Commenters asserted this requirement was correct for interest due (as
the rule provides), but not for principal.\100\ The agencies have
eliminated the ``and principal'' language contained in the interest
subordination paragraph, and have also eliminated the requirement that
the residual have the most subordinated claim to any part of the
series' share of principal repayment cash flows.\101\ In addition, the
agencies have clarified that, in applying interest and fees to reduce
the series' share of

losses for the applicable period, these losses must include charge-offs
that were not covered by available interest and fees in previous
periods. The agencies believe this clarification is appropriate to
prevent sponsors from receiving payments of excess spread on a period-
by-period basis for pools that have suffered un-covered losses on
securitized assets in previous periods.\102\
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    \100\ One group of commenters also said the obligation to pay
default-rate interest is typically subordinated to payment of the
contract-rate interest and coverage for allocated charge-offs. The
agencies regard this as desirable in that it uses available excess
spread first to protect investors from losses. At any rate, the
arrangement described by commenters in this regard means that the
sponsor only claims excess interest and fee collections remaining
after covering both types of ``interest,'' which is in compliance
with the rule text.
    \101\ Commenters requested the agencies eliminate the separate
waterfall requirement from the option, citing concern that single-
waterfall revolving pool securitizations could not utilize the
structure. Commenters did not elaborate on how the residual ABS
interest in excess interest and fees would be separately identified
or valued in such an approach. Since the separate waterfall
requirement is a central element of the option, the agencies have
retained it.
    \102\ This eliminates possible incentives for sponsors to
attempt to cluster charge-offs into particular periods.
---------------------------------------------------------------------------

    The second form of subordinated risk retention the agencies would
have recognized in the reproposal for purposes of reducing the required
amount of seller's interest would have been an eligible horizontal
residual interest the sponsor simultaneously held in the
securitization's outstanding series of ABS interests. The reproposal
required these interests to meet all the requirements for the standard
form of eligible horizontal residual interest pursuant to section 4 of
the reproposed rule. Commenters asserted that revolving pool
securitizations that retain a residual ABS interest in excess interest
and fees could not simultaneously satisfy the requirement pursuant to
section 4 that the eligible horizontal residual interest have the most
subordinated claim to interest and principal. Commenters said a
residual ABS interest in excess interest and fees is typically
structured first to apply a series' share of excess interest and fees
each period to cover the series' share of trust expenses and the
interest due to each tranche of ABS interests in the series; second to
apply remaining excess interest and fees to cover charge-offs allocated
to more senior ABS interests in the series; and third to make the
remainder available to the sponsor (net of portions shared with other
series, in some structures). Commenters said that this subordinated
interest is typically structured to pay interest to the holder before
excess interest and fee collections are applied to cover the series'
share of charge-offs. Accordingly, this residual interest would not
have the most subordinated claim to interest.\103\ The agencies note
that, now that the final rule recognizes subordinated forms of seller's
interest, the residual interest may not be the most subordinated claim
to principal distributions to the sponsor from the seller's interest,
depending on the particulars of the transaction.
---------------------------------------------------------------------------

    \103\ Commenters also said the cash flow restrictions in section
4 were not workable for revolving pool securitizations. As discussed
elsewhere in this Supplementary Information, these restrictions are
not included in the final rule.
---------------------------------------------------------------------------

    In order to permit sponsors to offset their seller's interest with
either of the two forms of horizontal risk retention included in the
reproposal, the agencies have modified the subordination requirements
that would be required for eligible horizontal residual interest, to
accommodate the issues described in the preceding paragraph. The final
rule provides that a sponsor may take the seller's interest offset for
ABS interests that would meet the definition of eligible horizontal
residual interest in section 2 of the rule but for the sponsor's
simultaneous holding of subordinated seller's interests, residual ABS
interest in excess interest and fees, or a combination thereof. In
connection with this approach, the sponsor's fair value determination
for this horizontal residual interest must not incorporate any value
attributable to the sponsor's holdings of subordinated seller's
interest or residual ABS interest in excess interest and fees.
    Under the final rule, if the sponsor is also taking risk retention
credit for its residual ABS interest in excess interest and fees, the
sponsor may not include any of the interest payments to itself on this
offset eligible horizontal residual interest (``offset EHRI'') in
determining the fair value of the offset EHRI. Similarly, if the
sponsor is taking risk retention credit for subordinated seller's
interest that is used to reduce charge-offs that would otherwise be
allocated to reduce the principal of the offset EHRI, the sponsor may
not include any principal payments on the offset EHRI in determining
the fair value of the offset EHRI. The agencies believe this bright-
line rule provides an appropriate compromise between flexibility for
sponsors and clarity for investors and regulators as to the nature of
the risk retention interests upon which a sponsor relies to comply with
the final rule.
    Under the final rule, if the sponsor seeks to rely on offset EHRI
as part of its risk retention interest for purpose of compliance with
the rule, any subordinated seller's interest or residual ABS interest
in excess interest and fees retained by the sponsor must also comply
with the applicable requirements of section 5 of the rule. This is true
even if the sponsor is not asserting reliance on these subordinated
seller's interests or residual ABS interests in excess interest and
fees as part of its retained risk retention interests to comply with
the rule.
    Commenters said that sponsors sought the ability to continue
incorporating subordinated seller's interest or residual ABS interest
in excess interest and fees into their deal structures and
simultaneously retain a junior bond, while still having the flexibility
to choose which combination of those interests the sponsor would use to
comply with the risk retention requirements. Commenters placed
particular importance on retaining the flexibility to do this without
being required to engage in fair value determinations for the interests
the sponsor does not count for purposes of regulatory compliance. Taken
together, the agencies believe that these rules for offset EHRI provide
an appropriate framework to accommodate that flexibility.\104\
---------------------------------------------------------------------------

    \104\ As an example, a sponsor could rely on a pari passu
seller's interest and supplement it with the fair value of principal
payments on an offset EHRI, at the same time the sponsor retained a
residual interest in excess spread but did not rely on that interest
for purposes of satisfying its risk retention requirements. Or for a
revolving pool securitization of assets that do not generate
significant excess spread, the sponsor might rely on a subordinated
seller's interest and supplement it with the fair value of interest
payments on an offset EHRI, since its residual interest in excess
interest and fee collections would provide a lesser contribution to
satisfying the sponsor's risk retention obligations.
---------------------------------------------------------------------------

    The final rule requires the sponsor to make the percentage fair
value determination for offset EHRI, and to make investor disclosures,
at the same time and in the same manner as is required for the standard
form of eligible horizontal residual interest pursuant to section 4 of
the rule. Consistent with the treatment of the standard form of
eligible horizontal residual interest pursuant to section 4 of the
rule, the sponsor is only required to perform the fair value
determination for offset EHRI with respect to the initial issuance of
the ABS interests supported by the offset eligible horizontal residual
interest. The final rule similarly requires a sponsor using a residual
ABS interest in excess interest and fees to disclose the fair value of
the interest in the same manner as required for eligible horizontal
residual interests pursuant to section 4. To accommodate the
fluctuating nature of securitized assets and outstanding investor ABS
interests present in revolving pool securitizations, the final rule's
valuation and disclosure provisions for offset EHRI and residual ABS
interests in excess interest and fees allow the use of specific dates
for data on securitized assets and outstanding investor ABS interests,
and adjustments to these amounts in connection with pre-sale
disclosures. These provisions are the same as those governing the
determination of minimum seller's interest, as described above.
    Consistent with the agencies' reproposal, the final rule also makes

clear that there is no sunset date for revolving pool securitization
risk retention interests. The basis for the agencies' decision to
propose a sunset date for risk retention was that sound underwriting is
less likely to be effectively promoted by risk retention after a
certain period of time has passed and a peak number of delinquencies
for an asset class has occurred. In the case of a revolving pool
securitization, this rationale does not apply, since the sponsor
continually transfers additional assets into the common pool of
collateral.\105\ For a seller's interest, the rule text continues to
specify that the seller's interest must be measured and satisfied at
least monthly until no ABS interest in the issuing entity is held by
any person which is not a wholly-owned affiliate of the sponsor.\106\
For other forms of risk retention employed by a revolving pool
securitization sponsor, the applicable provision on sunset is in
section 12(f) of the rule. Notably, this provision only lifts the
transfer and hedging restrictions of section 12 of the rule at ``the
latest of'' amortization of the securitized assets to 33 percent of the
original balance, amortization of the principal amount of the ABS
interests to 33 percent of their original balance, or two years after
closing. Since the common pool of securitized assets continually
revolves and the ABS interests typically are not paid principal until
maturity, neither the securitized assets nor the ABS interests amortize
down to 33 percent of the original unpaid balance (absent an early
amortization).
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    \105\ Even if the pool consists of receivables created by
revolving accounts, successful underwriting of revolving account
credits is an ongoing process for the life of the credit line.
    \106\ The agencies have modified the rule text to clarify that
holding by an affiliate for these purposes means holding by a
wholly-owned affiliate. This is consistent with the other
affiliation requirements of section 5 of the rule.
---------------------------------------------------------------------------

    Commenters requested several additional changes concerning the
rules for holding and measuring a seller's interest. One commenter
requested the agencies strike the element of the definition of seller's
interest that describes it as an ABS interest. The commenter requested
the agencies allow sponsors to hold anything that was the economic
equivalent of the seller's interest, regardless of form. The agencies
are not making this change because they believe the rule's definition
of ``ABS interest'' provides sufficient flexibility, balanced against
the agencies' interest in certainty and clarity regarding how a sponsor
achieves compliance with the rule. With respect to the form
requirements for an ABS interest, the definition applies to any type of
interest, whether certificated or uncertificated, and includes
beneficial interests and residual interests. This provides flexibility
for sponsors and imposes no specific requirements as to form or
documentation, but at the same time maintains a basic requirement for
the sponsor to be able to demonstrate that the legal source of its
entitlement to payments from, and its obligation to share losses of,
the securitized assets are consistent with the rule's requirements for
a risk retention interest.
    Another group of commenters requested the agencies modify the
holding requirements for sponsors reducing their 5 percent seller's
interest requirement with offsetting horizontal interests. As described
above, the sponsor must demonstrate that it holds the offset percentage
as a minimum percentage for every series of outstanding investor ABS
interests.\107\ Commenters requested the agencies permit sponsors to
determine they satisfied the requirement on a weighted average basis
taken across all outstanding series. The agencies decline to
incorporate this approach because it would result in at least some
series of outstanding investor ABS interests with less than 5 percent
risk retention. Commenters also requested sponsors be permitted to take
partial risk retention credit for horizontal interests the sponsor
holds jointly with another party, on a pro rata basis. The agencies
note this is not permitted for the standard form of eligible horizontal
residual interest, and commenters did not provide sufficient
justification for treating offset EHRI any differently.
---------------------------------------------------------------------------

    \107\ Commenters also expressed the view that the reproposal did
not provide sponsors with the flexibility to offset their minimum
seller's interest percentage with a form of horizontal risk
retention that supported more than one outstanding series. In this
regard, the agencies note that the final rule requires the sponsor
to satisfy the minimum floor for every series issued after the
applicable effective date of the rule, but that it does not require
them to hold that risk retention in each series. The rule does not
prevent sponsors from incorporating residual ABS interest in excess
interest and fees or offset EHRI that are structured to support more
than one series, or structured to support delinked structures, so
long as the sponsor demonstrates the structure satisfies the rule's
requirements as to the terms of those horizontal interests.
---------------------------------------------------------------------------

    The agencies revised the disclosure requirements of section 5 of
the rule in a manner consistent with the agencies' revisions to the
disclosure requirements throughout the rule, with appropriate
variations for valuation of seller's interest and offsetting
subordinated interests as described above.
    The reproposal also included provisions clarifying that a master
trust entering early amortization and winding down would not, as a
result, violate the rule's requirement that the seller's interest be
pari passu. Commenters requested changes to the details of these
provisions, to reflect more accurately the way early amortization
triggers are actually structured. In response to commenter concerns,
the agencies have revised the rule text to apply when the
securitization has entered early amortization, rather than focusing on
the technical trigger events that result in an early amortization
commencing.\108\ Nevertheless, the agencies also believe that the
revisions permitting subordination of the seller's interest make this
portion of the final rule less significant than it was when the
agencies would have required the seller's interest to be pari passu.
---------------------------------------------------------------------------

    \108\ The agencies have also eliminated the paragraph limiting
the provision to pools of revolving assets. The language was
included in the reproposal based on concerns about potential evasive
structures, but the agencies have now directly addressed that issue
in the discussion of revolving pool securitizations that amortize
without issuing a second series of investor ABS interests
collateralized by the common pool of assets.
---------------------------------------------------------------------------

    For servicing advance receivables, the agencies note that the final
rule permits sponsors of revolving pool securitizations to rely on
subordinated forms of seller's interest to meet their risk retention
requirements, which largely addresses the source of the commenters'
concerns.
3. Representative Sample
a. Overview of Reproposal and Public Comment
    The original proposal would have allowed a sponsor to satisfy its
risk retention requirement for a securitization transaction by
retaining ownership of a randomly selected representative sample of
assets. To ensure that the sponsor retained exposure to substantially
the same type of credit risk as investors in the securitized
transaction, the sponsor electing to use the representatives sample
option would have been required to construct a ``designated pool'' of
assets consisting of at least 1,000 separate assets from which the
securitized assets and the assets comprising the representative sample
would be drawn. The original proposal also would have required a number
of other measures in calculating the representative sample to ensure
the integrity of the process of selection, including a requirement to
obtain a report regarding agreed-upon procedures from an independent
public accounting firm.\109\
---------------------------------------------------------------------------

    \109\ See Original Proposal, 76 FR at 24104.

---------------------------------------------------------------------------

    Many commenters opposed the representative sample in the original
proposal, noting that it would be impractical to implement this option
for a variety of reasons, including that it would be unworkable with
respect to various asset classes, would be subject to manipulation, and
was too burdensome with respect to its disclosure requirements. Due to
these concerns and a conclusion that the representative sample option
would likely be too difficult to implement, the agencies did not
include a representative sample option in the reproposed rule. Instead,
the agencies invited comment on whether a representative sample option
should be included as a form of risk retention, and, if so, how should
such an option be constructed, and what benefits such an option might
provide.
    The agencies received several responses to this request for
comment. While some commenters were supportive of the reproposal's
elimination of the representative sample option, many commenters urged
the agencies to reconsider including the option in a simplified form.
Several commenters recommended a simplified version of a representative
sample option similar to the representative sample option included in
the FDIC's safe harbor for securitizations, which (prior to the
applicable effective date of the final rule) requires that the retained
sample be representative of the securitized asset pool, but does not
specify the requirements for establishing that the sample is
representative and, accordingly, does not itemize specific items, such
as servicing, accountant reports or other requirements.\110\ Commenters
asserted that the representative sample option is one of the two
permitted forms of risk retention under the existing FDIC safe harbor
and that the approach has been working effectively for several banks
that issue asset-backed securities. One commenter stated that its
sponsor members would strongly prefer to have a representative sample
method as an alternative option, even if the final rule is more
burdensome than they would prefer.
---------------------------------------------------------------------------

    \110\ See 12 CFR 360.6.
---------------------------------------------------------------------------

    Commenters indicated that the representative sample is one of the
alternative methods of risk retention permitted under Article 122a of
the European Union's Capital Markets Directive, and that if the
representative sample is not included it may place U.S. issuers at a
competitive disadvantage against asset-backed securities issuers from
outside the United States, and could make it more difficult for global
offerings of asset-backed securities originated outside the United
States to be sold to investors in the United States.
    Many commenters indicated that a revised representative sample
option would be particularly useful for automobile loan and lease
securitizations. Commenters also stated that the option would be useful
more generally for large pools of consumer or retail assets, such as
student loans, and for sponsors that do not securitize all of their
assets. In order to facilitate use by sponsors for these types of
securitizations, commenters generally agreed that the agencies should
revise the option so that (i) a sponsor selects a designated pool of
assets for securitization (ii) then uses a random selection process to
select a `sample' of assets with an aggregate unpaid principal balance
equal to 5 percent of the pool and (iii) that the pool should be
sufficiently large to ensure that the sample is representative of the
assets in the pool. To accomplish (iii), commenters suggested that a
pool size of 5,500 or 6,000 loans would be sufficient to achieve a high
confidence level that the sample shares significant asset
characteristics with the securitized pool.
    A commenter suggested that additional criteria could be added such
as documentation of material asset characteristics and a description of
the policies and procedures that the sponsor used to ensure that the
sample identification process complies with the risk retention
requirement. The commenter also recommended that documentation
identifying the representative sample be maintained for the same
duration required for a vertical risk retention interest and that the
assets be excluded from the securitization pool and from any other
securitization for such time period. Other commenters favored simpler
disclosures, such as a statement that the composition of the sample was
prepared in accordance with the rule's requirements, and a description
of the method used to randomly select assets.
    A few commenters suggested that additional criteria could be added
specifically to address smaller pool sizes, such as the criteria above,
or a `resampling' requirement if the sample is not sufficiently similar
to the securitized pool. Other commenters expressed the view that a
sponsor should not be required to `rework' the pool based on a post hoc
examination of the performance of the sample pool compared to the
securitized pool.
b. Response to Comments and Final Rule
    Having considered the comments, the agencies have concluded that
adopting the recommendations made by commenters would be insufficient
to address concerns about the practicality of obtaining an adequate and
truly representative sample, while providing sufficient flexibility for
use of the option in more than extremely limited scenarios.
Furthermore, the agencies concur with commenters' views that, at a
minimum, a large number of loans would be required depending on the
variability of asset characteristics in order to ensure an adequate
sample, which greatly reduces the number of asset classes that would be
able to utilize the option.
    The agencies do not believe that adopting the disclosure,
servicing, and independent review requirements as recommended by
commenters would be sufficiently robust to ensure the effectiveness of
the representative sample option and to minimize the ability of
sponsors to ``cherry pick'' assets favorable to them, which would
result in the risk retention sample having a better risk profile than
the assets collateralizing the ABS issued to investors. In addition,
unless large pools of loans are already largely homogeneous, a random
sample will not necessarily be a representative sample. The agencies do
not believe that effective pool consistency standards would be any less
burdensome or objectionable than the sample validation standards. Even
if an approach that met the requirements of section 15G of the Exchange
Act could be developed, the agencies acknowledge that the costs of such
requirements could be overly burdensome for sponsors. Furthermore, in
light of the revisions that have been made to other aspects of the
rule, the agencies believe that the final rule's risk retention options
should provide a workable risk retention option for various asset
classes including auto loan, auto lease, and student loan
securitizations. The agencies believe these additional risk retention
options will be more cost effective than the representative sample
option in the original proposal and will more effectively align the
interests of sponsors and investors. Therefore, the final rule does not
include a representative sample option.

4. Asset-Backed Commercial Paper Conduits
a. Overview of the Reproposal and Public Comments
    As explained in the original proposal and reproposal, ABCP is a
type of liability that is typically issued to investors by a special
purpose vehicle (commonly referred to as a ``conduit'') sponsored by a
financial institution or other sponsor. The commercial paper issued by
the ABCP conduit is collateralized by a pool of asset-backed
securities, which may change over the life of the entity. Depending on
the type of ABCP conduit, the securitized assets collateralizing the
ABS interests that support the ABCP may consist of a wide range of
assets including securitized automobile loans, commercial loans, trade
receivables, credit card receivables, student loans, and other loans.
Historically, these programs came about as a way for banks to extend
commercial firms credit at a lower cost than bank-funded working
capital lines or trade receivable financing. Like other types of
commercial paper, the term of ABCP typically is short, and the
liabilities are ``rolled,'' or refinanced, at regular intervals. Thus,
ABCP conduits generally fund longer-term assets with shorter-term
liabilities.\111\ During the financial crisis, however, ABCP conduits
experienced acute distress, which revealed significant structural
weaknesses in certain ABCP conduit structures, particularly those ABCP
conduits that did not have 100 percent liquidity commitments, and
exposed investors and the financial system to significant risks.\112\
---------------------------------------------------------------------------

    \111\ See section 9 of the Original Proposal.
    \112\ Daniel M. Covitz, Nellie Liang, and Gustavo A. Suarez,
``The Evolution of a Financial Crisis: Panic in the Asset-Backed
Commercial Paper Market,'' Finance and Economics Discussion Series
2009-36 (Washington: Board of Governors of the Federal Reserve
System, August 2009).
---------------------------------------------------------------------------

    In a typical ABCP conduit, the sponsor approves the originators
whose loans or receivables will collateralize the ABS interests that
support the ABCP issued by the conduit. Banks can use ABCP conduits
that they sponsor to meet the borrowing needs of a bank customer and
offer that customer a more attractive cost of funds than a commercial
loan or a traditional debt or equity financing. In such a transaction,
the customer (an ``originator-seller'') may sell loans or receivables
to an intermediate, bankruptcy remote SPV. The credit risk of the loans
or receivables transferred to the intermediate SPV then typically is
separated into two classes--a senior ABS interest that is acquired by
the ABCP conduit and a residual ABS interest that absorbs first losses
on the loans or receivables and that is retained by the originator-
seller. The residual ABS interest retained by the originator-seller
typically is sized with the intention that it be sufficiently large to
absorb all losses on the securitized assets.
    In this structure, the ABCP conduit, in turn, issues short-term
ABCP that is collateralized by the senior ABS interests purchased from
one or more intermediate SPVs (which are supported by the subordination
provided by the residual ABS interests retained by the originator-
sellers). The sponsor of this type of ABCP conduit, which is usually a
bank or other regulated financial institution or an affiliate or
subsidiary of a bank or other regulated financial institution, also
typically provides (or arranges for another regulated financial
institution or group of financial institution to provide) 100 percent
liquidity coverage on the ABCP issued by the conduit. This liquidity
coverage typically requires the support provider to provide funding to,
or purchase assets or ABCP from, the ABCP conduit in the event that the
conduit lacks the funds necessary to repay maturing ABCP issued by the
conduit.
    The agencies' original proposal included an ABCP option that
incorporated several conditions designed to ensure that the ABCP option
would have been available only to the type of single-seller or multi-
seller ABCP conduits described above. The proposed ABCP option would
only have been available to ABCP conduits that issued ABCP with a
maximum maturity at the time of issuance of nine months. Under the
original proposal, a sponsor of an ABCP conduit program would have been
eligible for the proposed ABCP option if a ``regulated liquidity
provider'' (defined in the rule generally to mean banks and certain
bank affiliates) provided 100 percent liquidity support to the ABCP
conduit and the originator-sellers retained a 5 percent horizontal
residual interest in each intermediate special purpose vehicle
containing the assets they finance through the ABCP conduit. Under the
original proposal, this risk retention option would have been available
to ABCP conduits collateralized by ABS interests that were issued or
initially sold by intermediate SPVs that sold ABS interests exclusively
to ABCP conduits and would not have been available to ABCP conduits
that purchased securities in the secondary market or operated
securities arbitrage programs.\113\
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    \113\ Such ABCP conduits purchase securities in the secondary
market and typically either lack such liquidity facilities or have
liquidity coverage that is more limited than those of the ABCP
conduits eligible to rely on this option for purposes of the
proposed rule.
---------------------------------------------------------------------------

    In the reproposal, the agencies maintained an option tailored for
ABCP securitization transactions that retained the basic structure of
the original proposal with modifications based in part on comments. The
modifications were intended to accommodate certain market practices
referred to by commenters, while maintaining a meaningful risk
retention requirement. The reproposal would have permitted the sponsor
of an eligible ABCP conduit to satisfy its risk retention requirement
if, for each ABS interest the ABCP conduit acquired from an
intermediate SPV, the intermediate SPV's sponsor (the `originator-
seller' with respect to the ABCP conduit) retained an exposure to the
assets collateralizing the intermediate SPV in the appropriate form and
amount under the rule, provided that all other conditions to this
option were satisfied. The agencies reaffirmed the view expressed in
the original proposal that such an approach is appropriate in light of
the considerations set forth in section 15G(d)(2) of the Exchange
Act.\114\
---------------------------------------------------------------------------

