entity with the same sponsor for which the securitization transaction
distributes amounts to investors on a quarterly or less frequent
basis.\62\
---------------------------------------------------------------------------

    \60\ The agencies expect that a sponsor will include disclosure
about the cut-off date as an aspect of the fair valuation
methodology it used.
    \61\ The sponsor may include adjustments to the balance of ABS
interests that are expected to occur in the ordinary course of
events, such as scheduled principal reductions and planned issuances
expected to occur after the pending offering of ABS interests.
    \62\ The 135-day period provides sponsors with approximately 45
days after the end of any quarter in which to provide the required
information to investors if the issuing entity makes distributions
to investors no more frequently than quarterly. This period
parallels timeframes for prospectus and static pool information
under Regulation AB. See Items 1104 and 1105 of Regulation AB.
---------------------------------------------------------------------------

    As discussed in the reproposal, fair value is a measurement
framework that requires an extensive use of judgment for certain types
of financial instruments, for which significant unobservable inputs are
necessary to determine their fair value. To provide transparency to
investors, regulators and others on how the sponsor calculates fair
value in order to determine its eligible horizontal residual interest,
and to ensure that this calculation adequately reflects the amount of a
sponsor's economic ``skin in the game,'' the agencies proposed to
require disclosure of the sponsor's fair value methodology and all
significant inputs used to measure its eligible horizontal residual
interest. Under the reproposal, sponsors that elected to utilize the
horizontal risk retention option would have been required to disclose
the reference data set or other historical information used to develop
the key inputs and assumptions intended to meaningfully inform third
parties of the reasonableness of the key cash flow assumptions
underlying the measure of fair value. Such key assumptions could
include default, prepayment, and recovery. As discussed in the
reproposal, the agencies believed that these valuation inputs would
help investors assess whether the fair value measure used by the
sponsor to determine the amount of its risk retention is comparable to
investors' expectations.
    Specifically, with respect to eligible horizontal residual
interests, the reproposal would have required that sponsors provide (or
cause to be provided) to potential investors a reasonable time prior to
the sale of ABS interests in the issuing entity and, upon request, to
the Commission and its appropriate Federal banking agency (if any)
disclosure of:
     The fair value (expressed as a percentage of the fair
value of all ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS interests are issued, as applicable)) of the eligible
horizontal residual interest that would be retained (or was retained)
by the sponsor at closing, and the fair value (expressed as a
percentage of the fair value of all ABS interests issued in the
securitization transaction and dollar amount (or corresponding amount
in the foreign currency in which the ABS interests are issued, as
applicable)) of

the eligible horizontal residual interest required to be retained by
the sponsor in connection with the securitization transaction;
     A description of the material terms of the eligible
horizontal residual interest to be retained by the sponsor;
     A description of the methodology used to calculate the
fair value of all classes of ABS interests;
     The key inputs and assumptions used in measuring the total
fair value of all classes of ABS interests and the fair value of the
eligible horizontal residual interest retained by the sponsor
(including the range of information considered in arriving at such key
inputs and assumptions and an indication of the weight ascribed
thereto) and the sponsor's technique(s) to derive the key inputs; and
     The historical data that would enable investors and other
stakeholders to assess the reasonableness of the key cash flow
assumptions underlying the fair value of the eligible horizontal
residual interest. Examples of key cash flow assumptions may include
default, prepayment, and recovery.
    The agencies received significant comment on the proposed
disclosure requirements with respect to the eligible horizontal
residual interest, particularly regarding the proposed timing of
disclosures and fair value calculations. Commenters expressed a number
of concerns regarding the pre-sale disclosure requirement. Several
commenters stated that there is an inherent conflict between the
proposed requirement that fair value disclosures be made a reasonable
time prior to the sale of ABS interests and the requirement that fair
value be determined as of the day on which the price of the ABS
interests to be sold to third parties is determined. Further, several
commenters asserted that the most objective and accurate way to
calculate fair value is to base the valuation on an observable market
price, but this option is unavailable to sponsors in advance of
pricing. In order to comply with the pre-sale disclosure requirement,
they contended that sponsors would be required to make material
assumptions, based on less reliable secondary sources, regarding
interest, default, recovery and prepayment rates, as well as timing of
reinvestments for revolving pools. Doing so, they asserted, would often
result in differences between the pre-sale and final fair value and
would confuse investors.
    One commenter raised a concern about the proposed requirement that
fair value be calculated as of the day on which the price of ABS
interests sold to third-party investors is determined. The commenter,
asserting that pricing for different classes in single-securitization
transactions often occurs on different days, urged the agencies to
clarify that the determination of fair value should be done for all
classes of asset-backed securities at a single time after a specified
percentage threshold of classes of asset-backed securities have priced.
    As a proposed solution to the timing concerns summarized above, two
commenters recommended that the final rule should require fair value
determinations to be made after pricing but before closing of the
transaction. The commenters stated that this would allow sponsors to
more accurately determine fair value based on pricing of the
securitization transaction. The commenters further stated that sponsors
could still be required to disclose the expected form of risk retention
prior to sale, but they should only be required to determine the fair
value of those interests shortly after pricing.
    In addition to timing concerns, many commenters expressed concerns
about the proposed requirement that sponsors disclose the key inputs
and assumptions used in measuring fair value and the sponsor's
technique(s) used to derive the key inputs. Two commenters specifically
stated that requiring such disclosures may mislead investors by making
such inputs and assumptions seem authoritative. Further, several
commenters asserted that the proposal would require sponsors to
disclose information that is proprietary, highly confidential and
commercially sensitive. Such information, they contended, could be used
by third parties to the competitive disadvantage of the sponsor. One
commenter raised specific concerns regarding the disclosure of
reference data sets, noting that disclosure of such information could
allow the reverse-engineering of proprietary models.
    While two commenters expressed support for the reproposal's
requirements that sponsors disclose the various components that were
used to make fair value determinations, many others requested
significant modifications to the disclosure requirements. Several
commenters asserted that the rule should only require a simple
disclosure to the effect that risk retention has been measured as
required by the final rule. Several commenters stated that sponsors
should only be required to make disclosures to the Commission and
banking agencies, rather than to investors. Two such commenters
proposed that issuers should be required to retain the documentation
about assumptions and methodology used in calculating their risk
retention obligations for a specified period of time and make such
information available for inspection by the Commission and banking
agencies, if requested. Further, one commenter proposed that sponsors
should only be required to provide the agencies with a post-
securitization fair value report within a reasonable time after the
issue date.
    Significant concern was raised regarding potential liability and
litigation that commenters stated may result when fair value
projections, assumptions and calculations disclosed to investors turn
out to be incorrect. A few commenters expressed the view that liability
risk would be particularly high from incorrect loss projections.
Several commenters asserted that litigation risks may undermine the
horizontal option by convincing many sponsors to rely instead on the
vertical option. Another commenter asserted such concerns may convince
sponsors to hold risk retention closer to the 5 percent minimum than
they otherwise would because it is easier to demonstrate that a
projected 5 percent risk retention would be accomplished than it would
be for a larger percentage. Several commenters urged the agencies to
provide a safe harbor from liability for all fair value calculations,
which would protect sponsors as long as the methodology and assumptions
used to make such calculations are reasonable and made in good faith.
    Two commenters proposed that for simple structures, sponsors should
not be required to make fair value determinations or related
disclosures, nor should the cash flow restriction (as described below)
apply. The commenters requested that such relief be provided to
structures with the following characteristics: (1) The principal amount
of the ABS interests sold to third parties is less than 95 percent of
the principal amount of the securitized assets (and, in the case of
pre-funded transactions, any cash held in a pre-funded account); (2)
the weighted average interest rate (for leases, the implicit interest
rate used to calculate the lease payments) on the securitized assets
(or the discount rate in the case of a securitization value
calculation) is not expected to be less than the time-weighted average
interest rate on the ABS interests sold to third parties (for revolving
and pre-funded transactions, this condition would be satisfied upon the
completion of each addition of additional assets); (3) all of the ABS
interests sold to third parties are traditional interest-bearing debt
securities; and (4) the residual interest

retained by the sponsor or other holder of a retained interest
otherwise meets the requirements of an eligible horizontal residual
interest.
    The agencies have carefully considered the concerns of commenters
with respect to the proposed disclosure requirements related to the
fair value calculation of eligible horizontal residual interests. The
agencies continue to believe that it is important to the functioning of
the final rule to ensure that investors and the markets, as well as
regulators, are provided with key information about the methodology and
assumptions used by sponsors under the final rule to calculate the
amount of their eligible horizontal residual interests using the fair
value measurement framework under GAAP. As the agencies have previously
observed, fair value is a measurement framework that for certain types
of instruments requires an extensive use of judgment. In situations
where significant unobservable inputs are used to determine fair value,
disclosures of those assumptions are necessary to enable investors to
effectively evaluate the fair value calculation. Therefore, the
agencies are generally retaining the proposed fair value disclosure
requirements with some modifications in response to commenter concerns,
as further discussed below.
    The agencies have considered the concerns raised by commenters
about the potential conflict between pre-sale disclosure and timing of
the fair value measurement. The agencies believe that it is important
that investors be provided with information that would allow them to
better evaluate how sponsors will measure the fair value of the
eligible horizontal residual interest to be retained and that such
information be provided prior to the investor's investment decision.
The final rule continues to require certain fair value disclosures to
be provided to investors a reasonable period of time prior to the sale
of an asset-backed security. Nonetheless, the agencies recognize that
any valuation information given prior to sale may often be preliminary.
Therefore, the agencies have revised the final rule to address these
concerns. The final rule allows sponsors, for disclosures provided
prior to sale, to disclose the sponsor's determination of a range of
fair values for the eligible horizontal residual interest that the
sponsor expects to retain at the close of the securitization
transaction. Under the final rule, a sponsor may provide a range of
fair values for the eligible horizontal residual interest only if the
specific prices, sizes or rates of interest of each tranche of the
securitization are not available. Additionally, this range of fair
values must be based on a range of bona fide estimates or specified
prices, sizes, or rates of interest of each tranche of the
securitization. The agencies note that in practice this will allow the
sponsor to provide fair value disclosures based on the pricing guidance
traditionally provided to investors prior to sale.\63\ The sponsor must
also disclose the method by which it determined any range of bona fide
estimates or specified prices, tranche sizes or rates of interest.
---------------------------------------------------------------------------

    \63\ The agencies expect that the range of bona fide estimates
or specified prices, tranche sizes or rates of interest should be
reasonably narrow, reflecting then current market conditions and the
relationship between the sponsor's range of bona fide estimates or
specified prices, tranche sizes or rates of interest and the
historical data or other information used to derive the range of
bona fide estimates or specified prices, tranche sizes or rates of
interest. The agencies also expect that in most instances the range
of assumed sale prices and tranche sizes will correspond closely to
any pricing guidance provided to potential purchasers prior to sale.
---------------------------------------------------------------------------

