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Proposed Rule

Asset-Backed Securities

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Start Preamble Start Printed Page 23328

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

We are proposing significant revisions to Regulation AB and other rules regarding the offering process, disclosure and reporting for asset-backed securities. Our proposals would revise filing deadlines for ABS offerings to provide investors with more time to consider transaction-specific information, including information about the pool assets. Our proposals also would repeal the current credit ratings references in shelf eligibility criteria for asset-backed issuers and establish new shelf eligibility criteria that would include, among other things, a requirement that the sponsor retain a portion of each tranche of the securities that are sold and a requirement that the issuer undertake to file Exchange Act reports on an ongoing basis so long as its public securities are outstanding. We also are proposing to require that, with some exceptions, prospectuses for public offerings of asset-backed securities and ongoing Exchange Act reports contain specified asset-level information about each of the assets in the pool. The asset-level information would be provided according to proposed standards and in a tagged data format using extensible Markup Language (XML). In addition, we are proposing to require, along with the prospectus filing, the filing of a computer program of the contractual cash flow provisions expressed as downloadable source code in Python, a commonly used open source interpretive programming language. We are proposing new information requirements for the safe harbors for exempt offerings and resales of asset-backed securities and are also proposing a number of other revisions to our rules applicable to asset-backed securities.

DATES:

Comments should be received on or before August 2, 2010.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

Paper Comments

  • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-08-10. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/​rules/​proposed.shtml). Comments are also available for Web site viewing and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

Start Further Info

FOR FURTHER INFORMATION CONTACT:

Katherine Hsu, Senior Special Counsel in the Office of Rulemaking, at (202) 551-3430, and Rolaine Bancroft, Special Counsel in the Office of Structured Finance, Transportation and Leisure, at (202) 551-3313, Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-3628.

End Further Info End Preamble Start Supplemental Information

SUPPLEMENTARY INFORMATION:

We are proposing amendments to Rule 30-1 [1] of the Commission's Rules of General Organization,[2] Items 512 [3] and 601 [4] of Regulation S-K; [5] Items 1100, 1101, 1102, 1103, 1104, 1106, 1110, 1111, 1121, and 1122 [6] of Regulation AB [7] (a subpart of Regulation S-K); Rules 139a, 144, 144A, 167, 190, 401, 405, 415, 424, 430B, 430C, 433, 456, 457, 502 and 503 [8] and Forms S-1, S-3 and D [9] under the Securities Act of 1933 (“Securities Act”); [10] Rules 11, 101, 201, 202, 305, and 312 [11] of Regulation S-T,[12] and Rules 15c2-8 and 15d-22 [13] and Forms 8-K, 10-D, and 10-K [14] under the Securities Exchange Act of 1934 (“Exchange Act”) [15] and Rule 103 [16] of Regulation FD.[17] We also are proposing to add Items 1111A and 1121A [18] to Regulation AB and Rule 192,[19] Rule 430D,[20] Form SF-1,[21] Form SF-3 [22] and Form 144A-SF [23] under the Securities Act.

Table of Contents

I. Executive Summary

A. Background

B. Securities Act Registration

C. Disclosure

D. Privately-Issued Structured Finance Products

II. Securities Act Registration

A. History of ABS Shelf Offerings

B. New Registration Procedures and Forms for Asset-Backed Securities

1. New Shelf Registration Procedures

(a) Rule 424(h) Filing

(b) New Rule 430D

2. Proposed Forms SF-1 and SF-3

3. Shelf Eligibility for Delayed Offerings

(a) Risk Retention

(b) Third Party Review of Repurchase Obligations

(c) Certification of the Depositor's Chief Executive Officer

(d) Undertaking To File Ongoing Reports

(e) Other Proposed Form SF-3 Requirements

(i) Registrant Requirements To Be Met for Filing a Form SF-3

(ii) Evaluation of Form SF-3 Eligibility in Lieu of Section 10(a)(3) Update

(iii) Quarterly Evaluation of Eligibility To Use Effective Form SF-3 for Takedowns

(A) Risk Retention

(B) Transaction Agreements and Officer CertificationStart Printed Page 23329

(C) Undertaking To File Exchange Act Reports

4. Continuous Offerings

5. Mortgage Related Securities

C. Exchange Act Rule 15c2-8(b)

D. Including Information in the Form of Prospectus in the Registration Statement

1. Presentation of Disclosure in Prospectuses

2. Adding New Structural Features or Credit Enhancements

E. Pay-as-You-Go Registration Fees

F. Signature Pages

III. Disclosure Requirements

A. Pool Assets

1. Asset-Level Information in Prospectus

(a) When Asset-Level Data Would Be Required in the Prospectus

(b) Proposed Disclosure Requirements and Exemptions

(i) Proposed Coded Responses

(ii) Proposed General Disclosure Requirements

(iii) Asset Specific Data Points

(iv) Proposed Exemptions

(c) Residential Mortgage-Backed Securities

(d) Commercial Mortgage-Backed Securities

(e) Other Asset Classes

(i) Automobiles

(ii) Equipment

(iii) Student Loans

(iv) Floorplan Financings

(v) Corporate Debt

(vi) Resecuritizations

2. Asset-Level Ongoing Reporting Requirements

(a) Proposed Disclosure Requirements

(b) Proposed Exemptions

(c) Residential Mortgage-Backed Securities

(d) Commercial Mortgage-Backed Securities

(e) Other Asset Classes

(i) Automobiles

(ii) Equipment

(iii) Student Loans

(iv) Floorplan Financings

(v) Resecuritizations

3. Grouped Account Data for Credit Card Pools

(a) When Credit Card Pool Information Would Be Required

(b) Proposed Disclosure Requirements

4. Asset Data File and XML

(a) Filing the Asset Data File and EDGAR

(b) Hardship Exemptions

(c) Technical Specifications

5. Pool-Level Information

B. Flow of Funds

1. Waterfall Computer Program

(a) Proposed Disclosure Requirements

(b) Proposed Exemptions

(c) When the Waterfall Computer Program Would Be Required

(d) Filing the Waterfall Computer Program and Python

(e) Hardship Exemptions

2. Presentation of the Narrative Description of the Waterfall

C. Transaction Parties

1. Identification of Originator

2. Obligation To Repurchase Assets

(a) History of Asset Repurchases

(b) Financial Information Regarding Party Obligated To Repurchase Assets

3. Economic Interest in the Transaction

4. Servicer

D. Prospectus Summary

E. Static Pool Information

1. Disclosure Required

2. Amortizing Asset Pools

3. Revolving Asset Master Trusts

4. Filing Static Pool Data

F. Exhibit Filing Requirements

G. Other Disclosure Requirements That Rely on Credit Ratings

IV. Definition of an Asset-Backed Security

V. Exchange Act Reporting Proposals

A. Distribution Reports on Form 10-D

B. Servicer's Assessment of Compliance With Servicing Criteria

C. Form 8-K

1. Item 6.05

2. Change in Sponsor's Interest in the Securities

D. Central Index Key Numbers for Depositor, Sponsor and Issuing Entity

VI. Privately-Issued Structured Finance Products

A. Rule 144A and Regulation D

B. Proposed Information Requirements for Structured Finance Products

1. General

2. Application of Proposals

3. Information Requirements

4. Proposed Rule 144 Revisions

5. New Rule 192 of the Securities Act

C. Notice of Initial Placement of Securities Eligible for Sale Under Rule 144A and Revisions to Form D

VII. Codification of Staff Interpretations Relating to Securities Act Registration

A. Fee Requirements for Collateral Certificates or Special Units of Beneficial Interest

B. Incorporating by Reference Subsequently Filed Periodic Reports

VIII. Transition Period

IX. General Request for Comment

X. Paperwork Reduction Act

A. Background

B. Revisions to PRA Reporting and Cost Burden Estimates

1. Form S-3 and Form SF-3

2. Form S-1 and Form SF-1

3. Form 10-K

4. Form 10-D

5. Form 8-K

6. Regulation S-K and Regulation S-T

7. Asset Data File

8. Waterfall Computer Program

9. Form 144A-SF and Form D

10. Privately-Issued Structured Finance Product Disclosure

11. Summary of Proposed Changes to Annual Burden Compliance in Collection of Information

12. Solicitation of Comments

XI. Benefit-Cost Analysis

A. Background

B. Benefits

1. Securities Act Registration

2. Disclosure

3. Privately-Issued Structured Finance Products

C. Costs

1. Securities Act Registration

2. Disclosure

3. Privately-Issued Structured Finance Products

D. Request for Comment

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

A. Shelf Registration Requirement

1. Risk Retention

2. Representations and Warranties in Pooling and Servicing Agreements

3. Depositor's Chief Executive Officer Certification

4. Ongoing Exchange Act Reporting

5. Eliminate Ratings Requirement

B. Five-Business Day Filing and Prospectus Delivery Requirements

C. Disclosure

1. Asset Data File and Waterfall Computer Program

2. Pay-As-You-Go Registration and Revisions to Registration Process

3. Restrictions on Use of Regulation AB

D. Safe Harbors for Privately-Issued Structured Finance Products

E. Combined Effect of Proposals

XIII. Small Business Regulatory Enforcement Fairness Act

XIV. Regulatory Flexibility Act Certification

XV. Statutory Authority and Text of Proposed Rule and Form Amendments

I. Executive Summary

A. Background

The recent financial crisis highlighted that investors and other participants in the securitization market did not have the necessary tools to be able to fully understand the risk underlying those securities and did not value those securities properly or accurately. The severity of this lack of understanding and the extent to which it pervaded the market and impacted the U.S. and worldwide economy calls into question the efficacy of several aspects of our regulation of asset-backed securities. In light of the problems exposed by the financial crisis, we are proposing significant revisions to our rules governing offers, sales and reporting with respect to asset-backed securities. These proposals are designed to improve investor protection and promote more efficient asset-backed markets.

Securitization generally is a financing technique in which financial assets, in many cases illiquid, are pooled and converted into instruments that are offered and sold in the capital markets as securities. This financing technique makes it easier for lenders to exchange payment streams coming from the loans for cash so that they can make additional loans or credit available to a wide range of borrowers and companies seeking financing. Some of the types of assets that are financed today through securitization include residential and commercial mortgages, agricultural equipment leases, automobile loans and leases, student loans and credit card receivables. Throughout this release, we refer to the securities sold through such Start Printed Page 23330vehicles as asset-backed securities, ABS, or structured finance products.

At its inception, securitization primarily served as a vehicle for mortgage financing. Since then, asset-backed securities have played a significant role in both the U.S. and global economy. At the end of 2007, there were more than $7 trillion of both agency and non-agency [24] mortgage-backed securities and nearly $2.5 trillion of asset-backed securities outstanding.[25] Securitization can provide liquidity to nearly all major sectors of the economy including the residential and commercial real estate industry, the automobile industry, the consumer credit industry, the leasing industry, and the commercial lending and credit markets.[26]

Many of the problems giving rise to the financial crisis involved structured finance products, including mortgage-backed securities.[27] Many of these mortgage-backed securities were used to collateralize other debt obligations such as collateralized debt obligations and collateralized loan obligations (CDOs or CLOs), types of asset-backed securities that are sold in private placements.[28] As the default rate for subprime and other mortgages soared, such securities, including those with high credit ratings, lost their value.[29] CDOs were noted, in particular, to have contributed to the collapse in liquidity during the financial crisis.[30] As the crisis unfolded, investors increasingly became unwilling to purchase these securities, and today, this sentiment remains, as new issuances of asset-backed securities, except for government-sponsored issuances, have recently dramatically decreased.[31] The absence of this financing option has negatively impacted the availability of credit.[32]

The financial crisis highlighted a number of concerns with the operation of our rules in the securitization market. Certain regulations for asset-backed securities rely on the ratings for those securities provided by the ratings agencies, and much has been written about the failures of those ratings accurately to measure and describe the risks associated with certain of those products that were realized during the financial crisis.[33] In addition, investors have expressed concern regarding a lack of time to analyze securitization transactions and make investment decisions.[34] While the Commission historically has not built minimum time periods into its registration process to deliberately slow down the market,[35] and instead has believed investors can insist on adequate time to analyze securities (and refuse to invest if not provided sufficient time), we have been told that this is not generally possible in this market, particularly in an active market.[36] In addition, market participants have expressed a desire for expanded disclosure relating to the assets underlying securitizations.[37] Investors have complained that the mechanisms for enforcing the representations and warranties contained in securitization transaction documents are weak, and thus are not confident that even strong representations and warranties provide them with adequate protection. In the private market, we believe that, in many cases, investors did not have the information necessary to understand and properly analyze structured products, such as CDOs, that were sold in transactions in reliance on exemptions from registration.[38] As a result of these and other factors, the financial crisis resulted in an absence of confidence in much of the securitization market.

We are proposing a number of changes to the offering process, disclosure, and reporting for asset-backed securities, which are designed to enhance investor protection in this market.[39] The proposals are intended to provide investors with timely and sufficient information, including information in and about the private market for asset-backed securities, reduce the likelihood of undue reliance on credit ratings, and help restore investor confidence in the representations and warranties regarding the assets. Although these revisions are comprehensive and therefore would impose new burdens, if adopted, we believe they would protect investors and promote efficient capital Start Printed Page 23331formation. The proposals cover the following areas:

  • Revisions to the shelf offering process and criteria and prospectus delivery requirements;
  • Securities Act and Exchange Act disclosure requirements, including new requirements to disclose standardized asset-level information or grouped asset data and a computer program that gives effect to the cash flow provisions of the transaction agreement (often referred to as the “waterfall”); and
  • Changes to the Securities Act safe harbors for exempt offerings and exempt resales for asset-backed securities.

In addition, we are proposing clarifying, technical and other changes to the current rules. The proposals are designed to address issues that contributed to or arose from the financial crisis. These proposals are also designed to be forward looking; some of these proposals are designed to improve areas that have the potential to raise issues similar to the ones highlighted in the financial crisis.

Our proposals are generally consistent with global initiatives that seek to improve practices in the securitization market.[40] These initiatives include calls by international organizations to require greater disclosure by issuers of securitized products, including initial and ongoing information about underlying asset pool performance.[41] Our focus on both the public and private markets for securitized products is supported by recommendations from international regulators about the type of disclosure that should be provided to investors in the private markets.[42]

B. Securities Act Registration

Securities Act shelf registration provides important timing and flexibility benefits to issuers. An issuer with an effective shelf registration statement can conduct delayed offerings “off the shelf” under Securities Act Rule 415 without further staff clearance. Under our current rules, asset-backed securities may be registered on a Form S-3 registration statement and later offered “off the shelf” if, in addition to meeting other specified criteria,[43] the securities are rated investment grade by a nationally recognized statistical rating organization (NRSRO). As described in detail in Section II.B.3. below, we are proposing to repeal that criterion and establish other criteria for shelf eligibility. We are also proposing changes to the Securities Act rules and forms for issuances of asset-backed securities.

We have undertaken a Commission-wide effort to consider whether references to NRSRO credit ratings in all the Commission's regulations are necessary or appropriate and whether they could cause investors to unduly rely on ratings.[44] In this release, we are proposing to eliminate the current means of establishing shelf eligibility for an ABS transaction based on the credit ratings of the securities to be issued.[45] Instead, we are proposing to require for shelf eligibility the following:

  • A certification filed at the time of each offering off of a shelf registration statement, or takedown, by the chief executive officer of the depositor [46] that the assets in the pool have characteristics that provide a reasonable basis to believe that they will produce, taking into account internal credit enhancements, cash flows to service any payments due and payable on the securities as described in the prospectus;
  • Retention by the sponsor of a specified amount of each tranche of the securitization,[47] net of the sponsor's hedging (also known as “risk retention” or “skin-in-the-game”);
  • A provision in the pooling and servicing agreement that requires the party obligated to repurchase the assets for breach of representations and warranties to periodically furnish an opinion of an independent third party regarding whether the obligated party acted consistently with the terms of the pooling and servicing agreement with respect to any loans that the trustee put back to the obligated party for violation of representations and warranties and which were not repurchased; and
  • An undertaking by the issuer to file Exchange Act reports so long as non-affiliates of the depositor hold any securities that were sold in registered transactions backed by the same pool of assets.

We also are proposing to replace Forms S-1 and S-3 with new forms for registered ABS offerings—proposed Forms SF-1 and SF-3—and to revise the shelf offering structure for those securities. Form SF-3 would be the form used for ABS shelf offerings.

Given many ABS investors' stated desire for more time to consider the transaction and for more detailed information regarding the pool assets,[48] we are proposing to revise the filing deadlines in shelf offerings to provide investors with additional time to analyze transaction-specific information prior to making an investment decision. These changes are designed to promote independent analysis of ABS by investors rather than reliance on credit ratings. Under the proposed ABS shelf procedures, an ABS issuer would be required to file a preliminary prospectus with the Commission for each takedown off of the proposed new shelf registration form for ABS (Form SF-3) at least five business days prior to the first sale in the offering.[49] Under the Start Printed Page 23332proposal, issuers would use one prospectus for each transaction and the current practice of using core or base prospectuses plus supplements would be eliminated for ABS.

C. Disclosure

In 2004, we adopted a new set of rules prescribing the disclosure requirements for asset-backed issuers.[50] Many disclosure requirements of Regulation AB are principles-based. Regulation AB currently requires that material, aggregate information about the composition and characteristics of the asset pool be filed with the Commission and provided to investors. As described in detail in Sections III, IV and V below, we are proposing additional, and, in some cases, revised disclosure requirements for ABS offerings and ongoing reporting.

For each loan or asset in the asset pool, we are proposing to require disclosure of specified data relating to the terms of the asset, obligor characteristics, and underwriting of the asset. Such data would be provided in a machine-readable, standardized format so that it is most useful to investors and the markets. Under our proposal, issuers would be required to provide the asset-level data or grouped account data at the time of securitization, when new assets are added to the pool underlying the securities, and on an ongoing basis.

We are proposing to require the filing of a computer program (the “waterfall computer program,” as defined in the proposed rule) of the contractual cash flow provisions of the securities in the form of downloadable source code in Python, a commonly used computer programming language that is open source and interpretive. The computer program would be tagged in XML and required to be filed with the Commission as an exhibit. Under our proposal, the filed source code for the computer program, when downloaded and run (by loading it into an open “Python” session on the investor's computer), would be required to allow the user to programmatically input information from the asset data file that we are proposing to require as described above. We believe that, with the waterfall computer program and the asset data file, investors would be better able to conduct their own evaluations of ABS and may be less likely to be dependent on the opinions of credit rating agencies.

We also are proposing additional requirements to refine current disclosure requirements for asset-backed securities. Among other things, we are proposing to require:

  • Aggregated and loan-level data relating to the type and amount of assets that do not meet the underwriting criteria that is specified in the prospectus;
  • For certain identified originators, information relating to the amount of the originator's publicly securitized assets that, in the last three years, has been the subject of a demand to repurchase or replace;
  • For the sponsor, information relating to the amount of publicly securitized assets sold by the sponsor that, in the last three years, has been the subject of a demand to repurchase or replace;
  • Additional information regarding originators and sponsors;
  • Descriptions relating to static pool information, such as a description of the methodology used in determining or calculating the characteristics of the pool performance as well as any terms or abbreviations used;
  • That static pool information for amortizing asset pools comply with the Item 1100(b) requirements for the presentation of historical delinquency and loss information; and
  • The filing of Form 8-K for a one percent or more change in any material pool characteristic from what is described in the prospectus (rather than for a five percent or more change, as currently required).

We also are proposing to limit some of the existing exceptions to the discrete pool requirement in the definition of an asset-backed security. This is intended to not only address recent concerns arising out of the financial crisis but also serve to protect against future practices of participants along the chain of securitization that could result in the addition of assets into a securitization pool without a clear understanding of their quality.

D. Privately-Issued Structured Finance Products

A significant portion of securities transactions, including the offer and sale of all CDOs and ABCP, is conducted in the exempt private placement market, which includes both offerings eligible for Rule 144A resales and other private placements.[51] CDOs are typically sold by the issuer in a private placement to one or more initial purchaser or purchasers in reliance upon the Section 4(2) private offering exemption in the Securities Act, which is available only to the issuer, followed by resales of the securities to “qualified institutional buyers” in reliance upon Rule 144A.[52] Subsequent resales may also be made in reliance upon Rule 144A. Rule 144A provides a safe harbor for resellers from being deemed an underwriter within the meaning of Sections 2(a)(11) and 4(1) of the Securities Act [53] for the sale of securities to qualified institutional buyers. If the conditions of the Rule 144A safe harbor are satisfied, sellers may rely on the exemption from Securities Act registration provided by Section 4(1) for transactions by persons other than issuers, underwriters or dealers.[54]

Some have concluded that the events of the financial crisis have demonstrated that a lack of understanding of CDOs and other privately offered structured finance products by investors, rating agencies and other market participants may have significant consequences to the entire financial system.[55] For example, the ratings of these products proved inaccurate, which significantly contributed to the financial crisis.[56] This lack of understanding by credit rating agencies, investors, and other market participants indicates that the offering processes and disclosure Start Printed Page 23333available in the public and private market were inadequate to provide appropriate investor protection. Further, these securities are issued by special purpose vehicles whose only purpose is holding financial assets, with numerous parties involved in the securitization process.[57] As a result, information about those assets and the structure of the vehicle is critical to an informed investment decision.

The safe harbors of Rule 144A and Regulation D that provide the ability to rely on an exemption from registration do not impose specific requirements on the disclosures provided to investors if those investors meet certain size requirements. However, the financial crisis has called into question the ability of our rules, as they relate to the private market for asset-backed securities, to ensure that investors had access to, and had sufficient time and incentives to adequately consider, appropriate information regarding these securities.[58]

We are proposing to require enhanced disclosure by asset-backed issuers who wish to take advantage of the safe harbor provisions for these privately-issued securities.[59] In addition, in order to provide additional transparency with respect to the private market for these securities, we are proposing amendments to Rule 144A to require a structured finance product issuer to file a public notice on EDGAR of the initial placement of structured finance products that are eligible for resale under Rule 144A. As we believe that the Commission may benefit from the availability of more information about private placements of structured finance products, we are proposing to require that in submitting such notice, the issuer undertakes to provide offering materials to the Commission upon written request.

All of our proposals, if adopted, would apply to new issuances of asset-backed securities. Therefore, the proposed rules, if adopted, would not impose new requirements on outstanding asset-backed securities.

II. Securities Act Registration

We are proposing a number of changes to the Securities Act registration process for the offer and sale of asset-backed securities. These changes include proposed new eligibility criteria for shelf offerings and changes to the shelf offering process.

A. History of ABS Shelf Offerings

In 1984, mortgage related securities, a subset of asset-backed securities, were first permitted to be offered on a “shelf” basis. Contemporaneous with the enactment of Secondary Mortgage Market Enhancement Act of 1984 (SMMEA),[60] which added the definition of “mortgage related security” to the Exchange Act, we amended Securities Act Rule 415 to permit mortgage related securities to be offered on a delayed basis, regardless of which form is utilized for registration of the offering.[61] SMMEA defined a mortgage related security to include a security that has a high investment grade credit rating.[62]

In 1992, in order to facilitate registered offerings of asset-backed securities and eliminate differences in treatment under our registration rules between mortgage related asset-backed securities (which could be registered on a delayed basis) and other asset-backed securities of comparable character and quality (which could not), we expanded the ability to use “shelf offerings” to other asset-backed securities.[63] Under the 1992 amendments, offerings of asset-backed securities rated investment grade by an NRSRO [64] could be registered on Form S-3.[65] The eligibility requirement's definition of “investment grade” was largely based on the definition in the existing eligibility requirement for non-convertible corporate debt securities.[66]

The 1992 amendments did not prescribe specific disclosure requirements for ABS offerings; disclosure in ABS offerings was based largely on market practices and SEC staff guidance.[67] At the end of 2004, the Commission adopted new rules and amendments under the Securities Act and the Exchange Act addressing the registration, disclosure and reporting requirements for asset-backed securities.[68] In the 2004 amendments (“2004 ABS Adopting Release”), we prescribed specific ABS disclosure requirements for the first time, which are largely principles-based. In addition, under the 2004 amendments, we retained the investment grade ratings condition to ABS Form S-3 eligibility [69] and added additional shelf eligibility conditions.[70]

Start Printed Page 23334

In 2008, we proposed several changes to our rules and form requirements that reference investment grade ratings (the “2008 Proposing Release”), including a proposal to revise shelf eligibility criteria for ABS offerings and primary offerings of non-convertible debt by replacing the investment grade ratings component.[71] Our proposal would have replaced investment grade ratings with a requirement that sales registered on Form S-3 be made in minimum denominations and only to qualified institutional buyers, as defined in Rule 144A. We reopened comment on the 2008 Proposing Release on October 5, 2009.[72]

We received comment letters from 35 commenters on the 2008 Proposing Release. Commenters generally opposed the proposed amendments that would have replaced investment grade ratings references in certain rules and the shelf eligibility criteria.[73] Some commenters on the proposed amendments to ABS shelf eligibility noted that the proposed eligibility requirements would result in many ABS issuers registering offerings on Form S-1 [74] or selling the securities privately.[75] After considering comments, we are withdrawing this part of the 2008 proposal and are proposing different replacements to the ratings requirement in the shelf eligibility criteria for ABS issuers that we believe are better measures of quality, and therefore, are more appropriate eligibility criteria. We are also proposing several changes to restructure the registered ABS offering process.

B. New Registration Procedures and Forms for Asset-Backed Securities

1. New Shelf Registration Procedures

Under existing rules, as with offerings of other types of securities registered on Form S-3 and Form F-3, the shelf registration statement for an offering of asset-backed securities will often be effective before a takedown is contemplated. Pursuant to existing Securities Act Rules 409 and 430B,[76] the prospectus in the registration statement may omit the specific terms of a takedown if that information is unknown or not reasonably available to the issuer when the registration statement is made effective.[77] For ABS offerings off the shelf, because assets for a pool backing the securities will not be identified until the time of an offering, information regarding the actual assets in the pool and the material terms of the transaction are sometimes only included in a prospectus or prospectus supplement that is filed with the Commission the second business day after first use.[78] This information includes information about the pool, underwriting criteria for the assets and exceptions made to the underwriting criteria, identification of the originators of the assets and other information that is keyed off the identification of specific assets for the pool.

We recognize that asset-backed issuers have expressed the need to use shelf registration to access the capital markets quickly.[79] We understand that the creation of an asset pool to support securitized products is a dynamic and ongoing process in which changes can take place up until pricing. As a result, our proposals today generally maintain the fundamental framework of shelf registration for ABS offerings.

However, we also recognize that it is important for investor protection that ABS investors have not just adequate information to make an investment decision, but also adequate time to analyze the information and the potential investment. For the most part, each ABS offering off of a shelf registration statement involves securities backed by different assets, so that, in essence, from an investor point of view, each offering is like an initial public offering with respect to the ABS issuer. Information regarding the assets is an important piece of information for investors to use to conduct an analysis of the ability of those underlying assets to generate sufficient funds to make payments on the securities. Furthermore, some have noted the lack of time to review transaction-specific information as hindering the investors' ability to conduct adequate analysis of the securities.[80] We believe that a more orderly process for asset-backed securities offerings with improved investor protections, where investors and underwriters have additional time to assist their review of offerings, may be needed, even if issuers may not always be able to time their offering in a way that takes advantage of short term price peaks. Therefore, we are proposing rules designed to increase the amount of time that investors have to review information regarding a particular shelf takedown and promote analysis of asset-Start Printed Page 23335backed securities in lieu of undue reliance on security ratings for shelf offerings.

(a) Rule 424(h) Filing

We are proposing to require an asset-backed issuer using a shelf registration statement on proposed Form SF-3 to file a preliminary prospectus containing transaction-specific information at least five business days in advance of the first sale of securities in the offering. This requirement, if adopted, would allow investors additional time to analyze the specific structure, assets, and contractual rights regarding each transaction. Requiring that such information be filed at least five business days before the first sale of securities in the offering is designed to balance the interest of ABS issuers in quick access to the capital markets and the need of investors to have more time to consider transaction-specific information. We considered whether a longer minimum time period than five business days would be more appropriate.[81] However, we are proposing five business days, because we preliminarily believe that the proposals discussed below that require the filing of standardized and tagged loan-level information and a computer program that gives effect to the cash flow provisions of the transaction agreement could reduce the amount of time required by investors to consider transaction specific information. Our requests for comment on the proposed new procedures below include questions about the appropriate amount of time investors need to consider transaction specific information.

Under our proposal, with respect to any takedown of securities in a shelf offering of asset-backed securities where information is omitted from an effective registration statement in reliance on newly proposed Rule 430D, a form of prospectus meeting certain requirements must be filed with the Commission by a means reasonably calculated to result in filing in accordance with proposed Rule 424(h) (the “Rule 424(h) filing” or “Rule 424(h) prospectus”) at least five business days prior to the first sale of securities in the offering.[82] If the preliminary prospectus is used earlier than such five business days to offer the securities, then it must be filed by the second business day after first use.

As discussed below, we are proposing new Rule 430D to provide the framework for shelf registration of ABS offerings. The proposed rule explains what information may be omitted from the prospectus filed with the effective registration statement and what information must be contained in the Rule 424(h) filing. Under new Rule 430D, as proposed, the Rule 424(h) filing must contain substantially all the information for the specific ABS takedown previously omitted from the prospectus filed as part of an effective registration statement,[83] except for the information with respect to the offering price, underwriting discounts or commissions, discounts or commissions to dealers, amount of proceeds or other matters dependent upon the offering price. The information required to be filed pursuant to proposed Rule 424(h) would include, among other things, information about the specific asset pool that is backing the securities in the takedown and the waterfall computer program discussed in Section III below. Proposed Rule 430D would provide that a material change in the information provided in the Rule 424(h) filing, other than offering price, would require a new Rule 424(h) filing and therefore, a new five business-day waiting period.[84] The new Rule 424(h) filing would be required to reflect the change and contain substantially all the information required to be in the prospectus, except for pricing information. For example, if a credit enhancement (that was contemplated in the registration statement) is added to the transaction after a Rule 424(h) filing is filed, we would expect the issuer to file a new Rule 424(h) filing that reflects the credit enhancement and wait an additional five business days before the first sale in the offering. This is designed to provide investors with information and time sufficient to conduct a thorough analysis of new information relating to the offering.

So long as a form of prospectus has been filed in accordance with Rule 430D, ABS issuers could continue to utilize a free writing prospectus or ABS informational and computational materials in accordance with existing rules.[85] However, because we believe that investors should have access to a comprehensive prospectus that contains substantially all of the required information, a free writing prospectus or ABS informational and computational materials could not be used for the purpose of meeting the requirements of proposed Rule 424(h). For liability purposes, a Rule 424(h) filing would be deemed part of the registration statement on the date such form of prospectus is filed with the Commission, or if the preliminary prospectus is used earlier than five business days in advance of the first sale of securities in the offering, then the date of first use.[86] A final prospectus for ABS offerings would continue to be filed pursuant to Rule 424(b). Consistent with Rule 430B for shelf offerings of corporate issuers, under proposed Rule 430D the filing of the final prospectus under Rule 424(b) would trigger a new effective date for the registration statement relating to the securities to which such form of prospectus relates for purposes of liability under Section 11 of the Securities Act.[87]

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(b) New Rule 430D

Currently, the framework for ABS shelf offerings, along with shelf offerings for other securities, is outlined in Rule 430B of the Securities Act. Rule 430B describes the type of information that primary shelf eligible and automatic shelf issuers may omit from a base prospectus in a Rule 415 offering [88] and include instead in a prospectus supplement, Exchange Act report incorporated by reference, or a post-effective amendment.[89] We are proposing new Rule 430D to provide the framework for delayed shelf offerings of asset-backed securities pursuant to Rule 415(a)(1)(vii), as proposed to be revised. If we adopt Rule 430D, existing Rule 430B would no longer apply to ABS offerings.

Proposed Rule 430D would require that with respect to each offering, substantially all the information previously omitted from the prospectus filed as part of an effective registration statement, except for the omission of information with respect to the offering price, underwriting discounts or commissions, discounts or commissions to dealers, amount of proceeds or other matters dependent upon the offering price, be filed at least five business days in advance of the first sale of securities in the offering in accordance with Rule 424(h). Thus, an issuer may not omit such information (other than offering price, underwriting discounts or commissions, discounts or commissions to dealers, amount of proceeds or other matters dependent upon the offering price) from the Rule 424(h) filing.

We are proposing conforming revisions to the undertakings that are required by Item 512 of Regulation S-K [90] in connection with a shelf registration statement. For the most part, ABS issuers would continue to provide the same undertakings that are currently required of ABS issuers conducting shelf offerings. We are proposing a conforming revision to the undertakings relating to the determination of liability under the Securities Act as to any purchaser in the offering. It would require an undertaking that each prospectus filed by the registrant pursuant to Rule 424(h) would be deemed part of the registration statement as of the date the prospectus was deemed part of, and included in, the registration statement (i.e., the date it was filed with the Commission, or, if the prospectus was used and filed earlier, the second business day after first use).[91] Also, under our proposed revision to Item 512 of Regulation S-K, an issuer would be required to undertake to file the information required to be contained in a Rule 424(h) filing with respect to any offering of securities.

Request for Comment

  • We request comment on our proposal to establish a minimum period of time available to investors to review registered ABS offering prospectuses. Are we correct that investors need additional time? Would the proposed timeline for filing the proposed preliminary prospectus at least five business days prior to the date of first sale pose problems for market participants? If so, how could we address those concerns while still providing investors with sufficient time to analyze the securities?
  • Is the proposed five business days sufficient time for investors? Should the required minimum number of days that the Rule 424(h) filing must be filed before the first sale be longer (e.g., six, seven, eight, or ten business days) or shorter than what we are proposing (e.g., two or four business days)? Given the increased amount of information that would be made available to investors under this proposal, would investors need more time to consider transaction specific information? Is our belief that the filing of standardized and tagged asset-level information and a computer program that gives effect to the cash flow provisions of the transaction agreement could reduce the amount of time investors need to consider transaction-specific information correct?
  • We are cognizant that having a transaction exposed to the markets for some period of time causes concerns to some issuers and underwriters in some instances. However, we also note situations in which transaction-specific information regarding ABS is provided to other deal participants for a longer period prior to selling the securities seemingly with no or minimal effect on the issuer's ability to sell securities. We note, in particular, that the Federal Reserve Board requires information to be provided to it regarding the assets pledged to the Term Asset-Backed Securities Loan Facility (TALF) at least three weeks prior to the subscription date.[92] Similarly, rating agencies receive information prior to rating transactions.[93] If there are issues raised by exposing the transaction publicly to the markets, please provide us with specific information about the concerns and ways we can revise the proposal to address them.
  • Under our proposal, the Rule 424(h) filing would not be required to include information dependent on pricing. Is that appropriate? If not, what information should be required to be included and how would an issuer have access to the information in the timeframe that we are proposing?
  • Under our proposal, if a material change to the disclosure other than to pricing information occurs, the issuer would be required to file a new Rule 424(h) prospectus with updated information. Is this requirement specific enough? Should we, instead or in addition, specify particular changes that would trigger a filing, or conversely, that would not trigger a filing? Should we, for example, provide that a new Rule 424(h) filing would be required if the asset pool has changed by a certain amount? If so, what should that amount be (e.g., 1%, 5%, or 10% of the final asset pool)? How would other changes be described, such as changes to the waterfall? Would it be appropriate to allow a material change without requiring a new Rule 424(h) filing and a new five-day waiting period? Should the new Rule 424(h) filing be required as proposed to reflect the change and contain substantially all the information required to be in the prospectus, except for pricing information? Should we only require that the change be reflected in a supplement?
  • The requirement to file a new Rule 424(h) filing would trigger another five-day waiting period before the first sale. Is this approach appropriate and workable? If the issuer is required to re-file the preliminary prospectus, as proposed, should the issuer be required to wait another five business days before the first sale, as proposed? If not, how long should the issuer be required to wait?Start Printed Page 23337
  • Are there any aspects of the Rule 424(h) filing that we should specify must be substantially set at the time it is required to be filed?
  • Are there any changes, other than the ones we are proposing, to the Item 512 undertaking that should be made? Is our proposed change to incorporate the Rule 424(h) filing in the undertakings relating to liability so that the Rule 424(h) filing shall be deemed part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement appropriate?
  • We have designed the proposed process for ABS shelf registration to strike a balance between facilitating registered ABS offerings and providing investors a meaningful opportunity to analyze the securities. Would our proposal to require that the Rule 424(h) prospectus be filed at least five business days before the first sale make shelf registration sufficiently less attractive to issuers that they would avoid the registered market? If so, are there ways to address this concern? Below, we are proposing to require more disclosure for private offerings of asset-backed securities that rely on the Commission's safe harbors that allow issuers to rely on an exemption from registration. Should we impose even more restrictions on private offerings of asset-backed securities than what is proposed below? For example, should we condition reliance on Rule 506 of Regulation D on a limitation of the total number of purchasers in an ABS offering, even for offerings to accredited investors or qualified institutional buyers? Alternatively, should we impose fewer restrictions on private offerings of asset-backed securities?
  • Should we also require, or require instead, that the initial purchaser or investor hold the securities for a period of time prior to resales in reliance on Rule 144A to better ensure that such resales of asset-backed securities are not a distribution? Could that better ensure that the public registered ABS market operates appropriately and that the existing safe harbors do not inappropriately erode the public markets? If we were to add these additional restrictions on private offerings, what would be the impact on the broader market for structured securities? Would requiring a holding period discourage investors from purchasing ABS in exempt private placements? Would these offerings all be done as public deals, or would these offerings cease to be conducted at all? Should we provide for fewer restrictions—for example, should we require a subset of loan-level disclosures in the context of an exempt private offering? Should issuers or sponsors have the option of providing only certain information? Or would these rules reduce the aggregate amount of transactions? What would be the economic effect?

2. Proposed Forms SF-1 and SF-3

In order to distinguish the ABS registration system from the registration system for other securities, we are proposing to add new registration forms that would be used for any sales of a security that meets the definition of an asset-backed security, as defined in Item 1101 of Regulation AB.[94] These new forms, which would be named Form SF-1 and Form SF-3,[95] would require all the items applicable to ABS offerings that are currently required in Form S-1 and Form S-3 as modified by the proposed amendments noted below. Offerings that qualify for delayed shelf registration [96] would be registered on proposed Form SF-3, and all other offerings would be registered on Form SF-1.[97]

Proposed Form SF-1 would not contain all the items that are currently required by Form S-1. Specifically, the proposed form would not include the instructions as to summary prospectuses, as we do not believe that the summary prospectus instructions are relevant for ABS offerings. Also, we are proposing to substitute the item in existing Form S-1 permitting incorporation by reference by reporting companies of previously filed Exchange Act reports and documents with an item that is more tailored to asset-backed securities on proposed Form SF-1. As discussed in Section I.D.1 below, we are proposing that ABS issuers file a single prospectus for each takedown with all of the information required by Regulation AB because we believe ABS offerings are more closely akin to initial public offerings. Therefore, we are proposing to limit incorporation by reference to certain disclosures. In particular, as discussed below,[98] we are proposing to permit an ABS issuer to incorporate by reference into proposed Form SF-1 information by the time of effectiveness of the registration statement the information that is required to satisfy certain disclosure requirements (i.e., static pool information filed pursuant to Item 6.08 of Form 8-K, asset data filed pursuant to Item 6.06 of Form 8-K, and the waterfall computer program filed pursuant to Item 6.07 of Form 8-K).[99] We also are proposing to permit ABS issuers structured as revolving asset master trusts to incorporate by reference certain asset-level disclosures that would have been provided in previously filed Form 10-Ds.[100]

We are proposing to revise some disclosure requirements that are currently located in Form S-3 but would be moved to proposed Form SF-3. As discussed in the sections immediately following this discussion, we are proposing changes to shelf eligibility for ABS issuers, which will now become the eligibility criteria for proposed Form SF-3. In addition, we are proposing to change an eligibility requirement in existing Form S-3 relating to delinquent filings of the depositor or an affiliate of the depositor for purposes of proposed Form SF-3. For Form S-3, an issuer is not eligible for registration on the form if the depositor or an affiliate of the depositor, with respect to a class of asset-backed securities involving the same asset class, has not filed the Exchange Act reports required to be filed or has not filed such reports in a timely manner for a period of twelve months prior to the filing of the registration statement.[101] However, for certain specified reports, including reports on Form 8-K pursuant to Item 6.05, untimely filing does not result in loss of eligibility.[102] We are proposing to repeal the existing exception from the filing timeliness requirement for Item 6.05 Form 8-K reports. Item 6.05 Form 8-K reports, which we discuss in further detail below, are required to be filed if there is a change in the asset pool characteristics from the description of the asset pool provided in the final prospectus and thereby provide important information regarding the composition of the assets. Under proposed Form SF-3, the untimely filing of an Item 6.05 Form 8-K report by the depositor or affiliate of the depositor, with respect to a class of asset-backed securities involving the same asset class, during the twelve Start Printed Page 23338calendar months and any portion of a month immediately preceding the filing of the registration statement would result in the loss of form eligibility for up to twelve months from the time the report was due.[103] As discussed in Section V.C.1 below, we also are proposing to lower the threshold amount of change that would trigger a filing requirement for Item 6.05 Form 8-K reports from five percent of any material pool characteristic to one percent.

Request for Comment

  • We request comment on our proposal to move the registration statement item requirements for ABS offerings into new forms that would apply only to asset-backed issuers. Would the proposed new forms create any difficulties? If so, please specify.
  • We are proposing to move the items applicable to asset-backed securities from Forms S-1 and S-3 to proposed Forms SF-1 and SF-3, with some exceptions noted. Do the proposed forms omit any requirement for asset-backed issuers that should be included? Do any of the requirements need further revisions?
  • The proposed Form SF-1 would not include the instructions as to summary prospectuses that are included in Form S-1. Is there any reason we should provide these instructions in proposed Form SF-1 for ABS issuers?
  • Are our proposed instructions for incorporation by reference appropriate?
  • Should we repeal the existing carve-out for the untimely filing of an Item 6.05 Form 8-K, as we are proposing to do? Why or why not?

3. Shelf Eligibility for Delayed Offerings

We are proposing to eliminate the ability of ABS issuers to establish shelf eligibility in part by means of an investment grade credit rating. This is part of our broad ongoing effort to remove references to NRSRO credit ratings from our rules in order to reduce the risk of undue ratings reliance and eliminate the appearance of an imprimatur that such references may create.[104] In place of credit ratings, we are proposing to establish four shelf eligibility criteria that would apply to mortgage related securities and other asset-backed securities alike. These proposed requirements, along with the other current requirements,[105] would determine an asset-backed issuer's eligibility to register for a delayed shelf offering. Similar to the existing requirement that the securities must be investment grade, the proposed requirements are designed to provide for a certain quality and character for asset-backed securities that are eligible for delayed shelf registrations.

(a) Risk Retention

Risk retention requirements have been discussed by some market participants as one potential way to improve the quality of asset-backed securities by better aligning the incentives of the sponsors and originators of the pool assets with investors' incentives. A chain of securitization may involve multiple participants that may serve the function of originator, sponsor, servicer, or trustee.[106] One concern that has been debated is whether the model of securitization where loan originators do not hold the loans they originate but instead repackage and sell them as securities may create a misalignment of incentives between the originator of the assets and the investors in the securities, which misalignment may have contributed to lower quality assets being included in securitizations that did not have continuing sponsor exposure to the assets in the pool.[107] The theory underlying a risk retention requirement is that if a sponsor retains exposure to the risks of the assets, the sponsor is more likely to have greater incentives to include higher quality assets in the pool. Because we believe that securitizations with sponsors that have continuing risk exposure would likely be higher quality than those without, we are proposing, among other things, to replace the investment grade ratings requirement in the ABS shelf eligibility conditions with a condition that the sponsor of any securitization retain risk in each tranche of the securitization on an ongoing basis. Such a requirement has colloquially been referred to as “risk retention,” or “skin in the game.” We believe that the proposed risk retention requirement for shelf eligibility would distinguish the types of securities that are of a sufficient quality and character to be shelf eligible while avoiding the possibility of undue reliance on ratings.

Risk retention requirements are being considered in the U.S. and internationally. In the U.S., proposals with such requirements have come in several different forms.[108] Risk retention requirements have recently garnered support.[109] On the other hand, some are Start Printed Page 23339concerned that mandatory risk retention will not necessarily result in improved asset quality, may not be calibrated to reflect the risk in any given pool and across different asset classes, and may conflict with various other goals and purposes of securitization.[110]

In addition, in its January 2009 framework, a working group on financial reform in the Group of Thirty recommended that regulated financial institutions be required to retain a meaningful portion of the credit risk of the financial assets they are packaging into securitized and other structured credit products.[111] On May 6, 2009, the European Union adopted an amendment to the Capital Requirements Directive, which sets out the rules for Basel II implementation in Europe, that will, upon effectiveness, prohibit a credit institution from investing in a securitization unless there is disclosure from the originator, sponsor, or original lender that one of them will retain, on an ongoing basis, a net economic interest in the securitized credit risk of at least five percent.

We are proposing to make risk retention a part of the shelf eligibility conditions for asset-backed issuers. Under our proposal, Form SF-3 would require that, as a condition to shelf eligibility, the sponsor or an affiliate of the sponsor retain a net economic interest in each securitization in one of the two following manners:

  • Retention of a minimum of five percent of the nominal amount of each of the tranches sold or transferred to investors, net of hedge positions directly related to the securities or exposures taken by such sponsor or affiliate; [112] or
  • In the case of revolving asset master trusts, retention of the originator's interest of a minimum of five percent of the nominal amount of the securitized exposures, net of hedge positions directly related to the securities or exposures taken by such sponsor or affiliate, provided that the originator's interest and securities held by investors are collectively backed by the same pool of receivables, and payments of the originator's interest are not less than five percent of payments of the securities held by investors collectively.[113]

Under the proposed eligibility requirement, the net economic interest required to be retained to be shelf eligible would be measured at issuance (or at origination in the case of originator's interest), and then maintained on an ongoing basis.[114] Also, proposed Form SF-3 would require disclosure relating to the interest that is retained by the sponsor.[115] Retention of five percent net economic interest is intended to align incentives of sponsors with investors, such that the quality of the assets in the pool or other aspects of the offering is likely to be higher than for a securitization without risk retention, and, thus, should be an appropriate partial substitute for the existing investment grade ratings requirement in the ABS shelf eligibility conditions. If we adopt a risk retention condition to shelf eligibility, we preliminarily believe that five percent is an appropriate amount of risk to require sponsors to retain and balances our goal of requiring some exposure to risk without overburdening the capital structure of sponsors.[116]

In constructing the risk retention shelf eligibility condition, we also considered, but are not proposing, an option of retaining risk through the retention of randomly selected exposures for purposes of meeting shelf eligibility conditions. If issuers retain randomly selected exposures, we believe the economic effects, including incentive alignment, should be approximately the same as retaining a fixed percentage of the nominal amount of each tranche, if the randomization is properly implemented. However, we believe that it would be both difficult and potentially costly for investors and regulators to verify that exposures were indeed selected randomly, rather than in a manner that favored the sponsor.

We believe that the proposed two different ways that a sponsor could retain risk to satisfy the risk retention shelf eligibility condition would likely result in better incentive alignment, and, consequently higher quality securities, than retention of only the residual interest in a securitization.[117] “Horizontal risk retention” in the form of retention of the equity or residual interest could lead to skewed incentive structures, because the holder of only the residual interest of a securitization may have different interests from the holders of other tranches in the securitization and, thus, not necessarily Start Printed Page 23340result in higher quality securities. The proposed ways that a sponsor could satisfy the risk retention shelf eligibility condition—either by retaining a “vertical” slice of the securitization, by which we mean taking a portion of the economic risk in each class of security that is being offered, or, in the case of revolving exposures, the originator's interest, would create a direct, shared interest with all the investors in the performance of the underlying assets.

We recognize that there are differing views on the effectiveness of risk retention policies as a means to align the incentives of securitization transaction parties with the interests of investors, both as an intrinsic matter and as compared with other alternatives, as well as concerns about the collateral consequences on the securitization markets associated with conditioning shelf eligibility on risk retention. Some note that originators and other financial institutions active in the mortgage securitization chain suffered massive losses in the financial crisis as a result of their direct and indirect exposure to asset underperformance and, therefore, risk retention exposes financial institutions who are sponsors to too much risk.[118] Another criticism of risk retention posits that different forms of risk retention, such as retention of the equity piece, may lead issuers to screen assets that go into the pool differently.[119] One industry group has asserted that other forms of requiring potential loss exposure, such as more stringent representations and warranties regarding the assets in the pool, may be preferable to outright retention of an economic interest in the securities.[120] Nevertheless, we believe it appropriate at this time to propose the risk retention requirement detailed herein, balancing various considerations that will need to be accounted for before reaching any final determination as to the best way to proceed.

Although sponsors in the past may have initially held a portion of the securitization, such retention often had different motivations and different effects than retention as we propose it. In many cases, sponsors held small portions. These portions were often a small horizontal slice of the securitization and, therefore, would have been unlikely to have driven the sponsor to focus on the quality of the loans or other underlying assets in order to protect that interest. Also, retention of that small portion of those securities may have been due to an inability or lack of incentive to sell those securities. This was often because the securities had a lower return or carried lower spread, and thus were of little interest to investors seeking yield, while the higher returning securities were sold. Many of the retained securities were securities backed by similarly ranked tranches of ABS, which magnified rather than diversified risk. It may be the case that originators and/or underwriters underestimated the risk of both higher (senior) and lower (subordinated) tranches, but their retention practices did not result in the sort of overall risk assessment that our proposal would entail.[121] Thus, retaining risk in that manner would have been unlikely to have the same impact on loan originations, risk analysis, or underwriting—and the resultant asset quality—as the risk retention requirement that we are proposing for ABS shelf eligibility.

In keeping with our belief that incentives are best aligned and quality of assets most significantly impacted if the sponsor retains an equal proportion of all tranches or the economic equivalent, we are proposing to require that, if sponsors select the second risk retention option, they retain a claim whose cash flows are at least five percent of those paid to investors, at all times and in all scenarios. This requirement means that the originator's interest must ultimately be a claim to the same pool of assets as the securities held by investors and must be equivalent in seniority to these securities. The originator's interest would, therefore, be the economic equivalent of retaining a fixed proportion of the nominal amount of all tranches held by investors. We understand that it is a typical practice for credit card ABS to retain an originator's interest in the pool.

For both options, we are proposing to require risk retention net of hedge positions directly related to the securities or exposures taken by the sponsor or its affiliate. This would mean that sponsors would not be able to simply “resell” the specific risks related to the retained securities or asset pool underlying them and remain shelf eligible. The purpose of risk retention is to align the sponsor's incentives with the investors' incentives by exposing each of them to the same risks which thereby promotes higher quality securities in ABS shelf offerings than without risk retention by the sponsor. However, we are primarily concerned with the risks that are under the direct or indirect control of the sponsor (such as the quality of the originator's underwriting standards and the extent of the review undertaken to verify the information regarding the assets). Therefore, hedge positions that are not directly related to the securities or exposures taken by the sponsor or affiliate would not be required to be netted under our proposal. Such positions would include hedges related to overall market movements, such as movements of market interest rates, currency exchange rates, or of the overall value of a particular broad category of asset-backed securities.

As noted above, the proposed risk retention shelf eligibility condition would apply to the sponsor or affiliate of the sponsor. Our proposal is intended to provide an incentive for the sponsor to take additional steps to consider the quality of the assets that are securitized by exposing sponsors to the same credit risk that investors will be exposed to. We believe that there may be reasons to impose these risk retention requirements on the sponsor rather than the originator. Where a non-affiliated aggregator acts as the sponsor of a transaction,[122] the costs of monitoring risk retention born by an originator rather than the sponsor may be disproportionately high because the securitization may include many originators where each originator may have contributed a very small part of the assets in the entire pool. In addition, if risk retention were imposed on each originator rather than the sponsor, the amount of risk held by each originator may be small. As such, the incentives afforded through risk retention may be Start Printed Page 23341diminished or rendered less effective. With risk retention imposed on sponsors, we believe that sponsors would have the appropriate incentives and mechanisms to ensure that originators' lending standards are consistent with the quality and character of the ABS to be offered off of the shelf. Therefore, we believe it is more appropriate to impose risk retention requirements on the sponsor than the non-affiliated originator.[123]

Under our proposal, a sponsor may still conduct a public offering without risk retention. However, such offering would be required to be registered on proposed Form SF-1 rather than proposed Form SF-3. Those offerings would not be eligible for delayed shelf registration, which would subject them to a longer period before they could be completed since a new registration statement would need to be filed and become effective before an offering could be completed. This would allow additional time for the investors to analyze the offering.[124]

We have also considered other ancillary impacts of our proposed risk retention shelf eligibility condition. For example, we considered the impact of the shelf eligibility condition on financial reporting. We note that the Financial Accounting Standards Board's newly-issued Statements of Financial Accounting Standards No. 166 and 167, contained in FASB's Accounting Standards Codification, Topic 860, Transfers and Servicing, and Topic 810, Consolidation, respectively, change the accounting for transfers of financial assets and the criteria for consolidation of variable interest entities. Substantially all types of special-purpose entities used in asset-backed securitization transactions are, for accounting purposes, variable interest entities.

