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On August 27, 2014, the Securities and Exchange Commission adopted the final version of revisions to its Regulation AB, in so-called Reg AB II. With a tiered effective date of November 23, 2015 for new Forms 10-D and 10-K, and a more granular loan-level disclosure schedule (in xml format) due after November 23, 2016, compliance has been evolving very slowly.
As we conclude the first year of loan-level disclosure in xml format for the new Schedule AL items (for every issuer of publicly-registered residential mortgage PLS), most issuers are simply complying with the xml format requirement. Such a lukewarm embrace of the new regulations may be because issuers have been inundated with the requirement to track as many as 270 data points for each underlying residential mortgage (imagine gathering and tagging and tracking and disclosing – on an ongoing basis – roughly 1.35 million facts in a trust with 5,000 loans…for the life of the loans).
The RMBS issuer may just want to comply with minimum game requirements (in the simple, agency-loan space), before moving on to the more exotic loans that private label securitization will bring. So, a simple “save as xml” approach has been the norm this year, according to the SEC. As investors look for higher yield opportunities and the PLS market gets progressively more active, the ability to examine the performance of underlying loans in securitized trusts will become more essential to investment decisions, and so we might see more creative presentation styles in annual and periodic reports (and especially in the attached schedules with all that extra data.). While the SEC has not said it has finished with Reg AB, issuers are calling for a halt to more rules in the AB arena.
The Treasury Department may have had enough disclosure as well. As Treasury mentioned in its recent Report on Capital Markets Regulatory Reform (dated October 6, 2017), the SEC should indicate it will not further extend Reg AB to apply to additional asset classes beyond the first five, nor to unregistered offerings under Rule 144A. Issuers have been pummeled with enough paint points for now, and perhaps standing back to see what images clearly emerge is the best approach to balance policy objectives and stimulate investment in these markets.
The first phase of Regulation AB was originally adopted in 2004. Reg AB represents the SEC’s comprehensive set of regulations related to registration, disclosure and reporting for publicly offered, asset backed securities (as defined in Regulation AB, rather than the broader definition of “asset backed securities” in the 1934 Exchange Act, as amended by the Dodd-Frank Act. Accordingly, Reg AB exempts from its structure any managed pools of assets, and omits any transactions exempt from registration via Rule 144A or otherwise.). As mentioned above, RMBS disclosure involves 270 data points for each loan. Similar tracking of applicable data points related to income stream, collateral, performance, and loss mitigation is also required when the underlying asset classes are commercial mortgages, auto loans or leases, and any re-packs of ABS that include these 4 types.
For now, minimal disclosure obligations require issuers of non-government backed loans to comply with the following new requirements:
Notably, the SEC did not include in the final rule any previously proposed provisions related to: Rule 144A offerings, separate issuer-hosted websites, waterfall computer programs for investor analysis, asset-level data disclosure for more than the 5 classes specified, data filings on Form 8-K for 1% or greater changes in asset pool since ABS issuance, final agreements to be filed as exhibits with the preliminary prospectus filing, and several provisions related to non-revolving assets (including duration and whether master-trust status might apply to specific types of assets).
After such an extended roll-out – over ten years from its proposal date – Reg AB appears to carefully weigh disclosure to both encourage ABS markets and guard against the opaque disclosure concerns of the recent housing market crisis. As the market for PLS heats up, this robust disclosure scheme should provide a clearer picture of the underlying assets, and permit the savvy investor to inform herself and then profit from her homework.