SEC Adopts Final Rules for Asset-Backed Securities

Transcription

1 SEC Adopts Final Rules for Asset-Backed Securities Atlanta Beijing Brussels Chicago Cleveland Columbus Dallas Frankfurt Hong Kong Houston Irvine London Los Angeles Madrid Menlo Park Milan Moscow Munich New Delhi New York Paris Pittsburgh San Diego San Francisco Shanghai Singapore Sydney Taipei Tokyo Washington In a release published in the Federal Register on January 7, 2005 ( Adopting Release ), the U.S. Securities and Exchange Commission ( SEC ) adopted new and amended rules and forms ( Rules ) to address comprehensively the registration, disclosure, and reporting requirements for publicly offered asset-backed securities ( ABS ) under the U.S. Securities Act of 1933 ( Securities Act ) and the U.S. Securities Exchange Act of 1934 ( Exchange Act ).1 The Rules codify much of the existing SEC interpretations and staff no action letters applicable to securitizations and were generally adopted along the lines of the SEC s proposed rules and forms (the Proposal ),2 although some significant modifications were made in response to the numerous comments submitted in respect of the Proposal.3 Although the Rules technically apply only to public offerings of ABS in the United States (including foreign ABS publicly offered in the United States), the market will nonetheless

2 need to consider how the new regime may affect private ABS offerings made in reliance on Rule 144A. In particular, participants in 144A offerings of ABS will need to determine their exposure to 10b-5 liability (general antifraud) to the extent that disclosures in the offering document fall short of the Rules now applicable to public offerings of ABS. The Rules reflect the SEC staff s recognition since the 1980s of the differences between ABS and corporate securities issued by operating companies. Accordingly, through a series of rules, staff statements, and staff no action letters, the SEC s registration, disclosure, and reporting requirements for securities issued by operating companies have been substantially modified for ABS offerings to focus on items such as transaction structure, quality of the asset pool, servicing, and cash flow distribution. The Rules comprise the SEC s comprehensive codification and reconciliation of these modifications. SECURITIES ACT REGISTRATION Current Requirements. Since 1992, registration for delayed or periodic offerings of investment-grade ABS has been permitted on Form S-3 (which, in the case of ABS, allows incorporation by reference of subsequent information contained in Exchange Act reports), so that public offerings of ABS may be effected via takedowns off the shelf from time to time. 4 Prospectus requirements are effected by means of a base prospectus (plus a form of prospectus supplement) included as part of the registration statement, with a prospectus supplement delivered with each distribution of ABS. The Rules codify this approach, with certain modifications as described below. Definition of Asset-Backed Security. The Rules retain the existing definition (contained in the instructions to Form S-3) of asset-backed security, with an expansion to cover securitizations of leases (even if the residual value of the leased property must be realized to fully repay the ABS). 5 The Rules also make the definition of ABS applicable irrespective of the form used for registration (i.e., applicable for both Form S-3 and Form S-1). This definition is further premised on the conditions that (i) neither the depositor nor the issuing entity is an investment company under the U.S. Investment Company Act of 1940 and (ii) the activities of the issuing entity must be restricted to passively holding the pool of assets, issuing the ABS and activities reasonably incidental thereto. The Rules do not, however, extend the definition of ABS to cover synthetic securitizations (i.e., where exposure to an asset pool is accomplished through a credit derivative), securitizations of delinquent assets 6 (although securitizations with delinquencies up to 50 percent of the asset pool would still qualify for the definition and delinquencies up to 20 percent would still qualify for shelf registration) or securitizations of nonperforming assets. 7 For lease-backed securitizations, the Rules impose limits on the percentage of the securitized pool balance attributable to residual values in order to be considered an ABS: residual values may not constitute, for motor vehicle leases 65 percent or more, and for non-motor vehicle leases 50 percent or more, of the original asset pool measured by dollar volume at the time of ABS issuance. For Form S-3 eligibility, residual values may not constitute 20 percent or more of the asset pool by dollar volume at the time of ABS issuance. The following exceptions are made under the Rules in respect of the discrete pool requirement: Master trusts (where multiple issuances of ABS are backed by the same pool of assets) meet the definition of ABS without any predetermined limits, but series trusts (where one entity issues multiple series of ABS each backed by a different pool of assets) do not qualify as ABS. Prefunding periods are permitted for up to one year from date of ABS issuance, with permitted prefunding amounts of up to 50 percent of issuance proceeds (or in the case of master trusts, up to 50 percent of the aggregate principal balance of the asset pool that supports the ABS), irrespective of the form used for registration. In respect of revolving periods, for receivables that by their nature revolve (e.g., credit cards), there would be no limits on the revolving period duration or amount of additional assets. For fixed asset receivables (e.g., residential mortgages, auto loans, leases), the revolving period may be up to three years, so long as new pool assets added are of the same general character as the original pool assets. Securities Act Registration Statements. Under the Rules, ABS may only be registered under the Securities Act using: (i) Form S-3, for ABS that meet the S-3 eligibility criteria (i.e., ABS are investment grade, delinquent assets are less than 2