The accounting guidance for consolidation requires a party to consolidate a variable interest entity if it has a variable interest in the securitization that is a controlling financial interest in the variable interest entity. The accounting guidance specifies that a party has a controlling financial interest if it has variable interests with both of the following characteristics: (a) The power to direct the activities of a variable interest entity that most significantly impact the variable interest entity's economic performance, and (b) the obligation to absorb losses of the variable interest entity (or the right to receive benefits from the variable interest entity) that could potentially be significant to the variable interest entity. Only one party, if any, is expected to have a controlling financial interest in a variable interest entity.

A sponsor that retains an economic interest in each tranche of securities, as we are proposing to require as a condition for shelf eligibility, generally will have a variable interest in the asset-backed securitization entity. However, satisfaction of the proposed risk retention condition would not, by itself, be determinative as to whether a sponsor's variable interests would be a controlling financial interest resulting in consolidation. This is the case because each sponsor will need to evaluate the facts and circumstances related to each particular transaction in light of the FASB's newly-issued guidance, including whether the sponsor has the power to direct the activities that most significantly impact the variable interest entity's economic performance. In some cases, the economic performance of the variable interest entity is most significantly impacted by the performance of the assets that back the securities. In those cases, the activity that most significantly impacts the performance of the assets could be, for example, management of asset delinquencies and defaults or, as another example, selecting, monitoring, and disposing of collateral securities.

We expect the effect of the FASB's newly-issued guidance, together with the effect of satisfaction of our proposed risk retention condition for shelf eligibility (or retention of risk for other reasons), to generally increase the instances in which financial assets (and corresponding financial obligations) continue to be reported in the financial statements of the reporting entity that transfers the financial assets. However, the accounting and consolidation determinations for any particular transaction will depend on judgments about the related facts and circumstances.

We understand that the isolation of the assets comprising the pool from claims of other creditors is important to ABS investors.[125] Currently, credit card issuers typically retain an originator's interest in the pool, so our proposed risk retention shelf eligibility condition should not impact those issuers. Our proposed shelf eligibility requirement of retaining a vertical slice of the securities offered is not intended to have an impact on the isolation of the underlying assets, and we are not aware of any reason to believe it would. The proposed shelf eligibility condition would be to hold an interest in all the securities sold to investors and not the underlying assets directly nor the residual interest. True sale opinions are typically required on the transfer of assets from the originator to the depositor. This proposed shelf eligibility condition would apply to the sponsor, which may not necessarily be the originator. Thus, we believe the shelf eligibility condition should not impact whether there has been a true sale at law of the assets and therefore not change the analysis in the event of bankruptcy, insolvency, receivership or conservatorship of the originator or the sponsor.

Request for Comment

  • Should we continue to condition shelf eligibility on requirements that are related to the quality of an ABS offering? Should we, as proposed, replace references to investment grade credit ratings with a risk retention requirement and/or the other criteria discussed below, which are intended to increase the likelihood of higher quality securities than securities that are not required to meet such criteria? Is there a possibility that, by establishing a risk retention requirement or any other criteria based on quality, investors may unduly rely on an appearance that incentives are aligned or that the security has greater quality and consequently be less inclined to expend effort to perform their own analyses creating a similar situation that over-reliance on ratings created? Do the policy bases for shelf eligibility suggest eligibility criteria based on quality of securities are appropriate? Conversely, are expedited offerings inconsistent with an attempt to promote independent analysis of asset-backed securities and reduce the likelihood of undue reliance by investors on credit ratings and therefore, should we not allow ABS offerings to be shelf registered? Should we continue to allow short-form registration for asset-backed securities? Given that each asset-backed security Start Printed Page 23342offering off the shelf is akin to an initial public offering with respect to the particular issuer, is the premise of most other short form registration (i.e., that an eligible issuer enjoys a widespread market following) applicable to issuers of asset-backed securities?
  • We request comment on risk retention as a condition to eligibility for a delayed ABS shelf offering. Would the proposed risk retention condition address concerns relating to the misalignment of incentives and lead to higher quality securities in registered ABS shelf offerings? Is this an appropriate condition for shelf eligibility? Would the requirement incentivize sponsors to consider the quality of the assets being underwritten and sold into the securitization vehicle?
  • Is five percent an appropriate amount of risk for the sponsor to retain in order for the offering to be shelf eligible? Should it be higher (e.g., ten or 15%)? Should it be lower (e.g., one or three percent)? Should the amount of required risk retention be tied to another measure?
  • Should the risk retention condition require retention of risk by sponsors (as proposed) or by originators?
  • Are there other better ways to address alignment of incentives, and thus quality of the securities, in the aggregator situation? Should we require in that situation that all originators and the sponsor retain some risk?
  • Should sponsors be permitted to satisfy the risk retention condition through a different form of risk retention than what is proposed (e.g., retention of first loss position or retention of first loss position in conjunction with retention of some form of vertical slice of the securitization)? Should the risk retention condition relate to retention of the mezzanine tranche? Should the risk retention condition depend on the type and quality of the assets, the structure of the securities and expected economic condition? How could we structure a shelf eligibility condition to take those variables into account?
  • We considered but are not proposing an alternative way to satisfy the risk retention shelf eligibility condition based on retention of randomly-selected exposures. We are concerned about the ability to subsequently demonstrate the randomness of the random selection process, including for purposes of monitoring or auditing. Should we include this alternative? Are there any mechanisms that we could adopt that would ensure adequate monitoring of the randomization process if such an alternative were permitted? For example, would our concerns be addressed if the sponsor was required to provide a third party opinion that the selection process has been random and that retained exposures are equivalent (i.e., share a similar risk profile) to the securitized exposures? Would this be sufficient? Would this opinion resemble a credit rating, raising the same issues that rule reliance on credit ratings has had? If this approach were taken, should we impose any requirements on the characteristics of such a third party? Should that third party be considered an expert for purposes of the registration statement?
  • If we adopted a random selection alternative, should we require the same disclosure regarding the securitized exposures that are subject to risk retention that is required for the assets in the pool at the time of securitization and on an ongoing basis? Should the shelf eligibility condition require that the retained exposures be subject to the same servicing as the securitized exposures?
  • Instead of requiring risk retention as a condition for shelf eligibility, should risk retention be made voluntary for shelf-eligible offerings and issuers only be required to add specified disclosure on the interest that the sponsor or other transaction participants retain? In other words, instead of mandating a certain amount of risk retention, should the requirement be that issuers disclose the percentage of risk retained and in what form? As discussed in greater detail in section III.C.3 of the release, we are also proposing to revise Items 1104, 1108 and 1110 of Regulation AB to require disclosure regarding the sponsor's, a servicer's or a 20% originator's interest retained in the transaction, including amount and nature of that interest. This information would be required for both shelf and non-shelf offerings. If those proposed risk retention disclosure requirements were adopted, would there be a need for or a significant incremental benefit from mandating specific minimum risk retention as a condition of shelf eligibility? Could this incremental benefit be achieved strictly through a market-based mechanism—for example, through fully-disclosed ABS covenants in which the sponsor pre-commits to retain a minimum percentage of the risk of the deal, as opposed to a regulatory requirement? Is the disclosure proposed to be required below sufficient to achieve such a benefit, and if not, what additional disclosures should we require? Would disclosure of the risk retention be a sufficient indicator of shelf-eligible offerings? Should we condition shelf eligibility on requiring the sponsor to covenant that it would maintain a minimum percentage of risk retention? If so, should we provide any limitations on the covenant (e.g., what percentage of tranche or assets must be retained, manner of sponsor's retention, no hedging)? What are the limitations to a market-based mechanism for risk retention? Would such a transaction covenant be credible and enforceable? Would requiring this transaction covenant, along with disclosure of risk retention pursuant to the covenant, sufficiently distinguish those offerings that should be made shelf eligible from those that should not?
  • Should net economic interest be measured at the time of origination/issuance as proposed? Would a different measurement date be more appropriate (e.g., the securitization cut-off date)? If the interest were measured at the time of securitization cut-off date, could this cause issuers to change various terms? Is the amount of retention that is required to be retained on an ongoing basis appropriate? Why or why not?
  • Should revolving asset master trusts be permitted to satisfy the shelf eligibility requirement by retaining the originator's interest, as proposed? In those cases, should we require as proposed that the originator's interest and securities held by investors are collectively backed by the same pool of receivables, and payments of the originator's interest are not less than five percent of payments of the securities held by investors collectively? Is that typical in credit card issuances?
  • Are the proposed netting provisions appropriate? Do we need to provide more guidance on what kind of hedges would be netted against the retained risk? Is the proposed “directly related” standard appropriate? Is it sufficiently clear what type of hedges would be allowed? Are there certain forms of hedges that we should indicate would not be netted against the retained risk? Is there any concern that sponsors may inadvertently hedge the economic risk required to be retained? If so, do we need to address that and what is the best way for us to address it? Should we expand the proposed netting provisions to other types of hedging? Should we narrow the proposed netting provisions in any way?
  • Should the sponsor be allowed to sell off the retained interest after a certain point in time while non-affiliates of the depositor still hold securities and still remain shelf eligible? If so, when? Would that undermine the purpose of the condition? If not, why not?
  • Should there be an alternate condition to the risk retention shelf eligibility condition? For instance, should risk retention apply to RMBS Start Printed Page 23343that are backed by mortgages that are not qualified mortgages, as defined H.R. 1728,[126] a recent legislative proposal? [127] Would it be appropriate to require risk retention unless full documentation has been provided for the assets, the borrower meets a certain minimum credit score, or the terms of the loan do not involve balloon payments? Would such requirements for the mortgages in the pool be a better condition to shelf eligibility than the proposed risk retention shelf eligibility condition? Would such a shelf eligibility condition be difficult to implement? Should we instead condition shelf eligibility on risk retention for loans with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for loans secured by a first lien on a dwelling, or by 3.5 or more percentage points for loans secured by a subordinate lien on a dwelling? [128] How would we structure a condition that relates to specified characteristics of the assets for other asset classes that may not have those variables or those industry standards or have different underwriting standards? What would be the appropriate categories and thresholds? Do those appropriate categories and thresholds differ for different classes? If so, how? Are there securitized asset classes that have no clear or established standards that could demarcate assets meriting shelf eligibility and those that do not?
  • The residual interest of a commercial mortgage securitization is typically sold to a third party purchaser, also known as the “B-piece buyer,” before the issuance of the securities. In light of this practice, should we permit third party retention of a portion of the securitization to fulfill the shelf eligibility condition? How can we ensure that incentives between the sponsor and investors are aligned in a manner that results in higher quality if the sponsor is permitted to sell off its risk to a third party? For example, should such a shelf eligibility condition require that if a third party will retain the credit risk, the third party purchaser must retain a higher percentage (e.g., ten or 15%) of the risk, rather than five percent? If we allow this approach, should we condition shelf eligibility on a requirement that the third party separately examine the assets in the pool and/or not sell or hedge its holdings? Are there reasons we should, or should not, permit a third party to retain risk in order to satisfy the proposed risk retention condition? [129]
  • Should any asset classes or types of securities be exempt from the proposed risk retention shelf eligibility condition or have different risk retention requirements apply? Because of the unique nature of residential mortgages in the financial markets, should risk retention apply to shelf offerings of residential mortgage-backed securities (RMBS) but not offerings of other ABS? If so, what would be an appropriate partial substitute for investment grade rating for shelf eligibility for those other asset classes?
  • How would the proposed risk retention shelf eligibility condition impact how sellers account for the transfer of assets in a securitization transaction? Is it desirable to revise the proposal to lessen that impact and if so, how?
  • Would the proposal have an impact on the true sale at law of the assets or on the rights of ABS investors as a result of conservatorship, receivership or bankruptcy of the originator or sponsor? If so, how can we revise the proposed risk retention condition to require risk retention without jeopardizing the transfer of assets as a true sale at law or the remoteness of those assets in the event of any bankruptcy, conservatorship, or receivership of the sponsor or originator?
  • We note that FINRA Rule 5130 (Restrictions on the Purchase and Sale of IPOs of Equity Securities) generally prohibits FINRA members from selling initial public offerings to broker dealers and their affiliates. The rule is designed to protect the integrity of the public offering process by ensuring that: (1) Members make bona fide public offerings of securities at the offering price; (2) members do not withhold securities in a public offering for their own benefit or use securities to reward persons who can give them future business; and (3) industry insiders do not take advantage of their insider position to purchase IPOs for their own benefit at the expense of the public.[130] Under FINRA's rules, if an ABS is an equity security, it is excluded from the application of the rule if the security is sold pursuant to an exemption under the Securities Act or if it is an offering of investment grade rated ABS. Will this rule have any significant impact on the ability to retain risk as a requirement for shelf eligibility? While our rule changes would eliminate references to credit ratings, sponsors may still obtain ratings, which would potentially qualify Start Printed Page 23344the offering for this exemption. Alternatively, FINRA could change its rule to provide the exemption to shelf-eligible ABS rather than investment grade rated ABS. Are there any other regulations or rules that may impact the retention of risk?

(b) Third Party Review of Repurchase Obligations

In the underlying transaction agreements for an asset securitization, sponsors or originators typically make representations and warranties relating to the pool assets and their origination, including about the quality of the pool assets. For instance, in the case of residential mortgage-backed securities, one such representation and warranty is that each of the loans has complied with applicable federal, state and local laws, including truth-in-lending, consumer credit protection, predatory and abusive laws and disclosure laws. Another representation that may be included is that no fraud has taken place in connection with the origination of the assets on the part of the originator or any party involved in the origination of the assets. Upon discovery that a pool asset does not comply with the representation or warranty, under transaction covenants, an obligated party, typically the sponsor, must repurchase the asset or substitute the non-compliant asset with a different asset that complies with the representations and warranties.

The effectiveness of these contractual provisions has been questioned and lack of responsiveness by sponsors to potential breaches of the representations and warranties relating to the pool assets has been the subject of investor complaint.[131] Transaction agreements typically have not included specific mechanisms to identify breaches of representations and warranties or to resolve a question as to whether a breach of the representations and warranties has occurred.[132] Thus, these contractual agreements have frequently been ineffective because without access to documents relating to each pool asset, it can be difficult for the trustee, which typically notifies the sponsor of an alleged breach, to determine whether or not a representation or warranty relating to a pool asset has been breached. Investors and trustees must rely on the sponsor to provide the necessary documentation about the assets in question. Without further safeguards, the protective quality of the representations and warranties can be compromised.

We are proposing to require as a condition to shelf eligibility, that the pooling and servicing agreement or other transaction agreement for the securitization, which is required to be filed with the Commission,[133] contain a specified provision to enhance the protective nature of the representations and warranties. The specified provision would require the obligated party (i.e. the representing and warranting party) to furnish a third party's opinion relating to any asset for which the trustee has asserted a breach of any representation or warranty and for which the asset was not repurchased or replaced by the obligated party on the basis of an assertion that the asset met the representations and warranties contained in the pooling and servicing or other agreement.[134] The third party opinion would confirm that the asset did not violate a representation or warranty contained in the pooling and servicing agreement or other transaction agreement. Because we believe that annual review of the assets is not sufficient to address investors' concerns regarding the enforceability of these provisions in the underlying transaction documents, the opinion would be required to be furnished to the trustee at least quarterly.

To better ensure that the opinion is impartial, we are proposing to require that the third party providing the opinion not be an affiliate of the obligated party. This proposed third party loan review condition to shelf eligibility is designed to help ensure that representations and warranties about the assets provide meaningful protection to investors, which should encourage sponsors to include higher quality assets in the asset pool.[135] As a result, we believe that this proposed condition is an appropriate partial substitute for the investment grade ratings requirement.

Request for Comment

  • Is this proposed condition an appropriate shelf eligibility condition for ABS offerings?
  • Would this proposed condition, which would only require an undertaking from the issuer, have a measurable benefit to investors? Should we require more assurance that third party opinions have been provided to investors as a condition to shelf eligibility? For example, should we instead condition eligibility on receipt of a certification from the trustee in offerings of the same asset class by the depositor or its affiliates to the effect that all required opinions have been obtained? Should we condition eligibility on a requirement that the trustee provide notice if required third party opinions are not obtained, along with an absence of a notice from the trustee to the effect that there was a failure to provide required opinions?
  • Should we provide more guidelines in this shelf eligibility condition regarding the specifics of the provision that would be required to be included in the pooling and servicing or other agreement? If so, what should be detailed?
  • Should the proposed condition provide any further specification of the terms of the third party opinion provision?
  • Is it appropriate to require, as proposed, the third party to be non-affiliated with the obligated party? Should we specify further any requirements relating to providers of the third party opinion? Should we specify that the third party opinion provider must be an independent expert, similar to what is required in Section 314(d)(1) [136] of the Trust Indenture Act of 1939? [137]
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  • Should we specify who should provide the third party opinion or who should not be permitted to provide the opinion? Should diligence firms that provide third party pre-securitization review of a random sample of assets be allowed to provide this opinion? Should we specify that it must be a legal opinion? Would attorneys or law firms be willing to provide this opinion? Why or why not? Would it be appropriate to allow a sponsor's in-house counsel to provide the opinion? If a law firm provides the opinion, should we prohibit the law firm that assisted in the offering from providing such an opinion?
  • Based on existing attestation standards of either the PCAOB or AICPA, we do not believe that the proposed opinion could be provided by a public accountant. Would a public accountant be able to provide the proposed opinion under existing attestation standards? If so, which standard or standards should be applied, what level of assurance should be provided and how should the third party opinion be reported?
  • Should we provide that the third party opinion must cover all of the representations and warranties in the agreement related to the assets, as proposed? Instead, are there certain representations and warranties that are the most significant that the opinion should cover? Are there types of representations and warranties that the third party opinion should not be required to opine on? For example, are there certain representations and warranties that an attorney or a law firm would not be able to opine on? If so, why?
  • Are there any other types of limitations that a third party opinion provider would or should place on the required opinion? In general, what type of exam, assessment or evaluation would a third party opinion provider need to make in order to provide the required opinion?
  • How costly or burdensome would it be for an issuer to be required to have a third party provide an opinion to satisfy the proposed shelf eligibility condition? Would this impose too much burden on ABS issuers? Are there ways to lessen the cost?
  • Should the third party opinion be required to be furnished annually rather than quarterly, as proposed?
  • Should we require that the third party opinion also be filed as an exhibit to an Exchange Act report?
  • We are aware of some insurance providers that have offered to insure in the context of mergers and acquisitions any breach of the representations and warranties in the transaction agreement. As an alternative to conditioning ABS shelf eligibility on an undertaking in the transaction agreement that the issuer furnish a third party opinion on assets not repurchased (or instead of the proposed condition), should we allow the issuer to purchase insurance to insure a minimum amount or percentage of the sponsor or originator's obligations under the transaction agreement? If so, what kind of disclosure should we require about the insurance provider? How can we ensure that this alternative method of meeting shelf eligibility adequately improves the incentive structure and therefore the quality of the securities?

(c) Certification of the Depositor's Chief Executive Officer

We also are proposing to establish a requirement that, as a condition to ABS shelf eligibility to replace investment grade ratings criteria, the issuer provide a certification signed by the chief executive officer of the depositor of the securitization regarding the assets underlying the securities for each offering.[138] The certification would require the depositor's chief executive officer to certify that to his or her knowledge, the assets have characteristics that provide a reasonable basis to believe they will produce, taking into account internal credit enhancements, cash flows at times and in amounts necessary to service payments on the securities as described in the prospectus. This officer would also certify that he or she has reviewed the prospectus and the necessary documents for this certification.[139]

Because we would frame this ABS shelf eligibility condition as a certification requirement instead of a disclosure requirement, we are using slightly different language than a similar EU disclosure requirement in order to more precisely outline what the officer is certifying to. We are proposing a certification rather than a disclosure requirement because we preliminarily believe the potential focus on the transaction and the disclosure that may result from an individual providing a certification should lead to enhanced quality of the securitization.[140] We believe, as we did when we proposed the certification for Exchange Act periodic reports, that a certification may cause these officials to review more carefully the disclosure, and in this case, the transaction, and to participate more extensively in the oversight of the transaction.[141]

We are proposing that the statements required in the certification would be made based on the knowledge of the certifying officer. As signatories to the registration statement, we would expect that chief executive officers of depositors would have reviewed the necessary documents regarding the assets, transactions and disclosures. Under current requirements, the registration statement for an ABS offering is required to include a description of the material characteristics of the asset pool,[142] as well as information about the flow of funds for the transaction, including the payment allocations, rights and distribution priorities among all classes of the issuing entity's securities, and within each class, with respect to cash flows, credit enhancement and any other structural features in the transaction.[143] The proposed certification would be an explicit representation by the chief executive officer of the depositor of what is already implicit in this disclosure Start Printed Page 23346contained in the registration statement.[144] This is similar to the certifications of Exchange Act periodic reports required by Exchange Act Rules 13a-14 and 15d-14,[145] which also refer to the disclosure. As with the certifications required by these rules, the language of the proposed certification could not be altered. Instead, any issues in providing the certification would need to be addressed through disclosure in the prospectus.[146] For instance, if the prospectus describes the risk of non-payment, or probability of non-payment, or other risks that such cash flows will not be produced or such payments will not be made, then those disclosures would be taken into consideration in signing the certification.

The chief executive officer of the depositor is already responsible as signatory of the registration statement for the issuer's disclosure in the prospectus and can be liable for material misstatements or omissions under the federal securities laws.[147] An officer providing a false certification potentially could be subject to Commission action for violating Securities Act Section 17.[148] The certification would be a statement of what is known by the signatory at the time of the offering and would not serve as a guarantee of payment of the securities.

Under our proposal, this certification would be an additional exhibit requirement for the shelf registration statement that would not be applicable to the non-shelf registration statement, Form SF-1, and that would be required to be filed by the time the final prospectus is required to be filed under Rule 424.[149] We believe that requiring the chief executive officer of the depositor to sign the certification is consistent with other signature requirements for asset-backed securities.[150]

Request for Comment

  • Is our proposal to require certification appropriate as a condition to shelf eligibility? Would investors find the certification valuable?
  • Is the proposed language for the certification requirement appropriate? Should we revise it in any way? Should we require that the officer certify that he has a reasonable basis to believe that the assets will produce cash flows at times and in amounts necessary to service payments on the securities as described in the prospectus (rather than certify that the assets have characteristics that provide a reasonable basis to believe that the assets will produce cash flows at times and amounts necessary to service payments as described)?
  • Should we identify the level of inquiry required by the executive officer? Should we specify which documents (other than the prospectus) would need to be reviewed for purposes of the certification, and, if so, which ones should we specify?
  • Under the proposal, the certifying officer could take into account internal credit enhancements for purposes of evaluating whether the assets have characteristics that provide a reasonable basis to believe they will produce cash flows at times and in amounts necessary to service payments on the securities as described in the prospectus. Should we also permit the certifying officer to also take into account external credit enhancements that may be utilized in the securitization? [151]
  • Are there concerns that it is not possible for any individual to be in a position to certify that the assets in the pool have characteristics that provide a reasonable basis to believe they will produce, taking into account internal credit enhancements, cash flows at times and in amounts necessary to service payments on the securities as described in the prospectus? If so, how can we address those concerns or are there steps we should take to ensure that the level of uncertainty in the structure and assets is clear to investors?
  • Instead of, or in addition to, requiring a certification, should we require the sponsor to disclose its estimates of default probability for all tranches in the transaction, default probability of loans in the pool, and/or the expected recovery rate on the loans conditional on default? Such estimates would be expected to be consistent with assumptions used in sponsors' internal modeling. Would this disclosure potentially provide investors useful insights into the sponsor's view of the creditworthiness of pool assets and the securitization overall? Would it convey information similar to that contained in credit ratings, which also have, historically, reflected beliefs about default probabilities and expected recovery rates? Do sponsors currently have internal models, or make internal assumptions for valuation purposes, that could be used to readily produce these numbers? If so, should we require that disclosed estimates be consistent with those used in sponsors' internal models? Should we indicate whether or not such disclosures constitute forward-looking statements?
  • Should the chief executive officer of the depositor, as proposed, be required to sign the certification, or should an individual in a different position be required to certify? Which individual should be required to sign the certification? Should we instead require that the certification be signed by the senior officer of the depositor in charge of securitization, consistent with other signature requirements for ABS? Given that the depositor is often a special purpose subsidiary of the sponsor, would it be more appropriate to have an officer of the sponsor sign the certification? If so, should it be the senior officer in charge of securitization or some other officer of the sponsor?
  • Is it appropriate to require the certification be filed as an exhibit to the registration statement at the time of the final prospectus by means of a Form 8-K?

(d) Undertaking To File Ongoing Reports

Our last proposed new shelf eligibility criterion replacing the investment grade ratings requirement is a requirement that the issuer provide an undertaking to file Exchange Act reports with the Commission on an ongoing basis. Exchange Act Section 15(d) requires an issuer with an effective Securities Act registration statement to file ongoing reports with the Commission. However, the statute also provides that for issuers that do not also have a class of securities registered under the Exchange Act the duty to file ongoing reports is automatically suspended after the first year if the securities of each class to which the registration statement relates are held of record by less than three hundred persons. As a result, typically the reporting obligations of all asset-Start Printed Page 23347backed issuers,[152] other than those with master trust structures,[153] are suspended after they have filed one annual report on Form 10-K because the number of record holders falls below, often significantly below, the 300 record holder threshold.[154]

In the proposing release for Regulation AB, we requested comment on whether the ability to suspend reporting under Section 15(d) should be revisited.[155] One investor group 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 Form 10-D.[156] While in 2004 we did not adopt rules that would create ongoing reporting obligations for asset-backed issuers, we did note that the concerns raised by investors 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.[157]

We are proposing to require as a condition to ABS shelf eligibility that the issuer undertake to file with the Commission reports to provide disclosure as would be required pursuant to Exchange Act Section 15(d) and the rules thereunder, if the issuer were required to report under that section.[158] The issuer's reporting obligation under the undertaking would extend as long as non-affiliates of the depositor hold any of the issuer's securities that were sold in registered transactions.[159] We believe that ongoing reporting of an asset-backed issuer would provide investors and the markets with transparency regarding many aspects about the ongoing performance of the securities and servicer in its compliance with servicing criteria, among other things. We believe this transparency is important for investors and the market and that it is appropriate to encourage ABS issuers to provide ongoing reports by conditioning shelf eligibility on an undertaking to do so. Thus, we believe this requirement is a reasonable additional condition to shelf eligibility. In conjunction with our proposal to require asset-level information, it may prove even more useful to investors.[160]

In connection with this shelf eligibility condition, we are proposing to require disclosure in the prospectus that is filed as part of the registration statement that the issuer has undertaken and will file with the Commission the reports as would be required pursuant to Exchange Act Section 15(d) and the rules thereunder if the issuer were required to report under that section. Such disclosure would be subject to the same liability as other disclosure in the prospectus.

Also, we are proposing to add a disclosure requirement to Item 1106 of Regulation AB [161] that would require disclosure in a prospectus of any failure in the last year of an issuing entity established by the depositor or any affiliate of the depositor to file, or file in a timely manner, an Exchange Act report that was required either by rule or by virtue of an undertaking. We are proposing further changes to ABS shelf eligibility requirements in connection with the proposed condition, as discussed in the following section.

Request for Comment

  • We request comment on our proposal to require ABS issuers who wish to conduct delayed shelf offerings to undertake to file reports that would be required under Section 15(d) of the Exchange Act for as long as non-affiliates of the depositor hold any securities that were sold in registered transactions. Should we impose such a requirement? Should ABS issuers who use shelf registration be permitted to terminate their reporting obligations at an earlier period in time under shelf eligibility conditions? If so, when?
  • Should we require, as proposed, the disclosure of any failure in the last year of an issuing entity established by the depositor or any affiliate of the depositor to file, or file in a timely manner, an Exchange Act report that was required either by rule or by virtue of the proposed undertaking?
  • We request comment on all of the four new proposed shelf eligibility conditions in general. Are the proposed shelf eligibility conditions appropriate alternatives to the existing investment grade ratings requirement? If one or more of these proposed criteria are not adopted, should an investment grade rating continue to determine whether or not an ABS issuer is eligible for shelf registration? Or should we prohibit ABS issuers from using shelf registration altogether? What would the impact be if ABS issuers were prohibited from utilizing shelf registration? Do the proposed changes to the shelf registration procedures described above, coupled with the proposed shelf eligibility conditions, mitigate concerns about ABS issuers using shelf registration?
  • Should our proposed shelf eligibility conditions (or some subset of them) be used in addition to the existing investment grade ratings requirement rather than replace it?
  • What is the aggregate effect of the proposed revisions to shelf eligibility criteria and the shelf registration process for ABS offerings? If these revisions are adopted, would this make using non-shelf registration (Form SF-1) more attractive to an ABS issuer? How would this change the costs and benefits analysis for using shelf registration for ABS issuers? Would this change cause shelf registration to be less attractive or become uneconomic?
  • If we continue to condition shelf eligibility, in part, on characteristics of the securities that relate to quality, should we establish shelf eligibility based on different criteria than the four Start Printed Page 23348proposed criteria? Should shelf eligibility be conditioned on a limitation of the capital structure of ABS offerings? For instance, should shelf offerings not be allowed to include leveraged tranches or should we limit the number of tranches? If so, how many (e.g., five, six, or seven)? Should we put restrictions on the size of each tranche? If so, how should we do that? Should we limit ABS shelf eligibility to offerings backed by assets that are seasoned for some period of time? If so, how much time for each asset class (e.g., six months, one year, or two years)? Are there certain standardized structures that we should use as a requirement for shelf offering?

(e) Other Proposed Form SF-3 Requirements

We are proposing other amendments to Rule 401 and the instructions in proposed Form SF-3 relating to form eligibility. Currently, to be eligible to use Form S-3, the existing form for ABS shelf registration, an issuer must meet the form's registrant requirements, which generally pertain for ABS issuers to reporting history under the Exchange Act of the depositor and affiliates of the depositor with respect to the same asset class, and at least one of the form's transaction requirements. One of the current ABS transaction requirements for use of Form S-3 is that the securities are investment grade securities, and above we have described our proposals for four new transaction requirements for use of Form SF-3 that would replace the investment grade ratings requirement (i.e., risk retention, third party opinion review of repurchase demands, certification, and the undertaking to file Exchange Act reports). We are proposing to add new registrant requirements that pertain to compliance with the four proposed transaction requirements. These registrant requirements would be new shelf eligibility conditions to registration on proposed Form SF-3, and would also serve as the new eligibility conditions to be evaluated prior to conducting an offering off an effective Form SF-3 shelf registration statement.

(i) Registrant Requirements To Be Met for Filing a Form SF-3

In order to be eligible to file a registration statement on proposed Form SF-3, we are proposing that the registrant meet the following new requirements. First, we are proposing to require that to the extent the sponsor or an affiliate of the sponsor of the ABS transaction being registered was required to retain risk with respect to a previous ABS offering involving the same asset class, then, at the time of filing the registration statement, such sponsor or affiliate must be holding the required risk.

Second, we are proposing that to the extent the depositor or an issuing entity previously established, directly or indirectly, by the depositor or any affiliate of the depositor were at any time during the twelve calendar months and any portion of a month immediately preceding the filing of the registration statement required to comply with the other transaction requirements of Form SF-3 (“twelve-month look-back period”), with respect to a previous offering of securities involving the same asset class, the following requirements would apply:

  • Such depositor and each such issuing entity must have timely filed all the transaction agreements that contained the required provision relating to the third party opinion review of repurchase demands; [162]
  • Such depositor and each such issuing entity must have timely filed all the required certifications of the depositor's chief executive officer; and
  • Such depositor and each such issuing entity must have filed all the reports that they had undertaken to file during the previous twelve months (or such shorter period during which the depositor or issuing entity had undertaken to file reports) as would be required under the Section 15(d) of Exchange Act if they were subject to the reporting requirements of that section.

Third, as proposed, there must be disclosure in the registration statement on Form SF-3 stating that these proposed registrant requirements have been complied with.

These proposed new registrant requirements are, in many respects, consistent with the existing Form S-3 registrant requirement relating to Exchange Act reporting.[163] As with the existing Form S-3 Exchange Act reporting registrant requirement, which we are retaining for proposed Form SF-3, the proposed new registrant requirements would require specified compliance with respect to previous offerings of the depositor or its affiliates. The proposed twelve-month look-back period (except for the requirement relating to risk retention) is also consistent with the existing Form S-3 Exchange Act reporting registrant requirement. The proposed new registrant requirement relating to risk retention requires an issuer to measure its risk retention as of the date of filing the registration statement, which we believe is a reasonable requirement. As described in more detail below, we are not proposing to require the sponsor or an affiliate of the sponsor to ensure that all risk was retained at all times during the previous twelve calendar months, for purposes of shelf eligibility, out of a concern that it may be overly burdensome.

(ii) Evaluation of Form SF-3 Eligibility in Lieu of Section 10(a)(3) Update

Form S-3 eligibility under the current rules is determined at the time of filing the registration statement and at the time of updating that registration statement under Securities Act Section 10(a)(3) [164] by filing audited financial statements. Because ABS registration statements do not contain financial statements of the issuer, a periodic determination of whether the issuer can continue to use the shelf would be specified by rule.[165] Such an evaluation would also provide a means for the Commission and its staff to better oversee compliance with the proposed new Form SF-3 eligibility conditions that would replace the existing investment grade ratings requirement. Therefore, in lieu of Section 10(a)(3) updating, we are proposing to revise Rule 401 to require, as a condition to conducting an offering off an effective shelf registration statement, an annual evaluation of whether the Exchange Act reporting registrant requirements have been satisfied. Under the proposal, an ABS issuer wishing to conduct a takedown off an effective shelf registration statement must evaluate whether affiliated issuers that were required to report under Sections 13(a) or 15(d) of the Exchange Act during the previous twelve months, have filed such reports on a timely basis, as of ninety Start Printed Page 23349days after the end of the depositor's fiscal year end.[166]

(iii) Quarterly Evaluation of Eligibility To Use Effective Form SF-3 for Takedowns

We also are proposing to require a quarterly evaluation of whether the ABS issuer has satisfied the proposed new registrant requirements relating to risk retention, third party opinions, the depositor's chief executive officer certification, and the undertaking to file ongoing reports. Under our proposal, an ABS issuer wishing to conduct a takedown off an effective shelf registration statement must evaluate its compliance with the proposed new registrant requirements as of the last day of the most recent fiscal quarter.

(A) Risk Retention

Accordingly, if the interest that a sponsor was required under the proposed risk retention shelf eligibility condition to retain during the previous twelve months (or shorter period as applicable), with respect to a previous offering of securities off a Form SF-3 registration statement involving the same asset class, was sold off or hedged as of the last day of the most recent fiscal quarter, the related shelf registration statement could not be utilized for subsequent offerings until the fiscal quarter after the sponsor has re-acquired the risk that was required to be retained (e.g., by removing the disqualifying hedge or open market purchases of the securities) and such risk was on the sponsor's books as of the end of the fiscal quarter. We have provided for quarterly testing because we are concerned that more frequent testing could be unnecessarily costly. By requiring an evaluation of risk retention at the end of the quarter, we are not suggesting that a sponsor could permissibly sell or hedge the required risk. Such activities would be inconsistent with the risk retention shelf eligibility condition, with the disclosure relating to a sponsor's interest in the transaction that we are proposing to require in the registration statement, and would be subject to our proposed periodic reporting disclosure requirements related to the sponsor's interest described in Section III.C.3. below. At the same time, we are concerned that there may be circumstances where a sponsor or its affiliates undertake transactions that inadvertently hedge a required risk retention interest, and discover this after a take-down off the shelf by an affiliated ABS issuer. We are not proposing that this would necessarily cause the new offering to be deemed not to have been registered on the appropriate form. However, we believe that it is important that our requirements take into consideration a practicable testing schedule that promotes compliance with the proposed shelf eligibility criteria without creating undue burdens or uncertainty for issuers, and we are proposing requirements that would require at least quarterly testing to achieve that goal. Similarly, with respect to our proposed registrant requirement relating to risk retention, we are proposing that an issuer evaluate whether the sponsor has retained required risk at the time of filing the registration statement.

(B) Transaction Agreements and Officer Certification

An ABS issuer must also evaluate whether, during the previous twelve months, the depositor or it affiliates had filed the transaction agreements required to contain the third party opinion provision and the depositor's chief executive officer certifications on a timely basis as of the end of the quarter. If they had not, then the depositor could not utilize the registration statement or file new registration statement on Form SF-3 until one year after the required filings were filed.

(C) Undertaking To File Exchange Act Reports

Finally, under this proposal, an issuer must evaluate whether Exchange Act reports, with respect to previous takedowns off an effective registration statement of the depositor or affiliate of the depositor, where the issuer had undertaken to file such reports during the prior twelve months had, in fact, been filed as of the last day of the most recent fiscal quarter. In this way, the reports required under Section 13(a) or 15(d) must continue to be timely for shelf eligibility but reports required pursuant to the undertaking must be current as of the end of the quarter. As such, the ABS issuer would need to confirm once a quarter that it continued to be eligible to use the effective registration statement for takedowns.

Request for Comment

  • Should we add, as proposed, registrant requirements that would require, as a condition to form eligibility, affiliated issuers of the depositor that had offered securities of the same asset class that were registered on Form SF-3 to have complied with the risk retention, third party opinion, certification and ongoing reporting shelf eligibility conditions that replace the investment grade ratings requirement? Will these requirements lead to better compliance by ABS issuers with the new shelf eligibility conditions that we are proposing?
  • Should we require disclosure, as proposed, in the registration statement that the registrant requirements have been complied with? Should we specify a location in the registration statement for such disclosure?
  • In our proposed registrant requirements for Form SF-3, we are proposing to require that sponsors of affiliated issuers have retained the required risk at the time of filing the registration statement. Is that appropriate? Should we require continued monitoring of risk retention compliance instead? Should we provide the loss of shelf eligibility if the sponsor of a previously established affiliated issuer has not retained at any time during the previous twelve months all of the risk that it was required to retain during that time? Or would such a requirement be overly burdensome?
  • Is it appropriate to require, as proposed, that the certifications and the transaction agreement containing the required third party opinion provision that are required to be filed pursuant to our proposed shelf eligibility conditions be filed on a timely basis? Why or why not?
  • We are proposing to require an affiliated issuer that has undertaken to file Exchange Act reports in the last twelve months to have filed such reports as required pursuant to the Exchange Act rules. Is this an appropriate additional registrant requirement for proposed Form SF-3? Should we also specify that such reports must have been filed on a timely basis?
  • Should we revise Rule 401, as proposed, to require that as a condition to continued use of an existing shelf registration statement for takedowns, an issuer conduct a periodic evaluation of form eligibility? Why or why not? If not, how should we address the concern that ABS issuers do not file amendments for purposes of Section 10(a)(3)?
  • Should we require, as proposed, that an issuer test for sponsor's compliance with risk retention requirements as of the end of the fiscal quarter? Could there be situations where a sponsor or its affiliates undertake transactions that inadvertently hedge a required risk retention interest? Alternatively, because the testing for compliance would occur at predictable Start Printed Page 23350intervals, are there concerns that the quarterly test for risk retention compliance could allow a sponsor to hold less than the required risk in between testing intervals? Should our requirements provide for testing that is made at different intervals (e.g., once a month, once a distribution period, twice a quarter, at minimum number of random intervals)?
  • Should we require that the evaluation of whether Exchange Act reports of affiliated issuers have been filed on a timely basis be made as of the 90 days after the depositor's fiscal year, as proposed? Should the evaluation be made on a different timeframe, such as the last day of the most recent fiscal quarter, consistent with our other proposals here?
  • Should we require, as proposed, that the evaluation of whether the registrant requirements relating to risk retention, third party opinions, certification, and the issuer's undertaking to file ongoing reports be made as the last day of the most recent fiscal quarter? Should that evaluation be made at different periods, such as monthly or annually?

4. Continuous Offerings

We also are proposing to amend Rule 415 to limit the registration of continuous offerings for ABS offerings to “all or none” offerings. While we have not encountered particular problems with respect to continuous ABS offerings to date (and we believe that ABS offerings are not typically continuous), we believe that our proposal would help ensure that ABS investors receive sufficient information relating to the pool assets, if an issuer registered an ABS offering to be conducted as a continuous offering. We believe that this would close a potential gap in our regulations for ABS offerings.

In an all or none offering, the transaction is only completed if all of the securities are sold. However, in a best-efforts or “mini-max” offering, a variable amount of securities may be sold. In those latter cases, because the size of the offering would be unknown, investors would not have the transaction-specific information and, in particular, would not know the specific assets to be included in the transaction. Thus, Item 1111, either in its existing form or as proposed to be amended, could not be complied with.[167] Under our proposal, the continuous offering must be commenced promptly and must be made on the condition that all of the consideration paid for such security will be promptly refunded to the purchaser unless (A) all of the securities being offered are sold at a specified price within a specified time, and (B) the total amount due to the seller is received by the seller by a specified date.[168]

Request for Comment

  • Is our proposed amendment to Rule 415 relating to continuous offerings of ABS appropriate?
  • Should we restrict the duration of a continuous offering of ABS? If so, how long should the offering be permitted to continue?

5. Mortgage Related Securities

As noted above, mortgage related securities, as that term is defined in Section 3(a)(41) of the Exchange Act, currently are eligible for shelf registration regardless of form eligibility. This was a provision that was added to Rule 415 contemporaneous with the enactment of SMMEA.[169] As a result, an offering of mortgage related securities that does not meet the requirements of Form S-3 can be registered on a delayed basis on Form S-1.[170]

We believe that mortgage related securities should meet all the requirements we are proposing for shelf eligibility in order to be eligible for registration on a delayed basis since these securities present the same complexities and concerns as other asset-backed securities. To achieve this goal and to better coordinate shelf registration for all types of asset-backed securities, we are proposing to amend Rule 415 to eliminate the provision for shelf eligibility for mortgage related securities regardless of the form that can be used for registration of the securities.[171] Under the proposal, offerings of mortgage related securities will only be eligible for shelf registration on a delayed basis if, like other asset-backed securities, they meet the criteria for eligibility for shelf registration that we are proposing today. Thus, as proposed, delayed shelf offerings of mortgage related securities must be registered on new proposed Form SF-3, and accordingly, must meet the eligibility requirements of Form SF-3.

Request for Comment

  • We request comment on the proposed amendment for mortgage related securities. Should we instead treat mortgage related securities differently from other asset-backed securities by continuing to condition the ability to conduct a delayed offering of mortgage related securities on their credit ratings by an NRSRO?
  • We are proposing to require that delayed offerings of mortgage related securities be registered on proposed Form SF-3, the same registration form for delayed offerings of other asset-backed securities. Is there any reason to permit delayed offerings of mortgage related securities on either proposed Form SF-1 or proposed Form SF-3?

C. Exchange Act Rule 15c2-8(b)

Except for securities issued under master trust structures, shelf-eligible ABS issuers generally are not reporting issuers at the time of issuance. Under Exchange Act Rule 15c2-8(b),[172] with respect to an issue of securities where the issuer has not been previously required to file reports pursuant to Sections 13(a) and 15(d) of the Exchange Act, unless the issuer has been exempted from the requirement to file reports thereunder pursuant to Section 12(h) of the Exchange Act, a broker or dealer is required to deliver a copy of the preliminary prospectus to any person who is expected to receive a confirmation of sale at least 48 hours prior to the sending of such confirmation (“48-hour preliminary prospectus delivery requirement”). The rule contains an exception to the 48-hour preliminary prospectus delivery requirement for offerings of asset-backed securities eligible for registration on Form S-3. An exception to the 48-hour preliminary prospectus delivery requirement was first provided in 1995 by staff no-action position.[173] This staff position was later codified in 2004.[174]

In light of recent economic events and to make this rule consistent with our other proposed revisions, we are proposing to eliminate this exception so that a broker or dealer would be Start Printed Page 23351required to deliver a preliminary prospectus at least 48 hours before sending a confirmation of sale for all offerings of asset-backed securities, including those involving master trusts. Because each pool of assets in an ABS offering is unique, we believe that an ABS offering is akin to an initial public offering, and therefore we believe the 48-hour preliminary prospectus delivery requirement in Rule 15c2-8(b) should apply. Even with subsequent offerings of a master trust, the offerings are more similar to an initial public offering given that the mix of assets changes and is different for each offering. Moreover, requiring that a broker or dealer provide an investor with a preliminary prospectus at least 48 hours before sending a confirmation of sale should be feasible and made easier to implement as a result of our proposal that a form of preliminary prospectus be filed with the Commission at least five business days in advance of the first sale in a shelf offering. We, therefore, are proposing to amend Rule 15c2-8(b) by repealing the exception for shelf-eligible asset-backed securities from the 48-hour preliminary prospectus delivery requirement.[175]

Under the proposed amendment, a broker or dealer would be required to comply with the 48-hour preliminary prospectus delivery requirement with respect to the sale of securities by each ABS issuer, regardless of whether the issuer has previously been required to file reports pursuant to Sections 13(a) or 15(d) of the Exchange Act.[176] In addition, the 48-hour preliminary prospectus delivery requirement would also apply to ABS issuers utilizing master trust structures that are exempt from the reporting requirements pursuant to Section 12(h) of the Exchange Act. In a master trust securitization, assets may be added to the pool in connection with future issuances of the securities backed by the pool.[177] Although ABS issuers utilizing master trust structures may be reporting under the Exchange Act at the time of a “follow-on” or subsequent offering of securities, additional assets are added to the entire pool backing the trust in connection with a subsequent offering of securities. Additional assets are added to the pool also in connection with a subsequent offering by an issuer utilizing a master trust structure that is exempt from reporting under Section 12(h) or the rules thereunder. Requiring a broker-dealer to deliver a preliminary prospectus at least 48 hours before sending a confirmation of sale of ABS involving master trust structures issued by a reporting ABS issuer could afford investors more time to consider information about the assets that is not provided in Exchange Act reports.[178]

We are also proposing a correcting amendment to Rule 15c2-8(j). Paragraph (j) states that the terms “preliminary prospectus” and “final prospectus” include terms that are defined in a Rule 434. In 1995, at the same time we adopted Rule 434, we added paragraph (j) to expand the use of the terms “preliminary prospectus” and “final prospectus” to reflect the terminology used in Rule 434.[179] Rule 434, however, was later repealed in 2005.[180] Accordingly, we are proposing to delete paragraph (j), which is no longer applicable.

Request for Comment

  • Should we adopt a 48-hour preliminary prospectus delivery requirement for all ABS issuers, as proposed? Should we instead provide a different application of the 48-hour preliminary prospectus delivery requirement for ABS issuers? Should a broker or dealer be required to deliver a preliminary prospectus for an ABS offering at a different time from initial public offerings, such as 48 hours before the first sale in the offering (instead of 48 hours before confirmation)?
  • Does our proposal to require filing of a preliminary prospectus pursuant to proposed Rule 424(h) at least five business days before the first sale in the offering make the proposed changes to Rule 15c2-8(b) unnecessary? Or is delivery of the preliminary prospectus, as contemplated by Rule 15c2-8(b), important? Would the proposed amendment to 15c2-8(b) provide a meaningful change in the information and time that investors are given to consider offering materials? [181]
  • How should the prospectus delivery requirement apply to master trust structures? Is our proposal appropriate with respect to master trusts? Should we instead amend the rule to apply the 48-hour preliminary prospectus delivery requirement to master trusts only if the pool assets have changed by a specified level? If so, what should that level be (e.g., a change in five, ten, or 20% of pool assets, a change in a specified percentage such as five, ten, or 20% of the dollar value of the pool assets as measured by the principal balance, a significant change in the pool assets)? Are there other ways of measuring change in pool assets? Should this be determined by asset class, and if so, which asset classes should be subject to what standards? For example, should a change in pool assets for purposes of Rule 15c2-8 be measured differently for credit card ABS than for dealer floorplan ABS?
  • As proposed, there are no specific disclosure requirements applicable to the 48-hour preliminary prospectus. Do we need to specify further how much asset or other information should be contained in the 48-hour preliminary prospectus? Or is that unnecessary in light of proposed Rule 430D and the proposed Rule 424(h) filing requirements?

D. Including Information in the Form of Prospectus in the Registration Statement

1. Presentation of Disclosure in Prospectuses

As currently permitted, asset-backed offerings registered on a shelf basis typically present disclosure through the use of two primary documents: the “base” or “core” prospectus and the Start Printed Page 23352prospectus supplement.[182] The base prospectus filed prior to effectiveness of the registration statement outlines the parameters of the various types of ABS offerings that may be conducted in the future, including asset types that may be securitized, the types of security structures that may be used and possible credit enhancements or other forms of support. The registration statement at the time of effectiveness also contains one or more forms of prospectus supplement, which outline the format of transaction-specific information that will be disclosed at the time of each takedown.[183] At the time of a takedown, a final prospectus supplement is used which describes the specific terms of the securities being offered.[184] The base prospectus and the final prospectus supplement together form the final prospectus which is filed with the Commission pursuant to Securities Act Rule 424(b).[185]

This practice has also been utilized by non-ABS issuers. However, for typical corporate issuers, their base prospectus is substantially shorter than in an ABS offering as the bulk of the information is incorporated by reference into the prospectus from the issuer's Exchange Act reports.

In the 2004 ABS Adopting Release, we explained that when presenting disclosure in base prospectuses and prospectus supplements, the base prospectus must describe the types of offerings contemplated by the registration statement.[186] We also noted that a takedown off of a shelf that involves assets, structural features, credit enhancement or other features that were not described as contemplated in the base prospectus will usually require either a new registration statement (e.g., to include additional assets) or a post-effective amendment (e.g., to include new structural features or credit enhancement) rather than simply describing them in the final prospectus filed with the Commission pursuant to Securities Act Rule 424. However, we admonished registrants to exercise discretion and describe only those material asset types and features reasonably contemplated to be included in an actual takedown in order to make the information easily accessible to investors.[187]

Today, we also remind issuers of the importance of providing disclosure in compliance with our plain English rules. Under Securities Act Rule 421,[188] information in a prospectus must be presented in a clear, concise and understandable manner. The note to Rule 421(b) states that issuers should avoid copying complex information directly from legal documents without any clear and concise explanation of the provisions. The rule also cautions against using boilerplate disclosure and repeating disclosure in different sections of the document because it increases the size of the document and it does not enhance the quality of information.[189]

Notwithstanding the discussion in the 2004 ABS Adopting Release and the provisions of Rule 421, we are concerned that the base and supplement format has resulted in unwieldy documents with excessive and inapplicable disclosure that is not useful to investors. Many ABS prospectuses in this format often include boilerplate disclosure and complex information that appears to be imported directly from forms of transaction agreements. Some issuers file a base prospectus that contemplates multiple asset types, security structures and possible types of enhancement and support that are never actually utilized in a takedown. Moreover, the length of a disclosure document for an ABS offering, as a result of the base and prospectus supplement format, is often overwhelming and is burdensome for investors to navigate.

Another problem that has arisen under current practices is that in some instances, issuers have filed with the Commission at the time of takedown only the prospectus supplement and not the base prospectus that was included in the registration statement. Since the base and the prospectus supplement together form the final prospectus, when an ABS issuer excludes the base prospectus from the EDGAR filing at the time of takedown, an investor needs to locate the base prospectus filed with the initial effective registration statement on Form S-3 on EDGAR. Given that a shelf registration statement is available for three years,[190] it can be unclear what information from the base prospectus is applicable to the current offering or is superseded by the supplement.

