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SEC Proposes Enhanced Disclosures to Protect Investors in Asset-Backed Securities

David P. Meyer, Esq.

Last week the SEC issued a proposal that would change the way issuers of asset-backed securities provide information to investors by requiring the issuers to perform and disclose a review of the products' assets, according to an Oct. 13 SEC press release. Asset-backed securities are products sold to investors in which the securities are backed by bundled loans. The underlying loans are often residential mortgage loans, commercial loans, and/or student loans.

The SEC has proposed the new rules with three goals in mind:

1. To make registered issuers of asset-backed securities conduct a thorough review of the products' underlying bundled assets;

2. To require registered issuers of asset-backed securities to publicly disclose the information obtained through the required review; and

3. To require both registered and unregistered issuers and underwriters of asset-backed securities to disclose the findings and conclusions of any third-party reviewer hired to conduct a review into the products' underlying bundled assets.

"This marks the third Commission proposal to address the ABS issues that came to light during the financial crisis," said SEC Chairman Mary L. Schapiro. "This proposal will require issuers to provide investors with better information about the loans backing the asset-backed securities."

Issuers would also be required to disclose: if and how the underlying assets differ from the disclosure in the prospectus regarding underwriting criteria, if the underlying assets failed to meet the underwriting criteria, and information about the entity that decided to include an asset in the security that did not meet the underwriting criteria.

The proposed changes are designed to meet the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act that said the SEC must "adopt rules regarding the review of assets, such as loans, underlying the securities no later than 180 days after enactment," according to the SEC's press release.

Additional proposals issued over the past six months have included: requirements that ABS issuers and credit rating agencies disclose representations, warranties and enforcement mechanisms to all investors; and revisions to the current disclosure, reporting and offering process by which asset-backed securities are underwritten and issued.

The SEC has requested comments from the public on the proposed rules. All comments should be received by November 15.