SEC Underwhelms with ABS Review Rules

The Securities and Exchange Commission last week largely punted on an opportunity to bring about meaningful change to the way residential mortgage-backed securities (RMBS) are reviewed.

The rules imposing minimum standards for the review of asset-backed securities (ABS) are underwhelming and disappointing for two chief reasons.
First, they do not require independent, third-party reviews of RMBS. Independent reviews should be a standard for our industry, just as outside audits are for publicly held companies. By allowing issuers to choose to do reviews in-house, the SEC did little to change the status quo.

Second, the new rules provide no specifics about what a review of RMBS deals should entail. As reporter Yali N’Diaye correctly pointed out, the new standards are principle-based and lacking in specifics.

Issuers now must meet a “reasonable assurance” standard for reviews. What would have served investors better are specific guidelines for what constitutes a minimum standard of review. I’m sympathetic to arguments that the SEC wanted to create flexible rules that would apply to a broad set of asset classes. But, at least as it pertains to RMBS markets, the industry needs a minimum standard for third-party reviews to bring about the level of transparency investors deserve and that the Dodd-Frank Act sought to bring about.

As I’ve written before on this blog, I support the other major change put forth by the SEC.

Unlike others in our industry, Allonhill is willing to accept the “expert” status set out in the SEC’s rules and the legal liability that goes with it. We’re not eager to take on the added legal risk, but we’re willing to, because the industry needs quality, third-party reviews. And we intend to deliver them. For the past two years we have worked closely with rating agencies, investors, the SEC and others to develop new due diligence standards for securitizations. We have already begun implementing these standards in new training programs through the Allonhill Academy, and will be accelerating our professional development in the coming year.

Due diligence firms like Allonhill that are willing to step up and accept “expert” status and the legal liability that goes with it must work hard to educate investors about the differences between a quality, independent review that will protect their interests and one that merely provides “reasonable assurance.”

Absent meaningful action by the SEC, the onus is on investors to demand new standards for reviews.