Asset-Backed Securities

Federal RegisterJan 7, 2005

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 228, 229, 230, 232, 239, 240, 242, 245 and 249

[Release Nos. 33-8518; 34-50905; File No. S7-21-04]

RIN 3235-AF74

Asset-Backed Securities

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule; request for comment.

SUMMARY:

We are adopting new and amended rules and forms to address comprehensively the registration, disclosure and reporting requirements for asset-backed securities under the Securities Act of 1933 and the Securities Exchange Act of 1934. The final rules and forms accomplish the following: update and clarify the Securities Act registration requirements for asset-backed securities offerings, including expanding the types of asset-backed securities that may be offered in delayed primary offerings on Form S-3; consolidate and codify existing interpretive positions that allow modified Exchange Act reporting that is more tailored and relevant to asset-backed securities; provide tailored disclosure guidance and requirements for Securities Act and Exchange Act filings involving asset-backed securities; and streamline and codify existing interpretive positions that permit the use of written communications in a registered offering of asset-backed securities in addition to the statutory registration statement prospectus. We also request additional comment regarding the appropriate treatment of certain structured securities that do not meet our definition of “asset-backed security.”

DATES:

Effective Date:

March 8, 2005.

Comment Date:

Comments regarding the request for comment in Section III.A.2.a. of this document and the Form 12b-25 “collection of information” requirement, within the meaning of the Paperwork Reduction Act of 1995, should be received on or before March 8, 2005.

Compliance Dates:

Any registered offering of asset-backed securities commencing with an initial bona fide offer after December 31, 2005, and the asset-backed securities that are the subject of that registered offering, must comply with the new rules and forms. For any such offerings that rely on Securities Act Rule 415(a)(1)(x), Securities Act registration statements filed after August 31, 2005 related to such offerings must be pre-effectively or post-effectively amended, as applicable, to make the prospectus included in Part I of the registration statement compliant and to make any required undertakings or other changes for Part II of the registration statement. For Securities Act registration statements that were filed on or before August 31, 2005, the prospectus and prospectus supplement, taken together, relating to such offerings that rely on Rule 415(a)(1)(x) must comply, provided, that, (1) the Securities Act registration statement will need to be post-effectively amended if any new undertakings are required to be made with respect to such offerings in Part II of the registration statement; and (2) the Securities Act registration statement will need to be post-effectively amended to make the prospectus included in Part I of the registration statement compliant, as well as to make changes, if any, to Part II of the registration statement with respect to any registered offering of asset-backed securities under such registration statement commencing with an initial bona fide offer after March 31, 2006.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (

http://www.sec.gov/rules/final.shtml

); or

• Send an e-mail to

rule-comments@sec.gov.

Please include File Number S7-21-04 on the subject line; or

• Use the Federal eRulemaking Portal (

http://www.regulations.gov

). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.

All submissions should refer to File Number S7-21-04. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (

http://www.sec.gov/rules/final.shtml

). Comments are also available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, NW., Washington, DC 20549. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:

Jeffrey J. Minton, Special Counsel, or Jennifer G. Williams, Attorney-Advisor, at (202) 942-2910, in the Office of Rulemaking, Division of Corporation Finance, U.S. Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

We are adopting: amendments to Rules 1-02, 2-01, 2-02 and 2-07

of Regulation S-X

under the Securities Act of 1933 (the “Securities Act”);

amendments to Items 10, 308, 401 and 406

of Regulation S-B

under the Securities Act; amendments to Items 10, 202, 308, 401, 406, 501, 503, 512, 601 and 701

of Regulation S-K

under the Securities Act; a new subpart of Regulation S-K, the 1100 series (“Regulation AB”);

amendments to Rules 411 and 434

under the Securities Act; new Rules 139a, 167, 190, 191 and 426

under the Securities Act; amendments to Rule 311

of Regulation S-T;

new Rule 312

of Regulation S-T; amendments to Forms S-1, S-2, S-3, S-11, F-1, F-2 and F-3

under the Securities Act; amendments to Rules 10A-3, 12b-2, 12b-15, 12b-25, 13a-10, 13a-11, 13a-13, 13a-14, 13a-15, 13a-16, 15c2-8, 15d-10, 15d-11, 15d-13, 15d-14, 15d-15 and 15d-16

under the Securities Exchange Act of 1934 (the “Exchange Act”);

new Rules 3a12-12, 3b-19, 13a-17, 13a-18, 15d-17, 15d-18, 15d-22 and 15d-23

under the Exchange

Act; amendments to Rule 100

of Regulation M

under the Exchange Act; amendments to Rule 101

of Regulation BTR

under the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);

amendments to Forms 20-F, 40-F, 8-K, 10-K, 10-KSB and 12b-25

under the Exchange Act; and new Form 10-D

under the Exchange Act.

17 CFR 210.1-02; 17 CFR 210.2-01; 17 CFR 210.2-02; and 17 CFR 210.2-07.

17 CFR 210.1-01

et seq.

15 U.S.C. 77a

et seq.

17 CFR 228.10; 17 CFR 228.308; 17 CFR 228.401; and 17 CFR 228.406.

17 CFR 228.10

et seq.

17 CFR 229.10; 17 CFR 229.202; 17 CFR 229.308; 17 CFR 229.401; 17 CFR 229.406; 17 CFR 229.501; 17 CFR 229.503; 17 CFR 229.512; 17 CFR 229.601; and 17 CFR 229.701.

17 CFR 229.10

et seq.

17 CFR 229.1100 through 1123.

17 CFR 230.411 and 17 CFR 230.434.

17 CFR 230.139a; 17 CFR 230.167; 17 CFR 230.190; 17 CFR 230.191; and 17 CFR 230.426.

17 CFR 232.311.

17 CFR 232.10

et seq.

17 CFR 232.312.

17 CFR 239.11; 17 CFR 239.12; 17 CFR 239.13; 17 CFR 239.18; 17 CFR 239.31; 17 CFR 239.32; and 17 CFR 239.33.

17 CFR 240.10A-3; 17 CFR 240.12b-2; 17 CFR 240.12b-15; 17 CFR 240.12b-25; 17 CFR 240.13a-10; 17 CFR 240.13a-11; 17 CFR 240.13a-13; 17 CFR 240.13a-14; 17 CFR 240.13a-15; 17 CFR 240.13a-16; 17 CFR 240.15c2-8; 17 CFR 240.15d-10; 17 CFR 240.15d-11; 17 CFR 240.15d-13; 17 CFR 240.15d-14; 17 CFR 240.15d-15; and 17 CFR 240.15d-16.

15 U.S.C. 78a

et seq.

17 CFR 240.3a12-12; 17 CFR 240.3b-19; 17 CFR 240.13a-17; 17 CFR 240.13a-18; 17 CFR 240.15d-17; 17 CFR 240.15d-18; 17 CFR 240.15d-22; and 17 CFR 240.15d-23.

17 CFR 242.100.

17 CFR 242.100 through 105.

17 CFR 245.101.

17 CFR 245.101 through 104.

15 U.S.C. 7201

et seq.

17 CFR 249.220f; 17 CFR 249.240f; 17 CFR 249.308; 17 CFR 249.310; 17 CFR 249.310b; and 17 CFR 249.322.

17 CFR 249.312.

Table of Contents

I. Overview

A. What are Asset-Backed Securities?

B. Securities Act Registration

C. Disclosure

D. Communications During the Offering Process

E. Ongoing Reporting Under the Exchange Act

F. Other Miscellaneous Amendments

II. Background and Development of ABS and Regulatory Treatment

III. Discussion of the Amendments

A. Securities Act Registration

1. Current Requirements

2. Definition of Asset-Backed Security

a. Approach and Supplemental Request for Comment for Other Structured Securities

b. Basic Definition

c. Nature of the Issuing Entity

d. Delinquent and Non-Performing Pool Assets

e. Lease-Backed Securitizations and Residual Values

f. Exceptions to the “Discrete” Requirement

3. Securities Act Registration Statements

a. Form Types

b. Presentation of Disclosure in Base Prospectuses and Prospectus Supplements

c. Form S-3 Eligibility Requirements for ABS

d. Determining the “Issuer” and Required Signatures

4. Foreign ABS

5. Exclusion From Exchange Act Rule 15c2-8(b) for Form S-3 ABS

6. Registration of Underlying Pool Assets

a. Current Requirements

b. When Registration Is Required

c. Exceptions From Disclosure and Delivery Conditions and Form S-3 Eligibility Requirements

7. Market-Making Transactions

B. Disclosure

1. Regulation AB

2. Forepart of Registration Statement and Prospectus

3. Transaction Parties

a. Sponsor

b. Depositor

c. Issuing Entity and Transfer of Asset Pool

d. Servicers

e. Trustees

f. Originators

g. Other Transaction Parties and Scope of Disclosure

4. Static Pool Information

a. Disclosure Required

b. Method of Presentation

5. Pool Assets

a. Pool Composition

b. Sources of Pool Cash Flow

c. Changes to the Asset Pool

d. Rights and Claims Regarding the Pool Assets

6. Transaction Structure

7. Significant Obligors

8. Credit Enhancement and Other Support

9. Other Basic Disclosure Items

a. Tax Matters

b. Legal Proceedings

c. Affiliations and Certain Relationships and Related Transactions

d. Ratings

e. Reports and Additional Information

10. Alternatives to Present Third Party Financial Information

a. Incorporation by Reference

b. Reference Information

C. Communications During the Offering Process

1. ABS Informational and Computational Material

a. Current Requirements

b. Exemptive Rule

c. Definition of ABS Informational and Computational Material

d. Conditions for Use

e. Filing Requirements

2. Research Reports

a. Current Requirements

b. ABS Research Report Safe Harbor

3. Other Communications During the Offering Process

D. Ongoing Reporting Under the Exchange Act

1. Current Requirements

2. Determining the “Issuer” and Operation of the Section 15(d) Reporting Obligation

3. Reporting on EDGAR

4. Distribution Reports on Form 10-D

a. New Form 10-D and Deadline for Filing

b. Signatures

c. Content

5. Annual Reports on Form 10-K

6. Certifications under Section 302 of the Sarbanes-Oxley Act

7. Report on Assessment of Compliance with Servicing Criteria and Accountant's Attestation

a. Background

b. Our Proposal and Overview of Revised Approach

c. Assessment and Attestation of Servicing Compliance

d. Attestation Report on Assessment of Compliance

8. Current Reporting on Form 8-K

a. Items Requiring Current Disclosure

b. Clarifying Amendments to Existing Items

c. New Items

d. Safe Harbor and Eligibility To Use Form S-3

9. Other Exchange Act Reporting Amendments

a. Exclusion From Form 10-Q

b. Exemptions From Section 16

c. Transition Reports

E. Other Miscellaneous Amendments

F. Transition Period

IV. Paperwork Reduction Act

V. Cost-Benefit Analysis

VI. Consideration of Burden on Competition and Promotion of Efficiency, Competition and Capital Formation

VII. Regulatory Flexibility Analysis Certification

VIII.Statutory Authority and Text of Rule and Form Amendments

I. Overview

A. What Are Asset-Backed Securities?

On May 3, 2004, we issued proposals to address comprehensively the registration, disclosure and reporting requirements for asset-backed securities, or ABS, under the Securities Act and the Exchange Act.

We received over 50 comments in response to our proposals.

Commenters expressed overall support for our proposals to establish a separate framework for the registration and reporting of asset-backed securities due to differences between asset-backed securities and other securities.

The final rule and form amendments we adopt today have been revised, as discussed in this

release, to incorporate a number of changes recommended by commenters.

See Release No. 33-8419 (May 3, 2004) [69 FR 26650] (the “Proposing Release”).

The public comments we received and a summary of the comments prepared by our staff (the “Comment Summary”) are available for inspection in our Public Reference Room at 450 Fifth Street, NW., Washington, DC 20549 in File No. S7-21-04, or may be viewed at

http://www.sec.gov/rules/proposed/s72104.shtml.

See,

e.g.

, Letters of AIG Credit Corp. (“AIG”); Allen & Overy (“A&O”); American Bar Association (“ABA”); American Financial Services Association (“AFSA”); American Institute of Certified Public Accountants (“AICPA”); American Bankers Association (“Am. Bankers”); American Society of Corporate Secretaries (“ASCS”); American Securitization Forum (“ASF”); Australian Securitisation Forum (“Aus. SF”); Joint letter of American Honda Finance Corporation, DaimlerChrysler Services North America LLC, Ford Motor Credit Company, General Motors Acceptance Corporation, and Navistar Financial Corporation (“Auto Group”); Bond Market Association (“BMA”); Bank of America Corporation (“BOA”); Capital One Financial Corporation (“Capital One”); CFA Institute (“CFAI”); Citigroup Global Markets, Inc. (“CGMI”); Citigroup Inc. (“Citigroup”); Commercial Mortgage Securities Association (“CMSA”); Ernst & Young LLP (“E&Y”); European Securisation Forum (“ESF”); Fidelity Management & Research Company (“FMR”); First Marblehead Corporation (“First Marblehead”); Financial Services Roundtable (“FSR”); Investment Company Institute (“ICI”); Jones Day; JPMorganChase & Co. (“JPMorganChase); Kutak Rock LLP (“Kutak”); Mortgage Bankers Association (“MBA”); MBNA Corporation (“MBNA”); Metropolitan Life Insurance Company (“MetLife”); Moody's Investors Service (“Moody's”); PriceWaterhouseCoopers LLP (“PWC”); Joint letter of Sallie Mae., Inc. and Nelnet, Inc. (“Sallie Mae”); State Street Global Advisors (“State Street”); Toyota Motor Credit Corporation (“TMCC”); UBS Securities LLC (“UBS”); U.S. Bank National Association (“US Bank”); and Wells Fargo Bank, National Association (“Wells Fargo”).

Asset-backed securities are securities that are backed by a discrete pool of self-liquidating financial assets. Asset-backed securitization is a financing technique in which financial assets, in many cases themselves less liquid, are pooled and converted into instruments that may be offered and sold in the capital markets.

In a basic securitization structure, an entity, often a financial institution and commonly known as a “sponsor,” originates or otherwise acquires a pool of financial assets, such as mortgage loans, either directly or through an affiliate. It then sells the financial assets, again either directly or through an affiliate, to a specially created investment vehicle that issues securities “backed” or supported by those financial assets, which securities are “asset-backed securities.” Payment on the asset-backed securities depends primarily on the cash flows generated by the assets in the underlying pool and other rights designed to assure timely payment, such as liquidity facilities, guarantees or other features generally known as credit enhancements. The structure of asset-backed securities is intended, among other things, to insulate ABS investors from the corporate credit risk of the sponsor that originated or acquired the financial assets.

“Securitization” is a commonly used term to describe this financing technique, although other terms, such as “asset-backed financing,” also are used.

The ABS market is fairly young and has rapidly become an important part of the U.S. capital markets. One source estimates that U.S. public non-agency ABS issuance grew from $46.8 billion in 1990 to $416 billion in 2003.

