Request for Public Comment Regarding Proposed Rule 192 “Conflicts of Interest Relating to Certain Securitizations” (SIFMA, SIFMA AMG and BPI)

Summary

SIFMA, SIFMA AMG, and Bank Policy Institute (BPI) provided additional comments to the U.S. Securities and Exchange Commission (SEC) on proposed Rule 192  under the Securities Act of 1933. When adopted in its final form by the Securities and Exchange Commission, Rule 192 will implement Section 27B of the Securities Act, which prohibits certain material conflicts of interest in securitizations, subject to the exceptions set forth therein.

Excerpt

June 27, 2023

VIA ELECTRONIC MAIL ([email protected])

Vanessa A. Countryman

Secretary

Securities and Exchange Commission

100 F Street NE

Washington, DC 20549-1090

Re: Request for Public Comment Regarding Proposed Rule 192

“Conflicts of Interest Relating to Certain Securitizations”

File Number S7-01-23

Dear Ms. Countryman:

The Securities Industry and Financial Markets Association (“SIFMA”),1 the Asset Management Group of SIFMA (“SIFMA AMG”)2 and the Bank Policy Institute (“BPI”)3 (collectively, the “Associations”) submit this letter to provide additional comments on proposed Rule 192 (the “Proposed Rule”) under the Securities Act of 1933 (the “Securities Act”). When adopted in its final form by the Securities and Exchange Commission (the “Commission”), Rule 192 will implement Section 27B of the Securities Act (“Section 27B”),4 which prohibits certain material conflicts of interest in securitizations, subject to the exceptions set forth therein.

On March 27, 2023, the Associations submitted a comment letter (the “First Associations Letter”) in response to the Proposed Rule which provided, among other things, the views of the Associations on the breadth and scope of the Proposed Rule as well as recommendations for limiting the scope of the Proposed Rule so that it is more narrowly tailored to prohibit material conflicts of interest between securitization participants and investors without unintentionally prohibiting transactions that are necessary to the functioning of the asset-backed securities market and do not constitute such a material conflict of interest. On the same date, SIFMA submitted a comment letter detailing specific concerns and recommendations for tender option bond (“TOB”) transactions (the “SIFMA TOB Letter”).

While we will not repeat the bulk of what was said in either of the First Associations Letter or the SIFMA TOB letter here, we restate the views expressed in those letters. This comment letter is not intended to replace or retract anything in the First Associations Letter or the SIFMA TOB letter. This letter is intended to provide mark-ups of the Proposed Rule on specific points requested orally by the Commission’s staff, and examples of how such revisions would work in practice. In this letter, we hope to present a mark-up of the Proposed Rule in a way that reflects our agreement with the Commission’s view and Congressional intent that (i) a securitization participant should not be able to “short” an asset-backed security that it helped create and (ii) the Proposed Rule should not prohibit transactions that are necessary to the functioning of the asset-backed securities market. We also recognize the Commission’s concerns of using information barriers, disclosure or requiring the Division of Enforcement to prove intent to achieve those objectives. Our mark-up of the Proposed Rule is reflective of and seeks to balance the above objectives and concerns.

It is vital to note that the provisions of the Proposed Rule are extremely interdependent. Changing or not changing one provision impacts changes to other provisions. Our mark-up reflects a holistic approach, and adopting one provision and not adopting another could potentially result in the above stated objective not being achieved. We have tried to highlight where such interdependencies exist. We encourage the Commission to raise any questions they may have on the mark-up of the Proposed Rule and encourage the Commission to consider re-proposal, rather than adoption, as the next step to avoid any unintended consequences.

EXECUTIVE SUMMARY

Our suggested changes to the regulatory text may be summarized as follows:

• We recommend setting a definitive start date of the prohibition;
• We recommend deleting the phrase “directly or indirectly” from section (a)(1) of the Proposed Rule;
• We recommend changing the “reasonable investor” test to a test that looks at whether a securitization participant is entering into a transaction that would benefit such securitization participant in a way that is materially adverse to the interests of an investor in the relevant asset-backed security;
• We propose two alternatives for the Commission to consider to address issues that arise with the inclusion of “affiliates and subsidiaries” in the definition of securitization participant;
• We recommend deleting the requirement that the risk-mitigating hedging exemption only applies to activities “arising out of” the securitization participant’s “securitization activities”;
• We suggest that synthetic securitizations should fall under the risk mitigating hedging exemption under most circumstances;
• We recommend changing the ongoing recalibration requirement of the risk-mitigating hedging exemption to a principles-based requirement that such activity is focused on risk reduction;
• We believe the initial distribution language should be deleted from the bona fide market-making activities exemption;
• We suggest an exemption of certain securitization formation activities;
• We suggest codifying that the long-standing practice of financing investors’ purchase of asset-backed securities is not a conflicted transaction;
• We suggest an exemption for transactions where long investor buys all securities (e.g., repacks);
• We suggest an exemption for TOBs;
• We suggest that the rules should exclude passive co-managers and other parties who have not had any influence over the composition of the asset pool or structure of the transaction from placement agent and sponsor definitions;
• We suggest that the rules should carve out long investors from “sponsor” definition;
• We suggest a definition of “synthetic asset-backed security”.

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1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).

2 SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.

3 The Bank Policy Institute is a nonpartisan public policy, research, and advocacy group, representing the nation’s leading banks and their customers. Our members include universal banks, regional banks, and the major foreign banks doing business in the U.S. Collectively, they employ almost two million Americans, make nearly half of the nation’s bank-originated small business loans, and are an engine for financial innovation and economic growth.

4 Section 27B was added to the Securities Act by Section 621 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).