3 20 percent of pool, residual values for non-motor vehicle lease-backed transactions are less than 20 percent of pool balance), thus qualifying for shelf registration and delayed or periodic offerings; or (ii) Form S-1, for securities falling within the definition of ABS but not eligible for Form S-3. Form S-11 will no longer be used. In the Adopting Release, the SEC adopted new instructions for both Form S-3 and Form S-1 specifically applicable to ABS offerings. Reflecting the SEC s recognition of the different nature of ABS from corporate securities issued by operating companies, and therefore the types of information that are meaningful to ABS investors, these instructions require compliance with provisions of new Regulation AB (see below), which modifies the standard disclosure requirements to dispense with certain types of corporate and operational information (notably, audited financial statements for the issuer and management s discussion and analysis of operations and financial condition) and to include information concerning the transaction structure, asset pool, servicing, and cash flow distributions. For Form S-3, a base prospectus and form of prospectus supplement will be required. Takedowns off the shelf registration must be described within the parameters of the asset type, structural features, enhancements, and other features described in the base prospectus. A separate base prospectus and form of prospectus supplement must be prepared for each asset type or jurisdiction. 8 The Rules continue existing industry practice by specifying that the depositor (often the sponsor or an affiliated intermediary that receives the pool assets and transfers them to the issuing entity) is the statutory issuer for purposes of signing the registration statement. As such, each of the depositor s principal executive officer, principal financial officer, controller, or principal accounting officer and a majority of its directors is required to sign the registration statement for the ABS offering. The same depositor will be considered a different statutory issuer in respect of each issuing entity and also in respect of its own securities. Foreign ABS. The Rules do not establish a different registration regime for ABS issued by foreign entities that are publicly offered in the United States; such foreign ABS are required to be registered on Form S-3 or Form S-1 and are subject to the same disclosure requirements in Regulation AB. In addition, if ABS are issued by a foreign issuer, are backed by foreign assets, or are affected by credit enhancement or other support provided by a foreign entity, then additional information must be disclosed. 9 Foreign ABS may also be subject to special SEC procedures, such as pre-filing conferences and full review by SEC staff on Form S-1 for first-time foreign issuers. Exclusion from Exchange Act Rule 15c2-8(b) for Form S-3 ABS. Recognizing the typically short time frame between finalization of the terms of an ABS transaction and closing, the Rules codify a long-standing SEC exclusion from Exchange Act Rule 15c2-8(b) for Form S-3 ABS to the effect that broker-dealers are not required to deliver a copy of the preliminary prospectus to any person who is expected to receive a confirmation of sale at least 48 hours prior to the sending of such confirmation. However, in the Adopting Release, the SEC indicated that this issue may be revisited depending on its evaluation of comments in respect of the SEC s proposed rules on securities offering reform published on November 17, 2004 ( Offering Process Release ). 10 In the Offering Process Release, the SEC raised the unassailable proposition that materially accurate and complete information regarding an offering should be available to investors at the time they make an investment decision. In the Adopting Release, the SEC states that the availability of adequate information for ABS offerings raises similar legal issues as those discussed in the Offering Process Release. Registration of Underlying Pool Assets. If the assets being securitized are themselves securities as defined under the Securities Act, then the offering of those underlying securities must also be registered or exempt from registration under the Securities Act. Under the Rules, registration of the underlying securities is not required if: (i) the depositor is free to publicly resell the underlying securities without registration (i.e., they are not restricted securities ); (ii) neither the issuer of the underlying securities nor its affiliates have any agreement or arrangement with the sponsor, depositor, issuing entity, or underwriter of the ABS relating to the underlying securities (e.g., they are not unsold allotments from their distribution) or the ABS; and (iii) neither the issuer of the underlying securities nor its 3

4 affiliates are affiliated with the sponsor, depositor, issuing entity, or underwriter of the ABS. Market-Making Transactions. In the Adopting Release, the SEC has determined that it will not require registration and delivery of a prospectus for market-making transactions by affiliates of the issuer or the servicer in respect of ABS. 11 DISCLOSURE Regulation AB. For ABS, the SEC is adopting a new principles-based set of disclosure items in one location within Regulation S-K called Regulation AB, which will form the basis of ABS disclosure in both Securities Act registration statements and Exchange Act reports. 12 The balance that Regulation AB seeks to achieve is to provide enough clarity so that the disclosure concept or objective is understood and can be applied on a consistent basis, while not providing too much detail that could obscure or override the concept or objective or that would result in disclosure that would be immaterial or inapplicable. Pervading across all disclosures are determinations as to materiality, both in terms of material information to be included and immaterial information to be omitted. Forepart of Registration Statement and Prospectus. Under Regulation AB, the cover page of the prospectus should be limited and brief and the forepart of the prospectus should contain a transaction summary with risk factors. The transaction summary should disclose the flow of funds, credit enhancement, classes of ABS offered, residual or equity interests, any prefunding or revolving periods, amount or formula for calculating the servicing fee, sources of payment, and distribution priorities. Risk factors should focus on the most significant factors that make the ABS offering speculative and risky and explain briefly yet particularly how those risks affect investors. A representative list of risk factors is not provided, as there is a concern that any such list would result in boilerplate and generic disclosures. The entire prospectus should be presented in plain English. Transaction Parties. The sponsor is the person who organizes and initiates an ABS transaction by selling or transferring assets, either directly or indirectly, including through an affiliate, to the