The Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 27B to the
The SEC proposed Rule 192 under the Dodd-Frank Act to prohibit securitization participants from engaging in conflicted transactions—such as short-selling ABS or buying credit default swaps tied to its decline—that could incentivize structuring securities to fail, with exceptions for hedging and market-making, but no enforcement actions or fines as it remains a proposed rule.
The U.S. Securities and Exchange Commission proposed Rule 192 to implement Section 27B of the Securities Act of 1933, as mandated by the Dodd-Frank Act, prohibiting securitization participants—including underwriters, sponsors, and their affiliates—from engaging in material conflicts of interest with ABS investors. The rule bans short sales of ABS, purchases of credit default swaps or other derivatives that profit from its adverse performance, and any financial transactions benefiting from its decline, effective from the point of engagement in structuring until one year after the first closing. Exceptions are permitted for bona fide hedging, market-making, and liquidity commitments, provided participants establish and maintain compliance programs with written policies reasonably designed to ensure adherence.
The U.S. Securities and Exchange Commission proposed Rule 192 under the Dodd-Frank Act to prohibit securitization participants—including underwriters, placement agents, initial purchasers, sponsors, and their affiliates—from engaging in transactions that create material conflicts of interest with investors in asset-backed securities (ABS). The rule specifically bans short sales of the ABS, purchases of credit default swaps or other credit derivatives that pay out upon adverse events in the ABS, and any financial instrument or transaction designed to profit from the decline, default, or poor performance of the underlying asset pool. These prohibitions apply from the moment a participant reaches or takes substantial steps toward an agreement to participate in the ABS transaction and extend for one year after the first closing of the sale. The rule includes exceptions for risk-mitigating hedging, bona fide market-making, and liquidity commitments, but requires participants relying on these exceptions to implement robust compliance programs with written policies and procedures. The definition of ABS under the rule includes both traditional and synthetic ABS, ensuring broad coverage. No enforcement actions, fines, or specific dollar amounts are cited because this is a proposed regulatory rule, not a final enforcement or litigation matter. The proposal was open for public comment for 30 to 60 days following publication in the Federal Register or on the SEC’s website, whichever period was longer, to gather stakeholder input before potential finalization.
Extracted insights
- person conflicted transaction
- agency Securities and Exchange Commission
- Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 27B to the Securities Act of 1933
- Section 27B prohibits certain securitization participants from engaging in transactions that would involve material conflicts of interest
- SEC proposed a rule to prohibit conflicts of interest in certain securitization transactions
- New Securities Act Rule 192 would prohibit a securitization participant from engaging in any transaction that would involve material conflict of interest between the participant and an investor in an ABS
- Proposed rule would include any ABS within the meaning set forth in Section 3 of the Exchange Act and any synthetic ABS
- Proposed rule would apply to an underwriter, placement agent, initial purchaser, or sponsor of an ABS and any affiliate or subsidiary
- Proposed rule would prohibit a securitization participant from entering into a conflicted transaction
- Conflicted transaction includes a short sale of the ABS, the purchase of a CDS or other credit derivative, or the purchase or sale of any financial instrument other than the relevant ABS
Warning: TT: undefined function: 32 FACT SHEET Prohibition Against Conflicts of Interest in Certain Securitizations U.S. SECURITIES AND EXCHANGE COMMISSION PAGE 1 OF 2 Why This Matters The Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 27B to the Securities Act of 1933. Section 27B prohibits certain securitization participants from engaging in transactions that would involve or result in certain material conflicts of interest and requires the SEC to issue rules to implement the prohibition and related exceptions. How This Rule Applies New Securities Act Rule 192 would prohibit a securitization participant 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 an ABS, subject to certain exceptions. Prohibited transactions would include, for example, a short sale of the 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. Asset-Backed Securities The proposed rule would include within the definition of “asset-backed security” any ABS within the meaning set forth in Section 3 of the Exchange Act, as well as any synthetic ABS. Securitization Participants The proposed rule would apply to an underwriter, placement agent, initial purchaser, or sponsor of an ABS, each as defined in the proposed rule. It would also apply to any affiliate or subsidiary of any such entity. The Securities and Exchange Commission proposed a rule to prohibit conflicts of interest in certain securitization transactions as required by Congress in the Dodd-Frank Act. The proposed rule would prohibit securitization participants from engaging in certain transactions that could incentivize a securitization participant to structure an asset-backed security (ABS) in a way that would put the securitization participant’s interests ahead of those of ABS investors. FACT SHEET | Prohibition Against Conflicts of Interest in Certain Securitizations U.S. SECURITIES AND EXCHANGE COMMISSION Page 2 of 2 Prohibited Transactions The proposed rule would prohibit a securitization participant from entering into a “conflicted transaction” beginning when a person has reached, or has taken substantial steps to reach, an agreement that such person