Speech by SEC Commissioner:
Statement at Open Commission Meeting: Credit Risk Retention and Listing Standards for Compensation Committees
Commissioner Kathleen L. Casey
U.S. Securities and Exchange Commission
March 30, 2011
Credit Risk Retention
Thank you, Chairman Schapiro, and of course, thanks very much to the staff — especially Meredith, Paula, Kathy and Jay, as well as the other offices and Divisions, such as Risk Fin. I appreciate all of your hard work on the Credit Risk Retention proposing release.
I support today’s release in which we propose, jointly with the OCC, the Fed, the FDIC, the FHFA and HUD, rules to implement the requirement in Sec. 941 of the Dodd-Frank Act that securitizers of asset-backed securities retain 5% of the credit risk of the assets collateralizing ABS.
In April last year, the Commission proposed rules to amend the Commission’s Regulation AB. In that release, we proposed as a condition to the use of shelf registration that the sponsor of an ABS retain 5% of each tranche of the securitization.
Although I supported that proposal, I raised several questions and concerns with this risk retention condition. In particular:
- Will risk retention in practice achieve the goal of improving underwriting quality by aligning the interests of sponsors with those of investors?
- Which of several possible forms of risk retention, and what amount of risk retention, would prove most effective in aligning interests? Moreover, would simply requiring disclosure of the form and amount of any risk retention in a particular transaction, rather than dictating the form and amount, enable the market more efficiently and effectively to determine the appropriate terms of risk retention?
- Would the proposed rules further entrench the GSE’s dominant competitive position in residential mortgage-backed securities?
- Finally, along with other policy-makers and commentators, I noted the importance of a coordinated, comprehensive approach to regulation of ABS in order to ensure rational regulation, avoid unintended consequences and promote certainty among market participants.
These questions remain pressing today as we face a Congressional mandate to require risk retention by ABS sponsors.
Most notably, I do not believe that risk retention is a panacea for the problems in the securitization market that were revealed in the financial crisis. And I am once again concerned that these proposed rules may further strengthen the competitive position of the GSEs.
Nevertheless, I am pleased that the requirement to undertake joint rulemaking largely addresses the concern that regulators’ approach to risk retention be coordinated rather than scattershot.
Furthermore, I am gratified that the proposal before us today reflects a collaborative effort to understand current securitization practices and to design risk retention requirements that mimic or accommodate many of these practices. The result of this effort is a set of proposed rules that would permit securitizers to select from a “menu” of options to satisfy risk retention requirements. I am hopeful that this approach will not only limit the disruption to existing securitization practices, but allow the mechanism of the market at least to influence the form of risk retention used in ABS transactions.
In addition to the open questions I have already discussed, the proposal of course raises a host of new questions, including, for instance, whether the definition of qualified residential mortgage is appropriately tailored, including whether private mortgage insurance should be considered in, or servicing standards excluded from, such a definition; whether the particular requirements for the various menu options are too restrictive or too permissive to achieve their stated purpose, and whether there are other risk retention mechanisms that should be permitted.
Just as I viewed our proposal to amend Regulation AB as the Commission’s preliminary views rather than definitive answers, this proposal cannot be the final word on risk retention regulations. A vibrant ABS market is crucial to ensuring the availability of credit in our economy at a cost that appropriately reflects risk. This market is too fundamental to our economy to get risk retention wrong. Thus, the rules that we ultimately adopt must support or, at a minimum, not unduly hinder the securitization market.
As a result, input from market participants will be particularly crucial as the agencies move toward crafting our final risk retention rules.
I have no questions for the staff at this time.
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Listing Standards for Compensation Committees
Once again, thanks to the staff for all of your hard work on this release.
As required by Sec. 952 of the Dodd-Frank Act, we are proposing rules that would direct the national securities exchanges and national securities associations to prohibit the listing of any equity security of an issuer that is not in compliance with the compensation committee and compensation adviser requirements of new Section 10C of the Exchange Act, as well as new disclosure rules concerning the use of compensation consultants and conflicts of interest.
I have stated in many other contexts my strong preference for state law and private ordering solutions to corporate governance requirements. So too here, my first choice would be not to impose — or to use the stock exchanges as our proxy to impose — compensation committee and compensation adviser requirements upon public companies, whose directors are subject to fiduciary duties and whose stockholders have rights established by state law and pursuant to a company’s governing documents.
Furthermore, as the release notes, the Commission adopted rules in 2009 relating to disclosure of potential conflicts of interest of compensation consultants. In the absence of the Dodd-Frank provisions that require additional disclosures, a wiser choice would be to monitor disclosures under those still-new requirements before imposing additional disclosure requirements.
Nevertheless, I support the proposing release because it seeks to hew closely to the statutory requirements of Sec. 952 of Dodd-Frank. In particular, the proposal does not inappropriately broaden the requirements under Sec. 952 or take an unnecessarily expansive view of the Commission’s role in mandating or approving the rules that the stock exchanges adopt to implement the compensation committee and compensation adviser requirements under Sec. 952.
As always, commentators’ input on the proposal will be very important as we look toward adopting final rules.
In particular, I highlight our approach to extending the new conflict of interest disclosure requirements relating to compensation advisers to companies that are not listed on a national securities exchange or a national securities association or that are “controlled companies.” We propose to harmonize the new disclosure rules with our existing rules and apply the harmonized rules to all companies that are required to file proxy statements. The rationale in support of such an approach is that maintaining separate disclosure rules for listed companies, on one hand, and issuers that are not listed or that are controlled companies, on the other hand, would be burdensome and confusing for both issuers and investors. I will be interested, however, to hear whether commentators agree with this analysis.
Relatedly, the release includes guidance as to factors that an issuer should consider in determining whether a conflict of interest exists that must be disclosed. I believe this guidance, which refers to the independence factors set forth in Sec. 952 and in proposed rule 10C-1(b)(4), may be helpful to issuers and is internally logical. However, because Sec. 952 and proposed Rule 10C-1(b)(4) apply directly only to listed issuers while our proposed rules extend the conflict of interest disclosure requirements to non-listed issuers and controlled companies, the guidance implicitly extends these factors to non-listed issuers and controlled companies. Accordingly, I am interested in whether commentators believe this guidance is appropriate.
I have no questions for the staff at this time.