Issuer Review of Assets in Offerings of Asset-Backed Securities, 64182-64197 [2010-26172]
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Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules
authority of the Corporation as receiver
to disaffirm or repudiate any personal
service agreement in the manner
provided for the disaffirmance or
repudiation of any agreement under 12
U.S.C. 5390.
(e) Paragraph (b) of this section shall
not apply to any personal service
agreement with any senior executive or
director of the covered financial
company or covered subsidiary, nor
shall it in any way limit or impair the
ability of the receiver to recover
compensation from any senior executive
or director of a failed financial company
under 12 U.S.C. 5390.
§ 380.4 Provability of claims based on
contingent obligations.
(a) This section only applies to
contingent obligations of the covered
financial company consisting of a
guarantee, letter of credit, loan
commitment, or similar credit obligation
that becomes due and payable upon the
occurrence of a specified future event
(other than the mere passage of time),
which:
(1) Is not under the control of either
the covered financial company or the
party to whom the obligation is owed;
and
(2) Has not occurred as of the date of
the appointment of the receiver.
(b) A claim based on a contingent
obligation of the covered financial
company may be provable against the
receiver notwithstanding the obligation
not having become due and payable as
of the date of the appointment of the
receiver.
(c) If the receiver repudiates a
guarantee, letter of credit, loan
commitment, or similar credit obligation
that is contingent as of the date of the
receiver’s appointment, the actual direct
compensatory damages for repudiation
shall be no less than the estimated value
of the claim as of the date the
Corporation was appointed receiver of
the covered financial company, as such
value is measured based upon the
likelihood that such contingent claim
would become fixed and the probable
magnitude thereof.
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§ 380.5 Treatment of covered financial
companies that are subsidiaries of
insurance companies.
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(a) In the event that the Corporation
makes funds available to a covered
financial company that is an insurance
company or is a covered subsidiary or
affiliate of an insurance company or
enters into any other transaction with
respect to such covered entity under 12
U.S.C. 5384(d), the Corporation will
exercise its right to take liens on some
or all assets of such covered entities to
secure repayment of any such
transactions only when the Corporation,
in its sole discretion, determines that:
(1) Taking such lien is necessary for
the orderly liquidation of the entity; and
(2) Taking such lien will not either
unduly impede or delay the liquidation
or rehabilitation of such insurance
company, or the recovery by its
policyholders.
(b) This section shall not be construed
to restrict or impair the ability of the
Corporation to take a lien on any or all
of the assets of any covered financial
company or covered subsidiary or
affiliate in order to secure financing
provided by the Corporation or the
receiver in connection with the sale or
transfer of the covered financial
company or covered subsidiary or
affiliate or any or all of the assets of
such covered entity.
Dated at Washington, DC, this 8th day of
October, 2010.
By order of the Board of Directors.
Roberte E. Feldman,
Executive Secretary, Federal Deposit
Insurance Corporation.
[FR Doc. 2010–26049 Filed 10–18–10; 8:45 am]
BILLING CODE 6714–01–P
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
Securities and Exchange
Commission.
ACTION: Proposed rule.
AGENCY:
The Corporation shall distribute the
value realized from the liquidation,
transfer, sale or other disposition of the
direct or indirect subsidiaries of an
insurance company, that are not
themselves insurance companies, solely
in accordance with the order of
priorities set forth in 12 U.S.C.
5390(b)(1).
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§ 380.6 Limitation on liens on assets of
covered financial companies that are
insurance companies or covered
subsidiaries of insurance companies.
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
SUMMARY:
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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 (https://www.sec.gov/
rules/proposed.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–26–10 on the subject line;
or
• Use the Federal eRulemaking Portal
(https://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
(https://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.
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Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules
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
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.
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.
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
1 17
CFR 229.1111.
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.
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).
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 thirdparty 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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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.
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.
1. Application of the Proposed Rule
Section 7(d)(1) relates to an assetbacked 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.
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.
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).
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.
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
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 AssetBacked Securities, SEC Release No. 33–9117 (April
7, 2010) [75 FR 23328] (the ‘‘2010 ABS Proposing
Release’’). The comment letters are available at
https://www.sec.gov/comments/s7-08-10/
s70810.shtml.
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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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.
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
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.
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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
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
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.
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 twostep transfer, the term ‘‘depositor’’ refers to the
sponsor.
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depositor transfers the assets to the
issuing entity for the particular assetbacked 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
If an issuer engages a third party for
purposes of reviewing the pool assets,
then an issuer may rely on the thirdparty’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
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.
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 https://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 thirdparty due diligence providers.
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Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules
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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 thirdparty 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.
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,
30 As noted above, we will address these
requirements in a subsequent rulemaking.
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
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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
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
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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
• 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
• 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
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.
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
https://www.sec.gov/divisions/corpfin/8124cert.htm.
