SEC Adopts New Rules For Issuer Review of Assets in ABS Offerings

By Final Rule adopted January 20 and to be effective 60 days after publication in the Federal Register, the SEC has approved new requirements in order to implement Section 945 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and new Rule 193 (17 CFR 230.193) under the Securities Act of 1933 to require any issuer registering the offer and sale of an asset-backed security (“ABS”) to perform a review of the assets underlying the ABS.

Rule 193, which implements Securities Act Section 7(d)(1), applies to all registered asset-backed securities, regardless of the assets that comprise the bundle.  However, the type of review may vary depending on such circumstances as the nature of the assets being securitized.  Under the final rules, the review must, at a minimum, be designed and effected to provide reasonable assurance that the prospectus disclosure about the assets is accurate in all material respects. 

The rule permits issuers to perform the review themselves or hire third parties to perform the review.  If an issuer obtains assistance from a third party to perform the review, and attributes, in the prospectus, the findings and conclusions of the review to the third party, the issuer may rely on the third-party's review to satisfy the review requirement provided the third party is named in the registration statement and consents to being named as an "expert" under federal securities laws. 

The SEC also adopted amendments to Item 1111 (17 CFR 229.1111) of Regulation AB (17 CFR 229.1100 through 17 CFR 229.1123) to require an ABS issuer to disclose the nature of its review of the assets and the findings and conclusions of the issuer’s review of the assets.  Issuers will be required to disclose:

• Information about how the loans in the pool differ from the loan underwriting criteria disclosed in the prospectus.
• Information about loans that did not meet the disclosed underwriting criteria but were nonetheless included in the pool.
• Information about the entity that made the determination that such loans should be included in the pool, despite not having met the disclosed underwriting standards.

The final rule provides a phase-in period to allow market participants to adjust their practices to comply with the new requirements.  Any registered offering of ABS commencing with an initial bona fide offer after December 31, 2011, must comply with the new rules.