Fitch Looks At Unintended Consequences Of SEC Rule Interpretations


Restrictions in dialogue between U.S. commercial mortgage-backed securities (CMBS) special servicers and credit rating agencies (CRAs) brought on by Securities and Exchange Commission (SEC) Rule 17 g-5 may have the unintended consequence of producing unnecessary rating volatility, according to Fitch Ratings.

SEC Rule 17 g-5, put into effect in June, requires transaction issuers to post information that is shared with a hired CRA in the issuance or maintenance of a rating to a 17 g-5 website that is available for review by both hired and non-hired CRAs. According to Fitch, some issuers have interpreted 17 g-5 to extend to the interaction that the servicer may have on an ongoing basis with the hired rating agencies in their efforts to monitor the performance of the transaction and maintain its ratings.

Recently, certain CMBS have begun to include language into newly issued pooling and servicing agreements (PSAs) that attempt to dictate how special servicers communicate with the CRAs.

‘A special servicer's compliance with the provisions of 17 g-5 should not be interpreted in a way that impacts the quantity, quality or timeliness of the information that a servicer shares with Fitch in the course of Fitch's transaction surveillance process,’ says Huxley Somerville, group managing director and head of U.S. CMBS for Fitch.

Fitch says it frequently contacts servicers to seek clarifications, resolve discrepancies, better understand the specifics of an asset and discuss the servicer's workout strategy.

‘Language that restricts the servicer's ability to directly communicate with a hired rating agency is problematic and has the potential to not only add extensive delays to response time, but likely limit the quality and completeness of the servicer's responses,’ adds Managing Director Stephanie Petosa.

SOURCE: Fitch Ratings

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