USA Law and Practice Contributed by: Bjorn Bjerke, Corey Reis and Joshua Kopel, A&O Shearman
• the relevant laws relating to the relevant form of organisation in its jurisdiction of formation; • the applicable tax laws; and • bankruptcy or other applicable insolvency laws. Factors in Choosing an Entity The primary factors driving the type and jurisdic - tion of the securitisation entity will be bankruptcy remoteness and tax. Other important factors include market practice and acceptance. As out - lined earlier, common law trusts are disfavoured compared to statutory entities for bankruptcy- remoteness purposes in light of the separate existence afforded to such statutory trusts. US domestic corporations are generally disfa - voured, in part because of the entity-level tax applicable to corporations and in part because of the mandatory fiduciary duty that directors have to the shareholders, which can cause dif - ficulties in de-linking the SPE from its parent. Delaware statutory trusts (DSTs) and Delaware limited liability companies (DLLCs) are often the entities of choice for securitisations. Delaware is viewed as a favourable jurisdiction for form - ing business entities. Delaware has up-to-date business entity laws that provide for efficient and quick formation, a sophisticated judiciary and a significant volume of decisions that together provide additional certainty and acceptance. 4.11 Activities Avoided by SPEs or Other As a point of departure, any entity of which more than 40% of its relevant assets (ie, excluding cash or US Treasuries) consists of securities within the meaning of the Investment Compa - ny Act (a broad term that includes loans) may have to register as an investment company in the absence of an available exemption. Regis - Securitisation Entities Investment Company Act
tered investment companies are subject to lever - age and capital structure requirements that are incompatible with a securitisation. The exemptions most commonly used for secu - ritisations are Rule 3a-7, Section 3(c)(5) and Sec - tion 3(c)(7). Rule 3a-7 is available for entities holding pri - marily self-liquidating assets that are only sold or purchased in accordance with the terms of the transaction, and not for the purpose of cap - turing market gains or avoiding market losses. The securitisation must also satisfy some addi - tional requirements, including having a trustee with certain minimum qualifications holding either title or a security interest in the assets, and investors in securities that are either below investment grade or not fixed-income securities must satisfy certain qualification requirements. The Section 3(c)(5) exemption is available for issuers securitising accounts receivable; loans to manufacturers, wholesalers, retailers or pur - chasers of specified merchandise, insurance or services; as well as for mortgages and other liens on and interests in real estate, as long as a holder of any such issuer’s securities does not have the right to require early redemption of such securities. Section 3(c)(7) provides a general registra - tion exemption for issuers that do not publicly offer their securities, and it limits their inves - tors to “qualified purchasers”. The Volcker Rule discussed below has made it less attractive for securitisation SPEs to rely on Section 3(c) (7), although the exemption is still relied on by actively managed CLOs.
481 CHAMBERS.COM
Powered by FlippingBook