SEC Adopts Rule to Prohibit Conflicts of Interest in Certain Securitizations

The Securities and Exchange Commission today adopted Securities Act Rule 192 to implement Section 27B of the Securities Act of 1933, a provision added by Section 621 of the Dodd-Frank Act. The rule is intended to prevent the sale of asset-backed securities (ABS) that are tainted by material conflicts of interest. It prohibits a securitization participant, for a specified period of time, from engaging, directly or indirectly, in any transaction that would involve or result in any material conflict of interest between the securitization participant and an investor in the relevant ABS. Under new Rule 192, such transactions would be “conflicted transactions.” Consistent with the statute, Rule 192 provides exceptions for risk-mitigating hedging activities, liquidity commitments, and bona fide market-making activities of a securitization participant.