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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.C - Communications During the Offering Process
Table of Contents
C.
Communications During the Offering Process
1. ABS Informational and Computational Material
a. Current Requirements
The Securities Act restricts the types of offering
communications that a registrant or those acting on its behalf (such as
an underwriter) may use during a registered public offering.179
The level of restriction depends on the period during which the
communications are to occur. Before the registration statement is filed,
all offers, in whatever form, are prohibited.180
After the registration statement is filed until it is declared
effective, offers made in writing (including by e-mail or Internet), by
radio or by television must conform to the information requirements of
Section 10 of the Securities Act.181
Thus, the only written material that may be used in connection with the
offering of the securities during this period is a preliminary
prospectus meeting the requirements of Section 10, which must be filed
with the Commission.182
After the registration statement is declared effective, the registrant
may use additional materials to offer the securities, but only if it
delivers a final prospectus that meets the requirements of Section 10(a)
of the Securities Act before or with those materials.183
The structuring of various classes of ABS can be quite
complex involving a detailed analysis of the asset pool and a
complicated allocation of pool asset cash flows. Given the important
focus on tranching and pool characteristics, including potential cash
flow patterns, sponsors or underwriters often wish to provide to
potential investors computational materials and term sheets identifying
the structure and underlying assets prior to finalizing the deal
structure and printing the final prospectus. These materials may help
investors understand the proposed transaction and analyze prepayment
assumptions and other issues affecting yield and flow of funds. This
information, which often includes detailed statistical and tabular data,
would be impractical to provide orally. Historically, few investors have
had the computer resources to prepare these analytics themselves.
Following a series of staff no-action letters from the
mid-1990s, ABS issuers are permitted to use term sheets and
computational material after the effectiveness of a registration
statement but before availability and delivery of a final Section 10(a)
prospectus.184
Under these no-action letters, three basic types of materials can be
used: structural term sheets; collateral term sheets; and computational
materials. Structural term sheets identify the proposed structure of the
securities being offered, such as the parameters of the various types of
classes offered. Collateral term sheets provide information regarding
the proposed underlying assets. Computational materials contain
statistical data displaying for a particular class of asset-backed
securities the yield, average life, expected maturity, interest rate
sensitivity, cash flow characteristics or other such information under
specified prepayment, interest rate, loss or related scenarios.
The existing staff no-action letters contain filing
requirements for the use of these materials, and provide that no
confirmations of sale can be sent until the filing requirements are met.
The filing requirements vary depending upon the type of material used
and how it is used. Subject to various conditions, any collateral term
sheet used before the final prospectus is delivered that represents a
substantive change from a prior collateral term sheet must be filed on
Form 8-K within two business days of first use and incorporated by
reference into the registration statement for the offering.
Under slightly more complex conditions, structural
term sheets and computational materials used before the final prospectus
is available must be filed on Form 8-K prior to or with the filing of
the final prospectus and incorporated by reference into the registration
statement. If the materials are provided after the final prospectus is
available but before it is delivered, they must be filed as soon as
possible but not later than two business days of first use. Materials
that relate to abandoned structures or that are furnished before the
structure of the entire issue is finalized to investors which have not
indicated their intention to purchase the ABS need not be filed.
We understand that where they are used, term sheets
and computational material often represent the primary, if not the only,
written materials that are used to offer asset-backed securities. We
also understand that advances in technology over the ten years since the
first no-action action letter was issued have raised several
interpretive issues regarding the scope and application of the letters.
For example, an increasing number of investors possess or have access to
the analytical capacity to perform their own models and scenarios on
pool data and therefore may request data at the individual pool asset
level, or "loan level" data, instead of summarized charts and tables.185
There has been some concern over whether the existing no-action letters
would permit disclosure at this level of granularity. In addition,
various third party services have developed over the past decade that
allow issuers and underwriters to import collateral and structural data
about a proposed transaction into a format that allows investors to
conduct their own analytics and computations with self-selected
assumptions and estimates in lieu of relying on underwriters to perform
these functions for them. This has raised questions over what
information should be filed with the Commission under the no-action
letters where such services are used.
b.
Proposed Exemptive Rule
We are proposing to codify the concept in the staff
no-action letters that permits the use of ABS informational and
computational material after the effectiveness of a registration
statement for an offering of asset-backed securities registered on Form
S-3 but before delivery of the final Section 10(a) prospectus.
Recognizing the current use of these materials in providing an increased
flow of information to investors, the flexibility to tailor materials to
specifically identified investor needs, and the liability for false and
misleading statements or omissions, we believe permitting the use of ABS
informational and computational material for Form S-3 ABS after
effectiveness of the registration statement would be appropriate in the
public interest and consistent with the protection of investors under
the proposed conditions discussed below, including the proposed filing
conditions. Accordingly, we propose to exempt from Section 5(b)(1) of
the Securities Act the use of these materials during that period if
certain specified conditions are met, including filing requirements.186
In doing so, we propose to streamline the conditions in the no-action
letters for how the materials can be used and when they must be filed.
