held by the sponsor under the rule. See Part III.D.2 of this
Supplementary Information.
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    In response to comments, the agencies are also proposing to allow
the seller's interest to be retained in multiple interests, rather than
a single interest. This approach is intended to address legacy trust
structures and would impose requirements on the division of the
seller's interest in such structures. In these structures, a sponsor
that controls an older revolving master trust that no longer issues ABS
to investors keeps the trust in place, with the credit lines that were
designated to the trust over the years still in operation and
generating new receivables for the legacy trust. The legacy trust
issues certificates collateralized by these receivables to a newer
issuing trust, which typically also has credit lines designated to the
trust, providing the issuing trust with its own pool of receivables.
The issuing trust issues investors' ABS interests backed by receivables
held directly by the issuing trust and also indirectly in the legacy
trust (as evidenced by the collateral certificates held by the issuing
trust).
    The proposal would permit the seller's interest for the legacy
trust's receivables to be held separately, but still be considered
eligible risk retention, by the sponsor at the issuing trust level
because it functions as though it were part of the seller's interest
associated with all the securitized assets held by the issuing trust
(i.e., its own receivables and the collateral certificates). However,
the portion of the seller's interest held through the legacy trust must
be proportional to the percentage of assets the collateral certificates
comprise of the issuing trust's assets. If the sponsor held more, and
the credit quality of the receivables feeding the issuing trust turned
out to be inferior to the credit lines feeding the legacy trust, the
sponsor would be able to avoid the full effect of those payment
defaults at the issuing trust level.
    The proposal would require the sponsor to retain a minimum seller's
interest in the receivables or loans held by the trust representing at
least 5 percent of the total unpaid principal balance of the investors'
ABS interests issued by the trust and outstanding.\55\

The sponsor would be required to meet this 5 percent test at the
closing of each issuance of securities by the master trust, and at
every seller's interest measurement date specified under the
securitization transaction documents, but no less than monthly. The
sponsor would remain subject to its obligation to meet the seller's
interest requirement on these measurement dates until the trust no
longer has ABS interests outstanding to any third party.
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    \55\ The agencies originally proposed 5 percent of the total
receivables and loans in the trust, but are persuaded by commenters
that this is disproportionate to the base risk retention requirement
in some cases. Revolving master trusts may hold receivables far in
excess of the amount of investors' ABS interests outstanding, for
example, when the sponsor has other funding sources at more
favorable costs than those available from investors in the master
trust's ABS.
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    The agencies are proposing to include the principal balance instead
of the fair value of outstanding ABS interests as the basis for the
calculation of the minimum seller's interest requirement. The agencies
currently consider this approach to be sufficiently conservative,
because sponsors of revolving master trusts do not include senior
interest-only bonds or premium bonds in their ABS structures. If this
were not the case, it would be more appropriate to require the minimum
seller's interest requirement to be included based on the fair value
basis of outstanding ABS interests. However, the fair value
determination would create additional complexity and costs, especially
given the frequency of the measurements required. In consideration of
this, the agencies would expect to include in any final rule a
prohibition against the seller's interest approach for any revolving
trust that includes senior interest-only bonds or premium bonds in the
ABS interest it issues to investors.
Request for Comment
    23(a). Is such prohibition appropriate? 23(b). If not, what is a
better approach, and why? Commenters proposing an alternative approach
should provide specific information about which revolving trusts in the
marketplace currently include such interests in their capital
structures, and the manner in which they could comply with a fair value
approach.
    24. In revising the definition of ``seller's interest'' the
agencies have modified the rule text to exclude ``assets that
collateralize other specified ABS interests issued by the issuing
entity'' as well as rule text excluding ``servicing assets,'' which is
a defined term under the proposal. Are such exclusions redundant, or
would they exclude rights to assets or cash flow that are commonly
included as seller's interest?
c. Combining Seller's Interest With Horizontal Risk Retention at the
Series Level
    The original proposal for revolving asset master trusts focused
primarily on the seller's interest form of risk retention. Commenters
requested that the agencies modify the original proposal to recognize
as risk retention the various forms of subordinated exposures sponsors
hold in master trust securitization transactions. The proposal would
permit sponsors to combine the seller's interest with either of two
horizontal types of risk retention held at the series level, one of
which meets the same criteria as the standard risk retention
requirement, and the other of which is eligible under the special
conditions discussed below.
    To be eligible to combine the seller's interest with horizontal
risk retained at the series level, the sponsor would be required to
maintain a specified amount of horizontal risk retention in every
series issued by the trust. If the sponsor retained these horizontal
interests in every series across the trust, the sponsor would be
permitted to reduce its seller's interest by a corresponding
percentage. For example, if the sponsor held 2 percent, on a fair value
basis, of all the securities issued in each series in either of the two
forms of permitted horizontal interests, the sponsor's seller's
interest requirement would be reduced to 3 percent of the unpaid
principal balance of all investor interests outstanding, instead of 5
percent. However, if the sponsor ever subsequently issued a series (or
additional classes or tranches out of an existing series of a delinked
structure) that did not meet this 2 percent minimum horizontal interest
requirement, the sponsor would be required to increase its minimum
seller's interest up to 5 percent for the entire trust (i.e., 5 percent
of the total unpaid principal balance of all the investors' ABS
interest outstanding in every series, not just the series for which the
sponsor decided not to hold the minimum 2 percent horizontal interest).
    The agencies propose to permit the sponsor to hold horizontal
interests at the series level in the form of a certificated or
uncertificated ABS interest. The interest in the series would need to
be issued in a form meeting the definition of an eligible horizontal
residual interest or a specialized horizontal form, available only to
revolving master trusts. The residual interest held by sponsors of
revolving trusts at the series level typically does not meet the
requirement of the proposed definition of eligible horizontal residual
interest which would limit the rate of payments to the sponsor to the
rate of payments made to the holders of senior ABS interests.
    Many revolving asset master trusts are collateralized with
receivables that pay relatively high rates of interest, such as credit
and charge card receivables or floor plan financings. The ABS interests
sold to investors are structured so there is an initial revolving
period, under which the series' share of borrower repayments of
principal on the receivables are used by the trust to purchase new,
replacement receivables. Subsequently, during the ``controlled
amortization'' phase, principal payments are accumulated for the
purpose of amortizing and paying off the securities on an expected
maturity date. Under the terms of the transaction, principal payments
are handled in a separate waterfall from interest payments. The series'
share of interest payments received by the trust each period (typically
a month) is used to pay trust expenses and the interest due to holders
of ABS interests.\56\ Because the series' share of cash flow from
interest payments is generally in excess of amounts needed to pay
principal and interest, it is used to cover the series' share of losses
on receivables that were charged-off during the period and a surplus
typically still remains. This residual interest is returned to the
sponsor (though it may, under the terms of the transaction, first be
made available to other series in the trust to cover shortfalls in
interest due and receivable losses during the period that were not
covered by other series' shares of the trust's proceeds).
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    \56\ In some trusts the expenses are senior in priority, but
this varies.
---------------------------------------------------------------------------

    This subordinated claim to residual interest by the sponsor is a
form of horizontal risk retention; the residual interest is payable to
the sponsor only to the extent it exceeds the amount needed to cover
principal losses on more senior securities in the series. The agencies
therefore believe it would be appropriate to recognize this form of
risk retention as an acceptable method of meeting a sponsor's risk
retention requirement for revolving master trusts. Accordingly, the
agencies are proposing to recognize the fair value of the sponsor's
claim to this residual interest as a permissible form of horizontal
risk retention for revolving master trust structures, for which the
sponsor could take credit against the seller's interest requirement in
the manner described above. Under the proposal, the sponsor would
receive credit for the residual interest whether it is certificated or

uncertificated, subject to the following requirements:
     Each series distinguishes between the series' share of
collection of interest, fees, and principal from the securitized assets
(separate waterfalls);
     The sponsor's claim to any of the series' share of
interest and fee proceeds each period pursuant to the horizontal
residual interest is subordinated to all interest due to all ABS
interests in the series for that period, and further reduced by the
series' share of defaults on principal of the trust's securitized
assets for that period (that is, charged-off receivables);
     The horizontal residual interest, to the extent it has
claims to any part of the series' share of principal proceeds, has the
most subordinated claim; and
     The horizontal residual interest is only eligible for
recognition as risk retention so long as the trust is a revolving
trust.
    Some commenters on the original proposal also requested that the
sponsor be permitted to combine the seller's interest with other
vertical forms of risk retention at the series level. The agencies are
not aware of any current practice of vertical holding at the series
level. The agencies would consider including, as part of the seller's
interest form of risk retention, vertical forms of risk retention
(subject to an approach similar to the one described in this proposal
for horizontal interests) if it was, in fact, market practice to hold
vertical interests in every series of ABS issued by revolving master
trusts. The agencies have considered this possibility but, especially
in light of the lack of market practice, are not proposing to allow
sponsors to meet their risk retention requirement in this manner.
    In addition, the sponsor would need to make the calculations and
disclosures on every measurement date required under the rule for the
seller's interest and horizontal interest, as applicable, under the
proposed rule. Furthermore, the sponsor would be required to retain the
disclosures in its records and make them available to the Commission or
supervising Federal banking agency (as applicable) until three years
after all ABS interests issued in a series are no longer outstanding.
Request for Comment
    25(a). Is there a market practice of retaining vertical forms of
risk retention at the series level? 25(b). What advantages and
disadvantages would there be in allowing sponsors to meet their risk
retention requirement through a combination of seller's interest and
vertical holdings at the series level?
    26(a). Are the disclosure and recordkeeping requirements in the
proposal appropriate? 26(b). Why or why not? 26(c). Is there a
different time frame that would be more appropriate and if so, what
would it be?
d. Early Amortization
    The original proposal did not address the impact of early
amortization on the seller's interest risk retention option. As noted
above, revolving master trusts issue ABS interests with a revolving
period, during which each series' share of principal collections on the
trust's receivables are used to purchase replacement receivables from
the sponsor. The terms of the revolving trust securitization describe
various circumstances under which all series will stop revolving and
principal collections will be used to amortize investors' ABS interests
as quickly as possible. These terms are designed to protect investors
from declines in the credit quality of the trust's asset pool. Early
amortization is exceedingly rare, but when it occurs, the seller's
interest may fall below its minimum maintenance level, especially if
the terms of the securitization subordinate the seller's interest to
investor interests either through express subordination or through a
more beneficial reallocation to other investors of collections that
would otherwise have been allocated to the seller's interest.
Accordingly, the agencies are revising the proposed rule to address the
circumstances under which a sponsor would fall out of compliance with
risk retention requirements after such a reduction in the seller's
interest in the early amortization context.
    Under the proposed rule, a sponsor that suffers a decline in its
seller's interest during an early amortization period caused by an
unsecured adverse event would not violate the rule's risk retention
requirements as a result of such decline, provided that each of the
following four requirements were met:
     The sponsor was in full compliance with the risk retention
requirements on all measurement dates before the early amortization
trigger occurred;
     The terms of the seller's interest continue to make it
pari passu or subordinate to each series of investor ABS with respect
to allocation of losses;
     The master trust issues no additional ABS interests after
early amortization is initiated to any person not wholly-owned by the
sponsor; \57\ and
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    \57\ In other words, the sponsor is not prohibited from repaying
all outstanding investors' ABS interests and maintaining the trust
as a legacy trust, which could be used at a later date to issue
collateral certificates to a new issuing trust.
---------------------------------------------------------------------------

