Asset-Backed Securities

By John White © 2002 John R. White. (john.white@dechert.com) is an associate in the New York office of Dechert LLP. Mr. White was on the staff of the Securities and Exchange Commission’s Division of Corporation Finance from 1997 to 2000.

This article is intended as a general guide to certain issues involved in registering asset-backed securities with the Securities and Exchange Commission under the Securities Act of 1933, as amended. The views expressed in this article are those of the author and do not necessarily represent the views of Dechert LLP or any of its clients. The article does not contain a general legal analysis or constitute an opinion of Dechert LLP or any member of the firm on the legal issues described. It is recommended that readers not rely on this general guide in structuring individual transactions but that professional advice be sought in connection with individual transactions.

• What are "asset-backed securities"?
• What types of ABS are there?
• How does an issuer of asset-backed securities differ from an issuer of traditional corporate debt obligations or equity securities?
• What does it mean to say that an ABS issuer is "bankruptcy remote"?
• How do the concepts of "true sale" and "substantive consolidation" relate to bankruptcy remoteness?
• What is the difference between an "asset-backed security" and a "mortgage-backed security"?
• What does it mean to say that an asset-backed security is "credit enhanced"?

• What registration forms can issuers use to register ABS under the Securities Act of 1933?
• What is "shelf" registration?
• When may an issuer of ABS use Form S-3?
• What are "asset-backed securities" for purposes of Form S-3?
• Are delinquent assets eligible for inclusion in a pool of assets backing an offering of ABS registered on Form S-3?
• Are non-performing assets eligible for inclusion in a pool of assets backing an offering of ABS registered on Form S-3?
• What are "investment grade securities" for purposes of Form S-3?
• What is the basic disclosure format for a Form S-3 registration statement?
• What is a "base prospectus"?
• What is a "prospectus supplement"?
• Where does an ABS issuer look to determine what information is required in an ABS registration statement?
• What must an ABS issuer disclose in the material federal income tax consequences discussion in the prospectus?
• What should an ABS issuer disclose in the "legal considerations" discussion in the prospectus?
• What is a "resecuritization"?
• Are there any special rules to consider when registering ABS in connection with a resecuritization of other securities?
• Are audited financial statements of an issuer of securities that are a part of the pool of underlying assets that back a publicly registered ABS required to be included in the prospectus for the publicly registered ABS?
• Are the above reference rules applicable when registering ABS as part of a resecuritization of other ABS?
• Are the resecuritization rules applicable to an offering of ABS backed in part by a participation in a loan or other assets?
• Are there any special disclosure rules an ABS issuer must consider when there are concentrations within the pool of assets backing an offering of ABS?
• What if the concentrations described above are less than 20% but equal to or greater than 10%?
• Could an ABS offering with more significant asset concentrations raise "co-issuer" concerns?
• Are there special disclosure rules an ABS issuer must consider when there are material third-party credit enhancers - or other providers of cash flow support - present in the transaction?

• Are ABS issuers subject to the periodic reporting requirements of the Securities Exchange Act of 1934?
• If an ABS issuer has a Securities Act registration statement that is declared effective, is it required to file periodic reports like a typical public company?
• What are the requirements for modified periodic reporting by ABS issuers?
• Does each ABS issuer have to request no-action relief from the Division of Corporation Finance staff to take advantage of the modified periodic reporting procedures?
• How long must an ABS issuer file periodic reports?

• What must be delivered to a purchaser of ABS in connection with an initial public offering of such securities?
• What written materials - other than a preliminary prospectus - may be provided to prospective ABS investors prior to the time a final prospectus is delivered to them?
• What is a "structural term sheet"?
• What is a "collateral term sheet"?
• What are "computational materials"?

