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Release No. 33-8419 Release No.
34-49644 69 Fed. Reg. 26649 - May 13, 2004
69 Fed. Reg. 30750 - May 28, 2004 (Correction)
ASSET-BACKED SECURITIES
Action: Proposed Rule
Section III.B - Disclosure
Table of Contents
B. Disclosure
1. Proposed Regulation AB
No disclosure items currently exist that are
specifically tailored to asset-backed securities. While some disclosure
items in Regulation S-K are relevant, such as a description of the
security, most items do not elicit the most useful disclosure for ABS
investors. There is generally no business or management to describe;
rather, information about the pool assets, servicing, transaction
structure, flow of funds and enhancements is more relevant. Analysis
regarding the characteristics of the pool assets is necessary to
determine the timing and amount of expected payments on the assets and
thus payments on the ABS. In addition, the legal and often complex flow
of funds of the transaction and the impact of any credit enhancement or
other support must be analyzed. Through the staff comment process and
industry practice, informal disclosure practices have developed. These
practices, however, may not be fully transparent to issuers and
investors.
We propose a new principles-based set of disclosure
items in one central location in a subpart of Regulation S-K, called
Regulation AB.118
These disclosure items, which are based on existing disclosure
practices, would form the basis for disclosure in both Securities Act
registration statements and Exchange Act reports for asset-backed
securities. As noted in Sections III.A. and D., specific disclosure
requirements in ABS registration statements and forms would be keyed to
items in Regulation AB in a manner consistent with the integrated
disclosure system applicable to other issuers.
We believe a principles-based approach would provide
the best framework for disclosure in the context of asset-backed
securities. In addition, due to differences between asset classes, we
believe it would be impractical to provide an exhaustive list of
disclosure items required for each asset class. Not only do we believe
this approach would be impractical due to the many existing asset
classes that are securitized today, it would not provide any effective
guidance with respect to new asset classes that may be securitized in
the future. Due to the dynamic nature of the ABS market, any such list
would likely become outdated.
Under our proposed principles-based approach, we
identify the disclosure concept or objective required and provide one or
more illustrative examples. Application of the particular concept or
objective would need to be tailored in preparing and presenting the
disclosure to the information material to the particular transaction and
asset-type involved. The balance we strive to achieve through this
approach is to provide enough clarity so that the disclosure concept or
objective is understood and can be applied on a consistent basis, while
not providing too much detail that could obscure or override the concept
or objective. Of course, in some instances we believe we must and
therefore do propose certain disclosure items with greater specificity.
Further, we propose to codify several existing percentage tests that
provide guidance as to when particular disclosure is required,
particularly regarding concentrated obligors or significant credit
enhancement or other support. We believe these proposed breakpoints
provide consistency, comparability and clarity.
The structure of Regulation AB would be as follows:
Item 1100 would set forth items of general
applicability for the whole subpart, such as guidance regarding the
presentation of delinquency and loss information when it is
required, alternative methods for presenting third party financial
information (discussed further in Section III.B.9.) and guidance
regarding disclosures related to foreign ABS (previously discussed
in Section III.A.4.).
Item 1101 would set forth definitions
applicable to asset-backed securities.
Items 1102 1118 would constitute the basic
disclosure required for Securities Act registration statements for
ABS offerings. In addition, several of the items would be required
on an ongoing basis in Exchange Act reports, such as updated
financial information regarding certain third parties and disclosure
regarding legal proceedings.
Item 1119 would form the basis for disclosure
required in distribution reports on proposed Form 10-D regarding
cash flows and performance of the asset pool and the allocation of
cash flows and distribution of payments on the ABS. This item is
discussed more fully in Section III.D.4.
Items 1120 and 1121 would address two
long-standing requirements for the Form 10-K report based on market
practice and the modified reporting system. Item 1120 would specify
the form of the proposed report on compliance with servicing
criteria based on an assessment by the depositor or servicer. It
also would require filing of the registered public accounting firms
attestation report on the assessment. This item is discussed more
fully in Section III.D.7. Item 1121 would specify the form of the
separate servicer compliance statement. This compliance statement
pertains to the servicers compliance with the particular servicing
agreement for the transaction, as opposed to an attested assertion
of compliance against a general set of servicing criteria. This item
is discussed more fully in Section III.D.5.
Many of our proposed disclosure items are based on the
market-driven disclosures that appear in filings today. In addition, our
consideration of the proposed disclosure items was informed by the staff
review process as well as the staffs participation in the 2003 MBS
Disclosure Report. However, we are concerned that disclosure practice
without a previously defined set of universal disclosure standards has
resulted in the inclusion of undue boilerplate language in ABS filings,
particularly prospectuses and registration statements, and a
disproportionate emphasis on legal recitations of transaction terms.
Further, as disclosure practice may have been driven primarily by the
staff review process and by observing and conforming to filings for
other transactions, disclosures may have been included from other
filings or retained from prior filings without necessarily considering
their applicability or continued applicability with respect to the
transaction in question.
However, the cumulative effect of these practices is
to diminish in some cases the usefulness of the document through the
accumulation of unnecessary detail, duplicative or uninformative
disclosure that obscures material information and legalistic recitations
of transaction terms. Efforts to revise disclosure documents in response
to our "plain English" initiative have certainly helped by demonstrating
that even the most complex structures can be described clearly and
accurately without resorting to overly legalistic presentations.119
However, we believe more work can be done regarding the manner and
content of disclosures.
Therefore, in connection with our proposed
codification of a universal set of disclosure items, we seek a
reevaluation by transaction participants of the manner and content of
presented disclosure, including the elimination of unnecessary
boilerplate and immaterial legal recitations of terms. Transaction
participants should view this rulemaking initiative as an opportunity to
evaluate whether there is information that has been included in
registration statements and prospectuses that is not required, not
material and not useful to investors, and therefore should be reduced or
omitted. Transaction participants should similarly consider whether
disclosure should be revised so that its relevance to the transaction in
question is more apparent and is presented in a manner that is more
focused on providing clear and understandable disclosure for investors.
Transaction participants also should continue to be mindful of the plain
English disclosure principles to avoid legalistic or overly complex
presentations and recitations that make the substance of the disclosure
difficult to understand. Transaction participants should continue to
focus on the use of tabular presentations, flow charts and other design
elements that aid understanding and analysis.
In addition to the manner and presentation of
disclosures, we also are concerned that existing disclosure standards
may not adequately capture certain categories of information that may be
material to an asset-backed securities transaction, such as the
background, experience, performance and roles of various transaction
parties, including the sponsor, the servicer and the trustee. While
asset-backed securities are not intended to be direct obligations of
these entities, it seems apparent from recent market events that their
roles often can be as important to the performance of an ABS transaction
as the transaction structure or its governing documents.120
As a result, our proposed disclosure items relating to these entities
are designed to elicit more useful information in these areas.
Consistent with current practice, we do not propose to
require audited financial statements for the issuing entity in either
Securities Act or Exchange Act filings. It does not appear that audited
financial statements prepared in accordance with generally accepted
accounting principles would provide material information to investors.121
Often a new issuing entity is created for each transaction, so prior
financial information about that entity would likely be of little use.
On an ongoing basis, while an annual audit could provide benefits in
providing some assurance with respect to controls over the
administration of the transaction and the pool assets, we preliminarily
believe our proposal to require an attestation by a registered public
accounting firm as to an assessment of compliance with particular
servicing criteria discussed in Section III.D.7. is a more direct and
targeted approach to achieve such objectives. Similarly, we believe that
one of the other objectives for financial statementsto present results
of financial activity during a periodcan be addressed more particularly
by our proposed disclosure requirements regarding distributions on the
asset-backed securities.
Questions regarding overall approach to proposed
Regulation AB:
We request comment on our proposed
principles-based approach for Regulation AB. Should we provide
detailed disclosure guides by asset type instead? In evaluating the
proposed items in Regulation AB, do the items provide sufficient
clarity in identifying the disclosure concept? Should we be more
specific (or less specific) regarding any particular items?
We also request comment on methods to improve
the usefulness of disclosure documents. What additional actions can
we take to encourage focus on clear and understandable material
disclosures?
Is additional disclosure regarding the
background, experience, performance and role of transaction parties
needed? In evaluating the proposed disclosure items relating to
these parties, should we be more specific on particular aspects that
should be disclosed?
Should audited financial statements be
required to be filed for issuing entities? If so, for what periods?
What would be the costs and benefits of such a requirement? Should
they be required in some filings (e.g., ongoing Exchange Act
reports) but not others (e.g., Securities Act registration
statements)? Are there alternative methods to reach the same
objectives that would be achieved by requiring financial statements?
Are one or more of the basic audited
financial statements (balance sheet, statement of income,
retained earnings, or cash flows) more relevant for issuing
entities than the others? If so, which one(s) and should it
(they) be required to be filed?
Should a statement of cash flows using the
direct method be required?122
What additional disclosures would be
relevant if only one or more basic financial statements, rather
than full audited financial statements, are provided (for
example, disclosures about the fair value of financial
instruments pursuant to FASB Statement 107)?123
Instead of GAAP financial statements,
should financial statements be required that are prepared on
another basis, such as on the basis of cash receipts and cash
disbursements?124
2. Forepart
of Registration Statement and Prospectus
Existing Items 501-503 of Regulation S-K would still
provide the basic disclosure requirements for the forepart of Securities
Act registration statements and registration statement prospectuses,
which cover items such as the cover page of the prospectus, the
prospectus summary and risk factors. Proposed Items 1102 and 1103 of
Regulation AB would amplify those requirements by providing guidance on
preparing those sections for ABS offerings consistent with current
practice. In particular, they would clarify information that is to
appear on the cover page of the prospectus, as well as inform the type
and manner of presentation for ABS-specific disclosure items for the
prospectus summary.
