Release No. 33-8518

Release No. 34-50905

70 Fed. Reg. 1506 - Jan, 7, 2005

ASSET-BACKED SECURITIES
Action: Final Rule

Section I - Overview

Section II - Background of ABS and Regulatory Treatment

Table of Contents

SUMMARY: We are adopting new and amended rules and forms to address comprehensively the registration, disclosure and reporting requirements for asset-backed securities under the Securities Act of 1933 and the Securities Exchange Act of 1934. The final rules and forms accomplish the following: update and clarify the Securities Act registration requirements for asset-backed securities offerings, including expanding the types of asset-backed securities that may be offered in delayed primary offerings on Form S-3; consolidate and codify existing interpretive positions that allow modified Exchange Act reporting that is more tailored and relevant to asset-backed securities; provide tailored disclosure guidance and requirements for Securities Act and Exchange Act filings involving asset-backed securities; and streamline and codify existing interpretive positions that permit the use of written communications in a registered offering of asset-backed securities in addition to the statutory registration statement prospectus. We also request additional comment regarding the appropriate treatment of certain structured securities that do not meet our definition of “asset-backed security.”

DATES: Effective Date: March 8, 2005.

Comment Date: Comments regarding the request for comment in Section III.A.2.a. of this document and the Form 12b-25 "collection of information" requirement, within the meaning of the Paperwork Reduction Act of 1995, should be received on or before March 6, 2005.

Compliance Dates: Any registered offering of asset-backed securities commencing with an initial bona fide offer after December 31, 2005, and the asset-backed securities that are the subject of that registered offering, must comply with the new rules and forms. For any such offerings that rely on Securities Act Rule 415(a)(1)(x), Securities Act registration statements filed after August 31, 2005 related to such offerings must be pre-effectively or post-effectively amended, as applicable, to make the prospectus included in Part I of the registration statement compliant and to make any required undertakings or other changes for Part II of the registration statement. For Securities Act registration statements that were filed on or before August 31, 2005, the prospectus and prospectus supplement, taken together, relating to such offerings that rely on Rule 415(a)(1)(x) must comply, provided, that, (1) the Securities Act registration statement will need to be post-effectively amended if any new undertakings are required to be made with respect to such offerings in Part II of the registration statement; and (2) the Securities Act registration statement will need to be post-effectively amended to make the prospectus included in Part I of the registration statement compliant, as well as to make changes, if any, to Part II of the registration statement with respect to any registered offering of asset-backed securities under such registration statement commencing with an initial bona fide offer after March 31, 2006.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments:

• Use the Commission’s Internet comment form (http://www.sec.gov/rules/final.shtml); or
  
• Send an e-mail to rule-comments@sec.gov. Please include File Number S7-21-04 on the subject line; or
  
• Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments:

• Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609.

All submissions should refer to File Number S7-21-04. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/rules/final.shtml). Comments are also available for public inspection and copying in the Commission’s Public Reference Room, 450 Fifth Street, NW, Washington, DC 20549. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Jeffrey J. Minton, Special Counsel, or Jennifer G. Williams, Attorney-Advisor, at (202) 942-2910, in the Office of Rulemaking, Division of Corporation Finance, U.S. Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are adopting: amendments to Rules 1-02, 2-01, 2-02 and 2-07¹ of Regulation S-X² under the Securities Act of 1933 (the “Securities Act”);³ amendments to Items 10, 308, 401 and 406⁴ of Regulation S-B⁵ under the Securities Act; amendments to Items 10, 202, 308, 401, 406, 501, 503, 512, 601 and 701⁶ of Regulation S-K⁷ under the Securities Act; a new subpart of Regulation S-K, the 1100 series (“Regulation AB”);⁸ amendments to Rules 411 and 434⁹ under the Securities Act; new Rules 139a, 167, 190, 191 and 426¹⁰ under the Securities Act; amendments to Rule 311¹¹ of Regulation S-T;¹² new Rule 312¹³ of Regulation S-T; amendments to Forms S-1, S-2, S-3, S-11, F-1, F-2 and F-3¹⁴ under the Securities Act; amendments to Rules 10A-3, 12b-2, 12b-15, 12b-25, 13a-10, 13a-11, 13a-13, 13a-14, 13a-15, 13a-16, 15c2-8, 15d-10, 15d-11, 15d-13, 15d-14, 15d-15 and 15d-16¹⁵ under the Securities Exchange Act of 1934 (the “Exchange Act”);¹⁶ new Rules 3a12-12, 3b-19, 13a-17, 13a-18, 15d-17, 15d-18, 15d-22 and 15d-23¹⁷ under the Exchange Act; amendments to Rule 100¹⁸ of Regulation M¹⁹ under the Exchange Act; amendments to Rule 101²⁰ of Regulation BTR²¹ under the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);²² amendments to Forms 20-F, 40-F, 8-K, 10-K, 10-KSB and 12b-25²³ under the Exchange Act; and new Form 10-D²⁴ under the Exchange Act.

