Prohibition Against Conflicts of Interest in Certain Securitizations

Federal RegisterDec 7, 2023

Ask Donna

What actually matters in this document.

Text

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-11254; File No. S7-01-23]

RIN 3235-AL04

Prohibition Against Conflicts of Interest in Certain Securitizations

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (“SEC” or “Commission”) is adopting a rule to implement Section 621 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) prohibiting an underwriter, placement agent, initial purchaser, or sponsor of an asset-backed security (including a synthetic asset-backed security), or certain affiliates or subsidiaries of any such entity, from engaging in any transaction that would involve or result in certain material conflicts of interest.

DATES:

Effective date:

This final rule is effective on February 5, 2024.

Compliance date:

See Section II.I.

FOR FURTHER INFORMATION CONTACT:

Brandon Figg, Special Counsel, or Kayla Roberts, Special Counsel in the Office of Structured Finance, Division of Corporation Finance at (202) 551-3850, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

We are adopting the following rule under 15 U.S.C. 77a

et seq.

(“Securities Act”):

Commission reference

CFR citation

(17 CFR)

General Rules and Regulations, Securities Act of 1933:

Rule 192

§ 230.192.

Table of Contents

I. Introduction

A. Background

B. Summary of the Proposed Rule

C. Summary of the Final Rule

II. Discussion of Rule 192

A. Scope: Asset-Backed Securities

1. Proposed Definition of Asset-Backed Security

2. Comments Received

3. Final Rule

B. Scope: Securitization Participants

1. Proposed Scope of Securitization Participants

2. Comments Received

3. Final Rule

C. Prohibition Timeframe

1. Proposed Prohibition Timeframe

2. Comments Received

3. Final Rule

D. Prohibition

1. Proposed Prohibition

2. Comments Received

3. Final Rule

E. Exception for Risk-Mitigating Hedging Activities

1. Proposed Exception

2. Comments Received

3. Final Rule

F. Exception for Liquidity Commitments

1. Proposed Approach

2. Comments Received

3. Final Rule

G. Exception for Bona Fide Market-Making Activities

1. Proposed Approach

2. Comments Received

3. Final Rule

H. Anti-Evasion

1. Proposed Rule

2. Comments Received

3. Final Rule

I. Compliance Date

III. Other Matters

IV. Economic Analysis

A. Introduction

B. Economic Baseline

1. Overview of the Securitization Markets

2. Affected Parties

3. Current Relevant Statutory Provisions, Regulations, and Practices

C. Broad Economic Considerations

D. Costs and Benefits

1. Benefits

2. Costs

E. Anticipated Effects on Efficiency, Competition, and Capital Formation

1. Competition

2. Efficiency

3. Capital Formation

F. Reasonable Alternatives

1. Changes to Scope of Definitions

2. Information Barriers

3. Changes to Exclusions

4. Conditions of the Exceptions

V. Paperwork Reduction Act

A. Summary of the Collections of Information

B. Summary of Comment Letters

C. Effects of the Final Rule on the Collections of Information

D. Aggregate Burden and Cost Estimates for the Final Rule

VI. Final Regulatory Flexibility Analysis

A. Need for, and Objectives of, the Final Rule

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Rule

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

Statutory Authority

I. Introduction

A. Background

On January, 25, 2023, the Commission proposed new Rule 192 to implement the prohibition in Securities Act Section 27B

(“Section 27B”),

which was added by Section 621 of the Dodd-Frank Act.

Section 27B(a) provides that an underwriter, placement agent, initial purchaser, or sponsor, or affiliates or subsidiaries of any such entity, of an asset-backed security (“ABS”), including a synthetic asset-backed security, shall not, at any time for a period ending on the date that is one year after the date of the first closing of the sale of the asset-backed security, engage in any transaction that would involve or result in any material conflict of interest with respect to any investor in a transaction arising out of such activity.

Section 27B(b) further requires that the Commission issue rules for the purpose of implementing the prohibition in Section 27B(a).

Section 27B(c) provides exceptions from the prohibition in Section 27B(a) for certain risk-mitigating hedging activities, liquidity commitments, and bona fide market-making activities.

15 U.S.C. 77z-2a.

Prohibition Against Conflicts of Interest in Certain Securitizations,

Release No. 33-11151 (Jan. 25, 2023) [88 FR 9678 (Feb. 14, 2023)] (“Proposing Release” or “proposed rule”). In Sept. 2011, the Commission proposed a rule designed to implement Section 27B, but no further action was taken on that proposal.

See Prohibition against Conflicts of Interest in Certain Securitizations,

Release No. 34-65355 (Sept. 19, 2011) [76 FR 60320 (Sept. 28, 2011)].

Sec. 621, Public Law 111-203, 124 Stat. 1376, 1632.

15 U.S.C. 77z-2a(a).

15 U.S.C. 77z-2a(b).

15 U.S.C. 77z-2a(c).

B. Summary of the Proposed Rule

Proposed Rule 192 would implement the prohibition in Securities Act Section 27B(a) and, consistent with Section 27B(c), provide exceptions from the prohibition for certain risk-mitigating hedging activities, liquidity commitments, and bona fide market-making activities.

The proposal was intended to target transactions that effectively represent a bet against a securitization and focus on the types of transactions that were the subject of regulatory and Congressional investigations following the financial crisis of 2007-2009.

See

Proposing Release Section II.

See

Proposing Release Section I.

In response to the Proposing Release, the Commission received over 900 comment letters from a variety of commenters, including institutional investors, issuers, and various other market participants, professional, policy, and trade associations, Members of Congress, former Federal Government officials, academics, and unaffiliated individuals.

Commenters generally supported the Commission's statutorily-mandated goal of protecting investors by preventing the sale of ABS tainted by material conflicts of interest,

but many commenters expressed concern that the scope of the proposed rule was overly broad and could have unintended consequences on securitization markets as a whole.

While acknowledging that adopting a rule to address conflicts of interest in securitizations is still appropriate, some commenters also stated that the rule as proposed was not appropriately balanced to the current state of securitization markets in light of the evolution of those markets since the enactment of the Dodd-Frank Act.

Section 27B mandates that the Commission issue rules with regard to conflicts of interest in securitizations. While we recognize that securitization markets have evolved in the years since the financial crisis of 2007-2009, we continue to believe that the adopted rule is necessary to prevent the resurgence of the types of transactions that were prevalent leading up to that time.

Additionally, we believe that the changes we have made in response to comments regarding the breadth of the proposed rule, which are discussed in detail below, take into account the current state of securitization markets, while still providing strong investor protection against material conflicts of interest in securitization transactions. As discussed in greater detail below, many commenters sought clarification or limitations with respect to the types of transactions and financial products that would be subject to the rule,

as well as the activities of various market participants that would or would not result in such entities being securitization participants subject to the final rule.

Many commenters also expressed concerns that the proposed commencement point of the prohibition timeframe was insufficiently clear to allow market participants to conform their activities for compliance with the rule.

Most significantly, commenters expressed general opposition to the proposed definition of “conflicted transaction” as overly broad and stated that it would unnecessarily capture a wide range of activities that are essential to the functioning and issuance of ABS and the routine risk management of securitization participants.

Commenters also requested that the final rule include an alternative materiality standard

and an “anti-evasion” provision rather than the “anti-circumvention” provision that was proposed.

Some commenters also requested that the final rule include a foreign transaction safe harbor to provide clarity with respect to the rule's cross-border application.

Finally, the Commission received comments suggesting certain revisions to the proposed exceptions for risk-mitigating hedging activities, liquidity commitments, and bona fide market-making activities.

As we discuss in greater detail below, we have made certain revisions in response to the comments received.

Comment letters received by the Commission are available on our website at

https://www.sec.gov/comments/s7-01-23/s70123.htm.

The comment period for the Proposing Release was open for 60 days from issuance and publication on

SEC.gov

and ended on Mar. 27, 2023. Several commenters said that the comment period was insufficient.

See, e.g.,

letters from American Investment Council dated Mar. 27, 2023 (“AIC”); Investment Company Institute dated Mar. 27, 2023 (“ICI”); National Association of Bond Lawyers et al. dated Mar. 27, 2023 (“NABL et al.”); U.S. Representatives Ann Wagner and Bill Huizenga dated Mar. 24, 2023 (“Representatives Wagner and Huizenga”); U.S. Senator John Kennedy dated Mar. 30, 2023 (“Senator Kennedy”). In stating that the comment period was insufficient, some commenters requested an extension (

see, e.g.,

letters from Alternative Investment Management Association and Alternative Credit Council dated Mar. 27, 2023 (“AIMA/ACC”); Association for Financial Markets in Europe dated Mar. 27, 2023 (“AFME”); American Property Casualty Insurance Association et al. dated Feb. 16, 2023 (“APCIA et al.”); Loan Syndications and Trading Association dated Mar. 1, 2023 (“LSTA I”)) and others indicated that they would submit multiple comment letters, some of which were received after the close of the comment period (

see

letters from Loan Syndications and Trading Association dated Mar. 27, 2023 (“LSTA II”); Loan Syndications and Trading Association dated May 2, 2023 (“LSTA III”); Loan Syndications and Trading Association dated Oct. 30, 2023 (“LSTA IV”); Managed Funds Association dated May 16, 2023 (“MFA II”); Structured Finance Association dated July 13, 2023 (“SFA II”); Securities Industry and Financial Markets Association, the Asset Management Group of SIFMA, and the Bank Policy Institute dated June 27, 2023 (“SIFMA II”). Some commenters requested that the Commission re-propose the rule after reviewing the comment letters.

See

letters from American Bar Association dated Apr. 5, 2023 (“ABA”); Andrew Davidson Co. dated Mar. 27, 2023 (“Andrew Davidson”); LSTA III; Securities Industry and Financial Markets Association, the Asset Management Group of SIFMA, and the Bank Policy Institute dated Mar. 27, 2023 (“SIFMA I”). Also, after the close of the comment period, one commenter submitted a letter referencing several of the Commission's proposals and stating that the number of outstanding proposals, together with insufficient time to respond, operated to deprive the public of the ability to meaningfully comment on all of the proposals.

See

letter from Managed Funds Association dated July 24, 2023 (“MFA III”). We have considered comments received since the issuance of the proposed rule, including those received after Mar. 27, 2023, and do not believe an extension of the comment period or a re-proposal of the rule is necessary.

See, e.g.,

letters from ABA; Americans for Financial Reform Education Fund dated June 7, 2023 (“AFR”); Better Markets dated Mar. 27, 2023 (“Better Markets”); Structured Finance Association dated Mar. 27, 2023 (“SFA I”).

See, e.g.,

letters from ABA, CRE Finance Council dated Mar. 27, 2023 (“CREFC I”); ICI; Arch Capital Group Ltd., Enact Holdings Inc., Essent Group Ltd., MGIC Investment Corporation, NMI Holdings, Inc., and Radian Group Inc. dated Mar. 27, 2023 (“PMI Industry I”); SFA I; SIFMA I.

See, e.g.,

letters from ABA; SIFMA I. These commenters cited the following as examples of the changes in securitization markets in that time period: the adoption and implementation of 17 CFR 246 (“Regulation RR”), 17 CFR 255 (“the Volcker Rule”), rules regulating swaps and security-based swaps, and changes in the regulation of nationally recognized statistical rating organizations (“NRSROs”) to enhance transparency and address conflicts of interest in connection with the issuance of ABS.

See, e.g.,

Wall Street and The Financial Crisis: Anatomy of a Financial Collapse, Majority and Minority Staff Report, Permanent Subcommittee on Investigations, United States Senate (Apr. 13, 2011) (“Senate Financial Crisis Report”).

See

Section II.A.

See

Section II.B.

See

Section II.C.

See

Section II.D.

See

Section II.D.3.d.

See

Section II.H.

See

Section II.A.3.c.

See

Sections II.E. through II.G.

C. Summary of the Final Rule

New Rule 192 implements Section 27B to the Securities Act. Fundamentally, the rule is intended to prevent the sale of ABS that are tainted by material conflicts of interest by prohibiting securitization participants

from engaging in certain transactions that could incentivize a securitization participant to structure an ABS in a way that would put the securitization participant's interests ahead of those of ABS investors. By focusing on transactions that effectively represent a “bet” against the performance of an ABS, Rule 192 will provide strong investor protection against material conflicts of interest in securitization transactions while not unduly hindering routine securitization activities that do not give rise to the risks that Section 27B is intended to address.

The definition of “securitization participant” for purposes of new Rule 192 includes a sponsor, underwriter, placement agent, initial purchaser, and certain affiliates and subsidiaries of such entities, as discussed in detail in Section II.B.

To achieve these objectives, Rule 192:

•

Prohibits, for a specified period, a securitization participant from engaging in any transaction that would result in a material conflict of interest between the securitization participant and an investor in the relevant ABS.

A securitization participant may not, for a period beginning on the date on which

such person has reached an agreement to become a securitization participant with respect to an ABS and ending on the date that is one year after the date of the first closing of the sale of such ABS,

directly or indirectly engage in any transaction that would involve or result in a material conflict of interest between the securitization participant and an investor in such ABS. Under the final rule, such transactions are “conflicted transactions” and include (i) engaging in a short sale of the relevant ABS, (ii) purchasing a credit default swap or other credit derivative that entitles the securitization participant to receive payments upon the occurrence of specified credit events in respect of the ABS, or (iii) purchasing or selling any financial instrument (other than the relevant ABS) or entering into a transaction that is substantially the economic equivalent of the aforementioned transactions, other than, for the avoidance of doubt, any transaction that only hedges general interest rate or currency exchange risk.

Transactions unrelated to the idiosyncratic credit performance of the ABS, such as reinsurance agreements, hedging of general market risk (such as interest rate and foreign exchange risks), or routine securitization activities (such as the provision of warehouse financing or the transfer of assets into a securitization vehicle) are not “conflicted transactions” as defined by the rule, and thus are not subject to the prohibition in 17 CFR 230.192(a)(1) (“Rule 192(a)(1)”);

See

Section II.C.

