Last Friday, Morgan Lewis structured transactions lawyer Charlie Sweet moderated Reg AB2 – Key Issues for Implementation, a panel presented by SIFMA. The panel featured several preeminent securitization lawyers, who discussed the issues facing industry participants as they prepare to implement Reg. AB II.
Reg. AB II contains provisions that significantly change disclosure requirements, the offering process and periodic reporting for public ABS, which the SEC adopted in an effort to enhance transparency, better protect investors and facilitate capital formation in the securitization market.
Issues that were spiritedly discussed by the panelists included:
- Asset-level data. The panelists agreed that the new requirement to disclose asset-level data is probably the most important of the new rules. While the SEC has strived to be very specific for the asset classes where these disclosures are required (RMBS, CMBS, auto loans and leases, debt securities and resecuritizations), significant interpretive issues remain as to several key data points. The SEC consulted with the CFPB and limited the required disclosure fields in an effort to address privacy concerns, but concerns remain. For RMBS in particular, the data fields required are in some respects less extensive than have become customary, and it is not clear whether investors will accept this more limited information.
- Shelf eligibility criteria. As required by the Dodd-Frank Act, the SEC has replaced the requirement that the securities be rated investment grade with several new requirements, including a certification by the CEO of the depositor at the time of each takedown addressing the prospectus disclosure and the structure of the securitization, and transaction document provisions requiring the appointment of an “asset representations manager” to review assets when certain trigger events occur. The panelists agreed that significant new internal compliance procedures, including sub-certifications, will be needed to prepare most CEOs for their certification responsibilities. It is not clear who will serve as “asset representations managers,” particularly in asset classes other than RMBS, or what will happen if sufficient service providers willing to undertake this task do not emerge. The newly required annual compliance check could result in the loss of shelf eligibility for issuers that do not pay close attention to ongoing compliance with all of the new shelf eligibility requirements.
- Shelf offering process. Currently, there is no absolute requirement that a shelf ABS issuer either file or deliver a preliminary prospectus. The panelists agreed that the new requirement to file a preliminary prospectus three business days before pricing, and to deliver it to investors 48 hours before delivery of a confirmation, will result in deal structures being cemented sooner. So-called “iterative pricing,” which used to be common in the private-label public RMBS markets, will no longer be possible in public deals.
- Transition period. The panel advised that asset originators and ABS issuers begin to focus now on the systems changes that will be required to enable them to capture and report on all of the required asset-level data fields. Issuers also should start work on individualized internal compliance procedures, consistent with their own particular corporate cultures, to enable their CEOs to be comfortable in the accuracy of the new certifications. The deadline for having an effective shelf registration statement that complies with the new rules is a little more than a year away, and in their effort to meet this deadline, issuers will need to consider carefully whether to participate in any pilot program that may be offered by the SEC.