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Expanded Disclosure Rules Published for Asset-Backed Securities

The SEC issued more detailed disclosure and registration requirements for asset-backed securities. The amendments are meant to lessen the risk of another market bubble by giving investors more time and information to evaluate investments that are packaged from pools of loans or other debt instruments.

The SEC issued more detailed disclosure and registration requirements for asset-backed securities on September 4, 2014.

In Release No. 33-9638, Asset-Backed Securities Disclosure and Registration, the SEC asks issuers to provide detailed information about individual residential and commercial mortgages, auto loans, and auto leases packaged into instruments sold to investors. The requirements also cover asset-backed instruments that have been resecuritized. The information has to be formatted in the eXtensible Markup Language (XML) to make it easier for investors to analyze it.

The rule will become effective 60 days after it’s published in the Federal Register, which usually happens within a few weeks of a rule’s posting to a regulatory agency’s website.

The SEC unanimously approved the rule on August 27.

“This set of reforms will greatly strengthen our rules applicable to the securitization market and address the significant failures that have hurt our economy,” said SEC Chair Mary Jo White.

Release No. 33-9638 includes amendments to SEC rules such as Regulation S-K and Regulation AB that are part of the agency’s post-financial crisis reforms. The amendments are meant to lessen the risk of another market bubble by giving investors more ability to evaluate the creditworthiness of asset-backed securities and steer clear of investments masking low-quality assets or selling at inflated prices.

The rule calls for disclosure of information specific to each loan, including a borrower’s credit quality, the collateral for each asset, the cash flow generated by the assets, the loan terms, expected payment amounts, and how the payment may change before the loan matures. The SEC said the asset-level information will have to be included in the prospectus and in subsequent reports.

Investors will get more time to consider information about the pool of securitized assets before they buy securities, the SEC said. The rule also repealed the condition that issuers must receive an “investment grade” rating for an asset-backed security in order to be granted “shelf” status or expedited eligibility for an offering. Instead, the CEO of the company that assembled the loans in the asset pool, which is often an affiliate of the issuer, has to certify the information about the loans.

The SEC said the asset-level data will be publicly available on its EDGAR regulatory filing system.

When the agency proposed disclosing the information via EDGAR four years ago, financial companies said they were concerned about violating borrowers’ privacy and exposing themselves to lawsuits. The SEC concluded that EDGAR is still the most efficient means of disclosing the information to investors.

“We continue to believe that the disclosure of data that relates to the credit risk of the obligor, such as an obligor’s credit score, income, or employment history, would strengthen investors’ risk analysis of ABS involving consumer assets,” the SEC said in the rule release. “It is critically important that the manner in which such information is disseminated enables all investors to receive access to the required asset-level disclosures.”

The release finalizes rules that were proposed in 2010 in Release No. 33-9117, Asset-Backed Securities.

“The rule appears to substantially improve the disclosures that must be made to investors in ABS,” Dennis Kelleher, president and CEO of Better Markets, said when the SEC approved the rule. “The information that investors will receive about the assets underlying these securities will be more detailed, more usable, and more timely, enabling investors to evaluate the investment offerings in a meaningful way.” Better Markets supports tough supervision of the financial markets.

Kelleher added that the rule must be supported with additional reforms on credit risk retention and elimination of the conflicts of interest in the asset-backed markets.

The SEC and banking regulators issued a revised proposal last year in Release No. 34-70277, Credit Risk Retention, which scaled back some stricter requirements from a 2011 proposal with the same name in Release No. 34-64148.

Both proposals seek to require having more issuers of asset-backed securities retain 5 percent of the loans they issue and are intended to limit the incentives for underwriting loans to risky borrowers.