    \114\ See Revised Proposal, 78 FR at 57949; Original Proposal,
76 FR at 24107.
---------------------------------------------------------------------------

    In response to comments, the reproposal would have included
additional flexibility not present in the original proposal to permit
affiliated groups of originator-sellers to finance credits through a
single intermediate SPV. Under the reproposal, both an originator-
seller and a ``majority-owned originator-seller affiliate'' (majority-
owned OS affiliate) could have sold or transferred assets that these
entities had originated to an intermediate SPV. A majority-owned OS
affiliate was defined as an entity that, directly or indirectly,
majority controls, is majority controlled by, or is under common
majority control with, an originator-seller. For purposes of this
definition, majority control would have meant ownership of more than 50
percent of the equity of an entity or ownership of any other
controlling financial interest in the entity, as determined under GAAP.
However, consistent with the original proposal, intermediate SPVs would
not be permitted to acquire assets from non-affiliates.
    The reproposal required the ABCP conduit sponsor to: (i) Approve
each originator-seller and majority-owned OS affiliate permitted to
sell or transfer

assets, directly or indirectly, to an intermediate SPV from which an
eligible ABCP conduit acquires ABS interests; (ii) approve each
intermediate SPV from which an eligible ABCP conduit is permitted to
acquire ABS interests; (iii) establish criteria governing the ABS
interests, and the assets underlying the ABS interests, acquired by the
ABCP conduit; (iv) administer the ABCP conduit by monitoring the ABS
interests acquired by the ABCP conduit and the assets supporting those
ABS interests, arranging for debt placement, compiling monthly reports,
and ensuring compliance with the ABCP conduit documents and with the
ABCP conduit's credit and investment policy; and (v) maintain and
adhere to policies and procedures for ensuring that the requirements
described above have been met.
    The reproposal also permitted there to be one or more intermediate
SPVs between an originator-seller and/or any majority-owned OS
affiliate and the intermediate SPV that issues ABS interests purchased
by the ABCP conduit.\115\ The reproposal redefined ``intermediate SPV''
as a direct or indirect wholly-owned affiliate \116\ of the originator-
seller that is bankruptcy remote or otherwise isolated for insolvency
purposes from the eligible ABCP conduit, the originator-seller, and any
majority-owned OS affiliate that, directly or indirectly, sells or
transfers assets to such intermediate SPV.\117\ Consequently, an
intermediate SPV was permitted to acquire assets originated by the
originator-seller or one or more of its majority-owned OS affiliates,
or it could also have acquired assets from another intermediate SPV or
asset-backed securities from another intermediate SPV collateralized
solely by securitized assets originated by the originator-seller or one
or more of its majority-owned OS affiliate and servicing assets.\118\
ABS interests collateralized by assets not originated by the
originator-seller or by a majority-owned OS affiliate would have been
ineligible as collateral for the ABCP conduit.
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    \115\ As indicated in the comments on the original proposal,
there are instances where, for legal or other purposes, there is a
need for multiple intermediate SPVs.
    \116\ See section 2 of the Revised Proposal (definition of
``affiliate'').
    \117\ See section 2 of the Revised Proposal (definition of
``Intermediate SPV'').
    \118\ The reproposal required each intermediate SPV in
structures with one or more multiple intermediate SPVs that do not
issue asset-backed securities collateralized solely by ABS interests
to be a pass-through entity that either transfers assets to another
SPV in anticipation of securitization (e.g., a depositor) or
transfer ABS interests to the ABCP conduit or another intermediate
SPV.
---------------------------------------------------------------------------

    The reproposal also would have relaxed activity restrictions on
intermediate SPVs, by permitting an intermediate SPV to sell asset-
backed securities that it issues to third parties other than ABCP
conduits.\119\
---------------------------------------------------------------------------

    \119\ As explained in the reproposal, the agencies believe that
some originator-sellers operate a revolving master trust to finance
extensions of credit the originator-seller creates in connection
with its business operations. The master trust sometimes issues a
series of asset-backed securities collateralized by an interest in
those credits directly to investors through a private placement
transaction or registered offering, and other times issues an
interest to an eligible ABCP conduit. The reproposal was designed to
accommodate such practices.
---------------------------------------------------------------------------

    The reproposal would have clarified and expanded (as compared to
the original proposal) the types of collateral that an eligible ABCP
conduit could acquire from an originator-seller and its majority-owned
affiliates.\120\ Under the revised reproposal definition of ``eligible
ABCP conduit'', an ABCP conduit could acquire any of the following
types of assets: (1) ABS interests collateralized by securitized assets
originated by an originator-seller or one or more majority-owned OS
affiliates of the originator-seller and servicing assets; (2) special
units of beneficial interest or similar interests in a trust or special
purpose vehicle that retains legal title to leased property underlying
leases that are transferred to an intermediate SPV in connection with a
securitization collateralized solely by such leases originated by an
originator-seller or one or more majority-owned OS affiliates and
servicing assets; and (3) interests in a revolving master trust
collateralized solely by assets originated by an originator-seller or
one or more majority-owned OS affiliates and servicing assets.\121\
Under the proposal, the ABCP option would have been available only for
ABCP conduits that were bankruptcy remote or otherwise isolated from
insolvency of the sponsor and from any intermediate SPV. Assets other
than the ABS interests and servicing assets, such as loans or
receivables purchased directly by an ABCP conduit or loans or
receivables acquired by an originator-seller, its majority-owned OS
affiliates or an intermediate SPV in the secondary market, would have
been expressly disqualified.
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    \120\ The purpose of this clarification was to allow originator-
sellers certain additional flexibility in structuring their
participation in eligible ABCP conduits, while retaining the core
principle that the assets being financed have been originated by the
originator-seller or a majority-controlled OS affiliate, not
purchased in the secondary market and aggregated.
    \121\ The definition of ``servicing assets'' is discussed in
Part II.B of this Supplementary Information. The agencies are
allowing an ABCP conduit to hold servicing assets.
---------------------------------------------------------------------------

    The reproposal also would have expanded the risk retention options
available to an originator-seller, in its capacity as sponsor of the
underlying ABS interests issued by the intermediate SPV, by allowing an
eligible ABCP conduit to purchase interests for which the originator-
seller or a majority-owned OS affiliate retained risk using the
standard risk retention or seller's interest options.
    The reproposal also would have required a regulated liquidity
provider to enter into a legally binding commitment to provide 100
percent liquidity coverage of all the ABCP issued by the issuing entity
and would have clarified that 100 percent liquidity coverage means
that, in the event that the ABCP conduit is unable for any reason to
repay maturing ABCP issued by the issuing entity, the total amount for
which the liquidity provider may be obligated is equal to 100 percent
of the amount of ABCP outstanding plus accrued and unpaid interest. In
response to commenters on the original proposal, the reproposal
clarified that the required liquidity coverage would not be subject to
credit performance of the ABS interests held by the ABCP conduit or
reduced by the amount of credit support provided to the ABCP conduit
and that liquidity coverage that only funds performing assets will not
meet the requirements of the ABCP option.
    Consistent with the original proposal, under the reproposal the
sponsor of an eligible ABCP conduit would have retained responsibility
for ensuring compliance with the requirements of the ABCP option.\122\
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    \122\ In response to commenters on the original proposal who
requested that the agencies replace the monitoring obligation with a
contractual obligation of an originator-seller to maintain
compliance, the agencies noted their belief that the sponsor of an
ABCP conduit is in the best position to monitor compliance by
originator-sellers and majority-owned OS affiliates.
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    With respect to disclosures, the reproposal did not include a
requirement that the sponsor of the ABCP conduit disclose the names of
the originator-sellers who sponsored the ABS interests held by the ABCP
conduit and instead included a requirement that an ABCP conduit sponsor
promptly notify investors, the Commission, and its appropriate Federal
banking agency, if any, in writing of (1) the name and form of
organization of any originator-seller that fails to maintain its risk
retention as required and the amount of asset-backed securities issued
by an intermediate SPV of such originator-

seller and held by the ABCP conduit; (2) the name and form of
organization of any originator-seller or majority-owned OS affiliate
that hedges, directly or indirectly through an intermediate SPV, its
risk retention in violation of its risk retention requirements and the
amount of asset-backed securities issued by an intermediate SPV of such
originator-seller or majority-owned OS affiliate and held by the ABCP
conduit; and (3) and any remedial actions taken by the ABCP conduit
sponsor or other party with respect to such asset-backed securities.
Consistent with the original proposal, the reproposal would have
required the sponsor of an ABCP conduit to provide to each purchaser of
ABCP information regarding the regulated liquidity provider, a
description of the liquidity coverage, and notice of any failure to
fund. The reproposal also retained the requirement that a sponsor
provide information regarding the collateral underlying ABS interests
held by the ABCP conduit and entities holding risk retention, as well
as a description of the risk retention interests. The reproposal also
retained the requirement that a sponsor provide to the appropriate
Federal regulators, upon request, all of the information required to be
provided to investors, as well as the name and form of organization of
each originator-seller or majority-owned OS affiliate retaining an
interest in the underlying securitization transactions.\123\
---------------------------------------------------------------------------

    \123\ See Revised Proposal, 78 FR at 57948.
---------------------------------------------------------------------------

    Finally, under the reproposal, the sponsor of an ABCP conduit would
have been required to take other appropriate steps upon learning of a
violation by an originator-seller or majority-owned OS affiliate of its
risk retention obligations, and listed, as examples of steps that may
be taken, curing any breach of the requirements, or removing from the
eligible ABCP conduit any asset-backed security that does not comply
with the applicable requirements.
    Many commenters expressed general support for the revisions made to
the ABCP option and stated that the reproposal provided significantly
more flexibility than the original proposal. However, commenters also
indicated that additional revisions would be necessary in order to
ensure that the ABCP option is available to the types of ABCP programs
predominantly available in the current market.
    Many commenters requested that the agencies permit additional forms
of risk retention within the ABCP option. Commenters encouraged the
agencies to recognize standby letters of credit, guarantees, liquidity
facilities, unfunded liquidity, asset purchase agreements, repurchase
agreements, and other similar support arrangements and credit
enhancements to satisfy the risk retention requirement. Commenters
expressed the view that allowing such additional forms of risk
retention would reduce the inconsistency between the European Union
risk retention regime and the U.S. proposal, thus improving the
possibility of cross border offerings.\124\ Commenters asserted that
these ABCP conduit features serve the purpose of credit risk retention
by allocating credit risk between asset originators and ABCP conduit
sponsors, and aligning incentives between ABCP conduit sponsors and
investors. For example, one commenter asserted that under existing
market practice, transferors of assets into ABCP conduits routinely
retain credit risk in the financed assets in an amount equal to not
less than 5 percent of the related subordinated ABCP notes, so that
there is no need for the rule to impose duplicative risk retention
requirements on ABCP conduit managers.
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    \124\ The European Union credit risk retention regime consists
of Articles 405-410 of the Capital Requirements Regulation developed
by the European Banking Authority, and is available at https://www.eba.europa.eu/regulation-and-policy/single-rulebook/interactive-single-rulebook/-/interactive-single-rulebook/toc/504.
---------------------------------------------------------------------------

