Reviewing Asset-Backed Securities – Increasing Transparency

Posted by Kathleen L. Casey, Commissioner, U.S. Securities and Exchange Commission, on Sunday November 7, 2010 at 11:14 am
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Editor’s Note: Kathleen L. Casey is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Casey’s statement at a recent open meeting of the SEC, which is available here. The views expressed in the post are those of Commissioner Casey and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. The post relates to a proposed SEC rule on issuer review of assets in offerings of asset-backed securities; the release is available here.

We are proposing rules today that are mandated by, or that are intended to implement, provisions in the Dodd-Frank Act relating to issuer and third-party review of the assets underlying asset-backed securities.

I believe that, properly crafted, these rules will provide decision-useful information to investors by enhancing transparency into the asset review process undertaken by issuers and by making available to investors the results of asset reviews conducted by issuers and third parties.

First, we are proposing rules mandated by Dodd-Frank that would require issuers of registered ABS to perform a review of the assets underlying the securities and to disclose the nature of that review. In addition, the proposed rules would require issuers to disclose the findings and conclusions of this review.

The release notes various ways in which issuers currently may already conduct asset reviews. Pursuant to Dodd-Frank, however, we are proposing a requirement that issuers do so. Moreover, by requiring disclosure of the nature of the review and the findings and conclusions of that review, the proposed rules should assist investors to make well-informed investment decisions.

As has already been noted, the release does not propose to set a minimum standard for this review; instead, the rule is designed to enable investors to evaluate the adequacy of the issuer’s review. However, we have included extensive requests for comments on this approach.

An issuer would be permitted to engage a third party – including providers of so-called “due diligence” services – to review the pool assets, and the issuer would be permitted to rely on the third party’s review to satisfy the issuer’s obligations so long as the third party is named in the registration statement and consents to be named as an “expert.”

Second, we are proposing rules to implement provisions of the Exchange Act that were added by Dodd-Frank that require ABS issuers and underwriters, in both registered and unregistered transactions, to make public the findings and conclusions of any third-party due diligence report relating to pool assets that is obtained by the issuer or underwriter. Again, it is my hope that this additional disclosure will be valuable to investors in deciding whether to invest in these securities.

I note that this rule is closely tied to another provision of the Exchange Act that was added by Dodd-Frank that requires a provider of third-party due diligence services with respect to an ABS transaction to provide a certification to any NRSRO that is rating the transaction. We are not proposing rules today to implement this provision, but we have invited the public to comment on this upcoming rulemaking – together with all of the other rulemakings and initiatives pursuant to Dodd-Frank – even before official comment periods are opened.

Accordingly, I will be very interested to review comments about the impact of the rules we propose today, as well as rules that will be required to implement the due diligence certification requirement, on participants in the ABS market and on the recovery and long-term vibrancy of the ABS market. In particular, I am interested in market participants’ views about the extent to which due diligence firms and other third-parties will be willing and able to consent to be named as experts in registration statements and, relatedly, how willing and able these firms will be to provide certifications to NRSROs that rate ABS transactions.

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