Release No. 33-8518

Release No. 34-50905

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

ASSET-BACKED SECURITIES

Section IV - Paperwork Reduction Act

Section V - Cost-Benefit Analysis

Section VI - Consideration of Burden

Section VII - Regulatory Flexibility Analysis Certification

Section VIII - Statutory Authority

Table of Contents

IV. Paperwork Reduction Act

A. Background

Our amendments contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (PRA).⁵⁷³ We published a notice requesting comment on the collection of information requirements in the Proposing Release, and we submitted these requirements to the Office of Management and Budget (OMB) for review in accordance with the PRA.⁵⁷⁴

We did not receive any comments on the PRA analysis contained in the Proposing Release. As discussed in Part III, we have made several changes to the proposed rules in response to comments on the substance of the proposals. These changes are designed to avoid potential unintended consequences and reduce possible additional costs or burdens pointed out by commenters. After evaluating the comments and our responsive revisions to address them, we have decided not to change our initial PRA estimates described in the Proposing Release and submitted to OMB.

However, as part of our changes to reduce potential additional burdens, we are extending the availability of filing extensions under Exchange Act Rule 12b-25 to new Form 10-D. Filing extensions under Rule 12b-25 already are available for several other required Exchange Act reports, and we requested comment in the Proposing Release as to whether we should extend the rule to Form 10-D. Filing extensions under Rule 12b-25 are contingent on filing a Form 12b-25 to provide notice to the Commission and the marketplace that registrants will be unable to file a required report in a timely manner. Form 12b-25 is a separate “collection of information” under the PRA, and accordingly we are revising our burden estimates for Form 12b-25 to reflect our amendments and new filings for Form 10-D late filings. We are submitting these revised burden estimates for Form 12b-25 to OMB for review in accordance with the PRA, and in this release we are publishing notice and requesting comment on the revised Form 12b-25 "collection of information" requirement.

In sum, the titles for all the collections of information affected by these amendments are:

(1) “Form S-1” (OMB Control No. 3235-0065);

(2) “Form S-3” (OMB Control No. 3235-0073);

(3) “Form S-11” (OMB Control No. 3235-0067);

(4) “Form 10-K” (OMB Control No. 3235-0063);

(5) “Form 8-K” (OMB Control No. 3235-0288);

(6) “Regulation S-K” (OMB Control No. 3235-0071);

(7) “Form 10-D” (a new collection of information); and

(8) “Form 12b-25” (OMB Control No. 3235-0058).

As we explained in the Proposing Release, the regulations and forms listed as Items (1)-(6) were adopted pursuant to the Securities Act and the Exchange Act and set forth the disclosure requirements for registration statements, periodic reports and current reports filed with respect to asset-backed securities and other types of securities to ensure that investors are informed. Form 10-D represents a new form type for distribution reports currently filed under cover of Form 8-K under the modified reporting system for asset-backed securities, or ABS. As noted above, Form 12b-25 provides notice to the Commission and the marketplace that a registrant will be unable to file a required report in a timely manner and is a condition to a filing extension for the underlying Exchange Act report. The hours and costs associated with preparing, filing and sending these forms constitute reporting and cost burdens imposed by each collection of information. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number.

B. Summary of Amendments

We are addressing comprehensively the registration, disclosure and reporting requirements for asset-backed securities under the Securities Act and the Exchange Act. This includes providing tailored disclosure requirements and guidance for Securities Act and Exchange Act filings involving asset-backed securities. This information is needed so that security holders can make informed investment decisions regarding asset-backed securities. As we explained in the Proposing Release, ABS issuers and ABS differ from operating companies and their securities. Many of the Commission’s existing disclosure and reporting requirements applicable to operating companies generally do not elicit information that is relevant for ABS transactions. Through the staff filing review process and, where necessary, through staff no-action letters and interpretive statements, an informal disclosure and reporting scheme has developed taking into account evolving industry practices.

With a few exceptions, the amendments consolidate and codify current staff positions and industry practice. We are adopting a new principles-based set of disclosure items, “Regulation AB,” as a sub-part of Regulation S-K that will form the basis for disclosure in both Securities Act registration statements and Exchange Act reports. Amendments to the forms referenced above (other than Form S-11⁵⁷⁵ and Form 12b-25) specify the menu of disclosure items that apply to asset-backed securities, including items contained in new Regulation AB and a limited number of pre-existing disclosure requirements identified in the forms. As noted above, our amendments to Form 12b-25 extend the availability of filing extensions under Exchange Act Rule 12b-25 to new Form 10-D.

The amendments are designed to establish a tailored registration, disclosure and reporting system for asset-backed securities offerings. Compliance with the revised disclosure requirements will be mandatory. There will be no mandatory retention period for the information disclosed (except with respect to registrants that elect to avail themselves of the Web site filing accommodation for static pool data in prospectuses, which entails a five year record retention requirement), and responses to the disclosure requirements will not be kept confidential.

C. Summary of Comment Letters on the PRA Analysis and Revisions to Proposals

As noted above, we received no comments in response to our request for comment on the PRA analysis in the Proposing Release. We have made several changes in response to comments on the substance of the proposals that are designed to avoid potential unintended consequences and reduce possible additional costs or burdens pointed out by commenters. For example, in response to comment regarding potential additional disclosure burdens regarding the proposed static pool disclosure requirement, we have made responsive revisions to clarify the disclosure required and to provide alternate means to provide the disclosure, including through Internet Web sites. As another example, we have revised the tests for determining financial significance regarding certain derivative instruments in response to comment that the proposed tests would lead to potential additional disclosure burdens. We have revised our proposal regarding an assessment and attestation of compliance with servicing criteria in response to comment that the proposed approach may also result in unintended additional burdens. We also have made several changes to the proposed disclosure items for prospectus and distribution report disclosure to further tailor and clarify the disclosure required, particularly in the areas where we proposed additional disclosure, such as that regarding the background, roles and experience of various transaction parties. As discussed above, we are revising our burden estimates for Form 12b-25 to reflect amendments to extend filing extensions to Form 10-D made in response to comment. These revisions are discussed below.

D. Revisions to PRA Reporting and Cost Burden Estimates

As discussed in the Proposing Release, the existing PRA burden estimates before these amendments for each of the affected collections of information are based on an average of the time and cost incurred by all types of public companies, not just ABS issuers, to prepare a particular information collection. As noted above, however, the existing disclosure and reporting system with respect to ABS that we are codifying recognizes that information relevant to ABS differs substantially from that relevant to other securities.

For purposes of the PRA collection of information requirements discussed in the Proposing Release, we first estimated the average number of hours that an ABS issuer currently spends to complete one of the listed forms.⁵⁷⁶ We then estimated the incremental burden change that would result from the amendments. Our final rules include disclosure options for providing static pool information in prospectuses, including through an Internet Web site under certain conditions. These conditions include Web site availability and record retention requirements. We have evaluated these disclosure options and their respective requirements in the context of the collections of information to which they relate (Forms S-1 and S-3), and they are incorporated into the estimates discussed below.

Further, and as discussed in the Proposing Release, we understand that some issuers may experience costs in excess of our average estimates in the first year of compliance, such as revising their systems and practices to adjust to the new rules, but that costs should decrease in subsequent years. The burden also will vary among issuers based on the complexity of the ABS transaction, the number of parties involved (especially parties participating in the servicing function in the case of Form 10-K), the disclosure option they choose for static pool information (in the case of Forms S-1 and S-3), and the nature and level of initial development of their compliance procedures. We considered all of these factors in evaluating our estimates. As discussed above, after evaluating the comments received and our changes to the proposals, we are not revising our estimates overall for each collection of information.

Each entity that files reports with the Commission is assigned a Standard Industrial Classification (SIC) code to indicate the entity’s type of business. SIC Code 6189 is used with respect to asset-backed securities. As we explained in the Proposing Release, entities assigned this SIC Code were used as a proxy for estimating the number of responses with respect to ABS issuers. In addition, unless otherwise specified below, all estimates of the number of responses were based on filings made during the Commission’s 2003 fiscal year: October 1, 2002 through September 30, 2003.

