SEC Proposes Rules to Address Comprehensively theRegistration, Disclosure, and Reporting Requirements forAsset-Backed Securities

Introduction

On April 28, 2004, the SEC proposed new and amended rules and forms for asset-backed securities ("ABS"). The present disclosure framework for asset-backed issuers has evolved over time from several sources, including a series of no-action letters and the filing review process. The SEC is proposing to address comprehensively the treatment of ABS and to bring a more uniform, transparent set of rules to the multitrillion dollar ABS market.

The proposed new and amended rules and forms for ABS (the "Proposed Rules") address four primary regulatory areas: Securities Act registration forms and mechanics, disclosure, communications during the offering process, and ongoing reporting, attestation, and certification under the Exchange Act (Release Nos. 33-8419, 34-49644 (May 3, 2004)). Generally, the Proposed Rules would (1) update and clarify the Securities Act registration requirements for offerings of ABS, (2) consolidate and codify the existing staff interpretive positions that permit the present modified Exchange Act reporting, (3) provide specific disclosure guidance and requirements specifically tailored to ABS filings, and (4) codify and streamline the existing interpretive guidance that allows the useof additional written informational and computational communications during registered offerings of ABS.

Summary of the Proposed Rules

We have summarized some of the salient features of the Proposed Rules from the lengthy release.

Securities Act Regulation

The Proposed Rules

• expand the basic ABS definition (financial assets that by their terms convert into cash) to include more lease-backed securitizations where part of the cash flows backing the securities is to come from the disposal of the residual asset underlying the lease (with certain residual value parameters–no more than 60% for automobile leases and 50% for all other leases, as measured by dollar volume, of the original asset pool at the time of issuance of the ABS; see more restrictive limitations with respect to Form S-3 registrations below);
• confirm that the definition of ABS does not include so-called "synthetic" securitizations;
• codify the practice of excluding delinquent and nonperforming assets from the asset pool at the time of the proposed offering of the ABS (with "nonperforming" defined as when either (i) the pool asset should be charged off based on the requirements in the transaction agreements for the ABS or (ii) the pool asset meets the charge-off policies of the sponsor);
• clarify that use of master trusts (without any predetermined limits) and prefunding periods and revolving periods (with certain limits on amounts and duration) by all asset classes is an exception to the requirement in the definition of ABS that the asset pool be "discrete";
• clarify that all ABS registered offerings would be on Form S-1 or Form S-3 and propose a separate general instruction relating to required and permitted disclosure items for issuers of ABS;
• expand existing staff interpretations with respect to the types of investmentgrade ABS that qualify for shelf registration on Form S-3 so that (1) delinquent assets may not constitute 20% or more, as measured by dollar volume, of the original asset pool; (2) the portion of cash flow to repay securities backed by leases other than automobile leases anticipated to come from the residual value of physical property underlying the leases may not constitute 20% or more, as measured by dollar volume, of the original asset pool; (3) the offering may not contemplate a prefunding account in excess of 25% of the proceeds of the offering or that lasts for more than one year; and (4) with respect to fixed financial assets that do not by their nature revolve, the amount of additional assets to be acquired in a revolving period may not exceed 25% of the proceeds of the offering or last for more than one year;
• codify the requirement that reporting obligations of a sponsor's or depositor's other ABS transactions must be current for the prior twelve months for Form S-3 eligibility for new transactions;
• clarify that the depositor (often the sponsor or affiliated intermediary that receives the pool of assets and transfers them to the issuing entity) is the statutory issuer for purposes of executing the registration statement;
• alleviate impediments to foreign ABS offerings registered on Form S-3 while providing for additional disclosure relating to the special issues (legal, currency, governmental regulation, etc.) with respect to ABS issued by a foreign issuer or backed by foreign assets;
• exclude broker-dealers from the requirement of having to deliver a copy of a preliminary prospectus prior to sending a confirmation of sale in connection with offerings of ABS eligible for registration on Form S-3;
• address when and how the offering of underlying debt securities must be concurrently registered with an offering of ABS that are backed by those underlying securities.