As with prospectuses for all registered offerings,
disclosure on the cover page is to be limited and brief. For example,
credit enhancement disclosure for the cover page should consist of only
brief identifying statements, such as bond insurance provided by the
particular named insurer.
Consistent with common ABS-specific items such as a
summary of the flow of funds and credit enhancement, disclosure
specified for the summary would include disclosure of the classes
offered by the prospectus and classes issued in the same transaction or
residual or equity interests in the transaction not being offered by the
prospectus.125
Also required would be a summary of any prefunding or revolving periods,
such as the length and amount of such periods and the requirements for
assets that may be added.126
A summary of the amount or formula for calculating the servicing fee,
including the source of payment of those fees and their distribution
priority, also would be separately required in the prospectus summary.
We do not propose to identify a representative list of
risk factors that may be common to many ABS transactions. We are
concerned that any such list would result in boilerplate and generic
disclosures in all prospectuses even if not applicable to the particular
transaction. Registrants should take care in analyzing the most
significant factors that make the ABS offering speculative and risky,
and explain briefly yet particularly how those risks affect investors.
We do propose to clarify that in identifying risk factors, registrants
are to identify any risks that may be different for investors in any
offered class of asset-backed securities (such as subordinated classes
or principal-weighted or interest-weighted classes), and if so, identify
such classes and describe such differences.
Questions regarding proposed disclosure for forepart
of registration statement and prospectus:
Are any modifications needed to the proposed
list of items? Should we be more specific (or less specific)
regarding any items?Are any modifications needed to the proposed
list of items
Should we provide a list of representative
risk factors? How could we address our concern that any such list
would become boilerplate disclosure in all filings?Are any
modifications needed to the proposed list of items
3.
Transaction Parties
a. Sponsor
We propose to define the "sponsor" as the person who
organizes and initiates an asset-backed securities transaction by
selling or transferring assets, either directly or indirectly, including
through an affiliate, to the issuing entity. As discussed above, in
addition to basic identifying information about the sponsor, we propose
to require a description of the sponsors securitization program. The
purpose of the description would be to provide context within which to
analyze the characteristics and quality of the asset pool.
Such a description would consist of both a general
discussion of the sponsors experience in securitizing assets of any
type, as well as a more detailed discussion of the sponsors experience
in and overall procedures for originating or acquiring and securitizing
assets of the type to be included in the current transaction.
Information should be included, to the extent material, regarding the
size, composition and growth of the sponsors portfolio of assets of the
type to be securitized and information or factors related to the sponsor
that may be materially relevant to an analysis of the origination or
performance of the pool assets. For instance, this could include whether
any prior securitizations organized by the sponsor have defaulted or
experienced an early amortization or other performance triggering event,
or if any action was taken outside the ordinary performance of the
transaction to prevent such an occurrence.
Other relevant information, to the extent material,
would include the sponsors credit-granting or underwriting criteria for
the asset types being securitized (and the extent to which they have
changed), the extent to which the sponsor outsources to third parties
any of its origination or purchasing functions and the extent to which
the sponsor relies on securitization as a funding source. A description
of the sponsors roles and responsibilities in its securitization
program and the sponsors participation in structuring the transaction
also would be required, including whether the sponsor or an affiliate is
responsible for the selection of the pool assets.
In addition to this information, an increasingly
valuable tool to analyze performance is the use of static pool data.127
Such data indicate how the performance of groups, or static pools, of
assets, such as those originated at different intervals, are performing
over time. By presenting comparisons between originations at similar
points in the assets lives, such data allow the detection of patterns
that may not be evident from overall portfolio numbers and thus may
reveal a more informative picture of material elements of portfolio
performance and risk.
For example, while presentation of a delinquency or
loss statistic at the pool level, such as an overall charge-off rate,
may be useful, it does not indicate the amount and timing of charge-offs
over time. Static pool analysis may indicate that more recent
originations are experiencing higher delinquencies at each point in
their life cycle than older originations, which could suggest a
declining quality in the obligor pool or a possible relaxation of credit
standards. In that case, as more seasoned originations with a lower
delinquency profile matured and exited the asset pool, the pool would
increasingly be left with more recent originations with a higher
delinquency profile, which may begin to affect performance. However, the
overall delinquency statistic presented at the beginning of the
transaction would be a blending of all originations and thus may not
indicate the potential performance change. Without static pool data, an
investor might have no means to identify a material potential increase
in delinquency rates that would be indicated by these data.
Static pool data for several different data groups may
be material for the current offering. For example, static pool data for
the sponsors overall portfolio can indicate origination trends relevant
to how a currently offered pool can be expected to perform, particularly
if the offered pool is unseasoned. Static pool data on a pool level
basis with respect to prior securitized pools of the sponsor also can
provide valuable information on both the quality and experience of pool
selection as well as additional insight into asset performance. Finally,
if the offered pool is seasoned, static pool data based on originations
in the pool itself may reveal trends that may not be evident by
aggregate pool-level statistics.
We have previously received requests that disclosure
of such data should be required because investors view static pool data
regarding delinquency and loss experience as important information in
evaluating an investment in asset-backed securities.128
We understand that such data are often available to sponsors and in many
instances may be used in the rating process for asset-backed securities.
We propose to require disclosure of such data if material to the
transaction. In particular, we propose to require three years of static
pool data with respect to the sponsors overall portfolio (or for such
shorter period as the sponsor has been making originations or purchases)
because we preliminarily believe this would be the minimum period to
provide meaningful evaluation of the data.129
Such data should be presented for delinquency and loss information
relevant to the particular asset type involved. Similarly, increments
for the static pools and increments in which performance is presented (e.g.,
monthly or quarterly) should be material to the asset type being
securitized. Statistical data should be presented in tabular or
graphical format, such as by loss curves, if such presentation will aid
understanding.
If material, static pool data also would be required
on a pool level basis with respect to prior securitized pools involving
the same asset type established by the sponsor during the period. Static
pool data, whether with respect to the sponsors portfolio, prior pools
or the pool itself, should be presented separately, to the extent
material, according to factors relevant to the pool involved, such as by
asset term, asset type, yield, geography or ranges of credit scores or
other applicable measures of obligor credit quality. Selection of
factors should result in disclosure of material information. How and
according to which factors static pool information is presented, if at
all, will depend on the particular asset class, the sponsors history
and the asset pool and transaction involved. Our proposals would not
require preparation or disclosure of static pool data for data groups or
factors that are immaterial.
In providing static pool data that is material to the
transaction, registrants are encouraged to provide accompanying
explanatory information about the data to place it in context for the
current pool, such as how the composition of the offered pool may differ
from the static pool data provided. In instances where the particular
assets selected for the pool differ materially from the data provided
regarding the overall portfolio or prior transactions, such additional
information may be required.130
b.
Depositor
We propose to define the "depositor" as the person who
receives or purchases and transfers or sells the pool assets to the
issuing entity. For asset-backed securities transactions where there is
not an intermediate transfer of assets from the sponsor to the issuing
entity, the sponsor would be deemed to be the depositor.131
If the depositor was not the same entity as the
sponsor, separate identifying information about the depositor would be
required, including information on the ownership structure of the
depositor and the general character of any activities of the depositor
other than securitizing assets. In addition, if materially different
from the sponsor, information similar to that discussed above regarding
the depositors securitization program and its experience would be
required. Finally, disclosure would be required regarding any continuing
duties of the depositor after issuance of the asset-backed securities
with respect to the asset-backed securities or the pool assets.
c. Issuing
Entity and Transfer of Asset Pool
The nature of the issuing entity and the transfer of
the pool assets is elemental to the concept of securitization. We
propose to define the "issuing entity" to mean the trust or other entity
created at the direction of the sponsor or depositor that owns or holds
the pool assets and in whose name the asset-backed securities supported
or serviced by the pool assets are issued.
Consistent with existing practice, disclosure would be
required regarding both the nature of the issuing entity and the sale or
transfer of the pool assets. Information about the issuing entity itself
would include a description of its permissible activities, restrictions
on activities and capitalization. The governing documents of the issuing
entity would need to be filed as an exhibit.132
The material terms of any management or administration agreement for the
issuing entity also would need to be described,133
and such agreement would need to be filed as an exhibit. If the issuing
entity has its own executive officers, board of directors or persons
performing similar functions, all of Item 403 of Regulation S-K, as well
as Items 401, 402 and 404 of Regulation S-K, would be required.
In addition to a material narrative description of the
sale or transfer of the pool assets, such information also should be
provided graphically or in a flow chart if it will aid understanding.
The discussion also must describe the creation (and perfection and
priority status) of any security interests for the benefit of the
transaction. Information would be required on the amount paid or to be
paid for the pool assets, including the principles followed in
determining such amounts, as well as information on any expenses
incurred in connection with the selection and acquisition of the pool to
be payable from offering proceeds.