See

Section II.D.

Id.

•

Defines the persons that are subject to the rule.

A securitization participant includes any underwriter, placement agent, initial purchaser, or sponsor of an ABS (each as defined by 17 CFR 230.192(c) (“Rule 192(c)”) and also includes any affiliate or subsidiary that acts in coordination with an underwriter, placement agent, initial purchaser, or sponsor or that has access to, or receives information about, the relevant ABS or the asset pool underlying or referenced by the relevant ABS prior to the first closing of the sale of the relevant ABS. The final rule includes functional definitions for the terms “underwriter,” “placement agent,” “initial purchaser,” and “sponsor,” which are based on the person's activities in connection with a securitization and are generally based on existing definitions of such terms under the Federal securities laws and the rules thereunder.

The definition of “sponsor” in the final rule excludes: (i) a person that acts solely pursuant to such person's contractual rights as a holder of a long position in the ABS; (ii) any person that performs only administrative, legal, due diligence, custodial, or ministerial acts related to the structure, design, assembly, or ongoing administration of an ABS or the composition of the underlying pool of assets;

and (iii) the United States or an agency of the United States with respect to any ABS that is fully insured or fully guaranteed as to the timely payment of principal and interest by the United States;

Rule 192(c) also defines “distribution” as used in the definition for “underwriter” and “placement agent.”

See

Section II.B.

As discussed in greater detail below, this exclusion includes accountants, attorneys, and credit rating agencies with respect to the creation and sale of an ABS and the activities customarily performed by trustees, custodians, paying agents, calculation agents, and other contractual service providers, including servicers.

See

Section II.B.3.b.iii.

As discussed in greater detail below, we are not adopting proposed paragraph (ii)(B) of the “sponsor” definition, which would have captured any person that directs or causes the direction of the structure, design, or assembly of an asset-backed security or the composition of the pool of assets underlying the asset-backed security.

See

Section II.B.3.b.ii. We are also not adopting the proposed exclusion from the definition of “sponsor” for the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac” and, together with Fannie Mae, the “Enterprises”) while operating under the conservatorship or receivership of the Federal Housing Finance Agency (“FHFA”) with capital support from the United States with respect to any ABS that is fully insured or fully guaranteed as to the timely payment of principal and interest by such entity.

See

Section II.B.3.b.iv.

•

Defines asset-backed securities that are subject to the prohibition.

Under the final rule, an “asset-backed security” subject to the prohibition is defined, consistent with Section 27B, to include asset-backed securities as defined in Section 3 of the Exchange Act of 1934 (“Exchange Act”)

and also includes synthetic ABS and hybrid cash and synthetic ABS;

15 U.S.C. 78a

et seq.

For purposes of this rule, we use the term “cash ABS” to refer to ABS where the underlying pool consists of one or more financial assets. We use the term “hybrid cash and synthetic ABS” to refer to ABS where the underlying pool consists of one or more financial assets as well as synthetic exposure to other assets.

See

Section II.A.

•

Provides exceptions to the prohibition for risk-mitigating hedging activities, liquidity commitments, and bona fide market-making activities.

These exceptions, which are specified in Section 27B, permit certain market activities, subject to satisfaction of the specified conditions, that would otherwise be prohibited by the rule;

See

Sections II.E. through II.G.

•

Addresses evasion of the exceptions.

Under 17 CFR 230.192(d) (“Rule 192(d)”), if a securitization participant engages in a transaction or series of related transactions that, although in technical compliance with the exception for risk-mitigating hedging activities, liquidity commitments, or bona fide market-making activities, is part of a plan or scheme to evade the prohibition in Rule 192(a)(1), that transaction or series of related transactions will be deemed to violate the prohibition;

and

See

Section II.H.

•

Provides a safe harbor for certain foreign transactions.

Pursuant to 17 CFR 192(e) (“Rule 192(e)”), the prohibition will not apply to an asset-backed security if it is not issued by a U.S. person (as defined in 17 CFR 902(k) (“Rule 902(k) of Regulation S”) and the offer and sale of the asset-backed security is in compliance with 17 CFR 203.901 through 905 (“Regulation S”).

See

Section II.A.3.c.

We discuss in greater detail below the securitization transactions and participants subject to Rule 192's prohibition, the timeframe during which the prohibition applies, the types of transactions that are prohibited by Rule 192 and the related exceptions, and the compliance date by which securitization participants must conform their activities with the requirements of the final rule. As adopted, Rule 192 will complement the existing federal securities laws that specifically apply to securitization, as well as the general anti-fraud and anti-manipulation provisions of the Federal securities laws,

by explicitly protecting ABS investors against material conflicts of interest.

See, e.g.,

Section 17(a) of the Securities Act of 1933 (15 U.S.C. 77q), Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78j) and 17 CFR 240.10b-5.

II. Discussion of Rule 192

A. Scope: Asset-Backed Securities

1. Proposed Definition of Asset-Backed Security

The Commission proposed to prohibit a securitization participant, for a specified period of time with respect to an asset-backed security, from engaging in any transaction that would involve or result in a material conflict of interest between such securitization participant and an investor in such asset-backed security. Consistent with Section 27B, the Commission proposed that the term “asset-backed security” would include ABS as defined in Section 3 of the

Exchange Act

(“Exchange Act ABS”) (which encompasses both registered and unregistered offerings), as well as synthetic ABS and hybrid cash and synthetic ABS.

The Commission did not propose a definition of “synthetic ABS” due to concerns that any such definition could be potentially overinclusive or underinclusive, and that a securitization participant might attempt to evade the prohibition by structuring transactions around a particular definition, despite creating a product that is substantively a synthetic ABS, as that term is commonly understood in the market.

17 U.S.C. 78c(a)(79). An Exchange Act ABS is defined as “a fixed-income or other security collateralized by any type of self-liquidating financing asset (including a loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset . . .”

See

Proposing Release Section II.A.

See

Proposing Release Section II.A.

2. Comments Received

Commenters generally supported the proposal to define “asset-backed security” for purposes of Rule 192 to include Exchange Act ABS, synthetic ABS, and hybrid cash and synthetic ABS,

though several commenters requested additional clarification regarding certain types of financial products and securities,

or that certain securities be excluded from the definition,

which we discuss in greater detail below. With respect to the proposed rule's inclusion of Exchange Act ABS in the definition of ABS, commenters generally supported the decision to incorporate the Exchange Act definition,

with some agreeing that market participants are familiar with analyzing whether a given security meets the definition and that there is common market understanding of whether Commission rules that use the Exchange Act ABS definition apply to them.

Other commenters disagreed, however, stating that it remains unclear to them whether certain securities would be captured by the definition as proposed.

Additionally, several commenters requested that the final rule include definitions for “synthetic ABS”

and “hybrid cash and synthetic ABS”

to provide clarity regarding the scope of transactions that are subject to the prohibition in Rule 192. The Commission also received comments suggesting that we adopt a safe harbor for ABS transactions offered and sold outside of the United States.

Finally, while some commenters agreed that Rule 192's prohibition should not be limited to ABS transactions that are intentionally “designed to fail,”

others expressed the view that Section 27B targets only ABS that are intentionally “designed to fail.”

See, e.g.,

letters from ABA; AFR; Better Markets; ICI.

See, e.g.,

letters from ABA (seeking,

e.g.,

clarification with respect to reliance on existing guidance regarding a transaction's status as an asset-backed security); NABL et al. (indicating confusion regarding whether certain municipal securities are Exchange Act ABS); PMI Industry I (seeking clarification that mortgage insurance-linked notes are not synthetic ABS).

See, e.g.,

letters from AFME (urging that the final rule include a safe harbor for ABS transactions that are not offered or sold to U.S. investors as part of the primary issuance); National Association of Health and Educational Facilities Finance Authorities dated Mar. 27, 2023 (“NAHEFFA”) (requesting that single-asset conduit bonds be excluded from the definition of asset-backed security); NABL et al. (requesting that municipal securities be excluded from the definition of asset-backed security); SIFMA I (requesting that the Commission exclude corporate debt, insurance products, and Section 4(a)(2) private placement transactions from the definition of asset-backed security).

See, e.g.,

letters from ABA; ICI; SIFMA I.

See, e.g.,

letters from ABA; ICI. For example, one commenter expressed the view that common market understanding is that investment funds registered under the Investment Company Act of 1940 do not issue ABS and that their securities are not considered Exchange Act ABS.

See

letter from ICI. Whether such securities are Exchange Act ABS will depend on the characteristics and structure of the security.

See, e.g.,

letters from NAHEFFA; NABL et al.

See

letters from ABA; AFME; AIMA/ACC; ICI; SFA I; SFA II; SIFMA I; SIFMA II.

See

letter from AIMA/ACC.

See, e.g.,

letters from ABA; AFME; AIC; SFA I; SFA II; SIFMA I; SFA II.

See

letters from AFR; Better Markets.

See, e.g.,

letters from AIC; American Securities Association dated Mar. 23, 2023 (“ASA”).

3. Final Rule

We are adopting, as proposed, a definition of “asset-backed security” for purposes of the prohibition in Rule 192(a)(1). As discussed below, under the final rule, “asset-backed security” will be defined to mean an Exchange Act ABS, a synthetic ABS, and a hybrid cash and synthetic ABS.

Rule 192, therefore, will apply to offerings of asset-backed securities as defined in Rule 192(c), regardless of whether the offerings are registered or unregistered. Consistent with the proposal, we are not adopting a definition for “synthetic ABS” or “hybrid cash and synthetic ABS.” In response to comments received, final Rule 192 includes a safe harbor for certain foreign securitizations, which is discussed in greater detail in Section II.A.3.c. Finally, Rule 192 does not require that an ABS was intentionally “designed to fail” for the ABS to be subject to the prohibition against engaging in conflicted transactions. Section 27B does not contain language referencing an intent element and provides, in relevant part, that securitization participants “of an asset-backed security . . . shall not . . . engage in any transaction that would involve or result in any material conflict of interest.”

The statutory text refers plainly to asset-backed securities (as defined in Section 3 of the Exchange Act and including synthetic ABS); it does not indicate that the ABS must have been intentionally designed to fail to be subject to the prohibition. As discussed below, further narrowing the scope in this way could reduce the effectiveness of the rule to prophylactically prevent these types of material conflicts of interest with investors.

This, in turn, would frustrate the statutory mandate of Section 27B.

17 CFR 230.192(c).

15 U.S.C. 77z-2a(a).

See also

Sections II.B.3. and II.D. for additional discussions about why the final rule does not include a knowledge- or intent-based standard for securitization participants or conflicted transactions.

a. Exchange Act ABS

Section 27B imposes a prohibition on transactions that would involve or result in a material conflict of interest,

i.e.,

a conflicted transaction under 17 CFR 230.192(a)(3) (“Rule 192(a)(3)”), and specifies that the prohibition applies to Exchange Act ABS. As a general matter, asset-backed securities differ from other types of securities because the securities are issued by a special purpose entity that has no business activities other than holding or owning the assets supporting the ABS and other activities reasonably incidental thereto.

As specified in the Exchange Act ABS definition, an asset-backed security is a security collateralized by any “self-liquidating financial asset.”

See

Section III.A.2. of

Asset-Backed Securities,

Release No. 33-8518 (Dec. 22, 2004) [70 FR 1506 (Jan. 7, 2005)] (“2004 Regulation AB Adopting Release”).

17 U.S.C. 78c(a)(79).

The Commission received various comments requesting clarification about whether certain products and securities would be captured by the Rule 192 ABS definition and further requesting that, for the avoidance of doubt, certain products and securities be exempt from the definition.

For example, several

commenters requested that the rule exempt certain municipal securities from being ABS subject to the prohibition in 17 CFR 230.192(a) (“Rule 192(a)”).

These commenters generally stated that certain municipal securities, including single-asset conduit bonds,

are structured and sold to achieve certain policy goals for the benefit of the government entity's citizens and that municipal issuers of such securities are subject to strict investment policies and federal and state statutes that limit their ability to engage in speculative investments, making it unlikely that relevant securitization participants could engage in conflicted transactions, therefore rendering the application of Rule 192 to municipal transactions unnecessarily burdensome.

Municipal securitizations that are collateralized by any type of self-liquidating financial asset and that allow the holder of the security to receive payments that depend primarily on the cash flow from such self-liquidating financial asset fall within the Exchange Act ABS definition. While it may be the case, as discussed above, that a municipal issuer is subject to restrictions that may limit their ability to engage in conflicted transactions, other parties to the securitization may not be subject to such restrictions and would therefore have the opportunity to engage in transactions that bet against the municipal ABS. For example, as one commenter stated, persons involved in municipal securitizations, such as the underwriter, may enter into swaps to mitigate risk associated with the security.

Such swaps or other transactions could be conflicted transactions if they meet the definition in Rule 192(a)(3).

We see no reason, therefore, why municipal securities that meet the definition of Exchange Act ABS (and are consequently subject to other federal securities laws), and which, like other Exchange Act ABS, involve securitization participants, such as an underwriter, that would have an opportunity to engage in conflicted transactions, should be exempted from the definition of ABS—and, thus, the prohibition against conflicts of interest—for purposes of this rule.

As discussed in greater detail below, one commenter stated that it was unclear whether certain municipal securities meet the definition of Exchange Act ABS. We also note that municipal market participants are already required to analyze whether such a security meets the Exchange Act ABS definition and whether other Commission rules implementing various provisions of the Dodd-Frank Act that use the Exchange Act ABS definition, such as Regulation RR, 17 CFR 240.15Ga-1(a) (“Exchange Act Rule 15Ga-1”), and

17 CFR 240.17g-7(a)(1)(ii)(N) (“Exchange Act Rule 17g-7”) are applicable.

See

Proposing Release Section II.A.

