SEC Finalizes Reg AB II

On Wednesday, August 27, 2014, the United States Securities and Exchange Commission finalized the changes to Regulation AB (commonly referred to as Reg AB II). The Commission issued a press release and a draft adopting release adopting the changes. The final version of the adopting release will be published in the Federal Register after review by the Office of Management and Budget (OMB). Regulation AB II and the related changes regulate the offering process and the disclosure and reporting requirements for asset-backed securities. Perhaps the most significant changes are (i) a requirement to file a preliminary prospectus at least three days prior to the sale of any securities and (ii) disclosure of loan-level information in machine readable form for ABS backed by residential mortgage loans, commercial mortgage loans, auto loans, auto leases, and debt securities (including resecuritizations). Updated loan-level data also must be filed periodically after issuance of the securities. The loan-level disclosure requirements come into force not later than two years after the effective date of the changes, which will be the date of the publication of the changes in the Federal Register.

The effect on covered bond issuers of these changes is still being analyzed and will be covered by a later post. However, it is clear that these changes would not be directly applicable to Rule 144A offerings of covered bonds.

See the MoFo Client Alert.

SEC Calls Reg AB II Meeting

The SEC announced today that it would hold a public meeting to consider amendments to Regulation AB on Wednesday, August 27:


Sunshine Act Meeting.

Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Pub. L. 94-409, that the Securities and Exchange Commission will hold an Open Meeting on Wednesday, August 27, 2014 at 10:00 a.m., in the Auditorium, Room L-002.

The subject matters of the Open Meeting will be:

  • The Commission will consider whether to adopt rules revising the disclosure, reporting and offering process for asset-backed securities.  The revisions would require asset-backed issuers to provide enhanced disclosures, including information for certain asset classes about each asset in the underlying pool in a standardized, tagged format, and revise the shelf offering process and eligibility criteria for asset-backed securities.
  • The Commission will consider whether to adopt rule amendments and new rules to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act concerning nationally recognized statistical rating organizations, providers of third-party due diligence services for asset-backed securities, and issuers and underwriters of asset-backed securities under the Securities Exchange Act of 1934.

The duty officer has determined that no earlier notice was practicable.

At times, changes in Commission priorities require alterations in the scheduling of meeting items.

For further information and to ascertain what, if any, matters have been added, deleted, or postponed, please contact:

The Office of the Secretary at (202) 551-5400.

Kevin M. O’Neill
Deputy Secretary

Dated: August 22, 2014

Although the SEC’s proposal to amend Regulation AB (hence Reg AB II) is primarily concerned with asset-backed securities, the Commission’s action will be of interest to covered bonds issuers for two reasons:

  • whether covered bonds will be defined as asset-backed securities and therefore expressly subject to Reg AB II;
  • whether Reg AB II requirements will be extended to asset-backed securities sold under Rule 144A.

Covered bonds do not fall within the current definition of asset-backed security, as the SEC has recognized in several no-action letter issued to Canadian banks. Nevertheless, in those no-action letters, the SEC has required the banks to comply with specific provisions of current Regulation AB as a condition of registering covered bonds with the SEC. If those provisions are amended, the banks could be required to comply with the provisions as amended.

However, if covered bonds are defined as asset-backed securities under Reg AB II, there may be other provisions that they would be required to comply with, including possibly the proposed requirement to issue a preliminary prospectus at least five days prior to the sale of any security.

Until now, Regulation AB has applied only to asset-backed securities registered with the SEC, and 144A covered bonds have not been subject to the regulation. The extension of Reg AB II to asset-backed securities offered under Rule 144A would therefore affect Rule 144A covered bonds if covered bonds were defined to be asset-backed securities. The extension of Reg AB II to privately placed securities sold under Rule 144A would be a major departure from prior practice. If Reg AB II is not extended to 144A securities, covered bonds could still be offered in the United States under Rule 144A without complying with Reg AB II, even if covered bonds were defined as asset-backed securities under Reg AB II.

Accordingly, the outcome of the meeting on Wednesday will be of considerable interest to covered bond issuers who currently offer or plan to offer covered bonds in the United States.

BNS Files U.S. Prospectus

BNS initially filed its registration statement for its legislative covered bond program on Form F-3 with the SEC on May 31, 2013. That registration was declared effective on September 9, 2013. However, BNS did not file a prospectus under the registration statement with the SEC until today, August 20, 2014. In the interim, BNS filed a prospectus with the UKLA and offered covered bonds in Europe on March 26, 2014. Now, with the filing of a prospectus with the SEC, BNS is ready to offer covered bonds in the U.S.

Year to date, the U.S. covered bond market has been very quiet. Only two issuers have brought bonds to market for a total of $3 billion: Westpac Banking Corp. on May 14 and Commonwealth Bank of Australia on June 14, both privately placed offerings. So far, no registered covered bonds have been issued in the U.S. in 2014.

MoFo Comment Letter to Treasury on Restoring PLS Market

On August 8, Morrison & Foerster LLP filed a comment letter with the United States Department of the Treasury in response to a request for comments on the private sector development of a well-functioning private label securities (PLS) market for residential mortgage loans. The comment letter notes that perhaps the easiest way to restore private funding to residential mortgage loans in the United States is to implement a covered bond statute in the United States to enable U.S. banks to issue covered bonds. The letter notes that the conditions necessary to the establishment of a covered bod market in the United States are well advanced and that the market could be established quickly. Based on the development of the investor base in the United States, the SEC's establishment of disclosure and reporting standards, and the well-developed legislation, creation of a domestic covered bond market would appear to be low hanging fruit that Treasury should take advantage of.