November 8, 1996 Mr. Jonathan G. Katz Secretary United States Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Securities Act Concepts and Their Effects on Capital Formation (Release No. 33-7314) (File No. S7- 19-96) Dear Mr. Katz: PSA The Bond Market Trade Association ("PSA")1 appreciates this opportunity to comment to the Securities and Exchange Commission (the "Commission" or "SEC") on the Commission's Concept Release: Securities Act Concepts and Their Effects on Capital Formation (Release No. 33-7314 (July 25, 1996)) (the "Concept Release"). PSA wishes to praise the Commission and its Staff on the comprehensive review they have undertaken of the U.S. capital formation methods and markets. We believe that the work of the Commission and Staff in connection with the Concept Release, as well as the efforts of the Task Force on Disclosure Simplification (the "Task Force") and the Advisory Committee on the Capital Formation and Regulatory Processes (the "Advisory Committee"), will help to preserve the integrity of the U.S. capital markets and keep them the strongest, as well as most transparent and liquid, in the world. This comment letter is organized in two sections, corresponding to the markets represented by PSA that are significantly impacted by the proposals contained in the Concept Release. The first section responds broadly to the Concept Release from the perspective of the membership of PSA's Corporate Bond Division, which includes bulge bracket firms, brokers' brokers and regional fixed income securities dealers. The activities of the Corporate Bond Division are governed by an Executive Committee, the members of which are listed on an attachment to this comment letter.2 The second section of the letter responds to the Concept Release from the perspective of PSA's Mortgage and Asset-Backed Securities Division. This portion of the letter is based upon input provided by an ad hoc Mortgage- and Asset-Backed Securities Regulatory Task Force, comprised of senior business and legal professionals from a representative group of PSA member firms that actively participate in the mortgage-backed and asset-backed securities ("MBS" and "ABS", respectively) markets. PSA organized this Task Force both for the purpose of responding to the issues raised in the Concept Release, as well as to respond to the Staff's invitation to provide PSA's suggestions on possible reforms to current disclosure rules and practices applicable to MBS and ABS. These latter views were recently communicated to the Staff in a separate letter,3 which overlaps somewhat with the subject matter addressed by the second section of this letter. However, PSA's members that are active in the mortgage- and asset- backed securities markets believe that it is vital to respond specifically to certain issues addressed in the Concept Release, for two principal reasons. First, although there is a significant degree of convergence between the views of PSA's Corporate Bond and Mortgage- and Asset-Backed Securities membership on many of the issues raised by the Concept Release, in several key areas this is not the case, and PSA's different views (and the reasons underlying those different views) need to be explained. Second, and perhaps of greater significance, mortgage- and asset-backed securities are fundamentally different from corporate debt and equity securities in a number of important respects. As a result, many of the traditional views underlying the existing federal securities law regime regarding the nature of the offering process and the information relevant to investors do not apply equally to both markets. Any reform as fundamental as that suggested by the ideas contained in the Concept Release must properly account for basic differences between the different securities and securities markets that would be impacted by such reform. Accordingly, the second section of this letter highlights those areas of the Concept Release in which a different regulatory approach for MBS and ABS may be warranted. As such, this portion of PSA's comment letter does not attempt to address comprehensively all of the issues implicated by the Concept Release, but instead focuses on issues that may raise different regulatory considerations when applied to the MBS and ABS markets. I. CORPORATE BONDS Advisory Committee Report Under the current regulatory system, the U.S. capital markets have become the strongest in the world. The transparency, depth and liquidity of our markets have provided U.S. and foreign issuers access to capital and have fostered financial instrument innovation unparalleled in other markets. To maintain this leadership in international capital markets, PSA believes that the current regulatory system should be modified and amended in accordance with the suggestions described below and that a more lengthy and exhaustive study of the ramifications of alternative regulatory systems, including Company Registration, should be undertaken. With respect to certain changes discussed in the Concept Release, as well as certain aspects of Company Registration, PSA believes that Company Registration should be the subject of further evaluation and debate. Although admirable as an attempt to address important issues facing the capital markets, the Company Registration concept needs to be studied and defined in more detail before the present system is abandoned in order to receive the analysis necessary to be certain that Company Registration will not have a negative impact upon the capital formation process and the trading markets. Without this study and analysis, PSA questions whether Company Registration will attract widespread issuer participation. Furthermore, it is our view that Company Registration might be somewhat controversial and will require compromises on many important issues. In that regard, PSA does not favor the adoption of a voluntary pilot program. It is our view that such a program will create confusion in the bond marketplace by creating a dual regulatory system. Company Registration should only be instituted after further analysis and presentation to the marketplace of all applicable rules and regulations. While supportive of the goals of Company Registration postulated by the Advisory Committee, including increased market access, PSA strongly believes that many of the practical benefits of Company Registration can nevertheless be attained by implementing certain of the proposals and improvements suggested by the Concept Release without the fundamental changes represented by Company Registration. The adoption of a Company Registration system will require a completely new regulatory system that will (and should) undoubtedly take a significant amount of time as the Commission seeks to incorporate the differing views of a number of constituencies. PSA is not in favor of delaying implementation of the more specific and targeted changes discussed below while the concept of Company Registration and the rules and regulations instituting such a system are discussed and debated. In this regard, we note that, in our view, certain changes discussed in the Concept Release might require legislative action4; recent experience has shown that this can be a lengthy and at times unpredictable process. Therefore, as discussed in more detail below, PSA suggests that the Commission act promptly to adopt certain enhancements to the current regulatory system through changes in (i) current rules that are within the scope of the Commission's rulemaking or exemptive power and (ii) Staff procedures that can be effected without rule changes, while continuing to study the necessity for more fundamental changes such as Company Registration or other alternatives that may be suggested by commenters in response to the Commission's request for comments. As set forth in more detail below, PSA is of the view that: the quality of ongoing disclosure in registration statements is generally better than the disclosure in periodic reports. Except for the adoption of mandatory SAS 71 interim reviews, PSA does not believe that the adoption of the other