Another source estimates 2003 new issuance closer to $800 billion.

ABS issuance is on pace to exceed corporate debt issuance in 2004.

While residential mortgages were the first financial assets to be securitized, non-mortgage related securitizations have grown to include many other types of financial assets, such as credit card receivables, auto loans and student loans. Before the Proposing Release, the Commission had not previously addressed on a comprehensive basis the regulatory treatment of asset-backed securities under the Securities Act or the Exchange Act.

See Bank One Capital Markets, Inc., 2004 Structured Debt Yearbook.

See Asset Securitization Report (pub. by Thomson Media Inc). See also Asset-Backed Alert (pub. by Harrison Scott Publications). The four primary asset classes currently securitized are residential mortgages, automobile receivables, credit card receivables and student loans, which represented approximately 52%, 19%, 16% and 9% of 2003 new issuance, respectively.

See,

e.g.

, Jennifer Hughes and David Wells, “Asset-Backed Bonds Hit Record,” Financial Times, Nov. 11, 2004, at 17; Aaron Lucchetti, “Indebted Consumers Reshape the Bond Market—Betting on Americans’ Ability To Pay Their Bills May Pose Risks If Interest Rates Move Higher,” Wall St. J., Sep. 14, 2004, at C1; and Christine Richard, “US Asset-Backeds: No Slowdown As Consumers Borrow,” Dow Jones Capital Markets Report, Sep. 17, 2004. See also The Bond Market Association, Bond Market Research Quarterly, November 2004.

Asset-backed securities and ABS issuers differ from corporate securities and operating companies. In offering ABS, there is generally no business or management to describe. Instead, information about the transaction structure and the characteristics and quality of the asset pool and servicing is often what is most important to investors. Many of the Commission's existing disclosure and reporting requirements, which are designed primarily for corporate issuers and their securities, do not elicit relevant information for most asset-backed securities transactions. Over time, Commission staff, through no-action letters and the filing review process, have developed a framework to address the different nature of asset-backed securities while being cognizant of developments in market practice.

With a few exceptions, our proposals were designed to consolidate and codify current staff positions and industry practice. After carefully evaluating the public comment received, we are adopting new rules and amendments to address the four primary regulatory areas affecting asset-backed securities that were the subject of the proposal: Securities Act registration; disclosure; communications during the offering process; and ongoing reporting under the Exchange Act.

B. Securities Act Registration

We are adopting a principles-based definition of asset-backed security, substantially as proposed, to demarcate the securities and offerings to which the new rules apply. The definition consolidates several staff positions regarding the definition of asset-backed security, including those regarding delinquent and non-performing pool assets, with several revisions to the proposal in response to comment. The definition we are adopting today also allows more lease-backed transactions to be included in the definition of asset-backed security and permits the use of master trusts and revolving periods for more asset classes. As we explained in the Proposing Release, these changes are designed to remove regulatory uncertainty and reduce regulatory obstacles and costs of securitization.

In 1992, the Commission amended Form S-3 to allow registration of offerings of investment grade asset-backed securities on a delayed, or “shelf,” basis.

As proposed, we are requiring that all registered offerings of asset-backed securities be registered either on Form S-1 or Form S-3, and we are specifying in those forms which disclosure items are required. In addition, we are expanding the types of investment grade asset-backed securities that qualify for shelf registration.

See Release No. 33-6964 (Oct. 22, 1992) [57 FR 48970] (the “1992 Release”).

Consistent with existing staff positions and our proposal, we are not adding a reporting history requirement for Form S-3 eligibility. However, we are codifying a staff position, as modified from the Proposing Release in response to comment, that Exchange Act reporting obligations regarding other ABS of the same asset class established by the depositor or an affiliate of the depositor must have been satisfied to maintain Form S-3 eligibility for new registration statements. Also consistent with existing staff positions, and pending consideration of our broader proposals recently issued for all Securities Act offerings,

we are excluding offerings of asset-backed securities eligible for Form S-3 registration from the requirements of Exchange Act Rule 15c2-8(b) to deliver a preliminary prospectus prior to delivery of a confirmation of sale.

See Release No. 33-8501 (Nov. 3, 2004) [69 FR 67392] (the “Offering Process Release”).

We also are adopting proposals to alleviate impediments to the shelf registration of offerings of asset-backed securities by foreign issuers or backed by foreign financial assets. We are adopting proposals that consolidate and streamline existing staff positions regarding when and how the offering of underlying securities must be concurrently registered with an offering of asset-backed securities backed by those underlying securities. Finally, we are revisiting staff interpretations regarding the registration of market-making transactions in the ABS context in response to comment. In particular, we will no longer require registration or delivery of a prospectus for market-making transactions for asset-backed securities.

C. Disclosure

Before today, there were no disclosure items tailored specifically to asset-backed securities. We are adopting, with modifications in response to comment, a new principles-based set of disclosure items, “Regulation AB,” that will form

the basis for disclosure in both Securities Act registration statements and Exchange Act reports. Although the few comments we received on this point were mixed, we still do not believe it would be practical or effective to draft detailed disclosure guides for each asset type that may be securitized. Instead, and as proposed, we have attempted to identify the disclosure concept required and provide several illustrative examples, while understanding and emphasizing, as we did in the Proposing Release, that the application of the particular concept must be tailored to the particular transaction and asset type involved and resulting determinations as to the materiality of information.

As we explained in the Proposing Release, the new disclosure items are for the most part based on the market-driven disclosures that appear today. However, with a codification of a universal set of disclosure items, we do seek, as we stated in the Proposing Release, a reevaluation by transaction participants of the manner and content of presented disclosure, including the elimination of unnecessary boilerplate and a de-emphasis on unnecessary legal recitations of terms. We also understand, and the comment process confirmed, that existing disclosure standards may not adequately capture certain categories of information that may be material to an asset-backed securities transaction, such as the background, experience, performance and roles of various transaction parties, including the sponsor, the servicing entity that administers or services the financial assets and the trustee. Our new disclosure items relating to these entities are designed to elicit additional information in these areas to the extent material, and we have made several revisions to the proposed disclosure items in response to comment.

Consistent with our proposal, we also are requiring for the first time that certain statistical information on a “static pool” basis be provided if material to the transaction. The final rules relating to the provision of this information have been revised from the Proposing Release in response to comment. The requirement to provide static pool data is still based upon the materiality of the data, although we are providing additional guidance on the scope of the data covered by the requirement. In addition, the guidance for static pool data under the final rules includes not only delinquency and loss data, but also prepayment data, if material. We also are providing flexibility in the manner of making the static pool data available. The final rules permit issuers to provide data that would be included in the prospectus but provided through a Web site under certain specified conditions.

Consistent with current practice and our proposals, we are not requiring audited financial statements regarding the issuing entity for the asset-backed securities in Securities Act or Exchange Act filings. However, we are adopting proposals, revised in response to comment, that consolidate and codify current staff positions on when financial or other descriptive information is required regarding certain other third parties, such as obligors of financial assets that reach pool concentration levels or providers of significant credit enhancement or other cash flow support for the asset-backed securities. In particular, we have revised our proposals regarding the provision of such information with respect to certain derivative counterparties to use an alternate measure for determining significance. We also are streamlining and codifying current staff positions, substantially as proposed, on when financial information regarding third parties may be incorporated by reference or referred to in an asset-backed securities filing in lieu of actually including the information in the filing.

D. Communications During the Offering Process

In the mid 1990's, Commission staff issued a series of no-action letters permitting the use of various written materials in addition to the statutory prospectus in an offering of asset-backed securities.

These materials provide data about the potential payouts of the financial assets and the asset-backed securities using various prepayment and other assumptions as well as disclose information about the structure of the offering or about the underlying asset pool. Pending consideration of our broader communications proposals in the recently-issued Offering Process Release, we are here codifying and simplifying, as proposed, the current staff positions on when these materials can be used and when they must be publicly filed with the Commission. We are clarifying our intention stated in the Proposing Release that the communications allowed under our final rules mirror those allowed under the staff no-action letters. We also are reiterating clarifications regarding several interpretive issues involving the use of these materials given market developments over the decade since the letters were issued. In this regard and given advances made to EDGAR (our electronic data gathering, analysis and retrieval system), we also are eliminating as proposed the current exemption from electronic filing for these materials.

See

Greenwood Trust Co., Discover Master Card Trust I

(Apr. 5, 1996);

Public Securities Ass'n

(Mar. 9, 1995);

Public Securities Ass'n

(Feb. 17, 1995);

Public Securities Ass'n

(May 27, 1994); and

Kidder Peabody Acceptance Corporation I

(May 20, 1994). The “statutory prospectus” refers to the full prospectus required by Section 10 of the Securities Act (15 U.S.C. 77j).

Shortly after the no-action letters referred to above were issued, Commission staff also issued a no-action letter regarding the publication of research reports by brokers or dealers proximate to an offering of asset-backed securities registered or to be registered on Form S-3.

The Commission had previously adopted several rules that provided safe harbors under which the publication of research reports would not be deemed a violation of the communications restrictions of Section 5 of the Securities Act.

However, several of the conditions in those rules were not relevant or practical for asset-backed securities. Again, pending consideration of any further changes to the research report safe harbors as a result of the Offering Process Release, we are codifying here, as proposed, the modified conditions in the staff no-action letter that provide a similar safe harbor for research reports as they relate to registered offerings of asset-backed securities on Form S-3.

See

Public Securities Ass'n

(Feb. 7, 1997).

15 U.S.C. 77e. See Securities Act Rules 137, 138 and 139 (17 CFR 230.137; 17 CFR 230.138; and 17 CFR 230.139).

E. Ongoing Reporting Under the Exchange Act

As with registration, the ongoing periodic and current reporting requirements under the Exchange Act applicable to operating companies do not elicit information that would be most relevant for asset-backed securities. First through a series of exemptive orders, and then primarily through the issuance of scores of no-action letters and other interpretations, Commission staff has allowed modified Exchange Act reporting by ABS issuers. In lieu of quarterly reports on Form 10-Q,

ABS issuers today generally file under cover of Form 8-K the distribution reports required to be prepared under the transaction agreements that detail the payments and performance of the financial assets in the asset pool and payments on the securities backed by that pool. Current reporting on Form 8-K for certain extraordinary events also is required

regarding asset-backed securities, but historically only for a narrow subset of events. A modified annual report on Form 10-K is required with two items being most important: a servicer's statement of compliance with its servicing obligations; and a report by an independent public accountant regarding compliance with particular servicing criteria. Financial statements of the issuing entity are not required. An asset-backed issuer is required to include a certification under Section 302 of the Sarbanes-Oxley Act

with its Form 10-K, and, as provided by the Commission's rules governing certification, the staff has previously provided a special form of certification for ABS issuers to use.

ABS issuers are exempt from the rules implementing Section 404 of the Sarbanes-Oxley Act

regarding reporting on internal control over financial reporting.

17 CFR 249.308a.

15 U.S.C. 7241.

See Exchange Act Rules 13a-14 and 15d-14; Release No. 33-8124 (Aug. 28, 2003) [67 FR 57276]; and Division of Corporation Finance, “Revised Statement: Compliance by Asset-Backed Issuers with Exchange Act Rules 13a-14 and 15d-14” (Feb. 21, 2003). See also

Merrill Lynch Depositor, Inc.

(Mar. 28, 2003) and

Mitsubishi Motors Credit of America, Inc.

(Mar. 27, 2003).

15 U.S.C. 7262.

See Exchange Act Rules 13a-15 and 15d-15.

We are codifying as proposed the basic modified reporting system for asset-backed securities. To distinguish periodic reporting regarding distributions from disclosure of important events that appropriately call for current reporting, we are adopting our proposal for one new form type, Form 10-D, to act as the report for the periodic distribution information currently provided under cover of Form 8-K. We also are adopting instructions, substantially as proposed, that specify which of the Commission's recently adopted Form 8-K events will be applicable to asset-backed securities, and we are adding a few additional events specific to asset-backed securities, again with certain modifications from the proposal. Consistent with the modified reporting no-action letters, we are adopting our proposals to expressly exclude ABS from quarterly reporting on Form 10-Q and exempt ABS from Section 16 of the Exchange Act.

We also are adopting proposed amendments to clarify how transition reports are to be filed regarding a change in fiscal year.

15 U.S.C. 78p.

We are adopting instructions, substantially as proposed, that specify the disclosure requirements applicable for annual reports on Form 10-K regarding asset-backed securities, which also are drawn from Regulation AB, and we are codifying the form of certification to be used under Section 302 of the Sarbanes-Oxley Act for asset-backed securities. As proposed, we are retaining the longstanding requirements relating to servicer compliance statements and reports by an independent public accountant as to compliance with particular servicing criteria. Regarding servicing criteria, we explained in the Proposing Release that there are very few existing criteria for evaluating compliance, the most widely used of which currently is the Uniform Single Attestation Program, or USAP, promulgated by the Mortgage Bankers Association. However, the USAP's “minimum servicing standards” are designed to be applicable only to servicing of residential mortgages and do not necessarily represent the full spectrum of servicing activities that may be material to an asset-backed securities transaction. We are adopting, with modifications, the proposed disclosure-based servicing criteria that will form the basis for an assessment and assertion as to material compliance with such criteria (or disclosure as to non-compliance). We also continue the practice of accountant involvement in assessing compliance with servicing criteria by adopting a requirement that a registered public accounting firm attest to the assertion of compliance. We are revising our proposal, however, to permit separate reports from each party that performs the actual servicing or administration functions. Both the reports containing the assertion of compliance and the accountant's attestation reports will be required to be filed with the report on Form 10-K. We also are revising the form of the Sarbanes-Oxley Section 302 certification to include an express statement by the certifying party as to whether reports have been filed covering the entire servicing function.

As with the Securities Act, we are adopting our proposed specification that the depositor is the “issuer” for purposes of Exchange Act reporting regarding asset-backed securities. We also are specifying who may sign the various Exchange Act reports. As proposed, either the depositor or the servicer may sign the reports on Form 10-K, Form 10-D and Form 8-K. A designated officer of that same party also must sign the Sarbanes-Oxley Section 302 certification. We also are clarifying how filings regarding asset-backed securities are to be filed on EDGAR and the operation of the reporting obligation for asset-backed securities under Section 15(d) of the Exchange Act,

including codifying as proposed several interpretive positions as to when the obligation starts and when it may be suspended.

15 U.S.C. 78o(d).

F. Other Miscellaneous Amendments

Finally, as discussed in the Proposing Release, we are making several miscellaneous and technical amendments to our rules and forms to accommodate the new rules and to update references regarding asset-backed securities.

II. Background and Development of ABS and Regulatory Treatment

As noted above, the ABS market rapidly has developed into an important part of the U.S. capital markets.

The modern securitization market originated in the 1970's with the securitization of residential mortgages.

