SEC Ruling on ABS Disclosure on the Mark

Late this week, the SEC published its Final Rule for disclosure for asset-backed securities, as required by Section 943 of the Dodd-Frank Act.

While there are any number of agencies considering changes to policies and regulations resulting from Dodd-Frank or simply as a result of the failure of past policies to adequately foresee or to cope with the wholesale collapse of the credit markets 3 years ago, we believe that the SEC’s rule may be the best of bunch.

Not only does the rule attempt to get right at the heart of the “toxic asset” issue, it really attempts to hold issuers of securitized debt to the basic principles that credible issuers have stood behind since the early days of this market.

Requiring issuers to disclose 3 years of Repurchase History should not be either cumbersome or an impediment to issuance for credible issuers of securitized debt. 

We have often spoken about the impractical expectation of investors performing granular level due diligence and surveillance on ABS, MBS, CDO’s, etc.  Sure, this all may have sounded good when most wanted to blame the rating agencies for not doing their jobs but we could never make the connection for how the average sophisticated investor could find the time or the means to perform that level of examination on their own.

What we like best about the new disclosure rule is that it will give investors a “practical metric” off which they can evaluate the suitability (“credibility”) of the due diligence process that a typical issuer utilizes in connection with their program.  Clearly those issuers with less repurchase activity would look more attractive (at least on that basis) to other alternatives in the market.

We are still studying the rule but bravo to the SEC for coming up with a measure that can be easily understood, can be reasonably easy to implement and will be of “real” use to investors.

We predict that this rule may have much more lasting impact on the resurgence of  “investor trust” than any other rule being considered including, the ever popular 5% Skin-in-the-Game rule.

About markferraris
Managing Principal Orchard Street Partners LLC

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