
[Federal Register: October 19, 2010 (Volume 75, Number 201)]
[Proposed Rules]               
[Page 64182-64197]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19oc10-15]                         

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229, 230, 240, and 249

[Release Nos. 33-9150, 34-63091; File No. S7-26-10]
RIN 3235-AK76

 
Issuer Review of Assets in Offerings of Asset-Backed Securities

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing new requirements in order to implement 
Section 945 and a portion of Section 932 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act of 2010 (the ``Act''). First, we are 
proposing a new rule under the Securities Act of 1933 to require any 
issuer registering the offer and sale of an asset-backed security 
(``ABS'') to perform a review of the assets underlying the ABS. We also 
are proposing amendments to Item 1111 of Regulation AB that would 
require an ABS issuer to disclose the nature of its review of the 
assets and the findings and conclusions of the issuer's review of the 
assets. If the issuer has engaged a third party for purposes of 
reviewing the assets, we propose to require that the issuer disclose 
the third-party's findings and conclusions. We also are proposing to 
require that an issuer or underwriter of an ABS offering file a new 
form to include certain disclosure relating to third-party due 
diligence providers, to implement Section 15E(s)(4)(A) of the 
Securities Exchange Act of 1934, a new provision added by Section 932 
of the Act.

DATES: Comments should be received on or before November 15, 2010.

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/proposed.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-26-10 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 Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-26-10. 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/proposed.shtml). Comments 
are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. 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.

[[Page 64183]]


FOR FURTHER INFORMATION CONTACT: Eduardo Aleman, Special Counsel, 
Division of Corporation Finance, at (202) 551-3430, U.S. Securities and 
Exchange Commission, 100 F Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are proposing amendments to Item 1111 \1\ 
of Regulation AB \2\ (a subpart of Regulation S-K). We also are 
proposing to add Rule 193 \3\ under the Securities Act of 1933 \4\ (the 
``Securities Act'') and Rule 15Ga-2 \5\ and Form ABS-15G \6\ under the 
Securities Exchange Act of 1934 (the ``Exchange Act'').\7\
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    \1\ 17 CFR 229.1111.
    \2\ 17 CFR 229.1100 through 17 CFR 229.1123.
    \3\ 17 CFR 230.193.
    \4\ 15 U.S.C. 77a et seq.
    \5\ 17 CFR 240.15Ga-2.
    \6\ 17 CFR 249.ABS-15G.
    \7\ 15 U.S.C. 78a et seq.
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I. Background

    This release is one of several we are required to issue to 
implement provisions of the Act.\8\ This release proposes a new rule 
and certain amendments to implement Section 7(d) of the Securities 
Act,\9\ which was added by Section 945 of the Act. In addition, we are 
proposing a new rule and form to implement Section 15E(s)(4)(A) of the 
Exchange Act,\10\ which was added by Section 932 of the Act.
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    \8\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
    \9\ 15 U.S.C. 77g(d).
    \10\ 15 U.S.C. 78o-7(s)(4)(A).
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    Section 945 of the Act amends Section 7 of the Securities Act to 
require the Commission to issue rules relating to the registration 
statement required to be filed by an issuer of ABS. Pursuant to new 
Section 7(d), the Commission must issue rules to require that an issuer 
of an ABS perform a review of the assets underlying the ABS, and 
disclose the nature of such review.\11\ Section 7(d) requires that we 
adopt these rules not later than 180 days after enactment.
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    \11\ We note that recently adopted amendments to a safe harbor 
rule by the Federal Deposit Insurance Corporation require, in 
residential mortgage-backed securities offerings, sponsors to 
disclose a third-party diligence report on compliance with 
origination standards and the representations and warranties made 
with respect to the assets. See Treatment by the Federal Deposit 
Insurance Corporation as Conservator or Receiver of Financial Assets 
Transferred by an Insured Depository Institution in Connection with 
a Securitization or Participation After September 30, 2010, Final 
Rule, Federal Deposit Insurance Corporation, (Sept. 27, 2010).
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    Section 932 of the Act adds new Section 15E(s)(4)(A) of the 
Exchange Act, which also relates to the review of assets underlying an 
ABS. Section 15E(s)(4)(A) requires an issuer or underwriter of any ABS 
to make publicly available the findings and conclusions of any third-
party due diligence report obtained by the issuer or underwriter.\12\ 
Because the substance of new Section 7(d) of the Securities Act is 
related to new Section 15E(s)(4)(A) of the Exchange Act, we are 
considering both provisions added by the Act together.
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    \12\ We will propose rules to implement the rest of Section 
15E(s)(4) at a later date. Section 15E(s)(4)(B) requires a provider 
of third-party due diligence services to provide a certification to 
any nationally recognized statistical rating organization 
(``NRSRO'') rating the transaction. Section 15E(s)(4)(C) requires 
the Commission to establish the form and content of such 
certification, and Section 15E(s)(4)(D) requires the Commission to 
adopt rules requiring an NRSRO to disclose the certification to the 
public. The Act requires that final regulations under Section 
15E(s)(4) be adopted not later than one year after enactment.
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II. Proposed Rules

A. Proposed Requirement That an ABS Issuer Perform a Review of the 
Assets

    We are proposing new Rule 193 under the Securities Act to require 
issuers of ABS to perform a review of the assets underlying registered 
ABS offerings.\13\ This rule would implement Securities Act Section 
7(d)(1),\14\ as added by Section 945 of the Act.
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    \13\ The requirement under this proposal to perform a review 
should not be confused with, and is not intended to change, the due 
diligence defense against liability under Securities Act Section 11 
[15 U.S.C. 77k] or the reasonable care defense against liability 
under Securities Act Section 12(a)(2) [15 U.S.C. 77l(a)(2)]. Our 
proposed rule is designed to require a review of the underlying 
assets by the issuer and to provide disclosure of the nature, 
findings and conclusions of such review.
    \14\ 15 U.S.C. 77g(d)(1).
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1. Application of the Proposed Rule
    Section 7(d)(1) relates to an asset-backed security, as defined in 
new Section 3(a)(77) of the Exchange Act.\15\ This new statutory 
definition (``Exchange Act-ABS'') is broader than the definition of 
``asset-backed security'' in Regulation AB \16\ and includes securities 
typically offered and sold in private transactions. Nevertheless, we 
have concluded that the review requirements mandated by Section 7(d)(1) 
apply only to registered offerings of ABS because Section 7(d)(1) 
requires the Commission to issue rules ``relating to the registration 
statement.'' Therefore, the rule we are proposing today that would 
require an ABS issuer to perform a review of the assets applies to 
issuers of ABS in registered offerings and not issuers of ABS in 
unregistered offerings.
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    \15\ 15 U.S.C. 78c(a)(77). This definition was added by Section 
941(a) of the Act.
    \16\ See Item 1101(c)(1) of Regulation AB [17 CFR 
229.1101(c)(1)].
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2. New Securities Act Rule 193
    Rule 193 would require an issuer to perform a review of the assets 
underlying an ABS in a transaction that will be registered under the 
Securities Act. Rule 193 would not specify the level or type of review 
an issuer is required to perform.\17\ We expect that the issuer's level 
and type of review of the assets may vary depending on the 
circumstances. For example, the level or type of review may vary among 
different asset classes. While proposed Rule 193 would not require a 
particular level or type of review, we note that, if adopted, required 
responsive disclosure would describe the level and type of review. We 
believe the disclosure requirements below will give investors an 
ability to evaluate the level and adequacy of the issuer's review of 
the assets.
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    \17\ We understand that various levels and types of review may 
be performed in a securitization. For example, commentators on a 
recent proposing release on asset-backed securities have identified 
that the type of review conducted by a sponsor of a securitization 
of sub-prime mortgage loans typically falls into three general 
categories. First, a credit review examines the sample loans to 
ascertain whether they have been originated in accordance with the 
originator's underwriting guidelines. This would include a review of 
whether the loan characteristics reported by the originator are 
accurate and whether the credit profile of the loans is acceptable 
to the sponsor. A second type of review could be a compliance review 
which examines whether the loans have been originated in compliance 
with applicable laws, including predatory lending and Truth in 
Lending statutes. Third, a valuation review entails a review of the 
accuracy of the property values reported by the originators for the 
underlying collateral. This could include a review of each original 
appraisal to assess whether it appeared to comply with the 
originator's appraisal guidelines, and the appropriateness of the 
comparables used in the original appraisal process. See comment 
letter from The Commonwealth of Massachusetts Office of the Attorney 
General (``Massachusetts AG comment letter'') on Asset-Backed 
Securities, SEC Release No. 33-9117 (April 7, 2010) [75 FR 23328] 
(the ``2010 ABS Proposing Release''). The comment letters are 
available at http://www.sec.gov/comments/s7-08-10/s70810.shtml.
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    Rule 193 would not specify the type or level of review an issuer is 
required to perform or require that a review be designed in any 
particular manner, although as set out below, we are requesting comment 
on whether and, if so, how the Commission should specify the nature of 
the review.\18\ We believe that the nature of review may vary depending 
on numerous circumstances and factors which could include, for example, 
the nature of the assets being securitized and the degree of continuing 
involvement by the sponsor. For

[[Page 64184]]