• Are issuers of ABS subject to the Investment Company Act of 1940?
• What exceptions - or exclusions - may ABS issuers use to avoid having to comply with the Investment Company Act of 1940?
• What are the requirements for the availability of an exclusion from the definition of "investment company" set forth in Rule 3a-7?
• What is the definition of "eligible assets" for purposes of Rule 3a-7?
• What is the definition of "fixed-income securities" for purposes of Rule 3a-7?
• What are the requirements for the availability of an exception from the definition of "investment company" set forth in Section 3(c)(7)?
• What is a "qualified purchaser" for purposes of Section 3(c)(7)?
• What are the requirements for the availability of an exception from the definition of "investment company" set forth in Section 3(c)(5)?
• What are the requirements for the availability of an exception from the definition of "investment company" set forth in Section 3(c)(1)?
  

A. Understanding Asset-Backed Securities

What are "asset-backed securities"?

In general, as the term suggests, asset-backed securities (also known as "ABS") are securities that are "backed" by one or more particular assets, such as credit card receivables, mortgage loans, and automobile loans.

They are said to be "backed" by assets because the performance of asset-backed securities is dependent upon the performance of the underlying assets. Said another way, the cash flows from the underlying assets are the primary source of payments on the asset-backed securities.

What types of ABS are there?

In short, many.

Investment bankers have been very creative in developing new and innovative types of asset-backed securities. In addition to the more common types of ABS, such as those backed by mortgage loans, credit card receivables, automobile loans and leases, home equity loans, health care receivables, equipment loans, small business loans, and dealer floorplan loans - there are more novel ABS backed by loans secured by taxicab medallions, the stranded costs of public utilities, lottery receivables, other asset-backed securities, and derivatives, such as credit default swap contracts, among others.

How does an issuer of asset-backed securities differ from an issuer of traditional corporate debt obligations or equity securities?

Issuers of ABS typically are passive, bankruptcy-remote entities (most often trusts), created for the limited purpose of acquiring the underlying assets and issuing ABS, and any activities incidental thereto.

Most have no employees, but have agents that perform the issuer's necessary day to day functions. On the other hand, traditional issuers of corporate debt obligations or equity securities typically are operating companies with ongoing business operations.

What does it mean to say that an ABS issuer is "bankruptcy remote"?

An ABS issuer is "bankruptcy remote" if the insolvency of the seller (often, but not always, an affiliate of the ABS issuer) of the underlying assets to the ABS issuer would not result in an interruption of the cash flows to the holders of the ABS - or in any other way affect the pool of underlying assets backing the ABS.

Provisions designed to ensure that the ABS issuer is bankruptcy remote generally are included either in the organizational documents of the ABS issuer or as restrictive covenants in the relevant transaction documents.

Such provisions include:

How do the concepts of "true sale" and "substantive consolidation" relate to bankruptcy remoteness?

Simply structuring an ABS issuer to be bankruptcy remote does not ensure that its assets will be secluded from those of the seller in the event that the seller becomes subject to a bankruptcy proceeding. The transfer of the underlying assets must be an absolute assignment, or "true sale," of those assets.

Generally, recourse to the seller is the most important factor in determining whether a transfer is a sale or merely a pledge of collateral by the seller - although courts have found a certain level of recourse to be acceptable.

Even if an ABS issuer is structured to be bankruptcy remote and the transfer of assets is a true sale - the ABS issuer still runs the danger of having its assets consolidated with those of the seller in the event that the seller becomes subject to a bankruptcy proceeding and the bankruptcy court exercises its equitable right to "substantively consolidate" the seller with the ABS issuer.

In order to avoid substantive consolidation, the ABS issuer must conduct its business in such a way as to assert a separate company identity from that of the seller, which may include, among other things, maintaining separate books, offices, directors, and officers.

What is the difference between an "asset-backed security" and a "mortgage-backed security"?

The term "mortgage-backed security" typically refers to a security backed by first mortgage loans. The term "asset-backed security" typically refers to a security backed by any other type of asset, including second mortgage loans and home equity loans.

For the most part, the SEC does not make this distinction. In its rules, regulations, and forms, the term "asset-backed security" generally refers to a security backed by any type of self-liquidating financial asset, including first mortgage loans. The term is used here in a similar manner.

What does it mean to say that an asset-backed security is "credit enhanced"?

