Last week, the SEC adopted a final rule¹ that revises the disclosure, reporting, and offering process for asset-backed securities (ABSs), which are typically offered through securitization transactions. The objectives of the final rule are to increase transparency, enhance information for investors, and implement Section 942(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. For additional information about the final rule, see the press release on the SEC’s Web site.

Amendments Under the Final Rule

The final rule introduces or revises requirements related to (1) asset-level information, (2) prospectus filings, (3) replacement of credit ratings, and (4) changes to Regulation AB.

Asset-Level Information

The final rule requires disclosure of asset-level information, including (1) the credit quality of obligors underlying the ABS, (2) collateral, and (3) certain cash flow and payment-related information. Further, the final rule defines and outlines the data points for disclosure and the scope of asset-level disclosures. For example, such asset-level disclosures must be presented in a standardized, tagged-data format for ABSs backed by certain asset classes.²

Prospectus Filings

The final rule increases the time within which an issuer of ABSs must file a preliminary prospectus (which would include transaction-specific information) to at least three days before the first sale of securities offered. The additional time will permit investors to analyze the ABS transaction’s “structure, assets, and contractual rights.”

The final rule changes other disclosure requirements in an ABS offering prospectus by (1) expanding disclosures about parties to the transaction, including disclosure of a sponsor’s retained economic interest in the transaction and financial information about parties obligated to repurchase assets underlying the ABS; (2) describing terms in the transaction agreements, including modification provisions; and (3) clarifying that transaction documents must be filed by the final prospectus date.

Replacement of Credit Ratings

In addition to requiring changes to certain shelf offering procedures and forms,³ the final rule replaces the prior investment-grade eligibility requirements (previously through credit agency ratings) with new ones that include:

• A certification from the depositor’s CEO — at the time of each offering — about the disclosures in the prospectus and the securitization structure.
• A provision in the transaction agreement for the “review of the assets for compliance with the representations and warranties upon the occurrence of certain trigger events.”
• Terms in the transaction documents addressing resolution of disputes.
• Disclosure of investors’ requests for communication with other investors.

Other Revisions to Regulation AB

The final rule amends aspects of Regulation AB such as (1) standardizing certain static pool disclosures, (2) revising the definition of ABS, and (3) specifying disclosure requirements for assets (on an aggregate basis) that do not meet the underwriting criteria stated in the prospectus. In addition, the final rule introduces certain changes to Forms 10-D, 10-K, and 8-K.

Effective Date and Transition

The final rule will be effective 60 days after its publication in the Federal Register. Issuers will be required to comply with the asset-level disclosure requirements no later than two years after the effective date. However, issuers must comply with the final rule’s other requirements and disclosures within one year of the effective date.

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1 SEC Final Rule Release No. 33-9638, Asset-Backed Securities Disclosure and Registration.

2 Asset classes for which asset-level information is required include residential mortgages, commercial mortgages, auto loans, auto leases, and debt securities (including resecuritizations).

3 For example, the final rule (1) permits “pay-as-you-go” registration fee alternatives, (2) creates new forms, and (3) revises the shelf registration process for ABS offerings to the filing of a single prospectus for each “takedown” (or offering) rather than the current practice of filing a base prospectus and a supplement for each takedown.