SEC Passes Tougher Rules for Asset-Backed Securities

Sellers of asset-backed securities (ABS) must now abide by more stringent disclosure and reporting rules intended to improve the market that brought down the financial system in 2008.

The US Securities and Exchange Commission (SEC) commissioners on Wednesday unanimously approved new regulations to “enhance transparency, better protect investors, and facilitate capital formation in the securitization market”.

Expanding on and revising rules already in place via the Dodd-Frank Act, the laws require “asset-level information in a standardized, tagged data format” for ABS backed by residential and commercial mortgages, auto loans and leases, and debt securities.

Such information includes credit quality, collateral, and cash flows related to each asset, the SEC said.

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“These are strong reforms to protect America’s investors by enhancing the disclosure requirements for asset-backed securities and by making it easier for investors to review and access the information they need to make informed investment decisions,” SEC Chair Mary Jo White said in a statement.

By requiring ABS issuers to file a preliminary listing of a potential transaction three days prior to the first sale of securities, investors will be permitted extra time to review the offering and assess credit risk, the SEC said. The new rules are meant to provide investors with “what food and drug labeling does for consumers—provide a list of ingredients,” according to Commissioner Kara Stein.

“This rule also addresses certain critical flaws that became apparent in the securitization process, including a dearth of quality information and insufficient time to make informed assessments of the underlying investments,” she said.

At the same time, the SEC adopted new requirements for credit rating agencies concerning conflicts of interest and governance controls, also intended to increase transparency and credit rating agency accountability.

“Today’s reforms will help protect investors and markets against a repeat of the conduct and practices that were central to the financial crisis,” White said.

Related Content: Is the ABS Market Making a Comeback?

More than half of senior executives are not overpaid, according to research, despite a significant number of shareholder revolts against pay packages and bonuses in the past three years.

In one of the more bizarre research papers of the summer, Bang Dang Nguyen of the University of Cambridge Judge Business School and Kasper Meisner Nielsen from the Hong Kong University of Science and Technology claimed to have found “empirical evidence” that 58% of senior executives are not overpaid. In addition, the paper—titled “What death can tell: Are executives paid for their contributions to firm value?”—found that the average top executive retains 71% of the value they create for shareholders through remuneration.

To calculate the figures, the pair examined how US-listed companies’ share prices reacted upon the news of the death of a serving executive, and compared their salaries to the expected salaries of their replacements.

They looked into the sudden deaths of 149 executives between 1991 and 2008 and analysed share price movements for five days afterwards, comparing the performance to the five days immediately before the unfortunate events. Of those, 63 triggered positive moves in their companies’ share prices, which the authors claimed indicated they were “pocketing more than 100% of the value they created”.

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Nguyen said the research offered a “novel approach to measuring executives’ perceived contribution to shareholder value and its relationship to pay”.

He added: “A large body of research, and many politicians and leaders, argue that executive compensation is excessive. But, without a measure of executives’ perceived contribution to shareholder value, a true assessment is difficult.

“Enacting regulation—especially as a response to social pressure—that punishes all CEOs alike also punishes the company, the shareholders, the taxman and ultimately the ordinary citizen. Results from this research show that the labour market for top executives, while not perfect, does work to some extent.”

Nguyen and Nielsen are no strangers to morbid research: According to the press release announcing the publication of their latest paper, the pair have already contributed research into the sudden deaths of independent directors for the Journal of Financial Economics.