Fewer than half of the rulemaking provisions in Dodd-Frank specify when the required or permitted rule should be issued or go into effect. Some of the Dodd-Frank rulemaking provisions require multiple agencies to issue rules jointly, some provisions require multiple agencies to issue rules separately, several provisions require that rules be issued by one agency in consultation with another agency… Some rulemaking deadlines are based on date of enactment of Dodd-Frank (July 21, 2010), others on the effective date (July 22, 2010, except as otherwise specifically provided in Dodd-Frank).
Below is a discussion about where we are in connection with some of the Dodd-Frank provisions that are of particular interest to the securitization industry.
Generally, the disclosure requirements of Dodd-Frank Section 942 overlap significantly with the SEC’s proposed rules to revise Reg AB.
Causing a recent stir is Section 942(a) of Dodd-Frank which amended Section 15(d) of the Securities Exchange Act (the “Exchange Act”) to exclude ABS, as defined in the Exchange Act (a definition that is more broad than the Regulation AB definition), from the automatic suspension provisions of 15(d). Prior to enactment of Dodd-Frank, Section 15(d) automatically suspended the duty to file ongoing Exchange Act reports after any fiscal year other than the fiscal year in which the related registration statement became effective - if the securities of each class to which the registration statement relates are held of record by fewer than 300 persons. As a result, for most issuers of ABS, Exchange Act reporting obligations suspended after the filing of one annual report on Form 10-K. Dodd-Frank Section 942(a) further authorizes the SEC to suspend or terminate Section 15(d) reporting requirements for any class of ABS on such terms and conditions and for such periods as the SEC deems appropriate.
The SEC is proposing in new Exchange Act Rule 15d-22(b) to permit suspension of the reporting obligations for a given class of ABS pursuant to Exchange Act Section 15(d) for any fiscal year, other than the fiscal year within which the registration statement became effective, if, at the beginning of the fiscal year, there are no longer ABS of the class that were sold in a registered transaction held by non-affiliates of the depositor. The SEC is also proposing to update Exchange Act Rule 15d-22 to indicate when annual and other reports need to be filed and when starting and suspension dates are determined with respect to a shelf takedown, and is proposing to amend Exchange Act Rule 12h-3(b)(1) to exclude ABS from the classes of securities eligible for suspension since Rule 12h-3 tracks the language of the Exchange Act. Comments to the SEC pertaining to the proposed rules are due on or before February 7, 2011.
Note that on January 6, 2011, the SEC issued a “no-action” letter to the American Securitization Forum (“ASF”) confirming that the SEC staff would not recommend enforcement action if an ABS issuer continues to determine whether its reporting requirements for existing transactions are suspended based on the standards of Section 15(d) prior to the enactment of Dodd-Frank. The “no-action” relief is subject to certain conditions.
Dodd-Frank imposes no rulemaking deadline in connection with Section 942.
TITLE II – Orderly Liquidation Authority
You may have happened upon my December 13, 2010 blog entry addressing concerns about FDIC treatment of preferential transfers under the Orderly Liquidation Authority (“OLA”). Since then, on December 29, 2010, the FDIC issued a letter from the FDIC General Counsel addressed to the ASF concluding that the treatment of preferential and fraudulent transfers under the Dodd-Frank OLA provisions was intended to be consistent with the related provisions under the Bankruptcy Code, and indicating that a formal regulatory resolution to the issue will be addressed by the FDIC Board of Directors. The FDIC published an NPR on October 19, 2010, with a deadline of November 18, 2010 for comments addressing the proposed rule and January 18, 2011 for comments on additional questions. Final rules are expected to be released by the FDIC in March 2011.
Coming any day now…
Here’s a hot button topic. Section 945 of Dodd-Frank (amending Section 7 of the Securities Act of 1933) states that the SEC shall issue rules relating to the registration statement required to be filed by any issuer of an ABS (as defined in the Exchange Act) that require such issuer to perform a review of the assets underlying the ABS and to disclose the nature of such review.
On October 19, 2010, the SEC published an NPR and comments were due November 15, 2010. In addition, the SEC proposed a new rule and form to implement Section 15E(s)(4)(A) of the Exchange Act, added by Section 932 of Dodd-Frank, which requires an ABS issuer or underwriter to make publicly available the findings and conclusions of any third-party due diligence report.
The SEC final rule is due by January 17, 2011 (within 180 days after the date of Dodd-Frank enactment).
Another hot button topic and another SEC final rule due by January 17, 2011 has to do with representations, warranties and repurchases in connection with ABS. In accordance with the requirements of Dodd-Frank Section 943, the SEC’s proposed rules would require ABS issuers to disclose fulfilled and unfulfilled repurchase requests across all transactions. In addition, they would require nationally recognized statistical rating organizations to include information regarding the representations, warranties and enforcement mechanisms available to ABS investors in any report accompanying a related credit rating, including a preliminary rating. The SEC’s NPR was published on October 13, 2010 with a comment deadline of November 15, 2010.
Dechert LLP worked with the Securities Industry and Financial Markets Association’s Securitization Group drafting two comment letters to the SEC in connection with Dodd-Frank Section 943 and Section 945 (the two comment letters can be found at: http://www.sec.gov/comments/s7-24-10/s72410-33.pdf and http://www.sec.gov/comments/s7-26-10/s72610-30.pdf).
Credit risk retention. Speaking of hot button, even my mother called me to ask about this one, and I sensed she was somewhat zoned out listening to my explanation until I mentioned “skin in the game” at which point she perked up and said, “That’s what I read-- that phrase.” We can pretty much count on skin covering at least 1/3 of the torso. (Is that a horribly inaccurate 5% estimate?) Here’s where we’re at insofar as risk retention rulemaking is concerned. Numerous acronyms are on this one, including the SEC, OCC, FDIC, HUD, FHFA and OTS to name a few. The SEC plans to propose rules (jointly with others) regarding risk retention by securitizers of ABS as well as implement the exemption of qualified residential mortgages from the risk retention requirements between January and March 2011 (see SEC rulemaking timetable at: http://www.sec.gov/spotlight/dodd-frank/dfactivity-upcoming.shtml#0910). The final rule is due by April 17, 2011 (within 270 days after the date of Dodd-Frank enactment). However, the buzz is that risk retention rulemaking will be delayed.
I’ll leave the Volcker Rule for another day (because, frankly, I’m hungry) and conclude with Dodd-Frank Section 621, the intent of which is to eliminate incentives for securitization market participants to intentionally design ABS to fail or default. Section 621 adds a new Section 27B to the Securities Act of 1933 entitled “Conflicts of Interest Relating to Certain Securitizations.” Section 27B(a) states that “[a]n underwriter, placement agent, initial purchaser, or sponsor, or any affiliate or subsidiary of any such entity, of an asset-backed security . . . which for the purposes of this section shall include a synthetic asset-backed security, shall not, at any time for a period ending on the date that is one year after the date of the first closing of the sale of the asset-backed security, engage in any transaction that would involve or result in any material conflict of interest with respect to any investor in a transaction arising out of such activity.” An NPR is expected to be released by the SEC any day now. Final rules are due by April 17, 2011. Recognizing that many potential and actual conflicts of interest are inherent in the ordinary course of securitization transactions, comment letters were submitted to the SEC by industry trade groups specifying conflicts of interest that should not be expressly prohibited under Section 621.
As the Muppets have sung, things are Movin’ Right Along.
By Laurie Nelson.