I join the Chairman in thanking the Staff of the Division of Corporation Finance and the other contributing Divisions and Offices for their work on the Adopting Releases before us today.
In the first release before us today — the "Reps and Warranties Release" — the staff recommends that we adopt rules to implement Section 943 of the Dodd-Frank Act, relating to disclosure of securitizers' repurchase history and disclosure and analysis by NRSROs, in reports accompanying credit ratings, relating to the representations, warranties and enforcement mechanisms in an ABS offering. I support the Reps and Warranties Release.
Regrettably, however, I am unable to support the recommended rules contained in the second release — the "Issuer Review Release" — which implement Section 945 of the Act relating to issuers' review of assets underlying ABS.
Section 943 of the Act requires us to adopt rules to require securitizers of asset backed securities to disclose fulfilled and unfulfilled requests to repurchase assets underlying ABS, and to require NRSROs to include in any report accompanying a credit rating for an ABS, a description of the representations, warranties and enforcement mechanisms available to investors and a description of how they differ from those in issuances of similar securities.
I believe the rules that we are adopting in the Reps and Warranties Release seek to achieve the objectives of the Act while also attempting to reflect an appropriate appreciation of concerns raised by commenters about the rules that we proposed in October last year.
In particular, the rules initially require disclosure of a securitizer's repurchase history for three years. This requirement is intended to provide market participants with a basis upon which to analyze historical trends, while recognizing that this information may be difficult or impossible for some sponsors and other securitizers to obtain on a historical basis, and may be of limited utility if the presentation of this information across securitizers is inconsistent or incomplete.
Also in recognition of these considerations, the rules allow a securitizer, to the extent that historical information is unknown or not reasonably available without unreasonable effort or expense, to explain this fact and omit such information.
Similarly, for registered transactions that are subject to Securities Act liability, the rules require the presentation of repurchase information for three years, but phase-in this requirement over that period to ensure that ABS issuers have sufficient time to put in place processes and controls to collect this data with a view toward disclosure in a prospectus.
With respect to the discussion and analysis by an NRSRO of representations, warranties and enforcement mechanisms of ABS, which is required to be included in NRSRO reports accompanying credit ratings, I support the rules we are adopting today because I believe they seek to faithfully implement the requirements of the Dodd-Frank Act.
I also want to sound a cautionary note, however, as I believe there is some inherent tension between this requirement of the Act and one of the primary goals of the Act: to reduce investor reliance on credit ratings.
Certainly the analysis by an NRSRO of representations, warranties and enforcement mechanisms may be a useful complement to investors' own research and analysis relating to their investment decisions, and there may be efficiencies for investors associated with including the NRSROs' analysis in the report that accompanies a credit rating. Nevertheless, the package of a credit rating and the analysis of representations, warranties and enforcement mechanisms contained in an NRSRO's report is not intended to be "one-stop-shopping" for investors' investment analysis.
Thus, it will be important for the Commission to continue to monitor the use of credit ratings — and the accompanying report — to ensure that our rules do not unintentionally thwart the goal of reducing investor reliance on credit ratings.
As I stated a few moments ago, I am not able to support the Issuer Review Release.
Section 945 of the Dodd-Frank Act requires that the Commission issue rules to require that an ABS issuer perform a review of the assets underlying the ABS, and disclose the nature of such review. Last October, we proposed rules that would give full effect to the requirements of the Act, and I was pleased to support that proposal. As I stated in October, I believe those rules could provide decision-useful information to investors by enhancing transparency into the asset review process undertaken by issuers.
The adopting release today, however, goes beyond implementation of the plain requirements of the Act and establishes a new minimum standard for the required review — that the review "be designed and effected to provide reasonable assurance that the disclosure regarding pool assets . . . is accurate in all material respects."
The Act does not mandate, nor contemplate, that the Commission establish a minimum standard for the required review, and it is not clear to me what is gained by establishing a minimum standard of review that relates to the accuracy of prospectus disclosure regarding the assets underlying an ABS. To the extent that the objective is simply to improve the quality of these disclosures, that purpose is already adequately served by our robust and longstanding anti-fraud regime under the Securities Act and Exchange Act. Indeed, the new standard appears to convert a process and disclosure obligation into a substantive, performance-based rule that stands in contrast to the clear reading of the Act. Further, it simply has not been demonstrated that introducing a "reasonable assurance" standard will result in improved disclosures.
Relatedly, the release refers to Congress's intent to ensure that issuers of ABS perform due diligence, and to Senate committee testimony that due diligence should be "re-introduced" into the offering process. Yet the original proposed rules would not only have accomplished this goal by explicitly requiring that issuers perform due diligence on pool assets, but also would have required that issuers describe their review — thus allowing investors to evaluate the quality of that review — and that they disclose the findings and conclusions of that review.
In the absence of a clear regulatory benefit served by adopting a minimum review standard, I am concerned that this standard will be interpreted to do something more than simply taking a "belt and suspenders" approach to ensuring the accuracy of ABS prospectus disclosures. While I do not wish to speculate on what those interpretations might be, at a minimum, the adoption of this standard appears to do little more than provide a new opportunity for post-hoc second-guessing of issuers' disclosure decisions. The touchstone of our regulations is that they should enhance investor protection and facilitate capital formation; yet this review standard provides no discernable benefits for investors while potentially hindering capital formation.
As a result, I am unable to support the Issuer Review Release.