SEC Open Meeting on ABS and Credit Rating Agency Rules
Key Topics & Takeaways
ABS Rules: The Commission unanimously approved new rules for asset-backed securities that entail enhanced disclosures and more time to assess investment decisions.
-
- Chair White stated that the ABS reforms will provide investors with data and “powerful new tools” to independently evaluate ABS and credit ratings.
- The new rules require a 3-day preliminary prospectus before an ABS can be sold, as well as an executive certification requirement from the issuer.
- 144A offerings and a cash flow waterfall program are outside of the scope of these final rules.
- The final rules require issuers to provide standardized asset-level information for RMBS, CMBS, auto loan and lease ABS, and debt securities (including resecuritizations). Asset classes such as student loan ABS are not included in these ALD rules. The SEC will host ALD on EDGAR, and has revised ALD requirements pursuant to discussions with the CFPB.
- Issuers must comply with new rules, forms, and disclosures other than the asset-level disclosure requirements no later than one year after the rules are published in the Federal Register.
Credit Rating Agency Rules: The Commission approved new rules for credit rating agencies in a 3-2 vote.
- White stated that each NRSRO will be required to develop strong control and reporting requirements and identify and address any instance of material weakness. The requirements provide for an annual certification by the CEO as to the effectiveness of internal controls and additional certifications to accompany credit ratings attesting that the rating was not influenced by other business activities.
- The final rule prohibits individuals that are influenced are have jobs with marketing or sales capacities from publishing credit ratings.
- Third party due diligence providers will be required to provide a certification to NRSROs. The certification will include a description of the diligence services, a summary of the findings and conclusions, and the identification of any relevant NRSRO due diligence criteria that the third party intended to meet in performing the due diligence. The NRSRO will be required to disclose the certification.
Speakers:
- Mary Jo White, SEC Chairman
- Luis Aguilar, SEC Commissioner
- Daniel Gallagher, SEC Commissioner
- Kara Stein, SEC Commissioner
- Michael Piwowar, SEC Commissioner
White Opening Remarks
Securities and Exchange Commission (SEC) Chair Mary Jo White, in her opening remarks, stated that the proposed asset-backed securities (ABS) and credit rating agency rules will add critical protections for investors and will strengthen the securitization markets. She stated that investors had too much reliance on credit ratings in the past and the new tools provided by the rules, such as the deal-level data, will provide investors with a means to evaluate the credit worthiness of ABS deals without relying on the credit rating agencies, and also noted that the data will be in a computer-readable format. She believes that these reforms will allow investors to take advantage of greater transparency and develop a better understanding of credit risk at the pool and loan level.
Staff Presentation
Keith Higgins, Director of the SEC’s Division of Corporation Finance, explained that the rules will allow issuers to access the market quickly but with appropriate parameters and conditions for shelf offerings.
Rolaine Bancroft of the SEC’s Division of Corporation Finance reiterated that asset-level data would be made available at the time of offering and on an ongoing basis. She stated that issuers will disclose in a standardized XML format so investors can compare collateral and cash flows, and that the ABS loan-level information would be publicly available on EDGAR. Regarding dispute resolution procedures related to the requirements that transactions include a credit risk manager, she continued, the final rule does not dictate who bears the cost of the dispute.
Scott Bauguess, the SEC’s deputy chief economist, stated that the rules provide increased transparency which should increase investor activity in the market and result in lower cost of capital for issuers. Since investors will receive significant benefits from the greater transparency, borrowers should also benefit in the end.
Commissioner Statements
Commissioner Luis Aguilar noted three things that caused investor harm: 1) investors lacked information to correctly assess and price ABS; 2) since little information was available, investors relied on credit ratings; and 3) to make money in the ABS market meant taking on more risk and investors had little ability to adequately asses those risks. Aguilar noted that investors will have 3 business days to review an ABS before making a decision. He also stated more work needs to be done regarding ABS, specifically towards risk retention rules.
