SEC Proposes Rules to Increase Investor Protections in Asset-Backed
Securities
FOR IMMEDIATE RELEASE
2010-54
Washington, D.C., April 7, 2010 — The Securities and Exchange
Commission today proposed rules that would revise the disclosure,
reporting and offering process for asset-backed securities (ABS) to better
protect investors in the securitization market.
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 proposed rules also seek to better align the interests of
issuers and investors by creating a retention or "skin in the game"
requirement for certain public offerings of ABS.
"The rules we are proposing stem from lessons learned during the
financial crisis," said SEC Chairman Mary L. Schapiro. "These rules if
adopted would revise the regulatory regime for asset-backed securities in
order to better protect investors."
Asset-backed securities are created by buying and bundling loans — such
as residential mortgage loans, commercial loans or student loans — and
creating securities backed by those assets, which are then sold to
investors. Often, a bundle of loans is divided into separate securities
with different levels of risk and returns. Payments on the loans are
distributed to the holders of the lower-risk, lower-interest securities
first, and then to the holders of the higher-risk securities.
Most public offerings of ABS are conducted through expedited SEC
procedures known as "shelf offerings." ABS offerings also are sold as
private placements which are exempt from SEC registration. ABS private
placements are typically sold to large institutional investors known as
qualified purchasers (QIBs).
Public comments on the proposed rules should be received by the
Commission within 90 days after its publication in the Federal
Register.
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FACT SHEET
Overview:
During the financial crisis, ABS holders suffered significant losses
and the securitization market has been relatively dormant ever since. The
crisis revealed that many investors were not fully aware of the risk in
the underlying mortgages within the pools of securitized assets and
over-relied on credit ratings assigned by rating agencies, which, in many
cases, turned out to be wrong.
The proposed rules seek to address the problems highlighted by the
crisis and to head off the next one, by giving investors the tools they
need to accurately assess risk and by better aligning the interests of the
issuer with those of the investor.
The Proposed Rules:
Specifically, the Commission's proposals 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 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. To make the required
information comparable among issuers of the same asset class and more
useable to investors, the rules require that the data be provided
according to proposed standards and in a format tagged in eXtensible
Markup Language (XML) so that it may be processed by computer. This would
enable investors to synthesize large amounts of data about the underlying
assets.
Examples of the types of information that would be provided for each
loan in the pool include:
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A number identifying each loan so that the loan and its performance
can be tracked throughout the life of the security.
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Disclosure of whether or not the loan was made without following the
stated loan underwriting standards.
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Disclosure of the extent to which the obligor's income was verified
(e.g. did the lender look at W-2 forms and tax returns?).
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Detailed information about the steps being taken by the servicer to
limit losses on loans that are not being paid in full.
The proposal requiring loan-level information would apply to ABS
issuers that offer securities backed by residential mortgages, commercial
mortgages, automobile loans and leases, equipment loans and leases,
student loans, floorplan financings, corporate debt, and ABS backed by
other ABS.
ABS that are backed by credit card receivables may have millions of
accounts in the pool, so those offerings would be exempt from loan-level
information requirements. However, proposed new rules would require
issuers to disclose more granular information regarding the underlying
credit card accounts in tagged, computer-readable and standardized
groupings. Under the proposed rules, issuers of ABS backed by credit cards
would present statistical data about accounts with similar characteristics
grouped by credit score range, age of account, payment status, and
geographic location.
Require the Filing of a Computer Program That Gives Effect to the
Waterfall
The SEC 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 the "waterfall." As noted above, the waterfall
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, as described above, giving
investors and the markets better tools to analyze an ABS offering.
Provide Investors with More Time to Consider Transaction-Specific
Information
The SEC will consider whether to impose time limits before a sponsor of
the ABS can conduct the first sale in a shelf offering. Under current
rules, issuers may sell ABS almost immediately, without providing
investors a minimum amount of time to review the disclosure in the
offering materials.
The SEC will consider whether to propose requiring that issuers, for
each off-the-shelf takedown or offering, file a preliminary prospectus at
least five business days before the first sale in the offering. This would
give investors time to consider transaction-specific information,
including the loan level data described above, before an investment
decision needs to be made.
Repeal the Investment Grade Ratings Criterion for ABS
Shelf-Eligibility
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, as a condition for shelf-eligibility,
that:
The chief executive officer of the ABS issuer certify that the assets
have characteristics that provide a reasonable basis to believe that they
will produce cash flows as described in the prospectus.
The ABS sponsor hold five percent of each class of asset-backed
securities and not hedge those holdings.
The ABS issuer provide a mechanism whereby the investors will be able
to confirm that the assets comply with the issuer's representations and
warranties, such as representations and warranties that the loans in the
ABS pool were underwritten in a manner consistent with the lenders'
underwriting standards.
The ABS issuer agrees to file Exchange Act reports with the Commission
on an ongoing basis (rather than stop reporting with the Commission in the
first year, which the Exchange Act currently permits many ABS issuers to
do).
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.
Increase Transparency in the Private Structured Finance
Market
The SEC will also consider whether to propose disclosure requirements
that would increase transparency in the exempt private structured finance
market where some types of asset-backed securities, such as collateralized
debt obligations (CDOs), are sold. Under these proposals, where an SEC
safe harbor (e.g., Rule 144A or Regulation D) is relied upon for
the unregistered sale of securities, the issuer must provide investors,
upon request, at the time of the offering and on an ongoing basis, the
same information that would be required if the offering were registered
with the SEC or if the issuer were required to report with the SEC under
the Exchange Act.
The SEC also will consider a proposal to require that an ABS issuer
file a public notice of the initial placement of securities to be sold
under Securities Act Rule 144A. This notice would require information
about those ABS offerings and would be publicly filed with the SEC in its
EDGAR database. Form D, the notice of an offering made in reliance on
Regulation D, also would be revised to collect information on structured
finance products.
Make Other Revisions to the Regulation of ABS
The SEC also will consider whether to propose other revisions regarding
ABS. Among other things, the SEC will consider whether to propose to:
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Standardize certain static pool disclosure.
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Amend the Regulation AB definition of an "asset-backed security" to
better ensure that investors have sufficient information about the
securities.
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Require 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.
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Lower the threshold change in the material pool characteristics that
triggers the filing of a Form 8-K (pursuant to Item 6.05) from five
percent to one percent.
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Specify, in addition to the loan-level proposed requirements, the
disclosure that must be provided on an aggregate basis relating to the
type and amount of assets that do not meet the underwriting criteria
that is described in the prospectus.
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