issuing entity. In addition to basic identifying information, disclosure is required, inter alia, of: the sponsor s securitization program; the sponsor s experience in securitizing assets of the type included in the ABS transaction; any defaults, early amortizations, or performance-triggering events in respect of prior securitizations organized by the sponsor; and the sponsor s credit-granting or underwriting criteria. The depositor is the person who receives or purchases and transfers or sells the pool assets to the issuing entity. For ABS transactions where there is no intermediate transfer, the sponsor is the depositor. Disclosure is required, inter alia, of: the ownership structure of the depositor; the general character of any activities of the depositor other than securitizing assets; and the depositor s securitization program (if materially different than that of the sponsor). The issuing entity is the trust or other special-purpose entity created at the direction of the sponsor or depositor that owns or holds the pool assets and in whose name the ABS supported or serviced by the pool assets are issued. Disclosure is required, inter alia, of: the nature of the issuing entity; sale and transfer of the pool assets; permissible activities and restrictions on activities; capitalization; and the issuing entity s directors and executive officers (if any). Copies of the issuing entity s governing documents, along with all material agreements for the ABS offering (including the pooling and servicing agreement, indenture and management or administration agreement) are required to be filed as exhibits to the registration statement. Other disclosure items include: security interests for the benefit of the transaction; transaction expenses; market price (if the pool assets comprise securities); and the risks and effects of bankruptcy, receivership, or a similar proceeding with respect to the issuing entity, sponsor, depositor, or other seller of the pool assets. The servicer is any person responsible for the management or collection of pool assets or making allocations or distributions to holders of the ABS. 13 The Rules also contemplate multiple servicer situations and distinguish: (i) master servicer, (ii) affiliated servicer, (iii) unaffiliated servicer (servicing 10 percent or more of the pool assets), and (iv) any other material servicer. For all servicers referred to under (i), (ii), and (iv) above, disclosure is required, inter alia, of: identifying information and experience of the servicer (e.g., name, experience with assets of any type and 4

5 with assets of the type included in the current transaction, material changes to policies and procedures in the servicing function, and financial condition to the extent there is a material risk that such financial condition could have a material impact on pool or ABS performance); servicing agreements and servicing practices (e.g., material terms of and duties under the servicing agreement, manner of collection and extent of commingling, any special or unique factors such as servicing of subprime assets, terms relating to any servicer advances required or permitted, process for handling delinquencies, losses, bankruptcies and recoveries, ability to waive or modify terms relating to the assets, any custodial arrangements, and any limitations of liability); and back-up servicing arrangements (e.g., successor servicers, process for transferring, transfer expenses, and identity of the back-up servicer). The servicing agreement is required to be filed as an exhibit to the registration statement. For all servicers referred to under (iii) above, disclosure is required of the identity of such servicers servicing 10 percent or more (but less than 20 percent) of the pool assets, with more detailed disclosures required for such servicers servicing 20 percent or more of the pool assets to the same extent as that required for servicers referred to under (i), (ii), and (iv) above. A separate definition of trustee is not provided. Disclosure is required, inter alia, of: each trustee s name and form of organization; prior experience with ABS with similar assets; duties and responsibilities; actions required (including notices to be given) upon event of default or other breaches; limitations of liability; indemnification; and terms of removal, replacement, or resignation. A separate definition of originator is not provided. Each entity (apart from the sponsor or its affiliates) originating 10 percent or more (but less than 20 percent) of the pool assets must be identified. For each entity originating 20 percent or more of the pool assets, disclosure is required, inter alia, of: the originator s form of organization; origination program; experience in originating asset types included in the current transaction; size and composition of the entity s origination portfolio; and an analysis of the performance of the pool assets such as credit-granting or underwriting criteria. Static Pool Information. The Rules require disclosure of static pool information, to the extent determined by the registrant to be material. The Rules provide separate starting points for disclosure of static pool information depending on whether the ABS transaction involves an amortizing asset pool or a revolving asset master trust. For amortizing asset pools, unless the registrant determines that such information is not material, the starting point for disclosure is static pool information regarding delinquencies, cumulative losses, and prepayments for prior securitized pools of the sponsor for that asset type. For unseasoned sponsors (i.e., sponsors lacking three years of securitization experience with the same asset type), the registrant should instead consider providing static pool information, to the extent material, regarding delinquencies, cumulative losses, and prepayments by vintage origination years in respect of originations or purchases by the sponsor, as applicable, for that asset type. All such information should cover, to the extent material and existing, the previous five years, be presented in periodic increments (e.g., monthly or quarterly), and include summary characteristics as applicable and material. 14 For revolving asset master trusts, unless the registrant determines that such information is not material, the starting point for disclosure is static pool data regarding delinquencies, cumulative losses, prepayments, payment rate, yield, and standardized credit scores or other applicable measure of obligor credit quality, as applicable, in separate increments based on the date of origination of the pool assets. Issuers should consider presenting such data at a minimum of 12-month increments through the first five years of the revolving account s life. Under the Rules, static pool information may be presented by physical inclusion in the prospectus (including in the form of a CD-ROM) or through incorporation by reference from a filed Exchange Act report (for ABS offerings on Form S-3). Static pool information may also be presented on a web site if certain conditions are met: (i) the prospectus discloses the intention to provide the information through a web site and provides the internet address; (ii) the information on the web site is unrestricted as to access and free of charge; (iii) the information remains available on 5

