85396 Federal Register / Vol. 88, No. 234 / Thursday, December 7, 2023 / Rules and Regulations 

1 15 U.S.C. 77z–2a. 

2Prohibition 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)]. 

3Sec. 621, Public Law 111–203, 124 Stat. 1376, 

1632. 4 15 U.S.C. 77z–2a(a). 

5 15 U.S.C. 77z–2a(b). 

6 15 U.S.C. 77z–2a(c). 

7See Proposing Release Section II. 8See Proposing Release Section I. 

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 assetbacked 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 

27B1 (‘‘Section 27B’’),2 which was 

added by Section 621 of the Dodd-Frank 

Act.3 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.4 Section 27B(b) further requires 

that the Commission issue rules for the 

purpose of implementing the 

prohibition in Section 27B(a).5 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.6

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 marketmaking activities.7 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 2007–2009.8


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9Comment 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 repropose 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. 10See, 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’’). 

11See, 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. 

12See, 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. 

13See, 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’’). 

14See Section II.A. 

15See Section II.B. 

16See Section II.C. 

17See Section II.D. 

18See Section II.D.3.d. 

19See Section II.H. 

20See Section II.A.3.c. 

21See Sections II.E. through II.G. 

22The 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. 

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.9 Commenters generally 

supported the Commission’s statutorilymandated goal of protecting investors by 

preventing the sale of ABS tainted by 

material conflicts of interest,10 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.11 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.12

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.13

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,14 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.15 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.16 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.17

Commenters also requested that the 

final rule include an alternative 

materiality standard 18 and an ‘‘antievasion’’ provision rather than the 

‘‘anti-circumvention’’ provision that 

was proposed.19 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.20 Finally, the 

Commission received comments 

suggesting certain revisions to the 

proposed exceptions for risk-mitigating 

hedging activities, liquidity 

commitments, and bona fide marketmaking activities.21 As we discuss in 

greater detail below, we have made 

certain revisions in response to the 

comments received. 

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 22

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. 

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 


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85398 Federal Register / Vol. 88, No. 234 / Thursday, December 7, 2023 / Rules and Regulations 

23See Section II.C. 

24See Section II.D. 

25 Id. 

26Rule 192(c) also defines ‘‘distribution’’ as used 

in the definition for ‘‘underwriter’’ and ‘‘placement 

agent.’’ See Section II.B. 

27As 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. 

28As 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. 

29 15 U.S.C. 78a et seq. 

30For 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. 

31See Sections II.E. through II.G. 

32See Section II.H. 

33See Section II.A.3.c. 

34See, 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. 

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,23 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.24 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)’’); 25

• 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.26 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; 27 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; 28

• 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’’) 29 and also includes 

synthetic ABS and hybrid cash and 

synthetic ABS; 30

• 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; 31

• 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 marketmaking 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; 32 and 

• 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’’).33

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,34 by explicitly protecting ABS 

investors against material conflicts of 

interest. 

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 


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35 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 . . .’’ 

36See Proposing Release Section II.A. 

37See Proposing Release Section II.A. 

38See, e.g., letters from ABA; AFR; Better 

Markets; ICI. 

39See, 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 insurancelinked notes are not synthetic ABS). 

40See, 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 assetbacked 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). 

41See, e.g., letters from ABA; ICI; SIFMA I. 

42See, 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. 

43See, e.g., letters from NAHEFFA; NABL et al. 

44See letters from ABA; AFME; AIMA/ACC; ICI; 

SFA I; SFA II; SIFMA I; SIFMA II. 

45See letter from AIMA/ACC. 

46See, e.g., letters from ABA; AFME; AIC; SFA I; 

SFA II; SIFMA I; SFA II. 

47See letters from AFR; Better Markets. 

48See, e.g., letters from AIC; American Securities 

Association dated Mar. 23, 2023 (‘‘ASA’’). 

49 17 CFR 230.192(c). 

50 15 U.S.C. 77z–2a(a). 

51See 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. 

52See 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’’). 

53 17 U.S.C. 78c(a)(79). 

54As 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 DoddFrank Act that use the Exchange Act ABS 

definition, such as Regulation RR, 17 CFR 

240.15Ga-1(a) (‘‘Exchange Act Rule 15Ga-1’’), and 

Continued 

Exchange Act 35 (‘‘Exchange Act ABS’’) 

(which encompasses both registered and 

unregistered offerings), as well as 

synthetic ABS and hybrid cash and 

synthetic ABS.36 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.37

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,38 though several commenters 

requested additional clarification 

regarding certain types of financial 

products and securities,39 or that certain 

securities be excluded from the 

definition,40 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,41 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.42 Other commenters disagreed, 

however, stating that it remains unclear 

to them whether certain securities 

would be captured by the definition as 

proposed.43 Additionally, several 

commenters requested that the final rule 

include definitions for ‘‘synthetic 

ABS’’ 44 and ‘‘hybrid cash and synthetic 

ABS’’ 45 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.46 Finally, 

while some commenters agreed that 

Rule 192’s prohibition should not be 

limited to ABS transactions that are 

intentionally ‘‘designed to fail,’’ 47

others expressed the view that Section 

27B targets only ABS that are 

intentionally ‘‘designed to fail.’’ 48

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.49 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.’’ 50 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.51 This, in turn, would 

frustrate the statutory mandate of 

Section 27B. 

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.52 As 

specified in the Exchange Act ABS 

definition, an asset-backed security is a 

security collateralized by any ‘‘selfliquidating financial asset.’’ 53

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.54 For example, several 


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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 lienbacked 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. 

55See, 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. 

56As 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. 

57See, e.g., letters from ASA; NABL et al.; 

NAHEFFA; letter from National Association of 

Municipal Advisors dated Mar. 31, 2023 

(‘‘NAMA’’); SIFMA I. 

58See letter from ASA. 

59See Section II.D. 

60See Section II.B.3.b. for a discussion of the 

definition of a ‘‘securitization participant’’ with 

respect to municipal securitizations. 

61See letter from NAHEFFA. 

62The 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. 

63See letter from NAHEFFA. 

64 Id. 

65See, 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). 

66Analyzing 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. 

67 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. 

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)’’).55 These commenters generally 

stated that certain municipal securities, 

including single-asset conduit bonds,56

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.57 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.58 Such swaps or other 

transactions could be conflicted 

transactions if they meet the definition 

in Rule 192(a)(3).59 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.60

With respect to single-asset conduit 

bonds, one commenter stated that the 

market (both municipal and nonmunicipal) does not consider a conduit 

bond backed by a single loan to be an 

asset-backed security.61 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’’ 62 of financial assets.63 The 

commenter described this as a ‘‘novel 

application’’ of the Exchange Act ABS 

definition.64 We disagree with the 

commenter’s characterization of the 

proposed definition. Section 27B, which 

was added by Section 621 of the DoddFrank 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.65 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.66 Moreover, if we were to 

adopt an exemption for transactions 

collateralized by a single, selfliquidating 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.’’ 

One commenter suggested that we 

exclude direct private placement 

transactions exempt from registration 

under Section 4(a)(2) of the Securities 

Act,67 stating that the ABS purchasers in 

such transactions are highly 

sophisticated investors that participate 

directly in nearly all phases of the 


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68See letter from SIFMA I. 

69 Id. 

70See 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. 

71 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. 

72See, e.g., letters from ABA; Representative 

Nickel et al.; SFA I; SIFMA I. 

73See also note 80, and the accompanying text for 

a discussion regarding funding agreement-backed 

notes. 

74See letters from AFME; ABA; SIFMA I. 

75 15 U.S.C. 77c. 

76See, e.g., letter from ABA. 

77For 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. 

78See, e.g., letter from SIFMA I. 

79See 17 CFR 230.192(c). 

80See 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. 

81See Proposing Release Section II.A. and Section 

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

Release. 

82See, e.g., letters from ABA; AIMA/ACC; AFME; 

SFA I; SFA II; SIFMA I; SIFMA II. 

83See letter from AIMA/ACC. 

84See letters from ABA; AFME; SFA II; SIFMA 

I; SIFMA II. 

85See, e.g., letters from ABA; SFA II; SIFMA II. 

structuring and creation of the ABS.68

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.69

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.70 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.71 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. 

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.72 Some 

commenters sought clarification that 

insurance policies or contracts (and 

securities related to those insurance 

products, such as mortgage insurance 

linked-notes (‘‘MILNs’’) 73) and 

corporate debt securities are not 

Exchange Act ABS.74 Insurance policies 

and contracts, such as private mortgage 

insurance contracts, are not securities,75

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.76 The collateral for the MILN 

are the private mortgage insurance 

contracts, which are not self-liquidating 

financial assets.77 Corporate debt 

securities are issued by a corporate 

issuer and represent direct payment 

obligations of the corporate issuer.78

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).79

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.80 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. 

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).81 The Commission 

received several comment letters 

requesting that we adopt a definition of 

‘‘synthetic asset-backed security’’ 82 and 

‘‘hybrid cash and synthetic asset-backed 

security’’ 83 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.84 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.85

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 


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86See Proposing Release Section II.A. and Section 

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

Release. 

87 Id. 

88See, 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. 

89 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. 90See Section II.D. for a discussion of ‘‘conflicted 

transactions’’ under the final rule. 91See, e.g., letters from SFA II; SIFMA I; SIFMA 

II. 92See, e.g., letters from ABA; SFA II; SIFMA I; 

SIFMA II. 93See 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 totalreturn swap on a single loan or narrow-based index 

is a security-based swap). 

94For 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. 

95See, e.g., letters from ABA; AFME; AIC; SFA I; 

SFA II; SIFMA I; SIFMA II. 

96See, 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). 

97 Morrison v. National Australia Bank, Ltd. et al., 

561 U.S. 247 (2010). 

98See generally 561 U.S. 247. See, e.g., Abitron 

Austria GmbH v. 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’’). 

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.86 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 selfliquidating financial assets.87

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 insurancelinked notes are not synthetic assetbacked securities under Rule 192(c) and 

that the reinsurance agreements 

embedded in the MILN transactions are 

not ‘‘conflicted transactions’’ under 

Rule 192(a)(3).88 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.89 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).90

Some commenters also requested 

confirmation that synthetic ABS for 

purposes of Rule 192 does not include 

equity-linked or commodity-linked 

products.91 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.92 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 selfliquidating 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.93 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.94 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. 

c. Cross-Border Application of Rule 192 

The Commission received several 

comments relating to the potential 

cross-border application of Rule 192.95

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 crossborder 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 crossborder context. 

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.96 Consistent with 

that territorial approach, which is based 

on U.S. Supreme Court precedent, 

including Morrison v. National 

Australia Bank, Ltd,97 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.98

If there are ABS sales in the United 


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99Securitization 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 SEC v. 

Scoville, 913 F.3d 1204, 1215–1219 (10th Cir. 2019) 

(holding ‘‘that Congress has ‘affirmatively and 

unmistakably’ indicated that the antifraud 

provisions of the federal securities acts apply 

extraterritorially when the statutory conduct-andeffects test is met’’). 

100See Abitron Austria GmbH, 2023 WL 4239255, 

at *2529 (explaining that ‘‘[i]f the conduct relevant 

to the statute’s focus occurred in the United States, 

then the case involves a permissible domestic 

application of the statute, even if other conduct 

occurred abroad’’ (citations and internal quotation 

marks omitted)). 

101See, e.g., Section I.C. 

102See, e.g., letters from AFME, AIC; SFA I. 

103See, e.g., letter from AFME. One commenter 

also stated that it is unclear whether the 

Commission has authority over foreign entities 

apart from legal and practical issues regarding 

supervision and enforcement and that Rule 192 

could put U.S. entities at a competitive 

disadvantage in relation to their international peers. 

See letter from AIMA/ACC. In addition to the 

changes discussed in this section, we believe that 

the revisions to the rule’s coverage of affiliates and 

subsidiaries, as discussed in Section II.B.3.c. below, 

will mitigate such concerns. 

104See letter from AFME. 

105 Id. 

106 Id. 

107See, e.g., letters from ABA; AFME; AIC 

(requesting that the Commission adopt a safe harbor 

for foreign entities and transactions and suggesting 

that it could do so by exempting foreign entities 

from the definition of ‘‘securitization participant’’ 

and excluding securities issued pursuant to 

Regulation S from the definition of ‘‘asset-backed 

security’’); SFA I; SFA II; SIFMA I (citing Morrison 

v. Nat’l Austl. Bank Ltd., 561 U.S. 247 (2010) as the 

existing law on the extent of the rule’s 

extraterritorial reach and seeking a safe harbor to 

provide clarity in order to facilitate compliance); 

SIFMA II. 

108See 12 CFR 246.20. 

109 17 CFR 240.15Ga–2. See, e.g., letters from 

ABA; AIC; AFME; SFA I; SFA II; SIFMA I; SIFMA 

II. 

110See, e.g., letters from SFA II; SIFMA II. 

111See 17 CFR 240.15Ga–2(e) (‘‘Rule 15Ga–2(e)’’) 

and 17 CFR 230.901 and 902(e). 

112See Morrison v. Nat’l Austl. Bank Ltd., 561 

U.S. 247 (2010). 

113Rule 15Ga–2(e) generally states that the 

requirements of Rule 15Ga–2 would not apply to an 

offering of an asset-backed security if certain 

conditions are met, including (1) the offering is not 

required to be, and is not, registered under the 

Securities Act, (2) the issuer of the rated security 

is not a U.S. person (as defined in Rule 902 of 

Regulation S), and (3) all offers and sales of the ABS 

is in compliance with Regulation S. 

114 17 CFR 230.902(k). 

115 17 CFR 230.901 through 905. See Rule 192(e). 

Securitization participants are advised that even if 

the safe harbor conditions are met, 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. See supra note 

99. 

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.99 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

Having provided the foregoing general 

guidance regarding Rule 192’s crossborder scope, we turn to address those 

comments that raised cross-border 

considerations. Some commenters 

expressed concerns that the 

Commission did not address crossborder application of the proposed rule 

in the Proposing Release,102 with some 

stating that, without guidance regarding 

cross-border applicability, together with 

the proposed definition of affiliates and 

subsidiaries, the proposed rule could 

potentially apply to all affiliates and 

subsidiaries of the named securitization 

participants anywhere in the world, 

regardless of their knowledge of, or 

participation in, the transaction.103 One 

commenter further stated that such 

application could have a significant 

adverse effect on the ability of market 

participants in non-U.S. jurisdictions to 

satisfy the prudential and capital 

requirements regulations related to 

permissible securitization transactions 

used for capital optimization and 

balance sheet management in those 

jurisdictions.104 For example, this 

commenter stated that certain synthetic 

securitizations are permitted in the 

European Union and the United 

Kingdom under the European Banking 

Authority’s Simple, Transparent and 

Standardized (‘‘STS’’) framework.105

The commenter further stated that, to 

the extent that such framework could be 

inconsistent with final Rule 192, crossborder applicability of Rule 192 could 

result in those transactions being 

impermissible, which could have 

undesirable consequences for European 

markets.106

The Commission also received 

comments requesting that the final rule 

include a safe harbor for foreign 

transactions and securitization 

participants to provide clarity to the 

market.107 These commenters stated that 

such an approach would be consistent 

with other Commission rules applicable 

to securitizations that were promulgated 

under the Securities Act and Exchange 

Act, such as Regulation RR108 and 

Exchange Act Rule 15Ga–2.109 Some of 

these commenters further suggested that 

the final rule include a foreign 

transaction safe harbor that states 

specifically that the prohibition in Rule 

192 does not apply to an asset-backed 

security if the offer and sale of the ABS 

was or is not required to be registered 

(and is/was not registered) under the 

Securities Act of 1933, the offer and sale 

of all of the ABS is or was made outside 

the United States, and the issuing entity 

of the ABS is a foreign issuer,110 which 

is similar to the safe harbor included in 

Rule 15Ga–2 and incorporates 

principles contained in Regulation S.111

After considering these suggestions, 

we are including a foreign transaction 

safe harbor in final Rule 192 to provide 

additional certainty with regard to the 

territorial approach discussed above. 

Moreover, we agree with commenters 

that including a foreign transaction safe 

harbor is consistent with other 

securitization rules promulgated by the 

Commission, such as Regulation RR and 

Exchange Act Rule 15Ga–2, and that 

commenters’ suggestions to rely on the 

principles contained in Regulation S in 

adopting such a safe harbor are 

consistent the Commission’s crossborder authority.112 We also agree with 

commenters that it is appropriate to 

model the safe harbor provision in Rule 

192 on existing Rule 15Ga–2(e).113

Therefore, the prohibition in final Rule 

192(a)(1) will not apply to an assetbacked security (as defined by this rule) 

if it is not issued by a U.S. person (as 

that term is defined in Rule 902 of 

Regulation S) 114 and the offer and sale 

of such asset-backed security is in 

compliance with Regulation S.115 The 

inclusion of this safe harbor for certain 

foreign securitizations will help address 

commenters’ concerns with respect to 

application of the rule to extraterritorial 

transactions and securitization 

participants. 


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116See Proposing Release Section II.B. 

117 Id. The Commission also proposed that 

‘‘affiliate’’ and ‘‘subsidiary’’ would have the same 

meaning as set forth in Securities Act Rule 405 (17 

CFR 230.405). 

118See Proposing Release Section II.B. 

119See Proposing Release Section II.B. 

120See Proposing Release Section II.B.2.b. 

121See Proposing Release Section II.B.2.c. 

122See, e.g., letters from AFR; ICI. The 

Commission also proposed a definition of 

‘‘distribution’’ as used in the underwriter and 

placement agent definition but did not receive 

comment addressing the proposed definition of 

‘‘distribution.’’ 

123See, e.g., letters from AFR; Better Markets 

(expressing support for the definition of ‘‘sponsor’’ 

as proposed). 

124See, e.g., letters from ABA; AIMA/ACC; 

CREFC I, MBA; MFA II; NAMA; U.S. 

Representatives Wiley Nickel, Bryan Steil, Josh 

Gottheimer, Blaine Luetkemeyer, Jim Himes, 

Michael V. Lawler, Juan Vargas, Scott Fitzgerald, 

Vicente Gonzalez, Young Kim, Ritchie Torres, Zach 

Nunn, Gregory W. Meeks, Andy Barr, Steven 

Horsford, Andrew R. Garbarino, Brittany Pettersen, 

Ann Wagner, David Scott, Bill Huizenga, Brad 

Sherman (Ranking Member, Subcommittee on 

Capital Markets), Byron Donalds, Bill Foster, 

Emanuel Cleaver, II, and Sean Casten dated Oct. 31, 

2023 (‘‘Representative Nickel et al.’’) (referring 

generally to the definition of ‘‘securitization 

participant’’); SFA I; SIFMA I. Some commenters 

also stated that certain underwriters, placement 

agents, and initial purchasers that were not part of 

the design of the ABS could be scoped in as well. 

See Sections II.B.2. and II.B.3.a. 

125See, e.g., letters from ABA; AIC; AIMA/ACC; 

AFME; Loan Syndications & Trading Association 

dated May 2, 2023 (‘‘LSTA III’’); MBA; MFA II; 

NAMA; Representatives Wagner and Huizenga; 

Senator Kennedy; SFA I; SIFMA I; Wulff Hansen. 

126See, e.g., letters from ABA; AFME; CREFC I; 

International Association of Credit Portfolio 

Managers dated Mar. 27, 2023 (‘‘IACPM’’); MBA; 

SFA I. 

127See, e.g., letters from ABA; AIC; AFME; ICI; 

LSTA III; Loan Syndications & Trading Association 

dated Oct. 30, 2023 (‘‘LSTA IV’’); MFA II; SFA I; 

SIFMA I. 

128See, e.g., letters from ABA; AIMA/ACC; 

AFME; AIC; ICI; LSTA II; LSTA III; MFA II; 

Pentalpha Surveillance LLC dated Mar. 27, 2023 

(‘‘Pentalpha’’); SFA I; SIFMA I. 

129See, e.g., letters from CREFC I; LSTA III; SFA 

I; SIFMA I. 

130See, e.g., letters from Fannie Mae and Freddie 

Mac dated Mar. 27, 2023 (‘‘Fannie and Freddie’’); 

Housing Policy Council dated Mar. 27, 2023 

(‘‘HPC’’); Mark Calabria, Former FHFA Director, 

dated Mar. 25, 2023 (‘‘M. Calabria’’). 

131See letter from HPC. 

132See Section II.B.3.b. for a detailed discussion 

of the comments received and the revised 

definition. 

B. Scope: Securitization Participants 

1. Proposed Scope of Securitization 

Participants 

Consistent with Section 27B(a), the 

Commission proposed that the 

prohibition in Rule 192 would apply to 

transactions entered into by an 

underwriter, placement agent, initial 

purchaser, or sponsor of a covered ABS, 

as well as any of their affiliates or 

subsidiaries, each of which would be a 

‘‘securitization participant’’ as defined 

in Rule 192(c).116 The Commission 

proposed definitions for the terms 

‘‘underwriter,’’ ‘‘placement agent,’’ 

‘‘initial purchaser,’’ and ‘‘sponsor’’ that 

are generally based on existing 

definitions and reflect the functions of 

these market participants in ABS 

transactions and not merely their formal 

labels.117 In addition, the proposed 

definition of ‘‘sponsor’’ was based on 

the definition of sponsor in Regulation 

AB as well as, subject to certain 

exceptions, any person that directs or 

causes the direction of the structure, 

design, or assembly of the ABS or the 

composition of the pool of assets 

underlying the ABS or that has the 

contractual right to do so.118 As 

explained in the Proposing Release, 

such a person 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 

of the relevant ABS or its underlying 

asset pool if such person were to enter 

in a conflicted transaction.119 The 

Commission also proposed certain 

limited exclusions from the definition of 

‘‘sponsor’’ for persons that perform only 

administrative, legal, due diligence, 

custodial, or ministerial acts related to 

the structure, design, or assembly of an 

asset-backed security or the composition 

of the pool of assets underlying the 

ABS,120 as well as for certain U.S. 

Federal Government entities and the 

Enterprises, subject to certain 

conditions.121

2. Comments Received 

Commenters generally supported the 

proposal to define the securitization 

participants subject to the prohibition in 

the final rule.122 While some 

commenters agreed with the proposed 

approach of defining the covered 

persons with respect to their functions 

in securitization markets,123 several 

commenters expressed significant 

concerns regarding the scope of the 

proposed definition of ‘‘sponsor,’’ 

stating that it could potentially capture 

market participants that Section 27B did 

not intend to include.124 For example, 

several commenters stated that the 

proposed definition of ‘‘sponsor’’ was 

overly broad and exceeded the intent of 

Section 27B.125 As discussed below, 

some of these commenters stated that 

including any person that directs or has 

the contractual right to direct the 

structure, design, or assembly of an ABS 

could result in nearly every participant 

in a securitization transaction being a 

sponsor, including, for example, 

investors in the relevant ABS.126 Many 

commenters acknowledged that Section 

27B specifically identifies affiliates and 

subsidiaries of other named 

securitization participants as being 

subject to the rule’s prohibition, but also 

expressed concern that the inclusion of 

certain affiliates and subsidiaries would 

make the rule unworkable.127

Accordingly, several commenters 

requested that the rule permit the use of 

information barriers to address these 

challenges.128 The Commission also 

received comments requesting revisions 

to the proposed exclusion for persons 

that perform only administrative, legal, 

due diligence, custodial, or ministerial 

acts related to the ABS or its underlying 

or referenced asset pool 129 and the 

proposed exclusion for certain U.S. 

Federal Government entities and the 

Enterprises, which we discuss in greater 

detail below.130 Finally, one commenter 

stated that a securitization participant 

should only come within the scope of 

the prohibition in Rule 192 if such 

participant intended to profit from the 

securitization transaction to the 

detriment of investors or otherwise 

designed an ABS to fail.131

3. Final Rule 

As discussed below, we are adopting 

the definitions of ‘‘underwriter,’’ 

‘‘placement agent,’’ ‘‘initial purchaser,’’ 

and ‘‘distribution’’ as proposed. We are 

modifying the proposed definition of 

‘‘sponsor’’ to address commenter 

concerns regarding the scope of the 

definition with respect to a person who 

acts solely pursuant to such person’s 

contractual rights as a holder of a long 

position in an asset-backed security and 

a person’s administrative and 

ministerial activities related to the 

ongoing administration of an ABS.132

Also, as discussed in greater detail in 

Section II.B.3.b.ii. 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. In response to comments 

received relating to confusion with 

respect to the proposed rule’s treatment 

of credit risk transfer transactions, we 

are removing the specific exclusion for 

the Enterprises in favor of addressing 

those comments through the riskmitigating hedging exception, which we 

discuss in more detail in Sections 

II.B.3.b.iv. and II.E., below. To address 

concerns about the rule’s applicability 

to affiliates and subsidiaries, we are 


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Federal Register / Vol. 88, No. 234 / Thursday, December 7, 2023 / Rules and Regulations 85405 

133See Section II.B.3.c. 

134 17 CFR 230.192(c). 

135The definition of underwriter for purposes of 

Rule 192 has no impact on the definition, 

responsibility, or liability of an underwriter under 

Securities Act Section 2(a)(11). Additionally, while 

these definitional prongs are also used for the 

definition of ‘‘underwriter’’ in the Volcker Rule (17 

CFR 255.4(a)(4)) and Regulation M (17 CFR 

242.100(b)), the definition we are adopting in Rule 

192(c) has no impact on the definition of 

‘‘underwriter’’ in either of those rules. See also 

Proposing Release Section II.B.1. 

136The Commission did not receive any 

comments addressing the proposed definition of 

‘‘distribution.’’ 

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. 

138The definition of ‘‘initial purchaser’’ in Rule 

192(c) has no impact on the application of Rule 

144A (17 CFR 230.144A). 

139See 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. 

140See Section II.C.3. for a discussion of what 

constitutes an ‘‘agreement’’ for purposes of Rule 

192(a)(1). 141See also Proposing Release Section II.B.1. 

adopting revisions to the definition of 

‘‘securitization participant’’ regarding 

when an affiliate or subsidiary of an 

underwriter, placement agent, initial 

purchaser, or sponsor is subject to the 

prohibition against engaging in 

conflicted transactions.133 Final Rule 

192 does not include a requirement that 

the securitization participant intended 

to profit from a transaction to the 

detriment of investors or otherwise 

designed the ABS to fail. As discussed 

in greater detail in Sections II.A.3. and 

II.D., we believe that narrowing the 

scope of the final rule to add an element 

of intent is inappropriate and it is not 

relevant for purposes of the final rule 

whether the securitization participant 

makes (or intended to make) a profit. 

Narrowing the scope of the rule to 

require knowledge or intent would 

frustrate the statutory mandate of 

Section 27B. 

a. Placement Agent, Underwriter, and 

Initial Purchaser 

Consistent with the proposal, final 

Rule 192(c) defines ‘‘placement agent’’ 

and ‘‘underwriter’’ as a person who has 

agreed with an issuer or selling security 

holder to: 

• Purchase securities from the issuer 

or selling security holder for 

distribution; 

• Engage in a distribution for or on 

behalf of such issuer or selling security 

holder; or 

• Manage or supervise a distribution 

for or on behalf of such issuer or selling 

security holder.134

These definitions are focused on the 

functional role that a person would 

assume in connection with a 

distribution of securities.135 Also 

consistent with the proposal,136 final 

Rule 192(c) defines ‘‘distribution’’ as 

used in the definitions for 

‘‘underwriter’’ and ‘‘placement agent’’ to 

mean: 

• 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

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

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. 

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 


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142The 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. 

143As 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. 

144See Sections II.B.2. and II.B.3.b.iv. for a 

discussion of comments received and the final U.S. 

Government Exclusion. 

145See 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. 

146 17 CFR 230.192(c). 

147 17 CFR 229.1101(l). 

148 17 CFR 246. 

149See, e.g., letters from AIC; SFA I; SIFMA I. 

150See, 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 v. 

San Antonio Metropolitan Transit Authority, 469 

U.S. 528 (1985); South Carolina v. 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. 

152See letter from NABL et al. (stating that 

municipal investment policies are ‘‘centered on 

preservation of principal or moderate growth.’’) 

153See Section II.D.3 

154See, e.g., letters from NABL et al.; NAHEFFA; 

NAMA; SIFMA I. 

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: 

• 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: 

Æ A person who performs only 

administrative, legal, due diligence, 

custodial, or ministerial acts related to 

the structure, design, assembly, or 

ongoing administration of an assetbacked security or the composition of 

the pool of assets underlying or 

referenced by the asset-backed security 

(the ‘‘Service Provider Exclusion’’); or 

Æ 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

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

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

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 


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155See, e.g., letters from NAHEFFA; NAMA. 

156See Proposing Release Request for Comment 

59. 

157See, e.g., letters from NAHEFFA, NAMA. 

158See Section IV for a discussion of the 

Commission’s economic analysis of the impacts of 

Rule 192 and a discussion of alternatives 

considered. 

159See Section II.A.3.a. 

160Or, 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. 

161The 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. 

162As 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. 

163See Proposing Release Section II.B.2.b. 

164See Proposing Release Section II.B. 

165See letters from AFR; Better Markets. 

166See, 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. 

167See, 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). 

168See, 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). 

169See, e.g., letters from ABA; AIC; SIFMA I. 

170See, e.g., letters from ABA; AIC; SIFMA I. 

protections afforded by the statute 

regardless of how likely the 

securitization participant is to engage in 

a conflicted transaction. 

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

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

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. 

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 ABbased 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 ABbased 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

Regulation AB is a set of disclosure 

items that form the basis for disclosure 

in Securities Act registration statements 

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171See Sections III.A.2. and III.B.3. of the 2004 

Regulation AB Adopting Release. 

172See 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. 

174See also Section III.A.2. of the 2004 Regulation 

AB Adopting Release. 

175See Section II.A.3. 

176The 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. 78o–11(a)(3)), which was added by 

Section 941 of the Dodd-Frank Act (Pub. L. 111– 

203). 

177See letter from AIC (citing The Loan 

Syndications and Trading Association v. 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). 

178See LSTA Decision. See also 15 U.S.C. 78o– 

11(b)(1). 

179See LSTA Decision, 882 F.3d at 223. 

180 15 U.S.C. 78o–11(a)(3). 

181See, 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). 

182See, 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. 

183See, e.g., letters from ABA; CREFC I; CREFC 

II; SFA I; SFA II; SIFMA I. 

184See, e.g., letter from ABA; LSTA IV. 

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 assetbacked 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. 

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

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


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185See, e.g., letter from ICI. 186See, 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. 187See, e.g., letter from ABA. 188See, 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. 189See Proposing Release Section II.B.2. 190See, 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. 

191For 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. 

192See, e.g., letters from CREFC I; ICI; SFA II. 

193See, e.g., letters from CREFC I; SFA II; SIFMA 

II. 

194See, e.g., letter from CREFC I; SFA I. 

195As 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 noninvestment 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. 

196See, e.g., letters from ABA; CREFC I; Fannie 

and Freddie; MBA. 

197The 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. 

198See, e.g., letter from CREFC I. 

199See Section II.B.3.b.iii. for a discussion of the 

final rule’s application to special servicers. 

and other investment advisers,185

servicers,186 and warehouse lenders,187

each of which we discuss below. 

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.’’ 

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. 

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 ‘‘Bpiece 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 Bpiece 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). 

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 


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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. 

201See Section II.B.3.c. 

202See Section II.B.3.b.i. for additional discussion 

about Rule 192’s application to municipal advisors. 

203See, e.g., letters from ABA; ICI; LSTA IV; 

NAMA; Wulff Hansen. 

204See letter from SIFMA I. 

205Section 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. 

206See 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)]). 

207See Commission Interpretation Regarding 

Standard of Conduct for Investment Advisers, 

Release No. IA–5248 (June 5, 2019) [84 FR 33669 

(July 12, 2019)] (‘‘IA Interpretation’’). 

208See, 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.). 

209See IA Interpretation at 33676. 

210See, 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). 

211See letter from LSTA IV. 

212See Section II.B.3.c. 

213See 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. 

214See 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. 

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. 

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. 

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.’’ 

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

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 


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216 15 U.S.C. 78o–4(c)(1). 

217See Section I.C. 

218See letter from ABA. 

219See also Section II.D. 

220 Id. 

221 Id. 

222See Proposing Release Section II.D.1. 

223See also Section II.D. below for a discussion 

of why warehouse financing is not a ‘‘conflicted 

transaction’’ under the final rule. 

224See Section II.B.3.c. 

225See 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. 

226See letter from AIC. 

227 Id. 

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 antimanipulation 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

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

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). 

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 


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228See, e.g., letters from AIC; CREFC I; LSTA III; 

LSTA IV; MBA; SFA II; SIFMA I; SIFMA II. 229See, 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. 230See letters from LSTA III; SFA I; SFA II; 

SIFMA I. 231See Proposing Release at 9686. 232See Section II.D. below for a discussion of 

servicing activity as it relates to the definition of 

‘‘conflicted transaction’’ under the rule. 

233See, e.g., letters from AIC; CREFC I; CREFC II; 

MBA; SFA I; SFA II. 

234Servicers 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. 

235See, e.g., letters from AIC; CREFC I; CREFC II; 

MBA; SFA II; SIFMA I. 

236Because 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. 

237See, 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. 

238See, e.g., letters from SFA I; SFA II; SIFMA II. 

239See, e.g., letters from SFA I; SFA II. 

240See letter from SFA II. 

241See Section II.B.3.b.ii. and Section II.D.1.c.iii. 242For 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. 

‘‘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

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

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

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. 

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 


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243See letter from LSTA IV. 

244 Id. 

245See Section II.B.3.a. 

246See letter from SFA II. 

247An 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. 

248 17 CFR 192(c). 

249See Proposing Release Section II.B.2.c. 

250 Id. 

251See, e.g., letters from M. Calabria; SIFMA I. 

252See 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. 

253See letter from M. Calabria. 

254 Id. 

255See Rule 192(c) and Proposing Release Section 

II.B.2.c. 

256 Id. 

257See Sections II.B.3.b.i. and II.B.3.b.ii. 

258See Section II.D. for a discussion of what 

constitutes a ‘‘conflicted transaction’’ under the 

final rule. 

259See, e.g., letters from Fannie and Freddie; SFA 

II. 

260See letter from Fannie and Freddie. 

261See 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. 

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. 

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 thirdparty 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

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. 

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. 

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

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 ‘‘assetbacked 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

Some commenters, however, opposed 

including the Enterprises in the 

exclusion from the ‘‘sponsor’’ 


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262See, e.g., letters from HPC; M. Calabria. 

263See 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. 

264See letter from HPC. 

265The 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, 

e.g., the relevant legal documentation and other 

related information about Freddie Mac’s singlefamily transaction, available at https://capital

markets.freddiemac.com/crt/securities/dealdocuments. 

266See Section II.E. 

267See, e.g., letters from ABA; Fannie and 

Freddie; SFA I. Some of these commenters stated 

that they did not believe that this was the intent in 

light of the Commission’s statement in the 

Proposing Release that the exclusion from the 

‘‘sponsor’’ definition should address concerns that, 

absent such an exception, an Enterprise might be 

prohibited from engaging in a security-based CRT 

transaction. See letters from ABA; SIFMA II. 

268See, e.g., letters from ABA; Fannie and 

Freddie; SIFMA II. 

269See letter from Fannie and Freddie. See also 

Section II.E. for a discussion of the risk-mitigation 

hedging exception under the final rule. 

270See letter from Fannie and Freddie. 

271See letter from SIFMA II. 

272See Proposing Release Section II.B.2.c. 

273See Section II.E. 

274As 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. 

275For purposes of the final rule, the terms 

‘‘affiliate’’ and ‘‘subsidiary’’ will have the same 

meaning as in Securities Act Rule 405 (17 CFR 

230.405). Under Securities Act Rule 405, an 

‘‘affiliate’’ of a specified person is a person that 

directly, or indirectly through one or more 

intermediaries, controls or is controlled by, or is 

under common control with, the person specified, 

and a ‘‘subsidiary’’ of a specified person means an 

affiliate controlled by such person directly, or 

indirectly through one or more intermediaries. 

Securities Act Rule 405 also defines the term 

‘‘control’’ to mean the possession, direct or indirect, 

of the power to direct or cause the direction of the 

management and policies of a person, whether 

through the ownership of voting securities, by 

contract, or otherwise. 17 CFR 230.405. 

276As suggested by one commenter, an affiliate or 

subsidiary would be acting in coordination with a 

named securitization participant if it (i) directly 

engages in the structuring of or asset selection for 

the securitization, (ii) directly engages in other 

activities in support of the issuance and 

distribution of the ABS, or (iii) otherwise acts in 

concert with its affiliated securitization participant 

through, e.g., coordination of trading activities. See 

letter from ABA. 

277 17 CFR 230.190(c). 

278See, e.g., letters from AARP dated Mar. 23, 

2023 (‘‘AARP’’); Better Markets. 

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. 

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 postconservatorship landscape becomes 

clear.270 Relatedly, one commenter 

stated that permitting the Enterprises to 

continue their credit risk transfer 

securitization program under the riskmitigating hedging exception would 

provide more clarity and certainty for 

all participants involved than excluding 

the Enterprises from the ‘‘sponsor’’ 

definition.271

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. 

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

While some commenters supported 

the proposal to include affiliates and 

subsidiaries of underwriters, placement 

agents, initial purchasers, and sponsors 

as securitizations participants,278 many 

commenters expressed concerns that the 


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279See, e.g., letters from ABA; AIC; AFME; 

AIMA/ACC; ICI; LSTA III; LSTA IV; MFA II; SFA 

I; SIFMA I. 

280See, e.g., letters from ABA; AIC; AFME; ICI; 

MFA II. Some commenters also expressed concern 

that, without recognizing information barriers or 

including other limitations on the rule’s 

applicability to affiliates and subsidiaries, the 

prohibition could apply to foreign affiliates and 

subsidiaries of U.S.-based securitization 

participants regardless of their participation in the 

transaction. See, e.g., letters from AFME; AIC. We 

believe that, together with the discussion in Section 

II.A.3.c. above about the cross-border application of 

Rule 192, the definition of ‘‘securitization 

participant’’ with respect to affiliates and 

subsidiaries, as discussed in greater detail below, 

will appropriately limit such application only to 

those affiliates and subsidiaries who have direct 

involvement in, or access to information about, a 

covered ABS, which should mitigate these 

concerns. 

281See, e.g., letters from ABA; SFA I; SFA II. 

282See, e.g., letters from ABA; AFME; ICI; LSTA 

III; SFA II; SIFMA I; SIFMA II. 

283See, e.g., letters from ABA; AIC; ICI; SFA I. 

284See, e.g., letter from AIC. 

285See, e.g., letters from ABA; AIC; ICI; LSTA IV; 

SIFMA I. See also Section II.B.3.b.ii., above, for a 

discussion of comments requesting an exclusion 

from the definition of ‘‘sponsor’’ for any person 

operating pursuant to a fiduciary duty. 

286See, e.g., letters from ABA; SIFMA I. 

287See Section II.D. for a discussion of why the 

rule does not include a similar exclusion from the 

definition of ‘‘conflicted transactions’’ for 

transactions that such securitization participants 

may enter into pursuant to a fiduciary duty. 

288See, e.g., letters from AARP; Better Markets. 

289See, e.g., letters from ABA; AIMA/ACC; 

AFME; AIC; ICI; LSTA II; LSTA III; LSTA IV; MFA 

II; Pentalpha; SFA I; SIFMA I; SFA II; SIFMA II. 

Some of these commenters also recommended that, 

in the alternative, the final rule could specify that 

any transaction described in paragraph (a)(3) of the 

final rule, entered into at the direction of a related 

person, would be presumed to be a conflicted 

transaction unless that person demonstrates that it 

had no substantive role in structuring, marketing, 

or selling the ABS or in the selection of the asset 

pool underlying or referenced by the relevant ABS. 

See letters from SFA II; SIFMA II. 

290See Proposing Release Section II.B.c.3. The 

Proposing Release noted as an example that brokers 

and dealers have used information barriers to 

manage the potential misuse of material non-public 

information to comply with Exchange Act 15(g) (17 

U.S.C. 78o(g)) and that Regulation M contains an 

exception for affiliated purchasers if, among other 

requirements, the affiliate maintains and enforces 

written policies and procedures reasonably 

designed to prevent the flow of information to or 

from the affiliate that might result in a violation of 

Regulation M (17 CFR 242.100–105; 17 CFR 

242.100(b)). Id. 

291See, e.g., letters from ABA; AIMA/ACC; 

AFME; AIC; ICI; LSTA II; LSTA III; MFA II; 

Pentalpha; SFA I; SIFMA I. 

292See, e.g., letters from ICI; Institute of Internal 

Auditors dated Mar. 27, 2023 (‘‘IIA’’); Pentalpha. 

See Proposing Release Section II.B.3. and Requests 

for Comment 29–38 for a discussion of potential 

conditions for an information barrier exception. The 

modifications suggested by these commenters 

include: to specify that policies and procedures 

must be ‘‘reasonably designed,’’ that an internal 

audit group be allowed to conduct the required 

independent assessment, and that the independent 

assessment should be conducted with respect to 

individual securitizations rather than on a corporate 

platform basis. While one of these commenters 

supported the inclusion of an information barrier 

exception subject to certain conditions in the final 

rule, the commenter also requested that investment 

funds and advisers be exempt from the conditions 

to qualify for such exception. See letter from ICI. 

293See, e.g., letters from ABA; AFME; AIC; LSTA 

III; MFA II; SIFMA I. 

294See, e.g., letters from LSTA III; LSTA IV; SFA 

II; SIFMA I. Other commenters similarly indicated 

that a final rule that merely permits the use of 

existing information barriers would be sufficient to 

address their concerns. See, e.g., letters from ABA 

(stating that it is critical for the final rule to 

acknowledge information barriers); MFA II (noting 

that any information barriers permitted must be 

workable). 

proposed approach would hinder 

market participants’ ability to effectively 

comply with the rule’s prohibition.279

Commenters stated that compliance 

with Rule 192 as proposed could 

interfere with securitization 

participants’ ability to comply with 

existing information barriers, including 

those that may be required by other 

applicable Federal- and State-level laws, 

in order to effectively implement a 

compliance program designed to 

monitor for, and prevent the occurrence 

of, potentially conflicted 

transactions.280 Some of these 

commenters acknowledged that Section 

27B specifies that the prohibition 

applies to affiliates and subsidiaries of 

other named securitization 

participants 281 and many supported 

such application in circumstances in 

which affiliates or subsidiaries have 

direct involvement in, or knowledge of, 

the covered ABS or are otherwise acting 

in coordination with the named 

securitization participant.282

Commenters recommended various 

approaches to address their stated 

concerns, which can generally be 

grouped into three categories, which we 

discuss below. 

First, several commenters requested 

that the rule exclude affiliates and 

subsidiaries from the definition of 

‘‘securitization participant’’ and instead 

treat a securitization participant’s use of 

an affiliate or subsidiary to indirectly 

engage in a conflicted transaction as an 

evasion of the prohibition in Rule 

192(a).283 To implement this 

recommendation, commenters suggested 

that the proposed anti-circumvention 

provision could be revised to make clear 

that a securitization participant could 

not engage in a transaction as part of a 

plan or scheme to evade the prohibition 

of the rule, whether directly or 

indirectly, including through the use of 

affiliates and subsidiaries.284 Section 

27B, however, states that affiliates and 

subsidiaries of an underwriter, 

placement agent, initial purchaser, or 

sponsor of a relevant ABS are subject to 

the prohibition in their own right, not 

merely that the other parties to the 

transaction are prohibited from engaging 

in conflicted transactions directly or 

indirectly through an affiliate or 

subsidiary. Accordingly, we believe that 

the suggested revision to treat a 

securitization participant’s use of an 

affiliate or subsidiary to engage in a 

conflicted transaction as an evasion of 

the prohibition would not be 

appropriate or consistent with Section 

27B. 

Second, some commenters requested 

that the rule exclude affiliates and 

subsidiaries bound by, and operating 

consistent with, fiduciary duties from 

the definition of securitization 

participant.285 These commenters stated 

that funds advised by the same asset 

manager should not be considered 

affiliates to the extent that the manager 

is bound by fiduciary duties to the 

issuing entity for the securitization and/ 

or its investors and that the term 

‘‘securitization participant’’ should 

exclude any entity acting in its capacity 

as an investment adviser, as well as that 

entity’s advisory clients.286 For the 

reasons stated in Section II.B.3.b.ii. 

above, we believe that permitting a 

fiduciary duty-based exclusion from the 

rule is inconsistent with the rule’s 

objective.287

Finally, while some commenters 

agreed that the rule should not include 

an exemption for affiliates and 

subsidiaries dependent on the use of 

information barriers,288 other 

commenters requested that the final rule 

permit the use of information barriers or 

other indicia of separateness to mitigate 

potential conflicts of interest.289 In 

support of this request, these 

commenters referenced the Proposing 

Release statements 290 acknowledging 

that the Commission has recognized 

information barriers in other Federal 

securities laws and the rules 

thereunder.291 Some of these 

commenters requested that we adopt a 

specific information barrier exception in 

the final rule and offered suggestions for 

modifications to the conditions for such 

an exception as discussed in the 

Proposing Release,292 but several others 

articulated concerns that the conditions 

would be too burdensome or 

expensive.293 Instead, many 

commenters suggested that the final rule 

should consider the presence or absence 

of information barriers (and the 

robustness and effectiveness thereof) as 

part of a multi-factor analysis as a 

preferred alternative to affirmatively 

requiring the use of prescriptive 

information barriers.294 To highlight the 

challenges that would be presented by 

a prescriptive information barrier 

exception, some commenters stated that 


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295See, e.g., letters from AFME; SIFMA I. 

296 17 CFR 255. 

297See, e.g., letter from AIC (noting as an example 

that investment funds and portfolio companies are 

not subject to the Volcker Rule). 

298For example, while it may be relatively easy 

for large multi-service firms to implement 

information barriers by establishing completely 

separate teams of employees to prevent the flow of 

information where necessary, smaller securitization 

participants may not have a sufficient number of 

employees to do so, and therefore such persons may 

need to employ different mechanisms to prevent 

such flow of information. 

299For example, larger multi-service entities may 

have many different business units already subject 

to various regulatory provisions related to the unit’s 

particular business and that may require 

compliance programs involving information 

barriers. A prescriptive information barrier 

exception in Rule 192, therefore, has the potential 

to overlap and/or interfere with those existing 

compliance programs, which could potentially 

increase compliance burdens. 

300 17 CFR 230.192(c). 

301See, e.g., letters from ABA; AFME; ICI; LSTA 

III; LSTA IV; SFA II; SIFMA I; SIFMA II. 

302See, e.g., letters from AIC; LSTA III; SFA II; 

SIFMA I; SIFMA II. 

303 If an affiliate or subsidiary receives 

information—or has access to information—after 

the closing of the first sale of the ABS, then—absent 

coordination with the securitization participant— 

the affiliate or subsidiary will not be a 

securitization participant as defined by the final 

rule. 

304 It will not be inconsistent with this example 

if the relevant entity has a shared research desk that 

provides research to the named securitization 

participant and an affiliated fund but the named 

securitization participant and the affiliated fund 

themselves do not share information with each 

other. 

305As an example, one commenter stated that, if 

affiliated entities operate as independent 

businesses, notwithstanding their common control 

by a shared manager, such entities may have no 

relationship or communication with one another. 

See letter from AIC. As stated above, whether the 

operation as independent businesses, despite 

common control, is sufficient to effectively prevent 

the flow of information between the named 

securitization participant and the affiliate or 

subsidiary will depend on the facts and 

circumstances of the particular transaction. 

