The SEC approved final rules last week that seek to add a measure of transparency to asset-backed securities. The rules had long been on the SEC’s docket and were originally proposed in April 2010 (before the passage of Dodd-Frank), reproposed in July 2011, and re-opened for comment in February 2014. While the SEC implemented significant reforms, the release notes that several rules that had earlier been proposed were not adopted with this release. Like the credit rating agency reforms finalized the same day, the Dodd-Frank Act mandated the reforms and the SEC’s delay in action had caused much congressional criticism.
Under the new rules, issuers must provide asset-level information in a standardized XML format both initially, and on an ongoing basis. At this time, the disclosure only applies to asset-backed securities where the underlying assets are residential or commercial mortgages, auto loans or leases, or “debt securities” (previously known in the proposal as “corporate debt”). This disclosure includes the following asset-level information:
- the payment stream of the asset;
- the collateral related to the asset;
- the performance of the asset over time; and
- the loss mitigation efforts of the servicer and losses that may be passed to the investor.
Additional disclosure will also be added to the prospectus, including information about the transaction agreements and parties, and statistical information about the pool of underlying assets.
The reforms also change the eligibility criteria and mechanics for a “shelf” offering, in which issuers can utilize a single registration for multiple offerings. Issuers must now file the preliminary prospectus at least three business days prior to the first offering. The SEC also continued its quest to remove references to credit ratings, where previously eligibility for this type of offering was limited to securities rated at “investment grade” or better. Going forward, in order to be eligible, the registration must include:
- a certification from the issuer’s CEO relating to the disclosures and structure of the securitization;
- a provision requiring a review of compliance with representations and warranties in the event that both the delinquency rate passes a specified percentage and the investors vote to direct such a review;
- a dispute resolution clause in the underlying transaction agreements exercisable at the expiration of a repurchase request period; and
- a provision requiring the disclosure through ongoing distribution reports of any investor’s request to communicate with other investors.