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Statement at Open Meeting

Commissioner Michael S. Piwowar

Aug. 27, 2014

Thank you, Chair White.

I am pleased to support today’s recommendation to revise Regulation AB and certain other rules governing the offering process, disclosure, and reporting for asset-backed securities.  Like my colleagues, I want to express appreciation for the efforts by our staff on this project, particularly those in the Division of Corporation Finance, the Division of Economic and Risk Analysis, and the Office of the General Counsel.

Today’s action implements two important provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).[1]  First, as directed by Section 939A, which requires the Commission to remove references to credit ratings from our rules, it removes a requirement in Form S-3 that relies on investment grade credit ratings as a criterion for shelf registration.  Second, it implements disclosure requirements for asset-backed securities as required by Section 942(b).  This provision requires the Commission to adopt regulations (1) setting forth data format standards for asset-backed security issuers (“ABS issuers”) that facilitate comparison among similar asset classes, and (2) requiring ABS issuers to disclose asset- or loan-level data, if such data are necessary for investors to independently perform due diligence.

Unlike a number of provisions in the Dodd-Frank Act that were drafted by politically-connected special interest groups well before the recent global financial crisis – such as conflict minerals, resource extraction, mine safety, and median pay ratio – reforms tackling the overreliance on credit ratings and the opacity of asset-backed securities directly address two interrelated areas that actually contributed to the crisis.

During that crisis, I was at the White House as a senior economist for the Council of Economic Advisers.  I observed first-hand the difficulties in obtaining reliable data about the quality and performance of assets underlying mortgage-backed securities.  This opacity contributed to the overreliance on credit rating agencies’ risk assessments of these complex securities by market participants such as large financial firms.  Prudential regulatory policies that failed to mitigate risk-management weaknesses led to taxpayer-funded bailouts of financial firms holding mortgage-backed securities that turned out to be far more risky than anticipated.[2]  I believe that improved disclosure requirements addressing the opacity with respect to structured products will have a larger impact in promoting market discipline, thereby protecting taxpayers, than expanding the scope of so-called macroprudential regulation.

Moreover, the adopted rules will require that the asset- and loan-level data be filed in interactive data format.  Interactive data facilitates the ability of investors and analysts to conduct their own assessments and reach their own conclusions as to the underlying risks of asset-backed securities.  Interactive data will be indispensable, for instance, when a single automotive securitization contains in excess of 50,000 individual car loans or leases.  The ability to use interactive data will also permit investors to lessen their reliance on credit ratings.  If more market participants are able to cost-efficiently analyze the underlying assets, then it will allow for better price discovery and increased market efficiency.

I am very pleased that Commission staff was able to obtain guidance from the Consumer Financial Protection Bureau providing assurances that the asset- and loan-level data required to be disclosed under the federal securities laws will not create implications for either issuers or the Commission under the Fair Credit Reporting Act.[3]  I must emphasize the need to eliminate any regulatory uncertainty over the ability to use and analyze the data that we are requiring to be disclosed today.  Market participants, whether they are issuers, investors, analysts, or investment advisers, as well as academic researchers, will need to be able to use this data in order to protect investors and maintain fair, orderly, and efficient markets.  Any result to the contrary risks merely recreating the circumstances that led up to the financial crisis.

Finally, I want to commend the staff for their procedural decisions on the path to today’s adoption.  The recommendation to re-open the comment period earlier this year to allow public review of the staff memorandum on privacy was a very important step.  It is the type of action that I think the Commission should utilize more often.  Rulemaking is a complicated process and it is important to engage in a continuing dialogue with the public.  The Commission could have simply plowed forward with adoption earlier this year, but instead it took the additional step to disclose how the staff’s thinking on privacy had evolved – and then listened to the reactions of commenters to that possible approach.  The final rule is much better as a result.

Today’s adoption is a step in the right direction toward more informationally efficient asset-backed securities markets.  While I still have significant concerns about the continued domination of the residential mortgage-backed securities market by Fannie Mae and Freddie Mac – and the potential for more taxpayer-funded bailouts – that will be a challenge to address on another day.

Thank you.  I have no questions.

[1] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[2] See, e.g., Economic Report of the President (2009), available at

[3]  15 U.S.C. 1681 et seq.

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