The American Securitization Forum (ASF) and the Securities Industry and Financial Markets Association (SIFMA) expressed their support for Securities and Exchange Commission (SEC) proposals designed to increase transparency in the securitization markets, although, at the same time, the groups also aired some of their reservations.
These formed part of comment letters submitted to the regulator today by both groups.
ASF submitted two comment letters that focused on the SEC’s proposals regarding Regulation AB requirements and those affecting privately placed ABCP.
The ASF “both appreciates and supports” the SEC’s goal of balancing investors’ needs for adequate information with issuers’ interest in securing timely access to the capital markets, ASF said in response to the Reg AB initiative.
It also agrees with the regulator’s attempt to provide investors with increased transparency for ABCP, but also expressed concern over the SEC’s propsed information delivery requirements.
Alternatively, the ASF proposed market consensus views that represent the perspective of issuers, investors, and dealers on large-scale improvements to information disclosure for different securitized asset types. The ASF specifically referred to upgrades in disclosure for RMBS as well as brand new consensus templates for credit card ABS and ABCP.
The ASF presented collective concerns over the SEC’s initiative to require public disclosure for all private 144A transactions. A number of concerns were presented regarding the regulator’s proposal to condition the availability of safe harbors for privately issued structured finance products on an issuer’s undertaking to provide investors the same information as would be required in a registered transaction, the comment letter indicated.
The ASF also commented on the SEC’s proposed risk retention requirements, indicating that for certain types of assets, such as RMBS and CMBS, a “vertical” slice approach in addition to a number of retention alternatives to the flat percentage based approach would be more appropriate, due to recent accounting and regulatory capital changes. A vertical slice approach is one where the issuer would retain a portion of each security issued from an ABS.
For other asset classes, including auto and credit card ABS, the ASF stated that a “horizontal” or “first loss” approach would be better suited, given the current markets structures.
Additionally, the letter included the ASF’s position that a “waiting period” for shelf transactions should be shortened to two days and a proposal to revise the CEO certification to focus on sufficiency of disclosure rather than on future performance of the assets, and a proposal regarding the reporting of delinquencies by asset characteristic.
“The presentation of asset-level information has been a long time coming in some asset classes such as residential mortgages and, as such, the ASF is very supportive of some of the SEC’s proposals,” said Tom Deutsch, executive director of the ASF. “At the same time, the proposal aimed at providing asset-level information is wholly unworkable for other asset classes such as credit card ABS and ABCP, where asset-level disclosure requirements would radically shrink these critical financing markets for consumer and business credit.”
He added that the ASF supports efforts that align the economic interests of originators and sponsors with investors with the adoption of the Financial Reform Act.
“We request that the Commission undertake a coordinated approach with other federal agencies tasked with developing risk retention requirements that may overlap significantly with the Commission’s proposals, and consider the views of our members on how risk retention requirements should be applied across asset classes and transaction structures, ” Deutsch said.
SIFMA focused on the proposals’ ability to allow more time for investors to review a preliminary prospectus before making an investment decision, but was also concerned that the proposal is too broad in some areas and imposes burdens that are not jusitfied.
Specifically, SIFMA supported regulation that provides investors with sufficient time to review information about a securities offering before deciding whether or not to invest. However, the five-day period to review a preliminary prospectuses that the SEC proposed for shelf offerings is longer than necessary in some ABS offerings, according to SIFMA. The association has requested adjustments to these time periods.
SIFMA’s letter also urged the regulator not to prohibit shelf registration of ABS and to reconsider the proposed certification of the chief executive officer of the depositor that would be required to be filed as an exhibit to the registration statement in each ABS shelf offering. The trade group stated that such a proposal is unreasonable and that officers of many ABS issuers would be unwilling to sign it.
SIFMA’s investor members, however, did support a requirement for a meaningful certification of an officer of the depositor, and SIFMA proposed an alternative form of certification that addresses disclosure included in the prospectus, rather than a belief in the future cash flows from the pool of assets or ABS ' quality . Investor members also favored improved mechanisms for enforcement of representations and warranties, specifically in RMBS transactions.
SIFMA’s requested that the SEC change the proposed noncompliance penalties for shelf eligibility requirements. The proposed penalties are extremely harsh, according to SIFMA, and could have a material adverse effect on a sponsor’s business even in the case of minor instances of noncompliance. The trade group also requested limited changes in Form 8-K reporting requirementsto mitigate unnecessary suspension of issuers’ shelf eligibility.
The association’s dealer and sponsor members disagree with investor members regarding approaches to compliance with the SEC’s proposed asset level data (ALD) disclosure requirements, but they agreed on the importance of standardized asset-level information, the letter stated. Investor Members believe that the mandatory provision of ALD is a key factor of the recovery of securitization markets and strongly support the SEC’s proposal, while dealer and sponsor members of SIFMA are concerned that a rigid approach could render entire pools of assets unsecuritizable in the most liquid securitization markets due to a single or small number of unavailable data fields.
SIFMA’s letter also proposed changes in certain data fields, and raised concerns regarding application of the ALD requirements to assets originated before the effectiveness of the new regulations. The group asked the SEC to reconsider the proposed requirement that grouped account data be filed in credit card or charge card receivable ABS offerings.
Additionally, SIFMA asked that the SEC clarify that the cash flow waterfall computer program that will be required for filing by an ABS issuers as a part of each ABS prospectus will be a simple cash flow program. The SEC is ambiguous regarding precisely what sort of program must be filed , the association said.
In terms of Regulation AB, SIFMA’s investor members requested that changes should be made to require additional disclosure for representations and warranties and servicing practices.
SIFMA asked the SEC to reconsider its plan to reduce the threshold for requiring the filing of a current report under Item 6.05 Form 8-K from 5% to 1% and asked that the regulator not add proposed item 6.06 to Form 8-K. It requested clarification that the amendment of Section 15(d) of the Securities Act of 1934, as amended by the enactment of the Dodd-Frank act, applies only prospectively.
While SIFMA’s investor members agree with the principle that disclosure in 144A/Reg D transactions should not differ from that of transactiosn executed under Reg AB, dealer and sponsor members expressed concern over the impact of the proposed rule changes on the viability of the 144A and Reg D markets and the impact this may have on the provision of credit that was previously funded through the securitization process in these markets.
Finally, SIFMA raised questions about Rule 192 and the SEC’s proposed definition of “structured finance product,” and requested that the SEC provide further clarification. It urged the regulator not to change its interpretation of what constitutes an underwriter, not to impose additional conditions on the availability of the Regulation S Safe Harbor, and not to require additional restrictions on private offerings.
“It is clear to everyone that we must restore the vibrant, liquid, publicly beneficial securitization market,” said Richard Dorfman, managing director and head of SIFMA’s securitization group. “We urge the SEC to very carefully consider the implications of every aspect of what will be a landmark rulemaking to ensure not only that the new rules do not restrain the recovery of the fragile securitization market, but that the rules will also support the continued growth of this essential tool for our economy.”
