THE MORTGAGE BANKERS ASSOCIATION OF AMERICA
COMMENTS ON AIRCRAFT CARRIER RELEASE
A. Introduction. The Mortgage Bankers
Association of America (the "MBA") appreciates the opportunity to
comment on the proposals made by the Securities and Exchange Commission (the "SEC") in November
1998 in what is referred to as the aircraft carrier release (the "Release"). The MBA represents
approximately 2,700 companies involved in real estate finance, including private conduits, independent
mortgage companies, banks, thrifts, mortgage company subsidiaries, mortgage insurers and others who
service the mortgage industry. Residential mortgage-backed securities, including securities backed by
home equity loans, but exclusive of securities issued or guaranteed by federal agencies, were issued in
1998 in an aggregate principal amount of approximately $210 billion. Because the members of the MBA
include many large, periodic issuers of residential mortgage-backed securities, this response focuses
primarily on the market for residential mortgage-backed securities currently issued under shelf registration
statements. Mortgage-backed securities and asset-backed securities will be referred to herein collectively
as asset-backed securities ("ABS").
B. Topics. The topics discussed in this response are set forth below.
II. Executive Summary
III. Characteristics of ABS Market
IV. Form B Issuer
V. Registration Statement
VI. Delivery and Filing Requirements
VII. Exchange Act Reports
II. EXECUTIVE SUMMARY
A. Comprehensive Approach. We recommend developing
a comprehensive approach to securities regulation
which takes into account the unique features of the ABS market. We believe the approach should balance
investor protection principles with the benefits to homeowners of efficient, cost-effective access of
mortgage lenders to the capital markets. In developing an approach, we strongly support the SECís goals
to facilitate market access by issuers and flexibility and timeliness in communications with investors.
However, we believe applying many of the timing, filing and liability requirements proposed by the SEC in
the Release to the ABS market would thwart the SECís goals and impose unfair burdens on the issuer.
B. Suggested Modifications. Due to the special
characteristics of the ABS market, we do not believe that
many of the provisions that would apply to Form A or Form B offerings as proposed in the Release
should be adopted for ABS. However, we also believe that a workable regulatory scheme can be
developed utilizing certain concepts contained in the Release. Specifically, we propose extending to ABS
the benefits proposed to be accorded to Form B issuers while also establishing timing, filing and liability
requirements which take into account the characteristics of the ABS market. Our proposal for a
regulatory system applicable to ABS is summarized as follows:
Statement. The registration statement including the prospectus would
material information about the offering. It would be filed with the SEC prior to settlement and
available to any investor upon request. It would become effective without SEC review at the
time designated by the issuer.
Sheet. A preliminary term sheet could be distributed by or on behalf
of the issuer to
the investor at any time. The preliminary term sheet could be revised and redistributed to
reflect any changes. Prior to settlement, a final term sheet would be filed with the SEC as
part of the prospectus.
Materials and Free Writing. Computational materials prepared by the
underwriter and free writing could be disseminated in a flexible manner which would readily
address the specific concerns of an investor. They would not be filed with the SEC or
required to be distributed to all investors. Computational materials would mean mathematical
calculations regarding yield, average life, duration, maturity and other characteristics of ABS
based on assumptions about the collateral and assumed scenarios regarding prepayment
speeds, interest rates, losses and other factors, with the assumed scenarios typically selected
by the underwriter or the investor. Free writing would mean any material which is not
required to be in the registration statement.
Harbors. The preliminary and final term sheet, computational materials
and any free
writing would be qualified by any other information filed contemporaneously or subsequently
with the SEC prior to settlement. The term sheet would benefit from a safe harbor for any
omission of information, since a brief summary by its nature will not include a complete
description of all the characteristics of the transaction. Computational materials would benefit
from a safe harbor to be promulgated by the SEC specifically for ABS computational
materials which would be similar to that for forward-looking statements under Section 27A
of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act"). Such a safe harbor would only be available if
the applicable computational materials were accompanied by "meaningful cautionary
Liability. Material information about the offering would be contained
in the registration
statement, available for review and subject to liability under the high standards imposed by
Sections 11 and 12 of the Securities Act. The preliminary term sheet, computational
materials and free writing materials would be subject to liability under Section 10(b) and
Rule 10b-5 under the Exchange Act.
