Today, February 19, is the deadline for Regulation AB II pilot program participants to submit initial draft shelf registration statements. Pilot program participants and others have begun to discuss various issues with the SEC staff, and the expressed views of various SEC staff members on these matters have begun to circulate among industry participants. Even more intelligence became public as a result of the session at the recent ABS Vegas 2015 conference in which Katherine Hsu, David Beaning, and M. Hughes Bates, all from the SEC’s Office of Structured Finance, gave their personal views on various Regulation AB II and other current regulatory hot topics. These SEC staff members prefaced their remarks with the traditional disclaimer that the views presented were their own and did not necessarily represent the views of the SEC or its staff and noted that they expect to engage in dialogue with issuers about many of these topics during the registration statement review process. While the individual views of SEC staff members may not represent official SEC or staff positions, and they may change their views as a result of discussions with registrants, knowing those views should still be useful to issuers who are preparing to file Regulation AB II–compliant shelf registration statements in the pilot program or otherwise.
Certification by Depositor’s CEO
- The depositor’s CEO needs to sign the required certification at the time of each takedown. Generally, the depositor will need to make sure that the CEO is available for this purpose. There may be circumstances in which a CEO is on an extended absence, during which the depositor has appointed an acting CEO. In that case, the staffers’ view is that the acting CEO should be able to sign the certification because he or she is the CEO for all practical purposes.
Asset Representations Review
- Asset classes other than RMBS may not have a history of repurchase requests due to alleged breach of representations and warranties concerning the pool assets. However, the rules were intended to prevent the same problems that historically arose in RMBS from recurring in other asset classes. In the staffers’ view, any flexibility in asset representations review of these asset classes is limited to the flexibility provided by the rules, such as the delinquency trigger (with its associated required disclosure of why the trigger chosen was reasonable). The staff expects to engage in significant dialogue with registrants about the reasonableness of the delinquency trigger chosen.
- While the asset representations reviewer for each takedown may not be identified at the time that the registration statement is initially filed, the staffers expect that filing to include in brackets the disclosure required regarding the asset representations reviewer and its responsibilities, as required by Item 1109(b) of Regulation AB. The staffers also noted that they expect to see bracketed placeholder language that specifically mirrors how the registrant intends to address the required disclosure items at the time of takedown.
- According to the staffers, the procedures for triggering asset representations review must strictly comply with the rules. For example, they believe that an extended timing component in the delinquency trigger—e.g., that a certain delinquency threshold must have been exceeded for a given number of months—may be impermissible, depending on the facts and circumstances. They are concerned that the imposition of additional requirements not specifically contemplated by the rules might make the process of initiating a review too onerous for investors. In their view, once the delinquency threshold has been exceeded, investors’ right to vote on initiating an asset representations review cannot be revoked.
- The staffers are skeptical of imposing quorum requirement for the investor vote to trigger asset representations review because the rule states that the required vote may not exceed a simple majority of votes cast. The only potential flexibility the staffers showed was the possibility of a 5% quorum requirement because the maximum number of investors that may be required to initiate a vote is 5% of the total pool, but even there, they indicated that further analysis would be required.
- According to the staffers, the disclosure in a registration statement filing should include robust information about how the asset representations reviewer will conduct any review. While they understand that potential asset representations reviewers may wish to negotiate specific procedures for reviewing compliance with particular representations and warranties, they are wary of the imposition of contractual limits on testing that the reviewer can perform. They believe that the reviewer should have the flexibility and discretion to perform additional testing if and when it finds it appropriate.
- The staff will review forms of transaction documents in tandem with the prospectus disclosure, so registrants are urged to file those documents as soon as possible.
- Because the rules state that an asset representations reviewer must review all assets that are 60 days or more delinquent, the staffers are wary of approaches that involve sampling, even for asset classes that involve large numbers of receivables.
Dispute Resolution
- According to the staffers, access to the dispute resolution procedures for alleged breaches of representations and warranties is not limited to investors. Any transaction party that could submit a repurchase request—including the trustee—may use these procedures.
- The staffers do not believe that registrants may impose additional hurdles to invoking the dispute resolution process that are not specified by the rules, such as representation of a minimum percentage of security holders or imposing a “loser pays” requirement. In their view, the rules’ requirement that the arbitrator allocate arbitration costs and that the parties agree upon the allocation of mediation costs with the assistance of the mediator is a sufficient deterrent to frivolous claims. Otherwise, they believe that transaction parties should have an almost unlimited right to invoke and pursue dispute resolution, even for claims that the issuer believes, in good faith, are meritless.
Preliminary Prospectus Filing Period
- Although the requirement to file a preliminary prospectus three business days before pricing may concentrate market activity in certain days of the week, the staffers believe that the rule as adopted represents a significant compromise from the initial proposal and that issuers should be able to manage their offerings within these constraints.
- There is no specific preliminary disclosure requirement for private transactions. However, the staffers noted that when the credit risk retention rules become effective, the disclosures required by those rules will need to be provided a reasonable period of time before sale.
Registration Statement Exhibits
- While the CEO certification does not need to be filed until the time of a takedown, and its language may not be changed, the staffers still expect to see a form of the certification filed as an exhibit to new registration statements.
- The staffers believe that new registration statements should include language that introduces and forward-incorporates future asset-level data filings by reference, even though asset-level data does not need to be filed until the time of a takedown.
NRSRO Third Party Diligence Rules
- The NRSRO third-party diligence rules were a statutory mandate, so the staffers do not believe that the SEC had any flexibility in applying them to asset classes other than RMBS. Registrants with questions are encouraged to bring them to the staff—probably beginning with a phone call, after which the staff would let the questioner know whether written follow-up is required. When required, questioners should be sure to include detailed descriptions of the relevant facts and circumstances, as well as legal analysis.
Credit Risk Retention
- Many in the industry have expressed great interest in pursuing a workable representative sample option, but the staffers did not believe that any of the agencies have the current intention to revisit this issue.
- Shelf registration statements are usable for three years, during which time the credit risk retention rules will become effective for all asset classes. Therefore, unless registrants wish to face the possibility of having to file a post-effective amendment at that time, the staffers encourage the inclusion of bracketed risk retention language in filings now. They noted that Rule 430D requires a posteffective amendment for any new structural feature, and while they admitted that the retention of a vertical strip may not constitute a new structural feature, the required language is so simple that that they would like to see it anyway.