On November 27, 2023, the US Securities Exchange Commission (“SEC”) adopted final Securities Act Rule 192 (“Final Rule 192”) prohibiting certain conflicts of interest in securitization transactions. In general, Final Rule 192 prohibits a “securitization participant” with respect to an “asset-backed security” (“ABS”) from directly or indirectly engaging in any “conflicted transaction” during the applicable prohibition period.

Compliance with Final Rule 192 is required with respect to any ABS the first closing of the sale of which occurs 18 months after Final Rule 192’s date of publication in the Federal Register (which publication is forthcoming).

In general, Final Rule 192 is a significant improvement over the proposed rule in both clarity and scope. But some ambiguities and compliance challenges remain. For securitization participants now working to reach consensus on reasonable interpretations of the final rule and to design and implement compliance programs, Mayer Brown’s white paper provides background and further detail on Final Rule 192 (including a markup of the changes to the proposed rule).

The Securities and Exchange Commission (the “Commission”) published proposed Rule 192 (Conflicts of Interest Relating to Certain Securitizations) on January 25, 2023 and closed the public comment period on March 27, 2023. After several months of review and discussions with industry trade groups, the Commission appears ready to publish a final rule in the near future, concluding a process that began in September of 2011. The Commission’s final rule could have a significant impact on asset-backed securitization markets and participants are keenly waiting to examine the final rule.

Mayer Brown’s recent article in The Review of Securities and Commodities Regulation highlights the provisions, definitions and exceptions of the Commission’s proposed rule and examines critical questions for participants in securitization markets.

Mere days before Halloween, California enacted California Senate Bill 666, imposing a set of restrictions on the fees that commercial financers may charge their small business customers. SB 666 closely follows an August 2023 rulemaking by the California Department of Financial Protection and Innovation targeting unfair, deceptive, or abusive acts or practices (“UDAAPs”) in commercial financing and requiring commercial financers to submit annual reports of their activities to the state. Given California’s history as a bellwether, these developments are an indication that states are not done regulating small business financing.

Mayer Brown’s Legal Update provides further detail for companies that offer commercial financing in California.

While residential mortgage lenders are facing tough headwinds driven by rising interest rates and low housing volume, the current market presents opportunities for savvy investors looking at mortgage servicing rights (“MSRs”). The current mortgage market is supported by non-bank mortgage originators and servicers who lack the same access to capital and liquidity as traditional banks. To continue growing, non-bank entities have had to be creative with respect to capital sources.

Non-bank owners of MSRs are seeking asset-specific alternative private capital vehicles to fund MSR portfolios. However, unlike whole mortgage loans, MSRs cannot be easily created and sold to investors. Fortunately, through creative thinking and structuring, investors are able to use non-bank, non-servicer, alternative capital sources to participate in the economics of MSRs. Mayer Brown’s Legal Update provides an overview of the phases and areas of consideration related to private capital vehicles that offer investment opportunities in MSRs.

On July 27, 2023, the US banking regulators issued a proposal to significantly revise the risk-based capital requirements applicable to large banks and to banks with significant trading activity. The proposal, which is colloquially referred to as “Basel III Endgame” or “Basel IV,” includes important changes to the calculation of credit risk weights for securitization exposures, as well as a new operational risk capital charge on certain fees and commissions. Mayer Brown’s white paper provides a detailed review of those changes, discusses their possible impacts, and highlights specific provisions that market participants will likely focus on in their comment letters. Please read more here.

The regulatory and judicial developments of the last few days relating to the loan markets and to loan funds have been significant.

On Tuesday, lenders and borrowers were concerned about a world in which syndicated and other loans would be treated as securities. And managers of collateralized loan obligation vehicles (“CLOs”) were concerned about being subject to extensive new Federal regulations. Both of these concerns were addressed this week.

On Wednesday afternoon, the SEC announced a final Private Fund Adviser Rule that has a broad exception for “securitized asset funds,” a category that includes CLOs. The SEC’s Release with the final Rule is here. An Update that we issued regarding the final Rule is here.

