SEC takes new step to pass trader conflict rule introduced after 2008 crisis

Wall Street’s top regulator on Wednesday voted unanimously to introduce a rule barring traders in asset-backed securities from betting against the very assets they sell to investors, a behavior that has become infamous since the 2008 global financial crisis.

The rule is one of the last to be passed under Frank Wall Street’s historic Dodd Reform Act in 2010, according to SEC officials. The 2010 legislation aimed to address the root causes of the mortgage crisis. An earlier version of the conflict rule, first proposed in 2011, was never finalized.

The sweeping 2010 reforms, named after their sponsors Senator Chris Dodd of Connecticut and Representative Barney Frank of Massachusetts, aimed to protect investors and taxpayers by preventing risk and liability from accumulating in the financial system.

Among other things, the legislation contained financial stability measures regulating banks deemed “too big to fail” and created the Consumer Financial Protection Bureau.

The rule, re-proposed on Wednesday, is now subject to public comment, during which industry criticism of certain aspects of the proposal is likely to arise.

Years after Dodd-Frank was passed, Democratic lawmakers complained that the SEC missed the 270-day deadline to issue a rule implementing Dodd Frank’s section 621. When the SEC rule goes into effect, this section will prohibit traders from betting against asset-backed securities they have sold to investors.

According to SEC representatives, the rule prohibits such actions for up to a year after the sale of securities.

In comments posted ahead of the vote, SEC Chairman Gary Gensler said the rule would include exemptions for legal actions such as hedging to reduce risk, market commitments and liquidity commitments.

“Through these exceptions set by Congress, the rule will allow these market activities that target conflicts identified by Congress to be resolved,” Gensler said, adding that the latest version of the rule has been finalized based on public feedback.

But at a public hearing ahead of the meeting, Republican committee members expressed concern that the proposal, in its current form, could interfere with legitimate activities.

Traders who disclose rates that conflict with clients’ investments are still breaking the rule, the SEC said.

While not citing any prominent recent examples of such conflicts of interest in the asset-backed securities market, SEC officials said the conflict rule is necessary to remove the opportunity and incentive for such behavior.

In 2010, Goldman Sachs agreed to pay a record $550 million fine to clear allegations by the SEC that it had misled investors with a mortgage-backed investment vehicle known as Abacus.

A Senate investigation later detailed how, in successive transactions, Goldman sold mortgage-backed securities to investors, often without disclosing that the investment bank or others were making substantial bets that those assets would lose value, which they actually did. were calculated.

In a civil lawsuit filed by the SEC in 2014, Fabrice Turret, a mid-level Goldman trader, was ordered to pay $825,000 in fines and ill-gotten gains.

Goldman did not immediately respond to a request for comment on specific steps taken over the years to prevent such behavior.