Reported and Time for Filing of Reports.
1. Forms filed under Rule 15Ga-1. In accordance with Rule 15Ga-1,
file the information required by Part I in accordance with Item 1.01,
Item 1.02, or Item 1.03, as applicable.
If the filing deadline for the information occurs on a Saturday,
Sunday or holiday on which the Commission is not open for business,
then the filing deadline shall be the first business day thereafter.
2. Forms filed under Rule 15Ga-2. In accordance with Rule 15Ga-2,
file the information required by Part II no later than five business
days prior to the first sale of securities in the offering.
C. Preparation of Report.
This form is not to be used as a blank form to be filled in, but
only as a guide in the preparation of the report on paper meeting the
requirements of Rule 12b-12 (17 CFR 240.12b-12). The report shall
contain the number and caption of the applicable item, but the text of
such item may be omitted, provided the answers thereto are prepared in
the manner specified in Rule 12b-13 (17 CFR 240.12b-13). All items that
are not required to be answered in a particular report may be omitted
and no reference thereto need be made in the report. All instructions
should also be omitted.
D. Signature and Filing of Report.
1. Forms filed under Rule 15Ga-1. Any form filed for the purpose of
meeting the requirements in Rule 15Ga-1 must be signed by the senior
officer in charge of securitization of the securitizer.
2. Forms filed under Rule 15Ga-2. Any form filed for the purpose of
meeting the requirements in Rule 15Ga-2 must be signed by the senior
office in charge of securitization of the depositor if information
required by Item 2.01 is required to be provided and must be signed by
a duly authorized officer of the underwriter if information required by
Item 2.02 is required to be provided.
3. Copies of report. If paper filing is permitted, three complete
copies of the report shall be filed with the Commission.
INFORMATION TO BE INCLUDED IN THE REPORT
PART I--REPRESENTATION AND WARRANTY INFORMATION
Item 1.01 Initial Filing of Rule 15Ga-1 Representations and Warranties
Disclosure
If any securitizer (as that term is defined in Section 15G(a) of
the Securities Exchange Act of 1934), issues an asset-backed security
(as that term is defined in Section 3(a)(77) of the Securities Exchange
Act of 1934), or organizes and initiates an asset-backed securities
transaction by selling or transferring an asset, either directly or
indirectly, including through an affiliate, to the issuer, provide the
disclosures required by Rule 15Ga-1 (17 CFR 240.15Ga-1) at the time the
securitizer, or an affiliate commences its first offering of the asset-
backed securities after [compliance or effective date of the final
rule], if the underlying transaction agreements contain a covenant to
repurchase or replace an underlying asset for breach of a
representation or warranty.
Item 1.02 Periodic Filing of Rule 15Ga-1 Representations and Warranties
Disclosure
Each securitizer which was required to provide the information
required by Item 1.01 of this form shall provide the disclosures
required by Rule 15Ga-1 (17 CFR 240.15Ga-1) as of the end of each
calendar month, to be filed not later than 15 calendar days after the
end of such calendar month.
Item 1.03 Notice of Termination of Duty To File Reports Under Rule
15Ga-1
If any securitizer has no asset-backed securities outstanding (as
that term is defined in Section 3(a)(77) of the Securities Exchange Act
of 1934) held by non-affiliates, provide the date of the last payment
on the last asset-backed security outstanding that was issued by or
issued by an affiliate of the securitizer.
[[Page 64197]]
PART II--ASSET REVIEW INFORMATION
Item 2.01 Findings and Conclusions of a Third Party Engaged by the
Issuer To Review Assets
Provide the disclosures required by Rule 15Ga-2 (17 CFR 240.15Ga-2)
for any report by a third party engaged by the issuer for the purpose
of reviewing assets underlying an asset-backed security.
Item 2.02 Findings and Conclusions of a Third-Party Engaged by the
Underwriter To Review Assets
Provide the disclosures required by Rule 15Ga-2 (17 CFR 240.15Ga-2)
for any third-party engaged by the underwriter for the purpose of
reviewing assets underlying an asset-backed security.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the reporting entity has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
-----------------------------------------------------------------------
(Depositor, Securitizer, or Underwriter)
Date-------------------------------------------------------------------
-----------------------------------------------------------------------
(Signature)*
*Print name and title of the signing officer under his signature.
By the Commission.
Dated: October 13, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-26172 Filed 10-18-10; 8:45 am]
BILLING CODE 8011-01-P