WASHINGTON — The Securities and Exchange Commission approved two sets of rules for asset-backed securities Thursday, including one that would apply to certain municipal securities in early 2015.
That set of rules, which the five-member commission approved unanimously, would require municipal issuers to disclose in quarterly filings the repurchase history on loans or assets securing all outstanding munis considered to be ABS “if the underlying transaction agreements include a covenant to repurchase or replace a pool asset,” according to an SEC fact sheet.
The issuers also would have to disclose a history of all “fulfilled and unfulfilled repurchase requests, including investor demands upon a trustee and pending requests.”
In addition, the SEC voted 3-2 to approve a related set of rules requiring ABS issuers to conduct a review of the assets underlying their securities. But that proposal would only apply to registered securities and therefore not munis.
The SEC postponed a vote on a portion of the second set of rules that would require ABS issuers to disclose the results of any due diligence reports they conduct or receive. As proposed in October, that provision would apply to both registered and unregistered securities. Though it would not mandate that muni issuers conduct such reviews of their underlying assets, it would require them to disclose the results if they do.
The commission will consider that provision along with other due-diligence rules that it will propose later and that are to be finalized within one year of July’s enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Though the disclosure requirements of the first set of asset-backed securities rules would apply to issuers of unregistered ABS, including certain municipal securities, the SEC would give muni issuers a three-year phase-in period.
Because the rules do not take effect for non-municipal ABS until next February, issuers would actually have more than four years before the rules go into effect.
In addition, muni issuers would be able to send their quarterly information to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access, or EMMA site.
Speaking before the vote on the rules, SEC chairman Mary Schapiro acknowledged that some market participants had urged the commission to exempt municipal issuers from them. But Dodd-Frank, which mandated the rules, “did not provide us with exemptive authority,” she said.
“I think the staff’s recommendation that we provide these issuers an additional three-year period to prepare for the rules, and the flexibility to file on EMMA instead of EDGAR, is a reasonable way to balance concerns in this area,” she said.
She added that the commission could make revisions to the rules after it considers additional “inputs,” including the results of the SEC’s ongoing inquiry into the muni market, a study of the market being conducted by the Government Accountability Office and the implementation experience of other issuers.
“At such time, we could make revisions to the rules if appropriate,” she said.
The rules are designed to increase ABS transparency to ensure there is no replay of the events leading to the subprime loan-triggered fiscal crisis, when loan originators had no incentives to make sure the loans performed well and walked away from them when they did not
It is not immediately clear how many munis, such as student loan or housing bonds, the proposed rules would affect. Market participants speculated it might be fairly limited and much less than the proposed rules, but they warned they only had a brief opportunity to glance at the final rules after they were posted on the SEC’s website Thursday afternoon.
“At first blush, it appears that the principal response to the comments received was to delay applicability to municipal securities that would otherwise fall within the previously proposed definition an asset-backed security to which the rule applies,” said Kenneth Roberts, a partner at Hawkins Delafield & Wood LLP in New York.
Len Weiser-Varon, a shareholder at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC in Boston, said there may be some munis that would be covered under the new rules, but probably not many.
He added that municipal transactions generally differ substantially from corporate ABS transactions, in which companies sell off assets thorough an affiliated securitization vehicle and covenant to repurchase assets that don’t meet specified eligibility criteria.
“Typically in the muni market, there’s some eligibility requirements for the loans, either imposed by a bond insurer or by a credit enhancer or by legal restrictions on what types of loans the issuer can make,” Weiser-Varon said. “The issuer may make representations that the loans meet those eligibility requirements, but rarely covenants, and may not have the assets to buy the loans back if the representation turns out to be incorrect. The issuer is fulfilling a public purpose in the transaction, not offloading assets.”
If an issuer’s bonds qualify as ABS, and if the issuer covenants to repurchase nonperforming loans or assets, it would have to post the quarterly reports in tabular form, listing the three-year history of the repurchase requests it received and made relating to its outstanding ABS.
The table would provide comparable disclosures so that investors would be able to identify originators with clear underwriting deficiencies, the SEC said in its fact sheet.
Each issuer would have to make one filing covering all of its asset-backed securities, rather than one filing for each security, SEC officials said.
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