Advocacy

Fact Sheets

Regulation AB II: Schedule AL and Form 10-D

Additional SEC Reporting Requirements for CMBS Duplicative and Unnecessary Given Best-in-Class Industry Solution in Place

Last updated: August 2, 2019

Executive Summary

  • In December 2004, the Securities and Exchange Commission (SEC) adopted a regulation relating to asset-backed securities (ABS), referred to as "Regulation AB." The regulation covered four major areas: registration, disclosure, communication practices, and periodic reporting. In August 2014, the SEC adopted final rules under Regulation AB, known colloquially as “Reg AB II,” that substantially revised the offering process, disclosure and reporting requirements for ABS. Two of the areas that impacted commercial mortgage-backed securities (CMBS) included a new monthly asset-level report (Schedule AL) and additional delinquency reporting (under a revised Form 10-D).
  • The CMBS industry has long been a leader in investor reporting and the CRE Finance Council Investor Reporting Package (CREFC IRPTM or IRP) was even acknowledged by the SEC as preferable to Reg AB II requirements for asset-level reporting. Indeed, with more than 850 data fields, the IRP contains substantially more information than the Schedule AL, including delinquency data in 30-day groupings up to 90+ days (long considered the industry standard in CMBS). Version 8.0 of the IRP was launched September 30, 2016 (prior to the rule’s effective date) to incorporate the full Reg AB II Schedule AL. 
  • Schedule AL requires issuers to disclose to investors 152 data points on the underlying loans of a CMBS issuance both at the date of issuance and on a monthly basis throughout the life of the security. The purpose of Schedule AL is to provide transparency in securitization pools at the loan level for the benefit of investors.  
  • An updated Form 10-D requires 120-day delinquency reporting, but industry already reports delinquencies in 30-day groupings up to a 90+ day category. Servicers have borne a significant burden and cost to incorporate the divergent delinquency reporting requirements under the new Form 10-D. Likewise, users of the existing data (e.g., trustees, investors, data providers, rating agencies) have had to revamp their systems and models to process the new data and the ongoing compliance costs remain high.  
  • Most investors agree that these additional reporting requirements are not useful to them as they already receive similar (and substantially more) data from the monthly trustee reports that incorporate the IRP template. Generally, the private sector reports are delivered faster and are easier to access, suggesting that Schedule AL and the added delinquency reporting under Form 10-D contribute little or no added transparency to the CMBS market.  

AL and 10-D QUICK FACTS

  • The asset data file specified in Schedule AL must be included in the preliminary prospectus, the final prospectus, and each Form 10-D for each CMBS offering.
  • Form 10-D, also known as the Asset-Backed Issuer Distribution Report, must be filed for each distribution period. 
  • The Schedule AL is operationally incompatible with industry standards: 1) the SEC uses XML, an application which is otherwise not used by the industry; 2) it is released later than the IRP; and 3) provides substantially less information than the IRP.  In addition, Schedule AL can cost as much as $750,000 per transaction for issuers to file, audit, and maintain.
  • CMBS loans become specially serviced after 60 days’ delinquency, which lends additional credence to the existing delinquency reporting (which reports 30, 60, and 90+ days delinquent) versus the 120-day 

Resources

SEC Asset-Backed Securities Disclosure and Registration
CREFC’s Letter to the SEC Regarding Regulation AB II Re-Proposal
The Dawn of CMBS 4.0: Changes and Challenges in a New Regulatory Regime (Alston & Bird)
At Long Last – SEC Adopts Final Regulation AB II (Cadwalader)

For further Information, visit CREFC’s Resource Center at: https://www.crefc.org/library

Additional Background & History

  • Regulation AB II goes beyond asset-level disclosures for CMBS, which are the focus of CREFC’s reform efforts and the IRP.  Overally, Reg AB IIincludes:
    • Disclosure of asset-level Information: requires issuers to provide standardized loan-level information for ABS backed by residential mortgages, commercial mortgages, auto loans, auto leases, debt securities and resecuritizations in the issuing prospectus and in ongoing reports.
    • Three-day investor review period: requires issuers to file a preliminary prospectus with the SEC that contains transaction-specific information at least 3 business days in advance of the sale of securities.
    • CEO Certification: requires the chief executive officer of the depositor to certify to the disclosures contained in the prospectus and the structure of the transaction.
    • Transaction document filing:  final transaction agreements must be filed no later than the date the final prospectus is required to be filed.
  • CREFC members only support changes to the first pillar, regarding asset-level disclosures.

CREFC Policy & Strategy


  • Given that CMBS investors prefer and are provided more disclosure through CREFC’s IRP than through Schedule AL and have developed systems to import disclosure data from the IRP, CREFC recommends:
    • The industry be allowed to use the IRP for CMBS asset-level disclosures (in lieu of the SEC’s required filings) as long as it contains the minimum disclosures required in Reg AB II (or any future variation thereon); and
    • If a CMBS issuance does not contain IRP disclosures, then it be required to file asset-level disclosures through the SEC as outlined in the Reg AB II rule (or any future variation thereon).
  • CREFC has the consensus support of its members regarding Schedule AL, including the CMBS investor community, as indicated by the results of the CREFC Advocacy Survey (July 2017).
  • CREFC views the additional delinquency reporting required under Form 10-D as out of sync with CMBS industry practice and as providinginsignificant value to investors. It is an unnecessary and costly compliance burden and, as a result, it is CREFC’s recommendation that the SEC remove the Form 10-D delinquency reporting requirements.

Disclaimer


The information provided herein is general in nature and for educational purposes only. CRE Finance Council makes no representations as to the accuracy, completeness, timeliness, validity, usefulness, or suitability of the information provided. The information should not be relied upon or interpreted as legal, financial, tax, accounting, investment, commercial or other advice, and CRE Finance Council disclaims all liability for any such reliance. © 2019 CRE Finance Council. All rights reserved.
 
 

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