    Another commenter asserted that the reproposed rule would increase
the costs of ABCP conduits and substantially reduce the market for ABCP
financing, and that the rules were not necessary to promote high-
quality underwriting of ABCP, which the commenter asserted is already
present in the multi-seller ABCP conduits operating in the current
markets. This commenter proposed that sponsors of ABCP collateralized
by originator-seller asset pools that are underwritten to high credit
quality standards should be permitted to fund 5 percent risk retention
either through a cash reserve or through a cash substitute (e.g.,
irrevocable unconditional letter of credit or credit facility) and
should be permitted to rely on committed liquidity facilities that are
limited to financing only performing assets.
    One commenter expressed the view that the risk retention
requirement should not apply to ABCP conduits collateralized by
repurchase agreements because the repurchase agreements provide
liquidity. One commenter stated that some conduits do not apply asset
collections to the payment of ABCP issued by such conduits but instead,
in the ordinary course, pay their maturing notes directly from funds
provided by their liquidity support providers. This commenter stated
that, although the agencies have to date declined to recognize unfunded
loan commitments to ABCP conduits as valid risk retention, a repurchase
counterparty is contractually obligated from the outset to repurchase
the assets from the ABCP conduit, and therefore retains credit risk
throughout the term of the transaction.\125\
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    \125\ The agencies do not believe there is sufficient basis to
distinguish an ABCP conduit collateralized by repurchase agreements
from other issuances of ABS interests. As a result, the sponsor of
an ABCP conduit collateralized by repurchase agreements would be
required to satisfy the requirements of the final rule.
---------------------------------------------------------------------------

    Many commenters requested a full exemption from risk retention
under section 15G of the Exchange Act for ABCP conduits with certain
features or structures. For example, one commenter asserted that fully-
supported bank-sponsored conduits should be exempt from risk retention,
regardless of whether the conduit satisfied other criteria set forth in
the rule, because 100 percent of the credit risk is retained by the
bank sponsor, and the only risk to investors would be the risk of the
sponsoring institution itself.
    Some commenters asserted that arrangers and managers of ABCP
conduits are not ``sponsors,'' and claimed that there is no valid basis
for imposing risk retention requirements on these parties. One
commenter asked for clarification as to who will be deemed a sponsor of
ABCP issued by an ABCP conduit. One of these commenters disagreed with
the agencies' position that in selecting the assets, one can be
characterized as ``transferring'' those assets to the issuer. This
commenter expressed the view that the word ``transfer,'' as used in
section 15G and in the reproposal, cannot reasonably be interpreted to
include a conduit manager's selection of the assets that its conduit
will purchase. This commenter cited to case law that the term
``transfer'' should be defined by reference to its ``commonly accepted
meaning''; and a conduit manager does not itself sell, assign or
deliver any assets to the conduit, so that it has not engaged in a
``transfer.''
    Several commenters expressed the view that the proposed nine-month
restriction on the maximum maturity at issuance for ABCP would be
unnecessarily restrictive. Commenters asserted that while historical
commercial paper maturities may have been shorter, many aspects of the
international liquidity standards for banking organizations established
by the Basel Committee on Banking Supervision's ``Basel liquidity

standards,'' including the liquidity coverage ratio and the proposed
net stable funding ratio may combine to push average maturities out
further. To address these concerns, commenters suggested that the
maximum maturity for ABCP held by an eligible ABCP conduit be extended
to 397 days, which is the maximum remaining maturity for securities
that are eligible for purchase by money market mutual funds pursuant to
Rule 2a-7 under the Investment Company Act of 1940, as amended.\126\
---------------------------------------------------------------------------

    \126\ See 17 CFR 270.2a7.
---------------------------------------------------------------------------

    The agencies received several comments regarding the definition of
``eligible ABCP conduit.'' Several commenters expressed concern that
limitations on assets that may be acquired by ABCP conduits were too
restrictive. Commenters stated that many ABCP conduits hold assets that
are not asset-backed securities, such as loans or receivables purchased
directly from originators under a deferred purchase price note, which
the commenters asserted is a customary structure by which conduits now
finance originator-seller's assets, not the originator-seller
securitization structure required by the reproposal. Commenters also
expressed concern that ABCP conduits often hold asset-backed securities
that are acquired from various sources, including other ABCP conduits
and in the secondary market. One commenter asserted that there is no
need to limit permitted investments of fully supported conduits,
because investors in ABCP issued by fully-supported conduits base their
investment decisions on the liquidity provider's financial strength and
reputation (rather than relying on asset quality). A few commenters
requested that the ABCP option be modified to permit originator-sellers
to convey to intermediate SPVs, in addition to assets originated by
them, assets acquired in business combinations and asset purchases.
    Another commenter asserted that the proposed limitation on eligible
collateral would not permit conduits to acquire assets through an
assignment from another ABCP conduit. One commenter requested that the
final rules permit transfers between conduits with a common liquidity
provider and transfers of positions between one funding agent/liquidity
provider/conduit group and another such group.
    Several commenters expressed concern regarding the proposed
definition of 100 percent liquidity coverage, noting that a significant
percentage of existing conduits are partially-supported or do not have
100 percent liquidity coverage as defined by the proposal. Most of
these commenters suggested that the definition of 100 percent liquidity
coverage be revised to include coverage in a structure under which the
liquidity provider's funding obligation is reduced by non-performing or
defaulted assets, if the conduit includes some form of credit
enhancement equal to at least 5 percent of the outstanding ABCP. One
commenter requested that the agencies align the 100 percent liquidity
coverage requirement with the regulatory capital treatment applicable
to unfunded credit enhancements under the Basel regulatory capital
framework for banking organizations, which generally calculates a
banking organization's exposure to an eligible ABCP liquidity facility
based on the maximum potential amount that the banking organization
could be required to fund given the ABCP program's current underlying
assets (calculated without regard to the current credit quality of
those assets).
    Several commenters interpreted the reproposal's requirement that an
eligible ABCP conduit obtain from a regulated liquidity provider a
legally binding commitment to provide 100 percent liquidity coverage to
all the ABCP issued by the ABCP conduit as limiting an ABCP conduit to
one regulated liquidity provider. Commenters opposed the requirement in
the definition of ``eligible ABCP conduit'' that requires liquidity
support from a single liquidity provider. One of these commenters
suggested that, although most fully-supported multi-seller conduits
currently have 100 percent liquidity support from an affiliate of the
conduit manager, the final rule permit conduits to have multiple
liquidity providers.
    Other commenters stated that syndication of backstop liquidity is
market practice, and that there is no reason to limit the number of
liquidity providers. One commenter recommended that the agencies revise
the definition of ``eligible ABCP conduit'' to clarify that eligible
liquidity facilities may include facilities entered into by an
affiliate of a regulated liquidity provider, if the regulated liquidity
provider unconditionally guarantees its affiliate's obligations.
    Commenters generally supported the proposed definition of majority-
owned OS affiliate. One commenter observed that the rule text in the
reproposal only referred to the originator-seller as the risk retainer,
but does not mention its majority-controlled affiliates. This commenter
requested that the final rules conform to the preamble of the original
proposal by stating that majority-controlled originator-seller
affiliates (including an SPV) can satisfy the originator-seller's risk
retention requirements.
    The agencies received several comments on the proposed definition
of intermediate SPV. One commenter stated that in certain circumstances
an intermediate SPV is not a direct or indirect wholly owned affiliate
of the originator-seller but instead is an ``orphan'' SPV that is owned
by a corporate service provider or a charitable trust.
    One commenter stated that it was not clear under the reproposal
whether an ABCP conduit sponsor would no longer be able to rely on the
option if a single asset held by its conduit does not comply with the
rule. This commenter requested that the rule prescribe cure periods (of
not less than 30 days) and threshold amounts (1 percent of the
conduit's assets), so that the conduit will not be forced to unwind
based on a single noncompliant asset.
    Commenters raised several concerns with respect to the reproposal's
disclosure requirements for the ABCP option. One commenter indicated
that the asset disclosures in ABCP programs are collectively negotiated
and agreed-upon by ABCP investors and conduit arrangers, and the
reproposal's calculation and reporting requirements would deter
borrowers from financing assets through ABCP conduits.
    One commenter indicated that the scope of the proposed disclosure
requirements set forth in section 4(c) of the reproposal is unclear,
and the proposed requirement to disclose fair value calculations and
supporting information would not be feasible. This commenter said that
because the conduits typically treat their extensions of credit as
loans for accounting purposes, and do not periodically revalue the
assets, a requirement to disclose fair value would not conform to
existing accounting practices. This commenter stated that many ABCP
financings are revolving transactions in which the principal balance of
the outstanding notes may change every business day. This commenter
also asserted that, because investors in fully supported conduits do
not rely on the market value of the assets in their investment
decisions, there would be no need to require fully supported conduits
to provide asset-level disclosures. The commenter also asserted that to
the extent a conduit finances assets for many different originator-
sellers, the volume and frequency of disclosures under this requirement
would be substantial and unreasonable. This

commenter expressed the view that the agencies should not impose
unnecessarily broad disclosure requirements that would result in a
narrowing of the short-term financing options available to businesses.
Another commenter said that the requirement to report the fair value of
each of the conduit's interests is unduly burdensome to a sponsor,
given the dynamic nature of a conduit's assets. This commenter proposed
that a sponsor be required to report only certain items.
    Some commenters stated that investors in ABCP fully supported by
liquidity facilities do not want or need disclosure from conduit
managers of an originator-seller's failure to comply with risk
retention requirements. One of these commenters stated that the
disclosure requirement would discourage originators from financing
assets through ABCP conduits. This commenter stated that since the
reproposal did not generally require sponsors of an ABS interests to
notify investors of the failure to comply with risk retention
requirements, and it was not clear why this obligation was imposed
solely for fully-supported ABCP conduits.
    One commenter asserted that a sponsor should not be required to
develop separate policies or procedures to actively monitor each
originator-seller; instead a sponsor should be allowed to rely on an
originator-seller's representations and warranties in satisfying its
compliance and monitoring requirements. This commenter also proposed
that a sponsor be required to notify only regulators upon the actual
discovery or knowledge of an originator-seller's failure to comply.
    One commenter asserted that investors have generally not requested
any significant changes to ABCP disclosure requirements in recent
years, and that reports currently being made contain sufficient
information for ABCP investors to monitor their investments, especially
since the most important economic factors will continue to be the
performance of the assets themselves, the 100 percent liquidity
coverage, and (in the case of partially supported ABCP conduits) the
sponsor's 5 percent or more credit enhancement--but not continued risk
retention on the part of the originator-sellers.
    Some commenters requested a complete exemption from the credit risk
retention requirements for conduits with underlying assets that were
originated before the applicable effective date of the rule that may be
securitized through an ABCP conduit. One commenter claimed that it
would be impractical to impose credit risk retention on an originator-
seller that has already entered into a financing transaction with a
conduit, because the conduits would not be able to timely renegotiate
terms.
b. Overview of the Final Rule
    The final rule includes a specific option for ABCP securitization
transactions that retains the basic structure of the reproposed ABCP
option, with modifications intended to address issues raised by
commenters. As with the reproposal, the final rule provides that an
eligible ABCP conduit sponsor will satisfy the base risk retention
requirement if, for each ABS interest the ABCP conduit acquires from an
intermediate SPV, the intermediate SPV's originator-seller \127\
retains an economic interest in the credit risk of the assets
collateralizing the ABS interest acquired by the eligible ABCP conduit
using either standard risk retention or the revolving pool
securitization risk retention option (as revised in the final
rule).\128\ As noted in the reproposal, the use of the ABCP option by
the sponsor of an eligible ABCP conduit does not relieve the
originator-seller from its independent obligation to comply with its
own risk retention obligations as a sponsor of an ABS interest under
the revised proposal, if any. The originator-seller will be the sponsor
of the asset-backed securities issued by an intermediate SPV and will
therefore be required under the final rule to hold an economic interest
in the credit risk of the assets collateralizing the asset-backed
securities issued by the intermediate SPV.
---------------------------------------------------------------------------

    \127\ See infra footnote 130.
    \128\ An originator-seller will be subject to the same
requirements and have the same benefits under the risk retention
rule as any other sponsor that retains risk, including restrictions
on transferring or hedging the retained interest to a third party as
applied to sponsors. See section 5(b)(1) of the final rule
(intermediate SPV's originator-seller to retain an economic interest
in the credit risk of the securitized assets in the amount and
manner required under section 4 or 5 of the rule). For example, an
originator-seller retaining risk in its intermediate SPV in the same
amount and manner required under section 4 of the rule, as an
eligible horizontal residual interest, would be permitted to
transfer that interest to a majority-owned affiliate as permitted
under section 3 of the rule, subject to the additional restrictions
of section 12 of the rule, but an originator-seller retaining risk
in its intermediate SPV in the same amount and manner permitted
under section 5 of the rule, as a revolving pool securitization
seller's interest, could only transfer it to a wholly-owned
affiliate, as required by section 5(e)(1) of the rule. See infra
note 130 for a discussion of the definition of the term
``originator-seller.''
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    Under the final rule, a sponsor of an ABCP conduit is not limited
to using the ABCP option to satisfy its risk retention requirements. An
ABCP conduit sponsor may rely on any of the risk retention options
described in section 4 of the rule, provided it meets the criteria for
such option. Consistent with the reproposal, standby letters of credit,
guarantees, repurchase agreements, asset purchase agreements, and other
unfunded forms of credit enhancement cannot be used to satisfy the risk
retention requirement.
    In response to comments questioning the application of the rule's
requirements to an ABCP conduit arranger or manager, the agencies are
affirming their view that an arranger or manager of an ABCP conduit is
a sponsor or ``securitizer'' under section 15G of the Exchange Act. The
agencies believe this is consistent with part (B) of the definition of
securitizer which includes ``a person who organizes and initiates an
asset-backed securities transaction by selling or transferring assets,
either directly or indirectly, including through an affiliate, to the
issuer.'' \129\ The arranger or manager of an ABCP conduit typically
organizes and initiates the transaction as it selects and approves the
originators whose loans or receivables will collateralize the ABS
interests that support the ABCP issued by the conduit. It also
indirectly transfers the securitized assets to the ABCP issuing entity
by selecting and directing the ABCP issuing entity to purchase ABS
interests collateralized by the securitized assets. The agencies
believe that reading the definition of securitizer to include a typical
arranger or manager of an ABCP conduit is consistent with the purposes
of the statute and principles of statutory interpretation. Furthermore,
the agencies believe that the narrow reading of ``securitizer''
supported by commenters is not consistent with Section 15G and could
lead to results that would appear contrary to Congressional intent by
opening the statute to easy evasion.
---------------------------------------------------------------------------

    \129\ See 15 U.S.C. 78o-11(a)(3)(B).
---------------------------------------------------------------------------

    A more detailed discussion of the agencies' interpretation of the
term ``securitizer,'' including analysis of the statutory text and
legislative history can be found in Part III.B.7 of this Supplementary
Information.
    The agencies have revised the definition of ``eligible ABCP
conduit'' in the final rule to accommodate certain business
combinations and to clarify the requirements for the types of assets
that can be acquired by an eligible ABCP conduit. Other elements of the
definition, such as the requirement that an ABCP conduit must be
bankruptcy remote or otherwise isolated for

insolvency purposes from the sponsor of the ABCP conduit and from any
intermediate SPV, and that an eligible liquidity provider enter into a
legally binding commitment to provide 100 percent liquidity coverage to
all the ABCP issued by the ABCP conduit remain unchanged from the
reproposal.
    The final rule definition of eligible ABCP conduit requires that
the ABS interests acquired by the ABCP conduit are: (i) ABS interests
collateralized solely by assets originated by an originator-seller and
by servicing assets; (ii) special units of beneficial interest (or
similar ABS interests) in a trust or special purpose vehicle that
retains legal title to leased property underlying leases originated by
an originator-seller that were transferred to an intermediate SPV in
connection with a securitization collateralized solely by such leases
and by servicing assets; (iii) ABS interests in a revolving pool
securitization collateralized solely by assets originated by an
originator-seller and by servicing assets; or (iv) ABS interests that
are collateralized, in whole or in part, by assets acquired by an
originator-seller in a business combination that qualifies for business
combination accounting under GAAP, and, if collateralized in part, the
remainder of such assets meet the criteria in items (i) through (iii).
The ABS interests must be acquired by the ABCP conduit in an initial
issuance by or on behalf of an intermediate SPV: (1) Directly from the
intermediate SPV, (2) from an underwriter of the ABS interests issued
by the intermediate SPV, or (3) from another person who acquired the
ABS interests directly from the intermediate SPV. Finally, the rule
requires that an eligible ABCP conduit is collateralized solely by ABS
interests acquired from intermediate SPVs and servicing assets.
    The agencies continue to believe that a limitation on the types of
assets that may be acquired by an eligible ABCP conduit is appropriate.
Although some commenters suggested eligible ABCP conduits should be
permitted to purchase assets directly from originator-sellers under
arrangements such as deferred purchase price notes, which commenters
argued impose continuing risk of loss on originator-sellers that would
be comparable to risk retention, the agencies are not incorporating
this approach. The agencies believe such an approach would add
complexity to the rule, and that requiring originator-sellers to retain
risk in the same way as the rule requires for other securitizers
provides investors and regulators with better clarity and transparency
as to the nature of the originator-seller's retention of risk in the
transaction.
    The agencies disagree with commenter assertions that, in the
context of ABCP conduits, loans or receivables originated before the
applicable effective date of the rule should not be subject to risk
retention. Section 15G of the Exchange Act applies to any issuance of
asset-backed securities after the effective date of the rules,
regardless of the date the assets in the securitization were
originated. The agencies note, however, that loans or receivables
meeting the seasoned loan exemption in section 19 of the rule would not
be subject to risk retention requirements, and an originator-seller
that sponsors a securitization of seasoned loans would not need to
retain risk with respect to a securitization of such assets under the
ABCP option.
    With respect to ABS interests, the agencies believe that in certain
circumstances described by commenters, acquisition of ABS interests
from sources other than an intermediate SPV or originator-seller may be
accomplished in a manner consistent with the purposes of section 15G of
the Exchange Act. The overview of the final rule discusses two
revisions to collateral criteria for eligible ABCP conduits: one that
would permit limited transfers between certain ABCP conduits, and
another that would permit securitization of assets acquired as the
result of certain business combinations.
    The agencies are adopting as reproposed the requirements that an
ABCP conduit sponsor (i) approve each originator-seller permitted to
sell or transfer assets, directly or indirectly, to an intermediate SPV
from which an eligible ABCP conduit acquires ABS interests; (ii)
approve each intermediate SPV from which an eligible ABCP conduit is
permitted to acquire ABS interests; (iii) establish criteria governing
the ABS interests, and the assets underlying the ABS interests,
acquired by the ABCP conduit; (iv) administer the ABCP conduit by
monitoring the ABS interests acquired by the ABCP conduit and the
assets supporting those ABS interests, arranging for debt placement,
compiling monthly reports, and ensuring compliance with the ABCP
conduit documents and with the ABCP conduit's credit and investment
policy; and (v) maintain and adhere to policies and procedures for
ensuring that the requirements described above have been met.
    The final rule retains the concept that a majority-owned affiliate
of an originator-seller may contribute assets it originates to the
originator-seller's intermediate SPV. To simplify the rule text for
most purposes, the final rule consolidates the reproposal's definition
of ``majority-owned OS affiliate'' into the definition of originator-
seller itself.\130\ In response to comments, the agencies seek to
clarify that the originator-seller is the sponsor of a securitization
transaction in which an intermediate SPV of such-originator-seller
issues ABS interests that are acquired by an eligible ABCP conduit, and
that the originator-seller may allocate risk retention to its majority
owned-affiliates (or wholly-owned affiliates) as permitted in
accordance with the sections 3, 4, and 5 of the rule, as applicable.
The sponsor of an ABCP conduit must fulfill the compliance requirements
of the ABCP option with respect to the originator-seller that is the
sponsor of the intermediate SPV.
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    \130\ In order to provide clarity in maintaining the distinction
between originator-sellers and majority-owned originator-seller
affiliates, the agencies have included a provision in the definition
of ``originator-seller'' indicating that the majority-owned
originator-seller affiliate may not be a sponsor of the originator-
seller's intermediate SPV.
---------------------------------------------------------------------------

    The agencies have carefully considered commenters' recommendations
regarding the definition of 100 percent liquidity coverage and are
adopting the rule as proposed. The agencies understand the concern
raised by commenters that a significant number of existing partially-
supported conduits will likely not be able to use the ABCP option to
satisfy the risk retention requirement, because they are covered by a
liquidity facility that adjusts the funding obligation of the liquidity
provider according to the performance of the assets collateralizing the
ABS interests held by the ABCP conduit.\131\ However, the agencies
observe that a liquidity facility of the type described by commenters,
that reduces the obligation of the liquidity provider to provide
funding based on a formula that takes into consideration the amount of
non-performing assets could serve to insulate the liquidity provider
from the credit risk of non-performing assets in the securitization
transaction. The ABCP option is designed to accommodate conduits that
expose the liquidity provider to the full credit risk of the assets in
the securitization, with the expectation that exposure to the credit
risk of such assets will provide the liquidity providers with incentive
to undertake robust credit underwriting and monitoring.
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    \131\ In response to commenters on the reproposal, the agencies
acknowledge that liquidity coverage that does not require the
regulated liquidity provider to pay in the event of a bankruptcy of
the ABCP conduit would meet the requirements of the ABCP option
adopted in the final rule.
---------------------------------------------------------------------------