37 15 U.S.C. 77k.
38 15 U.S.C. 77l(a)(2).
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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?
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, debtto-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?
39 See discussion in Section VI of the 2010 ABS
Proposing Release.
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 thirdparty’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
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 thirdparty 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?
41 Section
15E(s)(4)(C) of the Exchange Act.
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.’’
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.
42 Section
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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 thirdparty 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?
10. It appears that the scope of thirdparty 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.
44 See, e.g., John Arnholz & Edward E. Gainor,
Offerings of Asset-Backed Securities § 6.06 (2007
Supplement).
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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?
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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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
45 See, e.g., Proposed Rules for Nationally
Recognized Statistical Rating Organizations,
Release No. 34–57967 (June 16, 2008) [73 FR
36212].
46 17 CFR 229.1119.
47 17 CFR 229.1111.
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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.
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.
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
48 15.
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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.
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
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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commentators that submitted comments
on these proposed requirements in the
2010 ABS Proposing Release were
generally supportive.50
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.
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
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.
51 See proposed Item 1111(a)(8) of Regulation AB.
52 See Massachusetts AG comment letter.
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along the securitization chain that may
be directing decisions to include
exception loans in the pool.
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 assetbacked 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.
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
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.
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 thirdparty due diligence services are employed by an
NRSRO, an issuer or an underwriter, the person
providing the services give a certification to any
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require an underwriter of Exchange ActABS 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.
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
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
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.
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.).
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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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.
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 thirdparty 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.
The market for Exchange Act-ABS is
global.61 Securitizers in the United
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.
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.
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
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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.
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
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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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
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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
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 assetbacked security instead of the proposed
reference to Exchange Act Section
3(a)(77)? 63
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
62 See Rule 201 of Regulation S–T [17 CFR
232.201].
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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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
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
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 https://
www.ginniemae.gov/.
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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 ‘‘foreignoffered ABS,’’ and if so, should foreignoffered 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?
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
66 17
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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
(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.
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
67 44
U.S.C. 3501 et seq.
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.
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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68 44
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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 × 0.54 × 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.
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 × 0.54 × 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
71 This
estimate is based on data from Securities
Data Corporation (SDC).
72 This is based on ABS issuance data from AssetBacked Alert and information from SDC.
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64191
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 × 712 forms). We
allocate 75%, or 2,670 (0.75 × 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 × 0.25 × 3,560).
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
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.
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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 × 30 × 4) and an increase in
outside costs of $36,000 ($400 × 0.75 ×
30 × 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
Form
Current
annual
responses
proposed requirements would result in
an increase to the internal burden to
prepare Form S–3 filings of 6,968
burden hours (0.25 × 30 × 929) and a
total cost of $8,361,000 (400 × 0.75 × 30
× 929).
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
Proposed
annual
responses
Current
burden
hours
Increase in
burden
hours
Proposed
burden
hours
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.
Current
professional
costs
Increase in
professional
costs
Proposed
professional
costs
S–1 ..............
S–3 ..............
Form ABS–
15G ..........
1,168
2,065
1,168
2,065
247,982
236,959
30
6,968
248,012
243,927
$297,578,400
284,350,500
$36,000
8,361,000
$297,614,400
292,711,500
....................
712
....................
2,670
2,670
..........................
356,000
356,000
Total .....
....................
....................
....................
9,668
....................
..........................
8,753,000
..........................
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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
74 See
2004 Regulation AB Adopting Release.
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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;
75 See
PO 00000
• 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 noncompliant 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
S. Rep. No. 111–176, at 121 (2010).
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expect that requiring a review of the
assets will result in loan pools of higher
quality.
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.
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.
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
78 See
76 See
id.
77 See id.
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e.g., comment letter from Massachusetts
AG.
79 See
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64193
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.
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 thirdparty 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. Thirdparty 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
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Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules
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.
jlentini on DSKJ8SOYB1PROD with PROPOSALS
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 thirdparty 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
80 15
U.S.C. 78w(a).
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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.
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.
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
81 15
U.S.C. 77b(b).
U.S.C. 78c(f).
83 See, e.g., David Adler, A Flat Dow for 10 Years?
Why it Could Happen, Barrons (Dec. 28, 2009).
82 15
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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:
• 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
84 Pub.
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L. 104–121, Title II, 110 Stat. 857 (1996).
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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.
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
jlentini on DSKJ8SOYB1PROD with PROPOSALS
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,
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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80a–38(a), 80a–39, 80b–11, and 7201 et seq.;
and 18 U.S.C. 1350, unless otherwise noted.
78mm, 80a–8, 80a–24, 80a–28, 80a–29, 80a–
30, and 80a–37, unless otherwise noted.
*
*
*
*
*
2. Amend § 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:
*
§ 229.1111
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
§ 230.436 of this chapter.