Disclosure would be required to the extent material
regarding any provisions or arrangements included to address any one or
more of the following issues:134
Whether any security interests granted in
connection with the transaction are perfected, maintained and
enforced;
Whether a declaration of bankruptcy,
receivership or similar proceeding with respect to the issuing
entity can occur;
Whether in the event of a bankruptcy,
receivership or similar proceeding with respect to the sponsor,
originator, depositor or other seller of the pool assets, the
issuing entitys assets will become part of the bankruptcy estate or
subject to the bankruptcy control of a third party; and
Whether in the event of a bankruptcy,
receivership or similar proceeding with respect to the issuing
entity, the issuing entitys assets will become subject to the
bankruptcy control of a third party.
Of course, any material risks related to the above
must be discussed in the risk factors section of the prospectus.135
Consistent with current practice and our proposed disclosure, we do not
propose to require the filing of any statement or opinion, such as an
opinion of counsel, regarding any of the above items, although we
request comment on this point.
d.
Servicers
The role of the servicer is often not limited to
administration and collection of the pool assets. The servicer also
often is the primary party responsible for calculating the flow of funds
for the transaction, preparing distribution reports and disbursing funds
to the trustee who in turn uses the allocations provided by the servicer
to distribute funds to security holders. Our proposed definition of
"servicer" is designed to capture this entire spectrum of activity to
include both collection and asset maintenance activities as well as cash
flow allocation and distribution functions for the ABS. We propose to
define "servicer" as any person responsible for the management or
collection of the pool assets or making allocations or distributions to
holders of the asset-backed securities. This would include parties often
referred to as "administrators." Also, given that some of these
functions may be performed by the trustee in certain transactions, the
definition would clarify that the term "servicer" does not include a
trustee for the issuing entity or the asset-backed securities that makes
allocations or distributions to holders of the asset-backed securities,
if the trustee receives such allocations or distributions from a
servicer and the trustee does not otherwise perform the functions of a
servicer.
Given the increasing realization of the importance of
the role of the servicer in ABS transactions, our proposed disclosure
requirement regarding servicers is designed to elicit additional
information regarding their function, experience and servicing
practices.136
We also recognize that many transactions use multiple servicers to
perform different servicing functions. For example, an ABS transaction
may involve one or more master servicers that oversee the actions of
other servicers and perform allocation and distribution functions.
Different servicers, often called "primary servicers," may be
responsible for primary contact with obligors and collection efforts. In
addition, one or more "special servicers" may exist for specific
servicing functions, such as borrower work-out or foreclosure functions.
While some servicers may be affiliated with the sponsor, other
non-affiliated sub-servicers may be employed. Understanding the material
aspects of the entire servicing function is important to understanding
how servicing may impact expected performance.
Our proposed disclosure requirements would require
information regarding the entire servicing function, including a clear
description of the roles, responsibilities and oversight requirements of
the entire servicing process and the parties involved. In addition,
separate information would be required regarding certain sub-servicers.
In particular, where servicing of the pool assets utilizes multiple
servicers, separate information would be required for the master
servicer, each affiliated servicer, each unaffiliated servicer (such as
primary servicers) that services 10% or more of the pool assets and any
other servicer, such as a special servicer, that performs work-outs,
foreclosures or other material aspect of the servicing of the pool
assets upon which the performance of the pool assets or the asset-backed
securities is materially dependent. The 10% threshold we propose for
unaffiliated servicers is consistent with our proposed thresholds for
disclosure regarding other parties to the ABS transaction, such as third
party originators, concentrated obligors and providers of enhancement or
other support. We believe this breakpoint provides consistency and
clarity in determining a triggering event for disclosure, and is
consistent with many other longstanding standards used for our existing
disclosure requirements.137
For servicers where disclosure is required, the
information to be provided can be categorized into three general
categories: basic information and experience; the agreement with the
servicer and servicing practices; and back-up servicing. Basic
information and experience regarding the servicer would include a
description of the general character of the servicers business and how
long it has been servicing assets. As with the sponsor, this description
would include both a general discussion of the servicers experience in
servicing assets of any type, as well as a more detailed discussion of
the servicers experience in, and procedures for, servicing assets of
the type included in the current transaction. Information should be
included, to the extent material, regarding the size, composition and
growth of the servicers portfolio of serviced assets of the type to be
securitized and information on factors related to the servicer that may
be material to an analysis of the servicing of the pool assets, such as
collection processes, billing processes, computer systems and back-up
systems.
Other information that may be material could include
whether any prior securitizations involving the servicer have defaulted
or experienced an early amortization or other performance triggering
event because of servicing, the extent of outsourcing the servicer
utilizes or if there has been previous disclosure of material
noncompliance with servicing criteria with respect to other
securitizations involving the servicer. Disclosure would be required of
any material changes to the servicers policies or procedures in
servicing assets of the same type during the past three years in order
to demonstrate recent trends involving the servicer. Finally,
information regarding the servicers financial condition would be
required where it could have a material impact on one or more aspects of
servicing of the pool assets and where those aspects could materially
impact pool performance on the asset-backed securities. General
financial information would not be required. We are seeking particular
information that could have a material impact as described.
The material terms of the servicing agreement and the
servicers duties regarding the asset-backed securities transaction
would need to be described, and the servicing agreement would be
required to be filed as an exhibit. A description of the servicers
servicing practices also would be required, which would include such
commonly disclosed items as:138
The manner in which collections on the pool
assets will be collected and maintained, including the extent of
commingling of funds.
Terms or arrangements regarding advances of
funds regarding cash flows, including interest or other fees charged
and terms of recovery. Statistical information regarding past
advance activity would be required, if material.
The servicers process for handling
delinquencies and losses.
Any material ability to waive or modify any
terms, fees, penalties or payments on the pool assets.
Custodial requirements regarding the pool
assets.
Any material minimum criteria the servicer is
required to meet not specified in our proposed list of servicing
criteria discussed in Section III.D.7.
As the ABS market has matured, another aspect of such
transactions that has increased in importance is the role of servicer
transition arrangements, or back-up servicing.139
An efficient transition from one servicer to another can be essential to
prevent portfolio deterioration and possible losses. However, depending
on the nature of the assets and the availability of alternative
servicers, the process of transferring servicing can be complex. In
particular, if the existing servicing fee in a transaction is
insufficient to attract a replacement servicer, delays may occur that
could affect portfolio performance, and any additional fees required by
a replacement servicer could affect cash flows that otherwise would be
available to security holders.
As a result, the scrutiny of back-up servicing
arrangements has increased, including the level of arrangements with a
particular back-up servicer, often referred to in market practice as how
"warm" the back-up servicer is. We propose to require disclosure
regarding any terms regarding a servicers removal, replacement,
resignation or transfer, including arrangements regarding, and any
qualifications required for, a successor servicer. Material information
on the process for transferring servicing would need to be described, as
well as any provisions for the payment of expenses associated with a
servicing transfer or any additional fees that may be charged by a
successor servicer.
e.
Trustees
An ABS transaction may involve one or more trustees.
For example, there may be a separate trustee for the issuing entity and
for the ABS indenture. In addition to basic identifying information
about any such trustee, disclosure would be required regarding the
general character of the trustees business, the trustees prior
experience in similar ABS transactions, indemnification provisions,
limitations on liability and removal or replacement provisions.
Recently, there has been debate in the market on the
nature and role of the trustee in ABS transactions, in particular the
trustees level of oversight regarding the transaction.140
To help provide transparency to this topic, we are proposing to require
explicit disclosure of the trustees duties and responsibilities
regarding the asset-backed securities under the governing documents and
under applicable law. In providing this information, the description
should address factors such as the extent to which the trustee
independently verifies distribution calculations, access to and activity
in transaction accounts, compliance with transaction covenants, use of
credit enhancement, the addition, substitution or removal of pool
assets, and the underlying data used for such determinations. In
addition, the proposed item would require disclosure of any actions
required by the trustee, including whether notice is required to
investors, rating agencies or other third parties, upon an event of
default, potential event of default (and how defined) or other breach of
a transaction covenant. The required percentage of a class or classes of
asset-backed securities needed to require the trustee to take action
also would need to be described.
f.
Originators
Some ABS transactions involve pool assets that were
not originated by the sponsor. The sponsor may have acquired the pool
assets from a separate originator or through one or more intermediaries
in the secondary market before securitizing them. If the pool assets
from a single originator or group of affiliated originators reach a
certain concentration threshold, information regarding that originator
and its own origination program may become relevant.
Accordingly, we propose to require disclosure
regarding any originator apart from the sponsor that has originated, or
is expected to originate, 10% or more of the pool assets. As noted above
with respect to disclosure regarding unaffiliated servicers, a 10%
threshold is consistent with our proposed thresholds for disclosure
regarding other parties to the transaction, such as concentrated
obligors and providers of enhancement or other support. For any
originator that meets the 10% threshold, the originators origination
program would need to be described, to the extent material, including
the size and composition of the originators portfolio, as well as other
information material to an analysis of the performance of the pool
assets, such as the originators credit-granting or underwriting
criteria.
g. Other
Transaction Parties and Scope of Disclosure
ABS transactions may involve additional or
intermediate parties other than the typical ones identified above, such
as intermediate transferors. We propose to clarify in the general
applicability section of Regulation AB that if the ABS transaction
involves such a party, information is required to the extent material
regarding that party and its role, function and experience in relation
to the asset-backed securities and the asset pool.141
The material terms of any agreement with such party would need to be
described, and the agreement with that party would need to be filed as
an exhibit.