     To the extent that the sponsor is relying on any
horizontal interests of the type described in the preceding subsection
to reduce the percentage of its required seller's interest, those
interests continue to absorb losses as described above.
    The ability of a sponsor to avoid a violation of the risk retention
in this way is only available to sponsors of master trusts comprised of
revolving assets. If securitizers of ordinary non-revolving assets were
permitted to avail themselves of the seller's interest and this early
amortization treatment, they could create master trust transactions
that revolved only briefly, with ``easy'' early amortization triggers,
and thereby circumvent the cash distribution restrictions otherwise
applicable to risk retention interests under section 4 of the proposed
rule.
    As an ancillary provision to this proposed early amortization
treatment, the agencies are proposing to recognize so-called excess
funding accounts as a supplement to the seller's interest. An excess
funding account is a segregated account in the revolving master trust,
to which certain collections on the securitized assets that would
otherwise be payable to the holder of the seller's interest are
diverted if the amount of the seller's interest falls below the minimum
specified in the deal documentation.\58\ If an early amortization event
for the trust is triggered, the cash in the excess funding account is
distributed to investors' ABS interests in the same manner as
collections on the securitized assets. Accordingly, funding of an
excess funding account would typically be temporary, eventually
resolved either by the sponsor adding new securitized assets to restore
the trust to its minimum seller's interest amount (and the funds
trapped in the excess funding account subsequently would be paid to the
sponsor), or by the subsequent early amortization of the trust for
failure to attain the minimum seller's interest over multiple
measurement dates.
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    \58\ Ordinarily, if the seller's interest would not meet the
minimum amount required under a formula contained in the deal
documentation, the sponsor is required to designate additional
eligible credit plans to the transaction and transfer the
receivables from those credit plans into the trust to restore the
securitized assets in the trust to the specified ratio. If the
sponsor cannot do this for some reason, the excess funding account
activates to trap certain funds that would otherwise be paid to the
sponsor out of the trust.
---------------------------------------------------------------------------

    As a general matter, the agencies would not propose to confer
eligible risk retention status on an account that is funded by cash
flow from securitized

assets. However, for the other forms of risk retention proposed by the
agencies, the amount of retention is measured and set at the inception
of the transaction. Due to the revolving nature of the master trusts,
periodic measurement of risk retention at the trust level is necessary
for an effective seller's interest option.
    The agencies are therefore proposing the above-described early
amortization treatment for trusts that enter early amortization,
analogous to the measurement at inception under the other approaches.
If a revolving trust breaches its minimum seller's interest, the excess
funding account (under the conditions described in the proposed rule)
functions as an interim equivalent to the seller's interest for a brief
period and gives the sponsor an opportunity to restore securitized
asset levels to normal levels.\59\ Under the proposed rule, the amount
of the seller's interest may be reduced on a dollar-for-dollar basis by
the amount of cash retained in an excess funding account triggered by
the trust's failure to meet the minimum seller's interest, if the
account is pari passu with (or subordinate to) each series of the
investors' ABS interests and funds in the account are payable to
investors in the same manner as collections on the securitized assets.
---------------------------------------------------------------------------

    \59\ In addition, the only excess funding account that is
eligible for consideration under the proposed rule is one that is
triggered from the trust's failure to meet its collateral tests in a
given period; this is materially different than a violation of, for
example, a base rate trigger, which signals unexpected problems with
the credit quality of the securitized assets in the pool.
---------------------------------------------------------------------------

Request for Comment
    27(a). Are there changes the agencies should consider making to the
proposed early amortization and excess funding account provisions in
order to align them better with market practice while still serving the
agencies' stated purpose of these sections? 27(b). If so, what changes
should the agencies consider?
e. Compliance by the Effective Date
    Commenters requested that they only be required to maintain a 5
percent seller's interest for the amount of the investors' ABS
interests issued after the effective date of the regulations. As a
general principle, the agencies also do not seek to apply risk
retention to ABS issued before the effective date of the regulations.
On the other hand, the agencies believe that the treatment requested by
commenters is not appropriate, because the essence of the seller's
interest form of risk retention is that it is a pro rata, pari passu
exposure to the entire asset pool. Accordingly, at present, the
agencies propose to require sponsors relying on the seller's interest
approach to comply with the rule with respect to the entirety of the
unpaid principal balance of the trust's outstanding investors' ABS
interests after the effective date of the rule, without regard to
whether the investors' ABS interests were issued before or after the
rule's effective date.
    If the terms of the agreements under which an existing master trust
securitization operates do not require the sponsor to hold a minimum
seller's interest to the exact terms of the proposed rule, then the
sponsor could find revising the terms of outstanding series to conform
to the rule's exact requirements to be difficult or impracticable.
Therefore, the agencies propose to recognize a sponsor's compliance
with the risk retention requirements based on the sponsor's actual
conduct. If a sponsor has the ability under the terms of the master
trust's documentation to retain a level of seller's interest (adjusted
by qualifying horizontal interests at the series level, if any), and
does not retain a level of seller's interest as required, the agencies
would consider this to be failure of compliance with the proposed
rule's requirements.
Request for Comment
    28(a). The agencies request comment as to how long existing
revolving master trusts would need to come into compliance with the
proposed risk retention rule under the conditions described above. Do
existing master trust agreements effectively prohibit compliance?
28(b). Why or why not? 28(c). From an investor standpoint, what are the
implications of the treatment requested by sponsor commenters, under
which sponsors would only hold a seller's interest with respect to
post-effective date issuances of ABS interests out of the trust?
    29(a). Should the agencies approve exceptions on a case by case
basis during the post-adoption implementation period, subject to case-
specific conditions appropriate to each trust? 29(b). How many trusts
would need relief and under what circumstances should such relief be
granted?
    30. The agencies seek to formulate the seller's interest form of
risk retention in a fashion that provides meaningful risk retention on
par with the base forms of risk retention under the rule, and at the
same time accommodates prudent features of existing market structures.
The agencies request comment whether the proposal accomplishes both
these goals and, if not, what additional changes the agencies should
consider to that end.
3. Representative Sample
a. Overview of Original Proposal and Public Comment
    The original proposal would have provided that a sponsor could
satisfy its risk retention requirement for a securitization transaction
by retaining ownership of a randomly selected representative sample of
assets, equal to at least 5 percent of the unpaid principal balance of
all pool assets initially identified for securitizing that is
equivalent in all material respects to the securitized 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 and
containing no assets other than securitized assets or assets comprising
the representative sample. The proposed rule would have required a
sponsor to select a sample of assets from the designated pool using a
random selection process that would not take into account any
characteristics other than unpaid principal balance and to then assess
that representative sample to ensure that, for each material
characteristic of the assets in the pool, the mean of any quantitative
characteristic and the proportion of any categorical characteristic is
within a 95 percent two-tailed confidence interval of the mean or
proportion of the same characteristics of the assets in the designated
pool. If the representative sample did not satisfy this requirement,
the proposal stipulated that a sponsor repeat the random selection
process until it selected a qualifying sample or opt to use another
risk retention form.
    The original proposal set forth a variety of safeguards meant to
ensure that a sponsor using the representative sample option created
the representative pool in conformance with the requirements described
above. These included a requirement to obtain a report regarding
agreed-upon procedures from an independent public accounting firm
describing whether the sponsor has the required procedures in place for
selecting the assets to be retained, maintains documentation that
clearly identifies the assets in the representative sample, and ensures
that the retained assets are not included in the designated pool of any
other

securitizations. The proposed rule also would have required, until all
of the securities issued in the related securitization had been paid in
full or the related issuing entity had been dissolved, that servicing
of the assets in the representative sample and in the securitization
pool be performed by the same entity under the same contractual
standards and that the individuals responsible for this servicing must
not be able to identify an asset as being part of the representative
sample or the securitization pool. In addition, the sponsor would have
been required to make certain specified disclosures.
    While some commenters were supportive of the proposal's inclusion
of the representative sample option, many commenters were critical of
the option. A number of commenters stated 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. Other commenters recommended that the option
be limited for use with automobile loans and other loans that are not
identified at origination for sale through securitization. A number of
commenters expressed concerns regarding the required size of the
designated pool, including that the pool size was too large to be
practical, that it would favor larger lenders, and that it would not
work well with larger loans, such as jumbo residential mortgage-backed
securities and commercial mortgages.
    Commenters were generally critical of the proposed requirement for
a procedures report, contending that the report would impose costs upon
a sponsor without a commensurate benefit. Additionally, commenters
representing accounting firms and professionals questioned the value of
the procedures report and stated that if not provided to investors in
the securitized transaction, the report could run afoul of certain
rules governing the professional standards of accountants. Commenters
also recommended that the blind servicing requirement of the option be
modified to allow for certain activities, such as loss mitigation,
assignment of loans to special servicers, disclosure of loan level
data, and remittance of funds to appropriate parties.
b. Proposed Treatment
    The agencies have considered the comments on the representative
sample option in the original proposal and are concerned that, based on
observations by commenters, the representative sample option would be
difficult to implement and may result in the costs of its utilization
outweighing its benefits. Therefore, the agencies are not proposing to
include a representative sample option in the re-proposed rule. The
agencies believe that the other proposed risk retention options would
be better able to achieve the purposes of section 15G, including the
standard risk retention option, while reducing the potential to
negatively affect the availability and costs of credit to consumers and
businesses.
Request for Comment
    31(a). Should the agencies include a representative sample option
as a form of risk retention? 31(b). If so, how should such an option be
constructed, consistent with establishing a statistically
representative sample? 31(c). What benefits would including such an
option provide to the securitization market, investors, borrowers, or
others?
4. Asset-Backed Commercial Paper Conduits
a. Overview of the Original Proposal and Public Comments
    The original proposal included a risk retention option specifically
designed for asset-backed commercial paper (ABCP) structures. As
explained in the original proposal, ABCP is a type of liability that is
typically issued 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 conduit is collateralized by a pool
of assets, which may change over the life of the entity. Depending on
the type of ABCP program being conducted, the securitized assets
collateralizing the ABS interests that support the ABCP may consist of
a wide range of assets including automobile loans, commercial loans,
trade receivables, credit card receivables, student loans, and other
loans. 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.\60\ The original proposal was designed to
take into account the special structures through which some conduits
typically issue ABCP, as well as the manner in which participants in
the securitization chain of these conduits typically retain exposure to
the credit risk of the underlying assets.
---------------------------------------------------------------------------

    \60\ See Original Proposal at Sec.  ----.9.
---------------------------------------------------------------------------

