Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on January 20, 2011.
Today, the Commission will consider adopting two sets of rules, both of which are designed to help revitalize the important asset-backed securities market by encouraging better disclosure for investors.
At one time, the securitization market provided trillions of dollars of liquidity to virtually every sector of the economy. This enabled lenders to make loans and credit available to a wide range of borrowers and companies seeking financing.
However, during the financial crisis, ABS investors suffered significant losses, causing the market for securitization to rapidly decline. Last year, the ABS market represented only about $110 billion in issuance.
Last October, the Commission released for public comment two proposals intended to restore investor confidence in this market. Today we are considering whether to adopt these rules.
The first set of rules would enhance disclosure around ABS reps and warranties. In the transaction agreements that govern a securitization, ABS issuers, or originators of the loans typically make representations and warranties about the characteristics and the quality of those loans.
If a loan does not comply with the representation or warranty, an ABS issuer or lender can be required to repurchase the loan from the pool or replace it with a substitute asset.
Under the new rules, ABS issuers would be required to disclose the history of the repurchase requests they received, and the repurchases they made, relating to their outstanding ABS. This disclosure would be required to be filed in tabular format to help investors use this information to identify originators that may have underwriting deficiencies.
Issuers would have approximately one year to establish the systems and gather the data necessary to make this disclosure, before making their initial filing on EDGAR — the SEC public database. This initial filing would disclose the last three years of repurchase history. After the initial filing, the ABS issuer would file updated information on a quarterly basis.
These disclosure requirements would apply to issuers of unregistered ABS, including municipal ABS. However, municipal ABS would be provided an additional three-year phase-in period and would be permitted to provide their information on the MSRB’s EMMA database, rather than EDGAR.
In the context of registered ABS, the new rules would also provide investors with ready access to the most current information regarding an issuer’s repurchase history. It would do this by requiring the issuer to include — in the body of a prospectus — repurchase history for the last three years for ABS of the same asset class as the securities being registered. As with the initial EDGAR filings, this new requirement would become operable for registered offerings commencing approximately one year from now.
This first set of new ABS rules would also impose obligations upon each nationally recognized statistical rating organization (NRSRO). Under the rules, NRSROs would have to include, in any report accompanying a credit rating for an ABS offering, certain information about the representations and warranties that are contained in the ABS transaction documents.
Specifically, NRSROs would be required to describe the representations, warranties and enforcement mechanisms available to investors, as well as how those provisions differ from the representations, warranties and enforcement mechanisms in the issuances of similar securities.
We received many comments on the appropriate length of a look-back period for ABS issued in the past. Not surprisingly, divergent views were expressed. Some suggested that issuers may not have access to the repurchase information for historical periods, or that it would be extremely costly to produce. Other commenters suggested that only this historical repurchase demand data will allow for an analysis of the relative responsiveness of securitizers and asset originators. Additionally, some commenters expressed the view that the purpose of the legislation, which directed the Commission to adopt these rules, was to highlight for investors the identity of those asset originators that have habitual issues with underwriting deficiencies.
I believe that the staff has done a good job of balancing these competing concerns. The recommendation before us defines the look-back period at three years, includes relief for issuers who cannot obtain the information without unreasonable effort or expense, and phases-in the requirement for prospectus disclosure over several years. All of these are rational measures aimed at providing investors with the information that they need, without unreasonable cost.
I also know that some have suggested that we exempt municipal issuers from this rule. However, the Dodd-Frank Act did not provide us with exemptive authority. Again, I think the staff’s recommendation that we provide these issuers an additional three-year period to prepare for the rules, and the flexibility to file on EMMA instead of EDGAR, is a reasonable way to balance concerns in this area. Additionally, before the rules become operable for municipal issuers we will have the opportunity to consider additional inputs — including, the results of our ongoing study of the municipal securities markets, the study of this market that the GAO is conducting, and the implementation experience of other issuers. At such time, we could make revisions to the rules if appropriate.
The second ABS rule that we’re considering today would also enhance ABS disclosure, providing investors with better information about the quality of the loans backing the ABS. Specifically, issuers of ABS that are registered with the SEC would be required to perform a review, either themselves or with the help of third parties, of the bundled assets that underlie the ABS.
The type of review could vary, depending on circumstances such as the nature of the assets being securitized and the degree of continuing involvement by the sponsor. For example, the type of review required for ABS backed by credit card receivables may differ significantly from the review for ABS backed by residential mortgages.
Minimally, the review would need to be both designed and performed to provide reasonable assurance that the prospectus disclosure about the assets is accurate in all material respects.
This new rule would also require an ABS issuer to disclose the nature, findings and conclusions of this review of assets, as well as:
The rule would provide a phase-in period to allow market participants to adjust their practices to comply with the new requirements. Any registered offering of ABS commencing with an initial offer after the end of this calendar year would need to comply with the new rules.
When we proposed this rule, we did not include a minimum review standard, but we asked for public input about whether we should include a standard in the final rule, and if so, what that standard might be. After reviewing the comments and considering this further, I believe that a minimum standard better serves investors’ interest. Investors need to know that issuers are taking steps to check that the assets in the pool are what the prospectus represents them to be.
I believe the principles-based standard that the staff has prepared for our consideration strikes the right balance between providing issuers flexibility to design a standard that suits the particular transaction, while making sure that issuers do not shirk their responsibilities to perform a meaningful review of the assets.
In a moment, I will ask Meredith Cross, Director of the Division of Corporation Finance, to provide more details about the recommendation before us. But before I do, I’d like to thank the staff members who have put in countless hours working on this project.
From Corp Fin, thank you to Meredith, Paula Dubberly, Kathy Hsu, Rolaine Bancroft, Eduardo Aleman, Paul Dudek, Amy Starr, Cecile Peters, and Heather Mackintosh. From the Division of Trading and Markets, thanks to Joe Levinson, Ray Lombardo, Randall Roy, Mary Simpkins, and Martha Haines. Thanks also to our colleagues in the General Counsel’s Office, specifically David Becker, Meridith Mitchell, Richard Levine, David Fredrickson and Bryant Morris. From the Division of Risk, Strategy and Financial Innovation, thank you to Stas Nikolova and Emre Carr.
Finally, I would like to thank the other Commissioners and all of our counsels for their work and thoughtful comments.
Now I'll turn the meeting over to Meredith Cross to hear more about the Division’s recommendations.