Background:

On March 27, SFA submitted a comment letter to the Securities and Exchange Commission (SEC) regarding the recently re-proposed rule on the “Prohibition of Conflicts of Interest in Securitizations,” that would implement Section 27B of the Securities Act of 1933, a provision added by Section 621 of the Dodd-Frank Act. This rule, initially introduced in 2011, prohibits securitization participants from engaging in ABS transactions that would involve or result in any material conflicts of interest with respect to any investor in the transaction.

Given the SEC did not grant a deadline extension, as requested by SFA and 11 other trade associations, SFA’s letter acknowledges that more work remains to be done to assess the impact of the Proposed Rule, and focuses on the following points:

• Urges the Commission to strike the right balance to protect investors while maintaining the strengths of our financial markets.
• Highlights the sweeping approach taken in the re-proposed rule would significantly impede and restrict vital activities – including risk-mitigating hedging, financing, and investing – across a wide-swath of the investor, bank, broker-dealer, corporate issuer and servicer communities – and all of their affiliates and subsidiaries.
• Details how the re-proposal is critically flawed, conflicts with the goals of numerous prudential regulators, relies too heavily on the Volcker Rule as a precedent and would leave a broad universe of market participants not knowing whether it is covered by the rule; and if so, whether its conduct could be deemed to have violated the rule.
• Shares how rule could perversely discourage ABS investors from negotiating the terms and collateral of ABS because those actions could be interpreted as “substantial involvement” in the design, structure or assembly of the ABS that would then trigger the need to implement a complex, expansive and ambiguous compliance regime.
• Expresses concerns that the re-proposed rule could inadvertently impact the size and liquidity of the $12.5 trillion ABS market, which is an essential source of funding for American consumers, small business owners, and home buyers.
• Notes the SEC can use their regulatory authority to narrow the scope of the rule.
• Shares SFA’s ongoing work to develop consensus-built industry recommendations that will balance the protection of investors while maintaining healthy and functioning securitization markets. 

Given the limited deadline and broad remit of the re-proposed Rule, SFA plans to submit a second supplemental letter after the technical deadline to further detail our market-wide consensus recommendations.