I. Overview

A. What are Asset-Backed Securities?

On May 3, 2004, we issued proposals to address comprehensively the registration, disclosure and reporting requirements for asset-backed securities, or ABS, under the Securities Act and the Exchange Act.²⁵ We received over 50 comments in response to our proposals.²⁶ Commenters expressed overall support for our proposals to establish a separate framework for the registration and reporting of asset-backed securities due to differences between asset-backed securities and other securities.²⁷ The final rule and form amendments we adopt today have been revised, as discussed in this release, to incorporate a number of changes recommended by commenters.

Asset-backed securities are securities that are backed by a discrete pool of self-liquidating financial assets. Asset-backed securitization is a financing technique in which financial assets, in many cases themselves less liquid, are pooled and converted into instruments that may be offered and sold in the capital markets.²⁸ In a basic securitization structure, an entity, often a financial institution and commonly known as a “sponsor,” originates or otherwise acquires a pool of financial assets, such as mortgage loans, either directly or through an affiliate. It then sells the financial assets, again either directly or through an affiliate, to a specially created investment vehicle that issues securities “backed” or supported by those financial assets, which securities are “asset-backed securities.” Payment on the asset-backed securities depends primarily on the cash flows generated by the assets in the underlying pool and other rights designed to assure timely payment, such as liquidity facilities, guarantees or other features generally known as credit enhancements. The structure of asset-backed securities is intended, among other things, to insulate ABS investors from the corporate credit risk of the sponsor that originated or acquired the financial assets.

The ABS market is fairly young and has rapidly become an important part of the U.S. capital markets. One source estimates that U.S. public non-agency ABS issuance grew from $46.8 billion in 1990 to $416 billion in 2003.²⁹ Another source estimates 2003 new issuance closer to $800 billion.³⁰ ABS issuance is on pace to exceed corporate debt issuance in 2004.³¹ While residential mortgages were the first financial assets to be securitized, non-mortgage related securitizations have grown to include many other types of financial assets, such as credit card receivables, auto loans and student loans. Before the Proposing Release, the Commission had not previously addressed on a comprehensive basis the regulatory treatment of asset-backed securities under the Securities Act or the Exchange Act.

Asset-backed securities and ABS issuers differ from corporate securities and operating companies. In offering ABS, there is generally no business or management to describe. Instead, information about the transaction structure and the characteristics and quality of the asset pool and servicing is often what is most important to investors. Many of the Commission’s existing disclosure and reporting requirements, which are designed primarily for corporate issuers and their securities, do not elicit relevant information for most asset-backed securities transactions. Over time, Commission staff, through no-action letters and the filing review process, have developed a framework to address the different nature of asset-backed securities while being cognizant of developments in market practice.

With a few exceptions, our proposals were designed to consolidate and codify current staff positions and industry practice. After carefully evaluating the public comment received, we are adopting new rules and amendments to address the four primary regulatory areas affecting asset-backed securities that were the subject of the proposal: Securities Act registration; disclosure; communications during the offering process; and ongoing reporting under the Exchange Act.

B. Securities Act Registration

We are adopting a principles-based definition of asset-backed security, substantially as proposed, to demarcate the securities and offerings to which the new rules apply. The definition consolidates several staff positions regarding the definition of asset-backed security, including those regarding delinquent and non-performing pool assets, with several revisions to the proposal in response to comment. The definition we are adopting today also allows more lease-backed transactions to be included in the definition of asset-backed security and permits the use of master trusts and revolving periods for more asset classes. As we explained in the Proposing Release, these changes are designed to remove regulatory uncertainty and reduce regulatory obstacles and costs of securitization.

In 1992, the Commission amended Form S-3 to allow registration of offerings of investment grade asset-backed securities on a delayed, or “shelf,” basis.³² As proposed, we are requiring that all registered offerings of asset-backed securities be registered either on Form S-1 or Form S-3, and we are specifying in those forms which disclosure items are required. In addition, we are expanding the types of investment grade asset-backed securities that qualify for shelf registration.

Consistent with existing staff positions and our proposal, we are not adding a reporting history requirement for Form S-3 eligibility. However, we are codifying a staff position, as modified from the Proposing Release in response to comment, that Exchange Act reporting obligations regarding other ABS of the same asset class established by the depositor or an affiliate of the depositor must have been satisfied to maintain Form S-3 eligibility for new registration statements. Also consistent with existing staff positions, and pending consideration of our broader proposals recently issued for all Securities Act offerings,³³ we are excluding offerings of asset-backed securities eligible for Form S-3 registration from the requirements of Exchange Act Rule 15c2-8(b) to deliver a preliminary prospectus prior to delivery of a confirmation of sale.

We also are adopting proposals to alleviate impediments to the shelf registration of offerings of asset-backed securities by foreign issuers or backed by foreign financial assets. We are adopting proposals that consolidate and streamline existing staff positions regarding when and how the offering of underlying securities must be concurrently registered with an offering of asset-backed securities backed by those underlying securities. Finally, we are revisiting staff interpretations regarding the registration of market-making transactions in the ABS context in response to comment. In particular, we will no longer require registration or delivery of a prospectus for market-making transactions for asset-backed securities.

