Speech by SEC Chairman:
Statement at the SEC Open Meeting
Item 3 — Asset-Backed Securities
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
SEC Open Meeting
October 13, 2010
We will now turn to the last item on our agenda. The Commission will consider a proposal designed to enhance disclosure to investors in the asset-backed securities market. Like our previous two matters, this proposal is also a step toward implementing provisions of the Dodd-Frank Act.
Asset-backed securities (ABS) are created by buying and bundling loans — such as residential mortgage loans, commercial loans or student loans — and creating securities backed by those assets; these securities are then sold to 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, investors in the securitization market suffered significant losses, and the market has been relatively dormant ever since. The Dodd-Frank Act includes a number of issues concerning the ABS market that regulators, including the SEC, are required to address over the course of the next two years. One of these is to provide investors with better information about the loans backing the ABS.
This proposal seeks to address this issue, in three basic ways.
First, issuers of ABS that are registered with the SEC would be required to perform a review of the bundled assets that underlie the ABS. And then they would be required to describe the level and type of review that was conducted. This would apply to all registered ABS, regardless of the type of assets that are underlying the security — although the level and type of review is likely to vary depending on the circumstances, including the nature of the assets being securitized and the degree of continuing involvement by the sponsor.
For example, the level and type of a review of underlying residential mortgage loans, where the asset pool consists of a large group of loans, would likely be different from what would be reasonable when a significant portion of the cash flow will be derived from a single obligor or a small group of obligors.
Moreover, in ABS transactions where the asset pool composition turns over rapidly because it contains revolving assets, such as credit card receivables or dealer floorplan receivables, a different type of review may be warranted than in ABS transactions involving term receivables, such as mortgage or auto loans.
The rules would permit issuers to perform this review of assets themselves, or hire a third party. But, any third party that is hired would have to consent to being named in the registration statement and thereby accept potential expert liability under the federal securities laws.
The proposal does not set forth a minimum standard for the review that must be performed by the issuer or a third party engaged by the issuer to do the review. However, in order to obtain public input on a possible review standard, the release includes detailed requests for comment on whether we should set a minimum review standard, including possible standards that could be included in a final rule.
With the responses to these requests for comment, we will be in a position to include a minimum review standard in the final rule if we determine that would be the best course for investors and the markets.
Second, we also are proposing amendments to Regulation AB that would require an ABS issuer to disclose the nature, findings and conclusions of this review of assets. In addition, ABS issuers would be required to disclose:
- Information about how the loans in the pool differ from the disclosure in the prospectus about the underwriting criteria.
- Information about loans that did not meet the disclosed underwriting criteria.
- Information about the entity that made the determination that such loans should be included in the pool, despite not having met the disclosed underwriting standards.
Lastly, for both registered and unregistered ABS offerings, the issuer or underwriter would be required to disclose the findings and conclusions of any review performed by a third party that was hired to conduct such a review.
Before I turn to Meredith Cross, Director of the Division of Corporation Finance, I would like to thank Meredith and her colleagues in Corp Fin, specifically Paula Dubberly, Eduardo Aleman, Kathy Hsu, and Paul Dudek.
From the Division of Trading and Markets, thanks to Randall Roy and Joe Levinson. Thank you also to Emre Car and Stas Nikolova from the Division of Risk, Strategy and Financial Products.
And in the General Counsel’s Office, thank you to Rich Levine, David Fredrickson, and Bryant Morris. Lastly, from our Enforcement Division, thank you to Jacqueline Berman-Gorvine, Jason Anthony, and Mark Zehner.
Now I’ll ask Meredith to provide us with additional details about the staff’s recommendations.