Securities and Exchange Commission has proposed rules that would revise the disclosure, reporting and offering process for asset-backed securities (ABS) to better protect investors in the securitization market.
The proposed rules are intended to provide investors with detailed and current information about ABS and more time to make their investment decisions. The proposed rules also seek to better align the interests of issuers and investors by creating a retention or ‘skin in the game’ requirement for certain public offerings of ABS.
Mary Schapiro, chairman of SEC, said: “The rules we are proposing stem from lessons learned during the financial crisis. These rules if adopted would revise the regulatory regime for asset-backed securities in order to better protect investors.”
Asset-backed securities are created by buying and bundling loans, such as residential mortgage loans, commercial loans or student loans and creating securities backed by those assets, which are then sold to investors. Often, a bundle of loans is divided into separate securities with different levels of risk and returns. Payments on the loans are distributed to the holders of the lower-risk, lower-interest securities first, and then to the holders of the higher-risk securities.
Most public offerings of ABS are conducted through expedited SEC procedures known as ‘shelf offerings.’ ABS offerings also are sold as private placements which are exempt from SEC registration. ABS private placements are typically sold to large institutional investors known as qualified purchasers (QIBs).