Release No. 33-8518

Release No. 34-50905

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

ASSET-BACKED SECURITIES

Section III.A - Securities Act Registration

Table of Contents

III. Discussion of the Amendments

A. Securities Act Registration

1. Current Requirements

The 1992 Release, as part of a broad effort to expand access to shelf registration, allowed shelf registration for offerings of investment grade⁶⁰ asset-backed securities without a reporting history requirement for the issuing entity.⁶¹ As a result, a sponsor or depositor may register asset-backed securities to be offered on a delayed basis in the future through one or more offerings, or “takedowns,” of securities off of the shelf registration statement. Since the 1992 Release, shelf registration on Form S-3 has become the predominant method of registration for public offerings of asset-backed securities. Offerings generally are only registered on another form, most likely Form S-1 and less frequently Form S-11, if for some reason the securities technically do not meet the definition of “asset-backed security” in General Instruction I.B.5 of Form S-3 or an interpretation of that definition.

For offerings registered on a shelf basis on Form S-3, the prospectus disclosure in the registration statement is often presented through the use of two primary documents: the “base” or “core” prospectus and the prospectus supplement. The base prospectus outlines the parameters of the various types of ABS offerings that may be conducted in the future, including asset types that may be securitized, the types of security structures that may be used and possible credit enhancements or other forms of support. The registration statement at the time of effectiveness also contains one or more forms of prospectus supplement, which outline the format of deal-specific information that will be disclosed at the time of each takedown. At the time of a takedown, a final prospectus supplement is prepared which describes the specific terms of the takedown, and the base prospectus and the final prospectus supplement together form the final prospectus which is filed with the Commission pursuant to Securities Act Rule 424(b).⁶²

2. Definition of Asset-Backed Security

a. Approach and Supplemental Request for Comment for other Structured Securities

As we explained in the Proposing Release, the term “asset-backed security” currently is defined only for purposes of Form S-3. As many of our amendments relate to the treatment of asset-backed securities regardless of the form on which their offering is initially registered, we are moving the definition of “asset-backed security,” as proposed, to the definition section of Regulation AB, our new sub-part in Regulation S-K for asset-backed securities (discussed more fully in Section III.B). Under this new format, a security that meets the general definition of “asset-backed security” will be subject to the disclosure and other requirements of the new rules, regardless of the Form used for registration. Any additional conditions appropriate for Form S-3 eligibility, such as an investment grade requirement, will be retained in General Instruction I.B.5 of Form S-3, as discussed in Section III.A.3.c.

As we explained in the Proposing Release, after more than ten years of experience with the definition of “asset-backed security,” we believe that the core definition is still sound. The definition is principles-based and allows broad flexibility as to asset types and structures that we believe should be subject to the alternative disclosure and regulatory regime that exists for asset-backed securities. As the Commission stated in the 1992 Release, the definition does not distinguish between pass-through and pay-through asset-backed securities nor does it limit application to a list of “eligible” assets that can be securitized, so long as such assets meet the general principle that they are a discrete pool of financial assets that by their terms convert into cash within a finite time period.⁶³ We continue to believe, conversely, that the regime we have specifically designed for asset-backed securities is not necessarily appropriate for securities that do not meet these principles.

As we explained in the Proposing Release, experience with the definition has resulted in several interpretations since its adoption. These interpretations clarify the principles in the definition or, in some instances, permit limited exceptions to one or more of those principles where appropriate and consistent with overall application of the ABS regulatory regime. These interpretations have developed primarily through staff processing of ABS registration statements and, in a few instances, through staff no-action letters. As such, these interpretations may not always have been transparent, and we proposed codifying them with several expansions to allow additional asset types and transaction features to be considered an “asset-backed security,” including for purposes of shelf registration if the asset-backed securities meet the additional criteria for registration on Form S-3, such as the investment grade requirement.

Commenters were mixed on our proposed approach. On the one hand, commenters representing investors expressed reticence in expanding access to the ABS regulatory regime out of concern that it could have certain unintended consequences, such as investment decisions on these additional transactions being made under more compressed time frames and with less access to information through shelf registration.⁶⁴ On the other hand, commenters representing primarily issuers and their representatives would have preferred, in lieu of our proposed approach of codifying limited exceptions to the existing definition’s core principles, abandoning many of the core principles themselves to allow additional securities to receive the benefits of the proposed regime, such as immediate shelf registration and the ability to use ABS informational and computational material.⁶⁵ For example, most of these commenters would have preferred deleting the “discrete pool” requirement from the existing 1992 definition, hence rendering the proposed expansions to the existing interpretive exceptions from that requirement, such as those relating to master trusts, prefunding periods and revolving periods, unnecessary and thereby permitting unlimited use of those concepts. These commenters generally argued that such requirements would restrict innovation and were unnecessary to protect the universe of mostly institutional investors. According to the view of these commenters, any concerns with abandoning these and several other existing principles in the definition, such as the proposed delinquency and non-performing interpretations designed to uphold the principle that the ABS are primarily dependent on a pool of assets that self-liquidate instead of on the ability of the entity managing and foreclosing on the assets, could be addressed through disclosure.

We continue to believe that the ABS regime is at bottom not designed for transactions that depart significantly from the principles behind the definition. The alternative regime for asset-backed securities represents the codification of a very different registration, disclosure and reporting regime from that applicable to other securities, including other structured securities. We continue to believe that the current and proposed definition of “asset-backed security” reflects the core principles for securities that should be subject to this alternative regime, while still providing great flexibility and room for development. We continue to believe that emphasis on certain core principles is appropriate for these purposes, such as that the securities are primarily backed by a pool of assets, that there is a discrete pool with a general absence of active pool management, and an emphasis on the self-liquidating nature of pool assets that by their own terms convert into cash.

We do recognize, as have the staff in their prior interpretations, that there are instances where some limited exceptions to these general principles would be appropriate and consistent with access to the alternate regulatory regime, and these are reflected in the interpretations and exceptions discussed below. However, necessarily there is a point where application of the alternate regime is no longer appropriate. The further the security deviates from the core principles, the more acute concerns, such as those expressed by investors, become, which are not just disclosure concerns, that the security should not be treated necessarily the same as other securities that meet our definition of “asset-backed security.” In those instances, additional or different disclosures and/or registration and reporting treatment may be more appropriate.

As an example, we noted in the Proposing Release that, given the existing concept in the definition of a discrete pool of financial assets that by their terms convert into cash within a finite time period, so-called “synthetic” securitizations are not included in Regulation AB’s basic definition of ABS for purposes of determining whether the security qualifies for the particularized registration, disclosure and reporting regime under the Securities Act and Exchange Act we are adopting today. Synthetic securitizations are designed to create exposure to an asset that is not transferred to or otherwise part of the asset pool. These synthetic transactions are generally effectuated through the use of derivatives such as a credit default swap or total return swap. The assets that are to constitute the actual “pool” under which the return on the ABS is primarily based are only referenced through the credit derivative.

Some commenters representing primarily issuers and underwriters objected to not making accommodations in the definition of asset-backed security for synthetic securitizations.⁶⁶ These commenters generally argued that while these securities may not necessarily meet all of the core principles in the existing definition, they are still structured securities that should be treated under the Securities Act and the Exchange Act in the same manner and with access to the same benefits as an asset-backed security. The commenters also expressed concern that not addressing the appropriate treatment of synthetic securities would make it more difficult for market participants to develop such products without continued discussions with the staff, as they do today, for this developing submarket.

As we explained in the Proposing Release, for purposes of determining whether a security qualifies for the particularized regulation regime of Regulation AB, we believe the requirement that performance is primarily tied to a discrete pool of financial assets that by their terms convert into cash entails that the performance is primarily by reference to the assets in the pool. Synthetic securitizations do not meet the basic concepts embodied in our definition of asset-backed security for several reasons. Payments on the securities in a synthetic securitization can primarily or entirely comprise or include payments based on the value of a reference asset which is unrelated to the value of or payments on any actual assets in the pool. Payment is therefore by reference to an asset not in the pool instead of primarily from the performance of a discrete pool of financial assets that by their terms convert into cash and are transferred to a separate issuing entity.

