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Asset-Backed Securities Disclosure and Registration

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Start Preamble Start Printed Page 57184

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

We are adopting significant revisions to Regulation AB and other rules governing the offering process, disclosure, and reporting for asset-backed securities (“ABS”). The final rules require that, with some exceptions, prospectuses for public offerings under the Securities Act of 1933 (“Securities Act”) and ongoing reports under the Securities Exchange Act of 1934 (“Exchange Act”) of asset-backed securities backed by real estate related assets, auto related assets, or backed by debt securities, including resecuritizations, contain specified asset-level information about each of the assets in the pool. The asset-level information is required to be provided according to specified standards and in a tagged data format using eXtensible Markup Language (“XML”). We also are adopting rules to revise filing deadlines for ABS offerings to provide investors with more time to consider transaction-specific information, including information about the pool assets. We are also adopting new registration forms tailored to ABS offerings. The final rules also repeal the credit ratings references in shelf eligibility criteria for ABS issuers and establish new shelf eligibility criteria.

DATES:

Effective Date: November 24, 2014.

Compliance Dates:

Offerings on Forms SF-1 and SF-3: Registrants must comply with new rules, forms, and disclosures no later than November 23, 2015.

Asset level Disclosures: Offerings of asset-backed securities backed by residential mortgages, commercial mortgages, auto loans, auto leases, and debt securities (including resecuritizations) must comply with asset-level disclosure requirements no later than November 23, 2016.

Forms 10-D and 10-K: Any Form 10-D or Form 10-K that is filed after November 23, 2015 must comply with new rules and disclosures, except asset-level disclosures.

Start Further Info

FOR FURTHER INFORMATION CONTACT:

Rolaine S. Bancroft, Senior Special Counsel, Michelle M. Stasny, Special Counsel, M. Hughes Bates, Attorney-Advisor, or Kayla Florio, Attorney-Advisor, in the Office of Structured Finance at (202) 551-3850, 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 adopting amendments to Items 512 [1] and 601 [2] of Regulation S-K; [3] Items 1100, 1101, 1102, 1103, 1104, 1105, 1108, 1109, 1110, 1111, 1112, 1113, 1114, 1119, 1121, and 1122 [4] of Regulation AB [5] (a subpart of Regulation S-K); Rules 139a, 167, 190, 193, 401, 405, 415, 424, 430B, 430C, 433, 456, and 457,[6] and Forms S-1 and S-3 [7] under the Securities Act of 1933 (Securities Act); [8] Rules 11, 101, 201, 202, and 305 [9] of Regulation S-T; [10] and Rules 3a68-1a, 3a68-1b, 15c2-8, 15d-22, 15Ga-1, and 17g-7 [11] and Forms 8-K, 10-K, and 10-D [12] under the Securities Exchange Act of 1934; [13] and Rule 103 [14] of Regulation FD.[15] We also are adding new Items 1124 and 1125 [16] to Regulation AB, and Rule 430D,[17] Form SF-1,[18] Form SF-3,[19] and Form ABS-EE [20] under the Securities Act.

Table of Contents

I. Executive Summary

A. Background

B. Problems in the ABS Markets

C. Summary of Final Rules

1. Asset-Level Disclosure

2. Other Disclosure Requirements

3. Securities Act Registration

(a) Certification

(b) Asset Review Provision

(c) Dispute Resolution

(d) Investor Communication

(e) Other Shelf Offering Provisions

4. Other Changes to ABS Rules

5. Proposed Rules Not Being Adopted at This Time

II. Economic Overview

A. Market Overview and Economic Baseline

B. Economic Motivations

C. Potential Effects on the ABS Market

D. Potential Market Participants' Responses

III. Asset-Level Disclosure

A. Asset-Level Disclosure Requirement

1. Background and Economic Baseline for the Asset-Level Disclosure Requirement

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

2. Specific Asset-Level Data Points in Schedule AL

(a) Disclosure Requirements for All Asset Classes and Economic Analysis of These Requirements

(b) Asset Specific Disclosure Requirements and Economic Analysis of These Requirements

(1) Residential Mortgage-Backed Securities

(2) Commercial Mortgage-Backed Securities

(3) Automobile Loan or Lease ABS

(4) Debt Security ABS

(5) Resecuritizations

3. Asset-Level Data and Individual Privacy Concerns

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

4. Requirements Under Section 7(c) of the Securities Act

(a) Section 7(c)(2)(B)—Data Necessary for Investor Due Diligence

(b) Section 7(c)(2)(B)(i)—Unique Identifiers Relating to Loan Brokers and Originators

(c) Section 7(c)(2)(B)(ii)—Broker Compensations and Section 7(c)(2)(B)(iii)—Risk Retention by Originator and the Securitizer of the Assets

B. Asset-Level Filing Requirements

1. The Timing of the Asset-Level Disclosure Requirements

(a) Timing of Offering Disclosures

(1) Proposed Rule

(2) Comments on Proposed Rule

(3) Final Rule and Economic Analysis of the Final Rule

(b) Timing of Periodic Disclosures

(1) Proposed Rule

(2) Comments on Proposed Rule

(3) Final Rule and Economic Analysis of the Final Rule

2. The Scope of New Schedule AL

(a) Proposed Rule

(1) Offering Disclosures

(2) Periodic Disclosures

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

3. XML and the Asset Data FileStart Printed Page 57185

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

4. Asset Related Documents

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

5. New Form ABS-EE

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

6. Temporary Hardship Exemption

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

C. Foreign ABS

IV. Other Prospectus Disclosure

A. Transaction Parties

1. Identification of the Originator

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule

2. Financial Information Regarding a Party Obligated To Repurchase Assets

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule

3. Economic Interest in the Transaction

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule

4. Economic Analysis Related to the Rules Regarding Transaction Parties

B. Prospectus Summary

1. Proposed Rule

2. Comments on Proposed Rule

3. Final Rule and Economic Analysis of the Final Rule

C. Modification of Underlying Assets

1. Proposed Rule and Comments on Proposed Rule

2. Final Rule and Economic Analysis of the Final Rule

D. Disclosure of Fraud Representations

E. Static Pool Disclosure

1. Disclosure Required

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

2. Amortizing Asset Pools

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

3. Filing Static Pool Data

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and the Economic Analysis of the Final Rule

F. Other Disclosure Requirements That Rely on Credit Ratings

V. Securities Act Registration

A. Background and Economic Discussion

B. New Registration Procedures and Forms for ABS

1. New Shelf Registration Procedures

(a) Rule 424(h) and Rule 430D

(1) Proposed Rule

(2) Comments on Proposed Rule

(3) Final Rule and Economic Analysis of the Final Rule

(a) Rule 424(h) Filing

(b) New Rule 430D

2. Forms SF-1 and SF-3

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

3. Shelf Eligibility for ABS Offerings

(a) Shelf Eligibility—Transaction Requirements

(1) Certification

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Shelf Certification Requirement

(i) Paragraph One

(ii) Paragraph Two

(iii) Paragraph Three

(iv) Paragraph Four

(v) Paragraph Five

(vi) Signature Requirement

(vii) Date of the Certification

(viii) Opinion by an Independent Evaluator Alternative

(2) Asset Review Provision

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Asset Review Provision

(i) Triggers for Review

(a) Delinquency Prong

(b) Investor Vote Prong

(ii) Scope of the Review

(iii) Report of the Findings and Conclusions

(iv) Selection of the Reviewer

(3) Dispute Resolution Provision

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Dispute Resolution Shelf Requirement

(4) Investor Communication

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Investor Communication Shelf Requirement

(b) Shelf Eligibility—Registrant Requirements

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

(1) Annual Compliance Check Related to Timely Exchange Act Reporting

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

(2) Annual Compliance Check Related to the Fulfillment of the Transaction Requirements in Previous ABS Offerings

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

4. Continuous Offerings

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

5. Mortgage Related Securities

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

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

1. Proposed Rule

2. Comments on Proposed Rule

3. Final Rule and Economic Analysis of the Final Rule

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

1. Presentation of Disclosure in Prospectuses

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

2. Adding New Structural Features or Credit Enhancements

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

E. Pay-as-You-Go Registration Fees

1. Proposed Rule

2. Comments on Proposed Rule

3. Final Rule and Economic Analysis of the Final Rule

F. Codification of Staff Interpretations Relating to Securities Act Registration

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

2. Incorporating by Reference Subsequently Filed Exchange Act Reports

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

VI. Filing Requirements for Transaction Documents

A. Proposed Rule

B. Comments Received on Proposed Rule

C. Final Rule and Economic Analysis of the Final Rule

VII. Definition of Asset-Backed Security

A. Proposed Rule

B. Comments on Proposed Rule

1. The Master Trust Exception

2. The Revolving Period Exception

3. The Prefunding Exception

C. Final Rule and Economic Analysis of the Final Rule

VIII. Exchange Act Reporting

A. Distribution Reports on Form 10-D

1. Delinquency Presentation

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

2. Identifying Information and Cross-References to Previously Reported Information

3. Changes in Sponsor's Interest in the Securities

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

B. Annual Report on Form 10-K

1. Servicer's Assessment of Compliance With Servicing Criteria

(a) Proposed Rule

(b) Comments on Proposed Rule

(c) Final Rule and Economic Analysis of the Final Rule

2. Codification of Prior Staff Interpretations Relating to the Servicer's Assessment of Compliance With Servicing Criteria

C. Central Index Key Numbers for Depositor, Sponsor and Issuing EntityStart Printed Page 57186

IX. Transition Period

A. General Transition Period

B. Transition Period for Asset-Level Disclosure Requirements

C. Compliance Dates

X. Paperwork Reduction Act

A. Background

B. Summary of Comment Letters on the PRA Analysis

C. Revisions to Proposals

D. PRA Reporting and Cost Burden Estimates

1. Form ABS-EE

2. Form S-3 and Form SF-3

3. Form S-1 and Form SF-1

4. Form 10-K

5. Form 10-D

6. Form 8-K

7. Regulation S-K and Regulation S-T

E. Summary of Changes to Annual Burden of Compliance in Collection of Information

XI. Regulatory Flexibility Act Certification

XII. Statutory Authority and Text of Rule and Form Amendments

I. Executive Summary

A. Background

The Commission addressed the registration, disclosure, and reporting requirements for asset-backed securities in 2004 when it adopted new rules and amendments under the Securities Act and the Exchange Act.[21] Among other changes, the 2004 rules updated and clarified the Securities Act registration requirements for asset-backed securities offerings and allowed modified Exchange Act reporting tailored to asset-backed securities offerings. In April 2010, we proposed revisions to the registration, disclosure, and reporting requirements for ABS offerings in an effort to improve investor protection and promote more efficient asset-backed markets.[22]

In the 2010 ABS Proposing Release we noted that the financial crisis highlighted that investors and other participants in the securitization market did not have the necessary information and time to be able to fully assess the risks underlying asset-backed securities and did not value asset-backed securities properly or accurately. This lack of understanding and the extent to which it impacted the U.S. and global economy prompted us to revisit several aspects of our regulation of asset-backed securities.[23] To address these issues, we proposed 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 in a standardized tagged data format. Further, we proposed a rule that asset-backed issuers provide investors with more time to consider transaction-specific information about the pool assets. We also proposed to require asset-backed issuers to file a computer program modeling the flow of funds, or waterfall, provisions of the transaction to help investors analyze the offering and monitor ongoing performance. For offerings of asset-backed securities that qualify for shelf registration, we proposed investor protection-focused shelf eligibility and offering requirements that would indicate which types of offerings qualify for delayed shelf eligibility and also proposed to remove the investment-grade ratings requirement.[24] Finally, we proposed to require disclosure provisions in unregistered ABS transaction agreements as a condition to certain safe harbors for exempt offerings and resales of ABS.

In July 2010, subsequent to the 2010 ABS Proposing Release, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”),[25] which directed the Commission to prescribe several ABS related rules, some of which were included in the 2010 ABS Proposals and others of which were not. Two of the proposed shelf eligibility requirements—risk retention and continued Exchange Act reporting—were addressed by provisions of the Dodd-Frank Act. After taking the Dodd-Frank requirements into account, and considering comments received in connection with the 2010 ABS Proposing Release, in 2011 we re-proposed some of the 2010 ABS Proposals, including the shelf eligibility requirements. In that same release, we also sought additional comment on asset-level disclosure, including comment on how best to implement Section 7(c) of the Securities Act, as added by Section 942(b) of the Dodd-Frank Act, which directed the Commission to adopt regulations to require asset-level information.[26]

In February 2014, the Commission re-opened the comment period [27] on the 2010 ABS Proposals and the 2011 ABS Re-Proposals to permit interested persons to comment on an approach for the dissemination of asset-level data, which is described in a staff memorandum, dated February 25, 2014, that was posted to the public comment file.[28]

B. Problems in the ABS Markets

The financial crisis highlighted a number of concerns about the operation of our rules in the securitization market.[29] The failures of credit ratings to accurately measure and account for the risks associated with certain asset-backed securities have been well documented by lawmakers, market observers, and academics.[30] The collapse of these “investment-grade” rated securities was a major contributor to the financial crisis, and demonstrated the risks to investors of unduly relying on these securities' credit ratings without engaging in independent due diligence.[31] Although academic Start Printed Page 57187research suggests that some investors might have been able to price ABS credit risk beyond what the ratings implied, there is also evidence that investors in triple-A rated tranches were less informed than investors in lower tranches.[32]

In addition, investors have expressed concern about a lack of time to analyze securitization transactions and make informed investment decisions.[33] Time to analyze an offering is necessary if investors are being encouraged to perform their own diligence and to not over rely on credit ratings. While the Commission has not generally built waiting periods into its shelf offering registration process,[34] and instead has believed investors can take the time they believe is adequate to analyze securities (and refuse to invest if not provided sufficient time), investors have indicated that this is not generally possible in the ABS market, particularly in a heated market.[35]

Investors and others have also expressed concerns about other aspects of the securitization market, including concern about a lack of effective oversight by the principal officers of the ABS issuer.[36] In particular, investors have been concerned that these officers have not conducted sufficient due diligence when reviewing the pool assets and designing the securitization structure. Additionally, investors have noted that the mechanisms for enforcing the representations and warranties contained in the securitization transaction documents are weak, and thus they are not confident that even strong representations and warranties provide them with adequate protection.[37] They have also noted that difficulties in locating fellow ABS investors have prevented them from exercising rights under the transaction agreement, including requirements that an originator or sponsor repurchase an asset if it does not comply with the representations and warranties.[38]

Market participants have also expressed a desire for expanded disclosure about the assets underlying securitizations in order to conduct an analysis of the offering.[39] The financial crisis underscored that the information available to investors about ABS may not have provided them with all the information necessary to fully understand and correctly gauge the risks underlying the securities. As a result, investors may not have been able to accurately value those securities.[40]

C. Summary of Final Rules

We are adopting significant revisions to the rules governing disclosure, reporting, registration, and the offering process for asset-backed securities. The revised rules are designed to address the problems discussed above and to enhance investor protection in the ABS market.[41] In adopting these changes, we have taken into consideration the comments and recommendations made by commenters in connection with the 2010 ABS Proposing Release, the 2011 ABS Re-Proposing Release and the 2014 Re-Opening Release, which are reflected in the changes made in the final rules.[42] We received a total of 240 comment letters in connection with the 2010 ABS Proposals, 2011 ABS Re-Proposal and the 2014 Re-Opening Release.

The final rules are intended to provide investors with timely and sufficient information, reduce the likelihood of undue reliance on credit ratings, and provide mechanisms to help to enforce the representations and warranties made about the underlying assets. These revisions are comprehensive and although they will impose new burdens on issuers, we believe they will protect investors and promote efficient capital formation. The rules cover the following areas:

  • Securities Act and Exchange Act disclosures, including new requirements for certain asset classes to disclose standardized asset-level information;
  • Revisions to the shelf offering process, eligibility criteria, and prospectus delivery requirements; and
  • Several changes to the Asset-Backed Issuer Distribution Report on Form 10-D, the Annual Report on Form 10-K, and the Current Report on Form 8-K.[43]

In addition, we are adopting clarifying, technical, and other changes to the current rules. Some of the rules we are adopting are designed to address and improve areas that we believe have the potential to raise issues similar to those highlighted in the financial crisis. Furthermore, some of the rules we are adopting respond to Sections 939A and 942(b) of the Dodd-Frank Act.

1. Asset-Level Disclosure

Investors, other market participants, academics, and policy makers have increasingly noted that asset-level information is essential to evaluating an asset-backed security.[44] We believe that Start Printed Page 57188all investors and market participants should have access to the information they need to assess the credit quality of the assets underlying a securitization at inception and over the life of a security. In 2010, we proposed to require standardized asset-level information in prospectuses and on an ongoing basis in periodic reports. The 2010 ABS Proposals called for ABS issuers to disclose standardized asset-level information for most asset classes.

We are adopting standardized asset-level disclosure requirements because we believe this information will allow an investor to better conduct his or her own evaluation of the ongoing credit quality of a particular asset, risk layering of assets, and overall risks in the pool underlying the ABS. In our discussion below, we refer to each individual asset-level disclosure requirement as an asset-level data point. The asset-level data will be provided at the time of the offering and on an ongoing basis. The disclosures are required to be provided in a standardized XML format, so that they are more useful to investors and markets. We have revised the required data points to address commenters' concerns about a variety of topics that we discuss further below, such as the availability of data, market practice, need for increased transparency and privacy concerns. While we are adopting asset-level disclosure requirements for ABS where the underlying assets consist of residential mortgages, commercial mortgages, auto loans, auto leases and resecuritizations of ABS that include these asset types, or of debt securities,[45] we are continuing to consider the best approach for requiring more information about underlying assets for the remaining asset classes covered by the 2010 ABS Proposal.[46]

We have modified some of the proposed data points in response to comments. The new disclosure requirements include the following standardized data points:

  • Data points about the payment stream related to a particular asset, such as the contractual terms, scheduled payment amounts, basis for interest rate calculations and whether and how payment terms change over time;
  • Data points that allow for an analysis of the collateral related to the asset, such as the geographic location of the property, property valuation data and loan-to-value (“LTV”) ratio;
  • Data points about the performance of each asset over time, for example, data about whether an obligor is making payments as scheduled; and
  • Data points about the loss mitigation efforts by the servicer to collect amounts past due and the losses that may pass on to the investors.

Other key data points we are adopting will provide data about the extent to which income and employment status have been verified, mortgage insurance coverage, and lien position.

We have also made modifications from the 2010 ABS Proposal in light of privacy concerns. As we discuss below, many commenters were concerned with the privacy implications of asset-level disclosure, particularly the risk that the information could be combined with other publicly available information to discover, or “re-identify,” the identities of the obligors in ABS pools, thereby revealing potentially sensitive personal and financial information about an obligor. In light of these concerns, we are omitting or modifying certain asset-level disclosures for RMBS and securities backed by auto loans and leases (collectively, “Auto ABS”) to reduce the potential risk that the obligors could be re-identified. We refer to this risk throughout the release as “re-identification risk”. Additionally, in response to commenters' suggestions, we have sought and obtained guidance from the Consumer Financial Protection Bureau (“CFPB”) on the application of the Fair Credit Reporting Act (“FCRA”) [47] to the required disclosures. We believe these steps implement the statutory mandate of Section 7(c) and will provide investors with the asset-level information they need while reducing concerns about the potential re-identification risk associated with disclosing consumers' personal and financial information.[48]

2. Other Disclosure Requirements

We are also adopting other amendments to the prospectus disclosure requirements, which will require:

  • A summary of statistical information about the pool of underlying assets in the prospectus summary;
  • A description of the provisions in the transaction agreements about modification of the terms of the underlying assets;
  • More explanatory language about the static pool disclosures and standardized delinquency presentation and, for static pool filings on Form 8-K, a new separate Form 8-K item and exhibit number;
  • Expanded disclosure about transaction parties; and
  • Filing of the transaction documents, by the date of the final prospectus, which is a clarification of the current rules.

3. Securities Act Registration

ABS issuers have emphasized their desire to access the capital markets quickly through shelf registration. ABS shelf registration offers significant flexibility and timing benefits to issuers, but these interests must be balanced against investors' need for adequate information and time to make informed investment decisions. Investors have expressed concerns about not having adequate time to review the prospectus in order to make a well-informed investment decision, especially in an Start Printed Page 57189active market.[49] This lack of time to adequately review the transaction contributed to investors placing undue reliance on the investment-grade ratings of these securities.[50] Consequently, we are adopting a requirement that ABS issuers using a shelf registration statement on new Form SF-3 file a preliminary prospectus under new Rule 424(h) containing transaction-specific information at least three business days in advance of the first sale of securities in the offering.[51] The preliminary prospectus will give investors additional time to analyze the specific structure, assets, and contractual rights regarding each transaction. We had originally proposed that any material change to the preliminary prospectus, other than offering price, would require the filing of a new preliminary prospectus and re-starting the waiting period. In response to commenters' concerns, we are requiring, instead, that issuers file material changes in a prospectus supplement that provides a clear description of how the information has changed at least 48 hours before the first sale.

As noted above, while we recognize that ABS issuers have expressed the desire to use shelf registration in order to access the capital markets quickly, we believe that the shelf eligibility requirements should be designed to help ensure a certain quality and character for asset-backed securities eligible for delayed shelf registrations given the speed of these offerings. Prior to today, one of the shelf eligibility requirements for offerings of asset-backed securities was that the securities were investment-grade securities—meaning that at least one of the nationally recognized statistical rating organizations (“NRSRO”) rated them in one of its generic rating categories that signifies investment grade and is typically one of the four highest categories. As noted above, the financial crisis revealed that credit rating agencies had generally not appropriately evaluated the credit risk of the securities and that some investors may have placed too much reliance on these ratings without conducting their own analysis.[52] We proposed to replace the investment-grade ratings requirement with alternative shelf eligibility criteria. These proposals were part of a broad ongoing effort to remove references to NRSRO credit ratings from our rules in order to reduce the risk of undue reliance on ratings and also to eliminate the appearance of an imprimatur that such references may create.[53] Additionally, Section 939A of the Dodd-Frank Act requires us to review and eliminate the use of credit ratings as an assessment of creditworthiness in our rules.[54] Consequently, we are adopting four transaction requirements for ABS shelf eligibility to indicate which types of offerings qualify for shelf registration, and we are removing the prior investment-grade ratings requirement. The four new transaction requirements are:

  • A certification by the chief executive officer;
  • An asset review provision requiring review of the assets for compliance with the representations and warranties upon the occurrence of certain trigger events;
  • A dispute resolution provision; and
  • Disclosure of investors' requests to communicate.

We believe that these new shelf eligibility and offering requirements will reduce undue reliance on credit ratings and also help to ensure that ABS issued in shelf offerings are designed and prepared with more oversight and care that make them appropriate to be issued off a shelf, which we define as being “shelf appropriate” securities.

(a) Certification

In the aftermath of the financial crisis, investors have expressed concern that ABS issuers were creating securitization transactions that could not support the scheduled payments due to investors.[55] We are concerned, in particular, that issuers were not adequately reviewing the disclosure provided in the prospectus, examining the assets included in the pool, and assessing the security structure and the expected pool-asset cash flows. To address this concern, we are adopting, as a shelf eligibility requirement, a certification by the chief executive officer of the depositor at the time of each takedown about the disclosures contained in the prospectus and the structure of the securitization. We believe that a certification should cause the chief executive officer to participate more extensively in the oversight of the transaction. The certification will also provide explicit evidence of the certifier's belief about the securitization at the time of the takedown.

We have made revisions to the certification in order to address commenters' concerns about the certification constituting a guarantee about future performance and possibly increased liability for certifiers. To address commenters' concerns about certifier liability, we have added a Start Printed Page 57190paragraph to clarify that the certifier has any and all defenses available under the securities laws.

(b) Asset Review Provision

We have noted investors' concerns about the effectiveness of contractual provisions related to the representations and warranties about the pool assets and the lack of responsiveness by sponsors and other parties to the transaction about potential breaches.[56] Commenters shared this concern [57] and, to address it, we are requiring, as proposed that the relevant transaction agreements include provisions providing for a review of the underlying assets for compliance with the representations and warranties upon the occurrence of certain post-securitization trigger events. The rule is designed to address comments received related to the triggers and potential costs, while at the same time balance the need for stronger mechanisms to enforce underlying contract terms. Under the final rule, the agreements must require a review, at a minimum, upon the occurrence of a two-pronged trigger. The first prong of the trigger is the occurrence of a specified percentage of delinquencies in the pool. If the delinquency trigger is met, the second prong of the trigger is the direction of investors by vote. The report of the reviewer's findings and conclusions for all assets reviewed will be required to be provided to the trustee in order for the trustee to determine whether a repurchase request would be appropriate under the terms of the transaction agreements, and a summary of the report must be included on the Form 10-D. We believe that this shelf requirement will address investors' concerns about the enforceability of the representations and warranties and also will incentivize the obligated parties to better consider the disclosure, characteristics, and quality of the assets in the pool.

(c) Dispute Resolution

As demonstrated by events surrounding the financial crisis, investors have not only lacked an effective mechanism to identify potential breaches of the representations and warranties, they have also lacked a mechanism to require sponsors to address their repurchase requests in a timely manner.[58] We are requiring that the underlying transaction agreements include a provision providing that, if an asset subject to a repurchase request is not repurchased by the end of a 180-day period beginning when notice is received, then the party submitting such repurchase request would have the right to refer the matter, at its discretion, to either mediation or third-party arbitration. Under the final rule, the dispute resolution provision is a separate and distinct shelf eligibility requirement; investors will be able to take advantage of the dispute resolution provision regardless of whether they had utilized the asset review process.

(d) Investor Communication

The aftermath of the financial crisis has demonstrated that investors have also encountered difficulty in locating other investors in order to enforce rights collectively under the terms of the ABS transaction, especially those related to repurchase demands due to breaches of the representations and warranties.[59] Without an effective means for investors to communicate with each other, investors have told us that they are unable to utilize the contractual rights provided in the underlying transaction agreements. To address this concern, we are requiring as proposed that the underlying transaction agreements must include a provision to require that a request by an investor to communicate with other investors be included in ongoing distribution reports filed on Form 10-D.

(e) Other Shelf Offering Provisions

We are also adopting various other changes to the procedures and forms related to shelf offerings substantially as proposed, with some changes in response to comments, including:

  • Limiting registration of continuous ABS shelf offerings to “all or none offerings.”
  • Eliminating Rule 415(a)(1)(vii) that provided shelf eligibility to certain investment-grade mortgage related securities regardless of the registration statement form.
  • Permitting a pay-as-you-go registration fee alternative, allowing ABS issuers to pay registration fees at the time of filing the preliminary prospectus, as opposed to paying all registration fees upfront at the time of filing the registration statement.
  • Creating new Forms SF-1 and SF-3 for ABS issuers that will replace the usage of current Forms S-1 and S-3 in order to delineate between ABS filers and corporate filers and to tailor requirements for ABS offerings.
  • Eliminating the ABS investment-grade exemptive provision in Rule 15c2-8(b) so that a broker or dealer will be required to deliver a preliminary prospectus at least 48 hours before sending a confirmation of sale.
  • Revising the current practice of providing a base prospectus and prospectus supplement for ABS issuers and instead requiring that a single prospectus be filed for each takedown (except that it would be permissible to highlight material changes from the preliminary prospectus in a separate supplement to the preliminary prospectus).

4. Other Changes to ABS Rules

In addition to the prospectus disclosure changes and shelf requirements, we are also adopting other changes related to ABS. For example, we are adopting a revision to the prefunding exception provided in the definition of ABS, which will decrease the prefunding limit from 50% to 25% of the offering proceeds. Additionally, we are adopting several changes to Forms 10-D, 10-K and 8-K.

5. Proposed Rules Not Being Adopted At This Time

We are not adopting at this time, however, several rules that we proposed in the 2010 ABS Proposing Release or the 2011 ABS Re-Proposing Release. These proposals remain outstanding. They include:

  • Requiring issuers to provide the same disclosure for Rule 144A offering as required for registered offerings;
  • Making the general asset-level requirements applicable to all asset classes and asset-class specific requirements for equipment loans and leases, student loans, and floorplan financings;
  • Requiring grouped-account disclosure for credit and charge card ABS;Start Printed Page 57191
  • Filing of a waterfall computer program of the contractual cash flow provisions of the securities;
  • Requiring the transaction documents, in substantially final form, be filed by the date the preliminary prospectus is required to be filed;
  • Exempting ABS issuers from current requirements that the depositor's principal accounting officer or controller sign the registration statement and in lieu requiring an executive officer in charge of securitization sign the registration statement; and
  • Revising when pool disclosure must be updated on Form 8-K.

II. Economic Overview

We are mindful of the economic consequences and effects, including costs and benefits, of our rules, and we discuss them throughout this release when we explain the new rules that we are adopting. Further, Section 2(b) of the Securities Act [60] and Section 3(f) of the Exchange Act [61] 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. In addition, Section 23(a) of the Exchange Act requires the Commission, when making rules and regulations under the Exchange Act, to consider the impact a new rule would have on competition.[62] Section 23(a)(2) also 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.[63]

To assess these economic consequences, we are using as our baseline the ABS market as it exists at the end of 2013, including applicable rules adopted by the Commission but excluding the rules adopted herein. Because activity in the ABS market has changed due to the financial crisis, we will refer to market statistics that encompass the pre-crisis period, the crisis period, and the current period as appropriate in order to provide a more comprehensive picture of the ABS market. To the extent that certain amendments are mandated by statute, the economic analysis considers the consequences and effects that stem from statutory mandates, as well as those that are affected by the discretion we exercise in implementing the mandates. We provide a qualitative, and whenever possible quantitative, discussion of the costs, benefits, and the effects on efficiency, competition, and capital formation of individual rule provisions in the corresponding sections of the release. We anticipate, however, that the elements of the rules will interact with each other and also with other regulations to generate combined economic effects. Thus, it is appropriate to expand the analysis to include disparate elements of the rule. While we make every reasonable attempt to quantify the economic impact of the rules that we are adopting, we are unable to do so for several components of the new rules due to the lack of available data.[64] We also recognize that several components of the new rules are designed to change existing market practices and as a result, existing data may not provide a basis to fully assess the rules' economic impact. Specifically, the rules' effects will depend on how issuers, their investors, and other parties to the transactions (e.g., trustees, underwriters, and other parties that facilitate transactions between issuers and investors) will adjust on a long-term basis to these new rules and the resulting evolving conditions. The ways in which these groups could adjust, and the associated effects, are complex and interrelated and thus we are unable to predict them with specificity nor are we able to quantify them at this time.

The new rules are designed to improve investor protections and promote a more efficient asset-backed market. The new transaction requirements for shelf eligibility should encourage ABS issuers to design and prepare ABS offerings with greater oversight and care and should incentivize issuers to provide investors with accurate and complete information at the time of the offering. It is these transactions that are appropriate to be offered to the public off a shelf without prior staff review. The new requirements for more asset-level information and more time for investors to review this information will provide more disclosure and greater transparency about the underlying assets. The effect of the increased disclosure on competition, efficiency, and capital formation will depend, in part, on the level of granularity and standardization of information currently available and disclosed. The remaining changes to Regulation AB that we are adopting are refinements to existing Regulation AB. We recognize that these new and amended rules that we are adopting may impose costs on asset-backed issuers, investors, servicers, and other transaction participants and may affect competition, efficiency, and capital formation. The effect of the refinements to existing Regulation AB will depend, in part, on issuers' current methods to comply with the existing rules. While we cannot predict or quantify precisely all effects the new rules will have on competition, efficiency, and capital formation, we believe that the rules we are adopting will improve the asset-backed securities market.

A. Market Overview and Economic Baseline

For many asset classes, the ABS market before the 2007-2009 financial crisis differed significantly from the one immediately after the crisis, and even from our baseline, the market that exists today, as illustrated in Figure 1. Private-label (non-U.S. agency) ABS issuers held $2.6 trillion in assets in 2004, which grew to $4.5 trillion in 2007, and declined to $1.63 trillion in 2013.[65] This distinction is most stark in the case of private-label residential mortgage-backed securities (“RMBS”), including home equity lines of credit. In 2004, prior to the crisis, new issuances of registered private-label RMBS totaled $746 billion.[66] The overwhelming majority of private-label RMBS deals issued before the crisis were registered offerings. In 2008, registered private-label RMBS issuance drastically dropped to $12 billion. Today, the private-label RMBS market remains exceptionally weak overall and consists Start Printed Page 57192almost exclusively of unregistered RMBS offerings.[67] For 2013, new issuances of registered private-label RMBS totaled $4 billion, which represents 0.54% of the issuance level in 2004. Similarly, a drop in issuance level was evident with registered commercial mortgage-backed securities (“CMBS”), which totaled $74 billion in 2004, declined to $11 billion in 2008, and totaled $53 billion in 2013. The consumer finance ABS market, including credit card and auto securitizations, also declined drastically both in terms of number of deals and issuance volume after the financial crisis. For example, $85 billion of Auto ABS were issued in 2005, but after the crisis, in 2008, issuance plummeted to $32 billion. Unlike RMBS, consumer finance ABS, especially Auto ABS, has since 2008 steadily increased to $42 billion of issuance in 2011 and to $62 billion in 2013. Almost all ABS markets experienced historic downturns following the crisis, and the recovery of these markets has not been uniform.

The number of sponsors in the registered ABS markets has undergone changes similar to the issuance activity described above. In 2004 there were 131 sponsors of registered ABS, while currently there are 61 sponsors of registered ABS.[68] The decline in the number of sponsors is most dramatic in the RMBS segment where only a single sponsor of private-label RMBS was issuing registered securities as of the end of 2013—down from 52 sponsors in 2004. In the RMBS market, private-label RMBS issuers encounter competitive pressure from government-sponsored enterprises, whose mortgage-backed securities are guaranteed and exempt from registration and reporting requirements. As private-label issuance has declined, issuance of agency RMBS has increased. Issuances of Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), and Government National Mortgage Association (“Ginnie Mae”) mortgage-related securities were $1.4 trillion in 2004, and grew to $1.9 trillion in 2013.[69]

Many factors contributed to the financial crisis, including some that involved mortgage-backed securities.[70] The low interest rate environment prior to the crisis drove investor demand for high-yield, high-credit rated products, including mortgage-backed securities.[71] Start Printed Page 57193Among the many factors relating to mortgage-backed securities that contributed to the financial crisis, mortgage originators largely exhausted the supply of traditional quality mortgages, and to keep up with investor demand for mortgage-backed securities, subprime lending became increasingly popular.[72] During the crisis, as the default rate for subprime mortgages soared, such securities, including those with high credit ratings, lost value (up to 95% for triple-B rated and 70% for triple-A rated subprime RMBS issued in 2006), making investors reluctant to purchase these securities.[73] Some of the decline in the value began to reverse in 2010 as housing prices started to stabilize and investors gained a better understanding of the mortgage modification process. This reversal has been concentrated in the subprime RMBS tranches that were highly rated. As indicated above, activity in some parts of the ABS market continues to remain weak.

B. Economic Motivations

As described at the end of the previous section, during the financial crisis, many securitizations performed exceptionally poorly as investments. This has been attributed to the dual problems of moral hazard and asymmetric information.[74] In particular, many believe that originators and securitizers have more information about the credit quality and other relevant characteristics of the borrower than the ultimate investors; for example, they may have been aware that the underlying assets were of poor quality and, thus, presented greater risks. This leads to a potential moral hazard problem—the situation where one party (e.g., the loan originator or ABS sponsor) may have a tendency to incur risks because another party (e.g., investors) will bear the costs or burdens of these risks. Hence, when there are inadequate processes in place to encourage (or require) sufficient transparency to overcome concerns about informational differences, the securitization process could lead certain participants to maximize their own welfare and interests at the expense of other participants. Before and during the crisis, information regarding the quality of the underlying assets was not generally known by investors, and certain originators and sponsors were frequently able to transfer the financial consequences of poor origination decisions by packaging the assets in complex and often opaque securitization structures.[75] The incentives to maintain opacity were particularly acute for those securitizations where the originator and securitizer received full compensation for their services before investors could become informed about the loan quality of the underlying pool.[76]

At that time, many investors unduly relied upon the major credit rating agencies for credit analysis of these structures rather than conducting their own due diligence, and these agencies often failed to accurately evaluate and rate the securitization structures.[77] Many observers believe that inflated and inaccurate credit ratings contributed to the financial crisis in a significant way.[78] Investment in securitizations has diminished substantially since the financial crisis, in part, because investors have significantly less trust that incentives are properly aligned among originators, securitizers, independent evaluators (rating agencies), and investors.[79]

The rules we are adopting apply to private-label RMBS securitizations, and do not apply to Government Sponsored Entities (GSEs) such as Fannie Mae and Freddie Mac, whose principal and interest on issued securities is currently guaranteed, while the GSEs remain in conservatorship,[80] and otherwise may be perceived by market participants to carry an implicit guarantee.[81] Private-label RMBS securitizations are not guaranteed by the federal government and had a much higher serious delinquency rate than GSE-purchased Start Printed Page 57194loans, even after accounting for different underlying loan characteristics.[82] This historical performance-based evidence suggests that GSE underwriting standards offset the incentive to incur excess risk because of their capital support, at least in relation to the private-label securitizers that did not have such capital support. In particular, GSE purchased loans were six times less likely to default than private-label loans with similar characteristics.[83] The focus of the final rules is on private-label securitizations, which is the segment of the market where investors are more likely to experience losses.

We note that the rules are intended to increase transparency about the potential risks in the ABS market through greater loan-level disclosure and to provide additional recourse for investors when issues arise, thus providing better tools for investors to evaluate their capital allocation decisions. These measures should lessen the risk of overreliance on credit ratings as investors will now be able to conduct their own due diligence using more transparent and fuller disclosures regarding the assets underlying a securitization. Disclosure of higher quality and more complete data regarding the loan characteristics of the underlying collateral should result in better capital allocation decisions, improved capital formation and, ultimately, lower capital costs by making the markets more informationally-efficient.

One key objective of the final rules is to eliminate the reliance on credit ratings in the determination of shelf eligibility of asset-backed securities. Replacing the investment-grade rating requirement for the purposes of shelf eligibility may result in securitizers finding it uneconomic or unnecessary to obtain credit ratings for their securitizations, thus lowering the demand for the services of third-party evaluators. The rules do not, however, preclude investors from utilizing credit ratings in their investment analysis and decision-making, and asset-backed securities issuers are not prohibited from having their offerings rated. Thus, if there is sufficient demand for ratings due to a perception of value in the ratings, then securitizers may continue to obtain ratings and credit rating agencies would suffer a relatively small decrease in the demand for their ratings services.

The rules we are adopting are designed to work with other regulations to provide additional disclosures, further align incentives in the securitization market, and restore confidence in the ABS market. Specifically, Section 941(b) of the Dodd-Frank Act requires regulations that mandate that certain securitizers have “skin in the game” through the retention of a meaningful risk exposure in securitizations (at least a 5% economic loss exposure).[84] The requirement that securitizers hold risk exposure is likely to affect their decisions regarding the quality of assets to include in such structures. While we expect that the risk retention rules required by the Dodd-Frank Act, when adopted, will result in better underwriting practices, we believe that further regulation is necessary to align incentives and facilitate credit evaluation in the securitization market.[85]

In summary, the amendments to our regulations and forms for asset-backed securities are designed to enhance investor protection by reducing the likelihood of overreliance on ratings and increasing transparency to market participants.

C. Potential Effects on the ABS Market

We believe that these amendments will work together to also improve investors' willingness to invest in asset-backed securities and to help the recovery in the ABS market with attendant positive effects on informational and allocative efficiency, competition, and the level of capital formation. Enhanced ABS disclosures and the potential for improved pricing accuracy of the ABS market should ultimately benefit issuers in the form of a lower cost of capital and increased investor participation. We expect that increased transparency in the market and more certainty about the quality of underlying assets should result in lower required yields, and a larger number of investors should be willing to participate in the market because of reduced uncertainty and risk. This, in turn, would allow originators to conserve costly capital and to diversify credit risks among many investors. Further, we believe that credit risk transfer will result in greater efficiency in the lending decisions of originators, the lowering of credit costs, and ultimately greater capital availability through higher loan levels.[86]

Asset-level disclosure requirements will provide information about underlying asset quality that was not consistently available to investors prior to these rules. The new rules also standardize the reporting of asset-level information, thus lowering the cost of acquiring information and search costs for investors. The disclosure and the reduction in search costs should directly increase the transparency of the market and, thus, the informational efficiency in pricing ABS, both in the primary and secondary markets. This should lead to increased investor participation and more efficient allocation of capital.

There are important benefits to issuers from heightened disclosures of a structured finance asset base. In the absence of adequate information about the quality of assets in the ABS structure, as was the case in the RMBS market leading up to the start of the financial crisis, the market for structured products may break down.[87] The continuing problems in the CMBS Start Printed Page 57195and RMBS markets may be an extended manifestation of this problem.[88] Investors that previously (and erroneously) relied on credit rating agencies to mitigate the informational asymmetry problem about asset quality can avail themselves of improved disclosures that allow them to conduct their own due diligence on an issuer's structured product. This will benefit issuers of high quality ABS because if investors are better able to independently verify the quality of and value underlying assets, they will be better able to distinguish high quality ABS issuers from other issuers, where otherwise the distinction between different types of issuers' disclosures would be obfuscated because the quality of the underlying ABS assets could not be verified. This differentiation between good and bad quality issuers would also lead to more efficient allocation of capital.

Another consequence of the final rules is the increase in availability of capital through the potential expansion of the set of ABS eligible for shelf registration. A larger set of ABS will be eligible for shelf registration if they meet the new shelf eligibility requirements, namely, non-investment grade ABS tranches that were not eligible before. This may result in greater credit availability to issuers of non-investment grade ABS that would have otherwise been difficult or more costly to obtain.

D. Potential Market Participants' Responses

We recognize that the final rules may have direct and indirect economic impacts on various market participants. Importantly, as noted above, the market practices of participants are likely to evolve in response to the final rules. While we lack the ability to predict those effects with certainty, we qualitatively consider some of the potential effects of these rules by discussing the trade-offs various market participants may face when complying with these rules.

Most of the direct costs of these rules fall onto the sponsors of ABS, since they will initially bear any increased costs of compliance and implementation of the new requirements; however, there is some uncertainty surrounding who will ultimately bear these direct compliance costs. Depending on market conditions, the degree of competition at different levels of the securitization chain, and the availability of other forms of credit, the sponsors may attempt to pass some or all of these costs on to other market participants.

One way in which the sponsors may elect to pass costs to market participants is through lower returns paid to investors in securitizations. Promised returns to investors will typically depend on the costs of creating and maintaining the securitized credit structure, including new costs associated with compliance. If investors are willing to absorb some or all of these costs and yet still expect to receive an acceptable risk-adjusted return on their investment, then investor returns could be lower on these investments than in the past. How much of the higher costs sponsors can realistically pass through to investors will depend on the risk and return opportunities available from other similar investments in the market.

We also recognize that some of the new asset-level disclosure and shelf registration costs may be passed down the chain of securitization and ultimately to borrowers. In particular, and in the short term when new reporting and data handling systems have to be developed, borrowers may ultimately bear higher credit costs to compensate sponsors for these increased compliance costs. The ability to pass costs on to borrowers will be constrained by competition from lenders that do not securitize in the registered market. If the costs of compliance are significant, the competitive position of firms that are subject to the requirements of the final rules and that rely on securitization in the public market for funding, in particular through shelf registrations, could weaken relative to other financial firms that are not subject to these requirements, or that have other sources of funding.

If asset-backed issuers are unable to pass along their shelf registration costs as described above, and thus bear all or most of these new costs, then they might choose to avoid the shelf registration process by registering their ABS on Form SF-1 or they might choose to bypass registration altogether and issue through unregistered offerings instead to avoid the new shelf registration costs. Similarly, if asset-backed issuers are unable to pass along the costs incurred to provide asset-level disclosure (for those asset classes subject to it), then they may issue through unregistered offerings. Such actions could have the effect of reducing efficiency and could impede capital formation; however, there are reasons to believe that some investors may support the market for registered ABS despite additional costs. First, because the prospectus disclosure requirements are the same for both types of registered offerings, a shift from shelf-registration to non-shelf-registration may occur only due to the new shelf registration costs, and the shift would be constrained by the speed and convenience of shelf takedowns. Moreover, the reallocation of newly issued registered ABS between shelf- and non-shelf registration should not have a substantial effect on capital formation as long as new and existing issuers of registered ABS choose to or continue to choose to issue registered ABS (and accordingly provide the same disclosures). Second, not all investors satisfy the criteria of qualified institutional buyers (“QIBs”) under Rule 144A,[89] and, although such investors might be interested in investing in Rule 144A ABS, they would not be able to do so due to inability to qualify to participate in that market. To the extent that this segment of the investor base is sufficiently large, ABS issuers might experience substantial demand for their securities from investors that are not qualified to invest in unregistered offerings. Such demand would reduce the cost of capital for public ABS issuers, creating incentives to issue through registered rather than unregistered offerings. Third, since the final rule applies to registered offerings of ABS, to the extent that there are investors willing to pay (in the form of a reduced yield) for the resolution of uncertainty regarding the asset pool quality and reduced risk of investments, there again may be a substantial enough demand to fund ABS in the registered market. Thus, we believe that the shift from the registered ABS segment to other market segments should not be substantial. The potential expansion of the registered ABS market and wider investor participation discussed previously in this section should allow ABS sponsors to recoup some of the costs introduced by these rules and, thus, should increase the attractiveness of issuing ABS through registered offerings as opposed to through unregistered offerings.

Start Printed Page 57196

The enhancement of registered transactions could potentially reduce the degree to which credit is intermediated by banks.[90] In particular, greater availability of credit for borrowers through securitizations may result in less reliance on traditional bank loans and greater reliance on other financial intermediation mechanisms. This is especially likely to happen if and when the new capital and liquidity requirements (Basel III) result in an increase in the regulatory capital costs for financial institutions subject to regulatory capital and liquidity requirements.

One potential source of competition for private-label securitizers impacted by these rules is the GSEs in the mortgage market. As previously mentioned, the principal and interest on GSE-issued securities is currently guaranteed, while the GSEs are in conservatorship. Even upon resolution of their current status, their congressional charter and past government intervention will likely perpetuate a widely held view of an implicit federal guarantee of their securities.[91] This explicit or future implicit government support provides a competitive advantage over private-label securitizers through lower funding costs. In addition to this cost of capital advantage, GSEs will not be subject to these new rules and the costs associated with the enhanced disclosure rules,[92] which as we previously discussed are less relevant to investors of GSE securities because of the government support in the event of credit problems. Thus, to the extent that the adopted rules impose additional costs on securitizers, their offerings will either not be as competitive as those of the GSEs or potentially be crowded out of the market altogether.

The current federal guarantee of mortgage-backed securities issued by GSEs (and/or the market perception of an implicit guarantee) may explain why, among all the securitized asset categories impacted by the financial crisis, the private-label RMBS and CMBS have been the slowest to regain volume.[93] Thus, while the rules we are adopting are intended to create transparency in the market for private-label securitizations, the additional costs imposed on securitizers may be sufficiently large that, at least as long as the GSEs remain in federal government conservatorship, the cost differences between GSE and private-label securitizations may remain large enough to discourage substantial investment through the latter channel.[94] Longer-term, the competitiveness of private-label securitizations may depend as much on the ultimate fate of the GSEs as on the effectiveness of the rules we adopt.

III. Asset-Level Disclosure

We are adopting a requirement for standardized asset-level disclosures for ABS where the underlying assets consist of residential mortgages, commercial mortgages, auto loans, auto leases, and resecuritizations of ABS that include these asset types or of debt securities. The disclosure is required to be provided in a standardized tagged XML format. We are also adopting many of the proposed refinements to other disclosure requirements. At this time, we are not adopting our proposal for other asset classes.

A. Asset-Level Disclosure Requirement

1. Background and Economic Baseline for the Asset-Level Disclosure Requirement

Prior to these amendments, the Commission had not historically required the disclosure of asset-level data. Instead, issuers were only required to provide information about the composition and characteristics of the asset pool, tailored to the asset type and asset pool involved for the particular offering.[95] 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, but generally there was no mandatory regulatory requirement that asset-level data be provided.[96] Furthermore, such information was generally not standardized or required to be standardized.

Many investors and other participants in the securitization market did not previously have sufficient time and information to be able to understand the risks underlying the ABS and were not able to value the ABS accordingly.[97] This lack of understanding and the extent to which it impacted the U.S. and global economies prompted us to revisit several aspects of our regulation of ABS, including the information available to investors. This review led us to determine that investors need access to more robust and standardized information about the assets underlying a particular ABS in order to allow them to make informed investment decisions. To accomplish this, we proposed in the 2010 ABS Proposing Release several changes to the disclosure requirements in Regulation AB including, subject to certain exceptions, a new requirement that issuers provide asset-level information about each asset in the pool backing the ABS. The asset-level data requirements were proposed to apply to all asset types, except ABS backed by credit cards, charge cards and stranded costs. For ABS backed by credit or charge card receivables, we proposed that issuers provide standardized grouped-account disclosures about the underlying asset pool instead of asset-level disclosures. Taken together, we believed these disclosures would provide robust data about each ABS, which would allow investors to analyze for each securitization transaction, at the time of inception and over the life of a security, the characteristics of each asset, including the collateral supporting each asset and the cash flows derived from each asset in the transaction.