306This list is not exhaustive and simply includes 

examples of the types of barriers that could be used 

by securitization participants and their affiliates 

and subsidiaries. We are not endorsing any one of 

these methods over another mechanism that may be 

used to prevent the flow of information between the 

relevant entities. While it is possible that one of 

several securitization participants 

already use information barriers and 

similar mechanisms to ensure 

compliance with various laws and that 

requiring these entities to establish new 

information barriers tailored to Rule 192 

could lead to inconsistent, intersecting, 

and/or conflicting information barriers 

that compromise rather than facilitate 

compliance.295 Other commenters stated 

that, while some securitization 

participants may have existing 

information barriers for compliance 

with other securities laws, such as the 

Volcker Rule,296 not all securitization 

participants subject to the prohibition in 

Rule 192 are necessarily subject to such 

laws, and therefore a prescriptive 

information barrier exception (including 

one modeled on such an exception to 

another securities law) would 

disproportionately increase costs of 

compliance for those entities.297

While it is true that the Federal 

securities laws recognize the use of 

information barriers in certain 

situations, we do not believe that an 

information barrier exception would be 

appropriate in the context of Rule 192 

for several reasons. First, we are 

concerned that an information barrier 

exception has the potential to become a 

‘‘check-the-box’’ exercise that could 

result in an emphasis on form over 

function or effectiveness of such 

information barriers. Due to the wide 

range of securitization participants 

subject to the prohibition in Rule 192, 

any prescriptive information barrier 

exception would have to be drafted in 

such a way as to be generally applicable 

to the various types of securitization 

participants, which could result in 

standards that are either too permissive 

for one type of securitization participant 

(resulting in weakened protections for 

ABS investors) or too difficult for 

another to satisfy due to limitations 

such as numbers of employees, 

regulatory regimes applicable to certain 

types of securitization participants, 

etc.298 Additionally, as demonstrated by 

the commenter concerns discussed 

above, an information barrier exception 

could have the unintended consequence 

of potentially compromising various 

existing compliance programs or 

disadvantaging certain securitization 

participants.299 For these reasons, Rule 

192 does not include an information 

barrier exception. However, we 

acknowledge commenters’ concerns 

about their ability to concurrently 

comply with the prohibition in Rule 192 

with respect to various affiliates and 

subsidiaries, as well as other applicable 

Federal- and State-level laws that may 

permit or require information barriers or 

other similar firewalls. The revisions we 

are adopting to the definition of 

‘‘securitization participant,’’ as 

discussed in greater detail below, are 

aimed at alleviating commenters’ 

concerns with respect to the scope of 

the rule’s prohibition, while also 

obviating the need for a prescriptive 

information barrier exception, avoiding 

potential additional costs associated 

with establishing policies and 

procedures to satisfy conditions 

imposed by such an exception. 

As adopted, an affiliate or subsidiary 

of an underwriter, placement agent, 

initial purchaser, or sponsor will only 

be a securitization participant if the 

affiliate or subsidiary acts in 

coordination with a securitization 

participant or has access to, or receives, 

information about a covered ABS or the 

asset pool underlying or referenced by 

the relevant ABS prior to the date of 

first closing of the sale of the covered 

ABS.300 This approach is consistent 

with the commenter suggestions, as 

noted above, that affiliates or 

subsidiaries should only be subject to 

the prohibition if they have direct 

involvement in, or access to information 

about, the relevant ABS or are otherwise 

acting in coordination with the named 

securitization participant.301 This 

approach is also consistent with 

commenter recommendations that the 

final rule permit securitization 

participants to demonstrate lack of 

involvement or control through the 

presence and effectiveness of 

information barriers or other indicia of 

separateness.302

Whether an affiliate or subsidiary acts 

in coordination with a securitization 

participant or had access to, or received, 

information about an ABS or its 

underlying asset pool or referenced 

asset pool prior to the closing date will 

depend on the facts and circumstances 

of a particular transaction.303 Therefore, 

an affiliate or subsidiary may not be a 

‘‘securitization participant’’ if the 

named securitization participant, for 

example: 

• Has effective information barriers 

between it and the relevant affiliate or 

subsidiary (including written policies 

and procedures designed to prevent the 

flow of information between relevant 

entities, internal controls, physical 

separation of personnel, etc.),304

• Maintains separate trading accounts 

for the named securitization participant 

and the relevant affiliate or subsidiary, 

• Does not have common officers (or 

persons performing similar functions) or 

employees (other than clerical, 

ministerial, or support personnel) 

between the named securitization 

participant and the relevant affiliate or 

subsidiary, 

• Is engaged in an unrelated business 

from the relevant affiliated entity and 

does not, in fact, communicate with 

such relevant affiliated entity,305 or 

• Has personnel with oversight or 

managerial responsibility over accounts 

of both the named securitization 

participant and the affiliate or 

subsidiary, but such persons do not 

have authority to (and do not) execute 

trading in individual securities in the 

accounts or authority to (and do not) 

pre-approve trading decisions for the 

accounts.306


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these methods (or another method not listed here) 

may be sufficient for compliance with the final rule, 

securitization participants may find that they need 

to utilize a combination of methods to establish an 

effective compliance program. 

307A securitization participant generally should 

consider the structure of its organization and the 

ways in which information is shared to assess what 

mechanisms should be employed to comply with 

Rule 192. If, for example, a securitization 

participant employs an information barrier, and the 

barrier fails, whether the affiliate or subsidiary is a 

securitization participant under Rule 192 will 

depend on the facts and circumstances. On one 

hand, if the failure was accidental, was quickly 

remedied upon discovery, and the affiliate did not 

use the information to influence the assets included 

in the ABS, then the affiliate would likely not be 

a securitization participant under Rule 192. On the 

other hand, even if the failure was accidental, but 

the access to information led to the affiliate using 

the information to influence the assets included in 

the ABS, then that affiliate would likely be a 

securitization participant for purposes of Rule 192. 

Additionally, if the affiliated entity did not meet the 

terms of the definition of affiliate and subsidiary, 

as adopted, at the time that it enters into the 

conflicted transaction (i.e., it did not act in 

coordination with the named securitization 

participant and did not have information (or access 

to information) about the ABS or the asset pool 

prior to closing), such affiliated entity would not 

then retroactively become a securitization 

participant upon the subsequent receipt of such 

information. For example, if an affiliate or 

subsidiary receives information—or has access to 

information—after having previously engaged in a 

conflicted transaction, whether the affiliate or 

subsidiary would then be a securitization 

participant under the final definition depends on 

the facts and circumstances as they existed leading 

up to and at the time of the entry into the conflicted 

transaction. 

308See id. 

309This approach also significantly mitigates 

concerns expressed with respect to both the scope 

of the rule’s applicability to affiliates and 

subsidiaries and compliance burdens that would be 

associated with a new prescriptive information 

barrier requirement. See Section IV. 

310See Proposing Release Section II.C. 

311The Proposing Release stated that an 

‘‘agreement’’ need not constitute an executed 

written agreement, such as an engagement letter, 

but rather that oral agreements and facts and 

circumstances constituting an agreement could be 

an agreement for purposes of the rule. See 

Proposing Release at 9692, n. 101. Additionally, the 

Commission requested comment on whether the 

rule should identify specific indicia of having 

reached an ‘‘agreement,’’ but did not receive 

feedback in response to that request. See Proposing 

Release at 9693, Request for Comment 41. 

312See Proposing Release Section II.C. As an 

example, the Commission indicated that engaging 

in substantial negotiations over the terms of an 

engagement letter or other agreement to become an 

underwriter, placement agent, initial purchaser, or 

sponsor of an ABS would constitute taking 

substantial steps to reach an agreement to become 

a securitization participant. 

313See Proposing Release Section II.C. 

314See also Section II.D.1.c.iii for a discussion of 

the comments received regarding certain presecuritization activities by securitization 

participants and the rule’s applicability to such 

activities. 

315See, e.g., letters from ABA; AIMA/ACC; ICI; 

SFA II; SIFMA I. One commenter, without 

expressing support or opposition to the proposed 

commencement point, stated its belief that the 

prohibition timeframe should start ‘‘at the earliest 

moment that a covered person could reasonably 

foresee a conflict of interest with investors,’’ but did 

not elaborate or provide additional context as to 

how to identify such a point in time. See letter from 

AFR. 

Any such mechanisms must 

effectively prevent the affiliate or 

subsidiary from acting in coordination 

with the named securitization 

participant or from accessing or 

receiving information about the relevant 

ABS or the asset pool underlying or 

referenced by the relevant ABS.307

By revising the definition of 

‘‘securitization participant’’ in this way, 

the final rule aims to capture the range 

of affiliates and subsidiaries with the 

opportunity and incentive to engage in 

conflicted transactions without 

frustrating market participants’ ability to 

meet their obligations under other 

Federal- and State-level laws that 

require the use of information barriers 

or other such firewalls. Rather than an 

information barrier exception 

potentially becoming a ‘‘check-the-box’’ 

exercise, securitization participants will 

be incentivized to regularly assess their 

compliance programs to confirm the 

presence and effectiveness of their 

information barriers or other firewalls to 

prevent a potential violation of Rule 

192. Moreover, this approach addresses 

commenters’ concerns with respect to 

additional compliance burdens for 

securitization participants by not 

requiring that they either create new or 

recalibrate existing information barriers 

to satisfy a prescriptive set of conditions 

for Rule 192 compliance. The final rule 

is designed to provide securitization 

participants with the flexibility to use 

information barriers or other 

mechanisms to prevent coordination or 

sharing of information with an affiliate 

or subsidiary, while still achieving the 

objective of prohibiting securitization 

participants from engaging in conflicted 

transactions. 

If, however, an information barrier or 

other tool used to maintain the 

separation of an affiliate or subsidiary 

from another named securitization 

participant failed or was otherwise 

breached, it would call into question 

whether the affiliate or subsidiary had 

access to, or received, information or 

otherwise acted in coordination with 

such named securitization participant 

and such affiliate or subsidiary could 

therefore be a securitization 

participant.308 This approach is 

consistent with Section 27B and 

appropriately balances market 

participants’ need for sufficiently clear 

boundaries to establish effective 

compliance programs. Further, the final 

rule acknowledges the role that 

information barriers play in the 

financial markets, without the need for 

a prescriptive exception, which, as 

noted above, has the potential to 

prioritize form over function in light of 

the wide range of securitization 

participants subject to Rule 192.309

C. Prohibition Timeframe 

1. Proposed Prohibition Timeframe 

Section 27B specifies that 

securitization participants be prohibited 

from entering into a conflicted 

transaction 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,’’ but does 

not specify the commencement point of 

that prohibition. The Commission 

proposed that the prohibition in Rule 

192(a)(1) would commence on the date 

on which a person has reached, or has 

taken substantial steps to reach, an 

agreement that such person will become 

a securitization participant (‘‘proposed 

commencement point’’) and would end 

one year after the date of the first 

closing of the sale of the relevant 

ABS.310 The Commission did not 

propose definitions of ‘‘agreement’’ 311

or ‘‘substantial steps,’’ stating that 

whether a person has taken ‘‘substantial 

steps to reach an agreement to become 

a securitization participant’’ would be a 

facts and circumstances determination 

based on the actions of such person in 

furtherance of becoming a securitization 

participant.312 The proposed approach 

to the commencement point was 

designed to reduce the circumstances in 

which a person could engage in 

prohibited conduct prior to the issuance 

of the relevant ABS and was aimed at 

capturing the point at which a person 

may be incentivized and/or could act on 

an incentive to engage in the 

misconduct that Section 27B is designed 

to prevent.313

2. Comments Received 

The Commission received numerous 

comments on the proposed prohibition 

timeframe.314 Several commenters 

opposed the proposed commencement 

point, stating that the determination of 

whether a person has taken ‘‘substantial 

steps to reach an agreement’’ involves 

too much ambiguity and subjectivity to 

successfully conform their activities to 

the rule and ensure compliance.315

Some commenters further stated that, 

because the proposed commencement 

point is backward-looking (i.e., a person 

can become a securitization participant 

with respect to a relevant ABS before 

the ABS is created and sold), the 

ambiguity introduced by the 


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316See, e.g., letters from ABA; AIMA/ACC; LSTA 

III; MFA II; SIFMA I. Relatedly, one commenter 

stated that, because the proposed timeframe could 

last for more than one year, it could have the effect 

of restricting a trader’s ability to handle unrelated 

transactions because its firm is in a potentially 

conflicted position as it works on a securitization. 

See letter from ASA. We believe that the 

prohibition timeframe, as revised, together with the 

final rule’s applicability to affiliates and 

subsidiaries of named securitization participants, 

should help to mitigate this concern. See Section 

II.B.3.c. 

317See letter from ABA. 

318See Proposing Release at 9693. 

319See letter from SIFMA I. This commenter 

likewise observed that there could be a period of 

time after which a person has taken ‘‘substantial 

steps,’’ but before it is determined that an 

agreement to act as a securitization participant was 

never reached, during which a transaction could be 

challenged as a conflicted transaction, which 

further highlights the challenges presented by the 

‘‘substantial steps’’ construction. 

320See, e.g., letter from ICI. See Section II.B.3.c. 

for a discussion of how Rule 192 will apply to 

affiliates and subsidiaries and the role of 

information barriers. We believe that the changes to 

the definition of ‘‘securitization participant’’ in 

Rule 192(c) with respect to affiliates and 

subsidiaries, together with the revised 

commencement point discussed in this section, 

address these concerns. 

321See, e.g., letters from ABA; MFA II; SFA II; 

SIFMA I. 322See letter from Pentalpha. 

323 17 CFR 230.192(a)(1). 

324See, e.g., notes 319 and 320 and accompanying 

text. The revision to the commencement point also 

will address the commenter concern noted above 

that the proposed commencement point did not 

make clear when a person would no longer be 

subject to the rule if it never reaches an agreement 

to become a securitization participant because the 

prohibition as adopted does not apply until such 

person has reached an agreement. 

325See, e.g., letter from ABA. 

326See, e.g., letter from SFA II. 

327See, e.g., letters from LSTA III; MFA II; SIFMA 

I; SIFMA II. 

328See, e.g., letter from SFA II. 

329See, e.g., letters from LSTA III; MFA II. 

330While a written agreement (such as 

engagement letter) is not necessary to establish an 

‘‘agreement’’ for purposes of final Rule 192, it will 

be sufficient, regardless of whether such written 

agreement includes all material terms of the 

contractual arrangement. This is because, even in 

the absence of such material terms, the written 

agreement will be consistent with an agreement in 

principle to perform as a securitization participant 

for purposes of Rule 192. 

331For example, once a person agrees with the 

issuer or selling security holder to be the 

underwriter for the relevant ABS transaction, that 

underwriter is a securitization participant subject to 

the prohibition in Rule 192, even if a written 

agreement has not yet been executed. 

332See Proposing Release at 9692 n. 101 and 

accompanying text. 

333See, e.g., letters from LSTA III; SIFMA I. 

‘‘substantial steps’’ standard would 

make it particularly difficult to 

determine when a person becomes 

subject to the rule’s prohibition.316 One 

of these commenters stated that it is 

unclear what would constitute taking 

substantial steps related to the use of 

warehouse facilities for the financing of 

assets or for securitizations using master 

trust structures where a pool of assets 

can be assembled in a trust months or 

years before any particular ABS offering 

is contemplated.317 Another commenter 

further stated that, with respect to the 

statement in the Proposing Release that 

the prohibition on material conflicts of 

interest would not apply to a person 

that never reaches an agreement to 

become a securitization participant,318 it 

is not clear at what point in time a 

person would be determined to never 

have reached an agreement (e.g., date of 

first sale of the relevant ABS, or some 

earlier point in time).319 The 

Commission also received comment 

expressing concern that the proposed 

commencement point is particularly 

challenging to implement without an 

information barrier exception because, 

for example, it is possible that an 

affiliate or subsidiary of a person who 

took substantial steps to become a 

securitization participant would be 

unaware of such steps due to existing 

information barriers within a multiservice financial firm.320 Commenters 

requested, therefore, that the rule 

include a more definitive 

commencement point to enable market 

participants to effectively implement 

procedures to govern their compliance 

with the rule’s prohibition.321 The 

Commission received one comment on 

the proposed end date of the prohibition 

timeframe, which suggested that the 

prohibition should potentially apply for 

a longer period of time.322

3. Final Rule 

In response to comments received, we 

are revising the prohibition timeframe to 

begin at a more definitive 

commencement point and are adopting 

the end point of the prohibition 

timeframe as proposed. Under Rule 

192(a)(1), the prohibition against 

entering into conflicted transactions 

will commence on the date on which 

such person has reached an agreement 

to become a securitization participant 

with respect to an asset-backed security 

and will end one year after the date of 

the first closing of the sale of the 

relevant ABS.323 By omitting the 

proposed language about taking 

‘‘substantial steps’’ to reach an 

agreement, the final rule will avoid 

many of the concerns that commenters 

raised with respect to the scope of the 

proposed rule. The prohibition 

timeframe, as revised, together with the 

changes we are making to the final 

rule’s applicability to affiliates and 

subsidiaries of named securitization 

participants, should help to mitigate 

commenters’ concerns about their 

ability to determine when a person is 

subject to the rule’s prohibition.324

The Commission received several 

commenter suggestions for specific 

dates as the prohibition’s 

commencement point, including the 

commencement of marketing or pricing 

of the ABS,325 30 days prior to the first 

sale of the ABS,326 30 days prior to the 

date of the first closing of the sale of the 

ABS,327 the date on which an 

engagement letter is signed,328 and once 

an entity has ‘‘actually’’ become an 

underwriter, placement agent, initial 

purchaser, or sponsor.329 While we 

understand that such specific dates may 

be desirable for market participants 

because they provide a level of certainty 

with respect to when a person is 

operating subject to the prohibition 

against engaging in conflicted 

transactions, we continue to believe that 

using specific dates could be 

underinclusive because a securitization 

participant could engage in the conduct 

that Rule 192 is designed to prevent just 

prior to such commencement points and 

the rule would, as a result, not cover 

conduct prior to those dates. Because 

there is significant variability between 

securitization structures, the procedures 

used to originate, acquire, and/or 

identify collateral for a securitization, 

and timelines on which market 

participants operate to structure or 

assemble ABS and conduct their 

offerings, selecting a specified date such 

as those suggested by commenters 

could, depending on the features of the 

securitization, fail to capture critical 

points in time during which a 

securitization participant may be 

incentivized and/or could act on an 

incentive to engage in conflicted 

transactions. Moreover, such structures, 

procedures, and timelines employed by 

market participants today could change 

as the market evolves and potentially 

render a prohibition commencement 

point tied to a specific date ineffective. 

For purposes of Rule 192, 

‘‘agreement’’ refers to an agreement in 

principle (including oral agreements 

and facts and circumstances 

constituting an agreement) as to the 

material terms of the arrangement by 

which such person will become a 

securitization participant. An executed 

written agreement, such as an 

engagement letter, is not required; 330

whether there has been an agreement to 

become a securitization participant will 

depend on the facts and circumstances 

of the securitization transaction and the 

parties involved.331 As the Commission 

stated in the Proposing Release,332 and 

as some commenters pointed out,333

market participants are able to identify 

and understand when an agreement has 


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334As we noted above, the Commission received 

one comment suggesting that we consider extending 

the prohibition beyond one year after first closing 

of a sale of ABS. See letter from Pentalpha Letter. 

We believe this would be inconsistent with Section 

27B, which specifies that the prohibition apply for 

one year following the date of the first closing of 

the sale of the ABS. Therefore, we are adopting the 

prohibition end date as proposed. 

335 15 U.S.C. 77z–2a(a). 336See Proposing Release Section II.D. 

337See Proposing Release at 9694. 

338See letters from SFA II; SIFMA II. 

339See letter from SIFMA II. 

340See, e.g., letters from Better Markets; ICI. 

341See, e.g., letters from ABA (suggesting that the 

rule should prohibit a short sale of the relevant 

ABS); AIC (stating that, on its face, proposed Rule 

192(a)(3)(i) was sufficiently clear); SIFMA I 

(agreeing that a short sale of ABS by a securitization 

participant may create a conflict of interest between 

that securitization participant and investors); SFA 

I (stating that such a transaction is a direct bet 

against the success of the relevant ABS); SFA II 

(agreeing that short sales of ABS by securitization 

participants should be prohibited). 

342See, e.g., letters from SFA I (stating that such 

a transaction is a direct bet against the success of 

the relevant ABS); SFA II (agreeing that purchase 

of a CDS or other derivatives on which the 

securitization participant would be paid as a result 

of the occurrence of adverse credit events with 

respect to the ABS should be prohibited); SIFMA 

I (agreeing that the entry into a CDS on the relevant 

ABS by a securitization participant may create a 

conflict of interest between that securitization 

participant and investors). 

343See, e.g., letters from CREFC I (stating that, 

when read broadly, the proposal could mean that 

any component of a securitization transaction could 

Continued 

been reached in their ordinary business 

operations and, therefore, they will be 

able to establish effective procedures for 

determining when they have triggered 

the prohibition against engaging in 

conflicted transactions. 

While the prohibition against entering 

into conflicted transactions will 

commence on the date on which a 

person has reached an agreement to 

become a securitization participant with 

respect to an ABS, if such ABS is never 

sold to investors, Rule 192 will not 

apply. As noted above, the rule is 

designed to prevent the sale of ABS that 

are tainted by material conflicts of 

interest by specifically prohibiting 

securitization participants from 

engaging in conflicted transactions that 

could incentivize a securitization 

participant to structure an ABS in a way 

that puts the securitization participant’s 

interests ahead of ABS investors. In the 

event that the sale of an ABS is not 

completed, there will be no investors 

with respect to which a transaction 

could involve or result in a material 

conflict of interest. Therefore, as 

adopted, the Rule 192 prohibition on 

material conflicts of interest will not 

apply if the ABS is never actually sold 

to an investor. If an ABS is created and 

sold, however, then the rule’s 

prohibition will apply beginning on the 

date on which there was an agreement 

to become a securitization participant 

and will end one year after the date of 

the first closing of the sale of such 

ABS.334

D. Prohibition 

Section 27B(a) provides that an 

underwriter, placement agent, initial 

purchaser, or sponsor, or any affiliate or 

subsidiary of any such entity, of an 

ABS, including a synthetic ABS, 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.335

1. Proposed Prohibition 

Consistent with Section 27B(a), the 

Commission proposed in proposed Rule 

192(a)(1) that a securitization 

participant shall not, for a period 

commencing on the date on which a 

person has reached, or has taken 

substantial steps to reach, an agreement 

that such person will 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 any 

material conflict of interest between the 

securitization participant and an 

investor in such ABS.336 As set forth in 

proposed 17 CFR 230.192(a)(2) (‘‘Rule 

192(a)(2)’’), engaging in any transaction 

would involve or result in any material 

conflict of interest between a 

securitization participant and an 

investor if such transaction is a 

‘‘conflicted transaction’’ as defined in 

proposed Rule 192(a)(3). 

The Commission proposed to define 

this term under proposed Rule 192(a)(3) 

to include two main components. One 

component was whether the transaction 

is: 

• As specified in proposed 17 CFR 

230.192(a)(3)(i) (‘‘Rule 192(a)(3)(i)’’), a 

short sale of the relevant ABS; 

• As specified in proposed 17 CFR 

230.192(a)(3)(ii) (‘‘Rule 192(a)(3)(ii)’’), 

the purchase of a CDS or other credit 

derivative pursuant to which the 

securitization participant would be 

entitled to receive payments upon the 

occurrence of a specified adverse event 

with respect to the relevant ABS; or 

• As specified in proposed 17 CFR 

230.192(a)(3)(iii) (‘‘Rule 192(a)(3)(iii)’’), 

the purchase or sale of any financial 

instrument (other than the relevant 

asset-backed security) or entry into a 

transaction through which the 

securitization participant would benefit 

from the actual, anticipated, or 

potential: 

Æ Adverse performance of the asset 

pool supporting or referenced by the 

relevant ABS; 

Æ Loss of principal, monetary default, 

or early amortization event on the 

relevant ABS; or 

Æ Decline in the market value of the 

relevant ABS. 

The other component related to 

materiality—i.e., whether there is a 

substantial likelihood that a reasonable 

investor would consider the relevant 

transaction important to the investor’s 

investment decision, including a 

decision whether to retain the ABS. 

The proposed definition was designed 

to effectuate Section 27B(a) by 

prohibiting a securitization participant 

from entering into a conflicted 

transaction that is, in effect, a bet 

against the ABS that such securitization 

participant created and/or sold to 

investors. It was also designed to not 

unnecessarily prohibit or restrict 

activities routinely undertaken in 

connection with the securitization 

process, as well as routine transactions 

in the types of financial assets 

underlying covered securitizations.337

2. Comments Received 

Several commenters stated that the 

phrase ‘‘directly or indirectly’’ should 

be removed from proposed Rule 

192(a)(1).338 One commenter 

specifically stated that the rule, as 

proposed, would already apply directly 

to the affiliates and subsidiaries of a 

securitization participant.339 The 

Commission received no comments on 

proposed Rule 192(a)(2). With respect to 

proposed Rule 192(a)(3), commenters 

generally supported the Commission 

defining the term ‘‘conflicted 

transaction.’’ 340 Commenters also 

generally supported prohibiting 

securitization participants from entering 

into a short sale of the relevant ABS 

under proposed Rule 192(a)(3)(i) 341 and 

from purchasing a CDS or other credit 

derivative pursuant to which the 

securitization participant would be 

entitled to receive payments upon the 

occurrence of a specified adverse event 

with respect to the relevant ABS under 

proposed Rule 192(a)(3)(ii).342 However, 

the Commission received a substantial 

number of comments that proposed 

Rule 192(a)(3)(iii) would be overly 

broad and unnecessarily capture a wide 

range of activities that are essential to 

the functioning and issuance of ABS 

and securitization participants’ routine 

risk management activities.343


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be a conflicted transaction, including ordinary 

decision-making activities by securitization 

participants); MFA II (suggesting that the 

Commission not adopt proposed Rule 192(a)(3)(iii)); 

SIFMA I (stating that proposed Rule 192(a)(3)(iii) 

was vague and unworkable on its face). 

344See, e.g., letters from MFA II (requesting that 

the Commission expressly permit interest rate 

hedging, currency hedging, and other non-credit 

related hedging); SFA I (stating that the final rule 

should not prohibit warehouse financing or the sale 

of assets into a securitization); SFA II (stating that 

transactions that are not related to the credit risk 

of the relevant ABS should not be conflicted 

transactions, such as transactions ‘‘related to overall 

market movements’’); SIFMA I (requesting that 

certain pre-securitization transactions be expressly 

carved out of the definition of conflicted 

transaction); SIFMA II (requesting that certain presecuritization transactions be expressly carved out 

of the definition of conflicted transaction); LSTA IV 

(supporting SIFMA’s position); SFA II (requesting a 

specific exception for such activities). 

345See. e.g., letter from SFA II (suggesting a 

formulation to only capture transactions that 

‘‘substantially replicate’’ the type of transactions 

specified in Rule 192(a)(3)(i) or Rule 192(a)(3)(ii)); 

SIFMA I (suggesting a formulation to only capture 

transactions that are the ‘‘functional trading 

equivalent’’ of the type of transactions specified in 

Rule 192(a)(3)(i) or Rule 192(a)(3)(ii)); SIFMA II 

(suggesting a formulation to only capture 

transactions that ‘‘substantially replicate’’ the type 

of transactions specified in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii)). 

346See, e.g., letters from SFA I (stating that the 

proposed reasonable investor standard was 

designed by the courts ‘‘to identify when 

disclosures are inadequate, so it is very difficult to 

divorce from the context of the disclosures that 

have been made’’); SIFMA I (stating that the 

proposed reasonable investor standard is for 

disclosure and is not an appropriate standard for a 

rule that is a prohibition). 

347See, e.g., letters from ABA (suggesting a 

disclosure-based standard); AIMA/ACC (stating that 

it is unclear how a securitization participant would 

be able to determine what a ‘‘reasonable investor’’ 

would consider to be material to an investment 

decision and, therefore, a disclosure approach 

would be more effective at addressing conflict of 

interest concerns). 

348See Section II.C.3. above for a detailed 

discussion of the timeframe of the prohibition. 

349See Proposing Release Section II.D. 

350See letters from SFA II (stating that the 

inclusion of both ‘‘directly or indirectly’’ and the 

proposed anti-circumvention provision are 

overlapping and potentially inconsistent); SIFMA 

II. We are adopting Rule 192(a)(1) to include the 

phrase ‘‘directly or indirectly.’’ However, as 

described in further detail in Section II.H below, in 

a change from the proposal, we are adopting an 

anti-evasion provision that will apply only with 

respect to the use of an exception as part of a plan 

or scheme to evade the rule’s prohibition. We 

believe that this approach should address the 

concerns of commenters that the inclusion of both 

the phrase ‘‘directly or indirectly’’ in Rule 192(a)(1) 

and the proposed anti-circumvention provision 

could be overlapping and potentially inconsistent. 

351See letter from SIFMA II. 

352See Proposing Release at 9696. For example, 

a securitization participant might attempt to arrange 

a series of transactions through intermediate special 

purpose entities that are structured with ‘‘orphan’’ 

ownership structures where such intermediate 

special purpose entities are not affiliates or 

subsidiaries of the securitization participant but are 

instead notionally owned by a corporate services 

provider or a charitable trust. The inclusion of the 

phrase ‘‘directly or indirectly’’ in Rule 192(a)(1) is 

designed to capture this type of indirect activity. As 

described in further detail in Section II.H below, in 

a change from the proposal, we are adopting an 

anti-evasion provision that will apply only with 

respect to the use of an exception as part of a plan 

or scheme to evade the rule’s prohibition. 

353See letter from SIFMA II. 

354See Section II.D.3.d. below for a discussion of 

the materiality standard. 

Commenters provided numerous 

examples of transactions that, in their 

view, would not give rise to a material 

conflict of interest with ABS investors 

but that could nevertheless be 

potentially prohibited by proposed Rule 

192(a)(3)(iii), including general interest 

rate and currency exchange rate 

hedging, the provision of warehouse 

financing, and the sale or transfer of 

assets to an ABS issuer.344 Commenters 

suggested various formulations of Rule 

192(a)(3)(iii) that would, in their view, 

better align its scope with the 

discussion of its intended scope in the 

Proposing Release and avoid 

unnecessarily restricting customary 

transactions entered into with respect to 

securitizations.345 The Commission also 

received comment that the materiality 

standard, as proposed, would be 

inappropriate,346 and that the final rule 

should include a disclosure-based cure 

mechanism to mitigate material 

conflicts of interest.347

3. Final Rule 

We are adopting the prohibition in 

Rule 192(a) with certain modifications 

from the proposal in response to 

comments received. Consistent with the 

investor protection goals of Section 27B, 

we are adopting a prohibition that is 

designed to capture transactions that are 

bets against the relevant ABS or the 

asset pool supporting or referenced by 

such ABS. Consistent with the proposal, 

final Rule 192(a)(1) provides that a 

securitization participant shall not, for a 

specified period of time,348 directly or 

indirectly engage in any transaction that 

would involve or result in any material 

conflict of interest between the 

securitization participant and an 

investor in such asset-backed 

security.349

As noted above, several commenters 

suggested that the phrase ‘‘directly or 

indirectly’’ should be removed from 

proposed Rule 192(a)(1) 350 with one 

commenter specifically stating that the 

rule, as proposed, would already apply 

directly to the affiliates and subsidiaries 

of a securitization participant.351 The 

final rule will apply to certain affiliates 

and subsidiaries of a securitization 

participant, but, as explained in the 

Proposing Release, a securitization 

participant could design a transaction 

structure to route the various payment 

legs of a short transaction through a 

variety of different legal entities that are 

deliberately structured to not be 

affiliates or subsidiaries of the 

securitization participant in an effort to 

obscure the ultimate economics of the 

relevant transaction.352 Therefore, we 

are retaining the phrase ‘‘directly or 

indirectly’’ in the adopted rule to 

address this issue, minimize the risk of 

evasion, and, by extension, achieve the 

investor protection goals of Section 27B. 

At the same time, we recognize the 

separate concern of the same commenter 

that using the phrase ‘‘directly or 

indirectly’’ in Rule 192(a)(1) could be 

potentially interpreted to create a 

misalignment between the scope of the 

entities subject to the prohibition and 

the scope of the exceptions to the rule 

that apply to the activities of a 

securitization participant.353 However, 

as discussed in detail below in Sections 

II.E. through II.G., the final rule does not 

prohibit a securitization participant 

from using an affiliate or subsidiary as 

an intermediary, for example, to effect 

risk-mitigating hedging activity or fulfill 

a liquidity commitment obligation of the 

securitization participant consistent 

with the conditions enumerated in the 

exceptions to the rule. 

The Commission received no 

comments on proposed Rule 192(a)(2), 

and we are adopting it as proposed. 

Thus, engaging in any transaction 

would involve or result in any material 

conflict of interest between a 

securitization participant and an 

investor if such transaction is a 

‘‘conflicted transaction’’ as defined in 

final Rule 192(a)(3). A ‘‘conflicted 

transaction’’ is defined in final Rule 

192(a)(3) as any of the following 

transactions with respect to which there 

is a substantial likelihood that a 

reasonable investor would consider the 

transaction important to the investor’s 

investment decision, including a 

decision whether to retain the ABS: 354

• As specified in Rule 192(a)(3)(i), a 

short sale of the relevant ABS; 

• As specified in Rule 192(a)(3)(ii), 

the purchase of a CDS or other credit 

derivative pursuant to which the 

securitization participant would be 

entitled to receive payments upon the 

occurrence of a specified adverse event 

with respect to the relevant ABS; or 

• As specified in Rule 192(a)(3)(iii), 

the purchase or sale of any financial 

instrument (other than the relevant 

asset-backed security) or entry into a 

transaction that is substantially the 

economic equivalent of a transaction 

described in paragraph (a)(3)(i) or 

(a)(3)(ii), other than, for the avoidance of 

doubt, any transaction that only hedges 


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355See, e.g., letters from ABA (suggesting that the 

rule should prohibit a short sale of the relevant 

ABS); AIC (stating that, on its face, proposed Rule 

192(a)(3)(i) was sufficiently clear); SIFMA I 

(agreeing that a short sale of ABS by a securitization 

participant may create a conflict of interest between 

that securitization participant and investors); SFA 

I (stating that such a transaction is a direct bet 

against the success of the relevant ABS); SFA II 

(agreeing that short sales of ABS by securitization 

participants should be prohibited). 

356See letter from AIMA/ACC. 

357See letter from CreditSpectrum Corp. dated 

Feb. 22, 2023 (‘‘CreditSpectrum’’). 

358See Section II.B.3. 

359See, e.g., letters from SIFMA I (agreeing that 

the entry into a CDS on the relevant ABS by a 

securitization participant may create a conflict of 

interest between that securitization participant and 

investors); SFA I (stating that such a transaction is 

a direct bet against the success of the relevant ABS); 

SFA II (agreeing that purchase of a CDS or other 

derivatives on which the securitization participant 

would be paid as a result of the occurrence of 

adverse credit events with respect to the ABS 

should be prohibited). 

360See letter from ABA. 

361See Proposing Release at 9694. 

general interest rate or currency 

exchange risk. 

a. Rule 192(a)(3)(i): Short Sales 

We are adopting Rule 192(a)(3)(i) as 

proposed to prohibit a securitization 

participant from betting directly against 

an ABS by engaging in a short sale of 

the relevant ABS. A short sale occurs 

when a securitization participant sells 

an ABS when it does not own it (or that 

it borrows for purposes of delivery). In 

such a situation, if the price of the ABS 

declines, then the short selling 

securitization participant could buy the 

ABS at the lower price to cover its short 

and make a profit. As stated in the 

Proposing Release, it is not relevant for 

purposes of the rule whether the 

securitization participant makes a profit 

on the short sale. It is sufficient that the 

securitization participant sells the ABS 

short. 

Commenters generally supported 

adopting Rule 192(a)(3)(i) as proposed 

and agreed with the Commission that a 

short sale of an ABS by a securitization 

participant could create a conflict of 

interest between the securitization 

participant and investors in the relevant 

ABS.355 One commenter expressed a 

concern that ‘‘considering all short sales 

to be conflicted transactions’’ would 

have a disproportionate impact on 

securitization markets and indicated 

that a profit should be required for a 

short sale transaction to be a conflicted 

transaction.356 Another commenter 

stated that the practical effect of 

proposed Rule 192(a)(3)(i) would be to 

stop all ABS short selling and that such 

an outcome would be suboptimal for the 

ABS market.357

We believe that it would be 

inconsistent with the investor 

protection goals of Section 27B to limit 

the prohibition in Rule 192(a)(3)(i) to 

short sales where the securitization 

participant earns a profit. A short sale 

of an ABS by a securitization participant 

is a bet against the relevant ABS 

regardless of whether the bet is 

successful, and this is the exact type of 

transaction that the rule is intended to 

prohibit in order to remove the 

incentive for securitization participants 

to place their own interests ahead of 

those of investors. We also do not 

believe that the practical effect of Rule 

192(a)(3)(i) will be to prohibit all ABS 

short selling as the prohibition only 

applies to parties that are securitization 

participants with respect to the relevant 

ABS.358 Third parties that are not 

securitization participants, as defined in 

the final rule, with respect to the 

relevant ABS are not prohibited from 

entering into short sales of such ABS. 

b. Rule 192(a)(3)(ii): Credit Derivatives 

We are adopting Rule 192(a)(3)(ii) as 

proposed to prohibit a securitization 

participant from betting directly against 

the relevant ABS by entering into a 

credit default swap or other credit 

derivative that references such ABS and 

entitles the securitization participant to 

receive a payment upon the occurrence 

of a specified credit event with respect 

to the ABS such as a failure to pay, 

restructuring or any other specified 

credit event that would trigger a 

payment on the derivative contract. It is 

irrelevant for the purpose of Rule 

192(a)(3)(ii) whether the credit 

derivative is in the form of a CDS or 

other credit derivative product because 

the focus is on the economic substance 

of the credit derivative as a bet against 

the relevant ABS without regard to the 

specific contractual form or structure of 

the derivative. Rule 192(a)(3)(ii) also 

captures any credit derivative entered 

into by the securitization participant 

with the special purpose entity issuer of 

a synthetic ABS where that credit 

derivative would entitle the 

securitization participant to receive 

payments upon the occurrence of a 

specified credit event with respect to an 

ABS that is referenced by such credit 

derivative and with respect to which the 

relevant person is a securitization 

participant under the rule. 

Commenters generally supported 

adopting Rule 192(a)(3)(ii) as proposed 

and agreed with the Commission that a 

credit default swap or other credit 

derivative transaction of the type 

described in the proposal could create a 

conflict of interest between a 

securitization participant and the 

investors in the relevant ABS.359 One 

commenter suggested that Rule 

192(a)(3)(ii) should be revised to allow 

for transactions that are designed to 

offset a loss with respect to a 

securitization participant’s long position 

in the relevant ABS.360 We believe that 

such change is unnecessary as hedging 

transactions, consistent with Section 

27B, are permitted and more 

appropriately addressed by the riskmitigating hedging activities exception 

discussed in detail in Section II.E. 

below. 

c. Rule 192(a)(3)(iii): Substantially the 

Economic Equivalent of a Short Sale or 

Credit Derivative 

We are adopting proposed Rule 

192(a)(3)(iii) with certain modifications 

in response to comments received on 

the proposal. Specifically, final Rule 

192(a)(3)(iii) will cover the purchase or 

sale of any financial instrument (other 

than the relevant asset-backed security) 

or entry into a transaction that is 

substantially the economic equivalent of 

transaction described in paragraph 

(a)(3)(i) or (a)(3)(ii), other than, for the 

avoidance of doubt, any transaction that 

only hedges general interest rate or 

currency exchange risk. The inclusion 

of this ‘‘for the avoidance of doubt’’ 

language in the definition of conflicted 

transaction is not designed to limit the 

types of transactions that are not 

conflicted transactions. For example, 

other transactions unrelated to the 

idiosyncratic credit performance of the 

ABS, such as reinsurance agreements, 

hedging of general market risk, or 

routine securitization activities (such as 

the provision of warehouse financing or 

the transfer of assets into a 

securitization vehicle) are not conflicted 

transactions, and thus are not subject to 

the prohibition in Rule 192(a)(1). By 

anchoring the catch-all provision in the 

specific transactions set forth in Rule 

192(a)(3)(i) or Rule 192(a)(3)(ii), as 

opposed to the more general language 

used in the proposal, the final rule 

should alleviate concerns that the 

proposed rule would be unworkable and 

vague. As explained in the Proposing 

Release, Rule 192(a)(3)(iii) is intended 

to capture the purchase or sale of any 

other financial instrument or entry into 

a transaction the terms of which are 

substantially the economic equivalent of 

a direct bet against the relevant ABS.361

Given the potential ability of market 

participants to craft novel financial 

structures that can replicate the 

economic mechanics of the types of 

transactions described in Rule 

192(a)(3)(i) and (ii) without triggering 

those prongs, final Rule 192(a)(3)(iii) is 


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362See letters from ABA (stating that the ordinary 

meaning of ‘‘conflict of interest’’ is a conflict 

between a legal duty and a personal interest and 

that in defining ‘‘conflicted transactions’’ and 

determining the extent to which the rule should 

apply to transactions engaged in by affiliates and 

subsidiaries, it is useful to consider whether and to 

what extent the personal interest that a sponsor, 

underwriter, placement agent, or initial purchaser 

has with respect to a transaction may lead that 

entity to disregard its duties under the securities 

laws); LSTA III (stating that the proposed definition 

is far broader and more encompassing than 

‘‘conflict of interest’’ as set forth in Section 27B 

and, consequently, the proposed rule captured 

transactions that do not conflict with the duties that 

securitization participants have under the securities 

laws); SIFMA I (stating that the proposed definition 

seemed to conflate the term ‘‘conflict of interest’’ 

with the general expression ‘‘conflicting interests’’ 

and that Section 27B did not create any new 

underlying securities law duties so the 

Commission’s authority is limited by the ordinary 

and natural meaning of the term material conflict 

of interest). As described in this section, 

commenters generally agreed that the types of 

transactions specified in proposed Rule 192(a)(3)(i) 

and Rule 192(a)(3)(ii) are the types of transactions 

that create the potential for a material conflict of 

interest. 

363See id. 

364 15 U.S.C. 77z–2a. See Section II.D.3.d. below 

for a discussion of the materiality standard that we 

are adopting for purposes of Rule 192(a)(3). 

365See 15 U.S.C. 78o–7(h). 

366See e.g., letters from SIFMA I (agreeing that a 

short sale of ABS and entry into a CDS on the 

relevant ABS by a securitization participant may 

create a conflict of interest between that 

securitization participant and investors); SFA II 

(agreeing that short sales of ABS by securitization 

participants should be prohibited and agreeing that 

purchase of a CDS or other derivatives on which the 

securitization participant would be paid as a result 

of the occurrence of adverse credit events with 

respect to the ABS should be prohibited). 

367See. e.g., letters from AFR; AIC; Andrew 

Davidson. 

368See, e.g., letters from CREFC I (stating that, 

when read broadly, the proposal could mean that 

any component of a securitization transaction could 

be a conflicted transaction, including ordinary 

decision-making activities by securitization 

participants); MFA II (suggesting that the 

Commission not adopt proposed Rule 192(a)(3)(iii)); 

SIFMA I (stating that proposed Rule 192(a)(3)(iii) is 

vague and unworkable on its face). 

369See, e.g., letters from MFA II (requesting that 

the Commission expressly permit interest rate 

hedging, currency hedging, and other non-credit 

related hedging); SFA I (stating that the final rule 

should not prohibit warehouse financing or the sale 

of assets into a securitization); SFA II (stating that 

transactions that are not related to the credit risk 

of the relevant ABS should not be conflicted 

transactions, such as transactions ‘‘related to overall 

market movements’’); SIFMA I (requesting that 

certain pre-securitization transactions be expressly 

carved out of the definition of conflicted 

transaction); SIFMA II (requesting that certain presecuritization transactions be expressly carved out 

of the definition of conflicted transaction); LSTA IV 

(supporting SIFMA’s position); SFA II (requesting a 

specific exception for such activities). 

designed to alleviate the risk that 

securitization participants could avoid 

Section 27B’s prohibition premised on 

the form of the transaction rather than 

its substance while also addressing the 

concerns of commenters regarding the 

potentially overbroad formulation of 

Rule 192(a)(3)(iii) as proposed. 

Certain commenters stated that 

proposed Rule 192(a)(3)(iii) would be 

inappropriate because it would extend 

beyond the ‘‘ordinary and natural 

meaning’’ of what is a ‘‘conflict of 

interest’’.362 These commenters stated 

that the ordinary and natural meaning of 

a conflict of interest is limited to a 

conflict between an existing securities 

law duty of a securitization participant 

and its own self-interest.363 For the 

reasons discussed below, we believe 

this formulation suggested by 

commenters misconstrues the nature of 

the statutory prohibition. 

Final Rule 192(a)(3)(iii) defines 

conflicted transaction in a way that is 

consistent with the ordinary and natural 

meaning of what is a conflict of interest 

between a securitization participant and 

an ABS investor. Section 27B(b) 

requires that the Commission adopt 

rules to implement the prohibition in 

Section 27B(a) against a securitization 

participant 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 the ABS activity of a 

securitization participant.364 Section 

27B therefore specially addresses 

prohibited material conflicts of interest 

that arise between the self-interest of a 

securitization participant and the 

interests of ‘‘any investor’’ in a 

transaction arising out of the ABS 

activity of that securitization 

participant. The statutory prohibition 

does not reference a material conflict of 

interest with respect to existing Federal 

securities law duties to which 

securitization participants are currently 

subject, such as the prohibitions in 

Section 17(a) of the Securities Act or 

Section 206 of the Advisers Act. 

Furthermore, Section 27B is designated 

as its own section, apart from these 

other provisions. In our view, it would 

be inconsistent with the text and 

statutory placement of Section 27B to 

limit the scope of the rule to ABS 

activities that currently constitute a 

violation of existing Federal securities 

laws. To do so would render Section 

27B superfluous as the statute would 

have little effect beyond what is already 

prohibited under existing federal 

securities laws. This interpretation 

would not only fundamentally frustrate 

the purpose of the statute to prevent a 

securitization participant from placing 

its own self-interest ahead of ABS 

investors but would also be inconsistent 

with other statutes that address conflicts 

of interest. For example, it would be 

inconsistent with the meaning of a 

‘‘conflict of interest’’ set forth in Section 

15E of the Exchange Act, which does 

not limit the scope of a ‘‘conflict of 

interest’’ arising in the business of 

issuing credit ratings by nationally 

recognized statistical rating 

organizations (‘‘NRSRO’’) to conflicts 

that arise with respect to an existing 

securities law duty of an NRSRO.365

As explained above, commenters 

generally agreed that the types of 

transactions specified in proposed Rule 

192(a)(3)(i) and Rule 192(a)(3)(ii) are the 

types of transactions that create the 

potential for a material conflict of 

interest,366 and we are adopting Rule 

192(a)(3)(i) and Rule 192(a)(3)(ii) as 

proposed. By narrowing the scope of 

Rule 192(a)(3)(iii) from the proposal to 

capture only, as adopted, transactions 

that are substantially the economic 

equivalent of a transaction described in 

final Rule 192(a)(3)(i) or final Rule 

192(a)(3)(ii), the final Rule 192(a)(3)(iii) 

is designed to capture the types of 

transactions that create a potential for a 

material conflict of interest between the 

interest of a securitization participant 

and the interest of an investor in the 

relevant ABS. As discussed in further 

detail below, commenters generally 

agreed that it would be appropriate for 

final Rule 192(a)(3)(iii) to function as a 

catch-all to capture transactions that are, 

in economic substance, a direct bet 

against the relevant ABS or the asset 

pool supporting or referenced by the 

relevant ABS even if they are not 

documented in the same form as a 

transaction specified in Rule 192(a)(3)(i) 

or Rule 192(a)(3)(ii).367 Final Rule 

192(a)(3)(iii), as adopted, will specify 

that such direct bets against an ABS are 

subject to Section 27B’s prohibition 

regardless of their form in order to 

remove the incentive for securitization 

participants to place their own interests 

ahead of those of ABS investors, as 

contemplated by the statute. 

Commenters expressed concerns that 

proposed Rule 192(a)(3)(iii) would be 

overbroad as drafted and 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.368 Commenters provided 

numerous examples of transactions that, 

in their view, would not give rise to a 

material conflict of interest with ABS 

investors but that could nevertheless be 

potentially prohibited by proposed Rule 

192(a)(3)(iii), including general interest 

rate and currency exchange rate 

hedging, the provision of warehouse 

financing, and the sale or transfer of 

assets to an ABS issuer.369 As explained 

below, these types of transactions will 

not be captured by final Rule 


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370See letters from SIFMA I (suggesting the 

‘‘functional trading equivalent’’ formulation); 

AFME (supporting SIFMA’s suggestion); LSTA III 

(supporting SIFMA’s suggestion). 

371See letter from SIFMA II (stating its belief that 

securitization professionals are able to monitor for 

the types of transactions that would be captured in 

its suggested revised paragraph (iii) and that the 

Commission would have the ability to stop the 

functional equivalent of short sales and credit 

default swaps, even if done via a financial 

instrument that has not yet been conceived). This 

commenter also stated that its suggested revision 

would clarify that non-credit related ancillary or 

embedded derivatives, such as interest rate or 

currency swaps, are not implicated by Rule 192; 

LSTA IV (supporting SIFMA’s suggestion). 

372See letter from SFA I. 

373See letter from SFA II (in its second letter, 

SFA also suggested specific exceptions for the 

following types of transactions: (i) those entered 

into pursuant to a fiduciary duty, (ii) those entered 

into by a third-party manager with investment 

discretion, and (iii) those not related to the credit 

risk of the ABS.) 

