SEC Proposes Overhaul of Regulation AB and Related Rules Regarding the Offering Process, Disclosure and Reporting for Asset-Backed Securities
April 8, 2010
The SEC yesterday proposed a dramatic overhaul of Regulation AB and related rules governing the offering process, disclosure requirements and ongoing reporting requirements for asset-backed securities. The proposed regulation would not only establish extensive new requirements for SEC-registered publicly-offered asset-backed securities but would impose many of the new requirements on private placements of ABS under Rule 144A and Regulation D. The proposed rule is available by clicking here.
Key provisions of the proposed rule include:
Standards and Reporting
Modified Eligibility Criteria for ABS Shelf Offerings
- Asset-level Information in Prospectuses. Granular, loan-by-loan information appropriate to the category of assets securitized will be required in the prospectus. Asset data files must be filed in XML format on EDGAR. For certain categories of assets that implicate privacy concerns (such as credit cards), grouped account information will suffice.
- Ongoing Reporting Requirements. Periodic, asset-level performance information will be required to be filed in standardized format on EDGAR.
- Waterfall Computer Program. A computer program that gives effect to the flow of funds or payment waterfall would need to be filed on EDGAR in a downloadable program language called Python that may be utilized by potential investors.
- Five Business Day Rule. Issuers will be required to provide information, including asset-level data and the waterfall computer program, at least five business days before the first sale.
. ABS shelf eligibility will no longer be conditioned on the offered securities being rated investment grade. Instead, the following requirements must be satisfied.
Private Placements Required to Provide Equivalent Information
- CEO Certification. The CEO of the depositor will be required to certify that the assets have characteristics that provide a reasonable basis to believe they will produce cash flows at times and in amounts necessary to service payments on the securities.
- 5% Skin in the Game. The sponsor or its affiliate will be required to retain 5% of each class of securities offered and not hedge such positions. This requirement will be tested quarterly, and if not met, the related shelf may not be used.
- Third Party Certification of Representations and Warranties. A third party opinion will be required that the assets meet the relevant representations and warranties. This requirement would need to be satisfied quarterly.
- Ongoing Reporting. Ongoing Exchange Act reporting would be required (the provision that suspended reporting obligations after one year if less than 300 holders would be repealed).
. The safe harbors provided by Rule 144A and Regulation D would only be available to private placements if the issuer provides to investors upon request the same information that would be required in a registered offering (including ongoing reporting).
Please feel free to contact any of your regular contacts at the firm or any of the partners and counsel listed under Structured Finance
or Capital Markets
if you have any questions.