example, in offerings of residential mortgage-backed securities 
(``RMBS''), where the asset pool consists of a large group of loans, it 
may be appropriate, depending on all the facts, to review a sample of 
loans large enough to be representative of the pool, and then conduct 
further review if the initial review indicates that further review is 
warranted. By contrast, for ABS where a significant portion of the cash 
flow will be derived from a single obligor or a small group of 
obligors, such as ABS backed by a small number of commercial loans 
(``CMBS''), it may be appropriate for the review to include every pool 
asset. Moreover, in ABS transactions where the asset pool composition 
turns over rapidly because it contains revolving assets, such as credit 
card receivables or dealer floorplan receivables, a different type of 
review may be warranted than in ABS transactions involving term 
receivables, such as mortgage or auto loans.
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    \18\ Given the 180-day statutory deadline prescribed by the Act, 
we have not attempted to describe a type of review that may be 
appropriate for various different asset classes; we believe that 
devising various levels of review applicable to each different asset 
class would require a more extensive undertaking than is feasible in 
the time provided.
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    While proposed Rule 193 would not specify a particular type or 
level of review, we note that under our proposal, prospectus disclosure 
of the nature of review would be required. We believe the disclosure 
requirements described below will give investors an ability to evaluate 
the level and adequacy of the issuer's review of the assets. We request 
comment below on whether disclosure, without mandating the nature of 
the review to be conducted, is sufficient.
    While we are not proposing the nature of the review that would be 
required, we note that some of the data points proposed in the 2010 ABS 
Proposing Release describe the type of review items that may be 
relevant to the review that must be performed to comply with Rule 
193.\19\ In our proposals requiring enhanced disclosure for an ABS 
offering, we proposed to require prospectuses for public offerings of 
ABS and ongoing Exchange Act reports to contain specified asset-level 
information about each of the assets in the pool.\20\ The asset-level 
information would be provided according to proposed standards and in a 
tagged data format.\21\
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    \19\ Our proposal for asset-level data points in our 2010 ABS 
Proposing Release, which remains outstanding, provides examples of 
the kind of information that the issuer could undertake to review in 
order to comply with proposed Rule 193. For example, in the case of 
RMBS, the Commission proposed requiring, for each loan in the pool, 
standardized disclosure of, among others, credit score, employment 
status, and income of the obligor and how that information was 
verified. Some specific data points that were proposed include:
    The appraised value used to approve the loan, original property 
valuation type, and most recent appraised value, as well as the 
property valuation method, date of valuation, and valuation 
confidence scores;
    Combined and original loan-to-value ratios and the calculation 
date;
    Obligor and co-obligor's length of employment, whether they are 
self-employed and the level of verification (e.g., not verified, 
stated and not verified, or direct independent verification with a 
third-party of the obligor's current employment); and
    Obligor and co-obligor's wage and other income and a code that 
describes the level of verification.
    For income of the obligor, the issuer would be required, if 
adopted, under our 2010 ABS Proposing Release to indicate what level 
of review of the income was conducted. One possible level of review 
would be that income was verified by previous W-2 forms or tax 
returns and year-to-date pay stubs, if the obligor was salaried. 
Another possibility would be that the income was verified for the 
last 24 months through W-2 forms, pay stubs, bank statements, and/or 
tax returns. As noted, we are not proposing specific standards for 
the review required by proposed Rule 193. While the Commission 
believes these data points may be relevant, they are intended to 
serve only as examples of items that we anticipate an issuer would 
consider reviewing in order to comply with proposed Rule 193. These 
proposals remain outstanding as we consider comments received on the 
2010 ABS Proposing Release.
    \20\ Some asset classes such as credit card receivables and 
stranded costs would be exempt from this rule; however, credit card 
ABS would be required to provide grouped account data.
    \21\ In addition, Section 942 of the Act adds new Section 7(c) 
to the Securities Act requiring the Commission to adopt regulations 
requiring each issuer of an asset-backed security to disclose, for 
each tranche or class of security, standardized information 
regarding the assets backing that security.
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    Proposed Rule 193 would require that the asset review be conducted 
by the issuer of the ABS.\22\ The issuer, for purposes of this rule, 
would be the depositor or sponsor of the securitization. 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.\23\ 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, the depositor or the issuer, and then 
the depositor transfers the assets to the issuing entity for the 
particular asset-backed transaction. The issuing entity is typically a 
statutory trust.\24\ In cases where the originator and sponsor may be 
different, including in transactions involving a so-called 
``aggregator,'' the review may be performed by the sponsor, but we 
propose that a review performed by an unaffiliated originator would not 
satisfy proposed Rule 193. The originator may have different interests 
in the securitization, especially if the securitization involves many 
originators where each originator may have contributed a very small 
part of the assets in the entire pool, and may have differing 
approaches to the review.\25\
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    \22\ Under Securities Act Rule 191 (17 CFR 230.191), the 
depositor for the asset-backed securities acting solely in its 
capacity as depositor to the issuing entity is the ``issuer'' for 
purposes of the asset-backed securities of that issuing entity. 
``Depositor'' means the depositor who receives or purchases and 
transfers or sells the pool assets to the issuing entity. See Item 
1101 of Regulation AB. For asset-backed securities transactions 
where there is not an intermediate transfer of the assets from the 
sponsor to the issuing entity, the term depositor refers to the 
sponsor. For asset-backed securities transactions where the person 
transferring or selling the pool assets is itself a trust, the 
depositor of the issuing entity is the depositor of that trust. See 
id.
    \23\ As defined in Item 1101 of Regulation AB, the ``sponsor'' 
means the person who organizes and initiates an ABS transaction by 
selling or transferring assets, either directly or indirectly, 
including through an affiliate, to the issuing entity. See 17 CFR 
229.1101(1). Where there is not a two-step transfer, the term 
``depositor'' refers to the sponsor.
    \24\ See Asset-Backed Securities, Release No. 33-8518 (Dec. 22, 
2004) [70 FR 1506] (``2004 Regulation AB Adopting Release'') at 
Section III.B.3. The issuing entity is designed to be a passive 
entity, and in order to meet the definition of ABS issuer in 
Regulation AB its activities must be limited to passively owning or 
holding the pool of assets, issuing the ABS supported or serviced by 
those assets, and other activities reasonably incidental thereto.
    \25\ In the case of so-called aggregators, the sponsor acquires 
loans from many other unaffiliated sellers before securitization.
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    If an issuer engages a third party for purposes of reviewing the 
pool assets, then an issuer may rely on the third-party's review to 
satisfy its obligations under proposed Rule 193 provided the third 
party is named in the registration statement and consents to being 
named as an ``expert'' in accordance with Section 7 of the Securities 
Act and Rule 436 under the Securities Act.\26\ We are aware that, at 
least with respect to RMBS, there is a specialized industry of third-
party due diligence firms.\27\ These firms typically are retained to 
review, for example, the accuracy of loan level data.\28\ Allowing 
issuers to contract with a third-party due diligence provider \29\ is 
consistent with Section 15E(s)(4) of the

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Exchange Act which, as discussed further below, requires the issuer or 
underwriter of an ABS to make publicly available the findings and 
conclusions of a third-party due diligence report and requires a third-
party due diligence provider that is employed by a nationally 
recognized statistical rating organization (``NRSRO''), an issuer or an 
underwriter to provide a written certification to the NRSRO that 
produces a credit rating. Under Section 15E(s)(4) of the Exchange Act, 
the Commission is required to establish the appropriate format and 
content for the certifications ``to ensure that providers of due 
diligence services have conducted a thorough review of data, 
documentation, and other relevant information necessary for a 
nationally recognized statistical rating organization to provide an 
accurate rating.''\30\ We believe that a ``third party engaged for 
purposes of performing a review'' is a broad category that would 
include any third party on which the issuer relies to review assets in 
the pool. We believe that the third party engaged by the issuer to 
perform a review of the assets for purposes of complying with Rule 193 
likely would be the same third-party due diligence providers whose 
reports must be made publicly available by an issuer or underwriter for 
purposes of Section 15E(s)(4)(A), although we seek comment on whether 
that is appropriate.
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    \26\ Section 7 of the Securities Act requires the consent of any 
person whose profession gives authority to a statement made by him, 
is named as having prepared or certified any part of the 
registration statement, or is named as having prepared or certified 
a report or valuation for use in connection with the registration 
statement. The third-party's findings and conclusions must also be 
disclosed in a registration statement and a consent from the third 
party must be obtained in accordance with Section 7.
    \27\ See Testimony of Vicki Beal, Senior Vice President Clayton 
Holdings, Before the Financial Crisis Inquiry Commission (Sept. 23, 
2010), available at http://www.fcic.gov/hearings/pdfs/2010-0923-
Beal.pdf.
    \28\ See, e.g., Vikas Bajaj and Jenny Anderson, Inquiry Focuses 
on Withholding of Data on Loans, N.Y. Times, January 12, 2008; E. 
Scott Reckard, Sub-prime Mortgage Watchdogs Kept on Leash; Loan 
Checkers Say Their Warnings of Risk Were Met with Indifference, Los 
Angeles Times, March 17, 2008, at C1.
    \29\ In this release, we refer to third parties engaged for 
purposes of reviewing the assets also as third-party due diligence 
providers.
    \30\ As noted above, we will address these requirements in a 
subsequent rulemaking.
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Request for Comment
    1. Does our proposed rule to require the issuer of ABS in a 
registered transaction to perform a review of the assets adequately 
address Section 7(d)(1) of the Securities Act, as added by Section 945 
of the Act? Is this proposal, coupled with the proposed disclosure 
requirements described below, sufficient to carry out the purposes of 
Section 7(d)(1) of the Act? Can investors evaluate for themselves the 
sufficiency of the review undertaken by the issuer? Will issuers 
undertake a meaningful review absent a minimum review standard?
    2. Should we instead mandate a minimum level of review that must be 
performed on the pool of assets? Would requiring a minimum level of 
review better carry out the mandate of Securities Act Section 7(d)(1), 
which imposes a new review requirement, separate from the disclosure 
requirement in Section 7(d)(2)?\31\ If so, what level of review would 
be appropriate? For instance, should we require that the review, at a 
minimum, provide reasonable assurance that the disclosure in the 
prospectus regarding the assets is accurate in all material 
respects?\32\ We note that the federal securities laws currently 
require that disclosure in the prospectus not contain an untrue 
statement of a material fact or omit to state a material fact required 
to be stated therein or necessary to make the statements not 
misleading.\33\ Therefore, we would expect that issuers are currently 
performing some level of review in order to provide them sufficient 
comfort to believe that the prospectus disclosure is accurate. A 
reasonable assurance level would be similar to the standard that 
companies use in designing and maintaining disclosure controls and 
procedures required under Exchange Act Rule 13a-15.\34\ Our rules 
generally ``require an issuer to maintain disclosure controls and 
procedures to provide reasonable assurance that the issuer is able to 
record, process, summarize and report the information required in the 
issuer's Exchange Act reports'' within appropriate time frames, and 
companies have been subject to these requirements for many years.\35\
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    \31\ We note that this section is not limited to requiring 
disclosure; the section imposes an obligation to conduct a review 
and to disclose the nature of the review. In other contexts, we have 
previously adopted rules pursuant to a legislative mandate that 
required issuers or other parties to take (or not take) particular 
action. See e.g., Management's Report on Internal Control Over 
Financial Reporting and Certification of Disclosure in Exchange Act 
Periodic Reports, Release No. 33-8238 (June 5, 2003) (adopting rules 
requiring management of companies subject to the Exchange Act's 
reporting requirements to establish and maintain adequate internal 
control over financial reporting for the company as directed by 
Section 404 of the Sarbanes-Oxley Act of 2002); See also Insider 
Trades During Pension Fund Blackout Periods, Release No. 34-47225 
(Jan. 22, 2003) (adopting rules to give effect to Section 306(a) of 
the Sarbanes-Oxley Act of 2002), which prohibits directors or 
executive officers of any issuer of an equity security from 
conducting transactions in the issuer's securities during a pension 
plan blackout period. The Act also imposes other substantive 
requirements, such as requiring securitizers to retain 5% risk. See 
Section 941 of the Act.
    \32\ Thus, for example, if the prospectus disclosed that the 
loans are limited to borrowers with a specified minimum credit 
score, or certain income level, the review, as designed, would be 
required to provide reasonable assurance that the loans in the pool 
met this criterion.
    \33\ See Securities Act Section 11 [15 U.S.C. 77k] and 
Securities Act Sections 12 [12 U.S.C. 77l]. See also Securities Act 
Section 17 [15 U.S.C. 77q], Exchange Act Section 10(b) [15 U.S.C. 
78j] and Rule 10b-5 under the Exchange Act [17 CFR 240.10b-5].
    \34\ See Exchange Act Rule 13a-15 [17 CFR 240.13a-15].
    \35\ See Management's Report on Internal Control over Financial 
Reporting and Certification of Disclosure in Exchange Act Periodic 
Reports, at Section F.4, Release No. 33-8238 (June 5, 2003). See 
also Certification of Disclosure in Companies' Quarterly and Annual 
Reports, Release No. 34-8124 (June 14, 2002). ABS issuers must 
provide in Form 10-K an assessment by each party participating in 
the servicing function regarding its compliance with specified 
servicing criteria set forth in Item 1122 of Regulation AB. See 17 
CFR 229.1122. A registered public accounting firm must issue an 
attestation report on such party's assessment of compliance. See id.
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     If we required that the review, at a minimum, provide 
reasonable assurance that the disclosure in the prospectus regarding 
the assets is accurate in all material respects, would issuers and 
their advisers be familiar with this reasonable assurance level and 
understand how that level would apply in the context of a review of 
assets underlying ABS?\36\
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    \36\ Although ABS issuers are not subject to Rule 13a-15, ABS 
issuers that also issue corporate securities are familiar with it. 
We previously have recognized that, because the information ABS 
issuers are required to provide differs significantly from that 
provided by other issuers, and because of the structure of ABS 
issuers as typically passive pools of assets, the certification 
requirements should be tailored specifically for ABS issuers. See 
Certification of Disclosure in Companies' Quarterly and Annual 
Reports, Release No. 34-8124; See also Revised Statement: Compliance 
by Asset-Backed Issuers with Exchange Act Rules 13a-14 and 15d-14, 
Statement by the Staff of the Division of Corporation Finance (Feb. 
21, 2003), available at http://www.sec.gov/divisions/corpfin/
8124cert.htm.
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     Would a different level of assurance that the disclosure 
in the prospectus regarding the assets is accurate in all material 
respects be appropriate? If so, what level and why?
     Should a minimum standard require that the review be not 
just designed but also effected to provide reasonable assurance that 
the disclosure was accurate?
     Is there a minimum level of review that would be more 
appropriate or useful to investors without imposing impracticable 
burdens and costs on issuers?
     How, if at all, should any such standard of review affect 
current law regarding antifraud liability? How, if at all, should any 
such standard of review affect the due diligence defense against 
liability under Securities Act Section 11 \37\ and the reasonable care 
defense against liability under Securities Act Section 12(a)(2)? \38\
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    \37\ 15 U.S.C. 77k.
    \38\ 15 U.S.C. 77l(a)(2).
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     Should the rule further specify the types of matters--
e.g., credit--that should be covered by the review?
     In addition, should the rule further specify the level of 
review? For example, should it set out parameters to determine whether 
sampling is appropriate?
    3. We note that in the 2010 ABS Proposing Release, we proposed 
requiring that the underlying transaction agreement in a transaction 
relying on certain Commission safe harbors for an exemption from the