In addition, as noted in Section III.A.6., some ABS
transactions are structured such that the asset pool consists of one or
more financial assets that represent an interest in or the right to the
payments or cash flows of another asset pool, such as in the case of an
origination trust in an automobile lease transaction. In many cases,
such structures are established under the direction of the same sponsor
and depositor and are designed solely to facilitate the ABS transaction.
The actual source of the cash flows that are to be used to service the
asset-backed securities is the asset pool underlying the intermediate
financial asset. Consistent with current practice, we propose to clarify
that in such an instance, references to the asset pool and the pool
assets of the issuing entity also include the other asset pool.142
As such, required disclosure regarding the composition of the asset pool
would include disclosure of the composition of the underlying asset
pool, as material. In addition, our proposed requirement for an
assessment of compliance with servicing criteria and the proposed
servicer compliance statement would encompass the assets underlying the
intermediate financial asset.
Questions regarding proposed disclosure for
transaction parties:
We request comment on the proposed disclosure
regarding transaction parties. We also request comment on our
proposed definitions. Are there additional parties not mentioned
that should be specifically referenced? For each particular
disclosure item, are there any modifications that should be made to
the list of items to be disclosed? For example, should information
regarding personnel or management of the sponsor, servicer or other
party, including any recent turnover in personnel or management, be
listed as an additional item for disclosure, if material? Should any
of the examples of disclosure be added explicitly to the proposed
items? Would information about the depositors securitization
program ever materially differ from the sponsors? Several rating
agencies provide ratings for servicers. Should these be required to
be disclosed?
Should specific financial information be
required regarding any of the transaction parties? If so, for which
parties should information be required? What information should be
required (e.g., audited financial statements) and for what
periods? Under what circumstances should such information be
required? Should audited financial statements be required for the
servicer? Would this place too much emphasis on the servicer?
We request comment on the proposed requirement
to include static pool data for the sponsors portfolio and for
prior securitized pools by the sponsor. Is such data material? Is
such data available? Is additional clarity needed regarding the
scope of the requirement? For what period should such data be
presented? How should variations in what may be relevant for each
asset type or asset pool be considered? Are there particular
statistics that should be specifically identified for presentation
on a static pool basis? If data on a static pool basis are required,
should any updates to the data be required on an ongoing basis? If
so, what data should be updated, how often and where should they
appear? Should we require explanatory information about static pool
data?
Is additional specificity required for
disclosure of the transfer of the pool assets? For example, should
there be any modifications to the disclosure regarding bankruptcy
separation, bankruptcy remoteness and the creation of security
interests? In the case of sponsors that acquire pool assets for
securitization from other originators or issuers, should there be
disclosure of the difference between the acquisition price and the
price paid by the issuing entity?
Should any statement or opinion, such as an
opinion of counsel, regarding any bankruptcy separation or
bankruptcy remoteness issues be required to be filed? Should they
only be required if they are required by the underlying transaction
documents? Should there be disclosure if such opinions are not
provided?
We request comment on requiring more
disclosure regarding sub-servicers. What are the ramifications of
including additional disclosure regarding sub-servicers, including
the material terms of the agreements with such sub-servicers? Is
such disclosure important to investors? Are there instances where
this information should not be required?
Is a 10% breakpoint appropriate for triggering
disclosure regarding unaffiliated servicers and significant
originators? Should the percentage be higher (e.g., 20%) or
lower (e.g., 5%)? Should a specific percentage not be used
for determining when disclosure is appropriate? Is disclosure
regarding other servicers that account for a material portion or
aspect of the servicing of the pool assets appropriate?
Should the proposed disclosure regarding the
trustee include more explicit examples of activities that the
trustee does and does not do? Should there be disclosure of any
other entity that would perform such activities if the trustee does
not? Is the same disclosure needed for both the trustee for the
issuing entity and the trustee for the ABS indenture?
Should any information regarding third party
originators be required other than what is provided today? If so, is
it practical to obtain such information? Should material static pool
data regarding such originators be required?
We request comment on the clarification
regarding the application of our proposals to the asset pool
underlying a financial asset that represents an interest in or the
right to the payments or cash flows of that asset pool. Does our
proposed list of conditions adequately identify the relevant
structures?
4. Pool
Assets
Information about the composition and characteristics
of the asset pool is a cornerstone of the disclosure necessary to make
an informed investment decision regarding an asset-backed security. As
noted above, we do not propose detailed industry guides for each asset
type to be securitized. However, while the material characteristics will
vary depending on the nature of the pool assets, there are certain broad
categories of disclosure and examples of common characteristics that can
be identified as representative of the material disclosure that is to be
provided. The actual disclosure to be provided would need to be tailored
to the asset type and asset pool involved for the particular offering,
just as it is today.
a. Pool
Composition
Under our proposal, certain general information
regarding the asset pool would be required, including a brief
description of the asset type to be securitized and a general
description of the material terms of the pool assets. In addition, the
solicitation, credit-granting or underwriting criteria used to originate
or purchase the pool assets would need to be described. The selection
criteria for the asset pool also would need to be described, as well as
the cut-off date or similar date for establishing pool composition.
Finally, the effects of any legal or regulatory provisions would need to
be described, such as any bankruptcy, consumer protection, predatory
lending, privacy, property rights or foreclosure laws or regulations, to
the extent they may materially affect pool asset performance or payments
or expected payments on the asset-backed securities.143
As information about the asset pool necessarily
includes statistical information, the need for clear and material
presentations is important. Appropriate introductory and explanatory
information should be provided to introduce characteristics and any
terms or abbreviations used. As is the case today, statistical
information should be presented in tabular or graphical format, if it
would aid understanding. Statistical information also should be
presented in appropriate distributional groups or incremental ranges
material to an analysis of the information, in addition to presenting
appropriate overall pool totals, averages and weighted averages.144
Currently, statistical disclosures by distribution
groups or ranges often present just the number, amount and percentage of
pool assets for each group or range. If material, registrants also
should provide statistical information for each group or range by other
material variables, such as, among others, average balance, weighted
average coupon, average age and remaining term, average loan-to-value or
similar ratio, and weighted average credit score or other applicable
measure of obligor credit quality. Similarly, when presenting averages
on an aggregate basis and within each group or range, registrants should
consider providing minimums and maximums underlying the averages. As is
often the case today, historical data on pool assets is to be provided,
as appropriate, such as the lesser of three years or the time such
assets have existed, to allow a material evaluation of the pool data.
Examples of material characteristics specified in the
proposed disclosure item that may be common for many asset types and
representative of disclosures currently provided include:
Number of each type of pool assets.
Asset size, such as original balance and
outstanding balance as of a designated cut-off date.
Interest rate or rate of return, including
type of interest rate if the pool includes different types, such as
fixed and floating rates, and annual percentage rate.
Capitalized or uncapitalized accrued interest.
Age, maturity, remaining term, average life
(based on different prepayment assumptions), current
payment/prepayment speeds and pool factors, as applicable.
Servicer, if different servicers service
different pool assets.
If a loan or similar receivable: amortization
period; loan purpose; loan status; loan-to-value (LTV) ratios and
debt service coverage ratios (DSCR); type and/or use of underlying
property, product or collateral; and number of points or other
origination charges paid on the pool assets.
If a receivable or other financial asset with
a revolving balance, such as a credit card receivable: monthly
payment rate; maximum credit lines; average account balance; yield
percentages; type of receivable account; finance charges, fees and
other income earned; gross and net purchases and returns granted;
and percentage of full-balance and minimum payments made.
Whether the pool asset is secured or
unsecured, and if secured, the type(s) of collateral.
Ranges of standardized credit scores of
obligors and other information regarding obligor credit quality.
Billing and payment procedures, including
frequency of payment, payment options, fees, charges and origination
or payment incentives.
Information about the origination channel and
origination process for the pool assets, such as originator
information (and how acquired) and level of origination
documentation required, as applicable.
Geographic distribution, such as by state or
other material geographic region.145
In particular and consistent with existing practice and our other
proposed thresholds for increased disclosure, if 10% or more of the
pool assets are or will be located in any one state or other
geographic region, information is to be provided regarding any
economic or other factors specific to such state or region that may
materially impact the pool assets or pool asset cash flows. In
addition, if material, statistical data should be provided according
to the factors or variables in this proposed list for each such
geographic concentration.
If material, other concentrations material to
the asset type (e.g., school type for student loans), with
information regarding such concentrations similar to that provided
for geographic concentrations.
In addition to the above and consistent with existing
practice, delinquency and loss information for the pool would be
required. A proposed item of general applicability for Regulation AB
would provide guidance regarding the presentation of such information.146
In addition to overall delinquency percentages, delinquency experience
is to be presented in 30-day increments, beginning with assets 30-59
days delinquent, through the point that assets are written off or
charged off as uncollectable. At a minimum, such information is to be
presented by number of accounts and dollar amount. Disclosure also would
be required on how delinquencies, charge-offs and uncollectable accounts
are defined or determined, addressing the effect of any grace period,
re-aging, restructure or other practices on delinquency experience.
Similar information would be required with respect to the sponsor in a
registration statement or otherwise if delinquency and loss information
was being presented with respect to the sponsor.