Subsequent to the 2010 ABS Proposing Release, Congress passed the Dodd-Frank Act. Section 942(b) of the Dodd-Frank Act added Section 7(c) to the Securities Act, which requires, in relevant part, that the Commission adopt regulations requiring an issuer of Start Printed Page 57197an asset-backed security to disclose, for each tranche or class of security, information regarding the assets backing that security, including asset-level or loan-level data, if such data is necessary for investors to independently perform due diligence.[98] In July 2011, we re-proposed some of the rules proposed in the 2010 ABS Proposing Release in light of the provisions added by the Dodd-Frank Act and comments received on our 2010 ABS Proposals. In the 2011 ABS Re-Proposing Release, we requested comment on whether the asset-level disclosure requirements proposed in the 2010 ABS Proposals implemented Section 7(c) effectively and whether there were any changes or additions that would better implement Section 7(c). The Commission also requested comment on whether certain asset-level disclosures enumerated in Section 7(c) are necessary for investor due diligence.[99]

We received comments on the potential privacy implications of the proposed asset-level data requirements, including comments suggesting that the required asset-level information be provided by means other than public dissemination on the Commission's Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”).[100] In light of the privacy concerns about the proposed asset-level requirements, we re-opened the comment period on the 2010 ABS Proposals and the 2011 ABS Re-Proposals in February 2014 to permit interested persons to comment on an approach for the dissemination of asset-level data, which was described in the 2014 Staff Memorandum. The 2014 Staff Memorandum summarized the comments that had been received related to potential privacy concerns and outlined an approach that would require issuers to make asset-level information available to investors and potential investors through an issuer-sponsored Web site rather than having issuers file and make all of the information publicly available on EDGAR (the “Web site approach”). The Web site approach noted various ways in which issuers could address potential privacy concerns associated with the disclosure of asset-level information, including through restricting Web site access to such information.

To assess the economic consequences of these asset-level disclosure requirements, we are using as our baseline the ABS market as it existed at the end of 2013. Today, we note that for some types of ABS, issuers have begun or have continued to provide asset-level data. For instance, some registered RMBS issuers before the financial crisis provided asset-level disclosures, although the disclosures were not standardized. Since then, there have been a limited number of registered RMBS transactions. Those transactions have provided asset-level disclosures pursuant to recently developed industry standards.[101] Further, sellers of mortgage loans to Fannie Mae and Freddie Mac are required to deliver certain asset-level data in a standardized electronic form.[102] In turn, Fannie Mae and Freddie Mac provide investors loan-level disclosures about the assets underlying their securitizations.[103] For CMBS, we note that issuers commonly provide investors with asset-level disclosures at the time of securitization and on an ongoing basis pursuant to industry developed standards.[104] For other asset classes, we remain unaware of any publicly available data standards or instances where issuers have provided asset-level data.

We also note that prudential regulators in other jurisdictions require asset-level data about certain ABS in certain instances. For instance, the European Central Bank requires asset-level information for ABS accepted as collateral in the Eurosystem credit operations.[105] Additionally, the Bank of England requires that asset-level information be provided for certain ABS submitted as collateral against transactions with the Bank of England.[106] Some asset-level data is available today through third-party data providers who collect asset-level information about agency and non-agency mortgage loans and provide, for a fee, access to the data.[107] In addition, many third-party data providers have Start Printed Page 57198developed products to analyze and model asset-level data.[108]

After considering the comments received, the ABS market and the availability and use of asset-level data regarding ABS as they exist today, we are adopting, with modifications, the proposed asset-level disclosure requirements for ABS where the underlying assets consist of residential mortgages, commercial mortgages, auto loans or auto leases, resecuritizations of ABS that include these asset types, or of debt securities.[109] We provide detail on the final rules below.

As noted above, the proposed asset-level data requirements were to apply to all asset types, except ABS backed by credit cards, charge cards and stranded costs. For ABS backed by credit or charge card receivables, we proposed that issuers provide standardized grouped-account disclosures about the underlying asset pool instead of asset-level disclosures.

Asset-level information should provide investors with information that allows them to independently perform due diligence and make informed investment decisions; however, each asset class presents its own unique considerations. The response to our proposal was mixed, with some commenters supporting asset-level disclosure across asset classes and some commenters suggesting that alternative forms of disclosure were more appropriate for certain asset classes. We believe that the mix of information needed for analysis varies from asset class to asset class, and as we discuss in greater detail below, we have tailored the requirements for each asset class. While we are adopting requirements for only certain asset classes, we continue to consider the appropriate disclosure requirements for other asset classes and those proposals remain unchanged and outstanding.[110]

(a) Proposed Rule

To augment our current principles-based, pool-level disclosure requirements, we proposed to require that issuers disclose standardized asset-level information about the assets underlying the ABS at the time of offering and on an ongoing basis in Exchange Act reports.[111] Proposed Item 1111(h) and Schedule L of Regulation AB enumerated all of the data points that were to be provided for each asset in the asset pool at the time of offering. Proposed Item 1121(d) and Schedule L-D enumerated all of the data points that were to be provided in periodic reports required under Sections 13 and 15(d) of the Exchange Act. These requirements contained data points requiring general information or item requirements applicable to all asset types underlying an ABS transaction and specialized item requirements applicable to only certain asset types. For instance, the proposal included specialized data points for ABS backed by the following: residential mortgages, commercial mortgages, auto loans, auto leases, equipment loans, equipment leases, student loans, floorplan financings, and debt securities and also for resecuritizations. Each proposed data point contained a title, definition, and a standardized response. The standardized response could be a date, number, text, or coded response.[112] Finally, in order to facilitate investors' use of the asset-level data, we proposed that the data be filed with the Commission on EDGAR in a standardized tagged data format using XML.

(b) Comments on Proposed Rule

Support for requiring asset-level disclosures varied across asset types, and in some cases, between issuers and investors. Some commenters, mainly investors, generally indicated broad support for asset-level disclosure across asset types.[113] In general, these commenters suggested that asset-level disclosures would lead to better informed investment decisions,[114] better evaluation of the risk profile of the securities,[115] better pricing,[116] more transparency with respect to loan servicing operations,[117] and a broader range of opinions and analysis available with respect to ABS.[118] Certain commenters noted that the disclosure of Start Printed Page 57199asset-level data is an existing market practice,[119] and some commenters noted that asset-level disclosure requirements already exist in other jurisdictions.[120] Some commenters requested that the Commission require additional asset-level data fields,[121] and one commenter noted that asset-level data is necessary for implementation of the Commission's proposed waterfall computer program.[122] While most investors supported requiring asset-level disclosure across asset types,[123] some commenters, mainly issuers or entities representing issuers, generally limited their support for asset-level disclosures to RMBS and CMBS.[124] Some commenters expressed concern about whether the materiality of the information that was proposed to be required has been considered or shown to affect the performance of the securities or the pricing of securities.[125] Some commenters suggested that we address this concern by either adopting industry standards [126] or adopting a “provide-or-explain” type regime.[127]

In addition to comments indicating general support or opposition to the proposal, as discussed further below, we also received comments expressing more specific concerns about the proposal, such as the costs to provide the disclosures, the value of the disclosure to investors, the liability for errors in the data, individual privacy issues, the potential release of proprietary data, and whether asset-level disclosures were necessary to evaluate ABS involving certain asset classes.

Both investors and issuers noted that the disclosure requirements will impose costs and burdens on ABS issuers. Investors, however, also believed asset-level information is necessary to properly analyze ABS, and some investors believed that the concerns about the costs and burdens of providing such data may be exaggerated. For instance, the investor membership of one trade association acknowledged that requiring asset-level disclosures will impose costs and burdens on ABS issuers, but believed the information is a “necessary and key element of restoring investor confidence in the ABS markets.” [128] Another investor acknowledged that the proposed asset-level disclosures, among other proposed reforms, would increase costs, but the investor believed the reforms would “instill stronger origination and servicing of securitized assets, allow for more complete investor reviews and foster a more stable securitization market, which is a benefit to all borrowers, lenders and investors.” [129] One investor noted that the additional costs allegedly arising from some of the proposed reforms, including asset-level disclosures, may be “greatly exaggerated.” [130] This investor suggested that the deficiencies in “governance and transparency have dramatically increased the costs of securitization in the current market.” The investor also noted that asset-level disclosures are routinely provided in various global securitization sectors, such as U.S. CMBS and Australian CMBS, and these markets have not shut down.

Several commenters did not support asset-level requirements for certain asset classes, noting that the value of the disclosures to investors or market participants may not justify the potential costs and burdens derived from the disclosures.[131] Commenters Start Printed Page 57200expressed these concerns with respect to specific asset types, such as Auto ABS,[132] student loan ABS,[133] equipment ABS [134] or credit card ABS.[135] One commenter stated that for Auto ABS the proposed disclosure requirements would require significant reprogramming and technological investment.[136] Another commenter noted that the proposal would require sponsors to gather and present data in ways that differ from the way sponsors currently maintain and evaluate data.[137] This commenter also believed the preparation of such information would likely impose burdens upon sponsors' systems, auditing costs and create management oversight burdens that it believed the Commission had significantly underestimated. This commenter, however, did not quantify the amount that the Commission had underestimated these costs and burdens or provide its own estimate of these costs.[138] Also without providing a cost estimate, another commenter suggested that the Commission had not evaluated the entire cost of ongoing reporting for RMBS.[139] Another commenter expressed concern that if the new standards are not well integrated with existing industry practices, the data may be less reliable because reformatting data leads to a greater possibility for errors in the data.[140] Some commenters advised that the costs to implement the changes necessary to comply with the requirements may drive certain issuers from the market.[141] A few commenters suggested, without referencing a particular asset type, that the proposed disclosures may overwhelm investors [142] and a few commenters raised a similar concern solely with respect to the disclosures applicable to Auto ABS.[143]

Commenters also raised concerns about liability for inaccuracies.[144] Some commenters expressed concern that there will inevitably be errors in documents including typographical errors, information entered incorrectly (or not at all) into the files and other errors.[145] One concern was that some data may be difficult to objectively verify,[146] which one commenter referred to as “soft data.” [147] This commenter defined soft data as data that “is often self-reported by obligors, cannot be verified by issuers at a reasonable cost, cannot be confirmed by auditors, may not be consistent with (or comparable to) information obtained or presented by other issuers and may reflect subjective judgments.” [148] A few commenters noted that some soft data is used to calculate the response to other item requirements [149] and one of these commenters suggested issuers should have the discretion to include or exclude soft data from their disclosures.[150] In general, these commenters suggested that the materiality of individual data points should be determined on an aggregate basis across the entire asset portfolio, rather than at the level of the individual loan. Further, these commenters stated that even if an inaccuracy is material to a particular loan, the inaccuracy should not subject the issuer to the potential remedy of rescission of the entire issuance. The commenters urged that liability be based on the aggregate materiality in the context of the entire asset pool, the full offering disclosures and whether the securitization structure and documentation provide adequate remedies. Another commenter echoed this point.[151]

As noted above, some commenters did not support requiring asset-level disclosures for certain asset types. For example, several commenters, mainly Start Printed Page 57201issuers of ABS backed by automobile loans or leases,[152] equipment loans or leases,[153] floorplan financings,[154] and student loans,[155] opposed asset-level disclosures requirements for these asset types because the disclosures would raise individual privacy concerns, result in the release of proprietary data, and the disclosures would be of limited value to investors. To alleviate these concerns, some of these commenters suggested grouped-account disclosure or a combination of grouped account and standardized pool-level disclosures.[156] For equipment ABS, some commenters suggested standardized pool-level data was sufficient.[157] As discussed below, individual privacy concerns were also raised with respect to the proposed asset level disclosures for RMBS [158] and with respect to the Web site approach described in the 2014 Staff Memorandum.[159]

(c) Final Rule and Economic Analysis of the Final Rule

As noted above, the public availability of asset-level information has historically 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.[160] Such information is sometimes filed as part of the pooling and servicing agreement or as a free writing prospectus; however, the information provided varied from issuer to issuer and was not standardized.[161] We believe, however, that all investors and market participants should have access to information to analyze the risk and return characteristics of ABS offerings and that asset-level information about the assets underlying a securitization transaction at inception and over the life of a security provides a more complete picture of the composition and characteristics of the pool assets and the performance of those assets than pool-level information alone, and forms an integral part of ABS investment analysis.[162] Therefore, we are adopting, with modifications, a requirement that standardized asset-level data be provided, for certain asset types, in the prospectus and in Exchange Act reports. We are also adopting a requirement that the required asset-level disclosures be provided in XML, a machine-readable format.

At this time, we are adopting asset-level requirements for ABS where the underlying assets consist of residential mortgages, commercial mortgages, auto loans or leases, and resecuritizations of ABS, or of debt securities and we continue to consider whether asset-level disclosure would be useful to investors across other asset classes. Prior to the financial crisis, RMBS and CMBS had historically represented a large portion of the registered ABS market while Auto ABS represents a large portion of the current registered ABS market. Accordingly, these disclosures should benefit the largest number of investors, especially as greater numbers of RMBS and CMBS are issued. Although comments about the asset-level requirements for Auto ABS were mixed, with some opposing any asset-level requirements for Auto ABS, Auto ABS investors have indicated in comment letters that they believe that asset-level data will strengthen the Auto ABS market and make it more resilient over the long term.[163] We also note that the European Central Bank recently began requiring the disclosure of standardized asset-level data for all Auto ABS accepted as collateral in the Eurosystem credit operations.[164] For these reasons, we prioritized our efforts to develop asset-level requirements for these asset classes.

The asset-level disclosure requirements for debt security ABS are relatively limited in scope and primarily consist of information that should be readily available to issuers. These disclosures, while consisting of only the basic characteristics of the debt security, will provide useful information to investors, such as the cash flows associated with the debt security, and identifiers, such as the SEC file number of the debt security. Using the SEC file number of the debt security, investors will be able to access other disclosures filed with the Commission about the debt security. No commenters specifically opposed these requirements.

We are also adopting asset-level disclosure requirements for resecuritization ABS. In an ABS resecuritization, the asset pool is comprised of one or more ABS. The new rules require disclosures about the ABS in the pool and, if the ABS in the asset pool is an RMBS, CMBS or Auto ABS, issuers are also required to provide asset-level disclosures about the assets underlying the ABS. We are requiring disclosures about the ABS being resecuritized for the same reasons we are requiring disclosure for debt security ABS, which is to provide investors with information about the ultimate source of cash flows of assets underlying the resecuritization. As a result, we believe investors in resecuritization ABS should derive the same benefits as investors in other ABS.

Under current requirements the securities being resecuritized must be registered or exempt from registration Start Printed Page 57202under Section 3 of the Securities Act.[165] As a result, all disclosures for a registered offering are required. Therefore, requiring asset-level data for the assets underlying resecuritizations of RMBS, CMBS, Auto ABS or debt security ABS is consistent with our current disclosure requirements, which also prevents issuers from circumventing our asset-level requirements for these asset classes. We also note that over the past several years there have been no registered resecuritizations of RMBS, CMBS or Auto ABS. We recognize, however, that such a requirement could increase the disclosure costs of resecuritizations relative to disclosure costs of ABS backed by other assets should an issuer choose to do a resecuritization of RMBS, CMBS or Auto ABS in the future because sponsors may need to collect information about underlying assets from additional sources. We have made some revisions to the proposal to address some of those costs. To the extent that the pass-through of required asset level disclosures imposes costs above that required for the original securitization, this could limit the benefits of resecuritizations and potentially inhibit the issuance of resecuritizations.

We also believe the same benefits will accrue to investors in resecuritization ABS as to investors in RMBS, CMBS, Auto ABS or debt security ABS. Similar to a direct investment in an RMBS, CMBS, Auto ABS or debt security ABS, access to this information should provide further transparency about the assets underlying the security or securities underlying the resecuritization ABS. This additional information should allow investors to analyze the collateral supporting the security being resecuritized, the cash flows derived from each asset underlying the security being resecuritized, and the risk of each asset underlying the security being resecuritized.

We acknowledge commenters' concerns about other asset classes, which we think warrant further consideration. For instance, we continue to consider commenters' concerns about how asset-level disclosures should apply where there is lack of uniformity amongst the types of collateral or terms of the underlying contracts,[166] there is a large volume of assets in a pool,[167] and there are unique features to the ABS structure.[168] For those asset classes where we are deferring action, we will continue to consider the best approach for providing more information about underlying assets to investors, including possibly requiring asset-level data in the future.

We also believe that, for most investors, the usefulness of asset-level data is generally limited unless the asset-level data requirements, which include the following components, are standardized: The definitions of each data point, the format for providing the asset-level data (e.g., XML), and the scope of the information required, such as what data is required about each obligor, the related collateral, and the cash flows related to each asset. We believe that standardizing the asset-level disclosures facilitates the ability to compare and analyze the underlying asset-level data of a particular asset pool as well as compare that pool to other recent ABS offerings involving similar assets.[169] Over time, asset-level information about past ABS offerings, including asset-level information about the performance of those offerings, will be available to further facilitate the ability for issuers to assess expected performance of a new offering based on the performance of past offerings involving similar assets.

The asset-level data required will, in general, include information about the credit quality of the obligor, the collateral related to each asset, the cash flows related to a particular asset, such as the terms, expected payment amounts, indices and whether and how payment terms change over time and the performance of each asset over the life of a security. This information should allow investors to better understand, analyze, and track the performance of ABS. We believe the final requirements we are adopting for RMBS, CMBS, Auto ABS, debt security ABS and resecuritizations will implement the requirements of Section 7(c) for these asset classes.[170] Some commenters expressed concern that the proposed data points require more information than necessary for investor due diligence and could increase re-identification risk.[171] As discussed in further detail below, we have modified the proposed data set for RMBS and Auto ABS in response to these concerns. We believe these modifications will help to reduce re-identification risk without materially affecting investors' ability to evaluate ABS. We believe that the disclosure requirements that we are adopting will provide investors with information they need to independently perform due diligence and make informed investment decisions.

As noted above, we believe the usefulness of the asset-level information is further increased by our formatting requirements. We believe providing standardized data definitions and requiring the data to be in a machine-readable format will provide investors the ability to download the data into software tools that can promptly analyze the asset pool. While some investors may need to obtain the software or other tools needed to analyze the data, we believe such costs would be offset by a reduction or elimination of the costs investors would incur to convert non-machine-readable data into a format that makes analyzing it easier. As a result, this should reduce the time investors need to analyze the offering. We also believe requiring the data to be in a machine-readable format addresses concerns that investors will be overwhelmed by the granularity of the data, because investors can quickly extract the data most relevant to their analysis. Section 7(c) also requires that we set standards for the format of the data provided by issuers of an asset-backed security, which shall, to the extent feasible, facilitate the comparison of such data across securities in similar types of asset classes.

The requirements of standardized asset-level information in a machine-readable format coupled with, as we discuss in Section V.B.1.a Rule 424(h) and Rule 430D, more time to consider transaction-specific information provided through the new preliminary prospectus and three-day offering Start Printed Page 57203period rules that we are adopting [172] are aimed at addressing concerns, highlighted by the recent financial crisis, that investors and other participants in the securitization market may not have had the necessary time and information to be able to understand and analyze the risk underlying those securities and may not have valued those securities properly or accurately.[173] Taken together, standardized asset-level information in a machine-readable format and more time to consider the information should enable investors to analyze offerings more effectively and efficiently to better understand and gauge the risk underlying the securities. This, in turn should lead to better pricing, a reduced need to rely on credit ratings and a greater ability of investors to match their risk and return preferences with ABS issuances having the same risk and return profile. These benefits should improve allocative efficiency and facilitate capital formation.

Providing investors access to such information should reduce their cost of information gathering because they will not need to purchase the data from intermediaries or otherwise gather the information. Furthermore, requiring that a single entity, the issuer, provide the information rather than requiring each investor to collect it will reduce duplicative information-gathering efforts. Also, data accuracy may increase because issuers are incentivized to confirm the accuracy of the required asset-level disclosures provided in public filings.

Finally, we note that the public availability of standardized machine-readable data may encourage new entities to enter the ABS credit-analysis industry previously dominated by the top three largest NRSROs. This could increase competition in that industry and provide those investors who prefer not to analyze ABS themselves with more options when purchasing credit-risk assessments and reports from third parties. In addition, since asset-level information in standardized and machine-readable format will now be available, investors will have the ability to better assess the rating performance of NRSROs and other credit-analysis firms.

While we expect that the asset-level disclosure requirements we are adopting will generate the benefits described above, we also recognize that they will impose costs upon the issuers required to provide asset-level disclosures and on other market participants. We received only a few quantitative estimates of the potential costs to comply with the proposed asset-level disclosure requirements.[174] As discussed above, however, some commenters did express general concerns about the costs and burdens that would be imposed in order to comply with the requirements. After considering comments received, we acknowledge that, taken together, the asset-level disclosure requirements may result in the costs detailed immediately below.[175]

The asset-level disclosures, as commenters noted, will result in costs related to revising existing information systems to capture, store and report the data as required. These costs may be incurred by several parties along the securitization chain, including loan originators who pass the information to sponsors and ABS issuers who file the information with the Commission. As we describe later in the release, there could be significant start-up costs [176] to sponsors to comply with the asset level disclosures, but ongoing costs to sponsors likely will be significantly less than the initial costs. We recognize that our estimates may not reflect the actual costs sponsors will incur, particularly to the extent that there are differences in system implementation costs relative to our estimates. We also recognize that there are likely to be significant differences across sponsors in their current internal data collection practices and that implementation costs will depend on how the new requirements differ from the methods sponsors and ABS issuers currently use to maintain and transmit data. Additionally, we recognize that these costs will differ by asset class, depending on whether sponsors and ABS issuers within an asset class have a history of collecting and providing the asset-level information to investors. Further, in the last four years (2010-2013) only 296 registered RMBS, CMBS, Auto ABS, debt security ABS and resecuritization transactions took place. This limited issuance activity may discourage issuers and other market participants from investing in the new systems necessary to provide asset-level disclosures required by the final rules. As a result, several commenters stated that some entities may choose to exit the securitization market or not re-enter the market, which could decrease the availability of credit to consumers and increase the cost of available credit.[177] Furthermore, as we discussed earlier in this release, some sponsors may choose to issue through unregistered offerings where no asset-level disclosures are required.[178]

We also note that sponsors and ABS issuers may pass the costs they incur to comply with the requirements on to investors in the form of lower promised returns and/or originators may pass their costs on to borrowers in the form of higher interest rates or fees. We note, however, that some of these costs may be offset by a reduction in other expenses. For example, investors who previously paid data aggregators for access to relevant information may no longer be required to purchase this data and, to the extent that they do, lower data collection costs on the part of the data aggregators may flow through to investors. Many of the data gathering costs that previously were borne by several data aggregators and/or investors would be performed by the sponsor, eliminating the potential duplication of effort. Thus, the net effect of the new rules could be a reduction in the aggregate data collection costs imposed on the entire market through more efficient dissemination of relevant information. As a result, in the aggregate, the increase of the costs to investors in the form of lower returns Start Printed Page 57204may be offset by the reduction of the costs that are no longer paid to third-party data providers.

The 2010 ABS Proposing Release noted that the proposed standard definitions for asset-level information for RMBS and CMBS were similar to, and in part based on, other standards that have been developed by the industry, such as those developed under the American Securitization Forum's (ASF) Project on Residential Securitization Transparency and Reporting (“Project RESTART”) or those developed by CRE Finance Council (CREFC). We continue to acknowledge that to the extent that there are differences between standards for asset-level information, additional costs would be imposed on issuers and servicers to reconcile differences between standards. Further, servicers may incur some costs in monitoring their compliance with servicing criteria and requirements under the servicing agreement given that periodic reports will now include asset-level information. As we discuss in more depth below in the discussions about the requirements applicable to each asset type, we have attempted to reduce burden and cost concerns by further aligning the disclosure requirements with industry standards where feasible. Further, as discussed below, we are providing for an extended implementation timeframe, which we also believe will reduce the burden of implementing the requirements.[179] We discuss in greater detail below in Section III.A.2 Specific Asset-Level Data Points in Schedule AL the comments received with respect to RMBS, CMBS, Auto ABS, debt security ABS and resecuritizations and the changes to the final requirements to address these comments.

To further minimize implementation costs, we also removed the “General” category. We incorporated the data points proposed under this category into each of the asset class-specific requirements in order to tailor the requirements for each asset class.[180] We believe removing the General category and tailoring the disclosure requirements to each asset class minimizes implementation costs because issuers will not need to respond to generic disclosure requirements that may not be applicable to the particular asset class or that may not align with how the particular asset class captures and stores data.

We also understand the asset-level data requirements may also affect other market participants. For instance, some investors may have used the services of data providers to obtain the type of data that will now be mandatory under the requirements we are adopting. As a result, these data providers may experience reduced demand for their data aggregation business as investors may no longer seek such services since these requirements may provide them access to similar data. We believe, however, that this concern is mitigated as these entities will also be able to access the publicly available data. As a result, these data providers may not need to gather this asset-level data from other sources, thereby reducing their costs to obtain the data. Further, third-party data providers have developed products to analyze and model the asset-level data. Since the asset-level data will be standardized it may increase the utility of their current products or allow them to develop new products, thus increasing demand for their data analysis business.

We note that commenters raised other concerns regarding the asset-level reporting requirements beyond the cost to implement the requirements. One concern, as noted above, is that the proposed asset-level data may result in the release of an originator's proprietary data.[181] A commenter noted that if originators determine that asset-level disclosures reveal their proprietary business model to competitors they may refrain from securitizing assets.[182] We note, however, that one commenter believed that the proprietary concerns were unfounded.[183] While we acknowledge competitive concerns still may exist, we believe that information we are requiring about the underlying assets, including information about the obligors, will provide investors and potential investors with information they need to perform due diligence and make informed investment decisions and therefore should be disclosed. We also note that some of the asset-level data that we are requiring to be disclosed are available to the public, for a fee, through third-party data providers.[184]

Another concern that some commenters raised was the potential for securities law liability for inaccuracies in data points that require so-called “soft data.” [185] The commenters suggested that soft data includes data that may originate from representations provided by an obligor at origination or may represent a subjective judgment of a third party, such as property valuations of an appraiser. We note commenters' concerns about the potential cost to verify data of this type and whether such data can be verified objectively. We are not, however, persuaded by commenters' suggestions that we address these concerns by providing issuers with the discretion to include or exclude soft data from their disclosures. As noted below, we believe the discretion to determine what data would be included or excluded from their disclosures would reduce the comparability of asset pools. Further, we note that much of the required soft data includes data that is commonly part of the universe of data that originators use to make a credit decision, and we believe that investors should have access to similar data for each loan in order to evaluate the creditworthiness of the assets that they are dependent upon for payment of the securities. We note that some soft data, as defined by commenters, has been included in pool-level information provided in prior registered offerings and thus is already subject to potential securities law liability. In some instances the data will provide investors a baseline to compare how certain characteristics of the asset have changed over time. Finally, an investor's analysis can take into account the age of such disclosures.

In addition to concerns about the accuracy of data points requiring soft data, some commenters expressed concern about potential liability cost for errors or inaccuracies in the responses provided to other data points. Assessing materiality for purposes of securities law liability for an error or inaccuracy in an individual data point would depend on a traditional analysis of the particular facts and circumstances.[186] Start Printed Page 57205We agree with commenters that suggested that issuers should be able to provide narrative analysis of data in order to make their disclosure not misleading. Such additional explanatory disclosure can and should be added to the prospectus or the Form 10-D as may be necessary to make the asset-level disclosures, in the light of the circumstances under which they are made, not misleading.[187] Also, issuers that wish to provide other explanatory disclosure about the asset-level disclosures can provide such disclosures in a separate exhibit.[188]

We considered several possible alternatives to the new asset-level requirements we are adopting. Some alternatives we considered to address various concerns, including re-identification risk, included: Requiring more pool-level data in lieu of asset-level data, grouped account data in lieu of asset-level data, allowing a “provide-or-explain” type regime, only defining the type of information to be provided and allowing the registrant or other market participants to define the asset-level information or the Web site approach.[189]

We are concerned that these alternatives would be of limited benefit to investors, since they will not go far enough in providing them with information best suited to assessing the risk and return tradeoff presented by RMBS, CMBS, Auto ABS, debt security ABS and resecuritizations and to independently perform due diligence. Pool-level and grouped account data does not provide investors with the opportunity to develop the same level of understanding, because when loans or assets are aggregated into groups of information, certain characteristics of individual assets are lost. For example, investors may know how many loans fall in a particular loan-to-value range but may not know whether most loans are at the top, middle or bottom of that range.[190] This cross-sectional distribution of loans within a given loan-to-value range may have important implications for the pool's expected losses. A grouped account data approach groups loans based on certain loan characteristics, which does not allow investors to analyze the asset pool based on the loan characteristics the investors deem most important to their analysis. As a commenter noted, however, asset-level data provides investors the opportunity to analyze a broad set of loan characteristics and to assess risks based on the characteristics investors believe are most predictive of expected losses.[191] With standardized asset-level data in a machine readable format provided at issuance and over the life of a security, the data can be run through a risk model at issuance and over the life of a security to assess the risk profile of the transaction at issuance and any changes to the risk profile of the asset pool over time.

As noted above, we also considered the alternative suggested by some commenters that we require asset-level disclosure generally but allow an issuer or an industry group to define the disclosures. We also considered a provide-or-explain type regime that would permit an issuer to omit any asset-level data point and provide an explanation as to why the data was not disclosed.[192] We believe such approaches may limit the value of such disclosures. As noted above, the usefulness of asset-level data is generally limited unless the individual data points are standardized in terms of the definitions, the scope of information to be disclosed, and the format of the data points. A provide-or-explain regime may result in differing levels of disclosure provided about similar asset pools, as some may provide the required asset-level disclosures and others may exclude certain data points and only provide an explanation of why the information was excluded. This would inhibit the comparability of disclosures across ABS. Similarly, setting general asset-level disclosure requirements and allowing the issuer to define the data to be included and how the information is presented may result in differing levels of disclosure or different presentations of the data. This may limit the ability to compare across asset pools within the same asset class, which may reduce the usefulness of the data. Standardizing the information facilitates the ability to analyze the underlying asset-level data of a particular asset pool and the ability to compare the assets in one pool to assets in other pools.[193] As we note elsewhere in this release, we believe standardized disclosure requirements and making the disclosures easily accessible may facilitate stronger independent evaluations of ABS by market participants.

In addition to considering the alternatives we discussed above, we also considered adopting industry developed asset-level disclosure standards already in existence for RMBS and CMBS. We discuss in Section III.A.2.b.1 Residential Mortgage-Backed Securities and Section III.A.2.b.2 Commercial Mortgage-Backed Securities our consideration of adopting industry developed asset-level disclosure standards for these asset types.

Finally, as mentioned above, the final rules include several changes from the proposal. The changes are aimed at simplifying the requirements, addressing cost concerns and conforming our requirements, to the extent feasible, to other pre-existing asset-level disclosure templates. The discussions below address, for each asset type, the economic effects of the specific requirements, such as when the data is required and the types of Start Printed Page 57206disclosures required for each asset type. We also discuss the likely costs and benefits of the new rules and their effect on efficiency, competition and capital formation.

2. Specific Asset-Level Data Points in Schedule AL

This section is divided into several parts. Each part discusses the specific requirements we are adopting today for RMBS, CMBS, Auto ABS, debt security ABS and resecuritizations and highlights, for each asset class, the significant changes from the proposal.

(a) Disclosure Requirements for All Asset Classes and Economic Analysis of These Requirements

In the 2010 ABS Proposing Release, we proposed, between Schedule L and Schedule L-D, 74 general data points. We believed the proposed general item requirements captured basic characteristics of assets that would be useful to investors in ABS across asset types. As discussed below in Section III.B.2 The Scope of New Schedule AL, we have condensed the information previously proposed to be provided in either Schedule L or Schedule L-D into a single schedule, titled Schedule AL. Schedule AL enumerates all of the asset-level disclosures to be provided, if applicable, about the assets in the pool at securitization and on an ongoing basis.

We received a substantial number of comments directed at making technical changes to the data points and in some cases requesting we delete or add certain data points or that we change a data point to accommodate the characteristics of specified assets types.[194] Many commenters sought changes to the format of the information,[195] the range of possible responses for a particular data point, or the data point's title or definition in order to increase the usefulness of the information required, to address cost concerns or to align the data point with industry standards.[196]

To address comments that we revise data points to accommodate the characteristics of certain assets types, we integrated the proposed Item 1 General Requirements into the asset-specific requirements. This change permitted us to tailor the data points to each particular asset type and allowed us to further incorporate applicable industry standards. The data points we discuss below are incorporated into the rules for RMBS, CMBS, Auto ABS, debt security ABS and resecuritizations. In incorporating the proposed General Requirements into the requirements for each asset type, we are also making changes to the data points, based in large part on comments received, that we believe improve or clarify the disclosure, mitigate cost concerns and/or implement industry standards when we believe doing so would not materially diminish the value of the disclosures to investors.

Asset Number

We proposed that issuers provide a unique asset number for each asset that is applicable only to that asset and identify the source of the asset number.[197] We did not propose requiring that issuers use a specific naming or numbering convention. We asked for comment, however, about whether we should require or permit one type of asset number that is applicable to all asset types.[198] In response, several commenters urged that we recognize a specific type of asset numbering system currently in use within the industry for each asset type.[199] A few commenters were against a uniform number system that would apply across asset classes.[200] A few commenters, however, cautioned against requiring an asset number because privacy issues may arise if the asset number is associated with an individual.[201]

We are adopting, as proposed, that issuers provide for each asset in the pool a unique asset number applicable only to that asset and the source of the number.[202] We believe the use of an asset number is necessary and to the benefit of market participants, because it will allow them to follow the performance of an asset from securitization through ongoing periodic reporting. We remind issuers and underwriters that they should be mindful of the sensitive nature of the asset number and ensure that appropriate measures are taken to prevent the number from being associated with a particular person. While some commenters requested we adopt a specific type of identifier, we believe that identifiers for each asset may be generated in many ways and currently there is no single uniform asset identifier. These data points, as adopted, provide flexibility to issuers to use any numbering system, including those numbering systems that commenters recommended, and we believe this minimizes compliance costs. We are also adopting a data point, as proposed, that requires the identification of the source of the asset number. We recognize, however, that by not standardizing the numbering system, the usefulness of the data will be limited to the extent that investors intend to combine it with other data already incorporating a particular numbering system.

Underwriting Indicator

We proposed a data point that would disclose whether the loan or asset was an exception to defined or standardized underwriting criteria. The response to this data point was mixed. One commenter suggested that we correlate this data point with the then proposed Item 1111(a)(3) of Regulation AB that would have required disclosure on the underwriting of assets that deviate from the underwriting criteria disclosed in the prospectus.[203] Another commenter Start Printed Page 57207suggested the data point be omitted because the time and resources to provide the disclosures were not necessary or desired.[204] This commenter also noted that if we adopt the disclosure, then we should more precisely define what is considered defined and/or standardized underwriting criteria to avoid confusion.[205] An Auto ABS commenter stated that the exception disclosure required by Item 1111(a)(8) is sufficient and therefore this data point should be eliminated, but if this data point is adopted, the Commission should instruct registrants to omit it if no exceptions to the underwriting guidelines are reported in the prospectus.[206] Another commenter stated underwriting standards often contain certain elements of discretionary authority for an underwriter to vary from the stated criteria and an exercise of this discretion does not constitute an exception.[207] This commenter also noted specific concerns about the application of this data point to CMBS. The commenter stated that underwriting criteria for commercial mortgage loans are generally not clearly prescribed and the judgment of the originator is commonly used rather than an objective test based on established mathematical or financial models. Therefore, we should only require disclosure of exceptions to underwriting criteria in cases where such criteria are well defined, are fundamental to the credit analysis and are consistently applied.[208]

In contrast, one commenter requested additional disclosure because some market participants use “exception” to refer to loans that are unacceptable under the underwriting guidelines (i.e. they do not comply with the underwriting guidelines and do not meet the “compensating factor” standard set out in the guidelines to otherwise allow the approval of such loans) and at other times market participants use the term “exception” to refer to loans that are acceptable under the underwriting guidelines because they demonstrated sufficient compensating factors. The commenter suggested we require disclosure on an asset-level basis of exceptions both with and without the presence of sufficient compensating factors, the compensating factors relied upon and the specific underwriting exception.[209] Another commenter noted that this data point is not provided in asset-level disclosures for offerings of CMBS based on market practice and this data point should only be required if underwriting criteria become defined or standardized for commercial or multi-family mortgages.[210]

The proposed amendments to Item 1111(a)(3) were incorporated into Item 1111(a)(8) of Regulation AB which was added to Item 1111 of Regulation AB in early 2011.[211] Item 1111(a)(8) requires issuers, in part, to disclose how the assets in the pool deviate from the disclosed underwriting criteria. Rule 193 implements Section 945 of the Dodd-Frank Act by requiring that any issuer registering the offer and sale of an ABS perform a review of the assets underlying the ABS.[212] This review provides a basis for the Item 1111(a)(8) disclosure discussed above. Under Rule 193, such review, at a minimum, must be designed and effected to provide reasonable assurance that the disclosure regarding the pool assets in the prospectus is accurate in all material respects. The release adopting Item 1111(a)(8) noted that where originators may approve loans at a variety of levels, and the loans underwritten at an incrementally higher level of approval may be evaluated based on judgmental underwriting decisions, the criteria for the first level of underwriting should be disclosed. In addition, Item 1111(a)(8) requires disclosure of the loans that are included in the pool despite not meeting the criteria for this first level of underwriting criteria.

In light of comments received and the subsequent adoption of Item 1111(a)(8), we are adopting this data point with modifications.[213] As we noted when adopting the changes to Item 1111(a)(8), originators may approve loans at a variety of levels, and the loans underwritten at an incrementally higher level of approval are evaluated based on judgmental underwriting decisions. Therefore, we believe it is appropriate to base the data point on the standards of Item 1111(a)(8) and, in particular, on whether the asset met the disclosed underwriting criteria or benchmark used to originate the asset. We revised this data point to state: “indicate whether the loan or asset met the criteria for the first level of solicitation, credit-granting or underwriting criteria used to originate the pool asset.” Since originators may approve loans at a variety of levels, and the loans underwritten at an incrementally higher level of approval may be evaluated based on judgmental underwriting decisions, the data point, as defined, will capture whether the loan or asset met the criteria for the first level of underwriting. We believe aligning this data point to Item 1111(a)(8) responds to comments, including the concerns raised by a commenter with respect to CMBS, and minimizes confusion because the data point does not rely on what constitutes an exception to a defined and/or standardized set of underwriting criteria and instead focuses on whether the loan or asset met the disclosed underwriting criteria. For the same reasons, we also believe it addresses concerns that underwriting standards often contain certain elements of discretionary authority for an underwriter to vary from the stated criteria without being considered an exception or that the disclosure may release proprietary underwriting standards.[214] We are not persuaded that disclosures, on an asset-level basis, of exceptions both with and without the presence of sufficient compensating factors, the compensating factors relied upon and the specific underwriting exception, are necessary. We believe such disclosure is unnecessary because this data point, as adopted, captures Start Printed Page 57208whether an asset met the first applicable level of underwriting criteria.

We acknowledge a commenter's position, which was provided prior to the adoption of Rule 193, that a substantial expenditure of time and resources would be required to enable issuers to provide the proposed disclosures. We anticipate that in order to provide the new disclosure, an issuer could rely, in part, on the review that is already required in order for an issuer to comply with Rule 193. Since issuers can rely, in part, on the review that is required under Rule 193, issuers should incur less cost to provide this disclosure than if Rule 193 had not been implemented. We acknowledge that the information gained through a Rule 193 review may not provide all of the information needed to provide the disclosures.

Although issuers will incur potential costs to provide this disclosure, investors should benefit from the insight these disclosures will provide about the originator's underwriting of the pool assets and the originator's ongoing underwriting practices. For instance, the disclosures should provide investors the ability to identify the particular assets in the pool that did not meet the disclosed underwriting standards. Investors can then analyze whether these assets alter the risk profile of the asset pool and monitor the performance of these particular assets. In addition, we believe this information will allow investors to compare, over time, the performance of assets that met the disclosed underwriting criteria against those assets that did not meet the disclosed underwriting criteria used to originate the assets. This should allow investors to better evaluate an originator's underwriting practices.

Information About Repurchases

We proposed a data point to capture whether an asset had been repurchased from the pool.[215] If the asset had been repurchased, then the registrant would have to indicate through additional data points whether a notice of repurchase had been received,[216] the date the asset was repurchased,[217] the name of the repurchaser,[218] and the reason for the repurchase.[219]

One commenter suggested we clarify that the repurchase notice data point is intended to track whether a repurchase request has been made before the repurchase has been completed and add an option to indicate whether a repurchase request was made but the parties later agreed that a repurchase was not required.[220] Two commenters requested we delete the repurchase notice data point.[221]

The dealer and sponsor members of one commenter suggested we delete the data point identifying the name of the repurchaser because transaction documents will contain the name of the person obligated to make repurchases based on breaches of representations and warranties.[222] The investor members of the same commenter, however, suggested we retain the data point because multiple parties could be responsible for the repurchase of individual assets.[223]

We are adopting this group of data points with revisions in response to comments to align the data points with other disclosures about asset repurchases now required pursuant to the Dodd-Frank Act. As one commenter noted, Rule 15Ga-1 was adopted subsequent to the 2010 ABS Proposing Release.[224] Unlike the aggregated disclosures under Rule 15Ga-1, these data points provide transparency about fulfilled and unfulfilled demands for repurchase or replacement on an individual asset-level basis for investors in a particular transaction. We believe these data points provide investors with a more complete picture regarding the number of assets subject to a repurchase demand, including whether repurchases occur only after the receipt of a repurchase demand and the potential effects a repurchase may have on the cash flows generated by pool assets.

To address concerns about the costs to capture and report such data and to make the disclosure most useful and effective, we are aligning the data points to the type of demands that must be reported pursuant to Rule 15Ga-1. We believe this should minimize confusion, make the disclosures consistent with Rule 15Ga-1 disclosures, and help minimize costs because sponsors will already be required to capture such data to fulfill the disclosure requirements of Rule 15Ga-1. In particular, we are revising the titles and definitions of this group of data points in order to align them with the Rule 15Ga-1 disclosure requirements.[225] We expect that the information on the asset level should feed the aggregated disclosures already required pursuant to Rule 15Ga-1.[226]

We are also adding a data point to capture the status of an asset that is subject to a demand to repurchase or replace for breach of representations and warranties.[227] A commenter suggested that we should include an option to indicate assets subject to a repurchase or replacement demand, but where the relevant parties later agreed the repurchase or replacement was not required.[228] To address this concern, we based the coded responses for this data point on the requirements of Rule 15Ga-1. To this end, the data point captures whether the asset is pending repurchase or replacement (within the cure period); whether the asset was repurchased or replaced during the reporting period; [229] and whether the demand is in dispute, has been rejected or withdrawn. Finally, while not a requirement under Rule 15Ga-1, we are also adding “98=Other” to the list of coded responses. We believe adding “98=Other” accounts for dispositions of repurchase requests that Start Printed Page 57209may not fall into a category listed in the coded responses.

Two commenters suggested that we include a new data point to require issuers to provide the amount paid to repurchase the loan or lease from an Auto ABS transaction.[230] One of these commenters recommended that this new item replace the proposed repurchase indicator data point [231] because in Auto ABS there is not a lengthy period of time between an event requiring a repurchase and the actual repurchase as there may be in RMBS.[232] This commenter believed the repurchase amount would give timely indication that the loan has been repurchased. We believe that investors across asset classes would benefit from this data point and, therefore, we have added a repurchase amount data point to the final requirements for each asset class that is required to provide asset-level disclosures. The proposed repurchase indicator data point has been subsumed into another data point we are adopting, based on a comment received, titled “zero balance code.” [233] The zero balance code requires the selection, from a coded list, of the reason that the loan's balance was reduced to zero. One option is to select, “repurchased or replaced,” which if selected would indicate the loan balance was reduced to zero because the loan was repurchased from the pool. In effect, this data point provides the same information as the repurchase indicator data point would have provided.

We also are adopting data points that capture the name of the repurchaser [234] and the reason for the repurchase or replacement.[235] Although the transaction documents will contain the identity of the party that is obligated to make repurchases based on breaches of representations and warranties, multiple parties could provide representations and warranties for a pool of assets and the party responsible for the repurchase of individual assets may differ.[236] We believe this data point will clarify that responsibility.

Reporting Period Beginning and End Dates

We proposed that the asset-level disclosures in a preliminary prospectus be provided, unless the data point specified otherwise, as of a recent practicable date, which we defined as the “measurement date.” [237] We proposed that asset-level disclosures in a final prospectus be as of the “cut-off” date for the securitization, which would be the date specified in the instruments governing the transaction. This is the date on and after which collections on the pool assets accrue for the benefit of the asset-backed security holders. On an ongoing basis, the asset-level disclosures would be as of the end of the reporting period the Form 10-D covered.

A commenter believed that the proposed measurement dates were appropriate [238] and some commenters pointed out that the measurement date and cut-off date could be the same day.[239] We also received comments suggesting that some data points in proposed Schedule L were seeking data as of a date that was different than when the information was normally captured. For instance, some commenters noted that certain data points seek information as of the measurement date, but that the information is usually obtained during the underwriting process or at origination.[240] One of these commenters requested that we revise certain data points to clarify that the information was collected during the underwriting process or at origination.[241] Another commenter believed that the disclosure of data based on measurement dates and cut-off dates should be consistent with current industry practice regarding the frequency with which issuers can generate pool data.[242]

After considering comments received, we are adopting data points that require the disclosure of reporting period beginning and end dates in lieu of our proposal to require the measurement date and cut-off date.[243] We believe the date the asset-level information is provided in the prospectus should align with how information is normally captured and how it will be reported under the ongoing reporting requirements that will arise after issuance. Therefore, for a preliminary or final prospectus, the Schedule AL data is required to be provided as of the end of the most recent reporting period, unless otherwise specified in Schedule AL.[244] For periodic reports on Form 10-D, the Schedule AL data is required to be provided as of the end of the reporting period covered by the Form 10-D, unless otherwise specified in Schedule AL.

We recognize that this approach may reduce benefits to investors to the extent that some of the information disclosed may be stale. We believe, however, that this change should serve to address concerns that the proposal would require data to be captured at times different than when it is normally captured and thus result in undue issuer costs. To further address those concerns, we also revised some data points to clarify the “as of” date of the data required. If the data required is typically captured at a time other than the end of a reporting period, such as at origination, we revised the data point to clarify the “as of” date of the data required.[245] When making these changes, we either clarified the title, definition or both. These changes also help clarify whether we expect the response to a particular data point to remain static or be updated as new information becomes available. For instance, some data points request “original” or “initial” data or data as of “origination.” These data points require Start Printed Page 57210disclosure of data about the underlying loan at origination before any modifications.[246] The responses to these data points will be static and we do not expect updates to these responses over the life of the loan. The responses to these data points help to establish a baseline of the characteristics of each loan and will help investors monitor changes in the characteristics of an asset over the life of the loan. Therefore, unless the data point specifies a different “as of” date (e.g., asking for data created at origination or at some other time), the data should be as of the end of the reporting period.

Format of the Responses

We proposed that responses to the asset-level disclosure requirements be a date, number, text, or coded response. Consistent with the proposal, the final requirements we are adopting require responses as a date, a number, text, or a coded response. We received a number of comments that sought changes to the format of the information to be collected, the range of possible responses, or the data point's title or definition.[247] As noted elsewhere, we considered each of these comments and are making changes to mitigate cost and burden concerns and to implement industry standards when we believe doing so would not materially diminish the value of the disclosures to investors.

In the 2010 ABS Proposing Release, we also noted that situations may arise where an appropriate code for disclosure may not be currently available in the technical specifications. To accommodate those situations, the proposals provided a coded response for “not applicable,” “unknown” or “other” and many of the data points we are adopting include these potential responses. We noted in the proposing release that a response of “not applicable,” “unknown” or “other” would not be appropriate responses to a significant number of data points and that registrants should be mindful of their responsibilities to provide all of the disclosures required in the prospectus and other reports.[248] One commenter believed this language called into question the availability of Rule 409 under the Securities Act.[249] This commenter and another commenter requested that we clarify the circumstances under which issuers may rely on Rule 409 to omit responses to asset-level data points in a registered offering.[250] The rules we are adopting do not affect the availability of Rule 409 or Exchange Act Rule 12b-21. We remind issuers of the requirements of Rule 409 and, in particular, that if any required information is unknown and not reasonably available to the issuer, the issuer is to include a statement either showing that unreasonable effort or expense would be involved or indicating the absence of any affiliation with the person who has the information and stating the result of a request made to such person for the information. Also, in situations where an issuer selects “not applicable,” “unknown,” or “other,” we encourage issuers to provide additional explanatory disclosure in an “Asset Related Document” [251] describing why such a response was appropriate along with any other relevant detail.[252]

(b) Asset Specific Disclosure Requirements and Economic Analysis of These Requirements

Each section below discusses, for each asset type for which asset-level disclosure is required, the proposal, comments and final requirements applicable to each asset class and the anticipated economic effects arising from the final requirements applicable to each asset class, including the likely costs and benefits of the requirements and their effect on efficiency, competition and capital formation. Each section also discusses changes made to each group of proposed data points, including the addition of data points to or deletion of data points from the proposed group of data points.

(1) Residential Mortgage-Backed Securities

The proposal for RMBS included a total of 362 total data points between the 74 proposed general item requirements and the 288 data points specific to RMBS in proposed Schedules L and L-D. Based on the changes described below, the final requirements for RMBS, which are set forth in Item 1 of Schedule AL, include 270 data points. As noted in the 2010 ABS Proposing Release, we took into consideration standards that have been developed for the collection and/or presentation of asset-level data about residential mortgages. For instance, ASF had published an investor disclosure and reporting package for residential mortgage-backed securities. The package is part of the group's Project RESTART. This disclosure and reporting package includes standardized definitions for loan or asset-level information and a format for the presentation of the data to investors.[253] We also noted that another organization, the Mortgage Industry Standard Maintenance Organization (“MISMO”), has been developing a data dictionary of standardized definitions of mortgage related terms and an XML format for presenting such data.[254] We also considered the data that Fannie Mae and Freddie Mac receive from sellers of mortgage loans. In addition, we considered the data that the Office of the Comptroller of the Currency and the Office of Thrift Supervision receive from banks.[255]

As stated in the 2010 ABS Proposing Release, in developing the proposal, the staff surveyed the definitions used for data collected by the organizations mentioned above, as well as other industry sources. The scope of the Start Printed Page 57211proposed requirements was based mainly on information required to be provided to Fannie Mae and Freddie Mac for each loan sold to them or contained in the disclosure and reporting package for residential mortgage-backed securities developed by ASF's Project RESTART. We did not, however, include every requirement included in these packages. The presentation of the asset-level information was based, in part, on how information was presented under Project RESTART because that reporting template was designed specifically for reporting asset-level data about RMBS transactions to investors.

