SEC Passes Tougher Rules for Asset-Backed Securities

The US regulator has adopted stricter disclosure rules to bring about increased transparency in the ABS market.

Sellers of asset-backed securities (ABS) must now abide by more stringent disclosure and reporting rules intended to improve the market that brought down the financial system in 2008.

The US Securities and Exchange Commission (SEC) commissioners on Wednesday unanimously approved new regulations to “enhance transparency, better protect investors, and facilitate capital formation in the securitization market”.

Expanding on and revising rules already in place via the Dodd-Frank Act, the laws require “asset-level information in a standardized, tagged data format” for ABS backed by residential and commercial mortgages, auto loans and leases, and debt securities.

Such information includes credit quality, collateral, and cash flows related to each asset, the SEC said.

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“These are strong reforms to protect America’s investors by enhancing the disclosure requirements for asset-backed securities and by making it easier for investors to review and access the information they need to make informed investment decisions,” SEC Chair Mary Jo White said in a statement.

By requiring ABS issuers to file a preliminary listing of a potential transaction three days prior to the first sale of securities, investors will be permitted extra time to review the offering and assess credit risk, the SEC said. The new rules are meant to provide investors with “what food and drug labeling does for consumers—provide a list of ingredients,” according to Commissioner Kara Stein.

“This rule also addresses certain critical flaws that became apparent in the securitization process, including a dearth of quality information and insufficient time to make informed assessments of the underlying investments,” she said.

At the same time, the SEC adopted new requirements for credit rating agencies concerning conflicts of interest and governance controls, also intended to increase transparency and credit rating agency accountability.

“Today’s reforms will help protect investors and markets against a repeat of the conduct and practices that were central to the financial crisis,” White said. 

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