The proposed rule would make clear, however, that similar to our
existing communications exemptions regarding business combination
transactions, the exemption would not be available to communications
that may technically comply with the rule, but have the primary purpose
or effect of conditioning the market for another transaction or are part
of a plan or scheme to evade the requirements of Section 5 of the
Securities Act.187
The proposed exemption only would be available with
respect to registered offerings of investment grade asset-backed
securities that meet the requirements of General Instruction I.B.5 of
Form S-3. We believe this is consistent with the intent of the existing
staff no-action letters. We also believe offerings of asset-backed
securities meeting the additional requirements for Form S-3 registration
represent the appropriate categories of offerings that should be
permitted to use ABS informational and computational material outside of
the registration statement prospectus. The proposed rule, like the
existing staff no-action letters, would not be available to offerings
that meet the definition of asset-backed security but are registered on
Form S-1.
Similar to requests we have received regarding non-ABS
offerings, the Commission and the staff have received requests over the
past several years with respect to ABS to liberalize the use of
communications in and around the registered offering process beyond
those allowed by the existing staff no-action letters and our proposed
exemptive rule.188
The existing staff no-action letters already permit ABS offerings on
Form S-3 to use significantly more material outside of the Section 10
prospectus than non-ABS offerings. Requests for further relaxation of
the communications restrictions, including the type of materials that
can be used, when they can be used and filing and liability
requirements, raise broad issues that also are implicated by requests we
have received to relax communication restrictions for non-ABS offerings.
Staff in our Division of Corporation Finance is currently developing
recommendations to the Commission on potential reforms to the
registration process under the Securities Act, including potential
reforms to the communications restrictions. We plan to address the issue
of whether additional accommodations to the communications restrictions
would be appropriate, including for ABS offerings, in connection with
any recommendations on broader reforms. Therefore, our approach here
involves the existing allowance for additional materials in the ABS
context.
Questions regarding the proposed exemptive rule:
We request comment on the proposed exemptive
rule. What is the use of these materials in todays market? Is the
proposed exemption consistent with the use of these materials? Does
the use of these materials provide investors with enough time and
information to make informed investment decisions?
We do not propose to limit eligibility for the
exemption on any variables such as transaction size or asset type.
However, under the existing no-action letters we see few filings
related to the use of term sheets or computational material outside
of MBS. Should we limit eligibility by size, asset type or other
variable? Is the use of these materials not necessary for other
asset classes? Is there a reason why more of these materials are not
filed?
Should the exemption not be available to ABS
targeted to non-institutional investors? For example, should the
exemption not be available to ABS expected to have low minimum
investment denominations (e.g., less than $1,000) or ABS that
are to be listed?
Is the proposed limitation to registered
offerings on Form S-3 still appropriate? If not, under what
circumstances should the proposal be extended to offerings on Form
S-1? The existing letters and our proposals require filing of
material on Form 8-K that is incorporated by reference into the
registration statement. They also only apply to the use of materials
after the effective date of the registration statement (e.g.,
before a takedown off of an effective shelf registration statement).
How would this procedure work with respect to non-shelf registered
offerings on Form S-1?
Are any clarifying amendments necessary for
ABS with respect to Securities Act Rule 134?189
This rule deems certain limited communications announcing an
offering (often called a "tombstone" announcement) not a prospectus
so long as the communication is limited to the items specified in
that rule. What items would be appropriate for ABS (e.g.,
announcing the asset type being securitized, asset concentrations,
sponsor, servicer or weighed average life, maturity or coupon), and
why should they be included?
c.
