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US securitization: 144a – A proposal too far

No matter how much noise the SEC makes about shutting the door, the horse has already bolted.

Last month the SEC made the unprecedented suggestion that issuers in the private 144a securitization market should be required to provide the same level of disclosure to investors as those issuing in the public market. The suggestion is as damaging as it is surprising.

The fundamental problem is that the proposals treat securitization differently to other types of security. Its treatment would be unique. While there are many in the market and in government that might wholeheartedly sympathise with this aim, it does not mean that it is right for the SEC to pass judgement on one security versus another. If the regulator takes it upon itself to determine the level of disclosure necessary in one private placement market as opposed to another then it could go on to exercise that right in one market after another.

Transparency and disclosure are the endgame for ABS regulation, and rightly so. But disclosure for disclosure’s sake is not the answer. The securitization market did not implode because there was insufficient disclosure in the offering documents. It imploded because investors were buying on rating, the ratings were often based on false assumptions and no one seemed to be reading the offering documents at all.

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