Today, the Securities and Exchange Commission proposed a rule to implement Section 27B of the Securities Act. This section was added as a result of the addition of Section 621 of the Dodd-Frank Act, which was a late addition to the Act. Section 621 of the Dodd-Frank Act was added to address the sale of asset-backed securities “tainted” by a material conflict of interest—such as an instance similar to the Abacus transaction. According to the SEC’s release, the rule “would 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.”
A proposed rule had been released in 2011; however, it was never adopted. Many commenters responding to the 2011 proposal believed it to be unworkable. Many market participants since have taken the view that such a rule would be unnecessary given that the securities laws already address the circumstances that Section 621 of the Act was meant to police. The re-proposed rule provides exceptions for risk-mitigating hedging activities, bona fide market making, and certain liquidity commitments. Proposed Securities Act Rule 192, if adopted, would prohibit underwriters, placement agents, initial purchasers and sponsors in ABS transactions, and certain other related persons, from engaging in transactions that would involve or result in any material conflict of interest between the securitization participant and an investor in the transaction. The prohibition on conflicted transactions would commence on the date on which such a person had reached, or had taken substantial steps to reach, an agreement that such person will become a securitization participant with respect to a transaction, and would continue for one year after the first closing. The comment period will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.