SEC floats new rule to prevent conflict of interest in ASB trading

A rule amendment aimed at preventing the sale of asset-back securities (ASB) that are tainted by conflicts of interest has been proposed by the SEC.

The change would be an implementation of Section 27B of the Securities Act of 1933, a provision added by Section 621 of the Dodd-Frank Act. The proposal will be open for comment for 60 days following publication on the SEC website, and would take the form of new Securities Act Rule 192.

The SEC announcement defines the proposal as specifically seeking to “prohibit securitization participants from engaging in certain transactions that could incentivize a securitization participant to structure an ABS in a way that would put the securitization participant’s interests ahead of those of ABS investors”.

Conflict of interest

If the rule is adopted, it would, says the SEC, “prohibit an underwriter, placement agent, initial purchaser, or sponsor of an ABS, including affiliates or subsidiaries of those entities, from engaging, directly or indirectly, in any transaction that would involve or result in any material conflict of interest between the securitization participant and an investor in such ABS”.

SEC chair Gary Gensler added: “The re-proposed rule provides exceptions for risk-mitigating hedging activities, bona fide market making, and certain liquidity commitments. These changes, taken together, would benefit investors and our markets.”