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SEC Proposes Sweeping Changes to Disclosure Requirements for Privately-Placed Structured Finance Transactions
1. April 2010
SEC Proposes Sweeping Changes to Disclosure
Requirements for Privately-Placed Structured
Finance Transactions.
Contents
Introduction ....................... 1
Introduction
Effect on Private Deals ..... 2
On April 7, 2010, the U.S. Securities and Exchange Commission (the “SEC”)
Enhanced Disclosure Under
proposed a sweeping set of reforms (the “Proposed SEC Reforms”) to the Rule 144A and Regulation
regulations governing public and private offerings of structured finance D ....................................... 2
securities.1 This note discusses aspects of the Proposed SEC Reforms of
Scope of Structured
particular concern to issuers of privately-placed structured finance securities. Finance Products.............. 3
In a typical issuance of structured finance securities relying on Rule 144A under Revisions to Rule 144....... 4
the Securities Act of 1933 (the “Securities Act”), an initial sale of securities is New Rule 192 Under the
made by the issuer to an initial purchaser under Section 4(2)2 of the Securities Securities Act.................... 4
Act, and the securities are then immediately resold to investors under Rule 144A New Form 144A-SF.......... 4
under the Securities Act. In some limited cases, issuers may also sell structured
Conclusion ........................ 5
finance securities directly to investors pursuant to Regulation D under the
Securities Act.
At present such privately-placed structured finance transactions are exempt from
the enhanced disclosure required for public (i.e. SEC registered) structured
finance offerings under the SEC’s Regulation AB. These disclosure
requirements include the provision of material, aggregate information about the
pool of assets underlying an offering of structured finance securities as well as
disclosure and, in some cases, even financial information with regard to material
servicers and swap counterparties.
The Proposed SEC Reforms would make the current disclosure requirements
under Regulation AB applicable to offers of structured finance securities under
Rule 144A and Regulation D. In addition, the Proposed SEC Reforms would
require “asset-level” disclosure of the specific terms, obligor characteristics and
underwriting standards of the assets underlying a structured finance security.
1
See SEC Release 33-9117 (April 7, 2010) available at http://www.sec.gov/rules/proposed/
2010/33-9117.pdf.
2
Section 4(2) is the exemption for sales of securities by an issuer not involving any public offering.
1 U.S. Briefing⏐ SEC Proposes Sweeping Changes to Disclosure Requirements for Privately-
Placed Structured Finance Transactions
2. This data would be required to be provided in a specific standardized electronic
format that investors could easily access. Furthermore, the data would need to
be updated on a periodic basis, including where new assets are added to the
pool. In addition, structured finance issuers would be required to file, in a
standardized format, computer source code representing the payment waterfall
in respect of a structured finance transaction. The SEC’s stated goal is to enable
investors to utilize the asset-level data and this source code to perform their own
due diligence and modeling of the cash flows of a structure finance security,
arguably minimizing an investor’s potential to rely on credit rating agencies to
perform such due diligence instead. Finally, additional disclosure would be
required with regard to assets that do not meet a structured finance issuer’s
disclosed underwriting criteria, the amount of the issuer’s publicly securitized
assets for which a request for repurchase has been presented to the related
originator or sponsor and certain additional information with regard to
originators, sponsors and static pool information (the disclosure requirements
collectively described in this paragraph, the “Enhanced Disclosure”).
Effect on Private Deals
As further described below, the Proposed SEC Reforms would require
Enhanced Disclosure by issuers of structured finance securities who use the
safe harbors provided by Rule 144A and Regulation D under the Securities Act
in newly issued private deals. In addition, Rule 144A would be amended to
require structured finance issuers to make a public notice filing on the SEC’s
EDGAR website with respect to an offering of structured finance securities
eligible for resale under Rule 144A. The structured finance issuer would also be
required to provide the SEC with a copy of the disclosure materials upon written
request.
Enhanced Disclosure Under Rule 144A and Regulation D
Under the current forms of Rule 144A and Regulation D, structured finance
issuers are required to provide only certain minimal information about their
securities and the assets backing those securities.
Under the Proposed SEC Reforms, in order for a structured finance issuer to
utilize Rule 144A or Regulation D, the securities’ documentation must provide
investors with the right, upon request, to receive (i) the same information
(including the Enhanced Disclosure) that would otherwise be required in respect
of such structured finance securities if the transaction were registered under the
Securities Act on Form S-1 or Form SF-13 and (ii) in the case of Rule 144A re-
sales only, any periodic information that the structured finance issuer would be
otherwise required to provide if such issuer were required to file reports under
3
Form SF-1 is a new form envisioned by the Proposed SEC Reforms for use in public structured
finance offerings.
2 U.S. Briefing⏐ SEC Proposes Sweeping Changes to Disclosure Requirements for Privately-
Placed Structured Finance Transactions
3. Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”). The
structured finance issuer would be required to represent to investors that it will
provide this information and a failure to do so could potentially subject the issuer
to a lawsuit for breach of contract.
