Muni Groups Ask for ABS Rules Exemption

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WASHINGTON — Dealer and education groups are urging federal agencies to exempt tender option bonds, as well as nonprofit and state agency student loan organizations, from risk retention rules mandated by the Dodd-Frank Act.

The Securities Industry and Financial Markets Association and the Education Finance Council submitted comment letters to the Securities and Exchange Commission and other agencies, saying certain types of munis should not be covered by rules designed to ensure that the interests of sponsors of asset-backed securities transactions are aligned with the interests of investors.

The rules, which would require securitizers to retain at least 5% of the credit risk of assets collateralizing asset-backed securities, is intended to curb reckless bank behavior blamed for the financial crisis.

When the SEC and other agencies offered the original joint proposed rules for comment in 2011, muni market participants said that their definition of ABS was so broad that it would capture a wide range of municipal bonds, including housing bonds, student loan bonds, pooled financings, and leases and installment sales.

In this latest proposal, the agencies tried to narrow the definition in response to the comments. But SIFMA maintains it does not adequately address TOB programs.

TOBs are securities issued by a special purpose trust into which bonds deposited. The trust issues floating rate securities, which are sold to money market funds, and inverse floating rate securities retained by the fund that sets up the trust. The dealer group's letter argues that TOBs should receive a full exemption from the rules, whether they involve tax-exempt or taxable munis, because the rules would harm the muni market and because the interests of participants in TOB transactions are already aligned.

Leslie Norwood, SIFMA managing director, associate general counsel, and co-head of municipal securities, said TOBs are "fundamentally different" than the asset-backed securities the rules are intended to capture.

"Our primary concern is the potential impact on the municipal bond market," Norwood said.

In the absence of a full exemption, SIFMA suggested the agencies should make clear that a 5% residual interest in the TOB entity is sufficient for compliance, even though this might not technically satisfy the 5% requirement set forth in the rule due to the rules' reference to "eligible vertical" interests. SIFMA's letter suggested dropping the rules' reference to eligible vertical interests for TOBs. Alternatively, the agencies should provide an additional exemption for transactions involving qualified residual interest holders who are regulated liquidity providers providing credit support for TOB assets, the group said.

The Education Finance Council, a trade association representing nonprofit and state agency student loan organizations, some of which issue bonds, said those entities should be exempt because they use a model that does not mirror any for which the ABS rules are intended.

"The rule is based on is the fact that sponsors of securitizations in most asset classes use a transaction structure where they sell assets to a separate issuing entity, so the original sponsor of the transaction doesn't retain any risk," said EFC president Vince Sampson. "Nonprofit student loan issuers don't sell or transfer assets to an issuing entity. They keep the underlying student loans on their balance sheets, effectively already retaining all of the risk."

The National Association of Bond Lawyers has also previously commented on the rules topic, urging that they not be applied to the muni market.

The SEC and other agencies could approve the risk retention requirements as proposed or could further revise them.

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Law and regulation Washington
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