The current format has the unintended effect of encouraging a drafting approach that builds in the largest possible flexibility for as many differing transactions as possible, although with the negative effect that an investor bears the burden of determining which disclosures are relevant to a particular transaction. The current rule benefits issuers but may not be as useful for investors, when the registration statement is primarily for the benefit of investors. We believe we should facilitate investor understanding and access to prospectuses for ABS and eliminate unnecessary disclosures given to investors. Investors must be able to readily access and understand the information for a specific offering. Consequently, we are proposing to eliminate the practice of providing a base prospectus and a prospectus supplement for ABS issuers. To accomplish this, we are proposing to add a provision in new Rule 430D and an instruction to proposed Form SF-3 that would require ABS issuers to file a form of prospectus at the time of effectiveness of the proposed Form SF-3 and to file a single prospectus for each takedown, which would require that all of the information required by Regulation AB be included in the prospectus.[191] We believe our proposal will help issuers comply with our plain English requirements, help reduce the size of the offering documents, and eliminate the need to review inapplicable disclosure.

Other than the proposed limitation of one depositor and asset class per registration statement discussed below, Start Printed Page 23353we believe requiring only one form of prospectus with the registration statement would not limit the flexibility of the issuer to vary its structural features from takedown to takedown. As is the case today, assets, structuring and other features may be presented in brackets in the form of prospectus filed with the registration statement. Under the proposal, issuers could include the same bracketed information in the form of prospectus filed with the registration statement. At the time of the offering, only the disclosure applicable to the transaction at hand would be included in the prospectus provided to investors and filed with the Commission.

Currently, some sponsors create a separate depositor for each of its various loan programs, and each depositor files its own shelf registration statement. Other issuers have included multiple depositors,[192] multiple base prospectuses and multiple prospectus supplements all in one registration statement.[193] Under our proposal, each depositor would be required to file a separate registration statement for each form of prospectus. Each registration statement would cover offerings by one depositor securitizing only one asset class.[194] Although this would change current practice for asset-backed issuers, we believe such a change would make disclosure for investors much more accessible and useful.

Request for Comment

  • Is the proposed change to presentation of disclosure in the prospectus appropriate? Would investors benefit from the proposed change? Would it be unduly burdensome for issuers to prepare the disclosure in a single document? If so, how can we better mandate clear and concise documents so that investors are able and encouraged to analyze the investment?
  • Is our proposal to require a depositor to file a separate registration statement for each form of prospectus appropriate?
  • Are there any particular asset classes that should retain the base and form of prospectus supplement format? If so, why?
  • Should issuers be able to file more than one form of prospectus with a registration statement? If so, why? If issuers were permitted to do so, what other steps could be taken to help market participants understand the transaction?
  • Are there other changes we should make to the format and form of the prospectus to assist investors in analyzing the potential investment?

2. Adding New Structural Features or Credit Enhancements

We are also proposing to restrict the ability of ABS issuers to file a prospectus under Rule 424(b) for the purpose of adding certain types of information to the form of prospectus. Under the existing Rule 430B, ABS issuers and other issuers are permitted to provide the information omitted from the prospectus that is part of a registration statement at the time of the offering as a prospectus supplement, a post-effective amendment, or where permitted as described below, through its Exchange Act filings that are incorporated by reference into the registration statement and prospectus that is part of the registration statement and identified in a prospectus supplement.[195] In the 2004 ABS Adopting Release, we stated our longstanding position that the type or category of asset to be securitized must be fully described in the registration statement at the time of effectiveness.[196] We further explained the structural features contemplated also should be disclosed, as well as identification of the types or categories of securities that may be offered, such as interest-weighted or principal-weighted classes (including IO or PO securities), planned amortization or companion classes or residual or subordinated interests.[197] We stated that a takedown off of a shelf that involves assets, structural features, credit enhancements or other features that were not described as contemplated in the base prospectus will usually require either a new registration statement (e.g., to include additional assets) or a post-effective amendment (e.g., to include new structural features or credit enhancement) rather than simply describing them in the final prospectus filed with the Commission pursuant to Securities Act Rule 424.[198] Although, with Offering Reform, we adopted Rule 430B,[199] which provides all issuers on Form S-3 with the alternative to include information previously omitted in a prospectus filed pursuant to 424(b) or by incorporating periodic and current Exchange Act reports and the staff has continued to apply our position articulated in the 2004 ABS Adopting Release. We confirm that position by proposing to codify our statement regarding when a post-effective amendment would be required in Rule 430D.[200]

We are proposing to require that when the issuer desires to add information that relates to new structural features or credit enhancement, the issuer must file that information by post-effective amendment. As a result of this proposal, the staff would have the opportunity to review new structural features or credit enhancements that would be contemplated for future offerings. With respect to new assets, we believe that if the issuer intends to offer securities that are backed by assets that are not contemplated in the form of prospectus that is filed as part of the registration statement, a new registration statement should be filed.[201]

Request for Comment

  • Is our proposal to require issuers to file a post-effective amendment to reflect new structural features or credit enhancements and provide a related undertaking appropriate?

E. Pay-as-You-Go Registration Fees

In 2005, we first adopted pay-as-you-go rules [202] to allow well-known seasoned issuers using automatic shelf registration statements to pay filing fees at the time of a securities offering.[203] To Start Printed Page 23354alleviate some of the burden of managing multiple registration statements among ABS issuers, we are proposing to allow, but not require, asset-backed issuers eligible to use Form SF-3 to pay filing fees as securities are offered off of a shelf registration statement. If this approach, commonly known as “pay-as-you-go,” is adopted for ABS issuers, no filing fees would need to be paid at the time of filing a registration statement on Form SF-3. A dollar amount or a specific number of securities would not be required to be included in the calculation of the registration fee table in the registration statement, unless a fee based on an amount of securities is paid at the time of filing.[204] However, under our proposal the fee table on the cover of the registration statement must list the securities or class of securities registered and must indicate if the filing fee will be paid on a pay-as-you-go basis.[205]

Under our proposal, the triggering event for a fee payment would be the filing of a preliminary prospectus under proposed Rule 424(h).[206] At the time of filing a Rule 424(h) prospectus,[207] the asset-backed issuer would include a calculation of registration fee table on the cover page of the prospectus and would be required to pay the appropriate fee calculated in accordance with Securities Act Rule 457.[208]

Request for Comment

  • Is our proposal for a pay-as-you go fee alternative for ABS issuers appropriate? Should ABS issuers be able to register offerings of an unspecified amount of securities on Form SF-3?
  • Would this help with the management of multiple shelves for asset-backed issuers? Are there other steps we could take to help sponsors and depositors manage shelves for ABS?
  • Should we revise Rule 457(p), as proposed, to clarify that if an ABS offering is not completed after the fee is paid, the fee could be applied to future registration statements by the same depositor or affiliates of the depositor across asset classes?

F. Signature Pages

We also are proposing to revise the signature pages for registration statements of asset-backed issuers. Securities Act Section 6 [209] requires that the registration statement be signed by the issuer, its principal executive officer or officers, its principal financial officer, its comptroller or principal accounting officer, and the majority of its board of directors or persons performing similar functions. In 2004, we clarified that the depositor is the issuer for purposes of ABS.[210] We codified in the general instructions to Forms S-1 and S-3 that the registration statement must be signed by the depositor, the depositor's principal executive officer or officers, principal financial officer and controller or principal accounting officer, and by at least a majority of the depositor's board of directors or persons performing similar functions.[211]

Asset-backed issuers are not required to file financial statements of the issuer under our rules or pursuant to their governing documents, and these issuers do not employ a principal accounting officer or controller. Thus, because such signatures appear to serve no purpose, we are proposing to exempt asset-backed issuers from the requirement that the depositor's principal accounting officer or controller sign the registration statement.

The Form 10-K report for ABS issuers 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. In addition, the certifications for ABS issuers that are required under Section 302 of the Sarbanes-Oxley Act [212] must be signed either on behalf of the depositor by the senior officer in charge of securitization of the depositor if the depositor is signing the Form 10-K report, or on behalf of the issuing entity by the senior officer in charge of the servicing function of the servicer if the servicer is signing the Form 10-K report. We are now proposing to require that the senior officer in charge of securitization of the depositor sign the registration statement (either on Form SF-1 or Form SF-3) for ABS issuers. We believe that requiring such individual to sign the registration statement is more meaningful in the context of ABS offerings because it is more consistent with our other signature requirements for ABS issuers.

Request for Comment

  • Is our proposed amendment to the registration statement signature requirements appropriate? Is there any reason we should not exempt, as we are proposing to do, ABS issuers from the requirement that the depositor's principal accounting officer or comptroller sign the registration statement?
  • Is our proposal to require the senior officer in charge of securitization of the depositor to sign the registration statement for ABS issuers appropriate?

III. Disclosure Requirements

In addition to reformatting how prospectuses are presented in ABS Start Printed Page 23355offerings, we are proposing several changes to the disclosure requirements in Regulation AB for asset-backed securities. Three of our proposals involve significant changes from our current requirements. First, subject to certain exceptions, we are proposing to require asset-level information regarding each asset in the pool backing the securities. Second, we are proposing that issuers of ABS backed by credit card pools provide standardized grouped account data regarding the underlying asset pool. Third, we are proposing to require that most issuers provide the flow of funds, or waterfall, in a waterfall computer program. In addition, we are proposing changes that refine other disclosure requirements, including those relating to pool-level disclosure, the prospectus summary, transaction parties, and static pool information.

A. Pool Assets

We are proposing to increase the required disclosure regarding the assets underlying the ABS. We are proposing that in most ABS offerings asset-level data be required in the prospectus at the time of offering and in Exchange Act reports. For credit card ABS issuers, we are proposing that issuers provide grouped account data. In order to facilitate investors' use of asset data files, we are proposing that the data be filed on EDGAR in Extensible Mark-Up Language (XML). We also are proposing revisions to our pool-level disclosure requirements designed to enhance the information available to analyze the pool.

While Regulation AB does not restrict the type or quality of assets that may be included in the asset pool, our rules under the Securities Act are designed to assure that a prospectus contains disclosure regarding the assets that facilitates informed investment decisions.[213] We believe access to robust information concerning the pool assets is important to investors' ability to make informed investment decisions about asset-backed securities.[214] We also believe disclosure about the pool should be as multi-faceted as necessary to provide a full picture of the composition and characteristics of the pool assets. In addition, it is critical that the pool asset information be presented in a comprehensible and clear fashion.[215]

1. Asset-Level Information in Prospectus

To augment our current principles-based pool-level disclosure requirements, we are proposing a new requirement to disclose asset-level information. Investors, market participants, policy makers and others have increasingly noted that asset-level information is essential to evaluating an asset-backed security.[216] Some have said that there is a need and investor appetite for increased asset-level disclosures.[217] We have heard that understanding a borrower's ability to repay may be more important than the features of the underlying loan, or even the collateral, on an asset-level basis.[218] Others have stated that having access only to pool data (and not asset-level data) has made it difficult to discern whether the riskiest loans were to the most creditworthy borrowers or to the least creditworthy borrowers in the asset pool.[219]

The public availability of asset-level information has been limited. In the past, some transaction agreements for securitizations required issuers to provide investors with asset-level information, or information on each asset in the pool backing the securities.[220] Such loan schedules provided to an investor are sometimes filed as part of the pooling and servicing agreement or as a free writing prospectus. We believe that all investors and market participants should have access to the information necessary to assess the credit quality of the assets underlying a securitization transaction at inception and over the life of the transaction.[221]

For most investors, the usefulness of asset-level data is generally limited unless the individual data points are standardized. Standardizing the information facilitates the ability to compare and analyze the underlying asset-level data of a particular asset pool as well as compare them with other pools.[222] Standardized and easily accessible data points also may facilitate stronger independent evaluations of ABS by market participants.

Prior to today, the Commission had not proposed to require asset-level data or proposed standards for such information. We are aware that some standards have already been developed for registered and unregistered offerings of commercial mortgage-backed securities and residential mortgage-backed securities.[223] The CRE Finance Council (formerly Commercial Mortgage Securities Association)'s [224] Investor Reporting Package includes data fields on loan, property and bond-level information for commercial mortgage-backed securities at issuance and while the securities are outstanding.[225] The American Securitization Forum (ASF) [226] recently published disclosure Start Printed Page 23356and reporting packages for residential mortgage-backed securities that included standardized definitions for loan or asset-level information.[227] The package is part of the group's Project on Residential Securitization Transparency and Reporting (“Project RESTART”). The ASF has proposed implementation dates involving new issuance loans under the Disclosure Package of February 1, 2010.[228] Other organizations, such as Mortgage Electronic Registration Systems, Inc. (MERS),[229] have developed reporting packages to capture and report data at different times during the life of the underlying residential or commercial loan. Sellers of mortgage loans to Fannie Mae and Freddie Mac [230] are required to deliver loan-level data in a standardized electronic form.[231] Other federal agencies, such as the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) also collect certain loan-level data on mortgages. The OCC and the OTS gather mortgage performance data from national banks and thrifts.[232] We are unaware of any publicly available data standards for other asset classes and currently there is no mandatory requirement that issuers follow any of these standards for reporting to investors in asset-backed securities.

Because we believe that issuers should provide transparent and comparable data, we are proposing to require asset-level information in a standardized format to be included in the prospectus and periodic reports and filed on EDGAR. Our proposal specifies and defines each item that must be disclosed for each asset in the pool. In our discussion below, we refer to each individual item requirement as an asset-level data point. Some of the asset-level data points that we are proposing are indicator fields. Indicator fields will require an answer of “yes” or “no,” and are designed to facilitate investor review of the data.[233] We are also proposing an instruction to Schedule L that will contain definitions for some of the terms that we use throughout the schedule. Because we believe that asset-level data should be provided to investors and all market participants in a form that facilitates data analysis, we are also proposing to require that asset-level data be filed on EDGAR in XML format. These proposals would be in addition to the disclosure currently required about the composition and characteristics of the pool of assets taken as a whole. We believe the pool-level disclosure currently required by Regulation AB is still important to investment decisions and can facilitate an investor's understanding of the overall investment opportunity.

Request for Comment

  • Is our proposal to require asset-level disclosure with data points identified in our rules appropriate?
  • Is a different approach to asset-level disclosure preferable, such as requiring it generally, but relying on industry to set standards or requirements? If so, how would data be disclosed for all the asset classes for which no industry standard exists or for which multiple standards may exist? To the extent multiple standards exist, how would investors be able to compare pools? Please be detailed in your response.
  • We note that there are several different standards under which asset-level data is already required. Would our requirements impose undue burdens on ABS issuers?
  • Should we instead amend our current requirements regarding pool-level disclosure by requiring issuers to present certain pool-level tables in a standardized manner? For instance, should we specify how statistical data should be presented by defining the groups or incremental ranges that must be presented? What would those appropriate groups or incremental ranges be for an individual table? For instance, what would be the appropriate range for obligor income and why? Please be specific in your response.
  • Are the definitions of terms in the proposed instruction to Schedule L appropriate? Are there any other terms that should be included in the instruction?

(a) When Asset-Level Data Would Be Required in the Prospectus

Today we are proposing new Item 1111(h) and Schedule L of Regulation AB which enumerate all of the data points that must be provided for each asset in the asset pool at the time of the offering. Schedule L data would be an integral part of the prospectus, and in order to facilitate investor analysis prior to the time of sale, we are proposing to require issuers to provide Schedule L data as of a recent practicable date that we define as the “measurement date” at the time of a Rule 424(h) prospectus. So that investors receive a data file with final pool information at the time of the offering, we also are proposing that an updated Schedule L, as of the cut-off date for the securitization, be provided with the final prospectus under Rule 424(b).[234] Likewise, if issuers are required to report changes to the pool under Item 6.05 of Form 8-K, updated Schedule L data would be required.[235] As we discuss in Section III.A.3, we are proposing a new Item 6.06 to Form 8-K for issuers to file the XML data file.

Request for Comment

  • Is the proposed requirement to provide Schedule L data with the proposed Rule 424(h) prospectus, the final prospectus under 424(b) and for changes under Item 6.05 of Form 8-K appropriate? Should Schedule L data be required at any other time? If so, please tell us when and why.
  • Are the proposed measurement dates appropriate? Are there any data fields that would be inappropriate or too Start Printed Page 23357burdensome to supply as of two different measurement dates (i.e., the measurement date and the cut-off date)? If so, please specify the data field and provide a detailed explanation.
  • Should we provide further guidance about what would be a recent practicable date for purposes of determining the measurement date?

(b) Proposed Disclosure Requirements and Exemptions

We are proposing that issuers of ABS of most asset classes must provide the standardized data points enumerated in Schedule L. The proposed standardized data points would serve to indicate the payment stream related to a particular asset, such as the terms, expected payment amounts, indices and whether and how payment terms change over time. Such data points would be important in order to analyze the future payments on the asset-backed securities. To perform better prepayment analysis or credit analysis, we are proposing data points that indicate the quality of the obligor or the asset origination process. For instance, in the case of residential mortgages, data points we are proposing to require, among others, are credit score of the obligors, employment status, income, and how that information was verified. To perform analysis of the collateral related to the asset in the pool, we are proposing data points related to each property. For instance, in the case of loans or leases secured by automobiles, issuers would need to provide data points related to the type and model of car and the value of the car.

Except with respect to certain asset classes (as described below), we are proposing that every issuer must provide the data points listed under Item 1. General described below. We are proposing to subdivide Schedule L based on the asset class. We believe the general data points are consistent with the principles-based definition of an asset-backed security and apply to almost every asset class underlying a transaction that has been registered in the past, and should also apply to any new asset classes that may be included in a registered offering in the future. We also propose asset class specific data point requirements for eleven specific asset classes: Residential mortgages, commercial mortgages, auto loans, auto leases, equipment loans, equipment leases, student loans, floorplan financings, corporate debt and resecuritizations. We are proposing item requirements for these asset classes because, based on our experience with registered offerings for these types of asset classes, we believe these data points are among those that represent the more useful information for investors.

(i) Proposed Coded Responses

Consistent with our efforts to standardize asset-level disclosure, we are proposing that issuers provide responses to the asset-level disclosure requirements as a date, a number, text or a coded response. The required coded responses will be contained in the EDGAR Technical Specifications. Attached at the end of this release we provide an appendix which contains a table for the proposed general item requirements as well as asset class specific item requirements. Each table lists the proposed item number, the title of the proposed data field, the proposed definition, the proposed response type and codes, if applicable, and proposed category of information. The proposed category of information designates the type of information we are proposing so that users will know when the data point is applicable.

We are sensitive to the possibility that certain asset-level disclosure may raise concerns about the personal privacy of the underlying obligors. In particular, we are aware that data points requiring disclosure about the geographic location of the obligor or the collateralized property, credit scores, income and debt may raise privacy concerns. As we stated in the 2004 ABS Adopting Release, issuers and underwriters should be mindful of any privacy, consumer protection or other regulatory requirements when providing loan-level information, especially given that in most cases, the information would be publicly filed on EDGAR.[236] However, as we noted above, information about credit scores, employment status and income would permit investors to perform better credit analysis of the underlying assets. In light of privacy concerns, instead of requiring issuers to disclose a specific location, credit score, or exact income and debt amounts, we are proposing ranges, or categories of coded responses.

For instance, to designate geographic location of an obligor who is a person, instead of requiring, city, state or zip code of the property, we are proposing that issuers provide the broader geographic delineations of Metropolitan or Micropolitan Statistical Areas.[237] Metropolitan and Micropolitan Statistical Areas are geographic areas, designated by a five-digit number, defined by the U.S. Office of Management and Budget (OMB) for use by Federal statistical agencies in collecting, tabulating, and publishing Federal statistics.[238] A Metropolitan Statistical Area may also contain a subdivision, called a Metropolitan Division.[239] As an example, if the underlying property that serves as collateral to a mortgage is located in Alexandria, Virginia, the issuer would need to designate the geographic location as 47894—Washington-Arlington-Alexandria, DC-VA-MD-WV, the appropriate Metropolitan Division.

For asset-level disclosure data points that require disclosure of obligor credit scores, we are proposing coded responses that represent ranges of credit scores. The ranges are based on the ranges that some issuers already provide in pool-level disclosure. For monthly income and debt ranges, we developed the ranges based on a review of statistical reporting by other governmental agencies.

We also realize that a situation may arise where an appropriate code for disclosure may not be currently available in the technical specifications. To accommodate those situations, our proposals provide a coded response for “not applicable,” “unknown” or “other.” However, “not applicable,” “unknown” or “other” would not be appropriate responses to a significant number of data points and registrants should be mindful of their responsibilities to Start Printed Page 23358provide all of the disclosures required in the prospectus and other reports.[240] Additionally, a situation may arise where an issuer would like to disclose other data not already defined in our proposed disclosure requirements.[241] In these cases, registrants should provide appropriate explanatory disclosure. As we discuss in more detail below, we are proposing that issuers file explanatory disclosure and or definitions of additional data points as another exhibit to Form 8-K at the same time the asset-level data file is required to be filed on Form 8-K. The Form 8-K and each of these exhibits would be incorporated by reference into the prospectus.[242]

Request for Comment

  • Are the proposed coded responses contained in the attached tables appropriate? Please be specific in your responses by commenting on specific proposed line items and codes.
  • The combination of certain asset-level data disclosures may raise privacy concerns. Are there particular asset-level data points that give rise to privacy concerns, in addition to the ones noted above and why? Are there other ways we could provide investors with similar information and lessen privacy concerns? Which information raises the most significant privacy concerns?
  • Which data points, or combination of data points would be the most important to an investor's analysis? For instance, if we do not adopt any requirement to disclose geographic location, would the coded range of FICO score, coded range of income, and sales price still be useful to investors? If we do not adopt a requirement to disclose geographic location, a coded range of FICO score and coded range of income, would the sales price alone still be useful to investors? Please be specific in your response.
  • Is our approach to geographic location appropriate? Does the use of the Metropolitan or Micropolitan Statistical Area, or Metropolitan Division provide investors with meaningful disclosure? Should we require only Metropolitan and Micropolitan Statistical Area which would be a broader description? For example, for a property in Alexandria, Virginia, 47900-Washington-Arlington-Alexandria, DC-VA-MD-WV Metropolitan Statistical Area would be the appropriate designation that would be a larger geographic area than Metropolitan Division. Would disclosure by state or zip code be appropriate? If a particular geographic area is experiencing a low volume of real estate transactions, would the low volume of transactions make it easier to identify the underlying obligor using other publicly available resources? Are there other ways to designate geographic location that would provide investors meaningful disclosure while also addressing privacy concerns? For instance, instead of requiring geographic location at the asset-level, should we proscribe requirements for a pool-level table that presents the geographic concentration of the pool subdivided by state, size of loan and number of loans? In using such a pool-level disclosure approach would it also be necessary to subdivide by income, credit score and sales price?
  • Is our approach to credit scores, income and debt appropriate? Does our approach appropriately balance investor need for the information while addressing privacy concerns? Do the categories provide meaningful ranges for investor analysis? If not, please be specific in your response. Should we instead require asset-level disclosure of the specific credit score, amount of income and amount of debt of an obligor?
  • Are there other privacy issues that arise for issuers of ABS backed by foreign assets? How do the privacy laws of foreign jurisdictions differ from U.S. privacy laws? If the privacy laws of foreign jurisdictions are more restrictive regarding the disclosure of information, how should we accommodate issuers of ABS backed by foreign assets? Is there substitute information that could be provided to investors? Please be specific in your response.

(ii) Proposed General Disclosure Requirements

With respect to each asset in the pool, the issuer would be required to provide the disclosure described below. A description of the 28 proposed data points is provided in Table 1 of the Appendix. We believe the proposed general item requirements are basic characteristics of assets that would be useful to investors in ABS across asset classes.

1. A unique asset number applicable only to that asset and the source of the number. We are aware that identifiers for each asset may be generated in many ways. These identification numbers may have been generated at origination or at different times through the securitization process. An asset number is necessary so that investors and other market participants may follow the performance of a loan through ongoing periodic reporting. We do not propose a specific naming or numbering convention; however, we are proposing an instruction to clarify what type of asset numbers would satisfy this requirement and an instruction to clarify that the same asset number should be used to identify the asset for all reports required of an issuer under Section 13(a) or 15(d) of the Exchange Act. For instance, asset number types that would satisfy the requirements could be generated by CUSIP Global Services (CUSIP); [243] the American Securitization Forum (ASF Universal Link); MERS (Mortgage Identification Number); by the registrant; [244] or by using the convention “[CIK-number]-[Sequential asset number]”; [245]

2. Whether the asset is designated to a particular collateral group. Some asset pools designate assets to particular groups in order to determine how cash flows will be passed on to investors;

3. Information regarding origination, such as origination date, original amount of the loan or contract, original term of the asset in number of months;

4. The asset maturity date, which is the month the final payment on the asset is scheduled to be made;

5. The original amortization term, which is the number of months in which the asset would be retired if the amortizing principal and interest were to be paid each month;

6. Information regarding interest rate, such as the original interest rate, amortization type which means whether the interest rate is fixed or adjustable;

7. If the asset has an interest only term, the number of months in which the obligor is permitted to pay only interest on the asset;

8. Whether the interest calculation is simple or actuarial. A simple interest calculation is always based on the original principal, thus interest on interest is not included. An actuarial calculation is based on principal plus accrued interest;

9. The identity of the primary servicer that has the right to service the asset, either by name or by the MERS organization number (in the case of RMBS);Start Printed Page 23359

10. The servicing fees, either expressed as a percentage of the asset amount or as a flat-dollar amount, as applicable;

11. The servicing advance methodology by indicating the code that best describes the manner in which principal and/or interest are to be advanced by the servicer;

12. Whether the loan or asset was an exception to defined or standardized underwriting criteria; and

13. The measurement date, which would be the date the asset-level data is provided in accordance with proposed Item 1111(h)(1).[246]

As discussed above, proposed Item 1111(h)(2) would also require issuers to provide Schedule L data as part of a final prospectus filed in accordance with Rule 424(b), as of the cut-off date for the securitization.[247] The cut-off date would be the date specified in the instruments governing the transaction (i.e., the date on and after which collections on the pool assets accrue for the benefit of the asset-backed security holders). In addition, we are proposing the following data points to update for activity that could occur during the period between the time the asset-level data would have been previously provided in the proposed Rule 424(h) prospectus and the cut-off date.

1. The current asset balance, current interest rate, and current payment amount due.

2. The number of days the obligor is delinquent and the number of payments the obligor is past due as of the cut-off date.

3. If the obligor has not made the full scheduled payment, the number of days between the scheduled payment date and the cut-off date.[248] We are proposing this item requirement so that investors will receive comparable data about the payment performance of an asset.[249] We note that the disclosure provided in response to this proposed requirement may differ from other asset-level or pool-level delinquency disclosure due to the various delinquency recognition policies across issuers and asset classes.[250]

4. Remaining term to maturity, which would be the number of months between the cut-off date and asset maturity date.

Request for Comment

  • Are the general data points that would apply to all securitizations (other than credit cards, charge cards and stranded costs) appropriate? Should any be deleted or made applicable only to certain asset classes? If so, what data points? Are there any other data points that should apply to all asset classes? Please provide a detailed explanation of the reasons why or why not.
  • Is the approach to asset number identifier workable? Should we only require or permit one type of asset number for all asset classes? If so, which one would be most useful? It appears that our proposed naming convention of “[CIK-number]-[Sequential asset number]” would be applicable to all asset classes. Does the use of an asset number alleviate potential privacy issues for the underlying obligor? Why or why not? What issues arise if the asset number is determined by the registrant? Would there be any issues with investors being able to specifically identify each asset and follow its performance through periodic reporting?
  • Should we require a data point to disclose the CIK number of the sponsor? Would all sponsors have a CIK number? If not, in what other ways could we require standardized disclosure of the identity of sponsors?
  • Should we define delinquency in order to provide comparable delinquency disclosure across issuers and asset classes? If so, how should it be defined and why? Would market participants be able to make changes to their current systems to capture information to satisfy a standardized delinquency disclosure requirement? Would such a requirement be burdensome? Is there another way to provide comparable delinquency disclosure across issuers and asset classes? Please be detailed in your response.
  • The response to some data points requires the identification of a party (e.g., originator or servicer) or the MERS generated number of the organization. Is this approach to identification workable? Do any issues arise with allowing a text response to these types of data points? What alternatives would alleviate such issues? What if the organization does not have a MERS number?

(iii) Asset Specific Data Points

As discussed in detail below, we are proposing to further subdivide the Schedule L data points so that issuers can determine whether or not the data field applies to their transaction. For instance, if the asset pool contains only residential mortgages, then issuers would only need to provide those data points designated under proposed Items 1 and 2 of Schedule L. Similarly, if the asset pool contains only student loans, the issuer would only need to provide those data points designated under proposed Items 1 and 8. If the asset pool contains assets for which we have not proposed asset class specific data points, the issuer would only need to provide those general data points designated under proposed Item 1. Further, if the asset pool of residential mortgages consists only of fixed-rate mortgages, all of the data points related to adjustable rate mortgages [251] need not be included in the data file. Likewise, in a pool of student loans, if the asset pool comprised only loans issued under a federal student loan program, such as the Federal Family Education Loan Program (FFELP),[252] information related Start Printed Page 23360to private label student loan programs need not be included in the data file.[253] The issuer, however, may need to provide data in the appropriate indicator field, which is a “yes” or “no” answer to whether the characteristic is present. This approach is designed to facilitate investor review of the asset-level data.

Request for Comment

  • Is the proposed subdivision of Schedule L appropriate? Would this approach facilitate investor review of the asset-level data?

(iv) Proposed Exemptions

We are proposing to exclude ABS backed by credit cards, charge cards, and stranded costs from the requirement to provide asset-level data. Based on staff reviews of credit card and charge card asset pools, it appears that some may contain as many as 20 to 45 million accounts. Based on the overwhelming volume of data in these types of asset classes, we do not believe that granular asset-level information would be as useful for investors and the provision of asset-level data may be cost-prohibitive for issuers. We have also heard anecdotally that investors in credit card or charge card ABS do not have a desire for asset-level data. For these asset classes, we are proposing that credit card ABS issuers provide grouped account data that we discuss below.[254]

For ABS backed by stranded costs, the underlying asset is transition property or system restoration property. Stranded costs are the costs associated with a decline in the value of electricity-generating assets due to restructuring of the industry, and the underlying property is called transition property.[255] System restoration property is a similar underlying asset, but provides for recovery of system restoration costs incurred by electric utilities as a result of hurricanes, tropical storms, ice or snow storms, floods and other weather-related events and natural disasters. These types of property are usually created by the action of a state legislature or other designated authority.[256] The property generally includes a right and interest to impose, collect and receive charges payable by electric customers in a particular territory. Also, this right usually provides that the designated state authority may periodically adjust the charges billed to customers in order to recover the stranded costs in the event all collections are not made. Because transition property is not originated on a customer-by-customer basis, and is instead the right to impose charges on customers based on electrical usage, we preliminarily do not believe it is appropriate to require asset-level data be provided for stranded cost ABS.

Request for Comment

  • Should asset-level data be provided by credit card, charge card or stranded cost issuers? If so, please explain why and what asset-level data should be provided.
  • Would requiring asset-level data for these asset classes, rather than grouped asset data, as proposed below, be useful for investors? Is the volume of data in these types of asset classes a concern to investors? If so, are there ways to address this, for example, by facilitating the presentation of the data, to make it more useful to investors?
  • Are there any other asset classes that should be exempt from the requirement to provide asset-level data and why?
  • In light of the proposal not to set forth asset-level data for these assets, is there any pool-level data that should be provided by credit card, charge card, or stranded cost issuers? If so, please identify the pool-level data that we should require and explain why.
  • Should we specify standardized definitions for pool-level data? For instance, for credit cards or charge cards, should we define terms such as modification, excess spread and charge-off? How are issuers currently defining these various terms?
  • Should pool-level data for credit cards and charge cards be provided at the same time that we propose for other issuers to provide Schedule L data (i.e., with the proposed Rule 424(h) prospectus, the final prospectus under 424(b) and for changes under Item 6.05 of Form 8-K)? Should it also be provided at any other time, such as in periodic reports? If so, please tell us when and why.
  • Should we revise Item 1111 to require pool-level disclosure in a standardized format for ABS backed by credit cards or charge cards? Current Item 1111 requires issuers to present pool-level statistical information in appropriate distributional groups or incremental ranges in addition to presenting appropriate overall pool totals, averages and weighted averages, if such presentation will aid in the understanding of the data. In the case of credit cards and charge cards, should we proscribe the distributional groups or incremental ranges for material pool characteristics such as credit scores, credit limit, account balance, account age, geographic location or annual percentage rate (APR)? [257] For instance, in the case of FICO credit scores, should the distributional groups be similar to the coded response ranges for asset-level data in proposed Item 2(c)(3) of Schedule L? [258] What other types of credit scores are used by credit card issuers, if any? Are any proprietary? What distributional groups would be useful for disclosure of other types of credit scores?

○ In the case of credit limit and account balance, should we proscribe the following distributional groups for disclosure with respect to credit card and charge card pools: (1) <$1,000; (2) $1,000-$5,000; (3) $5,000-$10,000; (4) $10,000-$20,000; (5) $20,000-$30,000; (6) $30,000-$40,000; (7) $40,000-$50,000; and (8) greater than $50,000? Would using these distribution groups lead to useful disclosure?

○ In the case of account age, should we proscribe the following distributional groups for disclosure with respect to credit card and charge card pools: (1) 12 months or less; (2) 12-24 months; (3) 24-36 months; (4) 36-48 months; (5) 48-60 months; (6) 60-84 months; (7) 84-120 months; and (8) over 120 months? Would using these distribution groups lead to useful disclosure?

○ In the case of geographic location, should we require disclosure by state or by Metropolitan Statistical Area for credit card and charge card pools? [259] Which would be more useful? Should issuers be required to disclose all states or Metropolitan Statistical Areas for the entire pool, or only the top 10, 20 or some other number?

○ In the case of interest rate or APR, what would be the appropriate Start Printed Page 23361distributional groups? For example, would the following distributional groups be appropriate: (1) 0 to 1.99%; (2) 2.00% to 4.99%; (3) 5.00% to 9.99%; (4) 10.00% to 14.99%; (5) 15.00% to 19.99%; (6) 20.00% to 24.99%; (7) 25.00% to 29.99%; (8) 30.00% to 34.99%; (9) 35.00% to 39.99%; and (10) over 40.00%? Are there other characteristics that should be included in the same statistical table of information, such as how many accounts are currently deferring interest, deferring interest/principal, or other types of promotions?

○ Should we require issuers of ABS backed by credit cards and charge cards to provide statistical tables to disclose the amount of credit that is available for purchases? If so, should we proscribe the following distributional groups: (1) <$1,000; (2) $1,000-$5,000; (3) $5,000-$10,000; (4) $10,000-$20,000; (5) $20,000-$30,000; (6) $30,000-$40,000; (7) $40,000-$50,000; and (8) greater than $50,000? Would using these distribution groups lead to useful disclosure? Would this information be useful to investors and why?

○ Should we require issuers of ABS backed by credit cards and charge cards to provide statistical tables to disclose the type of products in the pool? For instance, credit card products could include affinity,[260] co-branded cards,[261] merchant cards, partner cards, and reward cards. Would this information be useful to investors and why?

○ Should we require issuers of ABS backed by credit cards and charge cards to provide statistical tables to disclose whether there any accounts in the pool are under a debt management program, have redefaulted, are diluted or whether the account has been closed? Would this information be useful to investors and why?

○ Should we require issuers of ABS backed by credit cards and charge cards to provide statistical tables to disclose payment habits of the obligors, such as the number of accounts, or percentage of the pool that make minimum payments, pays balances in full, or other payment types? Are there any other categories of payment behavior that would be useful to investors?

○ Should we require issuers of ABS backed by credit cards and charge cards to provide statistical tables to disclose whether the obligors are homeowners, mortgage holders or renters? Would this information be useful to investors and why? Do issuers have this information? Because credit card securitizations are usually structured as master trusts, how would issuers be able to provide updated information at the time of each takedown?

○ Should we require issuers of ABS backed by credit cards and charge cards to provide statistical tables to disclose whether the obligors are employed and if so, the type of employment? Should we specify the categories for this type of information, such as: (1) Professional; (2) technical; (3) managerial; (4) clerical; (5) sales; (6) service; (7) agricultural; (8) laborers; (9) military; (10) student; (11) retired; (12) unemployed; and (13) unknown? Would this information be useful to investors and why?

○ Should we require issuers of ABS backed by credit cards and charge cards provide statistical tables to disclose the level of education of the obligors? Should we specify the categories for this type of information such as: (1) Graduate; (2) college-4 year; (3) college-2 year; (4) high school or (5) unknown? Would this information be useful to investors and why?

○ Should we require issuers of ABS backed by credit cards and charge cards to provide statistical tables to disclose the debt-to-income ratio of the obligors? Would this information be useful to investors and why? Should the debt-to-income ratio be defined and calculated in the same manner as required in Schedule L? [262] What would the appropriate distributional categories be? For example, would the following distributional groups be appropriate: (1) 0 to 4.99%; (2) 5.00% to 9.99%; (3) 10.00% to 14.99%; (4) 15.00% to 19.99%; (5) 20.00% to 24.99%; (6) 25.00% to 29.99%; (7) 30.00% to 34.99%; (8) 35.00% to 39.99%; (9) 40.00% to 44.99%; (10) 45.00% to 49.99%; (11) 50.00% to 54.99%; (12) 55.00% to 59.99%; (13) 60.00% to 64.99%; (14) 65.00 to 69.99%; (15) 70.00% to 74.99%; (16) over 75.00%?

○ Because credit card securitizations are usually structured as master trusts, how would issuers be able to provide updated information described in the previous four bullet points at the time of each takedown?

○ Should we specify the data that should be presented for each distributional group in the above requests for comment? For instance, for each distributional group of credit scores, issuers typically provide a table detailing the number of accounts, dollar amount and percentage of the pool. Should we also require that issuers provide the following information for each credit score distributional group in the same table: (1) Weighted average credit limit; (2) weighted average utilization rate; (3) weighted average account age; (4) percentage of obligors that pay in full; (5) percentage of obligors that make minimum payments; (6) weighted average credit score; (7) weighted average APR; (8) portfolio yield; (9) amount of interchange; (10) amount of fees; (11) amount of gross charge-offs; (12) amount of recoveries; (13) amount of prepayments; (14) dollar amount of accounts that are over 30 days delinquent; (15) number of accounts that are over 30 days delinquent; and (16) weighted average excess spread? [263] Is there any other information that would be useful for investors in this format?

  • Should we require aggregated asset-level data in a machine-readable form for issuers of ABS backed by stranded costs so that investors may download the data and input it into a waterfall computer program? If so, please specify the characteristics, the appropriate distributional groups and related definitions and formulas, if applicable.

(c) Residential Mortgage-Backed Securities

We are proposing 137 data points for ABS backed by residential mortgages. The staff has surveyed the data and definitions provided by the organizations mentioned above, as well as other industry sources. We are proposing to require additional data fields that relate to residential mortgages that are based mainly on information already typically provided by sellers to Fannie Mae and Freddie Mac or likely to be collected by participants in Project RESTART.

Some of the Fannie Mae, Freddie Mac and Project RESTART data points appear in the general section (Item 1), because we believe those data points would apply to all types of asset-backed securities. We did not, however, include every data point included in those loan-level packages. We believe that there are numerous ways to capture the same data, and after reviewing other loan-level data dictionaries, our definitions may have minor differences from those in Fannie Mae, Freddie Mac and Project RESTART because we wanted to make sure that we captured disclosure that may be provided to other organizations. For instance, we believe that many of the points are also consistent with the data dictionary developed by Start Printed Page 23362MISMO.[264] We also reviewed other data definitions currently used by banks for reporting to the OCC and OTS.[265] As noted above, we also are proposing several indicator fields that usually require a “yes” or “no” answer in order to facilitate investor review of the data.

With respect to each mortgage in the pool, the issuer would be required to disclose the information described below. A complete description of each proposed data point is provided in Table 2 of the Appendix to this release.

1. A code that describes the loan purpose.

2. The lien position of the loan.

3. Whether the obligor is subject to any prepayment penalties, a code that describes the type of penalty, the term of penalty and a code that describes how the penalty is calculated.

4. The origination channel and whether a broker took the application.

5. The Nationwide Mortgage Licensing System (NMLS) loan originator number and loan origination company number.[266]

6. Whether the loan allows for negative amortization and information regarding the negative amortization terms which would include:

a. The maximum dollar amount and the number of months negative amortization amount allowed;

b. The initial and subsequent number of months an obligor can initially pay the minimum payment before a new payment is determined;

c. The current negative amortization amount that has accumulated;

d. The number of months the payment is fixed and the initial and subsequent limits on payment increases and decreases;

e. The length of the initial and any subsequent recast periods in number of months; and

f. The current minimum payment amount.

7. Whether the loan has been modified. If so:

a. The number of modifications;

b. A code that describes the reason for modification;

c. The effective date of the modification;

d. Updated debt-to-income ratios of the obligor;

e. The total amount added to the principal balance of the loan due to the modification or capitalized amount;

f. Any deferred amount that is non-interest bearing; and

g. The pre-modification interest rate, the pre-modification payment amount, and the forgiven principal and interest amounts.

8. Whether the loan documents require a lump-sum payment of principal at maturity, otherwise known as a balloon loan.

9. In the case of a refinance transaction, the amount of cash the obligor received.

10. The number of months a buydown period would be in effect. A buydown period is when a lump sum payment is made to the creditor by the obligor or by a third party to reduce the amount of some or all of the obligor's periodic payments.

11. The date through which interest is paid with the current payment, which is the date from which interest will be calculated for the application of the next payment.

12. The number of days after which a servicer can stop advancing funds on a delinquent loan.

13. Amount of any junior mortgages on the property and if the loan in the pool is a junior loan, information on the senior loan such as origination date, amount, loan type, hybrid period, and negative amortization limit.

14. If the loan is an adjustable rate mortgage:

a. The index on which the adjustable rate is based;

b. The margin, which is the number of percentage points added to the index to establish the new rate;

c. The fully indexed rate, which is the index rate plus the margin;

d. If the interest rate is initially fixed for a period of time, the number of months between the first payment date and the first interest adjustment date;

e. The maximum percentage by which a mortgage rate may increase or decrease, initially, at subsequent points in time, and over the lifetime of the loan;

f. The number of months between interest rate reset periods;

g. The number of days prior to an interest rate effective date which is used to determine the appropriate index rate or lookback;

h. The date of the next interest rate adjustment;

i. The method of rounding and the rounding percentage;

j. Whether the loan is an option ARM, that is whether the obligor can choose payment options;

k. A code that describes the means of computing the lowest monthly payment available to the obligor after recast. When the loan is recast, a new minimum payment is calculated to fully amortize the loan over the remaining term of the loan;

l. The initial minimum payment an obligor is required to make; and

m. Whether the loan is convertible to a fixed interest rate.

15. Whether the loan is a home equity line of credit, or HELOC, and the related period in which the obligor may draw funds against the HELOC account.

With respect to each mortgage loan in the pool, the issuer would be required to disclose the information on the property securing the loan described below.

1. Geographic location of the property, designated by Metropolitan Statistical Area, Micropolitan Statistical Area, or Metropolitan Division, as applicable.

2. A code that describes the property type and occupancy status of the property.

3. Sales price.

4. The appraised value used to approve the loan and most recent appraised value, the property valuation method, date of valuation, valuation scores and types of scores.

5. Combined and original loan-to-value ratios and the calculation date.

6. If the obligor pledged financial assets to the lender instead of making a down payment, the total value of assets pledged as collateral for the loan at the time of origination.

If the loans in the pool relate to manufactured housing, the issuer would Start Printed Page 23363be required to disclose the information described below.

1. A code that describes the interest of others in the real estate.

2. A code that describes the community ownership structure.

3. The name of manufacturer and model name, the year the home was manufactured and whether it was constructed in accordance with the 1976 HUD Code.

4. Gross and net invoice price of the home.

5. Loan to invoice ratios, whether the loan was made by a lender related to the community, and whether the securitized property is considered chattel or real estate.

6. The source of the obligor's down payment.

With respect to each mortgage in the pool, the issuer would be required to disclose the information on the obligor described below.

1. Obligor and co-obligor's credit scores and types of scores.

2. Obligor and co-obligor's wage and other income and a code that describes the level of verification.

3. A code that describes the level of verification of assets of the obligor and co-obligor.

4. Obligor and co-obligor's length of employment, whether they are self-employed and a code that describes the level of verification.

5. The dollar amount of verified liquid/cash reserves after the closing of the mortgage loan.

6. The total number of properties owned by the obligor that currently secure mortgages.

7. The amount of the obligor's other monthly debt.

8. The obligor's debt to income ratio used by the originator to qualify the loan.

9. A code that describes the type of payment used to qualify the obligor for the loan, such as the payment under the starting interest rate, the first year cap rate, the interest only amount, the fully indexed rate or the minimum payment.

10. The percentage of down payment from obligor's own funds other than any gift or borrowed funds.

11. The number of obligors on the loan.

12. Any other monthly payment due on the property other than principal and interest.

13. The number of months since any obligor bankruptcy or foreclosure.

14. The obligor and co-obligor's wage income, other income and all income.

With regard to mortgage insurance, the issuer would be required to disclose the information below.

1. Whether mortgage insurance is required.

2. The name of the mortgage insurance company, coverage plan type, certificate number, and insurance coverage percentage.

3. Whether the insurance is lender or borrower paid.

4. If there is pool insurance, the name of pool insurance provider and pool insurance stop loss percentage.

Request for Comment

  • Are all of the RMBS data points appropriate? Are there other data points that should be required for all RMBS issuers? Are any data points not necessary or overly burdensome to obtain? Please specify the proposed data points and provide a detailed explanation of the reasons why or why not.
  • Some data points request the results of calculations, such as debt-to-income ratios. Can these ratios otherwise be calculated from data provided by the other asset-level data points? If so, can users of the information independently calculate these data points? And should we not require these data points to be included in the asset-level data file?
  • Should we include a data point to require what effort an originator or sponsor made to see if there are other loans secured by the same property? If we were to code the response, what code descriptions should we provide?
  • Are the proposed type of responses and coded responses appropriate? Are there additional codes that should be included? Please provide a detailed explanation of the reasons why or why not.
  • What privacy concerns arise if we require issuers to disclose the sales price of the property, if any? Would rounding the sales price to the nearest thousandth alleviate privacy concerns? If not, what would be the appropriate rounding method? If we instead required the disclosure of sales price be provided by a coded range of dollar amounts, would that alleviate privacy concerns? What would be the appropriate ranges of dollar amounts? Would the above mentioned options have an effect on an investor's ability to analyze the asset-level data or use the waterfall computer program? If so, please be specific in your response. In what other ways could we require the disclosure of sales price so that investors receive useful information and also address any privacy concerns?

(d) Commercial Mortgage-Backed Securities

We are proposing 61 data points for ABS backed by commercial mortgages. The data points we are proposing to require are primarily based on the definitions included in the CRE Finance Council Investor Reporting Package, current Regulation AB requirements and staff review of current disclosure. The CRE Finance Council disclosure package standardizes bond, loan and property level information for commercial mortgage-backed securities.[267] We are not proposing, however, to include every data point included in the CRE Finance Council reporting package. Some of the data points already appear in the general section (Item 1), because we believe those data points would apply to all types of asset-backed securities. We did not include others because we did not believe the level of detail was necessary for investor analysis as we believe that the most important data points for CMBS are those that relate to the loan term and the property. With respect to each commercial mortgage loan in the pool, the issuer would be required to disclose the information described below. A description of each proposed data point and related response is provided in Table 3 to the Appendix to this release.

1. A code that describes the loan structure, including the seniority of participated mortgage loan components.

2. The current remaining term of the loan.

3. A code that describes the payment method, the amount of the periodic principal and interest payment, and frequency of payment for the loan, frequency that the payment will be adjusted, and grace days allowed.

4. The number of properties that serve as mortgage collateral for the loan;

5. The hyper-amortizing date, which is the current anticipated repayment date after which principal and interest may amortize at an accelerated rate, and/or interest to the mortgagor increases substantially.

6. Whether the loan is interest only or requires a balloon payment.

7. Whether the obligor is subject to prepayment penalties, the effective date after which the lender allows prepayment of a loan, the date after which yield maintenance prepayment penalties are no longer effective and the date after which prepayment premiums are no longer effective.

8. If the loan permits negative amortization, the maximum percentage and amount of the original loan balance that can be added to the original loan balance as a result of negative amortization.

9. If the loan is an adjustable rate mortgage:Start Printed Page 23364

a. The index on which the adjustable rate is based;

b. The first rate adjustment date;

c. The first payment adjustment date;

d. The number of percentage points that are added to the current index rate to establish the new note rate each interest adjustment date;

e. The maximum percentage by which a mortgage rate may increase or decrease, initially, at subsequent points in time, and over the lifetime of the loan;

f. A code describing the frequency with which the periodic mortgage rate is reset and a code describing the frequency with which the periodic mortgage payment will be adjusted; and

g. The number of days prior to an interest rate effective date which is used to determine the appropriate index rate or lookback.

10. Whether the loan had been modified from its terms at the time of origination.

The issuer also would be required to provide information on each of the properties collateralizing the loan. This would include:

1. The property name, geographic location, designated by zip code, as applicable, and the year that the property was built;

2. A code describing the current use of the property, including net rentable square feet of a property, number of units/beds/rooms, and percentage of rentable space occupied by tenants;

3. The valuation amount of the property as of a valuation date and source of valuation;

4. The total underwritten revenues from all sources for a property and total underwritten operating expenses (including real estate taxes, insurance, management fees, utilities, and repairs and maintenance); [268]

5. The date when the defeasance option becomes available. A defeasance option is when an obligor may substitute other income-producing property for the real property without pre-paying the existing loan; [269]

6. Net operating income and net cash flow, including a code describing how operating income and net cash flow were calculated (i.e., using the CMSA standard, using a definition in the pooling and servicing agreement, or using the underwriting method);

7. The ratio of underwritten net operating income to debt service, the ratio of underwritten net cash flow to debt service, and an indicator showing how the debt service coverage ratio was calculated; [270] and

8. The three largest tenants (based on square feet), including square feet leased by the tenant and lease expiration dates of the tenant.

We note that some of the data points that we are proposing to include in Schedule L are currently required on a loan-level basis under existing Item 1111(b)(9)(i) of Regulation AB.[271] Such items are described in the list above and relate to: the location and use of each property; net operating income and net cash flow information, as well as the components of net operating income and net cash flow, for each mortgaged property; current occupancy rates for each mortgaged property and the identity, square feet occupied by and lease expiration dates for the three largest tenants at each mortgaged property. Issuers of ABS backed by CMBS would be required to continue to provide the information required by Item 1111(b)(9)(i) in the prospectus in a narrative form.

Request for Comment

  • Are all of the CMBS data points appropriate? Is there any reason not to incorporate any of the requirements for commercial mortgage-backed securities into Schedule L? Are there any additional fields we should include? Are there any changes we should make for specific types of commercial properties?
  • Should we include the current Item 1111(b)(9)(i) asset-level disclosure requirement for CMBS in Schedule L, as proposed? Should we eliminate the requirement to provide the asset-level information in narrative form? If so, would any material information relating to a commercial mortgage be lost?
  • We are proposing to require an indicator that shows how net operating income and net cash flow were calculated for commercial mortgages. The code options for this indicator would show whether these items were calculated using a CMSA standard, using a definition in the pooling and servicing agreement, or using an underwriting method. Are these appropriate codes? Are there any additional codes that should be included?
  • We are proposing to require an indicator that shows how the debt service coverage ratio was calculated for commercial mortgages. The code options for this indicator would be: (1) Average—not all properties received financial statements, and the servicer allocates debt service only to properties where financial statements are received; (2) Consolidated—all properties reported on one “rolled up” financial statement from the borrower, (3) Full—all financial statements collected for all properties, (4) None Collected—no financial statements were received; (5) Partial—not all properties received financial statements and servicer to leave empty; and (6) “Worst Case”—not all properties received financial statements, and servicer allocates 100% of debt service to all properties where financial statements are received. Are these codes appropriate? Are there additional codes that should be included?
  • We currently require disclosure of the three largest tenants that occupy the underlying property in the prospectus. Should we also require issuers to disclose whether the named tenants are affiliated with the obligor as a data point in Schedule L and in narrative form in the prospectus? Should we require a description of the relation in narrative form?
  • Should we continue to require Item 1111(b)(9)(i) data in the prospectus, as proposed, or is the proposed asset-level data sufficient?

