(Adds second vote, details from meeting, reaction)
By Douwe Miedema
WASHINGTON Aug 27 The U.S. Securities and
Exchange Commission on Wednesday adopted tighter rules for
asset-backed securities and credit rating agencies, tackling two
issues at the core of the 2007-2009 financial crisis after years
Banks will need to give far more transparency about ABS
products under the new rules, and have to publicly disclose a
raft of information about the thousands of car, home or other
loans that underlie such securities.
And credit rating agencies will be required to erect strict
boundaries between sales staff and employees handing out ratings
to the securities, as part of an effort to prevent firms from
luring clients with the prospect of favorable ratings.
"The SEC must protect investors in asset-backed securities
just as it does investors in any other security," SEC Chair Mary
Jo White said during a public meeting, at which the five-member
commission voted on the two rules.
Asset-backed securities (ABS), which can be very complex and
lacking in transparency, boomed before the 2007-09 crisis, but
investors massively dumped them when they turned out to be
tainted by defaulting subprime mortgages.
Credit rating agencies such as Moody's, Standard and
Poors, and Fitch compounded the problem by giving top-notch
marks to the securities that later imploded, which led to
wide-spread calls for reform of the industry.
The SEC first proposed new rules on ABS more than four years
ago, but struggled to balance privacy concerns about the
sensitive loan-level data with investors' desire to know more
about the securities.
The industry had worried the level of detail in mortgage
disclosures, for example, would be enough to identify individual
borrowers, leading the SEC to repropose the rules in February,
when it had first scheduled a vote.
The final rules required information including the credit
quality and collateral and cash flows for certain assets, but
the disclosure demands were scaled back slightly.
Dennis Kelleher, who heads the Better Markets pressure
group, which is pushing for Wall Street reform, gave a
cautiously optimistic assessment of the new rules.
"On ABS, they did an okay job on the loan-level disclosure,
which should help investors," he said. "It appears they made
some significant improvements" on the rules on credit rating
agencies, Kelleher also said.
The final rules on ABS, adopted unanimously, dropped a
requirement to extend their scope to privately-closed deals with
professional investors. Such deals tend to follow public deal
practices anyway, given that investors want the same
The new rules would also give investors a three-day waiting
period to back out once they had agreed to a transaction, and in
some cases removed references to credit ratings.
Banks and other issuers such as finance companies, use ABS
to transfer risk in car loans, credit cards, mortgages and other
assets to investors, and are relying on them to a large degree
to fund their business. Volumes have recovered in recent years,
but are well below pre-crisis levels.
The rules for credit rating agencies prohibit staff from
working on the ratings to also be engaged in sales or marketing
of a product, or even to be influenced by sales considerations.
But they do not apply to smaller agencies.
The rules also gave a long list of measures intended to make
the rating process more reliable, such as periodic reviews, and
build up a robust internal control system. The two Republican
commissioners voted against those rules, saying they went too
far and would be largely ineffective.
(Reporting by Douwe Miedema; Editing by Chizu Nomiyama and Paul