Today the Commission adopted a new rule to address harmful conflicts of interest in the asset-backed securities (“ABS”) market. As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), Congress directed the Commission to issue rules prohibiting those conflicts of interest, which played a significant role in causing the 2008 financial crisis.

The worst since the Great Depression, this financial crisis resulted in historic wealth losses, mass unemployment, millions of foreclosures, and extensive taxpayer bailouts. The bipartisan Financial Crisis Inquiry Commission, created by Congress to investigate the causes of the crisis, as well as several congressional investigations, thoroughly documented numerous abuses and misconduct in securitization markets.

In the run-up to this crisis, many Wall Street firms packaged, marketed, and sold ABS to investors while simultaneously engaging in short sales of those same securities that were designed to fail.

To address this practice, harmful both to investors and to our capital markets, Congress passed a law to prohibit certain market participants, with certain exceptions, from engaging in any transaction that results in a material conflict of interest between themselves and an ABS investor.

While securitization markets have evolved since the 2008 financial crisis, due in part to the implementation of other Dodd-Frank Act mandates, it is equally true that in the absence of today’s rule, the opportunity still exists to engage in this type of harmful misconduct. Congress enacted this provision along with several others to address a range of abuses in our securitization markets and to ensure that investors in this space would be protected.

Securitization markets play an important role in promoting the availability of capital for loan originations that finance the purchase of cars, student loans, equipment and business loans, home improvements, and other significant purchases by millions of consumers and small businesses.

Well-functioning securitization markets can reduce the cost of credit and help communities across our country finance infrastructure projects, schools, water and sewage systems, hospitals and other municipal services. Securitization markets also play an essential and vital role in the home mortgage market.

The final rule we adopt today will contribute to the healthy functioning of ABS markets by reducing the ability of securitization participants to exploit their informational advantages at the expense of investors. It will provide investors with the confidence that their ABS investments will perform in a manner that is commensurate with the risks they are willing to take and are not tainted by speculative bets that make them more likely to perform poorly. Overall, it will result in improved investor protections, a lower cost of capital, and enhanced market stability.

The rule achieves this by prohibiting, with certain exceptions, a securitization participant from engaging in any transaction that would result in a material conflict of interest with an investor in the relevant ABS. It includes sponsors that are in a position to place “bets” against the ABS and are therefore key gatekeepers that have the power and opportunity to engage in conflicted behavior that could harm investors.

Conflicted transactions would include obtaining a short position in an ABS, or purchasing a credit default swap (“CDS”) or other credit derivative that would entitle the holder to receive payments if certain adverse credit events occur with respect to the ABS.

After considering stakeholder comments and in a change from the proposal, the final rule revises the third prong of the definition of a conflicted transaction to now focus on transactions that are, in economic substance, a direct bet against the relevant ABS or the asset pool supporting or referenced by the relevant ABS, even if they are not labeled as a short sale, CDS, or other credit-derivative.

The final rule includes several other changes that will provide additional clarity for market participants.

For example, it clarifies that transactions unrelated to the specific credit performance of the ABS are not scoped in, such as reinsurance agreements, hedging of general interest rate or currency exchange rate risks, or routine securitization activities such as warehouse financing or the transfer of assets into a securitization vehicle.

In addition, the final rule clarifies the scope of persons covered. Depending on particular facts and circumstances, a person that only performs administrative and ministerial activities related to an ABS, such as servicing activities, would not fall within the scope of the rule.

The final rule does not impede long-only investors from exercising their rights to negotiate the assets they prefer to include in an ABS pool or from having a say about their preferences with respect to the structure of the ABS, asset pool quality, concentration levels, yields, and other factors. These are the very investors that the rule is designed to protect.

Lastly, the final rule provides that affiliates without access to, or knowledge of, the relevant ABS or the asset pool underlying or referenced by the ABS will not fall within the scope of the rule, and will not need to be included in compliance programs connected with the rule.

Final adoption of this rule is long-overdue, fulfills congressional intent to prevent harmful conflicts of interest in securitizations markets, and brings us one-step closer to full implementation of the landmark Dodd-Frank Act. I am pleased to support it.