In response to a submission by the Securities Industry and Financial Markets Association (SIFMA), the staff of the SEC's Office of the Chief Accountant (OCA) has indicated that it would not object to a conclusion by a transferor (securitizer) of commercial real estate loans that use of the "third-party purchaser" option permitted under the Dodd-Frank risk retention rules does not, in and of itself, jeopardize the transfer qualifying for de-recognition (sale accounting) in the transferor's financial statements. In a letter dated December 4th, SIFMA confirmed its understanding of the SEC staff's position based on discussions held in November.
Prior to the SEC staff's clarification, it was uncertain whether securitizations involving the third-party purchaser option would satisfy one of the conditions for sale accounting under ASC 860, Transfers and Servicing. Under the Dodd-Frank rules, a third-party purchaser can agree to purchase and hold a prescribed interest in the securitization trust (sometimes referred to as the structure's "B-piece") for an extended period of time, thereby allowing the transferor (sponsor) to satisfy all or a portion of its "risk retention" obligation. During this extended period, the third-party purchaser is precluded from selling the prescribed interest. Accordingly, prior to the clarification by the OCA staff, it was unclear whether these transactions met the sale accounting requirements in ASC 860, specifically the requirement for all third-party holders of beneficial interests issued in a securitization to have the right to freely pledge or exchange their investment.
The SEC staff reached its view based on a broad array of considerations, which were not limited to its interpretation of the relevant provisions in ASC 860. The SEC staff considered the unique facts and circumstances described in SIFMA's submission, which arose as a result of a change in regulation in the securitization market, as well as the stated regulatory intent of the third-party purchaser option, which is to balance two overriding goals - namely, not to disrupt B-piece investor arrangements commonly seen in the CMBS market, while at the same time ensuring that risk retention promotes good underwriting. As a result, it would be inappropriate to extend the SEC staff's conclusions to other fact patterns.
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