[Federal Register Volume 88, Number 234 (Thursday, December 7, 2023)]
[Rules and Regulations]
[Pages 85396-85466]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-26430]



[[Page 85395]]

Vol. 88

Thursday,

No. 234

December 7, 2023

Part III





Securities and Exchange Commission





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17 CFR Part 230





Prohibition Against Conflicts of Interest in Certain Securitizations; 
Final Rule

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

[[Page 85396]]


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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.

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

DATES: Effective date: This final rule is effective on February 5, 
2024.
    Compliance date: See Section II.I.

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

SUPPLEMENTARY INFORMATION: We are adopting the following rule under 15 
U.S.C. 77a et seq. (``Securities Act''):

------------------------------------------------------------------------
          Commission reference                CFR citation  (17 CFR)
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General Rules and Regulations,
 Securities Act of 1933:
    Rule 192............................  Sec.   230.192.
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Table of Contents

I. Introduction
    A. Background
    B. Summary of the Proposed Rule
    C. Summary of the Final Rule
II. Discussion of Rule 192
    A. Scope: Asset-Backed Securities
    1. Proposed Definition of Asset-Backed Security
    2. Comments Received
    3. Final Rule
    B. Scope: Securitization Participants
    1. Proposed Scope of Securitization Participants
    2. Comments Received
    3. Final Rule
    C. Prohibition Timeframe
    1. Proposed Prohibition Timeframe
    2. Comments Received
    3. Final Rule
    D. Prohibition
    1. Proposed Prohibition
    2. Comments Received
    3. Final Rule
    E. Exception for Risk-Mitigating Hedging Activities
    1. Proposed Exception
    2. Comments Received
    3. Final Rule
    F. Exception for Liquidity Commitments
    1. Proposed Approach
    2. Comments Received
    3. Final Rule
    G. Exception for Bona Fide Market-Making Activities
    1. Proposed Approach
    2. Comments Received
    3. Final Rule
    H. Anti-Evasion
    1. Proposed Rule
    2. Comments Received
    3. Final Rule
    I. Compliance Date
III. Other Matters
IV. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. Overview of the Securitization Markets
    2. Affected Parties
    3. Current Relevant Statutory Provisions, Regulations, and 
Practices
    C. Broad Economic Considerations
    D. Costs and Benefits
    1. Benefits
    2. Costs
    E. Anticipated Effects on Efficiency, Competition, and Capital 
Formation
    1. Competition
    2. Efficiency
    3. Capital Formation
    F. Reasonable Alternatives
    1. Changes to Scope of Definitions
    2. Information Barriers
    3. Changes to Exclusions
    4. Conditions of the Exceptions
V. Paperwork Reduction Act
    A. Summary of the Collections of Information
    B. Summary of Comment Letters
    C. Effects of the Final Rule on the Collections of Information
    D. Aggregate Burden and Cost Estimates for the Final Rule
VI. Final Regulatory Flexibility Analysis
    A. Need for, and Objectives of, the Final Rule
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Rule
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    E. Agency Action To Minimize Effect on Small Entities
Statutory Authority

I. Introduction

A. Background

    On January, 25, 2023, the Commission proposed new Rule 192 to 
implement the prohibition in Securities Act Section 27B \1\ (``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\
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    \1\ 15 U.S.C. 77z-2a.
    \2\ Prohibition Against Conflicts of Interest in Certain 
Securitizations, Release No. 33-11151 (Jan. 25, 2023) [88 FR 9678 
(Feb. 14, 2023)] (``Proposing Release'' or ``proposed rule''). In 
Sept. 2011, the Commission proposed a rule designed to implement 
Section 27B, but no further action was taken on that proposal. See 
Prohibition against Conflicts of Interest in Certain 
Securitizations, Release No. 34-65355 (Sept. 19, 2011) [76 FR 60320 
(Sept. 28, 2011)].
    \3\ Sec. 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).
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B. Summary of the Proposed Rule

    Proposed Rule 192 would implement the prohibition in Securities Act 
Section 27B(a) and, consistent with Section 27B(c), provide exceptions 
from the prohibition for certain risk-mitigating hedging activities, 
liquidity commitments, and bona fide market-making activities.\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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    \7\ See Proposing Release Section II.
    \8\ See Proposing Release Section I.

