Bloomberg News

SEC Proposes Conflict Ban in Asset-Backed Securities Sales

September 19, 2011

(Updates with Levin comments in fifth paragraph.)

Sept. 19 (Bloomberg) -- The U.S. Securities and Exchange Commission proposed barring bets against asset-backed securities by underwriters and securitization participants to root out conflicts of interest that might harm investors.

SEC commissioners voted 4-0 today to seek comment on a rule, required by the Dodd-Frank Act, that would restrict those who package or sponsor asset-backed securities from engaging in deals that put their interests in conflict with buyers for a year after the first closing of a sale.

“This rule is designed to ensure that those who create and sell asset-backed securities cannot profit by betting against those same securities at the expense of those who buy them,” SEC Chairman Mary Schapiro said before the vote in Washington. “The rule is not intended to interfere with traditional securitization practices.”

Goldman Sachs Group Inc. paid $550 million last year to settle SEC claims related to its marketing of collateralized debt obligations linked to subprime mortgages. The Wall Street investment firm acknowledged making a mistake in marketing materials and providing “incomplete information” after being accused of creating and selling the securities without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against them.

Carl Levin

The proposal is “hopefully an important step forward” for Wall Street reform, said Senator Carl Levin, the Michigan Democrat who pushed to include the rule in Dodd-Frank and led an examination of the Goldman Sachs case as chairman of the Senate’s Permanent Subcommittee on Investigations.

“It was as if a car dealer sold a car with bad brakes, then bought insurance that paid off when the car crashed,” Levin said in a statement after today’s vote. Goldman Sachs created “junk investments and sold that junk to their clients” while betting they would fail, said Levin, who sought a U.S. Justice Department review of his panel’s findings after releasing them on April 13.

Stephen Cohen, a Goldman Sachs spokesman, declined to comment on the SEC’s proposal.

The rule specifies the restriction should be in place for a year from the security’s sale date, and it would also apply to third parties working with the securities’ underwriters.

‘Adverse Impacts’

“We hope that the rules proposed by the SEC are crafted to eliminate these incentives without unintentionally prohibiting appropriate hedging, market-making and other legitimate transactions, and causing unnecessary adverse impacts on the markets for asset-backed securities,” Tom Deutsch, executive director of the New York-based American Securitization Forum, said in a statement.

The SEC’s proposal would provide exceptions for risk- mitigating hedging activities, as well as activity consistent with liquidity commitments and bona fide market-making, Schapiro said in her prepared remarks.

The rule, which will be open for a 90-day comment period, was supposed to be completed in April, according to the law. The SEC’s Dodd-Frank schedule lists it for final adoption between January and June next year.

--Editors: Gregory Mott, Lawrence Roberts

To contact the reporter on this story: Jesse Hamilton in Washington at

To contact the editor responsible for this story: Lawrence Roberts at

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