will become a securitization participant with respect to an ABS and ending one year after the date of the first closing of the sale of the relevant ABS. “Conflicted transaction" is defined to include two main components. One component is whether the transaction is: • A short sale of the ABS; • The purchase of a CDS or other credit derivative pursuant to which the securitization participant would be entitled to receive payments upon the occurrence of a specified adverse event with respect to the ABS; or • The purchase or sale of any financial instrument (other than the relevant ABS) or entry into a transaction through which the securitization participant would benefit from the actual, anticipated, or potential: o Adverse performance of the asset pool supporting or referenced by the ABS; o Loss of principal, default, or early amortization event on the ABS; or o Decline in the market value of the ABS. The other component relates to materiality – i.e., whether there is a substantial likelihood that a reasonable investor would consider the relevant transaction important to the investor’s investment decision, including a decision whether to retain the ABS. Exceptions As specified in Section 27B, the proposed rule would provide exceptions for: • Risk-mitigating hedging activities; • Bona fide market-making activities; and • Liquidity commitments. The proposed rule would require a securitization participant relying on certain exceptions to implement compliance programs reasonably designed to ensure the securitization participant’s compliance with the conditions applicable to those exceptions, including reasonably designed written policies and procedures. The proposed definitions in the proposed rule also contain certain exceptions and exclusions, each with conditions designed to protect investors and further the purposes of Section 27B. Additional Information: The public 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.
FACT SHEET Prohibition Against Conflicts of Interest in Certain Securitizations U.S. SECURITIES AND EXCHANGE COMMISSION PAGE 1 OF 2 Why This Matters The Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 27B to the Securities Act of 1933. Section 27B prohibits certain securitization participants from engaging in transactions that would involve or result in certain material conflicts of interest and requires the SEC to issue rules to implement the prohibition and related exceptions. How This Rule Applies New Securities Act Rule 192 would prohibit a securitization participant 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 an ABS, subject to certain exceptions. Prohibited transactions would include, for example, a short sale of the 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. Asset-Backed Securities The proposed rule would include within the definition of “asset-backed security” any ABS within the meaning set forth in Section 3 of the Exchange Act, as well as any synthetic ABS. Securitization Participants The proposed rule would apply to an underwriter, placement agent, initial purchaser, or sponsor of an ABS, each as defined in the proposed rule. It would also apply to any affiliate or subsidiary of any such entity. The Securities and Exchange Commission proposed a rule to prohibit conflicts of interest in certain securitization transactions as required by Congress in the Dodd-Frank Act. The proposed rule would prohibit securitization participants from engaging in certain transactions that could incentivize a securitization participant to structure an asset-backed security (ABS) in a way that would put the securitization participant’s interests ahead of those of ABS investors. FACT SHEET | Prohibition Against Conflicts of Interest in Certain Securitizations U.S. SECURITIES AND EXCHANGE COMMISSION Page 2 of 2 Prohibited Transactions The proposed rule would prohibit a securitization participant from entering into a “conflicted transaction” beginning when a person has reached, or has taken substantial steps to reach, an agreement that such person will become a securitization participant with respect to an ABS and ending one year after the date of the first closing of the sale of the relevant ABS. “Conflicted transaction" is defined to include two main components. One component is whether the transaction is: • A short sale of the ABS; • The purchase of a CDS or other credit derivative pursuant to which the securitization participant would be entitled to receive payments upon the occurrence of a specified adverse event with respect to the ABS; or • The purchase or sale of any financial instrument (other than the relevant ABS) or entry into a transaction through which the securitization participant would benefit from the actual, anticipated, or potential: o Adverse performance of the asset pool supporting or referenced by the ABS; o Loss of principal, default, or early amortization event on the ABS; or o Decline in the market value of the ABS. The other component relates to materiality – i.e., whether there is a substantial likelihood that a reasonable investor would consider the relevant transaction important to the investor’s investment decision, including a decision whether to retain the ABS. Exceptions As specified in Section 27B, the proposed rule would provide exceptions for: • Risk-mitigating hedging activities; • Bona fide market-making activities; and • Liquidity commitments. The proposed rule would require a securitization participant relying on certain exceptions to implement compliance programs reasonably designed to ensure the securitization participant’s compliance with the conditions applicable to those exceptions, including reasonably designed written policies and procedures. The proposed definitions in the proposed rule also contain certain exceptions and exclusions, each with conditions designed to protect investors and further the purposes of Section 27B. Additional Information: The public 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. Why This Matters How This Rule Applies Asset-Backed Securities Securitization Participants Prohibited Transactions Exceptions Additional Information: