(as in the case of securities issued under Securities Act Rule 144A or debt placed
privately)- Illiquidity, for example, the absence of an active market
These provisions should be considered in connection with the other provisions and
restrictions in the transaction or rights retained by the transferor/originator, as they
may not constrain the transferee (or beneficial interest holder) individually, but may
as they work in combination with other aspects of a transaction.
Whether a constraint is of more than a trivial benefit to the transferor is not always
clear, but as transferors presumably incur costs if they impose constraints, since
transferees pay less than they would pay to obtain the asset without constraint, im-
position of a constraint by a transferor typically results in more than a trivial benefit
to the transferor.
For example, a provision in the transfer contract that prohibits selling or pledging
a transferred loan receivable not only constrains the transferee but also provides the
transferor with the more-than-trivial benefits of knowing who has the asset, a pre-
requisite to repurchasing the asset, and of being able to block the asset from finding
its way into the hands of a competitor for the loan customer’s business or someone
that the loan customer might consider an undesirable creditor. Transferor-imposed
contractual constraints that narrowly limit timing or terms, for example, allowing a
transferee to pledge only on the day assets are obtained or only on terms agreed with
the transferor, also constrain the transferee and presumptively provide the transferor
with more-than-trivial benefits. Additionally, a condition not imposed by the trans-
feror that constrains the transferee may or may not provide more than a trivial bene-
fit to the transferor. For example, if the transferor refrains from imposing its usual
contractual constraints on a specific transfer because it knows an equivalent con-
straint is already imposed on the transferee by a third party, it presumptively benefits
more than trivially if it is aware at the time of the transfer that the transferee is con-
strained. However, the transferor cannot benefit from a constraint if it is unaware at
the time of the transfer that the transferee is constrained.
(iii) Effective Control Criteria. Under FAS 140, if the transferor/originator has any
ability to unilaterally reclaim specific transferred assets on terms that are potentially
advantageous to the transferor/originator—whether through a removal-of-accounts
provision, the ability to cause the liquidation of the special purpose entity, a call op-
tion, forward purchase contract, or other means—sale treatment is precluded be-
cause, in those circumstances, the transferor/originator would still effectively control
the transferred assets. The transferor/originator maintains effective control by being
able to initiate action to reclaim specific assets with the knowledge that the transferee
cannot sell or distribute the assets because of restrictions placed on it.
A right to reclaim specific transferred assets by paying fair value for the assets
when reclaimed generally does not maintain effective control, because it does not
convey a more than trivial benefit to the transferor/originator. However, a trans-
feror/originator has maintained effective control if it has such a fair value right and
also holds the residual interest in the transferred assets because it can unilaterally
cause their return. For example, if a transferor/originator can reclaim such assets by
purchasing them in an auction at the termination of the transaction/QSPE, and thus
at what might appear to be fair value, then sale accounting for the assets it can re-
claim would be precluded. Such circumstances provide the transferor/originator with
21.6 ACCOUNTING 21 • 11