SEC Proposes Disclosure Requirements Regarding Representations and Warranties in Asset-Backed Securities Offerings SUMMARY On October 4, 2010, the Securities and Exchange Commission proposed rules pursuant to Section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules would require all securitizers to disclose fulfilled and unfulfilled repurchase requests across all securitization transactions, whether or not those transactions were registered under the Securities Act of 1933. The proposed rules would also require NRSROs to include information regarding representations, warranties and enforcement mechanisms available to investors in an ABS offering in any report accompanying a credit rating issued in connection with such offerings. Finally, the SEC is re-proposing the disclosure requirements with respect to repurchase requests in Regulation AB in order to conform the disclosures to those required by Section 943 of the Dodd-Frank Act. BACKGROUND In the transaction agreements underlying securitizations, sponsors or originators typically make representations and warranties relating to pool assets and their origination, and the sponsor typically has an obligation to repurchase or replace any assets discovered not to comply with those representations and warranties. Section 943 of the Dodd-Frank Act requires the Securities and Exchange Commission (SEC) to prescribe, not later than 180 days after the date of enactment, rules on the use of representations and warranties in the market for asset-backed securities, as defined in the Dodd-Frank Act. The new rules must (1) require any securitizer, as defined in the Dodd-Frank Act, to disclose fulfilled and unfulfilled repurchase requests across all of its securitization trusts, so that investors may identify asset originators with clear underwriting deficiencies and (2) require each nationally recognized statistical rating organization (NRSRO) to include in any report accompanying a credit rating of asset-backed securities a description of the representations, warranties and enforcement mechanisms available to New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com
investors and how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities. The SEC s October 4, 2010 release 1 proposes the required rules, and also re-proposes the disclosure requirements with respect to repurchase requests in Regulation AB 2 in order to conform the disclosures to those required by Section 943 of the Dodd-Frank Act. The SEC has required that comments be submitted by not later than November 15, 2010. THE PROPOSALS Proposed Rule 15Ga-1 would require each securitizer (defined as an issuer of an asset-backed security or a person who organizes and initiates an asset-backed securities transaction by selling or transferring assets, either directly or indirectly, to an issuer, regardless of whether the transactions undertaken by the issuer or other person are registered under the Securities Act of 1933 or conducted in reliance upon any particular exemption) to provide detailed disclosure as to fulfilled and unfulfilled repurchase requests across all of its securitization trusts. The new Exchange Act definition of asset-backed security, as added by the Dodd-Frank Act (Exchange Act ABS), which applies for this purpose, is broader than the definition in Regulation AB, and encompasses any fixed-income or other security collateralized by any type of self-liquidating financial assets that allow the holder to receive payments that depend primarily on cash flow from the asset, including CMOs, CDOs, collateralized bond obligations and CDOs of ABSs and CDOs. The required disclosure would include specified information in tabular form concerning all assets originated or sold by the securitizer that were subject of a demand 3 to repurchase or replace for breach of the representations and warranties concerning the assets for all outstanding Exchange Act ABSs held by non-affiliates of the securitizer. Information would be organized by issuing entity and asset class, indicating whether or not the transaction was registered under the Securities Act of 1933, the name of the originator, the number, outstanding principal balance and percentage by principal balance of assets that were subject of a demand, in the aggregate and separately for assets that were repurchased or replaced, not repurchased or replaced or pending repurchase or replacement. Narrative disclosure would indicate the reasons why any repurchase or replacement is pending. 1 2 3 Release Nos. 33-9148; 34-63029 (75 Fed. Reg. 62718 ()). Our April 23, 2010 memorandum entitled SEC Asset-Backed Securities Reform discusses the SEC s pending proposals to revise Regulation AB and other rules relating to the disclosure, reporting and offering processes for asset-backed securities, including with respect to the disclosure of publicly securitized assets originated or sold by the sponsor or obligor that were the subject of a demand to repurchase or replace for a breach of the representations concerning the pool assets in the last three years pursuant to the transaction agreements. Securitizers would be required to report investor demands as well as demands by a trustee, although the SEC notes in the release that securitizers may have difficulty in obtaining historical information with respect to investor demands because trustees may not have tracked them. Accordingly, the instructions to the table may permit securitizers to state in a footnote that the disclosures do not contain investor demands upon a trustee prior to the effective date of the Rule. -2-
The requirement to make an initial filing would be triggered at the time the securitizer, or an affiliate, commences its first offering of Exchange Act ABSs after the effective date of the Rule, if the underlying transaction agreements provide a covenant to repurchase or replace an underlying asset for breach of a representation or warranty. In that initial filing, disclosure would be required with respect to the five-year period immediately preceding the date of the filing, as of the preceding month. A securitizer would be required to update the disclosure as of the end of each subsequent calendar month, to be filed not later than 15 calendar days after the end of the month, until it no longer has any Exchange Act ABSs outstanding held by non-affiliates and files a notice to that effect. It should be noted that since the definition of Exchange Act ABS is much broader than the Regulation AB definition of asset-backed security, and Regulation AB currently applies only to publicly-offered assetbacked securities, 4 Section 943 of the Dodd-Frank Act and proposed Rule 15Ga-1 considerably expand the reporting obligations of issuers and organizers of securitization transactions. In particular, proposed Rule 15Ga-1 would extend to securitizers in the United States that sell Exchange Act ABSs to offshore purchasers, and to foreign private issuers that sell Exchange Act ABSs in the United States. 5 The release includes a proposed new Form ABS-15G that would be used for any initial filing, periodic filing or notice of termination of the duty to file reports under Rule 15Ga-1. The form would have to be signed by the senior officer in charge of securitization of the securitizer. Proposed Rule 17g-7 would provide that each NRSRO shall include in any report accompanying a credit rating with respect to an Exchange Act ABS a description of (a) the representations, warranties and enforcement mechanisms available to investors and (b) how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities. The proposed rule includes a note that for the purposes of this requirement, a credit rating includes any expected preliminary credit rating issued by an NRSRO. The proposed Rule does not define similar securities, but the release solicits comment on whether and if so how they should be defined. Finally, the release proposes to amend Item 1104(e) of Regulation AB to require disclosure, in the body of the prospectus for any registered offering of asset-backed securities, of the information required by Rule 15Ga-1(a) concerning assets of the class being securitized that were originated or sold by the sponsor and within the prior three years were subject of a demand to repurchase or replace for a breach 4 5 Note that the SEC has proposed amendments to Rule 144, Rule 144A and Regulation D that, in the case of asset-backed securities and other structured finance products, would condition the safe harbors granted by those rules on holders being granted the right to obtain from the issuer the information that would be required if the offering were registered on the appropriate form, and in the case of Rules 144 and 144A, the ongoing information that would be required by Section 15(d) of the Securities Exchange Act of 1934 if the issuer were required to report under that section. The SEC notes in the release that securities sold in foreign markets and assets originated in foreign jurisdictions may be subject to different laws, regulations, customs and practices that can raise questions as to the appropriateness of the disclosures called for by the proposed Rule. -3-
of representations and warranties. As re-proposed, Item 1104(e) would not include the previously proposed materiality threshold, and would broaden the required disclosure to include the repurchase and replacement history with respect to assets of the same class as the assets being securitized. Similarly, the release proposes to amend Item 1121(c) of Regulation AB to require the disclosure in periodic reports of the information required by Rule 15Ga-1(a) concerning all assets of the pool that were subject of a demand to repurchase or replace for a breach of representations and warranties, and would also eliminate the materiality threshold. * * * Copyright Sullivan & Cromwell LLP 2010-4-
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