See also

Section IV.A.D.6 of

Credit Risk Retention,

Release No. 34-70277 (Aug. 28, 2013) [78 FR 57928 (Sept. 20, 2013)] (“RR Proposing Release”) (explaining why an exemption from risk retention for securitizations of tax lien-backed securities sponsored by municipal entities was not proposed) and

Credit Risk Retention,

Release No. 34-73407 (Oct. 22, 2014) [79 FR 77602 (Dec. 24, 2014)] (“RR Adopting Release”) at 77661 (adopting certain provisions that apply to municipal tender option bonds) and 77680 (explaining why separate loan underwriting criteria for single borrower or single credit commercial mortgage transactions were not adopted). Because participants in this market are already required to consider whether a municipal security meets the definition of Exchange Act ABS to determine whether such offering must comply with other rules and regulations adopted under the Securities Act and Exchange Act, we believe that concerns relating to burdens associated with determining whether or not a municipal security is an Exchange Act ABS for purposes of compliance with Rule 192 will be mitigated.

See, e.g.,

letters from ASA; NABL et al.; NAHEFFA; SIFMA I; Wulff, Hansen & Co. dated Apr. 14, 2023 (“Wulff Hansen”).

See also

Section II.B. for a discussion of comments received related to municipal issuers and the definition of “sponsor” in the final rule.

As described by one commenter, a single-asset conduit bond is a tax-exempt bond issued by state and local governments for the benefit of tax-exempt organizations (as defined under Section 501(c)(3) of the Internal Revenue Code). The proceeds of the bond issuance are used to make a single loan to a single 501(c)(3) borrower, such as a hospital, higher education institution, provider of housing for elderly or low-income populations, museum, or other non-profit entity. The government issuer assigns the loan agreement to the bond trustee, which receives the borrower's loan payments (which mirror the government issuer's payment obligations on the bond) and makes those payments to the bondholders.

See

letter from NAHEFFA.

See, e.g.,

letters from ASA; NABL et al.; NAHEFFA; letter from National Association of Municipal Advisors dated Mar. 31, 2023 (“NAMA”); SIFMA I.

See

letter from ASA.

See

Section II.D.

See

Section II.B.3.b. for a discussion of the definition of a “securitization participant” with respect to municipal securitizations.

With respect to single-asset conduit bonds, one commenter stated that the market (both municipal and non-municipal) does not consider a conduit bond backed by a single loan to be an asset-backed security.

This commenter further stated that, by referencing Exchange Act ABS instead of the definition of ABS included in Regulation AB, the Commission was using a broader definition and “eliminating” the requirement that an asset-backed security include a “pool”

of financial assets.

The commenter described this as a “novel application” of the Exchange Act ABS definition.

We disagree with the commenter's characterization of the proposed definition. Section 27B, which was added by Section 621 of the Dodd-Frank Act, specifically states that the prohibition shall apply to ABS as defined in Section 3 of the Exchange Act, and the definition in Section 3 was added by Section 941 of the Dodd-Frank Act. Defining “asset-backed security” for purposes of Rule 192 by referencing Exchange Act ABS, therefore, is consistent with Section 27B. As the Commission has previously stated, an ABS that is backed by a single obligation would meet the definition of Exchange Act ABS.

Therefore, referring to Exchange Act ABS in identifying the types of ABS subject to the final rule is consistent with Section 27B and the inclusion of single-asset conduit bonds that meet the definition of Exchange Act ABS is consistent with our prior interpretation of both definitions.

Moreover, if we were to adopt an exemption for transactions collateralized by a single, self-liquidating asset, it would provide the opportunity for securitization participants to structure offerings as a series of transactions that would serve to evade the rule. For these reasons, we decline to include such an exemption from the definition of “asset-backed security.”

See

letter from NAHEFFA.

The definition of “asset-backed security” in Regulation AB Item 1101(c) (“Regulation AB ABS”), which was adopted for the limited purpose of identifying an ABS that is eligible for the specialized registration and reporting regime under Regulation AB, defines an “asset-backed security,” in relevant part, as a security that is primarily serviced by the cash flows of a “discrete pool of receivables or other financial assets. . .”

See

17 CFR 229.1101(c). Additionally, the word “pool” in the Regulation AB ABS definition does not require that the ABS be collateralized by more than one asset. Instead, it is part of the phrase “discrete pool” in the definition, which indicates the general absence of active pool management, and emphasizes the self-liquidating nature of pool assets.

See, e.g.,

Section III.A.2. of 2004 Regulation AB Adopting Release.

See

letter from NAHEFFA.

Id.

See, e.g.,

Section V.B.2. of the RR Adopting Release (explaining why separate loan underwriting criteria for single borrower or single credit commercial mortgage transactions were not adopted) and Section IV.D.6. of RR Proposing Release (explaining why an exemption from risk retention for securitizations of tax lien-backed securities sponsored by municipal entities was not proposed).

See also

Proposing Release Section II.A., n. 31 (stating that an ABS that is backed by a single asset or one or more obligations of a single borrower (often referred to as “single asset, single borrower” or “SASB” transactions) meets the definition of an Exchange Act ABS).

Analyzing whether a municipal single-asset conduit bond is an ABS entails a consideration of the nature of the activities of the issuing entity. For example, if the issuing entity is authorized to extend credit or make loans and it engages in activities in addition to holding or owning the underlying single obligation supporting the bonds, or in addition to other activities reasonably incidental to holding or owning the underlying obligation, the securities it issued will not be an ABS.

One commenter suggested that we exclude direct private placement transactions exempt from registration under Section 4(a)(2) of the Securities Act,

stating that the ABS purchasers in such transactions are highly sophisticated investors that participate directly in nearly all phases of the

structuring and creation of the ABS.

The commenter stated that such investor involvement renders the risk of a securitization participant entering into a separate transaction that gives rise to a material conflict of interest very low.

As discussed in the Proposing Release, and as we continue to believe, even if an investor is involved in asset selection or has access to information about those assets, such investor may not be aware of the involvement of other parties, nor does the participation of one investor in asset selection necessarily protect any other investors in the ABS.

We see no reason why investors in ABS sold in a Section 4(a)(2) private offering should not receive the protections provided by Section 27B that are available to all investors. Rather, excluding these transactions would place the burden on investors to confirm or otherwise negotiate for transaction terms to require that securitization participants not engage in bets against the ABS. Furthermore, excluding transactions that rely on Section 4(a)(2) would also result in excluding from the rule ABS sold to an initial purchaser in furtherance of resales in compliance with Securities Act Rule 144A.

As a result, purchasers of that ABS in the immediately subsequent Rule 144A transaction would not benefit from the protections afforded by the rule. Consequently, we believe that such an exclusion to the ABS definition would not be appropriate. Therefore, any securities that meet the definition of “asset-backed security,” as adopted for purposes of Rule 192, will be subject to the prohibition in Rule 192(a), whether registered or unregistered.

15 U.S.C. 77d. Section 4(a)(2) permits, without registration, the offer and sale of securities that do not involve a public offering.

See

letter from SIFMA I.

Id.

See

Proposing Release Section II.A. Moreover, even if an investor were aware of a potential conflict of interest, Rule 192 does not include an exception based on disclosure of material conflicts of interest because such an exception would be inconsistent with the prohibition in Section 27B.

See

Section II.D. for a discussion of comments received related to the use of disclosure to mitigate conflicts of interest.

17 CFR 230.144A. For example, collateralized loan obligations (“CLOs”) are typically sold in a private placement to one or more initial purchasers in reliance on Section 4(a)(2) (which is only available to the issuer), followed by resales of the securities to “qualified institutional buyers” in compliance with Rule 144A.

The Commission also received comments requesting exclusions or clarifications regarding certain financial products and securities that the Commission has not historically viewed as asset-backed securities.

Some commenters sought clarification that insurance policies or contracts (and securities related to those insurance products, such as mortgage insurance linked-notes (“MILNs”)

) and corporate debt securities are not Exchange Act ABS.

Insurance policies and contracts, such as private mortgage insurance contracts, are not securities,

and therefore are not Exchange Act ABS subject to Rule 192. MILNs are reinsurance products used by insurance companies to obtain reinsurance coverage for a portion of their risk related to private mortgage insurance policies, which assist homebuyers in obtaining low-down payment mortgages.

The collateral for the MILN are the private mortgage insurance contracts, which are not self-liquidating financial assets.

Corporate debt securities are issued by a corporate issuer and represent direct payment obligations of the corporate issuer.

The corporate issuer is ultimately responsible for payment on the debt, compared to asset-backed securities that are issued by a special purpose issuing entity where payment depends primarily on the cash flow from an underlying self-liquidating financial asset. In each of these cases, the securities do not meet the definition of Exchange Act ABS and, therefore, are not asset-backed securities as defined in Rule 192(c).

See, e.g.,

letters from ABA; Representative Nickel et al.; SFA I; SIFMA I.

See also

note 80, and the accompanying text for a discussion regarding funding agreement-backed notes.

See

letters from AFME; ABA; SIFMA I.

15 U.S.C. 77c.

See, e.g.,

letter from ABA.

For additional discussion regarding mortgage insurance-linked notes, and why the existing structures do not satisfy the criteria to be synthetic ABS or “conflicted transactions,” see Sections II.A.3.b. and II.D.

See, e.g.,

letter from SIFMA I.

See

17 CFR 230.192(c).

One commenter also requested clarification that, where the Commission or its staff has already provided guidance stating that a financial product or security would not be an asset-backed security, such products or securities would not be asset-backed securities under Rule 192(c) and thus would not be subject to the prohibition.

The definition of asset-backed security we are adopting in Rule 192(c) does not change the Exchange Act ABS definition, nor does it impact existing Commission guidance or staff positions regarding that definition. Market participants may, therefore, continue to look to such guidance or staff positions unless and until they are changed, withdrawn, or otherwise superseded, as applicable.

See

letter from ABA. This commenter provided the example of an existing staff position indicating that funding agreements between an insurance company and a special purpose entity, where the insurance company is directly liable for the funding agreement that backs the notes, is not an Exchange Act ABS.

See

Regulation AB Compliance & Disclosure Interpretation 301.03 (updated Sept. 6, 2016),

available at https://www.sec.gov/corpfin/divisionscorpfinguidanceregulation-ab-interpshtm.

These interpretations, and any other staff statements referenced in this release, represent the views of SEC staff. They are not rules, regulations, or statements of the Commission. The Commission has neither approved nor disapproved their content. Staff statements have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.

b. Synthetic ABS and Hybrid Cash and Synthetic ABS

As discussed in the Proposing Release, we have previously described synthetic securitizations as transactions that are designed to create exposure to an asset that is not transferred to or otherwise part of the asset pool, generally effectuated through the use of derivatives such as a credit default swap (“CDS”) or a total return swap (or an ABS structure that replicates the terms of such a swap).

The Commission received several comment letters requesting that we adopt a definition of “synthetic asset-backed security”

and “hybrid cash and synthetic asset-backed security”

to address what the commenters said was a lack of certainty with respect to the scope of Rule 192. Some of these commenters offered suggestions for a definition of synthetic ABS that they believe represent market understanding of the term and that would appropriately capture the types of transactions that Section 27B and Rule 192 are intended to cover.

While the text of the suggested definitions vary, including with respect to the level of specificity, they include a number of common elements, generally identifying synthetic ABS as a security issued by a special-purpose entity, secured by one or more credit derivatives or similar financial instrument that references a self-liquidating financial asset or pool of assets, and for which payment to the investor is dependent primarily on the performance of such reference asset or reference pool.

See

Proposing Release Section II.A. and Section III.A.2. of the 2004 Regulation AB Adopting Release.

See, e.g.,

letters from ABA; AIMA/ACC; AFME; SFA I; SFA II; SIFMA I; SIFMA II.

See

letter from AIMA/ACC.

See

letters from ABA; AFME; SFA II; SIFMA I; SIFMA II.

See, e.g.,

letters from ABA; SFA II; SIFMA II.

Given the variation of suggested definitions provided by commenters, we do not believe that adopting any one of these definitions, or a combination thereof, would appropriately capture the scope of the various features of existing

synthetic ABS and possible future structures or designs of synthetic ABS; however, commenters' suggestions are consistent with the characteristics that we have previously identified as features of synthetic ABS.

Because of the complexity of these transactions, however, we agree with commenters that guidance regarding synthetic ABS is beneficial. Accordingly, while a synthetic ABS may be structured or designed in a variety of ways, we generally view a synthetic asset-backed security as a fixed income or other security issued by a special purpose entity that allows the holder of the security to receive payments that depend primarily on the performance of a reference self-liquidating financial asset or a reference pool of self-liquidating financial assets.

See

Proposing Release Section II.A. and Section III.A.2. of the 2004 Regulation AB Adopting Release.

Id.

The Commission also received comments requesting clarification about whether the rule applies to synthetic transactions that have not traditionally been considered synthetic securitizations. Some commenters asked that we clarify that mortgage insurance-linked notes are not synthetic asset-backed securities under Rule 192(c) and that the reinsurance agreements embedded in the MILN transactions are not “conflicted transactions” under Rule 192(a)(3).

As discussed in Section II.A.3.a., above, while MILNs create synthetic exposure to insurance contracts, they are not covered by this rule because the underlying private mortgage insurance contracts are not self-liquidating.

Accordingly, MILNs are not synthetic ABS subject to the prohibition in Rule 192(a)(1), and consequently, neither would the reinsurance agreements executed between the mortgage insurer and the special purpose insurer be conflicted transactions under Rule 192(a)(3).