Since the mid-1980's, the techniques pioneered in the mortgage-backed securities, or MBS, market have been used to securitize other asset types. Most asset types that have been securitized have homogenous characteristics, including similar terms, structures and credit characteristics, with proven histories of performance, which in turn facilitate modeling of future payments and thus analysis of yield and credit risks.

See note 31 above. See also Gary Silverman

et al.

, “A $2.5 Trillion Market You Hardly Know,” Business Week, Oct. 26, 1998 (“Securitization is one of the most important and abiding innovations to emerge in the financial markets since the 1930s' (quoting Leon T. Kendall)).

The modern ABS market can be traced to 1970 when the Government National Mortgage Association (Ginnie Mae), a wholly owned federal government corporation, first guaranteed a pool of mortgage loans. The Federal Home Loan Mortgage Corporation (Freddie Mac) in 1971 issued its first mortgage-backed participation certificates. For a number of years, mortgage-backed securities were almost exclusively a product of government-sponsored entities (GSE's), such as Freddie Mac and the Federal National Mortgage Association (Fannie Mae), and Ginnie Mae. MBS issued by these GSE's and Ginnie Mae have been and continue to be exempt from registration under the Securities Act and most provisions of the federal securities laws. For example, Ginnie Mae guarantees are exempt securities under Section 3(a)(2) of the Securities Act (15 U.S.C. 77c(a)(2)) and Section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)). The chartering legislation for Fannie Mae and Freddie Mac contain exemptions with respect to those entities. See 12 U.S.C. 1723c and 12 U.S.C. 1455g. As a result, only non-GSE ABS, or so called “private label” ABS, will be required to comply with the new rules. For more information regarding the GSE's and Ginnie Mae, see Task Force on Mortgage-Backed Securities Disclosure, “Staff Report: Enhancing Disclosure in the Mortgage-Backed Securities Markets” (Jan. 2003) (hereinafter, the “2003 MBS Disclosure Report”). This report is available on our Web site at

http: www.sec.gov.

There are several distinguishing features between asset-backed securities and other fixed-income securities. For example, ABS investors are generally

interested in the characteristics and quality of the underlying assets, the standards for their servicing, the timing and receipt of cash flows from those assets and the structure for distribution of those cash flows. As a general matter, there is essentially no business or management (and therefore no management's discussion and analysis of financial performance and condition) of the issuing entity, which is designed to be a solely passive entity. GAAP financial information about the issuing entity generally does not provide useful information to investors. Information regarding characteristics and quality of the assets is important for investors in assessing how a pool will perform. Information relating to the quality of servicing of the underlying assets also is relevant to assessing how the asset pool is expected to perform and the reliability of the allocation and distribution functions. Another focus is the legal and structural nature of the issuing entity and the transfer of the assets to the issuing entity to assess legal and credit separation from third parties. ABS investors also analyze the impact and quality of any credit enhancements and other support designed to provide additional protection against losses and ensure timely payments.

A sponsor typically initiates a securitization transaction by selling or pledging to a specially created issuing entity a group of financial assets that the sponsor either has originated itself or has purchased in the secondary market.

Sponsors of asset-backed securities often include banks, mortgage companies, finance companies, investment banks and other entities that originate or acquire and package financial assets for resale as ABS. In some instances, the transfer of assets is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor for a securitization program and commonly called a depositor, and then the depositor will transfer the assets to the issuing entity for the particular asset-backed transaction.

While “sponsor” is a commonly used term for the entity that initiates the asset-backed securities transaction, the terms “seller” or “originator” also are often used in the market. However, as noted in the text, in some instances the sponsor is not the originator of the financial assets but has purchased them in the secondary market. Hence, we use the term “sponsor.”

Where there is not a two-step transfer, the terms “sponsor” and “depositor” are commonly used interchangeably in the market.

The issuing entity, most often a trust with an independent trustee, then issues asset-backed securities to investors that are either backed by or represent interests in the assets transferred to it. The proceeds of the sale of the asset-backed securities are used to pay for the assets that were transferred to the trust. Because the issuing entity is designed to be a passive entity, one or more “servicers,” often affiliated with the sponsor, are generally necessary to collect payments from obligors of the pool assets, carry out the other important functions involved in administering the assets and to calculate and pay the amounts net of fees due to the investors that hold the asset-backed securities to the trustee, which actually makes the payments to investors.

The predominant purchasers of asset-backed securities today are institutional investors, including financial institutions, pension funds, insurance companies, mutual funds and money managers.

Generally, ABS are not marketed to retail investors. However, securitizations of one fairly unique asset type—transactions that pool and securitize outstanding debt securities of other issuers—often are marketed to retail investors and are listed on a national securities exchange.

See 2003 MBS Disclosure Report.

A “national securities exchange” is an exchange registered as such under Section 6 of the Exchange Act (15 U.S.C. 78f).

While some ABS transactions consist of simple pass-through certificates representing a pro rata share of the cash flows from the underlying asset pool, ABS transactions often involve multiple classes of securities, or tranches, with complex formulas for the calculation and distribution of the cash flows. In addition to creating internal credit enhancement or support for more senior classes, these structures allow the cash flows from the asset pool to be packaged into securities designed to provide returns with specific risk and timing characteristics.

Transaction agreements specify the structure of an ABS transaction. A common form of such an agreement is a “pooling and servicing agreement” often among the sponsor, the trustee and the servicer. A pooling and servicing agreement often governs the transfer of the assets from the sponsor to the issuing entity and sets forth the rights and responsibilities of participants. Typically, the agreement also will detail how cash flows generated by the asset pool will be divided, commonly referred to as the “flow of funds” or “waterfall.” The flow of funds specifies the allocation and order of cash flows, including interest, principal and other payments on the various classes of securities, as well as any fees and expenses, such as servicing fees, trustee fees or amounts to maintain credit enhancement or other support. Cash flows also may be directed into various accounts, such as reserve accounts to provide support against potential future shortfalls. The agreement also specifies the type and content of reports that will be provided to investors regarding ongoing performance of the transaction.

In addition to any internally provided credit enhancement or support, the sponsor or other third parties may provide external credit enhancements or other support for the asset-backed securities.

For example, third party insurance may be obtained to reimburse losses on the pool assets or the asset-backed securities themselves. In addition, the issuing parties may arrange with a counterparty for an interest rate swap or similar swap transaction to provide incidental changes to cash-flow and return, such as where a floating-rate interest is to be paid on ABS backed by financial assets that pay a fixed rate of interest.

A guarantee of a security would be a separate “security” under Section 2(a)(1) of the Securities Act (15 U.S.C. 77b(a)(1)).

Credit rating agencies play a large role in most ABS transactions. As with a traditional corporate debt security, a rating on an asset-backed security is designed only to reflect credit risk. The rating generally does not address other market risks that may result from changes in interest rates or from prepayments on the underlying asset pool.

Before the Proposing Release, there had been few Commission initiatives directly related to ABS. In connection with the passage of the Secondary Mortgage Market Enhancement Act of 1984 (SMMEA),

the Commission permitted shelf registration to SMMEA eligible securities.

In 1992, the Commission extended shelf registration to non-mortgage investment grade ABS.

That same year, the Commission also adopted a rule under the Investment Company Act of 1940

to exclude ABS transactions under specific conditions from the definition of an investment company.

More recently,

the Commission tailored rules for asset-backed securities in its implementing rulemakings under the Sarbanes-Oxley Act, including exempting asset-backed securities from the reporting and attestation requirements relating to internal control over financial reporting established by Section 404 of the Sarbanes-Oxley Act.

The Commission followed this approach in contemplation of current staff practice and this rulemaking initiative where applicable objectives underlying the Sarbanes-Oxley Act, including requirements suitable to ABS transactions, could be evaluated.

Pub. L. No. 98-440, 98 Stat. 1689. See also Section II.C.1. of the 2003 MBS Disclosure Report.

See Release No. 33-6499 (Nov. 17, 1983) [48 FR 52889] and Securities Act Rule 415(a)(1)(vii) (17 CFR 230.415(a)(1)(vii)).

See note 32 above.

15 U.S.C. 80a-1

et seq.

See Release No. IC-19105 (Nov. 19, 1992) [57 FR 56248] and Investment Company Act Rule 3a-7 (17 CFR 270.3a-7). See also Release No. IC-18736 (May 29, 1992) [57 FR 23980] (proposing Investment Company Act Rule 3a-7 and explaining the application of the Investment Company Act to

ABS transactions). As we stated in the Proposing Release, the application of the Investment Company Act to ABS transactions is beyond the scope of this release. We note, however, that an ABS transaction that relies on Rule 3a-7 must comply with the conditions of that rule regardless of whether the issuer may register the offering of its asset-backed securities on Form S-3 or S-1. We encourage pre-filing conferences with the staff to discuss, as appropriate, questions or issues that may arise regarding the availability of Rule 3a-7, or any other applicable exemption, under the Investment Company Act to an ABS transaction.

See,

e.g.

, Release No. 33-8238 (Jun. 5, 2003) [68 FR 36636] (Management's report on internal control over financial reporting and certification of disclosure in Exchange Act reports); Release No. 33-8220 (Apr. 9, 2003) [68 FR 18788] (Standards relating to listed company audit committees); Release No. 33-8183 (Jan. 28, 2003) [68 FR 6006] (Commission requirements regarding auditor independence); and Release No. 33-8177 (Jan. 23, 2003) [68 FR 5110] (Disclosure required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002).

As we stated in the Proposing Release, we recognize that securitization is playing an increasingly important role in the evolution of the fixed income financial markets. Our staff has attempted to accommodate the different nature of ABS and evolving business practices, while reducing unnecessary or impractical compliance burdens, through its numerous no-action and interpretive positions. However, the accumulated informal guidance, while helpful to some ABS transactions, has diminished the transparency of applicable requirements because an ABS registrant or investor seeking to understand the applicable requirements must review and assimilate a large body of no-action letters and other staff positions. This time-consuming practice decreases efficiency and transparency and leads to uncertainty and common problems. Even before we issued the proposals, many issuers, investors and other market participants had requested a defined set of regulatory requirements for guidance.

Commenters on the proposals expressed universal support for a separate framework for the registration and reporting of ABS.

Staff reviews of filings provide further evidence that many compliance issues may be mitigated and potential issues avoided through clearer and more transparent regulatory requirements. Recent market events involving distressed transactions also have highlighted the need for improved disclosures as well as a renewed attention on servicing practices.

See,

e.g.

, Letter from the Association for Investment Management and Research (“AIMR”) to Brian J. Lane, Director, Division of Corporation Finance, “Recommendations for a Disclosure Regime for Asset-Backed Securities” (Sep. 30, 1996); Letter from ICI to Michael H. Mitchell, Special Counsel, Division of Corporation Finance, “Asset-Backed Securities Offerings” (Oct. 29, 1996); Letter from BMA to Brian Lane, Director, Division of Corporation Finance, “Response to Staff Request for Suggestions Concerning Possible Reforms of Disclosure and Reporting Rules for Mortgage and Asset-Backed Securities” (Nov. 5, 1996); Letter from BMA to Jonathan G. Katz, Secretary, Securities and Exchange Commission, “Securities Acts Concepts and Their Effects on Capital Formation (Release No. 33-7314) (File No. S7-19-96)” (Nov. 8, 1996); Letter from MBA to Brian J. Lane, Director, Division of Corporation Finance (Feb. 18, 1997); Letter from The Association of the Bar of the City of New York to Jonathan G. Katz, Secretary, Securities and Exchange Commission, “Securities Act Release No. 33-7606A File No. S7-30-98” (Apr. 5, 1999); Letter from ABA to Jonathan G. Katz, Secretary, Securities and Exchange Commission, “The Regulation of Securities Offerings (File No. S7-30-98)” (Jun. 29, 1999); Letter from ICI to Jonathan G. Katz, Secretary, Securities and Exchange Commission, “The Regulation of Securities Offerings (File No. S7-30-98)” (Jun. 29, 1999); Letter from MBA to Jonathan G. Katz, Secretary, Securities and Exchange Commission, “The Regulation of Securities Offerings (File No. S7-30-98)” (Jun. 30, 1999); Letter from Merrill Lynch & Co., Inc. to Securities and Exchange Commission, “The Regulation of Securities Offerings (File No. S7-30-98)” (Jun. 30, 1999); Letter from Residential Funding Corporation to Securities and Exchange Commission, “File No. S7-30-98—The ‘Aircraft Carrier Release’ ” (Jun. 30, 1999); Letter from BMA to David B.H. Martin, Director, Division of Corporation Finance, “Securities Act Reform” (Nov. 30, 2001); and Letter from BMA to Alan L. Beller, Director, Division of Corporation Finance, “Prior Correspondence Regarding Asset-Backed Securities Reform” (Apr. 23, 2002).

See note 27 above.

See,

e.g.

, notes 201, 229, and 235 below. See, also, “If Issuers Can Steal, Where's the Deal Cop,” Asset Securitization Report, Feb. 17, 2003, at 6; Christine Richard; “Moody's Trustees Don't See Eye-to-Eye on Trustee Role,” Dow Jones Newswires, Feb. 4, 2003; and “SEC Filings Reveal Little ABS Reporting Consistency,” Asset Securitization Report, Sep. 23, 2002, at 10.

Against this background, we issued the proposals to clarify the regulatory requirements for asset-backed securities in order to increase market efficiency and transparency and provide more certainty for the overall ABS market and its investors and other participants. After carefully evaluating the comments received on the proposals, we are adopting these new regulatory requirements, as discussed further below.

III. Discussion of the Amendments

A. Securities Act Registration

1. Current Requirements

The 1992 Release, as part of a broad effort to expand access to shelf registration, allowed shelf registration for offerings of investment grade

asset-backed securities without a reporting history requirement for the issuing entity.

As a result, a sponsor or depositor may register asset-backed securities to be offered on a delayed basis in the future through one or more offerings, or “takedowns,” of securities off of the shelf registration statement. Since the 1992 Release, shelf registration on Form S-3 has become the predominant method of registration for public offerings of asset-backed securities. Offerings generally are only registered on another form, most likely Form S-1 and less frequently Form S-11, if for some reason the securities technically do not meet the definition of “asset-backed security” in General Instruction I.B.5 of Form S-3 or an interpretation of that definition.

“Investment grade” is defined in General Instruction I.B.2 of Form S-3 to mean that, at the time of sale, at least one nationally recognized statistical rating organization (as that term is used in Exchange Act Rule 15c3-1(c)(2)(vi)(F) (17 CFR 240.15c3-1(c)(2)(vi)(F))) has rated the security in one of its generic rating categories which signifies investment grade. Typically, the four highest rating categories (within which there may be sub-categories or gradations indicating relative standing) signify investment grade.

