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Statement at Open Meeting: Asset-Backed Securities Disclosure and Registration

Commissioner Daniel M. Gallagher

Aug. 27, 2014

Thank you, Chair White. Today’s rulemakings directly address two major components of the financial crisis: a failure of confidence in the securitization markets and a failure of competence by credit rating agencies in producing structure finance ratings. 

The first of today’s rulemakings is the culmination of a long effort to restore investor confidence in asset-backed securities. I’d like to begin by thanking the staff for all of the hard work over the course of several years that led to today’s adopting release.  In particular, I’d like to acknowledge the efforts of Keith Higgins, Karen Garnett, Kathy Hsu, Rolaine Bancroft, Michelle Stasny, Hughes Bates and Kayla Florio. 

Our securitization markets play a crucial role in facilitating capital formation, effectively underwriting, and serving to manage the risks of, the millions of loans made to individuals seeking to buy a house or car, or to finance their education.  Unfortunately, a combination of failed federal housing policy that encouraged – indeed, mandated – reckless lending and the widespread failures by credit rating agencies in rating the securitized instruments formed from such loans seriously harmed investor confidence in the securitization markets.  As noted in today’s adopting release, the residential and commercial mortgage backed securities markets remain depressed even today. 

Although today’s rulemaking addresses mandates set forth in the Dodd-Frank Act, the origins of the new rules and rule amendments on which we vote today predate that statute.  The Commission first proposed reforms to our rules addressing asset-backed securitizations in April 2010, and while certain provisions of the Dodd-Frank Act impacted the Commission’s proposed approach and prompted a re-proposal of those proposed rules, it’s important to note that this rulemaking has been a proactive reform effort by the Commission from the beginning.

This distinction is important to note because today’s package of reforms marks a welcome return to our traditional role of mandating the disclosures investors need to make informed, educated investment decisions.  The SEC is first and foremost a disclosure agency, despite what it may say on our website.  And the rules we vote on today are first and foremost disclosure rules, requiring sponsors of asset-backed securitizations to provide investors with the information that they need in order to make informed investment decisions.  This, in turn, should imbue investors with added confidence in our securitization markets, spurring their revitalization.

In an ideal world, we would stop here for a time and take stock.  We would wait to see whether these rules achieve their objectives, or whether additional changes are necessary to the disclosure requirements we are adopting today.

Unfortunately, the Dodd-Frank Act imposes upon the Commission a mandate jointly to craft with five other financial regulatory agencies an onerous, redundant “solution” to the problems in the securitization markets through the “risk retention” requirements of Section 941 of the Act.   As I noted in my dissenting statement for the re-proposal of the risk retention rules almost exactly one year ago,1 those rules, if adopted as re-proposed, will help ensure that the vast majority of mortgages in the United States are insured or owned by the government, will introduce another flawed government imprimatur of creditworthiness into the markets, and will disincentivize proper risk management and due diligence in the mortgage markets. 

The risk retention rules would require sponsors of securitized instruments to maintain “skin in the game” in order to incentivize them to better structure those instruments and reduce investor risk – exactly the results that we seek to achieve through the disclosure reforms we are adopting today.  The risk retention rules are more than simply redundant.  They mark a forced departure from the Commission’s traditional role, requiring us to dictate prescriptive risk management standards for securitizers, in conjunction with banking regulators – prudential regulators whose approach to regulation is very different from the Commission’s. 

I realize that, given political pressure coming from the highest levels of the executive and legislative branches – the two arms of government from which “independent” agencies such as the SEC are supposed to be insulated, the agencies will not postpone the adoption of the risk retention rules until we have had the time to evaluate the effect today’s reforms have on our securitization markets.  I will note, however, that at a minimum, the economic analysis performed in conjunction with any future risk retention rulemaking must take into account the new economic baseline that will result from today’s rule reforms.

One final note:  neither the risk retention rule nor today’s rule addresses GSE mortgages, whether federally-owned or insured.  These mortgages, which represent over 90% of today’s residential mortgage market, are carved out from both rules by statute.2  Alas, the more things change, the more they stay the same.  Perhaps Congress should read some of the real histories of the crisis instead of the FCIC majority report.3

Thankfully, the risk retention rulemaking is not before the Commission today.  While the reforms to our ABS disclosure rules we are adopting today may not be perfect, they mark a measured approach to putting forth meaningful reforms to increase investor confidence in an important segment of our market and are consistent with the Commission’s core disclosure-based approach to regulation.  I am therefore pleased to support them, and I have no questions.

[1] Dissenting Statement of Commissioner Daniel M. Gallagher Concerning Re-Proposal of Rules Implementing the Credit Risk Retention Provisions of the Dodd-Frank Act, August 28, 2013 (available at

[2] Fannie Mae and Freddie Mac: How Government Housing Policy Failed Homeowners and Taxpayers and Led to the Financial Crisis: Testimony before the H. Committee on Financial Services, Subcommittee on Capital Markets and Government Sponsored Enterprises, 113th Cong. 1 (2013) (testimony of John L. Ligon, Policy Analyst, Center for Data Analysis, The Heritage Foundation).

[3] See, e.g., McLean, Bethany and Nocera, Joe, All the Devils Are Here: The Hidden History of the Financial Crisis; Morgenson, Gretchen and Rosner, Joshua, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Created the Worst Financial Crisis of Our Time; Wallison, Peter J., Dissent from the Majority Report of the Financial Crisis Inquiry Commission (available at

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