Trade Associations Call SEC Proposal on Conflicts of Interest in Securitizations "Significantly Flawed"

SIFMA, SIFMA Asset Management Group and the Bank Policy Institute (collectively, the “Associations”) urged the SEC not to adopt a proposed rule which would prohibit an asset-backed security ("ABS") "securitization participant" from engaging in any transaction that would involve or result in a material conflict of interest.

As previously covered, the supplemental proposed rule would implement Securities Act Section 27B ("Conflicts of Interest Relating to Certain Securitizations"), applying 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 the 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 the occurrence of a credit event pertaining to the underlying ABS.

Trade Association Comments

In a letter to the SEC, the Associations called the proposed rule “significantly flawed” for being both “excessively broad" and "vague.” The Associations stated that the proposed rule could:

• have “significant unintended” economic consequences for the asset-backed securities market, home buyers and small business owners;
• create compliance challenges for financial institutions and cause them to limit or completely halt their securitization activities; and
• disrupt the most basic components of the securitization markets as well as the broader corporate capital markets.