The Securities and Exchange Commission (SEC) adopted a rule that is intended to prevent the sale of asset-backed securities (ABS) that are tainted by conflicts of interest.
More specifically, it prohibits a securitization participant from engaging in any transaction that would involve any material conflict of interest between the securitization participant and an investor in the relevant ABS. Under this new Rule 192, such transactions would be “conflicted transactions.”
“I am pleased to support this rule as it fulfills Congress’s mandate to address conflicts of interests in the securitization market, a market which was at the center of the 2008 financial crisis,” SEC Chair Gary Gensler said. “As directed by Congress, today’s rule prohibits securitization participants — including those who sell or facilitate the sale of an asset-backed security — from engaging in transactions that involve or result in any material conflict of interest with investors in that ABS. Further, as required by Section 621 of the Dodd-Frank Act, the final rule provides exceptions for risk-mitigating hedging activities, bona fide market making, and certain liquidity commitments. Such a rule benefits investors and issuers alike.”
Under this rule, conflicted transactions include a short sale of the relevant ABS and the purchase of a credit default swap or other credit derivative that entitles the securitization participant to receive payments upon the occurrence of specified credit events in respect of the ABS. It also includes a transaction that is substantially the economic equivalent of the aforementioned transactions, other than any transaction that only hedges general interest rate or currency exchange risk.
Rule 192 does provide exceptions for risk-mitigating hedging activities, liquidity commitments, and bona fide market-making activities of a securitization participant. These exceptions permit certain market activities, subject to satisfaction of the specified conditions, which will allow securitization participants to continue risk management, liquidity commitment, and market-making activities.
Rule 192 will become effective 60 days after publication in the Federal Register.