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September 18, 2015  

Buck Stops Where? CMBS Shops Must Choose

Commercial MBS issuers will soon have to decide which executive at their operations will personally vouch that deal information supplied to investors is accurate.

Under an SEC rule that takes effect Nov. 24, a senior executive must sign a one-page form saying that he has personally reviewed the prospectus of a transaction being floated and is familiar “in all material aspects” with the collateral assets, the deal’s structure and “all material underlying transaction agreements.”

The form goes on to say that the signer certifies that the prospectus and supporting documents don’t contain untrue statements or omit material information.

Industry lobbyists last year tried to persuade the SEC to permit the signer to stipulate that he is relying on information provided by other parties, because a transaction’s collateral can be contributed by multiple lenders. But the regulator wouldn’t budge on the wording, which is outlined in the latest version of “Regulation AB,” the SEC’s sweeping set of disclosure rules for all types of securitizations.

The rule is intended to force issuers to more closely scrutinize collateral and raise their credit standards, following extraordinary losses on residential MBS transactions during the market crash. Violations of the certification carry no criminal liability, but could leave signers personally liable to civil lawsuits by investors or to SEC charges of civil violations of securities law.

The form must be signed by the chief executive of a securitization’s “depositor” — the entity that registers the transaction with the SEC and transfers collateral mortgages from the originators to the securitization trust.

While the depositor is essentially a paper entity, it has a board of directors made up of executives from the securitization’s lead bank. In the past, the chief executive was usually a CMBS executive, but sometimes has been a more-senior officer — such as the overall head of securitization or a risk officer. But going forward, because of the certification requirement, that post will have to be given to an executive working closely on the transaction. The most likely candidates are CMBS group heads or senior executives on their teams.

“Clearly, no one expects that Jamie Dimon will be signing the certification for J.P. Morgan deals,” said one industry attorney. “It will have to be somebody more familiar with the ins and outs of the actual deals.”

That will mean more time and effort for the selected executive and for other bankers delegated with performing some of the due diligence and briefing that person. “Signers of the CEO certification will need to consider what level of diligence will provide them with sufficient familiarity with the overall transaction to be comfortable making the required certifications,” said Janet Barbiere, a partner at law firm Orrick Herrington.

Some CMBS bankers are upset about the requirement, arguing that it’s unfair to subject them to personal liability for what should be a corporate responsibility.

“If something goes wrong in one of these deals — and you never really know everything that’s going to happen over the 10-year life of a loan — the SEC will come after you personally with all guns blazing,” said one group head at a major bank.

Another senior CMBS executive was less concerned, saying he assumed his employer will indemnify him against personal responsibility. What’s more, he added, “I have a high comfort that the descriptions of the loans we’re providing in the prospectus are accurate.”

The certification, required for public offerings, is one of a host of changes required under the Regulation AB amendments, which were finalized last year. Three conduit shops — Bank of America, Deutsche Bank and J.P. Morgan — participated in a pilot program with the SEC to devise model versions of shelf registrations that would comply with the changes. Those shelf registrations contain the boilerplate language to be used in the prospectus and the pooling and servicing agreement, with blank spaces to be filled in later with deal-specific information.

The templates, finalized in the past several weeks, followed months of discussions between the lenders and the SEC that clarified uncertainties about the changes and the exact wording to use. But there was virtually no discussion of the language for the certification, because the SEC had previously indicated it would not change the draft wording for the certification that it had unveiled last year.