An asset-backed security is said to be "credit enhanced" if there is some feature present in the transaction that makes it more likely that the holder of the asset-backed security will receive the principal or interest owed to her.

B. Registration of Asset-Backed Securities under the Securities Act of 1933

What registration forms can issuers use to register ABS under the Securities Act of 1933?

An issuer of ABS that wishes to make a public offering of its securities must use either Form S-3, Form S-1 (the "catch-all" registration form), or Form S-11 (the form typically used by issuers of mortgage-backed securities prior to the 1992 amendments to Form S-3 discussed below).

In most cases, issuers prefer to register its securities on Form S-3 - so that it may take advantage of the benefits of "shelf" or short-form registration.

What is "shelf" registration?

Rule 415 of Regulation C under the Securities Act of 1933 provides that certain offerings of securities may be made on a continuous or delayed basis in the future.

If Rule 415 is available and used, once the Division of Corporation Finance staff declares the registration statement effective, the issuer can "place the registered securities on the shelf" and leave them there until it is ready to consummate a particular transaction.

In 1992, the SEC extended the benefits of shelf registration under Rule 415 through the expansion of the availability of Form S-3 to offerings of certain ABS. Prior to that time, only certain mortgage-backed securities that qualified as "mortgage related securities" were eligible for "shelf" registration.

Sources: The Division of Corporation Finance's Current Issues and Rulemaking Projects outline (available at http://www.sec.gov/pdf/cfcr112k.pdf ) and Rule 415.

When may an issuer of ABS use Form S-3?

In general, Form S-3 may be used by any domestic issuer of ABS if the securities:

What are "asset-backed securities" for purposes of Form S-3?

For purposes of Form S-3, the term "asset-backed security" means "a security the obligations of which are primarily serviced by the cashflows 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, either fixed or revolving, designed to assure the servicing or timely distribution of proceeds to the securityholders."

Sources: Section I.B.5. of Form S-3's General Instructions.

Are delinquent assets eligible for inclusion in a pool of assets backing an offering of ABS registered on Form S-3?

Yes - up to a certain level.

In a 1997 no-action letter, the staff of the Division of Corporation Finance stated that "an asset-backed security will not fail to meet the definition of 'asset-backed security' in paragraph I.B.5 of the General Instructions of Form S-3 solely because such a security is supported by assets having total delinquencies ... of up to 20% at the time of the proposed offering."

Source: The Bond Market Association (pub. avail. October 16, 1997).

Are non-performing assets eligible for inclusion in a pool of assets backing an offering of ABS registered on Form S-3?

No. The Division of Corporation Finance staff has instructed that non-performing assets cannot be included in the underlying pool of assets backing ABS registered on Form S-3 at the time the shelf take down is consummated.

What are "investment grade securities" for purposes of Form S-3?

For purposes of Form S-3, an "asset-backed security" is an "investment grade security" "if, at the time of sale, at least one nationally recognized statistical rating organization ... has rated the security in one of its generic rating categories which signifies investment grade; typically, the four highest rating categories (within which there may be sub-categories or gradations indicating relative standing) signify investment grade."

At the present time there are three nationally recognized statistical rating organizations: Moody's Investors Service, Inc.; Standard & Poor's, a division of The Mc-Graw Hill Companies, Inc.; and Fitch, Inc. The lowest investment grade ratings are BBB- (S&P and Fitch) and Baa3 (Moody's).

Source: Section I.B.2. of Form S-3's General Instructions. See also Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act which defines "nationally recognized statistical rating organization."

What is the basic disclosure format for a Form S-3 registration statement?

In general, the ABS issuer will include one or more generic base prospectuses - and one or more forms of prospectus supplement in the Form S-3 at the time the registration statement is declared effective by the Division of Corporation Finance staff.

Specific transaction information will be provided in one or more Rule 424(b) filings after the Form S-3 is declared effective. See more @ Rule 424(b) filings.

Source: See, generally, Rule 424(b) of Regulation C under the Securities Act of 1933.

What is a "base prospectus"?

