This week the Securities and Exchange Commission (SEC) proposed rules that would require most ABS issuers to still file periodic reports for the life of the publicly registered ABS.
The proposed rules would suspend the duty to file periodic reports under the Exchange Act only when no registered ABS of the relevant class are held by non-affiliates of the ABS depositor.
Before the enactment of the Dodd-Frank Act, the duty of most issuers of publicly registered ABS to file periodic reports under Section 15(d) of the Securities Exchange Act of 1934, as amended under the Exchange Act, was automatically suspended after the year in which the ABS were issued for as long as there were less than 300 record holders of the ABS at the start of the following year, according to an alert from Bingham McCutchen.
Section 942(a) of the Dodd-Frank Act eliminated this automatic suspension and empowered the SEC to issue rules that address the suspension or termination of the duty of ABS issuers to file periodic reports, Bingham said.
Along with this, the staff of the SEC’s Division of Corporation Finance has also issued a no-action letter that grandfathers the reporting suspension for most ABS issuers issued prior to 2010.
In the letter, the staff said that, if certain conditions are satisfied, the staff will not recommend the enforcement action against an ABS issuer that does not file periodic reports, for as long as its reporting obligation was suspended prior to the enactment of Dodd-Frank.
The SEC's proposed rules offer a limited suspension of ABS issuers’ duty to file Exchange Act reports. According to Bingham, Section 15(d) of the Exchange Act generally tells every issuer with a registration statement that has become effective under the Securities Act of 1933, as amended, to file periodic reports under the Exchange Act.
For ABS issuers, these reports comprise the following: distribution reports on Form 10-D for each distribution period for the registered ABS, annual reports on Form 10-K, and current reports on Form 8-K.
Before Dodd-Frank's enactment, these obligations similar to those of issuers of other types of securities were automatically suspended for any fiscal year after the year in which the registration statement became effectivei f the securities of each relevant class were held of record by fewer than 300 persons, Bingham said. Or, alternatively for ABS offerings registered in a takedown from a shelf registration statement, the fiscal year after the takedown.
Most ABS issuers, unless they are master trusts, were able to take advantage of this suspension, as they usually have less than 300 record holders of a class of securities. Section 942(a) of the Dodd-Frank Act specifically excluded ABS issuers from those entitled to rely on the provisions of Section 15(d) that suspend periodic reporting obligations under the Exchange Act, and authorized the SEC to adopt rules prescribing the ability of ABS issuers to suspend or terminate periodic reporting.
In its recent proposed comprehensive revisions to Reg. AB, the SEC proposed to condition ABS shelf eligibility on an undertaking to continue to file Exchange Act reports for as long as non-affiliates of the depositor held any of the registered securities, signaling its view that it was important to offer investors and the markets with transparency regarding ongoing performance of the securities and servicer. In SEC's proposed release,it reiterates the importance to investors of post-issuance reporting in ABS transactions.
The SEC noted that the burden of preparing ongoing Exchange Act reports goes over the benefit to investors when the only holders of the ABS are affiliated with the depositor.
In the SEC proposed release, it is requests comment on whether an ABS issuer should be permitted to suspend its reporting obligation even if there are a limited number of non-affiliates of the depositor holding the ABS in question, whether another standard, including a certain percentage of pool assets remaining, would be more appropriate. It also askinig whether suspension should be based on the passage of a specified time period since the date of the registered ABS offering.
Comments on the proposed rules are due to the SEC by Feb.7.
According to Bingham, without further relief, Section 942(a) of Dodd Frank Act's enactment, along with SEC's proposed release, would re-impose Exchange Act reporting obligations on every issuer that offered and sold ABS in a registered public transaction and had those obligations subsequently suspended under Section 15(d) of the Exchange Act, no matter how long ago the offering or suspension of reporting, if any of the ABS are still outstanding and held by non-affiliates of the depositor.
In the No-Action Letter, the staff acknowledged industry concerns that traditionally the transaction documents for ABS issuers have not contained provisions needed to support an ongoing Exchange Act reporting obligation, or provided the funds to cover the costs of taking steps to recommence such a reporting obligation.”
Thus, the staff did not recommend enforcement action against an ABS issuer that still determines its Exchange Act reporting obligation based on Section 15(d) of the Exchange Act as it existed immediately before the enactment of the Dodd-Frank Act, so long as three conditions are satisfied.
First, the ABS issuer’s reporting obligations must already have been suspended by Section 15(d) of the Exchange Act prior to Dodd-Frank's enactment. Where applicable, Section 15(d) suspends reporting obligations for any fiscal year after the year when the securities were issued, as of the first day of that fiscal year, and ABS issuers generally operate on a calendar-based fiscal year, Bingham said.
Thus, the ABS reporting obligations issuers that issued securities before July 21, 2010, generally were not yet suspended as of the date that the Dodd-Frank Act was enacted. This means that the relief afforded by the no-action Letter generally will apply only to ABS issued in 2009 or before.
Secondly, the ABS issuer must still comply with its requirements under the related deal agreements to make ongoing information regarding the ABS and the related pool assets available to security holders, directly or through the trustee, in the way and to the extent required under the transaction agreements.
Under Securities Act Rule 191, the ABS issuer generally is the depositor, acting in that capacity for the issuing entity. But, in the deal documents for most ABS, ongoing information requirements are imposed directly on the issuing entity, instead of on the depositor. Ordinarily, the issuing entity is a trust with an independent trustee. Depositors will need to ensure that the trustee of the issuing trust, the trust administrator or other applicable party complies with its ongoing information requirements. Because compliance with these obligations is a condition of the relief provided by the No-Action Letter, the failure to comply could lead to enforcement action against the depositor (in its capacity as ABS issuer) for failure to file ongoing Exchange Act reports.
Third, the ABS issuer must retain the information, presumably required to be made available to holders of its ABS as described above,for at least five years after the ABS are no longer outstanding, and upon request, furnish a copy of any such information to the SEC or the Staff.
Depositors should set up procedures for retaining this information in an organized way for the required period and for responding to SEC requests, or will need to contract with the trustee of the issuing trust to perform these tasks on its behalf.
Bingham said that because compliance with this requirement is a condition of the relief provided by the no-action letter, the failure to comply could lead to enforcement action against the depositor for failure to file ongoing Exchange Act reports, Bingham said in its alert.