6 the web site for a period of not less than five years; and (iv) the registration statement contains an undertaking that the information provided on the web site is deemed to be part of the prospectus included in the registration statement. Pool Assets. The Rules require a description of the pool assets, including statistical information, which is to be presented in tabular or graphical format (if the same will aid understanding) and broken down by distributional groups or incremental ranges, with each group or range further broken down by variables. 15 The Rules require disclosure, inter alia, of: general information regarding pool asset types and selection criteria; 16 pool characteristics; 17 delinquency and loss information; sources of pool cash flow (including residual value information); representations and warranties and repurchase obligations regarding pool assets; claims on pool assets; and revolving periods, prefunding accounts, and other changes to the asset pool. 18 Transaction Structure. Existing Item 202 of Regulation S-K will continue to provide the core disclosure requirements for describing the securities being offered, although new Item 1113 of Regulation AB will provide additional guidance for disclosures for ABS. These include: the types or categories of securities offered (e.g., interest-only or principal-only); the flow of funds for the transaction (including graphic presentation if doing so will aid understanding); interest rate or rate of return; principal amortization schedule; denominations of the ABS; changes triggered by an event of default; liquidation, amortization, performance, or similar triggers; any required periodic evidence of absence of default; extent of over- or under-collateralization; restrictions on or suitability of investors; and required vote of security holders to amend the transaction. The Rules also require disclosure, inter alia, of: distribution frequency and cash maintenance; fees and expenses (including a separate table itemizing fees and expenses); disposition of residual or excess cash flow (including ownership thereof if such person is affiliated with any party to the transaction); information regarding additional securities in master trusts (e.g., relative priority, allocation of cash flow, terms of issuance, terms of security holder approval, and authority to determine issuance); optional or mandatory redemption or termination (e.g., terms triggering redemption or termination, party holding the option, amount of redemption, procedures involved, and allocation of recovery amounts); 19 and prepayment, maturity, and yield considerations (e.g., prepayment or interest rate sensitivity for each class of securities). Significant Obligors. If an asset pool contains a sufficiently high concentration of the assets of a particular obligor or group of related obligors (each a significant obligor ), 20 then additional descriptive and financial information would be required as to each such significant obligor: selected financial data at 10 percent or more (but less than 20 percent) of the asset pool, and audited financial statements at 20 percent or more of the asset pool. Exceptions to the requirement to provide financial information include pool assets backed by the full faith and credit of the United States (or, if the ABS are investment grade, by the full faith and credit of a foreign government). Credit Enhancement and Other Support. The Rules require disclosure of all material credit enhancement and other support for ABS, comprising: (i) any external credit enhancement (e.g., bond insurance, letters of credit, and guarantees); (ii) any mechanisms to ensure timely payments on ABS (e.g., liquidity facilities, lending facilities, guaranteed investment contracts, and minimum principal payment agreements); (iii) any derivatives whose primary purpose is to provide credit enhancement; and (iv) any internal credit enhancement (e.g., subordination provisions, overcollateralization, reserve accounts, cash collateral accounts, and spread accounts). Each agreement relating to material enhancement or support must be filed as an exhibit to the registration statement. In addition, if any entity or group of affiliated entities providing enhancement or other support is liable or contingently liable to provide payments representing 10 percent or more (but less than 20 percent) of the cash flow supporting any offered class of ABS, then selected financial data must be provided; and if the same represents 20 percent or more of the cash flow supporting any offered class of ABS, then audited financial statements must be provided. Exceptions exist if the obligations of the enhancement provider are backed by the full faith and credit of the United States (or, for enhancement providers having an investment grade rating, by the full faith and credit of a foreign 6