C. Investor Protection.
Under our proposal, investors would benefit from greater access to information
because adequate disclosure requirements would be balanced by reasonable timing and liability
More Information Prior to Investment Decision. We believe that
a more permissive
approach in the ABS market would result in the dissemination of more information useful to
investors. Under our proposal, the underwriter would be permitted to distribute to an
investor a preliminary term sheet, computational materials and any free writing, and liability
for such material would be limited to Section 10(b) and Rule 10b-5 of the Exchange Act.
Historically the prohibition on free writing under Section 5 of the Securities Act has restricted
the dissemination of information which investors wanted to obtain and underwriters were
willing to provide in the ABS market. Likewise, the current requirement to file computational
and other materials with the SEC and the consequent liability for such materials have
constricted the dissemination of information in the ABS market.
Safeguards for Investment Decision. We believe that our proposal
safeguards for the investor even in the unlikely case where adequate information has not
been disseminated prior to an investment decision. The final term sheet would be filed with
the SEC prior to settlement. In the event significant terms were not agreed upon by the
investor, state law would determine whether the underwriter could enforce the trade.
III. CHARACTERISTICS OF ABS MARKET
A. ABS Market. Certain unique characteristics
of the ABS market described below justify
modifications in the regulatory approach that was taken in the Release.
B. Special Purpose Vehicle. In a typical ABS
transaction, assets are transferred by the sponsor to a
special purpose vehicle, and cash flows from the assets are used to pay various classes of
securities. Even if the sponsor has created many other special purpose vehicles for ABS
transactions, ABS issued by each special purpose vehicle is deemed an initial offering. Accordingly,
the special purpose vehicle would not have any reporting history under the Exchange Act and
therefore would not qualify for the more favorable treatment of a Form B issuer under the Release.
We do not believe this would be an equitable result for ABS offerings.
C. Term Sheet. Only an abbreviated term sheet
can be prepared prior to the time when an investor
makes an investment decision because an ABS offering typically involves multiple classes of
securities with characteristics that are being negotiated over a period of time by the underwriter and
the various investors, the structure of the transaction may change as new investors are brought into
the transaction, and the pool of assets often is not final until shortly before settlement. For example,
an investor may make an investment decision based on information about the class of securities the
investor intends to purchase even though the structure for all the other classes has not been
determined. As additional investors decide to purchase other classes, the final structure will be
established. It is only at this later point that a final term sheet as contemplated by the Release could
D. Computational Materials. Many ABS investors
expect the delivery of computational materials that
are tailored specifically to their particular class of ABS. Unlike typical information required to be
disclosed by an issuer for an equity or unsecured debt offering, the scenario analyses contained in
ABS computational materials do not constitute information within the unique knowledge of the
issuer and are not prepared by the issuer. Therefore, the filing requirements and liability standards
proposed in the Release should be modified to recognize the particular nature of these materials.
E. Approach to Date. To assist investors,
the underwriter frequently distributes collateral and
structural term sheets and computational materials prior to the time when a prospectus can be
prepared. In no action letters dated May 20, 1994 to Kidder, Peabody Acceptance Corporation I
and May 27, 1994, February 17, 1995 and March 9, 1995 to the Public Securities Association,
the SEC imposed heavy and unfair burdens on the issuer by requiring such term sheets and
computational materials to be filed with the SEC and incorporated in the issuerís registration
IV. FORM B ISSUER
A. Form B. Under the SECís proposal,
an issuer eligible for Form B has several advantages: (i) the
issuer may distribute any type of communication at any time prior to or during an offering; (ii) the
registration statement will become effective at the time requested by the issuer without pre-sale staff
review; (iii) the issuer has more flexibility with respect to a transaction term sheet or a preliminary
prospectus; (iv) the issuer may incorporate by reference in its registration statement its Exchange
Act filings; and (v) the issuer need not deliver to the investor the final prospectus or the Exchange
Act filings incorporated by reference. Under the SECís proposal, an issuer generally will qualify for
Form B if, among other things, the following standards are satisfied:
History. The issuer has a one-year reporting history under the Exchange
including at least one filed annual report, the issuer has filed all reports due, and the issuer
has timely filed all reports in the 12-month period prior to the filing; and
Grade. The offering pertains to non-convertible investment grade securities
below investment grade rating has not been received from any rating agency; or
QIBs. The offering is made solely to qualified institutional buyers
as defined under Rule
144A of the Securities Act ("QIBs") other than dealers and investment advisors; or
Market Making. The offering involves certain market-making transactions
by brokers and
dealers affiliated with the issuer; and
Form. The issuer has previously registered an offering of securities
on a form that did
not become effective upon filing.
