New York, NY, March 28, 2023 – In a comment letter filed with the Securities and Exchange Commission (SEC) in response to its re-proposal on conflicts of interest in securitizations, SIFMA and SIFMA’s Asset Management Group (AMG) express appreciation for the SEC having taken their earlier feedback on the original proposal into account in drafting the newly proposed rule.  However, there remain many concerns with what the SEC has proposed and SIFMA and SIFMA AMG urge the SEC to consider comments received on the new proposal and revise the rule so that it does not hold such potential to damage the markets.

The proposed rule would implement Section 27B of the Securities Act of 1933, a provision added by Section 621 of the Dodd-Frank Act.  The rule is intended to prevent the sale of asset-backed securities (ABS) that are tainted by material conflicts of interest.  The SEC originally proposed a rule to implement Section 27B in September 2011.

“Securitization is a key component of long term, stable funding which supports consumer lending and provides investment diversification to investors,” said Chris Killian, managing director, securitization and corporate credit, at SIFMA.  “We believe the rule as proposed is overly broad and goes beyond the mandate of the statute, as it impacts not only those entities involved in a securitization, but also any of their affiliates, regardless of their nexus to or knowledge of the securitization activities.  We have serious concerns that the proposed rule could chill beneficial economy-supporting activity and impair banks’ risk management activities.  We believe the SEC should re-draft and repropose the rule to ensure it achieves the rulemaking mandate while also not harming the economy.”

“We appreciate the SEC’s focus on finalizing this rule, but we caution there is a need to ensure the rulemaking both mitigates conflicts and preserves the ability of asset managers to invest freely in securitized products on behalf of their clients,” said Lindsey Keljo, managing director, associate general counsel and head of SIFMA AMG.

In the letter, SIFMA and SIFMA AMG outline the ways in which the proposed rule could have far-reaching consequences on the economy.  The proposal:

• is both excessively broad and vague. It goes far beyond the scope of the mandate of Section 27B to address certain conflicts of interest between securitization participants and institutional investors;
• creates uncertainty about the ability of banks to manage their risks through the well-established mechanism of credit risk transfers conducted by special-purpose entities;
• threatens (whether intentionally or not) to disrupt very basic and commonplace components of, and activities within, the securitization market and broader corporate capital markets;
• is likely to cause major shifts in the composition of market participants as the inability of many institutions to comply with the rule may drive them to significantly curtail or discontinue their securitization activities; and
• will drive up the cost of funding for innumerable banks and other institutions that rely on securitization, and when such costs inevitably flow to consumers, will exacerbate the adverse economic effects of already rising interest rates.

SIFMA and SIFMA AMG further note that there was no regulatory emergency that warranted a proposed rule of such sweeping change, nor was there a regulatory emergency that warranted a 60-day comment period following a more than 10-year gap in activity related to this rulemaking.  The SEC should take whatever additional time is needed to develop and repropose an appropriate rule to implement Section 27B.

In addition, SIFMA filed a supplemental comment letter focused on issues that relate to the potential application of the proposed rule in the specific context of tender option bond (TOB) transactions. TOBs are a somewhat unique type of asset-backed securities (ABS) and the proposed rule would hinder their use with no clear regulatory benefit, and might actually add risk to TOB sponsors in the process.

Finally, SIFMA, along with several other organizations focused on all aspects of the municipal securities market, also filed a comment letter expressing concerns about the proposal’s potential impact on municipal issuers—state and local governmental entities—which mostly access the municipal market to finance critical infrastructure and community resources. These issuers could face unnecessary liability, cost, and compliance burdens if the proposal is enacted as drafted. The groups maintain their position that municipal securities should be broadly excluded from the definition of ABS and that issuers should be excluded from the proposal’s definition of securitization participants and ABS sponsors.

-30-

SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development.  SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).