    Under the original proposal, this risk retention option would have
been available only for short-term ABCP collateralized by asset-backed
securities that were issued or initially sold exclusively to ABCP
conduits and supported by a liquidity facility that provides 100
percent liquidity coverage from a banking institution. The option would
not have been available to ABCP conduits that lack 100 percent
liquidity coverage or ABCP conduits that operate purchased securities
or arbitrage programs \61\ in the secondary market.
---------------------------------------------------------------------------

    \61\ Structured investment vehicles (SIVs) and securities
arbitrage ABCP programs both purchase securities (rather than
receivables and loans) from originators. SIVs typically lack
liquidity facilities covering all of these liabilities issued by the
SIV, while securities arbitrage ABCP programs typically have such
liquidity coverage, though terms are more limited than those of the
ABCP conduits eligible for special treatment pursuant to the
proposed rule.
---------------------------------------------------------------------------

    In a typical ABCP conduit, the sponsor of the ABCP conduit 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 established by
the originator-seller. The credit risk of the receivables transferred
to the intermediate SPV then typically is separated into two classes--a
senior ABS interest that is purchased by the ABCP conduit and a
residual ABS interest that absorbs first losses on the 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 underlying
receivables.
    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 original proposal included several conditions designed to
ensure that this option would be available only to the type of ABCP
conduits that do not purchase securities in the secondary market, as
described above. For example, this option would have been available
only with respect to ABCP issued by an ``eligible ABCP conduit,'' as
defined by the original proposal. The original proposal defined an
eligible ABCP conduit as an issuing entity that issues ABCP and that
meets each of the following criteria.\62\ First, the issuing entity
would have been required to have been bankruptcy remote or otherwise
isolated for insolvency purposes from the sponsor and any intermediate
SPV. Second, the ABS issued by an intermediate SPV to the issuing
entity would have been required to be collateralized solely by assets
originated by a single originator-seller.\63\ Third, all the interests
issued by an intermediate SPV would have been required to be
transferred to one or more ABCP conduits or retained by the originator-
seller. Fourth, a regulated liquidity provider would have been required
to 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 similar arrangement) to
all of the ABCP issued by the issuing entity by lending to, or
purchasing assets or ABCP from, the issuing entity in the event that
funds were required to repay maturing ABCP issued by the issuing
entity.\64\
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    \62\ See Original Proposal at Sec.  ----.2 (definition of
``eligible ABCP conduit'').
    \63\ Under the original proposal, an originator-seller would
mean an entity that creates financial assets through one or more
extensions of credit or otherwise and sells those financial assets
(and no other assets) to an intermediate SPV, which in turn sells
interests collateralized by those assets to one or more ABCP
conduits. The original proposal defined an intermediate SPV as a
special purpose vehicle that is bankruptcy remote or otherwise
isolated for insolvency purposes that purchases assets from an
originator-seller and that issues interests collateralized by such
assets to one or more ABCP conduits. See Original Proposal at Sec.
----.2 (definitions of ``originator-seller'' and ``intermediate
SPV'').
    \64\ The original proposal defined a regulated liquidity
provider as a depository institution (as defined in section 3 of the
Federal Deposit Insurance Act (12 U.S.C. 1813)); a bank holding
company (as defined in 12 U.S.C. 1841) or a subsidiary thereof; a
savings and loan holding company (as defined in 12 U.S.C. 1467a)
provided all or substantially all of the holding company's
activities are permissible for a financial holding company under 12
U.S.C. 1843(k) or a subsidiary thereof; or a foreign bank (or a
subsidiary thereof) whose home country supervisor (as defined in
Sec.  211.21 of the Federal Reserve Board's Regulation K (12 CFR
211.21)) has adopted capital standards consistent with the Capital
Accord of the Basel Committee on Banking Supervision, as amended,
provided the foreign bank is subject to such standards. See http://www.bis.org/bcbs/index.htm for more information about the Basel
Capital Accord.
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    Under the original proposal, the sponsor of an eligible ABCP
conduit would have been permitted to satisfy its base risk retention
obligations if each originator-seller that transferred assets to
collateralize the ABS interests that supported the ABCP issued by the
conduit retained the same amount and type of credit risk as would be
required under the horizontal risk retention option under the original
proposal as if the originator-seller was the sponsor of the
intermediate SPV. Specifically, the original proposal provided that a
sponsor of an ABCP securitization transaction could satisfy its base
risk retention requirement with respect to the issuance of ABCP by an
eligible ABCP conduit if each originator-seller retained an eligible
horizontal residual interest in each intermediate SPV established by or
on behalf of that originator-seller for purposes of issuing interests
to the eligible ABCP conduit. The eligible horizontal residual interest
retained by the originator-seller would have been required to equal at
least 5 percent of the par value of all interests issued by the
intermediate SPV.
    Accordingly, each originator-seller would have been required to
retain credit exposure to the receivables sold by that originator-
seller to support issuance of the ABCP. The originator-seller also
would have been prohibited from selling, transferring, or hedging the
eligible horizontal residual interest that it is required to retain.
This option was designed to accommodate the special structure and
features of these types of ABCP programs.
    The original proposal also would have imposed certain obligations
directly on the sponsor in recognition of the key role the sponsor
plays in organizing and operating an eligible ABCP conduit. First, the
original proposal provided that the sponsor of an eligible ABCP conduit
that issues ABCP in reliance on the option would have been responsible
for compliance with the requirements of this risk retention option.
Second, the sponsor would have been required to maintain policies and
procedures to monitor the originator-sellers' compliance with the
requirements of the proposal.
    The sponsor also would have been required to provide, or cause to
be provided, to potential purchasers a reasonable period of time prior
to the sale of any ABCP from the conduit, and to the Commission and its
appropriate Federal banking agency, if any, upon request, the name and
form of organization of each originator-seller that retained an
interest in the securitization transaction pursuant to section 9 of the
original proposal (including a description of the form, amount, and
nature of such interest), and of the regulated liquidity provider that
provided liquidity coverage to the eligible ABCP conduit (including a
description of the form, amount, and nature of such liquidity
coverage).
    Section 15G permits the agencies to allow an originator (rather
than a sponsor) to retain the required amount and form of credit risk
and to reduce the amount of risk retention required of the sponsor by
the amount retained by the originator.\65\ In developing the risk
retention option for eligible ABCP conduits in the original proposal,
the agencies considered the factors set forth in section 15G(d)(2) of
the Exchange Act.\66\ The original proposal included conditions
designed to ensure that the interests in the intermediate SPVs sold to
an eligible ABCP conduit would have low credit risk, and to ensure that
originator-sellers had incentives to monitor the quality of the assets
that are sold to an intermediate SPV and collateralize the ABCP issued
by the conduit. In addition, the original proposal was designed to
effectuate the risk retention requirements of section 15G of the
Exchange Act in a manner that facilitated reasonable access to credit
by consumers and businesses through the issuance of ABCP backed by
consumer and business receivables. Finally, as noted above, an
originator-seller would have been subject to the same restrictions on
transferring or hedging the retained eligible horizontal residual
interest to a third party as applied to sponsors under the original
proposal.
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    \65\ See 15 U.S.C. 78o-11(c)(1)(G)(iv) and (d) (permitting the
Commission and the Federal banking agencies to allow the allocation
of risk retention from a sponsor to an originator).
    \66\ See id. at Section 78o-11(d)(2). These factors are whether
the assets sold to the securitizer have terms, conditions, and
characteristics that reflect low credit risk; whether the form or
volume of transactions in securitization markets creates incentives
for imprudent origination of the type of loan or asset to be sold to
the securitizer; and the potential impact of the risk retention
obligations on the access of consumers and businesses to credit on
reasonable terms, which may not include the transfer of credit risk
to a third party.
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b. Comments on the Original Proposal
    Commenters generally supported including an option specifically for
ABCP structures. Commenters

expressed concern, however, about several aspects of the option. Many
commenters recommended allowing the credit enhancements usually found
in ABCP conduit programs (i.e., 100 percent liquidity facilities or
program-wide credit enhancement) to qualify as a form of risk
retention, in addition to the proposed option, because sponsors that
provide this level of protection to their conduit programs are already
exposed to as much (or more) risk of loss as a sponsor that holds an
eligible horizontal residual interest. Several commenters also
requested that the agencies permit originator-sellers to also use the
other permitted menu options, such as master trusts.
    Commenters generally did not support the restrictions in the
definition of ``eligible ABCP conduit'' in the original proposal
because these restrictions would prevent ABCP multi-seller conduits
from financing ABS that was collateralized by securitized assets
originated by more than one originator. In particular, the restriction
that assets held by an intermediate SPV must have been ``originated by
a single originator-seller'' would, as these commenters asserted,
preclude funding assets that an originator-seller acquires from a third
party or from multiple affiliated originators under a corporate group,
which commenters asserted was a common market practice. Many commenters
noted that the requirement that all of the interests issued by the
intermediate SPV be transferred to one or more ABCP conduits or
retained by the originator-seller did not take into account that, in
many cases, an intermediate SPV may also sell interests to investors
other than ABCP conduits.
    Some commenters also observed that the original proposal did not
appear to accommodate ABCP conduit transactions where originator-
sellers sell their entire interest in the securitized receivables to an
intermediate SPV in exchange for cash consideration and an equity
interest in the SPV. The SPV, in turn, would hold the retained
interest. Therefore, these commenters recommended that the rule permit
an originator-seller to retain its interest through its or its
affiliate's ownership of the equity in the intermediate SPV, rather
than directly. In addition, a commenter requested that the agencies
revise the ABCP option to accommodate structures where the intermediate
SPV is the originator. A few commenters requested that the agencies
expand the definition of eligible liquidity provider to include
government entities, and to allow multiple liquidity providers for one
sponsor. Some commenters also criticized the monitoring and disclosure
requirements for the ABCP option in the original proposal. A few
commenters recommended that the ABCP option be revised so that ABCP
with maturities of up to 397 days could use the ABCP option.
c. Proposed ABCP Option
    The agencies are proposing an option for ABCP securitization
transactions that retains the basic structure of the original proposal
with modifications to a number of requirements intended to address
issues raised by commenters.\67\ As with the original proposal, the
proposal permits the sponsor to satisfy its base risk retention
requirement if each originator-seller that transfers assets to
collateralize the ABCP issued by the conduit retains the same amount
and type of credit risk as would be required as if the originator-
seller was the sponsor of the intermediate SPV. The agencies continue
to believe that such an approach, as modified by the proposal, is
appropriate in light of the considerations set forth in section
15G(d)(2) of the Exchange Act.\68\ These modifications are intended to
allow the ABCP option to accommodate certain of the wider variety of
market practices observed in the comments on the original proposal
while establishing a meaningful risk retention requirement. In summary,
these modifications are designed to permit somewhat more flexibility on
behalf of originator-sellers that finance through ABCP conduits
extensions of credit they create in connection with their business
operations. The additional flexibility granted under the revised
proposal permits affiliated groups of originator-sellers to finance
credits through a combined intermediate SPV. It also permits additional
flexibility where an originator seller uses an intermediate SPV not
only to finance credits through an ABCP conduit, but also other ABS
channels, such as direct private placements in the investor market. The
proposal also permits additional flexibility to accommodate the
structures of intermediate SPVs, such as revolving master trusts and
pass-through intermediate special purpose vehicles (ISPVs).
Nevertheless, the revised proposal retains the original proposal's core
requirements, including the 100 percent liquidity coverage requirement.
The revised proposal also does not accommodate ``aggregators'' who use
ABCP to finance assets acquired in the market; the assets underlying
each intermediate SPV must be created by the respective originator-
seller.
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    \67\ As with the original proposal, the proposal permits the
sponsor to satisfy its base risk retention requirement if each
originator-seller that transfers assets to collateralize the ABCP
issued by the conduit retains the same amount and type of credit
risk as would be required as if the originator-seller was the
sponsor of the intermediate SPV, provided that all other conditions
to this option are satisfied. The agencies continue to believe that
such an approach, as modified by the proposal, is appropriate in
light of the considerations set forth in section 15G(d)(2) of the
Exchange Act. See note 66, supra. In developing the risk retention
option for eligible ABCP conduits in the original proposal, the
agencies considered the factors set forth in section 15G(d)(2) of
the Exchange Act. The proposal include conditions designed to ensure
that the interests in the intermediate SPVs sold to an eligible ABCP
conduit would have low credit risk, and to ensure that originator-
sellers had incentives to monitor the quality of the assets that are
sold to an intermediate SPV and collateralize the ABCP issued by the
conduit. In addition, the proposal is designed to effectuate the
risk retention requirements of section 15G of the Exchange Act in a
manner that facilitates reasonable access to credit by consumers and
businesses through the issuance of ABCP backed by consumer and
business receivables. Finally, as noted above, an originator-seller
would be subject to the same restrictions on transferring or hedging
the retained interest to a third party as applied to sponsors of
securitization transactions.
    \68\ See note 66, supra.
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    First, the proposal would introduce the concept of a ``majority-
owned originator-seller affiliate'' (OS affiliate), which would be
defined under the proposal as an entity that, directly or indirectly,
majority controls, is majority controlled by, or is under common
majority control with, an originator-seller participating in an
eligible ABCP conduit. For purposes of this definition, majority
control would mean 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). Under the proposal, both an
originator-seller and a majority-owned OS affiliate could sell or
transfer assets that these entities have originated to an intermediate
SPV.\69\ However, intermediate SPVs could not acquire assets directly
from non-affiliates. This modification addresses the agencies' concern
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. Where, as in

