Speech by SEC Commissioner:
Effecting Real Due Diligence in the Asset-Backed Securities Markets
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
SEC Open Meeting
January 20, 2011
We are adopting two sets of rules today that are designed to respond to some of the lessons learned in the financial crisis. The first set of rules relates to representations and warranties in the offering of asset-backed securities. These rules are a direct response to Congress’s direction that the Commission require that securitizers and NRSROs provide investors with more complete information concerning their investments.1 These important disclosures will enhance transparency in the asset-backed securities market, and I am happy to support these rules.
The other set of rules before us would require that an issuer of asset-backed securities perform a review of the assets underlying an asset-backed security.2
These rules arise from Congress’s reaction to a “significant erosion of market discipline”3 in due diligence practices in connection with offerings of asset-backed securities. In response to this breakdown, Congress directed the Commission to “reintroduce” due diligence in the ABS offering process by requiring issuers to review the assets in ABS offerings.4
The final rules we are adopting today are a substantial improvement from the proposal. I strongly objected to the proposed rules because they did not require that an issuer’s review of the assets be reasonable or that the review satisfy any minimum standard. Instead, the proposed rules would have simply required that the issuer disclose the nature of its review, however paltry that review may have been.
As I explained before, I believe that Congress’s instruction to reintroduce due diligence necessarily called for us to require, at a minimum, a reasonable review.5 Therefore, I am gratified that the rules we are adopting today require the review to be designed and effected to provide reasonable assurance that disclosures made to investors are accurate in all material respects.6 Because of the significant changes to these rules to align them with the intent of Congress and the needs of investors, I support their adoption.7
In conclusion, I join my colleagues in thanking the staff for these rules, which are an important step forward in our continuing efforts to address the deficiencies that have been identified in the ABS market.
1 Dodd-Frank Wall Street Reform and Consumer Protection Act, § 943, “Representations and Warranties In Asset-Backed Offerings. Not later than 180 days after the date of enactment of this Act, the Securities and Exchange Commission shall prescribe regulations on the use of representations and warranties in the market for asset-backed securities (as that term is defined in section 3(a)(77) of the Securities Exchange Act of 1934, as added by this subtitle) that—
(1) require each national [sic] recognized statistical rating organization to include in any report accompanying a credit rating a description of—
(A) the representations, warranties, and enforcement mechanisms available to investors; and
(B) how they differ from the representations, warranties, and enforcement mechanisms in issuances of similar securities; and
(2) require any securitizer (as that term is defined in section 15G(a) of the Securities Exchange Act of 1934, as added by this subtitle) to disclose fulfilled and unfulfilled repurchase requests across all trusts aggregated by the securitizer, so that investors may identify asset originators with clear underwriting deficiencies.”
2 Dodd-Frank Wall Street Reform and Consumer Protection Act, § 945, “Due Diligence Analysis and Disclosure in Asset-Backed Securities Issues.”
3 Enhancing Investor Protection and the Regulation of Securities Markets—Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111th Congress, 1st session, p.56 (2009) (Testimony of Professor John Coffee).
4 Report of the Senate Committee on Banking, Housing, and Urban Affairs regarding The Restoring American Financial Stability Act of 2010, S. Rep. No. 111-176 at 133 (2010). “Section 945. Due diligence analysis and disclosure in asset-backed securities issues. Section 945 directs the SEC to issue rules that require any issuer of an asset-backed security to perform a due diligence analysis of the assets underlying the asset-backed security; and to disclose the nature of this analysis. Professor John Coffee, in congressional testimony, called for action to ‘reintroduce due diligence into the securities offering process.’”
5 See, Commissioner Luis A. Aguilar, Statement At SEC Open Meeting, “The More Things Change, The More It Seems They Stay the Same: Investors Deserve Better,” (October 13, 2010).
6 17 CFR § 230.193 (“At a minimum, such review must be designed and effected to provide reasonable assurance that the disclosure regarding the pool assets…is accurate in all material respects”).
7 While I support the adoption of these rules, I note that the Commission has more work to do to respond to the problems in the ABS market. Today’s rules concerning an issuer’s review of assets apply only to the registered, public offering of ABS. If we have learned anything from the recent crisis, it is that risks and abuses were more prevalent in the private markets than in the public markets. For that reason, the effectiveness of these rules could be limited until further rulemakings are in place. As the release points out, however, the Commission is continuing to work through the issues with the private market as part of the overall reform of ABS regulation that was proposed last April. See Asset-Backed Securities, Release No. 33-9117 (April 7, 2010). I therefore look forward to further Commission action to address the breakdowns in the market for unregistered structured products leading up to the financial crisis.