    The final rule also requires the sponsor to provide to investors a
reasonable time after the closing of the securitization transaction the
actual fair value measurement of the ABS interests and the eligible
horizontal residual interest that the sponsor is required to retain,
expressed as a dollar amount and percentage. This post-closing
disclosure must be based on actual sale prices and finalized tranche
sizes and corresponding interest rates at the closing of the
securitization transaction.
    The agencies continue to believe that the fair value of the
eligible horizontal residual interest held by the sponsor as calculated
post-closing must not be less than the amount required under the rule
to be held by the sponsor. Although commenters expressed some concern
about possible adjustments to the transaction occurring prior to
closing that may impact the fair value of the eligible horizontal
residual interest, the agencies expect that, if necessary, as part of
the pricing process, the sponsor will make adjustments to tranche
sizes, increase the percentage of vertical interest retained by the
sponsor, or otherwise take actions to ensure that the actual fair value
of the eligible horizontal residual interest held by the sponsor
satisfies the sponsor's risk retention obligations.
    The sponsor also must disclose at that time any material
differences between the inputs and assumptions that had been disclosed
by the sponsor to potential investors prior to sale (as required by the
final rule) and the actual methodology, inputs, and assumptions used by
the sponsor to measure fair value for purposes of the final rule. The
agencies believe that this bifurcated approach to the timing of
disclosures, as well as clarification that the pre-closing disclosures
are based on a sponsor's range of bona fide estimates or specified
prices, tranche sizes or rates of interest with relation to the fair
value measurement of the ABS interests, should effectively balance the
benefits investors and others receive from the disclosures against the
concerns of sponsors.
    The final rule generally retains the proposed requirement that the
sponsor disclose a description of the methodology it uses to measure
the fair value of the ABS interests and its eligible horizontal
residual interest. For example, under the final rule sponsors are
required to disclose the valuation methodology the sponsor used to
determine fair value, such as discounted cash flow analysis, comparable
market data, vendor pricing, or internal-model based analysis.
    As discussed above, a number of commenters expressed concern about
heightened legal risk and other risks due to the proposed requirement
to disclose quantitative information about key inputs and assumptions,
and various commenters requested that the agencies not require these
disclosures to be provided to investors. The agencies continue to
believe that disclosure of descriptive information with respect to key
inputs and assumptions used in fair value measurement is important for
helping investors to assess whether the fair value measure used by the
sponsor to determine its eligible horizontal residual interest is
comparable to market expectations. However, in response to commenter
concerns, the agencies are modifying these requirements to take into
account the preliminary and estimated nature of pricing information
that may need to be used to calculate fair value prior to the sale of
an asset-backed security.
    The agencies believe that the disclosure required by the accounting
standards that gives investors and others an understanding of how
companies measure fair value is also pertinent to investors' and
regulators' understanding how sponsors calculate the fair value of
their eligible horizontal residual interests under the rule. Therefore,
the final rule requires that the sponsor disclose, at a minimum, a
description of all the inputs and assumptions it uses to calculate the
fair value of the ABS interests and its eligible horizontal residual
interest, including, as applicable and relevant to the calculation,
disclosures on discount rates, loss given default (recovery rates),
prepayment rates, default rates, the lag time between default and
recovery, and

the basis of forward interest rates used. The agencies have not
prescribed the exact format of the description of key inputs and
assumptions that sponsors are required to provide under the final rule.
The agencies expect that the format of the required description will be
tailored to the key inputs and assumptions and the reference data sets
or other historical information underlying those key inputs and
assumptions being described. The agencies believe that the descriptions
may be disclosed in quantitative or narrative form or in a graphical or
tabular format, as appropriate.
    The sponsor is required to provide descriptions of all inputs and
assumptions that either could have a material impact on the fair value
calculation or would be material to a prospective investor's ability to
evaluate the sponsor's fair value calculations. The required
description of the material terms of the eligible horizontal residual
interest to be retained by the sponsor should include a description of
the rate of interest and other payment terms, including contractually
pre-determined events that would reasonably be likely to result in a
materially disproportionate payment of principal to the holder of the
residual interest, as well as any reductions in overcollateralization.
To the extent the required disclosure includes a description of a curve
or curves in connection with the sponsor's fair value calculations, the
sponsor must disclose a description of the methodology that was used to
derive each curve and a description of any aspects or features of each
curve that could materially impact the fair value calculation or the
ability of a prospective investor to evaluate the sponsor's fair value
calculation. The agencies expect that a description of the material
aspects of a curve would include any aspects of the curve that could be
reasonably expected to have a material impact on the timing and amounts
of distributions expected to be paid to the holder of the eligible
horizontal residual interest (or released from the eligible horizontal
cash reserve account).
    For example, if the sponsor uses curves with respect to certain key
inputs and assumptions in the fair value calculations, the agencies
expect that the description of those key inputs and assumptions would
not assume straight lines (e.g., zero-loss assumptions). As a further
example, if the sponsor uses a prepayment curve to calculate the fair
value of the ABS interests and its eligible horizontal residual
interest for a residential mortgage securitization transaction, the
disclosure might indicate that estimated annual prepayments are
expected to range from X percent to Y percent, notably increasing after
36 months of amortization and peaking after 84 months of amortization.
Furthermore, to the extent the inputs and assumptions are observable
and based on market prices or other public information, the sponsor
should disclose those inputs and assumptions or their source in order
to fulfill its requirement under the final rule.
    The post-closing fair value disclosure, which is required a
reasonable time after the closing, obligates the sponsor to disclose
any material differences between the range of bona fide estimates or
specified prices, tranche sizes or rates of interests disclosed
previously, as the case may be, and the actual prices, tranche sizes or
rates of interest used by the sponsor in its calculation of the fair
value under the rule for the ABS interests sold at closing. This
permits sponsors to use the actual pricing of the ABS interests as the
basis for their final disclosure requirement, which addresses certain
of the concerns raised by commenters discussed above.
    The agencies believe that the revisions made to the rule
appropriately balance the agencies' concerns that fair value disclosure
requirements adequately allow an investor to analyze the amount of a
sponsor's economic ``skin in the game'' with commenters' concerns about
the level of detail required by the fair value disclosure requirements.
    The agencies observe that financial companies commonly provide
company or portfolio-level disclosure in their financial statements
about estimated ranges (and weighted averages) for certain inputs, such
as interest rates and prepayment rates. Furthermore, sponsors of recent
publicly-offered securitization transactions have disclosed modeling
assumptions for prepayment rates based on the characteristics of
securitized loans. The agencies believe that the disclosures required
under the final rule are similar in nature, albeit more detailed, than
these public disclosures already being made for financial reporting and
similar purposes. The agencies understand that some types of inputs and
assumptions have generally not been publicly disclosed, and that most
sponsors have disclosed certain inputs at the balance sheet or
portfolio level for different types of assets, with varying degrees of
granularity that have generally not included disclosures for individual
transactions. However, the agencies observe that some of the concerns
that commenters have raised about potential liability for disclosure of
inputs and assumptions at the transactional level could also be
pertinent at the portfolio level if the inputs and assumptions were
later proved incorrect. Furthermore, the agencies believe that the
modifications to the disclosure requirement that permit the sponsor to
disclose a range of fair values based on assumptions about pricing,
appropriately balances commenters' concerns with the agencies' policy
goals of providing appropriate transparency into a sponsor's
calculation of the fair value of ABS interests and eligible horizontal
residual interest under the final rule. In response to commenters'
concerns about the proposed requirement to disclose the reference data
set or other historical information used to develop the key inputs and
assumptions used in the fair value measurement of the ABS interests,
the agencies have modified significantly that requirement in the final
rule. The agencies understand there may be significant legal concerns
with disclosing this data, including the proprietary nature and value
of the data and contractual restrictions with respect to disclosure
when the data is provided by third parties. The agencies believe that
investors may in many cases independently obtain representative data
sets for evaluating the ABS interests offered for purposes of
evaluating the sponsor's fair value measurement, including the
disclosures on the sponsor's inputs and assumptions required by the
final rule and described above.
    The final rule requires that the sponsor provide a summary
description of the reference data set or other historical information
used to develop the key inputs and assumptions used in the sponsor's
calculation of the fair value of the ABS interests, including loss
given default and default rates. This disclosure should meaningfully
inform third parties of the reasonableness of the key cash flow
assumptions underlying the sponsor's measurement of fair value.
Relevant information may include the number of data points, the time
period covered by the data set, the identity of the party that
collected the data, the purpose for which the data was collected and,
if the data is publicly available, how the data may be accessed. The
agencies believe that this represents an appropriate balance between
the information required for an investor to evaluate the sponsor's fair
value disclosure and commenter's concerns about the disclosure of the
reference data set or other historical information. In response to
commenters' requests that the agencies provide a safe

harbor from liability for all fair value calculations, as long as the
methodology and assumptions used to make such calculations are
reasonable and made in good faith, the agencies do not believe a new
safe harbor is necessary. The final rule does not alter any existing
antifraud liability provisions of the Federal securities laws.
Furthermore, sponsors may provide additional disclosure to take
advantage of the existing safe harbor for forward-looking statements
under section 27A of the Securities Act,\64\ if applicable, and the
``bespeaks caution'' defense developed through case law.\65\
---------------------------------------------------------------------------

    \64\ See 15 U.S.C. 77z-2.
    \65\ See, e.g., Polin v. Conductron Corp., 552 F.2d 797, 806
n.28 (8th Cir. 1977); Luce v. Edelstein, 802 F.2d 49, 56 (2d Cir.
1986); In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 364 (3d
Cir. 1993); P. Stolz Family P'ship L.P. v. Daum, 355 F.3d 92, 96-97
(2d Cir. 2004); and Iowa Pub. Emps.' Ret. Sys. v. MF Global Ltd.,
620 F.3d 137, 141-142 (2d Cir. 2010).
---------------------------------------------------------------------------

    To this end, the sponsor should consider carefully the disclosure
requirements under the Federal securities laws. The sponsor should be
cognizant of surrounding disclosure and should determine if the
disclosure of such fair value methodology and related assumptions
requires additional statements or information.\66\
---------------------------------------------------------------------------

    \66\ See, e.g., Rule 408 under the Securities Act; Sections 11,
12(a)(2) and 17(a) of the Securities Act; Section 10(b) of the
Exchange Act; Rule 10b-5 under the Exchange Act; and Rule 12b-20
under the Exchange Act.
---------------------------------------------------------------------------

    To the extent the assumptions made in connection with the
methodology used to measure fair value are not entirely consistent with
other disclosure regarding the securitization structure and the
transaction parties, the sponsor may need to include additional
statements or information that reduce the potential confusion among
investors. Alternatively, to the extent allowed under the fair value
measurement framework under GAAP, a sponsor could use a methodology and
assumptions that are more consistent with the sponsor's other
disclosures regarding the securitization structure and the transaction
parties.
    The agencies did not provide an option for ``simple structures''
based on the face value of the securitized assets and the face value of
the ABS interests. The agencies believe that the face value of both the
securitized assets and the face value of the ABS interests do not
necessarily reflect the actual value of the securitized assets or the
ABS interests, respectively. For certain assets such as leases, the
``face value'' of the underlying assets is a number calculated solely
for purposes of the securitization transaction and the calculation
involves many of the inputs and assumptions discussed above in relation
to fair value. The face value of certain ABS interests such as the CMBS
B-piece does not reflect the substantial discount to face value at
which such ABS interests are often sold to investors. As the face value
of both the securitized assets and the face value of the ABS interests
can materially differ from their relative value and cost to the
sponsor, the agencies do not believe that a credit risk retention
option based solely on a comparison of the face value of the underlying
assets and the face value of the ABS interests would provide meaningful
risk retention consistent with the goals and intent of section 15G.\67\
---------------------------------------------------------------------------

    \67\ See supra note 52.
---------------------------------------------------------------------------