In response to the proposal, issuers, trade associations, investors and others generally supported the Commission's effort to increase transparency in the RMBS market.[256] Commenters differed, however, on the approach to requiring standardized asset-level data. Some commenters, mainly investors, expressed their support for the proposed data points. One investor group stated the granularity of the proposed data points was necessary because the information is critical.[257] They noted that, unlike a corporate security, investors in structured finance can only look to the assets in the pool for their return and possibly to external credit enhancement if provided. Another investor stated that the proposal will enhance the ability of investors to evaluate the ongoing credit quality of mortgage loan pools and increase market efficiency.[258] This investor also noted that the disclosures will provide new transparency into loan servicing operations. Another commenter believed that granular asset-level data is essential to restoring investor confidence in the RMBS markets and a critical component in encouraging greater analysis by investors of RMBS transactions and reducing reliance on credit ratings.[259]

In addition to the concerns commenters raised with asset-level disclosure requirements that applied across asset classes, some commenters expressed concerns with certain proposed RMBS requirements. For instance, commenters were concerned with the granularity of some proposed data points,[260] with the potential for certain disclosure to compromise individual privacy,[261] and whether some of the disclosures were necessary or material to an investment decision.[262] Several commenters suggested we follow the MISMO data standards [263] and two commenters suggested we incorporate more of the reporting package developed under Project RESTART into the final requirements.[264]

After considering the comments received, we are adopting, as proposed, asset-level disclosures specific to RMBS, with some modification to individual data points, and the addition and deletion of some data points from the group of proposed data points, as described in more detail below. Under the final rules, issuers are required to disclose the information described in Item 1 of Schedule AL for each mortgage in the pool, as applicable.[265] These requirements include information about the property, mortgage, obligor's creditworthiness, original and current mortgage terms,[266] and loan performance information.[267]

We believe that the asset-level requirements we are adopting for RMBS will benefit investors and other market participants by providing them with a broader picture of the composition, characteristics and performance of pool assets, which we believe is critical to an investor's ability to make an informed investment decision about the securities. Further, while the requirements are granular, we believe the scope of the disclosures is consistent with the information that Fannie Mae and Freddie Mac require for each loan sold to them or that would likely be collected by participants in Project RESTART.[268] We believe the disclosures will facilitate investor due diligence regarding RMBS, allow investors to better understand, analyze and track the performance of RMBS, and will, in turn, allow for better pricing, reduce the need to rely on credit ratings and increase market efficiency.

The format of the final asset-level requirements remains based, at least in part, on how information was presented under Project RESTART. In developing the final requirements, we considered, however, the different formats currently available for the presentation of asset-level data about residential mortgages. For instance, we note that since the 2010 ABS Proposing Release, Fannie Mae and Freddie Mac have begun receiving asset-level data prepared in accordance with MISMO data standards for each loan they purchase.[269] As a result, we understand that a number of market participants, including mortgage Start Printed Page 57212originators and servicers, likely capture, store and communicate data in a MISMO format. Therefore, we considered whether the asset-level disclosures should be provided following the MISMO format.[270]

We are not persuaded, however, that our reporting requirements should follow the MISMO format. We believe that the format for the presentation of the asset-level data we are adopting is more investor-friendly, standardizes how the information is to be provided to investors and is easier to review. Also, the reporting package developed under ASF's Project RESTART was designed with the involvement of RMBS investors and issuers, which we believe provides some indication that issuers and investors support the disclosure and reporting of asset-level data about RMBS transactions based on that format. Furthermore, we note that since the Project RESTART standards were released, the few registered offerings of RMBS that have occurred have provided data based on the standards set under Project RESTART as part of their offering materials. We also believe this provides some indication that issuers and investors support this disclosure format. We also note that investors did not submit comment letters suggesting asset-level data for RMBS be presented in a MISMO format. Finally, we also considered that asset-level information being released by Fannie Mae and Freddie Mac does not appear to be presented in a MISMO format, although we note that the disclosures are likely compiled from asset-level information submitted to them that is in a MISMO format.[271]

While some data points we are adopting have minor differences to comparable data definitions contained in MISMO's data dictionary, we believe that most data points we are adopting are consistent with the information included in the MISMO data dictionary.[272] We believe that systems could be programmed, albeit at some cost, to combine data provided in response to multiple MISMO data definitions to one of our required data points.[273] Therefore, we believe that data originating in the MISMO data format could be compiled to comply with the new rules for reporting to RMBS investors so the costs of implementing the requirements may be limited to the extent that some MISMO data definitions overlap with data points we require.

We understand, however, that requiring data points that deviate from how issuers capture and store data may raise costs for both issuers and investors because issuers will need to create new systems or adjust their current systems to provide the data to satisfy our rules. In addition, investors will need to adjust their existing tools to read and analyze the newly required data. To further minimize the need to revise systems to provide the required data, we are revising data points to better align with MISMO data definitions. If a proposed data point and a MISMO data definition require the same or similar data and aligning to the MISMO data definition would not affect the value of the information or deviate from how information is reported under the requirements, we revised the proposed data point to better align with the MISMO data definition.[274] We believe these changes will help to minimize any burden or costs that may arise from the reporting of similar information under different standards.

We also acknowledge that some disclosures we are requiring are not part of the MISMO data dictionary or provided to Fannie Mae and Freddie Mac. Many of these disclosures relate to the ongoing performance of pool assets. We are requiring these disclosures so that an investor may conduct his or her own evaluation of the risk and return profile of the pool assets at issuance and throughout the life of the investment.

We also considered the alternative of requiring asset-level data generally and allowing the industry to develop the reporting requirement. While issuers in recent RMBS offerings have been providing asset-level disclosure in line with the disclosure templates developed by Project RESTART, providing such data to investors in this format is not mandatory. As noted above, we believe that, unless asset-level disclosures are standardized across all issuers, the benefits of asset-level data is generally limited. We believe that, without requiring and standardizing the asset-level requirements, issuers may choose to not provide asset-level data to investors, provide it inconsistently, or provide it under differing standards. These alternatives would limit the ability for investors and market participants to cost-effectively compare and analyze offerings of RMBS.

Finally, we also received many comments directed at individual data points, many of which were seeking changes to the format of the information, the range of possible responses for a particular data point, or the data point's title or definition. Other commenters made suggestions on how we could make the data points better align with an industry standard. We also received comments suggesting that certain data points should not be required if the data is derivable from other required data points.[275] We considered each of these comments, and we made changes that we believe improve or clarify the disclosure,[276] Start Printed Page 57213mitigate cost and burden concerns and/or implement industry standards when doing so would not materially diminish the value of the disclosures to investors.

In addition to revising the data points to align with industry standards or to address comments received,[277] we omitted some data points that were proposed for other reasons, such as to address concerns about disclosure of sensitive information or reduce repetition. As discussed below, certain proposed data points would have required disclosure of sensitive information and could have increased the re-identification risk.[278] While the changes we are making should reduce the risk of re-identification and the related privacy concerns, we do not believe that the changes will limit investors' ability to conduct due diligence and make informed investment decisions.

As noted below, proposed Schedules L and L-D contained identical or substantially identical data points, so by aggregating the schedules we are able to omit one of the identical or nearly identical data points.[279] We also proposed data points that would have required information about ARM loans that were modified during a reporting period. This information would have included pre-modification and post-modification characteristics of the ARM loans. We are not adopting the pre-modification data points since investors will have access to pre-modification information through other asset-level data.[280] We also aggregated several data points into either one data point or fewer data points based on comments received.[281] We are omitting some proposed data points in favor of other data points that we are adding to the requirements to address comments received. For instance, as discussed further below, we replaced some data points that capture advances with data points that disclose different categories of advances and how those advances were reimbursed.[282] We are also omitting, based on comments received, data points that relate to the Home Affordable Modification Program, a temporary government program, over concerns about the value of these data points over other modification data points and about adopting data points for a temporary government program.[283] We also are not adopting a proposed data point that commenters suggested would provide limited value to investors.[284]

Some commenters, however, suggested we expand the asset-level disclosures to include more data points than proposed.[285] For instance, commenters suggested adding data points that would correlate to information captured in ASF's Project RESTART disclosure and reporting template,[286] that would capture information about government sponsored loan modification programs,[287] and debt-to-income (“DTI”) ratios or property valuations.[288] Another commenter suggested that we add data points that increase the granularity of certain obligor-related data.[289] A commenter also suggested adding data points that captured more information about the characteristics of modified loans.[290] We added those data points to the extent we believe the data point improves or clarifies the proposed requirements or aids an investor's ability to make an informed investment decision, monitor loan performance for ongoing investment decisions, or understand loss mitigation efforts without significantly increasing re-identification risk.[291] We also took into consideration whether issuers have ready access to the information and whether requiring the information in the format requested would place an undue burden on issuers or market participants. The final requirements do not include every data point that commenters recommended we add because we are concerned they could impose an undue burden and we are not persuaded that the data would aide an investor's ability to analyze or price the security or monitor its ongoing performance. We believe that, to the extent issuers want to provide additional asset-level disclosures in order to capture the unique attributes of a particular pool, issuers can provide the additional asset-level disclosures in an Asset Related Document.[292]

We discuss below the significant comments we received about individual data points along with the revisions we have made in response to those comments.

Information About Payment Status and Payment History

The proposal included a group of data points that would require disclosure of information about the status of required payments. These data points would capture, both at the time of the offering and on an ongoing basis, current Start Printed Page 57214delinquency status,[293] the number of days a payment is past due,[294] and current payment status.[295] In addition, on an ongoing basis, a data point would capture the payment history over the past twelve months.[296]

One commenter suggested that we add, revise or delete data points in this group in order to align with servicing practices or to increase transparency.[297] In lieu of the proposed data points capturing current delinquency status, current payment status and the number of days a payment is past due, we are adopting, based on comments received, the following data points: Most recent 12-month pay history,[298] number of payments past due [299] and paid through date.[300] We discuss below the group of data points we are adopting. Taken together, we believe this group of data points should provide insight into the payment performance of each pool asset and allow investors to track delinquencies.

Paid Through Date

The proposed data point titled “Number of days payment is past due” would have required disclosure, at the time of the offering, of the number of days between the scheduled payment date and the cut-off date if the obligor did not make the full scheduled payment. The proposed ongoing disclosure requirements included a similar data point, but required the number of days between the scheduled payment date and the reporting period end date, instead of the cut-off date. A commenter indicated the final requirements should omit the proposed data point because servicers currently track delinquencies in 30-day intervals, measured on a monthly basis, rather than number of days past due at any given date, including the reporting date, and because the cost to capture the proposed information is not justifiable.[301] As an alternative, the commenter suggested the number of days past due could be derived from the interest paid through date reported in proposed Item 2(a)(14) of Schedule L and the measurement date.

We are not adopting, as a commenter suggested, the data point titled “Number of days payment is past due” because the proposed data point may have required data that differs from how data is captured.[302] We believe an alternative approach may provide investors similar information with lower costs to issuers. We believe investors can derive information about the number of days payment is past due from the date through which the loan is paid. Therefore, to address the commenter's concern and provide information in each report to derive the number of days a payment is past due, we are adopting a data point titled “Paid through date” which requires disclosure of the date the loan's scheduled principal and interest is paid through as of the end of the reporting period.[303] For each reporting period the response to this data point will disclose, regardless of when the last payment was made, the date the loan is paid through. The response to this data point will also indicate when a loan is paid several months in advance. We believe this approach addresses the commenter's cost concerns because the required information should be readily available.[304]

Most Recent 12-Month Pay History

The proposed data point titled “Current delinquency status” would have required that issuers disclose the number of days the obligor is delinquent at the time of the offering [305] and on an ongoing basis.[306] One commenter suggested that for RMBS we replace this data point with a data point contained in the Project RESTART disclosure package that required a string indicating the payment status per month over the most recent 12 months.[307] The commenter stated this string, with the addition of foreclosure and REO disclosures, would provide considerably more useful information than the proposed data point and would subsume the proposed data point instead of requiring the number of days an obligor is past due. We are persuaded that a payment history data point indicating the payment status per month over the most recent 12 months would provide more useful information than the number of days an obligor is past due. In addition, we believe, as a commenter suggested, that the payment history data point subsumes the proposed data point. Therefore, we are adopting a payment history data point and omitting the proposed current payment status data point.[308] Because this information should be readily available to issuers for the entire history of the loan, we believe any additional costs incurred from providing the disclosures in the format requested, to the extent that such format differs from how such information is collected and stored, will be limited.

Number of Payments Past Due

We also proposed a data point titled “Current payment status” that would capture the number of payments the obligor is past due.[309] We are revising the title to “Number of payments past due” to more accurately convey the information the data point requires.[310] A commenter requested we omit the proposed data point because it would be redundant with the proposed the “Current delinquency status” data point, which would have captured the number of days the obligor is delinquent.[311] There are many ways to present the status of payments, and the data point we are adopting will require disclosure of the number of payments an obligor is behind at any point in time. Therefore, we are not adopting the “Current delinquency status” data point Start Printed Page 57215which should eliminate any potential redundancy.

Information About Junior Liens and Senior Liens

We proposed data points that would require disclosure, at the time of the offering, about the junior liens and senior liens that existed at origination. For loans with subordinate liens at origination, the combined balances of all subordinate loans would be required.[312] For junior loans being securitized, the combined balances of all senior mortgages at the time the junior loan was originated would be required.[313] Where the associated most senior lien is a hybrid, the hybrid period of the most senior lien would be required.[314] Where the associated most senior lien features negative amortization, the negative amortization limit of the senior mortgage as a percentage of the senior lien's original unpaid principal balance would be required.[315] We did not propose a data point to capture the effort an originator or sponsor made to discover if the same property secures other loans, but we asked if this type of disclosure should be required.[316]

Comments on this group of data points varied. A few commenters requested that the data points capturing junior lien balances include an “if known” or similar qualifier to address concerns that originators may not always have knowledge of, or access to, balance information on loans not originated by them.[317] A few commenters also suggested that the combined senior loan and combined junior loan balances, if known, be captured on an ongoing basis.[318] Two commenters supported a data point capturing what effort an originator or sponsor made to discover if the same property secures other loans.[319] One of these commenters noted, however, that there may be difficulties providing this disclosure because the existence of a debt obligation may not be discovered before the required asset-level disclosures are provided.[320] The other commenter noted that the disclosure should be required because the failure to account for an additional loan will result in an inaccurately reported combined LTV ratio and, therefore, investors would want to know if the verification was made.[321]

We are adopting the group of data points described above, but with revisions to address comments received.[322] In response to comments that expressed concern that originators may not always have knowledge of, or access to, balance information on loans not originated by them, we revised this group of data points to require that the information be provided if the information was obtained or available to them. Regardless of whether the loan being securitized was originated by parties affiliated or unaffiliated to the issuer, we expect, however, that an issuer would make efforts to discern whether junior loans were originated concurrently to or immediately following the origination of the loan being securitized and the balances of those loans. We believe the review required under existing Rule 193 of the Securities Act, which requires a review of the pool assets underlying the asset-backed security may address concerns about verification. The review required under Rule 193 must be designed and effected to provide reasonable assurance that the disclosure regarding the pool assets in the prospectus, which includes the asset-level disclosures, is accurate in all material respects. We believe a Rule 193 review would necessarily include consideration of whether the disclosures about junior or senior liens are accurate in all material respects. We are not adopting a separate data point that would require disclosure of the effort an originator or sponsor made to discover if the same property secures other loans.[323] This data would be difficult to capture in a standardized way, and we are uncertain, at this time, whether this information is best captured within these particular asset-level requirements.

We believe investors will benefit from ongoing disclosure about the aggregate balances of all known senior and junior lien(s) and, therefore, we are revising the data points to capture the most recent senior lien(s) and junior lien(s) balances.[324] We understand, however, that obtaining updated balances on an ongoing basis may involve some burden and cost, particularly if the junior liens are originated by parties unaffiliated with the issuer. Therefore, to address burden concerns, these data points do not require that issuers obtain updated information each month. Instead, the definitions of these data points indicate that a response is required if the most recent junior or senior mortgage balances are obtained or available.[325]

Information About the Property

We proposed a group of data points that would capture information related to the property, such as the property type, occupancy status, geographic locations and valuations.[326] Taken together, these data points would provide insight into the physical asset underlying the mortgage. The response to this group of data points varied with some commenters suggesting the group of data points was too granular [327] and others suggesting we expand the information captured about valuations.[328] We discuss below the significant comments we received about this group of data points and the revisions we have made to data points within this group.

Property Location

We proposed to require that the location of the property by Metropolitan Statistical Area, Micropolitan Statistical Area or Metropolitan Division (collectively, “MSA”) be provided in lieu of zip code due to privacy concerns arising from providing the property's zip code.[329] The response to this Start Printed Page 57216approach varied. On the one hand, we received some comments suggesting we not require zip code because it would make the ability to identify an obligor within a loan pool easier.[330] On the other hand, some commenters indicated that 5-digit zip codes or 3-digit zip codes should be provided instead of MSA because zip codes provide more information about the property.[331] For instance, one commenter was concerned that disclosing only the MSA would result in less information than is currently available.[332] As another commenter noted, the zip code provides information such as whether the property is in a flood plain or earthquake zone.[333] One commenter indicated that using MSA rather than zip codes would restrict the information available to investors and, as such, issuers expect to receive substantially lower pricing for new RMBS offerings resulting in substantially higher costs for consumers of residential mortgage loans.[334] Another commenter echoed this concern.[335] Another commenter suggested that the “County Code,” which is a federal information processing standard code, is an appropriate alternative to other geographic location identifiers.[336]

As discussed below in response to the 2014 Re-Opening Release, several commenters stressed the importance of geography in assessing re-identification risk and recommended requiring issuers to identify assets by a broader geographic area to reduce the ability to re-identify.[337] One commenter recommended that, instead of requiring MSA as proposed, we require geography by 2-digit zip code.[338] Based on the reasons discussed in Section III.A.3 Asset-Level Data and Individual Privacy Concerns, we are requiring disclosure of the 2-digit zip code, which will allow investors to assess market risk associated with a particular geographic location without resulting in unnecessary re-identification risk.

Property Valuations

We proposed a group of data points that would capture information about original property valuations.[339] The comments we received on this group of data points varied with some commenters seeking more granularity and others seeking less granularity. Commenters seeking more granularity suggested expanding this group of data points to require data about recent property sales, more detail about the characteristics of the property, such as the gross living area, room count, and construction style,[340] and the disclosure of appraiser credentials and prior complaints against them.[341] A commenter also recommended including valuations captured as part of a “valuation diligence” process, including recalculated loan-to-value ratios and combined loan-to-value ratios based on these valuations.[342] Another commenter said there is no uniformity in how values are determined because the proposal would allow issuers to select from a long menu of valuation methods, approaches and sources for establishing property values.[343] This flexibility would allow issuers to pick-and-choose which valuation method best serves their purposes, and the proposed rule would not establish any qualification requirements or standards of care and/or competency for valuations performed in connection with mortgage-backed securities.

One commenter stated that the data captured about property valuations was too granular and not relevant to an investor.[344] With respect to the data point capturing the valuation date, a commenter suggested the purpose of disclosing the valuation date is to ensure that the loan-to-value ratio used in the underwriting process was current enough to not overstate the collateral value of the mortgaged property, particularly during periods of declining home prices.[345] The commenter stated that the precise date of the valuation may be difficult for some originators to track. As an alternative, the commenter suggested that we permit issuers to either provide the valuation date or represent in the relevant transaction agreement that the valuation was conducted not more than a specified number of days prior to the original closing of the loan. According to the commenter, such a representation would ensure that the issuer or originator is allocated the risk of stale valuation. Further, to address any concern about the effectiveness of a representation in lieu of disclosure, the commenter's suggested alternative would only apply in a transaction in which the transaction agreements provide for a robust third-party mechanism for evaluating and resolving breaches of representations.

As discussed in Section III.A.3 Asset-Level Data and Individual Privacy Concerns below, we are concerned that providing data about original property valuations may increase re-identification risk; therefore, we are not adopting any of the proposed data points related to original property valuations. In particular, we are concerned that data about original property valuations could provide a close approximation of sales price, and thus raise the same re-identification concern as sales price. Although we are not adopting the proposed data points related to original property valuations, we are adopting other data points, such as Original loan amount and Original loan-to-value, which will provide investors with key information that they need to perform due diligence and make an informed investment decision.

We also proposed data points requiring disclosure about the most recent property value, if an additional property valuation was obtained after the original appraised property value.[346] One commenter indicated that these data points appeared to relate only to valuations obtained by the originator.[347] The commenter suggested that we require any sponsor who obtains an alternative property valuation as part of due diligence to disclose that value to the extent it is the most recent property value. The commenter also suggested that we consider disclosure of the lowest alternative property value in the last six months (in addition to the most recent property value) to prevent the sponsor from evading the requirements Start Printed Page 57217by getting alternate values only when the most recent value is lower than the sponsor would like. Another commenter also suggested that the “Most recent property value” data point should only require property values obtained by the securitization sponsor, although the investor members of this commenter recommended that this include affiliates of the securitization sponsor.[348]

We are adopting these data points, as proposed, with revisions to address comments received.[349] In particular, we revised the definitions to require disclosure of any valuation obtained by or for any transaction party or their affiliates.[350] This revision addresses comments that these data points appear to relate to valuations obtained only by the originator. The reference to “obtained by or for any transaction party or its affiliates” contained in each definition should be construed broadly and should include, but not be limited to, valuations obtained as part of any due diligence conducted by credit rating agencies, underwriters or other parties to the transaction. We also made conforming changes to the titles and definitions “Most recent AVM model name” and “Most recent AVM confidence score” because these disclosures are providing information about the most recent property value.

We also considered, as a commenter suggested, adopting data points to capture the lowest alternative property valuation obtained in the last six months by, in addition to the originator, the sponsor or its affiliates. We did not adopt these data points because we are not persuaded, at this time, that the potential benefits investors may receive from such information would justify the potential costs and burdens that may be associated with providing the data. If, however, alternative property valuations are obtained that reflect substantially lower valuations, an issuer should consider whether these valuations need to be disclosed or whether additional narrative disclosure is necessary so that the disclosure about property valuations is not misleading.[351] Originators, sponsors or other transaction parties are not required to obtain updated valuations in order to respond to the data points capturing information about recent valuations. Instead, this requirement is meant to capture valuations conducted subsequent to the original valuation for whatever reason, such as updated valuations obtained in the normal course of their business or because other facts or circumstances required an updated valuation.

Information About the Obligor(s)

We proposed a group of asset-level data points that would provide data about an obligor's credit quality.[352] This group of data points was intended to capture information about the obligor(s) income, debt, employment, credit score and DTI ratio. In light of privacy concerns, the proposal included ranges, or categories of coded responses, instead of requiring disclosure of an exact credit score, income or debt amount in order to prevent the identification of specific information about an individual. We discuss below the significant comments we received about this group of data points and the revisions we have made in response to those comments.

Use of Coded Ranges, Updated Information and Information About Co-Obligors

The comments we received on this group of data points varied. As discussed below, several commenters noted that some data points related to obligors may cause individual privacy concerns if linked to the obligor even if that information, like obligor credit score, was provided in ranges.[353] On the other hand, some commenters generally opposed coded ranges because they believe exact credit scores are necessary to evaluate risk, appropriately price the securities or verify issuer disclosures.[354]

With respect to whether updated obligor information should be required, one commenter believed that servicers should provide updated borrower information whenever such information is obtained by the servicer.[355] Other commenters, without providing a reason, also suggested updated credit score information should be provided.[356] Another commenter, however, suggested that updated credit scores are obtained infrequently, if at all, and the benefit investors may receive from updated monthly credit scores across all securitized loans would not justify the costs to provide such disclosures.[357] The commenter recommended requiring this information only if the servicer obtains the information. We also received a few comments suggesting that we eliminate the co-obligor categories for various reasons,[358] and received a comment suggesting that we provide obligor information for up to four different obligors.[359]

We are eliminating certain data about obligor income based on comments received and in light of the recent adoption by the CFPB of the ability-to-repay requirements under the Truth in Lending Act or Regulation Z, which includes minimum standards for creditors to consider in making an ability-to-pay determination when underwriting a mortgage loan.[360] We note that all originators will need to adhere to these requirements and, therefore, it is appropriate to align our disclosure requirements with how originators will be required to assess the obligor's income when considering their ability to repay a loan while not requiring the disclosure of a significant amount of potentially sensitive obligor information that could increase re-identification risk.[361] To achieve this, we omitted the data points capturing obligor and co-obligor wage income,[362] obligor and co-obligor other income,[363] all obligor wage income,[364] all obligor Start Printed Page 57218total income,[365] and monthly debt.[366] A commenter suggested that we require monthly income used to calculate the DTI ratio.[367] However, as discussed below in Section III.A.3 Asset-Level Data and Individual Privacy Concerns, to help reduce re-identification risk, we are not adopting a number of data points that disclose potentially sensitive obligor information, such as debt or income.

We are also adopting data points capturing the obligor credit score, modified from the proposal.[368] The proposal would have required issuers to indicate the credit score type and score. If the score used was FICO, issuers would have been required to indicate the code that represented a range of FICO credit scores within which the score fell. The rules we are adopting require disclosure of the exact credit score used to evaluate the obligor during the origination process.[369] We are persuaded by commenters that exact credit scores are necessary to evaluate risk and to appropriately price securities.[370] We also added, in response to comments received, data points that capture the most recent credit score, credit score type and credit score date.[371] We are persuaded that updated scores should be provided, if obtained, since such information will provide investors with a picture of the obligor's ongoing ability to repay the loan. These data points do not require originators, sponsors or transaction parties to obtain updated information. Instead, this requirement is meant to capture credit scores obtained, for whatever reason, after the original score was obtained.

Length of Employment

We proposed data points requiring information about the length of time the obligor and co-obligor have been employed.[372] We received a comment that this level of detail about the obligor's length of employment is unnecessary.[373] As an alternative, the commenter stated that it would be sufficient to know if the obligor has been employed by his or her current employer for 24 months or less or more than 24 months because this is the standard demarcation in industry underwriting standards. In line with the commenter's suggestion, we revised the data point to require the issuer to indicate whether the obligor has been employed by his or her current employer for greater than 24 months as of the origination date. We believe this approach will mitigate the burden on issuers, but still provide investors with valuable information about the obligor's length of employment.

Months Bankruptcy and Months Foreclosure

We proposed a data point that would require disclosure of the number of months since any obligor was discharged from bankruptcy.[374] We also proposed a data point that would require disclosure, if the obligor has directly or indirectly been obligated on any loan that resulted in foreclosure, of the number of months since the foreclosure date.[375] We received a comment suggesting this information may be difficult or costly for many lenders to capture, and that a suitable substitute would consist of a representation designed to ensure that the obligor has not recently been discharged from bankruptcy and a representation designed to ensure that the obligor has not recently been obligated on a loan that resulted in a foreclosure sale.[376] The commenter suggested requiring representations in the relevant transaction agreements, in lieu of the disclosure of the number of months since the obligor was discharged from bankruptcy or the number of months since the foreclosure date, to the effect that at least a specified number of years have passed since any obligor was discharged from bankruptcy or was a direct or indirect obligor on a loan that resulted in a foreclosure sale.

Another commenter stated, with respect to the data point capturing the number of months since an obligor has directly or indirectly been obligated on any loan that resulted in foreclosure, that its dealer and sponsor members believe that this data point should be limited to direct obligations, whereas its investor members believed that guaranteed or co-signed obligations should be included.[377] Both groups agreed that this disclosure should be limited to obligations on residential property that resulted in foreclosure within the last seven years (so that such foreclosure would appear on a credit report).

In response to privacy concerns, we are not adopting either proposed data point. Section III.A.3 Asset-Level Data and Individual Privacy Concerns below provides a discussion of these and other related data points that we are not adopting due to the potential re-identification risk. As noted below, if an obligor had experienced a past bankruptcy or foreclosure, we would expect that those events would have been considered in generating a credit score. Because we are requiring disclosure of an exact credit score, investors will receive information they need about past payment behavior to perform due diligence.

Debt-to-Income

We proposed data points that would require at the time of securitization disclosure about the total DTI ratio used Start Printed Page 57219by the originator to qualify the loan.[378] In addition, at the time of securitization and on an ongoing basis the front-end and back-end DTI [379] ratios would be required for any modified loans.[380]

One commenter suggested DTI ratio disclosure provided at origination include both front-end and back-end DTI ratios.[381] The commenter also suggested we require the DTI ratio for an ARM loan to be recalculated using the fully indexed interest rate and that we require disclosure of any subsequent calculations.[382]

The data points we are adopting today require, as proposed and consistent with the comment received, front-end and back-end DTI ratios calculated during the loan origination process and at the time of any loan modification.[383] We believe both front-end and back-end DTI ratios provide important data about the total debt load of the obligor, which provides insight into the obligor's ability to repay the loan. We are not adopting, as one commenter recommended, data points capturing information about the DTI ratio recalculated using the fully indexed interest rate. We believe the DTI figures provided in response to this data point will be adequate for investors to use, in part, to assess a borrower's ability to repay. We also note that our approach is generally consistent with Regulation Z, which requires all loans covered by Regulation Z to consider DTI ratios calculated using the fully indexed interest rate.

Information About Servicer Advances

Servicer Advances

We made various changes to the group of data points capturing information about servicer advances. The proposal included information about the servicer's responsibility, if any, to advance principal or interest on a delinquent loan, the method of those advances, the outstanding cumulative balance advanced and how those advances were subsequently reimbursed. The requirements we are adopting today include the information proposed and described above, but also include the addition and deletion of some data points capturing advances to address comments received. We discuss immediately below the various changes to the group of data points capturing information about servicer advances.

Advancing Method

The final rule includes a data point suggested by a commenter titled “Advancing method.” [384] The data point includes a coded list that indicates the servicer's responsibility for advancing principal or interest on delinquent loans. We believe that the response to this data point will help investors understand the servicer's responsibility with respect to advances for each particular loan and the pool as a whole.

Advances: Principal, Interest, Taxes and Insurance, and Corporate

We proposed a general disclosure data point that would require, if amounts were advanced by the servicer during the reporting period, the disclosure of the amount advanced.[385] One commenter [386] suggested that for RMBS, we split this information into three categories that would capture principal and interest advances,[387] tax and insurance advances,[388] and corporate advances because these categories of information are more useful.[389] In addition, the investor membership of another commenter requested disclosure about the servicer's methodologies regarding advances of interest and principal on delinquent loans, the reimbursement of those advances,[390] and, for modified loans, disclosure about non-capitalized and capitalized advances.[391] The commenter also suggested aggregating the data points capturing, for liquidated loans, the various advances the servicer had made to cover expenses incurred due to concerns that the information was too granular and the information is immaterial to investors.[392]

In light of these comments, we have split the final data points into the following four categories: Principal advances, interest advances, taxes and insurance advances, and corporate advances. While one commenter recommended aggregating the principal advances and interest advances into one data point, the final rule includes data points capturing interest and principal advances separately since that is consistent with how other information that relates to principal and interest is captured in Schedule AL.

We agree with commenters that requiring disclosures about advances made by the servicer, the outstanding cumulative balance advanced and how those advances were subsequently reimbursed or addressed will provide investors insight into the payment status of a particular asset within the pool and the potential losses that may pass on to the trust. Therefore, in order to capture how these advances were reimbursed, the final rule includes additional data points that capture for these same categories of advances, the cumulative outstanding advanced amount or, if these advances were subsequently reimbursed, how they were reimbursed or resolved, such as through the obligor becoming current on payments, or being reimbursed at the time the loan was liquidated. Since this information is likely readily available to issuers, we believe the cost to provide this data should be low.

We have omitted from the final requirements, as a commenter recommended, proposed data points that would have required the disclosure of the amount of various expenses advanced and reimbursed, such as property inspection expenses, insurance premiums, attorney fees and property taxes paid for liquidated loans. Since the asset-level reporting requirements do not require that advances be reported in this fashion at each reporting period, we are uncertain at this time whether this level of granularity about outstanding advances at loan liquidation would be beneficial to Start Printed Page 57220investors. In general, we believe these expenses are captured by other data points that detail reimbursements at loan liquidation for advances of taxes and insurance and corporate expenses.[393]

Information About Modified Loans

We proposed a group of data points that would capture information about modified loans. The responses to this group of data points would provide data about whether a loan has been modified, the modification terms and the loan characteristics that were modified. We received comments suggesting we add [394] or delete [395] data points from this group of data points, and comments suggesting we revise certain data points within this group.[396] A commenter suggested adding a requirement for data that details the number of modification requests that are granted and denied and the average time that elapses between a borrower's request for a loan modification and a determination of that application.[397] The commenter also requested disclosure of the number and percentage of modified loans which have re-defaulted.

We are adopting most of this group of proposed data points,[398] as well as additional data points, mainly based on comments received to provide further transparency around modifications, including any change in loan characteristics or other loan features.[399] For instance, the final requirements include, in addition to the proposed data points, data points that capture information about step provisions,[400] the actual and scheduled ending balances of the total debt owed,[401] the date a trial modification was violated,[402] and the interest rate and amortization type after modification.[403] For loans that remain an adjustable rate mortgage after a modification, additional data points capture information, such as the index look-back, the post-modification initial interest rate, the maximum amount a rate can increase or decrease and information about negative amortization caps.[404] We did not add, as a commenter suggested, requirements about the number of modification requests received, the average time that elapses between a borrower's request for a loan modification and when a determination is made, or the number and percentage of modified loans which have re-defaulted.[405] We are not persuaded these disclosures would provide a clear benefit to investors, especially in light of the costs issuers would incur to provide such information.

Most Recent Loan Modification Event Type

We also proposed a data point as part of the ongoing disclosure requirements that would require the issuer to specify, if the loan has been modified, the code that describes the type of action that has modified the loan terms.[406] The proposed codes were: 1=capitalization-fees or interest have been capitalized into the unpaid principal balance; 2=change of payment frequency; 3=construction to permanent; and 4=other. One commenter requested we delete this data point because the coded list only describes a subset of possible loan modifications and the type of modification can be determined based on a comparison of pre-modification and post-modification characteristics.[407] Another commenter recommended we expand the coded list to add forgiveness of principal, rate reductions, maturity extensions and forgiveness of interest to the list of possible responses.[408]

We are adopting this data point because we believe this disclosure will allow investors to focus on what terms may have changed due to a modification, which should allow investors to quickly assess whether changes in the terms of an asset will affect future cash flows or the risk profile of the asset pool.[409] We added, as a commenter recommended, additional codes to the coded list.[410] We also note that a loan may go through several loan modifications. Therefore, we revised the data point to clarify that information about the most recent loan modification is required each time the disclosure is filed.[411]

Effective Date of the Most Recent Loan Modification

We proposed a data point titled “Loan modification effective date,” which is the date on which the most recent modification of the loan has gone into effect. A commenter suggested omitting this data point from the RMBS requirements because loan modifications are effective on the mortgage loan's next due date after entry.[412] While we acknowledge that may be current practice, we are adopting this data point as we are mindful that other practices regarding loan modifications may develop. Further, since responses to this data point will be provided on an ongoing basis after a loan is modified, we believe this date will provide a clear indication about the length of time that has passed since the loan was last modified. We are adopting this data point with a revision to clarify that only information about the most recent loan modification is required because, as noted above, a loan Start Printed Page 57221may go through several modifications.[413]

(2) Commercial Mortgage-Backed Securities

Between Schedule L and Schedule L-D, we proposed 108 data points that relate specifically to CMBS. The data points we proposed to require in Schedule L and Schedule L-D were primarily based on the data template included in the CREFC Investor Reporting Package (“CREFC IRP”), current Regulation AB requirements, and staff review of current disclosure. We did not propose, however, to include every piece of information exactly as specified in the CREFC IRP for two reasons. First, some of the disclosures required by the CREFC IRP would have already been captured by proposed data points in the Item 1 General Requirements, and we believed that those data points would apply to all types of ABS. Second, we did not believe the level of detail in the CREFC IRP was necessary for investor analysis because we believed that the most important data for CMBS is data that relates to the loan term and the property.

The response to the proposal indicated a general preference for CREFC IRP in lieu of the proposed requirements.[414] The preference applied to both information in the prospectus and ongoing reporting.[415] For asset-level reporting at the time of securitization, commenters seemed to favor initial reporting schedules commonly attached by issuers to the prospectus (typically referred to as Annex A) that frequently contain asset-level data based on the specific types of commercial mortgages in the transaction. Some of these commenters suggested that the proposed requirements would duplicate the data provided in the Annex A schedules provided with the prospectus [416] and the existence of duplicative data may confuse investors.[417] One commenter, who supported requiring Annex A in lieu of the proposed Schedule L disclosures, suggested that Schedule L does not reflect the practices that CMBS market participants have developed to provide “CMBS investors with clear, timely and useful disclosure specifically tailored for use by those investors.” [418] Finally, one investor believed it is reasonable to require the disclosures because much of the same information is currently provided in Annex A of the offering documents.[419] The investor suggested, however, that additional disclosure items to improve current industry disclosure practices, such as requiring disclosure of actual versus underwritten property performance metrics, including disclosure of the same performance metrics for the preceding three years, complete tenant information versus top three tenant information, rent rolls, full indebtedness information for each property and standardized tenant and borrower information.

For ongoing reporting, commenters indicated a preference for previously established industry standards in lieu of the proposal for several reasons.[420] For instance, one commenter was concerned that requiring data points unrelated to CMBS, such as those found in the general requirements, would cause undue programming burdens without a material benefit to investors.[421] Another commenter stated that “IRP guidelines identify which data points are restricted (i.e., only available to certain users), while the SEC data filings to be contained in Schedule L-D would be public information.” [422] The commenter then stated that publicly disclosing certain sensitive information could put the underlying properties at a competitive disadvantage, which could negatively influence the securities. Other commenters also believed that proprietary information should be considered sensitive information, and therefore CMBS issuers should not be required to publicly disclose such information on EDGAR.[423] Commenters also noted that based on current requirements, investors would receive CREFC IRP disclosures 15 days prior to the required filing date of the Schedule L-D disclosure.[424] One of these commenters also stated that CMBS transactions often involve multiple loans with different financial reporting dates, and the information has to be reviewed by the appropriate parties, and therefore, any particular reporting date may not reflect information for the current reporting period.[425] One investor suggested, in lieu of adopting our ongoing disclosure proposal, that we require disclosure of complete rent rolls at least once per year, the alternatives evaluated with respect to modifications, all terms related to a modification or assumption and that we require the format of the industry reporting standard to be in XML.[426]

After considering the comments we received, we are adopting a requirement that issuers of CMBS provide the disclosures contained under Item 2 of Schedule AL. We believe that investors and market participants should have access to information to assess the credit quality of the assets underlying a securitization transaction at inception and over the life of a security. While we recognize the current market practice is to include provisions in CMBS transactions that provide investors with asset-level data for each pool asset, we note that this market practice is not a mandatory requirement and is subject to change. As such, we believe the asset-level disclosure requirements that we are adopting will require a minimum level of standardized asset-level Start Printed Page 57222disclosures in the prospectus and over the life of a security regardless of market practices. We acknowledge commenters' concerns that requiring asset-level disclosures that deviate from the data template in the CREFC IRP may raise costs for both issuers and investors because users are accustomed to working with the CREFC IRP data templates. We also understand that investors are involved in the ongoing development of the CREFC IRP. For these reasons, we made efforts to align our requirements, as much as possible, with pre-established industry codes, titles and definitions to allow for the comparability of future offerings with past offerings and to minimize the burden and cost of reporting similar information in different formats.

The requirements that we are adopting contain several revisions from the proposal aimed at aligning our standards with the CREFC IRP. We reconsidered and are not adopting some data points that do not correspond to the CREFC IRP or are typically disclosed in Annex A because they are no longer necessary due to other changes we made, such as aggregating Schedules L and L-D, or because we are adding data points based on the CREFC IRP to capture the same or similar information.[427] Some data points that we are adopting, however, do not correspond exactly to data captured by the CREFC IRP, but we believe the responses to these data points will improve or clarify the requirements, or aid an investor's ability to make an investment decision.[428] We are also adding some data points that correspond to data captured by the CREFC IRP based on comments received, because the responses to these data points clarify other data points or they add more granularity to the data captured by other data points.[429] In total, the proposal for CMBS included a total of 182 data points between the proposed general item requirements of Schedules L and L-D and the data points specific to CMBS in proposed Schedules L and L-D. Based on the changes described above, the final requirements include 152 data points.

Finally, we are adjusting the codes, titles, and definitions of many of the data points to make them largely comparable to the data definitions set in the CREFC IRP.[430] We believe that through these changes and by making the asset-level data requirements for CMBS largely align with the CREFC IRP many of the disclosures provided under the CREFC IRP can be used to provide the required disclosures. As a result, we believe we have mitigated, to a great extent, cost and burden concerns expressed by commenters and the concern that CMBS investors will not be able to compare the data with the data from past deals.

We also considered concerns raised by commenters as well as alternatives to the final rules. For instance, one commenter suggested that the proposed ongoing reporting requirement would add no value to investors since the industry standard is to make ongoing asset-level disclosures available earlier than when the proposal would require them.[431] We are not persuaded by this comment. We believe that many transaction agreements, while they provide investors with access to asset-level disclosures on an ongoing basis, they do not guarantee that these disclosures will remain available or continue. We believe that requiring asset-level disclosures, which to a large extent aligns with how data is currently provided to investors, to be filed on EDGAR will preserve the information and result in greater transparency in the CMBS market.

We also considered the concerns raised by some commenters about requiring disclosure of proprietary information due to the sensitive nature of the entire data set.[432] While we acknowledge this concern, we believe that information about the underlying properties, including information about the borrowers, will provide CMBS investors and potential investors with information they need to perform due diligence and make informed investment decisions and therefore should be disclosed. We also note that some of the asset-level data that we are adopting is available to the public, for a fee, through third-party data providers.[433]

We considered, as an alternative to the final rules, that issuers provide standardized asset-level disclosures based solely on an industry standard, such as the CREFC IRP. We are not persuaded that this alternative is appropriate because as market practices evolve the consistency of the data provided by each transaction may differ since there is no mandatory requirement that all transactions provide the same type of data. Therefore, we believe adopting a standardized set of asset-level disclosures helps ensure that investors and other market participants will always have access to a minimum set of asset-level disclosures, both at the time of the offering and on an ongoing basis. While we have tailored the asset-level disclosure requirements for each asset class, we also understand from comments received that certain commercial mortgages in a pool may have unique features and that the standardized set of requirements may not capture all of the unique attributes of a particular asset or pool due to the various types of commercial properties.[434] Although we are not adopting all of the data points in the CREFC IRP, CMBS issuers may provide Start Printed Page 57223those data points as additional asset-level disclosures in an Asset Related Document, as appropriate.[435]

With respect to ongoing reporting, we are not adopting a commenter's suggestion that disclosures about alternatives evaluated related to a modification or disclosure of all terms related to a modification or assumption be provided. We believe this information would be difficult to capture in a standardized way, and we are uncertain, at this time, whether this information is best captured within these particular asset-level requirements. We are adopting as proposed, with revisions to address comments received, expanded disclosures about tenants. We discuss the comments received on tenant disclosures below. We are also requiring that asset-level disclosures be provided in XML. We discuss the requirement that asset-level disclosures be provided in XML in Section III.B.3 XML and the Asset Data File.

Tenant Disclosures

We proposed data points about the three largest tenants (based on square feet), including square feet leased by the tenant and lease expiration dates of the tenant. Several commenters suggested that we expand the scope of these disclosures.[436] For instance, one commenter, an investor, suggested the initial reporting requirements include a requirement to capture rent roll information (i.e., detailed schedules of lease payments for each tenant over time) and additional tenant and operating performance information, full indebtedness information and a way to identify borrowers and tenants.[437] This commenter also suggested that we require full rent rolls for every property in a transaction at least once per year. Other commenters also supported requiring full rent roll and tenant information.[438]

We are adopting as proposed data points about the three largest tenants (based on square feet), including square feet leased by the tenant and lease expiration dates of the tenant.[439] While some commenters requested several changes to the tenant disclosures for CMBS, the consensus among commenters was that rent roll information for each property supporting the mortgages underlying the CMBS was needed. We are not adopting a requirement within the asset-level requirements to require rent roll information at this time because it is not clear how to standardize detailed schedules of lease payments for each tenant over time on an asset-level basis, and we did not receive comment suggesting how this could be done.

Valuations

Proposed Schedule L and Schedule L-D both included data points aimed at capturing valuation information on the properties underlying the commercial mortgages.[440] The valuation data points contained in Schedule L would provide disclosure of the most recent property valuation as of the measurement date in the prospectus. The valuation data points contained in Schedule L-D would require the most recent property valuation available as of the reporting period that the Schedule L-D covered. One commenter suggested that the final rule should capture data on periodic updating and monitoring of commercial real estate assets because periodic (annual) appraisal and evaluation “updates” of commercial real estate are commonly performed.[441]

We are adopting, with some revisions, data points that capture the most recent appraisals or valuations available at the time of the securitization and on an ongoing basis.[442] While the information required by these data points is substantially similar to information captured by the CREFC IRP, the data points that we are adopting specifically require, in line with revisions made to RMBS property valuation data points, disclosure of any valuation “obtained by or for any transaction party or its affiliates.” The reference to “obtained by or for any transaction party or its affiliates” contained in each definition should be construed broadly to include, but not be limited to, valuations obtained as part of any due diligence conducted by credit rating agencies, underwriters or others parties to the transaction. We are also adopting data points that identify the source of the property valuation and the date of the valuation.[443] These data points do not require that originators, sponsors or transaction parties obtain updated valuations. Instead, this requirement is meant to capture valuations conducted subsequent to the original valuation for whatever reason, such as updated valuations obtained in the normal course of their business or because other circumstances require an updated valuation. We believe providing investors updated valuation information will allow them to understand changes in the value of collateral that is meant to protect against losses. Furthermore, since we are requiring issuers to disclose the information only if it is already available to them, we believe that the disclosures will not be unduly burdensome.

(3) Automobile Loan or Lease ABS

Between Schedule L and Schedule L-D, we proposed 110 data points that relate to ABS backed by auto loans and 116 data points that relate to ABS backed by auto leases. These proposed data points were comprised of a combination of data points, some of which were proposed to apply to all Start Printed Page 57224asset types and others which were proposed to apply only to auto loans or auto leases. The proposed data points were derived from the aggregate pool-level disclosure that has been commonly provided in Auto ABS prospectuses. The proposal also included data points related to obligor and co-obligor income, assets, employment and credit scores.

For Auto ABS, support for the proposal varied between issuers and investors. Many investors supported the asset-level model with certain modifications from the proposal.[444] Investor commenters stated that “the provision of loan-level data will strengthen the Auto ABS market and make it more resilient over the long term.” [445] We note, however, that even the investors that support asset-level disclosure have suggested various modifications and limitations to address issues such as privacy and competitive concerns. One investor commenter acknowledged that the incremental benefit of some proposed fields may be difficult to justify as compared to the costs of providing such information.[446] In light of standard industry practices and issuer concerns about costs and the disclosure of proprietary information, investor commenters recommended adopting fewer data points than were originally proposed.[447]

Issuers typically commented that asset-level reporting was not necessary for Auto ABS because they claimed that the Auto ABS market continues to be robust and active despite no material changes to disclosure practices.[448] One group of issuers also raised concerns that asset-level data requirements would push certain investors [449] and issuers [450] out of the Auto ABS market. They were also concerned that the auto industry could be affected if Auto ABS sponsors have to pass increased costs to automobile purchasers because Auto ABS sponsors are unable to access more cost-effective financing through the Auto ABS market.[451] These issuer commenters noted that several Auto ABS sponsors estimated the costs and employee hours necessary to reprogram systems and business procedures to capture, track and report all of the items for auto loans currently set forth in the proposal. The average cost estimated by those sponsors was approximately $2 million, and the average number of employee hours was approximately 12,000.[452] This group of issuer commenters also argued that Congress never intended to require asset-level data for Auto ABS by pointing to a Senate report published three months prior to the adoption of the Dodd-Frank Act.[453] One trade association commented that such requirements were not necessary for Auto ABS because “most investors have been able to adequately underwrite auto loan transactions—including during the economic downturn—on the basis of current disclosure, due to the conservative nature of the structure, the deleveraging and granularity of the underlying assets, and their understanding of the issuer's servicing capabilities.” [454] One group of issuer commenters noted possible re-identification risks.[455] These same commenters also expressed concern about the potential release of proprietary information.[456]

Issuer commenters generally noted that, if any data reporting was to be required, alternative models such as grouped account data, more robust pool-level reporting or some combination of the two would be sufficient.[457] Several commenters argued that alternatives such as grouped account data or expanded pool stratification would provide additional meaningful information to investors while at the same time addressing individual privacy concerns and proprietary concerns.[458] One group of issuer commenters suggested we consider conditioning the provision of asset-level reporting to compliance with potential risk retention rules.[459] These commenters also stated that certain data points are often the same for all assets in an Auto ABS.[460] They suggested that, if we adopt asset-level reporting for Auto ABS such data points should not be required if (1) the responses would be identical for each asset in the pool [461] and (2) adequate pool-level disclosure is given in the prospectus. In response to the 2014 Re-Opening Release, some commenters expressed opposition to asset-level requirements for Auto ABS.[462]

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As we developed the standards we are adopting today, we took into consideration how the proposed data points relate to how information is collected, tracked and reported in the Auto ABS marketplace, as well as how auto loans and leases differ from RMBS and CMBS, and how those differences impact the type of information available for collection and the utility of such information to investors. We also considered potential impacts on the automobile industry if Auto ABS sponsors pass down higher financing costs to consumers. After considering the comments received, we are adopting, as proposed, with some modification to individual data points and some reduction in the amount of data required to be provided, asset-level disclosures specific to Auto ABS. We did consider, as an alternative, whether asset-level reporting should be required in Auto ABS at all. We considered the legislative history of Section 942 of the Dodd-Frank Act, which was cited by commenters.[463] We also considered whether an alternative reporting model, such as grouped account data, pool stratifications or some combination of the two, would provide adequate information to investors. In the end, we concluded that none of these alternatives provide the benefits that we believe investors should receive. We agreed with investors that “[g]rouped data is preset, which prohibits a customizable analysis of pool information by an investor and presupposes that critical credit metrics and indicators do not change over time . . . [while] the transparency afforded by loan-level data will allow all investors to evaluate, in any market and on an independent basis, whether the pools and structures are robust and the ratings assigned are appropriate.” [464] We also do not agree that Auto ABS sponsors should be exempt from providing asset-level data if that sponsor has retained a certain amount of risk. As stated in Section II.A Economic Motivations, while we expect risk retention rules will result in better underwriting practices, we believe that more is needed to fully restore incentive alignment and credit screening in the securitization market. If sponsors are exempt from asset-level disclosure based on compliance with risk retention requirements, investors and market participants would have fewer Auto ABS pools available for asset-level comparisons. Finally, we are not making any data points optional on the basis that such data point may be the same across an Auto ABS pool. While we understand that commenters intended to consolidate repetitive data points, we believe that the asset-level presentation of data in a standardized format is an important tool to investors who want to make asset-to-asset comparisons across different Auto ABS pools. If responses to certain data points are omitted, an investor wanting to make pool-to-pool comparisons would first have to locate the omitted information in one or more prospectuses and then recreate portions of the asset-level data files before accurate comparisons could be made.