Proposed Definition of ABS Informational and Computational Material
In the existing no-action letters, there is an overlap
between the descriptions of structural term sheets, collateral term
sheets and computational materials. There also are differences regarding
which and how materials are to be filed depending on the type of
materials used. These differences can create uncertainty as to when
material needs to be filed given the overlapping descriptions. We
propose to consolidate the descriptions of the materials that may be
used under a single definition of "ABS informational and computational
material." ABS informational and computational material would be defined
as a written communication consisting solely of one or some combination
of the following:
A brief summary of the structure of an
offering of asset-backed securities that sets forth the name of the
issuer, the size of the offering and the structure of the offering
(such as the number of classes, seniority and priority and other
terms of payment);
Descriptive factual information
regarding the pool assets underlying an offering of asset-backed
securities, typically including data regarding the contractual and
related characteristics of the underlying pool assets, such as
weighted average coupon, weighted average maturity and other factual
information regarding the type of assets comprising the pool;
Static pool data, as discussed previously, for
the sponsors portfolio, prior transactions or the asset pool
itself; or
Statistical information displaying for a
particular class of asset-backed securities the yield, average life,
expected maturity, interest rate sensitivity, cash flow
characteristics, total rate of return, option adjusted spread or
other financial or statistical information relating to the class or
classes under specified prepayment, interest rate, loss or other
hypothetical scenarios. Examples of such information under the
definition would include:
Statistical results of interest rate
sensitivity analyses regarding the impact on yield or other
financial characteristics of a class of securities from changes
in interest rates at one or more assumed prepayment speeds;
Statistical information showing the cash
flows that would be associated with a particular class of
asset-backed securities at a specified prepayment speed; and
Statistical information reflecting the
financial impact of losses based on a variety of loss or default
experience, prepayment, interest rate and related assumptions.
These proposed items are intended to include existing
structural term sheets, collateral term sheets and computational
materials and also to clarify that static pool data would be permitted.
Consistent with our proposal discussed below for one unified filing rule
for these materials, ABS informational and computational material may be
used that includes one or more of these basic types of materials in one
set of materials without concern over the characterization of the
material or differing standards regarding when it must be filed.190
While we do not intend to change the general scope of
the materials that may be used, we do wish to clarify several
interpretive issues regarding the no-action letters. First, and as noted
above, some have been concerned whether the existing no-action letters
would permit "loan level" information to be provided. We believe
providing data at the individual pool asset level is permitted under the
no-action letters and would continue to be permitted under our proposal.
In providing such detail, however, issuers and underwriters should be
mindful of any privacy, consumer protection or other regulatory
requirements regarding the disclosure of individual information, such as
including Social Security Numbers, especially given that in most cases
the data must be publicly filed with the Commission.
Second, questions have arisen over what information
should be considered ABS informational and computational material and
filed with the Commission under the no-action letters, and by extension
our proposal, regarding investor analytics or other third party services
that allow issuers and underwriters to import into a system or otherwise
provide data regarding structure or underlying assets that investors can
then use to conduct their own analytics and computations. In the case of
third party services, a particular relationship with the individual
third party service may affect the analysis, such as whether the issuer
or the underwriter are affiliates with the service provider or how the
compensation is structured with the third party. Otherwise, if the
investor analytics or third party service simply allow an investor to
perform its own calculations based on collateral and structural inputs
and models provided by the issuer or underwriter, only the inputs,
models and other information provided by the issuer or underwriter would
constitute ABS informational and computational material for purposes of
the existing no-action letters and our proposal.191
Some also have questioned the format in which the
material must be filed, as the third party service may employ a unique
file format for the data inputs. Consistent with an allowance already in
the no-action letters and in our proposed filing rule discussed below,
issuers and underwriters may aggregate data presented in ABS
informational and computational material that are to be filed and file
such data in consolidated form, so long as any such aggregation does not
result in the omission of any information that should have been filed or
makes the information misleading. Presentation of the information should
be in an understandable form. While the preference is to file material
using the same presentation used for investors, just as with other
documents that contain computer instructions or formatting code,
executable code used by a program to read the information is not to be
filed.192
Questions regarding the proposed definition of ABS
informational and computational material:
We request comment on the proposed definition
of ABS informational and computational material, including the
proposed addition of static pool data to the types of materials that
may be used. Does the definition reflect the scope of materials that
are used under the existing no-action letters?
Consistent with the no-action letters, we do
not propose content restrictions for the material so long as it
meets the definition of ABS informational and computational
material. Is this still an appropriate approach? Of course, even
without content restrictions, the antifraud rules and other
liability provisions applicable to the material would continue to
apply.
Are additional interpretive clarifications
necessary regarding loan level detail or third party analytics
providers? Is any additional clarification needed regarding other
uses of ABS informational and computational material?
d.
Proposed Conditions for Use
Under our proposed rule, two conditions would be
required for ABS informational and computational material:
These proposed conditions are consistent with the
requirements of the existing staff no-action letters. We do not propose
to require additional legends from the no-action letters that the
information contained in the material supercedes all prior ABS
informational and computational material for the offering or will be
superseded by the description of the offering contained in the Section
10(a) prospectus.194
Instead, we propose the legend indicated above alerting investors of the
documents filed or to be filed with the Commission. We also do not
propose to require the condition in the letters that any required
filings must be made before an Exchange Act Rule 10b-10 confirmation of
sale may be sent.195
The filing requirement discussed below would be a separate requirement
under Commission rules, and thus conditioning the exemption on when a
Rule 10b-10 confirmation could be sent does not appear to be warranted
as an additional incentive for filing.
