SEC Reg AB Revisions Downplay Credit Raters

The Securities and Exchange Commission has proposed significant revisions to Regulation AB and other rules regarding the offering process, disclosure and reporting for ABS. The 5-0 vote Friday morning counts the SEC as an added player in the huge push coming from various regulators for more “skin-in-the-game” by ABS issuers.

The 5% risk-retention provision is aimed at better protecting securitization investors by providing them with more detailed information regarding pooled assets and more time to make their investment decisions. It also gives them the benefits of better alignment of the interests of issuers and investors.

The rules will also bring greater transparency to the private market because they would repeal the current credit ratings references in shelf eligibility criteria for ABS issuers as well as establish new shelf eligibility criteria that would include a requirement that issuers file Exchange Act reports on an ongoing basis so long as the firms' public securities are outstanding.

In other words, ratings might be removed as an eligibility for shelf registration criterion. Instead, issuers will be required to offer a certification from CEOs indicating the investors will receive a high likelihood of return. "This shifts the burden from ratings providing the underlying support for the securities to the sponsors of the securitization," according to lawyers from Dechert.

The lawyers said the new SEC shelf registration forms for securitized deals now require issuers to:

1.) Retain 5% of risk, which is a vertical slice in most cases;

2.) Include a mechanism to confirm that loans comply with reps and warranties including a third party opining on compliance;

3.) The CEO certification;

4.) '34 Act reports must be filed for the life of the deal instead of just through the first year, as has been the case thus far.

The Securities Industry and Financial Markets Association backed the proposed new regulations, although it said that the proposal still had room to refine its risk-retention provision. The American Securitization Forum (ASF) also said it supported the SEC proposals requiring greater disclosure and a new joint legislative-regulatory rulemaking process for securitizations. However, the ASF also said it was concerned that the 5% risk retention proposal could severely limit the number of privately-sponsored securitizations.

New Waterfall Computer Program

The SEC has also proposed a requirement that most ABS issuers file a computer program that gives effect to the flow of funds, or “waterfall,” provisions of the transaction. The computer program would be filed on EDGAR and under the proposal, an investor would be able to download the source code for the waterfall computer program.

The SEC that this proposed requirement is designed to make it easier for an investor to conduct a thorough investment analysis of the ABS offering at the time of its initial investment decision.

In addition, an investor may monitor ongoing performance of purchased ABS by updating its investment analysis from time to time to reflect updated asset performance. It would allow market participants the ability  to conduct their own evaluations of ABS and make them less dependent on the analysis of third parties such as credit rating agencies.