On August 27th, 2014, the Securities and Exchange Commission (“SEC”) unanimously decided to revise the rules that govern the disclosure, reporting, and offering of asset-backed securities (“ABS”) which would enhance transparency, better protect investors and facilitate capital formation in the market. ABS are financial securities backed by loans, leases or receivables against assets other than real estate and mortgage-backed securities. For investors, ABS are an alternative to investing in corporate debt.
After the 2008 financial collapse, the credit ratings system for securities was revealed to be less accurate than originally thought. The credit rating agencies had systemically faltered in executing their due diligence thoroughly, resulting in great losses for investors who relied on that information. The crisis revealed that many investors in the securitization market were not fully aware of the risks underlying ABS, and over-relied on ratings assigned by credit agencies, which in many cases failed to appropriately evaluate the credit risk. As a result of the collapse, the SEC initially proposed revisions to the disclosure rules in April of 2010, but changed its position after the passage of the Dodd-Frank Act and input from the financial community. The revisions will standardize disclosure of information by identifying both the type of information required to be disclosed and the scope of that requirement. The required disclosures will include the credit quality of the debtor, as well as related collateral and cash flow. The revisions also mandate more time for investor due diligence by requiring issuers of ABS to file a preliminary prospectus three (3) days in advance of the sale if they use a shelf registration statement. Further, the revisions will require ABS shelf offerings to attach the depositor-CEO’s certification of the prospectus and the structure of the ABS, in addition to various other required compliance, disclosure, and dispute resolution provisions.
SEC Chairperson Mary Jo White stated, “[t]he reforms before us today will add critical protections for investors and strengthen our securities markets by targeting products, activities and practices that were at the center of the financial crisis.” Ms. White further stated, “[t]hese 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 … Unlike during the financial crisis, investors will now be able to independently conduct due diligence to better assess the credit risk of asset-backed securities.”
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