LAGUNA NIGUEL, CALIF. - As the market prepared for the Dec. 1 implementation of new rules governing the securities offering process, a question lingered among structured finance professionals - whether the reforms governing the offering process for public deals will spill over to the 144A market.
Most still seem to think it will.
"I think prudence would indicate that we are going in that direction," said Lazarus Sun, senior vice president and associate general counsel at Trust Company of the West, speaking on a panel discussion at Opal Financial Group's CDO Summit held here last week.
On June 29, the Securities and Exchange Commission adopted securities offering reform rules. While the changes broadened the ability for written information regarding an upcoming final prospectus of a public offering to be shared, they also opened the door for issuing firms to be held liable for that preliminary information should it be considered the impetus for an investment decision.
In the structured finance market, the problem is that such preliminary information often differs from the final prospectus. Mark Adelson, head of structured finance research at Nomura Securities and a former securities lawyer, said, "This is going to change how all of Wall Street conducts itself in offering securities, particularly structured finance securities."
The offering reform is a particular challenge in the CDO market, where large portions of the capital structure are typically marketed on term sheets before the items are considered "red," said Timothy Saunders, Jr., vice president and associate general counsel at Goldman Sachs. "It's always been a challenge in the CDO market, you're always going to be getting comments along the way," he said. "I think there is an emerging consensus that we need to get more information early on, such as a more robust term sheet prior to pricing, or another red herring prior to pricing," Saunders said.
Saunders added that Goldman is considering the distribution of an additional pricing term sheet prior to closing transactions. Final changes, according to the new SEC rules, need to be given to investors prior to closing the deal. One item that remains in question is whether investors actually need a black-lined copy of changes to the offering circular prior to pricing. Rating agencies are expected to play a role in helping define what the reforms mean for the structured finance market, Saunders said.
In any case, TCW's Sun offered that collateral managers should avoid becoming responsible for the offering process. "It is the banker's concern," he said, "and especially now ... we need to be very careful of what we take on contractually, be aware of what is going on with the documentation," Lazarus said.
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