A longstanding and controversial regulatory proposal that would likely have heaped costly new disclosure requirements on issuers of asset-backed securities (ABS) was unexpectedly reissued for comment Feb. 25, reviving an issue that many hoped would fall by the wayside.
The proposed rules would impact virtually all ABS issuers, ranging from providers of financing for purchases of automobiles, to timeshares, to heavy equipment to mortgages, and especially issuers accessing the private Rule 144A market.
The amendments to Regulation AB, commonly referred to as Reg AB-2, were first proposed April 2010, a few months before the Dodd-Frank Act was passed by Congress. The securitization proposal was consequently placed on the backburner as regulators focused on financial reform, and some began to question whether it would ever re-emerge. The SEC revived the proposal early this year, surprising the industry, and planned to vote on it Feb. 5 but ended up canceling the vote with little explanation.
By re-opening the proposal for comment, until March 28, the SEC is seeking additional input on controversial elements. The original proposal sought to modernize the public offering process by providing investors with a complete standardized set of data for the underlying loans, unlike today’s hodge podge. It would increase the amount of disclosure for public offerings and give investors in shelf offerings at least five days to examine preliminary prospectuses. Perhaps the most controversial element would have provided investors in private Rule 144A offerings with the right to obtain all the same initial and ongoing information as public offerings.
“Since 144A ABS are only sold to extremely large sophisticated investors, less disclosure has been required than in public offerings,” said John Arnholz, leader of Bingham McCutchen’s structured finance group. “The theory is that these investors can fend for themselves. Issuers like 144A offerings because they can be completed quickly and far more efficiently than public deals.”
The increased disclosure would reduce that advantage and could add significant costs, potentially a problem for private-market issuers – typically new issuers or those pursuing less-than-plain-vanilla deal structures, although the SEC deal review process would still likely be shorter.
The original proposal, which was revised moderately in 2011, also raised concerns over disclosure requirements for public deals. ABS investors welcomed its new requirements for standardized data and more of it – the better with which to perform credit analysis, especially for certain types of securitized loans such as mortgages. Despite measures by the SEC to avoid identifying individual borrowers, though, issuers still raised concerns about privacy.
A memorandum filed by SEC staff, which market participants can comment on, would allow issuers to make sensitive loan-level data available to investors and potential investors directly, without the original proposal’s requirement to disclose it to the world using the EDGAR system. Issuers would be required to keep that sensitive data on their websites for at least five years along with the remaining data also displayed on EDGAR.
“The SEC faces a conflict in MBS offerings. On the one hand, they want issuers to give investors more information about the mortgage borrowers, but on the other hand they are concerned about protecting the privacy of homeowners whose mortgages are securitized,” Mr. Arnholz said.
The proposal just released for comment appears to give issuers discretion on what sort of data to provide on 144A deals, based on what investors ask for, potentially signaling the SEC may soften this controversial provision. However, the regulator notes that it’s unlikely issuers will move to the private market to avoid public-deal disclosures, since they will have to develop comparable disclosure systems for the private market. Such ambiguity, despite re-opening the comment period, leaves ABS market participants with few indications about where the SEC is headed.
“The announcement about the new comment period begs the far larger question of what other rules will be included in the Reg AB II package,” Mr. Arnholz said, adding, “Will it merely require more disclosure in public ABS offerings, or will it, for example, extend those requirements to the private 144A market as well?”