    In addition to the measurement and disclosure requirements
applicable to eligible horizontal residual interests, the reproposal
would have required sponsors holding their risk retention through
eligible vertical interests to measure such interests using fair value
and to comply with certain disclosure requirements. With respect to the
vertical option, the reproposal would have required that sponsors
provide (or cause to be provided) to potential investors a reasonable
time prior to the sale of ABS interests in the issuing entity and, upon
request, to the Commission and its appropriate Federal banking agency
(if any) disclosure of:
     Whether any retained vertical interest is retained as a
single vertical security or as separate proportional interests in each
ABS interest;
     Each class of ABS interests in the issuing entity
underlying the single vertical security at the closing of the
securitization transaction and the percentage of each class of ABS
interests in the issuing entity that the sponsor would have been
required to retain if the sponsor held the eligible vertical interest
as a separate proportional interest in each class of ABS interest in
the issuing entity;
     The fair value (expressed as a percentage of the fair
value of all ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS interests are issued, as applicable)) of any single vertical
security or separate proportional interests that would be (or was
retained) by the sponsor at closing, and the fair value (expressed as a
percentage of the fair value of all ABS interests issued in the
securitization transaction and dollar amount (or corresponding amount
in the foreign currency in which the ABS interests are issued, as
applicable)) of the single vertical security or separate proportional
interests required to be retained by the sponsor in connection with the
securitization transaction;
     A description of the methodology used to calculate the
fair value of all classes of ABS interests; and
     The key inputs and assumptions used in measuring the total
fair value of all classes of ABS interests (including the range of
information considered in arriving at such key inputs and assumptions
and an indication of the weight ascribed thereto) and the sponsor's
technique(s) to derive the key inputs.
    Several commenters asserted that the final rule should not require
sponsors to measure and disclose the fair value of eligible vertical
interests, so long as the underlying ABS interests have either a
principal or notional balance. The commenters stated that a 5 percent
interest in the cash flow of each class would always be equivalent to 5
percent of each class. In this regard, the commenters stated that
requiring fair value measurement and disclosures for the vertical
option would be unnecessary for ensuring compliance with the rule.
    The agencies agree that calculation of fair value for eligible
vertical interests is unnecessary. The agencies note that only those
sponsors that rely exclusively on an eligible vertical interest to meet
their risk retention requirements would not have to calculate the fair
value of the ABS interests and make the related disclosures. A sponsor
that wishes to receive credit for any residual interest that meets the
requirements of an eligible horizontal residual interest (other than
any portion of the residual retained as part of an eligible vertical
interest) would be required to calculate the fair value of the ABS
interests and make the related disclosures.
c. Restriction on Projected Cash Flows to Eligible Horizontal Residual
Interest
    The reproposal would have placed limits on projected payments to
holders of the eligible horizontal residual interest. Specifically, the
reproposal included a restriction on projected cash flows to be paid to
the eligible horizontal residual interest that would have limited how
quickly the sponsor would have been able to recover the fair value
amount of the eligible horizontal residual interest in the form of cash
payments from the securitization (or, if an eligible horizontal cash
reserve account were established, released to the sponsor or other
holder of such account). The sponsor would have been

prohibited from structuring a deal where it was projected to receive
such amounts at a faster rate than the rate at which principal was
projected to be paid to investors on all ABS interests in the
securitization. The restriction was designed with an intention of
enabling sponsors to satisfy their risk retention requirements with the
retention of an eligible horizontal residual interest in a variety of
ABS structures, including those structures that do not distinguish
between principal and interest payments and between principal losses
and other losses. The restriction was discussed in detail in the
reproposal.\68\
---------------------------------------------------------------------------

    \68\ Revised Proposal, 78 FR at 57938.
---------------------------------------------------------------------------

    The agencies invited comment in the reproposal on whether an
alternative provision should be adopted relating to the amount of
principal payments that could be received by the eligible horizontal
residual interest. Under this alternative, on any payment date, in
accordance with the transaction's governing documents, the cumulative
amount paid to an eligible horizontal residual interest would not be
permitted to exceed a proportionate share of the cumulative amount paid
to all holders of ABS interests in the transaction. The proportionate
share would equal the percentage, as measured on the date of issuance,
of the fair value of all of the ABS interests issued in the transaction
that is represented by the fair value of the eligible horizontal
residual interest.\69\
---------------------------------------------------------------------------

    \69\ See Revised Proposal, 78 FR at 57941.
---------------------------------------------------------------------------

    The agencies received a significant number of comments regarding
the proposed cash flow restrictions as well as the alternative approach
on which they invited comment. Several commenters requested that the
proposed cash flow restriction to the eligible horizontal residual
interest and related certification be eliminated, either entirely or
for specific asset classes, while one commenter proposed that the
restriction be eliminated at sunset.
    Several commenters suggested that the proposed restriction on cash
flow distributions would be incompatible with a variety of
securitization structures, such as those organized to have increasing
overcollateralization over time, large amounts of excess spread at
closing, or bullet maturities. Commenters stated that the reproposal's
failure to distinguish between payments of interest and principal on
the eligible horizontal residual interest would be particularly
problematic for many transactions. Such structures highlighted by
commenters included CMBS, where monthly cash flow comes predominantly
from interest payments for much of the life of the securitization, with
the result that these existing structures would not meet the test and
would not have an economically attractive eligible horizontal residual
interest (or B-piece) if they did meet the test. Several commenters
also stated that the proposed cash flow restriction would be
problematic for CLOs and other structures that use principal proceeds
to reinvest in additional assets, but continue to pay interest, for
significant reinvestment periods. One such commenter suggested that the
final rule should specify that the use of proceeds to acquire new
assets and reinvest does not constitute a payment with respect to the
eligible horizontal residual interest.
    Commenters raised a number of specific concerns regarding the
calculations and projections that would be required by the proposed
cash flow restriction. One commenter stated that the calculations that
sponsors would be required to compare in order to determine whether
restrictions are required would be too different to make effective
comparison possible. Several commenters asserted that the calculations,
disclosures, and certifications required by the proposed cash flow
restriction were incompatible with revolving structures, since the
asset pools of revolving structures change over time and the time at
which the amortization period will commence is not always known at the
closing date. These commenters suggested an alternative certification
and calculation method for revolving structures. Another commenter
suggested that when the ABS interest is a variable funding note that
may have periodic increases and decreases in principal amount, the date
of any increase or decrease should be treated as a new issue date for
purposes of calculating the proposed cash flow restriction.
    A few commenters asserted that the proposed cash flow restriction
would significantly change the nature of the residual structure, since,
for many structures, it would eliminate or severely restrict the
payment of interest or yield to holders of the eligible horizontal
residual interest. One commenter stated that if the holder of an
eligible horizontal residual interest is not able to receive a return
commensurate with the risk of the interest, the fair value of the
interest will decrease, requiring that it represent a significantly
greater portion of the capital structure of the securitization in order
to reach 5 percent of the fair value of all ABS interests issued.
Another commenter asserted that the proposed cash flow restriction
would discourage sponsors from structuring offerings of ABS interests
with excess spread exceeding 5 percent of the fair value of the
transaction because the restriction would effectively prevent sponsors
from reducing such excess spread to 5 percent during the life of the
transaction.
    The certifications and disclosures to investors that would have
been required by the proposed cash flow restriction were also a focus
of concern for commenters. Several commenters expressed concern about
potential liability that could result from the proposed requirement
that sponsors certify to investors that they had performed the required
calculations and to certify their expectations regarding the cash flow
to the eligible horizontal residual interest as compared to more senior
ABS interests. Commenters stated that sponsors could be subject to
liability, if their projections and assumptions differed from actual
results. One commenter specifically contended that the difficulty in
accurately modeling prepayment risks heightens the risk of liability.
Two commenters suggested that a safe harbor should be granted to
protect sponsors from such liability risk. One such commenter requested
limiting the safe harbor to sponsors who utilize reasonable
methodologies in making the required calculations. A different
commenter suggested that, rather than requiring the sponsor to make the
certifications to investors, the sponsor should only have to maintain a
record of the closing date calculations, including the methodology and
material assumptions underlying them, and make those records available
to the Commission and banking agencies upon request for five years. One
commenter suggested that the proposed certification to investors should
be replaced with a requirement that the sponsor disclose to investors,
in the offering documents, that it has performed and met the cash flow
restriction test.
    The agencies also received comments regarding the proposed
requirement that sponsors would have to disclose their past performance
in respect to the cash flow calculations. One commenter raised concern
that requiring such disclosures could create potential liability issues
concerning false disclosures. Two commenters suggested a modification
to the proposed requirement such that the sponsor would have to
disclose the number of payment dates on which the actual payments made
to the sponsor under the eligible horizontal residual interest exceeded
the amounts projected to be paid to the sponsor on such payment

dates. These commenters asserted that the focus of this disclosure
should be on the cumulative amount of payments made to the holder of
the eligible horizontal residual interests, rather than the cash flow
projected to be paid to the sponsor on the payment dates.
    Several commenters offered qualified support for the alternative
proposal on which the agencies invited comment. Such support was
largely based on the fact that the alternative proposal would have
required the comparison of all forms of payment to both the eligible
horizontal residual interest and the investor interests, while the
proposed cash flow restriction would have required the comparison of
all forms of payment to the eligible horizontal residual interest and
only principal payments to the investor interests. Two commenters
asserted that, without a detailed proposal, it is difficult to
determine what type of cash flow comparisons the agencies intended to
cover with the alternative proposal and that they would not support any
proposal that does not allow for market rates of return to be paid to
the eligible horizontal residual interest. One commenter would support
the alternative proposal if it were modified to clarify that a residual
interest, in order to be considered an eligible horizontal residual
interest, be limited in the amount of principal repayments it may
receive, such that the cumulative amount of payments applied to reduce
its principal or notional balance as of any payment date is
proportionate to (or less than) the cumulative amount of payments
applied to reduce the principal or notional balance of all ABS
interests in the transaction as of such payment date. One commenter
requested a modified version of the alternative proposal that the
commenter said would be more appropriate for CMBS transactions. The
commenter asserted that, since CMBS bonds associated with the
horizontal risk retention interest are sold at a discount, the
alternative proposal should allow the percentage of cash flow paid to
the horizontal risk retention holder to be based on the face value,
rather than the fair value, of their purchased interest.
    Commenters also offered various alternative proposals to the
proposed cash flow restriction. One commenter requested that a sponsor
be considered to have met its risk retention obligation if it satisfies
one of the following tests on the closing date based on projections or
assumptions of timely payment: (1) The projected fair value of the
amount retained as of each payment date will not be less than the
required 5 percent; (2) the level of overcollateralization calculated
based on the amortizing balance of the ABS interests as of each payment
date, is not projected to decline below 5 percent over the life of the
transaction; or (3) the projected principal payments to be paid to the
eligible horizontal residual interest, as of each payment date, will
not exceed its pro rata share of all payments made to ABS interest
holders on such payment date. One commenter suggested that the test
should be limited to a projection that the retained risk will be equal
to at least 5 percent of the sum of the projected aggregate fair value
of all ABS interests in the issuing entity, other than the eligible
horizontal residual interest, and the projected fair value of the
eligible horizontal residual interest.
    After careful consideration of the comments, the agencies agree
that the restrictions on projected cash flow to the eligible horizontal
residual interest included in the proposed rule would not operate
without significant risk of unintended consequences. Furthermore, the
agencies have not identified a cash flow restriction mechanism that
would function effectively across asset classes without having an
unduly restrictive impact on particular asset classes. While the
agencies could consider different tests for different classes, the
agencies believe that would lead to a more complicated rule that could
be difficult to administer and that would likely engender more
opportunity to undermine the impact of the final rule on the alignment
of interests between the sponsor and investors. Additionally, the
agencies believe that alternatives suggested by commenters that
proposed to restrict cash flows based on a comparison of projections of
the face value of securitized assets and the face value of outstanding
ABS interests (which do not capture expected credit losses, among other
things) and alternatives that focused only on repayment of principal
either would be easily evaded or would not effectively further the
statutory goals and directive of section 15G of the Exchange Act to
limit credit risk and promote sound underwriting. Accordingly, the
agencies are not including in the final rule the proposed cash flow
restriction, the alternative described in the reproposal, or the
alternatives suggested by commenters.
    The agencies are concerned that risk retention may become less
meaningful when a sponsor quickly recovers the value of risk retention
through distributions. However, the agencies note that the final rule
requires disclosure regarding the material terms of the risk retention
interest, and the timing of cash flows and determination of fair value,
which is designed to facilitate investor determination of whether the
risk retention interest to be held by the sponsor remains meaningful
over time. In addition, while the rule requires that the sponsor
measure an eligible horizontal residual interest only as of the closing
of a transaction (and, under certain circumstances, if additional ABS
interests are issued thereafter), the rule also restricts the ability
of a sponsor to transfer or hedge any interest in the credit risk of
the securitized assets it is required to retain until the expiration of
specified periods. Therefore, the rule is designed so that the sponsor
remains exposed to the credit risk of securitized assets, up to the
amount required to be retained. If the agencies observe that either the
assumptions and methodologies used to calculate the fair value of
horizontal risk retention or the structuring of securitization
transactions--including structuring of payments to the residual
interest--tends to undermine the ability of the risk retention to align
the interests of sponsor and investors, the agencies will consider
whether modifications to the rule should be made to address these
issues.
2. Master Trusts: Revolving Pool Securitizations
a. Overview of the Reproposal and Public Comments
    Many securitization sponsors face a mismatch between the maturities
of the assets they seek to securitize and the maturities of bonds
sought by investors in the market. In order to obtain best execution
for a securitization of those assets--or in other cases, in order to
obtain any investor interest in the market of any kind--the sponsor
must use a structure that transforms the available cash flow from the
assets into debt with a maturity and repayment type (amortizing or
bullet) sought by investors. Furthermore, if the sponsor's business
generates an ongoing stream of assets to be securitized under these
circumstances, especially (but not always) if the assets are
receivables generated from revolving credit lines, the sponsor faces
unique challenges in structuring its securitization.
    One solution to these issues, which has evolved over the last 25
years, is a type of revolving pool securitization commonly known as a
``master trust'' securitization. Master trusts generally issue multiple
series of asset-backed securities over time, collateralized by a common
pool of securitized assets. The transaction documentation requires the
sponsor to maintain the collateral

