I am congenitally pessimistic and some have, shockingly, called me cynical. Early last week, while we waited for Reg AB, I would have bet more than a dollar that there would have been a number of things in this final Rule which would disappoint.
Well, I was broadly wrong. The Rule as published, with its commentary (nearly 700 pages) is frankly… just not bad. Having been through it for a first go (and it is a slog) it is more notable for what it doesn’t do, than for what it does. It does not extend Reg AB to the 144A market as was suggested by the republished preliminary rule from 2011. It does not include the whacky waterfall computation program from that prior missive. It does not require all the transaction documents to be filed by the date of the preliminary prospectus. It does not impose its own bespoke version of risk retention as a condition to shelf registration. It does not turn some poor bastard who happens to be the CEO of the depositor into a guarantor of the success of the offering, and it does not continually reset a five-day pre-pricing requirement for the delivery of the final prospectus supplement when any late deal change occur.
If there’s news here, that’s it.
As to what the Rule does, the CMBS highlights would be as follows:
• New shelf registration requirements:
• A much more challenging depositor’s CEO certification for shelf registration (as mentioned above, not something that screams guarantee, like in the 2011 version, but still rather daunting);
• An asset level review trigger of all delinquent loans for possible put back, triggered by a certain percentage of delinquency and an investor request;
• A dispute resolution mechanic for put back disputes; and
• New structure to facilitate intra-investor communications.
• Tweaks to the CREFC reporting package and require XML tagging of data fields.
• A requirement that the prospectus be in the hands of investors 3 business days prior to the time of sale, with post red material modifications to be delivered in a supplemental prospectus which only has to be delivered 48 hours before the time of sale (and doesn’t reset the clock for each supplemental prospectus).
• Enhanced disclosure regarding transaction parties and financial information regarding parties on the rep and warrant hook for selling 20% or more of the loans.
• New shelf registration forms SF1 and SF3, apparently to remind those too dim to appreciate that this is a structured finance offering that it is. (One might be tempted to think that if an investor does not know a CMBS deal is a structured financing offering, he or she probably should not be allowed to buy gas, let alone bonds).
• Require all asset level information delivered both at the time of sale and on an ongoing basis on Form 10-D.
• Extend reporting on Form 10-K to material instances of non-compliance with servicing criteria and servicing actions.
My benchmark for assessing new regulation has become how does it impact capital formation? Admittedly, a rather low bar. Ok, this will increase costs some and perhaps add some transactional friction; but it’s not existential. Let’s agree, we need to understand and not obsess over the fact that politicians and regulators will have their fun. (Birds got to fly…) While the horses have indeed fled the barn, they had to do something. As “somethings” go, this is just not so bad. And we have a one year transition rule for most of this and two years for the asset data requirements. Clearly a huge improvement over the looming threats contained in the 2011 republication. First cautionary note: The devil’s in the details and as we get more familiar with this thing, more problems may come to light. Second cautionary note: Just to keep us on our toes, the SEC does say that they may return to some of the matters not covered in this Rule, most notably an extension of Reg AB to the 144A market and possibly enhanced new risk retention shelf registration criteria.
What’s next? Risk Retention. With Reg AB out of the way and a deal in place on qualified mortgages, risk retention cannot be far off. It would be delightful to think that having gone to school on Reg AB and having found it amiable, we can relax and assume that the risk retention rule will be similarly inoffensive. Hope that’s true, but then again I remain reflectively pessimistic and a tad cynical. Stand by.