As the third week of the US government shutdown comes to a close with no apparent end in sight, we note that the effects are being felt even in the asset-backed securities market.
SEC Registration Process
Only essential employees—approximately 6 percent of the overall workforce—are working at the US Securities and Exchange Commission (“SEC”). The staff members that remain are focusing their attention on “emergency situations involving market integrity and investor protection,” according to the SEC’s website.1 Although the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) is available for document submissions and the generation of online access codes, staff are not available to review and accelerate the effectiveness of registration statements, review periodic reports or provide other non-emergency support. As a result, the registration process for new offerings of securities, including asset-backed securities issued pursuant to shelf registration statements, has stalled as market participants wait on SEC feedback.
Section 8(a) of the Securities Act of 1933, as amended (“‘33 Act”) provides that a registration statement becomes effective on the 20th day after filing, if not declared effective earlier by the SEC. It is customary in both the securitization and corporate markets for issuers to incorporate a delaying legend on the cover of registration statements, stating that the registration statement will not be effective until the registrant files a further amendment specifically stating that the registration statement shall become effective as provided in Section 8(a) (i.e., on the 20th day after filing) or on such date as determined by the SEC. Some issuers are considering submitting new registration statements without the delaying legend or filing amendments to pending registration statements stating that the amendment will become effective as provided in Section 8(a), as applicable, thus enabling those registration statements to become effective automatically 20 days after submission. Issuers should be aware that if the shutdown ends, the SEC may request that an issuer amend the registration statement to include a delaying amendment.
Issuers with existing effective shelf registration statements may have another available option to issue securities during the continuing government shutdown, even if the registrant’s shelf expires before its next shelf is declared effective. Shelf registration statements typically expire three years after they are declared effective. However, Section (a)(5) of Rule 415 of the ‘33 Act permits securities to continue to be sold under the previous shelf registration statement for an additional 180 days after the expiration of the three-year period if, prior to such expiry date, the provisions of Section (a)(6) of Rule 415 have been followed and a new registration statement has been filed with the SEC.
Tax Identification Numbers
In a typical securitization structure, asset-backed securities are offered by a special purpose entity (“SPE”) established solely for the securities issuance. As with any newly formed entity, the SPE must obtain an Employer Identification Number (“EIN”) from the Internal Revenue Service (“IRS”). However, like the SEC, the IRS is operating a skeleton crew during the shutdown, causing delays in obtaining, or an inability to obtain, EINs. Although EINs can be obtained through the IRS’s online service, we understand that the service is experiencing delays, and if it is necessary to contact the IRS to complete the process, issuers should expect to be unable to do so.
The consequences of being unable to obtain an EIN for an SPE include, among other things, potential inability to (a) complete required SEC filings; (b) satisfy “Know Your Customer” regulations to open bank accounts or engage third-party trustees or underwriters; and (c) obtain, if required, a sales finance company license in certain states. Not being able to complete these operational tasks may complicate the execution of a securitization transaction. In some cases, the corporate sponsor may be able to repurpose an existing inactive entity that has been assigned an EIN for use as the securitization SPE.
1 The SEC website provides questions and answers concerning Division of Corporation Finance actions during the government shutdown at: https://www.sec.gov/page/corpfin-section-landing.