(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 § 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 § 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),
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*
*
*
*
Section 230.193 is also issued under sec.
943, Pub. L. 111–203, 124 Stat. 1376.
*
*
*
*
*
4. Add § 230.193 to read as follows:
§ 230.193 Review of underlying assets in
asset-backed securities transactions.
PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
5. The authority citation for part 240
is amended by adding authority for
§ 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 § 240.15Ga–2 to read as
follows:
§ 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
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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
§ 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.
*
*
*
*
llllllllllllllllll
l
(Exact name of issuing entity as
specified in its charter)
Central Index Key Number of issuing
entity (if applicable): llllllll
Commission File Number of issuing entity (if applicable): lllllllll
Central Index Key Number of underwriter (if applicable): llllllll
Commission File Number of underwriter (if applicable): llllllll
GENERAL INSTRUCTIONS
*
*
*
*
*
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
PART I—REPRESENTATION AND
WARRANTY INFORMATION
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).
Item 1.01 Initial Filing of Rule 15Ga–
1 Representations and Warranties
Disclosure
B. Events To Be Reported and Time for
Filing of Reports.
Washington, D.C. 20549
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.
FORM ABS–15G
C. Preparation of Report.
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:
llll Rule 15Ga–1 under the
Exchange Act (17 CFR 240.15Ga–1)
llll Rule 15Ga–2 under the
Exchange Act (17 CFR 240.15Ga–2)
Date of Report (Date of earliest event reported) lllllllllllllll
Commission File Number of securitizer:
llllllllllllllllll
l
Central
Index
Key
Number
of
securitizer: lllllllllllll
llllllllllllllllll
l
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:
llllllllllllllllll
Commission File Number of depositor
(if applicable): lllllllllll
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.
§ 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
(§ 240.15Ga–1 of this chapter) and Rule
15Ga–2 (§ 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.
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
16:35 Oct 18, 2010
INFORMATION TO BE INCLUDED IN
THE REPORT
A. Rule as to Use of Form ABS–15G.
*
Section 249.1400 is also issued under sec.
943, Pub. L. 111–203, 124 Stat. 1376.
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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.
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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
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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.
E:\FR\FM\19OCP1.SGM
19OCP1
Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Proposed Rules
amended by the Worker, Retiree, and
Employer Recovery Act of 2008. These
Item 2.01 Findings and Conclusions of regulations would affect sponsors,
administrators, participants, and
a Third Party Engaged by the Issuer To
beneficiaries of hybrid defined benefit
Review Assets
pension plans. This document also
Provide the disclosures required by
provides a notice of a public hearing on
Rule 15Ga–2 (17 CFR 240.15Ga–2) for
these proposed regulations.
any report by a third party engaged by
DATES: Written or electronic comments
the issuer for the purpose of reviewing
must be received by Wednesday,
assets underlying an asset-backed
January 12, 2011. Outlines of topics to
security.
be discussed at the public hearing
Item 2.02 Findings and Conclusions of scheduled for Wednesday, January 26,
2011, at 10 a.m. must be received by
a Third-Party Engaged by the
Friday, January 14, 2011.
Underwriter To Review Assets
ADDRESSES: Send submissions to:
Provide the disclosures required by
CC:PA:LPD:PR (REG–132554–08), Room
Rule 15Ga–2 (17 CFR 240.15Ga–2) for
5203, Internal Revenue Service, PO Box
any third-party engaged by the
7604, Ben Franklin Station, Washington,
underwriter for the purpose of
DC 20044. Submissions may be handreviewing assets underlying an assetdelivered Monday through Friday
backed security.
between the hours of 8 a.m. and 4 p.m.
SIGNATURES
to: CC:PA:LPD:PR (REG–132554–08),
Courier’s Desk, Internal Revenue
Pursuant to the requirements of the
Service, 1111 Constitution Avenue,
Securities Exchange Act of 1934, the
NW., Washington, DC, or sent
reporting entity has duly caused this
electronically, via the Federal
report to be signed on its behalf by the
eRulemaking Portal at https://
undersigned hereunto duly authorized.
llllllllllllllllll
l www.regulations.gov (IRS REG–132554–
08). The public hearing will be held in
(Depositor, Securitizer, or Underwriter)
Date llllllllllllllll the IRS Auditorium, Internal Revenue
llllllllllllllllll
l Building, 1111 Constitution Avenue,
NW., Washington, DC.
(Signature)*
FOR FURTHER INFORMATION CONTACT:
*Print name and title of the signing
Concerning the regulations, Neil S.
officer under his signature.
Sandhu, Lauson C. Green, or Linda S.F.
By the Commission.
Marshall at (202) 622–6090; concerning
Dated: October 13, 2010.
submissions of comments, the hearing,
Elizabeth M. Murphy,
and/or being placed on the building
Secretary.
access list to attend the hearing, Regina
[FR Doc. 2010–26172 Filed 10–18–10; 8:45 am]
Johnson, at (202) 622–7180 (not toll-free
BILLING CODE 8011–01–P
numbers).