While the existing no-action letters require, and our
proposal would require, a limited legend, we understand that today
issuers or other users of these materials sometimes include additional
legends or disclaimers in the materials. Several of these additional
legends or disclaimers are inappropriate. As discussed more fully below,
the materials are considered prospectuses and in many instances also
must be filed with the Commission and incorporated by reference into the
registration statement. Thus, disclaimers of responsibility or liability
that would be inappropriate for a prospectus or registration statement
also are inappropriate for these materials.
Examples of inappropriate legends or disclaimers
include disclaimers regarding accuracy or completeness and statements
requiring investors to read or acknowledge that they have read any
disclaimers or legends or the registration statement.196
Language indicating that the communication is neither a prospectus nor
an offer to sell or a solicitation or an offer to buy also would be
inappropriate. Finally, as the information in many instances must be
publicly filed, statements that the information is privileged,
confidential or otherwise restricted as to use or reliance also are
inappropriate.
Consistent with a similar provision in our
communications exemptions for business combination transactions,197
we propose to clarify that the exemption for ABS informational and
computational material is applicable not only to the offeror of the
asset-backed securities, but also to any other party to the asset-backed
securities transaction and any persons authorized to act on their behalf
that may need to rely on and complies with the rule in communicating
about the transaction. This ensures that affiliates, underwriters,
dealers and others acting on behalf of the parties to the transaction
would be permitted to rely on the exemption. While we realize that in
many circumstances the exemptions would not be necessary for persons
other than the parties to the transaction or the parties making the
offer, we do not want to chill the appropriate free flow of the
information where it would be helpful to investors and efficient capital
formation.
However, we do not propose another provision that
currently exists in the communications exemptions for business
combination transactions that a good faith immaterial or unintentional
failure to file or delay in meeting the filing requirements would not
result in a loss of protection under the exemption, primarily because an
analogous provision does not exist in the current staff no-action
letters for ABS term sheets and computational materials.198
This provision was added to the business combination rule to address
concerns raised by commenters on its proposal regarding the potential
chilling of communications and that people would not use the new rule as
a result. The ABS market has been operating for almost a full decade
under the existing staff no-action letters without such a provision, and
the lack of such a provision does not appear to have chilled the use of
such materials. However, we do request comment below on whether, and if
so why, such a provision would be justified now.
Questions regarding the proposed conditions to the
exemption:
We request comment on our proposed conditions
to the exemption, including whether any additional conditions would
be appropriate. For example, we request comment on the basic
information and legend we propose to require for the materials.
Should any additional information be required? Is any of the
proposed information not necessary? Is any additional clarification
about inappropriate disclaimers or legends necessary?
Is the proposed clarification that the
exemption also is applicable to any other party to the asset-backed
securities transaction and any persons authorized to act on their
behalf appropriate? Is any additional clarification needed?
While the ABS market has operated under the
no-action letters for nearly a decade without it, should the rule
include an exception for a good faith immaterial or unintentional
failure to file or delay in meeting the filing requirements? Has the
absence of this exception chilled communications? Why would such an
exception be appropriate now?
e.
Proposed Filing Requirements
As noted above, under the staff no-action letters,
there are currently multiple filing requirements depending on the type
of materials used and the circumstances in which they are used. We
propose to streamline these requirements into a unified filing rule that
would apply regardless of the type of materials used. We believe this
proposal will result in a more consistent approach and ease compliance
without a significant drop in investor protection.
Under our proposal, the following ABS informational
and computational material would need to be filed:
For each prospective investor that had
indicated to the underwriter that it would purchase all or a portion
of the class of asset-backed securities to which such materials
relate, all materials relating to such class that were provided to
such prospective investor;199
and
For any other prospective investor, all
materials provided to that prospective investor after the final
terms have been established for all classes of the offering.
If the materials met the conditions above, they would
need to be filed on Form 8-K (under proposed Item 6.01 of that Form),
and thereby incorporated by reference into the registration statement,
by the later of the due date for filing the final prospectus or two
business days of first use.
The cover page of Form 8-K would need to disclose the
Commission file number of the related registration statement for the
asset-backed securities. Consistent with the no-action letters, ABS
informational and computational material that relate to abandoned
structures or that are furnished to a prospective investor prior to the
time the final terms have been established for all classes of the
offering where such prospective investor has not indicated to the
underwriter its intention to purchase the asset-backed securities need
not be filed.