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[[Page 85397]]

    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 statutorily-mandated 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 ``anti-evasion'' 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 
market-making activities.\21\ As we discuss in greater detail below, we 
have made certain revisions in response to the comments received.
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    \9\ Comment letters received by the Commission are available on 
our website at https://www.sec.gov/comments/s7-01-23/s70123.htm. The 
comment period for the Proposing Release was open for 60 days from 
issuance and publication on SEC.gov and ended on Mar. 27, 2023. 
Several commenters said that the comment period was insufficient. 
See, e.g., letters from American Investment Council dated Mar. 27, 
2023 (``AIC''); Investment Company Institute dated Mar. 27, 2023 
(``ICI''); National Association of Bond Lawyers et al. dated Mar. 
27, 2023 (``NABL et al.''); U.S. Representatives Ann Wagner and Bill 
Huizenga dated Mar. 24, 2023 (``Representatives Wagner and 
Huizenga''); U.S. Senator John Kennedy dated Mar. 30, 2023 
(``Senator Kennedy''). In stating that the comment period was 
insufficient, some commenters requested an extension (see, e.g., 
letters from Alternative Investment Management Association and 
Alternative Credit Council dated Mar. 27, 2023 (``AIMA/ACC''); 
Association for Financial Markets in Europe dated Mar. 27, 2023 
(``AFME''); American Property Casualty Insurance Association et al. 
dated Feb. 16, 2023 (``APCIA et al.''); Loan Syndications and 
Trading Association dated Mar. 1, 2023 (``LSTA I'')) and others 
indicated that they would submit multiple comment letters, some of 
which were received after the close of the comment period (see 
letters from Loan Syndications and Trading Association dated Mar. 
27, 2023 (``LSTA II''); Loan Syndications and Trading Association 
dated May 2, 2023 (``LSTA III''); Loan Syndications and Trading 
Association dated Oct. 30, 2023 (``LSTA IV''); Managed Funds 
Association dated May 16, 2023 (``MFA II''); Structured Finance 
Association dated July 13, 2023 (``SFA II''); Securities Industry 
and Financial Markets Association, the Asset Management Group of 
SIFMA, and the Bank Policy Institute dated June 27, 2023 (``SIFMA 
II''). Some commenters requested that the Commission re-propose the 
rule after reviewing the comment letters. See letters from American 
Bar Association dated Apr. 5, 2023 (``ABA''); Andrew Davidson Co. 
dated Mar. 27, 2023 (``Andrew Davidson''); LSTA III; Securities 
Industry and Financial Markets Association, the Asset Management 
Group of SIFMA, and the Bank Policy Institute dated Mar. 27, 2023 
(``SIFMA I''). Also, after the close of the comment period, one 
commenter submitted a letter referencing several of the Commission's 
proposals and stating that the number of outstanding proposals, 
together with insufficient time to respond, operated to deprive the 
public of the ability to meaningfully comment on all of the 
proposals. See letter from Managed Funds Association dated July 24, 
2023 (``MFA III''). We have considered comments received since the 
issuance of the proposed rule, including those received after Mar. 
27, 2023, and do not believe an extension of the comment period or a 
re-proposal of the rule is necessary.
    \10\ See, e.g., letters from ABA; Americans for Financial Reform 
Education Fund dated June 7, 2023 (``AFR''); Better Markets dated 
Mar. 27, 2023 (``Better Markets''); Structured Finance Association 
dated Mar. 27, 2023 (``SFA I'').
    \11\ See, e.g., letters from ABA, CRE Finance Council dated Mar. 
27, 2023 (``CREFC I''); ICI; Arch Capital Group Ltd., Enact Holdings 
Inc., Essent Group Ltd., MGIC Investment Corporation, NMI Holdings, 
Inc., and Radian Group Inc. dated Mar. 27, 2023 (``PMI Industry 
I''); SFA I; SIFMA I.
    \12\ See, e.g., letters from ABA; SIFMA I. These commenters 
cited the following as examples of the changes in securitization 
markets in that time period: the adoption and implementation of 17 
CFR 246 (``Regulation RR''), 17 CFR 255 (``the Volcker Rule''), 
rules regulating swaps and security-based swaps, and changes in the 
regulation of nationally recognized statistical rating organizations 
(``NRSROs'') to enhance transparency and address conflicts of 
interest in connection with the issuance of ABS.
    \13\ See, e.g., Wall Street and The Financial Crisis: Anatomy of 
a Financial Collapse, Majority and Minority Staff Report, Permanent 
Subcommittee on Investigations, United States Senate (Apr. 13, 2011) 
(``Senate Financial Crisis Report'').
    \14\ See Section II.A.
    \15\ See Section II.B.
    \16\ See Section II.C.
    \17\ See Section II.D.
    \18\ See Section II.D.3.d.
    \19\ See Section II.H.
    \20\ See Section II.A.3.c.
    \21\ See Sections II.E. through II.G.
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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.
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    \22\ The definition of ``securitization participant'' for 
purposes of new Rule 192 includes a sponsor, underwriter, placement 
agent, initial purchaser, and certain affiliates and subsidiaries of 
such entities, as discussed in detail in Section II.B.
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    To achieve these objectives, Rule 192:
    <bullet> 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