We believe that the requirements we are adopting for Auto ABS will provide a better picture of the composition and characteristics of the pool assets, which is critical to an investor's ability to make an informed investment decision about the securities. We have considered commenters' concerns that Auto ABS is, in many ways, different from RMBS and CMBS, including that Auto ABS generally fared better during the recent financial crisis. We do not believe, however, that the grouped account data model proposed by commenters would provide information in sufficient detail for investors to compare and evaluate various Auto ABS pools and structures. With asset-level data, users would not have to rely on pre-determined groupings of information, and instead would be able to compare and evaluate the underlying assets using the individual pieces of information they consider to be material.[465]

While we are requiring that Auto ABS issuers provide asset-level data, we have significantly reduced the scope of the asset-level data required from the amount proposed. In doing so, we considered an estimate provided by several Auto ABS sponsors that, if we only adopted the data points proposed in their comment letter,[466] the average costs and employee hours necessary to reprogram systems and otherwise comply with the asset-level disclosures would be approximately $750,000 and 3,500, respectively.[467] In line with this suggestion, we have attempted to reduce burden and cost concerns by reducing the scope of the asset-level data required to align with the smaller scope of information that commenters, including investors, believed should be required for Auto ABS. While the final rules do not exactly mirror the scope of information the group of Auto ABS sponsors suggested be required, we believe that the significantly smaller scope of information we are requiring, coupled with revisions to align the data points with current industry standards should lead to substantially lower costs versus what was originally proposed. These substantially lower costs should also reduce any potential impact on the automobile industry. We also believe that the smaller scope of information and the revisions we made to the data points still provide investors with sufficient information to evaluate the security. Under the final requirements we are adopting, issuers are required to disclose the information described in Item 3, with respect to auto loans, and Item 4, with respect to auto leases, of Schedule AL for each auto loan or lease in the pool, as applicable. As noted above, we proposed 110 data points that relate to ABS backed by auto loans and 116 data points that relate to ABS backed by auto leases. In addition to the data points that were eliminated when Schedules L and L-D were condensed,[468] 40 of the proposed data points for auto loans are not being adopted and 57 of the proposed data points for auto leases are not being adopted. We are adopting 12 new data points for auto loans and 15 new data points for auto leases.[469] Accordingly, the final rules will require issuers to provide 72 data points for ABS backed by auto loans and 66 data points for ABS backed by auto leases. Fewer data points should reduce the cost of providing asset-level data for Auto ABS issuers and also should help to address Start Printed Page 57226individual privacy concerns.[470] We also believe that this reduction in scope should help address competitive concerns that were raised by issuers. While we acknowledge that some competitive concerns may still exist, we believe that the information we are requiring about the underlying assets will provide Auto ABS investors and potential investors with information they need to perform due diligence and make informed investment decisions and therefore should be disclosed. We also note that some of the asset-level data that we are adopting is available to the public, for a fee, through third-party data providers.[471]

We are not adopting a significant number of data points where we agreed with commenters that the data point was not applicable to Auto ABS or where we are concerned that the benefits investors may receive from the disclosures may not justify the potential costs and burdens to issuers to provide the disclosures.[472] Solely with respect to ABS backed by auto leases, we are also not adopting several data points that were part of the general schedule of data points proposed for all asset classes because the information required to be provided in the items is not something that is relevant for auto leases (for example, items that require issuers to provide interest, principal or amortization information would not be relevant because auto leases do not have amortization, interest, interest rates or principal balances).[473]

As with RMBS and CMBS, we believe that, unless the individual data points are standardized across all issuers of Auto ABS, the utility of asset-level data is generally limited. While commenters have pointed out several areas where there is a difference between how we have proposed that data be presented and how information is generally collected in Auto ABS,[474] we are unaware of any publicly available investor reporting data standards for Auto ABS. We also received many comments directed at individual data points, many of which were seeking changes to the format of the information, the range of possible responses for a particular data point, or the data point's title or definition. Some commenters also made suggestions on how we could make the data point better align with common business practices. Accordingly, we considered each of these comments, and we made changes that we believe improve or clarify the disclosure, mitigate cost concerns, and/or implement industry standards when doing so would not materially diminish the value of the disclosures to investors. We discuss below the significant comments we received about individual data points along with the revisions we have made in response to those comments.

Information About the Obligors

We proposed a group of asset-level data points that would provide data about an obligor's credit quality.[475] This group of data points was intended to capture information about the obligor(s) income, debt, employment, credit score and assets. In light of privacy concerns, the proposal proposed ranges, or categories of coded responses instead of requiring disclosure of an exact credit score, income or amount of assets in order to prevent the identification of specific information about an individual. We discuss below the significant comments we received about this group of data points and the revisions we have made in response to those comments.

Obligor Income and Payment-to-Income Ratio

We proposed ten obligor income data points (five for auto loans and five for auto leases) that would require issuers to provide responses to various data points that relate to the obligor's income.[476] Several commenters suggested that these proposed obligor income data points be replaced with a new payment-to-income ratio data point, where the issuer would specify the code indicating the scheduled monthly payment amount as a percentage of the total monthly income of all obligors at the origination date while providing its methodology for determining monthly income in the prospectus.[477] We agree that the new payment-to-income ratio data point provides investors with sufficient information about the obligor's income, and accordingly, we are not adopting any of the ten proposed obligor income data points and instead are adopting the new payment-to-income ratio data point proposed by commenters.[478]

Obligor Income and Employment Verification

We proposed data points that would require issuers to indicate the codes describing the extent to which the obligor's income and employment have been verified.[479] One group of issuer commenters stated that it is standard industry practice for obligors to self-report income and employment on the credit application and this information is only verified for the riskiest customers, but then went on to say that Auto ABS sponsors do not systematically capture this information in their origination files, and if they do, they do not keep it for more than 90 days.[480] We cannot reconcile these two comments. If most income and employment information is self-reported on the credit application, then that information should be captured in the loan file. Furthermore, if it is standard industry practice to not verify the self-reported information except for the riskiest customers, we assume that such verification is part of the loan or lease approval process that goes to the creditworthiness of the obligor or lessee. These same commenters also argued that obligor income and employment verification data points would only provide marginal additional value if other data points, such as obligor FICO Start Printed Page 57227score, payment-to-income ratio and LTV ratio, were provided. Investor commenters stated that obligor income and employment verification data points would provide valuable information.[481] Accordingly, we are adopting these data points substantially as proposed.[482]

Co-Obligor Items

We proposed a total of eighteen co-obligor data points (nine for auto loans and nine for auto leases) that would require issuers to provide information about co-obligors such as credit score data [483] and data about income, employment and assets used for qualification purposes.[484] Several commenters suggested that all eighteen of the proposed co-obligor data points be deleted as they are not particularly relevant to the analysis of Auto ABS [485] and that providing all of these co-obligor data points is not warranted given the additional time and expense associated with gathering the information.[486] These commenters suggested that the proposed co-obligor data points be replaced with a data point that would indicate whether the loan or lease has a co-obligor.[487] A group of commenters representing Auto ABS investors commented that it is sufficient to note the presence of a co-obligor, which would indicate that the primary obligor was not creditworthy enough to sustain the loan or lease on its own.[488] We agree, and we are not adopting any of the eighteen proposed co-obligor data points and instead are adopting only the co-obligor (or co-lessee, as applicable) present indicator data point suggested by commenters.[489]

Information About Terms of the Loan or Lease and Payment Activity

We proposed a group of data points that would capture information related to the terms of the loan or lease and payment activity, such as original and current loan or lease terms, interest rates, prepayments, interest paid-through dates and servicer advances. Taken together, the responses to these data points would provide insight into how the loan or lease has performed versus how it was intended to perform when originated. Commenters' response to this group of data points varied, with some commenters suggesting that some data points in this group were unnecessary or redundant and others advising that these data points provide valuable information about the loan or lease. We discuss below the significant comments we received about this group of data points and the revisions we have made to data points within this group.

Original and Current Terms and Initial Grace Periods

We proposed data points that would require issuers to indicate original and current loan terms in months.[490] One group of issuer commenters noted that, for marketing reasons, auto loans and leases are occasionally offered with first payment dates that are deferred for up to 90 days, during which time interest or financing fees accrue but no payments are due.[491] These commenters proposed that these items should be reported to reflect the number of scheduled payments due or remaining (converting non-monthly pay loans to monthly pay) to clearly indicate the payments on the loan in order to avoid odd month terms.[492] We believe it is important for investors to be provided the actual number of months in the term, even if such number includes a grace period where no payments are being made. We agree with commenters, however, that any grace period should be accounted for. Therefore, in addition to adopting the original and current term data points (with minor revisions for timing clarifications, as detailed in other sections of this release), we are also adopting a new initial grace period data point, which requires the issuer to indicate the number of months during which interest accrues but no payments are due from the obligor (or, for auto leases, the number of months during the term of the lease for which financing fees are calculated but no payments are due from the lessee).[493] If there is no initial grace period for an auto loan or lease, the response to this new data point would be zero.

Original Interest Rate

We proposed a data point that would require issuers to provide the rate of interest at the time of origination.[494] One group of issuer commenters believed that this item is generally not readily available or easily trackable by Auto ABS sponsors because it is industry practice to track only the current interest rate on auto loans.[495] Although we understand that there may be some costs to the sponsor or issuer associated with tracking the original interest rate, we believe it is important for investors to be able to compare the current interest rate to the original interest rate and we note that any costs associated with tracking the original interest rate would be one-time costs, as the response to this data point would be static. Therefore, we are adopting the original interest rate data point for ABS backed by auto loans substantially as proposed, with minor clarifying modifications as described elsewhere in this release.[496] Because auto leases do not have interest rates in the same manner as auto loans, we are not adopting this data point for ABS backed by auto leases.

Scheduled Payments and Actual Amounts Collected

We proposed data points that would require issuers to provide the principal and interest payments that were scheduled to be collected for the reporting period[497] and provide any unscheduled principal or interest adjustments during the reporting period.[498] We also proposed data points that would require issuers to indicate actual amounts collected during the reporting period.[499] As suggested by commenters, we are not adopting data points that separate interest and principal payment streams for ABS backed by auto leases.[500] Instead, for ABS backed by auto leases, we are adopting one data point that will capture the payment amount that was scheduled to be collected for the Start Printed Page 57228reporting period and another requiring issuers to provide the total of any other amounts collected during the reporting period.[501] With respect to ABS backed by auto loans, a group of issuer commenters stated that the scheduled payment data points are not relevant because auto loans are simple interest loans which have no scheduled principal or interest payment amounts and are not subject to principal or interest adjustments.[502] These same commenters stated that data points relating to actual amounts collected should only be required to be disclosed if a transaction is structured with separate interest and principal waterfalls or separate allocations of other amounts paid to the investors.[503] One investor commenter asked that both the scheduled payment and actual amounts collected data points be included for ABS backed by auto loans.[504] We believe that the scheduled interest amount, scheduled principal amount and other principal adjustments data points provide valuable information about payments that are expected to be received, and we are adopting these data points as proposed. The scheduled interest amount and scheduled principal amount data points will require the issuer to provide the amount of interest and principal, respectively, that were due to be paid during the reporting period, which will show quantitatively how far in advance a loan was paid or how far behind the obligor is in making payments.[505] The other principal adjustments data point would show the amount of any adjustments that are made to the principal balance of the loan, including but not limited to prepayments.[506] We agree with the issuer commenters that the other interest adjustment data point is unnecessary as interest adjustments would be reflected between responses to the original interest rate data point and the current interest rate data point. Accordingly, we are not adopting the other interest adjustment data point. We also believe that the actual payments collected data points provide relevant information about how each asset is performing, regardless of whether the transaction is structured with separate principal and interest waterfalls or a single waterfall. Furthermore, only requiring that responses to these data points be provided for transactions that have separate principal and interest waterfalls runs counter to the goal of facilitating investors' ability to compare the underlying asset-level data of a particular asset pool with other pools. Therefore, we are adopting each of these proposed data points for ABS backed by auto loans.

Prepayment and Interest Paid Through Date

One commenter suggested we add a new “voluntary prepayment” data point.[507] We agree that an asset-level prepayment data point will provide valuable information to investors about how prepayments will alter the timing of expected cash flows. Accordingly, we have slightly modified this commenter's suggestion for clarification purposes and to better coordinate with other asset-level requirements. For ABS backed by auto loans, we are adopting an interest paid through date data point that requires issuers to provide the date through which interest is paid with the current payment, which is the effective date from which interest will be calculated for the application of the next payment.[508] For ABS backed by auto leases, we are adopting a similar data point which requires issuers to provide the date through which scheduled payments have been made, which is the effective date from which amounts due will be calculated for the application of the next payment.[509]

Servicer Advanced Amount

We proposed a data point that would require issuers to specify the amount advanced by the servicer during the reporting period (if any such amounts were advanced).[510] One group of issuer commenters stated that this information was already provided under the proposed current delinquency status data point.[511] We do not agree that the responses to these two data points provide the same information, as servicing advances can be made if payment on a loan or lease is less than 30 days late (depending on when payments to investors are due in relation to the due date of the loan or lease payment). The current delinquency status data point only provides information to investors after the loan or lease becomes more than 30 days delinquent. Therefore, we are adopting the servicer advanced amount data point as proposed.[512]

Modifications and Extensions

We proposed a data point that would require issuers to indicate whether an asset was modified from its original terms during the reporting period.[513] A group of investor commenters suggested that this data point be replaced with a new modification type data point.[514] As suggested by commenters, the modification type data point would require issuers to indicate the code that describes the reason for the modification and would only be required if the asset was modified.[515] A group of issuer commenters suggested that the modification indicator data point be replaced with a new payment extension data point.[516] The payment extension data point would require issuers to indicate the number of months the loan was extended during the reporting period and would only be required if the loan or lease was extended beyond its original terms during the applicable reporting period.[517] Investor commenters also suggested that we replace the proposed lease term extension indicator data point [518] with a lease extension data point that would require the issuer to indicate whether the lease has been extended and would capture any incremental lease payments to the trust.[519] We agree with the commenters that these new and modified items are both useful and applicable to Auto ABS. We believe that it is important to include the proposed modification indicator data point so that investors can easily confirm whether the loan was modified during the reporting period. We also believe that the suggested modification type data point provides valuable information to investors based on the concerns that were raised by issuer commenters. If, in fact, modifications other than payment and term extensions are rare and usually lead to a repurchase, investors should Start Printed Page 57229be alerted to loans or leases that have these rare modifications. Accordingly, we are adopting the proposed modification indicator data point for all Auto ABS, as well as the modification type data point and the payment extension data point for ABS backed by auto loans and the lease extension data point for ABS backed by auto leases (rather than adopting the lease term extension indicator data point as proposed).[520]

Lease-Specific Data Points

We proposed several data points that only apply to ABS backed by auto leases that relate to information such as residual values, termination, wear and tear, mileage, sale proceeds, and extensions.[521] Commenters also pointed out several proposed data points in the general item requirements that were not applicable to ABS backed by auto leases. For instance, a group of issuer commenters noted that the securitization value, which is widely used in the lease securitization industry, is the correct valuation of the size of the lease.[522] The same group of commenters also suggested that the proposed original asset amount data point [523] be revised to an acquisition cost data point that requires the issuer to provide the original acquisition cost of the lease.[524] We agree with both comments, so we are adopting the securitization value and securitization value discount rate data points,[525] rather than the asset balance data points,[526] and are adopting the acquisition cost data point [527] rather than the proposed original asset amount data point.

With respect to the residual value of the lease, we proposed several data points that require the issuer to provide the base and updated residual values of the vehicle and provide the source of such residual values.[528] Both issuer and investor commenters agreed that the base residual value data point should be adopted (although one group of issuer commenters suggested that the data point be amended to capture “the securitized residual value of the leased vehicle, as determined by the sponsor and described in the prospectus”).[529] Investor commenters also stated that it is important for the issuer to disclose how the base residual value is calculated.[530] One group of issuer commenters stated that neither the updated residual value nor the source of the updated residual value data points should be adopted because the Auto ABS structure for leases is set up based on an original residual value that does not change, that it is enhanced to withstand residual losses and any gains just benefit investors while the costs and burdens to provide this information would be high.[531] While investor commenters did not specifically comment on either the updated residual value or the source of the updated residual value data points, they did request that we adopt a contractual residual value data point, as it would be valuable in determining the likelihood that the lessee will purchase the vehicle at the end of the lease or turn it back in.[532] Issuer commenters noted that the contractual residual value data point suggested by investor commenters is not as relevant as the base residual value or securitization residual value.[533] We agree with investors that the base residual value data point, the source of the base residual value data point and the contractual residual value data point each provide different and valuable information about a lease. Therefore, we are adopting the base residual value and source of base residual value data points as proposed as well as the new contractual residual value data point as suggested by investor commenters.[534] We are not adopting the proposed updated residual value data point or the source of updated residual value data point as these data points do not provide enough additional beneficial information to investors to justify the additional costs that would be imposed upon issuers.

(4) Debt Security ABS

We proposed that issuers of debt security ABS provide responses to the general data points enumerated in Item 1 of Schedule L and the nine data points specific to debt security ABS.[535] The comment we received on the proposal suggested that we require the disclosure of the CUSIP number, ISIN number, or other industry standard identifier of the debt security.[536]

As noted above, under the final rule we are integrating the general item requirements into the requirements for each asset type. Therefore, under the final rule, issuers of debt security ABS are only required to provide the asset-level disclosures required under new Item 5 Debt Securities. After integrating the proposed general data points, the final requirements for debt security ABS have been reduced from 83 possible proposed data points to 60 data points.

Also, in response to comments received, we have revised the asset number data point to require a standard industry identifier assigned to the security be provided for each security, if such number is available. Public access to the responses to these data points and to the responses to other data points that require disclosure of the SEC file number and Central Index Key (“CIK”) number for the debt security will provide investors, including secondary market investors, access to more information about each debt security in the pool. As proposed, the final rules will require that issuers provide more standardized information to investors about the debt securities underlying the ABS. The disclosures we are adopting today require the title of the underlying security, origination date, the minimum denomination of the underlying security, the currency of the underlying security, the trustee, whether the security is callable, the frequency of payments that will be made on the security and whether an underlying security or agreement is interest bearing along with other basic characteristics of the debt securities. At a minimum, these asset-level disclosures will provide investors with Start Printed Page 57230the basic characteristics of the underlying debt securities in a standardized format.

Public availability of all of the asset-level information we are requiring to be disclosed regarding debt security ABS should reduce the burden on investors, including secondary market investors, to obtain this information, which should reduce investors' costs of conducting their own independent analysis and, thereby, reduce their need to rely on credit ratings. In addition, we believe that having an issuer collect and report asset-level information will improve efficiency, since a single entity, as opposed to multiple investors, will incur the information gathering costs.

We recognize that although investors will benefit from receiving these asset-level disclosures, issuers will face an increase in information gathering and reporting costs, including costs related to system re-programming and technological investment. We recognize that the costs registrants may face will depend on the extent to which the information required to be disclosed is already available to issuers or will have to be newly collected, as well as the extent to which the information is already being disclosed to investors in some transactions. Although we are unable to estimate the magnitude of these costs with any precision, we believe the costs registrants will incur to provide the data should be nominal since the data that is required should already be readily available to registrants, especially since the asset-level disclosures required primarily relate to the performance of the security and the basic characteristics of the security, such as the title of the security, payment frequency, or whether it is callable. A description of each data point required for debt security ABS is provided in Item 5 of Schedule AL.

(5) Resecuritizations

In a resecuritization, the asset pool is comprised of one or more ABS. We proposed that issuers of a resecuritization provide, at the time of the offering and on an ongoing basis, asset-level data for each ABS in the pool and for each asset underlying each ABS in the pool. Under the proposal, resecuritizations would provide the same data as required for debt security ABS for each ABS in the asset pool. In addition, issuers would provide asset-level data for the assets underlying each ABS in the asset pool in accordance with the asset-level disclosure applicable to that particular asset class.

We received several comments that expressed concern about the proposal. Some commenters expressed concern over the cost and burden to provide the asset-level disclosures for the assets underlying the securities in comparison to what they believed to be a limited benefit.[537] One of these commenters was concerned about securities law liability for the asset-level disclosures of the assets underlying the securities.[538] Other commenters were concerned that asset-level data may not be available for the assets underlying an ABS that was originated prior to the compliance date of the rule.[539] Finally, to address some of these concerns, some commenters suggested exemptions from the asset-level disclosure requirements for some resecuritizations.[540]

After considering the comments received, we are adopting the proposal with revisions. For each registered resecuritization, issuers must provide, at the time of the offering and on an ongoing basis for each ABS in the asset pool, the same disclosures that are required for debt security ABS. Therefore, information about the security, such as the title of the security, payment frequency, whether it is callable, the name of the trustee and the underlying SEC file number and CIK number is required.[541] If a resecuritization consists of securities where we have adopted asset-level disclosure requirements (i.e., RMBS, CMBS, or Auto ABS), then a second tier of asset-level information is required. The second tier of asset-level disclosure is about the assets (such as each mortgage, loan or lease) underlying the ABS being resecuritized. For instance, in an offering where the asset pool includes RMBS, then the data points in Item 5 of Schedule AL would be required for every RMBS security in the asset pool, as well as the data points in Item 1 for each loan underlying each RMBS security. Accordingly, if asset-level disclosures are not required for a particular asset type, then an issuer is only required to provide the debt security ABS disclosures for each ABS in the underlying asset pool.

We are adopting an exemption from the new requirement to provide asset-level disclosure about the underlying ABS if the underlying ABS was issued prior to the compliance date for the asset-level disclosure requirements. We noted concerns about the cost to provide the disclosures, whether the information would be available, securities law liability for information provided by third parties and the other concerns raised by commenters. We acknowledge that investors will not have access to asset-level data for the resecuritized ABS for some period of time. We do not believe that providing this exemption would negatively affect investors because the resecuritization will still be subject to existing disclosure requirements, including pool-level disclosure requirements and the exemption will be limited over time by the underlying ABS becoming subject to the asset-level disclosure requirements. We also note that there have been no registered resecuritization offerings in the last few years. Further, as noted above, existing Securities Act Rule 190 requires that all information about the underlying ABS be disclosed in accordance with our registration rules and forms.[542] Therefore, if the underlying ABS was issued prior to the compliance date for the asset-level disclosure requirements, investors in a resecuritization will receive updated and current information about pool data, static pool, risk factors, Start Printed Page 57231performance information, how the underlying securities were acquired, and whether and when the underlying securities experienced any trigger events or rating downgrades.

The final requirement to provide asset-level data in the prospectus and in periodic reports will require that issuers provide more information to investors about resecuritizations than previously required. The asset-level disclosures about the ABS in the asset pool will provide investors, at a minimum, with the basic characteristics of a resecuritization. Further, by requiring disclosure of the SEC file number and CIK number for ABS being resecuritized, it will be easier for investors to locate more information about each resecuritized ABS. Public access to such information, including, when applicable, access to information about the assets underlying the ABS being resecuritized, should reduce investors' burden to obtain this information, and reduce their need to rely on credit ratings because investors will have access to the information in order to conduct their own independent analysis. In turn, this will allow for a more effective and efficient analysis of the offering and should help foster more efficient capital formation.

We do not agree with a commenter's view that there is a limited correlation between loan performance and bond performance and, as a result, there is little benefit from investors receiving asset-level data about the assets underlying the ABS being resecuritized. Specifically, the commenter believed that the asset-level data about the underlying ABS would not be useful because only certain classes of an ABS are resecuritized, and the loans backing a particular class are typically supported by the entire underlying loan pool, and therefore do not correlate to any specific classes of ABS. We disagree and believe that to determine the performance of any particular resecuritization, an understanding of each loan in the underlying loan pool is necessary in order to analyze how the underlying loans impact the cash flows to the resecuritization.

In addition, with respect to the availability of information, Section 942(a) of the Dodd-Frank Act eliminated the automatic suspension of the duty to file under Section 15(d) of the Exchange Act for ABS issuers and granted the Commission the authority to issue rules providing for the suspension or termination of such duty.[543] As a result, ABS issuers with Exchange Act Section 15(d) reporting obligations will be required to report asset-level information, thereby easing concerns that the asset-level information for residential mortgages, commercial mortgages, auto loans, auto leases, or debt securities underlying the ABS in the resecuritization would not be available on an ongoing basis.

With respect to the cost and burden to provide the disclosures and concerns about securities law liability for information obtained from third parties, we believe the existing ability to reference third party information, in part, addresses these concerns. As is the case today, issuers may satisfy their disclosure requirements by referencing third-party reports if certain conditions are met.[544] New Forms SF-1 and SF-3 require that the asset-level information be filed on Form ABS-EE and incorporated into the prospectus.[545] Similarly, revised Form 10-D requires incorporation by reference to Form ABS-EE.[546] If the underlying ABS is of a third-party, we will permit issuers to reference the third-party's filings of asset-level data provided that they otherwise meet the existing third-party referencing conditions. Consequently, reports of all third parties, not only those that are significant obligors, may be referenced. Because issuers are not incorporating third-party filings by reference, but instead merely referencing these filings, we believe we have addressed concerns about issuers' filing burdens and securities law liability for asset-level information filed by third parties.

While some commenters raised concerns about the cost to implement such requirements, commenters did not provide any quantitative cost estimates to comply with this requirement. Implementation of this requirement, even if a registrant can reference third-party filings, will require system re-programming and technological investment. In addition, registrants will incur a nominal cost to provide data about the securities being resecuritized. In general, the data about the securities, which track the debt security ABS requirements, should include data already readily available to issuers, especially since the requirements primarily include basic characteristics of the security, such as the title of the security, payment frequency, and whether it is callable. Registrants will incur a nominal cost to provide this data in the format requested. If asset-level data is required for the assets underlying the securities being resecuritized, registrants will, to the extent they cannot otherwise incorporate by reference or reference third-party filings, incur costs to obtain the data required about the assets underlying the securities being resecuritized or to convert data available to them into the required format. These costs were discussed earlier in the release in the context of complying with asset-level disclosure for RMBS, CMBS and Auto ABS. We believe such costs are appropriate because investors should receive information about the securities that will allow them to conduct their own independent analysis. In addition to the items noted above that mitigate cost concerns, we also believe the extended timeframe for compliance of 24 months lowers the overall burden placed on registrants and market participants and should provide ample time for registrants and market participants to assess the availability of the asset-level information required for resecuritizations and to put the information in the format required.

3. Asset-Level Data and Individual Privacy Concerns

(a) Proposed Rule

As we noted in the 2010 ABS Proposing Release and the 2011 ABS Re-Proposing Release and as the staff noted in the 2014 Staff Memorandum, we are sensitive to the possibility that certain asset-level disclosures may raise concerns about the underlying obligor's personal privacy. In particular, we noted that asset-level data points requiring disclosures about the geographic location of the obligor or the collateralized property, credit scores, income and debt may raise privacy concerns. We also noted, however, that information about credit scores, employment status and income would permit investors to perform better risk and return analysis of the underlying assets and therefore of the ABS.

In light of privacy concerns, we did not propose to require issuers to disclose an obligor's name, address or other identifying information, such as Start Printed Page 57232the zip code of the property.[547] We also proposed ranges, or categories of coded responses, instead of requiring disclosure of an exact credit score [548] or income or debt amounts in order to prevent the identification of specific information about an individual.[549]

The 2014 Staff Memorandum summarized the comments received related to potential privacy concerns and outlined an approach to address these concerns that would require issuers to make asset-level information available to investors and potential investors through an issuer-sponsored Web site rather than having issuers file on EDGAR and make all of the information, including potentially sensitive information, publicly available. Under the Web site approach, issuers could take steps to address potential privacy concerns associated with asset-level disclosures, including through restricting Web site access to potentially sensitive information. The Web site approach also would require issuers to file a copy of the information disclosed on a Web site with the Commission in a non-public filing to preserve the information and to enable the Commission to have a record of all asset-level information provided to investors. The prospectus would need to disclose the Web site address for the information, and the issuer would have to incorporate the Web site information by reference into the prospectus. In addition, issuers would be required to file asset-level information that does not raise potential privacy concerns on EDGAR in order to provide the public with access to some asset-level information.

(b) Comments on Proposed Rule

In response to the 2010 ABS Proposal, several commenters noted that the asset-level requirements would raise privacy concerns.[550] These commenters suggested that, while the proposed asset-level disclosures would not include direct identifiers, if the responses to certain asset-level data requirements are combined with other publicly available sources of information about consumers it could permit the identity of obligors in ABS pools to be uncovered or “re-identified.” [551] A number of commenters noted that, if an obligor was identified through this process, then the obligor's personal financial status could be determined.[552] The commenters noted that if obligors are re-identified, then information about an obligor's credit score, monthly income and monthly debt would be available to the general public through the EDGAR filing. Commenters also noted that if personal information was linked to an individual through the asset-level disclosures this may conflict with [553] or undermine [554] the consumer privacy protections provided by federal and foreign laws restricting the release of individual information and increase the potential for identity theft and fraud.[555]

Most commenters did not support the use of coded ranges, noting it would not address privacy concerns [556] and would not further the Commission's objective of improving disclosure for ABS investors. Two commenters noted that using coded ranges would not mitigate privacy concerns because the ranges are so narrowly defined they would identify the actual score or dollar amount of income.[557] Other commenters believed that the use of ranges for disclosures, such as credit scores and income, or requiring a broader geographic identifier for the property, such as MSAs, would greatly reduce the utility of the information.[558] Commenters also noted that disclosure of data that relates to the credit risk of the obligor, such as an obligor's exact credit score, income, or employment history, would strengthen investors' risk analysis of ABS involving consumer assets.[559] Commenters also suggested that exact income and credit scores are necessary to appropriately price the securities [560] and verify issuer disclosures.[561]

We received few suggestions for alternative approaches to balancing individual privacy concerns and the needs of investors to have access to detailed financial information about obligors. Commenters suggested we work with other federal agencies to evaluate whether the proposed asset-level information was in fact anonymized [562] and to assess whether the required asset-level disclosures would subject issuers to liability under Start Printed Page 57233the federal privacy laws.[563] Many commenters that supported grouped-account disclosures rather than asset-level disclosures indicated that grouped disclosures also could address privacy concerns with asset-level disclosures.[564] Other commenters suggested addressing privacy concerns by changing the disclosure format, such as by requiring that disclosure be presented in ratios rather than dollar amounts,[565] requiring a default propensity percentage in lieu of a credit score,[566] or only requiring narrative disclosure.[567]

We also received suggestions that we should restrict access to or impose conditions on the use of sensitive data. For instance, a commenter suggested that we establish a central “registration system” where access to sensitive data is only made to persons who have independently established their identities as investors, rating agencies, data providers, investment banks or other categories of users while forbidding others to use the data or include the data in commercially distributed databases.[568] Another commenter suggested that the Commission consider restricting access to registered users who acknowledge the potentially sensitive nature of the data and agree to maintain its confidentiality.[569] This commenter suggested that requiring users to identify themselves and accept appropriate terms of use would provide a deterrent to those who might attempt to abuse personal financial data and permit identification of such users should any abuse occur. Another commenter suggested establishing rules applicable to the posting, use and dissemination of potentially sensitive data disclosed on EDGAR, including penalties for violation of the rules.[570]

In light of the comments received raising individual privacy concerns and the requirements of new Section 7(c) of the Securities Act, we requested additional comment on privacy generally in the 2011 ABS Re-Proposing Release.[571] We received limited additional feedback on how to address the potential privacy issues surrounding the proposed asset-level disclosures. Commenters again stated that the asset-level requirements, as proposed, would raise privacy concerns.[572] One commenter suggested that the Commission could address privacy concerns by not requiring the disclosure of social security numbers, only requiring MSA information about the property instead of a property's full address, and replacing borrower name with an ID number.[573] Other commenters stated or reiterated that for some asset classes a grouped-account or pool-level disclosure format may mitigate privacy concerns.[574] One commenter repeated the suggestions that it provided in previous comment letters that the Commission could establish and manage (or have a third-party manage) a central “registration system” that could provide restricted access.[575]

On February 25, 2014, we re-opened the comment period to permit interested persons to comment on the Web site approach described in the 2014 Staff Memorandum. Only a few commenters indicated support for the Web site approach.[576] Most commenters generally opposed the Web site approach as a means to address privacy concerns,[577] and some commenters also noted that the Web site approach creates or shifts legal and reputational risks to issuers.[578] Commenters expressed concern about whether the Web site approach could result in issuer liability under applicable privacy laws.[579] Several commenters were specifically concerned that the Web site approach might create a risk that the issuer could be considered a “consumer reporting agency” under the FCRA and thus subject to its rules and regulations.[580] One commenter noted that the FCRA would not be relevant most of the time because the type of information contemplated by the Web site approach would be beyond the reach of the FCRA while also noting that privacy laws do not protect most consumer data, including the proposed asset-level data, regardless of how it may be disseminated.[581] A number of Start Printed Page 57234commenters requested that the Commission obtain an authoritative interpretation or some other form of guidance from the CFPB to clarify issuer liability under the privacy laws when an issuer provides asset-level data before moving forward.[582] A few commenters suggested that under the Web site approach data could still be widely distributed,[583] and two commenters stated that taking steps to reduce the ability to re-identify a person would be more appropriate than limiting access to sensitive data.[584] Some other general concerns about the Web site approach included: the costs and burdens of the Web site approach; [585] the possibility of data breaches and the impacts from data breaches; [586] potential negative market impacts; [587] and the possibility that inconsistencies in technical standards between Web sites may make the Web sites difficult to use.[588]

Some commenters disagreed with the description in the 2014 Staff Memorandum of how issuer Web sites were being used at the time the 2014 Staff Memorandum was released.[589] For instance, one commenter noted that while Web sites were being used at that time to provide information to investors, the information is not the same as what the Commission had proposed to require and does not raise the same privacy concerns.[590] Another commenter noted that current disclosure of asset-level information through Web sites is available only to a limited number of known institutional investors.[591]

Several commenters stated that additional information was necessary to fully assess the potential implications of the Web site approach. For instance, commenters requested clarity on the scope of asset-level disclosures that the Commission is considering adopting, what data would be disclosed on EDGAR and on the Web site, what type of restrictions on access would be reasonable and what information is “necessary” for investor due diligence.[592] Another commenter sought information about whether the Commission is still considering asset-level disclosures for certain non-RMBS asset classes.[593] Five commenters urged the Commission to re-open the 2010 ABS Proposal and the 2011 ABS Re-Proposal, in general, to permit further consideration of the concerns surrounding asset-level disclosures.[594]

A number of commenters responded to the 2014 Re-Opening Release by commenting generally on privacy concerns. Several commenters reiterated the re-identification concerns that were raised in response to the 2010 ABS Proposing Release and the 2011 ABS Re-Proposing Release.[595] Commenters again suggested that obligors may suffer harm if personal data is used to re-identify them.[596] Several commenters noted that the asset-level requirements, as proposed in 2010, contain a variety of highly sensitive personal information that consumers would not expect to be available to the general public, such as information about debt, income, bankruptcies, foreclosures, job losses, and even whether the consumer has experienced marital difficulties.[597] One commenter raised particular concern with disclosure of actual income as such data is highly desirable to the consumer data industry but hard to obtain.[598] One commenter requested that the Commission provide assurance that the data required to be filed on EDGAR could not be reasonably linked to an individual consumer.[599] Some commenters expressed concern that the proposed requirements could result in the disclosure of “Personally Identifiable Information” or “PII,” which could result in legal liability or reputational damage.[600] In addition, a few commenters identified various laws that may apply to the asset-level disclosures, including non-privacy related laws.[601] Another commenter noted, however, that the availability of potentially sensitive obligor data is not new to the market.[602] Another commenter believed criminal actors Start Printed Page 57235would prefer to obtain access to other databases containing information more conducive to identity theft, such as social security numbers and date of birth, neither of which would be required by the Commission.[603]

Many commenters expressed particular concern with the disclosure of a property's geographic location because it, along with other data points, can be used with other public databases to match a property with a specific borrower.[604] Commenters' recommendations to revise the geographic data point varied. One commenter recommended that the Commission limit disclosure of the zip code to only the first two digits.[605] Another commenter, without providing a specific recommendation, believed that any geographic data point must be sufficiently broad to ensure that there is no risk of re-identification.[606] One commenter reiterated its support for aggregation of geographic location.[607] In contrast, another commenter noted its opposition to the 2010 ABS Proposal to require only MSA because it would compromise the utility of the data for investors.[608]

Several commenters suggested various alternatives and modifications to the Web site approach. Three commenters suggested aggregating the asset-level data.[609] These commenters, however, did not specify what they meant by “aggregated.” [610] Another commenter suggested development of a system that permits investors to conduct analysis and produce models without providing access to asset-level information.[611] One commenter said the requirements should mirror the disclosures that the GSEs make with respect to RMBS and that issuers should have the discretion not to disclose sensitive information.[612] Others suggested that issuers should have the flexibility to modify the disclosures and decide the method of delivery to address privacy concerns.[613] Another commenter agreed that the better approach would be to modify the disclosure requirements such that the data increases transparency while still respecting the privacy of borrowers' information, but did not specify how those disclosures should be made available to investors.[614] Several commenters suggested that we adopt mechanisms or controls to restrict access to asset-level information filed with the Commission to investors and potential investors.[615]

Another commenter suggested a central repository or “aggregated data warehouse” to house the asset-level data because such an approach would simplify enforcement of access policies, ensure consistent data formats and lower incentives to exclude certain users.[616] Similarly, another commenter suggested that issuers disclose all asset-level data to a consumer reporting agency administered repository, along with a unique identification number for each asset, which would allow investors to access all the asset-level data for these assets.[617] Another commenter also suggested that credit bureaus, instead of issuers, should provide credit related information.[618] One commenter outlined revisions to the Web site approach that it believed are necessary if such an approach is adopted, including a data chain of custody, privacy and security rules and public disclosure of each issuer's privacy and security policies.[619]

(c) Final Rule and Economic Analysis of the Final Rule

After considering the comments received related to privacy concerns and on the Web site approach, and our obligations under Section 7(c) of the Securities Act,[620] we are adopting new rules to require that issuers file asset-level disclosures on EDGAR both at the time of the offering and on an ongoing basis in periodic reports. We are revising the required disclosures contained in the proposal to address the risk of parties being able to re-identify obligors and the associated privacy concerns. Specifically, as discussed below, we are modifying or omitting certain asset-level disclosures relating to RMBS and Auto ABS to reduce both the amount of potentially sensitive data about the underlying obligors and the potential risk that the obligors could be re-identified. In addition, in response to commenters' suggestions, we have sought and obtained guidance from the CFPB on the application of the FCRA to the required disclosures. As discussed Start Printed Page 57236below, the CFPB has issued a letter [621] to the Commission stating that the FCRA will not apply to asset-level disclosures where the Commission determines that disclosure of certain asset-level information is “necessary for investors to independently perform due diligence,” in accordance with Section 7(c). We believe these steps implement the statutory mandate of Section 7(c) and will provide investors with the asset-level information they need while reducing concerns about potential re-identification risk associated with disclosing consumers' personal and financial information.

While we have considered the Web site approach described in the 2014 Staff Memorandum, as discussed below, we are not adopting this approach due to concerns about the practical difficulties and unintended consequences of limiting access to only investors and potential investors.[622] Commenters also indicated that the Web site approach could negatively affect the ability of investors and the broader ABS market to have adequate access to the data.[623]

We continue to believe that the disclosure of data that relates to the credit risk of the obligor, such as an obligor's credit score, income, or employment history, would strengthen investors' risk analysis of ABS involving consumer assets.[624] We believe these disclosures, combined with other asset-level disclosures, such as the terms and performance of the underlying loan and information about the property, will enable investors to conduct their own due diligence for ABS involving consumer assets, and thus facilitate capital formation in the ABS market. Consequently, it is critically important that the manner in which such information is disseminated enables all investors to receive access to the required asset-level disclosures. The ability of other market participants, such as analysts and academics, to access this information may also benefit the market by encouraging a broader range of commentary and analysis with respect to ABS.[625]

Although we did not propose to require that an obligor's name, address, or other identifying information be disclosed, we are sensitive to the possibility that an obligor in an asset pool could be identified (now or in the future) due to the availability of the required disclosures (coupled with the XML requirement), the amount of data about obligors that is publicly available through other sources, and information about real estate transactions and other types of transactions that is available or that may become available in the future. In the event the obligor was re-identified, the information that would have been required by the proposal, even in ranges, might reveal information about the obligor's financial condition.

This issue is especially pronounced for securitizations backed by residential mortgages, as an obligor could potentially be re-identified using a combination of asset-level disclosures and real estate transaction data that is routinely disclosed by certain local governments.[626] Commenters noted that property address, sales price, and closing date are typically disclosed by local governments and could be used to link the asset-level disclosures to an individual.[627] If a specific mortgage is re-identified, sensitive financial data about an obligor (e.g., credit score, DTI, and payment history) could potentially be connected to the obligor.

In light of this concern, we are revising the proposed data set for RMBS as follows.[628] First, we are modifying the required geographic identifier from MSA, as proposed, to a 2-digit zip code.[629] Several commenters emphasized the importance of geography in assessing the re-identification risk for RMBS asset-level disclosure.[630] We believe that, because publicly available information like property records is typically sorted and searchable by geography, requiring issuers to identify assets by a broader geographic area should decrease the ability to re-identify individual obligors. In considering how to broaden the geographic area, we considered both the specific recommendations of commenters as well as current disclosure practices, including those of the GSEs and Ginnie Mae.[631] As noted above, one commenter specifically recommended that we require disclosure of either a 2-digit or 3-digit zip code.[632] There are currently less than 99 distinct 2-digit zip codes and approximately 900 distinct 3-digit zip codes.[633] By contrast, our proposal would have required disclosure of MSA, which represents approximately 960 unique geographic areas. We understand that Ginnie Mae currently discloses state (60 distinct areas, including Washington, DC and U.S. territories and associated states).[634] Depending on the data set, Fannie Mae and Freddie Mac disclose MSA, 3-digit zip code or state.[635] After considering the various alternatives, we are adopting a 2-digit zip code. In reaching this conclusion, we considered that a 3-digit zip code would not significantly reduce the re-identification risk relative to the proposal's use of MSA and that use of state may be too broad of an area to be useful to RMBS investors.[636]

To further reduce the risk of re-identification, we are also omitting several data points that, while Start Printed Page 57237potentially useful to investors, could increase the ability to identify underlying obligors. Specifically, we are omitting the unique broker identifier data point [637] as well as the sales price,[638] origination date, and first payment date [639] data points. In addition, we are omitting some information about an obligor's bankruptcy and foreclosure history,[640] although, if an obligor had experienced a past bankruptcy or foreclosure, we would expect that those events would have been considered in generating a credit score. As noted above, the final rules require disclosure of an exact credit score.

Another step that we are taking to address commenters' concerns about re-identification risk is to omit the proposed income and debt data points. While we believe that income and debt information would strengthen an investor's risk analysis of ABS involving consumer assets,[641] we are not requiring them based on concerns about the sensitive nature of this information and increased re-identification risk posed by this information.[642] As discussed in Section III.A.2.b)(1) Residential Mortgage-Backed Securities, however, we are requiring DTI ratios.[643] These are key calculations used to assess an obligor's ability to repay the loan that, we believe, will permit investors to perform due diligence in the absence of specific debt and income data points.

We also are revising [644] or removing [645] certain other proposed data points to further mitigate re-identification risk concerns since the responses to these items will be made available to the public through EDGAR.[646] We do not believe these proposed requirements necessarily would have increased re-identification risk alone, but we have concluded that these data points, if adopted as proposed, could disclose sensitive obligor data without providing additional information necessary for investor due diligence.

Finally, in response to commenters' suggestions, we have obtained guidance from the CFPB on the application of the FCRA to the proposed disclosure requirements.[647] In a letter issued to the Commission dated August 26, 2014, the CFPB stated that the FCRA will not apply to asset-level disclosures that exclude direct identifiers where the Commission determines that disclosure of such information is “necessary for investors to independently perform due diligence.” [648] Specifically, the CFPB letter confirms that (i) issuers and the Commission would not become consumer reporting agencies by obtaining and disseminating asset level information, and (ii) no violation of Section 604(f) of the FCRA [649] would occur if issuers or the Commission obtain or disseminate any information that is a consumer report (such as a credit score), in each case if the Commission determines that disclosure of the information is necessary for investors to independently perform due diligence and that the information should be filed with the Commission and disclosed on EDGAR to best fulfill a Congressional mandate. As noted above, we have revised or eliminated certain asset-level data points that implicate consumer privacy concerns where we determined that doing so would not compromise investors' ability to perform due diligence on the underlying assets. We believe the asset-level data points that we are requiring about underlying obligors for ABS involving consumers assets are necessary for investors to perform due diligence, as required by Section 7(c). After taking these steps and after careful consideration of alternative means of disseminating such information, we have determined that having the information filed with the Commission and disclosed on EDGAR is the most effective means of ensuring that investors have access to asset-level data.

As discussed above, we have taken significant steps to reduce the re-identification risk associated with providing certain asset-level data while adhering to the statutory mandate in Section 7(c) to require disclosure of such information to the extent necessary Start Printed Page 57238for investors to independently perform due diligence. We do recognize, however, that the final rules do not completely eliminate the risk of obligor re-identification [650] and there may be costs associated with providing certain sensitive information required by the final rules. These costs may include costs to issuers of consulting with privacy experts to understand the impact of providing these disclosures. We also recognize that some issuers and investors may move to unregistered offerings, which may affect capital formation.[651] Alternatively, the increased costs may be passed on to the underlying obligors in the form of a higher cost to borrowers (e.g., interest rates or fees).

Re-identification risk can also increase the cost of capital due to obligor preferences. If an obligor is particularly sensitive to the possibility of re-identification, the obligor may prefer to transact with originators that offer additional methods for preserving anonymity, which could increase that obligor's cost of or access to capital. For example, if a loan agreement gives an obligor the ability to opt out of disclosure, thereby prohibiting the ability to securitize the loan where asset-level information would be disclosed, originators may pass costs on to the obligor. Originators could also bear some increased costs if, as a result of being unable to securitize the loan or sell it to the GSEs, the originator would hold the asset on its balance sheet, thus limiting its ability to redeploy capital to more productive or efficient uses. In addition, the risk of re-identification could limit an obligor's access to capital if the obligor is unable to obtain assurances, even at a higher cost, that his or her loan would not be securitized in a way that gives rise to a potential risk of re-identification. Ultimately, an obligor's sensitivity to re-identification risk could lead to a reduction in the number of loans available for securitization. This could, in turn, lead to a reduction in liquidity of ABS markets and a corresponding increase in cost of capital even for those loans that are otherwise securitized through registered offerings.[652] In general, for these reasons, we believe that reducing the likelihood of obligor re-identification will reduce the impact of these potential costs of asset-level disclosure for the ABS market.

As discussed above, in considering how to modify the proposed disclosures to reduce the risk of re-identification, we considered the specific recommendations of commenters and current disclosure practices. Although we received various suggestions for reducing re-identification risk, commenters did not provide any data or analysis that quantified the likelihood of re-identification based on the proposed disclosures or their suggested approaches to addressing re-identification risk. Some commenters indicated that using less precise geographic identifiers would reduce the risk that an obligor could be re-identified.[653] Using less precise data points for sales price and origination date would also reduce the risk of re-identification.

To help confirm the effect of requiring less precise information, we performed an analysis of various modifications to the required data points. In particular, we have estimated the likelihood of isolating a unique mortgage in a sample pool of mortgage loans by considering different levels and combinations of precision for the geographic location of the property, sales price, and origination date. Our analysis examined mortgages collected from mortgage loan servicer providers and reported in the MBSData, LLC, dataset, which includes asset-level data for most of the mortgages securitized in the private-label RMBS market during the period from 2000 to 2012.[654] Categorizing loans according to their uniqueness is the first step someone could take to re-identify an obligor. Each of the 19.3 million mortgages reported during this period were sorted according to uniqueness of three loan characteristics—geographic location, sales price, and origination date—which could potentially link the mortgage to another publicly available dataset that contains obligors' identities.[655] We assume that loans that have unique values for these three variables, when compared to all other loans in the MBSData dataset, have an elevated potential for obligor re-identification. We note, however, that our analysis is not an actual measure of re-identification risk. Importantly, in order to actually re-identify an obligor, a unique mortgage must also be matched with publicly available data sources, such as from local government real estate transaction ledgers and tax records that contain information on property addresses, sales prices, and origination dates.[656] We have not attempted to quantify the likelihood that a unique mortgage, once isolated, can be matched with publicly available data sources. Instead, we have focused our analysis on this first step of the re-identification process, which is to isolate a unique mortgage.

