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SEC Adopts New "Short Form" Eligibility Standards for Debt Issuers and Proposes New ABS Rules

July 28, 2011

On July 26, 2011, the Securities and Exchange Commission unanimously adopted new rules to remove credit ratings as eligibility criteria for companies seeking to use “short-form” registration when registering certain securities for public offer and sale. These new rules were adopted in response to the requirements of Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The adopting release is available here.

In addition, the Commission re-proposed certain rules regarding “shelf” eligibility for asset-backed securities, proposed rules on the filing deadlines of exhibits to be included with the prospectuses of asset-backed securities, and requested additional comment on its prior proposal concerning asset-level data in connection with asset-backed securities. The proposing release is available here.

Replacement of Credit Ratings as a Condition to Form S-3/F-3 Eligibility

“Short form” registration statements, such as Form S-3 and Form F-3, allow eligible issuers to use their periodic reports under the Securities Exchange Act of 1934 to satisfy the disclosure obligations relating to a registered offering of securities under the Securities Act of 1933 and to offer securities “off the shelf” on an expedited basis. The rule amendments adopted by the Commission replace the current eligibility criteria set forth in General Instruction I.B.2 to Form S-3 and Form F-3 regarding the offering of “investment grade” non-convertible securities, such as debt securities, with four new, alternative eligibility criteria.[1]

The new eligibility standards allow for the use of Form S-3 or Form F-3 if an issuer satisfies one of the following four criteria:
 

  • The issuer has issued (as of a date within 60 days prior to the filing of the registration statement) at least $1 billion in non-convertible securities other than common equity, in primary offerings for cash, not exchange, registered under the Securities Act, over the prior three years.
  • The issuer has outstanding (as of a date within 60 days prior to the filing of the registration statement) at least $750 million of non-convertible securities other than common equity, issued in primary offerings for cash, not exchange, registered under the Securities Act.
  • The issuer is a wholly-owned subsidiary of a well-known seasoned issuer, or WKSI.
  • The issuer is a majority-owned operating partnership of a real estate investment trust that qualifies as a WKSI. 

To ease the transition for companies, the final rules also include a temporary grandfathering provision that allows an issuer to use Form S-3 or Form F-3 for a period of three years from the effective date of these amendments if it would have been eligible to register the offerings of securities under old General Instruction I.B.2 to Form S-3 or Form F-3.

Securities Act Form F-9

The Commission’s final rules also rescind Form F-9, used by Canadian registrants to register non-convertible investment grade debt, due to changes in Canadian regulations that now require Canadian issuers to use International Financial Reporting Standards (IFRS). This form will be rescinded effective December 31, 2012.

Proposed Amendments Regarding Asset-Backed Securities and Shelf Eligibility

The Commission also re-proposed eliminating the current “investment grade” credit rating criterion in determining the shelf eligibility of issuers of asset-backed securities, and replacing it with three new, cumulative eligibility criteria. The proposed amendments, which vary from those previously proposed by the Commission in April 2010, would allow issuers of asset-backed securities to use the previously proposed Form SF-3 if they satisfy all three of the following criteria:

  • Executive Officer Certification. The chief executive officer of the depositor, or an executive officer in charge of securitization, must certify at the time of each offering off of a shelf registration statement that the securitization is designed to produce cash flows at times and in amounts sufficient to service expected payments on the asset-backed securities being offered and sold and that the disclosures contained in the prospectus are accurate.
  • Dispute Resolution and Third-Party Review. The underlying transaction agreements must include provisions adopting dispute resolution procedures regarding repurchase requests, and requiring the trustee of the issuing entity to appoint a third-party credit risk manager to perform a review of assets upon certain triggering events. Any report of the third-party credit risk manager to the trustee concerning a review of assets during the distribution period would need to be included as an exhibit to the corresponding periodic report on Form 10-D.
  • Issuer Communications. The underlying transaction agreements must contain provisions concerning investor communication. In accordance with such provisions, the party responsible for making periodic filings on Form 10-D must include notice of any requests from an investor to communicate with other investors received on or before the end date of the reporting period of the corresponding periodic report on Form 10-D.

Under the re-proposed rules, issuers of asset-backed securities would be required to perform annual compliance checks. In the event that an issuer was not compliant with any of the criteria described above, it would be allowed to cure such non-compliance and maintain its shelf-eligibility by filing the required information and observing a 90-day waiting period.

Exhibits to be Filed with Proposed Rule 424(h) Prospectuses

The Commission proposed Securities Act Rule 424(h) on April 7, 2010. Under proposed Rule  424(h), issuers of asset-backed securities would be required to file a preliminary prospectus at least five business days prior to the first sale of securities in an offering. The Commission has not yet adopted Rule 424(h). To give investors adequate time to review disclosure and the underlying transaction agreements, the Commission proposed additional new rules requiring issuers of asset-backed securities to file copies of the underlying transaction agreements, including all attached schedules and other agreements containing representations and warranties regarding the underlying assets, simultaneously with the filing of a Rule 424(h) preliminary prospectus.

Request for Comment on Proposal for Asset-Level Data

In April 2010, the Commission also proposed certain disclosure rules that would require issuers of asset-backed securities to provide specific data for each loan in an asset pool. The Commission is seeking additional comment on whether the proposed rules would provide the information necessary to satisfy the requirements of Section 942(b) of the Dodd-Frank Act, as well as whether additional information is required.

Comment Period

Comments on the proposed rules regarding asset-back securities offerings are due 60 days after publication of the proposals in the Federal Register and can be submitted here.

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For questions regarding this alert or the final or proposed rules regarding short form eligibility requirements for non-convertible debt and asset-backed securities, please contact the authors or your O’Melveny & Myers advisor.

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[1] In addition, the Commission’s final rules made conforming revisions to Form S-4 and Form F-4 under the Securities Act, Schedule 14A under the Exchange Act, and Rules 138, 139 and 168 under the Securities Act. The Commission’s final rules also rescinded the Securities Act Rule 134(a)(17) "safe harbor," which permitted the disclosure of securities ratings issued or expected to be issued by a nationally recognized statistical rating organization in certain communications deemed not to be a prospectus or free writing prospectus.