At last week's meeting on disclosure and reporting practices for securitizations, the Securities and Exchange Commission voted unanimously to publish a proposal for comment, which it plans to release this week. The comment period should run for 60 days after the proposal debuts.
According to statements by the SEC commissioners and the staff, the proposal will be roughly 400 pages long and will codify existing practices in most areas. However, the document will propose a few important changes:
* ABS/MBS disclosure would include static pool performance data.
* ABS/MBS issuers would be permitted to distribute loan-level data to investors.
* ABS/MBS disclosure would include expanded information on transaction participants, such as sellers and servicers.
* The proposal would broaden the definition of "asset-backed security" to include securities backed by more kinds of assets, including auto leases.
* Shelf registration (Form S-3) would be available to the newly expanded class of "asset-backed securities."
* Shelf registration would be more readily available to foreign ABS/MBS issuers.
Additionally, the staff indicated that the proposal calls for changes in the periodic reporting framework for ABS/MBS. Quarterly reports would emphasize changes in pool composition. The proposal would codify the annual certification requirements for ABS/MBS under section 302 of the Sarbanes-Oxley Act and would establish principles-based criteria for assessing servicing compliance.
The staff emphasized that the breadth and variety of ABS make it impractical to create customized disclosure rules for every situation. Accordingly, the proposal would embrace a principles-based approach. It appears that the proposal would create a new subpart of Regulation S-K to be called Regulation A-B.
The proposal would codify and standardize existing practices relating to the use of written materials such as "structure term sheets" and "collateral term sheets." The proposal would retain the current requirement for filing such materials with the SEC.
Each of the commissioners offered individual remarks on the proposal. SEC Chairman William Donaldson noted that the securitization market has grown enormously and now constitutes a significant piece of the entire U.S. capital markets. He noted that the traditional disclosure system - one fashioned around the needs of the corporate securities environment - does not always accommodate the needs of the ABS/MBS sector. Over time, the staff developed an informal framework for handling the special needs of ABS/MBS, but the whole was not transparent. A potential ABS/MBS issuer can find only limited written guidance, even by reading mountains of "no-action letters." Donaldson emphasized that the proposal is important and beneficial because it should enhance transparency, provide certainty, and reduce confusion.
Commissioner Cynthia Glassman observed that, although the proposal appears "hefty" at 400 pages, it is concise compared to the accumulated parts of which it was made (i.e., mountains of no-action letters). She noted that the proposal incorporates the suggestions of the inter-agency task force on MBS disclosure.
Commissioner Harvey Goldschmid noted that the informality of no-action letter guidance has been a problem. He stated that the market needs the proposal in order to provide consistency and certainty. He said that the proposal is an important and sensible economic contribution.
Commissioner Paul Atkins emphasized that the proposal responds to a regulatory vacuum created by reliance on informal guidance. He expressed optimism that the proposal will improve the efficiency of the market and provide certainty to market participants. Commissioner Atkins also observed that the proposal may produce significant cost savings to issuers by superseding the unwieldy body of no- action letters as the primary source of guidance on certain issues.
Commissioner Roel Campos joked that the proposal could help reduce legal fees for issuers. He stated that the certainty provided by codification is an important benefit. He also emphasized the value of introducing disclosure of static pool performance data.
All the commissioners applauded the staff's tremendous accomplishment in constructing the proposal. Alan Beller, the director of the Division of Corporation Finance, was the staff's principal spokesperson at the meeting. Jeffrey Minton, special counsel in the Office of Rulemaking of the Division of Corporation Finance, delivered the staff's prepared statement. Mr. Minton was also the principal drafter of the proposal.
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