This proposed amendment would limit use of a shortform shelf registration statement for assetbacked securities to offerings to large sophisticated and experienced investors without, we believe, causing undue detriment to the liquidity of the assetbacked securities market.\69\ In keeping with that purpose and given the unique nature and structure of assetbacked securities, we are proposing at this time only to include qualified institutional buyers rather than also including institutional accredited investors as suggested by the commenter in 2004.
\69\ We are aware of two types of assetbacked offerings that may not meet these new criteria, unit repackaging and securitization of insurance funding agreements but believe that they can be effectively registered using Form S1 instead of Form S3.

2. Mortgage Related Securities and Securities Act Rule 415

In addition to being shelf eligible by meeting the requirements of Form S3, a particular subset of ABS may also be shelf eligible by meeting the requirements in Securities Act Rule 415,\70\ which enumerates the securities which are permitted to be offered on a continuous or delayed basis. Among those securities are ``mortgage related securities, including such securities as mortgagebacked debt and mortgage participation or pass through certificates.'' \71\ By specifically referring to mortgage related securities, Rule 415 has permitted such securities to be offered on a delayed basis, even if the offering cannot be registered on the Form S3 short form registration statement because it does not meet the eligibility requirements of Form S3.
\70\ 17 CFR 230.415.

\71\ 17 CFR 230.415(a)(vii).

Currently, the term ``mortgage related securities'' is defined by Section 3(a)(41) of the Exchange Act \72\ as, among other things, ``a security that is rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization.'' Given that the term mortgage related securities also depends on a ratings component, it would be a logical extension of our amendments here to amend the Rule 415 reference to a mortgage related security to add that the sale of such security must be in compliance with the additional requirements that initial sales are made to qualified institutional buyers and initial and subsequent sales are made in certain minimum denominations. Given that reliance on security ratings could just as easily impact an investor's investment decision in mortgagebacked securities as it could for other assetbacked securities,\73\ we believe it is appropriate that mortgagebacked securities be treated the same as all assetbacked securities.\74\ \72\ 15 U.S.C. 78c(a)(41). Section 3(a)(41) was added by the Secondary Mortgage Market Enhancement Act of 1984 (SMMEA) (Pub. L. 9844098 Stat. 1690). In 1984, contemporaneous with the enactment of SMMEA, the Commission amended Rule 415, which is known as the shelf rule, to allow SMMEAeligible mortgage related securities to use the shelf offering process. See Shelf Registration, Release No. 336499 (Nov. 17, 1983) [48 FR 5289].
\73\ The President's Working Group has noted that one of the principal underlying causes of the current global market turmoil relating to the mortgagebacked securities industry was the credit rating agencies' assessments of subprime residential mortgagebacked securities and other complex structured credit products that held residential mortgagebacked and other assetbacked securities. See Section I of the Policy Statement on Financial Market Developments. See n. 24 above.
\74\ Indeed, mortgagebacked securities are merely a type of, or subset of, assetbacked securities. We believe that there have not been any recent offerings that have relied on Rule 415(a)(vii) for shelf eligibility rather than through meeting the requirements of Form S3.

Therefore, under the proposed revision to Rule 415, mortgagebacked securities, having the same characteristics as mortgage related securities under the Section 3(a)(41) definition, regardless of the security
[[Page 40110]]
rating, could be offered on a delayed basis provided that:

1. Form S3 and Form F3

Forms S3 and F3 are the ``short forms'' used by eligible issuers to register securities offerings under the Securities Act. These forms allow eligible issuers to rely on reports they have filed under the Exchange Act to satisfy many of the disclosure requirements under the Securities Act. Form S3 eligibility for primary offerings also enables form eligible issuers to conduct primary offerings ``off the shelf'' under Securities Act Rule 415. Rule 415 provides considerable flexibility in accessing the public securities markets in response to changes in the market and other factors. Issuers that are eligible to register these primary ``shelf'' offerings under Rule 415 are permitted to register securities offerings prior to planning any specific offering and, once the registration statement is effective, offer securities in one or more tranches without waiting for further Commission action. To be eligible to use Form S3 or F3, an issuer must meet the form's eligibility requirements as to registrants, which generally pertain to reporting history under the Exchange Act,\77\ and at least one of the form's transaction requirements.\78\ One such transaction requirement permits registrants to register primary offerings of nonconvertible securities if they are rated investment grade by at least one NRSRO.\79\ Instruction I.B.2 provides that a security is ``investment grade'' if, at the time of sale, at least one NRSRO has rated the security in one of its generic rating categories, typically the four highest, which signifies investment grade. \77\ See General Instruction I.A to Forms S3 and F3.
\78\ See General Instruction I.B to Forms S3 and F3.