balance at an amount that is at all times sufficient to back the
aggregate amount of outstanding investor ABS interests with a specified
amount of collateral above that amount. The amount of outstanding
investor ABS interests changes over time as new series are issued or
existing series are paid down. Moreover, as each series is issued, it
begins with a revolving period (typically for some number of years),
during which the holders of investor ABS interests receive only
interest, and cash from borrower principal repayments on the
securitized assets are used to buy additional assets for the pool from
the sponsor. This provides the sponsor with ongoing funding for its
operations, and maintains the level of securitized assets over time.
Then, at a date specified under the terms of the series, the revolving
phase for the series comes to an end, and cash from borrower principal
repayments on securitized assets is used to repay investors and retire
that series of investor ABS interests.
    Separately from the issue of credit enhancement for the investor
ABS interests, which is discussed below, investors are concerned that
the total amount and quality of securitized assets does not decline
unacceptably during the revolving period of the series. If that were to
happen, the master trust could face difficulties repaying investors
months or years later when the series matures. To protect against this,
the sponsor is typically required, at various intervals, to measure the
amount by which the aggregate principal balance of the securitized
assets exceeds the aggregate principal balance of the outstanding
investor ABS interests. If this ``cushion'' of securitized assets falls
below a target level, the sponsor has a specified cure period in which
it may add more assets to restore the pool to its required target
size.\70\ Credit quality problems with the securitized assets would
lead to elevated charge-offs of securitized assets, which in turn could
cause the pool to fall below the target level.\71\
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    \70\ Instead of adding assets, the sponsor might also avail
itself of options described in the transaction documents to reduce
or repay outstanding investor ABS interests.
    \71\ The level of securitized assets in the pool might also fall
if securitized assets are repaid according to their terms and the
master trust does not use the repaid principal to acquire
replacement securitized assets from the sponsor.
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    If the sponsor cannot restore the pool balance to its required
target level within the cure period, the master trust commences an
``early amortization mode.'' Once that occurs, the sponsor may no
longer use borrower payments on the securitized assets to purchase
additional loans to transfer to the securitization, and interest and
principal payments on the securitized assets are used to begin paying
down outstanding investor ABS interests as rapidly as practicable. The
consequences to the sponsor are significant, since early amortization
of the master trust means the sponsor will no longer have access to
securitized funding through the master trust for future securitized
assets generated in connection with the sponsor's operations.
    The agencies' reproposal would have recognized the ``seller's
interest'' retained by a master trust sponsor as an acceptable form of
risk retention to meet the sponsor's obligations under the rule. In
many master trusts, the ``seller's interest'' is the amount by which
the outstanding principal balance (or equivalent measurement) of the
assets held by the master trust exceeds the outstanding principal
balance of the outstanding ABS interests and is required by the series
transaction documents to be maintained at or above a specified
percentage of the aggregate outstanding investor ABS interests,
measured monthly (e.g., the seller's interest in the principal balance
of pool collateral is required to equal at least 5 percent of the
principal balance of all outstanding investor ABS interests). The
seller's interest is not attached to specific pool collateral; it is an
undivided interest in the entire pool akin to a participation interest,
representing the sponsor's entitlement to a percentage of the total
principal and interest or finance charge payments received on the
pooled securitized assets for every payment period (typically monthly).
Investors in the various series of ABS interests issued by the master
trust have claims on the remaining principal and interest or finance
charge payments, as the source of repayment for the ABS interests they
purchased from the master trust. The seller's interest in these
structures is generally pari passu with the investor ABS interests,
resulting in the sponsor incurring a pro rata share of credit losses on
securitized assets, in a percentage amount equal to the percentage
amount of the seller's interest as calculated under the terms of the
transaction documents.\72\
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    \72\ A 5 percent pari passu seller's interest is commonly
required in credit card master trusts.
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    The agencies' reproposal would have treated a pari passu seller's
interest as a separate form of risk retention. The reproposal would
have allowed this option to be used only by issuing entities organized
as master trusts, established to issue on multiple issuance dates one
or more series of ABS interests, all of which are collateralized by a
common pool of assets that will change in composition over time. The
reproposal would have required distributions to the sponsor on the
seller's interest to be pari passu with each series of investor ABS
interests, prior to an early amortization event as defined in the
transaction documents. The sponsor would have been required to meet the
5 percent threshold for its seller's interest at the closing of each
issuance of ABS interests by the master trust, and at each seller's
interest measurement date specified in the transaction documents, but
no less often than monthly. The reproposal would have required the
seller's interest to be retained by the sponsor or by a wholly-owned
affiliate of the sponsor.
    For so-called ``legacy master trusts''--which hold revolving pools
of collateral and issue a certificate that entitles the holder to
distributions on that collateral to another one of the sponsor's master
trusts, which in turn securitizes those distributions into investor ABS
interests--the reproposal would have allowed the seller's interest with
respect to the legacy trust assets to be held by the sponsor at the
level of either trust, in proportion to their differing asset pools.
The agencies also proposed to allow an offset against the required
seller's interest, on a dollar-for-dollar basis, for so-called ``excess
funding accounts.'' These accounts receive distributions that would
otherwise be paid to the holder of the seller's interest if the sponsor
fails to meet the minimum seller's interest requirement. In the event
of an early amortization of the master trust, funds from the excess
funding account would be used to make distributions to outstanding
investor ABS interests, in the same manner as distributions on pool
collateral during early amortization.
    In the reproposal, the agencies also observed that some of the
master trusts in the market are not structured to include a pari passu
seller's interest of a sufficient size to meet the proposed rule's 5
percent trust-wide requirement. In an effort to accommodate sponsors of
these trusts, the reproposal would have allowed the sponsor to reduce
its 5 percent pari passu seller's interest requirement by whatever
corresponding percentage of horizontal ABS interest the sponsor held in
the structure. The reproposal would have given the sponsor credit for
an eligible horizontal residual interest under section 4 for these
purposes, as well as an alternative form of horizontal risk retention
based

on excess spread (described below). The sponsor would have been
required to determine the percentages of horizontal retention on a fair
value basis, consistent with the reproposal's treatment of other
subordinated forms of risk retention. Furthermore, any gap between the
amount of trust-wide pari passu seller's interest held by the sponsor
and the 5 percent minimum requirement would have been required to be
offset with an equivalent fair value percentage of the permitted
horizontal interests for every outstanding series issued by the master
trust.
    Another alternative form of horizontal risk retention that would
have been recognized by the reproposal was designed to allow sponsors
to receive risk retention credit for excess spread, which constitutes a
significant portion of the credit enhancement in master trusts
collateralized by credit card receivables. These master trusts are
structured with two separate cash waterfalls, one for principal
repayments collected from borrowers and one for interest and fees
(finance charges) collected from borrowers. Interest and fees collected
from borrowers each payment period are used to cover the master trust's
expenses and to pay interest due on outstanding investor ABS interests
for the period, and the remaining interest and fee collections are then
made available to cover principal charge-offs on securitized assets.
The sponsor is then entitled to collect whatever interest and fee
collections remain. Absent application of the excess interest and fee
collections to cover principal charge-offs, the principal charge-offs
would result in the balance of outstanding investor ABS interests being
reduced. Accordingly, the reproposal would have recognized the
sponsor's interest in the residual interest and fees (excess spread) as
a subordinated form of horizontal risk retention, if it was structured
in the manner described in this paragraph, so long as the master trust
continued to revolve, and the sponsor determined and disclosed the fair
value of the residual interest and fees on the same monthly basis as
its pari passu seller's interest.
    The reproposal also included provisions clarifying that a master
trust entering early amortization and winding down would not, as a
result, violate the rule's requirement that the seller's interest be
pari passu. During early amortization, distributions on this form of
seller's interest typically become subordinated to investor interests,
to allow for the repayment of the outstanding investor ABS interests
more rapidly.
    The agencies received extensive comments on the overall design and
the details of the reproposal's option for master trusts. Commenters
stated that the agencies needed to make numerous revisions to the
mechanics of the reproposal for master trusts or the seller's interest
option would not be useable by most revolving pool securitization
structures in the market. Moreover, commenters stated that most
revolving pool securitizations in the market would be left with no
mechanism for horizontal risk retention under the rule whatsoever,
because the requirements in section 4 of the reproposed rule for an
eligible horizontal residual interest conflicted with key provisions of
those revolving pool securitizations. Commenters pointed out that
revolving pool securitization structures have evolved beyond credit
cards and automobile dealer floorplan financing, to encompass numerous
specialized asset classes important to the U.S. economy. Examples they
cited included a wide variety of floorplan and trade receivable
financing for commercial manufacturing firms, other non-revolving
short-term assets such as insurance premium loans and servicer advance
receivables, a broad variety of equipment leasing programs, and home
equity line receivables. Commenters identified two overarching concerns
with the reproposal, and also made numerous, more detailed
recommendations for revisions to the mechanics of the rule.
    The first area of overarching concern for commenters centered on
the agencies' proposed treatment of subordinated forms of risk
retention in the master trust context. In the reproposal, the agencies
noted the existence of subordinated forms of seller's interests in the
market. The agencies invited comment on whether subordinated seller's
interests should be given risk retention credit under the rule, but
also pointed out that the agencies were inclined to require it to be
measured on a fair value basis, consistent with the treatment of other
forms of subordinated risk retention under the reproposal. Commenters
said many revolving pool securitizations in the market relied on
subordinated seller's interests as the principal source of credit
enhancement and, therefore, it was critical for the agencies to include
it in the rule.\73\ Commenters also said that monthly calculations of
fair value, as suggested by the agencies in the reproposal, would be
immensely burdensome. Commenters said this burden was especially
unwarranted in the case of revolving pool securitizations, which do not
monetize excess spread and, therefore, do not present the risks of
evasion through deal structures that motivated the agencies'
restrictions on other forms of horizontal risk retention. Commenters
also said that the agencies' concerns about sponsor manipulation and
evasion were misplaced, because revolving pool securitization sponsors
rely on the funding they thereby obtain as a principal source of
ongoing funding for their business operations. Commenters said this
creates an alignment of interests between sponsors and investors that
is the opposite of the originate-to-distribute model.\74\
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    \73\ One group of commenters said the typical pari passu
seller's interest in a floorplan securitization was zero percent,
and they were aware of no floorplan securitization with one higher
than 2 percent. These commenters said that a subordinated seller's
interest was, like a pari passu seller's interest, typically
calculated as a set percentage of additional assets required to be
held in the collateral pool, over and above an amount equal to the
total amount of outstanding investor ABS interests (though this
percentage is often determined on a series-by-series basis rather
than a trust-wide basis). Principal and interest payments made with
respect to this subordinated seller's interest are distributed to
the sponsor, after they are first applied to cover any charge-offs
of securitized assets that would otherwise reduce the principal
amount of outstanding investor ABS interests. The sponsor's share of
principal and interest distributions is also available to cover
shortfalls in payments of principal and interest due to investors.
    \74\ Commenters representing automobile, equipment, and dealer
floorplan manufacturers were among those advocating for a simplified
risk retention alternative, without fair value requirements and cash
flow restrictions, for ``simple'' securitization structures that
issue only ``traditional'' interest bearing asset-backed securities
with 5 to 10 percent overcollateralization on a face value basis and
weighted average interest rates on the issued asset-backed
securities in line with that of the securitized assets. The agencies
note that the elimination of the cash flow restrictions from section
4 of the rule, accompanied by the treatment of subordinated seller's
interests adopted in the final rule, should significantly address
the source of commenters' concerns in this regard.
---------------------------------------------------------------------------

