The SEC has indentified, as a
significant contributing factor to the RMBS collapse, the paucity
of adequate information which would have allowed investors to make
informed investment decisions and the resulting overreliance upon
ratings. In a previous piece, we touched upon the
SEC's proposal to require significant asset level disclosure in
shelf offerings. Today we will consider a further proposal which
the SEC believes to be "an appropriate partial substitute for
the investment grade ratings requirement."
In the aftermath of the RMBS collapse, disgruntled investors
attempted to probe the degree to which securitizers may have failed
to comply with their representations and warranties relating to the
assets in the pool and, more specifically, compliance with
underwriting policies. The investors suspected that there must have
been widespread breaches of the representations and warranties but
in some cases they were frustrated by what they perceived to be the
stonewalling of those parties who were the only available source of
In order to enhance the protective nature of the representations
and warranties, the SEC has proposed to require the deal
documentation to contain a requirement for the representing and
warranting party to furnish, on a quarterly basis, a non-affiliated
third party's opinion relating to any asset in respect of which
the securitization vehicle's trustee has asserted a breach of
any representation and warranty and which was not repurchased or
replaced as a result of such assertion.
The SEC has indicated that this requirement is
"designed to help ensure that representations and
warranties about the assets provide meaningful protection to
investors, which should encourage sponsors to include higher
quality assets in the asset pool".
It seems to me that there are several problems with this
proposal. First, it only requires delivery of the opinion after a
refused assertion of a breach. This does not address the lack of
transparency at the heart of the problem since the trustee may not
have sufficient knowledge at the asset level to assert a
Second, it is not clear that any qualified third party could be
found to give such an opinion. It would need not only to make a
technical assessment that the representation and warranty has been
breached, but, in most cases, also the less objective determination
of whether the breach is material and adverse. Given the factual
and subjective elements involved, these questions would not be
appropriate subjects of opinions from either accountants or lawyers
and it is difficult to think who would be in a position to render
such an opinion.
Finally, unless the transaction documents make it binding on the
parties, which is not part of the proposal, the rendering of the
opinion would not be a final determination of whether there has
been a breach. There is no guidance in the proposed rule as to what
is to done if the parties remain at an impasse.
Perhaps the fault with this proposal lies in a basic
misconstruing of the purpose of representations and warranties.
They are not intended to be used proactively but rather, if there
is ever a default and consequent loss in a transaction, to give the
trustee personal recourse to the representing party if any breach
can be identified.
SIFMA proposes the appointment of an independent credit risk
manager (a CRM) to represent the interests of securityholders. The
CRM would be provided with electronic access to all asset-level
documents and all underwriting guidelines. The CRM would be paid a
risk management fee out of the waterfall alongside other service
providers and would be responsible for monitoring performance of
the representations and warranties, and investigating, initiating
and attempting to settle claims. If the CRM and the seller are
unable to agree on whether a breach has occurred, the dispute would
be referred to binding arbitration.
Unlike the original SEC proposal, the SIFMA proposal might
actually have a chance of being effective. In either case, the
proposals would entail a further increase in price and complexity
which will do nothing to encourage the use of securitization as a
financing alternative. And once again, a blunt instrument is being
taken to an entire industry in response to a relatively localized
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The Law Society of British Columbia’s Cloud Computing Working Group issued its Final Report on Cloud Computing on January 27, 2012, amending an earlier consultation report approved by the "Benchers" on July 15, 2011.
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