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Securities Act contain a provision requiring the issuer to provide to 
any initial purchaser, security holder, and designated prospective 
purchaser the same information as would be required in a registered 
transaction.\39\ Similar to the approach in the 2010 ABS Proposing 
Release, should we condition the safe harbors for an exemption from 
registration provided in Regulation D and Securities Act Rule 144A on a 
requirement that the underlying transaction agreement for the ABS 
contain a representation that the issuer performed a review that 
complies with proposed Rule 193? Alternatively, if we adopt Rule 193 
with some minimum standard of review, should we condition the safe 
harbors for an exemption from registration provided in Regulation D and 
Securities Act Rule 144A simply on a requirement that the issuer 
perform a review of the underlying assets? If so, should we also 
require that the issuer represent in the transaction agreement that it 
will certify such review or provide disclosure regarding the nature of 
the issuer's review and findings and conclusions?
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    \39\ See discussion in Section VI of the 2010 ABS Proposing 
Release.
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    4. Should we specify the types of review that should be performed? 
For example, should we require that the review verify the accuracy of 
the data entry of loan information into the loan tape, containing data 
about the loans in the pool (e.g., loan-to-value ratio, debt-to-income 
ratio)? Should the rule establish a standard requiring a review 
sufficient to determine whether the underlying assets meet the 
underwriting criteria? Should any required review entail reviewing 
borrowers' income levels to determine borrowers' ability to repay the 
underlying loans? Should the rule establish a standard for reviewing 
whether the loans have been originated in compliance with applicable 
laws, including predatory lending and Truth in Lending statutes? Should 
we establish standards for a review of the accuracy of the property 
values reported by the originators for the underlying collateral? \40\ 
Could each such type of review be conducted across all asset classes 
(e.g., residential mortgages, commercial mortgages, credit card 
receivables, resecuritizations)? What standards would be appropriate 
for each asset class or across all asset classes of asset-backed 
securities?
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    \40\ See, e.g., joint comment letter from American Society of 
Appraisals, American Society of Farm Managers and Rural Appraisers, 
and National Association of Independent Fee Appraisers on the 2010 
ABS Proposing Release (recommending standards of appraisal).
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    5. Should we explore devising review standards for each particular 
asset class and consider proposing more detailed standards for the 
nature of review at a later date? If so, how?
    6. Should our rules, as proposed, permit issuers to rely on a third 
party that was hired by the issuer to perform the required review of 
the assets under Rule 193? Should we, as proposed, condition the 
ability to rely on a third party for this purpose on the third-party's 
review satisfying the requirements of Rule 193? When we adopt rules in 
the future to establish the appropriate format and content for the 
certifications required pursuant to Exchange Act Section 15E(s)(4)(B), 
we will be required to do so in a manner ``to ensure that providers of 
due diligence services have conducted a thorough review of data, 
documentation, and other relevant information necessary for a 
nationally recognized statistical rating organization to provide an 
accurate rating.'' \41\ Should we condition reliance on third parties 
for purposes of Rule 193 upon satisfaction of that standard? How else 
could the proposal better effectuate Exchange Act Section 15E(s)(4)? 
\42\
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    \41\ Section 15E(s)(4)(C) of the Exchange Act.
    \42\ Section 15E(s)(4)(A) of the Exchange Act requires issuers 
to make publicly available the findings and conclusions of ``any 
third-party due diligence report.''
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    7. If an originator performs a review of the assets and provides 
the findings and conclusions of its review to the issuer and the 
originator is not affiliated with the sponsor of the securitization, 
should we allow an issuer to rely on the originator's review of the 
assets in order to satisfy the issuer's review requirements? If so, 
should the information relating to the originator's review be treated 
similarly to third-party reviews? As described above, under our 
proposal, an issuer would be permitted to rely on a third party to 
conduct the Rule 193 review provided the review satisfied the 
requirements of Rule 193 and the third party is named in the 
registration statement and consents to being named as an expert in 
accordance with Section 7 of the Securities Act and Rule 436 under the 
Securities Act.\43\ If we allow such reviews to satisfy Rule 193, 
should the findings and conclusions of third-party originators who 
conduct Rule 193 reviews likewise be subject to expert liability?
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    \43\ If an issuer relies on a third party to perform the review 
of the assets, the third party would be an expert under Securities 
Act Section 11 [15 U.S.C. 77k] and its consent must be included as 
an exhibit to the registration statement. See Section 7 of the 
Securities Act.
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    8. Is there any other party that an issuer should be allowed to 
rely upon in order to satisfy the review required by proposed Rule 193? 
For example, should an issuer be permitted to rely upon the underwriter 
of the offering? If so, how should we treat the findings and 
conclusions of that party? Should that party's findings and conclusions 
be subject to expert liability? If not, how can we ensure that such 
parties would take appropriate responsibility for any findings included 
in the issuer's registration statement?
    9. We propose to permit an issuer to rely upon a third party that 
is engaged for purposes of performing a review of the assets to satisfy 
Rule 193. Is ``third party engaged for purposes of performing a review 
of the pool assets'' an appropriate description? If not, what is a more 
appropriate description? What entities should be considered a ``third 
party engaged for purposes of performing a review''? Should such third-
party reviewers include accountants who, for example, perform reviews 
and prepare reports pursuant to agreed-upon procedures? Should such 
third-party reviewers include attorneys who, for example, provide 
opinions as to the perfection of the security interest in the 
collateral? \44\ Are there policy reasons why a particular type of 
third-party reviewer should be excluded from this requirement? We note 
that the issuer would remain responsible for its disclosure under the 
federal securities laws, including disclosure regarding pool assets, 
even if it engages a third party to perform the review required by Rule 
193. Should the proposed rule be revised to clarify this point?
---------------------------------------------------------------------------

    \44\ See, e.g., John Arnholz & Edward E. Gainor, Offerings of 
Asset-Backed Securities Sec.  6.06 (2007 Supplement).
---------------------------------------------------------------------------

    10. It appears that the scope of third-party due diligence 
providers is broad enough to include appraisers and engineers for 
purposes of Section 15E(s)(4). Is there a basis for a different 
approach? Should this vary among different asset classes? For example, 
should the requirements differ depending on whether the asset class for 
the securities is commercial mortgages or residential mortgages? We are 
aware that for certain types of ABS offerings (e.g., CMBS offerings) an 
issuer may receive numerous reports from appraisers and engineers 
regarding the property underlying the loan.
    11. As discussed below, Exchange Act Section 15E(s)(4)(A) requires 
an issuer or underwriter of ABS to make publicly available the findings 
and conclusions of any third-party due diligence report obtained by the 
issuer or underwriter.

[[Page 64187]]

How does new Exchange Act Section 15E(s)(4)(A) impact the analysis 
here? Should the third parties whose findings and conclusions must be 
made publicly available under Exchange Act Section 15E(s)(4)(A) be the 
same group of third parties that are engaged for the review of the 
assets for purposes of proposed Rule 193? If not, how can we 
appropriately differentiate between the groups of third-party due 
diligence providers? In other words, how should the rule describe the 
nature of the work performed by third parties subject to Section 
15E(s)(4)(A) versus the nature of the work performed by third parties 
employed by an issuer whose findings and conclusions should be required 
to be disclosed in a registration statement if such parties should be 
different?
    12. We have previously noted the potential conflict of interest 
arising from the ``issuer pays'' model for NRSROs in which an NRSRO is 
paid by the arranger of a structured finance product to rate the 
product.\45\ Are third-party due diligence firms subject to the same 
type of potential conflicts of interest as credit rating agencies 
operating under the ``issuer pays'' model? If so, is there a way to 
mitigate this potential conflict?
---------------------------------------------------------------------------

    \45\ See, e.g., Proposed Rules for Nationally Recognized 
Statistical Rating Organizations, Release No. 34-57967 (June 16, 
2008) [73 FR 36212].
---------------------------------------------------------------------------

    13. Are there other potential conflicts relating to a third-party 
due diligence provider that we should address? How should we encourage 
the quality of third-party reviews? Should a third party be required to 
be independent if the review will be used to satisfy Rule 193? If so, 
do we need to define ``independent''? How should we define it? Should 
we require disclosure relating to the affiliations of the third party? 
Item 1119 of Regulation AB \46\ requires disclosure of affiliations 
among participants in the securitization. Should we revise Item 1119 to 
require disclosure regarding affiliations between a third-party due 
diligence provider and the parties listed in Item 1119?
---------------------------------------------------------------------------

    \46\ 17 CFR 229.1119.
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B. Proposed Disclosure Requirements

1. Registered Offerings
    Item 1111 of Regulation AB \47\ outlines several aspects of the 
pool that the prospectus disclosure for ABS should cover. We are 
proposing amendments to Item 1111 to require disclosure regarding the 
nature of the issuer's review of the assets under proposed Rule 193 and 
the findings and conclusions of the review. In addition, we are re-
proposing amendments from our 2010 ABS Proposing Release to require 
disclosure regarding the composition of the pool as it relates to 
assets that do not meet disclosed underwriting standards, as we believe 
this information would promote a better understanding of the impact of 
the review on the composition of the pool assets.
---------------------------------------------------------------------------

    \47\ 17 CFR 229.1111.
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a. Nature of Review
    We are proposing new Item 1111(a)(7) of Regulation AB to require 
that an issuer of ABS disclose the nature of the review it conducts to 
satisfy proposed Rule 193. This would include whether the issuer has 
hired a third-party firm for the purpose of reviewing the assets. In 
either case, we expect that this would include a description of the 
scope of the review, such as whether the issuer or a third party 
conducted a review of a sample of the assets or what kind of sampling 
technique was employed (i.e., random or adverse). This proposed 
requirement would implement Securities Act Section 7(d)(2),\48\ as 
added by the Act.
---------------------------------------------------------------------------

