Rewriting the Rules: The SEC Moves to Modernize ABS Regulation

Rohit Bachani
Nov 5
6 min read

By: Rohit Bachani, Class of 2028

Introduction

In September 2025, the Securities and Exchange Commission (“SEC”) published a concept release to solicit comments as to whether the definition of “asset-backed security” (“ABS”) in Regulation AB should be expanded to match the definition under the Securities Exchange Act of 1934 (“Exchange Act”).[1] A concept release is an early-stage request for public input that generally informs the SEC’s development of a proposal to create or amend a rule.[2] This particular concept release reflects the SEC’s growing interest in keeping its regulatory framework aligned with the realities of modern securitization markets, which increasingly involve new asset classes and more complex transaction structures.[3]

This potential regulatory shift is not coincidental. It signals the scale and significance of the asset-backed finance market—valued at approximately $25 trillion—in today’s credit system.[4] Asset-based finance is different from ordinary borrowing, in which lenders evaluate a company’s creditworthiness and financial resources to decide whether to extend a loan.[5] In asset-based finance, lenders instead look to the company’s specific assets—such as mortgages or royalty agreements—and are repaid directly from the cash that those assets generate.[6] Due to this structure, the ABS market is non-standardized and spans a wide range of assets, including auto loans, residential mortgages, aircraft leases, and royalty agreements.[7] Against this backdrop, a change to the definition of ABS under Regulation AB could reshape how securitizations are structured, disclosed, and used by borrowers to raise capital.[8]

How Securitization Works

Securitization is a tool used by companies to convert future cash flows they are contractually entitled to receive into capital that can be used immediately.[9] The typical use case for securitization is for a mortgage company that provides a mortgage for a family to buy a home.[10] Here, the family is contractually obligated to make mortgage payments on a monthly basis.[11] The payment obligations are assets—a predictable stream of cash flows owed to the company.[12]

Instead of waiting years for the full amount to be repaid, the mortgage company could transfer the assets into a separate legal entity called a special purpose vehicle (SPV), which issues debt securities (or ABS) that can be purchased by investors.[13] The cash raised from investors flows back to the mortgage company, while the investors receive payments over time as the family pays off its mortgage.[14]

Securitization allows the mortgage company to raise funds up-front without taking on traditional debt.[15] For the investors, securitization provides more predictable cash flows than lending directly to the company along with legal protections: because the assets are legally separated from the company through the SPV, the investors are protected if the company undergoes financial distress.[16]

Expanding the Definition of ABS

Under Regulation AB, which was adopted by the SEC in 2004, an asset-backed security is a security that is “primarily serviced by the cash flows of a discrete pool of receivable 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 distributions of proceeds to the security holders . . .”[17] While Regulation AB normally requires the pool of assets to be fixed, it provides narrow exceptions for distinct structures like master trusts and revolving periods, both of which allow companies to add or substitute assets after the securities have already been issued.[18] However, this definition excludes certain transactions such as series trusts and managed pools from being subject to Regulation AB.[19] A series trust is like a legal umbrella that allows a company to issue multiple sets of securities backed by different assets.[20] In a managed pool, the company can add, remove, or swap assets over time.[21]

After the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Exchange Act with a separate definition of ABS.[22] Under the Exchange Act, an asset-backed security is a “fixed-income or other security collateralized by any type of self-liquidating financial asset (including a loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset . . .”[23] The definition proceeds to list specific securities treated as ABS, and includes the series and managed pool structures that fall outside of the scope of Regulation AB.[24]

Put simply, the SEC’s Regulation AB definition for ABS is narrower and excludes certain modern deal structures, while the Exchange Act definition includes them.[25] If an ABS transaction involves managed pools and series trusts, it is excluded from Regulation AB and is not subject to the SEC’s rigorous disclosure framework for public investments.[26] Today, many transactions involving such structures and backed by assets like aircraft leases, data center revenues, and royalty payments are sold privately to large institutional investors, not the general public.[27] Such transactions are part of a $1.6 trillion market for ABS not tied to real estate.[28] Expanding the Regulation AB definition to match the Exchange Act definition would bring these investments to the public markets, providing greater transparency, stronger investor protections, and easier access to capital.[29]

Regulatory and Market Implications

The main benefit of bringing currently excluded transactions under the purview of Regulation AB is that it would subject them to rigorous investor protection standards under the Securities Act of 1933.[30] Section 11 of the Securities Act of 1933 holds companies liable if their official offering documents (registration statements) materially misstate or omit information.[31] This would subject ABS transactions involving series trusts and managed pools, which are already complex in nature, to a higher standard of disclosure.[32] Moreover, Section 12 would enact a similar function by imposing liability upon those who offer securities through investment documents or oral communication that includes material misstatements or omissions.[33] These obligations would apply in addition to the Regulation AB requirements, which impose their own standards for providing detailed and standardized information about each underlying asset in an ABS transaction.[34]

However, expanding the ABS definition could also increase compliance costs for issuers, since public offerings would impose extensive disclosure, filing, and certification obligations under Regulation AB.[35] Moreover, the change could reduce flexibility for issuers in specialized markets like royalty or aircraft-lease securitizations, where deal structures often depend on customized asset pools that might not be completely compatible with standardized reporting rules.[36]

Despite any potential drawbacks, access to public markets would ultimately make ABS investments easier to buy and sell (more liquid) because they would be accessible to both institutional and retail investors.[37] When a greater number of investors can purchase investments, they become cheaper for both issuers and investors over time.[38] While it is unclear whether the SEC will bridge the Regulation AB and Exchange Act definitions, its concept release represents a step towards greater regulatory clarity with respect to the regulation of an extremely complex financial product.[39]