C. Disclosure

Before today, there were no disclosure items tailored specifically to asset-backed securities. We are adopting, with modifications in response to comment, a new principles-based set of disclosure items, “Regulation AB,” that will form the basis for disclosure in both Securities Act registration statements and Exchange Act reports. Although the few comments we received on this point were mixed, we still do not believe it would be practical or effective to draft detailed disclosure guides for each asset type that may be securitized. Instead, and as proposed, we have attempted to identify the disclosure concept required and provide several illustrative examples, while understanding and emphasizing, as we did in the Proposing Release, that the application of the particular concept must be tailored to the particular transaction and asset type involved and resulting determinations as to the materiality of information.

As we explained in the Proposing Release, the new disclosure items are for the most part based on the market-driven disclosures that appear today. However, with a codification of a universal set of disclosure items, we do seek, as we stated in the Proposing Release, a reevaluation by transaction participants of the manner and content of presented disclosure, including the elimination of unnecessary boilerplate and a de-emphasis on unnecessary legal recitations of terms. We also understand, and the comment process confirmed, 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 servicing entity that administers or services the financial assets and the trustee. Our new disclosure items relating to these entities are designed to elicit additional information in these areas to the extent material, and we have made several revisions to the proposed disclosure items in response to comment.

Consistent with our proposal, we also are requiring for the first time that certain statistical information on a “static pool” basis be provided if material to the transaction. The final rules relating to the provision of this information have been revised from the Proposing Release in response to comment. The requirement to provide static pool data is still based upon the materiality of the data, although we are providing additional guidance on the scope of the data covered by the requirement. In addition, the guidance for static pool data under the final rules includes not only delinquency and loss data, but also prepayment data, if material. We also are providing flexibility in the manner of making the static pool data available. The final rules permit issuers to provide data that would be included in the prospectus but provided through a Web site under certain specified conditions.

Consistent with current practice and our proposals, we are not requiring audited financial statements regarding the issuing entity for the asset-backed securities in Securities Act or Exchange Act filings. However, we are adopting proposals, revised in response to comment, that consolidate and codify current staff positions on when financial or other descriptive information is required regarding certain other third parties, such as obligors of financial assets that reach pool concentration levels or providers of significant credit enhancement or other cash flow support for the asset-backed securities. In particular, we have revised our proposals regarding the provision of such information with respect to certain derivative counterparties to use an alternate measure for determining significance. We also are streamlining and codifying current staff positions, substantially as proposed, on when financial information regarding third parties may be incorporated by reference or referred to in an asset-backed securities filing in lieu of actually including the information in the filing.

D. Communications during the Offering Process

In the mid 1990’s, Commission staff issued a series of no-action letters permitting the use of various written materials in addition to the statutory prospectus in an offering of asset-backed securities.³⁴ These materials provide data about the potential payouts of the financial assets and the asset-backed securities using various prepayment and other assumptions as well as disclose information about the structure of the offering or about the underlying asset pool. Pending consideration of our broader communications proposals in the recently-issued Offering Process Release, we are here codifying and simplifying, as proposed, the current staff positions on when these materials can be used and when they must be publicly filed with the Commission. We are clarifying our intention stated in the Proposing Release that the communications allowed under our final rules mirror those allowed under the staff no-action letters. We also are reiterating clarifications regarding several interpretive issues involving the use of these materials given market developments over the decade since the letters were issued. In this regard and given advances made to EDGAR (our electronic data gathering, analysis and retrieval system), we also are eliminating as proposed the current exemption from electronic filing for these materials.

Shortly after the no-action letters referred to above were issued, Commission staff also issued a no-action letter regarding the publication of research reports by brokers or dealers proximate to an offering of asset-backed securities registered or to be registered on Form S-3.³⁵ The Commission had previously adopted several rules that provided safe harbors under which the publication of research reports would not be deemed a violation of the communications restrictions of Section 5 of the Securities Act.³⁶ However, several of the conditions in those rules were not relevant or practical for asset-backed securities. Again, pending consideration of any further changes to the research report safe harbors as a result of the Offering Process Release, we are codifying here, as proposed, the modified conditions in the staff no-action letter that provide a similar safe harbor for research reports as they relate to registered offerings of asset-backed securities on Form S-3.

E. Ongoing Reporting under the Exchange Act

As with registration, the ongoing periodic and current reporting requirements under the Exchange Act applicable to operating companies do not elicit information that would be most relevant for asset-backed securities. First through a series of exemptive orders, and then primarily through the issuance of scores of no-action letters and other interpretations, Commission staff has allowed modified Exchange Act reporting by ABS issuers. In lieu of quarterly reports on Form 10-Q,³⁷ ABS issuers today generally file under cover of Form 8-K the distribution reports required to be prepared under the transaction agreements that detail the payments and performance of the financial assets in the asset pool and payments on the securities backed by that pool. Current reporting on Form 8-K for certain extraordinary events also is required regarding asset-backed securities, but historically only for a narrow subset of events. A modified annual report on Form 10-K is required with two items being most important: a servicer’s statement of compliance with its servicing obligations; and a report by an independent public accountant regarding compliance with particular servicing criteria. Financial statements of the issuing entity are not required. An asset-backed issuer is required to include a certification under Section 302 of the Sarbanes-Oxley Act³⁸ with its Form 10-K, and, as provided by the Commission’s rules governing certification, the staff has previously provided a special form of certification for ABS issuers to use.³⁹ ABS issuers are exempt from the rules implementing Section 404 of the Sarbanes-Oxley Act⁴⁰ regarding reporting on internal control over financial reporting.⁴¹

