Release No. 33-8518

Release No. 34-50905

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

ASSET-BACKED SECURITIES

Section III.D - Ongoing Reporting under the Exchange Act

Table of Contents

III. Discussion of the Amendments

D. Ongoing Reporting under the Exchange Act

1. Current Requirements

As discussed previously, post-issuance reporting regarding an asset-backed security is important to monitoring and understanding the performance of both the asset pool and transaction parties.⁴²⁹ Issuers of asset-backed securities are not exempt from Exchange Act reporting requirements. In particular, if asset-backed securities are to be listed on a national securities exchange, they must be registered pursuant to Section 12 of the Exchange Act⁴³⁰ and file reports pursuant to Section 13(a) of the Exchange Act.⁴³¹ Even without a listing, an offering of asset-backed securities pursuant to an effective Securities Act registration statement triggers a reporting obligation under Section 15(d) of the Exchange Act with respect to those securities, at least for a period of time. This obligation automatically suspends as to any fiscal year, other than the fiscal year within which the registration statement became effective, if, at the beginning of such fiscal year, the securities of each class to which the registration statement relates are held of record by less than 300 persons.⁴³²

As most asset-backed securities are not presently listed and are held by less than three hundred record holders, most publicly offered asset-backed securities cease reporting with the Commission once they qualify for the automatic suspension. In the context of shelf registration statements where a new issuing entity is used for the issuance of each separate series of securities, a new reporting obligation is incurred with respect to those securities. Reporting regarding the asset-backed securities by that issuing entity may suspend if those securities subsequently meet the requirements of Section 15(d) of the Exchange Act (e.g., held of record by less than 300 persons at the beginning of any fiscal year other than the fiscal year in which the takedown occurred), notwithstanding that separate issuing entities of the same sponsor may issue additional asset-backed securities during the fiscal year.

Regardless of an ability to suspend reporting under the Exchange Act, ABS transaction agreements often require continued reporting of information to security holders. More and more issuers also are making such information available through their Web sites, although some still require registration and pre-approval before permitting access to such important information. Third party services continue to evolve to provide post-issuance performance data, although again such services often charge a fee and coverage may not be uniform.

Even though asset-backed securities are subject to an Exchange Act reporting obligation, the type and frequency of disclosure required under the Exchange Act with respect to operating companies generally is not relevant with respect to asset-backed securities. As a result, issuers of asset-backed securities have requested and received, first through Commission exemptive orders under the Exchange Act and later through scores of staff no-action letters, permission to modify the reports they may file to fulfill their reporting obligation.⁴³³

Under the modified reporting system, in lieu of quarterly reports on Form 10-Q, reports on Form 8-K typically are filed based on the frequency of distributions on the asset-backed securities (predominantly monthly), which in turn generally match the payment frequency of the underlying pool assets. These filings include a copy of the servicing or distribution report required by the ABS transaction agreements that contains unaudited information about the performance of the assets, payments on the asset-backed securities and any other material developments that affect the transaction. It also is a longstanding requirement under the modified reporting system that disclosure that otherwise would be required by certain items of Form 10-Q, such as legal proceedings, material uncured defaults and matters submitted to a vote of security holders, also are required for the Form 8-K distribution report for the period in which such events occurred. In addition to these “periodic” filings on Form 8-K, current reports on Form 8-K also are required, but only for a narrow list of events. Insider reporting under Section 16 also is generally not required.

An annual report on Form 10-K is still required, but the information required is reduced and modified. Audited financial statements for the issuing entity are not generally required. In lieu of audited financial statements, the ABS issuer must file as exhibits to the Form 10-K a servicer compliance statement and a reporting by an independent public accountant. The servicer compliance statement addresses compliance by the servicer with its obligations under the servicing agreement for the reporting period. The accountant’s report generally relates to the report required under the transaction agreements from an independent public accountant attesting to an assertion of compliance regarding particular servicing criteria.

As a result of implementation of the Sarbanes-Oxley Act, and in consideration of the existing requirement in the modified reporting system for an accountant attestation as to an assertion of compliance with servicing criteria, the Commission exempted asset-backed issuers from the reporting requirements regarding internal control over financial reporting.⁴³⁴ However, asset-backed issuers must include a certification required by Section 302 of that Act with their annual report on Form 10-K. In a staff statement originally published on August 29, 2002 and subsequently revised on February 21, 2003, the staff provided a tailored form of certification for use with ABS annual reports to address the realities of their structure as well as to address the information included in their reports under the modified reporting system.⁴³⁵ In addition, the staff statement provided alternatives with respect to who can sign the certification given the lack of a traditional CEO or CFO. Under the staff statement, a designated officer of the depositor, servicer or trustee may sign the certification, and alternate language for the certification is permitted depending on which entity’s officer is making the certification.

Commenters supported our proposal to codify the basic modified reporting system for asset-backed securities.⁴³⁶ We describe the final rules and forms with respect to the system, as modified in response to comment, in more detail below. In addition and as noted in Section III.A.4., we are not creating a separate Exchange Act reporting system for foreign ABS. As a result, foreign ABS will report on Forms 10-K, 10-D and 8-K, the same as domestic ABS. Commenters also supported this approach.⁴³⁷

2. Determining the “Issuer” and Operation of the Section 15(d) Reporting Obligation

First, we are adopting our proposed definition of “issuer” with respect to the reporting obligation and the nature and operation of the Section 15(d) reporting obligation with respect to asset-backed securities. The relevant aspects of the statutory definition of “issuer” under the Exchange Act are identical to the Securities Act definition.⁴³⁸ Accordingly, we are adopting a corollary Exchange Act rule for clarifying the definition of “issuer” for ABS similar to our new rule discussed in Section III.A.3.d. regarding the Securities Act. In particular, the Exchange Act rule clarifies 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.⁴³⁹ Like our similar definition for the Securities Act, the Exchange Act definition specifies that the person acting in its capacity as 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. For example, the depositor for a particular issuing entity created for the first takedown under a shelf registration statement will be deemed to be a different “issuer” than that depositor acting as depositor for a subsequent issuing entity created for a subsequent takedown under the same registration statement.⁴⁴⁰ Like our Securities Act rule, our Exchange Act rule will apply regardless of the issuing entity’s form of organization.

This approach addresses the reality of ABS offerings that offerings by different issuing entities registered on the same shelf registration statement are not related. Furthermore, it places responsibility for Exchange Act reporting with the party most able to oversee the reporting requirements. Finally, this approach differentiates reporting with respect to each issuing entity, and thus each ABS transaction, and does not require continuous reporting with respect to transactions that would otherwise be able to suspend reporting.

Consistent with this new definition, we are identifying who must sign Exchange Act reports. The particular signature requirements for each Exchange Act report are discussed below in connection with the discussions of the requirements for each report. However, our basic principle remains the same as in the Proposing Release that the depositor is to sign Exchange Act reports, although an authorized representative of the servicer will be permitted to sign on behalf of the issuing entity as an alternative.

As discussed in more detail in the next section, a takedown of asset-backed securities by a new issuing entity triggers a new reporting obligation under Exchange Act Section 15(d). Separate EDGAR access codes need to be established for the new issuing entity created at the time of each takedown to ensure that Exchange Act reports related to these ABS are filed under a separate file number from other ABS or from the depositor’s or sponsor’s own securities. As proposed and consistent with longstanding staff and prevalent industry practice, issuers should not “combine” reporting regarding multiple transactions in one report or with a report for the depositor’s or sponsor’s own securities.

In addition to clarifying who is the “issuer,” we are clarifying, as proposed, several interpretive positions regarding the operation of the Section 15(d) reporting obligation with respect to asset-backed securities, which commenters supported.⁴⁴¹ The first position relates to the time when any reporting obligation begins. Where an aggregate amount of asset-backed securities to be offered on a delayed basis is registered on Form S-3, until the first takedown of securities under the registration statement, there is no asset pool or securities to report about and no Exchange Act reporting requirement. It is only when the first takedown occurs and ABS are issued that ongoing reporting becomes relevant. Accordingly, we are codifying the longstanding interpretive position that no annual or other reports need be filed pursuant to Section 15(d) for ABS until the first bona fide sale in a takedown of securities under the registration statement.⁴⁴² For example, if an ABS Form S-3 shelf registration statement was declared effective on October 1, 2004 but no takedown occurred until February 1, 2005, no reports will need to be filed until after the first takedown. The first reporting obligation is triggered by the first takedown of asset-backed securities.⁴⁴³

We also are codifying the current position that the starting and suspension dates for any reporting obligation with respect to a takedown of asset-backed securities is determined separately for each takedown.⁴⁴⁴ For example, if takedowns involving different issuing entities occurred in 2004 and 2005, the reporting obligation related to the issuing entity created with respect to the 2004 takedown is separate from the reporting obligation related to a different issuing entity created with respect to the 2005 takedown. If at the beginning of the 2005 fiscal year the securities in the 2004 takedown were held of record by less than 300 holders, the reporting obligation related to the issuing entity for the 2004 takedown will be suspended.⁴⁴⁵ Of course, the suspension of that reporting obligation has no effect on any separate reporting obligation related to the issuing entity with respect to the 2005 takedown or related to issuing entities created with respect to any other takedown.

