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Section 621 of Dodd-Frank prohibits an underwriter, placement agent, initial purchaser, or sponsor of an asset-backed security (including a synthetic asset-backed security) or any affiliate or subsidiary of any such entity, from engaging 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 for a period of one year after the date of the first closing of the sale of the asset-backed security. Exceptions are made for (i) risk-mitigating hedging activities, (ii) liquidity commitments and (iii) bona fide market-making.
In September 2012, the SEC published proposed Rule 127B which would implement the prohibition under Section 621 in connection with most securitizations. According to then-Chairman Mary Shapiro, the proposed rule is designed to ensure that those who create and sell ABS cannot profit by betting against those same securities at the expense of those who buy them. The SEC has yet to publish final rules.
The SEC does not propose a bright-line test for determining compliance with the proposed rule, opting instead to propose an interpretive framework regarding application of the proposed rule.
Final regulation implementing Section 621 have not yet been adopted.
Regulatory Materials
- SEC Proposed Rule: Prohibition Against Conflicts of Interest in Certain Securitizations - September 28, 2011
- SEC Fact Sheet: Conflicts of Interest Proposal - September 19, 2011
- Dodd-Frank Act: Section 621: Conflicts of Interest - July 21, 2010
- Congressional Record: Dodd-Frank Section 621: Conflicts of Interest - July 15, 2010
