Sec Speeches Cryptocurrency Statement on Prohibiting Conflicts of Interest in Securitizations

Today, the Commission is considering whether to re-propose rules to prohibit a range of market participants that sell or sponsor asset-backed securities (ABS) from taking positions against those very products. I am pleased to support this re-proposed rule as it fulfills Congress’s mandate to address conflicts of interests in the securitization market, which contributed to the 2008 financial crisis.

In the aftermath of the financial crisis, Senator Carl Levin led an investigation into conflicts of interest and other abuses in the securitization markets. The resulting report (the Levin report) found that a conflict of interest arose when investment banks and other market participants sold securitized assets to investors while simultaneously taking large positions against those assets.[1] The Levin report said that, in doing so, these market participants from time to time may have put their own interests ahead of investors’ interests, and profited at investors’ expense.[2]

In response, Congress addressed such conflicts in the securitizations market through Section 621 in the Dodd-Frank Act, an amendment proposed by Senators Levin and Jeff Merkley.

Today, a dozen years after the Commission first proposed rules on this matter, the SEC’s work to implement Section 621 remains unfinished.[3] This re-proposed rule seeks to address this unfinished step in Congress’s vision for financial reform.

As directed by Congress, today’s re-proposed rule would prohibit so-called securitization participants[4]—those who sell or facilitate the sale of an asset-backed security—from engaging in a transaction that would involve or result in a material conflict of interest with investors in that ABS. The prohibition would last for a year after the ABS’s first sale.

Further, as required by Section 621 in Dodd-Frank, the re-proposed rule provides exceptions for risk-mitigating hedging activities, bona fide market making, and certain liquidity commitments. Through these congressionally mandated exceptions, the rule would allow these market activities while targeting the conflicts that Congress identified.

Today’s re-proposed rule responds to public feedback on the 2011 proposal, as well as developments since then in the ABS market. For example, today’s re-proposal clarifies the scope of the prohibited conduct, the exceptions, and the participants subject to the proposal. We would benefit greatly from public comment to help us further evaluate these matters.

This re-proposed rule is designed to help address conflicts of interest arising with market participants taking positions against investors’ interests. That would benefit investors and our markets.

I’d like to thank members of the SEC staff who worked on this rule, including:

• Renee Jones, Erik Gerding, Betsy Murphy, Rolaine Bancroft, Luna Bloom, Steven Hearne, Deanna Virginio, Ben Meeks, Kayla Roberts, and Brandon Figg in the Division of Corporation Finance;
• Jessica Wachter, Juan Echeverri, Igor Kozhanov, Lucretia Zinnen, and Rebecca Orban in the Division of Economic and Risk Analysis;
• Dan Berkovitz, Megan Barbero, Meridith Mitchell, Malou Huth, Bryant Morris, Robert Teply, Janice Mitnick, and Joseph Valerio in the Office of the General Counsel;
• Carol McGee, Josephine Tao, Elizabeth Sandoe, Mick Riley, James Curley, Patrice Pitts, and Will Miller in the Division of Trading and Markets;
• Christine Schleppegrell and Adele Murray in the Division of Investment Management,
• Dave Sanchez, Adam Wendell, and Adam Allogramento in the Office of Municipal Securities;
• Amy Sumner in the Division of Enforcement; and
• John Brodersen, Carrie O’Brien, and Asen Parachkevov in the Division of Examinations.