On February 25, 2014, the Securities and Exchange Commission (the “SEC”) re-opened the comment period for the proposed amendments to Regulation AB and other rules affecting the offering process for asset-backed securities, commonly known as “Regulation AB II.”1 The purpose was to permit comment on a new approach to the dissemination of potentially sensitive asset-level data, as discussed in a memorandum from the SEC staff that was filed with the public comments on Regulation AB II (the “Asset-Level Data Memorandum”).2 The re-opened comment period will close on March 28, 2014.
Regulation AB II originally was proposed in April 2010 (the “Original Proposal”),3 and was partially re-proposed in July 2011 (the “Re-Proposal”).4 The adoption of Regulation AB II was set to be considered at the SEC’s open meeting on February 5, 2014,5 but this item was removed from the agenda before the meeting.
As proposed, Regulation AB II includes provisions that would:
As originally proposed, the new asset-level data points would have been required to be publicly filed on EDGAR. In the Original Proposal, the SEC acknowledged that some asset-level data disclosure requirements, such as the obligor’s geographic location, credit score, income and debt, could raise privacy concerns. Therefore, the SEC did not propose to require disclosure of specific identifying information such as the obligor’s name, address or zip code, and instead proposed requiring disclosure of ranges or categories rather than exact information with respect to the obligor’s credit score, income and debt. The SEC specifically requested comment on privacy issues in the Original Proposal.
In the view of many commenters, the asset-level data requirements in the Original Proposal still would allow the identification of individual obligors and their personal financial status, in conflict with U.S. federal and foreign consumer privacy mandates. However, according to the SEC staff, commenters provided few specific suggestions to remedy these concerns. The SEC requested additional comment on privacy concerns in the Re-Proposal, but commenters offered limited new feedback.
In an effort to address these privacy concerns, the Asset-Level Data Memorandum suggests an approach that would require sensitive asset-level data to be made available to investors and potential investors directly by the issuer on a website, rather than being filed on EDGAR. According to the SEC staff, an approach that relies on issuers to disseminate this information would allow issuers to better police compliance with privacy laws. For example, the Fair Credit Reporting Act limits the ability to share some asset-level data, but there is an exception for disclosure to someone who intends to use the information as a potential investor in connection with evaluation of a credit obligation. The SEC staff believes that issuers are best suited to determine who is a potential investor and whether the method of dissemination falls within the exception. Issuers could implement their own procedures tailored to provide “both flexibility and the possibility of innovation in the delivery of information and privacy controls” – for example, by requiring user registration and a covenant not to reverse engineer the data.
The SEC staff notes that sponsors and issuers of asset-backed securities are quite familiar with website dissemination of important information, as they routinely post transaction agreements and distribution information online, and the required static pool data formerly was customarily provided on websites pursuant to the now-expired static pool accommodation. Regulation AB currently requires prospectuses to disclose how investors can access information on a website. In addition, some asset-level data is already available today, for a fee, from third-party data providers who control the use and access of the information by means of user accounts, confidentiality agreements, and the like.
Under the staff’s proposed approach, asset-level information that does not implicate privacy concerns would still be filed on EDGAR and made available to the general public. Potentially sensitive data, such as credit scores, income and debt amounts, would be provided in full to investors via a website, rather than in ranges or categories. Issuers would be permitted to restrict access to this data as necessary to comply with privacy laws. According to the staff, investors would benefit by having full access to all asset-level data. Because investors would benefit from having access to all asset-level data in one location, the website would be required to include not only the confidential data, but also the remainder of the data that is required to be filed on EDGAR. In addition, the SEC could require a non-public filing of the information disclosed on the website. The issuer would be required to keep the information on the website for at least five years, and to permit investors and potential investors to access it free of charge. The prospectus would disclose the website address, and the website information would be incorporated by reference into both the prospectus and the issuer’s periodic reports under the Securities Exchange Act of 1934.
According to the SEC staff, “[s]ome issuers and investors may decide to move to the private market instead of incurring the costs attendant to providing or receiving information through a Web site . . . . If investors in the private market expect the same or similar information as provided in the public market, this move may not be significant, as issuers would be required to develop comparable disclosure systems for the private market.” Overall, this language overall suggests to us that asset-level disclosure in the private market will not be driven by Regulation AB II, but by investor demand. The proposed new disclosure requirements for private offerings of asset-backed securities were one of the provisions of proposed Regulation AB II that drew the heaviest industry commentary, so this language may signal that the SEC is prepared to drop this controversial requirement, at least as it would apply to asset-level data. However, whether new disclosure requirements for Rule 144A offerings will be included in the final rules when adopted by the SEC remains to be seen.
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1 Re-Opening of Comment Period for Asset-Backed Securities Release, SEC Release Nos. 33-9552, 34-71611, available at https://www.sec.gov/rules/proposed/2014/33-9552.pdf.
2 Available at http://www.sec.gov/comments/s7-08-10/s70810-258.pdf.
3 Asset-Backed Securities; Proposed Rule, SEC Release Nos. 33-9117, 34-61858, 75 Fed. Reg. 23328 (May 3, 2010), available at https://www.sec.gov/rules/proposed/2010/33-9117fr.pdf. Our guide to the Original Proposal is available at http://www.bingham.com/Alerts/Files/2010/04/A-Guide-to-the-SECs-Proposed-Revisions-to-the-Rules-and-Forms-for-Offerings-of-Asset-Backed-Securities.
4 Re-proposal of Shelf Eligibility Conditions for Asset-Backed Securities and Other Additional Requests for Comment, SEC Release Nos. 33–9244, 34–64968, 76 Fed. Reg. 46948, Aug. 5, 2011), available at https://www.sec.gov/rules/proposed/2011/33-9244fr.pdf. Our client alert on the Re-Proposal is available at http://www.bingham.com/Alerts/2011/08/SEC-Re-Proposes-Shelf-Eligibility-Conditions-and-Filing-Requirements-for-Transaction-Documents-in-Offerings-of-Asset-Backed.
5 See our client alert at http://www.bingham.com/Alerts/2014/01/SEC-to-Consider-Adopting-Regulation-AB-II-on-February.
This article was originally published by Bingham McCutchen LLP.