(e) Other Asset Classes

We are unaware of any other organization that has standardized data points for asset classes other than mortgages for investor reporting.[272] As we explain above, standardized data points provide disclosure to investors about the payment stream and amount of payments related to individual assets; Start Printed Page 23365make it possible for users to perform prepayment and credit analysis on an individual asset, and evaluate the collateral, if any, that secures the individual asset.[273] Consequently, in order to make the asset-level information useful to investors, we are proposing data points derived from the aggregate pool-level disclosure that is commonly provided in prospectuses for the following asset classes: Automobile loans and leases; equipment loans and leases; student loans; floorplan financing; repackagings of corporate debt and resecuritizations. We are also proposing to add several data points related to obligor and co-obligor income, assets, employment, and credit scoring. These data points mirror the definitions proposed for RMBS in an effort to provide more robust disclosure about obligor credit quality. We solicit comment on all of our proposed asset specific data points and have specific questions on certain asset classes.

Request for Comment

  • Are there any organizations that have produced standardized data definitions for other asset classes? If so, would these definitions be appropriate for the proposed asset specific data points?
  • Are the asset specific data points appropriate? What other data points should be required by all issuers of that asset class? Please provide a detailed explanation of the reasons why or why not.

(i) Automobiles

Asset-backed securities may be backed by a pool of automobile loans or automobile leases. We are proposing to require 31 additional data fields that relate to ABS backed by loans for the purchase of automobiles and 33 data fields that relate to ABS backed by automobile leases. With respect to each loan or lease in the pool, the issuer would be required to disclose the information described below. A description of each proposed data point is provided in the Appendix to the release in Table 4 for automobile loans and Table 5 for automobile leases.

1. Whether payments are required monthly or a balloon payment is due;

2. Whether a form of subsidy was received by the borrower, such as an incentive or rebate;

3. Geographic location of the dealer by zip code;

4. The vehicle manufacturer, model, model year, vehicle type and whether it is new or used;

5. The vehicle value and source of vehicle value at the time of origination;

6. For leases, base residual value and source of residual value;

7. The obligor and co-obligor's credit scores and credit score type;

8. The obligor and co-obligor's wage and other income and a code that describes the level of verification;

9. A code that describes the level of verification of assets of the obligor and co-obligor;

10. The obligor and co-obligor's length of employment and a code that describes the level of verification; and

11. The geographic location of the obligor by Metropolitan Statistical Area, Micropolitan Statistical Area, or Metropolitan Division, as applicable.

Request for Comment

  • Are all of the automobile data points appropriate? What other data points should be required by all issuers of ABS backed by automobile loans or leases? Please provide a detailed explanation of the reasons why or why not.
  • For ABS backed by automobile leases, should we require a field indicating whether the lessor or lessee is responsible for selling the vehicle at the end of the lease? If so, please explain why.
  • We are proposing to require an indicator for the source of the vehicle value. The code options for this indicator would be: (1) Invoice price; (2) Sales Price; (3) Kelly Blue Book; and (98) Other. Are these codes appropriate? Are there additional codes that should be included?
  • We are proposing to require an indicator for the source of a vehicle's residual value. The code options for this indicator would be: (1) Black Book; (2) Automotive Lease Guide; and (98) Other. Are these codes appropriate? Are there additional codes that should be included?

(ii) Equipment

We are proposing to require five additional data fields that relate to ABS backed by equipment loans and eight that relate to equipment leases. With respect to each equipment loan or lease in the pool, the issuer would be required to disclose the information described below. A description of each proposed data point is provided in the Appendix to the release in Table 6 for equipment loans and Table 7 for equipment leases.

1. The frequency of payments, such as whether payments are due monthly, quarterly, semiannually, or annually.

2. The type of equipment financed and whether it is new or used.

3. The obligor industry and geographic location as indicated by zip code.

4. For leases, whether the lease type is a true lease or a finance lease.

5. For leases, the residual value of the equipment and source of residual value.

Request for Comment

  • Are all of the equipment data points appropriate? What other data points should be required by all issuers of ABS backed by equipment loans or leases? Please provide a detailed explanation of the reasons why or why not.
  • Should we require data points on the obligor's ability to pay the equipment loan or lease? If so, please provide a detailed explanation of the types of data points and what code descriptions should be provided.
  • Should we require a data point to disclose whether the equipment that serves as collateral is the subject of certain provisions of the U.S. Bankruptcy Code? For instance, section 1110 of the Bankruptcy Code [274] applies to financiers of aircraft, aircraft engines, and other defined equipment. If so, please provide a detailed explanation of what the data point should be and what code descriptions should be provided.
  • We are proposing to require an indicator for equipment type. The code options for this indicator would be: (1) Construction; (2) Furniture and Fixtures; (3) General Office Equipment/Copiers; (4) Industrial; (5) Maritime; (6) Printing Presses; (7) Technology; (8) Telecommunications; (9) Transportation; and (98) Other. Are these codes appropriate? Are there additional codes that should be included?
  • We are proposing to require an indicator for the obligor industry. The code options for this indicator would be: (1) Agriculture and Resources; (2) Communications and Utilities; (3) Construction; (4) Distribution/Wholesale; (5) Electronics; (6) Financial Services; (7) Forestry and Fishing; (8) Healthcare; (9) Manufacturing; (10) Mining; (11) Printing and Publishing; (12) Public Administration; (13) Retail; (14) Services; (15) Transportation; and (98) Other. Are these codes appropriate? Is code “(15) Transportation” too broad? If so, what codes would be more useful? Are there additional codes that should be included?
  • We are proposing to require an indicator for the source of the equipment residual value. The code options for this indicator would be: (1) Internal; (2) External Consultant; and (3) Other. Are these codes appropriate? Are Start Printed Page 23366there additional codes that should be included? Are there any published guides to equipment residual values?

(iii) Student Loans

We are proposing to require 28 additional data fields that relate to ABS backed by student loans. With respect to each loan in the pool, the issuer would be required to disclose the information described below. A description of each proposed data point is provided in the Appendix to the release in Table 8.

1. Whether payments on the loan are subsidized through a federal program.

2. A code describing the repayment terms and the current number of years in repayment.

3. The name of any guarantee agency.

4. The date the loan was disbursed to the obligor.

5. Whether the obligor payment status is in-school, grace period, deferral, forbearance or repayment.

6. Geographic location of the obligor by Metropolitan Statistical Area, Micropolitan Statistical Area, or Metropolitan Division, as applicable.

7. A code describing the type of school or program. Code options for this data point would be continuing education, graduate, K-12, medical, or undergraduate.

8. If the loan was not issued under a federally funded program, the following additional disclosure would be required:

a. The obligor and co-obligor's credit scores and credit score type;

b. The obligor and co-obligor's wage and other income and a code that describes the level of verification;

c. A code that describes the level of verification of assets of the obligor and co-obligor; and

d. The obligor and co-obligor's length of employment and a code that describes the level of verification.

Request for Comment

  • Are all of the student loan data points appropriate? What other data points should be required by all issuers of ABS backed by student loans? Please provide a detailed explanation of the reasons why or why not.
  • We are proposing to require an indicator for repayment type. The code options for this indicator would be: (1) Level; (2) Graduated Repayment; (3) Income-sensitive or (4) Interest Only Period. Are these codes appropriate? Are there additional codes that should be included?
  • We are proposing to require an indicator for school type. The code options for this indicator would be: (1) Continuing Education; (2) Graduate; (3) K-12; (4) Medical; or (5) Undergraduate. Are these codes appropriate? Are there additional codes that should be included?

(iv) Floorplan Financings

Asset-backed securities may be backed by a pool of floorplan receivables. Floorplan receivables are used by wholesalers and retailers to finance purchases of inventory, for instance, an automobile dealership will finance purchases of the vehicles available for sale in its inventory. Floorplan receivables are usually revolving in nature and are commonly structured as revolving asset master trusts. Payment terms may vary, but usually payment is due when the underlying collateral is sold. Generally, when new inventory is purchased, a new receivable is created; therefore, we are proposing that the asset-level data be provided for each receivable, instead of each account.

We are proposing to require six additional data fields that relate to ABS backed by floorplan financings. With respect to each receivable in the pool, the issuer would be required to disclose the information described below. A description of each proposed data point is provided in the Appendix to the release in Table 9.

1. The account origination date.

2. The type of inventory product line.

3. Whether the property financed is new or used.

4. Information related to the obligor such as geographic location by zip code, and credit score and type.

5. If the issuing entity is structured as a master trust that has previously issued securities, the information required by Items 1 and 9 of Schedule L-D for assets that were part of the asset pool prior to the current offering.[275]

Request for Comment

  • Since floorplan financings are usually structured as master trusts, we are proposing to require asset-level data based on each receivable in the pool. Should the data be provided by account? Which is more appropriate and why?
  • Are all of the proposed floorplan financing data points appropriate? What other data points should be required by all issuers of ABS backed by floorplan financings? Please provide a detailed explanation of the reasons why or why not.
  • We are proposing to require an indicator for product line type. The code options for this indicator would be: (1) Accounts Receivable; [276] (2) Consumer Electronics and Appliances; (3) Industrial; (4) Lawn and Garden; (5) Manufactured Housing; (6) Marine; (7) Motorcycles; (8) Musical Instruments; (9) Power Sports; (10) Recreational Vehicles; (11) Technology; (12) Transportation and (98) Other. Are these codes appropriate? Are there additional codes that should be included?
  • Is our proposal to require the information in Item 1 and Item 9 of Schedule L-D for pre-existing assets in master trusts appropriate?

(v) Corporate Debt

Asset-backed securities may be backed by corporate debt securities. Asset-backed securities backed by corporate debt securities are typically issued in smaller denominations than the underlying security and the ABS are registered under Section 12(b) of the Exchange Act for trading on an exchange. Additionally, a pooling and servicing agreement may also permit a servicer or trustee to invest cash collections in corporate debt instruments which may be securities under the Securities Act.[277] We are proposing nine additional data fields for ABS backed by corporate debt. We believe the data points in Item 1. General are appropriate because items such as origination date, maturity date, amortization term, etc. would also apply to corporate debt. A description of each proposed data point is provided in the Appendix to this release in Table 10.

1. Title of the underlying security or agreement, denomination, and currency.

2. The payment frequency of the security or agreement.

3. Whether the security or agreement is callable.Start Printed Page 23367

4. Name of trustee.

5. Underlying SEC file number and CIK number.

6. Whether the security is a zero-coupon, that is whether it bears interest by means of periodic payments or by means of purchase at a discount and full price repayment at maturity.

Request for Comment

  • Should asset-level disclosure be required for ABS backed by corporate debt? Are all of the corporate debt data points appropriate? What other data points should be required by all issuers of ABS backed by corporate debt? Please provide a detailed explanation of the reasons why or why not.
  • Should we require asset-level disclosure of credit enhancements related to the underlying security? If so, how would we define the data point(s) and the related responses?

(vi) Resecuritizations

In a resecuritization ABS, the asset pool is comprised of one or more asset-backed securities. We are proposing that issuers provide the same Schedule L data as required for corporate debt-backed securities, for each asset-backed security in the asset pool because the same information about the underlying asset-backed security, such as the title of the security, payment frequency, whether it is callable, the name of trustee and the underlying SEC file number and CIK number would be useful to an investor. In addition, we are proposing that issuers provide Schedule L data for assets underlying those securities.[278] For instance, in an offering where the asset pool is comprised of several RMBS, then the data points in Item 1 and Item 10 of Schedule L would be required for every RMBS security in the asset pool, as well as the data points in Item 1 and Item 2 for each loan underlying each RMBS security. Also, under current rules, if the assets that will be securitized are themselves securities under the Securities Act, the offering of those securities must be registered or exempt from registration under the Securities Act, and all disclosures for a registered offering is required.[279]

Request for Comment

  • Is our proposal for resecuritizations appropriate? What other data points should be required by all issuers of that asset class? Please provide a detailed explanation of the reasons why or why not.
  • Should we require disclosure of the ratings of the resecuritized securities in Schedule L?
  • Should we require Schedule L data for the asset pool only, i.e. only the data points in Item 1 and Item 9 of Schedule L?
  • Would issuers of the resecuritization ABS be able to obtain the asset-level data for the pool of assets underlying the resecuritized ABS? Should we phase in the requirement? We note that Project RESTART recommends that issuers provide the loan-level reporting package for outstanding RMBS,[280] although we note that the ASF recommendation may only serve to provide information similar to our proposed requirements for periodic reports, and may not include all the information required at the time of an offering.

2. Asset-Level Ongoing Reporting Requirements

In addition to asset-level information at the time of the offering, we are proposing to require asset-level performance information in a standardized format filed on EDGAR in periodic reports required under Sections 13 and 15(d) of the Exchange Act, including those required pursuant to the new undertaking to continue reporting described above. The proposed asset-level performance data in periodic reports would differ from information that would be required at the time of the offering. We believe that in periodic reports, some of the most important information focuses on whether an obligor is making payments as scheduled, the efforts by the servicer to collect amounts past due, and the losses that may pass on to the investors.

Currently, issuers report performance information in periodic reports on an aggregate basis; however, we believe that it would be most useful for investors to receive information regarding whether an individual obligor is making payments as scheduled, the efforts by the servicer to collect amounts past due, and the loss that may pass on to the investors on an asset-level basis. That way, an investor may use the asset-level information to conduct his or her own valuation of the credit quality of a particular asset and its effect on the pool throughout the life of the investment. We also believe that regulators could find this information useful. Like asset-level data at the time of the offering, we are proposing to require asset-level performance data to be filed on EDGAR in XML in order to facilitate data analysis. The proposed disclosure requirements are contained in proposed Item 1121(d) and Schedule L-D.

As we discussed earlier, in to order facilitate comparison of information across securities, we believe that asset-level data should be standardized, and some organizations have already developed data points for ongoing reporting of information for registered and unregistered commercial mortgage-backed securities and residential mortgage-backed securities.[281] In our proposed periodic reporting requirements, we have utilized such standardization where feasible. Like our proposal for asset-level data at the time of the offering, our proposed periodic reporting requirements specify and define each item that must be disclosed for each asset in the pool. We are also proposing an instruction to Schedule L-D that will contain definitions for some of the terms that we use throughout the schedule. Attached at the end of this release we provide an appendix which contains a table of the proposed general item requirements as well as asset class specific item requirements. Each table lists the proposed item number, the title of the proposed data field, the proposed definition, the proposed response type and codes, if applicable, and proposed category of information. The proposed category of information designates the type of information we are proposing so that users will know when the data point is applicable.

Proposed Item 1121(d) and Schedule L-D disclosure would be required at the time of each Form 10-D. Periodic Start Printed Page 23368reports on Form 10-D are 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.[282] If assets are added to the pool during the reporting period, either through prefunding periods, revolving periods or substitution, disclosure would be required under our proposed revisions to Item 6.05 on Form 8-K discussed in Section V.C.1. Similarly, the Schedule L data contained in proposed Item 1111A would need to be provided.

Request for Comment

  • Are the definitions of terms in the proposed instruction to Schedule L appropriate? Are there any other terms that should be included in the instruction?
  • Are the proposed coded responses contained in the attached tables appropriate? Does our approach to responses provide investors with meaningful disclosure while also addressing any privacy concerns? Please be specific in your response by commenting on specific proposed line items and codes.
  • Is the proposed requirement to provide Schedule L-D data with Form 10-D appropriate? Should Schedule L-D data be required at any other time, such as daily or monthly for all asset classes? Please tell us why.

(a) Proposed Disclosure Requirements

We are proposing that the same asset classes, subject to the requirement to provide asset-level data at the time of the offering, would also be required to provide the standardized data points enumerated in Schedule L-D. Like the proposed asset-level information at the time of the offering, we are proposing that most issuers must provide the 46 data points listed under Item 1. General of Schedule L-D. We believe these data points are generic and consistent across asset classes, and should also apply to any new asset classes that may be included in a registered offering. In addition, we also propose asset class specific data points that will be discussed further below.

With respect to each asset in the pool, we are proposing to require the following disclosure with each Form 10-D. A description of the 46 data points is provided in Table 11 of the Appendix.

1. The unique asset number and a description of the type of number. The asset number and type of asset number should be the same values assigned at the time of the offering that would appear in Schedule L.

2. Whether the asset is designated to a particular collateral group.

3. The beginning and ending dates of the reporting period.

4. The actual total amount paid during the reporting period, the amount of interest collected, the amount of principal collected and other amounts collected.

5. Any other principal and interest adjustments.

6. The current asset balance and scheduled asset balance.

7. Amounts that were scheduled to be collected during the reporting period, which would be the scheduled payment amount, scheduled interest payment amount, and scheduled principal amount.

8. A code that describes the current delinquency status and current payment status.

9. A code that describes the payment history over the most recent 12 months.

10. The next due date, next interest rate and remaining term to maturity.

11. Information related to servicing which would be:

a. The current servicer and the dollar amount of the fee earned by the current servicer for administering the loan for the reporting period;

b. If the loan's servicing has been transferred, the effective date of the servicing transfer;

c. Any amounts advanced by the servicer during the reporting period, and the cumulative outstanding amount;

d. A code that describes the manner in which principal and/or interest are advanced by the servicer;

e. The date a servicer stopped advancing payment; and

f. Other fees earned by the servicer and other fees assessed by the servicer related to the asset.

12. Whether the asset terms have been modified.

13. Whether a notice to repurchase the asset has been received, whether the asset has been repurchased, the repurchase date, name of the repurchaser, and the reason for repurchase.

14. Whether the asset has been liquidated.

15. Whether the asset has been charged-off and the charged-off principal and interest amounts.

16. Whether the asset has been paid-off, and if so, whether any prepayment penalties were paid or waived. If waived, a code indicating the reason why.

Request for Comment

  • Are the general data points appropriate for Form 10-D? What other data points would apply to all asset classes? Please provide a detailed explanation of the reasons why or why not.

(b) Proposed Exemptions

We are proposing to exclude ABS backed by credit cards, charge cards and stranded costs from the requirement to provide ongoing asset-level data in periodic reports. Like the proposed asset-level data at the time of the offering, because of the volume of accounts in a credit card or charge card securitization we believe that granular asset-level information would not be as useful to investors and would be very costly for issuers, depending on the level of automation of the issuer's information processing and delivery system. For these asset classes, we are proposing that issuers provide grouped account data that we discuss in Section III.A.3. below. As explained earlier, because transition property is not a receivable, nor a pool of receivables, we do not propose asset-level data be provided for stranded cost ABS for periodic reports.

Request for Comment

  • Is there any asset-level data that should be provided in periodic reports by credit card, charge card or stranded cost issuers? If so, please explain why.
  • Is there any pool-level data that should be provided in periodic reports by credit card, charge card, or stranded cost issuers? Should any pool-level data be standardized for these asset classes? If so, please explain why. For instance, we request comment above about whether we should require issuers of ABS backed by credit cards and charge cards to provide specific types of pool-level disclosure in a standardized manner at the time of an offering.[283] Should any of that pool-level information be required with each periodic report on Form 10-D? For instance, should we use the same distributional groups for account balance, account age, APR, credit available for purchase, types of products, and accounts under a debt management program?
  • Are there any other asset classes that should be exempt from the asset-level disclosure requirement in periodic reports and why?

(c) Residential Mortgage-Backed Securities

We are proposing 151 data points for periodic reports for ABS backed by residential mortgages. Similar to the RMBS data points we are proposing for Start Printed Page 23369Schedule L, much of the proposed data and definitions are based on fields developed by organizations doing work in the area of RMBS, as well as government agencies.[284] Many of the data points we are proposing relate to loan modifications and loss mitigation activities by the servicer. We describe the additional proposed data points below. A description of each proposed data point and related response is provided in Table 12 of the Appendix to this release.

1. Information related to delinquent loans, such as a code describing the reason for non-payment and codes describing the status of the non-payment;

2. If the loan is an adjustable rate mortgage, the rate at the next reset date, the next interest reset date, the payment at the next reset date, the next payment reset date, whether the loan is an option ARM, and whether the borrower exercised an option to convert an ARM loan to a fixed loan;

3. If the obligor has filed for bankruptcy:

a. The date of filing and case number;

b. The date on which the next payment is due under the terms of the bankruptcy plan;

c. If the bankruptcy has been released, the code that describes the reason for the release and the date of the release;

d. The actual due date of the loan had the bankruptcy not been filed; and

e. Whether the debt was reaffirmed and whether the trustee handles post-petition payments.

4. With respect to delinquent loans, whether the servicer is pursuing loss mitigation and the type of loss mitigation with the loan, borrower or property;

5. Information related to loan modifications:

a. The date of first payment due post modification;

b. The loan balance as of the modification effective payment date;

c. The amount added to the principal balance of the loan;

d. Pre- and post-modification interest rates;

e. Post-modification margin, which is the number of percentage points added to the index to establish the new rate;

f. Pre- and post-modification principal and interest scheduled payment amount;

g. Post-modification interest rate ceilings and floors;

h. Pre- and post-modification initial and subsequent limitations on interest rate increases and decreases;

i. Pre- and post-modification limitations on payment amount increases and decreases;

j. Pre- and post-modification maturity dates;

k. The number of months of the interest reset period, pre- and post- modification;

l. Updated debt-to-income ratios used to qualify the modification;

m. Pre- and post-modification interest only period;

n. Cumulative and current forgiven interest and principal amounts;

o. The due date on which the next payment adjustment is scheduled to occur for an ARM loan;

p. Whether the loan remains an ARM loan post-modification;

q. Whether the terms of the modification agreement call for the interest rate to step up over time, the maximum interest rate to which the loan may step up and the date the maximum interest rate will be reached;

r. Cumulative and current principal amount deferred by the modification that are not subject to interest accrual as well as any amounts collected from the obligor during the current period;

s. Cumulative and current interest and fees deferred by the modification that are not subject to interest accrual as well as any amounts collected from the obligor during the current period;

t. The total amount of expenses that have been waived or forgiven and reimbursable to the servicer;

u. The total amount of escrow and corporate advances made by the servicer at the time of the modification. Corporate advances are amounts paid by the servicer which may include foreclosure expenses, attorney fees, bankruptcy fees, and insurance, among others;

v. The total amount of servicing fees for delinquent payments that has been advanced by the servicer at the time of the modification;

w. Whether the loan has been modified under the terms of the Home-Affordable Modification Plan (HAMP).[285] If so, information regarding participation end dates, amounts paid and payable under the program, whether the mortgage holder has or will receive the incentive amount under the program, and actual and scheduled balance of the loan plus any deferred amounts.

6. If a forbearance plan is in effect, the start date and end date of the plan. A forbearance plan is a period during which no payment or a payment amount less than the contractual obligation is required by the obligor;

7. If a repayment plan is in effect, the start and end date of the plan, and the date the obligor ceased complying with the terms of the plan. A repayment plan refers to a period during which an obligor has agreed to make monthly mortgage payments greater than the contractual installment in an effort to bring a delinquent loan current;

8. If the type of loss mitigation is Deed-In-Lieu, the date on which a title was transferred to the servicer pursuant to a deed-in-lieu-of-foreclosure arrangement. Deed-In-Lieu refers to the transfer of title from an obligor to the lender to satisfy the mortgage debt and avoid foreclosure;

9. If the type of loss mitigation is a short sale, the amount accepted for a short sale. Short sale refers to the process in which a servicer works with a delinquent obligor to sell the property prior to the foreclosure sale;

10. If the loan has exited loss mitigation efforts, whether the plan was completed or satisfied, cancelled or failed, or denied and the date of exit;

11. If the loan is in the foreclosure process:

a. The date the loan was referred to a foreclosure attorney and the date on which foreclosure action was taken;

b. The expected date of the foreclosure sale, the date set for the foreclosure sale by the court or the trustee, and the actual date it occurs;

c. A code that describes the reason for delay in the foreclosure process;

d. If state law provides for a period for confirmation, ratification, redemption or upset period, the date of the end of the period;

e. The amount bid by the servicer at the foreclosure sale; [286]

f. If the loan exited foreclosure, the date and the code that describes the reason the proceedings ended;

g. If the property was sold to a third-party, the sale amount of the property;

h. In a judicial foreclosure state, if a judgment on the foreclosure has occurred, the date on which a court granted the judgment in favor of the creditor;

i. The date on which the publication of the trustee's sale information is published in the appropriate venue; andStart Printed Page 23370

j. The date on which the servicer sent a notice of intent to the obligor informing the obligor of the acceleration of the loan and pending initiation of foreclosure action.

12. If the property is now owned by the issuing entity due to an unsuccessful sale at the foreclosure auction, the asset is considered real estate owned (REO).[287] Information should be provided on the following:

a. The most recent listing date and price;

b. If an offer has been accepted, the amount and the date of acceptance;

c. The original list date and list price for the property;

d. If an REO sale has closed, the closing date, the gross proceeds, and the net proceeds;

e. The cumulative monthly and total loss amount passed on to the issuing entity;

f. Any amount recovered during the current period;

g. The start and end date of an eviction process, if applicable; and

h. If the loan exited REO during the current period, provide the date and a code describing the reason.

13. Information related to loss claims:

a. The unpaid principal balance at the time of liquidation;

b. Amounts advanced by the servicer and to be reimbursed such as interest, servicing fees, attorney fees, attorney costs, property taxes, property maintenance, insurance premiums, utility expenses, appraisal expenses, property inspections, any pre-securitization advances and other miscellaneous expenses;

c. If the loan is in REO, the amount of REO management fees;

d. The amount of the payment to the obligor or tenants in exchange for vacating the property; and

e. Any incentive payment to servicer for carrying out a deed-in-lieu or short sale.

14. Information related to loss recoveries:

a. The escrow balance and the suspense balance;

b. Proceeds collected from hazard claims, pool insurance, mortgage insurance, property tax refunds, and insurance premium refunds; and

c. The amount of any realized loss resulting from bankruptcy or special hazard.

15. If a mortgage insurance claim has been submitted to the primary mortgage insurance company for reimbursement, the following information would be required:

a. The date the claim was filed and the date it was paid;

b. The amount claimed and the amount paid;

c. The date the claim was denied or rescinded; and

d. If the property was conveyed to the insurance company, the date of conveyance.

Request for Comment

  • Are all of the RMBS data points appropriate for periodic reports? What other data points should be required by all RMBS issuers? Are any data points not necessary or overly burdensome to obtain? Please provide a detailed explanation of the reasons why or why not. Some data points request the results of calculations, such as debt-to-income ratios. Can those data points be calculated from information already provided by the other asset-level data points? If so, can users of the information independently calculate these data points? Should we not require these data points to be included in the asset-level data file for periodic reports?
  • Should we add a data point to require the amount of any loss as a result of intentional misstatement, misrepresentation, or omission by an applicant or other interested parties, relied on by a lender or underwriter to provide funding for, to purchase, or to insure a mortgage loan? If so, how would the issuer be able to verify the information? Is this information currently disclosed?
  • Should we require updated information about the obligor, such as updated credit scoring information? If so, why? Would issuers be able to obtain updated credit scores?
  • We are proposing several data points to capture activity specifically related to the HAMP program. Are more generic data points appropriate that would capture activity if other types of government programs are or become available? If so, please provide us with the data points that would be more appropriate and the related definition.
  • We are proposing, in the case of a foreclosure, that registrants provide the expected date of the foreclosure sale, the date on which the foreclosure sale has been set by the court or the trustee, and the date on which the foreclosure sale occurs. Are all three data points necessary?
  • We are proposing, in the case of a delayed foreclosure, that registrants provide a code describing the reason for the delay. Should we specify the number of days that would constitute a delay for this item requirement? If so, what would be the appropriate number of days and why?

(d) Commercial Mortgage-Backed Securities

We are proposing to require 47 additional data points for periodic reports that relate to commercial mortgages. Similar to the proposed Schedule L data points for commercial mortgage-backed securities, the data points we are proposing to require below are primarily based on the definitions provided by the CMSA. With respect to each commercial mortgage loan in the pool, the issuer would be required to disclose the information described below. A description of each proposed data point is provided in Table 13 to the Appendix to this release.

1. The remaining term, number of properties that collateralize the loan and the current hyper-amortizing date. The hyper-amortizing date is the current anticipated repayment date, after which principal and interest may amortize at an accelerated rate, and/or interest to the mortgagor increases substantially.

2. If the loan is an adjustable rate mortgage, the rate at the next reset date, the next date the rate is scheduled to change, the amount of the payment at next reset, and next payment change date.

3. If the loan permits negative amortization, the cumulative deferred interest, and deferred interest collected.

4. A code describing any workout strategy.

5. Information related to modifications, such as the date of the last modification, a code that describes the type of loan modification, the new modified note rate, payment amount, maturity date and amortization period.

6. Information related to each property such as property name, geographic location, as represented by zip code, property type, net rentable square footage, number of units, year built, valuation amounts, physical occupancy, property status and a code that describes the defeasance status. A defeasance option is when an obligor may substitute other income-producing property for the real property without pre-paying the existing loan.

7. Financial information related to the properties including:

a. Financial reporting beginning and end dates;

b. Revenues, operating expenses, net operating income, and net cash flow;

c. A code describing how net operating income and net cash flow were calculated; and

d. The ratio of underwritten net operating income to debt service, the ratio of underwritten net cash flow to Start Printed Page 23371debt service and a code describing how the ratio was calculated.[288]

Request for Comment

  • Are all of the CMBS data points for periodic reports appropriate? What other data points should be required by all CMBS issuers? Please provide a detailed explanation of the reasons why or why not.
  • Should we require more data points relating to foreclosure in CMBS, like we propose for RMBS? If so, please be specific as to which data points should be required and why.
  • We are proposing data points for information related to the properties collateralizing each asset in Item 3(d) of Schedule L-D because we note that issuers that currently provide the disclosure in accordance with the CMSA Investor Reporting Package provide property information on a periodic basis. Some of this information is the same disclosure that would have been provided at the time of the offering by proposed Schedule L. Is it appropriate to include all of the data points in proposed Item 3(d) with each Form 10-D filing? In particular, is it useful for investors to receive the Item 3(d)(1) Property name, Item 3(d)(2) Property geographic location, Item 3(d)(3) Property type and Item 3(d)(6) Year built with each Form 10-D filing? Please tell us why or why not.

(e) Other Asset Classes

As discussed above, because we are unaware of any other organizations attempting to standardize data points for asset classes other than mortgages, we are proposing data points for periodic reports derived from the aggregate pool-level disclosure that is already provided in periodic reports for the following asset classes: Automobile loans and leases; equipment loans and leases; student loans; and resecuritizations. We do not propose any asset specific data points related to repackagings of corporate debt for periodic reports. We believe the data points required under proposed Item 1. General of Schedule L-D will provide the appropriate asset-level performance disclosure for those assets to investors.

Request for Comment

  • Should we propose asset specific data points related to repackaging of corporate debt for periodic reports? If so, what would those be and what would be the appropriate form of disclosure?

(i) Automobiles

We are proposing to require five additional data fields for periodic reports that relate to ABS backed by automobiles loans and nine for ABS backed by automobile leases. With respect to each loan or lease in the pool, the issuer would be required to disclose the information described below. A description of each proposed data point is provided in the Appendix to the release in Table 14 for automobile loans and Table 15 for automobile leases.

1. Whether a form of subsidy is received on the loan, such as an incentive or rebate.

2. Any recovery of amounts previously charged-off.

3. Whether the vehicle was repossessed and related proceeds and fees.

4. For automobile leases, the updated residual value, source of residual value, whether the lease has been terminated and the reason why, any excess wear and tear or mileage charges, sales proceeds of the vehicle, or extension of lease term.

Request for Comment

  • Are all of the automobile data points appropriate for periodic reports? What other data points should be required by all issuers of ABS backed by automobile loans or leases? Please provide a detailed explanation of the reasons why or why not.
  • We are proposing to require an indicator for the reason for automobile lease termination. The code options for this indicator would be: (1) Scheduled termination; (2) Early termination due to bankruptcy; (3) Involuntary repossession; (4) Voluntary repossession; (5) Insurance payoff; (6) Customer payoff; (7) Dealer purchase; and (8) Other. Are these codes appropriate? Are there additional codes that should be included?

(ii) Equipment

We are proposing to require two additional data fields for periodic reports that relate to ABS backed by equipment loans and five that relate to equipment leases. With respect to each loan or lease in the pool, the issuer would be required to disclose the information described below. A description of each proposed data point is provided in the Appendix to the release in Table 16 for equipment loans and Table 17 for equipment leases.

1. Liquidation proceeds and any recovery of amounts previously charged-off; and

2. For equipment leases, the updated residual value, source of residual value, and whether the lease has been terminated and the reason why.

Request for Comment

  • Are all of the equipment data points appropriate for periodic reports? What other data points should be required by all issuers of ABS backed by equipment loans or leases? Please provide a detailed explanation of the reasons why or why not.
  • We are proposing to require an indicator for the reason for equipment lease termination. The code options for this indicator would be: (1) Scheduled termination; (2) Early termination due to bankruptcy; (3) Involuntary repossession; (4) Voluntary repossession; (5) Insurance payoff; (6) Customer payoff; (7) Dealer purchase and (98) Other. Are these codes appropriate? Are there additional codes that should be included?

(iii) Student Loans

We are proposing to require six additional data fields for periodic reports that relate to ABS backed by student loans. With respect to each loan in the pool, the issuer would be required to disclose the information described below. A description of each proposed data point is provided in the Appendix to the release in Table 18.

1. A code that describes the current obligor payment status.

2. The amount of capitalized interest during the reporting period.

3. If there is activity related to any guarantor during the reporting period, principal and interest received from the guarantor, whether a claim is in process and the outcome of the claim.

Request for Comment

  • Are all of the student loan data points appropriate for periodic reports? What other data points should be required by all issuers of ABS backed by student loans? Please provide a detailed explanation of the reasons why or why not.

(iv) Floorplan Financings

We are proposing to require five additional data fields for periodic reports that relate to ABS backed by floorplan financings. With respect to each loan in the pool, the issuer would be required to disclose the information described below. A description of each proposed data point is provided in the Appendix to the release in Table 19.

1. The liquidation proceeds and any recovery of amounts previously charged-off.

2. Updated credit score and type.Start Printed Page 23372

Request for Comment

  • Are all of the proposed floorplan financing data points appropriate for periodic reports? What other data points should be required by all issuers of ABS backed by floorplan financings? Please provide a detailed explanation of the reasons why or why not.

(v) Resecuritizations

As discussed earlier, at the time of the offering, we are proposing to require underlying asset-level data disclosure for resecuritization ABS.[289] Therefore, for periodic reporting, in addition to the asset-level data that would be required of the underlying securities as outlined in Item 1. General of Schedule L-D, we also propose that issuers of resecuritization ABS provide Schedule L-D data for the asset pool of the underlying securities. For example, if the ABS is comprised of several RMBS, then the data points in Item 1 of Schedule L-D would be required with respect to each RMBS security in the asset pool. In addition, the data points in Items 1 and 2 of Schedule L-D would be required for each loan underlying each RMBS security.[290] If the issuer of the underlying security suspends its reporting obligation and stops reporting, the issuer of the resecuritization ABS would still have to provide the required Schedule L-D data for each loan underlying each RMBS security because we believe that investors in the resecuritization ABS would need the underlying asset-level information to evaluate the performance of the resecuritization ABS.

Request for Comment

  • Is our proposal for asset-level reporting for resecuritizations appropriate?
  • Would issuers of the resecuritization ABS be able to obtain the asset-level data for the pool of assets underlying the resecuritized ABS? Should we phase in the requirement? We note that Project RESTART recommends that issuers provide the loan-level reporting package for outstanding RMBS.[291]

3. Grouped Account Data for Credit Card Pools

As we discussed above, we are proposing to exclude ABS backed by credit cards [292] from the requirement to provide asset-level data because we believe that level of information would result in an overwhelming volume of data that may not be useful to investors and providing the data may be cost-prohibitive for issuers. However, as we also noted above, we believe that investors and market participants should have access to the information necessary to assess the credit quality of the assets underlying a securitization transaction at inception and over the life of the transaction. Instead of providing asset-level data, we are proposing that issuers of ABS backed by credit cards provide disclosure more granular than pool-level disclosure by creating “grouped account data.” As we explain in more detail below, grouped account data would be created by compressing the underlying asset-level data into combinations of standardized distributional groups using asset-level characteristics and providing specified data about these groups. Like our proposals for other asset classes discussed above, we are proposing to require the grouped account data be provided in XML and filed as an Asset Data File in order to facilitate data analysis.[293] Our proposal for grouped account data would be in addition to the disclosure currently required about the composition and characteristics of the pool of assets taken as a whole.

Request for Comment

  • Is our proposal to require grouped account data disclosure with standardized groupings appropriate?
  • Do investors in ABS backed by credit cards need enhanced information about assets, or are our current disclosure requirements sufficient?
  • Is our proposal to require grouped account data in XML appropriate? Why or why not?

(a) When Credit Card Pool Information Would Be Required

Today we are proposing new Item 1111(i) and Schedule CC of Regulation AB that describe the standardized distributional groups and the information that would be provided for each group. Consistent with the proposed asset-level disclosure requirements for other asset classes, Schedule CC data would be an integral part of the prospectus, and in order to facilitate investor analysis prior to the time of sale, we are proposing to require issuers to provide Schedule CC data as of a recent practicable date that we define as the “measurement date” at the time of a Rule 424(h) prospectus and at the time of the final prospectus under Rule 424(b). Likewise, if issuers are required to report changes to the pool under Item 6.05 of Form 8-K, updated Schedule CC data would be required.[294] Updated Schedule CC would also be required if an issuer is required to report changes to the waterfall under proposed Item 6.07 to Form 8-K.[295] As we discuss in Section III.A.4, we are proposing a new Item 6.06 to Form 8-K for issuers to file the XML data file.

In addition, because credit card ABS are typically structured as master trusts, accounts may be added or withdrawn.[296] Unlike amortizing asset pools, the composition of the underlying asset pool varies over time and we believe investors and market participants would benefit from receiving information about the underlying asset pool as the pool evolves. Therefore, we are proposing that an updated Schedule CC be filed with each periodic report on Form 10-D.

Request for Comment

  • Is the proposed requirement to provide Schedule CC data with the proposed Rule 424(h) prospectus, the final prospectus under 424(b) and for changes under Item 6.05 of Form 8-K appropriate?
  • Is the proposed measurement date appropriate? Should we provide further guidance about what would be a recent practicable date for purposes of determining the measurement date? For example, should we specify that it be prepared as of a date that is five business days prior to filing?
  • Would the proposed Schedule CC contained in the most recent Form 10-D provide investors with sufficiently current information at the time of making an investment decision? In this regard, we note the result could be that the most recent Schedule CC data could be as old as 45 days.
  • Is our proposal to require that updated Schedule CC data be provided with Form 10-D appropriate? Should Schedule CC data be required at any other time, such as daily, weekly or Start Printed Page 23373monthly? If so, please tell us when and why.
  • Is our proposal to require that updated Schedule CC data be provided when changes to the waterfall are reported under proposed Item 6.07 appropriate? Please tell us why or why not.

(b) Proposed Disclosure Requirements

We are proposing that issuers group the underlying pool into grouped account data lines. Proposed Schedule CC sets forth the standardized groups and the information requirements that would be required for credit card pools. Grouped account data lines are created by grouping the underlying accounts by several characteristics. We further designate the groupings for each characteristic. This way, investors may receive more granular information about the underlying asset pool in order to perform better analysis of future payments on the asset-backed securities.[297]

We are proposing that data be grouped by a combination of the following characteristics:

1. Credit score. If the credit score used is FICO, the proposed groupings would be: (1) Less than 500; (2) 500-549; (3) 550-599; (4) 600-649; (5) 650-699; (6) 700-749; (7) 750-799; (8) 800 and over; and (9) unknown. We are proposing that issuers provide the most recent credit score available and accompanying disclosure would be required to explain the age of the credit score or the policy for updating the credit score from the time of account origination.[298] If the credit score used is not FICO, an issuer would designate similar groupings and provide explanatory disclosure. We are proposing a group of “unknown;” however, as we discuss above, registrants should be mindful of their responsibilities to provide all of the disclosures required in the prospectus and other reports.[299]

2. Number of Days Past Due. The proposed groupings would be accounts that are: (1) Current; (2) less than 30 days; (3) 30-59 days; (4) 60-89 days; (5) 90-119 days; (6) 120-149 days; (7) 150-179 days; and (8) 180 days and over.[300]

3. Account age. The proposed groupings would be accounts that are: (1) Less than 12 months; (2) 12 to 24 months; (3) 24 to 36 months; (4) 36 to 48 months; (5) 48 to 60 months; and (6) over 60 months.

4. State. The proposed groupings would be the top 10 states for aggregate account balance. The remaining accounts would be grouped into the category “other.”

5. Adjustable rate index. The proposed groupings for the adjustable rate indexes would be: (1) Fixed; (2) prime; and (3) other.

In order to create a grouped account data line, each group based on each of these characteristics should be combined with all groups for all other characteristics. All possible combinations would result in 14,256 grouped account data lines. The table below illustrates how the distributional groups and the information requirements relate to each other. For example, grouped account data line 2 in the table below presents the information required by columns (b)(1) through (b)(5) by combining all the credit card accounts in the underlying pool that fall within the 500-549 credit score group (column (a)(1)), payments are less than 30 days past due (column (a)(2)), account age of 12 to 24 months (column (a)(3)), with obligors located in the state of Alabama (column (a)(4)), where the adjustable rate index is based on a floating percentage (column (a)(5)). For each grouped account data line, we are proposing that issuers provide the following information: The aggregate credit limit; aggregate account balance; number of accounts; weighted average annual percentage rate; and weighted average net annual percentage rate.[301]

Grouped account data line numberCredit scoreDays payment is past dueAccount ageTop 10 StateAdjustable rate indexAggregate credit limit ($)Aggregate account balance ($)Number of accounts (#)Weighted average APR (%)Weighted average net APR (%)
(a)(1)(a)(2)(a)(3)(a)(4)(a)(5)(b)(1)(b)(2)(b)(3)(b)(4)(b)(5)
1less than 500CurrentLess than 12 monthsAKFixed
2500-549< 30 days12-24 monthsALPrime
3550-59930-59 days24-36 monthsAROther
4600-64960-89 days36-48 monthsAZFixed
5650-69990-119 days48-60 monthsCAPrime
6700-749120-149 daysOver 60 monthsCOOther
7750-799150-179 daysLess than 12 monthsCTFixed
8800 and over180+ days12-24 monthsDEPrime
9less than 500< 30 days24-36 monthsDCOther
10500-54930-59 days36-48 monthsFLFixed
11550-59960-89 days48-60 monthsOtherPrime
12600-64990-119 daysOver 60 monthsAKOther
13650-699120-149 daysLess than 12 monthsALFixed
14700-749150-179 days12-24 monthsARPrime
15750-799180+ days24-36 monthsAZOther
16800 and overCurrent36-48 monthsCAFixed

Request for Comment

  • Are the proposed standardized distributional groups appropriate? Are there any other distributional groups that we should specify? Are there any that should not be required?
  • Would credit card ABS issuers be able to provide this information in this Start Printed Page 23374format on a cost-effective basis? Would it raise competitive concerns?
  • We understand that most credit card ABS issuers currently provide disclosure about the FICO credit score distribution of the underlying pool. Rather than allowing the issuer to use a credit score that is not FICO, should we require that all issuers provide disclosure of FICO credit scores by distributional groups? Are there other types of credit scores with respect to which we should require disclosure by distributional group? If so, what would be the appropriate distributional groups?
  • Should we provide a definition for delinquency? If so, how should it be defined?
  • Are the distributional groups for adjustable rate index appropriate? Are there any other commonly used indexes that we should specify?
  • Would issuers already have information about all of the states in order to prepare the groupings for the top 10 states by aggregate account balance and other? If so, should we require that issuers provide groupings by every state? Please tell us why or why not.
  • Are the proposed informational requirements appropriate for the grouped account data (i.e., aggregate credit limit, aggregate account balance, number of accounts, weighted average APR and weighted average net APR)? What other types of information should issuers provide about their accounts in the grouped account data format?
  • Are credit cards ever securitized using structures that are not master trusts? If so, should we require asset-level disclosure for non-master trust credit card ABS issuers because the pool would be fixed and contain a smaller number of accounts?

4. Asset Data File and XML

We are proposing to require asset-level information [302] and grouped account data (with respect to credit cards) related to an offering and ongoing periodic reporting be filed on EDGAR in XML (extensible Markup Language) as an asset data file. By proposing to require the asset-level data file in XML, a machine-readable language, we anticipate that users of the data will be able to download the disclosure directly into spreadsheets and databases, analyze it using commercial off-the-shelf software, or use it within their own models in other software formats.

Asset-backed filers currently are required to file their registration statements, current and periodic reports in ASCII (American Standard Code for Information Interchange) or HTML (HyperText Markup Language).[303] Our electronic filing system also uses other formats for reporting related to corporate issuers, such as XML, to process reports of beneficial ownership of equity securities on Forms 3, 4, and 5 under Section 16(a) of the Exchange Act,[304] and a form of XML known as XBRL to provide financial statement data.[305] As we explained in the XBRL Adopting Release, electronic formats such as HTML and XML are open standards [306] that define or “tag” data using standard definitions. The tags establish a consistent structure of identity and context. This consistent structure can be recognized and processed by a variety of different software applications. In the case of HTML, the standardized tags enable Web browsers to present Web sites' embedded text and information in a predictable format so that they are human readable. In the case of XML and XBRL, software applications, such as databases, financial reporting systems, and spreadsheets recognize and process tagged information. For asset-backed issuers, we believe that XML is the appropriate format to provide standardized asset data disclosure. As we discuss earlier, some issuers already file loan schedules on EDGAR as part of the pooling and servicing exhibit or a free writing prospectus. However, the data is currently filed on EDGAR in ASCII or HTML, both of which do not facilitate data analysis. XBRL allows issuers to capture the rich complexity of financial information presented in accordance with U.S. GAAP.[307] In contrast, the proposed asset data file will present relatively simpler characteristics of the underlying loan, obligor, underwriting criteria and collateral among other items that are well suited for XML. We are proposing XML, rather than XBRL, because there are many commercial products that can be used with XML including parsers that would allow investors to insert data into a relational database for analysis, data extensions available in XBRL are not applicable to this data set, the nature of the repetitive data lends itself to an XML format and the schema could be easily updated.

We understand that most of this information is data collected at the time of origination and ongoing performance information is maintained on servicing systems. The CRE Finance Council (formerly CMSA) is already moving towards requiring issuers to provide its Investor Reporting Package in XML.[308] The use of XML will enable investors to use standard commercial off-the-shelf software for analysis of underlying loan-level data.[309] This software may also permit investors to insert the data into a database to identify individual data points. Then the data can be aggregated, compared and analyzed. Data can also be subjected to further waterfall analysis. Since XML data can be visualized in internet browsers, investors can develop a style sheet if viewing data is important in their analysis.[310]

Prior to requiring the asset data file in XML, technical specifications that describe the schema, which would include each data point described in Schedules L, L-D, and CC are necessary.[311] Also, extension data would not be permitted in the asset-level data file because we believe it would defeat the purpose of standardizing the data elements.[312] Instead, we are proposing to include a limited number of “blank” data tags in Start Printed Page 23375our XML schema. In order to reduce complexity for users we are proposing to limit the number to ten blank data tags. These blank data tags would give issuers the ability to present additional asset-level data not required by proposed Schedule L or L-D. For example, if servicers were required to comply with a new modification program, and related tagged information would be material to investors, it may be appropriate to use a blank data tag. Additionally, if an issuer registers ABS backed by an asset class that has not been previously registered, so that no asset class specific schema exists at the time, that issuer could use the available blank data tags. Issuers, however, would need to provide a narrative explanation of the definitions or formulas for the additional tagged data and file it as another exhibit on Form 8-K or Form 10-D.[313] Issuers could also file other explanatory disclosure regarding the asset-level data in an exhibit, if necessary.[314]

(a) Filing the Asset Data File and EDGAR

We are proposing that the new asset data file in XML be filed as an exhibit to the filings. Therefore, we are proposing changes to Item 601 of Regulation S-K, Rules 11, 201, and 202 of Regulation S-T and Form 8-K to accommodate the filing of asset data files. We are proposing to define the XML file required by proposed Schedules L, L-D, and CC as an “Asset Data File” in Regulation S-T and make corresponding changes to Rule 101 of Regulation S-T mandating electronic submission.[315] As we discuss above, we are proposing that the asset data be filed as an exhibit to the appropriate Form 8-K (in the case of an offering) or to the appropriate Form 10-D (in the case of a periodic distribution report).[316] As we note above, we realize that registrants may want to provide investors with additional asset information not defined in Schedule L or L-D, or that issuers of new asset classes may want to provide investors with other data points. As such, we also propose an additional exhibit, an asset related document, for registrants to disclose the definitions or formulas for the additional data points or to provide further explanatory disclosure regarding the asset data file.[317]

We also propose to add Item 6.06 to Form 8-K. Regardless of whether the issuer is registering the offering on Form SF-1 or SF-3, we are proposing to require all asset data files to be filed on Form 8-K so that investors may easily locate asset-level data disclosure on EDGAR. The proposed item explains that the asset data file must be filed with the Form 8-K on the same date of the filing of a prospectus filed in accordance with proposed Rule 424(h), a final prospectus meeting the requirements of section 10(a) of the Securities Act filed in accordance with Rule 424(b), and a report filed in accordance with Item 6.05 of Form 8-K (Securities Act Updating Disclosure). The proposed item also requires that any asset data related document [318] be filed at the same time the asset data file is filed on EDGAR. We have also included proposed instructions to Item 6.06 to refer to the proposed exhibit requirements in Item 601 of Regulation S-K and to the incorporation by reference item requirements on proposed Forms SF-1 and SF-3.

(b) Hardship Exemptions

We are proposing a self-executing temporary hardship exemption for filing the asset data file; however, we are proposing to exclude the asset data file from the continuing hardship exemption. Rule 201 under Regulation S-T generally provides for a temporary hardship exemption from electronic submission of information, without staff or Commission action, when a filer experiences unanticipated technical difficulties that prevent timely preparation and submission of an electronic filing. The temporary hardship exemption permits the filer to initially submit the information in paper, but requires the filer to submit a confirming electronic copy of the information within six business days of filing the information in paper.[319] Failure to file the confirming electronic copy by the end of that period results in short form ineligibility. Because the disclosure requirement for an asset data file is inherently electronic, and the information would not be useful if provided in paper, we are proposing an alternative approach to the temporary hardship exemption. Under our proposal, if the registrant experiences unanticipated technical difficulties preventing the timely preparation and submission of an asset data file, a registrant will still be considered timely if the asset data is posted on a Web site on the same day it was due to be filed on EDGAR, the Web site address is specified in the required exhibit, a legend is provided in the appropriate exhibit claiming the hardship exemption, and the asset data file is filed on EDGAR within six business days. We believe that posting the asset data on a Web site is preferable to a paper filing in this circumstance. By requiring the asset data file posting on a Web site, investors would have access to the disclosures and would not experience any delay in accessing the asset data in XML format. Consistent with our current temporary accommodation rules, under our proposed accommodation, the asset data file must be filed on EDGAR within six business days and failure to file the asset data file within that period will result in the loss of Form SF-3 eligibility. We believe it is important that the disclosure be filed with the Commission on EDGAR to preserve continuous access to the information. As we discuss below, our experience with the temporary accommodation for static pool disclosure raises concern that access to the information on Web sites may be lost due to the distress in the market or the fact that certain sponsors may cease operations.[320]

We are proposing to exclude asset data files from the continuing hardship exemption under Rule 202 of Regulation S-T. Rule 202 generally allows a registrant to apply for a continuing hardship if it cannot file all or part of a filing without undue burden or expense. In contrast to the self-executing temporary hardship exemption process, a filer may obtain a continuing hardship exemption only by submitting a written application, upon which the Commission staff must then act under delegated authority.

