MFA Says SEC Proposal on Securitizations Would Be "Disruptive"

The Managed Funds Association ("MFA") argued that an SEC proposal to prohibit a "securitization participant" from engaging in any transaction that would involve or result in a material conflict of interest, "could harm the securitization markets and, as a consequence, undermine the credit markets that depend upon securitization."

In a comment letter, the MFA emphasized that the SEC’s proposal to prohibit conflicts of interest goes "well beyond" the SEC’s Congressional mandate to specifically prohibit speculative investments against securitizations.

As previously covered, the 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 asset-backed security ("ABS"), as well as any affiliates or subsidiaries of these entities. 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. 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.

In the comment letter, the MFA recommended that the SEC:

• change the definitions of (i) "sponsor" to exclude investors taking a long position in ABS because they are relevant to the proposal’s policy concerns, (ii) "securitization participant" to exclude affiliates, subsidiaries and non-securitization employees who are behind information barriers, and (iii) "conflicted transaction" to only include transactional activity involved in investments against ABS;
• allow disclosure as a means of addressing conflicts of interest;
• include interest rate hedging, currency hedging and non-credit related hedging in the exception for risk-mitigating hedging activity; and
• remove the "substantial steps" test due to its "vague" language and lack of clarity for aiding compliance with the rule.