BNS SEC Filing Expires
On September 9, 2016, the SEC registration statement of Bank of Nova Scotia for its covered bonds expired without renewal.* This was followed by the pricing on September 13, 2016, of a $1.5 billion offering of five year covered bonds by BNS in a 144A private placement. Apparently BNS, like BMO, has abandoned the SEC registered format for its covered bonds.
On inquiry, BNS stated that ……. This action now leaves Royal Bank of Canada as the sole Canadian bank with an SEC registered covered bond program.*
The RBC program was inaugurated in September 2012 to much acclaim. While RBC has not publicly stated what action it will take regarding the loan-level disclosure requirements imposed under Regulation AB starting in November 2016, the response of BMO and BNS suggest that there may be no further issuances of SEC registered covered bonds after November. This will certainly be a disappointment to investors and will increase the funding costs of the banks.
Reg AB II — BMO Abandons SEC Filing
BMO Abandons SEC Filing
On December 16, 2015, Bank of Montreal quietly withdrew its SEC registration statement for covered bonds. The registration statement became effective on November 8, 2013. The registration statement was originally filed in July 2013. Prior to the filing, BMO had obtained a no-action letter from the SEC staff to permit the Guarantor to register its Guarantee on the same shelf registration statement as the bond to be issued by the bank.
On inquiry, BMO reports that there were a number of reasons for their withdrawal of the registrations statement. One of the reasons for the withdrawal was the prospect of needing to comply with the loan-level disclosure requirements of Regulation AB beginning in November 2016. That compliance requirement arose from the conditions imposed on BMO by the no-action letter. BMO cited the uncertainty of its ability under Canadian law to provide the information required and the significant cost of altering its systems nationwide to collect the information.
This is the first of the three Canadian banks with SEC registration statements to react publicly to the new loan-level disclosure requirements imposed by the SEC. (See Regulation AB II and Canadian Covered Bonds– the end of SEC registered covered bonds?). This action suggests that the other two banks, Bank of Nova Scotia and Royal bank of Canada, may cease issuing SEC registered covered bonds by the November 2016 date. Neither of the two banks, however, has publicly stated its intent in this regard.
Regulation AB II and Canadian Covered Bonds — the end of SEC registered covered bonds?
The recent amendments to Regulation AB (commonly referred to as “Reg AB II”) were a policy response to the perceived inadequacy of securitization disclosure prior to the financial crisis and a response to a request by very large investors for extensive, detailed information about the assets in a securitization. The adoption of the changes to Regulation AB was only possible after the SEC negotiated protection from the Consumer Financial Protection Bureau (the “CFPB”) for issuers filing the data required by the SEC. The CFPB statement provides that an issuer filing data in accordance with the SEC rules will not be in violation of the financial privacy laws.
The result of the amendment is a package of regulations that call for the disclosure of loan-level data that varies by asset class. In the case of assets that are residential mortgage loans, the rules call for the disclosure of 272 data fields for each mortgage loan, including the first two digits of the postal zip code for the property.
In a study conducted by the SEC staff prior to the adoption of the amendments, the staff calculated that disclosure of the full five digit postal zip code for a property would result in an 80% likelihood that the identity of the borrower would be discernable. With the reduction to disclosure of only the first two digits of the postal zip code, the staff concluded that there was still a 20% likelihood that a borrower could be identified. Thus the need for the SEC to obtain CFPB protection for issuers.
But what has this to do with covered bonds? After all, covered bonds are not securitizations, but rather special form of secured debt. The answer is somewhat complex.
Reg AB II and Covered Bonds
Updated: 12/28/2015
The United States Securities and Exchange Commission (the “SEC”) adopted revisions to Regulation AB on August 27, 2014, after a four year process of proposals and review. Regulation AB is the rule that governs the offering disclosure and periodic reporting obligations of issuers of asset-backed securities (“ABS”).
Insofar as covered bonds are concerned, several things are clear. First, covered bonds are not included in the definition of “asset-backed security.” Item 1101 of Regulation AB provides that:
Asset-backed security means a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the security holders; provided that in the case of financial assets that are leases, those assets may convert to cash partially by the cash proceeds from the disposition of the physical property underlying such leases.
It is clear that covered bonds are not “primarily serviced by the cash flows of a discrete pool of receivables or other financial assets.” Instead, covered bonds are senior obligations of the issuing financial institution and are expected to be repaid from the general funds of the institution. Accordingly, covered bonds should not be asset-backed securities and Regulation AB should not apply generally to covered bonds.
SEC Finalizes Reg AB II
On Wednesday, August 27, 2014, the United States Securities and Exchange Commission finalized the changes to Regulation AB (commonly referred to as Reg AB II). The Commission issued a press release and a draft adopting release adopting the changes. The final version of the adopting release will be published in the Federal Register after review by the Office of Management and Budget (OMB). Regulation AB II and the related changes regulate the offering process and the disclosure and reporting requirements for asset-backed securities. Perhaps the most significant changes are (i) a requirement to file a preliminary prospectus at least three days prior to the sale of any securities and (ii) disclosure of loan-level information in machine readable form for ABS backed by residential mortgage loans, commercial mortgage loans, auto loans, auto leases, and debt securities (including resecuritizations). Updated loan-level data also must be filed periodically after issuance of the securities. The loan-level disclosure requirements come into force not later than two years after the effective date of the changes, which will be the date of the publication of the changes in the Federal Register.
