The SEC delivered a qualified boost to the UK RMBS market earlier this year when, ahead of schedule, it published its rules governing ABS registration and disclosure. Joti Mangat sounded out legal opinion over the impact of the rules on the US distribution of the UK master trusts.
Although the proposal addressed the master trust structures – acknowledging that they fell within the definition – critics argued that certain stipulations about revolving periods and the type of assets backing notes were inconsistent with that definition. In particular, the proposal excluded revolving periods over one year and the pooling of additional assets during the revolving period in excess of 50% of any intending offering.
Further questions were raised by UK market representatives regarding the exclusion thresholds for delinquent and non-performing assets and which entities in the master trust structure would take on the disclosure risk.
The problem for the issuers is that, while underlying assets may be performing at the time of issuance, they may subsequently become non-performing or delinquent. In view of this, the SEC said that if non-performing or delinquent assets are not considered as contributing to the cashflows in a deal, then they do not need to be included in the threshold calculation.
In the US, where structures typically include a sponsor, depositor and issuer, the depositor takes on disclosure risk; in the absence of a depositor the sponsor takes on this responsibility. If that rule was applied to the UK, it leaves Abbey, HBOS or Northern Rock with disclosure risk, something they were keen to avoid. The SEC has informally clarified that in the UK's case, the funding entity will be deemed the depositor and shall therefore take on disclosure responsibilities.
Although the SEC seems to have addressed the master trusts in a broadly satisfactory manner, new rules governing the disclosure of static pool data could pose serious problems to all non-US issuers securitising static pools. Some critics argue that the SEC has given with one hand and taken away with the other; static pool data remains a big hurdle requiring significant time and investment.
Anna Glick, partner at Cadwalader Wickersham & Taft, gives an opinion on the new regulations and the potential issues arising from disclosure. Charles Roberts and Chaim Gottesman, partners, were co-authors.
Since the very inception of the ABS market, the task of determining how an offering should comply with the federal securities laws of the United States could only be likened to making a round peg fit into a square hole. Until very recently, the federal securities rules were designed for operating companies with boards of directors and balance sheets, not for securitisation trusts that hold financial assets and pass through the collections to the investors. Over time, the SEC bridged the gap between rule and practice with no-action letters and other informal guidance.
In May 2004, the SEC, in a massive release, attempted to codify the accumulated informal guidance as formal securities rules specifically tailored for the ABS industry. The proposed rules addressed four principal areas of regulation: registration under the Securities Act of 1933, disclosure, communications during the offering process, and ongoing reporting under the Securities Exchange Act of 1934.
After an extremely active comment period, the SEC published its final rules in December 2004. For the most part, the final rules codify the current practice in the ABS industry. However, they do represent significant departures from current practice.
The good news is that the SEC has made the US capital markets significantly more accessible for “foreign” issuers. In the past, the SEC would not allow a public offering of ABS from a foreign issuer unless the issuer had complied with additional requirements not otherwise applicable to US-based issuers. For example, the SEC would at times require one or more registered offerings on a non-shelf basis on Form S-1 or S-11 that are fully reviewed by the SEC’s staff before allowing shelf-registration on Form S-3. These additional hurdles could delay and impede access to the US capital markets.
Under the final rules, foreign ABS will be treated in the same manner as US-based ABS in each of the four areas of regulation referred to above, with one exception. The final rules require that if ABS are issued by a foreign issuer are backed by foreign assets or are affected by credit enhancement or other support provided by a foreign entity, then the related disclosure must also describe any pertinent governmental, legal or regulatory or administrative matters – and any pertinent tax matters, exchange controls, currency restrictions or other economic, fiscal, monetary or potential factors in the applicable home jurisdiction that could materially affect payments on, the performance of or other matters relating to, the assets contained in the pool or the ABS.
The bad news is that the final rules also require disclosure of static pool data. The SEC did not invent the static pool data requirement in a vacuum; it was a deliberate response to investor requests for more information viewed by investors as material to their investment decisions. At least some European investors will wonder why similar information should not be available in non-US offerings as well.
These investors may have conversations with the European securities authorities, which may in turn adopt similar rules. The European issuers may readily agree to provide the information if the newly required added information makes US offerings more attractive to investors than the European offerings. This assumes, of course, that the European issuers actually track the static pool data and therefore have the information to provide.
Note that these final rules only apply to public offerings of securities in the US. Technically, private placements in the US are exempt from all of these requirements. However, private offerings often substantially comply with all or most of the disclosure requirements for public offerings.