SNAPSHOT OF SEC ABS RULES AND PROPOSALS By Pierre

SNAPSHOT OF SEC ABS RULES AND PROPOSALS By Pierre F. de Ravel d’Esclapon and Starr L. Tomczak 1. What's Happening. The Securities and Exchange Commission (the "SEC") recently adopted for the first time comprehensive regulation (the "ABS Rules") of asset-backed securities ("ABS") under the Securities Act of 1933 (the "1933 Act") and the Securities Exchange Act of 1934 (the "1934 Act"). In addition, the SEC has proposed changes affecting the ABS offering process, and the SEC has requested comments on treating synthetics as ABS. • Regulation AB. On December 22, 2004, the SEC released ABS Rules regarding registration, communications, disclosure and reporting. The regulation reflects industry comments on the SEC's proposed regulation as released on May 3, 2004. The ABS Rules become effective on March 8, 2005 and generally require changes in offerings after December 31, 2005. The lengthy final regulation is set forth in Release No. 33-8518 and available at http://www.sec.gov/rules/final/33-8518.htm. The lengthy proposed regulation is set forth in Release No. 33-8419 and available at http://www.sec.gov/rules/proposed/33-8419.htm. Securities Offering Reform Proposal. On November 3, 2004, the SEC released its proposal for securities offering reforms affecting ABS as well as other securities. Comments on the application of the proposal to ABS have been submitted to the SEC. The lengthy proposal is set forth in Release No. 33-8501 and available at http://www.sec.gov/rules/proposed/33-8501.htm. Synthetics. In the release accompanying Regulation AB, the SEC requested comments by March 8, 2005 as to whether synthetic and other hybrid securities should be regulated as ABS or under an alternative disclosure system. Under the ABS Rules, synthetics may be included only if they reduce or alter risks of assets in the pool; and they may not be included if they relate to assets outside the pool. Additional Information. Because of the length of the regulations and proposals, this memorandum focuses on changes in market practice and omits many details that may be significant to you. In addition, throughout this year, changes and clarifications to the ABS Rules and developments regarding securities offering reform and synthetics may occur. Except for the last section on the securities offering reform proposal, this memorandum focuses on the ABS Rules. • • • 2. Act Now. Although the ABS Rules reflect in many ways current market practice and SEC staff positions, they mandate new disclosures and procedures that will have a significant impact on transactions. Because of the substantial changes, the SEC has provided a transition period over a year long. During the transition period, transaction parties should consider the following: • ABS Rules and Proposals. Review the ABS Rules and potential changes resulting from the securities offering reform proposal and the consideration of synthetic and hybrid securities. Through publications, conferences and trade groups, follow any new SEC regulations, proposals and other communications. • SEC Clarifications. Request clarification from the SEC of issues affecting particular companies. Work with industry groups seeking clarification from the SEC of issues broadly affecting market participants. Term Sheets. Reassess information in term sheets. The SEC has clarified that permitted content can be broader than the current practice of some issuers. As proposed in the securities offering reform, securities law liability would be based on information available at the time of an investment decision. The SEC disapproves of legends stating that materials are incomplete or superceded by a final prospectus. New Structures. Develop new structures taking advantage of the more liberal requirements for shelf registration of ABS on Form S-3 and the new application of the ABS Rules to ABS on Form S-1. For example, Forms S-1 and S-3 apply to ABS of foreign issuers and foreign assets; certain lease transactions may use Form S-3 instead of Form S-1; and Form S-3 has more flexibility for master trusts and revolving and prefunding periods. Registration Statement. Begin preparing a registration statement conforming to the ABS Rules and consider participation in the SEC pilot program. Some transaction parties may want to take the lead in developing new forms, while others may want to take advantage of the precedents developed by third parties. All registrants should allow sufficient time for a full review of their registration statements by the SEC staff. Transaction Agreements. Consider changes in the terms, representations, covenants and indemnities in asset purchase, servicing, credit enhancement and other agreements. Static Pool Web sites. Select and prepare static pool information and design a Web site for presenting the information. Servicing Assessments. Develop procedures for assessment of servicing compliance from service providers. Accountants. Discuss with accountants (1) procedures for attestation of servicing compliance assessments and (2) changes in comfort letters resulting from new ABS requirements such as static pool