1. Form S-3

We revised our current burden estimate for Form S-3 for ABS issuers to take into account that ABS issuers do not principally rely on incorporation by reference from separately required Exchange Act reports to provide their disclosure, which is the practice for most non-ABS issuers that use Form S-3. As a result, for ABS we used the same burden estimate for Form S-3 as we estimated for Form S-1 for ABS issuers, which we estimated to be an average of 1,000 hours. We then estimated that completing and filing a Form S-3 under the new disclosure requirements will result in an average increase of approximately 25% to our estimate of the current Form S-3 reporting burden imposed on ABS issuers, or 250 hours per form. We estimated that 25% of the burden is borne by the ABS issuer and that 75% of the burden is borne by outside professionals retained by the issuer at an average cost of $300 per hour.⁵⁷⁷ During our 2003 fiscal year, we received 168 Form S-3 filings related to asset-backed securities. Using our estimates of the percentages of the burden prepared by the issuer and outside professionals, we thus estimated that the amendments will result in an added annual burden of 10,500 hours (168 filings x 250 additional hours x .25) and an added annual cost of $9,450,000 (168 filings x 250 additional hours x .75 x $300 per hour).

2. Form S-1 and Form S-11

As discussed above, we estimated that an ABS Form S-1 filing currently imposes a reporting burden of an average 1,000 hours per response. As with Form S-3, we estimated that completing and filing a Form S-1 under the new disclosure requirements will result in an increase of approximately 25% over the amount of time currently spent by ABS issuers to complete and file the form, resulting in an increase of 250 hours per response over the current reporting burden. As with Form S-3, we estimated that 25% of the burden is borne by the ABS issuer and that 75% of the burden is borne by outside professionals retained by the issuer at an average cost of $300 per hour.

During our 2003 fiscal year, we received 7 Form S-1 filings related to asset-backed securities. In addition, we received 18 filings on Form S-11 related to asset-backed securities. As we explained in the Proposing Release, we are moving all Securities Act registrations of ABS offerings to Form S-1 or Form S-3. Assuming that the filings on Form S-11 could not otherwise be conducted on Form S-3, we estimated that these filings would instead be made on Form S-1. Thus, we estimated there would be 25 ABS offerings registered on Form S-1, and we correspondingly reduced our estimate of responses on Form S-11 by 18 responses. Using our estimates of the percentages of the Form S-1 burden prepared by the issuer and outside professionals, we estimated that the amendments will result in an added annual burden of 1,563 hours (25 filings x 250 additional hours x .25) and an added annual cost of $1,406,250 (25 filings x 250 additional hours x .75 x $300 per hour).

3. Form 10-K

As with our burden estimates for Securities Act registration statements, we first derived a reporting burden estimate to reflect the substantially different and more limited disclosures ABS issuers provide under the existing modified reporting system. We estimated that currently it takes an ABS issuer an average of 90 hours to prepare a Form 10-K. As we explained in the Proposing Release, the most significant difference between the amendments and the existing system is with respect to the assessment of compliance with servicing criteria. We estimated that completing and filing a Form 10-K under the amendments will result in an average increase of approximately 33% over the amount of time currently spent by entities completing the form, or 30 hours per response. We estimated that 25% of the reporting burden is borne by the ABS issuer and that 75% of the burden is borne by outside professionals retained by the issuer at an average cost of $300 per hour.

Based on filings in our 2003 fiscal year, we estimated 1,200 Form 10-K filings related to asset-backed securities.⁵⁷⁸ Using our estimates of the percentages of the burden prepared by the issuer and outside professionals, we thus estimated that the amendments will result in an added annual burden of 9,000 hours (1,200 filings x 30 additional hours x .25) and an added annual cost of $8,100,000 (1,200 filings x 30 additional hours x .75 x $300 per hour).

4. Form 8-K

As we explained in more detail in the Proposing Release, ABS issuers under the existing modified reporting system use Form 8-K to file periodic distribution and pool performance information in addition to reporting current events. To separate this reporting from the disclosure of current events, we proposed and are creating one new form type for asset-backed securities, Form 10-D, to act as the report for the periodic distribution and pool performance information. Form 8-K will continue to prescribe certain reportable events that require current disclosure by ABS issuers. Form 8-K also continues to be available to report any events that an ABS issuer deems to be of importance to security holders.

During our 2003 fiscal year, we received 12,633 Form 8-K filings related to asset-backed securities. We estimated 9,500 of these filings will instead appear as Form 10-D filings under the amendments.⁵⁷⁹ Accordingly, we estimated a 9,500 decrease in the total number of Form 8-K filings.

With respect to the use of Form 8-K for required reportable events, we estimated that the time it takes to prepare a Form 8-K for a required reportable event does not vary between an ABS and a non-ABS issuer. Thus, we estimated that an ABS issuer spends, on average, approximately 5 hours completing the form. As with our estimates for non-ABS issuers, we estimated that 75% of the burden is borne by the ABS issuer and that 25% of the burden is borne by outside professionals retained by the issuer at an average cost of $300 per hour.

We estimated that our amendments to the required reportable events on Form 8-K applicable to ABS issuers will cause, on average, an increase of two reports on Form 8-K per ABS issuer per year. Based on our estimate of 1,200 ABS issuers, we estimated an increase of 2,400 Form 8-K filings per year. Using our estimates of the percentages of the burden prepared by the issuer and outside professionals, we thus estimated that the amendments will result in an added annual burden of 9,000 hours (2,400 filings x 5 hours x .75) and an added annual cost of $900,000 (2,400 filings x 5 hours x .25 x $300 per hour).

5. Form 10-D

As discussed above, we estimated there will be 9,500 Form 10-D filings per year. We estimated that, on average, completing and filing a Form 10-D under the amendments will result in a burden of 30 hours per filing. As with our other estimates for Exchange Act reports by non-ABS issuers, we estimated that 75% of the burden is borne by the ABS issuer and that 25% of the burden is borne by outside professionals retained by the issuer at an average cost of $300 per hour. We thus estimated that Form 10-D would result in a total annual burden of 213,750 hours (9,500 filings x 30 hours x .75) and an added annual cost of $21,375,000 (9,500 filings x 30 hours x .25 x $300 per hour).⁵⁸⁰

6. Regulation S-K

Regulation S-K includes the requirements that an issuer must provide in filings under both the Securities Act and the Exchange Act. Our disclosure changes include changes to items under Regulation S-K and the addition of a new subpart to Regulation S-K—Regulation AB—that provides disclosure items particularly tailored to asset-backed securities.⁵⁸¹ However, as noted in the Proposing Release, the filing requirements themselves are included in Forms S-1, S-3, 10-K, 10-D and 8-K, and we reflected the burden for the new requirements in the burden estimates for those forms. The items in Regulation S-K, including Regulation AB, do not impose any separate burden. Consistent with historical practice, we assign one burden hour to Regulation S-K for administrative convenience to reflect the fact that the regulation does not impose any direct burden on companies.

7. Form 12b-25

As discussed above, we are extending Exchange Act Rule 12b-25 and Form 12b-25 to Form 10-D filings. The amendments permit ABS issuers to use Form 12b-25 for the purpose of obtaining a filing extension with respect to a Form 10-D filing. Form 10-D filings previously have been made under Form 8-K, which is not eligible for filing extensions under Rule 12b-25. Hence, we do not have experience with filing extensions or Form 12b-25 filings for the types of reports that will constitute Form 10-D filings. We do know that, based on filings in our 2003 fiscal year, Form 12b-25 filings were made for approximately 20% of Form 10-K and 10-KSB filings and approximately 12% of Form 10-Q and 10-QSB filings. After considering factors such as the frequency, disclosure requirements and relative administrative complexity of Form 10-D filings compared to these other filings, we are estimating that Form 12b-25 filings will be made for approximately 20% of Form 10-D filings. Based on our estimate of 9,500 Form 10-D filings, we thus estimate an increase of 1,900 Form 12b-25 filings. We estimate the time it takes for an ABS issuer to prepare a Form 12b-25 will not vary from that required by a non-ABS issuer, which we have estimated to be, on average, approximately 2.5 hours per form, all of which is borne by the issuer. Accordingly, we estimate that the amendments will result in an added annual burden of 4,750 hours (1,900 filings x 2.5 hours).

