Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC has adopted new requirements in order to implement Section 945 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  The new rules require any issuer registering the offer and sale of an asset-backed security, or ABS, to perform a review of the assets underlying the ABS.   The SEC has also adopted amendments to Item 1111 of Regulation AB that would require an ABS issuer to disclose the nature of its review of the assets and the findings and conclusions of the issuer’s review of the assets.

Under Rule 193, an issuer must perform a review of the assets underlying a registered ABS transaction that, at a minimum, must be designed and effected to provide reasonable assurance that the disclosure in the prospectus regarding the assets is accurate in all material respects.  Rule 193 does not specify the particular type of review an issuer is required to perform.   Thus, the term “reasonable assurance” in Rule 193 does not imply a single methodology, but encompasses the full range of reviews an issuer may perform to ensure that its review is designed and effected to provide reasonable assurance that the prospectus disclosure regarding the pool assets is accurate in all material respects.

If an issuer engages a third party for purposes of performing its Rule 193 review, then an issuer may rely on the third-party’s review to satisfy its obligations under Rule 193 provided the third party is named in the registration statement and consents to being named as an “expert” in accordance with Section 7 of the Securities Act and Rule 436 under the Securities Act.  On the other hand, if an issuer obtains assistance from a third party but attributes to itself the findings and conclusions of the review required by Rule 193, the third party would not be required to consent to being named as an expert.

New Item 1111(a)(7) of Regulation AB requires that an issuer of ABS disclose the nature of the review it conducts to satisfy proposed Rule 193.  This would include whether the issuer has hired a third-party firm for the purpose of reviewing the assets, or to assist it in reviewing the assets. This would include a description of the scope of the review, such as whether the issuer or a third party conducted a review of a sample of the assets and what kind of sampling technique was employed (i.e., random or adverse).  In addition, under new Item 1111(a)(7), the issuer will be required to disclose the findings and conclusions of the review performed by the issuer or by a third party engaged for purposes of reviewing the assets.  Item 1111(a)(8) of Regulation AB will require issuers to disclose how the assets in the pool deviate from the disclosed underwriting criteria and include data on the amount and characteristics of those assets that did not meet the disclosed standards.

Any registered offering of ABS commencing with an initial bona fide offer after December 31, 2011, must comply with the new rules.

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