information. Compliance. Put into place procedures to assure compliance with current and prospective ABS regulations and transaction documents. Deviations from the ABS regulations and transaction documents may result in embarrassing disclosures or inability to use shelf registration or term sheets. In addition, enforcement actions by the SEC will be easier to bring under the more tailored standards of the ABS Rules. Rule 144A, Regulation S and Private Markets. Consider the impact on Rule 144A, Regulation S and private markets. Although the ABS Rules apply to public offerings, they may affect disclosure and procedures for Rule 144A, Regulation S and private placements. As another impact, if the disclosures and procedures are overly burdensome for a small transaction, the issuing entity may decide to avoid a public offering. -2- • • • • • • • • • 3. Deadlines. Although the ABS Rules generally apply to offerings after this year, the ABS Rules will begin to impact transactions immediately. • Pilot Program Beginning this March. Beginning on March 1, 2005, the SEC is offering a voluntary pilot program for issuers to discuss registration statements under the ABS Rules on a confidential basis. Completed registration statements are expected to be posted on the SEC's Web site so that they can provide guidance for other issuers. Offerings After 2005. Offerings after December 31, 2005 generally must comply with the ABS Rules. The ABS Rules will be applicable to the reporting under the 1934 Act for such offerings. Reports for offerings prior to such date are grandfathered under the old procedures. First Quarter 2006 Window. As a precautionary measure, in addition to preparing a registration statement in compliance with the ABS Rules, issuers may want to prepare a shelf registration effective prior to August 31, 2005 with capacity through March 31, 2006. If the shelf registration statement is filed before August 31, 2005, offerings during the first quarter of 2006 require a compliant prospectus as well as registration statement undertakings for incorporating static pool information from a Web site or 1934 Act reports of certain third parties. But the prospectus included in the registration statement for such offerings need not be compliant, and as a consequence, the registration statement may be less likely to trigger full SEC review. Timely 1934 Act Filings in 2005. As a trap to the unwary, shelf registration and informational and computational material generally will be available only if any 1934 Act reports (other than certain items in Form 8-K) applicable to the depositor, or any affiliate of the depositor, with respect to the same asset class, are timely filed during the 12 calendar months and any partial month preceding the filing date for the registration statement. Contrary to past practice, the consequences of late filing cannot be avoided by forming an affiliate of the depositor to file a registration statement. The ABS Rules have limited exceptions for late filings and for business combinations. No Market-making Prospectuses. Effective immediately, market-making prospectuses for secondary trades by dealers affiliated with the depositor or servicer are no longer required. An evergreen prospectus nonetheless may be required for certain transactions such as remarketing and resecuritizations. SEC Positions. The release for the ABS Rules clarifies the SEC's position on numerous issues and provides guidance on what will become industry practice. • • • • • 4. Registration Statement. The ABS Rules will apply to all ABS offerings on either Form S-1 generally for an individual offering or Form S-3 for shelf registration of multiple offerings. Consistent with previous usage, the SEC generally has defined ABS as securities supported by a discrete pool of self-liquidating assets that by their terms convert into cash within a finite time period. The SEC has added to the definition for the first time securities backed by leases and the residual value of the underlying leased assets. Consistent with past practice, securities registered on Form S-3 must be investment grade. If an offering has characteristics of an ABS -3- offering, but does not meet all the criteria for an ABS offering, participants are encouraged to discuss with the staff how the offering will be handled. • Lease-Backed. At the time of the offering, the portion of the pool balance attributable to the residual value of the underlying leased property must be less than 65% for motor vehicle leases on Form S-1 or S-3. For other leases, it must be less than 50% for Form S-1 and 20% for Form S-3. Leases covered by residual value guarantees or insurance are not counted against these thresholds. Foreign. Under the ABS Rules, both Form S-1 and S-3 may be used by a foreign issuers, cover foreign assets and have foreign credit enhancement providers. The SEC recommends pre-filing conferences and anticipates a lengthier period before effectiveness. Prefunding Periods. Transactions may provide for a one-year prefunding period. Offering proceeds deposited in a prefunding account may not exceed 50% of the aggregate principal balance of the total asset pool