The Securities and Exchange Commission (SEC) is not slowing down in its efforts to craft new rules as 2023 comes to a close. These regulations are expected to have a significant impact on big banks and financial firms, potentially resulting in substantial costs.

One of the most recent developments is a rule from the SEC to address conflicts of interest in the asset-backed securitization market. The objective is to prevent firms from shorting or placing bets against asset-backed securities that they were involved in creating.

The motivation behind this regulation stems from the financial crisis-era case involving Goldman Sachs and the infamous “Abacus” deal. In that situation, Goldman Sachs allowed a hedge fund to assist in selecting assets for a collateralized debt obligation (CDO) it planned to bet against. However, Goldman Sachs failed to disclose the fund’s involvement to investors who purchased the CDO. As a result, in 2010, the bank agreed to pay $550 million to settle charges brought by the SEC regarding incomplete marketing materials for the security. Although the bank did not admit or deny the allegations, it acknowledged the incompleteness of its marketing materials.

Initially, there were concerns among financial institutions and trade groups when draft versions of the conflicts-of-interest rule were published. They feared that the rule, as originally written, would impede their day-to-day hedging activities.

For example, home lenders sometimes short mortgage-backed securities as a precaution against rising interest rates during the period between a home borrower locking in their rate and closing the home sale. Being unable to engage in such hedging activities could cause some large asset-backed security issuers to pull back from the business. Michael Bright, CEO of the Structured Finance Association, explained that this trade group represents companies in the securitization industry, including JP Morgan Chase and GM Financial.

However, in the final rule released on Monday, the SEC eliminated the most burdensome provisions. Despite this improvement, some firms may still need to invest millions or tens of millions of dollars to establish compliance programs ensuring they do not run afoul of the rule.

Title: The SEC’s Rule-Making Agenda Raises Concerns for Financial Firms


SEC Rule Eases Restrictions on Short Positions

The new conflicts-of-interest rule mandates that firms implement controls to prevent short positions being taken on any asset-backed security (ABS) they are involved with. However, financial firms express concerns about the increased costs associated with implementing such controls. According to industry experts, this additional burden affects profitability and may lead to higher fees for consumers.

Exceptions in the Rule

To accommodate large banks with extensive investment businesses, the SEC made exceptions in their rule. The rule doesn’t apply to subsidiaries or affiliates of securitizers that lack access to information on the security in question. This exemption allows these banks to engage in certain bets against specific securities without violating the conflicts-of-interest rule.

SEC Chairman’s Perspective

SEC Chair Gary Gensler emphasizes that the conflicts-of-interest rule fulfills Congress’s mandate to address conflicts of interest in the securitization market. Gensler believes that such measures are necessary to prevent a repeat of the 2008 financial crisis and maintain financial stability.

Industry Worries

Despite the conflicts-of-interest rule being less stringent than expected, financial firms remain wary of the overall impact of the SEC’s rule-making push. They argue that these regulatory changes impose significant costs and hinder profitability. In particular, the Securities Industry and Financial Markets Association criticizes the unprecedented pace of the SEC’s rule proposals, commenting that they cause disruption and increased billable hours for legal and compliance consultants.


The SEC’s rule-making agenda, including the conflicts-of-interest rule, has sparked concerns within the financial industry. While the rule aims to address conflicts of interest and promote market integrity, financial firms fear the potential negative impact on their profits and consumer fees. As the SEC continues to implement various rule changes, industry participants closely monitor their effects on the overall landscape of the financial market.

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