REG AB: Channeling the Cheshire Cat

Regulation AB is big. Reg AB governs, among other things, the condition for shelf registration. The SEC is fixing to do something significant to Reg AB; we’re just not sure what.

Reg AB, as we know it now, was published on December 22, 2004 and was essentially a restatement of years of private rulings, lore and bits of existing CMBS rules into a comprehensive whole.

After a bit of prolonged regulatory foreplay the SEC published in May of 2010 an Exposure Draft of a comprehensive restatement of Reg AB. It was momentous. It very substantially changed the rules of the securitization game. Among the highlights (so to speak) it imported risk retention into shelf registration, imposed draconian liability, creating certification responsibilities on the sponsor’s CEO or unit head, and imposed new self-reporting obligations with onerous penalties for relatively minor matters of non-compliance among others. See CREFC Comment letter.

The industry assembled its forces to analyze, assess and comment on that Exposure Draft. A lot of work was done by a lot of people. Hundreds of comment letters were submitted and the SEC staff very generously took meetings with an endless array of industry representatives. The comment period ended October 31, 2010. At that point, and having digested the comments, the SEC should have published a Final Rule, or an Interim Final Rule or republished all or part of the Exposure Draft for further discussion.

What did we get? Nothing. Silence. The Reg went subterranean and little of definitive substance happened. Then almost ten months later the SEC re-proposed parts of its Reg AB to conform AB to the Dodd-Frank Wall Street Reform and Consumer Protection Act provision on risk retention and de-listing. As to the rest, nada; crickets. For two and a half years.

But then at the 41st annual Securities Regulation Institute in California in late January, the SEC Chair, Mary Jo White, announced in passing, that Reg AB was back on the SEC’s agenda this year. Stirrings. And then, two weeks later, the SEC noticed a board meeting for February 5th in which the Commissioners would consider adopting at least some Reg AB II provision, but exactly which ones, we’re not clear.

They said:

The Commission will consider whether to adopt rules revising the disclosure, reporting, and offering process for asset-backed securities. The revisions would require asset-backed issuers to provide enhanced disclosures including information for certain asset classes about each asset in the underlying pool in a standardized, tagged format and revise the shelf offering process and eligibility criteria for asset-backed securities.

And then, on February 3rd, without comment, Reg AB II was deleted from the agenda.

They said:

The following item will not be considered during the Commission’s Open Meeting on February 5, 2014 at 3:00 p.m.:

The February 5th meeting proceeded without discussion of Reg AB.

Is this good? Is it bad? Does it indicate a policy debate on some or all of the issues embedded in Reg AB is continuing? We hear that the Commissioners could not reach consensus. But on what? Who knows? There was lots in the Exposure Draft that was good and workable but lots, and I mean Lots, that was not.

In any event, the on-again off-again appearance of Reg AB on the SEC’s agenda suggests that at least it is more front of mind than it’s been lo these many years, and suggests that the industry best be prepared to once again gird their loins, man the barricades, get ready for a “once more into the breach” speech, or perhaps an appeal to “come let’s reason together.” Pick your metaphor for engagement – but it seems engagement is close at hand and we best be ready for it.