Speech by SEC Commissioner:
Continued Efforts to Improve the Regulation of Asset-Backed Securities
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
July 26, 2011
Poorly designed collateralized debt obligations and other asset-backed securities (“ABS”) contributed significantly to the collapse of the credit markets of 2008 and the subsequent financial crisis. These effects are still being felt by American families and businesses. It was demonstrated that the creation and distribution of these instruments significantly increased the degree of risk in our financial system, and caused great harm to investors and to the real economy.1
In response to the problems laid bare by the crisis, in 2010 the SEC proposed amendments to its ABS regulations. Shortly thereafter, Congress, sharing many of the SEC’s concerns, included significant reforms to asset-backed securities in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). As you have heard this morning, in light of the ABS requirements in the Dodd-Frank Act and the comments received on the 2010 proposal,2 the Commission is re-proposing a subset of its amendments to the ABS regulations primarily regarding shelf eligibility.
I would like to highlight that today’s proposals include transactional standards that I hope will better empower investors and begin to level the playing field between investors and ABS sponsors. The proposed rules would require securitization agreements to require that a credit risk manager, an independent third party, scrutinize underlying assets in certain circumstances. We also anticipate these new requirements will facilitate communication between ABS investors, as well as require the adoption of procedures to resolve disputes between the issuer and investors.
We are requesting comment on today’s proposals, and I am interested to hear if the rules proposed today, in conjunction with the rules already under consideration, establish greater integrity in the securitization process. I look forward to the comments we will receive.
I join with my colleagues to thank the staff for their hard work on this re-proposal.
1 See, e.g., “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” Majority and Minority Staff Report of the Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs (April 13, 2011), p. 12.
2 Although the focus of the release being considered today is improvements to the regulation of asset-backed securities (ABS) in light of the Dodd-Frank Act and the financial crisis, the package of proposed reforms also would repeal the transactional eligibility condition for ABS shelf registration based on credit ratings, and replace it with conditions to such eligibility that the SEC preliminarily believes would be appropriate under the circumstances, as substitute indicators of credit quality.
It is important to recognize that the approach to credit ratings in this release (the “Re-proposal of Shelf Eligibility Conditions for Asset-Backed Securities and Other Additional Requests for Comment”) differs from the approach to credit ratings in another release being considered today that would adopt amendments to the eligibility standards for shelf registration of non-convertible debt securities (the “Security Ratings” release).
These approaches differ notwithstanding that Section 939A of the Dodd-Frank Act encourages the SEC “to establish, to the extent feasible, uniform standards of credit-worthiness.”
There are several reasons for these differences, I will highlight a few.
Asset-backed securities are different from traditional debt securities. Traditional debt securities are issued by operating companies, and the investment analysis of such debt differs from ABS, which are [often] structured and require analysis of underlying assets and that structure (among other things) rather than an issuer’s operations. The differences between ABS and traditional securities has resulted in longstanding differences in treatment under the securities laws, including separate regulations for asset-backed securities offerings and separate eligibility conditions for different types of offering registrations.
The purposes of the eligibility conditions that apply to shelf registrations of ABS, on the one hand, and to traditional non-convertible debt securities, on the other hand, differ. In the context of non-convertible debt securities offerings, which are the subject of the Security Ratings release, the purpose of the eligibility conditions is to permit issuers whose securities are “widely followed” to perform shelf registered offerings; the SEC does not believe the credit-worthiness of non-convertible debt securities is the appropriate criterion for whether such securities should be eligible to use registered shelf offerings.