Canadian Structured Finance Law : Canadian Structured Finance Law: Securitization/OTC Derivatives Blog by Stikeman Elliot Lawyers & Attorneys

Michael Rumball

As was reported last week, on October 4 the SEC issued a release to implement the provisions of the Dodd-Frank Act (the Act) relating to representations and warranties. In addition to the disclosure requirements imposed on securitizers, the Act also requires each nationally recognized statistical rating organization (NRSRO) to include in any report accompanying a credit rating with respect to an Exchange Act - ABS a description of (i) the representations, warranties and enforcement mechanisms available to investors, and (ii) how they differ from the representations, warranties and enforcement mechanisms of similar securities.

A few definitional points to begin with:  First, this provision applies to all Exchange Act - ABS which, as we have seen, is very broad and applies to all private as well as public ABS.  Second, it “applies to any report accompanying a credit rating for an ABS transaction, regardless of when or in which context such reports and credit ratings are issued”.  Third, a “credit rating” includes any expected or preliminary credit rating issued by an NRSRO.  This would include a pre-sale report.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Jonathan Willson and Roanne C. Bratz

The Hiring Incentives to Restore Employment Act (or HIRE Act) has now come into effect in the United States and it will likely be relevant to Canadian participants in the OTC derivatives and securities lending areas. 

By way of background, the HIRE Act added a new U.S. withholding tax provision for certain equity-related swaps, sale-repurchase transactions and securities lending transactions. The HIRE Act applies to dividend equivalent payments made on or after September 14, 2010.  Dividend equivalent payments include payments that are contingent on, or determined by reference to, U.S.-source dividends in sale-repurchase and securities lending transactions, including certain equity swap transactions where a non-U.S. counterparty buys or sells the underlying U.S. security from or to its counterparty.  After March 18, 2012, cross-border dividend equivalent payments made under all equity swap transactions will be treated as U.S.-source dividend income, unless the U.S. Department of the Treasury issues regulations exempting any particular equity–related swap from its application.  As a result, any U.S. source dividend equivalent payment received or paid by Canadian parties, for example, generally will be subject to U.S. withholding tax even if there is no U.S. counterparty to the transaction.  The withholding tax is imposed on the “gross amount” of any dividend-equivalent payment used in computing any net amount paid to the non-U.S. counterparty in connection with the transaction.  The U.S. withholding tax generally will be imposed at a 30% rate, unless the applicable withholding rate is reduced under the terms of an income tax treaty and proper documentary evidence is timely provided to the appropriate counterparty.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Michael Rumball

Well here’s one that potentially has direct bearing on the Canadian ABS market. In its original April proposals, the SEC had put forward rather modest disclosure requirements relating to assets that had been the subject of a demand to repurchase or replace for breach of the representations and warranties contained in the transaction documents.  On October 4, the SEC revisited these proposals in response to the Dodd-Frank Act which required the SEC “to prescribe regulations on the use of representations and warranties in the market for asset-based securities to require any securitizer to disclose fulfilled and unfulfilled repurchase requests across all trusts aggregated by the securitizer, so that investors may identify asset originators with clear underwriting deficiencies”.

The October 4 release is the first in a series of regulations relating to the ABS market which the SEC has been mandated to prescribe under the Dodd-Frank Act. There had previously been some doubt about how the SEC proposals and Dodd-Frank would fit together. Any such doubt has now been erased. The SEC will revise its proposals where necessary to comply with Dodd-Frank. Thus it says, almost in apology, “the Act requires us to implement the requirements discussed in this release”.

The SEC’s interpretation of the above direction and the resulting translation into regulation may well be a portent of things to come.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Michael Rumball

The SEC has indentified, as a significant contributing factor to the RMBS collapse, the paucity of adequate information which would have allowed investors to make informed investment decisions and the resulting overreliance upon ratings. In a previous piece, we touched upon the SEC’s proposal to require significant asset level disclosure in shelf offerings. Today we will consider a further proposal which the SEC believes to be “an appropriate partial substitute for the investment grade ratings requirement.”

In the aftermath of the RMBS collapse, disgruntled investors attempted to probe the degree to which securitizers may have failed to comply with their representations and warranties relating to the assets in the pool and, more specifically, compliance with underwriting policies.  The investors suspected that there must have been widespread breaches of the representations and warranties but in some cases they were frustrated by what they perceived to be the stonewalling of those parties who were the only available source of the information.

• Comments
• Trackbacks
• Email This
• Print
• Share Link

Michael Rumball

In our previous piece on the proposed Waterfall Computer Program requirement, we touched upon the unprecedented extension of securities law liability to the functionality of the computer program. At least in the RMBS context, different people can have different views on the degree to which this is a concern. Contrast, for example, the concerns raised by the comments of the Committee on Federal Regulation of Securities and the Committee on Securitization and Structured Finance of the Section of Business Law of the American Bar Association, dated August 17, 2010, at page 61 with those elicited by our blog piece. Perhaps the main point to be gleaned from these differing views is the uncertainty surrounding the application of the proposals in various situations, which uncertainty is itself a potential problem. 

• Comments
• Trackbacks
• Email This
• Print
• Share Link