SEC Implements New Rule to Prevent Conflicts of Interest in ABS Trading

Striving to uphold investor trust and stop potential conflicts of interest, the U.S. Securities and Exchange Commission (SEC) has established a new safeguard. Starting Monday, those trading in asset-backed securities (ABS) will no longer be allowed to act against the very assets they are supposed to be selling to investors—a practice that might undermine the market's integrity.

Underlying Reasons for the Change

This regulatory shift comes on the heels of a mandate from the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act responded to the 2008 financial meltdown by targeting unsafe practices like conflict of interest and deceptive sales strategies. With the goal of averting similar market turmoil, the rule impacts all 'securitization participants,' encompassing underwriters, placement agents, and sponsors involved in ABS dealings.

What the Rule Entails

The rule forbids these participants from engaging in short sales or credit-default swaps against the ABS they handle. It’s important to note that this rule is not without flexibility. Concerns from within the industry have led the SEC to incorporate exceptions, permitting risk hedging and market-making activities, among other provisions.

This Rule's Path to Establishment

Finalizing this rule wasn't without its delays. It has undergone a prolonged process, with its initial proposal dating back to 2011 but not reaching completion until now. SEC Chair Gary Gensler emphasized the rule's significance for a market that was at the epicenter of the 2008 crisis and affirmed its role in creating a fair trading environment.

Notable Dissent and Rule Details

Despite widespread support, the rule faced opposition from Republican SEC Commissioner Hester Peirce, who expressed concern about its complexity and its potential to affect market liquidity adversely. As for implementation, the SEC has announced that the rule will take effect for ABS transactions closing 18 months after its publication in the Federal Register.

SEC, ConflictsOfInterest, ABS