The American Securitization Forum (ASF), in a comment letter filed with the Securities and Exchange Commission (SEC), expressed its concerns regarding proposals that would introduce, among other changes, an investor qualification and minimum denomination standard in Form S-3.

These proposals will also cause the removal of credit ratings as a required element of a money market fund’s investment analysis in Rule 2a-7 of the Investment Company Act.

The ASF thinks that credit ratings are, and should continue to be, an important element of the regulatory regimes applying to structured finance products, the association said in a press release.

“The inclusion of references to credit ratings in regulations is useful and we strongly believe the proposed changes will cause more harm than benefit to market participants, particularly investors, while also negatively impacting liquidity and the ability to raise capital,” said George Miller, executive director of the ASF. “Given the reforms already underway, including the SEC’s proposals introduced in June, we believe the quality, accuracy and integrity of credit ratings is being addressed sufficiently and find continued inclusion of references to ratings in regulation to be appropriate.”

ABS issuers are currrently allowed to use Form S-3 to file a shelf registration statement for the ABS public offering on a delayed basis, provided that, among other requirements, the ABS are rated at the time of the offering in one of the four highest rating categories by at least one credit rating agency.

The ASF said that the proposal would eradicate the rating requirement and require ABS offered for cash to be made in minimum denominations of $250,000 and sold only to qualified institutional buyers as defined in Rule 144A in order to be eligible for Form S-3 registration.

According to a release from the ASF, the organization "very strongly believes" the rating requirement for ABS Form S-3 eligibility should not be removed and should not be replaced with another criterion. Requiring ABS to be rated investment grade is a reasonable way to identify those classes of ABS that are not exposed to concentrated credit risk on the underlying assets.

Aside from this, the public registration process has been designed to provide a “level playing
field” based on an integrated reporting and disclosure regime for both public investors
and registrants who choose to publicly register their offerings rather than engage in
private placements.

ASF is concerned that the proposed changes would provide a significant incentive to conduct ABS offerings through the private placement market, considering the time and expense of publicly registering securities which could only be sold to qualified institutional

As a result, ABS investors would lose the benefits and protection of registration under the 1933 Act. The net impact of fewer ABS offerings being made through a public registration statement the goals of transparency and quality of information, and would negatively impact capital raising and liquidity in all asset classes.

Added to these, the ASF does not support requiring a minimum denomination, as
this would be unduly disparate from the treatment afforded non-ABS issuers. If such a
restriction was made, the ASF thinks it should only apply to initial sales and not subsequent
resales. Finally, if any changes are made, ASF believes all existing Form S-3
registration statements of ABS issuers should be grandfathered so that they could be
used for two years following the rule change.

Rule 2a-7 of the Investment Company Act governs the operation of money market funds and currently limits a fund’s portfolio investments to securities that have received credit ratings in one of the two highest short-term ratings categories and to those securities which the fund’s board of directors has determined present minimal credit risks.

The SEC proposal removes the rating requirement and relies solely on the board of directors to determine which securities present minimal credit risk. It also introduces liquidity and monitoring requirements.


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