We requested comment on whether the ability to suspend reporting under Section 15(d) should be revisited. For example, we requested comment on whether it should be a condition or required undertaking for registration statement form eligibility or for any of our other proposals that Exchange Act reporting must continue for the life of the security. One commenter primarily representing investors recommended conditioning ABS shelf registration upon an issuer agreeing either to continue filing reports under Section 15(d) or to make publicly available on their Web sites copies of reports that contain the information required by proposed Form 10-D.⁴⁴⁶ Under the current system, the commenter argued, most investors remain dependent on sponsors voluntarily providing ongoing disclosures after the Section 15(d) suspension, and some issuers refuse to issue ongoing disclosures after their Exchange Act reporting obligation has been suspended.

Many other commenters did not believe the ability to suspend the Section 15(d) reporting obligation should be revised.⁴⁴⁷ These commenters generally argued that there is no reason to treat ABS issuers differently from other securities that can suspend reporting under Section 15(d). In addition, such a change would be costly and the commenters believed ABS investors, which are mostly institutional, already have sufficient access to information through proprietary and third party Web sites.

We are not at this time revisiting the statutory framework of Section 15(d) regarding the suspension of reporting obligations. Modifying the obligation would raise broad issues regarding the treatment of other non-ABS issuers that do not have public common equity. However, the concerns raised by investors do confirm the importance to investors of post-issuance reporting of information regarding an ABS transaction in understanding transaction performance and in making ongoing investment decisions.

Finally, we are adopting a separate rule, as proposed, to address the separate Section 15(d) reporting obligation that may be involved in ABS transactions where the issuing entity holds a pool asset that represents the interest in or the right to the payments or cash flows of another asset pool.⁴⁴⁸ As discussed in Section III.A., some credit card and auto lease ABS transactions are structured such that the issuing entity’s asset pool consists of one or more of such intermediate financial assets. For example, in an issuance trust structure, the asset pool of the issuing entity for the ABS consists of a collateral certificate representing an interest in the asset pool of the credit card master trust. In many instances, the deposit of the collateral certificate into the issuing entity’s asset pool must be separately registered along with the registration of the offering of the issuing entity’s asset-backed securities, thereby triggering a separate reporting obligation under Section 15(d) with respect to the collateral certificate.

Recognizing that these structures are designed solely to facilitate the structuring of the transaction, separate reports regarding the intermediate financial asset would provide no additional information to investors. Accordingly, we are providing that no separate annual and other reports need be filed with respect to the intermediate financial asset’s reporting obligation, if the following conditions are met:⁴⁴⁹

• Both the issuing entity for the asset-backed securities and the entity that issued the financial asset were established under the direction of the same sponsor and depositor;
   

• The financial asset was created solely to satisfy legal requirements or otherwise facilitate the structuring of the ABS transaction;
   

• The financial asset is not part of a scheme to avoid registration or reporting requirements of the Act;
   

• The financial asset is held by the issuing entity and is a part of the asset pool for the asset-backed securities; and
   

• The offering of the asset-backed securities and the offering of the financial asset were both registered under the Securities Act.

As proposed, the new rule does not affect any reporting obligation applicable with respect to the asset-backed securities, nor does it affect any obligation to provide information regarding the financial asset or the underlying asset pool in the ABS reports.⁴⁵⁰

3. Reporting on EDGAR

Registration statements and annual and other periodic and current reports are filed in electronic format on EDGAR.⁴⁵¹ As proposed, we are not fundamentally changing how documents regarding asset-backed securities are to be filed on EDGAR. However, there have been and continue to be inconsistencies by ABS issuers with respect to filing of registration statements and reports on EDGAR, thus making it difficult and time-consuming for investors and others to locate documents related to particular asset-backed securities. As such, we are reiterating the following guidance from the Proposing Release on how to submit documents on EDGAR that will enable investors and others to locate material information about particular asset-backed securities more efficiently.

This guidance clarifies existing practice regarding how documents are to be submitted on EDGAR. In addition, we are planning programming changes to the EDGAR system to permit the generation of new EDGAR access codes for an issuing entity before the Securities Act Rule 424(b) prospectus is filed. We believe such changes should significantly reduce some of the technical and compliance issues involved in establishing new transactions under the EDGAR system. We or the staff will issue additional instructive guidance once these programming changes are made to update and clarify further EDGAR reporting processes for ABS.

Under our EDGAR system, each entity that makes an EDGAR submission is assigned a Central Index Key code, or “CIK” code. For submissions to appear under the correct entity, the correct CIK code must be included in the EDGAR submission header.

Because typically no issuing entity exists at the time of filing, the depositor initially submits the registration statement registering the offering of an aggregate amount of asset-backed securities on EDGAR under its own CIK code. With each takedown of asset-backed securities by a new entity off the registration statement, a new reporting obligation under Exchange Act Section 15(d) is created. The EDGAR system will automatically generate a new CIK code and an Exchange Act reporting file number for the new entity when the depositor includes a “serial” tag in the header of the prospectus filed under Securities Act Rule 424(b) to report the takedown.⁴⁵² The depositor must include the complete name of the new entity as part of the serial tag.⁴⁵³ Subsequent takedowns from the same registration statement that create new reporting entities should follow the same approach for obtaining separate CIK codes and file numbers through serial tags.⁴⁵⁴

When these procedures are followed, the Rule 424(b) prospectus will appear under both the depositor’s and the new issuing entity’s CIK codes. The issuer in its capacity as depositor for newly created entities should prepare separate annual, periodic and other reports for each issuing entity and file such reports under the separate CIK code for each issuing entity.⁴⁵⁵ To make these subsequent filings under the newly created issuing entities, the sponsor will have to obtain additional access codes by creating and submitting Form IDs to the SEC using the SEC’s Web site.

As we explained in the Proposing Release, the creation of new issuing entities by identifying the serial tag in the Rule 424 filing header effectively identifies the reporting obligation of the depositor from that of the new entities. While not all commenters agreed,⁴⁵⁶ we continue to believe that filing separate annual, periodic and other reports for each issuing entity provides easier access to information on a particular issuing entity and its asset-backed securities, which increases transparency of such information for investors as well as the market for these securities. Also, submitting separate Exchange Act reports under the issuing entity’s CIK code will facilitate tracking of the respective issuing entity’s reporting obligation, as well as when such reporting obligation may be suspended under Section 15(d) of the Exchange Act, if applicable.

Conversely, we continue to believe that providing required information for multiple issuing entities in a “combined” annual or periodic report containing information regarding multiple issuing entities of a single sponsor or depositor is inconsistent with these objectives.⁴⁵⁷ Combined reporting contributes to confusion on the part of investors attempting to locate a report on EDGAR relating to the securities that are relevant to that investor. Combined reporting forces investors and other users to wade through superfluous information in order to retrieve information that is relevant to them. Further, combined reports create inefficiencies in the storage, retrieval, and analysis of information on EDGAR, which impedes market access and staff review.

4. Distribution Reports on Form 10-D

a. New Form 10-D and Deadline for Filing

Under the modified reporting system, periodic distribution and pool performance information is generally filed on Form 8-K in lieu of filing quarterly reports on Form 10-Q. However, investors are not able to easily distinguish these Form 8-K reports from other reporting on Form 8-K, such as the reporting of extraordinary events or the filing of transaction agreements.

Form 8-K is not designed to be a report filed on a periodic basis. Accordingly, we are adopting our proposal for one new form type for asset-backed securities, Form 10-D, to act as the report for the periodic distribution and pool performance information.⁴⁵⁸ Commenters supported a new form type for such reports.⁴⁵⁹ Under the final rule, every asset-backed issuer subject to Exchange Act reporting requirements will be required to make such reports on Form 10-D.⁴⁶⁰

Consistent with our proposal and the existing modified reporting system, these reports will be required to be filed within 15 days after each required distribution date on the asset-backed securities, as specified in the governing documents for such securities. Commenters generally supported codifying the existing deadline.⁴⁶¹ As proposed, a report will be required regardless of whether the required distribution was actually made or whether a distribution report was in fact prepared or delivered under the governing documents.

