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Corporate Governance

: The Harvard Law School Corporate Governance Blog

Reviewing Asset-Backed Securities – Investors Deserve Better

By Harvard Law School Program on Corporate Governance

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Editor?s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar's statement at a recent open meeting of the SEC, which is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. The post relates to a proposed SEC rule on issuer review of assets in offerings of asset-backed securities; the release is available here.

The rule before us is designed to implement a requirement of the Dodd-Frank Act to strengthen the process by which asset-backed securities are offered. [1] I fear that today?s proposal does not implement this Congressional intent. Instead, this proposal will frustrate investor protection by endorsing an ?anything goes? approach for issuers reviewing assets underlying an asset-backed security because it sets no minimal standards.

Leading up to the financial crisis, underwriters and others involved in offering asset-backed securities had, and I quote Professor John Coffee?s Senate Testimony, ?decreased their investment in due diligence, making only a cursory effort by 2006.? [2] Because market participants approached due diligence as just a formality, there was a significant erosion in market discipline by those involved. [3] As just one example, it has been reported that by 2005, outside due diligence firms hired by securitizers to conduct asset reviews were only evaluating 5 percent of the loans in the underlying mortgage pools. [4]

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Full post as published by The Harvard Law School Corporate Governance Blog on November 13, 2010 (boomark / email).