U.S. securities regulators gave investors a closer look before they buy asset-backed securities with the adoption of two new rules on Thursday.
Both rules were required under last year's Dodd-Frank financial reform law and respond to huge losses seen during the financial crisis by holders of securities backed by subprime mortgage loans.
The first rule, approved unanimously by the Securities and Exchange Commission, aims to give investors a way to review the track record of asset-backed issuers such as Bank of America.
Specifically, it would let investors see how often the issuers were asked to buy back assets because they failed to meet the underwriting criteria laid out in the prospectus. Issuers would also need to disclose how often they fulfilled the repurchase requests from investors.
The second rule would require issuers of asset-backed securities to conduct a review of the loans underlying the securities and disclose it to investors.
That rule was approved in a 3-2 vote, with both Republican commissioners dissenting.
Under the first rule, issuers will need to file a three-year repurchase history with the SEC by February 14, 2012 and then updated quarterly.
It applies only in cases where investors and issuers had a repurchase agreement included in the offering documents, and covers all asset-backed issuers, including municipal issuers. However, municipal issuers would get a three-year phase-in period to comply.
Additionally, credit-rating agencies would have obligations to disclose to investors the recourse they have if they feel the loans in the pool fail to meet the criteria in the prospectus.
SEC Chairman Mary Schapiro said she felt the final rule did a good job at balancing competing concerns between those who feared a three-year look-back was too costly and difficult to obtain, and those who felt it was vital for investors.
All of these are rational measures aimed at providing investors with the information that they need, without unreasonable cost, she said.
Republican commissioners both raised similar concerns with the second rule requiring the issuer to review the assets underlying a security.
Their main concern centered on a provision requiring a minimum review standard.
The minimum review standard was strongly pushed by Commissioner Luis Aguilar, a Democrat, but his Republican colleagues said it was not necessary and goes beyond the requirements of the Dodd-Frank Act.
It is not clear to me what is gained, said Republican Commissioner Kathleen Casey.
Under the rule, issuers could conduct the review themselves or they could solicit help from a third-party firm.
If an issuer obtains assistance and attributes the findings and conclusions to the third party, they can rely on it as long as the third-party agrees to be named in the securities registration statement as an expert.
That provision bothers Commissioner Troy Paredes, as well as some in the industry, who fear it might deter third-parties from conducting reviews amid concerns about getting sued.
Under the review rule, issuers would also need to disclose key information such as how the loans in the pool differ from the loan underwriting criteria in the prospectus and how the loans that did not meet the criteria were still included in the investment pool.
The asset review rule only applies to asset-backed securities that are registered with the SEC, which means municipal asset-backed securities are exempt.
(Reporting by Sarah N. Lynch; Editing by Gerald E. McCormick and Tim Dobbyn)