We do not believe a continuing hardship exemption is appropriate with respect to an asset data file because we believe the proposed asset data file would be an integral part of the prospectus and periodic performance reporting. We believe that, for ABS issuers, the information in machine readable format is generally already collected and stored on a servicer's systems. Therefore, we do not believe it would be appropriate for issuers to receive a continuing hardship exemption for the asset data file. We believe investors should receive all of the disclosures specified in Schedules L Start Printed Page 23376and L-D and in a format that will allow them to effectively utilize the information.[321]

(c) Technical Specifications

We are proposing to add detailed information on submitting an asset data file to the EDGAR Technical Specification. As discussed above and as specified in the Appendix to this release, there are several data points contained in Schedule L and Schedule L-D that require issuers to provide a coded response. These codes would be enumerated in the EDGAR Technical Specification. We expect that the technical specifications would be available as early as possible prior to any required compliance date. The manual would be published on the SEC's Web site on the “Information for EDGAR Filers” webpage.[322]

Request for Comment

  • Is it appropriate to require the asset data file in XML format? Does XML format most easily facilitate the analysis of the securities and their underlying assets for all market participants?
  • In what format do issuers currently provide asset data information to investors (as may be required, for example, under transaction agreements)? Do any market participants currently provide asset data in accordance with a technical specification or schema commonly used across a particular asset class? If so, would our data points cause divergence from current practice? Please tell us which specific proposed data points would be of concern and why. How can we address those concerns? Is another format preferable, such as XBRL?
  • Should we adopt the proposed changes to Item 601 of Regulation S-K, Regulation S-T and Form 8-K?
  • We are not proposing changes to Rule 305 of Regulation S-T to exempt the asset data file from the restrictions on the number of characters per line that may be filed on EDGAR in order to prevent issuers from filing the tagged data in one continuous string. We believe the restriction on the number of characters per line will help preparers and validators with their review of the asset data file. Should we exempt the asset data file from Rule 305 of Regulation S-T? If so, why?
  • Are the proposed blank data tags appropriate? Is ten blank data tags the appropriate number? Should the number be more or less? Would more blank data tags create undue complexity for investors? Are there other ways we could provide for additional disclosure and have that disclosure be standardized?
  • Is the proposed temporary hardship exemption, including the required Web site posting, appropriate? Should we allow a continuing hardship exemption for filing the asset data file on EDGAR?
  • We propose to use existing submission types in order to enable filers to attach the asset data file as an exhibit. Tagging specifications that explain the requirements of the XML schema would be included in the proposed technical specifications. Are there other specifications that would be helpful that should be provided in the EDGAR Filer Manual for asset data files that are not currently included in other Technical Specifications? Please be specific in your response.
  • Should we provide a transition period prior to the required compliance date that would allow filers to submit only test filings? Please be specific in your response.
  • The technical specification will outline in detail the required format of each data point. Are there other validation checks that need to be in place to check compliance? Please be specific in your response.

4. Pool-Level Information

By at least 2006, an increasing number of residential mortgages were generated in the United States through loosened underwriting standards.[323] In addition, originators engaged in practices such as the bundling of non-traditional features into a single loan product, known as “risk-layering.” [324] The loosening of underwriting standards for subprime mortgages has been cited as one of the principal causes of the recent turmoil in the financial markets.[325] In addition, compliance with the disclosure guidelines set forth in our rules by some ABS issuers was not consistent.

Item 1111 of Regulation AB [326] outlines several aspects of the pool that the prospectus disclosure should cover.[327] Item 1111 explicitly provides that exceptions to origination criteria must be disclosed.[328] We are proposing revisions to the pool-level disclosure requirements in Item 1111 to further detail and clarify the type of disclosure that is required to be provided for ABS offerings with respect to deviations from disclosed underwriting standards. We also are proposing revisions related to the originator's diligence with respect to the information used to underwrite the assets, and the remedies related to the pool assets that are available to investors that are provided in underlying transaction agreements.

First, we are proposing to amend Item 1111 to specify that disclosure regarding the underwriting of assets that deviate from the disclosed origination standards must be accompanied by specific data about the amount and characteristics of those assets that did not meet the disclosed standards. To the extent that disclosure is provided regarding compensating or other factors, if any, that were used to determine that the assets should be included in the pool, despite not having met the disclosed underwriting standards, the issuer would be required to specify the factors that were used and provide data on the amount of assets in the pool that are represented as meeting those factors. Thus, data would be required on the number of assets not meeting the underwriting criteria, the number of such assets meeting particular compensating factors (if those factors are disclosed), and the number of such assets not meeting such factors.Start Printed Page 23377

Second, we are proposing to require disclosure of what steps were undertaken by the originator or originators to verify the information used in the solicitation, credit-granting or underwriting of the pool assets.[329] Such information could include how the originator documented various criteria such as, for example, debt-to-income ratios, loan-to-value ratios or documentation type.[330] We believe that this information should provide helpful insight to investors regarding the underwriting of the pool assets.

Third, we are proposing amendments that would elicit more disclosure regarding certain remedies available to investors in the transaction agreements. As discussed above, most transaction agreements for ABS offerings contain representations and warranties by the sponsor or originator about the quality, legal compliance and other aspects of the pool assets. Typically, investors are entitled to recover through provisions that require the repurchase of assets from the securitized pool by an obligated party. The obligated party, typically the sponsor, would be obligated to repurchase the assets if the representations and warranties have been breached. Item 1111(e) currently requires summary disclosure regarding any representations and warranties made concerning the pool assets by the sponsor, transferor, originator or other party to the transaction. The item also requires disclosure of the remedies available if those representations and warranties are breached, such as repurchase obligations. In addition, many transaction agreements may provide for the repurchase of assets if the servicer has modified the terms of an asset in the pool in a manner or to a degree that is prohibited under the transaction agreements.

To help ensure that issuers provide meaningful disclosure in an area that has become increasingly important for investors, we are proposing to replace Item 1108(c)(6) with a more detailed and specific disclosure requirement in Item 1111.[331] Item 1108(c)(6) currently requires disclosure to the extent material of any ability of the servicer to waive or modify any terms, fees, penalties or payments on the assets and the effect of any such ability, if material, on the potential cash flows from the assets. Our proposal would replace Item 1108(c)(6) with a more detailed and specific disclosure requirement in Item 1111. As proposed to be revised, Item 1111 would require a description of the provisions in the transaction agreements governing modification of the assets. We also are proposing to require disclosure regarding how modification may affect cash flows from the assets or to the securities.

We also are proposing to require disclosure of whether or not a fraud representation is included among the representations and warranties. Under the proposal, the issuer would provide disclosure regarding whether a representation was made that no fraud has taken place in connection with the origination of the assets on the part of the originator or any party involved in the origination of the assets. We believe that it is important to highlight this representation to investors, although we do not intend to diminish the importance of other representations and warranties regarding the pool assets that are provided.

Existing Item 1111 requires the disclosure of statistical information about the pool in appropriate distributional groups or incremental ranges, among other things. The rule also requires that statistical information for each group or range also should be presented by material variables, such as average balance, weighted average coupon, average age and remaining term, average loan-to-value or similar ratio, and weighted average standardized credit score or other applicable measure of obligor credit quality.[332] Because we believe that existing Item 1111 calls for statistical information in the prospectus regarding an originator's “risk-layering practices” that demonstrates the manner and extent to which multiple non-traditional features of a loan are bundled into one instrument, issuers should already be providing this disclosure.[333] However, to the extent there is ambiguity or lack of clarity in Item 1111 regarding what disclosure with respect to risk-layering practices is required to be provided, we request comment on how to make changes to Regulation AB to require the appropriate disclosure on risk-layering practices.

Request for Comment

  • Above we noted that disclosure regarding risk layering practices is required under existing Item 1111. Is the application of Item 1111 to risk-layering practices clear? Is there some way we can make Item 1111 clearer in that regard? Should we revise any other rule in that regard?
  • Should we require, as proposed, disclosure on assets that deviate from the disclosed origination underwriting standards that must be accompanied by disclosure of specific data about the amount and characteristics of those assets that did not meet the standards? Should we require, as proposed, that if disclosure is provided regarding compensating or other factors, if any, that were used to determine that the assets should be included in the pool, despite not having met the disclosed underwriting standards, disclosure is required that would describe those factors and provide data on the amount of assets in the pool that are represented as meeting those factors and the amount of assets that do not meet those factors? Should we require any other disclosure with respect to exceptions to or deviations from disclosed origination underwriting standards? Should issuers be required to identify each exception loan by a loan identifier that will be disclosed in the proposed Schedule L discussed above?
  • Are the proposed amendments relating to disclosure concerning representations and warranties and modification provisions in the transaction agreements appropriate?
  • Are there other kinds of disclosure relating to representations and warranties and enforcement mechanisms of those representations and warranties that should be required to be provided? If so, please describe in detail.
  • A repurchase obligation also may be imposed under other circumstances.[334] Should the rules require prospectus disclosure of other types of repurchase obligations?
  • We are proposing to require disclosure of whether the transaction agreements include a fraud representation. Is this appropriate? Are there other types of representations and warranties that the prospectus should highlight?
  • Should we delete Item 1108(c)(6), as proposed? Is there any type of disclosure that will be omitted if we delete Item 1108(c)(6) in lieu of our proposed revision to Item 1111?Start Printed Page 23378

B. Flow of Funds

1. Waterfall Computer Program

We are proposing to require that most ABS issuers file a computer program that gives effect to the flow of funds, or “waterfall,” provisions of the transaction. We are proposing that the computer program be filed on EDGAR in the form of downloadable source code in Python. Python, as we will discuss further below, is an open source interpreted programming language.[335] Under our proposal, an investor would be able to download the source code for the waterfall computer program and run the program on the investor's own computer (properly configured with a Python interpreter).[336] The waterfall computer program would be required to allow use of the asset data files that we are also proposing today.[337] This proposed requirement is designed to make it easier for an investor to conduct a thorough investment analysis of the ABS offering at the time of its initial investment decision. In addition, an investor may monitor ongoing performance of purchased ABS by updating its investment analysis from time to time to reflect updated asset performance.[338] In this way, market participants would be able to conduct their own evaluations of ABS and may be less dependent on the analysis of third parties such as credit rating agencies.

The waterfall is a critical component of an ABS. Currently investors receive only a textual description of this information in the prospectus, which may make it difficult for them to perform a rigorous quantitative analysis of the ABS.[339] In a typical ABS, the waterfall governs the application of cash collected on pool assets. Using the waterfall, cash collections are applied to distributions to the holders of various classes of ABS backed by the pool assets. Depending on the level of prepayments, defaults and losses-given-default [340] that occur on the pool assets, the waterfall may redirect the application of cash to or away from a particular class of securities; may allocate cash to a reserve account or require the release of reserve account cash; [341] may change the allocation of cash to the classes in an ABS transaction from sequential pay to pro rata pay,[342] and vice versa; or may accelerate or defer the application of principal prepayments to a particular tranche. As a result, the calculation of the probable amount and timing of cash distributions to an investor on a particular ABS, an essential element of valuing or pricing the security, can be complex.

Institutional sellers and buyers of ABS typically rely on computer simulation of the results of applying the cash flows on the pool assets to the waterfall under different interest rate, prepayment, default and loss-given-default assumptions to determine the likely amount and timing of cash distributions on, and therefore the value of, the ABS. A common approach to this task is to: (a) Run many separate simulations, or projections, of the cash flows for the pool assets (using randomly generated assumed interest rates, prepayment speeds, default rates and loss-given-default rates—a simulation process referred to as the Monte Carlo method); (b) pass these simulated cash flows through the waterfall structure of the ABS; and (c) observe the resulting cash flows for each separate ABS tranche. To conduct this analysis, a market participant requires:

  • Loan-level information, or grouped account data, about the assets, including such fields as their coupon rates, balances, loan-to-value ratios, maturity dates, and the borrowers' credit scores, among others;
  • A computer program that calculates the contractual cash flows for each tranche of the ABS based on the presumed cash flows of the underlying pool assets;
  • Additional computer models that generate inputs for the computer simulation (such as interest rate, prepayment, loss and loss-given-default models); and
  • A computer system that combines the three elements above into a model that allows investors to calculate the values of ABS tranches based on their own assumptions about the behavior of the underlying pool assets combined with the waterfall of the ABS, and the current state and performance of the underlying pool assets.

Without these tools, market participants must rely on third party vendors to provide quantitative analysis of the asset-backed security [343] or must rely on computational materials provided by the issuer, without the opportunity to test the model or vary the assumptions used by the issuer.[344]

The ABS issuer or the underwriter generally will have a computer model of the waterfall. However, the issuer or underwriter currently has no obligation to share the computer model with actual or potential ABS investors. Because prospective investors in ABS typically do not have access to the ABS issuer's computer models, under current conditions, an investor must create its own computer program. It does this by taking the priority of payment rules stated in the trust agreement, pooling and servicing agreement, indenture, or other operative document for the ABS and described in the prospectus, converting the English language statement of those provisions into one or more algorithms, and then expressing the algorithms as computer code in a programming language. As a practical matter, it is often not possible to complete these steps before making an investment decision. This is particularly onerous for smaller institutional Start Printed Page 23379investors, for whom it may not be feasible to acquire the financial and technological expertise necessary to develop a computer program of the waterfall. Thus, investment decisions with respect to ABS may be made without the benefit of the investor performing its own quantitative valuation analysis. This may encourage undue reliance on the determinations of credit rating agencies. Further, there is the possibility that some investors will program the waterfall erroneously, leading to inaccurate ABS valuations.

We believe that the proposed requirement to file the waterfall computer program would convey information to investors in a form that is both more accurate and more useful to them for data analysis than a textual description of the waterfall. By running the waterfall computer program in combination with other internally-developed or commercially available vendor interest rate, prepayment, default and loss-given-default models, cash flow engines, or computational services, investors should be able to promptly run cash flow simulations and generate present value estimates for ABS tranches. An investor should also be able to more effectively monitor the ongoing performance of the ABS by using the proposed updated asset-level performance information to be filed with each periodic distribution report on Form 10-D.

(a) Proposed Disclosure Requirements

We are proposing to require, for offerings of asset-backed securities backed by most asset classes, that issuers file the waterfall computer program in the form of downloadable source code in the Python programming language.[345] We define the disclosure requirements of the waterfall computer program in proposed Item 1113(h)(1). We are proposing that the waterfall computer program give effect to the priority of payment provisions in the transaction agreements that determine the funds available for payments or distributions to the holders of each class of securities,[346] and each other person or account entitled to payments or distributions, from the pool assets, pool cash flows, credit enhancement or other support, and the timing and amount of such payments or distributions.[347]

Under the proposed requirement, the filed source code, when downloaded and run by an investor, must provide the user with the ability to programmatically input the user's own assumptions regarding the future performance and cash flows from the pool assets, including but not limited to assumptions about future interest rates, default rates, prepayment speeds, loss-given-default rates, and any other necessary assumptions required to be described under Item 1113 of Regulation AB. The waterfall computer program must also allow the use of the proposed asset-level data file that will be filed at the time of the offering and on a periodic basis thereafter.[348]

We also propose to require that the waterfall computer program produce a programmatic output, in machine-readable form, of all resulting cash flows associated with the ABS, including the amount and timing of principal and interest payments payable or distributable to a holder of each class of securities, and each other person or account entitled to payments or distributions in connection with the securities, until the final legal maturity date, as a function of the inputs into the waterfall computer program.

We are also proposing an instruction to the item requirement to make clear that the provisions captured in the waterfall computer program should include, but not be limited to, provisions that set forth the priorities of payments or distributions (and any contingencies affecting such priorities) to the holders of each class of securities and any other persons or accounts entitled to payments or distributions, and any related provisions necessary to determine the quantitative results of such provisions (including certain provisions required to be described in Item 1113 of Regulation AB). Item 1113 of Regulation AB currently requires disclosure of a plain English description of the structure of the waterfall and we believe that the provisions given effect in the proposed waterfall computer program should largely be the same as those provisions required to be described under current Item 1113. But in the event that there are any provisions that are not required to be described under Item 1113 because they are not material to the description of the waterfall in the prospectus, but those provisions are used to determine the value of the inputs to the waterfall computer program, the waterfall computer program would be required to give effect to the provisions by which those inputs are determined.

In addition, we are proposing to require that the issuer file as part of the waterfall computer program a sample expected output for each ABS tranche based on sample inputs provided by the issuer. By using the sample inputs to run the program, the investor will be able to confirm that the program is working correctly by matching the actual outputs produced against the sample expected output provided by the issuer.[349]

Lastly, so that investors may easily locate the waterfall computer program, we are proposing that the prospectus include a statement that the information provided in response to proposed Item 1113(h) is provided as a downloadable source code in the Python programming language filed on the SEC Web site. Issuers would also need to disclose the CIK and file number of the related filing.

(b) Proposed Exemptions

We are proposing to exclude issuers of ABS backed by stranded costs from the requirement to provide the waterfall computer program. As we discuss above, we are not proposing to require such issuers to file an asset data file at the time of the offering or on a periodic basis,[350] and therefore, we do not believe investors would have the necessary inputs to run the waterfall computer program.

(c) When the Waterfall Computer Program Would Be Required

Like the asset data file, the waterfall computer program would be an integral part of the prospectus so that issuers would be required to provide the waterfall computer program at the time of filing the Rule 424(h) prospectus as of the date of the filing. Similarly, as a prospectus requirement, the waterfall computer program would be filed with the final prospectus under Rule 424(b) as of the date of the filing.

In addition, we are proposing to require credit card master trusts to report changes to the waterfall computer program on Form 8-K and file the updated waterfall computer program as an exhibit to the report. Furthermore, we are also proposing to require that registrants provide updated Schedule CC grouped account data at the same time the updated waterfall computer program is filed so that investors may evaluate the effect of the change in the Start Printed Page 23380flow of funds using updated underlying pool information.

(d) Filing the Waterfall Computer Program and Python

We are proposing that the waterfall computer program be filed as an exhibit in accordance with Item 6.07 of Form 8-K. The Form 8-K would then also be incorporated by reference into the registration statement. Therefore, we are proposing changes to Item 601 of Regulation S-K, Rules 101, 201, 202 and 305 of Regulation S-T, new Rule 314 of Regulation S-T and changes to Form 8-K to accommodate the filing of the waterfall computer program. We realize that registrants may want to provide more program functionality in the waterfall computer program than would be required by proposed Item 1113(h). For example, additional program functionality could include features designed to allow interoperability with other ABS quantitative analysis software. As such, we also propose to permit the filing of an additional exhibit, a waterfall computer program related document, for registrants to disclose the additional program functionality.

We are proposing new Rule 314 of Regulation S-T to require that the waterfall computer program be written in the Python programming language and be filed as source code that is able to be downloaded and run on a local computer properly configured with a Python interpreter. As we note above, Python is an open source interpreted programming language. Open source means that the source code is available to all users (as opposed to proprietary source code that can be viewed only by the owner or developer of the program). An interpreted language is a programming language that requires an interpreter in the target computer for program execution.[351] We prohibit the inclusion of executable code in electronic submissions on EDGAR because of the computer security risks posed by accepting executable code for filing.[352] Executable code results from separately compiling a computer program prior to running it.[353] Since Python is an interpreted language that does not need to be compiled prior to running it, executable code would not need to be published on EDGAR, and we would not require EDGAR to establish facilities to host, run, or operate any computer program. The waterfall computer program source code would be required to be submitted as tagged XML data. The EDGAR Technical Specification would contain detailed information on how to file the waterfall computer program.

Additionally, we are proposing a change to Rule 305 of Regulation S-T to exempt the waterfall computer program from number and character per line requirements on EDGAR.

(e) Hardship Exemptions

We are proposing a self-executing temporary hardship exemption for filing the waterfall computer program; however, we are proposing to exclude the waterfall computer program from the continuing hardship exemption under Rule 202 of Regulation S-T.[354] We are proposing the same approach to the temporary hardship exemption for the waterfall computer program as we propose for the asset-level data file. Because the disclosure requirement for the waterfall computer program is inherently electronic, the information would not be useful if provided on paper. Under our proposal, if the registrant experiences unanticipated technical difficulties preventing the timely preparation and submission of the waterfall computer program, a registrant would be considered to have made a timely filing if the waterfall computer program is posted on a Web site on the same day it was due to be filed on EDGAR, the Web site address is specified in the required exhibit, a legend is provided in the appropriate exhibit claiming the hardship exemption, and the waterfall computer program is filed on EDGAR within six business days.

We are also proposing to exclude the waterfall computer program from the continuing hardship exemption under Rule 202 of Regulation S-T. This is the same approach for the waterfall computer program that we are proposing for asset-level data files. We do not believe a continuing hardship exemption is appropriate with respect to the waterfall computer program because, as we discuss above, the waterfall computer program will be an integral part of the prospectus. Therefore, we do not believe it would be appropriate for issuers to receive a continuing hardship exemption for the waterfall computer program.

Request for Comment

  • Is it appropriate for us to require most ABS issuers to file the waterfall computer program? Is there an alternative form of required information filing that would be more useful to investors, subject to the limitation that executable code may not be filed on EDGAR?
  • Should we require, as proposed, that the Rule 424(h) filing include the waterfall computer program?
  • Does access to the waterfall computer program decrease the amount of time needed to analyze the information in a prospectus? If we adopt the waterfall computer program filing requirement, would less time be needed for investors to review transaction-specific information? If so, how much time would be needed after the waterfall computer program is filed? Four days? Two days? Does analysis of the waterfall computer program require more time than what we allow as proposed so that we should increase the time period for the Rule 424(h) filing?
  • Is it appropriate to require issuers to submit the waterfall computer program in a single programming language, such as Python, to give investors the benefit of a standardized process? If so, is Python the best choice or are there other open source programming language alternatives (such as PERL) that would be better suited for these purposes?
  • Should more than one programming language be allowed? If so, which ones and why?
  • Should we restrict ourselves to only open source programming languages or allow fully commercial or partly-commercial languages (such as C-Sharp or Java) to be used? If so, what factors should be considered?
  • Are there other requirements we should impose on the possible computer programming languages that are used to satisfy this requirement, other than that such languages be open source and interpreted?
  • Under our proposal, issuers would be required to file the waterfall computer program in the form of downloadable source code on EDGAR. Prior to filing, the code would not be tested by the Commission. Would downloading the code onto a local computer give rise to any significant risks for investors? If so, please identify those risks and what steps or measures Start Printed Page 23381we should take to address the risks, if any.
  • Are the proposed input and output requirements for the waterfall computer program appropriate? If not, what type of output and tests should be required for the waterfall computer program? Should the outputs of the waterfall computer program be specified in detail by rule, or broadly defined to afford flexibility to ABS issuers?
  • Should we require comments in the code that explain what each line does? Is this necessary given the narrative disclosure of the waterfall in the prospectus? If it is appropriate, are there any specific explanations we should require?
  • Is it appropriate to exempt issuers of ABS backed by stranded costs from the requirement to provide a waterfall computer program? If not, what types of inputs would be necessary to run the waterfall computer program? How would issuers obtain these inputs?
  • Is our proposal to require credit card master trusts to report changes to the waterfall computer program on Form 8-K and file the updated waterfall computer program as an exhibit appropriate? Would the flow of funds, and thus the waterfall computer program, change over time? If so, how and why would it change? Should we require the waterfall computer program be filed at any other time? Should we require it be filed with each Form 10-D?
  • Is the proposed requirement to provide the waterfall computer program with the proposed Rule 424(h) prospectus as of the date of filing and a final prospectus under Rule 424(b) as of the date of filing appropriate? Should the waterfall computer program be required to be filed at any other time? If so, please tell us why. As we discuss above in Section II.B.1.a., under our proposal, for material changes in information, other than offering price, which would include material changes to the waterfall computer program, a new Rule 424(h) filing would be required as well as a new five business-day waiting period.
  • Should we adopt the proposed changes to Item 601 of Regulation S-K and to Regulation S-T?
  • Is the proposed temporary hardship exemption appropriate? Should we allow a continuing hardship exemption?
  • We propose to use existing submission types in order to enable filers to attach the proposed waterfall computer program as an exhibit. Specifications that explain the requirements would be included in the EDGAR technical specifications. Are there other specifications that would be helpful that should be provided in the EDGAR Filer Manual for the waterfall computer program that are not currently included in other technical specifications? Please be specific in your response.
  • Should we provide a transition period prior to the required compliance date that would allow filers to submit only test filings? Please be specific in your response.
  • Is our proposal to permit the filing of an exhibit to disclose additional program functionality appropriate?
  • Are there any impediments that issuers would face if they are required to file the waterfall computer program on EDGAR?

2. Presentation of the Narrative Description of the Waterfall

The information relating to the structure of the transaction pursuant to Item 1113 of Regulation AB may be used by investors to model the cash flows for the securities. In order to facilitate this modeling, we believe that such information should be easily accessible and in a useable format. We are proposing to revise Item 1100 of Regulation AB [355] to require that the information detailing the flow of funds for the transaction (and related definitions of terms) be included in one location in the prospectus. We note that the waterfall computer program and the narrative description of the waterfall would need to be accurate and the accuracy of one would not compensate for inaccuracies in the other.

Request for Comment

  • Is our proposal to require that the narrative description of the waterfall be presented in one location appropriate? Are there any reasons not to require this?

C. Transaction Parties

1. Identification of Originator

Existing Item 1110(a) of Regulation AB requires identification of originators apart from the sponsor or its affiliates only if the originator has originated, or expects to originate, 10% or more of the pool assets. The existing rule does not require identification of a non-affiliate that has originated less than 10% of the pool assets. In situations where much of the pool assets have been purchased from originators other than the sponsor, identification of originators is not required if each originator has originated less than 10% of the pool assets. This can result in very little, if any information about originators if there are multiple originators with less than 10% that make up a major part of the securitization. We believe that where the sponsor securitizes assets of a group of originators that are not affiliated with the sponsor, more disclosure regarding the originator of the assets is needed than is required under the current rules. Therefore, we are proposing that an originator would be required to be identified even if such originator has originated less than 10% of the pool assets if the cumulative amount of originated assets by parties other than the sponsor (or its affiliates) comprises more than 10% of the total pool assets.

Request for Comment

  • Should we amend Item 1110 to require identification of originators even if no single originator comprises 10% or more of the pool? Is it appropriate to require identification of originators, as proposed, if the cumulative amount of originated assets by parties other than the sponsor (or its affiliates) comprises 10% or more of the total pool asset?
  • Are the proposed revised thresholds for originator identification appropriate? Should they be different (e.g., 5%)?

2. Obligation To Repurchase Assets

We are proposing expanded disclosure regarding the obligations to repurchase assets. As discussed above, many transaction agreements underlying a securitization provide for the repurchase of pool assets by an obligated party upon breach of a representation and warranty related to the pool assets.[356] This obligated party could be the originator of the assets or, most typically, the sponsor of the securities—who could also function as the originator, depending on the transaction. Depending on the application of Section 15(d) to the issuer, ongoing reports filed by the issuer may provide some information regarding assets that have been repurchased from the pool by the obligated party pursuant to transaction agreements.

Start Printed Page 23382

(a) History of Asset Repurchases

We are proposing to amend Item 1104 and Item 1110 to require disclosure of the amount, if material, of publicly securitized assets originated or sold by the sponsor or an identified originator (as identified under the specifications detailed below) that were the subject of a demand to repurchase or replace any of the assets for breach of the representation and warranties concerning the pool assets in the last three years pursuant to the transaction agreements.[357] We are proposing to require that such disclosure be provided on a pool by pool basis. The percentage of that amount that was not then repurchased or replaced by the obligated party (i.e., the sponsor and/or originator) also would be disclosed. Of those assets that were not then repurchased or replaced, we propose to require disclosure whether an opinion of a third party not affiliated with the obligated party had been furnished to the trustee that confirms that the assets did not violate a representation or warranty. This enhanced information about the originator or sponsor's history with assets they have originated or sold into public securitization vehicles should allow investors to better assess practices of the originator or the sponsor.

Under existing Item 1110(b), additional disclosure relating to an originator, such as the originator's experience in originating assets, is only required to be provided if the originator has originated or is expected to originate 20% or more of the assets (“20% originator”). This threshold for disclosure was adopted in 2004. Consistent with the existing threshold, the proposed disclosure requirement relating to the repurchase of assets would only be required if the originator is a 20% originator.

(b) Financial Information Regarding Party Obligated To Repurchase Assets

In the events arising out of the financial crisis, the financial condition of the party obligated to repurchase assets pursuant to the transaction agreements underlying an asset-securitization became increasingly important to whether payments on asset-backed securities would be made.[358] Currently, there is no requirement for asset-backed issuers to disclose the financial condition of an originator unless some other financial disclosure threshold is also triggered such as the trigger for servicers.[359] We believe that there are situations where it is appropriate for financial information about certain obligated parties to be provided to ABS investors.

We are proposing to amend Item 1104 and Item 1110(b) to require financial information of the party obligated to repurchase a pool asset for breach of a representation and warranty pursuant to the transaction agreements. These requirements would be similar to the requirement regarding financial information of certain servicers. Under the proposal, information regarding the financial condition of a 20% originator would be required if there is a material risk that the financial condition could have a material impact on the origination of the originator's assets in the pool or on its ability to comply with provisions relating to the repurchase obligations for those assets. Information regarding the sponsor's financial condition similarly would be required to the extent that there is a material risk that the financial condition could have a material impact on its ability to comply with the provisions relating to the repurchase obligations for those assets or otherwise materially impact the pool.

Request for Comment

  • Is the proposed amendment requiring disclosure regarding amount of assets that were not repurchased appropriate? Should we also require, as proposed, disclosure of the percentage of that amount that was not then repurchased or replaced by the sponsor or 20% originator? Should we also, as proposed, require disclosure whether an opinion of a third party not affiliated with the obligated party had been furnished to the trustee that confirms that the assets that were not repurchased or replaced did not violate a representation or warranty?
  • Would requiring this disclosure, as proposed, have the unintended consequence of incentivizing sponsors (who may want to put an asset back to an originator) or trustees to demand that originators repurchase assets in situations where that might not be required under the transaction agreements? If so, how should we address this?
  • Should we also require disclosure of the percentage of assets that have been repurchased by a 20% originator or the sponsor?
  • Should disclosure be required regarding demands to repurchase in the last three years, as proposed? Should the timeframe be different (e.g., one year, two years, four years, or five years)?
  • Are there parties other than 20% originators or sponsors that may have a repurchase obligation under the transaction agreements for breach of the representations and warranties? If so, should similar disclosure about these parties be required?
  • With regard to the requirement to disclose the financial condition of originators and sponsors, rather than add disclosure requirements to Item 1104 and Item 1110, should we expand the definition of significant obligor to incorporate the obligated party that is required to repurchase assets for breach of a representation or warranty? How should we revise Item 1112 for this purpose?
  • Are the proposed amendments relating to disclosure of the financial condition of the obligated party appropriate? Should we specify further when disclosure of the financial condition would be required such as a certain level of financial concentration? If so, what should that level be? Should we require financial information about 20% originators and sponsors for other circumstances? Should we require financial information for 20% originators and sponsors for all securitizations?
  • Should our disclosure requirements be consistent with existing thresholds (i.e., when the originator has originated 20% or more of the assets) for when disclosure relating to an originator is required? Should we instead require disclosure of the proposed items for any originator required to be identified? Should we require disclosure of the proposed items for originators of more than ten percent of the assets?
  • Are there other situations where we should require financial information? For instance, should we always require disclosure of financial information of all servicers and all sponsors? If so, should we require audited financial statements?

3. Economic Interest in the Transaction

As described in Section III.B.3.a. above, as a condition to shelf eligibility, we are proposing that the sponsor retain Start Printed Page 23383an economic interest in the transaction. Item 1103(a)(3)(i) of Regulation AB [360] currently requires disclosure of the classes of securities offered by the prospectus and any class of securities issued in the same transaction or residual or equity interests in the transaction that are not being offered by the prospectus.

We believe that information regarding the sponsor's, a servicer's [361] or a 20% originator's continuing interest in the pool assets is important to ABS investors, and we are proposing to expand our requirements in that regard. Specifically, we are proposing to revise Items 1104, 1108 and 1110 to require disclosure regarding the sponsor's, a servicer's or a 20% originator's interest retained in the transaction, including amount and nature of that interest.[362] Unlike current Item 1104, which requires a description of the sponsor's material roles and responsibilities in the securitization, the new disclosure requirements would further specify that disclosure relating to the interest retained in the transaction would be required. The information would be required for both shelf and other offerings. If any sponsor is retaining an interest pursuant to the shelf eligibility requirements, as proposed above,[363] the interest and its amount and scope would need to be clearly delineated in the prospectus that is contained in the registration statement.[364] If the offering is being registered on Form SF-1, we are proposing to require that the issuer provide clear disclosure that the sponsor is not required by law to retain any interest in the securities and may sell any interest initially retained at any time.

Request for Comment

  • Is our proposed disclosure requirement relating to retained economic interest appropriate? Is there any additional information that would aid investors' analysis?
  • Should we instead require disclosure of whether the sponsor has retained any interest in the securitization?
  • Should we require, as proposed, disclosure that the sponsor is not required by law to retain any risk in the securities and may sell any interest initially retained at any time for any offering registered on Form SF-1?

4. Servicer

The definition of servicer in Item 1108 is a principles-based definition. An entity falls within the definition of servicer if it is responsible for the management or collection of the pool assets or making allocations or distributions to holders, regardless of the entity's title. Item 1108(b)(2) of Regulation AB [365] requires a detailed discussion in the prospectus of the servicer's experience in, and procedures for, the servicing function it will perform in the current transaction for assets of the type included in the current transaction.[366] This item also requires disclosure of information or factors related to the servicer that may be material to an analysis of the servicing of the assets.

While we are not proposing any changes to Item 1108(b)(2) at this time, the staff believes that application of this requirement has not been consistent among issuers, and therefore we believe it is appropriate to emphasize how this requirement applies. Item 1122 requires that the servicer assess its compliance with specified criteria and that a registered public accounting firm issue an attestation report on the party's assessment of compliance with the applicable servicing criteria. The reports and the compliance statement are required to be filed as an exhibit to Form 10-K. We believe that Item 1108(b)(2) requires disclosure of any material instances of noncompliance noted in the assessment or attestation reports that are required by Item 1122 or the servicer compliance statement that is required by Item 1123. In addition, the prospectus should also provide disclosure of any steps taken to remedy the noncompliance disclosed and the current status of those steps.

Request for Comment

  • Are there any changes we should make to Item 1108(b)(2) to clarify what disclosure should be included?
  • Item 1108(b)(4) [367] requires information regarding the servicers' financial condition to the extent there is a material risk that the effect on one or more aspects of servicing resulting from such financial condition could have a material impact on pool performance or performance of the securities. Should we revise this requirement?
  • For example, should we require financial statements or other financial information be provided with respect to the servicer in all asset-backed transactions, regardless of whether there is a material risk that servicing resulting from the financial condition could have a material impact on pool performance or performance of the securities? If the servicing function is divided among different unaffiliated parties, should disclosure of a servicer's financial statements depend on how much of the pool a servicer is servicing? What about a special servicer? Should we take into account any other considerations?
  • If we revise our rules to specifically require servicer financial statements in all cases, how should the rules apply if the registration statement or offering prospectus contemplates a change in servicer soon after the offering is complete? In that situation, which servicer's financial statements should be required—the original servicer, the new servicer, or both? [368]

D. Prospectus Summary

Under our current rules, a prospectus summary should briefly highlight the material terms of the transaction, including an overview of the material characteristics of the asset pool.[369] However, we believe that summary disclosures in ABS prospectuses currently may not adequately highlight the material characteristics, including material risks, particular to the ABS being offered. Instead, the prospectuses often summarize metrics that are common to all securitizations of a particular asset class. For instance, under current practice, a prospectus summary related to an offering of securities backed by residential mortgages typically only includes common metrics such as the number, averages and ranges of common pool characteristics such as principal balances, interest rates, credit scores and loan to value. Other material characteristics of pool assets, however, typically are not highlighted, such as statistics regarding whether the loans in the asset pool were originated under Start Printed Page 23384various underwriting or origination programs, whether loans were underwritten as exceptions to the underwriting or origination programs, or whether the loans in the pool have been modified. We believe these types of statistics could be summarized by broad category on the basis of the underwriting program, type of exception or modification, but historically, this type of information has not been included.

We believe that the summary disclosures should be improved to include this information, which is among the most significant for investors. Accordingly, we are proposing a new instruction to Item 1103(a)(2) of Regulation AB [370] to clarify the summary disclosure requirements. Specifically, the proposed new provision would instruct issuers to provide statistical information regarding the types of underwriting or origination programs, exceptions to underwriting or origination criteria and, if applicable, modifications made to the pool assets after origination.

Request for Comment

  • Is our proposed instruction to require summary statistical information regarding the types of underwriting or origination programs, exceptions to underwriting and origination criteria and, if applicable, modifications made to the pool assets after origination appropriate?
  • Should we specify line item disclosure requirements for the summary section? If so, are the pool characteristics identified in the proposed new instruction appropriate? Would those characteristics be common across all asset classes, or only apply to a specific asset class?
  • Are there other features of the transaction that we should specify must be disclosed in the summary?

E. Static Pool Information

When we adopted Regulation AB, we included the requirement to disclose static pool information with respect to prior securitized pools of the sponsor for the same asset class in the prospectus that is part of the registration statement if the information is material to the transaction. Static pool information indicates how the performance of groups, or “static pools” of assets, such as those originated at different intervals, are performing over time. By presenting comparisons between originations at similar points in the assets' lives, static pool data allows detection of patterns that may not be evident from overall portfolio numbers and thus may reveal a more informative picture of material elements of portfolio performance and risk. In the 2004 ABS Adopting Release, we noted that the development of static pool information was an increasingly valuable tool in analyzing performance.[371]

Under Rule 312 of Regulation S-T, asset-backed issuers are permitted, but not required, to post the static pool information required by Item 1105 on an Internet Web site, rather than file the information with the prospectus on EDGAR. As long as certain conditions are met, the information provided on the Web site pursuant to Rule 312 is deemed to be part of the prospectus included in the registration statement. Rule 312 was adopted in 2004 as a temporary accommodation in response to comments received concerning the significant amount of statistical information that would be difficult to file electronically on EDGAR as it existed at the time and the difficulty for investors to use the information in that format. At the time, we were persuaded by commenters that a web-based approach might allow for the provision of the required information in a more efficient, dynamic and useful format than was currently feasible on the EDGAR system.[372] At the same time, we explained that we continued to believe that, at some point, for future transactions, the information should also be submitted to the Commission in some fashion, provided this would not result in investors not receiving the information in the form they have requested. We also explained that we were directing our staff to consult with the EDGAR contractor, EDGAR filing agents, issuers, investors and other market participants to consider how static pool information could be filed with the Commission in a cost-effective manner without undue burden or expense while still allowing issuers to provide the information in a desirable format.[373]

On October 19, 2009, we proposed to extend the temporary filing accommodation until December 31, 2010 so that the staff could continue to explore whether a filing mechanism for static pool information on EDGAR would be feasible.[374] In that release we solicited comments about current practice and potential alternatives for providing static pool disclosure that we will discuss below. On December 15, 2009, we adopted the proposed one-year extension.[375]

We now are proposing changes to Item 1105 seeking to provide greater transparency and comparability with respect to static pool disclosure. We also are proposing to repeal our temporary Web site accommodation for static pool disclosure. These proposed changes to Rule 312 would allow issuers to make filings on EDGAR in Portable Document Format (PDF).[376]

1. Disclosure Required

We are proposing revisions to the static pool disclosure requirement designed to increase clarity, transparency and comparability. Some of our proposals apply to all issuers, and some apply only to amortizing asset pools and not revolving asset master trusts. Since adoption of Regulation AB, we have observed that static pool information provided by asset-backed issuers may vary greatly within the same asset class. Variations exist not only with regard to the type or categories of information disclosed, but also with the manner in which it is disclosed. As a result, static pool information between different sponsors has not necessarily been comparable, which reduces its value to investors. For example, some issuers of residential mortgage-backed securities provide a one-page graphical static pool presentation, while others present several hundred pages of distribution data for prior securitized pools on their Web site, making it difficult to determine which prior securitizations were most similar to the securities being offered.

Static pool information is required to the extent the information is material. In the 2004 ABS Adopting Release, we Start Printed Page 23385emphasized that in all instances information is required only if material for the particular asset class, sponsor or asset pool involved; disclosure for groups or factors that would not be material is not required. We continue to believe that it is appropriate not to exclude particular asset classes or transactions from the requirements in their entirety. While keeping this general approach, we believe there are ways, nevertheless, to make the static pool information more comparable and facilitate analysis of the information. By requiring issuers to file this information on EDGAR, we do not want to discourage issuers from providing granular data on their Web sites for investors to analyze. We believe that clear summaries and explanation complement the statistical data and allow investors to more easily evaluate material information. To address these concerns, we are proposing to amend our static pool disclosure requirement in several ways to enhance clarity, transparency and comparability. Our proposals cover static pool information for all classes of assets and specific requirements for amortizing trusts.

First, we are proposing to amend Item 1105 to require narrative disclosure describing the static pool information presented. For example, for a pool of RMBS, the disclosure would note the number of assets, types of mortgages (e.g., conventional, home equity, Alt-A, etc.) and the number of loans that were exceptions to standardized underwriting criteria. We believe appropriate explanatory information should introduce the characteristics of the static pool. A brief snapshot of the static pool presented would provide investors with context in which to evaluate the information without sophisticated data analysis tools. We do not intend for this requirement to cause issuers to repeat the underlying static pool disclosure; rather the requirement would serve as a clear and brief introduction of the disclosure.

Second, we are proposing to require that issuers describe the methodology used in determining or calculating the characteristics and describe any terms or abbreviations used. Such a requirement would help investors ascertain whether calculations of terms are comparable across issuers. For example, a description of the method used to calculate the loan-to-value ratio could assist investors compare this information across different issuers.

Third, we are proposing to require a description of how the assets in the static pool differ from the pool assets underlying the securities being offered. Again, we believe that a clear and concise description of these differences would provide investors with context in which to evaluate the information without sophisticated data analysis tools.

Finally, if an issuer does not include static pool information or includes disclosure that is intended to serve as alternative static pool information, we are proposing to amend Item 1105(c) to require additional disclosure. As we explained in the 2004 ABS Adopting Release, we did not adopt line-item disclosure requirements for static pool information; however, we noted there may be instances where failure to provide static pool information would make the data that is presented misleading.[377] It is not always obvious why one issuer does not provide static pool information or provides alternative disclosure in lieu of such information, while another issuer within the same asset classes does provide the information. Under our proposal, issuers would be required to explain why they have not included static pool disclosure or why they have provided alternative information. We do not intend for issuers to explain why each of their static pool disclosure points differ from their competitors. However, we believe basic information about the issuer's approach to static pool disclosure would promote transparency and help investors place the disclosure in context.

2. Amortizing Asset Pools

We are proposing additional changes to the static pool disclosure requirements for amortizing asset pools. While the staff has previously noted that the static pool presentation should be governed by the general principles of materiality rather than a specific requirement in Regulation AB,[378] we are concerned that the inconsistency of presentation for delinquencies across issuers within the same asset class has resulted in a lack of clarity and comparability. Accordingly, we are proposing to add an instruction to Item 1105(a)(3)(ii) to require the static pool information related to delinquencies and losses be presented in accordance with the guidelines outlined in Item 1100(b) for amortizing asset pools. Item 1100(b) requires that information be presented in a certain manner—for example, it requires that information regarding delinquency be presented in 30-day increments through the point that assets are written off or charged off as uncollectable. Because information regarding delinquencies and losses, such as number of accounts, dollar amount and percentage of pool, should already be collected in order to report under other Regulation AB item requirements,[379] we believe it should not be overly burdensome for issuers to provide this information, and we believe that static pool disclosure would be improved with this consistent approach.

We also are proposing to amend Item 1105(a)(3)(iv) to require graphical presentation of delinquency, losses and prepayments for amortizing asset pools. We believe many asset-backed issuers already provide graphical illustrations of their static pool data. Depending on the volume and the type of data provided, the static pool data can be difficult to analyze without the use of sophisticated data analysis tools. Static pool information is important for analyzing trends within a sponsor's program by comparing originations at similar points in the asset's lives. In the 2004 ABS Adopting Release, we encouraged issuers to present information in tables or graphs if doing so would aid in the understanding of the data, such as in the sections describing the transfer of the assets, flow of funds, servicing responsibilities, pool asset composition, and periodic performance information including delinquencies.[380] Static pool disclosure has emerged as another disclosure area where graphical presentation appears to be important for an investor's understanding of the overall disclosure. Presentation of the data in this fashion better allows the detection of patterns that may not be evident from overall portfolio numbers and may reveal a more informative picture of material elements of portfolio performance and Start Printed Page 23386risk. Given the wide range of information provided by sponsors of the same asset class, we believe that graphical presentation will provide a more useful snapshot of the underlying granular information. We are proposing to require delinquency, loss and prepayments as specific line item requirements because we believe those are material characteristics applicable across all asset classes and structures and would promote transparency and comparability across issuances by the same sponsor and across sponsors. Although not required by our proposal, we also encourage graphical presentation of any other material terms.

3. Revolving Asset Master Trusts

Other than our proposals discussed above intended to apply to all issuers of asset classes and structures, we are not proposing specific changes to the static pool disclosure framework for revolving asset master trusts. However, we would like to highlight two areas concerning static pool data and these issuers. First, a practice has developed among revolving asset master trust issuers to aggregate the static pool data in tables or a graphical illustration. We believe this approach facilitates investor understanding and we encourage issuers to continue this practice.

Second, as we discuss above, we propose changes to the way static pool delinquency information would be reported for amortizing asset pools. For revolving master asset trusts, however, our rules provide a different approach for presenting static pool delinquency disclosure.[381] Commenters on the 2004 ABS Proposing Release argued there could be even more concerns about the “static” nature of the pool for these transaction structures due to changes in the master trust revolving asset pool over time and the relationship between the sponsor's retained portfolio or other securitized pools previously established by the sponsor and the master trust asset pool.[382] In response to these comments, additional incremental performance information based on asset age, or origination year, for the revolving asset pool in the master trust was adopted as an appropriate starting point. As we discussed in the 2004 ABS Adopting Release, this starting point allows an investor to distinguish performance of newer accounts comprising the master trust pool from those of more seasoned accounts.[383] Because the static pool disclosure requirement for master trusts is different from amortizing pools, we are not proposing changes to require that static pool information for revolving asset master trusts be provided in accordance with Item 1100(b) of Regulation AB. Furthermore, if our proposed amendments to Item 1121(b)(9) are adopted, all issuers, including revolving master trusts, would have to present delinquency and loss information in accordance with Item 1100(b) to satisfy the proposed periodic reporting requirement.[384] Therefore, we believe that investors would receive continuing performance data on the master trust pool, similar to the static pool data provided to investors in amortizing asset pools, because revolving asset master trust registrants would continuously report delinquency, prepayment and loss information on the pool assets through periodic reporting on Form 10-D.

Request for Comment

  • Should we adopt the changes to Item 1105 for all types of issuers (instead of only amortizing asset pools, as proposed) to require narrative disclosure of the static pool information presented, require the methodology used in determining or calculating the characteristics, and terms, and a description of how the assets in the static pool differ from the pool assets underlying the securities being offered? Would these changes help investors evaluate static pool data?
  • Should we require all issuers to provide static pool data, whether or not material?
  • Should static pool delinquency and loss information for amortizing asset pools be required to be presented in accordance with the standards in Item 1100(b)? If not, why not? Consistent with 1100(b), should delinquencies be presented through charge-off or some other shorter period of time?
  • We are proposing to require graphical presentation of delinquency, losses and prepayments for amortizing asset pools. Is this appropriate? Should we also require graphical presentation for other specific characteristics? Should we require graphical presentation of static pool information for revolving asset master trusts?
  • Should we require that static pool delinquency and loss information for revolving asset master trusts be presented in accordance with the standards in Item 1100(b)? If so, please also explain why the same information would not be reported by the registrant on a periodic basis on Form 10-D.
  • Should static pool data be required in an offering if there is an ongoing reporting requirement of asset-level data applicable to other pools of the sponsor of the same asset class? Would static pool data be informative even if there is an ongoing duty to report? How would we address issuers registered on Form SF-1 that are not required to provide ongoing information?
  • Should revolving asset master trusts continue to use a different starting point for their static pool disclosure? Should we consider any other changes to the static pool requirement for revolving asset master trusts? If so, why? Are there other starting points more appropriate for other asset classes or structures? Should we require asset specific static pool data?
  • Should we specify that issuers of ABS backed by credit cards and charge cards need to provide static pool disclosure of delinquencies, monthly payment rates and losses by both vintage origination year and by credit score? [385] Would it be useful for investors? Why or why not?
  • Typically, ABS backed by dealer floorplan receivables are structured as revolving asset master trusts. Some do not appear to present static pool disclosure for revolving asset master trusts in the manner specified in Item 1105(b). Should we provide an alternative starting point for revolving asset master trusts backed by dealer floorplans? If so, why?
  • Are there other changes we should make to the static pool disclosure requirement to make the information more useful and comparable across issuers?

4. Filing Static Pool Data

We are proposing to require all static pool information be filed on EDGAR by amending Rule 312 of Regulation S-T. We are also proposing to permit static pool disclosure to be filed on EDGAR in PDF format as an official filing.[386] As noted above, currently Rule 312 permits but does not require an asset-backed issuer to post the static pool information required by Item 1105 on an Internet Web site, rather than file the information with the prospectus on EDGAR, if certain conditions are met. Since the adoption of Rule 312 in December 2004, technological advances and expanded use of the Internet have enabled the Commission to adopt additional rules incorporating electronic Start Printed Page 23387communications. The Commission continues to recognize that, in certain circumstances and under certain conditions, the Internet can present a cost-effective alternative or supplement to traditional disclosure methods.[387]

As discussed above, we extended Rule 312 until December 31, 2010 so that the staff could continue to explore whether a filing mechanism for static pool information on EDGAR would be feasible. We received three comment letters to the Static Pool Extension Proposing Release that addressed the proposed extension.[388] Two commenters supported the extension. One of these commenters expressed a strong preference among both its issuer and investor members for Web-based presentation of static pool information due to its efficiency, utility and effectiveness and the current lack of an adequate filing alternative.[389] The other commenter expressed its belief that the accommodation has been highly successful and of great value to investors.[390] A third commenter that did not support the extension believed that the Commission should require structured disclosure using an industry standard computer language.[391]

For the reasons discussed below, we continue to believe it is preferable to have the disclosure filed with the Commission on EDGAR, and we are proposing to permit as an alternative to ASCII or HTML that the static pool information could be filed as a PDF. Filing on EDGAR would preserve continuous access to the information if a Web site is not maintained, for example, due to distress in the market or if the sponsor ceases operations.[392]

In addition, filing the disclosure on EDGAR will ensure that the data provided at the time of each offering is preserved. Some issuers have used the same Web site to centralize static pool data as well as ongoing performance data for their prior securitized pools. In the case of static pool data, updating without indicating or preserving data delivered at the time of each offering makes it difficult to determine what material was part of the prospectus.[393] While we do not want to discourage issuers from providing updated information, we believe it is important to be able to identify which information was provided at the time of the offering. Requiring filing on EDGAR would address that concern.

We also note that most of the static pool information posted on the Web sites has been provided in PDF format. In response to the Regulation AB Proposing Release, commenters argued that a Web site-based approach could provide greater dynamic functionality and utility both for the ability of issuers to present the information and the ability of investors to access and analyze the information, including interactive facilities for organizing and viewing the information.[394] While we encourage issuers to provide the data on their Web sites so that investors may take advantage of those capabilities, we believe it should be filed on EDGAR to centralize and preserve the disclosure provided at the time of the offering. Instead, we are proposing to permit the information be filed on EDGAR in PDF as an official filing. Providing the information on EDGAR also would address the concern of providing a single place for investors to retrieve all information for the offering.

We received comment at the time of the Static Pool Extension release that much of the information for prior securitized pools or the sponsor's portfolio would be similar from one transaction to the next, and a Web site would provide flexibility to allow the information to be presented in one place for multiple prospectuses, therefore, reducing the burdens of repeating the data for each prospectus.[395] However, we believe our proposal to require filing static pool disclosure on EDGAR will not pose a burden on issuers because, as we noted above, most issuers already provide static pool disclosure as PDF documents on their Web sites. And, as is the case today, our rules would allow incorporation by reference of previously filed disclosure into the prospectus for the related issuance.[396] Therefore, we are proposing to revise Rule 312 to remove the temporary accommodation set to expire on December 31, 2010 for asset-backed issuers to post the static pool information required by Item 1105 on an Internet Web site under conditions set forth in Regulation AB.

In addition, in lieu of providing the static pool information in the form of prospectus or in the prospectus for the offering, we are proposing to allow issuers to file the disclosure on Form 8-K and incorporate it by reference. In the prospectus, issuers would need to identify the Form or report on which the static information was filed by including the CIK number, file number and the date on which the static pool information was filed. We believe that this accommodation would allow more flexibility for issuers to provide static pool information and would allow users to easily search and locate static pool disclosure on EDGAR. Such information would be filed with the Form 8-K on the same date that the form of prospectus is required to be filed under proposed new Rule 424(h) and incorporated by reference into the prospectus. We are proposing to amend Form 8-K and Item 601 to add a new item requirement that would identify filings made to include static pool information.