supporting the ABS for a master trust, or 50% of the aggregate offering proceeds for other transactions. Revolving Periods. For non-revolving assets, cash flow from the transaction may be applied to the acquisition of additional assets for three years. The additional assets must be of the same general character as the original pool assets. No limitations apply to revolving assets. Master Trust. Master trusts may add revolving or non-revolving assets without limitation in connection with (1) future issuances of ABS backed by the same pool and (2) maintenance of minimum pool balances required by the transaction agreements. A master trust must comply with the limits on a revolving period for non-revolving assets. Multi-Tiers and Series Trust. The ABS Rules allow (1) multi-tier REMICs, (2) "stacked transactions" where different classes of securities are backed by corresponding loan groups in a pool, (3) "origination" or "titling" trusts for motor vehicle lease transactions and other asset classes currently using this structure, and (4) "issuance trusts," commonly used by credit card master trusts, which hold a collateral certificate representing an interest in an underlying asset pool (but not multiple pools). Generally, the underlying titling trust or issuance trust certificate must be registered, but does not need an investment grade rating separate from the rating of the ABS securities offered to the public. By contrast, ABS may not use a series trust whereby an issuing entity conducts separate, unrelated transactions and holds separate pools of assets with separate classes of securities for each pool. Resecuritizations. Absent an exemption for the underlying securities under the 1933 Act, registration of the underlying securities in a resecuritization generally would be required unless the issuing entity of the underlying securities does not have any understanding related to the ABS transaction and is not affiliated with the parties to the ABA transaction, and the depositor would be free to resell publicly the underlying securities without registration under the 1933 Act. If a sponsor, depositor or underwriter was the underwriter or an affiliate of the underwriter in a registered offering of the underlying securities, the distribution of ABS would not -4- • • • • • • be considered a distribution of the underlying securities if they were purchased at arm's length in the secondary market at least three months after the last sale of any unsold allotment or subscription by the affiliated underwriter. • Non-performing or Delinquent. On the cut-off date for a transaction, or the date of information for a master trust, the asset pool may not contain non-performing assets, although reperforming assets are permissible. Delinquent assets as measured by dollar volume generally cannot exceed 50% of the asset pool for Form S-1 or 20% for Form S-3. Assets that are not funded by offering proceeds or contained in cash flow calculations are excluded from these tests. Assets are considered nonperforming if they are wholly or partially charged off, and delinquent if they are more than 30 or 31 days or a single payment cycle, as applicable, past due from the contractual due date, under the most restrictive of the following: (1) the transaction agreement, (2) the policies of the sponsor, its affiliated originator, or the servicer or (3) the policies of the primary safety and soundness regulator of any of the foregoing, or the program or regulatory entity that oversees the asset origination program. Synthetics. The SEC has excluded synthetic securities from ABS because such securities often involve derivatives such as a credit default swap or total return swap to create exposure to assets not in the pool. The SEC encourages pre-filing conferences to discuss synthetic or other hybrid securities and has requested comments on the overall disclosure system for such securities. Derivatives related to the asset pool may continue to be used for ABS on Forms S-1 and S-3. • 5. Static Pool and Asset Description. Regulation AB is a set of principles-based disclosure items which would be material to an ABS investor. The disclosure of static pool information is one of the most significant changes in the ABS Rules. Static pool information must be provided to the extent material for a minimum of the past five years or such shorter period as the sponsor has been securitizing, originating or purchasing assets of the same type as those in the transaction. If the sponsor has been securitizing the asset type for at least three years, material static pool information should be disclosed on delinquencies, cumulative losses and prepayments for such prior securitized pools. If the sponsor has been securitizing the asset type for less than three years, the registrant should consider providing instead material static pool information on delinquencies, cumulative losses and prepayments by vintage origination years for the sponsor's overall portfolio for the same asset type. Static pool data for the current transaction must be provided to the extent material, such as for a seasoned pool. Static pool information should be presented