SEC seeks “skin in the game” for securitizations

One of the fundamental vulnerabilities exposed by the 2008 financial crisis — a lack of “skin in the game” for players in asset-backed securities transactions — is finally being addressed in new rule proposals from the U.S. Securities and Exchange Commission (SEC).

The regulator proposed new rules to combat conflicts of interest in the asset-backed securities (ABS) market, which was one of the key factors at the heart of the global financial crisis.

The proposal is designed to ensure that ABS transactions aren’t structured in a way that puts the interests of the underwriters, sponsors, and other parties involved with crafting a transaction, ahead of investors in the vehicles.

The SEC originally proposed a rule to address the issue back in 2011, as policymakers sought to implement a series of post-crisis reforms.

“The re-proposed rule would provide an important safeguard against the rampant misconduct that contributed to the 2008 financial crisis, which resulted in historic wealth losses, massive unemployment and millions of foreclosures,” SEC commissioner Jaime Lizárraga said in a statement.

“It recognizes the information asymmetries that exist between investors and the parties who design, structure, and create these often complex, and sometimes overly risky, asset-backed securities. By aligning incentives between investors and securitization participants, it would protect investors and strengthen market integrity,” he said.

SEC chair Gary Gensler voiced his support for the rule, saying it’s “designed to help address conflicts of interest arising with market participants taking positions against investors’ interests,” adding it would include exemptions for certain hedging activities, legitimate market making, and certain liquidity commitments.

“These changes, taken together, would benefit investors and our markets,” he said.

Meanwhile, the U.S. Securities Industry and Financial Markets Association (SIFMA) said that it is reviewing the proposals with its members.

“Overly broad or unclear rules that suppress beneficial activity will have real and harmful economic consequences,” SIFMA said in a statement, adding that it’s also concerned about the comment period adopted by the SEC — 60 days from today, or 30 days from its publication in the Federal Register, whichever is longer.

“Today’s proposal is a complicated and important rulemaking mandated by the Dodd-Frank Act, which was passed more than a decade ago, so we do not see a reason to move with such haste, especially since this rule applies to the same markets impacted by other pending SEC rulemakings such as a proposed best execution rule for fixed income securities,” SIFMA said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.