the case of an eligible ABCP conduit, a banking institution provides
100 percent liquidity coverage to the conduit, the Federal banking
agencies are concerned that the aggregation model could interfere with
the liquidity provider's policies and practices for monitoring and
managing the risk exposure of the guarantee. In light of the purposes
of section 15G, the Federal banking agencies do not believe that
extending the ABCP option to ABCP conduits that are used to finance the
purchase and securitization of receivables purchased in the secondary
market would consistently help ensure high quality underwriting of ABS.
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    \69\ With the majority ownership standard, the agencies are
proposing to require a high level of economic identity of interest
between firms that are permitted to use a common intermediate SPV as
a vehicle to finance their assets. The agencies are concerned that a
lower standard of affiliation in this regard could make it more
difficult for the conduit sponsor and liquidity provider to
understand the credit quality of assets backing the conduit.
Moreover, a lower standard of affiliation creates opportunities for
an originator-seller to act as an aggregator by securitizing
purchased assets through special-purpose vehicles the originator-
seller creates and controls for such purposes, and putting the ABS
issued by those special-purpose vehicles into the intermediate SPV.
---------------------------------------------------------------------------

    Second, the proposal would allow for multiple intermediate SPVs
between an originator-seller and a majority-owned OS affiliate. 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. Under the proposal, an intermediate SPV would be
defined to be a direct or indirect wholly-owned affiliate \70\ 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-controlled OS affiliate that, directly or
indirectly, sells or transfers assets to such intermediate SPV. The
intermediate SPV would be permitted to acquire assets originated by the
originator-seller or its majority-controlled OS affiliate from the
originator-seller or majority-controlled OS affiliate, or it could also
acquire assets or asset-backed securities from another controlled
intermediate SPV collateralized solely by securitized assets originated
by the originator-seller or its majority-controlled OS affiliate and
servicing assets. Finally, intermediate SPVs in structures with
multiple intermediate SPVs that do not issue asset-backed securities
collateralized solely by ABS interests must be pass-through entities
that either transfer assets to other SPVs in anticipation of
securitization (e.g., a depositor) or transfer ABS interests to the
ABCP conduit or another intermediate SPV. Finally, under the proposal,
all ABS interests held by an eligible ABCP conduit must be issued in a
securitization transaction sponsored by an originator-seller and
supported by securitized assets originated or created by an originator-
seller or one or more majority-owned OS affiliates of the originator-
seller.
---------------------------------------------------------------------------

    \70\ See proposed rule at Sec.  ----.2 (definition of
``affiliate'').
---------------------------------------------------------------------------

    Third, the proposed rule, in contrast to the original proposal,
would allow an intermediate SPV to sell asset-backed securities that it
issues to third parties other than ABCP conduits. For example, 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 ABS backed 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 proposed rule would accommodate this practice.
    Fourth, the proposal would clarify and expand (as compared to the
original proposal) the types of collateral that an eligible ABCP
conduit could acquire from an originator-seller. Under the proposed
definition of ``eligible ABCP conduit'', a conduit could acquire any of
the following types of assets: (1) ABS interests supported by
securitized assets originated by an originator-seller or one or more
majority-controlled OS affiliates of the originator seller, and by
servicing assets; \71\ (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 were transferred
to an intermediate SPV in connection with a securitization
collateralized solely by such leases originated by an originator-seller
or majority-controlled OS affiliate and by servicing assets; and (3)
interests in a revolving master trust collateralized solely by assets
originated by an originator-seller or majority-controlled OS affiliate;
and by servicing assets.\72\
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    \71\ The purpose of this clarification is 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 and aggregated.
    \72\ 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, and thus acknowledge the
kinds of rights and assets that a typical ABCP conduit needs to have
in order to conduct the activities required in a securitization.
---------------------------------------------------------------------------

    Consistent with this principle, the agencies seek to clarify that
the ABS interests acquired by the conduit could not be collateralized
by securitized assets otherwise purchased or acquired by the
intermediate SPV's originator-seller, majority-controlled OS affiliate,
or by the intermediate SPV from unaffiliated originators or sellers.
The ABS interests also would have to 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
securities issued by the intermediate SPV, or (3) from another person
who acquired the securities directly from the intermediate SPV. In
addition, the ABCP conduit would have to be collateralized solely by
asset-backed securities acquired by the ABCP conduit in an initial
issuance by or on behalf of an intermediate SPV directly from the
intermediate SPVs, from an underwriter of the securities issued by the
intermediate SPV, or from another person who acquired the securities
directly from the intermediate SPV and servicing assets. Because
eligible ABCP conduits can only purchase ABS interests in an initial
issuance, eligible ABCP conduits may not aggregate ABS interests by
purchasing them in the secondary market.
    Fifth, in response to comments on the original proposal that an
originator-seller should be able to use a wider variety of risk
retention options, the proposal would expand the retention options
available to the originator-seller. Under the proposed rule, an
eligible ABCP conduit would satisfy its risk retention requirements if,
with respect to each asset-backed security the ABCP conduit acquires
from an intermediate SPV, the originator-seller or majority-controlled
OS affiliate held risk retention in the same form, amount, and manner
as would be required using the standard risk retention or revolving
asset master trust options. Thus, in the example above of an
originator-seller that finances credits through a revolving master
trust, the originator-seller could retain risk in the form of a
seller's interest meeting the requirements of the revolving master
trust provisions of the proposed rule.
    Sixth, consistent with the original proposal, the proposal requires
that a regulated liquidity provider must have entered 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 similar arrangement) of all the ABCP issued by the
issuing entity by lending to, or purchasing assets from, the issuing
entity in the event that funds are required to repay maturing ABCP
issued by the issuing entity. The proposal clarifies 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. Amounts due pursuant to the required
liquidity coverage may not be subject to credit performance of the ABS
held by the ABCP conduit or reduced by the amount of credit support
provided to the ABCP conduit. Liquidity coverage that only funds
performing receivables or performing ABS interests will not meet the
requirements of the ABCP option.
d. Duty To Monitor and Disclosure Requirements
    Consistent with the original proposal, the agencies are proposing
that the sponsor of an eligible ABCP conduit would continue to be
responsible for compliance. Some commenters on the original proposal
requested that the agencies replace the monitoring obligation with a
contractual obligation of an originator-seller to maintain compliance.
However, the agencies believe that the sponsor of an ABCP conduit is in
the best position to monitor compliance by originator-sellers.
Accordingly, the proposal would continue to require the sponsor of an
ABCP conduit to monitor compliance by an originator-seller.
e. Disclosure Requirements
    The agencies also are proposing disclosure requirements that are
similar to those in the original proposal, with two changes. First, the
agencies are proposing to remove the requirement that the sponsor of
the ABCP conduit disclose the names of the originator-sellers. The
proposal would continue to require the sponsor of an ABCP conduit to
provide to each purchaser of ABCP 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 form, amount,
and nature of such liquidity coverage, and notice of any failure to
fund. In addition, with respect to each ABS interest held by the ABCP
conduit, the sponsor of the ABCP conduit would be required to provide
the asset class or brief description of the underlying receivables for
each ABS interest, the standard industrial category code (SIC Code) for
the originator-seller or majority-controlled OS affiliate that will
retain (or has retained) pursuant to this section an interest in the
securitization transaction, and a description of the form, amount
(expressed as a percentage and as a dollar amount (or corresponding
amount in the foreign currency in which the ABS are issued, as
applicable) of the fair value of all ABS interests issued in the
securitization transaction. Finally, an ABCP conduit sponsor relying on
the ABCP option would be required to 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 or majority-controlled OS affiliate that will retain
(or has retained) an interest in the underlying securitization
transactions.
    Second, a sponsor of an ABCP conduit would be required to 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 by the proposed rule 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 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 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. In addition, the sponsor of an
ABCP conduit would be required to take other appropriate steps upon
learning of a violation by an originator-seller of its risk retention
obligations including, as appropriate, 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.
To cure the non-compliance of the non-conforming asset, the sponsor
could, among other things, purchase the non-conforming asset from the
ABCP conduit, purchase 5 percent of the outstanding ABCP and comply
with the vertical risk retention requirements, or declare an event of
default under the underlying transaction documents (assuming the
sponsor negotiated such a term) and accelerate the repayment of the
underlying assets.
f. Other Items
    In most cases, the sponsor of the ABCP issued by the conduit will
be the bank or an affiliate of the bank that organizes the conduit. The
agencies note that the use of the ABCP option by the sponsor of an
eligible ABCP conduit would not relieve the originator-seller from its
independent obligation to comply with its own risk retention
obligations under the revised proposal, if any. In most, if not all,
cases, the originator-seller will be the sponsor of the asset-backed
securities issued by an intermediate SPV and will therefore be required
to hold an economic interest in the credit risk of the assets
collateralizing the asset-backed securities issued by the intermediate
SPV. The agencies also note that a sponsor of an ABCP conduit would not
be limited to using the ABCP option to satisfy its risk retention
requirements. An ABCP conduit sponsor could rely on any of the risk
retention options described in section 4 of the proposed rule.
    The agencies are proposing definitions of ``ABCP'' and ``eligible
liquidity provider'' that are the same as the definitions in the
original proposal. The agencies believe it would be inappropriate to
expand the ABCP option to commercial paper that has a term of over nine
months, because a duration of nine months accommodates almost all
outstanding issuances and the bulk of those issuances have a
significantly shorter term of 90 days or less. In addition, the
agencies have not expanded the definition of eligible liquidity
provider to include sovereign entities. The agencies do not believe
that prudential requirements could be easily designed to accommodate a
sovereign entity that functions as a liquidity provider to an ABCP
conduit.
Request for Comments
    32(a). To the extent that the proposed ABCP risk retention option
does not reflect market practice, how would modifying the proposal help
ensure high quality underwriting of ABCP? 32(b). What structural or
definitional changes to the proposal would be appropriate, including
but not limited to any changes to the proposed definitions of 100
percent liquidity coverage, eligible ABCP conduit, intermediate SPV,
majority-owned OS affiliate, originator-seller, and regulated liquidity
provider? 32(c). Do ABCP conduits typically have 100 percent liquidity
coverage as defined in the proposal? 32(d). What percentage of ABCP
conduits and what percentage of ABCP currently outstanding was issued
by such conduits?
    33(a). Do ABCP conduits typically only purchase assets directly
from intermediate SPVs (i.e., that meet the requirements of the
proposal? 33(b). What percentage of ABCP currently outstanding was
issued by such conduits?
    34(a). Do ABCP conduits typically purchase receivables directly
from customers, rather than purchasing ABS interests from SPVs
sponsored by customers? 34(b). What percentage of ABCP currently
outstanding was issued