7 government). Exceptions also exist if the enhancement provider is a guarantee agency under the Higher Education Act of 1965 for student loans under the Federal Family Education Loan Program (FFELP). A separate treatment and method of disclosure is prescribed for derivatives, such as interest rate and currency swaps, that are used to alter the payment characteristics of the cash flows from the issuing entity and whose primary purpose is not to provide credit enhancement related to the pool assets or the ABS. If the aggregate significance percentage 21 related to any entity or group of affiliated entities providing such derivative instruments is 10 percent or more (but less than 20 percent), then selected financial data must be provided; and if the same is 20 percent or more, then audited financial statements must be provided. The agreement relating to the derivative instrument must be filed as an exhibit to the registration statement. Other Basic Disclosure Items. The Rules also require certain other disclosures, such as tax matters, legal proceedings, 22 affiliations among parties in an ABS transaction, 23 material related party transactions, 24 ratings and the reports required by the transaction agreements (including whether web site access will be provided in respect thereto). Alternatives to Present Third Party Financial Information. As discussed above, there are instances when additional financial information regarding third parties is required in ABS filings, including financial information about significant obligors and significant providers of enhancement or other support. The Rules codify the SEC s practice of permitting alternative methods to present or refer to this information if it exists in other SEC filings of the third party. The first alternative allows incorporation by reference into the ABS filing of the third party s financial information contained in Exchange Act reports if the following conditions are met: (i) the third party is subject to Exchange Act reporting requirements; (ii) the third party has been current with its Exchange Act reporting for the past 12 months; (iii) the reports incorporated include the third party financial statements; and (iv) if incorporated by reference into a prospectus or registration statement, the prospectus also states that all documents subsequently filed by the third party prior to the termination of the ABS offering also will be deemed to be incorporated by reference into the prospectus. As with all materials incorporated by reference into a registration statement, written consent for use of the incorporated material must be obtained. 25 The second alternative (which applies only to unaffiliated significant obligors) allows an ABS filing to reference the significant obligor s Exchange Act reports in lieu of providing such information if the following conditions are met: (i) the significant obligor is unaffiliated with the sponsor, depositor, issuing entity, and underwriter and does not have any type of agreement with them relating to the ABS transaction; and (ii) the significant obligor meets one of the eligibility categories relating to Form S-3 eligibility. 26 COMMUNICATIONS DURING THE OFFERING PROCESS ABS Informational and Computational Material. The Securities Act restricts the types of communications that a registrant or those acting on its behalf (e.g., underwriters) may use during a registered public offering. Before the registration statement is filed, no offers are permitted. After the registration statement is filed but before it is declared effective, oral offers are permitted but written offers must conform to the Securities Act Section 10 prospectus requirements. After the registration statement is declared effective, additional written materials may be used for the offering but only if a final prospectus that meets the Securities Act prospectus requirements is delivered before or with those materials. The SEC staff in the past issued a series of no action letters that permit term sheets (both structural and collateral) and computational materials (containing statistical data on the pool assets) to be provided to potential ABS investors after the effectiveness of a registration statement but before availability and delivery of the final prospectus. These no action letters contained filing requirements for use of such materials and provided that no confirmations of sale may be sent until such filing requirements were met. The Rules codify the basic concept of these no action letters by permitting the use of ABS information and computational material after the effectiveness of a Form S-3 registration statement but before delivery of the final Section 10 prospectus, provided that certain filing requirements are met and certain conditions are fulfilled. The Rules do not apply in respect of ABS registered on Form S-1. 7

8 The Rules merge the term sheets and computational materials (as referred to in the no action letters) into the single concept of ABS informational and computational material. This term is defined to mean a written communication consisting solely of one or some combination of the following: Factual information regarding the ABS being offered and the structure and basic parameters of the securities. Factual information regarding the pool assets underlying the ABS. Identification of key parties to the transaction. Static pool data. Statistical information displaying for a particular class of ABS: the yield, average life, expected maturity, interest rate sensitivity, cash flow characteristics, total rate of return, option-adjusted spread, or other financial or statistical information relating to the class or classes under specified prepayment, interest rate, loss, or other hypothetical scenarios. Names of underwriters participating in the ABS offering. Anticipated schedule for the ABS offering and a description of marketing events. Description of the procedures by which the underwriters will conduct the ABS offering and the procedures for transactions in connection with the ABS offering with an underwriter or participating dealer. The Rules impose two conditions for use of ABS informational and computational material: (i) the communications must be filed as described below; and (ii) the communications must include prominently on the cover page: the issuing entity s name, the depositor s name, the SEC file number for the related registration statement, a statement that the communication is ABS informational and computational material used in reliance on the exemptive rule, and a legend urging investors to read the relevant documents filed or to be filed with the SEC because they contain important information and explaining to investors that such documents are accessible at no charge on the SEC s web site or may be obtained from the issuer or underwriter. The Rules adopt a single unified filing rule in respect of ABS information and computational material, as follows: ABS informational and computational material (i) relating to a class of ABS provided to each prospective investor indicating interest in purchasing such class of ABS and (ii) provided to any other prospective investor after the final terms have been established for all classes of the ABS offering must be filed on Form 8-K (and thereby incorporated by reference into the registration statement) by the later of the due date for filing the final prospectus and two business days of first use. Unlike the no action letters, there is no requirement that such filing must be made before a confirmation of sale may be sent. There may well occur multiple filings of ABS informational and computational material in respect of an ABS offering, although ABS informational and computational material that does not contain new or different information from that which was previously filed need not be filed. 