Mar. 27, 2023
March 27, 2023 The following comments are provided by students participating in course BU 433 Financial Markets II in the School of Business and Computer Science, Caldwell University, Caldwell New Jersey. The comments are offered for informational purposes only and are not to be construed as to represent advocacy of any form. They are presented in the spirit of providing thoughts and insights into the issue and to provide these students their first opportunity to engage in the ongoing discourse around our financial markets. The student participants were Michael Brown-Cariola, Imogen Cook, Michael Costantini, Kevin DaCruz, Christopher Ferri, Ricky Gole, Matthew Hanzich, Michael Lorhmann, Eric McKenna, Tevin Skeete and Connor Woods. The Course Instructor was Frank SanPietro, PhD, CFP. The Instructor and Students wish to thank Virginia Rich, JD Dean of the School of Business and Computer Science for her support in their pursuit of this activity. The SEC's proposed implementation of the Prohibition Against Conflicts of Interest in Certain Securitizations rule, hereinafter referred to as the rule aims to ensure fairness and transparency in securities markets, with one of the ultimate goals being that of consumer protection. The regulation has several arguments supporting its introduction. Firstly, the rule will constrain situations and behaviors that may lead to conflicts of interest. This is aimed at reducing the moral hazard that led to excessive risky behaviors during previous periods of financial market instability. An important consequence of these constraints would be a better alignment between the interests of financial institutions and the public by reducing or eliminating the possibility of lower quality or so called tainted assets being offered to the public. In disallowing these sorts of transaction, the rule seeks to encourage sustainable behavior for securitization participants. The activities that were investigated by Congress or regulators regarding misconduct related to ABS issues during the 2008 financial crisis, would fall under the purview of the proposed change. Under the new rule, financial institutions would more accurately price the risk related to specific securitization, and thus avoid taking on the excess risk that was a catalyst to that crisis. By encouraging these ethical and sustainable practices, the benefits could extend beyond the activities under review and could offer benefits to the financial system. This would be evidenced in greater information sharing and dissemination. The rule provides for the creation of a new public database on ABS. It also directs that rating agencies increase their investor disclosure on their ratings methods. We note and appreciate the concerns of those that see additional regulation as being unnecessary, citing no major issues with the ABS market since the 2008 crisis. In fairness, setting aside the concerns over auto financing ABS in 2016, that is an accurate assertion. We would politely pose the question as to whether or not waiting until after there is a major crisis before implementing regulations to prevent the conditions that caused the crisis is a prudent course of action. Further, we note that the proposed rule is not overly restrictive, as it allows financial institutions to continue to engage in those activities that help them manage risk and sustain orderly markets for all participants. These include risk-mitigating hedging activities, bona fide market making, and specific liquidity commitments. In closing, we reiterate our belief that the rule as proposed will contribute to fairness and transparency in the financial system. It will introduce and encourage ethical and sustainable practices that will help to appropriately manage risk and provide reasonable protection for market participants and the public.