by such conduits? 34(c). Is the requirement that an ABCP conduit
relying on this option may not purchase receivables directly from the
originator appropriate? 34(d). Why or why not?
    35(a). Is the requirement that an ABCP conduit relying on this
option may not purchase ABS interests in the secondary market
appropriate? 35(b). Why or why not? 35(c). Does the proposed ABCP
option appropriately capture assets that are acquired through business
combinations?
    36(a). Do ABCP conduits typically purchase corporate debt
securities on a regular or occasional basis? 36(b). What percentage of
ABCP currently outstanding was issued by such conduits?
    37(a). Do ABCP conduits typically purchase ABS in the secondary
market on a regular or occasional basis? 37(b). What percentage of ABCP
currently outstanding was issued by such conduits?
    38. With respect to ABCP conduits that purchase assets that do not
meet the requirements of the proposal, what percentage of those ABCP
conduits' assets do not meet the requirements?
    39(a). Should the agencies allow multiple eligible liquidity
providers for purposes of the ABCP risk retention options? 39(b). If
so, should this be limited to special circumstances? 39(c). Should the
agencies allow a liquidity provider to provide liquidity coverage with
respect to a specific ABS interest?
    40(a). Does the definition of majority-owned OS affiliate
appropriately capture companies that are affiliated with an originator-
seller? 40(b). Why or why not?
    41. Should the rule require disclosure of the originator seller in
the case of noncompliance by the originator seller?
    42(a). Should the rule also require disclosure to investors in ABCP
in all cases of violation of this section? 42(b). Why or why not?
42(c). If so, should the rule prescribe how such disclosure be made
available to investors?
    43. Are there other changes that should be made to disclosure
provisions?
    44. Should the rule provide further clarity as to who will be
deemed a sponsor of ABCP issued by an ABCP conduit?
    45(a). Should there be a supplemental phase-in period (beyond the
delayed effective dates in 15 U.S.C. 78o-11(i)) for existing ABCP
conduits that do not meet the proposed definition of eligible ABCP
conduit? 45(b). Why or why not? 45(c). If so, what would be the
appropriate limit (e.g., up to 10 percent of the assets in the ABCP
conduit could be nonconforming), and what would be the appropriate time
period(s) for conformance (e.g., up to two years)?
5. Commercial Mortgage-Backed Securities
a. Overview of the Original Proposal and Public Comments
    Section 15G(c)(1)(E) of the Exchange Act (15 U.S.C. 78o-
11(c)(1)(E)) 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 originally proposed to permit a sponsor of ABS that is
collateralized by commercial real estate loans to meet its risk
retention requirements if a third-party purchaser acquired an eligible
horizontal residual interest in the issuing entity.\73\ The acquired
interest would have had to take the same form, amount, and manner as
the sponsor would have been required to retain under the horizontal
risk retention option. The CMBS risk retention option would have been
available only for securitization transactions where commercial real
estate loans constituted at least 95 percent of the unpaid principal
balance of the assets being securitized and where six proposed
requirements were met:
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    \73\ 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.''
---------------------------------------------------------------------------

    (1) The third-party purchaser retained an eligible horizontal
residual interest in the securitization in the same form, amount, and
manner as would be required of the sponsor under the horizontal risk
retention option;
    (2) The third-party purchaser paid for the first-loss subordinated
interest in cash at the closing of the securitization without financing
being provided, directly or indirectly, from any other person that is a
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;
    (3) The third-party purchaser performed a review of the credit risk
of each asset in the pool prior to the sale of the asset-backed
securities;
    (4) The third-party purchaser could not be affiliated with any
other party to the securitization transaction (other than investors) or
have control rights in the securitization (including, but not limited
to acting as servicer or special servicer) that were not collectively
shared by all other investors in the securitization;
    (5) The sponsor provided, or caused to be provided, to potential
purchasers certain information concerning the third-party purchaser and
other information concerning the transaction; and
    (6) Any third-party purchaser acquiring an eligible horizontal
residual interest under the CMBS option complied with the hedging,
transfer and other restrictions applicable to such interest under the
proposed rules as if the third-party purchaser was a sponsor who had
acquired the interest under the horizontal risk retention option.
    As stated in the original proposal, these requirements were
designed to help ensure that the form, amount and manner of the third-
party purchaser's risk retention would be consistent with the purposes
of section 15G of the Exchange Act.
    Generally, commenters supported the ability of sponsors to transfer
credit risk to third-party purchasers. One commenter stated that the
CMBS option acknowledged the mandate of section 941 of the Dodd-Frank
Act and the recommendations of the Federal Reserve Board by providing
much need flexibility to the risk retention rules and recognized the
impact and importance of the third-party purchaser in the CMBS market.
Some commenters, however, believed the proposed criteria for the option
would discourage the use of the option or render the option unworkable.
In particular, one commenter raised concerns with the restrictions on
financing and hedging of the B-piece, the restrictions on the transfer
of such interest for the life of the transaction, restrictions on
servicing and control rights including the introduction of an operating
advisor, and requirements related to the disclosure of the B-piece
purchase price would likely discourage the use of the CMBS option.
    In response to the agencies' question in the original proposal as
to whether a third-party risk retention option should be available to
other asset classes, commenters' views were mixed. Some commenters
expressed support for allowing third parties to retain the risk in
other asset classes, with other commenters supporting a third-party

option for RMBS and another commenter suggesting the option be made
available to any transaction in which individual assets may be
significant enough in size to merit the individual review required of a
third-party purchaser.
    The agencies believe that a third-party purchaser that specifically
negotiates for the purchase of a first-loss position is a common
feature of commercial mortgage securitizations that is generally not
found in other asset classes. For this reason, section 15G(c)(1)(E)(ii)
of the Exchange Act specifically permits the agencies to create third-
party risk retention for commercial mortgage securitizations. However,
the agencies believe there is insufficient benefit to market liquidity
to justify an expansion of third-party risk retention to other asset
classes, and propose to maintain the more direct alignment of
incentives achieved by requiring the sponsor to retain risk for the
other asset classes not covered by section 15G(c)(1)(E)(ii).
    The agencies also received many comments with respect to the
specific conditions of the CMBS option in the original proposal. In
this proposed rule, the CMBS option is similar to that of the original
proposal, but incorporates a number of key changes the agencies believe
are appropriate in response to concerns raised by commenters. These are
discussed below.
b. Proposed CMBS Option
i. Number of Third-Party Purchasers and Retention of Eligible Interest
    Under the original proposal, only one third-party purchaser could
retain the required risk retention interest. Additionally, the third-
party purchaser would have been required to retain an eligible
horizontal residual interest in the securitization in the same form,
amount and manner as would be required of the sponsor under the
horizontal retention option. The proposed CMBS option was not designed
to permit a third-party purchaser to share the required risk retention
with the sponsor.
    Many commenters on the original proposal requested flexibility in
satisfying the CMBS option through the sharing of risk retention
between sponsors and third-party purchasers, as well as among multiple
third-party purchasers. In particular, some commenters noted that
allowing such flexibility would be consistent with how the proposed
rule would allow a sponsor to choose to retain a vertical and
horizontal retention piece to share the risk retention obligation with
an originator.
    The agencies considered the comments on the original proposal
carefully and believe that some additional flexibility for the CMBS
risk retention option would be appropriate. Accordingly, under the
proposed rule, the agencies would allow two (but no more than two)
third-party purchasers to satisfy the risk retention requirement
through the purchase of an eligible horizontal residual interest (as
defined under the proposed rule). Each third-party purchaser's interest
would be required to be pari passu with the other third-party
purchaser's interest, so that neither third-party purchaser's losses
are subordinate to the other's losses. The agencies do not believe it
would be appropriate to allow more than two third-party purchasers to
satisfy the risk retention requirement for a single transaction,
because it could dilute too much the incentives generated by the risk
retention requirement to monitor the credit quality of the commercial
mortgages in the pool.
    The agencies are also revising the CMBS option to clarify that,
when read together with the revisions that have been made to the
standard risk retention requirements, the eligible horizontal residual
interest held by the third-party purchasers can be used to satisfy the
standard risk retention requirements, either by itself as the sole
credit risk retained or in combination with a vertical interest held by
the sponsor. The agencies believe this flexibility increases the
likelihood that third-party purchasers will assume risk retention
obligations. The agencies further believe that the interests of the
third-party purchaser and other investors are aligned through other
provisions of the proposed CMBS option, namely the Operating Advisor
provisions and disclosure provisions discussed below.
ii. Third-Party Purchaser Qualifying Criteria
    In the original proposal, the agencies did not propose qualifying
criteria for third-party purchasers related to the third-party
purchaser's experience or financial capabilities.
    One commenter proposed that only ``qualified'' third-party
purchasers be permitted to retain the risk under the CMBS option, with
such qualifications based on certain pre-determined criteria of
experience, financial analysis capability, capability to direct the
special servicer and certain financial capabilities to sustain losses.
Another commenter requested that the final rule require third-party
purchasers to be independent from special servicers.
    Consistent with the original proposal, the agencies are not
proposing to add specific qualifying criteria for third-party
purchasers. The agencies believe that investors in the business of
purchasing B-piece interests in CMBS transactions, who are typically
interested in acquiring special servicing rights in such transactions,
likely have the requisite experience and capabilities to make an
informed decision regarding their purchases. Furthermore, the agencies
continue to propose disclosure requirements with respect to the
identity and experience of third-party purchasers in the transaction,
which will alert investors in a CMBS transaction as to the experience
of third-party purchasers and other material information necessary to
make an informed investment decision. Additionally, based generally on
comments the agencies have received, the agencies have not added a
requirement that third-party purchasers be independent from special
servicers since the acquisition of special servicing rights is a
primary reason why third-party purchasers are willing to purchase the
B-piece in the CMBS transactions. Such an independence requirement
would adversely affect the willingness of third-party purchasers to
assume the risk retention obligations in CMBS transactions.
iii. Composition of Collateral
    Consistent with the original proposal, the agencies are restricting
the third-party purchaser option to securitization transactions
collateralized by commercial real estate loans. However, the original
proposal allowed up to 5 percent of the collateral to be other types of
assets, in order to accommodate assets other than loans that are
typically needed to administer a securitization. Since then, the
agencies have added the servicing assets definition to the proposed
rule, to accommodate these kinds of assets.\74\ Accordingly, the
agencies are eliminating the 95 percent test and revising the
collateral restriction to cover securitization transactions
collateralized by commercial real estate loans and servicing assets.
---------------------------------------------------------------------------