27 Finally, the Rules eliminate the electronic filing exemption in respect of such materials so that all ABS informational and computational material would be required to be electronically filed on the SEC s Electronic Data Gathering, Analysis and Retrieval system ( EDGAR ). Research Reports. In the Adopting Release, the SEC notes that the current SEC rules creating safe harbors for distribution of broker or dealer research reports in the context of a public offering 28 do not correspond well to ABS offerings. The Rules as adopted provide a safe harbor to the effect that the publication or distribution by a broker or dealer of a research report with respect to investmentgrade ABS meeting the other criteria of Form S-3 will not be deemed to constitute an offer for sale or offer to sell such ABS registered or proposed to be registered, even if the broker or dealer is a participant in the registered offering, if the following conditions are met: the broker or dealer has previously published or distributed with reasonable regularity information, opinions, or recommendations of Form S-3 ABS backed by substantially similar collateral as that backing the Form S-3 in the research report; if the ABS are part of an unsold allotment, the research report must not identify those ABS or give those ABS greater prominence than other ABS mentioned in the research report or contain any ABS informational and computational material with respect to those ABS; if the research report identifies specific ABS of a specific 8

9 issuer and specifically recommends that such ABS be purchased, sold, or held, then the last publication of such broker or dealer prior to its participation in the distribution of the current ABS offering must have contained a recommendation of such ABS as favorable or more favorable than that contained in the research report; sufficient information is available from one or more public sources to provide a reasonable basis for the views expressed by the broker or dealer in the research report; if the research report identifies other ABS backed by collateral that is substantially similar to collateral backing the ABS being registered and specifically recommends that such ABS be preferred over ABS backed by different types of collateral, then the research report must explain in reasonable detail the reasons for such preference. Other Communications During the Offering Process. In the Adopting Release, the SEC reiterated its adoption and entanglement theories with respect to pre-sale reports by rating agencies as being equally applicable to ABS offerings. In short, information (such as a pre-sale report) prepared and distributed by third parties that are not offering participants (such as a rating agency) may be attributed to an issuer or an underwriter (who would therefore be liable for its contents) if the issuer or underwriter had adopted such information (e.g., by distributing the information in connection with an offering) or had become entangled with such information (e.g., by being heavily engaged in its preparation). ONGOING REPORTING UNDER THE EXCHANGE ACT Current Requirements. As with the current Securities Act registration requirements, the current Exchange Act reporting requirements were designed for disclosures by operating companies. Nonetheless, post-issuance reporting in respect of ABS is critically important to ABS investors in their monitoring of asset pool performance and the performance of the transaction parties, thereby contributing to the liquidity of ABS. The transaction documents for ABS offerings generally require (as a matter of private contract) that periodic servicing and cash flow distribution reports be sent to ABS investors and/or made available on web sites. As a result, the SEC staff has issued no action letters permitting a modified Exchange Act reporting system for ABS, whereby reports on Form 8-K are filed based on the frequency of distribution reports (generally monthly) in lieu of quarterly reports on Form 10-Q, and whereby a modified annual report on Form 10-K must be filed (e.g., audited financial statements are generally not required for the issuing entity, but the accountant s report on compliance with servicing criteria and the servicer compliance statement on compliance with its obligations under the servicing agreement are both required to be filed as exhibits). In addition, to comply with the certification requirement under Section 302 of the U.S. Sarbanes-Oxley Act of 2002 ( Sarbanes-Oxley Act ), the SEC has prepared a tailored form of certification for use with ABS annual reports on Form 10-K. The following Exchange Act reporting requirements, to the extent they are applicable to any particular ABS, would apply alike to both U.S. domestic- and foreign-issued ABS (including the Exchange Act forms to be used as described below). In other words, the Rules do not contemplate a separate Exchange Act reporting system for foreign ABS. Determining the Issuer and Operation of the Section 15(d) Reporting Obligation. The Exchange Act rule as adopted clarifies that the depositor for ABS, acting solely in its capacity as depositor to the issuing entity, is the issuer under the Exchange Act for purposes of ABS of that issuing entity. As with the SEC s similar definition for the Securities Act, the Exchange Act definition specifies that the person acting in its capacity as depositor for the issuing entity of an ABS is a different issuer from that same person acting as a depositor for any other issuing entity or for purposes of that person s own securities. As such, each takedown of ABS by a new issuing entity triggers a new reporting obligation under Section 15(d) of the Exchange Act, and the starting and suspension dates for any reporting obligation with respect to a takedown of ABS is determined separately for each takedown. The SEC in the Adopting Release identifies who must sign Exchange Act reports: The depositor is to sign Exchange Act reports, although an authorized representative of the servicer will be permitted to sign on behalf of the issuing entity as an alternative. 9