Securities Act Rule 415 (17 CFR 230.415) permits registration of offerings of securities on a delayed or continuous basis, and paragraph (a)(1)(x) of that rule permits such registration with respect to offerings registered (or qualified to be registered) on Form S-3. The 1992 Release, among other things, added General Instruction I.B.5 to Form S-3, which permits registration of offerings of investment grade asset-backed securities. Certain mortgage related securities, as defined in Section 3(a)(41) of the Exchange Act (15 U.S.C. 78c(a)(41)), are permitted to be offered on a delayed basis under Securities Act Rule 415(a)(1)(vii). See note 52 above. Our actions today do not affect the continued availability of Rule 415(a)(1)(vii) for shelf registration of mortgage related securities, as defined, even if they do not meet the requirements of Form S-3. However, consistent with our movement of all asset-backed securities offerings to Form S-1 or Form S-3, to the exclusion of Form S-11, mortgage related securities offerings should use Form S-1 in lieu of Form S-11 for future transactions. Just like prior practice on Form S-11, an offering meeting the requirements of Rule 415(a)(1)(vii) could be a continuous or delayed offering on Form S-1.

For offerings registered on a shelf basis on Form S-3, the prospectus disclosure in the registration statement is often presented through the use of two primary documents: the “base” or “core” prospectus and the prospectus supplement. The base prospectus outlines the parameters of the various types of ABS offerings that may be

conducted in the future, including asset types that may be securitized, the types of security structures that may be used and possible credit enhancements or other forms of support. The registration statement at the time of effectiveness also contains one or more forms of prospectus supplement, which outline the format of deal-specific information that will be disclosed at the time of each takedown. At the time of a takedown, a final prospectus supplement is prepared which describes the specific terms of the takedown, and the base prospectus and the final prospectus supplement together form the final prospectus which is filed with the Commission pursuant to Securities Act Rule 424(b).

17 CFR 230.424(b).

2. Definition of Asset-Backed Security

a. Approach and Supplemental Request for Comment for Other Structured Securities

As we explained in the Proposing Release, the term “asset-backed security” currently is defined only for purposes of Form S-3. As many of our amendments relate to the treatment of asset-backed securities regardless of the form on which their offering is initially registered, we are moving the definition of “asset-backed security,” as proposed, to the definition section of Regulation AB, our new sub-part in Regulation S-K for asset-backed securities (discussed more fully in Section III.B). Under this new format, a security that meets the general definition of “asset-backed security” will be subject to the disclosure and other requirements of the new rules, regardless of the Form used for registration. Any additional conditions appropriate for Form S-3 eligibility, such as an investment grade requirement, will be retained in General Instruction I.B.5 of Form S-3, as discussed in Section III.A.3.c.

As we explained in the Proposing Release, after more than ten years of experience with the definition of “asset-backed security,” we believe that the core definition is still sound. The definition is principles-based and allows broad flexibility as to asset types and structures that we believe should be subject to the alternative disclosure and regulatory regime that exists for asset-backed securities. As the Commission stated in the 1992 Release, the definition does not distinguish between pass-through and pay-through asset-backed securities nor does it limit application to a list of “eligible” assets that can be securitized, so long as such assets meet the general principle that they are a discrete pool of financial assets that by their terms convert into cash within a finite time period.

We continue to believe, conversely, that the regime we have specifically designed for asset-backed securities is not necessarily appropriate for securities that do not meet these principles.

For example, common stock and similar equity instruments do not meet this general principle. Our view would not be altered if the equity security was subject to a separate liquidity or repurchase agreement or other arrangement. However, limited life equity securities, such as trust preferred securities, that themselves have a finite life and a mandatory redemption, could satisfy the general principle.

As we explained in the Proposing Release, experience with the definition has resulted in several interpretations since its adoption. These interpretations clarify the principles in the definition or, in some instances, permit limited exceptions to one or more of those principles where appropriate and consistent with overall application of the ABS regulatory regime. These interpretations have developed primarily through staff processing of ABS registration statements and, in a few instances, through staff no-action letters. As such, these interpretations may not always have been transparent, and we proposed codifying them with several expansions to allow additional asset types and transaction features to be considered an “asset-backed security,” including for purposes of shelf registration if the asset-backed securities meet the additional criteria for registration on Form S-3, such as the investment grade requirement.

Commenters were mixed on our proposed approach. On the one hand, commenters representing investors expressed reticence in expanding access to the ABS regulatory regime out of concern that it could have certain unintended consequences, such as investment decisions on these additional transactions being made under more compressed time frames and with less access to information through shelf registration.

On the other hand, commenters representing primarily issuers and their representatives would have preferred, in lieu of our proposed approach of codifying limited exceptions to the existing definition's core principles, abandoning many of the core principles themselves to allow additional securities to receive the benefits of the proposed regime, such as immediate shelf registration and the ability to use ABS informational and computational material.

For example, most of these commenters would have preferred deleting the “discrete pool” requirement from the existing 1992 definition, hence rendering the proposed expansions to the existing interpretive exceptions from that requirement, such as those relating to master trusts, prefunding periods and revolving periods, unnecessary and thereby permitting unlimited use of those concepts. These commenters generally argued that such requirements would restrict innovation and were unnecessary to protect the universe of mostly institutional investors. According to the view of these commenters, any concerns with abandoning these and several other existing principles in the definition, such as the proposed delinquency and non-performing interpretations designed to uphold the principle that the ABS are primarily dependent on a pool of assets that self-liquidate instead of on the ability of the entity managing and foreclosing on the assets, could be addressed through disclosure.

See,

e.g.

, Letter of ICI.

See,

e.g.

, Letters of ABA; ASF; Auto Group; ESF; and FSR.

We continue to believe that the ABS regime is at bottom not designed for transactions that depart significantly from the principles behind the definition. The alternative regime for asset-backed securities represents the codification of a very different registration, disclosure and reporting regime from that applicable to other securities, including other structured securities. We continue to believe that the current and proposed definition of “asset-backed security” reflects the core principles for securities that should be subject to this alternative regime, while still providing great flexibility and room for development. We continue to believe that emphasis on certain core principles is appropriate for these purposes, such as that the securities are primarily backed by a pool of assets, that there is a discrete pool with a general absence of active pool management, and an emphasis on the self-liquidating nature of pool assets that by their own terms convert into cash.

We do recognize, as have the staff in their prior interpretations, that there are instances where some limited exceptions to these general principles would be appropriate and consistent with access to the alternate regulatory regime, and these are reflected in the interpretations and exceptions discussed below. However, necessarily there is a point where application of the alternate regime is no longer appropriate. The further the security deviates from the core principles, the more acute concerns, such as those expressed by investors, become, which are not just disclosure concerns, that the security should not be treated necessarily the same as other securities

that meet our definition of “asset-backed security.” In those instances, additional or different disclosures and/or registration and reporting treatment may be more appropriate.

As an example, we noted in the Proposing Release that, given the existing concept in the definition of a discrete pool of financial assets that by their terms convert into cash within a finite time period, so-called “synthetic” securitizations are not included in Regulation AB's basic definition of ABS for purposes of determining whether the security qualifies for the particularized registration, disclosure and reporting regime under the Securities Act and Exchange Act we are adopting today. Synthetic securitizations are designed to create exposure to an asset that is not transferred to or otherwise part of the asset pool. These synthetic transactions are generally effectuated through the use of derivatives such as a credit default swap or total return swap. The assets that are to constitute the actual “pool” under which the return on the ABS is primarily based are only referenced through the credit derivative.

Some commenters representing primarily issuers and underwriters objected to not making accommodations in the definition of asset-backed security for synthetic securitizations.

These commenters generally argued that while these securities may not necessarily meet all of the core principles in the existing definition, they are still structured securities that should be treated under the Securities Act and the Exchange Act in the same manner and with access to the same benefits as an asset-backed security. The commenters also expressed concern that not addressing the appropriate treatment of synthetic securities would make it more difficult for market participants to develop such products without continued discussions with the staff, as they do today, for this developing submarket.

See,

e.g.

, ASF; BMA; and CGMI.

As we explained in the Proposing Release, for purposes of determining whether a security qualifies for the particularized regulation regime of Regulation AB, we believe the requirement that performance is primarily tied to a discrete pool of financial assets that by their terms convert into cash entails that the performance is primarily by reference to the assets in the pool. Synthetic securitizations do not meet the basic concepts embodied in our definition of asset-backed security for several reasons. Payments on the securities in a synthetic securitization can primarily or entirely comprise or include payments based on the value of a reference asset which is unrelated to the value of or payments on any actual assets in the pool. Payment is therefore by reference to an asset not in the pool instead of primarily from the performance of a discrete pool of financial assets that by their terms convert into cash and are transferred to a separate issuing entity.

An example of a synthetic exposure would be a transaction where the asset pool consists of securities coupled with a swap or other derivative under which payments are made based on the value of an equity or commodity or other index such that the payments on the security comprise or include payments based primarily on the performance of the external index and not by the performance of the actual securities in the pool. Because payments in synthetic securitizations are primarily based on the performance of assets or indices not included in the pool, we do not believe such a securitization should fall into the Regulation AB registration, disclosure and reporting regime. Payments on ABS must be based primarily on the performance of the financial assets in the pool.

Our view that securities resulting from synthetic securitizations are not within the definition of “asset-backed security” is not altered by the fact that payments on the swap or other derivative based on the value of assets or indices not related to the assets in the pool held by the issuer are conditioned on performance of the assets in the pool held by the issuer. In addition, the derivative does not act as credit enhancement on existing pool assets or as rights or other assets designed to ensure timely servicing or distribution, because it does not relate to the value of any pool asset but instead relates to an external asset in order to bring the risk of that asset into the pool synthetically. Further, in a synthetic securitization, if a credit event occurs there may be a transfer of assets that would no longer make the pool discrete.

Synthetic securitization transactions also differ from ABS transactions where swaps or other derivatives are used either to reduce or alter risk resulting from assets contained in the pool held by the issuer. For example, the existence of an interest rate or currency swap covering either or both of the principal or interest payments on assets in the pool held by the issuer are designed to reduce or alter risk resulting from those assets and fall within the definition of asset-backed security. The return on the ABS is still based primarily on the performance of the financial assets in the pool.

We believe there is a principles-based difference between structures that use an interest rate or currency swap but whose performance is still primarily based on the performance of the financial assets in the pool and structures that use a swap or other derivative such that the performance of the security is no longer primarily related to the performance of the pool. Because certain interest rate and currency swaps have been permitted consistent with this principle does not lead to the conclusion that there is no such principle or that the principle should be abandoned. Instead, the difference as to application in many instances necessarily depends on the particular nature and structure of the transaction in question.

As another example of a swap or other derivative permissible in an ABS transaction, a credit derivative such as a credit default swap could be used to provide viable credit enhancement for asset-backed securities. For example, a credit default swap may be used to reference assets actually in the asset pool, which would be analogous to buying protection against losses on those pool assets. The issuing entity would pay premiums to the counterparty (as opposed to the counterparty paying the premiums to the issuing entity). If a credit event occurred with respect to a referenced pool asset, the counterparty would be required to make settlement payments regarding the pool asset or purchase the asset to provide recovery against losses.

As we explained in the Proposing Release, the basic definition of “asset-backed security” and its interpretations are intended to establish parameters for the types of securities that are appropriate for the alternate disclosure and regulatory regime we are adopting today. This approach is based on the history and development of the traditional ABS market such that a definable set of criteria and requirements can be established. The definition does not mean or imply in any way that public offerings of securities outside of these parameters, such as synthetic securitizations, may not be registered with the Commission, but only that the alternate regulatory regime we are adopting today is not designed for those securities. The definition does mean that such securities must rely on non-ABS form eligibility for registration, including shelf registration.

As is the case today, Form S-1 is the default form for registration for which no other form is authorized or prescribed. See General Instruction I. to Form S-1.

Some commenters were concerned that if such structured securities were left outside the definition, issuers of those securities would be forced to provide potentially misleading disclosures under Regulation S-K if they were not included in Regulation AB. Structured securities outside of the definition have been registered before the adoption of Regulation AB, and the staff has worked with issuers to develop appropriate disclosures for such securities under our existing disclosure regime. As is the case today, we encourage issuers that are

contemplating structured securities outside of the Regulation AB definition to have pre-filing conferences with the staff to discuss the proposed transaction and the appropriate approach.

At the same time, we recognize that while it is pragmatic and feasible to establish Regulation AB at this time for an appropriately definable group of asset-backed securities, we also want to foster a system that is most efficient and consistent with investor protection for other structured securities, particularly for those that may develop in the future but may not be contemplated in Regulation AB. We understand that a default application of the existing disclosure regime might not be most appropriate for these structured securities, but we also believe that neither would it be appropriate for such securities to be treated the same as “asset-backed securities” as we are defining that term under Regulation AB. Depending on the structure of the transaction and the terms of the securities, some disclosure aspects of Regulation AB may be applicable, but aspects from the traditional disclosure regime also may be applicable. In some instances, a third approach might be more appropriate.

We seek additional comment on whether we should consider an alternative scheme for these kinds of securities. We will evaluate comments received in determining whether it is appropriate to issue additional proposals or take other additional action, as appropriate. In providing comments, please be as specific as possible.

Request for Comment

• Apart from the traditional approach of addressing hybrid securities as they arise, are there definable categories of securities where neither the existing regime nor Regulation AB would be appropriate, but a specifiable alternative regime would be? What would be the advantages and disadvantages of such an approach? Is the existing approach of addressing these securities more practical if and until a market for that particular type of security matures such that establishing a separate regime is appropriate? Are there additional alternatives that should be considered? How are these securities offered and sold today? Who offers and purchases these securities?

• If an alternative regime should be established, how would these securities be defined? Why should they be treated differently?

• What would be appropriate for this alternative regime with respect to registration, disclosure and ongoing reporting? What flexibility should be permitted under the existing regime and what additional or alternate requirements should be imposed?

• While the Investment Company Act considerations are beyond the scope of this release for ABS, we also would seek comment as to the treatment of such securities, including synthetic securitizations, under Rule 3a-7 under that Act or other exemptive provisions of that Act or rules thereunder.

• Regarding synthetic securitizations where the return on the securities is not primarily dependent on the performance of the pool, what additional disclosures would be appropriate? For example, for other entities that offer securities and have derivatives or contingent obligations, there is required disclosure of financial intricacies, such as disclosures under FIN No. 45,

FIN No. 46,

SFAS No. 5

and SFAS No. 133,

and off-balance sheet and MD&A disclosure.

Would some or all of these disclosures be appropriate in synthetic securitizations? If not, why not? Please note these are non-exclusive examples.

See FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (Nov. 2002).

See FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (Dec. 2003).

See FASB Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (Mar. 1975).

See FASB Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (Jun. 1998).

See Item 303 of Regulation S-K.

• Would financial statements be necessary to fully understand the risks and potential performance of these securities? Should some form of off-balance sheet disclosure be required when performance is tied to such instruments? Should market valuations of assets and liabilities be required?

• Where performance of the security is primarily tied to the performance of a derivative rather than the performance of the pool assets, what additional disclosure should be required regarding the derivative counterparty? Should financial statements for the derivative counterparty always be required?

