SEC Consults On ABS Disclosure Rules

by Glen Shapiro, LawAndTax-News.com, New York

11 October 2010

The United States’ Securities and Exchange Commission (SEC) is seeking public comments on proposed regulations to require issuers of asset-backed securities (ABS), and the credit rating agencies that rate them, to provide investors with new disclosures about representations, warranties, and enforcement mechanisms.

The Dodd-Frank Wall Street Reform and Consumer Protection Act instructs the SEC to prescribe regulations on the use of representations and warranties in the ABS market by January 14, 2011 (180 days after its enactment).

In the transaction agreements that govern a securitization, ABS issuers, or the originators of the underlying loans, typically make “representations and warranties” about the characteristics and the quality of those loans. If a loan does not comply with the representation or warranty, an ABS issuer or lender can be required to repurchase the loan from the pool or replace it with a substitute asset.

Since the financial crisis, many investors and other transaction parties have questioned whether all of the securitized loans meet the characteristics specified by the representations and warranties in transaction agreements, and have been seeking to enforce repurchase provisions. The Dodd-Frank Act imposes new disclosure obligations so that investors receive information about the representations and warranties and repurchase history, so they may identify originators with clear underwriting deficiencies.

The SEC’s proposed rules would require issuers to file with the SEC an issuer’s repurchase history for its outstanding ABS so that investors may identify originators with clear underwriting deficiencies. Specifically, at the time an issuer commences its first offering of the ABS (after the effective date of the rule), an issuer would be required to provide the last five years of repurchase history in an initial filing.

After the initial filing, the ABS issuer would have to file updated information on a monthly basis, including the repurchase history for all outstanding ABS (regardless of whether the securities were offered in a transaction registered with the SEC) if the underlying transaction agreements include a covenant to repurchase or replace a pool asset.

The proposed rules would also require all rating agencies to provide a description of the representations, warranties and enforcement mechanisms available to investors for an ABS offering. Furthermore, rating agencies would have to disclose how the representations, warranties, and enforcement mechanisms differ from those of similar ABS. They would need to make the disclosures in any report accompanying a credit rating, including in presale reports that are distributed prior to the sale of the security.

The period for public comments will end on November 15, 2010

Recommended