B. ABS Modification. We believe that
ABS should be eligible for Form B or a similar form adopted
specifically for ABS. ABS have a huge market predominately consisting of sophisticated issuers
offering investment grade securities backed by familiar asset types to sophisticated investors. Unlike
a typical initial public offering or an equity or unsecured debt offering by a less seasoned issuer, the
asset types and securitization structures for ABS offerings are generally well-known in the market.
To apply to ABS, the standards for Form B should be modified for the following reasons:
Reporting History. An ABS issuer typically would not meet the reporting
for a Form B issuer because the staff views each issuance of ABS as an initial public offering
for Exchange Act reporting purposes. For this reason, Form S-3 currently allows shelf
registration for ABS as defined in the form without a reporting period requirement.
Grade. We would permit registration under Form B of any class of investment
grade ABS. Since many investors purchase investment grade securities on the basis of the
rating and yield, delays caused by SEC review would interfere with market access without
meeting a demonstrable need for better disclosure. In addition, we do not believe the
issuance of securities rated investment grade by one rating agency should be impeded if
another rating agency provides a lower rating because (i) investors are purchasing the
securities on the basis of the rating by the rating agency described in the offering documents
and (ii) a rating by a rating agency which has not been selected for the transaction may not
be based on adequate information. The instructions for use of the form should clearly state
the security rating requirement must be met at the time of settlement.
or IAI. We would permit eligibility for Form B if all the publicly
grade ABS were sold to either QIBs or institutional accredited investors ("IAIs"). We
support expanding the QIB market by maintaining the QIB threshold for assets under
management at $100 million and including additional categories of investors, such as state
pension plans. We support permitting IAIs because it would facilitate transactions and
benefit investors. Under current practice, an ABS transaction often entails a public offering
of the senior, investment grade classes and a private placement to IAIs of the subordinate,
non-investment grade classes. Since investors in the non-investment grade classes frequently
are IAIs but not QIBs, permitting sales to IAIs would allow the entire transaction to be
Form. We do not believe SEC review should be required for ABS which
investment grade or sold to QIBs or IAIs. Even if SEC review is required for an initial
offering by a sponsor or issuer, it should only affect the ability to go effective and not other
advantages accorded to a Form B issuer. Moreover, the issuer should not be subject to
review if the sponsor or any affiliate has been subject to the SEC review process for ABS
because the experience of the sponsor or affiliate with the SEC registration process for ABS
should be sufficient.
C. ABS Qualifications. Accordingly, we propose
that an ABS issuer should have the advantages of a
Form B issuer if the offering meets the following standards:
under Current Form S-3. The offering pertains to ABS defined in a manner
the definition in the instructions to Form S-3; and
Grade. The offering of a registered ABS class pertains to non-convertible
investment grade securities; or
QIB or IAI. The offering of a registered ABS class is made solely
to QIBs and IAIs other
than dealers and investment advisors.
