SEC Proposes Rules to Revise Regulatory Regime for ABS

On Wednesday, the ""Securities and Exchange Commission"":http://www.sec.gov/ (SEC) proposed rules that would revise the disclosure, reporting, and offering process for asset-backed securities (ABS) to better protect investors in the securitization market.

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""The proposed rules"":http://www.sec.gov/news/press/2010/2010-54.htm are intended to provide investors with more detailed and current information about ABS, including mortgage-backed securities, and more time to make their investment decisions. In addition, the rules seek to better align the interests of issuers and investors by creating a retention or ""skin in the game"" requirement for certain public offerings of ABS.

Specifically, the commission's proposals would:
* Require the filing of tagged computer-readable, standardized loan-level information
* Require the filing of a computer program that gives effect to the waterfall
* Provide Investors with more time to consider transaction-specific information
* Repeal the investment grade ratings criterion for ABS shelf-eligibility
* Increase the transparency in the private structured finance market

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""The rules we are proposing stem from lessons learned during the financial crisis,"" said Mary L. Schapiro, SEC chairman. ""These rules, if adopted, would revise the regulatory regime for asset-backed securities in order to better protect investors.""

ABS are created by buying and bundling loans, such as residential mortgage loans, commercial loans, or student loans, and creating securities backed by those assets, which are then sold to investors. Often, a bundle of loans is divided into separate securities with different levels of risk and returns, and payments on the loans are distributed to the holder of the lower-risk, lower-interest securities first and then to the holder of the higher-risk securities.

Most public offerings of ABS are conducted through expedited SEC procedures known as ""shelf offerings."" However, ABS offerings are also sold as private placements, which are exempt from SEC registrations. ABS private placements are typically sold to large institutional investors known as qualified purchasers.

During the financial crisis, ABS holders suffered significant losses, and the securitization market has been relatively dormant ever since, SEC explained. This crisis revealed that many investors were not fully aware of the risk in the underlying mortgages within the pools of securitized assets and over-relied on credit ratings assigned by rating agencies, which, in many cases, turned out to be wrong.

The proposed rules seek to address the problems highlighted by the crisis and help avoid a similar crisis in the future by giving investors the tools they need to accurately assess risk and by better aligning the interests of the issuer with those of the investor.