An example of a synthetic exposure would be a transaction where the asset pool consists of securities coupled with a swap or other derivative under which payments are made based on the value of an equity or commodity or other index such that the payments on the security comprise or include payments based primarily on the performance of the external index and not by the performance of the actual securities in the pool. Because payments in synthetic securitizations are primarily based on the performance of assets or indices not included in the pool, we do not believe such a securitization should fall into the Regulation AB registration, disclosure and reporting regime. Payments on ABS must be based primarily on the performance of the financial assets in the pool.⁶⁷

Synthetic securitization transactions also differ from ABS transactions where swaps or other derivatives are used either to reduce or alter risk resulting from assets contained in the pool held by the issuer. For example, the existence of an interest rate or currency swap covering either or both of the principal or interest payments on assets in the pool held by the issuer are designed to reduce or alter risk resulting from those assets and fall within the definition of asset-backed security. The return on the ABS is still based primarily on the performance of the financial assets in the pool.⁶⁸ We believe there is a principles-based difference between structures that use an interest rate or currency swap but whose performance is still primarily based on the performance of the financial assets in the pool and structures that use a swap or other derivative such that the performance of the security is no longer primarily related to the performance of the pool. Because certain interest rate and currency swaps have been permitted consistent with this principle does not lead to the conclusion that there is no such principle or that the principle should be abandoned. Instead, the difference as to application in many instances necessarily depends on the particular nature and structure of the transaction in question.

As we explained in the Proposing Release, the basic definition of “asset-backed security” and its interpretations are intended to establish parameters for the types of securities that are appropriate for the alternate disclosure and regulatory regime we are adopting today. This approach is based on the history and development of the traditional ABS market such that a definable set of criteria and requirements can be established. The definition does not mean or imply in any way that public offerings of securities outside of these parameters, such as synthetic securitizations, may not be registered with the Commission, but only that the alternate regulatory regime we are adopting today is not designed for those securities. The definition does mean that such securities must rely on non-ABS form eligibility for registration, including shelf registration.⁶⁹

Some commenters were concerned that if such structured securities were left outside the definition, issuers of those securities would be forced to provide potentially misleading disclosures under Regulation S-K if they were not included in Regulation AB. Structured securities outside of the definition have been registered before the adoption of Regulation AB, and the staff has worked with issuers to develop appropriate disclosures for such securities under our existing disclosure regime. As is the case today, we encourage issuers that are contemplating structured securities outside of the Regulation AB definition to have pre-filing conferences with the staff to discuss the proposed transaction and the appropriate approach.

At the same time, we recognize that while it is pragmatic and feasible to establish Regulation AB at this time for an appropriately definable group of asset-backed securities, we also want to foster a system that is most efficient and consistent with investor protection for other structured securities, particularly for those that may develop in the future but may not be contemplated in Regulation AB. We understand that a default application of the existing disclosure regime might not be most appropriate for these structured securities, but we also believe that neither would it be appropriate for such securities to be treated the same as “asset-backed securities” as we are defining that term under Regulation AB. Depending on the structure of the transaction and the terms of the securities, some disclosure aspects of Regulation AB may be applicable, but aspects from the traditional disclosure regime also may be applicable. In some instances, a third approach might be more appropriate.

We seek additional comment on whether we should consider an alternative scheme for these kinds of securities. We will evaluate comments received in determining whether it is appropriate to issue additional proposals or take other additional action, as appropriate. In providing comments, please be as specific as possible.

Request for Comment.

• Apart from the traditional approach of addressing hybrid securities as they arise, are there definable categories of securities where neither the existing regime nor Regulation AB would be appropriate, but a specifiable alternative regime would be? What would be the advantages and disadvantages of such an approach? Is the existing approach of addressing these securities more practical if and until a market for that particular type of security matures such that establishing a separate regime is appropriate? Are there additional alternatives that should be considered? How are these securities offered and sold today? Who offers and purchases these securities?
   

• If an alternative regime should be established, how would these securities be defined? Why should they be treated differently?
   

• What would be appropriate for this alternative regime with respect to registration, disclosure and ongoing reporting? What flexibility should be permitted under the existing regime and what additional or alternate requirements should be imposed?
   

• While the Investment Company Act considerations are beyond the scope of this release for ABS, we also would seek comment as to the treatment of such securities, including synthetic securitizations, under Rule 3a-7 under that Act or other exemptive provisions of that Act or rules thereunder.
   

• Regarding synthetic securitizations where the return on the securities is not primarily dependent on the performance of the pool, what additional disclosures would be appropriate? For example, for other entities that offer securities and have derivatives or contingent obligations, there is required disclosure of financial intricacies, such as disclosures under FIN No. 45,⁷⁰ FIN No. 46,⁷¹ SFAS No. 5⁷² and SFAS No. 133,⁷³ and off-balance sheet and MD&A disclosure.⁷⁴ Would some or all of these disclosures be appropriate in synthetic securitizations? If not, why not? Please note these are non-exclusive examples.
   

• Would financial statements be necessary to fully understand the risks and potential performance of these securities? Should some form of off-balance sheet disclosure be required when performance is tied to such instruments? Should market valuations of assets and liabilities be required?
   

• Where performance of the security is primarily tied to the performance of a derivative rather than the performance of the pool assets, what additional disclosure should be required regarding the derivative counterparty? Should financial statements for the derivative counterparty always be required?
   

• Where performance is by reference to an unrelated entity or assets, what information should be required about the referenced entity or assets?

b. Basic Definition

We are retaining the same basic definition of asset-backed security that has existed since 1992, with the addition of the one modification we proposed with respect to leases, discussed below. Under Regulation AB, the basic definition of “asset-backed security” is “a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the securityholders; provided that in the case of financial assets that are leases, those assets may convert to cash partially by the cash proceeds from the disposition of the physical property underlying such leases.”⁷⁵ We also are codifying, with modifications and expansions in response to specific comment, the several clarifying interpretations we proposed to the definition that recognize and build upon the operational and structural distinctions between ABS and non-ABS transactions. Each of these interpretations is discussed below in a separate subsection.

As we stated in the 1992 Release and the Proposing Release, the basic definition is sufficiently broad to encompass any self-liquidating asset which by its terms converts into cash payments within a finite time period. There are no substantive requirements as to the timing of the cash flows under the definition, such as that they must be constant and uninterrupted. For example, so-called “balloon” loans that have large payments at maturity that differ from other payments during the term of the loan would be included.⁷⁶

c. Nature of the Issuing Entity

The first set of interpretations we are codifying relates to the nature of the issuing entity in whose name the asset-backed securities are issued. As we explained in the Proposing Release, we believe that two interpretations always have been implied, and, as proposed, we are codifying both as additional conditions to the definition of “asset-backed security.”

The first condition is that neither the depositor nor the issuing entity is an investment company under the Investment Company Act, nor will either become one as a result of the asset-backed securities transaction. If either was the case, we continue to believe that the regime for asset-backed securities that we are adopting today would not be appropriate.

The second condition relates to the passive nature of the issuing entity in that its activities must be restricted to the asset-backed securities transaction. In particular, the activities of the issuing entity must be limited to passively owning or holding the pool of assets, issuing the asset-backed securities supported or serviced by those assets, and other activities reasonably incidental thereto. As we stated in the proposing release for the 1992 amendments, the legal nature of the issuing entity—whether a trust, limited purpose subsidiary or other legal person—is not necessarily relevant.⁷⁷ However, we believe the limited function and permissible activities of the issuing entity are fundamental to the notion of a security that is to be backed solely by a pool of assets.

Commenters generally agreed with this principle, although several expressed concern with the wording of the condition that the issuing entity’s activities are limited to “passively” owning or holding the pool assets, issuing the ABS and other reasonably incidental activities.⁷⁸ This formulation already exists in Exchange Act Rule 10A-3 to exclude similar securities from the mandated requirements for national securities exchanges and national securities associations to impose audit committee listing requirements for such issuers.⁷⁹ We are retaining the term in the final condition for the definition of “asset-backed security.” We believe the use of this term neither imposes a new requirement, nor is inconsistent with existing practice, but instead is confirmatory of one of the fundamental premises of asset-backed securitization that the issuing entity is intended to be passive in nature and its activities limited to the asset-backed securities transaction.

In the Proposing Release, we also specified that in connection with this condition, securities issued out of so-called “series trusts” do not qualify as asset-backed securities under the definition. Under the concept of a series trust, the same trust will conduct wholly separate ABS transactions out of the same trust. The trust will hold separate pools of assets with separate classes of securities for each pool. Securities backed by one pool do not have rights to the other pools. As we described in the Proposing Release, the issuing entity in this instance is not limited to owning and holding one asset pool and issuing securities backed by that pool.