Making. In addition, if the registration and prospectus delivery requirements
applicable contrary to our views expressed below, we believe that Form B should apply to
an ABS offering involving a market-making transaction by broker or dealer affiliated with the
issuer or other resale by an affiliate of the issuer where the initial offering qualified for Form
D. "Bad Boy" Provisions. As proposed
in the Release, an issuer is disqualified from using Form B
because of (i) certain legal violations of, or SEC actions against, the issuer, its directors, executive
officers or underwriters, (ii) significant liquidity problems such as defaults on material indebtedness,
a "going concern" qualification by its accountants or recent insolvency proceedings, or (iii) a failure
to amend an Exchange Act report in accordance with a staff comment. We do not think such
disqualifications will materially improve the quality of disclosure. We are particularly concerned with
disqualifications for (i) action by an underwriter, (ii) actions by officers and directors unknown to
the issuer, (iii) liquidity problems of the sponsor which would not affect the special purpose vehicle,
or (iv) the lack of response to a staff comment based on a reasonable position taken in good faith.
E. Shelf. The SEC has questioned
whether delayed shelf offerings should be permitted. We strongly
believe that shelf registration or a similar process should be continued for the many high volume
issuers of ABS. The leading sponsors of ABS frequently issue ABS many times a month and
continuous, efficient access to the capital markets is essential to assuring low costs of mortgage
financing to homeowners. In addition, the preparation and filing of all information and exhibits
would be considerably more burdensome if done for each transaction rather than done upon the
filing of a shelf registration statement and supplemented for each takedown. Accordingly, we would
permit basic information about the sponsorís program, the operative agreements, opinions and
other exhibits to be either (i) filed in a shelf registration statement or (ii) filed with the SEC from time
to time at the issuerís election and incorporated by reference in a registration statement for a single
offering. Finally, we support the SECís proposal that registration fees be paid only upon an issuerís
request to proceed with a transaction instead of upon the filing of a shelf registration statement.
V. REGISTRATION STATEMENT
A. Registration Statement.
As proposed in the Release, an issuer could file a registration statement
Form B at any time prior to the first sale of registered securities. Under one proposal for Form B,
transactional information would be contained in a term sheet which would be included in the
prospectus. Under an alternative proposal, transactional information would consist of information
currently required by Form S-3 and would be contained in a traditional preliminary prospectus.
B. Contents of Registration
Statement. We support a flexible approach to a term sheet and other
of the registration statement. We believe issuers should be required to provide material transaction
information and use their judgment as to materiality.
Offering Information. We suggest including as offering information
in the prospectus for
ABS: (i) the amount and terms of the securities, (ii) who is selling the securities, (iii) the plan
of distribution, (iv) the method of determining the offering price, (v) the underwriterís
discounts and commissions and (vi) material risks and other information about the
transaction, including information about the assets, the servicer and any credit enhancer.
Information. The Release includes as offering information any written
and, at the
issuerís election, oral offering information disclosed by or on behalf of the issuer during the
offering period. We believe this requirement confuses the content of the registration
statement with other disclosure which should have different liability and filing requirements.
We support including in the registration statement information which is material to an investor
and within the unique knowledge of the issuer. We do not believe the issuer should be
required to include in the registration statement (i) the same information which is distributed
to prospective investors in a different format, (ii) other information distributed to prospective
investors which is not material to the offering or is not materially different from the
information included in the registration statement, or (iii) computational and other materials
which are not within the unique knowledge of the issuer.
Prospectus. We think the SEC should not require a prospectus for
market-making transactions involving secondary trading in ABS by a broker-dealer affiliated
with the issuer or the sponsor of the ABS or for resales by any other affiliates of the issuer or
the sponsor that did not purchase with a view to the distribution of the securities. However, if
the SEC determines that some form of market-making prospectus would be necessary, the
SEC should clarify that delivery of the prospectus filed at the time of the offering, plus a copy
of the most recent periodic report accompanying payments to investors, is sufficient.
C. Section 5 Violation for Improper Form. The
SEC proposes to eliminate the presumption that a
registration statement on Form B is on the proper form. Accordingly, if any element of eligibility for
the form were subsequently found lacking, an issuer and its underwriters would be in violation of
Section 5, and investors may be able to rescind the sale under Section 12(a)(1). For example, the
definition of ABS for use of Form S-3 states that the assets must by their terms convert into cash.