Commissioner Daniel Gallagher began by stating that the rulemaking addressed two major components of the financial crisis: a failure of confidence and a failure of competence. He stated that the SEC is a disclosure agency, and the rules voted on today are disclosure rules designed to help investors make better decisions.
Commissioner Kara Stein stated that the rule requires data to be standardized and available in XML format. She also noted that a waterfall model software engine for investors is currently on hold. Stein expressed her confidence that the rules will provide investors with better information than was available in the past, and that the rule is an important step towards providing investors with tools and data to assess investment risk with ABS products.
Commissioner Michael Piwowar briefly discussed the “interactive” data format that will be provided on ABS deals, and stated his expectation that investors will now be able to rely less on credit ratings and the nationally recognized statistical rating organizations (NRSROs). He did state concerns with the dominance of Fannie Mae and Freddie Mac in the MBS market and voiced his hope the concerns he has with their dominant market share can be addressed.
White Opening Remarks
White stated that the top two NRSRO reform items are ensuring better internal controls and mechanisms to ensure there is no conflict of interest in regards to credit ratings. Regarding internal controls, she said each NRSRO must develop strong control and reporting requirements that are defendable. In the case of any material weakness, she continued, the firm must state how that weakness is being addressed. Regarding conflicts of interests, persons with capacities that involve sales or marketing are to be prohibited from taking part in the ratings process.
Staff Presentation
Tom Butler, director of the SEC’s Office of Credit Ratings, provided an overview of Dodd-Frank mandates as they relate to oversight of the NRSROs and stated that the modification made strikes a balance in terms of costs and benefits
Harriet Orol of the SEC’s Office of Credit Ratings described in some detail the control measures that must be put in place by the NRSRO. Orol stated that the annual controls report will address four items: 1) describe material weakness and how that weakness was addressed; 2) state where the control structure was effective; 3) officers must attest to the report; and 4) prohibition for people influenced by sales and marketing from participating in the rating process. She added, however, that smaller agencies may seek an exemption from the prohibition.
Commissioner Statements
Aguilar provided a brief historical overview of the role of credit rating agencies in the financial crisis. Aguilar believed the internal controls create a foundation through which the agencies can build a robust control structure. However, he also believes that a more focused solution is needed for the conflict of interest that arises because companies pay NRSROs to rate their own products.
Gallagher was adamant in his belief that a reproposal was needed and found the final rule to place greater focus on the development of defendable internal controls instead of the usefulness or the appropriateness of the controls themselves. He stated that “last-minute changes” have forced him to withdraw his support for the rulemaking.
Stein expressed concern that rating symbols need to be applied consistently across products so investors can better understand the risk inherent in each rating. She also claimed to be a firm believer in attestations and said she was pleased to see the rule requires a CEO certification of ratings and internal controls, explaining that “nothing focuses the mind like signing your own name.”
Piwowar noted two provisions that he found troubling. Piwowar stated that given the multitude of protections already in place, he sees no benefit from adding in further rules on keeping analysts from even being “influenced” by sales and marketing, saying any employee would have an interest in the success of an enterprise, and therefore any employee’s conclusion on ratings can be questioned. He also voiced concern that the rule requires NRSROs to enforce and document an internal control structure.
Piwowar also stressed that when investors put too much weight on credit ratings rather than on their own due diligence, “problems are obvious,” and said the SEC should look into addressing investors’ overreliance on credit ratings. Piwowar closed with noting one element of the rulemaking that he did support: offering an exemption to certain provisions for smaller NRSROs. He praised this as an acknowledgment that a one-size-fits-all approach has negative impacts on competition.
Votes
The Commission voted unanimously in support of the new ABS rules, and the credit rating agency rules were approved in a 3-2 vote with Piwowar and Gallagher voting against them.
For more information on this hearing, please click here.
