Release No. 33-8518

Release No. 34-50905

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

ASSET-BACKED SECURITIES

Section III.C - Communications during the Offering Process

Table of Contents

III. Discussion of the Amendments

C. Communications during the Offering Process

1. ABS Informational and Computational Material

a. Current Requirements

As we explained in the Proposing Release, the Securities Act currently restricts the types of offering communications that a registrant or other parties subject to the Act’s provisions (such as underwriters) may use during a registered public offering.³⁷⁵ The nature of the restrictions depends on the period during which the communications are to occur. Before the registration statement is filed, all offers, in whatever form, are prohibited.³⁷⁶ Between the filing of the registration statement and its effectiveness, offers made in writing (including by e-mail or Internet), by radio or by television are limited to a “statutory prospectus” that conforms to the information requirements of Section 10 of the Securities Act.³⁷⁷ As a result, the only written material that is permitted in connection with the offering of the securities during this period is a preliminary prospectus meeting the requirements of Section 10, which must be filed with the Commission.³⁷⁸ Even after the registration statement is declared effective, offering participants may still make written offers only through a statutory prospectus, except that they may use additional written offering materials, if a final prospectus that meets the requirements of Section 10(a) of the Securities Act precedes or accompanies those materials.³⁷⁹

The structuring of various classes of ABS can be quite complex involving a detailed analysis of the asset pool and a complicated allocation of pool asset cash flows. These factors may vary from transaction to transaction. Given the important focus on tranching and pool characteristics, including potential cash flow patterns, sponsors or underwriters may wish to provide to potential investors computational materials and term sheets identifying the structure and underlying assets prior to finalizing the deal structure and printing the final prospectus. These materials may help investors understand the proposed transaction and analyze prepayment assumptions and other issues affecting yield and flow of funds. This information, which often includes detailed statistical and tabular data, would be impractical to provide orally. Historically, few investors had the computer resources to prepare these analytics themselves.

Following a series of staff no-action letters from the mid-1990’s, issuers of Form S-3 ABS have been permitted to use term sheets and computational material after the effectiveness of a registration statement but before availability and delivery of a final Section 10(a) prospectus.³⁸⁰ Under these no-action letters, three basic types of materials can be used: structural term sheets; collateral term sheets; and computational materials. Structural term sheets identify the proposed structure of the securities being offered, such as the parameters of the various types of classes offered. Collateral term sheets provide information regarding the proposed underlying assets. Computational materials contain statistical data displaying for a particular class of asset-backed securities the yield, average life, expected maturity, interest rate sensitivity, cash flow characteristics or other such information under specified prepayment, interest rate, loss or related scenarios.

All of the existing staff no-action letters contain filing requirements for the use of these materials, and provide that no confirmations of sale can be sent until the filing requirements are met. The filing requirements vary depending upon the type of material used and how it is used. Subject to various conditions, any collateral term sheet used before the final prospectus is delivered that represents a substantive change from a prior collateral term sheet must be filed on Form 8-K within two business days after first use and incorporated by reference into the registration statement for the offering.

Under slightly more complex conditions, structural term sheets and computational materials used before the final prospectus is available must be filed on Form 8-K prior to or with the filing of the final prospectus and incorporated by reference into the registration statement. If the materials are provided after the final prospectus is available but before it is delivered, they must be filed as soon as possible but not later than two business days after first use. Materials that relate to abandoned structures or that are furnished before the structure of the entire issue is finalized to investors which have not indicated their intention to purchase the ABS need not be filed.

Commenters confirmed our understanding that where they are used, term sheets and computational material often represent the primary, if not the only, written materials that currently are used to offer asset-backed securities.³⁸¹ As we stated in the Proposing Release, we also understand that advances in technology over the decade since the first no-action action letter was issued have raised several interpretive issues regarding the scope and application of the letters. For example, an increasing number of investors possess or have access to the analytical capacity to perform their own models and scenarios on pool data and therefore may request data at the individual pool asset level, or “loan level” data, instead of summarized charts and tables.³⁸² There had been some concern over whether the existing no-action letters would have permitted disclosure at this level of granularity. In addition, various third party services have developed over the past decade that allow issuers and underwriters to import collateral and structural data about a proposed transaction into a format that allows investors to conduct their own analytics and computations with self-selected assumptions and estimates in lieu of relying on underwriters to perform these functions for them. This had raised questions over what information should be filed with the Commission under the no-action letters where such services are used.

b. Exemptive Rule

We proposed to codify the concept in the staff no-action letters that permits the use of ABS informational and computational material after the effectiveness of a Form S-3 registration statement for an offering of asset-backed securities but before delivery of the final Section 10(a) prospectus. Commenters overall supported the proposals, although several commenters representing primarily issuers and their representatives requested several expansions beyond the existing no-action letter positions.³⁸³ For example, these commenters requested expanding the type of materials that may be used, expanding the ability to use materials to Form S-1 ABS offerings, allowing the use of materials before effectiveness of the registration statement and excluding underwriter-prepared material from filing and Securities Act liability requirements.