The SEC staff has interpreted this definition to mean that no more than a specified percentage of
the credit cards in a trust may be delinquent. Until the staffís pronouncement, practitioners had not
taken this position because the credit card holder is obligated to pay by the terms of the account
even if the holder has failed to do so. If the definition of ABS under Form S-3 had been used for
Form B, the issuer of any offering with credit card defaults exceeding a specified percentage
arguably would be subject to Section 5 liability. We believe such liability would be a severe penalty
for what could be a reasonable judgment made in good faith. We do not expect that the
presumption of a proper form is likely to result in abuse especially in light of the SECís intention to
screen registration statements. As an alternative proposal, the form for the offering could be
presumed to be correct, but an issuer using a form without a reasonable basis could be subject to
pre-sale SEC review for a future offering.
D. Staff Review Policy. We do not believe staff
review should be required prior to effectiveness on
Form B or the equivalent form for ABS. Staff review prior to effectiveness has frequently resulted
in uneven adoption of the staffís views. An issuer filing a new registration statement must comply
with staff articulated policies whereas an issuer which has sufficient shelf capacity may avoid such
policies. Participants in the industry have frequently expressed concern over the absence of a level
playing field and the absence of procedures for proposing and commenting on staff positions.
Eliminating staff review will mitigate these concerns. Staff positions could be taken by more formal
means such as interpretative releases.
E. Officers and Directors. The SEC proposes
to add a certification to Form B that the officers and
directors signing the registration statement have read it and do not know of any misstatement or
omission. Criminal liability could apply if the statement is false; i.e., the signer had not read the final
document. We believe such a certification is unrealistic in light of the time constraints for
preparation of documents involving the complex collateral and structures of ABS transactions,
could result in severe consequences and would not materially improve the quality of disclosure.
VI. DELIVERY AND FILING REQUIREMENTS
A. Delivery and Filing. The Release proposes
substantial changes regarding the delivery and filing of a
term sheet, free writing and the prospectus.
Sheet Prior to Sale. Under Form B, a document containing "transactional
would be required to be delivered to an investor before the date an investor makes a binding
investment decision. Currently, there is no comparable requirement mandating delivery of
any document for a large seasoned issuer prior to sale. In addition, the SEC staff has taken
the position in no action letters that an ABS transaction need not comply with Rule 15c2-8
under the Exchange Act which requires a broker or dealer in connection with an offering by
a first time issuer to deliver a copy of the preliminary prospectus at least 48 hours before
sending a confirmation.
Writing. Under the proposal, a Form B issuer would be able to communicate
time prior to or during an offering period. Free writing materials used after the
commencement of the offering period would be required to be filed when the registration
statement is filed. Free writing materials used after the filing of the registration statement
would be required to be filed upon use. Any free writing material (whether or not filed)
would be subject to Section 12(a)(2) liability.
Prospectus. The SEC proposes that no final prospectus would be required
delivered in connection with Form B offerings. The final prospectus would be required to be
filed with the SEC prior to transmission of confirmations and, if free writing materials are
used, prior to sale. Pricing information could be filed subsequently pursuant to Rule 430A.
Since an ABS issuer currently may file the prospectus supplement two business days after it
is sent with a confirmation, the proposed timing is at least two business days earlier if free
writing is not used and substantially earlier if free writing is used.
B. Insufficient Time to Prepare Lengthy Documents.
Although we agree with the SECís concern about
the need of investors to obtain adequate information, we believe the SECís approach requires
issuers to delay the speed of and disclosure for an offering or face severe liability. The gap between
the disclosure used to sell and the disclosure filed with the SEC has developed because of the
difficulty in preparing complex documents subject to high standards of liability while a transaction is
evolving. An ABS transaction typically involves multiple classes of complex cash flow securities
which are structured and modified from time to time to meet the requirements of various investors
and to reflect changes in the collateral.
C. Adequate Information. Nonetheless, an ABS
investor is able to make an investment decision based
on familiarity with transactions involving the same asset type, abbreviated information about the
assets and structure for the particular transaction, computational materials showing yield under
various assumptions, and the proposed rating by a rating agency of the securities. If this information
changes, a revised or expanded description is circulated reflecting the assets, structure or yield
analysis. Prior to settlement, the investor also has available the final prospectus base and
supplement describing the transaction.
