Regulation AB

Regulation AB

Regulation AB was introduced in 2004 by the Securities and Exchanges Commission to regulate registration, offering and reporting of public deals of Asset Backed Securities


Regulation AB is a comprehensive set of new rules and amendments that address the registration, disclosure and reporting requirements for asset-backed securities (ABS) under the Securities Act of 1933 and the Securities Exchange Act of 1934. Because the ABS market is a relatively new and fast growing component of the U.S. capital markets, regulators and industry professionals alike sought to bring about transparency and clarity regarding registration, disclosure, and reporting requirements for asset backed securities.

SEC definition of Asset-backed securities for Regulation AB

The SEC's definition for asset-backed securities is the same basic definition that has existed since 1992, with the addition of a modification with respect to leases. The SEC is also requiring that all registered offerings of asset-backed securities be registered on either Form S-1 or Form S-3. The definition thus consists of the following:

Regulation AB's definition of an 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 security holders; provided that in the case of financial assets that are leases, those assets may convert to cash partially by the cashed proceeds from the disposition of the physical property underlying such leases." (1)

The SEC adopted a principles based definition for ABS which allows broad flexibility as to what asset types fall under the regulatory mandates for Regulation AB. To date, the most common affected asset types will typically be residential mortgages, home equity, commercial mortgages, credit card receivables, automobile loans, automobile and equipment leases, along with student loans. This is without question an extraordinary far-reaching scope and will certainly be felt for years to come in regards to Regulation AB compliance.

Regulation AB Item's 1100 to 1123

The main focus of Regulation AB consists of twenty-four rules, commonly known as "items", which are numbered items 1100 through 1123. These twenty-four items comprehensively address the four primary regulatory areas affecting asset-backed securities: Securities Act Registration, disclosure, communications during the offering process, and ongoing reporting under the exchange act. In rolling out Regulation AB, the Securities and Exchange Commission (SEC) sought to update and create a higher degree of clarity regarding securities act registration requirements for Asset Backed Securities along with expanding the various types of securities that may be offered. Additionally, a consolidation of existing conditions regarding exchange act reporting and streamlining existing positions for written communication in a registered ABS offering was also sought. Lastly, the remediation of no-action, disjointed servicing standards, such as the USAP, was to be augmented, and ultimately replaced, by a more comprehensive, stringent, and thorough servicing standard.

Item 1100 - In General. This introductory item includes "general provisions" that apply to the rest of Regulation AB. It provides information on how to present historical static pool data and how to present relevant financial information about third parties.

Item 1101 - Definitions. This item establishes definitions for the terms used throughout Regulation AB. Most importantly provided is the definition of the "Asset-Backed Securities" themselves which by its nature defines the scope of Regulation AB. Terms discussed and defined within the transaction and function are Servicers, Sponsors, Originators, Credit Enhancement, delinquency, Depositor, and other terms that can be considered statistical information. The definition of asset-backed securities is the following: "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 security holders; provided that in the case of financial assets that are leases, those assets may convert to cash partially by the cashed proceeds from the disposition of the physical property underlying such leases."

Item 1102 - Forepart of registration statement and outside cover page of the prospectus. This item provides parameters for the representations that can and should be represented on the outside front cover page of the prospectus. Items discussed include the Sponsor, Depositor, Asset Type, Aggregate Principal Amount, Interest Rate or Rate of Return, and Asset distribution frequency.

Item 1103 - Transaction Summary & Risk Factors. This item discusses the means for providing an understanding of the relationships among the parties and the assets of the transaction through diagrams and illustrations.

Item 1104 - Sponsors. This item lists the appropriate disclosure information for the sponsor.

Item 1105 - Static Pool Information. This item provides discussion for the guidelines for sponsor representations on delinquencies, cumulative losses, and prepayments for prior sponsor transactions of the same asset type. Distinctions are made based on the sponsor's prior years of experience.

Item 1106 - Depositors. When the Depositor differs from the Sponsor, this item requires disclosure items similar to Item 1104 above for the Depositor.

Item 1107 - Issuing Entities. This item provides for disclosure about the issuing entity such as entity legal form, State of organization, and governing documents. Further, a description of the governing documents including permissible activities and restrictions should be summarized. Additional information presenting discretionary activities, other assets, management, bankruptcy, and capitalization should be presented.

