SEC Pushes Accountability Around Asset-backed Securities
The Securities and Exchange Commission has moved to require greater accountability on and boost the quality of asset-backed securities when issuers seek to use an expedited registration process known as shelf registration.
In April 2010, the SEC initially proposed rules to enable investors to assess the risk associated with asset-backed securities and align the interest of issuers with those of the investors. The rules would particularly revise the disclosure, reporting and offering process for asset-backed securities to better protect investors in the securitization market.
After the SEC voted to propose its rules, the Congress passed the Dodd-Frank Act, which resulted in some of the previously proposed asset-backed securities rules to be unnecessary or in need of changes.
“It is very important that we move forward with our new registration and reporting rules for the asset-backed securities market, but we also want to make sure we get it right,” said SEC chairperson Mary Schapiro.
“This re-proposal will help us solicit the input and constructive comments we need to finalize this critically important project to protect investors in asset-backed securities.”
Asset-backed securities consist of bundled loans – such as residential mortgage loans, commercial loans or student loans – whose public offerings are conducted through expedited SEC procedures known as “shelf offerings.”
Under existing rules, an asset-backed securities offering is not eligible for an expedited shelf offering unless the securities are rated investment-grade by a credit rating agency.
Last year, the SEC proposed new shelf eligibility criteria enhancing the type of securities offered and increasing the accountability of participants in that securitization chain.
As a shelf eligibility requirement, the new rules would require an executive officer of the ABS issuer to certify among other things the accuracy of the disclosure. In addition, the securitization must be designed so that it produces cash flows at times and in amounts sufficient to service expected payments on the asset-backed securities being offered and sold.
Moreover, the underlying transaction agreements must have provisions that would appoint a credit risk manager to review assets upon the occurrence of certain trigger events. The provisions must also set forth dispute resolution procedures outlining the way in which pending or disputed requests to repurchase potentially non-compliant assets in the pool can be resolved.
While ratings would continue to be allowed for asset-backed securities offerings, the proposed rules would eliminate the ratings requirement from the SEC’s expedited shelf eligibility test.
Under the current shelf registration rules, issuers may sell ABS almost immediately, without providing investors with a minimum amount of time to review the disclosure in the offering materials.
In April 2010, the SEC proposed to give investors more time to review the disclosure in the offering materials, by requiring that a preliminary prospectus be given to investors a minimum period of time in advance of first sale.
Now the SEC is issuing a proposal – that dovetails with the previous proposal – which would require ABS issuers to file copies of the underlying transaction agreements, including all attached schedules, at the time of a preliminary prospectus.
In April 2010, the SEC proposed new disclosure rules that would require ABS issuers to provide specific data for each loan in the asset pool both at the time of securitization and on an ongoing basis. The loan-level data would cover items such as the terms and underwriting of the loan, credit information about the borrower, and/or characteristics of the property securing the loan.
The SEC received many comment letters regarding the asset-level proposal, and is requesting further comment on a few possible additional approaches.
In addition, Section 942(b) of the Dodd-Frank Act requires the SEC to adopt regulations requiring an issuer of an ABS to disclose loan-level information, if it is necessary for investors to independently perform due diligence.
The SEC is requesting comment to assist it in considering whether the April 2010 proposal appropriately implements Section 942(b) and whether additional information may be required.
Public comments are due 60 days after publication of the re-proposed rules in the Federal Register.