    \48\ 15. U.S.C. 77g(d)(2).
---------------------------------------------------------------------------

b. Findings and Conclusions
    In order to harmonize this provision with the language used in 
Exchange Act Section 15E(s)(4)(A), under proposed Item 1111(a)(7), the 
issuer would be required to disclose the findings and conclusions of 
any review performed by the issuer or by a third party engaged for 
purposes of reviewing the assets. Although Section 7(d) of the 
Securities Act does not require our rules to mandate that the issuer 
disclose the findings and conclusions of a review in its registration 
statement, we believe this information is important for investors to 
consider along with the information in the registration statement 
relating to the nature of the issuer's review and the findings and 
conclusions of third-party due diligence providers, as required to be 
publicly disclosed by Securities Act Section 7(d) and Exchange Act 
Section 15E(s)(4)(A). We believe that disclosure of the findings and 
conclusions of the review would provide investors with a better picture 
of the assets than only the nature of the review and a better ability 
to evaluate the review.
    As noted above, Section 15E(s)(4)(A) of the Exchange Act requires 
an issuer or underwriter of any ABS to make publicly available the 
findings and conclusions of any third-party due diligence report 
obtained by an issuer or underwriter. Exchange Act Section 15E(s)(4)(A) 
does not apply to an issuer who itself performs the review of the 
underlying assets. We believe that it is important to consider these 
two provisions together to minimize the difference in the required 
disclosure based merely on whether the issuer performs the review, or 
instead hires a third party to perform the review.\49\ Consequently, as 
noted above, for registered offerings of ABS, proposed Item 1111(a)(7) 
would require disclosure of the findings and conclusions of the issuer 
or a third-party reviewer. We believe this approach would avoid 
incentives for ``regulatory arbitrage'' based merely on whether the 
review of assets was performed internally by the issuer, or whether 
instead the issuer hired a third party to perform the review. We are 
concerned that the intent of Exchange Act Section 15E(s)(4)(A) may be 
frustrated, and investor protection may not be served, if issuers who 
hired third-party loan review firms to perform a review of the assets 
were required to make publicly available the findings and conclusions 
of a review of pool assets, but issuers who performed the review 
themselves were not, because it could create an incentive for issuers 
to conduct the review themselves to avoid making publicly available the 
findings and conclusions of any review of the assets underlying the 
ABS.
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    \49\ As one commentator has noted, the issuer or underwriter 
``may decide that it is easier not to retain such an outside firm 
than to have to describe its procedures and the information it 
reviewed and then provide a certification to the ratings agency * * 
*. In short, given the choice, issuers and underwriters might prefer 
the easier course of doing nothing.'' Examining Proposals to Enhance 
the Regulation of Credit Rating Agencies: Testimony before the U.S. 
Senate Committee on Banking, Housing, and Urban Affairs, 111th 
Congress, 1st session, p. 6 (2009) (Testimony of John Coffee).
---------------------------------------------------------------------------

c. Disclosure Regarding Exception Loans
    We also are re-proposing additional requirements that we had 
previously proposed in the 2010 ABS Proposing Release. In the 2010 ABS 
Proposing Release, we proposed to detail and clarify the type of 
disclosure that is required to be provided for ABS offerings with 
respect to deviations from disclosed underwriting standards. We 
proposed to require that disclosure regarding the inclusion in the pool 
of assets that deviate from the disclosed underwriting criteria be 
accompanied by specific data about the amount and characteristics of 
those assets that did not meet the disclosed standards. We also 
proposed to require disclosure of what compensating or other factors, 
if any, were used to determine that the asset should be included in the 
pool, despite not having met the originator's specified underwriting 
standards. The

[[Page 64188]]

commentators that submitted comments on these proposed requirements in 
the 2010 ABS Proposing Release were generally supportive.\50\
---------------------------------------------------------------------------

    \50\ See, e.g., comment letters from Mortgage Bankers 
Association, Community Mortgage Banking Project, Realpoint, LLC, CFA 
Institute, and American Securitization Forum; but see comment letter 
from IPFS Corporation.
---------------------------------------------------------------------------

    We are re-proposing an amendment to Item 1111 in this release to 
require similar disclosure.\51\ As re-proposed, Item 1111(a)(8) of 
Regulation AB would require issuers to disclose how the assets in the 
pool deviate from the disclosed underwriting criteria and include data 
on the amount and characteristics of those assets that did not meet the 
disclosed standards. Issuers would be required to disclose the entity 
(e.g., sponsor, originator, or underwriter) who determined that such 
assets should be included in the pool, despite not having met the 
disclosed underwriting standards, and what factors were used to make 
the determination. For example, this could include compensating factors 
or a determination that the exception was not material. If compensating 
or other factors were used, issuers would be required to provide data 
on the amount of assets in the pool that are represented as meeting 
each factor and the amount of assets that do not meet those factors. As 
discussed in the 2010 ABS Proposing Release, we believe that these 
revisions would further detail and clarify the type of disclosure that 
is required to be provided for ABS offerings with respect to deviations 
from disclosed underwriting standards and help elicit important 
information in areas that became problematic in the recent financial 
crisis. We also believe that this information would help provide 
investors with a fuller understanding of the quality and extent of the 
issuer's review of the assets (through hiring a third-party or 
otherwise) and how that relates to a determination to either include a 
loan in the pool or exclude it from the pool.
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    \51\ See proposed Item 1111(a)(8) of Regulation AB.
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    The requirements proposed here are substantially similar to what we 
proposed in the 2010 ABS Proposing Release. However, we are proposing 
an additional requirement, consistent with one commentator's 
suggestion, that the issuer disclose the entity (e.g., sponsor, 
originator or underwriter) who determined that such assets would be 
included in the pool, despite not having met the disclosed underwriting 
standards.\52\ We believe that this additional requirement would assist 
investors in understanding the entities along the securitization chain 
that may be directing decisions to include exception loans in the pool.
---------------------------------------------------------------------------

    \52\ See Massachusetts AG comment letter.
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2. Exchange Act Section 15E(s)(4)(A) and New Form ABS-15G
    As noted above, Section 932 of the Act amends Exchange Act Section 
15E by adding, among other things, a new Section 15E(s)(4)(A) which 
sets forth the requirement that the issuer or underwriter of any ABS 
make publicly available the findings and conclusions of any third-party 
due diligence report obtained by the issuer or underwriter. Unlike 
Securities Act Section 7(d), which is expressly limited to registered 
ABS offerings, we believe that the requirements of Exchange Act Section 
15E(s)(4)(A) were intended to apply to issuers and underwriters of both 
registered and unregistered offerings of ABS.\53\ In this regard, we 
note that Section 941 of the Act amends Section 3(a) of the Exchange 
Act to add a definition of ``asset-backed security'' and that this 
definition includes asset-backed securities typically offered and sold 
in unregistered transactions. Further, unlike Section 945 of the Act, 
Section 932 does not refer to Section 7 of the Securities Act or 
registration statements filed under the Securities Act.
---------------------------------------------------------------------------

    \53\ We note that ``underwriter'' is a term that is more 
typically used in connection with registered offerings, and the 
parties performing similar functions in unregistered transactions 
are typically referred to as placement agents or initial purchasers. 
We use the term ``underwriter'' here to describe all those persons.
---------------------------------------------------------------------------

    For registered ABS offerings, this disclosure, with respect to 
reports obtained by issuers, would be required to be provided in the 
prospectus as described above. In order to implement the disclosure 
requirement for unregistered offerings we are proposing new Rule 15Ga-2 
under the Exchange Act. Proposed Rule 15Ga-2 would require an issuer of 
Exchange Act-ABS to file a new Form ABS-15G to disclose the findings 
and conclusions of any third party engaged for purposes of performing a 
review obtained by an issuer with respect to unregistered 
transactions.\54\ Rule 15Ga-2 also would require an underwriter of 
Exchange Act-ABS to file Form ABS-15G with the same information for 
reports obtained by an underwriter in registered and unregistered 
transactions. Proposed Form ABS-15G would be filed with the Commission 
on EDGAR.
---------------------------------------------------------------------------

    \54\ In a separate release implementing Section 943 of the Act, 
we are proposing new Form ABS-15G which would be required to be 
filed by any securitizer that offers asset-backed securities that 
would be subject to the federal securities laws. See Disclosure for 
Asset-Backed Securities Required by Section 943 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010, Release No. 
33-9148 (Oct. 4, 2010) (the ``Section 943 Release''). The term 
``securitizer'' is defined in Section 15G of the Exchange Act, as 
added by the Act. Section 15E(s)(4)(B)-(D) also would require that 
when third-party due diligence services are employed by an NRSRO, an 
issuer or an underwriter, the person providing the services give a 
certification to any NRSRO that produces a rating. Section 15E(s)(4) 
also requires the Commission to issue rules regarding the format, 
content and disclosure of the certification. As noted above, the 
Commission will propose and adopt rules to address the other 
provisions of Section 15E(s)(4) not later than one year after the 
date of the Act's enactment.
---------------------------------------------------------------------------

    We are proposing that Form ABS-15G be required to be filed five 
business days prior to the first sale of the offering. This 
requirement, if adopted, would allow investors and NRSROs time to 
consider the disclosure about a third-party's findings and conclusions 
regarding its review of the pool assets.\55\
---------------------------------------------------------------------------

    \55\ This five-day time period is intended to be consistent with 
the proposal in the 2010 ABS Proposing Release that would require 
that an ABS issuer using a shelf registration statement on proposed 
Form SF-3 file a preliminary prospectus containing transaction-
specific information at least five business days in advance of the 
first sale of securities in the offering. Commentators' reactions to 
the proposed five-day requirement in the 2010 ABS Proposing Release 
were mixed, with some commentators suggesting that five days was 
longer than investors needed to consider the information in the 
prospectus (e.g., comment letters from American Bar Association, 
Bank of America), while other commentators were supportive of the 
proposed five-day requirement (e.g., comment letter from MetLife, 
Inc.).
---------------------------------------------------------------------------

    We recognize that public disclosure of information relating to an 
unregistered offering could raise concerns regarding an issuer's or 
underwriter's reliance on the private offering exemptions and safe 
harbors under the Securities Act.\56\ We intend for Form ABS-15G to be 
used for both registered and unregistered ABS transactions (although as 
we note below, if the information has already been provided in a 
prospectus for a registered transaction, it need not be provided again 
in Form ABS-15G). We are of the view that issuers and underwriters can 
disclose information required by Rule 15Ga-2 without jeopardizing 
reliance on those exemptions and safe harbors, provided that the only 
information made publicly available is that which is required by the 
proposed rule, and the issuer does not otherwise use Form ABS-15G to 
offer or sell securities or in a manner that conditions the market for 
offers or sales of its securities.\57\
---------------------------------------------------------------------------

    \56\ See 15 U.S.C. 77d(2), 17 CFR 230.144A, 17 CFR 230.501-508.
    \57\ Filing proposed Form ABS-15G would not foreclose the 
reliance of an issuer on the private offering exemption in the 
Securities Act and the safe harbor for offshore transactions from 
the registration provisions in Section 5 [15 U.S.C. 77e]. However, 
the inclusion of information beyond that required in proposed Rule 
15Ga-2, may jeopardize such reliance by constituting a public 
offering or conditioning the market for the ABS being offered under 
an exemption.

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[[Page 64189]]

    Under our proposal, Form ABS-15G would be signed by the senior 
officer in charge of securitization of the depositor, if the form were 
filed to include the findings and conclusions of a third party hired by 
the issuer. We believe that requiring the senior officer in charge of 
securitization of the depositor to sign the form is consistent with 
other signature requirements for filings relating to asset-backed 
securities.\58\ If the form included the findings and conclusions of a 
third party engaged by the underwriter, then the form would be signed 
by a duly authorized officer of the underwriter. We believe that 
requiring Form ABS-15G to be signed by a duly authorized officer of the 
underwriter would provide an incentive for the person who signs the 
form to review it for accuracy.
---------------------------------------------------------------------------

    \58\ See, e.g., signature requirement for Form 10-K (17 CFR 
249.312). It is also consistent with our proposed signature 
requirements for the registration statement for ABS in the 2010 ABS 
Proposing Release.
---------------------------------------------------------------------------

    As discussed above, because we are proposing that, for registered 
offerings, the findings and conclusions of the report of a third party 
that is engaged by the issuer for purposes of asset review would be 
required to be included in a prospectus that is required to be filed 
with the Commission,\59\ an issuer that has filed such information on 
EDGAR would satisfy the Exchange Act Section 15E(s)(4)(A) requirement 
to make publicly available a third-party report obtained by an ABS 
issuer. Thus, an ABS issuer that has disclosed the findings and 
conclusions of a third-party due diligence provider in the first 
prospectus that is required to be filed under Rule 424 of the 
Securities Act \60\ and filed in accordance with Rule 424 would not be 
required to file a Form ABS-15G with the same information. However, any 
underwriter that has hired a third-party due diligence provider for the 
registered offering would still be required to file Form ABS-15G with 
the findings and conclusions of that third-party due diligence 
provider.
---------------------------------------------------------------------------

