These proposals could significantly alter the securitization industry – particularly the areas where there is currently little or no investor disclosure, such as with private placements and short-term commercial paper. Bank-sponsored commercial paper conduits, which have always represented the largest part of the securitized product market, may be most affected. These “multi-seller” conduits buy assets from a number of different sellers, the identities of which are not disclosed to investors. Prospectuses have never been practical for these entities because they issue new paper daily and can change assets regularly. As well, disclosure of 10 or 15 different programs and asset originators and pool performance data could run in to the thousands of pages. Investors for the most part relied on the rating agencies to scrutinize the assets and the programs, and purchased commercial paper on the basis of the rating and the reputation of the sponsor. Investors also express comfort that a bank sponsor would have the financial ability and reputational incentive to inject money into a conduit in the event of difficulty, as many are thought to have done during the credit crisis.
Going forward, the new proposals may ultimately spell the end of the multi-seller conduit. If each seller must assume liability for misrepresentations in the offering documents prepared by the bank sponsor, it is unlikely sellers will want to be accountable for disclosure provided by other sellers. Each seller will want to have its own special purpose issuer to ensure that it would only be liable for its own disclosure. Simply requiring that sellers in each conduit be identified will discourage some sellers from selling assets into multi-seller conduits since they might be concerned that problems or market perceptions about another seller may affect the price at which their securities trade in the market and even in their ability to place securities. When the third-party commercial paper conduits ran into trouble in August of 2007, many of the assets were performing well but the concern that bad assets were in the mix resulted in all of the conduits being frozen out of the market.
If bank sponsors are required to assume liability on the disclosure of the conduits – much of which comes from information provided to them by the sellers of the assets – this may discourage banks from sponsoring conduits altogether, preferring to be underwriters where they at least have a due diligence defence to any statutory liability for misrepresentation.
Private placements of medium- and long-term securities will become subject to greater disclosure and certification requirements and consequently become more costly and cumbersome for issuers, erasing some of the benefits of avoiding public issuances. Finally, the requirement for certification by promoters (generally the asset originators), sponsors and underwriters will expand the scope of liability beyond the special purpose vehicle. These increased disclosure requirements and risks for participants will inevitably lead to increased costs for issuers, which may also cause some market participants to seek lower-cost financing alternatives.
Comments have been invited on the new proposals and must be submitted to the CSA by July 1, 2011.