New SEC Rules Require More Data from Servicers
The Securities and Exchange Commission's rules relating to disclosures on asset-backed securities are currently in effect on a voluntary basis, in a transition period, and the disclosures will be compulsory beginning Jan. 1, 2006. Initial offerings of ABS made after Jan. 1, 2006 have to comply with the new rules. The new regulations recognize that servicers play a significant role in the asset-backed securities world and that their actions could have a material impact on investment values. Consequently, commercial mortgage-backed securities servicers, as well as servicers of other asset-backed securities, are now called upon to disclose some information pertaining to their portfolios.
At the Mortgage Bankers Association's recent Asset Administration & Technology Conference in Chicago, Jennifer Williams, an attorney advisor with the SEC's Office of Rulemaking, was on hand to answer questions relating to the new regulations and their implications for CMBS servicers.
Ms. Williams noted that the rules were put in place after the SEC decided that "it was not appropriate for what has emerged as the largest section of the debt market to not have rules." The goal is to make for market transparency for all market participants and the SEC looked to current market practice in drafting the rules, she said. There was also a need for the regulation considering that "one size does not fit all asset classes" and that the disclosures should be tailored to the specific asset-type involved. Shelf registration statements filed after Aug. 31, 2005 need to be amended in advance for offerings to be made after Jan. 1, 2006 under the new regulations.
While the regulation's definition of a servicer is "broad enough to capture all the servicing entities," they don't all have to provide the same information and the key is whether the servicer's duties involved management and collection.
There are also certain servicing thresholds that come into play to determine if disclosures need to be made by servicers.
Ms. Williams clarified that servicers do not need to disclose all their procedural details and the disclosures are limited to "what a reasonable investor would find material" from an investment standpoint. Therefore, facts relating to, for instance, a servicer's operating policies, which are immaterial to investors, need not be disclosed.
And "sensitive pricing information" also doesn't need to be disclosed. This does mean that a servicer and their attorney have to make a judgment call, she noted, and fines can be imposed on those who intentionally commit fraud. In case a servicer does not disclose something that later turns out to be material, she advises that the best course of action would be to contact the SEC staff in the post-offering period.
Touching on the liability, if any, of a master servicer for lack of disclosure by a primary servicer, Ms. Williams clarified that master servicers can sign annual reports and documents on behalf of the trust. The master servicer does not have any duty towards primary servicers and is only required to sign the required disclosures.
About the need for disclosures if a servicer's procedures change, Ms. Williams said that the question is whether it is necessary to inform investors. If it is a material change that would need to be disclosed, it would need to be disclosed within a certain timeframe.
Catherine Rodewald, chief information officer, Prudential Mortgage Capital, was the moderator of the panel session at the MBA conference. And Kathy Marquardt, senior vice president, GMAC Commercial Holding Corp., was also on the panel, posing questions to Ms. Williams.
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