D. Term Sheet. We would permit a preliminary
term sheet for ABS to be distributed to an investor
prior to the time of an investment decision. From time to time, the preliminary term sheet could be
revised to reflect different or additional terms, and any preliminary term sheet could be redistributed
to an investor. A final prospectus or prospectus supplement including a final term sheet would be
filed with the SEC prior to settlement. Each term sheet would contain a legend referring the investor
to the other information filed with the SEC, stating how such information could be obtained from
the SEC web site or the issuer, and stating the term sheet is qualified in its entirety by such other
E. Free Writing. Although we support
more flexibility in communicating with investors, we strongly
object to any filing requirements for computational materials and free writing. We also believe
certain definitions in the SECís proposal need clarification. For example, as proposed, factual
business communications and information filed as part of a registration statement would be
excluded from the filing requirement for free writing. However, factual business communications
would exclude information about the offering. Excluding information about the offering from the
definition of factual business communications is confusing since many factual business
communications could be considered pertinent to the assets subject to the offering. Moreover, the
distinction between a registration statement and free writing is confusing since offering information
required to be in the registration statement includes any offering information disclosed by the issuer
during the offering period. If the information is not required to be included in the registration
statement, it should be considered free writing, and it should not be required to be filed with the
F. Liability. The approach we recommend
would not require filing the preliminary term sheet,
computational materials or free writing with the SEC and would not result in liability for such
materials under Sections 11 and 12(a)(2). The filing requirements and consequent liability for
collateral and structural term sheets and computational materials described in the Kidder and PSA
no action letters have been strenuously objected to by issuers. We would create a safe harbor for
any preliminary and final term sheet, computational materials and free writing by providing that it
must be read in the context of other documents and an omission would not be deemed material if
the omitted information is included in other documents. The investor would have sufficient
protection because liability under Section 10(b) and Rule 10b-5 of the Exchange Act could be
imposed with respect to the preliminary term sheet, computational materials and free writing and the
usual liability for a prospectus could be imposed with respect to the final term sheet as part of the
prospectus. In addition, the investor would have any available remedies under state law if the terms
of the transaction are sufficiently unknown or revised after the sale occurs. By taking a balanced
approach to the standard of liability for ABS, the SEC is more likely to encourage a free flow of
communication which will benefit investors.
G. Computational Materials Safe Harbor.
To the extent any party is liable for computational materials,
we believe there should be a safe harbor adopted specifically for ABS comparable to the current
safe harbor for forward-looking statements under Section 27A of the Securities Act and Section
21E of the Exchange Act. Unfortunately, Sections 27A and 21E are limited to reporting companies
under the Exchange Act and exclude initial public offerings; these Sections pertain to
forward-looking statements such as projections; and these Sections do not clearly cover
mathematical calculations such as computational materials. In addition, we suggest that the safe
harbor provision confirm that a legend covering the following types of "warnings" would be
sufficient as a meaningful cautionary statement for computational materials: (i) the computational
materials are based on numerous assumptions about the collateral, prepayment speeds, interest
rates, losses and other factors and (ii) actual results may vary materially.
H. Prospectus. We support the SECís
proposal to require the delivery of a final prospectus only upon
an investorís request. Eliminating the delivery requirement would save substantial costs and ease an
administrative burden. We also support delivery of a prospectus in electronic form if such means of
transmission is acceptable to an investor requesting delivery. We do not support the proposal to
require earlier prospectus filings with the SEC.
VII. EXCHANGE ACT REPORTS
A. Exchange Act Proposals.
The SEC has proposed improving the quality and timeliness of
information in Exchange Act reports by: (i) expanding items of disclosure required to be reported
on Form 8-K; (ii) accelerating the deadlines for filing reports on Form 8-K; (iii) extending risk
factor disclosure to Exchange Act reports; (iv) drafting the risk factor and possibly all Exchange
Act reports in plain English; and (v) expanding the signatories and liability of the signatories for
Exchange Act reports.