\79\ See General Instruction I.B.2 to Forms S3 and F3.

The Form S3 investment grade requirement was originally proposed by
[[Page 40111]]
the Commission in a 1982 release.\80\ Prior to adopting Form S3, the Commission had previously provided a short form registration statement on Form S9, which permitted the registration of issuances of certain high quality debt securities.\81\ The criteria for use of Form S9 related primarily to the quality of the issuer.\82\ While these eligibility criteria delineated the type of issuer of high quality debt for which Form S9 was intended, the Commission believed that certain of its requirements may have overly restricted the availability of the form.\83\ The Commission believed that security ratings were a more appropriate standard on which to base Form S3 eligibility than specified quality of the issuer criteria, citing letters from commenters indicating that short form prospectuses are appropriate for investment grade debt because such securities are generally purchased on the basis of interest rates and security ratings.\84\
\80\ See Reproposal of Comprehensive Revision to System for Registration of Securities Offerings, Release No. 336331 (Aug. 6, 1981) [46 FR 41902] (``the S3 Proposing Release'').
\81\ Form S9 was rescinded on December 20, 1976, because it was being used by only a very small number of registrants. The Commission believed the lack of usage was due in part to interest rate increases which made it difficult for many registrants to meet the minimum fixed charges coverage standards required by the form. Adoption of Amendments to Registration Forms and Guide and Rescission of Registration Form, Release No. 335791 (Dec. 20, 1976) [41 FR 56301].
\82\ The criteria included net income during each of the registrant's last five fiscal years, no defaults in the payment of principal, interest, or sinking funds on debt or of rental payments for leases, and various fixed charge coverages. The use of fixed charges coverage ratios, typically 1.5, was common in state statutes defining suitable debt investments for banks and other fiduciaries. \83\ See the S3 Proposing Release.

\84\ See the Integrated Disclosure Release.

Today we are proposing to revise the transaction eligibility criteria for registering primary offerings of nonconvertible securities on Forms S3 and F3. As proposed, the instructions to these forms would no longer refer to security ratings by an NRSRO as a transaction requirement to permit issuers to register primary offerings of nonconvertible securities for cash. Instead, these forms would be available to register primary offerings of nonconvertible securities if the issuer has issued (as of a date within 60 days prior to the filing of the registration statement) for cash more than $1 billion in nonconvertible securities, other than common equity, through registered primary offerings over the prior three years.\85\ \85\ See proposed General Instruction I.B.2 of Forms S3 and F 3. We are also proposing to delete Instruction 3 to the signature block of Forms S3 and F3.

We are proposing to revise the form criteria using the same method and threshold by which the Commission defined an issuer of non convertible securities, other than common equity, that does not meet the public equity float test as a ``wellknown seasoned issuer.'' \86\ Similar to our approach with wellknown seasoned issuers, we believe that having issued $1 billion of registered nonconvertible securities over the prior three years would lead to a wide following in the marketplace. These issuers generally have their Exchange Act filings broadly followed and scrutinized by investors and the markets.\87\ The Commission intends for the number of issuers eligible under the proposed criteria to register primary offerings of nonconvertible securities on Forms S3 and F3 to not be significantly reduced, or to differ significantly from, the number of those eligible under the current form requirements.\88\ Using the $1 billion threshold, we preliminarily believe that for issuances that have occurred thus far this year, the proposed change would result in approximately six issuers filing on Form S1 instead of on a shortform registration statement. This approach is designed to provide assurance that eligible issuers are followed by the markets such that it is appropriate to allow forward incorporation by reference and delayed offering. We realize that it is now possible that some offerings of noninvestment grade securities, such as highyield bonds (also known as ``junk bonds'') may be registered for sale on Form S3.
\86\ See Securities Offering Reform, Release No. 338591 (Jul. 19, 2005) [70 FR 44722]. Rule 405 under the Securities Act defines a ``wellknown seasoned issuer'' as an issuer that meets the
registrant requirements of Form S3 or F3, and either has a worldwide market value of its outstanding voting and nonvoting common equity held by nonaffiliates of $700 million or more, or has issued in the last three years, in registered offerings, at least $1 billion aggregate principal amount of nonconvertible securities in primary offerings for cash. 17 CFR 230.405.
\87\ See Securities Offering Reform, Release No. 338501 (Nov. 3, 2004) [69 FR 67392].
\88\ We preliminarily anticipate that under the proposed threshold some additional high yield debt issuers would be eligible to use the Forms.

