The CRE Finance Council (CREFC) and the Mortgage Bankers Association (MBA) have filed comment letters on several recent Securities and Exchange Commission (SEC) proposals.
The CREFC expressed its concern over the cost of new shelf eligibility requirements, fearing that current SEC proposals could create conditions that will raise the cost for all CMBS transaction parties without concomitant benefits for clarity of disclosure, transparency, and alignment. The trade group urged the SEC to consider alternatives that would not impose unnecessary costs on the CMBS industry.
The commercial mortgage group was also concerned that the propose rules enhancing disclosure and reporting requirements do not fully align with the practices that CMBS market investors and other participants have developed to provide investor with clear, timely, and useful disclosure and reporting that is specifically tailored to the CMBS industry. The non - alignment, they feared, could add to transaction costs without delivering added clarity or transparency. The CREFC suggested that the SEC conform data fields of the proposed Schedule L-D asset-level data disclosure to the related fields of the Investor Reporting Package (IRP).
The CREFC's investor reporting package is a transparent, standardized set of bond, loan and property level information provided for all CMBS securitizations.
Likewise, “Annex A,” which is provided to investors as part of the CMBS offering materials, contains information on the securitized mortgage loans, the comment letter stated. “We ask that the Commission conform proposed Schedule L asset-level data disclosure to the then-current “Annex A” data fields formulated by the CREFC “Annex A” committee,” the CREFC wrote. “ Moreover, we request that the Commission permit Schedule L-D to be delivered in XML at such time as the CREFC investor reporting committee adopts a version of the IRP in XML.”
The Annex A is the attachment that goes with the original prospectus on a deal. Much of the information that is in the Annex A is then included in the original static “loan level” file within a firm's trademarked IRP.
Meanwhile, the MBA stated that it believes the IRP is the best standard for monthly investor reporting and that the CMBS industry will continue to look to the IRP. “The CMBS industry would like to avoid having two standards for reporting, both a separate Schedule L-D and the IRP,” the MBA said in its comment letter.
Additionally, the CREFC asked the SEC to allow, as an alternative to the provisions regarding the waterfall computer program source code disclosure requirement, a system in which third party service providers model cash flows for CMBS investors.
Private Placements
The CRE Finance Council also conveyed its concern with private placement transaction disclosure requirements, which they felt would place unnecessary administrative and cost burdens that would impose public market information delivery requirements on CMBS private placements. “We believe sophisticated institutional investors can and do demand and obtain the information they need to make investment decisions and do not need additional rule-based protections,” the letter stated.
They highlighted their fear that application of the public offering rules to the private market would make certain classes of transactions, such as stand-alone and highly concentrated pool transactions and re-REMICs, difficult or impossible to execute in the 144A market.
The MBA expressed a similar concern in its comment letter, stating that the proposals will further stifle a market that is just beginning to recover.
“For example, transactions such as resecuritizations would become unviable if the disclosure requirements were governed by the requirements of Form S-1 or Form SF-1 or subject to the ongoing periodic reporting requirements of Section 15(d),” MBA’s comment letter said. “Nothing precludes an investor from obtaining all of the information that would otherwise be included by either of the f orms if such investor were so inclined. "
CREFC also objected to certain elements of the transition periods for compliance, stating that transition periods could be insufficient to effectively implement many of the SEC’s proposed changes to disclosure and reporting requirements, specifically with regard to rules related to data reporting in particular formats. The CREFC requested that the SEC revise these time frames to afford the CMBS industry enough time to revise its procedures.
In the MBA’s comment letter, the association urged the SEC to work with other federal regulatory agencies to “harmonize” risk retention regulations based upon Section 941 of the Dodd-Frank Act. The MBA stated that the proposed rule to require a sponsor of CMBS securitization to hold a 5% vertical strip of bonds issued is unnecessary, could have a detrimental effect on the CMBS market and the availability of credit, and is inconsistent with the Dodd-Frank Act passed by Congress.
The MBA said that one of the SEC’s most important obstacles will be striking an appropriate balance between the timely implementation of its proposed rules and the real estate industry’s capacity and resources to implement them. Its letter encouraged the regulator to take into account the implementation period for each regulatory addition or change, the aggregate implementation timeframe, and a holistic approach to implementation.
Additionally, the MBA expressed its concern that the proposals increase the frequency and detail of filing burdens on CMBS issuers while also imposing more severe penalties for mistakes that do not necessarily result in a commensurate disadvantage to CMBS investors.
The MBA also stated that the proposed quarterly evaluation of shelf eligibility imposes a compliance burden that is unnecessary given the practical need to confirm eligibility before any offering that already exists.
“While MBA understands and respects the Commission’s seriousness of purpose with respect to ongoing reporting and the new certification requirements, MBA would urge the Commission to consider whether less severe penalty options than the loss of shelf eligibility for a year may be appropriate for a single violation of what will be a significantly increased number of requirements,” the comment letter stated.