As discussed previously, we recently issued expansive proposals to revise the Securities Act regulatory process for all securities offerings.³⁸⁴ These proposals directly address matters such as the appropriate use, filing and liability requirements for communications during the offering process, including whether communications prepared by separate parties should be treated differently. As we indicated in the Proposing Release, requests for further relaxation of the communications restrictions in the ABS context raise broad issues that also are implicated by the proposals in the Offering Process Release. Given the current evaluation of these broader issues in that release, we do not think it would be appropriate at this time to make substantial changes to our proposed approach with respect to ABS communications. The existing staff no-action letters already permit ABS Form S-3 offerings to use significantly more material outside of the statutory prospectus than non-ABS Form S-3 offerings. We plan to address the issue of whether additional accommodations to the communications restrictions would be appropriate, including for ABS offerings, in connection with the Offering Process Release. Therefore, our approach here remains codifying the longstanding existing allowance for additional materials in the ABS context. We will evaluate the comments we received regarding ABS communications in connection with the Offering Process Release. We also encourage ABS market participants to comment specifically on the proposals in that release.

Accordingly, today we are adopting, as proposed, an exemption from Section 5(b)(1) of the Securities Act for the use of ABS informational and computational materials in offerings of Form S-3 ABS after the effectiveness of a registration statement but before delivery of the final Section 10(a) prospectus.³⁸⁵ As we stated in the Proposing Release, given the current use of these materials in providing an increased flow of information to investors, the flexibility to tailor materials to specifically identified investor needs, and the liability for false and misleading statements or omissions, we believe permitting the use of ABS informational and computational material for Form S-3 ABS during such period is appropriate in the public interest and consistent with the protection of investors under the conditions discussed below, including the filing conditions.³⁸⁶ However, as we stated in the Proposing Release and similar to our existing communications exemptions regarding business combination transactions, the rule makes clear that the exemption is not available to communications that may technically comply with the rule, but have the primary purpose or effect of conditioning the market for another transaction or are part of a plan or scheme to evade the requirements of Section 5 of the Securities Act.³⁸⁷

As proposed, the exemption continues to include filing requirements for such material and only will be available with respect to registered offerings of investment grade asset-backed securities that meet the requirements of General Instruction I.B.5 of Form S-3, which is consistent with the existing staff no-action letters. As discussed above, we do not believe it is appropriate at this time to either expand the exemption to additional offerings or alter the basic filing requirements under the letters, except as discussed below regarding consolidating those requirements, as proposed.

c. Definition of ABS Informational and Computational Material

We explained in the Proposing Release that there is an overlap in the existing no-action letters between the descriptions of structural term sheets, collateral term sheets and computational materials. There also are differences regarding which and how materials are to be filed depending on the type of materials used. These differences can create uncertainty as to when material must be filed given the overlapping descriptions.

We proposed consolidating the descriptions of the materials that may be used under a single definition of “ABS informational and computational material.” Although we were proposing to consolidate the descriptions, we specifically noted that we were not intending to change the scope of materials that may be used. Nevertheless, several commenters were concerned that the proposed consolidated definition could possibly be read as somehow more restrictive than the no-action letters and suggested revisions to more closely track the descriptions of such material in the existing no-action letters to avoid any confusion.³⁸⁸

We believe many of the examples provided by commenters of information used today were already covered by the proposed consolidated definition. However, in response to these comments and to clarify further that we are not intending to change current practice, we are revising the definition of “ABS informational and computational material” to more closely track the descriptions in the existing staff no-action letters. We also are adding several non-exclusive examples provided by commenters of information provided today that may not have been otherwise clear from the descriptions of the materials in the no-action letters, such as information on key parties to the transaction, to clarify the scope of materials that can be used. Finally, we are expanding the scope of the definition in response to comment to include certain basic factual information about the offering process.³⁸⁹

As a result, ABS informational and computational material will be defined as a written communication consisting solely of one or some combination of the following:

• Factual information regarding the asset-backed securities being offered and the structure and basic parameters of the securities, such as the number of classes, seniority, payment priorities, terms of payment, the tax, ERISA and other legal conclusions of counsel, and descriptive information relating to each class (e.g., principal amount, coupon, minimum denomination, anticipated price, yield, weighted average life, credit enhancements, anticipated ratings, and other similar information relating to the proposed structure of the offering);
  

• Factual information regarding the pool assets underlying the asset-backed securities,³⁹⁰ including origination, acquisition and pool selection criteria, information regarding any prefunding or revolving period applicable to the offering, information regarding significant obligors, data regarding the contractual and related characteristics of the underlying pool assets (e.g., weighted average coupon, weighted average maturity, delinquency and loss information and geographic distribution) and other factual information concerning the parameters of the asset pool appropriate to the nature of the underlying assets, such as the type of assets comprising the pool and the programs under which the loans were originated;
  

• Identification of key parties to the transaction, such as servicers, trustees, depositors, sponsors, originators and providers of credit enhancement or other support, including a brief description of each such party’s roles, responsibilities, background and experience;
  

• Static pool data, as discussed previously, such as for the sponsor’s and/or servicer’s portfolio, prior transactions or the asset pool itself;³⁹¹
  

