In a comment letter filed today with the Securities and Exchange Commission, SIFMA expressed its appreciation for the intent of Section 621 of the Dodd-Frank Act, and agreed that certain reforms may be necessary to ensure that securitization transaction parties are not creating and selling asset-backed securities (ABS) that are intentionally designed to fail or default and profiting from the failure or default of such ABS. At the same time, however, SIFMA urged the SEC to create a framework that prohibits these types of transactions while still allowing for the issuance of ABS without the uncertainty of overly broad or vague regulations or undue restrictions or prohibitions.
“SIFMA’s comments reflect its continued goals of restoring capital flow to the securitization markets and increasing the availability of credit to American consumers and small businesses,” said Richard A. Dorfman, managing director and head of SIFMA’s Securitization Group. “Securitization is a key component of long term, stable funding for banks and other lenders and provides investment diversification to investors. Rules should be crafted in a way that does not prevent the recovery of these markets and that presents clear guidance for a pathway to compliance.”
The following points are made in SIFMA’s comment letter:
- The Proposed Rule would have a significant economic impact due to the curtailment of securitization and other risk management activity and SIFMA believes the economic analysis set forth in the Proposed Rule is insufficient. The SEC should re-propose the rule, and provide a thorough economic analysis quantifying and comparing the costs and benefits of the Proposed Rule. In SIFMA’s view, the costs of implementation of the Proposed Rule far exceed the benefits.
- Intent should be a necessary element in determining the existence of a “material conflict of interest.” As seen through its legislative history, Section 621 was aimed at eliminating “designed to fail” transactions, which implies a focus on intent. Without a standard of intent, many otherwise mutually beneficial transactions would unjustly be deemed impermissible.
- The Proposed Rule would prevent financial institutions from engaging in common and widely accepted safety-and-soundness enhancing balance sheet risk management
practices which utilize securitization. SIFMA suggests that these transactions should be permissible. - The Proposed Rule is overly broad and unclear. It should incorporate aspects of the SEC’s commentary which provide guidance as to its application, and should define key terms. Insufficient guidance and undefined terms will only lead to uncertainty and chill activity in the securitization markets.
- The rules should focus on the activities of the business units involved in the structuring of or selection of the assets for the securitization transaction. As proposed, the Rule would require all business units, regardless of their knowledge of or involvement in the securitization transaction, to be aware of the activities of those who are involved in a transaction. Information barriers between business units, constructed to comply with other regulations, create serious obstacles to the sharing of information
and create material difficulty in compliance with the proposed rule. - To strengthen this focus on specific business units, the rule should include a safe harbor that permits each financial institution to design its own policies and procedures to restrict the spread of information regarding securitization transactions from the business unit or units structuring the ABS or selecting the assets underlying the ABS to other parts of the institution.
- The use of disclosure should be permitted to mitigate potential and actual conflicts of interest; we note that the proposed Volcker rule includes this concept.