We also are providing the ability to obtain a five calendar day filing extension under Exchange Act Rule 12b-25 for Form 10-D filings, similar to the process available today for Form 10-Q filings by non-ABS issuers.⁴⁶² Commenters supported extending Rule 12b-25 to Form 10-D filings, particularly if we continued an approach that linked Exchange Act reporting compliance with Form S-3 eligibility requirements.⁴⁶³ Under Rule 12b-25, the issuer must file a Form 12b-25 no later than one business day after the due date for the Form 10-D filing if all or any portion of the Form 10-D report is not filed in a timely manner. To obtain the filing extension, the Form 12b-25 must contain certain representations by the registrant, including why the inability to file timely could not be eliminated without unreasonable effort or expense and that the subject Form 10-D filing will be made not later than the fifth calendar day following its original due date. The related Form 10-D filing must then be made not later than five calendar days after its original due date.⁴⁶⁴ If the issuer timely provides the proper notice on Form 12b-25 filing and subsequently makes the related Form 10-D filing within the required five calendar day period, the Form 10-D filing will be deemed to be filed on its original due date, including for purposes of Form S-3 eligibility.⁴⁶⁵

b. Signatures

As we stated in the Proposing Release, it is our understanding that in many ABS transactions, the trustee is the recipient and not necessarily the preparer of the Form 10-D information, and the depositor or the servicer is thus in a better position with respect to possession, responsibility and awareness of the information that would need to be reported. Our proposed signature requirements for Form 10-D reflected this understanding by proposing that the report must be signed by either the depositor, or in the alternative, on behalf of the issuing entity by a duly authorized representative of the servicer (or master servicer if multiple servicers were involved). We did not propose to permit the trustee to sign the report as an alternative to the depositor or the servicer.

Commenters were mixed on these proposals. While some commenters supported the proposals,⁴⁶⁶ others believed additional parties should be able to sign, including the trustee.⁴⁶⁷ Some of these commenters believed any party should be permitted to sign an Exchange Act report for asset-backed securities, if the transaction parties so agreed.

We are not persuaded that additional parties should be permitted to sign the Form 10-D. While the final rule will result in a change in practice for some issuers from the inconsistent practice under the modified reporting system, we continue to believe it is more appropriate for the reports to be signed by either the depositor, or the servicer in the alternative. In the various scenarios presented by commenters who argued for the ability of additional parties to sign, in each case either the depositor or the servicer would still be in a position to sign. We also do not believe it is appropriate to permit any transaction party to sign a required report under the Exchange Act.⁴⁶⁸ Accordingly, we are adopting our signature requirements as proposed.⁴⁶⁹

c. Content

Consistent with our proposal and the longstanding requirements under the modified reporting system, the disclosure content for Form 10-D will consist of both the distribution and pool performance information for the distribution period, and certain non-financial disclosures, similar to those required by Part II of Form 10-Q, that occurred during the period. Some commenters requested a change from this longstanding practice by limiting the Form 10-D to only distribution and pool performance information and moving the other disclosures from the modified reporting system to Form 8-K disclosure requirements, albeit with longer deadlines than current Form 8-K requirements.⁴⁷⁰ Given our other amendments to Form 8-K disclosure requirements for ABS, discussed below, we do not believe it is necessary at this time to deviate further from the established requirements of the ABS modified reporting system.

The menu of disclosure items for Form 10-D is presented in the following table:

Disclosure for Form 10-D

The requirement with respect to distribution and pool performance information requires the registrant to provide the information required by Item 1121 of Regulation AB and to attach as an exhibit to the Form 10-D the distribution report delivered to the trustee or security holders, as the case may be, pursuant to the transaction agreements for the related distribution date. Recognizing that the distribution report specified under the transaction agreements will likely contain most, if not all, of the disclosures about the distribution and pool performance that will be required by Item 1121 of Regulation AB, any information required by that Item that was included in the attached distribution report need not be repeated in the Form 10-D.⁴⁷¹ As a result, and as is typically the case today with distribution reports filed under Form 8-K, no additional information may be required in the Form 10-D with respect to distribution or pool performance if all of the required information is included in the attached distribution report. However, taken together, the attached distribution report and the information provided in the Form 10-D must contain the information required by Item 1121 of Regulation AB.

Item 1121 of Regulation AB, as proposed, requires a description of the distribution and the performance of the asset pool during the distribution period. Recognizing the variety of asset types that can be securitized and the variety of transaction structures that can be used, we did not propose and we are not adopting a standardized format for the presentation of either the information required by Item 1121 of Regulation AB or the distribution report prepared under the transaction agreements. Commenters overall supported this decision.⁴⁷² However, while the material characteristics will vary depending on the nature of the transaction, we continue to believe that, similar to asset pool disclosure for the registration statement prospectus, there are certain broad categories of disclosure and examples of common characteristics that can be identified as illustrative examples. Therefore, Item 1121 of Regulation AB continues to set forth non-exclusive examples of such information, as revised in response to comment. As we stressed in the Proposing Release, and consistent with our discussion above regarding prospectus disclosure, the actual disclosure to be provided will need to be tailored to the material characteristics of the asset pool and transaction involved. As with the item for prospectus asset pool disclosure, we recognize that not all of the characteristics identified will be applicable or material to the particular asset class and transaction involved. As proposed, appropriate introductory and explanatory information should be provided to introduce material terms, parties and abbreviations used (or a cross-reference to a Commission filing where such information may be found), and statistical information should be presented in tabular and graphical formats, if such presentations will aid understanding.

Commenters representing investors in particular supported our proposed disclosure for the distribution and pool performance information.⁴⁷³ As adopted, examples of illustrative characteristics in Item 1121 of Regulation AB include:

• Applicable record dates, accrual dates, determination dates and distribution dates.
   

• Cash flows received and their sources (including portfolio yield, if applicable).
   

• Calculated amounts and distribution of the flow of funds for the period itemized by type and priority of payment, including fees and expenses, payments with respect to enhancement, distributions to security holders and excess cash flow and disposition of excess cash flow.⁴⁷⁴
   

• Interest rates applicable to the assets and the asset-backed securities, as applicable. Registrants should consider providing interest rate information for pool assets in appropriate distributional groups or incremental ranges.
   

• Beginning and ending principal balances of the asset-backed securities.
   

• Beginning and ending balances of transaction accounts, such as reserve accounts, and material account activity during the period.
   

• Amounts drawn on any credit enhancement or other support, as applicable,⁴⁷⁵ and amounts still available, if known and applicable.
   

• Updated pool composition information for the period, such as the number and amount of pool assets at the beginning and ending of each period, weighted average coupon, weighted average life, weighted average remaining term, pool factors and prepayment amounts.⁴⁷⁶
   

• Delinquency and loss information for the period.⁴⁷⁷
   

• The amount, terms and general purpose of any advances made or reimbursed during the period.
   

• Material modifications, extensions or waivers to pool asset terms, fees, penalties or payments during the distribution period or that have cumulatively become material over time.
   

• Material breaches of pool asset representations or warranties or transaction covenants.
   

• Information on ratio, coverage or other tests used for determining any early amortization, liquidation or other performance trigger and whether the trigger was met.

As explained in the Proposing Release, in part because we are expanding the availability of prefunding periods, revolving periods and master trusts, we also are expanding related periodic disclosure to include information regarding any new issuance of asset-backed securities backed by the same asset pool and any pool asset changes (other than in connection with a pool asset converting into cash in accordance with its terms), such as additions or removals in connection with a prefunding or revolving period and pool asset substitutions and repurchases. Such information includes any material changes in solicitation, credit-granting, underwriting, origination, acquisition or pool selection criteria or procedures. While comments on this aspect of the proposal were mixed between investors who desired such information and issuers and their representatives who generally objected to providing information that is not already provided today,⁴⁷⁸ we continue to believe it is important to provide transparency in those instances where the pool is changing not as a result of the assets converting into cash in accordance with their terms, but instead through external administration via an exception to the basic principle that the asset pool is discrete.

In addition, we proposed that if the addition, substitution or removal of pool assets had materially changed the composition of the asset pool as a whole, full updated pool composition information required by Items 1110, 1111 and 1112 of Regulation AB would be required to the extent such information had not been provided previously. Several commenters representing primarily issuers and their representatives objected to the proposal, generally arguing that disclosure of the parameters of the possible pool changes in the prospectus should be sufficient and updated pool disclosure reflecting actual changes, even if the pool has materially changed, should not be required because such disclosure is not publicly provided today.⁴⁷⁹ We continue to believe that, with respect to changes to the asset pool that occur not as a result of the assets converting into cash in accordance with their terms but rather as a result of external administration, updated disclosure about the effects of such external changes should be required. We understand that the proposal, which would have triggered new pool composition information at any time a material change in pool composition occurred, could create administrative burdens in assessing on an ongoing basis whether the pool composition has materially changed. To ease these burdens and difficulties associated with the proposal, our final requirement will require such updated pool composition information at set times, but only where a prefunding or revolving period is in effect or new issuances have occurred from a master trust and, in each instance, only if the information has materially changed from that previously provided.

