On January 25th, the SEC announced that it is updating and re-proposing rules initially proposed in 2011 that would prohibit conflicts of interest in certain securitization transactions, as required by Congress. The Dodd-Frank Wall Street Reform and Consumer Protection Act added new Section 27B to the Securities Act to reintroduce and clarify the original proposed rules and to require the SEC to issue rules to implement the prohibition and related exceptions.
Pursuant to new Securities Act Rule 192, securitization participants (including underwriters, placement agents, sponsors of an asset-backed security (ABS), and initial purchasers) would be prohibited from engaging, whether directly or indirectly, in some transactions that might encourage participants to form an ABS in a way that would prioritize their interests over of those of ABS investors.
Under the re-proposed rule, the following transactions would be considered conflicted or prohibited:
a short sale of a relevant ABS where the securitization participant sells an ABS that it does not own
the purchase of a credit default swap (CDS) or other credit derivative under which the securitization participant would be entitled to receive payments when a specified adverse event occurs concerning the ABS
the purchase or sale of any financial instrument (other than the relevant ABS) or entry into a transaction where the securitization participant would benefit from the actual, anticipated, or potential: 1) negative performance of the asset pool supporting or referenced by the ABS; 2) loss of principal, default, or early amortization event on the ABS, or 3) a decline in the market value of the ABS
The definitions in the proposed rule also include certain exceptions and exclusions, with requirements intended to safeguard investors and further the purposes of Section 27B. The proposed rule would provide exceptions for the following:
risk-mitigating hedging activities
bona fide market-making activities
The comment period for the revised and re-proposed rule will remain open for 60 days following publication on the SEC’s website or 30 days following publication in the Federal Register, whichever period is later. For more information, including instruction on how to submit comments, refer to the proposed rule on the sec.gov.