The proposed rule clarifies, as do the letters, that
ABS informational and computational material that does not contain new
or different information from that which was previously filed need not
be filed. In addition, the issuer may aggregate data presented in ABS
informational and computational material that are to be filed and file
such data in consolidated form, so long as any such aggregation does not
result in the omission of any information that should have been filed or
makes the information misleading. Finally, the filing rule clarifies
that certain communications allowed under other Commission rules, though
they may technically fall into the definition of ABS informational and
computational material, need not be filed under this filing rule, such
as limited notices of the offering meeting the requirements of
Securities Act Rules 134, 135 and 135c,200
Exchange Act Rule 10b-10201
confirmations, prospectuses filed under Securities Act Rule 424 and
research reports relying on one of our safe harbors discussed below.202
Under the existing no-action letters and our proposal,
multiple ABS informational and computational material for an offering
may need to be filed. For example, if an underwriter provides a set of
materials to an investor, and the investor then asks for and the
underwriter provides an additional set of materials with the same pool
and structure but with different modeling assumptions (e.g.,
different expectations of future interest rates or prepayment speeds),
then both sets of materials would need to be filed if the offering was
completed with that same structure or the investor had indicated an
intention to purchase. Similarly, if multiple investors requested
different analytics on the same structure but with different
assumptions, each set of materials would need to be filed under the same
circumstances.
Consistent with the no-action letters, ABS
informational and computational material would not be excluded from the
definition of "offer," "offer to sell," "offer for sale" or "prospectus"
under the Securities Act.203
To the extent these communications constitute offers, they currently
would be subject to liability under Section 12(a)(2) of the Securities
Act.204
The proposed rule would specify that material used in reliance on the
proposed exemption would be considered "prospectuses" and thus subject
to Section 12(a)(2) liability, even if not filed. In addition, the
materials that are filed on Form 8-K would be incorporated by reference
into the registration statement, which is subject to liability under
Section 11 of the Securities Act,205
consistent with the existing staff no-action letters.
The staff no-action letters were issued when
electronic filing on EDGAR was still in its relative infancy. At that
time, EDGAR only accepted submissions in ASCII format. Participants
argued that data included in computational material, which could be
extensive, were in formats that were impractical to convert into ASCII
format for electronic filing. In response, we amended our EDGAR filing
rules to exempt computational materials filed as an exhibit to Form 8-K
from electronic filing.206
Instead, such materials can currently be filed in paper under cover of a
Form SE.207
There have been several advances to EDGAR since the
original staff no-action letters. In particular, EDGAR now accepts HTML
documents in addition to ASCII documents and also accepts filings made
over the Internet. Even non-ABS registrants now routinely include
detailed statistical and tabular data in their EDGAR filings. We no
longer believe that the filing of ABS informational and computational
material needs an electronic filing exemption. Filing in paper form is
of little practical use to investors as the material cannot be retrieved
electronically.
Accordingly, we propose to eliminate the electronic
filing exemption for these materials.208
By treating these materials consistently with nearly all other material
filed with the Commission, we hope to realize the same investor benefits
and efficiencies in information transmission, dissemination, retrieval
and analysis achieved since we began mandating EDGAR filing in 1993.
Questions regarding the proposed filing requirements:
We believe our proposed unified filing rule
will result in better administration and compliance with the filing
requirements. However, it is possible that under the proposal some
collateral term sheets that are required to be filed today under the
no-action letters would no longer be filed. For example, the current
no-action letters require all collateral term sheets to be filed.
However, the existing letters use overlapping definitions and it is
thus difficult to distinguish what truly is a "collateral term
sheet" versus what is acceptable "background information" that can
be included in computational material, which is not always required
to be filed. We also understand that current practice is to call
such materials "computational material." We are thus proposing to
codify current practice and treat all ABS informational and
computational material the same. However, is it common practice to
prepare multiple collateral term sheets separate from computational
materials? Would the lack of filing each collateral term sheet
result in substantial harm due to a reduction in materials filed?
Under the no-action letters and our proposals,
not all materials need be filed. Should all material related to the
offering be filed? Are the conditions for the material that is to be
filed appropriate? Should filing requirements distinguish between
material provided or containing information provided by the issuer,
on the one hand, and materials provided by underwriters or dealers
not containing such issuer information, on the other? If so, why,
and how should the two be differentiated?
The filing requirement does not require filing
until the later of the filing of the final prospectus or two
business days of first use. Should there be an earlier filing
requirement, such as always two business days of first use, even if
the deadline is before filing of the final prospectus? Conversely,
while the proposed deadlines are consistent with the no-action
letters, is there any reason to shorten or extend the deadlines, and
if so, to what period?
Are any additional clarifications or
modifications needed on when or how such materials need to be filed?
We request comment on liability requirements
for ABS informational and computational material. While the existing
liability framework does not appear to have chilled the use of such
materials, is there any reason to re-evaluate the liability
framework for them? If so, how and why?