SUPPLEMENTARY INFORMATION:
PART II—ASSET REVIEW
INFORMATION
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–132554–08]
RIN 1545–BI16
Additional Rules Regarding Hybrid
Retirement Plans
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
jlentini on DSKJ8SOYB1PROD with PROPOSALS
AGENCY:
This document contains
proposed regulations providing
guidance relating to certain provisions
of the Internal Revenue Code (Code) that
apply to hybrid defined benefit pension
plans. These regulations would provide
guidance on changes made by the
Pension Protection Act of 2006, as
SUMMARY:
VerDate Mar<15>2010
16:35 Oct 18, 2010
Jkt 223001
Background
This document contains proposed
amendments to the Income Tax
Regulations (26 CFR part 1) under
sections 411(a)(13), 411(b)(1), and
411(b)(5) of the Code. Generally, a
defined benefit pension plan must
satisfy the minimum vesting standards
of section 411(a) and the accrual
requirements of section 411(b) in order
to be qualified under section 401(a) of
the Code. Sections 411(a)(13) and
411(b)(5), which modify the minimum
vesting standards of section 411(a) and
the accrual requirements of section
411(b), were added to the Code by
section 701(b) of the Pension Protection
Act of 2006, Public Law 109–280 (120
Stat. 780 (2006)) (PPA ’06). Sections
411(a)(13) and 411(b)(5), as well as
certain effective date provisions related
to these sections, were subsequently
amended by the Worker, Retiree, and
Employer Recovery Act of 2008, Public
PO 00000
Frm 00025
Fmt 4702
Sfmt 4702
64197
Law 110–458 (122 Stat. 5092 (2008))
(WRERA ’08).
Section 411(a)(13)(A) provides that an
applicable defined benefit plan (which
is defined in section 411(a)(13)(C)) is
not treated as failing to meet either (i)
the requirements of section 411(a)(2)
(subject to a special vesting rule in
section 411(a)(13)(B) with respect to
benefits derived from employer
contributions) or (ii) the requirements of
section 411(a)(11), 411(c), or 417(e),
with respect to accrued benefits derived
from employer contributions, merely
because the present value of the accrued
benefit (or any portion thereof) of any
participant is, under the terms of the
plan, equal to the amount expressed as
the balance of a hypothetical account or
as an accumulated percentage of the
participant’s final average
compensation. Section 411(a)(13)(B)
requires an applicable defined benefit
plan to provide that an employee who
has completed at least 3 years of service
has a nonforfeitable right to 100 percent
of the employee’s accrued benefit
derived from employer contributions.
Under section 411(a)(13)(C)(i), an
applicable defined benefit plan is
defined as a defined benefit plan under
which the accrued benefit (or any
portion thereof) of a participant is
calculated as the balance of a
hypothetical account maintained for the
participant or as an accumulated
percentage of the participant’s final
average compensation. Under section
411(a)(13)(C)(ii), the Secretary of the
Treasury is to issue regulations which
include in the definition of an
applicable defined benefit plan any
defined benefit plan (or portion of such
a plan) which has an effect similar to a
plan described in section
411(a)(13)(C)(i).
Section 411(a) requires that a defined
benefit plan satisfy the requirements of
section 411(b)(1). Section 411(b)(1)
provides that a defined benefit plan
must satisfy one of the three accrual
rules of section 411(b)(1)(A), (B), and (C)
with respect to benefits accruing under
the plan. The three accrual rules are the
3 percent method of section
411(b)(1)(A), the 1331⁄3 percent rule of
section 411(b)(1)(B), and the fractional
rule of section 411(b)(1)(C).
Section 411(b)(1)(B) provides that a
defined benefit plan satisfies the
requirements of the 1331⁄3 percent rule
for a particular plan year if, under the
plan, the accrued benefit payable at the
normal retirement age is equal to the
normal retirement benefit, and the
annual rate at which any individual
who is or could be a participant can
accrue the retirement benefits payable at
normal retirement age under the plan
E:\FR\FM\19OCP1.SGM
19OCP1
]]>Agencies
[Federal Register Volume 75, Number 201 (Tuesday, October 19, 2010)]
[Proposed Rules]
[Pages 64182-64197]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-26172]
=======================================================================
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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 (https://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-26-10 on the subject line; or
Use the Federal eRulemaking Portal (https://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 (https://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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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)].
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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 https://www.sec.gov/comments/s7-08-10/s70810.shtml.
---------------------------------------------------------------------------
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
[[Page 64184]]
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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
[[Page 64185]]
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.
---------------------------------------------------------------------------
\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 https://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 https://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
[[Page 64186]]
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 por