10 Reporting on EDGAR. Registration statements and annual and other periodic and current reports are required to be filed in electronic format on EDGAR. The Rules provide guidance on how to submit documents on EDGAR that will enable investors and others to locate material information about particular ABS more efficiently. Under the EDGAR system, each entity that makes an EDGAR submission is assigned a Central Index Key code, or CIK code. For submissions to appear under the correct entity, the correct CIK code must be included in the EDGAR submission header. With each takedown of ABS by a new entity off the registration statement, a new reporting obligation under Section 15(d) of the Exchange Act is created. The EDGAR system will automatically generate a new CIK code and an Exchange Act reporting file number for the new entity. The issuer in its capacity as depositor for newly created entities should then prepare separate annual, periodic, and current reports for each issuing entity and file such reports under the separate CIK code for each issuing entity. Distribution Reports on Form 10-D. Since Form 8-K was not designed to be a report filed on a periodic basis, the SEC has now adopted a new Form 10-D to be used in lieu of Form 8-K to report periodic distributions and pool performance information for ABS, to be filed within 15 days 29 after each required distribution date. Form 10-D requires a description of the distribution and pool performance information for the related distribution period, with statistical information presented in tabular or graphical format (if the same will aid understanding). While the material information will vary depending on the nature of the transaction, such information may include, inter alia: record, accrual, determination, and distribution dates; cash flows received; distribution of the flow of funds (fees and expenses, payments with respect to enhancement or other support, principal and interest distributions, excess cash flow); beginning and ending principal balances on ABS; interest rates on the pool assets and ABS; beginning and ending balances on transaction accounts; any amounts drawn on credit enhancement or other support; beginning and ending amounts of pool assets; delinquency and loss information; advances made or reimbursed; material modifications, extensions or waivers; material breaches; information on ratio, coverage, or other tests; and any new issuance of ABS. The distribution report delivered to the trustee or security holders pursuant to the transaction agreements must be filed as an exhibit to Form 10-D. Form 10-D also requires disclosure of other information for the relevant period, such as legal proceedings, sales of securities and use of proceeds, defaults upon senior securities, submission of matters to a vote of security holders, significant obligors of pool assets, and significant enhancement provider information. Updated financial information in respect of significant obligors and significant enhancement providers must be provided on Form 10-D in accordance with the percentage breakpoints described above. The Form 10-D report is required regardless of whether the required distribution is actually made or whether a distribution report is in fact delivered pursuant to the transaction documents. Annual Reports on Form 10-K. In the Adopting Release, the SEC is adding a new general instruction for Form 10-K to specify how that form is to be used for an annual report with respect to ABS. The general instruction identifies the existing items on the form that may be omitted as well as substitute items from Regulation AB that are required. Any other applicable items specified in Form 10-K will continue to be required. The additional items from Regulation AB include: significant obligor financial information and significant enhancement provider financial information in accordance with the percentage breakpoints described above; legal proceedings (same information as required for Form 10- D); and affiliations and certain relationships and related transactions. The separate instructions to Form 10-K make clear that audited financial statements for the issuing entity are not required. Instead, the Adopting Release will require: (i) a servicer compliance statement; (ii) an assessment of and attestation regarding compliance with servicing criteria (see below); and (iii) a Section 302 certification (see below). The servicer compliance statement must be signed by an authorized officer of the servicer and must state that a review of the activities of the servicer and its performance under the servicing agreement has been made under the officer s supervision, and that to the best of the officer s knowledge 10

11 and except as otherwise disclosed, the servicer has fulfilled its obligations under the agreement in all material respects throughout the reporting period, or specifying each material failure to fulfill any such obligation. Certifications under Section 302 of the Sarbanes-Oxley Act. The Adopting Release amends Item 601 of Regulation S-K to add the specific form and content of the certification required under Section 302 of the Sarbanes-Oxley Act as applied to ABS. In the new form of certification, the signatory thereto (who must be the same person that signs the Form 10-K) must certify that: (i) he or she has reviewed the Form 10-K report and all Form 10-D reports in respect of the period covered by the Form 10-K report; (ii) the Exchange Act reports taken as a whole do not contain any untrue statement of material fact or any material omissions; 30 (iii) all of the distribution, servicing, and other information required under Form 10-D for the period covered in the Form 10-K report is included in the Exchange Act periodic reports; (iv) each servicer has fulfilled its obligations under the servicing agreement(s); 31 and (v) all of the reports on assessment of compliance with servicing criteria for ABS and their related attestation reports have been included as an exhibit to the Form 10-K report. 