A failure of compliance with any of the six tests included in Table A.1 requires that a financial asset transfer be reported as a secured borrowing with pledge of collateral—otherwise the transfer “imputes fraud conclusively.”

TRUE SALE OPINION AND NON-CONSOLIDATION OPINION

1. An example of the conclusions in an attorney’s opinion for a U.S.-based transferor that provides persuasive evidence, in the absence of contradictory evidence, to support management’s assertion that transferred financial assets are presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, is as follows:

“We believe (or it is our opinion) that in a properly presented and argued case, under all principles of law and equity which may have material application to the parties or the transactions described herein, the transfer of financial assets (“Financial Assets”) would be considered to be a sale (or a true sale) of the Financial Assets and not a transfer thereof for security in respect of a loan and, accordingly:

“(a) The Financial Assets and the proceeds thereof transferred to the Purchaser by the Seller in accordance with the Purchase Agreement would not be deemed to be property of (or be recoverable by) the Seller, any member of the Selling Group¹ or their creditors for purposes of all applicable bankruptcy, insolvency, conservatorship, receivership or other similar proceedings which may generally affect the rights of creditors, or otherwise by proceedings in law or equity,² and

“(b) No person or entity that subsequently purchases or otherwise acquires from the Seller an interest in the Financial Assets, for value and without notice of the Purchaser’s interest therein, would thereby obtain rights in or to the Financial Assets which are senior to (or would otherwise defeat) the rights obtained by the Purchaser under the Purchase Agreement.³”

2. The legal isolation condition may be satisfied either by a single transaction (that is, a “one-step” transfer of financial assets, whereby the transferor sells assets directly to a non-consolidated, unaffiliated transferee) or by a series of transactions (“two-step” transfers) considered as a whole. In a one-step or a two-step transfer of financial assets, a true sale opinion could be obtained on the first step of the transfer, and in addition, for a two-step transfer, a true sale opinion could be obtained on the second step of the transfer.

3. A two-step securitization structure taken as a whole may satisfy the legal isolation criterion because the design of the structure achieves isolation. Typical two-step structures involve the following: first, the transferor transfers a group of financial assets to a securitization entity that, although wholly owned, is designed so that the possibility is remote that the transferor, its consolidated affiliates included in the financial statements being presented, or its creditors could reclaim the financial assets (that is, a bankruptcy-remote entity); second, the bankruptcy-remote entity transfers the group of financial assets to a securitization entity, often providing credit or yield protection to the holders of the beneficial interests in the securitization entity. To support management’s assertion that the transferred financial assets are legally isolated, although a true sale opinion could be obtained on either or both steps, it is usually obtained for the first step in the transaction. The subsequent transfer to the securitization entity is often not a true sale at law, because of the credit enhancement provided by the transferor. Despite the fact that legal isolation may not be achieved in the second step, the consolidated entity would derecognize the financial assets when the transferor has obtained a true sale opinion and nonconsolidation opinion for the first step in the transfer, and neither the transferor nor its consolidated bankruptcy remote entity is required to consolidate the securitization entity.

4. Although a true sale opinion (as described in paragraph 1 of this interpretation) provides support for management’s assertion on legal isolation, a true-sale opinion does not address the risk that a court could order the “substantive consolidation” of the transferee into the bankruptcy estate of the transferor. If the transferee can be substantively consolidated into the bankruptcy estate of the transferor, then the legal isolation criterion would not be met. Accordingly, an attorney’s nonconsolidation opinion may also be required to support management’s assertion that the transferee (including any bankruptcy-remote affiliates of the transferor) would not be substantively consolidated into the bankruptcy estate of the transferor.

