SEC Final Rule -- Securitizations under Section 943 of the Dodd-Frank Act

SEC Final Rule -- Securitizations under Section 943 of the Dodd-Frank Act

by Howard M. Goldwasser, Lloyd H. Johnson, and Drew A. Malakoff

Excerpt:

On January 20, 2011, the Securities and Exchange Commission (the "SEC") published a final rule under the Securities Act of 1933 (the "Securities Act") to set requirements for due diligence procedures and disclosure in asset-backed securities offerings. This rule is designed to implement Section 943 of the Dodd-Frank Act.

The new rule, Securities Act Rule 193 ("Rule 193"), requires issuers of publicly offered asset-backed securities ("ABS") to "perform a review of the pool assets underlying the asset-backed security." In conjunction with Rule 193, the SEC has amended Item 1111 of Regulation AB ("Item 1111") to require that issuers also disclose the nature of the review of the assets, the "findings and conclusions" of the review and information regarding the amount and characteristics of assets that deviate from the underwriting criteria.

The Final Rule is effective as of March 28, 2011, but only registered offerings of ABS commencing with an initial bona fide offer after December 31, 2011 must comply with the Final Rule.

Differences Between the Final Rule and the Proposed Rules

The Final Rule differs from the SEC's original proposal in three important respects.

First, the SEC has implemented a minimum standard of review for an issuer's ABS, which was discussed but not proposed in the Proposed Rules.

Second, a third party reviewer of an issuer's ABS pool assets may now avoid expert liability if the issuer adopts the findings and conclusions of the third party's review as its own. The SEC modified disclosure rules under Regulation AB to require issuers to describe the criteria that are used to select assets, the instances where non-complying assets are selected for the asset pool, and the entity that made such selection.

Third, the SEC has postponed promulgation of a provision that would have required issuers or underwriters of ABS to make publicly available the findings and conclusions of third party due diligence reports.[footnotes omitted]

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Howard M. Goldwasser is a partner in K&L Gates LLP''s New York office. He has more than 18 years of experience advising major U.S. and European investment and commercial banks, hedge funds and private equity funds, investment managers, and investors.

Lloyd H. Johnson and Drew A. Malakoff are associates at K&L Gates LLP.