SEC Adopts Rule to Prohibit Conflicts of Interest in Certain Securitizations

SEC Implements Rule 192 to Safeguard Against Conflicts of Interest in Asset-Backed Securities

Washington D.C., Nov. 27, 2023 — The Securities and Exchange Commission (SEC) has adopted Securities Act Rule 192. This rule, designed to enforce Section 27B of the Securities Act of 1933, as introduced by Section 621 of the Dodd-Frank Act, is tailored to curtail conflicts of interest in certain securitizations.

A Crucial Safeguard: Rule 192 Overview

SEC Chair Gary Gensler expressed satisfaction in supporting this rule, emphasizing its alignment with Congress’s directive to address conflicts of interest within the securitization market—a market that played a pivotal role in the 2008 financial crisis. Rule 192 places a temporary embargo on securitization participants, preventing them from engaging, either directly or indirectly, in transactions that could result in material conflicts of interest with investors in the associated asset-backed securities (ABS).

Defining Conflicted Transactions

Under the purview of Rule 192, conflicted transactions encompass various activities, including the short sale of relevant ABS, the acquisition of a credit default swap or similar credit derivative entitling the securitization participant to receive payments based on specified credit events linked to the ABS, or transactions substantially mirroring the economic impact of the aforementioned activities. Notably, transactions solely hedging general interest rate or currency exchange risks are exempt.

Balancing Act: Exceptions for Risk Mitigation and Market Activities

Rule 192 incorporates exceptions in line with the Dodd-Frank Act, permitting securitization participants to engage in risk-mitigating hedging activities, bona fide market-making, and certain liquidity commitments. These exceptions are contingent upon meeting specified conditions, ensuring that essential risk management, liquidity commitment, and market-making activities can continue unabated.

Path to Implementation and Compliance

The adopting release for Rule 192 is accessible on and will also feature in the Federal Register. The rule is slated to take effect 60 days after its publication in the Federal Register. Compliance with Rule 192 becomes mandatory concerning any ABS, with the initial sale closing occurring 18 months post the Federal Register publication date.

This proactive measure by the SEC underlines its commitment to upholding market integrity and shielding investors from potential conflicts of interest, echoing lessons learned from past financial crises.

SEC Press Release

SEC Fact Sheet


Sallah Astarita & CoxRepresenting Advisors and Investors, Nationwide.
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