Several commenters representing issuers, underwriters and their representatives wished to relax this existing principle, arguing that series trusts may reduce the costs of creating multiple issuing entities by having multiple unrelated transactions under one entity.⁸⁰ However, the more fundamental issue with the use of multiple, separate and unrelated transactions under one issuing entity for asset-backed securities is that it raises concerns that deviate from the core principle that investors of a particular asset-backed security should look solely to the related pool of assets for primary repayment. With a series trust structure, instead of only analyzing the particular pool, an investor also may need to analyze any effect on its security, including bankruptcy remoteness issues, if problems were to arise in another wholly separate and unrelated transaction in the same issuing entity. These concerns are exacerbated if new unrelated transactions are created after the original transaction involving the investor. No commenter indicated that series trusts as described above have been commonly used for issuing asset-backed securities.

Other commenters requested clarification as to the scope of what is considered in the concept of a “series trust.” As we explained in the Proposing Release, the concept of a series trust, with multiple, separate and unrelated transactions in one issuing entity, is different from a master trust structure typical in credit card ABS and discussed later where all securities, although issued at different times, are backed by one pool. In addition, we explained that an ABS transaction with one asset pool could divide allocations of the cash flows from the pool among separate classes of securities and still qualify as an “asset-backed security.”⁸¹ This could include allocating cash flows from various defined subpools within the larger pool to support particular classes but not others, regardless of whether there is any cross-cashflow support or collateralization. In these instances, there is still only one ultimate pool held by the issuing entity with securities backed by that single pool.

We also explained in the Proposing Release that some ABS transactions are structured such that the asset pool consists of one or more financial assets that represent an interest in or the right to the payments or cash flows of another asset pool solely in order to facilitate the asset-backed issuance. For example, some older credit card master trust structures have added an “issuance trust” structure to provide additional flexibility in the types of ABS that may be offered. An issuance trust generally receives a collateral certificate from the master trust representing an interest in the master trust asset pool. The master trust often may have issued its own ABS backed by the same pool. The issuance trust then issues its own ABS backed by the collateral certificate, and hence indirectly by the whole master trust pool. This structure would be consistent with the definition of “asset-backed security.”⁸²

Another structure we referenced in the Proposing Release relates to one used in some auto lease transactions where the auto leases and car titles often are originated in the name of a separate trust, sometimes called an “origination” or “titling” trust, to avoid administrative expenses in retitling the physical property underlying the leases. The origination trust will issue to the issuing entity for the ABS a certificate, often called a “special unit of beneficial interest” or SUBI, representing a beneficial interest in a pool of leases and automobiles in the origination trust which is to constitute the asset pool. The ABS issuing entity will issue ABS backed by the SUBI certificate, and hence indirectly by the assets underlying the SUBI. For the next transaction, the origination trust will issue a separate SUBI representing a separate pool of leases and automobiles in the origination trust which is to constitute the asset pool for the next transaction. This SUBI will be transferred to a newly created issuing entity for the next transaction which will issue ABS backed by the second SUBI. In each instance, although the same origination trust will issue multiple SUBIs representing multiple pools in the trust, there is a separate issuing entity for each ABS issuance whose “pool” consists of a separate SUBI, and hence indirectly a separate underlying group of assets. In our proposals and in our final rules we recognize this unique structure that developed under current practice before the codification of the new ABS regulatory regime, but, as proposed, we do not extend the origination trust structure to other asset classes that do not use it currently.

d. Delinquent and Non-Performing Pool Assets

In 1997, Commission staff issued a no-action letter clarifying that an asset pool having total delinquencies of up to 20% at the time of the proposed offering may still be considered an “asset-backed security.”⁸³ In addition, there also exists a longstanding staff interpretive position that no non-performing assets may be included as part of the asset pool at the time of the proposed offering. We are codifying these interpretations, with modifications from our original proposal.

The issue in either case is that such assets may no longer be (or in the case of non-performing assets, are not) converting into cash within a finite time period, as required by the definition of asset-backed security, given that such assets are not performing in accordance with their terms and management or other action may be needed to convert them to cash. While as discussed above some commenters requested relaxing these clarifications, we believe the principle that the ABS should be primarily dependent on a pool of assets that self-liquidate instead of on the ability of the entity performing collection services is an important principle that should be retained. Further, we believe the conditions we are codifying regarding delinquent and non-performing assets, as revised in response to comment and discussed below, are appropriate in achieving this principle.

i. How to Calculate Delinquency and Non-Performing Levels

Several commenters requested clarification regarding when delinquency and non-performance levels should be measured.⁸⁴ In the Proposing Release, we reiterated the standard in the 1997 no-action letter that the cut-off date (i.e., the date on and after which collections on the pool assets accrue for the benefit of the ABS holders) may be employed to establish delinquency and non-performance levels. The commenters requested further specificity regarding this standard, as well as clarity regarding application to master trusts. In response to commenters’ suggestions, we are adding an instruction specifying that the measurement date for the delinquency and non-performing thresholds is to be the cut-off date for the transaction, if applicable, or, in the case of master trusts, the date as of which delinquency and loss information is presented in the prospectus for the securities.⁸⁵

Additional commenters requested clarification regarding transactions that include non-performing or delinquent assets as part of a pool but not as part of the funded portion and not as part of cash flow calculations for the asset-backed securities.⁸⁶ In other words, some transactions permit non-performing or delinquent loans to be included, although the proceeds of the asset-backed securities are not used to fund or purchase those assets for the pool and those assets are not considered in cash flow calculations. As another example, a master trust may contemplate that a pool asset that becomes non-performing may remain designated to the pool after being charged-off, with the asset being assigned a zero balance and not considered in cash flow calculations. We are including an instruction clarifying that non-performing and delinquent assets that are not funded or purchased by proceeds from the asset-backed securities and that are not considered in cash flow calculations for the asset-backed securities need not be considered as part of the asset pool for purposes of determining non-performing and delinquency thresholds.⁸⁷

Some commenters also requested clarification as to calculating the thresholds for master trusts given that the same asset pool supports different series of ABS over time.⁸⁸ We are adding an additional instruction clarifying that the thresholds are to be measured against the entire pool whose cash flows support the asset-backed securities and not just against any new assets that are added as a result of the new issuance. Otherwise, issuers could effectively avoid the requirements by conducting the transaction through a multi-step master trust transaction instead of through a single transaction.⁸⁹

ii. Non-Performing Pool Assets

Regarding non-performing pool assets, we are codifying as proposed the longstanding requirement that no non-performing assets may be part of the asset pool, determined as of the measurement date discussed above. We are not persuaded by commenters’ requests that the position should be relaxed.⁹⁰

As we discussed in the Proposing Release, part of the difficulty for issuers in complying with the existing interpretive position is that there has been no uniform definition of what is a “non-performing asset.” As commenters confirmed to us, the point at which a financial asset is considered “non-performing” is often dependent upon asset type, with some financial assets being considered non-performing before other types of financial assets would.⁹¹ However, we continue to believe the point at which the financial asset should be charged-off is a consistent reference point, even if the point at which that event would occur may vary. Accordingly, we are defining “non-performing” to be a pool asset if any of the following is true:

• The pool asset would be treated as wholly or partially charged-off under the requirements in the transaction agreements for the asset-backed securities;
   

• The pool asset would be treated as wholly or partially charged-off under the charge-off policies of the sponsor, an affiliate of the sponsor that originates the pool asset or a servicer that services the pool asset; or
   

• The pool asset would be treated as wholly or partially charged-off under the charge-off policies applicable to such pool asset established by the primary safety and soundness regulator of any entity listed above or the program or regulatory entity that oversees the program under which the pool asset was originated.⁹²

We believe this definition provides flexibility for different asset classes while still ensuring that no assets are included in the securitized pool balance that would otherwise be considered to be non-performing and thus charged-off under an objective standard. Commenters generally supported this approach.⁹³ This definition differs from our original proposal in two principal ways. First, the definition has been revised in response to a commenter’s request to include references not only to the sponsor’s charge-off policies, but also to the policies of any affiliated originator or the servicer of the pool asset.⁹⁴ Second, the definition also includes a reference to the charge-off policies applicable to such pool asset established by either the primary safety and soundness regulator of the sponsor, an originating affiliate or the servicer, or the program or regulatory entity that oversees the program under which the pool asset was originated, as applicable. Several commenters indicated that, depending on the loan type, these regulators also have requirements for recognizing delinquencies and losses.⁹⁵

As we described in the Proposing Release, we also are adopting requirements for disclosure of the relevant charge-off policies in Regulation AB, discussed more fully in Section III.B. Commenters representing investors in particular strongly supported such disclosure.⁹⁶

iii. Delinquent Pool Assets

In addition to the non-performing limitation, we also are codifying a delinquency concentration limit in a manner consistent with the 1997 staff no-action letter. As we stated in the Proposing Release, because we are creating a general definition of “asset-backed security” regardless of eligibility for shelf registration, we are adopting two separate delinquency concentration limits. We are adopting the percentage limits as proposed. For the general definition (e.g., for offerings that could be registered on a non-shelf basis on Form S-1), delinquent assets may not constitute 50% or more, as measured by dollar volume, of the asset pool as of the measurement date described above. As we noted in the Proposing Release, we believe concentrations above that threshold begin to raise serious doubt that the transaction should be characterized as an “asset-backed security” as the payments on the securities in such transactions would appear to depend more on the ability of the entity or entities that provide collection services for the delinquent assets than on the self-liquidating nature of the underlying assets. For shelf registration eligibility, we are retaining the existing 20% delinquency concentration level in the no-action letter, as proposed.