Under the final requirement, during a prefunding or revolving period (including for asset classes where an unlimited revolving period is permitted), or if there has been a new issuance of ABS backed by the same pool under a master trust during the fiscal year of the issuing entity, updated pool composition information will be required in the Form 10-D report for the last required distribution of the fiscal year of the issuing entity. In addition, such updated pool composition information also will be required in the first Form 10-D report filed for the period in which the prefunding or revolving period ends (if applicable).⁴⁸⁰ Consistent with the proposal, such updated pool composition information will include information required by Items 1110, 1111 and 1112 of Regulation AB applied taking the revised pool composition into account.⁴⁸¹

Consistent with our proposal, no information will be required, however, if the information has not materially changed from that provided previously in an Exchange Act report, an effective registration statement under the Securities Act or a prospectus timely filed pursuant to Securities Act Rule 424 under the same CIK code regarding a subsequent issuance of asset-backed securities backed by the same pool. For example, if a takedown related to an ABS transaction with a revolving period occurred in October and the revised pool as of the end of the issuing entity’s fiscal year in December while the revolving period was still in effect had not materially changed from the pool described in the prospectus supplement for the takedown, updated pool composition information would not be required. Similarly, if a new issuance from a master trust occurred in October and the revised pool as of the end of the issuing entity’s fiscal year in December was substantially similar to the pool described in the prospectus supplement for the takedown, updated pool composition information would not be required.

Regarding the other disclosure items for Form 10-D, the requirements regarding disclosure of legal proceedings, sales of securities, use of proceeds, submission of matters to a vote of security holders, defaults on senior securities and other information are consistent with the longstanding non-financial disclosures in Form 10-Q required under the modified reporting system.⁴⁸² For legal proceedings, we reference as proposed the tailored ABS disclosure in Item 1117 of Regulation AB. As with legal proceedings disclosure in Form 10-Q, a proceeding only will need to be reported for the distribution period in which it first became a reportable event and in subsequent periods where there have been material developments. The other disclosure items contain cross-references to similar items in Form 10-Q. For disclosure regarding the issuance of additional securities, we are providing, in response to comment, that information regarding consideration required by Item 701(c) of Regulation S-K⁴⁸³ need not be provided with respect to securities that were not registered under the Securities Act.⁴⁸⁴

As proposed, Items 6 and 7 of Form 10-D will require updated financial information about significant obligors and providers of enhancement, to the extent updated information is required. As has long been the case under the modified reporting system and consistent with the practice for non-ABS issuers, we continue to believe that such information should be provided on an ongoing basis in addition to in the initial prospectus while the asset-backed securities are reporting under the Exchange Act. As proposed, such information only will need to be included in the first distribution report for the period in which updated financial information regarding the third party is required under Regulation S-X. As discussed in Section III.B.10., alternative methods may be available, subject to conditions, to present information regarding the third party, such as through incorporation by reference or by including a reference to the third party’s Commission filings.

Regarding providing updated financial information for third parties, several commenters requested clarification as to when the percentage concentration tests should be measured for determining significant obligors.⁴⁸⁵ The suggestions by commenters were mixed. Some commenters believed determinations should be made at closing and not change over time as a result of pool fluctuations, arguing that to monitor changes on an ongoing basis would be burdensome.⁴⁸⁶ In addition, some of these commenters argued that it is typical to contract with known significant obligors at closing that additional information is to be provided for securitization reporting, and new significant obligors that arise as the pool pays down would not have such provisions negotiated into their agreements. Other commenters, however, thought the tests should be recalculated with pool fluctuations.⁴⁸⁷ One commenter believed the tests should be measured as of the date the significant obligor is initially added to the transaction, but not change as the pool pays down.⁴⁸⁸

We are clarifying in an instruction to the definition of significant obligor that the determination of significant obligors is to be made as of the designated cut-off date for the transaction, provided, that, in the case of master trusts, the determination is to be made as of the cut-off date (or issuance date if there is not a cut-off date) for each issuance of asset-backed securities backed by the same asset pool.⁴⁸⁹ We also are noting, however, that if the percentage concentration drops below 10% subsequent to the dates discussed above, then the entity no longer need be considered a significant obligor.

Similar to recent revisions to Form 10-Q, we are requiring, as proposed, that if any event occurs that required the filing of a Form 8-K during the period covered by the particular distribution report, but was not disclosed on Form 8-K, the Form 10-D must include the disclosure prescribed by the relevant Form 8-K item for the period during which that event occurred.⁴⁹⁰ Like Form 10-Q, this requirement applies to all Form 8-K items, including those covered by the recently enacted Form 8-K safe harbor from liability under Exchange Act Section 10(b) or Rule 10b-5 for failure to timely file certain Form 8-K reports.⁴⁹¹ With respect to the Form 8-K items covered by the safe harbor, the safe harbor extends only until the due date of the next report of the issuer for the relevant periodic period in which the Form 8-K was not timely filed. As with similar disclosure now required in Forms 10-Q and 10-K, failure to make such disclosure would subject the issuer to potential liability under Section 10(b) and Rule 10b-5, in addition to potential liability under Section 13(a) or 15(d).

5. Annual Reports on Form 10-K

Similar to our new general instructions for Forms S-1 and S-3, we are adopting a separate general instruction for Form 10-K to specify how that form is to be used for an annual report with respect to asset-backed securities.⁴⁹² As proposed, under the instruction the depositor’s name and sponsor’s name also will need to be listed on the cover page of the Form 10-K.⁴⁹³

The instruction also clarifies who is to sign the Form 10-K. Consistent with our proposal and the existing requirements for who must sign the Sarbanes-Oxley Section 302 certification, the report must be signed either on behalf of the depositor by the senior officer in charge of securitization of the depositor, or on behalf of the issuing entity by the senior officer in charge of the servicing function of the servicer. If a servicer is to sign the report on behalf of the issuing entity and multiple servicers are involved in the servicing of the pool assets, the senior officer in charge of the servicing function of the master servicer (or entity performing the equivalent function) must sign. For the same reasons as the Form 10-D, we are not persuaded that additional parties, such as the trustee, should be permitted to sign the report as an alternative to the depositor or the servicer.⁴⁹⁴

Substantially as proposed, the general instruction identifies the existing items in the form that may be omitted as well as substitute items from Regulation AB that are required. Any other applicable items specified in Form 10-K will continue to be required.⁴⁹⁵ As we explained in the Proposing Release, the requirements specified are consistent with the modified reporting system, and commenters overall agreed.⁴⁹⁶ The application of the disclosure items for Form 10-K is presented in the following table:⁴⁹⁷

Disclosure for Form 10-K for ABS

¹ If the issuing entity does not have any executive officers or directors.

As noted in the table above, if the issuing entity has its own executive officers, board of directors or persons performing similar functions, Items 401, 402, 403 and 404 of Regulation S-K, will be required.⁴⁹⁸ As discussed in Section III.B.1., we are not requiring audited financial statements for the issuing entity, nor are we adding reporting requirements regarding internal control over financial reporting.

Regarding the items to be included from Regulation AB, information about legal proceedings required by Item 1117 of Regulation AB will need to be provided, as well as information on affiliate relationships and related party transactions required by Item 1119 of Regulation AB. Regarding the latter, no information will be required, however, if substantially the same information had been provided previously in an annual report on Form 10-K for the asset-backed securities or in an effective registration statement under the Securities Act or prospectus timely filed pursuant to Securities Act Rule 424 under the same CIK code as the current annual report on Form 10-K. Updated financial information regarding significant obligors and enhancement providers also will be required,⁴⁹⁹ although alternative methods may be available, subject to conditions, to present the information, such as through incorporation by reference or by including a reference to their Commission filings. The reporting requirement regarding an assessment of compliance with servicing criteria is discussed in Section III.D.7.

As proposed, we are codifying the longstanding requirement in the modified reporting system that a servicer compliance statement must be filed as an exhibit to the Form 10-K.⁵⁰⁰ The servicer compliance statement requires a statement of compliance regarding the servicer’s obligations under the particular servicing agreement for the ABS transaction. This is different from both the assessment of and attestation regarding compliance with servicing criteria, which is against a single set of criteria applicable to all ABS transactions, and the Section 302 certification, which is related to disclosure in Commission reports.

Like the existing requirement under the modified reporting system, the servicer compliance statement is a statement, signed by an authorized officer of the servicer, to the effect that a review of the activities of the servicer and its performance under the servicing agreement had been made under the officer’s supervision, and that to the best of the officer’s knowledge and except as otherwise disclosed, the servicer has fulfilled its obligations under the agreement in all material respects throughout the reporting period. If multiple servicers are involved in servicing the pool assets, separate compliance statements are required from each servicer that meets the criteria in Item 1108(a)(2)(i) through (iii) of Regulation AB (i.e., master servicer, each affiliated servicer and each unaffiliated servicer that services 10% or more of the pool assets). As we explained in the Proposing Release, we believe this is consistent with general practice and should result in coverage of the material aspects of the primary servicing function.

