non-u.s. abs issuers face significant implications from ... · deliver to investors promptly upon...

On April 7, 2010, the U.S. Securities andExchange Commission (the “SEC”)published sweeping proposals to updateand expand the regulation of offerings ofasset-backed securities and otherstructured finance transactions in the U.S.in both the public and, for the first time,the private markets. The proposals, whichwere made in a 667–page regulatorystatement (the “ABS Release”), wouldinvolve substantial revisions to RegulationAB (“Regulation AB”) under the U.S.Securities Act of 1933, as amended (the“Securities Act”), and other U.S. rulesregarding the offering process, disclosureand reporting for asset-backed securitiesand other structured finance products.The ABS Release can be found at:http://www.sec.gov/rules/proposed/2010/33-9117.pdf.

If adopted in substantially their currentform, the proposals in the ABS Releasewould have a wide-ranging impact onparticipants in the asset-backed securitiesmarkets in the United States, including onissuers and underwriters outside the U.S.who seek to access the deep investor basein the U.S. for products such as residentialmortgage-backed securities (“RMBS”),asset-backed securities supported bycredit card receivables (“Cards ABS”),synthetic securities and other structuredfinance transactions directly or indirectlybacked by financial assets, asset-backedcommercial paper (“ABCP”) and,potentially, certain covered bonds.

While the ABS Release details majorreforms for SEC-registered U.S. pubicofferings, if the proposals are adopted,the disclosure requirements for publictransactions would also becomeeffectively mandatory for private offeringsin the U.S. under Rule 144A (“Rule144A”) and Regulation D (“RegulationD”) of the Securities Act. Notwithstandingthis harmonization of disclosure levels inthe public and private markets, webelieve that the overall impact of theproposals in the ABS Release would be

to encourage non-U.S. issuers to preferthe private markets in the U.S. over theregistered public market.

The table below sets out the primaryimplications for issuers of securitiessold in the Rule 144A market, whichremains the most commonly useddistribution channel for non-U.S. issuersof asset-backed securities in theU.S. markets:

May 2010

Non-U.S. ABS Issuers face significantimplications from the U.S. SEC’sproposed revisions to the ABSdisclosure and offering regime Introduction

Summary of Key Changesn For the first time, disclosure in Rule 144A transactions will be effectively subject

to regulation by the SEC, even if the primary market for the securities offered isoutside of the United States

n Non-U.S. issuers in Rule 144A transactions will be required to undertake todeliver to investors promptly upon request detailed portfolio information, includinginformation about the underlying pool on an asset-by-asset basis

n The asset-level information must be accompanied by a computer program thatallows investors to “stress test” the portfolio cash flows, so that they can maketheir own assessment of the ability of the assets to service the amounts payableon the securities in various scenarios

n Information required from issuers of synthetic securities will include details of thedifference between cash and underlying credit spreads of the underlying assets

n Issuers will be required to deliver to the SEC details of each issuance of securitiesin Rule 144A transactions within 15 days of issuance on a prescribed form

n The approach to disclosure and the offering process in the public markets, asdetailed below, is likely to set the standard for best practice in the Rule 144Amarket and, possibly, in the international markets

http://www.sec.gov/rules/proposed/2010/33-9117.pdf

http://www.sec.gov/rules/proposed/2010/33-9117.pdf

It is important for non-U.S. issuers tounderstand that the SEC has issued theABS Release in the context of apolitically charged environment in theUnited States, in response to perceivedfailures of the domestic securitizationmarkets, particularly in the sub-primeRMBS and collateralized debt obligation(“CDO”) sectors. Accordingly, theproposals are geared to address whatthe SEC believes were the causes ofthese failures, with only passingconsideration for any impact that theproposals may have on markets forasset-backed securities outside of theUnited States. The ABS Release is alsopart of a constellation of overlapping(and, in places, inconsistent) regulatoryinitiatives in the U.S. intended to “fix”securitization, including proposedlegislation in both the House ofRepresentatives and the Senate and amajor policy statement issued by U.S.bank regulators. The SEC has alsoadopted a number of separate rulesregarding the “regulation of nationallyrecognized statistical rating agencies”(“NRSROs”) including Rule 17g-5(discussed below).

The proposals were published in theFederal Register on May 3, 2010 andare subject to a 90-day publicconsultation period with a deadline ofAugust 2, 2010, during which industryparticipants submit comments andreactions to the SEC. Following theconsultation period, the SEC willconsider all submissions, and mayrevise the proposals in response to thefeedback received. At that time, theSEC may choose to adopt some or allof the proposals found in the ABSRelease. Alternatively, the SEC maychoose to re-propose portions of theproposals if they feel that there was asufficiently adverse response from

commentators to portions of the originalproposal to merit re-consideration.

At this point, it is very difficult toforecast when some or all of theseproposals will come into effect. Ifadopted, the provisions of the ABSRelease will strictly apply only to asset-backed securities and other structuredfinance products issued in the U.S. afterthe date set by the SEC forimplementation of the proposals.However, as discussed further below,even prior to adoption, we expect thatthe proposals will start to establish anew level of “best practice” in the U.S.securitization markets. The strongposition taken by the SEC in a numberof areas, such as the provision of loan-level data by issuers, mirrors some ofthe recent proposals consulted on bythe European Central Bank and theBank of England. Further, the variousproposals may well start to shapeinvestor expectations prior to theirformal effectiveness.

This memorandum focuses on theimpact of the current proposals on non-U.S. issuers and underwriters of asset-backed securities and other structuredfinance products sold into the UnitedStates in either the public or mostcommon private markets. In addition tosections describing the variousproposals contained in the ABS

Release, we also provide commentaryon these proposals which we hope willhelp market participants better respondto the challenges and opportunitiespresented by the ABS Release.

If you have any comments or concernsrelating to the impact of the ABSRelease on your business, please donot hesitate to contact the authors ofthis memorandum or your normalClifford Chance contacts.