For purposes of determining whether a pool asset is delinquent under either threshold, we proposed to define a pool asset as “delinquent” if any portion of a contractually required payment on the asset is 30 days or more past due. The proposed definition was based on the existing standard in the staff no-action letter.⁹⁷

Several commenters requested more flexibility for the definition. In particular, several commenters noted that some sponsors do not consider an obligor delinquent when any portion of a contractually required payment is late, but instead only when less than some percentage (e.g., 90%) or amount of a payment is received.⁹⁸ Changing their systems for purposes of the proposed requirement, these commenters argued, would be burdensome. Others argued that sponsors use different reporting methodologies in determining delinquency, such as the Office of Thrift Supervision method or the Mortgage Bankers Association of America method.⁹⁹

We noted in the Proposing Release that, with regard to determining delinquency, one potential area of concern is improper re-aging or restructuring of delinquent accounts, such as declaring an asset with multiple past-due payments as current even if only the last payment was made. We proposed clarifying in the definition of “delinquent” that a pool asset that was more than one payment past due could not be characterized as not delinquent if only partial payment on the total past due amount had been made, unless the obligor had contractually agreed to restructure the obligation, such as part of a workout plan. While not all agreed, commenters generally objected to this approach, arguing that servicers sometimes restructure obligations without contractually amending the pool asset documents.¹⁰⁰

As an alternative to the proposed definition of “delinquent,” some of these commenters suggested an approach similar to the definition of “non-performing” that looks to the provisions specified in the relevant transaction agreements or the policies of the sponsor in determining delinquency, so long as these provisions and policies are disclosed. As commenters confirmed to us, policies relating to delinquency vary somewhat across asset types and sponsors, similar to charge-off policies. However, we continue to believe a standard linked to the longstanding 1997 no-action letter should be retained to clarify the degree of flexibility permitted.

Accordingly, we are defining a pool asset as “delinquent” if a pool asset is more than 30 or 31 days or a single payment cycle, as applicable, past due from the contractual due date, as determined in accordance with any of the following:

• The transaction agreements for the asset-backed securities;
   

• The delinquency recognition policies of the sponsor, any affiliate of the sponsor that originated the pool asset or the servicer of the pool asset; or
   

• The delinquency recognition policies applicable to such pool asset established by the primary safety and soundness regulator of any entity listed above or the program or regulatory entity that oversees the program under which the pool asset was originated.¹⁰¹

With an approach that relies more on a party’s delinquency recognition policies, we believe appropriate disclosure of the policies and their application becomes even more important.¹⁰² As a result and as referenced in the Proposing Release, in adopting delinquency limits, we also are adopting disclosure requirements, discussed more fully in Section III.B., of policies regarding grace periods, re-aging, restructures, partial payments considered current or other such practices on delinquencies. We also are adopting disclosure requirements for on-going reporting, discussed more fully in Section III.D., regarding material modifications, extensions or waivers to pool asset terms, fees, penalties or payments. We also are requiring disclosure of any material changes to delinquency recognition policies. Given this disclosure-based approach, we are not adopting the proposed requirement permitting only contractual-based re-agings.

e. Lease-Backed Securitizations and Residual Values

As discussed above, the one change we proposed making to the basic definition of “asset-backed security” is to expand the definition to include securitizations backed by leases where part of the cash flows backing the securities is to come from the disposal of the residual asset underlying the lease (e.g., selling an automobile at the end of an automobile lease). In that instance, the asset-backed securities are not backed solely by financial assets that “by their terms convert into cash,” because the transaction also involves a physical asset that must be sold in order to obtain cash. As a result, securitizations where a portion of the cash flow to repay the securities is anticipated to come from the residual value of the physical property do not fall within the current definition of “asset-backed security” in Form S-3 and thus are often registered on a non-shelf basis on Form S-1.

As we explained in the Proposing Release, lease-backed ABS have grown into a common and recognized segment of the overall ABS market.¹⁰³ We received support from commenters for adding lease-backed ABS to the definition of “asset-backed security,” and therefore eligibility for shelf-registration if the requirements of Form S-3 are met.¹⁰⁴ However, as we explained in the Proposing Release, even though we are recognizing the growth in lease-backed ABS that include securitizations of residual value, such securitizations are subject to additional factors that are not present in securitizations backed solely by financial assets that convert into cash. Residual value is often determined at the inception of a lease contract and represents an estimate of the leased property’s resale value at the end of the lease. Assumptions and modeling are necessary to determine the amount of the residual value. In addition, the transaction is not simply dependent on the servicing and amortization of the pool assets, but also on the capability and performance of the party that will be used to convert the physical property into cash and thus realize the residual values.

The higher the percentage of cash flows that are to come from residual values, the more important these other factors become and the less the transaction resembles a traditional securitization of financial assets for which our regime for asset-backed securities is designed. Although some commenters did not believe we should have any limits on residual values,¹⁰⁵ we continue to believe, as discussed above, that the core principle that an asset-backed security should be primarily serviced by financial assets that by their terms convert into cash should be retained. At the same time, we believe a defined limited exception to this general principle is appropriate and consistent for access to the alternate regulatory regime for certain lease-backed ABS.

As we explained in the Proposing Release, we are addressing concerns with the deviation from the core principle in two principal ways. First, we are adopting disclosures, discussed more fully in Section III.B., on how residual values are estimated and derived, statistical information on historical realization rates and disclosure of the manner and process in which residual values will be realized, including disclosure about the entity that will convert the residual values into cash. Second, we are establishing limits on the percentage of the securitized pool balance attributable to residual values in order to be considered an “asset-backed security.” We believe these changes will expand eligibility of lease-backed transactions for shelf registration and appropriately permit lease-backed transactions under our new rules while continuing to apply the core principles underlying the definition of “asset-backed security.”

As we noted in the Proposing Release, market practice regarding lease-backed securitizations varies on the typical percentage of the securitized pool balance attributable to residual values. For example, motor vehicle lease securitizations often have higher residual value percentages than equipment lease securitizations due to the higher resale values that often exist between motor vehicles and other equipment. Accordingly, after reviewing residual value percentages for typical lease-backed securitizations, we proposed that the portion of the cash flow to repay the securities anticipated to come from the residual value of the physical property underlying the leases could not constitute:

• For automobile leases, 60% or more, as measured by dollar volume, of the original asset pool at the time of issuance of the asset-backed securities; and
   

• For all other leases, 50% or more, as measured by dollar volume, of the original asset pool at the time of issuance of the asset-backed securities.

In addition, we proposed a more stringent limitation for cash flow from residual values for offerings of securities backed by leases other than motor vehicle leases that may be registered on Form S-3 and thus eligible for shelf registration. For Form S-3 eligibility of ABS backed by such leases, we proposed that the portion of the cash flow anticipated to come from residual values could not constitute 20% or more, as measured by dollar volume, of the original asset pool at the time of issuance of the asset-backed securities.

Commenters raised several concerns with our proposal if percentage limitations were to be maintained. First, commenters believed the proposal did not provide enough clarity on how to make the necessary calculations.¹⁰⁶ In particular, commenters were concerned with the proposed choice of language for the calculation, which was phrased in reference to “the portion of the cash flow anticipated to come from residual values.” We note that filings for lease-backed ABS today typically disclose the portion of the securitized pool balance attributable to residual values and the method of determining such figures. Our intention had been and is to codify that practice in connection with complying with the residual value percentages. To clarify this intention, we are revising the language in the requirement to more closely track language used in lease-backed ABS filings to refer to the portion of the securitized pool balance attributable to residual values, as determined as of the measurement date in accordance with the transaction agreements for the asset-backed securities. We note that the residual value itself is often calculated at the inception of the lease, but the portion of the securitized pool balance attributable to it (e.g., vis a vis lease payments) is a percentage determined at the time of the transaction. Similar to our final rules with respect to determining delinquency and non-performance thresholds, we are clarifying in an instruction that the “measurement date” is the cut-off date for the transaction, if applicable, or, in the case of master trusts, the date as of which securitized pool balance information is presented in the prospectus for the securities.