6. Certifications under Section 302 of the Sarbanes-Oxley Act

In June 2003, the Commission adopted amendments to its general rules relating to certifications required by the Sarbanes-Oxley Act, including providing the form of the Section 302 certification in the exhibit requirements in Item 601 of Regulation S-K.⁵⁰¹ As proposed, we are amending Item 601 of Regulation S-K to add the specific form and content of the required ABS Section 302 certification to the exhibit filing requirements.⁵⁰²

As we explained in the Proposing Release, in specifying the form of the ABS Section 302 certification, we are making several amendments to the form provided in the revised staff statement to reflect our other substantive Exchange Act amendments.⁵⁰³ Other changes reflect the approach, as proposed and consistent with the approach for non-ABS issuers, that the language of the certification must not be revised in providing the certification apart from the alternatives specified. Instead, any issues should be addressed through disclosure in the reports. Commenters generally agreed with our proposed revisions to the form of the certification.⁵⁰⁴ The new form of certification, as modified from the proposal, is as follows:⁵⁰⁵

CERTIFICATIONS

I, [identify the certifying individual], certify that:

1. I have reviewed this report on Form 10-K and all reports on Form 10-D required to be filed in respect of the period covered by this report on Form 10-K of [identify the issuing entity] (the “Exchange Act periodic reports”);

2. Based on my knowledge, the Exchange Act periodic reports, taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, all of the distribution, servicing and other information required to be provided under Form 10-D for the period covered by this report is included in the Exchange Act periodic reports;

4. [I am responsible for reviewing the activities performed by the servicer(s) and based on my knowledge and the compliance review(s) conducted in preparing the servicer compliance statement(s) required in this report under Item 1123 of Regulation AB, and except as disclosed in the Exchange Act periodic reports, the servicer(s) [has/have] fulfilled [its/their] obligations under the servicing agreement(s); and]

[Based on my knowledge and the servicer compliance statement(s) required in this report under Item 1123 of Regulation AB, and except as disclosed in the Exchange Act periodic reports, the servicer(s) [has/have] fulfilled [its/their] obligations under the servicing agreement(s); and]

5. All of the reports on assessment of compliance with servicing criteria for asset-backed securities and their related attestation reports on assessment of compliance with servicing criteria for asset-backed securities required to be included in this report in accordance with Item 1122 of Regulation AB and Exchange Act Rules 13a-18 and 15d-18 have been included as an exhibit to this report, except as otherwise disclosed in this report. Any material instances of noncompliance described in such reports have been disclosed in this report on Form 10-K.

[In giving the certifications above, I have reasonably relied on information provided to me by the following unaffiliated parties [name of servicer, sub-servicer, co-servicer, depositor or trustee].]

Date: . . . . . . . . . . . . . .

As we explained in the Proposing Release, paragraphs 1 and 3 have been changed from the revised staff statement to reflect the addition of Form 10-D and the fact that the certification covers the information filed in those distribution reports rather than Form 8-K.⁵⁰⁶ Paragraph 4 refers to the servicer compliance statement explicitly required by our rules. In addition and consistent with the revised staff statement, two alternatives are provided for paragraph 4 depending on who is signing the Form 10-K report. The first version is to be used when the servicer signs the report on behalf of the issuing entity. The second version is to be used when the depositor is signing the report. Paragraph 5 of the certification has been amended from the revised staff statement and our proposal to refer specifically to our revised requirements regarding assessment of compliance with servicing criteria, discussed more fully in Section III.D.7.

Because asset-backed issuers do not typically have a principal executive officer or principal financial officer, the signature requirements for the ABS certifications differ from other issuers. Consistent with our proposal and the revised staff statement, the final rules specify who must sign the certification. The certification must be signed by either the senior officer in charge of securitization of the depositor if the depositor is signing the Form 10-K report, or the senior officer in charge of the servicing function of the servicer if the servicer is signing the Form 10-K report on behalf of the issuing entity.⁵⁰⁷ If multiple servicers are involved in servicing the pool assets, the senior officer in charge of the servicing function of the master servicer (or entity performing the equivalent function) must sign if a representative of the servicer is to sign, and references in the certification relate to the master servicer. As is the case today for all Section 302 certifications, a natural person must sign the certification in his or her individual capacity, although the title of that person in the organization of which he or she is an officer may be included under the title.

As proposed, these signature requirements are consistent with our final rules for who must sign the Form 10-K. The same person that signs the Form 10-K must sign the Section 302 certification. Although comments in this area were mixed, we are not persuaded that a representative of the trustee should be permitted to sign the Section 302 certification, especially given that the trustee is not the party signing the report itself.⁵⁰⁸

Consistent with our proposal and the revised staff statement, we are including an instruction to the certification to clarify that because the signer of the certification must rely in certain circumstances on information provided by unaffiliated parties outside of the signer's control, the signer in such situation may reasonably rely on information that unaffiliated trustees, depositors, servicers, sub-servicers or co-servicers have provided. As is the case today, if the signer does so, it must provide an additional statement in the certification identifying the unaffiliated parties on which the signer reasonably relied. Commenters supported retaining this instruction.⁵⁰⁹ Like the revised staff statement, we are not specifying the manner in which reasonable reliance may be established. As proposed, the reasonable reliance instruction for the Section 302 certification is not applicable with respect to affiliated parties, nor is it applicable with respect to information from any registered public accounting firm or firms performing an attestation on an assessment of compliance with servicing criteria for an affiliated party.

7. Report on Assessment of Compliance with Servicing Criteria and Accountant’s Attestation

a. Background

As noted above, the modified reporting system has not required audited financial statements for the issuing entity in the annual report on Form 10-K, but has instead generally required an assertion by the servicer and an attestation by an independent public accountant regarding compliance with servicing criteria. This longstanding framework was developed based on the recognition that one of the most important elements affecting an investor’s assessment of a particular asset-backed security is the performance of the servicer and that an independent third party checking some aspect of the servicing function provides a certain level of assurance and transparency regarding the servicer’s performance.

However, the types of assessments and attestations, and the criteria that servicing compliance was assessed against, historically have varied significantly. The most common example involves an assertion on and disclosure regarding compliance with criteria set forth in the Uniform Single Attestation Program for Mortgage Bankers, or USAP, developed by the Mortgage Bankers Association.⁵¹⁰ The accountant’s report attesting to the assertion under the USAP is prepared in accordance with SSAE No. 10.⁵¹¹ The servicer’s assertion as to compliance and the accompanying accountant’s report are commonly referred to as a “USAP Report.”

As we noted in the Proposing Release, the USAP was created early in the development of securitization as a mortgage financing technique to provide uniform minimum criteria against which the servicing of mortgage-backed securities could be assessed. It was created at a time when most securitizations consisted of either simple pass-through or pay-through structures of simple pools of residential mortgages. As new, more-complex ABS transactions were introduced into the marketplace and additional asset types were securitized, the USAP, in the absence of any other well-recognized criteria, continued to be used as the default criteria for assessment and disclosure of servicer performance.

The USAP describes uniform minimum servicing criteria against which a servicing entity is to assess material compliance. In general, the servicer’s management makes a written assertion about compliance with the USAP minimum criteria for a particular period (usually a year). The accountant engaged to perform the examination engagement evaluates the servicer’s assertion regarding compliance with the minimum servicing criteria.⁵¹²

While the USAP has by default become the dominant criteria to assess servicing compliance for purposes of fulfilling the accountant report requirement of the modified reporting system, it has significant limitations in the context of ABS reporting. The USAP was originally written to address compliance criteria related to residential mortgage loan servicing. Over time, it has been extended to other ABS transactions, such as those involving auto loans. However, the USAP’s minimum servicing criteria may not adequately capture the needs of investors in ABS transactions other than mortgage-backed securities. Some of the USAP criteria may not be applicable to these other asset types (e.g., criteria regarding property tax escrow accounts) and are often specifically excluded from the assertion of compliance and the related accountant’s report. There does not appear to be any consistency as to which USAP criteria are applied to a particular asset type outside of residential mortgage loans, so the list of exceptions varies from issuer to issuer, even in the same asset class. In addition, rarely are substitute criteria included that would be relevant to that asset class, further diminishing the scope and relevance of the final report for other asset classes.

