The Securities and Exchange Commission (SEC) resurrected an unfulfilled mandate of the Dodd-Frank Act that would prevent the sale of certain securities if there is a conflict of interest.
The proposed rule, revisited for the first time after initially being put forward in 2011, would prohibit securitization participants like underwriters, placement agents, initial purchasers, or sponsors of an asset-backed security, as well as their affiliates and subsidiaries, from engaging in any transaction that would involve or result in a material conflict of interest between the securitization participant and an investor in such an ABS.
“Prohibited transactions would include, for example, a short sale of the ABS or 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,” the SEC said in a fact sheet accompanying Wednesday’s proposal.
Exceptions could be granted in certain circumstances, including risk-mitigating hedging activities, bona fide market-making activities, and liquidity commitments, the fact sheet said.
The public comment period on the rule will last 60 days from its publication on the SEC’s website or 30 days from its publication in the Federal Register, whichever is longer.
“Today, a dozen years after the commission first proposed rules on this matter, the SEC’s work to implement Section 621 remains unfinished,” SEC Chair Gary Gensler said in a statement. “This reproposed rule seeks to address this unfinished step in Congress’s vision for financial reform.”
The ABS conflict of interest rule was one of seven new mandates for asset-backed securities laid out in the Dodd-Frank Act. Six other ABS rules—on credit risk retention (3 rules), disclosure, reps and warranties, and due diligence disclosure—are already on the books.
Before Gensler took over the agency in April 2021, there were 11 Dodd-Frank rules that had not been enacted. As he promised, Gensler and the SEC have been slowly resurrecting proposed rulemaking on the 11 languishing rules that touched on areas including executive compensation, security-based swaps, short-sale reforms, and stress testing on nonbanking financial institutions.
In August, the SEC adopted Dodd-Frank’s pay vs. performance rule, followed by the passing of its executive pay clawback rule in October. The agency has proposed rules on executive compensation votes, reforming the short sale market, and requiring security-based swap execution facilities to register with the agency and hire a chief compliance officer.
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