In a joint comment letter filed with the Financial Accounting Standards Board (FASB), The Bond Market Association (Association) and the American Securitization Forum (ASF) expressed concerns and recommended revisions to proposed amendments to FASB Statement 140, which sets accounting standards for transfers of financial assets. The proposed amendments would tighten existing criteria governing which special purpose entities (SPEs) can achieve qualified special purpose entity (QSPE) status under Statement 140.
SPEs are widely used throughout the financial markets. Among other applications, SPEs facilitate capital market transactions (including mortgage-backed and asset-backed securities) in which the funds raised are linked to the performance of specific financial assets. In general, QSPEs are a special class of SPEs that are legally isolated from their sponsors, and whose permitted activities and assets are significantly limited. Under recently adopted FASB accounting guidance (FIN 46), QSPEs are not required or permitted to be consolidated on the balance sheet of any transaction participant. Non-qualifying SPEs are not entitled to this exemption from accounting consolidation, and must be separately analyzed for this purpose under FIN 46.
FASB’s stated goals in proposing the amendments are to ensure that financial assets are not derecognized, and that SPEs will not be exempt from consolidation analysis under FIN 46, when transferors or related parties continue to retain effective control over the transferred assets.
In their joint comment letter, the Association and the ASF agreed with these policy objectives, but said the proposed amendments would impose new limitations that extend far beyond what is necessary to achieve them. According to the Association and the ASF, this would produce substantial costs, uncertainties and unintended consequences for a wide range of financial market transactions that do not implicate FASB’s principal concerns.
“The Exposure Draft would, we think unintentionally, change the accounting for a large number of transactions where that change is not required in order to accomplish FASB’s main goals,” the Association and the ASF said in their comments. “In fact, if the Exposure Draft is given its broadest reading, we doubt whether any current qualifying special purpose entity would qualify under the proposed new standards.”
The Association and the ASF cited a number of capital markets transactions that would be unnecessarily harmed by FASB’s proposed changes. These include sales of financial assets to SPEs where sellers make customary representations to buyers about the character and quality of those assets; mortgage securitization programs conducted by federal housing agencies and government-sponsored enterprises; revolving master trust and municipal bond securitizations; and a number of other transactions and arrangements. In each case, the proposed changes would inappropriately impute continuing accounting “control” over financial assets where a far lesser degree of involvement is present. As a consequence, nearly any manner in which a transferor or decision-maker maintains some continuing connection to a financial asset transferred to an SPE, no matter how immaterial, could prevent that party from derecognizing the asset for accounting purposes.
To avoid these consequences, the Association and the ASF proposed a number of revisions to the Exposure Draft. These include specifying the types of ongoing relationships that transferors may have with QSPEs, and clarifying the limitations on the ability of QSPEs (such as those used in traditional securitization master trusts) to reissue securities without nullifying their QSPE status. In the event that FASB does not adopt these and other recommendations made in their comment letter, the groups proposed an alternative form of financial statement presentation for eligible SPEs, referred to as the “matched” presentation. Under the matched presentation, the gross assets of SPEs would be shown on a separate line, immediately followed by a deduction for non-recourse debt and third party equity interests issued by the SPE. According to the Association and ASF, this would provide a more logical and practical financial statement presentation than full consolidation of SPEs, where the transferor retains rights only to certain portions of the cash flows of the underlying financial assets.
The Bond Market Association, with offices in New York, Washington, D.C. and Europe (London), represents securities firms and banks that underwrite, trade and sell debt securities in the U.S. and globally. The ASF is a broadly-based professional forum through which participants in the U.S. securitization market advocate their common interests on a number of important legal, regulatory and market practice issues. The ASF is a forum of The Bond Market Association.