U.S. Securities and Exchange Commission Chairman Mary Schapiro testified before the financial crisis inquiry commission yesterday and advocated for the tightening of securitization requirements.
The commission, which was set up by Congress last year to find out the root cause of the current economic crisis, started hearings yesterday with testimonies from Schapiro, Federal Deposit Insurance Corp. Chairman Sheila Bair as well as the top executives of four of the six biggest U.S. banks. The commission's 10-member panel will report its findings this year after holding more hearings in the upcoming months.
Schapiro said that the financial crisis revealed a number of gaps in the ABS market. Because of this, she said that the SEC staff is broadly reviewing its regulation of ABS. This includes a review of disclosures, offering process, and reporting of ABS issuers.
The staff is also considering several proposed changes that would enhance investor protection in this vital part of the market.
"I believe changes are critical to facilitating capital formation in this market, which played a central role in the crisis and has suffered significant erosion in investor confidence," Schapiro said, adding that these proposals will be coming before the commission shortly, and if approved, would then be subject to public comment.
The SEC staff proposals will be addressing issues that contributed to or resulted from the financial crises such as a lack of timely information sufficient to allow investors to adequately assess investment opportunities.
Schapiro expects the proposals will include a number of important disclosure requirements and qualitative revisions to the eligibility standards for "shelf" offerings. It will also eliminate the use of credit ratings as an eligibility standard for shelf. These proposals will also be forward looking, the SEC chairman said, specifically to improve areas that although might not yet have caused the economy's serious problems, have the potential to raise issues similar to the ones highlighted in the financial crisis.
In her prepared remarks, Schapiro said, "First, requirements around asset securitizations must be strengthened. I believe this is an essential as one of the major factors in the financial crisis was the rise of subprime mortgage-backed securities."
She said that the process of securitizing mortgages has unintentionally fostered weaker underwriting standards by originators and excessive reliance on credit ratings by investors.
"In short, the financial crisis exposed serious gaps in the asset-backed securities market," she said.
Because of this, she stated that the SEC staff is engaged in a broad review of the way in which ABS are regulated. "We are looking at disclosures, the offering process, and reporting by asset-backed issuers, and we're considering several proposed changes designed to enhance investor protection in this market," she remarked.
She called securitization a "vital market," and believes that these changes are key to restoring investor confidence as well as help capital formation.
"Our proposals will seek to align the interests of investors with those selling asset-backed securities," she said in her prepared remarks." Among other things, the proposals will seek to provide significantly more time for investors to conduct a careful analysis before investing. "
According to her, these SEC proposals will require that low loan-level data is presented in a format or manner that is accessible to investors. The proposals also aim to create a mechanism for continous disclosure, Schapiro stated.