• Statistical information displaying for a particular class of asset-backed securities the yield, average life, expected maturity, interest rate sensitivity, cash flow characteristics, total rate of return, option adjusted spread or other financial or statistical information relating to the class or classes under specified prepayment, interest rate, loss or other hypothetical scenarios. Examples of such information under the definition include:
   

  • Statistical results of interest rate sensitivity analyses regarding the impact on yield or other financial characteristics of a class of securities from changes in interest rates at one or more assumed prepayment speeds;
    

  • Statistical information showing the cash flows that would be associated with a particular class of asset-backed securities at a specified prepayment speed; and
    

  • Statistical information reflecting the financial impact of losses based on a variety of loss or default experience, prepayment, interest rate and related assumptions.
    

• The names of underwriters participating in the offering of the securities, and their additional roles, if any, within the underwriting syndicate;
  

• The anticipated schedule for the offering (including the approximate date upon which the proposed sale to the public will begin) and a description of marketing events (including the dates, times, locations and procedures for attending or otherwise accessing them); and
  

• A description of the procedures by which the underwriters will conduct the offering and the procedures for transactions in connection with the offering with an underwriter or participating dealer (including procedures regarding account-opening and submitting indications of interest and conditional offers to buy).

As we stated in the Proposing Release, the definition of ABS informational and computational material is intended to include existing structural term sheets, collateral term sheets and computational materials and also to clarify that several additional items are permitted, such as static pool data and basic information about the offering process. Consistent with the unified filing rule we are adopting for these materials discussed below, ABS informational and computational material may be used that includes one or more of these basic types of materials in one set of materials without concern over the characterization of the material or differing standards regarding when it must be filed.³⁹²

We also are reiterating several clarifications from the Proposing Release regarding the scope of the materials. First, and as noted above, some had been concerned whether the existing no-action letters would permit “loan level” information to be provided. We believe providing data at the individual pool asset level was already consistent with the no-action letters and is permitted under the exemptive rule. However, we again note, as we did in the Proposing Release, that in providing such detail issuers and underwriters should be mindful of any privacy, consumer protection or other regulatory requirements regarding the disclosure of individual information, such as including Social Security Numbers, especially given that in most cases the data must be publicly filed with the Commission.

Second, questions had arisen over what information should be considered ABS informational and computational material and filed with the Commission under the no-action letters, and by extension our exemptive rule, regarding investor analytics or other third party services that allow issuers and underwriters to import into a system or otherwise provide data regarding structure or underlying assets that investors can then use to conduct their own analytics and computations. As we stated in the Proposing Release, in the case of third party services, a particular relationship with the individual third party service may affect the analysis, such as whether the issuer or the underwriter are affiliates with the service provider or how the compensation is structured with the third party. Otherwise, if the investor analytics or third party service simply allow an investor to perform its own calculations based on collateral and structural inputs and models provided by the issuer or underwriter, only the inputs, models and other information provided by the issuer or underwriter would constitute ABS informational and computational material for purposes of the exemptive rule.³⁹³

Some also had questioned the format in which the material must be filed, as the third party service may employ a unique file format for the data inputs. Consistent with an allowance that already existed in the no-action letters and which will continue in the exemptive rule, discussed below, issuers and underwriters may aggregate data presented in ABS informational and computational material that are to be filed and file such data in consolidated form, so long as any such aggregation does not result in the omission of any information that should have been filed or makes the information misleading. As we stated in the Proposing Release, presentation of the information should be in an understandable form. While the preference is to file material using the same presentation used for investors, just as with other documents that contain computer instructions or formatting code, executable code used by a program to read the information is not to be filed.³⁹⁴ As is the case today, issuers and underwriters should contact the staff with any specific questions regarding the filing of particular materials.

d. Conditions for Use

As proposed, the final rule requires two conditions for ABS informational and computational material, both of which are consistent with the existing no-action letters:

• The communications shall be filed to the extent required under new Rule 426 (discussed in Section III.C.1.e.); and
  

• The communication shall include prominently on the cover page:
   

  • The issuing entity’s name and depositor’s name;
    

  • The Commission file number for the related registration statement;
    

  • A statement that the communication is ABS informational and computational material used in reliance on the exemptive rule; and
    

  • A legend that urges investors to read the relevant documents filed or to be filed with the Commission because they contain important information. The legend also shall explain to investors that they can get the documents for free at the Commission’s Web site and describe which documents are available free from the issuer or an underwriter.

As we stated in the Proposing Release, we are not conditioning use on providing additional legends from the no-action letters that the information contained in the material supercedes all prior ABS informational and computational material for the offering or will be superseded by the description of the offering contained in the Section 10(a) prospectus.³⁹⁵ Instead, the legend we are adopting is designed to alert investors of the documents filed or to be filed with the Commission. We also are not requiring the condition in the no-action letters that any required filings must be made before an Exchange Act Rule 10b-10 confirmation of sale may be sent.³⁹⁶ As we explained in the Proposing Release, the filing requirement discussed below is a separate condition under Commission rules, and thus conditioning the exemption on filing before sending of the Rule 10b-10 confirmation does not appear to be warranted as an additional incentive for filing.