disclosure enhancements will have a dramatic impact on disclosure in periodic reports; investors should be permitted to receive transaction-specific information of the type that would be included in a term sheet through physical or electronic delivery prior to delivery of a final prospectus; any requirement to impose a transaction- specific filing requirement prior to sale would significantly reduce the benefits of shelf registration; ú additional liberalization of "free writing" without adequate controls is neither necessary or desirable; ú the confirmation and prospectus delivery requirements should be decoupled, thus permitting a confirmation (and, if desired by an underwriter, an optional "term sheet") to be sent to customers prior to delivery of a final prospectus; the role of underwriters in today's capital markets should be reassessed and that the liability of underwriters should be correlated with their ability to impact the content of prospectuses; changes in Staff review procedures would significantly improve the efficiency of the U.S. capital markets, improve the quality of filings and reduce Staff review time; the adoption of many of the recommendations of the Task Force Report would result in significant improvements to the present regulatory system; the expansion of Rule 144A to reduce the investment security threshold as well as several other modifications will increase the efficiency of the rule; and the general solicitation prohibition on Regulation D and Rule 144A offerings hampers the utility of these rules, results in unnecessary uncertainty and raises costs to issuers. Securities Act Concepts PSA fully appreciates the continuing challenge for the Commission to adapt the disclosure framework of the Securities Act of 1933 (the "Securities Act") to developments and innovation in the primary capital markets, while ensuring that investors receive full and fair disclosure in a manner and at a time that allows for informed decision-making. We suggest that equally important is the timely receipt of disclosure by the marketplace in order to ensure that an informed and orderly secondary market can be maintained to assure continued transparency and liquidity that are so vital to our capital markets. Quality of Ongoing Disclosure. We believe that the quality of disclosure in Securities Act offering documents is generally better than the disclosure documents required by the Securities Exchange Act of 1934 (the "Exchange Act"). In addition, we believe the quality of ongoing disclosure under the Exchange Act differs significantly among issuers. However, investment grade debt issuers and frequent non- investment grade debt issuers generally provide better on- going disclosure in their periodic reports. It is our view that ongoing disclosure documents are generally adequate but nevertheless could be enhanced. PSA believes that Securities Act offering documents benefit from the attention that the event of capital raising is given by issuers, which is assisted by the objective focus and involvement of underwriters and their counsel and the issuers' accountants. However, underwriters and their counsel often have little impact upon disclosure that already exists in Exchange Act disclosure documents that have been filed with the Commission without their prior involvement and review.5 As discussed below, the adoption of Form S-3, the prominent use of incorporation by reference and the evolution of Securities Act offerings since the 1930's have transformed the traditional role of the underwriter with respect to Exchange Act disclosure documents. As a result, the quality of disclosure included in Exchange Act disclosure documents is not always consistent. We believe that the quality of such disclosure is highly dependent on the issuer's internal controls, the extent to which the issuer involves outside lawyers and accountants in the preparation process, the significance placed by the issuer on Exchange Act disclosure documents and the frequency of securities offerings. It is not clear to PSA that the application of additional liability provisions or the adoption of the Advisory Committee's disclosure recommendations will dramatically improve the disclosure in Exchange Act documents. For example, certification by senior management or a senior management report submitted to the audit committee of the board of directors would not, in our opinion, necessarily improve disclosure. Since certain senior members of management are already required to sign periodic reports, a certification or senior management report is not likely to significantly enhance these disclosure documents. Also, while we believe that a "disclosure committee" of the board of directors could improve the accuracy of disclosure, we seriously doubt that directors would agree to serve on such a committee unless they were provided some relief from liability. On the other hand, we believe that more timely reports on Form 8-K (i.e., accelerating the filing requirement from 15 calendar days to 5 business days) would improve disclosure. We also would support expansion of current reporting obligations on Form 8- K to include material modifications to the rights of security holders, resignation or removal of any of the top five executive officers, defaults of senior securities, sales of significant amounts of securities and events affecting audit reports that are currently required to be filed on Form 10-Q. We believe that Form 10-K risk factor disclosure may be helpful, but in itself should not be expected to significantly enhance disclosure. PSA also believes that the quality of disclosure in Exchange Act disclosure documents would be enhanced by the participation of independent accountants through the use of mandatory SAS 71 interim reviews. These third-party review procedures would not only assist the underwriters in their due diligence efforts in connection with primary offerings, but would improve the quality of an issuer's interim financial statements. Informing Investors. PSA believes that at a minimum all investors should be allowed to receive physical or electronic delivery of transaction-specific information ("Term Sheets"). 6 While the amount of information that an investor may possess prior to an offering may vary, every investor has the same need for transaction-specific information. In fact, given the larger average purchase by institutional investors, they may have a greater need for timely transaction-specific information. Such information is also vital for the formation of an informed secondary market. We also believe that the method of information delivery or access should be a matter of investor choice rather than differing by regulation based on the investor's level of sophistication. On the other hand, it is our view that there are some classes of investors who do not require the protection afforded by actual delivery of a prospectus disclosure beyond a term sheet. For sophisticated investors in offerings made by issuers of investment grade debt and frequent issuers of non-investment grade debt7, constructive delivery of disclosure other than term sheet information should be sufficient to satisfy the requirements of the Securities Act. As to general company information relating to such issuers, we believe that the assumptions of the "efficient market hypothesis" are realistic for the debt market and we support notions of constructive delivery. Finally, we also believe that the Commission should not impose special registration requirements for types of securities never before sold or never before sold by the issuer. Timing of Delivery of Transaction-Specific Information. PSA is of the view that details of the securities being offered and any recent developments or changes with respect to company-specific information contained in prior disclosures should be made available as soon as possible after pricing. At least with respect to primary offerings of investment grade debt securities, we believe that the information needed by an investor to make an informed decision is relatively limited and can be given orally