Speech by SEC Commissioner:
Addressing the Information Asymmetry in the Securitization Market to Put Investors and the Economy on Safer Footing
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
SEC Open Meeting
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.