Last week the U.S. Securities and Exchange Commission (SEC) commissioners unanimously approved rules requiring sellers of bonds backed by mortgages, auto loans, and commercial buildings will have to give investors more details to judge the quality of loans they have packaged in their bond. These rules mandated by the Dodd-Frank Act after investors were burned by soured debt sold by Wall Street before the 2008 credit crisis. The new requirements apply to the $750 billion market for private mortgage-backed securities, which imploded in 2008 and financed just 1 percent of new mortgages in 2013.
Banks eligible to expedite sales of asset-backed bonds with minimal SEC review will have to provide an executive’s certification that documents given to investors are accurate. They also will have to provide a process to review soured assets to determine whether they should be repurchased.
Powerful tool for investors with a massive hole?
“The 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 centre of the financial crisis,” SEC Chair Mary Jo White said in a statement before the vote. “Investors will have powerful new tools for independently evaluating the quality of asset-backed securities and credit ratings.”
However, the SEC commissioners dropped from the rules: a requirement that issuers of private securities be ready to furnish to buyers the same type of information that’s available for publicly registered debt. This leaves ‘a massive hole’ according to some experts because most of the asset-backed market is a private market. Most private securities are issued using rule 144a, which the SEC created to allow for their resale among large, sophisticated investors of securities issued without being registered under the Securities Act of 1933.
Some experts are predicting that the SEC will have to revive the reporting requirements for private securities.
CTMfile take: The SEC are, like other regulatory authorities, missing key pieces of regulatory control, while widening their remit to globally - see FT article on ‘European fund houses fear SEC’s reach’. But at least, the financial world is a less risky than if there were no controls.
Like this item? Get our Weekly Update newsletter. Subscribe today