SEC Alert & OPEN for comment! SEC is reissuing and revising a proposal that was initially published in September 2011 that would implement a provision under the Dodd-Frank
prohibiting certain entities engaging in any transaction that would involve or result in certain material conflicts of interest
Source: https://public-inspection.federalregister.gov/2023-02003.pdf (168 pages)
[Release No. 33-11151; File No. S7-01-23]
RIN 3235-AL04
Prohibition Against Conflicts of Interest in Certain Securitizations
ACTION: Supplemental proposed rule.
SUMMARY
The Securities and Exchange Commission (“SEC” or “Commission”) is reissuing and revising a proposal that was initially published in September 2011 that would implement a provision under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) prohibiting an underwriter, placement agent, initial purchaser, or sponsor of an asset-backed security (including a synthetic asset-backed security), or any affiliate or subsidiary of any such entity, from engaging in any transaction that would involve or result in certain material conflicts of interest.
DATES:
Comments should be received on or before March 27, 2023.
Comments may be submitted by any of the following methods:
Electronic comments:
- Use the Commission’s internet comment form (http://www.sec.gov/rules/ submitcomments.htm)
- Send an email to [email protected]. Please include File Number S7-01-23 on the subject line
Paper comments:
- Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-01-23. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s website (http://www.sec.gov/rules/proposed.shtml). Comments also are available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission’s Public Reference Room. All comments received will be posted without change. Persons submitting comments are cautioned that we do not edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly.
The re-proposed rule takes into account developments in the ABS market since 2011 and the comments received in response to the 2011 proposed rule to provide greater clarity regarding the scope of prohibited and permitted conduct.14 Fundamentally, the re-proposed rule is intended to prevent the sale of ABS that are tainted by material conflicts of interest. It seeks to accomplish this goal by prohibiting securitization participants15 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. By focusing on transactions that represent a “bet” against the performance of an ABS, the re-proposed rule seeks to provide an explicit standard for determining which types of transactions would be prohibited. We believe this standard would provide strong protection against material conflicts of interest while not unnecessarily hindering routine securitization activities that do not give rise to the risks that Section 27B was intended to address.
To achieve these objectives, the re-proposed rule would:
Prohibit, for a specified period, a securitization participant from engaging in any transaction that would result in a “material conflict of interest” between the securitization participant and an investor in the relevant ABS.
- A securitization participant could not, for a period ending on the date that is one year after the date of the first closing of the sale of an ABS, directly or indirectly engage in any transaction that would involve or result in any material conflict of interest between the securitization participant and an investor in such ABS.
- Under the re-proposed rule, such transactions would be “conflicted transactions” and would include, for example, a short sale of the relevant ABS or the purchase of a credit default swap or other credit derivative that entitles the securitization participant to receive payments upon the occurrence of specified credit events in respect of the ABS
Define the persons that would be subject to the re-proposed rule.
- The terms “underwriter,” “placement agent,” “initial purchaser,” and “sponsor” (collectively, together with their affiliates and subsidiaries, “securitization participants”) would capture the persons subject to the re-proposed rule and would be functional definitions based on a person’s activities in connection with a securitization, which would generally be based on existing definitions of such terms under the Federal securities laws and the rules thereunder to ease compliance with the re-proposed rule
Define asset-backed securities that would be subject to the prohibition
- Prohibited transactions would be those with respect to an “asset-backed security.”
- An “asset-backed security”, for purposes of the re-proposed rule, would be defined based on the Section 3 definition of asset-backed security in the Securities Exchange Act of 1934 (“Exchange Act”)18 and also would specifically include synthetic ABS, as well as hybrid cash and synthetic ABS19, which is consistent with Section 27B
Provide certain exceptions to the prohibition.
- The re-proposed rule would implement certain exceptions for risk-mitigating hedging activities, bona fide market-making activities, and liquidity commitments as specified in Section 27B.
- The proposed exceptions would focus on distinguishing the characteristics of such activities from speculative trading.
- The proposed exceptions would also seek to avoid disrupting current liquidity commitment, market-making, and balance sheet management activities that we do not believe would give rise to the risks that Section 27B was intended to address.
There are a ton of questions SEC is requesting comment on (more than images allowed in this post) but some of them are:
TLDRS: Generally speaking, anything from the financial crisis and what came out of it with Dodd-Frank should be fully implemented, even 12 years after the initial rule proposed? Please consider using your voice to comment on the official record so.
EDIT: citizenfaith01 in the comments with the assist to the Fact sheet on this: https://www.sec.gov/files/33-11151-fact-sheet.pdf
