May 26, 1999
Internet Direct Dial
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 6-9
Washington, D.C. 20549
Attention Jonathan G. Katz, Secretary
Re: Securities Exchange Act Release No. 41110, File No. S7-5-99
Ladies and Gentlemen:
We represent clients with an interest in the asset-backed securities market. We submit these comments in response to the re-proposed amendments to rule 15c2-11 under the Securities Exchange Act of 1934.1
Rule 15c2-11 requires broker-dealers that publish the first priced quotation for certain micro-cap securities to obtain and review specific information about the issuer prior to posting the quotation on a quotation medium. Under the current rule, broker-dealers that publish subsequent quotes on the quotation medium are not obligated to obtain and review this information. The re-proposed amendments to rule 15c2-11 would expand the requirements of the rule so that all broker-dealers would be required to obtain and review the issuer information before entering their first quotation, whether priced or not. The re-proposed amendments would also obligate broker-dealers to obtain and review issuer information when publishing subsequent priced quotes.
We address these comments solely to the application of rule 15c2-11 to asset-backed securities ("ABSs"). We specifically endorse the comments dated April 27, 1999, submitted by The Bond Market Association ("TBMA").
We note that the Securities and Exchange Commission proposes to except investment grade ABS from rule 15c2-11. We do not believe that the anti-manipulative objectives of rule 15c2-11 are necessary or effective for the debt markets, including the non-investment grade asset-backed segment of the debt markets. ABSs represent a financial obligation by the issuer to pass through payments received on the securitized assets rather than the value and corporate prospects of the issuer. ABSs are priced off of the spread to Treasury securities with comparable maturities. Thus prices are sensitive to interest rates. As such, ABSs, whether investment grade or non-investment grade, are generally fungible with other similarly-rated ABS instruments backed by similar assets and having similar maturities. In order to manipulate an ABSís market value, one would have to manipulate all the ABSs within a particular rating category and having similar assets and maturities. Moreover, the ABS market is comprised almost exclusively of institutional investors who have the incentive and means to review independently the fundamentals of the issues in which they invest. These investors have an equal ability to identify any artificial pressure on the price of the securities as broker-dealers. As such, a greater number of sophisticated market participants monitors the market for ABS issues, resulting in a greater likelihood that any manipulative scheme that might arise involving ABSs would be quickly discovered and defeated. ABSs also trade in large denominations that make them irrelevant to the general retail market. Accordingly, it would be extremely costly and difficult, if not impossible, effectively to manipulate ABSs, as evidenced by the lack of instances of fraud found by the Commission in the ABS and other debt markets.
In addition, rule 15c2-11 is aimed at a segment of the market the Commission believes is most susceptible to manipulation -- the securities for thinly-traded, thinly-capitalized companies. ABS do not share these characteristics. ABSs are used as vehicles to securitize a group of assets sharing similar attributes and producing a stream of revenues. They do not customarily rely on a single obligor for their value, and the risk of non-payment of any particular securitized asset is reduced because it is part of an extremely large asset pool. The very size of the pool reduces the ability to manipulate ABSs. Most ABS offerings generally exceed $100 million in value.
We do not believe that the regulatory burdens imposed by rule 15c2-11 with respect to the ABS market yield any benefits to investors, issuers, broker-dealers or the markets generally. These burdens include the cost of collecting information and verifying the reliability of the source of that information. Under the re-proposed amendments, this burden would be expanded significantly, as broker-dealers would no longer be able to avail themselves of the "piggyback" exception, which excepts broker-dealers from the rule when they publish quotes in an interdealer quotation system for securities that are already regularly and frequently quoted in that system. Thus, all broker-dealers publishing the quotations would be obligated to undertake the collection and review of issuer information for all issues in which they publish the first quotation, whether priced or unpriced, and in which they publish subsequent priced quotations. These broker-dealers would additionally be required to provide this information to investors and others upon request.
For these reasons, we strongly encourage the Commission to except non-investment grade ABSs from the application of rule 15c2-11. At a minimum, we request that the Commission except non-investment grade ABSs from the ruleís application until it has completed its review of the asset-backed market and the relevance of ratings to that market so it may avoid penalizing this market on the basis of a merely hypothetical concern.
Thank you for your attention to this matter.
Very truly yours,
/s/ Katharine I. Crost
Katharine I. Crost
Orrick, Herrington, Sutcliffe
|1||Sec. Exch. Act Rel. No. 41110, File No. S7-5-99 (Feb. 25, 1999), 64 Fed. Reg. 11124 (Mar. 8, 1999).|