Should we not remove the EDGAR filing
exemption for ABS informational and computational material? Are
there particular difficulties or unreasonable expenses that would be
associated with electronic filing of such material that would still
exist under EDGAR? If so, please explain and quantify any such
expenses in relation to other electronic filings.
2. Research
Reports a.
Current Requirements
The publication or distribution by a broker or dealer
of information, opinions or recommendations with respect to an issuer or
its securities around the time of a registered offering can present
issues under the communications restrictions of the Securities Act,
especially if the broker is or will be a participant in the distribution
of the securities.209
In particular, such a report may constitute an offer to sell the
securities and would thus constitute an illegal offer if published or
distributed before a registration statement is filed, or it may
constitute an illegal written offer to sell securities that does not
meet the information requirements of Section 10 of the Securities Act if
published or distributed after the registration statement is filed. To
recognize the potential benefits of research reports while limiting
their potential misuse to promote a securities offering, the Commission
has previously issued Securities Act Rules 137, 138 and 139. These rules
create safe harbors that describe circumstances under which brokers or
dealers may publish or distribute research reports in and around a
registered offering without fear of violating Section 5 of the
Securities Act through making an illegal offer or using a non-conforming
prospectus. The existing rules look to the brokers participation in an
offering, differences between the securities offered and those covered
in the research report and the size and reporting history of the issuer.
However, the conditions in those rules do not
correspond well to ABS offerings. For example, several of the
requirements in the research rules, particularly Rule 139 (the
applicable rule where the broker also is participating in the registered
offering), require issuer size and reporting history requirements,
neither of which are applicable to most asset-backed securities.
In response, the staff of the Division of Corporation
Finance issued a no-action letter in 1997 to provide a separate safe
harbor for the publication of research reports by brokers or dealers in
and around offerings of asset-backed securities registered or to be
registered on Form S-3.210
The no-action letter contained conditions for the safe harbor adapted
from Rules 137, 138 and 139 and modified to address asset-backed
securities. We now propose to codify this safe harbor with several minor
adjustments to add it to our existing research report safe harbors.211
b.
Proposed ABS Research Report Safe Harbor
As with the existing no-action letter, the proposed
safe harbor would be available only with respect to ABS offerings
registered on Form S-3. That is, it would only be available with respect
to offerings of investment grade asset-backed securities that meet the
requirements of General Instruction I.B.5 of Form S-3. Similar to our
proposals for ABS informational and computational material and existing
Rule 139, we believe offerings of securities meeting the additional
requirements for Form S-3 registration represent the appropriate
categories of offerings for the safe harbor.
Under our proposal, the publication or distribution by
a broker or dealer of a research report with respect to investment grade
asset-backed securities meeting the criteria of General Instruction
I.B.5 of Form S-3 will not be deemed to constitute an offer for sale or
offer to sell such asset-backed securities registered or proposed to be
registered, even if the broker or dealer is or will be a participant in
the registered offering, if the following conditions are met:212
The broker or dealer must have previously
published or distributed with reasonable regularity information,
opinions or recommendations relating to Form S-3 ABS backed directly
(or, with respect to securitizations of other securities,
indirectly) by substantially similar collateral as that directly or
indirectly backing Form S-3 ABS that is the subject of the
information, opinion or recommendation that is proposed to be
published or distributed.
If the securities for the registered offering
are proposed to be offered, offered or part of an unsold allotment
or subscription, the information, opinion or recommendation must
not:
Identify those securities;
Give greater prominence to specific
structural or collateral-related attributes of those securities
than it gives to the same attributes of other ABS that it
mentions;213
and
Contain any ABS informational and
computational material relating to those securities.
If the material identifies specific ABS of a
specific issuer and specifically recommends that such ABS be
purchased, sold or held by persons receiving such material, then a
recommendation as favorable or more favorable as to such ABS must
have been published by the broker or dealer in the last publication
of such broker or dealer addressing such ABS prior to the
commencement of its participation in the distribution of the
securities whose offering is being registered.
Sufficient information is available from one
or more public sources to provide a reasonable basis for the view
expressed by the broker or dealer with respect to the ABS that are
the subject of the information, opinion or recommendation.
If the material published by the broker or
dealer identifies other ABS backed directly or indirectly by
substantially similar collateral as that directly or indirectly
backing the securities whose offering is being registered and
specifically recommends that such ABS be preferred over other ABS
backed by different types of collateral, then the material must
explain in reasonable detail the reasons for such preference.
