impact of a certification requirement on differently-sized sponsors.
Because the SOX requirements apply primarily to operating companies
and include the internal control report requirement and the
auditor's attestation of the report in addition to officer
certification, we do not believe these studies provide a direct
comparison for assessing the impact of the certification alone. For
a general discussion of costs related to these requirements under
the Sarbanes-Oxley Act, see, e.g., Office of Economic Analysis,
Study of the Sarbanes-Oxley Act of 2002 Section 404 Internal Control
over Financial Reporting Requirements (2009), available at http://
www.sec.gov/news/studies/2009/sox-404study.pdf (finding
that the start-up costs related to SOX Section 404 compliance and
the internal control report requirement weighed proportionally more
on smaller companies, but dissipated over time and noting that 79%
of executives surveyed acknowledged that compliance had a positive
impact on the quality of their internal control structure); Cindy R.
Alexander, Scott W. Bauguess, Gennaro Bernile, Yoon-Ho Alex Lee, &
Jennifer Marietta-Westberg, Economic Effects of SOX Section 404
Compliance: A Corporate Insider Perspective, 56 J. Acct. & Econ. 267
(2013) (finding that corporate executives perceived significant
benefits from compliance, particularly for larger companies); Ehud
Kamar, Pinar Karaca-Mandic & Eric Talley, Sarbanes-Oxley's Effects
on Small Firms: What is the Evidence?, in In the Name of
Entrepreneurship? The Logic and Effects of Special Regulatory
Treatment for Small Business 143 (Susan M. Gates & Kristin J.
Leuschner, eds., Kauffman-RAND Inst. for Entrepreneurship Pub. Pol'y
2007) (discussing the impact of the entire Sarbanes-Oxley Act, not
only the CEO certification requirement); Ellen Engel, Rachel M.
Hayes & Xue Wang, The Sarbanes-Oxley Act and Firms' Going Private
Decisions, J. Acct. & Econ. (2007) (finding that the frequency of
going-private transactions increased after the passage of SOX, that
SOX compliance costs were more burdensome for smaller and less
liquid firms, and that small firms with highly concentrated
ownership structures had higher going-private announcement returns);
and Peter Iliev, The Effect of SOX Section 404: Costs, Earnings
Quality and Stock Prices, J. Fin. (2010) (finding that among small
companies, SOX compliance reduced the market value of those that had
to comply with Section 404 relative to those that did not because
they were under the $75 million compliance threshold).
---------------------------------------------------------------------------

    As noted above, commenters expressed concern that the certification
could be interpreted as a guarantee of the future performance of the
assets underlying the ABS. In an attempt to mitigate these costs and
taking into account commenters' suggestions, we have revised the
certification language to reflect that it is a statement of what is
known by the certifier at the time of the offering and that he or she
has a reasonable basis to conclude that the securitization is
structured to produce, but the certification is not a guarantee that it
will produce, expected cash flows at times and in amounts to service
scheduled payments of interest and the ultimate repayment of principal
on the securities (or other scheduled or required distributions on the
securities, however denominated) in accordance with their terms as
described in the prospectus.\961\ In addition, to address some
commenters' concerns about increased certifier liability, which would
in turn increase costs, the final certification includes a new
paragraph that clarifies that the certifier has any and all defenses
available under the securities laws.\962\
---------------------------------------------------------------------------

    \961\ See, e.g., letters from AFME, J.P. Morgan Chase & Co.
dated Oct. 4, 2010 submitted in response to the 2010 ABS Proposing
Release (``J.P. Morgan II''), SIFMA III-dealers and sponsors, and
Wells Fargo II.
    \962\ See, e.g., letters from ABA II, ABAASA II, ASF V, and J.P.
Morgan II.
---------------------------------------------------------------------------

    When deciding whether to conduct a shelf offering, an issuer may
consider the review and due diligence costs, the liability
implications, and the reputational consequences to the chief executive
officer of signing the certification. We believe that for
securitizations of low-risk pool assets, simple structures, or
structures used previously that have performed well in the past,
issuers likely will conclude that the due diligence, liability, and
reputation costs will be relatively low. For such securitizations these
costs will likely be justified by the benefits of quick access to the
capital markets, and these securitizations will continue to be offered
off a shelf registration statement. On the other hand, for
securitizations of high-risk assets and complex cash-flow structures,
the expected costs of shelf offerings may increase. Issuers may choose
not to use shelf registration because the chief executive officer may
need to dedicate additional time to review the pool assets and the
securitization structure in order to provide the assurances included in
the certification. In addition, for such securitizations, the potential
litigation risk to the chief executive officer may be higher, even when
prudent measures are employed to structure an offering, thus further
increasing the costs of shelf registration.
    We also acknowledge a commenter's concern that certification is not
a requirement for any other debt or equity offering and another
commenter's opinion that the certification requirement will impose a
barrier to new ABS issuance.\963\ We note, however, unlike other
offerings, ABS issuers can go directly to shelf without any reporting
and operating experience for the trust or any size requirement designed
to be a proxy for market following.\964\ We also note that the

principal executive and financial officers certify the Exchange Act
reports that are incorporated by reference into a shelf prospectus of a
corporate issuer. The certification requirement is not intended to be a
barrier to new issuance of ABS since the certification is not a
condition for selling or registering ABS as they may be offered in
unregistered transactions or registered on new Form SF-1. The
certification requirement, along with the other shelf transaction
requirements, should encourage ABS issuers to design and prepare ABS
offerings with greater oversight and care and should incentivize
issuers to provide investors with accurate and complete information at
the time of the offering. It is these transactions that are appropriate
to be offered to the public off a shelf without prior staff review. For
these reasons, we are not limiting the certification to disclosure
alone as suggested by some commenters, but we have taken into account
those commenters' concerns in developing the text of the final
certification.
---------------------------------------------------------------------------

    \963\ See letters from Kutak and SIFMA II-investors.
    \964\ We further note that we have replaced the investment-grade
rating shelf criterion for non-convertible securities with
alternative criteria that serve as proxies for market following. See
the Security Ratings Release.
---------------------------------------------------------------------------

    Other financial regulators, including foreign counterparts, have
adopted similar rules designed to enhance accountability for the
transaction structure. For example, the European Union adopted
requirements that ABS issuers disclose in each prospectus that the
securitized assets backing the issue have characteristics that
demonstrate a capacity to produce funds to service any payments due and
payable on the securities.\965\ Although we considered adopting an
issuer disclosure requirement, we believe that requiring the chief
executive officer to provide a certification is a stronger approach and
more appropriate for purposes of determining shelf eligibility.
---------------------------------------------------------------------------

    \965\ Annex VIII, Disclosure Requirements for Asset-Backed
Securities Additional Building Block, Section 2.1 (European
Commission Regulation (EC) No. 809/2004 (Apr. 29, 2004). See also
the North American Securities Administrators Association's
(``NASAA'') guidelines for registration of asset-backed securities,
in which sponsors are required to demonstrate that for securities
without an investment-grade rating, based on eligibility criteria or
specifically identified assets, the eligible assets being pooled
will generate sufficient cash flow to make all scheduled payments on
the asset-backed securities after taking certain allowed expenses
into consideration. The guidelines are available at http://www.nasaa.org/.
---------------------------------------------------------------------------

    Therefore, while we recognize that the new shelf certification
requirement introduces new costs to issuers, we believe that its net
effect on capital formation in the ABS markets would be positive. The
certification will help to ensure that the chief executive officer of
the depositor is actively involved in the oversight of the transaction,
and, as discussed above, along with the other shelf transaction
requirements, it should encourage ABS issuers to design and prepare ABS
offerings with greater oversight and care and should incentivize
issuers to provide investors with accurate and complete information at
the time of the offering. As a result, we believe that the
certification may also improve investor perceptions about the accuracy
and completeness of the disclosures, which may, in turn, help restore
investors' willingness to invest and participate in the ABS markets.
The impact of certification requirements in other contexts--in
particular, certification requirements under the Sarbanes-Oxley Act--
provides information about the potential consequences of certification
in the securitization market.\966\ Several academic studies found that
the overall effect on issuer's capitalization and on measures of market
efficiency has been estimated to be either neutral \967\ or
positive,\968\ suggesting that many investors perceived that the
benefits of SOX certification outweighed the costs. We believe there
will be potentially similar benefits for capital formation and market
efficiency resulting from the new shelf certification. The final
certification consists of five paragraphs.\969\ We discuss each one in
order below.
---------------------------------------------------------------------------

    \966\ We note that there are some differences between the SOX
certification requirements and the certification requirements in the
rule we are adopting. First, the burdens are different, as SOX
mandates that a CEO sign certifications that require a sizeable
commitment of resources, whereas the rule we are adopting may
require hundreds of ABS deals to be certified each year (see
footnote 959 for the estimates of annual certification burden per
depositor) but with a significantly lower burden for each
certification. Second, the SOX CEO certification carries both civil
and criminal penalties for false certification, and, thus, due in
part to the availability of criminal penalties, likely imposes
higher litigation costs for certifying officers and issuing
corporations than the new shelf certification.
    \967\ See Utpal Bhattacharya et al., Is CEO Certification of
Earnings Numbers Value-Relevant?, 14 J. Empirical Fin., 611 (2007)
and Brett R. Wilkinson & Curtis E. Clements, Corporate Governance
Mechanisms and the Early-Filing of CEO Certification, 25 J. Acct. &
Pub. Pol'y, 121 (2006). These papers examined the market reaction to
early filing of CEO certifications that the Commission required in
advance of the passage of SOX using event-study methodology and
found no reaction to early filing for the market as a whole. The
Battacharya et al. study also found that certification had a neutral
effect on returns, volatility of returns, and volume of trade not
only for early certifiers around their certification date, but for
the non-certifiers as well.
    \968\ See Hsihui Chang et al., CEOs'/CFOs' Swearing by the
Numbers: Does It Impact Share Price of the Firm?, 81 Acct. Rev. 1
(2006) (finding also that certifying firms benefited from a
significant decline in information asymmetry, as measured by bid-ask
spread, after certification) and Beverly Hirtle, Stock Market
Reaction to Financial Statement Certification by Bank Holding
Company CEOs, 38 J. Money Credit and Banking, 1263 (2006) (finding a
positive market reaction to certification requirements among bank
holding companies, given the inherent opacity in the banking system,
with the certification providing valuable information to investors).
Because we are requiring new asset-level disclosure to address
asymmetric information in addition to the shelf certification, we
recognize that the results from these studies may not provide a
fully comparable basis for the potential impact of requiring
certification for asset-backed securities.
    \969\ Consistent with other certifications, the language of the
certification must not be revised in providing the required
certification. See the 2004 ABS Adopting Release at 1570.
---------------------------------------------------------------------------

(i) Paragraph One
    The first paragraph of the final certification is substantially
similar to the re-proposed text, with some modifications made in
response to comments. The chief executive officer must make the
following statement:

    I have reviewed the prospectus relating to [title of all
securities, the offer and sale of which are registered] (the
``securities'') and am familiar with, in all material respects, the
following: The characteristics of the securitized assets underlying
the offering (the ``securitized assets''), the structure of the
securitization, and all material underlying transaction agreements
as described in the prospectus;

    As proposed, the certifier is required to certify that he or she
has reviewed the prospectus and the necessary documents to make the
certification. We believe that the chief executive officer should be
sufficiently involved in overseeing the transaction and should review
the prospectus and the documents necessary to make the certification.
Several commenters suggested that we clarify that the chief executive
officer may rely on senior officers under his or her supervision that
are more familiar and involved with the structuring of the transaction
in order to more accurately reflect the team-oriented nature of the
transaction.\970\ We understand that a principal officer of the
depositor may rely on the work of other parties, thus we are not
requiring that the chief executive officer actually structure the
transaction. We continue to believe, however, that the chief executive
officer should provide appropriate oversight so that he or she is able
to make the certification. Furthermore, the text of this certification
in this respect is consistent with the text of other certifications,
which do not specifically state that the certifier relied on the work
of others.\971\
---------------------------------------------------------------------------

    \970\ See letters from ABA II, ABAASA II, ASF V, BoA II, and
Wells Fargo II.
    \971\ See, e.g., the 2004 ABS Adopting Release at 1569 (amending
Item 601 of Regulation S-K to add specific form and content of the
required ABS Section 302 certification to the exhibit filing
requirements).

