SEC Moves to Block New Asset-Backed Securities Issuance 'Flash-Freeze'
The Securities and Exchange Commission (SEC) addressed industry concerns that the Dodd-Frank financial reform act signed this week by President Barack Obama could have the unintended consequence of freezing new asset-backed securities (ABS) issuance. The SEC said Thursday it reviewed the concerns of issuers and credit-rating agencies. The SEC's Corporate Finance division then issued a 'no action' letter allowing issuers to omit credit ratings from registration statements in the next six months. The American Securitization Forum (ASF) was quick to issue a statement on the SEC's no-action position. "Without the SEC's action, the securitization markets would have been flash frozen, as credit rating agencies were unable to issue new ratings without a clear understanding of their long-term legal liabilities," said ASF executive director Tom Deutsch. "We look forward to working with regulators and all market participants to develop a long-term solution to these changes that will allow critical con-sumer and business credit to continue to flow through the securitization process." The Dodd-Frank Act repeals Rule 436(g), essentially requiring the consent of a Nationally Recognized Statistical Rating Organization (NRSRO) to be named as an expert when a rating is disclosed in a registration statement. Standard & Poor's (S&P) president Deven Sharma already noted the legislation could expose rating agencies to greater liability for — and lawsuits over — ratings of mortgage-backed deals. As a result, the SEC said in a 'no-action' letter, NRSROs like S&P indicated they "are not willing to provide their consent," as it would expose them to greater liability and potential lawsuits. The Corporation Finance division will therefore not recommend any enforcement action if an ABS issuer omits the ratings disclosure from the registration statement altogether. The no-action position will remain in effect for six months, expiring for any registered offerings for ABS offered on or after Jan. 24, 2011. "Although there are currently few issuers in the registered asset-backed securities market, we understand from some issuers that they cannot currently obtain credit rating agency consent to include the credit ratings" in registration statements, said Meredith Cross, director of the Corporation Finance Division, in a statement. "This action will provide issuers, rating agencies and other market participants with a transition period in order to implement changes to comply with the new statutory requirement while still conducting registered ABS offerings. Write to Diana Golobay.