or through the use of a Term Sheet. Therefore, we believe that any requirement that transaction-specific information be filed prior to sale would significantly reduce the flexibility and instantaneous access shelf registration has brought to the U.S. capital markets. The imposition of such a requirement, we believe, would place the U.S. capital markets at a significant disadvantage to the European and other global markets which do not have any such impediments. We believe that the pre-filing of transaction-specific information would delay absorption of that information by investors in the primary offering. Limitations on Written Communications. While we believe that expansion of research and the use of term sheets is desirable, it is our view that additional liberalization of "free writing" outside the statutory prospectus is not necessary or desirable without adequately addressing issues relating to liability, indemnification and discrepancies among each of the underwriters' documents.8 However, we do believe that the current rules regarding research coverage of investment grade debt issuers and frequent non-investment grade issuers should be clarified and expanded. The benefits obtained from continuous research coverage of most segments of issuers should more than outweigh any regulatory issues presented by such coverage. As stated above, we believe that the benefits of any requirement mandating pre-offering filings of transaction- specific Term Sheets would be more than offset by the burdens such a requirement would place on instantaneous market access that has become the hallmark of shelf registration in the U.S. capital markets. We do believe, however, that the Commission should consider authorizing the optional use of a Term Sheet containing transaction-specific information regarding the offering, which could be made available promptly after pricing, could be more quickly provided to investors than the current prospectus and prospectus supplement requirement and could assist investors in the secondary market by delivering the Term Sheet to such investors. PSA would not favor any requirement to pre-file the Term Sheet with the Commission as such a requirement would defeat the purpose and intent of the Term Sheet. The Term Sheet would summarize the transaction-specific information associated with the offering, incorporate the prospectus or prospectus supplement by reference and disclose that the prospectus or prospectus supplement is available upon request. The contents of such a term sheet would not and should not be mandated by rule other than to require that the information be derived from and consistent with the prospectus or prospectus supplement. PSA believes that the current requirement that a prospectus or prospectus supplement accompany or precede the confirmation of the transaction should be amended by decoupling the confirmation and prospectus delivery requirements. As noted by the Advisory Committee, delivery of the final prospectus does not occur until after an investor has already made his or her investment decision. The reality of the marketplace is such that investment decisions are generally based on the "Subject to Completion" prospectus or prospectus supplement or, more likely with respect to issuers of investment grade debt or frequent issuers of non-investment grade debt, upon oral information delivered at or prior to the pricing of the securities. The adoption of Rule 15c6-1 ("T+3") has placed significant pressure on issuers and underwriters not only to perform their traditional roles but also to finalize the prospectus or prospectus supplement in time to be delivered with the confirmation. Any further reduction in the settlement cycle will further exacerbate the timing issue associated with the confirmation and prospectus delivery requirements. We urge the Commission to consider permitting broker-dealers to incorporate the prospectus into the confirmation and undertake to deliver such prospectus to anyone who requests a copy. Accordingly, the confirmation and prospectus would be decoupled for prospectus delivery requirements, and the confirmation and any optional term sheet would not be an illegal prospectus if delivered in the manner suggested herein. The Role of "Gatekeepers". The capital formation process has changed significantly since the enactment of the Securities Act. At that time, investment banks essentially controlled access to the capital markets. From the enactment of the Securities Act until prior to the adoption of the shelf registration process investors relied upon the "sponsorship" of the investment bank for a specific offering, Moreover, investment banks played a more substantial role in the drafting of the disclosure included in the prospectus. Therefore, the liability scheme of Section 11 of the Securities Act placed responsibilities, with a "due diligence" defense, upon underwriters which were consistent with their then existing role and their ability to affect the disclosure contained in the prospectus. Developments since that time have significantly changed the role of underwriters. Integrated disclosure (where underwriters are seldom involved in non-transaction specific disclosure), significant developments in communications (where information about reporting companies is available instantaneously from numerous sources), shelf registration (where issuers can instantaneously effect transactions with any underwriter), T+3 settlement (where little time is available to deliver a confirmation and prospectus and receive payment), and the globalization and institutionalization of the securities markets (where institutions are willing to purchase securities from any major underwriter) have made the responsibilities of underwriters under Section 11 inappropriate and less realistic. "Relationship" investment banking has become "transactional" investment banking, with underwriters providing advice and distribution services; investment grade debt issuers and frequent non-investment grade issuers have, in effect, become their own "gatekeepers," accessing the capital markets at will. Underwriters have little control over the content of the prospectus, which has become a multi- document "offering package" consisting of documents that have been filed by the issuer at varying times for varying purposes (e.g., periodic reporting and proxy solicitation) and in the case of continuous offerings is subject to automatic change whenever the issuer files an Exchange Act report. An underwriter today cannot realistically be expected to exercise the same degree of control over the disclosure document that it could at the time the Securities Act was enacted. Except for certain transaction-specific disclosure, the prospectus and periodic reports are, for all significant purposes, the documents of the issuer. Therefore, we believe that the role of an underwriter in today's capital markets should be addressed directly and that the liability of an underwriter should be correlated with its ability to impact the content of the prospectus. Unless the Commission elects to exercise its newly granted exemptive authority,9 it would appear that legislative action would be required to change an underwriter's liability. Because this could be a lengthy process, we suggest that if the Commission agrees with our position, it would be appropriate to consider amending Rule 176 to recast the Rule in the form of a safe harbor and to add factors such as: The time available to the underwriter for investigation in connection with a transaction and the use made by the underwriter of the available time; The degree to which the procedures followed by the underwriter in connection with a transaction are consistent with procedures generally followed by underwriters in connection with offerings of comparable securities of comparable issuers in comparable transactions; The degree to which investors rely upon a rating assigned to the underwritten securities by an independent rating agency; and The degree to which investors have independent access to information and credit judgments