See, e.g.,

letters from ABA; letter from Housing Policy Council dated Mar. 27, 2023 (“HPC”); Mortgage Bankers Association dated Mar. 27, 2023 (“MBA”); PMI Industry I; Arch Capital Group Ltd., Enact Holdings Inc., Essent Group Ltd., MGIC Investment Corporation, NMI Holdings, Inc., and Radian Group Inc. dated Oct. 20, 2023 (“PMI Industry II”) (suggesting rule text to include an exclusion in the final rule for activities related to the purchase or sale of MILNs); U.S. Representatives Blaine Luetkemeyer and Emmanuel Cleaver dated May 23, 2023 (“Representatives Luetkemeyer and Cleaver”); SFA I; SIFMA I.

See also

Section II.D. for a discussion of the types of transactions that would be “conflicted transactions” under the final rule.

In a typical MILN structure, the mortgage insurer enters into a reinsurance agreement with a special purpose insurer, which issues the MILNs to investors and places the proceeds from the sale of those securities in a reinsurance trust to make any required payments to the mortgage insurer under the reinsurance agreement, which requires payments based on certain losses incurred on a specified pool of mortgage insurance policies that are obligations of the mortgage insurer. The premiums paid by the mortgage insurer to the special purpose insurer are used to make interest payments to the holders of the MILNs. Because the reinsurance agreement functions similarly to a swap and the reference mortgage insurance policies are not transferred to the reinsurance trust, commenters requested confirmation that MILNs are not synthetic ABS that would be asset-backed securities as defined for purposes of Rule 192.

See, e.g.,

letters from ABA; HPC; MBA; PMI Industry I; Representatives Luetkemeyer and Cleaver; SFA I; SIFMA I.

See

Section II.D. for a discussion of “conflicted transactions” under the final rule.

Some commenters also requested confirmation that synthetic ABS for purposes of Rule 192 does not include equity-linked or commodity-linked products.

Because such products do not involve self-liquidating financial assets, they are not synthetic ABS subject to Rule 192's prohibition. Similarly, some commenters requested confirmation that corporate debt obligations and security-based swaps are not synthetic ABS.

As described above, we generally view a synthetic asset-backed security as a fixed income or other security issued by a special purpose entity that allows the holder of the security to receive payments that depend primarily on the performance of a reference self-liquidating financial asset or a reference pool of self-liquidating financial assets. In contrast, as discussed above, a corporate debt obligation is issued by, and offers investors recourse to, an operating entity that is not a special purpose entity. Therefore, a corporate debt obligation is not a synthetic ABS for purposes of Rule 192. Similarly, a security-based swap is also not a synthetic ABS for purposes of Rule 192 because it is a financial contract between two counterparties without issuance of a security from a special purpose entity.

A security-based swap can represent a component of a synthetic ABS transaction where, for example, the relevant special purpose entity that issues the synthetic ABS enters into a security-based swap that collateralizes the synthetic ABS that it is issuing. However, the standalone security-based swap in such example is not a synthetic ABS; it is only one component of the broader synthetic ABS transaction. Under the final rule, whether a transaction is a “synthetic ABS” subject to Rule 192 will depend on the nature of the transaction's structure and characteristics of the underlying or referenced assets.

A similar analysis will be necessary to determine whether a transaction constitutes a hybrid cash and synthetic ABS, which would have characteristics of both cash ABS and synthetic ABS.

See, e.g.,

letters from SFA II; SIFMA I; SIFMA II.

See, e.g.,

letters from ABA; SFA II; SIFMA I; SIFMA II.

See also Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping,

Release No. 33-9338 (July 18, 2012) [77 FR 48208 (Aug. 13, 2012)] (establishing that a credit default swap or total-return swap on a single loan or narrow-based index is a security-based swap).

For example, such transactions generally should be analyzed to determine whether the assets that are transferred to or otherwise part of the asset pool are self-liquidating. Additionally, we note that a synthetic transaction could be effectuated through the use of derivates or swaps but could also use some other feature or structure that replicates the terms of a derivate or swap.

c. Cross-Border Application of Rule 192

The Commission received several comments relating to the potential cross-border application of Rule 192.

Before addressing those comments, we are providing the following guidance as to Rule 192's cross-border scope. As a threshold matter, Rule 192's cross-border scope is co-extensive with the cross-border scope of Securities Act Section 27B(a), which this rule implements pursuant to the mandate in Section 27B(b). It is therefore appropriate to consider Section 27B(a)'s cross-border scope when determining whether Rule 192 applies in a cross-border context.

See, e.g.,

letters from ABA; AFME; AIC; SFA I; SFA II; SIFMA I; SIFMA II.

Our understanding of Section 27B(a)'s cross-border scope is based on the territorial approach that the Commission has applied when adopting rules to implement other provisions of the securities laws.

Consistent with that territorial approach, which is based on U.S. Supreme Court precedent, including

Morrison

National Australia Bank, Ltd,

the Commission understands the relevant domestic conduct that triggers the application of Section 27(B)(a)'s prohibition to be the sale in the United States of the ABS.

If there are ABS sales in the United

States to investors, the prohibition of Section 27B(a)—as implemented through the provisions of Rule 192—applies. Put simply, the existence of domestic ABS sales to investors means that securitization participants are prohibited pursuant to the terms of Rule 192 from engaging in their own separate transactions that would cause a material conflict with the ABS investors.

And when domestic ABS sales exist, the prohibition on securitization participants engaging in separate transactions that would cause the material conflicts of interest applies

even if

the securitization participants seek to engage in those prohibited transactions exclusively overseas or if the securitization participant is itself a non-U.S. entity.

100

In this way, Section 27B(a) and Rule 192 further the statutory objective of prophylactically protecting ABS investors in the U.S. securities markets from ABS transactions that would involve material conflicts of interest.

101

See, e.g., Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information,

Release No. 34-74244 (Feb. 11, 2015), [80 FR 14563, 14649 (Mar. 19, 2015)] (“2015 Regulation SBSR Adopting Release”) (discussing the territorial approach to the cross-border application of Title VII requirements for regulatory reporting and public dissemination of security-based swap transactions).

Morrison

National Australia Bank, Ltd. et al.,

561 U.S. 247 (2010).

See generally

561 U.S. 247.

See, e.g., Abitron Austria GmbH

Hetronix Int'l, Inc,

No. 21-1043, 2023 WL 4239255, at *4 (U.S. June 29, 2023) (stating that “[the Supreme Court has] repeatedly and explicitly held that courts must “identif[y] `the statute's “focus”' and as[k] whether the conduct relevant to that focus occurred in United States territory”).

Securitization participants are advised that even if there is no domestic sale to an investor that would trigger Rule 192's regulatory prohibition, the Commission still retains broad cross-border antifraud authority that will apply when securities participants engage in fraudulent or manipulative conduct that has a sufficient nexus to the United States. Specifically, the Commission's antifraud authorities will apply if a securities participant engages in securities fraud that involves: (1) conduct within the United States that constitutes significant steps in furtherance of the fraud, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring entirely outside the United States that has a foreseeable substantial effect within the United States.

See

Section 27(b) of the Exchange Act (15 U.S.C. 78aa).

See also

Proposing Release Section II.B.1.

136

The Commission did not receive any comments addressing the proposed definition of “distribution.”

• An offering of securities, whether or not subject to registration under the Securities Act, that is distinguished from ordinary course trading transactions by the presence of special selling efforts and selling methods; or

• An offering of securities made pursuant to an effective registration statement under the Securities Act.

137

17 CFR 230.192(c). As the Commission noted in the Proposing Release, activities generally indicative of special selling efforts and methods include, but are not limited to, greater than normal sales compensation arrangements, delivering a sales document (

e.g.,

a prospectus or offering memorandum), and conducting road shows. A primary offering of ABS pursuant to an effective Securities Act registration statement would also be captured because such an offering is a primary issuance by an issuer immediately following the creation of the ABS, which is clearly distinguishable from an ordinary secondary trading transaction.

See

Proposing Release at 9683.

The definition of “initial purchaser” is similarly focused on a person's function in a securities offering and includes, as proposed, “a person who has agreed with an issuer to purchase a security from the issuer for resale to other purchasers in transactions that are not required to be registered under the Securities Act in reliance upon Rule 144A or that are otherwise not required to be registered because they do not involve any public offering.”

138

The definition of “initial purchaser” in Rule 192(c) has no impact on the application of Rule 144A (17 CFR 230.144A).

Some commenters requested that we limit the definition of “underwriter,” “placement agent,” and “initial purchaser” to capture only those persons who are directly involved in structuring the relevant ABS or selecting the assets underlying the ABS, stating as an example that underwriting syndicate co-managers generally rely on lead managers and have little direct involvement with the aforementioned securitization activities.

139

While it may be the case that underwriters, placement agents, or initial purchasers are involved in the issuance of an ABS in varying degrees, the prohibition in Rule 192(a)(1) only applies to such persons if they have entered into an agreement

140

with an issuer (or, with respect to underwriters and placement agents, a selling security holder) because those persons would likely be privy to certain information about the ABS or underlying assets. Conversely, underwriters, placement agents, and initial purchasers with no such agreement with the issuer or selling security holder (“selling group members”), as applicable, may help facilitate a successful distribution of securities to a wider variety of purchasers, but these selling group members do not have a direct relationship with the issuer or selling security holder and, thus, are unlikely to have the same ability to influence the design of the relevant ABS. Therefore, selling group members who do not have such an agreement are not underwriters, placement agents, or initial purchasers as defined in Rule 192(c).

141

Moreover, such a limitation could have the unintended consequence of creating uncertainty about whether an underwriter, placement agent, or initial purchaser is subject to the rule's prohibition because it would require a determination of whether such person is “directly involved” in structuring an ABS or selecting the underlying assets. For purposes of Rule 192, therefore, it is sufficient that a person who otherwise meets the definitions of “underwriter,” “placement agent,” or “initial purchaser” in Rule 192(c) has an agreement with the issuer or selling security holder, as applicable, to perform the enumerated functions because, as stated above, such persons would likely be privy to information about the ABS or underlying assets, giving them the opportunity to influence the structure of the relevant ABS and engage in a bet against it. No factual determination of whether such person actually had “direct involvement” in the structure or design of the ABS is required.

139

See

letters from SFA I; SIFMA I. Another commenter stated that underwriters and other participants should be defined to include persons who make a “material contribution” to the economic structure, composition, management, or sale of an ABS.

See

letter from AFR.

140

See

Section II.C.3. for a discussion of what constitutes an “agreement” for purposes of Rule 192(a)(1).

141

See also

Proposing Release Section II.B.1.

b. Sponsor

We are adopting the definition of “sponsor” with certain modifications from the proposal in response to comments received. The definition of “sponsor” will differ in four ways from the proposal. First, we are not adopting proposed paragraph (ii)(B) of the “sponsor” definition, which would have captured any person that directs or causes the direction of the structure, design, or assembly of an asset-backed security or the composition of the pool of assets underlying the asset-backed security. Second, we are revising the text of the final rule to state that persons who act solely pursuant to their contractual rights as holders of a long position in the relevant ABS are excluded from paragraph (ii) of the definition of sponsor, as discussed below. Third, we are revising the text to specifically exclude persons who perform only administrative, legal, due diligence, custodial, or ministerial activities related to the ongoing administration of the ABS or the composition of the pool of assets

underlying or referenced by the ABS.

142

Fourth, we are deleting the proposed exclusion from the “sponsor” definition for the Enterprises while they are operating under the conservatorship or receivership of FHFA with capital support from the United States, which we discuss in Section II.B.3.b.iv., below.

143

Accordingly, for purposes of Rule 192, “sponsor” means:

142

The inclusion of the language “or referenced by the asset-backed security” in the definition of sponsor and other aspects of final Rule 192 is designed to address activities related to the reference pool for a synthetic ABS.

143

As discussed below, final Rule 192 includes the proposed exclusion from definition of “sponsor” for the United States or any agency of the United States with respect to its fully insured or fully guaranteed ABS.

• Any person who organizes and initiates an asset-backed securities transaction by selling or transferring assets, either directly or indirectly, including through an affiliate, to the entity that issues the asset-backed security (a “Regulation AB-based Sponsor”); or

• Any person with a contractual right to direct or cause the direction of the structure, design, or assembly of an asset-backed security or the composition of the pool of assets underlying or referenced by the asset-backed security (a “Contractual Rights Sponsor”), other than a person who acts solely pursuant to such person's contractual rights as a holder of a long position in the ABS (a “Long-only Investor”)

• But not including:

○ A person who performs only administrative, legal, due diligence, custodial, or ministerial acts related to the structure, design, assembly, or ongoing administration of an asset-backed security or the composition of the pool of assets underlying or referenced by the asset-backed security (the “Service Provider Exclusion”); or

○ The United States or an agency of the United States with respect to an asset-backed security that is fully insured or fully guaranteed as to the timely payment of principal and interest by the United States (“U.S. Government Exclusion”).

144

See

Sections II.B.2. and II.B.3.b.iv. for a discussion of comments received and the final U.S. Government Exclusion.

As with the definitions discussed above, we are adopting a functional definition of “sponsor” that will apply regardless of the person's title and that instead focuses on the person's activities with respect to the ABS transaction. Accordingly, a person who organizes and initiates an ABS transaction, or who has a contractual right to direct or cause the direction of the structure, design, or assembly of an ABS or the composition of the pool of assets underlying or referenced by the ABS whether before or after the initial issuance of the relevant ABS, is a sponsor under Rule 192 (unless one of the exceptions described below applies). For example, an “issuer” of a municipal securitization will be a “sponsor” if its activities meet the definition. This definition also includes, for example, a portfolio selection agent for a collateralized debt obligation (“CDO”) transaction with a contractual right to direct or cause the direction of the composition of the pool of assets on behalf of the CDO or a collateral manager for a collateralized loan obligation (“CLO”) transaction with the contractual right to direct or cause the direction of asset purchases or sales on behalf of the CLO.

