SEC CORNER

In response to past market abuse, such as the 2008 financial crisis, the SEC has made an ongoing effort to protect investment transactions. The SEC is revisiting an earlier proposal that was never finalized, to implement a provision under the Dodd Frank Act prohibiting underwriters, agents, purchasers, sponsors, subsidiaries, and affiliates of asset-backed securities from engaging in transactions that would result in material conflicts of interest. Conflicted transactions include short sales, credit default swaps, or other credit derivatives where the participant would receive payment upon the occurrence of an adverse event to the asset backed security, as well as transactions that are material to the investor’s decision to invest. The re-proposed rule would apply to both registered and unregistered securities and would prohibit participants from entering a conflicted transaction for a period of a year after the closing of the asset-backed security sale. SEC Chair Gary Gensler supports the proposition which is designed to address situations where market participants place their interests ahead of the investors, by protecting investors and strengthening market integrity. Exceptions are provided for risk-mitigating hedging activities, bona fide market-making activities, and certain commitments by a securitization participant to provide liquidity for the relevant asset backed security. 

Despite the unanimous decision to issue the proposal for comment, the Commissioners are not in agreement as to whether the rule strikes the right balance between protecting investors from conflicts of interest while ensuring that market participants can engage in transactions without causing harm.