Item 1108 - Servicers. This item provides for disclosure and identification of the servicers involved including a description of roles, responsibilities, and oversight.

Item 1109 - Trustees. This item provides for disclosure and identification of the trustee along with their prior experience in asset-backed securities transactions.

Item 1110 - Originators. This item provides for originator identity disclosure for those providing origination of 10% or more of the pool assets and further detail disclosure requirements for originators of 20% or more of the pool's assets.

Item 1111 - Pool Assets. This item provides for a description of the specific assets included in a transaction such as loan size, interest rate, amortization period, and loan-to-value ratio. Statistical information is to be presented in appropriate topical information and groups in order to aid in the understanding of the Pool Assets.

The required disclosures cover such items changes in an originator's underwriting criteria, credit-granting or underwriting and "ranges of standardized credit scores."

Item 1112 - Significant obligors of Pool Assets. Presumably in the interest of risk assessment, this item provides for disclosure of items determined to be relevant to an obligor if they represent 10% or more of the asset pool. Additional disclosure including financial statement inclusion are required for obligors representing 20% or more of the asset pool.

Item 1113 - Structure of the Transaction. This item requires the description of the financial aspects and terms of the transaction such as interest and principal formulas and calculations, distributions, credit enhancement mechanisms, cash-flows, triggers or events, allocations, distributions, fees, expenses, voting rights, and other factors.

Item 1114 - Credit Enhancement and other support, except for certain derivatives instruments. This item requires disclosure about internal and external credit enhancement factors such that each is designed to affect or ensure timely payment.

Item 1115 - Certain Derivatives instruments. This item requires disclosure about derivatives, such as interest rate swaps and currency swaps, whose primary purpose is not to provide credit enhancement. These items are generally in place to alter payment characteristics.

Item 1116 - Tax Matters. This item requires disclosure about the federal income tax law treatment of an asset-backed security including any areas of expected differences among investor classes and any substantive information from the counsel's tax opinion.

Item 1117 - Legal Proceedings. This item requires disclosure of material legal proceedings pending against the sponsor, depositor, trustee, issuing entity, services, or originator.

Item 1118 - Reports and Additional Information. This item requires a description of the reporting requirements to investors. The investor requirements are noted in Item 1118, by reference to the instructions to forms 10-K, 10-D, and 8-K. These forms, in turn, will reference back to the respective Items of Regulations AB.

Item 1119 - Affiliations and certain relationships and related transactions. This item requires disclosure about relationships among parties to a transaction under Regulation AB. Parties noted in reference to disclosure are the servicer, trustee, Originator, Significant Obligor, an enhancement provider. Additionally, Item 1119 requires disclosure of non-arm's length transactions among transaction parties during the past two years.

Item 1120 - Ratings. This item requires disclosure of the credit ratings by each agency with the minimum rating that must be assigned for the securitization transaction along with on-going monitoring arrangements.

Item 1121 - Distribution and Pool Performance information. This item provides for the information that should be reported on an on-going basis in distribution reports with statistical information in tabular or graphical format included if aiding understanding. Most notably, item 1121 requires disclosure of material breaches of pool asset representations or warranties or transaction covenants. Provisions are also provided for disclosure of material changes in the solicitation, credit-granting, underwriting, origination, acquisition or pool selection criteria or procedures, as applicable, used to originate, acquire or select the new pool assets.

Item 1122 - Compliance with applicable servicing criteria. This item requires servicers to assert and assess their compliance within the servicing function and a report on the assessment of compliance setting forth the appropriate criteria. Further, the servicer must obtain an attestation report from a PCAOB registered accounting firm on the servicer's compliance. Item 1122 thus requires two deliverables from servicers: (1) Assessment of Compliance and (2) Accountant's Attestation Report.

For deals with multiple servicers, each servicer whose activities represent more than 5% of the pool assets must supply the Auditor's attestation report. This report must include disclosure of any non-compliance with the servicing criteria.

Item 1123 - Sevicer compliance statement. This item requires a statement of compliance be issued by an officer of each servicer stating that a review of the servicer's activities were conducted under the supervision of the signing officer and that the servicer has fulfilled its obligations.


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