in periodic increments, such as monthly or quarterly, with the most recent data being no later than 135 days of first use of the prospectus. Summary information about the original characteristics of each prior securitized pool or vintage year would include interest rate, term, balance, credit score, loan-to-value ratio and geographical distribution, if material. For a master trust, material data regarding delinquencies, cumulative losses, prepayments, payment rate, yield and standardized credit scores or other applicable measures of obligor credit quality should be disclosed in separate increments at least annually for the first five years of the account, based on date of origination of the pool assets. • Materiality. The SEC acknowledges that static pool information need be presented only to the extent material. If the issuing entity concludes static pool information is not material but provides it to a rating agency, the SEC asks the issuing entity to consider its determination of materiality in the context of the provision of -5- information to the rating agency. The SEC further acknowledges that in some transactions static pool information of parties other than the sponsor may be more material. For example, in a rent-a-shelf transaction, static pool information of the seller may be material. • Selection. The registrant must identify the relevant static pool data for each offering. Static pool data indicating trends or risks which may not be apparent from the overall pool data may be considered especially material to investors. Web sites. The issuing entity may present static pool information by (1) including it in the prospectus, (2) incorporating it by reference in a 1934 Act report, (3) providing it in electronic format, or (4) until 2010 posting it on a Web site. This is the first time that the SEC has allowed incorporation of material from a Web site. The data must be freely accessible, maintained for at least five years, and meet other conditions. The design of the Web site should take into account the exclusion of hyperlinks and other factors. Liability. For pools that were securitized before January 1, 2006, or information about the offering pool before January 1, 2006, the registrant must provide information to the extent feasible, and liability is limited to the anti-fraud provisions of the securities laws. Otherwise registrants will be liable under Sections 11 and 12 of the 1933 Act for material misstatements and omissions as well as the antifraud provisions. Other Data. Contrary to the current practice of some issuers, the ABS Rules generally require disclosure of standardized credit scores (but not proprietary, internally derived scores of the originator) for all consumer asset classes. Disclosure must include the solicitation, credit gathering or underwriting criteria used to originate or purchase pool assets and the selection criteria for the asset pool. Special rules apply to the estimates, historical statistics and procedures for realizing residual value of physical assets related to leases and similar assets. New Arrangements. Sponsors should consider what type of comfort on static pool and other data will be acceptable to underwriters and what contractual provisions will be useful in agreements with sellers and servicers. • • • • 6. Transaction Parties. The ABS Rules expand disclosure of the background, experience, performance and responsibilities of the sponsor, depositor, servicer, originator, trustee and issuer. • Definition of Servicer. Servicer means any person responsible for the management or collection of pool assets or making allocations or distributions to security holders. The term servicer excludes a trustee making distributions to security holders if the trustee receives the allocations from a servicer and does not perform other servicing functions. The term servicer includes parties which have primary contact with the obligors even if such parties do not have contractual privity with the issuer. In addition, back-up servicing arrangements must be described. Types of Servicers. Disclosure requirements apply to each master servicer, each affiliated servicer, each unaffiliated servicer servicing 20% or more of the pool -6- • assets, and any other material servicer managing a material aspect of servicing. An unaffiliated servicer of 10% or more of assets must be identified. If material, the disclosures include any default, early amortization or performance triggering event due to servicing, or material noncompliance with servicing criteria, in a servicer's other securitizations. The disclosures also include financial information if material to the servicing. • Originators. Disclosure requirements apply to any originator originating 20% or more of the pool assets. An originator of 10% or more of the pool assets must be identified. Sponsor. The sponsor initiating the transaction may transactions or the seller in rent-a-shelf transactions. requirements include any default, early amortization event, or action taken outside the ordinary course to sponsor's prior securitizations. be the aggregator in some If material, the disclosure or performance triggering