Comment Deadline Set for SEC Proposal Prohibiting ABS Transactions Where There Are Conflicts

Comments on an SEC proposal prohibiting an asset-backed security ("ABS") "securitization participant" from engaging in any transaction that would involve or result in material conflicts of interest are due by March 27, 2023. The Notice was published in the Federal Register.

As previously covered, the supplemental proposed rule would implement Securities Act Section 27B ("Conflicts of Interest Relating to Certain Securitizations") and would apply to any underwriter, placement agent, initial purchaser or sponsor of an ABS, as well as any affiliates or subsidiaries of these entities, with limited exceptions. Under the proposal, "conflicted transactions" would include any agreement where the securitization participant would benefit from actual, anticipated or potentially adverse credit events or other declines in value of the ABS. Such conflicted transactions could include short sales of the relevant ABS, or the purchase of a credit default swap based on a credit event pertaining to the underlying ABS.

The SEC said that the prohibition would begin on the date on which an individual "has reached, or has taken substantial steps to reach, an agreement that such person will become a securitization participant with respect to an ABS," and would end one year after the first closing date of the relevant ABS. The SEC will grant exceptions to the proposed prohibition for (i) certain risk-mitigating hedging activities, (ii) bona fide market-making activities and (iii) other commitments by securitization participants to provide liquidity for the relevant ABS.