about the issuer that are of a comparable degree of reliability to those available to the underwriter. Staff Review. While the Commission considers the full ramifications of the adoption of Company Registration, we suggest it take immediate action to increase the certainty of Staff review of pre-transaction filings. PSA believes that increased certainty of Staff review will significantly improve the efficiency of the U.S. capital markets. PSA also strongly suggests that the Commission make public the criteria used by the Staff in determining whether to review registration statements. We do not believe that anything is gained by withholding this information from the public. We favor enhanced reviews of Exchange Act filings, limiting reviews of transaction filings to such transactions as initial public offerings and "novel and unique" securities. We also suggest that the Staff permit an issuer to submit a transaction to the Staff a short period of time, such as 60 days, in advance of filing. If a review were indicated, the issuer should be able at that time to request a review of its Exchange Act documents in advance of the filing of the registration statement. We also suggest that the Staff permit U.S. issuers to be able to take advantage of the confidential filing procedures that have been made available to non-U.S. issuers. PSA also believes that the Staff should periodically make public frequent legal and accounting comments, as well as legal interpretations that affect public offerings. It should also make public its reviews of "novel and unique" securities to eliminate redundant Staff reviews of new financial instruments. This would be of great benefit to issuers and underwriters, would improve the quality of filings and reduce Staff review time. We also suggest that the Staff consider the automatic effectiveness of pricing amendments or Rule 430A amendments that effect no substantive changes other than the size of the offering. This would afford issuers and underwriters greater certainty in scheduling and sizing offerings in volatile markets. Task Force Report Recommendations Consistent with our suggestion above that the Commission focus on improving the current regulatory system while continuing to develop and study Company Registration and other alternative regulatory systems, PSA supports many of the Task Force Report recommendations. In particular, PSA supports the following recommendations: Eliminate restrictions for "at the market" offerings; Permit companies engaged in shelf offerings to include secondary offerings without identifying the selling security holders until the time of the actual offering; Allow multiple undesignated issuers on a shelf registration; Permit an issuer to reallocate securities, or register a new class of securities, on a shelf registration statement by post-effective amendment; Allow seasoned issuers to pay registration fees at the time securities are taken down from the shelf; Permit seasoned issuers to register a dollar amount of securities without specifying the classes of securities being registered; Eliminate the Form D filing requirement under Regulation D; Expand the safe harbor of Rule 152 as recommended by the Task Force Report; Permit the submission of a registration statement on a "quiet" basis (i.e., without any issuer or underwriter generated publicity) without being deemed to have commenced a public offering; Streamline and modernize the safe harbors provided for by Securities Act Rules 137, 138 and 139 relating to the use of broker-dealer research reports; Eliminate a broker-dealer's prospectus "market-making" delivery obligations in connection with "regular way" market making transactions in securities of its affiliates; Permit a shelf registrant to qualify an indenture by post-effective amendment rather than be required to file a new registration statement; Eliminate Forms T-1 and T-3 and instead require an issuer to make an "eligible trustee" representation in the registration statement; Broaden the circumstances in which the guaranteed convertible securities of a wholly-owned subsidiary can be exchanged for securities of its parent under Section 3(a)(9) without registration; and Streamline the rules requiring separate audited financial statements of affiliates whose stock collateralizes a registrant's securities and of persons who guarantee a registrant's securities. Rule 144A PSA supports the expansion of Rule 144A under the Securities Act. Rule 144A has resulted in a significant expansion of the private institutional market for unregistered securities, giving issuers a real alternative to the registered market without a significant pricing penalty. It has also clarified the resale of unregistered securities and provided additional liquidity to the marketplace. PSA believes that the success of the Rule indicates that it should be expanded and revised as follows: The definition of qualified institutional buyers ("QIBs") should be modified to (i) reduce the investment security threshold to $25 to 50 million10; and (ii) allow any investor meeting the investment level to be a QIB, even if an individual _ experience has indicated that any investor of this size either possesses or has advisors that possess the necessary level of investment sophistication. These changes would significantly reduce the necessity for parallel QIB/Institutional Accredited Investor offerings; The rule should be available for sales to QIBs only; offers, on the other hand, should not be subject to any restriction; and The Rule should be revised to delete the certification requirement of Rule 144A(d)(iv) as unnecessary and burdensome on QIBs who are inundated with requests even when such requests are unnecessary because of the public status of the purchaser. We do not believe that the above expansion of Rule 144A would lessen investor protection in any way or harm the public interest. In this regard, we suggest that the Staff expand the availability of the registered exchange offer to apply to all securities sold in reliance upon Rule 144A. The current limitations do not appear to serve any useful function. We further suggest that the Staff consider issuing a "staff legal bulletin" to clarify the application of the integration doctrine to concurrent and subsequent private placements and registered offerings. We also suggest that the Staff expressly sanction the use of the Depository Trust Company's book entry system in the case of non-PORTAL offerings to non-QIB Institutional Accredited Investors. The current situation has been interpreted to require physical delivery of certificates to non-QIBs, thereby denying such investors the efficiencies of the book entry system. We request that the Commission specifically exempt Rule 144A from the application of Section 11(d)(1) of the Exchange Act. We note that in the Release adopting Rule 144A, the Commission stated that the Staff was prepared to provide interpretive relief under Section 11(d)(1) in "appropriate circumstances."11 We believe, however, that there is no legal or policy reason for Section 11(d)(1) to be applicable to Rule 144A offerings of investment grade debt securities as there is no distribution for purposes of the rule. In this context, we would also suggest that separate underwritten takedowns of corporate debt securities from a typical Rule 415 "shelf" registration statement should be exempt from the prohibitions of Section 11(d)(1).12 Similar to Rule 144A offerings, where the financial terms of the securities are tailored to the individual needs of investors and each tranche is "bought" prior to the pricing of the transaction, there is no legal or policy justification for requiring broker-dealers to wait thirty days before they may extend credit on the securities. General Solicitation We believe that the general solicitation prohibition on offerings made under Regulation D, as well as in the context of Rule 144A discussed above, hampers the utility of Regulation D and Rule 144A, unnecessarily creates uncertainty and raises costs to issuers. This change by the Commission would shift the