Speech by SEC Commissioner:
Addressing the Information Asymmetry in
the Securitization Market to Put Investors and the Economy on Safer
Footing
by
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
Washington, D.C.
April 7, 2010
Before I begin, I would like to thank the staff for the hard work that
is reflected in the recommendations before us.
The widespread ramifications of the financial crisis demand an in-depth
review into what happened and significant reform in areas where the crisis
has revealed that change is needed.1 The securitization market is one such area.2 With the benefit of hindsight, investors have said
that "[t]he structures and mechanisms that have defined the securitization
market to date have been constructed by issuers, underwriters, credit
ratings agencies, and asset servicers with minimal disclosure-based,
procedural, or substantive regulation by Congress, financial regulators,
or the SEC."3 Investors are demanding more information and a
better regulatory framework that will support healthy and efficient
markets.4 Today's proposals begin the dialogue to address
structural inequities in the asset-backed securities markets, and I hope
that Congress will grant the Commission the authority to do more.
The rules proposed today are designed to respond to the lessons learned
in the crisis and the demands of investors. The proposals would provide
additional tools and information to investors and other participants to
allow them to better assess asset-backed securities. This disclosure is
intended to arm investors with additional information about cash flows to
investors, the securitized pool and, with limited exceptions, information
about the assets underlying the pool. The approach is designed to provide
investors with a comprehensive picture. I am interested to hear from the
public about whether our rule proposals go far enough to require the key
disclosures to put investors on an equal footing with issuers. The
information asymmetry in this market between buyers and sellers must be
addressed.
In addition, these rules would improve the offering process by
providing investors in registered shelf offerings with a "speed bump" to
allow them more time to review the prospectus and to make an informed
investment decision.
The proposed rules would also require, for the first time, that
substantially the same information investors receive in public offerings
of asset-backed securities be provided to investors, upon request, in
unregistered offerings under Regulation D and Rule 144A. This is
appropriate because many have concluded that a contributing factor to the
crisis was a lack of disclosure about, and understanding of, asset-backed
securities — including CDOs — offered in private placements.5 While this aspect of the proposal is designed to
improve the information available in unregistered offerings of structured
finance products, its effectiveness could be limited. As the release
points out, these proposed rules would not apply to structured finance
products offered and sold under the private placement statutory exemption
of Section 4(2) of the Securities Act of 1933 and the so-called Section
4(1-1/2) exemption for private resales. I am particularly interested in
hearing from commenters as to their views of how best to address the
problems in the unregistered structured finance market revealed by the
crisis.
It is time that the Commission reexamined the offering, sale and
on-going reporting applicable to asset-backed issuers. In the wake of the
crisis, originations of asset-backed securities in the registered and
unregistered markets decreased significantly from pre-crisis levels.6 In 2009, registered offerings of asset-backed
securities in the U.S. were approximately $10 billion, and private
placements of asset-backed securities were estimated at $3.2 billion.7 Recently, however, the market has shown signs of
revival. For example, registered offerings of asset-backed securities in
the U.S. in the first quarter of 2010 already are at around $9.3 billion,
nearly the amount of issuances in all of 2009.8 Moreover, private offerings of asset-backed
securities in reliance on Rule 144A in the first quarter of 2010 already
are at $21.2 billion, far exceeding the volume of issuances in all of
2009.9
I am glad this financing is becoming more available to businesses
across the country. But with this indication of renewed activity in the
asset-backed market, it is even more important that the Commission moves
forward with reform. I believe today's proposal is a step forward in
addressing some of the deficiencies that have been identified in the
securitization market. I look forward to the comments we will receive and
the improvements to the proposal that are certain to result from the
comments.
Thank you.
Endnotes