Second, commenters believed the proposed percentages were too stringent to permit all motor vehicle lease-backed ABS transactions that have been conducted.¹⁰⁷ A threshold set against market practice may not encompass every transaction conducted before the threshold was set. However, we do seek to codify percentages that are based upon current market practice. Based on further review of lease-backed ABS transactions during the past five years, including the examples provided by commenters, we are raising the percentage for motor vehicle lease-backed ABS from 60% to 65%.

Finally, commenters believed that if residual value limitations are retained, an exception should be made to the extent there is a residual value guarantee, residual value insurance or where the lessee is obligated to cover any residual losses.¹⁰⁸ In each instance, these commenters argued, the credit risk for the residual loss is with a separate obligated party. We are providing an instruction that residual values need not be included in measuring against the limitation to the extent a separate party is obligated for such amount. However, we note that, depending on the extent of the separate party’s obligation for such amounts, such obligation may result in that party constituting a significant provider of credit enhancement or other support or, when the lessee is obligated to cover any residual losses, a significant obligor. In that instance, as described in Sections III.B.7 and 8, additional disclosures, including financial disclosures, may be required.

In addition to other technical changes,¹⁰⁹ we are adopting as proposed the limits for non-motor vehicle leases. For the basic definition, the portion of the securitized pool balance attributable to residual values for such leases may not constitute 50% or more, as measured by dollar volume. For Form S-3 eligibility, the portion of the securitized pool balance attributable to residual values for such leases may not constitute 20% or more, as measured by dollar volume.¹¹⁰

f. Exceptions to the “Discrete” Requirement

The last set of interpretations we are codifying relates to exceptions to the requirement in the definition of “asset-backed security” that the asset pool be “discrete.” As discussed above, the existence of the “discrete” requirement is to prevent a level of portfolio management that is not contemplated by the definition of “asset-backed security” or consistent with this registration and reporting regime. In addition, the lack of a “discrete” requirement would make it difficult for an investor to make an informed investment decision when the composition of the pool is unknown or could change over time.

However, as we explained in the Proposing Release, ever since the original definition of “asset-backed security” was adopted, there has been some confusion over the meaning of the term “discrete” in the definition, particularly with respect to language in the definition that specifies the asset pool must be a “discrete pool of receivables or other financial assets, either fixed or revolving.” The 1992 Release specified that the phrase “fixed or revolving” was added “in order to make clear that the definition covers ‘revolving’ credit arrangements, such as credit card and short-term trade receivables, home equity loans and automotive dealer floorplan financings, where account or loan balances revolve due to periodic payments, charge-offs and closings of the receivables.”¹¹¹ Thus, the basic principle was that the balance of a pool asset may revolve, but not the asset pool itself.¹¹²

Nevertheless, in response to market developments, the staff has allowed certain exceptions, with limits, to the discrete pool requirement. These exceptions relate to master trusts, prefunding periods and revolving periods. In a master trust, the ABS transaction contemplates future issuances of asset-backed securities backed by the same, but expanded, asset pool. Pre-existing securities also would therefore be backed by the same expanded asset pool. In a prefunding period, a limited portion of the proceeds of the offering is set aside for the future acquisition of additional pool assets within a specified period of time after the issuance of the asset-backed securities. In a revolving period, cash flows from the asset pool may be recycled for a specified period to acquire new pool assets instead of being applied to payments on the asset-backed securities.¹¹³

The staff’s interpretive history in this area has resulted in limits on which asset classes may use these structures and still be considered an “asset-backed security.”¹¹⁴ As discussed above, we are codifying these three exceptions and also expanding them so that they are applicable to all asset types.¹¹⁵ As we noted in the Proposing Release, a transaction can employ one or more of these features and still qualify as an “asset-backed security.”¹¹⁶ We believe these expansions will result in increased flexibility in structuring transactions to meet market demands. As in the case of our treatment of lease-backed ABS that involve residual values, we believe a large part of the concern relating to these structures can be appropriately addressed through disclosure, both at the time of issuance of the asset-backed securities as well as on an ongoing basis through disclosure of how the asset pool is materially changing. As such, we are adopting, with certain modifications, our proposed requirements for more detailed disclosures in Regulation AB, discussed more fully in Sections III.B. and III.D., regarding the operation of such structures and changes to the asset pool over time.

We also are adopting limits, as discussed below, on the amount and duration of prefunding and certain revolving periods to limit the amount of changes to the asset pool, while still allowing flexibility to accommodate market demands. As noted in the Proposing Release, these limits are designed to establish parameters for the types of securities that should be subject to the ABS regulatory regime. As with lease-backed ABS, we believe these proposals will expand eligibility of these structures while continuing to apply the core principles underlying the definition of “asset-backed security.”

i. Master Trusts

As proposed, master trust structures will be allowed to meet the definition of “asset-backed security” without any pre-determined limits.¹¹⁷ Commenters supported expanding access to master trusts.¹¹⁸ However, several commenters noted that most master trusts permit, and in some cases require, the depositor to make additional asset additions to the asset pool from time to time, regardless of when ABS are issued.¹¹⁹ In particular, commenters expressed concern that the proposed wording of the exception for master trusts, which was limited to asset additions in connection with future issuances of asset-backed securities, would not allow for additions of pool assets in current master trust structures that are necessary to maintain minimum pool balances, such as the depositor’s interest in the trust. As the commenters explained, permitting such additions is an essential means for these current structures of assuring an adequate pool balance for master trusts with revolving assets. To maintain existing practice, we are modifying the exception for master trusts to clarify that the offering related to the securities may contemplate both adding additional assets to the pool in contemplation of future issuances of asset-backed securities backed by such pool as well as, for master trusts with revolving periods or receivables or other financial assets that arise under revolving accounts, additions to the asset pool in connection with maintaining minimum pool balances in accordance with the transaction agreements.¹²⁰

ii. Prefunding Periods

For prefunding periods, we proposed separate limits for shelf and non-shelf offerings similar to our proposals for lease-backed ABS. For the general definition of “asset-backed security,” we proposed that the amount of proceeds that may be used for a prefunding period could be up to 50% of offering proceeds and the length of the prefunding account could last up to one year from the date of issuance of the asset-backed securities. As we stated in the Proposing Release, we believe prefunding periods above these thresholds begin to raise serious doubt that the transaction should be characterized as an “asset-backed security.” For Form S-3 eligibility, we proposed that the amount of proceeds that may be used for a prefunding period could be up to 25% of offering proceeds over a similar one-year period.

Commenters were mixed on our proposals. One commenter representing an ABS investor supported the proposed limits.¹²¹ Several other commenters representing primarily issuers and their representatives noted that although the proposed Form S-3 level was consistent with the requirements in the staff’s no-action letter regarding relief from Rule 15c2-8(b), they believed the staff has permitted higher limits and requested eliminating or expanding the tests to provide increased flexibility.¹²²

As discussed above, we continue to believe a limit on prefunding is appropriate. However, after evaluating the comment received, we no longer believe it is necessary to have separate limits for Form S-3 shelf registration. Therefore, we are only codifying the proposal with respect to the basic definition. In addition and in response to comment, we are clarifying application of the prefunding limitation with respect to master trusts.¹²³ Under the final rule, regardless of the form on which the offering was registered, a prefunding period is permitted for up to one year from the date of issuance of the asset-backed securities and the prefunded amount may consist of up to 50% of offering proceeds or, in the case of master trusts, up to 50% of the aggregate principal balance of the total asset pool whose cash flows support the asset-backed securities.

iii. Revolving Periods

Our proposals for revolving periods recognized the nature of the asset being securitized (i.e., whether it itself is fixed or revolving). We proposed that for receivables or other financial assets that by their nature revolve (e.g., credit cards, dealer floorplan financings or home equity lines of credit), there would as today be no limit on the number of assets that may revolve nor a limit on the duration of the revolving period. For fixed receivables or other financial assets (e.g., standard residential mortgages, auto loans and leases), we proposed limits similar to prefunding periods; that is, the basic definition of “asset-backed security” would specify that the additional assets that may be acquired in the revolving period may constitute up to 50% of the proceeds of the offering and the duration of the revolving period may last for up to one year from the date of issuance of the asset-backed securities. For Form S-3 eligibility, the revolving period would be limited to 25% of proceeds over a one-year period.