    The final rule adopts as proposed the requirement that a regulated
liquidity

provider enter into a legally binding commitment to provide 100 percent
liquidity coverage (in the form of a lending facility, an asset
purchase agreement, a repurchase agreement, or other similar
arrangement) to all the ABCP issued by the ABCP conduit by lending to,
purchasing ABCP issued by, or purchasing assets from, the ABCP conduit
in the event that funds are required to repay maturing ABCP issued by
the ABCP conduit.
    While the final rule continues to require that there be only one
registered liquidity provider with responsibility to make payment in
respect of the commercial paper notes, the regulated liquidity provider
is not prohibited from hedging its liquidity obligation or from
backstopping the obligation by entering into sub-participations or
other arrangements in respect of this commitment, so long as one
regulated liquidity provider remains directly responsible to all
holders of ABCP issued by the conduit. To the extent that the regulated
liquidity provider that provides liquidity support to the ABCP conduit
is exposed to the credit risk of the assets covered by such liquidity
support, the agencies believe the incentives that encourage robust
underwriting remain appropriately aligned.
    The agencies continue to believe that unfunded risk retention is
not consistent with the regulatory goal of meaningful risk retention.
As such, the requirement in the ABCP credit risk retention option for
100 percent non-asset tested liquidity is not a substitute for risk
retention by the ABCP sponsor, but rather a recognition of an integral
part of the overall ABCP conduit securitization structure. As the
liquidity support is not an ABS interest retained to satisfy a risk
retention requirement under the rule, the liquidity provider is not
subject to the prohibitions on transfer and hedging in section 12 of
the rule with respect to the liquidity support.
    The agencies were persuaded by commenters views regarding the
likelihood that many conduits will need to issue ABCP with a longer
maturity in the future in order to accommodate the needs of regulated
institutions that are subject to new liquidity requirements under the
Basel liquidity standards. Accordingly, the final rule extends the nine
month maximum maturity and defines ABCP as asset-backed commercial
paper that has a maturity at the time of issuance not exceeding 397
days, exclusive of grace periods, or any renewal thereof the maturity
of which is likewise limited.
    The agencies did not receive any comments regarding the
reproposal's definition of ABCP conduit. Accordingly, as with the
reproposal, the final rule defines an ABCP conduit as an issuing entity
with respect to ABCP.
    In response to comments, the final rule permits eligible ABCP
conduits to acquire ABS interests from other eligible ABCP conduits
with the same regulated liquidity provider. Under the final rule, an
eligible ABCP conduit may acquire an ABS interest from another eligible
ABCP conduit if: (i) The sponsors of both eligible ABCP conduits are in
compliance with section 6 of the rule; and (ii) the same regulated
liquidity provider has entered into one or more legally binding
commitments to provide 100 percent liquidity coverage to all of the
ABCP issued by both eligible ABCP conduits.
    However, because the agencies continue to be concerned about asset
aggregators that acquire loans and receivables from multiple sources in
the market, place them in an intermediate SPV, and issue interests to
ABCP conduits the agencies have declined to extend the ABCP option to
ABCP conduits that purchase ABS interests other than in an initial
issuance by or on behalf of an originator-seller's intermediate SPV.
    In order to accommodate certain market practices, as referred to in
the comments to the reproposal, the agencies are revising the
definition of ``intermediate SPV'' in the final rule. The final rule
revises this provision to include a special purpose vehicle, often
referred to as an ``orphan SPV,'' that has nominal equity owned by a
trust or corporate service provider that specializes in providing
independent ownership of special purpose vehicles, and such trust or
corporate service provider is not affiliated with any other transaction
parties. For purposes of the final rule, ``owned by a trust'' includes
``held by a trustee in trust'' and ``issued to a trustee.'' In
addition, the corporate service provider will not be affiliated solely
because it provides professional directors or administrative services
to the orphan SPV or the trust. Finally, the nominal equity in the
orphan SPV will not be entitled to a share of the profits and losses or
any other economic indicia of ownership.
    Consistent with the reproposal, the final rule allows an
intermediate SPV to sell ABS interests that it issues to third parties
other than ABCP conduits. However, the agencies emphasize that, except
as otherwise provided for loans or receivables acquired as part of
certain business combinations, the ABS interests acquired by the
conduit cannot not be collateralized by securitized assets otherwise
purchased or acquired by the intermediate SPV's originator-seller, the
originator-seller's majority-owned affiliates, or by the intermediate
SPV from unaffiliated originators or sellers. Commenters requested the
addition of a cure period, expressing concern as to whether a conduit
would be considered to be in violation of the rule any time one of its
originator-sellers failed to comply, and the agencies have addressed
this issue. The final rule includes the reproposal's provisions
obligating the sponsor to monitor originator-sellers' compliance,
notify investors of any failure of compliance by an originator-seller,
and take appropriate steps to cure the breach. A sponsor of an eligible
ABCP conduit that notifies investors and takes appropriate steps in
accordance with the terms of the rule will be in compliance with its
obligations under the rule, and, accordingly, no ``cure period'' is
necessary. Although commenters objected to the requirement to identify
originator-sellers by name in these circumstances, the agencies believe
it is an important part of incentivizing the originator-seller and ABCP
conduit sponsor to comply with the requirements of the ABCP option.
    The final rule requires an ABCP conduit sponsor to provide, or
cause to be provided, certain disclosures to ABCP investors. In
response to commenters' concerns, the disclosure requirement requires
that the information about the underlying ABS interests be updated at
least monthly, rather than updated in connection with each issuance of
ABCP. The final rule requires that disclosures be provided before or
contemporaneously with the first sale of ABCP to the investor and must
be provided on at least a monthly basis to all conduit investors. In
order to implement this requirement, the agencies have required that
the disclosures to investors must be based on information as of a date
not more than 60 days prior to the date of first use with investors in
order to accommodate variations in reporting timelines and
incorporation of information received from originator-sellers.
    The agencies are persuaded by commenters who expressed concern that
the reproposal's disclosure requirements for the details of each
originator-seller's risk retention interest, together with the same
information as the originator-seller would be required to provide
direct investors pursuant to the rule, provides more information than
necessary. Accordingly, the final rule revises this disclosure to
simplify it significantly. The disclosure must

contain the following information as of a date not more than 60 days
prior to the date of first use with investors:
    (i) The name and form of organization of the regulated liquidity
provider that provides liquidity coverage to the eligible ABCP conduit,
including a description of the material terms of such liquidity
coverage, and notice of any failure to fund;
    (ii) The asset class or brief description of the underlying
securitized assets;
    (iii) The standard industrial category code (SIC Code) for the
originator-seller that will retain (or has retained) pursuant to this
section an interest in the securitization transaction; and
    (iv) A description of the percentage amount of risk retention by
the originator-seller, and whether it is in the form of an eligible
horizontal residual interest, vertical interest, or revolving pool
securitization seller's interest, as applicable, pursuant to the rule.
    The final rule also requires that an ABCP sponsor provide, or cause
to be provided, upon request, to the Commission and its appropriate
Federal banking agency, if any, in writing, all of the information
required to be provided to investors, and the name and form of
organization of each originator-seller that will retain (or has
retained) a rule-compliant interest in the securitization transaction.
As investors in ABCP initially will have significantly less information
about the risk retention held by the originator-sellers that sponsor
ABS interests collateralizing the ABCP than investors in other forms of
ABS interests, the requirement that sponsors disclose a breach by an
originator-seller will provide them with relevant information about the
originator-seller upon the occurrence of a breach.
5. Commercial Mortgage-Backed Securities
a. Overview of the Reproposal and Public Comments
    Section 15G(c)(1)(E) of the Exchange Act \132\ provides that, with
respect to CMBS, the regulations prescribed by the agencies may provide
for retention of the first-loss position by a third-party purchaser
that specifically negotiates for the purchase of such first-loss
position, holds adequate financial resources to back losses, provides
due diligence on all individual assets in the pool before the issuance
of the asset-backed securities, and meets the same standards for risk
retention as the Federal banking agencies and the Commission require of
the securitizer. In light of this provision and the historical market
practice of third-party purchasers acquiring first-loss positions in
CMBS transactions, the agencies proposed to permit a sponsor of ABS
interests that is collateralized by commercial real estate loans to
meet its risk retention requirements if third-party purchasers acquired
eligible horizontal residual interests in the issuing entity.\133\ The
reproposal would have permitted one or two third-party purchasers to
satisfy the risk retention requirement, so long as their eligible
horizontal residual interests were pari passu with each other, so that
neither third-party purchaser's losses were subordinate to the other's
losses. The eligible horizontal residual interest held by the third-
party purchasers would have been permitted to be used to satisfy the
risk retention requirements either by itself as the sole credit risk
retained, or in combination with a vertical interest held by the
sponsor.
---------------------------------------------------------------------------

    \132\ 15 U.S.C. 78o-11(c)(1)(E).
    \133\ Such third-party purchasers are commonly referred to in
the CMBS market as ``B-piece buyers'' and the eligible horizontal
residual interest is commonly referred to as the ``B-piece.''
---------------------------------------------------------------------------

    The CMBS risk retention option in the reproposal would have been
available only for securitization transactions collateralized solely by
commercial real estate loans and servicing assets. In addition, the
following eight requirements would have been required to be met:
    (1) Each third-party purchaser retains an eligible horizontal
residual interest in the securitization in the same form, amount, and
manner as would have been required of the sponsor under the horizontal
risk retention option;
    (2) Each third-party purchaser pays for the first-loss subordinated
interest in cash at the closing of the securitization;
    (3) No third-party purchaser obtains financing, directly or
indirectly, from any other person party to the securitization
transaction (including, but not limited to, the sponsor, depositor, or
an unaffiliated servicer), other than a person that is a party solely
by reason of being an investor;
    (4) Each third-party purchaser performs a review of the credit risk
of each asset in the pool prior to the sale of the asset-backed
securities;
    (5) Except for an affiliation with the special servicer in the
securitization transaction or an originator of less than 10 percent of
the unpaid principal balance of the securitized assets, no third-party
purchaser can be affiliated with any other party to the securitization
transaction (other than investors);
    (6) The transaction documents provide for the appointment of an
operating advisor (Operating Advisor), subject to certain terms and
conditions;
    (7) The sponsor provides, or causes to be provided, to potential
purchasers certain information concerning the third-party purchasers
and other information concerning the transaction; and
    (8) Any third-party purchaser acquiring an eligible horizontal
residual interest under the CMBS option complies with the hedging,
transfer and other restrictions applicable to such interest under the
reproposed rule as if such third-party purchaser was a sponsor who had
acquired the interest under the horizontal risk retention option.
    Generally, commenters supported the CMBS risk retention option
described in the reproposal. One commenter cautioned against further
modifications to the proposed CMBS option, expressing its view that
CMBS underwriting standards were beginning to deteriorate.
    Another commenter, however, pointed out that risk retention is
better implemented where the sponsor retains some ``skin in the game.''
This commenter suggested that the rule require the sharing of risk
retention between the sponsor and the third-party purchasers. This
commenter suggested that third-party purchasers not be allowed to hold
more than 2.5 percent of the risk retention requirements, and that they
be required to hold the first-loss position for more than 5 years
before being allowed to transfer the position even to another qualified
third-party purchaser (barring an earlier sunset). Another commenter
requested clarification as to whether multiple sponsors can divide a
vertical interest among themselves, on a pro rata basis, based on their
contribution to the transaction, with no minimum retention for any one
sponsor. Another commenter requested clarification as to whether a
sponsor holding an eligible vertical interest in a CMBS transaction
would need to retain a portion of the eligible horizontal residual
interest as part of that vertical interest, expressing the preference
of its CMBS sponsor members that the eligible horizontal residual
interest not be included as part of the eligible vertical interest.
    After considering these comments, the agencies do not believe it is
necessary to require that the sponsor retain or share with third-party
purchasers the credit risk in CMBS transactions because third-party
purchasers, under the framework of the final rule, must hold the risk
and independently review each securitized asset. The agencies observe
that under the final rule, the

sponsor remains responsible for compliance with the CMBS option and
risk retention and must monitor a third-party purchaser's compliance
with the CMBS option.\134\ The agencies also do not believe it is
necessary to limit the amount of risk retention held by the third-party
purchaser in an L-shaped structure. This approach provides parties to
CMBS transactions with flexibility to choose how to structure their
retention of credit risk in a manner compatible with the practices of
the CMBS market. Further, consistent with the reproposal, the agencies
continue to believe that the interests of the third-party purchaser and
other investors are aligned through other provisions of the proposed
CMBS option, such as the Operating Advisor provisions and the sponsor's
disclosure requirements discussed below. The agencies also do not
believe it is necessary to extend the five-year holding period after
which the third-party purchaser may transfer the eligible horizontal
residual interest to another third-party purchaser. As stated in the
reproposal, the agencies selected five years as a holding period that
was sufficiently long to enable underwriting defects to manifest
themselves. The agencies did not receive sufficient data or information
demonstrating that a longer holding period was warranted.
---------------------------------------------------------------------------

    \134\ See section 7(c) of the final rule.
---------------------------------------------------------------------------

    Additionally, the agencies have determined that it would unduly
dilute the credit risk being retained in the CMBS transaction if
multiple sponsors were allowed to divide the vertical interest.
Consistent with the standard risk retention option generally where
multiple sponsors are not permitted to divide the requisite 5 percent
credit retention among themselves, in a CMBS transaction with multiple
sponsors, if any portion of the required 5 percent retention is to be
held by a sponsor (i.e., if any portion of the eligible horizontal
residual interest is not sold to a qualified third-party purchaser or
an eligible vertical interest is being used to meet the 5 percent
retention requirement), that portion of the 5 percent required
retention must be held by a single sponsor (and its majority-owned
affiliates).
    As the agencies stated in the reproposal, the eligible horizontal
residual interest held by the third-party purchasers can be used to
satisfy the risk retention requirements in combination with a vertical
interest held by a sponsor. Consistent with this approach, where the
eligible horizontal residual interest is held by a third-party
purchaser, and the sponsor holds a vertical interest, the sponsor must,
as part of that vertical interest, also retain a portion of the
eligible horizontal residual interest, as the vertical interest must
constitute 5 percent of the cash flows of each tranche, including the
eligible horizontal residual interest.\135\
---------------------------------------------------------------------------

    \135\ If there is no third-party purchaser and the sponsor holds
all of the required retention in the form of a vertical interest,
the sponsor must hold 5 percent of each tranche including the most
subordinated tranche in the structure.
---------------------------------------------------------------------------