• Where performance is by reference to an unrelated entity or assets, what information should be required about the referenced entity or assets?

b. Basic Definition

We are retaining the same basic definition of asset-backed security that has existed since 1992, with the addition of the one modification we proposed with respect to leases, discussed below. Under Regulation AB, the basic definition of “asset-backed security” is “a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the securityholders; provided that in the case of financial assets that are leases, those assets may convert to cash partially by the cash proceeds from the disposition of the physical property underlying such leases.”

We also are codifying, with modifications and expansions in response to specific comment, the several clarifying interpretations we proposed to the definition that recognize and build upon the operational and structural distinctions between ABS and non-ABS transactions. Each of these interpretations is discussed below in a separate subsection.

The reference to “financial assets that are leases” is meant to clarify the application of the definition with respect to leases and is not meant to affect the accounting treatment of the lease.

As we stated in the 1992 Release and the Proposing Release, the basic definition is sufficiently broad to encompass any self-liquidating asset which by its terms converts into cash payments within a finite time period. There are no substantive requirements as to the timing of the cash flows under the definition, such as that they must be constant and uninterrupted. For example, so-called “balloon” loans that have large payments at maturity that differ from other payments during the term of the loan would be included.

We understand that in some jurisdictions, balloon loans for motor vehicles are structured to be similar to leases. At maturity of the loan, the obligor may return the vehicle to the lender to satisfy the balloon payment. In such instances, if the cash flows that are to back the asset-backed securities are to include the balloon payment, the limits on the portion of the securitized pool balance attributable to residual values of the pool assets, discussed in Section III.A.2.d., should apply to such securities the same as if they were backed by leases and disclosure similar to that described in Section III.B.5.b. should be provided. If the pool includes a mixture of leases and balloon loans, they should be treated together for purposes of those calculations.

c. Nature of the Issuing Entity

The first set of interpretations we are codifying relates to the nature of the issuing entity in whose name the asset-backed securities are issued. As we explained in the Proposing Release, we believe that two interpretations always have been implied, and, as proposed, we are codifying both as additional

conditions to the definition of “asset-backed security.”

The first condition is that neither the depositor nor the issuing entity is an investment company under the Investment Company Act, nor will either become one as a result of the asset-backed securities transaction. If either was the case, we continue to believe that the regime for asset-backed securities that we are adopting today would not be appropriate.

The second condition relates to the passive nature of the issuing entity in that its activities must be restricted to the asset-backed securities transaction. In particular, the activities of the issuing entity must be limited to passively owning or holding the pool of assets, issuing the asset-backed securities supported or serviced by those assets, and other activities reasonably incidental thereto. As we stated in the proposing release for the 1992 amendments, the legal nature of the issuing entity—whether a trust, limited purpose subsidiary or other legal person—is not necessarily relevant.

However, we believe the limited function and permissible activities of the issuing entity are fundamental to the notion of a security that is to be backed solely by a pool of assets.

See Release No. 33-6943 (July 16, 1992) [57 FR 32461].

Commenters generally agreed with this principle, although several expressed concern with the wording of the condition that the issuing entity's activities are limited to “passively” owning or holding the pool assets, issuing the ABS and other reasonably incidental activities.

This formulation already exists in Exchange Act Rule 10A-3 to exclude similar securities from the mandated requirements for national securities exchanges and national securities associations to impose audit committee listing requirements for such issuers.

We are retaining the term in the final condition for the definition of “asset-backed security.” We believe the use of this term neither imposes a new requirement, nor is inconsistent with existing practice, but instead is confirmatory of one of the fundamental premises of asset-backed securitization that the issuing entity is intended to be passive in nature and its activities limited to the asset-backed securities transaction.

See,

e.g.

, Letters of ABA; ASF; and MBA.

See 17 CFR 240.10A-3(c)(7).

In the Proposing Release, we also specified that in connection with this condition, securities issued out of so-called “series trusts” do not qualify as asset-backed securities under the definition. Under the concept of a series trust, the same trust will conduct wholly separate ABS transactions out of the same trust. The trust will hold separate pools of assets with separate classes of securities for each pool. Securities backed by one pool do not have rights to the other pools. As we described in the Proposing Release, the issuing entity in this instance is not limited to owning and holding one asset pool and issuing securities backed by that pool.

Several commenters representing issuers, underwriters and their representatives wished to relax this existing principle, arguing that series trusts may reduce the costs of creating multiple issuing entities by having multiple unrelated transactions under one entity.

However, the more fundamental issue with the use of multiple, separate and unrelated transactions under one issuing entity for asset-backed securities is that it raises concerns that deviate from the core principle that investors of a particular asset-backed security should look solely to the related pool of assets for primary repayment. With a series trust structure, instead of only analyzing the particular pool, an investor also may need to analyze any effect on its security, including bankruptcy remoteness issues, if problems were to arise in another wholly separate and unrelated transaction in the same issuing entity. These concerns are exacerbated if new unrelated transactions are created after the original transaction involving the investor. No commenter indicated that series trusts as described above have been commonly used for issuing asset-backed securities.

See,

e.g.

, Letters of ABA; ASF; and BMA.

Other commenters requested clarification as to the scope of what is considered in the concept of a “series trust.” As we explained in the Proposing Release, the concept of a series trust, with multiple, separate and unrelated transactions in one issuing entity, is different from a master trust structure typical in credit card ABS and discussed later where all securities, although issued at different times, are backed by one pool. In addition, we explained that an ABS transaction with one asset pool could divide allocations of the cash flows from the pool among separate classes of securities and still qualify as an “asset-backed security.”

This could include allocating cash flows from various defined subpools within the larger pool to support particular classes but not others, regardless of whether there is any cross-cashflow support or collateralization. In these instances, there is still only one ultimate pool held by the issuing entity with securities backed by that single pool.

Further, both the condition relating to the passive nature of the issuing entity and the concept of a series trust are unrelated to the tax treatment of the transaction, such as REMIC elections.

We also explained in the Proposing Release that some ABS transactions are structured such that the asset pool consists of one or more financial assets that represent an interest in or the right to the payments or cash flows of another asset pool solely in order to facilitate the asset-backed issuance. For example, some older credit card master trust structures have added an “issuance trust” structure to provide additional flexibility in the types of ABS that may be offered. An issuance trust generally receives a collateral certificate from the master trust representing an interest in the master trust asset pool. The master trust often may have issued its own ABS backed by the same pool. The issuance trust then issues its own ABS backed by the collateral certificate, and hence indirectly by the whole master trust pool. This structure would be consistent with the definition of “asset-backed security.”

However, using the issuance trust for subsequent unrelated transactions in the manner discussed in the text with respect to series trusts would not be consistent with the definition.

Another structure we referenced in the Proposing Release relates to one used in some auto lease transactions where the auto leases and car titles often are originated in the name of a separate trust, sometimes called an “origination” or “titling” trust, to avoid administrative expenses in retitling the physical property underlying the leases. The origination trust will issue to the issuing entity for the ABS a certificate, often called a “special unit of beneficial interest” or SUBI, representing a beneficial interest in a pool of leases and automobiles in the origination trust which is to constitute the asset pool. The ABS issuing entity will issue ABS backed by the SUBI certificate, and hence indirectly by the assets underlying the SUBI. For the next transaction, the origination trust will issue a separate SUBI representing a separate pool of leases and automobiles in the origination trust which is to constitute the asset pool for the next transaction. This SUBI will be transferred to a newly created issuing entity for the next transaction which will issue ABS backed by the second SUBI. In each instance, although the same origination trust will issue multiple SUBIs representing multiple pools in the trust, there is a separate

issuing entity for each ABS issuance whose “pool” consists of a separate SUBI, and hence indirectly a separate underlying group of assets. In our proposals and in our final rules we recognize this unique structure that developed under current practice before the codification of the new ABS regulatory regime, but, as proposed, we do not extend the origination trust structure to other asset classes that do not use it currently.

d. Delinquent and Non-Performing Pool Assets

In 1997, Commission staff issued a no-action letter clarifying that an asset pool having total delinquencies of up to 20% at the time of the proposed offering may still be considered an “asset-backed security.”

In addition, there also exists a longstanding staff interpretive position that no non-performing assets may be included as part of the asset pool at the time of the proposed offering. We are codifying these interpretations, with modifications from our original proposal.

See

Bond Market Ass'n

(Oct. 8, 1997).

The issue in either case is that such assets may no longer be (or in the case of non-performing assets, are not) converting into cash within a finite time period, as required by the definition of asset-backed security, given that such assets are not performing in accordance with their terms and management or other action may be needed to convert them to cash. While as discussed above some commenters requested relaxing these clarifications, we believe the principle that the ABS should be primarily dependent on a pool of assets that self-liquidate instead of on the ability of the entity performing collection services is an important principle that should be retained. Further, we believe the conditions we are codifying regarding delinquent and non-performing assets, as revised in response to comment and discussed below, are appropriate in achieving this principle.

i. How To Calculate Delinquency and Non-Performing Levels

Several commenters requested clarification regarding when delinquency and non-performance levels should be measured.

In the Proposing Release, we reiterated the standard in the 1997 no-action letter that the cut-off date (

i.e.

, the date on and after which collections on the pool assets accrue for the benefit of the ABS holders) may be employed to establish delinquency and non-performance levels. The commenters requested further specificity regarding this standard, as well as clarity regarding application to master trusts. In response to commenters' suggestions, we are adding an instruction specifying that the measurement date for the delinquency and non-performing thresholds is to be the cut-off date for the transaction, if applicable, or, in the case of master trusts, the date as of which delinquency and loss information is presented in the prospectus for the securities.

See,

e.g.

, Letters of ABA; ASF; and Kutak.

Also in response to commenters' concerns, we have eliminated the word “original” from the proposed reference to the asset pool as unnecessary under the revised formulation.

Additional commenters requested clarification regarding transactions that include non-performing or delinquent assets as part of a pool but not as part of the funded portion and not as part of cash flow calculations for the asset-backed securities.

In other words, some transactions permit non-performing or delinquent loans to be included, although the proceeds of the asset-backed securities are not used to fund or purchase those assets for the pool and those assets are not considered in cash flow calculations. As another example, a master trust may contemplate that a pool asset that becomes non-performing may remain designated to the pool after being charged-off, with the asset being assigned a zero balance and not considered in cash flow calculations. We are including an instruction clarifying that non-performing and delinquent assets that are not funded or purchased by proceeds from the asset-backed securities and that are not considered in cash flow calculations for the asset-backed securities need not be considered as part of the asset pool for purposes of determining non-performing and delinquency thresholds.

See,

e.g.

, Letters of ASF; Capital One; and MBNA.

Of course, in such instances clear disclosure should be provided to investors of these features and the manner, composition, treatment and effect of those assets.

Some commenters also requested clarification as to calculating the thresholds for master trusts given that the same asset pool supports different series of ABS over time.

We are adding an additional instruction clarifying that the thresholds are to be measured against the entire pool whose cash flows support the asset-backed securities and not just against any new assets that are added as a result of the new issuance. Otherwise, issuers could effectively avoid the requirements by conducting the transaction through a multi-step master trust transaction instead of through a single transaction.

See,

e.g.

, Letters of A&O; ASF; and MBNA.

Some of these commenters expressed concern regarding master trusts with assets that were originally performing for a previous issuance but that subsequently become non-performing. This situation for subsequent ABS issuances can be addressed by the codification of existing practice that such assets be assigned a zero pool balance and no longer be considered in cash flow transactions as part of the securitized pool.

ii. Non-Performing Pool Assets

Regarding non-performing pool assets, we are codifying as proposed the longstanding requirement that no non-performing assets may be part of the asset pool, determined as of the measurement date discussed above. We are not persuaded by commenters' requests that the position should be relaxed.

See,

e.g.

, Letters of ABA and Jones Day.

As we discussed in the Proposing Release, part of the difficulty for issuers in complying with the existing interpretive position is that there has been no uniform definition of what is a “non-performing asset.” As commenters confirmed to us, the point at which a financial asset is considered “non-performing” is often dependent upon asset type, with some financial assets being considered non-performing before other types of financial assets would.

However, we continue to believe the point at which the financial asset should be charged-off is a consistent reference point, even if the point at which that event would occur may vary. Accordingly, we are defining “non-performing” to be a pool asset if any of the following is true:

See,

e.g.

, Letters of ABA; Auto Group; MBA; and MBNA.

• The pool asset would be treated as wholly or partially charged-off under the requirements in the transaction agreements for the asset-backed securities;

• The pool asset would be treated as wholly or partially charged-off under the charge-off policies of the sponsor, an affiliate of the sponsor that originates the pool asset or a servicer that services the pool asset; or

• The pool asset would be treated as wholly or partially charged-off under the charge-off policies applicable to such pool asset established by the primary safety and soundness regulator of any entity listed above or the program or regulatory entity that oversees the program under which the pool asset was originated.

As a result, the charge-off requirement that is most restrictive will govern. Of course, under the definition as proposed and as adopted, a pool asset that changes payment status in accordance with its

terms (

e.g.

, a student loan that is in “in-school,” grace, deferment or forbearance status) does not make the asset “non-performing,” unless the asset also meets a charge-off policy identified in the definition of “non-performing.”

We believe this definition provides flexibility for different asset classes while still ensuring that no assets are included in the securitized pool balance that would otherwise be considered to be non-performing and thus charged-off under an objective standard. Commenters generally supported this approach.

This definition differs from our original proposal in two principal ways. First, the definition has been revised in response to a commenter's request to include references not only to the sponsor's charge-off policies, but also to the policies of any affiliated originator or the servicer of the pool asset.

Second, the definition also includes a reference to the charge-off policies applicable to such pool asset established by either the primary safety and soundness regulator of the sponsor, an originating affiliate or the servicer, or the program or regulatory entity that oversees the program under which the pool asset was originated, as applicable. Several commenters indicated that, depending on the loan type, these regulators also have requirements for recognizing delinquencies and losses.

See,

e.g.

, Letters of ABA; Auto Group; and MBA.

See Letter of ABA.

See,

e.g.

, Letters of ASF and MBNA.

As we described in the Proposing Release, we also are adopting requirements for disclosure of the relevant charge-off policies in Regulation AB, discussed more fully in Section III.B. Commenters representing investors in particular strongly supported such disclosure.

See,

e.g.

, Letters of MetLife and State Street.

iii. Delinquent Pool Assets

In addition to the non-performing limitation, we also are codifying a delinquency concentration limit in a manner consistent with the 1997 staff no-action letter. As we stated in the Proposing Release, because we are creating a general definition of “asset-backed security” regardless of eligibility for shelf registration, we are adopting two separate delinquency concentration limits. We are adopting the percentage limits as proposed. For the general definition (

e.g.

, for offerings that could be registered on a non-shelf basis on Form S-1), delinquent assets may not constitute 50% or more, as measured by dollar volume, of the asset pool as of the measurement date described above. As we noted in the Proposing Release, we believe concentrations above that threshold begin to raise serious doubt that the transaction should be characterized as an “asset-backed security” as the payments on the securities in such transactions would appear to depend more on the ability of the entity or entities that provide collection services for the delinquent assets than on the self-liquidating nature of the underlying assets. For shelf registration eligibility, we are retaining the existing 20% delinquency concentration level in the no-action letter, as proposed.