SEC Press Release on ABS Rules
SEC Press Release on Credit Rating Agency Rules
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Key Topics & Takeaways
ABS Rules: The Commission unanimously approved new rules for asset-backed securities that entail enhanced disclosures and more time to assess investment decisions.
-
- Chair White stated that the ABS reforms will provide investors with data and “powerful new tools” to independently evaluate ABS and credit ratings.
- The new rules require a 3-day preliminary prospectus before an ABS can be sold, as well as an executive certification requirement from the issuer.
- 144A offerings and a cash flow waterfall program are outside of the scope of these final rules.
- The final rules require issuers to provide standardized asset-level information for RMBS, CMBS, auto loan and lease ABS, and debt securities (including resecuritizations). Asset classes such as student loan ABS are not included in these ALD rules. The SEC will host ALD on EDGAR, and has revised ALD requirements pursuant to discussions with the CFPB.
- Issuers must comply with new rules, forms, and disclosures other than the asset-level disclosure requirements no later than one year after the rules are published in the Federal Register.
Credit Rating Agency Rules: The Commission approved new rules for credit rating agencies in a 3-2 vote.
- White stated that each NRSRO will be required to develop strong control and reporting requirements and identify and address any instance of material weakness. The requirements provide for an annual certification by the CEO as to the effectiveness of internal controls and additional certifications to accompany credit ratings attesting that the rating was not influenced by other business activities.
- The final rule prohibits individuals that are influenced are have jobs with marketing or sales capacities from publishing credit ratings.
- Third party due diligence providers will be required to provide a certification to NRSROs. The certification will include a description of the diligence services, a summary of the findings and conclusions, and the identification of any relevant NRSRO due diligence criteria that the third party intended to meet in performing the due diligence. The NRSRO will be required to disclose the certification.
Speakers:
- Mary Jo White, SEC Chairman
- Luis Aguilar, SEC Commissioner
- Daniel Gallagher, SEC Commissioner
- Kara Stein, SEC Commissioner
- Michael Piwowar, SEC Commissioner
White Opening Remarks
Securities and Exchange Commission (SEC) Chair Mary Jo White, in her opening remarks, stated that the proposed asset-backed securities (ABS) and credit rating agency rules will add critical protections for investors and will strengthen the securitization markets. She stated that investors had too much reliance on credit ratings in the past and the new tools provided by the rules, such as the deal-level data, will provide investors with a means to evaluate the credit worthiness of ABS deals without relying on the credit rating agencies, and also noted that the data will be in a computer-readable format. She believes that these reforms will allow investors to take advantage of greater transparency and develop a better understanding of credit risk at the pool and loan level.
Staff Presentation
Keith Higgins, Director of the SEC’s Division of Corporation Finance, explained that the rules will allow issuers to access the market quickly but with appropriate parameters and conditions for shelf offerings.
Rolaine Bancroft of the SEC’s Division of Corporation Finance reiterated that asset-level data would be made available at the time of offering and on an ongoing basis. She stated that issuers will disclose in a standardized XML format so investors can compare collateral and cash flows, and that the ABS loan-level information would be publicly available on EDGAR. Regarding dispute resolution procedures related to the requirements that transactions include a credit risk manager, she continued, the final rule does not dictate who bears the cost of the dispute.
Scott Bauguess, the SEC’s deputy chief economist, stated that the rules provide increased transparency which should increase investor activity in the market and result in lower cost of capital for issuers. Since investors will receive significant benefits from the greater transparency, borrowers should also benefit in the end.
Commissioner Statements
Commissioner Luis Aguilar noted three things that caused investor harm: 1) investors lacked information to correctly assess and price ABS; 2) since little information was available, investors relied on credit ratings; and 3) to make money in the ABS market meant taking on more risk and investors had little ability to adequately asses those risks. Aguilar noted that investors will have 3 business days to review an ABS before making a decision. He also stated more work needs to be done regarding ABS, specifically towards risk retention rules.
