SEC Proposes Rule to Prohibit Conflicts of Interest in Certain Securitizations

The U.S. Securities and Exchange Commission, SEC, has published a press statement to announce an upcoming consultation on proposed enhancements to the conflicts of interest requirements pertaining to securitizations. Specifically, the Commission seeks to implement a new rule under the Securities Act of 1933, namely 17 CFR Part 230 § 230.192, to prohibit sponsors, underwriters, placement agents, or initial purchasers of securitizations (securitization participants) to engage in certain transactions, if such transactions „involve or result in any material conflict of interest between themselves and an investor“ in an asset-backed security (ABS), including synthetic securities.
Prohibited transactions would include
– the short sale of the ABS;
– the purchase of credit default swaps or other credit derivatives „pursuant to which the securitization participant would be entitled to receive payments upon the occurrence of specified credit events in respect of the relevant asset-backed security“; and
– the engagement in any financial instrument whose value would benefit from a decline in value of the ABS.
Excluded from the prohibition would be risk-mitigating hedging activities provided that certain conditions are met, such as that
(a) the activity is used for the reduction or mitigation of risks in connections with other holdings of the securitization participant or
(b) the participants has adequate policies and internal governance rules in place to ensure compliance with this new rule (e.g. adequate documentation policies).
Additionally excluded would be activities for the purpose of bona fide market making, again subject to certain conditions, and transactions for purposes of creating liquidity for the ABS.