Shelf-Eligibility Requirements for Asset-Backed Securities

Editor’s Note: Mary Schapiro is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Schapiro’s opening statement at a recent open meeting of the SEC, which is available here. The views expressed in the post are those of Chairman Schapiro and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. This post discusses re-proposed rules concerning asset-backed securities, available here.

Next, we will consider re-proposing rules outlining the requirements for an issuer of asset-backed securities to be able to use shelf registration.

Today’s actions partially re-propose a set of rules the Commission proposed in April 2010 that would significantly revise the regulatory regime for asset backed securities. Among other things, the 2010 proposals were designed to increase transparency and to improve the quality of securities that are offered through the shelf registration process.

Subsequent to our proposal, Congress — through the Dodd-Frank Act — sought to address some of the same concerns and we have reevaluated the proposals in light of those provisions. The proposals today also take into consideration suggestions from commenters on the April proposal.

Today the staff is recommending that we re-propose shelf eligibility requirements for ABS issuers and seek additional comment on certain parts of our April 2010 proposal.

As we consider a final set of rules, we will look to the rules we proposed in 2010 as well as the revisions to those proposals we are considering today.

The proposals include three shelf eligibility requirements:

  • First, the proposal would require an executive officer of the issuer to certify that the securitization is designed to produce cash flows at times and in amounts sufficient to service expected payments on the asset-backed securities being offered and sold. In addition, the executive officer would certify to the accuracy of the disclosure. This is similar to our 2010 proposal. However, to address comments we received, the re-proposed rules would offer an alternative signatory to the certification and revise the text of the certification.
  • Second, the proposal would require the issuer to adopt a dispute resolution procedure outlining the way in which to resolve disputes over requests to repurchase assets in the pool under the terms of the transaction agreements. Also, to address concerns about the enforceability of representations and warranties, the proposal would require that an independent party in certain specified situations must confirm compliance of the assets with the representation and warranty provisions in the underlying agreements. We continue to believe that a mechanism to better enforce representations and warranties is needed to address the failures that plagued this market.
  • Third, the proposal would require that the issuer agree to make it possible for investors to communicate with each other. This would address comments we received that some ABS investors have had difficulty locating other investors.

Subsequent to the Commission’s 2010 proposals, the Dodd-Frank Act required rules that would direct sponsors to retain some of the risk associated with the ABS. The Act also eliminated the ability of ABS issuers to avail themselves of an automatic suspension from ongoing reporting. As such, this proposal at this time does not include the risk retention or continuous reporting conditions to shelf we originally included in the April 2010 proposal.

Additionally, in the April proposal we proposed that ABS issuers must file standardized information about the specific loans in the pool, allowing investors to have better, more timely and usable information. Because we received many helpful and detailed suggestions in this area, the release requests additional comment about possible alternatives.

I am aware that commentators have expressed concerns about certain aspects of the informational requirements for our safe harbor provisions included in the April proposal. Today’s release requests additional comment in this area as well.

Finally, the release requests comment on whether the April proposal effectively implements a Dodd-Frank requirement that the Commission adopt rules requiring disclosure of the assets that back a security.

I believe it is very important that we move forward to finalize our new registration and reporting rules for the ABS market. But I also want to make sure we get it right. I’m very pleased that the staff has recommended that we publish this re-proposal so that we can solicit the input we need to make these decisions. I very much look forward to receiving the public’s constructive comments on this release and moving to closure on this critically important project.

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One Comment

  1. Wayne Isaacks
    Posted Saturday, August 20, 2011 at 11:22 am | Permalink

    Looking back at the age of 59, I see a road littered with disclosure requirments the reponse to which is full and complete disclosure in opaque language and of arcane nuances wherein is imbedded the trap, the flaw, the inhrent failure of the deal, which is invaraibly lost on the buyer and ignored by the broker or the rater, so no one is protected by anything but “caveat emptor”, and the government agency has done its job.

    The SEC and the US Government ought to just say “you are on your own, don’t trust these skalawags”. Really, there’s no help in any of this transparency laws and regulation. Folks just comply with the letter, but the content is snake oil no matter how well the ingedients are disclosed. Moving to food and the FDA…