    \74\ The definition of ``servicing assets'' is discussed in Part
II.B of this Supplementary Information.
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iv. Source of Funds
    The original proposal would have required that the third-party
purchaser pay for its eligible horizontal residual interest in cash,
and would have prohibited the third-party purchaser from obtaining
financing, directly or

indirectly, for the purchase of such interest from any party to the
securitization transaction other than an investor.
    A few commenters supported the proposed limitation on financing,
while another commenter recommended that no distinction be made between
the sponsor's ability to finance its risk retention interest compared
to third-party purchasers. Several commenters requested clarification
on what ``indirect'' financing means under the proposal and requested
that the final rule not prohibit the third-party purchaser from
obtaining financing from a party for an unrelated transaction.
    The agencies are re-proposing this condition consistent with the
original proposal. The limitation on obtaining financing would apply
only to financings for the purchase of the B-piece in a specific CMBS
transaction and only where the financing provider is another party to
that same CMBS transaction. The agencies are clarifying that the
financing provider restriction would include affiliates of the other
parties to the CMBS transaction. This limitation would not restrict
third-party purchasers from obtaining financing from a transaction
party for a purpose other than purchasing the B-piece in the
transaction; provided that none of such financing is later used to
purchase the B-piece, which would be an indirect financing of the B-
piece. Nor would third-party purchasers be restricted from obtaining
financing from a person that is not a party to the specific
transaction, unless that person had some indirect relationship with a
party to the transaction, such as a parent-subsidiary relationship or a
subsidiary-subsidiary relationship under a parent company (subject to
the required holding period and applicable hedging restrictions). The
use of the term indirect financing is meant to ensure that these types
of indirect relationships are prohibited under the financing
limitations of the rule.
v. Review of Assets by Third-Party Purchaser
    Under the original proposal, a third-party purchaser would have
been required to conduct a review of the credit risk of each
securitized asset prior to the sale of the ABS that includes, at a
minimum, a review of the underwriting standards, collateral, and
expected cash flows of each loan in the pool. Most commenters
addressing this issue generally supported the proposed condition that a
third-party purchaser must separately examine each asset in the pool.
Specifically, one commenter noted that this level of review is
currently the industry standard and is a clear indication of the
strength of the credit review process for CMBS transactions.
    The agencies are proposing this condition again with only minor
changes to indicate, in the event there is more than one third-party
purchaser in a transaction, that each third-party purchaser would be
required to conduct an independent review of the credit risk of each
CMBS asset.
vi. Operating Advisor
(1) Affiliation and Control Rights
    The original proposal included a condition of the CMBS option
intended to address the potential conflicts of interest that can arise
when a third-party purchaser serves as the ``controlling class'' of a
CMBS transaction. This condition would have prohibited a third-party
purchaser from (1) being affiliated with any other party to the
securitization transaction (other than investors); or (2) having
control rights in the securitization (including, but not limited to
acting as servicer or special servicer) that are not collectively
shared by all other investors in the securitization. The proposed
prohibition of control rights related to servicing would have been
subject to an exception from this condition, however, only if the
underlying securitization transaction documents provided for the
appointment of an independent operating advisor (``Operating Advisor'')
with certain powers and responsibilities that met certain criteria. The
proposed criteria were: (1) The Operating Advisor is not affiliated
with any other party to the securitization, (2) the Operating Advisor
does not directly or indirectly have any financial interest in the
securitization other than in fees from its role as Operating Advisor,
and (3) the Operating Advisor is required to act in the best interest
of, and for the benefit of, investors as a collective whole. The
original proposal would have required that an independent Operating
Advisor be appointed if the third-party purchaser was acting as, or was
affiliated with, a servicer for any of the securitized assets and had
control rights related to such servicing.
(2) Operating Advisor Criteria and Responsibilities
    The agencies received many comments with respect to the criteria in
the original proposal for the Operating Advisor, as well as with
respect to the Operating Advisor's required responsibilities.
    Commenters had mixed views concerning when the rule should require
an Operating Advisor and whether the Operating Advisor should play an
active role while the third-party purchaser is the ``controlling
class.'' There was a comment supporting the proposed requirement that
an Operating Advisor be included when the third-party purchaser is
affiliated with and controls the special servicing function of the
transaction. Some commenters supported the inclusion of an Operating
Advisor in all CMBS transactions. Other commenters supported a dormant
role for the Operating Advisor while the third-party purchaser was the
``controlling class,'' and the Operating Advisor's power would be
triggered when such purchaser was no longer the controlling class
(typically when the third-party purchaser's interest is reduced to less
than 25 percent of its original principal balance after taking into
account appraisal reductions). Some of these commenters asserted that
the introduction of an Operating Advisor may support the interests of
the senior investors at the expense of the third-party purchaser,
thereby adversely affecting the willingness of third-party purchasers
to assume the risk retention obligations. Further, commenters stated
that the Operating Advisor would add layers of administrative burden on
an already highly structured CMBS framework and make servicing and
workouts for the underlying loans more difficult and expensive, thereby
reducing returns. Finally, some commenters stated that oversight is
unnecessary while the third-party purchaser continues to have an
economic stake in the transaction because third-party purchasers are
highly incentivized to discharge their servicing duties in a manner
that maximizes recoveries. One of these commenters noted that this is
its current approach and is working to the satisfaction of both
investment grade investors and third-party purchasers. Some commenters
recommended a framework whereby the Operating Advisor would be involved
immediately but its role would depend on whether the third-party
purchaser was the controlling class.
    Additionally, some commenters specifically requested that the
Operating Advisor's authority apply only to the special servicer
(instead of all servicers as originally proposed) for three reasons.
First, the special servicer has authority or consent rights with
respect to all material servicing actions and defaulted loans, whereas
the master servicer has very little discretion because its servicing
duties are typically set forth in detail in the pooling and

servicing agreement and its authority to modify loans is limited.
Moreover, any control right held by a third-party purchaser with
respect to servicing is typically exercised through the special
servicer and the third-party purchaser does not generally provide any
direct input into master servicer decisions.
    Second, the B-piece termination right is another structural feature
of CMBS transactions that applies to special servicers but not to
master servicers. The third-party purchaser's right to terminate and
replace the special servicer without cause is one method of control by
the third-party purchaser over special servicing. The master servicer,
however, is not subject to this termination without cause. The master
servicer typically can be terminated by the trustee only upon the
occurrence of one of the negotiated events of default with respect to
the master servicer. In the event of such a default, holders of ABS
evidencing a specified percentage of voting rights (25 percent in many
deals) of all certificates can direct the trustee to take such
termination action.
    Third, an Operating Advisor's right to remove the master servicer
may be problematic for the master servicer's servicing rights assets.
Master servicers usually purchase their servicing rights from the
sponsors in the securitization and these rights retain an ongoing
value. Therefore, any termination rights beyond those based on
negotiated events of default jeopardize the value of the master
servicer's servicing asset.
    Based on comments received, the agencies acknowledge that third-
party purchasers often are, or are affiliated with, the special
servicers in CMBS transactions. Because of this strong connection
between third-party purchasers and the special servicing rights in CMBS
transactions, the agencies are proposing to limit application of the
Operating Advisor provisions to special servicers, rather than any
affiliated servicers as originally proposed in the original proposal.
Consequently, the agencies are also proposing a revised CMBS option to
require as a separate condition the appointment of an Operating Advisor
in all CMBS transactions that rely on the CMBS risk retention option.
    As stated in the original proposal, the agencies believe that the
introduction of an independent Operating Advisor provides a check on
third-party purchasers by limiting the ability of third-party
purchasers to manipulate cash flows through special servicing. In
approving loans for inclusion in the securitization, third-party
purchasers ideally will be mindful of the limits on their ability to
offset the consequences of poor underwriting through servicing tactics
if loans become troubled, thereby providing a stronger incentive for
third-party purchasers to be diligent in assessing the credit quality
of pool assets at the time of securitization. Because the agencies are
proposing that an Operating Advisor be required for all CMBS
transactions relying on the CMBS option, the prohibition on third-party
purchasers having control rights related to servicing is no longer
necessary and has been removed.
(3) Operating Advisor Independence
    The original proposal would have prohibited the Operating Advisor
from being affiliated with any party to the transaction and from
having, directly or indirectly, any financial interest in the
transaction other than its fees from its role as Operating Advisor.
    An investor commenter supported complete independence for the
Operating Advisor, reasoning that the Operating Advisor should not in
any way be conflicted when representing all holders of ABS. Other
commenters did not support the independence criteria, instead proposing
to rectify any conflicts of interest through disclosure. One of these
commenters commented that it would be counter-productive to preclude
current Operating Advisors from serving in that capacity in the future,
as such a framework would leave only smaller firms with little or no
experience as the only eligible candidates and could result in
diminution of available investment capital. Independence concerns
should instead be addressed by the Operating Advisor's disclosure at
the time it initiates proceedings to replace a special servicer, of
whether the Operating Advisor has any conflicts of interest.
    Consistent with the original proposal, the CMBS option in the
proposed rule would require that the Operating Advisor not be
affiliated with other parties to the securitization transaction. Also
consistent with the original proposal, the Operating Advisor would be
prohibited from having, directly or indirectly, any financial interest
in the securitization transaction other than fees from its role as
Operating Advisor and would be required to act in the best interest of,
and for the benefit of, investors as a collective whole. As stated
above, the agencies believe that an independent Operating Advisor is a
key factor in providing a check on third-party purchasers and special
servicers, thereby protecting investors' interests.
(4) Qualifications of the Operating Advisor
    In the original proposal, the agencies did not propose
qualifications for the Operating Advisor other than independence from
other parties to the securitization transaction.
    One commenter recommended that the final rule include eligibility
requirements for Operating Advisors, such as requiring an Operating
Advisor to have an existing servicing platform (not necessarily rated);
have at least 25 full time employees; have at least $25 million in
capital; and have some metric for assuring that the Operating Advisor
will have an ongoing real estate market presence and the in-house
expertise necessary to effectively carry out their responsibilities.
Another commenter requested clarification regarding the qualifications
of an Operating Advisor but did not expressly advocate for or against
particular qualifications.
    Based in part on comments received, the agencies are proposing
certain general qualifications for the Operating Advisor. Under the
proposed rule, the underlying transaction documents must provide for
standards with respect to the Operating Advisor's experience, expertise
and financial strength to fulfill its duties and responsibilities under
the applicable transaction documents over the life of the
securitization transaction. Additionally, the transaction documents
must describe the terms of the Operating Advisor's compensation with
respect to the securitization transaction.
    The agencies do not believe it is necessary to mandate specific
minimum levels of experience, expertise and financial strength for
Operating Advisors in CMBS transactions relying on the CMBS option.
Rather, the agencies believe that CMBS transaction parties should be
permitted to establish Operating Advisor qualification standards and
compensation in each transaction. By requiring disclosure to investors
of such qualification standards, how an Operating Advisor satisfies
such standards, and the Operating Advisor's related compensation, the
proposed rule provides investors with an opportunity to evaluate the
Operating Advisor's qualifications and compensation in the relevant
transaction.
(5) Role of the Operating Advisor
    Under the original proposal, the duties of the Operating Advisor
were generally to (1) act in the best interest of investors as a
collective whole, (2) require the servicer for the securitized assets
to consult with the Operating Advisor in connection with, and prior

