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SEC Adopts Final Rules Regarding ABS Third-Party Due Diligence

August 28, 2014

On August 27, 2014, in a 3-2 vote, the SEC approved final rules applicable to nationally recognized statistical rating organizations (NRSROs). The final rules implement 14 rulemaking requirements under the Dodd-Frank Act and are designed to improve the quality of credit ratings and increase credit rating agency accountability by enhancing governance, protecting against conflicts of interest, and increasing transparency.

Of particular interest to securitization market participants, the final rules adopt new requirements for issuers, underwriters, and third-party due diligence service providers to promote the transparency of the findings and conclusions of third-party due due diligence as it relates to asset-backed securities (ABS). These new requirements include:

The portions of the final rule relating to ABS third-party due diligence reports will be effective 9 months after publication of the new rules in the Federal Register.

In addition to the rules described above, which are specifically aimed at regulating the ratings process for ABS, the final rules also adopt requirements that are generally applicable to NRSROs, including rules addressing internal controls, conflicts of interest, disclosure of credit rating performance statistics, procedures to protect the integrity and transparency of rating methodologies, disclosures to promote the transparency of credit ratings and standards for training, experience, and competence of credit analysts. The final rules also provide for an annual certification by the CEO of a NRSRO as to the effectiveness of internal controls and additional certifications to accompany credit ratings attesting that the rating was not influenced by other business activities.

This overview is based on the remarks of the SEC Commissioners and staff at the open meeting on August 27, 2014. We will provide further information and analysis upon further review of the adopting release and the final rules.

For a copy of the adopting release, click here.