    The other areas of concern for commenters were differences between
the reproposal's requirements for the eligible horizontal residual
interest and the terms of existing revolving pool securitizations in
the market. First, commenters said the cash flow recovery percentage
calculations were structurally incompatible with revolving pool
securitizations.\75\ Second, commenters expressed heightened concerns
about their potential liability for disclosing predictions and
assumptions about the future performance of a revolving pool
securitization, in connection with making the fair value determination

required by the rule. Third, commenters asserted that the requirement
for the eligible horizontal residual interest to be the most
subordinated claim to payments of both principal and interest could not
be achieved when the sponsor is also entitled to collect residual
interest and fees, because there are separate interest and principal
waterfalls and the subordinated junior bond in the series held by the
sponsor (whether or not it is certificated or rated) is usually
structured to be paid interest before the allocation of interest and
fee collections to cover charge-offs otherwise allocable to senior
bonds (and in some cases, charge-offs allocable to the junior interests
held by the sponsor as well).
---------------------------------------------------------------------------

    \75\ The agencies note that the elimination of the cash flow
restrictions from section 4 of the rule addresses commenters'
concerns in this regard.
---------------------------------------------------------------------------

    Commenters said that sponsors sought the ability to continue
incorporating subordinated seller's interest or residual ABS interest
in excess interest and fees into their deal structures and
simultaneously retain a junior bond, while still having the flexibility
to choose which combination of those interests the sponsor would use to
comply with the risk retention requirements. Commenters placed
particular importance on retaining the flexibility to do this without
being required to engage in fair value determinations for the interests
the sponsor does not count for purposes of regulatory compliance.
    In addition, commenters expressed concerns about paragraphs (2) and
(3) of the eligible horizontal residual interest definition in
connection with the series-level allocations and delinked structures
used in revolving pool securitizations.
    Commenters also asked the agencies to modify the rule's
subordination requirements to allow a subordinated tranche held as an
eligible horizontal residual interest to be repaid prior to later-
maturing senior tranches, noting that, in delinked structures, a
subordinated tranche which enhances one or more senior tranches may
mature before the senior tranche. In these circumstances, commenters
said the securitization transaction documents contain terms requiring
the subordinated tranche to be replaced to the extent the remaining
senior tranches still require credit enhancement under the terms of the
transaction documents.
    In addition to these concerns, commenters requested numerous
changes they said were necessary to recognize the risk retention
existing in revolving pool securitizations in the current market.
    Commenters said many revolving securitization structures that are
commonly referred to as ``master trusts'' do not, in fact, use issuing
entities organized in the form of a trust, and their organizational
documents do not necessarily state that they are established to issue
multiple series. Commenters also expressed concern about whether
sponsors universally hold their seller's interests in the form of an
``ABS interest'' as defined in the reproposed rule.
    Commenters requested clarification as to whether the requirement
that the master trust be collateralized by a common pool of securitized
assets means that every series must be secured by every asset held by
the issuing entity. Commenters explained that some revolving pool
securitizations may use collateral groupings, and further that
principal accumulation and interest reserve accounts may be held only
for the benefit of an identified series. Commenters also requested
clarification as to whether the common pool requirement prevents the
issuing entity from holding assets that are not eligible to support
issuance of additional ABS interests to investors (such as excess
concentration receivables), but are nonetheless pledged as collateral
to the structure, with proceeds from these ineligible assets being
allocated to the sponsor, sometimes with varying extents of
subordination to one or more series of outstanding investor ABS
interests.
    In the reproposal, the agencies invited comment on whether, if a
sponsor is relying on the seller's interest as its required credit risk
retention under the rule, the final rule should preclude the master
trust from monetizing excess spread, in exchange for allowing the
seller's interest to be calculated on the basis of the principal
balance of outstanding investor ABS interests instead of the fair value
of outstanding investor ABS interests. Commenters questioned the
agencies' rationale for this restriction, asserting that revolving pool
securitizations that generate excess spread do not monetize it through
the issuance of interest-only securities or premium bonds. Commenters
said revolving pool securitizations do exactly the opposite, making
excess spread available to cover losses that would otherwise reduce the
principal repayments to outstanding investor ABS interests.\76\
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    \76\ Commenters also expressed concern as to how the agencies
could define the difference between premium bonds and bonds that
price above par due to investor enthusiasm for a particular bond.
---------------------------------------------------------------------------

    Commenters questioned why the reproposal would, as a general rule,
permit a majority-owned affiliate of a securitizer to hold the
securitizer's risk retention interest required by the rule, but in the
case of revolving pool securitizations would only permit the seller's
interest or special horizontal interest to be held by the securitizer
or a wholly-owned affiliate of the securitizer.
    Commenters also requested that the agencies revise the rule to
permit risk retention in legacy master trusts to be held at the legacy
master trust level, not only for seller's interests, as the agencies
proposed, but also for horizontal forms of risk retention permitted
under the rule.
    Commenters requested that the agencies make changes to the details
of the definition of seller's interest concerning the requirement that
the sponsor's distributions on the seller's interest be pari passu
prior to an early amortization event. Commenters pointed out that
principal distributions on the seller's interest are subordinated to a
series of outstanding investor ABS interests in a controlled
accumulation phase or amortization, because the transaction documents
typically fix the proportions for allocation of principal distributions
to the series at the start of the accumulation phase or amortization
period.\77\
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    \77\ Moreover, some revolving pool securitizations allocate
principal during an accumulation phase pursuant to a formula that
captures all available principal collections from the assets that
are not otherwise needed for other principal accumulation accounts
and acquisition of new pool collateral.
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    With respect to the reproposal's requirement for master trusts to
measure the seller's interest on the measurement date specified in the
transaction documents, no less than monthly, commenters requested two
changes. First, commenters stated that some revolving pool
securitizations require measurements of the seller's interest on a more
frequent basis, and that they should not be required to measure the
seller's interest for regulatory compliance purposes more often than
monthly (and at the closing of each issuance of ABS interests).\78\
Second, commenters requested the agencies to recognize the cure period
afforded them under their transaction documents. Commenters also
requested changes to the specifics of the disclosure requirements with
respect to the cut-off dates for disclosing the amount of seller's
interest retained by the sponsor.
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    \78\ Commenters said that the measurement referred to by the
agencies in the reproposal, for purposes of determining whether the
sponsor must add more assets to the collateral pool, generally takes
place monthly. However, the seller's interest is measured more
frequently (as often as daily) for other purposes, such as verifying
whether cash may be released to the sponsor.
---------------------------------------------------------------------------