    The agencies also received many comments with respect to the more
specific aspects of the CMBS option in the reproposal. These comments
and the final rule for these aspects of the CMBS option are discussed
below.
b. Third-Party Purchasers
i. Number of Third-Party Purchasers and Retention of Eligible
Horizontal Residual Interest
    While commenters generally supported allowing up to two third-party
purchasers to hold risk retention, one commenter recommended expanding
the number of third-party purchasers to allow participation by more
than two B-piece investors.
    Several commenters recommended allowing the third-party purchasers
to hold the interests in a senior-subordinated structure, rather than
pari passu, provided that the holder of the subordinated interest
retains at least half of the requisite eligible horizontal residual
interest, and that both third-party purchasers independently satisfy
all of the requirements and obligations imposed on third-party
purchasers. These commenters suggested that a senior-subordinated
structure would better allow the market to appropriately and
efficiently price the interests in a manner that is commensurate with
the risk of loss of each interest, and to address the different risk
tolerance levels of each third-party purchaser. One of these commenters
asserted that the pari passu requirement would reduce the capacity of
third-party purchasers to invest in the eligible horizontal residual
interest. However, two commenters strongly opposed allowing third-party
purchasers to satisfy the risk retention requirements through a senior-
subordinated structure, commenting that such a change would
significantly dilute and render ineffective the risk retention
requirements.
    As stated in the reproposal, the agencies provided additional
flexibility for the CMBS option by allowing up to two third-party
purchasers to satisfy the risk retention requirement. The agencies do
not believe it would be appropriate to allow more than two third-party
purchasers in a single transaction, because it could dilute the
incentives generated by the risk retention requirement to monitor the
credit quality of the commercial mortgages in the pool. Similarly, the
agencies agree that allowing the third-party purchasers to satisfy the
risk retention requirement through a senior-subordinated structure
would significantly dilute the effectiveness of the risk retention
requirements. Accordingly, the agencies therefore are adopting as
proposed the pari passu requirement with respect to the retained
interests held by third-party purchasers in a CMBS transaction.
ii. Third-Party Purchaser Qualifying Criteria
    The agencies did not propose any qualifying criteria for third-
party purchasers in the original proposal or the reproposal.
    In response, one commenter requested that third-party purchasers be
``qualified'' based on predetermined criteria of experience, financial
analysis capability, capability to direct the special servicer, and
capability to sustain losses. Another commenter requested that if a
third-party purchaser's affiliate contributes more than 10 percent of
the securitized assets to a CMBS transaction, that third-party
purchaser should be precluded from holding the eligible horizontal
residual interest.
    Another commenter stated its belief that it is common for several
funds within a fund complex that are managed by the same or affiliated
investment adviser to purchase eligible horizontal residual interests
in the same CMBS transaction and, to be consistent with practice, the
definition of third-party purchaser should be expanded to include
multiple funds that are managed by the same or affiliated investment
advisers.
    Consistent with the reproposal, the agencies are not adopting
specific qualifying criteria for third-party purchasers. The agencies
believe that investors in the business of purchasing first-loss
positions or ``B-piece'' interests in CMBS transactions have the
requisite experience and capabilities to make an informed decision
regarding their purchases. B-piece interests are not offered or sold
through registered offerings--typically a B-piece interest will be sold
in reliance on Securities Act Rule 144A, which requires purchasers to
be qualified institutional buyers. The agencies observed that B-piece
CMBS investors are typically real estate specialists who use their
knowledge about the underlying assets and mortgages in the pools to
conduct

extensive due diligence on new deals. The agencies also observed that
the B-piece market has very few participants. According to Commercial
Mortgage Alert data, in 2009-2013, there were 38 different B-piece
buyers with nine of them participating in 70 percent of CMBS deals.
Furthermore, as discussed below, the agencies believe that the
reproposed rule's disclosure requirements with respect to the identity
and CMBS investment experience of third-party purchasers are sufficient
to allow investors in a CMBS transaction to assess the investment
experience and other qualifications of third-party purchasers and other
material information necessary to make an informed investment decision.
If, in the future, the agencies observe adverse changes in the
experience and capabilities of third-party purchasers in CMBS
transactions, the agencies may consider whether modifications to the
rule should be made to address these issues.
    Also consistent with the reproposal, the final rule retains the
requirement that third-party purchasers be independent from originators
of more than 10 percent of the securitized assets. The agencies believe
that the independence requirement will help ensure a new review by the
third-party purchaser of the underwriting of the securitized loans and
do not believe that the requirement will adversely affect the number of
third-party purchasers willing to assume the risk retention obligations
in CMBS transactions. Last, the agencies are not expanding the
definition of third-party purchaser to include multiple funds that are
managed by the same or affiliated investment adviser. The agencies
introduced the concept of a ``majority-owned affiliate'' in the
reproposal, which would permit risk retention to be retained by a
third-party purchaser or its majority-owned affiliate. The final rule
retains the reproposal's provisions allowing sponsors and third-party
purchasers to transfer retained risk to their majority-owned
affiliates. The final rule does not allow sponsors or third-party
purchasers to transfer retained risk to parties other than majority-
owned affiliates, as the agencies believe the rule being adopted today
already includes flexibility with respect to risk retention held by an
entity that is a majority-owned affiliate of a third-party purchaser,
and that further expansion of the definition of third-party purchaser
is not necessary and would dilute the risk required to be retained by a
sponsor or third-party purchaser.
c. Operating Advisor
i. Applicability of the Operating Advisor Requirement
    The reproposal included a requirement that all CMBS transactions
that use the third-party purchaser option to satisfy the risk retention
requirement must appoint an Operating Advisor that is not affiliated
with other parties to the securitization transaction. The reproposal
would have prohibited the Operating Advisor from having, directly or
indirectly, any financial interest in the securitization transaction,
other than fees from its role as Operating Advisor, and would have
required the Operating Advisor to act in the best interest of, and for
the benefit of, investors as a collective whole.
    Multiple commenters expressed support for the Operating Advisor
requirement, noting that it was a helpful governance mechanism and
reflective of current market practice. One of these commenters
advocated expanding the Operating Advisor requirement to all CMBS
transactions, and not simply those relying on the CMBS option. Another
commenter recommended that the Operating Advisor be prohibited from
having any direct or indirect financial interest in, or financial
relationship with, the special servicer.
    After considering the comments received, the agencies have decided
not to expand the Operating Advisor requirement to CMBS transactions
that do not rely on the third-party purchaser CMBS option. As stated in
the reproposal, the agencies believe that there is generally a strong
connection between third-party purchasers and the special exercise of
the servicing rights in CMBS transactions. In CMBS transactions where
credit risk is being retained by a third-party purchaser, the agencies
believe there is a particular need to provide a check on third-party
purchasers by limiting their ability to manipulate cash flows through
the exercise of the special servicing rights. The agencies are
providing this check by requiring an Operating Advisor in CMBS
transaction where the third-party purchaser is holding the risk
retention. The agencies note that the requirement that there be an
Operating Advisor for any transaction relying on the CMBS option means
that the Operating Advisor must be in place at any time that a third-
party purchaser holds any portion of the required risk retention.
Accordingly, whether the B-piece is initially sold to a third-party
purchaser or sold to a third-party purchaser after the initial five
year holding period expires, the transaction must have an Operating
Advisor in place at all times that a third-party purchaser holds any
portion of the required risk retention.
    Consistent with the reproposal, the agencies are adopting the
requirement that the Operating Advisor be a party that is not
affiliated with other parties to the securitization transaction, and
does not have, directly or indirectly, any financial interest in the
securitization transaction other than fees from its role as Operating
Advisor. The agencies continue to believe that this requirement
sufficiently establishes the independence of the Operating Advisor and
protects investors' interests.
ii. Qualifications of the Operating Advisor
    The agencies included in the reproposal certain general
qualifications for the Operating Advisor. The reproposal would have
required underlying transaction documents in a CMBS transaction to
provide standards with respect to the Operating Advisor's experience,
expertise and financial strength to fulfill its duties and obligations
under the applicable transaction documents over the life of the
securitization transaction.
    One commenter cautioned against the requirement that qualification
standards for the Operating Advisor be specified in the transaction
documents. This commenter asserted that the requirements must ensure
that a sufficient number of qualified and independent Operating
Advisors will be available to fill the role. Additionally, this
commenter encouraged the agencies to clarify the mechanism by which the
acceptability of the Operating Advisor may be determined.
    The agencies do not believe that the rule should mandate the
mechanism by which the acceptability of the Operating Advisor is
determined, but that the CMBS transaction parties should have the
flexibility to establish the appropriate standards for the Operating
Advisor in each transaction. As a result, the agencies are adopting the
qualification requirements as proposed.
iii. Role of the Operating Advisor
    Under the reproposal, once the eligible horizontal residual
interest held by third-party purchasers reaches a principal balance of
25 percent or less of its initial principal balance, the special
servicers would have been required to consult with the independent
Operating Advisor in connection with, and prior to, any major investing
decisions related to the servicing of the securitized assets. The
reproposal would have required that the Operating Advisor be provided
with adequate and timely access to

information and reports necessary to fulfill its duties under the
transaction documents. It also would have required that the Operating
Advisor be responsible for reviewing the actions of the special
servicer, reviewing all reports made by the special servicer to the
issuing entity, reviewing for accuracy and consistency in calculations
made by the special servicer in accordance with the transaction
documents, and issuing a report to investors and the issuing entity on
the special servicer's performance.
    One commenter supported this requirement, but requested that the
agencies clarify the scope of the decisions on which the special
servicer was to consult with the Operating Advisor's review, and the
scope of the reports to be provided to the Operating Advisor. Several
commenters requested that the agencies clarify that the calculation of
the principal balance could take into account appraisal reductions and
realized losses, in order to be consistent with current market
practice. Another commenter questioned the usefulness of the
consultation requirement, noting that there is no meaningful connection
between the 25 percent threshold and the goal of risk retention. This
commenter proposed either eliminating this requirement or limiting the
consultation right to the period from the closing of the transaction
until the holder of risk retention loses control over the special
servicing rights. Another commenter believed that the 25 percent
threshold should be reduced to 10 percent.
    After considering the comments received, the agencies are adopting
the proposed consultation requirement, with some modifications in
response to comments. For purposes of determining the principal
balance, the agencies are clarifying in the final rule that the
calculation should be performed in a manner that is consistent with the
calculation as permitted under the transaction documents, and take into
account any realized losses and appraisal reduction amounts to the
extent permitted under the terms and conditions of the transaction
documents. In terms of the scope of reports made by the special
servicer to the issuing entity that the Operating Advisor must review,
the agencies are clarifying in the final rule that the Operating
Advisor shall have adequate and timely access to all reports delivered
to all classes of bondholders as well as the holders of the eligible
horizontal residual interest. Finally, the agencies believe that
section 7(b)(6)(iv) of the final rule sufficiently describes the types
of decisions that are subject to consultation--specifically, any
material decision in connection with the servicing of the securitized
assets which includes, without limitation, any material modification or
waiver of any provision of a loan agreement, any foreclosure or similar
conversion of the ownership of a property, or any acquisition of a
property.
iv. Special Servicer Removal Provisions
    The reproposal would have required that the Operating Advisor have
the authority to recommend the removal and replacement of the special
servicer. Under the reproposal, the removal of the special servicer
would have required the affirmative vote of a majority of the
outstanding principal balance of all ABS interests voting on the
matter, and required a quorum of 5 percent of the outstanding principal
balance of all ABS interests.
    The agencies received many comments with respect to the Operating
Advisor's ability to remove the special servicer. Commenters generally
supported retaining the Operating Advisor's ability to recommend the
replacement of the special servicer, especially when the special
servicer had not acted in the best interest of all investors. However,
commenters differed on their views of the appropriate voting quorum
requirements.
    One commenter believed that the special servicer removal provisions
should mirror current CMBS transactions, which typically provide that
(i) the Operating Advisor may recommend to remove the special servicer
only after the most senior tranche of the B-piece has been reduced to
less than 25 percent of its initial principal balance, and (ii) removal
can only take place if more than 50 percent of the aggregate
outstanding principal balance of all classes affirmatively vote for
such removal.
    One commenter recommended providing Operating Advisors with a safe
harbor from liability, except in the case of gross negligence, fraud or
willful misconduct, for recommending replacement of the special
servicer. This commenter also recommended requiring the maintenance of
an investor registry, so that investors can be easily contacted if the
Operating Advisor makes a replacement recommendation that requires a
vote.
    Commenters submitted a wide range of comments on the quorum
requirement for removal of the special servicer. Two commenters
asserted that the quorum requirement would be more appropriately
specified by the underlying transaction documents, rather than in the
final rule, in order to accommodate any future changes in the market.
One commenter favored a requirement that in order to reach a quorum, no
fewer than three unaffiliated investors participate in the vote.
Another commenter recommended two options: (i) Increasing the quorum to
15 percent and requiring the participation of three unaffiliated
investors, or (ii) increasing the quorum to 20 percent with no minimum
unaffiliated investor-voting requirement. This commenter opposed a more
substantive increase to the quorum requirement, asserting that it would
be nearly impossible for interest holders to remove the special
servicer. Both of these commenters recommended adding a provision that
specified that the third-party purchaser may not unilaterally re-
appoint the original special servicer or its affiliate following a
removal and replacement process.
    One commenter highlighted a split in views among those parties who
contributed to its comments. Some favored increasing the voting quorum
requirement to two-thirds of all investors eligible to vote (before the
eligible horizontal residual interest has been reduced below 25
percent), and to one-third of all investors eligible to vote (after the
eligible horizontal residual interest has been reduced below 25
percent). Others supported a quorum requirement of at least 20 percent,
with at least three independent investors participating in the vote.
    After considering the comments received, the agencies have decided
to permit CMBS transaction parties to specify in the underlying
transaction documents the quorum required for a vote to remove the
special servicer. However, the transaction documents may not specify a
quorum of more than the holders of 20 percent of the outstanding
principal balance of all ABS interests in the issuing entity, with such
quorum including at least three ABS interest holders that are not
affiliated with each other. The agencies believe that this balanced
approach provides CMBS transaction parties with the flexibility to
establish the quorum required to remove the special servicer in the
applicable transaction documents, as is commonly done, while addressing
commenter concerns that a quorum requirement of more than 20 percent
may make is difficult for interest holders to remove the special
servicer.
    The agencies do not believe that it would be appropriate to include
a safe harbor for the Operating Advisor or a requirement that there be
an investor