Another difficulty with the current criteria is that they do not clearly address the totality of activities and parties involved in servicing an ABS transaction, even for mortgage-backed securities. The USAP does not completely address the full spectrum of servicing functions, including allocation and distribution functions, that may be important in an ABS transaction, particularly as the complexity of flow of funds calculations has increased. In addition, the current system does not contemplate the fact that multiple unaffiliated parties may be involved in servicing an asset-backed security. As a result, the current system potentially leaves gaps in servicing compliance reporting.

b. Our Proposal and Overview of Revised Approach

Our proposal sought to retain the assessment and attestation approach as well as improve and add consistency to the approach by providing a specified manner for making assertions and associated attestations. These improvements were largely facilitated by the introduction of a single uniform set of servicing criteria that covers all aspects of the servicing function and that could be used in the context of multiple asset classes.

We continue to believe that for asset-backed securities, an assessment and attestation regarding servicing compliance provides material information to investors in monitoring transactions and thus their investments more directly and efficiently than an audit of financial statements or reporting on internal control over financial reporting. As we stated in the Proposing Release, the performance of the servicing function is of material importance to the performance of an ABS transaction. Recent events in both the ABS and non-ABS markets have highlighted the need for appropriate controls and processes and mechanisms to assess compliance with controls and processes.⁵¹³ A disclosure-based assessment and attestation system identifies for investors those aspects of the standard servicing criteria that are in material compliance. Investors will thus be better able to evaluate servicing responsibilities and performance and the reliability of the information they receive. Additionally, the assessment should help to identify potential weaknesses that may adversely affect security holders.

As we noted in the Proposing Release, the current modified reporting system does not provide complete transparency as to what is expected of issuers, servicers, accountants and other parties. While the varying no-action letters on this subject need uniform codification, the principal weakness in the current system is the lack of suitable servicing criteria on which reporting can be based. The result has been significant inconsistencies in the type of reporting provided, diminishing its usefulness, relevance and comparability.⁵¹⁴

Accordingly, we are retaining the basic approach set forth in our original proposal, although we are making certain modifications, discussed in more detail below. Specifically, we are modifying our original proposal to remove the requirement for a single responsible party to make an assertion regarding servicing compliance covering the entire servicing function, which was the primary area of comment on the proposals.⁵¹⁵ Instead, we are adopting a revised approach suggested by many commenters that will require reports on assessments of compliance with servicing criteria from each party participating in the servicing function as specified, with associated attestation reports from registered public accountants, to be filed as exhibits to the Form 10-K report.⁵¹⁶ As an additional aspect of this revised approach, we are revising paragraph 5 of the ABS Section 302 certification, as discussed further below in response to comment, to require a certification that, except as otherwise disclosed, required reports from all parties participating in the servicing function as specified have been included as an exhibit to the Form 10-K report.

As proposed, a material instance of noncompliance identified in the reports will not by itself have regulatory restrictions on market access, such as an effect on continued form eligibility under the Securities Act for additional ABS transactions.⁵¹⁷ Rather, the assessment and reporting on the criteria is designed to operate within a disclosure-based framework.

c. Assessment and Attestation of Servicing Compliance

As discussed above, our revised approach will require that the annual report on Form 10-K must include as exhibits reports from each party participating in the servicing function that assesses compliance with the servicing criteria that we are adopting in Item 1122 of Regulation AB.⁵¹⁸ Item 1122 of Regulation AB also specifies the format for each of the assessment reports and requires them to include:⁵¹⁹

• A statement of the party’s responsibility for assessing compliance with the servicing criteria applicable to it.
   

• A statement that the party used the servicing criteria to assess compliance with the applicable servicing criteria.
   

• The party’s assessment of compliance with the applicable servicing criteria as of and for the period ending the end of the fiscal year covered by the Form 10-K report. The report must include disclosure of any material instance of noncompliance identified by the party.
   

• A statement that a registered public accounting firm has issued an attestation report on the party’s assessment of compliance with the applicable servicing criteria as of and for the period ending the end of the fiscal year covered by the report on Form 10-K.

As discussed further in Section III.D.7.d, our revised approach also requires the attestation report of a registered public accounting firm to be filed as an exhibit to the Form 10-K report.⁵²⁰

i. Responsible Party

Our proposal contemplated that a single “responsible party,” defined as either the depositor if the depositor signs the report on Form 10-K, or the servicer if the servicer signs the report on behalf of the issuing entity, would make an assertion regarding compliance with the servicing criteria. The proposal contemplated that the responsible party’s assertion would cover the entire servicing function and that the responsible party would, in certain instances, have to place reasonable reliance upon third parties in making its assertion.

As discussed above, this was the primary focus of comment on our assessment and attestation proposals. Many of the commenters, in responding to our specific requests for comment on this point, believed that instead of a single “responsible party,” there should be separate assessments of compliance by each entity responsible for the particular criteria and separate accompanying auditor attestations.⁵²¹ These commenters believed the responsibility for assessing compliance with the criteria should be placed solely, in each case, with the individual party whose servicing activities are being evaluated. As stated by one of these commenters, individual assessments can be performed by each party at a platform level consistent with the proposal and these reports could be filed as exhibits to the Form 10-K report along with the responsible party’s assessment of its own servicing compliance, as applicable.⁵²² Several commenters also supported as an addition to this alternative a requirement that a single party would either confirm that an assessment and attestation covering each unaffiliated party with material servicing or administration responsibilities has been received, or disclose that an entity with such responsibilities has failed to deliver its required assessment and attestation.⁵²³

These alternatives still achieve our proposed objective of covering the entire servicing function. We continue to believe it is important that the investor receives notice as to whether reports evidencing all aspects of the servicing function are in fact provided. As discussed in Section III.B.3.d., the delegation of servicing and administration functions in an ABS transaction can vary significantly among different parties, even in the same asset class. The investor likely will not be in the best position to determine whether the reports that are ultimately attached to the Form 10-K report collectively cover all aspects of the servicing criteria.

Thus, we are adopting a revised approach in response to these comments that does not require an assertion by a single responsible party, but instead requires that the person that signs the Section 302 certification certify in paragraph 5 of the certification that assertions prepared by all parties participating in the servicing function as specified, and associated attestation reports from registered public accountants, have been included as exhibits to the report on Form 10-K, except as otherwise disclosed in the report.⁵²⁴ In addition, the certifying person must certify that all material instances of noncompliance with the servicing criteria described in the reports have been disclosed in the report on Form 10-K. In order to make this certification, reports will need to be accumulated from all parties participating in the servicing function as specified, along with associated attestation reports from registered public accounting firms, and filed as exhibits. Disclosure will be required in the Form 10-K if any of those reports are missing, along with an associated explanation, and disclosure also will be required of material instances of noncompliance described in the reports, if any.

The revised approach we are adopting requires coordination among the various parties participating in the servicing function to be able to comply with the filing requirements; however, we believe that the amount of required coordination is reduced from our original proposal and, as discussed above, meets the regulatory objective of providing investors insight into the operation of the entire servicing function. We expect that such coordination is possible and, as confirmed to us by commenters, issuers can obtain the reports that must be filed as exhibits.

ii. Scope: Period Covered

We proposed that the assessment of the servicing function would be for a full fiscal period, rather than just at a point in time. We continue to believe that an assessment and attestation for the entire period covered by the report on Form 10-K is the appropriate approach in this context, and commenters generally agreed.⁵²⁵ This approach is consistent with the USAP approach commonly followed today. Accordingly, we are adopting this approach without modification.

iii. Scope: Level of Reporting

In light of current practice and servicers’ focus on overall compliance with standards at the platform level, we proposed to accept a “platform” level assessment for purposes of assessing servicing compliance. This means an assessment of compliance with respect to all asset-backed securities transactions involving the asserting party that are backed by assets of the type backing the asset-backed securities covered by the Form 10-K report. This “platform” level assessment was proposed to permit a single assessment and assertion regarding compliance for entities involved in multiple ABS transactions, as compared to requiring separate assessments for each individual transaction, which would be more costly and might be administratively burdensome. Commenters generally supported an assessment at the platform, rather than transaction, level.⁵²⁶ We are adopting this approach as we continue to believe a platform level assessment provides an appropriate level of information to investors and does not result in substantial increased cost to issuers. As commenters confirmed to us, we believe that platform level assessments can be performed by all parties participating in the servicing function to allow an issuer to meet its requirements to file the resulting assessment and related attestation reports as exhibits to the Form 10-K report.

iv. Scope: Entire Servicing Function

As we explained in the Proposing Release, the servicing of an asset-backed security consists of many functions, including: collecting principal, interest and other payments from obligors; paying taxes and insurance from escrowed funds; monitoring and accounting for delinquencies; executing foreclosure if necessary; temporarily investing funds pending distribution; remitting fees and payments to enhancement providers, trustees and others providing services; and allocating and remitting distributions to security holders. Each of these functions can represent a material element of ABS performance.

