by Calvin Z. Cheng, Melissa D. Beck, Kenneth
E. Kohler and Jerry R. Marlatt
Recent weeks have seen a number
of legal, regulatory and political developments in the realm of asset
securitization, culminating for the moment on September 27 with the issuance by
the FDIC of a long-awaited "safe harbor" rule specifying the
conditions under which U.S. banks and thrifts may issue mortgage-backed and
other asset-backed securities without the threat that the FDIC will attempt to
unwind the transaction in the event of the issuer's seizure by the FDIC.
Below we offer a summary of the FDIC's final safe harbor rule. We leave it to
the reader to reach her or his own assessment of where the securitization
market is, where it is headed, and at what speed.
What Now? FDIC's Final Safe Harbor Restrains
They said they were going to do it-and now, some critics say, "they've
really done it."
On September 27, 2010, the Board of Directors of the Federal Deposit Insurance
Corporation ("FDIC") resolved by a four-to-one vote to issue a final
rule amending 12 C.F.R. § 360.6 (the "Securitization Rule") relating
to the FDIC's treatment, as conservator or receiver, of financial assets
transferred by an insured depository institution ("IDI") in
connection with a securitization or participation. Although initially
prompted by the need to address changes to accounting standards on which the original
Securitization Rule, adopted in 2000, was premised, the FDIC capitalized on the
opportunity to address at the same time perceived structural failures inherent
in the "originate to sell" securitization model widely believed to
have contributed to the recent financial meltdown. As adopted, the Final Rule
contains a number of reform-oriented qualitative conditions that
securitizations must satisfy in order to be afforded safe harbor protections
under the rule.
The Final Rule was issued a little more than two months after the enactment of
the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act (the
"Dodd-Frank Act"). The Dodd-Frank Act mandates a host of
securitization "reforms," including requirements relating to risk
retention, asset class differentiation, disclosure, conflicts of interest and
due diligence, which are to be "fleshed out" and implemented through
an interagency rulemaking process. Truly ahead of the game with the issuance
of the Final Rule, the FDIC adopted securitization reforms before the Office of
the Comptroller of the Currency ("OCC"), the Board of Governors of
the Federal Reserve System, and the Securities and Exchange Commission (the
"SEC"), the other regulatory agencies charged with adopting
regulations to implement the securitization reforms prescribed by the
Dodd-Frank Act. Notably, the Final Rule was issued prior to the SEC's issuance
of final rules ("Regulation AB II") that would significantly modify
Regulation AB, the SEC's rule governing registration of and disclosures
regarding asset-backed securities, by imposing qualitative standards and
additional disclosure requirements on asset-backed securitizations.
The FDIC originally adopted the Securitization Rule in 2000 to provide comfort
that loans or other financial assets transferred by an IDI into a
securitization trust or participation would be "legally isolated"
from an FDIC conservatorship or receivership if, among other requirements, the
transfer met all conditions for sale accounting treatment under generally
accepted accounting principles ("GAAP").
The Securitization Rule fulfilled two important functions. First, it satisfied
a technical requirement of Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("FAS 140"), not uncoincidentally
adopted by the Financial Accounting Standards Board (the "FASB") at
the same time the original Securitization Rule was adopted by the FDIC, that
accountants have a reasonable basis for concluding that securitized assets have
been legally isolated from the sponsor. Second, quite apart from the technical
accounting purpose, the Securitization Rule has provided investors and credit
rating agencies with substantive comfort that securitized assets will not be
reclaimed by the FDIC in conservatorship or receivership of an IDI sponsor.
Securitization participants have thus relied for a decade on the Securitization
Rule as a safe harbor for assurance that investors could satisfy payment obligations
from securitized assets without fear that the FDIC might interfere as
conservator or receiver.
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Calvin Z. Cheng is a
Corporate Group associate based in Morrison & Foerster's Los Angeles
office. Mr. Cheng has advised U.S. and China-based companies, venture capital
funds, investment banks, and REITs on a wide variety of matters, including
private equity and debt financings, mergers and acquisitions, public offerings,
periodic reporting under the Securities Exchange Act of 1934, compliance with
SEC, NYSE, and NASDAQ rules and regulations, general corporate law matters, and
real estate transactions. Mr. Cheng practiced in the firm's Beijing office from
2006 to 2007 and continues to work closely with the firm's China offices on
cross-border transactional matters. Mr. Cheng received his B.A. with Academic
Honors and General Distinction from the University of California at Berkeley
and his J.D. from the University of California, Los Angeles (UCLA) School of
Law, where he served as Articles Editor for the Asian Pacific American Law
D. Beck is an associate in the Capital Markets Group of the New York office of
Morrison & Foerster. Ms. Beck's practice is focused on the insurance
industry, where she specializes in the life settlement sector. She has advised
clients on the establishment of proprietary programs, the drafting of
transaction documents, the development of policies and procedures, and the
oversight of ongoing operations, including state licensing filings, and has
performed audits on third-party providers for clients. Ms. Beck has experience
in catastrophe bonds, sidecars, and CDO and CLO transactions. She has used her
insurance regulatory knowledge to assist in M&A and litigation projects.
Kenneth E. Kohler is senior of counsel at Morrison & Foerster LLP.
Mr. Kohler's practice involves a broad range of corporate and capital markets
work, including public offerings and private placements of equity and debt
securities, mergers and acquisitions of public and private companies, and
disclosure and reporting matters under the federal securities laws.
Jerry R. Marlatt is senior of counsel at Morrison & Foerster LLP.
Mr. Marlatt specializes in corporate finance with a focus on structured capital
markets. He represents issuers, underwriters and placement agents in covered
bonds, surplus notes, structuring investment and specialized operating
vehicles, insolvency restructuring of such vehicles, securities repackagings
and public offerings and private placements of asset-backed securities in
domestic and foreign capital markets. Representative transactions involve the
first covered bond by a US financial institution, the first covered bond
program for a Canadian bank, surplus notes and common stock for a US monoline
insurance company, eurobond offerings by US issuers and a variety of structured
vehicles, including CBOs, SIVs, CDOs, derivative product companies, ABCP
conduits and credit-linked investments.