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SEC Adopts Rules for Asset-Backed Securities Issuers, Reproposes Reg. NMS

The SEC yesterday adopted a new regulatory regime for asset-backed securities and voted to repropose Regulation NMS for 30 days to reflect preliminary conclusions that have been reached since the last extension of the comment period. Commissioner Paul Atkins strongly opposed the reproposal of Regulation NMS for its philosophical shift since the initial proposal in January, for unanswered procedural questions that it raises and for the risk of unintended circumstances. Atkins also criticized the short 30-day comment period in the midst of the holiday season and the statement in the release that any comment letters submitted after the close of the comment deadline may not be considered. He said he has never seen this kind of language in an SEC rule proposal in the 20 years he has worked in and around the Commission. It raises the question of how seriously the Commission plans to consider the comments, in Atkins' view.

In opening remarks at yesterday's open meeting, Chairman William Donaldson noted that asset-backed securities issuances have hit new records and may soon even exceed corporate debt issuances. The SEC proposed the reporting and disclosure requirements for the ABS market because the existing framework is not suited for the information that is reported for most asset-backed securities transactions. The ABS reporting regime has been developed through staff no-action letters and interpretive positions. The ABS market has supported the adoption of a defined set of regulatory guidance, which was echoed by Commissioners Atkins' and Cynthia Glassman's remarks that their offices had not received any negative comments about the proposal.

The new reporting framework to a large degree codifies current staff positions and industry practice. It updates and clarifies the 1933 Act requirements for ABS offerings, and expands the types of ABS that may conduct delayed primary offerings on Form S-3. The rules consolidate and codify the interpretive positions that allow for modified 1934 Act reporting. Donaldson observed that participants in the ABS market will no longer have to review and assimilate a stack of no-action letters and other staff positions to understand the ABS regulatory framework.

Regulation NMS

Regulation NMS is intended to modernize the national market system for the trading of equity securities. Donaldson said it reflects the culmination of five years of study. The SEC's decision to repropose Regulation NMS to reflect preliminary conclusions is a departure from the normal administrative process, Donaldson explained, but the Commission wanted interested parties to know the direction of those conclusions before finalizing its proposal. There is a time for study, he said, a time for consultation and a time for action. He expects the Commission to act on the proposal early next year.

Annette Nazareth, the director of the Division of Market Regulation, described the proposal's four main segments relating to the trade-through rule, access, sub-pennies and market data. The trade-through rule is reproposed in the alternative, she said. She explained the alternatives as the top of the book and the depth of book, the first of which would extend trade-through protection only to the best quotes of a market center, while the other would extend protection to quotes further down the book if the market center voluntarily seeks protection for those quotes. The opt-out provision in the original proposal that would allow market participants to disregard displayed quotations has been removed and replaced by a number of exceptions to make it more operable.

The access fee issue is very controversial, Nazareth noted. There is no consensus on a single approach other than that access fees need to be addressed. The reproposal would harmonize the pricing of quotations across trading centers by limiting the fees that can be charged to no more than $.003 per share. On the matter of trading in sub-pennies, the reproposal would prohibit market participants from displaying, ranking or accepting quotations in NMS shares that are priced in an increment of less than a penny unless the quotation is for less than a dollar.

The market data proposal remains largely as it was in the proposing release. Regulation NMS would update and simplify the formulas for allocating revenues generated by market data fees to the self-regulatory organizations.

The Division of Market Regulation estimates that the proposal will provide savings, by a conservative estimate, of over $300 million. Atkins argued that the proposal imposes tremendous costs and said there is no way to know the true costs if the proposal negatively influences the markets.