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

    At the suggestion of commenters, we are adding defined terms for
``securities'' and ``securitized assets'' for purposes of the
certification and incorporating those defined terms throughout the
remainder of the certification to ease readability.\972\ In the final
rule, the term ``securities'' refers to all of the securities that are
offered and sold with the related prospectus. The term ``securitized
assets'' refers to the assets underlying the securities that are being
offered.
---------------------------------------------------------------------------

    \972\ See letters from ABA II, ABAASA II, ASF V, CREFC II, and
J.P. Morgan II.
---------------------------------------------------------------------------

    Commenters also requested that the paragraph be revised to make it
more explicit that the certifier is responsible for knowing material
aspects of the assets and the material underlying transaction
agreements.\973\ Commenters argued that ``material'' is consistent with
customary disclosure principles, including Regulation AB, and therefore
provides consistency.\974\ Additionally, commenters explained that the
contracts for the transaction and the documents for each underlying
asset are extensive and that the certifying officer should not be
expected to be familiar with all of the terms in these documents.\975\
We have revised the first paragraph to clarify that the certifier is
speaking of material facts by inserting ``in all material respects.''
We have also used this phrase at the beginning of paragraphs three and
four to address similar concerns by commenters.
---------------------------------------------------------------------------

    \973\ See letters from ABA II, ABAASA II, AFME, ASF V, BoA II,
CREFC II, J.P. Morgan II, SIFMA III-dealers and sponsors, and Wells
Fargo II.
    \974\ See, e.g., letter from ABA II.
    \975\ See, e.g., letter from Wells Fargo II.
---------------------------------------------------------------------------

    We have deleted ``including without limitation'' in response to
commenters' suggestions that this language made the scope of the
certification unclear.\976\ In addition, some commenters requested that
we add ``described therein'' following ``am familiar with the structure
of the securitization'' to clarify that the certification is based on
the certifier's review of the prospectus.\977\ The final text does not
incorporate this suggestion because we do not believe the chief
executive officer's review should necessarily be based solely on the
review of the prospectus, which we discuss in more detail below.
---------------------------------------------------------------------------

    \976\ See letters from ABA II, ABAASA II, ASF V, BoA II, CREFC
II, and J.P. Morgan II.
    \977\ See letters from ABA II, ABAASA II, ASF V, CREFC II, and
J.P. Morgan II.
---------------------------------------------------------------------------

    Finally, under the re-proposed rule, the certifying officer could
take into account only internal credit enhancements in making the
certification.\978\ Commenters, however, believed that the certifier
should be permitted to take into consideration external credit
enhancement in providing the certification. One commenter noted, for
example, that investors in ABS with external credit enhancement rely on
and give credit for external credit enhancement just as they do for
internal credit enhancement.\979\ Another commenter noted that external
credit enhancements can play an integral role in maximizing the
likelihood that securities will receive payment.\980\ Further, one
issuer noted that it could not provide the certification unless it is
able to take into account external credit enhancements.\981\
---------------------------------------------------------------------------

    \978\ See footnotes 33 and 55 in the 2011 ABS Re-Proposal. In
the 2011 ABS Re-Proposing Release, we noted that internal credit
enhancement would include subordination provisions,
overcollateralization, reserve accounts, cash collateral accounts or
spread accounts, as well as guarantees applicable to an underlying
loan, whereas, external credit enhancement would include third-party
insurance to reimburse losses on the pool assets or the securities.
    \979\ See letter from SIFMA III-dealers and sponsors.
    \980\ See letter from ASF V.
    \981\ See letter from Sallie Mae II (noting that it could not
certify student loan transactions without taking into account
related government guarantees). In the 2011 ABS Re-Proposing
Release, we noted internal credit enhancement would include
guarantees applicable to the underlying loans.
---------------------------------------------------------------------------

    In light of comments, under the final rule, the certifier is
permitted to consider internal and external credit enhancement in
providing the certification. We continue to believe, however, that the
primary focus of the certification should be on the underlying assets
rather than on any credit enhancement since, consistent with the
Regulation AB definition of asset-backed security, the cash flows from
the pool assets should primarily service distributions on the ABS.\982\
We also note that we decided not to list ``credit enhancement''
specifically in the final certification because we believe that the
phrase ``the structure of the securitization'' encompasses, among other
things, credit enhancement and cash flows.
---------------------------------------------------------------------------

    \982\ See Regulation AB definition of asset-backed security in
Item 1101(c) of Regulation AB.
---------------------------------------------------------------------------

(ii) Paragraph Two
    We did not receive any comments suggesting specific changes to
paragraph two and we continue to believe that it is appropriate to
expect signers of a registration statement to satisfy themselves about
the accuracy of the disclosure at the time of each takedown. The chief
executive officer must make the following statement:

    Based on my knowledge, the prospectus does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading;
(iii) Paragraph Three
    The third paragraph of the final certification is substantially
similar to the proposed text, with some modifications. The chief
executive officer must make the following statement:

    Based on my knowledge, the prospectus and other information
included in the registration statement of which it is a part fairly
present, in all material respects, the characteristics of the
securitized assets, the structure of the securitization and the
risks of ownership of the securities, including the risks relating
to the securitized assets that would affect the cash flows available
to service payments or distributions on the securities in accordance
with their terms; and

    Paragraph three requires a certification that the disclosures in
the prospectus and other information in the registration statement are
fairly presented.\983\ Several commenters requested that we delete the
term ``fairly present'' and suggested that we use alternative
language.\984\ Some commenters noted that the term ``fairly presents''
is customarily used by experts primarily in certifying the accuracy of
the financial information.\985\ For example, one commenter stated that
because the certifying officer is not certifying to the accuracy of the
financial information, but rather to the adequacy of the disclosure in
the prospectus regarding the securitization it would be more
appropriate to use a different term.\986\ Commenters differed as to an
appropriate replacement. Several commenters recommended ``describe,''
\987\ and several other commenters suggested ``disclose.'' \988\ The
term ``fairly presents'' is used in our regulations with respect to
financial information; however, we do not intend for the term to have
the same meaning in this context. We are retaining the phrase in the
certification because we

believe it articulates the appropriate standard for the certification.
The term ``fairly presents,'' as adopted, will require the CEO to
consider whether the disclosure is tailored to the risks of the
particular offering and presented in a clear, non-misleading fashion.
Commenters also requested that we insert the term ``material'' in
certain places in the paragraph similar to their requests in connection
with paragraph one.\989\ We are not adding the term ``material'' in
multiple parts of the paragraph as requested because we believe that
the phrase ``in all material respects'' sufficiently captures
materiality across all the statements in the paragraph and therefore
use of the term ``material'' elsewhere in the paragraph would be
redundant.
---------------------------------------------------------------------------

    \983\ For the same reasons articulated in our discussion of
paragraph one, we have also added ``structure of the
securitization'' here in paragraph three and in paragraph four.
    \984\ See letters from ABA II, ABAASA II, AFME, ASF V, BoA II,
CREFC II, J.P. Morgan II, SIFMA III-dealers and sponsors, and Wells
Fargo II.
    \985\ See letters from ABA II, ASF V, J.P. Morgan II, SIFMA III-
dealers and sponsors, and Wells Fargo II.
    \986\ See, e.g., letter from ABA II.
    \987\ See letters from ABAASA II, ASF V, BoA II, J.P. Morgan II,
and Wells Fargo II.
    \988\ See letters from ABA II (recommending the term ``disclose
fairly''), AFME, CREFC II, and SIFMA III-dealers and sponsors.
    \989\ See, e.g., letters from ABA II, AFME, BoA II, SIFMA III-
dealers and sponsors, and Wells Fargo II (recommending adding
``material'' before ``credit enhancements''). See also letters from
BoA II and Wells Fargo II (proposing to add ``material'' before
``characteristics of the securitized assets'').
---------------------------------------------------------------------------

    In addition, paragraph three, as re-proposed, would have required
that the certifier consider the risk factors relating to the
securitized assets underlying the offering that would affect the cash
flows sufficient to service payments on the asset-backed securities as
described in the prospectus. Commenters requested that we revise our
reference to ``risk factors'' \990\ so that the certifier considers
instead ``all material risks'' because disclosure of risks related to
the securitized assets is not limited to the information included under
the risk factors section of the prospectus but also includes
information in other parts of the prospectus, such as historical static
pool ``loss'' data.\991\ One commenter recommended that instead of
referring to ``all risk factors,'' as proposed, that the certification
be limited to only the most significant risks because a certifying
officer cannot reasonably anticipate that an insignificant risk might
cause significant losses at the time the officer signs the
certification.\992\ The same commenter noted that the existing standard
for risk factor disclosure requires ``a discussion of the most
significant risk factors that make the offering speculative or risky''
and expressed concern that the language in paragraph three could lead
to increased disclosure of risk factors that are not significant to the
ABS transaction.\993\
---------------------------------------------------------------------------

    \990\ See letters from ABA II, ABAASA II, and ASF V. See also
letter from CREFC II (recommending a slightly different
qualification, namely that ``all risks relating to the Assets that
would materially and adversely affect the cash flows'') (emphasis
added).
    \991\ See, e.g., letter from ABA II.
    \992\ See letter from BoA II.
    \993\ See id. See also Item 1103(b) of Regulation AB and Item
503(c) of Regulation S-K.
---------------------------------------------------------------------------

    We have considered the comments received and are revising the
language of the certification to replace the phrase ``all risk
factors'' with ``the risks relating to the securitized assets that
would affect the cash flows available to service payments or
distributions on the securities in accordance with their terms.'' We
agree with commenters that the disclosure related to the risks of the
securitized assets is not limited to only the risk factor section of
the prospectus and may be appropriately presented in other parts of the
prospectus. Some commenters also believed that the certification with
regard to material risks related to the securitized assets should be
further qualified to include only those that would ``adversely'' affect
the cash flows ``available'' to service payments on the ABS ``in
accordance with their terms.'' \994\ We are not inserting the word
``adversely'' because we believe that the concept is incorporated in
the term ``risk'' and therefore would be redundant to include. We are,
however, revising the phrase ``cash flows sufficient'' to ``cash flows
available'' in order to more accurately reflect the nature of pass-
through certificates and junior tranches of registered ABS. We are also
adding the phrase ``in accordance with their terms'' as suggested,
because we believe it better describes the certification that we are
requiring by paragraph three (i.e., fair presentation of the risks
relating to the securitized assets that would affect the cash flows
available to service payments or distributions on the securities in
accordance with their terms).\995\
---------------------------------------------------------------------------

    \994\ See letters from ASF V and J.P. Morgan II.
    \995\ We are also making revisions to enhance readability by
listing each element of the certification in paragraph three, which
eliminates redundancies from the proposed language, as phrases in
the proposed language such as ``described therein'' and ``as
described in the prospectus'' are no longer necessary to include.
See letters from ABAASA II, ASF V, BoA II, J.P. Morgan II, and Wells
Fargo II (noting that it was unclear how the language after the
third comma modifies the prior portion of the sentence and also
whether this language is intended to extend the certification beyond
the disclosure to the performance of the transaction and
recommending that ``including all material credit enhancements''
should be moved to follow ``the material characteristics of the
securitized assets underlying the offering described therein'').
---------------------------------------------------------------------------

(iv) Paragraph Four
    Paragraph four of the final certification has also been modified.
As described below, we have also added a fifth paragraph to address
concerns related to paragraph four. The chief executive officer must
make the following statement:

    Based on my knowledge, taking into account all material aspects
of the characteristics of the securitized assets, the structure of
the securitization, and the related risks as described in the
prospectus, there is a reasonable basis to conclude that the
securitization is structured to produce, but is not guaranteed by
this certification to produce, expected cash flows at times and in
amounts to service scheduled payments of interest and the ultimate
repayment of principal on the securities (or other scheduled or
required distributions on the securities, however denominated) in
accordance with their terms as described in the prospectus.