E. Request for Comment

We request comment on our amendments to the collection of information requirements for Form 12b-25 in order to (a) evaluate whether the collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; (b) evaluate the accuracy of our estimates of the burden of the collection of information; (c) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; (d) evaluate whether there are ways to minimize the burden of the collection of information on those who respond, including through the use of automated collection techniques or other forms of information technology; and (e) evaluate whether the amendments to Form 12b-25 will have any effects on any other collections of information not previously identified in this section.

Any member of the public may direct to us any comments concerning the accuracy of the Form 12b-25 burden estimates and any suggestions for reducing the burdens. Persons who desire to submit comments on the Form 12b-25 collection of information requirements should direct their comments to the OMB, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and send a copy of the comments to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609, with reference to File No. S7-21-04. Requests for materials submitted to the OMB by us with regard to these collections of information should be in writing, refer to File No. S7-21-04, and be submitted to the Securities and Exchange Commission, Records Management, Office of Filings and Information Services, 450 Fifth Street, NW, Washington, DC 20549. Because the OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication, your comments are best assured of having their full effect if the OMB receives them within 30 days of publication.

V. Cost-Benefit Analysis

A. Background and Summary of the Final Rules

The final rules and Regulation AB provide definitive rules for public offerings of asset-backed securities registered under the Securities Act as well as ongoing reporting by asset-backed issuers under the Exchange Act. They mostly codify staff and industry practice for ABS offerings with some incremental changes and responsive changes made to comments on the proposals. The rules and this release also should resolve a number of ambiguities and potential misconceptions regarding application of the federal securities laws to asset-backed securities. We are sensitive to the cost and benefits that result from our rules. In this section, we examine the benefits and costs of our rules.

As discussed in the Proposing Release, the Commission’s corporate offering and disclosure rules were not designed to accommodate some of the special characteristics of ABS offerings. The current offering and disclosure process for ABS has developed through no-action letters, staff comment, market practice and informal staff interpretations. This current informal regulatory regime for asset-backed offerings is sub-optimal for a well-developed market that represents a large portion of the U.S. capital markets. The accumulated informal guidance has diminished the transparency of applicable requirements, potentially decreasing efficiency and leading to uncertainty and common problems. Before the Proposing Release, many issuers, investors and other market participants had requested a defined set of regulatory requirements.⁵⁸² Many compliance issues may be mitigated and potential issues avoided through clearer and more transparent regulatory requirements. Establishing clear and transparent requirements also could reduce costs of entry into the market. As a result, the final rules to codify staff position and industry practice with incremental changes and responsive changes should clarify and simplify the process of registering an ABS offering. This should lower the overall costs of complying with the federal securities laws, promote more efficient capital markets, and potentially lower the cost of capital. There also may be secondary effects relating to more efficient securitizations, such as the opportunity for lowered borrowing costs for obligors of the underlying assets, such as consumers.

In order to improve an investor’s understanding of an ABS offering, we are adopting incremental enhancements, with modifications in response to comment, to disclosure regarding the participants involved in an ABS transaction and of historical data regarding the performance of the assets backing the current and prior comparable asset-backed offerings, known as static pool data. In addition, we intend to improve the current framework for reporting on compliance with servicing criteria that will operate within a disclosure-based framework and cover the entire spectrum of the servicing function in an ABS transaction. We are retaining the basic approach set forth in our original proposal with a uniform set of criteria, although we are adopting a modification in response to comment that instead of a single "responsible party," reports of compliance with servicing criteria from each party participating in the servicing function, with associated attestation reports from registered public accountants, must be provided.

We also are adopting incremental changes to current staff and industry practice to allow certain lease-backed asset-backed securities immediate access to shelf registration through Form S-3 eligibility, along with disclosure to address the different nature of these offerings. In addition, we are allowing additional asset types to be securitized through master trusts or through transactions using a revolving period, again with disclosure to add transparency to the use of these structures and potential changes to the asset pool over time. We are relaxing restrictions on incorporation by reference for asset-backed securities and codifying alternatives to refer to third party filings to provide more cost-effective options to provide required information. We also are granting foreign ABS issuers access to shelf offerings and Form S-3. Finally, we are providing interpretive guidance in a number of areas in addition to the final rules, such as guidance regarding the preparation of base prospectuses and prospectus supplements and EDGAR reporting, to establish more clear and uniform practices across the ABS market.

Commenters on the proposals overwhelmingly supported establishing a separate framework for the registration and reporting of asset-backed securities.⁵⁸³ We did not receive any specific comments on our cost-benefit analysis contained in the Proposing Release. Some commenters suggested as a general matter that we should carefully consider each incremental step beyond current market practice to ensure that the perceived benefit to investors is outweighed by the additional burdens that would be imposed, and whether the benefits sought can be achieved in a less intrusive manner.⁵⁸⁴ Another commenter also noted on a general matter that, because of the limited recourse special purpose nature of most ABS transactions, the costs of compliance burdens are likely to be passed through to the investor who owns the residual or junior cash flows in the ABS transaction.⁵⁸⁵

As discussed in the Proposing Release, we are aware of potential costs and burdens associated with the incremental changes that we proposed to the existing current market practices for ABS transactions and requested comments on these potential burdens. We have carefully evaluated the concerns expressed by commenters and have made several measured changes in response to comments on the substantive discussion of the proposals that are designed to alleviate potential unintended consequences and reduce possible additional costs or burdens pointed out by commenters. For example, in response to comment regarding potential additional disclosure burdens regarding the proposed static pool disclosure requirement, we have made responsive revisions to clarify the scope of the disclosure required and to provide alternative means to provide disclosure, including through Internet Web sites. We have revised our proposal regarding an assessment and attestation of compliance with servicing criteria in response to comment that the proposed approach may also result in unintended administrative burdens. We also have made several changes to the proposed disclosure items for prospectus and distribution report disclosure to further tailor and clarify the disclosure required. Cumulatively, we believe the final rules, as revised from the proposal, will achieve clearer and more transparent regulatory requirements for both issuers and investors in a less intrusive manner to issuers.

We also have delayed the compliance date beyond that discussed in the Proposing Release in response to requests for an extended transition period. A longer transition period will help to alleviate the immediate impact of any costs and burdens imposed on issuers. We expect investors to benefit from the additional time that we are affording issuers and market participants to implement appropriate disclosure processes, including improved Exchange Act reporting processes and more meaningful and relevant disclosure documents. In addition, we are grandfathering ABS offerings that become subject to Exchange Act reporting obligations before the end of our extended transition period. These allowances should assist various transaction participants in planning for compliance with the new regulatory regime for future ABS offerings, which may reduce uncertainty and support more effective pricing of those asset-backed securities.

B. Parties Eligible to Use the New Regulatory Structure

We continue to take a principles-based approach to the definition of asset-backed security that allows broad flexibility as to asset types and structures that we believe should be subject to the alternative regulatory regime that we are creating for such securities. The definition of an asset-backed security will no longer be limited to those issuers eligible to register securities on Form S-3 but expanded to any type of security that meets the definition. This is intended to bring all ABS transactions and issuers into an appropriate registration, disclosure and reporting system regardless of what Securities Act form they are eligible to use.

Our amendments codify several clarifying interpretations of existing staff positions to recognize and build upon the operational and structural distinctions between ABS and non-ABS transactions. The current staff position regarding non-performing assets will be incorporated into the definition of an asset-backed security. We have made revisions in response to comment to take a disclosure-based approach to delinquent assets as a less burdensome way to incorporate the current staff position on delinquency into the definition of an asset-backed security. We are adopting, with certain modifications in response to comment, proposed expansions of certain staff positions to allow additional asset types and transaction features to be included. For example, the definition of asset-backed security will be expanded so that more lease-backed ABS will be eligible to use Form S-3. The rules we are adopting will allow structures such as master trusts and revolving periods, currently allowed by the staff for only certain asset classes, to be used by all asset-backed issuers. In response to comment, we have even further expanded the revolving period. We believe these expansions will result in increased flexibility in structuring transactions that meet market demands. The rules we are adopting will require more disclosure to provide greater transparency of the operations of these structures and changes to pool composition over time.