Disclosure

The Proposed Rules

• create a new principles-based set of disclosure items in one central location: Regulation AB;
• clarify disclosure requirements for ABS in the forepart of the registration statement and prospectus, including the summary and risk factors (existing Items 501–503 of Regulation S-K) and provide for amplified disclosure such as descriptions of the flow of funds and credit enhancement;
• provide for disclosure related to the transaction parties (sponsors, depositors, issuing entity, servicers–including entire servicing function, trustees, originators, and other parties) in ABS transactions;
• require disclosure of statistical "static pool" performance data, if material, to aid the investor's analysis of current and prior pool and overall portfolio performance;
• continue to require core disclosure consistent with Item 202 of Regulation S-K relating to the ABS being offered and incorporate new requirements of Item 1112 of Regulation AB consistent with existing practice requiring disclosure of certain specific information relating to the ABS, including the types or categories of securities that may be offered and how principal and interest are calculated and payable, amortization, performance or similar triggers or events, overcollateralization or undercollaterization, cross-default or cross-collateralization provisions, voting requirements to amend the transaction documents and any minimum standards, restrictions or suitability requirements regarding ownership of the ABS, flow of funds, a table of the fees and expenses in the ABS transaction, amount and timing of distributions, optional/mandatory redemption or termination provisions (including any permitted clean-up calls), and certain expanded disclosure for master trusts focusing on the rights of the various classes of securities issued or issuable;
• require certain financial information from significant obligors (10% or more of the pool) and rules establishing when such information may be incorporated by reference or simply referred to if the obligor is not involved in the ABS securitization;
• require disclosure of the servicer's experience and contractual obligations, and its financial condition in cases where it could have a material impact on one or more aspects of servicing of the pool assets and where those aspects could materially impact pool performance;
• mandate disclosure relating to tax matters, legal proceedings, affiliations and certain relationship and related transactions, ratings, reports, and additional information.

Communications during the Offering Process

The Proposed Rules

• codify the practice of using ABS informational and computational material including structural term sheets, collateral term sheets, and statistical data related to the class of ABS, after the effectiveness of a registration statement for an offering of investment-grade ABS registered on Form S-3 but before delivery of the final Section 10(a) registration statement prospectus in new Rule 167;
• clarify that ABS informational and computational materials need to be filed on Form 8-K (including any data at the individual pool asset level provided by the issuer or underwriter to any prospective investor that had indicated to the underwriter that it would purchase all or a portion of the class of ABS to which such materials relate, and all materials provided to that prospective investor after the final terms have been established for all classes of the offering) and that the materials may constitute "offers" and will be subject to Section 12(2) liability whether or not requiring to be filed;
• establish a safe harbor for certain research reports for investment-grade ABS offerings registered on Form S-3, exempting them from Section 5 of the Securities Act under new Rule 139a.

Ongoing Reporting under the Exchange Act.

The Proposed Rules

• define the "issuer" for Exchange Act reporting purposes as the depositor of the assets (separate from such depositor's own securities and separate from the depositor on any other take-down under a shelf registration of ABS);
• codify and expand the modified reporting framework presently used to revise Form 10-K, including specific required exhibits: (1) the responsible party's (generally defined by the Proposed Rules as the party who executes the report on Form 10-K–the depositor or servicer) report on compliance with the servicing criteria and (2) an attestation report by an independent public accountant;
• provide a single set of disclosure-based servicing criteria for all transactions that builds incrementally on the current criteria in the Uniform Single Attestation Program for Mortgage Bankers ("USAP") and seek comment on whether another suitable single set of criteria could be developed;
• clarify that reports on Form 10-K are not required to contain the ABS issuer's financial statements, and thus a Section 906 certification requirement would not be triggered;
• provide a new form (Form 10-D) for reporting of the periodic distribution and pool performance information statements relating to the ABS to be filed within fifteen days after each required distribution date (replacing the current practice of using Form 8-K for this information); the new Form 10-D expands the disclosure required related to prefunding periods, revolving periods and master trusts, any material changes related to the pool of assets, nonfinancial disclosures similar to that required in the Form 10-Q, and updated information about significant obligors and providers of credit enhancement;
• amend Item 601 of Regulation S-K to add the specific form and content of the required ABS Section 302 certification to the exhibit filing requirements with certain permitted alternatives specified in the form (see below for a discussion of the ABS 302 certification requirements);
• provide clarification on items requiring disclosure on Form 8-K for ABS (including new proposed items for ABS informational and computational material, change of servicer or trustee, change in credit enhancement or other external support, failure to make a required distribution, sale of additional securities, and updating Securities Act disclosure relating to the composition of the actual pool of assets if more than 5% different from that described in the final prospectus);
• exempt the issuers of ABS from filing quarterly reports on Form 10-Q and from compliance with Section 16 of the Exchange Act.