These issuers also would have to satisfy the other conditions of the form eligibility requirement. In determining compliance with this threshold:

2. U.S. GAAP Reconciliation Requirements

The Commission's rules relating to U.S. GAAP reconciliation requirements for foreign filers also rely on ratings. Forms F1, F3, and F4 under the Securities Act permit foreign private issuers registering offerings of investment grade securities to provide financial information in accordance with Item 17 of Exchange Act Form 20F. Item 17 requires foreign private issuers to reconcile their financial statements and schedules to U.S. GAAP if they are prepared in accordance with a basis of accounting other than U.S. GAAP or International Financial Reporting Standards as issued by the International Accounting Standards Board. This reconciliation need only include a narrative discussion of reconciling differences, a reconciliation of net income for each year and any interim periods presented, a reconciliation of major balance sheet captions for each year and any interim periods, and a reconciliation of cash flows for each year and any interim periods. Item 18 of Form 20F, by contrast, requires that a foreign private issuer provide all of the information required by U.S. GAAP and Regulation SX, in addition to the reconciling information for the line items specified in Item 17.\92\ Foreign private issuers of investment grade rated securities are permitted to provide the lessextensive U.S. GAAP reconciliation disclosure pursuant to Item 17 in registration statements and annual reports.
\92\ See also Foreign Issuer Reporting Enhancements, Release No. 338900 (Feb. 29, 2008) [73 FR 13404] at Section III.A.

The definition of ``investment grade'' is the same as in the Form S3 eligibility requirements. A security is ``investment grade'' if, at the time of sale, at least one NRSRO has rated it in one of its generic rating categories that signifies investment grade. Also, a foreign private issuer conducting a private placement of investment grade securities under Regulation D can provide Item 17 information to the extent the issuer is able to do so in a registration statement.\93\ \93\ Rule 502 requires a foreign private issuer to provide the same kind of information the issuer would be required to include in a registration statement on a form the issuer would be eligible to use if any sales are made to investors who are not accredited investors. See 17 CFR 230.502(b)(2)(i)(C).

The Commission recently proposed to require foreign private issuers offering investment grade securities, among others, to file financial statements that comply with the more complete Item 18 level of reconciliation, thus eliminating the option of providing Item 17 financial disclosure.\94\ The Commission reasoned that ``a reconciliation that includes footnote disclosures required by U.S. GAAP and Regulation SX \95\ can provide important additional information.'' \96\ The Commission specifically requested comment, however, on whether foreign private issuers should continue to be permitted to provide Item 17 financial disclosure for offerings of, and periodic reporting relating to, investment grade securities.\97\ We now also propose to remove from these requirements the components relying on investment grade ratings and instead permit foreign private issuers to comply with the less extensive U.S. GAAP reconciliation requirements under Item 17 in a registration statement or private offering document if the issuer would meet the proposed Form F3 eligibility requirements (i.e., if the issuer has issued (as of a date within 60 days prior to the filing of the registration statement) for cash more than $1 billion in non convertible securities, other than common equity, through registered [[Page 40113]]
primary offerings over the prior three years).
\94\ See Release No. 338900.
\95\ 17 CFR 210.101 et seq.
\96\ Release No. 338900 at Section III.A.
\97\ See Request for Comment No. 23 of Release No. 338900. Request for Comment