    Commenters also requested changes to the details of the reproposed
rule's

treatment of excess funding accounts and the provisions on early
amortization, to better reflect the way early amortization triggers are
currently structured.
    Commenters supported the reproposal's inclusion of residual
interest and fees as a recognized form of risk retention for revolving
pool securitizations. They recognized the rationale for requiring
sponsors using the option to measure it on a fair value basis, but
expressed concern that the burdens of performing the valuation monthly
would be so substantial as to dissuade all but a few revolving pool
securitizations from using the option. Commenters also requested some
changes and clarifications to the mechanics of the rule language in the
reproposal, to accommodate established structures being used in the
market. They also requested that the agencies eliminate the requirement
for separate interest and principal waterfalls.
    Commenters supported the reproposal's inclusion of provisions
allowing revolving pool securitizations to offset and reduce their 5
percent seller's interest with corresponding amounts of horizontal
interests. They objected to the agencies' requirement that the
offsetting amount be held with respect to every series in the trust,
and requested that the agencies permit the offset to be determined on a
weighted average basis across all series of outstanding investor ABS
interests. Commenters also requested that, if a sponsor held the
horizontal interest jointly with an investor, the sponsor be allowed to
take credit for its proportional holding in that horizontal interest.
    Commenters agreed with the agencies that it is not practicable to
create a grandfathered status for seller's interest, since it
represents the sponsor's undivided interest in, and exposure to, the
common pool of securitized assets in the trust, on a trust-wide basis.
Commenters suggested that a revolving pool securitization relying on
horizontal interests to offset any portion of the seller's interest
should be allowed to do so on a grandfathered basis, whereby the
sponsor would only be required to hold that horizontal element with
respect to series issued after the applicable effective date of the
rule.
    Commenters also described a type of revolving pool securitization
that securitizes mortgage servicer advance receivables, in which the
seller's interest is fully subordinated to all expenses and investor
obligations. These commenters requested inclusion of these subordinated
interests as part of the master trust option, and inclusion of certain
series-specific interest reserve accounts as an offset to the minimum
seller's interest.
b. Description of the Final Rule
    The agencies are revising the master trust option in the final rule
in order to make the option available to more commercial firms that
currently rely on revolving pool securitizations as an important
component of their funding base. These revisions recognize and
accommodate the meaningful exposure to credit risk currently held by
sponsors of these vehicles, in light of the heightened alignment of
incentives between sponsors and investors that attaches to their
revolving nature. The agencies are also making a number of other
refinements in the final rule in order to align it more closely with
the mechanics of revolving pool securitizations as they are structured
in the market today.
    The pari passu seller's interest option proposed by the agencies
represents a special form of over-collateralization for the ABS
interests issued by a revolving pool securitization. Under the final
rule, sponsors must maintain the size of the seller's interest
position, which they most commonly do through the ongoing addition of
assets to the pool or repayment of investor ABS interests, if the
existing pool is diminished by charge-offs exceeding expected loss
rates.
    The agencies are also adopting an additional change requested by
commenters to accommodate other revolving pool securitizations that are
common in the market and rely on over-collateralization in a different
manner, which varies between asset classes. Commenters described two
different structures, one of which the agencies are persuaded should be
recognized as an eligible form of risk retention under the final rule.
This form was described by commenters as a common feature of some asset
classes, such as equipment leasing and floorplan financing. In these
revolving pool securitizations, the sponsor is obligated, as is the
case in the pari passu seller's interest structure, to maintain an
undivided interest in the securitized assets in the collateral pool, in
an amount equal to a specified percentage of the trust's outstanding
investor ABS interests. Whereas the pari passu seller's interest is a
trust-level interest equal to a minimum percentage of the revolving
pool securitization's combined outstanding investor ABS interests, the
minimum percentage in these structures may be tied to the outstanding
investor ABS interests in each separate series. While the sponsor's
right to receive distributions on the seller's interest included in the
reproposal was required to be pari passu, the sponsor's right to
receive its share of distributions on its subordinated seller's
interest may be subordinated to varying extents to the series' share of
credit losses.
    Importantly, notwithstanding these differences with the pari passu
seller's interest, the sponsor of this form of revolving pool
securitization is still required under the transaction documents to
maintain the specified minimum percentage amount of securitized assets
in the pool if the securitization is to continue revolving, through the
ongoing addition of extra securitized assets to the pool if necessary.
The agencies believe this requirement to maintain the specified minimum
percentage amount creates incentives for the sponsor to monitor the
quality of the securitized assets added to the pool in both structures.
If the sponsor replaces depleted pool collateral with poorly
underwritten assets, those assets will, in turn, underperform, and the
sponsor will be obligated to add even more assets. If this cycle is
perpetuated and the specified minimum percentage amount is breached,
the deal will enter early amortization, and the sponsor's access to
future funding from the structure will be terminated. In consideration
of this, the agencies have made modifications so that the final rule
recognizes this subordinated form of seller's interest as an eligible
form of risk retention for revolving pool securitizations, because the
agencies believe this form aligns the interests of sponsors and
investors in a manner similar to other forms of risk retention
recognized pursuant to the final rule.
    The second form of revolving pool securitization described by
commenters as used in some asset classes, such as equipment leasing and
floorplan financing, represents various types of excess securitized
assets. The transaction documents for revolving pool securitizations
typically impose eligibility requirements on the securitized assets
that are allowed to be included as collateral for purposes of
calculating the total amount of outstanding investor ABS interests that
may be issued by the revolving trust. According to commenters, these
eligibility requirements include concentration limits on securitized
assets with common characteristics, such as those originating from a
particular manufacturer or dealer or a particular geographic area. The
sponsor places assets in the revolving pool securitization that do not
meet these requirements (excess concentration

receivables), but these ineligible assets are not included when
calculating the total amount of outstanding investor ABS interests the
revolving pool securitization may issue. Commenters asserted that these
ineligible assets are often subject to the pledge of collateral to the
ABS investors, but distributions on these assets are typically
allocated to the sponsor. Depending on the terms of the securitization,
the sponsor's claim to the cash flow from these excess assets may be
partially or fully subordinated to investor interests, and these
subordination features may be at the trust level, at the series level,
or some combination of both.
    The agencies are not persuaded that the sponsor's interest in these
receivables should be included as eligible risk retention. By their
terms, these are assets that are not representative of the assets that
stand as the principal repayment source for investor ABS issued by the
revolving pool securitization.
    To accommodate revolving pool securitizations with subordinated
seller's interest, the agencies have revised the distribution language
in the definition of seller's interest to include seller's interests
that are pari passu with each series of investor ABS interests, or
partially or fully subordinated to one or more series in identical or
varying amounts with respect to the allocation of all distributions and
losses on the securitized assets. This language retains the vertical
nature of the proposed seller's interest, since the sponsor must
receive at least its pro rata share of losses on securitized assets
through the pari passu aspect of the distribution. The sponsor is also
free to use its pari passu share of distributions from securitized
assets to provide loss protection to outstanding investor ABS
interests, thereby subordinating its interest. The final rule provides
that these levels of subordination may be varied, thereby affording the
sponsor flexibility with regard to the extent of this subordination.
For example, the sponsor may provide varying levels of subordination to
different series, or provide different levels of subordination
depending on the occurrence of triggers specified in the transaction
documents.
    Commenters stated that structures with pari passu seller's interest
also often include elements of conditional subordination that are
included to accommodate investor or rating agency concerns that vary
from transaction to transaction. These are also permitted pursuant to
the final rule. The agencies believe this flexibility is necessary to
accommodate the kinds of variations in current market practice from
deal to deal that commenters described in their comment letters.
Nevertheless, the flexibility afforded under the rule does not permit
the sponsor to participate in distributions to any extent greater than
pari passu. Therefore, the seller's interest may not be senior to any
series of investor ABS interests with respect to allocation of
distributions pursuant to the seller's interest.
    Commenters asserted that revolving pool securitizations typically
provide different distribution regimes for seller's interests if the
securitization moves into early amortization. The reproposed rule
contained language reflecting this, relieving the seller's interest
from the pari passu distribution requirement only after an ``early
amortization event.'' In response to these comments, the agencies have
removed the technical reference to a triggering event and substituted
functional language describing a revolving pool securitization in early
amortization, as specified in the securitization transaction
documents.\79\
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    \79\ As discussed above, the definition of seller's interest has
also been revised to allow, prior to early amortization,
subordinated distributions.
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    In addition, the agencies have modified slightly the operational
portion of the final rule text allowing retention of a seller's
interest to satisfy a sponsor's risk retention obligation. Whereas the
reproposal obligated the sponsor to ``retain a seller's interest of not
less than 5 percent,'' the final rule requires the sponsor to
``maintain a seller's interest of not less than 5 percent'' (emphasis
added). The agencies believe that the sponsor's obligation to replenish
the seller's interest underlies the alignment of interests unique to
the revolving pool securitization structure. Commenters indicated that
there are some forms of subordinated seller's interest that the sponsor
is not required to replenish. These do not qualify for the seller's
interest option under the final rule.
    The definition of seller's interest in the final rule provides that
ineligible assets--specifically, assets which are not eligible under
the terms of the securitization transaction to be included when making
periodic determinations whether the revolving pool securitization holds
aggregate securitized assets in the required specified proportions to
aggregate outstanding investor ABS interests issued by the revolving
pool securitization (e.g., excess concentration receivables)--are not
to be considered a component of the seller's interest.\80\ By the terms
of the transaction documents, these are assets that are typically not
representative of the assets that stand as the principal repayment
source for investor ABS interests issued by the revolving pool
securitization, and the agencies are declining to grant commenter's
request that they be recognized as a form of risk retention comparable
to the forms of seller's interest recognized under the rule. The
agencies have also clarified the proposed exclusion from seller's
interest of assets that have been allocated as collateral only for a
specific series. As the agencies discussed in the reproposal, this
exclusion was designed to accommodate limited forms of exclusion in
connection with administering the trust, accumulating principal, and
reserving interest.\81\ To reflect this condition within the rule text
itself, the agencies have revised the exclusion so it applies only to
servicing assets.
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    \80\ One group of commenters recommended that the agencies
simply modify the seller's interest definition to exclude assets
within the revolving pool securitization that secure less than all
of the ABS interests. The agencies are implementing this approach in
a more targeted way by identifying the particular categories of
assets to be excluded.
    \81\ Revised Proposal, 78 FR at 57943, n.52.
---------------------------------------------------------------------------

    To address certain comments about the application of the definition
of eligible horizontal residual interest to revolving pool
securitizations, the agencies have modified paragraph (2) of the
definition of eligible horizontal residual interest to refer to
allocation dates as well as payment dates.\82\ The agencies also
confirm that, in applying the eligible horizontal residual interest
definition to a revolving securitization with multiple series, the
requirements in paragraphs (2) and (3) specifying priority of payment
with respect to amounts due to other interest holders and requiring
subordination are to be applied with respect to the series supported by
the particular eligible horizontal residual interest (including, where
applicable, certain delinked structures), and should only be construed
to refer to all outstanding investor ABS interests if the eligible
horizontal residual interest is, in fact, structured to function as an
enhancement to all outstanding investor ABS interests issued by that
revolving pool securitization. To accommodate delinked structures,
commenters requested that the agencies allow replacement of a
subordinate tranche before maturity of the senior tranches it supports.
The agencies are not adopting

this requested modification. The agencies note that, to serve as risk
retention pursuant to the rule, the sponsor must retain an eligible
horizontal retention interest for the life of the securitization it
supports, and the agencies believe sponsors can readily structure their
retained residual interests to achieve this outcome.\83\
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    \82\ Commenters stated that the reproposal's definition of
eligible horizontal residual interest refers to loss allocations
occurring on ABS interest payment dates, whereas revolving pool
securitizations allocate losses periodically, in advance of ABS
interest payment dates.
    \83\ The agencies are also concerned that the approach suggested
by commenters is inconsistent with the rule's approach to the timing
of the fair value determination for retained eligible horizontal
residual interests under the standard risk retention option, under
which the fair value ratio of residual to ABS interests issued is
measured at the time of issuance. Although sponsors noted that the
terms of a delinked revolving pool securitization transaction
include requirements for minimum levels of subordination to be
maintained in connection with the maturity and replacement of
subordinated interests, these measures do not necessarily ensure
equivalent fair value for a replacement subordination interest.
Commenters did not suggest any alternatives to address this area of
concern.
---------------------------------------------------------------------------

    The risk retention options described in section 5 of the final rule
are available only to a specific category of securitization vehicles,
originally defined as ``revolving master trusts'' but now defined as
``revolving pool securitizations.'' \84\ The option is not available to
an issuing entity that issues series of ABS interests at different
times collateralized by segregated independent pools of securitized
assets within the issuing entity such as a series trust, or an issuing
entity that issues shorter-term ABS interests collateralized by a
static pool of securitized assets, or an issuing entity with a
predetermined re-investment period that precedes an ultimate
amortization period.
---------------------------------------------------------------------------

    \84\ The agencies made this change, and eliminated language in
the definition requiring the issuing entity to be a ``master
trust,'' in response to comments indicating sponsors sometimes
organize the issuing entity as a different type of legal entity.
---------------------------------------------------------------------------