32 Report on Assessment of Compliance with Servicing Criteria and Accountant s Attestation. In the Adopting Release, the SEC states that it seeks a single uniform set of servicing criteria that covers all aspects of the servicing function and that could be used in the context of multiple asset classes. The SEC states that the only generally used criteria for assessing and reporting on servicing compliance is the Uniform Single Attestation Program for Mortgage Bankers ( USAP ), which was created early in the development of securitization to provide uniform minimum criteria for mortgage-backed securities, and as such the USAP s utility for ABS reporting has significant limitations. Nevertheless, in view of the absence of any other generally used criteria at this time, the SEC in the Adopting Release is adopting servicing criteria designed to be incremental to the current criteria in the USAP. These criteria consist of four broad categories: (i) general servicing considerations; (ii) cash collection and administration; (iii) investor remittances and reporting; and (iv) pool asset administration. The annual report on Form 10-K must include as exhibits reports from each party participating in the servicing function that assess compliance with the servicing criteria adopted by the SEC. 33 Each assessment report must include: (i) a statement of the party s responsibility for assessing compliance with the servicing criteria applicable to it; (ii) a statement that the party used the servicing criteria to assess compliance with the applicable servicing criteria; (iii) the party s assessment of compliance with the applicable servicing criteria for the period covered by the Form 10-K report, including any material instance of noncompliance; and (iv) a statement that a registered public accounting firm has issued an attestation report on the party s assessment of compliance in respect of the relevant period. To ensure independence and objectivity for the attestation function, the Adopting Release requires, for each attestation, that a registered public accounting firm will perform an attestation examination in accordance with the standards for attestation engagements issued or adopted by the Public Company Accounting Oversight Board and issue an attestation report to be filed as an exhibit to the Form 10-K report. In assessing compliance, the Adopting Release permits a platform level of compliance. This means an assessment of compliance with respect to all ABS transactions involving the asserting party that are backed by assets of the type backing the ABS covered by the Form 10-K report. This permits a single assessment and assertion regarding compliance for entities involved in multiple ABS transactions. Current Reporting on Form 8-K. Similar to Form 10-K, the SEC is adding a new general instruction to Form 8-K to specify how the form is to be used with respect to ABS. The general instruction identifies the existing items on the form that may be omitted as well as substitute items from Regulation AB that are required. Any other applicable items specified in Form 8-K will continue to be required. Form 8-K must be filed within four business days after the occurrence of the relevant reportable event (being responsive to the real time disclosure mandate under the Sarbanes-Oxley Act). Items on current Form 8-K that remain applicable to ABS include: entry into a material definitive agreement; termination of a material definitive agreement; bankruptcy 11

12 or receivership of the sponsor, depositor, servicer, trustee, significant obligor, significant enhancement provider, or other material party to the ABS transaction; triggering events that accelerate or increase a direct financial obligation under an off-balance sheet arrangement (including an occurrence of early amortization, performance trigger, event of default, or other event that would materially alter the payment priority or distribution of cash flows or amortization schedule); material modifications to rights of security holders; amendments to articles of incorporation or bylaws and change of fiscal year; and Regulation FD disclosure. 34 New items added to Form 8-K for ABS include: ABS informational and computational material; change of servicer or trustee; change in credit enhancement or other external support; failure to make a required distribution (that is material); and securities act updating disclosure (i.e., where the composition of the actual asset pool at the time of issuance of the ABS differs from the composition of the pool described in the final prospectus for the offering by 5 percent or more, other than as a result of conversion into cash). Other Exchange Act Amendments. The Rules codify the requirement to file reports tied to distributions on ABS in lieu of quarterly reporting on Form 10-Q. The Rules exempt ABS from Section 16 of the Exchange Act (regarding transactions by corporate insiders) in view of the fact that issuing entities often do not have directors or officers. The Rules adopt special rules for transition reports applicable to ABS when an issuing entity changes its fiscal year. TRANSITION The effective date of the Rules is March 8, However, the Rules include transition provisions to enable market participants time to prepare and satisfy the new requirements. Registered offerings of ABS commencing after December 31, 2005 ( Post-2005 Offerings ) will be required to comply with the new rules and forms, with offerings commencing prior to that date grandfathered under the current regime. Shelf registration statements filed prior to September 1, 2005 and relied upon for Post-2005 Offerings on or prior to March 31, 2006, need not be amended to conform the base prospectus to the requirements of the Rules, but the Rule 424(b) prospectus and supplement must, taken together, comply with the Rules, and Part II of the registration statement must comply with the undertakings required by the Rules (including by way of post-effective amendment, if necessary). For shelf takedowns after March 31, 2006, Part I of such registration statement must comply with the Rules, and Part II must contain the undertakings required by the Rules (in each case by way of post-effective amendment, if necessary). Shelf registration statements relied upon for Post-2005 Offerings, if filed after August 31, 2005, must be pre- or post-effectively amended to make the prospectus included in Part I thereof compliant and to make any required undertakings in Part II thereof (and for Post-2005 Offerings commencing after March 31, 2006, to make all changes required in Part II thereof). FURTHER INFORMATION Readers may contact Glenn S. Arden in our New York Office (telephone: ; gsarden@jonesday.com), Jeffrey H. Chen in our Hong Kong Office (telephone: ; jhchen@jonesday.com), or their regular contacts at Jones Day concerning their own situations or any specific legal questions they may have. General messages may be sent using our web site feedback form, which can be found at White Papers are a publication of Jones Day and should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general informational purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at its discretion. The mailing (including electronic mailing) of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. 12