Las Vegas - Although market participants are still waiting on official word regarding how to implement certain provisions of Regulation AB, Paula Dubberly, Securities and Exchange Commision associate director, gave a good indication of what the SEC stance is on the issue of third-party assessments at last week's ASF 2007.
In a panel called Regulation AB and Offering Process Reform Implementation, Dubberly shed some light on the SEC's response to the industry call for clarification on Item 1122 of Reg AB. She also said that a telephone interpretation of Item 1122 as it relates to the provision's assessments of vendor activities could be expected within the next two weeks.
In December last year, The American Securitization Forum along with the Mortgage Bankers Association submitted a joint letter to the SEC for interpretative guidance on the aforementioned item as well as Rules 13a-18 and 15d-18 under the Securities and Exchange Act of 1934. These provisions focus on the registration, disclosure and reporting requirements for asset-backed deals.
Specifically, the letter asked for further guidance on the "responsible party" concept. The ASF and MBA wanted to clarify whether servicers could actually assume responsibility for assessing vendor compliance under the servicing criteria enumerated in Item 1122 (d) of Reg AB. Vendors are third parties employed by servicers to perform a limited and specific function on assets backing ABS pools. In the panel, participants used the example of the lockbox provider for mortgage deals and call centers for credit card issuers.
Although Dubberly made it clear that her remarks at the panel were her own and did not necessarily reflect the SEC's stance, she indicated that the SEC is inclined to allow servicers to perform an assertion on behalf of the vendor and to declare that the vendor executed specified servicing functions under Reg AB. In other words, there could be cases where a servicer - instead of obtaining an Item 1122 assessment from these vendors - could choose to take responsibility for providing the Item 1122 assessment related to such vendor's activities, but only if certain criteria apply. These criteria are that the vendor's activities are limited or scripted - meaning that the vendor's activities are very specific and do not really involve discretion on the vendor's part. Another condition is that the servicer has in place, during the entire reporting period, policies and procedures that offer reasonable assurance that the vendor's activities comply with the applicable criteria for that particular vendor specified under Reg AB. Also, the vendor should not fit the definition of a servicer under Item 1101.
According to a summary report produced by Cadwalader, Wickersham & Taft after the panel concluded, from what Dubberly said in her conference remarks, it is really not clear whether the SEC would be requiring more than the disclosure of deficiencies in a servicer's policies and procedures to assess whether it has complied with Reg AB provisions or not.
Dubberly further noted that such a servicer assessment must disclose the servicing criteria that apply to the vendor for which the servicer is assuming responsibility for. It must also disclose any material noncompliance by the vendor of the servicing criteria as well as any deficiencies in the servicers' policies and procedures for monitoring the vendor. She also said that servicers should have policies and procedures that are operating effectively during the reporting period.
Tom Deutsch, associate director at the ASF, said that judging from Dubberly's remarks at the panel, the SEC appears to be heading in a direction that is consistent with the suggestions made by the ASF and MBA in their request for further guidance on the "responsible party" concept under Item 1122. Allowing the servicer to take responsibility for assessing compliance by a vendor under specified circumstances, offers the industry a lot of cost savings, according to Deutsch. It also saves servicers from having to compel vendors not only to perform such assessments but also to have to hire accountants to make attestations on such assessments.
In her remarks, Dubberly also said that the SEC would be performing reviews on Form 10-Ks of ABS issuers that are filed this year. She indicated that issuers would not be notified in advance of these reviews and would only be made aware if the SEC issues a comment letter after the review.
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