To provide a basis for comparison, we first considered the likelihood of identifying a unique loan using a 5-digit zip code for the property location, the exact sales price and the exact origination date. Approximately 76% of the 19.3 million loans analyzed are unique when these three characteristics are compared across all mortgages in the database. That is, these loans could be distinguished from all other loans with respect to geography, imputed sales price, and origination date, and they were originated in states for which there Start Printed Page 57239is no prohibition on public disclosure of the property sales price.[657]

We next considered the likelihood of identifying a unique loan using the required disclosures in the final rules. As discussed above, we are modifying the required geographic identifier from MSA, as proposed, to a 2-digit zip code and are requiring securitizers to report only the original amortization term, and remaining term to maturity, from which year and month of origination can be approximated, but not the precise origination or sales date.[658] Based on the historical data and the same method described above of determining uniqueness, we estimate that by requiring 2-digit zip code, imputed sales price, and the month and year of origination, less than 20% of mortgages in the sample pool could be unique in their characteristics. This is also significantly lower than the almost 30% likelihood of isolating a unique loan determined based on the required disclosure items in the 2010 ABS Proposal.[659]

These estimates, however, do not fully reflect the difficulty of actually re-identifying an underlying obligor.[660] As noted above, the loan would have to be matched to a record in the relevant public database of real estate transactions. As noted, some counties within states do not release property sale values. Even in those jurisdictions that do make property sale information publicly available, matching the loans to a particular property record might be challenging to do because the jurisdiction providing the information might not offer access in a way that would make the information easily accessible or in convenient format. For example, knowing the 5-digit zip code of the unique property would not necessarily be helpful in a jurisdiction that requires a street name in order to search and view records. Hence, in some cases it may be too burdensome to find the matching loan even if that information is publicly available, particularly if such search is part of a large scale matching effort (i.e., for commercial purposes). We also note that public property databases contain, in addition to property transactions with mortgages securitized through private-label RMBS, property transactions without using borrowed funds, property transactions with mortgages that are never securitized, or property transactions with mortgages that are securitized through GSEs. The addition of these other transactions only compounds the burden of matching a particular loan with a particular property record.

Although the approach that we are adopting does not eliminate the possibility of obligor re-identification, we believe it strikes the appropriate balance between privacy and transparency. Some obligors may still be particularly sensitive to the possibility of re-identification and may seek originators that offer additional methods of preserving their anonymity. We do not, however, anticipate that this will have an adverse effect on the functioning of the private-label RMBS market or the cost of capital to the originators of mortgages and their obligors because of the relatively low likelihood of re-identification associated with the revised data points. Moreover, as noted above, asset-level information has been provided by issuers and third-party data providers for private-label RMBS (although not standardized), as well as by the GSEs and Ginnie Mae,[661] and this availability has not led to market disruption or adverse effects on cost of capital for obligors. We believe that there will be significant benefits to RMBS investors by having access to obligor-specific financial information in their evaluation of the potential default risk of the securitized assets, thus improving their ability to price registered RMBS tranches. This information also will allow investors to better understand, analyze and track the performance of RMBS, and, in turn, will allow for more accurate ongoing pricing and increase market efficiency.[662]

We acknowledge that further modification of certain data points could further reduce the risk of obligor re-identification. For example, several commenters emphasized the importance of geographic location in potentially re-identifying an underlying obligor.[663] Based on our analysis, eliminating a geographic identifier reduces the likelihood of isolating a unique mortgage in the sample pool to less than 2%. We considered whether further modification to certain data points will reduce transparency of critical data points for ABS investors. As we discuss below, we believe that a geographic location identifier is critical to pricing RMBS and is therefore necessary for investors to perform due diligence.

To confirm our view, and the views of commenters,[664] that certain data points are critical for ABS investment decisions, we analyzed the potential pricing impact of various data points on RMBS transactions. Our analysis indicates that, for RMBS, certain characteristics and loan term features, such as geographic location, are key determinants of expected performance of underlying mortgage loans as measured by the historical rate of serious delinquency (“SDQ”).[665] We used a model to predict the presence or absence of SDQ within a historical dataset of private-label securitized loans.[666] We found that, by a wide margin, the following four data points make the largest contribution to explaining SDQ: [667] the year of Start Printed Page 57240origination, the LTV ratio, the geographic location of the property as measured by 2-digit zip code, and the obligor's credit score (FICO score was reported in the dataset). Our analysis shows that the year of origination provides the greatest contribution to the measure of how well these factors explain the likelihood of serious delinquency.[668] LTV, geographic location of the property and FICO score provide the next greatest contribution to explaining the likelihood of serious delinquency and have a similar magnitude in overall contribution.[669] Eliminating any of these three variables from the final disclosure requirements significantly and negatively affects the predictive ability of the model. On the other hand, in the instances we studied, providing a geographic location that represents a smaller area or the exact origination date only marginally improves the model's predictive ability,[670] but it could significantly increase the possibility of obligor re-identification.

Another approach we considered, although not specifically suggested by commenters, was an approach that rounds the loan amount, other loan balance-related data points, and monthly performance data points to further hinder potential obligor re-identification.[671] The rounding of loan amount would result in an imputed sales price that may be sufficiently different from the true sales price so as to lessen the possibility of a match to other publicly accessible real estate datasets. Rounding the loan balance to the nearest $1,000 results in the reduction of the likelihood of isolating a unique mortgage in the MBSData dataset to 11%. It would, however, come at a loss of precision in the cash flow variables that we believe is necessary for investors.[672] As noted above, such precision is key to investors' ability to analyze and track the performance of various parties involved in RMBS transactions.

We considered several alternative approaches to disseminating asset-level data as potential means to address privacy concerns, including the Web site approach.[673] Most commenters were generally opposed to the Web site approach as the appropriate means to address privacy concerns.[674] For example, commenters raised concerns about the difficulty in determining who would be a potential investor and thus should have access to asset-level data; [675] the liability for failing to disclose all material information to investors in the event a potential investor was denied access to asset-level data; [676] the need for guidance on what controls are necessary to address privacy; [677] and access to the data by other market participants.[678] Given these concerns and our belief that it is critically important that investors receive access to asset-level information, we are not adopting the Web site approach. We believe the final asset-level requirements, which have been modified from the proposal to address privacy concerns, provide investors with information they need to perform due diligence and make informed investment decisions, and therefore, we are requiring the asset-level information to be filed on EDGAR where it will be readily available to and accessible by investors. For similar reasons, we do not think it would be appropriate to restrict access to such information on EDGAR.

Commenters suggested a central repository or “aggregated data warehouse” to house the asset-level data because such an approach would simplify enforcement of access policies, ensure consistent data formats and lower incentives to exclude certain users.[679] Similarly, another commenter suggested that issuers disclose all asset-level data to a consumer reporting agency administered repository, along with a unique identification number for each asset, which would allow investors to access all the asset-level data for these assets.[680] Another commenter also Start Printed Page 57241suggested that credit bureaus, instead of issuers, should provide credit-related information.[681] While these suggestions have the potential to address privacy concerns, as noted by one commenter, they are not currently in use, would require further development, and would depend upon the willing participation of certain third parties in order to function as a viable means of disseminating asset-level data.[682]

4. Requirements Under Section 7(c) of the Securities Act

As we note elsewhere, subsequent to the 2010 ABS Proposing Release, Congress adopted the Dodd-Frank Act. Section 942(b) of the Dodd-Frank Act added Section 7(c) to the Securities Act which requires the Commission to adopt regulations requiring an issuer of ABS to disclose, for each tranche or class of security, information regarding the assets backing that security. It specifies, in part, that in adopting regulations, the Commission shall require issuers of asset-backed securities, at a minimum, to disclose asset-level or loan-level data, if such data are necessary for investors to independently perform due diligence including—data having unique identifiers relating to loan brokers or originators; the nature and extent of the compensation of the broker or originator of the assets backing the security; and the amount of risk retention by the originator and the securitizer of such assets.[683]

In the 2011 ABS Re-Proposing Release, we requested comment as to whether our 2010 ABS Proposals implemented Section 7(c) effectively and whether any changes or additions to the proposals would better implement Section 7(c). We discuss below the comments we received in response to the requests for comment regarding the requirements of Section 7(c).

(a) Section 7(c)(2)(B)—Data Necessary for Investor Due Diligence

Section 7(c)(2)(B) states, in part, that we require issuers of asset-backed securities, at a minimum, to disclose asset-level or loan-level data, if such data are necessary to independently perform due diligence. We requested comment in the 2011 ABS Re-Proposing Release whether the 2010 ABS Proposal implements Section 7(c) effectively. In response, two investors supported requiring asset-level disclosures for all asset types, except for credit cards.[684] The investor membership of one trade association suggested that the disclosure of relevant asset-level data is necessary for well-functioning markets [685] and another commenter suggested that the 2010 ABS proposals would successfully implement Section 7(c) of the Securities Act.[686] Two other commenters, however, questioned whether borrower data proposed in the 2010 ABS proposals was “necessary” for investors to perform their own due-diligence.[687] These commenters, however, did not specifically identify the asset-level disclosures that are necessary for investors to independently perform due diligence.

We are adopting asset-level requirements for RMBS, CMBS, Auto ABS, debt security ABS, and resecuritizations. We prioritized these asset classes for various reasons that we discuss above.[688] Our decision to adopt these requirements is based on our belief that investors should have access to robust information concerning the pool assets that provides them the ability to independently perform due diligence. We continue to consider the appropriate disclosures for other asset classes. We believe the data points we are adopting fulfill, for those asset types, the Section 7(c) requirement that we adopt asset-level disclosures that are necessary for investors to independently perform due diligence. To the extent issuers believe additional data is needed, we encourage them to provide such additional disclosures in an Asset Related Document.[689]

(b) Section 7(c)(2)(B)(i)—Unique Identifiers Relating to Loan Brokers and Originators

Section 7(c)(2)(B)(i) requires the Commission to require disclosure of asset-level or loan-level data, including, but not limited to, data having unique identifiers relating to loan brokers or originators if such data are necessary for investors to independently perform due diligence. In the 2010 ABS Proposing Release, we proposed to require issuers to provide the originator's name for all asset types and, if the asset is a residential mortgage, the MERS number [690] for the originator, if available. We also proposed requiring RMBS issuers to provide the National Mortgage License System registration number required by the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, otherwise known as the NMLS number, for the loan originators and company that originated the loan.[691]

In the 2011 ABS Re-proposing Release, we stated our belief that the proposal to require NMLS numbers would implement the requirements of Section 7(c) with respect to mortgages by requiring a numerical identifier for a loan broker.[692] We requested comment on whether unique identifiers for loan brokers and/or originators were necessary to permit investors to independently perform due diligence for asset classes other than RMBS or CMBS and, if so, whether there is a unique system of identifiers for brokers and originators for other asset classes.[693] We did not receive any comments suggesting this requirement would not satisfy the requirements of Section 7(c), although one commenter opposed requiring an NMLS identifier (for RMBS) because disclosure should focus on the collateral and its performance and an NMLS identifier does not provide investors with information they can use to value the assets.[694]

For RMBS, we are adopting the requirement that issuers provide for ABS backed by residential mortgages the NMLS number of the loan originator company. As noted above, we are not adopting the requirement that issuers provide a unique broker identifier, (i.e., the NMLS number of the specific loan originator) because we are concerned this disclosure may increase re-identification risk.[695] Even though we Start Printed Page 57242are not requiring disclosure of the NMLS loan originator number, we believe disclosure of the NMLS number of the loan originator company satisfies Section 7(c)(2)(B)(i) regarding the asset-level disclosure of unique identifiers for loan brokers or originators. We believe this disclosure should, over time, allow investors to compare loans originated by particular loan originator companies and determine whether there is any correlation to the performance of the loan. This should facilitate independent investor due diligence with respect to the loan pools underlying RMBS.

We are unaware of unique identifiers for loan originators and, if applicable, brokers within the commercial mortgage, auto loan and lease, and debt security markets. We note the ongoing development of certain identifiers, but we are uncertain, at this time, especially due to the lack of response to our request for comment, whether a unique identifier for loan originators for these asset classes is necessary for investor due diligence. Therefore, at this time, we are not adopting unique identifiers for loan originators or brokers within the CMBS, Auto ABS or debt security markets.

(c) Section 7(c)(2)(B)(ii)—Broker Compensations and Section 7(c)(2)(B)(iii)—Risk Retention by Originator and the Securitizer of the Assets

In the 2010 ABS Proposing Release, we did not propose requiring asset-level disclosures of broker compensation or risk retention held by loan originators or securitizers. Section 942(b) of the Dodd-Frank Act, however, amended Section 7(c) of the Securities Act to require disclosure on an asset-level or loan-level basis with respect to the nature and extent of the compensation of the broker or originator of the assets backing the security and the amount of risk retention by the originator and the sponsor of such assets if these disclosures are necessary for investor due diligence. In the 2011 ABS Re-Proposing Release, we requested comment on whether these disclosures were necessary for investor due diligence.

We received few comments on these portions of Section 7(c) in response to our requests for comments. One commenter stated that disclosure of broker compensation was appropriate to require because it “is necessary for evaluating how the compensation structure associated with an asset—including possible conflicts of interest—might affect its quality.” [696] The same commenter believed that asset-level or loan-level disclosure of risk retention held by an originator or sponsor “would undoubtedly be of value to investors as they perform due diligence and assess the quality of the offering.” [697] This commenter stated that we must require asset-level risk retention disclosure because of the “many forms of risk retention that have been proposed in accordance with Section 941(b) of the Dodd-Frank Act, including vertical, horizontal, and other configurations” and because “[e]ach of those forms of risk retention presents a different risk profile, depending on the specific underlying assets that are subject to the risk retention.” [698]

A CMBS issuer and a trade association did not believe that broker compensation disclosure in the prospectus would be useful to investors in performing due diligence on the assets in the pool.[699] The CMBS issuer stated that the general due diligence focus for CMBS was whether the income-producing potential of the underlying commercial property was sufficient to service the debt that it secures and broker compensation does not assist that analysis.[700] Another trade association stated that it did not support disclosure of asset-level risk retention disclosures because its “members do not believe this would add any value in the CMBS industry.” [701]

We did not receive any comments from investors suggesting that disclosure of broker compensation is necessary for their due diligence. While the disclosure of broker compensation on an asset-level basis may provide some value to investors in assessing possible conflicts of interest, we are not persuaded at this time that such information is necessary for investors to independently conduct due diligence.

With respect to asset-level risk retention, we are not persuaded at this time that additional requirements relating to risk retention, on an asset-level basis, are needed for investors to independently conduct due diligence. A sponsor, however, will be required to provide information, on an aggregate basis, about its retained interest in a securitization transaction. As explained below, we are adopting amendments to Items 1104, 1108, and 1110 of Regulation AB that will require disclosure regarding the sponsor's, a servicer's, or a 20% originator's interest retained in the transaction, including the amount and nature of that interest.[702] The disclosure would be required for both shelf and other offerings. We note the recent re-proposal of the credit risk retention rules, issued jointly by the Commission and other agencies, implementing Section 941 of the Dodd-Frank Act.[703] When adopted, we will review the final credit risk retention rules to determine whether additional asset-level or other disclosure requirements, if any, are appropriate. The asset-level requirements we are adopting should provide investors with transparency about the quality of the assets in a securitization.

B. Asset-Level Filing Requirements

1. The Timing of the Asset-Level Disclosure Requirements

This section, Section III.B.1, is divided into two parts covering when asset-level information must be provided. Section III.B.1.a discusses when asset-level disclosures are required at the time of the offering. Section III.B.1.b discusses the frequency with which the asset-level disclosures are required on an ongoing basis. Section III.B.2 discusses the scope of asset-level data required at the time of the offering and on an ongoing basis.

(a) Timing of Offering Disclosures

(1) Proposed Rule

In the 2010 ABS Proposing Release, we proposed to require asset-level information of asset pool characteristics at the following times during the offering process:

  • At the time the preliminary prospectus is filed.
  • At the time the final prospectus is filed.
  • With an Item 6.05 Form 8-K if the requirements of Item 6.05 were triggered.[704]
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(2) Comments on Proposed Rule

Only one commenter responded to our proposal that the asset-level disclosures be required at the time of the offering. This commenter stated the proposal seemed to cover the period of offering sufficiently.[705]

(3) Final Rule and Economic Analysis of the Final Rule

Under the final rule, as proposed, those issuers that are required to provide asset-level data must provide all of the required asset-level disclosures in a preliminary prospectus and the final prospectus. Requiring that asset-level disclosures be filed by the same time a preliminary prospectus is filed will provide investors more time to analyze the asset-level data in advance of an investment decision. We acknowledge that every time asset-level disclosures are filed issuers likely will incur filings costs and costs to verify the data. We believe the costs incurred to provide this information are justified in order to provide investors access to relevant data about the assets underlying the particular ABS offering in advance of their investment decision. In addition, we believe providing investors time to analyze the asset-level data may result in better pricing and therefore may improve allocative efficiency and facilitate capital formation. Compliance costs are minimized, to some extent, because if there has been no change to the asset-level information provided with the preliminary prospectus, then under current requirements, this information can be incorporated by reference into the final prospectus. This eliminates the costs associated with re-filing the information.

Under the proposal, an issuer would have been required to provide updated asset-level disclosures about the pool composition, including characteristics of new assets added to the pool, if an Item 6.05 Form 8-K was triggered.[706] Under the final rules, asset-level information about the actual pool composition is required with each Form 10-D. Therefore, we do not believe that issuers should also incur the cost to provide asset-level information if an Item 6.05 is triggered.

(b) Timing of Periodic Disclosures

(1) Proposed Rule

We also proposed in the 2010 ABS Proposing Release to require ongoing asset-level disclosures. Under the proposal, asset-level disclosures would be required at the time of each Form 10-D, which under current requirements is within 15 days after each required distribution date on the ABS.

(2) Comments on Proposed Rule

With respect to when and how frequently the ongoing asset-level disclosures should be provided, comments varied. One commenter recommended that the required disclosures be provided on the distribution date rather than 15 days thereafter.[707] Some commenters noted that industry standards for CMBS make ongoing disclosures available earlier than when the proposal would require them.[708]

With respect to how frequently the ongoing asset-level disclosures should be provided, comments varied. For instance, a few commenters suggested we require disclosure on the day of an “observable event,” or promptly thereafter.[709] Alternatively, one commenter suggested requiring less asset-level data each month or allowing issuers to provide the data annually or quarterly.[710] Other commenters stated that the asset-level disclosures should not be required on a daily basis or on a timeframe that occurs less than monthly.[711] Relatedly, one commenter stated that the final rule should include an instruction clarifying that the ongoing asset-level information reported for any particular reporting period may be reporting information from a prior reporting period due to delays that can occur between the time when asset-level information is received and such information is ready to be reported.[712]

(3) Final Rule and Economic Analysis of the Final Rule

The final rule requires, as proposed, that issuers provide the asset-level disclosures at the time of each Form 10-D. As discussed, however, in Section III.B.2 the scope of information required with each Form 10-D has changed to also include the same set of data points that were required in the prospectus. We are not persuaded by commenters' suggestions that the ongoing asset-level disclosures be provided quarterly, annually or monthly, because reporting at these times may be outside the time when such disclosures are normally collected. The requirement to file a Form 10-D is tied to the distribution date on the ABS, as specified in the governing documents for the securities. In effect, tying the asset-level disclosures to each Form 10-D filing aligns the frequency of the disclosures to the payment cycle (when data about the collections and distributions is captured) which should minimize the burdens and costs to issuers of collecting such information. For investors, receiving asset-level data tied to the payment cycle should allow them to conduct their own valuation and risk analysis of each asset in the pool at periods close in time to when the data is captured and other distribution information is already being reported. This should allow investors to understand, on an ongoing basis for the life of the investment, how the performance of any particular asset is affecting pool performance.

We also believe that only requiring asset-level disclosures on a quarterly or monthly basis may not provide investors with timely access to data about the performance of pool assets because it ties the reporting of asset-level disclosures to a timeframe that may be outside the payment cycle when the data is normally captured, which may increase costs or inhibit investors' ability to make timely and informed ongoing investment decisions. For instance, if asset-level reporting was required monthly, but the payment cycle occurred every six months, then requiring a filing on a monthly basis Start Printed Page 57244may unnecessarily increase costs without a corresponding benefit. If reporting was required on a quarterly basis, but the payment cycle was monthly, then in instances where the performance of pool assets deteriorates or the pool assets change, investors would not receive timely updates about such events. This may impact their ability to spot developing trends, thus limiting their ability to make informed ongoing investment decisions with respect to the ABS.

We are also not persuaded that we should require reporting any time an “observable event” occurs with respect to a single asset because we do not believe that the benefits to investors of such a requirement would justify the costs to issuers of capturing and reporting data in a timeframe that falls outside when data is typically captured and reported. Reporting on an observable event basis could result in the issuer constantly updating the data. As noted above, we believe providing investors access to timely and relevant asset-level disclosures and minimizing costs to issuers is best achieved by requiring asset-level disclosures be provided with each Form 10-D, which means the disclosures will be provided in a timeframe that is in line with the payment cycle and when the data is typically captured.

The final rule also requires that the asset-level disclosures be provided for each asset that is in the pool at any point in time during the reporting period. Therefore, if a substitution occurred during the reporting period, then asset-level disclosures are required for both the loan added and the loan removed during the reporting period in which the change occurred. Providing investors with disclosure about assets that are added and removed will allow investors to understand the actual composition of the asset pool over the life of a security. This will benefit investors by allowing them to assess on an ongoing basis the current risk of the collateral pool and to compare the characteristics of the assets involved in a substitution. We recognize that this benefit to investors will result in increased reporting costs to sponsors and ABS issuers.

A commenter suggested the final rule include an instruction clarifying that the information reported for any particular reporting period may be information from a prior reporting period due to delays that can occur between the time when asset-level information is received and such information is ready to be reported.[713] We are not persuaded that this is a significant problem for issuers; therefore the final rule does not include such an instruction. The transaction agreements specify a distribution date to investors that is generally sometime after the end of a reporting period so that the amounts of a distribution may be calculated so that reports may be prepared. Consistent with current requirements, the Form 10-D is required to be filed 15 days after each required distribution date on the ABS and accordingly, because the asset-level disclosures are included in the Form 10-D disclosure requirements, they are due at the same time. Based on current market practice, the amount of time between the end of a reporting period and filing of a Form 10-D may be four weeks or more. Therefore, we believe aligning the timing of filing the asset-level disclosure with current Form 10-D reporting requirements will not be costly and will provide a sufficient period of time for the appropriate parties to review the information before filing.

2. The Scope of New Schedule AL

Section III.B.1 discussed when asset-level disclosures are required at the time of offering and on an ongoing basis. This section discusses the scope of those required asset-level disclosures required at the time of the offering and on an ongoing basis.

(a) Proposed Rule

(1) Offering Disclosures

As noted above, in the 2010 ABS Proposing Release, we proposed to add the prospectus disclosure requirements in new Item 1111(h) and new Schedule L to Regulation AB. We also proposed data points related to each asset. Proposed Schedule L focused, in general, on providing investors asset-level data about the credit quality of the obligor, the collateral related to each asset and the cash flows related to a particular asset, such as the terms, expected payment amounts, indices and whether and how payment terms change over time. Schedule L contained some data points capturing some loan performance data.[714] As noted above, proposed Schedule L would have been provided at the time of the preliminary prospectus. We also proposed that an updated Schedule L be provided with the final prospectus.[715] Finally, we proposed that, if issuers are required to report changes to the pool under Item 6.05 of Form 8-K, then an updated Schedule L would be required.[716] We also requested comment on whether Schedule L data should be required at any other time.[717]

Under our proposed revisions to Item 6.05 of Form 8-K, we proposed that a new Schedule L be filed if any material pool characteristic of the actual asset pool at the time of issuance of the asset-backed securities differs by 1% or more from the description of the asset pool in the prospectus.[718] Based on comments received, it seemed that it may not be clear that an Item 6.05 Form 8-K would be required when prefunding or revolving assets increased or changed the pool by 1% or more, although that was the intent of the proposal. Therefore, in the 2011 ABS Re-Proposing Release, we requested additional comment about whether we should clarify that a new Schedule L would be required with an Item 6.05 Form 8-K when assets are added to the pool after the issuance of the securities either through prefunding periods, revolving periods or substitution and the triggers in Item 6.05 are met.[719] The Schedule L provided with an Item 6.05 Form 8-K would provide investors with the current pool composition including data related to the cash flows related to a particular asset, data that allows for better prepayment analysis or credit analysis and data about the property. We also requested comment on whether the updated Schedule L should include all assets in the pool and whether the Schedule L should be an exhibit to a Form 8-K or to a Form 10-D.[720]

(2) Periodic Disclosures

In the 2010 ABS Proposing Release, we also proposed ongoing disclosure requirements in Item 1121(d) and Schedule L-D. Proposed Schedule L-D Start Printed Page 57245would require, in general, disclosures corresponding to payments received during the payment cycle, as well as amounts past due and the servicer's efforts during the payment cycle to collect past due amounts. Proposed Item 1121(d) and Schedule L-D disclosure would be provided at the time of each Form 10-D. We also requested comment in the 2010 ABS Proposing Release about whether Schedule L-D data should be provided at other times.[721]

(b) Comments on Proposed Rule

We received limited response to the request for comment on whether Schedule L and Schedule L-D data should be provided at any other time. Commenters generally indicated that the disclosures enumerated in Schedule L and Schedule L-D may be appropriate at other times than proposed. For instance, one investor stated that the same disclosures for all ABS sectors (other than CMBS) should be required for offering documents and ongoing reports.[722] The investor recognized that certain data will be static, while other data will change from month to month. Another investor stated that for transactions involving a prefunding period or revolving period, a new Schedule L should be filed monthly when new collateral is added.[723]

In response to the questions asked in the 2011 ABS Re-Proposing Release about clarifying that a new Schedule L would be required with an Item 6.05 Form 8-K, an investor reiterated its earlier position that issuers should file a Schedule L at issuance and each month new assets are added to the collateral pool.[724] The investor added that this would allow investors to evaluate the changing nature of the risk layering introduced by the new assets and it would allow investors to confirm that the quality of the newly added collateral meets the expected origination practices of the issuer.[725]

One commenter noted that current rules require that updated information about the characteristics of the collateral in the pool be provided with the Form 10-D, rather than in a Form 8-K.[726] The commenter, however, also believed requiring an updated Schedule L for assets added after the measurement date for revolving asset master trusts is inappropriate because the asset composition of these trusts changes on a daily basis during its revolving period and, therefore, an issuer would be filing both a Schedule L and Schedule L-D each month.[727] Another commenter suggested that a new Schedule L should not be required when assets are added to the pool after issuance, either through prefunding periods, revolving periods or substitution unless the triggers under Item 6.05 of Form 8-K are met. If the 5% threshold under Item 6.05 was met, then the commenter asserted filing the Schedule L with the Form 10-D would be more efficient.[728]

(c) Final Rule and Economic Analysis of the Final Rule

After considering the comments received, we are adopting a rule, based on a commenter's suggestion that the same asset-level disclosures be provided, if applicable, at the time of the offering and on an ongoing basis. Therefore, we have condensed information previously proposed to be provided in either Schedule L or Schedule L-D into a single schedule, titled Schedule AL. Schedule AL in new Item 1125 of Regulation AB enumerates all of the asset-level disclosures to be provided, if applicable, about the assets in the pool at securitization and on an ongoing basis. The asset-level disclosures apply to each asset in the pool during the reporting period covered by Schedule AL.[729]

We believe aggregating Schedule L and Schedule L-D into one unified schedule simplifies the new rules to the benefit of both issuers and investors. For investors, we believe a unified schedule will make it easier to understand the actual pool composition and the performance of the asset pool both at issuance and on an ongoing basis. We recognize that, in certain circumstances, the pool composition may continue to change even after the final prospectus is filed. As a result, the asset-level information provided with the final prospectus may not reflect the pool composition at closing.[730] On an ongoing basis, the composition of the asset pool may change due to prefunding or revolving periods, or substitution. Under the proposal, if the assets in the pool changed after the filing of the final prospectus, then investors would have only received updated disclosures about the characteristics of the current asset pool, if an Item 6.05 of Form 8-K was triggered. Some assets could be added or removed from the pool without investors receiving updated disclosures about the changes to the composition and characteristics of the asset pool. As a result, the assets identified in the most recent Schedule L-D would not exactly match the assets identified in the last Schedule L that was filed.

Requiring that the asset-level information provided with the Form 10-D include information about the characteristics of each asset will make it easier to understand the actual pool composition at any point in time and, in particular, when the asset composition has changed through additions, substitutions or removal of assets.[731] This requirement will also make it easier to compare the characteristics of the current asset pool with the pool characteristics for a prior period or date. As a result, we believe investors will be able to better assess any potential risk layering introduced by changes to the composition of the asset pool and confirm that the quality of the newly added collateral meets expected origination practices.

Another benefit is that investors at the time of the offering will receive a more complete picture of any seasoned assets in the ABS pool, including the current performance of these assets. As we noted in the 2010 ABS Proposing Release, proposed Schedule L-D focused on whether an obligor is making payments as scheduled, the efforts by the servicer to collect amounts past due, Start Printed Page 57246and the losses that may pass on to investors.[732] We believe these disclosures, if made at the time of the offering, will also assist an investor in its investment analysis, especially with respect to asset pools involving seasoned assets.

We recognize that the one schedule format may benefit issuers, but it may also result in some increased compliance costs. We believe that it may be easier to revise, amend and file one schedule than two separate schedules. Also, as discussed above, because we are not adopting the proposed requirement that an updated Schedule L be provided if an Item 6.05 is triggered, issuers will not need to bear the burden or cost of assessing whether an updated Schedule L is required if the requirements of Item 6.05 were triggered.[733]

We also recognize that aggregating the data points proposed in Schedules L and L-D into one schedule may increase the number of data points that an issuer will need to respond to at the time of the offering and on an ongoing basis. We do not believe that this change increases the data issuers must collect about the assets beyond what was proposed as the unified schedule primarily consists of information proposed to be provided under Schedule L and Schedule L-D. Under the rule we are adopting, the issuer will be required, at the time of the offering, to provide all the information relating to the underwriting of the asset (e.g., terms of the asset, obligor characteristics determined at origination) and any applicable performance related information for the most recent reporting period. On an ongoing basis, the issuer will be required to provide the relevant ongoing performance information for the most recent reporting period and the underwriting information previously provided about the asset. Issuers may incur some increased filing costs compared to what they would have incurred under the proposal because they will be verifying and filing more data at each filing. Although we cannot quantify the increase in filing costs that issuers may incur, our qualitative assessment is that the increase will not be significant over what was proposed.[734]

We considered, as an alternative, requiring information to be provided only about assets added to the pool during a reporting period. We believe asset-level information is most useful when it reflects all the assets actually in the pool. Therefore, we believe that current investors and potential secondary market investors should have access through the current Form 10-D to the asset-level information reflecting the assets in the pool at that time. Otherwise those parties may have to piece together various tables of information to construct the current pool. Piecing together various tables may lead to confusion and errors and, as a result, market participants may base their analysis on data that does not provide an accurate picture of the asset pool. Further, investors rather than issuers would bear the cost of piecing together the disclosures and having each investor doing so would create duplicative costs.

One investor commenter who supported the same asset-level disclosure in offering documents and in ongoing reports for most asset classes did not support this format for CMBS.[735] For CMBS, this commenter stated the loan originator and the loan servicer are not affiliated and, therefore, unifying items in Schedule L and Schedule L-D may be impractical for the CMBS sector. We considered this concern, but we believe the information is available to issuers, albeit perhaps at some cost. Thus, Schedule AL enumerates for issuances of CMBS all of the asset-level disclosures to be provided, if applicable, about the assets in the pool at securitization and on an ongoing basis.

In the end, we believe this approach is reasonable despite the increased compliance costs, because this approach provides investors with access, both at the time of the offering and on an ongoing basis, to more data about the characteristics and performance of the pool assets. As a result, investors can evaluate the characteristics of the pool with the benefit of a more complete picture of the pool assets' characteristics and performance.

3. XML and the Asset Data File

(a) Proposed Rule

In the 2010 ABS Proposing Release, we proposed requiring that asset-level information be provided in XML. We believed that requiring the asset-level data file in XML, a machine-readable language, would allow users to download the data directly into spreadsheets and databases, analyze it using commercial off-the-shelf software, or use it within their own models in other software formats.

(b) Comments on Proposed Rule

In response to the 2010 ABS Proposing Release, several commenters supported the use of XML to report loan-level data [736] and some commenters noted that the residential mortgage industry already uses XML to transmit data about loans.[737] For CMBS, some commenters suggested not requiring XML at this time.[738] A few commenters suggested that we not adopt the XML requirement for RMBS, but instead require the information in comma separated values (“CSV”).[739] Start Printed Page 57247Other commenters also suggested the use of another standard, such as XBRL.[740]

As we note above, subsequent to the 2010 ABS Proposing Release, Congress adopted the Dodd-Frank Act. Section 942(b) of the Dodd-Frank Act added Section 7(c) to the Securities Act, which requires the Commission to set standards for the format of the data provided by issuers of an asset-backed security, which shall, to the extent feasible, facilitate the comparison of such data across securities in similar types of asset classes. We requested comment in the 2011 ABS Re-Proposing Release as to whether the proposed XML format was an adequate standard for the format of data that facilitated the comparison. We did not receive any comments suggesting that requiring that asset-level data be provided in XML did not, as it relates to data standardization, implement Section 7(c) effectively.

Instead, comments on the 2011 Re-Proposing Release reiterated concerns raised in prior comment letters. For instance, some commenters reiterated their belief that XML should not be required for CMBS at this time [741] and one of these commenters said requiring XML should be tied to investor demand.[742] These commenters were concerned with the cost to implement the standard,[743] the cost of providing the data in duplicate formats,[744] data quality risks,[745] and the time needed to implement the standard.[746] On the other hand, one commenter believed that the current format of CMBS reports (CSV, Excel and even PDF) “greatly limits the transparency of CMBS.” [747]

(c) Final Rule and Economic Analysis of the Final Rule

After considering the comments received, we are adopting the proposed XML requirement. We believe requiring asset-level information in a standardized machine-readable format should lower the cost for investors of collecting data about ABS offerings and should allow data to be analyzed by investors and other end-users more quickly than if the data was provided in a non-machine readable format. For instance, if the asset-level data is made available to investors in a format that is not machine-readable, it would require the manual key-entry of the data into a format that allows statistical analysis and aggregation. Thus, investors seeking to gain a broad understanding of ABS offerings would either need to spend considerable time manually collecting the data and manually entering the data into a format that allows for analysis, thus increasing the time needed to analyze the data, or incur the cost of subscribing to a financial service provider that specializes in this data aggregation and comparison process. Further, manual entering of data can lead to errors, thereby reducing data accuracy and usefulness. Requiring companies to report asset-level data in a standardized machine-readable format, such as XML, should lower both the time and expense for each investor to access this data. Since asset-level disclosures will be tagged and can be immediately downloaded into a larger, more comprehensive database that may include data about other ABS offerings, investors will not need to manually enter the data or subscribe to a third-party data aggregator. With more information readily available in a usable format, investors may be able to better distinguish the merits of various investment choices, thereby allowing investors to better match their risk and return preferences with ABS issuances having the same risk and return profile. Thus, we expect that this reduction in the costs of accessing, collecting and analyzing information about the value of ABS will lead to better allocation of capital. We believe that the requirements we are adopting to require standardized asset-level disclosures in XML fulfill, for the asset types subject to these requirements, the requirement under the Dodd-Frank Act that we set a standard for the format of data that facilitates comparison across securities in similar types of assets.

We understand that some commenters expressed concerns regarding the burden and cost to implement the standard. We recognize that requiring asset-level disclosures in XML will result in substantial initial set-up costs to filers.[748] In a further attempt to mitigate costs to issuers, as we discuss below in Section IX.B, we are requiring that issuers comply with the asset-level disclosures no later than November 23, 2016, which we believe reduces the burden of implementation by providing time for market participants to reprogram their systems. With respect to the costs of implementation, we believe that the costs are justified because we believe investors need the asset-level disclosures in a standardized machine-readable format that makes the data transparent and comparable. We continue to believe that having the asset-level data in a standardized machine-readable format will enable investors to use commercial off-the-shelf software for analysis of underlying asset-level data, which will allow them to aggregate, compare and analyze the information.

We also considered, as several commenters suggested, alternative formats to XML, such as PDF, CSV and XBRL. We do not believe PDF format is a suitable alternative because it is not a convenient medium for tabular structured data and it is not designed to convey machine-readable data. As explained above, the ability of investors to easily utilize the asset-level data required of issuers is crucial to its usefulness. We believe that the CSV format is not suitable either, since any given dataset reported will require more than a single set of uniformly structured Start Printed Page 57248rows and CSV format will not support the disclosure of such datasets easily. Finally, while XBRL allows issuers to capture the rich complexity of financial information presented in accordance with U.S. Generally Accepted Accounting Principles, we do not believe that it is appropriate for the asset-level disclosure requirements we are adopting.[749] The Asset Data File will present relatively simpler characteristics of the underlying loan, obligor, underwriting criteria, and collateral, among other items, that is better suited for XML. Further, the data extensions available in XBRL are not appropriate for this dataset where comparability of data is critical and the nature of the repetitive data lends itself to an XML format. In addition, the XML schema can be easily updated.[750]

4. Asset Related Documents

(a) Proposed Rule

We understand that a situation may arise where an issuer would need to disclose other asset-level data not already defined in Schedule AL. To address this situation, we proposed to include a limited number of “blank” data tags in our XML schema to provide issuers with the ability to present additional asset-level data not required under the proposal.[751] We also proposed an “Asset Related Document” that would allow registrants to disclose the definitions or formulas of any additional asset-level data or provide further explanatory disclosure regarding the Asset Data File.[752]

(b) Comments on Proposed Rule

We received some comments, which were mixed, on the blank tag proposal, but we did not receive any comments regarding the use of an Asset Related Document. With regard to the blank tag proposal, one commenter suggested that as long as the information in the blank data tag is clearly described, neither the number of blank data tags nor the information would add complexity to the requirements.[753] One commenter, however, did not see the benefit of the proposed blank tags because new data points can be added as business and reporting needs evolve.[754] Another commenter did not believe a blank tag was appropriate or consistent with “good XML syntax.” [755]

(c) Final Rule and Economic Analysis of the Final Rule

We continue to believe, given the possible variety of assets and structures for securitization and that business and reporting needs may evolve faster than changes can be made to the asset-level requirements, issuers should have the flexibility to provide asset-level data in addition to what is required by Schedule AL. For instance, we note that some commenters suggested we adopt data points that we had not proposed.[756] While we are adopting some of the data points commenters suggested, we are not adopting all the additional data points recommended for various reasons that we describe above. We encourage issuers to provide any additional asset-level data that may be appropriate. We believe the flexibility to provide additional data in a machine-readable format will provide benefits to investors and issuers at no significant cost.

Under the final requirements, issuers can provide additional asset-level disclosures in an Asset Related Document and such Asset Related Document(s) must then disclose the tags, definitions, and formulas for each additional asset-level disclosure.[757] As we stated in the 2004 ABS Adopting Release and 2010 ABS Proposing Release, issuers and underwriters should be mindful of any privacy, consumer protection or other regulatory requirements when providing additional loan-level information, especially given that the information would be publicly filed on EDGAR.[758] Finally, issuers may also provide other explanatory disclosure regarding the asset-level data in an Asset Related Document.[759] As with any information that is part of the prospectus or ongoing reports, all Asset Related Documents must be filed concurrently with the Schedule AL it supplements. We are not adopting the blank tag proposal as we are persuaded by comments that the blank tags are not appropriate, may provide limited benefits and may not be consistent with “good XML syntax.”

5. New Form ABS-EE

(a) Proposed Rule

We proposed that the new Asset Data File be filed as an exhibit to certain filings. Therefore, we proposed changes to Item 601 of Regulation S-K, Rule 11 and 101 of Regulation S-T, and Form 8-K to accommodate the filing of Asset Data Files. We proposed to define the XML file required by Schedules L and L-D as an Asset Data File in Rule 11 to Regulation S-T and proposed corresponding changes to Rule 101 of Regulation S-T mandating electronic submission. For asset-level disclosures required at the time of the offering, we proposed, regardless of whether the issuer was registering the offering on Form SF-1 or SF-3, that the Asset Data File be filed as an exhibit to the appropriate Form 8-K (in the case of an offering) under proposed Item 6.06 of Form 8-K. Proposed Item 6.06 would have required that issuers file the Asset Data File as an exhibit to a Form 8-K on the same date a preliminary or final prospectus is filed or an Item 6.05 of Form 8-K is filed. The proposed requirement would have also required that any Asset Related Document be filed at the same time the Asset Data File is filed on EDGAR.

For ongoing reporting of asset-level disclosure, we proposed to require the Asset Data File and any Asset Related Document be filed with the appropriate Form 10-D. As noted above, we also proposed an additional exhibit, an Asset Related Document, for registrants to disclose the definitions or formulas of any additional asset-level data or to provide further explanatory disclosure regarding the Asset Data File.

(b) Comments on Proposed Rule

We did not receive any comments with respect to the requirement of filing the Asset Data Files or Asset Related Documents with the Form 8-K (in the case of an offering) or with the Form 10-D (in the case of a periodic distribution report).

(c) Final Rule and Economic Analysis of the Final Rule

We are adopting new Form ABS-EE to facilitate the filing of the new Asset Data Files [760] and Asset Related Documents.[761] The Asset Data Files and the Asset Related Documents are Start Printed Page 57249required to be filed as exhibits to new Form ABS-EE.[762]

We had proposed that the Asset Data Files and Asset Related Documents be filed with the Form 8-K because, in the case of a shelf offering, a Form 8-K is typically used to file other documents related to a registration statement. We had proposed filing the documents with Form 10-D to keep periodic disclosures on the same form. We believe, however, that requiring the information on a single Form ABS-EE will facilitate the filing of the Asset Data Files and Asset Related Documents because EDGAR programming for XML files can be specifically tailored for these types of documents, therefore simplifying filing obligations for issuers. Form ABS-EE will benefit investors by making it easier for users to run queries on EDGAR to locate these documents for download.

The fact that the disclosures are filed as exhibits does not impact the fact that the data contained in the Asset Data Files and the Asset Related Documents are disclosures that are part of a prospectus or a periodic report, as applicable.[763] As noted earlier, they are required to be incorporated by reference into the prospectus or the Form 10-D, as applicable. Accordingly, there is no change to the timing and frequency requirements for filing information to meet our offering and periodic disclosure rules and the corresponding Form ABS-EE, with the proper attachments, must be on file and be incorporated by reference into those filings by the time those filings are made or are required to be made.

6. Temporary Hardship Exemption

(a) Proposed Rule

We proposed to revise Rule 201 of Regulation S-T to include a self-executing temporary hardship exemption for filing the Asset Data File.[764] We also proposed to exclude Asset Data Files from the continuing hardship exemption under Rule 202 of Regulation S-T. Rule 202 generally allows an issuer to apply for a continuing hardship if it cannot file all or part of a filing without undue burden or expense. Under the proposed temporary hardship exemption, if the registrant experiences unanticipated technical difficulties preventing the timely preparation and submission of an Asset Data File, a registrant would still be considered timely if: The Asset Data File(s) containing the asset-level data is posted on a Web site on the same day it was due to be filed on EDGAR; an Asset Data File is filed on EDGAR that contains the Web site address, a legend is provided in the Asset Data File filed on EDGAR claiming the hardship exemption; and the Asset Data File(s) are filed on EDGAR within six business days.

(b) Comments on Proposed Rule

We did not receive any comments regarding our proposed self-executing temporary hardship exemption. We also did not receive any comments on the proposal to exclude Asset Data Files from the continuing hardship exemption under Rule 202 of Regulation S-T.

(c) Final Rule and Economic Analysis of the Final Rule

We are adopting, as proposed, a temporary hardship exemption. Under the requirement, if an issuer experiences unanticipated technical difficulties preventing the timely preparation and submission of an Asset Data File required to be filed on EDGAR, it may still be considered timely. For the Asset Data File, an issuer will still be considered timely if: The Asset Data File is posted on a Web site accessible to the public on the same day it was due to be filed on EDGAR; a Form ABS-EE is filed that identifies the Web site address where the file can be located; a legend is provided claiming the hardship exemption; and the Asset Data File is filed on EDGAR within six business days.[765] We believe that the hardship exemption will benefit both issuers and investors, because it will allow issuers to maintain compliance with our rules while providing investors with access to the information required to be disclosed without further delay.

We are also excluding the Asset Data File, as proposed, from the continuing hardship exemption under Rule 202 of Regulation S-T. We continue to believe that a continuing hardship exemption is not appropriate with respect to the Asset Data File because the Asset Data File is an integral part of the prospectus and periodic reports. We also 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 all investors will benefit from receiving the disclosures specified in Schedule AL in a format that will allow them to effectively utilize the information.

C. Foreign ABS

We requested comment on whether there are other privacy issues that arise for issuers of ABS backed by foreign assets.[766] The responses we received indicated concerns regarding foreign privacy laws,[767] as well as concerns related to variations in the characteristics of consumer receivables originated in different jurisdictions,[768] the inconsistencies between our proposal and other countries' disclosure and reporting standards,[769] and certain terms or structures used in the proposed rule that lack a direct European equivalent.[770] As an alternative to our proposal, some commenters requested that the disclosure standards for transactions involving assets located outside the United States be based on local requirements.[771] In response to the Start Printed Page 572502014 Re-Opening Release, a few commenters raised cost and burden concerns about foreign ABS issuers' compliance with overlapping regulatory regimes.[772] A few commenters suggested flexible requirements for foreign ABS issuers to account for differences in the applicability and availability of information or a substitute compliance regime to account for differences between jurisdictions, including differences between the privacy laws of foreign jurisdictions.[773]

We have reviewed the requirements we are adopting against the requirements adopted by the European Central Bank [774] and the Bank of England.[775] We note several similarities and differences between our requirements and theirs, and we believe that perfect agreement between the Commission's requirements and the requirements of all foreign jurisdictions may not be achievable. We believe U.S. investors may expect data in a certain format and/or a certain level of disclosure that is not required under the requirements of other jurisdictions, some of which require the information for supervisory purposes and not specifically for the benefit of investors.[776] In addition, the underlying assets, the form of issuance, parties to the structures, terms and definitions and the structures themselves vary across jurisdictions. We also note that the privacy laws vary across jurisdictions, resulting in disclosure requirements of one jurisdiction that may conflict with the privacy laws in another jurisdiction.

We are not persuaded, however, that the Commission should implement a regime that would recognize the asset-level data requirements developed by foreign authorities, for example the European Central Bank and the Bank of England, that are tailored to assets originated outside of the U.S. or a “provide-or-explain” type regime that would permit selective disclosure based upon foreign laws. We continue to believe, as for U.S. originated assets, the usefulness of asset-level data is generally limited unless the data is standardized. We believe adopting another disclosure regime for foreign asset ABS would reduce standardization and, thereby, the comparability of ABS backed by assets originated outside of the U.S. and ABS backed by assets originated within the U.S. Further, a provide-or-explain regime lowers the comparability of ABS pools comprised of assets originated outside the U.S. against each other as the scope of disclosures provided by each issuer for each ABS may differ depending on the privacy laws of the home jurisdiction of the issuer. We acknowledge that compliance challenges and increased costs for foreign market participants may arise; however, we believe U.S. investors should receive the same data about ABS backed by assets originated outside the U.S. as ABS backed by assets originated within the U.S. This approach is consistent with our approach for corporate issuers, under which foreign private issuers generally provide comparable information to U.S. issuers.

IV. Other Prospectus Disclosure

A. Transaction Parties

1. Identification of the Originator

(a) Proposed Rule

In the 2010 ABS Proposing Release, we noted that Item 1110(a) of Regulation AB, prior to the adoption of today's amendments, required 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. We noted that in situations where many of the pool assets have been purchased from originators other than the sponsor and each of these originators originated less than 10% of the pool assets that the requirement requires very little, if any, information about the originators. Therefore, we proposed to amend the item to require that an originator originating less than 10% of the pool assets would be required to be identified 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.

(b) Comments on Proposed Rule

Comments on the proposal were focused on the scope of the requirement. Commenters argued that the rule should require disclosure identifying the originator of each asset without exception.[777] Another commenter recommended that the requirement be modified to include a low threshold (e.g., 2% of the original pool assets) under which identification of the non-affiliated originators would not be required.[778] In contrast, one commenter believed that the proposal was excessive with the costs outweighing the benefits and recommended keeping the current requirement and supplementing it with disclosure of “additional originators to the extent necessary so that information about the originators of at least 85% of the pool assets has been included in the prospectus.” [779] Another commenter stated that disclosure of only third parties who originated more than 10% of the pool and all originators who provided 5% or more of the pool by dollar value would be more valuable to investors.[780]

(c) Final Rule

After considering the comments received, we are adopting the amendment to Item 1110(a) of Regulation AB, as proposed, with a slight modification to clarify the change that we are making to the existing requirement. Under the final rule that we are adopting, 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, then those originator(s) originating less than 10% of the pool assets will also be required to be identified in the prospectus. We continue to believe that where the sponsor securitizes assets of a group of originators that are not affiliated with the sponsor, more disclosure regarding the originators of the assets is needed. We believe investors will benefit from these disclosures because they will be Start Printed Page 57251better able to assess pools comprising assets from these originators. We acknowledge that the revised rule will likely result in more originators having to be identified in the prospectus than is currently required; however, we do not think that it will result in significant costs to issuers since the information is readily available and the disclosure is limited only to identification of the originator. In addition, while we note that some commenters requested that we impose an additional minimum threshold before issuers would be required to identify unaffiliated originators,[781] we do not believe that such a distinction would be appropriate for the same reasons.

2. Financial Information Regarding a Party Obligated To Repurchase Assets

(a) Proposed Rule

In the 2010 ABS Proposing Release, we noted that in the events arising out of the financial crisis, the financial condition of the party obligated to repurchase assets pursuant to the transaction agreement governing an asset securitization became increasingly important as to whether repayments on asset-backed securities would be made.[782] We proposed to require disclosure of the financial condition of certain parties required to repurchase assets when there is a breach, pursuant to the transaction agreements, of a representation and warranty related to pool assets. 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 about 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.