We are codifying as proposed the basic modified reporting system for asset-backed securities. To distinguish periodic reporting regarding distributions from disclosure of important events that appropriately call for current reporting, we are adopting our proposal for one new form type, Form 10-D, to act as the report for the periodic distribution information currently provided under cover of Form 8-K. We also are adopting instructions, substantially as proposed, that specify which of the Commission’s recently adopted Form 8-K events will be applicable to asset-backed securities, and we are adding a few additional events specific to asset-backed securities, again with certain modifications from the proposal. Consistent with the modified reporting no-action letters, we are adopting our proposals to expressly exclude ABS from quarterly reporting on Form 10-Q and exempt ABS from Section 16 of the Exchange Act.⁴² We also are adopting proposed amendments to clarify how transition reports are to be filed regarding a change in fiscal year.

We are adopting instructions, substantially as proposed, that specify the disclosure requirements applicable for annual reports on Form 10-K regarding asset-backed securities, which also are drawn from Regulation AB, and we are codifying the form of certification to be used under Section 302 of the Sarbanes-Oxley Act for asset-backed securities. As proposed, we are retaining the longstanding requirements relating to servicer compliance statements and reports by an independent public accountant as to compliance with particular servicing criteria. Regarding servicing criteria, we explained in the Proposing Release that there are very few existing criteria for evaluating compliance, the most widely used of which currently is the Uniform Single Attestation Program, or USAP, promulgated by the Mortgage Bankers Association. However, the USAP’s “minimum servicing standards” are designed to be applicable only to servicing of residential mortgages and do not necessarily represent the full spectrum of servicing activities that may be material to an asset-backed securities transaction. We are adopting, with modifications, the proposed disclosure-based servicing criteria that will form the basis for an assessment and assertion as to material compliance with such criteria (or disclosure as to non-compliance). We also continue the practice of accountant involvement in assessing compliance with servicing criteria by adopting a requirement that a registered public accounting firm attest to the assertion of compliance. We are revising our proposal, however, to permit separate reports from each party that performs the actual servicing or administration functions. Both the reports containing the assertion of compliance and the accountant’s attestation reports will be required to be filed with the report on Form 10-K. We also are revising the form of the Sarbanes-Oxley Section 302 certification to include an express statement by the certifying party as to whether reports have been filed covering the entire servicing function.

As with the Securities Act, we are adopting our proposed specification that the depositor is the “issuer” for purposes of Exchange Act reporting regarding asset-backed securities. We also are specifying who may sign the various Exchange Act reports. As proposed, either the depositor or the servicer may sign the reports on Form 10-K, Form 10-D and Form 8-K. A designated officer of that same party also must sign the Sarbanes-Oxley Section 302 certification. We also are clarifying how filings regarding asset-backed securities are to be filed on EDGAR and the operation of the reporting obligation for asset-backed securities under Section 15(d) of the Exchange Act,⁴³ including codifying as proposed several interpretive positions as to when the obligation starts and when it may be suspended.

F. Other Miscellaneous Amendments

Finally, as discussed in the Proposing Release, we are making several miscellaneous and technical amendments to our rules and forms to accommodate the new rules and to update references regarding asset-backed securities.

II. Background and Development of ABS and Regulatory Treatment

As noted above, the ABS market rapidly has developed into an important part of the U.S. capital markets.⁴⁴ The modern securitization market originated in the 1970’s with the securitization of residential mortgages.⁴⁵ Since the mid-1980’s, the techniques pioneered in the mortgage-backed securities, or MBS, market have been used to securitize other asset types. Most asset types that have been securitized have homogenous characteristics, including similar terms, structures and credit characteristics, with proven histories of performance, which in turn facilitate modeling of future payments and thus analysis of yield and credit risks.

There are several distinguishing features between asset-backed securities and other fixed-income securities. For example, ABS investors are generally interested in the characteristics and quality of the underlying assets, the standards for their servicing, the timing and receipt of cash flows from those assets and the structure for distribution of those cash flows. As a general matter, there is essentially no business or management (and therefore no management’s discussion and analysis of financial performance and condition) of the issuing entity, which is designed to be a solely passive entity. GAAP financial information about the issuing entity generally does not provide useful information to investors. Information regarding characteristics and quality of the assets is important for investors in assessing how a pool will perform. Information relating to the quality of servicing of the underlying assets also is relevant to assessing how the asset pool is expected to perform and the reliability of the allocation and distribution functions. Another focus is the legal and structural nature of the issuing entity and the transfer of the assets to the issuing entity to assess legal and credit separation from third parties. ABS investors also analyze the impact and quality of any credit enhancements and other support designed to provide additional protection against losses and ensure timely payments.