    We have made revisions to this paragraph similar to revisions made
to paragraph one. First, commenters suggested that we add the word
``material'' because, in general, the paragraph should relate only to
material information about the securitized assets, the structure of the
securitization (as discussed below, which includes any credit
enhancement) and the related risks of the offering.\996\ We are adding
the phrase ``all material aspects of'' to paragraph four. Second,
commenters asked that we remove the limitation that the certifier
consider only internal credit enhancement in providing the
certification.\997\ In response to comments, we have revised paragraph
four to remove this limitation for the same reasons articulated in our
discussion of paragraph one.\998\
---------------------------------------------------------------------------

    \996\ See letters from ABA II, ABAASA II, ASF V, BoA II, CREFC
II, J.P. Morgan II, and Wells Fargo II.
    \997\ Several commenters contended that the certifying officer
must be permitted to take into account the external credit
enhancements given that they can play a critical role in certain
transactions. See letters from ABAASA II, ASF V, AFME, and SIFMA
III-dealers and sponsors. Another commenter requested that the
Commission clarify that external credit enhancement that is
ultimately backed by the full faith and credit of the United States
government may be considered by the certifying officer. See letter
from Sallie Mae II. This commenter explained that a certifying
officer cannot certify that ``a transaction backed by FFELP loans is
designed to produce cash flows at times and in amounts sufficient to
service expected payments on the ABS'' unless it is able to take
into account external credit enhancement. To address this issue,
this commenter recommended that the Commission either exempt ABS
transactions backed by FFELP loans from the proposed certification
requirement or clarify that external credit enhancements from
sources backed by the full faith and credit of the United States
government may be considered by the certifying officer.
    \998\ As we emphasized in connection with paragraph one, while
we are permitting the certifier to consider credit enhancement in
providing the certification, the primary focus in providing the
certification should be on the assets, not the credit enhancement.
We note that we have also removed the phrase ``any other material
features of the transaction'' from paragraph four since we also
believe that ``structure of the securitization'' encompasses such
features.

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

    We also received several detailed comments on the remaining text of
paragraph four. Some commenters suggested that we replace the word
``designed'' with ``structured'' when certifying to the cash flows that
will service payments on the securities.\999\ Commenters explained that
the term ``structured'' is better understood in the context of these
transactions and also reflects the nature of these securitizations as a
type of structured finance.\1000\ Several commenters recommended adding
that the securitization is structured ``to be expected to produce''
rather than just ``structured to produce'' for further clarification
that paragraph four does not constitute a guarantee.\1001\ We are
revising the final certification to use the term ``structured'' as
requested by some commenters; however, we note that we believe the term
``structured'' to encompass more than tranching to include, among other
things, selection of the assets, credit enhancement, and other
structural features designed to enhance credit and facilitate timely
payment of monies due on the pool assets to security holders.\1002\ We
are not inserting the term ``expected'' before ``to produce'' because
we believe that the concept of expected is implicit in the phrase
``structured to produce'' and that the phrase ``is not guaranteed by
this certification to produce'' adequately addresses some commenters'
concern about paragraph four constituting a guarantee.
---------------------------------------------------------------------------

    \999\ See letters from ABA II, ABAASA II, AFME, ASF V, BoA II,
CREFC II, J.P. Morgan II, SIFMA III-dealers and sponsors, and Wells
Fargo II.
    \1000\ See, e.g., letter from ABA II.
    \1001\ See letters from J.P. Morgan II and Wells Fargo II.
    \1002\ See, e.g., Item 1113 of Regulation AB (describing the
disclosure required for the structure of transaction).
---------------------------------------------------------------------------

    Many commenters stressed that they were unsure what the ``expected
payments'' would be with respect to any particular securitization, such
as with pass-through certificates or more junior tranches of registered
ABS. With respect to the issue of pass-through certificates, one
commenter noted that ``no fixed principal payments are required to be
made.'' \1003\ Additionally, several commenters explained that the
proposed language failed to account for the possibility that more
junior tranches of registered ABS may bear a moderate credit risk
somewhere in between the most senior registered tranches and the most
subordinated unregistered tranches.\1004\ Several commenters
recommended deleting ``expected payment'' and inserting ``the assets
will produce cash flows at times and in amounts sufficient to service
payments on the offered securities in accordance with the terms
described in the prospectus.'' \1005\ One commenter expressed concern
that the proposed form of the certification could be interpreted to
suggest that the adverse effects of the potential risk had been negated
through structuring.\1006\ Therefore, this commenter supported
modifying the certification so that it clearly states that the risks
described in the prospectus could adversely affect the cash
flows.\1007\ Other commenters similarly noted that the certification
fails to acknowledge the Commission's intent, as stated in the 2010 ABS
Proposing Release, to qualify the certification by the disclosure in
the prospectus.\1008\
---------------------------------------------------------------------------

    \1003\ See letter from ABA II (noting that many pass-through
securities ``require payment only to the extent of cash flows
actually received and available in accordance with the priority of
payments waterfall'' and also indicating that credit rating
agencies, in evaluating the likelihood of the payment on ABS
classes, typically refer to ``scheduled payments'' of interest and
``ultimate'' repayment of principal and recommended using those
terms here).
    \1004\ See letters from AFME, J.P. Morgan II, and SIFMA III-
dealers and sponsors.
    \1005\ See letters from AFME, J.P. Morgan II, SIFMA III-dealers
and sponsors, and Wells Fargo II.
    \1006\ See letter from ABA II. See also letter from Wells Fargo
II (stating that the certification, as currently drafted, could be
interpreted to say that the certifying officer has taken into
consideration all the material information included in the
prospectus and that, notwithstanding the risks and uncertainties
described in the prospectus, the certifying officer has certified
that the securitization is designed to produce cash flows sufficient
to service the ABS).
    \1007\ See letter from ABA II (recommending the following
language: ``provided that the risks described in the prospectus may
adversely affect such cash flows'').
    \1008\ See letters from ABAASA II, AFME (stating that it is
important that the certification specifically state that its
conclusion takes into account any assumptions described in the
prospectus, and also that it state that cash flows may vary if and
to the extent that any of the risk factors described in the
prospectus come to pass), ASF V, and SIFMA III-dealers and sponsors.
---------------------------------------------------------------------------

    To address commenters' concerns with ``expected payments,'' we have
revised paragraph four so that the certification relates to ``expected
cash flows at times and in amounts to service scheduled payments of
interest and the ultimate repayment of principal on the securities (or
other scheduled or required distributions on the securities, however
denominated) in accordance with their terms as described in the
prospectus.'' We agree with commenters that certain ABS may not be
required to produce fixed payments, as is the case with pass-through
certificates, and that using the term ``expected payments'' may have
caused confusion.\1009\ We believe the revised language provides
greater clarity as to what the chief executive officer is certifying to
and more precisely captures the varying terminology used to describe
the amounts due to investors depending upon the type of ABS
transaction.
---------------------------------------------------------------------------

    \1009\ See, e.g., letter from ABA II.
---------------------------------------------------------------------------

    We also recognize that characterizing the cash flows as
``sufficient'' to service the payments or distributions may have
inadvertently implied that there will always be adequate cash flows to
service such payments or distributions regardless of whether the ABS is
of a lower tranche or structured as a pass-through security. We have
deleted the term ``sufficient'' to eliminate this possible
confusion.\1010\ We believe, however, that even if fixed payments are
not required to be made, a securitization is structured with the
expectation that cash flows from the assets will provide distributions
at certain times and amounts, and accordingly we believe that
certification should reflect that expectation. We have therefore moved
``expected'' to before ``cash flows'' to clarify the requirement. We
also believe that this change addresses some commenters' concerns about
lower tranches of shelf registered ABS in that the expectation is not
so much related to payment as to how the cash flow has been structured
to allocate distributions of interest and principal.
---------------------------------------------------------------------------

    \1010\ We also removed the term ``sufficient'' in paragraph
three for the same reason where we changed the language from ``the
cash flows sufficient'' to ``cash flows available.''
---------------------------------------------------------------------------

    One commenter suggested inserting language to indicate that the
certifying officer's statements are his or her ``current beliefs'' and
that there may be future developments that would cause his or her
opinion to change or result in the assets not generating sufficient
cash flows.\1011\ Also, commenters stressed the importance of including
cautionary statements in the certification that identify those risks
and uncertainties as factors that could cause the actual results to
differ materially from those set forth in the certification.\1012\
Several commenters supported the Commission's language outlined in
Request for Comment No. 4 in the 2011 ABS Re-Proposal.\1013\ As we note
above,

the certification will be a statement of what is known by the certifier
at the time of the offering. This is made clear by the introductory
language to paragraphs three and four (``based on my knowledge'') and
therefore we have not made this change.\1014\ We are also revising the
text to insert the phrase ``a reasonable basis to conclude,'' as
suggested by some commenters to further clarify that the certification
applies to what is known at the time of securitization.\1015\ Many
commenters argued that paragraph four represents an assessment and
forecast of the future performance of the securitized assets and the
ABS, which would make it a forward-looking statement, and thus the
issuers should be entitled to protections afforded by the safe harbor
for forward-looking statements.\1016\ We do not believe that paragraph
four is protected by the statutory safe harbor for a forward-looking
statement.\1017\ We have, however, included ``related risks'' of the
securitized assets and structure as described in the prospectus to
address comments that the certifier should be allowed to take risk
disclosure into account. We also note that because the language of the
certification cannot be altered, any issues in providing the required
certification must be addressed through disclosure in the prospectus.
For example, if the prospectus describes the risk of nonpayment or
other risk that such cash flows will not be produced, then the
certifier would take those disclosures into consideration in signing
the certification.
---------------------------------------------------------------------------

    \1011\ See letter from J.P. Morgan II.
    \1012\ See letters from ABA II, AFME, BoA II, CREFC II, J.P.
Morgan II, SIFMA III-dealers and sponsors, and Wells Fargo II.
    \1013\ See letters from ABAASA II, AFME, ASF V, and SIFMA III-
dealers and sponsors. See also the 2011 ABS Re-Proposal Release at
47954, Request for Comment No. 4 (requesting comment on whether to
allow the certification to state, among other things, that it is
only an expression of the executive officer's current belief and is
not a guarantee that those assets will generate such cash flows).
    \1014\ Also note that paragraph one requires that the certifier
review the prospectus and the necessary documents regarding the
assets, transactions and disclosures.
    \1015\ See letters from ABAASA II, ASF V, J.P. Morgan II (noting
that this language is also consistent with the defenses that an
officer of a registrant would have under the federal securities
laws), and Wells Fargo II.
    \1016\ See letters from ABAASA II, AFME, ASF V, BoA II, CREFC
II, J.P. Morgan II, MBA III, SIFMA III-dealers and sponsors, and
Wells Fargo II.
    \1017\ The statutory safe harbor for forward-looking statements
is only available to an issuer that is subject to the reporting
requirements of Section 13(a) or Section 15(d) of the Exchange Act.
The depositor for the issuing entity of an asset-backed security is
a different ``issuer'' from that same person acting as a depositor
for any other issuing entity or for purposes of that person's own
securities. See Securities Act Rule 191 [17 CFR 230.191], and
Exchange Act Rule 3b-19 [17 CFR 240.3b-19]. Therefore, at the time
of an ABS takedown, other than in the case of master trusts, the
entity acting as issuer is not subject to the reporting requirements
of Section 13(a) or Section 15(d) of the Exchange Act. See
Securities Act Section 27A (15 U.S.C. 77z-2).
---------------------------------------------------------------------------

(v) Paragraph Five
    As discussed above, some commenters expressed concern over
potential increased liability with the certification. We acknowledge
that the potential litigation risk to the chief executive officer may
be higher, and we recognize that participants in securities offerings
who make statements about those offerings can face liability for their
statements, but we believe that possible additional risk to the
certifier is justified where each takedown provides investors with
offering information about the underlying assets and structure of the
securities and recent market events persuade us that these were
insufficient incentives for proper oversight over the transaction. In
this regard, we also note that the certification is tied to the
disclosure in the prospectus. For example, if the prospectus includes
disclosure that the terms of the securities do not include any
expectation (or limited expectation) that the structure will produce
cash flows sufficient to make distributions, the certifier would
nonetheless be able to sign the certification because the certification
is based, in part, on the disclosure in the prospectus. In response to
commenters' concerns about certifier liability,\1018\ we note that the
CEO can take steps to mitigate the risks of signing. In addition, the
final certification includes a fifth paragraph to further clarify that
the certifier has any and all defenses available to him or her under
the federal securities laws. The chief executive officer must make the
following statement:
---------------------------------------------------------------------------

    \1018\ See letter from ASF V (requesting that the Commission
make clear that the certifying officer have any and all defenses
available under the federal securities laws as a person signing the
registration statement and providing recommended language to include
in the certification). See also letters from ABA II & J.P. Morgan II
(supporting ASF's recommended language).

