The Investors’ Working Group (IWG) highlighted their recommendations on financial regulatory reform at its conference held this week in New York.
IWG’s recommendations tackle the very same financial regulatory reform issues that the Obama administration focused on in a recent white paper.
There are obvious differences in their approach, and in some cases, the Obama administration has not revealed the specific ways it plans to implement regulatory reform. In any case, both the administration and IWG have come up with proposals that could potentially advance the securitization market.
IWG’s report titled U.S. Financial Regulatory Reform: The Investor’s Perspective and the Obama administration’s recently issued white paper tackled different securitization-related topics, including securitized products, mortgage originators, ratings agencies, and the systemic risk oversight board.
Bill Donaldson, co-chair of IWG, said the differences in the proposals between IWG and the administration is “all part of the process” of establishing concrete methods of moving forward.
He cautioned, however, that this process must be conducted properly, and that “the idea of acting immediately upon these proposals is a mistake."
Both the IWG and the Obama administration called for increased ABS transparency and reporting by the Securities and Exchange Commission (SEC).
The IWG suggested that new accounting standards for off-balance sheet deals and securitizations be implemented right away. The group also supported having an ABS regulatory reporting regime developed by the SEC requiring issuers to make prospectuses available for potential investors in advance of their purchasing decisions.
Meanwhile, the Obama administration recommended that the Generally Accepted Accounting Principles ( GAAP) should be changed to require many securitizations to be consolidated on the originator’s balance sheet. The administrration also believes that asset performance should be reflected in the originator’s consolidated financial statements.
The administration also said the SEC should be authorized to require summary prospectus for investors at or before sale, if it would facilitate investor understanding. The SEC, it said, should continue to increase ABS market transparency and standardization as well as have the authority to require robust ABS reporting.
In terms of mortgages, the administration had more specific suggestions for reform than did the IWG.
While the IWG said banks and mortgage originators should comply with minimum underwriting standards- including documentation, verification, and suitability requirements- the Obama administration proposed that the newly proposed Consumer Financial Protection Agency ensure alternative mortgages are obtained only if consumers understand and can manage the risks.
It also suggested originators and purchasers of ‘plain vanilla’ mortgages should be able pressume that these products are suitable.
Both the administration and IWG also focused on rating agency reform.
The IWG, who said that NRSRO credit ratings contributed to the financial crisis, suggested that Congress and the administration consider ways to encourage alternatives to the controversial issuer-pays NRSRO business model.
The group also said fees should be vested based on the performance of the original ratings and changes to those ratings over time relative to the credit performance of the bonds. Credit rating agencies, IWG suggested, should continue to operate under the issuer-pays model should be subject to the strictest regulation.
In a similar tone, the administration voiced that credit rating agencies should be required to maintain robust policies and procedures for managing and disclosing conflicts of interest and otherwise ensuring the integrity of the ratings process.
Both parties said the influence of credit ratings should be reduced, with the IWG offering more precise proposals. While the group said less reliance should come from statutory and regulatory amendments and from the investor, the administration simply said without elaborating that regulators should reduce their use of credit ratings in regulations and supervisory practices.
The group also called for ratings agencies to be held to a higher standard of accountability. IWG said that rating agencies should only provide ratings when they have adequate information to do so and be subject to legal repercussions if they do otherwise.
The IWG also proposed that Congress create a systemic risk oversight board, with fulltime members who are independent of governmental agencies and financial institutions.
The group said an oversight board is necessary at this time instead of a regulator, since this kind of move would currently be too premature. The group also said that the systemic risk area is the one which needs the most immediate attention.
Meanwhile, the administration proposed to allow the Federal Reserve to oversee and regulate any financial firm whose failure could pose a threat to the financial stability as well as systemically important payment, clearing and settlement systems, and activities of financial firms.