(b) Comments on Proposed Rule

The response to the proposal was mixed with some commenters supporting the proposal,[783] some commenters opposing the proposal,[784] and other commenters who did not express whether they supported or opposed the proposal, but suggested certain revisions.[785] One concern, raised by some commenters who opposed the proposal, was that investors may perceive the disclosure and the existence of representations and warranties as suggesting that the obligated parties are providing credit or liquidity support to the transaction.[786] Some commenters stated that the disclosure requirement may act as a barrier to entry for participation in the securitization markets, may potentially be misleading because it would likely be provided long before repurchase demands would be made, and in most instances disclosure would be required because an obligated party's financial condition would likely always impact a party's ability to perform its repurchase-related obligations.[787]

(c) Final Rule

After considering the comments received, we are adopting the amendments to Item 1104 and Item 1110, with some modification. We have revised the amendments so that the standard for when disclosure of financial information is required mirrors the existing standard for disclosures required about certain servicers.[788] Under the revised rules, the standard focuses on whether the sponsor or 20% originator's financial condition would have an effect on its ability to comply with any repurchase obligations in a manner that could have a material impact on pool performance or performance of the asset-backed securities.

We are adopting these amendments because we believe an investor's ABS investment decision includes consideration of obligations from certain parties to repurchase assets if there is a breach of the representations and warranties relating to those assets and the capacity of those parties to repurchase those assets. As evident from the crisis, the mere existence of a repurchase provision provides investors with little comfort as to the ability of the party obligated to repurchase assets for a breach of a representation or warranty.[789] The expanded disclosure Start Printed Page 57252that we are requiring will provide investors insight into the capacity of the obligated parties to repurchase assets. We acknowledge that the financial condition of these parties may change between the time of the transaction, when the disclosure is provided, and when a repurchase is required. We believe that investors will nonetheless benefit from the required information because it will allow investors to assess, at the time of their investment decision, whether the representations and warranties provided regarding the pool assets are made by entities financially capable of fulfilling their obligations.

We also note the concerns that some of these parties are private companies who may choose to exit the securitization market rather than provide financial disclosures. While we acknowledge this possibility, we believe that this information is material for investors in order to make an informed investment decision. Furthermore, we believe this concern is minimized, to some extent, because the requirement does not necessarily require financial statements, but only information about their financial condition similar to the type of disclosure required under current rules regarding financial information of certain servicers, some of which may be private companies. Where disclosure is required, the type and extent of information regarding certain originators' and sponsors' financial condition would depend upon the particular facts. We note that sponsors will typically conduct due diligence regarding the pool assets when purchasing assets to include in the ABS pool, including assessing the financial condition of originators that are obligated to repurchase or replace any asset for breach of a representation and warranty pursuant to the transaction agreements. We believe that when the trigger for disclosure of the financial information of sponsors and 20% originators is met, as outlined in the rule, investors should have the same information. We are mindful, however, of the costs that originators and sponsors would incur if we required audited financial information, especially for those originators and sponsors that have not previously been subject to an audit; therefore, we are not requiring that financial information included be audited.

3. Economic Interest in the Transaction

(a) Proposed Rule

In the 2010 ABS Proposing Release, we noted that existing Item 1103(a)(3)(i) of Regulation AB required 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.[790] We also noted our belief that information regarding the sponsor's, a servicer's, or a 20% originator's continuing interest in the pool assets is important to an ABS investor and, therefore, we proposed 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 the amount and nature of that interest.[791] The disclosure would be required for both shelf and other offerings.[792]

(b) Comments on Proposed Rule

Several commenters supported the proposed rule but recommended certain revisions.[793] Some of these commenters suggested that the required disclosures include the effect of hedging.[794] For instance, one commenter stated that the rule should state that the disclosure should be net of hedging,[795] and the other commenter recommended requiring the sponsor to disclose “any hedge (security specific or portfolio) that was entered into by the sponsor or, to the extent it has actual knowledge of such a hedge, an affiliate in an effort to offset any risk retention position held by the sponsor or an affiliate.” [796]

Another commenter requested that we limit the retention disclosure requirements “to those required in any risk retention construct that may be included in the final rules.” [797] The commenter acknowledged that it “is difficult for investors to ascertain how many securities cleared the market and how many were taken down by the issuer or sponsor,” but that disclosure of any retention held above a required amount would be impractical and misleading because accurate information about retention interests may not be known until closing, which is after investors make their investment decision, and the retention interests often change during the period between the time of sale and closing.

(c) Final Rule

After considering the comments received, we are adopting the proposed revisions to Items 1104, 1108, and 1110 with some modifications.[798] As noted below, the requirements that we are adopting for shelf eligibility do not contain a requirement for risk retention in light of the risk retention proposals currently being considered by regulators under the Dodd-Frank Act.[799] Because commenters noted that disclosure about a sponsor's, a servicer's, or a 20% originator's continuing interest in the pool assets is an important factor that investors consider when analyzing the alignment of interests among various parties in the securitization chain, we are adopting this rule.[800] We are also persuaded by commenters that this disclosure should describe the effect of hedging because a hedge could effectively reduce the actual exposure that the party may face from its continuing interest in the pool assets.[801] We do not believe that providing disclosure of the interests retained by the sponsor, servicer, or 20% originator net of hedging alone, as suggested by one commenter, provides investors with Start Printed Page 57253sufficient insight into the hedging activities used by these entities to minimize exposure to their interests. Therefore, we are adopting the rule that each of these parties disclose their continuing interest in the pool assets, including the amount and nature of that interest, and disclose any hedge (security specific or portfolio) materially related to the credit risk of the securities that was entered into by these parties or, if known, by any affiliate of these parties to offset any risk position held.[802] We believe this approach provides investors with appropriate information about these entities' continuing interest in the pool assets and how these parties may be managing those exposures.

We also acknowledge the concerns that the exact amount retained by these parties may not be known until closing and that these retention interests may and do often change during the period between the time of sale and closing.[803] To address these concerns, the parties will only need to describe in the preliminary prospectus the amount and nature of the interest that they intend to retain. The parties must, however, also disclose in the preliminary prospectus the amount and nature of risk retention that they have retained in order to comply with law (for example, to comply with the final risk retention rules once they are adopted).[804] In order to clarify the requirement, we have included an instruction specifying that the amount and nature of the interest or asset retained in compliance with law must be separately stated in the preliminary prospectus.[805] For purposes of the final prospectus, the parties must also disclose the actual amount and nature of the interest to be retained.

4. Economic Analysis Related to the Rules Regarding Transaction Parties

The rules discussed in this section seek to provide ABS investors with greater information about the transaction parties to a securitization, thereby allowing them to make more informed investment decisions. First, investors will now be able to identify a potentially larger number of the originators of pool assets, which will improve their ability to compare the loan performance across originators and assess the relative stringency of these originators' underwriting standards as well as their historical performance. Second, at the time of an ABS offering, investors will now be able to better assess the ability of parties obligated to repurchase assets to actually fulfill those obligations. This will allow investors to more accurately assess the representations and warranties in the transaction agreements, since the enforceability of these depends on the ability of the obligated party to repurchase breached assets. Third, investors will now have information about the sponsor's, servicer's, or a 20% originator's interest retained in the transaction net of hedging. Investors have indicated that this information will be beneficial to them because the information will allow them to consider the incentives of the various parties involved in the securitization chain.

The costs of the revised rule will be borne primarily by issuers, who will be required to provide additional disclosure about the transaction parties to a securitization. The magnitude of the costs will depend on the extent to which issuers already gather the required information. For instance, on the one hand, issuers likely already obtain the identities of originators; therefore, providing that information should not impose significant additional costs. On the other hand, issuers may need to gather some additional information from third parties regarding the financial condition of an originator who originated 20% or more of the pool assets and is obligated to repurchase assets under the transaction agreements. As a result, issuers may incur costs to gather the financial data and then prepare and provide the required disclosure. However, we believe that the revised rule strikes the appropriate balance between the benefit of providing investors with useful information about the originators and the burden of requiring the identification of all originators, regardless of the amount they contributed to the pool.

Some commenters were concerned that disclosing the financial condition of a party obligated to repurchase assets may impose an indirect cost on investors, if investors misinterpret this disclosure and the existence of representations and warranties as the obligated parties providing credit or liquidity support to the transaction. In light of our other rules on disclosure of credit and liquidity support, we believe investors will see a clear distinction between the representations and warranties and any credit or liquidity support provided. Similarly, some commenters were concerned that the disclosure may be misleading to investors because the financial condition of the party may have changed between the time of the transaction when the disclosure was provided and the repurchase demand. We believe that investors will still benefit from the required information since it will allow investors to assess at the time of making their investment decision whether the entities that provided representations and warranties regarding the pool assets are, at least as an initial matter, financially capable of fulfilling their obligations.

B. Prospectus Summary

1. Proposed Rule

In the 2010 ABS Proposing Release, we noted that a prospectus summary should briefly highlight the material terms of the transaction, including an overview of the material characteristics of the asset pool. We also noted our belief that the prospectus summaries provided in ABS prospectuses may not adequately highlight the material characteristics, including material risks, particular to the ABS being offered. Instead, these prospectus summaries often summarize types of information that are common to all securitizations of a particular asset class.[806] Accordingly, we proposed a new instruction to clarify the prospectus summary disclosure requirements.[807] Specifically, the proposed instruction noted that the prospectus 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.

2. Comments on Proposed Rule

Comments on the proposal were mixed.[808] One commenter, who was supportive of the proposal, stated that the instruction would help “highlight potential risks relating to the underwriting of the underlying pool assets.” [809] Another commenter, who opposed the proposed instruction, requested an exception for CMBS transactions stating that each commercial mortgage is unique and, as Start Printed Page 57254a result, the proposed disclosures would not enhance an investor's understanding of the risks and characteristics of a particular CMBS loan pool.[810] One commenter stated that the instruction runs counter to the Commission's plain English rules because it requires the repeating of disclosure in different sections of the document without enhancing the quality of the information.[811] This commenter also contended that the proposed instruction seems to encourage reliance on a summary of information that should be considered in the fuller context of the narrative in the body of the prospectus. The commenter suggested that we reconsider the proposal or, in the alternative, require only a cross-reference in the summary to the location of this information in the body of the prospectus.[812]

3. Final Rule and Economic Analysis of the Final Rule

After considering comments received, we are adopting the proposed instruction with revisions. From our experience, the prospectus summaries often summarize types of information that are common to all securitizations of a particular asset class rather than the material characteristics of the particular ABS, such as statistics regarding whether the loans in the asset pool were originated under various underwriting or origination programs, whether loans were underwritten as exceptions to the underwriting or originations programs, or whether the loans in the pool have been modified.[813] We believe that investors would benefit from a prospectus summary that summarizes the disclosures in the prospectus regarding this type of information because presenting this information in a summarized format may aid investors' understanding of material characteristics. In that regard, we also believe that the final instruction is less prescriptive than one commenter suggested since it does not require specific disclosure but rather indicates the types of information that may be summarized. We acknowledge that the prospectus summary should be brief and should not contain, and is not required to contain, all of the detailed information in the prospectus and, therefore, issuers should not simply repeat the disclosure found elsewhere in the prospectus in the prospectus summary. We also acknowledge that more fulsome narrative disclosures discussing these summary statistics may provide greater context about these disclosures; therefore, we added as part of the final instruction a requirement to include a cross-reference in the prospectus summary to the location of corresponding disclosure in the body of the prospectus.

The costs associated with this disclosure should be minimal as the issuer should already have this information, or be able to easily generate the information, in light of the more detailed disclosure required by other item requirements in Regulation AB. Furthermore, this is not a new requirement, but rather a clarification of our position on what should be provided in the prospectus summary. Finally, if this disclosure is not appropriate for a particular asset class, then existing Item 1103(a) addresses this concern by indicating that the disclosure is only required where applicable.[814]

C. Modification of Underlying Assets

1. Proposed Rule and Comments on Proposed Rule

In the 2010 ABS Proposing Release, we proposed to replace Item 1108(c)(6) of Regulation AB with a more detailed and specific disclosure requirement in Item 1111.[815] Item 1108(c)(6) 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 exercising such ability, if material, on the potential cash flows from the assets. The proposed requirement in Item 1111 would require a description of the provisions in the transaction agreements governing modification of the assets and disclosure regarding how modifications may affect cash flows from the assets or to the securities. We received only one comment on the proposal, which supported the proposed amendments.[816]

2. Final Rule and Economic Analysis of the Final Rule

We are adopting the final rule, as proposed. We continue to believe that the ability of the servicer to modify any terms, fees, and penalties and the effect of this ability on potential cash flows remains an important factor to investors. We believe that more granular data about this ability will enable investors to better assess the possibility of a potential change in the cash flows, which should, in turn, promote more efficient allocation of capital. To the extent issuers will be providing more detail than they previously provided, issuers' costs to provide the required disclosure will likely increase.

D. Disclosure of Fraud Representations

We also proposed to revise Item 1111(e) to require disclosure of whether a representation was included among the representations and warranties 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. In proposing this requirement, we believed that it was important that any fraud representation be highlighted to investors.

Several commenters were opposed to the proposed requirement.[817] One commenter noted that both its investor and issuer members agreed that the absence of fraud in the origination is an element of several representations and warranties concerning the pool assets, such as the representation and warranty stating that the pool assets were originated in compliance with the requirements of law and applicable underwriting standards, and that the pool assets are legal, valid, and binding payment obligations of the related obligors.[818] This commenter further noted that singling out a fraud representation in the disclosure was unnecessary and duplicative in light of our other proposal that would require issuers to provide disclosure on representations and warranties. Another commenter stated that the proposed requirement did not pass a reasonable Start Printed Page 57255cost-benefit test and, without clarifying why, stated that the disclosure would not benefit investors.[819] This commenter suggested that we not adopt the proposed requirement and instead require a restatement or identification of the specific fraud representation, if any, included in the transaction “rather than including a binary response to whether or not there is a fraud representation.” [820]

After considering the comments we received, we are not adopting the proposed revisions to Item 1111(e). As one commenter noted, the absence of fraud may be an element of several representations and warranties concerning the pool assets and therefore is already adequately disclosed under the current requirements of Item 1111(e).

E. Static Pool Disclosure

1. Disclosure Required

(a) Proposed Rule

In the 2010 ABS Proposing Release, we noted that since the 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 the type or category 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.

To address this problem, we proposed revisions to Item 1105 of Regulation AB [821] to increase the clarity, transparency, and comparability of static pool information. Some of the proposed rules would apply to all issuers, and other proposed rules would apply only to amortizing asset pools and not to revolving asset master trusts. For all issuers, we proposed the following five requirements.[822] First, we proposed to require appropriate introductory and explanatory information to introduce the characteristics. Second, we proposed to require that issuers describe the methodology used in determining or calculating the characteristics and describe any terms or abbreviations used. Third, we proposed to require a description of how the assets in the static pool differ from the pool assets underlying the securities being offered. Fourth, we proposed to require additional disclosure if an issuer does not include static pool information or includes disclosure that is intended to serve as alternative static pool information. Finally, we proposed to require graphical presentation of the static pool information, if doing so would aid in understanding.

(b) Comments on Proposed Rule

Commenters were generally supportive of these proposed rules [823] and mostly requested that the Commission clarify certain aspects.[824] Some commenters were supportive of the proposal to provide narrative disclosure.[825] One commenter stated that the inclusion of explanatory information introducing the characteristics of the static pool would increase the clarity of the required static pool disclosure.[826] Other commenters requested greater clarification about the narrative disclosure requirements. For instance, one commenter believed that it was unclear whether “narrative disclosure” would permit presentation in tabular format.[827] Another commenter expressed concern with the RMBS example provided in the 2010 ABS Proposing Release and noted that one of the aspects we listed—the number of loans that were exceptions to standardized underwriting—is qualitatively different and more granular and detailed than the other aspects listed (i.e., number of assets and types of mortgages).[828]

One commenter, supportive of the proposal to require a description of the methodology used in determining or calculating the characteristics, urged the Commission to require that the methodologies used by issuers be standardized to facilitate comparison of securities within the same asset class.[829] This commenter also emphasized that key defined terms, such as “delinquency” and “default” must be standardized.

Several commenters provided differing views on whether the proposal to require a description of how the assets in the static pool differ from the pool assets underlying the securities being offered was necessary or helpful to investors. One commenter indicated that this disclosure is helpful in understanding “pool construction risk.” [830] Another commenter, however, argued that it did not understand how this requirement adds anything to the proposed narrative disclosure.[831]

With respect to requiring an issuer to explain why it did not provide static pool information or provided alternative information, one commenter interpreted this proposal as capable of being satisfied through summary disclosure stating that either the data are not available or that static pool disclosure is immaterial.[832]

One commenter opposed requiring the graphical presentation of static pool information in addition to the proposed narrative description.[833] This commenter asserted its belief that graphical presentation is not market practice, has “highly questionable utility” and is possibly misleading. This commenter supported, however, graphical presentation of delinquency, loss, and prepayment information for amortizing pools.

(c) Final Rule and Economic Analysis of the Final Rule

After considering the comments provided, we are adopting the requirements as proposed.[834] First, we are amending Item 1105 to require narrative disclosure that provides introductory and explanatory information to introduce the static pool information presented. We continue to believe that a brief snapshot of the static pool information presented will benefit investors by providing them with context in which to evaluate the information, especially for those investors who lack sophisticated Start Printed Page 57256analytical tools.[835] We do not intend for the requirement to cause issuers to repeat the underlying static pool disclosure in the narrative; rather we intend for the requirement to serve as a clear and brief introduction of the static pool disclosure in order to provide context to investors. We do believe, however, that the type of narrative disclosure that we are requiring is best presented in paragraph format, and not in tabular format as one commenter recommended, in order for the narrative description to clearly convey to investors the differences in the assets being securitized in the deal and the assets comprising the static pools.[836]

To aid issuers in understanding what the narrative disclosure would typically include, and as commenters noted, we provided an example in the 2010 ABS Proposing Release, as we have done in other releases, to illustrate the disclosure principle.[837] In our example, for a pool of RMBS, the disclosure would typically include, among other things, the number of loans that were exceptions to the standardized underwriting criteria. As noted above, one commenter expressed concern and noted that the number of loans that were exceptions to the standardized underwriting criteria was qualitatively different and granular than the other two characteristics in the example and raised questions for issuers as how to apply the disclosure standard in a principled way to distinguish among various credit characteristics of the pool.[838] We believe that for RMBS, the number of exceptions to the standardized underwriting criteria is an important credit characteristic for issuers to highlight in the narrative disclosure. Inclusion of a significant number of mortgages that deviate from the underwriting standards could pose a risk to the performance of the RMBS. We believe disclosure of the number of loans that were exceptions to standardized underwriting criteria is likely to be important to highlight for other asset classes as well. Issuers should highlight those characteristics that would be most important for investors to be aware of before analyzing the actual static pool disclosure, which for some asset classes can be extensive.

Second, we are adopting, as proposed, an amendment to require issuers to describe the methodology used in determining or calculating the characteristics and also to describe any terms or abbreviations used.[839] We believe that this requirement will provide clarity and transparency to investors and assist them in determining whether the calculations or terms are comparable across issuers. This will benefit investors because it will facilitate their ability to make better informed investment decisions. One commenter urged the Commission to direct that the methodologies and key terms used by issuers be converged and standardized over time so that investors can compare securities within the same asset class.[840] Although we are not adopting standardized methodologies and terms for static pool disclosure, the proposal we are adopting requires asset-level disclosures for ABS backed by certain asset types.[841] As a result of the new asset-level requirements, the data used to produce the static pool information for these asset classes will be standardized.

Third, we are requiring a description of how the assets in the static pool differ from the pool assets underlying the securities being offered.[842] We continue to believe that this requirement benefits investors by providing them with context in which to evaluate the information without sophisticated data analysis tools and, as one commenter noted, to evaluate pool construction risk. If the pool in the offering is materially different from prior pools, then the issuer should describe the difference so that investors can factor in that difference when examining the static pool information. We agree with one commenter's statement that “[t]he prospectus should highlight the extent to which the current collateral pool was originated with the same or differing underwriting criteria, loan terms and/or risk tolerances than the static pool data.” [843] We also believe that in cases where the assets of the pool being securitized were underwritten through different origination channels (e.g., loans originated directly through an originator's retail channel or through unaffiliated mortgage brokers) compared to prior securitized pools, disclosure of the proportion of assets originated through each channel should be provided. To address commenters' concerns, we are clarifying that we are requiring “a clear and concise description” of the material differences, if any, from the pool being securitized, but not a detailed comparison.[844]

Fourth, as proposed, the final rule states that the static pool information should be presented graphically if doing so would aid in understanding.[845] As with the other requirements discussed above, we believe graphical presentations help investors to more easily evaluate material information, without the use of sophisticated analytical tools. One commenter stated that the graphical presentation has “highly questionable utility” and also may be misleading under many circumstances.[846] We are requiring the issuer to provide a graphical illustration only if it would be helpful; therefore, if an issuer believes that providing graphical presentation of the static pool information would not be useful for understanding the data or misleading, then the issuer would not be required to provide it. However, we generally believe that graphical presentation of information can be beneficial to investors by helping them to quickly spot trends, which may not be evident by looking at the numbers alone.

Finally, in addition to providing investors with a clear and brief introduction of the static pool data, we are also requiring issuers to provide disclosure in cases where an issuer does not include static pool information or includes disclosure that is intended to serve as alternative static pool information.[847] It is not always apparent why one issuer does not provide static pool information or provides alternative disclosure in lieu of such information, when other issuers within the same asset class provide the information. Therefore, we are requiring that issuers explain why they have not included static pool disclosure or why they have provided alternative information. One commenter interpreted this requirement as capable of being satisfied through summary disclosure, such as stating that the data is not available or not material.[848] While we are not requiring that the issuer provide an extensive explanation, the issuer should provide some explanation beyond a conclusory statement that the information is not Start Printed Page 57257available or not material. If the information is not included because it is not material, an issuer should explain why the data is immaterial, such as if the assets differ so significantly from the assets in the pool being offered.

We believe that taken together the static pool disclosure requirements adopted will benefit investors by providing them with more clearly explained and more consistently presented information about static pools, thereby facilitating their understanding of how the performance of the static pools may or may not be indicative of how the current pool may perform. This will help investors make better informed investment decisions and lead to more efficient allocation of capital. The requirements will be costly to issuers to the extent that they require reformatting information such as in graphical format. We expect that these costs will be minimal because issuers can use off-the-shelf software to create the graphs. Issuers will also incur costs for analyzing prior pools as compared to the current offering, but these costs should not be significant since they will have all the necessary information.

2. Amortizing Asset Pools

(a) Proposed Rule

We proposed to add an instruction to Item 1105(a)(3)(ii) of Regulation AB to require the static pool information related to delinquencies, losses, and prepayments be presented in accordance with the existing guidelines outlined in Item 1100(b) [849] for amortizing asset pools. Additionally, we proposed to amend Item 1105(a)(3)(iv) to require graphical presentation of delinquency, losses, and prepayments for amortizing asset pools.

(b) Comments on Proposed Rule

Comments received on the proposed changes for amortizing asset pools were mixed. With respect to requiring that delinquencies, losses, and prepayments be presented in accordance with Item 1100(b), several commenters supported the proposal,[850] and several other commenters opposed.[851] Those commenters opposing the requirement were most concerned about the one-size-fits-all approach to Item 1100(b)(1). They stated, for example, that reporting delinquencies, losses, and prepayments in 30- or 31-day increments through charge-off would be for a longer period of time than required under general principles of materiality.[852] In regard to the graphical presentation requirement, one commenter noted that graphical presentations provide immediate recognition of changes in asset performance.[853] Commenters that opposed the requirement argued that not all graphical presentations are useful or meaningful, especially for asset classes with extensive data.[854]

(c) Final Rule and Economic Analysis of the Final Rule

We are adopting the proposed rules for amortizing asset pools with modification in response to comments. We remain concerned that the inconsistent presentation of delinquencies, losses, and prepayments across issuers within the same asset class has resulted in a lack of clarity and comparability.[855] To address this concern, we are adding an instruction to Item 1105(a)(3)(ii) of Regulation AB to require for amortizing asset pools that the static pool information related to delinquencies, losses, and prepayments be presented in accordance with Item 1100(b) with respect to presenting such information in 30- or 31-day increments. In response to commenters' concerns with requiring such presentation through charge-off, the final instruction requires that delinquencies, losses, and prepayments be presented in 30- or 31-day increments through no less than 120 days.[856] We believe that this revised time period balances commenters' concerns with the cost and burden of having to track and report this information in a more granular manner for a longer period of time while still providing investors with a more comprehensive picture of the delinquencies, losses, and prepayments in a uniform manner across asset classes. We also note that this revised time period is consistent with the new asset-level data requirement for presentation of delinquencies and losses in RMBS.[857] While investors will not receive as granular a presentation as proposed (through charge-off), investors investing in asset classes required to provide asset-level disclosures will be receiving more detailed information about the payment status of each individual asset, such as the paid through date.[858] We recognize that to the extent that issuers will now be required to present delinquencies and losses for a longer period of time than previously provided in the distribution reports, such issuers will incur some costs. We believe, however, the benefits gained from standardized and comparable delinquency and loss disclosure justify the costs issuers may incur to provide the information.

In addition to requiring that delinquencies, losses, and prepayments be presented in accordance with Item 1100(b) through no less than 120 days, we are amending Item 1105(a)(3)(iv) to require the graphical presentation of this information for amortizing asset pools. We acknowledge commenters' concern that the substantial quantitative data associated with some prior securitized pools could make graphical presentation of the data “unintelligible” and that investors may prefer actual data over graphs because they cannot ascertain the data from the graphs and they can take the tabular data and create their own graphs.[859] We believe, however, that static pool data alone, depending on the volume and type of data, can be difficult to analyze without the use of sophisticated analytical tools. Requiring graphical presentation of this information will benefit investors by enabling them to analyze the information without such tools.[860] In addition, graphical presentation of the information highlights possible data segments that warrant further analysis and may therefore facilitate a more Start Printed Page 57258tailored and efficient in-depth analysis. We also note that the inherent function of static pool information (i.e., analyzing trends within a sponsor's program by comparing originations at similar points in the assets' lives) is well-suited for graphical presentation as it allows for better detection of patterns that may not necessarily be evident from overall portfolio numbers.

3. Filing Static Pool Data

(a) Proposed Rule

We proposed to permit issuers to file their static pool information required under Item 1105 of Regulation AB on EDGAR in Portable Document Format (“PDF”) as an official filing in lieu of, as currently required, including the information directly in the prospectus (or incorporating by reference) in ASCII or HTML format.[861]

As is the case today, however, issuers can incorporate static pool information filed on a Form 8-K or as an exhibit to a Form 8-K by reference into a prospectus.[862] We proposed that all static pool disclosure, if filed on a Form 8-K, be filed under a new item number so that investors could easily locate the information that is incorporated by reference into the prospectus. We also proposed to create a new exhibit number to Item 601 of Regulation S-K for static pool information filed as an exhibit to a Form 8-K or prospectus.

(b) Comments on Proposed Rule

Commenters were generally opposed to our PDF proposal, favoring data formats other than PDF for static pool information. One commenter stated that PDF makes detailed analysis “difficult” and “time-consuming.” [863] Another commenter preferred a format that is readily importable to Excel or a comparable database program.[864] One commenter stated its belief that EDGAR in its current form will not facilitate the usability of static pool information, such as allowing investors to download the data in a format that investors can use with their own analytical tools and applications.[865] With respect to our proposal to house all static pool information filed on Form 8-K under a new item number, commenters were supportive of the proposal.[866]

(c) Final Rule and the Economic Analysis of the Final Rule

Given commenters' concerns regarding the usability of static pool information in PDF, we are not adopting our proposal to permit issuers to file their static pool information in PDF as an official filing. This decision benefits investors because they will continue to receive static pool information in a more usable format compared to PDF. Issuers, however, will be precluded from taking advantage of any cost savings that could be achieved by filing the static pool information in PDF.

We are adopting the proposed rules to amend Form 8-K and Item 601 of Regulation S-K. We believe that these amendments will benefit investors in searching and locating the static pool information filed on EDGAR. Therefore, if the issuer wishes to incorporate static pool information by reference to a Form 8-K filing rather than to include it in the prospectus, then an issuer must file it under new Item 6.06 of Form 8-K. If the issuer files the static pool information as an exhibit to a Form 8-K to be incorporated into a prospectus, the issuer must file the static pool information as Exhibit 106. Under the final rule, issuers will be required to include a statement in the prospectus that the static pool information incorporated by reference is deemed to be a part of the prospectus and also identify the Form 8-K on which the static pool information was filed by including the CIK number, file number, exhibit number (if applicable) and the date on which the static pool information was filed. Investors will benefit by being able to more easily search and locate static pool information incorporated by reference into the prospectus, and the only cost issuers are likely to incur is to update their information systems to reflect the new Form 8-K item requirement and exhibit number, which we believe should be minimal.

We also proposed that the information should be filed with the Form 8-K on the same date that the preliminary prospectus is required to be filed.[867] We are adopting that proposal with one clarification. Consistent with current practices under existing requirements, issuers may incorporate by reference the same static pool information into the prospectus of one or more offerings of the same asset class as long as the information meets the requirements of Item 1105 of Regulation AB,[868] which states that the most recent periodic increment for the static pool data must be of a date no later than 135 days after the first use of the prospectus.[869] The amended requirement clarifies that issuers are required to provide information by the date that the prospectus is required to be filed rather than on the same date the prospectus is filed (i.e., permitting incorporation of a previously-filed Form 8-K), and thereby allows issuers to continue to have the flexibility to incorporate the static pool information by reference into prospectuses of multiple deals.

F. 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 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 Start Printed Page 57259are rated investment grade by an NRSRO.[870] 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 credit enhancement provider has an investment-grade rating.[871] We proposed to revise Item 1112 and Item 1114 to eliminate the exceptions based on investment-grade ratings.

We received only one comment on this proposal, which supported the proposal.[872] We are adopting the amendments to Items 1112 and 1114 as proposed. We continue to believe that these changes are consistent with the requirements of Section 939A of the Dodd-Frank Act, which requires us to reduce regulatory reliance on credit ratings, and our revisions to eliminate ratings from the shelf eligibility criteria for asset-backed issuers. We believe that this will allow investors to directly consider the financial condition of significant obligors and credit enhancement providers rather than rely solely on the implication of these parties' credit ratings. Because the information now required to be disclosed is likely available to the issuer, the revisions to Item 1112 and Item 1114 will not impose substantial costs or burdens on an asset-backed issuer.

V. Securities Act Registration

A. Background and Economic Discussion

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 staff action.[873] Asset-backed securities are often registered on a Form S-3 registration statement and later offered “off the shelf” if, in addition to meeting other specified criteria,[874] the securities are rated investment grade by an NRSRO. We continue to recognize that ABS issuers have expressed the desire to use shelf registration to access the capital markets quickly. ABS issuers' interest in shelf registration is also evidenced by the lack of ABS issuers using Form S-1.[875]

In the 2010 ABS Proposing Release, we proposed, among other things, new registration procedures, registration forms and shelf eligibility requirements for asset-backed security issuers. The 2010 ABS Proposals sought to address a number of concerns about the ABS offering process and ABS disclosures that were subsequently addressed in the Dodd-Frank Act, while others were not addressed by the Dodd-Frank Act. Two of the proposed shelf eligibility requirements—risk retention [876] and continued Exchange Act reporting [877] —were addressed by provisions of the Dodd-Frank Act. In July 2011, we re-proposed some of the 2010 ABS Proposals in light of the changes made by the Dodd-Frank Act and comments we received.

The 2011 ABS Re-Proposals for ABS shelf registration eligibility were also part of several rule revisions we are considering in connection with Section 939A of the Dodd-Frank Act. Section 939A of the Dodd-Frank Act requires Start Printed Page 57260that we review any regulation issued by us that requires the use of an assessment of the credit-worthiness of a security or money market instrument and any references to or requirements in such regulations regarding credit ratings. Once we have completed that review, the statute provides that we modify any regulations identified in our review to remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of credit-worthiness as we determine to be appropriate. In that connection, we take into account the context and purposes of the affected rules.

B. New Registration Procedures and Forms for ABS

1. New Shelf Registration Procedures

Under existing rules, as with current offerings of other types of securities registered on Form S-3 and Form F-3, the shelf registration statement for an offering of ABS will often be effective weeks or months before a takedown is contemplated. The prospectus in an effective registration statement must describe, among other things, the type or category of assets to be securitized, the possible structural features of the transaction, and identification of the types or categories of securities that may be offered.[878] Pursuant to existing Securities Act Rules 409 and 430B,[879] 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.[880] 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 typically only included in a prospectus or prospectus supplement that is required to be filed with the Commission by the second business day after first use.[881] This information includes information about the structure of the cash flows, 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 related to the identification of specific assets for the pool. 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, the new rules we are adopting maintain the fundamental framework of shelf registration for delayed ABS offerings, but provide new important protections for investors who choose to commit capital to the ABS transactions.

We also recognize that it is important for investor protection that, in addition to receiving adequate information to make an investment decision, ABS investors also have 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 requires a new investment analysis. Information about the underlying assets is an important piece of information for analyzing the ability of those 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 investors' ability to conduct adequate analysis of the securities.[882] We believe that a process for ABS offerings where investors and underwriters have additional time to conduct their review of offerings will result in improved investor protections and promote a more efficient asset-backed market, even if issuers may not always be able to complete their offering as swiftly as they could in the past. Therefore, we are adopting rules designed to increase the amount of time that investors have to review information about a particular shelf takedown, which we believe will allow for better analysis of ABS in lieu of undue reliance on security ratings.

a) Rule 424(h) and Rule 430D

(1) Proposed Rule

In the 2010 ABS Proposing Release, we proposed to require that an ABS issuer using a shelf registration statement on proposed Form SF-3 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 would allow investors additional time to analyze the specific structure, assets and contractual rights of each transaction. We proposed this requirement in response to investors' concerns that ABS issuers were not providing them enough time to review the transaction-specific information, which hindered their ability to conduct adequate analysis of the securities. We noted in the 2011 ABS Re-Proposal that the five business-day waiting period was also intended to reduce undue reliance on security ratings, thus part of our efforts to remove the prior investment-grade ratings requirement.[883] We believed that requiring such information to be filed at least five business days before the first sale of securities in the offering balances 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. In the 2010 ABS Proposing Release, we explained that we considered whether a longer minimum time period than five business days would be more appropriate.[884] We had proposed five business days because we believed that the companion proposals requiring the filing of standardized and tagged asset-level information and a computer program could reduce the amount of time required by investors to Start Printed Page 57261consider transaction specific information. The proposal also provided that a material change from the information provided in the preliminary prospectus, other than offering price, would require a new preliminary prospectus to be filed and therefore, a new five business-day waiting period.

(2) Comments on Proposed Rule

Comments received on this proposal were mixed. Several commenters supported the proposal that a preliminary prospectus be filed five business days in advance of the first sale.[885] Two commenters generally supported the proposed five business-day waiting period and also provided additional feedback on other time periods.[886] One of the commenters recommended that investors should have not less than three days to evaluate an ABS offering,[887] while the other stated that two business days for repeat issuers may be sufficient.[888]

Other commenters opposed the five business-day waiting period [889] and suggested shorter alternatives such as two business days prior to the first sale,[890] one business day,[891] or no waiting period.[892] One commenter suggested that the waiting period vary by asset class.[893] Another commenter recommended a one business-day waiting period for a category of “well-known seasoned asset-backed sponsors” that meet certain issuer classification (e.g., seasoned depositors and sponsors with established securitization programs that have issued more than a threshold aggregate amount and/or over a specified period of time), asset class classification (e.g., master trusts where the asset pool does not change materially from transaction to transaction and a specified dollar amount of transactions have been issued and supported by the pool), or transaction structure (e.g., transactions by the same depositor or sponsor, where issuances involve waterfall structures that do not change materially from transaction to transaction).[894] Along the same lines, another commenter suggested that certain types of ABS offerings do not warrant any mandatory waiting periods because of their frequency and nature (e.g., where a sponsor, its parent or a subsidiary has completed at least one public offering within the preceding two years of securities in the same asset class and where the cash flows and structure are substantially similar to a prior public offering).[895] Several commenters argued that a five business-day waiting period is more consistent with the time delays associated with an equity initial public offering (“IPO”), and noted that the proposed rule could lead to the “perverse result” that a well-known seasoned issuer can issue relatively risky forms of capital such as equity or unsecured debt without any required waiting period, but secured debt, generally regarded as less risky, would have a waiting period.[896]

While we did not specifically request further comment on this topic in the 2011 ABS Re-Proposing Release, several commenters offered comment on the proposal. For the most part, commenters reiterated their suggestions from their comment letters on the 2010 ABS Proposing Release. Several commenters agreed that a preliminary prospectus should be provided to investors in advance.[897] Some commenters noted concern if the proposed time period were to be shortened.[898] One commenter reiterated its suggestion for different filing requirements based on asset class.[899] Another commenter suggested a one business-day waiting period for “widely followed, programmatic ABS issuers” and a two business-day waiting period for all others.[900]

As noted above, the proposal provided that a material change from the information provided in a preliminary prospectus, other than offering price, would require a new preliminary prospectus and therefore, a new five business-day waiting period. Some investor commenters supported the proposal to require a new waiting period for any material changes.[901] However, several commenters recommended changes to this aspect of the proposal.

Some commenters, believing the five business-day waiting period after material changes was too long, suggested shorter periods.[902] Commenters recommending shorter periods generally argued that in most cases a material change can be easily identified and reviewed and will not Start Printed Page 57262take investors the same amount of time to consider as compared to the first review of the entire preliminary prospectus.[903] Some investor commenters suggested that the waiting period should be shortened because investors will have the opportunity to become familiar with the transaction documents during the initial marketing period.[904] One commenter stated that a five business-day waiting period unnecessarily exposes well-established sponsors to market and execution risk without providing a meaningful benefit to investors and recommended both a shorter waiting period and a requirement that material changes be disclosed in a supplement to the preliminary prospectus to facilitate easy identification of such changes.[905]

Some commenters suggested that no additional waiting period after material changes may be necessary.[906] One investor commenter recommended a new filing and a new five business-day period only if a change to the transaction occurs that a reasonable investor would consider material to an investment decision, such as: Changes to more than 1% of the collateral pool, including changes at the property, tenant or borrower level; any changes to the priority of payment (i.e., waterfall); any changes of any service provider or party to the transaction; or any changes to the terms in the documents related to the transaction, including changes to any representations and warranties, covenants or indemnities originally contained in such documents.[907]

Commenters also requested that we provide additional clarity regarding the material changes to the preliminary prospectus that would trigger a new five business-day waiting period.[908] One of those commenters stated that changes in pool composition as a result of ordinary events, such as payments of interest or principal, should not require additional disclosure or a renewed waiting period unless such payments reflect another material change.[909] Several commenters recommended that the requirement should not focus so much on the materiality of the change in terms of its economic impact or importance, but rather on the likely extent of the effect of such a change on the disclosure itself and the need for more time to review.[910]

We also received comments on our proposal to permit omission of pricing information in the required preliminary prospectus. One commenter recommended that we define what is contemplated by the phrase “information dependent on pricing” and whether this would include only quantitative pricing terms, or whether it could also include other additional information that is typically determined at pricing (e.g., selection of a swap counterparty, weighted average life calculations, or, in the case of credit card master trusts, transaction size and minimum principal receivables balance requirements).[911] Along the same lines, several commenters suggested an accommodation for transactions involving derivative contracts.[912] Another commenter suggested that the preliminary prospectus should have a section that specifically discusses any aspect of the transaction that is “to be determined” at the time of the filing.[913]

We did not receive comments on our proposed conforming revisions to the undertakings that are required by Item 512 of Regulation S-K [914] in connection with a shelf registration statement for ABS. We also did not receive comments on our proposed addition to Item 512 to require an issuer to undertake to file the information required to be contained in a preliminary prospectus.

(3) Final Rule and Economic Analysis of the Final Rule

(a) Rule 424(h) Filing

Under the final rule, 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 new Rule 430D, as discussed below, a form of prospectus meeting certain requirements must be filed with the Commission in accordance with the new Rule 424(h) preliminary prospectus at least three business days prior to the first sale of securities in the offering.[915] After considering the various comments received on the initial five-business day waiting period, we have shortened the waiting period as proposed from five business days to three business days. We believe that three business days balances the benefit to investors of providing additional time to conduct an analysis of the offering—a longstanding concern of ABS investors [916] —and the concerns of issuers expressed in the comment letters. While the final rule imposes a minimum three-day waiting period, issuers may provide additional time to potential investors to consider the offering.

We recognize that the final rule will require issuers to provide information to investors earlier in the process than was often provided for ABS issued before the crisis. During the required waiting period, issuers may be exposed to the risk of changing market conditions because they may have to hold the underlying assets on their balance sheets (inventory risk), and the risk may have larger impact on small sponsors with smaller balance sheets. To assess the magnitude of this risk and the costs that it may impose on issuers, we Start Printed Page 57263analyzed time series changes in the price of the Bank of America Merrill Lynch U.S. Fixed Rate Asset Backed Securities Index (R0A0).[917] Average index returns for the pre-crisis, crisis, and post-crisis periods are presented in Table 1. To assess the cost of the three business-day waiting period that we are adopting against the cost of reasonable alternatives, we calculated index returns over one, three, five and ten days. Outside of the volatile 2008-2009 crisis period, the average change in ABS market conditions as measured by index returns is below 1.5 basis points (bps) for all horizons (1, 3, 5, and 10 days) with the standard deviation below 15bp for three-day returns. These results suggest that the economic exposure of issuers to market conditions (opportunity cost) is relatively small for all waiting period lengths in the range from 1 day to 10 days, but increases with the horizon. Further, reducing the waiting period from 5 days to 3 days lowers the riskiness of returns by more than 15% (the standard deviation drops from 17bps to 14bps). To put these numbers in perspective, for a $100 million ABS issuance that is similar to the above-mentioned R0A0 ABS index, a three business-day waiting period during the analyzed period would result in an expected change of less than $10,000 and a 10% likelihood of a more than $230,000 increase or decrease in the value of the issuance. Additionally, exposure to several sources of risk, for example, the three-day interest rate risk or credit spread risk, can be hedged with forward contracts, further reducing potential exposure to losses due to a three-day delay in offering.[918]

Table 1—Index Returns Are Calculated Using the Price of Bank of America Merrill Lynch U.S. Fixed Rate Asset Backed Securities Index for the 5/6/2004 to 12/31/2013 Period. Three, Five, and Ten Day Returns Are Overlapping.

Time periodNumber of daily observations1-day3-day5-day10-day
AverageStandard deviationAverageStandard deviationAverageStandard deviationAverageStandard deviation
5/6/2004-12/31/20079540.00000.0011−0.00010.0017−0.00020.0020−0.00030.0025
1/1/2008-12/31/2009524−0.00010.0021−0.00030.0037−0.00050.0050−0.00090.0077
1/1/2010-12/31/201310460.00000.00060.00000.00110.00000.00140.00000.0020
2004-2013 excl. 2008-200920000.00000.00090.00000.0014−0.00010.0017−0.00010.0022

As noted above, comments received on the waiting period were mixed on the appropriate length of time for the initial waiting period before first sale with mostly investors supporting [919] an initial waiting period of five business days and issuers mostly opposing [920] such a requirement. Commenters opposing five business days provided various suggested alternatives to the proposal—ranging from two business days prior to first sale to no waiting period at all.[921] Some of these commenters recommended that the length of the waiting period be determined based on asset class or whether the issuer is a repeat issuer.[922] Because we believe that, regardless of the asset class or whether the issuer is well-known, investors should have more time to conduct their analysis before making an investment decision than was provided previously, we are not adopting such distinctions based on asset class or type of issuer. We also believe that given the complexity of ABS transactions that two-business days, and especially one-business day, would not provide investors with enough time to conduct their due diligence.[923] As a result, we believe that a minimum of three business days strikes the appropriate balance of providing investors with more time to analyze the information related to the transaction while also minimizing issuers' exposure to changing market conditions and giving them flexibility in timing of ABS issuance.

Finally, while we have observed that post-crisis ABS issuers have provided investors with additional time, we are concerned that market practice could change in a heated market with many issuers possibly reverting to the practice of providing investors with insufficient time and causing investors to place undue reliance on ratings. Because of this concern and our belief that investors should conduct their own due diligence rather than unduly rely on ratings, we are mandating a waiting period of at least three-business days as part of our rules.[924] We are persuaded by commenters that neither a new preliminary prospectus nor a restart of the waiting period is necessary for material changes because, in most cases, a material change can be easily identified and reviewed and therefore may not take an investor as long to review compared to the first review of the preliminary prospectus.[925] The final rule will require that the issuer disclose any material changes in a supplement to the preliminary prospectus that must be filed with the Commission at least 48 hours before the date and time of the first sale.[926] The supplement must Start Printed Page 57264provide a description of how the information in the initial preliminary prospectus has changed so that the changes are apparent to investors.

This revision will help to address cost and other concerns expressed by issuers and others about the proposed amount of waiting time after a material change and the concerns about filing an entirely new preliminary prospectus. It should reduce some commenters' concerns regarding exposure to market risk and unnecessary delay. We are concerned, however, that extensive material changes, even after an initial waiting period for the preliminary prospectus, could be difficult for investors to review in this shortened timeframe; therefore, we are requiring issuers to clearly delineate in a prospectus supplement what material information has changed and how the information has changed from the initial preliminary prospectus. We expect that the asset-level disclosure requirements that we are adopting, which will provide investors with standardized machine-readable data about the pool assets, will facilitate investors' ability to update their investment analysis quickly. As a result, we do not believe that investors will need as much time to review the supplement as they will need for their initial review of the preliminary prospectus.

(b) New Rule 430D

Prior to the rules we are adopting, the framework for ABS shelf offerings, along with shelf offerings for other securities, was 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 and include instead in a prospectus supplement, Exchange Act reports incorporated by reference, or a post-effective amendment, and addresses both the treatment of prospectuses filed pursuant to Rule 424(b) and effective date triggers for securities sold off the shelf registration statement.[927] As discussed above, we are adopting new Rule 430D to provide the framework for shelf offerings of asset-backed securities pursuant to revised Rule 415(a)(1)(vii) or (xii); therefore, ABS issuers eligible to conduct shelf offerings are no longer eligible to use Rule 430B. By removing ABS shelf offerings from existing Rule 430B and creating new Rule 430D, we are providing a shelf offering framework that is appropriately tailored to ABS shelf offerings and that incorporates the new preliminary prospectus requirement.[928]

New Rule 430D requires that, with respect to each offering, all the information previously omitted from the prospectus filed as part of an effective registration statement must be filed at least three business days in advance of the first sale of securities in the offering in accordance with new Rule 424(h), except for the omission of information with respect to the offering price, underwriting syndicate (including any material relationships between the registrant and underwriters not named therein), underwriting discounts or commissions, discounts or commissions to dealers, amount of proceeds or other matters dependent upon the offering price to the extent such information is unknown or not reasonably available to the issuer pursuant to Rule 409. The information required to be filed pursuant to Rule 424(h) includes, among other things, information about the specific asset pool that is backing the securities in the takedown and the structure of the transaction. As summarized above, commenters requested that we clarify what we mean by information with respect to the offering price. We note that new Rule 430D largely conforms to existing Rule 430B but is tailored to ABS shelf offerings; therefore, the type of information permitted to be omitted from a preliminary prospectus is the same as the information that Rule 430B permitted to be omitted from the base prospectus in a shelf offering prior to this rulemaking.

As we stated in the 2010 ABS Proposing Release, so long as a form of prospectus has been filed in accordance with Rule 430D,[929] asset-backed issuers can continue to utilize a free writing prospectus or ABS informational and computational materials in accordance with existing rules.[930] Because we believe that investors should have access to a comprehensive prospectus that contains 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 new Rule 424(h). As proposed, the Rule 424(h) preliminary prospectus filing will be deemed part of the registration statement on the earlier of the date such form of prospectus is filed with the Commission or, if used earlier, the date of first use.[931] A final prospectus for ABS shelf offerings should continue to be filed pursuant to Rule 424(b). Consistent with Rule 430B for shelf offerings of corporate issuers, under new Rule 430D, the filing of the final prospectus under Rule 424(b) will trigger a new effective date for the registration statement relating to the securities to which such form of prospectus relates for purposes of liability.

To reflect the requirements under new Rule 424(h) and new Rule 430D, we are also adopting, as proposed, conforming revisions to the undertakings that are required by Item 512 of Regulation S-K [932] in connection with a shelf registration statement. For the most part, ABS issuers will continue to provide the same undertakings that have been required of ABS issuers conducting delayed shelf offerings. In light of adopting the new Rule 424(h) preliminary prospectus, we are adopting conforming revisions to the undertakings relating to the determination of liability under the Securities Act as to any purchaser in the offering. In particular, the issuer must undertake that information that was omitted from an effective registration statement and then later included in a Rule 424(h) preliminary prospectus shall be deemed part of and included in the registration statement on the earlier of the date the Rule 424(h) preliminary prospectus was filed with the Commission, or if used earlier, the date it was first used after effectiveness. Also, in light of the new Rule 424(h) preliminary prospectus, under our revisions to Item 512 of Regulation S-K, an issuer is required to undertake to file the information required to be contained in a Rule 424(h) filing with respect to any offering of securities.