374See Proposing Release at 9694. 

375See discussion above of letters from AFR; AIC; 

Andrew Davidson; SFA II; SIFMA II. 

376See letters from SFA II; SIFMA II. 

377See letters from AFR; AIC; Andrew Davidson. 

378See letter from AFR. 

379See letter from AIC. 

192(a)(3)(iii) and, as a result, Rule 

192(a)(3)(iii) is appropriately focused on 

transactions that give rise to material 

conflicts of interest between a 

securitization participant and ABS 

investors. 

Commenters suggested various 

formulations of Rule 192(a)(3)(iii) that 

would, in their view, better align its 

scope with the discussion of its 

intended scope in the Proposing Release 

and avoid unnecessarily restricting 

customary transactions entered into 

with respect to securitizations. Certain 

commenters suggested that Rule 

192(a)(3)(iii) should only capture 

transactions that are the ‘‘functional 

trading equivalent’’ of the transactions 

specified in Rule 192(a)(3)(i) and Rule 

192(a)(3)(ii).370 In a follow-up letter, two 

of these commenters suggested that Rule 

192(a)(3)(iii) be revised to capture ‘‘the 

purchase or sale of any financial 

instrument (other than the relevant 

asset-backed security) or entry into a 

transaction that substantially replicates 

one or both of the types of transactions 

set forth in [Rule 192(a)(3)(i)] or [Rule 

192(a)(3)(ii)] by means of the 

securitization participant’s shorting or 

buying protection on the asset pool 

underlying or referenced by the relevant 

asset-backed security.’’ 371 Another 

commenter initially suggested that Rule 

192(a)(3)(iii) be revised to only capture 

transactions that are the ‘‘substantive 

equivalent’’ of the types of transactions 

in Rule 192(a)(3)(i) and Rule 

192(a)(3)(ii) and should exclude 

transactions that are unrelated to the 

credit risk of the ABS.372 In a follow-up 

letter, this commenter suggested that 

Rule 192(a)(3)(iii) be revised to capture 

the ‘‘purchase or sale of any financial 

instrument (other than the relevant 

asset-backed security) or entry into a 

transaction that substantially replicates 

one or both of the types of transactions 

set forth in [Rule 192(a)(3)(i)] or [Rule 

192(a)(3)(ii)] by means of referencing the 

relevant asset-backed security or the 

asset pool underlying or referenced by 

the relevant asset-backed security.’’ 373

We are revising Rule 192(a)(3)(iii) 

from the proposal to better capture 

transactions that are within the 

intended scope of the rule, that is, 

transactions that are substantially the 

economic equivalent of a transaction 

described in final Rule 192(a)(3)(i) or 

final Rule 192(a)(3)(ii). This is 

consistent with the Commission’s 

statements in the Proposing Release 374

and generally consistent with the 

suggestions from commenters described 

above that Rule 192(a)(3)(iii) should be 

focused on transactions that are similar 

in substance to the types of transactions 

described in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii).375 However, the rule that 

we are adopting is more appropriate 

than the alternative approaches 

suggested by commenters because these 

approaches could potentially prioritize 

the form of a transaction over its 

economic substance and therefore be 

under-inclusive. This is because only 

capturing transactions that are the 

‘‘functional trading equivalent’’ of a 

short sale or CDS or a transaction that 

‘‘substantially replicates’’ a short sale or 

CDS could unnecessarily limit the scope 

of Rule 192(a)(3)(iii) to transactions with 

payment profiles or terms that are the 

same as or closely similar in form to a 

short sale or CDS. Under either such 

standard, securitization participants 

could design bets against the relevant 

ABS or the asset pool supporting or 

referenced by the relevant ABS that are 

documented to have payment profiles or 

terms that are sufficiently different from 

those of market-standard short sales or 

CDS in order to not trigger such 

suggested standards but that are 

nevertheless bets against the relevant 

ABS in economic substance. We are 

therefore adopting a rule that specially 

focuses on the economic substance of 

the relevant transaction rather than its 

form to address this concern. 

We disagree with commenters who 

said that the scope of Rule 192(a)(3)(iii) 

should be limited to transactions that 

are entered into with respect to the 

relevant ABS or the asset pool 

supporting or referenced by such 

ABS.376 Such an approach would be 

underinclusive. For example, it would 

allow a securitization participant to 

enter into a short with respect to a pool 

of assets with characteristics that 

replicate the idiosyncratic credit 

performance of the asset pool 

supporting the relevant ABS. We do not 

believe that it would be appropriate to 

exclude such transactions as 

securitizations participants would still 

have an opportunity to bet against the 

performance of their ABS by being 

allowed to enter into such transactions. 

Whether a short transaction entered into 

with respect to a similar pool of assets 

is a conflicted transaction under the 

final rule will be a facts and 

circumstances determination. If such a 

short position with respect to a similar 

pool of assets would be substantially the 

economic equivalent of a short sale of 

the relevant ABS itself or a CDS or 

credit derivative pursuant to which the 

securitization participant would be 

entitled to receive payments upon the 

occurrence of specified credit events in 

respect of the relevant ABS, then it 

would be a conflicted transaction. 

However, this standard is designed to 

not capture transactions entered into by 

a securitization participant with respect 

to an asset pool that has characteristics 

that are sufficiently distinct from the 

idiosyncratic credit risk of the asset pool 

that supports or is referenced by the 

relevant ABS. Such transactions do not 

give rise to the investor protection 

concerns that Section 27B is designed to 

address. 

As noted above, various commenters 

agreed with the discussion in the 

Proposing Release that Rule 

192(a)(3)(iii) should capture 

transactions that are, in economic 

substance, a bet against the relevant 

ABS or the asset pool supporting or 

referenced by the relevant ABS.377 One 

of these commenters specifically stated 

that a conflicted transaction ‘‘should be 

defined in terms of the economic 

substance, rather than the form or label 

of the transaction.’’ 378 Another one of 

these commenters stated that ‘‘it would 

be appropriate for the final rule to 

include some kind of category that 

encompasses transactions that 

substantially replicate the economic 

effects of a short sale of, or credit default 

swap on, the relevant ABS.’’ 379

Additionally, another commenter agreed 

that it would be appropriate for the final 

rule to prohibit transactions that are 

‘‘substantially the economic equivalent 


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380See letter from Andrew Davidson. 

381One commenter specifically requested an 

exception to the final rule for a riskless principal 

transaction where a securitization participant that 

is a broker-dealer intermediates a trade for a 

customer by entering into a conflicted transaction 

and offsetting that conflicted transaction by 

entering into a contemporaneous transaction with a 

third-party. See letter from SFA II. This type of 

activity is eligible for the bona fide market-making 

activities exception discussed in detail in Section 

II.G subject to satisfaction of the conditions 

applicable to the exception. Therefore, we do not 

believe that a separate exception is necessary for 

this type of activity. 

382See letter from SIFMA I. 

383See, e.g., letters from AIC (stating its belief that 

the rule, as proposed, was intended to prohibit 

taking a short position with respect to a material 

concentration of the assets underlying the ABS and 

that an investor would not consider such a position 

with respect to a single asset or obligor to be 

material); LSTA II (requesting clarification that the 

rule does not apply to transactions related to 

individual assets or a group of assets held by a 

securitization vehicle). 

384Even if such transaction is a conflicted 

transaction, it could be eligible for the riskmitigating hedging activities exception if the 

conditions applicable to the exception are satisfied. 

See the discussion in Section II.E. below. 

385See, e.g., letters from AFME (requesting an 

exception for transactions involving the purchase or 

sale of an index including ABS where those ABS 

constitute a de minimis portion of the overall 

index); ICI (specifically requesting clarification that 

a fund or adviser, as a fiduciary on behalf of another 

fund or other client, taking a position on an ABS 

index that includes ABS of an affiliated 

securitization participant, would not be a conflicted 

transaction); SIFMA I (recommending that, if an 

ABS is referenced in an index, a short position in 

that index should be carved out of the prohibition 

as long as the ABS represents less than a threshold 

percentage of that index and citing the language 

adopted in Regulation RR, which limits the 

exclusion to indices where the subject ABS 

represents no more than 10% of the dollar-weighted 

average of all instruments in the index). 

386For example, a transaction with respect to an 

index that includes a class of the relevant ABS and 

that is permissible under 12 CFR 373.12(d) will not 

be a conflicted transaction for purposes of the final 

rule given that the restrictions on the composition 

of the relevant index will not result in a short 

position with respect to such index being 

substantially the economic equivalent of a 

transaction described in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii). We also believe that it would be 

inconsistent for an index hedge that is permissible 

under 12 CFR 373.12(d) to be impermissible under 

this rule. 

of a direct bet against the relevant 

ABS.’’ 380

Focusing Rule 192(a)(3)(iii) on 

transactions that are substantially the 

economic equivalent of a transaction 

specified in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii), which, as explained above, 

commenters broadly agreed give rise to 

a material conflict of interest, is 

designed to address many of the 

concerns that commenters expressed 

regarding the potentially overbroad 

application of the rule as proposed 

while still prohibiting securitization 

participants from engaging in 

transactions that result in material 

conflicts of interest with investors. As 

adopted, final Rule 192(a)(3)(iii) will 

capture the types of transactions 

through which the securitization 

participant could, in economic 

substance, bet against the ABS or the 

asset pool supporting or referenced by 

the relevant ABS in the same way as a 

short sale of the ABS or a CDS 

referencing the ABS but without regard 

to the particular form of the relevant 

transaction. This will help ensure that 

the rule protects investors from 

purchasing ABS tainted by material 

conflicts of interests as markets evolve 

and new forms of betting against an ABS 

or its relevant asset pool that are distinct 

from a short sale or CDS, but which are 

substantially the economic equivalent of 

such transactions, may emerge. 

The types of transactions that are 

‘‘conflicted transactions’’ for purposes 

of Rule 192(a)(3)(iii) and that will be 

substantially the economic equivalent of 

a transaction described in Rule 

192(a)(3)(i) or Rule 192(a)(3)(ii) will 

include a securitization participant 

entering into the short-side of a 

derivative that references the credit 

performance of the pool of assets 

underlying the relevant ABS and 

pursuant to which the securitization 

participant would benefit if the 

referenced asset pool performs 

adversely.381 One commenter stated that 

taking a short position in the asset pool 

underlying or referenced by the relevant 

ABS should not be a conflicted 

transaction because such short activity 

does not raise the same material conflict 

of interest concerns as are raised by 

shorting the relevant ABS itself.382

Other commenters stated that taking a 

short position in some portion of the 

asset pool underlying or referenced by 

the relevant ABS should not be a 

conflicted transaction because such 

short activity does not raise the same 

material conflict of interest concerns as 

are raised by shorting the relevant ABS 

itself.383 In our view, however, a bet 

against the asset pool supporting or 

referenced by an ABS should be 

captured as a conflicted transaction. 

ABS are cash-flow vehicles that 

distribute cash to investors based on the 

performance of the relevant asset pool 

for such ABS. Therefore, a bet against 

the relevant asset pool is a bet against 

the ABS itself, which presents the same 

type of material conflict of interest 

raised by a short sale of the relevant 

ABS or a CDS entered into with respect 

to the relevant ABS as addressed in Rule 

192(a)(3)(i) and Rule 192(a)(3)(ii), 

respectively. Accordingly, it would not 

be appropriate to allow a securitization 

participant to bet against the 

performance of the relevant asset pool. 

In the context of an ABS with an asset 

pool consisting of a large number of 

different and distinct obligations, we 

recognize that a short transaction with 

respect to a single asset or some nonsizeable portion of the assets in that 

pool would generally not result in a 

short position with respect to such asset 

or assets being substantially the 

economic equivalent of a short sale of 

the relevant ABS itself or a CDS or 

credit derivative pursuant to which the 

securitization participant would be 

entitled to receive payments upon the 

occurrence of specified credit events in 

respect of the relevant ABS. However, if 

the relevant assets do represent a 

sizeable portion of the asset pool 

supporting or referenced by the relevant 

ABS, then entering into a transaction 

with respect to such assets can present 

the same investor protection concerns 

that Section 27B was intended to 

address. Under the final rule, such a 

transaction can be a conflicted 

transaction based on the facts and 

circumstances.384

Commenters stated that the definition 

of conflicted transaction should not 

capture the use of CDS index-based 

hedging strategies where the relevant 

ABS only represents a minimal 

component of the index.385 Whether or 

not a transaction with respect to such 

index is a conflicted transaction under 

Rule 192(a)(3)(iii) will be a facts and 

circumstances determination based on 

the composition and characteristics of 

the relevant index. In particular, 

securitization participants will need to 

determine if a short position with 

respect to such index is substantially 

the economic equivalent of a short sale 

of the relevant ABS itself or a CDS or 

credit derivative pursuant to which the 

securitization participant would be 

entitled to receive payments upon the 

occurrence of specified credit events in 

respect of the relevant ABS. If the 

relevant ABS or the asset pool 

supporting or referenced by such ABS 

does not represent a sizeable portion of 

the index, then entering into a 

transaction with respect to such index 

will not present the same investor 

protection concerns that Section 27B 

addresses. In such a scenario, the 

adverse performance of the asset pool 

supporting or referenced by such ABS 

would not have enough of an economic 

impact on the performance of the 

relevant index for a short position with 

respect to that index to be substantially 

the economic equivalent of a transaction 

described in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii).386 However, if the relevant 

ABS or the asset pool does represent a 


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387Even if such transaction is a conflicted 

transaction, it could be eligible for the riskmitigating hedging activities exception if the 

conditions applicable to the exception are satisfied. 

See the discussion in Section II.E. below. 

388See, e.g., letters from MFA II (requesting that 

the Commission expressly permit interest rate 

hedging, currency hedging, and other non-credit 

related hedging); SFA II (stating that hedging 

transactions that are not related to the credit risk 

of the relevant ABS should not be subject to the 

conditions in the proposed risk-mitigating hedging 

activities exception); SIFMA I (focusing on ‘‘interest 

rate, currency or other non-credit related trading 

and hedging activities’’). 

389This approach would be generally consistent 

with the suggestion of a commenter that proposed 

17 CFR 230.192(a)(3)(iii)(C) should be revised to 

capture only a decline in the market value of the 

relevant ABS relative to similar ABS. We agree that 

the market value of an ABS can decline due to 

macro-economic shifts that affect the entire ABS 

market, such as interest rate changes, that are 

beyond the control of a securitization participant. 

390See, e.g., letters from MFA II (requesting that 

the Commission expressly permit interest rate 

hedging, currency hedging, and other non-credit 

related hedging); SFA II (stating that transactions 

that are not related to the credit risk of the relevant 

ABS should not be conflicted transactions, such as 

transactions ‘‘related to overall market 

movements’’). 

391See, e.g., letters from AFME (requesting that 

certain pre-securitization transactions be expressly 

carved out of the definition of conflicted 

transaction); SFA I (stating that the final rule should 

not prohibit warehouse financing or the sale of 

assets into a securitization); SFA II (requesting a 

specific exception for such activities); SIFMA I 

(requesting that certain pre-securitization 

transactions be expressly carved out of the 

definition of conflicted transaction); SIFMA II 

(requesting that certain pre-securitization 

transactions be expressly carved out of the 

definition of conflicted transaction). 

392See Proposing Release at 9679. 

393As discussed above in Section II.B.3., 

warehouse lenders that are not affiliated with a 

named securitization participant and that engage 

only in warehouse lending activity with respect to 

an ABS are not sponsors under the final rule. 

However, if the warehouse lender is an affiliate or 

subsidiary of another securitization participant, it 

will be subject to the prohibition in Rule 192(a). 

394The short sale of the relevant ABS is 

separately covered under Rule 192(a)(3)(i). 

395See letter from SFA II. 

sizeable portion of the index, then 

entering into a transaction with respect 

to such index presents the same investor 

protection concerns that Section 27B 

addresses. Under the final rule, such a 

transaction could be a conflicted 

transaction based on the facts and 

circumstances.387

Although we do not believe that a 

general interest rate or currency 

exchange rate hedge will be captured as 

a transaction that is substantially the 

economic equivalent of a transaction 

described in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii), we are specifying in final 

Rule 192(a)(3)(iii) that, for the avoidance 

of doubt, any transaction that only 

hedges general interest rate or currency 

exchange risk is not a conflicted 

transaction in order to avoid uncertainty 

and to not unnecessarily limit or 

discourage the prudent management of 

general interest rate and currency 

exchange risks by securitization 

participants. The inclusion of this 

language will also directly address the 

concerns raised by commenters that the 

rule as proposed could inadvertently 

prohibit the hedging of general interest 

rate and foreign exchange risks by a 

securitization participant.388 We do not 

believe that Section 27B was intended 

to restrict the ability of a securitization 

participant to manage its general 

interest rate and/or foreign exchange 

risk exposures. The language that we are 

adding to final Rule 192(a)(3)(iii) 

expressly allows for a securitization 

participant’s continued ability to hedge 

general interest rate or foreign exchange 

exposure, and by extension, a 

securitization participant will not need 

to rely on the risk-mitigating hedging 

activities exception under the final rule 

to enter into such transactions.389 The 

qualifier ‘‘general’’ has been included to 

specify that the relevant transaction 

must relate to overall market 

movements and not the idiosyncratic 

credit risk of the relevant ABS. This is 

consistent with the suggestion of 

commenters that the definition of 

‘‘conflicted transaction’’ should not 

capture interest rate or currency 

exchange hedges that are not related to 

the credit risk of the relevant ABS.390 As 

adopted, Rule 192(a)(3)(iii) will permit 

any transaction that only hedges general 

interest rate or currency exchange risk. 

Other transactions unrelated to the 

idiosyncratic credit performance of the 

ABS, such as hedging of general market 

risk, are not conflicted transactions, and 

thus are not subject to the prohibition in 

Rule 192(a)(1). The inclusion of this ‘‘for 

the avoidance of doubt’’ language in the 

definition of conflicted transaction also 

does not limit the scope of the riskmitigating hedging activities exception 

or any other exception to the final rule. 

Each of the exceptions to the final rule 

is discussed in detail below. 

Commenters expressed concerns that 

the rule as proposed would prohibit the 

ordinary course pre-securitization and 

issuance activities of market 

participants, such as the provision of 

warehouse financing or the transfer of 

assets into a securitization vehicle.391

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 

addresses.392 This includes the 

provision of warehouse financing and 

the transfer or sale of assets into the 

relevant securitization vehicle, which 

are standard activities in connection 

with the issuance of ABS. Such normalcourse activities are not prohibited by 

final Rule 192(a)(3)(iii) as they are not 

transactions that are substantially the 

economic equivalent of a transaction 

described in final Rule 192(a)(3)(i) or 

final Rule 192(a)(3)(ii).393 As described 

in further detail below, the customary 

mechanics of secured loans, such as 

warehouse financing facilities, do not 

render that financing facility a 

conflicted transaction under Rule 

192(a)(3)(iii) because they do not 

provide a mechanism for the financing 

provider to benefit from the adverse 

performance of the asset pool 

supporting or referenced by the relevant 

ABS. Similarly, the transfer or sale of 

assets to a securitization vehicle does 

not provide the transferor or seller a 

mechanism for such entity to benefit 

from the adverse performance of the 

asset pool supporting or referenced by 

the relevant ABS as, absent some other 

transaction that may need to be 

separately analyzed, such entity no 

longer has exposure to the performance 

of such assets. 

Similarly, the final rule is not 

designed to disincentivize an 

underwriter, placement agent, or initial 

purchaser from intermediating an ABS 

transaction for a customer, client, or 

counterparty where the securitization 

participant does not take a short 

position with respect to the relevant 

ABS. Rule 192(a)(3)(iii) captures, in 

relevant part, the purchase or sale of any 

financial instrument ‘‘(other than the 

relevant asset-backed security)’’ or entry 

into a transaction that is substantially 

the economic equivalent of a transaction 

described in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii). The inclusion of the 

language ‘‘(other than the relevant assetbacked security)’’ is designed to specify 

that merely entering into an agreement 

to serve as a securitization participant 

with respect to an ABS and engaging in 

a purchase or sale of the ABS as an 

underwriter, placement agent, or initial 

purchaser for such ABS is not itself a 

conflicted transaction.394

The Commission received a comment 

that the prohibition should not apply to 

transactions that terminate prior to the 

issuance of the relevant ABS.395 As 

explained above in Section II.C.3., the 

prohibition on material conflicts of 

interest will not apply if the relevant 

ABS is never actually sold to an 

investor. However, if an ABS is created 

and sold, then the rule’s prohibition 

will apply beginning on the date on 

which there was an agreement by the 

relevant person to become a 

securitization participant with respect 

to the relevant ABS and will end one 


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396See letter from SIFMA II. 

397See, e.g., letters from ABA (urging the 

Commission to clarify that CRT transactions are not 

per se ‘‘conflicted transactions’’ and that they are 

generally permissible unless they evidence an 

intentional bet against a separate ABS by a 

securitization participant for that separate ABS); 

AFME (noting that synthetic securitizations are 

important credit risk and balance sheet 

management tools for banks); Fannie and Freddie 

(requesting that the Commission modify the 

proposed definition of conflicted transaction to 

make clear that it does not encompass the 

Enterprises’ entry into the associated transaction 

agreements necessary to effect CRT securities 

issuances); HPC (requesting that CRTs, regardless of 

sponsor, be excluded from the definition of 

conflicted transaction or, alternatively, that they be 

allowed under the risk-mitigating hedging 

exception); IACPM (stating the breadth of proposed 

Rule 192(a)(3)(iii) would make credit portfolio 

management via synthetic ABS functionally 

untenable); SIFMA I (stating its belief that neither 

the text of the statute or the legislative history 

empowered the Commission to ban entire classes or 

categories of securitization transactions). 

398See letter from AFR. 

399 15 U.S.C. 77z–2a(a)(1) and 15 U.S.C. 77z– 

2a(c)(1). 

400See Proposing Release at 9695. As discussed 

above, the inclusion of the language ‘‘(other than 

the relevant asset-backed security)’’ in Rule 

192(a)(3)(iii) is designed to specify that merely 

entering into an agreement to serve as a 

securitization participant with respect to an ABS 

and engaging in a purchase or sale of the ABS as 

an underwriter, placement agent, or initial 

purchaser for such ABS is not itself a conflicted 

transaction. 401See Proposing Release at 9695. 

year after the date of the first closing of 

the sale of such ABS. We do not believe 

that it would be appropriate to allow a 

securitization participant to bet against 

the performance of an asset pool while, 

for example, after reaching an agreement 

to become a securitization participant, 

simultaneously marketing an ABS to 

investors that references or is 

collateralized by that same asset pool 

even if the relevant bet is closed out 

prior to the issuance of the relevant 

ABS. As discussed in detail in Section 

II.E.3. below, a securitization participant 

may rely on the risk-mitigating hedging 

activities exception for transactions 

entered into prior to the issuance of the 

relevant ABS when the conditions to the 

exception are satisfied. 

The Commission also received a 

comment that the prohibition should 

not apply to any transaction relating to 

all or a portion of the pool of assets 

underlying the ABS that terminates on 

or prior to the date on which such assets 

are included in the securitization.396

Rule 192(a)(3)(iii) as adopted captures a 

transaction that is substantially the 

economic equivalent of a short sale of 

the relevant ABS itself or a CDS or 

credit derivative pursuant to which the 

securitization participant would be 

entitled to receive payments upon the 

occurrence of specified credit events in 

respect of the relevant ABS. As 

discussed above, ABS are cash-flow 

vehicles that distribute cash to investors 

based on the performance of the 

relevant asset pool for such ABS, and, 

therefore, a bet against the relevant asset 

pool is a bet against the ABS itself. 

In response to the comment, if a 

securitization participant engages in a 

transaction with respect to a pool of 

assets that, during the duration of the 

transaction, neither underlies the 

relevant ABS nor is referenced by the 

relevant ABS, then that transaction will 

not be substantially the economic 

equivalent of a transactions described in 

Rule 192(a)(3)(i) or Rule 192(a)(3)(ii). 

Therefore, including a specific 

exception for such transactions is 

unnecessary. However, as discussed in 

detail above, if the transaction is with 

respect to a pool of assets with 

characteristics that replicate the 

idiosyncratic credit performance of pool 

of assets that is already underlying or 

referenced by the relevant ABS, then 

whether such transaction is a conflicted 

transaction under the final rule will be 

a facts and circumstances 

determination. 

Several commenters questioned 

whether the intrinsic feature of certain 

risk-management transactions 

documented as synthetic ABS 

transactions would be captured under 

Rule 192(a)(3)(iii) and suggested that the 

final rule should not prohibit balance 

sheet synthetic securitizations used for 

risk-mitigation purposes.397 Another 

commenter generally stated that the rule 

should not include any exception from 

the prohibition for conflicts that are 

‘‘inherent’’ to the securitization.398

Section 27B specifically applies to 

synthetic ABS transactions, and, for the 

reasons discussed below, we are 

adopting a definition of conflicted 

transaction that captures the relevant 

conflict of interest in the context of the 

issuance of a new synthetic ABS. 

However, Section 27B also provides an 

exception for risk-mitigating hedging 

activity; 399 therefore, we believe that it 

is consistent with Section 27B to allow 

for the conflicted transaction that arises 

in the context of a synthetic ABS as 

described below to be eligible for the 

risk-mitigating hedging activities 

exception if it satisfies the conditions to 

the exception. 

As discussed in the Proposing 

Release, the relevant material conflict of 

interest in the context of the issuance of 

a new synthetic ABS arises when the 

securitization participant engages in a 

transaction (such as CDS contract(s) 

with the synthetic ABS issuer) where 

cash paid by investors to acquire the 

newly created synthetic ABS will fund 

the relevant contract(s) and be available 

to make a payment to the securitization 

participant upon the occurrence of an 

adverse event with respect to the assets 

included in the reference pool.400 In 

economic substance, if the reference 

pool for the synthetic ABS performs 

adversely, then the securitization 

participant benefits at the expense of the 

investors in the synthetic ABS. Pursuant 

to the final rule, this arrangement will 

result in a conflicted transaction with 

respect to the investors in the synthetic 

ABS because it is substantially the 

economic equivalent of a bet against 

such ABS itself. Additionally, if the 

reference pool for the synthetic ABS 

collateralizes a separate ABS with 

respect to which the relevant 

securitization participant is a 

securitization participant under the 

final rule, this arrangement will result 

in a conflicted transaction with respect 

to the investors in the ABS 

collateralized by such reference pool as 

being substantially the economic 

equivalent of a bet against such ABS 

itself. Such transaction, in economic 

substance, is the same as the 

securitization participant entering into a 

bilateral CDS on the ABS that is 

collateralized by such reference pool. As 

discussed in the Proposing Release, in 

certain synthetic ABS structures, the 

relevant agreement that the 

securitization participant enters into 

with the special purpose entity that 

issues the synthetic ABS may in some 

circumstances not be documented in the 

form of a swap; however, the terms of 

such agreement are structured to 

replicate the terms of a swap pursuant 

to which the special purpose entity that 

issues the synthetic ABS is obligated to 

make a payment to the securitization 

participant upon the occurrence of 

certain adverse events with respect to 

the reference pool.401 Such an 

agreement will be a conflicted 

transaction under Rule 192(a)(3)(iii) due 

to the economic substance of the 

transaction. 

Like a short sale or credit default 

swap, the securitization participant 

stands to benefit at the expense of the 

investors in the synthetic ABS, and this 

results in a material conflict of interest 

with investors and is a conflicted 

transaction for purposes of the final 

rule. However, we also understand, as 

commenters stated, that securitization 

participants may utilize synthetic ABS 

structures for hedging purposes. 

Therefore, as discussed in detail in 

Section II.E. below, we are adopting a 

change to the proposed risk-mitigating 

hedging exception so that the issuance 

of synthetic ABS that are entered into 


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402See, e.g., letters from AIC (requesting that the 

Commission clarify that the exercise of a 

securitization participant’s rights under the ABS 

transaction documents does not constitute a 

conflicted transaction with respect to that ABS); 

AFME (providing as an example that actions of loan 

officers related to refinancing, restructuring, or 

working out a defaulted loan could constitute a 

conflicted transaction, as proposed); CREFC I 

(suggesting an additional exception for the exercise 

of contractual rights granted to, or performance of 

contractual obligations by, a securitization 

participant with respect to the underlying assets or 

the related asset-backed securities pursuant to the 

agreements governing such transaction); LSTA II 

(focusing on, among other things in the context of 

collateralized loan obligations, LIBOR transaction 

amendments, loan restructurings, and refinancings). 

403See letter from CREFC I. 

404See letter from CREFC I (explaining that, for 

example, the servicing standard for CMBS places 

requirements on the servicer with a view to 

maximizing the recovery of principal and interest 

on the mortgage loans). 

405See letters from IACPM (describing the margin 

posting mechanics of certain financing 

transactions); SFA I (providing as an example that, 

in a repurchase transaction, the repurchase buyer 

(lender) has the right to protect its level of 

collateralization through the borrowing base 

mechanics by marking the ABS to market and that, 

when it does so in a declining market, it often will 

make a margin call on the repurchase seller 

(borrower) for additional cash or collateral); SFA II 

(requesting a specific exception for financing 

activities); SIFMA II (requesting a specific 

exception for financing arrangements). 

406 In such scenario, the lender would 

customarily apply any such collateral to the 

satisfaction of the outstanding relevant loan 

obligations of the borrower. 

407See, e.g., letters from MBA (stating that 

MILNs, which are reinsurance-based note 

structures, should not viewed as a conflicted 

transaction); PMI Industry I (stating that MILNs 

should not be considered conflicted transactions). 

408See, e.g., letters from ICI (stated that advisers 

are fiduciaries and must act in the best interest of 

their clients, including the funds they manage); 

SFA I (noting that not allowing a securitization 

participant to execute such a transaction could 

cause it to violate its fiduciary duties imposed by 

law); SFA II (suggesting that the rule should not 

apply to any securitization participant with a 

fiduciary duty to the issuer of the ABS pursuant to 

the Advisers Act when the transaction is entered 

into by that securitization participant on behalf of 

another client, fund or account managed by the 

securitization participant and conducted in 

accordance with that securitization participant’s 

fiduciary duty to that client, fund or account under 

the Advisers Act). 

and maintained for hedging purposes 

are eligible for the risk-mitigating 

hedging activities exception. To help 

ensure that these types of transactions 

cannot be utilized as a bet by a 

securitization participant against the 

credit performance of the reference 

assets, any such transaction will need to 

satisfy each of the conditions to the riskmitigating hedging activities exception 

described in Section II.E. If such 

transaction is not entered into for 

purposes of hedging an existing long 

exposure of the securitization 

participant to the assets included in the 

reference pool in accordance with the 

requirements of the risk-mitigating 

hedging activities exception, then such 

activity will not qualify for the 

exception and will be prohibited by the 

final rule. 

Certain commenters also expressed 

concern that the proposed rule could 

prohibit the normal-course servicing 

activity of a securitization participant 

pursuant to its contractual rights and 

obligations under the transaction 

documents for the relevant ABS, 

particularly with respect to the servicing 

of distressed assets supporting the 

relevant ABS.402 We recognize the role 

played by servicers over the life cycle of 

an ABS to help minimize losses for ABS 

investors with respect to distressed 

assets and understand that servicers 

may be entitled to additional income or 

expense reimbursement when servicing 

distressed assets that require the 

servicer to expend more of its time and 

resources or require specialized 

skills.403 Accordingly, the final rule is 

designed not to impede the ability of 

servicers to service the assets supporting 

an ABS in accordance with the 

contractual covenants applicable to the 

servicer in the transaction agreements 

for such ABS. We understand that these 

covenants are subject to the negotiation 

of investors prior to the closing of the 

relevant ABS and that such covenants 

typically set forth a servicing standard 

that is designed to direct the servicer to 

maximize the recovery value of the 

assets and, by extension, support the 

overall performance of the ABS for the 

benefit of the investors in such ABS.404

Restricting servicing activity that is 

conducted in accordance with such 

servicing standards could, in some 

cases, not only harm the ABS investors 

that the rule is intended to protect but 

also impede the ability of the relevant 

underlying obligors to avoid foreclosure 

or insolvency. As adopted, the final rule 

will not prohibit such servicing activity 

as it is not substantially the economic 

equivalent of a transaction described in 

final Rule 192(a)(3)(i) or final Rule 

192(a)(3)(ii). We also note that, as 

discussed above in Section II.B.3.b.iii., 

persons that only perform activities that 

are administrative, legal, due diligence, 

custodial, or ministerial in nature with 

respect to an ABS are excluded from the 

definition of ‘‘sponsor.’’ 

A number of commenters expressed 

concern that a securitization participant 

financing an investor’s long purchase of 

an ABS could be a conflicted 

transaction under the proposed rule.405

We understand that it is customary for 

financing arrangements of ABS to 

include borrowing base mechanics, 

which are collateral arrangements that 

require the long purchaser (borrower) to 

post cash or other collateral in order to 

maintain a required collateralization 

level if the value of the financed ABS 

declines. Customary transactions that 

are designed to protect the financing 

provider from a decline in the value of 

the collateral for its loan would not give 

rise to the investor protection concerns 

addressed by Section 27B. In the event 

of a default by the borrower, any 

additional collateral posted by the 

borrower would customarily be 

available to the lender exercising its 

rights as a secured creditor but would 

not provide an additional net benefit to 

the lender.406 These types of customary 

mechanics of secured loans do not 

render a financing facility a conflicted 

transaction under Rule 192(a)(3)(iii) 

because they do not provide a 

mechanism for the financing provider to 

benefit from the adverse performance of 

the asset pool supporting or referenced 

by the relevant ABS and are therefore 

not substantially the economic 

equivalent of a transaction described in 

final Rule 192(a)(3)(i) or final Rule 

192(a)(3)(ii). 

Some commenters stated that MILNs 

and similar reinsurance arrangements 

should not be captured as conflicted 

transactions.407 As explained above in 

Section II.A.3., MILNs and similar 

reinsurance arrangements do not meet 

the definition of ‘‘asset-backed security’’ 

for purposes of the final rule and 

transactions with respect to such 

structures are not subject to the 

prohibition of the final rule. Therefore, 

no changes to the conflicted transaction 

definition are required to address the 

concerns of these commenters. 

Some commenters expressed concerns 

that entities, such as investment 

advisers, may be in violation of the 

prohibition if they engage in conflicted 

transactions on behalf of a client, 

customer, or counterparty pursuant to a 

fiduciary duty.408 We do not believe 

that a carve-out for conflicted 

transactions entered into pursuant to a 

fiduciary duty would be appropriate or 

necessary. As discussed above in 

Section II.B.3., Rule 192 will 

complement the existing Federal 

fiduciary duties. Final Rule 192(a)(3)(iii) 

is focused on prohibiting a 

securitization participant from entering 

into a bet against the ABS or the asset 

pool supporting or referenced by an 

ABS. This approach is designed to 

remove the incentive for a securitization 

participant to select poor credit quality 

assets for the asset pool supporting or 

referenced by an ABS. The final rule, 

therefore, prohibits an investment 

adviser from entering into a conflicted 

transaction to allow a fiduciary client to 


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409See letter from LSTA IV (stating that many 

asset management companies that manage CLOs 

often employ other strategies managed by different 

personnel who have fiduciary duties to other clients 

than the CLO and that ‘‘[i]ncorporating information 

barriers into any final rule would solve this 

problem and comport with other provisions in the 

U.S. securities laws’’). 

410See letters from ABA (suggesting a definition 

of profit that focuses on income or gain generated 

as a result of a short position or the settlement of 

loss protection); MFA II (suggesting that the 

Commission replace ‘‘benefit’’ with ‘‘profit’’). 

411See, e.g., letters from AIC (stating that a 

requirement that the securitization participant has 

actual knowledge of the subject ABS and structures 

the transaction to fail would align the rule with 

Section 27B); SFA II (requesting an exception for 

transactions entered into by a third-party manager 

on behalf of a securitization participant without the 

direction of the securitization participant). 

412See letter from AFR. 

413 15 U.S.C. 77z–2a(a). 

414See letters from AIC; SFA II; SIFMA II. 

415See Section II.B.3.c. (discussing how 

paragraph (ii) of the definition of a ‘‘securitization 

participant’’ as adopted will only capture any 

affiliate (as defined in 17 CFR 230.405) or 

subsidiary (as defined in 17 CFR 230.405) of a 

person described in paragraph (i) of the definition 

if the affiliate or subsidiary: (A) acts in coordination 

with a person described in paragraph (i) of the 

definition; or (B) has access to or receives 

information about the relevant asset-backed security 

or the asset pool supporting or referenced by the 

relevant asset-backed security prior to the first 

closing of the sale of the relevant asset-backed 

security). 

416See Basic v. Levinson, 485 U.S. 224, 231–32 

(1988) (citing TSC Industries, Inc. v. Northway, Inc., 

426 U.S. 438, 449 (1976)). 

417See, e.g., letters from AIC (explaining that it 

would be difficult for a sponsor-affiliated portfolio 

company to perform a Basic analysis); SFA II 

(stating that the proposed materiality standard 

would be difficult to apply if the rule does not 

provide for disclosure as a mitigant of a material 

profit from the adverse performance of 

an ABS with respect to which the 

investment adviser structured and 

selected the asset pool in order to sell 

such ABS to long investors. In response 

to the concerns of commenters, the 

revised approach to affiliates and 

subsidiaries described above in Section 

II.B.3.c. should help address situations 

that do not involve these same investor 

protection concerns, such as where 

there is no coordination or information 

sharing between the relevant personnel 

of the investment adviser entering into 

the relevant client transaction and the 

relevant investment personnel 

responsible for the design and 

composition of the ABS.409 We 

recognize that securitization 

participants, when entering into an 

agreement to participate in the 

securitization, will need to consider 

potential impacts related to their 

affiliates or subsidiaries (that meet the 

definition of securitization participant 

in Rule 192(c)), as the prohibition will 

restrict those affiliates and subsidiaries 

from entering into conflicted 

transactions. A conflicted transaction 

entered into by such an affiliate or 

subsidiary may fall within an available 

exception, but, in any case, will still be 

covered by this rule. Additionally, as 

discussed in detail in Section II.E.3. 

below, the revised scope of the riskmitigating hedging activities exception 

is designed to not unnecessarily restrict 

the ability of an affiliate or subsidiary of 

a securitization participant to hedge 

exposures that it originates, retains, 

acquires, or finances in connection with 

the ordinary course of its business but 

that is unrelated to the securitization 

activities of the securitization 

participant (such as its CLO business). 

We do not believe that the suggestion 

of certain commenters that Rule 

192(a)(3)(iii) should be limited in scope 

to only prohibit transactions through 

which the securitization participant 

actually profits from its bet against the 

ABS would be appropriate.410 As 

discussed above, final Rule 192(a)(3)(iii) 

is focused on prohibiting a 

securitization participant from entering 

into a bet against the ABS or the asset 

pool supporting or referenced by the 

relevant ABS. This approach is intended 

to remove the incentive for a 

securitization participant to select poor 

credit quality assets for the asset pool 

supporting or referenced by the ABS. If 

the prohibition were limited to 

transactions through which the 

securitization participant actually 

profits from its bet, it would fall short 

of implementing the statutory 

prohibition and addressing the 

incentive to design transactions that are 

intended to fail. Therefore, under Rule 

192(a)(3)(iii), the securitization 

participant need not ultimately profit 

from the conflicted transaction in order 

for it to be prohibited. 

Certain commenters stated that the 

definition of ‘‘conflicted transaction’’ 

should include an intent or knowledge 

element in order to narrow the 

application of the final rule.411

However, another commenter stated that 

intent should not be a required 

element.412 Section 27B does not 

include an intent or knowledge element 

and provides, in relevant part, that a 

securitization participant ‘‘shall not . . . 

engage in any transaction that would 

involve or result in any material conflict 

of interest.’’ 413 We believe that 

narrowing the scope of the final rule to 

add an element of intent or knowledge 

is not appropriate because the statute is 

clear in mandating the prohibition of 

material conflicts of interest in ABS 

transactions. Narrowing the scope of the 

rule to require knowledge or intent 

would frustrate the statutory mandate of 

Section 27B. The final rule is intended 

to prophylactically protect against the 

sale of ABS tainted by material conflicts 

of interest; therefore an investor is able 

to rely on the fact that it is unlawful for 

a securitization participant to bet 

against the relevant ABS or the asset 

pool supporting or referenced by an 

ABS. Introducing an element of 

knowledge or intent would not provide 

the same level of prophylactic 

protection and would introduce an 

element of uncertainty that an investor 

would need to consider with each ABS 

transaction. 

The Commission also received 

comment that the final rule should 

include a provision authorizing it to 

exempt certain transactions from the 

final rule.414 As discussed in detail 

below, we are adopting specific 

exceptions to the rule’s prohibition to 

implement the exceptions provided for 

in Section 27B. We are not persuaded 

that any additional exceptions are 

necessary in order to implement Section 

27B, nor do we believe that it is 

necessary to include a mechanism to 

provide such additional exceptions in 

the future. The changes made from the 

proposed rule to narrow the scope of the 

definition of conflicted transaction as 

described in this section and the 

changes made from the proposed rule to 

narrow the scope of the affiliates and 

subsidiaries of a securitization 

participant that are subject to the rule as 

described in Section II.B.3.c. above 415

should generally ease compliance 

burdens and mitigate the need for any 

additional exceptions to the final rule. 

If the Commission determines that 

additional exceptions are needed in the 

future, it can utilize available 

authorities under its governing statutes, 

including Section 28 of the Securities 

Act, to provide such exceptions. 

d. Materiality 

Consistent with Section 27B’s 

prohibition of conflicts of interest that 

are ‘‘material,’’ we are adopting, as 

proposed, a definition of ‘‘conflicted 

transaction’’ in Rule 192(a)(3) requires 

that there is a substantial likelihood that 

a reasonable investor would consider 

the relevant transaction important to the 

investor’s investment decision, 

including a decision whether to retain 

the asset-backed security. As stated in 

the Proposing Release, this is derived 

from the ‘‘reasonable investor’’ standard 

of materiality articulated in Basic v. 

Levinson.416 The Commission received 

comments stating that this longstanding 

standard would be inappropriate in this 

context,417 and some commenters 


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conflict of interest); SIFMA II (explaining that there 

are many non-adverse transactions that a 

securitization participant enters into which a 

reasonable investor would want to figure into their 

investment decision). 

418See letters from ABA; AFME; SFA II; SIFMA 

I; SIFMA II. 

419The transactions specified in Rule 192(a)(3)(i), 

Rule 192(a)(3)(ii), or Rule 192(a)(3)(iii) are 

prohibited under the final rule to the extent that 

there is a substantial likelihood that a reasonable 

investor would consider the transaction important 

to the investor’s investment decision, including 

whether to retain the ABS. The application of the 

materiality standard does not, for example, mean 

that a transaction that only hedges general interest 

rate or current exchange risk (that is not a conflicted 

transaction under Rule 192(a)(3)(iii)) is a conflicted 

transaction. 

420Proposing Release at 9696. 

421See, e.g., letters from ABA (stating that, except 

with respect to certain categories of conflicted 

transactions such as short sales of the relevant ABS, 

disclosure would be appropriate to protect investors 

where there are inherent conflicts of interest); AIC 

(stating that disclosure is a valuable tool and should 

be used where possible to mitigate the materiality 

of the relevant conflict); MFA II (stating that the 

rules should permit disclosure as a means of 

addressing conflicts of interest). 

422See letters from AFR; Better Markets. 

423Proposing Release at 9697. 

424See letters from SFA II; SIFMA II. 425 15 U.S.C. 77z–2a(c)(1). 

recommended that the ‘‘materially 

adverse’’ standard utilized in the 

Volcker Rule would be more 

appropriate.418 However, we continue to 

believe that the ‘‘reasonable investor’’ 

materiality standard that is applied 

throughout the securities laws should be 

used for purposes of implementing 

Section 27B. This materiality standard 

is more appropriate for purposes of 

implementing Section 27B than the 

other suggested alternatives as it is 

focused on the perspective of the 

reasonable investor in the ABS (not the 

securitization participant) and, 

specifically, whether there is a 

substantial likelihood that such 

reasonable investor would consider the 

relevant transaction important to the 

investor’s investment decision whether 

to acquire or retain the ABS.419 Also, 

given that Section 27B was designated 

as a part of the Securities Act, the 

existing materiality standard will be 

more familiar to the broad base of 

securitization participants that are 

subject to the rule that engage in the 

issuance of ABS as opposed to a new 

standard that is not based on any 

jurisprudence related to the Securities 

Act. In this regard, we note that the 

Volcker Rule and its application relates 

to the Bank Holding Company Act, 

which is primarily designed to address 

safety and soundness concerns 

applicable to bank holding companies, 

as opposed to the investor protection 

focus of the securities laws, including 

Section 27B. 

As stated in the Proposing Release, 

the use of the reasonable investor 

standard in this context does not imply 

that a transaction otherwise prohibited 

under the final rule would be permitted 

if disclosure of the conflicted 

transaction is made by the securitization 

participant to the relevant investor.420

The prohibition will apply to 

transactions that are bets against the 

relevant ABS whether or not such 

transactions are disclosed to investors in 

the ABS. While certain commenters 

suggested that disclosure could 

adequately mitigate material conflicts of 

interest,421 other commenters opposed 

any disclosure-based exception to the 

rule.422 Consistent with the proposal 

and the prohibition in Section 27B, we 

have not included an exception to the 

final rule based on disclosure of 

potential material conflicts of interest 

because the final rule is designed to 

prevent the sale of ABS that are tainted 

by material conflicts of interest by 

prohibiting a securitization participant 

from entering into a conflicted 

transaction with respect to ABS that it 

creates or sells to investors. If the final 

rule were to include a disclosure-based 

exception, compliance with the rule 

could become a check-the-box exercise 

that would permit securitization 

participants to enter into a transaction 

prohibited by Section 27B, thereby 

allowing securitization participants to 

bet against the same ABS that they are 

creating or selling to investors when 

such conflicted transaction is disclosed. 

Even if disclosure of a conflicted 

transaction reduced the likelihood that 

an investor would invest in a tainted 

ABS, the incentive for a securitization 

participant to enter into the conflicted 

transaction might remain and investors 

might not benefit from the mandated 

investor protection of Section 27B. 

Furthermore, even if the relevant 

conflict is disclosed to investors, that 

does not mean that the relevant conflict 

is not material to the decision of the 

investor to purchase, retain, or sell the 

relevant ABS. 

Similarly, as stated in the Proposing 

Release, the use of the reasonable 

investor standard does not imply that a 

transaction otherwise prohibited by the 

final rule will be permitted if an 

investor selected or approved the assets 

underlying the ABS.423 We are not 

persuaded, as suggested by some 

commenters, that the prohibition should 

not apply with respect to an ABS where 

the investor selects or approves the asset 

underlying the relevant ABS.424 Even if 

an investor in an ABS is given accurate 

information about the pool of assets 

underlying the ABS, and consents to the 

asset pool on the basis of such 

information, a securitization participant 

could nonetheless structure the ABS or 

construct the underlying asset pool in a 

way that would position the 

securitization participant to benefit from 

the adverse performance of the assets 

underlying the ABS, including in ways 

that investors may not understand. 

Additionally, as explained in the 

Proposing Release, we are concerned 

that an exclusion dependent on investor 

consent could cause some securitization 

participants to pressure investors to 

provide consent to the portfolio of 

underlying assets as a condition to 

participating in an ABS offering, which 

would undermine the effectiveness and 

purpose of such disclosure and the 

meaningfulness of the investor’s 

consent. 

E. Exception for Risk-Mitigating Hedging 

Activities 

1. Proposed Exception 

The Commission proposed to 

implement the exception for riskmitigating hedging activity in Section 

27B(c) by proposing that the prohibition 

in proposed Rule 192(a), subject to 

certain specified conditions, would not 

apply to the risk-mitigating hedging 

activities of a securitization participant 

in connection with and related to 

individual or aggregated positions, 

contracts, or other holdings of the 

securitization participant arising out of 

its securitization activities, including 

the origination or acquisition of assets 

that it securitizes, except that the initial 

distribution of an asset-backed security 

would not be eligible for the exception. 

