SEC Reg AB Proposals May Cause Delay, Confusion in Securitization

Proposed regulations on securitization reporting could delay the offering of new deals and cause confusion regarding the consolidation issues raised in Financial Accounting Standards (FAS) 166 and 167, according to a partner at accounting firm Deloitte. The Securities and Exchange Commission (SEC) on April 2 announced proposed Reg AB amendments, which it intends to improve the disclosure underlying initial offerings, subsequent take downs, and ongoing reporting for all asset-backed securitizations, according to commentary by Kenyon. While “reducing the uncertainty with respect to the regulation of structured finance products can only be viewed as a positive step in restoring the robustness of the market,” Ann Kenyon writes, several elements of the proposal could cause unintended complications. For example, the SEC intends to slow down timing for deals, to allow sufficient time for analysis by investors who may hesitate to make a decision and thereby turn down the purchase. The SEC proposed a five-day waiting period for review of the deal. If any information were to change during that review period, the five-day clock would reset. “[T]he length of time it would take to bring a transaction to market would certainly extend from what we had seen historically,” Kenyon writes. “As issuers grow familiar with the ramifications on the securitization process and its consequent impact on changes to the data that need to be filed, it is likely that an organized, prepared and savvy issuer could still get to market expeditiously.” Additionally, FAS 166 and 167 requires many securitized assets to be brought onto balance sheet — a costly process. The SEC’s proposed Reg AB is not clear on the implications of this consolidation when an issuer is also required to hold some share of credit risk inherent in the securitized deal. According to FAS 166 an 167, an issuer of a securitization must meet two criteria in order to consolidate the special purpose entities in the transaction. The issuer must have the power to direct activities of the entity that have a significant impact on its economic performance, and the issuer must have a financial interest in the entity that obligates the issuer to absorb losses or receive benefits potentially significant to the entity. The proposed 5% credit risk retention could complicate matters, as it remains unclear whether the 5% vertical slice would be significant enough to require consolidation of special purpose entities under FAS 166 and 167. “It is unclear from the proposal whether the SEC thinks that a 5% interest is potentially significant,” Kenyon writes. “While a 5% vertical slice would not generally represent a quantitatively significant interest, it is unclear whether, in this context, the interest would represent a qualitatively significant interest.” Write to Diana Golobay.

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