A sponsor typically initiates a securitization transaction by selling or pledging to a specially created issuing entity a group of financial assets that the sponsor either has originated itself or has purchased in the secondary market.⁴⁶ Sponsors of asset-backed securities often include banks, mortgage companies, finance companies, investment banks and other entities that originate or acquire and package financial assets for resale as ABS. In some instances, the transfer of assets is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor for a securitization program and commonly called a depositor, and then the depositor will transfer the assets to the issuing entity for the particular asset-backed transaction.⁴⁷

The issuing entity, most often a trust with an independent trustee, then issues asset-backed securities to investors that are either backed by or represent interests in the assets transferred to it. The proceeds of the sale of the asset-backed securities are used to pay for the assets that were transferred to the trust. Because the issuing entity is designed to be a passive entity, one or more “servicers,” often affiliated with the sponsor, are generally necessary to collect payments from obligors of the pool assets, carry out the other important functions involved in administering the assets and to calculate and pay the amounts net of fees due to the investors that hold the asset-backed securities to the trustee, which actually makes the payments to investors.

The predominant purchasers of asset-backed securities today are institutional investors, including financial institutions, pension funds, insurance companies, mutual funds and money managers.⁴⁸ Generally, ABS are not marketed to retail investors. However, securitizations of one fairly unique asset type—transactions that pool and securitize outstanding debt securities of other issuers—often are marketed to retail investors and are listed on a national securities exchange.⁴⁹

While some ABS transactions consist of simple pass-through certificates representing a pro rata share of the cash flows from the underlying asset pool, ABS transactions often involve multiple classes of securities, or tranches, with complex formulas for the calculation and distribution of the cash flows. In addition to creating internal credit enhancement or support for more senior classes, these structures allow the cash flows from the asset pool to be packaged into securities designed to provide returns with specific risk and timing characteristics.

Transaction agreements specify the structure of an ABS transaction. A common form of such an agreement is a “pooling and servicing agreement” often among the sponsor, the trustee and the servicer. A pooling and servicing agreement often governs the transfer of the assets from the sponsor to the issuing entity and sets forth the rights and responsibilities of participants. Typically, the agreement also will detail how cash flows generated by the asset pool will be divided, commonly referred to as the “flow of funds” or “waterfall.” The flow of funds specifies the allocation and order of cash flows, including interest, principal and other payments on the various classes of securities, as well as any fees and expenses, such as servicing fees, trustee fees or amounts to maintain credit enhancement or other support. Cash flows also may be directed into various accounts, such as reserve accounts to provide support against potential future shortfalls. The agreement also specifies the type and content of reports that will be provided to investors regarding ongoing performance of the transaction.

In addition to any internally provided credit enhancement or support, the sponsor or other third parties may provide external credit enhancements or other support for the asset-backed securities.⁵⁰ For example, third party insurance may be obtained to reimburse losses on the pool assets or the asset-backed securities themselves. In addition, the issuing parties may arrange with a counterparty for an interest rate swap or similar swap transaction to provide incidental changes to cash-flow and return, such as where a floating-rate interest is to be paid on ABS backed by financial assets that pay a fixed rate of interest.

Credit rating agencies play a large role in most ABS transactions. As with a traditional corporate debt security, a rating on an asset-backed security is designed only to reflect credit risk. The rating generally does not address other market risks that may result from changes in interest rates or from prepayments on the underlying asset pool.

Before the Proposing Release, there had been few Commission initiatives directly related to ABS. In connection with the passage of the Secondary Mortgage Market Enhancement Act of 1984 (SMMEA),⁵¹ the Commission permitted shelf registration to SMMEA eligible securities.⁵² In 1992, the Commission extended shelf registration to non-mortgage investment grade ABS.⁵³ That same year, the Commission also adopted a rule under the Investment Company Act of 1940⁵⁴ to exclude ABS transactions under specific conditions from the definition of an investment company.⁵⁵ More recently, the Commission tailored rules for asset-backed securities in its implementing rulemakings under the Sarbanes-Oxley Act, including exempting asset-backed securities from the reporting and attestation requirements relating to internal control over financial reporting established by Section 404 of the Sarbanes-Oxley Act.⁵⁶ The Commission followed this approach in contemplation of current staff practice and this rulemaking initiative where applicable objectives underlying the Sarbanes-Oxley Act, including requirements suitable to ABS transactions, could be evaluated.