When an ABS issuer uses Form S-3 to register securities, the issuer will not know everything that will be relevant to each "take down" from the shelf at the time the Form S-3 is declared effective by the staff of the Division of Corporation Finance.

In general, information that is known and will be relevant to each take down is included in one or more base prospectuses at the time of effectiveness (there may be more than one base prospectus if the ABS issuer anticipates consummating different types of transactions pursuant to the Form S-3).

Most of the deal specific information is included in one or more prospectus supplements which generally are filed with the SEC under Rule 424(b). Only generic forms of prospectus supplement are filed with the Form S-3 at the time of effectiveness (unless the ABS issuer is contemplating an immediate take down).

Examples of disclosure items that may be set forth in the base prospectus include:

What is a "prospectus supplement"?

A prospectus supplement sets forth the specific transaction information relevant to a particular take down which could not have been known at the time the Form S-3 registration statement was declared effective (this is why only forms of prospectus supplement are included in the registration statement at the time the Division of Corporation Finance staff declares the Form S-3 effective).

Examples of disclosure items that may be set forth in the prospectus supplement include:

Where does an ABS issuer look to determine what information is required in an ABS registration statement?

Unfortunately, while the information required to be included by the applicable registration form is generally relevant, many of the particular disclosure items required in an ABS registration statement are uncodified requirements that have been established by the Division of Corporation Finance staff through the comment letter process. See more @ what is the "comment letter" process.

ABS issuers should review recently filed registration statements relating to offerings of ABS backed by the same underlying assets. This, however, will be only of limited help because the ABS issuer generally will not know whether the Division of Corporation Finance staff has reviewed such registration statements for compliance with its requirements, and even if the registration statements were reviewed most of the particular disclosure requirements will be reflected in subsequent Rule 424(b) filings.

Specifically, in the context of a full review of a Form S-3 registration statement, the Division of Corporation Finance staff will issue comments in one or more letters to the related ABS issuer and, prior to effectiveness, the issuer will undertake to comply with those staff comments in connection with all take downs from the shelf registration statement.

For that reason, the Rule 424(b) filings related to a fully-reviewed Form S-3 shelf registration statement can be an excellent source in determining what the staff of the Division of Corporation Finance expects to be disclosed for that type of transaction. ABS issuers also should review:

What must an ABS issuer disclose in the material federal income tax consequences discussion in the prospectus?

If a Form S-3 shelf registration statement is used, the base prospectus must describe - in general terms - each of the applicable potential tax structures (e.g., grantor trust, owner trust, REMIC, FASIT, etc.) and the resulting tax consequences.

This discussion necessarily makes various assumptions because the actual terms of a particular transaction will not be known at the time the registration statement is declared effective.

A tax opinion, and a related consent of counsel, must be filed as an exhibit to the registration statement prior to its effectiveness. This tax opinion can be a "short form" opinion, which confirms and adopts the prospectus discussion as counsel's own opinion, or a "long form" opinion, which is a stand alone opinion that makes various assumptions with respect to each potential tax structure and the resulting tax consequences. The prospectus supplement will disclose the material federal income tax consequences of the particular transaction.

A firm "take down" opinion - and a related consent of counsel - must be filed as an exhibit to a Form 8-K prior to or at the time confirmations are sent to investors.

If a Form S-1 or Form S-11 registration statement is used, the prospectus must include a discussion of the material federal income tax consequences of the transaction; a firm opinion, and a related consent of counsel, must be filed in a pre-effective amendment to the registration statement.

Source: See generally Item 601(b)(8) of Regulation S-K under the Securities Act.

What should an ABS issuer disclose in the "legal considerations" discussion in the prospectus?

In general, in the "legal considerations" section, the ABS issuer should include a general discussion of the procedures, under applicable federal and state law, that the ABS issuer - or an agent on behalf of the ABS issuer - must follow in order to collect on the underlying pool of assets backing the ABS in the event of late payments by the underlying obligors and a general discussion of any potential defenses that might be raised by obligors on those assets which might act as a bar to recovery or which might slow down the collection process.

If real property is involved, this section also should describe any potential environmental liabilities.

