The Securities and Exchange Commission (SEC) will give securitization issuers six months to omit credit ratings from ABS registration statements filed under Regulation AB, the SEC announced Thursday in a 'no action' letter.
This decision comes a day after President Obama signed into law Wednesday a sweeping overhaul of the nation's financial services system or the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The bill repealed the current version of Section 436(G) of the Securities Act of 1933 — what the Wall Street Journal in an article yesterday called an “unintended consequence” of the bill.
The repeal is likely to open rating agencies to unprecedented liability for the quality of their ratings on ABS transactions, analysts from Barclays Capital said in a research note released yesterday.
With difficulty assessing this new liability, Moody’s Investors Service, Standard & Poor’s Fitch Ratings and DBRS have already pulled back from the new -issue securitization market.
And because of the withdrawal of these firms, a Ford Motor Credit ABS sale had been pulled yesterday along with a planned sale from another issuer that remained unamed, pubished reports said.
Section 436(G) protects rating agencies from liability for their ratings, which are considered opinions rather than expert advice.
To close an ABS transaction, it must have a rating from one or more nationally recognized statistical rating organizations (NRSROs). When ratings are mandated, Barclays analysts explained that the SEC regulations require the ratings to be disclosed and released by the agency in the public offering documents. The failure to disclose this information could be considered a material omission and would potentially subject the issuer and underwriter to further liability.
Industry Reaction
Tom Deutsch, the executive director of the American Securitization Forum, issued the following statement after the SEC's announcement.
“The SEC’s action today allows market participants time to adjust to new rules con-tained in the financial reform package just signed by President Obama," Deutsch said. "Without the SEC’s action, the securitization markets would have been flash frozen, as credit rating agencies were unable to issue new ratings without a clear understanding of their long-term legal liabilities. We look forward to working with regulators and all market par-ticipants to develop a long-term solution to these changes that will allow critical con-sumer and business credit to continue to flow through the securitization process.”
The Securities Industry and Financial Markets Association (SIFMA) today issued the following statement from Richard Dorfman, managing director and head of SIFMA’s securitization group.
"We applaud the SEC for their timely recognition of the unintended effect this provision in interaction with Reg AB had on the public ABS markets," Dorfman said. “The no-action letter will allow issuers, credit rating agencies and other market participants to conduct registered ABS offerings, avoiding the potential for negative impact on the availability of financing and to the U.S. economy. SIFMA will continue to act assertively and constructively to help ensure that our financial markets will be reformed knowledgably and effectively while continuing to serve American businesses, investors and families.”
Earlier today Dorfman released comments on 436 (G). He said that, “SIFMA is deeply concerned about the impact this provision of regulatory reform is already having on the public asset-backed securities market. "
He added that this is a "real and significant" unintended outcome with real consequences to the general economy. Public securitization, according to Dorfman, is a big source of finance for consumers and businesses, with over $7 trillion in issuance since 2001.
This provision of the bill, he said, has created a roadblock to the issuance of any deals in these markets because of the interaction of provisions of Reg AB and the refusal of the major rating agencies to consent to the inclusion of their ratings in transaction documents.
“By stopping this market cold, this situation will negatively impact both credit availability and economic recovery," Dorfman said. "The alternative for issuers is to only place deals into the private market, which decreases transparency to both market participants and regulators. It is critical that this consequence be addressed so markets can move forward in all areas. SIFMA looks forward to working with the SEC and other market participants on unfreezing this important sector of the market.”