We also explained in the Proposing Release that, in addition to the legends discussed above, some issuers and other users of these materials have been including legends or disclaimers in the materials that are inappropriate. As discussed more fully below, the materials are considered prospectuses and in many instances also must be filed with the Commission and incorporated by reference into the registration statement. Thus, as we stated in the Proposing Release, disclaimers of responsibility or liability that are not appropriate for a prospectus or registration statement also are not appropriate for these materials.

Examples of inappropriate legends or disclaimers that we identified include disclaimers regarding accuracy or completeness and statements requiring investors to read or acknowledge that they have read any disclaimers or legends or the registration statement.³⁹⁷ Language indicating that the communication is neither a prospectus nor an offer to sell or a solicitation or an offer to buy also is inappropriate. Finally, as the information in many instances must be publicly filed, statements that the information is privileged, confidential or otherwise restricted as to use or reliance are inappropriate.

Several commenters indicated that they wish to include additional legends in their materials and requested an instruction clarifying that the prescribed legend in the exemptive rule is not exclusive and other legends may be included.³⁹⁸ We do not believe such an instruction is necessary. However, some of the legends suggested by commenters also would be inappropriate. For example, as explained in the Offering Process Release, we interpret Section 12(a)(2) and Section 17(a)(2) as not taking into account information conveyed only after the date of sale, which includes the date of a contract for sale (e.g., the date of the investment decision). As such, it would be inappropriate to include a legend that information contained in ABS informational and computational material will be superceded or changed by the final prospectus, even if limited to the extent the information was included in the final prospectus, if the final prospectus is not delivered until after the date of the contract for sale.

Apart from the two conditions for the exemption, we also are clarifying, as proposed and consistent with a similar provision in our communications exemptions for business combination transactions,³⁹⁹ that the exemption for ABS informational and computational material is applicable not only to the offeror of the asset-backed securities, but also to any other party to the asset-backed securities transaction and any persons authorized to act on their behalf that may need to rely on and complies with the rule in communicating about the transaction. As we explained in the Proposing Release, this ensures that affiliates, underwriters, dealers and others acting on behalf of the parties to the transaction are permitted to rely on the exemption if necessary. While we realize that in many circumstances the exemptions will not be necessary for persons other than the parties to the transaction or the parties making the offer, we do not want to chill the appropriate free flow of the information where it would be helpful to investors and efficient capital formation.

We also are codifying as requested a provision in the existing no-action letters that failure by a particular underwriter to cause the filing of materials in connection with an offering will not affect the ability of any other underwriter who has complied with the procedures to rely on the exemption. While this position was mentioned in the text of the Proposing Release, several commenters wished to codify the provision to avoid any potential confusion.⁴⁰⁰ We are including it in the final rule as it appears in the existing no-action letters.

We are adding another provision in response to comment that currently exists in the communications exemptions for business combination transactions⁴⁰¹ that an immaterial or unintentional failure to file or delay in meeting the filing requirements will not result in a loss of protection under the exemption, so long as a good faith and reasonable effort was made to comply with the filing requirement and the material is filed as soon as practicable after discovery of the failure to file.⁴⁰² Several commenters believed that the absence of this provision in the existing no-action letters, which were issued before the communications exemptions for business combination transactions were adopted, has had a chilling effect on the use of materials due to concerns over filing errors and the harsh consequences of a potential Section 5 violation as a result.⁴⁰³ Commenters particularly stressed the need for such a provision if underwriter communications continue to be included in the filing requirements. As discussed in our adopting release for the business combination communication exemptions, this provision is similar to the good faith standard in Rule 508(a) of Regulation D.⁴⁰⁴ Although an immaterial or unintentional failure to file or delay in filing is a violation of the filing requirement, it will not render the exemption unavailable.

e. Filing Requirements

As noted above, there are multiple filing requirements under the staff no-action letters depending on the type of materials used and the circumstances in which they are used. As proposed, we are streamlining these requirements into a unified filing rule that applies regardless of the type of materials used. We believe a unified filing requirement will result in a more consistent approach and ease compliance without a significant drop in investor protection.

As proposed, under new Rule 426 the following ABS informational and computational material must be filed:

• If a prospective investor has indicated to the issuer or an underwriter that it will purchase all or a portion of the class of asset-backed securities to which such materials relate, all materials relating to such class that are or have been provided to such prospective investor;⁴⁰⁵ and
  

• For any other prospective investor, all materials provided to that prospective investor after the final terms have been established for all classes of the offering.

As under the existing no-action letters, these materials must be filed on Form 8-K (under new Item 6.01 of that Form), and thereby incorporated by reference into the registration statement, by the later of the due date for filing the final prospectus or two business days after first use.

The cover page of the Form 8-K must disclose the Commission file number of the related registration statement for the asset-backed securities. Consistent with the no-action letters, ABS informational and computational material that relate to abandoned structures or that are furnished to a prospective investor prior to the time the final terms have been established for all classes of the offering where such prospective investor has not indicated to the issuer or an underwriter its intention to purchase the asset-backed securities need not be filed.

