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By Ronald Fink
The Securities and Exchange Commission has at long last unveiled a proposal to improve the information disclosed to investors regarding asset-backed securities and announced an enforcement action in a case of alleged fraud involving them.
Proposed new rules would require banks and other issuers to disclose information on each individual loan that is part of the pool of assets in such securities. Additionally, issuers would have to show that the underwriting standards for such loans were at least as stringent as those used by issuers on similar loans they retain on their books.
The information on loan quality would have to be updated on what the SEC called "an ongoing basis." Currently, issuers can cease disclosing any information on such securities a year after they're sold and rely on credit ratings to vouch for their quality.
In addition, the new rules would require underwriters to post a computer program to the SEC's website that shows how projected cash flow, potential losses, and fees on each deal are to be distributed or assessed. Finally, issuers would have to retain an equity stake of no less than 5 percent in the deals and give investors at least five business days to decide whether to buy the securities.
To prevent issuers from skirting the rules, the SEC would require the same type of information to be disclosed even if the deals were sold to sophisticated investors through private offerings normally exempt from such requirements.
"The proposed rules are intended to better protect investors in the securitization market by giving them more detailed information about pooled assets, more time to make their investment decisions, and the benefits of better alignment of the interests of issuers and investors through a retention or 'skin in the game' requirement," SEC chairman Mary Schapiro said in a statement today at an open meeting of the commission during which it will vote on the proposed rules.
Schapiro stressed that the SEC had taken into account the views of other financial regulators, including the Federal Reserve, and would continue to do so during the 90-day comment period before the rules would be finalized for adoption. But she noted that the commission had concluded "that we can and must do a better job of protecting investors."
Meanwhile, the commission also announced administrative proceedings against Morgan Keegan and Morgan Asset Management along with two employees accused of fraudulently overstating the value of securities backed by subprime mortgages.
"This scheme had two architects — a portfolio manager responsible for lies to investors about the true value of the assets in his funds, and a head of fund accounting who turned a blind eye to the fund's bogus valuation process," said Robert Khuzami, director of the SEC's Division of Enforcement.
The enforcement division alleged that Morgan Keegan failed to employ reasonable procedures to internally price the portfolio securities in five funds managed by Morgan Asset, and consequently did not calculate accurate "net asset values" for the funds. "Morgan Keegan recklessly published these inaccurate daily NAVs, and sold shares to investors based on the inflated prices," the SEC said in a press release today.
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