On July 16, 2019, the Federal Deposit Insurance Corporation (the “FDIC”) proposed changes to certain provisions of its securitization safe harbor rule (the “Rule”), which relates to the treatment of financial assets transferred in connection with a securitization or participation transaction. 12 C.F.R. § 360.6. The proposed rule (“Proposed Change”) would eliminate the requirement that the securitization documents require compliance with Regulation AB of the Securities and Exchange Commission (“SEC”), 17 C.F.R. §§ 229.1100 et. seq. (“Regulation AB”), in circumstances where Regulation AB by its terms would not apply to the issuance of obligations backed by such financial assets. This proposed change would modify section 360.6(b)(2)(i)(A) of the Rule to read as follows:
In the case of an issuance of obligations that is subject to Regulation AB of the Securities and Exchange Commission (17 C.F.R. 229.1100 et. seq.) as in effect from time to time (Regulation AB) or any successor disclosure requirements applicable to the issuance of obligations, the documents shall require that, on or prior to issuance of obligations and at the time of delivery of any periodic distribution report and, in any event, at least once per calendar quarter, while obligations are outstanding, information about the obligations and the securitized financial assets shall be disclosed to all potential investors at the financial asset or pool level, as appropriate for the financial assets, and security-level to enable evaluation and analysis of the credit risk and performance of the obligations and financial assets. The documents shall require that such information and its disclosure, at a minimum, shall comply with the requirements of Regulation AB or any successor disclosure requirements applicable to the issuance of obligations. Information that is unknown or not available to the sponsor or the issuer after reasonable investigation maybe omitted if the issuer includes a statement in the offering documents disclosing that the specific information is otherwise unavailable
The proposed change would eliminate the Reg AB disclosure requirement for bank-sponsored 144A and other private securitizations relying on the Rule.
One of the most difficult issues for banks who wish to rely on the Rule for a 144A or private securitization has been the requirement to provide the same disclosure to investors that would be required in a public offering under Regulation AB. For securitizations of mortgages and retail auto loans and leases, this has also meant, among other things, providing asset-level data to investors in accordance with Reg AB requirements. Many banks have not made the investments in their systems to be able to provide asset-level data under the Reg AB requirements. This requirement has discouraged some insured depository institutions from sponsoring securitizations that rely on compliance with the Rule.
If the proposed change is adopted, this could result in an increase in the amount of bank-sponsored ABS and MBS. This proposed change would mean that, unlike under the Rule as currently in effect, the documents governing a private placement or an issuance not otherwise required to be registered would not be required to mandate compliance with Regulation AB.
The Proposed Change was issued in response to feedback from insured depository institution indicating that it is difficult for institutions to comply with Regulation AB as applied to certain types of securitization transactions, including residential mortgage securitizations. While the SEC has not applied the Regulation AB disclosure requirements to private placement transactions, the Rule has required (except for certain grandfathered transactions) that these disclosures be required as a condition for eligibility for insured depository institutions to receive the Rule’s benefits. In certain circumstances, this requirement has discouraged insured depository institutions from sponsoring securitizations that are compliant with the Rule.
While the Rule’s requirement that documents governing a private securitization require compliance with the disclosure requirements of Regulation AB differs from the requirements of Regulation AB as adopted by the SEC in 2014, the requirement was consistent with an earlier proposal for Regulation AB, which was pending when the FDIC adopted the Rule and proposed that investors in “structured finance products” be entitled to request and receive the information that would be required by Regulation AB in a public transaction. Subsequently, the SEC finalized Regulation AB to apply only to public offerings. This fact is one of the reasons that the FDIC is now proposing changes to the Rule that would align its disclosure requirements with Regulation AB.
The Rule also imposes a number of additional requirements on insured depository institutions, which are not affected by the Proposed Change and would remain in effect if the proposal is adopted.
Comments must be received by the FDIC within sixty days of publication of the Proposed Change in the Federal Register.
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