3. Form F9

Form F9 allows certain Canadian issuers to register investment grade debt or investment grade preferred securities that are offered for cash or in connection with an exchange offer, and which are either nonconvertible or not convertible for a period of at least one year from the date of issuance.\98\ Under the Form's requirements, a security is rated ``investment grade'' if it has been rated investment grade by at least one NRSRO, or at least one Approved Rating Organization (as defined in National Policy Statement No. 45 of the Canadian Securities Administrator).\99\ This eligibility requirement was adopted as part of a 1993 revision to the multijurisdictional disclosure system originally adopted by the Commission in 1991 in coordination with the Canadian Securities Administrators.\100\ Consistent with the Commission's proposal to reduce reliance on security ratings in its rules and regulations the Commission is proposing to eliminate the eligibility requirement of Form F9 that allows Canadian issuers to register certain debt and preferred securities if they are rated investment grade by at least one NRSRO. As with our proposals regarding Forms S3 and F3, this requirement would be replaced by a requirement that the issuer has issued in the three years immediately preceding the filing of the Form F9 registration statement at least $1 billion of aggregate principal amount of debt or preferred securities for cash in primary offerings registered under the Securities Act.
\98\ Securities convertible after a period of at least one year may only be convertible into a security of another class of the issuer.
\99\ See General Instruction I.A to Form F9.
\100\ See Amendments to the Multijurisdictional Disclosure System for Canadian Issuers, Release No. 337025 (Nov. 3, 1993) [58 FR 62028]. See also Multijurisdictional Disclosure and Modifications to the Current Registration and Reporting System for Canadian Issuers, Securities Act Release No. 336902 (Jun. 21, 1991) [56 FR 30036].

The proposed revision would not change a Canadian issuer's ability to use Form F9 to register debt or preferred securities meeting the requirements of current General Instruction I.A if the securities are rated ``investment grade'' by at least one Approved Rating Organization (as defined in National Policy Statement No. 45 of the Canadian Securities Administrators). While the proposal would still permit Canadian issuers to register certain securities rated investment grade by an Approved Rating Organization, the Commission believes this approach is appropriate and consistent with the Commission's intent in adopting the multijurisdictional disclosure system to look to form eligibility requirements under Canadian rules.\101\ To the extent that the Canadian securities regulators revise similar requirements to remove references to investment grade ratings, we may revise Form F9 to mirror those revisions.
\101\ See Release No. 336902, section II.
Request for Comment

a. Forms S4 and F4 and Schedule 14A

Issuing investment grade securities confers benefits that extend to other forms and rules as well. Forms S4 and F4 allow registrants that meet the registrant eligibility requirements of Form S3 or F3 and are offering investment grade securities to incorporate by reference certain information.\102\ Similarly, Schedule 14A permits a registrant to incorporate by reference if the Form S3 registrant requirements are met and the registrant is offering investment grade securities.\103\ Because the Commission proposes to change the eligibility requirements in Forms S3 and F3 to remove references to ratings by an NRSRO, the Commission believes the same standard should apply to the disclosure options in Forms S4 and F4 based on Form S3 or F3 eligibility. That is, a registrant will be eligible to use Forms S4 and F4 to register nonconvertible debt or preferred securities if the issuer has issued (as of a date within 60 days prior to the filing of the registration statement) for cash more than $1 billion in nonconvertible securities, other than common equity, through registered primary offerings over the prior three years. Similarly, we propose to amend Schedule 14A to refer simply to the requirements of General Instruction I.B.2. of Form S3, rather than to ``investment grade securities.''
\102\ See General Instruction B.1 of Forms S4 and Form F4. \103\ See Note E and Item 13 of Schedule 14A.

b. Securities Act Rules 138, 139 and 168

The reliance on security ratings is also evident in other Securities Act rules. Rules 138, 139, and 168 under the Securities Act provide that certain communications are deemed not to be an offer for sale or offer to sell a security within the meaning of Sections 2(a)(10) \104\ and 5(c) \105\ of the Securities Act when the communications relate to an offering of nonconvertible investment grade securities. These communications include the following: \104\ 15 U.S.C. 77b(a)10.
\105\ 15 U.S.C. 77e(c).