As discussed in Section III.B.3.a., we also propose to
require static pool data for the asset pool regarding delinquency and
losses, to the extent material. As with static pool data at the sponsor
level, additional explanatory disclosure regarding the static pool data
could be included, and in some cases could be required.147
We recognize, however, that there may be instances where such static
pool data would not be material, such as where the asset pool
predominantly consisted of new originations without a history of data to
present.
In a commercial mortgage-backed securitization, given
the importance of the underlying properties, our sample list of proposed
disclosure items for these assets is consistent with similar disclosure
required by existing Form S-11 for the registration of offerings of
securities for certain real estate companies. This information would
include, to the extent material:148
Net cash flow information from the pool assets
and the components of net cash flow.
Location and general character of all
materially important real properties.
Nature and amount of other material mortgages,
liens or encumbrances.
Proposed renovation, improvement or
development programs.
Competitive conditions.
Management of the properties, occupancy rates
and property uses.
Material tenants and lease terms.
b. Sources
of Pool Cash Flow
In some ABS transactions, cash flows to support the
asset-backed securities come from more than one source, such as in
lease-backed transactions that include separate cash flows from lease
payments and from the sale of the residual asset at the termination of
the lease. In such instances, disclosure would be required, consistent
with what is provided today, of the specific sources of funds and their
uses, including, if applicable, the relative amount and percentage of
funds that are to be derived from each source. Any assumptions, data,
models and methodology used to derive such amounts also would need to be
described.
As discussed in Section III.A.2.d., we propose
additional specific disclosures if the asset pool includes leases or
other assets where a portion of the cash flow is anticipated to come
from the residual value of an underlying physical asset. Such disclosure
would include information on how residual values are estimated and
derived, statistical information regarding estimated residual values and
historical statistics on turn-in rates and residual value realization
rates. Information also would be required regarding the manner and
process in which residual values are to be realized, including
disclosure of the entity that will convert the residual values into cash
and the experience of such entity. Finally, disclosure would be required
of the effects if not enough cash flow was received from the realization
of residual values, whether there existed any provisions to address such
a contingency, as well as how any cash flow greater than that necessary
to repay security holders would be allocated.
c. Changes
to the Asset Pool
As discussed in Section III.A.2.e., we are proposing
more detailed disclosures on when and how the composition of an asset
pool may change, such as through a prefunding or revolving period. Such
disclosure would include:
The term or duration of any prefunding or
revolving period.
Aggregate amounts and percentages involved in
the prefunding or revolving period.
Triggers that would terminate limits or
terminate such periods.
When and how new pool assets may be added,
removed or substituted, and the acquisition or underwriting criteria
for additional pool assets, and the party that makes determinations
on such changes.
Any minimum requirements to add or remove pool
assets.
Temporary investment of funds pending use.
How investors will be notified of any changes
to the asset pool.
d. Rights
and Claims Regarding the Pool Assets
When pool assets are transferred to the issuing
entity, the sponsor, transferor or other party often makes certain
representations and warranties concerning the pool assets, such as to
their principal balance and status at the time of transfer. If an asset
fails to meet the requirements of those representations or warranties,
there may be obligations for the depositor to repurchase or substitute
that asset for assets that do comply with the representations and
warranties. Consistent with current practice, disclosure of these rights
and remedies would be required. Similarly, disclosure would be required
regarding any material direct or contingent claims that parties other
than the holders of the asset-backed securities have on any pool assets,
such as prior mortgages, liens or encumbrances.
Questions regarding proposed disclosure for the asset
pool:
We request comment on the proposed disclosure
regarding the asset pool. Are there any modifications that should be
made to the list of representative items to be disclosed? For
example, is additional specificity needed regarding when and how the
asset pool may change? Is the disclosure regarding rights and claims
regarding the pool assets appropriate?
Is the proposed disclosure regarding
lease-backed ABS appropriate? Is additional specificity needed
regarding residual value disclosures or how residual values are to
be realized?
Should additional guidance be provided on the
methods to present statistical disclosure so that it is presented in
a clear and understandable format?
Similar to our proposals for the sponsor, we
request comment on the proposed requirement to include static pool
data for the asset pool. Is such data material to an investment
decision? Is it readily available for presentation? Is additional
clarity needed regarding the scope of the requirement? Should any
updates to the data be required on an ongoing basis? If so, what
data should be updated, how often should they be updated, and where
should they appear?
5.
Transaction Structure
Existing Item 202 of Regulation S-K would continue to
provide the core disclosure requirements for describing the securities
being offered. Proposed Item 1112 of Regulation AB would provide
additional guidance consistent with existing practice for preparing this
disclosure for asset-backed securities. For example, the item would
clarify that an explanation is to be given of the types or categories of
securities that may be offered, such as interest-weighted or
principal-weighted classes or planned amortization or companion classes,
as well has how principal and interest on each class of securities is
calculated and payable. Other specified items would include
amortization, performance or similar triggers or events (and their
effects on the transaction if triggered), overcollateralization or
undercollateralization information, cross-default or
cross-collateralization provisions, voting requirements to amend the
transaction documents and any minimum standards, restrictions or
suitability requirements regarding ownership of the securities.
A clear description of the flow of funds for the
transaction would be required. Such a description would include payment
allocations, rights and distribution priorities among all classes of the
issuing entitys securities, and within each class, with respect to cash
flows, credit enhancement and any other structural features in the
transaction. Any requirements directing cash flows would need to be
described, such as to reserve accounts, along with a description of the
purpose and operation of those requirements. In addition to an
appropriate narrative description, the flow of funds should be presented
graphically if doing so would aid understanding.
There has been increased emphasis in the market on the
level of fees and expenses involved in an ABS transaction.149
To provide increased transparency of this information in a unified
location, we propose to require in a separate table an itemized list of
all estimated fees and expenses to be paid or payable out of the cash
flows for the transaction. This fee and expense table would indicate for
each item the amount of the fee or expense, its general purpose, the
party receiving such fees or expenses, the source of funds for such fees
or expenses (if different from other fees or expenses or if such fees or
expenses are to be paid from a specified portion of the cash flows) and
the distribution priority of such expenses. If the amount of a fee or
expense was not fixed, the formula used to determine it would need to be
provided. The tabular presentation could be accompanied by footnotes or
other accompanying narrative disclosure to the extent necessary for an
understanding of the timing or amount of such fees and expenses. In
addition, through footnote or other accompanying narrative disclosure,
disclosure would be required if any, and if so how, any fees or expenses
could be changed without notice to, or approval by, security holders.
Other disclosures regarding the transaction structure
would include information on the frequency of distribution dates and the
collection periods for the pool assets and arrangements for cash held
pending use, including identification of the parties with access to cash
balances and the authority to make decisions regarding their investment
and use. Information on the ownership of any residual or retained
interests to the cash flows would be required, as well as the
disposition of excess cash flow. Disclosure would need to be provided of
any requirements to maintain a minimum amount of excess cash flow or
spread from, or retained interest in, the transaction, and effects on
the transaction if the requirements were not met.
As with any fixed-income security, optional or
mandatory redemption or termination provisions would need to be
described, including any "clean up" calls if the principal balance of
the pool assets reaches a specified minimum level. Many ABS transactions
include "clean up" calls whereby the securities are called and the trust
terminated before its stated termination date when the administrative
costs no longer justify the limited outstanding life.150
This is typically conducted only when less than 10% of the outstanding
pool balance is outstanding. We also propose to codify the existing
staff position that the title of any class of securities with an
optional or mandatory redemption or termination feature that may be
exercised when 25% or more of the original principal balance of the pool
assets is still outstanding must include the word "callable." This is to
alert investors that the callable feature is greater than a typical ABS
"clean up" call.
We propose to require additional information if the
transaction structure involves a master trust. For example, information
would be required to the extent material regarding any additional
securities already outstanding or that may be issued in the future that
are backed by the same asset pool, including:
The relative priority of those additional
securities to the securities being offered and their respective
rights to the underlying pool assets and cash flows;
Allocations of cash flow from the asset pool
and any expenses or losses among the various series or classes;
Terms under which additional series or classes
may be issued and pool assets increased or changed; and
The terms of any security holder approval or
notification of any additional issuance.
In describing generally the scope of disclosure
expected in ABS registration statements, the 1992 Release specifically
referenced disclosure regarding prepayment, maturity and yield
considerations that may be material to ABS. In our proposed disclosure
requirements, a description would be required, which is often provided
today, of any material models, including material assumptions and
limitations, used as a means to identify cash flow patterns with respect
to the pool assets. Similarly, the disclosure would need to explain, to
the extent material, the degree to which each class of securities is
sensitive to changes in the rate of payment on the pool assets, and
describe the specific consequences of such changing rate of payment.151
Consistent with market practice, statistical information of such effects
is to be provided, such as the effect of prepayments on yield and
weighted average life at one or more given prepayment speeds. Any
special allocations of prepayment risks among the classes of securities
would need to be described, as well as whether any class protects other
classes from the effects of the uncertain timing of cash flow.
Questions regarding proposed disclosure regarding the
transaction structure:
We request comment on the above proposed
disclosure regarding transaction structure. Are there any
modifications that should be made to the list of items? For example,
is additional specificity needed regarding the information that
should be provided regarding prepayment, maturity and yield
considerations?
Is a separate itemized fee and expense table
useful, or would disclosure of fees and expenses as part of a flow
of funds discussion be sufficient?
If the proposal regarding an assessment of
compliance with servicing criteria is modified, should additional
disclosure be required regarding controls and procedures over
collections and cash balances?