    The foregoing certifications are given subject to any and all
defenses available to me under the federal securities laws,
including any and all defenses available to an executive officer
that signed the registration statement of which the prospectus
referred to in this certification is part.
(vi) Signature Requirement
    In the 2010 ABS Proposing Release, we had proposed that the
depositor's chief executive officer sign the certification. We
explained that the chief executive officer of the depositor is already
responsible for the disclosure as a signer of the registration
statement.\1019\ We also asked, in the 2010 ABS Proposing Release,
whether an individual in a different position should be required to
provide the certification, such as the senior officer of the depositor
in charge of securitization, in order to be consistent with other
signature requirements for ABS. In response to comments, as part of the
2011 ABS Re-Proposal, we re-proposed to allow either the chief
executive officer of the depositor or the executive officer in charge
of securitization of the depositor sign the certification.
---------------------------------------------------------------------------

    \1019\ See the 2010 ABS Proposing Release at 23346.
---------------------------------------------------------------------------

    We received various comments on the appropriate party to sign the
certification. One commenter supported the re-proposal to allow ``the
executive officer in charge of securitization'' to sign the
certification but suggested modifying it to require the signature of
``an executive officer in charge of the securitization.'' \1020\ This
commenter explained that it may be the case that more than one person
may satisfy the role of executive officer in charge of securitization,
and it would be appropriate to permit the executive officer with
particular knowledge of the specific securitization to sign the
certification. In response to a request for comment in the 2011 ABS Re-
Proposal regarding whether we should conform signature requirements
across forms (e.g., Form 10-K and proposed Form SF-3),\1021\ one
commenter recommended that the ``senior officer in charge of
securitization'' sign the certification,\1022\ and another suggested we
broaden the list of signers to include the principal executive officer,
the principal financial officer and controller or the principal
accounting officer of the depositor.\1023\ One commenter recommended
requiring an executive officer with a title such as ``chief transaction
officer'' if the Commission is seeking a party to assume more
responsibility for disclosure.\1024\
---------------------------------------------------------------------------

    \1020\ See letter from MBA III (stressing that in the context of
CMBS it is common for more than one person to satisfy the definition
of executive officer who has worked closely with the
securitization).
    \1021\ See Request for Comment No. 3 in the 2011 ABS Re-
Proposing Release. The Form 10-K [17 CFR 249.310] report for ABS
issuers must be signed either on behalf of the depositor by the
senior officer in charge of securitization of the depositor, or on
behalf of the issuing entity by the senior officer in charge of the
servicing. In addition, the certifications for ABS issuers that are
required under Section 302 of the Sarbanes-Oxley Act must be signed
either on behalf of the depositor by the senior officer in charge of
securitization of the depositor if the depositor is signing the Form
10-K report, or on behalf of the issuing entity by the senior
officer in charge of the servicing function of the servicer if the
servicer is signing the Form 10-K report.
    \1022\ See letter from Sallie Mae II.
    \1023\ See letter from J.P. Morgan II.
    \1024\ See letter from Kutak (proposing ``chief transaction
officer'' (without defining this position) because the proposed
certification would not provide any additional oversight than what
is presently required with regard to the signers of a registration
statement).
---------------------------------------------------------------------------

    Commenters also provided comments as to why an executive officer
would be

unable to provide the certification. For example, some commenters
argued that executive officers lack the expertise to perform the credit
analysis necessary to provide the certification.\1025\ Another
commenter recommended that, with respect to paragraph four as to any
assurance about the structure and cash flows of the securitization, the
issuer, not a principal officer, should provide the certification
because the chief executive officer may be too removed from the process
and the team approach to securitization may not leave any one person in
a position to evaluate all of the material attributes of the
securitization.\1026\
---------------------------------------------------------------------------

    \1025\ See letters from AFME and SIFMA III-dealers and sponsors
(noting that executives may not be trained to perform the type of
credit analysis that would be required to give a certification and
that credit rating agencies are the more appropriate parties to
perform the credit analysis).
    \1026\ See letter from ABA II.
---------------------------------------------------------------------------

    Similarly, some commenters explained why an executive officer might
be unwilling to provide the certification. One commenter noted that
depositors would be unable to effectively price for the possibility of
liability under such a broad certification.\1027\ The commenter
explained that to the extent that an executive officer is willing to
sign it, he or she will likely do so only in the most conservative
circumstances, which may result in shelf-offered ABS of only the
highest quality and thus preclude shelf offerings of securities with
different credit risk and profiles. Another expressed concern that
principal officers may be discouraged from taking such positions due to
exposure to personal litigation.\1028\
---------------------------------------------------------------------------

    \1027\ See letter from SIFMA III-dealers and sponsors.
    \1028\ See letter from SIFMA II-investors.
---------------------------------------------------------------------------

    After considering the comments, the final rule requires that the
certification be signed by the chief executive officer. We are not
adopting the suggestion that the executive officer in charge of the
securitization for the depositor sign the certification, as re-
proposed, because we are not acting at this time on the proposal to
revise the signature requirements for the registration statement. We
believe that the certification should be signed by a signatory to the
registration statement. Furthermore, we believe that having the chief
executive officer as the sole signatory is appropriate for other policy
reasons. Although we understand that the chief executive officer may
not personally undertake credit analysis and that he or she will likely
rely on the work of others to assist him or her with structuring the
transaction and preparing the certification as noted by some
commenters, we believe that the depositor's chief executive officer, as
an officer of the depositor at the highest level, should be responsible
for providing proper oversight over the transaction and thus should be
held accountable for the structuring of the transaction and for the
disclosure provided in the prospectus supplement. In that regard, we
believe, as we did when we proposed the certification for Exchange Act
periodic reports, that a certification should cause the chief executive
officer to more carefully review the disclosure, and in this case, the
transaction, and to participate more extensively in the oversight of
each transaction.\1029\
---------------------------------------------------------------------------

    \1029\ See the 2011 ABS Re-Proposing Release at 47951 and the
2010 ABS Proposing Release at 23345.
---------------------------------------------------------------------------

(vii) Date of the Certification
    The date of the certification, as proposed, is required to be as of
the date of the final prospectus.\1030\ One commenter supported the
proposed date because the deal structure will be final at that time and
the final deal structure is what is being addressed in the
certification.\1031\
---------------------------------------------------------------------------

    \1030\ See Item 601(b)(36) of Regulation S-K [17 CFR
229.601(b)(36)]. The certification should be filed as an exhibit to
the final 424(b)(2) or (5) prospectus. See also new Item 1100(f) of
Regulation AB [17 CFR 229.1100(f)] (specifying procedures for filing
required exhibits).
    \1031\ See letter from Sallie Mae II.
---------------------------------------------------------------------------

(viii) Opinion by an Independent Evaluator Alternative
    In the 2011 ABS Re-Proposing Release, we also requested comments on
whether, in lieu of the requirement that the chief executive officer or
executive officer in charge of the securitization of the depositor
provide a certification, the Commission should allow an opinion to be
provided by an ``independent evaluator.'' \1032\ Several commenters
supported allowing an opinion by an ``independent evaluator'' in lieu
of the proposed certification.\1033\ One commenter believed that
allowing an opinion by an independent evaluator meeting particular
requirements would provide a more detached and objective basis for
certification.\1034\ The other commenter stressed that an independent
evaluator is particularly important in evaluating the structure of a
transaction given that structures are often the product of investment
bankers or third parties who know what securities will sell in the
market.\1035\ Relatedly, several commenters noted that a credit rating
agency is the more appropriate party to perform the credit analysis
required.\1036\
---------------------------------------------------------------------------

    \1032\ See Request for Comment No. 12 in the 2011 ABS Re-
Proposing Release.
    \1033\ See letters from C. Barnard (recommending independence,
experience, and related disclosure requirements related to the
independent evaluator) and Kutak (suggesting limiting information
disclosed to identification of the independent evaluator,
compensation, and affiliations and that the person not be considered
an expert).
    \1034\ See letter from C. Barnard (acknowledging that such
opinion could reduce the executive oversight of the transaction
structure but emphasized that the responsibility for the
certification would still reside with the executive).
    \1035\ See letter from Kutak.
    \1036\ See letters from AFME and SIFMA III-dealers and sponsors
(noting that any conflict of interest inherent in the rating
agency's credit analysis would be magnified exponentially were such
analysis to be effectively required to be undertaken by an affiliate
of an issuer). Additionally, SIFMA III-dealers and sponsors was
troubled that given the Commission's express intent to reduce the
reliance on credit analysis by NRSROs, that shelf eligibility would
instead be conditioned on a credit analysis by an officer of the
depositor.
---------------------------------------------------------------------------

    In contrast, one commenter noted its opposition to allowing the use
of an independent evaluator, stating that the certification, as
proposed, may result in a more careful review of the disclosure and
transaction by the issuer and ultimately higher-quality ABS in shelf
offerings.\1037\ Another commenter recommended that we not mandate the
use of an independent evaluator, explaining that it is uncertain,
especially in the RMBS market, whether there are companies willing to
serve as an independent evaluator given the possibility of increased
liability and preclusion from performing other more desirable roles in
the transaction.\1038\
---------------------------------------------------------------------------

    \1037\ See letter from CFA II.
    \1038\ See letter from MBA III.
---------------------------------------------------------------------------

    As reflected in the comments above, an independent evaluator
alternative may provide benefits to investors and issuers. For issuers
that conduct offerings on an infrequent basis, such an alternative may
be less costly than implementing an infrastructure in order for the
chief executive officer to conduct the review required by the
certification. However, as one commenter noted with respect to RMBS,
such issuers may encounter difficulty hiring a company that is willing
to provide such services and sign the certification.\1039\ A
certification by the chief executive officer is designed to increase
internal oversight within the issuer. For investors, the independent
evaluator may be able to provide a more detached and objective opinion;
however, investors should also benefit from the enhanced internal
oversight by the issuer obtained from the CEO certification. We are
therefore not adopting the independent evaluator as

an alternative to providing a certification.
---------------------------------------------------------------------------

    \1039\ See letter from MBA III.
---------------------------------------------------------------------------

(2) Asset Review Provision
(a) Proposed Rule
    Investors have expressed concerns about the effectiveness of the
contractual provisions related to the representations and warranties
about the pool assets and the lack of responsiveness by sponsors about
potential breaches.\1040\ A significant hurdle faced by investors
seeking to enforce repurchase obligations has been that transaction
agreements typically have not included specific mechanisms to identify
breaches of representations and warranties or to resolve a question as
to whether a breach of the representations and warranties has occurred.
Further, investors have had to rely upon the trustees to enforce
repurchase covenants because the transaction agreements do not
typically contain a provision for an investor to directly make a
repurchase demand. Investors have been frustrated with this structure
and process because trustees have not enforced repurchase rights, and
investors have been unable to locate other investors in order to force
trustees to do so.\1041\ Furthermore, these contractual agreements have
frequently been ineffective because, without access to documents
relating to each pool asset, it can be difficult for the trustee, which
typically notifies the sponsor of an alleged breach, to determine
whether a representation or warranty relating to a pool asset has been
breached.\1042\ The impact of these difficulties for investors is
particularly concerning given the pervasiveness of misrepresentation
among securitized residential real estate loans in the 2000's.\1043\
---------------------------------------------------------------------------