In addition, the entire servicing function may be performed by a single party or different aspects may be performed by multiple parties (e.g., primary servicers, master servicers, trustees, etc.). For example, in some instances, one party may perform the servicing functions that relate to administration of the pool assets while another party may perform the servicing functions that relate to calculating payments to security holders. Currently, when multiple parties are involved in the servicing function, sometimes only one report on servicing compliance by one servicer is filed with the Form 10-K report covering only a limited subset of the servicing function. As we explained in the Proposing Release, this approach provides no assurance with respect to other aspects of the servicing function. In other instances, multiple reports may be filed, one from each party involved in the servicing function covering only those steps that are applicable for the standards impacted by their work. This approach may lead to fragmented reporting that potentially results in certain aspects of the servicing function not being addressed by the reports at all or requiring an investor to ascertain if all aspects have been covered.

To address these concerns, we proposed that the responsible party would assess material compliance with the servicing criteria covering the entire servicing function, based on reasonable reliance upon third-parties where necessary. We continue to believe that the entire servicing function should be subject to an assessment of compliance. As noted above, we believe the revised approach we are adopting requiring separate reports regarding compliance by each party participating in the servicing function as specified also achieves this objective while eliminating many of the concerns or potential complexities raised by commenters regarding a single “responsible party” approach.

Some commenters thought that, in the event that we pursued a multiple report approach, we should set a specific threshold for which reports should be required as some parties may be providing servicing activities for only a minor portion of the assets included in a transaction.⁵²⁷ Other commenters thought that providing a threshold for reporting may result in very few reports being included in instances where there are multiple parties each servicing a minor portion of the assets included in the transaction, such as may be the case in residential mortgage ABS transactions.⁵²⁸

To address this issue, we are specifying that reports will be required by any “party participating in the servicing function,” which is defined as any entity that is performing activities that address the servicing criteria, unless such entity’s activities relate only to 5% or less of the pool assets. For example, if a party is servicing individual pool assets that comprise only 4% of the pool, a report from that party will not be required. However, some servicing functions cover all assets included in a transaction. For example, a single party, such as a trustee or an administrator, may calculate the amount due to investors in a transaction. In those cases, an assessment from that party and a related attestation report from a registered public accounting firm will be required to be filed as an exhibit to the Form 10-K for the transaction.

As proposed, the revised approach we are adopting does not distinguish which parties should file reports based on the respective role played by the party in the servicing function. Any party participating in the servicing function, including trustees, may be required to provide an assessment and related attestation report to the extent that the assets covered by their activities relates to more than 5% of the pool assets. However, the fact that a party, such as a trustee, may perform an aspect of the servicing function covered by the criteria for purposes of requiring an assessment and attestation report does not mean that the party is included in the definition of “servicer” in Regulation AB for purposes of other requirements, such as disclosure regarding servicers and servicer compliance statements.

v. Servicing Criteria

As we explained in the Proposing Release, the only generally used criteria for assessing and reporting on servicing compliance is the USAP. However, as previously discussed, the USAP was not designed for the breadth of asset classes included in ABS offerings. It also does not address aspects of the servicing function that may be important in servicing asset-backed securities.

In the absence of other suitable criteria, we proposed to establish disclosure-based servicing criteria to be used by those making an assertion regarding servicing compliance and by registered public accounting firms in assessing servicing compliance. Our proposal illustrated our belief that a single set of servicing criteria that is publicly available would enhance the quality of the assessment of compliance, promote the comparability of reports of different issuers, and provide value in establishing market-wide benchmarks with respect to assessing the servicing function.

Most commenters commended the initiative to enunciate a consistent set of criteria.⁵²⁹ As explained by one of these commenters, substantial modifications to the existing criteria under the USAP were in order and the proposed modifications were appropriate.⁵³⁰

With certain minor clarifying revisions in response to comment, we are adopting the uniform set of servicing criteria substantially in the form proposed. As we explained in the Proposing Release, no other set of uniform servicing criteria exists for purposes of this type of compliance assessment today, nor are we aware of any that are under development in the market. A few commenters believed that our final rules should permit the use of criteria established by a private body or group that followed due-process procedures.⁵³¹ If other sets of criteria were developed by market participants in the future that were subject to appropriate due process, we would be willing to consider, at that time, their applicability in a separate rulemaking action. As we explained in the Proposing Release, in order for a set of servicing criteria to be considered in the future, the criteria would need to: be established by a group or body that has followed due process procedures; be free from bias; permit reasonably consistent qualitative and quantitative measurements; be sufficiently complete so that relevant factors that would alter a conclusion about the subject matter were not omitted; and be relevant to the subject matter.⁵³² In addition, the set of criteria would need to address all material aspects of the servicing function with respect to an asset-backed securities transaction.

As proposed, the disclosure-based servicing criteria we are adopting are designed to be incremental to the current criteria in the USAP. Accordingly, and as commenters confirmed to us, many of the criteria are not new.⁵³³ Criteria that we proposed that included specific timeframes, such as two business days, mirrored for the most part the current criteria in the USAP. The servicing criteria we proposed that were incremental to the USAP criteria were developed based on staff study and experience with ABS transactions, including experience gained through the filing review process and the 2003 MBS Disclosure Report. Commenters suggested several minor clarifying revisions to the proposed criteria, and as discussed above we have made clarifying revisions to the final criteria in response.

While certain of the proposed servicing criteria referred to specific timeframes as adapted from the USAP, others relied upon transaction agreements to set forth specific details regarding that aspect of the servicing function. The few commenters that commented on this aspect of the proposal were mixed. One commenter preferred more reliance on transaction agreements instead of specific timeframes to provide flexibility, while another commenter preferred specific timeframes in the criteria instead of reliance on transaction agreements to promote consistency.⁵³⁴ To balance these objectives, we are maintaining our proposed references to specific timeframes in the criteria, which as noted above were adapted from the current USAP. However, we are also providing in those criteria that transaction agreements can expressly provide an alternate timeframe. Under this approach, the specific timeframes in the criteria will continue to apply in the event that the transaction agreements happen to be silent on those timeframes. We believe this approach appropriately leaves the responsibility for determining the details of the servicing functions with investors and ABS issuers while still providing default benchmarks that are generally consistent with the existing USAP. Further, as ABS transaction agreements are required to be filed with the Commission, disclosure of these details for individual transactions will be readily available.

Regarding another commenter’s concern that the assessment and related attestation regarding servicing compliance will be performed at the platform level while the servicing criteria refer to transaction agreements,⁵³⁵ in many instances we do not expect this will be a major issue because it is our understanding that many transaction agreements, particularly in the same asset class, contain the same or nearly the same specific servicing-related requirements.

The criteria, as proposed, consist of four broad categories: general servicing considerations; cash collection and administration; investor remittances and reporting; and pool asset administration. As we explained in the Proposing Release, these categories describe major components of the servicing function, and each category contains servicing criteria that have been designed to have general applicability to the servicing of all asset-backed securities. The complete criteria are set forth in the text of paragraph (d) of Item 1122 of Regulation AB. As noted in Section III.D.7.c.vi., some servicing criteria may be more or less applicable depending on the type of asset underlying the ABS transactions.

The servicing criteria are summarized as follows:

General servicing considerations. The general servicing considerations are designed to provide disclosure on whether the servicer or other relevant party has instituted policies and procedures for structural monitoring of the ABS securities (e.g., triggers or events of default) and performed other general administrative tasks during the period covered by the report as set forth in the transaction agreements, such as monitoring the activities of third parties to which material servicing activities have been outsourced, maintaining a back-up servicer and maintaining certain insurance coverages in force, if applicable. As we explained in the Proposing Release, with the exception of the criterion regarding the maintenance of certain insurance coverages in force, these criteria are not addressed in the current USAP. We continue to believe they are appropriately included given their importance to an ABS transaction.

Cash collection and administration. These servicing criteria are designed to provide disclosure on whether the servicer or other relevant party has administered the collection of cash from obligors, segregated (as applicable) and reconciled such cash for investors and maintained transaction accounts as set forth in the transaction agreements. As we explained in the Proposing Release, the servicing criteria included within this section are comparable to those set forth in the USAP, although the USAP does not have specific criteria to address the maintenance of transaction accounts. We continue to believe disclosure of whether the servicer complies with maintenance of transaction accounts is information investors may need to confirm the ABS transaction is functioning as originally planned.

Investor remittances and reporting. These servicing criteria are designed to provide disclosure on whether the servicer or other relevant party is calculating amounts due to investors and reporting such amounts to investors in accordance with the flow of funds in the transaction agreements. These servicing criteria also are designed to provide disclosure on whether the servicer or other relevant party has allocated and remitted distributions to investors in accordance with the transaction agreements and filed information with the Commission as required by its rules and regulations. As we explained in the Proposing Release, while certain elements of these criteria are presently included in the USAP, an explicit assessment of compliance with the flow of funds calculations may be incremental to what is currently performed in satisfying the current USAP criteria. It remains our understanding that oversight of the flow of funds calculations can be critical for proper distributions to investors.

