The Securities and Exchange Commission (SEC) moved quickly to adopt an unfulfilled mandate of the Dodd-Frank Act to prevent the sale of certain securities if there is a conflict of interest.
The rule, finalized Monday, was reintroduced for comment in January after not being acted upon since it was first put forward in 2011. It will take effect 60 days after publication in the Federal Register.
The rule establishes Securities Act Rule 192, which “prohibits a securitization participant, for a specified period of time, from engaging, directly or indirectly, in any transaction that would involve or result in any material conflict of interest between the securitization participant and an investor in the relevant ABS (asset-backed securities),” said the SEC in a press release. The prohibition will remain in place for one year after the ABS’s first sale.
Such transactions will be deemed “conflicted.” Other conflicted transactions listed by the SEC include “a short sale of the relevant ABS; the purchase of a credit default swap or other credit derivative that entitles the securitization participant to receive payments upon the occurrence of specified credit events in respect of the ABS; or a transaction that is substantially the economic equivalent of the aforementioned transactions, other than any transaction that only hedges general interest rate or currency exchange risk.”
The rule provides exceptions for risk-mitigating hedging activities, liquidity commitments, and bona fide market-making activities.
The compliance deadline for Rule 192 will apply to any ABS with a first closing sale date occurring 18 months after the rule’s publication in the Federal Register.
“[T]he final rule will help address conflicts of interest arising when securitization participants take positions against ABS investors’ interests,” said SEC Chair Gary Gensler in a statement. “Such a rule benefits investors and issuers alike.”
Republican SEC Commissioner Mark Uyeda agreed to support the rule, citing changes made to the initial proposal to address the more than 900 comments it received. Amendments included narrowing the scope of the definition of a “conflicted transaction,” the introduction of a principles-based information barrier for excluding affiliates and subsidiaries, and eased conditions around certain exceptions.
Uyeda’s counterpart, Hester Peirce, dissented.
“It certainly is better than what we proposed, but it is also different enough from the proposal that public comment on the new approach is necessary to ensure that we got it right this time,” Peirce stated.
The SEC has adopted four lingering rules mandated by the Dodd-Frank Act since Oct. 13, including three this month.