Is the proposed disclosure about additional
series or classes of securities in master trust structures
sufficient? Should disclosure of additional information be required?
6.
Significant Obligors
In most securitizations, the asset pool represents
obligations of a large enough number of separate obligors that
information on any individual obligor is not material. However, as
discussed in Section III.A.6., as concentration with a particular
obligor or group of related obligors increases, additional disclosures
regarding that obligor or group of related obligors, including financial
information, is required. Analogizing to the standards in Topic 1.I of
Staff Accounting Bulletin No. 103, current staff and market practice is
to require additional disclosures regarding a particular obligor or
group of related obligors when concentration reaches 10%, with more
particular disclosures at 20%.152
Consistent with this long-standing practice, we
propose to define a "significant obligor" that would trigger additional
disclosures as any of the following:
An obligor or a group of affiliated obligors
on any pool asset or group of pool assets if such pool asset or
group of pool assets represents 10% or more of the asset pool;
A single property or group of related
properties securing a pool asset or a group of pool assets if such
pool asset or group of pool assets represents 10% or more of the
asset pool; or
A lessee or group of affiliated lessees if the
related lease or group of leases represents 10% or more of the asset
pool.
Instructions to the proposed definition would clarify
that if separate pool assets, or properties underlying pool assets, are
cross-defaulted and/or cross-collateralized, such pool assets are to be
aggregated and considered together in determining concentration levels.
With respect to lessees, the concentration calculation must focus on the
leases whose cash flow supports the asset-backed securities directly or
indirectly, regardless of whether the asset pool contains the leases
themselves, mortgages on properties that are the subject of the leases
or other assets related to the leases. Finally, if the pool asset is a
mortgage or lease relating to real estate and non-recourse to the
obligor, and the obligor does not manage the property or does not own
other assets and has no other operations, then the obligor need not be
considered a separate significant obligor from the real estate.
Otherwise, if any of the 10% tests were met, the obligor would be a
separate significant obligor for which disclosure would be required.
For each significant obligor, both descriptive and
financial information would be required consistent with existing
practice. Descriptive information would include the identity of the
significant obligor, its organizational form, the general character of
its business, the nature of the concentration and the material terms of
the pool assets or the agreements with the obligor involving the pool
assets.
Consistent with current practice, different levels of
financial information would be required depending upon the level of
concentration.153
If the pool assets relating to a significant obligor represented 10% or
more, but less than 20%, of the asset pool, selected financial data
required by Item 301 of Regulation S-K would need to be provided.154
If the pool assets relating to the significant obligor represented 20%
or more of the asset pool, audited financial statements meeting the
requirements of Regulation S-X would be required. Both thresholds
represent long-standing breakpoints in Commission and staff requirements
for determining the level of required financial disclosure.155
Section III.B.9. discusses proposals for alternative methods that may be
available, subject to conditions, to present this disclosure, such as
through incorporation by reference or by including a reference to the
obligors Commission filings.
We propose instructions to address exceptions to the
requirement to provide financial information regarding a significant
obligor. For example, no financial information would be required if the
obligations of the significant obligor as they relate to the pool assets
are backed by the full faith and credit of the United States. Similarly,
no financial information would be required if the obligations of the
significant obligor as they relate to the pool assets are backed by the
full faith and credit of a foreign government, if the pool assets are
investment grade securities. Otherwise, information required by
paragraph (5) of Schedule B of the Securities Act156
regarding the foreign government could be incorporated by reference. If
the significant obligor was an asset-backed issuer and the pool assets
relating to the significant obligor were asset-backed securities, rather
than financial information we would require disclosure under proposed
Items 1104-1113 and 1117 of Regulation AB regarding such asset-backed
securities.
Questions regarding proposed disclosure regarding
significant obligors:
We request comment on the proposed definition
of significant obligor. Are any modifications necessary? Is the test
of whether the pool asset represents 10% or more of the asset pool
the appropriate test? Should it instead be based on cash flows
supporting the offered ABS, the principal amount of the offered
asset-backed securities or a combination of any of these tests? Is
the application to lessees appropriate? Should any other particular
entities be included or excluded?
Are the 10% and 20% breakpoints still
appropriate for triggering when different levels of financial
disclosure should be required? Should they be changed?
We also request comment on the level of
disclosure to be required, both descriptive and financial, regarding
significant obligors. Are there alternative disclosures that should
be required or permitted? For example, in the case of an insurance
company or other regulated entity that is not subject to Exchange
Act reporting requirements and does not otherwise provide GAAP
financial statements, should financial statements prepared under the
entities regulatory accounting principles be acceptable as a
substitute?
Should there be any additional exclusions to
when financial information would be required? Are the proposed
instructions regarding governments and asset-backed securities
appropriate?
7. Credit
Enhancement and Other Support
The definition of asset-backed security contemplates
the inclusion of "rights or other assets designed to assure the
servicing or timely distribution of proceeds to security holders."
Credit enhancement or other support for asset-backed securities can be
provided in a variety of ways, including features internally structured
into the transaction to provide support as well as externally provided
enhancement. Disclosure would be required of all such methods of
enhancement, to the extent material, including any of the following:157
Any external credit enhancement designed to
ensure that the asset-backed securities or pool assets will pay in
accordance with their terms, such as bond insurance, letters of
credit or guarantees;
Any mechanisms to ensure that payments on the
asset-backed securities are timely, such as liquidity facilities,
lending facilities, guaranteed investment contracts and minimum
principal payment agreements;
Any derivatives that are used to reduce or
alter risk resulting from financial assets in the asset pool and
that provide payments in return for payments on such assets, such as
interest rate or currency swaps, or that are used to provide credit
enhancement related to assets in the pool;158
and
Any internal credit enhancement structured
into the transaction to increase the likelihood that one or more
classes of asset-backed securities will pay in accordance with their
terms, such as subordination provisions, overcollateralization,
reserve accounts, cash collateral accounts or spread accounts.
Disclosure of the material terms of any agreement to
provide such enhancement would be required, including any limits on the
timing or amount of the enhancement or any conditions that must be met
before the enhancement can be accessed. Provisions permitting the
substitution of enhancement also would need to be disclosed. The
agreement relating to the enhancement would be required to be filed as
an exhibit to the filing.
Similar to significant obligors, enhancement or other
support by a particular entity or group of affiliated entities may reach
a certain level of concentration such that additional disclosures,
including financial disclosures, would be appropriate. Consistent with
current practice, we propose that if an entity or group of affiliated
entities providing enhancement or other support for the asset-backed
securities is liable or contingently liable to provide payments
representing 10% or more of the cash flow supporting any offered class
of asset-backed securities, additional information, both descriptive and
financial, would be required. The descriptive information would include
the name of the enhancement provider, its organizational form and the
general character of its business.
Also consistent with current practice and our
proposals for significant obligors, we propose to use 10% and 20%
thresholds in determining the level of financial information that would
be required regarding an enhancement provider. In particular, if any
entity or group of affiliated entities that provided enhancement or
other support for the asset-backed securities was liable or contingently
liable to provide payments representing 10% or more, but less than 20%,
of the cash flow supporting any class of the asset-backed securities,
selected financial data required by Item 301 of Regulation S-K would
need to be provided. If the entity or group of affiliated entities was
liable or contingently liable to provide payments representing 20% or
more of the cash flow supporting any class of the asset-backed
securities, audited financial statements meeting the requirements of
Regulation S-X would be required. As with financial disclosure regarding
significant obligors, Section III.B.9. discusses a proposal for an
alternative method that may be available to incorporate the information
by reference. We also propose similar instructions if the obligations of
the enhancement provider are backed by the full faith and credit of the
United States or certain foreign governments.
These disclosure requirements would apply to all
providers of external credit or liquidity enhancement, insurance or
guarantees, counterparties to swap or hedging arrangements, interest
rate exchange arrangements, interest rate cap or floor arrangements,
currency exchange arrangements or similar arrangements, and any other
parties providing external credit enhancement or other support for
payments on the asset-backed securities. Enhancement may support payment
on the pool assets or payments on the asset-backed securities
themselves.
Unlike current practice, our proposals would base the
triggering event for disclosure on payments that the enhancement
provider is liable or contingently liable to provide. Valuation of the
enhancement, such as for swaps or other derivatives, would not be the
relevant test. Even if a swap, such as an interest rate swap, was
currently "out of the money" and no payments were required, if the swap
provider was contingently liable for more than 10% of the cash flow
supporting a class (for example, if interest rates changed), disclosure
would be required on the same basis as any other form of enhancement,
such as a guarantee, even though probability of payment on the guarantee
likewise could be remote due to a high quality asset pool.
Questions regarding proposed disclosure regarding
credit enhancement and other support:
We request comment on our proposals for
disclosure regarding credit enhancement and other forms of support
for an ABS transaction. Are any modifications necessary? Are there
any additional examples we should provide?
Is the test of whether the enhancement
provider is liable or contingently liable for payments representing
10% or more of the cash flows to any class of the asset-backed
securities the appropriate test? If not, why? What alternatives
should be used? Should different tests be used for different forms
of enhancement? What would be the rationale for different tests?
Are the 10% and 20% breakpoints still
appropriate for triggering when different levels of financial
disclosure should be required? Should they be changed?