2. Forms SF-1 and SF-3

(a) Proposed Rule

In order to delineate between ABS filers and corporate filers and, more importantly, to tailor requirements for ABS offerings, we proposed to add new Start Printed Page 57265registration forms that would be used for any sales of a security that is an asset-backed security, as defined in Item 1101 of Regulation AB.[933] New forms named Form SF-1 and Form SF-3 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 proposals in the 2010 ABS Proposing Release and the 2011 ABS Re-Proposal. Under the proposal, ABS offerings that qualify for shelf registration would be registered on proposed Form SF-3, and all other ABS offerings would be registered on Form SF-1.[934]

(b) Comments on Proposed Rule

Several commenters specifically supported adopting new Forms SF-1 and SF-3 and none opposed.[935]

(c) Final Rule and Economic Analysis of the Final Rule

We are adopting new Forms SF-1 and SF-3 for ABS offerings, which are largely based on existing Forms S-1 and S-3. ABS offerings that qualify for shelf registration will be registered on Form SF-3, and all other ABS offerings will be registered on Form SF-1. These new registration forms are tailored to ABS offerings and incorporate the offering and disclosure changes that we are adopting. The new forms will help in providing organizational clarity to our registration forms and their requirements.[936] In addition to providing organizational clarity to our forms, the new forms will facilitate easy identification of registered ABS offerings. We acknowledge, however, that ABS issuers may incur some costs in revising their information systems to reflect the new forms, but we believe that such one-time costs will be justified by the benefits of tailoring the registration system for ABS offerings.[937]

3. Shelf Eligibility for ABS Offerings

In the 2010 ABS Proposing Release, we proposed revisions to both the registrant and the transaction shelf eligibility requirements for ABS issuers.[938] In particular, ABS issuers would no longer establish shelf eligibility through an investment-grade credit rating. The proposals were part of a 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.[939] In place of credit ratings, we had proposed to establish four shelf eligibility criteria that would apply to mortgage-related securities and other asset-backed securities alike.[940] Similar to the existing requirement that the securities must be investment grade, the 2010 ABS Proposal for registrant and transaction requirements were designed to provide that asset-backed securities that are eligible for delayed shelf registrations are shelf appropriate. As noted above, the 2011 ABS Re-Proposal for registrant and transaction requirements for shelf did not contain a requirement for risk retention or a requirement to include an undertaking to provide Exchange Act reports in light of the changes mandated by the Dodd-Frank Act.[941]

We believe the new transaction and registrant shelf eligibility requirements being adopted will continue to allow ABS issuers to access the market quickly by conducting delayed shelf offerings (rather than registering each offering on Form SF-1), while imposing conditions that we think are appropriate in light of the compressed timing and lack of staff review inherent in the shelf offering process. These new shelf eligibility conditions should encourage ABS issuers to design and prepare ABS offerings with greater oversight and care and, along with providing investors stronger enforcement mechanisms in the transaction agreements, should incentivize issuers to provide investors with accurate and complete information at the time of the offering. We believe that such transactions are appropriate for public offerings off a shelf without prior staff review.

(a) Shelf Eligibility—Transaction Requirements

The new transaction requirements for shelf offerings include:

  • A certification filed at the time of each offering from a shelf registration statement, or takedown, by the chief executive officer of the depositor concerning the disclosure contained in the prospectus and the structure of the securitization;
  • A provision in the underlying transaction agreements requiring review of the assets for compliance with the representations and warranties following a specific level of defaults and security holder action;
  • A provision in the underlying transaction agreements requiring repurchase request dispute resolution; and
  • A provision in the underlying transaction agreements to include in ongoing distribution reports on Form 10-D a request by an investor to communicate with other investors.

In both the 2010 ABS Proposing Release and the 2011 ABS Re-Proposing Release, we did not propose to change the other current ABS shelf offering transaction requirements related to the amount of delinquent assets in the asset pool and the residual values of leases.[942] Therefore, those transaction requirements remain unchanged and have been moved to new Form SF-3.

(1) Certification

(a) Proposed Rule

As part of the 2010 ABS Proposing Release, we proposed to require a certification by the depositor's chief executive officer as a criterion for shelf eligibility.[943] After considering the Start Printed Page 57266comments received on the proposed certification in the 2010 ABS Proposing Release, we re-proposed the requirement in the 2011 ABS Re-Proposing Release. The re-proposed requirement would require the CEO or the executive officer in charge of securitization for the depositor to certify that:

  • The executive officer has reviewed the prospectus and is familiar with the structure of the securitization, including without limitation the characteristics of the securitized assets underlying the offering, the terms of any internal credit enhancements, and the material terms of all contracts and other arrangements entered into to effect the securitization;
  • Based on the executive officer's knowledge, the prospectus does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading;
  • Based on the executive officer's knowledge, the prospectus and other information included in the registration statement of which it is a part, fairly present in all material respects the characteristics of the securitized assets underlying the offering described therein and the risks of ownership of the asset-backed securities described therein, including all credit enhancements and all risk factors relating to the securitized assets underlying the offering that would affect the cash flows sufficient to service payments on the asset-backed securities as described in the prospectus; and
  • Based on the executive officer's knowledge, taking into account the characteristics of the securitized assets underlying the offering, the structure of the securitization, including internal credit enhancements, and any other material features of the transaction, in each instance, as described in the prospectus, the securitization is designed to produce, but is not guaranteed by the certification to produce, cash flows at times and in amounts sufficient to service expected payments on the asset-backed securities offered and sold pursuant to the registration statement.

In the 2011 ABS Re-Proposal, we stated, 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, which is intended to result in shelf-eligible ABS being of a higher quality than ABS structured without such oversight.[944]

(b) Comments on Proposed Rule

Comments on the certification requirement in the 2010 ABS Proposing Release were mixed. Some commenters supported our proposed certification by noting, among other things, that the certification would create accountability at the highest levels of an issuer's organization and more careful issuer review of the securitization.[945] Other commenters generally opposed the proposed certification in the 2010 ABS Proposing Release for various reasons, including that the certification would constitute a guarantee or would cause undue reliance on the certification.[946]

In response to comments on the proposed certification, in the 2011 ABS Re-Proposing Release, we re-proposed the certification taking into account commenters' concerns and recommendations. Comments received on the re-proposed certification requirement were mixed. Several commenters generally supported the re-proposed certification for similar reasons as articulated in comments on the 2010 proposed certification.[947] For example, one commenter agreed with our view that the certification may result in a more careful review of the disclosure and transaction by the issuer, and ultimately in higher-quality ABS eligible for shelf.[948] Other commenters generally opposed the re-proposed certification shelf requirement.[949] Although the investors of a trade association applauded the intention behind the proposed certification requirement and concurred with us that executive oversight of a securitization transaction is important, they also expressed concern about the certification imposing a barrier to new ABS issuance.[950] Some of these commenters contended that the proposed certification would not provide any additional benefits by noting the existing regulatory framework for accountability and their trust in the market's determination of the issuer's soundness.[951]

Commenters provided differing views on the scope of the certification. Some commenters believed the certification should encompass both the structure of the transaction and the prospectus disclosure, as proposed.[952] One commenter, supportive of the re-proposed certification, emphasized that the quality of an ABS offering is fundamentally a function of whether the assets and structure are capable of producing sufficient cash flows to service payments.[953] On the other hand, several commenters believed that the certification should focus only on the disclosure in the prospectus and not on the performance of the assets for various reasons, including the role of the executive officers and their limited credit analysis expertise.[954]

Many commenters also offered alternative language or specific changes Start Printed Page 57267to the text of the certification to address their concerns. The specific changes included: Using defined terms, adding materiality to certain parts of the certification, replacing the term “fairly presented,” and permitting the certifier to take into consideration external credit enhancement. We considered these specific changes and made revisions to the certification, which are reflected in the final version of the certification that we are adopting. Below we discuss these recommendations and the revisions made to each paragraph of the certification in order to highlight how we have addressed commenters' concerns.

(c) Final Rule and Economic Analysis of the Shelf Certification Requirement

After taking into consideration the comments we received and alternatives to the re-proposed certification, we are adopting as one of the transaction requirements for shelf eligibility that a certification about the disclosures contained in the prospectus and the structure of the securitization be provided by the chief executive officer of the depositor at the time of each takedown. We believe, as discussed more fully below, that requiring the chief executive officer to sign a certification at the time of each takedown will help to ensure that he or she is actively involved in the oversight of the transaction when the actual structuring occurs. We have made significant changes to the language of the certification to address commenters' concerns, which are described below.

The financial crisis revealed several failures of the ABS market. Some issuers of asset-backed securities were creating securitization transactions without considering whether the assets or the structuring of cash flows could support the scheduled distributions due to investors.[955] In addition, it has been difficult to hold senior officers of ABS issuers accountable for the failure to provide accurate information.

At the time of filing a shelf registration statement, the chief executive officer of the depositor, as well as the depositor's other principal officers, are required to sign the registration statement and are liable under Securities Act Section 11 for material misstatements or omissions in the registration statement, subject to a due diligence defense. As a result, signers of a registration statement are expected to satisfy themselves about the accuracy of disclosure at the time of effectiveness. The disclosure at the time of effectiveness of the shelf registration statement does not typically include transaction specific information because the shelf registration process permits a separation between the time of effectiveness and the time securities are offered in a takedown. Shelf takedowns sometimes occur long after the effectiveness of the registration statement, and the signers of a registration statement are not required to sign a prospectus supplement for a takedown. Thus, the process that an officer signing the registration statement would undertake at the time of shelf effectiveness might not necessarily be followed at the time of a takedown. At the time of a takedown, some of these officers may not have carefully reviewed the prospectus disclosures for the accuracy of the disclosures of the pool assets, cash flows, and other transaction features. We believe that investors' willingness to participate in ABS offerings may have suffered, in part, because of a belief by investors that sufficient attention may not have been devoted to the preparation of the disclosures in prospectuses, especially in asset classes characterized by the largest losses and due diligence failures.

Prior to today, a certification by the chief executive officer of the depositor has not been a requirement at the time of registered offerings of ABS. As part of the Sarbanes-Oxley Act (“SOX”) enacted in 2002, CEOs of operating companies are required to certify to the accuracy of the financial statements of their companies.[956] Those SOX certifications are filed with their periodic reports and then incorporated by reference into their shelf registration statements. The same does not apply to ABS. The SOX certifications that are provided by ABS issuers are limited to the disclosures regarding periodic distributions and servicing of the underlying assets since ABS issuers do not provide financial statements. Further, the information in periodic reports relates to an individual ABS transaction, and therefore in most cases, periodic reports of one ABS offering would be unrelated to future offerings of ABS off the same shelf. Thus, the periodic reports of an ABS issuer are not typically incorporated into the shelf registration statement.

We believe, therefore, that because of the market failures described above and where the depositor is a limited purpose entity created by the sponsor for a particular securitization program, it is appropriate to condition shelf eligibility on a certification requirement that should result in a review of the disclosure at the time of a takedown similar to what would occur if the offering were being conducted at the time of effectiveness of the initial registration statement. As noted above, the shelf requirements and practices under the existing regulatory structure were not sufficient to address the failures in the market to provide accurate and full information to investors. An ABS offering most resembles an IPO,[957] which under our rules would not be eligible for shelf registration. The principal executive officer signs the registration statement for an IPO, but no similar process is involved at the time of an offering of ABS off a shelf registration statement. Corporate issuers that are eligible for shelf registration file periodic reports that are certified by their principal executive and financial officers and, for Section 11 purposes, the filing of the annual report on Form 10-K is considered an amendment to a shelf registration statement with a new effective date. We believe that requiring the certification with each takedown will put ABS issuers on a similar footing in that this requirement will provide an incentive for all CEOs to participate more extensively in the oversight of the transaction at the time of takedown. We acknowledge that the certification shelf transaction requirement will impose additional costs on ABS issuers, as discussed more fully below.

The depositor's chief executive officer will need to certify to the characteristics of the asset pool, the payment and rights allocations, the distribution priorities and other structural features of the transaction. We note that because the chief executive officer could rely, in part, on the review that is already required in order for an issuer to comply with Securities Act Rule 193, much of the additional costs will relate to reviewing the securitization structure to have a reasonable basis to conclude that the expected cash flows are sufficient to service payments or distributions in accordance with their terms.[958] We also Start Printed Page 57268note that the certification requirement does not dictate that the chief executive officer follow any particular procedures in order to make the certification. By allowing the issuers to determine what procedures are necessary to meet the obligations of the certification, we have attempted to mitigate the costs associated with compliance. The new certification, however, is intended to increase oversight by the chief executive officer, which will likely require that issuers create or strengthen internal controls and procedures to enable the chief executive officer to meet the certification obligation under the new requirement. To the extent that issuers already regularly monitor and evaluate their policies and procedures, their incremental costs will be lower than those issuers with less robust controls and procedures. Because the size and scope of these internal systems is likely to vary among issuers, it is difficult for us to provide an accurate cost estimate.[959]

The final rules may also affect competition in the asset-backed securities market. For example, the requirement that the chief executive officer provide a certification concerning the disclosures contained in the prospectus and the structure of the securitization is based on the intent that the certification will strengthen oversight over the transaction. Prior to today, a certification by the chief executive officer has not been a requirement of public offerings of ABS. Just as every issuer in an IPO must go through a process to satisfy itself with the disclosure in a prospectus, ABS issuers must institute controls in order to provide the certification. The burden of the certification requirements will likely fall disproportionately on smaller-sized sponsors to the extent that there are direct fixed (i.e., non-scalable) costs related to administrative and legal expenses. This could ultimately result in smaller sponsors not registering their offerings on shelf (by registering their ABS on Form SF-1 instead), offering them through unregistered offerings, or quitting the securitization markets altogether, thereby reducing competition.[960]

As noted above, commenters expressed concern that the certification could be interpreted as a guarantee of the future performance of the assets underlying the ABS. In an attempt to mitigate these costs and taking into account commenters' suggestions, we have revised the certification language to reflect that it is a statement of what is known by the certifier at the time of the offering and that he or she has a reasonable basis to conclude that the securitization is structured to produce, but the certification is not a guarantee that it will produce, expected cash flows at times and in amounts to service scheduled payments of interest and the ultimate repayment of principal on the securities (or other scheduled or required distributions on the securities, however denominated) in accordance with their terms as described in the prospectus.[961] In addition, to address some commenters' concerns about increased certifier liability, which would in turn increase costs, the final certification includes a new paragraph that clarifies that the certifier has any and all defenses available under the securities laws.[962]

When deciding whether to conduct a shelf offering, an issuer may consider the review and due diligence costs, the liability implications, and the reputational consequences to the chief executive officer of signing the certification. We believe that for securitizations of low-risk pool assets, simple structures, or structures used previously that have performed well in the past, issuers likely will conclude that the due diligence, liability, and reputation costs will be relatively low. For such securitizations these costs will likely be justified by the benefits of quick access to the capital markets, and these securitizations will continue to be offered off a shelf registration statement. On the other hand, for securitizations of high-risk assets and complex cash-flow structures, the expected costs of shelf offerings may increase. Issuers may choose not to use shelf registration because the chief executive officer may need to dedicate additional time to review the pool assets and the securitization structure in order to provide the assurances included in the certification. In addition, for such securitizations, the potential litigation risk to the chief executive officer may be higher, even when prudent measures are employed to structure an offering, thus further increasing the costs of shelf registration.

We also acknowledge a commenter's concern that certification is not a requirement for any other debt or equity offering and another commenter's opinion that the certification requirement will impose a barrier to new ABS issuance.[963] We note, however, unlike other offerings, ABS issuers can go directly to shelf without any reporting and operating experience for the trust or any size requirement designed to be a proxy for market following.[964] We also note that the Start Printed Page 57269principal executive and financial officers certify the Exchange Act reports that are incorporated by reference into a shelf prospectus of a corporate issuer. The certification requirement is not intended to be a barrier to new issuance of ABS since the certification is not a condition for selling or registering ABS as they may be offered in unregistered transactions or registered on new Form SF-1. The certification requirement, along with the other shelf transaction requirements, should encourage ABS issuers to design and prepare ABS offerings with greater oversight and care and should incentivize issuers to provide investors with accurate and complete information at the time of the offering. It is these transactions that are appropriate to be offered to the public off a shelf without prior staff review. For these reasons, we are not limiting the certification to disclosure alone as suggested by some commenters, but we have taken into account those commenters' concerns in developing the text of the final certification.

Other financial regulators, including foreign counterparts, have adopted similar rules designed to enhance accountability for the transaction structure. For example, the European Union adopted requirements that ABS issuers disclose in each prospectus that the securitized assets backing the issue have characteristics that demonstrate a capacity to produce funds to service any payments due and payable on the securities.[965] Although we considered adopting an issuer disclosure requirement, we believe that requiring the chief executive officer to provide a certification is a stronger approach and more appropriate for purposes of determining shelf eligibility.

Therefore, while we recognize that the new shelf certification requirement introduces new costs to issuers, we believe that its net effect on capital formation in the ABS markets would be positive. The certification will help to ensure that the chief executive officer of the depositor is actively involved in the oversight of the transaction, and, as discussed above, along with the other shelf transaction requirements, it should encourage ABS issuers to design and prepare ABS offerings with greater oversight and care and should incentivize issuers to provide investors with accurate and complete information at the time of the offering. As a result, we believe that the certification may also improve investor perceptions about the accuracy and completeness of the disclosures, which may, in turn, help restore investors' willingness to invest and participate in the ABS markets. The impact of certification requirements in other contexts—in particular, certification requirements under the Sarbanes-Oxley Act—provides information about the potential consequences of certification in the securitization market.[966] Several academic studies found that the overall effect on issuer's capitalization and on measures of market efficiency has been estimated to be either neutral [967] or positive,[968] suggesting that many investors perceived that the benefits of SOX certification outweighed the costs. We believe there will be potentially similar benefits for capital formation and market efficiency resulting from the new shelf certification. The final certification consists of five paragraphs.[969] We discuss each one in order below.

(i) Paragraph One

The first paragraph of the final certification is substantially similar to the re-proposed text, with some modifications made in response to comments. The chief executive officer must make the following statement:

I have reviewed the prospectus relating to [title of all securities, the offer and sale of which are registered] (the “securities”) and am familiar with, in all material respects, the following: The characteristics of the securitized assets underlying the offering (the “securitized assets”), the structure of the securitization, and all material underlying transaction agreements as described in the prospectus;

As proposed, the certifier is required to certify that he or she has reviewed the prospectus and the necessary documents to make the certification. We believe that the chief executive officer should be sufficiently involved in overseeing the transaction and should review the prospectus and the documents necessary to make the certification. Several commenters suggested that we clarify that the chief executive officer may rely on senior officers under his or her supervision that are more familiar and involved with the structuring of the transaction in order to more accurately reflect the team-oriented nature of the transaction.[970] We understand that a principal officer of the depositor may rely on the work of other parties, thus we are not requiring that the chief executive officer actually structure the transaction. We continue to believe, however, that the chief executive officer should provide appropriate oversight so that he or she is able to make the certification. Furthermore, the text of this certification in this respect is consistent with the text of other certifications, which do not specifically state that the certifier relied on the work of others.[971]

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At the suggestion of commenters, we are adding defined terms for “securities” and “securitized assets” for purposes of the certification and incorporating those defined terms throughout the remainder of the certification to ease readability.[972] In the final rule, the term “securities” refers to all of the securities that are offered and sold with the related prospectus. The term “securitized assets” refers to the assets underlying the securities that are being offered.

Commenters also requested that the paragraph be revised to make it more explicit that the certifier is responsible for knowing material aspects of the assets and the material underlying transaction agreements.[973] Commenters argued that “material” is consistent with customary disclosure principles, including Regulation AB, and therefore provides consistency.[974] Additionally, commenters explained that the contracts for the transaction and the documents for each underlying asset are extensive and that the certifying officer should not be expected to be familiar with all of the terms in these documents.[975] We have revised the first paragraph to clarify that the certifier is speaking of material facts by inserting “in all material respects.” We have also used this phrase at the beginning of paragraphs three and four to address similar concerns by commenters.

We have deleted “including without limitation” in response to commenters' suggestions that this language made the scope of the certification unclear.[976] In addition, some commenters requested that we add “described therein” following “am familiar with the structure of the securitization” to clarify that the certification is based on the certifier's review of the prospectus.[977] The final text does not incorporate this suggestion because we do not believe the chief executive officer's review should necessarily be based solely on the review of the prospectus, which we discuss in more detail below.

Finally, under the re-proposed rule, the certifying officer could take into account only internal credit enhancements in making the certification.[978] Commenters, however, believed that the certifier should be permitted to take into consideration external credit enhancement in providing the certification. One commenter noted, for example, that investors in ABS with external credit enhancement rely on and give credit for external credit enhancement just as they do for internal credit enhancement.[979] Another commenter noted that external credit enhancements can play an integral role in maximizing the likelihood that securities will receive payment.[980] Further, one issuer noted that it could not provide the certification unless it is able to take into account external credit enhancements.[981]

In light of comments, under the final rule, the certifier is permitted to consider internal and external credit enhancement in providing the certification. We continue to believe, however, that the primary focus of the certification should be on the underlying assets rather than on any credit enhancement since, consistent with the Regulation AB definition of asset-backed security, the cash flows from the pool assets should primarily service distributions on the ABS.[982] We also note that we decided not to list “credit enhancement” specifically in the final certification because we believe that the phrase “the structure of the securitization” encompasses, among other things, credit enhancement and cash flows.

(ii) Paragraph Two

We did not receive any comments suggesting specific changes to paragraph two and we continue to believe that it is appropriate to expect signers of a registration statement to satisfy themselves about the accuracy of the disclosure at the time of each takedown. The chief executive officer must make the following statement:

Based on my knowledge, the prospectus does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading;

(iii) Paragraph Three

The third paragraph of the final certification is substantially similar to the proposed text, with some modifications. The chief executive officer must make the following statement:

Based on my knowledge, the prospectus and other information included in the registration statement of which it is a part fairly present, in all material respects, the characteristics of the securitized assets, the structure of the securitization and the risks of ownership of the securities, including the risks relating to the securitized assets that would affect the cash flows available to service payments or distributions on the securities in accordance with their terms; and

Paragraph three requires a certification that the disclosures in the prospectus and other information in the registration statement are fairly presented.[983] Several commenters requested that we delete the term “fairly present” and suggested that we use alternative language.[984] Some commenters noted that the term “fairly presents” is customarily used by experts primarily in certifying the accuracy of the financial information.[985] For example, one commenter stated that because the certifying officer is not certifying to the accuracy of the financial information, but rather to the adequacy of the disclosure in the prospectus regarding the securitization it would be more appropriate to use a different term.[986] Commenters differed as to an appropriate replacement. Several commenters recommended “describe,” [987] and several other commenters suggested “disclose.” [988] The term “fairly presents” is used in our regulations with respect to financial information; however, we do not intend for the term to have the same meaning in this context. We are retaining the phrase in the certification because we Start Printed Page 57271believe it articulates the appropriate standard for the certification. The term “fairly presents,” as adopted, will require the CEO to consider whether the disclosure is tailored to the risks of the particular offering and presented in a clear, non-misleading fashion. Commenters also requested that we insert the term “material” in certain places in the paragraph similar to their requests in connection with paragraph one.[989] We are not adding the term “material” in multiple parts of the paragraph as requested because we believe that the phrase “in all material respects” sufficiently captures materiality across all the statements in the paragraph and therefore use of the term “material” elsewhere in the paragraph would be redundant.

In addition, paragraph three, as re-proposed, would have required that the certifier consider the risk factors relating to the securitized assets underlying the offering that would affect the cash flows sufficient to service payments on the asset-backed securities as described in the prospectus. Commenters requested that we revise our reference to “risk factors” [990] so that the certifier considers instead “all material risks” because disclosure of risks related to the securitized assets is not limited to the information included under the risk factors section of the prospectus but also includes information in other parts of the prospectus, such as historical static pool “loss” data.[991] One commenter recommended that instead of referring to “all risk factors,” as proposed, that the certification be limited to only the most significant risks because a certifying officer cannot reasonably anticipate that an insignificant risk might cause significant losses at the time the officer signs the certification.[992] The same commenter noted that the existing standard for risk factor disclosure requires “a discussion of the most significant risk factors that make the offering speculative or risky” and expressed concern that the language in paragraph three could lead to increased disclosure of risk factors that are not significant to the ABS transaction.[993]

We have considered the comments received and are revising the language of the certification to replace the phrase “all risk factors” with “the risks relating to the securitized assets that would affect the cash flows available to service payments or distributions on the securities in accordance with their terms.” We agree with commenters that the disclosure related to the risks of the securitized assets is not limited to only the risk factor section of the prospectus and may be appropriately presented in other parts of the prospectus. Some commenters also believed that the certification with regard to material risks related to the securitized assets should be further qualified to include only those that would “adversely” affect the cash flows “available” to service payments on the ABS “in accordance with their terms.” [994] We are not inserting the word “adversely” because we believe that the concept is incorporated in the term “risk” and therefore would be redundant to include. We are, however, revising the phrase “cash flows sufficient” to “cash flows available” in order to more accurately reflect the nature of pass-through certificates and junior tranches of registered ABS. We are also adding the phrase “in accordance with their terms” as suggested, because we believe it better describes the certification that we are requiring by paragraph three (i.e., fair presentation of the risks relating to the securitized assets that would affect the cash flows available to service payments or distributions on the securities in accordance with their terms).[995]

(iv) Paragraph Four

Paragraph four of the final certification has also been modified. As described below, we have also added a fifth paragraph to address concerns related to paragraph four. The chief executive officer must make the following statement:

Based on my knowledge, taking into account all material aspects of the characteristics of the securitized assets, the structure of the securitization, and the related risks as described in the prospectus, there is a reasonable basis to conclude that the securitization is structured to produce, but is not guaranteed by this certification to produce, expected cash flows at times and in amounts to service scheduled payments of interest and the ultimate repayment of principal on the securities (or other scheduled or required distributions on the securities, however denominated) in accordance with their terms as described in the prospectus.

We have made revisions to this paragraph similar to revisions made to paragraph one. First, commenters suggested that we add the word “material” because, in general, the paragraph should relate only to material information about the securitized assets, the structure of the securitization (as discussed below, which includes any credit enhancement) and the related risks of the offering.[996] We are adding the phrase “all material aspects of” to paragraph four. Second, commenters asked that we remove the limitation that the certifier consider only internal credit enhancement in providing the certification.[997] In response to comments, we have revised paragraph four to remove this limitation for the same reasons articulated in our discussion of paragraph one.[998]

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We also received several detailed comments on the remaining text of paragraph four. Some commenters suggested that we replace the word “designed” with “structured” when certifying to the cash flows that will service payments on the securities.[999] Commenters explained that the term “structured” is better understood in the context of these transactions and also reflects the nature of these securitizations as a type of structured finance.[1000] Several commenters recommended adding that the securitization is structured “to be expected to produce” rather than just “structured to produce” for further clarification that paragraph four does not constitute a guarantee.[1001] We are revising the final certification to use the term “structured” as requested by some commenters; however, we note that we believe the term “structured” to encompass more than tranching to include, among other things, selection of the assets, credit enhancement, and other structural features designed to enhance credit and facilitate timely payment of monies due on the pool assets to security holders.[1002] We are not inserting the term “expected” before “to produce” because we believe that the concept of expected is implicit in the phrase “structured to produce” and that the phrase “is not guaranteed by this certification to produce” adequately addresses some commenters' concern about paragraph four constituting a guarantee.

Many commenters stressed that they were unsure what the “expected payments” would be with respect to any particular securitization, such as with pass-through certificates or more junior tranches of registered ABS. With respect to the issue of pass-through certificates, one commenter noted that “no fixed principal payments are required to be made.” [1003] Additionally, several commenters explained that the proposed language failed to account for the possibility that more junior tranches of registered ABS may bear a moderate credit risk somewhere in between the most senior registered tranches and the most subordinated unregistered tranches.[1004] Several commenters recommended deleting “expected payment” and inserting “the assets will produce cash flows at times and in amounts sufficient to service payments on the offered securities in accordance with the terms described in the prospectus.” [1005] One commenter expressed concern that the proposed form of the certification could be interpreted to suggest that the adverse effects of the potential risk had been negated through structuring.[1006] Therefore, this commenter supported modifying the certification so that it clearly states that the risks described in the prospectus could adversely affect the cash flows.[1007] Other commenters similarly noted that the certification fails to acknowledge the Commission's intent, as stated in the 2010 ABS Proposing Release, to qualify the certification by the disclosure in the prospectus.[1008]

To address commenters' concerns with “expected payments,” we have revised paragraph four so that the certification relates to “expected cash flows at times and in amounts to service scheduled payments of interest and the ultimate repayment of principal on the securities (or other scheduled or required distributions on the securities, however denominated) in accordance with their terms as described in the prospectus.” We agree with commenters that certain ABS may not be required to produce fixed payments, as is the case with pass-through certificates, and that using the term “expected payments” may have caused confusion.[1009] We believe the revised language provides greater clarity as to what the chief executive officer is certifying to and more precisely captures the varying terminology used to describe the amounts due to investors depending upon the type of ABS transaction.

We also recognize that characterizing the cash flows as “sufficient” to service the payments or distributions may have inadvertently implied that there will always be adequate cash flows to service such payments or distributions regardless of whether the ABS is of a lower tranche or structured as a pass-through security. We have deleted the term “sufficient” to eliminate this possible confusion.[1010] We believe, however, that even if fixed payments are not required to be made, a securitization is structured with the expectation that cash flows from the assets will provide distributions at certain times and amounts, and accordingly we believe that certification should reflect that expectation. We have therefore moved “expected” to before “cash flows” to clarify the requirement. We also believe that this change addresses some commenters' concerns about lower tranches of shelf registered ABS in that the expectation is not so much related to payment as to how the cash flow has been structured to allocate distributions of interest and principal.

One commenter suggested inserting language to indicate that the certifying officer's statements are his or her “current beliefs” and that there may be future developments that would cause his or her opinion to change or result in the assets not generating sufficient cash flows.[1011] Also, commenters stressed the importance of including cautionary statements in the certification that identify those risks and uncertainties as factors that could cause the actual results to differ materially from those set forth in the certification.[1012] Several commenters supported the Commission's language outlined in Request for Comment No. 4 in the 2011 ABS Re-Proposal.[1013] As we note above, Start Printed Page 57273the certification will be a statement of what is known by the certifier at the time of the offering. This is made clear by the introductory language to paragraphs three and four (“based on my knowledge”) and therefore we have not made this change.[1014] We are also revising the text to insert the phrase “a reasonable basis to conclude,” as suggested by some commenters to further clarify that the certification applies to what is known at the time of securitization.[1015] Many commenters argued that paragraph four represents an assessment and forecast of the future performance of the securitized assets and the ABS, which would make it a forward-looking statement, and thus the issuers should be entitled to protections afforded by the safe harbor for forward-looking statements.[1016] We do not believe that paragraph four is protected by the statutory safe harbor for a forward-looking statement.[1017] We have, however, included “related risks” of the securitized assets and structure as described in the prospectus to address comments that the certifier should be allowed to take risk disclosure into account. We also note that because the language of the certification cannot be altered, any issues in providing the required certification must be addressed through disclosure in the prospectus. For example, if the prospectus describes the risk of nonpayment or other risk that such cash flows will not be produced, then the certifier would take those disclosures into consideration in signing the certification.

(v) Paragraph Five

As discussed above, some commenters expressed concern over potential increased liability with the certification. We acknowledge that the potential litigation risk to the chief executive officer may be higher, and we recognize that participants in securities offerings who make statements about those offerings can face liability for their statements, but we believe that possible additional risk to the certifier is justified where each takedown provides investors with offering information about the underlying assets and structure of the securities and recent market events persuade us that these were insufficient incentives for proper oversight over the transaction. In this regard, we also note that the certification is tied to the disclosure in the prospectus. For example, if the prospectus includes disclosure that the terms of the securities do not include any expectation (or limited expectation) that the structure will produce cash flows sufficient to make distributions, the certifier would nonetheless be able to sign the certification because the certification is based, in part, on the disclosure in the prospectus. In response to commenters' concerns about certifier liability,[1018] we note that the CEO can take steps to mitigate the risks of signing. In addition, the final certification includes a fifth paragraph to further clarify that the certifier has any and all defenses available to him or her under the federal securities laws. The chief executive officer must make the following statement:

The foregoing certifications are given subject to any and all defenses available to me under the federal securities laws, including any and all defenses available to an executive officer that signed the registration statement of which the prospectus referred to in this certification is part.

(vi) Signature Requirement

In the 2010 ABS Proposing Release, we had proposed that the depositor's chief executive officer sign the certification. We explained that the chief executive officer of the depositor is already responsible for the disclosure as a signer of the registration statement.[1019] We also asked, in the 2010 ABS Proposing Release, whether an individual in a different position should be required to provide the certification, such as the senior officer of the depositor in charge of securitization, in order to be consistent with other signature requirements for ABS. In response to comments, as part of the 2011 ABS Re-Proposal, we re-proposed to allow either the chief executive officer of the depositor or the executive officer in charge of securitization of the depositor sign the certification.

We received various comments on the appropriate party to sign the certification. One commenter supported the re-proposal to allow “the executive officer in charge of securitization” to sign the certification but suggested modifying it to require the signature of “an executive officer in charge of the securitization.” [1020] This commenter explained that it may be the case that more than one person may satisfy the role of executive officer in charge of securitization, and it would be appropriate to permit the executive officer with particular knowledge of the specific securitization to sign the certification. In response to a request for comment in the 2011 ABS Re-Proposal regarding whether we should conform signature requirements across forms (e.g., Form 10-K and proposed Form SF-3),[1021] one commenter recommended that the “senior officer in charge of securitization” sign the certification,[1022] and another suggested we broaden the list of signers to include the principal executive officer, the principal financial officer and controller or the principal accounting officer of the depositor.[1023] One commenter recommended requiring an executive officer with a title such as “chief transaction officer” if the Commission is seeking a party to assume more responsibility for disclosure.[1024]

Commenters also provided comments as to why an executive officer would be Start Printed Page 57274unable to provide the certification. For example, some commenters argued that executive officers lack the expertise to perform the credit analysis necessary to provide the certification.[1025] Another commenter recommended that, with respect to paragraph four as to any assurance about the structure and cash flows of the securitization, the issuer, not a principal officer, should provide the certification because the chief executive officer may be too removed from the process and the team approach to securitization may not leave any one person in a position to evaluate all of the material attributes of the securitization.[1026]

Similarly, some commenters explained why an executive officer might be unwilling to provide the certification. One commenter noted that depositors would be unable to effectively price for the possibility of liability under such a broad certification.[1027] The commenter explained that to the extent that an executive officer is willing to sign it, he or she will likely do so only in the most conservative circumstances, which may result in shelf-offered ABS of only the highest quality and thus preclude shelf offerings of securities with different credit risk and profiles. Another expressed concern that principal officers may be discouraged from taking such positions due to exposure to personal litigation.[1028]

After considering the comments, the final rule requires that the certification be signed by the chief executive officer. We are not adopting the suggestion that the executive officer in charge of the securitization for the depositor sign the certification, as re-proposed, because we are not acting at this time on the proposal to revise the signature requirements for the registration statement. We believe that the certification should be signed by a signatory to the registration statement. Furthermore, we believe that having the chief executive officer as the sole signatory is appropriate for other policy reasons. Although we understand that the chief executive officer may not personally undertake credit analysis and that he or she will likely rely on the work of others to assist him or her with structuring the transaction and preparing the certification as noted by some commenters, we believe that the depositor's chief executive officer, as an officer of the depositor at the highest level, should be responsible for providing proper oversight over the transaction and thus should be held accountable for the structuring of the transaction and for the disclosure provided in the prospectus supplement. In that regard, we believe, as we did when we proposed the certification for Exchange Act periodic reports, that a certification should cause the chief executive officer to more carefully review the disclosure, and in this case, the transaction, and to participate more extensively in the oversight of each transaction.[1029]

(vii) Date of the Certification

The date of the certification, as proposed, is required to be as of the date of the final prospectus.[1030] One commenter supported the proposed date because the deal structure will be final at that time and the final deal structure is what is being addressed in the certification.[1031]

(viii) Opinion by an Independent Evaluator Alternative

In the 2011 ABS Re-Proposing Release, we also requested comments on whether, in lieu of the requirement that the chief executive officer or executive officer in charge of the securitization of the depositor provide a certification, the Commission should allow an opinion to be provided by an “independent evaluator.” [1032] Several commenters supported allowing an opinion by an “independent evaluator” in lieu of the proposed certification.[1033] One commenter believed that allowing an opinion by an independent evaluator meeting particular requirements would provide a more detached and objective basis for certification.[1034] The other commenter stressed that an independent evaluator is particularly important in evaluating the structure of a transaction given that structures are often the product of investment bankers or third parties who know what securities will sell in the market.[1035] Relatedly, several commenters noted that a credit rating agency is the more appropriate party to perform the credit analysis required.[1036]

In contrast, one commenter noted its opposition to allowing the use of an independent evaluator, stating that the certification, as proposed, may result in a more careful review of the disclosure and transaction by the issuer and ultimately higher-quality ABS in shelf offerings.[1037] Another commenter recommended that we not mandate the use of an independent evaluator, explaining that it is uncertain, especially in the RMBS market, whether there are companies willing to serve as an independent evaluator given the possibility of increased liability and preclusion from performing other more desirable roles in the transaction.[1038]

As reflected in the comments above, an independent evaluator alternative may provide benefits to investors and issuers. For issuers that conduct offerings on an infrequent basis, such an alternative may be less costly than implementing an infrastructure in order for the chief executive officer to conduct the review required by the certification. However, as one commenter noted with respect to RMBS, such issuers may encounter difficulty hiring a company that is willing to provide such services and sign the certification.[1039] A certification by the chief executive officer is designed to increase internal oversight within the issuer. For investors, the independent evaluator may be able to provide a more detached and objective opinion; however, investors should also benefit from the enhanced internal oversight by the issuer obtained from the CEO certification. We are therefore not adopting the independent evaluator as Start Printed Page 57275an alternative to providing a certification.

(2) Asset Review Provision

(a) Proposed Rule

Investors have expressed concerns about the effectiveness of the contractual provisions related to the representations and warranties about the pool assets and the lack of responsiveness by sponsors about potential breaches.[1040] A significant hurdle faced by investors seeking to enforce repurchase obligations has been that 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. Further, investors have had to rely upon the trustees to enforce repurchase covenants because the transaction agreements do not typically contain a provision for an investor to directly make a repurchase demand. Investors have been frustrated with this structure and process because trustees have not enforced repurchase rights, and investors have been unable to locate other investors in order to force trustees to do so.[1041] Furthermore, 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 a representation or warranty relating to a pool asset has been breached.[1042] The impact of these difficulties for investors is particularly concerning given the pervasiveness of misrepresentation among securitized residential real estate loans in the 2000's.[1043]

To address this concern, we proposed in the 2011 ABS Re-Proposal as one of the transaction requirements for shelf eligibility, that the underlying transaction documents of an ABS include provisions requiring a review of the underlying assets of the ABS for compliance with the representations and warranties upon the occurrence of certain post-securitization trigger events. Specifically, we proposed that the transaction agreements require, at a minimum, a review of the underlying assets (1) when the credit enhancement requirements, as specified in the transaction documents, are not met, or (2) at the direction of investors pursuant to processes provided in the transaction agreement and disclosed in the prospectus.[1044] We proposed that the review would be conducted by a “credit risk manager” who would have access to the underlying loan documents to assist in determining whether the loan complied with the representations and warranties provided to investors.[1045] A report of the findings and conclusions of the review would be provided to the trustee to use in determining whether a repurchase request would be appropriate, and would also be filed as an exhibit to the Form 10-D.

Finally, we proposed to require certain provisions in the underlying transaction agreements that would help to resolve repurchase request disputes. We discuss the dispute resolution provision requirement below in Section V.B.3.a)(3) Dispute Resolution Provision because we are adopting it as a stand-alone shelf eligibility condition.

As noted above, studies have highlighted the extent of misrepresentations among securitized residential real estate loans in the 2000's; however, we are unable to quantify the extent to which enforcing representations and warranties was an issue during the crisis. While recently adopted Exchange Act Rule 15Ga-1 implementing Section 943 of the Dodd-Frank Act requires disclosure of fulfilled and unfulfilled repurchase request activity, as a practical matter, it does not address directly the enforceability of put-back provisions in the underlying transaction agreements. Further, the historical data provided by Rule 15Ga-1 is limited, as initially only those securitizers that issued ABS between January 1, 2009 and December 31, 2011 were required to report on Form ABS-15G demand and repurchase history that occurred during that same period.[1046] As we discussed in the Section 943 Adopting Release, we limited the rule to a three-year look-back period because we recognized concerns regarding the availability and comparability of historical information related to repurchase demands.[1047] While we recognize these limitations, we used the information contained in recent Form ABS-15G filings in order to provide some baseline information on current market practices. Based on Form ABS-15G filings of the first quarter of 2013, we find that more than 99% of repurchase requests are in dispute, and with respect to the resolved requests: 16.5% were satisfied, 48.5% were withdrawn, and 35% were rejected.[1048] These numbers highlight the fact that enforcing representations and warranties may be time-consuming and lead to uncertain outcomes for investors. We believe that the asset review shelf requirement will help to address this problem and enhance the Start Printed Page 57276enforceability of the representations and warranties regarding the pool assets.

(b) Comments on Proposed Rule

Several commenters generally agreed that a review of assets for compliance with representations and warranties should be a shelf eligibility requirement.[1049] Commenters made it clear that investors desire more robust representation and warranty enforcement mechanisms.[1050] Many commenters noted that a review mechanism would enhance investor protection and promote the integrity of asset-backed securities.[1051] Some commenters argued that the proposed requirement should not be imposed upon transactions other than RMBS transactions.[1052] They were concerned that enforcement mechanisms could increase costs on transactions where there have been only a limited number of repurchase requests historically.[1053] Some commenters responded to the 2011 ABS Re-Proposal by suggesting that the Commission adopt, as an alternative criterion for shelf eligibility for asset classes other than RMBS, the original proposed shelf requirements that there be a quarterly third-party review of the assets for compliance with the representations and warranties, which we did not re-propose in light of comments.[1054] Below we discuss comments about the various parts of the proposal.

Commenters provided varying comments on the appropriateness of the proposed review triggers. Several commenters suggested that a trigger for review should not be tied to credit enhancement, as proposed.[1055] Commenters stated that, for most transactions, a credit enhancement trigger would not be a feasible measurement across asset classes because many deals provide for a buildup of credit enhancement over time and, under the proposed rule, the first distribution could trigger a review.[1056] One commenter stated that certain transactions do not have pool-level credit enhancements that would trigger a review.[1057] Given these potential issues with a credit enhancement trigger, some commenters suggested as an alternative that the trigger for review be based on a more common measurement of asset performance such as delinquencies.[1058]

As part of the 2011 ABS Re-Proposal, we requested comments on certain aspects of the investor-directed trigger. For example, we requested comment on whether we should require that at least 5% of investors must first call for an investor vote on the question of whether to initiate a review before a vote occurs.[1059] Although comments received were mixed, several commenters supported such a provision.[1060] Additionally, many commenters agreed that investors should have the ability to direct a review of assets and suggested procedures that would provide investors with an effective means to request a review while minimizing baseless claims that could impose costs.[1061]

We also requested comment on whether, as an alternative to specifying voting procedures, it would be appropriate to specify certain maximum conditions, where the percentage of investors required to direct review could be no more than a certain percentage, such as 5%, 10%, or 25%. Commenters provided differing views on imposing maximum conditions. Several commenters suggested that 25% would be the appropriate percentage of investors that should agree to a review before one is required.[1062] Another Start Printed Page 57277commenter suggested that we consider a majority or plurality of those casting a vote, and that we also specify a quorum requirement.[1063] One commenter suggested that a super-majority would be appropriate.[1064]

With respect to disclosing the report on the findings and conclusions of the review, several commenters recommended that we require a summary of the report instead of the proposed requirement that the full report be filed as an exhibit to Form 10-D because of privacy concerns or potential problems that the requirement would cause with workouts or modifications with delinquent borrowers.[1065]

We also received comments on the selection and appointment of the credit risk manager. Commenters, in general, opposed the proposal to require that the trustee appoint the credit risk manager. Commenters noted that the trustee would not be a suitable party to appoint the credit risk manager and would not be likely to accept the responsibility for appointing the credit risk manager.[1066] Furthermore, commenters generally explained that the appointment by a trustee would be unworkable since the trustee is not typically a party to the transaction until it closes, therefore the trustee would technically not have the authority to appoint the manager until after the transaction closes.[1067] One of these commenters stated that it is important to have details about the manager disclosed in the prospectus so that investors can fully understand their impact on the transaction.[1068]

With respect to the proposed prohibited affiliations between the credit risk manager and certain transaction parties, several commenters supported the proposal, although some commenters suggested that we not permit the credit risk manager to be affiliated with other additional transaction parties, such as the trustee or any investor.[1069] One commenter stated that the credit risk manager should not be affiliated with any party hired by the sponsor or underwriter to perform pre-closing due diligence on the pool assets.[1070] However, one commenter suggested that the proposal to limit affiliations was overly broad.[1071]

Additionally, commenters provided comments about other aspects of the credit risk manager. For example, some commenters recommended that we revise the title “credit risk manager” as it may not properly describe its function.[1072] Commenters also stated that it was important for managers to have access to the underlying documents in order to perform their duties.[1073] Some commenters also offered their views about the process and conditions for the removal and replacement of a credit risk manager. One commenter stated that it would be acceptable for the trustee to appoint a new credit risk manager if the existing one needs to be removed or replaced for any reason.[1074] Another commenter suggested that we require an affirmative vote of 25% of the investors in order for investors to initiate replacement.[1075] One commenter recommended that the transaction documents detail the conditions and process for removal.[1076]

(c) Final Rule and Economic Analysis of the Asset Review Provision

We are adopting, as a second shelf eligibility requirement, that the underlying transaction agreements include provisions requiring a review of pool assets in certain situations for compliance with the representations and warranties made with regard to those assets. Under the final rule, the agreements must require a review, at a minimum, upon the occurrence of a two-pronged trigger based first upon the occurrence of a specified percentage of delinquencies in the pool and if the delinquency trigger is met, then upon direction of investors by vote. We have made modifications to the review triggers, discussed below, that we believe help to address some of the cost concerns expressed by commenters for asset classes that historically have seen a limited number of repurchase requests. Because we are unable to predict which asset classes may experience problems in the future, we believe that it is prudent to impose this requirement for all asset classes.[1077]

We have taken into consideration the array of comments received related to the triggers and potential costs, while at the same time balancing the need for stronger mechanisms to enforce underlying contract terms. As we noted above, most transaction agreements lack a specific mechanism for investors to not only identify potential assets that fail to comply with the representations and warranties made but also to resolve a question of whether noncompliance of the representations and warranties constitutes a breach of the contractual provisions. These problems have been compounded by the fact that investors typically cannot make repurchase requests directly, thus they have had to rely upon the trustees who have not enforced repurchase requests in most circumstances. We believe that adopting this shelf provision coupled with the new dispute resolution and investor communication shelf requirements should provide investors with effective tools to address the enforceability of repurchase obligations and help overcome collective action problems. In that regard, we see these shelf requirements working together to help investors enforce repurchase obligations. Our investor communication provision, discussed below, will help investors to communicate with each other in order to determine whether they should vote to direct a review of the assets and later Start Printed Page 57278whether to initiate a repurchase request. The review of the assets required once certain triggers are met will not only benefit investors in determining whether the assets have breached the representations and warranties but also whether to move forward with a repurchase request. Additionally, should those parties with repurchase obligations fail to address investors' repurchase requests in a timely manner, investors will now have a means to demand resolution through arbitration or mediation. We believe that these transactional safeguards will collectively enhance the enforceability of representations and warranties about the pool assets and provide incentives for obligated parties to more carefully consider the characteristics and quality of the assets that are included in the pool. Therefore, this shelf transaction requirement should encourage ABS issuers to design and prepare ABS offerings with greater oversight and care. We believe that stronger enforcement mechanisms should incentivize issuers to provide investors with accurate and complete information at the time of the offering. It is these transactions that are appropriate for public offerings off a shelf without prior staff review. The magnitude of these benefits will depend on whether the reviewers are able to correctly evaluate the contractual terms to identify non-compliance with the representations and warranties about the pool assets. Such evaluations may be challenging to the extent that the contractual language for the representations and warranties are incomplete or ambiguous. Nonetheless, we conclude that the asset review provision will enhance investor protection for the reasons stated above. We also note that the review requirement we are adopting is similar to post-crisis industry efforts, such as the American Securitization Forum's Project RESTART, which includes repurchase principles for investigating, resolving, and enforcing remedies with respect to representations and warranties in RMBS transactions.[1078] Additionally, some recent CMBS deals have included a provision for a third-party review of the underlying assets.

While we believe that this review requirement will enhance the enforceability of repurchase obligations, we acknowledge that it will also increase costs, particularly on investors, who will incur the expense of the reviews. A group of investors noted that despite the additional costs, increased investor protection will produce net economic benefits to investors.[1079] We expect that the bulk of the costs for this shelf requirement will be incurred with individual reviews of pool assets directed by investors. There will also be some expense arising from retaining a reviewer to conduct the reviews in the form of an annual retainer fee.[1080] Although the exact magnitude of the expenses incurred in connection with the reviews is not possible to predict, we expect that they will depend on the frequency with which a review is triggered and on the extent of the review.[1081] For instance, securitizations of high-risk assets are more likely to meet the delinquency threshold and therefore more likely to undergo a review and incur the review expenses. Additionally, sponsor representations about pool assets characterized by low or no documentation may require more time for the reviewer to examine and therefore may result in higher expenses. We have attempted to mitigate the potential costs by not requiring a review of the assets until after the occurrence of a two-pronged trigger as described below. We expect that investors will weigh the benefits of a review of the assets against the costs and vote for a review only if the benefits justify the costs. This revised approach should address concerns about potentially frivolous review requests being made at the cost of other investors.

We also recognize that our approach to require that a reviewer be engaged at the time of issuance, as opposed to when the above two triggers are met, will be more costly. For asset classes that rarely experience breaches of representations and warranties, the benefits of this shelf provision may be smaller than for other asset classes and thus there may be situations where the costs may be greater than the benefits. We believe, however, that for asset classes where the likelihood of investors using the review provision is low, the upfront retainer fee should also be low. We note also that the requirement that the reviewer be engaged at the time of issuance could potentially create incentive alignment issues. Because of this requirement, a reviewer could seek to be appointed to as many ABS transactions as possible, thus potentially creating an incentive to submit reports favorable to sponsors and win future business from them. This could potentially impact the quality and usefulness of the reports if the reviews are not—or are not perceived as being—objective.[1082] The significance of this problem should be reduced to the extent that the reviewer's compensation is paid by investors, particularly if done so after the objective triggers for the asset reviews are met. In addition, transaction agreements may prescribe mechanisms to replace reviewers in the event of failure to meet their obligations. Finally, reputational concerns could potentially influence reviewers' decisions to adhere to their limited role of determining whether the assets comply with the representations and warranties made. As discussed below, the investors through the trustee, not the reviewer, are responsible for determining whether to initiate a repurchase request.[1083] Furthermore, we have chosen to require that the reviewer be named in the offering documents because the identity and competency of the reviewer is an important consideration for investors in making an ABS investment decision.

