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ARTICLE · 28 APRIL 2023

SEC's Proposed Conflicts Of Interest Rule May Impede Hedging

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Critics are warning that the SEC's recently proposed rule (the "Proposed Rule") prohibiting conflicts of interest in asset-backed securities (ABS) transactions may impede the ability...

United StatesFinance and Banking
Aaron Levy
Aaron Levy
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Critics are warning that the SEC's recently proposed rule (the "Proposed Rule") prohibiting conflicts of interest in asset-backed securities (ABS) transactions may impede the ability of financial institutions, broker-dealers and others to enter into interest rate hedges and other risk-mitigating transactions.

The Proposed Rule, issued in January, resurrects a prior 2011 SEC proposal that lay dormant for over a decade after facing substantial pushback from industry participants. The re-proposal has revived this controversy, with critics arguing it is overly broad in scope and may create unintended consequences for the broader market.

Statutory Requirement and Proposed Rule

Section 27B of the Securities Act of 1933, which was added by Section 621 of the Dodd-Frank Act, prohibits underwriters, placement agents, initial purchasers and sponsors of ABS and their affiliates from engaging in "any transaction that would involve or result in a material conflict of

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