As discussed in Section III.A., commenters were mixed on our approach to the definition of an asset-backed security. On the one hand, commenters representing investors expressed concern in expanding access to the alternative regulatory regime for asset-backed securities in recognition of the fact that investment decisions on these transactions are being made under more compressed time frames and with less access to information through shelf registration. On the other hand, commenters representing primarily issuers and their representatives would have preferred, in lieu of our approach of codifying exceptions to the definition of an asset-backed security, abandoning many of the core principles of the definition, such as deleting the "discrete pool" requirement, which would permit unlimited use of master trusts structures and revolving periods, in order to encourage further innovation. While we recognize that there are instances where some limited exceptions to these general principles would be appropriate and consistent for access to the ABS regulatory regime, and these are reflected in the modifications adopted in the final rules, we agree with the concerns of investors that lack of a "discrete" requirement in the definition of an asset-backed security would make it difficult for an investor to make an informed investment decision when the composition of the pool is unknown or could change over time. However, in response to comment, we made several minor revisions to the proposed limits as well as modifications to staff positions relating to delinquent and non-performing assets to reduce the potential costs raised by commenters and to be more consistent with current market practice.

The definition and interpretations we are adopting are intended to establish parameters for the types of securities that are appropriate for our alternative regulatory regime for ABS. The definition does not mean or imply that public offerings of securities outside of these parameters may not be registered, but only that the disclosure and other requirements in the ABS regime are not specifically designed for those securities. Such securities would need to rely on non-ABS form eligibility for registration and additional or alternative disclosures would be required.

Commenters also noted that some securities, most notably synthetic securitizations, may not necessarily meet all of the core principles in the definition of an "asset-backed security," but nonetheless argued it would make it more difficult for market participants to develop such products without continued discussions with the staff if they were not included in our new regulatory regime. We continue to believe the ABS regulatory regime that we are adopting should be appropriately limited to a definable group of asset-backed securities. However, we also recognize that the default application of the existing disclosure regime for corporate issuers might not be most appropriate for synthetic securitization. We encourage issuers and promoters of such securities to continue their interaction with the staff. In addition, we request additional comment about these securities and whether an appropriate alternative regime should be established for these kinds of securities with respect to registration, disclosure and ongoing reporting.

C. Securities Act Registration

We are adopting rules to allow domestic and foreign issuers to use either Form S-1 or Form S-3 to register an offering of asset-backed securities. Some transactions backed by lease pools also will be allowed to use Form S-3 under the final rules. This will provide the benefit of delayed offerings to foreign issuers and many issuers of ABS backed by pools of leases that currently are not S-3 eligible. We believe this will make the offering process less costly for these issuers. We are adopting, substantially as proposed, disclosure requirements for these two types of offerings to provide investors with a clear understanding of the unique issues these offerings raise, which commenters generally supported.

The rules codify current staff position that the depositor is considered the issuer for Securities Act purposes and should sign the registration statement. To remove regulatory uncertainty for issuers, we are codifying a number of current staff positions, including clarifying and streamlining the conditions when a distribution of underlying pool assets must be concurrently registered with the distribution of ABS. We also are codifying, as proposed, the basic concept in existing staff no-action letters that broker-dealers involved in Form S-3 ABS transactions do not need to deliver a copy of the preliminary prospectus 48 hours prior to sending a confirmation of sale. We believe these rules we are adopting for Securities Act registration will increase transparency of the current informal regulatory regime for issuers of asset-backed securities, provide increased flexibility for additional ABS transactions and help the asset-backed securities market function more efficiently.

We are adopting general instructions for Form S-1 and Form S-3 for registered asset-backed offerings substantially as proposed to clarify those items under Regulation S-K that an issuer will be required to disclose, if applicable, and list the items that an issuer may omit due to the different nature of the ABS transactions. The instructions for Form S-1 and Form S-3 also specify the additional disclosure items to be required under Regulation AB, which is a new set of principles-based disclosure requirements for ABS discussed in the next section. We believe the instructions integrate disclosure items for the respective forms, which will reduce compliance costs and provide certainty about the disclosure requirements for issuers while promoting relevant disclosure for investors.

As discussed above, we are adopting limits on the amounts and duration on the codified exceptions to the "discrete" requirement in the definition of an "asset-backed security." However, in response to comments describing the current market practice of prefunding accounts and the commercial reality of the use of revolving periods, we are not adopting the proposed additional restrictions for prefunding accounts and revolving periods for Form S-3 eligibility.

As noted in Section III.A., issuers and their representatives generally objected to the proposals requiring Exchange Act reporting compliance for Form S-3 eligibility as being more restrictive than necessary. While recognizing there have been compliance problems with Exchange Act reporting as well as the need to fix the problem with the current staff position, which simply allows a sponsor to establish a new special purpose depositor, most commenters nevertheless requested flexibility and less restrictive alternatives. In response to several commenter suggestions, we are revising the proposal to limit the focus to transactions established by affiliated depositors involving the same asset class. We believe this revision, while maintaining an emphasis on Exchange Act reporting and proper disclosure for investors, reduces the potential breadth of the proposed application of the reporting compliance requirement for Form S-3 eligibility across all asset classes and avoids commenter concerns about inadvertently linking a person's Form S-3 eligibility to an unrelated party's reporting history. We also are providing several additional accommodations to assist issuers with the requirement, including an extensive transition period to allow issuers to improve their reporting practices from the present state, instituting Rule 12b-25 filing extensions for Form 10-D filings, modifying several Regulation AB disclosure items that could potentially require third party information, and expanding the number of Form 8-K items that need only be current and not timely for Form S-3 eligibility.

The Proposing Release discussed what needs to be included in a market-making prospectus when a broker-dealer is an affiliate of the servicer. As discussed in Section III.A., we received many comments requesting that the Commission revisit staff interpretations regarding the registration of market-making transactions in the ABS context given the costs involved in meeting the market-making prospectus delivery requirements and the limited investor benefits as a result. We are persuaded that the affiliation issue in ABS is not the same as a broker-dealer affiliated with a corporation, such as through significant ownership or board representation, and we will no longer interpret a requirement to register market-making transactions for asset-backed securities. As pointed out by many commenters on this topic, this should result in reduced compliance expenses and risk of shelf disqualification, all without materially affecting investor protections.

D. Disclosure

The disclosure items in Regulation AB that we are adopting provide a disclosure structure tailored to the different nature of ABS. This requirement will assist issuers and investors by clarifying the disclosure requirements. We have made revisions to the proposed disclosure structure as suggested by commenters in recognition of market practice. We continue to provide several illustrative examples for a limited number of disclosure items in response to comment for additional guidance by issuers. In addition, the final rules:

• Confirm that financial statements of the issuing entity are not required for ABS transactions;
   

• Clarify and revise in response to comment when third party financial information and other descriptive information is required; and
   

• Codify when third party financial information may be incorporated by reference or referred to in registration statements.

As we noted in Section III.B., commenters generally agreed that the disclosure required under Regulation AB is largely based on market driven disclosure that appears in public filings today. One commenter representing investors believed Regulation AB represents a major step in improving disclosures provided to investors and includes many of the items investors have previously recommended as critical to investors.⁵⁸⁶ Most commenters also supported principles-based disclosure requirements in lieu of an exhaustive list of disclosure items for each asset-class. We continue to believe a principles-based approach fosters clarity and comparability for investors without being overly rigid and burdensome for issuers. The emphasis on a materiality-based standard for the new disclosure items attempts to mitigate the possibility that immaterial information may overwhelm the disclosure. The new principles-based set of disclosure based on materiality in Regulation AB gives registrants, underwriters and their advisors the opportunity to balance the need for registrants to have flexibility when drafting disclosure with investors’ need for more transparency. As we stated in the Proposing Release, whether they will take advantage of this opportunity is largely their decision.

