Editor's note: This version of the story has been updated throughout.
WASHINGTON (Reuters)—The U.S. Securities and Exchange Commission on Wednesday [Aug. 27] adopted tighter rules for asset-backed securities and credit rating agencies, tackling two issues at the core of the 2007-2009 financial crisis after years of delays.
Banks will need to give far more transparency about ABS products under the new rules, and have to publicly disclose a raft of information about the thousands of car, home or other loans that underlie such securities.
And credit rating agencies will be required to erect strict boundaries between sales staff and employees handing out ratings to the securities, as part of an effort to prevent firms from luring clients with the prospect of favorable ratings.
"The SEC must protect investors in asset-backed securities just as it does investors in any other security," SEC Chair Mary Jo White said during a public meeting, at which the five-member commission voted on the two rules.
Asset-backed securities (ABS), which can be very complex and lacking in transparency, boomed before the 2007-09 crisis, but investors massively dumped them when they turned out to be tainted by defaulting subprime mortgages.
Credit rating agencies such as Moody's, Standard & Poor's, and Fitch compounded the problem by giving top-notch marks to the securities that later imploded, which led to wide-spread calls for reform of the industry.
The SEC first proposed new rules on ABS more than four years ago, but struggled to balance privacy concerns about the sensitive loan-level data with investors' desire to know more about the securities.
The industry had worried the level of detail in mortgage disclosures, for example, would be enough to identify individual borrowers, leading the SEC to re-propose the rules in February, when it had first scheduled a vote.
The final rules required information including the credit quality and collateral and cash flows for certain assets, but the disclosure demands were scaled back slightly.
Dennis Kelleher, who heads the Better Markets pressure group, which is pushing for Wall Street reform, gave a cautiously optimistic assessment of the new rules.
"On ABS, they did an okay job on the loan-level disclosure, which should help investors," he said. "It appears they made some significant improvements" on the rules on credit rating agencies, Kelleher also said.
The final rules on ABS, adopted unanimously, dropped a requirement to extend their scope to privately-closed deals with professional investors. Such deals tend to follow public deal practices anyway, given that investors want the same information.
The new rules would also give investors a three-day waiting period to back out once they had agreed to a transaction, and in some cases removed references to credit ratings.
Banks and other issuers such as finance companies, use ABS to transfer risk in car loans, credit cards, mortgages and other assets to investors, and are relying on them to a large degree to fund their business. Volumes have recovered in recent years, but are well below pre-crisis levels.
The rules for credit rating agencies prohibit staff from working on the ratings to also be engaged in sales or marketing of a product, or even to be influenced by sales considerations. But they do not apply to smaller agencies.
The rules also gave a long list of measures intended to make the rating process more reliable, such as periodic reviews, and build up a robust internal control system. The two Republican commissioners voted against those rules, saying they went too far and would be largely ineffective.
By Douwe Miedema