I assumed the SEC wouldn’t begin making new rules on disclosure until Congress/Obama passed the financial reform bill. Wrong. Last week, the SEC proposed a bunch of new securitization rules that represent real change and are already drawing controversy.
For CMBS, the biggest immediate changes have to do with 1) new rules regarding disclosure of information to rating agencies that were not selected by the issuer to rate the securitization and 2) the mandate to move reporting to XML.
All rating agencies get all documents
I got wind of the new rules about two weeks ago when an existing Backshop client that has a SEC-registered securitization shelf called needing a document-sharing Web application (which we are currently building).
Specifically, they were told that for any securitization that happens after June 2, 2010, all documents that are shared with the rating agency hired to rate the deal must be disclosed to the other rating agencies that do not rate the deal. These disclosures must be maintained for the life of the bonds (10 years for most CMBS deals).
That means if S&P and Fitch are selected to rate a securitization, then Moody’s, DBRS and Real Point will all have the rights to access the same data.
This includes the asset summary reports, operating statements, rent rolls, underwriting assumptions, loan documents, bond model, the Q&A on specific deals and anything else shared between the issuer and the rating agency.
In the short term, this mostly benefits DBRS and Real Point as they now will get access to data that was historically limited to the hired agencies. The additional disclosures should also encourage (or at least not penalize) the “investor pays” rating models as opposed to “issuer pays” ratings.
The next logical step is to disclose this data not only to all the rating agencies but also to the investors themselves so they can make their own buy/sell decisions.
The June 2 rules state that documents need to be shared, but documents are not the same as data (for data, we need XML).
The good news is, the fine print of the new SEC rules states that the data reporting standard for all public securitizations is going to be XML. No longer will Excel or even CSV be tolerated. For CMBS, hopefully that finally means the adoption of IRP version 6 and the resultant ability to disclose the critical deal information needed to value the collateral — not only to rating agencies but to investors themselves.
These new disclosure rules represent a real victory for transparency.
The way I read the proposals, the SEC is putting the securitization community on notice: By June 2 they must be sharing documents, and they must start preparing to report in XML.
Feels like real movement. …
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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.