The disclosure rules require increased disclosure regarding the roles and qualifications of parties involved in the offering and on-going activities of the ABS transaction. As discussed more fully in Section III.B., commenters generally endorsed increasing disclosure beyond current market practice to increase transparency in this area. In particular, investors supported increased disclosure regarding the servicer and its servicing practices. However, commenters representing issuers and their representatives were also concerned with the potential breadth of the disclosure, and we have made responsive revisions to these concerns. In recognition of the importance of the servicer to the ongoing performance of the ABS transaction, we are retaining our proposed approach for a principles-based definition of "servicer" that captures the multiple entities that may perform one or more material aspects of the entire servicing function. We believe it would be impractical and ineffective to create separate definitions to describe the many entities used to perform different servicing functions across all classes. However, to reduce potential disclosure burdens regarding unrelated third parties, we have revised the percentage breakpoint for determining when more detailed disclosure would be required for unaffiliated servicers that service individual pool assets from 10 percent to 20 percent. We have made similar changes for required disclosure for unaffiliated originators. Similarly, we have significantly revised the test for determining financial significance for certain derivative instruments in response to comment that the proposed tests would lead to potential additional disclosure burdens. The revised test to determine the maximum probable exposure for these derivatives will reduce the potential burden while still providing disclosure to investors regarding such instruments, including when their financial significance to the transaction increases.

As discussed in Section III.B., investors uniformly supported the proposed requirement for static pool information, emphasizing the importance of the information to them in making informed investment decisions. Further, as we stated in the Proposing Release, we understand many issuers already have static pool information available, although it may have to be subjected to additional procedures and diligence before it is included in the disclosure documents. The most common concern for issuers was the lack of guidance on the scope of the requirement might result in unnecessary and excessive disclosure. These commenters provided a number of suggestions to clarify the scope of the request and tailor it to reduce the issuer's burden.

To provide clarity in determining the material information to be disclosed by issuers, we are adopting separate starting points for disclosure depending on whether the ABS transaction involves an amortizing asset pool or a revolving asset master trust. These flexible starting points should help guide issuers in determining the scope of the static pool data, while still promoting comparability of information across issuers. At the same time, we are revising the requirement in response to comment to include several additional features. For example, we are increasing the amount of data to a minimum of five years, to the extent material, based upon commenter concerns that the proposed three year requirement may not be sufficient for a meaningful evaluation of trends by asset type. We also are adding prepayment information and, for prior pools and information about the sponsor's portfolio, summary characteristics. These additional features, some of which were suggested by issuers themselves, may impose certain additional marginal costs, but commenters agreed they will significantly increase the usefulness of the data and the resultant benefits to investors and the efficiency of the ABS market. However, we are not adopting several other proposed items as specific line items in the disclosure requirement in response to comment that their potential breadth would be too burdensome and to tailor the disclosure that is material to the transaction. We also are providing a limited safe harbor for static pool data that relate to certain pools and periods before the compliance date to encourage disclosure of such information and minimize the amount of time before investors can begin to incorporate static pool information into their investment decisions.

In response to comment on making the disclosure more functional by taking advantage of the technological advancements of the Internet to enable investors to access and analyze the information, we are providing a filing accommodation that permits issuers to provide the information through an Internet Web site. Commenters confirmed that many issuers already provide performance data through an Internet Web site. Under this accommodation, investors could be assured access to accurate and reliable information since the information provided through the specific Internet Web site is deemed to be a part of the prospectus included in the registration statement for the asset-backed securities. The functionality of this alternative method will assist investors in analyzing the information and remove the burden to issuers of duplicating the information in each prospectus and should ease updating such information. Despite the potential benefits of being able to provide the disclosure in the manner most desirable to investors, issuers electing the Web-based option will incur cost in maintaining and retaining information to satisfy the record retention requirement. There also may be start-up costs in creating or modifying Web sites for disclosure through this accommodation consistent with its required conditions.

Even with the responsive revisions to clarify and tailor the disclosure requirements, we recognize the disclosure under Regulation AB may increase the costs to issuers of asset-backed securities. The final rules are intended to enhance the utility of the disclosure in registration statements and ongoing Exchange Act reports. Issuers may need to reevaluate current disclosure from prior registration statements to determine the scope of additional information. We also encourage issuers to evaluate whether they should eliminate immaterial boilerplate disclosure that is not required under Regulation AB and that does not aid understanding by investors, but that they currently provide. Due to the informal nature of the current requirements, issuers may be unnecessarily including information that is not relevant or helpful to investors. Issuers may need to employ additional resources, including in-house personnel and outside legal counsel, to assist in this evaluation. We anticipate that most of these costs may be short-term or one-time costs in preparing the first registration statement and Exchange Act reports under the new ABS disclosure regime.

We also estimate that issuers may, at least initially, need extra time to prepare the information or obtain such information from the respective parties to the ABS transaction. However, we continue to believe that parties already provide much of this information to rating agencies during the process of obtaining a rating on the offering based on comments we received, and thus such information should be readily available. In addition, we are providing an extended transition period for compliance with the disclosure requirements in Regulation AB to allow issuers additional time to implement processes and procedures to adapt to the new disclosure structure. Therefore, we do not anticipate that issuers should incur significant long-term costs in complying with the new disclosure regime.

For purposes of the Paperwork Reduction Act, we estimated that the incremental burden in preparing the additional Securities Act disclosures would be on average 250 hours per registration statement. Based on our estimated costs of in-house personnel time, we estimated the incremental PRA hour-burden would translate into an approximate cost of $12,967,275.⁵⁸⁷ We did not receive any comments on the PRA analysis contained in the Proposing Release and none of the commenters provided any comments to the estimates of increased compliance costs. These additional compliance costs should result in consistent and more tailored information that may assist the capital markets in properly valuing asset-backed securities. These benefits are difficult to quantify.

E. Communications during the Offering Process

In codifying as proposed the existing ability to use written communications outside of the statutory prospectus, we recognize the current beneficial information these communications provide to potential investors in an ABS offering. Under the final rules, issuers and underwriters can communicate with potential investors through additional communications apart from the statutory prospectus to structure the offering. The rules we are adopting clarify further the definition of the written communications that an issuer may use to avoid uncertainty and incrementally expand it by allowing the use of static pool data, the identification of key parties and information about the offering process. The rules also clarify that the scope of the written communications permitted includes data at the individual pool asset level. Loan level data may in some cases assist investors in better understanding the nature of the individual loans included in the pool, which in turn may increase the quality of information available to investors. As we explain in Section III.C., commenters overall supported the proposals although some requested expansion. We are addressing whether additional accommodations to the communications restrictions would be appropriate in connection with the Offering Process Release.

The rules adopted today streamline the filing requirements for the communications allowed by providing that all types of ABS informational and computational material are to be filed in the same timeframe, thus reducing the regulatory uncertainty for issuers as to when to file written communications. The rules eliminate the hardship exemption for filing these materials in paper rather than on EDGAR. While two commenters suggested delaying the electronic filing requirement until the ability to file material in additional format, such as PDF, is allowed,⁵⁸⁸ we continue to believe that even under our current system, the filing of ABS information and computational material no longer needs an electronic filing exemption. The rules should increase the uniformity and timeliness of information received by investors as well as disseminated to the marketplace. Since all investors almost uniformly access offering information electronically, these rules should significantly benefit them.

As proposed, we are not changing the scope or liability requirements of the material that may be used from the present state, so our rules should not result in incremental costs from existing requirements. At the request of commenters and in order to provide certainty, we have codified in the final rules our discussion in the Proposing Release that failure by a particular underwriter to cause the filing of materials in connection with an offering will not affect the ability of any underwriter who has complied with the procedures to rely on the exemptions. In addition, we are adding another provision in response to comment that an immaterial or unintentional failure to file will not result in a loss of protection under the exemption. As commenters explained, both of these provisions should further encourage an appropriate free flow of information.