As we stated in the Proposing Release, we recognize that securitization is playing an increasingly important role in the evolution of the fixed income financial markets. Our staff has attempted to accommodate the different nature of ABS and evolving business practices, while reducing unnecessary or impractical compliance burdens, through its numerous no-action and interpretive positions. However, the accumulated informal guidance, while helpful to some ABS transactions, has diminished the transparency of applicable requirements because an ABS registrant or investor seeking to understand the applicable requirements must review and assimilate a large body of no-action letters and other staff positions. This time-consuming practice decreases efficiency and transparency and leads to uncertainty and common problems. Even before we issued the proposals, many issuers, investors and other market participants had requested a defined set of regulatory requirements for guidance.⁵⁷ Commenters on the proposals expressed universal support for a separate framework for the registration and reporting of ABS.⁵⁸ Staff reviews of filings provide further evidence that many compliance issues may be mitigated and potential issues avoided through clearer and more transparent regulatory requirements. Recent market events involving distressed transactions also have highlighted the need for improved disclosures as well as a renewed attention on servicing practices.⁵⁹

Against this background, we issued the proposals to clarify the regulatory requirements for asset-backed securities in order to increase market efficiency and transparency and provide more certainty for the overall ABS market and its investors and other participants. After carefully evaluating the comments received on the proposals, we are adopting these new regulatory requirements, as discussed further below.

¹17 CFR 210.1-02; 17 CFR 210.2-01; 17 CFR 210.2-02; and 17 CFR 210.2-07.

²17 CFR 210.1-01 et seq.

³15 U.S.C. 77a et seq.

⁴17 CFR 228.10; 17 CFR 228.308; 17 CFR 228.401; and 17 CFR 228.406.

⁵17 CFR 228.10 et seq.

⁶17 CFR 229.10; 17 CFR 229.202; 17 CFR 229.308; 17 CFR 229.401; 17 CFR 229.406; 17 CFR 229.501; 17 CFR 229.503; 17 CFR 229.512; 17 CFR 229.601; and 17 CFR 229.701.

⁷17 CFR 229.10 et seq.

⁸17 CFR 229.1100 through 1123.

⁹17 CFR 230.411 and 17 CFR 230.434.

¹⁰17 CFR 230.139a; 17 CFR 230.167; 17 CFR 230.190; 17 CFR 230.191; and 17 CFR 230.426.

¹¹17 CFR 232.311.

¹²17 CFR 232.10 et seq.

¹³17 CFR 232.312.

¹⁴17 CFR 239.11; 17 CFR 239.12; 17 CFR 239.13; 17 CFR 239.18; 17 CFR 239.31; 17 CFR 239.32; and 17 CFR 239.33.

¹⁵17 CFR 240.10A-3; 17 CFR 240.12b-2; 17 CFR 240.12b-15; 17 CFR 240.12b-25; 17 CFR 240.13a-10; 17 CFR 240.13a-11; 17 CFR 240.13a-13; 17 CFR 240.13a-14; 17 CFR 240.13a-15; 17 CFR 240.13a-16; 17 CFR 240.15c2-8; 17 CFR 240.15d-10; 17 CFR 240.15d-11; 17 CFR 240.15d-13; 17 CFR 240.15d-14; 17 CFR 240.15d-15; and 17 CFR 240.15d-16.

¹⁶15 U.S.C. 78a et seq.

¹⁷17 CFR 240.3a12-12; 17 CFR 240.3b-19; 17 CFR 240.13a-17; 17 CFR 240.13a-18; 17 CFR 240.15d-17; 17 CFR 240.15d-18; 17 CFR 240.15d-22; and 17 CFR 240.15d-23.

¹⁸17 CFR 242.100.

¹⁹17 CFR 242.100 through 105.

²⁰17 CFR 245.101.

²¹17 CFR 245.101 through 104.

²²15 U.S.C. 7201 et seq.

²³17 CFR 249.220f; 17 CFR 249.240f; 17 CFR 249.308; 17 CFR 249.310; 17 CFR 249.310b; and 17 CFR 249.322.

²⁴17 CFR 249.312.

²⁵See Release No. 33-8419 (May 3, 2004) [69 FR 26650] (the “Proposing Release”).

²⁶The public comments we received and a summary of the comments prepared by our staff (the "Comment Summary") are available for inspection in our Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549 in File No. S7-21-04, or may be viewed at http://www.sec.gov/rules/proposed/s72104.shtml.

²⁷See, e.g., Letters of AIG Credit Corp. (“AIG"); Allen & Overy (“A&O”); American Bar Association (“ABA”); American Financial Services Association (“AFSA”); American Institute of Certified Public Accountants (“AICPA”); American Bankers Association (“Am. Bankers”); American Society of Corporate Secretaries (“ASCS”); American Securitization Forum (“ASF”); Australian Securitisation Forum (“Aus. SF”); Joint letter of American Honda Finance Corporation, DaimlerChrysler Services North America LLC, Ford Motor Credit Company, General Motors Acceptance Corporation, and Navistar Financial Corporation (“Auto Group”); Bond Market Association (“BMA”); Bank of America Corporation (“BOA”); Capital One Financial Corporation (“Capital One”); CFA Institute (“CFAI”); Citigroup Global Markets, Inc. (“CGMI”); Citigroup Inc. "Citigroup”); Commercial Mortgage Securities Association (“CMSA”); Ernst & Young LLP (“E&Y”); European Securisation Forum (“ESF”); Fidelity Management & Research Company (“FMR”); First Marblehead Corporation (“First Marblehead”); Financial Services Roundtable (“FSR”); Investment Company Institute (“ICI”); Jones Day; JPMorganChase & Co. (“JPMorganChase); Kutak Rock LLP (“Kutak”); Mortgage Bankers Association (“MBA”); MBNA Corporation (“MBNA”); Metropolitan Life Insurance Company (“MetLife”); Moodys Investors Service (“Moodys”); PriceWaterhouseCoopers LLP (“PWC”); Joint letter of Sallie Mae., Inc. and Nelnet, Inc. (“Sallie Mae”); State Street Global Advisors (“State Street”); Toyota Motor Credit Corporation (“TMCC”); UBS Securities LLC (“UBS”); U.S. Bank National Association (“US Bank”); and Wells Fargo Bank, National Association (“Wells Fargo”).

