In April 2010, the Securities and Exchange Commission (SEC) proposed material changes to public and private offerings of asset-backed securities that substantially amend the existing regulatory framework under Regulation AB that currently provides guidance to issuers of securitization transactions in the public markets. Within the securitization community, the SEC proposed rulemaking has become known as “Regulation AB II.”
A key component of the proposal is increased disclosure requirements including asset-level disclosures on the pools underlying the securitization transaction. The disclosure requirements would apply to the offering and to ongoing transaction reporting. The details required for the asset-level disclosure is tailored to each asset type (e.g., residential mortgage loans, auto loans, etc.). Certain assets like credit card and charge card receivables would be subject to grouped account disclosures given the number of accounts that could be held by a master trust. Utility stranded costs would not be subject to revised asset-level disclosure requirements. In addition to asset level disclosures, sponsors will be required to file a computer program that contains calculations for the payment date distributions under the cash flow waterfall.
Another component of the revisions to Regulation AB is that the forms used to register a public offering of asset-backed securities would be specific to structured transactions for the first time. Form SF-1 would be used for individual registrations that not eligible for a shelf registration, and Form SF-3 would be used for shelf registrations. For shelf registrations, the existing requirement that the offered securities have an investment grade credit rating would be replaced by a risk retention requirement that the sponsor retains a 5% “vertical slice” of the offered securities or a 5% transferor’s interest in a revolving structure. The sponsor’s risk retention could not be hedged. To qualify for a shelf registration, sponsors will also be required to file a preliminary prospectus at least five days before the offering of securities, and the preliminary prospectus will need include disclosures similar to a final prospectus excluding pricing information. The current practice of using a base prospectus with a supplement will be replaced by one integrated prospectus in a single document. The chief executive officer of the issuer will need to provide a certificate stating that he has a reasonable belief that the pool assets will generate sufficient cash flows to support the payments on the offered securities. The proposal will require that issuers file periodic payment reports as long as third party investors hold the offered securities. To qualify for ongoing takedowns under a shelf registration, issuers will need to maintain compliance with shelf registration rules.
Another major change to the offering of asset-backed securities would be the disclosure requirements applicable to private transactions relying on exemptions from registration under Rule 144A or Regulation D under the Securities Act of 1933. The disclosure requirements would apply to “structured finance products” that is a broader category than “asset-backed securities” that are eligible for shelf registrations under the existing Regulation AB. Synthetic transactions and collateralized debt obligations would fall within the proposed definition of “structured finance products.” The proposed rules would subject the issuers of asset-backed securities issued in reliance on an exemption under Rule 144A or Regulation D to the same disclosure and reporting requirements as publicly offered securities. A private offering of securities using either exemption would obligate the issuer to deliver to any investor the same disclosures required in a public offering upon an investor’s request. In a 144A offering, the issuer would be required to file a notice of the offering with the SEC similar to that of a Regulation D offering.