We also are codifying as proposed an existing staff safe harbor regarding the use of research reports published or distributed by a broker or dealer involving ABS. Our rule recognizes the different nature of ABS by providing tailored conditions for ABS research reports. Given that the rule we are adopting is consistent with the existing staff safe harbor, it too should not result in incremental costs.

F. Ongoing Reporting under the Exchange Act

We are adopting our proposals to integrate and streamline the modified reporting structure currently permitted by scores of no-action letters for issuers of asset-backed securities to meet their reporting obligations under the Exchange Act, which received general support from commenters. The final rules clarify who has the reporting obligation under the Exchange Act and who must file and sign the annual, periodic and current reports. Although the comments we received on this point were mixed, we continue to believe that either the depositor, or the servicer in the alternative, should sign the Exchange Act reports because either the depositor or servicer is the party most able to monitor the ongoing Exchange Act reporting requirements of the ABS transaction. In addition, the final rules provide clarifying guidance on when the reporting obligation begins and when it can be suspended, which commenters overall supported. This will provide certainty to issuers as to when their reporting obligation is suspended as well as provide notice to investors as to when issuers may cease post-issuance reporting under the Exchange Act.

The final rules outline the required disclosure in the Exchange Act reports to ensure uniform reporting by issuers while reducing information asymmetry between issuers and investors. We are codifying the longstanding requirements that periodic information be disclosed based on the periodicity of distributions on the securities and the periodic reports contain the non-financial disclosures in Form 10-Q. Rather than filing these reports on Form 8-K, as they are currently, we are adopting our proposal that issuers use a new form type for ABS, Form 10-D, for reporting periodic distributions to assist investors and the marketplace in distinguishing such distribution reports from the reporting of significant events relevant to the ABS transaction, which commenters supported. We believe the use of the new form will not result in additional costs beyond minimal one-time transition costs. We have made several measured amendments to the disclosure for Form 10-D in response to comment to focus more on statistical disclosures than disclosures that require analysis, which we understand is more consistent with current practice and should ease preparation burden. We do continue to support some additional disclosure to investors, which may be incremental to what is typically provided today, such as disclosure regarding asset pool changes where those changes are the result of external administration instead of the pool converting into cash in accordance with their terms. Here again, however, we have made measured modifications in an attempt to ease administrative complexity. To further remove regulatory uncertainty for issuers, we also clarify when periodic disclosure for significant obligors is required. For purposes of the Paperwork Reduction Act, we continue to estimate that the burden in preparing these incremental disclosures for the Form 10-D would be on average 10 hours per Form 10-D. Based on our estimated costs of in-house staff time, we estimated the incremental PRA hour-burden would translate into an approximate cost of $19,593,750.⁵⁸⁹

The final rules also provide the ability for issuers to obtain a five calendar day filing extension under Exchange Act Rule 12b-25 for Form 10-D filings, similar to the current process available for Form 10-Q filings by corporate issuers. The ability to use the Rule 12b-25 extension, if necessary, should help issuers with the implementation process and with staying timely with their Exchange Act reporting, which is important in order to maintain Form S-3 eligibility for new registration statements. To use the exemption, an issuer must file a Form 12b-25 with respect to the subject report, although we believe the burden is minimal. For purposes of the Paperwork Reduction Act, we estimate that the burden in preparing these Form 12b-25 filings would be an average 2.5 hours of in-house staff time. Based on our estimated cost of in-house staff time, we estimate the incremental PRA hour burden would translate into an approximate cost of $831,250.⁵⁹⁰

We are adopting instructions, substantially as proposed, to specify which of the existing items of Form 8-K will be applicable to ABS issuers. We also are adopting several ABS-specific reportable events for Form 8-K disclosure, again with certain modifications from the proposal to reduce potential additional disclosure burdens pointed out by commenters. The separate filing of reportable events on Form 8-K will accelerate the delivery of information to the capital markets, which should enable investors to better monitor reportable events affecting the asset-backed securities or the relevant parties involved in the ABS transaction. Issuers of asset-backed securities may incur additional costs to report these events under a shorter timeframe; however, these additional costs should be consistent with the costs incurred by corporate issuers of other securities. For purposes of the PRA, we estimated that the proposals may cause, on average, an increase of two reports on Form 8-K per ABS issuer per year. Based on our estimated costs of in-house staff time, we estimated the PRA hour-burden will translate into an approximate cost of $2,475,000.⁵⁹¹

Under the modified reporting no-action letters, ABS issuers include with their annual report on Form 10-K a report by an independent public accountant attesting to an assertion of compliance with servicing criteria. Under this approach, audited financial statements of the issuing entity and reporting regarding internal control over financial reporting are not required. We are adopting the basic approach set forth in our original proposal, with the one primary modification discussed below, because we continue to believe the costs to provide audited financial statements and reporting regarding internal control over financial reporting are not justified by any minimal benefits obtained from these requirements, which commenters generally supported. We believe the approach we are adopting today is more cost-effective to issuers and beneficial to investors and the market in monitoring ABS transactions.

We are modifying our original assessment and attestation proposal to remove the requirement for a single responsible party in response to comment that such a requirement would be more costly and might be administratively burdensome. Instead, we are adopting a revised approach suggested by commenters that reports on assessments of compliance with servicing criteria from each party participating in the servicing function, along with associated attestation reports from a registered public accountant, be filed as exhibits to the Form 10-K report. To ensure that the investor receives notice as to whether reports evidencing all aspects of the servicing function are in fact provided, we also are requiring that the person who signs the Section 302 certification must certify the required reports from all parties participating in the servicing function have been included as an exhibit to the Form 10-K report, or explain why. The revised approach resolves several concerns and potential complexities raised by commenters regarding a single responsible party approach while still achieving our proposed objective of covering the entire servicing function and clarifying to the investor whether all aspects of the servicing function are covered. When multiple parties are participating in the servicing function, we are providing that no report need be filed for a party that is servicing individual pool assets that comprise only 5% or less of the asset pool. This allowance should reduce time and cost in obtaining reports.

We are adopting, substantially in the form proposed, a single set of transparent and comprehensive servicing criteria regarding an ABS transaction, which should enhance the current framework for reporting on compliance. As discussed in the Proposing Release, the framework generally used today is limited to a specific asset class, covers only limited servicing functions and represents minimum standards. We have attempted to provide flexibility by utilizing servicing criteria that clarify the transaction agreements can expressly provide an alternative timeframe for those servicing criteria that refer to specific timeframes. We continue to believe that the disclosure-based criteria will improve the quality of the assessment of compliance and elicit disclosure that is comparable among different issuers. As we explained in Section III.D., most commenters on this aspect of the proposal commended our initiative to put forward a consistent set of criteria that could be applied across asset types.

As we noted in the Proposing Release, the servicing criteria are designed to be incremental to the current framework and several commenters confirmed that many of the criteria are not new. The servicing criteria is designed to cover the full spectrum of servicing asset-backed securities, thereby facilitating an evaluation of all relevant servicing activities by each party involved in the servicing function. For example, one of the additional components of the servicing criteria that we continue to believe to be critical to the servicing function is the calculation of the payments on the securities, also referred to as the “flow of funds.” This improved assessment will enable investors, other parties participating in the transaction and ultimately the marketplace to analyze the operational quality of the entire servicing function, which should improve investor confidence in the overall performance of the asset-backed securities.

The assessment and reporting on the servicing criteria will continue to operate within a disclosure-based framework. For example, because our revised approach requires reports from multiple parties that participate in the servicing function, we have revised the proposed approach to allow a party to exclude a particular criterion from its assessment if it is not applicable to the asserting party based on the types of activities it performs. Disclosure also will be required of any material instances of noncompliance in the reports, if any. The revised approach continues to have the benefit of alerting investors whether all relevant reports covering the entire servicing function have been filed as exhibits to the Form 10-K as well as informing investors of any potential problems regarding a participating party's servicing function. As proposed, disclosure of material non-compliance in the Form 10-K would not result in regulatory restrictions on market access such as Form S-3 eligibility.