²⁸“Securitization” is a commonly used term to describe this financing technique, although other terms, such as “asset-backed financing,” also are used.

²⁹See Bank One Capital Markets, Inc., 2004 Structured Debt Yearbook.

³⁰See Asset Securitization Report (pub. by Thomson Media Inc). See also Asset-Backed Alert (pub. by Harrison Scott Publications). The four primary asset classes currently securitized are residential mortgages, automobile receivables, credit card receivables and student loans, which represented approximately 52%, 19%, 16% and 9% of 2003 new issuance, respectively.

³¹See, e.g., Jennifer Hughes and David Wells, “Asset-Backed Bonds Hit Record,” Financial Times, Nov. 11, 2004, at 17; Aaron Lucchetti, “Indebted Consumers Reshape the Bond Market – Betting on Americans' Ability To Pay Their Bills May Pose Risks If Interest Rates Move Higher,” Wall St. J., Sep. 14, 2004, at C1; and Christine Richard, “US Asset-Backeds: No Slowdown As Consumers Borrow,” Dow Jones Capital Markets Report, Sep. 17, 2004. See also The Bond Market Association, Bond Market Research Quarterly, November 2004.

³²See Release No. 33-6964 (Oct. 22, 1992) [57 FR 48970] (the “1992 Release”).

³³See Release No. 33-8501 (Nov. 3, 2004) [69 FR 67392] (the “Offering Process Release”).

³⁴See Greenwood Trust Co., Discover Master Card Trust I (Apr. 5, 1996); Public Securities Assn (Mar. 9, 1995); Public Securities Ass’n (Feb. 17, 1995); Public Securities Ass’n (May 27, 1994); and Kidder Peabody Acceptance Corporation I (May 20, 1994). The “statutory prospectus” refers to the full prospectus required by Section 10 of the Securities Act (15 U.S.C. 77j).

³⁵See Public Securities Assn (Feb. 7, 1997).

³⁶15 U.S.C. 77e. See Securities Act Rules 137, 138 and 139 (17 CFR 230.137; 17 CFR 230.138; and 17 CFR 230.139).

³⁷17 CFR 249.308a.

³⁸15 U.S.C. 7241.

³⁹See Exchange Act Rules 13a-14 and 15d-14; Release No. 33-8124 (Aug. 28, 2003) [67 FR 57276]; and Division of Corporation Finance, “Revised Statement: Compliance by Asset-Backed Issuers with Exchange Act Rules 13a-14 and 15d-14” (Feb. 21, 2003). See also Merrill Lynch Depositor, Inc. (Mar. 28, 2003) and Mitsubishi Motors Credit of America, Inc. (Mar. 27, 2003).

⁴⁰15 U.S.C. 7262.

⁴¹See Exchange Act Rules 13a-15 and 15d-15.

⁴²15 U.S.C. 78p.

⁴³15 U.S.C. 78o(d).

⁴⁴See note 31 above. See also Gary Silverman et al., “A $2.5 Trillion Market You Hardly Know,” Business Week, Oct. 26, 1998 (“Securitization is one of the most important and abiding innovations to emerge in the financial markets since the 1930s” (quoting Leon T. Kendall)).

⁴⁵The modern ABS market can be traced to 1970 when the Government National Mortgage Association (Ginnie Mae), a wholly owned federal government corporation, first guaranteed a pool of mortgage loans. The Federal Home Loan Mortgage Corporation (Freddie Mac) in 1971 issued its first mortgage-backed participation certificates. For a number of years, mortgage-backed securities were almost exclusively a product of government-sponsored entities (GSE’s), such as Freddie Mac and the Federal National Mortgage Association (Fannie Mae), and Ginnie Mae. MBS issued by these GSE’s and Ginnie Mae have been and continue to be exempt from registration under the Securities Act and most provisions of the federal securities laws. For example, Ginnie Mae guarantees are exempt securities under Section 3(a)(2) of the Securities Act (15 U.S.C. 77c(a)(2)) and Section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)). The chartering legislation for Fannie Mae and Freddie Mac contain exemptions with respect to those entities. See 12 U.S.C. 1723c and 12 U.S.C. 1455g. As a result, only non-GSE ABS, or so called “private label” ABS, will be required to comply with the new rules. For more information regarding the GSE’s and Ginnie Mae, see Task Force on Mortgage-Backed Securities Disclosure, "Staff Report: Enhancing Disclosure in the Mortgage-Backed Securities Markets" (Jan. 2003) (hereinafter, the "2003 MBS Disclosure Report”). This report is available on our Web site at www.sec.gov.

