SEC says securitizers must have ‘skin in the game’

The U.S. Securities and Exchange Commission called for issuers of asset-backed securities to have more “skin in the game,” as part of a series of recommendations for new rules governing the investment vehicle that loomed large in the recent financial crisis.

SEC Chairman Mary Schapiro proposed a rule at a Wednesday meeting that would require issuers of asset-backed securities to retain 5 percent of the securitization.

Such a requirement would create a “better alignment” of issuers and investors’ interests because they would be exposed to the same risks, she said in her opening statement.

Asset backed securities — typically housing, student or commercial loans that are bundled and then sold to investors — played a critical role in the financial crisis. Investors often believed they were buying into relatively safe investments, but in fact were exposed to subprime mortgages and other weak loans.

Securitization often led to poor lending practices by encouraging banks to shift their risk of loss to investors, Ms. Schapiro said.

“In the area of mortgage-backed securities, sound underwriting practices sometimes took a back seat to immediate profits,” she said.

Ms. Schapiro rolled out a number of other proposed changes at the meeting.

Among them are new rules requiring greater disclosure about they type and quality of loans that have been securitized and a requirement to give first-time investors a five-business-day window to consider transaction-specific information before they invest.

The proposed rules are subject to a public-comment period before they can be formerly adopted.

During the past year, the SEC and other regulators cited asset-backed securities as one of the contributing causes of the financial crisis.

The commission has “concluded that we can and must do a better job of protecting investors,” Schapiro said.