The Commission proposes to revise Rules 138, 139, and 168 to be consistent with the proposed revisions to the eligibility requirements in Forms S3 and F3 since in order to rely on these rules the issuer must either satisfy the public float threshold of Form S3 or F [[Page 40114]]
3, or issue nonconvertible investment grade securities as defined in the instructions to Form S3 or F3 as proposed to be revised. Request for Comment

c. Item 1100 of Regulation AB

Under the existing Item 1100(c) of Regulation AB,\106\ if a significant obligor \107\ meets the registrant requirements for Form S 3 or Form F3 and the pool assets relating to the obligor are non convertible investment grade rated securities, then an ABS issuer's filings may include a reference to the financial information of the obligor rather than presenting the full financial information of the obligor. The Commission now proposes to amend this provision of Item 1100(c) to remove the ratings reference and permit incorporation by reference of third party financial statements if the third party meets the registrant requirements of Form S3 and the pool assets relating to such third party are nonconvertible securities, other than common equity, that were issued in a primary offering for cash that was registered under the Securities Act. The Commission believes that, for the most part, nonconvertible securities that were issued in a registered offering constitute higher quality securities than securities issued under an exemption under, for example, Securities Act Rule 144A, and then subsequently exchanged for registered securities because such securities are subject to the Securities Act.
\106\ 17 CFR 229.1100(c).
\107\ The term ``significant obligor'' is defined in Item 1101(k) of Regulation AB [17 CFR 229.1101(k)].
Request for Comment

d. Items 1112 and 1114 of Regulation AB

Items 1112 and 1114 of Regulation AB require the disclosure of certain financial information regarding significant obligors of an asset pool and significant credit enhancement providers relating to a class of assetbacked securities. An instruction to Item 1112(b)\108\ provides that no financial information on a significant obligor, however, is required if the obligations of the significant obligor as they relate to the pool assets are backed by the full faith and credit of a foreign government and the pool assets are investment grade securities. Item 1114 of Regulation AB contains a similar instruction that relieves an issuer from providing financial information when the obligations of the credit enhancement provider are backed by a foreign government and the enhancement provider has an investment grade rating. Under both Items 1112 and 1114, to the extent that pool assets are not investment grade securities, information required by paragraph (5) of Schedule B of the Securities Act may be provided in lieu of the required financial information.\109\
\108\ Instruction 2 to 17 CFR 229.1112(b).
\109\ Paragraph 5 of Schedule B requires disclosure of three years of the issuer's receipts and expenditures classified by purpose in such detail and form as the Commission prescribes.

We are now proposing to revise these instructions so that these exceptions based on investment grade ratings to the requirements of Items 1112 and 1114 of Regulation AB would no longer apply and information required by paragraph (5) of Schedule B would be required in all situations when the obligations of a significant obligor are backed by the full faith and credit of a foreign government. We are not aware of any benchmark comparable to an investment grade rating here and the requirement would not impose substantial costs or burdens to an ABS issuer, as such information should be readily available. Request for Comment

As noted above, in 1981 the Commission issued its policy on disclosure of security ratings, articulated in Item 10(c) of Regulation SK,\110\ that permits, but does not require, issuers to disclose in Commission filings security ratings assigned by credit rating agencies to classes of debt securities, convertible debt securities, and preferred stock.\111\ In 1994, the Commission proposed to change from permissible to mandated disclosure of security ratings.\112\ While the Commission did not adopt mandatory disclosure at that time, it signaled concerns relating to adequate disclosure to the markets regarding new financial products and security ratings. In the proposal we noted the dramatic proliferation in the types of securities offered in the marketplace with the development of the market for mortgage and asset backed securities and other highly structured or derivative financial obligations. In response to the growth of this market, we adopted new and amended rules and forms

FOR FURTHER INFORMATION CONTACT Steven Hearne, Eduardo Aleman, or Katherine Hsu, Special Counsels in the Office of Rulemaking, Division of Corporation Finance, at (202) 5513430, 100 F Street NE., Washington, DC 20549.