SEC Commissioner Hester Peirce and SFA President Kristi Leo discuss the SEC's RFI on RMBS Reg AB II at our 2019 Residential Mortgage Finance Symposium.
In November 2022, the SEC issued a revised No-Action Letter (New NAL) in relation to amended Rule 15c2-11 and its application to fixed income securities and the 144A market.
On May 9, SFA submitted a letter to the SEC regarding its proposed cybersecurity disclosure that would scope in asset-backed issuers. SFA explains that any cybersecurity disclosure framework for ABS demands tailored standards that align with Reg AB.
Enhanced transparency has become a key focus for the securitization industry in order to improve investor confidence and expand the investor base. A consistent and standard securitization structuring and reporting framework is critically important within this effort.
The two main SEC rules designed to address disclosure specifically tailored for ABS offerings are: Reg AB and Reg AB II.
Reg AB (effective Rulemaking date: August 27, 2014, Effective date: November 24, 2014)
Prior to adoption of Reg AB, none of the disclosure requirements in the 1933 Act and accompanying rules were specifically tailored to address ABS offerings. The SEC became concerned that the informal disclosure practices that had developed through the SEC comment process and industry practices were not fully transparent to issuers and investors. To address this, the SEC adopted a new disclosure regime in Reg AB. This new regime was intended to be principles-based, rather than an exhaustive list of disclosure items required for each asset class, and to govern not only existing asset classes but also new asset classes that may develop in the future. The new rules were also intended to bring greater uniformity to the disclosure process. The structure of Reg AB is as follows:
- Item 1100 sets forth items of general applicability for Reg AB.
- Item 1101 provides definitions.
- Items 1102-1120 provide the basic disclosure package required in ABS registration statements and periodic reporting.
- Item 1121 forms the basis for disclosure for distribution reports on Form 10-D, the form on which periodic Servicer’s reports will be filed.
- Item 1122 addresses assessments of compliance with servicing criteria and the filing of attestation reports by registered public accounting firms on these assessments.
Reg AB II (adopted Aug 2014; effective Nov 2015)
On August 27, 2014, the SEC adopted final rules that amended Reg AB, resulting in what is referred to as Reg AB II. Reg AB II adopted new rules, forms, and disclosures for registered ABS transactions that became effective in late November 2015. Reg AB II included many changes that impacted the marketing process, deal terms, disclosure requirements, registration process, and periodic reporting requirements for registered transactions, but it did not govern ABS offered for sale pursuant to an exemption from registration (i.e., Rule 144A, Regulation D, or Regulation S offerings). The four most significant elements of Reg AB II are: (1) changes to the definition of an “asset-backed security”; (2) new eligibility conditions for shelf registration; (3) asset-level data disclosure for selected asset classes and related privacy issues; and (4) other new prospectus disclosure requirements.
Changes to the Definition of Asset-Backed Security.
Reg AB II set forth amendments to the definition of ABS. The SEC amended the definition to address its concern that pools of assets were not sufficiently developed at the time of an offering but still qualified for ABS treatment, and, as a result, investors did not receive appropriate information about the asset pool. The SEC was particularly concerned with whether the asset pool was truly a discrete pool of assets that by its terms converts to cash. To address these concerns, the SEC decreased the pre-funding limit to qualify as an ABS from 50% to 25% of the offering proceeds and, in the case of master trusts, of the principal balance of the total asset pool.
New Eligibility Conditions for Shelf Registration.
Reg AB II instituted a number of new registrant and transaction eligibility requirements for using Form SF-3 to register ABS for public offerings in the U.S., including:
- a certification by the chief executive officer of the depositor regarding the disclosure concerning the securitized assets in the prospectus and the structure of the securitization at the time of the filing of a final prospectus for each takedown off the shelf;
- inclusion in the transaction documents of provisions: (1) required an asset-representations reviewer to review delinquent assets for compliance with the representations and warranties if a delinquency test has been triggered and Investors vote to require a review; (2) established dispute resolution procedures for repurchase requests unresolved after 180 days; and (3) facilitating communications among investors; and
- a registrant requirement regarding the timely filing of Exchange Act reports and required Form SF-3 transaction documents, including annual compliance checks.