We estimate that the servicing criteria may impose new disclosure requirements on compliance assessments that do not presently utilize the current framework. Since the servicing criteria are designed to evaluate servicing compliance, including compliance related to the waterfall, we estimate that the scope of compliance assessments may need to be enhanced to address these new disclosure requirements. To the extent that parties involved in servicing do not maintain compliance with the servicing criteria and do not wish to publicly disclose this fact, the disclosure-based criteria could lead to these parties instituting appropriate procedures to comply with the criteria and thus incur implementation costs. We also understand that additional time and cost may be required to obtain reports from all appropriate parties, including those that may not have provided such reports previously. The extended transition period for compliance with the applicable servicing criteria should help mitigate transition to the new requirements. In addition, we are maintaining the proposed approach of requiring platform level assessments, which as noted in Section III.D., commenters supported as less costly.

Consistent with the modified reporting system, we are adopting the requirement that a registered public accounting firm attest to the assessment of compliance with servicing criteria. As discussed above, each party participating in the servicing function will engage its own independent accountant for the attestation of the party's assessment and the attestation will be required to be filed as an exhibit to the Form 10-K. As we stated in the Proposing Release, the engagement of an independent accountant improves investor confidence by establishing an independent check on the party’s assessment of servicing compliance. In addition, the attestation by the independent accountant may detect material instances of noncompliance with the servicing criteria that may provide early warning signals to investors. As with the assessments themselves, the attestation of the entire servicing function may increase the accounting costs for those criteria that are incremental to the current framework.

In addition to the assessment of compliance with servicing criteria, we will continue requiring issuers to file a servicer compliance statement regarding compliance with material aspects of the servicing agreement. This rule generally codifies current practice and should not by itself result in any additional costs. The final rules, as proposed, also specify the form and content of the Sarbanes-Oxley Section 302 certification for ABS issuers consistent with existing staff practice, with the one primary modification discussed above regarding the revised assessment of compliance. As proposed, the language of the certification is not to be revised apart from the alternatives specified. Instead, any issues should be addressed through disclosure in the reports. We do not believe these revisions will result in incremental costs and should result in a more uniform and consistent certification process.

For purposes of the Paperwork Reduction Act, we estimated that the incremental burden in preparing the Form 10-K, including the assessment of compliance with servicing criteria, will be on average 30 hours per response. Based on our estimated costs, we estimated the PRA hour-burden will translate into an approximate cost of $9,675,000.⁵⁹² We continue to believe this increased burden will result in benefits to the ABS market in terms of an enhanced assessment and disclosure regarding the servicing functions and increased assurance and investor confidence in these disclosures. These benefits are difficult to quantify. Taken together, the total increased cost using PRA estimates is approximately $45,542,275. As noted above, we did not receive any comments on the PRA analysis contained in the Proposing Release and none of the commenters provided any comments to the estimates of increased compliance costs.

Finally, we reiterate the existing staff view that the final prospectus and Exchange Act reports are to be separately filed under the CIK code and file number of the respective issuing entity on EDGAR.⁵⁹³ While not all commenters agreed, we continue to believe this facilitates access to information relevant to the particular securities involved, which increases transparency of such information for investors as well as the market for these securities. We anticipate that some issuers may incur additional costs by preparing separate Exchange Act reports for each issuing entity because these issuers currently provide combined reports. However, we continue to believe these costs will be limited since issuers are already reporting this information for a particular issuing entity, albeit in a combined report. Some of the issuers that combine reports do so for scores of issuers such that investors may have to sift through hundreds of pages that relate to securities they do not own. Further, combined reporting creates inefficiencies in the storage, retrieval and analysis of EDGAR information.

VI. Consideration of Burden on Competition and Promotion of Efficiency, Competition and Capital Formation

Section 23(a)(2) of the Exchange Act⁵⁹⁴ requires us, when adopting rules under the Exchange Act, to consider the impact that any new rule would have on competition. In addition, Section 23(a)(2) prohibits us from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. Furthermore, Section 2(b) of the Securities Act⁵⁹⁵ and Section 3(f) of the Exchange Act⁵⁹⁶ require us, when engaging in rulemaking where we are required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.

The final rules are intended to increase transparency by codifying informal industry and staff practices, along with incremental changes and responsive changes, into a formal regulatory regime for offerings of asset-backed securities under the Securities Act and ongoing reporting under the Exchange Act. We anticipate that these rules will enhance capital formation by simplifying the process of registering an offering of asset-backed securities, thereby allowing parties not fully immersed in the ABS market to ascertain and understand the offering and disclosure requirements. Establishing clear and transparent requirements also should remove barriers to entry for securitizations, thus promoting efficiency and competitiveness of the U.S. capital markets for asset-backed offerings. Commenters overwhelmingly supported our proposed separate framework for the registration and reporting of asset-backed securities due to the growth of the market and inherent differences between asset-backed securities and other securities.⁵⁹⁷

The principles-based disclosure requirements we are adopting will allow great flexibility in implementation for all asset classes while enhancing the quality of disclosure for ABS transactions. Similarly, the servicing criteria we are adopting are intended to provide a comprehensive assessment to evaluate the overall servicing function for the ABS transaction. We anticipate these rules, that have been modified in response to comment, should improve investors’ ability to make informed investment decisions about asset-backed offerings as well as help increase investor confidence in the servicing of ABS transactions. Enhanced disclosure should raise investors' expectations regarding material information that issuers must make available to the public. We anticipate this will therefore lead to increased efficiency and competitiveness of the U.S. capital markets. Increased market efficiency and investor confidence also may encourage more efficient capital formation.

In addition, the rules are designed to improve the current framework for reporting on compliance with servicing criteria that will operate within a disclosure-based framework and cover the entire spectrum of the servicing function. We believe the servicing criteria will provide value to the ABS industry in establishing market-wide disclosure benchmarks and promote market efficiency by providing meaningful disclosure regarding each party participating in the servicing function that is attested to by the respective party's independent public accountant. The disclosure-based framework of the servicing criteria will provide information about the entire servicing function to be publicly available for investors, as well as to the marketplace, to monitor the performance of the ABS transaction. This should promote investor confidence and market efficiency by decreasing information asymmetries and promoting more efficient pricing and valuation of the securities. As a result, capital may be allocated more efficiently. In addition, the servicing criteria will promote the comparability of reports of different issuers, thus promoting investor analysis as well as competition among such issuers.

We requested comment on whether the proposals, if adopted, would promote efficiency, competition and capital formation or have an impact or burden on competition. We received no comments on this subject but a few of the comments on other areas touched on these issues. Two commenters thought the requirement to disclose the policies and procedures of the servicer is too broad and would require servicers to disclose competitive information to the public.⁵⁹⁸ We have emphasized in the release the materiality-based standard for the new disclosure items in Regulation AB, including disclosure regarding the servicer. This should mitigate the possibility that detailed information about the servicer's operational practices would not subsume the disclosure. However, we continue to believe enhanced material disclosure about the servicer's business practices provides more certainty to investors that they are making investment decisions in a transparent market. All material parties that meet the definition of "servicer" will be required to make available to the public the same level of disclosure on their business practices. To reduce potential disclosure burdens regarding unrelated third parties, we have raised the percentage breakpoint for determining when more detailed disclosure would be required for unaffiliated servicers thereby decreasing the number of times disclosure is required.

Commenters also believed there was no compelling reason to propose different bright-line limits for ABS transactions using a prefunding period or revolving period if the transaction is filed on Form S-1 or Form S-3.⁵⁹⁹ One group of commenters suggested increasing the proposed limit for revolving periods to an unlimited three-year revolving period would improve efficiency in structuring transactions.⁶⁰⁰ In response to comment, we have eliminated the different bright-line percentage tests for ABS offerings utilizing a prefunding period or revolving period and registered on either Form S-1 or Form S-3. We also have further expanded the revolving period to allow an unlimited revolving period for up to three years so long as added assets are of the same general character as the original pool assets. These expansions should allow similar treatment in structuring transactions that meet market demands.