Executive SummaryThe ABS Release contains a number ofproposed regulatory changes designedto increase transparency for investors inthe securitization markets and to reducereliance on rating agencies. However, theproposals will also significantly expandthe disclosure and reporting obligationsof issuers and underwriters of asset-backed securities in the U.S. and, ifadopted, may discourage or makeuneconomic certain types ofsecuritization. Highlights of the proposalscontained in the ABS Release include:

n Issuers of asset-backed securities orother structured finance products inmost private transactions in the U.S.(including non-U.S. issuersconducting an offering in the U.S.pursuant to Rule 144A alongside aseparate offering outside of the U.S.)

© Clifford Chance LLP, May 2010

Non-U.S. ABS Issuers2

Investors – Not Rating AgenciesOne of the main themes underlying the ABS Release is the perceived failure of theNRSROs most directly involved in the asset-backed securities markets to correctlyassess the risk of default in many asset-backed securities and the over-reliance ofinvestors on these rating agencies. Accordingly, the proposals in the ABS Releaseseek to provide to investors all the data and analytic tools necessary to allow themto make a full evaluation of the risks inherent in any structured product offering,effectively seeking to de-emphasize the role of the NRSROs going forward.

Non-U.S. ABS Issuers 3


will be required to undertake toprovide the same level of informationas would be required in an SEC-registered transaction promptly uponrequest by any prospectivepurchaser. In addition, the issuer willbe required to file a publicnotification of issuance with theSEC, setting out specifiedinformation about the offeredsecurities and the underlying assetswithin 15 days after the offering.

n Significantly enhanced “loan-level”disclosure will be required on eachof the underlying pool assets forvirtually all U.S. offerings, withspecific data fields identified by theSEC for 11 different asset types(although use of “grouped” datawould be permitted for Cards ABS).

n In public offerings, the required loan-level data must be filed with the SECin computer-readable form and, inboth public and private transactions,this data must be accompanied by acomputer program based on the“waterfall” contained in the transactiondocuments in order to permitinvestors to run their own analysis ofthe assets and the cash flows.

n In public offerings, an investmentgrade credit rating will no longer be afactor in determining eligibility for shelfregistration; instead, eligibility for shelfregistration will require the following:

• Retention by the program’ssponsor of a five percent“vertical” slice of each tranche ofsecurities offered to investors or,in the case of Cards ABS, a fivepercent “seller” interest in thetrust assets;

• Periodic third-party verification ofcompliance with any asset

repurchase provisions forviolations of representations inthe program documentation;

• Certification by the chief executiveofficer of the depositor at the timeof each offering that the assetpool is reasonably expected togenerate cash flows sufficient toservice the issuer’s liabilities; and

• Periodic reports by the issuerunder the U.S. SecuritiesExchange Act of 1934, asamended (the “Exchange Act”),are required for as long as theissued securities are outstanding(rather than only for one year, aspresently).

n Each public offering of asset-backedsecurities under a program using“shelf” registration (i.e., where theSEC approves an initial registrationstatement and not each “take down”offering from that registrationstatement) will have to be madeusing a single prospectus containingall material information relating toeach individual issuance, other than

pricing-dependent information. Thisprospectus must be provided toinvestors not less than five businessdays prior to any sale of thesecurities. Offerings by master trustsbacked by non-revolving assets,such as traditional residentialmortgage loans, will not be eligiblefor shelf registration.

n For public offerings, two new forms of“registration statement” (i.e., thedocument containing the prospectusand other disclosure required to bepublicly filed with the SEC) will beintroduced exclusively for asset-backed securities issued in the publicmarkets by both U.S. and non-U.S.issuers, and these forms will containsignificantly expanded disclosurerequirements. Issuers of structuredfinance products that do not meet theSEC’s definition of “asset-backedsecurity” such as CDOs will still berequired to use the traditional forms ofregistration statement.

n Broker-dealers in public deals will berequired to wait for at least 48 hours

between the distribution of anyprospectus to investors andconfirming sales.

n Issuers in both public and privateofferings will be required to provideperiodic data on assets that havebeen put back to the sponsor ororiginator for breaches of point-of-sale representations and warranties.

Key Provisions of the ABSRelease for Non-U.S. IssuersThe ABS Release contains provisionswhich are primarily focused on theoffering process and disclosure for asset-backed securities issued in publictransactions registered with the SEC,whether on a stand-alone basis or undera program listed, for example, on aEuropean exchange and registered as a“shelf” in the U.S. (this has historicallybeen the U.S. distribution channel usedprimarily by non-U.S. issuers for largeRMBS and Cards ABS transactions). TheABS Release also contains provisionsthat affect asset-backed securities offeredon a private basis in the U.S. under thesafe-harbors from the registrationrequirements of the Securities Actprovided by Rule 144A and Regulation D,which has generally been the distributionchannel used by non-U.S. issuers locatedin emerging markets or for transactionsbacked by assets that require a morebespoke selling effort, as well as by less-frequent non-U.S. issuers of RMBS andCards ABS.

New DisclosureRequirementsResponding to a perceived lack ofdisclosure to investors, in the asset-backed market prior to the Credit Crisis,the SEC in the ABS Release proposesubstantially enhanced disclosurerequirements. As noted above, while

these requirements apply directly only toofferings in the U.S. public markets,because the proposals in the ABSRelease would effectively harmonizedisclosure in most private offerings withthe new requirements for non-shelf publictransactions, we believe that it is crucialthat all non-U.S. issuers and underwriterswho may seek to offer in the U.S.familiarize themselves with these newdisclosure requirements.

Asset-Level Reporting Requirements

n Proposed General DisclosureRequirements

Historically, the only statistical dataprovided to investors in asset-backedsecurities was at the “pool” level. Underthe proposals in the ABS Release,whether or not shelf registration is used,issuers will be required to include detailedasset-level data both in the prospectus atthe time of initial offering and in their on-going reports to the SEC. This asset-leveldata will have to be provided in astandardized, computer readable formatfiled on EDGAR (the SEC’s electronicsystem for data submission). Loan-leveldata would have to be provided at the

time of issuance, when new loans,cardholder accounts or other assets areadded to the pool underlying thesecurities, and on an on-going basis inperiodic reports pursuant to Sections 13and 15(d) of the Exchange Act.

