The Structured Finance Committee of The Association of the Bar of the City of New York submitted a comment letter last week regarding proposed amendments to a Financial Accounting Standards Board rule on transfers of financial assets. The comment letter, the first from the newly formed committee, addresses proposed amendments to FASB's Statement of Financial Accounting Standards No. 140.
The rule, which was issued in September 2000 to address accounting for transfers and servicing of receivables and deals, governs the accounting for most securitizations. The rule specifically deals with whether certain transfers should be treated as sales or loans for accounting purposes and whether the debt of transferees must be included in the transferor's consolidated financial statements.
The comment letter focuses on a FASB exposure draft issued in August, proposing certain changes to FAS 140. The committee says it is particularly concerned about the lack of consistency between proposed new requirements for "legal isolation" and "the analytical underpinnings of legal isolation dictated by current bankruptcy law."
"The committee appreciates the FASB's considerable efforts to revise and clarify the de-recognition requirements for financial assets under FASB Statement No. 140 and believes that the transfers exposure draft remedies many of the objections to the June 2003 exposure draft. However, the committee submitted this letter to convey its particular concerns regarding to unresolved issues," said committee Chair Craig Wolson. Wolson, a partner with Duane Morris in New York, said the committee focused on these particular issues because they are legal issues, as opposed to the pure accounting issues dealt with in most of the other proposed amendments.
According to the letter, FASB's proposed revisions to the rule demand that lawyers, in their determination of the legal isolation of a transferor, disregard the separateness of the transferor from its consolidated affiliates and presume they will be consolidated in the event of the bankruptcy. The committee says this is at odds with respect to boundaries mandated by governing case law on the subject, and that such consolidation is generally the exception rather than the rule. The committee requests that the proposed amendments be revised to be consistent with present case law.
The committee's other chief concerns stem from the "practical difficulties in applying the proposed additional guidance regarding legal isolation to the delivery of true sale,' non-consolidation and other similar legal opinions in connection with ABS transactions." The proposed amendments require that the isolation analysis of a particular transaction include consideration of whether the transferred financial assets are also isolated from the consolidated affiliates of the transferor.
Assuming the rule stipulates that attorneys must consider the activities of all consolidated affiliates of a transferor, the committee is concerned about the practical difficulties and cost of timely compliance with this provision. The comment letter notes that since many frequent ABS issuers are affiliates of, or are themselves, large and widespread organizations, this requirement "will in many circumstances represent a nearly insurmountable hurdle to the rendering of standard bankruptcy/insolvency-related opinions."
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