SEC Chair Gary Gensler said the rule was guided by the Dodd–Frank Wall Street Reform and Consumer Protection Act, which Congress passed in 2010.
"In essence, Congress wanted to make sure that so-called securitization participants cannot bet against the ABS that they underwrite, place, or sponsor," Gensler said in a Nov. 27 statement after the rule was adopted. The SEC originally introduced the proposal in 2011 under former Chair Mary L. Schapiro but never completed it.
Gensler said the final rule includes a number of differences from the January proposal after taking comments into consideration. One of those differences is that the rule gives a more specific definition of a transaction that involves or would result in a conflict of interest.
"Under the final rule, a conflicted transaction entails directly shorting the ABS, entering into a credit default swap that references the underlying assets, or something economically equivalent to either of those activities," Gensler said.
In addition, the rule clarifies that generalized hedging, like an interest rate or currency hedge, is not a conflicted transaction, and mortgage insurance linked notes are not included in the definition of asset-backed securities, according to Gensler. The rule also revises the proposed exception permitting risk-mitigating hedging activities under certain conditions.
"Such a rule benefits investors and issuers alike," Gensler added, though Republican SEC Commissioner Hester M. Peirce dissented.
"A rule that is more than a decade and multiple iterations in the making should be really good," Peirce said in a Nov. 27 statement. "This rule, with its lingering ambiguities and over-breadth, may not be."
Peirce said she worries the SEC did not get the substance of the rule right.
"By 'right,' I mean implementing the congressional mandate in a way that stops the types of conflicted transactions that plagued financial crisis era securitizations without placing undue burdens on ordinary course transactions," she added.
The final rule, which substantially differs from its original proposal, would have benefited from another comment period, Peirce said, and is reflective of what she sees as a larger issue in the SEC's rule-making process.
"Our pattern of proposing unrealistic rules with numerous questions, only to substantively revise the rule text after the comment period closes inhibits our ability to receive and consider comprehensive feedback, and thus write sound final rules," Peirce said.
Peirce has criticized several aspects of the SEC's rule-making agenda in recent months, including what she's said is an overwhelming pace of rule-making, preventing industry commenters and SEC staff from properly voicing and addressing concerns.
