Schapiro Calls for Legislation on Asset-Backed Securities

In a recent speech, SEC Chairman Mary Schapiro stated that there may be gaps in the regulation of the asset-backed securities market. She has asked the staff to broadly review the Commission's regulation of ABS including disclosures, offering process, and reporting of asset-backed issuers. The staff is considering a number of proposed changes, which are designed to enhance investor protection in this part of the market.

However, the chairman indicated that not all problems with ABS can be addressed under the agency's current rulemaking authority. Legislative action may be necessary to deal with the issues recently highlighted by the credit crisis. The chairman described how the current disclosure-based regulation regime was designed to deal with issuers in actively-managed businesses. Securitization, however, is a financing technique in which financial assets, in many cases themselves less liquid, are pooled and converted into instruments that may be offered and sold in the capital markets. Asset-backed securities are generally securities that are backed by a discrete pool of self-liquidating financial assets.

The chairman described how most legislative proposals aimed at improving securitization have focused on the disclosure of material information. She believes, however, that substantive protections beyond disclosure requirements are needed for the ABS arena due to the nature of securitization and the role it plays in the national economy.

Creating a new act directed solely at securitizations would allow Congress to "specifically tailor solutions for these investment vehicles—much like the Investment Company Act of 1940, and, it could be done without compromising or changing the fundamental structure and underpinnings of existing statutes," said the chairman. As described by Chairman Schapiro, such a statute could have substantive restrictions or requirements for the trust that issues the securities and for related parties, and set minimum requirements for the pooling and servicing agreements.

These minimums could include strong representations and warranties about the assets being securitized and the procedures for ensuring those representations and warranties are followed. Any substantive changes would apply in addition to the disclosure requirements of the Securities Act, which would continue to apply when ABS securities were offered and sold.

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