SEC Steps In To Untangle Conflicting Regulation

November 10, 2010 by · Leave a Comment
Filed under: Financial Reform, SEC, The Rating Agencies 

The Securities and Exchange Commission (SEC) was needed recently to unravel an impossible situation that resulted from the newly passed financial reform act.

The new law creates legal liability for the evaluations that the ratings agencies assign to new bond issues. As a result, the ratings agencies refused to allow clients to use their ratings in documents needed to register new bond products. However the issuers are required by the SEC to include these ratings in their registration documents.

Bond issuers found themselves in an unworkable position and, in this case, the market selling new bundles of auto and consumer loans came to a full stop.

To circumvent the problem, the SEC announced that for the next six months ratings would not be required to register new bond products.

In a prepared statement Meredith Cross, director of the SEC’s corporate finance division said, “This action will provide issuers, rating agencies and other market participants with a transition period in order to implement changes to comply with the new statutory requirement while still conducting registered ABS (asset-backed securities) offerings.”

The confusion caused concern among the investment community. The Washington Post quotes Jeffery Elswick of Frost Investment Advisors as saying, “It’s still kind of murky…I’ve been involved in the asset-backed markets for 18 years, and I don’t understand [the legislation] at this point. If I don’t understand it, a lot of people don’t.”

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