The Securities and Exchange Commission (SEC) proposed significant revisions to Regulation AB and other rules regarding the offering process, disclosure and reporting for ABS.

The 5-0 vote this morning counts the SEC as an added player in the huge push coming from various regulators for more "skin-in-the-game" by ABS issuers.

The 5% risk retention provision is aimed at better protecting securitization investors by providing them with more detailed information regarding pooled assets and more time to make their investment decisions. It also gives them the benefits of better alignment of the interests of issuers and investors.

The rules will also bring greater transparency to the private market because they would repeal the current credit ratings references in shelf eligibility criteria for ABS issuers as well as establish new shelf eligibility criteria that would include a requirement that issuers file Exchange Act reports on an ongoing basis so long as the firms' public securities are outstanding.

In other words, ratings might be removed as an eligibility for shelf registration criterion. Instead, issuers will be required to offer a certification from CEOs indicating the investors will receive a high likelihood of return. "This shifts the burden from ratings providing the underlying support for the securities to the sponsors of the securitization," according to lawyers from Dechert.

The lawyers added that the new SEC shelf registration forms for use in securitized deals and to qualify for use of shelf registration, which is critical for regular ABS/MBS issuers, these firms must follow the following requirements.

These requirements are: (1) retain 5% of risk, which is a vertical slice in most cases; (2) include a mechanism to confirm that loans comply with reps and warranties including a third party opining on compliance;(3) the CEO certification; (4) and '34 Act reports must be filed for the life of the deal instead of just through the first year, as has been the case thus far.

The Securities Industry and Financial Markets Association (SIFMA) said it backed the proposed new regulations, although it said that the proposal still had room to refine its risk retention provision.

"We support in principle the efforts of the SEC to increase the transparency and effectiveness of the disclosure and marketing practices for ABS," said SIFMA President and CEO Tim Ryan. "This includes reasonable risk retention requirements that are calibrated to align the interests of securitization market participants according to the risks presented by various asset classes and transaction types. We look forward to working with the SEC to refine the risk retention provisions and other aspects of this proposal. "

The American Securitization Forum (ASF) also said it supported the SEC proposals requiring greater disclosure and a new joint legislative-regulatory rulemaking process for securitizations.

“The ASF has long supported additional upfront and ongoing disclosure to investors as evidenced by the requirements which are part of ASF Project RESTART,” said Tom Deutsch, ASF executive director. “We applaud the Commission staff for drawing extensively from the extraordinary efforts by our members in this area. Better disclosure is vitally important to improving investor confidence so further recovery can occur in the private securitized credit markets that help fuel our economy and its ability to create jobs.”

However, the ASF also said it was concerned that the 5% risk retention proposal could severely limit the number of privately-sponsored securitizations.

“ASF’s members are committed to restoring the availability and affordability of private credit to Main Street and are particularly concerned that the 5% ‘skin-in-the-game’ provision in the proposed rules will result in accounting and regulatory capital treatments for private securitizations that could significantly reduce the availability and affordability of private lending to consumers and small businesses over time,” Deutsch said.

The 5% risk retention provision has crept up in proposals from the Federal Deposit Insurance Corp. (FDIC) and Congress and, in each instance, the industry has voiced its concern that extending the skin-in-the-game provision would result in accounting and regulatory capital treatments for private securitizations that could considerably limit  the availability and affordability of private lending to consumers and small businesses over time.

Deutsch said that such unintended consequences could create even greater reliance on a costly taxpayer-backed system of mortgage credit extension that would not be subject to these proposed rules, such as the one currently in existence through the GSEs.

Private Deals

The SEC rules being proposed to regulate ABS and MBS offerings would considerably expand the disclosure requirements for these offerings and could virtually remove any distinction between disclosure required in the SEC-registered and Rule 144A ABS markets, said Ed Gainor, a partner at Bingham McCutchen

The SEC voted to propose new rules that require that in any private offering under Rule 144A or Regulation D, an ABS issuer has to provide to any investor that so requests, at the time of the initial offering and on an ongoing basis, all information that would be required in an SEC-registered offering.

Gainor said that the proposed rules would also eliminate the investment-grade rating requirement for shelf eligibility and impose new disclosure, risk retention, certification and reporting requirements. It would also require the 5% unhedged risk retention by securitization sponsors as a condition for shelf eligibility, also not for individually registered or private offerings.  The new rules also authorize detailed asset-level disclosure on the pool assets at the time of the offering and on an ongoing basis.

The SEC also mandates that ABS issuers file with the SEC a computer program that investors can use to model the cash flow waterfall.

These rules would apply, upon investor request, broadly to offerings of structured finance products such as synthetic transactions and CDOs.

Dechert attorneys added that private deals will probably be used more. Thus the SEC is reconsidering the longstanding notion that institutional buyers do not need the protections of a registered deal.

As a result, it is proposed that in private deals:(1) issuers will have to provide, upon request the same info that is required in registered deals. (2) investors will have a breach of contract claim if issuers fails to provide that info and (3) new Rule 192 will provide an enforcement action against issuers who do not provide the requested data.


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