145

See also

Sections II.A.2. and II.A.3. for a discussion of the comments received and the final definition of “asset-backed security” as it applies to municipal securitizations.

i. Regulation AB-Based Sponsor

We are adopting paragraph (i) of the definition of “sponsor” as proposed. For purposes of Rule 192, therefore, a sponsor includes, but is not limited to, any person who organizes and initiates an asset-backed securities transaction by selling or transferring assets, either directly or indirectly, including through an affiliate, to the entity that issues the asset-backed security.

146

This portion of the definition is derived from the definition of the term “sponsor” in Regulation AB and was generally supported by commenters, who stated that it is consistent with the use of the term in both Regulation AB

147

and Regulation RR,

148

as well as market understanding of what a securitization sponsor is.

149

146

17 CFR 230.192(c).

147

17 CFR 229.1101(l).

148

17 CFR 246.

149

See, e.g.,

letters from AIC; SFA I; SIFMA I.

Some commenters requested that we exclude states and their political subdivisions from the definition of “sponsor” under the final rule.

150

These commenters generally stated that application of Rule 192's prohibition to municipal issuers is unnecessary because these issuers engage in transactions pursuant to enabling legislation that is designed specifically to aid in the furtherance of important government functions and other public purposes, are restricted from engaging in speculative investments, and are not driven by a profit motive that would lead to the type of behavior that Section 27B is intended to address.

151

While municipal issuers may be subject to other provisions that regulate their conduct, we are not persuaded that issuers of municipal ABS are uniquely different from other securitization participants such that they should be excluded from the final rule. Similarly, the fact that municipal entities are subject to investment policies that limit the ability of such entities as investors to engage in speculative investments is not a reason to exempt these entities from the definition of “sponsor.” While the outcome of such policies may be that the entities may not, for example, take a short position against their municipal ABS, the objectives of those policies are typically focused on protection of the entity's investment portfolio.

152

Being subject to various laws and regulations that may intersect is not a position that is unique to issuers of municipal ABS. Additionally, the prohibition in Rule 192 is designed to prophylactically protect investors in U.S. securities markets from ABS transactions tainted by material conflicts of interest, regardless of whether a securitization participant has a profit motive or actually does profit from such transactions.

153

As such, while it may be unlikely, as some commenters stated, that issuers of municipal ABS would engage in the type of conduct that Section 27B prohibits for the reasons discussed above,

154

we do not believe that an exclusion from the definition of “securitization participant” or “sponsor” would be appropriate because investors are entitled to the

protections afforded by the statute regardless of how likely the securitization participant is to engage in a conflicted transaction.

150

See, e.g.,

letters from NABL et al.; NAHEFFA (also requesting that 501(c)(3) organizations and the issuers of qualified 501(c)(3) conduit bonds to such organizations be excluded from the definition); NAMA; SIFMA I; Wulff Hansen (expressing support for the comments submitted by NAMA).

151

Id.

One of these commenters also stated that application of the prohibition in Rule 192 to State and local governmental issuers would be a breach of the principles of federalism and intergovernmental comity.

See

SIFMA I. The U.S. Supreme Court has held that State and local governments “must find their protection from congressional regulation through the national political process, not through judicially defined spheres of unregulable state activity.”

See Garcia

San Antonio Metropolitan Transit Authority,

469 U.S. 528 (1985);

South Carolina

Baker,

485 U.S. 505 (1988). Congress enacted Section 621 of the Dodd-Frank Act, adding Section 27B of the Securities Act. Rule 192 implements Section 27B of the Securities Act with respect to certain activities undertaken by State and local governmental issuers that fall within its proscriptions. It follows, therefore, as provided in

Garcia

and

Baker,

that the application of Rule 192 to State and local governmental issuers is not inconsistent with principles of federalism and intergovernmental comity.

152

See

letter from NABL et al. (stating that municipal investment policies are “centered on preservation of principal or moderate growth.”)

153

See

Section II.D.3

154

See, e.g.,

letters from NABL et al.; NAHEFFA; NAMA; SIFMA I.

Some commenters went on to state that, because municipal ABS issuers are unlikely to engage in conflicted transactions for the reasons discussed above, these entities would need to expend administrative and financial resources to “prove a negative” (

i.e.,

that they do not engage in conflicted transactions), especially if securitization participants were to be required to have documented policies and procedures in place to prevent violation of the prohibition, adding compliance costs without a clear regulatory benefit.

155

Although the Commission requested comment in the Proposing Release about whether the final rule should include a requirement that a securitization participant have documented policies and procedures reasonably designed to prevent a violation of the rule's prohibition on conflicted transactions,

156

the Commission did not receive any comments in support of such a requirement. Commenters, however, expressed concerns about the potential costs associated with such a provision,

157

and therefore, final Rule 192 does not include a requirement that securitization participants have documented policies and procedures reasonably designed to prevent a violation of the rule's prohibition. As such, while we recognize that compliance with the prohibition against engaging in conflicted transactions may result in increased compliance costs to municipal issuers subject to Rule 192, we expect that such costs will be modest because the final rule does not include a general requirement for policies and procedures.

158

155

See, e.g.,

letters from NAHEFFA; NAMA.

156

See

Proposing Release Request for Comment 59.

157

See, e.g.,

letters from NAHEFFA, NAMA.

158

See

Section IV for a discussion of the Commission's economic analysis of the impacts of Rule 192 and a discussion of alternatives considered.

For these reasons, we continue to believe that any such costs will be justified because investors in municipal securitizations should be entitled to the same legal protections as investors in other types of ABS that meet the definition of “asset-backed security” in Rule 192(c). Accordingly, if a municipal security meets the definition of Exchange Act ABS,

159

then the municipal issuer that organizes and initiates such an offering

160

is a sponsor for purposes of Rule 192.

161

159

See

Section II.A.3.a.

160

Or, in the case of a municipal advisor, if the advisor has a contractual right to direct or cause the direction of the structure, design, or assembly of a municipal ABS, such person is a sponsor under paragraph (ii) of the “sponsor” definition in final Rule 192(c).

See

Section II.B.3.b.ii.

161

The same analysis will apply for issuers of single-asset conduit bonds that meet the definition of Exchange Act ABS or otherwise meet the definition of “asset-backed security” in Rule 192(c).

See

Section II.A.3.a.

ii. Contractual Rights Sponsor

We are adopting the definition of “Contractual Rights Sponsor” that was proposed in paragraph (ii)(A) of the proposed definition of “sponsor” with certain modifications in response to comments received. Also, in response to comments received, we are not adopting the definition of “Directing Sponsor” that was proposed in paragraph (ii)(B) of the proposed definition of “sponsor.” Accordingly, paragraph (ii) of the definition of “sponsor” for purposes of Rule 192 captures, subject to certain exceptions discussed below, any person with a contractual right to direct or cause the direction of the structure, design, or assembly of an asset-backed security or the composition of the pool of assets underlying or referenced by the asset-backed security (a Contractual Rights Sponsor), other than a person who acts solely pursuant to such person's contractual rights as a holder of a long position in the asset-backed security (a Long-only Investor).

162

The revision to explicitly exclude Long-only Investors from the definition of sponsor by deleting the proposed “Directing Sponsor” definition is consistent with the Commission's stated intent in the Proposing Release that an ABS investor (that does not otherwise meet any of the other definitions of parties covered by the rule) would not be a sponsor under the rule merely because such investor expresses its preferences regarding the assets that would collateralize its ABS investment.

163

Also, Rule 192 is not designed to discourage ABS investors from exercising contractual rights as a holder of a long position in an ABS. As discussed below, the final rule excludes any person who acts solely pursuant to such person's contractual rights as a holder of a long position in the ABS.

162

As discussed in more detail below, we are also adopting an exclusion from the “sponsor” definition for any person who performs only administrative, legal, due diligence, custodial, or ministerial acts related to the ABS and for the United States or an agency of the United States with respect to ABS that is fully insured or fully guaranteed as to the timely payment of principal and interest by the United States.

See

Sections II.B.3.b.iii. and II.B.3.b.iv.

163

See

Proposing Release Section II.B.2.b.

The Commission proposed a comprehensive definition of “sponsor” that would include a person that is in a unique position to structure the ABS and/or construct the underlying asset pool or reference pool in a way that would position the person to benefit from the actual, anticipated, or potential adverse performance of the relevant ABS or its underlying asset pool if such person were to enter in a conflicted transaction.

164

Some commenters supported this approach, citing the significant role that such parties play in securitization transactions.

165

As discussed in greater detail below, a number of commenters, however, opposed the proposed inclusion of Contractual Rights Sponsors and Directing Sponsors as too broad.

166

Some of these commenters requested that the “sponsor” definition be limited to paragraph (i) (

i.e.,

a Regulation AB-based sponsor),

167

while others stated that such a definition would not be sufficient to capture the key transaction parties that have a significant role in asset selection for ABS transactions.

168

Some commenters also stated that defining “sponsor” to include functions beyond the scope of the Regulation AB-based Sponsor definition extends beyond the “ordinary and natural meaning” of the term, which they state is understood by market participants to be the definition that was codified in Regulation AB.

169

These commenters stated that the Commission codified the “ordinary and natural meaning” of the term “sponsor” when it adopted the definition in Regulation AB in 2004 and that, because Section 27B uses the term “sponsor” without separately defining it, any other definition for purposes of Rule 192 would be inconsistent with Congressional intent.

170

164

See

Proposing Release Section II.B.

165

See

letters from AFR; Better Markets.

166

See, e.g.,

letters from ABA; AIMA/ACC; AFME; CREFC I, CRE Finance Council dated July 5, 2023 (“CREFC II”); NAMA; Representatives Wagner and Huizenga; Senator Kennedy; SFA I; SFA II; SIFMA I.

167

See, e.g.,

letters from ABA; AIC; SIFMA I. letters from ABA; AIC; SIFMA I.

See

Section II.B.3.b.i. above for a discussion of paragraph (i) of the “sponsor” definition in Rule 192(c).

168

See, e.g.,

letters from Better Markets (expressing support for the scope of the definition and stating that collateral managers should be subject to the rule because they play a significant role in selecting and managing the assets underlying an ABS); SFA II (acknowledging the Commission's desire to scope in CLO managers that are not sponsors for purposes of Regulation RR).

169

See, e.g.,

letters from ABA; AIC; SIFMA I.

170

See, e.g.,

letters from ABA; AIC; SIFMA I.

Regulation AB is a set of disclosure items that form the basis for disclosure in Securities Act registration statements and Exchange Act reports for asset-

backed securities and identify the transaction parties responsible for making that disclosure.

171

When the Commission adopted these specialized registration, disclosure, and reporting requirements in Regulation AB for certain types of asset-backed securities, it explained that those requirements were specifically designed for asset-backed securities that have certain characteristics (

i.e.,

ABS as defined in Regulation AB).

172

At that time, the Commission acknowledged that the types of ABS that would meet the definition in Regulation AB were a subset of the full spectrum of ABS in the market.

173

For example, synthetic securitizations are not eligible for registration and reporting under Regulation AB because such securitizations are primarily based on the performance of assets or indices not included in the ABS.

174

As such, the concept of a sponsor “selling or transferring assets . . . to the entity that issues the [ABS]” in the “sponsor” definition under Regulation AB would not be applicable in a synthetic ABS because, as described in Section II.A.3.b. above, a synthetic ABS is designed to create exposure to an asset that is not sold, transferred to, or otherwise part of the asset pool. Rule 192, consistent with the express language of Section 27B, applies to a wider spectrum of ABS (

i.e.,

Exchange Act ABS, synthetic ABS, and hybrid cash and synthetic ABS)

175

than Regulation AB and—as discussed throughout this section—the characteristics of the structure, assets, and the role of transaction parties involved in those types of ABS may differ significantly from those in Regulation AB ABS. We do not believe the concept of “sponsor” in Section 27B is limited to the Regulation AB definition of that term, as that would mean that there is no “sponsor” for synthetic asset-backed securities, even though Congress explicitly referenced those participants in the statute. It is therefore appropriate for Rule 192 to define the securitization participants subject to the rule's prohibition to align with the characteristics of that wider spectrum of ABS. Accordingly, we continue to believe that, while it is appropriate for the final rule to incorporate a definition based on the Regulation AB definition of sponsor, defining “sponsor” for purposes of Rule 192 as a Regulation AB-based sponsor alone would not be sufficient to address the full range of securitization activities involved in asset-backed securities transactions that Section 27B addresses.

171

See

Sections III.A.2. and III.B.3. of the 2004 Regulation AB Adopting Release.

172

See

Section III.A.2. of the 2004 Regulation AB Adopting Release.

173

Id.

(stating, for example, that a default application of the traditional disclosure regime might not be appropriate for some structured securities, but that treating them the same as ABS as defined in Regulation AB may not be appropriate either and that, depending on the structure of the transaction and the terms of the securities, it might be most appropriate to apply some aspects of both regimes in combination). The Commission also acknowledged in that release that there may be securities developed in the future that are not contemplated in Regulation AB, which would similarly require consideration of which regulatory regime would be most appropriate.

174

See also

Section III.A.2. of the 2004 Regulation AB Adopting Release.

175

See

Section II.A.3.

One commenter also cited to the holding of the U.S. Court of Appeals for the District of Columbia Circuit that the application of the term “securitizer”

176

to CLO collateral managers in Regulation RR was an overreach of its authority.

177

The Court's analysis was centered around the statutory text that directed the Commission, together with several other Federal agencies, to issue regulations to require any securitizer to “retain” an economic interest in a portion of the credit risk for any asset that the securitizer, through the issuance of an asset-backed security, “transfers, sells, or conveys” to a third party.

178

The Court held that, because open-market CLO managers do not “hold” the securitized loans in a CLO transaction at any point, they can neither “transfer” those loans, nor “retain” credit risk in the loans because such terms require that the “securitizer” has control over the assets via possession or ownership.