What is a "resecuritization"?

The term "resecuritization" refers to a transaction where the security being issued is backed, at least in part, by other securities. That is, some or all of the underlying assets are themselves securities. See more @ special rules for resecuritizations.

Are there any special rules to consider when registering ABS in connection with a resecuritization of other securities?

Yes. In an attempt to avoid an end-run around the registration requirements of the Securities Act of 1933, the Division of Corporation Finance staff has taken the position that a resecuritization of securities represents a distribution of the underlying securities as well as the newly issued ABS.

As a result, the same registration, disclosure, and prospectus delivery requirements will apply to the underlying securities - unless the underlying securities were:

Are audited financial statements of an issuer of securities that are a part of the pool of underlying assets that back a publicly registered ABS required to be included in the prospectus for the publicly registered ABS?

Yes, if 20% or more of the underlying pool of assets consists of securities of that underlying issuer.

The SEC staff has stated, however, that they will accept a reference in the ABS prospectus to the underlying issuer's periodic reports on file with the SEC - if the underlying issuer is eligible to use Form S-3 for a primary common stock offering and the ABS issuer's transaction in the underlying securities is purely secondary. In this case, the prospectus still must include a description of the material terms of the underlying securities.

Source: Division of Corporation Finance's Current Issues and Rulemaking Projects outline.

Are the above reference rules applicable when registering ABS as part of a resecuritization of other ABS?

Yes, if the underlying issuer:

Are the resecuritization rules applicable to an offering of ABS backed in part by a participation in a loan or other assets?

The Division of Corporation Finance staff may take the position that the participation is a security. If so, the rules apply.

Are there any special disclosure rules an ABS issuer must consider when there are concentrations within the pool of assets backing an offering of ABS?

Yes. In comment letters, the Division of Corporation Finance staff has instructed that if the pool of underlying assets backing an ABS includes a recourse loan (or a group of recourse loans) - or an ABS (or a group of ABS) relating to a single underlying obligor or a group of affiliated underlying obligors with a principal amount equal to 20% or more of the principal amount of the ABS being registered - the financial statements of such obligor or group of affiliated obligors should be included in the prospectus.

If the pool of underlying assets backing an ABS is similarly concentrated - but instead there is recourse to property (or a group of cross-collateralized properties) - the financial statements of the property (or the group of cross-collateralized properties) should be included in the prospectus.

Source: See, generally, Rule 3-14(a) of Regulation S-X under the Securities Act and, by way of analogy, Staff Accounting Bulletins 71 and 71A.

What if the concentrations described above are less than 20% but equal to or greater than 10%?

In those situations, respectively, the Division of Corporation Finance staff has instructed that the ABS issuer should include in the prospectus information, including financial information, sufficient for investors to assess the

Could an ABS offering with more significant asset concentrations raise "co-issuer" concerns?

Yes.

In a 1987 no-action letter, the Division of Corporation Finance staff indicated that Rule 140 under the Securities Act might be implicated if more than 45% of the underlying pool of assets backing an offering of ABS consisted of the certificates of a single issuer.

Source: FBC Conduit Trust I, First Boston Mortgage Securities Corporation (pub. avail. October 6, 1987). In addition, in Securities Act Release No. 33-6964 (October 29, 1992), the SEC stated that "asset-backed offerings with significant asset concentration issues may involve one or more co-issuers under Securities Act Rule 140." See also Rule 140 under the Securities Act.

Are there special disclosure rules an ABS issuer must consider when there are material third-party credit enhancers - or other providers of cash flow support - present in the transaction?

Yes.

The prospectus or prospectus supplement must identify the third-party credit enhancer or provider of cash flow support (e.g., a counterparty to an interest rate swap agreement) and any agreement related to the credit enhancement or the cash flow support must be filed as an exhibit to a Current Report on Form 8-K (in the case of a Form S-3; if a Form S-1 or a Form S-11 is used the agreement must be filed as an exhibit to the registration statement prior to or at the time of effectiveness).