    \59\ In the 2010 ABS Proposing Release, we proposed to require 
that an asset-backed issuer that offers securities off of a shelf 
registration statement file a preliminary prospectus at least five 
business days before first sale. We anticipate that this information 
would be required to be included in such preliminary prospectus, 
should we adopt that proposal.
    \60\ 17 CFR 230.424.
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    The market for Exchange Act-ABS is global.\61\ Securitizers in the 
United States may sell ABS to offshore purchasers as part of a 
registered or unregistered offering. As proposed, these transactions 
would be subject to the requirements of proposed Rule 15Ga-2. In 
addition, U.S. investors may participate in offerings of ABS that are 
primarily offered by foreign securitizers to purchasers outside the 
United States. For example, a small proportion of a primarily offshore 
offering of ABS may be made available to U.S. investors pursuant to 
Section 4(2) of the Securities Act or Rule 144A under that Act.
---------------------------------------------------------------------------

    \61\ Indeed, the International Organization of Securities 
Commissions (IOSCO) cites the recent crisis in the subprime markets, 
stemming from defaulted mortgage loans in the United States and 
affected by issues related to liquidity and transparency, as 
evidence of the interrelation of today's global markets. See Report 
on the Subprime Crisis--Final Report, Report of the Technical 
Committee of IOSCO, May 2008, available at https://www.iosco.org/
library/pubdocs/pdf/IOSCOPD273.pdf.
---------------------------------------------------------------------------

    We recognize that Exchange Act Section 15E(s)(4)(A) does not 
specify how its requirements apply to offshore transactions. As noted, 
consistent with Section 15E(s)(4)(A), proposed Rule 15Ga-2 would 
require issuers and underwriters to disclose information about 
unregistered transactions, including those sold in unregistered 
transactions outside the United States. Securities that are sold in 
foreign markets and assets originated in foreign jurisdictions may be 
subject to different laws, regulations, customs and practices which can 
raise questions as to the appropriateness of the disclosures called for 
under Form ABS-15G. Although our proposed rules are required by the 
Act, and we believe the added protections of our rules would benefit 
investors who purchase securities in these offerings, we are mindful 
that the imposition of a filing requirement in connection with private 
placements of ABS in the United States may result in foreign issuers 
seeking to avoid the filing requirement by excluding U.S. investors 
from purchasing portions of ABS primarily offered outside the United 
States, thus depriving U.S. investors of diversification and related 
investment opportunities.
Request for Comment
    14. Are our disclosure proposals appropriate? Should we provide 
more specific requirements regarding the information that must be 
provided about the nature and scope of the review? If so, what should 
we require?
    15. Should we consider Securities Act Section 7(d) and Exchange Act 
Section 15E(s)(4)(A) together and require disclosure of the findings 
and conclusions of the issuer's or third party's review of the assets, 
as proposed? Should we, instead, implement Section 15E(s)(4)(A) as part 
of the later rulemaking under Section 15E?
    16. Should we require, as proposed, disclosure relating to assets 
that deviate from the disclosed origination underwriting criteria?
    17. Should we require, as proposed, disclosure of the entity who 
determined that assets that did not meet the disclosed criteria should 
be included in the pool, despite not having met the disclosed 
underwriting criteria? Should issuers be required to disclose, as 
proposed, what factors were used to make the determination? Would this 
provide useful information for investors?
    18. Is requiring the filing of information regarding the findings 
and conclusions of the third-party due diligence provider's report on 
proposed Form ABS-15G on EDGAR an appropriate way for issuers in 
unregistered offerings and for underwriters in registered and 
unregistered offerings to make this information publicly available? 
Should we allow Web site posting of the information instead? If so, how 
can we ensure the materials remain public? What advantages does Web 
site posting have over requiring that the information be filed on 
EDGAR? How do we ensure that investors and market participants have 
access to such information? What would be the liability implications of 
allowing the information to be posted on a Web site as an alternative 
to filing on EDGAR? Are there other appropriate means of making the 
findings and conclusions ``publicly available''?
    19. As discussed in request for comment number 10 above, we are 
aware that for certain types of ABS offerings an issuer may receive 
numerous reports from appraisers and engineers regarding the property 
underlying the loan. To what extent do the findings and conclusions of 
these reports help the issuer in performing its review? We are aware 
that CMBS issuers often provide the results of such reports to the ``B-
piece purchaser'' to the extent that the findings of those reports 
differ from the representations and warranties regarding the assets in 
the underlying transaction agreements. Should we require that the 
issuer disclose all of the findings and conclusions provided to a B-
piece buyer for purposes of the required disclosure in the registration 
statement? To what extent do the findings and conclusions of these 
reports assist rating agencies rating ABS? Should we require, for 
purposes of Section 15E(s)(4)(A), the findings and conclusions of such 
reports to be disclosed only to the extent that those findings and 
conclusions differ from the

[[Page 64190]]

representations and warranties or the complete list of findings and 
conclusions provided to a B-piece buyer?
    20. Should we provide a temporary hardship exemption from 
electronic submission of Form ABS-15G with the Commission for filers 
who experience unanticipated technical difficulties that prevent timely 
preparation and submission of an electronic filing? Are there any 
reasons that ABS issuers and underwriters would not be able to submit 
Form ABS-15G on EDGAR in a timely fashion? If so, what would be an 
appropriate format for the filing? Would a paper filing be useful to 
investors and other market participants? Is timely availability of an 
electronic filing of this information important? If so, should we 
instead require that the information be posted on a Web site on the 
same day it was due to be filed on EDGAR, but require that the filer 
submit a confirming electronic copy of the information within a 
prescribed number of business days (e.g., six) of filing the 
information in paper? \62\
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    \62\ See Rule 201 of Regulation S-T [17 CFR 232.201].
---------------------------------------------------------------------------

    21. Is there any reason Exchange Act Section 15E(s)(4)(A) should 
not apply to both registered and unregistered ABS transactions? If the 
requirement applies to both registered and unregistered transactions, 
should the universe of ABS offerings that are subject to the 
requirement be defined, as proposed, as an offering of asset-backed 
securities, as that term is defined in Section 3(a)(77) of the Exchange 
Act? Should the requirement be instead applicable to some other 
subcategory of asset-backed securities? For example, existing Exchange 
Act Section 15E(i) refers to a security or money market instrument 
issued by an asset pool or as part of any asset-backed or mortgage-
backed securities transaction. Should our rule refer to this 
description of an asset-backed security instead of the proposed 
reference to Exchange Act Section 3(a)(77)? \63\
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    \63\ Rules relating to NRSROs have used this terminology, and we 
have said that this refers to a ``broad category of financial 
instrument that includes, but is not limited to, asset-backed 
securities such as residential mortgage-backed securities and to 
other types of structured debt instruments such as collateralized 
debt obligations, including synthetic and hybrid CDOs, or 
collateralized loan obligations.'' See, e.g., fn. 3 of Amendments to 
Rules for Nationally Recognized Statistical Rating Organizations, 
Release No. 34-61050 (Nov. 23, 2009)[74 FR 63832].
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    22. Should we exempt any issuers, underwriters or other parties 
from this requirement? Should we exempt issuers and underwriters of ABS 
that are not rated by an NRSRO from having to make publicly available 
the findings and conclusions of third-party due diligence reports? \64\ 
As proposed, Rule 15Ga-2 would apply to issuers and underwriters of ABS 
that are exempted securities as defined in Section 3(a)(12) of the 
Exchange Act, including government securities and municipal securities. 
Should such exempted securities be exempt from this provision? \65\
---------------------------------------------------------------------------

    \64\ For example, Fannie Mae and Freddie Mac are government 
sponsored enterprises (``GSEs'') that purchase mortgage loans and 
issue or guarantee mortgage-backed securities (``MBS''). MBS issued 
or guaranteed by these GSEs have been, and continue to be, exempt 
from registration under the Securities Act and reporting under the 
Exchange Act. These securities have not been, and are not currently, 
rated by a credit rating agency.
    \65\ Exchange Act ``exempted securities'' include government 
securities and municipal securities, as defined under the Exchange 
Act. For example, MBS issued by the Government National Mortgage 
Association are fully modified pass-through securities guaranteed by 
the full faith and credit of the United States government. See 
http://www.ginniemae.gov/.
---------------------------------------------------------------------------

    23. Would the proposed requirement that Form ABS-15G be filed five 
business days prior to first sale provide investors with sufficient 
time to review the findings and conclusions contained therein? Would it 
provide NRSROs with sufficient time to take the included information 
into account in determining a rating? If not, what would be a more 
appropriate filing deadline and why? Are five business days also 
appropriate in unregistered offerings? Is there reason to require a 
different number of days in unregistered offerings?
    24. Is our proposed signature requirement for Form ABS-15G 
appropriate? Is it necessary? Conversely, are there other appropriate 
individuals that are better suited to sign the form?
    25. Should issuers of registered ABS offerings be required to 
provide notice on Form ABS-15G that they have provided information 
relating to the third-party due diligence report obtained by the issuer 
in a prospectus that is filed with the Commission?
    26. Where an issuer, underwriter or NRSRO employs a third-party due 
diligence provider, Section 15E(s)(4)(B) of the Exchange Act also 
requires that the person providing the due diligence services provide 
to the NRSRO a written certification in the format and containing 
content to be determined by the Commission. The Commission is required 
to prescribe this form and content not later than one year after 
enactment of the Act. Although we are not proposing to implement this 
requirement in this release, we request comment on the appropriate 
format and content for this certification and how we can appropriately 
coordinate the rules and requirements proposed in this release with 
that statutory requirement.
    27. Are there any extra or special considerations relating to 
offshore sales of ABS that we should take into account in our rules? 
Should our rules permit issuers or underwriters to exclude information 
from Form ABS-15G with respect to assets underlying ``foreign-offered 
ABS,'' and if so, should foreign-offered ABS be defined to include 
Exchange Act-ABS that were initially offered and sold solely in 
accordance with Regulation S, the payments to holders of which are in 
non-U.S. currency, that are governed by non-U.S. law, and have foreign 
assets (i.e., assets that are not originated in the United States) that 
comprise at least a majority of the value of the asset pool? For this 
purpose, should the foreign asset composition threshold be higher or 
lower (e.g., 40%, 60%, or 80%)? Would another definition be more 
appropriate?
    28. Should our rules require issuers that are foreign private 
issuers \66\ to provide information on Form ABS-15G for those Exchange 
Act-ABS that are to be offered and sold in the United States pursuant 
to an exemption in an unregistered offering, as proposed? Instead, 
should our rules only require disclosure about Exchange Act-ABS as to 
which more than a certain percentage (e.g., 5%, 10% or 20%) of any 
class of such ABS is sold to U.S. persons?
---------------------------------------------------------------------------

    \66\ 17 CFR 240.3b-4.
---------------------------------------------------------------------------

    29. Should we include requirements tailored to revolving asset 
master trusts? For example, should we include a disclosure requirement 
in Exchange Act Form 8-K requiring that the issuer provide updated 
disclosure on its review or due diligence with respect to accounts or 
assets that are added to the pool after the offering transaction has 
been completed? Should this be a requirement for each Form 10-D or 
should it be provided on a quarterly basis instead?

III. General Request for Comment

    We request comment on the specific issues we discuss in this 
release, and on any other approaches or issues that we should consider 
in connection with the proposed amendments. We seek comment from any 
interested persons, including investors, asset-backed issuers, 
sponsors, originators, servicers, trustees, disseminators of EDGAR 
data, industry analysts, EDGAR filing agents, and any other members of 
the public.

