Securities Act Registration
The registration form for publicly-sold ABS is Form S-3, a form that allows for "shelf-registration."
Shelf registration allows an issuer to issue multiple series of the same type of securities by registering on a
shelf registration basis, where the full registration process is only completed once by the issuer, and subsequent
registration are avoided for each individual transaction. The new ABS Rules are concerned with two topics: the
definition of an "asset-backed security," and eligibility to use Form S-3 for shelf registration.
Definition of "asset-backed security"
Form S-3 may be used for shelf registration for all investment-grade securities that comply with the SEC's
definition of an "asset-backed security." The changes that the SEC will make to the definition include:
Lease-backed securities will now be a part of the definition for "asset-backed security." The SEC wants to limit the amount of cash used to reimburse the lease-backed securities which will stem from the remaining value of a physical property. The addition to the definition of "asset-backed security" is that the remaining value will not exceed 50% (or, in the case of automobile leases, 60%) in dollars of the original asset pool. To be able to use Form S-3 for shelf registration, the amount cannot exceed 20% (or, for automobiles, 60%) of the original asset pool.
Currently, the definition of "asset-backed security" excludes synthetic securitizations, which often concern credit default swap or total return swap in order to expose an asset not included in the original pool. The SEC contends that "asset-backed security," by definition, should only focus on those securities payments that stem from the performance of a pool of assets, and not by assets lying outside of the original pool. This new definition will ultimately stop the growth of public markets centered on synthetic securitizations, and regulate them under Rule 144A, Regulation S and private market participation.
Delinquent and Non-Performing Assets
Non-performing assets may not be included in the original pool when an "asset-backed security" is issued. The SEC clearly states that non-performing assets are essentially a pool asset that is a transactional charge-off, or meets the charge-off policies of a sponsor. Further, the SEC decided on their no-action position in regard to delinquent assets. Under the "asset-backed security" definition, delinquent assets cannot be comprised of more than 50% of the original asset pool; for eligibility to use Form S-3, the delinquent assets cannot be comprised of more than 20% of the original pool. An asset is thus delinquent if payment is more than 30 days past-due.
Any security issued in a master trust structure will meet the definition of "asset-backed security" under the new rules.
A security with a prefunding period qualifies under the definition of "asset-backed security," if it adheres to the following conditions:
* Up to 25% of the offering proceeds may be used for subsequent purchases for Form S-3 eligibility; and,
* The length of the prefunding period may not last longer than a year.
A 50% threshold over the course of a year also applies under the definition of "asset-backed security."
The SEC has also added securities with revolving periods to the definition of "asset-backed security," with the applicable rule depending on the asset type that backs the "asset-backed security." There is no limit on the quantity of assets or revolving period duration for revolving assets such as credit cards and home equity lines of credit; however, in the case of fixed receivables, such as mortgage loans and auto loans, then the thresholds created for prefunding periods will apply (additional assets during the revolving period can constitute 50% of proceeds annually, and only 25% in order for Form S-3 eligibility).
Securities act registration statement
In the event a depositor, using an eligible Form S-3 registration statement, fails to file under the Exchange Act in time, then that depositor is prevented from filing a new Form S-3 registration statement for additional securities until one year after the failed filing. Currently, a financial institution with a non-compliant depositor can sidestep this rule by setting up a new depositor entity with a clean reporting history and filing a fresh registration statement. The SEC is closing this loophole by requiring that both depositor and sponsor (a person who organizes and initiates an asset-backed securities transaction by selling or transferring assets, either directly or indirectly, including through an affiliate or issuing company) should be compliant for at least 12 months under the Exchange Act.
Form S-3 can be used to register "asset-backed securities" that are from a foreign source, backed by foreign assets, or affected by credit enhancement from a foreign entity. The registration must include applicable legal, tax and any factors that affect the payments or performance of the assets in the original pool, or else Form S-3 eligibility will not pertain.
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