Several commenters urged eliminating any restrictions on revolving periods, regardless of the type of asset or the form of registration.¹²⁴ Revolving periods, these commenters argued, allow issuers flexibility to create ABS with longer or different maturities and weighted average lives than the underlying pool assets. Revolving periods were argued to be particularly necessary in the case of shorter-term assets to create ABS with meaningful maturities. As with the other proposed exceptions to the definition of asset-backed security, these commenters believed concerns about increased revolving periods were mitigated by the proposed increased disclosure regarding such periods and changes to the asset pool over time.

Revolving periods have long been permitted under staff practice for assets that by their nature revolve, as discussed above. There is thus an established record of experience with revolving periods for such asset classes. For other assets, while we recognize the commenters’ arguments regarding the benefit of revolving periods in structuring asset-backed securities, we also recognize the management aspects that arise and are thus not prepared at this point to eliminate all restrictions on revolving periods for purposes of which securities should qualify as an “asset-backed security” subject to Regulation AB. However, after evaluating the comments and their arguments regarding the market reality of the use of revolving periods, we are expanding the exception from that proposed for those asset classes. We also are making technical changes to the proposal in response to comment to clarify the types of assets subject to the requirement.

Accordingly, under the final rules there will remain no restrictions on revolving periods for securities backed by receivables or other financial assets that arise under revolving accounts. For securities backed by receivables or other financial assets that do not arise under revolving accounts, an unlimited revolving period will be permitted for up to three years, so long as the new pool assets that are added are of the same general character as the original pool assets. One group of commenters who suggested such an alternative believed a three year revolving period would improve efficiency in structuring transactions.¹²⁵ As with prefunding accounts, we are not establishing a more stringent revolving limitation for Form S-3 eligibility. These expansions from the proposal allow issuers substantially increased flexibility over current staff practice to structure asset-backed securities.

3. Securities Act Registration Statements

a. Form Types

As we noted in the Proposing Release, we are not creating a new registration statement form for ABS offerings. We believe the existing form structure is sufficient, provided there are appropriate instructions in the applicable forms as to their use for ABS offerings. As proposed, we are limiting registration of asset-backed securities offerings to two forms: Form S-1 or Form S-3.¹²⁶ As is currently the case, Form S-3 will retain the requirements that will qualify an offering for delayed shelf registration on that form pursuant to Rule 415(a)(1)(x).¹²⁷ Form S-1 will be the form for all other offerings that meet the definition of an “asset-backed security” but do not meet the additional eligibility requirements for Form S-3 (e.g., investment grade and additional limits on lease-backed ABS and delinquent pool assets). We received support from commenters for this approach.¹²⁸ As proposed, we are amending our other Securities Act registration statement forms for primary offerings to exclude explicitly their use for ABS offerings.¹²⁹ Since as discussed below we are not establishing a separate disclosure regime or requirements for foreign ABS, we continue to believe it is unnecessary to provide separate form types for foreign ABS offerings. These offerings also will be registered on Forms S-1 or S-3, as applicable.

As we noted in the Proposing Release, while Form S-3 currently specifies eligibility for ABS offerings, neither it nor any other form clarifies how the form is to be prepared for such an offering. Therefore, we are adopting our proposal for separate general instructions for both Form S-1 and Form S-3 to specify use for ABS offerings.

New General Instruction VI. to Form S-1 clarifies how that form is to be prepared for an ABS offering. In particular, the instruction clarifies who is to sign the registration statement (discussed more fully in Section III.A.3.d.) as well as the menu of required disclosure items. As to the latter, the instruction identifies the existing items in the form that may be omitted as well as substitute core disclosure items from Regulation AB that will be required. As discussed in Section III.B., Items 1102-1120 of Regulation AB represent the basic disclosure package for registered ABS offerings. Any other applicable items specified in Form S-1, such as the description of the securities and the offering, will continue to be required.¹³⁰ Under the final rules, the application of the disclosure items for Form S-1 will be as follows:

Disclosure for Form S-1 for Registered ABS Offerings

New General Instruction V. to Form S-3 performs a similar function for that form. As we explained in the Proposing Release, unlike current practice on Form S-1, non-ABS offerings on Form S-3 rely predominately on incorporation by reference of Exchange Act reports for disclosure unrelated to the offering. As a result, existing Form S-3 does not set forth a detailed menu of disclosure items apart from disclosure about the offering. However, because a reporting history is not required for ABS for Form S-3 eligibility, investment grade ABS offerings registered on that form often must present most of their disclosure in the base prospectus and prospectus supplement in lieu of incorporating information by reference. Accordingly, the new Form S-3 instruction for ABS, as proposed, does not specify any existing items that may be omitted, but rather specifies the addition of the same basic disclosure package from Regulation AB. The other disclosure items required by Form S-3, such as the description of the securities and the offering, will continue to be required as applicable. Therefore, as shown in the following table, the effect of the new instruction is to add the basic disclosure package of Items 1102-1120 of Regulation AB:

Disclosure for Form S-3 for Registered ABS Offerings

b. Presentation of Disclosure in Base Prospectuses and Prospectus Supplements

As we noted in the Proposing Release, by specifying the menu of disclosure items applicable for ABS offerings eligible for Form S-3, and thus shelf registration, we do not intend to change the current practice or ability to present such disclosure in a separate base prospectus and prospectus supplement, a practice also available for non-ABS offerings.¹³¹ Items in the basic disclosure package that are known or reasonably available should continue to be described in the base prospectus, while disclosure dependent on the final terms of the particular takedown can still be provided in the prospectus supplement.¹³² If this approach is followed, a form of prospectus supplement is required to accompany the base prospectus in the registration statement at the time of effectiveness that outlines the format of deal-specific information that will be disclosed at the time of each takedown.¹³³

As referenced in the 1992 Release, the type or category of asset to be securitized must be fully described in the registration statement at the time of effectiveness. The structural features contemplated also should be disclosed, as well as identification of the types or categories of securities that may be offered, such as interest-weighted or principal-weighted classes (including IO or PO securities), planned amortization or companion classes or residual or subordinated interests. In addition, risks associated with changes in interest rates or prepayment levels should be fully disclosed. The various scenarios under which payments on the asset-backed securities could be impaired also should be discussed.

In the Proposing Release, we explained the longstanding position that when presenting disclosure in base prospectuses and prospectus supplements, the base prospectus must describe the types of offerings contemplated by the registration statement. A takedown off of a shelf that involves assets, structural features, credit enhancement or other features that were not described as contemplated in the base prospectus will usually require either a new registration statement (e.g., to include additional assets) or a post-effective amendment (e.g., to include new structural features or credit enhancement) rather than simply describing them in the final prospectus filed with the Commission pursuant to Securities Act Rule 424. Registrants should exercise discretion, however, in describing only the material asset types or features reasonably contemplated to be included in an actual takedown.

As proposed, we are specifying in the general instruction to Form S-3 the existing requirement to prepare separate base prospectuses and forms of prospectus supplements when multiple asset types may be securitized in discrete pools in takedowns under that registration statement. As stated in the 1992 Release, a registration statement may not merely identify several alternative types of assets that may be securitized. A separate base prospectus and form of prospectus supplement must be presented for each asset class that may be securitized in a discrete pool in a takedown under that registration statement. We also are adopting as proposed a similar requirement for takedowns involving pools of foreign assets where the assets originate in separate countries or the property securing the pool assets is located in separate countries.

Commenters raised several questions about the proposed instruction, particularly regarding the proposed requirement for a separate base and form of supplement for takedowns involving separate jurisdictions.¹³⁴ We wish to clarify a potential misconception regarding these requirements. A separate base and form of supplement only is required for asset types or jurisdictions that may be securitized in a discrete pool in separate takedowns under the registration statement. If pool assets of different asset types or different jurisdictions are to be pooled together in a single transaction (e.g., an offering with a multi-jurisdictional pool or an offering with a pool of 45% residential mortgages and 55% commercial mortgages), a single base and form of prospectus supplement would be permitted, so long as the appropriate disclosures for each asset type or jurisdiction were included.

Similarly, several commenters pointed out that the staff has permitted the use of a single base and form of supplement for transactions that principally consist of a particular asset class, but which also describes one or more potential additional asset classes, so long as the pool assets for the additional classes in the aggregate are limited to 10% of the pool for any particular takedown. We also are clarifying this position in the instruction and applying it to both separate asset classes and separate jurisdictions.