With respect to each individual asset inthe pool (or each “group” of assets inCards ABS), the issuer will be requiredto provide specified data, including theterms of the asset, obligorcharacteristics, interest rates andprimary servicer information. For CardsABS, the “grouped” data is intended tobe more granular than the pool-levelinformation currently disclosed toinvestors and would be created bycompressing the underlying asset-leveldata into combinations of standardized“distributional” groups.

Issuers would also be required toupdate the asset-level data for changesto the pool prior to the date that cashflows start being allocated to investors,if the initial data is from an earlier date.These data points would include thecurrent asset balance, the number ofdays the obligor is delinquent, the

4 Non-U.S. ABS Issuers


number of payments the obligor is pastdue as of the cut-off date and theremaining term to maturity.

The ABS Release seeks to addressprivacy concerns with respect to thepublic release of loan-level data byrequiring only ranges or categories ofcoded responses instead of specificlocation, credit score or exact income ordebt amounts.

Commentary: As with U.S. issuers,non-U.S. issuers of asset-backedsecurities may struggle at first to meetthis new requirement. The SEC believesthat most of the information theypropose to require is currently beingprovided voluntarily to the ratingagencies. However, non-U.S. issuersmay be able to negotiate with the ratingagencies as to exactly what informationthey provide (and in what format),especially where the issuers face IT orother technical difficulties in obtainingthe information. In most cases, theSEC’s proposed requirements wouldneed to be met to the letter (subject toa six-day “hardship” exemptiondiscussed below) in order to effect apublic transaction, potentiallypresenting greater challenges toissuers. Also, if the provision of asset-level data and the way in which it isprovided to investors becomes thesubject of market convention in theU.S., first-time or infrequent non-U.S.issuers of asset-backed securities mayface greater challenges when seekingto effect a U.S. offering. It is alsopossible that, if this proposal isadopted, European or other regulatorsmay seek to impose a similarrequirement to obtain regulatory paritybetween markets. We believe that anumber of proposals in Europeregarding loan level data, for example,from the European Central Bank and

the Bank of England, very much pointin this direction. Depending on thenature of the requirements adopted invarious jurisdictions, non-U.S. issuersmay face challenges in harmonizing theprovision of asset-level data to U.S.investors with process andrequirements for providing similarinformation to investors outside of theU.S. A level of internationalcoordination would be desirable fordata disclosure purposes.

n Asset-Specific Data Points - RMBS

For RMBS, the issuer will be required toprovide specific information regardingeach mortgage loan, with 137 specificdata points required, including details ofthe loan, the property, the obligor’scredit and employment status and anymortgage insurance.

Commentary: Over the last severalyears, there has been extensivediscussion in the U.S. about loan-levelreporting in RMBS transactions and theSEC has indicated that the data pointsproposed in the ABS Release werederived from the disclosure andreporting fields produced by theAmerican Securitization Forum throughtheir Project RESTART (ResidentialSecuritization Transparency andReporting), which was developed withsignificant industry involvement in theU.S. The SEC expects that non-U.S.issuers will find a way to adapt to theserequirements, even if they weredeveloped from the perspective of theU.S. markets.

n Asset Specific Data Points -Automobile Loans and Leases

For asset-backed securities backed byloans for the purchase of automobiles orautomobile leases, the issuer will berequired to file specific data regarding thepayment type of the loan/lease, dealer

location, vehicle manufacture details,vehicle value and the obligor’s credit andemployment status.

n Asset Specific Data Points - OtherAsset Classes

The ABS Release contains detailedrequirements for asset-level data for awide variety of other asset classes,including commercial mortgage-backedsecurities, as well as securities backedby equipment loans or leases, studentloans, dealer floorplan financings,corporate debt and “re-securitizations”.

Commentary: The asset-specific datapoints for other asset categories werealso generally built around current U.S.market practice or experience,particularly in the area of commercialmortgage-backed securities (“CMBS”).Non-U.S. issuers will have to determinewhether the SEC’s required data pointsfor any given asset class areapplicable to the lending practices intheir home markets.

n Asset Data File

Issuers in both “shelf” and standardpublic offerings in the U.S. will berequired to file the relevant asset data(the “asset data file”) on Form 8-K atvarious times during the offeringprocess, including when a prospectus isfiled with the SEC and when updatingdisclosure is otherwise required.

Commentary: In addition to theadministrative burden for issuers ofpreparing and updating asset data files,non-U.S. issuers in jurisdictions withrobust data protection laws, such asmost European jurisdictions, will need totake particular care to ensure that theidentity of the obligors of the underlyingassets is fully protected and cannot beinferred from the information containedin the asset data files. This may include



ensuring that postal codes and otherdata points that could relate to aparticular obligor are not included. Non-U.S. issuers will need to considerwhether any such data would berequired to be disclosed by the SEC’sregulations, and, if so, remove from theportfolio any underlying assets whichmay result in the disclosure of protectedpersonal information. This processcould increase the cost and potentialliability for any non-U.S. issuer.

If the registrant experiencesunanticipated technical difficultiespreventing the timely preparation andsubmission of an asset data file, thesubmission will still be considered timelyif the asset data is posted on a web siteon the same day it was due to be filedon EDGAR, the web site address isspecified in the required exhibit, alegend is provided in the appropriateexhibit claiming the hardship exemption,and the asset data file is filed onEDGAR within six business days. TheSEC proposes that failure to file theasset data file within that period willresult in the loss of eligibility to use theshelf registration process.

Waterfall Computer Program

Issuers of asset-backed securities will berequired to file on EDGAR a computerprogram (the “waterfall computerprogram”) of the contractual cash flowprovisions of the offered securities in theform of downloadable source code inPython, which the SEC notes in the ABSRelease is a commonly used opensource and interpretive computerprogramming language.

The filed source code for the waterfallcomputer program would be required toprovide users with the ability to build intheir own assumptions regarding the futureperformance and cash flows from the pool

assets, including but not limited to,assumptions about future interest rates,default rates, prepayment speeds, loss-given-default rates, and any otherassumptions required to be describedunder Item 1113 of Regulation AB. Thewaterfall computer program must allow theuser to integrate those assumptions withthe asset data file required to be madeavailable by the issuer at the time of theoffering and on a periodic basis thereafter.