In addition, in comment letters the Division of Corporation Finance staff has instructed that:

C. Periodic Reporting by ABS Issuers under the Securities Exchange Act of 1934

Are ABS issuers subject to the periodic reporting requirements of the Securities Exchange Act of 1934?

Yes, like any other issuer, an ABS issuer becomes subject to the periodic reporting requirements of the Exchange Act whenever it has a Securities Act registration statement declared effective by the Division of Corporation Finance.

Source: Sections 13 and 15(d) of the Exchange Act.

If an ABS issuer has a Securities Act registration statement that is declared effective, is it required to file periodic reports like a typical public company?

Technically, yes, just like any other issuer that has a Securities Act registration statement declared effective.

Because much of the information required by Form 10-Q and Form 10-K is not relevant to an ABS issuer, however, an alternative system of periodic reporting by ABS issuers has developed through the no-action letter process. See more @ what is modified periodic reporting.

Does each ABS issuer have to request no-action relief from the Division of Corporation Finance staff to take advantage of the modified periodic reporting procedures?

Generally, no.

Since the staff of the Division of Corporation Finance has granted so many requests for relief over the past several years, the modified reporting procedures have become relatively settled.

Recently, instead of submitting their own no-action requests, ABS issuers have been encouraged by the staff to follow the guidance in previously granted requests. Only when novel disclosure issues are involved should a no-action request be submitted to the staff.

How long must an ABS issuer file periodic reports?

Because the securities of ABS issuers generally are held by less than 300 record holders - and because ABS issuers generally are not required to register their classes of securities under Section 12 of the Securities Exchange Act of 1934, an ABS issuer's Section 15(d) reporting obligations automatically will be suspended on the first day of the fiscal year after the year in which the Securities Act registration statement became effective (although a Form 15 is required to be filed for notice purposes).

Sources: Exchange Act Section 15(d) and Rule 12h-3 under the Exchange Act.

D. Prospectus Delivery and Delivery of Other Written Materials

What must be delivered to a purchaser of ABS in connection with an initial public offering of such securities?

In general, the Securities Act of 1933 requires only that the ABS purchaser receive a final prospectus prior to - or with the - confirmation of the sale.

The Securities Act allows the use of preliminary prospectuses after a registration statement has been filed.

Sources: Securities Act Sections 5(b)(1) and (2).

What written materials - other than a preliminary prospectus - may be provided to prospective ABS investors prior to the time a final prospectus is delivered to them?

The general rule under the Securities Act of 1933 is the only written information that may be provided to prospective investors - prior to the time a final prospectus is delivered to them - is a preliminary prospectus.

Through a series of no-action letters, however, the Division of Corporation Finance staff has carved out certain exceptions from this general rule in connection with the distribution of certain written materials relating to asset-backed securities. In general, "structural term sheets," "computational materials," and "collateral term sheets" may be provided to prospective ABS investors provided that they are filed with the SEC.

In particular, if "structural term sheets" or "computational materials" are provided to prospective investors before the final prospectus is available, they must be filed under the cover of a Form 8-K prior to - or with the - filing of the final prospectus and incorporated by reference into the related Form S-3; if such materials are provided to prospective investors after the final prospectus is available but before it is sent or given, they must be filed as soon as possible but no later than two days after first use. See more @ structural term sheets - and computational materials.

Similarly, if "collateral term sheets" are provided to prospective investors before the final prospectus is available - or not yet given or sent to investors - they must be filed within two business days of first use and incorporated by reference into the related Form S-3. See more @ collateral term sheets.

Sources: See, in general, the following no-action letters: Greenwood Trust Company, Discover Card Master Trust I (pub. avail. April 5, 1996); Public Securities Association (pub. avail. March 9, 1995); Public Securities Association (pub. avail. February 17, 1995); Kidder Peabody Acceptance Corporation I, Kidder, Peabody & Co. Incorporated or Kidder Structured Asset Corporation (pub. avail. May 20, 1994).

What is a "collateral term sheet"?

In general, a "collateral term sheet" is a brief written description of certain characteristics of the pool of assets backing an offering of ABS.