Request for Comment

  • Would our proposal to allow static pool data to be filed in PDF on EDGAR accommodate the interests of market participants? Would another format be more appropriate? What should we consider in adopting a format? What Start Printed Page 23388should we do in the interim? What format would provide the easiest way for users to search and find static pool data on EDGAR?
  • Could PDF documents be prepared in a way that would facilitate conversion of data into a useable format? We solicit comment as to whether some other format would be an appropriate method to file static pool data on EDGAR for all market participants. Would the data need to be tagged? If so, what would be the appropriate tagging?
  • Are there any other changes we should consider making to Rule 312 of Regulation S-T?
  • We are proposing to allow, but not require, registrants to file static pool information on Form 8-K and incorporate it by reference into the prospectus, in lieu of filing it in the prospectus. Is this accommodation appropriate? Should we instead require that all static pool disclosure be filed in the prospectus?

F. Exhibit Filing Requirements

In the 2004 ABS Adopting Release, we stated that, consistent with Item 601 of Regulation S-K, governing documents and material agreements for an ABS offering such as the pooling and servicing agreement,[397] the indenture and related documents must be filed as an exhibit.[398] Item 1100(f) of Regulation AB allows ABS issuers to file agreements or other documents as exhibits on Form 8-K and, in the case of offerings on Form S-3, incorporate the exhibits by reference instead of filing a post-effective amendment. In the staff's experience with the filing of these documents, ABS issuers have delayed filing such material agreements with the Commission until several days or even weeks after the offering of securities off of a shelf registration statement.

These transaction agreements and other documents provide important information on the terms of the transactions, representations and warranties about the assets, servicing terms, and many other rights that would be material to an investor. As noted above, investors have expressed concerns regarding the timeliness of information in ABS offerings, and we believe that the information in the exhibits is an important part of the overall information package to investors. We are proposing to revise Item 1100(f) of Regulation AB to explicitly state that the exhibits filed with respect to an ABS offering registered on Form SF-3 must be on file and made part of the registration statement at the latest by the date the final prospectus is required to be filed pursuant to Rule 424.[399] ABS shelf offerings were designed to mirror non-shelf offerings in terms of filing exhibits and final prospectuses. All exhibits to Form S-1 must be filed by the time of effectiveness. Consistent with these requirements, under our proposed amendments, exhibits must be on file by the date of filing the final prospectus, upon which a new effective date for the registration statement is triggered.[400]

Request for Comment

  • Is our proposed amendment to Item 1100(f) appropriate? Is there any reason that exhibits to the registration statement could not be filed by the time the final prospectus is required to be filed under Rule 424?
  • Do investors need the complete exhibits sooner? Is it appropriate instead to require filing at the time of filing the Rule 424(h) filing? Could issuers satisfy such a requirement? Should a draft of each material agreement be required to be filed at that time if the final agreement is not available then?

G. Other Disclosure Requirements That Rely on Credit Ratings

Items 1112 and 1114 of Regulation AB require the disclosure of certain financial information regarding significant obligors of an asset pool and significant credit enhancement providers relating to a class of asset-backed securities. An instruction to Item 1112(b) provides that no financial information regarding a significant obligor, however, is required if the obligations of the significant obligor, as they relate to the pool assets, are backed by the full faith and credit of a foreign government and the pool assets are securities that are rated investment grade by an NRSRO.[401] Item 1114 of Regulation AB contains a similar instruction that relieves an issuer of the obligation to provide financial information when the obligations of the credit enhancement provider are backed by a foreign government and the enhancement provider has an investment grade rating.[402] Under both Items 1112 and 1114, to the extent that pool assets are not investment grade securities, information required by paragraph (5) of Schedule B of the Securities Act may be provided in lieu of the required financial information.[403]

In the 2008 Proposing Release, we proposed to revise Item 1112 and Item 1114 of Regulation AB to remove references to credit ratings.[404] We proposed to revise the instructions to these items so that exceptions based on investment grade ratings to the requirements of Items 1112 and 1114 of Regulation AB would no longer apply, and information required by paragraph (5) of Schedule B would be required in all situations when the obligations of a significant obligor are backed by the full faith and credit of a foreign government. We received one comment on the proposed change that supported the amendments, although the commenter noted its general opposition to the 2008 shelf eligibility proposals for ABS offerings.[405]

We are proposing again to eliminate the exceptions based on investment grade ratings. We are not aware of any benchmark comparable to an investment grade rating here, and we continue to believe the information would be readily available and therefore the proposed change would not impose substantial costs or burdens to an ABS issuer. We believe that these changes are consistent with our revisions to eliminate ratings from the shelf eligibility criteria for asset-backed issuers.

Request for Comment

  • Is it appropriate to require the information about foreign government issuers, even if their securities are rated Start Printed Page 23389investment grade, as proposed? Is there a different way to replace investment grade ratings in Items 1112 and 1114 of Regulation AB?
  • Would the proposed change impose undue burdens on issuers?
  • Would the disclosure be useful to investors?

IV. Definition of an Asset-Backed Security

As part of our effort to provide more timely and detailed disclosure regarding the pool assets to investors, we are proposing revisions to the Regulation AB definition of an asset-backed security. Currently, a security must meet the definition of an “asset-backed security” under Regulation AB [406] in order to utilize the disclosure requirements of Regulation AB and be eligible for shelf registration on Form S-3.[407] Prior to 2004, an “asset-backed security” was defined only for purposes of Form S-3 eligibility. In 2004, the Commission incorporated the basic definition of an “asset-backed security” from Form S-3 into Regulation AB. This definition requires, among other things, that the security be primarily serviced by the cash flows of a discrete pool of assets.[408]

In the 2004 ABS Adopting Release, we noted that the definition of “asset-backed security” outlines the parameters for the types of securities that are appropriate for the alternate disclosure and regulatory regime provided by Regulation AB.[409] We also noted that the further a security deviates from the core purpose of the definition, the more acute the concerns, which include concerns regarding the sufficiency of disclosure to investors, are that the security should not be treated in the same way as other securities that meet the definition.[410] If a security does not meet the definition under Regulation AB, the offering may still be registered with the Commission on Form S-1. As noted in the 2004 ABS Adopting Release, the staff has worked with issuers offering structured securities outside the Regulation AB definition of an asset-backed security to develop appropriate disclosures under our regulations for such securities.[411]

A core principle of the Regulation AB definition of an asset-backed security is that the security is backed by a discrete pool of assets that by their terms convert into cash, with a general absence of active pool management. However, in response to commenters and previous staff interpretation, we adopted certain exceptions to the “discrete pool” requirement in the definition of asset-backed security to accommodate master trusts, prefunding periods, and revolving periods.[412] Based on our experience with the definition, we are concerned that pools that are not sufficiently developed at the time of an offering to fit within the ABS disclosure regime may, nonetheless, qualify for ABS treatment, which may result in investors not receiving appropriate information about the securities being offered.[413] Consequently, we are proposing amendments to these exceptions to address these concerns. We believe that our proposals would restrict deviations from the discrete pool of assets requirements without substantially changing market practice.[414]

First, we are proposing to carve back the availability of the exceptions to the discrete pool requirement. We are proposing to amend the master trust exception for securities that are not backed by assets that arise out of revolving accounts.[415] Under the existing requirement, securitizations that are not backed by such revolving account assets—for example, mortgages—qualify for an exception from the discrete pool requirement of the definition of an asset-backed security. As a result, additional assets that are non-revolving can be added to the pool of assets backing all the securities issued by the master trust in connection with subsequent offerings of securities. While we do not believe that it is important to repeal the accommodations for revolving assets under Regulation AB, we also do not believe that there is a similar need to accommodate an exception to the discrete pool requirement for offerings backed by non-revolving assets. In light of concerns, which we have noted above, about sufficient disclosure about the pool assets, we are proposing to revise the definition of an asset-backed security to restrict the use of Regulation AB for master trust issuers backed by non-revolving assets. Under our proposed revision, if the master trust is not supported by assets arising out of revolving accounts, the securitization would no longer qualify for the exception.[416] We believe that it is appropriate to carve back on the expansion of the definition of an asset-backed security that was provided in 2004 [417] so that investors have sufficient information relating to the pool assets.[418]

Second, we are proposing to limit further the number of years for revolving periods of non-revolving assets. The current provision allows the offering to contemplate a revolving period where cash flows from the pool assets may be used to acquire additional pool assets, provided, that for securities backed by non-revolving assets, the revolving period does not extend for more than three years from the date of issuance of the securities and the additional pool assets are of the same general character as the original pool assets.[419] We are proposing to reduce the permissible duration of the revolving period from three years to one year.[420] While we have not experienced Start Printed Page 23390problems with the use of this feature to date, we believe that a one-year revolving period limit would help to better ensure that investors have sufficient information about their securities by limiting the amount of time that assets may be added to the pool.

Third, we are proposing to decrease the limit on the amount of prefunding permitted by the prefunding exception to the discrete pool requirement. During prefunding periods, pool assets may be added within a specified period of time after the issuance of the asset-backed securities using a portion of the offering proceeds. Under the existing requirement, the amount of prefunding may not exceed 50% of the offering proceeds, or, in the case of master trusts, 50% of the aggregate principal balance of the total asset pool whose cash flows support the asset-backed securities.[421] We propose to lower this ceiling to 10% of the offering proceeds or, for master trusts, 10% of the aggregate principal balance of the total asset pool whose cash flows support the asset-backed securities.[422] We believe that the combination of shortening the revolving period and lowering the ceiling of prefunding, as proposed, should better align the offerings that use these features with our goal of maintaining the integrity of the discrete pool requirement in offerings that use these features, consistent with investor demand for more meaningful asset-level data.[423]

Requests for Comment

  • Is the proposed revision relating to master trusts not backed by revolving account assets appropriate? Are there any asset classes or types of ABS issuers that would be excluded from the revised definition of an asset-backed security that should not be?
  • Is it appropriate for ABS structured as master trusts that are backed by non-revolving accounts to register on S-1? How would existing and prospective investors be able to analyze the pool if it is constantly changing? Please be specific in your response.
  • Is 10% the appropriate ceiling for the amount of permissible prefunding? Should that amount be higher (e.g., 20%, 30%, 40%), lower (e.g., five percent), or disallowed altogether under the definition of an asset-backed security? Under the existing definition, the duration of the prefunding period is limited to one year from the date of issuance of the asset-backed securities. Should the one-year limitation be shortened?
  • Is the one-year permissible length of the revolving period for non-revolving assets, as proposed, the appropriate amount of time? Should the permissible length be a different amount of time (e.g., two years)? Should any other amendments be made to the allowance for revolving periods?

V. Exchange Act Reporting Proposals

A. Distribution Reports on Form 10-D

We are proposing to revise General Instruction C.3. of Exchange Act Form 10-D. The instruction provides that if information required by an Item has been previously reported, the Form 10-D does not need to repeat the information.[424] Because information that is previously reported may relate to a different issuer from the issuer to which the report relates, such information may be difficult to locate, and therefore, we believe a clear reference to the location of the previously reported information should be provided in the Form 10-D.[425] We are proposing to amend Form 10-D to require disclosure of a reference to the Central Index Key number, file number and date of the previously reported information.

We also are proposing to add a new requirement to Item 1121 of Regulation AB to address concerns about the activities of parties obligated to repurchase assets for breach of a representation or warranty in declining trustee or investor demands to repurchase assets from the pool for a possible breach of a representation or warranty.[426] Under this proposed new item requirement, for the assets in the pool backing securities covered by the distribution report, the report would be required to contain disclosure relating to the amount of repurchase demands made of the obligated party during the period covered by this report for the assets in the pool of securities covered by this report.[427] This new item requirement would require disclosure of any demands made of the obligated party in the period covered by the report to repurchase the assets in the pool backing the securities due to a breach in the representations and warranties concerning the pool assets as provided in the transaction agreements. This disclosure would include the percentage of that amount that was not then repurchased or replaced by the originator. Of those assets that were not then repurchased or replaced, we would require disclosure whether an opinion of a third party not affiliated with the obligated party had been furnished to the trustee that confirms that the assets did not violate a representation or warranty.

In addition, we are proposing to reverse our position for delinquency presentation in periodic reports. In the 2004 ABS Adopting Release, we stated that delinquency and loss information for the Form 10-D reporting period, like the other listed items in Item 1121(a) of Regulation AB, is based on materiality, and not on Item 1100(b) of Regulation AB.[428] Item 1100(b) outlines the minimum requirements for presenting historical delinquency and loss information, such as requiring delinquency experience be presented in 30 or 31 day increments, through the point that assets are written-off or charged-off as uncollectible.[429] Therefore, consistent with our efforts to standardize the disclosure across all ABS, we are proposing to add an instruction to Item 1121(a)(9) to provide pool-level disclosure in periodic reports in accordance with Item 1100(b) of Regulation AB.

Further, we are proposing to revise the cover page of the Form 10-D to include the name and phone number of the person to contact in connection with the filing. This information would assist the staff in its review of asset-backed filings.[430]

Start Printed Page 23391

Request for Comment

  • Should we amend, as proposed, Form 10-D to require disclosure of a reference to the Central Index Key number, file number and date of the previously reported information?
  • Should we amend, as proposed, Item 1121 to require disclosure regarding the amount of repurchase demands made of the obligated party during the period covered by the report for the assets in the pool of securities covered by the report? Should we require, as proposed, disclosure regarding the percentage of those assets that were subject to a repurchase demand that were not repurchased? Should we also require, as proposed, disclosure whether an opinion of a third party not affiliated with the obligated party had been furnished to the trustee that confirms that the assets that were not repurchased or replaced did not violate a representation or warranty.
  • Should we add, as proposed, an instruction to Item 1121(a)(9) to provide pool-level disclosure in periodic reports in accordance with Item 1100(b) of Regulation AB?
  • Should we specify the format for reports on Form 10-D? Should we specify line items that issuers must disclose in order to meet the requirements in current Item 1121 of Regulation AB (e.g., disclosure of sources and uses of monthly cash flows, changes in asset pool balance from the beginning to the end of the reporting period)? For instance, in the case of a credit card master trust, should we specify line item disclosure for changes in the assets of the trust (e.g., beginning balance, amount of account additions, amount of accounts withdrawn, amounts collected, gross charge-offs, and ending balance)? [431]

B. Servicer's Assessment of Compliance With Servicing Criteria

The Form 10-K report of an asset-backed issuer is required to contain, among other things, an assessment of compliance with servicing criteria that is set forth in Item 1122 of Regulation AB [432] by each party participating in the servicing function.[433] The servicer's assessment is filed as an exhibit to the report, and the body of the Form 10-K report must also contain disclosure regarding material instances of non-compliance with servicing criteria.[434] In order to provide enhanced information regarding instances of non-compliance with servicing criteria with respect to the offering to which the report relates, including information on steps taken to address non-compliance, we are proposing to expand the disclosure required to be contained in the body of the Form 10-K. We are also proposing to codify certain staff positions with respect to the servicer's assessment, as we believe codifying these positions will make them more transparent and readily available to the public.

A particular servicer may provide servicing for several asset-backed issuers that may not be related. As discussed in the 2004 ABS Adopting Release and in an instruction to Item 1122, the servicer's assessment is required to be made at the platform level,[435] which means the servicer's assessment should be made 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.[436] Typically, one servicer's assessment relating to several issuers backed by the same type of assets will be filed as an exhibit to each of the issuers' Forms 10-K. Therefore, it may not be clear whether the asset-backed securities covered in the Form 10-K report may have been impacted by the material instance of non-compliance.

In order to elicit disclosure regarding the material instances of non-compliance with respect to the particular securities to which the Form 10-K report relates, we are proposing to require that, along with disclosure of material instances of noncompliance with servicing criteria, the body of the annual report also disclose whether the identified instance of noncompliance involved the servicing of the assets backing the asset-backed securities covered in the particular Form 10-K report.[437]

We are also proposing to require that the body of the annual report discuss any steps taken to remedy a material instance of noncompliance previously identified by an asserting party for its activities made on a platform level. This disclosure would be required whether or not the instance of non-compliance involved the servicing of assets backing the securities covered in the particular Form 10-K. We believe that if a material instance of non-compliance exists at the platform level, investors should know whether any steps have been taken to remedy the material instance of non-compliance.

We also are proposing to codify certain staff positions issued by the Division of Corporation Finance relating to the servicer's assessment requirement, with some modification. First, we are proposing to codify a staff interpretation relating to aggregation and conveyance of information between a servicer and another party (who may also be a servicer for purposes of the servicer's assessment requirement). In the fulfillment of its duties as set forth in transaction agreements, a servicer will often provide information to another party. Such information conveyed is generated by a servicing activity that falls under a particular criterion in Item 1122(d). Likewise, the second servicer may use the information in a servicing activity that falls under a particular criterion in Item 1122(d). While the conveyance of information to another party is not explicitly contained in any of the criterion in Item 1122(d), the staff in the Division of Corporation Finance has taken the position that the accurate conveyance of the information is part of the same servicing criterion Start Printed Page 23392under which the activity that generated the information is assessed.[438]

We are now proposing to codify the staff's interpretation; however, unlike the staff's position that the conveyance of the information is part of the same servicing criterion under which the activity that generated the information is assessed, we are proposing to add a new servicing criterion to Item 1122. This new criterion, as proposed,[439] would state that if information obtained in the course of duty is required by any party or parties in the transaction in order to complete their duties under the transaction agreements, the aggregation of such information, as applicable, is mathematically accurate and the information conveyed accurately reflects the information that was obtained. Any servicer that is responsible for either aggregation or conveyance of information should assess whether there are any instances of noncompliance with respect to such activities that should be reported under the proposed criteria. We are proposing a new criterion because we believe that a separate criterion for the accurate aggregation and conveyance of information to other parties would better elicit disclosure regarding a servicer's compliance with its duties.

In a publicly available telephone interpretation,[440] the staff explained that the platform for reporting purposes should not be artificially designed, but rather, it should mirror the actual servicing practices of the servicer. However, the staff also noted that if in the conduct of servicing the transactions, the servicer has made divisions in its servicing function by geographic locations or among separate computer systems, the servicer may take these factors into account in determining the platform for reporting purposes. Absent changes in circumstances such as a merger between services, we expect that the groupings of transactions included in a platform would remain constant from period to period. Also, if the servicer includes in its platform less than all of the transactions backed by the same asset type that it services, we expect a description of the scope of the platform would be included in a servicer's report submitted pursuant to Item 1122.

We are proposing to codify these interpretations relating to the scope of the Item 1122 servicer's assessment in an instruction to Item 1122. The proposed instruction also states that the servicer's assessment should cover, except if disclosure is provided as required below, all asset-backed securities transactions involving such party and that are backed by the same asset type backing the class of asset-backed securities which are the subject of the Commission filing. The proposed instruction states that the servicer may take into account divisions among transactions that are consistent with the servicer's actual practices. However, if the servicer includes in its platform less than all of the transactions backed by the same asset type that it services, the proposed instruction provides that a description of the scope of the platform should be included in the servicer's assessment.

Request for Comment

  • Would additional disclosure in the body of the Form 10-K as to whether the identified instance of noncompliance involved the servicing of the assets backing the asset-backed securities covered in the particular Form 10-K report, as we are proposing to require, provide investors with meaningful additional disclosure that is not already covered by the existing requirements? Would the proposed requirement to disclose any steps taken to remedy the previously identified instances of noncompliance provide helpful information to investors?
  • Should we, as proposed, add a separate criterion addressing the accurate aggregation and conveyance of information by one servicer to another party who must use the information in the performance of its duties? Would it be better not to add the criterion but instead revise Item 1122 to provide, similar to the staff's position, that accurate conveyance of the information is part of the same servicing criterion under which the activity that generated the information is assessed? Should timeliness of conveyance of this information also be included as part of the proposed servicing criterion?
  • Should we codify prior staff interpretations relating to the scope of Item 1122 by adding the proposed instruction? Does the proposed instruction to Item 1122 reflect current servicer's practices? Do servicers conduct servicing in any ways different from what is contemplated in the proposed instruction?

C. Form 8-K

1. Item 6.05

Item 6.05 of Form 8-K [441] applies to asset-backed securities offerings registered on Form S-3 and, if our proposed amendments are adopted, will apply to offerings registered on Form SF-3. Under the existing item requirement, if any material pool characteristic of the actual asset pool at the time of issuance of the securities differs by five percent or more (other than as a result of the pool assets converting to cash in accordance with their terms) from the description of the asset pool in the prospectus filed for the offering pursuant to Securities Act Rule 424, the issuer must provide certain disclosure regarding the actual asset pool, such as that required by Item 1111 and 1112 of Regulation AB.

In light of the new requirements regarding asset-level disclosure, which reflect the significance of the composition of the assets, we are proposing to revise Item 6.05 of Form 8-K to require that the issuer file a current report with disclosure pursuant to Item 1111 and Item 1112 if any material pool characteristic of the actual asset pool at the time of issuance of the asset-backed securities differs by one percent or more from the description of the asset pool in the prospectus filed for the offering pursuant to Securities Act Rule 424 (other than as a result of the pool assets converting into cash in accordance with their terms). We believe that changes below one percent are likely de minimis changes. We believe that except for the assets acquired through prefunding, the assets of the pool underlying the securities should be set and described in the prospectus. For shelf offerings, much of this information would already be provided by means of the Rule 424(h) filing. We remind issuers that information about significant changes in pool asset composition provided to an investor after the sale may not have been adequately conveyed at the time of Start Printed Page 23393sale for the purpose of Securities Act Rule 159.[442]

The item, as proposed to be revised, also requires a description of the changes that were made to the asset pool, including the number of assets substituted or added to the asset pool.[443] In some transactions, the pooling and servicing agreement may provide for investments of cash collections and reserve funds in “eligible” or “permitted” investments.[444] However, even though investments of cash collections are contemplated at the time of the offering, the investment of cash collections and reserve funds may be a material change to the asset pool. Consequently, disclosure of the change would be required under Item 6.05 of Form 8-K.

Request for Comment

  • Should we revise Item 6.05 of Form 8-K as proposed? Is 1% an appropriate threshold to trigger disclosure on Form 8-K? Should it be higher or lower such as 0.5% or 2%?
  • Is the language for the proposed item appropriate?
  • Should we also require, as proposed, a description of the changes to the asset pool?
  • Should we provide by rule that changes in pool assets of more than 10% (or some other amount) from the description of the asset pool in the prospectus filed pursuant to Rule 424 must be conveyed to investors for purposes of Rule 159?
  • How often would ABS issuers cross the 1% threshold? We propose, above, to eliminate the current exception to the shelf eligibility condition that requires timely filing of an Item 6.05 Form 8-K. Is there a risk that pool assets may change by more than 1% without the sponsor being aware soon enough that an issuing entity has crossed this threshold in order to be able to comply with the shelf eligibility criteria, as proposed to be revised? If so, how should we address that risk while still providing incentive for timely compliance?

2. Change in Sponsor's Interest in the Securities

We are proposing to add a new item to require the filing of a Form 8-K to describe any material change in the sponsor's interest in the securities. Under this Item, a Form 8-K would be required to be filed if there is a material change in the sponsor's interest in the securities. We believe that such disclosure would assist an investor in monitoring the sponsor's interest in the securities, including its retention of risk in connection with the proposed shelf eligibility requirements discussed above. Under the proposal, the report on Form 8-K would be required to include disclosure of the amount of change in interest and a description of the sponsor's resulting interest in the transaction.

Request for Comment

  • Should we require, as proposed, the issuer to file a Form 8-K if there is a material change in the sponsor's interest in the securities? Should we provide a quantitative measure for the trigger for disclosure on Form 8-K? For example, should we require the filing of a Form 8-K if the sponsor's interest has changed by 1%, 5% or 10%?
  • Is the proposed disclosure that would be required to be provided on Form 8-K appropriate? Would other types of disclosure provide more useful information for investors?
  • Should we also require the issuer to file a Form 8-K if an originator's interest in the securities has changed? If such a requirement were adopted, what would be the costs of monitoring an originator's interest?
  • Should we instead require that the issuer file a report each fiscal quarter that discloses the scope of the sponsor's interest in the securities as of a particular date? If so, what date should that be?

D. Central Index Key Numbers for Depositor, Sponsor and Issuing Entity

We are proposing amendments to make it easier for interested parties to locate the depositor's registration statement and periodic reports associated with a particular offering and information related to the sponsor of the offering. Currently, ABS offerings with a particular file number may be associated with a registration statement with a different file number. Further, Forms 8-K for ABS offerings may be filed under the depositor file number, making it difficult to track material for the related offering with only the information provided in the Form 8-K. In order to facilitate the ability of investors to find information that is filed on EDGAR relating to the depositor, the issuing entity and the sponsor more easily, we are proposing to require that the cover pages of registration statements on Form SF-1 and Form SF-3 include the CIK number of the depositor, and if applicable, the CIK number of the sponsor.[445] We are also proposing to require that the cover pages of the Form 10-D, Form 10-K, and Form 8-K for ABS issuers include the CIK number of the depositor and of the issuing entity, and if applicable, the CIK number of the sponsor.

Request for Comment

  • Should we require, as proposed, CIK numbers for the depositor, the issuing entity, and the sponsor (if applicable) on the cover pages of Forms 10-K, 10-D and 8-K for ABS issuers? Should we require, as proposed, CIK numbers for the depositor and the sponsor (if applicable) on the cover pages of proposed Forms SF-1 and SF-3?
  • Are there any other changes we should make to the forms to make it easier to locate materials related to an ABS offering or ABS issuer?

VI. Privately-Issued Structured Finance Products

We are proposing significant revisions to the safe harbors for exempt offerings and resales of asset-backed securities. In the U.S., all CDO issuances have taken place in the private exempt markets. An offering of CDOs in the private market typically is a two-step process involving an exempt private sale by the issuer to one or more initial purchaser or purchasers [446] under Section 4(2) of the Securities Act [447] immediately followed by a private resale by the initial purchaser or purchasers to eligible investors made in reliance on the Securities Act Rule 144A safe harbor.[448] In addition, while it may not be typically used in the private market for structured finance products, Rule 506 [449] of Regulation D [450] provides any issuer, regardless of the type of security it issues, a safe harbor for the Section 4(2) private offering exemption from Securities Act registration.

Securitization in the private, unregistered market played a significant role in the financial crisis. In particular, the CDO market has been cited as Start Printed Page 23394central to the crisis.[451] While the CDO market comprised a large part of the capital market at the time of the financial crisis,[452] many have asserted that the lack of information about CDOs and other structured securities in the private market exacerbated the harm to investors and the markets as a whole during the financial crisis.[453] In addition, other market participants and regulators did not have access to important information about this significant component of the capital markets.[454] Further, the costs of information asymmetry for ABS issuances can differ significantly from those incurred in the issuances of most other securities. Asset-backed securities are issued by single purpose issuers whose only business purpose is holding financial assets and may involve numerous parties that participate in the chain of securitization (i.e., originator, sponsor, servicer, etc.). Thus, unlike the securities of other companies where information needed to value the securities might be able to be gleaned from a review of basic summary information and discussions with management, information about the assets and the parties in the securitization chain facilitates an understanding of the valuation of asset-backed securities. To address these concerns, we are proposing revisions relating to Rule 144A offerings of structured finance products and Rule 506 of Regulation D to provide for specific disclosures for private offerings of structured finance products, as well as additional public information about private structured finance products offerings conducted in reliance upon these safe harbors.

We acknowledge that the steps we are proposing to take in the private placement market are significant. We recognize that structured finance products issuers may conduct offerings in reliance on a statutory exemption under the Securities Act without seeking the safe harbor provided by Rule 506 of Regulation D or without representing that the securities are eligible for sale under Rule 144A.[455] As a result, our proposed amendments to the safe harbors would not apply to these offerings, and as such, may not fully address the concerns we seek to address in all securitization transactions.

A. Rule 144A and Regulation D

We adopted Securities Act Rule 144A [456] in 1990.[457] The rule provides a safe harbor for a reseller of securities from being deemed an underwriter within the meaning of Sections 2(a)(11) and 4(1) of the Securities Act for the offer and sale of non-exchange listed securities to “qualified institutional buyers” (QIBs), as defined in Rule 144A. The Rule 144A safe harbor can be claimed only by persons other than the issuer. The safe harbor has been utilized to develop a private market for collateralized debt obligations and other asset-backed securities [458] that may not meet the definition of an asset-backed security under Regulation AB, and, therefore, are not eligible for the particularized regulation regime of Regulation AB.[459]

One condition of the Rule 144A safe harbor requires the issuer to provide the security holder or a prospective purchaser designated by the security holder, certain information relating to the issuer, which is required to be reasonably current in relation to the date of resale under the rule.[460] To satisfy the rule, the information must be provided upon the security holder's request, or the prospective purchaser must have received such information at or prior to the time of sale, upon the prospective purchaser's request to the security holder or issuer. In the original adopting release for Rule 144A, we noted that this condition had been proposed in response to commenters' concerns regarding the lack of available information about issuers in the exempted transaction.[461]

This information requirement in Rule 144A delineates the type of information that should be provided by corporate issuers.[462] However, there is no discussion in the text of the rule regarding the type of information that is required for ABS offerings. In the original adopting release for Rule 144A, we stated that the information requirements in Rule 144A with respect to asset-backed issuers require, “basic, material information concerning the structure of the securities and distributions thereon, the nature, performance and servicing of the assets supporting the securities, and any credit mechanism associated with the securities.” [463] Under these requirements, purchasers of asset-backed securities in Rule 144A transactions may receive only a minimal Start Printed Page 23395amount of information about their investment.

Under the existing provisions in Regulation D, when the issuer sells securities in reliance on Rule 506 to a purchaser that is not an “accredited investor,” as defined in Regulation D, an issuer must furnish information akin to what is required in a registration statement on Form S-1.[464] The prescribed information, however, need not be provided to a purchaser that is an accredited investor. Except for a few types of ABS, we believe that investors in privately issued asset-backed securities typically would qualify as accredited investors, and therefore, issuers would not be required to provide the prescribed information to them in order rely on Rule 506 of Regulation D for the sale of the securities. Thus, if an ABS issuer were to rely on Rule 506 of Regulation D for the sale of its securities, purchasers in the offering may receive only a minimal amount of information regarding the securities, though they may request the information that they desire.

B. Proposed Information Requirements for Structured Finance Products

1. General

In order to address concerns about the lack of information available to investors in the private markets for structured finance products, we are proposing amendments to our safe harbors and new related rules regarding the information that must be made available to investors in privately-issued asset-backed securities. In summary, we are proposing to:

  • Require that, in order for a reseller of a “structured finance product” to sell a security in reliance on Rule 144A, or in order for an issuer of a “structured finance product” to sell a security in reliance on Rule 506 of Regulation D:

○ The underlying transaction agreement for the securities must grant to purchasers, holders of the securities (or prospective purchasers designated by the holder) the right to obtain from the issuer of such securities the information, upon request, that would be required if the transaction were registered under the Securities Act and such ongoing information as would be required by Section 15(d) of the Exchange Act if the issuer were required to file reports under that section; and

○ The issuer must represent that it will provide such information.

  • Conform the informational requirement of Securities Act Rule 144 [465] to the above revisions; and
  • Add a new Securities Act rule that would require a structured finance product issuer that had represented and covenanted to provide information as proposed to be required by Rule 144, Rule 144A and Rule 506 of Regulation D to provide such information, upon request.

2. Application of Proposals

Our proposals would apply to a “structured finance product,” which would be more broadly defined than the Regulation AB Item 1101(c) definition of “asset-backed security” in order to reflect the wide range of securitization products that are sold in the private markets. In addition to traditional “asset-backed securities,” the proposed definition of “structured finance product” would cover:

  • A synthetic asset-backed security; or
  • A fixed-income or other security collateralized by any pool of self-liquidating financial assets, such as loans, leases, mortgages, and secured or unsecured receivables that entitles its holder to receive payments that depend on the cash flow from the assets—including:

○ An asset-backed security as used in Item 1101(c) of Regulation AB (§ 229.1101(c));

○ A collateralized mortgage obligation;

○ A collateralized debt obligation;

○ A collateralized bond obligation;

○ A collateralized debt obligation of asset-backed securities;

○ A collateralized debt obligation of collateralized debt obligations; or

○ A security that at the time of the offering is commonly known as an asset-backed security or a structured finance product.[466]

We believe that the enumerated characteristics in our proposed definition generally distinguish structured finance products from other types of securities. This proposed definition of structured finance product would encompass certain managed asset-backed securities (where a manager is appointed and paid fees to make changes to the collateral or a referenced portfolio). In this proposed definition, there would be no requirement of a discrete pool of assets so as to include CDOs, which are typically managed for some period of time.[467]

3. Information Requirements

We are proposing to condition the safe harbors of Rule 144A and Rule 506 of Regulation D on a requirement that, if the securities offered or sold are structured finance products, an underlying transaction agreement (such as an indenture or servicing agreement) must contain a provision requiring the issuer to provide specified information to any purchaser (and also, in the case of Rule 144A, any security holder or prospective purchaser designated by the security holder).[468] Also, the issuer must represent that it will provide such information upon request. For securities to be eligible for resale under Rule 144A, we would require that an underlying transaction agreement grant any initial purchaser, any security holder or any prospective purchaser designated by a security holder the right to obtain from the issuer promptly, upon the request of the purchaser or security holder, information as would be required if the offering were registered on Form S-1 or Form SF-1 under the Securities Act and any ongoing information regarding the Start Printed Page 23396securities that would be required by Section 15(d) of the Exchange Act if the issuer were required to file reports under that section. For an offering made in reliance on Rule 506 of Regulation D, we would require that an underlying transaction agreement contain a provision granting any purchaser in the Rule 506 offering the right to obtain from the issuer promptly, upon the purchaser's request, information that would be required if the offering were registered on Form S-1 or Form SF-1 under the Securities Act.

The specific disclosure that would need to be provided to satisfy this condition would vary depending on the type of security offered. For an offering of structured finance products where the securities meet the Regulation AB definition of an asset-backed security, the disclosure requirements of Form SF-1 would apply. For offerings of structured finance products where the securities fall outside the Regulation AB definition, the requirements of Form S-1 would apply. In the latter case, the issuer would be required to provide information required under Regulation AB regarding the assets and parties as well as additional information required under Regulation S-K.[469] For a managed CDO offering, we would expect disclosure regarding the asset and collateral managers, including fees and related party transaction information, their objectives and strategies, any interest that they have retained in the transaction or underlying assets, and substitution, reinvestment and management parameters. For a synthetic CDO offering, we would expect, among other things, disclosure of the differences between the spreads on synthetic assets and the market prices for the assets, the process for obtaining the credit default swap or other synthetic assets, and the internal rate of return to equity if that was a consideration in the structuring of the transaction.

4. Proposed Rule 144 Revisions

In addition, we are proposing to revise Securities Act Rule 144. Rule 144 creates a safe harbor for the sale of securities under the exemption set forth in Section 4(1) of the Securities Act. One of the conditions of Rule 144 requires the availability of adequate current public information with respect to the issuer of the securities (“the current public information requirement”). This current public information requirement is only at issue if the seller who is relying on Rule 144 is an affiliate of the issuer.[470] Under Rule 144, affiliates of non-reporting companies may resell securities in reliance on the rule only after the securities have been held for at least one year after purchase and if certain conditions are met, including the current public information requirement.

We are proposing to revise the current public information requirement in Rule 144 for non-reporting issuers of structured finance products. If the securities are structured finance products, and the issuer of the securities is not subject to the reporting requirements of Section 13 or 15(d) of Exchange Act, then in order to satisfy the current public information requirement, two conditions must be satisfied. First, the underlying transaction agreement of the issuer must grant any purchaser, any security holder and any prospective purchaser of the securities designated by the holder the right to obtain, upon request of the purchaser or security holder, information that would be required if the offering were registered on Form S-1 or Form SF-1 under the Securities Act and any ongoing information regarding the securities that would be required by Section 15(d) of the Exchange Act, if the issuer were required to file reports under that section. Second, the issuer must have represented that it would provide such information to the purchaser, security holder, or prospective purchaser, upon request of the purchaser or security holder.

5. New Rule 192 of the Securities Act

We are proposing new Rule 192 to require an issuer of privately-issued structured finance products to provide, upon the investors' request, information as would be required if the transaction were registered (or ongoing information). If an issuer of structured finance products has represented and covenanted to provide such offering information in order to rely on Rule 506 of Regulation D or has represented and covenanted to provide both offering or ongoing information pursuant to the proposed new provision of Rule 144A or Rule 144, then the issuer must provide such information, upon request of the purchaser or security holder. Recent events have shown the importance of structured finance product issuers complying with a representation to provide initial and ongoing information to security holders and prospective purchasers.[471] In making investment decisions, ABS investors should be able to rely on the continued availability of information to themselves and prospective purchasers as a prophylactic measure against the possibility of fraud. Indeed, failure to provide such information upon request may constitute a fraud in the offer of securities.[472] Thus, the Commission could bring an enforcement action under this rule against an issuer that failed to provide the required information.

The obligation to provide information under proposed new Rule 192 would not be a condition of the Rule 144, Rule 144A, or Regulation D safe harbors. As proposed new conditions of the safe harbors for structured finance products, the underlying transaction agreements must contain the specified representations and covenants to provide information. If the issuer does not include the representation and covenant, it would have failed to satisfy the safe harbor and may not be entitled to the exemption under Sections 4(1) or 4(2), as applicable. If, on the other hand, the transaction agreements contain the representation and covenant but the issuer fails to provide, for example, Start Printed Page 23397some of the information to a security holder or prospective purchaser, upon their request, that failure, in and of itself, would not mean the conditions of the safe harbor would not have been met. We have concerns that a potential claim arising under Section 5 of the Securities Act may not be the appropriate remedy under these circumstances but believe it appropriate that there be regulatory consequences. Investors should nevertheless be able to take appropriate action under those transaction agreements regarding the provision of information and the Commission could bring an action for violation of Rule 192.

Request for Comment

  • We recognize that our proposals would impose significant changes to the existing requirements in the safe harbors for private offers, sales and resales of structured finance products, and we request comment on all aspects of our proposed approach. This will be the first time, for example, that we would require an undertaking to provide information to accredited investors as a condition to the safe harbor in Rule 506 of Regulation D, and the first time we would require an undertaking to provide such specific information to QIBs in Rule 144A transactions. While we recognize that the proposals may impose substantial additional requirements on ABS issuers in the private market, we believe that, if adopted, these proposals would help to provide needed transparency in the private markets for structured finance products. As a practical matter, how feasible will an exempt private offering be in light of the requirements? Is the rationale offered for distinguishing ABS from other securities for purposes of our proposal appropriate?
  • We request comment on the proposed definition of “structured finance products” for purposes of our proposed revisions to Rule 144A, Regulation D and other rules. Is the proposed definition appropriate? Should other types of securities be included that are not included? Should any types of included securities not be?
  • Is it appropriate to require, as proposed, that as a condition of Rule 144A, the transaction agreements contain a provision that would require an issuer of structured finance products to provide to investors promptly, upon investors' request, such information that would be required if the offering were registered on Forms S-1 or SF-1 and any ongoing information regarding the securities as would be required by Section 15(d) of the Exchange Act if the issuer were required to file reports under that section? Is it appropriate to require, as proposed, the same requirement as a condition of Rule 506 of Regulation D for sales to accredited investors?
  • Should we require instead that, as a condition of Rule 144A, issuers make the required information (both offering and ongoing information) available at all times, rather than only upon investor's request? Could an issuer, for example, be required to post the information on a password-protected Web site?
  • Is new Rule 192 appropriate? Should we require, as a matter of federal securities law, that an issuer of structured finance products that has represented and covenanted to provide information pursuant to the safe harbors under Rule 144A, Regulation D, or Rule 144 provide such information?
  • Should we provide more specificity in the rules covering what disclosure would be required to be provided? If so, what types of disclosure should we specifically require? Should the required disclosures differ by type of security? If so, in what way?
  • Are our proposals with respect to ongoing information regarding the securities appropriate? Is there any reason that we should not require structured finance product issuers that utilize the safe harbors to comply with the proposed requirements for ongoing information?
  • Is our proposed approach of requiring the transaction agreements to contain a provision requiring the issuer to provide information upon request appropriate? Should we instead condition the availability of the safe harbors of Rule 144A and Regulation D on the actual provision of the information if the securities sold are structured finance products? Would that approach have a chilling effect on the private markets if not providing some of the information required under our revised rule might raise the possibility of a Section 5 violation, with the resultant rescission right under Section 12(a)(1)? If so, should we address that potential concern by providing that no failure to provide information as required solely under such a provision of Rule 144A would result in a loss of the safe harbor for purposes of Section 12(a)(1) liability as long as the other conditions of Rule 144A are satisfied and basic material information concerning the securities is provided, including information regarding the structure of the securities, distributions on the securities, nature, performance and servicing of the assets, and any credit enhancements? Such an approach would be designed to enable the Commission to bring an action, if appropriate, based on Section 5 if the required information were not provided while limiting litigation by a purchaser seeking to rescind the transaction to situations where there was a significant failure to provide basic information. By contrast, is it necessary or appropriate to rely on the possibility of a rescission right to foster compliance with the proposed information requirements?
  • Are our proposed amendments to Rule 506 of Regulation D appropriate? Should we require, as proposed, that information regarding structured finance products be provided to any purchaser, regardless of whether the purchaser meets the definition of an accredited investor?
  • Should our proposed conditions apply to offerings made pursuant to Rule 505, which are made under the Securities Act Section 3(b) exemption from registration rather than Section 4(2)? How likely would it be for issuers of structured finance products to conduct Rule 505 offerings?
  • Instead of amending Rule 506, should we adopt a new Regulation D safe harbor just for structured finance products? Since it appears that issuers of structured finance products have relied on the statutory private placement exemption rather than Regulation D, would such a safe harbor be used?
  • Even if there was not extensive use of Regulation D for private offerings of structured finance products, is it necessary or appropriate for us to amend Rule 506 of Regulation D, as proposed, in order to forestall potential future problems in the private markets for structured finance products?
  • Is our proposed amendment to Rule 144 appropriate?
  • As proposed, the revisions to Rule 144A, Regulation D and Rule 144 require that the underlying transaction agreement include a provision that the issuer provide information to investors upon request. Should we revise the requirement to provide that the servicer, collateral administrator or some other party provides the information?
  • The proposed revisions to Rule 144A, Regulation D, and Rule 144 also require that the issuer represent that prescribed information would be provided to investors. Is the proposal appropriate?
  • Would the proposed rule revisions provide investors and market participants with sufficient transparency regarding private sales of structured finance products? Would additional or other requirements promote greater transparency? For example, should we make the safe harbors, such as Rule 144A, unavailable Start Printed Page 23398for offerings of structured finance products? Would this result in structured finance products being offered and sold in registered transactions, or in private transactions without the benefit of the safe harbor? Would a new safe harbor for private ABS offerings designed to make information available to investors and the market (e.g., a limited public offering exemption) be a more appropriate approach?
  • The proposed amendments would have the effect of treating offers and sales in reliance on safe harbors substantially similar to public ones in terms of the relevant disclosure requirements. Is this appropriate? Why or why not? To what extent and in what way should our regulatory regime account for the nature of the investors (e.g., accredited investors and QIBs) who participate in private offerings? What would the impact be on the securitization market if offerings of ABS in reliance on the safe harbors were subject to the disclosure requirements that we propose?
  • Should we address private resales of ABS outside of our safe harbors by interpreting the definition of “underwriter” for purposes of the statutory exemptions to include any sales of asset-backed securities where information that would be required in the registered context is not provided? Why or why not? Would doing so prevent issuers from engaging in transactions that are not subject to the proposed requirements by using a statutory exemption (and not the safe harbors) for the unregistered sale of asset-backed securities?
  • To the extent we adopt the proposed changes to Rule 144A or Regulation D, we request comment on whether issuers of structured finance products would be more likely to sell such products outside the United States in reliance on the safe harbor provided by Regulation S [473] under the Securities Act. Should we adopt similar changes under Regulation S as we are proposing for Rule 144A and Regulation D to cover sales of structured finance products outside the United States? Are there any extra or special considerations relating to offshore sales of structured finance products that are different from considerations under Rule 144A and Regulation D that we should take into account in considering adopting similar changes under Regulation S?
  • In order to facilitate unsolicited ratings in unregistered transactions, should we require that the issuer also provide information to an NRSRO if the rating agency intends to rate the security?
  • Are there other disclosure approaches that would better satisfy the objectives we have identified? For example, should we require more targeted disclosures in private placements? Should we give issuers or investors other options for addressing issues in the ABS private market? If so, how? Should all asset classes be treated the same?

C. Notice of Initial Placement of Securities Eligible for Sale Under Rule 144A and Revisions to Form D

In light of the role that privately-issued structured finance products play in our capital markets and concerns raised by the lack of transparency in the private market, we also believe it is important to implement rules that will provide information to us and to the markets at large about sales of structured finance products in the private markets. Consequently, we are proposing to require that a notice of an initial placement of structured finance products be filed with the Commission.

Form D [474] is the official notice of an offering of securities made without registration under the Securities Act in reliance on an exemption provided by Regulation D.[475] While Form D is not a condition to the availability of the Regulation D exemption, Rule 507 [476] of Regulation D disqualifies an issuer from using a Regulation D exemption in the future if it has been enjoined by the court for violating the Regulation D provision that requires the filing of Form D. Form D serves an important data collection objective, among other things.[477] On February 27, 2008, we adopted changes to mandate the electronic filing of the form and to revise the form.[478] Currently, there is no such notice filing requirement for offerings made in reliance on Rule 144A.

We are proposing to require a notice of the offering to be filed with the Commission for the initial placement of structured finance products that are represented as eligible for resale under Rule 144A. The notice would include information regarding major participants in the securitization, the date of the offering and initial sale, the type of securities being offered, the basic structure of the securitization, the assets in the underlying pool, and the principal amount of the securities being offered. Like Form D, the notice would be required to be filed in XML tagged format.[479]

The notice would also provide that in submitting the notice, the issuer is undertaking to furnish the offering materials relating to the securities to the Commission upon written request. We also are proposing to add an amendment to Rule 30-1 of the Commission's Rules of General Organization to provide delegated authority to the Director of the Division of Corporation Finance to request information that the issuer would be required to undertake to provide to the Commission upon request. This proposed amendment to Rule 30-1 would also apply to the existing undertaking in Form D and provide the Director of the Division of Corporation Finance the authority to request information from issuers of structured finance products that file Form D.

This notice, which we are proposing to call Form 144A-SF,[480] would be signed by the issuer and filed with the Commission no later than 15 calendar days after the first sale of securities in the offering, unless the end of that period falls on a Saturday, Sunday or holiday, in which case the due date would be the first business day following such period. This timeframe is based on the current timeframe for filing a Form D. Similar to Form D, the Form 144A-SF notice requirement is not proposed to be a condition of the availability of the Rule 144A safe harbor. However, in light of the importance of this information, we are proposing to provide that if an issuer has failed to file Form 144A-SF, then Rule 144A will not be available for subsequent resales of newly issued structured finance products of the issuer or affiliates of the issuer.

Also similar to Form D, hardship exemptions in Regulation S-T would be unavailable to Form 144A-SF.[481] We believe that issuers should have access to the Internet and be able to file this notice within 15 calendar days after the first sale of securities in the offering (i.e. Start Printed Page 23399the initial placement of securities), as proposed. We also believe hardship exemptions should not be available for Form 144A-SF because of the relative ease of filing, the limited value of paper filings and the utility of a uniform, comprehensive database.

We also are proposing to amend Form D to collect the same information that we are proposing to require to be provided in proposed Form 144A-SF. Further, we are proposing to add a checkbox to Form D that would indicate if the issuer is offering or selling structured finance products.[482]

Request for Comment

  • Is our proposal to require a notice of the initial placement of structured finance products that may be resold in reliance on Rule 144A appropriate?
  • Instead of, or in addition to, a notice, should we require that the offering circular be filed? If we require that the offering circular be filed, should the filing be with the Commission on a non-public basis? Should it be made available to the public? If so, when should it be made public (e.g., immediately or after some period of time)? If it were made public, would there be any general solicitation concerns? If so, how should we address them?
  • Should proposed Form 144A-SF be required to be filed, as proposed, in XML tagged format? Similar to Form D, should we provide a Web site page where issuers can submit directly to EDGAR the information required by Form 144A-SF, which would automatically tag the information that is delivered? Would issuers of structured finance products benefit from such a webpage?
  • Are the items of information that are proposed to be required in proposed Form 144A-SF appropriate? Are there other items that are useful and should be required to be provided on proposed Form 144A-SF? Are there particular ways that these items should be required to be tagged?
  • Should the Rule 144A safe harbor be conditioned on the filing of this notice, or is it better to require the notice separate from the conditions of the Rule 144A safe harbor, as proposed? Is our proposal relating to the consequences for failure to file the notice appropriate?
  • Should we require the filing of proposed Form 144A-SF sooner than proposed (e.g., three or four business days from the date of first sale) or should we provide issuers with more time for filing the notice (e.g., 20 calendar days from the date of first sale)? Should we provide a hardship exemption for filing proposed Form 144A-SF, or is our proposal to make the hardship exemptions unavailable appropriate?
  • Should we revise Form D, as proposed? Are the proposed revisions to Form D appropriate?
  • Should we also adopt changes under Regulation S to require a notice of sales of ABS that are to be sold in reliance on that safe harbor, similar to the proposed requirement under Rule 144A? Are there any extra or special considerations relating to offshore sales of structured finance products that are different from considerations under Rule 144A that we should take into account in considering adopting a similar filing requirement under Regulation S?

VII. Codification of Staff Interpretations Relating to Securities Act Registration

We also are proposing to codify certain staff positions relating to the registration of asset-backed securities. These codifications should simplify our rules by making these positions more transparent and readily available to the public.

A. Fee Requirements for Collateral Certificates or Special Units of Beneficial Interest

In some ABS transactions backed by auto leases, the auto leases and car titles are originated in the name of a separate trust to avoid the administrative expenses of retitling the physical property underlying the leases.[483] The separate trust will issue to the issuing entity for the asset-backed security a collateral certificate, often called a “special unit of beneficial interest” (SUBI). The issuing entity will then issue the asset-backed securities backed by the SUBI certificate.

Rule 190 governs the registration requirements for underlying securities of an asset securitization. Rule 190(c) provides that if the asset pool for the asset-backed securities includes a pool asset representing an interest in or the right to the payments or cash flows of another asset pool, then that pool asset is not considered an “underlying security” that must be registered in accordance with the other provisions in Rule 190 if certain conditions are met. These conditions are:

  • Both the issuing entity for the asset-backed securities and the entity issuing the pool asset were established under the direction of the same sponsor and depositor;
  • The pool asset is created solely to satisfy legal requirements or otherwise facilitate the structuring of the asset-backed securities transaction;
  • The pool asset is not part of a scheme to evade registration or the requirements of Rule 190; and
  • The pool asset is held by the issuing entity and is a part of the asset pool for the asset-backed securities.[484]

In a publicly available telephone interpretation, the staff has advised that the offer and sale of the collateral certificate or SUBI involved in asset-backed transactions must also be registered (along with the securities themselves).[485] However, the staff has advised that, if the collateral certificate or SUBI meets the requirements of Rule 190(c) of the Securities Act, no additional registration fee for the offering of the collateral certificates or SUBIs should be required.[486] We are proposing to codify the staff's positions in this respect in Rule 190 and Rule 457 under the Securities Act,[487] which relates to the computation of Securities Act registration fees. Under the proposed amendment to Rule 190, notwithstanding other provisions, if the pool assets for the asset-backed securities are collateral certificates or SUBIs, those collateral certificates or SUBIs must be registered concurrently with the registration of the asset-backed securities.[488] Pursuant to the proposed revision to Rule 457, where the securities to be offered are collateral certificates or SUBIs underlying asset-backed securities which are being registered concurrently, no separate fee for the certificates or SUBIs will be payable.[489]

B. Incorporating by Reference Subsequently Filed Periodic Reports

Currently, the prospectus for an offering of securities registered on Form S-3 is required to incorporate by reference all subsequently filed periodic and other reports filed under Exchange Start Printed Page 23400Act Sections 13(a) and 15(d) [490] prior to the termination of the offering.[491] For corporate issuers, information regarding the issuer that is allowed to be omitted from the registration statement is made available through the Exchange Act reports.