Discussion on the Proposed ABS Section 302 Certification

When the SEC rules for certifications under Section 302 of Sarbanes-Oxley were adopted, the SEC recognized that most ABS "issuers" did not have the organizational structure to provide the required CEO and CFO certifications. The staff proposed several amendments to accommodate ABS (August 29, 2002, revised on February 21, 2003). Two no-action letters were also issued. See Merrill Lynch Depositor, Inc. (Mar. 28, 2003) and Mitsubishi Motors Credit of America, Inc. (Mar. 27, 2003). The proposed rules bring all the guidance together and include three significant deviations from the revised staff statement with respect to the ABS 302 certification. See Exhibit A attached to this alert for the proposed form of ABS Section 302 Certification. Since the Form 10-K for ABS issuers, as proposed, would not contain financial statements, no certification under Section 906 of Sarbanes-Oxley would be required. The proposed Section 302 certification amends prior formulation:

• Paragraphs 1 and 3 are revised to reflect the addition of proposed Form 10-D and the information filed in those distribution reports, rather than Forms 8-K.
• Paragraph 4 refers to the servicer compliance statement (required as new Exhibit 35 for Form 10-K as described in Item 1121 of Regulation AB by the proposed rules) with two alternatives provided for paragraph 4 depending on who signs the Form 10-K report: the first version would be used when the servicer was executing the report on behalf of the issuing entity; the second version would be used when the depositor was signing the report.
• Paragraph 5 is revised to refer specifically to the proposed assessment of compliance with servicing criteria and, consistent with that proposal, refers to "material instances of noncompliance" (rather than the existing language, which has taken on new significance in other areas, "significant deficiencies").

The SEC acknowledged that asset-backed issuers typically do not have a CEO or CFO or anything approximating such executive officers and the proposed rules specify who must execute the certification. The staff proposes that the certification must be signed by either the senior officer in charge of securitization of the depositor, if the depositor is executing the Form 10-K, or the senior officer in charge of the servicing function of the servicer, if the servicer is signing the Form 10-K, on behalf of the issuing entity. The staff is not proposing to permit the trustee to sign the Form 10-K and similarly is not proposing to allow a representative of the trustee to execute the ABS Section 302 certification.

Complicated ABS securitizations may have multiple servicers. In those cases, the rules propose that (1) any certification by the servicer be signed by the same person who signs the Form 10-K and makes the assessment of the servicer compliance, (2) the senior officer in charge of the servicing function of the master servicer (or entity performing the equivalent functions) must sign if a representative of the servicer is to sign, and (3) references in the certification would relate to the master servicer.

If the information relied on by the signing officer is provided by entities over which he has no control (unaffiliated trustees, depositors, servicers, subservicers, and coservicers), the signing officer may reasonably rely on information provided by those unaffiliated parties.

In addition, as is the case today for all Section 302 certifications, a natural person must sign the certification in his or her individual capacity, although the title of that person in the organization of which he or she is an officer may be included under the title.

Comment Period

Comments on the Proposed Rules are due within sixty days after publication in the Federal Register (mid-July, 2004).

Filers Required to have EDGAR Passphrases as of April 26, 2004

As of April 26, 2004, the SEC began requiring filers to utilize a new passphrase before they could make any filings utilizing the updated version of EDGAR (EDGAR Release 8.7). When a filer logs on to the EDGAR system for the first time after April 26, 2004 to transmit a submission or change company information, the filer will be instructed how to create the passphrase. Once the passphrase has been created, it will be added to the company information and can be utilized to manage other codes. The passphrase will be requested only for the CIK that logged into the EDGAR system. Filers who use the services of a filing agent and do not use their CIK to log on will not be prompted to create a passphrase.

I, [identify the certifying individual], certify that:

1. I have reviewed this report on Form 10-K and all reports on Form 10-D required to be filed in respect of the period covered by this report on Form 10-K of [identify the issuing entity];

2. Based on my knowledge, the information in these reports, taken as a whole, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading as of the last day of the period covered by this report;

3. Based on my knowledge, all of the distribution, servicing and other information required to be provided under Form 10-D for the period covered by this report is included in those reports;

4. [I am responsible for reviewing the activities performed by the servicer(s) and based on my knowledge and the compliance review conducted in preparing the servicer compliance statement required in this report under Item 1121 of Regulation AB, and except as disclosed in the reports, the servicer has fulfilled its obligations under the servicing agreement; and] [Based on my knowledge and the servicer compliance statement required in this report under Item 1121 of Regulation AB, and except as disclosed in the reports, the servicer has fulfilled its obligations under the servicing agreement; and]

5. This report discloses all material instances of noncompliance with the servicing criteria as provided in Item 1120 of Regulation AB based on an assessment of compliance with such criteria.

[In giving the certifications above, I have reasonably relied on information provided to me by the following unaffiliated parties [name of servicer, sub-servicer, co-servicer, depositor or trustee].]

Date: ...........

_______________________¹

[Signature]

[Title]

_____________
¹senior officer of depositor or servicer

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