to, any major decision in connection with servicing, which would
include any material loan modification and foreclosures and
acquisitions of properties, and (3) review the actions of the
affiliated servicer and report to investors and the issuing entity on a
periodic basis.
    With respect to the role of the Operating Advisor in the original
proposal, comments were mixed. Investor commenters generally supported
the consultative role given to Operating Advisors under the original
proposal. Issuers and industry association commenters did not support
such role and believed that the powers granted to the Operating Advisor
under the original proposal were too broad. In particular, these
commenters generally did not support the proposed requirement that the
servicer consult with the Operating Advisor prior to any major
servicing decision.
    Another commenter recommended a framework such that after the
change-in-control event (that is, when the B-piece position is reduced
to less than 25 percent of its original principle balance), the
Operating Advisor's role would be that of a monitoring role and
investigate claims of special servicer noncompliance when initiated by
a specified percentage of investors, and provide its findings on a
regular basis to CMBS investors, the sponsor and the servicers.
    A trade association commenter, supported by two other commenters,
preferred an approach in which the Operating Advisor's role would be
reactive while the third-party purchaser is the controlling class, and
become proactive when the third-party purchaser is no longer the
controlling class. Under this commenter's approach, the rule would
provide that the third-party purchaser is no longer in control if the
sum of principal payments, appraisal reductions and realized losses
have reduced the third-party purchaser's initial positions to less than
25 percent of its original face amount.
    Consistent with the original proposal, the proposed rule would
require consultation with the Operating Advisor in connection with, and
prior to, any major investing decision in connection with the servicing
of the securitized assets. However, based on comments received, the
consultation requirement only applies to special servicers and only
takes effect once the eligible horizontal residual interest held by
third-party purchasers in the transaction has a principal balance of 25
percent or less of its initial principal balance.
(6) Operating Advisor's Evaluation of Servicing Standards
    The original proposal would have included a requirement that the
Operating Advisor be responsible for reviewing the actions of any
affiliated servicer and issue a report evaluating whether the servicer
is operating in compliance with any standard required of the servicer,
as provided in the applicable transaction documents.
    One trade association commenter recommended that the rule establish
the standard by which the Operating Advisor evaluates the special
servicer. It stated that one such standard would be to include language
in the pooling and servicing agreement or similar transaction document
that would require the special servicer to maximize the net present
value of the loan without consideration of the impact of such action on
any specific class of ABS. However, as this trade association was
unsupportive of requiring the servicer to consult with the Operating
Advisor prior to any material workout, it also stated that an
alternative to actually including the servicing standard would be for
the Operating Advisor to monitor all loan workouts and, if the special
servicer is not meeting the stated standard, the Operating Advisor
could then take the appropriate action.
    The agencies are proposing that the CMBS option require the
Operating Advisor to have adequate and timely access to information and
reports necessary to fulfill its duties under the transaction
documents. Further, the proposed rule would require the Operating
Advisor to 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 calculations
made by the special servicer within the transaction documents, and
issuing a report to investors and the issuing entity on special
servicer's performance.
(7) Servicer Removal Provisions
    Under the original proposal, the Operating Advisor would have had
the authority to recommend that a servicer be replaced if it determined
that the servicer was not in compliance with the servicing standards
outlined in the transaction documents. This recommendation would be
submitted to investors and would be approved unless a majority of each
class of investors voted to retain the servicer.
    Many commenters were of the view that the rule granted too much
authority to the Operating Advisor in regards to the removal of a
servicer. As discussed above, many commenters believed that the
Operating Advisor's authority should only apply to special servicers.
Following on this point, many commenters commented that the special
servicer should be removed only upon the affirmative vote of ABS
holders (instead of a negative vote as originally proposed).
    One commenter suggested that the special servicer removal process
should be negotiated among the CMBS transaction parties and specified
in the pooling and servicing agreement or similar transaction document.
In this scenario, the special servicer would have the opportunity to
explain its conduct, the Operating Advisor would be required to
publicly explain its rationale for recommending special servicer
removal, and investors in non-controlling classes would vote in the
affirmative for special servicer removal. Another commenter proposed
that an Operating Advisor's recommendation to remove a special servicer
would have to be approved by two-thirds of all ABS holders voting as a
whole, or through an arbitration mechanism. Another commenter proposed
that a minimum of 5 percent of all ABS holders based on par dollar
value of holdings be required for quorum, and decisions would be
adopted with the support of a simple majority of the dollar value of
par of quorum. Another commenter advocated removal only after the
third-party purchaser is no longer the controlling class.
    After considering comments that the servicer removal provision
should only apply to special servicers, the agencies are proposing that
the Operating Advisor's authority to recommend removal and replacement
would be limited to special servicers. Additionally, based on comments
received, the agencies are proposing that the actual removal of the
special servicer would require the affirmative vote of a majority of
the outstanding principal balance of all ABS interests voting on the
matter, and require a quorum of 5 percent of the outstanding principal
balance of all ABS interests.
    Because of the agencies' belief that the introduction of an
independent Operating Advisor provides a check on third-party
purchasers by limiting the ability of third-party purchasers to
manipulate cash flows through special servicing, the agencies believe
that the removal of the special servicer should be independent of
whether the third-party purchaser is the controlling class in the
securitization transaction or similar considerations. The proposed
affirmative majority vote and quorum requirements are designed to
provide