We have made several measured changes in the final rules after carefully balancing issuer concerns of potential burdens with the need for investor protection and market efficiency. For example, we made responsive revisions to the final rules and Regulation AB to assist issuers meet the eligibility requirements to register an offering on Form S-3 to quickly access the ABS market. We are supporting an alternative method of providing disclosure through publicly available Internet Web sites to limit the potential burden of the static pool disclosure requirement for issuers while increasing the efficiency of the disclosure for investors and the market. We also are extending the transition period to assist various transaction participants plan for compliance with the new regulatory regime for future ABS offerings and ensure orderly transition of the alternative disclosure regime for existing ABS transaction with minimal disruption to the ABS market.

The rules could have certain indirect negative effects. For example, if transactions in the private market for ABS or in foreign markets do not result in similar disclosures, issuers could, all things being equal, migrate to those markets to avoid such disclosures. A few commenters mentioned such concerns generally.⁶⁰¹ Conversely, some commenters believed practices in the public markets would influence disclosures in the private market as well.⁶⁰² We have made responsive revisions to the proposals to address commenter concerns about potentially adverse unintended consequences from the new requirements. Moreover, there may be limitations on the ability to migrate to other markets given the large size of the U.S. registered ABS market and potential regulatory or investment restrictions on the ability of investors to purchase non-registered ABS. In addition, competitors and markets not subject to the new alternative disclosure regime for asset-backed securities may suffer from decreased investor confidence if the asset-backed offerings lack the transparency of asset-backed offerings that do comply with the new regime. The possibility of these effects and their magnitude if they were to occur are difficult to quantify.

Our specific rules relate only to transactions that meet the definition for an asset-backed security under the Securities Act. The definition and interpretations that we are adopting are intended to establish parameters for the types of securities that are appropriate for our new regulatory regime for ABS. Although the definition for an asset-backed security is flexible as to capture most asset-backed structures, there may be transactions that are fundamentally different from the principles-based definition. However, we continue to believe transactions that do not fit the parameters of the definition will still be able to access the capital markets. These transactions will need to rely on non-ABS form eligibility for registration, and additional disclosures, depending on the type of offering and transaction, will be required.

VII. Regulatory Flexibility Analysis Certification

Under Section 605(b) of the Regulatory Flexibility Act,⁶⁰³ we certified that, when adopted, the proposals would not have a significant economic impact on a substantial number of small entities. We included this certification in Part VII of the Proposing Release. While we encouraged written comment regarding this certification, none of the commenters responded to this request.

VIII. Statutory Authority and Text of Rule and Form Amendments

We are adopting the new rules, forms and amendments contained in this document under the authority set forth in Sections 6, 7, 8, 10, 19 and 28 of the Securities Act,⁶⁰⁴ Sections 3, 10A, 12, 13, 14, 15, 16, 23 and 36 of the Exchange Act,⁶⁰⁵ and Sections 3, 302, 306, 404, 406 and 407 of the Sarbanes-Oxley Act.⁶⁰⁶

⁵⁷³44 U.S.C. 3501 et seq.

⁵⁷⁴44 U.S.C. 3507(d) and 5 CFR 1320.11.

⁵⁷⁵We are moving all Securities Act registrations of ABS offerings to Form S-1 or Form S-3. Correspondingly, we reduced our estimate of responses on Form S-11.

⁵⁷⁶The staff estimated the average number of hours each ABS issuer currently spends completing the form by contacting a number of issuers and other persons regularly involved in completing the forms.

⁵⁷⁷This estimate is consistent with the estimate of the allocation of the burden for non-ABS issuers on Form S-1 where all of the required information must be included in the form. The staff estimated the average hourly rate for outside professionals by contacting a number of issuers and other persons regularly involved in completing the forms.

⁵⁷⁸This estimate was based on the number of final prospectuses filed pursuant to Securities Act Rule 424(b) during this period with respect to asset-backed securities. For most ABS offerings, the filing of the prospectus under Rule 424(b) for a takedown of securities results in a new issuing entity and a separate Exchange Act reporting obligation. However, some issuers had been filing “combined” reports of filing one Form 10-K covering multiple issuing entities. We used the Rule 424(b) estimate to reflect the approximate number of Form 10-K filings that would have been made by ABS issuers in the absence of combined reporting.

⁵⁷⁹This estimate also reflected the approximate number of distribution report filings that would have been made by ABS issuers in the absence of combined reporting.

⁵⁸⁰We noted that this reflection of the burden predominantly consists of codifying the already existing requirements applicable under the modified reporting system where such filings appear under cover of Form 8-K and are offset by our corresponding reduction in our estimated number of Form 8-K’s that will be filed.

⁵⁸¹We also are adopting, as proposed, technical changes to Regulation S-B, which includes the requirements that a small business issuer must provide in the Securities Act and the Exchange Act similar to Regulation S-K. These technical changes are designed to clarify that Regulation S-B is inapplicable to asset-backed securities. Like, Regulation S-K, Regulation S-B does not impose any separate burden. We previously have assigned one burden hour to Regulation S-B for administrative convenience to reflect the fact that the regulation does not impose any direct burden on companies.

⁵⁸²See note 57 above.

⁵⁸³See note 27 above.

⁵⁸⁴See Letters of ABA and ASF.

⁵⁸⁵See Letter of AFGI.

⁵⁸⁶See Letter of ICI. See also Letter of CFAI.

⁵⁸⁷We estimated that the additional disclosures for Form S-1 and Form S-3 would result in 12,063 internal burden hours and $10,856,250 in external costs. Assuming a cost of $175/hour for in-house professional staff, the total cost for the internal burden hours would be $2,111,025. Hence the aggregate cost estimate is $12,967,275.

⁵⁸⁸See, e.g., Letters of ASF and BMA.

⁵⁸⁹We estimated that preparing the incremental disclosures would result in 71,250 internal burden hours and $7,125,000 in external costs. Assuming a cost of $175/hour for in-house professional staff, the total cost for the internal burden hours would be $12,468,750. Hence the aggregate cost estimate is $19,593,750. As Form 10-Q Part II information already is required under the modified reporting system, we do not estimate the codification of that reporting obligation would result in incremental costs.

⁵⁹⁰We estimate that the additional Form 12b-25 filings would result in 4,750 internal burden hours. Assuming a cost of $175/hour for in-house professional staff, the total cost of the internal burden hours would be $831,250.

⁵⁹¹We estimated that the additional Form 8-K filings would result in 9,000 internal burden hours and $900,000 in external costs. Assuming a cost of $175/hour for in-house professional staff, the total cost for the internal burden hours would be $1,575,000. Hence the aggregate cost estimate is $2,475,000.

⁵⁹²We estimated that the incremental burden would result in 9,000 internal burden hours and $8,100,000 in external costs. Assuming a cost of $175/hour for in-house professional staff, the total cost for the internal burden hours would be $1,575,000. Hence the aggregate cost estimate is $9,675,000.

⁵⁹³We also are planning programming changes to the EDGAR system that should significantly reduce some of the technical and compliance issues involved in establishing new transactions under the EDGAR system.

⁵⁹⁴15 U.S.C. 78w(a)(2).

⁵⁹⁵15 U.S.C. 77b(b).

⁵⁹⁶15 U.S.C. 78c(f).

⁵⁹⁷See note 27 above.

⁵⁹⁸See Letters of JPMorganChase and MBA.

⁵⁹⁹See, e.g., Letters of ASF, Citigroup, and MBNA.

⁶⁰⁰See Letter of Auto Group.

⁶⁰¹See, e.g., Letter of ABA; Jones Day; and NYCBA.

⁶⁰²See, e.g., Letter of A&O.

⁶⁰³5 U.S.C. 605(b).

⁶⁰⁴15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77q, 77s and 77z-3.

⁶⁰⁵15 U.S.C. 78c, 78j, 78j-1, 78l, 78m, 78n, 78o, 78p, 78w and 78mm.

⁶⁰⁶15 U.S.C. 7202, 7241, 7244, 7262, 7264 and 7265.