Structured Finance Alert: Proposed Rule to Implement Dodd-Frank Risk Retention Requirement

Executive summary -

Overview -

On August 28, 2013, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System (Federal Reserve Board), the Federal Deposit Insurance Corporation (FDIC), the U.S. Securities and Exchange Commission (SEC), the Federal Housing Finance Agency (FHFA) and the Department of Housing and Urban Development (HUD) (collectively, Agencies) released a revised proposed rule (Proposed Rule) to implement the risk retention requirement of Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Proposed Rule follows an initial rule proposal released in April 2011 (the Original Proposal). The Proposed Rule reflects comments received on the Original Proposal and re-proposes the risk retention rules with a number of significant modifications. Comments to the Proposed Rule must be received by October 30, 2013.

The risk retention requirements of Section 941 of the Dodd-Frank Act are intended to align the interests of securitizers with those of other securitization transaction participants by requiring securitizers to retain some of the credit risk in the assets they securitize, or to have “skin in the game.” Section 941 added Section 15G to the Securities Exchange Act of 1934, as amended (Exchange Act), which requires the Agencies to prescribe risk retention rules. Section 15G generally requires a securitizer to retain no less than 5 percent of the credit risk in assets it sells into a securitization and prohibits a securitizer from directly or indirectly hedging or otherwise transferring the retained credit risk. The commentary to the Proposed Rule notes that Section 15G does not distinguish between transactions that are required to be registered with the SEC and those that are exempt from registration and the Proposed Rule applies to both public and private asset-backed securities (ABS) transactions.

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