IV. Paperwork Reduction Act

    Certain provisions of the proposed rule amendments contain 
``collection of information'' requirements within the

[[Page 64191]]

meaning of the Paperwork Reduction Act of 1995 (PRA).\67\ The 
Commission is submitting these proposed amendments and proposed rules 
to the Office of Management and Budget (OMB) for review in accordance 
with the PRA.\68\ An agency may not conduct or sponsor, and a person is 
not required to comply with, a collection of information unless it 
displays a currently valid control number. The titles for the 
collections of information are: \69\
---------------------------------------------------------------------------

    \67\ 44 U.S.C. 3501 et seq.
    \68\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
    \69\ The paperwork burden from Regulation S-K is imposed through 
the forms that are subject to the requirements in those regulations 
and is reflected in the analysis of those forms. To avoid a 
Paperwork Reduction Act inventory reflecting duplicative burdens and 
for administrative convenience, we assign a one-hour burden to 
Regulation S-K.
---------------------------------------------------------------------------

    (1) ``Form ABS-15G'' (a proposed new collection of information);
    (2) ``Form S-1'' (OMB Control No. 3235-0065);
    (3) ``Form S-3'' (OMB Control No. 3235-0073); and
    (4) ``Regulation S-K'' (OMB Control No. 3235-0071).
    Compliance with the proposed amendments would be mandatory. 
Responses to the information collections would not be kept confidential 
and there would be no mandatory retention period for proposed 
collection of information.
    Our PRA burden estimates for the proposed amendments are based on 
information that we receive on entities assigned to Standard Industrial 
Classification Code 6189, the code used with respect to ABS, as well as 
information from outside sources.\70\ When possible, we base our 
estimates on an average of the data that we have available for the 
years 2004 through 2009.
---------------------------------------------------------------------------

    \70\ We rely on two outside sources of ABS issuance data. We use 
the ABS issuance data from Asset-Backed Alert on the initial terms 
of offerings, and we supplement that data with information from 
Securities Data Corporation (SDC).
---------------------------------------------------------------------------

1. Form ABS-15G
    Form ABS-15G is a new collection of information that relates to 
proposed disclosure requirements for issuers or underwriters of any 
ABS. Under the proposed amendments, issuers or underwriters would be 
required to make publicly available the findings and conclusions of any 
third party engaged by the issuer or underwriter for the purposes of 
performing a review of the underlying assets. The burden assigned to 
Form ABS-15G reflects the cost of preparing and filing the form on 
EDGAR. The proposed Form ABS-15G would be filed by issuers of 
unregistered offerings of ABS, and underwriters of registered and 
unregistered offerings of ABS. During 2004 through 2009, there was an 
average of 958 registered offerings of ABS per year. We assume for 
purposes of this PRA that third-party due diligence reports typically 
are obtained only in RMBS and CMBS transactions. This assumption is 
based on our belief that the smaller the average loan in the pool of 
assets and the higher the frequency with which the pool loans revolve 
the less likely it is that there will be a third-party due diligence 
report. We estimate that RMBS and CMBS comprised 54% (or 517) of the 
registered offerings during the above time frame.\71\ We assume that 
not all offerings of RMBS and CMBS will involve a third-party due 
diligence report. We estimate that 75% of RMBS and CMBS offerings would 
involve a third-party due diligence report. Thus, we estimate that 388 
of all registered offerings (958 x 0.54 x 0.75) involve the hiring of a 
third-party due diligence provider by an underwriter. Because issuers 
would include the findings and conclusions of any third-party due 
diligence report in a prospectus in registered offerings, only 
underwriters would file a Form ABS-15G in registered ABS offerings.
---------------------------------------------------------------------------

    \71\ This estimate is based on data from Securities Data 
Corporation (SDC).
---------------------------------------------------------------------------

    In addition, over the period 2004 through 2009, the average number 
of Rule 144A ABS offerings per year was 716.\72\ Because there may be 
additional ABS offerings that would have been subject to the 
requirement to file Form ABS-15G (e.g., offerings of asset-backed 
securities that relied upon Section 4(2) for an exemption from 
registration), we assume that there would be a total of 800 offerings 
of asset-backed securities that could be subject to our proposed Form 
ABS-15G filing requirement. Using the same assumptions and percentage 
estimates as above, we estimate that 324 (800 x 0.54 x 0.75) of all 
unregistered ABS offerings involve the hiring of a third-party due 
diligence provider by the issuer and underwriter or placement agent. 
Therefore, we estimate that approximately 712 (388 + 324) Forms ABS-15G 
would be filed annually. Our burden estimate is based on the assumption 
that the issuer's or underwriter's costs would be limited since Rule 
15Ga-2 only requires that issuers or underwriters make publicly 
available the findings and conclusions they obtained from a third-
party. We estimate that the burden to an issuer or underwriter of 
making the findings and conclusions of a third-party publicly available 
will be approximately 5 hours to prepare, review and file the Form ABS-
15G. This would amount to 3,560 burden hours (5 hours x 712 forms). We 
allocate 75%, or 2,670 (0.75 x 3,560), of those hours to internal 
burden hours and 25% for professional costs at $400 per hour for total 
outside costs of $356,000 ($400 x 0.25 x 3,560).
---------------------------------------------------------------------------

    \72\ This is based on ABS issuance data from Asset-Backed Alert 
and information from SDC.
---------------------------------------------------------------------------

2. Rule 15Ga-2
    Rule 15Ga-2 contains the requirements for disclosure that an issuer 
must provide in Form ABS-15G filings described above. The collection of 
information requirements, however, are reflected in the burden hours 
estimated for Form ABS-15G. Therefore, Rule 15Ga-2 does not impose any 
separate burden.
3. Forms S-1 and S-3
    We are proposing amendments to Item 1111 of Regulation AB to 
increase the disclosure that would be required in offerings of ABS 
registered on either Forms S-1 or S-3. The disclosure required under 
Item 1111 would include disclosure that otherwise would be required by 
proposed Exchange Act Rule 15Ga-2 (which implements Section 
15E(s)(4)(A) of the Exchange Act), as well as additional information 
about issuer reviews not required by proposed Rule 15Ga-2. The 
amendment to Item 1111 would require issuers to disclose how the assets 
in the pool deviate from the disclosed underwriting criteria, and 
include data on the amount and characteristics of those assets that did 
not meet the disclosed standards. Issuers would be required to disclose 
the entity who determined that such assets should be included in the 
pool and what factors were used to make the determination. Under 
proposed Rule 193, if an issuer employs a third party to perform the 
review, the third party must be named in the registration statement and 
consent to being named as an expert in accordance with Securities Act 
Rule 436. Thus, we anticipate that issuers will incur a burden in 
obtaining a consent from the third party.
    We believe that the proposed requirements would increase the annual 
incremental burden to issuers by 30 hours per form.\73\ For 
registration statements, we estimate that 25% of the burden of 
preparation is carried by the company internally and that 75% of the 
burden is carried by outside

[[Page 64192]]

professionals retained by the registrant at an average cost of $400 per 
hour. From 2004 through 2009, an estimated average of four offerings 
was registered annually on Form S-1 by ABS issuers. We believe that the 
proposed requirements would result in an increase to the internal 
burden to prepare Form S-1 of 30 burden hours (0.25 x 30 x 4) and an 
increase in outside costs of $36,000 ($400 x 0.75 x 30 x 4). During 
2004 through 2009, we estimate an annual average of 929 offerings of 
ABS registered on Form S-3. Therefore, we believe that the proposed 
requirements would result in an increase to the internal burden to 
prepare Form S-3 filings of 6,968 burden hours (0.25 x 30 x 929) and a 
total cost of $8,361,000 (400 x 0.75 x 30 x 929).
---------------------------------------------------------------------------

    \73\ This does not reflect burdens associated with the review 
that would be required as a result of proposed Rule 193, which we 
believe does not impose a collection of information requirement for 
purposes of our PRA analysis.
---------------------------------------------------------------------------

Regulation S-K
    Regulation S-K includes the item requirements in Regulation AB and 
contains the disclosure requirements for filings under both the 
Securities Act and the Exchange Act. In 2004, we noted that the 
collection of information requirements associated with Regulation S-K 
as it applies to ABS issuers are included in Form S-1 and Form S-3.\74\ 
The proposed changes would revise Regulation S-K. The collection of 
information requirements, however, are reflected in the burden hours 
estimated for the various Securities Act and Exchange Act forms related 
to ABS issuers. The rules in Regulation S-K do not impose any separate 
burden. Consistent with historical practice, we have retained an 
estimate of one burden hour for Regulation S-K for administrative 
convenience.
---------------------------------------------------------------------------

    \74\ See 2004 Regulation AB Adopting Release.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                Current    Proposed     Current    Increase    Proposed       Current       Increase in      Proposed
                    Form                        annual      annual      burden     in burden    burden     professional    professional    professional
                                               responses   responses     hours       hours       hours         costs           costs           costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
S-1.........................................       1,168       1,168     247,982          30     248,012    $297,578,400         $36,000    $297,614,400
S-3.........................................       2,065       2,065     236,959       6,968     243,927     284,350,500       8,361,000     292,711,500
Form ABS-15G................................  ..........         712  ..........       2,670       2,670  ..............         356,000         356,000
                                             -----------------------------------------------------------------------------------------------------------
    Total...................................  ..........  ..........  ..........       9,668  ..........  ..............       8,753,000  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------

Request for Comment
    We request comments in order to evaluate (1) Whether the proposed 
collection of information is necessary for the proper functioning of 
the agency, including whether the information would have practical 
utility; (2) the accuracy of our estimate of the burden of the proposed 
collection of information; (3) whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(4) whether there are ways to minimize the burden of the collection of 
information on those who are to respond, including through the use of 
automated collection techniques or other forms of information 
technology.
    Any member of the public may direct to us any comments concerning 
the accuracy of these burden estimates and any suggestions for reducing 
these burdens. Persons submitting comments on the collection of 
information requirements should direct the comments to the Office of 
Management and Budget, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and should send a copy to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090, with reference to File No. S7-26-10. Request 
for materials submitted to OMB by the Commission with regard to these 
collections of information should be in writing, refer to File No. S7-
26-10, and be submitted to the Securities and Exchange Commission, 
Office of Investor Education and Advocacy, 100 F Street, NE., 
Washington, DC 20549-0213. OMB is required to make a decision 
concerning the collection of information between 30 and 60 days after 
publication of this release. Consequently, a comment to OMB is best 
assured of having its full effect if OMB receives it within 30 days of 
publication.

V. Benefit-Cost Analysis

    The proposed amendments to our regulations for ABS relate to 
requiring an issuer of an ABS to perform a review of the assets 
underlying the security. We are proposing rules that are intended to 
implement the requirements under new Section 7(d) of the Securities 
Act. We also are proposing rules that are intended to implement part of 
new Section 15E(s)(4) of the Exchange Act. First, we are proposing a 
new Securities Act rule to require issuers of registered offerings of 
asset-backed securities to perform a review of the assets underlying 
the asset-backed securities. Second, we also are proposing new 
requirements in Regulation AB to require disclosure regarding:
     The nature of the review of assets conducted by an ABS 
issuer;
     The findings and conclusions of a review of assets 
conducted by an issuer or third party;
     Data on assets in the pool that do not meet the 
underwriting standards; and
     Disclosure regarding which entity determined that the 
assets should be included in the pool, despite not having met the 
underwriting standards and what factors were considered in making this 
determination.

We also are proposing to require that an issuer or underwriter of any 
Exchange Act-ABS be required to file the findings and conclusions of a 
third-party due diligence report on a new form filed on EDGAR.

