A clean-up call, however, is permitted as an exception to the effective control cri-
teria. A clean-up call is an option held by the servicer or its affiliate, which may be
the transferor, to purchase the remaining transferred financial assets, or the remain-
ing beneficial interests not held by the transferor, its affiliates, or its agents in a QSPE
(or in a series of beneficial interests in transferred assets within a QSPE), if the
amount of outstanding assets or beneficial interests falls to a level at which the cost
of servicing those assets or beneficial interests becomes burdensome in relation to the
benefits of servicing.
(d) Consolidation. Once it is concluded that the transfer meets the three sale crite-
ria discussed above, the transferor/originator must determine whether the SPE that
holds the assets and issues the beneficial interests must be consolidated. If a transfer
is accounted for as a sale and the SPE is subsequently consolidated in the transferor’s
consolidated balance sheet, then the result would be that the transferor continues to
recognize the transferred assets.
The first and most typical way for the transferor/originator in a securitization to
avoid consolidating the SPE, is to structure the SPE as a qualifying SPE (QSPE).
FAS 140 provides that a QSPE should not be consolidated in the financial statements
of a transferor or its affiliates. This does not exempt beneficial interest holders other
than the transferor from consolidating the SPE should they be deemed to have con-
trol. Any entity that is not a transferor of financial assets to a QSPE, including a trans-
feror that transfers financial assets to an SPE that does not meet the qualification cri-
teria, should consider other guidance on consolidation policy (FAS 94, EITF Topic
D-14, EITF 90-15, and related guidance).
(e) Qualifying Special-Purpose Entities (QSPEs). FAS 140 provides detailed guid-
ance on the criteria to be a QSPE. The concept of a QSPE is intended to be restric-
tive. Under FAS 140, a QSPE must meet four broad conditions. The QSPE must be
demonstrably distinct from the transferor, restricted as to its permitted activities, lim-
ited as to the types of assets it can hold, and limited as to its ability to sell or other-
wise dispose of noncash financial assets.
(i) Demonstrably Distinct Nature of a QSPE. A QSPE is demonstrably distinct from
the transferor if the transferor cannot “unilaterally” decide to change the QSPE and
at least 10% of the beneficial interest issued by the QSPE are held by outside parties
(i.e., parties that are not the transferor, its affiliates, or its agents).
(ii) Activities of a QSPE. The activities of a QSPE must be significantly limited, fully
described in the legal documents that established the SPE or created its beneficial in-
terests, and changeable only with the consent of the majority of the outside beneficial
interest holders.
A QSPE may not have discretion over its activities and it may not engage another
entity to make such decisions. Instead all of the QSPE’s activities must be “prepro-
grammed” at the inception. Because of its limited activities, a QSPE may be de-
scribed as “brain dead” or running on “autopilot.”
(iii) Assets a QSPE May Hold. A QSPE may hold financial assets transferred to it that
are passive in nature, passive derivative financial instruments that pertain to benefi-
cial interests, financial assets (e.g., guarantees) that would reimburse it if others were
21.6 ACCOUNTING 21 • 13