prevent such event, in the • • Trustee. Disclosure requirements include the extent that the trustee independently checks cash flow, activity in transaction accounts, compliance with transaction covenants, use of credit enhancement, the addition, substitution or removal of pool assets, and the underlying data used for such determinations. Relationships. If material to an investor, the ABS Rules require disclosure of (1) any arrangements outside of the ordinary course of business or on terms other than arm's length between various parties to the transaction, (2) material relationships related to the transaction and pool assets even if in the ordinary course of business and on arm's-length terms, and (3) affiliations between parties to the transaction. Transaction Structure. The ABS Rules require disclosure of (1) the amount, purpose and recipient of estimated fees and expenses payable from cash flow for the transaction, (2) the party authorized to decide the investment and use of cash from pool assets, (3) the ownership of residual or retained interests, if the holder is affiliated with any transaction parties or has rights that may alter the transaction structure, and (4) the amount paid by the issuing entity for any pooled assets that are securities. Third Party Information. The SEC did not respond to industry requests that (1) an ABS issuing entity should be able reasonably to rely on information provided by unaffiliated third parties and (2) the SEC's public policy on the unenforceability of indemnification should not apply to losses from third party information. Nonetheless, practitioners recommend that issuers obtain representations, warranties, covenants and indemnification for third party information. • • • 7. Obligors, Credit Enhancement and Derivatives. The ABS Rules require disclosure of significant obligors, credit enhancement and other support, and derivatives. On both Forms S-1 and S-3, financial information for a significant obligor or enhancement provider may be provided through incorporation by reference or simple reference to the third party's SEC filings. Incorporation by reference is available if (1) the third party has complied with any 1934 Act filing requirements for the preceding 12 months and agrees to continue such filings and (2) the registrant -7- includes in its registration statement certain undertakings on liability. Reference to 1934 Act filings is available if the third party (1) is unaffiliated, and does not have any agreement, with the transaction parties, and (2) meets criteria indicating its financial information is widely followed in the market. Since the registrant must provide information in its 1934 Act reports even if the third party terminates 1934 Act filings, the SEC acknowledges that the registrant may provide for the termination of the transaction if the third party ceases to file required 1934 Act reports. As another alternative, the registrant could enter into a contract whereby the third party agrees to provide required financial information as long as the registrant is required to file 1934 Act reports. • Significant Obligor. A "significant obligor" includes (1) an obligor or lessee or affiliated group of such on assets representing at least 10% of the pool and (2) a single property or group of related properties securing assets representing at least 10% of the pool. An entity is no longer a significant obligor if the percentage drops below 10%. Credit Enhancements. Any sources of credit enhancement or other support for timely payments to security holders must be disclosed, including (1) bond insurance, letters of credit and guarantees and other external credit enhancement, (2) liquidity facilities, lending facilities guaranteed investment contracts, minimum principal payment agreements and other mechanisms for timely payment, (3) credit default swaps and other derivatives providing credit enhancement but only if linked to the asset pool and not to the creditworthiness of a third party and (4) subordination, over-collateralization, reserve, cash collateral and spread accounts and other internal credit enhancement. Additional disclosure requirements apply to entities liable or contingently liable to provide payments representing 10% or more of the cash flow supporting a class of ABS. Derivative Counterparties. The ABS Rules have separate disclosure items for derivative instruments like basis, interest and currency swaps that alter the payment characteristics of cash flow from the issuing entity and do not have credit support as their primary purpose. Financial information about derivative counterparties is required if the "significance percentage" for the derivative instrument is 10% or more of the aggregate principal balance of the pool or the classes related to the derivative instrument. The "significance percentage" is based on a reasonable goodfaith estimate of "maximum probable exposure," in substantially the same manner as that used in the sponsor's internal risk management process for similar instruments. Financial Information. If the applicable percentage for a significant obligor, credit enhancer or derivative counterparty