We noted in the Proposing Release that an additional issue that often results in staff comment is the inclusion of language in registration statements that investors should rely on the information in the prospectus supplement if the terms of a particular series of securities conflict or vary between the base prospectus and the accompanying prospectus supplement. As is currently the case today, disclosure in prospectus supplements regarding the transaction may enhance disclosure in the base prospectus regarding contemplated transactions, but should not contradict it. Similarly, including language to the effect of “Except as otherwise provided in the prospectus supplement” will permit some supplemental or modified terms of transactions, but should not be construed as creating the ability to add asset types or structural features in a takedown that were not otherwise contemplated by and described in the base prospectus.

c. Form S-3 Eligibility Requirements for ABS

As proposed, we are maintaining the existing requirement for ABS Form S-3 eligibility that the asset-backed securities must be rated “investment grade” by a nationally recognized statistical rating organization, or NRSRO, at the time of offer and sale to the public.¹³⁵ The definition of “investment grade” will remain the same as for other investment grade securities that may be registered on Form S-3.¹³⁶ As we explained in the Proposing Release, the “investment grade” requirement has existed for over ten years with respect to asset-backed securities and for over twenty years with respect to other non-convertible securities. The Commission is engaged in a broad review of the role of credit rating agencies in the operation of the securities markets, including whether credit ratings should continue to be used for regulatory purposes under the federal securities laws.¹³⁷ We received comment in response to the Proposing Release on possible alternatives to using an investment-grade requirement for ABS Form S-3 eligibility purposes.¹³⁸ However, pending the outcome of our review of credit rating agencies, we are maintaining the same rules and standards currently used for purposes of Form S-3 eligibility.

As discussed more fully in Section III.A.2. above, we are adding two additional conditions regarding the types of asset-backed securities that would qualify for Form S-3 eligibility. First, we are codifying the current position that delinquent assets may not constitute 20% or more, as measured by dollar volume, of the asset pool. Second, for securities backed by leases other than motor vehicle leases, the portion of the securitized pool balance attributable to residual values may not constitute 20% or more, as measured by dollar volume. As referenced in Section III.A.2.f., we are not adopting the proposed additional restrictions for prefunding accounts and revolving periods for Form S-3 eligibility.

Consistent with existing requirements, we did not propose to add an issuer Exchange Act reporting history requirement for ABS Form S-3 eligibility. However, we did propose codifying that Exchange Act reporting obligations regarding other asset-backed securities transactions established by the sponsor and the depositor must have been complied with for the prior 12 months for continued Form S-3 eligibility for new registration statements.¹³⁹ This proposal would not have required that there be a reporting history with respect to any prior transactions, only that any existing or prior requirements during the past year had been met. As explained in the Proposing Release, we did not believe it would be appropriate to continue to allow the benefits of shelf registration to new registration statements established by sponsors or depositors that have not complied with ongoing reporting obligations involving previous asset-backed securities transactions.

Comments from issuers and their representatives objected to the proposals as generally being more restrictive than necessary to encourage better Exchange Act reporting compliance.¹⁴⁰ Commenters also thought the proposed formulation linked to the sponsor was potentially ambiguous as to which depositors were affected. While some suggested alternatives, some commenters objected to conditioning form eligibility on any reporting history. Commenters also thought any disqualification should be limited to depositors of the same asset class, arguing that securitizations of separate asset classes are often separately managed business units within a sponsor and to penalize all of the sponsor’s programs for the reporting noncompliance of one would be too burdensome. Several commenters also believed that Form S-3 eligibility for asset-backed securities should be treated differently from the requirements for non-ABS securities in that eligibility should not be impaired by good faith, immaterial, inadvertent or involuntary failures in Exchange Act reporting, particularly if the untimely reporting was the result of the inability to obtain information from an unaffiliated third party.

Compliance with Exchange Act reporting by ABS issuers under the existing modified reporting no-action letters has been unacceptable. While this may be partially attributable to a lack of widely understood requirements due to reduced transparency in the current process, which these final rules are intended to help remedy, the concerns in this area are more broad-based than minor inadvertent or unintentional failures to file. Instead, reporting issues in the ABS market include widespread instances of untimely, deficient and sometimes even complete lapses in reporting.

As a resultant responsibility from registering a public offering of securities under the Securities Act, the Exchange Act specifically requires that the obligation to provide information does not stop with the final prospectus, but continues afterwards, at least for a period of time.¹⁴¹ For asset-backed securities in particular, commenters representing investors have expressed a clear preference for required Exchange Act reporting, regardless of whether the issuer also elects to provide the information voluntarily.¹⁴² Given past deficiencies in Exchange Act reporting compliance in the ABS sector, we continue to believe that issuers that fail to comply with their responsibilities under the Exchange Act for prior transactions should not continue to receive the benefits of shelf registration for new registration statements. Nor do we believe that the current practice of being able to form a new special purpose depositor to avoid the consequences of reporting noncompliance creates appropriate incentives for reporting compliance. Several commenters also recognized the need to fix this current problem.¹⁴³ Further, the ability for investment grade ABS offerings to have immediate access to Form S-3 without a reporting history requirement for the newly created issuing entity separates ABS from most non-ABS issuers such that a linkage to affiliated entities is appropriate.

Accordingly, we believe it is appropriate to continue to link Form S-3 eligibility requirements to Exchange Act reporting compliance for prior transactions. In response to several commenter suggestions,¹⁴⁴ we are revising the proposal to focus not on any transactions established directly or indirectly by a sponsor, but instead on transactions established by affiliated depositors involving the same asset class. We think this approach addresses many commenter concerns about the potential breadth of the proposed application across asset classes and tying the requirements to the sponsor definition.¹⁴⁵

Under the final rules, to the extent the depositor for an ABS offering or any issuing entity previously established, directly or indirectly, by the depositor or any affiliate of the depositor are or were during the previous twelve calendar months and any portion of a month immediately preceding the filing of the Form S-3 registration statement subject to Exchange Act reporting requirements with respect to asset-backed securities involving the same asset class, such depositor and each such issuing entity must have timely complied with its Exchange Act reporting requirements.¹⁴⁶ This would include all prior Exchange Act reporting obligations for such asset-backed securities during the preceding year, even if and only up until those obligations were suspended at some point during the year pursuant to Section 15(d) of the Exchange Act.”¹⁴⁷ In response to comment, we are adopting one exception to the requirement. Some commenters requested an exception for depositors of other parties that are acquired in a good faith business combination transaction, arguing that prior noncompliance by the acquired depositors should not affect pre-existing depositors of the acquirer, so long as the acquisition is not part of a plan or scheme to evade the reporting requirements.¹⁴⁸ We are providing an exception that, regarding an affiliated depositor that became an affiliate as a result of a business combination transaction during the twelve month period before the filing of the registration statement, the filing of any material prior to the business combination transaction relating to asset-backed securities of an issuing entity previously established, directly or indirectly, by such affiliated depositor is excluded, provided such business combination transaction was not part of a plan or scheme to evade the requirements of the Securities Act or the Exchange Act.

With respect to imposing a reporting compliance requirement, some commenters expressed concern that an untimely Exchange Act filing would have an immediate effect on the ability to conduct offers and sales under previously filed registration statements.¹⁴⁹ We wish to clarify that Securities Act Form eligibility requirements for ABS issuers are determined at the time of filing of the registration statement.¹⁵⁰

In the Proposing Release, we proposed to add one of our proposed new Form 8-K items for ABS—Item 6.03, Change in Credit Enhancement or Other External Support—to the list of Form 8-K Items where failure to file such Items timely would not result in Form S-3 ineligibility.¹⁵¹ One commenter believed two other ABS Form 8-K Items—Item 6.01, ABS Informational and Computational Material, and Item 6.05, Securities Act Updating Disclosure—should be added to the list because they relate to offerings for specific transactions and not to ongoing reporting.¹⁵² We are adding Items 6.01 and 6.05 along with Item 6.03 to the Form 8-K Item list for Form S-3 eligibility purposes. However, we do not believe it is appropriate to include Items 6.01 and 6.05 in the list of Form 8-K items for the Rule 10b-5 safe harbor for failure to file such items. As discussed in Section III.D.8.d., we are only adding Item 6.03 to that safe harbor, as proposed.

