Mar. 23, 2023
March 23, 2023
The Dodd-Frank Wall Street Reform and Consumer Protection Act introduced Section 27B to the Securities Act of 1933, which prohibits specific securitization participants from engaging in transactions that create certain material conflicts of interest. The Act mandates that the Securities and Exchange Commission (SEC) issue rules to enforce this prohibition and its associated exceptions.
The proposed rule seeks to prevent securitization participants from engaging in \"conflicted transactions\" from the moment a person has taken significant steps or reached an agreement to become a securitization participant with regard to an asset-backed security (ABS). A \"conflicted transaction\" encompasses several transactions, including a short sale of the ABS, the purchase of a credit default swap (CDS), or the purchase or sale of any financial instrument that benefits the securitization participant from the asset pool's adverse performance, loss of principal, default, early amortization event, or decline in the market value of the ABS. The transaction's materiality is also considered, as a reasonable investor would likely consider it important to their investment decision.
The proposed rule offers exceptions for risk-mitigating hedging activities, bona fide market-making activities, and liquidity commitments. However, securitization participants who rely on these exceptions must implement compliance programs designed to ensure their compliance with the associated exception conditions, including written policies and procedures.
The proposed definitions in the rule provide several exceptions and exclusions, each with conditions that protect investors and align with Section 27B's objectives.
In conclusion, I completely disagree with the implementation of this rule.