is at least 10% but less than 20%, selected financial data generally must be provided. If the applicable percentage is 20% or more, audited financial statements meeting the requirements of Regulation S-X generally must be provided. For property, generally only net operating income for the most recent fiscal year and interim period is required. Foreign ABS: See Appendix A 1934 Act Reports. Similar to current practice, ABS issuers will be required to file periodic distribution and pool performance reports on a new Form 10-D, ABS informational and computational material and current reports for unusual events on -8- • • • • • Form 8-K, and annual reports on Form 10-K. Contrary to current practice of some issuers, each issuing entity must file separate reports under its own discrete central index key, or "CIK," number. Reports must be signed by the depositor or servicer, and not by the trustee. The first reporting obligation is triggered by the first takedown of ABS. As under current law, 1934 Act reporting can be suspended after the fiscal year in which the offering is made if there are less than 300 holders of record. Updated information about significant obligors and enhancement providers is required while 1934 Act reports are filed. • Servicing Criteria, Compliance Assessment and Accountant's Attestation. The SEC has developed new comprehensive servicing criteria for collecting assets, distributing funds and administering the pool. The master servicer, each affiliated servicer and each servicer servicing more than 5% of the assets must provide (1) an annual report on assessment of compliance with the applicable servicing criteria and (2) an attestation from its registered public accountants that the assessment was fairly stated in all material respects. The assessment and attestation may be on a platform basis for all the service provider's transactions for similar assets. Disclosure of noncompliance would be required if noncompliance occurred during the relevant period, regardless of any correction before the end of the period. Servicer Compliance Statement. The master servicer, each affiliated servicer and each unaffiliated servicer that services 10% or more of the pool assets must provide a statement addressing its compliance with its servicing obligations under the specific transaction agreement. The compliance statements are required to be filed as an exhibit to Form 10-K. Sarbanes-Oxley Certification. The Section 302 Sarbanes-Oxley certification, which is filed as an exhibit to Form 10-K, continues to cover the absence of material misstatements and omissions in 1934 Act reports taken as whole for the covered period. The certification will include (1) a statement that all information required by the ABS Rules is contained in the 1934 Act reports, (2) a reference to the servicer compliance statements as a basis for certification that each servicer has complied with its obligations under the servicing agreement, and (3) a provision that all reports of assessment of compliance, and the related attestation reports, have been included, except as otherwise disclosed. Form 10-K. Contrary to prior SEC staff positions, a Form 10-K must be filed for an entity that issues securities near the end of its fiscal year even if no distributions are made during such fiscal year. Form 10-D. Form 10-D in lieu of Form 8-K must be filed within 15 days after each required distribution date. Among other items, updated information on the pool composition must be provided under various circumstances. Form 8-K. The ABS Rules clarify the application of Form 8-K reporting items to ABS, including an early amortization, performance trigger, or event of default altering payment priority, distributions or amortization. Similar to current practice, the ABS Rules add items including ABS informational and computational material, change of servicer, trustee or credit enhancer, failure to make required distributions • • • • • -9- to security holders, and a description of the final pool where it varies by 5% or more from the pool described in the prospectus. 8. Communications during Offering. Consistent with current practice, ABS issuers using Form S-3 may provide ABS informational and computational material after the effective date of the registration statement and before the delivery of a final prospectus. Following current practice, such material must be filed with the SEC on Form 8-K, incorporated by reference in the registration statement and be subject to Section 11 as well as other liability. In addition to other structural and collateral information previously provided, the SEC has clarified that ABS informational and computational material may include (1) static pool data relating to the sponsor's or servicer's portfolio, its prior transactions, or the applicable transaction, (2) identification of the parties to the applicable transaction, (3) information on individual assets, (4) ratings, legal investment, tax and ERISA information and (5) the underwriting names, offering schedule, marketing events such as roadshows, and other information about the offering process. • Filing on Form 8-K. All ABS informational