focus to purchasers of securities rather than offerees and would avoid current problems relating to the offering of securities such as publicity, research coverage, publication of quotations and similar "general solicitation" issues, without, in our view, any decrease in investor protection. MORTGAGE-BACKED AND ASSET-BACKED SECURITIES Advisory Committee Report As noted in the introductory portion of this letter, the basic framework of securities laws and regulations was established substantially before the broad emergence of the MBS and ABS markets. In a number of areas, this framework does not adequately address and accommodate the distinctive characteristics of MBS and ABS, inhibiting the growth and efficiency of these markets. In both general and specific contexts, PSA believes that a rethinking and rationalization of the SEC's regulation of these markets is needed to remove, or at least reduce, these impediments to growth and greater efficiency. At the outset, it is important to recognize that MBS and ABS possess a number of features that readily distinguish them from more traditional corporate debt and equity securities. Principally, these differences relate to the importance of (1) the nature and quality of the underlying collateral, and (2) the structure and timing of cash flows supported by that collateral, as the primary determinants of value of an ABS offering. These features contrast sharply with corporate debt and equity obligations, where the current financial condition and future earnings prospects of an issuer_generally, an ongoing business enterprise with active management oversight_are the most important considerations and are publicly available to investors. These fundamental differences between traditional corporate debt and equity securities on the one hand, and MBS and ABS, on the other, are perhaps nowhere brought more sharply into focus than by certain portions of the Advisory Committee Report, and specifically, by the discussion of the Company Registration concept. While PSA's members that are active in the MBS and ABS markets generally agree that a more lengthy and exhaustive study of alternative regulatory systems, including Company Registration, should be undertaken, the basic relevance and applicability of such systems to MBS and ABS need to be considered. Although the eligibility criteria for the initial Company Registration pilot envisioned by the Advisory Committee would operate to exclude issuers of mortgage and asset-backed securities13, as a conceptual matter it is difficult to envision the manner in which a "Company Registration" paradigm could be applied to such securities, where issuers are usually distinct, special purpose entities without ongoing business activities. Once an MBS or ABS offering has been completed, the performance of the related securities depends on the cash flows generated by the underlying collateral, and in most circumstances is entirely unrelated to the financial condition and prospects of the "issuer". This limited role of the issuer renders conventional notions regarding ongoing financial and other issuer disclosure irrelevant; the nature of the assets underlying the MBS/ABS offering and the structure of the transaction become, instead, the paramount considerations for investors. As a consequence, the Company Registration concept would appear to require significant rethinking and modification before its application to the MBS and ABS markets could be considered. Given the general inapplicability of this concept to a large and growing sector of the fixed income marketplace, PSA would therefore urge the Commission to consider reforms outside of the context of Company Registration that may address more directly and effectively the unique needs and circumstances of the MBS and ABS markets. Securities Act Concepts General. PSA's Mortgage and Asset-Backed Securities membership equally appreciates the continuing challenge for the Commission to adapt the disclosure framework of the Securities Act to developments and innovation in the primary markets, while ensuring that investors receive full and fair disclosure in a manner and at a time that allows for informed decision-making. The Commission's pending initiatives concerning capital formation present a unique opportunity to address these challenges in a manner that adequately accounts for the unique requirements of MBS and ABS. In the past several years, market participants have identified and worked with the Staff to resolve a number of securities regulatory issues of particular significance to the MBS/ABS markets. These issues have arisen in connection with, among other things, the desire to clarify the circumstances in which MBS/ABS research reports may be circulated without resulting in prohibited "market conditioning" or "gun jumping" activity; the use of "computational materials" and related term sheets to communicate essential collateral and structural information to investors and potential investors in MBS and ABS offerings; the distribution of preliminary prospectuses; and the treatment of re-securitization transactions, among others. Although PSA recognizes the substantial efforts by the Staff to address such issues consistent with the requirements of the securities laws, the Staff's positions on a number of these significant regulatory questions has not been wholly adequate to accommodate the legitimate and sometimes unique business needs of the MBS/ABS markets. In particular, the Staff has imposed a number of conditions and restrictions in connection with its no-action or other relief that unnecessarily burden issuers and underwriters and otherwise interfere significantly with the efficient distribution of securities and information in the MBS/ABS markets. In PSA's view, many of the unnecessarily restrictive and burdensome requirements currently imposed on MBS/ABS issuers and underwriters reflect the difficulty of fitting these securities into a regulatory framework that, as discussed above, was largely developed prior to the existence of the MBS/ABS markets. Many of the traditional views underlying the existing federal securities law regime regarding the nature of the offering process and the information relevant to investors do not apply in these markets. In particular, the distinctive features of the MBS and ABS markets render it essential that asset originators, underwriters and investors engage in an iterative structuring process that differs significantly from the process for offering most other securities. In light of these considerations, PSA hopes to use the Commission's pending initiatives regarding capital formation and the securities offering process to work with the Staff to identify steps that can be taken to address more effectively the needs of the MBS/ABS markets. Our specific comments in several key areas are provided below. Quality of Ongoing Disclosure. PSA firmly believes that the Commission should work to rationalize and codify the nature of the ongoing disclosure requirements applicable to MBS/ABS issuers to reflect the differences between the categories of information relevant to MBS/ABS investors on an ongoing basis and those relevant to other types of securities investor. PSA has considered whether the existing disclosure system for MBS/ABS could adequately be improved simply by modifying the instructions to Forms S-3 and S-11 and the related provisions of Regulation S-K in a manner that would eliminate inapplicable provisions and otherwise more appropriately adapt these forms and rules to the realities of the MBS/ABS market. PSA's view is that such incremental modifications would be difficult to implement, would be confusing to apply and would not sufficiently resolve existing problems. Instead, PSA would urge the Commission to consider promulgating a new regulation specifically designed to create a disclosure system that meets the unique requirements of the MBS/ABS market and better serves the needs of MBS/ABS investors, issuers and underwriters. Approaching the matter de novo, with full participation of all market participants, is