In response to problems exposed by the financial crisis, the Securities and Exchange Commission today proposed comprehensive changes to the rules governing offers, sale and reporting with respect to asset-backed securities. The proposed revisions are intended to improve investor protection and increase transparency and efficiency in the public and private markets for asset-backed securities.

Shelf Offerings
Under current rules, asset-backed securities may be registered on a Form S-3 registration statement and later offered “off the shelf” if the securities are rated investment grade by a nationally recognized statistical rating organization. In recognition that investors may have unduly relied on ratings, the proposed rules would eliminate the credit rating requirement and require the following for shelf registration:

• A certification filed at the time of each offering off of a shelf registration statement by the chief executive officer of the depositor that the assets in the pool have characteristics that provide a reasonable basis to believe that they will produce, taking into account internal credit enhancements, cash flows to service any payments due and payable on the securities as described in the prospectus;

• Retention by the sponsor of a specified amount of each tranche of the securitization (“skin-in-the-game”);

• A provision in the pooling and servicing agreement that requires the party obligated to repurchase the assets for breach of representations and warranties to periodically furnish an opinion of an independent third party regarding whether the obligated party acted consistently with the terms of the pooling and servicing agreement with respect to any loans that the trustee put back to the obligated party for violation of representations and warranties and which were not repurchased; and

• An undertaking by the issuer to file Exchange Act reports so long as non-affiliates of the depositor hold any securities that were sold in registered transactions backed by the same pool of assets.

In order to give investors more time to consider transactions, the SEC is proposing to revise the filing deadlines applicable to shelf offerings. An asset-backed security issuer would be required to file a preliminary prospectus with the SEC for each takedown off of the shelf at least five business days prior to the first sale in the offering.

Disclosure
The SEC is proposing to revise Regulation AB, which currently requires disclosure of material, aggregate information about the composition and characteristics of asset pools, to provide additional disclosure requirements for asset-backed security offerings. For each loan or asset in the asset pool, the SEC is proposing to require disclosure of specified data relating to the terms of the asset, obligor characteristics, and underwriting of the asset. Such data would be provided in a machine-readable, standardized format. Issuers would be required to provide the asset-level data or grouped account data at the time of securitization, when new assets are added to the pool underlying the securities, and on an ongoing basis. The revised rules would also require:

• the filing of a computer program of the contractual cash flow provisions of the securities in the form of downloadable source code in Python, a commonly used computer programming language that is open source and interpretive;

• aggregated and loan-level data relating to the type and amount of assets that do not meet the underwriting criteria that is specified in the prospectus;

• for certain identified originators, information relating to the amount of the originator’s publicly securitized assets that, in the last three years, has been the subject of a demand to repurchase or replace;

• for the sponsor, information relating to the amount of publicly securitized assets sold by the sponsor that, in the last three years, has been the subject of a demand to repurchase or replace;

• additional information regarding originators and sponsors;

• descriptions relating to static pool information, such as a description of the methodology used in determining or calculating the characteristics of the pool performance as well as any terms or abbreviations used;

• that static pool information for amortizing asset pools comply with the Item 1100(b) requirements for the presentation of historical delinquency and loss information; and

• the filing of Form 8-K for a one percent or more change in any material pool characteristic from what is described in the prospectus (rather than for a five percent or more change, as currently required).

Privately-Issued Structured Finance Products
In order to enhance the disclosure available to investors participating in private offerings of asset-backed securities, the SEC is proposing amendments to Rule 144A and Regulation D. The proposed revisions would require that, in order for a reseller of a “structured finance product” to sell a security in reliance on Rule 144A, or in order for an issuer of a “structured finance product” to sell a security in reliance on Rule 506 of Regulation D, (i) the underlying transaction agreement for the securities must grant to purchasers, holders of the securities (or prospective purchasers designated by the holder) the right to obtain from the issuer of such securities the information, upon request, that would be required if the transaction were registered under the Securities Act and such ongoing information as would be required by Section 15(d) of the Exchange Act if the issuer were required to file reports under that section, and (ii) the issuer must represent that it will provide such information.

If you have any questions regarding the above, please contact the Investment Funds and Investment Management Team:

Attorneys:
Jay Gould
(415) 983-1226
jay.gould@pillsburylaw.com

Ildiko Duckor
(415) 983-1035
ildiko.duckor@pillsburylaw.com

Clint Keller
(415) 983-1649
clint.keller@pillsburylaw.com

Michael Wu
(415) 983-1655
michael.wu@pillsburylaw.com

Practice Support Specialist:
Jennifer Dickinson
(415) 983-1106
jennifer.dickinson@pillsburylaw.com