SEC Proposes Revision of Rule That Will Reduce ABS Conflicts

The U.S. Securities and Exchange Commission has introduced a proposal in which bets made by securitization participants and underwriters against ABS, or asset-backed securities, that cause a conflict of interest will be barred. The hope is that this bar will prevent possible harm to investors that are caused by these conflicts of interest.

According to Investopedia, an asset-backed security is “a financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. For investors, asset-backed securities are an alternate to investing in corporate debt.” While an alternate to corporate debt investment can be appealing to investors, asset-backed securities are not without their risks.

On September 19, a 4-0 vote by SEC commissioners passed the decision to seek comment on a Dodd-Frank Act-required rule. The clarification of this rule 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,” according to Bloomberg Businessweek.

Last year, Goldman Sachs paid $550 million to settle SEC claims having to do with how it marketed collateralized debt obligations related to subprime mortgages. After being accused of failing to disclose that the securities Goldman Sachs had created and sold were also picked by hedge fund Paulson & Co. — who had then bet against the ABS — Goldman Sachs acknowledged that it provided “incomplete information” and made a mistake with its marketing materials.

The rule will undergo a 90-day comment period and its final adoption is scheduled for between January and June of 2012.

If you believe you may have invested in an asset-backed security that was subject to a bet that caused a conflict of interest, contact an investment attorney at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.