We also request comment on the level of
disclosure to be required, both descriptive and financial. Are there
alternative disclosures that should be required or permitted? For
example, in the case of an insurance company or other regulated
entity that is not subject to Exchange Act reporting requirements
and does not otherwise provide GAAP financial statements, should
financial statements prepared under the entities regulatory
accounting principles be acceptable as a substitute?
Should there be any additional exclusions as
to when financial information would be required? Are the proposed
instructions regarding U.S. and foreign government-backed
obligations appropriate?
8. Other
Basic Disclosure Items
a. Tax Matters
Consistent with existing practice, the registration
statement would need to include a brief, clear and understandable
summary of:
The tax treatment of the asset-backed
securities transaction under federal income tax laws.
The material federal income tax consequences
of purchasing, owning and selling the asset-backed securities. In
addition, if any of the material federal income tax consequences are
not expected to be the same for investors in all classes offered by
the registration statement, the material differences would need to
be described.
The substance of counsels tax opinion,
including identification of the material consequences upon which
counsel has not been asked, or is unable, to opine.
The filing and disclosure of tax opinions is a
frequent topic of staff comment. The requirements with respect to tax
opinions in ABS transactions are generally consistent with the
requirements for non-ABS transactions.159
For example, when using a "short form" tax opinion where disclosure in
the prospectus is to constitute counsels opinion, the tax opinion filed
as an exhibit to the registration statement must confirm or adopt the
statements in the prospectus discussion as counsel's opinion. It is not
sufficient for the tax opinion to merely state that the disclosure in
the prospectus is accurate in all material respects. Registrants and
their counsel should take care in preparing and describing tax opinions
consistent with practices required for Securities Act registration
statements.160
b. Legal
Proceedings
In lieu of Item 103 of Regulation S-K, we propose a
more tailored disclosure item for material legal proceedings with
respect to asset-backed securities. For example, under the proposed
disclosure item, a brief description would be required regarding any
legal proceedings pending or known to be threatened against the sponsor,
depositor, trustee, issuing entity, any servicer or any enhancement
provider, or of which any property of the foregoing is the subject, that
is material to security holders. Similar information would be required
as to any such proceedings known to be contemplated by governmental
authorities.
c.
Affiliations and Certain Relationships and Related Transactions
There often can be several affiliations between
parties in an ABS transaction. For example, the servicer often is an
affiliate of the sponsor. We propose to require a description of
whether, and if so, how, the sponsor, depositor or issuing entity is an
affiliate of any of the following parties: servicer, trustee, originator
of at least 10% of the pool assets, significant obligor, significant
enhancement provider, underwriter or other material party identified
with respect to the transaction. Disclosure also would be required, to
the extent known, of any affiliate relationships among any of the
parties listed above. An "affiliate" of, or a person "affiliated" with,
a specified person, is defined in Commission rules to mean "a person
that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the
person specified."161
We also propose disclosure regarding whether there is,
and if so, the general character of, any business relationship,
agreement, arrangement, transaction or understanding entered into
outside the ordinary course of business or on terms other than would be
obtained in an arms length transaction with an unrelated third party,
apart from the asset-backed securities transaction, between the sponsor,
depositor or issuing entity and any of the above referenced parties that
either currently exists or that existed during the past two years that
is material to an investors understanding of the asset-backed
securities. An instruction to the proposed item would clarify that what
would be required is information material to an investors understanding
of the asset-backed securities. A detailed description or itemized
listing of all commercial relationships among the parties would not be
required. Instead, the disclosure should indicate whether any
relationships outside of the asset-backed securities transaction do
exist that meet the specified standard, including materiality to an
understanding of the asset-backed securities, and the general character
of those relationships. However, disclosure of specific relationships
involving or related to the ABS transaction and the pool assets,
including the material terms and approximate dollar amount involved,
would be required to the extent material. For example, material credit
arrangements relating to the pool assets provided by an underwriter or
promoter for the asset-backed securities, such as providing a warehouse
line of credit to fund originations or acquisitions pending
securitization, would need to be described.
d. Ratings
We propose to codify current industry practice by
requiring disclosure of whether the issuance or sale of any class of the
offered securities is conditioned on the assignment of a rating by one
or more rating agencies, whether or not NRSROs.162
If so, each rating agency must be identified as well as the minimum
rating that must be assigned. A description regarding any arrangements
to have such rating monitored while the securities are outstanding also
would be required.
e. Reports
and Additional Information
Post-issuance reporting of information regarding an
ABS transaction is important to an understanding of transaction
performance and, hence, investment decisions, including whether existing
holders should sell their securities and whether prospective buyers
should purchase them. Such disclosures in the ABS context generally
involve both updated information about pool performance as well as
information on allocations and distributions of cash flows to holders of
the securities and other third parties according to the flow of funds.
Investors necessarily consider the availability and quality of
transaction reporting in determining whether, and at what level, to
invest in such securities.
In addition to disclosure regarding reports to be
filed with the Commission, we propose to require disclosure, which is
often provided today, of the reporting investors can expect to receive
and be able to access. This disclosure would need to include a
description of the reports or other documents required under the
transaction agreements, including the information to be included in the
reports, the schedule and manner of their distribution or availability
and who will prepare the reports.
We also propose to require disclosure of whether
website access will be provided to Commission and transaction reports.163
Disclosure would be required in the prospectus regarding whether the
issuing entitys annual reports on Form 10-K, distribution reports on
Form 10-D, current reports on Form 8-K and amendments to those reports
filed or furnished with the Commission will be made available on the
website of a specified transaction party (e.g., sponsor,
depositor, servicer, issuing entity or trustee) as soon as reasonably
practicable after such material is electronically filed with, or
furnished to, the Commission. As the Commission specified in its release
adopting similar disclosure for accelerated filers, we interpret the "as
soon as reasonably practicable" standard to mean that the report would
be available, barring unforeseen circumstances, on the same day as
filing.164
In addition, disclosure would be required regarding:
Whether other reports to security holders or
information about the asset-backed securities will be made available
in this manner;
If filings will be made available in this
manner, the website address where such filings may be found; and
If filings and other reports will not be made
available in this manner, the reasons why they will not and whether
an identified transaction party voluntarily will provide electronic
or paper copies of those filings free of charge upon request.
The guidance provided in the Commissions release
adopting similar disclosure for accelerated filers, such as how the
website access can be provided, would be equally applicable to this
disclosure.165
In addition, the inclusion of the website address in response to the
disclosure requirement would not, by itself, include or incorporate by
reference the information on the site into the prospectus or
registration statement, unless the registrant otherwise acts to
incorporate the information by reference.166
Similarly, the proposed disclosure is not designed to create new duties
under the antifraud provisions of the federal securities laws or in
private rights of action or to alter any existing liability provisions.
For example, the new disclosure would not separately create or otherwise
affect any duty to update prior statements.
Questions regarding other proposed basic disclosure
items:
We request comment on these other basic
disclosure items. Are there any modifications that should be made to
these items? For example, is additional specificity needed regarding
the tax consequences that should be described?
What should be the proper scope for disclosure
of affiliations and relationships between transaction parties?
Should any modifications be made to the proposed disclosure item?
Are all of the proposed related party transaction disclosures
useful, or should the disclosure be limited from what is proposed?
Should disclosure be required regarding any relationships at an
individual level, such as with an executive officer or director of
the sponsor, depositor or issuing entity, if applicable, that exists
in connection with or apart from the asset-backed securities
transaction?
Should additional disclosure regarding ratings
or the rating process be required? For example, should disclosure of
fees paid to rating agencies be required? Should we require an
explanation of what an NRSRO rating addresses and the
characteristics the rating does not address?
With regard to the content of reports that
will be provided to investors, should a copy of the form of the
report to be used be included with the registration statement or
filed as an exhibit?
We request comment on the proposed disclosure
regarding website access to reports. Should disclosure also be
required on an ongoing basis in the Form 10-K or in distribution
reports? Is additional guidance necessary in how to comply with the
proposal? Should alternative methods be considered in promoting the
availability of transaction reporting to investors and market
participants?
Are there additional areas of disclosure that
should be separately identified? For example, should there be a
separate disclosure item for legal investment considerations, such
as ERISA qualifications?
9.
Alternatives to Present Third Party Financial Information
As discussed in Sections III.B.6. and 7., there are
instances both today and under our proposals when additional financial
information regarding third parties would be required in ABS filings,
including financial information about significant obligors and
significant providers of enhancement or other support. Over time,
through several no-action letters and interpretations, the staff has
permitted alternative methods to present or refer to this information if
it exists in other Commission filings of the third party. The first
alternative allows incorporation by reference of the third partys
financial information into the ABS filing. The second alternative,
available only with respect to significant obligors, allows an ABS
filing to reference the significant obligors Exchange Act reports on
file with the Commission in lieu of providing the information.
We propose to codify both of these alternatives and
clarify the conditions for their use. Both alternatives would relate
only to the presentation of financial information regarding the third
party. Information specific to the asset-backed securities transaction,
such as the material terms of the pool assets in the case of significant
obligors or the enhancement in the case of an enhancement provider,
would still be required as is the case today.
a.
Incorporation by Reference
The first alternative is derived from several staff
no-action letters that permit the incorporation by reference of
financial information regarding certain bond insurers from their or
their affiliated entities Exchange Act reports.167
We propose to codify the expansion of these positions by the staff to
permit incorporation by reference (by means of a statement in the ABS
filing to that effect) of the required financial information of any
enhancement provider from its Exchange Act reports (or the reports of
the entity that consolidates such party), if the following conditions
were met:168
The third party or entity that consolidates
the third party in its financial statements is subject to the
Exchange Act reporting requirements and is current with its
reporting for the past twelve months (or such shorter period that it
has been required to file reports);
The reports to be incorporated by reference
include (or properly incorporate by reference) the financial
statements of the third party or such information is consolidated
into the financial statements of the entity that consolidates the
third party;
The filing incorporating the information by
reference describes any and all material changes to the incorporated
information which have occurred subsequent to the filing of the
incorporated information; and
If included in a prospectus or registration
statement, the prospectus also states that all documents
subsequently filed by such third party, or the entity that
consolidates the third party, prior to the termination of the
offering also will be deemed to be incorporated by reference into
the prospectus.
This option also could be used to include the
information required of any significant obligor.
As we propose to expand the basic definition of
asset-backed security to registered offerings on Form S-1, we also are
proposing to permit incorporation by reference of third party financial
information for ABS offerings registered on that form. In addition,
several amendments to our existing incorporation by reference and
updating rules are necessary to reflect incorporation by reference of
information of third party filings in Securities Act registration
statements.169
For example, if the registrant was relying on the incorporation by
reference alternative for third party financial information, it would
need to make an undertaking in its registration statement, similar to
that required for existing registration statements that rely on
incorporation of subsequent Exchange Act reports of the registrant,170
that, for purposes of determining any liability under the Securities
Act, each filing of the annual report of the third party that is
incorporated by reference in the registration statement will be deemed
to be a new registration statement relating to the securities offered by
that registration statement, and the offering of such securities at that
time will be deemed to be the initial bona fide offering thereof.
We also propose to add three instructions that would
remind registrants of our other existing incorporation by reference and
updating requirements. The first instruction would remind ABS issuers
that in addition to the proposed conditions above, any information
incorporated by reference must comply with any other applicable
Commission rules pertaining to incorporation by reference.171
The second instruction would remind issuers that any applicable
requirements under the Securities Act or our rules and regulations
regarding the filing of a written consent for the use of incorporated
material also would apply to the material incorporated by reference.172
For example, if a subsequent Form 10-K of a third party was being used
to update the ABS registration statement under Section 10(a)(3) of the
Securities Act,173
any required consents would need to be filed under a filing by the ABS
issuer, such as in a Form 10-K, 10-D or 8-K with respect to registered
offerings on Form S-3. The third instruction reminds issuers that any
undertakings set forth in Item 512 of Regulation S-K would apply to any
material incorporated by reference in a registration statement or
prospectus.
Request for comment on the incorporation by reference
alternative:
We request comment on the alternative that
permits incorporation by reference of required third party financial
information. Should any of the conditions to the proposal be
modified? Should the proposal be allowed for all significant
obligors and enhancement providers that meet the proposed
conditions?
Is it appropriate to extend incorporation by
reference for third parties to registered ABS offerings on Form S-1?
Would it be appropriate to extend it to all parties?
We also request comment on our proposed
amendments to the incorporation by reference and updating rules to
accommodate the proposal. In particular, we request comment on the
proposed undertaking for incorporation by reference of third party
information. Is additional guidance necessary regarding updating
requirements?
b.
Reference Information
The second alternative to presenting third party
financial information is derived from several staff no-action letters
and interpretive positions that permit reference to the Exchange Act
reports of a significant obligor in lieu of inclusion of the obligors
financial information in the filing or incorporating them by reference.174
In particular, these positions recognize the practical difficulties that
may be involved in obtaining the required information or the necessary
consent to use the information, or the ability to evaluate the
information, from an unaffiliated significant obligor whose securities
have been securitized without any obligor involvement in the ABS
transaction. A common example of such a situation is a sponsor that
acquires outstanding corporate debt securities of other issuers in
purely secondary market transactions (i.e., there is no
relationship to the issuer or the issuers distribution) and securitizes
them in a transaction where one or more of these issuers is a
significant obligor.
Under our proposal, an ABS filing may include a
reference to a significant obligors Exchange Act reports (which would
include a statement of how those reports may be accessed, including the
third partys name and Commission reporting number) in lieu of providing
the required financial information in the filing, if the following
conditions were met:175
Neither the significant obligor nor any of its
affiliates has had a direct or indirect agreement, arrangement,
relationship or understanding, written or otherwise, relating to the
asset-backed securities transaction, and neither the third party nor
any of its affiliates is an affiliate of the sponsor, depositor,
issuing entity or underwriter of the asset-backed securities
transaction;176
The significant obligor meets at least one of
the eligibility categories discussed below; and
An undertaking is included that if the
significant obligor ceases to meet any of the eligibility
conditions, either the required information will be provided or the
transaction, or that portion of the transaction, will terminate.
The first condition would clarify that the significant
obligor must be unaffiliated and otherwise not involved with the ABS
transaction. If the obligor was affiliated or involved with or
participating in the ABS transaction, the policy argument to permit
reference to the third partys reports in lieu of presenting the
information or incorporating it by reference because of the potential
impracticality in obtaining it is not present. As a result, the proposed
reference alternative would not be available for financial information
regarding a significant enhancement provider due to its involvement in
the transaction and the information would have to be included in the
filing or, if the conditions in Section III.B.9.a. are met, incorporated
by reference.
The second condition refers to the categories of
significant obligors that would be eligible for the reference
alternative. Consistent with existing staff positions and market
practice, the proposed eligible categories relate to the existing Form
S-3 eligibility of the significant obligor. For example, the first
category would be a significant obligor eligible to use Form S-3 or F-3
for a primary offering of non-investment grade securities pursuant to
General Instruction I.B.1 of such forms, which requires a $75 million
public float.177
A second category would be a significant obligor that would be eligible
to register the related pool assets under General Instruction I.B.2 of
Form S-3 or F-3 (i.e., the pool assets relating to the
significant obligor are non-convertible investment grade securities). A
third and fourth category would relate to pool assets guaranteed by a
parent or subsidiary of the significant obligor where both the
information requirements under Rule 3-10 of Regulation S-X178
and applicable Form S-3 or Form F-3 eligibility requirements (such as
General Instruction I.C.3 of Form S-3) are met.
A fifth category would relate to significant obligors
that are U.S. government-sponsored enterprises. Several GSEs
historically have not been subject to Exchange Act reporting
requirements. The staff has made accommodations for several of these
entities so long as they have outstanding securities held by
non-affiliates with a market value of $75 million or more and publicly
make available audited financial statements prepared in accordance with
generally accepted accounting principles and extensive business
information. Our proposal would clarify the meaning of this requirement
by permitting reference if the GSE had $75 million outstanding of
securities held by non-affiliates and the GSE makes information publicly
available on an annual and quarterly basis, including audited financial
statements prepared in accordance with generally accepted accounting
principles covering the same periods that would be required for audited
financial statements under Regulation S-X and non-financial information
consistent with that required by Regulation S-K.
A final category relates to significant obligors where
the pool assets in question are themselves asset-backed securities. We
would permit reference in this instance if the significant obligor was
filing Exchange Act reports and was current in such reporting for at
least twelve calendar months and any portion of a month immediately
preceding the filing referencing the obligors reports (or such shorter
period that the obligor was required to file such materials). We do not
propose to include an additional existing staff condition that the
significant obligor has outstanding securities in excess of $75 million
because we do not believe a market capitalization condition is relevant
in the context of underlying ABS.
Because of the possibility that corporate debt issuers
could suspend their reporting requirements, the staff has permitted ABS
issuers securitizing such debt to include a provision that, if a
significant obligors financial information is not available, the
transaction, or a portion of the transaction, would terminate, such as
by distributing the pool assets to investors or selling the pool assets
and liquidating the asset-backed securities. This option to terminate
the transaction has developed through market practice where it is
believed that the alternative of including the information in the ABS
filing might become impractical or impossible. Our proposal addresses
this problem and allows termination as an option. However, if the
termination option was elected, the transaction, or that portion of the
transaction, must terminate before updated information regarding the
third party would be required. Provisions that the transaction would
terminate "in a reasonable time" or after a given period of time would
not be an alternative to providing information regarding a third party
that otherwise would be required.
Request for comment on the reference alternative:
We request comment on the alternative that
permits reference to a third partys Exchange Act reports on file
with the Commission in lieu of providing that information. Should
any of the conditions to the proposal be modified? Should a
termination option be recognized? We also request comment on the
limitation of the proposal to only unaffiliated and uninvolved
significant obligors. What are the reasons that would justify
reference to reports by affiliated obligors, others involved in the
transaction or an enhancement provider even though that entity is
involved with the ABS transaction?
We request comment on the proposed
codification of the eligible categories of significant obligors for
which reference information would be permitted. Given the size of
most ABS transactions, would a $75 million requirement for
outstanding securities add value for the ABS category?
118See proposed Items 11001121 of Regulation AB.
119See,
e.g., Release No. 33-7497
(Jan. 28, 1998) [63 FR 6370]. See also Division of Corporation Finance
Staff Legal Bulletin No. 7A, "Plain English Disclosure" (Jun. 7, 1999)
and Office of Investor Education and Analysis, "A Plain English
Handbook: How to Create Clear SEC Disclosure Documents" (Aug. 1998). All
of these documents are available on our websi |
