More color and commentary emerged in the second full week since the Securities and Exchange Commission released its 400-page proposal for new disclosure requirements to govern the ABS offering and reporting process.
While panelists at last week's American Securitization Forum Sunset Seminar were quick to voice their support of the SEC's efforts, the uneasy undercurrent was unmistakable.
"This may be too much of a good thing," said Stephen Kudenholdt, partner at Thacher Proffitt & Wood. "This will change the way the industry operates; it could push marginal players out of the market."
The industry was taken somewhat by surprise by the amount of information the SEC is asking issuers to include in the prospectus. "This is more than just codifying existing practice, and more than just incremental change," said JPMorgan Securities Managing Director and Associate General Counsel Bianca Russo.
None of the requirements would appear particularly onerous on a stand-alone basis, said GMAC-RFC's David Marple, managing director, legal. However, all together, the picture is much more taxing than what had been anticipated, he said.
Of primary concern is the inclusion of static pool information, which Kudenholdt dubbed the "hallmark" of the SEC's release.
It has been noted that the SEC failed to provide a clear definition of static pool. In addition, the proposal uses the nebulous phrase "to the extent material" to qualify the need for such information. The general understanding is that the rule would require three years of static pool data, including losses and delinquencies. This data would further be stratified by other factors that could be material, including loan-to-value and FICO scores. Issuers are also encouraged to provide editorial comment.
"I don't think the disclosure of 50 different pools is a meaningful exercise for anybody," Marple said. "I think the lines between useful and material are being blurred."
Thomas Hourican, a managing director at Societe Generale, argued that from an investor's standpoint, static pool information is undeniably useful. As it now stands, there is no ready source and investors are left to comb through previous securitizations to create their own static pool analysis, he said. However, he agreed that the language in the rule needs to be more specific. "The managed portfolio is typically in the prospectus," he said. "The problem is that the influx of new assets over time radically changes those numbers."
Also at issue is the disclosure
of servicer information. The rule would require a description of any prior securitizations involving a
servicer in which there has been a default, early amortization or
performance trigger event, and information about the servicer's financial condition. The rule would apply to subservicers as well as to master servicers, which could set
off a due diligence nightmare, Marple said.
Soc Gen's Hourican dutifully supported increased disclosure in the area of servicing as well. However, his position was fairly restrained. "Societe Generale has bought $7 billion in these securities; it would be difficult for me to say there is not enough information to make an informed decision."
One of the more contentious proposals involves the 10-K. The SEC is proposing that a so-called "responsible party" - whoever signs the annual report - sign off on the servicing, including the integrity and accuracy of cash flow aggregations and distributions being made to investors (see ASR 5/10). "If an individual is signing a SOX certification, and is completely unaffiliated with the servicer, that individual is scared," JPMorgan's Russo said.
Additionally, some servicers may want to renegotiate for a higher servicing fee if they are asked to sign something that confers liability, Marple said. Meanwhile, Hourican maintained that a bit more oversight would not be amiss. "We have certainly seen some servicers who have not complied. Investors are much more concerned today than they were 10 years ago about servicers not doing what they were supposed to do," he said.
Also circulating last week were two analyses of the proposal from law firms McKee Nelson and Sidley Austin Brown & Wood.
The 90-day comment period for the proposal ends July 12. Market participants expect the rule to take effect sometime this year.
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