On January 20, 2011, the SEC issued final rules implementing Section 943 of the Dodd‑Frank Act. Section 943 requires the SEC to promulgate regulations governing the use of representations and warranties in the market for ABS. The rules, adopted by the SEC by unanimous consent, also impose new disclosure requirements on issuers, originators, depositors and nationally recognized statistical rating organizations (“NRSROs”) addressing securitization transactions where the underlying transaction agreements include a covenant to repurchase or replace an underlying asset for a purported breach of the representations or warranties. Significantly, the rules cover a broad range of both registered and unregistered ABS transactions, and, generally, include the two following components.
Securitizers of asset-backed securities (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) must disclose, and periodically update, historical information on repurchase and replacement requests in connection with purported breaches of representations and warranties in both registered and unregistered offerings.
NRSROs must disclose information regarding the representations, warranties and enforcement mechanisms in an ABS transaction available to investors in any credit rating report relating to the ABS, including in a report accompanying a preliminary credit rating.
Section 943 of the Dodd-Frank Act was enacted, in part, in response to the perceived lack of effectiveness of the covenants underlying ABS transaction documents. The SEC’s purpose, as stated in its release, in adopting these rules is to provide investors with historical information on both fulfilled and unfulfilled repurchase requests so that investors may better identify ABS originators with clear underwriting deficiencies. The new reporting requirements are covered in four regulations.
New Rule 15Ga-1 under the Exchange Act
Form ABS-15G used for reports to be filed with the SEC under Rule 15Ga-1
An amendment to Item 1104 of Reg AB requiring disclosure of repurchase request history in prospectuses subject to Reg AB
An amendment to Item 1121 of Reg AB requiring disclosure of repurchase request history in ongoing reports on Form 10-D
Significantly, these new rules apply only if the transaction agreements underlying the securities contain a covenant to replace or repurchase an asset for a purported breach of the representations and warranties. The new rules, however, are not limited to disclosure of demands successfully made by trustees under the securities or other transaction documentation. The new disclosure rules include, as underscored by the SEC in its release, disclosures of investor repurchase and replacement demands.
The SEC’s rule’s effective date is March 28, 2011. The compliance period for prospectus disclosures (Rule 15Ga-1) begins February 14, 2012, except for municipal issuers for which compliance is required by February 14, 2015, with a phase-in period on the look-back period. Item 1104 of Reg AB provides for the same transition period and disclosures under that item as are required with the first bona fide offerings of registered ABS on or after February 14, 2012, but would be subject to the same phase-in of look-back periods during the first two years of compliance. For prospectuses filed between February 14, 2012 and February 14, 2013, the look-back period extends one year. For prospectuses filed between February 14, 2013 and February 14, 2014, the look-back period extends two years. Subsequently, all prospectuses must include information for the full three-year look-back period.
There is no transition period for new disclosure items under Item 1121(c) of Reg AB. The compliance period for Form 10-Ds begins with the first filing of Form D after December 31, 2011.
There is only a six month transition period for Rule 17g-7 and NRSROs will be required to include the information mandated by Rule 17g-7 in reports accompanying credit ratings beginning September 26, 2011.
New Disclosure Requirements for Securitizers
Under the rules promulgated by the SEC, “securitizers” of “asset-backed securities” are required to disclose fulfilled and unfulfilled demand, repurchase and replacement history across all trusts aggregated by securitizer. “Asset-backed security” is defined using the expansive definition of ABS from Section 3(a)(77) of the Exchange Act, which includes fixed income or other securities, collateralized by any type of self-liquidating financial asset, that allows the holder of the security to receive payments that depend primarily on cash flow from the asset, including CDOs, CMOs and any security that the SEC, by rule, determines to be an ABS. (This is the same definition used for new Rule 193 and related amendments to Item 1111 of Reg AB, which are discussed above.) The definition is broader than the definition of ABS under Reg AB and encompasses securities that are exempt from registration as well as securities guaranteed or issued by government sponsored entities (or GSEs) and municipal securities.
The term “securitizer” is defined to include issuers as well as entities that organize and initiate a covered ABS transaction by transferring assets, either directly or indirectly, including through an affiliate, to the issuer. Thus, the rule applies to both sponsors and depositors. To avoid duplicative disclosures by sponsors and affiliated depositors, the final rule provides that if the disclosures filed by a sponsor include the required disclosures for its affiliated depositors, then those affiliated depositors need not file separately. This exception, however, applies only to affiliated depositors and does not extend to issuers under Reg AB who must still file separately.
New Rule 15Ga-1
Under new Rule 15Ga-1, a securitizer will be required to provide information for all assets securitized that were the subject of a demand for repurchase or replacement. Rule 15Ga-1 requires securitizers to provide information in the tabular format specified, including the following information;
Name of the issuing entity, grouped by asset class and listed in order of the issuing entity’s formation date;
Indication by check mark whether the transaction was registered and the Central Index Key (or CIK) number of each issuing entity;
Name of each originator of the underlying assets, grouped by asset class and issuer; and
The number, outstanding principal balance and percentage by principal balance of each of the following:
Assets originated by each originator in the pool at the time of securitization for each issuing entity;
Assets that were the subject of a demand to repurchase or replace for breach of representations and warranties, including demands made upon a trustee;
Assets that were repurchased or replaced for breach of representations and warranties;
Assets where the repurchase or replacement request is pending specifically due to the expiration of the cure period;
Assets where the demand is in dispute;
Assets that were not repurchased or withdrawn because the demand was withdrawn; and
Assets that were not repurchased or withdrawn because the demand was rejected.