The proposed rule was consistent with 

Section 27B(c), which provides that the 

prohibition in Section 27B(a) does not 

apply to risk-mitigating hedging 

activities in connection with positions 

or holdings arising out of the 

underwriting, placement, initial 

purchase, or sponsorship of an ABS, 

provided that such activities are 

designed to reduce the specific risks to 

the underwriter, placement agent, initial 

purchaser, or sponsor associated with 

positions or holdings arising out of such 

underwriting, placement, initial 

purchase, or sponsorship.425 In order to 

distinguish permitted risk-mitigating 

hedging activities from prohibited 

conflicted transactions, the Commission 

proposed the following three conditions 

that would need to be satisfied in order 

for a securitization participant to rely on 

the risk-mitigating hedging activities 

exception: 

• That, at the inception of the 

hedging activity and at the time of any 


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426See, e.g., letters from AIMA/ACC (stating that 

is uncertain whether the scope of the exception is 

sufficiently clear so as to be relied upon); AFME 

(focusing on CRT transactions); Andrew Davidson 

(stating its belief that the proposed exception is too 

narrow); IACPM (stating its belief that, as proposed, 

the exception is too narrow to facilitate effective 

credit portfolio management activities); SFA II 

(expressing concern about the ability of 

securitization participants to limit credit, interest 

rate, and other risks); SIFMA II (stating that the 

proposed formulation of the exception would 

unintentionally limit important business activity). 

427See, e.g., letters from HPC (focusing 

specifically to interest rate risk hedging); MFA II 

(expressing a preference that the Commission not 

construe such transactions as conflicted 

transactions); SIFMA I (stating that these hedging 

activities are unrelated to the concerns that 

motivated Section 27B). 

428See letters from AARP (describing the 

proposed conditions and agreeing that exceptions 

for hedging transactions, to the extent narrowly 

drawn and clearly defined, are appropriate); AFR 

(stating that hedge positions must never be greater 

than the actual exposure of the securitization 

participant); Better Markets (stating that the 

compliance program requirement will strengthen 

the ability of the Commission to police the use of 

the exception). 

429See letters from ABA (expressing concerns 

that the compliance program requirement would 

create limitations and confusion given the scope of 

securitization participants that would be subject to 

the rule); AIMA/ACC (expressing concern that the 

conditions would require facts and circumstances 

determinations); IACPM (expressing concerns 

regarding the conditions on the basis that credit 

portfolio management activities are rarely directed 

calibrated to the risks of specific securitization 

activities); SFA I (requesting that the ongoing 

recalibration requirement be eliminated), SIFMA II 

(requesting that the ongoing recalibration 

requirement should be eliminated). 

430See letters from AFME (specifically supporting 

SIFMA’s recommendations); Andrew Davidson 

(suggesting that CRTs be specifically exempted or 

evaluated against a separate set of rules); Fannie 

and Freddie (requesting as one alternative that the 

Commission amend the exception to permit the 

Enterprises to continue to engage in CRT issuances 

following conservatorship); HPC (expressing a 

preference that credit risk transfer transactions be 

carved out of the definition of conflicted 

transactions, but suggesting inclusion as riskmitigating hedging as an alternative); LSTA III 

(stating that the risk-mitigating hedging activities 

exception should include permitted risk transfer 

transactions); PGGM Credit Risk Sharing dated Mar. 

27, 2023 (‘‘PGGM’’) (advocating for an exception for 

on-balance-sheet synthetic securitizations); SFA II 

(requesting that the exclusion of initial distribution 

of ABS be removed to permit prudent risk transfer 

transactions); SIFMA II (stating its belief that 

synthetic securitization should fall under the risk 

mitigating hedging activities exception under most 

circumstances). 

431This standard would not broaden, limit, or 

otherwise modify the requirements applicable to a 

securitization participant pursuant to Regulation 

RR. 

432See letters from AFME (specifically supporting 

SIFMA’s recommendations); Andrew Davidson 

(suggesting that CRTs be specifically exempted or 

evaluated against a separate set of rules); Fannie 

and Freddie Letter (requesting as one alternative 

that the Commission amend the exception to permit 

the Enterprises to continue to engage in CRT 

issuances following conservatorship); HPC 

(expressing a preference that credit risk transfer 

adjustments to the hedging activity, the 

risk-mitigating hedging activity is 

designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks arising in 

connection with and related to 

identified positions, contracts, or other 

holdings of the securitization 

participant, based upon the facts and 

circumstances of the identified 

underlying and hedging positions, 

contracts or other holdings and the risks 

and liquidity thereof; 

• That the risk-mitigating hedging 

activity is subject, as appropriate, to 

ongoing recalibration by the 

securitization participant to ensure that 

the hedging activity satisfies the 

requirements of the exception and does 

not facilitate or create an opportunity to 

benefit from a conflicted transaction 

other than through risk-reduction; and 

• That the securitization participant 

has established, and implements, 

maintains, and enforces, an internal 

compliance program that is reasonably 

designed to ensure the securitization 

participant’s compliance with the 

requirements set out in paragraph (b)(1) 

of the exception, including reasonably 

designed written policies and 

procedures regarding the risk-mitigating 

hedging activities that provide for the 

specific risk and risk-mitigating hedging 

activity to be identified, documented, 

and monitored. 

2. Comments Received 

A number of commenters stated that 

the risk-mitigating hedging exception, as 

proposed, would be too narrow to 

facilitate the effective credit portfolio 

management of securitization 

participants.426 In particular, 

commenters expressed concerns that the 

exception, as proposed, would restrict 

the ability of securitization participants 

to hedge interest rate, foreign exchange, 

and other risks that are not materially 

related to the credit risk of the relevant 

ABS or the asset pool supporting or 

referenced by the relevant ABS.427

While certain commenters supported 

the proposed conditions applicable to 

the exception,428 other commenters 

stated that the proposed conditions 

would be unnecessarily prohibitive or 

difficult to implement.429 The 

Commission also received comments 

specifically requesting that synthetic 

securitizations used for risk-mitigation 

purposes should be permitted under the 

risk-mitigating hedging exemption.430

These comments are addressed in detail 

below. 

3. Final Rule 

We are adopting the risk-mitigating 

hedging activities exception with 

certain modifications from the proposal 

in response to comments received. 

Consistent with Section 27B, we are 

adopting a risk-mitigating hedging 

activities exception that permits 

securitization participants to continue 

to hedge their risk exposures. Subject to 

the conditions discussed in detail 

below, the final rule provides an 

exception for risk-mitigating hedging 

activities of a securitization participant 

in connection with and related to 

individual or aggregated positions, 

contracts, or other holdings of the 

securitization participant, including 

those arising out of its securitization 

activities, such as the origination or 

acquisition of assets that it securitizes. 

Given that the accumulation of assets 

prior to the issuance of an ABS is a 

fundamental component of assembling 

an ABS prior to its sale, consistent with 

the proposal, the final risk-mitigating 

hedging activities exception allows for a 

securitization participant to not only 

hedge retained ABS positions (in 

compliance, as applicable, with 

Regulation RR) 431 but also hedge 

exposures arising out of the assets that 

are originated or acquired by the 

securitization participant in connection 

with warehousing assets in advance of 

an ABS issuance. Also consistent with 

the proposal, the final risk-mitigating 

hedging activities exception allows for 

the relevant hedging activity related to 

a securitization participant’s 

securitization activity to be done on an 

aggregated basis and would not require 

that the exempt hedging be conducted 

on a trade-by-trade basis. Given the 

nature of the ABS market and the types 

of assets that collateralize ABS (such as 

receivables or mortgages), it may not be 

possible for a securitization participant 

to enter into a hedge with respect to an 

ABS or any of its underlying assets on 

an individualized basis. Such hedge 

may also need to be aggregated with 

hedges of risks that are unrelated to the 

relevant ABS and the asset pool 

supporting or referenced by such ABS. 

Therefore, this approach to the riskmitigating hedge exception should 

allow securitization participants 

sufficient flexibility to design their 

securitization-related hedging activities 

in a way that is not unduly complicated 

or cost prohibitive. 

In a change from the proposal, the 

initial issuance of a synthetic ABS will 

be eligible for the risk-mitigating 

hedging activities exception set forth in 

the final rule. This change is intended 

to allow for the initial issuance of a 

synthetic ABS that the relevant 

securitization participant enters into 

and maintains as a hedge. This change 

is also consistent with the requests of 

certain commenters.432 As discussed 


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transactions be carved out of the definition of 

conflicted transactions, but suggesting inclusion as 

risk-mitigating hedging as an alternative); LSTA III 

(stating that the risk-mitigating hedging activities 

exception should include permitted risk transfer 

transactions); PGGM (advocating for an exception 

for on-balance-sheet synthetic securitizations); SFA 

II (requesting that the exclusion of initial 

distribution of ABS be removed to permit prudent 

risk transfer transactions); SIFMA II (stating its 

belief that synthetic securitization should fall under 

the risk mitigating hedging activities exception 

under most circumstances). 

433See Section II.D.3. (discussing how the 

inclusion of the language ‘‘(other than the relevant 

asset-backed security)’’ in Rule 192(a)(3)(iii) is 

designed to specify that merely entering into an 

agreement to serve as a securitization participant 

with respect to an ABS and engaging in a purchase 

or sale of the ABS as an underwriter, placement 

agent, or initial purchaser for such ABS is not itself 

a conflicted transaction). 

434 15 U.S.C. 77z–2a(a)(1) and 15 U.S.C. 77z– 

2a(c)(1). 

435See, e.g., Matt Wirz and Peter Rudegeair, Big 

Banks Cook Up New Way to Unload Risk, Wall 

Street J. (Nov. 7, 2023), available at https://

www.wsj.com/finance/banking/bank-synthetic-risktransfers-basel-endgame-62410f6c. 

436See, e.g., letters from HPC (referring 

specifically to interest rate risk hedging); LSTA III 

(stating the risk-mitigating hedging activities 

exception should include interest rate, currency, 

and other non-credit related trading and hedging 

activities); MFA II (stating that the exception for 

risk-mitigating hedging activity should specifically 

include interest rate and currency hedging, but 

expressing a preference that the Commission not 

construe such transactions as conflicted 

transactions at all). 

437 If the relevant affiliate or subsidiary is not a 

securitization participant under the final rule 

because it does not act in coordination with the 

named securitization participant and does not have 

access to or receive 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, then such affiliate or 

subsidiary will not need to rely on the riskmitigating hedging activities exception. See Section 

II.B.3.c. above (discussing the application of the 

final rule to affiliates and subsidiaries). By 

including both a narrower definition of the affiliates 

and subsidiaries of a securitization participant that 

are subject to the final rule’s prohibition and an 

expanded risk-mitigating hedging activities 

exception, the final rule is designed to provide 

securitization participants with more than one way 

to approach the compliance of the activities of their 

affiliates and subsidiaries with the requirements of 

the final rule. 

438See, e.g., letters from IACPM (stating that 

credit portfolio managers use credit portfolio 

management transactions to hedge risks wholly 

unrelated to the institution’s securitization 

exposures); LSTA IV (stating that deleting this 

requirement is necessary to capture hedging 

activities that are related to positions that did not 

arise out of securitization activities); SIFMA II 

(stating that this requirement could have adverse 

and unintended effects on everyday operations and 

risk management practices of financial institutions 

and their affiliates); SFA II (suggesting that the 

Commission broaden the exception by deleting this 

requirement). 

439See letters from IACPM (stating that, if banks 

are unable to engage in effectively hedging their 

portfolio, they may simply reduce the activity that 

gives risk to the risk by reducing lending activities 

altogether and thereby constraining access to credit 

or other financial transactions); SIFMA I (stating 

that the exception should include transactions that 

hedge risk where a sponsor serves as an 

intermediary to facilitate a customer’s exposure or 

when a sponsor provides financing to ABS 

investors). 

above in Section II.D.3., the relevant 

material conflict of interest in the 

context of the issuance of a new 

synthetic ABS arises when the 

securitization participant engages in a 

transaction (such as CDS contract(s) 

with the synthetic ABS issuer) where 

cash paid by investors to acquire the 

newly created synthetic ABS would 

fund the relevant contract(s) and be 

available to make a payment to the 

securitization participant upon the 

occurrence of an adverse event with 

respect to the assets included in the 

reference pool.433 If such activity is not 

entered into for purposes of hedging an 

exposure of the securitization 

participant to the assets included in the 

reference pool, then such activity will 

not qualify for the risk-mitigating 

hedging exception. 

However, we understand that the 

Enterprises and other market 

participants utilize synthetic ABS 

structures for hedging purposes. To the 

extent that such transactions mitigate a 

specific and identifiable risk exposure 

of the securitization participant, we 

agree that such transactions should be 

permitted under the risk-mitigating 

hedging exception. Section 27B 

specifically applies to synthetic ABS 

transactions and provides an exception 

for risk-mitigating hedging activity; 434

therefore, we believe that it is consistent 

with Section 27B to allow a synthetic 

ABS as described above to be eligible for 

the risk-mitigating hedging activities 

exception if it is entered into and 

maintained for risk-mitigating hedging 

purposes. We understand that 

commentators have expressed concerns 

about the systemic risk implications of 

CRTs.435 However, we are adopting this 

rule pursuant to our congressional 

mandate under Section 27B, which 

focuses on investor protection rather 

than mitigating systemic risk. To ensure 

that these types of transactions cannot 

be utilized as a bet by a securitization 

participant against the performance of 

the reference assets, the rule as adopted 

requires any such transaction to satisfy 

each of the conditions to the riskmitigating hedging activities exception 

described below. 

A number of commenters stated that 

the risk-mitigating hedging activities 

exception should encompass interest 

rate, currency, and other hedging 

activities that are not materially related 

to the credit risk of the relevant ABS or 

the asset pool supporting or referenced 

by the relevant ABS.436 As described in 

Section II.D.3., general interest rate 

hedges and currency exchange hedges 

entered into by a securitization 

participant are not conflicted 

transactions. Furthermore, hedges that 

are unrelated to the credit performance 

of the relevant ABS or the asset pool 

supporting or referenced by the relevant 

ABS will not be conflicted transactions 

as they are not substantially the 

economic equivalent of a transaction 

described in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii). Therefore, we are not 

including such activities in the riskmitigating hedging exception because 

securitization participants engaging in 

such transactions will not need to rely 

on any exception to the rule. 

In a change from the proposal, the 

risk-mitigating hedging activities 

exception will apply to the riskmitigating hedging activities of a 

securitization participant in connection 

with and related to individual or 

aggregated positions, contracts or other 

holdings of the securitization, 

‘‘including those’’ arising out of its 

securitization activities, such as the 

origination or acquisition of assets that 

is securities, rather than only those 

positions, contracts or other holding of 

a securitization participant arising out 

of its securitization activities. The 

addition of the phrase ‘‘including those’’ 

is designed to not unnecessarily restrict 

the ability of an affiliate or subsidiary of 

a securitization participant to hedge 

exposures that it may originate, retain, 

acquire, or finance in connection with 

the ordinary course of its business but 

that may be unrelated to the 

securitization activities of the 

securitization participant.437 For 

example, if an underwriter of an ABS 

has an affiliate or subsidiary (that is 

subject to the rule) that acquires, in its 

ordinary course of business, a long 

position in such ABS, the affiliate or 

subsidiary will be able to rely on the 

risk-mitigating hedging activities 

exception to hedge that long position, 

subject to the conditions of the 

exception. This change is also 

responsive to the concerns of certain 

commenters that stated that the riskmitigating hedging activities exception 

should not be limited to the hedging of 

exposures arising out of a securitization 

participant’s securitization activities.438

Other commenters requested an 

exception for hedging related to 

intermediation and financing services 

provided by a securitization 

participant.439 As discussed above in 

Section II.D.3., providing financing to a 

long purchaser of an ABS is not a 

conflicted transaction under Rule 

192(a)(3). If the person providing such 

financing is a securitization participant 

with respect to the relevant ABS and 


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440See letters from SFA II (focusing on large, 

diversified financial institutions); SIFMA II (also 

focusing on large, diversified financial institutions). 

441See Section II.B.3.c. (discussing how 

paragraph (ii) of the definition of a ‘‘securitization 

participant’’ as adopted will only capture any 

affiliate (as defined in 17 CFR 230.405) or 

subsidiary (as defined in 17 CFR 230.405) of a 

person described in paragraph (i) of the definition 

only if the affiliate or subsidiary: (A) acts in 

coordination with a person described in paragraph 

(i) of the definition; or (B) has access to or receives 

information about the relevant asset-backed security 

or the asset pool supporting or referenced by the 

relevant asset-backed security prior to the first 

closing of the sale of the relevant asset-backed 

security). 442See letter from SIFMA dated Mar. 27, 2023 

(making comparisons to the treatment of TOBs 

under Regulation RR and explaining its belief that 

‘‘TOBs are a well-known form of securitization, 

akin to repo and securities lending finance, with 

unique features and functions, that are formed with 

high-grade or credit enhanced assets and which do 

not carry the risks the Proposed Rule is designed 

to address.’’) In a typical TOB transaction, taxexempt municipal securities are deposited into a 

special purpose trust that issues two classes of 

securities: floating rate securities with a put option 

marketed to short-term institutional investors, like 

a municipal money market fund, and inverse 

floating rate securities which are retained by the 

trust or marketed to long-term institutional 

investors. 

443See letter from SIFMA II. 

444 If the affiliate or subsidiary is not acting in 

coordination with such person or does not have 

access to or receive information about the relevant 

ABS or the asset pool underlying or referenced by 

the relevant ABS, then such affiliate or subsidiary 

is not subject to the prohibition of the final rule and 

does not need to avail itself of the risk-mitigating 

hedging activities exception. 

desires to enter into a hedge with 

respect to its financing exposure that 

would constitute a conflicted 

transaction under the rule, then such 

person can enter into that hedge so long 

as such hedge satisfies the requirements 

of the risk-mitigating hedging activities 

exception. The risk-mitigating hedging 

activities exception applies to the 

individual or aggregated positions, 

contracts, or other holdings of the 

securitization participant, and this riskmitigating hedging activity will be 

covered by the exception. Therefore, 

creating an expanded or separate 

exception for such hedging activity 

would be redundant. Intermediary 

functions of a securitization participant 

are separately addressed by the bona 

fide market-making activities exception 

in 17 CFR 230.192(b)(3) (‘‘Rule 

192(b)(3)’’), which is discussed in detail 

in Section II.G. below and addresses the 

hedging of market-making positions. 

Some commenters focused on the 

hedging of long ABS positions that are 

purchased by a securitization 

participant with respect to such ABS 

and requested that hedging such long 

positions should be allowed for under 

the exception.440 As discussed above in 

Section II.D.3., the long purchase of an 

ABS is not a conflicted transaction 

under Rule 192(a)(3). Also, subject to 

the conditions discussed below, the 

exception does not preclude the hedging 

of a long position in an ABS by a 

securitization participant. The riskmitigating hedging activities exception 

applies to the individual or aggregated 

positions, contracts, or other holdings of 

the securitization participant, and this 

risk-mitigating hedging activity will be 

covered by the exception. Therefore, 

creating an expanded or separate 

exception for such hedging activity 

would be redundant. Also, as described 

in Section II.B.3.c. above, we are making 

changes from the proposed rule to 

narrow the scope of the affiliates and 

subsidiaries that are subject to the rule, 

which should mitigate the concerns of 

commenters regarding the hedging 

activities of affiliates and subsidiaries 

within large, diversified financial 

institutions being unnecessarily 

restricted.441

One commenter focused specifically 

on hedging by a securitization 

participant in the context of tender 

option bonds (‘‘TOBs’’) and requested 

that the risk-mitigating hedging 

activities exception clearly state that 

hedges with respect to the underlying 

asset of a TOB are permissible to the 

extent that the sponsor either provides 

credit enhancement on the asset or the 

ABS issued or where the sponsor 

assigns, subordinates its right of 

payment on the hedge to or otherwise 

provides the benefit of the hedge to the 

ABS investors ahead of its benefiting 

therefrom.442 We do not believe that a 

special exception for TOBs is necessary. 

This is because the risk-mitigating 

hedging activities exception, subject to 

the conditions discussed below, 

generally allows for the risk-mitigating 

hedging activities of a securitization 

participant in connection with and 

related to individual or aggregated 

positions, contracts, or other holdings of 

the securitization participant, including 

those arising out of its securitization 

activities, such as the origination or 

acquisition of assets that it securitizes. 

This includes hedging by a 

securitization participant of its retained 

and/or guaranteed exposures arising out 

of its ABS activity regardless of whether 

the relevant ABS is a TOB transaction 

or some or other type of ABS. Therefore, 

to the extent that the hedging activity of 

a securitization participant in 

connection with a TOB satisfies the 

conditions applicable to the exception, 

then such hedging activity will be 

permitted risk-mitigating hedging 

activity for purposes of the rule. 

As described above in Section II.D.3., 

one commenter expressed a concern 

that using the phrase ‘‘directly or 

indirectly’’ in proposed Rule 192(a)(1) 

could be potentially interpreted to 

create a misalignment between the 

scope of the entities subject to the 

prohibition and the scope of the 

exceptions to the rule that apply to the 

activities of a securitization 

participant.443 The final rule does not 

prohibit a securitization participant 

from using an affiliate or subsidiary as 

an intermediary for the purpose of 

effecting risk-mitigating hedging 

activity. This is because the riskmitigating hedging activities exception 

is available to a ‘‘securitization 

participant,’’ which is defined to 

include not only the underwriter, 

placement agent, initial purchaser, or 

sponsor of an ABS but also any affiliate 

or subsidiary who is acting in 

coordination with such person or who 

has access to or receives information 

about the relevant ABS or the asset pool 

underlying or referenced by the relevant 

ABS.444 For example, it is not 

inconsistent with the exception for riskmitigating hedging activities for an 

entity to retain a position in an ABS for 

which it is an underwriter, placement 

agent, initial purchaser, or sponsor, 

under the final rule and to hedge that 

exposure by causing one of its 

subsidiaries to enter into the relevant 

hedge and pass through the economics 

of that hedge back to the parent entity. 

Each of the specific conditions 

applicable to the risk-mitigating hedging 

activities exception is described in 

detail below. 

a. Specific Risk Identification and 

Calibration Requirements 

We are adopting proposed 17 CFR 

230.192(b)(1)(ii)(A) (‘‘Rule 

192(b)(1)(ii)(A)’’) as proposed. 

Therefore, the first condition to the riskmitigating hedging activities exception 

is that, at inception of the hedging 

activity and at the time of any 

adjustments to the hedging activity, the 

risk-mitigating hedging activity of the 

securitization participant is designed to 

reduce or otherwise significantly 

mitigate one or more specific, 

identifiable risks arising in connection 

with and related to identified positions, 

contracts, or other holdings of the 

securitization participant, based upon 

the facts and circumstances of the 

identified underlying and hedging 

positions, contracts, or other holdings 

and the risks and liquidity thereof. This 

condition is an essential requirement of 

the exception to help ensure that the 

relevant hedging activity is riskmitigating. 


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445See letter from AFR. 

446See letters from Andrew Davidson (stating that 

a firm will generally enter into risk mitigating 

hedges on a portfolio rather than on identified 

positions); IACPM (stating that credit portfolio 

management transactions may be designed to 

address portfolio credit and other risks not related 

to an institution’s securitization exposures). 

447See letter from AIMA/ACC. 

448See letter from SIFMA II (providing, as an 

example, that this would allow for the hedging of 

exposures to assets that are not yet included in the 

asset pool underlying or referenced by the relevant 

ABS); LSTA IV (stating that, at a minimum, the 

‘‘identified positions, contracts, or other holdings’’ 

need to include not only current positions, 

contracts, or other holdings, but also future 

positions, contracts, or other holdings, as hedged 

are sometimes arranged in advance). As described 

above in Section II.D.3., a transaction entered into 

by a securitization participant that is not entered 

into with respect to the relevant ABS is only a 

conflicted transaction under the final rule if it is 

substantially the economic equivalent of a 

transaction described in final Rule 192(a)(3)(i) or 

final Rule 192(a)(3)(ii) with respect to the relevant 

ABS. 

449See letter from Andrew Davidson. 

450See Section II.C.3. for a discussion of the time 

period during which the prohibition applies. 

451 Id. 

452See letter from AFR. 

453See, e.g., letters from Andrew Davidson 

(stating that it would be difficult and costly for a 

firm which engages in overall portfolio hedging to 

comply with this requirement); IACPM (stating its 

belief that this condition does not accurately reflect 

the way credit portfolio managers manage risk in 

the context of credit portfolio management 

transactions, which can be used to hedge risks 

wholly unrelated to the institution’s securitization 

exposures); SFA II (requesting that the ongoing 

recalibration requirement be replaced with a 

requirement that the primary benefit of the riskmitigating hedging activity is risk reduction and not 

the facilitation or creation of an opportunity to 

realize some other benefit from a conflicted 

transaction); SIFMA II (suggesting as an alternative 

that the primary benefit of the risk-mitigating 

activity is risk reduction). 

One commenter generally supported a 

clear standard that the relevant hedging 

activity must never result in a short 

position with respect to the relevant 

ABS.445 Other commenters stated that 

the requirement that the relevant 

hedged risks are ‘‘specific, identifiable 

risks’’ is unrealistic as securitization 

participants conduct credit portfolio 

management on a portfolio basis and 

that such requirement could unduly 

limit risk-mitigating activities.446 One 

commenter generally stated that is 

unclear how the condition should be 

interpreted due to the subjectivity 

involved in risk assessment and 

identifying a necessary degree of riskmitigating hedging in any given 

circumstance.447

We recognize that various activities of 

a securitization participant, such as 

acquiring a portfolio of assets in 

anticipation of issuing an ABS or 

retaining a portion of an ABS issuance 

with respect to which it is a 

securitization participant, expose the 

securitization participant to the risk that 

such positions could decline in value. 

We also recognize that securitization 

participants may currently hedge such 

risks on an aggregated basis. Therefore, 

as discussed above, the final exception 

applies broadly to hedging of the 

individual or aggregated positions, 

contracts, or other holdings of the 

securitization participant. The final 

exception specifically allows for 

hedging on an aggregated basis, 

consistent with the rule as proposed. 

Although the relevant risks are 

permitted under 17 CFR 230.192(b)(1)(i) 

(‘‘Rule 192(b)(1)(i)’’) to be hedged on an 

aggregated basis to address more than 

one exposure, we continue to believe 

that such risks need to be specific and 

identifiable at the inception of the 

hedging activity, as well as at the time 

of any adjustments to the hedging 

activity, and must arise in connection 

with and be related to identified 

positions, contracts, or other holdings of 

the securitization participant. Without 

this condition, it would be impractical 

or impossible to determine whether the 

securitization participant has 

overhedged. This condition will 

prohibit a securitization participant 

from engaging in speculative activity 

that is designed to gain exposure to 

incremental risk by, for example, 

entering into a CDS contract referencing 

a retained ABS exposure where the 

notional amount of the CDS exceeds the 

amount of the securitization 

participant’s relevant exposure to that 

ABS, and any other aggregated 

exposures, that are intended to be 

hedged. Such a transaction would 

provide the securitization participant 

with an opportunity to profit from a 

decline in the value of the relevant 

retained exposure rather than simply to 

reduce its risk to it. For the same reason, 

we are not persuaded by the suggestion 

from certain commenters that the final 

rule allow, under the risk-mitigating 

hedging activity exception, for the 

hedging of specific, identifiable 

positions, contracts, or other holdings of 

a securitization that do not exist at the 

time of the hedging activity but that may 

exist at some point in the future.448

Under such a standard, a securitization 

participant would, for example, be 

allowed to overhedge its exposure to the 

relevant ABS or the asset pool 

underlying or referenced by such ABS 

on the mere basis that it may at some 

point in the future increase its exposure 

to such assets even if it ultimately never 

does so. 

One commenter stated that the 

requirement that the condition apply at 

the inception of the hedging activity and 

at the time of any adjustments to the 

hedging activity should be deleted.449

We recognize that the risks of the 

relevant exposures are dynamic and 

may change over time and that new 

risks may emerge in a way that would 

make the hedging activity that was 

designed at inception less effective. As 

explained above in Section II.C.3., the 

prohibition of the rule only applies for 

a limited timeframe with respect to the 

relevant ABS,450 and this first condition 

of the risk-mitigating hedging activities 

exception does not restrict a 

securitization participant from making 

adjustments to a hedge over time. 

However, consistent with the investor 

protection mandate of Section 27B and 

recognizing that a securitization 

participant’s exposures may change over 

time, it is important that the 

requirements of this condition, as stated 

in the Proposing Release, must apply 

not only at the inception of the hedging 

activity but also whenever such hedging 

activity is subsequently adjusted during 

the time period in which the prohibition 

applies.451 Therefore, any changed or 

new risks that are being hedged, 

including those being hedging on an 

aggregated basis, will need to be 

specifically identified, and the adjusted 

hedging activity needs to be designed to 

address them, in order for the exception 

to apply. 

We are adopting 17 CFR 

230.192(b)(1)(ii)(B) (‘‘Rule 

192(b)(1)(ii)(B)’’) with certain 

modifications in response to comments 

received on the proposal. Specifically, 

the second condition of the exception is 

that the risk-mitigating hedging activity 

is required to be subject, as appropriate, 

to ongoing recalibration by the 

securitization participant to ensure that 

such hedging activity satisfies the 

requirements applicable to the first 

condition of the exception and does not 

facilitate or create an opportunity to 

materially benefit from a conflicted 

transaction other than through riskreduction. This condition is designed to 

prevent a position that initially 

functions as a hedge to develop into a 

prohibited bet against the relevant ABS. 

One commenter stated that the rule 

should provide that the relevant 

hedging activity must never result in a 

short position with respect to the 

relevant ABS.452 Other commenters 

expressed concerns that this condition 

could unduly limit a securitization 

participant’s risk-management 

abilities.453

We continue to believe that the 

recalibration requirement is a necessary 

condition to the exception so that 

subsequent changes to the hedging 


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454See letters from SFA II (suggesting a 

requirement that the primary benefit of the riskmitigating hedging activity is risk reduction and not 

the facilitation or creation of an opportunity to 

realize some other benefit of a conflicted 

transaction); SIFMA II (suggesting a requirement 

that the primary benefit of the risk-mitigating 

hedging activity is risk reduction); LSTA IV 

(supporting SIFMA’s suggestion). 

455See letter from SIFMA I. 

456See letter from AIMA/ACC. 457See letter from IACPM. 

arrangements do not result in those 

arrangements functioning as conflicted 

transactions that would otherwise be 

prohibited by the final rule. For 

example, if a securitization participant 

enters into a hedge that is permitted 

under the exception at inception and 

the risk exposure of the securitization 

participant is subsequently reduced 

such that its hedge fails to achieve its 

designed purpose and constitutes a bet 

against the relevant ABS, the 

securitization participant should be 

required to adjust or recalibrate its 

hedge to continue to rely on the 

exception. Otherwise, securitization 

participants could reduce their 

exposures after entering into a hedge in 

order to achieve a net short position, 

which would constitute a bet against the 

ABS. The second condition is designed 

to prevent that very conduct. 

In a change from the proposal, the 

risk-mitigating hedging activity is 

required to be subject, as appropriate, to 

ongoing recalibration by the 

securitization participant to ensure that 

such hedging activity does not facilitate 

or create an opportunity to ‘‘materially’’ 

benefit from a conflicted transaction 

other than through risk-reduction. We 

recognize that it may not be possible for 

a securitization participant to 

immediately recalibrate its hedging 

positions given the liquidity, maturity, 

and depth of the relevant market for 

such hedging positions. For example, if 

there is an unexpected early 

prepayment of the relevant positions 

being hedged, a securitization 

participant may be unable to 

immediately reduce its related hedge. 

The addition of the word ‘‘materially’’ is 

designed to address this concern and 

not unduly disrupt normal course 

hedging activities that do not present 

material conflicts of interest with ABS 

investors. We believe that this standard 

is more appropriate than stipulating, as 

some commenters suggested, that to 

meet the risk-mitigating hedging 

activities exception, it is necessary that 

the ‘‘primary benefit’’ of such activity 

must be risk reduction.454 These 

commenters did not specify how to 

calculate or otherwise determine 

whether the primary benefit of a riskmitigating hedging activity is risk 

reduction, and the term ‘‘primary 

benefit’’ implies that a securitization 

participant could, as a ‘‘secondary 

benefit’’ to the activity, materially profit 

from a net short position with respect to 

the relevant ABS. This standard would 

allow a securitization participant to 

enter into a bet against the relevant ABS 

in contradiction to the statutory 

prohibition. 

One comment requested that the 

recalibration requirement only apply 

with respect to the hedging of 

aggregated holdings and not an 

individual position.455 We believe that 

the recalibration requirement should 

apply to both the hedging of individual 

and aggregate positions as the relevant 

concerns that a securitization 

participant should not be able to bet 

against the relevant ABS are the same 

regardless of whether the relevant 

exposures are hedged on an aggregated 

or individualized basis. 

Overall, we believe that the first and 

second conditions as adopted should 

not unduly disrupt normal course 

hedging activities that do not present 

material conflicts of interest with ABS 

investors and therefore should reduce 

the compliance burden from that of the 

proposed exception. In response to the 

comment that there is subjectivity 

involved in risk assessment and 

identifying a necessary degree of riskmitigating hedging in any given 

circumstance,456 the final rule does not 

include an exact negative correlation 

standard in the risk-mitigating hedging 

activities exception out of concern that 

such a standard could be unattainable in 

many circumstances given the potential 

complexity of positions, market 

conditions at the time of the hedge 

transaction, availability of hedging 

products, costs of hedging, and other 

circumstances at the time of the 

transaction that would make a hedge 

with exact negative correlation 

impractical or unworkable. For 

example, a securitization participant 

may not be able to hedge its exposure 

on an individualized basis and may 

have to enter into a broader-based 

hedging transaction. However, the 

presence of negative correlation will 

generally indicate that the hedging 

activity reduced the risks it was 

designed to address. The first and 

second conditions to the risk-mitigating 

hedging activities exception will serve 

to promote risk-mitigating hedging 

activity where there is negative 

correlation between the risk being 

hedged and the corresponding hedged 

position because the relevant risk will 

be required to be specifically identified 

and the risk-mitigating hedging activity 

cannot facilitate or create an 

opportunity to benefit from a conflicted 

transaction other than through risk 

reduction. The first and second 

conditions to the risk-mitigating 

hedging activities exception also allow 

for consideration of the facts and 

circumstances of the particular exposure 

or exposures and the related hedging 

activity, including the type of position 

being hedged, market conditions, depth 

and liquidity of the market for the 

underlying and hedging positions, and 

type of risk being hedged. 

Consistent with the proposal, the riskmitigating hedging activities exception 

also does not require that a hedge be 

entered into contemporaneously (i.e., at 

the exact time that a risk is incurred or 

within a prescribed time period after a 

risk is incurred). Rather, both the first 

and second conditions are premised on 

the relevant hedging activity, whenever 

it is entered into or adjusted, being 

designed to mitigate a specifically 

identified risk and not to function as a 

bet against the relevant ABS. The 

hedging activity will cease to qualify for 

the risk-mitigating hedging activities 

exception if it is no longer reducing a 

specific risk to the securitization 

participant in connection with its 

individual or aggregates positions, 

contracts, or other holdings, for example 

if the securitization participant failed to 

unwind its risk-mitigating hedging 

activities after disposing of the position 

or holding being hedged. This is 

because the securitization participant 

will no longer be engaged in riskmitigating hedging activities in 

connection with such position or 

holding. 

As an alternative to the first and 

second conditions, one commenter 

suggested a condition that the hedging 

activity relates to an ABS, or any asset 

or assets supporting or referenced by an 

ABS, issued under an established and 

documented risk mitigation program 

established by the original sponsor of 

such asset-backed security.457 We do 

not believe that this alternative would 

be appropriate because the suggested 

alternative condition fails to specify that 

the relevant activity cannot result in an 

overhedged position that constitutes a 

bet against the relevant ABS or the asset 

pool supporting or referenced by such 

ABS. This is the exact type of activity 

that the rule is intended to prohibit. 

b. Compliance Program Requirement 

We are adopting 17 CFR 

230.192(b)(1)(ii)(C) (‘‘Rule 

192(b)(1)(ii)(C)’’) as proposed. 

Therefore, the third condition to the 


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458See letters from AARP; Better Markets. 459See letter from ABA. 

460See letters from AFME (supporting SIFMA’s 

suggestions); SFA I (expressing concern that the 

proposed compliance program requirement would 

apply to a broader range of entities that those 

subject to the Volcker Rule); SIFMA I (initially 

suggesting that the compliance program be deleted 

in its entirety). 

461See letters from SFA II; SIFMA II. 

462See Section II.D.3. (discussing how Rule 

192(a)(3)(iii) as adopted only applies to the 

purchase or sale of any financial instrument that is 

substantially the economic equivalent of a 

transaction described in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii) and provides that, for the avoidance of 

doubt, any transaction that only hedges general 

interest rate or currency exchange risk is not a 

conflicted transaction) and Section II.B.3.c. 

(discussing how paragraph (ii) of the definition of 

a ‘‘securitization participant’’ as adopted will only 

capture any affiliate (as defined in 17 CFR 230.405) 

or subsidiary (as defined in 17 CFR 230.405) of a 

person described in paragraph (i) of the definition 

if the affiliate or subsidiary: (A) acts in coordination 

with a person described in paragraph (i) of the 

definition; or (B) has access to or receives 

information about the relevant asset-backed security 

or the asset pool supporting or referenced by the 

relevant asset-backed security prior to the first 

closing of the sale of the relevant asset-backed 

security). 

exception is that the securitization 

participant has established, and 

implements, maintains, and enforces, an 

internal compliance program that is 

reasonably designed to ensure the 

securitization participant’s compliance 

with the requirements applicable to the 

exception, including reasonably 

designed written policies and 

procedures regarding the risk-mitigating 

hedging activities that provide for the 

specific risk and risk-mitigating hedging 

activity to be identified, documented, 

and monitored. This condition is 

designed to promote robust compliance 

efforts and to help ensure that activity 

that would qualify for the exception is 

indeed risk-mitigating while also 

recognizing that securitization 

participants are positioned to determine 

the particulars of effective riskmitigating hedging activities policies 

and procedures for their own business. 

Additionally, as discussed in Section 

IV, this condition will enhance the 

benefits of the rule by assuring investors 

that a securitization participant is less 

likely to engage in activities that are 

prohibited by Rule 192 if it has a 

program to monitor ongoing compliance 

with the rule. We believe it is important 

that reasonably designed written 

policies and procedures provide for the 

specific risk and the risk-mitigating 

hedging activities to be identified, 

documented, and monitored to help 

facilitate the securitization participant’s 

compliance with the conditions 

specified in Rule 192(b)(1)(ii)(A) and 

Rule 192(b)(1)(ii)(B), which require that 

the risk-mitigating hedging activity be 

tied to such risks at inception and over 

the time period that the prohibition of 

the rule would apply and that the 

activity be subject to ongoing 

recalibration as appropriate, as 

discussed above. 

A number of commenters expressly 

supported including a compliance 

program requirement.458 However, one 

commenter stated that the potential 

confusion regarding this requirement 

would undercut the ability of 

securitization participants to rely on the 

exception and that it is not clear that 

such condition is within the scope of 

the congressional intent of Section 

27B.459 Other commenters also stated 

that the compliance program condition 

would be unnecessarily burdensome 

and have the potential to create 

unintended consequences.460 In 

subsequent letters, certain of these 

commenters requested that the 

condition should be rephrased so that 

the compliance program is required to 

be reasonably designed to ‘‘result in’’ 

compliance with the requirements of the 

exception rather than to ‘‘ensure’’ 

compliance with those requirements 

and that the policies and procedures of 

a securitization participant should not 

provide for the monitoring of the riskmitigating hedging activity.461

In response to the comment that the 

compliance program condition would 

undercut the ability of a securitization 

participant to rely on the exception and 

that it is not clear that such condition 

is within the scope of the congressional 

intent of Section 27B, we recognize that 

certain securitization participants may 

need to create a new compliance 

program to comply with this condition 

and that this may result in increased 

compliance costs. However, Section 

27B(b) requires that the Commission 

adopt rules to implement the 

prohibition in Section 27B(a) against a 

securitization participant 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 the ABS 

activity of a securitization participant. 

The compliance program condition is 

necessary to help ensure that the 

activities of a securitization participant 

relying on the risk-mitigating hedging 

activities exception are indeed riskmitigating hedging activities, and not 

the type of transactions that would 

involve or result in a material conflict 

of interest between a securitization 

participant for an ABS and an investor 

in such ABS. Given that the ABS 

exposures of a securitization participant 

and the financial instruments that are 

utilized to hedge such exposures can be 

inherently complex, requiring a 

securitization participant to establish 

and enforce an internal compliance 

program will help that entity adequately 

evaluate and track its ABS exposures 

and monitor its hedging activity in a 

way that is reasonably designed to help 

prevent violations of the rule. Similarly, 

given that the exposure of a 

securitization participant can change 

over time, we continue to believe that it 

is necessary that securitization 

participants develop reasonably 

designed policies and procedures 

regarding their risk-mitigating hedging 

activities that provide for the specific 

activities to be monitored on an ongoing 

basis. We also believe that it is 

important for this condition to apply to 

all securitization participants that seek 

to rely on this exception given that the 

focus of Section 27B is investor 

protection. 

However, to avoid imposing a onesize-fits-all requirement that may 

unduly burden securitization 

participants that are different in size or 

that make markets in different financial 

instruments, this condition recognizes 

that a securitization participant that 

engages in risk-mitigating hedging 

activity is well positioned to design its 

own individual internal compliance 

program to reflect the size, complexity, 

and activities of the securitization 

participant. This should help ease 

compliance costs as the relevant 

securitization participant can tailor its 

compliance program to its particular 

business model. As a general matter, we 

recognize that costs of the final rule 

potentially may have a proportionally 

greater effect on small entities, as such 

costs may be a relatively greater 

percentage of the total cost of operations 

for smaller entities than larger entities, 

and thus small entities may be less able 

to bear such costs relative to larger 

entities. However, the potentially less 

complex securitization activities of 

small entities and their correspondingly 

less complex compliance considerations 

may counterbalance such costs as 

compared to larger and more diversified 

securitization participants. In addition, 

the changes discussed above to refine 

the scope of the definition of ‘‘conflicted 

transaction’’ and the scope of covered 

affiliates and subsidiaries are designed 

to ease the compliance program burden 

on securitization participants by 

narrowing the scope of the types of 

transactions and relevant entities that 

are subject to the rule’s prohibition.462

This should also reduce the cost of 

developing policies and procedures 

regarding the risk-mitigating hedging 

activity that provide for the specific 


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463See letters from SFA II; SIFMA II. 

464See letters from SFA II; SIFMA II. These 

commenters did not also address the same concerns 

regarding the similar formulation of the compliance 

program condition to the bona fide market-making 

activities exception. 

465See, e.g., 17 CFR 255.5(b)(1)(i), 17 CFR 

240.17g–8(a), 17 CFR 240.15Fh–5(b), 17 CFR 

240.15c3–5(c)(2). 

466See letter from Better Markets. 

467See letters from AARP; Better Markets. 

468 15 U.S.C. 77z–2a(c)(2)(A). 

469See letter from Better Markets. 

470See letter from ICI (noting that its concern 

regarding typical liquidity arrangements for assetbacked commercial paper (‘‘ABCP’’) markets would 

be addressed by the Commission’s example that 

commitments to promote full and timely interest 

payments to ABS investors would meet the 

liquidity commitment exception). 

471See letter from Fannie and Freddie. 

472For example, a sponsor of ABCP may provide 

a liquidity facility if a tranche of $3 million of the 

ABCP matures on the 30th day of the month, yet 

only $2 million of the underlying receivables match 

that maturity. If there is an inability to repay the 

$1 million shortfall by issuing new commercial 

paper, the sponsor may provide a loan secured by 

the receivables to provide for the $1 million 

shortfall. 

473See Financial Accounting Manual for Federal 

Reserve Banks, Jan. 2017, Paragraph 40.13, Board of 

Governors of the Federal Reserve System, available 

at https://www.federalreserve.gov/federal-reservebanks/fam/chapter-4-system-open-marketaccount.htm. 

activity to be identified, documented, 

and monitored over time. 

In response to comments that the 

compliance program requirement 

should specify that it would only apply 

to any securitization participant 

utilizing the exception,463 adding that 

language would be redundant. Rule 

192(b)(1)(ii)(C) sets forth a condition to 

utilizing the exception in Rule 

192(b)(1)(i) and does not separately 

require that a securitization participant 

satisfy the compliance program 

requirement if it is not utilizing the 

exception. 

As described above, certain 

commenters stated that the compliance 

program condition should be revised to 

provide that such program is reasonably 

designed to ‘‘result in’’ a securitization 

participant’s compliance with the 

requirements of the exception rather 

than to ‘‘ensure’’ such securitization 

participant’s compliance because the 

word ‘‘ensure’’ could be inconsistent 

with a reasonably designed standard 464

We are adopting the condition as 

proposed. The reasonably designed to 

‘‘ensure’’ formulation is used in 

numerous other Commission rules, 

including a similar condition to the riskmitigating hedging activities to the 

Volcker Rule.465 Furthermore, we do not 

believe that the ‘‘ensure’’ formulation is 

inconsistent with the rule’s ‘‘reasonably 

designed’’ standard as the two 

components will work together to 

require that a securitization participant 

designs a sufficiently detailed internal 

compliance program that promotes 

compliance with the requirements 

applicable to the exception. 

One commenter suggested that any 

securitization participant relying on the 

exception for risk-mitigating hedging 

activities should be required to 

affirmatively certify that it is 

undertaking such activity for the sole 

purpose of hedging a risk arising in 

connection with its securitization 

activities and not for the purpose of 

generating speculative profits.466

Certain commenters also suggested that 

a responsible party at the securitization 

participant should be required to certify 

the effectiveness of the applicable 

written policies and procedures prior to 

their implementation and on an ongoing 

basis.467 Consistent with the discussion 

of this in the Proposing Release, we did 

not include certification requirements in 

the final rule because we believe that 

the conditions to the risk-mitigating 

hedging activity exception are 

sufficiently robust to prevent the 

exception from resulting in conflicted 

transactions in contradiction to Section 

27B’s prohibition. 

F. Exception for Liquidity Commitments 

1. Proposed Approach 

The Commission proposed to 

implement the exception for liquidity 

commitments in Section 27B(c) by 

proposing that the prohibition in 

proposed Rule 192(a) would not apply 

when a securitization participant 

engages in purchases or sales of ABS 

made pursuant to, and consistent with, 

commitments of the securitization 

participant to provide liquidity for the 

relevant ABS. This approach was 

consistent with Section 27B(c), which 

provides that the prohibition in Section 

27B(a) does not apply to purchases or 

sales of ABS made pursuant to, and 

consistent with, commitments of the 

underwriter, placement agent, initial 

purchaser, or sponsor, or any affiliate or 

subsidiary of any such entity, to provide 

liquidity for the ABS.468

2. Comments Received 

A number of commenters supported 

the proposed exception to exclude 

transactions pursuant to and consistent 

with commitments to provide liquidity 

for the relevant ABS. One commenter 

specifically supported limiting the 

exception to ‘‘purchases and sales’’ of 

ABS on the basis that such approach 

would be consistent with Section 

27B(c).469 Another commenter 

supported the Commission statement in 

the Proposing Release that the 

prohibition in proposed Rule 192(a) 

would not apply to liquidity 

commitments that promote the full and 

timely interest payment to ABS 

investors.470 One commenter requested 

that the Commission confirm that 

‘‘dollar roll’’ transactions for Enterprise 

mortgage-backed securities would fall 

within the exception for liquidity 

commitments.471

3. Final Rule 

We are adopting the exception for 

liquidity commitments in 17 CFR 

230.192(b)(2) (‘‘Rule 192(b)(2)’’) as 

proposed. Specifically, under the final 

exception, purchases or sales of the 

relevant ABS made pursuant to, and 

consistent with, commitments of the 

securitization participant to provide 

liquidity for such ABS are not 

prohibited by the final rule. We 

understand that commitments to 

provide liquidity may take a variety of 

forms in addition to purchases and sales 

of the ABS, such as commitments to 

promote full and timely interest 

payments to ABS investors or to provide 

financing to accommodate differences in 

the payment dates between the ABS and 

the underlying assets.472 As discussed 

above in Section II.D.3., such as an 

extension of credit by a securitization 

participant that functions to support the 

performance of the securitization rather 

than to benefit from its adverse 

performance will not be a conflicted 

transaction under the final rule. 

Therefore, a securitization participant 

will not need to rely on any exception 

to the rule to enter into such extension 

of credit. 

With respect to the commenter who 

raised concerns about ‘‘dollar roll 

transactions,’’ in the context of the 

Enterprise ABS market, we understand 

that dollar roll transactions are utilized 

as a form of short-term financing that 

are similar to a repurchase agreement; 

however, unlike a typical repurchase 

agreement, a similar security may be 

returned to the seller rather than the 

original security.473 As adopted, the 

liquidity commitments exception will 

apply when a securitization participant 

engages in purchases or sales of 

Enterprise ABS made pursuant to, and 

consistent with, commitments of the 

securitization participant to provide 

liquidity for the relevant ABS. To the 

extent that the purchases and sales of 

the relevant Enterprise ABS in a dollar 

roll transaction are consistent with a 

commitment of the securitization 

participant to provide liquidity for the 

relevant ABS, then such dollar roll 


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474See letter from SIFMA II. 