registry requirement in the final rule since the agencies believe the
Operating Advisor's indemnification rights and the trustee's investor
communication provisions should be set forth in, and governed by, the
transaction documents.
    Finally, the agencies agree with comments requesting that the
third-party purchaser should not have the unilateral ability to
reappoint the original special servicer or its affiliate. The rule
requires the replacement of the special servicer following the
recommendation of the Operating Advisor and an affirmative vote of the
requisite number of ABS holders. The agencies believe that the
independence of the Operating Advisor as otherwise required by the
final rule sufficiently ensures that the recommendation of the
replacement special servicer will be made independent of third-party
purchasers, and that the voting and enhanced quorum requirements being
adopted today provide additional assurance in this regard. The quorum
and voting requirements effectively require that the third-party
purchasers not have the unilateral ability to re-appoint the original
special servicer or its affiliate.
d. Disclosures
    The reproposal would have required the sponsor to provide, or cause
to be provided, to potential purchasers and federal regulators certain
information concerning the third-party purchasers and other information
concerning the CMBS transaction, such as each third-party purchaser's
name and form of organization, experience investing in CMBS, and any
other information about the third-party purchaser deemed material to
investors in light of the particular securitization transaction.
    Additionally, it would have required a sponsor to disclose to
investors the amount of the eligible horizontal residual interest that
each third-party purchaser will retain (or has retained) in the
transaction (expressed as a percentage of the fair value of all ABS
interests issued in the securitization transaction and the dollar
amount of the fair value of such ABS interests); the purchase price
paid for such interest; the material terms of such interest; the amount
of the interest that the sponsor would have been required to retain if
the sponsor had retained an interest in the transaction; the material
assumptions and methodology used in determining the aggregate amount of
ABS interests of the issuing entity; the representations and warranties
concerning the securitized assets; a schedule of exceptions to these
representations and warranties; and information about the factors that
were used to make the determination that such exceptions should be
included in the pool even though they did not meet the representations
and warranties.
    In addition, the reproposal would have required that certain
material information with respect to the Operating Advisor be disclosed
in the applicable transaction documents, including, without limitation,
the name and form of organization of the Operating Advisor, the
qualification standards applicable to the Operating Advisor, how the
Operating Advisor satisfies these qualification standards, and the
terms of the Operating Advisor's compensation.
    The reproposal also would have required the sponsor to maintain and
adhere to policies and procedures to actively monitor the third-party
purchaser's compliance with the CMBS option, and to notify investors if
the sponsor learns that a third-party purchaser no longer complies with
such requirements.
    The agencies received a few comments regarding the disclosure
requirements under the CMBS risk retention option. Two commenters
opposed the disclosure of the purchase price paid by third-party
purchasers for the eligible horizontal residual interest. These
commenters pointed out that such information has traditionally been
viewed by all market participants as highly confidential and
proprietary, and that the disclosure requirement would deter B-piece
buyers from retaining risk. One of these commenters suggested that the
issuer or third-party purchaser could instead provide the purchase
price to the appropriate regulatory agency on a confidential basis, or
disclose only that it has fulfilled the risk retention requirement.
    The investment grade investor members of an industry association
requested that two additional disclosures be required with respect to
the Operating Advisor: (1) Any material conflict of interest or
potential conflict of interest of the Operating Advisor; and (2)
additional information regarding the formula for calculating the
Operating Advisor's compensation.
    The agencies are adopting the disclosure requirements for the CMBS
option, with some modifications in response to comments. As stated in
the reproposal, the agencies believe that the importance of the
disclosures to investors with respect to third-party purchasers
outweighs potential issues associated with the sponsor or third-party
purchaser making such information available. The agencies believe that
the disclosure requirements with respect to the identity and experience
of third-party purchasers in the CMBS transaction that are being
adopted today will alert investors in the transaction as to the
experience of third-party purchasers and other material information
necessary to make an informed investment decision. In this regard, the
rule retains the requirement that the price at which the B-piece is
sold be disclosed. Disclosure of the price of the B-piece is consistent
with other fair value disclosures. The agencies believe these
disclosures are necessary to allow other investors to assess the risk
being retained, and that the ability of investors to assess the value
of the retained risk outweighs the preferences of some B-piece buyers
to keep the price confidential.
    With respect to requests that the rule require the disclosure of
the method of calculating the Operating Advisor's compensation, the
agencies believe the requirement to disclose the terms of the Operating
Advisor's compensation already encompasses disclosure as to how such
compensation is calculated. Therefore, the agencies believe that no
change to the reproposed rule is required in this respect.
    With respect to the request that the rule require disclosure of any
material conflicts of interest involving the Operating Advisor, the
agencies agree that disclosure of any material or potential material
conflicts of interest of the Operating Advisor with respect to the
securitization transaction should be disclosed. Such disclosure will
allow transaction parties to better ensure that the Operating Advisor
will act independently. Accordingly, the agencies have added this
disclosure requirement to the final rule.
e. Transfer of B-Piece
    As discussed above, consistent with the reproposal, the rule allows
a sponsor of a CMBS transaction to meet its risk retention requirement
where a third-party purchaser acquires the B-piece, and all other
criteria and conditions for this CMBS option as described are met.
    The reproposal would have permitted, as an exception to the
transfer and hedging restrictions in that reproposed rule and section
15G of the Exchange Act, the transfer of the retained interest by any
initial third-party purchaser to another third-party purchaser at any
time after five years after the date of the closing of the
securitization transaction, provided that the transferee satisfies each
of the conditions applicable to the initial third-party purchaser under
the CMBS option in connection with such purchase. Conditions that an
initial third-party purchaser was required to

satisfy at or prior to the closing of the securitization transaction
would be required to be satisfied by the transferee at or prior to the
time of the transfer to the transferee. The reproposed rule also would
have permitted transfers by any such subsequent third-party purchaser
to any other purchaser satisfying the criteria applicable to initial
third-party purchasers. In addition, if the sponsor retained the B-
piece at closing, the reproposed rule would have permitted the sponsor
to transfer such interest to a purchaser satisfying the criteria
applicable to subsequent third-party purchasers after a five-year
period following the closing of the securitization transaction has
expired. The reproposed rule also would have required that any
transferring third-party purchaser provide the sponsor with complete
identifying information as to the transferee third-party purchaser.
    Comments on the proposed rule included objections that the five-
year holding period was too long and that a sponsor that retained the
B-piece at closing should not be required to hold the position for five
years before transfer to a qualifying third-party purchaser. Concern
was also expressed that imposing the five-year holding period, in
tandem with the limitation that there can be no more than two third
parties sharing the B-piece on a pari passu basis only, could decrease
the liquidity of the B-piece and, therefore, disrupt the CMBS market.
    Many commenters stated that the five-year transfer restriction
period should be reduced, because it would significantly impair the
liquidity of CMBS and render the B-piece interests much less desirable.
However, these commenters differed on their suggested alternative
approaches. One commenter recommended a tiered approach by requiring a
third-party purchaser to retain its interest for one year, allowing
such third-party purchaser to transfer its interest to a ``qualified
transferee'' who meets the same criteria as the third-party purchaser
for the following four years, and having no transfer or hedging
restrictions after that time. Another commenter asserted that there
should be no minimum holding requirement as long as the third-party
purchaser transfers the interest to a subsequent third-party purchaser
meeting the same qualification requirements as the initial third-party
purchaser. Another commenter recommended reducing the transfer
restriction period to three years because performance and other pool
data are readily available from multiple sources, and investors would
have the opportunity to determine loan performance and to identify
loans that are not performing as expected.
    One commenter suggested reducing the 5 percent risk retention
requirement if a five-year holding period is imposed, or allowing the
third-party purchaser to transfer to a qualified transferee who meets
the same criteria as the third-party purchaser, a qualified
institutional buyer under Rule 144A under the Securities Act, or an
institutional accredited investor under Rule 501 under the Securities
Act. Another commenter recommended allowing sponsors to transfer the
retained interest to a qualified third-party purchaser within 90 days
after the date of closing of the transaction. One commenter also
pointed out the five-year period applicable to holders of eligible
horizontal residual interests and contained in section 7 of the
reproposal is inconsistent with, and suggested that it be harmonized
with, the general transfer restriction period that is contained in
section 12 of the reproposal \136\ and that it should apply to vertical
risk retention in a CMBS transaction, and that both holding periods
should be reduced to three years. Several commenters suggested that, if
a sponsor holds the B-piece, it should not be subject to the five-year
holding period or should be allowed to transfer the B-piece within some
short period after the transaction closing. One commenter requested
that the final rule state that a sponsor's risk retention obligation be
terminated with respect to a CMBS transaction once all of the loans
have been defeased.
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    \136\ Section 12(f)(1) of the reproposal sets forth the hedging
and transfer restriction period that would be generally applicable
to risk retention, which is the latest of (i) the date on which the
total unpaid principal balance of the securitized assets that
collateralize the securitization transaction has been reduced to 33
percent of the total unpaid principal balance of the securitized
assets as of the closing of the securitization transaction; (ii) the
date on which the total unpaid principal obligations under the ABS
interests issued in the securitization transaction has been reduced
to 33 percent of the total unpaid principal obligations of the ABS
interests at closing of the securitization transaction; or (iii) two
years after the date of the closing of the securitization
transaction.
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    The final rule, as it relates to the rights to transfer the B-
piece, is substantially the same as the reproposal, in which the
agencies attempted to balance two overriding goals: (1) Not disrupting
the existing CMBS third-party purchaser structure and (2) ensuring that
risk retention promotes good underwriting. In formulating the