The final rule clarifies, as did the letters and our proposal, that ABS informational and computational material that does not contain new or different information from that which was previously filed need not be filed. In addition, the issuer may aggregate data presented in ABS informational and computational material that are to be filed and file such data in consolidated form, so long as any such aggregation does not result in the omission of any information that should have been filed or makes the information misleading. Finally, the filing rule clarifies that certain communications allowed under other Commission rules, though they may technically fall into the definition of ABS informational and computational material, need not be filed under this filing rule, such as limited notices of the offering meeting the requirements of Securities Act Rules 134, 135 and 135c,⁴⁰⁶ Exchange Act Rule 10b-10⁴⁰⁷ confirmations, prospectuses filed under Securities Act Rule 424 and research reports relying on one of our safe harbors discussed below.⁴⁰⁸

Under the final rule, as was the case under the existing no-action letters, multiple ABS informational and computational material for an offering may need to be filed. For example, if an underwriter provides a set of materials to an investor, and the investor then asks for and the underwriter provides an additional set of materials with the same pool and structure but with different modeling assumptions (e.g., different expectations of future interest rates or prepayment speeds), then both sets of materials would need to be filed if the offering was completed with that same structure or the investor had indicated an intention to purchase. Similarly, if multiple investors requested different analytics on the same structure but with different assumptions, each set of materials would need to be filed under the same circumstances.

Consistent with the no-action letters and the Proposing Release, ABS informational and computational material are not being excluded from the definition of “offer,” “offer to sell,” “offer for sale” or “prospectus” under the Securities Act.⁴⁰⁹ We continue to believe the Securities Act standard of liability is appropriate for materials that are used to offer the asset-backed securities. The flexibility to use offering materials outside the statutory prospectus does not mean that the materials should not have liability as offering materials. Accordingly and as proposed, to the extent these communications constitute offers, they will continue to be subject to liability under Section 12(a)(2) of the Securities Act, as is the case today with oral offers and statutory prospectuses.⁴¹⁰ In addition, the final rule specifies, as proposed, that material used in reliance on the exemption will be considered “prospectuses” and thus subject to Section 12(a)(2) liability, even if not filed. Further, consistent with the existing no-action letters and our proposal, the materials that are filed on Form 8-K will be incorporated by reference into the registration statement, which is subject to liability under Section 11 of the Securities Act.

As we explained in the Proposing Release, the staff no-action letters were issued when electronic filing on EDGAR was still in its relative infancy. At that time, EDGAR only accepted submissions in ASCII format, and ABS market participants argued that data included in computational material, which could be extensive, were in formats that were impractical to convert into ASCII format for electronic filing. In response, we amended our EDGAR filing rules to exempt computational materials filed as an exhibit to Form 8-K from electronic filing.⁴¹¹ Instead, such materials can currently be filed in paper under cover of a Form SE.⁴¹²

We proposed eliminating the electronic filing exemption. There have been many advances to EDGAR since the original staff no-action letters. In particular, EDGAR now accepts HTML documents in addition to ASCII documents and also accepts filings made over the Internet. Even non-ABS registrants now routinely include detailed statistical and tabular data in their EDGAR filings.

Two commenters suggested delaying electronic filing until the ability to file material in additional formats, such as PDF, is allowed.⁴¹³ However, we continue to believe that even under the current system, the filing of ABS informational and computational material no longer needs an electronic filing exemption. As we stated in the Proposing Release, filing in paper form is of little practical use to investors as the material cannot be retrieved electronically. By treating these materials consistently with nearly all other material filed with the Commission, we seek to realize the same investor benefits and efficiencies in information transmission, dissemination, retrieval and analysis achieved since we began mandating EDGAR filing in 1993. Accordingly, as proposed, we are eliminating the electronic filing exemption.⁴¹⁴

2. Research Reports

a. Current Requirements

The publication or distribution by a broker or dealer of information, opinions or recommendations with respect to an issuer or its securities around the time of a registered offering can present issues under the communications restrictions of the Securities Act, especially if the broker is or will be a participant in the distribution of the securities.⁴¹⁵ In particular, such a report may constitute an offer to sell the securities and thus constitute an illegal offer if published or distributed before a registration statement is filed, or it may constitute an illegal written offer to sell securities that does not meet the information requirements of Section 10 of the Securities Act if published or distributed after the registration statement is filed.

To recognize the potential benefits of research reports while limiting their potential misuse to promote a securities offering, the Commission has previously issued Securities Act Rules 137, 138 and 139. These rules create safe harbors that describe circumstances under which brokers or dealers may publish or distribute research reports in and around a registered offering without fear of violating Section 5 of the Securities Act through making an illegal offer or using a non-conforming prospectus. The existing rules look to the broker’s participation in an offering, differences between the securities offered and those covered in the research report and the size and reporting history of the issuer.

As we explained in the Proposing Release, the conditions in those rules do not correspond well to ABS offerings. For example, several of the requirements in the research rules, particularly Rule 139, require issuer size and reporting history requirements, neither of which are applicable to most asset-backed securities.