    \1040\ In the underlying agreements for an asset securitization,
sponsors or originators typically make representations and
warranties about the pool assets and their origination, including
representations about the quality of the pool assets. Upon discovery
that a pool asset does not comply with the representation or
warranty, an obligated party (typically the sponsor) must repurchase
the asset or replace it with an asset that complies with the
representations and warranties. See the 2011 ABS Re-Proposal at
47956-57. See also the Section 943 Adopting Release at 4489-90.
    \1041\ Typically, investor rights require a minimum percentage
of investors acting together in order to enforce the representation
and warranty provisions contained in the underlying transaction
agreements. See Housing Finance Reform: Fundamentals of a
Functioning Private Label Mortgage Backed Securities Market Hearing
Before the S. Comm. on Banking, Housing & Urban Affairs, 113th Cong.
39 (2013) (statement of Adam J. Levitin, law professor at Georgetown
University Law Center) (noting that ``before PLS [private label
securities] investors are able to spur a trustee to take action to
protect their interests, they face the challenge of limited
information available on which to determine if an event of default
has occurred, the information problem of identifying other PLS
investors in their deal, and the collective action problem of
coordinating the required threshold of PLS investors (who do not
always have identical incentives and may trade in and out of their
positions), and the expense of indemnifying the trustee).
    \1042\ See, e.g., Kathryn Brenzel, $615M MBS Suit Aims To
Rewrite Deal's Terms, Deutsche Says, Law360, May 6, 2013 (noting
that the defendant argued that the notification provided by the
trustee did not adequately show misrepresentations). Our requirement
addresses this problem because the review required will provide
evidence of misrepresentations that the trustees and investors can
then use in making a repurchase request.
    \1043\ Between 10% and 30% of securitized residential real
estate loans exhibited some indication of potential
misrepresentation. See Tomasz Piskorski et al., Asset Quality
Misrepresentation by Financial Intermediaries: Evidence from RMBS
Market, (Nat'l Bureau of Econ. Research, Working Paper No. 18843,
2013) and John Griffin & Gonzalo Maturana, Who Facilitated
Misreporting in Securitized Loans?, (University of Texas at Austin,
Working Paper, 2013), available at http://papers.ssrn.com/sol3/
papers.cfm?abstractid=2256060&download=yes.
---------------------------------------------------------------------------

    To address this concern, we proposed in the 2011 ABS Re-Proposal as
one of the transaction requirements for shelf eligibility, that the
underlying transaction documents of an ABS include provisions requiring
a review of the underlying assets of the ABS for compliance with the
representations and warranties upon the occurrence of certain post-
securitization trigger events. Specifically, we proposed that the
transaction agreements require, at a minimum, a review of the
underlying assets (1) when the credit enhancement requirements, as
specified in the transaction documents, are not met, or (2) at the
direction of investors pursuant to processes provided in the
transaction agreement and disclosed in the prospectus.\1044\ We
proposed that the review would be conducted by a ``credit risk
manager'' who would have access to the underlying loan documents to
assist in determining whether the loan complied with the
representations and warranties provided to investors.\1045\ A report of
the findings and conclusions of the review would be provided to the
trustee to use in determining whether a repurchase request would be
appropriate, and would also be filed as an exhibit to the Form 10-D.
---------------------------------------------------------------------------

    \1044\ We also proposed that disclosure of the findings and
conclusions of the review be required on Form 10-D if an event
triggers a review.
    \1045\ Under the proposal, the credit risk manager would be
appointed by the trustee and could not be affiliated with any
sponsor, depositor, or servicer in the transaction. Disclosure about
the experience of the credit risk manager in prospectuses would also
be required.
---------------------------------------------------------------------------

    Finally, we proposed to require certain provisions in the
underlying transaction agreements that would help to resolve repurchase
request disputes. We discuss the dispute resolution provision
requirement below in Section V.B.3.a)(3) Dispute Resolution Provision
because we are adopting it as a stand-alone shelf eligibility
condition.
    As noted above, studies have highlighted the extent of
misrepresentations among securitized residential real estate loans in
the 2000's; however, we are unable to quantify the extent to which
enforcing representations and warranties was an issue during the
crisis. While recently adopted Exchange Act Rule 15Ga-1 implementing
Section 943 of the Dodd-Frank Act requires disclosure of fulfilled and
unfulfilled repurchase request activity, as a practical matter, it does
not address directly the enforceability of put-back provisions in the
underlying transaction agreements. Further, the historical data
provided by Rule 15Ga-1 is limited, as initially only those
securitizers that issued ABS between January 1, 2009 and December 31,
2011 were required to report on Form ABS-15G demand and repurchase
history that occurred during that same period.\1046\ As we discussed in
the Section 943 Adopting Release, we limited the rule to a three-year
look-back period because we recognized concerns regarding the
availability and comparability of historical information related to
repurchase demands.\1047\ While we recognize these limitations, we used
the information contained in recent Form ABS-15G filings in order to
provide some baseline information on current market practices. Based on
Form ABS-15G filings of the first quarter of 2013, we find that more
than 99% of repurchase requests are in dispute, and with respect to the
resolved requests: 16.5% were satisfied, 48.5% were withdrawn, and 35%
were rejected.\1048\ These numbers highlight the fact that enforcing
representations and warranties may be time-consuming and lead to
uncertain outcomes for investors. We believe that the asset review
shelf requirement will help to address this problem and enhance the

enforceability of the representations and warranties regarding the pool
assets.
---------------------------------------------------------------------------

    \1046\ See Exchange Act Rule 15Ga-1(c)(1). After December 31,
2011 all securitizers are required to report, on a quarterly basis,
demand and repurchase activity for any new or outstanding ABS. See
Exchange Act Rule 15Ga-1(c)(2).
    \1047\ See the Section 943 Adopting Release at 4498-99. We noted
that the three-year look-back period for initial disclosures struck
the right balance between the disclosure benefits to investors,
availability of historical information and compliance costs to
securitizers. In doing so, we acknowledged that older data may be
very hard or impossible for securitizers to obtain if they have not
had systems in place to track the data required for the required
disclosures, which may lead to less comparable data.
    \1048\ We found similar figures for Form ABS-15G filings in
other quarters.
---------------------------------------------------------------------------

(b) Comments on Proposed Rule
    Several commenters generally agreed that a review of assets for
compliance with representations and warranties should be a shelf
eligibility requirement.\1049\ Commenters made it clear that investors
desire more robust representation and warranty enforcement
mechanisms.\1050\ Many commenters noted that a review mechanism would
enhance investor protection and promote the integrity of asset-backed
securities.\1051\ Some commenters argued that the proposed requirement
should not be imposed upon transactions other than RMBS
transactions.\1052\ They were concerned that enforcement mechanisms
could increase costs on transactions where there have been only a
limited number of repurchase requests historically.\1053\ Some
commenters responded to the 2011 ABS Re-Proposal by suggesting that the
Commission adopt, as an alternative criterion for shelf eligibility for
asset classes other than RMBS, the original proposed shelf requirements
that there be a quarterly third-party review of the assets for
compliance with the representations and warranties, which we did not
re-propose in light of comments.\1054\ Below we discuss comments about
the various parts of the proposal.
---------------------------------------------------------------------------

    \1049\ See letters from C. Barnard, ICI II, MBA III, Metlife II,
Prudential II, SIFMA II-investors, and Sallie Mae II.
    \1050\ See letters from Metlife II, Prudential II, and SIFMA II-
investors (stating that they do not believe the ABS market will
recover without a mechanism to enforce breaches of representations
and warranties).
    \1051\ See letters from ASF III, C. Barnard, ICI II (noting that
``it would provide investors with a stronger basis to pursue
remedies under the transaction agreement for violations of
representations and warranties relating to pool assets, and create
better incentives for obligated parties to consider and monitor the
quality of the assets in the pool''), Prudential II, and SIFMA II-
investors.
    \1052\ See letters from ABA II (stating that transactions with
assets that have no meaningful history of repurchase demands should
not be subject to the requirement), ABAASA II (noting that the
proposed requirement should be required only for RMBS transactions),
ASF III, J.P. Morgan II, and Wells Fargo II (stating that credit
card and auto transactions should not be subject to the
requirement), BoA II (recommending a tailored approach), Sallie Mae
II (noting student loans should not be subject to the proposal), and
VABSS III (noting that auto deals have not had a history of
significant repurchases and thus should not incur the costs
associated with the proposed requirement).
    \1053\ See letters from ABA II, ABAASA II, ASF III, and Wells
Fargo II (all supporting a review system for residential mortgage-
backed securities transactions and opposing a requirement for other
asset-backed securities that do not typically have repurchase
demands).
    \1054\ See letters from ASF III, BoA II, and VABSS III. In the
2010 ABS Proposing Release, the Commission proposed to require a
provision in the pooling and servicing agreement requiring the party
obligated to repurchase the assets for breach of representations and
warranties to periodically furnish an opinion of an independent
third party regarding whether the obligated party acted consistently
with the terms of the pooling and servicing agreement with respect
to any loans that the trustee put back to the obligated party for
violation of representations and warranties and which were not
repurchased. In the 2011 ABS Re-Proposal, we replaced the quarterly
third-party opinion proposal with a proposed review of the
underlying assets upon certain triggers being reached in response to
the comments received on the 2010 ABS Proposal.
---------------------------------------------------------------------------

    Commenters provided varying comments on the appropriateness of the
proposed review triggers. Several commenters suggested that a trigger
for review should not be tied to credit enhancement, as proposed.\1055\
Commenters stated that, for most transactions, a credit enhancement
trigger would not be a feasible measurement across asset classes
because many deals provide for a buildup of credit enhancement over
time and, under the proposed rule, the first distribution could trigger
a review.\1056\ One commenter stated that certain transactions do not
have pool-level credit enhancements that would trigger a review.\1057\
Given these potential issues with a credit enhancement trigger, some
commenters suggested as an alternative that the trigger for review be
based on a more common measurement of asset performance such as
delinquencies.\1058\
---------------------------------------------------------------------------

    \1055\ See letters from ABA II, ABAASA II, ASF III, BoA II,
CREFC II, J.P. Morgan II, Kutak, MBA III, SIFMA III-dealers and
sponsors, VABSS III, and Wells Fargo II.
    \1056\ See, e.g., letters from ASF III, SIFMA III-dealers and
sponsors, and Wells Fargo II (explaining that transactions involving
assets with interest rates in excess of the rates required to be
paid on the ABS may initially be structured with little or no
initial overcollateralization and that the required credit
enhancement is built up over time by applying excess interest to pay
principal on the ABS, resulting in overcollateralization), BoA II
(noting that in cases where credit enhancement is built over time,
credit enhancement levels do not meet required target levels during
most of the early life of the deal), VABSS III (noting that while
credit enhancement may increase over time, in other transactions,
credit enhancement can be reduced if certain performance results are
achieved).
    \1057\ See letter from MBA III.
    \1058\ See letters from ASF III (suggesting objective factors
such as cumulative losses, delinquencies, or average loss severity
be the trigger), Metlife II (noting the review should be based on
delinquencies as a percentage of the original subordination for the
senior-most class in a transaction), Prudential II (stating that a
review should be triggered if the 60+ day delinquencies percentage
is greater than the currently available credit support or if a loan
becomes 90 days delinquent within six months of the loan's
origination or four months from being included in the pool) and
Sallie Mae II (recommending ``linking the action of the CRM to an
element that can arise across all asset classes and all structures,
namely losses'').
---------------------------------------------------------------------------