and computational material must be filed with the SEC by the later of (1) the due date for the filing of the related final prospectus and (2) two business days after the first use of such materials. Filings must be on EDGAR and not hard copy. No Disclaimer. For ABS informational and computational material, the SEC considers inappropriate disclaimers regarding the accuracy or completeness of information or legends indicating such materials do not constitute a prospectus or are privileged or confidential. Analytic Firms. Generally the filing of ABS informational and computational material pertains to solely the information provided to an analytics firm and not the output generated by the firm for investors. Rating Agency Pre-Sale Report. An issuing entity or underwriter is liable for information prepared and distributed by a rating agency and other third parties if the issuing entity or underwriter is involved in the preparation of the information (the "entanglement" theory) or endorses the information by distributing the report or other means (the "adoption" theory). Research Reports. The ABS Rules codify a no-action letter providing a safe harbor as to when publication by a broker-dealer of a research report concerning an ABS type, while the broker-dealer is participating in an offering of similar ABS on Form S-3, would not be deemed an illegal offer or non-conforming prospectus. The SEC maintained the requirement that sufficient information be available from public sources to provide a reasonable basis for the views expressed in the report. No Preliminary Prospectus. The SEC has codified its position that broker-dealers for Form S-3 eligible ABS generally do not need to deliver a preliminary prospectus 48 hours prior to sending a confirmation of sale. Change. The ABS Rules for communications during the offering process will change if the securities offering reform proposal described below is adopted. • • • • • • - 10 - 9. Securities Offering Reform Proposal. The proposal for securities offering reform would have special impact on ABS. Comments on the proposal include the following: • Investment Decision. The SEC has proposed liability under Section 12(a)(2) and 17(a)(2) based on the information available at the time of an investment decision. Commenters note that the investor generally is not obligated to purchase if the information in the final prospectus contains a material change from the preliminary information as of the trade date or otherwise is not reasonably consistent with market customs and the practice of the depositor and its affiliates. Because of the investor's right to disaffirm the contract, these commenters believe that information provided after the trade date should be taken into account for Section 12(a)(2) and 17(a)(2) liability. The provisions for liability based on information available at the time of an investment decision are among the most controversial aspects of the securities offering reform. Free Writing. The SEC has proposed that ABS informational and computational materials like other free writings generally would be filed with the SEC, but would not be incorporated by reference into the registration statement, and would be subject to only Section 12(a)(2) and 17(a)(2) and not Section 11 liability. Commenters recommend (1) the use of free writing by all ABS issuers and not just ABS issuers using Form S-3, (2) no filing requirement for computational material prepared by the underwriters, and (3) use of the more liberal filing deadlines for ABS informational and computational material set forth in the ABS Rules. Commenters recommend that rating agency pre-sale reports not be considered free writing prospectuses unless the issuing entity or the underwriter uses the report in making offers. Commenters support the SEC's proposal for the research report safe harbor to apply even if reports have not been published with regularity or prior recommendations have not been at least as favorable. Commenters encourage the SEC to expand information applicable to ABS which may be included in tombstones and support the proposed "access equal delivery" principle. WKSIs/ABSIs. The SEC has proposed that well-known seasoned issuers ("WKSIs") would have automatic shelf registration, pay-as-you-go filing fees, ability to add information omitted from the base prospective without a post-effective amendment, and ability to add additional securities with an automatically effective amendment. Although the SEC's proposal did not include ABS issuers as WKSIs, industry groups are requesting treatment as WKSIs for all issuers issuing investment grade ABS on Form S-3 or alternatively all depositors or affiliates which have had an effective registration statement for the same asset class ("ABSIs"). Commenters also urge the SEC to eliminate the three-year limitation on effectiveness for ABS registration statements so that registration statements need be updated only if changes have occurred. Risk Factors. The SEC has proposed including risk factors in Form 10-K. Commenters state that risk factors would be less useful and more burdensome in 1934 Act filings for ABS. • • • - 11 -