For purposes of determining whether a pool asset is delinquent under either threshold, we proposed to define a pool asset as “delinquent” if any portion of a contractually required payment on the asset is 30 days or more past due. The proposed definition was based on the existing standard in the staff no-action letter.

See note 83 above.

Several commenters requested more flexibility for the definition. In particular, several commenters noted that some sponsors do not consider an obligor delinquent when any portion of a contractually required payment is late, but instead only when less than some percentage (

e.g.

, 90%) or amount of a payment is received.

Changing their systems for purposes of the proposed requirement, these commenters argued, would be burdensome. Others argued that sponsors use different reporting methodologies in determining delinquency, such as the Office of Thrift Supervision method or the Mortgage Bankers Association of America method.

See,

e.g.

, Letters of ABA; ASFA; Auto Group; Citigroup; MBA; and TMCC.

See,

e.g.

, Letters of ABA; MBA; and Metlife. See also Fitch, Inc., “Residential Mortgage Delinquency Reporting Methods” (Nov. 13, 2003).

We noted in the Proposing Release that, with regard to determining delinquency, one potential area of concern is improper re-aging or restructuring of delinquent accounts, such as declaring an asset with multiple past-due payments as current even if only the last payment was made. We proposed clarifying in the definition of “delinquent” that a pool asset that was more than one payment past due could not be characterized as not delinquent if only partial payment on the total past due amount had been made, unless the obligor had contractually agreed to restructure the obligation, such as part of a workout plan. While not all agreed, commenters generally objected to this approach, arguing that servicers sometimes restructure obligations without contractually amending the pool asset documents.

100

Compare,

e.g.

, Letters of ABA; ASFA; ASF; and TMCC; with Letter of State Street.

As an alternative to the proposed definition of “delinquent,” some of these commenters suggested an approach similar to the definition of “non-performing” that looks to the provisions specified in the relevant transaction agreements or the policies of the sponsor in determining delinquency, so long as these provisions and policies are disclosed. As commenters confirmed to us, policies relating to delinquency vary somewhat across asset types and sponsors, similar to charge-off policies. However, we continue to believe a standard linked to the longstanding 1997 no-action letter should be retained to clarify the degree of flexibility permitted.

Accordingly, we are defining a pool asset as “delinquent” if a pool asset is more than 30 or 31 days or a single payment cycle, as applicable, past due from the contractual due date, as determined in accordance with any of the following:

• The transaction agreements for the asset-backed securities;

• The delinquency recognition policies of the sponsor, any affiliate of the sponsor that originated the pool asset or the servicer of the pool asset; or

• The delinquency recognition policies applicable to such pool asset established by the primary safety and soundness regulator of any entity listed above or the program or regulatory entity that oversees the program under which the pool asset was originated.

101

Similar to the “non-performing” definition, the delinquency requirement that is most restrictive will govern. In addition and as similar to the “non-performing” definition, a pool asset that changes payment status in accordance with its terms (

e.g.

, a student loan that is in “in-school,” grace, deferment or forbearance status) does not make the asset “delinquent,” unless the asset also meets a delinquency policy identified in the definition of “delinquent.”

With an approach that relies more on a party's delinquency recognition policies, we believe appropriate disclosure of the policies and their application becomes even more important.

102

As a result and as referenced in the Proposing Release, in adopting delinquency limits, we also are adopting disclosure requirements, discussed more fully in Section III.B., of policies regarding grace periods, re-aging, restructures, partial payments considered current or other such practices on delinquencies. We also are adopting disclosure requirements for

on-going reporting, discussed more fully in Section III.D., regarding material modifications, extensions or waivers to pool asset terms, fees, penalties or payments. We also are requiring disclosure of any material changes to delinquency recognition policies. Given this disclosure-based approach, we are not adopting the proposed requirement permitting only contractual-based re-agings.

102

See,

e.g.

, Moody's Investors Service, Inc., “Loan Modifications and Forbearance Plans Impact on Home Equity Securitizations” (Sep. 24, 2004).

e. Lease-Backed Securitizations and Residual Values

As discussed above, the one change we proposed making to the basic definition of “asset-backed security” is to expand the definition to include securitizations backed by leases where part of the cash flows backing the securities is to come from the disposal of the residual asset underlying the lease (

e.g.

, selling an automobile at the end of an automobile lease). In that instance, the asset-backed securities are not backed solely by financial assets that “by their terms convert into cash,” because the transaction also involves a physical asset that must be sold in order to obtain cash. As a result, securitizations where a portion of the cash flow to repay the securities is anticipated to come from the residual value of the physical property do not fall within the current definition of “asset-backed security” in Form S-3 and thus are often registered on a non-shelf basis on Form S-1.

As we explained in the Proposing Release, lease-backed ABS have grown into a common and recognized segment of the overall ABS market.

103

We received support from commenters for adding lease-backed ABS to the definition of “asset-backed security,” and therefore eligibility for shelf-registration if the requirements of Form S-3 are met.

104

However, as we explained in the Proposing Release, even though we are recognizing the growth in lease-backed ABS that include securitizations of residual value, such securitizations are subject to additional factors that are not present in securitizations backed solely by financial assets that convert into cash. Residual value is often determined at the inception of a lease contract and represents an estimate of the leased property's resale value at the end of the lease. Assumptions and modeling are necessary to determine the amount of the residual value. In addition, the transaction is not simply dependent on the servicing and amortization of the pool assets, but also on the capability and performance of the party that will be used to convert the physical property into cash and thus realize the residual values.

103

See,

e.g.

, Fitch, Inc., “Under the Hood: Automobile Lease ABS Uncovered” (Jun. 14, 2000).

104

See,

e.g.

, Letter of Auto Group.

The higher the percentage of cash flows that are to come from residual values, the more important these other factors become and the less the transaction resembles a traditional securitization of financial assets for which our regime for asset-backed securities is designed. Although some commenters did not believe we should have any limits on residual values,

105

we continue to believe, as discussed above, that the core principle that an asset-backed security should be primarily serviced by financial assets that by their terms convert into cash should be retained. At the same time, we believe a defined limited exception to this general principle is appropriate and consistent for access to the alternate regulatory regime for certain lease-backed ABS.

105

See,

e.g.

, Letters of ABA; American Honda Finance Corporation (“AHFC”); ASF; Auto Group; and TMCC.

As we explained in the Proposing Release, we are addressing concerns with the deviation from the core principle in two principal ways. First, we are adopting disclosures, discussed more fully in Section III.B., on how residual values are estimated and derived, statistical information on historical realization rates and disclosure of the manner and process in which residual values will be realized, including disclosure about the entity that will convert the residual values into cash. Second, we are establishing limits on the percentage of the securitized pool balance attributable to residual values in order to be considered an “asset-backed security.” We believe these changes will expand eligibility of lease-backed transactions for shelf registration and appropriately permit lease-backed transactions under our new rules while continuing to apply the core principles underlying the definition of “asset-backed security.”

As we noted in the Proposing Release, market practice regarding lease-backed securitizations varies on the typical percentage of the securitized pool balance attributable to residual values. For example, motor vehicle lease securitizations often have higher residual value percentages than equipment lease securitizations due to the higher resale values that often exist between motor vehicles and other equipment. Accordingly, after reviewing residual value percentages for typical lease-backed securitizations, we proposed that the portion of the cash flow to repay the securities anticipated to come from the residual value of the physical property underlying the leases could not constitute:

• For automobile leases, 60% or more, as measured by dollar volume, of the original asset pool at the time of issuance of the asset-backed securities; and

• For all other leases, 50% or more, as measured by dollar volume, of the original asset pool at the time of issuance of the asset-backed securities.

In addition, we proposed a more stringent limitation for cash flow from residual values for offerings of securities backed by leases other than motor vehicle leases that may be registered on Form S-3 and thus eligible for shelf registration. For Form S-3 eligibility of ABS backed by such leases, we proposed that the portion of the cash flow anticipated to come from residual values could not constitute 20% or more, as measured by dollar volume, of the original asset pool at the time of issuance of the asset-backed securities.

Commenters raised several concerns with our proposal if percentage limitations were to be maintained. First, commenters believed the proposal did not provide enough clarity on how to make the necessary calculations.

106

In particular, commenters were concerned with the proposed choice of language for the calculation, which was phrased in reference to “the portion of the cash flow anticipated to come from residual values.” We note that filings for lease-backed ABS today typically disclose the portion of the securitized pool balance attributable to residual values and the method of determining such figures. Our intention had been and is to codify that practice in connection with complying with the residual value percentages. To clarify this intention, we are revising the language in the requirement to more closely track language used in lease-backed ABS filings to refer to the portion of the securitized pool balance attributable to residual values, as determined as of the measurement date in accordance with the transaction agreements for the asset-backed securities. We note that the residual value itself is often calculated at the inception of the lease, but the portion of the securitized pool balance attributable to it (

e.g., vis a vis

lease payments) is a percentage determined at the time of the transaction. Similar to our final rules with respect to determining delinquency and non-performance thresholds, we are

clarifying in an instruction that the “measurement date” is the cut-off date for the transaction, if applicable, or, in the case of master trusts, the date as of which securitized pool balance information is presented in the prospectus for the securities.

106

See,

e.g.

, Letters of ABA; ASF; Auto Group; and TMCC.

Second, commenters believed the proposed percentages were too stringent to permit all motor vehicle lease-backed ABS transactions that have been conducted.

107

A threshold set against market practice may not encompass every transaction conducted before the threshold was set. However, we do seek to codify percentages that are based upon current market practice. Based on further review of lease-backed ABS transactions during the past five years, including the examples provided by commenters, we are raising the percentage for motor vehicle lease-backed ABS from 60% to 65%.

107

See,

e.g.

, Letters of ABA; AHFC; ASF; Auto Group; and TMCC.

Finally, commenters believed that if residual value limitations are retained, an exception should be made to the extent there is a residual value guarantee, residual value insurance or where the lessee is obligated to cover any residual losses.

108

In each instance, these commenters argued, the credit risk for the residual loss is with a separate obligated party. We are providing an instruction that residual values need not be included in measuring against the limitation to the extent a separate party is obligated for such amount. However, we note that, depending on the extent of the separate party's obligation for such amounts, such obligation may result in that party constituting a significant provider of credit enhancement or other support or, when the lessee is obligated to cover any residual losses, a significant obligor. In that instance, as described in Sections III.B.7 and 8, additional disclosures, including financial disclosures, may be required.

108

See,

e.g.

, Letters of ABA; ASF; and Auto Group.

In addition to other technical changes,

109

we are adopting as proposed the limits for non-motor vehicle leases. For the basic definition, the portion of the securitized pool balance attributable to residual values for such leases may not constitute 50% or more, as measured by dollar volume. For Form S-3 eligibility, the portion of the securitized pool balance attributable to residual values for such leases may not constitute 20% or more, as measured by dollar volume.

110

109

For example, in response to comment we are clarifying the reference from “automobile” lease to “motor vehicle” lease. Motor vehicle leases for this purpose includes leases for automobiles (which includes light duty trucks, sport utility vehicles and vans), motorcycles, trucks and buses. As proposed, motor vehicle lease would not include leases for leisure craft such as watercraft or snowmobiles.

110

Securitizations backed solely from the payment on the leases and not including the residual value of the underlying physical property would not, of course, need to comply with the thresholds.

f. Exceptions to the “Discrete” Requirement

The last set of interpretations we are codifying relates to exceptions to the requirement in the definition of “asset-backed security” that the asset pool be “discrete.” As discussed above, the existence of the “discrete” requirement is to prevent a level of portfolio management that is not contemplated by the definition of “asset-backed security” or consistent with this registration and reporting regime. In addition, the lack of a “discrete” requirement would make it difficult for an investor to make an informed investment decision when the composition of the pool is unknown or could change over time.

However, as we explained in the Proposing Release, ever since the original definition of “asset-backed security” was adopted, there has been some confusion over the meaning of the term “discrete” in the definition, particularly with respect to language in the definition that specifies the asset pool must be a “discrete pool of receivables or other financial assets, either fixed or revolving.” The 1992 Release specified that the phrase “fixed or revolving” was added “in order to make clear that the definition covers ‘revolving’ credit arrangements, such as credit card and short-term trade receivables, home equity loans and automotive dealer floorplan financings, where account or loan balances revolve due to periodic payments, charge-offs and closings of the receivables.”

111

Thus, the basic principle was that the balance of a pool asset may revolve, but not the asset pool itself.

112

111

See note 32 above. The 1992 Release also explained that, “In credit card financings, for example, the securities are backed by current and future receivables generated by specified credit card accounts. The balances of the pool assets fluctuate as new receivables are generated and existing amounts are paid or charged off as a default. If the accounts do not generate sufficient cash flow to support the securities, the sponsor may be required to assign additional receivables from other accounts to the public security holders' interest in the pool.”

112

As we indicated in the Proposing Release, there are additional instances when the asset pool may change under the current definition without infringing the “discrete pool” requirement. For example, often the depositor or other seller of the pool assets will make standard representations and warranties regarding the pool assets, such as to their principal balance and status at the time of transfer to the trust. If an asset fails to meet the requirements of those representations or warranties, there may be obligations for the depositor to repurchase or substitute that asset for assets that do comply with the representations or warranties. These pool composition changes are permissible under the current definition as “rights or other assets designed to assure the servicing or timely distribution of proceeds to securityholders.” There is thus no need to specify a separate exception from the “discrete” requirement for such instances.

Nevertheless, in response to market developments, the staff has allowed certain exceptions, with limits, to the discrete pool requirement. These exceptions relate to master trusts, prefunding periods and revolving periods. In a master trust, the ABS transaction contemplates future issuances of asset-backed securities backed by the same, but expanded, asset pool. Pre-existing securities also would therefore be backed by the same expanded asset pool. In a prefunding period, a limited portion of the proceeds of the offering is set aside for the future acquisition of additional pool assets within a specified period of time after the issuance of the asset-backed securities. In a revolving period, cash flows from the asset pool may be recycled for a specified period to acquire new pool assets instead of being applied to payments on the asset-backed securities.

113

The period after the revolving period when cash flows are applied to payments on the asset-backed securities is often called the “amortization” or “pay-down” period.

The staff's interpretive history in this area has resulted in limits on which asset classes may use these structures and still be considered an “asset-backed security.”

114

As discussed above, we are codifying these three exceptions and also expanding them so that they are applicable to all asset types.

115

As we noted in the Proposing Release, a transaction can employ one or more of these features and still qualify as an “asset-backed security.”

116

We believe these expansions will result in increased flexibility in structuring transactions to meet market demands.

114

For example, nearly all asset classes might employ a limited prefunding period. However, only a limited subset of asset classes were permitted to have revolving periods. Not all of these interpretations have been transparent.

