Along with approving new requirements for credit rating agencies such as Moody’s and Standard & Poor’s, the Securities and Exchange Commission this week also adopted revisions to rules governing the disclosure, reporting, and offering process for asset-backed securities (ABS), which often batches together auto loans from a wide array of finance companies.

SEC officials explained that they made the move to enhance transparency, better protect investors, and facilitate capital formation in the securitization market.

The agency highlighted the new rules, among other things, require loan-level disclosure for certain assets, such as residential and commercial mortgages and auto loans. The SEC indicated the rules also provide more time for investors to review and consider a securitization offering, revise the eligibility criteria for using an expedited offering process known as “shelf offerings,” and make important revisions to reporting requirements.

“These are strong reforms to protect America’s investors by enhancing the disclosure requirements for asset-backed securities and by making it easier for investors to review and access the information they need to make informed investment decisions,” SEC chair Mary Jo White said.

“Unlike during the financial crisis, investors will now be able to independently conduct due diligence to better assess the credit risk of asset-backed securities,” White continued.

The SEC recapped that ABS are created by buying and bundling loans, such as residential and commercial mortgage loans, and auto loans and leases, and creating securities backed by those assets for sale to investors.  A bundle of loans is often divided into separate securities with varying levels of risk and returns.  Payments made by the borrowers on the underlying loans are passed on to investors in the ABS.

Officials reiterated ABS holders suffered significant losses during the 2008 financial crisis.

“The crisis revealed that many investors in the securitization market were not fully aware of the risks underlying the securitized assets and over-relied on ratings assigned by credit rating agencies, which in many cases did not appropriately evaluate the credit risk of the securities,” the SEC said.

“The crisis also exposed a lack of transparency and oversight by the principal officers in the securitization transactions,” the agency continued. “The revised rules are designed to address these problems and to enhance investor protection.”

SEC officials noted the revised rules become effective 60 days after publication in the Federal Register. They emphasized issuers must comply with new rules, forms, and disclosures other than the asset-level disclosure requirements no later than one year after the rules are published in the Federal Register. 

The agency went on to mention offerings of ABS backed by residential and commercial mortgages, auto loans, auto leases and debt securities (including resecuritizations) must comply with the asset-level disclosure requirements no later than two years after the rules are published in the Federal Register.

SEC Adopts Credit Rating Agency Reform Rules

In other news from the SEC, the agency approved new requirements for credit rating agencies to enhance governance, protect against conflicts of interest, and increase transparency to improve the quality of credit ratings and increase credit rating agency accountability. 

Officials explained the new rules and amendments — which implement 14 rulemaking requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act — apply to credit rating agencies registered with the Commission as nationally recognized statistical rating organizations (NRSROs).

“This expansive package of reforms will strengthen the overall quality of credit ratings, enhance the transparency of credit rating agencies and increase their accountability,” White said.

“These reforms will help protect investors and markets against a repeat of the conduct and practices that were central to the financial crisis,” she added.

The SEC indicated the new requirements for NRSROs address internal controls, conflicts of interest, disclosure of credit rating performance statistics, procedures to protect the integrity and transparency of rating methodologies, disclosures to promote the transparency of credit ratings, and standards for training, experience and competence of credit analysts. 

“The requirements provide for an annual certification by the CEO as to the effectiveness of internal controls and additional certifications to accompany credit ratings attesting that the rating was not influenced by other business activities,” officials said.

The commission also adopted requirements for issuers, underwriters, and third-party due diligence services to promote the transparency of the findings and conclusions of third-party due diligence regarding asset-backed securities.

Officials noted that certain amendments will become effective 60 days after publication in the Federal Register. 

The SEC added the amendments with respect to the annual report on internal controls and the production and disclosure of performance statistics will be effective on Jan. 1, 2015, which means that the first internal controls report to be submitted by an NRSRO would cover the fiscal year that ends on or after Jan. 1, 2015, and the first annual certification on Form NRSRO relating to performance statistics is required for the annual certifications filed after the end of the 2015 calendar year.