On May 28, 2011, as part of its ongoing efforts to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission (SEC) approved for public comments (which will be accepted until July 18, 2011) proposed rules pursuant to Section 932 that would require nationally recognized statistical rating organizations (NRSROs), issuers and underwriters to make public the findings and conclusions of any due diligence reports prepared by a third-party service provider in an asset-backed securities transaction. Such third-parties would also have to furnish a certification to each NRSRO rating the securities.
Since the Dodd-Frank Act does not define “due diligence services,” the SEC has identified four categories of reviews, and thus has defined “due diligence services” in the proposed Rule 17g-10 to mean “an entity that engages in a review of the assets underlying an Exchange Act-ABS for purposes of making findings with respect to:
- quality or integrity of the information or data about the assets provided, directly or indirectly, by the securitizer or originator of the assets;
- whether the assets origination conformed to stated underwriting or credit extension guidelines, standards, criteria or other requirements;
- value of collateral securing such assets;
- whether the assets originator complied with federal, state or local laws or regulations; and
- any other factor or characteristic of such asset that would be material to the likelihood that the issuer of the Exchange Act-ABS will pay interest and principal according to its terms and conditions.”
Proposed Rule 17g-10 will also define “issuer” to include a sponsor (as defined in 17 CFR 229.11) or depositor (as defined in 17 CFR 229.1011) that participates in the issuance of an Exchange Act-ABS. The terms “originator” and “securitizer” as used in proposed Rule 17g-10 will have the meanings stated in Section 15Gf of the Exchange Act.
An issuer or underwriter is not required to furnish a Form ABS-15G if such issuer or underwriter obtains a representation from each NRSRO engaged in the rating of the Exchange Act-ABS that the NRSRO will publicly disclose the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter. The NRSRO must disclose the finding and conclusions of any third-party due diligence report with the publication of the credit rating in an information disclosure form prepared pursuant to new paragraph (a)(1) of Rule 17g-7 no less than five business days prior to the first sale in the offering. Rule 17g-7 as amended by the proposed rules, would require an NRSRO to disclose in the information disclosure form:
- whether and to what extent it relied upon third-party due diligence services;
- description of the information that such third-party reviewed in conducting its due diligence services; and
- description of the findings or conclusions of such third-party.
Also in accordance with Section 15E(s)(4)(C) of the Exchange Act, the SEC proposed that the format of the certification in Form ABS Due-Diligence-15E include the following line items:
- identity and address of the provider of the third-party due diligence services;
- identity and address of the issuer, underwriter or NRSRO that hired the provider of the third-party due diligence services;
- identity of each NRSRO that published criteria for performing;
- scope and manner of the due diligence performed, including but not limited to the type of assets that were reviewed, the same size of the assets reviewed, how the sample size was determined and any other type of review conducted with respect to the assets; and
- findings and conclusions resulting from the review.
In addition, any individual executing the Form ABS Due Dilignce-15E on behalf of a third-party due diligence provider will be required to represent that he/she executed the form on behalf of, and on the authority of, the third-party due diligence provider and the third-party due diligence provider conducted a complete due diligence review.