The SEC supports making companies retain risk when selling bonds backed by mortgages and car loans, trying to reduce Wall Street’s incentive to package debt into securities without concern for whether the assets sour.
The SEC today voted 5-0 on a proposal that financial firms hold 5% of each class of an asset-backed security if they want to avoid regulatory hurdles when selling the bonds, according to an SEC statement. Banks would be barred from hedging on the portion of the securities they retain.
The SEC will seek comment on its proposal for 90 days before the agency’s commissioners consider holding a second vote on whether to make the rule binding.
The plan “represents a fundamental revision” to how asset-backed securities are regulated, SEC Chairman Mary Schapiro said at a meeting. “Changes are both necessary and critical components of restoring investor confidence.”
The SEC proposal would apply to so-called shelf offerings, which let companies register stocks and bonds with the SEC before an offering and then sell the securities as financing needs arise. The process allows debt sellers to raise money quickly because companies don’t need SEC approval each time they want to sell a security.
The proposal will also require more disclosure about the underlying loans that make up an asset-backed security and give investors more time to review registration statements before a sale goes through.
Bond sellers would be required to disclose matters such as whether a mortgage underwriter verified borrowers’ income and assign each loan an identification code so its performance can be tracked throughout the life of the security.
The SEC disclosure rules would also increase regulation of the private market for asset-backed debt offerings, which aren’t registered with the agency and are typically sold to hedge funds and pension funds. If investors requested it, issuers would have to reveal the same information in private offerings that they do in public sales.
The U.S. House in December passed a financial overhaul bill that includes a requirement that sellers of repackaged securities hold 5% of the credit risk. The Senate Banking Committee approved a similar measure in March.