ABS Issuers Discuss Impact of Dodd-Frank Financial Reform Act

Prior to July 22, Rule 436(g) under the Securities Act of 1933 provided nationally recognized statistical rating organizations (NRSROs) with an exemption from expert liability under the Securities Act for ratings information included in registration statements.  When the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, Section 939G of Dodd-Frank repealed Rule 436(g) of the 1933 Act. 

In the MD&A section of its Form 10-Q filed on August 6, American Express Co. notes this circumstance is of particular significance in offerings of asset-backed securities (ABS), which require ratings disclosure that, subsequent to Dodd-Frank, can be made only with rating agency consent.  Following enactment of Dodd-Frank, the three principal NRSROs announced that they would not consent to the inclusion of their ratings in registered public offerings of securities. 

In order to facilitate a transition for asset-backed issuers, the SEC Division of Corporation Finance issued a no-action letter on July 22 to temporarily allow ABS issuers to omit the credit rating disclosure required under Regulation AB (see Ford Motor Credit Co., WSB File No. 0726201001).  Items 1103(a)(9) and 1120 of  Reg AB require disclosure of whether an issuance or sale of any class of offered ABS is conditioned on the assignment of a rating by one or more rating agencies.  The disclosure of a rating in a registration statement now requires the consent of a rating agency to be named as an expert.  The no-action position will expire with respect to any registered offerings of ABSs commencing with an initial bona fide offer on or after January 24, 2011.

Ally Financial Inc. (formerly GMAC Inc.) notes in the Risk Factors section of its Form 10-Q filed on August 5 that NRSROs have refused to permit their ratings to be used pending more clarity related to potential legal exposure. Ally also notes it is unclear whether the SEC will extend the six-month period to omit credit ratings from ABS registration statements.  Ally states that if the repeal of Rule 436(g) stands without further action, it would likely be limited to only private securitizations, which could have an adverse impact on its liquidity and cost of funds. American Express also indicates it may have to rely on private offerings to raise funding through its ABS program.