    Commenters expressed concern that language in the revolving pool
securitization definition requiring the issuing entity to be
``established to issue on multiple issuance dates one or more series''
would require them to re-constitute their issuing entities. The
agencies note that the rule does not require specific statements of
intention to issue multiple series in the issuing entity's
organizational documents. That being said, the agencies believe that
the ability to issue more than one series of ABS interests is one of
the defining characteristics of the structure.\85\ In light of this,
the agencies are replacing the ``one or more'' language with rule text
requiring the issuing entity to be established to issue ``more than
one'' series. While the rule requires no specialized documentation of
this intention to be made in connection with the issuing entity's legal
organization, the sponsor must be able to establish that, under the
constituent legal powers of the entity pursuant to applicable law, the
issuing entity has the authority to issue more than one series. The
agencies also recognize that a business organization might establish a
revolving pool securitization vehicle and, after issuing one series,
changes in circumstances could prevent the sponsor from seeking to
issue any additional series, with the structure ceasing to revolve and
amortizing out. The agencies typically would not dispute this issuing
entity's eligibility under section 5 of the rule in hindsight, absent
facts and circumstances indicating the sponsor sought to use the
structure to improperly avoid the standard risk retention obligations
of section 4 of the rule. A business organization that did so more than
once would face a heightened burden to establish that its reliance on
section 5 of the rule was not a violation of its obligations under the
rule.
---------------------------------------------------------------------------

    \85\ Although ``series'' could be considered a term of art in
securitization, it is not a defined term in the rule. The rule text
in this regard refers to ``more than one series, class, subclass, or
tranche.'' Section 5(a) of the final rule. The agencies believe the
text is sufficiently flexible to accommodate, regardless of
transaction labels used, the concept of a discrete issuance of ABS
interests of a certain maturity, albeit one with a renewable or
renegotiated maturity, as well as delinked structures. However, in
the same vein, the rule's reference to a class, subclass, or
tranche, which are terms commonly used to describe subsets within a
series, is not an invitation to sponsors to assert that subdivisions
of an issuance qualify as multiple issuances for these purposes.
---------------------------------------------------------------------------

    The final rule retains the reproposal's requirement that the
issuing entity's ABS interests are collateralized by a common pool of
securitized assets that will change in composition over time. This is
another defining characteristic of a revolving pool securitization
eligible to use section 5 of the rule. Under these structures,
principal collections on the securitized assets (net of funds required
to amortize the principal of outstanding investor ABS interests or to
accumulate such funds) are used to purchase additional assets to
collateralize existing and future investor ABS interests in the
securitization on a revolving basis, with no predetermined end
date.\86\ Revolving pool securitizations allow sponsors to restructure
the cash flows on the securitized assets not only for credit
enhancement, but for mismatches between the maturities of the
securitized assets and the maturities of ABS interests that are sought
by the market on attractive terms.\87\
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    \86\ The agencies also recognize that the extent to which the
sponsoring organization utilizes investor funding to fund the
securitized assets may vary according to business need, as well as
the availability of alternate sources of funds at more favorable
rates.
    \87\ In referring to maturities in this aspect of the
discussion, the agencies do not focus on legal maturity, or to
effective maturity or duration, as those terms are used in finance,
but to the actual lifespan of the assets and interests. For example,
in many revolving pool securitizations, such as credit card,
automobile floor plan, construction loan, and trade receivable
deals, the maturity of the securitized assets is so short that the
structure is used to lengthen the maturity of the asset-backed
securities to attract investors. In other revolving pool
securitizations, such as UK residential mortgage deals, the
structure is used to create shorter maturity bullet asset-backed
securities to attract investors.
---------------------------------------------------------------------------

    Commenters requested further clarification about the common pool
requirement. One concern centered on the presence of ineligible assets,
including so-called ``excess concentration'' receivables. The agencies
observe that, on the one hand, these ineligible assets are part of the
asset pool, and proceeds from them may even be used to cover losses
that would otherwise be allocated to investors. On the other hand, the
bulk, or in many cases all, of the proceeds from the ineligible assets
are directed to the sponsor, and the receivables are not eligible to be
included when determining the revolving pool's limit on outstanding
investor ABS interests. The agencies do not consider these arrangements
to violate the common pool requirement, though as noted above the final
rule does not permit these assets to be included when calculating the
size of the seller's interest.
    Notwithstanding the agencies' willingness to accommodate these
ineligible assets that are allocated to the sponsor, if a revolving
pool securitization designated a collateral group as the securitized
assets for a specific series, the arrangement would not meet the common
pool requirement. In this vein, commenters requested clarification as
to whether a revolving pool securitization with collateral groups meets
the common pool requirement. Commenters did not provide details about
these grouping practices, and the agencies believe the use of
collateral groups may not satisfy the common pool requirement. If the
arrangement were analogous to a construct with multiple revolving pool
securitizations being operated out of a single issuing entity, and the
sponsor could demonstrate that each group would comply with the rule's
requirements on an independent basis, the arrangement could meet the
common pool standard. On the other hand, if the arrangement is
analogous to a revolving pool securitization in one group and a series
trust in another

group, the arrangement would be extremely unlikely to satisfy the
common pool standard. If distributions and losses from any ``group''
are designated to a single outstanding series, the arrangement would
not meet the common pool standard.\88\ To accommodate the possibility
of a multiple group arrangement, the agencies have modified the rule
text of the common pool requirement slightly to eliminate the
requirement that the common pool collateralize ``all'' series issued by
the revolving pool securitization, as well as a similar requirement in
the definition of seller's interest. Nevertheless, a sponsor that
relies on section 5 of the rule for a multiple group arrangement bears
ultimate responsibility to demonstrate full compliance with the rule's
common pool requirement.
---------------------------------------------------------------------------

    \88\ The use by a revolving pool securitization of excess cash
flows resulting from allocations of distributions to one series of
ABS interests as credit enhancement to cover shortfalls in periodic
interest obligations, periodic losses, and similar exposures
experienced by other specified series of ABS interests (but not all
other series of ABS interests) does not violate the common pool
requirement. The agencies do not believe this sharing of allocations
of distributions among ``groups'' of outstanding series raises the
same concerns as separate groups of collateral. Similarly, principal
accumulation formulas would not violate the common pool requirement.
As discussed above, some revolving pool securitizations allocate
principal collections from pool assets during an accumulation phase
pursuant to a formula that captures all available principal
collections from pool assets that are not otherwise needed for other
principal accumulation accounts and acquisition of new pool
collateral.
---------------------------------------------------------------------------

    As discussed above, the reproposal also noted that revolving pool
securitizations do not monetize excess spread, and the agencies invited
comment as to whether the rule should be modified to expressly prohibit
structures that rely on the seller's interest option from issuing
senior interest-only bonds or premium bonds.\89\ In light of
commenters' concerns about the feasibility of incorporating this
restriction into a regulatory requirement and attendant grandfathering
issues with respect to structures that have classes of bonds previously
issued with idiosyncratic interest rates, the agencies are taking a
different approach. The agencies have added to the definition of a
revolving pool securitization the requirement that the sponsor does not
monetize excess spread from its securitized assets. The ability of a
sponsor to meet this standard with respect to its outstanding investor
ABS interests depends on the facts and circumstances of the issuance,
including whether the revolving pool securitization issues ABS
interests that price materially above par in light of all the features
of the ABS interests and market conditions, or the revolving pool
securitization issues ABS interests that pay investors interest on
notional principal absent issuance of a corresponding issuance of
principal-only bonds to support the revolving pool securitization.
---------------------------------------------------------------------------

    \89\ Revised Proposal, 78 FR at 57944.
---------------------------------------------------------------------------

    Consistent with the reproposal, the final rule requires the
seller's interest to be not less than 5 percent of the aggregate unpaid
principal balance of all outstanding investor ABS interests in the
issuing entity. The phrase ``all outstanding investor ABS interests
issued'' refers to ABS interests issued to persons other than the
sponsor and wholly-owned affiliates of the sponsor. Although the
reproposal suggested that ABS interests held by the sponsor would still
be treated as outstanding investor ABS interests if those asset-backed
securities were ``issued under a series,'' the agencies are simplifying
the final rule to eliminate this distinction, which could raise
associated interpretive issues as to whether certain retained interests
met that description. Accordingly, in determining the 5 percent ratio,
a sponsor is not required to include in the denominator the amount of
ABS interests that are held by the sponsor or its wholly-owned
affiliates, but only if the sponsor (or its wholly-owned affiliates)
retains them for the life of the ABS interests. This treatment applies
for ABS interests held by the sponsor and its wholly-owned affiliates
for purposes of complying with the risk retention rule, or held for
other reasons.\90\ In order to maintain consistency with a sponsor's
disclosures as to the manner of its compliance with the seller's
interest requirement, which are communicated to investors in connection
with the issuance of a series of ABS interests, the sponsor must make a
threshold determination as to whether it intends to retain excluded ABS
interests for their life and disclose this election to investors. If a
sponsor wishes to retain the flexibility to transfer an ABS interest in
the future, the sponsor must, from the time of the issuance of the ABS
interest onward, include such ABS interest in the denominator.\91\
---------------------------------------------------------------------------

    \90\ There are several circumstances in which a sponsor might
retain additional ABS interests. Investors may not be inclined to
purchase investor ABS interests unless the sponsor holds a greater
interest in the securitization transaction. The sponsor's cost of
funds to place a subordinated tranche of a series may be greater
than the sponsor's cost to fund that tranche through other means, or
the sponsor's overall cost of funds may be lower than the funding
that can be obtained by issuance of a new series. If the ABS
interest is being retained by the sponsor as part of its required
risk retention pursuant to the rule, the interest is subject to
hedging and transfer restrictions of section 12 of the rule.
    \91\ An ABS interest retained in this manner and that is not
being used to satisfy the minimum risk retention requirements under
the rule, and that is excluded from the denominator, is not subject
to the restrictions of the final rule that apply to ABS interests
retained to meet the risk retention obligations under the final
rule. For instance, the sponsor would be permitted to hedge the
risks related to holding such an interest.
---------------------------------------------------------------------------

    The agencies have also added language clarifying that, if the
transaction documents set minimum required seller's interest as a
proportion of the unpaid principal balance of the outstanding investor
ABS interests in one or more identified series, rather than all
outstanding investor ABS interests of the revolving pool securitization
as a whole, seller's interest may be measured on that basis. However,
the percentage of each series' specific seller's interest must (when
combined with the percentage of securitization-wide seller's interest,
if any) equal at least 5 percent other than for any series issued prior
to the applicable effective date. For example, the final rule does not
permit a sponsor to include in the numerator of the seller's interest
ratio a reserve account that only covers shortfalls of principal and
interest payments to holders of a specific series of investor ABS
interests.
    The final rule requires the 5 percent minimum seller's interest
test to be determined and satisfied at the closing of each issuance of
ABS interests to investors by the issuing entity, and at least monthly.
The agencies have made several adjustments to the measurement details,
in response to comments. Sponsors must measure the seller's interest at
a seller's interest measurement date specified in the transaction
documents at least monthly. If the seller's interest does not meet the
minimum percentage requirement on any measurement date and the
transaction documents specify a cure period, the minimum percentage
requirement must be satisfied within the cure period, but no later than
one month after the original measurement date.
    For purposes of determining the size of the seller's interest at
the closing of each issuance of ABS interests to investors, the final
rule permits the sponsor to use a specified ``as of'' date or cut-off
date for data in establishing the outstanding value of the revolving
pool securitization's securitized assets and an ``as-of'' date or cut-
off date for data in establishing the value of the revolving pool
securitization's outstanding ABS interests. The agencies expect that
sponsors of revolving pool securitizations will, as a practical

matter, continue their past practice of using cut-off dates or similar
dates as the basis for disclosures about the amount of securitized
assets held by the issuing entity, and similarly using investor
reporting or distribution dates as the basis for disclosures about the
amount of outstanding investor ABS interests. The final rule
accommodates this, both for disclosure purposes and for determining
compliance with the regulatory minimum seller's interest requirement.
The sponsor is required to describe its use of specified dates for
these purposes in connection with the associated investor disclosures
for the issuance of ABS interests by the revolving pool securitization.
In addition, in the interests of ensuring sponsors use up-to-date
information, the rule requires the specified dates to be no more than
60 days prior to the date of first use with investors. To accommodate
revolving pool securitizations that only make investor distributions
quarterly (or less frequently), rather than monthly, the final rule
permits the specified dates to be up to 135 days prior to the date of
first use with investors.\92\
---------------------------------------------------------------------------

