Insights

28 November 2023

SEC Drops Hammer on Conflicts in Securitization Deals

The Securities and Exchange Commission (SEC) recently adopted Rule 192, spotlighting conflicts of interest in assembling and selling asset-backed securities (ABS). The complex rule leaves few stones unturned in its precise definitions and extensive prohibitions restricting specific transactions likely to pit securitization participant priorities against those of ABS investors.

Here are 5 key takeaways for industry players to fully grasp what the SEC deems over the compliance line:


1) Sweeping Definitions Encircle Nearly All Industry Deal-Makers 

The SEC takes an expansive view of parties considered “securitization participants” subject to Rule 192’s scrutiny. Beyond obvious big fish like underwriters and sponsors, the definitions pull in just about everyone playing an influential role in ABS deals — including placement agents, initial purchasers, and affiliates/subsidiaries privy to nonpublic deal insights. The extensive sponsor classification even ensnares attorneys structuring terms behind the scenes.

2) New Sheriff in Town Watching All Access Points

In casting such a wide net, the SEC makes no bones about policing every possible junction where conflicting priorities could sway those assembling or selling ABS products to put their interests before vulnerable investors lacking full structural transparency. Simply having advanced access to deal information appears enough to warrant restrictions.

3) The Most Dangerous Transactions Come Under an SEC Microscope

The SEC prohibits clearly specified transactions likely to undermine investor interests. Shorting assembled securities, derivatives betting on asset pool losses, and equivalent wagers tied to deal failure face outright bans under Rule 192.

4) Carve-outs Permit Necessary Industry Risk Management and Liquidity

However, pragmatic exemptions allowing risk-mitigating hedging activities and liquidity support show the regulator understands securitization necessities. By permitting measured transactions offsetting hazards related to market-making and underwriting as long as tailored conditions are met, the SEC demonstrates balance in separating reasonable activities from predatory plays under the new compliance regime. 

5) Industry Will Need to Adjust

Make no mistake — Rule 192 warrants weighty operational impact across securitization functions. With the industry on notice to root out intentional — and unintentional — conflicting priorities made opaque to investors, honoring both the letter and spirit of augmented restrictions and transparency will necessitate another hard look. While immediate compliance isn’t yet required, meeting the SEC’s high bar likely involves more than superficial tweaks for industry veterans accustomed to greater leeway.

In essence, Rule 192 builds a firewall securities issuers and sellers can no longer cross at their own discretion. Riddled with complex specifications, its intense focus on isolating and eliminating distorted incentives between distribution parties and end-investors ushers compliance into securitizations’ next chapter.

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