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Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on
March 30, 2011.
Today, the Commission will consider two proposals, both of which stem from the Dodd-Frank Wall
Street Reform and Consumer Protection Act.
First, we will consider joining with other regulators to propose rules implementing section
941 of the Dodd-Frank Act. That section generally requires that certain parties involved in
non-exempted asset-backed securities, retain a minimum amount of economic interest in the
credit risk of the assets being securitized.
Second, we will consider proposing rules to implement section 952 of the Dodd-Frank Act.
That section requires the Commission to adopt rules concerning the disclosure of a compensation
consultant’s potential conflicts of interest. It also calls for rules directing the exchanges
to adopt certain listing standards addressing compensation committee independence.
Risk Retention in the ABS Market
We begin with the risk retention proposal.
As we know, securitization – which is the buying and bundling of assets such as housing,
student, car or commercial loans – played a key role in the financial crisis.
Like many investment products, securitization has both benefits and risks. The benefits
to our national economy include lowering the cost of credit to households and businesses,
enabling lenders to make loans and credit available to a wide range of borrowers and
companies seeking financing. From an investors’ perspective, securitization can provide an
attractive yield and an important opportunity to diversify risk. For these reasons, at one
time, the securitization market provided trillions of dollars of liquidity to virtually every
sector of the economy.
However, these benefits are not without costs. For example, many parties in the securitization
chain, such as loan originators, may have access to information not readily available
to investors of asset-backed securities or ABS. This could include information that may
affect the future credit worthiness of a borrower.
In addition, participants in this chain may be able to affect the value of the securities
in ways that are not fully transparent to investors. This could happen, for instance,
when an originator includes the most poorly underwritten loans through a securitization
and retains for itself only those loans very likely to fully perform.
This misalignment of incentives and information are contrary to fair and efficient markets.
And, as we have learned repeatedly, when investors don’t trust the fairness of a market, they
often withdraw their capital. In the securitization market, this has had a dramatic impact on
businesses and households across America.
Addressing the various lessons that we have learned about the ABS market is a multi-pronged
effort. In fact, this is the fourth major ABS proposal that the Commission has undertaken
in just the past 12 months.
As many of you may recall, last April, the Commission proposed rules that sought to level
the information playing field among different parties in the securitization chain. Among
other things, these rules would require issuers of ABS to file loan-level information in a
specific computer-readable format. The proposal also would require issuers to file on the
SEC website a computer program that would show the so-called “waterfall,” allowing
investors to see and analyze how borrowers’ loan payments are being distributed.
Additionally, the April 2010 proposal included a provision that sought to realign economic
incentives in the ABS market. Specifically, it would have required, as a condition of
shelf eligibility, that ABS sponsors retain some of the credit risk associated with the
underlying assets.
However, after our April 2010 proposal, Congress passed the Dodd-Frank Act which directed the
Commission, as well as other financial regulators, to address many of the weaknesses in the ABS
market that the financial crisis brought to light.
As a result, earlier this year the Commission adopted two other sets of ABS rules, both
of which enhance transparency and thereby further minimize the information gap that
has existed in this market.
The first requires issuers of asset-backed securities to provide greater disclosure about
their representations and warranties, as well as the history of loan repurchases. All of
this data will help investors identify originators that may have underwriting deficiencies.
The second requires issuers of ABS that are registered with the SEC to conduct a review,
either themselves or with the help of third parties, of the bundled assets that underlie
the ABS, and then to disclose information about that review.
The proposal we consider today impacts a broader class of issuers than did our April 2010 proposal
regarding credit risk retention. As directed by Dodd-Frank, today’s proposed rules have
been jointly developed by the staffs of several agencies. Specifically, our staff worked with
staff at the Federal Reserve Board, the Office of the Comptroller of the Currency, the FDIC,
the Federal Housing Finance Agency, and the Department of Housing and Urban Development.
Yesterday, those other agencies approved the joint proposal that we are now considering.
As I mentioned earlier, our April proposal was narrowly crafted to only impose risk retention
requirements upon sponsors of asset-backed securities seeking to use the “shelf”
registration process. This was due to limitations to the Commission’s statutory authority.
However, with enactment of the Dodd-Frank Act, the Commission (jointly with our fellow
regulators) is not only authorized to write rules requiring risk retention in all non-exempted
ABS transactions – whether “shelf” eligible or not – but is required to do so.
In a moment I will ask Meredith Cross, Director of the Division of Corporation Finance, to
provide the details about the recommendation before us. But before I do, I’d like to
thank the staff members who have put in countless hours working on this project.
From Corp Fin, thank you to Meredith, Paula Dubberly, Kathy Hsu, Jay Knight, Rolaine Bancroft,
Paul Dudek, Amy Starr, and Stephanie Hunsaker. From the Division of Trading & Markets, thanks
to Gregg Berman. Thanks also to our colleagues in the General Counsel’s Office, specifically
Rich Levine, David Fredrickson and Bryant Morris. From the Division of Risk, Strategy
and Financial Innovation, thank you to Stas Nikolova and Emre Carr. Thanks also to Paul
Beswick and Wes Bricker from the Office of Chief Accountant, and to David Grim from the
Division of Investment Management
Finally, I would like to thank the staffs of our fellow regulatory agencies, as well
as my colleagues on the Commission and our counsels for their work and thoughtful comments.
Now I'll turn the meeting over to Meredith Cross to hear more about the Division’s
recommendations.