    As part of the 2011 ABS Re-Proposal, we requested comments on
certain aspects of the investor-directed trigger. For example, we
requested comment on whether we should require that at least 5% of
investors must first call for an investor vote on the question of
whether to initiate a review before a vote occurs.\1059\ Although
comments received were mixed, several commenters supported such a
provision.\1060\ Additionally, many commenters agreed that investors
should have the ability to direct a review of assets and suggested
procedures that would provide investors with an effective means to
request a review while minimizing baseless claims that could impose
costs.\1061\
---------------------------------------------------------------------------

    \1059\ See Request for Comment No. 30 in the 2011 ABS Re-
Proposing Release at 47958.
    \1060\ See letters from Metlife II (suggesting that we require
5% of investors to initiate a vote), Prudential II, and SIFMA II-
investors (suggesting that at least 5% of the total interest in the
pool may poll other investors to determine whether a review should
be performed). See also letter from Metlife I (explaining that the
vast majority of securitization transactions require a ``25%-in-
interest voting threshold'' before the trustee can be directed by
investors to undertake actions such as polling investors as to
whether to exercise rights or remedies under the transaction
agreements).
    \1061\ See, e.g., letters from ASF III (stating that its
investor members generally favor the proposal while issuer members
generally oppose it), J.P. Morgan II (stating their belief that
investors representing a minimum of 25% of the pool be required to
trigger a review), MBA III (noting that a threshold of investors
should be required to agree to a review due to the potential costs),
Prudential II (stating that note holders should be permitted to
request a credit risk manager review if 25% of the note holders
believe a review is warranted), SIFMA II-investors (stating their
belief that a review be triggered if investors with at least 25% (by
principal balance) of the total interest in the pool of securitized
assets agree to a review), and Sallie Mae II (suggesting specific
requirements if the final rule permits investors to direct a review
independently of the credit enhancement trigger).
---------------------------------------------------------------------------

    We also requested comment on whether, as an alternative to
specifying voting procedures, it would be appropriate to specify
certain maximum conditions, where the percentage of investors required
to direct review could be no more than a certain percentage, such as
5%, 10%, or 25%. Commenters provided differing views on imposing
maximum conditions. Several commenters suggested that 25% would be the
appropriate percentage of investors that should agree to a review
before one is required.\1062\ Another

commenter suggested that we consider a majority or plurality of those
casting a vote, and that we also specify a quorum requirement.\1063\
One commenter suggested that a super-majority would be
appropriate.\1064\
---------------------------------------------------------------------------

    \1062\ See letters from J.P. Morgan II (stating that ``if there
is a requirement for review based on a certain percentage of
investors, we strongly recommend that the required percentage of
investors required to direct a review be no less than 25% of each
class of securities outstanding''), Prudential II (``Note holders
should be permitted to request a credit risk manager review if 25%
of the note holders believe a review is warranted. A 25% threshold
would serve to limit both the number of frivolous claims and any
unnecessary credit risk manager expenses.''), and Sallie Mae II
(stating that if an investor is allowed to direct a review, among
other requirements, the requesting investor must own at least 25% of
the outstanding principal balance of the related ABS).
    \1063\ See letter from Metlife II.
    \1064\ See letter from Wells Fargo II.
---------------------------------------------------------------------------

    With respect to disclosing the report on the findings and
conclusions of the review, several commenters recommended that we
require a summary of the report instead of the proposed requirement
that the full report be filed as an exhibit to Form 10-D because of
privacy concerns or potential problems that the requirement would cause
with workouts or modifications with delinquent borrowers.\1065\
---------------------------------------------------------------------------

    \1065\ See letters from ASF III (noting that the report may
include confidential or non-public personal information on
obligors), CREFC II (stating too much detailed information provided
to the public could provide a borrower with an inappropriate
advantage in negotiations), MBA III, and Wells Fargo II.
---------------------------------------------------------------------------

    We also received comments on the selection and appointment of the
credit risk manager. Commenters, in general, opposed the proposal to
require that the trustee appoint the credit risk manager. Commenters
noted that the trustee would not be a suitable party to appoint the
credit risk manager and would not be likely to accept the
responsibility for appointing the credit risk manager.\1066\
Furthermore, commenters generally explained that the appointment by a
trustee would be unworkable since the trustee is not typically a party
to the transaction until it closes, therefore the trustee would
technically not have the authority to appoint the manager until after
the transaction closes.\1067\ One of these commenters stated that it is
important to have details about the manager disclosed in the prospectus
so that investors can fully understand their impact on the
transaction.\1068\
---------------------------------------------------------------------------

    \1066\ See, e.g., letters from ABA II (noting that appointing
any transaction party is outside the scope of a trustee's duties),
ASF III (stating that in conversation with trustees the trustees
have indicated their discomfort with appointing a manager), BoA II,
J.P. Morgan II, SIFMA III-dealers and sponsors (noting that trustees
would not likely accept the responsibility of appointing a manager),
and VABSS III (stating that the independent reviewer should be
appointed in the relevant agreement but not solely by the trustee).
    \1067\ See letters from ABA II, ABAASA II, ASF III, BoA II,
SIFMA II-investors, and VABSS III.
    \1068\ See letter from ABAASA II.
---------------------------------------------------------------------------

    With respect to the proposed prohibited affiliations between the
credit risk manager and certain transaction parties, several commenters
supported the proposal, although some commenters suggested that we not
permit the credit risk manager to be affiliated with other additional
transaction parties, such as the trustee or any investor.\1069\ One
commenter stated that the credit risk manager should not be affiliated
with any party hired by the sponsor or underwriter to perform pre-
closing due diligence on the pool assets.\1070\ However, one commenter
suggested that the proposal to limit affiliations was overly
broad.\1071\
---------------------------------------------------------------------------

    \1069\ See letters from Better Markets (stating that, to ensure
independence, the proposal must provide that the manager have no
conflicts of interest with any party including investors), J.P.
Morgan II (suggesting that the manager not be affiliated with other
transaction parties such as the trustee or any investor), Metlife II
(noting that independence from other parties in the securitization
is imperative), Prudential II (also stating the manager not be
affiliated with the trustee), and SIFMA II-investors.
    \1070\ See letter from SIFMA II-investors.
    \1071\ See letter from MBA III.
---------------------------------------------------------------------------

    Additionally, commenters provided comments about other aspects of
the credit risk manager. For example, some commenters recommended that
we revise the title ``credit risk manager'' as it may not properly
describe its function.\1072\ Commenters also stated that it was
important for managers to have access to the underlying documents in
order to perform their duties.\1073\ Some commenters also offered their
views about the process and conditions for the removal and replacement
of a credit risk manager. One commenter stated that it would be
acceptable for the trustee to appoint a new credit risk manager if the
existing one needs to be removed or replaced for any reason.\1074\
Another commenter suggested that we require an affirmative vote of 25%
of the investors in order for investors to initiate replacement.\1075\
One commenter recommended that the transaction documents detail the
conditions and process for removal.\1076\
---------------------------------------------------------------------------

    \1072\ See letters from ASF III and VABSS III (both noting that
prior credit risk managers had varied functions including loss
mitigation and reporting advice to the servicer), and Wells Fargo II
(noting that the title ``credit risk manager'' could be misleading
because the credit risk manager would not guarantee the credit of an
underlying borrower).
    \1073\ See letters from Metlife II, Prudential II, and SIFMA
III-dealers and sponsors (generally expressing support for the
proposal to require the manager to have access to all underlying
documents including the underwriting guidelines and credit
underwriting files and any other documents necessary to investigate
compliance).
    \1074\ See letter from MBA III (RMBS).
    \1075\ See letter from Prudential II.
    \1076\ See letter from MetLife II.
---------------------------------------------------------------------------

(c) Final Rule and Economic Analysis of the Asset Review Provision
    We are adopting, as a second shelf eligibility requirement, that
the underlying transaction agreements include provisions requiring a
review of pool assets in certain situations for compliance with the
representations and warranties made with regard to those assets. Under
the final rule, the agreements must require a review, at a minimum,
upon the occurrence of a two-pronged trigger based first upon the
occurrence of a specified percentage of delinquencies in the pool and
if the delinquency trigger is met, then upon direction of investors by
vote. We have made modifications to the review triggers, discussed
below, that we believe help to address some of the cost concerns
expressed by commenters for asset classes that historically have seen a
limited number of repurchase requests. Because we are unable to predict
which asset classes may experience problems in the future, we believe
that it is prudent to impose this requirement for all asset
classes.\1077\
---------------------------------------------------------------------------

    \1077\ We note, for example, that there was not a need to
enforce representations and warranties for RMBS and CMBS until the
crisis.
---------------------------------------------------------------------------

    We have taken into consideration the array of comments received
related to the triggers and potential costs, while at the same time
balancing the need for stronger mechanisms to enforce underlying
contract terms. As we noted above, most transaction agreements lack a
specific mechanism for investors to not only identify potential assets
that fail to comply with the representations and warranties made but
also to resolve a question of whether noncompliance of the
representations and warranties constitutes a breach of the contractual
provisions. These problems have been compounded by the fact that
investors typically cannot make repurchase requests directly, thus they
have had to rely upon the trustees who have not enforced repurchase
requests in most circumstances. We believe that adopting this shelf
provision coupled with the new dispute resolution and investor
communication shelf requirements should provide investors with
effective tools to address the enforceability of repurchase obligations
and help overcome collective action problems. In that regard, we see
these shelf requirements working together to help investors enforce
repurchase obligations. Our investor communication provision, discussed
below, will help investors to communicate with each other in order to
determine whether they should vote to direct a review of the assets and
later

whether to initiate a repurchase request. The review of the assets
required once certain triggers are met will not only benefit investors
in determining whether the assets have breached the representations and
warranties but also whether to move forward with a repurchase request.
Additionally, should those parties with repurchase obligations fail to
address investors' repurchase requests in a timely manner, investors
will now have a means to demand resolution through arbitration or
mediation. We believe that these transactional safeguards will
collectively enhance the enforceability of representations and
warranties about the pool assets and provide incentives for obligated
parties to more carefully consider the characteristics and quality of
the assets that are included in the pool. Therefore, this shelf
transaction requirement should encourage ABS issuers to design and
prepare ABS offerings with greater oversight and care. We believe that
stronger enforcement mechanisms should incentivize issuers to provide
investors with accurate and complete information at the time of the
offering. It is these transactions that are appropriate for public
offerings off a shelf without prior staff review. The magnitude of
these benefits will depend on whether the reviewers are able to
correctly evaluate the contractual terms to identify non-compliance
with the representations and warranties about the pool assets. Such
evaluations may be challenging to the extent that the contractual
language for the representations and warranties are incomplete or
ambiguous. Nonetheless, we conclude that the asset review provision
will enhance investor protection for the reasons stated above. We also
note that the review requirement we are adopting is similar to post-
crisis industry efforts, such as the American Securitization Forum's
Project RESTART, which includes repurchase principles for
investigating, resolving, and enforcing remedies with respect to
representations and warranties in RMBS transactions.\1078\
Additionally, some recent CMBS deals have included a provision for a
third-party review of the underlying assets.
---------------------------------------------------------------------------

    \1078\ See letter from ASF III.
---------------------------------------------------------------------------

    While we believe that this review requirement will enhance the
enforceability of repurchase obligations, we acknowledge that it will
also increase costs, particularly on investors, who will incur the
expense of the reviews. A group of investors noted that despite the
additional costs, increased investor protection will produce net
economic benefits to investors.\1079\ We expect that the bulk of the
costs for this shelf requirement will be incurred with individual
reviews of pool assets directed by investors. There will also be some
expense arising from retaining a reviewer to conduct the reviews in the
form of an annual retainer fee.\1080\ Although the exact magnitude of
the expenses incurred in connection with the reviews is not possible to
predict, we expect that they will depend on the frequency with which a
review is triggered and on the extent of the review.\1081\ For
instance, securitizations of high-risk assets are more likely to meet
the delinquency threshold and therefore more likely to undergo a review
and incur the review expenses. Additionally, sponsor representations
about pool assets characterized by low or no documentation may require
more time for the reviewer to examine and therefore may result in
higher expenses. We have attempted to mitigate the potential costs by
not requiring a review of the assets until after the occurrence of a
two-pronged trigger as described below. We expect that investors will
weigh the benefits of a review of the assets against the costs and vote
for a review only if the benefits justify the costs. This revised
approach should address concerns about potentially frivolous review
requests being made at the cost of other investors.
---------------------------------------------------------------------------

