SEC Regulation of Loans as Securities
One potential reform posed to the panel by the Committee was whether the SEC should have statutory power to regulate securitized instruments. Generally, the panel felt that loans should not be regulated by the SEC, or SEC regulation largely would not have an effect. De Fontenay suggested that, as a practical matter, if loans were treated as securities, they would qualify for exceptions from registrations. In fact, there is likely better disclosure in the debt market than the equity market. Even further, additional disclosure may not have an effect on the leveraged loan market if investors are buying leveraged loans not because of their potential to provide a yield in a low-interest environment, but rather in an attempt to get a AAA rating with a product that actually has some risk (i.e., for purpose of regulatory capital arbitrage).
Rating Agency Regulation
Gerding highlighted the need for disclosure surrounding the rating process. Disclosure may include identifying how the deal was structured to take rating methodologies into account. However, there is danger in having too much disclosure or too much standardization in the rating agency industry. If one were to know exactly what the tests were for ratings, it would be simple to reverse engineer the agency’s methodologies. One solution, Gerding suggested, would be to require ratings from more than one rating agency.
De Fontenay opined that the problem may not be with rating agencies misleading investors into purchasing exceedingly risky loans; rather, the problem could be the regulatory structure that rewards financial institutions for having safe assets on their balance sheets. Continue reading “This means that there would be very little mandatory disclosure”