The waterfall computer program will berequired to produce a programmaticoutput, in machine-readable form, of allresulting cash flows associated with theoffered securities, including the amountand timing of principal and interestpayments payable or distributable to aholder of each class of securities, andeach other person or account entitled topayments or distributions in connectionwith the securities, until the final legalmaturity date. The issuer will berequired to file with the SEC an exampleof the expected output for each tranchebased on sample inputs with thewaterfall computer program.

Like the asset data file, the waterfallcomputer program would be an integralpart of the prospectus so that issuerswould be required to provide thewaterfall computer program at the time offiling the preliminary prospectus, with dataaccurate as of the date of the filing.Similarly, as a prospectus requirement, thewaterfall computer program would befiled with the final prospectus with dataaccurate as of the date of the filing.

The registrant will be entitled to thesame hardship exemption discussedunder “Asset Data File” above.

Commentary: Non-U.S. issuers,particularly smaller issuers, may beconcerned about taking responsibility forthe waterfall computer program,

especially where, historically, thetransaction “model” may have beenprepared by the arranger on behalf of theissuer. A similar point is made in the Bankof England’s current consultation on itsDiscount Window Facility, which alsoproposes cash flow model disclosure forissuers of asset-backed securities. Inaddition, underwriters of asset-backedsecurities will need to give considerationto what “due diligence” they need toperform with respect to the accuracy ofthe waterfall computer program.

Matters Relating to TransactionParties

n Identification of Originator

Regulation AB currently provides that anyparty that has originated 10% or more ofthe assets underlying a transaction mustbe treated as an originator, even if thatentity is not affiliated with the issuer orthe sponsor. The SEC is concerned thatthis may result in minimal disclosureabout the originators if a substantial partof the underlying assets comes fromthird-party originators but no singleoriginator represents more than 10% ofthe asset pool.

Under the proposal, an entity will beidentified as an originator even if suchoriginator has originated less than 10%of the pool assets if the cumulativeamount of originated assets by partiesother than the sponsor (or its affiliates)comprises more than 10% of the totalpool assets.

Commentary: In our experience, veryfew non-U.S. issuers of asset-backedsecurities use multi-originator structures(which are common in the UnitedStates). Accordingly, we do notanticipate this portion of the proposalsto have a significant impact on mostnon-U.S. issuers, although participantsin the European wholesale loan



securitisation market that often pooledloans from multiple originators will needto take note of this proposal.

n Obligation to Repurchase Assets

The detailed provisions of the proposalsrelating to asset-level warranties expandon those referred to above fordetermining eligibility for shelfregistration. Under the proposals, theissuer would be required to disclose theamount, if material, of securitized assetsoriginated or sold by the sponsor or anidentified originator that were put backto the sponsor or originator forrepurchase as a result of a breach of apoint-of-sale representation andwarranty on a rolling three-year basis.This disclosure is required to beprovided on a pool-by-pool basis,together with the percentage of suchassets that had not then beenrepurchased or replaced by the sponsoror originator.

The issuer would also be required todisclose whether an independent thirdparty had given an opinion to the trusteeconfirming that any such assets that hadnot been repurchased did not in factviolate a representation or warranty.

Financial information of the partyrequired to repurchase a pool asset forbreach of a representation and warrantypursuant to the transaction agreementswill be required, including the interest ofthat party in the securitization.Information regarding the financialcondition of an originator that accountsfor 20% or more of the pool assets willbe required if there is a material risk thatits financial condition could have amaterial impact on the origination of itsassets in the pool or on its ability tocomply with repurchase obligations forthose assets. The SEC also focuses ondisclosure of the steps taken by the

originator to verify borrower applicationdata, including dislosure of whether theoriginator has made a representationthat there was no fraud in theorigination of the assets as well as onthe availability of investor remedies inthe transaction documents.

This information will be required for bothshelf and other offerings. If the offeringis being registered on Form SF-1, theissuer will be required to provide cleardisclosure that the sponsor is notrequired by law to retain any interest inthe securities and may sell any interestinitially retained at any time.

Commentary: While this provision isclearly cumbersome and will requirenon-U.S. issuers of asset-backedsecurities to bear additional costs toaddress a primarily U.S. issue, we donot anticipate this to create a significantstumbling block for non-U.S. issuers.

Consideration will have to be given,though, to how some of theseadditional disclosure points are handled,as some may provoke sensitivediscussions in the working group (suchas the presence or absence of a “nofraud” representation).

Prospectus Summary RequirementsThe SEC is concerned that existingprospectus summaries for asset-backedsecurities tend to describe structuralfeatures that are common to allsecuritizations of a particular assetclass, rather than concentrating on thevariances that might be material to thespecific securities described in theprospectus. The ABS Release containsprovisions requiring prospectussummaries to include statisticalinformation relating to the types ofunderwriting or origination programs,exceptions to the underwriting or



origination criteria and, whereappropriate, modifications to poolassets after origination.

Commentary: Although it mayrepresent a significant change in currentmarket practice, we do not anticipatethis part of the ABS Release to presentsignificant concerns for non-U.S.issuers. However, it is likely that non-U.S. issuers will need to spend a fairamount of time, initially at least, revisingtheir prospectuses to align with theproposals. Further, because issuers willwant to have only one form ofprospectus for all investors, regardlessof where they are located, non-U.S.investors will probably receive offeringdocuments with expanded prospectussummaries as well. It is likely thatprospectus summaries will be the partof the prospectus which changes themost as a result of the variousdisclosure reforms proposed in variousjurisdictions, as the Bank of Englandhas set out a list of information itproposes to require to be present in thesummary section and the EuropeanCommission has also set out proposalsfor the “key information” which must beincluded in a prospectus that iscompalint with the EuropeanProspectus Directive.