475 15 U.S.C. 77z–2a(c)(2)(B). 

476See letters from AARP; Better Markets Letter. 

477See letters from ABA (stating that the 

compliance program requirement could be 

confusing); AIC (stating that compliance would be 

burdensome for organizations not already subject to 

the Volcker Rule). 

478See letters from SFA II; SIFMA II. 

479See letters from SFA II (focusing on synthetic 

ABS and suggesting the deletion of the exclusion 

of the initial distribution of an ABS from the bona 

fide market-making activities exception); SIFMA II 

(stating that is unclear why the initial distribution 

of an ABS should not be considered bona fide 

market-making activity). 

transaction will be eligible for the 

liquidity commitment exception. 

As described above in Section II.D.3., 

one commenter expressed a concern 

that using the phrase ‘‘directly or 

indirectly’’ in proposed Rule 192(a)(1) 

could be potentially interpreted to 

create a misalignment between the 

scope of the entities subject to the 

prohibition and the scope of the 

exceptions to the rule that apply to the 

activities of a securitization 

participant.474 The final rule does not 

prohibit a securitization participant 

from utilizing an affiliate or subsidiary 

as an intermediary for the purpose of 

fulfilling its liquidity commitment 

obligations with respect to the relevant 

ABS. This is because the liquidity 

commitments exception is available to a 

‘‘securitization participant,’’ which is 

defined to include not only the 

underwriter, placement agent, initial 

purchaser, or sponsor of an ABS but 

also any affiliate or subsidiary who is 

acting in coordination with such person 

or who has access to or receives 

information about the relevant ABS or 

the asset pool underlying or referenced 

by the relevant ABS. For example, it is 

not inconsistent with the exception for 

liquidity commitments in Rule 192(b)(2) 

for an entity that it is an underwriter, 

placement agent, initial purchaser, or 

sponsor with respect to an ABS under 

the final rule to provide liquidity for the 

ABS by causing one of its subsidiaries 

to engage in purchases and sales of the 

relevant ABS. 

G. Exception for Bona Fide MarketMaking Activities 

1. Proposed Approach 

The Commission proposed to 

implement the exception for bona fide 

market-making activity in Section 

27B(c) by proposing that the prohibition 

in proposed Rule 192(a), subject to 

specified conditions, would not apply to 

certain bona fide market-making 

activities conducted by a securitization 

participant. This approach was 

consistent with Section 27B(c), which 

provides that the prohibition in Section 

27B(a) does not apply to purchases or 

sales of ABS made pursuant to and 

consistent with bona fide marketmaking in the ABS.475 Subject to 

specified conditions, the proposed 

exception would apply to bona fide 

market-making activity, including 

market-making related hedging, of a 

securitization participant conducted in 

connection with and related to an ABS, 

the assets underlying such ABS, or 

financial instruments that reference 

such ABS or underlying assets. In order 

to distinguish permitted bona fide 

market-making activity from prohibited 

conflicted transactions, the Commission 

proposed the following five conditions 

that would need to be satisfied in order 

for a securitization participant to rely on 

the bona fide market-making activities 

exception: 

• That the securitization participant 

routinely stands ready to purchase and 

sell one or more types of the financial 

instruments set forth in proposed 17 

CFR 230.192(b)(3)(i) (‘‘Rule 

192(b)(3)(i)’’) as a part of its marketmaking related activities in such 

financial instruments, and is willing 

and available to quote, purchase and 

sell, or otherwise enter into long and 

short positions in those types of 

financial instruments, in commercially 

reasonable amounts and throughout 

market cycles on a basis appropriate for 

the liquidity, maturity, and depth of the 

market for the relevant types of such 

financial instruments; 

• That the securitization participant’s 

market-making related activities are 

designed not to exceed, on an ongoing 

basis, the reasonably expected near term 

demands of clients, customers, or 

counterparties, taking into account the 

liquidity, maturity, and depth of the 

market for the relevant types of financial 

instruments; 

• That the compensation 

arrangements of the persons performing 

the market-making activity of the 

securitization participant are designed 

not to reward or incentivize conflicted 

transactions; 

• That the securitization participant 

would be required to be licensed or 

registered to engage in the relevant 

market-making activity, in accordance 

with applicable laws and self-regulatory 

organization (‘‘SRO’’) rules; and 

• That the securitization participant 

would be required to have established 

and must implement, maintain, and 

enforce an internal compliance program 

that is reasonably designed to ensure the 

securitization participant’s compliance 

with the requirements of the bona fide 

market-making activities exception, 

including reasonably designed written 

policies and procedures that 

demonstrate a process for prompt 

mitigation of the risks of its marketmaking positions and holdings. 

2. Comments Received 

Most commenters that addressed this 

aspect of the final rule provided 

comments related to the proposed 

conditions to the exception. Certain 

commenters supported the proposed 

conditions.476 Other commenters 

focused on the compliance program 

requirement and stated that it would be 

unduly burdensome and 

inappropriate.477 In subsequent letters, 

certain of the commenters suggested 

that the compliance program 

requirement should only apply to any 

securitization participant utilizing or 

relying on the exception and that the 

license and registration requirement 

should only apply to a securitization 

participant to the extent that it is 

required to be licensed or registered to 

engage in market-making activity by 

applicable law and self-regulatory 

organization rules.478 The Commission 

also received comments that the bona 

fide market-making activities exception 

should be available in the case of the 

initial distribution of an ABS.479

3. Final Rule 

We are adopting the bona fide marketmaking activities exception largely as 

proposed, with a technical modification 

from the proposal to one of the 

conditions as discussed in further detail 

below. Consistent with Section 27B, we 

are adopting a bona fide market-making 

activities exception that is designed to 

distinguish permitted bona fide marketmaking activity from prohibited 

conflicted transactions, while 

permitting securitization participants to 

continue providing intermediation 

services in less liquid and illiquid 

markets. Specifically, subject to the 

specified conditions discussed in detail 

below, the final rule provides an 

exception for bona fide market-making 

activities, including market-making 

related hedging, of a securitization 

participant conducted in connection 

with and related to ABS with respect to 

which the prohibition in Rule 192(a)(1) 

applies, the assets underlying such ABS, 

or financial instruments that reference 

such ABS or underlying assets or with 

respect to which the prohibition in 

paragraph (a)(1) applies, except that the 

initial distribution of an ABS is not 

bona fide market-making activity for 

purposes of Rule 192(b)(3). Consistent 

with the proposed rule, because the 

prohibition in Rule 192(a)(1) extends to 


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480 Given the nature of the ABS market and that 

the scope of the prohibition of the rule will prohibit 

transactions that include not only entering into a 

short sale of ABS but also entering into CDS on the 

relevant ABS or the asset underlying such ABS, we 

are specifying that the bona fide market-making 

activities exception extends to bona fide marketmaking activity in financial instruments, such as 

CDS on the relevant ABS, that are conflicted 

transactions under the final rule. However, under 

the final rule, if the ‘‘conflicted transaction’’ is a 

short sale of the relevant ABS, then, in order to rely 

on the exception, such sale will need to constitute 

bona fide market-making activity in such ABS. 

Similarly, if the relevant ‘‘conflicted transaction’’ is 

a purchase and sale of a CDS, then, in order to rely 

on the exception, such purchase and sale will need 

to constitute bona fide market-making activity of 

the securitization participant in such CDS. 

481Furthermore, the activity would not qualify for 

the exception because even if the securitization 

participant purchased the CDS protection (i.e., a 

short position) purportedly as part of its marketmaking activity, the creation and sale of the new 

ABS is primary, not secondary, market activity. 

482See letter from SFA II (focusing on synthetic 

ABS and suggesting that the bona fide marketmaking activities exception should cover the initial 

distribution of an ABS); SIFMA II (stating that is 

unclear why the initial distribution of an ABS 

should not be considered bona fide market-making 

activity). 

483See letter from SIFMA II. 

484See 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). 

transactions such as the purchase of a 

credit derivative with respect to the 

relevant ABS or the assets underlying 

the relevant ABS,480 the final bona fide 

market-making activities exception 

applies to market-making in not only 

the ABS that will be subject to the 

prohibition of the final rule but, as 

described in Rule 192(b)(3)(i), also the 

assets underlying such ABS as well as 

financial instruments that reference 

such ABS or the assets underlying such 

ABS. This would capture CDS or other 

credit derivative products with payment 

terms that are tied to the performance of 

the ABS or its underlying assets. 

Consistent with this reasoning, the final 

bona fide market-making activities 

exception will also apply to bona fide 

market-making in any other financial 

instrument with respect to which the 

prohibition in Rule 192(a)(1) applies. 

The addition of this language is 

designed to more appropriately align the 

text relating to the scope of the 

exception with the text relating to the 

scope of the categories of transactions 

that are captured by the definition of 

conflicted transaction. For example, as 

discussed in Section II.D.3., if a 

securitization participant engages in a 

CDS transaction with respect to a pool 

of assets with characteristics that 

replicate the idiosyncratic credit 

performance of the pool of assets that 

underlies the relevant ABS, then such 

CDS could be, depending on the facts 

and circumstances, a conflicted 

transaction that is prohibited by Rule 

192(a)(1) even if it is not a financial 

instrument that directly references the 

assets underlying the ABS. Under the 

bona fide market-making activities 

exception, the relevant securitization 

participant may rely on the exception to 

engage in such CDS transaction if it 

satisfies the conditions to the exception. 

Consistent with the proposed rule, the 

initial issuance of an ABS does not 

qualify as bona fide market-making 

activity under the final exception in 

Rule 192(b)(3). This means that a 

securitization participant is not able to 

rely on the adopted exception for bona 

fide market-making activities in ABS for 

primary market activities, such as 

issuing a new synthetic ABS.481 As 

explained above in Section II.E.3., 

initial issuances of ABS, including new 

synthetic ABS, can be eligible for the 

risk-mitigating hedging activity 

exception. 

Certain commenters requested the 

bona fide market-making activities 

exception be available in the case of the 

initial distribution of an ABS.482 One of 

these commenters stated that it is 

unclear why the initial distribution of 

an ABS would not be considered bona 

fide market-making activity and that the 

concerns of the Commission regarding 

an initial distribution of an ABS set 

forth in the Proposing Release would 

already be addressed by the various 

conditions applicable to the exception 

and the proposed anti-circumvention 

provision.483

As explained above in Section II.D.3., 

Rule 192(a)(3)(iii) captures, in relevant 

part, the purchase or sale of any 

financial instrument ‘‘(other than the 

relevant asset-backed security)’’ or entry 

into a transaction that is substantially 

the economic equivalent of a transaction 

described in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii). The inclusion of the 

language ‘‘(other than the relevant assetbacked security)’’ is designed to specify 

that merely entering into an agreement 

to serve as a securitization participant 

with respect to an ABS and engaging in 

a purchase or sale of the ABS as an 

underwriter, placement agent, or initial 

purchaser for such ABS is not itself a 

conflicted transaction. Therefore, as 

explained above in Section II.D.3., the 

final rule is not designed to 

disincentivize an underwriter, 

placement agent, or initial purchaser 

from intermediating a synthetic ABS 

transaction for a customer, client, or 

counterparty where the securitization 

participant does not take a short 

position with respect to the investors in 

the relevant synthetic ABS. 

Accordingly, the sale of a synthetic ABS 

to investors by an underwriter, 

placement agent, or initial purchaser 

where such securitization participant 

does not take a short position in the 

relevant synthetic ABS is not a 

conflicted transaction and such activity 

does not need to be eligible for any 

exception to the final rule. 

However, in cases where the 

securitization participant enters into a 

conflicted transaction as a component of 

the initial distribution of the synthetic 

ABS, we do not believe that it would be 

appropriate to allow that conflicted 

transaction to be eligible for the bona 

fide market-making activities exception. 

The relevant conflicted transaction in 

the context of the initial distribution of 

a synthetic ABS arises when a 

securitization participant engages in a 

transaction (such as CDS contract(s) 

with the issuer) where cash paid by 

investors to acquire the newly created 

synthetic ABS would fund the relevant 

contract(s) and be available to make a 

payment to the securitization 

participant upon the occurrence of an 

adverse event with respect to the assets 

included in the reference pool. If such 

activity is not entered into for purposes 

of hedging an exposure of the 

securitization participant to the assets 

included in the reference pool in 

accordance with the conditions of the 

risk-mitigating hedging activities 

exception as described above, then such 

activity is a bet by the securitization 

participant against the performance of 

the relevant reference assets. This type 

of material conflict of interest with 

investors in the new synthetic ABS is 

the same as those raised by the synthetic 

CDO transactions that were the subject 

of Congressional scrutiny in connection 

with the financial crisis of 2007– 

2009.484 The final rule is designed to 

prohibit such conflicted transactions 

unless they are entered into for hedging 

purposes in accordance with the 

requirements of the risk-mitigating 

hedging activities exception, and they 

are accordingly not eligible for the bona 

fide market-making activities exception. 

In response to the comment that our 

concerns regarding these transactions 

could be addressed by the other 

conditions that were proposed for the 

bona fide market-making activities 

exception or by the anti-evasion 

provision, we do not believe that these 

other conditions are adequate to address 

our concerns that these types of 

transactions can only be utilized for 

hedging purposes and cannot be utilized 

as a bet against the relevant ABS in the 

same way as they were during the 


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485See letter from SIFMA II. 

486See letters from ABA; AIC. 

487See letters from AIMA/ACC. 

488See Section IV. 

489This approach differs from the requirements 

under Regulation SHO, whereby the market maker 

must be engaged in bona fide market-making in the 

security at the time of the short sale for which it 

seeks the exception. See Amendments to Regulation 

SHO, 34–58775, 73 FR 61690, 61699 n.103 (Oct. 17, 

2008) (citing Rules 203(B)(1) and 203(B)(2)(iii) of 

Regulation SHO). Activity that might be bona fide 

market-making activities for purposes of Rule 192 

may not be bona fide market-making for purposes 

of other rules, including Regulation SHO, and vice 

versa. 

490Market-makers will generally already have 

certain policies and procedures in place to promote 

compliance with other securities laws applicable to 

them. 491See letters from SIFMA II. 

financial crises of 2007–2009. 485 The 

conditions to the bona fide marketmaking activities exception do not 

require that the relevant transaction be 

entered into only for hedging purposes, 

and the anti-evasion provision does not 

set forth any standard that the relevant 

transaction be entered into only for 

hedging purposes. 

Some commenters generally stated 

that the requirements of the bona fide 

market-making activities exception 

would be confusing, unduly 

burdensome, and unnecessary.486

Although commenters did not explain 

what specific aspects of the 

requirements would be burdensome or 

confusing, we do not think that these 

conditions will be unduly difficult for 

securitization participants to satisfy, as 

discussed in further detail below. 

Furthermore, we believe that the 

conditions to the exception are 

necessary to distinguish permitted bona 

fide market-making activity from 

prohibited conflicted transactions. 

Without the inclusion of such 

conditions, the scope of the bona fide 

market-making activities exception 

could be susceptible to misuse by 

securitization participants and give rise 

to conflicted transactions in 

contradiction of Section 27B’s 

prohibition. 

At the same time, we acknowledge the 

important role played by securitization 

participants that are market makers in 

less liquid financial instruments and 

that unduly burdensome conditions 

could potentially impede marketmaking activity in less liquid financial 

instruments. Consistent with the 

reasons stated in the Proposing Release, 

in order to not discourage such valuable 

activity, the conditions to the exception 

as adopted specifically take into account 

the liquidity, maturity, and depth of the 

market for the relevant financial 

instruments, which may vary across 

different types of financial instruments. 

In response to the commenter that stated 

that the exception requires certain facts 

and circumstances determinations that 

may increase compliance costs,487 we 

believe that considering the relevant 

facts and circumstances of the relevant 

market is necessary in order to avoid 

imposing an overly restrictive one-sizefits-all standard on market participants 

that may be confusing for marketmakers with different business models 

to comply with and, as a result, 

unnecessarily impede market-making 

activity. As discussed in Section IV 

below, we acknowledge that a 

securitization participant availing itself 

of the exception will incur certain costs 

to do so.488

Furthermore, as proposed, the 

adopted bona fide market-making 

activities exception does not include a 

requirement to analyze the applicability 

of the exception on a trade-by-trade 

basis.489 The adopted bona fide marketmaking activities exception in 17 CFR 

230.192(b)(3)(ii)(B) (‘‘Rule 

192(b)(3)(ii)(B)’’) is instead focused on 

the overall market-making related 

activities of a securitization participant 

in assets that would otherwise be 

conflicted transactions, with a condition 

that those activities are related to 

satisfying the reasonably expected near 

term demand of the securitization 

participant’s customers. The adopted 

exception also encompasses marketmaking related hedging in order to give 

a securitization participant that is a 

market maker the flexibility to acquire 

positions that hedge the securitization 

participant’s market-making inventory. 

As adopted, hedging the risk of a 

price decline of market-making related 

ABS positions and holdings while the 

market maker holds such ABS qualifies 

for the adopted bona fide marketmaking activities exception so long as 

the conditions of the bona fide marketmaking activities exception are satisfied. 

Therefore, with respect to such activity, 

a securitization participant does not 

need to separately rely on the riskmitigating hedging activities exception, 

which is principally designed to address 

the hedging of retained exposures rather 

than market-making positions that are 

entered into in connection with 

customer demand. To facilitate 

monitoring and compliance, as 

discussed below in the context of the 

compliance program condition in 17 

CFR 230.192(b)(3)(ii)(E) (‘‘Rule 

192(b)(3)(ii)(E)’’), a securitization 

participant relying on the exception for 

bona fide market-making activities is 

required to have reasonably designed 

written policies and procedures that 

demonstrate a process for prompt 

mitigation of the risks of its positions 

and holdings arising from its marketmaking activity. This should allow 

securitization participants that are 

market makers to determine how best to 

manage the risks of their market-making 

activity without causing a reduction in 

liquidity, wider spreads, or increased 

trading costs for market makers and 

their customers.490

As described above in Section II.D.3., 

one commenter expressed a concern 

that using the phrase ‘‘directly or 

indirectly’’ in Rule 192(a)(1) could be 

potentially interpreted to create a 

misalignment between the scope of the 

entities subject to the prohibition and 

the scope of the exceptions to the rule 

that apply to the activities of a 

securitization participant.491 The final 

rule does not prohibit a broker-dealer 

affiliate or subsidiary of a securitization 

participant from engaging in bona fide 

market-making activities. This is 

because the bona fide market-making 

activities exception is available to a 

‘‘securitization participant,’’ which is 

defined to include not only the 

underwriter, placement agent, initial 

purchaser, or sponsor of an ABS but 

also any affiliate or subsidiary who is 

acting in coordination with such person 

or who has access to or receives 

information about the relevant ABS or 

the asset pool underlying or referenced 

by the relevant ABS. For example, it is 

not inconsistent with the exception for 

bona fide market-making activities in 

Rule 192(b)(3) for a broker-dealer 

affiliate or subsidiary of an entity that is 

a securitization participant with respect 

to an ABS under the final rule to engage 

in bona fide market-making activity 

with respect to that ABS. 

Each of the specific conditions in 

Rule 192(b)(3) applicable to the bona 

fide market-making activities exception 

is described in detail below. 

a. Requirement to Routinely Stand 

Ready To Purchase and Sell 

The Commission did not receive 

comments to proposed 17 CFR 

230.192(b)(3)(ii)(A), and we are 

adopting it as proposed. Therefore, the 

first condition to the final exception is 

that the securitization participant 

routinely stands ready to purchase and 

sell one or more types of the financial 

instruments set forth in Rule 192(b)(3)(i) 

as a part of its market-making related 

activities in such financial instruments, 

and is willing and available to quote, 

purchase and sell, or otherwise enter 

into long and short positions in those 

types of financial instruments, in 

commercially reasonable amounts and 

throughout market cycles on a basis 


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85440 Federal Register / Vol. 88, No. 234 / Thursday, December 7, 2023 / Rules and Regulations 

492For example, under Regulation SHO’s bona 

fide market-making exception, the relevant brokerdealer should generally be holding itself out as 

standing ready and willing to buy and sell the 

relevant security by continuously posting widely 

disseminated quotes that are near or at the market, 

and must be at economic risk for such quotes. See 

2008 Regulation SHO Amendments at 61690, 61699 

(citing indicia including whether the market maker 

incurs any economic or market risk with respect to 

the securities (e.g., by putting its own capital at risk 

to provide continuous two-sided quotes)); see also 

Further Definition of ‘‘As a Part of a Regular 

Business’’ in the Definition of Dealer and 

Government Securities Dealer, Release No. 34– 

94524 (Mar. 28, 2022) [87 FR 23054 (Apr. 18, 2022)] 

(‘‘Dealer Release’’) at 23068 n.157 (stating that 

broker-dealers that do not publish continuous 

quotations, or publish quotations that do not subject 

the broker-dealer to such risk (e.g., quotations that 

are not publicly accessible, are not near or at the 

market, or are skewed directionally towards one 

side of the market) would not be eligible for the 

bona fide market-making exception under 

Regulation SHO). 

493See Prohibitions and Restrictions on 

Proprietary Trading and Certain Interests In, and 

Relationships With, Hedge Funds and Private 

Equity Funds, Release No. BHCA–1 (Dec. 10, 2013) 

[79 FR 5536 (Jan. 31, 2014)] at 5619. 

appropriate for the liquidity, maturity, 

and depth of the market for the relevant 

types of such financial instruments. 

This ‘‘routinely stands ready’’ 

standard takes into account the actual 

liquidity and depth of the relevant 

market for ABS and financial 

instruments related to ABS described in 

Rule 192(b)(3)(i), which may be less 

liquid than, for example, listed equity 

securities. This ‘‘routinely stands ready’’ 

standard, as opposed to a more stringent 

standard such as ‘‘continuously 

purchases and sells,’’ 492 is designed to 

avoid having a chilling effect on a 

person’s ability to act as a market maker 

in a less liquid market. The ‘‘routinely 

stands ready’’ standard is appropriate 

for bona fide market-making activities in 

ABS and related financial instruments 

described in Rule 192(b)(3)(i) because 

market makers in such illiquid markets 

likely do not trade continuously but 

trade only intermittently or at the 

request of customers. 

However, the mere provision of 

liquidity is not necessarily sufficient for 

a securitization participant to satisfy 

this condition. This condition is 

designed to help ensure that activity 

that will qualify for the exception in the 

final rule will not apply to a 

securitization participant only 

providing quotations that are wide of (in 

comparison to the bid-ask spread) one 

or both sides of the market relative to 

prevailing market conditions. In order to 

satisfy this condition, the securitization 

participant needs to have an established 

pattern of providing price quotations on 

either side of the market and a pattern 

of trading with customers on each side 

of the market. Furthermore, a 

securitization participant needs to be 

willing to facilitate customer needs in 

both upward and downward moving 

markets and not only when it is 

favorable for the securitization 

participant to do so in order for it to 

‘‘routinely stand ready’’ to purchase and 

sell the relevant financial instruments 

throughout market cycles. Also, in this 

context, ‘‘commercially reasonable’’ 

amounts means that the securitization 

participant must be willing to quote and 

trade in sizes requested by market 

participants in the relevant market. This 

is indicative of the securitization 

participant’s willingness and 

availability to provide intermediation 

services for its clients, customers, or 

counterparties that is consistent with 

bona fide market-making activities in 

such market. 

b. Limited to Client, Customer, or 

Counterparty Demand Requirement 

The Commission did not receive 

comments to proposed Rule 

192(b)(3)(ii)(B), and we are adopting it 

as proposed. Therefore, the second 

condition to the final exception is that 

the securitization participant’s marketmaking related activities are designed 

not to exceed, on an ongoing basis, the 

reasonably expected near term demands 

of clients, customers, or counterparties, 

taking into account the liquidity, 

maturity, and depth of the market for 

the relevant types of financial 

instruments discussed in Rule 

192(b)(3)(i) (permitted bona fide marketmaking activities). The purpose of this 

condition is to distinguish activity that 

is characteristic of bona fide marketmaking activities from a securitization 

participant entering into a conflicted 

transaction to bet against the relevant 

ABS for the benefit of its own account, 

while still allowing securitization 

participants to make a market in ABS 

and the related financial instruments 

described in Rule 192(b)(3)(i), which 

may be relatively illiquid. Under the 

final rule, this is a facts and 

circumstances determination that is 

focused on an analysis of the reasonably 

expected near-term demand of 

customers while also recognizing that 

the liquidity, maturity, and depth of the 

relevant market may vary across asset 

types and classes. The recognition of 

these differences in the condition 

should avoid unduly impeding a market 

maker’s ability to build or retain 

inventory in less liquid instruments. 

The facts and circumstances that will be 

relevant to determine compliance with 

this condition include, but are not 

limited to, historical levels of customer 

demands, current customer demand, 

and expectations of near-term customer 

demand based on reasonably 

anticipated near term market 

conditions, including, in each case, 

inter-dealer demand. For example, a 

securitization participant facilitating a 

secondary market credit derivative 

transaction with respect to an ABS in 

response to a current customer demand 

will satisfy this condition. However, if 

the securitization participant builds an 

inventory of CDS positions in the 

absence of current demand and without 

any reasonable basis to build that 

inventory based on either historical 

demand or anticipated demand based 

on expected near term market 

conditions, there will be no reasonably 

expected near term customer demand 

for those positions and that transaction 

will fail to satisfy this condition. 

c. Compensation Requirement 

The Commission received no 

comments regarding proposed 17 CFR 

230.192(b)(3)(ii)(C), and we are adopting 

it as proposed. Therefore, the third 

condition of the final exception is that 

the compensation arrangements of the 

persons performing the market-making 

activity of the securitization participant 

are designed not to reward or 

incentivize conflicted transactions. For 

example, it would be consistent with 

this condition if the relevant 

compensation arrangement is designed 

to reward effective and timely 

intermediation and liquidity to 

customers. It would be inconsistent 

with this condition if the relevant 

compensation arrangement is instead 

designed to reward speculation in, and 

appreciation of, the market value of 

market-making positions that the 

securitization participant enters into for 

the benefit of its own account. This 

approach is similar to that taken for 

purposes of the Volcker Rule.493

d. Registration Requirement 

We are adopting proposed 17 CFR 

230.192(b)(3)(ii)(D) largely as proposed 

to provide that the fourth condition of 

the exception is that the securitization 

participant is licensed or registered, if 

required, to engage in the relevant 

market-making activity, in accordance 

with applicable laws and SRO rules. 

This condition is designed to limit 

persons relying on the exception for 

bona fide market-making activities to 

only those persons with the appropriate 

license or registration to engage in such 

activity in accordance with the 

requirements of applicable laws and 

SRO rules for such activity—unless the 

relevant person is exempt from 

registration or excluded from regulation 

with respect to such activity under 


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494For example, a person meeting the conditions 

of the de minimis exception in Exchange Act Rule 

3a71–2 would not need to be a registered securitybased swap dealer to act as a market maker in 

security-based swaps. See 17 CFR 240.3a71–2. 

495See letters from SFA II; SIFMA II; LSTA IV. 

496See, e.g., Definition of Terms in and Specific 

Exemption for Banks, Savings Associations, and 

Savings Banks Under Sections 3(a)(4) and 3(a)(5) of 

the Securities Exchange Act of 1934, Release No. 

34–46745 (Oct. 30, 2002) [67 FR 67496 (Nov. 5, 

2002)] at 67498–67500; see also Further Definition 

of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap Dealer,’’ 

‘‘Major Swap Participant,’’ ‘‘Major Security-Based 

Swap Participant’’ and ‘‘Eligible Contract 

Participant,’’ Release No. 34–66868 (Apr. 27, 2012) 

[77 FR 30596 (May 23, 2012)] at 30616–30619. See 

also Dealer Release, supra note 492. 

497The bona fide market-making activities 

exception in the final rule is narrower than marketmaking activity that may require a person to register 

as a dealer. In other words, a securitization 

participant who does not meet all conditions of the 

rule’s bona fide market-making activities exception 

may still be required to register as a broker-dealer. 

See id.; see also 15 U.S.C. 78c(a)(38) (defining the 

term ‘‘market maker’’ to mean any specialist 

permitted to act as a dealer, any dealer acting in 

the capacity of block positioner, and any dealer 

who, with respect to a security, holds himself out 

(by entering quotations in an inter-dealer 

communications system or otherwise) as being 

willing to buy and sell such security for his own 

account on a regular or continuous basis). Further, 

defined terms and the determination of eligibility 

for the bona fide market-making activities exception 

in the final rule are distinct from those available 

under other rules, such as Regulation SHO and 

recently proposed rules to include certain 

significant market participants as ‘‘dealers’’ or 

‘‘government securities dealers.’’ See, e.g., Dealer 

Release, supra note 492, at 23068 n.131 

(distinguishing the determination of eligibility for 

the bona fide market-making exceptions of 

Regulation SHO from the determination of whether 

a person’s trading activity indicates that such 

person is acting as a dealer or government securities 

dealer under the rule proposed in that Exchange 

Act Release). 

498See letters from AARP; Better Markets. 

499See letter from ABA. 

500See letter from SIFMA I. 

501See letter from SIFMA II. 

502See letter from SFA II. 

503See Section IV. 

applicable law and SRO rules.494 In a 

change from the proposal, the addition 

of the phrase ‘‘if required’’ specifies that 

a securitization participant that is so 

exempt from registration or excluded 

from regulation is still eligible to use the 

exception. This is also consistent with 

the suggestion of the comments that the 

Commission received with respect to 

this condition.495

Persons engaged in market-making 

activity in the securities markets in 

connection with ABS may be engaged in 

dealing activity. If so, absent an 

exception or exemption, these persons 

are required to register as ‘‘dealers’’ 

pursuant to Section 15(a) of the 

Exchange Act, as ‘‘government 

securities dealers’’ pursuant to Section 

15C of the Exchange Act, or as 

‘‘security-based swap dealers’’ pursuant 

to Section 15F(a) of the Exchange 

Act.496 A securitization participant that 

is a registered broker-dealer will satisfy 

the market-making exception’s 

registration condition.497 Similarly, a 

securitization participant licensed as a 

bank or registered as a security-based 

swap dealer in accordance with 

applicable law will also be eligible for 

the exception. 

e. Compliance Program Requirement 

We are adopting proposed Rule 

192(b)(3)(ii)(E) as proposed. Therefore, 

the fifth and final condition to the 

exception is that the securitization 

participant is required to have 

established and must implement, 

maintain, and enforce an internal 

compliance program that is reasonably 

designed to ensure the securitization 

participant’s compliance with the 

requirements of the bona fide marketmaking activities exception, including 

reasonably designed written policies 

and procedures that demonstrate a 

process for prompt mitigation of the 

risks of its positions and holdings. 

A number of commenters expressly 

supported including a compliance 

program requirement.498 However, one 

commenter stated that the potential 

confusion regarding this requirement 

would undercut the ability of 

securitization participants to rely on the 

exception and that it is not clear that 

such condition is within the scope of 

the congressional intent of Section 

27B.499 One commenter initially 

requested that the compliance program 

requirement be omitted in its entirety 

because it would be unduly burdensome 

and unnecessary.500 However, this 

commenter subsequently requested that 

the compliance program requirement 

instead specify that it would only apply 

to any securitization participant 

utilizing the exception.501 Another 

commenter suggested a similar 

revision.502

In response to the comment that the 

compliance program condition would 

undercut the ability of a securitization 

participant to rely on the exception and 

that it is not clear that such condition 

is within the scope of the congressional 

intent of Section 27B, we recognize that 

certain securitization participants may 

need to create a new compliance 

program to comply with this condition 

and that this may result in increased 

compliance costs.503 However, Section 

27B(b) requires that the Commission 

adopt rules to implement the 

prohibition in Section 27B(a) against a 

securitization participant 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 the ABS 

activity of a securitization participant. 

The compliance program condition is 

necessary to help ensure that the 

activities of a securitization participant 

relying on the bona fide market-making 

activities exception are indeed bona fide 

market-making activities and not the 

type of transactions that would involve 

or result in a material conflict of interest 

between a securitization participant for 

an ABS and an investor in such ABS. 

The market-making activity of a 

securitization participant in ABS and 

related financial instruments described 

in Rule 192(b)(3)(i) can be inherently 

complex. Therefore, requiring a 

securitization participant to establish 

and enforce an internal compliance 

program will help that entity adequately 

evaluate and track its market-making 

activity in a way that is reasonably 

designed to help prevent violations of 

the rule. Additionally, as discussed in 

Section IV, this condition will enhance 

the benefits of the rule by assuring 

investors that a securitization 

participant is less likely to engage in 

activities that are prohibited by Rule 

192 if it has a program to monitor 

ongoing compliance with the rule. 

To avoid imposing a one-size-fits-all 

requirement that may unduly burden 

securitization participants that are 

different in size or that make markets in 

different types of financial instruments, 

this condition recognizes that a 

securitization participant that is a 

market maker in ABS and related 

financial instruments described in 

paragraph (b)(3)(i) is well positioned to 

design its own individual internal 

compliance program to reflect the size, 

complexity, and activities of the 

securitization participant. This should 

help ease compliance costs as the 

relevant securitization participant can 

tailor its compliance program to its 

particular business model. As a general 

matter, we also recognize that costs of 

the final rule potentially may have a 

proportionally greater effect on small 

entities, as such costs may be a 

relatively greater percentage of the total 

cost of operations for smaller entities 

than larger entities, and thus small 

entities may be less able to bear such 

costs relative to larger entities. However, 

the potentially less complex 

securitization activities of small entities 

and their correspondingly less complex 

compliance considerations may 

counterbalance such costs as compared 

to larger and more diversified 

securitization participants. We also 

believe that the changes discussed 

above to refine the scope of the 


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504See Section II.D.3. (discussing how Rule 

192(a)(3)(iii) as adopted only applies to the 

purchase or sale of any financial instrument that is 

substantially the economic equivalent of a 

transaction described in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii) and provides that, for the avoidance of 

doubt, any transaction that only hedges general 

interest rate or currency exchange risk is not a 

conflicted transaction). 

505See Section II.B.3.c. (discussing how 

paragraph (ii) of the definition of a ‘‘securitization 

participant’’ as adopted will only capture any 

affiliate (as defined in 17 CFR 230.405) or 

subsidiary (as defined in 17 CFR 230.405) of a 

person described in paragraph (i) of the definition 

if the affiliate or subsidiary: (A) acts in coordination 

with a person described in paragraph (i) of the 

definition; or (B) has access to or receives 

information about the relevant asset-backed security 

or the asset pool supporting or referenced by the 

relevant asset-backed security prior to the first 

closing of the sale of the relevant asset-backed 

security). 

506See letters from SFA II; SIFMA II. 

507See letter from Better Markets. 

508See letters from AARP; Better Markets. 

509See letter from Better Markets. 

510See letters from AIMA/ACC; AIC (alternatively 

requesting that an anti-evasion provision only apply 

to a securitization participant’s intentional use of an 

affiliate or subsidiary to accomplish an otherwise 

prohibited result). 

511See letters from ABA (stating that the Federal 

securities laws generally include anti-evasion 

provisions and not anti-circumvention provisions 

and expressing its belief that an anti-evasion 

standard would be more appropriate because it 

would be tied to the actions of the securitizations 

participant rather than the effect of the transaction); 

AFME (supporting the approach suggested by 

SIFMA); LSTA III (supporting the approach 

suggested by SIFMA); SFA II (suggesting an antidefinition of ‘‘conflicted transaction’’ 504

and the scope of covered affiliates and 

subsidiaries 505 are designed to ease the 

compliance program burden on 

securitization participants by providing 

greater certainty regarding the types of 

transactions and relevant entities that 

are subject to the rule’s prohibition. 

In response to comments that the 

compliance program requirement 

should specify that it only applies to 

any securitization participant utilizing 

the exception,506 it is unnecessary to do 

so because the requirement applies only 

if the securitization participant is 

relying on the exception. Rule 

192(b)(3)(ii)(E) sets forth a condition to 

utilizing the exception in Rule 192(3)(i) 

and does not separately require that a 

securitization participant satisfy the 

compliance program requirement if it is 

not utilizing the exception. 

In order to assist a securitization 

participant in determining whether it 

satisfies the first and second conditions 

of the exception, we observe that a 

reasonably designed compliance 

program of the securitization participant 

generally should set forth the processes 

by which the relevant trading personnel 

will identify the financial instruments 

described in Rule 192(b)(3)(i) related to 

its securitization activities that the 

securitization participant may make a 

market in for its customers and the 

processes by which the securitization 

participant will determine the 

reasonably expected near term demand 

of customers for such products. The 

identification of such instruments and 

the processes for determining the 

reasonably expected near term demand 

of customers for such instruments in the 

compliance program should help 

prevent trading personnel at the 

relevant securitization participant from 

taking positions in conflicted 

transactions that are not positions that 

the securitization participant expects to 

make a market in for customers or that 

are in an amount that would exceed the 

reasonably expected near term demands 

of customers. Furthermore, to assist a 

securitization participant in 

determining whether it satisfies the first 

and second conditions of the exception 

on an ongoing basis, we observe that a 

reasonably designed compliance 

program of the securitization participant 

generally should also establish internal 

controls and a system of ongoing 

monitoring and analysis that the 

securitization participant will utilize in 

order to effectively ensure the 

compliance of its trading personnel with 

its policies and procedures regarding 

permissible market-making under the 

final rule. 

It is important that the reasonably 

designed written policies and 

procedures demonstrate a process for 

prompt mitigation of the risks of a 

securitization participant’s positions 

and holdings that arise from marketmaking in ABS and the related financial 

instruments described in Rule 

192(b)(3)(i), such as the risks of aged 

positions and holdings, because doing 

so should help to prevent a 

securitization participant from engaging 

in a transaction and maintaining a 

position that is adverse to the relevant 

ABS that remains open and exposed to 

potential gains for a prolonged period of 

time. While mitigating the risks of such 

positions and holdings is not required to 

be contemporaneous with the 

acquisition of such positions or 

holdings, prompt mitigation means that 

the mitigation occur without an 

unreasonable delay that will facilitate or 

create an opportunity to benefit from a 

conflicted transaction remaining in the 

securitization participant’s marketmaking inventory considering the 

liquidity, maturity, and depth of the 

market for the relevant types of financial 

instruments. 

The requirement that a process for 

such risk mitigation activity be included 

in a securitization participant’s written 

policies and procedures should help 

prevent speculative activity being 

disguised as market-making by 

establishing the processes by which the 

relevant trading personnel will enter 

into, adjust, and unwind positions and 

holdings that arise from market-making 

in ABS. 

One commenter suggested that any 

securitization participant relying on the 

exception for bona fide market-making 

activities should be required to 

affirmatively certify that it is 

undertaking such activity for the sole 

purpose of market-making and not for 

the purpose of generating speculative 

profits.507 Certain commenters also 

suggested that a responsible party at the 

securitization participant should be 

required to certify the effectiveness of 

the applicable written policies and 

procedures prior to their 

implementation and on an ongoing 

basis.508 Consistent with the Proposing 

Release, we did not include certification 

requirements in the final rule because 

we believe that the conditions to the 

bona fide market-making activities 

exception are sufficiently robust to 

prevent the exception from resulting in 

conflicted transactions in contradiction 

to Section 27B’s prohibition. 

H. Anti-Evasion 

1. Proposed Rule 

To address concerns that the potential 

circumvention of the proposed rule 

could undermine the investor protection 

goals of Section 27B, the Commission 

proposed Rule 192(d) to provide that, if 

a securitization participant engages in a 

transaction that circumvents the 

prohibition in proposed Rule 192(a)(1), 

the transaction would be deemed to 

violate proposed Rule 192(a)(1). 

2. Comments Received 

One commenter supported the 

proposed anti-circumvention provision 

and stated that ‘‘it should remain broad 

to give the Commission ample authority 

to enforce efforts by market participants 

to evade the prohibition.’’ 509 However, 

other commenters stated that anticircumvention provision, as proposed, 

would make it difficult for market 

participants to understand the scope of 

the proposed rule and requested that the 

Commission delete the provision.510 As 

an alternative, certain commenters 

suggested that the Commission should 

replace the provision with an antievasion provision, with some of these 

commenters stating that such antievasion standard should apply only 

with respect to the use of an exception 

to the rule as part of a plan or scheme 

to evade the rule’s prohibition.511


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evasion standard); SIFMA I (suggesting an antievasion standard that applies to the exceptions). 

512See letters from ABA (stating that the Federal 

securities laws generally include anti-evasion 

provisions and not anti-circumvention provisions 

and expressing its belief that an anti-evasion 

standard would be more appropriate because it 

would be tied to the actions of the securitizations 

participant rather than the effect of the transaction); 

SFA II (suggesting an anti-evasion standard). 

513See letters from SIFMA Letter I (suggesting an 

anti-evasion standard that applies to the 

exceptions); AFME (supporting the approach 

suggested by SIFMA); LSTA III (supporting the 

approach suggested by SIFMA). 

514See letters from AIMA/ACC; AIC. 

515See letters from ICI Letter; LSTA III 

(requesting that the compliance period begin at 

least 12 months following the date that the final 

rule is published in the Federal Register); MFA II 

(requesting a transition period of at least 12 

months); SFA I; SIFMA I (requesting that the 

compliance period begin at least 12 months 

following the date that the final rule is published 

in the Federal Register). 

516See letter from SFA II. 

517See Section II.D.3. (discussing how Rule 

192(a)(3)(iii) as adopted only applies to the 

purchase or sale of any financial instrument that is 

substantially the economic equivalent of a 

transaction described in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii) and provides that, for the avoidance of 

doubt, any transaction that only hedges general 

interest rate or currency exchange risk is not a 

conflicted transaction). 

518See Section II.B.3.c. (discussing how 

paragraph (ii) of the definition of a ‘‘securitization 

participant’’ as adopted will only capture any 

affiliate (as defined in 17 CFR 230.405) or 

subsidiary (as defined in 17 CFR 230.405) of a 

person described in paragraph (i) of the definition 

if the affiliate or subsidiary: (A) acts in coordination 

with a person described in paragraph (i) of the 

definition; or (B) has access to or receives 

information about the relevant asset-backed security 

or the asset pool supporting or referenced by the 

relevant asset-backed security prior to the first 

closing of the sale of the relevant asset-backed 

security). 

519With respect to the compliance date, one 

commenter requested the Commission to consider 

interactions between the proposed rule and other 

recent Commission rules. In determining 

compliance dates, the Commission considers the 

benefits of the rules as well as the costs of delayed 

compliance dates and potential overlapping 

compliance dates. For the reasons discussed 

throughout the release, to the extent that there are 

costs from overlapping compliance dates, the 

benefits of the rule justify such costs. See Section 

IV for a discussion of the interactions of the final 

rule with certain other Commission rules. 

3. Final Rule 

We are adopting Rule 192(d) with 

certain modifications in response to 

comments received on the proposal. In 

a change from the proposal, the antievasion provision will only apply with 

respect to the use of an exception as part 

of a plan or scheme to evade the rule’s 

prohibition. Specifically, Rule 192(d) 

will provide that if a securitization 

participant engages in a transaction or a 

series of related transactions that, 

although in technical compliance with 

one of the exceptions described in Rule 

192(b), 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 

Rule 192(a)(1). As discussed below, this 

anti-evasion provision is important for 

helping to ensure the effectiveness of 

the final rule’s prohibition, and we do 

not believe that the provision, when 

considered together with the other 

changes we are making from the 

proposal, will make it difficult for 

market participants to understand the 

scope of the final rule. 

Rule 192(d), as adopted, is generally 

consistent with the suggestion of certain 

commenters that we adopt an antievasion provision as opposed to an anticircumvention provision.512 We are 

persuaded that an anti-circumvention 

provision could have the potential to be 

both overinclusive and vague in this 

particular circumstance given the other 

elements of the rule, and that an antievasion standard that focuses on the 

actions of the securitization participants 

as part of scheme to evade the rule’s 

prohibition would be more appropriate. 

We are also persuaded by the suggestion 

of certain commenters that the antievasion provision should only apply to 

a securitization participant’s claimed 

compliance with one of the exceptions 

to the rule.513 This is because the 

prohibition in Rule 192(a), as adopted, 

includes certain provisions that are 

designed to prevent attempted evasion 

of the rule. For example, the prohibition 

in Rule 192(a)(1) captures a 

securitization participant ‘‘indirectly’’ 

engaging in any transaction that would 

involve or result in any material conflict 

of interest between the securitization 

participant and an investor in such 

ABS. Additionally, Rule 192(a)(3)(iii) 

captures any transaction that is 

substantially the economic equivalent of 

a transaction described in Rule 

192(a)(3)(i) or Rule 192(a)(3)(ii). 

Therefore, we do not believe that it is 

necessary to apply the anti-evasion 

provision to the prohibition itself. 

We disagree with commenters’ 

suggestions that the final rule should 

not include any anti-circumvention or 

anti-evasion provision.514 The antievasion provision is designed to address 

those situations in which securitization 

participants engage in efforts to evade 

the rule’s prohibition by claiming 

technical compliance with one of the 

exceptions to the rule when, in fact, 

such securitization participant’s 

conduct constitutes part of a plan or 

scheme to evade the rule’s prohibition. 

Such evasion would undermine the 

investor protection mandate of Section 

27B. 

I. Compliance Date 

The final rule is effective February 5, 

2024. Under the compliance date that 

we are adopting in this release, any 

securitization participant must comply 

with the prohibition and the 

requirements of the exceptions to the 

final rule, as applicable, with respect to 

any ABS the first closing of the sale of 

which occurs on or after Mon., June 9, 

2025. 

Numerous commenters addressed the 

compliance period for the final rule, 

with many of these commenters 

suggesting at least 12 months following 

the date that the final rule is published 

in the Federal Register.515 These 

commenters cited operational 

challenges and systems changes, 

particularly with respect to the 

compliance program requirements 

applicable to the risk-mitigating hedging 

activities exception and the bona fide 

market-making activities exception, 

which would necessitate time to adopt 

and implement. One commenter 

recommended a compliance period of 

18 to 24 months based on concerns 

regarding the scope of the proposed 

definition of conflicted transaction and 

the proposed application of the rule to 

affiliates.516 We recognize that certain 

persons subject to the rule will need to 

update their operations and systems in 

order to comply with the final rule, and 

we are adopting the compliance date of 

18 months after adoption. This delayed 

compliance date is designed to provide 

affected securitization participants that 

intend to utilize the risk-mitigating 

hedging activities exception and the 

bona fide market-making activities 

exception with adequate time to 

develop the internal compliance 

programs that are required to satisfy the 

conditions of such exceptions as well as 

adequate time to develop any internal 

compliance mechanisms that the 

securitization participant decides to 

implement in order to address the scope 

of its affiliates and subsidiaries that are 

subject to the final rule. We are not 

persuaded that any additional time is 

needed because we believe that the 

changes made from the proposed rule to 

narrow the scope of the definition of 

conflicted transaction 517 and the scope 

of the affiliates and subsidiaries of a 

securitization participant that are 

subject to the rule 518 generally are 

expected to ease compliance burdens 

and mitigate the need for a compliance 

period longer than 18 months after 

adoption.519

III. Other Matters 

If any of the provisions of these rules, 

or the application thereof to any person 

or circumstance, is held to be invalid, 


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520 15 U.S.C. 77z–2a. 

521See Section I.A. 

522See Sections II.E. through II.G. 

523Section 2(b) of the Securities Act (15 U.S.C. 

77b(b)) requires us, when engaging in rulemaking 

that requires us to consider or determine whether 

an action is necessary or appropriate in the public 

interest, to consider, in addition to the protection 

of investors, whether the action will promote 

efficiency, competition, and capital formation. 

524See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111– 

15 (D.C. Cir. 2022). This approach also follows SEC 

staff guidance on economic analysis for rulemaking. 

See Staff’s ‘‘Current Guidance on Economic 

Analysis in SEC Rulemaking’’ (Mar. 16, 2012), 

available at https://www.sec.gov/divisions/riskfin/ 

rsfi_guidance_econ_analy_secrulemaking.pdf (‘‘The 

economic consequences of proposed rules 

(potential costs and benefits including effects on 

efficiency, competition, and capital formation) 

should be measured against a baseline, which is the 

best assessment of how the world would look in the 

absence of the proposed action.’’); Id. at 7 (‘‘The 

baseline includes both the economic attributes of 

the relevant market and the existing regulatory 

structure.’’). The best assessment of how the world 

would look in the absence of the proposed or final 

action typically does not include recently proposed 

actions, because doing so would improperly assume 

the adoption of those proposed actions. 

525See letter from MFA III (‘‘We urge the 

Commission to evaluate the costs and benefits of 

the Proposals, in the aggregate, for private fund 

advisers, their investors, and the markets 

generally.’’). 

