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March 29, 2023

Better Markets Supports SEC Proposal to Prohibit Outrageous Conflicts of Interest in ABS Market in Run Up to the 2008 Financial Crisis

Better Markets filed a comment letter in response to the Securities and Exchange Commission’s proposal prohibit conflicts of interest in certain securitizations as required by Section 621 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Why It Matters. Asset-backed securities (“ABS”), and in particular credit default swaps (“CDS”) and collateralized debt obligations (“CDOs”), played a prominent role in the events that led up to the Financial Crisis of 2008. The poorly regulated and poorly policed ABS market, operating in tandem with the unregulated derivatives market, helped to turn a housing crisis into a global financial crisis and the worst economic downturn since the Great Depression. Not only did ABS such as CDS and CDOs help to facilitate fraud and manipulation in the housing markets, they also became a breeding ground for significant fraud in ABS transactions, notwithstanding the mythology that market participants were capable of regulating and policing themselves.

What We Said. More than a dozen years have passed since Congress enacted the Dodd-Frank Act and mandated substantive reforms to the rules governing ABS transactions, including those required under Section 621. The proposal displays an appreciation and careful consideration of the comments submitted by the public, including Better Markets, on its 2011 proposed rule. For example, the Proposal includes important anti-evasion language as well as documentation requirements for demonstrating compliance with the exemptions for risk-mitigation hedging activities and bona fide market-making activities. The Proposal also refused to dilute the effectiveness of several provisions from the 2011 proposed rule, despite industry arguments for special carveouts and exemptions. Overall, the Proposal would faithfully carry out the Commission’s congressionally mandated duty to implement rules to prohibit conflicts of interest in securitization such as we saw in the lead up to the Financial Crisis of 2008.  It is time for the Commission to finally adopt this rule.

Bottom Line. Better Markets supports the Commission’s proposal to prohibit conflicts of interest in certain securitizations. The proposal is well-designed and there is no reason for further delay. It is well past time to finalize the rules to implement Section 621 and explicitly prohibit material conflicts of interest in certain securitizations, as a complement to the general anti-fraud provisions at the Commission’s disposal.

Read our full Comment Letter here or click the button below.

Comment Letters

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