Good Morning. This is an open meeting of the
U.S. Securities and Exchange Commission.
Today, we are considering a recommendation
that the Commission approve for public comment
proposed rules that would fundamentally revise
the regulatory regime for asset-backed securities.
The proposed rules are intended to better
protect investors in the securitization market
by giving them more detailed information about
pooled assets, more time to make their investment
decisions, and the benefits of better alignment
of the interests of issuers and investors
through a retention or "skin in the game"
requirement. Finally, the rules would bring
greater transparency to the private market
as well.
As we know all too well, securitization — that
is, the buying and bundling of assets such
as housing, student or commercial loans into
securities that are then sold to investors
— played a central role in the financial
crisis. Like most investment products, securitization
has both its positive and negative attributes.
At one time, the securitization market provided
trillions of dollars of liquidity to virtually
every sector of the economy. This enabled
lenders to make loans and credit available
to a wide range of borrowers and companies
seeking financing.
But, securitization has also fostered poor
lending practices by encouraging lenders to
shift their risk of loss to investors. In
the area of mortgage-backed securities, sound
underwriting practices sometimes took a back
seat to immediate profits. When poorly underwritten
mortgages began to default, the securities
backed by the mortgages lost their value.
Investors suffered significant losses, and
have consequently largely withdrawn from the
market.
During the past year, we have worked hard
to better understand the practices that contributed
to the financial crisis, and to identify ways
to prevent reoccurrence in the future. We
— along with other financial regulators
— have looked closely at ABS oversight both
in the public and private markets for these
instruments, and have concluded that we can
and must do a better job of protecting investors.
The release that the Commission is considering
today is the result of our comprehensive reevaluation
of existing rules, and our conclusion that
three fundamental things need to change in
order to better protect investors and promote
more efficient asset-backed securities markets.
First, investors must have better information
about the pooled assets that "back" these
securities. This information must be both
granular and current enough to provide investors
the data they need to accurately assess risk
and value. It also must be provided in a manner,
and within a timeframe, so that investors
can access and use the information effectively.
Second, the interests of organizations that
issue and sponsor these securities must be
better aligned with the interests of investors.
And third, we must consider the impact that
more rigorous rules for the public ABS market
will have on the private ABS market, and make
sure that we are not simply moving tomorrow's
problems into a less regulated area.
There are likely many avenues to address these
macro objectives. As staff will explain in
more detail in a moment, the release proposes
to address these issues in a number of specific
ways.
First, to provide investors with better, more
timely and usable information, the proposal
would require ABS issuers to file with the
Commission standardized information about
the specific loans in the pool, allowing investors
to better understand their investment. This
"loan level information" would be required
at the time that the asset is securitized
and on an ongoing basis.
Additionally, these issuers would be required
to file on the SEC Web site a computer program
of the contractual cash flow provisions, or
"waterfall." The waterfall is essentially
the rules that dictate how the borrowers'
loan payments are distributed to investors
in the ABS, how losses or lack of payment
on those loans is divided among the investors,
and when administrative expenses (such as
servicing fees), are paid to service providers.
This computer program could be used to analyze
the loan level information and would give
investors and the markets better tools to
analyze asset-backed securities.
And lastly in this area, the proposal would
for the first time give investors a minimum
period of time — specifically five business
days — to consider transaction-specific
information, including the loan level data,
before an ABS investment decision needs to
be made.
Second, to better align interests — as well
as improve the quality of securities that
are offered through the shelf registration
process — the proposal would remove references
to the ABS' credit rating as an eligibility
requirement for shelf registration, replacing
this instead with four new eligibility criteria:
The chief executive officer of the ABS depositor
would need to certify that the assets have
characteristics that provide a reasonable
basis to believe that they will produce cash
flows as described in the prospectus.
The ABS sponsor would be required to retain
five percent of the securitization, net of
the sponsor's hedging, to ensure that the
sponsor — like investors — has "skin in
the game."
The ABS issuer also would be required to provide
a mechanism whereby the investors could confirm
that the assets comply with the issuer's representations
and warranties, such as representations and
warranties that the loans in the ABS pool
were underwritten in a manner consistent with
the lenders' underwriting standards.
The ABS issuer would have to agree to file
Exchange Act reports with the Commission on
an ongoing basis (rather than discontinuing
reporting with the Commission in the first
year, which the Exchange Act currently permits
many ABS issuers to do).
And lastly, we need to re-examine the assumption,
in light of the financial crisis, that sophisticated
investors do not need the types of protections
that come with registration under the Securities
Act.
Further, as we make improvements to the disclosure
provisions which apply in the public markets,
we also must address the potential that these
changes will further drive ABS transactions
to the private structured products markets
where some types of asset-backed securities
(such as collateralized debt obligations)
are sold.
As a result, we are proposing that when an
SEC safe harbor is relied upon for the unregistered
sale of securities (for example, under Rule
144A or Regulation D), the issuers would have
to provide investors, upon request, the same
information that would be required if the
offering were in the public markets. This
information would need to be provided at the
time of the offering and on an ongoing basis.
The proposal also would require that an ABS
issuer file a public notice of the initial
placement of securities to be sold under Securities
Act Rule 144A. This notice would require information
tailored to ABS offerings and be publicly
filed with the SEC in its EDGAR database.
Form D, the notice of an offering made in
reliance on Regulation D, also would be revised
to collect information on structured finance
products.
This release represents a fundamental revision
to the way in which the ABS market would be
regulated. I think changes are both necessary
and critical components of restoring investor
confidence. The 90-day comment period will
provide an important opportunity for market
participants to weigh in on the judgment calls
that we have preliminarily made.
During this time, I have also asked our staff
to continue to work with other financial regulators
— the FDIC, the Fed, Treasury and the President's
Working Group — to ensure that our work
in this area is fully informed by the activities
of our regulatory colleagues.
Before I ask Meredith Cross to provide us
with more details on the proposal, I would
like to thank our staff for their yeoman's
effort on this very weighty project. From
the Division of Corporation Finance, thank
you to Meredith Cross, Paula Dubberly, Kathy
Hsu, Rolaine Bancroft, Cecile Peters, Amy
Starr, Jennifer Zepralka, Max Webb, Julie
Rizzo, Lauren Nguyen, Shu Liu, Christina Padden,
John Harrington, Paula Lee, Paul Dudek, and
Gerry Laporte.
From our Office of General Counsel, thanks
go to David Becker, David Fredrickson, Bryant
Morris and Bill Barton. And thank you also
to our colleagues in the Division of Risk,
Strategy and Financial Innovation, specifically
Henry Hu, Adam Glass, Gregg Bermann, Rick
Bookstaber, Josh White, Stas Nikolova, Kathleen
Hanley and Don Monk.
Now I'll turn the meeting over to Meredith
Cross, Director of the Division of Corporation
Finance.