526 Modernization of Beneficial Ownership 

Reporting, Release No. 33–11030 (Feb. 10, 2022), 87 

FR 13846 (Mar. 10, 2022) (see letter from MFA III, 

at 14–15); Private Fund Advisers; Documentation of 

Registered Investment Adviser Compliance Reviews, 

Release No. IA–5955 (Feb. 9, 2022), 87 FR 16886 

(Mar. 24, 2022) (see letter from MFA III, at 10–12); 

Short Position and Short Activity Reporting by 

Institutional Investment Managers, Release No. 34– 

94313 (Feb. 25, 2022), 87 FR 14950 (Mar. 16, 2022) 

(see letter from MFA III, at 15–16). 

527See Modernization of Beneficial Ownership 

Reporting, Release Nos. 33–11030; 34–94211 (Oct. 

6, 2023) (‘‘Beneficial Ownership Reporting 

Release’’). Among other things, the amendments 

generally shorten the filing deadlines for initial and 

amended beneficial ownership reports filed on 

Schedules 13D and 13G, and require that Schedule 

13D and 13G filings be made using a structured, 

machine-readable data language. The new 

disclosure requirements and filing deadlines for 

Schedule 13D are effective 90 days after publication 

in the Federal Register. The new filing deadline for 

Schedule 13G takes effect on Sept. 30, 2024, and the 

rule’s structured data requirements have a one-year 

implementation period ending Dec. 18, 2024. See 

Beneficial Ownership Reporting Release, Section 

II.G. 

528See Private Fund Advisers; Documentation of 

Registered Investment Adviser Compliance Reviews, 

Release No. IA–6383 (Aug. 23, 2023), 88 FR 63206 

(Sept. 14, 2023) (‘‘Private Fund Advisers Adopting 

Release’’). The Private Fund Advisers Adopting 

Release includes new rules designed to protect 

investors who directly or indirectly invest in 

private funds by increasing visibility into certain 

practices and restricting other practices, along with 

amendments to the Advisers Act books and records 

rule and compliance rule. The amended Advisers 

Act compliance provision for registered investment 

advisers has a Nov. 13, 2023, compliance date. The 

compliance date is Mar. 14, 2025, for the rule’s 

quarterly statement and audit requirements for 

registered investment advisers with private fund 

clients. For the rule’s adviser-led secondaries, 

restricted activity, and preferential treatment 

requirements, the compliance date is Sept. 14, 2024, 

for larger advisers and Mar. 14, 2025, for smaller 

advisers. See Private Fund Advisers Adopting 

Release, Sections IV., VI.C.1. 

529See Short Position and Short Activity 

Reporting by Institutional Investment Managers, 

Release No. 34–98738 (Oct. 13, 2023), 88 FR 75100 

(Nov. 1, 2023) (‘‘Short Position Reporting Release’’). 

The new rule and related form are designed to 

provide greater transparency through the 

publication of short sale-related data to investors 

and other market participants. Under the new rule, 

institutional investment managers that meet or 

exceed certain specified reporting thresholds are 

required to report, on a monthly basis using the 

related form, specified short position data and short 

activity data for equity securities. The compliance 

date for the rule is Jan. 2, 2025. In addition, the 

Short Position Reporting Release amends the 

national market system plan governing the 

consolidated audit trail (‘‘CAT’’) to require the 

reporting of reliance on the bona fide market 

such invalidity shall not affect other 

provisions or application of such 

provisions to other persons or 

circumstances that can be given effect 

without the invalid provision or 

application. 

Pursuant to the Congressional Review 

Act, the Office of Information and 

Regulatory Affairs has designated this 

rule as a ‘‘major rule,’’ as defined by 5 

U.S.C. 804(2). 

IV. Economic Analysis 

A. Introduction 

This final rule implements the 

requirements of Section 27B,520 as 

mandated by the Dodd-Frank Act. As 

discussed above, Section 621 of the 

Dodd-Frank Act added Section 27B to 

the Securities Act. Section 27B prohibits 

an underwriter, placement agent, initial 

purchaser, or sponsor, or any affiliate or 

subsidiary of any such entity, of an 

ABS, including a synthetic ABS, from 

engaging in any transaction that would 

involve or result in certain material 

conflicts of interest.521 Section 27B also 

includes exceptions from this 

prohibition for certain risk-mitigating 

hedging activities, bona fide marketmaking activities, liquidity 

commitments, and a foreign transaction 

safe-harbor provision. 522

As discussed above in Sections I.A. 

and I.B., Section 27B requires that the 

Commission issue rules for the purpose 

of implementing the prohibition in 

Section 27B. We are sensitive to the 

economic impact, including the costs 

and benefits, imposed by this rule.523

This section presents an analysis of the 

expected economic effects—including 

costs, benefits, and impact on efficiency, 

competition, and capital formation— 

that may result from the final rule, as 

well as possible alternatives to the final 

rule. Many of these effects, costs, and 

benefits stem from statutory mandates, 

while others are affected by the 

discretion exercised in implementing 

these mandates. 

Where possible, we have sought to 

quantify the benefits, costs, and effects 

on efficiency, competition, and capital 

formation expected to result from the 

final rule. However, we are unable to 

reliably quantify many of the economic 

effects due to limitations on available 

data. Therefore, parts of the discussion 

below are qualitative in nature, although 

we try to describe, where possible, the 

direction of these effects. We further 

note that even in cases where we have 

some data regarding certain economic 

effects, the quantification of these 

effects is particularly challenging due to 

the number of assumptions that we need 

to make to forecast how the ABS 

issuance practice will change in 

response to the final rule, and how 

those responses will, in turn, affect the 

broader ABS market. For example, the 

rule’s effects will depend on how 

sponsors, borrowers, investors, and 

other parties to the ABS transactions 

(e.g., originators, trustees, underwriters, 

and other parties that facilitate 

transactions between borrowers, issuers, 

and investors) adjust on a long-term 

basis to this new rule and the resulting 

market conditions. The ways in which 

these parties may adjust, and the 

associated effects, are complex and 

interrelated. As a result, we are unable 

to predict some of them with specificity 

or quantify them. 

The Commission received comments 

related to various aspects of the 

economic analysis of the proposed rule. 

The Commission has considered and 

responds to these comments in the 

sections that follow. 

B. Economic Baseline 

The baseline against which the costs, 

benefits, and the effects on efficiency, 

competition, and capital formation of 

the final rule are measured consists of 

the current state of the ABS market, 

current practice as it relates to 

securitization participants, and the 

current regulatory framework. The 

economic analysis considers existing 

regulatory requirements, including 

recently adopted rules, as part of its 

economic baseline against which the 

costs and benefits of the final rule are 

measured.524

One commenter requested the 

Commission consider interactions 

between the economic effects of the 

proposed rule and other recent 

Commission proposals.525 The 

commenter indicated there could be 

interactions between this rulemaking 

and three proposals that have since been 

adopted: 526 the Beneficial Ownership 

Reporting Release,527 the Private Fund 

Advisers Adopting Release,528 and the 

Short Position Reporting Release.529 In 


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making exception in the Commission’s short sale 

rules. The compliance date for the CAT 

amendments is July 2, 2025. 

530See Form PF; Event Reporting for Large Hedge 

Fund Advisers and Private Equity Fund Advisers; 

Requirements for Large Private Equity Fund Adviser 

Reporting, Release No. IA–6297 (May 3, 2023), 88 

FR 38146 (June 12, 2023) (‘‘May 2023 SEC Form PF 

Amending Release’’). The Form PF amendments 

require large hedge fund advisers and all private 

equity fund advisers to file reports upon the 

occurrence of certain reporting events. For new 

sections 5 and 6 of Form PF, the compliance date 

is Dec. 11, 2023; for the amended, existing sections, 

it is June 11, 2024. See May 2023 SEC Form PF 

Amending Release, section II.E. 

531 In addition, one commenter indicated there 

could also be overlapping compliance costs 

between the final amendments and proposals that 

have not been adopted. See, letter from MFA III. To 

the extent those proposals are adopted, the baseline 

in those subsequent rulemakings will reflect the 

existing regulatory requirements at that time. One 

of the proposals identified by the commenter, 

Prohibition Against Fraud, Manipulation, or 

Deception in Connection With Security-Based 

Swaps; Prohibition Against Undue Influence Over 

Chief Compliance Officers; Position Reporting of 

Large Security-Based Swap Positions, Exchange Act 

Release No. 93784 (Dec. 15, 2021), [87 FR 6652, 

6678 (Feb. 4, 2022)], has been partially adopted. See 

Prohibition Against Fraud, Manipulation, or 

Deception in Connection with Security-Based 

Swaps; Prohibition against Undue Influence over 

Chief Compliance Officers, Release No. 34–97656 

(June 7, 2023), [88 FR 42546 (June 20, 2023)] 

(‘‘Security-Based Swaps Release’’). However, the 

commenter focused their comments on the portion 

of that proposal that has not yet been adopted (i.e., 

reporting of large security-based swap positions), 

and the adopted rule would not have any 

significant effects from overlapping compliance 

periods because that rule was effective Aug. 23, 

2023. 

532See, e.g., SEC Staff Report, U.S. Credit Markets 

Interconnectedness and the Effects of the COVID– 

19 Economic Shock (Oct. 2020), available at https:// 

www.sec.gov/files/US-Credit-Markets_COVID-19_

Report.pdf. Among other things, the report provides 

an overview of the various parts of the 

securitization markets and their connections to the 

broader U.S. financial markets. This is a report of 

the staff of the U.S. Securities and Exchange 

Commission. This report represents the views of 

Commission staff, and is not a rule, regulation, or 

statement of the Commission. The Commission has 

neither approved nor disapproved the content of 

this report and, like all staff statements, it has no 

legal force or effect, does not alter or amend 

applicable law, and creates no new or additional 

obligations for any person. 

533See, e.g., Board of Governors of the Federal 

Reserve System, Report to the Congress on Risk 

Retention (Oct. 2010), available at https://

www.federalreserve.gov/boarddocs/rptcongress/ 

securitization/riskretention.pdf; Financial Stability 

Oversight Council, Macroeconomic Effects of Risk 

Retention Requirements (Jan. 2011), available at 

https://www.lexissecuritiesmosaic.com/gateway/ 

treasury/pr/Documents_Section_20946_20Risk_

20Retention_20Study_20_20(FINAL).pdf. 

534The primary data source for our numeric 

estimates of issuance of private-label non-municipal 

ABS are the Green Street Asset-Backed Alert 

Database and the Green Street Commercial 

Mortgage Alert Database. The databases present the 

initial terms of all ABS, MBS, CMBS, and CLOs 

collateralized by assets, and synthetic CDOs, rated 

by at least one major credit rating agency, and 

placed anywhere in the world (however, only deals 

sold in the U.S. are included in our analysis). The 

databases identify the primary participants in each 

transaction. The primary data source of our numeric 

estimates of issuance of municipal ABS is Mergent 

Municipal Bond Securities Database. The proposing 

release used calendar year 2021 as its baseline due 

to data availability at time of proposal. 

535Private-label ABS are ABS that are not 

sponsored or guaranteed by U.S. Government 

agencies or the Enterprises. 

536 Data drawn from the Green Street AssetBacked Alert Database, the Green Street 

Commercial Mortgage Alert Database, and Mergent 

Municipal Bond Securities Database. 

537 Data drawn from the Green Street AssetBacked Alert Database and the Green Street 

Commercial Mortgage Alert Database. 

538See Laurie Goodman, et al., Housing Finance 

At a Glance: Monthly Chartbook, July 2023, Urban 

Institute (July 28, 2023), at 34, available athttps:// 

www.urban.org/research/publication/housingfinance-glance-monthly-chartbook-july-2023. 

539See The Green Street Asset-Backed Alert 

Database. Of the 29 CRT transactions in 2022, 19 

were issued by Freddie Mac ($12.72 billion) and 9 

were issued by Fannie Mae ($8.92 billion). Broadly, 

the Enterprise CRT programs transfer mortgage 

credit risk from the Enterprises to private investors. 

In doing so, CRT issuance lowers Enterprise capital 

requirements and increases their return on capital, 

while providing the Enterprises with market-based 

pricing information on Enterprise ABS credit risk. 

See Freddie Mac, CRTcast E4: CRT Then and Now, 

A Conversation with Don Layton (Nov. 17, 2021), 

available at https://crt.freddiemac.com/_assets/ 

pdfs/insights/crtcast-episode-4-transcript.pdf; 

Jonathan B. Glowacki, CRT 101: Everything you 

need to know about Freddie Mac and Fannie Mae 

Credit Risk Transfer, Milliman (Oct. 11, 2021), 

available at https://www.milliman.com/en/insight/ 

crt-101-everything-you-need-to-know-about-freddiemac-and-fannie-mae-credit-risk-transfer. 

540See discussion in Section II.B.3.b.iv. 

addition, the commenter identified one 

rule that had recently been adopted 

prior to the commenter’s letter, the May 

2023 SEC Form PF Amending 

Release.530 These rules were not 

included as part of the baseline in the 

Proposing Release because they were 

not adopted at that time. In response to 

commenters, this economic analysis 

considers potential economic effects 

arising from any overlap between the 

compliance period for the final rule and 

each of these recently adopted rules.531

The requirements of the final rule will 

affect ABS market participants, 

including securitization participants, as 

defined in Rule 192, and investors in 

ABS, and indirectly affect loan 

originators, consumers, businesses, 

municipal entities, and nonprofits that 

seek access to credit. The costs and 

benefits of the requirements depend 

largely on the current market practices 

specific to each securitization market. 

The economic significance or the 

magnitude of the effects of the 

requirements also depend on the overall 

size of the securitization market and the 

extent to which the requirements affect 

access to, and the cost of, capital. 

Below, we describe our current 

understanding of the securitization 

markets that will be affected by the final 

rule. 

1. Overview of the Securitization 

Markets 

The securitization markets are 

important for the U.S. economy and 

constitute a large fraction of the U.S. 

debt market.532 Securitizations play an 

important role in the creation of credit 

by increasing the amount of capital 

available for the origination of loans and 

other receivables through the transfer of 

those assets—in exchange for new 

capital—to other market participants. 

The intended benefits of the 

securitization process include reduced 

cost of credit and expanded access to 

credit for borrowers, ability to match 

risk profiles of securities to investors’ 

specific demands and increased 

secondary market liquidity for loans and 

other receivables.533

Since the final rule applies to a 

securitization participant commencing 

on the date on which such person has 

reached an agreement to become a 

securitization participant until one year 

after the date of the first closing of the 

sale of the ABS, we generally use ABS 

issuance information rather than 

information on ABS amounts 

outstanding to estimate the number of 

affected parties and the size of the 

affected ABS market. Information 

presented regarding securitized asset 

fund advisors is instead based on 

amounts outstanding due to data 

availability. For the purposes of 

establishing an economic baseline and 

to estimate affected market size, we use 

data covering the most recent full 

calendar year 2022 to avoid any 

seasonal effects on estimates (‘‘baseline 

period’’).534

We estimate that the baseline period 

annual issuance of private-label 535 nonmunicipal ABS in the United States was 

$603 billion in 1,122 individual ABS 

deals and the baseline period annual 

issuance of municipal ABS in the U.S. 

was $74 billion in 1,332 deals.536 Out of 

private-label non-municipal ABS, 10 

deals totaling $2.8 billion were risk 

transfer ABS deals; some or all of these 

risk transfer ABS deals could be 

synthetic ABS or hybrid cash and 

synthetic ABS deals.537 During the 

baseline period, Ginnie Mae provided a 

government guarantee to $527 billion of 

newly issued MBS, and the Enterprises 

issued $1.20 trillion of Enterpriseguaranteed MBS 538 and 19 CRT 

securities deals worth $21.6 billion.539

Currently, the Enterprises are in 

conservatorship with the U.S. Treasury 

and are regulated by the FHFA.540


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541The exclusion from the definition of 

‘‘sponsor,’’ as discussed in Section II.B.3.b.iv., with 

respect to these entities is expected to lessen the 

impact of the final rule on the United States or an 

agency of the United States with respect to ABS that 

is fully insured or fully guaranteed, but these 

entities may still be otherwise affected. Notably, the 

Enterprises are more directly affected under the 

final rule while operating under conservatorship of 

the FHFA than contemplated by the proposed rule, 

but this is offset somewhat by other changes 

between the proposed and final rule. See Section 

IV.D.2. 

542Households benefit from the ABS markets in 

a variety of ways, including for example the 

Enterprises’ issuance of RMBS which adds liquidity 

and reduces credit risk to investors who finance 

home purchases. See The Fed. Nat’l Mortg. Ass’n, 

Mortgage-Backed Securities, available at https://

capitalmarkets.fanniemae.com/mortgage-backedsecurities. 

543The Green Street Asset-Backed Alert Database. 

544To arrive at the figure of 180 unique issuers, 

we used the number of unique issuer IDs for 

securities issued in the baseline period, less one to 

account for the value ‘‘Multiple Issuers’’ (see Ginnie 

Mae MBS SF Monthly New Issues data, available 

at https://www.ginniemae.gov/data_and_reports/ 

disclosure_data/Pages/disclosurehistoryfiles

.aspx?prefix=nimonSFPS&grp=

MBS%20(Single%20Family)). It is possible that 

some issuers of Ginnie Mae-guaranteed MBS were 

never a sole issuer, and thus were only included in 

the data as an unspecified member of ‘‘Multiple 

Issuers.’’ 

545See Freddie Mac Mortgage Securities 

Approved Dealer Group, available at Internet 

Archive of https://capitalmarkets.freddiemac.com/ 

mbs/products/dealer-groups, captured on Nov. 17 

and Dec. 6, 2022. 

546The Green Street Asset-Backed Alert Database. 

547Mergent Municipal Bond Securities Database. 

The Commission received a comment stating that 

this analysis conflates ABS issued by municipalities 

and municipal securitizations issued by special 

purpose entities. See letter from SIFMA I. Both are 

subject to the rule and should be counted as part 

of the baseline. 

548See Division of Investment Management: 

Analytics Office, Private Funds Statistics Report: 

Fourth Calendar Quarter 2022 (July 18, 2023) 

(‘‘Form PF Statistics Report’’), at 4, available at 

https://www.sec.gov/files/investment/private-fundsstatistics-2022-q4.pdf (showing number of funds 

and advisers by category as reported on Form PF). 

549Cross-referencing Form PF and Form ADV 

data. 

2. Affected Parties 

Parties potentially affected by the 

final rule include: 

• Parties that have direct compliance 

obligations under the final rule with 

respect to the prohibition, namely, 

underwriters, placement agents, initial 

purchasers, and sponsors, or any 

affiliates or subsidiaries of such entities 

which act in coordination with such 

entities, or have access to or receive 

information about the relevant ABS or 

its underlying or referenced asset pool 

prior to the first closing of the sale of the 

ABS. 

• U.S. agencies with respect to certain 

types of ABS.541

• Other entities that provide services 

in the securitization process, including 

depositors, servicers, special servicers, 

and other contractual service providers, 

as well as their domestic and foreign 

affiliates and subsidiaries with 

involvement in or knowledge 

concerning the securitization prior to its 

closing. 

• Counterparties that invest/deal in 

financial products, including 

derivatives, related to synthetic ABS 

(and hybrid cash and synthetic ABS). 

For example, dealers that trade CDS on 

the ABS to securitization participants. 

• Investment advisers and ABS 

investors. For example, pension funds, 

endowments, foundations, hedge funds, 

and mutual funds. 

• Ultimate borrowers that rely on 

ABS markets for capital (e.g., 

corporations, households, municipal 

entities) and participants in the markets 

where the borrowed capital is 

applied.542

• Other market participants that may 

be affected by changes in securitization 

practices. For example, originators that 

retain a residual interest in the 

underlying or referenced asset pool or 

their creditors. 

As explained in Section II.B.3., the 

final definition of the term ‘‘sponsor’’ is 

a functional definition that will apply 

regardless of a person’s title, so long as 

its activities with respect to the ABS 

meet the definition. Accordingly, a 

person who organizes and initiates an 

ABS transaction, (a Regulation ABbased sponsor) 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 (a Contractual Rights Sponsor) is a 

sponsor under the definition. Whether a 

person is a sponsor will be based on the 

specific facts and circumstances and 

which part of the sponsor definition the 

person qualifies under. For example, 

Registered Investment Advisers 

(‘‘RIAs’’) that advise hedge funds could 

be a Contractual Rights Sponsor under 

the final rule if they have a contractual 

right to direct or cause the direction of 

the structure, design, or assembly of an 

ABS or the composition of the pool 

assets underlying the ABS. 

We estimate that, in the baseline 

period, there were 385 unique sponsors 

of private-label non-municipal ABS and 

there were 106 unique underwriters for 

such ABS deals; of these, we estimate 

that there were 6 unique sponsors and 

10 unique underwriters of risk transfer 

ABS.543 We also estimate that, in the 

baseline period, there were 180 unique 

issuers of Ginnie Mae-guaranteed 

MBS,544 53 unique mortgage securities 

approved dealers of Freddie Macguaranteed MBS,545 and 15 unique 

underwriters of Enterprise CRT 

securitizations.546 We estimate that 

there were 352 unique municipal 

entities that sponsored municipal ABS, 

145 unique underwriters of municipal 

ABS, and 97 unique municipal 

advisors.547 We estimate that in the 

baseline period there were 177 

securitized asset fund advisers 

associated with 2482 securitized asset 

funds.548 Changes in numbers vis-a`-vis 

the Proposing Release can be attributed 

to different stages in the business cycle: 

the significant increase in interest rates 

that occurred in 2022 may explain some 

of the decrease in the number of 

sponsors. 

There is an overlap between these 

categories of sponsors and underwriters 

since some sponsors and underwriters 

might perform multiple functions and 

might be active in multiple market 

segments and, thus, the total number of 

potentially affected sponsors and 

underwriters may be lower than the sum 

of the numbers above. As for 

Contractual Rights Sponsors, we note 

that the definition of sponsor does not 

capture persons that direct or cause the 

direction of the structure, design, or 

assembly of ABS or the composition of 

the underlying or referenced asset pool 

unless they have contractual rights to do 

so. As discussed in Section II.B.3.b.ii., 

certain investment advisers could be 

Contractual Rights Sponsors. We 

derived an estimate of the number of 

investment advisers that would be 

subject to the rule from Form PF and 

Form ADV data. 

Table 1 shows the number of private 

fund advisors along with estimates of 

their assets which may be affected by 

the rule, including those smaller firms 

which may face difficulties establishing 

and demonstrating sufficient separation 

between staff involved in activities that 

lead to the firm being included as a 

securitization participant and those 

advising other funds, as of the fourth 

quarter of 2022.549


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550See, e.g., Consent and Final Judgement as to 

Defendant J.P. Morgan Securities LLC in SEC v. J.P 

Morgan Securities LLC (f/k/a/ J.P. Morgan Securities 

Inc.), 11 CV 4206 (S.D.N.Y. 2011) Litigation Release 

No. 22008 (June 21, 2011), 2010 WL 6796637; 

Consent and Final Judgement as to Defendant 

Goldman, Sachs & Co. in SEC v. Goldman, Sachs 

& Co. and Fabrice Tourre, 10 CV 3229 (S.D.N.Y 

2010) Litigation Release No. 21592 (July 15, 2010), 

2010 WL 2799362 (July 15, 2010); Senate Financial 

Crisis Report, supra note 13. 551See RR Adopting Release, supra note 54. 

552See RR Adopting Release, Subpart A.2. at 

77742, supra note 54. 

553Asset-level requirements are specified in Item 

1125 of Regulation AB (17 CFR 229.1125). 

TABLE 1—PRIVATE SECURITIZED ASSET FUND ADVISOR STATISTICS AS OF 2022Q4 

Stratification Adviser count Fund count 

Gross asset 

value 

($B) 

Net asset 

value 

($B) 

All ..................................................................................................................... 177 2482 936.8 275.9 

With at Least 1 Fund >10% Relevant Strategy Exposure .............................. 72 ........................ 586.6 194.6 

With at Least 1 Fund >10% Relevant Strategy Exposure and <50 Non-clerical or <100 Investment Adviser Employees ............................................... 25 ........................ 133.5 36.9 

Note: These statistics related to the ‘‘Adviser Count,’’ ‘‘Fund Count,’’ ‘‘Gross Asset Value,’’ ‘‘Net Asset Value,’’ and ‘‘Relevant Strategy Exposure’’ rely on Form PF. The statistics related to ‘‘Non-clerical’’ and ‘‘Investment Adviser Employees’’ rely on Form ADV. Only SEC-registered advisers with at least $150 million in private fund assets under management must report to the Commission on Form PF; SEC-registered investment advisers with less than $150 million in private fund assets under management, SEC-exempt reporting advisers, and state-registered investment advisers are not required to file Form PF. 

Data aggregated to Level 1. 

‘‘>10% Relevant Strategy Exposure’’ refers to gross exposure attributable to specified strategies (Credit, Event Driven, Relative Value, Macro), 

as reported in Form PF, Q20. The same fund may allocate its assets to multiple strategies. We believe these private fund strategies are those 

most likely to engage in a conflicted transaction with an affiliate or subsidiary that issues an ABS, and that the 10% threshold will capture those 

funds which employ those strategies to a sufficient degree to be meaningfully conflicted. The cutoff for employees is based on estimates of the 

size of firm in terms of employees at which information barriers including physical separation will be feasible and is based on the number of employees typical of a single floor of an office building in New York. Fund counts and asset values are based on funds outstanding, not primary 

issuance. For comparison, in 2022 there were 283 broadly syndicated and middle market CLOs issued in the United States, totaling $130 billion. 

See Fitch Ratings, ‘‘Global CLO 4Q22 Activity Struggles Amid High Spreads, Low Corporate Issuance,’’ available at https://www.fitchratings.com/ 

research/structured-finance/global-clo-4q22-activity-struggles-amid-high-spreads-low-corporate-issuance-24-01-2023. 

3. Current Relevant Statutory 

Provisions, Regulations, and Practices 

As an initial matter, the general antifraud and anti-manipulation provisions 

of the Federal securities laws, including 

Section 17(a) of the Securities Act and 

Section 10(b) and Rule 10b–5 under the 

Exchange Act, apply to ABS 

transactions. 

Several ABS deals that originated in 

the pre-financial crisis years between 

2005–2007 exhibited conflicts of 

interest targeted by the final rule. These 

deals resulted in significant investor 

harm and received increased attention 

from Congress, the market, and 

regulators in the 2010s.550 However, 

despite the increased scrutiny at that 

time, we do not have data on the extent 

of securitization participants’ 

involvement in ABS transactions that 

are tainted by material conflicts of 

interest following the financial crisis of 

2007–2009. We note that the types of 

transactions with material conflicts of 

interest exhibited during the 2007–2009 

financial crisis and targeted by Section 

621 of the Dodd-Frank Act may not be 

easily detected or as prevalent under 

current market practices as they were 

prior to the law’s passage, possibly 

because of market participants’ 

compliance with existing rules and 

reputational incentives, as described 

below. 

Following the financial crisis of 2007– 

2009, the Commission adopted several 

rules that reinforce the alignment of 

economic incentives of securitization 

participants and investors and reduce 

information asymmetries. Regulation 

RR, adopted by the Commission in 2014 

for the purpose of implementing Section 

941 of the Dodd-Frank Act, generally 

requires certain ABS sponsors (as 

defined under Regulation RR) to retain 

not less than 5 percent of the credit risk 

of the assets collateralizing an ABS for 

a period from five to seven years, after 

the date of closing of the securitization 

transaction, as specified by the rule.551

Credit risk retention aims to align the 

economic interest of ABS sponsors and 

long investors in an ABS by requiring 

ABS sponsors to retain financial 

exposure to the same credit risks as ABS 

investors and, in this regard, differs 

from the final rule, which does not 

require securitization participants to 

retain any exposure to securitization 

risks. Generally, a sponsor of an ABS 

deal that is required to retain exposure 

to the credit risk of the deal is not 

expected to engage in the transactions 

prohibited by the final rule because 

Regulation RR prohibits them from 

hedging, subject to an exception for 

certain permitted hedging activities 

under that regulation, the interest that 

they retain and, otherwise, such 

transactions would perform against the 

economic interest of the sponsor 

resulting from the extent of the retained 

exposure. 

Compared to Rule 192, Regulation RR 

is narrower in its scope: it applies to 

only those persons that are ‘‘sponsors’’ 

for purposes of Regulation RR, the 

definition of which is roughly analogous 

to paragraph (i) of the final rule’s multipart definition of ‘‘sponsor.’’ 552

However, Rule 192 is not limited to 

such ‘‘sponsors’’ and thus final Rule 192 

applies to a broader set of persons that 

are not sponsors under Regulation RR 

and that are not required to retain credit 

risk under Regulation RR. Additionally, 

Regulation RR applies to certain types of 

securitizations and does not apply to 

other types of securitizations (e.g., 

arbitrage or open-market CLO, synthetic 

ABS, or a security issued or guaranteed 

by any State, or by any political 

subdivision of a State, or by any public 

instrumentality of a State that is exempt 

from the registration requirements of the 

Securities Act by reason of Section 

3(a)(2) of that Act) while the final rule 

applies to a wider range of ABS, such 

as synthetic ABS, as discussed in 

Section II.A. 

Further, SEC-registered ABS offerings 

must comply with the SEC’s 

registration, disclosure, and reporting 

requirements. Commission disclosure 

requirements, including asset-level 

disclosures which are required for some 

asset classes,553 reduce asymmetric 

information about securitization 

participants and underlying assets in 

ABS and allow investors easy access to 

data and tools to review ABS deals, 

including to assess underlying asset 

quality. While such disclosure creates 

incentives for securitization participants 

to avoid potential conflicts of interest by 


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85448 Federal Register / Vol. 88, No. 234 / Thursday, December 7, 2023 / Rules and Regulations 

554See, e.g., Consent and Final Judgement as to 

Defendant J.P. Morgan Securities LLC in SEC v. J.P 

Morgan Securities LLC (f/k/a/ J.P. Morgan Securities 

Inc.), 11 CV 4206 (S.D.N.Y. 2011) Litigation Release 

No. 22008 (June 21, 2011), 2010 WL 6796637; 

Consent and Final Judgement as to Defendant 

Goldman, Sachs & Co. in SEC v. Goldman, Sachs 

& Co. and Fabrice Tourre, 10 CV 3229 (S.D.N.Y 

2010) Litigation Release No. 21592 (July 15, 2010), 

2010 WL 2799362 (July 15, 2010). Further, as part 

of an adviser’s fiduciary duty to a hedge fund, the 

duty of loyalty requires it to ‘‘make full and fair 

disclosure to its clients of all material facts relating 

to the advisory relationship’’ and ‘‘eliminate, or at 

least expose, through full and fair disclosure all 

conflicts of interest which might incline an 

investment adviser—consciously or 

unconsciously—to render advice which was not 

disinterested.’’ See Commission Interpretation 

Regarding Standard of Conduct for Investment 

Advisers, Release No. IA–5248 (June 5, 2019) [84 FR 

33669 (July 12, 2019)] at 33675. 

555The term ‘‘market participants’’ used in this 

section encompasses all participants in the ABS 

markets, including ABS investors, and is a broader 

term than the proposed defined term ‘‘securitization 

participant.’’ 

556See George A. Akerlof, The Market for 

‘Lemons’: Quality Uncertainty and the Market 

Mechanism, 84 The Quarterly J. of Econ. 488–500 

(1970). 

557See Joseph E. Stiglitz & Andrew Weiss, Credit 

Rationing in Markets with Imperfect Information, 71 

The Am. Econ. Rev. 393–410 (1981). 

558See Amy Finkelstein & James Poterba, Adverse 

Selection in Insurance Markets: Policyholder 

Evidence from the U.K. Annuity Market, 112 J. of 

Pol. Econ. 183–208 (2004). 

559See Adam B. Ashcraft & Til Schuermann, 

Understanding the Securitization of Subprime 

Mortgage Credit, Fed. Reserve Bank of N.Y. Staff 

Report No. 318 (2008) (identifying frictions in the 

residential mortgage securitization chain and 

explaining that the overarching friction that creates 

all other problems at every step in the securitization 

process is asymmetric information). 

560See, e.g., Bengt Holmstrom, Moral hazard and 

observability, Bell Journal of Economics, pp. 74–91 

(1979) and references therein. 

561See supra note 559. 

562See, e.g., Senate Financial Crisis Report. 

563See Oliver Faltin-Traeger and Christopher 

Mayer, Lemons and CDOs: Why Did So Many 

Lenders Issue Poorly Performing CDOs?, Columbia 

Business School Working Paper (2012) (analyzing 

the characteristics and performance of underlying 

assets going into CDOs and synthetic CDOs issued 

in 2005–2007 and comparing the ABS observed in 

a CDO with other ABS not observed in a CDO). 

making such conflicts visible to a large 

set of potential investors, these 

disclosure rules only apply to SECregistered ABS offerings. In contrast, the 

final rule applies to both ABS offered 

and sold in registered and unregistered 

transactions (including synthetic ABS as 

well as hybrid cash and synthetic ABS) 

that are not subject to the Commission’s 

disclosure requirements for registered 

offerings, and therefore the broader 

scope of the final rule prohibits certain 

types of transactions involving 

registered ABS and unregistered ABS 

that involve or would result in a 

material conflict of interest. Also, the 

final rule applies to underwriters, 

placement agents, initial purchasers, 

and sponsors of an ABS, as well as to 

certain of their affiliates and 

subsidiaries, such that it prohibits 

misconduct by securitization 

participants that may or may not have 

disclosure liability under the Federal 

securities laws. 

Furthermore, securitization 

participants might be incentivized to 

avoid conflicted transactions to 

maintain their industry reputation and 

avoid reputational harm. A 

securitization participant that is known 

to regularly engage in ‘‘conflicted 

transactions,’’ as defined in Rule 

192(a)(3), might harm its reputation 

among investors and be excluded from 

ABS deals that a participant facilitates. 

Failure to disclose a person’s substantial 

role in selecting assets underlying an 

ABS and that person engaging in 

conflicted transactions with respect to 

those ABS would make a securitization 

participant potentially subject to 

enforcement actions under the antifraud provisions of the securities laws, 

as occurred in certain cases following 

the financial crisis.554 On the other 

hand, disclosing conflicted transactions 

to investors would create negative 

reputational effects for securitization 

participants. Thus, as a baseline matter, 

securitization participants may be 

incentivized to avoid conflicts of 

interest and make assurances to ABS 

investors about the absence of such 

conflicts of interest, which might serve 

as a signal to some investors that 

securitization participants have 

investors’ interest in mind while 

facilitating ABS transactions and might 

increase investor participation in such 

deals; however, it may be difficult for 

investors to assess the credibility of 

those assurances. 

C. Broad Economic Considerations 

Securitizations are an important part 

of the financial system, facilitating 

capital formation and capital flows from 

investors to borrowers. However, they 

can generate significant risks to the 

economy and ABS investors. 

Specifically, securitization markets are 

characterized by information 

asymmetries between securitization 

participants and investors in ABS, who 

are the ultimate providers of credit, and 

such information asymmetries may give 

rise to two groups of adverse effects. 

First, asymmetric information can 

reduce the willingness of less informed 

market participants 555 to transact in a 

market. This is a secondary effect of 

‘‘adverse selection,’’ the situation in 

which information asymmetry benefits 

some market participants (i.e., 

securitization participants) to the 

detriment of others (i.e., ABS 

investors).556 Adverse selection has 

been thoroughly documented in the 

economic literature, and its deleterious 

effects on market liquidity and 

efficiency are well known in sectors 

such as banking 557 and insurance.558 In 

securitization markets, adverse selection 

could possibly manifest itself through a 

reduction in the number of investors, 

because investors would be less 

informed about the quality of 

underlying assets than securitization 

participants, a consequence that reduces 

liquidity and increases transaction 

costs.559

Second, asymmetric information may 

increase risk-taking by more informed 

counterparties if they do not bear the 

adverse consequences of such risks—an 

effect commonly known as ‘‘moral 

hazard.’’ 560 In the realm of 

securitizations, loan originators and 

securitization participants potentially 

create or increase risks in the 

underwriting or securitization process 

for which they do not bear the 

consequence, and about which the 

investor lacks information.561

Securitization participants have 

access to more information about the 

credit quality and other relevant 

borrower characteristics than the 

ultimate investors in the securitized 

assets. Securitization participants may 

also participate in the selection of assets 

for ABS. This information asymmetry 

can have adverse market effects to the 

extent that securitization participants 

seek to profit from their differential 

information. Prior to the financial crisis 

of 2007–2009, sponsors sold assets that 

they knew to be very risky, without 

adequately conveying that information 

to ABS investors, and sometimes even 

while taking financial positions to 

benefit from adverse performance of 

underlying assets to the detriment of 

investors. 

The patterns for adverse selection and 

misreporting low-quality assets were 

even more severe in CDOs and synthetic 

CDOs in the period prior to the financial 

crisis of 2007–2009.562 One paper finds 

evidence consistent with the tailoring of 

CDO structures for short bets and 

negative performance and finds that the 

synthetic CDOs issued in 2005–2007 

that were shorted in CDS contracts 

performed even worse in 2008–2010 

than other CDOs.563 This is consistent 

with incentives of underwriters to 

structure these securities to profit from 

short positions on such securities 

enabled by the information asymmetries 

in the market at the time. 

There are several possible ways, 

which can be complementary, to 

mitigate the effects of such information 


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564See discussion of current market practices 

with respect to credit risk retention in Section 

IV.B.3. 

565See Asset-Backed Securities Disclosure and 

Registration, Release No. 33–9638 (Sept. 4, 2014) 

[79 FR 57184 (Sept. 24, 2014)] (‘‘2014 Regulation 

AB 2 Adopting Release’’). 

566See discussion in Section II.B.3.b.iv. 

567See letters from NABL et al.; NAHEFFA. 

568See Section II.B.3.b.i. 

569See Section II.B.3.b.iv. 

570See SEC, Report on Municipal Securities 

Market, July 31, 2012, at p. 22 and references 

therein for a discussion on municipal bond default 

rates, available at https://www.sec.gov/files/ 

munireport073112.pdf. 

571See footnote 56 for a discussion of municipal 

conduit assets. 

572 Yang, LK, General Purpose Local Government 

Defaults: Type, Trend, and Impact. 2020 Public 

Budgeting & Finance, 40(4): 62–85 (showing that 

defaulted bonds are more likely to be conduit debt 

and unrated). 

573Heather Gillers, How Did Things Go So Wrong 

at This Arizona Park Built With Muni Bonds?, 

WALL ST. J. (Aug. 28, 2023), available at https:// 

www.wsj.com/finance/investing/how-did-things-goso-wrong-at-this-arizona-park-built-with-munibonds-a30a54f0 (retrieved from Factiva database) 

(discussing the shortcomings of the conduit 

structure and how conduit-related defaults are 

piling up); Martin Z Braun, Bloomberg, Aug. 10, 

2020, Muni Bonds Sold by Phantom Agency Draw 

Texas Town’s Scrutiny, available at https:// 

Continued 

asymmetries in the securitization 

process. One way to partially offset 

information asymmetries is to require 

that sponsors retain some ‘‘skin in the 

game,’’ through which loan performance 

can affect sponsors’ profits as much as— 

or more than—those of the ABS 

investors: that is accomplished by the 

credit risk retention mandated for some 

securitization participants by Regulation 

RR.564 To the extent that Regulation RR 

reduces adverse selection costs and 

moral hazard, affected currently issued 

ABS are less likely to be instruments 

used in conflicted transactions. Another 

way to partially offset information 

asymmetries is to require securitization 

participants to have robust disclosures 

of information about ABS deals or 

individual assets. The Commission has 

employed this strategy previously, 

including in amendments to Regulation 

AB in 2014, which enhanced disclosure 

requirements, including by requiring 

asset-level disclosures.565 More broadly, 

securitization participants may be able 

to take steps to credibly signal that they 

are not engaging in actions to exploit 

information asymmetries with investors, 

or investors can require information 

disclosures and other means of reducing 

the threat of adverse selection and moral 

hazard as part of underlying ABS 

contracts or in the marketing and sales 

process. An additional approach to 

partially offset the effects of information 

asymmetries is to directly prohibit 

securitization participants from 

engaging in certain transactions through 

which they could benefit from that 

information asymmetry, which is what 

the final rule, as mandated under the 

Dodd-Frank Act, is designed to achieve. 

The adverse selection problem may be 

especially severe when it is costly for 

investors to demand from securitization 

participants sufficient transparency 

about the assets or securitization 

structure to overcome informational 

differences between these securitization 

participants and investors or when it is 

costly for investors to process such 

information. In these cases, the 

securitization process can misalign 

incentives so that the welfare of some 

market participants is maximized at the 

expense of other market participants. 

Some of these risks may not be 

adequately disclosed to investors in 

securitizations, an issue that may be 

compounded as sponsors introduce 

increasingly complex structures like 

CDOs or synthetic ABS. 

The final rule is designed to enhance 

investor protection and the integrity of 

the ABS markets by helping to constrain 

the ability of securitization participants 

to benefit from the information 

asymmetry and limiting their incentives 

to exploit the information asymmetry at 

the expense of ABS investors. In 

particular, under the final rule, 

securitization participants will be 

precluded from obtaining a short 

position in an ABS, purchasing a credit 

default swap or other credit derivative 

pursuant to which the securitization 

participant would be entitled to receive 

payments upon the occurrence of 

specified credit events in respect of the 

ABS or 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 

or that otherwise satisfies the conditions 

of one of the exceptions. The final rule 

will help prevent the sale of ABS that 

are tainted by the material conflicts of 

interest that Section 27B is designed to 

address, to the extent such sales 

currently occur, and will curb activity 

that is viewed as having contributed to 

the financial crisis of 2007–2009 and 

may continue today. In this way, the 

final rule will help discourage the 

creation and sale of ABS that facilitate 

amplification of risk transfer from 

informed to uninformed parties and the 

spread of risks from low quality or 

riskier loans throughout the financial 

system. 

Accordingly, the final rule may have 

economic effects on broader credit 

markets. ABS investors may be willing 

to pay more or accept a lower rate of 

return for bearing the credit risk, which 

in turn could reduce borrowing costs for 

underlying borrowers. Additional 

compliance costs, frictions in matching 

borrowers and lenders, or increased 

difficulty managing risk can have the 

opposite effect. The direction and 

magnitude of this possible impact on 

borrowing rates will depend on the 

tradeoff between the costs of complying 

with the final rule and how market 

participants reprice ABS due to the 

enhanced investor protection that the 

final rule will provide. 

The economic considerations above 

are significantly less applicable to ABS 

backed by the full faith and credit of the 

United States Government. Even though 

investment in such fully insured or fully 

guaranteed ABS is not risk-free, 

investors in such ABS are not exposed 

to the credit risk of individual 

underlying assets and, thus, are not 

subject to the adverse selection and 

moral hazard issues described above.566

As a result, such ABS are less 

susceptible to the conflicts of interest 

that Section 27B is designed to prevent 

and are excluded from the final rule. 

Some commenters have stated that 

municipal issuers of ABS do not have 

an incentive to enter into conflicted 

transactions relative to for-profit issuers 

and sponsors and suggested that such 

municipal ABS and their issuers should 

be excluded from Rule 192.567 However, 

application of the final rule is not 

conditioned on a securitization 

participant having a profit motive.568

Additionally, as discussed earlier, the 

exclusion from the definition of sponsor 

for the United States or an agency of the 

United States with respect to ABS that 

are fully insured or fully guaranteed by 

the United States is primarily based on 

the insulation of investors from credit 

risk in such ABS.569 Municipal 

securities are considered safe 

investments with default rates at 

significantly lower levels compared to 

corporate and foreign government 

bonds.570 However, unlike the United 

States Government, issuers of municipal 

ABS are in most cases not responsible 

for repaying obligations they issue on 

behalf of conduit borrowers, including 

borrowers in single-asset conduit 

bonds.571 As noted previously by the 

Commission, non-governmental conduit 

borrowers account for the majority of 

municipal bond defaults.572 In 

particular, certain conduit issuers which 

are managed by private firms have 

elevated default risks on their bonds.573


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www.bloomberg.com/news/articles/2020-08-19/ 

muni-bonds-sold-by-phantom-agency-draw-texastown-s-scrutiny (The Public Finance Authority had 

a much higher rate of borrower payment defaults 

than any other issuer over a three year period). 

574See Sections II.A.3.a. and II.B.3.b. for 

discussion of the rule’s applicability to municipal 

ABS and issuers. 

575See, e.g., Mortgage Backed Securities, Fannie 

Mae, available at https://capitalmarkets.fanniemae.

com/mortgage-backed-securities (stating that ‘‘[t]he 

certificates and payments of principal and interest 

on the certificates are not guaranteed by the U.S. 

Government and do not constitute a debt or 

obligation of the United States or any of its agencies 

or instrumentalities other than Fannie Mae.’’). 

576See letters from Fannie Mae and Freddie Mac; 

HPC; M. Calabria; SFA I. 

577Part of the reason for excluding the Enterprises 

in the proposed rule had been to enable them to 

continue to issue CRTs. See Proposing Release 

Section II.B.2.c.ii. 578See supra note 559. 

579One commenter on the rule proposal 

supported a broader definition of sponsor to 

‘‘capture any person that directs or causes the 

direction of the structure, design, or assembly of an 

ABS or the composition of the pool of assets 

underlying the ABS or has the right to do so.’’ See 

letter from Better Markets. As discussed below, we 

have revised the definition of sponsor in the final 

rule to remove the Directing Sponsor prong in light 

of commenter concerns regarding the scope of the 

proposed definition. To the extent a party is able 

to direct the structuring of the ABS without 

contractual provisions granting them the right to do 

so, opportunities to bet against the ABS may 

remain, which would limit the extent of the benefits 

described above. For the reasons discussed in 

Section II.B.3.b., the final definition of sponsor 

appropriately balances commenter concerns about 

the Directing Sponsor prong being a potential 

impediment to a long investor’s negotiating power 

with the need to protect investors against potential 

conflicts of interests in securitization transactions. 

Because investors in municipal ABS are 

exposed to credit risk in a way that 

investors in ABS that are fully 

guaranteed by the United States 

Government are not, carving out 

municipal ABS or their issuers from the 

final rule would reduce the investor 

protection benefits of the rule more 

significantly as compared to the carveout for U.S. Government guaranteed 

ABS.574

Similarly, the Enterprises’ ABS 

guarantees as to principal and interest 

payments are not fully guaranteed by 

the United States Government.575 Given 

that the Enterprises may eventually 

emerge from FHFA conservatorship and 

to avoid granting unnecessary 

competitive benefits to the Enterprises 

as market participants, as discussed in 

Section II.B.3.b.iv., we are not excluding 

the Enterprises from the definition of 

sponsor.576 Changes between the 

proposed and final rule, most notably in 

the risk-mitigating hedging activities 

exception, will enable the Enterprises to 

maintain their CRT issuance without 

such general exclusion from the 

securitization participant definition 

where guaranteed ABS are 

concerned.577

D. Costs and Benefits 

The overall costs and benefits of the 

final rule depend on the extent to which 

existing market practices and other 

regulations, including the anti-fraud and 

anti-manipulation provisions of the 

Federal securities laws, already reduce 

the risk of conflicts in ABS transactions. 

We discuss costs and benefits separately 

in the next sections in more detail. 

1. Benefits 

Investors benefit when an ABS 

performs in a manner that is 

commensurate with the level of risk that 

investors are willing to take and, 

generally, they do not benefit from the 

adverse performance of an ABS. The 

final rule will benefit investors by 

prohibiting securitization participants 

from engaging in a short sale of the 

relevant ABS, purchasing a credit 

default swap or other credit derivative 

pursuant to which the securitization 

participant would be entitled to receive 

payments upon the occurrence of 

specified credit events in respect of the 

relevant ABS. These benefits are 

supported by the rule’s further 

prohibition against securitization 

participants 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. 

The final rule may thus help alleviate 

investor concerns that the securities 

they purchase might be tainted by 

certain material conflicts of interest. It 

can also help reduce moral hazard and 

adverse selection costs in the ABS 

market, leading to better investor 

protection and a lower cost of capital.578

The final rule will enhance market 

stability through reduced incentives to 

engage in conflicted transactions and 

other speculative activity in the ABS 

market. This effect could be especially 

pronounced for asset pools that are 

involved in re-securitizations or 

synthetic ABS because of their 

complexity and the relative difficulty of 

assessing information about underlying 

assets of such ABS. Enhanced market 

stability may reduce the variance of 

ABS prices in the primary market and 

volatility of ABS prices in the secondary 

market. 