With respect to asset-backed issuers, information filed with a current report on Form 8-K [492] prior to the termination of the offering would often be important to incorporate into the prospectus. For example, disclosure under Item 6.05 of Form 8-K may provide information regarding a change in the composition of the pool assets. However, the staff has previously noted that asset-backed issuers should not be required to incorporate information filed with their Form 10-D or Form 10-K [493] reports into the prospectus.[494]

We are proposing to codify in proposed Form SF-3 the staff's position regarding incorporation by reference of subsequently filed Exchange Act reports for offerings of asset-backed securities. Because, except for issuers that utilize master trust structures, the Form 10-D and Form 10-K that is filed prior to the termination of the offering is generally for a different ABS issuer than the ABS issuer that has filed the prospectus (even though the issuers are affiliated), Form 10-D and Form 10-K reports may not be relevant to asset-backed offering that is the subject of the prospectus. Thus, under the proposed codification, rather than state that all reports subsequently filed by the registrant pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the offering shall be deemed to be incorporated by reference into the prospectus, the registration statement may, alternatively, state that all current reports on Form 8-K filed by the registrant pursuant to 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the offering shall be deemed to be incorporated by reference into the prospectus.[495]

Request for Comment

  • Should we codify the above staff positions?
  • Should we make any changes to the staff positions? For example, should we require master trust issuers to state that all Exchange Act reports subsequently filed by the registrant shall be deemed to be incorporated by reference into the prospectus rather allow them to incorporate by reference only Form 8-K?
  • Should we revise any of the positions we are proposing to be codified? Does the proposed language in any of the codifications modify, or create an ambiguity that we should revise?

VIII. Transition Period

We are considering the appropriate timing for implementation of the proposals, if adopted. Because sponsors of asset securitizations typically are large issuers,[496] we preliminarily believe that a tiered approach to implementation based on size of the sponsor would not be appropriate for asset-backed issuers. We believe that some of our proposed amendments, including asset-level and data tagging requirements, may initially impose significant burdens on sponsors and originators as they adjust to the new requirements. This could include changes to how information relating to the pool assets is collected and disseminated to various parties along the chain of securitization. While we believe that compliance dates should not extend past a year after adoption of the new rules, we request that commenters provide input about feasible dates for implementation of the proposed amendments. We currently anticipate that, if adopted, the new and amended rules, including the proposed asset-level information requirements and the changes with respect to privately-issued asset-backed securities, would apply to asset-backed securities that are issued after the implementation date of the new requirements.[497]

Request for Comment

  • Should implementation of any proposals be phased-in? If so, explain why and provide a reasonable timeframe for a phase-in (e.g., six months, one or two years)?
  • Should implementation be based on a tiered approach that relates to a characteristic other than the size of the sponsor? Is there any reason to structure implementation around asset class of the securities?

IX. General Request for Comments

We request comment on the specific issues we discuss in this release, and on any other approaches or issues that we should consider in connection with the proposed amendments. We seek comment from any interested persons, including investors, asset-backed issuers, sponsors, originators, servicers, trustees, disseminators of EDGAR data, industry analysts, EDGAR filing agents, and any other members of the public.

X. Paperwork Reduction Act

A. Background

Certain provisions of the proposed rule amendments contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (PRA).[498] The Commission is submitting these proposed amendments and proposed rules to the Office of Management and Budget (OMB) for review in accordance with the PRA.[499] An agency may not conduct or sponsor, and a person is not required to comply with, a collection of information unless it displays a currently valid control number. The titles for the collections of information are: [500]

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

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

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

(4) “Form 10-D” (OMB Control No. 3235-0604);

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

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

(7) “Regulation S-T” (OMB Control No. 3235-0424);

(8) “Form D” (OMB Control No. 3235-0076);

(9) “Form SF-1 (a proposed new collection of information);

(10) “Form SF-3 (a proposed new collection of information);

(11) “Asset Data File” (a proposed new collection of information);

(12) “Waterfall Computer Program” (a proposed new collection of information).

(13) “Form 144A-SF” (a proposed new collection of information); and

(14) “Privately-Issued Structured Finance Product Disclosure” (a Start Printed Page 23401proposed new collection of information).

The regulations and forms listed in Nos. 1 through 8 were adopted under the Securities Act and the Exchange Act and set forth the disclosure requirements for registration statements and periodic and current reports filed with respect to asset-backed securities and other types of securities to inform investors. Regulation S-T specifies the requirements that govern the submission of electronic documents. Form D is filed by issuers as a notice of sales without registration under the Securities Act based on the claim of an exemption under Regulation D of the Securities Act.

The regulations and forms listed in Nos. 9 through 14 are newly proposed collections of information under the Securities Act and Exchange Act. Form SF-1 and Form SF-3, if adopted, would represent the new registration forms for offerings of asset-backed securities, as defined in Item 1101(c) of Regulation AB. Form SF-3 would represent the registration form for offerings that meet certain shelf eligibility conditions and can be offered on a delayed basis under Rule 415. Form SF-1 would represent the registration forms for other asset-backed offerings. Asset Data File and Waterfall Computer Program are proposed new collections of information that would relate to the regulations and proposed new forms for asset-backed issuers under the Securities Act and Exchange Act that set forth certain disclosure requirements for registration statements and periodic and current reports for asset-backed issuers. Under the requirements, an asset-backed issuer would be required to submit to the Commission specified, tagged information on assets in the pool underlying the securities and a computer program that gives effect to the flow of funds or “waterfall” provisions of the transaction agreements. Form 144A-SF would represent a new notice requirement for certain offerings made in connection with the safe harbor provided in Rule 144A. Finally, Privately-Issued Structured Finance Product Disclosure is the disclosure that issuers would be required to agree to provide to investors when an ABS issuer sells securities that are eligible for resale under the Rule 144A safe harbor or when an ABS issuer sells securities in reliance on the Regulation D safe harbor.

Compliance with the proposed amendments would be mandatory except that the amendments that would impose collection of information requirements on privately-issued structured finance products would only be required if the issuer is relying on the safe harbors to which those collection of information requirements relate. Responses to the information collections would not be kept confidential and there would be no mandatory retention period for proposed collections of information.

B. Revisions to PRA Reporting and Cost Burden Estimates

Our PRA burden estimates for each of the existing collections of information, except for Form 10-D, 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 collection of information. Form 10-D is a form that is only prepared and filed by ABS issuers. In 2004, we codified requirements for ABS issuers in these regulations and forms, recognizing that the information relevant to asset-backed securities differs substantially from that relevant to other securities.

Our PRA burden estimates for the proposed amendments are based on information that we receive on entities assigned to Standard Industrial Classification Code 6189, the code used with respect to asset-backed securities, as well as information from outside data sources.[501] When possible, we base our estimates on an average of the data that we have available for years 2004, 2005, 2006, 2007, 2008, and 2009. In some cases, our estimates for the number of asset-backed issuers that file Form 10-D with the Commission are based on an average of the number of ABS offerings in 2006, 2007, 2008, and 2009.[502]

1. Form S-3 and Form SF-3

Our current PRA burden estimate for Form S-3 is 236,959 annual burden hours. This estimate is based on the assumption that most disclosures required of the issuer are incorporated by reference from separately filed Exchange Act reports. However, because an Exchange Act reporting history is not a condition for Form S-3 eligibility for ABS, ABS issuers using Form S-3 often must present all of the relevant disclosure in the registration statement rather than incorporate relevant disclosure by reference. Thus, our current burden estimate for ABS issuers using Form S-3 under existing requirements is similar to our current burden estimate for ABS issuers using Form S-1. During 2004 through 2009, we received an average of 99 Form S-3 filings annually related to asset-backed securities.

We are proposing to move the requirements for asset-backed issuers into new forms that would be solely for the registration by offerings of asset-backed securities. Under our proposal, proposed Form SF-3 would be the ABS shelf equivalent form of existing Form S-3. For purposes of our calculations, we estimate that the proposals relating to shelf eligibility and new shelf procedures would cause a 10% movement in the number of filers (i.e., a decrease of ten registration statements) out of the shelf system due to the new requirements of risk retention and ongoing reporting for shelf registration eligibility.[503] On the other hand, we estimate the number of shelf registration statements for ABS issuers would increase by five as a result of the proposed elimination of base and supplement prospectuses for these issuers.[504] Thus, we estimate that the number of shelf registration statements will decrease by five altogether. Accordingly, we estimate that the proposals would cause a decrease of 99 ABS filings on Form S-3 and a corresponding number of 94 Form SF-3s filed annually.[505]

In 2004, we estimated that an ABS issuer, under the 2004 amendments, would take an average of 1,250 hours to prepare a Form S-3 to register ABS.[506] For registration statements, we estimate that 25% of the burden of preparation is carried by the company internally and that 75% of the burden is carried by outside professionals retained by the registrant at an average cost of $400 per hour.[507] In this release, we are proposing new and revised disclosure requirements for ABS issuers that if adopted, would be a cost to filing on Form SF-3.

We are proposing a significant new disclosure requirement that the issuer provide asset-level information for each of the assets in the underlying pool. Start Printed Page 23402Credit card ABS issuers would be required to provide grouped asset data. Another new disclosure requirement would be the filing of a waterfall computer program that gives effect to the waterfall provisions of the transaction. For purposes of the PRA, we are including the costs relating to providing this disclosure on the assets in the estimate for our newly proposed collection of information entitled “Asset Data File.” We are also including the costs related to the filing of the waterfall computer program as a separate collection of information, as discussed in the section below entitled “Waterfall Computer Program.” We are also proposing some additional disclosure requirements that may impose some additional costs to ABS issuers with respect to registration statements.

If the proposals are adopted, we estimate that the incremental burden for ABS issuers to complete the disclosure requirements in Form SF-3, prepare the information, and file it with the Commission would be 100 burden hours per response on Form SF-3. As a result, we estimate that each Form SF-3 would take approximately 1,350 hours to complete and file.[508] We estimate the total internal burden for Form SF-3 to be 31,725 hours and the total related professional costs to be $38,070,000.[509] This would result in a corresponding decrease in Form S-3 burden hours of 30,937.5 and $37,125,000 in professional costs.[510]

2. Form S-1 and Form SF-1

We are proposing to move the requirements for asset-backed issuers into new forms that would be solely for the registration of asset-backed issuers. Proposed Form SF-1 would be the non-shelf equivalent form of existing Form S-1 under our proposal. As noted above, for purposes of our calculation, we estimate that the new proposals for shelf eligibility and new shelf procedures would cause small movement in the number of filers from the shelf system to the non-shelf system. For purposes of the PRA, we estimate three ABS issuers will move from the shelf system to the non-shelf system of proposed Form SF-1.[511] From 2004 through 2009, an average of four Form S-1s were filed annually by ABS issuers. Correspondingly, we estimate that the number of filings on Form SF-1 will be seven, which is the sum of the four average filings per year and the estimated incremental three filings from shelf to Form SF-1.

For ABS filings on Form S-1, we have used the same estimate of burden per response that we used for Form S-3, because the disclosures in both filings are similar.[512] Even under the proposals, the disclosures would continue to be similar for shelf registration statements and non-shelf registration statements. The burden for the proposed requirements for the asset data file and the waterfall computer program to be filed as exhibits to Form SF-1 are included in the newly proposed collections of information discussed below rather than in this section for Form SF-1. Thus, we estimate that an ABS Form SF-1 filing will impose an incremental burden of 100 hours per response, which is equal to the incremental burden to file Form SF-3. We estimate the total number of hours to prepare and file each Form SF-1 at 1,350, the total annual burden for the issuer at 2,362.5 hours and added costs for professional expenses at $2,835,000.[513] This would result in a corresponding decrease in Form S-1 burden hours of 1,250 and $1,500,000 in professional costs.[514]

3. Form 10-K

The ongoing periodic and current reporting requirements applicable to operating companies differ substantially from the reporting that is most relevant to investors in asset-backed securities. For asset-backed issuers, in addition to a limited menu of Form 10-K disclosure items, the issuer must file a servicer compliance statement, a servicer's assessment of compliance with servicing criteria, and an attestation of an independent public accountant as exhibits to the Form 10-K.

One of our proposed ABS shelf eligibility conditions (i.e., criteria that must be met in order to be eligible to register ABS on Form SF-3) would require the issuer to undertake to file Exchange Act reports as long as non-affiliates hold any of its securities that were sold in registered transactions. Except for master trust issuers, the requirement to file Form 10-K for ABS issuers is typically suspended after the year of initial issuance because the issuer has fewer than 300 security holders of record.[515] Therefore, the incremental impact to the number of Forms 10-K filed by ABS issuers would increase each year after the proposal is adopted by the number of ABS shelf offerings. The yearly average of ABS registered shelf offerings with the Commission over the period from 2004 to 2009 was 929.[516] In the first year after implementation, we use 958, which is the average number of all offerings over 2004-2009, as an estimate for the number of Forms 10-K we expect to receive. In the second year after implementation, we increase our estimate of the number of Forms 10-K expected by 929 to a total of 1,887. In the third year after implementation, the addition of another 929 brings the total to 2,817. The average number of Forms 10-K over three years would, therefore, be 1,887. As a result, for PRA purposes, we estimate an increase in Form 10-K filings of 929 filings.

We estimate that, for Exchange Act reports, 75% of the burden of preparation is carried by the company internally and that 25% of the burden is carried by outside professionals retained by the registrant at an average Start Printed Page 23403cost of $400 per hour. In 2004, we estimated that 120 hours would be needed to complete and file a Form 10-K for an ABS issuer. We estimate that our proposals relating to Form 10-K would not increase the estimate for the time needed to complete and file Form 10-K for an ABS issuer.

However, our proposed amendments may have a limited impact on the preparation of Form 10-K for the sponsor of the ABS issuer, if the sponsor is a company that is required to report under the Exchange Act. Though we are not proposing changes to Form 10-K disclosure requirements for sponsors, our proposals may impact the work that sponsors would have to do to disclose in their Form 10-K the securities they are required to hold as a result of the proposals and the investments they make to manage risks associated with the new requirements. We estimate that our proposals will cause an increase in the number of hours the sponsor will incur to prepare, review and file Form 10-K by 10 hours. From 2004 to 2009, the number of unique ABS sponsors was 343, for an average of 57 unique sponsors per year. Therefore, we estimate that, for PRA purposes, the total annual increase in the number of hours to prepare, review, and file Form 10-K would be 112,050.[517] We allocate 75% of those hours (84,038 hours) to internal burden and the remaining 25% to external costs totaling $11,205,000 using a rate of $400 per hour.

4. Form 10-D

In 2004, we adopted Form 10-D as a new form for only asset-backed issuers. This form is filed within 15 days of each required distribution date on the asset-backed securities, as specified in the governing documents for such securities. The form contains periodic distribution and pool performance information. We have derived an estimate of the number of Form 10-Ds filed by registered ABS issuers using the average annual number of ABS registered offerings completed over the period 2004-2009.[518] The average over those years was 958 offerings annually.

As discussed above, we are proposing to require, as a condition to shelf eligibility, an undertaking from the issuer that it will continue to file Exchange Act reports as long as non-affiliates hold any of its securities that were sold in registered transactions. As with the Form 10-K, we believe that our proposals would result in an increase in the number of Form 10-Ds filed. Except for master trust issuers, the requirement to file Form 10-D for ABS issuers is typically suspended after the year of initial issuance because the issuer has fewer than 300 security holders of record.[519] Therefore, the incremental impact to the number of Forms 10-D filed by ABS issuers would increase each year after the proposal is adopted by the number of ABS shelf offerings older than one year where any of its securities are held by non-affiliates. From 2004 to 2009, the yearly average of ABS registered shelf offerings filed with the Commission was 929.[520] Since Form 10-D is required on a periodic basis based on the distribution schedule of the security, we estimate the total number of Form 10-Ds filed in the first year after implementation to be 5,748.[521] In the second year after implementation, we increase our estimate of the number of Forms 10-D expected by 5,576 for a total of 11,324.[522] In the third year after implementation, the addition of another 5,576 brings the total to 16,899. The average number of Forms 10-D over three years would, therefore, be 11,324. Therefore, for PRA purposes, we estimate an increase in Form 10-D filings of 5,576 filings.

In 2004, we estimated that it would take 30 hours to complete and file Form 10-D.[523] As discussed below, we are proposing to add asset-level disclosure requirements that relate to ongoing performance of the assets to the requirements of Form 10-D. For credit card ABS issuers, we are proposing to add to Form 10-D a requirement that such issuers provide grouped asset data. Those proposed requirements are included in our estimate of the asset-level disclosure collection of information requirements, as discussed below in the section entitled “Asset Data File.” We believe that our other proposed revisions to Form 10-D would not increase the burden hours for the form. Therefore, we estimate that the total annual increase in the number of hours to prepare, review, and file Form 10-D would be 167,280.[524] We allocate 75% of those hours (125,460 hours) to internal burden and the remaining 25% to external costs totaling $16,728,000 using a rate of $400 per hour.

5. Form 8-K

Our current PRA estimate for Form 8-K is based on the use of the report to disclose the occurrence of certain defined reportable events, some of which are applicable to asset-backed securities.

The number of ABS issuers filing Form 8-Ks on an annual basis may be affected by our proposal to require an ABS issuer that wishes to be shelf-eligible to undertake to file Exchange Act reports on an ongoing basis. In addition, our proposal to revise existing Item 6.05 of Form 8-K, which currently requires disclosure for any change in the actual asset pool over five percent from the description in the prospectus, by instead requiring an ABS issuer to instead provide information for any change equal to or greater than one percent in the asset pool from the prospectus description, may lead to an increase of Form 8-K filings.[525] We are also proposing to add a requirement that the sponsor provide disclosure on Form 8-K for a material change in its interest in the transaction.[526]

In 2004, we estimated that the new items added to Form 8-K to address ABS disclosure would cause an increase of two reports on Form 8-K per ABS issuer per year.[527] We estimate that our proposals would cause an increase of 1.5 reports on Form 8-K per ABS issuer per year, or a total of approximately 1,437 additional reports per year.[528]

In 2004, we estimated that an average ABS issuer would spend about five Start Printed Page 23404hours completing the form.[529] We estimate that the average burden for the disclosure per Form 8-K would remain relatively the same. Accordingly, we estimate the total annual increase in the number of hours to prepare, review, and file Form 8-K would be 7,185, with 75% of those hours (5,389) allocated to internal burden and the remaining 25% allocated to external costs of $718,500 using a rate of $400 per hour.[530]

6. Regulation S-K and Regulation S-T

Regulation S-K, which includes the item requirements in Regulation AB, contains the requirements for disclosure that an issuer must provide in filings under both the Securities Act and the Exchange Act. As noted above, Regulation S-T contains the requirements that govern the electronic submission of documents. In 2004, we noted that the collection of information requirements associated with Regulation S-K as it applies to ABS issuers are included in Form S-1, Form S-3, Form 10-K and Form 8-K. We assign one burden hour to Regulation S-K for administrative convenience to reflect that the changes to the regulation did not impose a direct burden on companies.[531]

The proposed changes would make revisions to Regulation S-K and Regulation S-T. The collection of information requirements, however, are reflected in the burden hours estimated for the various Securities Act and Exchange Act forms related to ABS issuers. The rules in Regulation S-K and Regulation S-T do not impose any separate burden. Consistent with historical practice, we have retained an estimate of one burden hour each to Regulation S-T and Regulation S-K for administrative convenience.

7. Asset Data File

This new collection of information corresponds to asset data file information requirements that we are proposing to add to proposed Form SF-1, proposed Form SF-3, Form 10-D, and Form 8-K. They would be required to appear in exhibits to these forms. Our proposed standard definitions for asset-level information are similar to, and in part based on, other standards that have been developed by the industry, such as those developed under ASF's Project RESTART and those developed by the CRE Finance Council (formerly CMSA). These proposed standard definitions employ widely used metrics relating to asset-level information and, based on discussions with the industry, we believe that much of asset-level information may already be available for collection, although the format of such information may not be the one that we propose to require. We also believe that first year implementation costs may be much more significant than ongoing implementation costs.

An ABS issuer filing on proposed Form SF-1 or proposed Form SF-3 would be required to provide this new information. For the most part, this new information would be provided at the time that the newly proposed Rule 424(h) filing is required to be filed, at the time the final prospectus is required to be filed, and after there are certain changes to the pool, such as the substitution or addition of assets. Certain information would be required to be filed on an ongoing basis. We believe the information is currently available to the ABS issuer but additional time and expense will be involved in including the information in registration statements in the format that we are proposing.

The requirements are tailored by asset class. All asset classes except credit card receivables and stranded costs are required to provide asset-level information on each asset in the pool. Information relating to the performance of the assets would be required to be filed on an ongoing basis. Credit card ABS issuers would be required to provide grouped asset data, both at the time of securitization and on an ongoing basis. The grouped asset data could be incorporated by reference (from a previously filed Form 10-D).

We believe that the costs of implementation would include software costs, costs to tag the required data, costs of maintaining the required information, and costs of filing. The number of unique ABS sponsors over 2004-2009 was 343, for an average of 57 unique sponsors per year. We estimate that there are 10 unique sponsors of credit card securitizations over a three-year period (or three unique sponsors per year). We base our burden estimates for this collection of information on the assumption that most of the costs of implementation of the proposed asset-level data filing requirements would be incurred before the sponsor files its first asset-level data filing in compliance with the proposed rules. Because asset-backed issuers are currently required by Regulation AB to file pool-level information on the assets in the underlying pool,[532] we assume, for purposes of our PRA estimates, that much of the information that is required to be provided by the new disclosure requirements should be accessible from existing sponsor data systems.

Because of the number of fields involved, our estimates for the proposed asset-level requirements are based on EDGAR data on RMBS and CMBS issuers. We estimate that, for purposes of the PRA burden estimate for the asset-level disclosure requirements, approximately two percent of the proposed asset-level data fields that are required at the time of securitization and approximately two percent of the asset-level data fields that are required on an ongoing basis would require the sponsor to adjust its systems and procedures for collecting information on each asset. We estimate that, for purposes of an initial filing of asset-level information at the time of securitization, a sponsor would be required to expend at least 18 minutes for each item where adjustments must be made for each asset in a pool. We estimate that an RMBS sponsor would incur a one-time setup cost for the initial filing of 3,194 hours to adjust its existing systems to provide the required information at the time of securitization for each asset in the initial filing, 86 hours for a CMBS sponsor, and 2,010 hours for a credit card receivables sponsor.[533] After a sponsor has made the necessary adjustments to its systems and after an initial filing of asset-level data has been made, we estimate that subsequent filings for asset-level data will take approximately ten hours to prepare, review, and file. For credit card ABS sponsors, grouped asset data may be incorporated by reference, as proposed, and therefore, we are not including additional costs for Start Printed Page 23405subsequent filings by a credit card master trust.

Similarly, we estimate that for purposes of an initial filing of asset-level ongoing information, a sponsor would be required to expend at least 18 minutes for each item where adjustments must be made for each asset in a pool. We estimate that an RMBS sponsor would incur a one-time set-up cost of 3,811 hours to adjust its existing systems to provide the required ongoing information for each asset in the initial filing, 92 hours for a CMBS sponsor, while a credit card receivables sponsor would not incur additional setup costs for ongoing information.[534] After a sponsor has made the necessary adjustments to its systems in connection with the proposed rule and, after an initial filing of asset-level ongoing information has been made, we estimate that subsequent filings for asset-level ongoing information by a sponsor will take approximately ten hours to prepare, review, and file. We estimate that filings of grouped asset data for credit card ABS issuers would take approximately ten hours to prepare, review and file.

Based on the number of loans that may be securitized in a particular offering and the asset-level requirements for each of the asset classes, and the number of offerings for each of the asset classes, we estimate that the total annual burden hours for preparing, tagging and filing asset-level disclosure or grouped asset data at the time of securitization will be 151,368.[535] We allocate 25% of those hours (37,842.04) to internal burden hours for all ABS issuers and 75% of the hours to out-of pocket expenses for software consulting and filing agent costs at a rate of $250 per hour totaling $28,381,527.95. We estimate that the average annual hours for preparing, tagging and filing asset-level disclosure or grouped asset data on an ongoing basis with the Form 10-D will be 207,009 hours for all ABS issuers.[536] We allocated 75% of those hours (155,256.5 hours) to internal burden hours and 25% of those hours for out-of-pocket expenses for software consulting and filing agent costs at a rate of $250 per hour totaling $12,938,042.83. Thus, we estimate the total annual incremental burden for the asset-level disclosure requirements or grouped asset data at 193,098.6 hours [537] and the added total amount of out-pocket expenses for software and filing agent costs at $41,319,570.78.[538]

8. Waterfall Computer Program

While the proposed requirement that ABS issuers file machine-readable computer code detailing the waterfall of the ABS securities issued would be a new collection of information, we believe issuers already produce such a code to structure the ABS deal. However, issuers would bear the costs of converting the code that they typically create into code that meets our proposed requirements. We believe that a substantial portion of those costs will be incurred for each sponsor at the time of implementation of the rule to set up mechanisms to convert the typical program used for waterfall purposes.

Some examples of the need for such mechanisms are: (i) Waterfall programs written in languages not directly portable to Python that will have to be adapted to the Python language, (ii) code within the waterfall program that is not required by the rule or necessary for investors to use and understand the waterfall may need to be removed or adapted for the program to run as required by the rule, (iii) and additional functionality of the program, such as a user interface to input assumptions or to input the asset data file, not currently used by sponsors will have to be incorporated. We estimate that issuers will incur a one-time setup cost of 672 hours to create such mechanisms to meet this filing requirement.[539] Additionally, we estimate a two-hour burden at the time of filing for each ABS deal for which a waterfall program is required to be filed to verify that the mechanisms worked properly and that the program meets the requirements of the rule.

As noted above, the number of unique ABS sponsors over 2004-2009 was 343, for an average of 57 unique sponsors per year. Therefore, we estimate that it would take a total of 38,304 hours for ABS issuers to set up the mechanisms to file the waterfall computer program.[540] We allocate 25 percent of these hours (9,576 hours) to internal burden for all sponsors. For the remaining 75 percent of these hours (28,728 hours), we use an estimate of $250 per hour for the costs of computer programmers to derive an external cost of $7,182,000.[541]

The yearly burden at the time of filing for each deal is estimated to be 1,916 hours.[542] For PRA purposes we allocate 25% of these hours (479 hours) to internal burden hours and 75% for out-of-pocket expenses for professional costs totaling $574,800 using a rate of $400 per hour. Therefore, the total internal burden hours are 10,055 and the total external costs are $7,756,800.[543]

9. Form 144A-SF and Form D

Form 144A-SF is a new collection of information that would cover the notice of sales of asset-backed securities that would be required under the proposed revisions to Rule 144A. This notice would contain information related to major participants in the securitization, the date of the offering, the type of securities offered, the basic structure of the securitization and the principal amount of the securities offered. Over the period 2004-2009, the annual Start Printed Page 23406average number of Rule 144A ABS offerings was 716.[544]

We believe that the burden assigned to Form 144A-SF should reflect the cost of preparing the notice and the cost of filing the notice. We estimate that preparing, tagging, and filing the Form 144A-SF will require approximately 2.0 hours per response. Using the annual average of 716 Rule 144A offerings, the total burden hours equals 1,432. We allocate 25% as a burden to the seller and 75% as costs of counsel utilized for the preparation and filing of the form. Therefore, the incremental annual impact of Form 144A-SF will be 358 hours and $429,600 in professional costs using an hourly rate of $400.

Form D is an existing collection of information under the PRA. Form D is a notice of sales for offerings made under Regulation D. Currently, we estimate that the burden hours of Form D to be approximately 4.0 hours per response, of which one hour is borne internally and three hours are borne externally. Under the proposal, Form D would be revised to collect, in addition to the information that the form currently collects, the same information as proposed Form 144A-SF when filed in connection with an ABS offering. We are aware of only one Form D filed for an ABS offering in 2009.[545] Thus, we believe that the change to this collection of information should be very small. For PRA purposes, we estimate that the Form D filing burden would not increase. Therefore, we continue to estimate that the burden hours for Form D will be 4.0 hours.

10. Privately-Issued Structured Finance Product Disclosure

This new collection of information relates to proposed disclosure requirements for structured finance product issuers that wish to take advantage of the safe harbors provided by Rule 144A, Regulation D and Rule 144. Under the proposed amendments, such issuers would be required to provide the purchaser or prospective purchaser with the same information that would be required if the offering were registered with the Commission. Some of the information that is required for registered offerings, we believe, is being provided to investors who purchase structured finance products in the private markets.[546] For purposes of the PRA, we are assuming that the hours that private structured finance product issuers expend to provide information to investors are approximately the same hours that would be required to prepare information in the registered context. Therefore, our estimate for this new collection of information will be based on the incremental costs that the proposed amendments in this release would include. Although information for a private ABS issuer is not required to be filed with the Commission, the cost of preparing such information should be relatively the same as the estimated burdens for preparing and filing information required in the registered context. We estimate that it will take approximately 300 hours per offering to prepare additional offering information that would be required under the proposed amendments. This is based on the incremental cost of the proposed amendments to ABS issuers that register their offerings with the Commission, along with the cost estimates for the asset data file that would be filed at the time of securitization and the waterfall computer program that we are proposing to require be filed for each ABS offering. Under our proposal, ABS issuers that relied on the safe harbors would be required to provide the same ongoing information that would be required in registered offerings. We estimate that it will take an issuer approximately 18 hours to complete a distribution report accompanied by asset-level and grouped asset data ongoing information for the distribution period. This is based on the incremental costs of providing Form 10-K, Form 10-D, and Form 8-K reports, which would comprise of the cost estimates for the asset data file that is required to be filed on an ongoing basis, as proposed.

As noted above, the average number of private offerings of ABS per year pursuant to Rule 144A over the period 2004-2009 was 716. Based on that number, we estimate an average number of 8,592 ongoing reports containing distribution information and ongoing asset data file information would be provided to investors each year,[547] and a total of 716 annual reports that would be provided to investors each year. Therefore, at the time of securitization, we estimate that the proposed collection of information will impose a total annual burden of 214,791 hours,[548] with 25% of the cost borne internally (53,698 hours) and the remainder of hours paid to outside professionals or software consulting and programming costs ($48,328,318).[549] For information that is provided on an ongoing basis, we estimate that the proposed collection of information will impose a total annual burden of 157,067 hours,[550] with 75% of the cost borne internally (117,800 hours) and the remainder paid to outside professionals or software consulting costs ($9,816,658).[551] Thus, the total estimate for internal burden hours is 171,498,[552] and the total estimate for outside costs is $58,144,976.[553]

11. Summary of Proposed Changes to Annual Burden Compliance in Collection of Information

Table 1 illustrates the changes in annual compliance burden in the collection of information in hours and costs for existing reports and registration statements and for the proposed new registration statements for asset-backed issuers. Below, the asset data file is annotated as “Asset Data,” the waterfall computer formula is annotated as “WCP”, and privately-issued structured-finance disclosure is annotated as “P-SF.” Bracketed numbers indicate a decrease in the estimate.Start Printed Page 23407

FormCurrent annual responsesProposed annual responsesCurrent burden hoursDecrease or increase in burden hoursProposed burden hoursCurrent professional costsDecrease or increase in professional costsProposed professional costs
S-32,0651,966236,959[30,937.5]206,021.5284,350,500[37,125,000]247,225,500
S-11,1681,164242,360[2,362.5]239,997.5290,832,000[1,500,000]289,332,000
SF-39431,72531,72538,070,00038,070,000
SF-172,362.52,362.52,835,0002,835,000
10-K13,54514,47421,337,93984,03821,421,9712,845,058,50011,205,0002,856,263,500
10-D10,00015,576225,000125,460350,46030,000,00016,728,00046,728,000
8-K115,795117,232493,4365,389498,82554,212,000718,50054,871,500
Asset Data16,534193,099193,09941,319,57141,319,571
WCP95810,05510,0557,756,8007,756,800
D25,00025,000100,000100,00030,000,00030,000,000
144A-SF716358358429,600429,600
P-SF9,308171,498171,49858,144,97658,144,976

12. Solicitation of Comments

We request comments in order to evaluate: (1) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information would have practical utility; (2) the accuracy of our estimate of the burden of the proposed collection of information; (3) whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (4) whether there are ways to minimize the burden of the collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.[554] We also specifically request comment regarding:

  • Whether and to what extent the proposed shelf eligibility requirements would cause a movement in filers that are currently eligible for shelf registration on Form S-3 out of shelf registration on proposed Form SF-3;
  • For all types of asset classes that are subject to the proposed asset level data requirements, the cost of adjusting the sponsor's systems to meet the proposed requirements and the cost of preparing, tagging, and filing the information; and
  • For credit card ABS issuers, whether any grouped asset data proposed to be required is not currently collected on existing sponsors' systems and what are the costs of preparing, tagging and filing such grouped asset data at the time of securitization and on an ongoing basis;
  • To what extent the proposals to require more information relating to sales of privately-issued structured finance products in reliance on certain safe harbors would increase the number of hours that issuers of such securities already expend in providing information to investors.

Any member of the public may direct to us any comments concerning the accuracy of these burden estimates and any suggestions for reducing these burdens. Persons submitting comments on the collection of information requirements should direct the comments to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should send a copy to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090, with reference to File No. S7-08-10. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7-08-10, and be submitted to the Securities and Exchange Commission, Records Management, Office of Filings and Information Services, 100 F Street, NE., Washington, DC 20549. OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication of this release. Consequently, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication.

XI. Benefit-Cost Analysis

A. Background

The proposed amendments to our regulations and forms for asset-backed securities relate to the offering process, disclosure and reporting requirements for these securities. We also are proposing amendments to safe harbor rules for exempt offerings and resales to require additional disclosure by ABS issuers. In this section, we examine the benefits and costs of our proposed rules in each of these areas. We request that commenters provide their views along with supporting data as to the benefits and costs of the proposed amendments.

First, we are proposing to revise shelf registration for ABS issuers and create new registration forms that would be applicable only to ABS offerings. Under the proposals, for ABS issuers that wish to register their offerings on a shelf basis, for offerings to be conducted after the shelf registration statement is effective, transaction-specific information relating to each offering of securities must be filed with the Commission at least five business days ahead of the first sale in the offering. We also are proposing to replace the existing shelf eligibility requirement that the securities must be investment grade rated by an NRSRO with alternate requirements. Instead of the investment grade ratings requirement, the following would be required for any offering off the shelf registration statement:

  • The sponsor must retain a portion of each tranche of the securities sold in the offering, net of hedging and on an ongoing basis;
  • The chief executive officer of the depositor must certify that the securitized assets backing the issue have characteristics that provide a reasonable basis to believe that they will produce, taking into account internal credit enhancements, cash flows at times and in amounts necessary to service any payments of the securities as described in the prospectus;
  • The pooling and servicing agreement must contain a provision that would require third party review for assets that were not repurchased or replaced by an obligated party after being put back for breach of a representation or warranty; and
  • The ABS issuer must undertake to file Exchange Act reports so long as non-affiliates of the depositor hold any of the issuer's securities sold in registered transactions.

We also are proposing to eliminate the exception from the 48-hour preliminary prospectus delivery requirement for ABS adopted in 2004 under Exchange Act 15c2-8(b), such that in connection with all issuances of ABS, regardless of whether the issuer has previously been required to file reports pursuant to Sections 13(a) or 15(d) of the Exchange Start Printed Page 23408Act, or exempted from the reporting requirements by Section 12(h) of the Exchange Act, broker-dealers would be subject to the 48-hour preliminary prospectus delivery requirement. Further, we are proposing several revisions to enhance the disclosures made by asset-backed issuers in prospectuses and Exchange Act reports. For most asset classes, we are proposing to require information regarding each asset in the pool in addition to the existing requirements relating to pool-level disclosures. Issuers of ABS backed by credit card receivables would be required to provide grouped asset data. This information would be provided according to standardized definitions and filed with the Commission in XML. In addition, we are proposing to require that ABS issuers file a computer program on EDGAR that gives effect to the flow of funds, or “waterfall,” of the transaction. This computer program would be required to provide users with the ability to input the asset data file and other assumptions.

We also are proposing revisions to our disclosure requirements for ABS issuers that would require, among other things:

  • Additional information on exception loans;
  • Enhanced static pool disclosure;
  • Disclosure regarding the loans that were put back to the originator or sponsor for repurchase;
  • Additional information regarding an originator, including its interest in the securitization and, to the extent there is material risk that the financial condition of the originator could have a material impact on the origination of the originator's assets in the pool or on its ability to comply with provisions relating to the repurchase obligations for assets, its financial condition;
  • Additional information regarding a sponsor, including its interest in the securitization and, to the extent there is a material risk that the financial condition could have a material impact on its ability to comply with the provisions relating to the repurchase obligations for assets or otherwise materially impact the pool, its financial condition;
  • A description of the standards in the pooling and servicing agreement for modifying the terms of the underlying assets;
  • A statement whether the pooling and servicing agreement contains a fraud representation; and
  • The description of the flow of funds in a single place in the prospectus.

We also are proposing revisions to the definition of an asset-backed security to further restrict the type of security that may be sold under the framework set forth in Regulation AB. While securities that do not meet the proposed definition may still be registered with the Commission, an issuer may need to provide additional disclosure regarding the securities and consider issues that are not contemplated by Regulation AB. We are proposing to limit the amount of prefunding accounts and revolving periods that may be utilized under the definition, and we are proposing to exclude master trusts that are backed by non-revolving assets (e.g., mortgages) from the definition.

We also address privately-issued structured finance products in our proposals. In order to foster additional transparency in the exempt securitization markets, we propose to require the issuer to agree to provide additional disclosure to the investor for any resale made under the Rule 144A safe harbor or offering under the Regulation D safe harbor. We also are proposing to amend the current public information requirement in Rule 144 to require that, in order to satisfy that requirement, in the case of a non-reporting ABS issuer, the issuer must agree to provide additional disclosure to the investor. In addition, we propose to require that the issuer file with the Commission a notice of the sales for the initial placement of securities that are to be sold under Rule 144A that provides basic information on the sale and a description of the securities sold.

B. Benefits

The proposed amendments are designed to increase investor protection by improving the disclosure and offering process of asset-backed securities, and thereby enhancing the transparency of the securitization market. This should result in an increase in investors' understanding of the underlying pool of assets.

In 2009, there were 87 registered ABS offerings as compared to 1,306 in 2004.[555] The market for securitized assets has suffered dramatically, in part due to the perception of inadequacies in the disclosure and transparency of the underlying pool of assets in the securitization process.[556] Securitization is a large component of borrowing and lending, which can benefit borrowers by lowering borrower costs.[557]

1. Securities Act Registration

The lack of time to adequately consider deal-specific information in an offering has been a longstanding concern of ABS investors, as discussed in the 2004 Adopting Release.[558] Based on our experience with the financial crisis, we continue to have concerns regarding the lack of time for investors to analyze asset-backed securities. By requiring that information about the specific offering be filed at least five business days before first sale, we seek to provide investors with the benefit of additional time to value and assess the issuance.

Unlike other types of securities, the payments on asset-backed securities primarily depend on the credit quality of the assets in the underlying pool. Each offering of asset-backed securities involves a new set of assets, which requires investment analysis to be done anew. Our proposal to require an issuer to file a form of preliminary prospectus at least five business days ahead of first sale seeks to give investors additional time to review offering documents without unduly burdening issuers.[559] We believe that this additional time will benefit investors by increasing their ability to assess an offering and to perform a better analysis of information provided by the parties to the securitization. This in turn should lead to better investment decisions.

We believe that investment grade credit ratings may no longer be an appropriate criterion for use as a shelf eligibility requirement for ABS.[560] In addition to promoting independent analysis, we believe that replacing investment grade ratings requirement for shelf eligibility conditions for ABS offerings would reduce the appearance that the Commission has placed an imprimatur on credit ratings.

Our proposed risk retention requirement for shelf-registration eligibility is aimed at better aligning the incentives of an ABS sponsor with those of investors. By doing so, risk retention provides investors with an assurance that the quality and characteristics of the underlying assets are consistent Start Printed Page 23409with the disclosures and representations of the sponsor. The proposed risk-retention requirement may also make it more likely that sponsors select assets of higher quality for the pool than they would have, absent the requirement. Thus, although we do not believe that risk retention would result in only investment-grade ABS being shelf-registered, we do nonetheless consider it an appropriate partial replacement for the existing shelf eligibility condition that ABS have investment-grade rating.

We are proposing to require the sponsor to retain five percent of each tranche, net of hedging and on an ongoing basis. Spreading the sponsor's economic interest across all tranches evenly is designed to better address the overall risk assessment and quality of the entire offering rather than only aspects that relate to a specific tranche. Risk retention in the amount of five percent of a tranche is aimed at increasing alignment of incentives of transaction participants in securitizations that will in turn lead to better performing securities without placing an undue burden on issuers.

We note that our proposal only mandates the minimum amount of risk that the issuer is required to retain to have access to shelf registration. A sponsor may voluntarily retain an amount in a tranche greater than that required by our proposed requirement, which could alter the alignment in incentives between the sponsor and the investor.

We also are proposing that, in the case of revolving exposures, a sponsor can meet the risk retention requirement by retaining the originator's interest of not less than five percent. This is proposed to accommodate the special structure of revolving asset master trusts. For example, credit card ABS issuers already retain a seller's percentage that is equivalent to a portion of the pool.[561] Allowing an alternative to the proposed vertical slice requirement for these particular ABS sponsors would benefit investors by allowing incentive alignment aimed at achieving better quality assets to be compatible with the nature of revolving assets.

Requiring the sponsor to meet the risk retention condition rather than the originator may provide benefits to both originators and investors. We are aware that smaller originators may not have the resources to retain such risks. In addition, by not placing the requirement on originators, these institutions could have greater capital resources available to make loans which could ultimately benefit borrowers and financial systems as a whole. We are also aware that implementing an originator-based risk retention requirement would be difficult in a securitization involving multiple originators and may unnecessarily increase the cost of such securitizations.

We believe that our proposal requiring the pooling and servicing agreement or other governing document for an ABS shelf transaction to contain a provision that requires third party loan review of loans that are not repurchased or replaced by the originator after being put back because of a breach in a representation or warranty should strengthen the enforcement mechanisms surrounding representations and warranties for shelf transactions. ABS investors have expressed concerns with the integrity and enforceability of bargained-for contractual provisions in underlying transaction documents ABS offerings.[562] By requiring that the third party be unaffiliated, investors can be better assured that the opinion as to whether a representation and warranty has been breached is impartial. This requirement, which strengthens enforcement mechanisms of representations and warranties, should incentivize obligated parties to better consider the characteristics and quality of the assets underlying the securities, making it an appropriate partial replacement for the existing shelf eligibility requirement that requires the securities to have an investment grade rating.

We believe our proposal to require a certification by the depositor's chief executive officer will focus the certifier on the transaction and the disclosure. Such certification should enhance investors' confidence in the securitization. We believe that a certification may cause these officials to review more carefully the disclosure, and in this case the transaction, and to participate more extensively in the oversight of the transaction making it an appropriate partial replacement for the existing shelf requirement relating to investment grade ratings.

Under Section 15(d) of the Exchange Act, investors in most asset-backed securities may not receive ongoing reporting pursuant to the Act, as most ABS issuers may have less than 300 record holders. Given recent history, we believe ongoing reporting for ABS is important even if the number of holders is low.[563] Our proposal to require that the issuer in an ABS shelf offering undertake to file Exchange Act reports would provide investors with ongoing access to information. Although some issuers already provide ongoing information to investors pursuant to transaction agreement provisions, we believe that our requirements and the undertaking would impose greater discipline on issuers to provide such information and thereby provide further transparency for investors, especially when combined with the proposed loan level disclosure requirements. Investors would benefit from greater transparency on the continuing performance, composition and disposition of assets which can be used to evaluate both their investment as well as the performance of sponsors and originators.

2. Disclosure

We believe that the proposed requirements for asset-level disclosures in XML format and with standardized data definitions will benefit investors in several important ways. First, such required disclosures should reduce investors' cost of information production by reducing duplicative efforts on their part to gather such data on their own or purchase it through data intermediaries. Although some ABS issuers currently provide asset-level data to investors, this is not the case across all asset classes. For example, issuers of certain asset classes, such as credit card receivables, dealer floorplans or equipment loans, typically do not consistently provide asset-level information. As discussed in further detail below, we are proposing an exemption from the asset-level disclosure requirement for a few asset classes. We are unaware of any publicly available data standards for asset classes other than mortgage-backed securities and currently there is no mandatory requirement that issuers follow any of these standards for reporting to investors in asset-backed securities.[564] For the ABS offerings of asset classes that fall within our proposed requirement, our proposal seeks to provide investors with consistent and equal access to asset-level information.

We believe that requiring the asset-level disclosures in XML format and utilizing standardized definitions of material loan, obligor, and collateral characteristics will further benefit investors. The machine-readable format should lower the cost of information processing, and the standardized Start Printed Page 23410definitions should increase comparability of information across issuers. Currently, one sponsor's use of a term in asset-level information may differ from another sponsor's use. For example, “reduced documentation” may not have the same meaning from one sponsor to another or from one originator to another. The XML format that is proposed to be required, along with the utilization of standardized definitions, should allow issuers to provide investors with asset-level information in an immediately usable format. Investors could promptly download and input this information into software tools for analysis of the assets in the underlying pool and pricing of the asset-backed securities.

This process will be further aided by the proposed requirement to provide a programming language representation of the ABS waterfall, which we refer to as the waterfall computer program requirement. This is intended to benefit investors by facilitating their ability to run simulations of expected cash flows under different prepayment, loss and loss-given-default assumptions, while obtaining the full benefit of the loan-level data that we are proposing to require. Requiring the filing of a programming language representation of the waterfall will provide information about the terms of the securities to investors in a form they can readily use for computerized valuation methods of ABS. This will make more relevant information available to investors and allow them to make better-informed investment choices.

The proposal should eliminate the transaction costs for single institutional investors individually to script the waterfall provisions into a programming language representation. This should reduce some of the information asymmetry between the sponsor and a prospective investor that arises because the sponsor, as the person creating the contractual cash flows has access to a programming language representation of the waterfall, a necessary element of ABS valuation using computer simulations of security performance, at the time of the initial public offering, and the investor does not.

Asset-level data in easy to use format and accompanied by the waterfall computer program will likely improve investors' ability to conduct independent analysis and reduce their reliance on credit ratings. With usable information on the composition of the asset pool, investors can evaluate the sponsor's disclosed characteristics of the pool. This, in turn, will allow them not only to price the issue more efficiently but to evaluate the investment potential of the issue better. Indeed, there is some evidence that a major benefit of asset-level disclosure, and more specifically borrower-characteristics disclosure, is an ability to price ABS more accurately.[565] In addition, if asset-level data reduces investors' uncertainty about the composition of the asset pool, investors should be willing to pay higher prices for the security.[566] We believe that the proposed grouped asset data requirement applicable to credit cards ABS issuers offers benefits similar to that of the proposed asset-level data requirements.

We also are proposing to require asset-level disclosure be provided on an ongoing basis. Ongoing disclosure of asset-level information should encourage better monitoring of the security by investors and other market participants. Such information would be useful for tracking the performance of the assets, as well as an assessment of performance of the originator, sponsor, or servicer. This would allow investors to continue their independent analysis of the asset-backed securities rather than rely on NRSRO credit ratings to alert them of changes in the ABS risk-return profile.

Our proposed asset-level information requirements, notably, are tailored by asset class. We have taken under consideration situations in which the amount of asset-level disclosure would be too voluminous, or investors are unlikely to find such disclosure meaningful. We have decided to modify these requirements or not impose them at all, if they do not appear to justify the compliance costs imposed on issuers. For example, instead of asset-level information, we propose to require that issuers of ABS backed by credit card receivables provide grouped asset data. Such issuers will be required to disclose information on the assets in the underlying pool by grouping these assets into different combinations of standardized pool characteristics. Similarly, we believe that the potential costs of requiring issuers of stranded-costs ABS to provide asset-level disclosures would not justify the benefits, so we are not proposing to require such disclosures.[567]

Our proposed enhancements to pool-level disclosure are intended to help elicit important information in areas that became problematic in the recent financial crisis, such as with respect to exception loans. We also are proposing to amend the definition of an asset-backed security to further restrict the type of securities that may utilize the framework provided in Regulation AB. We believe that the restrictions on exceptions to the discrete pool requirement of an asset-backed security benefits investors by maintaining the integrity of the discrete pool requirement and is consistent with investor demand for more meaningful asset-level data. Our proposed revisions to Item 6.05 of Form 8-K would require that issuers file a current report and provide pool information when there is a one percent or greater change in a material pool characteristic of the asset pool. These revisions to the rules, we believe, assist in closing existing gaps by which the asset pool composition could be changed significantly or without necessary accompanying disclosure. Investors will be able to evaluate the consequences of asset pool composition changes in order to determine the continuing suitability of the investment.

Certain of the proposed disclosure requirements should benefit investors by helping them to more easily and effectively assess the structure of the ABS transaction and the parties involved. For example, where assets have been put back to an originator or sponsor in the offering in the last three years and those assets have not been repurchased or replaced, we are proposing to require disclosure of the number of those assets that have not been repurchased or replaced. Similarly, Start Printed Page 23411disclosure on the originator's and sponsor's financial condition where material, as provided in the proposal, should benefit investors by allowing them to assess whether the condition of the originator or sponsor may have bearing on their ability to make payments relating to their repurchase obligations. Our proposed requirement relating to disclosure of a fraud representation in the transaction documents would allow an investor to consider the existence of the representation (or lack thereof) in making an investment decision. Finally, our proposed disclosure requirement relating to the originator's and sponsor's interest in the securitization program, including risk retention, would allow an investor to better consider the incentive structure and other possible risks relating to such party.

We also have several proposals relating to the presentation of information in the prospectus for ABS offerings, including our proposal on the flow of funds, our proposal eliminating the use of a base prospectus and accompanying prospectus supplement, and our proposed revisions to the static pool information requirements. Through such proposals, we seek to improve the presentation of information in ABS offering materials, which may be unwieldy and contain duplicative disclosure, jargon or discussion inapplicable to the specific transaction at hand. These proposed revisions aim to facilitate more ready access to the information for investors and other market participants.

In addition, in coordination with the expiration of the temporary accommodation in Rule 312 allowing ABS issuers to file static pool information on an Internet Web site, issuers would need to file static pool information with the Commission. We are proposing to permit that such information be filed in PDF format. Implementation of the requirement to file static pool information on EDGAR addresses concerns relating to the maintenance of Web sites and the presentation of static pool information while our proposal to allow issuers to file such information in PDF format would allow this disclosure to be provided to investors in an easy to read format.

3. Privately-Issued Structured Finance Products

Many ABS and similar structured finance products are offered and resold in reliance on the Rule 144A safe harbor.[568] Rule 144A is a safe harbor from being deemed an underwriter within the meaning of Sections 2(a)(11) and 4(1) of the Securities Act for the resale of securities to qualified institutional buyers. Many of the types of asset-backed securities that caused significant concern in the financial crisis included securities that are typically sold in private transactions.[569] Our proposal to require more disclosure for privately-issued structured finance products are designed to provide investors in such securities, which can have complex incentive structures among various parties and whose valuation is dependent on an understanding of the assets in the underlying pool, with better information than they currently receive.

Our proposal to require a notice of sales for the initial placement of securities to be sold in reliance on Rule 144A, we believe, would improve transparency in the asset-backed securitization market. This notice could in turn help regulators with monitoring developments in the securitization market and determining whether future rulemaking or other actions with regard to asset-backed securities may be necessary. This notice could also have the additional benefit of supporting the Commission's efforts to enforce the federal securities laws relating to asset-backed securities. The items proposed to be added to Form D for asset-backed issuers would have similar benefits to the extent ABS issuers rely on Rule 506 of Regulation D.

C. Costs

Our proposals for asset-backed securities are designed to improve disclosure to ABS investors but would impose costs on ABS issuers and other participants in the chain of securitization in various ways. The proposals to revise shelf registration and to replace the investment grade ratings requirement for shelf eligibility would impose additional costs on ABS issuers offering securities through shelf registration. Sponsors of shelf registered issuers would also incur direct costs, as a result of the proposed risk retention shelf eligibility condition that would require the sponsor to retain and maintain five percent of each tranche, or, in the case of revolving assets, five percent of the pool.

Some of the proposed disclosure requirements refine existing disclosure requirements; however the proposal to require standardized asset-level information or grouped asset data and to provide a computerized program of the issue's waterfall are new disclosure requirements, and thus issuers would be required to incur additional costs to which they were previously not subject. Our proposals relating to the disclosure by privately-issued structured finance product issuers would impose additional costs on such issuers seeking to rely on certain regulatory safe harbors.

1. Securities Act Registration

The proposed requirement to file a form of preliminary prospectus at least five business days before the date of first sale and the proposed requirement that brokers deliver a preliminary prospectus 48 hours ahead of sale would require that issuers provide information to investors earlier in the process than is currently the case. During that period, issuers may be exposed to the risk of changing market conditions; however, such uncertainty is similar to that faced by other issuers of underwritten initial public offerings of debt whose final offer prices are not set for weeks or months after filing.

