The Securities and Exchange Commission today voted to adopt two sets of new rules designed to help revitalize the important asset-backed securities (ABS) market by encouraging better disclosure for investors.
Final Rule: Disclosure for Asset-Backed Securities Required by Section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
Final Rule: Issuer Review of Assets in Offerings of Asset-Backed Securities
The SEC approved one set of rules that requires issuers of asset-backed securities to disclose the history of the requests they received and repurchases they made related to their outstanding asset-backed securities.
The Commission also approved a second set of rules that would require issuers of asset-backed securities to conduct a review of the assets underlying those securities.
"At one time, the securitization market provided trillions of dollars of liquidity to virtually every sector of the economy. However, during the financial crisis, ABS investors suffered significant losses, causing the market for securitization to rapidly decline," said SEC chairman Mary L. Schapiro. "These rational measures are designed to help revitalize the important asset-backed securities market by encouraging better disclosure for investors."
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Disclosure for Asset-Backed Securities Related to Representations, Warranties and Repurchase Histories
Asset-backed securities (ABS) are created by buying and bundling loans — such as residential mortgage loans, commercial loans or student loans — and creating securities backed by those assets that are then sold to investors. In the transaction agreements that govern a securitization, ABS issuers or originators of those loans typically make "representations and warranties" about the characteristics and the quality of those loans. If a loan does not comply with the representation or warranty, an ABS issuer or lender can be required to repurchase the loan from the pool or replace it with a substitute asset.
Since the financial crisis, many investors and other transaction parties have questioned whether the loans in the bundle meet the characteristics specified by the representations and warranties, and have been seeking to enforce repurchase provisions. The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes new disclosure obligations about the representations, warranties and repurchase history so that investors may identify originators with clear underwriting deficiencies.
Section 943 of the Dodd-Frank Act requires the Commission to prescribe regulations on the use of representations and warranties in the market for asset-backed securities. The final rules approved today, which were proposed in October 2010, implement Section 943.
Requirements of the Final Rules
Disclosure of Repurchase History on New Form ABS-15G
The final rules require ABS issuers to file with the SEC, in tabular format, the history of the requests they received and repurchases they made relating to their outstanding ABS. The table will provide comparable disclosures so that investors may identify originators with clear underwriting deficiencies. Specifically, issuers are required to disclose the last three years of repurchase history in an initial filing on EDGAR due by Feb. 14, 2012.
After the initial filing, the ABS issuer is required to file updated information on a quarterly basis, including:
Repurchase history for all outstanding ABS (regardless of whether the securities were offered in a transaction registered with the SEC) if the underlying transaction agreements include a covenant to repurchase or replace a pool asset.
History of all fulfilled and unfulfilled repurchase requests, including investor demands upon a trustee and pending requests.
The disclosure requirements will apply to issuers of unregistered ABS, including municipal ABS. However, municipal ABS are provided an additional three-year phase-in period 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.
Disclosure of Repurchase History in Prospectuses and Ongoing Reports
The final rules also provide investors with ready access to the most current information regarding an issuer’s repurchase history by requiring an issuer in a registered ABS offering to include — in the body of a prospectus — repurchase history for the last three years for ABS of the same asset class as the securities being registered. This information must be included in registered offerings in a phase-in period commencing on Feb. 14, 2012. In its ongoing reports, an issuer will be required to provide updated repurchase history for the particular, related asset pool beginning with distribution reports required to be filed on Form 10-D after Dec. 31, 2011.
Disclosure in Any Report Accompanying a Credit Rating by an NRSRO
As required by Section 943(1) of the Dodd-Frank Act, the final rules also require Nationally Recognized Statistical Rating Organizations (NRSROs) to provide a description of the representations, warranties and enforcement mechanisms available to investors in an ABS offering. NRSROs will be required to disclose how the representations, warranties, and enforcement mechanisms differ from those of similar ABS. NRSROs will be required to make the disclosures in any report accompanying a credit rating, including in presale reports that are distributed prior to the sale of the security. NRSROs will be required to provide this information for any report issued on or after six months after the effective date of the rules.
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The effective date for the new rules is 60 days after their publication in the Federal Register.
Issuer Review of Assets Underlying Asset-Backed Securities
Asset-backed securities (ABS) are created by buying and bundling loans — such as residential mortgage loans, commercial loans or student loans — and creating securities backed by those assets that are then sold to investors.
As a result of the financial crisis and subsequent events, the market for securitizations has declined due, in part, to perceived uncertainty about the accuracy of the information about the loans backing the ABS.
Section 945 of the Dodd-Frank Act requires the Commission to adopt rules regarding the review of assets, such as loans, underlying asset-backed securities. The final rules approved today, which were proposed in October 2010, implement Section 945.
Requirements of the Final Rules
Issuers of ABS in Registered Offerings to Perform a Review of the Assets
Issuers of ABS registered under the Securities Act will be required to conduct a review of the assets underlying the ABS. This requirement applies to all registered asset-backed securities, regardless of the assets that comprise the bundle. However, the type of review may vary depending on such circumstances as the nature of the assets being securitized. Under the final rules, the review must, at a minimum, be designed and effected to provide reasonable assurance that the prospectus disclosure about the assets is accurate in all material respects.
The rule permits issuers to perform the review themselves or hire third parties to perform the review. If an issuer obtains assistance from a third party for purposes of performing the review, and attributes, in the prospectus, the findings and conclusions of the review to the third party, the issuer may rely on the third-party’s review to satisfy the requirement provided the third party is named in the registration statement and consents to being named as an "expert" under the federal securities laws.
Issuers of ABS to Disclose Information about their Reviews
Issuers of ABS will be required to disclose the nature of the review performed to satisfy the review requirements, as well as the findings and conclusions of the review. Issuers also would be required to disclose:
Information about how the loans in the pool differ from the loan underwriting criteria disclosed in the prospectus.
Information about loans that did not meet the disclosed underwriting criteria but were nonetheless included in the pool.
Information about the entity that made the determination that such loans should be included in the pool, despite not having met the disclosed underwriting standards.
The final rule provides a phase-in period to allow market participants to adjust their practices to comply with the new requirements.
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Any registered offering of ABS commencing with an initial offer after Dec. 31, 2011, must comply with the new rules if they’re adopted by the Commission.