This article was originally published 27 July, 2009
On July 21 and July 22, 2009 the Obama Administration proposed legislation (the "proposed legislation") to implement the securitization and rating agency reform proposals (the "reform proposals") contained in its Financial Reform Plan announced on June 17, 2009. We summarized the reform proposals and the other aspects of the Financial Reform Plan in a client update dated June 18, 2009. In this client update we summarize the proposed legislation.
The proposed legislation would implement the reform proposals' recommendations calling for risk retention by securitizers, increased disclosure and periodic Securities Exchange Act of 1934 (the "Exchange Act") reporting by issuers of asset-backed securities and increased regulation of the use of representations and warranties in the asset-backed securities market. However, the Administration did not include in the proposed legislation provisions that would implement several of the reform proposals' other recommendations (such as those calling for reforming compensation and fees of brokers, originators, sponsors and others involved in the securitization process, and changes in GAAP to eliminate "gain on sale" recognition by originators). It is unclear how the Administration plans to move forward with these recommendations.
Risk Retention Requirement
The proposed legislation would require the Federal banking agencies and the Securities and Exchange Commission (the "SEC") to jointly adopt regulations that require any "securitizer" of an "asset-backed security" to retain an economic interest in a "material portion" of the credit risk for any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells or conveys to a third party (a "securitized exposure").
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This article has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Readers should not act upon this without seeking professional counsel.