Scope of Structured Finance Products
The Proposed SEC Reforms would apply to “structured finance products”, the
definition of which is broader than that of an “asset-backed security” under
Regulation AB. The definition of “structured finance product” covers:
I. synthetic asset-backed securities;
II. fixed-income or other securities collateralized by any pool of self-
liquidating financial assets, such as loans, leases, mortgages and
secured or unsecured receivables that entitles its holder to receive
payments that depend on the cash flow from the assets, including:
A. an asset-backed security, as used in item 1101(c) of Regulation
AB;
B. a collateralized mortgage obligation (“CMO”);
C. a collateralized debt obligation (“CDO”);
D. a collateralized bond obligation (“CBO”);
E. a collateralized debt obligation of asset-backed securities (“ABS
CDO”);
F. a collateralized debt obligation of collateralized debt obligations
(“CDO2”); or
G. a security that at the time of the offering is commonly known as
an asset-backed security or a structured finance product (the
“catch-all”).
The SEC has said that the definition specifically does not require a discrete pool
of assets so as not to exclude managed structured finance products (such as
managed CDOs).
Where the structured finance securities would meet the definition of “asset-
backed securities” under Regulation AB, disclosure to investors of the same
types of information required by Regulation AB would be required. Otherwise,
the structured finance issuer would be required to provide, in addition to the
information required by Regulation AB, certain information required by
Regulation S-K.
For example, in the case of a cash CDO, the SEC says that it would expect the
relevant disclosure to include a discussion of: “the asset and collateral
managers, including fees and related party transaction information, their
3 U.S. Briefing⏐ SEC Proposes Sweeping Changes to Disclosure Requirements for Privately-
Placed Structured Finance Transactions
4. objectives and strategies, any interest that they have retained in the transaction
or the underlying assets and substitution, reinvestment and management
parameters.”4
For a synthetic CDO, the SEC would expect disclosure on: “the differences
between the spreads on synthetic assets and the market prices for such assets,
the process for obtaining the credit default swap or other synthetic assets and
the internal rate of return to equity if that was a consideration in the structuring of
the transaction.”5
Revisions to Rule 144
The Proposed SEC Reforms would also modify the current public information
requirement of Rule 144 under the Securities Act, which provides a safe harbor
for the sale of securities under Section 4(1) of the Securities Act. The new
current public information requirement would require structured finance issuers
who are not reporting issuers under Sections 13 or 15(d) of the Exchange Act to
grant investors the right to obtain, upon request, the information that would be
required if the offering were registered on Form S-1 or Form SF-1 under the
Securities Act (including the Enhanced Disclosure) and any periodic information
required by Section 15(d) of the Exchange Act, if the structured finance issuer
were required to file reports under that section. In addition, the structured
finance issuer must represent that it will provide such information to investors.
New Rule 192 Under the Securities Act
The Proposed SEC Reforms would introduce a new Rule 192 under the
Securities Act in order to enforce a structured finance issuer’s representation to
provide the information described above. Rule 192 would separately require an
issuer of structured finance securities to provide such information and, if the
structured finance issuer then failed to provide it, the SEC could bring an
enforcement action under Rule 192 against the issuer.
It is important to understand that only the representation to provide information
would be required to comply with the Rule 144A or Regulation D safe harbors. If
a structured finance issuer provided the representation but then failed to supply
investors with the relevant information, the structured finance issuer would not
lose the benefit of the safe harbors but may face regulatory action from the SEC
under Rule 192.
New Form 144A-SF
Structured finance issuers utilizing Rule 144A would be required to provide
notice of the initial placement of structured finance securities to the SEC by
4
SEC Release 33-9117 at 278.
5
SEC Release 33-9117 at 278-9.
4 U.S. Briefing⏐ SEC Proposes Sweeping Changes to Disclosure Requirements for Privately-
Placed Structured Finance Transactions
5. publicly filing new Form 144A-SF. The relevant information would include: major
deal parties, the date of the offering and initial sale, the type of securities being
offered, the basic structure, the pool assets and the principal amount of offered
securities. The notice would also require that the structured finance issuer
undertake to provide offering materials to the SEC upon written request. In
addition, a new Rule 30-1 would be added to the SEC’s Rules of General
Organization to provide delegated authority to the Director of the Division of
Corporation Finance to request information that the structured finance issuer
would be required to provide to the SEC upon request.
The notice would need to be filed no later than 15 calendar days following the
first sale of structured finance securities under Rule 144A. Failure to file the
notice would not cause the structured finance issuer to lose the benefit of the
Rule 144A safe harbor in respect of that particular offering, however, the issuer
and its affiliates would then lose the ability to utilize the Rule 144A safe harbor
for all future offerings, a potentially devastating result.
Form D, to be filed in connection with a sale of securities under Regulation D,
would also be amended to collect the same information as new Form 144A-SF.
Conclusion
It should be emphasized that the Proposed SEC Reforms are the first stage of a
multi-part regulatory rule-making process. The SEC is aware of some of the
wide-reaching effects of the Proposed SEC Reforms and is seeking comment
from structured finance industry participants with regard to many issues,
including, among others, the definition of a “structured finance product”, the
scope of information to be made available, whether SEC enforcement of a
structured finance issuer’s representation to provide certain disclosures under
Rule 192 is appropriate, whether privately-placed structured finance securities
should be treated differently than other types of securities in general, and
whether Regulation S should be similarly amended to prevent structured finance
issuers from trying to replace Rule 144A re-sales with sales to non-U.S.
investors under Regulation S.
We will continue to alert clients to further developments in this area.
5 U.S. Briefing⏐ SEC Proposes Sweeping Changes to Disclosure Requirements for Privately-
Placed Structured Finance Transactions