115

But see note 179 and the accompanying text regarding other factors that may limit the use of these features where the distribution of the underlying pool assets may need to be separately registered.

116

For example, an offering may be set up as a master trust with a prefunding period for a portion of the proceeds of the issuance and a revolving period.

As in the case of our treatment of lease-backed ABS that involve residual values, we believe a large part of the concern relating to these structures can be appropriately addressed through disclosure, both at the time of issuance

of the asset-backed securities as well as on an ongoing basis through disclosure of how the asset pool is materially changing. As such, we are adopting, with certain modifications, our proposed requirements for more detailed disclosures in Regulation AB, discussed more fully in Sections III.B. and III.D., regarding the operation of such structures and changes to the asset pool over time.

We also are adopting limits, as discussed below, on the amount and duration of prefunding and certain revolving periods to limit the amount of changes to the asset pool, while still allowing flexibility to accommodate market demands. As noted in the Proposing Release, these limits are designed to establish parameters for the types of securities that should be subject to the ABS regulatory regime. As with lease-backed ABS, we believe these proposals will expand eligibility of these structures while continuing to apply the core principles underlying the definition of “asset-backed security.”

i. Master Trusts

As proposed, master trust structures will be allowed to meet the definition of “asset-backed security” without any pre-determined limits.

117

Commenters supported expanding access to master trusts.

118

However, several commenters noted that most master trusts permit, and in some cases require, the depositor to make additional asset additions to the asset pool from time to time, regardless of when ABS are issued.

119

In particular, commenters expressed concern that the proposed wording of the exception for master trusts, which was limited to asset additions in connection with future issuances of asset-backed securities, would not allow for additions of pool assets in current master trust structures that are necessary to maintain minimum pool balances, such as the depositor's interest in the trust. As the commenters explained, permitting such additions is an essential means for these current structures of assuring an adequate pool balance for master trusts with revolving assets. To maintain existing practice, we are modifying the exception for master trusts to clarify that the offering related to the securities may contemplate both adding additional assets to the pool in contemplation of future issuances of asset-backed securities backed by such pool as well as, for master trusts with revolving periods or receivables or other financial assets that arise under revolving accounts, additions to the asset pool in connection with maintaining minimum pool balances in accordance with the transaction agreements.

120

117

Of course, each additional issuance of securities backed by the same pool and the additional pool assets would need to be consistent with the requirements for an “asset-backed security.”

118

See,

e.g.

, Letters of ABA; AFSA; AIG; Capital One; MBNA; and State Street.

119

See,

e.g.

, Letters of AFSA, Capital One; and MBNA.

120

Note that the limit on revolving periods for securities backed by receivables or other financial assets that do not arise under revolving accounts is co-extensive with this provision for master trusts. Hence, if a master trust for such pool assets uses a revolving period, including to maintain minimum pool balances, the revolving period for each series would be limited to a three-year period. We have included clarifying language regarding this point in the “discrete” pool exception for master trusts.

ii. Prefunding Periods

For prefunding periods, we proposed separate limits for shelf and non-shelf offerings similar to our proposals for lease-backed ABS. For the general definition of “asset-backed security,” we proposed that the amount of proceeds that may be used for a prefunding period could be up to 50% of offering proceeds and the length of the prefunding account could last up to one year from the date of issuance of the asset-backed securities. As we stated in the Proposing Release, we believe prefunding periods above these thresholds begin to raise serious doubt that the transaction should be characterized as an “asset-backed security.” For Form S-3 eligibility, we proposed that the amount of proceeds that may be used for a prefunding period could be up to 25% of offering proceeds over a similar one-year period.

Commenters were mixed on our proposals. One commenter representing an ABS investor supported the proposed limits.

121

Several other commenters representing primarily issuers and their representatives noted that although the proposed Form S-3 level was consistent with the requirements in the staff's no-action letter regarding relief from Rule 15c2-8(b), they believed the staff has permitted higher limits and requested eliminating or expanding the tests to provide increased flexibility.

122

121

See Letter of State Street. In addition, the commenter suggested further limiting prefunding such that it is applicable only to financially secure sponsors with a track record of securitizations with the same asset type.

122

See,

e.g.

, Letters of ASFA; ASF; Auto Group; BMA; Capital One; FSR; and TMCC.

As discussed above, we continue to believe a limit on prefunding is appropriate. However, after evaluating the comment received, we no longer believe it is necessary to have separate limits for Form S-3 shelf registration. Therefore, we are only codifying the proposal with respect to the basic definition. In addition and in response to comment, we are clarifying application of the prefunding limitation with respect to master trusts.

123

Under the final rule, regardless of the form on which the offering was registered, a prefunding period is permitted for up to one year from the date of issuance of the asset-backed securities and the prefunded amount may consist of up to 50% of offering proceeds or, in the case of master trusts, up to 50% of the aggregate principal balance of the total asset pool whose cash flows support the asset-backed securities.

123

See,

e.g.

, Letter of ASF.

iii. Revolving Periods

Our proposals for revolving periods recognized the nature of the asset being securitized (

i.e.

, whether it itself is fixed or revolving). We proposed that for receivables or other financial assets that by their nature revolve (

e.g.

, credit cards, dealer floorplan financings or home equity lines of credit), there would as today be no limit on the number of assets that may revolve nor a limit on the duration of the revolving period. For fixed receivables or other financial assets (

e.g.

, standard residential mortgages, auto loans and leases), we proposed limits similar to prefunding periods; that is, the basic definition of “asset-backed security” would specify that the additional assets that may be acquired in the revolving period may constitute up to 50% of the proceeds of the offering and the duration of the revolving period may last for up to one year from the date of issuance of the asset-backed securities. For Form S-3 eligibility, the revolving period would be limited to 25% of proceeds over a one-year period.

Several commenters urged eliminating any restrictions on revolving periods, regardless of the type of asset or the form of registration.

124

Revolving periods, these commenters argued, allow issuers flexibility to create ABS with longer or different maturities and weighted average lives than the underlying pool assets. Revolving periods were argued to be particularly necessary in the case of shorter-term assets to create ABS with meaningful maturities. As with the other proposed exceptions to the definition of asset-backed security, these commenters believed concerns about increased revolving periods were mitigated by the proposed increased disclosure regarding

such periods and changes to the asset pool over time.

124

See,

e.g.

, Letters of ABA; AIG; ASF; Auto Group; ESF; and TMCC.

Revolving periods have long been permitted under staff practice for assets that by their nature revolve, as discussed above. There is thus an established record of experience with revolving periods for such asset classes. For other assets, while we recognize the commenters' arguments regarding the benefit of revolving periods in structuring asset-backed securities, we also recognize the management aspects that arise and are thus not prepared at this point to eliminate all restrictions on revolving periods for purposes of which securities should qualify as an “asset-backed security” subject to Regulation AB. However, after evaluating the comments and their arguments regarding the market reality of the use of revolving periods, we are expanding the exception from that proposed for those asset classes. We also are making technical changes to the proposal in response to comment to clarify the types of assets subject to the requirement.

Accordingly, under the final rules there will remain no restrictions on revolving periods for securities backed by receivables or other financial assets that arise under revolving accounts. For securities backed by receivables or other financial assets that do not arise under revolving accounts, an unlimited revolving period will be permitted for up to three years, so long as the new pool assets that are added are of the same general character as the original pool assets. One group of commenters who suggested such an alternative believed a three year revolving period would improve efficiency in structuring transactions.

125

As with prefunding accounts, we are not establishing a more stringent revolving limitation for Form S-3 eligibility. These expansions from the proposal allow issuers substantially increased flexibility over current staff practice to structure asset-backed securities.

125

See Letter of Auto Group.

3. Securities Act Registration Statements

a. Form Types

As we noted in the Proposing Release, we are not creating a new registration statement form for ABS offerings. We believe the existing form structure is sufficient, provided there are appropriate instructions in the applicable forms as to their use for ABS offerings. As proposed, we are limiting registration of asset-backed securities offerings to two forms: Form S-1 or Form S-3.

126

As is currently the case, Form S-3 will retain the requirements that will qualify an offering for delayed shelf registration on that form pursuant to Rule 415(a)(1)(x).

127

Form S-1 will be the form for all other offerings that meet the definition of an “asset-backed security” but do not meet the additional eligibility requirements for Form S-3 (

e.g.

, investment grade and additional limits on lease-backed ABS and delinquent pool assets). We received support from commenters for this approach.

128

As proposed, we are amending our other Securities Act registration statement forms for primary offerings to exclude explicitly their use for ABS offerings.

129

Since as discussed below we are not establishing a separate disclosure regime or requirements for foreign ABS, we continue to believe it is unnecessary to provide separate form types for foreign ABS offerings. These offerings also will be registered on Forms S-1 or S-3, as applicable.

126

As is the case today, Form S-4 also will remain available with respect to transactions, such as exchange offers, authorized by that Form. The disclosure required will remain consistent with that for a primary offering on Form S-1 or S-3, as applicable.

127

17 CFR 230.415(a)(1)(x). In the Offering Process Release, we proposed several changes to the operation of the shelf registration system under the Securities Act. We encourage ABS market participants to comment specifically on those proposals.

128

See,

e.g.

, Letter of ABA.

129

See amendments to Form S-2, S-11, F-1, F-2 and F-3. Any offerings meeting the definition of asset-backed security that previously used one of these forms for registration, such as Form S-11, in lieu of Form S-3 must henceforth be registered on Form S-1 instead. As discussed in Section III.E., we also are clarifying that ABS issuers do not qualify as a “small business issuer.” Therefore, ABS offerings are ineligible for Forms SB-1 and SB-2 (referenced in 17 CFR 239.9 and 17 CFR 239.10). For mortgage related securities that are relying on Rule 415(a)(1)(vii), see note 61 above.

As we noted in the Proposing Release, while Form S-3 currently specifies eligibility for ABS offerings, neither it nor any other form clarifies how the form is to be prepared for such an offering. Therefore, we are adopting our proposal for separate general instructions for both Form S-1 and Form S-3 to specify use for ABS offerings.

New General Instruction VI. to Form S-1 clarifies how that form is to be prepared for an ABS offering. In particular, the instruction clarifies who is to sign the registration statement (discussed more fully in Section III.A.3.d.) as well as the menu of required disclosure items. As to the latter, the instruction identifies the existing items in the form that may be omitted as well as substitute core disclosure items from Regulation AB that will be required. As discussed in Section III.B., Items 1102-1120 of Regulation AB represent the basic disclosure package for registered ABS offerings. Any other applicable items specified in Form S-1, such as the description of the securities and the offering, will continue to be required.

130

Under the final rules, the application of the disclosure items for Form S-1 will be as follows:

130

As is the case today, unless otherwise specified, no reference need be made in the prospectus to inapplicable items. See Securities Act Rule 404(c) (17 CFR 230.404(c)).

Disclosure for Form S-1 for Registered ABS Offerings

Existing form items

Required if applicable

May be omitted

Item 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus

•

Item 2. Inside Front and Outside Back Cover Pages of Prospectus

•

Item 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges

•

Item 4. Use of Proceeds

•

Item 5. Determination of Offering Price

•

Item 6. Dilution

•

Item 7. Selling Security Holders

•

Item 8. Plan of Distribution

•

Item 9. Description of Securities to be Registered

•

Item 10. Interests of Named Experts and Counsel

•

Item 11. Information with Respect to the Registrant

•

Item 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities

•

Item 13. Other Expenses of Issuance and Distribution

•

Item 14. Indemnification of Directors and Officers

•

Item 15. Recent Sales of Unregistered Securities

•

Item 16. Exhibits and Financial Statement Schedules

•

Item 17. Undertakings

•

Additional Disclosure Items from Regulation AB:

Items 1102-1120 of Regulation AB

•

New General Instruction V. to Form S-3 performs a similar function for that form. As we explained in the Proposing Release, unlike current practice on Form S-1, non-ABS offerings on Form S-3 rely predominately on incorporation by reference of Exchange Act reports for disclosure unrelated to the offering. As a result, existing Form S-3 does not set forth a detailed menu of disclosure items apart from disclosure about the offering. However, because a reporting history is not required for ABS for Form S-3 eligibility, investment grade ABS offerings registered on that form often must present most of their disclosure in the base prospectus and prospectus supplement in lieu of incorporating information by reference. Accordingly, the new Form S-3 instruction for ABS, as proposed, does not specify any existing items that may be omitted, but rather specifies the addition of the same basic disclosure package from Regulation AB. The other disclosure items required by Form S-3, such as the description of the securities and the offering, will continue to be required as applicable. Therefore, as shown in the following table, the effect of the new instruction is to add the basic disclosure package of Items 1102-1120 of Regulation AB:

Disclosure for Form S-3 for Registered ABS Offerings

Existing form items

Required if applicable

May be omitted

Item 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus

•

Item 2. Inside Front and Outside Back Cover Pages of Prospectus

•

Item 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges

•

Item 4. Use of Proceeds

•

Item 5. Determination of Offering Price

•

Item 6. Dilution

•

Item 7. Selling Security Holders

•

Item 8. Plan of Distribution

•

Item 9. Description of Securities to be Registered

•

Item 10. Interests of Named Experts and Counsel

•

Item 11. Material Changes

•

Item 12. Incorporation of Certain Information by Reference

•

Item 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities

•

Item 14. Other Expenses of Issuance and Distribution

•

Item 15. Indemnification of Directors and Officers

•

Item 16. Exhibits

•

Item 17. Undertakings

•

Additional Disclosure Items from Regulation AB:

Items 1102—1120 of Regulation AB

•

b. Presentation of Disclosure in Base Prospectuses and Prospectus Supplements

As we noted in the Proposing Release, by specifying the menu of disclosure items applicable for ABS offerings eligible for Form S-3, and thus shelf registration, we do not intend to change the current practice or ability to present such disclosure in a separate base prospectus and prospectus supplement, a practice also available for non-ABS offerings.

131

Items in the basic disclosure package that are known or reasonably available should continue to be described in the base prospectus, while disclosure dependent on the final terms of the particular takedown can still be provided in the prospectus supplement.

132

If this approach is followed, a form of prospectus supplement is required to accompany the base prospectus in the registration statement at the time of effectiveness that outlines the format of deal-specific information that will be disclosed at the time of each takedown.

133

131

However, as stated in the 1992 Release and as currently applicable to all shelf offerings, registrants are reminded that disclosure in the registration statement at the time of effectiveness should accurately reflect the registrant's current plans and arrangements with respect to the distribution of its securities. If a registrant plans to conduct a prompt takedown of asset-backed securities, the registration statement at the time of effectiveness must currently include all available information regarding the offering, including information about the asset pool, subject to any omissions permitted by Securities Act Rule 430A (17 CFR 230.430A), including a completed prospectus supplement and not just a form of prospectus supplement. Tax and legality opinions reflecting the takedown and related consents also would need to be filed pre-effectively with respect to any proposed offering contemplated to occur promptly. The Commission has proposed to eliminate this restriction on the use of so called “convenience shelf.” See the Offering Process Release. This proposed general change, if adopted, would also apply to ABS.

