With great fanfare today, President Obama signed the financial reform bill into law. Many times over the past several months, I thought this legislation would die, but this is a big, important deal. And now the law is clear: Transparency is required for securitized products.
The big question is whether the SEC enacts rules and regulations to actually bring about transparency.
Regulation AB update
The SEC proposed a whole bunch of new rules regarding securitization reform, known as Regulation AB, and have set Aug. 2 as the deadline for public comment on the proposals.
I have been active on committee calls with three different groups (CREFC, MBA and MISMO) that are all preparing separate comment letters to the SEC. I have been reluctant to blog about the drafting of the responses because the process is dynamic, and I have not wanted to pre-judge the response letters.
For sure, different subcommittees have expressed different views, and not everyone is in agreement with the SEC strategy. However, the final form of the letters seem to be taking shape, and the industry letters from CREFC and MBA appear to disagree with just about everything the SEC has proposed. From risk retention, to private deal disclosure standards, to the waterfall program, to shelf eligibility changes, the comments are all different versions of “no.”
In fact, up until a week ago, the CREFC letter was asking for an exemption from the new disclosure rules proposed with Schedule L and LD (the actual XML data fields the SEC asked for). CREFC was taking the position that their reporting is already sufficient and nothing would be gained by following the new SEC reporting requirements.
Luckily, CREFC leaders met with the SEC last Thursday and were told there would be no categorical exemption for CMBS. This week they are reviewing their response letter; expect some last-minute changes.
There is even debate on whether there should be any reporting in XML. While the MBA is more open than CREFC on this issue, the endorsement for even XML reporting is far from certain.
Industry response disappointing
Unless there is a huge change in the next week or so, both the CREFC and the MBA industry responses to the SEC will be disappointing.
Neither group is answering the SEC proposals with the goal of actually providing transparency. Instead, the letters seem to be taking a “negotiating” position with the SEC by offering nothing and hoping the directives will be few.
This is most evident with the Schedule L and Schedule LD response. The discussion was never about whether the list of data elements actually gives investors transparency into CMBS. Rather, the discussion focused on not expanding the current IRP reporting. No discussion of rent rolls. No discussion of adding anything new. If an SEC field was not already in the IRP (and about half were not), the response has been “The field is not necessary for CMBS investors.”
I’ll blog after the response letters are final and certainly as the SEC starts to act. It looks like it will be up to the SEC to ignore most of the industry objections and stick to their guns and the letter and spirit of the new law. From my position close to the process, I am worried that — despite today’s legislative victory — transparency in CMBS is by no means guaranteed.
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Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.