SEC Issues Revised C&DI Clarifying That Certain Funding-Agreement-Backed Notes Not Within Definition of ABS Under Regulation AB | Practical Law

SEC Issues Revised C&DI Clarifying That Certain Funding-Agreement-Backed Notes Not Within Definition of ABS Under Regulation AB | Practical Law

The SEC issued a revised compliance and disclosure interpretation (C&DI) clarifying that certain funding-agreement-backed notes are not considered ABS because the notes utilize the same financing as the funding agreements backing the notes. The notes are therefore not subject to SEC ABS rules.

SEC Issues Revised C&DI Clarifying That Certain Funding-Agreement-Backed Notes Not Within Definition of ABS Under Regulation AB

by Practical Law Finance
Published on 08 Sep 2016 • USA (National/Federal)
The SEC issued a revised compliance and disclosure interpretation (C&DI) clarifying that certain funding-agreement-backed notes are not considered ABS because the notes utilize the same financing as the funding agreements backing the notes. The notes are therefore not subject to SEC ABS rules.
On September 6, 2016, the SEC issued a revised compliance and disclosure interpretation (C&DI) on Item 1101(c) of Regulation AB (Reg AB), clarifying that certain funding-agreement-backed notes do not fall within the definition of asset-backed security (ABS) under Reg AB and the Exchange Act.
The SEC found that the notes are not ABS because there is no separation between the financing for the notes and the financing for the funding agreements backing the notes. The notes are therefore not subject to SEC ABS rules.
The question posed in the C&DI asked whether a funding-agreement-backed note with the following characteristics would be considered ABS:
  • The funding agreement is a direct liability of an insurance company.
  • The terms of the notes and funding agreement match exactly.
  • Only one funding agreement backs a particular series of notes.
  • Payments by the insurance company under the funding agreement are used only for making payments due under the notes.
The SEC responded that funding-agreement-backed notes with these characteristics cannot be considered ABS because they are not serviced by cash flows such as receivables or other financial assets, as is required by Item 1101(c) of Reg AB. Similarly, section 3(a)(79) of the Exchange Act requires that a security that falls within its ABS definition must be serviced by a self-liquidating financial asset, such as a pool of loans, which these notes were not.
The SEC reasoned that:
  • The funding agreement is a direct liability of the insurance company.
  • The structure of the funding-agreement-backed notes mirrors the insurance company's payments under the funding agreement.
  • Payments on the funding-agreement-backed notes depend on the insurance company's ability to make the payments.
For information on ABS rules under Regulation AB, see Practice Note, Regulation AB II.