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Speech by SEC Chairman:
Opening Statement at SEC Open Meeting — Conflicts of Interest Relating to Certain Securitizations


Chairman Mary Schapiro

U.S. Securities and Exchange Commission

Washington, D.C.
September 19, 2011

Good Morning. This is an open meeting of the U.S. Securities and Exchange Commission on Sept. 19, 2011.

The Commission today will consider whether to propose a rule related to conflicts of interest in the structuring and offering of asset backed securities. It stems from Section 621 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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.

At the same time, the rule is not intended to interfere with traditional securitization practices in which loans are originated, packaged into asset-backed securities, and offered to investors in different structures.

In drafting the proposed rule, the staff considered several different types of conflicts that could occur with securitizations.

For instance, a firm might package an asset-backed security, sell that security to an investor, and then subsequently short the security to potentially profit as the investor incurs a loss.

Or a firm might allow a third party to help assemble an asset-backed security in a way that creates an opportunity for the third party to short the security and reap a profit.

The staff’s proposal addresses potential conflicts like these.

Consistent with the Dodd-Frank Act, the proposed rule would prohibit entities that create and distribute asset-backed securities from engaging in any transaction that would involve or result in a material conflict of interest with someone investing in the security. It would also apply to the entities’ affiliates and subsidiaries.

The rule also would provide exceptions for risk-mitigating hedging activities, as well as activity consistent with liquidity commitments and bona fide market-making.

As many already know, throughout our Dodd-Frank rule-writing process, we have welcomed public comments even before we propose a rule – and today’s proposal has benefited from that input.

Nevertheless, we continue to seek public comment regarding all aspects of this proposal. Among other things, we seek comment on the practical implications of the proposal for the markets, whether it achieves its stated objectives and on whether disclosure of a conflict should have any impact on the proposal.

The SEC has made significant progress in writing rules required by Dodd-Frank. Of the nearly 100 mandatory rulemaking provisions, the SEC has now proposed or adopted rules for about three-quarters of them.

And today’s proposal is just one of several rulemaking efforts aimed at addressing issues associated with asset-backed securities.

For instance, the Commission has adopted rules that require asset-backed security issuers to provide disclosures on the use of representations and warranties in the market for asset-backed securities.

We also have adopted rules that require issuers to conduct a review of the assets underlying those securities and disclose the nature of such review with respect to registered asset-backed offerings.

Together with other agencies, the SEC also has proposed rules that generally require the sponsor of asset-backed securities to retain no less than five percent of the credit risk of the underlying assets.

And in July, the Commission re-proposed some of the rules that we initially proposed pre-Dodd-Frank that related to the shelf registration of asset-backed securities.

I want to also note another initiative under the Dodd-Frank Act commonly referred to as the “Volcker Rule.” This rulemaking, which we anticipate proposing along with other financial regulatory agencies in the near future, will prohibit proprietary trading at certain financial entities affiliated with banks. Like Section 621, the Volcker Rule generally would permit risk mitigating hedging activities and market making. As such, we are also asking for comment regarding the interplay of the exceptions in today’s proposed rule with the similar exceptions that we expect to discuss in the Volcker Rule proposal.

Before I turn to the staff to provide a detailed discussion about the Division’s recommendation, I would like to thank Robert Cook, Jamie Brigagliano, Nathaniel Stankard, Catherine McGuire, Gregg Berman, Jack Habert, Josephine Tao, Liz Sandoe, Anthony Kelly, and Barry O’Connell for their long hours and hard work devoted to preparing the recommendation before us.

I also would like to thank their colleagues. In the Division of Corporation Finance: Paula Dubberly, Katherine Hsu, and David Beaning. From the Division of Enforcement: Jason Anthony and Jeffrey Leasure. In the Office of the General Counsel: Meredith Mitchell, David Blass, Paula Jenson, Janice Mitnick, and Bryant Morris. In the Division of Risk, Strategy, and Financial Innovation: Jennifer Marrietta-Westberg, Eric Carr, Stas Nikolova, and Chuck Dale.



Modified: 09/19/2011