The U.S. Securities and Exchange Commission (SEC), whileexpanding disclosure requirements for one set of asset-backedsecurities, has stepped back from a plan to shed more light on amajor part of the market.

On Wednesday, the five SEC commissioners unanimously approved arule to offer investors more details on bonds backed by assets suchas mortgages and car financing, including specific data onindividual loans, and new practices such as a cooling-off period toreview documents before certain bond sales.

Dropped from the rules: a requirement that issuers of privatesecurities be ready to furnish to buyers the same type ofinformation that's available for publicly registered debt. The SECsaid in a Federal Register posting proposing the rule in 2010 thatsuch a step would bring “transparency to formerly opaque”markets.

“It's a massive hole,” said David Jacob, the former globalhead of structured finance at Standard & Poor's. “Most of theasset-backed market is a private market.”

Most private securities are issued using rule 144a, which theSEC created to allow for their resale among large, sophisticatedinvestors of securities issued without being registered under theSecurities Act of 1933.

Issuers sold about $60 billion of 144a asset-backed securitiesin the U.S. this year through mid-August, compared with $85 billionof publicly registered notes, according to newsletter Asset-BackedAlert.

The SEC may revive the requirement for private securities,according to Keith Higgins, director of the SEC's division ofcorporation finance.

“The Dodd-Frank Act mandated that the commission put in placerules for asset-level disclosure in registration statements,”Higgins said yesterday. “Consistent with that mandate, thecommission determined that it was important for investors that itmove forward with the rules for registered offerings as theproposal for the rule 144a market remains under consideration.While that proposal is pending, we continue to monitor themarket.”

The 2010 Dodd-Frank Financial Regulatory Reform Bill, namedafter Senator Christopher J. Dodd and U.S. Representative BarneyFrank, increased government oversight of financial transactions totry to avoid the conditions that led to the 2008 crisis.

While most mortgage bonds without U.S. government backing werepublicly registered before the crisis, all 12 of the deals tied tonew home loans this year have been private placements, according todata compiled by Bloomberg. The transactions packaged $3.5 billionof mortgages, down from a peak of $1.2 trillion issued in each of2005 and 2006.

In other securitization areas that have revived more completely,lenders including Deutsche Bank AG, Citigroup Inc., and JPMorganChase & Co. sold commercial-mortgage bonds using the 144a safeharbor in the past month, while First Investors Financial ServicesGroup Inc., CarFinance Capital LLC, and American Credit AcceptanceLLC tapped the option for subprime-auto securities, the datashow.

The 144a issuance this year accounts for 23 percent of bondsales tied to cars, including 39 percent of non-prime debt, andalso generally all securities backed by speculative-grade corporatedebt known as collateralized loan obligations, according to areport by JPMorgan analysts including Amy Sze.

'Controversial Part'

In initially proposing the rule known as Reg AB II in 2010 andthen re-proposing it in 2011, the SEC had said a change in thedisclosure requirements for such sales was needed as it attemptedto address flaws unveiled by the crisis that bonds tied to U.S.mortgages helped to create.

“The financial crisis has called into question the ability ofour rules, as they relate to the private market for asset-backedsecurities, to ensure that investors had access to, and hadsufficient time and incentives to adequately consider, appropriateinformation,” the agency said in its 2010 proposal.

The idea represented a “very controversial part of theproposal,” said Jason Kravitt, a partner in New York at law firmMayer Brown LLP, who works with underwriters and issuers.

Marcus Stanley, policy director at Americans for FinancialReform, a coalition working for stronger regulations, said that hewas disappointed that the private-bond market wasn't covered.

“A lot of the biggest abuses were in precisely that area,” hesaid, citing mortgage-backed notes that were repackaged into otherinstruments. “It just leaves a huge gap in the coverage of thisrule not to mandate proper disclosures for those privately issuedsecurities.”

'Big Reversal'

The SEC's decision is “a pretty big reversal from what Iexpected,” said Ned Myers, a senior vice president at Waltham,Massachusetts-based Lewtan Technologies Inc., which runs the ABSNetinformation and analytics service.

While many issuers will still want the access to the broadergroup of potential investors offered in public sales, where thebuyers don't need to qualify as sophisticated investors, “based onmy conversations, my guess is you're probably going to see a lot ofmore use of the 144a structure,” he said.

Making the avenue for sales more difficult could have posed athreat to the flow of money to borrowers, said Kravitt, the lawyer.Private deals are often used by issuers “who aren't quite ready forprime time of public offerings to introduce themselves to themarkets,” being either too small or new to provide all the neededdisclosures, he said.

“You've got to be careful before you tamper with somethingthat's so valuable and that's worked so well,” he said.

Stanley of Americans for Financial Reform said the loan-leveldata that the SEC will be requiring for public bonds is just asneeded for private securities.

“At the end of the day, this stuff is like the ingredients labelon what you're getting at the supermarket,” he said. “It'simportant in making the choice whether to buy.”

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