Asset-Level Data Disclosure for Selected Asset Classes.
Reg AB II required asset-level disclosures for ABS backed by residential mortgages, commercial mortgages, automotive loans, automotive leases, debt securities, and re-securitizations. The SEC has not yet adopted asset-level disclosure requirements for any other asset classes. For the relevant asset classes, issuers must provide disclosure in standardized XML machine-readable format, filed and publicly available through EDGAR on Form ABS-EE. Issuers are required to provide this information in the preliminary prospectus and final prospectus and to update such information over the life of the ABS transaction in ongoing Exchange Act periodic reports.
The SEC stated that it required standardized asset-level disclosures in order to allow investors to compare and analyze more easily the underlying asset-level data of a particular pool as well as to compare that pool to other recent pools in similar ABS offerings. The SEC’s stated goals are to mitigate prior problems caused by investors not having the necessary information to consider and understand the risks related to the assets underlying the ABS and to make information available to track the performance of ABS offerings.
Other New Prospectus Disclosure Requirements.
Reg AB II included several other requirements affecting prospectus disclosure in registered offerings. Specifically, it provided for:
- an enhanced disclosure requirement regarding certain transaction parties;
- a requirement that prospectus summaries highlight material characteristics of the particular ABS being offered;
- a more detailed disclosure requirement regarding modifications of underlying assets by the Servicer;
- revisions to static pool information disclosure requirements designed to increase the clarity, transparency, and comparability of static pool information; and
- the elimination of certain disclosure requirements that rely on credit ratings.
Item 1123 specifies the form of servicer compliance report to be executed by the servicer with respect to its compliance with the particular servicing agreement.
Reg AB provides additional disclosure requirements for ABS offerings, including increased disclosure about transaction parties, static pool data, pool assets, transaction structure, credit enhancement, derivative instruments, related-party transactions, and credit ratings.
On October 30, 2019, Jay Clayton announced that the SEC is seeking feedback on whether the Commission’s 2014 ABS rules are a significant contributing factor to the absence of SEC-registered RMBS offerings. The announcement from the SEC notes that public input from investors, issuers and other market participants is welcome. Importantly, the notice states that any proposed revisions should ensure appropriate investor protection, including access to information material to an investment decision.
In particular, the SEC is seeking feedback on RMBS asset-level disclosure requirements, including general questions about the state of the market and feedback on existing disclosure requirements. For a full list of questions and topics on which the SEC seeks feedback, please click here. SFA has convened our RMBS Reg AB II Task Force and is in the process of building member consensus to respond to the SEC’s request – and submitted a letter to the SEC with our expected timeline. If you are interested in sharing your viewpoints, please join our RMBS Reg AB II Task Force.
Under our Marketplace Lending Committee, SFA initiated the Disclosure & Reporting work stream with the goal of establishing recommended data disclosure standards for offering of ABS backed loans originated through marketplace lending platforms for any asset class(es) identified by our members as benefiting from codified industry best practices, where possible, to foster sufficient and timely investor disclosure and reporting. In particular, industry participants sought to create consistency with existing practices and regulations already applied to other origination channels and/or asset classes.
The workstream identified unsecured consumer loans as area of focus given the both the volume being issued in the primary market and the lack of guidance under the SEC’s Reg AB regulations.
Industry participants, with a focus on issuer and investor members, carefully considered current market practices for ABS issuances, and developed best practices under three collateral data components:
- Loan-level data disclosure
- Pool-level disclosure
- Historical static pool performance data disclosure
Investors have indicated that the time and resources required to make an assessment as to the ERISA eligibility of a particular tranche can sometimes result in missed investment opportunities. In an attempt to address these concerns, our ERISA Task Force is working to develop a standardized “best practice” sample set of disclosures for ERISA considerations to help assist the review of offering documents when investors are considering a purchase of securities. SFA members have begun this work for CMBS transactions, and anticipate finalizing those guidelines in 1Q 2020.