5. A nonconsolidation opinion which addresses substantive consolidation applies when the entity to which the assets are transferred is an “affiliate”⁴ of the selling entity (the transferor) and may also apply in other situations as noted by the attorney. For example, if a two-step transfer structure is used to achieve legal isolation, a nonconsolidation opinion usually is required with respect to the transferee in the first step of the structure. When the transferor enters into transactions with an affiliate that could affect substantive consolidation, the opinion should address the effect of that involvement. An example of a nonconsolidation opinion is as follows:

“Based upon the assumptions of fact and the discussion set forth previously, and on a reasoned analysis of analogous case law, we are of the opinion that in a properly presented and argued case, as a legal matter, in any reorganization, receivership, conservatorship or liquidation proceeding which, by law, order or determination of appropriate authorities, would be applicable in respect of the Seller, the trustee, receiver, conservator or liquidator would not have authority to order (and a court would not order or confirm an order of the trustee, receiver, conservator or liquidator) consolidating the assets and liabilities of the Purchaser with those of the Seller or any member of the Selling Group without obtaining consent of the Purchaser subsequent to the commencement of any such proceeding.”

Examples of Inadequate Opinion Language That Would Not Provide Sufficient Appropriate Audit Evidence

6. An attorney’s opinion that includes inadequate opinion language does not provide sufficient appropriate audit evidence to support management’s assertion that the transferred financial assets have been put presumptively beyond the reach of the transferor (including its consolidated affiliates) and its creditors, even in bankruptcy or other receivership. A legal letter that includes conclusions expressed using any of the following language should be considered inadequate because the opinion provides other than “would level” assurance. Accordingly, such a letter would not provide persuasive evidence that a transfer of financial assets has met the isolation criterion of ASC 860-10-40-5(a):

• “We are unable to express an opinion . . .”
• “It is our opinion, based upon limited facts . . .”
• “We are of the view . . .” or “it appears . . .”
• “There is a reasonable basis to conclude that . . .”
• “In our opinion, the transfer would either be a sale or a grant of a perfected security interest . . .”⁵
• “In our opinion, there is a reasonable possibility . . .”
• “In our opinion, the transfer should be considered a sale . . .”
• “It is our opinion that the company will be able to assert meritorious arguments . . .”
• “In our opinion, it is more likely than not . . .”
• “In our opinion, the transfer would presumptively be . . .”
• “In our opinion, it is probable that . . .”

QUALIFICATIONS, LIMITATIONS, OR DISCLAIMERS INCLUDED IN AN ATTORNEY’S OPINION

7. An attorney’s opinion that includes inappropriate qualifications, limitations, or a disclaimer of opinion, or that effectively limits the scope of the opinion to facts and circumstances that are not applicable to the transaction, does not provide sufficient appropriate audit evidence to support management’s assertion that the transferred financial assets have been put presumptively beyond the reach of the transferor (including its consolidated affiliates) and its creditors, even in bankruptcy or other receivership.

8. Limitations in the legal opinion may negate the opinion by instructing the reader to consider performing additional legal analysis, thereby implying those factors have not been considered by the attorney. For example, the following limitation generally precludes reliance on the attorney’s opinion:

“We note that legal opinions on bankruptcy law matters unavoidably have inherent limitations that generally do not exist in respect of other legal issues on which opinions to third parties are typically given. These inherent limitations exist primarily because of the pervasive powers of bankruptcy courts and other factors. The recipients of this opinion should take these limitations into account in analyzing the bankruptcy risk associated with the transactions as contemplated by the agreements.”

9. Qualifying language in some attorney’s opinions discusses how a court would view the level of recourse, with the attorney not providing an opinion with respect to this aspect of the transaction. For example, when recourse provisions are included in the transaction, the transferor’s legal isolation analysis should consider whether the attorney’s opinion conclusively considers the nature and significance of any recourse provided for in the transaction. Limited historical information, heterogeneous assets or significant changes in underwriting are a few factors that may cause the attorney’s analysis to be more difficult. The auditor should consider whether these analyses of any recourse provisions are consistent or inconsistent with other information used by management to make any related estimates.

10. Furthermore, conclusions about hypothetical transactions may not be relevant to the transaction that is the subject of management’s assertions. Conclusions about hypothetical transactions may not contemplate all of the facts and circumstances or the provisions in the agreements of the transaction that is the subject of management’s assertions, and generally would not provide persuasive evidence. For example, a memorandum of law from an attorney usually analyzes (and may make conclusions about) a transaction that may be completed subsequently. Such memorandum generally would not provide persuasive evidence unless the conclusions conform with this interpretation and an attorney opines that such conclusions apply to a completed transaction that is the subject of management’s assertion.