In response, the staff of the Division of Corporation Finance issued a no-action letter in 1997 to provide a separate safe harbor for the publication of research reports by brokers or dealers in and around offerings of asset-backed securities registered or to be registered on Form S-3.⁴¹⁶ The no-action letter contained conditions for the safe harbor adapted from Rules 137, 138 and 139 and modified for ABS. We proposed codifying this safe harbor with several minor adjustments to add it to our existing research report safe harbors.

b. ABS Research Report Safe Harbor

Commenters were mixed about our proposal to codify the no-action letter. One commenter believed the 1997 no-action letter provides a workable compromise to address the issues discussed above.⁴¹⁷ However, this commenter and several others also suggested extending the proposal in several ways beyond the current no-action letter, such as extending the safe harbor to Form S-1 ABS, eliminating one or more of the letter’s conditions or suggesting alternative sets of conditions that would have the same practical effect of eliminating conditions in the letter.⁴¹⁸

However, another commenter objected to codifying the no-action letter and instead urged a 30-day quiet period on research for ABS offerings.⁴¹⁹ This commenter believed permitting research during this period is unlikely to provide any benefits to the institutional investors which make up most of the market but could have a harmful impact if retail investors take a more active role. The commenter also thought permitting research could lead to structures designated as ABS but that are, in effect, equity securities to avoid other research rules.

After evaluating these comments, we are adopting the safe harbor along the lines of the existing no-action letter as proposed.⁴²⁰ We are not persuaded that one or more of the existing conditions in the no-action letter should be relaxed to expand the safe harbor beyond its current contours. The reasons expressed for the expansions do not sufficiently relate to whether the proposed research is separate enough from offering material such that it should be excluded from the definition of “offer” in its entirety.

In addition, consistent with our proposal and the existing no-action letter, the safe harbor will be available only with respect to ABS offerings registered on Form S-3. That is, it is only available with respect to offerings of investment grade asset-backed securities that meet the requirements of General Instruction I.B.5 of Form S-3. Similar to our rules for ABS informational and computational material and existing Rule 139, we believe offerings of securities meeting the requirements for Form S-3 registration represent the appropriate categories of offerings for the safe harbor.

Under the safe harbor, the publication or distribution by a broker or dealer of a research report with respect to investment grade asset-backed securities meeting the criteria of General Instruction I.B.5 of Form S-3 will not be deemed to constitute an offer for sale or offer to sell such asset-backed securities registered or proposed to be registered, even if the broker or dealer is or will be a participant in the registered offering, if the following conditions are met:⁴²¹

• The broker or dealer shall have previously published or distributed with reasonable regularity information, opinions or recommendations relating to Form S-3 ABS backed directly (or, with respect to securitizations of other securities, indirectly) by substantially similar collateral as that directly or indirectly backing Form S-3 ABS that is the subject of the information, opinion or recommendation that is proposed to be published or distributed.
  

• If the securities for the registered offering are proposed to be offered, offered or part of an unsold allotment or subscription, the information, opinion or recommendation shall not:
   

  • Identify those securities;
    

  • Give greater prominence to specific structural or collateral-related attributes of those securities than it gives to the same attributes of other ABS that it mentions;⁴²² or
    

  • Contain any ABS informational and computational material relating to those securities.

  
  

• If the material identifies specific ABS of a specific issuer and specifically recommends that such ABS be purchased, sold or held by persons receiving such material, then a recommendation as favorable or more favorable as to such ABS shall have been published by the broker or dealer in the last publication of such broker or dealer addressing such ABS prior to the commencement of its participation in the distribution of the securities whose offering is being registered.
  

• Sufficient information is available from one or more public sources to provide a reasonable basis for the view expressed by the broker or dealer with respect to the ABS that are the subject of the information, opinion or recommendation.
  

• If the material published by the broker or dealer identifies other ABS backed directly or indirectly by substantially similar collateral as that directly or indirectly backing the securities whose offering is being registered and specifically recommends that such ABS be preferred over other ABS backed by different types of collateral, then the material shall explain in reasonable detail the reasons for such preference.

As proposed, not included in the list is a condition in the existing no-action letter that the research material must refer as required by law or applicable rules to any relationship that may exist between the issuer of the information, opinion or recommendation and any participant of the offering. A footnote in the incoming request for the no-action letter stated that the condition “contemplates statutory provisions such as Section 17(b) of the [Securities] Act or relevant SRO standards requiring disclosure of possible sources of bias.” As we explained in the Proposing Release, because these types of disclosures already are themselves separate regulatory requirements, we do not believe this additional condition is necessary for the safe harbor. Further, no similar condition exists in Rules 137, 138 or 139 even though the situation is analogous. However, our decision not to retain this condition to the safe harbor does not affect any other requirement that would require disclosure of such relationships.

As part of the Offering Process Release, we proposed revisions to the existing research report safe harbors of Rules 137, 138 and 139.⁴²³ To the extent these existing safe harbors are modified, we also will consider similar modifications to the ABS safe harbor. We also encourage ABS market participants to comment specifically on the proposals in that release regarding any appropriate changes to the existing safe harbors or the ABS safe harbor.

