SECs ABS Proposal and Its Impact on the Student Loan Market

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SECs ABS Proposal and Its Impact on the Student
Loan Market

• August 2, 2004
• Richard L. Fried

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The Times They Are A Changin Bob Dylan
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According to SEC

• Update and Clarify Securities Act Registration
  Requirements for ABS
• Expand Range of Assets Eligible for Form S-3
• Consolidate and Codify Existing Interpretive
  Positions Regarding Exchange Act Reporting
• Disclosure Guidance and Requirements for
  Securities Act and Exchange Act Filings
• Streamline and Codify Existing Interpretive
  Positions Regarding Written Communications with
  Investors

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4 Principal Areas

• Securities Act Registration
• Disclosure
• Communications During the Offering Process
• Ongoing Reporting Under the Exchange Act

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And You May Ask Yourself WellHow Did I Get
Here? Talking HeadsOnce In A Lifetime
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Background

• Since advent of ABS in the 1970s, only a few
  regulations have directly related to ABS
• 1983 Shelf Registration for MBS
• 1992 Shelf Registration for other Assets
• 1992 Rule 3a-7 under Investment Company Act

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Informal Process

• Comment Letters
• No-Action Requests
• Interpretive Releases

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Securities Act Registration
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You Cant Always Get What You Want The Rolling
Stones
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Asset-Backed Security

• Substantially the same as existing definition,
  but would add certain lease-backed transactions.

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Issuing Entity

• Not an Investment Company
• Passive
• Master Trusts OK
• Series Trusts Not OK

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Delinquent and Non-Performing Assets

• No Non-Performing Assets Permitted
• Master Trusts?
• Delinquency Limits
• 20 for Form S-3
• 50 for Form S-1

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Exceptions to Discrete Pool

• Master Trusts
• Prefunding
• Revolving Periods

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Prefunding/Revolving

• Up to 1 year
• 25 for Form S-3
• 50 for Form S-1
• Separate or Aggregate?

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The Devil is in the Details
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Form S-3 Eligibility

• BIG CHANGE
• Sponsor and Depositor Must Have Complied with ALL
  ABS Exchange Act Reports for Prior 12 Months

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Key Definitions

• Depositor
• Issuer
• Servicer
• Sponsor

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Depositor

• Person who receives or purchases and transfers or
  sells the pool assets for the issuing entity

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Issuer

• Depositor for the ABS, acting solely in its
  capacity as depositor

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Servicer

• Any person responsible for the management or
  collection of the pool assets or making
  allocations or distributions to holders of the ABS

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Sponsor

• 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

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DISCLOSURE
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Its a Thousand Pages Give or Take a Few Ill be
Writing More in a Week or Two The
Beatles Paperback Writer
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Principles Based Set of Disclosure Rules
Contained in Proposed Regulation AB
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Significantly More Information Required for
Transaction Parties

• Originators
• Sponsors
• Servicers
• Trustees
• Credit Providers
• Significant Obligors

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Static Pool Data if Material to the Transaction-
3 Years of Delinquency and Loss Data
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Disclose

• Amount Paid for Pool Assets
• Table Itemizing all Fees and Expenses to be Paid
  From Cash Flow
• Ownership of Residual or Retained Interest

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Callable

• Must be in the name of any security with optional
  or mandatory redemption at 25 or more of
  original pool balance

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Credit Providers

• BIG CHANGE
• Liable or Contingently Liable for Any Class
• 10 - Summary Financials
• 20 - Audited Financials satisfying Regulation S-X

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NOT REQUIRED If

• Obligations of the enhancement provider are
  backed by the full faith and credit of the United
  States
• However-Includes Swaps, Currency Exchanges and
  Hedging Arrangements

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More Complete Disclosure of Terms of Underlying
Contracts and Warehouse Arrangements
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COMMUNICATIONS DURING THE OFFERING PROCESS
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Proposal Codifies Existing Safe Harbors and
Provides Additional Relief for

• Computational Material
• Structural Term Sheets
• Collateral Term Sheets
• Concerns with EDGAR

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ONGOING REPORTING UNDERTHE EXCHANGE ACT
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Why You Have To Go and Make Things So
Complicated Avril Lavigne Complicated
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New Form 10-D Would Replace Form 8-K for Filing
Distribution Reports

• 15 days after Payment Date
• Increased Disclosure
• Updated Pool Information
• Financial Disclosure for 3rd Party Credit
  Providers

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BIG CHANGE

• Terminate Transaction if Required Financials of
  3rd Party Credit Providers are Unavailable

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Modified Form 10-K

• Report of Responsible Party concerning Assessment
  of Servicing Compliance
• Report of Public Accountants
• Sarbanes-Oxley Certification

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Transition Period

• New Registration Statements or Takedowns of
  Effective Shelf 3 Months After Effective Date
• Outstanding ABS6 Months After Effective Date
• NO GRANDFATHERING

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COMMENT LETTERS
Aint Too Proud To Beg The Temptations

• Over 50 Received
• Proposals Go Well Beyond Incremental Change
• Overbroad Language
• Significantly Expand Time and Expense

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Richard L. Fried 212.806.6047 rfried_at_stroock.com