SEC Prohibits "Securitization Participants" with Conflicts of Interest Engaging in ABS Transactions

The SEC adopted a final rule to prohibit an asset-backed security ("ABS") "securitization participant" from engaging in any transaction that could involve or result in a material conflict of interest.

As previously covered, the final rule will implement Securities Act Section 27B ("Conflicts of interest relating to certain securitizations") and will apply to any underwriter, placement agent, initial purchaser or sponsor of an ABS, as well as to certain affiliates or subsidiaries of these entities.

New Rule 192 under the Securities Act:

• defines asset-backed securities subject to the prohibition, as well as synthetic ABS;
• provides exceptions for risk-mitigating hedging activities, liquidity commitments and bona fide market-making activities;
• provides that transactions in compliance with exceptions entered into with the intent to evade the prohibition will "be deemed to violate the prohibition"; and
• includes a safe harbor for certain foreign transactions, including asset-backed securities not issued by a U.S. person.

The rule will go into effect 60 days following publication in the Federal Register.

Statements

SEC Commissioner Jaime Lizárraga touted the rule's "contribut[ion] to the healthy functioning" of ABS markets. He said that the rule prevents securitization participants from exploiting their "information advantages at the expense of investors." He added that the rule will increase investor confidence that ABS investments will perform in accordance with the risks they take, and are not "tainted by speculative bets that make them more likely to perform poorly."

SEC Commissioner Mark T. Uyeda supported the steps the SEC took to address commenter concerns as to "protection against material conflicts of interest while not unnecessarily hindering routing securitization activities."

In dissent, SEC Commissioner Hester M. Peirce argued that the final rule was "different enough from the [original] proposal that public comment on the new approach is necessary to ensure that [the SEC] got it right this time." She said that she doubted that the new rule satisfies the SEC's congressional mandate to stop "conflicted transactions" without "placing undue burdens on ordinary course transactions."