We do not underestimate the effects of linking reporting compliance with continued Form S-3 eligibility. Non-ABS issuers have long dealt with the consequences of reporting compliance for Form S-3 eligibility, and we appreciate the consequences of losing access to shelf registration. There are several accommodations, both in the amendments we are adopting today and under existing Commission rules, which should assist ABS issuers. Most notably, we are providing an extensive transition period to allow issuers to improve their reporting processes from the present state. As noted above, we also are expanding the number of Form 8-K Items that need only be current and not timely for ABS Form S-3 eligibility purposes. As discussed in Section III.D.4.a., we are extending Rule 12b-25 to provide filing extensions for Form 10-D reports. We also are modifying several of the proposed Regulation AB disclosure requirements, discussed more fully in Section III.D., that could potentially require third party information, such as information about unaffiliated servicers.¹⁵³

d. Determining the “Issuer” and Required Signatures

We are clarifying as proposed which entity is considered the “issuer” under the Securities Act with respect to an offering of asset-backed securities. The Securities Act defines the term “issuer” in part to include every person who issues or proposes to issue any security, except that with respect to certificates of deposit, voting-trust certificates, or collateral trust certificates, or with respect to certificates of interest or shares in an unincorporated investment trust not having a board of directors (or persons performing similar functions), the term issuer means the person or persons performing the acts and assuming the duties of depositor or manager pursuant to the provision of the trust or other agreement or instrument under which the securities are issued.¹⁵⁴ Under current staff positions, the depositor must sign the Securities Act registration statement for an ABS offering.

We are clarifying that the depositor for the asset-backed securities, acting solely in its capacity as depositor to the issuing entity, is the “issuer” for purposes of the asset-backed securities of that issuing entity.¹⁵⁵ Further, our new rule specifies that the person acting in its capacity as the depositor for the issuing entity of an asset-backed security is a different “issuer” from that same person acting as a depositor for any other issuing entity or for purposes of that person’s own securities. As the definition of asset-backed security requires the issuing entity to be a restricted special purpose investment vehicle, the new rule will apply regardless of the issuing entity’s form of organization.

By clarifying that the person acting as the depositor in its capacity as depositor to the issuing entity is a different “issuer” from that person in respect of its own securities, we are making clear our longstanding position that any applicable exemptions from registration that person may have with respect to its own securities are not applicable to the asset-backed securities.¹⁵⁶ Similarly, the reporting history with respect to a particular class of asset-backed securities does not affect Form S-3 eligibility with respect to the depositor’s or sponsor’s own securities, although as discussed above we are requiring that the reporting history with respect to certain prior ABS transactions can affect continued Form S-3 eligibility for future ABS registration statements.

Consistent with our proposal, we also are codifying in the general instructions for Forms S-1 and S-3 that the registration statement must be signed, as is currently the case, by the depositor, the depositor’s principal executive officer or officers, principal financial officer and controller or principal accounting officer, and by at least a majority of the depositor’s board of directors or persons performing similar functions. As proposed, we are not requiring the issuing entity to sign if formed prior to effectiveness as such a requirement would be superfluous.

4. Foreign ABS

As we described in the Proposing Release, while not as prevalent as in the U.S., securitization by foreign issuers has been developing rapidly.¹⁵⁷ However, asset-backed securities issued by a foreign issuer¹⁵⁸ or that are backed by foreign assets raise special issues due to potential differences in the legal and regulatory regime of the relevant home jurisdiction. Differing laws and practices regarding banking regulation, accounting, bankruptcy, property rights, secured transactions, “true sale,” tax, asset servicing, consumer protection and other matters may alter fundamentally the basic principles underlying an “asset-backed security.” Also, given the early stage of securitization in some foreign markets, ABS may be used not just as an alternative funding source, but more for capital management, including efforts to “prune” a lender’s portfolio by off-loading poorly performing assets.¹⁵⁹

As a result of these concerns, the staff historically has required additional conditions for the processing of Form S-3 registration statements involving foreign ABS offerings. These conditions have included first requiring one or more registered offerings on a non-shelf basis on Form S-1 or S-11 that is fully reviewed by the staff, as well as other steps or conditions to help assure that novel or unique questions can be addressed by the staff. As experience with a particular issuer, asset type and laws related to asset-backed issues in the home jurisdiction increases, the requirements decrease. Nevertheless, while designed to address the concerns noted above, these additional steps and conditions can result in delays and possible impediments to access to the U.S. public capital markets through shelf registration for foreign ABS, even if the other requirements for shelf registration, such as an investment grade rating, can be met.

As proposed, to address the foreign and legal and regulatory issues while appropriately treating foreign ABS transactions, we are not establishing a different disclosure or regulatory regime for foreign ABS, with the one exception discussed below. Foreign ABS will be registered on the same Securities Act registration forms as domestic ABS, and with the exception of the disclosure discussed below, foreign ABS will be subject to the same disclosure requirements in Regulation AB. Foreign ABS offerings registered on Form S-3 also will be eligible for our new rules regarding use of ABS informational and computational material and ABS research reports discussed in Section III.C.

As discussed in the Proposing Release, we believe that many of the concerns relating to foreign ABS can be appropriately addressed through adequate disclosure. Commenters supported this approach.¹⁶⁰ As such, we are adopting as proposed an additional general instruction in Regulation AB focused on foreign ABS. This instruction provides that if asset-backed securities are issued by a foreign issuer, are backed by foreign assets, or are affected by credit enhancement or other support provided by a foreign entity, then in providing the disclosures required, the filing also must describe any pertinent governmental, legal or regulatory or administrative matters and any pertinent tax matters, exchange controls, currency restrictions or other economic, fiscal, monetary or potential factors in the applicable home jurisdiction that could materially affect payments on, the performance of, or other matters relating to, the assets contained in the pool or the asset-backed securities.¹⁶¹ This disclosure should particularly address the material items and legal and regulatory or administrative factors discussed above.

We expect that at the time of filing, the registration statement will include fully developed disclosure clearly articulating the material aspects and effects of the applicable home jurisdiction legal and regulatory regime. In this regard, we also encourage pre-filing conferences with the staff where appropriate to discuss the applicable home jurisdiction legal and regulatory environment, the proposed transaction and the relevant disclosures that will be required.¹⁶²

As proposed, we also are not creating a different Exchange Act reporting structure for foreign ABS. We believe periodic disclosure of distribution and pool performance information, reports regarding servicing compliance (including the requirements regarding assessment and attestation of compliance with servicing criteria) and current disclosure of significant events are equally relevant and applicable for foreign ABS as they are for domestic ABS. Thus, like domestic ABS, foreign ABS will be required to report on Forms 10-D, 10-K and 8-K. In addition, ongoing disclosures will be required in Forms 10-D and 10-K, as proposed, regarding any material impact caused by foreign legal and regulatory developments during the period covered by the report which had not been previously described.

5. Exclusion from Exchange Act Rule 15c2-8(b) for Form S-3 ABS

Through a series of staff no-action letters dating back to 1995, broker-dealers, in connection with offerings of asset-backed securities eligible for registration on Form S-3, are not required under Exchange Act Rule 15c2-8(b) to deliver a copy of a preliminary prospectus to any person who is expected to receive a confirmation of sale at least 48 hours prior to the sending of such confirmation.¹⁶³ Without these no-action letters, most broker-dealers would be required to deliver a preliminary prospectus in ABS offerings because Rule 15c2-8(b) requires such delivery if the issuer has not previously been required to file reports with the Commission pursuant to Section 13(a)¹⁶⁴ or 15(d) of the Exchange Act. Most ABS issuers at the time of the ABS offering are not so required to report.

Given the more than eight years of experience with the staff no-action letters, we proposed codifying the basic concept in those letters as a formal exclusion from Exchange Act Rule 15c2-8(b).¹⁶⁵ However, we expressed concern in the Proposing Release with statements from investors in previous communications to the staff that a combination of factors, including the introduction of shelf registration for ABS, relief from Rule 15c2-8(b) and the ability to use term sheets and computational material, has reduced the amount of time and information investors have to make informed investment decisions.¹⁶⁶ We requested comment on these concerns.

Commenters were split on our proposal to codify the exclusion from Rule 15c2-8(b). Commenters representing primarily issuers and their representatives supported the codification of the existing staff positions and requested it be expanded to all ABS offerings, not just those eligible to use Form S-3.¹⁶⁷ One commenter noted that Rule 15c2-8(b) was originally designed to take into account new and speculative offerings.¹⁶⁸ Some of the commenters discounted concerns that investors do not have adequate information to make informed investment decisions. Also, one commenter believed most ABS investors are institutional investors and