The effect on covered bond issuers of these changes is still being analyzed and will be covered by a later post. However, it is clear that these changes would not be directly applicable to Rule 144A offerings of covered bonds.
See the MoFo Client Alert.
SEC Calls Reg AB II Meeting
The SEC announced today that it would hold a public meeting to consider amendments to Regulation AB on Wednesday, August 27:
SECURITIES AND EXCHANGE COMMISSION
Sunshine Act Meeting.
Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Pub. L. 94-409, that the Securities and Exchange Commission will hold an Open Meeting on Wednesday, August 27, 2014 at 10:00 a.m., in the Auditorium, Room L-002.
The subject matters of the Open Meeting will be:
- The Commission will consider whether to adopt rules revising the disclosure, reporting and offering process for asset-backed securities. The revisions would require asset-backed issuers to provide enhanced disclosures, including information for certain asset classes about each asset in the underlying pool in a standardized, tagged format, and revise the shelf offering process and eligibility criteria for asset-backed securities.
- The Commission will consider whether to adopt rule amendments and new rules to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act concerning nationally recognized statistical rating organizations, providers of third-party due diligence services for asset-backed securities, and issuers and underwriters of asset-backed securities under the Securities Exchange Act of 1934.
The duty officer has determined that no earlier notice was practicable.
At times, changes in Commission priorities require alterations in the scheduling of meeting items.
For further information and to ascertain what, if any, matters have been added, deleted, or postponed, please contact:
The Office of the Secretary at (202) 551-5400.
Kevin M. O’Neill
Deputy Secretary
Dated: August 22, 2014
http://www.sec.gov/news/openmeetings/2014/ssamtg082714.htm
Although the SEC’s proposal to amend Regulation AB (hence Reg AB II) is primarily concerned with asset-backed securities, the Commission’s action will be of interest to covered bonds issuers for two reasons:
- whether covered bonds will be defined as asset-backed securities and therefore expressly subject to Reg AB II;
- whether Reg AB II requirements will be extended to asset-backed securities sold under Rule 144A.
Covered bonds do not fall within the current definition of asset-backed security, as the SEC has recognized in several no-action letter issued to Canadian banks. Nevertheless, in those no-action letters, the SEC has required the banks to comply with specific provisions of current Regulation AB as a condition of registering covered bonds with the SEC. If those provisions are amended, the banks could be required to comply with the provisions as amended.
However, if covered bonds are defined as asset-backed securities under Reg AB II, there may be other provisions that they would be required to comply with, including possibly the proposed requirement to issue a preliminary prospectus at least five days prior to the sale of any security.
Until now, Regulation AB has applied only to asset-backed securities registered with the SEC, and 144A covered bonds have not been subject to the regulation. The extension of Reg AB II to asset-backed securities offered under Rule 144A would therefore affect Rule 144A covered bonds if covered bonds were defined to be asset-backed securities. The extension of Reg AB II to privately placed securities sold under Rule 144A would be a major departure from prior practice. If Reg AB II is not extended to 144A securities, covered bonds could still be offered in the United States under Rule 144A without complying with Reg AB II, even if covered bonds were defined as asset-backed securities under Reg AB II.
Accordingly, the outcome of the meeting on Wednesday will be of considerable interest to covered bond issuers who currently offer or plan to offer covered bonds in the United States.
BNS Files U.S. Prospectus
BNS initially filed its registration statement for its legislative covered bond program on Form F-3 with the SEC on May 31, 2013. That registration was declared effective on September 9, 2013. However, BNS did not file a prospectus under the registration statement with the SEC until today, August 20, 2014. In the interim, BNS filed a prospectus with the UKLA and offered covered bonds in Europe on March 26, 2014. Now, with the filing of a prospectus with the SEC, BNS is ready to offer covered bonds in the U.S.
Year to date, the U.S. covered bond market has been very quiet. Only two issuers have brought bonds to market for a total of $3 billion: Westpac Banking Corp. on May 14 and Commonwealth Bank of Australia on June 14, both privately placed offerings. So far, no registered covered bonds have been issued in the U.S. in 2014.
SEC Request for Comment on Asset-Level Information
On February 25, 2014, the SEC requested comment on a new proposal for disclosing asset-level information in connection with asset-backed securities. This is a reopening of a request for comment originally made in 2010 in connection with the proposal for amending Regulation AB. Under the new disclosure proposal, the issuer of ABS would disclose asset-level information on its website rather than submitting such information to the SEC for disclosure through the SEC’s EDGAR system. This new proposal was made in response to comments on the original proposal that raised significant privacy concerns.
The SEC proposes that issuers could restrict access to asset-level information only to investors in the related ABS and could require investors to certify that they would not “reverse engineer” downloaded data.
Under existing registration statements, the SEC does not require covered bond issuers to make asset-level information available. The no-action relief granted to Canadian covered bond issuers (see, e.g., the RBC letter) recognizes that covered bonds are not ABS, but nevertheless require disclosures regarding the cover pool assets consistent with ABS disclosure required under Regulation AB. The SEC has not committed to continue to take that position after the adoption of the amendments to Regulation AB. Accordingly, covered bond issuers who issue into the U.S. have been waiting see whether the new Regulation AB (Reg AB II) would require disclosure of asset-level information for covered bonds. This request for comment does not shed any light on that question.
More Views on Low RMBS Issuance
In a letter to the SEC dated February 14, 2014, FINRA stated that during the fourth quarter of 2013, the issuance of mortgaged-related securities declined 33 percent compared to the same period in 2012.