Enhanced Static Pool DisclosureThe initial version of Regulation ABintorduced the idea of pool providinginvestors with historic information on a“static” basis (i.e., breaking downperformance by asset “cohorts such as allassets either originated or securitised in aparticular year). The SEC in the ABSRelease has proposed four new disclosurerequirements regarding static poolinformation:

• narrative disclosure describing thestatic pool information presented(for example, for a pool of RMBS,

the disclosure would cover thenumber of assets, types ofmortgages (e.g., conventional,home equity, Alt-A, etc.), and thenumber of loans that wereexceptions to standardizedunderwriting criteria);

• a description of the methodologyused in determining orcalculating the characteristicspresented and a description ofany terms or abbreviations used;

• a description of how the assetsin the static pools shown in theprospectus differ from the poolassets underlying the securitiesbeing offered; and

• if an issuer does not includestatic pool information orincludes disclosure that isintended to serve as alternativestatic pool information, anexplanation of why they have notincluded static pool disclosure orwhy they have providedalternative information.

Static pool information related todelinquencies, losses and prepayments

will also need to be presented foramortizing asset pools such as RMBS.Also, in public transactions, the SECwould no longer permit static pool data tobe posted to a website - all static pooldata would need to be filed with the SEC(although PDF format would be permitted).

Commentary: In our experience,compliance with the existingrequirements in Regulation AB to providestatic pool data has been challenging formany non-U.S. issuers. We would expectthat the expanded requirementsproposed by the SEC will add to thechallenges of preparing this data. Inparticular, non-U.S. issuers should bear inmind that, as a result of theharmonization of disclosure in the publicand private markets, if the proposals areadopted, it will be very difficult to avoidpreparing, and providing to investors,static pool data.

Pool-Level InformationIn addition to the requirements for loan-level data, the proposals in the ABSRelease also seek to enhance the pool-level information traditionally provided inmost offering documents.



• The issuer’s disclosure regardingthe underwriting of assets thatdeviate from the disclosedorigination standards (forexample, assets that are past dueat the time of inclusion) must beaccompanied by specific dataabout the amount andcharacteristics of those assetsthat did not meet the disclosedstandards. To the extent thatdisclosure is provided regardingcompensating or other factors, ifany, that were used to determinethat the assets should beincluded in the pool, despite nothaving met the disclosedunderwriting standards, the issuerwill be required to specify thefactors that were used andprovide data on the amount ofassets in the pool that arerepresented as meetingthose factors. An example wouldbe when a very low loan-to-valueratio for a particular residentialmortgage loan is considered bythe originator to offset a poorcredit score in the part of theborrower.

• The issuer will be required todisclose what steps wereundertaken by the originator ororiginators to verify theinformation used in thesolicitation, credit-granting orunderwriting of the pool assets.

• The issuer will be required toinclude disclosure of theprovisions in the transactionagreements governingmodification of the assets,disclosure about howmodification may affect cashflows from the assets or to thesecurities and disclosure ofwhether or not a fraud

representation is included amongthe representations andwarranties.

Commentary: These disclosurerequirements were clearly driven by well-publicized failures in the U.S. markets,particularly in the sub-prime RMBSsector. We expect that non-U.S. issuerswill be able to address these pointsthrough due diligence and that they willnot present a significant impediment totransactions, although there may besome non-U.S. issuers who may find itcommercially sensitive to highlight someof this information.

Other Disclosure Requirements thatRely on Credit Ratings

The ABS Release would eliminateexisting exceptions to disclosure rules,which are based on investment graderatings, including:

• removing an instruction to Item1112(b) which provides that nofinancial information regarding asignificant obligor is required ifthe obligations of the significantobligor are backed by the fullfaith and credit of a foreigngovernment, and the pool assetsare securities that are ratedinvestment grade by an NRSRO;

• removing an instruction to Item1114 of Regulation AB whichrelieves an issuer of theobligation to provide financialinformation when the obligationsof the credit enhancementprovider are backed by a foreigngovernment and theenhancement provider has aninvestment grade rating.

Commentary: This requirement couldhave a significant impact on issuers oftransactions where the obligations of theunderlying obligor are guaranteed by an

agency of a foreign government (e.g., aresidential mortgage loan guaranteedunder a state-level guarantee program),because it would potentially requiredisclosure of financial information aboutthe guaranteeing agency, which may notbe readily available.

New RegistrationProcedures and Forms forAsset-Backed Securities New Forms SF-1 and SF-3

The ABS Release proposes two newforms of registration statement, to beused by issuers of asset-backedsecurities: Form SF-1 for stand-alonetransactions and Form SF-3 for shelfprograms. These new forms would beexclusively for use in the registration ofsecurities that meet the definition of“asset-backed security” (see “Definition of‘Asset-Backed Security’” below). Themain difference between proposed FormsSF-1 and SF-3 and the current Forms S-



1 and S-3 is the extent and nature of theinformation required to be disclosed onthe underlying assets, as discussedbelow, and the extent to which suchinformation can be incorporated byreference. As with current Forms S-1 andS-3, the new forms largely incorporateprovisions of Regulation AB.

Commentary: While the proposed newforms will not particularly impact foreignissuers, a proposed change in thedefinition of “asset-backed security”would mean that securities issued bymaster trusts which are backed by non-revolving assets, such as residentialmortgages, would no longer be withinthe definition and, therefore, would notbe eligible to use the new registrationforms and, therefore, not be eligible forshelf registration. It is worth noting,however, that anecdotal information atthe time of writing indicates thatindustry sentiment in the U.S. may begenerally moving toward the conclusionthat the proposed conditions to the useof shelf registration will be difficult tomeet and that, as a result, if adopted asproposed, many issuers would choosevoluntarily not to issue under shelfprograms. Likewise, we believe thatvery few non-U.S. issuers will elect tomake use of the shelf registrationprocess if the proposals are adopted.

New Shelf Eligibility Criteria

Currently, the eligibility of asset-backedsecurities programs for shelf registrationis based in part on whether thesecurities to be issued would receive aninvestment grade rating from anNRSRO, such as Standard & Poor’s,Moody’s or Fitch. Under the proposalsin the ABS Release, the ratings-basedeligibility criterion will be eliminatedand replaced by the following fournew criteria:

n “Skin-in-the-Game”: The sponsorwill be required to retain risk in eachtranche of the securitization on anongoing basis, net of the sponsor’shedging, by either:

• retaining a minimum of fivepercent of the nominal amount ofeach of the tranches sold ortransferred to investors; or

• in the case of revolving assetmaster trusts (primarily used inCards ABS transactions),retaining a minimum of fivepercent of the nominal amount ofthe securitized exposures as anoriginator’s interest, provided thatthe originator’s interest andsecurities held by investors arecollectively backed by the samepool of receivables, andpayments of the originator’sinterest are not less than fivepercent of payments of thesecurities held by investorscollectively.

