On August 27, 2014, the Securities and Exchange Commission (SEC) released the long-awaited final rule on Asset-Backed Securities (ABS) Disclosure and Regulation, which significantly modifies Regulation AB and will result in new disclosure and registration requirements for the CMBS market.
The SEC originally proposed the Reg AB II rule in April 2010, re-proposed it in 2011 in light of Dodd-Frank, and then re-opened the comment period to discuss a disclosure issue in the spring of this year.
The final rule impacts the CMBS market in two major areas:
(1) creates new disclosure requirements for asset-level data; and
(2) expands the registration requirements for shelf-eligibility.
Once the final rule is published in the Federal Register, the CMBS industry will have two months and two years to comply with the new asset-level disclosure requirements and two months and one year to comply with the other new and amended requirements, including shelf-eligibility.
During the rule making process, the SEC not only considered CREFC’s comment letters and market-driving recommendations, but in many cases adopted such recommendations. Additionally, the SEC stated, with respect to the disclosure of asset-level data, that:
[W]e made efforts to align our requirements, as much as possible, with pre-established industry codes, titles, and definitions to allow for the comparability of future offerings with past offerings and to minimize the burden and cost of reporting similar information in different formats. The requirements we are adopting contain several revisions from the proposal aimed at aligning our standards with the CREFC Investor Reporting Package (IRP).
In our comment letters, CREFC strongly advocated that the rule should not include certain provisions or cover certain aspects of the market. In the final rule, the SEC declined to move forward on the following initial proposals that CREFC opposed:
- The ABS Rule does not cover disclosure for 144A offerings;
- Issuers are not required to file a waterfall computer program of the contractual cash flow provisions of the securities; and
- A credit risk manager will not be required to oversee the transactions to ensure shelf-eligibility.
While the SEC did not take action on these proposals, they did explicitly state that these proposals remain “outstanding.” CREFC will continue to monitor SEC activities on these issues and advocate our opposition should they ever re-surface.
Final Rule Asset-Level Data Disclosure Requirements
CMBS issuers will be required to disclose to the SEC and to the public asset-level data.
Asset-level data (Schedule AL) will be provided in an XML format and filed on EDGAR at the time of the original prospectus, final prospectus, and at the same time Form 10-D is filed.
This is very different from the proposed rule which called for a Schedule L-D (comparable to the CREFC IRP) and a Schedule L (comparable to the Annex A) to be filed.
In the final rule Schedules L-D and L were combined into Schedule AL, which will contain 152 data points of asset-level information (down from the initial 182 data points initially proposed by the SEC).
It’s important to note that the data points required by the SEC are just a subset of the robust transparency provided to investors on a more timely basis through the CREFC IRP, which contains more than 800 data fields (not including any of the substantial information provided through the IRP disclosure templates).
In addition to the asset-level disclosures, issuers will be required to file several other disclosures, including:
- Identification of the originator;
- Certain financial information regarding a party obligated to repurchase assets;
- Continuing economic interests in the pool of the sponsor, servicer, or originator;
- Prospectus summaries;
- The ability of the servicer to modify or waive any “terms, fees, penalties, or payments on the assets and the effect”; and
- Static pool information
Final Rule Shelf-Eligibility Requirements
ABS issuers will be subject to new shelf-eligibility requirements. In order for an offering to be eligible, it must meet the following requirements as part of registration:
- A certification signed by the Chief Executive Officer of the depositor concerning the disclosures and structure of the securitization (the language was modified from the proposed rule in light of concern from commentators, including CREFC, and several of CREFC’s suggestions to make the certification more applicable to the CMBS market were adopted);
- An asset review provision that is included in the underlying transaction agreement;
- A repurchase request dispute review provision that is included in the underlying transaction agreement; and
- A provision in the underlying transaction agreement providing for investor communication requests in ongoing distribution reports.
The SEC is also requiring a three-day waiting period after the filing of the original prospectus before the first sale of the securities in the offering can occur (CREFC advocated for a five-day waiting period).
Next Steps: CREFC Establishes Working Groups to Ensure Standardized Approach to Implementation
In order to ensure a standardized industry approach to implementation of the new disclosure and reporting requirements, especially with regard to deal document language and transaction party responsibilities, CREFC has created two working groups.
Schedule AL Working Group
Schedule AL will be used for both the offering disclosure as well as ongoing disclosures. While many of CREFC’s recommendations regarding asset-level data points were adopted, the new Schedule AL does not map exactly to the CREFC IRP or Annex A.
This working group, led by Kathleen Olin of CWCapital and Leslie Hayton of Wells Fargo and comprised of master and special servicers and other market participants, will conduct a line by line comparison of the SEC’s required asset-level data points to the CREFC IRP and Annex A to determine which fields are new or similar, and how to report such information going forward in the most efficient and useful manner.
Shelf-Eligibility Working Group
This working group, led by Mike Gambro of Cadwalader, Wickersham & Taft and Kevin Blaugh of Sidley, is comprised of issuers and counsel and will create industry standardized language addressing the new and expanded disclosure requirements for shelf-eligibility.
The creation and adoption of industry best practices ensuring the appropriate, consistent and seamless implementation of Reg AB II is a priority initiative for CREFC.