 Then, on Thursday morning, the Second Circuit issued a decision in the closely watched Kirschner v. JPMorgan case rejecting the plaintiff’s argument that the subject notes associated with syndicated term loans should be treated as securities.

What does all of this mean for the loan markets?

  • Managers of, and investors in, CLOs are relieved after potentially facing demanding new Federal regulations.
  • Sponsors of, and investors in, other loan funds also will benefit from the SEC’s significant paring back of its Private Fund Adviser Rule. Beyond the possibility of satisfying the securitized asset fund definition, many of these market participants will also be able to avail themselves of rule exceptions that should, among other things, limit new obstacles to certain agreed side-letter arrangements tailored for certain investors.
  • The loan markets, and the loan fund universe, won’t have to deal with the substantial complications for origination and trading that would have accompanied a Second Circuit decision that certain syndicated loans are securities. These complications could have also impacted other markets that utilize loan-based funding, such as asset based lending and non-ABS structured finance markets.

No doubt there will be future twists and turns in regulation and in the courts that will pose challenges for the loan markets. But the developments of Wednesday and Thursday might be remembered for a while as the August 2023 Doubleheader.

Following closely on the heels of a Georgia law enacted in May, Connecticut and Florida have become the latest states to enact laws requiring providers of small business financing to provide disclosures to recipients—and in Connecticut’s case, to require certain commercial finance providers to register with the state. We examine the unique and interesting provisions in these laws, and what the new laws might signal for the regulatory landscape in coming years, in Mayer Brown’s Legal Update.

On 20 July 2023 the long awaited Electronic Trade Documents Act 2023 (the Act) received Royal Assent, and will come into effect in the UK on 20 September 2023.

The Act, which is largely based on the UK Law Commission’s draft Bill published in March 2022, sets out the basis upon which trade documents can exist and be dealt with in electronic form under English law, such that an electronic trade document has the same effect as an equivalent paper trade document.

Read more in Mayer Brown’s Legal Update.

Earlier this year, the SEC re-proposed a rule to implement Section 27B of the Securities Act of 1933, a provision added by Section 621 of the Dodd-Frank Act.

The Dodd-Frank provision, intended to prohibit certain conflicts of interest in securitization transactions, is interpreted broadly by the SEC’s sweeping proposal. If not amended, these rules would threaten the viability of many common, beneficial transactions in mortgage- and asset-backed securities.

On Tuesday, June 20 from 1:00 – 2:00 p.m. EST, please join SIFMA’s Chris Killian and Mayer Brown’s Christopher Horn, Stuart Litwin and Michelle Stasny in this webinar as they discuss the proposed rule, the rule’s potential impact, the industry’s response and the issue’s trajectory.

Registration for the webinar is located here: Register for the SIFMA Webinar: SEC Re-Proposal on Conflicts of Interest in Securitization (hs-sites.com).

SIFMA Webinar: SEC Re-Proposal on Conflicts of Interest in Securitization
SIFMA Securitization Webinar 2023 Featured Speakers

Christopher Horn, Counsel, Mayer Brown LLP

Stuart Litwin, Partner, Mayer Brown LLP

Michelle Stasny, Counsel, Mayer Brown LLP

Chris Killian, Managing Director, Securitization and Corporate Credit, SIFMA

Providers of commercial financing should take note that Georgia has become the fifth US state to enact small business financing disclosure requirements since California started the trend in 2018. Georgia Senate Bill 90 was signed by Governor Brian Kemp on May 1, 2023, and takes effect January 1, 2024. The Georgia law applies to transactions of $500,000 or less, including closed and open-end loans and accounts receivable purchases, and provides some helpful exemptions for equipment financers, affiliates of depository institutions, and others. Mayer Brown’s Legal Update provides details on the law’s requirements, scope, exemptions, and penalties.