Proposed Form 41-103F specifies the supplementary prospectus disclosure requirements for distributions of securitized products. Item 1 deals with the various parties to a transaction and requires clear identification of each role that they play and the specific functions and responsibilities being performed in connection with each role.
The roles specified as being material and, where applicable, the related definitions are as follows:
- Sponsor: the person who organizes and initiates a securitized products transaction by selling or transferring assets, either directly or indirectly, to the issuer.
- Depositor: a person or company in a securitized product transaction who receives or produces pool assets from the sponsor and transfers or sells the pool assets to an issuer of securitized products.
- Arranger: a person or company that arranges and structures a securitized product transaction, but does not sell or transfer assets, direct or indirectly, to the issuer of the securitized products, and in the absence of evidence to the contrary, includes the underwriters for a distribution of securitized products.
- Originator: a person or company that originates receivables, loans or other financial assets that are pool assets.
- Issuer
- Servicer: a person or company responsible for the management or collection of pool assets or making allocations or payment distributions to a holder of a securitized product, that does not include a trust of an issuer of securitized products or for the securitized product that makes allocations or payment distributions.
- Trustee
- Any other party with a material role including, without limitation, a custodian, intermediate transferor or liquidity provider in the secondary market.
Apart from identifying each party and describing its role and function in the securitized product transaction, most of the other line items (almost all of which are adopted from the U.S. Securities and Exchange Commission's Regulation AB (Reg AB) are relatively non-controversial and are not likely to require much more or different disclosure than issuers have been used to providing under the current regime in keeping with their obligation to provide full, true and plain disclosure of all material facts.
However certain of them do raise issues which will be the subject-matter of this and a future piece.
Originator
The required disclosure in respect of originators seems to have been inspired by the proposed amendments to Reg AB (Reg AB II) which require the identification of all originators except where (i) it has originated less than 10% of the pool assets and (ii) the cumulative amount of originated assets by parties other than the sponsor (or its affiliates) comprised less than 10% of the total pool assets. In other words, disclosure is not required in respect of originators of less than 10% of the asset pool if the sponsor and its affiliates have originated 90% or more of the asset pool.
In the CSA proposals, the basic disclosure requirement applies to originators of more than 10% of the pool assets. In addition, disclosure is also required where "the originator has originated as of the cut-off date, or is reasonably expected to originate, assets in respect of a pool in which a sponsor and its affiliates have cumulatively originated less than 10% of the pool assets". In other words, disclosure is not required in respect of the originators of less than 10% of the asset pool if the sponsor and its affiliates have originated 10% or more of the asset pool.
The original intent of the Reg AB II proposal seems to be that where an originator represents an insignificant proportion of the asset pool when compared to the sponsor, disclosure in respect of the former is deemed to be immaterial and thus not required. This seems to make good sense. It is not clear what the intent of the CSA proposal might be but it is suspected that something simply got lost in the translation.
More detailed disclosure is required in respect of each originator (or group of affiliated originators) which has or is reasonably expected to originate 20% or more of the pool assets. A couple of the disclosure items are worth noting. First is a requirement to disclose the originator's "credit-granting or underwriting criteria for assets of the type being securitized". (A similar requirement applies to sponsors as well). It is assumed that only a very general discussion is required here as the details may be proprietary and competitively sensitive and not relevant in any case since, in any transaction, the eligibility criteria of the specific asset pool being securitized will be disclosed.
Second, disclosure must also be made in respect of the originator's financial condition "to the extent that there is a significant risk that its financial condition could have a material impact on its ability to comply with any obligations to, or fulfill any reasonable expectations that it will, originate assets for the pool." In any situation involving an amortizing pool of assets, this would not be a material consideration and presumably need not be discussed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.