Mar. 27, 2023
To whom it may concern, I am writing this to express my disapproval of this re-proposal. Gary Gensler claims that this proposal would protect investors from conflict of interest, and yet includes the very reasons as to how investors could be potentially exploited. “This re-proposed rule is designed to help address conflicts of interest arising with market participants taking positions against investors’ interests. Further, as required by Section 621 of the Dodd-Frank Act, the re-proposed rule provides exceptions for risk-mitigating hedging activities, bona fide market making, and certain liquidity commitments. These changes, taken together, would benefit investors and our markets.” - Gary Gensler If the rules that are "required" by section 621 were merely written by men to protect investors, then surely they can be unwritten just the same. Inclusion of risk-mitigating hedging activities, bona fide market making, and certain liquidity commitments could prove to be potentially harmful to investors. 1. Risk-mitigating hedging activities: This exception would allow securitizers to engage in hedging activities to reduce their risk exposure related to the securitization, but it could be exploited to engage in conflicted practices. For example, a securitizer could engage in hedging activities that benefit their own interests at the expense of investors in the securitization. 2. Bona fide market making: This exception would allow securitizers to make a market in the securities being securitized, which could be used to ensure liquidity and pricing stability in the market. However, it could also be used as a loophole to engage in conflicted practices. For example, a securitizer could artificially manipulate the market to benefit their own interests. 3. Certain liquidity commitments: This exception would allow securitizers to make certain commitments to provide liquidity in the event of market disruptions or other contingencies. While this is intended to ensure the stability of the securitization market, it could also be used as a loophole to engage in conflicted practices. For example, a securitizer could use this exception to avoid losses at the expense of investors in the securitization. To better express my concern, an article from Cadwalader provides insight into the issue of the definition of "sponsor" used in the proposal: The Re-Proposal creates ambiguity as to the role “bad intent” plays in “sponsor” status, particularly in the case of Contractual Right Sponsors and Non-Contractual Right Sponsors. Although the Re-Proposal states that sponsor status is based upon the function a person performs,[26] the Commission’s discussion suggests this may not be case if the person’s intention is to acquire a long position, rather than to select or direct the selection of assets the person believes will perform poorly. The Re-Proposal’s failure to acknowledge, on a consistent basis, the fundamental role “bad intent” plays in identifying the “material conflict of interest” transactions Section 27B was designed to prohibit is a recurring problem that causes certain portions of proposed Rule 192 to be both unclear as to scope and to sweep too broadly. The Re-Proposal’s suggestion that involvement in the selection of ABS assets will not result in “sponsor” status if the person’s intention is to acquire a long position in the ABS is helpful for ABS investors, such as “B-piece buyers” in CMBS issuances. However, to provide clarity to the market, we believe the contours of this exception should be expressly included in the proposed rule. Taking a look a the same article, the author goes on to explain some of the issues they found with the possible use of information barriers: The scope of the “sponsor” definition is particularly significant because of the broad definition of “affiliate” in the Re-Proposal, the current absence of information barriers and the proposed “catch-all” and “anti-circumvention” provisions discussed below In the case of Securitization Participants that are part of a large corporate group – as is often the case – the ability to rely upon information barriers appears to be essential to avoiding a host of problems that would arise from the adoption of proposed Rule 192. Ironically, the absence of an information barriers exception could have the counter-productive effect of requiring difficult-to-achieve interactions among affiliates that normally operate independently, including affiliates that operate outside the U.S. In the event proposed Rule 192 is revised to include an information barrier exception, the regulatory conditions relating to those barriers should not be unreasonably difficult for Securitization Participants to implement or depart significantly from approaches with which the Commission has been comfortable in other contexts. These select points were chosen to highlight the importance of providing clear definitions to all who are affected by this proposal. However, In order to fully understand the risks that this proposal introduces, the entirety of the article can be found on the Cadwalader website. Thank you, Investor