The Securities and Exchange Commission on Wednesday proposed a rule that would forbid entities that create asset-backed securities from taking positions against those very products.
The proposal, which the commission agreed to issue in a 5-0 vote, stems from the Dodd–Frank Wall Street Reform and Consumer Protection Act and is designed to protect against conflicts of interests in the securitization market, which contributed to the 2008 financial crisis, Chairman Gary Gensler said Wednesday.
If adopted, the rule would prohibit an underwriter, placement agent, initial purchaser or sponsor of an asset-backed security, including affiliates or subsidiaries, from engaging, directly or indirectly, in any transaction that would involve or result in any material conflict of interest between itself and an investor in a given asset-backed security.
Such transactions, including the short sale of an asset-backed security within one year of its closing date, would be deemed conflicted.
The proposed rule would provide certain exceptions 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, the SEC noted in a fact sheet.
The proposal was initially introduced in 2011 but never completed. Mr. Gensler said Wednesday's action responds to public feedback on the 2011 proposal, as well as developments in the asset-backed security market.
The commission's two Republicans, Hester M. Peirce and Mark T. Uyeda, supported issuing the proposal but raised concerns and urged public feedback.
"Because of the stark nature of an outright prohibition — in contrast to a disclosure rule where the underlying transaction can still occur — a rule prohibiting transactions must especially balance protecting investors from harmful conflicts, with ensuring that market participants can engage in transactions that do not cause such harm," Mr. Uyeda said. "I have concerns whether today's rule proposal correctly struck this balance."
The proposal's public comment period will remain open for 60 days following publication on the SEC's website or 30 days following publication in the Federal Register, whichever period is longer.
Stephen Hall, legal director and securities specialist at Better Markets, a non-profit market watchdog group, welcomed the proposal and said in a statement that it would target some of the "most outrageous abuses we saw leading up to the 2008 financial crisis."
