The Securities and Exchange Commission has gone too far with its proposed rules for the asset-backed market, which in their current form could discourage some issuers from selling public transactions and make the entire financing process more expensive, according to members of the securitization industry. Among other elements, the 400-page document proposes forcing issuers to produce more detailed prospectuses, including information on sub-servicers and potential risks to the underlying pool for each transaction. Industry pros predicted at an American Securitization Forum panel in New York last week that this will raise transaction costs for all parties involved and said the proposals need to be significantly re-worked, perhaps even re-proposed. The outcry is surprising since market participants, from investors to issuers, had said they would welcome greater transparency.
Critics say extra printing and increased liability risks due to the additional information required will make it more expensive for lenders, who will in turn pass on these costs in the form of higher borrowing rates to consumers and lower yields for investors.
Higher disclosure expenses could ultimately affect consumers because lenders will charge higher rates if it becomes more cumbersome to arrange financing through the securitization market. "It will increase the cost of doing business, and at whose cost?" asked David Marple, managing director and co-chief counsel at GMAC-RFC, a major issuer of residential mortgage-backeds, who spoke on a panel. Although the proposed additional disclosure may indeed be useful for some investors, it is not material, but providing it in prospectuses would take a material effort.
Observers questioned the SEC's view that information posted on issuers' Web sites is not sufficient and that the disclosure needs to be printed in prospectuses and official filings. Marty Rosenblatt, partner at Deloitte, proposed the ASF set up a repository for information, suggesting this might appease the SEC, investors and issuers. Marple agreed that a central site would be a solution.
To be sure, panelists lauded the SEC for its comprehensiveness and said certain sections, such as the one that governs communications, will strengthen the market without changing the course of business.
The proposed disclosures would add significant filing costs, according to Bianca Russo, managing director and associate general counsel at J.P. Morgan Securities. She said the firm spends "several hundred thousands dollars per year on EDGAR filings and it will be millions" if the proposals go through. Stephen Kudenholdt, partner at Thacher Proffitt & Wood, said disclosure proposals "might be too much of a good thing. It could push marginal players out" of the securitization market.
Panelists said the proposals would like more time to respond, since the proposals are so sweeping. The SEC had 10 years to come up with the proposals while the industry has 60 days to respond, Marple quipped.