Client Alert

Sarbanes-Oxley Act Certifications of Asset-Backed Securities Issuers


The Securities and Exchange Commission ("SEC") has recently adopted regulations (the "Rules") specifying the requirements under Section 302(a) of Sarbanes-Oxley Act of 2002 (the "Act"), which require a public issuer's principal executive and financial officers each to certify the financial and other information contained in such issuer's quarterly and annual reports. (See our update SEC Adopts Rule Requiring Accelerated Filing of Quarterly and Annual Reports and Requires Disclosures Regarding Website Access, September 2002.) The Rules contain special provisions that provide for asset-backed issuers regarding compliance with the certification requirement.

Definition an Asset-Backed Issuer

For purposes of the Rules, "asset-backed issuer" means any issuer whose reporting obligation results from the offering of securities it issued that are primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period plus any rights or other assets designed to assure the servicing or timely distribution of proceeds to security holders.

Reporting Obligations of Asset-Backed Securities Issuers

Issuers of asset-backed securities in public offerings have a reporting obligation under either Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), at least for a period of time. Because of the nature of asset-backed issuers, the SEC has granted requests allowing asset-backed issuers to file modified reports under the Exchange Act.[FN1]

The modified reporting structure for asset-backed issuers allows issuers or depositors to file modified annual reports on Form 10-K and to file reports tied to payments on the underlying assets in the trust (typically, monthly). These reports include a copy of the servicing or distribution report required by the issuer's governing documents and information on the performance of the assets, payments on the asset-backed securities and any other material developments that affect the issuer. Because the reported information for asset-backed issuers differs significantly from that for other issuers, the certification requirement of Section 302 of the Act was specifically tailored for asset-backed issuers.

Substance of the Certification

The Act requires that in each annual report on Form 10-K filed by an asset-backed issuer, the certifying officer certify that:

  • The certifying officer has reviewed the annual report and other reports containing distribution information for the period covered by the annual report;
  • To the best of the certifying officer's knowledge, there is no any untrue statement of material fact or omission of a material fact necessary to make the statements made in the report, in light of the circumstances under which such statements were made, not misleading;
  • To the best of the certifying officer's knowledge, the report includes all the financial information required to be provided to the trustee under the governing documents of the issuer; and
  • The servicer has complied with its servicing obligations and minimum servicing standards.

Who Must Certify and When

Because asset-backed issuers do not typically have a CEO or CFO, the certification required by the Rules should be signed by the following persons: (i) if the trustee signs the annual report, the trustee of the trust, OR (ii) if the depositor signs the annual report, the senior officer in charge of securitization of the depositor. In the alternative, the senior officer in charge of the servicing function of the master servicer (or entity performing the equivalent functions) may sign the certification.

This certification is required only with respect to annual reports (unless the issuer voluntarily files Exchange Act reports in order to comply with an indenture or pooling and servicing agreement, in which case such reports shall be certified on a quarterly and annual basis). The rules requiring these certifications became effective as of August 29, 2002, so the first certification is due with first annual report on Form 10-K. The Form 10-K is due 90 days after the end of the fiscal year covered by the annual report. For asset-backed issuers with a calendar fiscal year, this means the first certification is due on or before March 31, 2003.

What Steps Must an Asset-Backed Issuer Now Take?

The Adopting Release does not mandate any specific due diligence procedures for a certifying officer to follow in preparing to give his or her certification; however, the SEC has indicated that the certifying officer's review of an annual report must be a critical one. Such a critical review would necessarily include certain inquiries where appropriate, such as questioning disclosure that they do not understand, or questioning the materiality of information known to them.[FN2] A trustee or other certifying officer will have to rely primarily on information provided to them from the servicer and, to a lesser extent, the trustee or custodian, as well as any subservicer or other person to whom a portion of the servicing duties may be delegated.

Liability for a False Certification

As in the case of certifications given by officers of operating companies, a certifying officer signing a false certification potentially could be subject to an SEC enforcement action for violating Section 13(a) of the 1934 Act and private actions under Section 10(b) of the 1934 Act and Rule 10b-5 thereunder. A false certification also may have liability consequences under Sections 11 and 12(a)(2) of the 1933 Act where the information from Form 10-K is incorporated by reference into a registration statement. Penalties in SEC enforcement actions for Section 302 violations, which is a civil penalty provision, could include monetary penalties and/or injunctive actions. Relief in private actions could include monetary damages. In addition, if a false certification is "willfully" provided, the SEC may refer the matter to the Department of Justice for possible criminal prosecution under criminal statutes that existed prior to enactment of the Act.

Section 906 Certifications and Criminal Provisions

Section 906 of the Act requires each periodic report containing financial statements filed with the SEC under Section 13(a) or 15(d) of the 1934 Act to be accompanied by a written statement by the issuer's chief executive officer and chief financial officer (or their equivalent). Officers who sign the certification, knowing that the statement does not comply with all of Section 906 can be fined up to $1 million or imprisoned for up to 10 years (or both). Officers who willfully certify false reports can be fined up to $5 million or imprisoned for up to 20 years (or both).


The special rules for issuers of asset-backed securities authorize disclosures and certifications that are appropriate in timing and content to the specialized context of these transactions. They do not, however, relieve the sponsoring organization of the duty to provide officers' certifications in a manner that is analogous to the certifications given by the CEO and CFO of an operating company.

Companies that sponsor asset-backed securities issuances should not forget that if the issuer is registered with the SEC, then both periodic reporting and the new certifications are required, albeit in the modified form. In some cases, there may be a need for the servicer, depositor and trustee to coordinate their actions in order to be sure that one and only one certification is filed for each asset pool.

1: See, for example, Release No. 34-16520 (Jan. 23, 1980) (order granting application pursuant to Section 12(h) of the Exchange Act [15 U.S.C. §78l(h)] of Home Savings and Loan Association); Release No. 34-14446 (Feb. 6, 1978) (order granting application pursuant to Section 12(h) of the Exchange Act of Bank of America National Trust and Savings Association); Division of Corporation Finance no-action letters to Key Bank USA, N.A. (May 9, 1997) and Bay View Securitization Corp. (Jan. 15, 1998).

2: Depending on the type of assets, there may be industry standards that will serve as the basis for this review. For example, in the mortgage servicing industry, there is a single-audit procedure that has for many years been sanctioned by the accounting industry and is expressly referenced in most securitization governing documents. If there is not currently such a standard for this type of asset that is included in the asset pool, the certifying officer may be guided by the single-audit procedure for mortgage loans, by the matters covered in any reports that are contractually required of the servicer, and by the subjects disclosed in the prospectus and prospectus supplement that were used when the securities were issued.




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