SEC Allows Asset-Backed Issuers to Omit Ratings Required by Dodd-Frank Act
The Securities and Exchange Commission indefinitely extended the timeframe for asset-backed bond issuers to omit credit ratings from marketing materials, effectively exempting companies from part of the U.S. Dodd-Frank financial reform act.
Pending further notice, the SEC won’t recommend enforcement action if an asset-backed issuer doesn’t include the ratings disclosure required by law, according to a letter today from Katherine Hsu, senior special counsel for the SEC.
Issuers received a six-month reprieve from a portion of the law in July after ratings firms balked at allowing companies to include rankings in public documents. The reluctance stemmed from concern that firms such as Moody’s Investors Service, Standard & Poor’s and Fitch Ratings may be vulnerable to lawsuits when underwriters include their assessments.
“Without this extension, the entire public securitization market would have closed in late January,” Tom Deutsch, executive director of the American Securitization Forum, said today in an e-mailed statement.
Borrowers were unable to obtain permission from the ratings firms to include their rankings in registration statements, Meredith Cross, director of the SEC’s division of corporate finance, said in a July 22 statement when the SEC granted the reprieve. In a statement today, Cross said the agency is working on “significant changes” to the regulation of asset-backed securities and the rating agencies. The extension will give the SEC more time to come up with possible solutions, she said.
Working on Change
“The staff believed that it was better for investor protection if these offerings are able to be done in the registered markets, and the letter should facilitate that,” Cross said.
“We believe the SEC’s decision is consistent with Congress’s intent to reduce reliance on ratings in regulation, which we have long supported,” Michael Adler, a spokesman for Moody’s Corp. in New York, said today in a telephone interview.
Edward Sweeney, a spokesman for S&P, declined to comment.
The Dodd-Frank law, signed by President Barack Obama in July, subjects ratings companies to so-called expert liability, meaning they would face the same legal risks as accountants and other parties that participate in bond sales.
Ford Motor Credit Co. asked the SEC in July to allow the company to exclude ratings from an asset-backed prospectus because ratings firms refused to consent, according to a copy of the correspondence posted on the SEC website.
Rating companies are still unwilling to consent, the regulator said in its letter today.
“Given the current state of uncertainty in the asset- backed securities market and the benefits to investor protection resulting from Securities Act registration, the Division is extending the relief,” the SEC said.
Ford Motor’s finance arm sold $1.39 billion of bonds backed by auto loans on July 27, five days after the SEC granted the issuers’ exemption from including ratings, according to data compiled by Bloomberg.
“We are pleased,” Margaret Mellott, a spokeswoman for Ford Motor Credit, said in an e-mailed statement. “The SEC recognizes the importance of the public ABS markets, and we are glad the staff is ensuring the public ABS markets remain available.”
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