Banks and large investors are clashing over new SEC-proposed disclosure rules

Large investors are clashing with banks and other financial firms over new disclosure rules that could affect hundreds of billions of dollars in securities.

The firms are fighting over part of the Securities and Exchange Commission’s (SEC) effort to boost regulation of complex securities that are tied to a wide range of assets such as home loans. Many of those asset-backed securities were at the heart of the financial crisis, and their complexity was blamed for obscuring risks to investors and the public.

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Under the SEC proposal, which is still being debated, large investors would have much greater power to request information about some types of the securities issued by banks and other firms.

“This was really a historic step,” said Edward Gainor, partner at the Bingham McCutchen law firm. 

As part of its broad effort to increase transparency in the asset-backed securities business, the SEC proposed sweeping changes to the private part of the market, which has traditionally been exempted from some disclosure requirements.

The change would allow investors in the so-called “private placement market” to demand the same amount of information as investors receive in conventional publicly registered securities. The private market functions under a rule known as “144A” that exempts securities from many registration requirements because the market is limited to large institutional investors deemed more sophisticated than the retail public.

The proposal could have a major impact on a market that exceeds $100 billion each year. Between 2004 and 2007, the market for asset-backed securities issued under the 144A rule more than quadrupled, to $592 billion, according to the industry publication Asset-Backed Alert. The market plunged to roughly $113 billion in 2009.

“The consequence of requiring comparable disclosure and reporting in public and private deals could very well be a complete drying-up of the private market,” said Evan Drutman, partner at Alston+Bird LLP. “And that could force certain issuers and certain products out of the securitization market entirely, eliminating a vital source of capital for certain issuers and an important investment for certain investors.”

The SEC proposal is driving a wedge between the financial industry’s most powerful lobbying associations, with the American Bankers Association (ABA) and many banks generally opposed and the Council of Institutional Investors and Investment Company Institute (ICI) largely supportive.

Securities issuers argue the proposal would limit the flow of credit to a variety of industries and that large institutional investors are sophisticated enough to assess the risks in the private market. Smaller issuers may be shut out of the market because of the new costs of complying with the disclosure requirements, Wells Fargo argued.

“We are very concerned that these new requirements could lead to the effective elimination of the private securitization market,” Lawrence Rubenstein, managing counsel at Wells Fargo & Co., wrote in a public response to the SEC.

Meanwhile, the Association of Mortgage Investors, a new industry association whose members have roughly $300 billion in combined assets, supports the revised disclosure requirements.

“There is no reasonable distinction to be made between the information requirements of an investor in a 144A placement from those in a public offering when it concerns these products,” wrote Chris Katopis, executive director of the mortgage investors group. Suggesting a difference, he said, would be “irrational.”

Underscoring the split in the industry is the Securities Industry and Financial Markets Association (SIFMA), one of the broadest and most powerful lobbying associations.

The group’s dealer and issuer members think the disclosure requirements are “excessive and unnecessary” and could make some securities “difficult or impossible.” The group’s investor members, meanwhile, “generally support” the proposal.

“There are starkly different perspectives and they need to come together for there to be a market,” Gainor said.