179

We believe a different analysis is applicable to Section 27B, which directs the Commission to prohibit securitization participants of Exchange Act ABS and synthetic ABS from engaging in transactions that would involve or result in a material conflict of interest. Section 941 of the Dodd-Frank Act added Section 15G of the Exchange Act,

180

in which Congress provided a statutory definition for the term “securitizer” that incorporated from the Regulation AB definition of sponsor the general concept of transferring or selling assets into a special purpose entity. In the case of Section 15G, therefore, the statutory text specified the functions that Congress intended to be captured by the term “securitizer.” In Section 27B, however, Congress did not define “sponsor,” but it did specify the types of ABS (

i.e.,

Exchange Act ABS and synthetic ABS) that are subject to the prohibition. Moreover, as evidenced by statutory text in other laws, where Congress intended to refer to a portion of Regulation AB, it did so explicitly.

181

176

The statutory term at issue in the case was “securitizer,” which was defined by Congress as an issuer of an ABS or a person who organizes and initiates an ABS transaction by selling or transferring assets, either directly or indirectly, including through an affiliate, to the issuer.

See

Section 15G(a)(3) of the Securities Exchange Act of 1934 (15 U.S.C. 78

-11(a)(3)), which was added by Section 941 of the Dodd-Frank Act (Pub. L. 111-203).

177

See

letter from AIC (citing

The Loan Syndications and Trading Association

Securities and Exchange Commission et al.,

882 F.3d 220 (D.C. Cir. 2018) (the “LSTA Decision”) and stating that, by proposing to define “sponsor” in Rule 192 to refer to functions beyond the scope of the Regulation AB-based Sponsor definition, the Commission failed to heed the D.C. Circuit's guidance and exceeded the scope of its authority).

178

See

LSTA Decision.

See also

15 U.S.C. 78

-11(b)(1).

179

See

LSTA Decision, 882 F.3d at 223.

180

15 U.S.C. 78

-11(a)(3).

181

See, e.g.,

Credit Rating Agency Reform Act of 2006 (Pub. L. 109-291) (referring specifically to “issuers of asset-backed securities (as that term is defined in section 1101(c) of part 229 of title 17, Code of Federal Regulations, as in effect on the date of enactment of this paragraph)”). We also note that the term “sponsor” appears in several other places throughout the securities laws with varying meanings. For example, in Item 901 of Regulation S-K, a sponsor is defined in the context of roll-up transactions as “the person proposing the roll-up transaction.”

See

17 CFR 901(d).

As we discussed above, the characteristics of the structure, assets, and the role of transaction parties involved in the wider spectrum of ABS covered by Section 27B (including synthetic asset-backed securities) differ significantly from those ABS subject to Regulation AB, and therefore the definitions adopted by the Commission in Regulation AB do not capture the types of ABS that Congress determined should be subject to Rule 192's prohibition. Accordingly, we believe that the statutory inclusion of these types of ABS requires that Rule 192 define the market participants and their roles in such ABS in congruence with the structures and characteristics specific to the relevant ABS.

A number of commenters also expressed concern that paragraph (ii) of the “sponsor” definition includes activities that could be attributed to a wide variety of transaction parties and could therefore be understood to scope in, as a Contractual Rights Sponsor or Directing Sponsor, almost any party with any role in the structuring of the transaction.

182

Commenters stated that the definition could include entities such as investors,

183

asset managers

184

and other investment advisers,

185

servicers,

186

and warehouse lenders,

187

each of which we discuss below.

182

See, e.g.,

letters from ABA; AIMA/ACC; AFME, CREFC I; CREFC II; NAMA; Representatives Wagner and Huizenga; Senator Kennedy; SFA I; SFA II; SIFMA I.

183

See, e.g.,

letters from ABA; CREFC I; CREFC II; SFA I; SFA II; SIFMA I.

184

See, e.g.,

letter from ABA; LSTA IV.

185

See, e.g.,

letter from ICI.

186

See, e.g.,

letters from MBA; SFA I; CREFC I. We discuss the final rule's applicability to servicers in Section II.B.3.b.iii., below.

187

See, e.g.,

letter from ABA.

Many commenters expressed concern that ABS investors could be captured by the definition of sponsor by virtue of the iterative negotiation process between deal participants and investors.

188

These commenters recognized the stated intent in the Proposing Release

189

that investors acquiring a long position in an ABS would not be Directing Sponsors merely because they express their preferences regarding the structure of the ABS or the underlying assets, but requested that this be codified in rule text to avoid the unintended consequence of discouraging investors from actively participating in discussions about deal structures and underlying asset pools in their ABS investments and to help ensure that they are not unnecessarily subject to additional costs associated with developing compliance programs under Rule 192.

190

In current market practice, investors in ABS transactions may receive information about collateral (including, for example, specific loan data and due diligence results) and may specify preferences or requirements for a given deal structure or terms of the security.

191

Commenters stated, and we agree, that these negotiations are important and beneficial market functions.

192

Consequently, as requested by commenters and to help ensure that Rule 192 is not an impediment to an investor's negotiating power, we are not adopting paragraph (ii)(B) (Directing Sponsor) of the proposed definition of “sponsor.”

188

See, e.g.,

letters from ABA; AFME; CREFC I; CREFC II; IACPM; ICI; MBA; MFA II; LSTA III; LSTA IV; Representatives Wagner and Huizenga; Senator Kennedy; SFA I; SFA II; SIFMA I; SIFMA II.

189

See

Proposing Release Section II.B.2.

190

See, e.g.,

letters from ABA; AFME; CREFC I; CREFC II; IACPM; ICI; MBA; MFA II; LSTA III; Representatives Wagner and Huizenga; Senator Kennedy; SFA I; SFA II; SIFMA I; SIFMA II.

191

For example, investors may specify a certain rating, yield, or maturity on the bonds, require particular levels of subordination or credit enhancement, or may request that assets be added or removed to satisfy preferences with respect to asset quality, concentration levels, etc.

192

See, e.g.,

letters from CREFC I; ICI; SFA II.

Some commenters suggested that the regulatory text should specify that long investors are also excluded from proposed paragraph (ii)(A) (Contractual Rights Sponsor).

193

Relatedly, some commenters stated that the exercise of contractual rights inherent to the purchase of the ABS should not be conflicted transactions under Rule 192(a)(3).

194

In securitizations, it is often the case that long investors purchasing the most senior or the most subordinated tranche of the relevant ABS negotiate for certain rights that are exercisable over the life of the securitization. A person's contractual rights as a holder of a long position in the ABS could include, for example, consent rights over major decisions such as initiating foreclosure proceedings with respect to assets underlying the ABS, the right to replace the special servicer of the ABS, or the right to direct or cause the direction of an optional redemption of outstanding interests in the ABS. Rule 192 is not designed to impair an ABS investor's ability to negotiate for such contractual rights as a holder of a long position in the ABS. Nor is it designed to discourage investors from exercising such rights as a holder of a long position in the ABS. Therefore, we are adopting paragraph (ii) of the definition of “sponsor” to exclude from the definition of Contractual Rights Sponsor any person who acts solely pursuant to such person's contractual rights as a holder of a long position in the ABS.

193

See, e.g.,

letters from CREFC I; SFA II; SIFMA II.

194

See, e.g.,

letter from CREFC I; SFA I.

Whether a long investor is acting “solely” pursuant to its contractual rights as a holder of a long position in the relevant ABS will depend on the relevant facts and circumstances, including what other roles the long investor may have in the transaction. For example, some commenters requested that the rule specify that the holders of “B-piece” bonds (the “B-piece buyer”) in commercial mortgage backed securities (“CMBS”) transactions

195

are not ”sponsors” as defined by the final rule or, alternatively, that the B-piece buyers be otherwise excluded because they should be considered long investors.

196

Whether a B-piece buyer in a CMBS transaction is a “sponsor” for purposes of Rule 192 or satisfies the condition of the exclusion for Long-only Investors will depend on the facts and circumstances of a given transaction and B-piece buyer.

197

Generally, the B-piece buyer purchases the most subordinate tranches of the ABS and, in connection with this investment, performs extensive due diligence on the underlying loans and negotiates with the deal sponsor for changes to pool composition and to increase credit quality of the pool. As a holder of a long position in the relevant ABS, a B-piece buyer will generally have additional ongoing rights in an ABS transaction. For example, transaction agreements may dictate that certain actions with respect to the asset pool underlying the ABS (such as releasing a property from a lien) are subject to the approval of the B-piece buyer,

198

giving the B-piece buyer a contractual right to direct or cause the direction of the composition of the pool. As such, absent the exclusion we are adopting for Long-only Investors, a B-piece buyer could be subject to the prohibition of Rule 192(a)(1) as a Contractual Rights Sponsor. Under the final rule, if the B-piece buyer exercises such rights solely pursuant to its contractual rights as a holder of a long position in the ABS, then the B-piece buyer will satisfy the conditions for the Long-only Investor carve-out from the definition of Contractual Rights Sponsor as adopted and, therefore, will not be subject to the prohibition in Rule 192(a)(1).

195

As is the case with most ABS, CMBS securities are offered in tranches, with each tranche representing a different risk profile. The top tranche (referred to as “AAA”) represents the lowest risk investment while the lower tranches (typically non-investment grade) represent the highest risk profile because they are the first to incur losses in the event that there are shortfalls in collections on the underlying assets. In CMBS, the “B-piece” bonds are the lowest tranche(s) of the CMBS (

i.e.,

the most subordinate tranche(s), meaning that holders are purchasing the first-loss position) and the holders of those bonds are typically third-party purchasers, commonly referred to as the “B-piece buyer.”

See, e.g.,

Section III.B.5. of the RR Adopting Release.

196

See, e.g.,

letters from ABA; CREFC I; Fannie and Freddie; MBA.

197

The same analysis applies for the directing noteholder in a commercial real estate collateralized loan obligation (“CRE CLO”), which functions similarly to the B-piece buyer in CMBS transactions.

198

See, e.g.,

letter from CREFC I.

In some circumstances, however, the B-piece buyer can also act as a special servicer for the securitization (

i.e.,

a contractual party to the transaction) or may be an affiliate or subsidiary of the special servicer. Whether a special servicer's activities satisfy the conditions of the exclusion for persons that perform only administrative, legal, due diligence, custodial, or ministerial acts with respect to the relevant ABS will depend on the nature of the special servicer's activities.

199

Accordingly, if a B-piece buyer is also a special servicer for an ABS transaction, the B-piece buyer will not be acting “solely” pursuant to its rights as a holder of a long position in the relevant ABS and will need to then consider whether the performance of its contractual obligations as special servicer will be sufficiently administrative or custodial in nature to be excluded from the

definition.

200

Similarly, if the B-piece buyer is an affiliate or subsidiary, as defined by this rule, of another securitization participant in the relevant ABS, then it will also be a securitization participant subject to the prohibition in Rule 192(a)(1).

201

For the foregoing reasons, whether a B-piece buyer is a “sponsor” for purposes of Rule 192, or is eligible for the Long-only Investor exclusion, will depend on the facts and circumstances of the particular ABS and the roles of the B-piece buyer and its affiliates and subsidiaries in the ABS transaction.

199

See

Section II.B.3.b.iii. for a discussion of the final rule's application to special servicers.

200

Id.

As discussed in Section II.D.3.c., however, the exercise of such contractual rights and obligations will not themselves be conflicted transactions under the final rule. Also, if the performance of the B-piece buyer's contractual obligations as special servicer is sufficiently administrative or custodial in nature to rely on the Service Provider Exclusion and the B-piece buyer's only other role in the transaction is as a Long-only Investor, then the B-piece buyer will not be a sponsor under the final rule.

201

See

Section II.B.3.c.

Some commenters requested that market participants acting subject to a fiduciary duty to a client or customer, such as open-market CLO collateral managers, municipal advisors,

202

or other investment advisers be excluded from the definition of “sponsor” because such participants are already subject to various laws and regulations that regulate their conduct and address conflict management.

203

Rule 192 will complement the existing federal securities laws, including those that govern a market participant's Federal fiduciary duties. As discussed earlier, the fact that an entity is subject to other rules, laws, or regulatory policies pertaining to its conduct, including the existence and management of conflicts of interest, does not preclude such entity from satisfying the conditions of other regulatory requirements. Additionally, we recognize, as one commenter stated, that securitization participants in an ABS subject to Rule 192 do not owe a fiduciary duty to the investors in an ABS because the securitization participants' advisory clients are the deal sponsors rather than the ABS investors.

204

In cases where a sale of an ABS does not involve the sale of an interest in a private fund

205

or other vehicle advised by an investment adviser, there is no advisory relationship creating a Federal fiduciary duty owed between a purchaser and seller. In cases where the private fund issues ABS (such as tranches of a CLO), the private fund's adviser owes a Federal fiduciary duty to the fund and the antifraud provisions of the Advisers Act and the rules thereunder (the “Antifraud Provisions”) apply.

206

Such advisers include CLO collateral managers who will also be subject to Rule 192. Although the application of an adviser's Federal fiduciary duty, which requires the adviser to serve the best interests of its clients,

207

and the Antifraud Provisions provide protections relating to conflicts of interest that act in harmony with Rule 192, these duties and provisions do not necessarily require elimination of conflicted transactions. Accordingly, a fiduciary duty-based exclusion from Rule 192 would frustrate Section 27B's prophylactic investor protection objectives to eliminate certain conflicted transactions.

202

See

Section II.B.3.b.i. for additional discussion about Rule 192's application to municipal advisors.

203

See, e.g.,

letters from ABA; ICI; LSTA IV; NAMA; Wulff Hansen.

204

See

letter from SIFMA I.

205

Section 202(a)(29) of the Investment Advisers Act of 1940 (the “Advisers Act”) defines the term “private fund” as an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3), but for section 3(c)(1) or 3(c)(7) of that Act.

