The Securities and Exchange Commission (SEC) has proposed rules that would revise the disclosure, reporting and offering process for asset-backed securities (ABS).
The proposed rules are intended to provide investors with more detailed and current information about ABS and more time to make their investment decisions, the SEC says. The proposed rules also seek to better align the interests of issuers and investors by creating a retention requirement for certain public offerings of ABS.
‘The rules we are proposing stem from lessons learned during the financial crisis,’ says SEC Chairman Mary L. Schapiro. ‘These rules, if adopted, would revise the regulatory regime for asset-backed securities in order to better protect investors.’
Under existing rules, an ABS offering is not eligible for an expedited offering unless the securities are rated investment-grade by a credit rating agency. The SEC will consider whether to propose new ABS ‘shelf’ eligibility criteria to enhance the type of securities that are being offered and the accountability of participants in that securitization chain.
The proposals would require, among other conditions for shelf-eligibility, that the ABS sponsor hold 5% of each class of asset-backed securities and not hedge those holdings. While ratings would continue to be allowed for ABS offerings, the proposed rules would eliminate the ratings requirement from the SEC's expedited shelf-eligibility test. Additionally, the added information and time provided under the proposals should allow investors to perform their own analyses and rely less on ratings, the commission says.
Another proposal would require the filing of tagged computer-readable, standardized loan-level information. Under the current ABS rules, information about the loans in an ABS pool is required only at the pool level. The SEC will consider whether to propose 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 proposal requiring loan-level information would apply to ABS issuers that offer securities backed by residential mortgages and commercial mortgages, as well as automobile loans and leases, equipment loans and leases, student loans and other assets. Credit card receivables would be exempt from the loan-level requirements.
The SEC also will consider a proposal requiring, along with the filing of a prospectus for an ABS transaction, the filing of a computer program that demonstrates the effect of a "waterfall" that dictates how borrowers' loan payments are distributed to investors in the ABS, how losses or lack of payment on those loans is divided among the investors and when administrative expenses such as servicing those loans are paid to service providers.
Currently, a narrative description of the waterfall must be disclosed to investors in the prospectus. The computer program of the waterfall would allow the user to input the loan-level data that would also be required to be provided, giving investors and the markets better tools to analyze an ABS offering, the SEC says.
Furthermore, the SEC will consider whether to propose disclosure requirements that would increase transparency in the exempt private structured finance market where some types of ABS, such as collateralized debt obligations, are sold.
Another proposal being considered is requiring additional information regarding originators and sponsors, such as information for certain identified originators and the sponsor relating to the amount of the originator's or sponsor's publicly securitized assets that, in the last three years, has been the subject of a demand to repurchase or replace.