    \92\ See supra note 62.
---------------------------------------------------------------------------

    In addition, the final rule's disclosure requirements require the
sponsor to provide pre-sale descriptions of the percentage of seller's
interest the sponsor expects to retain at closing. To accommodate this,
the final rule permits sponsors to describe adjustments to their
specified-date data reflecting increases or decreases for additions or
removals of assets the sponsor expects to make before the closing
date.\93\ The sponsor, in describing the amount of additional investor
ABS interest that are expected to be added by the securitization
transaction, may also describe other adjustments to the issuing
entity's outstanding investor ABS interest data resulting from expected
increases and decreases of those interests under the control of the
sponsor, such as additional issuances, or scheduled principal payments
on outstanding investor ABS interests that the sponsor expects will be
made before the closing date. If the amount of seller's interest the
sponsor determines that it retains at the closing of the securitization
transaction is materially different from the amount described in the
pre-closing disclosures, the sponsor must disclose the amount as of
closing, within a reasonable time after the closing.
---------------------------------------------------------------------------

    \93\ In providing the sponsor this operational flexibility, the
final rule does not allow the sponsor to adjust the asset total for
changes other than additions or removals of assets made by the
sponsor itself. Accordingly, the rule does not permit the sponsor to
adjust the asset total to take into account seasonal changes in
borrowers' revolving credit drawdown rates, expected changes in
borrower repayment rates, or other estimated factors.
---------------------------------------------------------------------------

    Consistent with the reproposal, the seller's interest amount is the
unpaid principal balance of the seller's interest in the common pool of
receivables or loans. The minimum required seller's interest cannot be
less than 5 percent of the aggregate unpaid principal balance of all
outstanding investor ABS interests issued by the issuing entity. The
agencies have added language clarifying the measurement of this ratio.
Consistent with the definition of seller's interest, the final rule
also clarifies that the sponsor may not include in the numerator of the
seller's interest ratio ineligible assets, or those servicing assets
allocated as collateral for a particular series. The agencies have also
added language permitting the sponsor to take a deduction from the
denominator (the principal of outstanding investor ABS interests) equal
to the amount of funds held in a segregated principal accumulation
account for the repayment of outstanding investor ABS interests,
subject to certain conditions specified in the rule.\94\ For
securitized assets without a principal or stated balance, such as
royalty payments or leases, the amount of the securitized assets is the
value of the collateral as determined under the transaction documents
for purposes of measuring the seller's interest required for the
revolving pool securitization.
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    \94\ The terms of the securitization documents must prevent
funds in the accumulation account from being applied for any purpose
other than the repayment of the unpaid principal of outstanding
investor ABS, and the funds in the account may only be invested in
the types of assets permitted for a horizontal cash reserve account
pursuant to section 4 of the rule.
---------------------------------------------------------------------------

    The requirements from the reproposal are unchanged with respect to
the holding of the seller's interests. The rule permits wholly-owned
affiliates of the sponsor to retain the seller's interest (and the
horizontal interests described in section 5 of the rule, described
below). The agencies decline to permit holding by majority-owned
affiliates, as requested by commenters. The agencies are affording the
treatment provided to seller's interest in section 5 of the rule
because of the special alignment of incentives created by the sponsor's
interest in maintaining access to continued funding through the
revolving pool securitization, and the agencies seek to maintain this
alignment through this stricter holding requirement under the final
rule. The final rule includes changes to the other affiliate-holding
provisions within section 5 to maintain consistency with this approach.
The final rule also clarifies the provisions allowing seller's interest
for ``legacy trust'' assets to be held at either the legacy trust level
or the issuing entity level. The final rule, like the reproposal,
limits the amount of seller's interest that may be held at the legacy
trust level to its proportional share of the combined securitized
assets of the two trusts. The text has been clarified to indicate that
this proportional share is determined based on the principal balance of
the securitized assets in each trust. The final rule also clarifies
that the proportion of seller's interest held at the legacy trust level
must be equal to this proportion.\95\ Commenters requested the agencies
permit legacy trusts to retain horizontal forms of risk retention at
either level, but the comments did not provide details of these
structures. Without more details about the structures commenters seek
to accommodate, the agencies have not made changes to section 5 of the
rule in this regard.
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    \95\ The reproposal indicated that the legacy trust must hold at
least that proportion of seller's interest, but also suggested the
sponsor would be permitted to hold a greater proportion of seller's
interest at the legacy trust. The final rule clarifies that the
proportion must be the same.
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    The agencies made changes requested by commenters to allow for
dollar-for-dollar offset from the 5 percent seller's interest
requirement for funds maintained in a segregated excess funding account
that is funded from distributions otherwise payable to the holder of
the seller's interest. The agencies expanded the funding trigger
requirements for the account to include the sponsor's failure to meet
the minimum seller's interest requirement, and the failure to meet
other minimum securitized asset balance tests under the transaction
documents.\96\ The agencies agree with the commenters that losses would
not be allocated to an excess funding account, and have removed a pari
passu requirement on the priority of such distributions to the
account.\97\ In order to expand the issuing entity's flexibility
slightly to hold the account in a form other than cash deposits, the
agencies have also decided to add language permitting investments in
the same assets permitted for a horizontal

cash reserve account pursuant to section 4 of the rule.
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    \96\ Commenters described a common test requiring the principal
balance of the securitized assets to be not less than the sum of the
numerators used for each series' calculation of its seller's
interest ratio to allocate principal collections to the investor ABS
interests.
    \97\ As in the reproposal, the account must, in the event of
early amortization, pay out to outstanding investor ABS interest
holders in the same manner as distributions on the securitized
assets.
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    The final rule retains the reproposal's provisions allowing the
sponsor to reduce its seller's interest to a percentage lower than 5
percent to the extent that, for all series of investor ABS interests
issued by the revolving pool securitization, the sponsor retains, at a
minimum, a corresponding fair value percentage of subordinated risk
retention. This treatment is available with respect to the same two
forms of subordinated risk retention the agencies included in the
reproposal. As discussed in more detail below, the agencies have
revised the requirements of each type slightly, in light of sponsor
comments stating that existing structures would not be able to comply
with the reproposed rule. An example of the reduction in seller's
interest permitted by the final rule is as follows: a revolving pool
securitization sponsor holds a seller's interest in the issuing
entity's common collateral pool equal to 2 percent of the aggregate
balance of outstanding investor ABS interests issued by the
securitization. The securitization has two outstanding series; for one
series the sponsor retains a residual interest in excess interest and
fees with a fair value of 5 percent of the fair value of outstanding
investor ABS interests in that series, and for the other, the sponsor
retains a horizontal interest with a fair value of 3 percent of the
fair value of outstanding investor ABS interests in that series. This
revolving pool securitization holds adequate risk retention to comply
with section 5 of the rule. So long as the structure in this example
only holds 2 percent seller's interest, every future series issued to
investors will be required to be supported by at least a 3 percent fair
value subordinated interest.
    For revolving pool securitizations relying on both seller's
interest and subordinated risk retention, commenters requested the
agencies grandfather all series issued prior to the applicable
effective date of the rule with respect to the subordinated portion of
risk retention. For example, for a revolving pool securitization in
which the sponsor holds 2 percent seller's interest, these commenters
urged the agencies to permit the structure to come into compliance with
the rule by continuing to maintain the 2 percent seller's interest and
supplement it with at least a 3 percent horizontal interest to support
each series issued to investors after the applicable effective date of
the rule. Commenters said that, unless the agencies permit this
grandfathering approach, a revolving pool securitization with less than
5 percent seller's interest would have no option other than to increase
its seller's interest to 5 percent. Commenters asserted it was not
feasible to grandfather existing series issued before the applicable
effective date of the rule with respect to a seller's interest, since a
seller's interest is an interest in the securitization's entire
collateral pool, and this factor raises serious obstacles to
implementing it on a series-by-series basis. The agencies agree that
the grandfathering approach requested by commenters should achieve
meaningful risk retention in ABS interests issued in a revolving pool
securitization after the applicable effective date of the rule, and the
approach is reflected in the final rule text.\98\
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    \98\ Specifically, section 5(f) of the rule provides that the
seller's interest requirement would be reduced by the subordinated
portion of risk retention support for all series of ABS interests
issued by the revolving pool securitization after the applicable
effective date of the rule.
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    In the reproposal, the agencies sought to give revolving pool
securitizations the above-described offset credit against a seller's
interest for two different forms of horizontal risk retention. The
first form was based on the sponsor's interest in excess interest and
fees, as described above, made available to the sponsor periodically
after covering the trust's expenses, interest due on more senior ABS
interests in the series for that payment date, and charge-offs for that
period that would otherwise be allocated to more senior ABS interests.
Some revolving pool securitizations allocate each series its ratable
share of interest and fee collections from the pool collateral and
apply the interest and fee collections only within each series, while
others permit sharing of excess interest and fee collections to cover
shortfalls in another series after application of its share of interest
and fee collections. The agencies proposed to allow sponsors to use the
fair value of this residual ABS interest in excess interest and fees,
as a percentage of the fair value of outstanding investor ABS
interests, to reduce their 5 percent minimum seller's interest. As
discussed above, commenters said they anticipated the burden of
calculating the fair value of these excess interest and fees on a
monthly basis would be so high that few, if any, sponsors would avail
themselves of the option. The agencies note that this is a residual
interest comprised of a stream of future cash flows, and no commenter
suggested any other reasonable methodology to assign a value to it for
purposes of determining the required amount of risk retention. To
address this burden, the final rule does not require the sponsor to
disclose its fair value determination to investors monthly. The sponsor
also must continue to calculate the fair value of the residual ABS
interest in excess interest and fees at the same time the sponsor
calculates the seller's interest, to verify that it continues to hold
at least the minimum required amount of risk retention.\99\
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    \99\ To reduce burden further, the rule permits the periodic
determinations of this residual interest's fair value percentage to
be made without re-determining the fair value of the outstanding
investor ABS interests in the denominator. The sponsor may, at its
option, carry forward the fair values of the outstanding investor
ABS interests from the determinations made for the closings of the
transactions in which those outstanding investor ABS interests were
issued (which are likely to be based on observable market data at
that time). Only the fair value of the residual ABS interest in the
numerator of the ratio needs to be determined every period. The
agencies recognize that, for revolving pool securitizations with one
or more amortizing series, this approach may result in a larger
denominator and thus a larger residual ABS interest in excess
interest and fees. The final rule permits a sponsor to elect to make
monthly redeterminations of the fair value of such amortizing series
in connection with their periodic determinations.
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    The agencies have made two clarifying changes to the text of the
final rule. First, at the request of commenters, the agencies have
eliminated the requirement that the sponsor's residual claim to the
interest and fee cash flows for any interest payment period be
subordinated to all accrued and payable principal due on the payment
date to more senior ABS interests in the series for that period.