206

See

17 CFR 275.206(4)-8 (“Advisers Act Rule 206(4)-8”), which prohibits investment advisers to a pooled investment vehicle from (1) making untrue statements of a material fact or omitting to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading, to any investor or prospective investor in the pooled investment vehicle; or (2) otherwise engaging in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle).

See also Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles,

Release No. IA-2628 (Aug. 3, 2007) [72 FR 153 (Aug. 9, 2007)]).

207

See Commission Interpretation Regarding Standard of Conduct for Investment Advisers,

Release No. IA-5248 (June 5, 2019) [84 FR 33669 (July 12, 2019)] (“IA Interpretation”).

Some commenters also stated that an adviser's Federal fiduciary duty may address conflicts of interest, including through appropriate disclosure and informed client consent.

208

As the Commission has stated, while full and fair disclosure of all material facts relating to the advisory relationship or of conflicts of interest and a client's informed consent prevent the presence of those material facts or conflicts themselves from violating the adviser's fiduciary duty, such disclosure and consent do not satisfy the adviser's duty to act in the client's best interest.

209

By contrast, Rule 192 sets forth an express prohibition against certain conflicted transactions. The final rule will therefore provide additional prophylactic protections for ABS investors by requiring the elimination of those conflicted transactions. For these reasons, we do not believe it would be necessary, appropriate, or consistent with the investor protection objectives of Section 27B to provide a fiduciary duty-based exclusion from the definition of “sponsor.”

208

See, e.g.,

letters from AIMA/ACC; ICI; SIFMA I.

See also

IA Interpretation at 33676 (noting that an adviser must eliminate or at least expose through full and fair disclosure the conflicts associated with its allocation policies, including how the adviser will allocate investment opportunities between clients, such that a client can provide informed consent.).

209

See

IA Interpretation at 33676.

Some commenters also expressed concern that investment advisers who do not participate in the structuring or distribution of ABS would be captured by the proposed definition of “securitization participant” only as a result of being an affiliate or subsidiary of another named securitization participant.

210

One of these commenters stated, however, that permitting the use of information barriers in the final rule would “solve this problem.”

211

Our changes to the scope of the affiliates and subsidiaries covered by the rule, including permitting securitization participants and their affiliates and subsidiaries to employ various mechanisms (such as information barriers) to prevent coordination or sharing of information tailored to their organization,

212

will help address commenters' concerns about the rule's applicability to affiliates and subsidiaries. Therefore, a fiduciary duty-based exclusion to address these concerns is unnecessary.

213

210

See, e.g.,

letters from AIC; ICI; LSTA IV. For example, these commenters stated that investment advisers may engage in separate businesses that are unrelated to their securitization activities, and thus those entities and their employees would have no knowledge of, or involvement in, the securitization activity.

See also

letter from SFA II (stating that advisers typically have fiduciary duties to multiple clients and that such advisers must act in the best interest of each client separately).

211

See

letter from LSTA IV.

212

See

Section II.B.3.c.

213

See also

Section II.D. for a discussion of the revised definition of “conflicted transaction” and the rule's applicability to transactions undertaken pursuant to a fiduciary duty.

Some of these commenters also requested that municipal advisors be excluded from the definition of “sponsor.”

214

These commenters stated that, in addition to the reasons already stated that make it unlikely that a municipal issuer would engage in conflicted transactions, municipal advisors also have a fiduciary duty to their clients, various existing rules and regulations governing their conduct, and that any proprietary bet by a municipal advisor against its client's ABS would already be a violation of the federal securities laws.

215

Municipal advisors

participate in structuring the securities, and although municipal advisors may be subject to other provisions that regulate their conduct, we are not persuaded that advisors to municipal ABS are uniquely different from other securitization participants such that they should be excluded from the final rule. The fact that such entities are subject to potential liability for violations of other laws and regulations does not preclude the Commission from subjecting them to other rules with different objectives. In particular, we note that a municipal advisor's fiduciary duty is to its municipal entity clients, not to investors, and therefore would not necessarily require elimination of conflicted transactions.

216

As discussed earlier, Rule 192 will complement the existing federal securities laws, including general anti-fraud and anti-manipulation provisions, as well as those that apply specifically to securitization, by prophylactically protecting against the sale of ABS tainted by material conflicts of interest.

217

214

See

letters from NAMA; Wulff Hansen.

215

Id. See also

Sections II.B.3.c. and II.D.3. for additional discussions with respect to fiduciary duties in relation to Rule 192.

216

15 U.S.C. 78

-4(c)(1).

217

See

Section I.C.

The Commission also received comment requesting that providers of warehouse financing be excluded from the definition of “sponsor.”

218

A warehouse financing facility is a secured loan from a warehouse lender to provide capital to sponsors to acquire and aggregate assets for securitization.

219

One commenter stated that, because a warehouse lender bears the risk with respect to any assets that cannot be securitized, it acts pursuant to strict underwriting standards reflective of the lender's risk tolerance.

220

If a lender determines that it is unwilling to lend against certain assets, this commenter stated that such influence over the exclusion of those assets could be construed as directing or causing the direction of the structure, design, or assembly of an ABS or the composition of the asset pool.

221

As stated in the Proposing Release, the rule is not designed to hinder routine securitization activities that do not give rise to the risks that Section 27B was intended to address.

222

Warehouse financing is a routine activity to finance the purchase of assets by a securitization participant in furtherance of the issuance of an ABS. A warehouse lender whose role is to engage in such routine lending activity with respect to the ABS, including the lender's right to determine which assets it is or is not willing to finance pursuant to its underwriting standards, does not meet the definition of “sponsor” under the final rule.

223

However, if a securitization participant has an affiliate or subsidiary that is a warehouse lender, and such affiliate or subsidiary meets the definition of securitization participant in Rule 192(c), such person will be subject to the prohibition in Rule 192(a).

224

218

See

letter from ABA.

219

See also

Section II.D.

220

Id.

221

Id.

222

See

Proposing Release Section II.D.1.

223

See also

Section II.D. below for a discussion of why warehouse financing is not a “conflicted transaction” under the final rule.

224

See

Section II.B.3.c.

In the Proposing Release, the Commission explained that the definition of Contractual Rights Sponsor in paragraph (ii)(A) would not require an actual exercise of contractual rights. Two commenters opposed this approach, stating that such person should only be a sponsor if it actually exercised its contractual rights to direct or cause the direction of the structure, design, or assembly of an ABS or the underlying or referenced assets.

225

One of these commenters requested that, if the definition of “sponsor” is not limited to paragraph (i), the final rule should define “sponsor” to include a Regulation AB-based Sponsor or

both

a Contractual Rights Sponsor and Directing Sponsor (

i.e.,

a person who both has a contractual right to, and actually does, direct or cause the direction of the structure, design, or assembly of an ABS or the underlying or referenced assets).

226

This commenter stated that any person who does not have the contractual right, but that is actually involved in the structuring of an ABS or the composition of the underlying or referenced asset pool, would have no practical ability to structure the ABS to fail because the Regulation AB-based Sponsor in the deal (who has exposure to the credit risk of the ABS by operation of the risk retention requirement in Regulation RR) would have no reason to take direction from such person, and that any person who has the contractual right but does not exercise it has no real culpability.

227

While the risk retention requirement in Regulation RR does contribute to the alignment of interests between ABS sponsors and investors, not all types of ABS that are subject to the prohibition in Rule 192 are subject to Regulation RR. A sponsor of an ABS that is not subject to Regulation RR would not be required to retain exposure to the credit risk of the ABS, meaning that there may not be an alignment of interests between the sponsor and investors, which could create an opportunity for the sponsor to be influenced by a third party's requests. Moreover, any person with a contractual right to structure, design, or assemble an ABS or the underlying or referenced pool of assets—whether those rights are exercised or not—would have access to information about the ABS or its underlying or referenced assets prior to the sale of the ABS and would therefore have the opportunity to use that information to engage in a conflicted transaction with respect to such ABS or underlying or referenced assets. As discussed above, final Rule 192 is designed to eliminate such opportunity and incentive. As such, a person may be a “sponsor” subject to the prohibition in final Rule 192 if it is either a Regulation AB-based Sponsor or a Contractual Rights Sponsor, and the final rule does not require that an actual exercise of contractual rights is necessary to meet the definition of “sponsor.” Consequently, a person who meets the definitional criteria in Rule 192(c) can be a “sponsor” regardless of whether it is referred to as the sponsor or some other title (

e.g.,

issuer, depositor, originator, collateral manager).

225

See

letters from AIC; SIFMA I (stating that such a position would be inconsistent with the ordinary and natural meaning of the term). We discuss the comments related to the “ordinary and natural meaning” of sponsor earlier in this section.

226

See

letter from AIC.

227

Id.

While we understand commenter concerns about the number and types of entities that may be sponsors under the rule, we continue to believe, for the reasons discussed above, that the scope of the definition is necessary to capture the relevant securitization participants that would have the incentive and ability to engage in conflicted transactions as a result of their ability to structure, design, or assemble an ABS or its underlying or referenced asset pool. Moreover, we believe that commenters' concerns will be mitigated by the revisions made to the definition of “sponsor” to exclude Long-only Investors and to not adopt the proposed definition of Directing Sponsor, as discussed above, and to the scope of affiliates and subsidiaries captured by the definition of “securitization participant” discussed in Section II.B.3.c. below, as well as the guidance that we have provided with respect to certain market participants discussed in this section and in the discussion about the Service Provider Exclusion in Section II.B.3.b.iii. below.

iii. Service Provider Exclusion

Commenters generally supported an exclusion from the definition of

“sponsor” for transaction parties performing the enumerated types of activities, but requested certain modifications to clarify the scope of the exclusion.

228

Several commenters stated that the activities performed over the life of the securitization by servicers, special servicers, and other contractual providers are consistent with the activities enumerated in the Service Provider Exclusion in proposed paragraph (ii)(C) and requested that servicers be specifically listed in the exclusion.

229

Some commenters further requested that the rule include an explicit exclusion for credit rating agencies in the final rule text.

230

228

See, e.g.,

letters from AIC; CREFC I; LSTA III; LSTA IV; MBA; SFA II; SIFMA I; SIFMA II.

229

See, e.g.,

letters from AIC; CREFC I; CREFC II; MBA; SFA II; SIFMA I. One of these commenters noted that its membership was not in agreement with respect to whether a special servicer in CMBS transactions should be included in the Service Provider Exclusion.

See

letter from SFA II.

230

See

letters from LSTA III; SFA I; SFA II; SIFMA I.

Consistent with the view expressed by the Commission in the Proposing Release,

231

we agree with commenters that the activities customarily performed by accountants, attorneys, and credit rating agencies with respect to the creation and sale of an ABS, as well as the activities customarily performed by trustees, custodians, paying agents, calculation agents, and servicers,

232

relating to the ongoing management and administration of the entity that issues the ABS and its related assets, are the types of activities described in the Servicer Provider Exclusion. We understand, however, commenters' concern that, because the proposed text of the exclusion did not refer specifically to activities that constitute “ongoing administration” of the ABS or the underlying or referenced asset pool, the scope of the exclusion as proposed could be read to refer only to activities performed in connection with the initial creation of the securitization and therefore was not sufficiently clear.

233

231

See

Proposing Release at 9686.

232

See

Section II.D. below for a discussion of servicing activity as it relates to the definition of “conflicted transaction” under the rule.

233

See, e.g.,

letters from AIC; CREFC I; CREFC II; MBA; SFA I; SFA II.

We are revising the definition of “sponsor” to align with the Commission's intent as stated in the Proposing Release and in response to commenter requests to specify in the rule text that the activities performed over the life of the securitization by third-party servicers and other contractual providers

234

are consistent with the activities enumerated in the rule.

235

As adopted, therefore, the definition of “sponsor”—notwithstanding paragraph (ii)—excludes any person that performs only administrative, legal, due diligence, custodial, or ministerial acts related to the structure, design, assembly, or ongoing administration of the ABS or the composition of the pool of assets underlying or referenced by the ABS (the Service Provider Exclusion).

236

For purposes of the Service Provider Exclusion, “ongoing administration” refers to the types of activities typically performed by servicers, trustees, custodians, paying agents, calculation agents, and other contractual service providers pursuant to their contractual obligations in a securitization transaction over the life of the ABS; it does not refer to active portfolio management or other such activity that would be subject to the “sponsor” definition.

237

234

Servicers and other contractual service providers whose activities meet the criteria specified in the Service Provider Exclusion may nonetheless be securitization participants subject to the prohibition in Rule 192(a)(1) with respect to the relevant ABS if, for example, such person is an affiliate or subsidiary of a named securitization participant.

See

Section II.B.3.c.

235

See, e.g.,

letters from AIC; CREFC I; CREFC II; MBA; SFA II; SIFMA I.

236

Because the types of activities listed in the Service Provider Exclusion rule text already cover the activities of credit rating agencies, no additional revision to the rule text is unnecessary.

237

See, e.g.,

the discussion in Section II.D. below related to normal-course servicing activity in a covered transaction not constituting a “conflicted transaction” under the final rule.

Some commenters also requested that we replace the qualifier “only” in the Service Provider Exclusion with “primarily,”

238

stating that the use of “only” erodes the exclusion because the administrative, legal, due diligence, custodial, or ministerial acts performed by the service providers discussed above could also be viewed as activities causing the direction of the structure, design, or assembly of an ABS or the composition of the pool assets.

239

As one of these commenters pointed out, such activities could include the drafting and negotiation of the operating and disclosure documents with respect to an ABS, setting fees to be paid to certain transaction parties, reviewing the asset pool, negotiating the priority of payments within an ABS transaction, potentially advising on how to structure an ABS to meet the objectives of the deal parties, collecting payments on underlying assets, and making distributions to bondholders.