Not included in the above list of proposed conditions
is a condition in the existing no-action letter that the research
material must refer as required by law or applicable rules to any
relationship that may exist between the issuer of the information,
opinion or recommendation and any participant of the offering. A
footnote in the incoming request for the no-action letter stated that
the condition "contemplates statutory provisions such as Section 17(b)
of the [Securities] Act or relevant SRO standards requiring disclosure
of possible sources of bias." Because the types of disclosures
contemplated already are themselves separate regulatory requirements, we
do not believe this additional condition is necessary for the safe
harbor. Further, no similar condition exists in Rules 137, 138 or 139
even though the situation is analogous. However, our decision not to
propose this condition here does not otherwise affect any requirement
that would require disclosure of such relationships.
As with our proposal for the use of ABS informational
and computational material, the staff has received several requests to
liberalize the ABS research report safe harbor beyond the staff
no-action letter.214
In 1998, the Commission proposed an extensive revision of Rules 137, 138
and 139.215
Those proposals would have removed or altered several conditions in
those rules that were adapted for use in the no-action letter for the
ABS research report safe harbor. As with communications restrictions,
staff in our Division of Corporation Finance is reviewing those 1998
proposals and the comments received in possibly developing new
recommendations to the Commission on potential reforms to the research
report safe harbors. To the extent the existing safe harbors are
modified, we also would consider similar modifications to the ABS safe
harbor. Therefore, our approach here, like our proposal for ABS
informational and computational material, is consistent with the
existing safe harbor in the staff no-action letter, with the few
alterations discussed above.
Questions regarding the proposed ABS research report
safe harbor:
We request comment on the proposed safe
harbor. We have reorganized and reordered the conditions from the
staff no-action letter and altered the wording slightly to make them
easier to read and consistent with terms used in our other
proposals. We otherwise did not mean to change the intent or scope
of the original no-action letter. Are any additional revisions
necessary or would any additional clarifications be appropriate?
We also request comment on the continued
applicability of any of the conditions or whether any additional
conditions are necessary. For example, should the condition
regarding disclosures of additional relationships be retained?
Our proposal, like the 1997 no-action letter,
does not contain any instructions. Are any instructions or
clarifications necessary for a codification of the ABS research
report safe harbor?
Is the limitation to offerings on Form S-3
still appropriate? If not, under what circumstances should the
proposal be extended to offerings on Form S-1? In particular, are
there any additional conditions that should be required for
extending the safe harbor to Form S-1 offerings?
179See Section 5 of the Securities Act (15 U.S.C. 77e).
180See Section 5(c) of the Securities Act (15 U.S.C. 77e(c)).
18115 U.S.C. 77j. See Section 5(b)(1) of the Securities Act
(15 U.S.C. 77e(b)(1)).
182Person-to-person oral offers are allowed during this period
and do not have to satisfy the informational requirements of Section 10.
See note 179 above.
18315 U.S.C. 77j(a).
184See note 28 above.
185See,
e.g., "Investors Gain Clout, Urge Specifics," Asset-Backed Alert,
Jun. 6, 2003.
186See proposed Securities Act Rule 167. Similar to our
existing rules that allow communications in business combination
transactions outside of the Section 10 prospectus, for ABS informational
and computational material we propose a general Securities Act Rule that
sets forth the basic exemption and its conditions (proposed Securities
Act Rule 167) and a rule under Regulation C (17 CFR 230.401 through
230.498) that sets forth the filing requirements for such communications
(proposed Securities Act Rule 426). For more on our exemptive rules in
the business combination context, see Release No.
33-7760 (Oct. 22, 1999) [64 FR 61408].
187For similar provisions, see Securities Act Rules 165 and
166 (17 CFR 230.165 and 17 CFR 230.166).
188See,
e.g., Letter from BMA to Brian J. Lane, Director, Division of
Corporation Finance, "Response to Staff Request for Suggestions
Concerning Possible Reforms of Disclosure and Reporting Rules for
Mortgage and Asset-Backed Securities" (Nov. 5, 1996); Letter from BMA to
Jonathan G. Katz, Secretary, Securities and Exchange Commission,
"Securities Acts Concepts and Their Effects on Capital Formation
(Release No. 33-7314) (File
No. S7-19-96)" (Nov. 8, 1996); Letter from MBA to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, "The Regulation of
Securities Offerings (File No. S7-30-98)" (June 30, 1999); Letter from
Residential Funding Corporation to Securities and Exchange Commission,
"File No. S7-30-98 The Aircraft Carrier Release" (June 30, 1999);
Letter from BMA to David B.H. Martin, Director, Division of Corporation
Finance, "Securities Act Reform" (Nov. 30, 2001); and Letter from BMA to
Alan L. Beller, Director, Division of Corporation Finance, "Prior
Correspondence Regarding Asset-Backed Securities Reform" (Apr. 23,
2002).
18917 CFR 230.134.
190As a result, the proposed definition would subsume the
concept of "Series Term Sheets" addressed in the Greenwood Trust Company
no-action letter where a Series Term Sheet was defined as a combined
collateral and structural term sheet. See note 28 above.
191Any subsequent modification or updates to the information
provided by the issuer or an underwriter would be considered new ABS
informational and computational material no different than if a separate
set of materials were prepared. As provided for in the no-action letters
and our proposed rule, data presented in ABS informational and
computational material that are to be filed may be aggregated and filed
in consolidated form, so long as any such aggregation does not result in
the omission of any information that should have been filed or makes the
information misleading.
192See,
e.g., Rule 106 of Regulation S-T (17 CFR 232.106).
193Consistent with the no-action letters, failure by a
particular underwriter to cause the filing of materials in connection
with an offering would not affect the ability of any other underwriter
who has complied with the procedures to rely on the exemption.
194Such statements do not appear applicable considering that
not all of the informationparticularly the computational materialis
included or updated in subsequent materials or the final prospectus.
195See 17 CFR 240.10b-10.
196Such disclaimers of responsibility by the issuer are also
inappropriate.
197See,
e.g., Securities Act Rule 165(d) (17 CFR 230.165(d)).
198See,
e.g., Securities Act Rule 165(e) (17 CFR 230.165(e)). As noted in
the adopting release for Rule 165, this provision is similar to the good
faith standard in Rule 508(a) of Regulation D (17 CFR 230.508(a)). In
addition, although an immaterial or unintentional failure to file or
delay in filing does not render the exemption in Rule 165 unavailable,
it is a violation of the filing requirement in Securities Act Rule 425
(17 CFR 230.425). Factors identified in the adopting release to be
considered in determining whether a delay in filing is immaterial or
unintentional include: the nature of the information, the length of the
delay, and the surrounding circumstances, including whether a bona fide
effort was made to file timely. See Release No.
33-7760.
199This provision would apply regardless of whether the
indication to purchase is given before or after the final terms have
been established for all classes of the offering.
20017 CFR 230.134; 17 CFR 230.135; and 17 CFR 230.135c.
20117 CFR 240.10b-10.
202Similar clarifying provisions exist in our existing
communications exemptions for business combination transactions.
203See 15 U.S.C. 77b(a)(3) and 15 U.S.C. 77b(a)(10).
20415 U.S.C. 77l(a)(2).
20515 U.S.C. 77k.
206See Rule 311(j) of Regulation S-T (17 CFR 232.311(j)).
20717 CFR 239.64.
208As electronically filed documents, ABS informational and
computational material would be eligible for any applicable hardship
exemptions similar to other filings that must be made electronically,
such as the temporary hardship exemption in Rule 201 of Regulation S-T
(17 CFR 232.201). However, the practice that existed prior to adoption
of the electronic filing exemption in Rule 311(j) of Regulation S-T of
seeking a continued hardship exemption for the filing of these materials
would not be appropriate except in the rarest of circumstances. See Rule
202 of Regulation S-T (17 CFR 232.202). We do not believe that the
routine filing of such material would qualify for a continued hardship
exemption.
209The Commissions Securities Act safe harbors in this area
(Rules 137, 138 and 139) refer to the publication by a broker or dealer
of information, an opinion or a recommendation with respect to a
registrants securities or in some instances the registrant itself. For
sake of simplicity, we refer to these publications in this release as
"research reports." By using this convention, we do not mean necessarily
to encompass the separate definition of "research report" in Section 15D
of the Exchange Act (15 U.S.C. 78o-6) added by the Sarbanes-Oxley Act.
Nor do our proposals affect in any way the applicability of that
Section, any of our other rules with respect to research reports or any
applicable SRO rules or other requirements regarding research reports.
210See note 29 above.
211See proposed Securities Act Rule 139a (17 CFR 230.139a).
Note that the proposed safe harbor would be a non-exclusive safe-harbor
the same as existing Rules 137, 138 and 139. Each of the existing safe
harbors in Rules 137, 138 and 139 would remain available with respect to
asset-backed securities if the conditions for the particular safe harbor
were met.
212Consistent with the existing no-action letter, in the case
of a multi-tranche registered offering of asset-backed securities, each
tranche would be treated as a different security.
213Consistent with the staff no-action letter, this condition
would not by itself prevent the dissemination of research material that
focuses on a single topic (e.g., a single collateral attribute,
asset type (but not a particular obligor), structural attribute or
market sector).
214See,
e.g., Letter from BMA to David B.H. Martin, Director, Division of
Corporation Finance, "Securities Act Reform" (Nov. 30, 2001); and Letter
to Alan L. Beller, Director, Division of Corporation Finance, "Prior
Correspondence Regarding Asset-Backed Securities Reform" (Apr. 23,
2002).
215See Release No.
33-7606A (Nov. 13, 1998) [63 FR 67174].
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