Recovering Losses caused by Investment Misconduct

SEC Seeks Comments on Material Conflicts of Interest Ban in Asset-Backed Securities

On Monday, SEC commissioners approved a public comment period for a proposed rule that would seek to uncover and prohibit material conflicts of interest in the packaging and selling of asset-backed securities (ABS), according to a Sept. 19 SEC press release. The SEC hopes the implementation of the proposed rule will increase investor protections without disrupting the creation and sale of the products.

"This proposed rule is designed to ensure that those who create and sell asset-backed securities cannot profit by betting against those same securities at the expense of those who buy them," said SEC Chairman Mary L. Schapiro in the release. "At the same time, the proposed rule is not intended to interfere with traditional securitization practices in which loans are originated, packaged into asset-backed securities, and offered to investors in different structures."

As written, the proposed rule would prohibit "securitization participants of an ABS for a designated period of time from engaging in certain transactions that would involve or result in any material conflict of interest." The "designated period of time" would last for one year after the ABS was first sold.

As the ABS market has grown, SEC officials have become increasingly concerned with the potential for investor losses caused by conflicts of interest. Under current rules, a firm that packages, underwrites and sells the products to investors could also short the ABS, which would result in a profit for the firm and a loss to investors. A firm could also allow a third party to assemble an ABS in such a way as to allow the third party to profit from the ABS' failure. The proposed rule would prohibit firms from engaging in such actions, as long as certain conditions were met.

The SEC's proposed rule change is one of several rulemaking efforts that deal with asset-backed securities. The comment period will last 90 days.

 

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