A. Benefits

    The proposed amendments are designed to increase investor 
protection by implementing the requirement on issuers to perform a 
review of the underlying assets and disclose the nature of the review. 
This should lead to enhanced transparency in offerings of ABS, and 
result in an increase in investors' understanding of the underlying 
pool of assets. We believe that the proposal to require the issuer to 
perform a review of the assets underlying an ABS is likely to result in 
an improvement in the quality of securitized loan pools to the extent 
that these reviews are able to identify non-compliant or otherwise low-
quality assets. It also will allow the public to determine the adequacy 
and level of due diligence services provided by a third party which is 
consistent with the purposes of Section 932 of the Act.\75\ We

[[Page 64193]]

expect that requiring a review of the assets will result in loan pools 
of higher quality.
---------------------------------------------------------------------------

    \75\ See S. Rep. No. 111-176, at 121 (2010).
---------------------------------------------------------------------------

    Further, the description of the nature of the review and disclosure 
of findings and conclusions should encourage more rigorous asset 
reviews, whether by issuers or third parties engaged to perform the 
asset reviews. These disclosures would complement the requirement to 
perform a review by improving their quality. We also believe that the 
proposal to make publicly available on EDGAR the findings and 
conclusions of third-party due diligence reports in ABS offerings will 
allow the public to better assess and more easily determine the 
adequacy and level of due diligence services provided by a third party. 
This benefit of the proposed rule is consistent with the purposes of 
Section 932 of the Act as indicated in the legislative history of the 
Act which states that ``many analysts point to the decline of due 
diligence as a factor that contributed to the poor performance of 
asset-backed securities during the crisis.'' \76\ We also note the 
reference in the Act's legislative history to a need to address the 
lack of due diligence regarding information on which ratings are 
based.\77\ Finally, although issuers in registered offerings would not 
be required to use a third party to satisfy the review requirement, as 
a condition to such use, a third party would be required to consent to 
being named in the registration statement and thereby accept potential 
expert liability, which should increase the quality of that review. In 
registered offerings, the potential expert liability for the findings 
of third-party reviews provides accountability and creates stronger 
incentives to perform high-quality reviews that protect investors. The 
resulting disclosures reduce the information risk of investing in these 
securities. Our proposal to require disclosure by the issuer of the 
nature, findings and conclusions of its review could result in improved 
asset review practices. Moreover, this could be useful to investors if 
they prefer investing in securities about which there is disclosure 
indicating a more robust review over investing in securities about 
which the disclosure indicates a less robust review.
---------------------------------------------------------------------------

    \76\ See id.
    \77\ See id.
---------------------------------------------------------------------------

    The proposed requirement to disclose exception loans should provide 
important information to investors regarding the characteristics of the 
pool that may otherwise not be publicly known. For those issuers that 
currently provide asset-level information about the pool, an investor 
might be able to determine some information about the number of 
exception loans; however, even where this could be determined, the 
proposals would reduce investors' cost of information production by 
reducing duplicative efforts on their part to gather such data on their 
own or purchase it through data intermediaries. We also are proposing 
to require more information about the entities that have determined 
that an asset that deviates from underwriting standards should, 
nonetheless, be included in the pool. Because third-party asset review 
providers typically work for sponsors, there is potentially a conflict 
of interest when a sponsor can waive or overrule the third-party's 
conclusions that insufficient compensating factors exist to allow 
inclusion of an asset that does not meet the underwriting standards 
governing the pool.\78\ We expect that information about which entity 
made the determination to include an asset in the pool despite not 
having met the underwriting standards will provide investors with 
information to gauge whether the decision to accept such loans 
otherwise may be subject to a conflict of interest. We also expect this 
will reduce the cost of information asymmetry and could be useful 
information to investors because investors may be able to price a 
securitization of a pool of assets more accurately, and to credit 
rating agencies in assigning more informed credit ratings.
---------------------------------------------------------------------------

    \78\ See e.g., comment letter from Massachusetts AG.
---------------------------------------------------------------------------

    Our proposal to require disclosure of the nature of the review, as 
well as the findings and conclusions of any such review, may increase 
investor confidence in the market for ABS. This proposal, in 
conjunction with the proposal to require that issuers perform a review, 
could allow investors to better understand the information about the 
asset pool and credit risk of the asset pool including whether the 
asset pool consists of loans to borrowers without the ability to repay 
the loans, or is composed of loans made to creditworthy borrowers.
    In addition, Section 15E(s)(4)(A) of the Exchange Act, as added by 
Section 932 of the Act, which requires issuers and underwriters to make 
the findings and conclusions of third-party due diligence reports 
publicly available, is aimed at improving the quality of information 
received by rating agencies issuing ratings on asset-backed securities 
in registered and unregistered offerings.\79\ We have proposed to make 
this information publicly available on EDGAR. By requiring the proposed 
Form ABS-15G to be filed on EDGAR, the information that would be 
required would be housed in a central repository that would preserve 
continuous access to the information.
---------------------------------------------------------------------------

    \79\ See id.
---------------------------------------------------------------------------

B. Costs

    The proposed rule would implement the requirement that all issuers 
of registered ABS offerings perform a review of the underlying assets 
and that those issuers disclose the nature of their review. Although 
some issuers of ABS may currently perform a review of the underlying 
assets, ABS issuers in registered offerings may incur additional costs 
to perform more extensive reviews, whether the issuer performs the 
review itself, or hires a third-party to perform the review. It is 
possible that by not establishing a minimum level of review and leaving 
the determination of the appropriate level of review to each individual 
issuer, a lack of a uniform standard could result in investors having 
difficulty comparing the level of review and the disclosures about the 
review among various issuers and asset classes.
    It is possible that by not establishing a minimum level of review 
and leaving the determination of the appropriate level of review to 
each individual issuer, some issuers who otherwise may have performed a 
more thorough review to meet a proposed minimum level of review may 
design their reviews to accomplish no more than what is required by the 
rule.
    As proposed, Rule 193 permits an issuer to rely on a third party to 
perform the required review, provided the review satisfies the standard 
in Rule 193 and the third party consents to be named in the 
registration statement. Some asset classes may not have third-party due 
diligence providers available to be engaged to conduct a review. In 
instances where an issuer must conduct the review, we believe that the 
costs of conducting these reviews will not exceed the costs of engaging 
third parties to conduct the reviews. Third-party due diligence 
providers are not registered with the Commission and some may not be 
subject to professional standards. Further, it is possible that third-
party providers may lack sufficient capabilities to provide the review 
for which they are retained. However, our rules would subject third-
party due diligence providers in registered transactions to potential 
expert liability for the disclosure regarding the findings and 
conclusions of their review of the assets. For certain firms, however, 
in particular smaller due diligence entities

[[Page 64194]]

that may lack the financial resources to cover their potential 
liabilities, expert liability may not be a significant deterrent 
because these firms have less financial resources exposed to potential 
liability and may not be as concerned about losing potential claims 
compared to firms that have more financial resources exposed to 
liability. This may create a burden on both qualified providers of due 
diligence and the securitizers that hire them.
    We acknowledge that this requirement would impose costs on issuers 
and third-party due diligence providers, and they may be required to 
adjust their practices (and prices in the case of third parties) to 
account for this new requirement.
    Finally, for unregistered offerings, the disclosure of the results 
of an asset review is required only for third-party reviews. This may 
indirectly result in discouraging issuers and underwriters from 
obtaining third-party reviews in unregistered offerings.
    Our proposals requiring issuers to disclose the nature of the 
review as well as the findings and conclusions of such review will 
impose a disclosure burden. In addition, filers will make the 
information proposed to be required available on EDGAR, which requires 
obtaining authorization codes and adherence to formatting instructions. 
For purposes of the PRA, we estimate that the new disclosure would 
cause an increase in the total cost of preparing Forms S-1 and S-3 of 
$13,995,000. In addition, for purposes of the PRA, we estimate that the 
cost for including third-party findings in Form ABS-15G would be 
$356,000.
Request for Comment
    We seek comments and empirical data on all aspects of this Benefit-
Cost Analysis including identification and quantification of any 
additional costs and benefits. Specifically, we ask the following:
     What would be the costs to an issuer of performing a 
review of the underlying assets? How would this compare to the cost of 
hiring a third-party provider to perform the review?
     What would be the additional costs arising from the 
application of expert's liability to third-parties performing reviews 
for issuers?

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

    Section 23(a) of the Exchange Act \80\ requires the Commission, 
when making rules and regulations under the Exchange Act, to consider 
the impact a new rule would have on competition. Section 23(a)(2) 
prohibits the Commission from adopting any rule that would impose a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act. Section 2(b) of the Securities Act 
\81\ and Section 3(f) of the Exchange Act \82\ require the Commission, 
when engaging in rulemaking that requires it to consider whether an 
action is necessary or appropriate in the public interest, to consider, 
in addition to the protection of investors, whether the action would 
promote efficiency, competition, and capital formation. Below, we 
address these issues for each of the proposed, substantive changes to 
offerings of ABS.
---------------------------------------------------------------------------

    \80\ 15 U.S.C. 78w(a).
    \81\ 15 U.S.C. 77b(b).
    \82\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    As a result of the financial crisis and subsequent events, the 
market for securitization has declined due, in part, to perceived 
uncertainty about the accuracy of information about the pools backing 
the ABS and perceived problems in the securitization process that 
affected investors' willingness to participate in these offerings.\83\ 
Greater transparency of the review performed on the underlying assets 
would decrease the uncertainty about pool information and, thus, should 
help investors price these products more accurately. The proposed 
requirements are likely to positively affect pricing, efficiency, and 
capital allocation in ABS capital markets.
---------------------------------------------------------------------------

    \83\ See, e.g., David Adler, A Flat Dow for 10 Years? Why it 
Could Happen, Barrons (Dec. 28, 2009).
---------------------------------------------------------------------------

    Finally, the introduction of expert liability on the third-party 
review providers may have consequences for the competition in this 
market. The possibility of expert liability may provide an incentive 
for due diligence providers to improve the quality of their reviews. 
Thus, one possible market outcome is for reviewers to compete on the 
quality of their services, because competing on price accompanied by 
lower quality may cease to be economically viable given the potential 
liability.
    On the other hand, the possibility of expert liability may not be a 
significant deterrent for smaller due diligence providers that do not 
have the financial resources to cover their potential liabilities. This 
may adversely affect competition in both the market for the provision 
of due diligence and the market for ABS. Diligent providers of asset 
reviews may be pressured to decrease their standards, their prices or 
both. In addition, ABS with reviews obtained from such parties may 
affect the pricing of competing securities. Alternatively, the 
possibility of expert liability could be an incentive for due diligence 
providers to improve their capabilities.
    In summary, taken together the proposed amendments and regulations 
implement Congress' mandate under the Act and are designed to improve 
investor protection, improve the quality of the assets underlying an 
ABS, and increase transparency to market participants. We believe that 
the proposals also would improve investors' confidence in asset-backed 
securities and help recovery in the asset-backed securities market with 
attendant positive effects on efficiency, competition and capital 
formation.
    We request comment on our proposed amendments. We request comment 
on whether our proposals would promote efficiency, competition, and 
capital formation. Commentators are requested to provide empirical data 
and other factual support for their views, if possible.

VII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996,\84\ a rule is ``major'' if it has resulted, or is likely 
to result in:
---------------------------------------------------------------------------

    \84\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the U.S. economy of $100 million or 
more;
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment, or 
innovation.

We request comment on whether our proposed amendments would be a 
``major rule'' for purposes of the Small Business Regulatory 
Enforcement Fairness Act. We solicit comment and empirical data on:
     The potential effect on the U.S. economy on an annual 
basis;
     Any potential increase in costs or prices for consumers or 
individual industries; and
     Any potential effect on competition, investment, or 
innovation.

VIII. Regulatory Flexibility Act Certification

    The Commission hereby certifies pursuant to 5 U.S.C. 605(b) that 
the proposals contained in this release, if adopted, would not have a 
significant economic impact on a substantial number of small entities. 
The proposals relate to the registration, disclosure and reporting 
requirements for asset-backed

[[Page 64195]]

securities under the Act, the Securities Act and the Exchange Act. 
Securities Act Rule 157 \85\ and Exchange Act Rule 0-10(a) \86\ defines 
an issuer, other than an investment company, to be a ``small business'' 
or ``small organization'' if it had total assets of $5 million or less 
on the last day of its most recent fiscal year. As the depositor and 
issuing entity are most often limited purpose entities in an ABS 
transaction, we focused on the sponsor in analyzing the potential 
impact of the proposals under the Regulatory Flexibility Act. Based on 
our data, we only found one sponsor that could meet the definition of a 
small broker-dealer for purposes of the Regulatory Flexibility Act.\87\ 
In addition, we do not believe that any underwriter of ABS would meet 
the definition of a small entity for purposes of the Regulatory 
Flexibility Act.\88\ Accordingly, the Commission does not believe that 
the proposals, if adopted, would have a significant economic impact on 
a substantial number of small entities.
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    \85\ 17 CFR 230.157.
    \86\ 17 CFR 240.0-10(a).
    \87\ This is based on data from Asset-Backed Alert.
    \88\ This is based on data from Asset-Backed Alert.
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IX. Statutory Authority and Text of Proposed Rule and Form Amendments

    We are proposing the new rules and amendments contained in this 
document under the authority set forth in Sections 6, 7, 10, 19(a), and 
28 of the Securities Act, and Sections 3(b), 15E, 15G, 23(a), 35A and 
36 of the Exchange Act.