    \1079\ See letter from SIFMA II-investors (``The concept of
increasing costs to investors in order to increase investor
protections is not new. On balance, the strict enforcement of the
deal documents by an independent credit risk manager, we believe,
will in the ordinary course produce net economic benefits to the
investors.'').
    \1080\ The staff is aware of only several recent unregistered
RMBS transactions that include a comparable provision for which we
have some cost information. According to Kroll's Pre-Sale Report for
J.P. Morgan Mortgage Trust 2013-1, the reviewer will be paid an
annual retainer fee of $20,000 for the first six years and $12,000
annually thereafter. The reviewer will also be paid $525 for each
mortgage loan subject to a review. See Kroll's Pre-Sale Report: J.P.
Morgan Mortgage Trust 2013-1 (Mar. 20, 2013). We believe that these
costs figures are generally comparable to the costs that RMBS
issuers and investors will likely incur in connection with our
review requirement. The costs for other asset classes may be more or
less than these costs figures depending upon the quality of the
assets, the extensiveness of the representations and warranties, and
the volume of documents required to review.
    \1081\ In a typical ABS transaction, fees are paid before
distributions are made to investors. We remind issuers that
information related to the review fees should be disclosed in
accordance with Regulation AB requirements. See, e.g., Items
1109(b)(4) and 1113 of Regulation AB.
---------------------------------------------------------------------------

    We also recognize that our approach to require that a reviewer be
engaged at the time of issuance, as opposed to when the above two
triggers are met, will be more costly. For asset classes that rarely
experience breaches of representations and warranties, the benefits of
this shelf provision may be smaller than for other asset classes and
thus there may be situations where the costs may be greater than the
benefits. We believe, however, that for asset classes where the
likelihood of investors using the review provision is low, the upfront
retainer fee should also be low. We note also that the requirement that
the reviewer be engaged at the time of issuance could potentially
create incentive alignment issues. Because of this requirement, a
reviewer could seek to be appointed to as many ABS transactions as
possible, thus potentially creating an incentive to submit reports
favorable to sponsors and win future business from them. This could
potentially impact the quality and usefulness of the reports if the
reviews are not--or are not perceived as being--objective.\1082\ The
significance of this problem should be reduced to the extent that the
reviewer's compensation is paid by investors, particularly if done so
after the objective triggers for the asset reviews are met. In
addition, transaction agreements may prescribe mechanisms to replace
reviewers in the event of failure to meet their obligations. Finally,
reputational concerns could potentially influence reviewers' decisions
to adhere to their limited role of determining whether the assets
comply with the representations and warranties made. As discussed
below, the investors through the trustee, not the reviewer, are
responsible for determining whether to initiate a repurchase
request.\1083\ Furthermore, we have chosen to require that the reviewer
be named in the offering documents because the identity and competency
of the reviewer is an important consideration for investors in making
an ABS investment decision.
---------------------------------------------------------------------------

    \1082\ We note that our rules do not mandate the particular
contents of the report. Should these reports ultimately include
subjective elements, the potential incentive misalignments could
increase.
    \1083\ As we have indicated above, investors have encountered
difficulty with getting the trustees to initiate repurchase
obligations. We believe that the required report of the conclusions
and findings to the trustee, which should provide evidence of any
noncompliance, will make it difficult for trustees to ignore
possible breaches of the contractual provisions.
---------------------------------------------------------------------------

(i) Triggers for Review
    As noted above, the 2011 ABS Re-Proposal specified two separate
events, either of which would trigger a review of the underlying assets
under the new shelf eligibility requirement. One proposed trigger would
have required a review when the credit enhancement requirements of the
transaction are not met. The other proposed trigger would have
permitted investors to direct a review of the assets, pursuant to

procedures specified in the transaction agreements. After taking into
account the comments received related to the applicability of the
proposed triggers and potential costs, we are modifying the triggers
for review.
    Under the new shelf eligibility requirement, the pooling and
servicing agreement, or other transaction agreement, must provide for a
review of assets, at a minimum, upon the occurrence of a two-pronged
trigger with the first prong being a percentage of delinquencies in the
pool and the second prong being the direction of an investor vote, in
each case as specified in the transaction agreements. Because these
thresholds are negotiated by sponsors and investors in advance of the
ABS issuance, and could vary by asset class, deal structure, or
takedown, this approach allows the market to optimize and determine the
most effective thresholds, subject to caps discussed below. In
developing this two-prong trigger approach, we have attempted to
balance some commenters' concerns about potentially unfounded claims by
requiring that an objective threshold based on delinquencies first be
met while protecting investors' ability to effectively direct a review
at a time when rising delinquencies may begin to cause concern that the
assets in the pool may not have met the representations and warranties
made in the transaction documents.
(a) Delinquency Prong
    Rather than tying the trigger to credit enhancement levels, we are
adopting an objective trigger based on delinquencies.\1084\ As
summarized above, although commenters generally supported the
requirement of an objective trigger, many stated that the proposed
credit enhancement trigger did not easily apply across different asset
classes and deal structures.\1085\ We received some recommendations for
alternative objective triggers and, in particular, commenters noted
that a trigger based on delinquencies would work across all deal
types.\1086\ The amount of delinquencies in an asset pool is a metric
that is required to be reported at the time of offering and on an
ongoing basis.\1087\
---------------------------------------------------------------------------

    \1084\ Current Regulation AB does not establish a standard for
determining delinquencies, and we are not providing a definition of
delinquency for purposes of the asset review provision. Regulation
AB requires disclosure of the methodology for determining
delinquencies in the prospectus and accordingly, we expect that the
transaction agreements provide the method of determining
delinquencies. See Item 1101(d) of Regulation AB [17 CFR
229.1101(d)]. If the transaction agreements do not use delinquencies
to measure late or non-payment of an underlying obligor, then in
order to meet this shelf requirement, a comparable metric measuring
late or non-payment should be used and disclosed. As discussed
below, the final rule requires disclosure regarding how the
delinquency trigger was determined to be appropriate. See Item
1113(a)(7)(i) of Regulation AB [17 CFR 229.1113(a)(7)(i)]. Under the
new rule, in the case of a transaction using a metric other than
delinquencies, disclosure regarding why a different metric is
appropriate would need to be included.
    \1085\ See letters from ASF III, BoA II, MBA III, SIFMA II-
investors, VABSS III, and Wells Fargo II (all noting that many
transactions do not provide for a specific level of credit
enhancement to be maintained or the credit enhancement levels build
up over time to a target. In these situations, the review would be
triggered before there would be any real indication that there have
been breaches of representations or warranties).
    \1086\ See letters from ASF III (suggesting objective factors
such as cumulative losses, delinquencies or average loss severity be
the trigger), Metlife II (noting the review should be based on
delinquencies as a percentage of the original subordination for the
senior-most class in a transaction), and Prudential II (stating that
a review should be triggered if the 60+ day delinquencies percentage
is greater than the currently available credit support or if a loan
becomes 90 days delinquent within six month of the loan's
origination or four months from being included in the pool).
    \1087\ See Items 1100(b), 1101(c), 1105, 1111(c) and 1121(a)(9)
of Regulation AB.
---------------------------------------------------------------------------

    We are not specifying the threshold amount of delinquencies that
must first be reached, given the variety of thresholds that may be
relevant and the differing approaches offered by commenters. For
instance, we note that some ABS transactions include delinquent loans
at the onset. Furthermore, the shelf eligibility requirements permit
registration of offerings of ABS that include up to 20% of delinquent
assets.\1088\ We also acknowledge that transaction participants should
have some flexibility across deal structures and asset classes so that
they may negotiate the terms appropriate for each particular offering,
including the appropriate delinquency threshold.\1089\ We recognize,
however, that providing the transaction parties with such flexibility
may impose costs to investors depending on the procedures established.
In particular, we recognize that by not prescribing a particular
delinquency threshold, transaction parties could theoretically set this
threshold high and thereby make it difficult for investors to exercise
their rights under this provision. To address this concern, we are
requiring disclosure in the prospectus that describes how the
delinquency trigger was determined to be appropriate.\1090\ The
disclosure must include a comparison of the delinquency trigger against
the delinquencies disclosed for prior securitized pools of the sponsor
for that asset type. Using this disclosure, investors will be able to
analyze the reasonableness of the delinquency trigger.
---------------------------------------------------------------------------

    \1088\ See General Instruction I.B.1(e) of Form SF-3.
    \1089\ We also note that our proposed credit enhancement trigger
provided the transaction parties with the flexibility to set the
target levels of the credit enhancement requirements so that they
could tailor the procedures to each ABS transaction, taking into
account the specific features of the transaction and/or asset class.
    \1090\ See Item 1113(a)(7)(i) of Regulation AB.
---------------------------------------------------------------------------

    The final rule provides some specificity as to how the delinquency
threshold must be calculated in order to provide clarity to issuers and
consistency to investors across various transactions and assets
classes, and to prevent possible mechanisms from reducing the
effectiveness of the trigger. The delinquency prong requires that the
delinquency threshold be calculated as a percentage of the aggregate
dollar amount of delinquent assets in a given pool to the aggregate
dollar amount of all the assets in that particular pool, measured as of
the end of the reporting period in accordance with the issuer's
reporting obligations. By requiring that the delinquency calculation be
measured as a percentage of the aggregate dollar amount of all assets
in the pool, the calculation will better reflect the magnitude of
delinquencies, as compared to a delinquency calculation measured by
counting only the number of delinquent assets without consideration of
the delinquent assets' relative dollar values.\1091\ Furthermore, to
prevent issuers from imposing a higher hurdle to trigger the
delinquency threshold for transactions with multiple sub-pools, we are
also requiring that the percentage be based on the percentage of
delinquencies in the sub-pool. For example, if a transaction has
divided the underlying assets into three sub-pools, there will be three
separate delinquency trigger calculations. If the delinquencies in one
sub-pool triggers an investor vote (and, as explained below, the
subsequent vote is attained to trigger a review), the final rule
requires that the transaction documents specify, at a minimum, that the
assets of the respective sub-pool would be subject to review.\1092\ We
believe that requiring the delinquency threshold to be calculated on a
sub-pool basis also recognizes the notion that investors would be
primarily concerned about the

assets that support their respective pool.\1093\
---------------------------------------------------------------------------

    \1091\ We also note that this requirement is similar to how
delinquencies are reported by servicers in their monthly reports (as
a percentage of the ending pool balance).
    \1092\ Transaction participants may, however, provide for
reviews of additional assets in this instance.
    \1093\ See letter from Metlife II (noting that the review should
be based on delinquencies as a percentage of the original
subordination for the senior-most class in a transaction).
---------------------------------------------------------------------------

(b) Investor Vote Prong
    The underlying transaction documentation must include a provision
that, after the delinquency threshold has been reached or exceeded,
investors have the ability to vote to direct a review. In formulating
the final rule, we considered whether an investor vote would be
necessary given that the final rule would require an objective trigger
first be satisfied. We appreciate the costs that will be incurred by
the investors in connection with these reviews.\1094\ Furthermore, we
acknowledge that there may be cases where some investors may not wish
to incur the cost of an asset review, for example, when the transaction
is performing as expected. For these reasons, the review is not
automatic but rather must be initiated by investors as specified in the
transaction documents. In order to balance the concern that the
transaction parties may impose stringent voting requirements in the
transaction documents in an effort to diminish investors' voting
rights, we have imposed certain restrictions on the voting requirements
in response to comments that we received.
---------------------------------------------------------------------------

    \1094\ See letter from SIFMA II-investors (noting that although
the review requirement would result in additional costs, it would
also increase investor protections).
---------------------------------------------------------------------------

