CMBS ‘Unique’ Under Regulation AB

NEW YORK CITY-The “unique characteristics” of CMBS among asset-backed securities need to be considered in the SEC’s proposed revisions of Regulation AB, says the CRE Finance Council in comments filed Monday. These characteristics, the council argues, “warrant specialized treatment for CMBS.”

The council notes that while it endorses many of the SEC’s proposed rules and “broadly supports” the commission’s goals of enhanced transparency and alignment of interest between issuers and investors, certain provisions of the new rules “may impair the efficient operation of the CMBS market without a concomitant benefit.” With that in mind, the CREFC is suggesting alternatives or refinements to the rules that it believes would achieve the SEC’s goals “without unduly burdening capital formation.”

In a statement, Dottie Cunningham, CEO of the CREFC, says that when it comes to disclosure and transparency, “We believe that the industry's longstanding CRE Finance Council Investor Reporting Package provides the information required by CMBS investors.” She adds that the council proposes that the SEC “take into account the unique aspects of CMBS and build on the protective measures already in place in the space, rather than seeking to replace them.”

For instance, the CREFC asks the SEC to align the data fields of its proposed Schedule L-D with the equivalent fields in the IRP, along with taking other steps to conform its reporting requirements with established industry practices on CMBS. Non-alignment “will increase transaction costs without delivering added clarity or transparency,” the CREFC says in its comments. The Mortgage Bankers Association similarly endorses the IRP in its comment letter to the SEC, according to published reports.

The costs of new shelf eligibility requirements, as currently proposed by the SEC, represent another area of concern, the CREFC says. One red flag is raised by the proposed requirement to make a new Rule 424(h) filing each time ABS issuers make material changes to the disclosure, with a five-day review period triggered each time. In the case of CMBS, this waiting-period requirement could pose “significant negative consequences to a transaction” and the CREFC suggests that the transaction’s sponsors should be given the latitude to determine the appropriate length of review time on a case-by-case basis.

The council also takes exception to provisions that it says would “mechanistically impose” public market information delivery requirements on private placements of CMBS. “We believe sophisticated institutional investors can and do demand and obtain the information they need to make investment decisions and do not need additional rule-based protections,” according to the comment letter.

Applying public offering rules to the private markets would make it “difficult, if not impossible” to execute stand-alone and highly concentrated pool transactions as well as re-REMICs, the council says. A CMBS holder intending to conduct a re-REMIC transaction would not have access to the data required under the proposed rules “and therefore, this significant tool for the capital markets would be extinguished.”

The CREFC is requesting an implementation period of at least two years after the final rules are published. It asks the SEC to take into account how long each new regulation will take to implement “on an individual basis” as well as the total number of regulatory changes in the final rule.

Additionally, the council says the SEC should consider the ability of a CMBS issuer “to implement the rule changes simultaneously and not just consider the sum of how long each new regulation would take to implement on an individual basis.” The CREFC says it plans to continue its dialogue with the SEC as the commission coordinates rulemaking in light of the recent passage of the Dodd-Frank Act.