Reg AB II: Shelf Offerings Disclosure – Does More Data Yield a Clearer Picture of RMBS or PLS Markets a Year After New Regulations?
On August 27, 2014, the Securities and Exchange Commission adopted the final version of revisions to its Regulation AB, in so-called Reg AB II. With a tiered effective date of November 23, 2015 for new Forms 10-D and 10-K, and a more granular loan-level disclosure schedule (in xml format) due after November 23, 2016, compliance has been evolving very slowly.
As we conclude the first year of loan-level disclosure in xml format for the new Schedule AL items (for every issuer of publicly-registered residential mortgage PLS), most issuers are simply complying with the xml format requirement. Such a lukewarm embrace of the new regulations may be because issuers have been inundated with the requirement to track as many as 270 data points for each underlying residential mortgage (imagine gathering and tagging and tracking and disclosing – on an ongoing basis – roughly 1.35 million facts in a trust with 5,000 loans…for the life of the loans).
The RMBS issuer may just want to comply with minimum game requirements (in the simple, agency-loan space), before moving on to the more exotic loans that private label securitization will bring. So, a simple “save as xml” approach has been the norm this year, according to the SEC. As investors look for higher yield opportunities and the PLS market gets progressively more active, the ability to examine the performance of underlying loans in securitized trusts will become more essential to investment decisions, and so we might see more creative presentation styles in annual and periodic reports (and especially in the attached schedules with all that extra data.). While the SEC has not said it has finished with Reg AB, issuers are calling for a halt to more rules in the AB arena.
The Treasury Department may have had enough disclosure as well. As Treasury mentioned in its recent Report on Capital Markets Regulatory Reform (dated October 6, 2017), the SEC should indicate it will not further extend Reg AB to apply to additional asset classes beyond the first five, nor to unregistered offerings under Rule 144A. Issuers have been pummeled with enough paint points for now, and perhaps standing back to see what images clearly emerge is the best approach to balance policy objectives and stimulate investment in these markets.
The first phase of Regulation AB was originally adopted in 2004. Reg AB represents the SEC's comprehensive set of regulations related to registration, disclosure and reporting for publicly offered, asset backed securities (as defined in Regulation AB, rather than the broader definition of “asset backed securities” in the 1934 Exchange Act, as amended by the Dodd-Frank Act. Accordingly, Reg AB exempts from its structure any managed pools of assets, and omits any transactions exempt from registration via Rule 144A or otherwise.). As mentioned above, RMBS disclosure involves 270 data points for each loan. Similar tracking of applicable data points related to income stream, collateral, performance, and loss mitigation is also required when the underlying asset classes are commercial mortgages, auto loans or leases, and any re-packs of ABS that include these 4 types.
For now, minimal disclosure obligations require issuers of non-government backed loans to comply with the following new requirements:
- Speed Bumps -- A preliminary prospectus must be available at least 3 days before sale (the “3-day speed bump” provision) and contain all required information, other than pricing/underwriting syndicate/discount. Any material change from that disclosure requires a prospectus supplement at least 48 hours before the first sale (the “48-hour speed bump”). NOTE: The offering prospectus must be a single integrated document, rather than a base plus prospectus supplement.
- New Registration Forms -- Asset-backed securities offering registrations are now made on Forms SF-1 and SF-3, just for ABS and in effect since November 23, 2015. The SF Forms should contain a “form of” integrated prospectus and cover only one asset class.
- New PAYG method – Shelf registration forms now permit filing fees to be paid when the preliminary prospectus is filed at the time of each take-down.
- Compliance Checks for Continuing Shelf -- Annual compliance checks, to be performed within 90 days after year-end and looking backward 12 months from the compliance check, will permit the same shelf registration to remain effective for subsequent take-downs. Remaining current and compliant also allows the issuer to file subsequent shelf registration statements with no delay.
- New Shelf Form Eligibility – To use Form SF-3, specifically for ABS, the depositor (as the issuer here) also must meet certain entity and transaction requirements.
ENTITY ELIGIBILITY REQUIREMENTS:
- Depositor and Affiliates (D&A) must have timely filed all periodic reports for the last 12 months – if not, no new shelf registration for 12 months from date issuer becomes current;
- D&A must have timely filed all transaction agreements (that contain provisions for asset representation reviewer, dispute resolution and investor communications);
- Any failure to timely comply with the transaction agreement filing will result in an embargo on use of the shelf registration statement for 90 days after all transaction agreements have been filed; and
- D&A (all) must also have timely filed for previous 12 months all periodic reports for all ABS of the same asset class.
TRANSACTION ELIGIBILITY REQUIREMENTS:
- Assets offered must be for cash, and must meet ABS definition in Reg AB (not Exchange Act, so e.g., no managed pools);
- Delinquent assets not more than 20% of pool;
- CEO Certification in the ABS format provided:
- Statement re: familiarity with the assets, agreements and transaction, and has reviewed prospectus;
- With knowledge qualifier, filing contains no untrue statement of material fact(s) and fairly presents in all material respects the assets, transaction and risks;
- With knowledge qualifier, and considering all material information, reasonable basis to conclude the transaction is structured (but not guaranteed) to result in cash flows at times/amounts to satisfy obligations and repay principal timely, as set forth in prospectus;
- Appointment of Asset Representation Reviewer (two-prong test, results in an audit of the rep and warrant compliance, by an ARR that is named up-front);
- Dispute Resolution provision (180 days after an unsatisfied repurchase request, this provision is triggered); and
- Investor Communication specifics (method specified, plus proof of ownership).
- Additional Regular Disclosure. The issuer now makes its periodic reports on Forms 10-D (for AB issuer distributions) or 10-K (annual report, including any servicing MINC disclosures) since 2015 -- except for the exhaustive mortgage-level disclosure, only in effect since November 23, 2016 – and some Form 8-K periodic and current reports (while permitting incorporation by reference of static pool info).
- Detailed Loan Schedule. Asset-level disclosure and reporting (after Nov 23, 2016) in a tagged xml format on Forms ABS-EE satisfying Schedule AL, both at the time of offering and on an ongoing basis in Exchange Act reports. Over 150 data points tracked for each asset class (270 points for RMBS!) with no de minimis level for the data tracked. Often this data must be collected from multiple places: the servicing system, the originators’ systems, the default management system, and the payment history/credit score system (if obtained during life of loan).
- Other Information. SEC requested disclosure of detailed delinquency metrics by asset, the financial status of any party required to repurchase, as well as a graphical presentation of static pool data, and a healthy discussion of any risk retention by the parties.
Notably, the SEC did not include in the final rule any previously proposed provisions related to: Rule 144A offerings, separate issuer-hosted websites, waterfall computer programs for investor analysis, asset-level data disclosure for more than the 5 classes specified, data filings on Form 8-K for 1% or greater changes in asset pool since ABS issuance, final agreements to be filed as exhibits with the preliminary prospectus filing, and several provisions related to non-revolving assets (including duration and whether master-trust status might apply to specific types of assets).
After such an extended roll-out – over ten years from its proposal date – Reg AB appears to carefully weigh disclosure to both encourage ABS markets and guard against the opaque disclosure concerns of the recent housing market crisis. As the market for PLS heats up, this robust disclosure scheme should provide a clearer picture of the underlying assets, and permit the savvy investor to inform herself and then profit from her homework.