    Under the final rule, if the transaction agreement includes a
minimum investor demand percentage in order to trigger a vote on the
question of whether to direct a review, then the maximum percentage of
investors' interest in the pool required to initiate a vote may not be
greater than 5% of the total investors' interest in the pool (i.e.,
interests that are not held by affiliates of the sponsor or
servicer).\1095\ We are imposing this restriction because we believe
that a higher threshold will blunt its effectiveness.\1096\ Once the
requisite percentage of investors' interest seeks to initiate a vote,
as required by the transaction agreement, investors will proceed to
vote on whether to direct a review. Our interpretation of ``pool,'' as
discussed above in connection with the delinquency trigger, is also
applicable for the voting procedures. Thus, if there are multiple sub-
pools, then the calculation of whether there is the requisite
percentage of investors' interest to initiate a vote would be
determined based on that particular sub-pool.
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    \1095\ The final rule does not require that the transaction
agreement include a minimum investor demand percentage to trigger a
vote; rather the final rule requires that if such provision is part
of the transaction agreement, then it may require no more than 5% of
the total interest in the pool.
    \1096\ See letter from Metlife I (noting that many
securitization transactions impose a 25%-in-interest voting
threshold before the trustee can be directed by investors to
undertake certain actions such as polling investors on questions as
to whether to exercise certain rights or remedies, thereby making it
difficult for investors to act).
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    Under the proposed rule, the transaction parties would have been
given significant flexibility in setting the voting requirements for
the investor vote trigger. We are concerned, however, that the
transaction parties could establish a high delinquency threshold and
high investor vote threshold as noted by one commenter, thus making it
difficult for investors to utilize this shelf provision.\1097\ We
requested comments in the 2011 ABS Re-Proposal on whether we should
establish maximum conditions for voting. Commenters offered a range of
thresholds from 25% to a supermajority.\1098\ Under the final rule, the
transaction parties will be able to specify the percentage of
investors' interest required to direct a review, provided that the
threshold of approval shall be no more than a simple majority of those
interests casting a vote. The final rule requires a simple majority of
those interests casting a vote as the maximum condition because we
believe that a simple majority threshold will help to reduce
potentially frivolous claims while also helping to ensure that
investors will be able to use the review provision. In addition to
imposing restrictions on the voting requirements, we note that issuers
are required to provide disclosure in the prospectus regarding the
voting procedures for the review under existing Regulation AB, which
will permit investors to analyze the reasonableness of the voting
procedures.\1099\
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    \1097\ See letter from Metlife II (explaining, for example, that
in a case where a transaction agreement requires 25% of all
investors to initiate a vote, and 75% of all investors to approve a
resolution, the likelihood of meeting a voting threshold would be
slim at best).
    \1098\ See letters from J.P. Morgan II and Sallie Mae II
(recommending a 25% threshold), MetLife II (suggesting a majority or
plurality of those casting a vote), and Wells Fargo II (recommending
a supermajority).
    \1099\ See Item 1113(a)(12) of Regulation AB (requiring
disclosure regarding allocation of voting rights among security
holders).
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    We also recognize that the rule may complicate the voting process
for investors in transactions that include assets consisting of
previously issued ABS. In particular, when trigger conditions for a
review are met in connection with the previously issued ABS, the
trustee acting on behalf of the investors in the second securitization
must vote since they are also investors in the first securitization via
the resecuritization. To address this potential issue, each
securitization will need to have clearly delineated voting rules and
eligibility criteria in the event that some of its investors are
through a resecuritization. It is hard for us to evaluate the extent to
which this problem may affect the ABS markets because, over the past
several years, there have been no registered resecuritizations of RMBS,
CMBS, or Auto ABS.
    The requirements of this shelf eligibility criterion are meant to
be the minimum procedures that should be included in the transaction
documents to provide investors with a means to trigger a review of the
assets. We acknowledge that transaction parties have and may develop
more specific and robust procedures for monitoring and reviewing assets
that support the ABS.\1100\ The adoption of this rule will not preclude
the transaction parties from specifying additional, separate triggers
for a review in the transaction agreements, as appropriate for a
particular deal or asset class. To clarify, while we are permitting
additional triggers to be established by the transaction parties, the
final rule does not allow the transaction parties to add additional
restrictions or requirements on the two triggers that we are
establishing in order to make it more onerous for investors to utilize
the provision.
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    \1100\ For example, the shelf requirement would not preclude an
ABS issuer from including a review trigger for any asset delinquent
for 120 days or more, without requiring an investor vote, if such a
trigger is appropriate for that transaction. The transaction
documents for the shelf registration statement would, however, need
to include, at minimum, the asset review requirements that we are
adopting.
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(ii) Scope of the Review
    We are also modifying the proposal to add some specificity
regarding the scope of the review, since we have changed the objective
trigger from being based on credit enhancement to one based on
delinquencies and received varied comments regarding the appropriate
scope for a review based on delinquencies.\1101\ Under the final rule,
once both prongs have been met (the delinquencies have reached or
exceeded the threshold and investors have voted to conduct a review), a
review must be

conducted of all assets that are 60 or more days delinquent as reported
in the most recent periodic report, at a minimum, for compliance with
the related representations and warranties, as suggested by commenters.
We are also adopting, as proposed, that the transaction agreement must
provide the reviewer with access to copies of the underlying loan
documents in order to determine whether the loan complied with the
representations and warranties.\1102\ As discussed below, a summary of
the reviewer's report must be included in the Form 10-D.\1103\
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    \1101\ See letters from Metlife II (stating that a random sample
of all 60+ day delinquent loans should be reviewed once a review is
triggered) and Prudential II (stating that once a review is
triggered the reviewer should be required to ``review all 60+ day
delinquent loans and prior defaults'').
    \1102\ See General Instruction I.B.1(b)(B) of Form SF-3.
    \1103\ We would expect that the reviewer would conduct the
review and provide its report to the trustee in a reasonably prompt
manner once the review is triggered.
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(iii) Report of the Findings and Conclusions
    As proposed, under the final rule, a report of the reviewer's
findings and conclusions for all assets reviewed will be required to be
provided to the trustee.\1104\ The trustee could then use the report to
determine whether a repurchase request would be appropriate under the
terms of the transaction agreements. We are also requiring, as
proposed, that disclosure be provided about any event triggering a
review of the assets in the Form 10-D filing for the period in which
the event occurred.\1105\
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    \1104\ See General Instruction I.B.1(b)(E) of Form SF-3.
    \1105\ If the transaction parties decide to include additional
triggers beyond the minimum two-prong trigger required by this shelf
eligibility rule, then disclosure is required about those trigger
events as well.
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    We proposed to require that any report of results provided to the
trustee also be filed on periodic report Form 10-D. Commenters
generally supported filing the reports on Form 10-D. Several commenters
indicated, however, that privacy concerns may arise related to the
information about the underlying loans if a full report is filed and
recommended that we instead require summaries of the reports.\1106\ We
are persuaded by commenters that only a summary of the report of the
findings and conclusions needs to be included on the Form 10-D. We
acknowledge, however, a potential cost of this approach is that
investors may not receive all of the information necessary to determine
whether the trustee, or another party with demand rights, has made an
appropriate decision regarding whether to initiate a repurchase
request.
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    \1106\ See letters from ABAASA II, ASF III, CREFC II, MBA III,
VABSS III, and Wells Fargo II.
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(iv) Selection of the Reviewer
    In response to comments received, we are not adopting the proposal
to require that the trustee appoint the reviewer. We are requiring,
instead, that the pooling and servicing agreement or other transaction
agreement provide for the selection and appointment of the reviewer
since we believe that the transaction parties should be able to agree
on who should serve as the reviewer.\1107\
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    \1107\ See General Instruction I.B.1(b) of Form SF-3.
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    We are requiring, as proposed, disclosure in the prospectus of the
name of the reviewer, its form of organization, the extent of its
experience serving as a reviewer for ABS transactions involving similar
pool assets, and the manner and amount in which the reviewer is
compensated.\1108\ ABS investors will benefit from this increased
disclosure as they will be able to assess the qualifications of the
reviewer. ABS issuers will incur some additional disclosure costs to
provide this information. In addition, as proposed, under the new rule
disclosure is required with respect to: The reviewer's duties and
responsibilities under the governing documents and under applicable
law; any limitations on the reviewer's liability under the transaction
agreements; any indemnification provisions; any contractual provisions
or understanding regarding the reviewer's removal, replacement, or
resignation, and how any related expenses would be paid.\1109\ In
addition, we are adopting, as proposed, a requirement that if, during
the reporting period, the reviewer has resigned, or has been removed,
replaced or substituted, or if a new reviewer has been appointed, then
disclosure regarding the event and circumstances surrounding the change
must be provided in the report for the period in which the event
occurred.\1110\
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    \1108\ See Item 1109(b) of Regulation AB [17 CFR 229.1109(b)].
    \1109\ Id.
    \1110\ See Item 1121(d)(2).
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    We are also adopting a requirement that prohibits the reviewer from
being affiliated with certain transaction parties and from performing
certain duties due to concerns over potential conflicts of interest.
Under the final rule, the reviewer, at a minimum, cannot be affiliated
with the sponsor, depositor, servicer, the trustee, or any of their
affiliates.\1111\ In addition, a conflict may arise if the reviewer is
also assigned the responsibility under the transaction documents to
determine whether non-compliance with representations and warranties
constitutes a breach of any contractual provision. Therefore, the
reviewer shall not be the party to determine whether the non-compliance
constitutes a breach. We believe that the role of the reviewer should
be limited to reviewing the assets' compliance with the representations
and warranties since we believe that the investors through the trustee
are the most appropriate parties for determining, after reviewing the
report of the conclusions and findings, whether to pursue a repurchase
claim. In response to comments, particularly in the context of CMBS,
the final rule will permit that the reviewer may be the same party
serving another role in the transaction, provided that it is not
affiliated with the sponsor, depositor, servicer, trustee, or any of
their affiliates. As recommended by one commenter, however, the final
rules prohibit the reviewer from being the same party or an affiliate
of the party hired by the sponsor or underwriter to perform pre-closing
due diligence on the pool assets due to the inherent conflict posed by
the same party performing the pre-closing review and the review
required by this shelf provision.\1112\ The reviewer is also prohibited
from being affiliated with the trustee in light of several commenters
recommending this prohibition given the economic relationships the
trustee or its affiliates may have with other transaction parties and
the conflicts of interest that such relationships may create.\1113\ We
have not, however, added investors as a prohibited affiliation, as some
commenters requested.\1114\ We understand that issuers might view
investor affiliation with the reviewer as a possible conflict; however,
since issuers will be responsible for selecting the reviewer, they will
be able to address any concern. We do not think such an affiliation
will likely cause harm or conflict to investors as a whole because, if
there is evidence of high or growing delinquencies in the asset pool,
it would be in the best interest of investors as a whole to have a
review conducted in order to determine whether investors should make a
repurchase demand.\1115\ Because the

rule establishes the minimum restrictions on affiliations, the
transaction parties could agree to exclude other parties based on their
relationships. As proposed, the final rule requires disclosure about
those relationships in the prospectus, which will help alert investors
to any potential conflicts.\1116\
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    \1111\ See Item 1101(m) of Regulation AB (defining the
reviewer).
    \1112\ See letter from SIFMA II-investors.
    \1113\ See letters from Better Markets, J.P. Morgan II, and
Prudential II.
    \1114\ See letters from Better Markets and J.P. Morgan II.
    \1115\ However, any investor, or affiliate of an investor,
affiliated with a sponsor, depositor, or any servicer would not
qualify as a reviewer. For example, in the context of CMBS, an
investor that is affiliated with a special servicer would not
qualify as a reviewer.
    \1116\ Item 1119 of Regulation AB requires disclosure of any
known, material relationships among the various parties to the
transaction and the character of those relationships.
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    As noted above, some commenters suggested, as an alternative, that
we revert back to an approach proposed in the 2010 ABS Proposing
Release. They recommended that we allow issuers of asset classes other
than residential mortgages the option to choose between the 2011 ABS
Re-Proposal to require review of the assets upon certain triggers being
met or the 2010 ABS Proposal to allow for a third-party review