New York (HedgeCo.Net) – The Securities and Exchange Commission has adopted revisions to rules governing the disclosure, reporting, and offering process for asset-backed securities (ABS) to enhance transparency, better protect investors, and facilitate capital formation in the securitization market.
The new rules, among other things, require loan-level disclosure for certain assets, such as residential and commercial mortgages and automobile loans. The rules also provide more time for investors to review and consider a securitization offering, revise the eligibility criteria for using an expedited offering process known as “shelf offerings,” and make important revisions to reporting requirements.
“These are strong reforms to protect America’s investors by enhancing the disclosure requirements for asset-backed securities and by making it easier for investors to review and access the information they need to make informed investment decisions,” said SEC Chair Mary Jo White. “Unlike during the financial crisis, investors will now be able to independently conduct due diligence to better assess the credit risk of asset-backed securities.”
ABS are created by buying and bundling loans, such as residential and commercial mortgage loans, and auto loans and leases, and creating securities backed by those assets for sale to investors. A bundle of loans is often divided into separate securities with varying levels of risk and returns. Payments made by the borrowers on the underlying loans are passed on to investors in the ABS.today adopted new requirements for credit rating agencies to enhance governance, protect against conflicts of interest, and increase transparency to improve the quality of credit ratings and increase credit rating agency accountability. The new rules and amendments, which implement 14 rulemaking requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act, apply to credit rating agencies registered with the Commission as nationally recognized statistical rating organizations (NRSROs).
“This expansive package of reforms will strengthen the overall quality of credit ratings, enhance the transparency of credit rating agencies and increase their accountability,” said SEC Chair Mary Jo White. “Today’s reforms will help protect investors and markets against a repeat of the conduct and practices that were central to the financial crisis.”
The new requirements for NRSROs address internal controls, conflicts of interest, disclosure of credit rating performance statistics, procedures to protect the integrity and transparency of rating methodologies, disclosures to promote the transparency of credit ratings, and standards for training, experience, and competence of credit analysts. The requirements provide for an annual certification by the CEO as to the effectiveness of internal controls and additional certifications to accompany credit ratings attesting that the rating was not influenced by other business activities.
The Commission also adopted requirements for issuers, underwriters, and third-party due diligence services to promote the transparency of the findings and conclusions of third-party due diligence regarding asset-backed securities.
Certain amendments will become effective 60 days after publication in the Federal Register. The amendments with respect to the annual report on internal controls and the production and disclosure of performance statistics will be effective on Jan. 1, 2015, which means that the first internal controls report to be submitted by an NRSRO would cover the fiscal year that ends on or after Jan. 1, 2015, and the first annual certification on Form NRSRO relating to performance statistics is required for the annual certifications filed after the end of the 2015 calendar year.
The following provisions are effective nine months after publication in the Federal Register: prohibiting the sales and marketing conflict; addressing look-back reviews to determine whether the credit analyst’s prospects of future employment influenced a credit rating; requiring the disclosure of rating histories; addressing rating methodologies; requiring the form and certification to accompany credit ratings; addressing issuer and underwriter disclosure of third-party due diligence findings; addressing the certification of a third-party due diligence provider; addressing NRSRO standards of training, experience, and competence; and addressing universal rating symbols. This period is intended to provide time for NRSROs, issuers, underwriters, and providers of third-party due diligence services to prepare for the changes resulting from the new requirements.