(i) Triggers for Review

As noted above, the 2011 ABS Re-Proposal specified two separate events, either of which would trigger a review of the underlying assets under the new shelf eligibility requirement. One proposed trigger would have required a review when the credit enhancement requirements of the transaction are not met. The other proposed trigger would have permitted investors to direct a review of the assets, pursuant to Start Printed Page 57279procedures specified in the transaction agreements. After taking into account the comments received related to the applicability of the proposed triggers and potential costs, we are modifying the triggers for review.

Under the new shelf eligibility requirement, the pooling and servicing agreement, or other transaction agreement, must provide for a review of assets, at a minimum, upon the occurrence of a two-pronged trigger with the first prong being a percentage of delinquencies in the pool and the second prong being the direction of an investor vote, in each case as specified in the transaction agreements. Because these thresholds are negotiated by sponsors and investors in advance of the ABS issuance, and could vary by asset class, deal structure, or takedown, this approach allows the market to optimize and determine the most effective thresholds, subject to caps discussed below. In developing this two-prong trigger approach, we have attempted to balance some commenters' concerns about potentially unfounded claims by requiring that an objective threshold based on delinquencies first be met while protecting investors' ability to effectively direct a review at a time when rising delinquencies may begin to cause concern that the assets in the pool may not have met the representations and warranties made in the transaction documents.

(a) Delinquency Prong

Rather than tying the trigger to credit enhancement levels, we are adopting an objective trigger based on delinquencies.[1084] As summarized above, although commenters generally supported the requirement of an objective trigger, many stated that the proposed credit enhancement trigger did not easily apply across different asset classes and deal structures.[1085] We received some recommendations for alternative objective triggers and, in particular, commenters noted that a trigger based on delinquencies would work across all deal types.[1086] The amount of delinquencies in an asset pool is a metric that is required to be reported at the time of offering and on an ongoing basis.[1087]

We are not specifying the threshold amount of delinquencies that must first be reached, given the variety of thresholds that may be relevant and the differing approaches offered by commenters. For instance, we note that some ABS transactions include delinquent loans at the onset. Furthermore, the shelf eligibility requirements permit registration of offerings of ABS that include up to 20% of delinquent assets.[1088] We also acknowledge that transaction participants should have some flexibility across deal structures and asset classes so that they may negotiate the terms appropriate for each particular offering, including the appropriate delinquency threshold.[1089] We recognize, however, that providing the transaction parties with such flexibility may impose costs to investors depending on the procedures established. In particular, we recognize that by not prescribing a particular delinquency threshold, transaction parties could theoretically set this threshold high and thereby make it difficult for investors to exercise their rights under this provision. To address this concern, we are requiring disclosure in the prospectus that describes how the delinquency trigger was determined to be appropriate.[1090] The disclosure must include a comparison of the delinquency trigger against the delinquencies disclosed for prior securitized pools of the sponsor for that asset type. Using this disclosure, investors will be able to analyze the reasonableness of the delinquency trigger.

The final rule provides some specificity as to how the delinquency threshold must be calculated in order to provide clarity to issuers and consistency to investors across various transactions and assets classes, and to prevent possible mechanisms from reducing the effectiveness of the trigger. The delinquency prong requires that the delinquency threshold be calculated as a percentage of the aggregate dollar amount of delinquent assets in a given pool to the aggregate dollar amount of all the assets in that particular pool, measured as of the end of the reporting period in accordance with the issuer's reporting obligations. By requiring that the delinquency calculation be measured as a percentage of the aggregate dollar amount of all assets in the pool, the calculation will better reflect the magnitude of delinquencies, as compared to a delinquency calculation measured by counting only the number of delinquent assets without consideration of the delinquent assets' relative dollar values.[1091] Furthermore, to prevent issuers from imposing a higher hurdle to trigger the delinquency threshold for transactions with multiple sub-pools, we are also requiring that the percentage be based on the percentage of delinquencies in the sub-pool. For example, if a transaction has divided the underlying assets into three sub-pools, there will be three separate delinquency trigger calculations. If the delinquencies in one sub-pool triggers an investor vote (and, as explained below, the subsequent vote is attained to trigger a review), the final rule requires that the transaction documents specify, at a minimum, that the assets of the respective sub-pool would be subject to review.[1092] We believe that requiring the delinquency threshold to be calculated on a sub-pool basis also recognizes the notion that investors would be primarily concerned about the Start Printed Page 57280assets that support their respective pool.[1093]

(b) Investor Vote Prong

The underlying transaction documentation must include a provision that, after the delinquency threshold has been reached or exceeded, investors have the ability to vote to direct a review. In formulating the final rule, we considered whether an investor vote would be necessary given that the final rule would require an objective trigger first be satisfied. We appreciate the costs that will be incurred by the investors in connection with these reviews.[1094] Furthermore, we acknowledge that there may be cases where some investors may not wish to incur the cost of an asset review, for example, when the transaction is performing as expected. For these reasons, the review is not automatic but rather must be initiated by investors as specified in the transaction documents. In order to balance the concern that the transaction parties may impose stringent voting requirements in the transaction documents in an effort to diminish investors' voting rights, we have imposed certain restrictions on the voting requirements in response to comments that we received.

Under the final rule, if the transaction agreement includes a minimum investor demand percentage in order to trigger a vote on the question of whether to direct a review, then the maximum percentage of investors' interest in the pool required to initiate a vote may not be greater than 5% of the total investors' interest in the pool (i.e., interests that are not held by affiliates of the sponsor or servicer).[1095] We are imposing this restriction because we believe that a higher threshold will blunt its effectiveness.[1096] Once the requisite percentage of investors' interest seeks to initiate a vote, as required by the transaction agreement, investors will proceed to vote on whether to direct a review. Our interpretation of “pool,” as discussed above in connection with the delinquency trigger, is also applicable for the voting procedures. Thus, if there are multiple sub-pools, then the calculation of whether there is the requisite percentage of investors' interest to initiate a vote would be determined based on that particular sub-pool.

Under the proposed rule, the transaction parties would have been given significant flexibility in setting the voting requirements for the investor vote trigger. We are concerned, however, that the transaction parties could establish a high delinquency threshold and high investor vote threshold as noted by one commenter, thus making it difficult for investors to utilize this shelf provision.[1097] We requested comments in the 2011 ABS Re-Proposal on whether we should establish maximum conditions for voting. Commenters offered a range of thresholds from 25% to a supermajority.[1098] Under the final rule, the transaction parties will be able to specify the percentage of investors' interest required to direct a review, provided that the threshold of approval shall be no more than a simple majority of those interests casting a vote. The final rule requires a simple majority of those interests casting a vote as the maximum condition because we believe that a simple majority threshold will help to reduce potentially frivolous claims while also helping to ensure that investors will be able to use the review provision. In addition to imposing restrictions on the voting requirements, we note that issuers are required to provide disclosure in the prospectus regarding the voting procedures for the review under existing Regulation AB, which will permit investors to analyze the reasonableness of the voting procedures.[1099]

We also recognize that the rule may complicate the voting process for investors in transactions that include assets consisting of previously issued ABS. In particular, when trigger conditions for a review are met in connection with the previously issued ABS, the trustee acting on behalf of the investors in the second securitization must vote since they are also investors in the first securitization via the resecuritization. To address this potential issue, each securitization will need to have clearly delineated voting rules and eligibility criteria in the event that some of its investors are through a resecuritization. It is hard for us to evaluate the extent to which this problem may affect the ABS markets because, over the past several years, there have been no registered resecuritizations of RMBS, CMBS, or Auto ABS.

The requirements of this shelf eligibility criterion are meant to be the minimum procedures that should be included in the transaction documents to provide investors with a means to trigger a review of the assets. We acknowledge that transaction parties have and may develop more specific and robust procedures for monitoring and reviewing assets that support the ABS.[1100] The adoption of this rule will not preclude the transaction parties from specifying additional, separate triggers for a review in the transaction agreements, as appropriate for a particular deal or asset class. To clarify, while we are permitting additional triggers to be established by the transaction parties, the final rule does not allow the transaction parties to add additional restrictions or requirements on the two triggers that we are establishing in order to make it more onerous for investors to utilize the provision.

(ii) Scope of the Review

We are also modifying the proposal to add some specificity regarding the scope of the review, since we have changed the objective trigger from being based on credit enhancement to one based on delinquencies and received varied comments regarding the appropriate scope for a review based on delinquencies.[1101] Under the final rule, once both prongs have been met (the delinquencies have reached or exceeded the threshold and investors have voted to conduct a review), a review must be Start Printed Page 57281conducted of all assets that are 60 or more days delinquent as reported in the most recent periodic report, at a minimum, for compliance with the related representations and warranties, as suggested by commenters. We are also adopting, as proposed, that the transaction agreement must provide the reviewer with access to copies of the underlying loan documents in order to determine whether the loan complied with the representations and warranties.[1102] As discussed below, a summary of the reviewer's report must be included in the Form 10-D.[1103]

(iii) Report of the Findings and Conclusions

As proposed, under the final rule, a report of the reviewer's findings and conclusions for all assets reviewed will be required to be provided to the trustee.[1104] The trustee could then use the report to determine whether a repurchase request would be appropriate under the terms of the transaction agreements. We are also requiring, as proposed, that disclosure be provided about any event triggering a review of the assets in the Form 10-D filing for the period in which the event occurred.[1105]

We proposed to require that any report of results provided to the trustee also be filed on periodic report Form 10-D. Commenters generally supported filing the reports on Form 10-D. Several commenters indicated, however, that privacy concerns may arise related to the information about the underlying loans if a full report is filed and recommended that we instead require summaries of the reports.[1106] We are persuaded by commenters that only a summary of the report of the findings and conclusions needs to be included on the Form 10-D. We acknowledge, however, a potential cost of this approach is that investors may not receive all of the information necessary to determine whether the trustee, or another party with demand rights, has made an appropriate decision regarding whether to initiate a repurchase request.

(iv) Selection of the Reviewer

In response to comments received, we are not adopting the proposal to require that the trustee appoint the reviewer. We are requiring, instead, that the pooling and servicing agreement or other transaction agreement provide for the selection and appointment of the reviewer since we believe that the transaction parties should be able to agree on who should serve as the reviewer.[1107]

We are requiring, as proposed, disclosure in the prospectus of the name of the reviewer, its form of organization, the extent of its experience serving as a reviewer for ABS transactions involving similar pool assets, and the manner and amount in which the reviewer is compensated.[1108] ABS investors will benefit from this increased disclosure as they will be able to assess the qualifications of the reviewer. ABS issuers will incur some additional disclosure costs to provide this information. In addition, as proposed, under the new rule disclosure is required with respect to: The reviewer's duties and responsibilities under the governing documents and under applicable law; any limitations on the reviewer's liability under the transaction agreements; any indemnification provisions; any contractual provisions or understanding regarding the reviewer's removal, replacement, or resignation, and how any related expenses would be paid.[1109] In addition, we are adopting, as proposed, a requirement that if, during the reporting period, the reviewer has resigned, or has been removed, replaced or substituted, or if a new reviewer has been appointed, then disclosure regarding the event and circumstances surrounding the change must be provided in the report for the period in which the event occurred.[1110]

We are also adopting a requirement that prohibits the reviewer from being affiliated with certain transaction parties and from performing certain duties due to concerns over potential conflicts of interest. Under the final rule, the reviewer, at a minimum, cannot be affiliated with the sponsor, depositor, servicer, the trustee, or any of their affiliates.[1111] In addition, a conflict may arise if the reviewer is also assigned the responsibility under the transaction documents to determine whether non-compliance with representations and warranties constitutes a breach of any contractual provision. Therefore, the reviewer shall not be the party to determine whether the non-compliance constitutes a breach. We believe that the role of the reviewer should be limited to reviewing the assets' compliance with the representations and warranties since we believe that the investors through the trustee are the most appropriate parties for determining, after reviewing the report of the conclusions and findings, whether to pursue a repurchase claim. In response to comments, particularly in the context of CMBS, the final rule will permit that the reviewer may be the same party serving another role in the transaction, provided that it is not affiliated with the sponsor, depositor, servicer, trustee, or any of their affiliates. As recommended by one commenter, however, the final rules prohibit the reviewer from being the same party or an affiliate of the party hired by the sponsor or underwriter to perform pre-closing due diligence on the pool assets due to the inherent conflict posed by the same party performing the pre-closing review and the review required by this shelf provision.[1112] The reviewer is also prohibited from being affiliated with the trustee in light of several commenters recommending this prohibition given the economic relationships the trustee or its affiliates may have with other transaction parties and the conflicts of interest that such relationships may create.[1113] We have not, however, added investors as a prohibited affiliation, as some commenters requested.[1114] We understand that issuers might view investor affiliation with the reviewer as a possible conflict; however, since issuers will be responsible for selecting the reviewer, they will be able to address any concern. We do not think such an affiliation will likely cause harm or conflict to investors as a whole because, if there is evidence of high or growing delinquencies in the asset pool, it would be in the best interest of investors as a whole to have a review conducted in order to determine whether investors should make a repurchase demand.[1115] Because the Start Printed Page 57282rule establishes the minimum restrictions on affiliations, the transaction parties could agree to exclude other parties based on their relationships. As proposed, the final rule requires disclosure about those relationships in the prospectus, which will help alert investors to any potential conflicts.[1116]

As noted above, some commenters suggested, as an alternative, that we revert back to an approach proposed in the 2010 ABS Proposing Release. They recommended that we allow issuers of asset classes other than residential mortgages the option to choose between the 2011 ABS Re-Proposal to require review of the assets upon certain triggers being met or the 2010 ABS Proposal to allow for a third-party review opinion.[1117] These commenters explained that the 2010 ABS Proposal for a third-party review opinion would limit costs on the issuers where repurchases have not presented the same difficulties as they have in RMBS.[1118] However, in response to the 2010 ABS Proposal, some commenters stated that the third-party opinion provision would not provide investors with the protection they would need in the event issues arise with the enforcement of representations and warranties provisions because, in general, transaction agreements have not included mechanisms to identify potential breaches of representations and warranties.[1119] The rule we are adopting is designed to protect against potential risks even where they have not surfaced in the past. As noted above, a group of investors commented that despite the additional costs, increased investor protections will produce net economic benefits to investors.[1120] In light of these considerations, rather than permitting a third-party opinion as an alternative requirement for shelf eligibility, we have revised the review process to address the costs concerns.

(3) Dispute Resolution Provision

(a) Proposed Rule

In the 2011 ABS Re-Proposal, along with the credit risk manager proposal, we proposed to require that underlying transaction documents include repurchase request dispute resolution procedures. As we have noted elsewhere, not only have investors lacked a mechanism to identify potential breaches of the representations and warranties, they have also lacked a mechanism to require sponsors to address their repurchase requests in a timely manner.[1121] Under the proposal, the transaction agreements would be required to provide that if an asset subject to a repurchase request pursuant to the terms of the transaction agreements is not repurchased by the end of the 180-day period beginning when notice is received, then the party submitting such repurchase request will have the right to refer the matter, at its discretion, to either mediation or third-party arbitration, and the party obligated to repurchase must agree to the selected resolution method. As noted above, the dispute resolution provision, along with the other new shelf transaction requirements, should encourage ABS issuers to design and prepare ABS offerings with greater oversight and care. We believe that the dispute resolution provision will enhance the enforceability of the transaction terms and should incentivize issuers to provide investors with accurate and complete information at the time of the offering. We believe that these requirements are appropriate for asset-backed securities transactions to be offered to the public off a shelf registration statement.

(b) Comments on Proposed Rule

Commenters generally supported a dispute resolution process.[1122] Several commenters recommended that we require that binding arbitration be the sole process.[1123] We received a significant number of comments stating that 180 days is an appropriate time period for the obligated party to review repurchase requests.[1124] One commenter stated that 180 days may not be long enough for RMBS.[1125] Another commenter noted that transactions backed by assets that have shorter maturity dates should have a shorter timeframe.[1126] Although the proposed rule did not specifically address payment of the costs of the dispute resolution process, several commenters made recommendations for which party should pay.[1127] We also received comments that we specify that a repurchase is not the only way a repurchase request can be satisfied.[1128]

(c) Final Rule and Economic Analysis of the Dispute Resolution Shelf Requirement

As a third transaction requirement for shelf registration, we are requiring, as proposed but with slight modification, that the underlying transaction documents include dispute resolution procedures for repurchase requests.[1129] We note that our original proposal for the dispute resolution requirement appeared in the same subsection of Form SF-3 as our credit risk manager proposal, even though we intended them to operate separately from each other. Thus, while we believed that our asset review shelf requirement would help investors evaluate whether a repurchase request should be made, we structured the dispute resolution provision so that investors could utilize the dispute resolution provision for any repurchase request, regardless of whether investors direct a review of the assets. We believe that organizing the dispute resolution requirement as a separate subsection in the shelf eligibility requirements will help to Start Printed Page 57283clarify the scope of the dispute resolution provision.

As we have discussed above, the shelf eligibility conditions that we are adopting are intended to help ensure that ABS shelf offerings have transactional safeguards and features that make securities appropriate to be issued off a shelf. We believe that the dispute resolution provision will provide a key procedural safeguard for investors to resolve disputes over repurchase requests in an effective and timely manner. We expect that the dispute resolution provision should generate efficiencies in the repurchase request process. We believe that, as a result of the asset review provision and the dispute provision, sponsors may have an increased incentive to carefully consider the characteristics of the assets underlying the securitization and to accurately disclose these characteristics at the time of the offering. We also believe that investors should benefit from reduced losses associated with nonperforming assets since, as a result of this new shelf requirement, sponsors will have less of an incentive to include nonperforming assets in the pool.

Under the new rule, the transaction agreements must provide that if an asset subject to a repurchase request pursuant to the terms of the transaction agreements is not resolved by the end of the 180-day period beginning when notice is received, then the party submitting such repurchase request will have the right to refer the matter, at its discretion, to either mediation or third-party arbitration, and the party obligated to repurchase or replace must agree to the selected resolution method.[1130] In response to comments, the final rule applies to those assets subject to a repurchase request that has not been resolved. We agree with several commenters that indicated that the term “resolved” is more appropriate than “repurchased,” which was proposed, since “repurchased” could have the unintended effect of restricting resolution of a repurchase request only to repurchasing the asset.[1131] We also believe that investors should be able to utilize the dispute resolution provision not only in connection with those requests in which the sponsor has failed to respond in a timely manner but also for those requests in which investors believe that the resolution offered by the sponsor does not make them whole.

We realize there are possible costs associated with setting the waiting period at 180 days before the party submitting the request has the right to refer the matter to mediation or arbitration. On the one hand, we recognize that there is the possibility that 180 days may not be long enough to come to a resolution due to numerous rebuttals in some situations, as noted by one commenter.[1132] This commenter recommended that the 180 days serve as a timeframe for due diligence and discussion and that the transaction parties be permitted to specify in the transaction agreements how much additional time beyond the 180 days the responsible party should be provided before the requesting party has the right to refer the dispute to mediation or arbitration. We believe that such an approach, however, may result in investors having to wait too long before being able to proceed to mediation or arbitration. On the other hand, we also recognize that the 180-day period may be too long for shorter term transactions since some investors may hold classes of assets that pay off sooner than 180 days. Although commenters generally supported the 180-day waiting period, one commenter recommended, for shorter term transactions, that the timeframe be reduced to 90 days before investors could proceed to mediation or arbitration.[1133] While we appreciate the timing issues raised by shorter term transactions, it is not clear that 90 days provides the responsible party with enough time to complete due diligence and engage in discussions with the requesting party. For these reasons, we believe 180 days, in general, fairly balances the need of investors for quick resolution with the desire of issuers for time to address the request.

In addition, some commenters recommended that we require binding arbitration as the single form of dispute resolution. Because we believe that investors should have access to all options available to resolve a dispute, we are not requiring a specific form or process to resolve disputes. The final rule permits a demanding party to determine what form of dispute resolution is appropriate.

Finally, after considering the comments received, we are requiring that the transaction documents specify that if arbitration occurs, the arbitrator will determine the party responsible for paying the dispute resolution fees and in the case of mediation, the parties, with the assistance of the mediator, will mutually agree on the allocation of the expenses incurred. While some commenters recommended that the losing party should pay the expenses, we believe that letting the arbitrator or the parties in mediation determine who pays balances competing concerns. On the one hand, some commenters expressed concern about the possibility of investors using the dispute resolution process for frivolous disputes and therefore recommended that we require the transaction documents to specify that the losing party pays.[1134] On the other hand, there may be instances where the requesting party uses the dispute resolution process for a legitimate claim and the arbitrator rules against the claim but believes that the requesting party should not be required to bear all the expenses associated with the dispute resolution.[1135] By giving the arbitrator the discretion to make this determination based on the facts and circumstances of the repurchase claim at issue, we believe investors will not be discouraged from using the dispute resolution process for valid claims while also curbing potentially frivolous claims, given the possibility of having to pay the fees associated with the dispute resolution.

We recognize that the dispute resolution provision could result in increased costs for ABS issuers and investors. We believe that these costs will likely be similar to other securities industry dispute resolution costs, which typically include filing fees, hearing session fees, and other miscellaneous arbitrator or mediator expenses. According to FINRA, arbitration and mediation filing fees depend on the size of the claim and can be up to $500 for an amount in controversy over $100,000.[1136] In addition, the dispute parties will incur the costs of arbitrator/mediator compensation, which depends on the length of the hearing and the complexity of the case. A typical arbitration hearing of three days can cost from $2,700 to $6,750 for an amount in controversy in the $100,000 to $500,000 range.[1137] A typical Start Printed Page 57284mediation hearing of one day can cost between $1,000 and $6,400.[1138] The parties will also incur attorneys' fees with arbitration or mediation hearings, which will depend upon the length of the hearing, the number of attorneys involved, and the amount of preparation required.

Because the dispute resolution provision is not limited strictly to repurchase requests connected with a review pursuant to the asset review provision, there is a possibility that frivolous repurchase requests could be made and thus subject to the dispute resolution process. As discussed above, under the final rule the requesting party could be responsible for paying the dispute resolution expenses based on a determination by the arbitrator (or if the parties mutually agree that the requesting party should incur these expenses in the case of mediation). This is intended to limit the number of potentially frivolous claims.

(4) Investor Communication

(a) Proposed Rule

In the 2011 ABS Re-Proposing Release, we proposed, as a shelf eligibility requirement, a method for facilitating investor communication with other investors related to their rights under the terms of the ABS. In particular, the proposed rule would require that the transaction agreements contain a provision requiring the party responsible for filing the Form 10-D to include in ongoing distribution reports on Form 10-D any request received from an investor to communicate with other investors related to investors exercising their rights under the terms of the asset-backed security. The request to communicate would be required to include: the name of the investor making the request, the date the request was received, and a description of the method by which other investors may contact the requesting investor. As we discussed in the 2011 ABS Re-Proposing Release, investors have raised concerns about the inability to locate other investors in order to enforce rights contained in the transaction documents, such as those relating to the repurchase of underlying assets for breach of representations and warranties.[1139] Frequently, in order to act, the transaction agreements require a minimum percentage of investors acting together. Additionally, as one investor noted, since most ABS are held by custodians or brokers in “street name” through the Depository Trust Company (DTC), investors face further difficulties in trying to locate one another to communicate about exercising their investor rights.[1140]

While we did not propose specific procedural requirements for verifying that the person requesting to communicate is a beneficial owner of the particular ABS, we proposed to include an instruction to limit investor verification requirements, if the underlying transaction agreements contain such procedures, to no more than the following: (1) If the investor is a record holder of the securities at the time of a request to communicate, then the investor would not have to provide verification of ownership because the person obligated to make the disclosure will have access to a list of record holders; and (2) if the investor is not the record holder of the securities at the time of the request to communicate, the person obligated to make the disclosure must receive a written statement from the record holder verifying that, at the time the request is submitted, the investor beneficially held the securities.

(b) Comments on Proposed Rule

Many commenters were generally supportive of the concept to allow for mechanisms for investors to contact and communicate with each other.[1141] Some commenters generally supported the proposal that investors' requests to communicate be reported on Form 10-D.[1142] Other commenters suggested that the Commission allow for alternative methods of communication and recommended that the Commission permit the use of investor registries and trustee Web site processes currently in practice for many recent CMBS transactions.[1143] Some of these commenters noted that it would be quicker for investors to communicate with each other on a Web site compared to requiring the issuer to include the notice on Form 10-D and would be less costly.[1144] One of these commenters also recommended a Web site approach because it would provide investors with more privacy, which investors may want in certain situations.[1145] The other commenter noted that a Web site approach could provide investors with an open and instant dialogue with other investors.[1146]

Commenters suggested other methods to simplify the verification process. One commenter opposed the proposed instruction on how an investor's ownership of the securities is verified because most certificates are held through DTC, which may make it difficult and costly to determine who the ultimate holders are.[1147] Several commenters suggested requiring investors to complete a certification regarding their ownership.[1148] Another commenter suggested a written certification plus one or more items to verify interest.[1149] One commenter suggested that the right to communicate be limited to current investors and that the nature of communication be limited to a “factual statement that the investor wishes to communicate with other investors with respect to exercising a right under the transaction documents.” [1150] This commenter explained that limiting the nature of the Start Printed Page 57285communication would eliminate any need for the filing party to monitor or edit the communication and also would address any liability concerns associated with the inclusion of references to a specific party to the transaction or as to what contractual standard may have been violated. Responding to a request for comment in the 2011 ABS Re-Proposing Release,[1151] some commenters stated the disclosure should include a reason for the communication that would be specified in a pre-set list.[1152] One commenter, however, opposed requiring the issuer to disclose the type or category of matter that the investor wishes to discuss with other investors.[1153]

(c) Final Rule and Economic Analysis of the Investor Communication Shelf Requirement

We are adopting, as proposed, a shelf eligibility requirement that an underlying transaction agreement include a provision to require the party responsible for making periodic filings on Form 10-D to include in the Form 10-D any request from an investor to communicate with other investors related to an investor's rights under the terms of the ABS that was received during the reporting period by the party responsible for making the Form 10-D filings.[1154] Without an effective means for investors to communicate with each other, investors may be unable to utilize the contractual rights provided in the underlying transaction agreements.[1155] Therefore, we are requiring that the investor communication provision be included in an underlying transaction agreement so that the party responsible for making Form 10-D filings will be contractually obligated to disclose an investor's desire to communicate.[1156] We continue to believe that this is an appropriate requirement for ABS shelf eligibility because facilitating communications among investors enables them to more effectively exercise the rights included in the underlying transaction agreements, which we believe will enhance the enforceability of representations and warranties regarding the pool assets. As noted above, the new shelf transaction requirements should encourage ABS issuers to design and prepare ABS offerings with greater oversight and care. We believe that stronger enforcement mechanisms should incentivize issuers to provide investors with accurate and complete information at the time of the offering. This shelf eligibility requirement, for example, will assist investors in exercising their rights related to the new asset review provision required for shelf eligibility. Those rights would include the right to direct a review of underlying assets to determine whether the assets comply with the representations and warranties. Consequently, we believe that these new shelf requirements aimed at helping investors exercise their contractual rights will assist in increasing investors' participation in the ABS markets and thereby foster greater capital formation.

In previous releases, we have recognized that in certain circumstances the Internet can present a cost-effective alternative or supplement to traditional disclosure methods. We considered whether a Web site or investor registry would be a more effective approach to facilitate investor communication, including consideration of the comments received supporting a Web site approach. While we appreciate some of the potential benefits that may be afforded by a Web site approach, such as faster dissemination of the notices and more robust communication capabilities as noted by some commenters,[1157] we believe that requiring that the investor communication notices be filed with the Form 10-D is the best way to ensure that these requests reach investors. This approach is consistent with our efforts to facilitate the distribution of all investor information regarding the ABS in one place at an expected time—that is, through distribution reports that are attached as exhibits to the Form 10-D. We also believe that this approach is a cost-effective means for issuers to provide investors with communication notices since we are using an existing periodic report. Additionally, by requiring issuers to file the notices with the Commission, as opposed to posting the notices on a Web site, we will be able to more effectively monitor compliance with this shelf requirement and provide investors with reliable access to the notices through EDGAR, even at times when the markets are in distress and issuers' Web sites are not accessible. Finally, we note that while our shelf requirement is intended to provide investors with at least one method to contact other investors, the final rule does not preclude issuers from utilizing Web sites to provide investors with more robust communications capabilities and we encourage issuers to do so.

We acknowledged in the 2011 ABS Re-Proposing Release that transaction parties might want to specify procedures in the underlying transaction agreements for verifying the identity of a beneficial owner in a particular ABS prior to including a notice in a Form 10-D. While we did not propose specific procedural requirements to be added to the agreements, we did propose to limit the extent of the verification procedures that the transaction parties could impose to verify investor ownership. As summarized above, several commenters consisting of issuers, investors, trustees, and trade associations suggested that the investor verification procedures should be easy and quick to perform and provided various recommendations for the Commission to consider.[1158] Taking into account suggestions from commenters, we are modifying part of the proposed instruction to specify that, if the investor is not the record holder of the securities, an issuer may require no more than a written certification from the investor that it is a beneficial owner and another form of documentation such as a trade confirmation, an account statement, a letter from the broker or dealer, or other similar document verifying ownership.[1159] We are making this Start Printed Page 57286change since ownership of most ABS is held in book-entry form through DTC.[1160] We are also adopting, as proposed, the other part of the instruction that states that if the investor is the record holder of the securities, an investor will not have to provide verification of ownership because the person obligated to make the disclosure will have access to a list of record holders.

Under the final rule, the disclosure in Form 10-D is required to include no more than the name of the investor making the request, the date the request was received, a statement to the effect that the party responsible for filing the Form 10-D has received a request from such investor, stating that such investor is interested in communicating with other investors about the possible exercise of rights under the transaction agreements, and a description of the method by which other investors may contact the requesting investor.[1161] While we requested comment on whether we should prescribe a pre-set list of objective categories from which an investor could choose for the purpose of indicating why it is requesting communication with other investors, we are not requiring that the investor specify the substance of the communication due to concerns raised by commenters. As summarized above, some commenters opposed imposing any obligation on the party responsible for filing the Form 10-D to monitor or edit the communications.[1162] We also agree with one commenter that the substance of the communication is more appropriately conveyed directly by the investor and should not be given an imprimatur of the party involved in facilitating the communication request.[1163] Thus, the purpose of this communication requirement is not to communicate specific issues or concerns of an investor but rather is intended to be a method for investors to notify other investors of their interest to communicate.

As proposed, we are also including an instruction to Item 1121(e) of Regulation AB to define the type of notices that are required to be on Form 10-D. The party responsible for filing the Form 10-D will be required to include disclosure of only those notices of an investor's desire to communicate where the communication relates to the investor exercising its rights under the terms of the ABS. Thus, the party responsible for filing is not required to disclose an investor's desire to communicate for other purposes, such as identifying potential customers or marketing efforts.[1164]

While we acknowledge that issuers will incur some cost to implement this provision, we believe, taken together with the new asset review provision, that the disclosure will benefit investors by helping them establish communication and overcome collective action problems. As a result, this requirement should help investors exercise their rights under the transaction agreements, including those that are required to be included in the transaction documents to comply with shelf eligibility requirements. We acknowledge that the rule will minimally increase the costs for the party responsible for making the periodic filings on Form 10-D since it will need to modify its existing information systems to receive investors' requests to communicate. However, this is a very low cost method to help distinguish shelf appropriate ABS offerings. The Form 10-D is an existing periodic report that provides investors with, among other things, distribution information and pool performance information for the distribution period. Given the nature and frequency of the Form 10-D, we believe that adding the investor communication request requirement to the Form 10-D is appropriate and beneficial to investors because it will facilitate the distribution of all investor information regarding the ABS in one place, at an expected time. Using an existing form will also limit the cost for issuers because a separate reporting mechanism will not be necessary. While we have sought to limit costs by using Form 10-D, we recognize for those issuers that currently offer investor registries or Web sites and decide to continue to offer those methods of communication that there will be additional costs.

(b) Shelf Eligibility—Registrant Requirements

In the 2010 ABS Proposing Release, we proposed new registrant requirements related to compliance with the proposed transaction requirements for shelf eligibility (i.e., risk retention, a third-party opinion provision in transaction agreements, an officer certification, and an undertaking to file ongoing Exchange Act reports).[1165] We proposed that prior to filing a registration statement on proposed Form SF-3 to the extent the depositor, any issuing entity that was previously established by the depositor, or an affiliate of the depositor is or was at any time during the previous twelve months required to comply with the proposed transaction requirements of Form SF-3 with respect to a previous offering of asset-backed securities involving the same asset class, such depositor, each such issuing entity, and any affiliate of the depositor must have filed all material required to be filed during the twelve months (or shorter period that the entity was required to have filed such materials). Also, such material, other than certain specified reports on Form 8-K, must have been filed in a timely manner.[1166] Finally, we proposed a separate registrant requirement that there be disclosure in the registration statement stating that the proposed registrant requirements have been complied with.

In light of the changes to proposed amendments to the transaction requirements for shelf eligibility, we revised the proposed registrant requirements to make conforming changes in the 2011 ABS Re-Proposal. We re-proposed that to the extent the depositor, any issuing entity that was previously established by the depositor, or any affiliate of the depositor is or was at any time during the twelve month look-back period required to comply with the proposed transaction requirements of Form SF-3 with respect to a previous offering of asset-backed securities involving the same asset class then the registrant must meet certain registrant requirements at the time of filing the shelf registration statement. The re-proposed registrant requirements would require that such depositor, each such issuing entity, and any affiliate of the depositor must have timely filed all required certifications and all transaction agreements that contain the required provisions relating to the credit Start Printed Page 57287risk manager, repurchase request disputes, and investor communication.

In addition, we re-proposed to make the proposed separate registrant requirement that would have required the registrant to include disclosure in the registration statement stating the depositor has complied with the registrant requirements an instruction rather than a shelf eligibility registrant requirement.

Because we did not receive any comments on the revised registrant requirements for shelf eligibility, we are adopting the revised registrant requirements largely as re-proposed. Under the final rule, we are retaining the registrant requirement that was previously in Form S-3 relating to delinquent filings of the depositor or an affiliate of the depositor for purposes of new Form SF-3. Since registrants are already required to comply with this particular existing shelf registrant requirement, registrants should not incur additional compliance costs.

The final rule also requires that to the extent the depositor or any issuing entity that was previously established by the depositor, or any affiliate of the depositor is or was at any time during the twelve month look-back period required to comply with the transaction requirements of Form SF-3 with respect to a previous offering of asset-backed securities involving the same asset class, then such depositor, each such issuing entity, and any affiliate of the depositor, must have timely filed all required certifications and all transaction agreements that contain the required provisions relating to the asset review provision, dispute resolution, and investor communication.

We believe that connecting the registrant requirements to the transaction requirements of prior offerings by the depositor, or affiliates of the depositor, will incentivize the depositor to timely file all required transaction documents with the required provisions and the required certifications.

In addition, as proposed, we are including an instruction stating that the registrant must disclose in a prospectus that it has met the registrant requirements. We believe disclosure of compliance with the registrant requirements will provide a means for market participants (as well as the Commission and its staff) to better gauge compliance with the shelf eligibility conditions of Form SF-3.

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

(1) Annual Compliance Check Related to Timely Exchange Act Reporting

(a) Proposed Rule

As we noted in the 2010 ABS Proposing Release, Form S-3 eligibility is determined at the time of filing the registration statement and again at the time of updating the registration statement under Securities Act Section 10(a)(3) by filing audited financial statements.[1167] We explained that, because ABS registration statements do not contain financial statements of the issuer, we believe a different periodic determination of continued shelf eligibility must be established. We believed that such an evaluation would provide us and the staff with a better means to oversee compliance of the new Form SF-3 eligibility conditions that would replace the investment-grade ratings requirement. Therefore, in lieu of the Section 10(a)(3) updating, we proposed to revise Securities Act 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. An ABS issuer wishing to conduct a takedown off an effective shelf registration statement would be required to evaluate whether the depositor, any issuing entity previously established by the depositor or any affiliate of the depositor that was required to report under Sections 13(a) and 15(d) of the Exchange Act during the previous twelve months for asset-backed securities involving the same asset class, have filed such reports on a timely basis, as of 90 days after the end of the depositor's fiscal year end.[1168] Under this proposal the related registration statement could not be utilized for subsequent offerings for at least one year from the date the depositor or the affiliated issuing entity that had failed to file Exchange Act reports then became current in its Exchange Act reports (and the other requirements had been met).

(b) Comments on Proposed Rule

We received only a few comments on our proposal. One commenter expressed concern that it is not possible for ABS issuers to fully verify compliance with the Exchange Act reporting registrant requirements as of 90 days after the end of the depositor's fiscal year end because there could be an unknown defect, latent or otherwise, in one or another of the relevant issuing entities' reports or reporting history.[1169] Another commenter suggested that the loss of shelf eligibility should not be automatic.[1170] This commenter suggested allowing for an explanation and any resulting penalty should be at the staff's discretion.[1171]

(c) Final Rule and Economic Analysis of the Final Rule

Under the new rule, an ABS issuer with an effective shelf registration statement will be required to evaluate whether the depositor, any issuing entity previously established by the depositor or any affiliate of the depositor was required to report under Sections 13(a) or 15(d) of the Exchange Act during the previous twelve months for asset-backed securities involving the same asset class, have filed such reports on a timely basis. As noted above, one commenter expressed concern that ABS issuers would be unable to fully verify compliance with the Exchange Act reporting registrant requirements as of 90 days after fiscal year end due to an unknown defect in one or another of the relevant issuing entities' periodic reports or reporting history.[1172] We note that this annual compliance check is the same evaluation undertaken today by registrants at the time of filing the registration statement and at the time of filing Form 10-K; therefore, we expect that issuers would use the same procedures that are used to verify compliance at the time of filing the registration statement. As a result, this rule conforms the ABS process to the corporate issuers' process. Additionally, we believe that the costs will be minimal and limited to ABS issuers performing the same procedures they perform at the time of filing a registration statement. We believe that Start Printed Page 57288this annual shelf eligibility compliance check will benefit investors because it will encourage issuers to file their Exchange Act reports in connection with prior offerings at the required time and therefore enhance informed investment decisions. We acknowledge, however, that there will be costs to those issuers that determine, as a result of their annual evaluation, that they did not timely file their Exchange Act reports and lose shelf access since they will be required to use Form SF-1. These costs are related to market timing given the possibility of additional staff review that may occur with a Form SF-1 compared to Form SF-3. We believe that this new provision simply ensures that the shelf process for ABS includes a mechanism to check whether the shelf issuer is current and timely with its Exchange Act reporting obligations as is currently required for corporate shelf issuers.

(2) Annual Compliance Check Related to the Fulfillment of the Transaction Requirements in Previous ABS Offerings

(a) Proposed Rule

In the 2010 ABS Proposing Release, we also proposed to require that, for continued shelf eligibility, an ABS issuer would be required to conduct an evaluation at the end of the fiscal quarter prior to the takedown of whether the ABS issuer was in compliance with the proposed transaction requirements relating to risk retention, third-party opinions, the officer certification, and the undertaking to file ongoing reports. If the ABS issuer was not in compliance with the transaction requirements, then it could not utilize the registration statement or file a new registration statement on Form SF-3 until one year after the required filings were filed.

In the 2011 ABS Re-Proposal, we re-proposed this registrant requirement to require an annual evaluation of compliance with the transaction requirements of shelf registration rather than an evaluation on a quarterly basis as we had originally proposed. Therefore, notwithstanding that the registration statement may have been previously declared effective, in order for the registrant to conduct a takedown off an effective registration statement, an ABS issuer would be required to evaluate, as of 90 days after the end of the depositor's fiscal year end, whether it meets the registrant requirements. Under the 2011 ABS Re-Proposal, to the extent that the depositor or any issuing entity previously established by the depositor or any affiliate of the depositor, is or was at any time during the previous twelve months, required to comply with the proposed new transaction requirements related to the certification, credit risk manager and repurchase dispute resolution provisions, and investor communication provision, with respect to a previous offering of ABS involving the same asset class, such depositor and each issuing entity must have filed on a timely basis, at the required time for each takedown, all transaction agreements containing the provisions that are required by the proposed transaction requirements as well as all certifications.

In response to commenters' concerns that the one-year penalty for non-compliance with the transaction requirements was too extreme, we revised and re-proposed to allow depositors and issuing entities to cure any failure to file the required certification or transaction agreements with the required shelf provisions. Under the proposed cure mechanism, the depositor or any issuing entity would be deemed to have met the registrant requirements, for purposes of Form SF-3, 90 days after the date all required filings were made.

(b) Comments on Proposed Rule

Commenters recommended that we reduce the waiting period after curing the deficiency. Some commenters requested that the waiting period after curing the deficiency be reduced to 30 days.[1173] Another commenter recommended changing the period to 30 or 45 days.[1174]

(c) Final Rule and Economic Analysis of the Final Rule

The final rule includes a registrant requirement that requires an annual evaluation of compliance with the transaction requirements of shelf registration, as re-proposed in the 2011 ABS Re-Proposing Release. Under the final rule, notwithstanding that the registration statement may have been previously declared effective, in order to conduct a takedown off an effective shelf registration statement, an ABS issuer would be required to evaluate, as of 90 days after the end of the depositor's fiscal year end, whether it meets the registrant requirements, which is the same look-back period for the ABS issuer as the compliance evaluation for Exchange Act reporting described above.

Under the final rule, a depositor and issuing entity may cure the deficiency if it subsequently files the information that was required. After a waiting period, it will be permitted to continue to use its shelf registration statement.[1175] Under the cure mechanism, the depositor and issuing entity will be deemed to have met the registrant requirements, for purposes of Form SF-3, 90 days after the date all required filings are filed.

Because the issuer can cure the deficiency while it continues to use the shelf and before the required annual evaluation, the issuer can avoid being out of the market. For example, a depositor with a December 31 fiscal year end has an effective shelf registration statement and on March 30 of Year 1, it evaluates compliance with all registrant requirements under new Rule 401(g) (90 days after the last fiscal year end) and determines that it is in compliance. The depositor then offers ABS but does not timely file the required transaction agreements that should have been filed on June 20 of Year 1. The depositor would be able to continue to use its existing shelf until it is required to perform the annual evaluation required by new Rule 401(g), on March 30 of Year 2. After March 30 of Year 2 and until June 20 of Year 2 (one year after the agreements should have been filed), the depositor would not be able to offer ABS off of the shelf registration statement, and would not be permitted to file a new shelf registration statement. However, if the depositor had cured the deficiency by filing the agreements on July 1 of Year 1, under the final rule, a new registration statement could be filed 90 days after July 1 of Year 1 (or September 29 of Year 1), instead of waiting until June 20 of Year 2 (when it otherwise would meet the twelve month timely filing requirement). In that case, at the time of the next annual evaluation for the registration statement on March 30 of Year 2, the depositor would be deemed to have met the registrant requirements because it would have cured the deficiency more than 90 days earlier on July 1 of Year 1, and thus the depositor could continue to use its existing shelf registration statement.[1176]

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Our approach is designed to strike a balance between encouraging issuers' compliance with the shelf transaction requirements and commenters' concerns that the one-year time out period in the 2010 ABS Proposals was too long. Also, as discussed above, we received comments that 90 days was still too long and that a 30 or 45 day waiting period would be more appropriate.[1177] We continue to be concerned that 30 or 45 days would not adequately incentivize issuers to comply with the transaction requirements. Based on staff observations of shelf offerings since the crisis, registrants typically conduct between two and three offerings during the course of a year. Under such conditions, a short waiting period such as 30 or 45 days would provide minimal, if any, incentive to comply with transaction requirements.

We are not adopting another commenter's suggestion that the loss of shelf eligibility not be automatic and that issuers should instead be allowed to explain and be penalized at the staff's discretion.[1178] The eligibility requirement is an incentive for issuers to comply with the shelf transaction requirements—providing the market with information about the issuer and thus an appropriate eligibility criterion to offer securities off the shelf. Furthermore, an ad hoc review of justifications for delays or missing filings would be inefficient use of the Commission's resources and would not incentivize issuers to monitor compliance.

We believe that the annual shelf eligibility compliance check will benefit investors because it will encourage issuers to file their transaction documents in connection with prior offerings at the required time and therefore enhance informed investment decisions. We acknowledge that the annual evaluations of compliance with the transaction requirements will impose additional costs on ABS issuers in the form of systems needed to examine compliance with the filing requirements. However, we believe that these costs should be minimal because issuers should already have, in most instances, systems designed to ensure that the transaction agreements are being filed timely in accordance with rules under the Securities Act.

4. Continuous Offerings

(a) Proposed Rule

In the 2010 ABS Proposing Release, we had proposed to amend Rule 415 to limit the registration of continuous offerings for ABS offerings to “all or none” offerings. In an “all or none” offering, the transaction is completed only if all of the securities are sold. In contrast, in a “best-efforts” or “mini-max” offering, a variable amount of securities may be sold by the issuer. 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, information about the asset pool required by Item 1111 of Regulation AB, either in its existing form or as amended today, could not be complied with.[1179] As noted in the 2010 ABS Proposing Release, we believe that our proposed restriction 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.[1180]

(b) Comments on Proposed Rule

Only one commenter commented on the proposal to limit the use of continuous offerings on shelf to “all or none” offerings.[1181] This commenter agreed that “in a continuous offering where the ultimate size of the offering is unknown, investors would not necessarily know the specific assets to be included in the transaction” and the proposal properly eliminates this issue. However, this commenter suggested more guidance on what constitutes an “all or none” offering.[1182]

(c) Final Rule and Economic Analysis of the Final Rule

We are adopting the rule as proposed. The new rule will provide ABS investors in continuous ABS offerings with information about all relevant pool assets and would close a potential gap in our regulations for ABS offerings. Under the final rule, 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.[1183]

As one commenter noted, in some ABS offerings, all or a portion of one or more classes of ABS that are offered for sale to investors through one or more underwriters may initially be retained by the depositor or sold to one or more of its affiliates.[1184] In these cases, the offerings may be conducted as a firm commitment underwritten offering or as a best efforts offering. The commenter believed that such offering would not be a “mini-max” offering because the total size of the offering is known and disclosed in the prospectus. We agree with the commenter that these offerings would not be a “mini-max” offering if the prospectus includes all transaction-specific information, including information about the specific assets included in the pool.

This rule will be beneficial to investors in continuous offerings by ensuring that the information they receive is about all pool assets underlying the asset-backed securities they purchase. While ABS offerings are typically not conducted as a continuous offering, we believe that it is important for us to close a potential gap in our regulations for ABS offerings so that ABS investors receive this material information when making an investment decision—irrespective of the type of public offering. We acknowledge that restricting continuous offerings to “all or none” limits issuers' choice and may potentially impose costs on those issuers that would have preferred to conduct the offering on a best efforts basis. However, we also note that the staff is not aware of any prior public offering of ABS that was conducted on a continuous offering—either as “all or none” or best efforts—and therefore we expect these costs to be minimal. For similar reasons, we do not believe that the amended rule will have an impact Start Printed Page 57290on competition, efficiency, or capital formation.

5. Mortgage Related Securities

(a) Proposed Rule

In the 2010 ABS Proposing Release, we proposed to require that offerings of mortgage related securities be eligible for shelf registration on a delayed basis only if, like other asset-backed securities, they meet the registrant and transaction requirements for shelf registration. Under the proposal, delayed shelf offerings of mortgage related securities could be registered only on new Form SF-3, and accordingly, must meet the eligibility requirements of Form SF-3. We proposed eliminating the provision in Rule 415 that permits the registration of “mortgage related securities,” as that term is defined in Section 3(a)(41) of the Exchange Act, for shelf offerings without regard to form eligibility requirements. This was a provision that was added to Rule 415 contemporaneous with the enactment of SMMEA.[1185] Therefore, under the provision, an offering of mortgage related securities did not have to meet the requirements of Form S-3 and could have been registered on a delayed basis on Form S-1.[1186] As we stated in the 2010 ABS Proposing Release, we proposed this requirement based on our belief that mortgage related securities should be required to meet all the requirements that we proposed 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 ABS.[1187]

(b) Comments on Proposed Rule

One commenter agreed that mortgage related securities should be held to the same standards as other asset-backed securities.[1188] Another commenter believed that both proposed Forms SF-1 and SF-3 should be available for delayed offerings of mortgage related securities “to accommodate issuers or transactions that may not have a need for an SF-3 registration or assets that are unique and better suited for an SF-1 filing,” but the commenter did not provide specific examples or further explanation.[1189]

(c) Final Rule and Economic Analysis of the Final Rule

We are revising Rule 415 as proposed. The change requires that mortgage related securities meet all criteria for eligibility for shelf registration on new Form SF-3. We believe that mortgage related securities should meet all the requirements we are adopting in order to be eligible for shelf registration on a delayed basis since these securities present the same complexities and concerns as other asset-backed securities. If we continue to allow issuers of mortgage related securities to offer securities on a delayed basis off the shelf without regard to the shelf eligibility requirements, we would effectively allow mortgage related securities issuers to circumvent the requirements we are adopting.

We believe that the amendment to Rule 415 adopted today will result in consistent and fair treatment of all asset-backed securities, regardless of the nature of the underlying pool assets. We believe that the impact of this rule on competition and capital formation will be minimal since most, if not all, issuers of mortgage related securities have met the shelf eligibility requirements and conducted offerings off shelf registration statements.

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

1. Proposed Rule

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),[1190] with respect to an issue of securities where the issuer has not been previously required to file reports pursuant to Sections 13(a) or 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.[1191] This staff position was later codified in 2004.[1192]

In light of recent economic events and to make this rule consistent with our other proposed revisions, in the 2010 ABS Proposing Release, we proposed to eliminate this exception so that a broker or dealer would be required 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 IPO, 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 IPO given that the mix of assets changes and is different for each offering. Additionally, 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 three business days in advance of the first sale in a shelf offering.

2. Comments on Proposed Rule

Commenters generally supported the proposal.[1193] Several trade associations agreed that investors should have sufficient time to review an offering.[1194] One trade association supported the proposal, but suggested an “access equals delivery” model akin to final prospectuses to satisfy the requirements.[1195] One individual commenter supported the proposal but suggested that ABS structured as master trusts be treated differently so as not to require information delivered previously to be delivered again.[1196]

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3. Final Rule and Economic Analysis of the Final Rule

We are eliminating the exception in Rule 15c2-8(b) for shelf-eligible asset-backed securities from the 48-hour preliminary prospectus delivery requirement as proposed.[