The two methods to satisfy the risk retention shelf eligibility condition that we are proposing to allow for shelf eligibility may increase costs of securitization to sponsors. We note, however, if issuers find the cost of risk retention too high, ABS offerings could be registered without being subject to a risk retention requirement, as long as such offerings are registered on proposed Form SF-1. For purposes of PRA analysis, we estimate the total movement out of the shelf registration system to be 10% of the current number of shelf offerings, although not all of this movement is estimated to move to proposed Form SF-1 and some may move to private markets.

We also note that the risk retention shelf eligibility condition may impact the risk management process of a sponsor. Some financial institutions are impacted through requirements to hold capital against the risk to which they are exposed, which would put them at a disadvantage to other institutions. Reserving capital for risk retention reduces the amount of funds available for lending which will increase a borrower's cost of funds. Any such reduction in lending capacity suffered by the ABS issuer may be passed through to the financial institution's investors and customers as a cost of the securitization process.Start Printed Page 23412

In addition, as we noted in our PRA estimates, while we are not imposing additional disclosure requirements for the Form 10-K for sponsors, they may incur some additional costs in preparing their annual reports in determining the impact of the required risk retention on their disclosure. We estimate, for purposes of the PRA, that sponsors will need an additional 10 hours to prepare their Form 10-K filings at a total cost of $2,500 per sponsor.[570]

Also, under our proposed shelf eligibility conditions, issuers in shelf registrations would be subject to additional costs of hiring a third party to review assets that have been put back to an obligated party, usually the sponsor or originator, for breach of the representation and warranties. Additionally, the value of these opinions is dependent on investors' perception of the expertise of the entity providing the opinion. This proposed shelf eligibility condition also might create incentives for originators or sponsors to agree to repurchase or replace assets that have been put back to them even in cases where these assets were not in breach. Under our proposals, ABS offerings that are shelf registered would be required to include a certification signed by the depositor's chief executive officer regarding the characteristics of the assets, which will impose some additional disclosure burden.

Our proposed shelf eligibility condition to require ABS issuers to undertake to file Exchange Act reports would also impose certain costs on ABS issuers on shelf. The Exchange Act reporting requirements for ABS issuers take into account existing reporting obligations to investors required under ABS transaction agreements. Many ABS transaction agreements contemplate continued reporting to investors, but those reports, while provided to investors, are not required to be filed if the issuer has suspended its Exchange Act reporting obligation. Because our proposal would require the issuers to undertake to file reports with the Commission, an ABS issuer registered on shelf would include additional costs to file ongoing information with the Commission. Certain types of asset-backed securities, such as ABS backed by credit cards, continue to issue securities backed by the same pool, and thus are required to continue to report on an ongoing basis, and thus would not incur additional costs as a result of the proposed amendments. Other asset-backed securities are exchange-listed and are subject to the reporting requirements of Section 12(b) of the Exchange Act, and thus our proposal would not impose additional costs of them. We estimate in the PRA that the incremental cost of the proposed changes relating to Exchange Act reporting is $71,628,900.[571]

These proposed shelf eligibility conditions would replace, in part, the prior reliance on investment grade ratings as a condition for shelf eligibility. A potential cost of this substitution is that investors may incorrectly believe that these requirements are an indication that shelf registrations are, effectively, investment grade offers. Under the proposed requirements, securitizations would be eligible for shelf registration if they meet the rule's requirements regardless of their credit rating, which may or may not be investment grade.

The costs associated with both the shelf registration requirements and asset-level disclosures detailed above could be passed down the chain of securitization. If the market is much more concentrated at the sponsor level than at the originator level, sponsors may be able to pass on to originators some of the costs of our proposals. Originators could, in turn, pass some of these costs onto borrowers, although their ability to do so might be constrained by competition from non-securitizing lenders.

2. Disclosure

Although some issuers currently provide asset-level information, this is not a consistent practice across all issuers.[572] Our proposals to require disclosure of asset-level information are designed to provide, investors with equal access to such information with certain exceptions discussed below. This will lead to additional costs being imposed on sponsors to compile and report asset-level data. As noted in the PRA, we estimate that it will cost issuers $79,939,291 to compile and report asset-level information.[573]

Where we believe individual asset-level disclosures would be overly burdensome and of little utility to investors, we are proposing to require less granular disclosures or no disclosures altogether. For instance, credit-card ABS are backed by millions of accounts. For this ABS class, asset-level disclosures likely would produce an overwhelming amount of data, which we believe would not be useful for investors. Thus, we are proposing that issuers of ABS backed by credit and charge card receivables provide information on the assets in the underlying pool grouped along specified standardized dimensions. Based on similar considerations, we propose to exclude from the required asset-level disclosures issuers of ABS backed by stranded costs.

Our proposed standard definitions for asset-level information are similar to, and in part based on, other standards that have been developed by the industry, such as those developed under ASF's Project RESTART or those developed by CRE Finance Council. Because these proposed standard definitions employ widely used metrics for asset-level information, we also believe that these standards should be similar to other standards used for reporting purposes, including the mortgage metrics that national banks and thrifts must provide to the Office of Comptroller of the Currency and the Office of Thrift Supervision.[574] To the extent that there are differences between standards on the same information, additional costs would be imposed on issuers and servicers to track the differences between one standard and another. Further, servicers may incur some costs in monitoring their compliance with servicing criteria and requirements under the servicing agreement with respect to reports on asset-level information.

Under the proposed requirements, issuers of ABS would be subject to additional ongoing asset-level or Start Printed Page 23413grouped asset disclosure requirements. Because we believe the information required already should be available, we do not expect significant increase in information gathering costs. However, we do believe that the costs discussed above of reconciling variable definitions, tagging required asset data and filing information with the Commission will be incurred in the process of continued reporting.[575] For purposes of our PRA analysis, we estimate that after the sponsor has incurred initial setup costs and after it has made its first filing, ongoing asset-level disclosure requirements would impose an additional cost of 10 burden hours per filing, which is equivalent to $2,125.[576]

The proposed requirements for asset data disclosure might have important implications for originators' ability to remain competitive and retain their lending market share. Once detailed data on borrower characteristics matched to loan terms becomes publicly available in XML format, a disclosing originator's competitors may be able to more easily infer its loan pricing model and might use the data to increase their own market share at the disclosing originator's expense. This may have an adverse impact on the profitability of credit institutions that choose to securitize some of the credit they extend.

Disclosures about an originator's or a sponsor's refusal to repurchase or replace assets put back to them for breach of representations and warranties (as well as the proposed third party opinion shelf eligibility condition, as noted above) might create incentives for originators to agree to repurchase or replace such assets even in cases where these assets were not in breach. If investors regard such disclosures as indicative of a willingness to comply with representations and warranties in the future, then originators or sponsors might try to preserve their reputation by taking back assets even when they do not have to do so. This might create an incentive for sponsors and possibly trustees to ask for repurchase or replacement of poorly performing assets that represent no breach of representations or warranties.

The proposed requirement to provide a programming language representation of the waterfall computer program would facilitate the ability of ABS investors to meaningfully use the asset data disclosed by the ABS issuer at the time of the public offering and with the monthly or other periodical distribution reports on Form 10-D filed with the Commission. We believe that the sponsor of an ABS generally will have in its possession at the time of the public offering a representation in computer programming language of the waterfall. However, additional time and expense will be involved in filing this computer programming language as source code on EDGAR concurrently with the filing of the Rule 424 prospectus, as the waterfall computer program may have to be subjected to additional review before it is filed with the Commission. We are proposing to exempt issuers of offerings backed by stranded costs from the proposed requirement, as they are not required to provide asset-level information under the proposal. As discussed in the PRA section, we believe that initial startup costs for preparing waterfall computer program for ABS would be approximately 672 burden hours per sponsor at a cost of $159,600.[577] Also in our PRA analysis, we estimate the ongoing costs associated with converting the waterfall computer program to the necessary format to be two hours per securitization, which equals $700.[578]

The asset data and waterfall computer program disclosure requirements might impose costs on entities other than the securitization participants. Making such information available to the public for free may adversely impact the business model of firms currently selling such information to investors. If waterfall formulas are available to investors free of charge, in program form, investors may face a reduced incentive to purchase existing products that provide essentially the same service.

Sponsors may face costs in addition to the initial and ongoing mechanical costs of waterfall preparation. Increased product transparency may reduce some effects of product complexity, potentially enabling investors to more accurately value securities. The resulting price transparency may place new constraints on sponsors' latitude in pricing the products, potentially lowering the profitability of bringing ABS to market.

Rating agencies may also face costs related to implementation of the waterfall computer program requirement. To the extent that rating agency analysis has served as a proxy, for some investors, for in-depth modeling, investors may rely less on this analysis as a result of being more readily able to perform their own calculations, potentially on an automated basis.

We believe that our proposals to amend the discrete pool exception in the Regulation AB definition of an asset-backed security, for the most part, only carve back on outlier structures and should result in little cost to asset-backed issuers.[579] Our proposed revisions to the Regulation AB definition of an asset-backed security should be minimal, and, if adopted, a security that does not meet the new Regulation AB definition of an asset-backed security could still register with the Commission as long as additional, suitable disclosure is provided regarding the offering, the securities and transaction parties.

We note that our proposals to revise the pool-level information requirements and information requirements on originators and sponsors further refine the disclosure requirements rather than impose significant burdens, which is why we expect no material increase in compliance costs. Our proposal to eliminate the base prospectus and prospectus supplement format for ABS issuers may cause a small increase in the number of registration statements filed with the Commission and a corresponding increase in the cost to issuers to prepare and file such registration statements. In addition, this proposal and our proposal to require the filing of a post-effective amendment for additional structural features or credit enhancements could increase some compliance costs for ABS issuers. However, we believe that our proposal to allow ABS issuers to use a “pay-as-you-go” registration system for each offering would offset some of those costs by providing ABS issuers with greater flexibility that would improve the Start Printed Page 23414utility of shelf registration, increase efficiency and thereby ultimately reduce costs for issuers.

3. Privately-Issued Structured Finance Products

The costs of complying with the shelf registration requirements may make alternate offering mechanisms, such as private placements or exempt offerings more attractive. To improve investor protection in these types of offerings, our proposed regulations would give investors the right to obtain the same level of disclosure as required in a registered Form S-1 or proposed Form SF-1 offering (and ongoing information that would be required if the issuer were subject to Exchange Act reporting obligations) when sales are made in reliance on Rule 506 of Regulation D or resales are made in reliance on Rule 144A. We also are proposing to require that transaction agreements contain a provision by which the issuer promises and represents to provide this disclosure to investors and prospective purchasers upon request.

While the costs to implementing this new information requirement may be significant to ABS issuers, we believe that such costs are justified in light of the role that privately-placed issued ABS played in the financial crisis. We believe that the recent financial crisis exposed deficiencies in the information available about CDOs and other privately-issued structured finance products.[580] Not only does it appear that these instruments were not well understood by investors, but market participants and regulators did not have access to important information about this significant component of the capital markets.[581] We also recognize that the additional proposed requirements that would be imposed on issuers who wish to rely on the safe harbors may possibly result in changes in the number of ABS offerings and increased use of offshore ABS offerings. For purposes of PRA analysis, we estimate for that total annual number of internal burden hours that would be imposed by the proposed amendments is 171,498 hours, while the total annual external cost estimate is be $58,144,976.

We believe that costs of the proposed requirement that issuers file a notice of sales for the initial placement of securities to be sold in reliance on Rule 144A should be minimal. In addition, we are proposing to add disclosure requirements specific to ABS issuers to Form D. For purposes of PRA, we estimate that proposed requirement on issuers to file Form 144A-SF would take approximately two hours per response per year at a total dollar cost of $700.[582] For purposes of the PRA, the added requirements to Form D would not increase the current four-hour estimate for completing the form.

D. Request for Comment

We seek comments and empirical data on all aspects of this Benefit-Cost Analysis including identification and quantification of any additional costs and benefits. Specifically, we ask the following:

  • Would the required risk retention threshold for shelf eligibility be overly burdensome on issuers? If yes, please provide both qualitative and quantitative information to support your position.
  • How does the proposed level of risk retention for shelf eligibility differ from current industry standards?
  • Are there other more cost-effective ways we can accommodate issuer practices with respect to risk retention in order to lower overall costs without jeopardizing interest alignment?
  • Who will bear the costs of the risk retention shelf eligibility condition? How would the proposed risk retention shelf eligibility condition impact borrowers?
  • Would the proposed risk retention shelf eligibility condition impose costs in addition to those identified above, such as costs arising from systems changes and restructuring business practices to account for the new risk retention requirements?
  • Are the cost estimates per ABS issuance estimated by the Commission in line with industry's expectations?
  • Would these proposals affect originators by making publicly available asset data that makes it possible to infer their loan pricing model? Is it possible to quantify or mitigate such effects?
  • Do you believe that the proposed disclosure requirements will impose costs on other market participants, including firms that currently provide asset-level data information and waterfall computer code for a fee?
  • Do the proposed disclosure requirements strike an appropriate balance in requiring sufficient pool-level information? Do you believe that providing more pool-level information will affect investors' willingness to analyze the individual assets comprising the pool? If so, what might be the consequences of such an outcome?
  • Are our estimates for costs of disclosing and tagging asset data file appropriate?
  • What type of burden would the proposed waterfall computer program requirement impose on ABS issuers? What is the magnitude of that burden?
  • What are the costs of our proposal to require that more information be disclosed to the investor when a sale is made in reliance on the Rule 144A or Regulation D safe harbors? Are those costs justified by the benefits provided by the proposals?

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

Section 23(a) of the Exchange Act [583] requires the Commission, when making rules and regulations under the Exchange Act, to consider the impact a new rule would have on competition. Section 23(a)(2) prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. Section 2(b) of the Securities Act [584] and Section 3(f) of the Exchange Act [585] require the Commission, when engaging in rulemaking that requires it to consider whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action would promote efficiency, competition, and capital formation. Below, we address these issues for each of the proposed substantive changes to ABS offerings.

A. Shelf Registration Requirements

1. Risk Retention

The impact of our proposed shelf eligibility condition to require that issuers retain a certain amount of risk in each tranche of the securitization is similar to the existing regulations imposed by the EU. Under EU Start Printed Page 23415regulations, certain investing institutions may not hold a position in asset-backed securities unless the sponsor or originator agrees to retain a certain amount of the exposures in the securitization. Because the EU- and the U.S.-issued shelf registered ABS (which had comprised most of the publicly offered ABS market) would then have comparable risk retention features, our proposed shelf eligibility condition should not cause a reduction in U.S. competitiveness from the status quo that existed prior to the current EU regulations.

Risk retention may have the additional effect on capital adequacy for those issuers who are subject to the regulatory capital requirements. The risk retention requirement may put sponsors subject to regulatory capital requirements at a competitive disadvantage with those who are not.

In addition, we recognize that some issuers may not wish to retain risk and requiring those issuers to retain risk in order to conduct a shelf offering could reduce the investment alternatives available to investors. Therefore, our proposal would allow an issuer to register an offering on proposed Form SF-1 without retaining risk. The tradeoff facing the issuer is that offers on proposed Form SF-1 would likely have a longer wait before being able to go to market, for instance possibly waiting for the registration statement to be declared effective for 60 to 90 days compared to five business days for the proposed revised shelf registration procedures. The amount of time in non-shelf registration is greater than that of shelf offerings in order to allow the Commission staff the ability to review and comment on the filing and give investors additional time to consider the issue and make a better informed investment decision. These features of our proposal could have the pro-competitive effect of providing more alternatives to issuers. Alternatively, some or all issuers could decide that registration is not an acceptable alternative, which could result in fewer alternatives for investors.

The proposed risk retention shelf eligibility condition promotes capital formation and efficiency by improving the alignment of sponsors' interest with that of investors. This could result in an allocation of capital to the most productive uses and lead to gains in overall economic efficiency.

2. Representations and Warranties in Pooling and Servicing Agreements

One of the problems in the ABS market that was highlighted during the financial crisis is the inability to efficiently enforce contractual provisions and unilateral modification of those ABS provisions. Our proposed ABS shelf eligibility condition relating to the representations and warranties stated in a pooling and servicing agreement promotes a better understanding of the enforceability of those representations and warranties. As a result, investors should have greater certainty and transparency about the consequences of breaches of the representations and warranties. With respect to shelf offerings of ABS, all other things equal, this proposal is competitively neutral.

3. Depositor's Chief Executive Officer Certification

Our ABS shelf eligibility condition that the chief executive officer of the depositor certify that to his or her knowledge the assets have characteristics that provide a reasonable basis to believe that the underlying pool of assets will produce cash flows at times and in amounts necessary to service payments on the securities as described in the prospectus promotes capital formation by providing investors in shelf offerings with additional assurance that the sponsor has performed the necessary evaluation of the underlying assets and this evaluation is consistent with the disclosure provided in the prospectus.

4. Ongoing Exchange Act Reporting

Our proposals would require that issuers of ABS using shelf registration provide ongoing Exchange Act reporting. We believe that this will promote both efficiency and capital formation by making information useful for monitoring and assessing the performance of both the assets and the sponsor available to investors and the markets in general. More public information on an ongoing basis should assist investors to make better informed decisions on how to allocate capital, and should promote allocational efficiency by enabling investors to better match their preferences for risk and return.

5. Eliminate Ratings Requirement

We propose to eliminate the current ABS shelf eligibility condition that relies on the ratings provided by an NRSRO. Our proposal, however, does not prohibit an investor from using a credit rating in its investment decision in an offering under a shelf registration statement if they should find this information useful. Rather, we would be eliminating the reference to credit ratings in our rules in order to reduce the likelihood of undue reliance and remove the appearance of an imprimatur that such references may create. This is designed to decrease the appearance that we sanction the use of ratings over investor analysis in an investment decision. We believe that doing so promotes investor protection by reducing the possibility that our rules encourage investors to rely unduly on ratings [586] rather than conduct their own analysis of the securities. If the proposals are adopted, investors may still utilize ratings. It is also possible that ABS sponsors will continue to have their offerings rated. Even if ratings agencies see a decline in their business due to this regulation and other information being made available by sponsors, we believe that the benefits of the proposals would justify these potential indirect costs. The proposals provide an efficient means of assessing the quality and character of ABS shelf offerings, which thus would not impose a burden on competition.

B. Five-Business Day Filing and Prospectus Delivery Requirements

In the case of shelf registration, once the registration statement is effective, we are effectively proposing to increase the time that issuers are required to provide information about the offering from no minimum to at least five business days before first sale in the offering off the shelf. This additional time is designed to provide investors with additional time to analyze and understand the risk profile of the securities being offered and to make more informed and better investment decisions that will improve pricing efficiency, and should assist investors to make better informed decisions on how to allocate capital.

Our proposal to require brokers to provide investors with a preliminary prospectus at least 48 hours before confirmations are sent would apply to all registered ABS offerings, regardless of whether they are made under a shelf registration statement. Given that each ABS offering requires a consideration of new and different assets, we propose to treat ABS offerings in this regard similarly to any other initial public offering of securities. Because all registered ABS offerings will have the Start Printed Page 23416same requirement, this proposal is competitively neutral with respect to all public issuers.

C. Disclosure

As a result of the financial crisis and subsequent events, the market for securitized assets has suffered dramatically due, in part, to the recession, lower housing prices and increased consumer debt load—but also because of perceived problems in the securitization process that affected investors' willingness to participate in these issues. Increased transparency of the underlying assets is valuable because it provides better information that should allow the market to price these products more accurately. Greater disclosure should give investors better tools to evaluate the underlying assets and to determine whether or not to invest in the instrument and at what price. By doing so, the Commission intends to promote efficient capital allocation. Consequently, each of these regulations, described individually below, should provide the following:

  • Productive efficiency: The underwriter and sponsor are in the best position to be the lowest cost providers of the loan level information that we are proposing. Making such information available will reduce the amount of investor and third party research that is repetitive. Requiring that this data be easily machine-readable will allow parties to perform, at relatively low cost, larger scale analysis than now occurs.
  • Allocational efficiency: Investors will be better able to match their risk/return preferences with ABS issues having the same risk return profile;
  • Capital formation: Better disclosure should increase demand for these securities that will then be used to increase capital formation.[587]

We note that some of our proposals refine rules to provide investors with a better understanding of the offering, the transaction parties, or the material characteristics of the pool assets, including the underwriting of the assets. These proposals do not significantly change the framework that exists under our current rules for asset-backed securities.

1. Asset Data File and Waterfall Computer Program

Under our proposed asset-level disclosure requirements, issuers would be required to provide certain standardized information on each asset that is in the pool underlying the securities, or on standardized groupings in the case of credit card receivables. Such information would not only be required at the time of securitization but also on an ongoing basis. This should be an efficiency-enhancing requirement because issuers and underwriters have ready access to the asset-level information that we propose be provided; consequently, the information will be publicized by the lowest cost provider. As evidence that this is not an onerous burden, some issuers already provide much of the information to investors (although such information is not standardized). Nonetheless, where we believe the costs in providing this information may not be justified in light of the limited benefit to investors and with consequent potentially negative effects on efficiency, competition and/or capital formation, we are proposing to exclude those issuers from the asset-level requirements, or, in the case of credit card ABS issuers, to modify the approach. Asset data file information requirements are proposed to be applied equally to shelf eligible and non-shelf eligible offerings alike, thus applying the burdens equally to all publicly offered ABS issuers.

As described in the Benefit-Cost section above, the proposed asset-level disclosure requirements are likely to increase competition in lending markets by making information more cheaply available. Large datasets of loan-level information on credit terms and borrower characteristics are now available—but often at a considerable cost to subscribers and with incomplete information for some mortgage originators of the loans in the underlying pool. The data can be used to reverse engineer an originator's lending strategy in general or loan-pricing model in particular. Such information can be used by lenders to compete more effectively and even more generally can lower barriers to entry into geographic or product lending markets. By making this information more cheaply available, small loan originators may have access in the future to data that only the larger institutions could afford. As such, the provision of this data will be pro-competitive in lending markets.

We are mindful that forced disclosure of detailed information may create disincentives for innovation. At the present time, however, asset-level data are sometimes available from third party vendors for a price. Consequently, there should be little incremental effect on innovation from our proposed disclosure requirement.

We expect that the proposed asset-level and waterfall-computer-program disclosure requirements may negatively impact the profitability of providers of similar information and products currently being marketed. If the individual-asset data and cash-flow generating code are available free of charge, investors will no longer have the incentive to purchase similar products from third party vendors. Thus, some data vendor product market share may be negatively impacted by our requirements. However, the free availability of this data could give rise to new products from third party vendors who will offer data analyses, data analysis services and even user software to process the data that has features absent from the proposed waterfall computer program requirement.

Our proposals should benefit consumers because, first, the same information will be available at lower cost than is now the case and, second, we expect to see innovations in information processing and delivery to provide insights to investors that may now be prohibitive.

2. Pay-As-You-Go Registration and Revisions to Registration Process

Some of our proposals are directed at the format and presentation in which information is provided to investors to facilitate analysis of offering materials and, thus, promote more efficient capital formation through greater understanding of ABS. For example, we propose to eliminate the base prospectus and prospectus supplement format for disclosure. We believe that this should significantly improve disclosure for investors. While we acknowledge that the proposal may increase costs for issuers by increasing the number of registration statements that must be filed, our proposal to allow a “pay-as-you-go” registration system for ABS issuers should help to offset those costs and thereby improve efficiency for ABS issuers.Start Printed Page 23417

3. Restrictions on Use of Regulation AB

Part of our proposed changes would change the definition of an asset-backed security to restrict the types of structures that could be utilized under the Regulation AB framework. The proposed revisions should impact only a few offerings. Inasmuch as this is basically delineating the securities that are not suitable for the Regulation AB framework, this action does not significantly change the status quo and therefore has no effect on efficiency, competition and capital formation.

D. Safe Harbors for Privately-Issued Structured Finance Products

We also note that some of our changes to registered offerings of ABS may make alternate offering mechanisms, such as private placements or exempt offerings more attractive. We are proposing to revise our rules relating to offers and sales made in reliance on Rule 506 of Regulation D and resales made in reliance on Rule 144A to give the investors the right to obtain the same level of disclosure as required in a registered Form S-1 or proposed Form SF-1 offerings. This in turn may make offers and sales pursuant to Section 4(2) of the Securities Act or resales pursuant to so-called Section 4(1-1/2) more attractive to issuers. We think this will promote efficiency by bringing transparency to formerly opaque private structured finance product market, particular for CDOs and similar products.

E. Combined Effect of Proposals

If sponsors/issuers bear the costs discussed above, this could put private-label RMBS sponsors/issuers at further disadvantage relative to government sponsored enterprises [588] whose RMBS are exempt from SEC registration (e.g., Freddie Mac, Fannie Mae and Ginnie Mae). Increasing the costs of securitization may give a competitive advantage to residential mortgage originators who can securitize through government sponsored enterprises and may increase the cost of non-conforming loans to borrowers. Such GSEs are not required to disclose loan-level information and/or commit to the requirements of SEC registration. If the proposed costs are sufficiently high relative to the resulting benefits of these regulations to investors, originators could receive a better price from selling conforming loans to these agencies as opposed to private conduits, thus increasing the competitive advantage of GSEs. In addition, the better selling price of conforming loans to GSEs could adversely affect originators' incentives to underwrite non-conforming loans, since these cannot be securitized through GSEs. The combined effect might be a reduction in the number of assets available for securitization by non-GSE ABS issuers and could provide GSEs with greater market power at the expense of conforming loan lenders and non-conforming borrowers. We believe that to the extent the consideration of risk and return makes non-GSE more attractive than GSEs, this competitive advantage could be reduced.

In summary, taken together the proposed amendments to our regulations and forms on asset-backed securities are designed to improve investor protection, reduce the likelihood of undue reliance on ratings, and increase transparency to market participants. We believe that the proposals also would improve investors' confidence in asset-backed securities and help recovery in the ABS market with attendant positive effects on efficiency, competition and capital formation.

We request comment on our proposed amendments. We request comment on whether our proposals would promote efficiency, competition, and capital formation. Commenters are requested to provide empirical data and other factual support for their views, if possible. We also request comment on whether our proposed changes to Exchange Act Rule 15c2-8(b), the disclosure requirements and Exchange Act forms would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.

XIII. Small Business Regulatory Enforcement Fairness Act

For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996,[589] a rule is “major” if it has resulted, or is likely to result in:

  • An annual effect on the U.S. economy of $100 million or more;
  • A major increase in costs or prices for consumers or individual industries; or
  • Significant adverse effects on competition, investment, or innovation.

We request comment on whether our proposed amendments would be a “major rule” for purposes of the Small Business Regulatory Enforcement Fairness Act. We solicit comment and empirical data on:

  • The potential effect on the U.S. economy on an annual basis;
  • Any potential increase in costs or prices for consumers or individual industries; and
  • Any potential effect on competition, investment, or innovation.

XIV. Regulatory Flexibility Act Certification

The Commission hereby certifies pursuant to 5 U.S.C. 605(b) that the proposals contained in this release, if adopted, would not have a significant economic impact on a substantial number of small entities. The proposals relate to the registration, disclosure and reporting requirements for asset-backed securities under the Securities Act and the Exchange Act. Securities Act Rule 157 [590] and Exchange Act Rule 0-10(a) [591] defines an issuer, other than an investment company, to be a “small business” or “small organization” if it had total assets of $5 million or less on the last day of its most recent fiscal year. As the depositor and issuing entity are most often limited purpose entities in an ABS transaction, we focused on the sponsor in analyzing the potential impact of the proposals under the Regulatory Flexibility Act. Based on our data, we only found one sponsor that could meet the definition of a small broker-dealer for purposes of the Regulatory Flexibility Act.[592] Accordingly, the Commission does not believe that the proposals, if adopted, would have a significant economic impact on a substantial number of small entities.

XV. Statutory Authority and Text of Proposed Rule and Form Amendments

We are proposing the new rules, forms and amendments contained in this document under the authority set forth in Sections 4, 5, 6, 7, 8, 10, 17(a), 19(a), and 28 of the Securities Act, Sections 10, 12, 13, 14, 15, 23(a), 35A and 36 of the Exchange Act, and Section 319 [593] of the Trust Indenture Act.[594]

Start List of Subjects

List of Subjects in 17 CFR Parts 200, 229, 230, 232, 239, 240, 243 and 249

End List of Subjects

For the reasons set out above, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows:

Start Part Start Printed Page 23418

PART 200—ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION REQUESTS

1. The authority citation for Part 200 Subpart A continues to read in part as follows:

Start Authority

Authority: 15 U.S.C. 77o, 77s, 77sss, 78d, 78d-1, 78d-2, 78w, 78 ll (d), 78mm, 80a-37, 80b-11, and 7202, unless otherwise noted.

End Authority

Sections 200.27 and 200.30-6 are also issued under 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77q, 77u, 78e, 78g, 78h, 78i, 78k, 78m, 78o, 78o-4, 78q, 78q-1, 78t-1, 78u, 77hhh, 77uuu, 80a-41, 80b-5, and 80b-9.

Section 200.30-1 is also issued under 15 U.S.C. 77f, 77g, 77h, 77j, 78c(b) 78 l, 78m, 78n, 78 o (d).

Section 200.30-3 is also issued under 15 U.S.C. 78b, 78d, 78f, 78k-1, 78q, 78s, and 78eee.

Section 200.30-5 is also issued under 15 U.S.C. 77f, 77g, 77h, 77j, 78c(b), 78 l, 78m, 78n, 78o(d), 80a-8, 80a-20, 80a-24, 80a-29, 80b-3, 80b-4.

2. Amend § 200.30-1 by adding paragraph (a)(11) to read as follows:

Delegation of authority to Director of Division of Corporation Finance.
* * * * *

(a) * * *

(11) To request materials from issuers as required to be furnished to the Commission, upon written request, pursuant to Form D (referenced in § 239.500 of this chapter) and Form 144A-SF (referenced in § 239.144A of this chapter).

* * * * *
End Part Start Part

PART 229—STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND CONSERVATION ACT OF 1975—REGULATION S-K

3. The authority citation for part 229 continues to read in part as follows:

Start Authority

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 777iii, 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78 l, 78m, 78n, 78o, 78u-5, 78w, 78 ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-38(a), 80a-39, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise noted.

End Authority
* * * * *

4. Amend § 229.512 by:

a. In paragraph (a)(1)(iii)(B) by adding the phrase “, Form SF-3 (§ 239.45 of this chapter)” immediately after the phrase, “Form S-3 (§ 239.13 of this chapter)”;

b. In paragraph (a)(1)(iii)(C) by revising the phrase “on Form S-1 (§ 239.11 of this chapter) or Form S-3 (§ 239.13 of this chapter)” to read “Form SF-1 (§ 239.44 of this chapter) or Form SF-3 (§ 239.45 of this chapter)”;

c. Adding paragraphs (a)(5)(iii) and (a)(7); and

d. Removing paragraph (l).

The additions read as follows:

(Item 512) Undertakings.

(a) * * *

(5) * * *

(iii) If the registrant is relying on Rule 430D (§ 230.430D of this chapter):

(A) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) and Rule 424(h) (§ 230.424(b)(3) and § 230.424(h) of this chapter) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and

(B) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) (§ 230.424(b)(2), (b)(5), or (b)(7) of this chapter) as part of a registration statement in reliance on Rule 430D relating to an offering made pursuant to Rule 415(a)(1) (vii) (§ 230.415(a)(1) (vii) of this chapter) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430D, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or

* * * * *

(7) If the offering is registered on Form SF-3 (§ 239.45) and the registrant is relying on Rule 430D (§ 230.430D of this chapter):

(i) With respect to any offering of securities to file substantially all the information previously omitted from the prospectus filed as part of an effective registration statement in reliance on Rule 430D (§ 230.430D) except for the omission of information with respect to the offering price, underwriting discounts or commissions, discounts or commissions to dealers, amount of proceeds or other matters dependent upon the offering price in accordance with Rule 424(h) (§ 230.424(h)); and

(ii) To file reports for each offering that is registered on Form SF-3 as would be required by Section 15(d) of the Exchange Act and the rules thereunder if the issuer were required to report under that section as long as non-affiliates of the depositor hold any of the issuer's securities that were sold in registered transactions and provide disclosure in the prospectus that is filed as part of the registration statement that the registrant has undertaken to, and will, file with the Commission reports as would be required by Section 15(d) of the Exchange Act and the rules thereunder.

* * * * *

5. Amend § 229.601 by:

a. Revising the exhibit table in paragraph (a);

b. Adding paragraph (b)(36); and

c. Adding paragraphs (b)(102) through (b)(106).

The revision and additions read as follows:

Item 601. Exhibits.

(a) * * *

EXHIBIT TABLE

* * * * *

Exhibit Table

Securities Act FormsExchange Act Forms
S-1S-3SF-1SF-3S-41S-8S-11F-1F-3F-41108-K210-D10-Q10-K
(1) Underwriting agreementXXXXXXXXXX
Start Printed Page 23419
(2) Plan of acquisition, reorganization, arrangement, liquidation or successionXXXXXXXXXXXXX
(3) (i) Articles of incorporationXXXXXXXXXXXX
(ii) BylawsXXXXXXXXXXXX
(4) Instruments defining the rights of security holders, including indenturesXXXXXXXXXXXXXXX
(5) Opinion re legalityXXXXXXXXXX
(6) [Reserved]N/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
(7) Correspondence from an independent accountant regarding non-reliance on a previously issued audit report or completed interim reviewX
(8) Opinion re tax mattersXXXXXXXXX
(9) Voting trust agreementXXXXXXX
(10) Material contractsXXXXXXXXXXX
(11) Statement re computation of per share earningsXXXXXXXX
(12) Statements re computation of ratiosXXXXXXXX
(13) Annual report to security holders, Form 10-Q or quarterly report to security holders 3XX
(14) Code of EthicsXX
(15) Letter re unaudited interim financial informationXXXXXXXXX
(16) Letter re change in certifying accountant 4XXXXXX
(17) Correspondence on departure of directorX
(18) Letter re change in accounting principlesXX
(19) Report furnished to security holdersX
(20) Other documents or statements to security holdersX
(21) Subsidiaries of the registrantXXXXXXXXX
(22) Published report regarding matters submitted to vote of security holdersXXX
(23) Consents of experts and counselXXXXXXXXXX5 X5 X5 X5 X
(24) Power of attorneyXXXXXXXXXXXXXX
(25) Statement of eligibility of trusteeXXXXXXXX
(26) Invitation for competitive bidsXXXXXXXX
(27) through (30) [Reserved]
(31) (i) Rule 13a-14(a)/15d-14(a)XX
Certifications (ii) Rule 13a-14/15d-14 CertificationsX
(32) Section 1350 Certifications 6XX
(33) Report on assessment of compliance with servicing criteria for asset-backed issuersX
(34) Attestation report on assessment of compliance with servicing criteria for asset-backed securitiesX
(35) Servicer compliance statementX
(36) Depositor Certification for shelf offerings of asset-backed securitiesX
(36) through (98) [Reserved]N/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
(99) Additional exhibitsXXXXXXXXXXXXXXX
(100) XBRL-Related DocumentsXXXX
(101) Interactive Data FileXXXXXXXXXX
(102) Asset Data FileXXXX
(103) Asset Related DocumentsXXXX
(104) Waterfall Computer ProgramXXXX
(105) Waterfall Computer Program Related DocumentsXXXX
(106) Static Pool PDFXXX
Start Printed Page 23420

(b) * * *

(36) Depositor certification for shelf offerings of asset-backed securities. For any offering of asset-backed securities (as defined in § 229.1101) made on a delayed basis under § 230.415(a)(1)(vii), provide the certification required by General Instruction I.B.iii. of Form SF-3 (referenced in § 239.45) exactly as set forth below:

Certification

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

1. To my knowledge, the securitized assets backing the issue have characteristics that provide a reasonable basis to believe that they will produce, taking into account internal credit enhancements, cash flows at times and in amounts necessary to service any payments of the securities as described in the prospectus; and

2. I have reviewed the prospectus and the necessary documents for this certification.

End Part

Date:

[Signature]

[Title]

The certification should be signed by the chief executive officer of the depositor, as required by General Instruction I.B.1(c) of Form SF-3.

* * * * *

(102) Asset Data File. An Asset Data File (as defined in § 232.11 of this chapter) pursuant to, with respect to any registration statement on Form SF-1 (§ 239.44) or Form SF-3 (§ 239.45), Items 1111(h) and 1111(i) (§ 229.1111(h) and 229.1111(i) of this chapter) or, with respect to any distribution report on Form 10-D, Item 1121(d) and 1121(e) (§ 229.1121(d) and 229.1121(e) of this chapter).

(103) Asset Related Documents. (i) If a registrant includes other data points in the Asset Data File filed pursuant to (102) of this subparagraph, in addition to those required by Schedule L of Regulation AB (§ 229.1111A of this chapter), Schedule L-D of Regulation AB (§ 229.1121A of this chapter), or Schedule CC of Regulation AB (§ 229.1111B of this chapter), a document identifying and setting forth the definitions and formulas for each of those additional data points and the related tagged data.

(ii) A document setting forth, in reasonable detail other explanatory disclosure regarding the asset-level data file filed pursuant to (102) of this paragraph,

(104) Waterfall Computer Program. A Waterfall Computer Program as defined in Item 1113(h) of Regulation AB (§ 229.1113(h) of this chapter) filed pursuant to, with respect to any registration statement on Form SF-1 (§ 239.44) or Form SF-3 (§ 239.45), Item 1113(h) of Regulation AB (§ 229.1113(h) of this chapter).

(105) Waterfall Computer Program Related Documents. If a registrant includes additional program functionality in the Waterfall Computer Program filed pursuant to (104) of this subparagraph, in addition to that required by Item 1113(h) of Regulation AB (§ 229.1113(h) of this chapter), a document identifying and setting forth in reasonable detail the additional program functionality.

(106) Static Pool. If not included in the prospectus, static pool disclosure as required by Item 1105 of Regulation AB (§ 229.1105 of this chapter).

* * * * *

6. Amend § 229.1100 by revising paragraph (f) and adding paragraph (g) to read as follows:

(Item 1100) General.
* * * * *

(f) Filing of required exhibits. Where agreements or other documents in this Regulation AB are specified to be filed as exhibits to a Securities Act registration statement, such final agreements or other documents, if applicable, may be incorporated by reference as an exhibit to the registration statement, such as by filing a Form 8-K in the case of offerings registered on Form SF-3 (§ 239.45 of this chapter). They must, however, be filed and made part of the registration statement at the latest by the date the final prospectus is required to be filed under Securities Act Rule 424 (§ 230.424 of this chapter).

(g) Presentation of flow of funds on the transaction. Provide information on the flow of funds in the transaction, as required in Item 1113 of Regulation AB, including any related definitions of terms, in one location in the prospectus.

7. Amend § 229.1101 by:

a. Revising paragraph (c)(3)(i);

b. Revising the references to “50%” in paragraphs (c)(3)(ii)(A) and (B) to read “10%”; and

c. Revising the phrase “three years” in paragraph (c)(3)(iii) introductory text to read “one year”.

The revision reads as follows:

(Item 1101) Definitions.
* * * * *

(c) * * *

(3) * * *

(i) Master trusts. The offering related to the securities contemplates adding additional assets to the pool that backs such securities in connection with future issuances of asset-backed securities backed by such pool, provided, however, that the securities are backed by receivables or other financial assets that arise under revolving accounts. Such offering also may contemplate additions to the asset pool, to the extent consistent with paragraphs (c)(3)(ii) and (c)(3)(iii) of this section, in connection with maintaining minimum pool balances in accordance with the transaction agreements.

* * * * *

8. Amend § 229.1102 by revising paragraph (a) to read as follows:

(Item 1102) Forepart of registration statement and outside cover page of the prospectus.
* * * * *

(a) Identify the sponsor, the depositor and the issuing entity (if known). Such identifying information should include a Central Index Key number for the depositor and the issuing entity, and if applicable, the sponsor.

* * * * *

9. Amend § 229.1103 by adding an instruction after paragraph (a)(2) to read as follows:

(Item 1103) Transaction summary and risk factors.
* * * * *

(a) * * *

(2) * * *

Instruction to Item 1103(a)(2). What is required is summary disclosure tailored to the particular asset pool backing the asset-backed securities. While the material characteristics will vary depending on the nature of the pool assets, summary disclosure may include, among other things, statistical information of: The types of underwriting or origination programs, exceptions to underwriting or origination criteria and, if applicable, modifications made to the pool assets after origination.

* * * * *

10. Amend § 229.1104 by adding new paragraphs (e) and (f) to read as follows:

(Item 1104) Sponsors.
* * * * *

(e) Describe any interest that the sponsor has retained in the transaction, including amount and nature of that interest. If the offering is registered on Form SF-1 (§ 239.44), provide disclosure (if applicable) that the sponsor is not required by law to retain any interest in the securities and may sell any interest initially retained at any time.

(f) If the sponsor is required to repurchase or replace any asset for Start Printed Page 23421breach of a representation and warranty pursuant to the transaction agreements, provide the following information:

(1) On a pool by pool basis, the amount, if material, of the publicly securitized assets originated or sold by the sponsor that were the subject of a demand to repurchase or replace for breach of the representations and warranties concerning the pool assets that has been made in the prior three years pursuant to the transaction agreements. Provide the percentage of that amount that were not then repurchased or replaced by the sponsor. Of those assets that were not then repurchased or replaced, disclose whether an opinion of a third party not affiliated with the sponsor had been furnished to the trustee that confirms that the assets did not violate a representation or warranty.

(2) The sponsor's financial condition to the extent that there is a material risk that the financial condition could have a material impact on its ability to comply with the provisions relating to the repurchase obligations for those assets or otherwise materially impact the pool.

11. Amend § 229.1105 by:

a. Adding introductory text;

b. Revising paragraph (a)(3)(ii);

c. Adding an instruction to paragraph (a)(3)(ii);

d. Adding new paragraph (a)(3)(iv); and

e. Revising paragraph (c).

The revisions and additions read as follows:

(Item 1105) Static pool information.

Describe the static pool information presented. Provide appropriate introductory and explanatory information to introduce the characteristics, the methodology used in determining or calculating the characteristics and any terms or abbreviations used. Include a description of how the static pool differs from the pool underlying the securities being offered. In addition to a narrative description, the static pool information should be presented graphically if doing so would aid in understanding.

(a) * * *

(3) * * *

(ii) Present delinquency, cumulative loss and prepayment data for each prior securitized pool or vintage origination year, as applicable, over the life of the prior securitized pool or vintage origination year. The most recent periodic increment for the data must be as of a date no later than 135 days after the date of first use of the prospectus.

Instruction to Item 1105(a)(3)(ii). Refer to Item 1100(b) of this Regulation AB for presentation of historical delinquency and loss information.

* * * * *

(iv) Provide graphical illustration of delinquencies, prepayments and losses for each prior securitized pool or by vintage origination year regarding originations or purchases by the sponsor, as applicable for that asset type.

* * * * *

(c) If the information that would otherwise be required by paragraph (a)(1), (a)(2) or (b) of this section is not material, but alternative static pool information would provide material disclosure, provide such alternative information instead. Similarly, information contemplated by paragraph (a)(1), (a)(2) or (b) of this section regarding a party or parties other than the sponsor may be provided in addition to or in lieu of such information regarding the sponsor if appropriate to provide material disclosure. In addition, provide other explanatory disclosure, including why alternative disclosure is being provided and explain the absence of any static pool information contemplated by paragraphs (a)(1), (a)(2) or (b) of this section, as applicable.

* * * * *

12. Amend § 229.1106 by adding paragraph (d) to read as follows:

(Item 1106) Depositors.
* * * * *

(d) Any failure in the last year of an issuing entity established by the depositor or any affiliate of the depositor to file or file in a timely manner an Exchange Act report that was required either by rule or by virtue an undertaking pursuant to Item 512 of Regulation S-K (17 CFR 229.512).

13. Amend § 229.1108 by:

a. Revising in paragraph (a)(3) the phrase “(c) and (d)” to read “(c), (d), and (e)”;

b. Removing paragraph (c)(6);

c. Redesignating paragraphs (c)(7) and (c)(8) as paragraphs (c)(6) and (c)(7); and

d. Adding paragraph (e).

New paragraph (e) reads as follows:

(Item 1108) Servicers.
* * * * *

(e) Describe any interest that the servicer has retained in the transaction, including amount and nature of that interest.

14. Amend § 229.1110 by:

a. Revising paragraph (a);

b. Adding paragraph (b)(3); and

c. Adding paragraph (c).

The revision and additions read as follows:

(Item 1110) Originators.

(a) Identify any originator or group of affiliated originators, apart from the sponsor or its affiliates, provided, however, identification of an originator is not required if such originator has originated, or is expected to originate, less than 10% of the pool assets and the cumulative amount of originated assets by parties other than the sponsor (or its affiliates) comprises less than 10% of the total pool assets.

(b) * * *

(3) Describe any interest that the originator has retained in the transaction, including amount and nature of that interest.

(c) For any originator identified under paragraph (b) of this section, if such originator is required to repurchase or replace a pool asset for breach of a representation and warranty pursuant to the transaction agreements, provide the following information:

(1) On a pool by pool basis, the amount, if material, of the publicly securitized assets originated or sold by the originator that were the subject of a demand to repurchase or replace for breach of the representations and warranties concerning the pool assets that has been made in the prior three years pursuant to the transaction agreements. Provide the percentage of that amount that were not then repurchased or replaced by the originator. Of those assets that were not then repurchased or replaced, disclose whether an opinion of a third party not affiliated with the originator had been furnished to the trustee that confirms that the assets did not violate the representations and warranties.

(2) The originator's financial condition to the extent that there is a material risk that the financial condition could have a material impact on the origination of the originator's assets in the pool or on its ability to comply with the provisions relating to the repurchase obligations for those assets.

15. Amend § 229.1111 by:

a. Revising paragraph (a)(3);

b. Redesignating paragraphs (a)(5) and (a)(6) and Instruction to Item 1111(a)(6) as paragraphs (a)(6) and (a)(7) and Instruction to Item 1111(a)(7);

c. Adding new paragraph (a)(5);

d. Revising paragraph (e); and

e. Adding paragraphs (h) and (i).

The additions and revisions read as follows:

(Item 1111) Pool assets.
* * * * *

(a) * * *

(3) A description of the solicitation, credit-granting or underwriting criteria used to originate or purchase the pool Start Printed Page 23422assets, including any changes in such criteria and the extent to which such policies and criteria are or could be overridden. Disclosure on the underwriting of assets that deviate from the disclosed criteria must be accompanied by data on the amount and characteristics of those assets that did not meet the disclosed standards. If disclosure is provided regarding compensating or other factors, if any, that were used to determine that those assets should be included in the pool, despite not having met the disclosed underwriting standards, describe those factors and provide data on the amount of assets in the pool that are represented as meeting those factors and the amount of assets that do not meet those factors.

* * * * *

(5) The steps undertaken by the originator to verify the information used in the solicitation, credit-granting or underwriting of the pool assets.

* * * * *

(e) Representations and warranties and modification provisions relating to the pool assets. Provide the following information:

(1) Representations and warranties. (i) Summarize any representations and warranties made concerning the pool assets by the sponsor, transferor, originator or other party to the transaction, and describe briefly the remedies available if those representations and warranties are breached, such as repurchase obligations.

(ii) Describe any representation and warranty relating to fraud in the origination of the assets. If none, so state.

(2) Modification provisions. Describe any provisions in the transaction agreements governing the modification of the terms of any asset, including how modification may affect cash flows from the assets or to the securities.

* * * * *

(h) Asset-level information. Provide asset-level information for each asset in the pool in a manner specified in Schedule L (§ 229.1111A). This paragraph (h) does not apply to issuers of asset-backed securities backed primarily by receivables due on credit cards, charge cards or stranded costs. State in the prospectus that the information provided in response to this subparagraph and Schedule L is provided as a machine-readable data file filed with the Securities and Exchange Commission on its Web site at www.sec.gov. Identify the CIK and file number.

(1) If the information is part of a prospectus filed with a registration statement on Form SF-1 (§ 239.44) or in accordance with Rule 424(h) (§ 230.424(h)), provide the information as of a measurement date, unless otherwise specified. For purposes of this subparagraph, the measurement date is a date designated by the registrant that is as recent as practicable.

(2) If the information is part of a final prospectus meeting the requirements of section 10(a) of the Securities Act (15 U.S.C. 77j(a)(a)) filed in accordance with Rule 424(b) (§ 230.424(b)), provide the information as of the cut-off date as specified in the instruments governing the transaction (i.e., the date on and after which collections on the pool assets accrue for the benefit of the asset-backed security holders).

(3) If the information is part of a report filed on Form 8-K (referenced in § 249.308) in accordance with Item 6.05, provide the information as of the cut-off date as specified in the instruments governing the transaction, unless otherwise specified.

(i) Credit card pool information. If the asset-backed securities are backed primarily by receivables due on credit cards or charge cards, provide the information for the underlying pool in a manner specified in Schedule CC (§ 229.1111B). State in the prospectus that the information provided in response to this subparagraph and Schedule CC is provided as a machine-readable data file filed with the Securities and Exchange Commission on its website at www.sec.gov. Identify the CIK of the issuer and file number.

(1) If the information is part of a prospectus filed in accordance with Rule 424(h) (§ 230.424(h)), or if the information is part of a final prospectus meeting the requirements of section 10(a) of the Securities Act (15 U.S.C. 77j(a)(a)) filed in accordance with Rule 424(b) (§ 230.424(b)), provide the information as of a measurement date. Identify the measurement date in the prospectus. For purposes of this paragraph, the measurement date is a date designated by the registrant that is as recent as practicable.

(2) If the information is part of a report filed on Form 8-K (referenced in § 249.308) in accordance with Item 6.05, provide the information as of a measurement date.

16. Add § 229.1111A to read as follows:

(Item 1111A) Asset-level information.

Schedule L

Note A. Submit the disclosures as an Asset Data File (as defined in § 232.11 of this chapter) in the format required by the EDGAR Filer Manual. See Rule 301 of Regulation S-T (§ 232.301 of this chapter).

Instruction. The following definitions apply to the terms used in this schedule unless otherwise specified:

MI. Mortgage insurance.

Underwritten. The amount of revenues or expenses adjusted based on a number of assumptions made by the mortgage originator or seller.

Item 1. General. Provide the following data for each asset in the asset pool:

(a) Information related to the asset. (1) Asset number type. Identify the source of the asset number used to specifically identify each asset in the pool.

Instruction to Item 1(a)(1). Asset number types that will satisfy the requirements of this subparagraph may be generated by organizations such as CUSIP Global Services (CUSIP), the American Securitization Forum (ASF Universal Link) or MERS (Mortgage Identification Number); by the registrant; or by using the convention “[CIK number]—[Sequential asset number]”.

(2) Asset number. Provide the unique ID number of the asset.

Instruction to Item 1(a)(2). The asset number should be the same number that will be used to identify the asset for all reports that would be required of an issuer under Sections 13(a) or 15(d) of the Exchange Act.

(3) Asset group number. For structures with multiple collateral groups, indicate the collateral group number in which the asset falls.

(4) Originator. Identify the name or MERS organization number of the originator entity. If the asset is a security, identify the name of the issuer.

(5) Origination date. Provide the date of asset origination. For revolving asset master trusts, provide the origination date of the receivable that will be added to the asset pool.

(6) Original asset amount. Indicate the dollar amount of the asset at the time of origination.

(7) Original asset term. Indicate the initial number of months between asset origination and the asset maturity date.

(8) Asset maturity date. Indicate the month and year in which the final payment on the asset is scheduled to be made.

(9) Original amortization term. Indicate the number of months in which the asset would be retired if the amortizing principal and interest payment were to be paid each month.

(10) Original interest rate. Provide the rate of interest at the time of origination of the asset.

(11) Interest type. Indicate whether the interest rate calculation method is simple or actuarial.

(12) Amortization type. Indicate whether the interest rate on the asset is fixed or adjustable.

(13) Original interest only term. Indicate the number of months in which the obligor is permitted to pay only interest on the asset.

(14) First payment date. Provide the date of the first scheduled payment.

(15) Primary servicer. Identify the name or MERS organization number of the entity that services or will have the right to service the asset.Start Printed Page 23423

(16) Servicing fee—percentage. If the servicing fee is based on a percentage, indicate the percentage of monthly servicing fee paid to all servicers as a percentage of the Original Contract Amount.

(17) Servicing fee—flat-dollar. If the servicing fee is based on a flat-dollar amount, indicate the monthly servi