additional protections to investors in this regard.
c. Disclosures
    Under the original proposal, the sponsor would have been required
to provide, or cause to be provided, to potential purchasers and
federal supervisors certain information concerning the third-party
purchaser and other information concerning the CMBS transaction, such
as the third-party purchaser's name, the purchaser's experience
investing in CMBS, and any other material information about the third-
party purchaser deemed material to investors in light of the particular
securitization transaction.
    Additionally, a sponsor would have been required to disclose to
investors the amount of the eligible horizontal residual interest that
the 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; and certain information about the
representations and warranties concerning the securitized assets.
    While commenters generally supported the proposed disclosure
requirements, many commenters raised concerns about specific portions
of these requirements.
    Under the original proposal, the sponsor would have been required
to disclose to investors the name and form of organization of the
third-party purchaser as well as a description of the third-party
purchaser's experience in investing in CMBS. The original proposal also
solicited comment as to whether disclosure concerning the financial
resources of the third-party purchaser would be necessary in light of
the requirement that the third-party purchaser fund the acquisition of
the eligible horizontal residual interest in cash, without direct or
indirect financing from a party to the transaction. Some commenters
supported these proposed requirements, while others did not.
    Under the original proposal, a third-party purchaser would have
been required to disclose the actual purchase price paid for the
retained residual interest. Several commenters did not support
requiring purchase price disclosure. These commenters noted that price
disclosure raises confidentiality concerns and could reveal the
purchaser's price parameters to its competitors. These commenters
provided suggestions for maintaining the confidentiality of such
information or alternatives to actual disclosure of prices paid.
    Under the original proposal, sponsors would have been required to
disclose to investors the material assumptions and methodology used in
determining the aggregate amount of ABS interests issued by the issuing
entity, including those pertaining to any estimated cash flows and the
discount rate used. One commenter did not support requiring this
disclosure and believed that such disclosure would be irrelevant in
CMBS transactions in that the principal balance of the certificates
sold to investors would equal the aggregate initial principal balance
of the mortgage loans, and CMBS transactions did not utilize
overcollateralization (as is the case with covered bonds and other
structures).
    Under the original proposal, the sponsor would have been required
to disclose the representations and warranties concerning the assets, a
schedule of exceptions to these representations and warranties, and
what factors 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.
    One commenter agreed that loan-by-loan exceptions should be
disclosed but did not comment on whether the disclosure of subjective
factors disclosure should be required. This commenter also advocated
for a standardized format of disclosure of representations and
warranties. Another commenter noted that in recent CMBS transactions,
all representations and warranties and all exceptions thereto are fully
disclosed. Two commenters were unsupportive of requiring disclosure of
why exceptions were allowed into the pool because they stated that such
determinations are often qualitative and the benefit of such disclosure
would be outweighed by the burden imposed on the issuer. The original
proposal also requested comment on whether the rule should require that
a blackline of the representations and warranties for the
securitization transaction against an industry-accepted standard for
model representations and warranties be provided to investors at a
reasonable time prior to sale. One commenter noted that it was
unnecessary to require that investors be provided with a blackline so
long as the representations and warranties are themselves disclosed.
    The original proposal requested comment on whether the rule should
specify the particular types of information about a third-party
purchaser that should be disclosed, rather than requiring disclosure of
any other information regarding the third-party purchaser that is
material to investors in light of the circumstances of the particular
securitization transaction. One investor commenter generally supported
requiring disclosure of any other information regarding the purchaser
that is material to investors in light of the circumstances. A few
commenters were unsupportive of this disclosure requirement. One
commenter stated that there should be a safe harbor for the types of
information about the third-party purchaser and that requiring this
material information disclosure is too broad. Another commenter stated
that disclosure of ``material information'' is already required under
existing disclosure rules.
    The agencies are proposing disclosure requirements for the CMBS
option substantially consistent with the original proposal. The
agencies have carefully considered the concerns raised by commenters,
but believe that the importance of the proposed disclosures to
investors with respect to third-party purchasers, the retained residual
interest (including the purchase price), the material terms of the
eligible horizontal residual interest retained by each third-party
purchaser (including the key inputs and assumptions used in measuring
the total fair value of all classes of ABS interests, and the fair
value of the eligible horizontal residual interest), and the
representations and warranties concerning the securitized assets,
outweigh any issues associated with the sponsor or third-party
purchaser to making such information available.
    The agencies are also proposing again to require disclosure of the
material terms of the applicable transaction documents with respect to
the Operating Advisor, including without limitation, the name and form
of organization of the Operating Advisor, the qualification standards
applicable to the Operating Advisor and how the Operating Advisor
satisfies these standards, and the terms of the Operating Advisor's
compensation.
d. Transfer of B-Piece
    As discussed above, consistent with the original proposal, the
proposed rule would allow 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
of the proposed requirements for this option as described are met.
    Under the original proposal, the sponsor or, if an eligible third-
party purchaser purchased the B-piece, the third-party purchaser, would
have been required to retain the required eligible horizontal residual
interest for the full duration of the securitization transaction.
Numerous commenters urged that this proposal be changed to allow
transfer of the B-piece prior to the end of the securitization
transaction. Some of the commenters making this recommendation
requested a specified termination point (or ``sunset'') for the CMBS
risk retention requirement. Other commenters recommended that third-
party purchasers be permitted to transfer the retained interest to
other third-party purchasers, either immediately or after a maximum
waiting period of one year. Some commenters proposed that there be both
an overall sunset period for any risk retention requirement and that,
prior to the end of that period, transfers between qualified third-
party purchasers be permitted.
    Several commenters asserted that permitting transfers by third-
party purchasers was critical to the continuation of the third-party
purchaser structure for CMBS transactions. Another commenter, a
securitization sponsor, stated that the transfer restrictions included
in the original proposal would undermine the effectiveness of the CMBS
option because some investors could not (due to fiduciary or
contractual obligations) or did not desire to invest where such
restrictions would be imposed. A broker-dealer commenter stated that it
was crucial for the rules to give third-party purchasers some ability
to sell the B-piece to qualified transferees because third-party
purchasers or their investors would not be able to agree to a
prohibition on the sale of the B-piece investment for the entire life
of the transaction.
    Commenters that advocated a sunset for CMBS risk retention
generally requested that it occur after two-to-five years. Commenters
that requested permitted transfers to a qualified third-party purchaser
by the original B-piece holder prior to the end of the risk retention
requirement advocated that there be no minimum retention period by the
original B-piece holder, while one commenter suggested a one-year
initial retention period.
    Certain commenters contended that the restrictions of the original
proposal were not necessary to promote good underwriting and that
permitting transfer of the B-piece prior to the end of the
securitization transaction would be warranted because after a certain
amount of time, performance of the underlying commercial mortgages is
dependent more on economic conditions rather than an underwriting
requirement. One industry group stated that three years would be
sufficient to provide all securitization participants the opportunity
to determine the quality of underwriting, arguing that after a three-
year period, deficient underwriting or other performance factors would
be reflected in the sale price of the retained interest.
    Some of the commenters that recommended permitting transfers to
qualified third-party purchasers suggested additional conditions, such
as that the third-party purchaser also be a qualified institutional
buyer or accredited investor for purposes of the Securities Act of
1933, or that the transferee certify that it had performed the same due
diligence and had the same access to information as the original third-
party purchaser. One commenter suggested that qualified institutional
buyer or accredited investor status alone should cause an entity to
qualify as a qualified transferee of a third-party purchaser.
    The agencies have considered the points raised by commenters on the
original proposal with respect to transferability of the B-piece and
believe, for the reasons discussed further below, that limited
transfers prior to the end of the securitization transaction are
warranted. The agencies are therefore proposing, as an exception to the
transfer and hedging restrictions of the proposed rule and section 15G
of the Exchange Act, to permit 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 (as described above) in connection with such purchase.
The proposed rule also would permit transfers by any such subsequent
third-party purchaser to any other purchaser satisfying the criteria
applicable to initial third-party purchasers. In addition, in the event
that the sponsor retained the B-piece at closing, the proposed rule
would permit the sponsor to transfer such interest to a purchaser
satisfying the criteria applicable to third-party purchasers after a
five-year period following the closing of the securitization
transaction has expired. The proposed rule would require that any
transferring third-party purchaser provide the sponsor with complete
identifying information as to the transferee third-party purchaser.
    In considering the comments and formulating the revised proposed
rule, 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. The agencies
followed the analysis of the commenters who asserted that, after a five
year period, the quality of the underwriting would be sufficiently
evident that the initial third-party purchaser or, if there was no
initial third-party purchaser, the sponsor would suffer the
consequences of poor underwriting in the form of a reduced sales price
for such interest. The agencies also believe that the initial holder of
the B-piece, whether a third-party purchaser or the sponsor, would need
to assume that retention for a five-year period would result in such
holder bearing the consequences of poor underwriting and, thus, that by
permitting transfer after the five year period the agencies would not
be creating a structure which resulted in the initial holder being less
demanding of the underwriting than if it was required to retain the B-
piece until the full sunset period applicable to CMBS securitizations
had expired. In connection with this, the requirement (among other
conditions) that a subsequent purchaser, like the initial third-party
purchaser, conduct an independent review of the credit risk of each
securitized asset was important to the agencies, as this requirement
would emphasize to the initial B-piece holder that the performance of
the securitized assets would be scrutinized by any potential purchaser,
thus exposing the initial purchaser to the full risks of poor
underwriting.
    The standards for the Federal banking agencies to provide
exemptions to the risk requirements and prohibition on hedging are
outlined in section 941(e) of the Dodd-Frank Act. The exemption
described above would allow third-party purchasers and sponsors to
transfer a horizontal risk retention interest after a five year period
to sponsors or third-party purchasers that meet the same standards. The
agencies believe that under 15 U.S.C. 78o-11(e)(2), a five-year
retention duration helps ensure high underwriting standards for the
securitizers and originators of assets that are securitized or
available for securitization by forcing sponsors or initial third-party
purchasers to absorb a significant

portion of losses related to underwriting deficiencies. Furthermore,
the agencies believe that this exemption would meet the statute's
requirement that the exemption encourage appropriate risk management
practices by the securitizers and originators of assets, improve the
access of consumers and businesses to credit on reasonable terms, or
otherwise is in the public interest and for the protection of
investors. By limiting the risk retention requirement for CMBS to five
years rather than the entire duration of the underlying assets, the
agencies are responding to commenters' concerns that lifetime retention
requirements would eliminate B-piece buyers' ability to participate in
the CMBS market, and without their participation, market liquidity for
commercial mortgages would be severely impacted. The proposed approach
of requiring the third-party purchaser to hold for at least five years
accommodates continuing participation of B-piece buyers in the market,
in a way that still requires meaningful risk retention as an incentive
to good risk management practices by securitizers in selecting assets,
and addressing specific concerns about maintaining consumers' and
businesses' access to commercial mortgage credit.
    The agencies have not adopted the recommendations made by several
commenters that transfers to qualified third-party purchasers be
permitted with no minimum holding period or after a one year holding
period. The agencies decided that unless there was a holding period
that was sufficiently long to enable underwriting defects to manifest
themselves, the original third-party purchaser might not be
incentivized to insist on effective underwriting of the securitized
assets. This, in turn, would be in violation of section 941(e)'s
requirement that any exemption continue to help ensure high quality
underwriting standards. The agencies are therefore proposing a period
of five years based on the more conservative comments received as to
duration of the CMBS retention period. The agencies believe that
permitting transfers to qualifying third-party purchasers after five
years should not diminish in any respect the pressure on the sponsor to
use proper underwriting methods.
Request for Comment
    46. Should the period for B-piece transfer be any longer or shorter
than five years? Please provide any relevant data analysis to support
your conclusion.
    47(a). Should the agencies only allow one third-party purchaser to
satisfy the risk retention requirement? 47(b). Should the agencies
consider allowing for more than two third-party purchasers to satisfy
the risk retention requirement?
    48(a). Are the third-party qualifying criteria the agencies are
proposing appropriate? 48(b). Why or why not? 48(c). Would a sponsor be
able to track the source of funding for other purposes to determine if
funds are used for the purchase of the B-piece?
    49(a). Are the Operating Advisor criteria and responsibilities the
agencies are proposing appropriate? 49(b). Why or why not?
e. Duty To Comply
    The original proposal would have required the sponsor of a CMBS
transaction to maintain and adhere to policies and procedures to
monitor the third-party purchaser's compliance with the CMBS option and
to notify investors if the sponsor learns that the third-party
purchaser no longer complies with such requirements.
    Several commenters criticized the proposed monitoring obligations
because they believed that such monitoring would not be feasible for a
sponsor, especially the restriction on hedging. Some commenters
proposed alternatives, such as making the Operating Advisor responsible
for compliance by the third-party purchaser or using contractual
representations and warranties and covenants to ensure compliance.
    Another commenter suggested that the pooling and servicing
agreement or similar transaction document set forth a dispute
resolution mechanism for investors, including the ability of investors
to demand an investigation of possible noncompliance by the special
servicer upon request from a specified percentage of ABS and how the
costs of resulting investigations would be borne and that independent
parties would perform such investigations.
    The agencies have considered these comments but continue to believe
that it is important for the sponsor to monitor third-party purchasers.
A transfer of risk to a third-party purchaser is not, under the
agencies' view of the risk retention requirement, a transfer of the
sponsor's general obligation to satisfy the requirement. Although the
proposal allows third-party purchasers to retain the required eligible
horizontal residual interest, the agencies believe that the sponsor of
the CMBS transaction should ultimately be responsible for compliance
with the requirements of the CMBS option, rather than shifting the
obligation to the third-party purchaser or Operating Advisor, as some
commenters on the original proposal suggested, by requiring
certifications or representations and warranties. Additionally, the
agencies are not proposing a specific requirement that the pooling and
servicing agreement or similar transaction document include dispute
resolution provisions because the agencies believe that most investor
disputes, particularly disputes related to possible noncompliance by
the special servicer, will be resolved through the proposed Operating
Advisor process. However, this is not intended to limit investors and
other transaction parties from continuing to include negotiated rights
and remedies in CMBS transaction documents, including dispute
resolution provisions in addition to the proposed Operating Advisor
provisions.
    Accordingly, the agencies are proposing the same monitoring and
notification requirements as under the original proposal with no
modifications. The sponsor would be required to maintain policies and
procedures to actively monitor the third-party purchaser's compliance
with the requirements of the rule and to notify (or cause to be
notified) ABS holders in the event of any noncompliance with the rule.
6. Government-Sponsored Enterprises
a. Overview of Original Proposal and Public Comment
    In the original proposal, the agencies proposed that the guarantee
(for timely payment of principal and interest) by the Enterprises while
they operate under the conservatorship or receivership of FHFA with