For those that believe disclosure is the best disinfectant, the Securities and Exchange Commission's freshly minted asset-backed securities regulation, dubbed Reg AB, will be a welcome addition to the ABS marketplace. The rule is a mixed blessing for investors, who will likely see increased price tags on ABS while getting a more detailed look into those deals. For now, the rule has left issuers and servicers with a lot of new disclosures and liability to swallow.
"The burden of improved disclosure practices is real but the SEC has given a long transition period for the rule," said Mark Adelson, head of ABS research for Nomura Securities. "Just like consumers pay for having air-bags in cars, investors ultimately pay for having better disclosure in their ABS deals," he said. Adelson said although servicing fees could go up by as much as one-third as a result of the rule, it is not likely to hurt the market, but rather will attract new investors by making the deals more transparent.
The static pool disclosure requirements, for example, mandate that for the first time issuers disclose asset pool statistical information when it is material to outstanding transactions. The final rule provides guidance for static pool data on delinquency, loss and prepayment data and allows issuers to provide that information over their Web sites.
John Timperio, partner in the securitization practice of law firm Dechert, said the static pool disclosures are among his clients greatest concerns with the new rule because of the additional layer of liability the new rules represent. "Though disclosure via Web sites makes it more convenient, this is a big additional burden on ABS issuers," said Timperio. There is potential liability for incomplete information, and the accompanying cost of gaining comfort with those numbers, he said. Timperio noted that the new disclosures apply only for asset pools securitized after Jan. 1, 2006.
The original rule proposal called for a 10% ownership threshold for expanded disclosure regarding unaffiliated servicers, but that was raised to 20% after the SEC received numerous comments on the issue. That threshold means that unaffiliated servicers that service at least 10% but not more than 20% will be required to make certain limited disclosures. Fully expanded disclosure will only be necessary for those that service 20% or more of the assets in a pool.
The information to be provided is grouped into three categories - basic information and experience, agreement with the servicer and servicing practices, and backup servicing. Other disclosures include information regarding the size, composition and growth of the servicer's portfolio of serviced assets of the type to be securitized and information on factors related to the servicer that may be material to an analysis of the servicing of the assets or the asset-backed securities. "The new model is to focus not just on information about the collateral in transactions, but to include more detail about transaction participants and their roles," said George Miller, executive director and general counsel at the American Securitization Forum.
"The rule will probably mean an increased amount of disclosure in areas that people, for the most part, have not done a lot of disclosure, in terms of past history of sponsors and previous transactions," said Craig Wolson, partner with Duane Morris in New York. "The bottom line is it is probably going to take a lot more time and cost a lot more money," he added. Wolson will serve as the chairman of the first-ever structured finance committee of The Association of the Bar of the City of New York (see ASR 12/13/04).
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