Commentary: The impact of thisrequirement on non-U.S. issuers will turnon where the issuer is based and howtheir home jurisdiction capital and asset-

transfer rules are being applied. We wouldanticipate that, in the UK and in manyother jurisdictions, Cards ABS would notbe significantly affected because thisasset class is issued primarily throughmaster trusts that generally have sellerinterests at or above five percent. Thisstandard will not be relevant to many non-U.S. issuers of traditional RMBS sincenon-revolving assets such as mortgageswould not be permitted to use the shelfregistration channel under the proposals.

n Originator Buy-Back ComplianceOpinion: The party required torepurchase pool assets for breach ofrepresentations and warranties willalso be required to furnish toinvestors, at least quarterly, anopinion of an independent third-party as to whether the obligatedparty acted consistently with theterms of the relevant transactiondocuments, with respect to anyloans that the issuer or the trusteeput back to the relevant party forviolation of representations andwarranties and which were notrepurchased or replaced by theobligated party.



Commentary: Most securitizations bynon-U.S. issuers currently require theoriginator or depositor to warrant as tothe compliance of the assets withspecified standards and criteria set outin the transaction documents.However, the requirement formandatory verification of compliancewith the provisions is new, and reflectsthe SEC’s concern that originators (inthe U.S. at least) were not consistentin meeting the buy-back obligations.Implementation of this requirement willinvolve additional administration andexpense. It is also not clear who willperform the verification role as the ABSRelease states that audit firms in theU.S. have already indicated that thissort of opinion would not be within thescope of their professionalresponsibilities. Further, because thereare likely to be relatively few non-U.S.issuers using shelf registration, theremay be few service providers focusingon helping issuers outside of the U.S.meet this requirement.

n CEO Certification: The proposalsin the ABS Release would requirethe chief executive officer of thedepositor to file a certification at thetime of each offering off of a shelfregistration statement that theassets in the pool havecharacteristics that provide areasonable basis to believe that theywill produce, taking into accountinternal credit enhancements, cashflows to service any payments dueand payable on the securities asdescribed in the prospectus.

Commentary: Many depositors instructures involving shelf offerings bynon-U.S. issuers are special purposevehicles. Consideration should be given

to what comfort the directors of theseentities (often supplied by corporatemanagement companies) would requireto give these certifications. It should benoted that this requirement is similar tothe requirement in the EuropeanProspectus Directive which requiresissuers of asset-backed securities tomake a statement in the prospectusthat the assets backing the offeredsecurities “have characteristics thatdemonstrate the capacity to producefunds to service any payments on thenotes issued”.

n Exchange Act Reporting: Theproposals would also require theissuer to undertake to file ExchangeAct reports so long as non-affiliatesof the depositor hold any securitiesthat were sold in registeredtransactions backed by the samepool of assets.

Commentary: This element of theproposal would require non-U.S. issuersto prepare servicer assessments andobtain auditor attestations under Item1122 of Regulation AB for the life of thetransaction. Preparation of theseassessments and obtaining theattestations has proved very time-consuming for non-U.S. issuers, andthis requirement may further discourageeligible non-U.S. issuers from utilizingshelf registration unless the benefits ofshelf registration can be clearly shownto outweigh the challenges of beingsubject to Item 1122 for the life ofthe program.

Shelf Offerings - FormalRequirements

Certain large non-U.S. issuers,particularly in the RMBS and Cards ABSmarkets, have used shelf programs to

facilitate the quick and efficient issuanceof securities when appropriate marketconditions arise. The SEC hasexpressed concern that shelf programsgenerally may have confused investorsor presented a lower level of disclosurethan stand-alone offerings, because thedisclosure relating to the securities issplit between a pre-registered base, orprogram, prospectus and a transaction-specific prospectus supplement foreach individual issuance. The baseprospectus often omits importantinformation relating to the underlyingasset pool, and the prospectussupplement is generally not filed withthe SEC until the second business dayafter the first use of the program. Toaddress these concerns, the SEC hasproposed new Rules 424(h) and 430Das a framework for shelf offerings ofasset-backed securities.

Consistant with current practice, underthe proposals, the form of prospectuswhich would be contained in a FormSF-3 registration statement maycontinue to omit any transactionstructure or asset/pool-specificinformation or data at the time it isdeclared effective by the SEC.However, under proposed new Rule424(h), the issuer would be required tofile a preliminary prospectus (a “Rule424(h) filing” or “Rule 424(h)prospectus”) that contains alltransaction-specific information aboutthe proposed offering except verylimited pricing information, such as theoffering price/coupon and underwritingdiscount, at least five business days inadvance of the first sale of securities inthe offering, This five-day period isintended by the SEC to give investorssufficient time to analyze thetransaction and loan-level data and run



their own scenario analysis with thewaterfall computer program.

Proposed Rule 430D would require that,with respect to each offering,substantially all of the information thatwas omitted from the form ofprospectus (except for informationrelating to the offering price,underwriting discounts or commissions,amount of proceeds or other mattersdependent upon the offering price) mustbe filed with the SEC in a near-finalpreliminary prospectus filed inaccordance with Rule 424(h). As aconsequence, the proposals wouldresult in each offering being made onthe basis of a single prospectus, ratherthan the existing base-and-supplement format.

Commentary: Non-U.S. issuers whosetransactions are still eligible to use FormSF-3 and who have in the past haveintegrated a U.S. registered offering intotheir listed offering programs (e.g., onthe London Stock Exchange) will needto focus on the implications of beingrequired to use a single prospectus inthe U.S., rather than a base prospectusand supplement and/or final termsdocument. This is particularly relevantwhere non-U.S. issuers utilize medium-term note (“MTN”) programmes, whichhave allowed them to includestratification tables and other data in afinal terms document that is notreviewed or approved by the relevantlisting authority. Although there may berelatively few non-U.S. issuers in theSEC shelf-registered channel directlyimpacted by this element of theproposal, if investors becomeaccustomed to receiving a singledisclosure document, we may see morenon-U.S. issuers voluntarily preparingsupplemental prospectuses that areeffectively stand-alone for each offering

and that are significantly different from“final terms” style issuances currently inuse. This could impact the time requiredto undertake an offering under MTNprogrammes for non-U.S. issuers.