Lower adverse selection costs, higher 

expected liquidity, and lower expected 

volatility in ABS markets are expected 

to lower the expected return required by 

ABS investors to invest in ABS. These 

effects, in turn, may lower credit costs 

in loan markets for households and 

corporations whose debts enter the asset 

pools underlying the asset-backed 

securitizations. 

The definitions of the terms 

‘‘underwriter,’’ ‘‘placement agent,’’ 

‘‘initial purchaser,’’ ‘‘sponsor,’’ 

‘‘material conflict of interest,’’ and 

‘‘conflicted transaction’’ in the final rule 

encompass an array of securitization 

participants and conduct. This coverage 

will reduce asymmetries of information 

between securitization participants and 

investors at various stages of the 

transaction structuring and marketing 

process, which, in turn, is expected to 

enhance investor protection and reduce 

evasion.579

The final rule’s prohibition 

commences when a person has reached 

an agreement to become a securitization 

participant. As discussed in Section 

II.C., this approach helps ensure that the 

prohibition will apply during the 

transaction structuring and marketing 

process when a securitization 

participant may be incentivized to 

engage in conflicted transactions, and, 

thus, further enhances investor 

protection benefits of the final rule. 

Similarly, covering certain affiliates or 

subsidiaries of securitization 

participants under the definition of 

‘‘securitization participant’’ helps 

ensure that the benefits of the final rule 

are robust with respect to securitization 

participants that are part of large, 

complex entities, while leaving each 

affiliate or subsidiary primarily liable 

for its own conduct rather than that of 

other persons within the larger 

organization. 

In addition, the final rule specifies the 

scope of conflicts of interest subject to 

the prohibition by defining the terms 

‘‘material conflict of interest’’ and 

‘‘conflicted transaction,’’ as well as 

including an anti-evasion provision. 

Under Rule 192(a)(2), ‘‘engaging in any 

transaction would involve or result in a 

material conflict of interest between a 

securitization participant of an ABS and 

an investor in such ABS if such a 

transaction is a conflicted transaction.’’ 

The definition of ‘‘conflicted 

transaction’’ identifies specific types of 

conflicting transactions and also 

includes any transaction that is 

substantially the economic equivalent of 

the specified transactions, provided that 

in either case ‘‘there is a substantial 

likelihood that reasonable investor 

would consider the transaction 

important to the investor’s investment 

decision, including a decision whether 


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580See Section II.D for a more detailed discussion 

of the definition of a ‘‘conflicted transaction’’ under 

the final rule. 

581See letter from ABA. 

582See, e.g., letter from AIMA/ACC. 

583See, e.g., letters from AFME; Representatives 

Wagner and Huizenga; U.S. Representative Brad 

Sherman dated June 21, 2023 (‘‘Representative 

Sherman’’); Senator Kennedy. 

584See letter from AIC. 

to retain the asset-backed security.’’ 580

These aspects of the final rule tailor the 

prohibition to specified conflicts of 

interest that are likely to present the 

most acute investor protection concerns. 

Under the anti-evasion provision, if a 

securitization participant engages in a 

transaction or series of related 

transactions that, although in technical 

compliance with the Rule’s exceptions, 

is a part of a plan or scheme to evade 

the prohibition in Rule 192(a)(1), then 

the transaction will be deemed to 

violate the final rule’s prohibition. To 

the extent market participants are more 

familiar with complying with antievasion restrictions than anticircumvention provisions, as stated by a 

commenter, the final rule’s anti-evasion 

restriction may reduce the compliance 

burden imposed by the rule in 

comparison to that of the proposed 

rule.581 To the extent that the antievasion provision reduces uncertainty 

by focusing on the actions of 

securitization participants rather than 

the effect of transactions, the final rule 

may reduce compliance costs imposed 

relative to the proposed rule. In 

addition, the final definition of the term 

‘‘conflicted transaction’’ is consistent 

with Section 27B’s prohibition of 

conflicts of interest that are ‘‘material’’ 

and looks to whether there is a 

substantial likelihood that a reasonable 

investor would consider the conflicted 

transaction important to the investor’s 

investment decisions. By using a 

definition of materiality grounded in the 

Federal securities laws, the final rule 

sets forth a standard that is familiar to 

both investors and registrants, 

facilitating compliance and enhancing 

investor confidence in the rule’s 

effectiveness. These elements of the 

final rule will work together to capture 

certain types of material conflicts of 

interest that give rise to adverse 

selection and moral hazard costs. 

The Commission received comment 

that the extent of benefits from the rule’s 

prohibition of conflicts of interest may 

be reduced relative to when the DoddFrank Act was passed due to other new 

regulatory requirements and evolving 

market practices and incentives.582 We 

acknowledge this consideration and 

have considered these developments in 

our assessment of the economic effects 

of the final rule, but note that these 

developments do not remove the 

possibility of conflicts occurring in 

securitization transactions, and thus the 

final rule will provide additional 

investor protection benefits as compared 

to the baseline. In addition, 

implementing Section 27B remains a 

Congressional mandate. 

The adopted definition of conflicted 

transactions differs from the proposed 

definition by including any transactions 

that constitute substantially the 

economic equivalent of the specified 

transactions. This definition replaces 

the proposed broader category of any 

financial transactions through which the 

participant would benefit from the 

actual, anticipated, or potential adverse 

performance of an ABS or its underlying 

assets. This narrowed definition 

addresses the concerns of various 

commenters who stated that adverse 

performance of an ABS can be 

associated with many factors not unique 

to the security, such as general interest 

rates or foreign exchange rates,583 and it 

is similar to commenter suggestions.584

As discussed in Section II.D, the revised 

definition is intended to cover bets 

placed against an ABS to effectuate 

Section 27B’s investor protection 

mandate while not unnecessarily 

restricting transactions wholly unrelated 

to 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). 

The final rule provides exceptions for 

risk-mitigating hedging activities, 

liquidity commitments, and bona fide 

market-making activities, which are 

consistent with Section 27B. As 

discussed below, all these exceptions 

taken together can improve market 

efficiency and facilitate investor 

protection without diluting the investor 

protection benefits of the final rule. The 

final rule’s conditions for the 

availability of these exceptions will 

permit valuable risk-mitigating hedging, 

liquidity provision, and bona fide 

market-making, while minimizing the 

likelihood of conflicts of interest 

between securitization participants and 

investors in ABS, thus enhancing 

investor protections. Defining the scope 

of these exceptions may also ease 

compliance with the rule, although 

benefits from specificity can be limited 

by the anti-evasion provision which 

states that a transaction which is part of 

a scheme to evade the prohibition will 

be deemed a conflicted transaction, 

because the anti-evasion provision is 

necessarily less certain. However, the 

potential ambiguity under the antievasion restriction may be minimal, to 

the extent that it covers transactions that 

are part of a scheme to evade the rule’s 

prohibitions rather than considering the 

effects of a transaction and to the extent 

the prohibitions are clearly and tightly 

defined. To the extent the anti-evasion 

provision prevents misuse of the 

exceptions, that provision will 

strengthen investor protections. 

Risk-mitigating hedging activities 

permit a securitization participant to 

fine-tune the amount of credit or other 

risk taken or to limit some of the 

consequences of taking a risk. 

Consistent with Section 27B, we are 

adopting a risk-mitigating hedging 

activities exception that permits 

securitization participants to continue 

to hedge their risk exposures. Subject to 

specified conditions, the final rule 

provides an exception for riskmitigating hedging activities of a 

securitization participant in connection 

with, and related to, individual or 

aggregated positions, contracts, or other 

holdings of the securitization 

participant, including those arising out 

of its securitization activities, such as 

the origination or acquisition of assets 

that it securitizes. The final riskmitigating hedging activities exception 

are expected to promote the final rule’s 

benefits of investor protection without 

prohibiting securitization participants’ 

risk mitigation activities, unduly 

increasing securitization participants’ 

costs of engaging in such activities or 

increasing barriers to entry in ABS 

markets. Thus, the exception may 

improve efficiency of ABS markets and 

help protect ABS investors. 

The final rule includes the following 

conditions to the risk-mitigating 

hedging activities exception: (i) at the 

inception of the hedging activity and at 

the time of any adjustments to the 

hedging activity, the risk-mitigating 

hedging activity is designed to reduce or 

otherwise significantly mitigate one or 

more specific, identifiable risks arising 

in connection with and related to 

identified positions, contracts, or other 

holdings of the securitization 

participant, based upon the facts and 

circumstances of the identified 

underlying and hedging positions, 

contracts or other holdings and the risks 

and liquidity thereof; (ii) the riskmitigating hedging activity is subject, as 

appropriate, to ongoing recalibration by 

the securitization participant to ensure 

that the hedging activity satisfies the 

requirements of the exception and does 

not facilitate or create an opportunity to 


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585 Various commenters suggested that meeting 

the requirements of the rule would create additional 

legal and compliance costs. These costs will make 

it more costly to participate in securitization 

transactions. See, e.g., letters from AIMA/ACC; 

NAMA. 

586See, e.g., letters from AIC; LSTA II. 

587See Section V (discussing costs and burdens 

relating to the final rule for purposes of the 

Paperwork Reduction Act). 

588See letter from AIMA/ACC. 

589See, e.g., letters from AFME; LSTA III; SFA I; 

SIFMA I. 

590See, e.g., letters from ABA; AIMA/ACC 

(stating that ‘‘uncertainty surrounding what 

constitutes compliance will increase costs and 

potentially reduce securitization activity’’). 

materially benefit from a conflicted 

transaction other than through riskreduction, and (iii) the securitization 

participant has established, and 

implements, maintains, and enforces, an 

internal compliance program that is 

reasonably designed to ensure the 

securitization participant’s compliance 

with the requirements of the exception, 

including reasonably designed written 

policies and procedures regarding the 

risk-mitigating hedging activities that 

provide for the specific risk and riskmitigating hedging activity to be 

identified, documented, and monitored. 

The scope of these conditions 

enhances the benefits of the rule by 

assuring investors that risk-mitigating 

hedging activities of securitization 

participants will be less likely to create 

(intentionally or inadvertently) 

economic conflicts of interest with 

investors. Moreover, the policies and 

procedures in the risk-mitigating 

hedging activities exception that 

provide for the identification, 

monitoring, and documentation of the 

risk and related hedging can be used by 

the Commission in its examination 

programs for regulated entities. Thus, 

the final risk-mitigating hedging 

activities exception will help ensure the 

investor protection benefits of the rule, 

while allowing risk-reducing actions of 

securitization participants. 

The exceptions for liquidity 

commitments and bona fide marketmaking activities may help prevent a 

loss of secondary liquidity and 

efficiency in the ABS market and, thus, 

benefit ABS investors. The final rule 

conditions for the availability of and 

limits on the liquidity commitments and 

bona fide market-making activities 

exceptions, including the requirement 

that a securitization participant 

establish an internal compliance 

program when relying on the bona fide 

market-making activities exception, may 

enhance the benefits of the final rule by 

assuring investors that such activities of 

securitization participants will be less 

likely to create (intentionally or 

inadvertently) economic conflicts of 

interest with investors. 

2. Costs 

The final rule will create direct 

compliance costs for securitization 

participants, some of which are 

discussed in detail in Section V. The 

compliance costs will result from the 

need to implement and monitor 

policies, procedures, and information 

barriers to ensure compliance with the 

final rule, as well as associated legal 

review.585 Some commenters also 

expressed concerns that compliance 

with the rule will be more costly for 

securitization participants that are not 

subject to the Volcker Rule.586 We agree 

that the final rule may impose 

additional compliance and legal costs 

on certain securitization participants. 

These costs are likely to be higher if a 

securitization participant has no 

established compliance framework that 

facilitates the Volcker Rule 

requirements since the conditions of the 

final rule share similarities with the 

Volcker Rule. However, we expect that 

after incurring initial start-up costs to 

establish the necessary compliance 

systems, or modify the existing 

compliance frameworks, some of these 

costs will decrease over time as 

securitization participants gain 

experience in fulfilling the requirements 

and implementing the rule. 

Section V below estimates, for the 

purposes of the Paperwork Reduction 

Act, the initial and ongoing compliance 

costs to implement, maintain, test, and 

enforce written policies and procedures 

for securitization participants that rely 

on the risk-mitigating hedging activities 

or bona fide market-making activities 

exceptions of the final rule.587 As 

reported in Section V, the total annual 

paperwork burden of the final rule for 

securitization participants to prepare, 

review, and update the policies and 

procedures under the final rule is 

estimated to be 31,606 burden hours 

and cost $6,321,150. 

The Commission received comment 

that considering all short sales of ABS 

to be conflicted transactions would have 

a disproportionate impact and be 

unworkable and that only short 

positions that result in a profit for the 

securitization participant should be 

considered potentially conflicted.588 A 

short sale of an ABS by a securitization 

participant is a bet against the relevant 

ABS regardless of whether the bet is 

successful, and this is the exact type of 

transaction that the rule is intended to 

prohibit in order to remove the 

incentive for securitization participants 

to place their own interests ahead of 

those of investors. However, we do not 

believe that this provision will have a 

disproportionate effect on the market 

because Rule 192(a)(3)(i) will not 

prohibit all ABS short selling. Rather, 

the prohibition only applies to parties 

that are securitization participants with 

respect to the relevant ABS. Third 

parties that are not securitization 

participants, as defined in the final rule, 

with respect to the relevant ABS are not 

prohibited from entering into short sales 

of such ABS. Furthermore, a short sale 

of the relevant ABS may, subject to 

satisfaction of the applicable conditions, 

be permitted by the final rule pursuant 

to one of its exceptions. 

In response to commenters’ concerns 

about the broad scope of the terms 

‘‘material conflict of interest’’ and 

‘‘conflicted transaction’’ under the 

proposed rule, the final rule defines 

these terms more precisely by including 

descriptions of specific types of 

conflicting transactions: the short sale of 

an ABS, the purchase of a CDS or other 

credit derivative pursuant to which the 

securitization participant would be 

entitled to receive payments upon the 

occurrence of specified credit events in 

respect of the relevant asset-backed 

security, or any transaction that is 

substantially the economic equivalent of 

the previous two transactions. These 

definitions should enable securitization 

participants to better evaluate a 

potentially conflicted transaction, 

including those covered by the antievasion provision, mitigating the costs 

of uncertainty. In addition, the 

exclusion of certain general interest rate 

or currency exchange risk hedges from 

the definition of ‘‘conflicted 

transaction’’ is designed to address the 

concerns of several commenters, who 

stated that hedges for interest rate or 

foreign exchange risk, for example, 

could in some cases benefit from 

adverse ABS performance while having 

no meaningful connection to the credit 

quality of the assets included in a 

securitization pool.589

Also, the final rule, in response to 

several commenters’ concerns regarding 

the commencement point of the 

prohibition,590 begins application of the 

rule’s prohibition when a person has 

reached an agreement to become a 

securitization participant. This timing 

will provide a more definite point of 

reference that securitization participants 

can use to structure their transactions 

and monitor their market activities and 

thereby ensure compliance with the 

rule. The revised commencement point 


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591See, e.g., letters from ABA; AFME; AIC; ICI; 

SIFMA I. 

592See Section II.B.3.c. (discussing the 

availability of information barriers or other indicia 

of separateness under the final rule). 

593See letters from AIMA/ACC; SFA I; MFA III. 

594See letter from MFA III. 

595Specifically, we considered the Beneficial 

Ownership Reporting Release, the May 2023 SEC 

Form PF Amending Release, the Private Fund 

Advisers Adopting Release, and the Short Position 

Reporting Release. See supra notes 527–30. As 

noted above, one commenter also specifically 

suggested the Commission consider potential 

overlapping compliance costs between the final rule 

and certain proposing releases. See supra note 531. 

These proposals have not been adopted and thus 

have not been considered as part of the baseline 

here. To the extent those proposals are adopted in 

the future, the baseline in those subsequent 

rulemakings will reflect the regulatory landscape 

that is current at that time. 

596See supra notes 527–30 (summarizing 

compliance dates). 

597For example, an ABS market participant who 

reports on Form PF may need to comply with both 

the final rule and the May 2023 SEC Form PF 

Amending Release but may not have to comply 

with all of the other recently adopted rules. 

598The final rule mitigates costs relative to the 

proposal. As discussed above, the revised definition 

of affiliates and subsidiaries includes only those 

Continued 

will thus help limit the costs imposed 

by the rule generally. 

The scope of securitization 

participants in the final rule includes 

certain affiliates and subsidiaries of 

underwriters, placement agents, initial 

purchasers, and sponsors rather than 

any affiliate or subsidiary of such 

persons, as was proposed. The 

Commission received several comments 

on the proposed definition to the effect 

that monitoring costs would be 

substantial and that an exception for 

affiliates and subsidiaries separated 

from securitization participants by 

information barriers would be a 

mechanism to mitigate conflicts of 

interest.591 The final rule does not 

include an exception or requirement for 

information barriers. However, as 

adopted, the prohibition of the final rule 

will apply only to affiliates and 

subsidiaries of securitization 

participants that act in coordination 

with an underwriter, placement agent, 

initial purchaser, or sponsor or have 

access to or receive information about 

the relevant ABS or the asset pool 

underlying or referenced by the relevant 

asset-backed security prior to the first 

closing of the sale of the relevant assetbacked security. 

The Commission received comments 

requesting that the final rule permit the 

use of information barriers or other 

indicia of separateness to mitigate 

potential conflicts of interest, with some 

commenters supporting a specific 

exception if certain conditions were 

satisfied, and others instead requesting 

that the final rule consider the presence 

or absence of information barriers (and 

the robustness and effectiveness thereof) 

as part of a multi-factor analysis as a 

preferred alternative to affirmatively 

requiring the use of prescriptive 

information barriers. As discussed in 

greater detail in Section II.B.3.c., the 

revised definition of ‘‘securitization 

participant’’ will capture the range of 

affiliates and subsidiaries with the 

opportunity and incentive to engage in 

conflicted transactions while still 

obviating the need for a prescriptive 

information barrier exception. 

Information barriers, including barriers 

which exist for purposes other than 

compliance with the final rule, may be 

used to support a claim that an affiliate 

or subsidiary should be excluded from 

the rule’s prohibitions on the basis of an 

absence of coordination with a 

securitization participant or access to 

information, along with other potential 

indicia such as maintaining separate 

accounts and a lack of common officers 

or employees.592 This revision may help 

mitigate cost concerns of those 

commenters who maintain information 

barriers separating securitization 

participants from affiliates and 

subsidiaries, as they do not need to 

incur the costs of recalibrating the 

existing information barriers. They can 

use the information barriers to support 

a claim that the affiliates and 

subsidiaries are not involved in 

conflicted transactions, reducing the 

compliance costs. Furthermore, the final 

rule enables flexibility in ensuring 

affiliates and subsidiaries are not 

securitization participants rather than 

prescribing a set of policies and 

procedures, so that entities may have 

less costly options to do so than formal 

information barriers. 

The Commission received comments 

that without accommodations to 

facilitate compliance, additional costs to 

comply with the rule may limit 

participation in securitizations by 

smaller firms or those unfamiliar with 

compliance programs similar to the 

Volcker Rule, or smaller or emerging 

advisors and managers, potentially 

limiting investor choice through a 

decline in the available set of 

investment opportunities.593 The 

revised scope of conflicted transactions, 

affiliates and subsidiaries covered by 

the rule, and exceptions to the rule’s 

prohibitions all serve to reduce the costs 

associated with compliance to the rule. 

Smaller entities may tend to have less 

complex operations requiring less 

substantial compliance considerations, 

which would result in lower costs of 

compliance relative to larger and more 

complex entities. 

The compliance date for the final rule 

is 18 months following adoption. One 

commenter stated that the Commission 

should consider that ‘‘the sheer number 

and complexity of the Commission’s 

Proposals, when considered in their 

totality, if adopted, would impose 

staggering aggregate costs, as well as 

unprecedented operational and other 

practical challenges.’’ 594 But, consistent 

with its long-standing practice, the 

Commission’s economic analysis in 

each adopting release considers the 

incremental benefits and costs for the 

specific rule—that is the benefits and 

costs stemming from that rule compared 

to the baseline. In doing so, the 

Commission acknowledges that, in some 

cases, resource limitations can lead to 

higher compliance costs when the 

compliance period of the rule being 

considered overlaps with the 

compliance period of other rules. In 

determining compliance periods, the 

Commission considers the benefits of 

the rules as well as the costs of delayed 

compliance periods and potentially 

overlapping compliance periods. 

We considered here whether recently 

adopted rules identified by one 

commenter that affect market 

participants subject to the final rule 

have overlapping implementation 

timeframes with the final rule.595 The 

Commission acknowledges that there 

are compliance dates for certain 

requirements of these rules that overlap 

in time with the final rule, which may 

impose costs on resource-constrained 

entities affected by multiple rules.596

However, we do not think these 

increased costs from overlapping 

compliance periods will be significant 

for several reasons. First, the number of 

ABS market participants who are also 

private fund advisers, and who will be 

subject to one or more of these recently 

adopted rules could be limited; as 

discussed above, we estimate that in the 

baseline period there were 177 

securitized asset fund advisors 

associated with 2,481 securitized asset 

funds, and of those securitized asset 

fund advisors, depending on their 

activities, only a portion, if potentially 

a substantial one, may also be required 

to comply with one or more of the 

recently adopted rules raised by one 

commenter (and even fewer may need to 

comply with more than one of those 

other rules).597 In addition, the 

commenter’s concerns about the costs of 

overlapping compliance periods were 

raised in response to the proposal and 

as discussed above, we have taken steps 

to reduce costs of the final rule.598


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that act in coordination with an underwriter, 

placement agent, initial purchaser, or sponsor or 

receive, or have access to, information about 

relevant ABS or underlying or referenced asset 

pools prior to the first closing sale of the ABS. We 

believe that this revision may help mitigate cost 

concerns of those commenters who maintain 

information barriers separating securitization 

participants from affiliates and subsidiaries. 

599For example, the compliance period for the 

May 2023 SEC Form PF Amending Release 

concludes by mid-2024 while reporting under the 

final rule will be required by the end of 2024 at the 

earliest. For the Private Fund Advisers Adopting 

Release, the compliance date is Mar. 14, 2025, for 

the rule’s quarterly statement and audit 

requirements for registered investment advisers 

with private fund clients. See supra notes 527–30. 

600See letter from MFA III. 

601See Sections I.C. and IV.C and Sections I.B. 

and III.C. of the Proposing Release. 

602See, e.g., letters from ABA; AFME; CREFC I; 

IACPM; MBA; LSTA III; Representatives Wagner 

and Huizenga; Senator Kennedy; SFA I; SIFMA I. 

603See letters from ABA; CREFC I; Fannie and 

Freddie; MBA. 

604See letter from IACPM. 

605See, e.g., letters from AIC; AFME; IACPM. 

606See Section II.D. and included citations. 

Finally, although the compliance 

periods for these rules overlap in part, 

the compliance dates adopted by the 

Commission are generally spread out 

over a two-year period from 2023 to 

2025.599

The Commission also received a 

comment stating that existing guidance 

places the ‘‘burden of proof’’ in 

conducting a rulemaking with the 

Commission and the Commission must 

establish ‘‘substantial evidence’’ of a 

market failure as well as the sufficiency 

of the purported benefits of the rule in 

light of any costs.600 In response, we 

note that this rule is being issued 

pursuant to a Congressional mandate in 

the Dodd-Frank Act that the 

Commission implement a rule 

prohibiting certain transactions by 

specified parties. Furthermore, the 

analysis set forth in this release, as well 

as the corresponding discussion in the 

Proposing Release, describes in detail 

the investor protection concerns that the 

final rule is designed to address.601

The Commission received comments 

stating that investors intending to 

purchase a long position in a 

securitization can have a role in 

determining the composition of the 

asset pool but have little incentive to 

engage in conflicted transactions, and 

can operate as a check against 

asymmetric information by negotiating 

over what risks may be included in the 

asset pool.602 The commenters 

expressed concern that such negotiation 

may become less desirable if it carries 

additional regulatory costs, as these 

costs can prove significant and thus 

operate in opposition to the purpose of 

the rule, which is to protect the 

purchasers of ABS. In a change from the 

proposal, the final rule does not include 

the Directing Sponsor prong of the 

definition of sponsor and the final rule’s 

Contractual Rights Sponsor prong of the 

definition excludes a person that is 

solely a purchaser of a long position in 

the ABS. 

Some commenters also requested an 

exemption for the B-piece buyers of 

CMBS on a similar basis.603 B-piece 

buyers are generally affected by the 

rule’s prohibitions in roughly the same 

way as any other securitization 

participant. They may face greater 

exposure to the performance of an ABS 

than investors due to their role as a 

holder of a lower-seniority economic 

interest. They may thus be more affected 

by the rule than other parties, but they 

also may utilize the same exceptions for 

risk-mitigating hedging and transactions 

intrinsic to the operation of an ABS. 

Because the role of B-piece buyers is 

more involved, including potentially 

acting as a special servicer or making 

decisions such as whether to release a 

borrower from a lien, we believe the 

benefits of providing such an exception 

to be less than those for long-only 

investors, and the potential for 

conflicted transactions to be greater. 

Subject to certain conditions, the final 

rule provides an exception for riskmitigating hedging activities of a 

securitization participant in connection 

with, and related to, individual or 

aggregated positions, contracts, or other 

holdings of the securitization 

participant, including those arising out 

of its securitization activities, such as 

the origination or acquisition of assets 

that it securitizes. Despite the inclusion 

of the risk-mitigating hedging activities 

exception, restrictions under the final 

rule may limit some options for risk 

mitigation and revenue-enhancing 

investment available to affected 

securitization participants. For example, 

securitization participants wanting to 

engage in risk mitigation may face 

additional costs to comply with the 

conditions to the risk-mitigating 

hedging activities exception.604 This 

outcome could require securitization 

participants to increase their fees to 

compensate for such costs. 

Alternatively, such costs could be borne 

by securitization participants or passed 

to investors in the form of lower 

expected returns or to borrowers in the 

form of higher cost of capital. 

To help mitigate such unintended 

effects, the final rule uses narrower 

definitions of both conflicted 

transactions and affiliates and 

subsidiaries subject to the rule (via 

changes to the definition of 

‘‘securitization participant’’) than the 

proposed rule and permits the initial 

issuance of an ABS to qualify for the 

risk-mitigating hedging activities 

exception. These changes relative to the 

proposed rule are expected to 

substantially reduce the restrictions and 

additional costs associated with riskmitigating hedging by securitization 

participants. For example, these changes 

enable risk-mitigating hedging by 

affiliates or subsidiaries that act in 

coordination with the parts of a firm 

actively engaged in securitization 

activities as well as the issuance of new 

ABS as a means of transacting a riskmitigating hedge. 

We recognize that the definition of 

conflicted transaction can affect the 

scope of some current activities 

undertaken by underwriters, sponsors, 

and other securitization participants if 

they perceive such activities as 

conflicting with the rule. For example, 

several commenters suggested 

paragraph (iii) of the conflicted 

transaction definition in the proposed 

rule could include a wide range of 

activities deemed essential for the 

functioning and issuance of ABS and 

the risk- and balance sheet-management 

of many securitization participants. 

These commenters suggested that the 

rule could therefore result in 

participants leaving or reducing 

involvement in the market and 

potentially require a complete 

restructuring of the market to issue ABS 

with only parties who would be free of 

conflicted transactions.605

As discussed above, the revised 

definition in the final rule is intended 

to cover bets placed against an ABS to 

effectuate Section 27B’s investor 

protection mandate, while not 

unnecessarily restricting transactions 

wholly unrelated to 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).606 The reduction in scope and 

increased precision of clause (iii) is 

expected to result in lower costs 

associated with compliance with the 

final rule. Securitization participants are 

prohibited from a narrow range of 

transactions under the final rule, 

resulting in minimal limitation to the 

exposures they may take on or lay off, 

which is further reduced by the rule’s 

exceptions. The monitoring of 

transactions unrelated to positions in 

the ABS is expected to impose modest 

costs, relative to the baseline and will be 


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607See, e.g., letter from ABA. 

608See, e.g., letter from AIMA/ACC. 609See letter from AIMA/ACC. 

610See letters from NABL et al.; NAHEFFA; 

SIFMA I. 

611Municipal Securities Rulemaking Board, 2018, 

as reported in ‘‘Self-Regulation and the Municipal 

Securities Market,’’ available at https://

www.msrb.org/sites/default/files/MSRB-SelfRegulation-and-the-Municipal-SecuritiesMarket.pdf. 

612See letter from M. Calabria at 4. 

far simpler than would have been 

expected under the proposed rule. 

Indeed, many transactions that might 

plausibly have caused a participant to 

benefit from adverse performance of an 

ABS will not need to be considered 

under the final rule because only 

transactions directly linked to an ABS, 

or series of transactions constructed to 

be directly linked to an ABS, which may 

include those linked to a substantially 

overlapping and/or similar asset pool, 

will qualify as conflicted. 

The Commission received comments 

that not providing a definition of 

synthetic ABS creates ambiguity about 

what constitutes synthetic 

transactions.607 Some commenters 

suggested that clarifying which specific 

synthetic securitizations are subject to 

the rule will help market participants 

comply with new requirements.608

While we believe that most 

securitization participants understand 

and are able to identify synthetic ABS 

transactions, we acknowledge that not 

having an explicit definition of 

synthetic securitizations may impose 

compliance costs on certain 

securitization participants who may 

seek legal advice and incur other costs 

to ascertain whether the transactions 

they seek to participate in are subject to 

the final rule. We also expect that some 

securitization participants may refrain 

from entering transactions if they are 

uncertain about whether the final rule 

applies. 

Not defining synthetic securitizations 

may lessen benefits to investors who 

may not be certain if they can rely on 

the rule’s protections for a transaction. 

However, we believe that these costs 

may be partially offset by a higher 

degree of substantive compliance with 

the rule. The compliance costs of the 

rule should also decrease with time, as 

market participants gain experience in 

applying the new rule. In addition, not 

including an explicit definition of 

synthetic securitizations will help the 

rule remain effective over time by 

increasing its responsiveness to 

financial innovation. 

Additionally, as discussed above, we 

do not believe that there is a significant 

amount of activity in the synthetic or 

hybrid cash and synthetic securitization 

markets outside of the Enterprises’ CRT 

market and a CRT market for U.S. banks. 

Because CRTs are eligible for the riskmitigating hedging activities exception 

under the final rule, due to the removal 

of the carve-out of initial distributions 

of an ABS from the risk-mitigating 

hedging activities exception, we do not 

expect economic effects in the synthetic 

securitization markets to be substantial. 

We recognize that the curtailment or 

cessation of certain activities by 

securitization participants, in turn, can 

lead to potential costs for such 

participants and the broader 

securitization market. Material conflicts 

of interest may arise between an 

investor and a particular securitization 

participant that may lead that investor 

to seek a relationship with another 

securitization participant. However, 

depending upon the nature or structure 

of the transaction considered, there may 

be a lack of counterparties willing or 

able to accept the regulatory costs and 

risks required to engage in the 

transaction under the final rule. In such 

cases, investors and securitization 

participants may seek alternative, 

potentially less efficient transaction 

structures to effect a similar investment 

strategy, if even feasible. This may have 

an adverse impact on securitization 

participant revenues as well as costs, 

due to the nature of the business (for 

example, underwriting), where finding 

and retaining clientele could be an 

expensive activity. 

At the same time, clients, customers, 

or counterparties of securitization 

participants in the ABS market could 

face higher search costs should they lose 

the ability to utilize firms with 

experience in certain areas due to real 

or perceived material conflicts of 

interest and, therefore, need to find nonconflicted counterparties. Some 

potential clients, customers, or 

counterparties might choose to forgo the 

ABS investment, in which instance the 

investor could incur costs in seeking out 

alternative investments as well as the 

opportunity cost of the loss of return on 

the ABS investment. This could reduce 

market liquidity and investor choice, 

and this effect may be more acute in the 

short-term when securitization 

participants and clients, customers, or 

counterparties realign their business 

practices to comply with the rule. 

Having said that, there remain 

significant incentives for securitization 

participants to find efficient means of 

complying with the rule, which could 

serve to limit the magnitude of these 

costs to securitization participants, 

investors, and the broader market. 

The Commission also received a 

comment suggesting the additional costs 

of the rule could limit the appetite of 

smaller firms to participate in 

securitizations and potentially limit 

investor choice.609 The extent to which 

this occurs may be limited as smaller 

firms may have less extensive and 

complex securitization activities and a 

smaller range of other operations, thus 

potentially reducing their compliance 

costs relative to large, diversified 

securitization participants. We believe 

that some of these disruptions will be 

temporary, since securitization 

participants will have incentives to 

adapt the methods they use to avoid 

conflicted transactions over time to 

minimize costs. The potential costs to 

investors will be mitigated to the extent 

that a securitization participant who 

leaves the market was profiting at 

investors’ expense through undisclosed 

conflicted transactions. 

The Commission received comments 

that municipal ABS issuers are unlikely 

to engage in conflicted transactions yet 

may face ‘‘unnecessary’’ or 

‘‘unjustifiable’’ costs, burdens, or 

liability and should be excluded from 

Rule 192.610 Since the final rule does 

not exclude municipal issuers from the 

definition of sponsor, these issuers may 

seek legal guidance and incur costs to 

ascertain that the activities they seek to 

engage in are not violating the final rule. 

We expect that the overall impact of the 

final rule on the municipalities will be 

modest as it will be limited to those 

municipalities that issue ABS covered 

by the rule, an approximated 352 in the 

baseline year out of over 50,000 issuers 

of municipal securities in the United 

States as of 2018.611 Thus, even among 

municipalities issuing securities, under 

1% of municipalities are expected to be 

covered by the final rule. The final rule 

does not exclude the Enterprises from 

the definition of sponsor with respect to 

any ABS for which they provided a 

guarantee of principal and interest 

payments. The final rule could thus 

result in some additional costs, such as 

compliance costs, for the Enterprises. 

These costs will be mitigated, however, 

by the rule’s risk-mitigating hedging 

activities exception, which the final rule 

extends to the initial distribution of an 

ABS. This change is intended in large 

part to permit CRT transactions, 

including by the Enterprises, given that 

the Enterprises are now included as 

ABS sponsors under the final rule.612

The Commission received various 

comments that the inclusion of the 

Directing Sponsor prong in the 

proposed rule’s definition of sponsor 


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613See, 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. 

was too broad and thus costly.613 The 

Directing Sponsor prong defined a 

‘‘sponsor’’ functionally as any person 

that directs or causes the direction of 

the structure, design, or assembly or the 

composition of the pool of assets of an 

ABS other than a person that is solely 

a purchaser of a long position in the 

ABS. Removing this prong from the 

final rule will help limit the costs for 

securitization participants by limiting 

the scope of persons encompassed by 

the sponsor definition. 

Notwithstanding this change, the 

adopted definition of sponsor will 

impose certain compliance costs for 

securitization participants. For example, 

compliance costs may arise even for 

entities performing solely 

administrative, legal, due diligence, 

custodial, or ministerial functions, 

because such entities would have 

needed to determine whether they fall 

within the Service Provider Exclusion 

from the term ‘‘sponsor.’’ Likewise, such 

costs may arise for entities that are 

solely service providers or the holder of 

long positions in an ABS, when such 

entities need to determine whether they 

have affiliates or subsidiaries that are 

participants in the ABS. In some cases, 

an organization containing various 

affiliates and subsidiaries may engage in 

activities that cause it to be a 

securitization participant as well as 

activities that will fall within the 

Service Provider Exclusion or other 

exclusion. If such an organization is 

unable to arrange these activities in 

such a way that they take place in 

separate affiliates or subsidiaries 

wherein the servicer affiliate does not 

coordinate with or receive information 

regarding the ABS from the sponsor 

affiliate, then the organization will need 

to ensure that such servicing activities 

either do not entail conflicted 

transactions or otherwise fall within 

other exceptions to the rule. 

Organizations unable to do so may need 

to abandon one set of activities or the 

other, leading to costs for that 

organization and their counterparties. 

Finally, the rule provides exceptions 

for risk-mitigating hedging activities, 

liquidity commitments, and bona fide 

market-making activities, which are 

consistent with Section 27B. As 

discussed in Section II.E.3., we believe 

that such exceptions will preserve the 

ability of securitization participants to 

reduce and mitigate specific risks that 

arise out of underwriting, placement, 

initial purchase, or sponsorship of an 

asset-backed security, and may preserve 

secondary market liquidity and 

efficiency, while enhancing investor 

protections. We recognize that certain 

securitization participants will incur 

costs related to complying with the 

conditions for the availability of these 

exceptions, such as costs related to the 

requirement to establish, and to 

implement, maintain, and enforce an 

internal compliance program, including 

certain reasonably designed written 

policies and procedures, when relying 

on the risk-mitigating hedging activities 

exception or the bona fide marketmaking activities exception. 

The rule includes a safe harbor for 

foreign ABS transactions if the ABS is 

not issued by a U.S. person and the offer 

and sale of the ABS are in compliance 

with Regulation S. This safe harbor will 

provide regulatory certainty for 

securitization participants in connection 

with securitizations occurring outside 

the United States and thus may help to 

reduce certain compliance costs. It is 

not expected to have a significant effect 

on the costs of U.S. securitization 

participants. 

E. Anticipated Effects on Efficiency, 

Competition, and Capital Formation 

The scope of activities under the final 

rule that could constitute material 

conflicts of interest and therefore would 

be prohibited can potentially impact 

market efficiency, competition among 

asset-backed securitization market 

participants, and capital formation via 

the ABS markets. As with the general 

costs and benefits discussed above, we 

are sensitive to these factors and 

consider the rule’s effects through those 

lenses below. 

1. Competition 

Larger entities with multiple business 

lines could have unavoidable material 

conflicts of interest because of their 

structure. Such entities may abandon 

their participation in certain 

securitizations to avoid violating the 

final rule. In addition, an investor that 

utilizes such entities for multiple 

services may have to switch to 

competitors or, depending on the 

structure of asset-backed security, forgo 

the transaction. Thus, relatively smaller 

entities may gain market share at the 

expense of relatively larger entities, or 

firms with less diverse operations may 

gain market share at the expense of 

those with more diverse operations. 

This effect may be limited by the final 

rule’s exclusion of affiliates and 

subsidiaries that do not act in 

coordination with a sponsor or other 

securitization participant within an 

entity or receive, or have access to, 

information about the ABS or asset pool 

prior to the first closing of the ABS sale. 

We also expect that the costs on smaller 

securitization participants may 

adversely impact competition, notably 

the ability of smaller investment 

advisers to compete, due to their limited 

ability to effectively implement 

information barriers. 

On the other hand, certain 

requirements of the final rule that apply 

to the risk-mitigating hedging activities 

exception and bona fide market-making 

activities exception are similar to those 

under the Volcker Rule (see discussion 

in Sections II.E. and II.G.). Such 

similarity will be more beneficial to 

securitization participants that are 

already familiar with the Volcker Rule 

compliance requirements and already 

have relevant programs in place, 

because these securitization participants 

will incur lower marginal costs of 

compliance, especially in the short run. 

Securitization participants of this type 

tend to be larger entities (e.g., bank 

holding companies). Accordingly, those 

that are not subject to the requirements 

of the Volcker Rule may incur larger 

initial compliance costs to the extent 

they wish to utilize the risk-mitigating 

hedging activities exception or the bona 

fide market-making activities exception. 

This may be offset by smaller entities 

having smaller and less complex 

securitization activities, as well as fewer 

and less complex non-securitization 

activities which could result in 

conflicted transactions, leading to less 

intensive compliance requirements than 

entities that are larger, more complex, 

and more diversified. Furthermore, both 

smaller and larger entities can also 

benefit from the flexibility provided by 

the final rule since it does not prescribe 

a specific set of policies and procedures 

with which market participants need to 

comply to demonstrate the separation of 

their affiliates and subsidiaries. 

To the extent that the rule could lead 

to reduced moral hazard and curb 

excessive risk-taking, it can both draw 

more capital into the ABS market and 

lead to better allocation of capital 

between market participants, increasing 

competition among underwriters. 

Alternatively, if some of the activity in 

the ABS market is pursued only because 

sponsors or underwriters are subsidized 

by exploiting moral hazard, the market 

may shrink while still achieving a better 

allocation of resources and more 

competitive landscape. 

In addition, as stated above, one 

commenter requested the Commission 

consider interactions between the 

economic effects of the proposed rule 

and other recent Commission rules, as 

well as practical realities such as 


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614See Section IV.B. 

615See id. 

616But see infra Section VI. (noting that the final 

rule will not affect smaller entities other than those 

that will be a ‘‘sponsor’’ for purposes of the final 

rule). 

617See supra note 598. 

618See Section IV.D.2. 

619See, e.g., Murat M. Binay, Vladimir A. 

Gatchev, and Christo A. Pirinsky. The Role of 

Underwriter-Investor Relationships in the IPO 

Process, Journal of Financial and Quantitative 

Analysis 42, no. 3, 785–809 (2007), and the 

literature reviewed therein. 

620See, e.g., letters from ABA; AIMA/ACC. 

621See letters from AFR; Better Markets; SFA I; 

SIFMA I; SIFMA II. 

implementation timelines.614 As 

discussed above, the Commission 

acknowledges that overlapping 

compliance periods may in some cases 

increase costs.615 This may be 

particularly true for smaller entities 

with more limited compliance 

resources.616 This effect can negatively 

impact some competitors because these 

entities may be less able to absorb or 

pass on these additional costs, making 

it more difficult for them to remain in 

business or compete. However, the final 

rule mitigates overall costs relative to 

the proposal,617 and we do not believe 

these increased compliance costs will be 

significant for most ABS market 

participants.618 We therefore do not 

expect the risk of negative competitive 

effects from increased compliance costs 

due to simultaneous compliance periods 

to be significant. 

2. Efficiency 

As discussed above in Section IV.D.1., 

the final rule will generally lead to 

lower adverse selection costs, higher 

expected liquidity, and lower expected 

volatility in the ABS markets. In 

particular, the rule will reduce the 

effects of information asymmetries 

between securitization participants and 

ABS investors, which may reduce 

adverse selection costs and increase the 

willingness of ABS investors to engage 

in ABS transactions, thus, possibly 

improving informational efficiency of 

ABS prices. These effects will improve 

the efficiency of the ABS markets. 

ABS investors could incur additional 

search costs and less efficient business 

processes due to the loss of 

relationships with securitization 

participants described above. These 

costs would be mitigated to the extent 

that securitization participants that 

leave the market were profiting at 

investors’ expense through conflicted 

transactions. Securitization participants 

and ABS investors might also find the 

application of the final rule disruptive 

to existing firm-investor relationships, 

which are costly to develop, but 

valuable to maintain.619 Thus, the final 

rule may result in a contraction in the 

securitization markets’ size, liquidity, or 

efficiency, and these adverse effects may 

flow through to asset markets 

underlying ABS. This could result in 

higher costs for borrowers and lower 

risk- and liquidity-adjusted returns for 

investors. 

3. Capital Formation 

We believe that the final rule will 

improve pricing efficiency and reduce 

adverse selection costs. These effects 

will benefit investors, who are less 

informed about the quality of 

underlying assets than securitization 

participants. The final rule is also likely 

to increase investor confidence because 

it restricts activities that possibly deter 

investors from participating in the ABS 

market. Furthermore, the final rule will 

reduce the screening costs of those 

investors who prefer to ensure that 

securitization participants have no prior 

reputation of engaging in conflicted 

transactions. Thus, the final rule will 

lead to greater investor participation, 

and more efficient allocation of capital, 

thereby enhancing capital formation. 

However, the potential benefits of the 

final rule for capital formation may be 

offset by potential losses in investment 

opportunities due to disruptions in 

relationships with securitization 

participants, at least in the short-term. 

The rule may negatively affect those 

securitization participants and investors 

who seek to invest in asset pools that 

back ABS, if certain ABS transactions 

do not occur because of the scope of the 

final rule. Additionally, new 

compliance requirements under the rule 

may also increase costs of 

securitizations that are not currently 

associated with a material conflict of 

interest. 

The net effect of the final rule on 

capital formation is likely to be small 

given the offsetting factors discussed 

above. The potential costs of the final 

rule will be further limited due to the 

narrowed scope of transactions 

restricted by the final rule relative to the 

proposed rule. 

F. Reasonable Alternatives 

We considered several alternative 

approaches, including alternatives 

suggested by commenters to the 

proposed rule. This section considers 

the potential economic effects of these 

reasonable alternatives. 

1. Changes to Scope of Definitions 

We considered changing the scope of 

the definition for securitization 

participants. One alternative to our 

definition would be to broaden the 

definition of the terms ‘‘placement 

agent’’ and ‘‘underwriter’’ to include 

language used in the Volcker Rule that 

would include ‘‘a person who has 

agreed to participate or is participating 

in a distribution of such securities for or 

on behalf of the issuer or selling security 

holder.’’ While this approach could 

offer additional investor protections, we 

believe that the benefits associated with 

applying the rule’s prohibitions to 

persons with an ancillary role in the 

distribution of an ABS, such as selling 

group members who have no direct 

relationship with an issuer or selling 

security holder, would not offer 

substantial benefit, and could 

substantially increase compliance costs. 

We also considered commencing the 

prohibition at an earlier point in time, 

i.e., when a person has taken substantial 

steps to reach an agreement to become 

an underwriter, placement agent, initial 

purchaser, or sponsor of an ABS. This 

approach was revised from the proposal 

in response to comments regarding 

ambiguity and undue compliance costs 

associated with determining when the 

potential securitization participant has 

taken substantial steps to reach an 

agreement to participate.620

Alternatively, we could narrow the 

scope of securitization participants. We 

could, for example, narrow the scope of 

securitization participants, as suggested 

by some commenters, to capture only 

those with direct involvement in 

structuring the ABS or choosing the 

underlying assets.621 This approach, by 

reducing the number of covered 

participants, would limit costs 

associated with complying with the 

rule. However, it would not offer the 

investor protection benefits associated 

with including these persons, given that 

this could also create opportunities to 

evade the intended prohibition of 

Section 27B and the final rule. 

We also considered changing the 

scope of material conflicts of interest for 

purposes of the final rule. As discussed 

above in Section II.D., the final rule 

defines such conflicts of interest as 

those that arise between a securitization 

participant and ABS investors, as a 

result of engaging in a short sale of the 

relevant ABS, purchasing a credit 

default swap or other credit derivative 

pursuant to which the securitization 

participant would be entitled to receive 

payments upon the occurrence of 

specified credit events in respect of the 

relevant ABS or 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, 


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622See, e.g., letters from ABA; AIMA/ACC; ICI. 

623See letters from SFA II; SIFMA II. 

624See letter from SIFMA I. 

625See Proposed Rule text, ‘‘(B) The Federal 

National Mortgage Association or the Federal Home 

Loan Mortgage Corporation operating under the 

conservatorship or receivership of the Federal 

Housing Finance Agency pursuant to section 1367 

of the Federal Housing Enterprises Financial Safety 

and Soundness Act of 1992 (12 U.S.C. 4617) with 

capital support from the United States; or any 

limited-life regulated entity succeeding to the 

charter of either the Federal National Mortgage 

Association or the Federal Home Loan Mortgage 

Corporation pursuant to section 1367(i) of the 

Federal Housing Enterprises Financial Safety and 

Soundness Act of 1992 (12 U.S.C. 4617(i)), provided 

that the entity is operating with capital support 

from the United States; will not be a sponsor for 

purposes of this rule with respect to an asset-backed 

security that is fully insured or fully guaranteed as 

to the timely payment of principal and interest by 

such entity.’’ 

for the avoidance of doubt, any 

transaction that only hedges general 

interest rate or currency exchange risk. 

This aspect of the rule limits the scope 

of the prohibition to certain conflicts of 

interest, rather than extending the 

proposed rule’s prohibition to broader 

conflicts of interest that are wholly 

independent of and unrelated to a 

specific ABS. Defining the scope of the 

final rule to broadly cover any conflict 

of interest between securitization 

participants and investors would 

potentially offer some incremental 

investor protection but would 

significantly increase the costs of the 

rule and decrease efficiency of the 

securitization markets. The tailored 

approach to this prohibition in the final 

rule should limit the economic costs of 

the rule as discussed above while still 

providing substantial investor 

protection benefits. 

2. Information Barriers 

The final rule’s definition of affiliates 

or subsidiaries of named securitization 

participants includes only those 

affiliates or subsidiaries that act in 

coordination with an underwriter, 

initial purchaser, placement agent, or 

sponsor of an ABS or receive, or have 

access to, information about an ABS or 

its underlying or referenced asset pool 

prior to the first closing of sale of the 

ABS. We considered not including this 

limitation or not permitting 

securitization participants to rely on 

information barriers to be excluded from 

the ‘‘securitization participant’’ 

definition. As discussed above in 

Section IV.D.2., Rule 192, as proposed, 

might have been significantly more 

costly for large and diversified 

securitization participants with an 

extensive network of affiliates and 

subsidiaries, such as investment 

companies and investment advisers, 

engaged in unrelated businesses. 

