The new rules have been structured to protect investors by providing them with more information regarding asset-backed securities, which played an integral role in the recent economic downfall.
One rule, which will go into effect next year, requires financial institutions and banks that issue asset-backed securities to scrutinize the assets underlying each security, in turn the SEC feels this will ensure that the loans are an accurate reflection of what is being sold to investors. It has been reported that the markets for securities supported by mortgage, auto, student loans and credit cards have remained unstable since the crisis due to investors being uncertain about the quality of the loans.
Moreover, the findings drawn from the review would have to be made public, the agency said. The commission voted 3-2 in favour of the rule, with SEC Chairman Mary Schapiro and commissioners Elisse Walter and Luis Aguilar supporting and Commissioners Kathleen Casey and Troy Paredes opposing, the Wall Street Journal reports.
Further, the federal watchdog adopted another rule, effective February 2012, that requires issuers to report and provide information regarding requests from lenders to repurchase loans.
‘At one time, the securitization market provided trillions of dollars of liquidity to virtually every sector of the economy,’ says Schapiro. ‘However, during the financial crisis, ABS investors suffered significant losses, causing the market for securitization to rapidly decline [and] these rational measures are designed to help revitalize the important asset-backed securities market by encouraging better disclosure for investors.’
Additionally, the SEC approved rules requiring rating agencies to disclose information about the representations issuers make about a security, the journal said.
The new rules were approved unanimously and received backing from organisations such as the American Securitization Forum (ASF) which lauded the SEC’s efforts in making asset-backed securities more transparent for investors.
‘We commend the commission for seeking industry input regarding reforms in the asset-backed securities market and appreciate that the final rules approved today for repurchase disclosure,’ says Tom Deutsch executive director of ASF. ‘While the commission did announce steps attempting to alleviate this concern, it is unclear without seeing the final rules whether issuers will continue to be able to offer investors cost-effective due diligence by independent third parties.’