The proposed Rule 430D would alsoprovide that a material change in theinformation provided in the Rule 424(h)filing, other than pricing information,would require a new Rule 424(h) filingand, consequently, a new five businessday waiting period.

Definition of “Asset-BackedSecurity”A core principle of Regulation AB’sdefinition of an “asset-backed security”is that it is a security backed by adiscrete pool of assets that, by theirterms, convert into cash, absent anyactive pool management. RegulationAB contained an exception to thisprinciple that allowed issuers to takeadvantage of master trust structures,prefunding periods and revolvingperiods to allow for changeable assetpools. This exception will change foreach category:

Master Trust Structures: Under the ABSRelease, the exception will be revised toprevent master trust issuers from usingnon-revolving assets (e.g., mortgages) Amaster trust that is not supported byrevolving assets would be outside of thegeneral regime for “asset-backedsecurities”. While SEC registration wouldstill be theoretically possible, issuers inthis situation would need to determinehow they would comply with the broaderrequirements of Form S-1, or obtainexemptions from these requirements.

Revolving Periods: The permissibleduration of the revolving period of non-revolving assets will be reduced fromthree years to one year.

Prefunding Periods: The amount ofpermitted prefunding will be decreasedfrom the current 50% of the offeringproceeds, or, in the case of mastertrusts, 50% of the aggregate principalbalance of the total asset pool, to 10%of the offering proceeds or, for mastertrusts, 10% of the aggregate principalbalance of the total asset pool.

Commentary: Excluding non-revolvingassets from master trusts in thedefinition of “asset-backed security” willmake accessing the public markets inthe U.S. much more difficult for non-U.S. sponsors of residential mortgagemaster trusts by eliminating thepossibility of using the shelf registrationchannel and forcing these issuers touse “old” Form S-1, which was notintended for issuers of asset-backedsecurities. Non-U.S. issuers of CardsABS will not be affected by thesechanges. Further, it is not yet clear howthe SEC will treat covered bonds forpurposes of this definition. The term“covered bond” does not appear in theABS Release. While most observers arehopeful that the SEC will recognizecovered bonds as something otherthan “asset-backed securities” (or other“structured finance products”), andthus outside the scope of the proposalscontained in the ABS Release, this isnot clear, and the SEC’s final view mayturn on the structure of the coveredbond program and the way in whichthe covered bonds are being marketedto investors.

Exchange Act Reporting In the ABS Release, the SEC alsoexpresses significant concern about thequality of on-going reporting to investorsin public transactions and proposesseveral important changes to the existingrequirements in this area.




Form 8-K and Reporting of MaterialChanges

Under the proposals, issuers will berequired to file a current report withdisclosure pursuant to Item 1111 and Item1112 if any material pool characteristic ofthe actual asset pool at the time ofissuance of the asset-backed securitiesdiffers by one percent or more from thedescription of the asset pool in theprospectus filed for the offering pursuantto Securities Act Rule 424 (other than as aresult of the pool assets converting intocash in accordance with their terms),together with a description of the changesthat were made to the asset pool.

The issuer will be required to file a Form8-K to describe any material change inthe sponsor’s interest in the offeredsecurities.

Application of 48-hour rule

Exchange Act Rule 15c2-8(b) currentlycontains an exception for ABStransactions from the requirement thatbroker-dealers must deliver a preliminaryprospectus at least 48 hours beforeconfirming any sale of the relevantsecurities. Under the proposals, thisexception will be eliminated for allofferings of asset-backed securities,including those involving master trusts.

Commentary: This proposal is unlikely tobe of significant concern for non-U.S.issuers operating in markets such asEurope and most Asian markets wheresimilar rules are already in place.

Privately-Issued StructuredFinance Products The ABS Release, if adopted, would forthe first time require disclosure inprivate offerings in the U.S. conductedin reliance on Rule 144A and RegulationD to be in line with that required in the

U.S. public markets, effectivelyeliminating one of the main benefits ofthis distribution channel: the ability oftransaction parties to make judgmentaldeterminations as to what informationthey consider “material’ for purposes ofa given transaction. The proposal wouldintroduce a definition of “structuredfinance products” which, in addition totraditional “asset-backed securities”, willbroadly cover, among other things,synthetic asset-backed securities andfixed-income or other securitiescollateralized by any pool of self-liquidating financial assets, such asloans, leases, mortgages, and securedor unsecured receivables. This portionof the proposal represents a majorchange from prior practice andevidences a clear intention on the partof the SEC to close what it perceives asa disclosure “loophole” in theirdisclosure regulation.

Commentary: Although certain sectorsof the U.S. securitization markets have

utilized the Rule 144A distributionchannel regularly (particularly, CDOsand synthetics), very few of the mostcommonly issued asset-backedsecurities, such as RMBS and CardsABS, are offered by U.S. issuers in thisfashion. However, non-U.S. issuers oftraditional and more esoteric assets useRule 144A offerings to a much greaterextent and, accordingly, will experiencea much greater impact from thischange. Non-U.S. issuers may be lessfamiliar with Regulation D offerings,which are generally targeted at smallerinstitutional investors than thosecovered by Rule 144A, as well as atcertain high net worth individuals. It isworth noting that neither “traditional”private placements made by issuerspursuant to Section 4(2) of theSecurities Act nor private re-sales underso-called “Section 4(1-1/2)” would becovered by the proposals in the ABSRelease because the SEC does nothave jurisdiction to amend legislationenacted by Congress. Also, the



proposals would not apply to offeringsconducted outside the United Statespursuant to Regulation S under theSecurities Act.