3. Other Communications during the Offering Process

In response to a request for comment, several commenters recommended revising Securities Act Rule 134⁴²⁴ to provide additional items for purposes of ABS offerings.⁴²⁵ Rule 134 deems certain limited communications announcing an offering (often called “tombstone” announcements) not a prospectus so long as the communication is limited to the items specified in that rule. In the Offering Process Release, we proposed several expansions to Rule 134 that would address in part these commenters’ requests. Some of the remaining items requested by commenters may be beyond the proper scope of Rule 134.⁴²⁶ As we stated in the Offering Process Release, we have not proposed to amend Rule 134 in a manner that would permit detailed term sheets for offerings under the rule, which is consistent with Rule 134 for offerings generally. We encourage ABS market participants to comment specifically on the proposals in that release. In the meantime, we note that the scope of the detailed items requested by commenters for Rule 134 are generally subsumed already within the scope of permitted ABS informational and computational material.

Finally, one commenter requested clarification regarding issuer or underwriter involvement with pre-sale reports by rating agencies.⁴²⁷ Whether information prepared and distributed by third parties that are not offering participants is attributable to an issuer or underwriter depends upon whether the issuer or underwriter has involved itself in the preparation of the information or explicitly or implicitly endorsed or approved the information. The courts and we have referred to the first line of inquiry as the "entanglement" theory and the second as the "adoption" theory.⁴²⁸ We think these theories are equally applicable with respect to ABS issuer or underwriter involvement regarding rating agency pre-sale reports. For example, if an issuer or underwriter distributed the pre-sale report in connection with an offering of the securities, it would be appropriate to conclude that such party has adopted that report and should be liable for its contents. Liability under the "entanglement" theory depends upon the level of pre-publication involvement in the preparation of the information.

³⁷⁵ See Section 5 of the Securities Act (15 U.S.C. 77e). For more information on the background and current operation of Securities Act communication requirements, as well as our recent proposals in this area, see the Offering Process Release.

³⁷⁶ See Section 5(c) of the Securities Act (15 U.S.C. 77e(c)).

³⁷⁷ 15 U.S.C. 77j. See Section 5(b)(1) of the Securities Act (15 U.S.C. 77e(b)(1)).

³⁷⁸ Oral offers are allowed during this period and do not have to satisfy the informational requirements of Section 10. See note 375 above.

³⁷⁹ 15 U.S.C. 77j(a). See Section 2(a)(10) (15 U.S.C. 77b(a)(10)) and Section 5(b)(1) of the Securities Act.

³⁸⁰ See note 34 above.

³⁸¹ See, e.g., Letter of ABA.

³⁸² See, e.g., “Investors Gain Clout, Urge Specifics,” Asset-Backed Alert, Jun. 6, 2003.

³⁸³ See, e.g., Letters of ABA; ASF; BMA; FSR; and NYCBA.

³⁸⁴ See note 33 above.

³⁸⁵ See Securities Act Rule 167. Similar to our existing rules that allow communications in business combination transactions outside of the Section 10 prospectus, for ABS informational and computational material we are adopting a general Securities Act Rule that sets forth the basic exemption and its conditions (Securities Act Rule 167) and a rule under Regulation C (17 CFR 230.401 through 230.498) that sets forth the filing requirements for such communications (Securities Act Rule 426). For more on our exemptive rules in the business combination context, see Release No. 33-7760 (Oct. 22, 1999) [64 FR 61408].

³⁸⁶ As is the case under the existing no-action letters, such material can be used regardless of whether a preliminary prospectus is prepared and used.

³⁸⁷ For similar provisions, see Securities Act Rules 165 and 166 (17 CFR 230.165 and 17 CFR 230.166). We also proposed similar provisions in the Offering Process Release.

³⁸⁸ See, e.g., Letters of ABA; ASF; BMA; CMSA; FSR; and NYCBA.

³⁸⁹ Note we also proposed to add these items to Rule 134 in the Offering Process Release.

³⁹⁰ We note this may include graphical material regarding the pool assets, such as photographs, maps and site plans in CMBS transactions.

³⁹¹ Such information could be provided through a Web site address for inclusion in the ABS informational and computational material under the same conditions specified in Section III.B.4.bESF>. In addition, disclosure required by Item 1105(e) of Regulation AB is to be provided in ABS informational and computational material, if applicable.

³⁹² As a result, the definition subsumes the concept of “Series Term Sheets” addressed in the Greenwood Trust Company no-action letter where a Series Term Sheet was defined as a combined collateral and structural term sheet. See note 34 above.

³⁹³ Any subsequent modification or updates to the information provided by the issuer or an underwriter would be considered new ABS informational and computational material no different than if a separate set of materials were prepared. As was the case under the no-action letters, under the final rule, data presented in ABS informational and computational material that are to be filed may be aggregated and filed in consolidated form, so long as any such aggregation does not result in the omission of any information that should have been filed or makes the information misleading.