most likely to achieve a reform that will serve the interests of investors, while enabling the market to operate in a more efficient fashion. Closely related to the disclosure system are the reporting requirements under the Exchange Act as they apply to MBS/ABS. In connection with any reform of the MBS/ABS disclosure system, PSA suggests that the Commission also consider a parallel reform of the Exchange Act reporting system as applied to MBS/ABS. The inapplicability of many of the requirements of the Exchange Act continous reporting rules to MBS/ABS is evidenced by the fact that virtually every registrant seeks either an exemptive order or a no- action letter to relieve it of inappropriate reporting requirements. This process alone consumes significant time of both the Staff and registrants and should be replaced with a rule of general applicability. A fundamental problem with the existing reporting system is demonstrated by the fact that most registrants "deregister" at the earliest possible opportunity, not because they wish to stop supplying information to investors but because they wish to avoid liability for information over which they have no control. An issuance of MBS/ABS by its nature is a stand-alone structure. Once the securities have been sold, information about the registrant (which often is itself a special purpose entity that exists only to bring together pools of assets and securitize them) is immaterial to investors. What investors and the secondary market need is information about the performance of the pool of assets. This typically is supplied by filing copies of the periodic reports that the trustee is required to send to investors. These reports in turn incorporate information provided by the servicer. All of the relevant information is internal to the pool of assets and is generated by entities, such as the trustee and servicer, whose function in the transaction is to provide services to the investors. The current system does not adequately serve the interests of participants in the secondary market, who need as much current information as possible about the performance of the pools of assets underlying MBS/ABS. This concern is shared broadly by such participants, including investors and broker/dealers. Accordingly, PSA would propose that the Commission consider adopting rules to replace, for MBS/ABS, the reporting requirements currently applied under the Exchange Act with a requirement (a) that all transaction documents require the trustee or servicer to report to investors at least a prescribed minimum set of information no less often than or shortly following each payment date on the securities and (b) that all such information provided to investors be made available by the trustee or servicer on request to any requester (which requirement could be met by making such information generally available to the public, either directly or through third-party data providers). Compliance with these requirements should obviate the need for filing such information under the Exchange Act, although PSA would urge that registrants (including issuers whose securities are already outstanding) that satisfy these requirements should still be considered reporting companies for technical reasons (e.g., eligibility to use Form S-3 and the availability of Rule 139). Informing Investors: Timing; Limitations on Written Communications. A. Term Sheets. In many respects, existing rules relating to the offering of MBS/ABS have the effect of constricting the flow of relevant information to investors, especially to the sophisticated institutional investors who make up the vast bulk of the market for these securities. A number of pending problems in this area could be addressed as part of the Commission's broader consideration of reforms to the capital formation process. Many of these stem from general Section 5 prohibitions on the distribution of written non-prospectus communications. PSA believes that one of the principal goals of regulatory reform should be enhancement of the ability of asset originators, underwriters and investors to work together to achieve the most efficient structures for MBS/ABS offerings without artificial and unnecessary constraints under the federal securities laws on the dissemination of computational materials, term sheets and other communications designed to facilitate the structuring process. In the MBS/ABS market broker-dealers and issuers attempt to structure their offerings to meet particular investor needs and constantly changing market conditions. MBS/ABS offerings are typically divided into a number of separate classes of securities, with cash flows of principal and interest in the underlying assets allocated among the classes according to specified payment risks. Unlike a going concern that issues debt or equity, the key characteristics of each MBS/ABS transaction essentially are invented in response to investors and the market. The demands of the institutional investor market, coupled with the inherent quantitative nature of MBS/ABS collateral and structural information, require that underwriters of MBS/ABS be able to circulate a brief description of the economic features of a specific transaction to institutional investors before the final prospectus supplement is distributed. Consistent with the views previously expressed by PSA's Corporate Bond Division, we believe that Commission (even if a more extensive reform of the MBS/ABS regulatory system is not undertaken) should consider promulgating a rule that makes circulation of such a term sheet possible without violating the prospectus rules, as long as a complete prospectus is delivered to the investor in connection with the consummation of any sale. B. Preliminary Prospectuses. PSA believes that requirements governing the timing of distribution of preliminary and final disclosure materials in the context of MBS/ABS offerings should be revisited in light of the practical limitations on the ability of underwriters to prepare in a timely fashion materials that are both responsive to investor needs and consistent with the requirements of the federal securities laws. Preparation of a "red herring" preliminary prospectus addressing in detail all aspects of a possible transaction is not a feasible or desirable means in every case to provide important information to investors or to bring securities to market. Rule 15c2-8 substantially predates the evolution of the MBS and ABS markets in their current form, as well as the current widespread availability of the Commission's shelf registration rule. In general, PSA believes that the application of Rule 15c2-8(b) to MBS and ABS offerings (regardless of whether made pursuant to a shelf registration statement) is not necessary to achieve the rule's policy objectives. Although such offerings generally involve an issuer which, at the time of the offering, has not been filing reports pursuant to Section 13(a) or 15(d), the absence of such reports is merely a reflection of the difference between the MBS and ABS markets and the traditional markets for debt and equity securities, and should not be construed to imply that the offering falls into the "new or speculative" category that originally led the Commission to adopt the rule. Moreover, the features of an MBS or ABS offering, particularly its structure, evolve throughout the offering process, often until shortly before the closing of the transaction. As a result, a preliminary prospectus typically could not provide much of the critical information that is expected by investors and, indeed, even a final prospectus, reflecting structural and other changes that occur up until the moment of pricing, must be prepared under considerable time constraints. Investors have sought other, more timely and effective means of obtaining the information they regard as essential in arriving at informed investment decisions, such as through the distribution of computational materials. As described above, PSA believes that similar benefits would accrue from a liberalization of the use of other forms of written communication