Whether or not a collateral term sheet is used in connection with any take down from a Form S-3 shelf registration statement, the actual characteristics of the underlying pool of assets must be filed under the cover of a Form 8-K within 15 days of the closing of the transaction.

Source: See Public Securities Association (pub. avail. February 17, 1995).

What are "computational materials"?

In a 1994 no-action letter from the Division of Corporation Finance staff, the term "computational materials" was defined as "computer generated tables and charts displaying for a proposed class of [ABS] the yield, average life, duration, expected maturity, interest rate sensitivity and cash flow characteristics of the class under a variety of possible prepayment scenarios including, without limitation, ... such background information concerning the underlying pool of assets and the proposed structure of [such ABS] as may be necessary for an analysis of the comparative data."

Source: Kidder Peabody Acceptance Corporation I, Kidder, Peabody & Co. Incorporated or Kidder Structured Asset Corporation (pub. avail. May 20, 1994).

E. Investment Company Act of 1940 Considerations

Are issuers of ABS subject to the Investment Company Act of 1940?

Generally, yes.

Because the Investment Company Act of 1940 definition of "security" is broader than its analogs in the Securities Act of 1933 and the Securities Exchange Act of 1934, most ABS issuers meet the definition of "investment company" set forth in Section 3(a)(1) of the ICA - which includes as an "investment company" any issuer which "is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities," and/or Section 3(a)(3) of the ICA, which includes as an "investment company" any issuer which "is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 per centum of the value of such issuer's total assets (exclusive of government securities and cash items) on an unconsolidated basis."

Absent an available exception or an exclusion, therefore, most ABS issuers would have to register as an "investment company" under - and otherwise comply with - the ICA. And given the restrictive nature of the ICA, which has many substantive requirements in addition to disclosure requirements, compliance is rarely - if ever - a viable option for an ABS issuer.

Sources: Section 2(a)(36) of the ICA, which sets forth the definition of "security" under the ICA (see, in particular, the reference to "evidence of indebtedness"), and Section 3(a) of the ICA.

What exceptions or exclusions may ABS issuers use to avoid having to comply with the Investment Company Act of 1940?

Generally speaking, short of obtaining special exemptive relief from the SEC pursuant to Section 6(c) of the Investment Company Act of 1940, ABS issuers must rely on the:

What are the requirements for the availability of the exclusion from the definition of "investment company" set forth in Rule 3a-7?

In general, Rule 3a-7 excludes from the definition of "investment company" any issuer "who is engaged in the business of acquiring and holding eligible assets (and in activities related or incidental thereto) and who does not issue redeemable securities," provided that, among other things:

What is the definition of "eligible assets" for purposes of Rule 3a-7?

Rule 3a-7 defines "eligible assets" as "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 distribution of proceeds to security holders."

Source: Rule 3a-7 under the Investment Company Act of 1940.

What is the definition of "fixed-income securities" for purposes of Rule 3a-7?

Rule 3a-7 defines "fixed-income securities" as "any securities that entitle the holder to receive":

What is a "qualified purchaser" for purposes of Section 3(c)(7)?

In general, the definition of "qualified purchaser" includes:

What are the requirements for the availability of the exception from the definition of "investment company" set forth in Section 3(c)(5)?

In general, Section 3(c)(5) of the Investment Company Act of 1940 provides an exception from the definition of "investment company" to "[a]ny person who is not engaged in the business of issuing redeemable securities ... and who is primarily engaged in one or more of the following businesses":

What are the requirements for the availability of the exception from the definition of "investment company" set forth in Section 3(c)(1)?

In general, Section 3(c)(1) of the Investment Company Act of 1940 provides an exception from the definition of "investment company" to "[a]ny issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred [U.S.] persons and which is not making and does not presently propose to make a public offering of its securities."

Certain attribution rules, which are set forth in the text of Section 3(c)(1) and in Rule 3c-1, must be considered when calculating the total number of beneficial owners. The Section 3(c)(1) exception is commonly known as the "private investment company" exception.

Source: Section 3(c)(1) of the Investment Company Act of 1940.

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