³⁹⁴ See, e.g., Rule 106 of Regulation S-T (17 CFR 232.106).

³⁹⁵ As we stated in the Proposing Release, one of the reasons such statements do not appear applicable is that not all of the information—particularly the computational material—is included or updated in subsequent materials or the final prospectus. In addition, and as discussed subsequently in the text, there are additional problems with such statements. For more information, see the Offering Process Release.

³⁹⁶ See 17 CFR 240.10b-10.

³⁹⁷ Such disclaimers of responsibility by the issuer are also inappropriate.

³⁹⁸ See, e.g., Letters of ASF; BMA; and FSR.

³⁹⁹ See, e.g., Securities Act Rule 165(d) (17 CFR 230.165(d)).

⁴⁰⁰ See, e.g., Letters of ABA; ASF; FSR; and NYCBA.

⁴⁰¹ See, e.g., Securities Act Rule 165(e) (17 CFR 230.165(e)).

⁴⁰² A similar provision has been proposed in connection with written communications in the Offering Process Release.

⁴⁰³ See, e.g., Letters of ABA and ASF.

⁴⁰⁴ 17 CFR 230.508(a).

⁴⁰⁵ This provision applies regardless of whether the indication to purchase is given before or after the final terms have been established for all classes of the offering.

⁴⁰⁶ 17 CFR 230.134; 17 CFR 230.135; and 17 CFR 230.135c.

⁴⁰⁷ 17 CFR 240.10b-10.

⁴⁰⁸ Similar clarifying provisions exist in our existing communications exemptions for business combination transactions.

⁴⁰⁹ See 15 U.S.C. 77b(a)(3) and 15 U.S.C. 77b(a)(10).

⁴¹⁰ 15 U.S.C. 77l(a)(2). Such information also will remain subject to the general antifraud provisions of the Securities Act and Exchange Act. See Section 17(a) of the Securities Act; Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5.

⁴¹¹ See Rule 311(j) of Regulation S-T (17 CFR 232.311(j)).

⁴¹² 17 CFR 239.64.

⁴¹³ See, e.g., Letters of ASF and BMA.

⁴¹⁴ As electronically filed documents, ABS informational and computational material are eligible for any applicable hardship exemptions similar to other filings that must be made electronically, such as the temporary hardship exemption in Rule 201 of Regulation S-T (17 CFR 232.201). However, the practice that existed prior to adoption of the electronic filing exemption in Rule 311(j) of Regulation S-T of seeking a continued hardship exemption for the filing of these materials is not appropriate except in the rarest of circumstances. See Rule 202 of Regulation S-T (17 CFR 232.202). We do not believe that the routine filing of such material qualifies for a continued hardship exemption.

⁴¹⁵ For more information about research reports and recent Commission proposals in this area, see the Offering Process Release. The Commission’s existing Securities Act safe harbors in this area (Rules 137, 138 and 139) refer to the publication by a broker or dealer of information, an opinion or a recommendation with respect to a registrant’s securities or in some instances the registrant itself. For sake of simplicity, we refer to these publications in this release as “research reports.” By using this convention, we do not mean necessarily to encompass in this release the separate definition of “research report” in Section 15D of the Exchange Act (15 U.S.C. 78o-6) added by the Sarbanes-Oxley Act. Nor does our new safe harbor in new Rule 139a affect in any way the applicability of that Section, any of our other rules with respect to research reports or any applicable SRO rules or other requirements regarding research reports. For more information, again see the Offering Process Release.

⁴¹⁶ See note 35 above.

⁴¹⁷ See Letter of ABA.

⁴¹⁸ See, e.g., Letters of ABA; ASF; BMA; and NYCBA.

⁴¹⁹ See Letter of CFAI.

⁴²⁰ See Securities Act Rule 139a. As we noted in the Proposing Release, the safe harbor is a non-exclusive safe-harbor the same as existing Rules 137, 138 and 139. In addition, each of the existing safe harbors in Rules 137, 138 and 139 remain available with respect to asset-backed securities if the conditions for the particular safe harbor are met.

⁴²¹ Consistent with the existing no-action letter, in the case of a multi-tranche registered offering of asset-backed securities, each tranche is to be treated as a different security.

⁴²² Consistent with the staff no-action letter, this condition does not by itself prevent the dissemination of research material that focuses on a single topic (e.g., a single collateral attribute, asset type (but not a particular obligor), structural attribute or market sector).

⁴²³ For example, we proposed to remove a similar prohibition in existing Rule 139 on a broker or dealer making a more favorable recommendation than the one it made in the last publication.

⁴²⁴ 17 CFR 230.134.

⁴²⁵ See, e.g., Letters of ABA; ASF; BMA; and FSR.

⁴²⁶ E.g., more detailed class or pool level information, even if on a summary characteristic basis, such as LTV ratio, weighted average FICO, grace and forbearance percentages, delinquencies, losses and asset concentrations.

⁴²⁷ See Letter of ABA.

⁴²⁸ For a fuller discussion of these theories, see Release No. 33-7856 (Apr. 28, 2000) [65 FR 24843], at fn. 48 and accompanying text.