ABS Shelf Registration; The Sequel
Last Tuesday, the SEC re-proposed for comment amendments to the rules governing offers, sales and reporting of asset-backed securities (“ABS”) using shelf registration. The SEC initially proposed the rules in April 2010. That proposal discussed concerns about the ABS offering process and ABS disclosures that were subsequently addressed by the Dodd-Frank Act. Two of the April 2010 proposed requirements—risk retention and continued Securities Exchange Act reporting—will be required for most registered ABS offerings as a result of changes mandated by the Dodd-Frank Act. The re-proposed amendments, therefore, do not address those issues.
In the 2010 proposing release, the SEC proposed that ABS shelf registrants use new registration forms, Form SF-1 and Form SF-3, in lieu of Form S-1 and Form S-3. Offerings qualifying for delayed shelf registration would be registered on proposed Form SF-3, and all other ABS offerings would be registered on Form SF-1. The re-proposal only changes certain registrant and transaction requirements contained in the instructions to Form SF-3. The other parts of proposed Form SF-3, which include disclosure requirements and instructions for signatures, remain unchanged from the April 2010 proposal, as do the other provisions of the April 2010 proposal.
As re-proposed, shelf eligible ABS offerings would be required to contain:
- A certification from the executive in charge of the securitization concerning the disclosures contained in the prospectus and the design of the securitization;
- Provisions in the underlying transaction agreement requiring the appointment of a credit risk manager to review assets upon the occurrence of certain trigger events and provisions requiring repurchase request dispute resolution;
- Provisions in the underlying transaction agreement allowing a request by an investor to communicate with other investors; and
- An annual evaluation of compliance with the registrant requirements.
The re-proposal also requires that the underlying transaction agreements, in substantially final form, be filed and made part of a registration statement by the date the preliminary prospectus is required to be filed.
The certification is designed to encourage better oversight by an executive officer of the securitization process. The certification also is proposed as a partial substitute for the investment grade rating. A certifier could rely, in part, on the review that would already be required in order for an issuer to comply with recently adopted Rule 193, which implements Section 945 of the Dodd-Frank Act by requiring any issuer registering the offer and sale of an ABS to perform a review of the assets underlying the ABS.
To address commenters’ concerns raised in response to the April 2010 proposal, the re-proposal revises the text of the certification to state that the securitization is not guaranteed by the certification to produce cash flows at times and amounts sufficient to service the expected payments on the asset-backed securities. Furthermore, the certification in the re-proposal no longer addresses how the securities “will” pay or perform but instead focuses on the design of the transaction.
Repurchase Request Dispute Resolution
This provision would be in lieu of the previously proposed condition requiring an independent third party opinion on the securitizer’s compliance with underlying loan requirements. Under the re-proposal, the underlying transaction agreements would require a review by the credit risk manager (i) when the credit enhancement requirements specified in the underlying transaction agreements are not met; and (ii) when so directed by investors pursuant to the processes provided in the transaction agreement and disclosed in the prospectus.
Annual Evaluation of Compliance
Under the re-proposal, notwithstanding that the registration statement may have been previously declared effective, in order to conduct a takedown off an effective shelf registration statement, an ABS issuer would be required to evaluate, as of ninety days after the end of the depositor’s fiscal year end, whether it continues to meet the registrant requirements. The re-proposal also allows depositors and issuing entities to cure any failure to meet the transaction requirements, or failure to file the required certification or transaction agreements at the required time for purposes of ABS shelf eligibility.
Comments should be submitted within 60 days after publication in the Federal Register, which is expected during the week of August. 1. View the re-proposal here.