Pool asset administration. These servicing criteria are designed to provide disclosure on whether the servicer or other relevant party is maintaining the pool assets as set forth in the transaction agreements, including:

• Maintaining specified collateral;
   

• Administering changes to the asset pool;
   

• Posting payments and other changes regarding pool assets;
   

• Instituting loss mitigation or recovery actions;
   

• Administering funds held in trust for an obligor, if required for the pool assets; and
   

• Maintaining external credit enhancement or other support.

As we explained in the Proposing Release, these servicing criteria, mostly included within the USAP, have been incrementally enhanced to encompass more aspects of pool asset maintenance. For example, the USAP does not address external credit enhancement or other support.

vi. Identification of Inapplicable Criteria

Because of the unique and fluid nature of the ABS market, our proposal provided discretion to the responsible party to exclude those servicing criteria that were inapplicable to the servicing of a particular asset class, so long as the excluded criteria were identified in the responsible party’s and the registered public accounting firm’s reports. We also requested comment on an alternative approach that would allow for a party to voluntarily determine which specific servicing criteria to exclude from its assessment (even if they were otherwise applicable to the particular asset class), so long as any excluded criteria were disclosed and the reason for their exclusion was also disclosed.

One commenter thought it critical to permit exclusion of criteria that was inapplicable to the asset class and did not object to requiring each assessing party to identify either all of the inapplicable criteria, or, alternatively, only the criteria that were applicable.⁵³⁶ One commenter supported our alternative approach and believed a servicer should be able to exclude any particular criterion, even if it cannot conclude that the criterion is not applicable to the asset class, as long as it discloses the exclusion in the assessment (e.g., the criterion is not required by the transaction documents).⁵³⁷

As noted above, we continue to believe all applicable servicing criteria should be covered. However, with our revised approach requiring reports from multiple parties that participate in the servicing function, we also recognize that it may be necessary for a particular party to exclude a particular criterion from its assessment not because it is inapplicable to the asset class, but because that particular party does not perform it. As a result, we are revising our proposal to allow for the exclusion in a party’s assessment report of those specific servicing criteria that are not applicable to the asserting party based on the activities it performs with respect to asset-backed securities transactions taken as a whole involving such party and that are backed by the same asset type backing the class of asset-backed securities. For example, a servicer may exclude a particular criterion either because in its servicing platform it does not participate in that element of the servicing function or the criterion is broadly inapplicable in the context of the asset class being serviced. However, a party may not voluntarily select to exclude specific servicing criteria if they are otherwise applicable to that party.

In the event that servicing criteria are excluded for those reasons that are permitted, the inapplicability of the criteria must be disclosed in both the asserting party’s assertion and the related registered public accounting firm’s report. However, while the individual asserting parties will be permitted to exclude criteria they do not perform, it will be incumbent on the person making the Section 302 certification to certify whether all required reports covering the entire servicing function, including all the criteria applicable to the asset class, are included with the Form 10-K report.

One commenter requested the ability to exclude certain servicing criteria that are inapplicable in certain foreign jurisdictions, as some of the proposed criteria do not apply to non-U.S. issuers given there is not a corresponding concept in the home jurisdiction.⁵³⁸ We do not believe it is necessary to create a separate ability to exclude certain criteria for foreign ABS transactions. The approach we have adopted provides those parties who participate in servicing foreign ABS transactions the ability to exclude certain criteria if those criteria are not applicable to the asserting party based on the activities it performs. For example, if there are certain activities that are necessary for the servicing of a mortgage loan in the U.S. that are not applicable for the servicing of a mortgage loan in a foreign jurisdiction because of regulatory or other structural reasons, the approach we have adopted would permit the inapplicable criteria for the foreign asset class to be excluded from the assertion and related attestation with appropriate disclosure in each of those reports.

vii. Disclosure of Material Instances of Non-compliance

Our proposal contemplated that the responsible party’s report on an assessment of compliance with servicing criteria would identify any material instance of noncompliance with the criteria, and that the same party would be required to disclose in the report on Form 10-K any material impacts or effects as a result of the material instances of noncompliance that have affected or that may reasonably be likely to affect pool asset performance, servicing of the pool assets or payments or expected payments on the asset-backed securities. We continue to believe it is important for material instances of noncompliance that are reported in each of the reports prepared by parties participating in the servicing function to be identified by the person preparing the Form 10-K in the report on Form 10-K.

However, we are not adopting a specific line item requirement to disclose any material impacts or effects as a result of the material instances of noncompliance. Commenters were mixed on whether and to what extent there should be such a specific disclosure requirement.⁵³⁹ Even in the absence of a specific line item disclosure requirement, whether any such disclosure is required will depend on the particular facts and circumstances.⁵⁴⁰

Consistent with our proposal, the period to be covered by the report on Form 10-K is consistent with the common practice today under the USAP of assessing compliance as of and for the period ending on a particular date. As we explained in the Proposing Release, this is different from reporting regarding internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, which speaks as of a particular date only. Thus, consistent with our proposal and general practice today, disclosure will be required of material instances of noncompliance during the reporting period, even if such noncompliance was subsequently corrected in the period. We continue to believe this approach is consistent with our approach not to require interim evaluations and reporting of compliance or disclosures of changes in reports (i.e., Form 10-D reports) during the Form 10-K reporting period.

d. Attestation Report on Assessment of Compliance

We proposed that a registered public accounting firm would be required to attest to, and report on, the assessment of compliance made by the single responsible party through performance of an examination engagement. As our proposal would be in lieu of audited financial statements and Sarbanes-Oxley Section 404 reporting, we believed that requiring a registered public accounting firm to provide the attestation is important to help assure independence and objectivity for the attestation function, similar to that required with respect to an audit of financial statements, and thereby increase investor confidence in the reliability of the compliance assessment.

Our revised approach does not require an assertion by a single responsible party covering the entire servicing function, but instead contemplates that assertions will be made by each party participating in the servicing function as specified and that each party will be responsible for having an attestation engagement performed by a registered public accounting firm. The attestation would not cover servicing criteria properly excluded by the servicing party and disclosed as described above. Further, the revised approach requires that each registered public accounting firm’s report be filed as an exhibit to the report on Form 10-K.⁵⁴¹ As proposed, the attestation examination must be made in accordance with standards for attestation engagements issued or adopted by the Public Company Accounting Oversight Board (PCAOB). On April 25, 2003, the Commission approved the PCAOB's adoption of the auditing and attestation standards in existence as of April 16, 2003 as interim auditing and attestation standards.⁵⁴² The Attestation Standards for Compliance Attestation (AT § 601) in those interim auditing and attestation standards should be used in performing this examination engagement.

We are adopting conforming amendments to Regulation S-X, substantially as proposed, to reflect the attestation report that will be prepared by a registered public accounting firm and to require an ABS issuer to file the attestation report with the report on Form 10-K. Under these amendments, a new “Attestation report on assessment of compliance with servicing criteria for asset-backed securities” is defined as a report in which a registered public accounting firm expresses an opinion, or states that an opinion cannot be expressed, concerning an asserting party’s assessment of compliance with servicing criteria, as required under the revised approach, in accordance with standards on attestation engagements.⁵⁴³ When an overall opinion cannot be expressed, the registered public accounting firm must state why it was unable to express such an opinion. As proposed, the report must be dated, signed manually, identify the period covered by the report and clearly state the opinion of the accountant as to whether the party’s assessment of compliance with the servicing criteria was fairly stated in all material respects, or must include an opinion to the effect that an overall opinion cannot be expressed.⁵⁴⁴

Consistent with our proposal, the report issued by the registered public accounting firm must be available for general use and not contain restricted use language. We believe that the servicing criteria we have adopted as part of Item 1122 of Regulation AB are suitable criteria, as that term is defined in the SSAE No. 10, and are available to enable a registered public accounting firm to issue a report on a party’s assertion without restricted use language.

8. Current Reporting on Form 8-K

On March 11, 2004, the Commission adopted amendments to expand the number of events that are reportable on Form 8-K.⁵⁴⁵ The amendments also shortened the Form 8-K filing deadline for most items to four business days after the occurrence of an event requiring disclosure under the form. These amendments were responsive to the “real time disclosure” mandate in Section 409 of the Sarbanes-Oxley Act and were intended to provide investors with better and faster disclosure of important events.⁵⁴⁶ As we stated in the Proposing Release, we believe the objectives of those amendments are equally applicable with respect to asset-backed securities. Accordingly, we are clarifying application of the Form 8-K reporting items for asset-backed securities. As proposed, the result of the existing amendments and our clarifying amendments will mean that the number of reportable events under Form 8-K with respect to asset-backed securities will increase from current modified reporting requirements.

a. Items Requiring Current Disclosure

Similar to Form 10-K, we are adding a new general instruction to Form 8-K to specify how the form