⁴⁶While “sponsor” is a commonly used term for the entity that initiates the asset-backed securities transaction, the terms “seller” or “originator” also are often used in the market. However, as noted in the text, in some instances the sponsor is not the originator of the financial assets but has purchased them in the secondary market. Hence, we use the term “sponsor.”

⁴⁷Where there is not a two-step transfer, the terms “sponsor” and “depositor” are commonly used interchangeably in the market.

⁴⁸See 2003 MBS Disclosure Report.

⁴⁹A “national securities exchange” is an exchange registered as such under Section 6 of the Exchange Act (15 U.S.C. 78f).

⁵⁰A guarantee of a security would be a separate “security” under Section 2(a)(1) of the Securities Act (15 U.S.C. 77b(a)(1)).

⁵¹Pub. L. No. 98-440, 98 Stat. 1689. See also Section II.C.1. of the 2003 MBS Disclosure Report.

⁵²See Release No. 33-6499 (Nov. 17, 1983) [48 FR 52889] and Securities Act Rule 415(a)(1)(vii) (17 CFR 230.415(a)(1)(vii)).

⁵³See note 32 above.

⁵⁴15 U.S.C. 80a-1 et seq.

⁵⁵See Release No. IC-19105 (Nov. 19, 1992) [57 FR 56248] and Investment Company Act Rule 3a-7 (17 CFR 270.3a-7). See also Release No. IC-18736 (May 29, 1992) [57 FR 23980] (proposing Investment Company Act Rule 3a-7 and explaining the application of the Investment Company Act to ABS transactions).  As we stated in the Proposing Release, the application of the Investment Company Act to ABS transactions is beyond the scope of this release.  We note, however, that an ABS transaction that relies on Rule 3a-7 must comply with the conditions of that rule regardless of whether the issuer may register the offering of its asset-backed securities on Form S-3 or S-1.  We encourage pre-filing conferences with the staff to discuss, as appropriate, questions or issues that may arise regarding the availability of Rule 3a-7, or any other applicable exemption, under the Investment Company Act to an ABS transaction.

⁵⁶See, e.g., Release No. 33-8238 (Jun. 5, 2003) [68 FR 36636] (Management’s report on internal control over financial reporting and certification of disclosure in Exchange Act reports); Release No. 33-8220 (Apr. 9, 2003) [68 FR 18788] (Standards relating to listed company audit committees); Release No. 33-8183 (Jan. 28, 2003) [68 FR 6006] (Commission requirements regarding auditor independence); and Release No. 33-8177 (Jan. 23, 2003) [68 FR 5110] (Disclosure required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002).

⁵⁷See, e.g., Letter from the Association for Investment Management and Research (“AIMR") to Brian J. Lane, Director, Division of Corporation Finance, "Recommendations for a Disclosure Regime for Asset-Backed Securities" (Sep. 30, 1996); Letter from ICI to Michael H. Mitchell, Special Counsel, Division of Corporation Finance, “Asset-Backed Securities Offerings” (Oct. 29, 1996); Letter from BMA to Brian 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 Brian J. Lane, Director, Division of Corporation Finance (Feb. 18, 1997); Letter from The Association of the Bar of the City of New York to Jonathan G. Katz, Secretary, Securities and Exchange Commission, “Securities Act Release No. 33-7606A File No. S7-30-98” (Apr. 5, 1999); Letter from ABA to Jonathan G. Katz, Secretary, Securities and Exchange Commission, “The Regulation of Securities Offerings (File No. S7-30-98)” (Jun. 29, 1999); Letter from ICI to Jonathan G. Katz, Secretary, Securities and Exchange Commission, “The Regulation of Securities Offerings (File No. S7-30-98)” (Jun. 29, 1999); Letter from MBA to Jonathan G. Katz, Secretary, Securities and Exchange Commission, “The Regulation of Securities Offerings (File No. S7-30-98)” (Jun. 30, 1999); Letter from Merrill Lynch & Co., Inc. to Securities and Exchange Commission, “The Regulation of Securities Offerings (File No. S7-30-98)” (Jun. 30, 1999); Letter from Residential Funding Corporation to Securities and Exchange Commission, “File No. S7-30-98 – The ‘Aircraft Carrier Release’” (Jun. 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).

⁵⁸See note 27 above.

⁵⁹See, e.g., notes 201, 229 and 235 below. See, also, “If Issuers Can Steal, Where’s the Deal Cop,” Asset Securitization Report, Feb. 17, 2003, at 6; Christine Richard; “Moody’s Trustees Don’t See Eye-to-Eye on Trustee Role,” Dow Jones Newswires, Feb. 4, 2003; and “SEC Filings Reveal Little ABS Reporting Consistency,” Asset Securitization Report, Sep. 23, 2002, at 10.