132

For example, the base prospectus should likely contain risk factors applicable to the transaction as a whole or the nature of the securities to be issued. The base prospectus also should include a discussion of the material federal income tax consequences from investing in asset-backed securities. Of course, the prospectus supplement would include any additional risk factors or more specific disclosure as to tax consequences applicable to the particular structure and securities to be offered.

133

In addition, consistent with the longstanding requirements for all registered offerings, required opinions of counsel regarding tax consequences and

the legality of the securities being registered must be filed prior to effectiveness of the registration statement. See Items 601(b)(5) and 601(b)(8) of Regulation S-K. Note that these requirements exist independently from any contractual requirements of the transaction to deliver opinions at the closing of the asset-backed securities transaction. Where a prompt offering under the registration statement is not contemplated, opinions filed as of effectiveness may be appropriately conditioned or qualified pending the actual issuance of securities in the future. However, the opinions filed as of the time of effectiveness must still be signed opinions, not unsigned or draft forms of opinion. For each takedown that occurs, as with other exhibits representing the final terms of the takedown, amended or final opinions without such conditions or qualifications must be filed, either as an exhibit to the registration statement (See Securities Act Rule 462(d) (17 CFR 230.462(d) which provides for immediate effectiveness of a post-effective amendment filed solely to add exhibits), or under cover of Form 8-K and incorporated by reference into the registration statement.

We also are adding a clarifying instruction to General Instruction V.A.2. of Form S-3 that when a preliminary prospectus is required under Form S-3 pursuant to new Securities Act Rule 190(b)(7), the information to be included in the base prospectus and prospectus supplement is to be substantially similar to that which would be included if the preliminary prospectus was required under Form S-1 pursuant to such rules.

As referenced in the 1992 Release, the type or category of asset to be securitized must be fully described in the registration statement at the time of effectiveness. The structural features contemplated also should be disclosed, as well as identification of the types or categories of securities that may be offered, such as interest-weighted or principal-weighted classes (including IO or PO securities), planned amortization or companion classes or residual or subordinated interests. In addition, risks associated with changes in interest rates or prepayment levels should be fully disclosed. The various scenarios under which payments on the asset-backed securities could be impaired also should be discussed.

In the Proposing Release, we explained the longstanding position that when presenting disclosure in base prospectuses and prospectus supplements, the base prospectus must describe the types of offerings contemplated by the registration statement. A takedown off of a shelf that involves assets, structural features, credit enhancement or other features that were not described as contemplated in the base prospectus will usually require either a new registration statement (

e.g.,

to include additional assets) or a post-effective amendment (

e.g.,

to include new structural features or credit enhancement) rather than simply describing them in the final prospectus filed with the Commission pursuant to Securities Act Rule 424. Registrants should exercise discretion, however, in describing only the material asset types or features reasonably contemplated to be included in an actual takedown.

As proposed, we are specifying in the general instruction to Form S-3 the existing requirement to prepare separate base prospectuses and forms of prospectus supplements when multiple asset types may be securitized in discrete pools in takedowns under that registration statement. As stated in the 1992 Release, a registration statement may not merely identify several alternative types of assets that may be securitized. A separate base prospectus and form of prospectus supplement must be presented for each asset class that may be securitized in a discrete pool in a takedown under that registration statement. We also are adopting as proposed a similar requirement for takedowns involving pools of foreign assets where the assets originate in separate countries or the property securing the pool assets is located in separate countries.

Commenters raised several questions about the proposed instruction, particularly regarding the proposed requirement for a separate base and form of supplement for takedowns involving separate jurisdictions.

134

We wish to clarify a potential misconception regarding these requirements. A separate base and form of supplement only is required for asset types or jurisdictions that may be securitized in a discrete pool in separate takedowns under the registration statement. If pool assets of different asset types or different jurisdictions are to be pooled together in a single transaction (

e.g.,

an offering with a multi-jurisdictional pool or an offering with a pool of 45% residential mortgages and 55% commercial mortgages), a single base and form of prospectus supplement would be permitted, so long as the appropriate disclosures for each asset type or jurisdiction were included.

134

See,

e.g.,

Letters of A&O; ABA; ASF; Association of the Bar of the City of New York (“NYCBA”); Aus. SF; CMSA; and ESF.

Similarly, several commenters pointed out that the staff has permitted the use of a single base and form of supplement for transactions that principally consist of a particular asset class, but which also describes one or more potential additional asset classes, so long as the pool assets for the additional classes in the aggregate are limited to 10% of the pool for any particular takedown. We also are clarifying this position in the instruction and applying it to both separate asset classes and separate jurisdictions.

We noted in the Proposing Release that an additional issue that often results in staff comment is the inclusion of language in registration statements that investors should rely on the information in the prospectus supplement if the terms of a particular series of securities conflict or vary between the base prospectus and the accompanying prospectus supplement. As is currently the case today, disclosure in prospectus supplements regarding the transaction may enhance disclosure in the base prospectus regarding contemplated transactions, but should not contradict it. Similarly, including language to the effect of “Except as otherwise provided in the prospectus supplement” will permit some supplemental or modified terms of transactions, but should not be construed as creating the ability to add asset types or structural features in a takedown that were not otherwise contemplated by and described in the base prospectus.

c. Form S-3 Eligibility Requirements for ABS

As proposed, we are maintaining the existing requirement for ABS Form S-3 eligibility that the asset-backed securities must be rated “investment grade” by a nationally recognized statistical rating organization, or NRSRO, at the time of offer and sale to the public.

135

The definition of “investment grade” will remain the same as for other investment grade securities that may be registered on Form S-3.

136

As we explained in the Proposing Release, the “investment grade” requirement has existed for over ten years with respect to asset-backed securities and for over twenty years with respect to other non-convertible securities. The Commission is engaged in a broad review of the role of credit rating agencies in the operation of the securities markets, including whether credit ratings should continue to be used for regulatory purposes under the federal securities laws.

137

We received comment in response to the Proposing

Release on possible alternatives to using an investment-grade requirement for ABS Form S-3 eligibility purposes.

138

However, pending the outcome of our review of credit rating agencies, we are maintaining the same rules and standards currently used for purposes of Form S-3 eligibility.

135

NRSRO continues to have the same meaning as used in 17 CFR 240.15c3-1(c)(2)(vi)(F).

136

See General Instruction I.B.2 of Form S-3 and note 60 above.

137

See Release No. 33-8236 (Jun. 4, 2003) [68 FR 35258]. For a detailed discussion on credit rating agencies and the Commission's use of credit ratings under the federal securities laws, see the U.S. Securities and Exchange Commission, “Report on the Role and Function of Credit Rating Agencies in the Operation of the Securities Markets, As Required by Section 702(b) of the Sarbanes-Oxley Act of 2002” (Jan. 2003). The Report is available on our Web site.

138

See,

e.g.,

Letters of ABA; Kutak; Moody's; and State Street.

As discussed more fully in Section III.A.2. above, we are adding two additional conditions regarding the types of asset-backed securities that would qualify for Form S-3 eligibility. First, we are codifying the current position that delinquent assets may not constitute 20% or more, as measured by dollar volume, of the asset pool. Second, for securities backed by leases other than motor vehicle leases, the portion of the securitized pool balance attributable to residual values may not constitute 20% or more, as measured by dollar volume. As referenced in Section III.A.2.f., we are not adopting the proposed additional restrictions for prefunding accounts and revolving periods for Form S-3 eligibility.

Consistent with existing requirements, we did not propose to add an issuer Exchange Act reporting history requirement for ABS Form S-3 eligibility. However, we did propose codifying that Exchange Act reporting obligations regarding other asset-backed securities transactions established by the sponsor and the depositor must have been complied with for the prior 12 months for continued Form S-3 eligibility for new registration statements.

139

This proposal would not have required that there be a reporting history with respect to any prior transactions, only that any existing or prior requirements during the past year had been met. As explained in the Proposing Release, we did not believe it would be appropriate to continue to allow the benefits of shelf registration to new registration statements established by sponsors or depositors that have not complied with ongoing reporting obligations involving previous asset-backed securities transactions.

139

The proposal with regard to the depositor was consistent with existing staff policy.

Comments from issuers and their representatives objected to the proposals as generally being more restrictive than necessary to encourage better Exchange Act reporting compliance.

140

Commenters also thought the proposed formulation linked to the sponsor was potentially ambiguous as to which depositors were affected. While some suggested alternatives, some commenters objected to conditioning form eligibility on any reporting history. Commenters also thought any disqualification should be limited to depositors of the same asset class, arguing that securitizations of separate asset classes are often separately managed business units within a sponsor and to penalize all of the sponsor's programs for the reporting noncompliance of one would be too burdensome. Several commenters also believed that Form S-3 eligibility for asset-backed securities should be treated differently from the requirements for non-ABS securities in that eligibility should not be impaired by good faith, immaterial, inadvertent or involuntary failures in Exchange Act reporting, particularly if the untimely reporting was the result of the inability to obtain information from an unaffiliated third party.

140

See,

e.g.,

Letters of ABA; ASF; BMA; BOA; CGMI; Citigroup; CMSA; FSR; MBA; NYSBA; and UBS.

Compliance with Exchange Act reporting by ABS issuers under the existing modified reporting no-action letters has been unacceptable. While this may be partially attributable to a lack of widely understood requirements due to reduced transparency in the current process, which these final rules are intended to help remedy, the concerns in this area are more broad-based than minor inadvertent or unintentional failures to file. Instead, reporting issues in the ABS market include widespread instances of untimely, deficient and sometimes even complete lapses in reporting.

As a resultant responsibility from registering a public offering of securities under the Securities Act, the Exchange Act specifically requires that the obligation to provide information does not stop with the final prospectus, but continues afterwards, at least for a period of time.

141

For asset-backed securities in particular, commenters representing investors have expressed a clear preference for required Exchange Act reporting, regardless of whether the issuer also elects to provide the information voluntarily.

142

Given past deficiencies in Exchange Act reporting compliance in the ABS sector, we continue to believe that issuers that fail to comply with their responsibilities under the Exchange Act for prior transactions should not continue to receive the benefits of shelf registration for new registration statements. Nor do we believe that the current practice of being able to form a new special purpose depositor to avoid the consequences of reporting noncompliance creates appropriate incentives for reporting compliance. Several commenters also recognized the need to fix this current problem.

143

Further, the ability for investment grade ABS offerings to have immediate access to Form S-3 without a reporting history requirement for the newly created issuing entity separates ABS from most non-ABS issuers such that a linkage to affiliated entities is appropriate.

141

See,

e.g.,

Section 15(d) of the Exchange Act.

142

See,

e.g.,

Letters of FMR and ICI.

143

See,

e.g.,

Letters of ASF and BMA.

Accordingly, we believe it is appropriate to continue to link Form S-3 eligibility requirements to Exchange Act reporting compliance for prior transactions. In response to several commenter suggestions,

144

we are revising the proposal to focus not on any transactions established directly or indirectly by a sponsor, but instead on transactions established by affiliated depositors involving the same asset class. We think this approach addresses many commenter concerns about the potential breadth of the proposed application across asset classes and tying the requirements to the sponsor definition.

145

144

See,

e.g.,

Letters of ASF; BMA; CMSA; FSR; NYCBA; and UBS.

145

Commenters were particularly concerned that tying to common sponsors could inadvertently link a person's Form S-3 eligibility to an unrelated entity's reporting history in the “rent-a-shelf” context. We are persuaded that tying the requirements to a common depositor avoids this problem while still ensuring related sponsors are covered because all depositors of a given sponsor would be considered affiliates.

Under the final rules, to the extent the depositor for an ABS offering or any issuing entity previously established, directly or indirectly, by the depositor or any affiliate of the depositor are or were during the previous twelve calendar months and any portion of a month immediately preceding the filing of the Form S-3 registration statement subject to Exchange Act reporting requirements with respect to asset-backed securities involving the same asset class, such depositor and each such issuing entity must have timely complied with its Exchange Act reporting requirements.

146

This would include all prior Exchange Act reporting obligations for such asset-backed securities during the preceding year, even if and only up until those obligations were suspended at some point during the year pursuant to Section 15(d) of the Exchange Act.”

147

146

As discussed subsequently, compliance with Form 8-K requirements for certain Items of that Form is limited to whether such filings are current, instead of timely and current, as of the filing of the registration statement.

147

An “affiliate” of, or a person “affiliated” with, a specified person, is defined in Commission rules

to mean “a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.” See,

e.g.,

Securities Act Rule 405 and Exchange Act Rule 12b-2. The term “control” also is defined in those rules as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”

In response to comment, we are adopting one exception to the requirement. Some comments requested an exception for depositors of other parties that are acquired in a good faith business combination transaction, arguing that prior noncompliance by the acquired depositors should not affect pare-existing depositors of the acquirer, so long as the acquisition is not part of a plan or scheme to evade the reporting requirements.

148

We are providing an exception that, regarding an affiliated depositor that became an affiliate as a result of a business combination transaction during the twelve month period before the filing of the registration statement, the filing of any material prior to the business combination transaction relating to asset-backed securities of an issuing entity previously established, directly or indirectly, by such affiliated depositor is excluded, provided such business combination transaction was not part of a plan or scheme to evade the requirements of the Securities Act or the Exchange Act.

148

See,

e.g.,

Letters of ABA; ASF; and Citigroup.

With respect to imposing a reporting compliance requirement, some commenters expressed concern that an untimely Exchange Act filing would have an immediate effect on the ability to conduct offers and sales under previously filed registration statements.

149

We wish to clarify that Securities Act Form eligibility requirements for ABS issuers are determined at the time of filing of the registration statement.

150

149

See,

e.g.,

Letters of ABA; ASF; BMA; BOA; CMSA; FSR; Sallie Mae; and TMCC.

150

In the Offering Process Release, the Commission has proposed that a new Form S-3 shelf registration statement would be required after three years, at which time form eligibility requirements would be reassessed.

In the Proposing Release, we proposed to add one of our proposed new Form 8-K items for ABS—Item 6.03, Change in Credit Enhancement or Other External Support—to the list of Form 8-K Items where failure to file such Items timely would not result in Form S-3 ineligibility.

151

One commenter believed two other ABS Form 8-K Items—Item 6.01, ABS Informational and Computational Material, and Item 6.05, Securities Act Updating Disclosure—should be added to the list because they relate to offerings for specific transactions and not to ongoing reporting.

152

We are adding Items 6.01 and 6.05 along with Item 6.03 to the Form 8-K Item list for Form S-3 eligibility purposes. However, we do not believe it is appropriate to include Items 6.01 and 6.05 in the list of Form 8-K items for the Rule 10b-5 safe harbor for failure to file such items. As discussed in Section III.D.8.d., we are only adding Item 6.03 to that safe harbor, as proposed.

151

All required Form

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