SEC Implements Rule Prohibiting Conflicts of Interest in Asset-Backed Securities

The Securities and Exchange Commission (SEC)  is attempting to bolster the integrity of the financial markets by adopting Securities Act Rule 192. This rule, crafted to align with Section 621 of the Dodd-Frank Act, introduces a framework to prevent the sale of asset-backed securities (ABS) tainted by material conflicts of interest. The newly adopted rule, which will become effective 60 days after publication in the Federal Register, seeks to enhance transparency and protect investors in the securitization market.

Addressing Conflicts of Interest

SEC Chair Gary Gensler expressed satisfaction with the adoption of Rule 192, stating, "I am pleased to support this rule as it fulfills Congress’s mandate to address conflicts of interests in the securitization market, a market which was at the center of the 2008 financial crisis." The rule prohibits securitization participants, including those involved in selling or facilitating the sale of ABS, from engaging in transactions that create material conflicts of interest with investors in the relevant ABS.

Key Provisions of Rule 192

1. Conflicted Transactions: Rule 192 defines conflicted transactions as those involving a short sale of the relevant ABS, the purchase of a credit default swap, or other credit derivatives that allow the securitization participant to receive payments upon specified credit events related to the ABS. It also encompasses transactions substantially equivalent to the aforementioned activities, excluding those that hedge general interest rate or currency exchange risk.
2. Exceptions: The rule includes exceptions for risk-mitigating hedging activities, bona fide market-making, and specific liquidity commitments of securitization participants. These exceptions aim to permit essential risk management, market-making, and liquidity commitment activities while ensuring compliance with specified conditions.
3. Effective Date and Compliance: Rule 192 will be effective 60 days after its publication in the Federal Register. Compliance with the rule will be required for any ABS, with the first closing of the sale occurring 18 months after the Federal Register publication date.

Upholding Investor and Issuer Interests

Chair Gensler emphasized that the rule benefits both investors and issuers by mitigating conflicts of interest, enhancing market integrity, and aligning with the regulatory intent to address shortcomings observed during the 2008 financial crisis. The adoption of Rule 192 underscores the SEC's commitment to fostering transparency, reducing systemic risks, and fortifying the regulatory framework governing the securitization market.

The GRC Report is the first word in governance, risk, and compliance news. As your trusted source for comprehensive coverage, the GRC Report keeps you informed and equipped to navigate the evolving landscape of governance, risk, and compliance. And remember, the GRC Report isn't just a news source; it's a community of professionals who share your passion for GRC excellence. Don't miss out on our insightful articles and breaking news – join the conversation and empower your GRC journey.