B. Periodic Reports. Through
no action letters and other means, the SEC has recognized for many
years that financial statements and many other disclosure items in Exchange Act reports are not
relevant to ABS. Typically an ABS issuer satisfies any reporting requirement primarily by filing the
periodic reports to investors which are prepared in connection with payments to investors. These
reports generally include the amount of principal and interest being distributed to various classes,
loss and delinquency information about the assets, and the availability of any credit enhancement.
We believe the SECís current approach should be formally provided for in the new regulatory
C. No Risk Factors.
An ABS issuer should not be required to include risk factors in Exchange
reports. The essential risks, such as loss and delinquency of the assets and prepayment and interest
rate impact on yield, are disclosed at the time of the offering, and data relating to such risks are
disclosed in the periodic reports. A periodic discussion of risks would not be useful or feasible
because the issuer is a passive entity without an active management.
D. Deadlines. We believe
a filing requirement with respect to ABS issuers could be based on a
specified number of days after a periodic report is required to be distributed to investors. Special
deadlines for various events are not necessary because most events of significance to operating
companies have little significance to ABS transactions. For example, a change in personnel of the
sponsor would not concern investors in ABS. Other developments, such as a change in the servicer
or trustee, could be included in the periodic reports.
E. Plain English. The periodic
reports primarily provide numerical information. The reports do not
contain legal jargon.
F. Signatories. Increasing
the number of signatories and liability of the signatories does not improve
disclosure because the preparation of the periodic reports is an administrative function performed
by the servicer of the assets or the trustee for the transaction.
A. Section 11. As proposed
by the SEC, Section 11 liability would apply to all the information in
registration statement. Consistent with the views of many commentators, we believe that Section 11
liability currently does not apply to a prospectus supplement or Exchange Act reports incorporated
into a registration statement after its effective date.
B. Section 12(a)(2). As proposed
by the SEC, Section 12(a)(2) liability would apply to (i) free writing
materials used during the offering period including forward-looking information and (ii) factual
business communications made during the offering period to offer securities. We believe that liability
under Section 10(b) and Rule 10b-5 under the Exchange Act provides sufficient protection of
C. Term Sheet and Computational Materials.
In our view, only the final term sheet for ABS should be
subject to Section 11 and 12(a)(2) liability. Liability of the underwriter under Section 10(b) and
Rule 10b-5 for computational materials should be sufficient. As explained previously, safe harbors
should pertain to the ABS term sheet and computational materials.
D. Sections 5 and 12(a)(1). As
proposed by the SEC, the form of the registration statement would not
be presumed to be correct. Violations under Section 5 of the Securities Act, and the resulting
availability of rescission rights to investors under Section 12(a)(1) of that Act, may arise if the
registration is not on the proper form or the registration statement does not contain required
information. We believe the presumptive form rule should remain applicable.
E. Signatories. The additional
signatories to the registration statement and Exchange Act reports and
the certification requirement imposed on signatories may result in additional liability of officers and
directors. As explained previously, we believe that these requirements would produce an
inequitable result for ABS participants and would not improve the quality of disclosure for ABS.
F. Underwriterís Due Diligence.
We are not commenting directly on the proposals for underwriterís
due diligence because these proposals generally would not apply to ABS. However, we caution
that a procedure should not be encouraged as an indication of due diligence unless the SEC
reasonably believes that the procedure materially adds to the quality of disclosure. Otherwise
issuers may bear the expense of such procedure without a corresponding benefit to investors.
A. Further Discussion. We commend
the SEC for its goal of providing a comprehensive approach to
ABS which facilitates access to the capital markets in a manner that protects investors. The MBA
is available to meet with the SEC and the staff and to discuss any questions or comments.
B. Contact. For questions
concerning the matters discussed herein, please contact Starr L. Tomczak
at LeBoeuf, Lamb, Greene & MacRae, L.L.P. Her telephone number is (212) 424-8444; her
telecopy number is (212) 424-8500; and her e-mail is STomczak@LLGM.com.