in the MBS and ABS markets, including term sheets and other structuring information. In light of these considerations, PSA believes that the Commission should codify through specific rulemaking the basic policy set forth in the Staff's existing no-action position concerning the application of Rule 15c2-8(b) to MBS and ABS14; namely, that no preliminary prospectus need be delivered at least 48 hours prior to the sending of a confirmation, as long as a final prospectus is sent or given to a purchaser prior to or at the same time a confirmation is sent. C. Computational Materials. PSA believes that the market and the interests of all participants would best be served by adoption of a rule that replaced the current burdensome and untargeted system of filing certain computational materials and term sheets by a system that greatly liberalizes the ability to send to potential investors a wide range of information without a requirement that it be filed, so long as the prospectus (or prospectus supplement) includes indicative materials covering, with respect to the final structure of the transaction, the topics and types of data addressed in those preliminary materials. If only on the basis of practicality and cost, the formal disclosure document can not and should not include every item sent to every potential investor about every possible structure. Ready distribution of term sheets and other information would respond most directly to the expressed need of potential investors to obtain an early and meaningful understanding of proposed transactions. The market can do a better job of informing investors (and getting reactions from investors to possible structures) on a timely basis without the procedural burdens of the existing system - and the formal offering documents can be better focused on providing useful information. D. Information Relating to Underlying Assets. A particular problem under the current disclosure system arises in connection with certain MBS/ABS transactions in which some (but not necessarily all) investors seek access to voluminous information about the underlying assets. This is particularly characteristic of securitized offerings of commercial mortgage loans, in which some institutional investors, even though the securities are being publicly offered, wish to perform their own due diligence on the underlying loans and real properties as if they were purchasing an interest in those assets directly. Such investors often seek access to third-party documentation held by the issuer and underwriters, such as appraisals, environmental reports, property managers' reports and engineering reports. Existing law makes unclear the ability of issuers and underwriters to furnish such materials or their liability for doing so. It would seem appropriate, if individual investors wish to have access to underlying information that the issuer has not deemed requires disclosure in the prospectus (or has covered by summarizing in the prospectus), for such investors to have that option, so long as any prospective investor is given the same access upon request. However, there should be no requirement for the issuer to include such material in the prospectus or file it with the Commission, or for either the issuer or the underwriters to be required to assume liability under the Securities Act. E. Electronic Access to Transaction Information. Another issue under current rules is the desire of investors to have electronic access to information about the pools of assets underlying a proposed issue of MBS/ABS at the earliest possible moment. For example, both investors and underwriters would like underwriters to be able to post information about the characteristics of underlying pools on electronic bulletin boards, such as Bloomberg, no later than when the prospectus is delivered to the underwriters, or in some cases even earlier. This information is contained in the prospectus (and currently is also furnished by some issuers to investors in an electronic medium together with the prospectus). It is generally not practicable to post the entire prospectus on such a bulletin board or to establish a hyper-text link to another site containing the prospectus. The current rules should be reformed to make clear that such a posting is permissible, as long as investors can obtain the entire prospectus upon request. It would also be desirable to make it possible for issuers to post on the same bulletin boards the computer models they have used to produce information in the prospectus, such as the effect of various interest rate and prepayment scenarios on yields. This would make it easier for prospective investors to model other scenarios that better fit the investor's own assumptions or needs. F. Research Reports. The state of the law currently is unclear as to the ability of broker-dealers to rely on current Rule 139 as the basis for permitting the distribution of research reports and similar published information concerning MBS and ABS offerings. As a result, broker-dealers face significant practical and interpretive uncertainties in attempting to distinguish normal or routine MBS and ABS research publications from those which might be deemed to condition the market for an upcoming offering. Analogous to its views on Rule 15c2-8(b), PSA does not believe that the absence of an Exchange Act reporting status for MBS and ABS issuers_a circumstance that relates more to the structure of MBS/ABS offerings than it does to any inherent speculative quality of the securities involved_should prevent the market from benefiting from widespread research coverage of both new and seasoned MBS and ABS issues, and in particular those that qualify for an investment-grade rating. PSA believes that the Commission should use the opportunity of more general regulatory reform to establish a framework for distribution of MBS/ABS research materials that is consistent with concerns identified by PSA in the context of existing rules, with particular emphasis on eliminating formalistic prohibitions that limit the ability of underwriters to distribute accurate materials while engaging in their ordinary, ongoing business activities involving the structuring of MBS/ABS offerings. G. Resecuritizations. The state of the law currently is similarly unclear as to the ability of an issuer of MBS/ABS to include, as part of a pool of collateral, assets that are indirectly held through a securitization vehicle that has been the subject of a private placement or an earlier public offering. A variety of views expressed by members of the Staff to different issuers at different times has left market participants in a state of uncertainty. Any reform of the existing rules should address this issue and should eliminate artificial distinctions between securitized and unsecuritized assets. As long as there is full disclosure in the prospectus of relevant information about the assets underlying an issue of MBS/ABS (including any material disclosure about the effects that prior securitization may have on servicing, cash flows or other relevant matters), there seems no reason to raise obstacles to including assets that have already been securitized or to require registration or reregistration of the earlier transaction in which such assets were securitized. III. CONCLUSION PSA appreciates this opportunity to provide its views to the Commission. If it would be helpful to the Staff and the Commission, we would be most willing to make PSA staff and member firm personnel available to meet and discuss any of the points raised in this letter. Please address any questions or requests for additional information to Joseph W. Sack, George P. Miller or Sarah M. Starkweather of PSA, at 212-440-9400. Very truly yours, Stanley J. Becchetti Thomas K. Guba Chairman, PSA Corporate Bond Division Chairman, PSA Mortgage and Asset-Backed (Vice President, A.G. Edwards & Sons, Inc) Securities Division (Managing Director, Donaldson, Lufkin & Jenrette Securities Corporation) Arthur D. Hyde Lawrence E. Thomas Vice Chairman, PSA Corporate Bond Vice Chairman , PSA Mortgage and