240

While we agree that such activities could be understood to be consistent with the activities described in the Contractual Rights Sponsor definition, we also agree that they are consistent with the administrative, legal, due diligence, custodial, and ministerial activities covered by the Service Provider Exclusion. As the Commission stated in the Proposing Release, the Service Provider Exclusion is intended to avoid inadvertently including certain parties to securitization transactions whose contractual rights could be interpreted as consistent with the activities described in paragraph (ii) of the definition of “sponsor” but who are otherwise not the parties that Section 27B was intended to cover. For this reason, so long as a person's activities with respect to the relevant ABS are only administrative, legal, due diligence, custodial, or ministerial in nature, the Service Provider Exclusion is available “notwithstanding” the fact that such a person's contractual rights could also be understood to be captured by paragraph (ii) of the definition of sponsor. Accordingly, we do not believe that changing “only” to “primarily” is necessary.

238

See, e.g.,

letters from SFA I; SFA II; SIFMA II.

239

See, e.g.,

letters from SFA I; SFA II.

240

See

letter from SFA II.

Moreover, we continue to believe that limiting the exclusion in this way is necessary to ensure that it does not inadvertently extend to deal participants with more active participation in the creation and administration of asset-backed securities. For example, a special servicer can potentially have a significant role in the servicing and disposition of troubled assets in an asset pool, such as the ability to determine whether (and when) to negotiate a workout of a loan, take possession of the property collateralizing a loan, and purchase the loan out of the securitization at a discount and, therefore, the special servicer's activities may not be limited to the types of administrative or ministerial functions eligible for the exclusion.

241

As such, whether a special servicer qualifies for the exclusion will depend on the facts and circumstances of the ABS and the activities performed by the special servicer.

242

Similarly, as support for its request that the Service Provider Exclusion include activities relating to ongoing administration of the ABS, one commenter gave the example of a

situation in which a placement agent for a CLO may also be an administrative agent under a loan that underlies a CLO and therefore has various duties that it must perform.

243

This commenter requested, therefore, that the final rule include an exception for actions taken by securitization participants pursuant to their duties under the CLO or underlying loan documents and stated that including ongoing administration activities in the Service Provider Exclusion would achieve that.

244

In the example provided by this commenter, such administrative agent is also the placement agent for the relevant ABS, and therefore will be ineligible to rely on the Service Provider Exclusion because its activities are not “only” administrative in nature and because, as placement agent, such person is a securitization participant pursuant to the definition of “placement agent” in Rule 192(c).

245

For these reasons we do not believe that it would be appropriate to revise the exclusion as requested.

241

See

Section II.B.3.b.ii. and Section II.D.1.c.iii.

242

For example, if the special servicer for a CMBS transaction is also the B-piece buyer (or an affiliate or subsidiary of the B-piece buyer) and can exercise such contractual rights with respect to the asset pool without needing to obtain the consent of any unaffiliated investor or transaction party in the CMBS transaction, then the special servicer's activities are not only administrative, legal, due diligence, custodial, or ministerial in nature with respect to such CMBS transaction.

243

See

letter from LSTA IV.

244

Id.

245

See

Section II.B.3.a.

The Commission also received comment requesting that third-party asset sellers be included in the Servicer Provider Exclusion.

246

A third-party asset seller is a third-party originator who sells loans or other assets to the ultimate ABS sponsor before those assets are transferred into the securitization structure. The purchase of assets from unaffiliated originators to be later transferred into a securitization is a routine capital market function through which the seller would not have the contractual right to direct or cause the direction of the structure, design, or assembly of an ABS or the composition of the underlying or referenced pool of assets. Such persons' activities are limited to merely originating assets that are then transferred to the ABS sponsor in a true sale; they do not have ongoing roles or contractual rights or duties with respect to the assets or the ultimate ABS. Therefore, while we do not believe that the function performed by these third-party asset sellers is consistent with the types of activities enumerated in the Service Provider Exclusion, we do agree that such persons are not “sponsors” under the rule.

247

246

See

letter from SFA II.

247

An originator that is affiliated with an underwriter, placement agent, initial purchaser, or sponsor of a covered transaction, however, may be a securitization participant subject to the rule's prohibition against engaging in conflicted transactions.

See

Section II.B.3.c. below.

iv. U.S. Government Exclusion

Consistent with the proposal, the United States or an agency of the United States is not a “sponsor” for purposes of the final rule with respect to its ABS that are fully insured or fully guaranteed as to the timely payment of principal and interest.

248

However, in a change from the proposal, we are not adopting the proposed exclusion from the “sponsor” definition for the Enterprises, which we discuss in greater detail below.

248

17 CFR 192(c).

With respect to an ABS that is fully insured or fully guaranteed as to the timely payment of principal and interest by the United States, it is the United States as guarantor that is exposed to the full credit risk related to the underlying assets, rather than the investors in the ABS.

249

This is because investors in such ABS rely on the support provided by the full faith and credit of the United States and not on the creditworthiness of the obligors on the underlying assets, meaning they are not exposed to the credit risk of the underlying assets.

250

Consequently, investors in such ABS are not exposed to the risk that was present in certain ABS transactions at the time of the financial crisis of 2007-2009 where investors suffered credit-based losses due to the poor performance of the relevant asset pool while key securitization parties entered into transactions to profit from such poor performance.

249

See

Proposing Release Section II.B.2.c.

250

Id.

Commenters supported the proposal to exclude the United States Government and its agencies from the definition of “sponsor,”

251

with one of these commenters specifically agreeing that mortgage-backed securities (“MBS”) guaranteed by the Government National Mortgage Association (“Ginnie Mae”) are fully guaranteed by the United States Government

252

and thus should be excluded from the “sponsor” definition.

253

This commenter also stated that, because issuers of Ginnie Mae MBS have “considerable discretion” over which loans to include in the MBS, those issuers should be sponsors under the rule.

254

For purposes of the final rule, and as noted in the Proposing Release, the exclusion in paragraph (iv) of the definition of “sponsor” applies only to the specified entities (

i.e.,

the United States or an agency of the United States).

255

Any other securitization participant involved with an ABS issued or guaranteed by a specified entity (

e.g.,

an underwriter or a non-governmental sponsor) is subject to the prohibition in Rule 192 against engaging in transactions that effectively represent a bet against the relevant ABS.

256

If, therefore, the issuer of a fully-guaranteed Ginnie Mae ABS meets the definition of “sponsor” as adopted,

257

such issuer is prohibited from engaging in conflicted transactions.

258

251

See, e.g.,

letters from M. Calabria; SIFMA I.

252

See

Title III of National Housing Act, 12 U.S.C. 1716-1723 (2019) (stating that “[t]he full faith and credit of the United States is pledged to the payment of all amounts which may be required to be paid under any guaranty under this subsection.”)

available at https://www.ginniemae.gov/about_us/what_we_do/Documents/statutes.pdf.

253

See

letter from M. Calabria.

254

Id.

255

See

Rule 192(c) and Proposing Release Section II.B.2.c.

256

Id.

257

See

Sections II.B.3.b.i. and II.B.3.b.ii.

258

See

Section II.D. for a discussion of what constitutes a “conflicted transaction” under the final rule.

Comments related to the proposed exclusion from the definition of “sponsor” for the Enterprises were mixed. Some commenters supported the exclusion of Fannie Mae and Freddie Mac from the “sponsor” definition with some modifications to extend the exclusion beyond conservatorship,

259

with one suggesting that the exclusion be conditioned on the Enterprises retaining their current status as government sponsored entities because the Federal Housing Finance Agency's (“FHFA”) oversight sufficiently guards against the types of behavior that Section 27B is intended to prevent.

260

Another commenter suggested that, in addition to the exclusion from the “sponsor” definition, the rule should exclude from the definition of “asset-backed security” any ABS that is fully insured or fully guaranteed as to the timely payment of principal and interest by the Enterprises while operating under the conservatorship or receivership of the FHFA.

261

259

See, e.g.,

letters from Fannie and Freddie; SFA II.

260

See

letter from Fannie and Freddie.

261

See

letter from ABA. As discussed below, the final rule does not include an exclusion from the definition of “sponsor” for the Enterprises while in conservatorship in light of concerns that the proposed exclusion was unclear and concerns regarding the impact of an automatic change to the Enterprises' status immediately upon existing conservatorship. For the same reasons, the final rule does not contain an exclusion for an ABS that is fully insured or fully guaranteed as to the timely payment of principal and interest by the Enterprises while in conservatorship.

See

Section II.A. for more information about the types of ABS that are subject to the final rule.

Some commenters, however, opposed including the Enterprises in the exclusion from the “sponsor”

definition.

262

One commenter stated that the capital support from the United States while in conservatorship or receivership is not an explicit government guarantee of the Enterprises' ABS or MBS.

263

Another commenter suggested that the Enterprises should be sponsors for purposes of Rule 192, but that the final rule should permit credit risk transfer (“CRT”) transactions regardless of sponsor,

264

which would treat the Enterprises and other market participants alike.

262

See, e.g.,

letters from HPC; M. Calabria.

263

See

letter from M. Calabria. This commenter also stated that an exclusion from the prohibition in Rule 192 would disincentivize or prevent the Enterprises from leaving conservatorship.

264

See

letter from HPC.

Because, as proposed, the Enterprise exclusion from the “sponsor” definition would only apply with respect to ABS fully guaranteed by the Enterprises and not with respect to the CRT securities they issue,

265

some commenters expressed concerns that, together with the proposed restriction that the initial distribution of an asset-based security would not be risk-mitigating hedging,

266

the proposed rule would have the effect of prohibiting all Enterprise CRTs as

per se

conflicted transactions.

267

Some commenters stated that, for this reason, the cumulative effect of the proposed approach (

i.e.,

to exclude the Enterprises as sponsors with respect to fully-guaranteed ABS, but not with respect to CRTs, and to exclude CRT transactions from the risk-mitigation hedging exception) was unclear.

268

To address this concern, one commenter requested that either the Enterprises be excluded from the “sponsor” definition in perpetuity (or until the Commission revisited the exclusion), or that the Enterprises' synthetic ABS issuances (

i.e.,

CRT transactions) be permitted to qualify under the risk-mitigating hedging exception so long as they continue to be government-sponsored enterprises.

269

Alternatively, this commenter requested that the sponsor exclusion remain in place for at least 24 months following the Enterprises' exit from conservatorship to permit the Commission to make a determination after the nature of the post-conservatorship landscape becomes clear.

270

Relatedly, one commenter stated that permitting the Enterprises to continue their credit risk transfer securitization program under the risk-mitigating hedging exception would provide more clarity and certainty for all participants involved than excluding the Enterprises from the “sponsor” definition.

271

265

The Enterprises engage in security-based credit risk transfer transactions to allow for efficient mitigation of the Enterprises' retained credit risk associated with their holdings of residential and commercial mortgages and MBS. A security-based CRT transaction typically involves the issuance of unguaranteed ABS by a special purpose trust where the performance of such ABS is linked to the performance of a reference pool of mortgage loans that collateralize Enterprise guaranteed-MBS. As part of a security-based CRT transaction structure, the relevant Enterprise enters into an agreement with the special purpose trust pursuant to which the trust has a contractual obligation to pay the Enterprise upon the occurrence of certain adverse events with respect to the referenced mortgage loans.

See

letter from Fannie and Freddie;

See also

Section II.E. for a discussion of the risk-mitigation hedging exception under the final rule.

270

See

letter from Fannie and Freddie.

271

See

letter from SIFMA II.

After considering the comments received, we are not adopting the proposed Enterprise exclusion from the “sponsor” definition and, therefore, the Enterprises are sponsors under the final rule with respect to any ABS they issue, whether or not it is fully guaranteed. Although we still believe that, while the Enterprises are in conservatorship, investors in their guaranteed ABS are not exposed to the same types of risk that existed in certain ABS transactions leading up the financial crisis of 2007-2009,

272

that would not be the case once the Enterprises exit conservatorship. In light of the concerns that the cumulative effect of the proposed exclusion from the “sponsor” definition and the proposed exception for risk-mitigating hedging activities was unclear, we have concluded that including the Enterprises as sponsors and permitting Enterprise CRT transactions so long as they meet the conditions enumerated in the risk-mitigating hedging exception,

273

would provide more certainty for the Enterprises and the market. Further, we believe that the revisions to the definition of “conflicted transactions,” together with the revised exception for risk-mitigating hedging activities discussed below, sufficiently address commenter concerns with respect to the ability of the Enterprises to continue to engage in CRT transactions for purposes of managing their credit risk.

274

As sponsors—and, thus, securitization participants—subject to the prohibition in Rule 192(a) against engaging in conflicted transactions, the Enterprises are subject to the same limitations on such behavior as private market participants.

272

See

Proposing Release Section II.B.2.c.

273

See

Section II.E.

274

As discussed in detail below, the definition of “conflicted transaction” in final Rule 192(a)(3) captures the relevant conflict of interest in the context of the issuance of a new synthetic ABS (

e.g.,

the issuance of a CRT transaction), but such synthetic ABS will be permissible if it meets the conditions for the exception for risk-mitigating hedging activities. Furthermore, the synthetic ABS will be subject to the rule and the related securitization participants will be subject to the prohibition.

See

Sections II.D. and II.E. below.

c. Affiliates and Subsidiaries

After consideration of commenters' concerns and recommendations, discussed in detail below, we are revising paragraph (ii) of the definition of “securitization participant” to limit which affiliates or subsidiaries

275

are securitization participants. An affiliate or subsidiary is a securitization participant for purposes of the final rule only if it acts in coordination with

276

an underwriter, placement agent, initial purchaser, or sponsor or if it has access to or receives information about the relevant ABS or the asset pool underlying or referenced by the relevant ABS prior to the date of the first closing of the sale of the relevant ABS.

277

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.