A pragmatic tone hung over last week's American Securitization Forum gathering, as panelists and audience members addressed concerns about impact of the recently passed Sarbanes-Oxley Act on securitization markets in the coming year. While single-party certification is a central concern, there is hope is that the Securities & Exchange Commission will recognize a "reasonable reliance" safe harbor standard for the entity (read individual) that puts its signature and its neck on the line by certifying the accuracy of statements based on information from third parties.
"The SEC believes that the congressional mandate is clear - to have one party certify to the accuracy of financial statements but in securitizations there are multiple parties, each with different liabilities and asset information for transactions," said ASF Executive Director Dwight Jenkins. "The good news is that the Commission reached out to the ASF for industry input." The U.S. Senate approved the Act by a 97-0 margin, with three abstentions.
Short of an exemption for securitizations, panelists hoped for the SEC to allow "responsible party" or "split" certifications, where the third party providing information to the master servicer would also provide a certification of the information it provided
Without some reasonable-reliance provision for information provided by third parties, some suggested there is a risk that none of the potential certifiers would have the incentive to step up to the plate and sign on the dotted line.
But a boycot by certifiers, "is not an option," noted Orrick, Herrington & Sutcliffe attorney Mike Mitchell.
The SEC staff guidance does not specify which entity - depositor, servicer or trustee - will provide the required disclosure certifications. The individual that ultimately certifies as to the accuracy would have personal liability for the content of the report.
Without the desired reliance provisions, there would be no leeway for master servicers to lay off the risk of inaccurate information provided by sub-servicers. Issuers and trustees also are wary of taking on this risk, considering the intention of Congress to hold not only the company, but the individual legally responsible, and therefore liable, for any discrepancies.
Despite the discrete roles taken on by depositors, servicers and trustees in securitizations, "The SEC concluded that asset-backed securities are subject to the same requirements as financial statement filings for operating companies," noted Larry Rubenstein, general counsel for Wells Fargo Asset Securities Corp. and ASF executive committee member.
Panelists did, however, hold out hope that the SEC would recognize reasonable reliance standards, particularly for master servicers, which frequently rely on information from various sub-servicers when providing monthly loan level reports on asset- and mortgage-backed trusts. Some mortgage trusts have up to 10 sub-servicers, making it logistically impossible for the master servicer to verify all of the information that needs to now be certified.
Rubenstein added that he expects industry participants to obtain supporting certification from providers of information to support the certification required by the SEC. He added that going forward, Wells Fargo will require such certifications from the multiple underlying servicers for all transactions. This, he added, would give the certifier the right to use the based on my knowledge' defense should improprieties arise.