To address concerns that a securitizer may not be able to obtain the complete information required to be disclosed from a trustee, the SEC allows a securitizer to include a footnote that the securitizer was unable to obtain all information with respect to investor demands upon a trustee that occurred prior to July 22, 2010 (the effective date of the Dodd-Frank Act) and state that the information disclosed does not include investor demands on a trustee prior to that date. In addition, the rule permits a securitizer to omit information, with an explanatory footnote, that is either unknown or not reasonably available without unreasonable effort or expense. Securitizers are also required to provide additional explanatory information in footnotes to the table, as necessary, to explain the information presented.
The final rule modifies the look-back period for disclosing demand history from five years, as originally proposed, to three years in response to comments citing, in part, the difficulty in obtaining historical data from other transaction parties. Some commentators had urged the SEC to adopt the rule prospectively only. The SEC did not take that approach, but does (as described above under “Timing”) provide a phase-in for the look-back periods for prospectus disclosures.
Application to Municipal Securitizers
In a change from the proposed regulations, municipal ABS securitizers are provided an additional three-year phase-in period to comply with Rule 15Ga-1 and will be permitted to provide their information on EMMA, the Municipal Securities Rulemaking Board's centralized public database for information about municipal securities issuers and offerings. Municipal securities stakeholders had urged the SEC, in comments on the proposed rules, to wholly exempt municipal securitizers from the disclosure requirements.
Securitizers are required to file the information mandated by Rule 15Ga-1 in a new report on Form ABS-15G covering a three-year look-back period for the initial disclosures and subsequently covering quarterly periods on quarterly reports on Form ABS-15G. The initial report on Form ABS-15G must be filed by any securitizer that issued or sponsored ABS during the three-year period ending on December 31, 2011 and cover that three-year period. The initial report must be filed no later than February 14, 2012. If the securitizer has no activity to report during the three-year period, then the securitizer may “check the box” on the Form ABS-15G.
Securitizers must then file quarterly, no later than 45 calendar days after the end of a calendar quarter, on Form ABS-15G to report on demand, repurchase and replacement activity. The rule also provides for termination of the reporting obligations when the last payment is made on the last ABS outstanding held by a non-affiliate that was issued by the securitizer or an affiliate.
The SEC clarified that filing Form ABS-15G will not affect the issuer’s reliance on a private exemption or safe harbor. The SEC noted the clarification in response to concerns that providing narrative information, particularly in footnotes to the demand history table, could jeopardize an issuer’s reliance on an exemption or safe harbor.
Conforming Amendments to Reg AB
New amendments to Item 1104 of Reg AB require issuers to provide Rule 15Ga-1 information in the body of the prospectus for the prior three years for all assets securitized by the sponsor that were the subject of a repurchase demand. Disclosures in the prospectus must not be more than 135 days old and the issuer must include a reference to the CIK number of the securitizer. By amendment to Item 1121, issuers must also file the information required by Rule 15Ga-1 in ongoing reports to Form 10-D.
The amendments to Reg AB build on the SEC’s pending proposed rule, issued on April 7, 2010, that would significantly revise Reg AB (often referred to as Reg AB II) and other rules with respect to the offering process, disclosure and reporting obligations for ABS public transactions. The amendments to Items 1104 and 1121 track closely the 2010 proposed amendments, which would require originators and sponsors to disclose the amount of publicly securitized assets originated or sold by the sponsor, including information on demand repurchase and replacement history. Notably, the amendments to Items 1104 and 1121 do not subject disclosures to a materiality threshold.
New Disclosure Requirements for NRSROs
The SEC also adopted Rule 17g-7 requiring NRSROs to include in any credit rating report a description of the representations, warranties and enforcement mechanisms available to investors, as well as a description on how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities. The rule seemingly stands in contrast with other recent regulatory efforts that appeared intended to limit the role of NRSRO’s credit ratings (and had, at least initially (until suspended), the consequence of significantly limiting the availability of NRSRO credit ratings) in the ABS markets. (See “SEC Staff Extends Indefinitely No-Action Relief Permitting Omission of Credit Ratings from Registration Statements under Regulation AB” and “Dodd-Frank Wall Street Reform and Consumer Protection Act - Public Company Impact”.) In fact, one NRSRO noted the inconsistency in its comments to the proposed rule and urged the SEC to limit the role of NRSRO’s as much as permitted by statute. The SEC, however, adopted Rule 17g-7 substantially in the form proposed.
For purposes of this rule, the SEC has broadly defined “credit rating” to include “preliminary credit ratings” including any rating, any range of ratings or “any other indications of a rating used prior to the assignment of an initial credit rating for a new rating.” The rule also applies to both solicited and unsolicited credit ratings. Commentators, particularly credit rating agencies, requested clarification on the term “similar securities,” but the SEC declined to provide guidance, noting in its release that the determination of what constitutes “similar securities” is ultimately one best left to the discretion of NRSROs.