Additional Disclosure for Resalesunder Rule 144A

Additional disclosure to investors will berequired for any resale made under Rule144A or offering under Rule 506 ofRegulation D. In particular:

• the underlying transactionagreements for the securities mustgrant to purchasers (and also, inthe case of Rule 144A, any securityholder or prospective purchaserdesignated by the security holder)the right to obtain from the issuerof such securities the information,promptly upon request, that wouldbe required if the transaction wereregistered under the Securities Act,and, in the case of a Rule 144Aoffering, such ongoing informationas would be required by Section15(d) of the Exchange Act if theissuer were required to file reportsunder that section; and

• the issuer must represent that itwill provide such informationpromptly.

Commentary: Because the ABSRelease seems to distinguish betweenRule 144A offerings and Regulation Dofferings, in terms of required on-goingdisclosure (with specific requirementsfor on-going disclosure only applicableto Rule 144A offerings), non-U.S.issuers may want to put greater focuson the requirements of Regulation Dto conduct private offerings in theUnited States.

Proposed Rule 144 RevisionsThe SEC has also proposed to conformthe public informational requirement of

Securities Act Rule 144 to the revisionsset out above. Accordingly, in the case ofa non-reporting issuers of structuredfinance products, the issuer must agreein the underlying transaction agreementto provide to any purchaser, any securityholder and any prospective purchaser ofthe securities designated by the holderthe right to obtain, upon request of thepurchaser or security holder, informationthat would be required if the offering wereregistered on Form S-1 or Form SF-1under the Securities Act and any ongoinginformation regarding the securities thatwould be required by Section 15(d) of theExchange Act, if the issuer were requiredto file reports under that section. Similarly,the issuer must have represented that itwould provide such information to thepurchaser, security holder, or prospectivepurchaser, upon request of the purchaseror security holder.

Notice of Initial Placement ofSecurities Eligible For Sale Under Rule144A and Revisions to Form D

The issuer will be required to file withthe SEC a notice on a new Form 144A-SF of the offering for the initialplacement of structured financeproducts that are represented aseligible for resale under Rule 144A. Thenotice would include informationregarding major participants in thesecuritization, the date of the offeringand initial sale, the type of securitiesbeing offered, the basic structure of thesecuritization, the assets in theunderlying pool, and the principalamount of the securities being offered.The notice would also provide that insubmitting the notice, the issuer isundertaking to furnish the offeringmaterials relating to the securities tothe SEC upon written request.

This notice must be filed with the SEC nolater than 15 calendar days after the first

sale of securities in the offering, unlessthe end of that period falls on a Saturday,Sunday or holiday, in which case the duedate would be the first business dayfollowing such period.

If an issuer has failed to file Form 144A-SF, then Rule 144A will not be availablefor subsequent resale of newly issuedstructured finance products of the issueror affiliates of the issuer.

Form D will also be amended to collectthe same information that the SEC isproposing to require to be provided inproposed Form 144A-SF.

Commentary: Non-U.S. issuers maybe particularly impacted by thisrequirement as they will be obliged tointegrate this notice with other publicnotice requirements in their homejurisdiction and/or with the relevantlisting authority (if the offered securitiesare listed).

New Rule 192 of the Securities Act

An issuer of privately-issued structuredfinance products will be required toprovide, upon the investors’ request,information as would be required if thetransaction were registered (or ongoinginformation). This rule is intended toprovide a basis for sanction by the SECof any issuer that fails to provide suchinformation on a timely basis.

Implications for Sponsors of Asset-Backed Commercial Paper Conduits

On their face, the proposals in the ABSRelease apply to offerings of asset-backed commercial paper (“ABCP”).Most ABCP sold in the United States isoffered in private placements with verylittle disclosure on underlying poolassets or other matters covered byRegulation AB. However, unlike almostall other types of asset-backed


securities, ABCP either is, or mayreadily be, sold pursuant to the Section4(2) exemption (which is not covered bythe proposals in the ABS Release, asnoted above). Accordingly, unless theproposals in the ABS Release arerevised to address this point, it ispossible that issuances of ABCP will notfall into the disclosure requirements inthe proposals.

Commentary: Non-U.S. sponsors ofABCP conduits should bear in mind that,even if offerings of commercial paper bytheir conduits wind up being not strictlycovered by the ABS Release, they maywant to consider whether “best practice”might not involve taking a closer look at thelevel of disclosure program documentation.

Transition PeriodThe SEC anticipates that, if adopted,the new and amended rules set forthabove would apply to asset-backedsecurities that are issued after theimplementation date of the newrequirements. In addition, a transitionperiod will be provided by the SEC afterthe final version of the ABS Releaseis adopted.

ConclusionFrom its broad scope and innovative provisions, the ABS Release represents themost significant governmental initiative in the U.S. to date in the area of regulationof the securitization markets. The requirement that effectively all investors instructured finance products receive loan-level data accompanied by a bespokecomputer model has the potential to revolutionize the securitization markets in theU.S. and around the world. In addition, by harmonizing disclosure in the public andprivate markets, the SEC sends a strong signal that they expect a greater degree ofintegrity and “best practice” in the offering and sale of asset-backed securities.

The proposals in the ABS Release have the potential to benefit non-U.S. issuers ofasset-backed securities and other structured products if U.S. investors embracethe new approach to disclosure and offering methodology, restoring a vibrantmarket for these products in the U.S. and providing non-U.S. issuers with ameaningful alternative to the European, Asian and other domestic markets.

At the same time, these potential benefits will come with a not insignificant cost asnon-U.S. issuers will seek to adapt to the new requirements and harmonize themwith other regulatory initiatives to which they may also be subject in their homemarkets. In addition, non-U.S. issuers are also currently grappling with theimplications of the SEC’s separate Rule 17g-5, effective June 2, 2010, whichregulates conflicts of interest at NRSROs subject to regulation by the SEC but thatplaces significant burdens on arrangers of asset-backed securities offerings wherethere is a rating from at least one NRSRO which is paid for by the arranger.

Market participants and other observers will be keenly following the commentprocess on the ABS Release with the SEC over the next several months for signs ofthe level of acceptance of these proposals and the chance that they will either beadopted largely in their current form or, alternatively, substantially revised prior toadoption. The degree of take-up of the proposals in the U.S. may also signalwhether the ideas proposed by the SEC in the ABS Release wind up setting globalstandards for the industry.



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