SEC Issues Rule Blocking Conflicting Short Sells in Asset-Backed Securities

The Securities and Exchange Commission on Wednesday proposed a rule barring institutions that create asset-backed securities from taking positions against those very products.

The proposal, which the panel agreed to put forward in a 5–0 vote, stems from the Dodd-Frank Wall Street Reform and Consumer Protection Act and is intended to protect against conflicts of interest in the securitization market that contributed to the 2008 financial crisis. , Chairman Gary Gensler said Wednesday.

If passed, the rule would prohibit an underwriter, issuing agent, original purchaser or sponsor of an asset-backed security, including affiliates or subsidiaries, from participating directly or indirectly in any transaction that could give rise to or give rise to any material conflict of interest. between themselves and an investor in that asset-backed security.

Such transactions, including a short sale of an asset-backed security within one year of its closing date, would be considered conflict transactions.

The proposed rule would provide for certain exemptions for risk-reducing hedging activities, bona fide market-creating activities, and certain obligations of a securitization participant to provide liquidity for a qualifying asset-backed security, the SEC fact sheet notes.

The proposal was originally submitted in 2011 but was never completed. Mr. Gensler said Wednesday’s action is in response to public feedback on the 2011 proposal as well as the development of the asset-backed securities market.

Two Republicans on the committee, Hester M. Pierce and Mark T. Ueda, supported passing the proposal, but raised concerns and urged the public to get feedback.

“Because of the harsh nature of an outright prohibition—as opposed to a disclosure rule where an underlying transaction can still take place—a rule prohibiting transactions must especially balance protecting investors from harmful conflicts with ensuring that market participants can engage in transactions, which do not cause such harm,” Mr. Ueda said. “I have concerns about whether today’s rule proposal strikes that balance right.”

The public comment period for the proposal will remain open for 60 days after posting on the SEC website or 30 days after posting in the Federal Register, whichever is longer.

Steven Hall, legal director and securities specialist at Better Markets, a non-profit market watch group, welcomed the proposal and said in a statement that it would target some of the “most outrageous abuses we saw in the run-up to the 2008 financial crisis.” “.

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