Relative to the final rule, defining 

certain uninvolved and uninformed 

affiliates and subsidiaries as 

securitization participants could 

increase the compliance costs of the 

final rule for securitization participants 

with large affiliate and subsidiary 

networks. Such increased costs could be 

greatest for affiliates or subsidiaries not 

subject to existing rules and regulations 

that provide for conflict management or 

restricting information flow. Similarly, 

those operating subject to existing 

information barriers that could 

complicate implementation of steps to 

avoid conflicted transactions would face 

greater costs.622 To the degree that such 

an alternative could increase the scope 

of ABS transactions that would become 

conflicted, it could allow a smaller 

number of securitization participants to 

retain relationships with ABS investors 

and continue transacting in ABS. Thus, 

the alternative might increase 

disruptions to counterparty 

relationships, with potential detrimental 

effects on efficiency and capital 

formation in ABS and underlying asset 

markets. 

In the Proposing Release, the 

Commission also requested comment 

with respect to certain conditions that 

securitization participants could satisfy 

to qualify for a potential information 

barrier exception to the final rule, 

including, for example, the 

establishment of written policies and 

procedures to prevent the flow of 

information between securitization 

participants and their affiliates and 

subsidiaries, internal controls, etc. 

While commenters suggested that 

affiliates and subsidiaries should only 

be subject to the rule if they have direct 

involvement in, or access to information 

about, the relevant ABS or are otherwise 

acting in coordination with the named 

securitization participant, they 

expressed concerns, as discussed in 

Section II.B.3.c., that the inclusion of a 

prescriptive information barrier 

exception could be too burdensome or 

expensive and suggested instead that 

the final rule consider the presence, 

robustness, and effectiveness of 

information barriers as part of a multifactor analysis. Relative to the 

prescriptive information barrier 

conditions discussed in the Proposing 

Release, the adopted approach of 

including as securitization participants 

only those affiliates and subsidiaries 

which acted in coordination with a 

securitization participant or received or 

had access to information regarding an 

ABS or its underlying or referenced 

asset pool prior to the first closing of the 

sale of the ABS should result in lower 

implementation and compliance costs. 

We expect these costs to be lower 

because securitization participants are 

not required to establish a customized 

information barrier compliance program 

for Rule 192, but can instead rely on 

existing information barriers or other 

mechanisms that would effectively 

prevent coordination or flow of 

information between named 

securitization participants and their 

affiliates and subsidiaries. Similar 

potential limitations and exceptions to 

the rule were suggested by commenters. 

Two commenters proposed that, rather 

than including as securitization 

participants all affiliates and 

subsidiaries of a named securitization 

participant, the rule should specify that 

any transaction described in paragraph 

(a)(3) of the final rule, entered into at 

the direction of a related person, would 

be presumed to be a conflicted 

transaction unless that person 

demonstrates that it had no substantive 

role in structuring, selecting the assets 

for, marketing, or selling the ABS.623

This alternative would substantially 

reduce compliance costs for affiliates 

and subsidiaries which do not engage in 

conflicted transactions, but does not 

sufficiently address the potential for 

conflicts of interest because it would 

still permit information transfer which 

could enable bets against an ABS. 

Similarly, a commenter’s suggestion 624

that the Regulation M ‘‘Separate 

Accounts Exception’’ framework could 

be used to determine whether the 

prohibition applied to affiliates and 

subsidiaries could likewise reduce 

compliance costs but may not 

sufficiently address the concerns 

motivating Section 27B(a). 

3. Changes to Exclusions 

The Commission proposed an 

exclusion from the definition of 

‘‘sponsor’’ for the Enterprises while 

operating under conservatorship of the 

FHFA with respect to ABS that are fully 

insured or fully guaranteed by the 

Enterprises.625 This exception would 

have reduced the costs of compliance 

with the rule for the Enterprises while 

they remained in conservatorship. The 

final rule’s removal of this exclusion 

will encourage market efficiency and 

competition by applying the same 

treatment to a larger proportion of 

market participants and reducing any 

competitive advantages accruing to the 

Enterprises because of the final rule’s 

implementation. At the same time, the 

expansion of the risk mitigating hedging 

activities exception to provide for initial 

distributions of ABS should help to 

mitigate the additional costs to 


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626See Section II.B.3.b.iv. and footnotes 261, 265, 

267, and 274 for further discussion of the proposed 

exception for the Enterprises and related comments. 627 44 U.S.C. 3501 et seq. 

Enterprises. Applying the rule to all of 

the Enterprises’ ABS (together with 

changing the risk-mitigating hedging 

activities exception to permit the 

Enterprises’ CRT transactions) addresses 

commenter concerns regarding the 

treatment of Enterprise securities if and 

when they emerge from 

conservatorship, including whether CRT 

transactions would continue to be 

issued post-conservatorship under a 

rule that would not have considered 

such ABS eligible for the risk-mitigating 

hedging activities exception.626

Another alternative exception 

concerns entirely excepting synthetic 

balance sheet transactions from the rule 

without imposing any conditions on 

such transactions (such as those 

specified in the adopted risk-mitigating 

hedging activities exception). Providing 

such an unconditional exception would 

reduce compliance costs to certain 

banks and sponsors who could engage 

in such synthetic balance sheet 

transactions without needing to satisfy 

the conditions applicable to the riskmitigating hedging activities exception. 

However, such an alternative might 

limit the scope of reduced adverse 

selection and investor protection 

benefits relative to the final rule because 

a conflicted transaction could be 

structured using such instruments, thus 

running counter to the investorprotection mandate of Section 27B. To 

ensure that these types of transactions 

cannot be utilized as a bet by a 

securitization participant against the 

performance of the reference assets, the 

final rule requires compliance with each 

of the conditions to the risk-mitigating 

hedging activities exception. 

4. Conditions of the Exceptions 

We considered alternative conditions 

to the exceptions for risk-mitigating 

hedging activities, liquidity 

commitments, and bona fide marketmaking activities as described in detail 

in Sections II.E., II.F., and II.G., 

respectively, including alternatives 

suggested by commenters. Generally, 

making the conditions for the 

exceptions less stringent would reduce 

investor protection benefits of the final 

rule while also reducing compliance 

costs. Conversely, making the 

exceptions more stringent (e.g., making 

the exception for bona fide marketmaking activities more stringent than 

the equivalent concept in the Volcker 

Rule) would increase compliance costs 

and could restrict the relevant activities, 

although it may provide additional 

investor protection benefits. We believe 

that the final conditions, in particular 

their similarity to the existing rules (e.g., 

in the case of the bona fide marketmaking activities exception, with the 

concept of market-making in both the 

Volcker Rule and 15 U.S.C. 78c(a)(38)), 

strike the appropriate balance between 

investor protection benefits and 

compliance costs of the final rule. For 

those entities already subject to the 

Volcker Rule, the similarities could 

make it less costly to comply with the 

final rule. The conditions allow 

securitization participants sufficient 

flexibility to design their securitizationrelated risk-mitigating hedging 

activities, liquidity commitments, and 

bona fide market-making activities in a 

way that is not unduly complicated or 

cost prohibitive. To the extent smaller 

entities engage in less complex 

securitization activities or have fewer or 

less complex other operations that 

might require costs to comply with the 

rule, these costs may be proportionally 

less than larger entities with more 

complex and diverse securitization 

activities and other operations. Notably, 

the final rule’s risk-mitigating hedging 

activities exception includes the initial 

distribution of an ABS which is used to 

mitigate the risks associated with 

another ABS, allowing for a greater 

range of risk management tools available 

to market participants than proposed. 

We also considered adopting a 

certification requirement for using the 

risk-mitigating hedging activities and 

bona fide market-making activities 

exceptions. Under this alternative, an 

officer within the securitization 

participant would certify that the 

conditions supporting the exception had 

been met. This additional step might 

provide additional investor protection 

but would also create additional 

paperwork and procedural burdens 

associated with documenting the 

exception. To avoid these burdens, or 

potential enforcement or liability risk, 

securitization participants might choose 

not to engage in the excepted activities 

even in circumstances where they do 

not represent a bet against the relevant 

ABS. 

V. Paperwork Reduction Act 

A. Summary of the Collections of 

Information 

Certain provisions of the final rule 

contain ‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 

(‘‘PRA’’).627 The Commission published 

a notice requesting comment on these 

collections of information in the 

Proposing Release and submitted these 

requirements to the Office of 

Management and Budget (‘‘OMB’’) for 

review in accordance with the PRA. An 

agency may not conduct or sponsor, and 

a person is not required to comply with, 

a collection of information unless it 

displays a currently valid OMB control 

number. The title for the affected 

collection of information is ‘‘Securities 

Act Rule 192’’ (OMB Control No.: 3235– 

0807). 

The final rule implements Section 621 

of the Dodd-Frank Act, which added 

Section 27B to the Securities Act, by 

prohibiting securitization participants 

from directly or indirectly engaging in 

any transaction that would involve or 

result in any material conflict of interest 

between a securitization participant for 

such ABS and an investor in such ABS. 

The final rule includes certain 

exceptions for risk-mitigating hedging 

activities and bona fide market-making 

activities, both of which are conditioned 

on the securitization participant 

implementing, maintaining, and 

enforcing certain written policies and 

procedures. A more detailed description 

of the final rule, including the need for 

the information collection associated 

with these exceptions and its use, as 

well as a description of the likely 

respondents, can be found in Section II 

above, and a discussion of the economic 

effects of the final rule can be found in 

Section IV above. 

The collection of information is 

mandatory for securitization 

participants that rely on two exceptions 

to the final rule described below. The 

collection of information is not required 

to be filed with the Commission or 

otherwise made publicly available but 

will not be confidential. 


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628Proposing Release at 9723. 629See letters from ABA; AIC. 630See letter from ABA. 631See letter from AIC. 

632See Section II.B.3.c. (discussing how 

paragraph (ii) of the definition of a ‘‘securitization 

participant’’ as adopted will only capture any 

affiliate (as defined in 17 CFR 230.405) or 

subsidiary (as defined in 17 CFR 230.405) of a 

person described in paragraph (i) of the definition 

if the affiliate or subsidiary: (A) acts in coordination 

with a person described in paragraph (i) of the 

definition; or (B) has access to or receives 

information about the relevant asset-backed security 

or the asset pool supporting or referenced by the 

relevant asset-backed security prior to the first 

closing of the sale of the relevant asset-backed 

security). 

633See Section II.D.3. (discussing how Rule 

192(a)(3)(iii) as adopted only applies to the 

purchase or sale of any financial instrument that is 

substantially the economic equivalent of a 

transaction described in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii) and provides that, for the avoidance of 

doubt, any transaction that only hedges general 

interest rate or currency exchange risk is not a 

conflicted transaction). 

634We estimate that only a subset of 

securitization participants (e.g., broker-dealers) will 

rely on the bona fide market-making activities 

exception and that, while amending their written 

policies and procedures to address the more 

broadly applicable risk-mitigating hedging activities 

exception, such securitization participants will also 

amend their written policies and procedures to 

address the bona fide market-making activities 

exception. 

635We recognize that not all securitization 

participants that will rely on the risk-mitigating 

hedging activities exception or the bona fide 

market-making activities exception (e.g., municipal 

entities that are sponsors of municipal ABS) would 

be subject to the Commission’s examination and 

oversight programs (or, if applicable, those of the 

relevant self-regulatory organization). 

636See Section II.B.3.c. (discussing how 

paragraph (ii) of the definition of a ‘‘securitization 

participant’’ as adopted will only capture any 

affiliate (as defined in 17 CFR 230.405) or 

subsidiary (as defined in 17 CFR 230.405) of a 

person described in paragraph (i) of the definition 

if the affiliate or subsidiary: (A) acts in coordination 

with a person described in paragraph (i) of the 

definition; or (B) has access to or receives 

information about the relevant asset-backed security 

or the asset pool supporting or referenced by the 

relevant asset-backed security prior to the first 

closing of the sale of the relevant asset-backed 

security) and Section II.D.3. (discussing how Rule 

192(a)(3)(iii) as adopted only applies to the 

purchase or sale of any financial instrument that is 

substantially the economic equivalent of a 

transaction described in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii) and provides that, for the avoidance of 

doubt, any transaction that only hedges general 

interest rate or currency exchange risk is not a 

conflicted transaction). 

B. Summary of Comment Letters 

In the Proposing Release, the 

Commission requested comment on the 

PRA burden hour and cost estimates 

and the analysis used to derive the 

estimates.628 While a number of parties 

commented on the potential costs of the 

proposed rule, only two commenters 

specifically addressed the PRA 

analysis.629 One of these commenters 

stated that the PRA analysis in the 

Proposing Release underestimated the 

number of securitization participants 

that could rely on the risk-mitigating 

hedging activities exception given the 

scope of securitization participants that 

would be subject to the rule, as 

proposed, and the scope of the proposed 

definition of ‘‘conflicted 

transaction.’’ 630 The other commenter 

expressed similar concerns regarding 

the scope of the proposed rule and 

stated that the PRA underestimated the 

annual hourly burden for each 

securitization participant relying on the 

risk-mitigating hedging activities or 

bona fide market-making activities 

exceptions and the total annual direct 

compliance cost of the proposed rule.631

While we acknowledge the 

commenter’s concerns about costs of the 

proposal, for the reasons discussed in 

Sections II.E. and II.G. and elsewhere 

throughout this release, we believe that 

the information required by the final 

rule with respect to the compliance 

program conditions to the riskmitigating hedging activities and the 

bona fide market-making activities 

exceptions is necessary and appropriate 

in the public interest and for the 

protection of investors. Further, a 

discussion of the economic effects of the 

final rule, including consideration of 

comments that expressed concern about 

the expected costs associated with the 

proposed rule, can be found in Section 

IV above. With regard to the calculation 

of paperwork burdens, we note that both 

the Proposing Release’s PRA analysis 

and our PRA analysis of the final rule 

here estimate the burden of the 

collection of information requirements 

of the applicable exceptions and fully 

comport with the requirements of the 

PRA. In response to the comments that 

the PRA analysis in the Proposing 

Release underestimated the number of 

affected securitization participants and 

their average annual hourly burden 

given the scope of the proposed rule, the 

modifications to the proposed rule that 

we are adopting in response to 

commenter concerns, including the 

changes discussed above in Section 

II.B.3.c. regarding the scope of affiliates 

and subsidiaries that will be subject to 

the final rule 632 and the changes 

discussed above in Section II.D.3. 

regarding the scope of the defined term 

‘‘conflicted transaction’’ 633 should 

reduce both the number of respondents 

and the burden hours associated with 

the collection of information. We are 

adjusting our PRA estimates to reflect 

these modifications. 

C. Effects of the Final Rule on the 

Collections of Information 

The final rule requires a securitization 

participant to implement, maintain, and 

enforce written policies and procedures 

when it relies on the risk-mitigating 

hedging activities exception in 17 CFR 

230.192(b)(1) (‘‘Rule 192(b)(1)’’) or the 

bona fide market-making activities 

exception in Rule 192(b)(3). 

Specifically, when a securitization 

participant relies on the risk-mitigating 

hedging activities exception it is 

required, under Rule 192(b)(1)(ii)(C), to 

have established, and to implement, 

maintain, and enforce, an internal 

compliance program that is reasonably 

designed to ensure the securitization 

participant’s compliance with the other 

requirements of the exception, 

including reasonably designed written 

policies and procedures regarding the 

risk-mitigating hedging activities that 

provide for the specific risk and riskmitigating hedging activity to be 

identified, documented, and monitored. 

Similarly, when a securitization 

participant relies on the bona fide 

market-making activities exception it is 

required, under Rule 192(b)(3)(ii)(E), to 

have established, and to implement, 

maintain, and enforce, an internal 

compliance program that is reasonably 

designed to ensure the securitization 

participant’s compliance with the other 

requirements of the exception, 

including reasonably designed written 

policies and procedures that 

demonstrate a process for prompt 

mitigation of the risks of its marketmaking positions and holdings. 

Accordingly, securitization participants 

will be required to either prepare new 

policies and procedures or update 

existing ones in order to rely on these 

exceptions.634 As adopted, these written 

policies and procedures requirements 

will help prevent evasion of the final 

rule and discourage practices that 

resulted in the misconduct that Section 

27B was enacted to prohibit. If a 

securitization participant is a regulated 

entity, the collection of such 

information (i.e., policies and 

procedures) required by Rule 192 will 

provide important information to staff 

in the Commission’s examination and 

oversight program, and if such 

securitization participant is also subject 

to oversight by a self-regulatory 

organization, this collection of 

information should provide important 

compliance information to the relevant 

self-regulatory organization in 

connection with its oversight of the 

securitization participant.635 As 

discussed in Section II, we have made 

some changes to the proposed rule as a 

result of comments received.636

As stated below in PRA Table 1, we 

estimate that there are a total of 1,277 


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637While some securitization participants may 

have policies and procedures in place related to 

hedging or market-making, we are estimating the 

same burden hour estimates for all securitization 

participants. Burden hour estimates for the 

preparation of new policies and procedures (80 

hours) are derived from similar estimates for the 

documentation of policies and procedures by RIAs 

as required by Rule 206(4)–7 of the Advisers Act. 

See Compliance Programs of Investment Companies 

and Investment Advisers, Release No. IA–2204 

(Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003)] 

(taking into account industry participant comments 

specific to the 80-hour estimate). Because the final 

exceptions would require the drafting or updating 

of reasonably designed written policies and 

procedures regarding each requirement applicable 

to such exception, we believe 80 hours is an 

appropriate burden estimate. 

638Burden hour estimates for the annual review 

of policies and procedures (10 hours) are derived 

from the same estimates for recently proposed 

Exchange Act Rule 17Ad–25(h). Rule 17Ad–25(h) 

requires updating current policies and procedures 

or establishing new policies and procedures to 

ensure ongoing compliance, which would impose 

an ongoing annual burden similar to the one 

imposed by the proposed risk-mitigating hedging 

activities exception here. See Clearing Agency 

Governance and Conflicts of Interest, Release No. 

34–95431 (Aug. 8, 2022) [87 FR 51812 (Aug. 23, 

2022)]. 

639These estimates represent a three-year average. 

In deriving our estimate, the burden hour estimates 

for the preparation of new policies and procedures 

(80 hours) were added to the ongoing estimates for 

the annual review of policies and procedures (10 

hours) for the following two years resulting in a 100 

hour burden over three years, or approximately 33 

hours per year. Some securitization participants 

may experience costs in excess of this average in 

the first year of compliance with the amendments 

and some securitization participants may 

experience less than the average costs. Averages 

also may not align with the actual number of 

estimated burden hours in any given year. 

640We recognize that the costs of retaining 

outside professionals (e.g., compliance 

professionals and outside counsel) might vary 

depending on the nature of the professional 

services, but for purposes of this PRA analysis, we 

estimate that such costs would be an average of 

$600 per hour, consistent with other recent 

rulemakings. 

securitization participants, all of whom 

could rely on the risk-mitigating 

hedging activities exception, and 156 

securitization participants who could 

rely on the bona fide market-making 

activities exception. For the purposes of 

this analysis, as described below, we 

have made assumptions regarding 

actions respondents are expected to take 

to implement, manage, and ensure 

compliance with the final rule. 

PRA TABLE 1—ESTIMATED NUMBER OF SECURITIZATION PARTICIPANTS 1

Private-label ABS sponsors ................................................................................................................................................................. 420 

Municipal ABS sponsors 2 ................................................................................................................................................................... 516 

Sponsors related to government-backed securities ............................................................................................................................ 185 

Unique underwriters, placement agents, and initial purchasers that are not included in the categories above ................................ 156 

Total .............................................................................................................................................................................................. 1,277 

1The securitization participant estimates are derived from data in the Green Street Asset-Backed Alert Database, the Green Street Commercial Mortgage Alert Database, the Mergent Municipal Bond Securities Database, and information on www.ginniemae.gov and https://capitalmarkets.freddiemac.com/mbs/products/dealer-groups. To account for recent market variability, these estimates represent a two-year average of the 

data available from such sources for calendar year 2021 and calendar year 2022. 2This estimate includes municipal advisors, municipal issuers, and issuers of securitizations of municipal securities that may be sponsors for 

purposes of the final rule but are not municipal issuers. 

We estimate that for each 

securitization participant relying on 

these exceptions, it would take 

approximately 80 hours to initially 

prepare new written policies and 

procedures 637 and approximately 10 

hours annually to review and update 

those policies and procedures.638 As a 

result, we estimate that the annual 

burden for each securitization 

participant would be 33 hours.639

Because these estimates are an average, 

the burden could be more or less for any 

particular securitization participant, and 

might vary depending on a variety of 

factors, such as the degree to which the 

participant uses the services of outside 

professionals or internal staff. 

The following table summarizes the 

estimated paperwork burdens associated 

with the final rule. 

PRA TABLE 2—ESTIMATED PAPERWORK BURDEN OF FINAL RULE 192 

Final Rule 192 Estimated burden increase Brief explanation of estimated burden increase 

Require policies and procedures implementing, 

maintaining, and enforcing written policies and 

procedures reasonably designed to ensure compliance with the requirements of the applicable 

exceptions, including the identification, documentation, and monitoring of such activities.

An increase of 33 burden hours ......... This is the estimated burden to initially prepare 

and subsequently review and update the policies and procedures. 

D. Aggregate Burden and Cost Estimates 

for the Final Rule 

Below we estimate the paperwork 

burden in hours and costs as a result of 

the new collection of information 

established by the final rule. These 

estimates represent the average burden 

for all securitization participants who 

could rely on the risk-mitigating 

hedging activities exception or the bona 

fide market-making activities exception, 

both large and small. In deriving our 

estimates, we recognize that the burdens 

would likely vary among individual 

securitization participants. We estimate 

the total annual burden of the final rule 

to be 42,141 burden hours. We 

calculated the burden estimate by 

multiplying the estimated number of 

securitization participants by the 

estimated average amount of time it 

would take a securitization participant 

to prepare and review and update the 

policies and procedures under the final 

rule. For purposes of the PRA, the 

burden is to be allocated between 

internal burden hours and outside 

professional costs. PRA Table 3 sets 

forth the percentage estimate for the 

burden allocation for the new collection 

of information. We also estimate that the 

average cost of retaining outside 

professionals is $600 per hour.640


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641 5 U.S.C. 553. 

642 5 U.S.C. 604. 

643See Proposing Release at 9724–9726. 644See letter from AIMA/ACC. 

645See letter from AIMA/ACC. 

646See letters from AIMA/ACC; NAMA (stating 

that many municipal advisors are small entities and 

that including them within in the scope of the rule 

would require them to ‘‘spend a great deal of time, 

effort and expense’’ and suggesting an exclusion 

from the rule for municipal advisors); Wulff Hansen 

(supporting NAMA’s statements). 

647We believe that the final rule will not affect 

small entities other than those that will be a 

‘‘sponsor’’ for purposes of the final rule. 

648 5 U.S.C. 601(6). 

PRA TABLE 3—ESTIMATED BURDEN ALLOCATION FOR THE COLLECTION OF INFORMATION

Collection of information Internal 

(%) 

Outside 

professionals 

(%) 

Prohibition Against Conflicts of Interest in Certain Securitizations ......................................................................... 75 25 

The following PRA Table 4 

summarizes the requested paperwork 

burden, including the estimated total 

reporting burdens and costs, under the 

final rule. 

PRA TABLE 4—REQUESTED PAPERWORK BURDEN FOR THE NEW COLLECTION OF INFORMATION

Collection of information 

Requested paperwork burden 

Securitization 

participants Burden hours Cost burden 

(A) (A) × 33 × (0.75) (A) × 33 × (0.25) × $600 

Prohibition Against Conflicts of Interest in Certain Securitizations ................. 1,277 31,606 $6,321,150 

VI. Final Regulatory Flexibility 

Analysis 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires the Commission, in 

promulgating rules under Section 553 of 

the Administrative Procedure Act,641 to 

consider the impact of those rules on 

small entities. We have prepared this 

Final Regulatory Flexibility Analysis 

(‘‘FRFA’’) in accordance with Section 

604 of the RFA.642 An Initial Regulatory 

Flexibility Analysis (‘‘IRFA’’) was 

prepared in accordance with the RFA 

and was included in the Proposing 

Release.643

A. Need for, and Objectives of, the Final 

Rule 

We are adopting Rule 192 to 

implement Section 27B of the Securities 

Act. The final rule is designed 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. As discussed in more 

detail in Section II.D.3. above, the final 

rule specifies which types of 

transactions will be prohibited so that 

activities that are routinely undertaken 

in connection with the securitization 

process or that are unrelated to the 

securitization process will not be 

unnecessarily restricted. Also, as 

discussed in more detail in Sections 

II.E.3., II.F.3. and II.G.3., the final rule 

also provides specific exceptions to its 

prohibition with respect to the types of 

risk-mitigating hedging, liquidity 

commitment, and bona fide marketmaking activities of securitization 

participants that do not give rise to the 

risks that Section 27B addresses. The 

need for, and objectives of, the final rule 

are discussed in more detail in Section 

II above. We discuss the economic 

impact and potential alternatives to the 

final rule in Section IV above, and the 

estimated compliance costs and burdens 

of the final rule under the PRA in 

Section V above. 

B. Significant Issues Raised by Public 

Comments 

In the Proposing Release, the 

Commission requested comment on any 

aspect of the IRFA, and particularly on 

the number of small entities that would 

be affected by the proposed rule, the 

existence or nature of the potential 

impact of the proposed rule on small 

entities discussed in the analysis, how 

the proposed rule could further lower 

the burden on small entities, and how 

to quantify the impact of the proposed 

amendments. 

The Commission did not receive any 

comments specifically addressing the 

IRFA. The Commission did receive, 

however, one comment expressing 

concern that the proposed rule would 

apply to small entities without a longer 

implementation period or other 

accommodations to facilitate their 

compliance.644 This commenter stated 

the additional costs that would be 

imposed under the rule, as proposed, 

would limit the ability of smaller firms 

to participate in securitizations, 

potentially limiting investor choice.645

The Commission also received 

comments expressing concerns 

regarding the compliance burdens that 

would be imposed under the rule, as 

proposed, on municipal advisors that 

are small entities.646 We have 

considered these comments in 

developing the FRFA. 

C. Small Entities Subject to the Rule 

The final rule will affect some small 

entities—such as municipal entities, 

small broker-dealers, and RIAs that 

advise hedge funds—that will be 

‘‘sponsors’’ for purposes of the final 

rule.647 The RFA defines ‘‘small entity’’ 

to mean ‘‘small business,’’ ‘‘small 

organization,’’ or ‘‘small governmental 

jurisdiction.’’ 648

For purposes of the RFA, under 17 

CFR 230.157 and 17 CFR 240.0–10(a), 

an issuer, other than an investment 

company, is a ‘‘small business’’ or 

‘‘small organization’’ if it had total 

assets of $5 million or less on the last 

day of its most recent fiscal year and is 

engaged or proposing to engage in an 

offering of securities not exceeding $5 

million. We estimate that no sponsors of 

private-label ABS will meet the 

definition of ‘‘small entity’’ applicable 

to issuers. 


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649 5 U.S.C. 601(5). 

650We analyzed and averaged calendar year 2021 

data and calendar year 2022 data from the Mergent 

Municipal Bond Securities Database to determine 

the scope and characteristics of municipal entities 

that are sponsors of municipal ABS, including ABS 

issued by municipal issuers and securitizations of 

municipal securities issued by special purpose 

entities. Although certain securitizations of 

municipal securities issued by special purpose 

entities might not have a sponsor that is a 

municipal entity, we are taking the conservative 

approach to include such securitizations in these 

estimates to avoid any potential undercounting for 

purposes of the FRFA. 

651See 17 CFR 240.0–10. 

652We analyzed and averaged calendar year 2021 

and calendar year 2022 data to determine whether 

their characteristics and affiliations (as described in 

FOCUS data and other disclosures) would result in 

their being ‘‘small entities’’ for purposes of Section 

605 of the RFA. 

653See 17 CFR 275.0–7(a). 

654We analyzed and averaged calendar year 2021 

data and calendar year 2022 data from Form ADV. 

Based on Form ADV data, we estimate that (i) for 

calendar year 2021, only 17 RIAs that advise hedge 

funds, representing 0.7% of all RIAs advising hedge 

funds, would be a small entity as defined by Rule 

0–7(a) of the Advisers Act and (ii) for calendar year 

2022, only 15 RIAs that advise hedge funds, 

representing 0.6% of all RIAs advising hedge funds, 

would be a small entity as defined in Rule 0–7(a) 

of the Advisers Act. See Definitions of ‘‘Small 

Business’’ or ‘‘Small Organization’’ Under the 

Investment Company Act of 1940, the Investment 

Advisers Act of 1940, the Securities Exchange Act 

of 1934, and the Securities Act of 1933, Release 

Nos. 33–7548, 34–40122, IC–23272, and IA–1727 

(June 24, 1998) [63 FR 35508 (June 30, 1998)]. 

Furthermore, we believe that not all of those RIAs 

act as sponsors of ABS transactions. 

655We analyzed and averaged calendar year 2021 

data and calendar year 2022 data from Mergent 

Municipal Bond Securities Database. We note that 

some municipal advisors are broker-dealers and/or 

RIAs. 

656See Registration of Municipal Advisors, 

Release No. 34–70462 (Sept. 20, 2013) [78 FR 67468 

(Nov. 12, 2013)] (‘‘MA Adopting Release’’). 

657See 13 CFR 121.201. 

658The Commission estimated for purposes of the 

PRA, as of Dec. 31, 2022, approximately 446 

municipal advisors were registered with the 

Commission and an estimated 333 of these 

municipal advisors, or approximately, 75%, were 

small entities. See PRA Supporting Statement for 

Registration of Municipal Advisors (Aug. 1, 2023), 

available at https://www.reginfo.gov/public/do/ 

PRAViewDocument?ref_nbr=202307-3235-012. 

A municipal entity is a small entity 

for purposes of the RFA (i.e., a ‘‘small 

government jurisdiction’’) if it is a city, 

county, town, township, village, school 

district, or special district, with a 

population of less than fifty 

thousand.649 We estimate that, of the 

415 municipal entities who act as 

sponsors of ABS, between 69 and 90 

will meet the definition of small entity 

applicable to municipal entities.650

A broker-dealer is a small entity if it 

has total capital (net worth plus 

subordinated liabilities) of less than 

$500,000 on the date in the prior fiscal 

year as of which its audited financial 

statements were prepared pursuant to 

17 CFR 240.17a–5(d), or, if not required 

to file such statements, had total capital 

of less than $500,000 on the last 

business day of the preceding fiscal year 

(or in the time that it has been a 

business, if shorter); and it is not 

affiliated with any person (other than a 

natural person) that is not a small 

business or small organization.651 We 

estimate that two sponsors that are 

broker-dealers will meet the applicable 

definition of small entity.652

RIAs other than broker-dealers that 

advise hedge funds and municipal 

advisors that advise with respect to 

municipal securitizations, could also 

qualify as a ‘‘sponsor’’ under the final 

rule. A RIA is a small entity if it: (i) has 

assets under management having a total 

value of less than $25 million; (ii) did 

not have total assets of $5 million or 

more on the last day of its most recent 

fiscal year; and (iii) does not control, is 

not controlled by, and is not under 

common control with another 

investment adviser that has assets under 

management of $25 million or more, or 

any person (other than a natural person) 

that had total assets of $5 million or 

more on the last day of its most recent 

fiscal year.653 We estimate that, of the 

RIAs that advise hedge funds, up to 16 

will be a small entity as defined for 

investment advisers.654

We estimate that there are 105 

municipal advisors who will be 

sponsors of ABS for purposes of the 

final rule.655 There is no Commission 

definition regarding small municipal 

advisors. In adopting rules relating to 

municipal advisors, the Commission has 

used the Small Business 

Administration’s definition of small 

business for municipal advisors.656 The 

Small Business Administration defines 

small business for purposes of entities 

that provide financial investment and 

related activities as a business that had 

annual receipts of less than $47 million 

during the preceding fiscal year and is 

not affiliated with any person that is not 

a small business or small 

organization.657 Based on this 

definition, a majority of municipal 

advisors will be small businesses. The 

Commission recently estimated that 

approximately 75% of municipal 

advisors would be small entities; 658

therefore, we estimate that 79 will be 

small entities. 

This results in a Commission estimate 

of 166 to 187 small entities that could 

be impacted by the final rule. 

D. Projected Reporting, Recordkeeping, 

and Other Compliance Requirements 

The final rule will apply to small 

entities to the same extent as other 

entities, irrespective of size. Therefore, 

we expect that the nature of most of the 

benefits and costs associated with the 

final rule to be similar for large and 

small entities. We discuss the economic 

effects, including the estimated costs 

and burdens, of the final rule on all 

affected entities, including small 

entities, in Section IV above. Consistent 

with that discussion, we anticipate that 

the economic benefits and costs could 

vary widely among small entities based 

on a number of factors, such as the 

nature and conduct of their businesses, 

which makes it difficult to project the 

economic impact on small entities with 

precision. We note, however, that 

reliance on certain exceptions to the 

final rule may be more burdensome for 

small entities than larger entity 

securitization participants (e.g., banking 

entities and affiliated broker-dealer 

entities) due to the similarity of these 

exceptions to the Volcker Rule, with 

which such larger entities will be 

familiar, thereby reducing their costs. 

Conversely, as discussed above in 

Section IV, small entities may face fewer 

compliance costs than large and 

diversified securitization participants 

that have an extensive network of 

affiliates and subsidiaries. This may 

allow such small entities to gain market 

share at the expense of such large and 

diversified securitization participants. 

As a general matter, we also recognize 

that costs of the final rule potentially 

may have a proportionally greater effect 

on small entities, as such costs may be 

a relatively greater percentage of the 

total cost of operations for smaller 

entities than larger entities, and thus 

small entities may be less able to bear 

such costs relative to larger entities. 

However, the potentially less complex 

securitization activities of small entities 

and their correspondingly less complex 

compliance considerations may 

counterbalance such costs as compared 

to larger and more diversified 

securitization participants. Compliance 

with the final rule might require the use 

of professional skill, including legal 

skills. 

E. Agency Action To Minimize Effect on 

Small Entities 

The RFA directs us to consider 

alternatives that would accomplish our 

stated objectives, while minimizing any 

significant adverse impact on small 

entities. Accordingly, we considered the 

following alternatives: 

• Establishing different compliance 

requirements or timetables that take into 

account the resources available to small 

entities; 

• Exempting small entities from all or 

part of the requirements; 

• Using performance rather than 

design standards; and 


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659See letters from AIMA/ACC (expressing a 

concern about the lack of accommodations for small 

entities to facilitate their compliance); NAMA 

(stating that many municipal advisors are small 

entities and that including them within in the scope 

of the rule would require them to ‘‘spend a great 

deal of time, effort and expense’’ and suggesting an 

exclusion from the rule for municipal advisors); 

Wulff Hansen (supporting NAMA’s statements). See 

also Section II.B.3.b. above for a discussion of why 

we are not adopting an exclusion from the rule for 

municipal advisors. 

660See letter from AIMA/ACC. 

661See letter from SFA II. 

662See Section II.D.3. (discussing how Rule 

192(a)(3)(iii) as adopted only applies to the 

purchase or sale of any financial instrument that is 

substantially the economic equivalent of a 

transaction described in Rule 192(a)(3)(i) or Rule 

192(a)(3)(ii) and provides that, for the avoidance of 

doubt, any transaction that only hedges general 

interest rate or currency exchange risk is not a 

conflicted transaction). 

663See Section II.B.3.c. (discussing how 

paragraph (ii) of the definition of a ‘‘securitization 

participant’’ as adopted will only capture any 

affiliate (as defined in 17 CFR 230.405) or 

subsidiary (as defined in 17 CFR 230.405) of a 

person described in paragraph (i) of the definition 

if the affiliate or subsidiary: (A) acts in coordination 

with a person described in paragraph (i) of the 

definition; or (B) has access to or receives 

information about the relevant asset-backed security 

or the asset pool supporting or referenced by the 

relevant asset-backed security prior to the first 

closing of the sale of the relevant asset-backed 

security). 

• Clarifying, consolidating, or 

simplifying compliance and reporting 

requirements under the rules for small 

entities. 

The final rule is designed 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. Exempting small entities 

from the final rule’s prohibition could 

frustrate Section 27B’s investor 

protection purpose by narrowing the 

scope of the rule to transactions with 

respect to which the relevant 

securitization participants are larger 

entities. We see no reason why investors 

should not be protected from 

securitization participants that are small 

entities betting against the relevant ABS 

in the same way that they will be for 

larger entities. Similarly, applying 

different standards and legal 

requirements based on the size of an 

entity would dimmish investor 

protection, create unnecessary 

complexity, and likely result in 

additional costs associated with 

ascertaining whether a particular 

securitization participant is eligible to 

claim an exception from the rule or 

avail itself of such different standards 

and legal requirements. For these 

reasons, we are not adopting different 

compliance or reporting requirements, 

or an exception, for small entities as 

suggested by certain commenters.659

The final rule, however, does include a 

delayed implementation period for all 

entities as discussed in detail in Section 

II.I. One commenter generally expressed 

a concern that the proposed rule did not 

include an implementation period for 

small entities.660 Another commenter 

recommended a compliance period of 

18–24 months based on concerns 

regarding the scope of the proposed 

definition of conflicted transaction and 

the proposed application of the rule to 

affiliates.661 We recognize that certain 

persons subject to the rule will need to 

update their operations and systems in 

order to comply with the final rule, and 

we are adopting the compliance date of 

18 months after adoption. We believe 

that this delayed compliance date will 

provide affected securitization 

participants that intend to utilize the 

risk-mitigating hedging activities 

exception and the bona fide marketmaking activities exception, including 

small entities, with adequate time to 

develop the internal compliance 

programs that are required to comply 

with such exceptions. We are not 

persuaded that any additional time is 

needed for smaller entities because we 

believe that the changes made from the 

proposed rule to narrow the scope of the 

definition of conflicted transaction 662

and the scope of the affiliates and 

subsidiaries of a securitization 

participant that are subject to the 

rule 663 should generally ease 

compliance burdens and mitigate the 

need for a compliance period longer 

than 18 months after adoption. 

As discussed in Section II, we have 

made certain changes from the proposal 

to clarify and simplify the scope of the 

final rule for all entities by further 

specifying the type of conduct that will 

be prohibited as well as the 

applicability of the final rule to an 

entity’s affiliates and subsidiaries. With 

respect to using performance rather than 

design standards, the prohibition of the 

final rule is a performance standard that 

will prohibit a securitization participant 

from entering into a conflicted 

transaction during the covered timeperiod. Although the bona fide marketmaking activities and risk-mitigating 

hedging activities exceptions do include 

design standards such as those specified 

in Rule 192(b)(1)(ii)(A) and Rule 

192(b)(3)(ii)(B), we believe that those 

design standards will promote the 

investor protection objectives of the 

final rule while still providing 

flexibility to securitization participants 

to design compliance programs that are 

tailored to their specific business 

models. 

Statutory Authority 

The Commission is adopting new 17 

CFR 230.192 under the authority set 

forth in Sections 10, 17(a), 19(a), 27B, 

and 28 of the Securities Act. 

List of Subjects in 17 CFR Part 230 

Reporting and recordkeeping 

requirements, Securities. 

Text of Amendments 

For the reasons set forth in the 

preamble, the Commission amends title 

17, chapter II of the Code of Federal 

Regulations as follows: 

PART 230—GENERAL RULES AND 

REGULATIONS, SECURITIES ACT OF 

1933 

■ 1. The general authority citation for 

part 230 continues to read, in part, as 

follows: 

Authority: 15 U.S.C. 77b, 77b note, 77c, 

77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z–3, 77sss, 

78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o–7 note, 

78t, 78w, 78ll(d), 78mm, 80a–8, 80a–24, 80a– 

28, 80a–29, 80a–30, and 80a–37, and Pub. L. 

112–106, sec. 201(a), sec. 401, 126 Stat. 313 

(2012), unless otherwise noted. 

■ 2. Add § 230.192 to read as follows: 

§ 230.192 Conflicts of interest relating to 

certain securitizations. 

(a) Unlawful activity—(1) Prohibition. 

A securitization participant shall not, 

for a period commencing on the date on 

which such person has reached an 

agreement that such person will become 

a securitization participant with respect 

to an asset-backed security and ending 

on the date that is one year after the date 

of the first closing of the sale of such 

asset-backed security, directly or 

indirectly engage in any transaction that 

would involve or result in any material 

conflict of interest between the 

securitization participant and an 

investor in such asset-backed security. 

(2) Material conflict of interest. For 

purposes of this section, engaging in any 

transaction would involve or result in a 

material conflict of interest between a 

securitization participant for an assetbacked security and an investor in such 

asset-backed security if such a 

transaction is a conflicted transaction. 

(3) Conflicted transaction. For 

purposes of this section, a conflicted 

transaction means any of the following 

transactions with respect to which there 

is a substantial likelihood that a 

reasonable investor would consider the 

transaction important to the investor’s 

investment decision, including a 


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decision whether to retain the assetbacked security: 

(i) A short sale of the relevant assetbacked security; 

(ii) The purchase of a credit default 

swap or other credit derivative pursuant 

to which the securitization participant 

would be entitled to receive payments 

upon the occurrence of specified credit 

events in respect of the relevant assetbacked security; or 

(iii) The purchase or sale of any 

financial instrument (other than the 

relevant asset-backed security) or entry 

into a transaction that is substantially 

the economic equivalent of a transaction 

described in paragraph (a)(3)(i) or 

(a)(3)(ii) of this section, other than, for 

the avoidance of doubt, any transaction 

that only hedges general interest rate or 

currency exchange risk. 

(b) Excepted activity. The following 

activities are not prohibited by 

paragraph (a) of this section: 

(1) Risk-mitigating hedging 

activities—(i) Permitted risk-mitigating 

hedging activities. Risk-mitigating 

hedging activities of a securitization 

participant conducted in accordance 

with this paragraph (b)(1) in connection 

with and related to individual or 

aggregated positions, contracts, or other 

holdings of the securitization 

participant, including those arising out 

of its securitization activities, such as 

the origination or acquisition of assets 

that it securitizes. 

(ii) Conditions. Risk-mitigating 

hedging activities are permitted under 

paragraph (b)(1) of this section only if: 

(A) At the inception of the hedging 

activity and at the time of any 

adjustments to the hedging activity, the 

risk-mitigating hedging activity is 

designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks arising in 

connection with and related to 

identified positions, contracts, or other 

holdings of the securitization 

participant, based upon the facts and 

circumstances of the identified 

underlying and hedging positions, 

contracts or other holdings and the risks 

and liquidity thereof; 

(B) The risk-mitigating hedging 

activity is subject, as appropriate, to 

ongoing recalibration by the 

securitization participant to ensure that 

the hedging activity satisfies the 

requirements set out in paragraph (b)(1) 

of this section and does not facilitate or 

create an opportunity to materially 

benefit from a conflicted transaction 

other than through risk-reduction; and 

(C) The securitization participant has 

established, and implements, maintains, 

and enforces, an internal compliance 

program that is reasonably designed to 

ensure the securitization participant’s 

compliance with the requirements set 

out in paragraph (b)(1) of this section, 

including reasonably designed written 

policies and procedures regarding the 

risk-mitigating hedging activities that 

provide for the specific risk and riskmitigating hedging activity to be 

identified, documented, and monitored. 

(2) Liquidity commitments. Purchases 

or sales of the asset-backed security 

made pursuant to, and consistent with, 

commitments of the securitization 

participant to provide liquidity for the 

asset-backed security. 

(3) Bona fide market-making 

activities—(i) Permitted bona fide 

market-making activities. Bona fide 

market-making activities, including 

market-making related hedging, of the 

securitization participant conducted in 

accordance with this paragraph (b)(3) in 

connection with and related to assetbacked securities with respect to which 

the prohibition in paragraph (a)(1) of 

this section applies, the assets 

underlying such asset-backed securities, 

or financial instruments that reference 

such asset-backed securities or 

underlying assets or with respect to 

which the prohibition in paragraph 

(a)(1) of this section otherwise applies, 

except that the initial distribution of an 

asset-backed security is not bona fide 

market-making activity for purposes of 

paragraph (b)(3) of this section. 

(ii) Conditions. Bona fide marketmaking activities are permitted under 

paragraph (b)(3) of this section only if: 

(A) The securitization participant 

routinely stands ready to purchase and 

sell one or more types of the financial 

instruments described in paragraph 

(b)(3)(i) of this section as a part of its 

market-making related activities in such 

financial instruments, and is willing 

and available to quote, purchase and 

sell, or otherwise enter into long and 

short positions in those types of 

financial instruments, in commercially 

reasonable amounts and throughout 

market cycles on a basis appropriate for 

the liquidity, maturity, and depth of the 

market for the relevant types of financial 

instruments; 

(B) The securitization participant’s 

market-making related activities are 

designed not to exceed, on an ongoing 

basis, the reasonably expected near term 

demands of clients, customers, or 

counterparties, taking into account the 

liquidity, maturity, and depth of the 

market for the relevant types of financial 

instruments described in paragraph 

(b)(3)(i) of this section; 

(C) The compensation arrangements 

of persons performing the foregoing 

activity are designed not to reward or 

incentivize conflicted transactions; 

(D) The securitization participant is 

licensed or registered, if required, to 

engage in the activity described in 

paragraph (b)(3) of this section in 

accordance with applicable law and 

self-regulatory organization rules; and 

(E) The securitization participant has 

established, and implements, maintains, 

and enforces, an internal compliance 

program that is reasonably designed to 

ensure the securitization participant’s 

compliance with the requirements of 

paragraph (b)(3) of this section, 

including reasonably designed written 

policies and procedures that 

demonstrate a process for prompt 

mitigation of the risks of its marketmaking positions and holdings. 

(c) Definitions. For purposes of this 

section: 

Asset-backed security has the same 

meaning as in section 3(a)(79) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(79)), and also includes a 

synthetic asset-backed security and a 

hybrid cash and synthetic asset-backed 

security. 

Distribution means: 

(i) An offering of securities, whether 

or not subject to registration under the 

Securities Act of 1933, that is 

distinguished from ordinary trading 

transactions by the presence of special 

selling efforts and selling methods; or 

(ii) An offering of securities made 

pursuant to an effective registration 

statement under the Securities Act of 

1933. 

Initial purchaser means 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 17 CFR 

230.144A or that are otherwise not 

required to be registered because they 

do not involve any public offering. 

Placement agent and underwriter each 

mean a person who has agreed with an 

issuer or selling security holder to: 

(i) Purchase securities from the issuer 

or selling security holder for 

distribution; 

(ii) Engage in a distribution for or on 

behalf of such issuer or selling security 

holder; or 

(iii) Manage or supervise a 

distribution for or on behalf of such 

issuer or selling security holder. 

Securitization participant means: 

(i) An underwriter, placement agent, 

initial purchaser, or sponsor of an assetbacked security; or 

(ii) Any affiliate (as defined in 17 CFR 

230.405) or subsidiary (as defined in 17 

CFR 230.405) of a person described in 

paragraph (i) of this definition if the 

affiliate or subsidiary: 


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(A) Acts in coordination with a 

person described in paragraph (i) of this 

definition; or 

(B) Has access to or receives 

information about the relevant assetbacked security or the asset pool 

underlying or referenced by the relevant 

asset-backed security prior to the first 

closing of the sale of the relevant assetbacked security. 

Sponsor means: 

(i) 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; or 

(ii) 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, 

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. 

(iii) Notwithstanding paragraph (ii) of 

this definition, a person that 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 assetbacked security will not be a sponsor for 

purposes of this rule. 

(iv) Notwithstanding paragraphs (i) 

and (ii) of this definition, the United 

States or an agency of the United States 

will not be a sponsor for purposes of 

this rule 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. 

(d) Anti-evasion. If a securitization 

participant engages in a transaction or a 

series of related transactions that, 

although in technical compliance with 

paragraph (b) of this section, is part of 

a plan or scheme to evade the 

prohibition in paragraph (a)(1) of this 

section, that transaction or series of 

related transactions will be deemed to 

violate paragraph (a)(1) of this section. 

(e) Safe harbor for certain foreign 

transactions. The prohibition in 

paragraph (a)(1) of this section shall not 

apply to any asset-backed security for 

which all of the following conditions 

are met: 

(1) The asset-backed security (as 

defined in this section) is not issued by 

a U.S. person (as defined in 17 CFR 

230.902(k)); and 

(2) The offer and sale of the assetbacked security (as defined by this 

section) is in compliance with 17 CFR 

230.901 through 905 (Regulation S). 

By the Commission. 

Dated: November 27, 2023. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2023–26430 Filed 12–6–23; 8:45 am] 

BILLING CODE 8011–01–P 


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