Commissioner Daniel Gallagher began by stating that the rulemaking addressed two major components of the financial crisis: a failure of confidence and a failure of competence. He stated that the SEC is a disclosure agency, and the rules voted on today are disclosure rules designed to help investors make better decisions.
Commissioner Kara Stein stated that the rule requires data to be standardized and available in XML format. She also noted that a waterfall model software engine for investors is currently on hold. Stein expressed her confidence that the rules will provide investors with better information than was available in the past, and that the rule is an important step towards providing investors with tools and data to assess investment risk with ABS products.
Commissioner Michael Piwowar briefly discussed the “interactive” data format that will be provided on ABS deals, and stated his expectation that investors will now be able to rely less on credit ratings and the nationally recognized statistical rating organizations (NRSROs). He did state concerns with the dominance of Fannie Mae and Freddie Mac in the MBS market and voiced his hope the concerns he has with their dominant market share can be addressed.
White Opening Remarks
White stated that the top two NRSRO reform items are ensuring better internal controls and mechanisms to ensure there is no conflict of interest in regards to credit ratings. Regarding internal controls, she said each NRSRO must develop strong control and reporting requirements that are defendable. In the case of any material weakness, she continued, the firm must state how that weakness is being addressed. Regarding conflicts of interests, persons with capacities that involve sales or marketing are to be prohibited from taking part in the ratings process.
Staff Presentation
Tom Butler, director of the SEC’s Office of Credit Ratings, provided an overview of Dodd-Frank mandates as they relate to oversight of the NRSROs and stated that the modification made strikes a balance in terms of costs and benefits
Harriet Orol of the SEC’s Office of Credit Ratings described in some detail the control measures that must be put in place by the NRSRO. Orol stated that the annual controls report will address four items: 1) describe material weakness and how that weakness was addressed; 2) state where the control structure was effective; 3) officers must attest to the report; and 4) prohibition for people influenced by sales and marketing from participating in the rating process. She added, however, that smaller agencies may seek an exemption from the prohibition.
Commissioner Statements
Aguilar provided a brief historical overview of the role of credit rating agencies in the financial crisis. Aguilar believed the internal controls create a foundation through which the agencies can build a robust control structure. However, he also believes that a more focused solution is needed for the conflict of interest that arises because companies pay NRSROs to rate their own products.
Gallagher was adamant in his belief that a reproposal was needed and found the final rule to place greater focus on the development of defendable internal controls instead of the usefulness or the appropriateness of the controls themselves. He stated that “last-minute changes” have forced him to withdraw his support for the rulemaking.
Stein expressed concern that rating symbols need to be applied consistently across products so investors can better understand the risk inherent in each rating. She also claimed to be a firm believer in attestations and said she was pleased to see the rule requires a CEO certification of ratings and internal controls, explaining that “nothing focuses the mind like signing your own name.”
Piwowar noted two provisions that he found troubling. Piwowar stated that given the multitude of protections already in place, he sees no benefit from adding in further rules on keeping analysts from even being “influenced” by sales and marketing, saying any employee would have an interest in the success of an enterprise, and therefore any employee’s conclusion on ratings can be questioned. He also voiced concern that the rule requires NRSROs to enforce and document an internal control structure.
Piwowar also stressed that when investors put too much weight on credit ratings rather than on their own due diligence, “problems are obvious,” and said the SEC should look into addressing investors’ overreliance on credit ratings. Piwowar closed with noting one element of the rulemaking that he did support: offering an exemption to certain provisions for smaller NRSROs. He praised this as an acknowledgment that a one-size-fits-all approach has negative impacts on competition.
Votes
The Commission voted unanimously in support of the new ABS rules, and the credit rating agency rules were approved in a 3-2 vote with Piwowar and Gallagher voting against them.
For more information on this hearing, please click here.
SEC Press Release on ABS Rules
SEC Press Release on Credit Rating Agency Rules