Tuesday, September 26, 2023
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SEC Dusts Off the Shelf Rule

WASHINGTON (CN) - The Securities Exchange Commission proposes to require issuers of asset-backed securities to keep some "skin in the game" by retaining a part of each tranche of securities that it issues.

In addition, issuers would be required to make public any trades they make in their own securities via Exchange Act reports, as long as the issuer has public securities outstanding.

The SEC's proposed changes come as the agency has uncovered so-called "synthetic" credit default swap agreements, which were pools of high-risk mortgage loans created by Goldman Sachs with the intention that the securities would lose value. Goldman's sales people made money selling the securities, and its traders and big clients made money betting against their own portfolio.

As part of the proposed rules, the SEC would revoke current credit ratings provided by Securities Act shelf registrations, which represent the asset value and credit worthiness of an issuer allowing them to issue securities without SEC review or "off the shelf". The system was first used in 1984 when the SEC allowed mortgage related securities to be preapproved by the agency based on the credit ratings of the issuer and its underlying assets.

The proposed new shelf ratings would require certification by the CEO of the entity that buys, transfers or sells a pool of assets to the issuer, that there is a reasonable basis for investors to believe that the assets in the pool will perform as described in the prospectus.

The rules also would require that, with some exceptions, prospectuses for public offerings of asset-backed securities and ongoing Exchange Act reports contain specific asset-level information about each of the assets in the pool upon which the securities are based, including ongoing cash flow. That information would, under the proposed rule, be constantly updated online and available to investors as tagged data that could be downloaded to their computers for analysis. The SEC also would require issuers to file a preliminary prospectus meeting the new shelf guidelines at least five business days before the initial sale of a security to provide investors more time to investigate offerings.

The SEC no longer would allow a base prospectus, which shows the general value and expected cash flow for the issuer as a whole, for off the shelf transactions. Instead the agency would require a new detailed prospectus for each offering.

At the end of 2007, there were more than $7 trillion of both agency and non-agency mortgage-backed securities and nearly $2.5 trillion of asset-backed securities outstanding. The proposed rules would only cover securities issued after the agency adopts a final rule.

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