Division Asset-Backed Securities Division (Managing Director, Salomon Brothers Inc.) (Manager/General Partner, Edward Jones) cc: The Honorable Arthur Levitt, Chairman, Securities and Exchange Commission The Honorable Steven M. H. Wallman, Commissioner The Honorable Norman S. Johnson, Commissioner The Honorable Isaac Hunt, Jr., Commissioner Brian J. Lane, Director, Division of Corporation Finance David A. Sirignano, Associate Director, Division of Corporation Finance Anita Klein, Office of Chief Counsel, Division of Corporation Finance _______________________________ 1 PSA represents approximately 250 securities firms and banks that underwrite, trade and sell debt securities, both domestically and internationally. PSA's member firms include underwriters which participate in approximately ninety to ninety-five percent of the initial distribution and secondary market trading of corporate debt securities, including investment grade and non-investment grade corporate debt securities as well as mortgage and other asset-backed securities. More information about PSA is available on PSA's Internet home page at http://www.psa.com. 2 In order to gain a better and more detailed view of members' reactions to the Concept Release and the issues raised, PSA distributed a Questionnaire to 56 PSA member firms represented on the Corporate Bond Division Executive, Investment Grade Debt, High Yield Debt and Fixed Rate Capital Securities Committees. Comments in the first section of this letter are based upon Questionnaire responses received from a segment of these member firms, representing a broad spectrum of participants in the traditional corporate debt markets, as well as the input of a special Task Force established to respond to the Concept Release. The Questionnaire enabled PSA member firms to focus on the essential issues raised by the Concept Release and, thereby, formulate what PSA believes are innovative opportunities to change salient elements of the current regulatory framework under the Securities Act of 1933. 3 PSA letter dated November 5, 1996 to Brian Lane, Director, SEC Division of Corporation Finance, regarding response to Staff request for suggestions concerning possible reforms of disclosure and reporting rules for mortgage- and asset- backed securities. 4 While the Commission may have been granted broad exemptive power by the National Securities Markets Improvements Act of 1996, certain of the changes that might result from Company Registration may not fall within this new exemptive authority. For example, it is unclear whether the Commission could eviscerate the private placement exemption provided by Section 4(2) of the Securities Act with the adoption of rules implementing Company Registration. 5 Underwriters, however, are much more likely to have an impact upon Exchange Act disclosure relating to (i) events not previously addressed in Exchange Act filings, but required in the registration statement, (ii) elaboration of prior disclosure and (iii) certain extraordinary situations. 6 See PSA's comment letter, dated October 16, 1996, in response to the Commission's release regarding Use of Electronic Media by Broker-Dealers, Transfer Agents and Investment Advisors for Delivery of Information (Release No. 33-7288). 7 For this purpose, PSA would consider a frequent issuer to be one that accesses the markets at least twice a year or maintains an active medium-term note program. 8 In this regard, PSA recognizes that the Staff of the Commission has granted no-action advice permitting underwriters of mortgage-backed and asset-backed securities to distribute written "computational materials" to prospective investors prior to the availability of a final prospectus (see Kidder, Peabody Acceptance Corporation I (May 20, 1994) and Public Securities Association (May 27, 1994)). Section II of this letter, reflecting the views of PSA's Mortgage and Asset-Backed Securities Division, in fact advocates an expansion of the circumstances in which written non-prospectus communications may be circulated. It is our view, however, that the unique and largely quantitative characteristics of mortgage and asset-backed securities, described at greater length in Section II, may be readily distinguished from investment grade debt and non-investment grade debt. 9 As discussed above, we note that the National Securities Markets Improvements Act of 1996 granted the Commission broad and general exemptive authority under both the Securities Act and the Exchange Act to conditionally or unconditionally exempt any person, security or transaction, or any class of the same, from any provision of the Securities Act or Exchange Act (except Section 15C of the Exchange Act) or any rule or regulation thereunder. 10 We note that the National Securities Markets Improvements Act of 1996, adding the definition of "qualified purchaser" to the Investment Company Act of 1940, used investment thresholds of $5 million for natural persons and $25 million for other persons. 11 See Resale of Restricted Securities; Changes to Method of Determining Holding Period of Restricted Securities under Rules 144 and 145 (Release No. 33-6862 (April 23, 1990)). 12 See Kidder, Peabody & Co., SEC No-Action Letter [1990-1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) 79,626 (Aug. 16, 1990) where the Staff reversed a prior position and permitted a broker-dealer acting as agent for an issuer in a medium-term note program to extend credit on notes of a particular tranche after the expiration of thirty days, even if sales of other medium-term notes by the broker-dealer continued. 13 Under these criteria, issuers would be required to: have registered at least one public offering under the Securities Act; have been reporting under the Exchange Act for two years; have a public float of at least $75 million; and have securities listed on the New York Stock Exchange, the American Stock Exchange or NASDAQ NMS. See footnote 11 of the Concept Release. 14 See Public Securities Association, SEC No-Action Letter on Asset Backed Securities, File No. TP 95-450 (December 15, 1995). PSA notes that certain technical issues and limitations on the scope of this no-action relief would need to be addressed in any rulemaking initiative. ------------------------------------------------------------------------------------------- Attachment PSA's CORPORATE BOND DIVISION EXECUTIVE COMMITTEE Stanley J. Becchetti, Chairman A.G. Edwards & Sons, Inc. Bart McDade Lehman Brothers Inc. Arthur D. Hyde, Vice Chairman Salomon Brothers Inc Kent B. Monypeny Morgan Keegan & Company, Inc. James J. Baldino BA Securities Richard W. Morton First Chicago Capital Markets Inc. Thomas E. Bernard Lehman Brothers Inc. Steven Bowman Vincent Murray Smith Barney Inc. ABN AMRO Securities (USA) Inc. Robert F. Campbell Sal Naro First Albany Corporation Bear, Stearns & Co. Inc. Louis S. Caro, Jr. Barry Nordstrand The Industrial Bank of Japan Piper Jaffray Inc. Nelson D. Civello Timothy O'Neill Dain Bosworth Incorporated Bear, Stearns & Co. Inc. Thomas S. Dillon Randall C. Outlaw Daiwa Securities America Inc. J.P. Morgan Securities Inc. Michael Evelyn Steven C. Rattner Deutsche Morgan Grenfell Donaldson, Lufkin & Jenrette Securities Corporation Alan M. Green Steve Renehan McFadden Farrell & Smith, L.P. Merrill Lynch & Co., Inc. Raleigh Hortenstine III Lewis A. Sachs Nations Securities Bear, Stearns & Co. Inc. Christopher T. Huff J. Hamilton Scherer, Jr. EVEREN Securities, Inc. Wheat First Butcher Singer William H. James Philip W. Seefried, Jr. Lazard Freres & Co. LLC CS First Boston Ronald G. Keenan Joseph P. Shea Chase Securities, Inc. Cantor Fitzgerald Securities Gregory F. Kiernan Michael Shea PaineWebber Incorporated J.C. Bradford & Co. Ferdinand Masucci James P. Sickling Morgan Stanley & Co. IncorporatedRaymond James & Associates, Inc. James F. Smith Freeman Securities Company, Inc. Salvatore J. Trani Garban Corporates Inc. Michael Walsh Chapdelaine Corporate Securities Inc. I. Ladd Weinberg Asiel & Co. Jon Winkelreid Goldman, Sachs & Co. Stephen W. Yarbrough Interstate/Johnson Lane Corporation