Speech by SEC Commissioner:
Statement Regarding Issuer Review of Assets in Offerings of Asset-Backed Securities
Commissioner Troy A. Paredes
U.S. Securities and Exchange Commission
SEC Open Meeting
January 20, 2011
Thank you, Chairman Schapiro.
I join my colleagues in thanking the staff — particularly those from the Division of Corporation Finance — for your hard work throughout this rulemaking.
Today, the Commission is adopting a final rule that goes toward implementing Section 945 of the Dodd-Frank Act. The rule change — which centers on new Rule 193 under the '33 Act — concerns an issuer's review of assets in offerings of asset-backed securities (ABS).
Although I am in agreement with certain aspects of the recommendation before us, my concerns with the recommendation are such that, in the end, I am not able to support the final rule and respectfully dissent.
The following captures the core of my two primary concerns.
First, I have considerable concern about the "reasonable assurance" standard of review that Rule 193 mandates of issuers of asset-backed securities. Rule 193 provides that an issuer's review of the pool assets underlying the asset-backed security must, at a minimum, "be designed and effected" to provide "reasonable assurance" that the prospectus disclosure regarding the assets is materially accurate. The issuer also must disclose the nature of the asset review and the review's findings and conclusions.
I prefer Rule 193 as initially proposed by the Commission. As proposed, Rule 193 would have required issuers to perform an asset review and to disclose the nature of the review, along with the findings and conclusions, but would not have imposed on issuers a minimum standard of review. Instead, the proposed rule would have relied on investors to evaluate the quality of the issuer's asset review, anticipating that the dynamics of market discipline would influence the nature of asset reviews as investors adjusted their investment decisions according to their degree of satisfaction with the reviews. Rule 193's initial approach was part and parcel of the disclosure philosophy of regulation that animates the federal securities laws.
I am particularly disquieted by one aspect of the final rule's "reasonable assurance" standard of review: What the "reasonable assurance" standard means in practice is not clear. It is difficult to understand how the standard will be applied. The adopting release draws an analogy to the "reasonable assurance" standard under Rule 13a-15 under the Exchange Act, which covers disclosure controls and procedures for non-ABS issuers. Elsewhere the release draws a second analogy to the Foreign Corrupt Practices Act.
It is not self-evident to me that these analogies provide adequate guidance to issuers.
Further, one could question what the purpose is behind Rule 193's requirement that an issuer's asset review provide "reasonable assurance" that the issuer's disclosures are materially accurate, since longstanding provisions of the federal securities laws already hold issuers accountable for misleading disclosures. What, if anything, does Rule 193 demand of issuers of asset-backed securities that these existing provisions do not?
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In fulfilling its obligation to perform a review of the pool assets underlying the asset-backed security, an ABS issuer may engage a third party to perform the required review of the underlying pool assets. However, under Rule 193, if the third party's findings and conclusions are to be attributed to it, the third-party due diligence provider must consent to being named in the issuer's registration statement as an "expert," thus subjecting the third party to so-called "expert liability" under the '33 Act.
This introduces my second primary concern with the final rule.
I am quite concerned that third-party due diligence providers will refuse to give the required consent because of the threat of legal liability. Recent experience suggests that this is a real possibility. Unsurprisingly, NRSROs refused to consent to being named as "experts" in registration statements after Dodd-Frank subjected them to expert liability under the '33 Act.
I do not think it is worth running the risk that due diligence providers will not provide their consent — especially when one acknowledges the potential value to investors when third parties can bring their independence to bear in evaluating the assets underlying an ABS offering. Third-party diligence reviews also may be important to the ratings process for certain ABS offerings. And those third parties that may be willing to provide their consent will likely charge more for performing the asset review to account for the heightened risk of liability. A related consideration is that there simply may be fewer third-party due diligence providers. Providers may exit the market or third parties that otherwise would have entered the business may decide against it when confronted with the prospect of expert liability.
There is a complementary point that one should note — that is, even if third-party diligence providers are not subject to legal liability as experts, the issuer itself remains legally accountable for the accuracy of the disclosures it makes to investors.
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It is widely recognized that securitization helps spur the real economy. Most notably, securitization expands the availability of credit so that homeowners, consumers, and small and large businesses alike can tap into financing more efficiently to fund their needs. With securitization, credit becomes easier and cheaper to come by. With securitization, it becomes easier for people to buy homes; for consumers to shop; and for businesses to finance their operations.
From among our options, I believe that the Commission could have chosen a regulatory path that is better calibrated to facilitate the securitization market. Indeed, as my remarks this morning indicate, I believe that we could have fashioned a rule — one that does not impose on issuers a minimum standard of review and one that does not subject third-party due diligence providers to expert liability — that would have done more to restore and sustain the benefits of securitization to our economy. Accordingly, I am unable to support the recommendation before us.