List of Subjects in 17 CFR Parts 229, 230, 240, and 249

    Advertising, Reporting and recordkeeping requirements, Securities.

    For the reasons set out above, Title 17, Chapter II of the Code of 
Federal Regulations is proposed to be amended as follows:

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

    1. The authority citation for part 229 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 777iii, 
77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 
78ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 
80a-38(a), 80a-39, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *
    2. Amend Sec.  229.1111 by:
    a. Revising the introductory text to paragraph (a):
    b. Adding paragraphs (a)(7) and (a)(8).
    The revision and additions read as follows:


Sec.  229.1111  (Item 1111) Pool assets.

* * * * *
    (a) Information regarding pool asset types and selection criteria. 
Provide the following information:
* * * * *
    (7)(i) The nature of a review of the assets performed by an issuer 
or sponsor (required by Sec.  230.193), including whether the issuer of 
any asset-backed security engaged a third party for purposes of 
performing a review of the pool assets underlying an asset-backed 
security; and
    (ii) The findings and conclusions of the review of the assets by 
the issuer, sponsor, or third party described in paragraph (a)(7)(i) of 
this section.
    Instruction to Item 1111(a)(7): If the issuer has engaged a third 
party for purposes of performing the review of assets, the issuer must 
provide the name of the third-party reviewer and comply with the 
requirements of Sec.  230.436 of this chapter.
    (8) If any assets in the pool deviate from the disclosed 
underwriting criteria, disclose how those assets deviate from the 
disclosed underwriting criteria and include data on the amount and 
characteristics of those assets that did not meet the disclosed 
standards. Disclose which entity (e.g., sponsor, originator, or 
underwriter) determined that those assets should be included in the 
pool, despite not having met the disclosed underwriting standards, and 
what factors were used to make the determination, such as compensating 
factors or a determination that the exception was not material. If 
compensating or other factors were used, provide data on the amount of 
assets in the pool that are represented as meeting each such factor and 
the amount of assets that do not meet those factors.
* * * * *

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    3. The authority citation for part 230 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w, 
78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, 
unless otherwise noted.
* * * * *
    Section 230.193 is also issued under sec. 943, Pub. L. 111-203, 
124 Stat. 1376.
* * * * *
    4. Add Sec.  230.193 to read as follows:


Sec.  230.193  Review of underlying assets in asset-backed securities 
transactions.

    An issuer of an ``asset-backed security'', as that term is defined 
in Section 3(a)(77) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(77)), offering and selling such a security pursuant to a 
registration statement shall perform a review of the pool assets 
underlying the asset-backed security. The issuer may conduct the review 
or an issuer may employ a third party engaged for purposes of 
performing the review provided the third party is named in the 
registration statement and consents to being named as an expert in 
accordance with Sec.  230.436 of this chapter.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    5. The authority citation for part 240 is amended by adding 
authority for Sec.  240.15Ga-2 to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 80a- 20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 
80b-11, and 7201 et seq.; and 18 U.S.C. 1350 and 12 U.S.C. 
5221(e)(3), unless otherwise noted.
* * * * *
    Section 240.15Ga-2 is also issued under sec. 943, Pub. L. 111-
203, 124 Stat. 1376.
* * * * *
    6. Add Sec.  240.15Ga-2 to read as follows:


Sec.  240.15Ga-2  Findings and conclusions of third-party due diligence 
reports.

    (a) The issuer or underwriter of any ``asset-backed security'' (as 
that term is defined in Section 3(a)(77) of the Securities Exchange Act 
of 1934 (15 U.S.C. 78c(a)(77)) shall file Form ABS-15G (17 CFR 
249.1400) containing the findings and conclusions of any report of a 
third party engaged for purposes of performing a review of the pool 
assets obtained by the issuer or underwriter five business days prior 
to the first sale in the offering.
    (b) If the issuer in a registered offering of asset-backed 
securities has included the information required by paragraph (a) of 
this section in the first prospectus that is required to be filed under 
17 CFR 230.424 for that offering and filed in

[[Page 64196]]

accordance with 17 CFR 230.424, then the issuer is not required to file 
Form ABS-15G (17 CFR 249.1400) to include the same information.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    7. The authority citation for part 249 is amended by adding an 
authority for Sec.  249.1400 to read as follows:

    Authority:  15 U.S.C. 78a et seq. and 7201 et seq.; and 18 
U.S.C. 1350, unless otherwise noted.
* * * * *
    Section 249.1400 is also issued under sec. 943, Pub. L. 111-203, 
124 Stat. 1376.
* * * * *
    8. Revise Subpart O, as proposed at 75 FR 62736, October 13, 2010, 
to read as follows:

Subpart O--Forms for Securitizers of Asset-Backed Securities


Sec.  249.1400  Form ABS-15G, Asset-backed securitizer report pursuant 
to Section 15G of the Securities Exchange Act of 1934.

    This form shall be used for reports of information required by Rule 
15Ga-1 (Sec.  240.15Ga-1 of this chapter) and Rule 15Ga-2 (Sec.  
240.15Ga-2 of this chapter).

    Note: The text of Form ABS-15G does not, and this amendment will 
not, appear in the Code of Federal Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ABS-15G

ASSET-BACKED SECURITIZER REPORT PURSUANT TO SECTION 15G OF THE 
SECURITIES EXCHANGE ACT OF 1934

    Check the appropriate box to indicate the filing obligation to 
which this form is intended to satisfy:

-------- Rule 15Ga-1 under the Exchange Act (17 CFR 240.15Ga-1)
-------- Rule 15Ga-2 under the Exchange Act (17 CFR 240.15Ga-2)

Date of Report (Date of earliest event reported)-----------------------

Commission File Number of securitizer:---------------------------------

-----------------------------------------------------------------------
Central Index Key Number of securitizer:-------------------------------
-----------------------------------------------------------------------
Name and telephone number, including area code, of the person to 
contact in connection with this filing

    For filings under Rule 15Ga-2, also provide the following 
information:

Central Index Key Number of depositor:---------------------------------
Commission File Number of depositor (if applicable):-------------------
-----------------------------------------------------------------------
(Exact name of issuing entity as specified in its charter)

Central Index Key Number of issuing entity (if applicable):------------
Commission File Number of issuing entity (if applicable):--------------

Central Index Key Number of underwriter (if applicable):---------------
Commission File Number of underwriter (if applicable):-----------------

GENERAL INSTRUCTIONS

A. Rule as to Use of Form ABS-15G.

    This form shall be used to comply with the requirements of Rules 
15Ga-1 and 15Ga-2 under the Exchange Act (17 CFR 240.15Ga-1 and 17 CFR 
240.15Ga-2).

B. Events To Be Reported and Time for Filing of Reports.

    1. Forms filed under Rule 15Ga-1. In accordance with Rule 15Ga-1, 
file the information required by Part I in accordance with Item 1.01, 
Item 1.02, or Item 1.03, as applicable.
    If the filing deadline for the information occurs on a Saturday, 
Sunday or holiday on which the Commission is not open for business, 
then the filing deadline shall be the first business day thereafter.
    2. Forms filed under Rule 15Ga-2. In accordance with Rule 15Ga-2, 
file the information required by Part II no later than five business 
days prior to the first sale of securities in the offering.

C. Preparation of Report.

    This form is not to be used as a blank form to be filled in, but 
only as a guide in the preparation of the report on paper meeting the 
requirements of Rule 12b-12 (17 CFR 240.12b-12). The report shall 
contain the number and caption of the applicable item, but the text of 
such item may be omitted, provided the answers thereto are prepared in 
the manner specified in Rule 12b-13 (17 CFR 240.12b-13). All items that 
are not required to be answered in a particular report may be omitted 
and no reference thereto need be made in the report. All instructions 
should also be omitted.

D. Signature and Filing of Report.

    1. Forms filed under Rule 15Ga-1. Any form filed for the purpose of 
meeting the requirements in Rule 15Ga-1 must be signed by the senior 
officer in charge of securitization of the securitizer.
    2. Forms filed under Rule 15Ga-2. Any form filed for the purpose of 
meeting the requirements in Rule 15Ga-2 must be signed by the senior 
office in charge of securitization of the depositor if information 
required by Item 2.01 is required to be provided and must be signed by 
a duly authorized officer of the underwriter if information required by 
Item 2.02 is required to be provided.
    3. Copies of report. If paper filing is permitted, three complete 
copies of the report shall be filed with the Commission.

INFORMATION TO BE INCLUDED IN THE REPORT

PART I--REPRESENTATION AND WARRANTY INFORMATION

Item 1.01 Initial Filing of Rule 15Ga-1 Representations and Warranties 
Disclosure

    If any securitizer (as that term is defined in Section 15G(a) of 
the Securities Exchange Act of 1934), issues an asset-backed security 
(as that term is defined in Section 3(a)(77) of the Securities Exchange 
Act of 1934), or organizes and initiates an asset-backed securities 
transaction by selling or transferring an asset, either directly or 
indirectly, including through an affiliate, to the issuer, provide the 
disclosures required by Rule 15Ga-1 (17 CFR 240.15Ga-1) at the time the 
securitizer, or an affiliate commences its first offering of the asset-
backed securities after [compliance or effective date of the final 
rule], if the underlying transaction agreements contain a covenant to 
repurchase or replace an underlying asset for breach of a 
representation or warranty.

Item 1.02 Periodic Filing of Rule 15Ga-1 Representations and Warranties 
Disclosure

    Each securitizer which was required to provide the information 
required by Item 1.01 of this form shall provide the disclosures 
required by Rule 15Ga-1 (17 CFR 240.15Ga-1) as of the end of each 
calendar month, to be filed not later than 15 calendar days after the 
end of such calendar month.

Item 1.03 Notice of Termination of Duty To File Reports Under Rule 
15Ga-1

    If any securitizer has no asset-backed securities outstanding (as 
that term is defined in Section 3(a)(77) of the Securities Exchange Act 
of 1934) held by non-affiliates, provide the date of the last payment 
on the last asset-backed security outstanding that was issued by or 
issued by an affiliate of the securitizer.

[[Page 64197]]

PART II--ASSET REVIEW INFORMATION

Item 2.01 Findings and Conclusions of a Third Party Engaged by the 
Issuer To Review Assets

    Provide the disclosures required by Rule 15Ga-2 (17 CFR 240.15Ga-2) 
for any report by a third party engaged by the issuer for the purpose 
of reviewing assets underlying an asset-backed security.

Item 2.02 Findings and Conclusions of a Third-Party Engaged by the 
Underwriter To Review Assets

    Provide the disclosures required by Rule 15Ga-2 (17 CFR 240.15Ga-2) 
for any third-party engaged by the underwriter for the purpose of 
reviewing assets underlying an asset-backed security.

SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 
1934, the reporting entity has duly caused this report to be signed on 
its behalf by the undersigned hereunto duly authorized.
-----------------------------------------------------------------------
(Depositor, Securitizer, or Underwriter)
Date-------------------------------------------------------------------
-----------------------------------------------------------------------
(Signature)*

*Print name and title of the signing officer under his signature.

    By the Commission.

    Dated: October 13, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-26172 Filed 10-18-10; 8:45 am]
BILLING CODE 8011-01-P

