As part of its recently finalized reforms to the securities offering process, the Securities & Exchange Commission has interpreted a rule under the Securities Act of 1933 that will leave ABS underwriters liable for all deal information provided to investors up until an investment decision is made.

At the heart of the issue is a type of liability faced by underwriters under Section 12(a)(2) of the 1933 act, which states that any person who offers or sells a security by the use of information, such as a prospectus, which includes an untrue statement of material fact or an omission of material fact, shall be liable for damages to the buyer. The interpretation came in the form of a clarification of how 12(a)(2) liability would apply to ABS underwriters under Rule 159.

The SEC has interpreted Rule 159 to mean that 12(a)(2) liability attaches to every piece of information an investor receives up until the time that an investment decision is made. This means that underwriters no longer have the ability to make material changes in a deal's final prospectus. "In terms of 12(a)(2) liability, it is as if the final [prospectus] didn't exist," said Nadine Cancell, vice president and assistant general counsel at The Bond Market Association.

The Association wrote a comment letter in January requesting the SEC revise its proposed version of Rule 159 to provide a safe harbor provision, whereby 12(a)(2) claims must be based on "the totality of information provided during the offering process, including the final prospectus, and cannot be based solely on the preliminary information provided at the time of the contract of sale..." The SEC provided no such safe harbor in the final rule.

"We kind of lost that battle," said Cancell. However, Cancell noted the final rule reflects many of the concerns suggested by the Association. "The final [rule] does take into consideration several points we mentioned in the comment letter," added Cancell.

"The way the SEC interpreted 12(a)(2) liability in the final version is a little bit easier to deal with than it was in the proposal," Cancell said. She said the Association's next step is for its task force, which convened during the comment letter writing process, to reconvene within the next two weeks to develop guidance for the industry on how to best comply with the rule. This task force will be smaller than the original one and will be made up of in-house and outside counsel.

Cancell said she believes there will be some changes to deal procedure, for example, underwriters may start terminating contracts of sale with investors in order to make material changes to offering documents.

On a broader scope, the BMA was also concerned that, since the offering reform proposals dealt with all publicly offered securities, issues facing the ABS market were not adequately addressed. The final rule alleviated those concerns by more clearly specifying how the rules were to relate to ABS. "ABS was not really integrated into the proposal, but it is integrated into the final," said Cancell.

The rule is set to become effective on December 1.

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