THE MORTGAGE BANKERS ASSOCIATION OF AMERICA
COMMENTS ON AIRCRAFT CARRIER RELEASE
I. INTRODUCTION
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.
I.
Introduction
II.
Executive Summary
III. Characteristics
of ABS Market
IV. Form
B Issuer
V.
Registration Statement
VI. Delivery
and Filing Requirements
VII. Exchange
Act Reports
VIII. Liability
IX. Conclusion
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 SEC’s
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 SEC’s 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:
1.
Registration
Statement. The registration statement including the prospectus would
include
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.
2.
Term
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.
3.
Computational
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.
4.
Safe
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
statements."
5.
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
requirements.
1.
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.
2.
Safeguards for Investment Decision. We believe that our proposal
provides sufficient
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
be prepared.
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 issuer’s registration
statement.
IV. FORM B ISSUER
A. Form B. Under the SEC’s 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 SEC’s proposal, an issuer generally will qualify
for
Form B if, among other things,
the following standards are satisfied:
1. Reporting
History. The issuer has a one-year reporting history under the Exchange
Act
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
2. Investment
Grade. The offering pertains to non-convertible investment grade securities
and a
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
3. Prior
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:
1. No
Reporting History. An ABS issuer typically would not meet the reporting
requirements
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.
2. Investment
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.
3. QIB
or IAI. We would permit eligibility for Form B if all the publicly
offered non-investment
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
publicly offered.
4. Prior
Form. We do not believe SEC review should be required for ABS which
are either
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:
1. ABS
under Current Form S-3. The offering pertains to ABS defined in a manner
similar to
the definition in the instructions to Form S-3; and
2. Investment
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.
3. Market
Making. In addition, if the registration and prospectus delivery requirements
are
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
B.
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 sponsor’s 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
issuer’s election and incorporated by reference in a registration statement
for a single
offering. Finally,
we support the SEC’s proposal that registration fees be paid only upon
an issuer’s
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
on
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
parts
of the
registration statement. We believe issuers should be required to provide
material transaction
information
and use their judgment as to materiality.
1. ABS
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 underwriter’s
discounts and commissions and (vi) material risks and other information
about the
transaction, including information about the assets, the servicer and any
credit enhancer.
2. Other
Information. The Release includes as offering information any written
and, at the
issuer’s 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.
3. Market-Making
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 staff’s 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 SEC’s 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
staff’s 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.
1. Term
Sheet Prior to Sale. Under Form B, a document containing "transactional
information"
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.
2. Free
Writing. Under the proposal, a Form B issuer would be able to communicate
at any
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.
3. Final
Prospectus. The SEC proposes that no final prospectus would be required
to be
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 SEC’s concern about
the need of investors to
obtain adequate information, we believe the SEC’s 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
information.
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 SEC’s 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
SEC.
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 SEC’s
proposal to require the delivery of a final prospectus only upon
an investor’s
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
SEC’s current approach should be formally provided for in the new regulatory
system.
C. No Risk Factors.
An ABS issuer should not be required to include risk factors in Exchange
Act
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.
VIII. LIABILITY
A. Section 11. As proposed
by the SEC, Section 11 liability would apply to all the information in
the
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
investors.
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. Underwriter’s Due Diligence.
We are not commenting directly on the proposals for underwriter’s
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.
IX. CONCLUSION
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.