Before the 2008 financial crisis, markets in ABS and mortgage-backed securities (MBS) were important sources of funding for consumer lenders and consumers. By providing a secondary market for the loans originated by banks and other financial firms, investors enabled financial firms to leverage their balance sheets, boost noninterest income, and increase the level of funding in these markets. At the same time, the increased funding for these markets helped to reduce the costs of funding for mortgages and other consumer finance products.
Before the financial crisis, investors often had to invest in these instruments sight unseen. Issuers and securities underwriters regularly delivered one-page term sheets to potential investors as little as an hour before the offering, forcing such investors to make decisions on the basis of limited information. Making decisions in this manner is contrary to the fiduciary obligations that such investors owe to their customers, investors, and beneficiaries.
Regulation
The SEC adopted revisions to Regulation AB to require prospectuses for public offerings and reports of certain ABS to include specific asset-level information about each asset in the pool. The SEC also revised the filing deadlines for offerings to give investors more time to consider transaction-specific information.
CFA Institute Viewpoint
CFA Institute believes issuers must provide comprehensive, accurate, timely, and relevant information to investors at least 24 hours before offering securities for them to purchase. This requirement should prevail regardless of whether the offering consists of traditional equity or bond securities, or more structured instruments such as ABS and MBS.
Without appropriate information, issuers, underwriters, and regulators are compelling investors to make decisions without having conducted adequate due diligence. Moreover, such offerings subject institutional and fund investors to legal and financial risk should a deal subsequently default.
ABS Prospectuses
Issuers of ABS should have to provide information about the structure of the deal, historical performance of similar or related transactions, and financial and legal information about the entities involved in the offering. Information about the structure, performance, issuer, servicer, and originator of the securities offered will give investors the vital information they need to understand the risks involved in the securities offered.
Reporting on Corporate Events
Issuers or sponsors of ABS should have to notify ABS investors about the following:
- The creation of a direct financial obligation;
- An obligation under an off-balance sheet arrangement; and
- Changes in control of the issuer.
Typically, the entity that receives payments from borrowers and pays interest and principal to ABS investors, known as the “servicer,” is the same company whose activities gave rise to the issuance of the ABS securities. ABS investors need relevant information about the servicer to understand the long- and short-term risks associated with receiving their principal and interest payments when due. An exemption from reporting on these corporate events would put ABS investors at a disadvantage to both the company and to investors in other securities issued by the company.
Pre-ABS Offering Documents
Issuers of ABS should be required to ensure that investors have received relevant prospectus and computational information about an offering at least 24 hours before being permitted to issue ABS securities. Permitting ABS offerings to proceed without giving investors sufficient information and time to review that information puts investors at legal and financial risk should a deal subsequently default.
Communications between Investors and Services
Servicers of ABS should create repositories on their websites to ensure that all investors receive answers simultaneously to any parties’ questions about the relevant securities. Such website repositories would ensure that all investors receive the same relevant information at the same time and ensure that the information is widely distributed in a timely manner.