[[Page 85398]]

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\
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    \23\ See Section II.C.
    \24\ See Section II.D.
    \25\ Id.
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    <bullet> 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\
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    \26\ Rule 192(c) also defines ``distribution'' as used in the 
definition for ``underwriter'' and ``placement agent.'' See Section 
II.B.
    \27\ As discussed in greater detail below, this exclusion 
includes accountants, attorneys, and credit rating agencies with 
respect to the creation and sale of an ABS and the activities 
customarily performed by trustees, custodians, paying agents, 
calculation agents, and other contractual service providers, 
including servicers. See Section II.B.3.b.iii.
    \28\ As discussed in greater detail below, we are not adopting 
proposed paragraph (ii)(B) of the ``sponsor'' definition, which 
would have captured any person that directs or causes the direction 
of the structure, design, or assembly of an asset-backed security or 
the composition of the pool of assets underlying the asset-backed 
security. See Section II.B.3.b.ii. We are also not adopting the 
proposed exclusion from the definition of ``sponsor'' for the 
Federal National Mortgage Association (``Fannie Mae'') or the 
Federal Home Loan Mortgage Corporation (``Freddie Mac'' and, 
together with Fannie Mae, the ``Enterprises'') while operating under 
the conservatorship or receivership of the Federal Housing Finance 
Agency (``FHFA'') with capital support from the United States with 
respect to any ABS that is fully insured or fully guaranteed as to 
the timely payment of principal and interest by such entity. See 
Section II.B.3.b.iv.
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    <bullet> 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\
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    \29\ 15 U.S.C. 78a et seq.
    \30\ For purposes of this rule, we use the term ``cash ABS'' to 
refer to ABS where the underlying pool consists of one or more 
financial assets. We use the term ``hybrid cash and synthetic ABS'' 
to refer to ABS where the underlying pool consists of one or more 
financial assets as well as synthetic exposure to other assets. See 
Section II.A.
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    <bullet> 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\
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    \31\ See Sections II.E. through II.G.
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    <bullet> Addresses evasion of the exceptions. Under 17 CFR 
230.192(d) (``Rule 192(d)''), if a securitization participant engages 
in a transaction or series of related transactions that, although in 
technical compliance with the exception for risk-mitigating hedging 
activities, liquidity commitments, or bona fide market-making 
activities, is part of a plan or scheme to evade the prohibition in 
Rule 192(a)(1), that transaction or series of related transactions will 
be deemed to violate the prohibition; \32\ and
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    \32\ See Section II.H.
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    <bullet> 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\
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    \33\ See Section II.A.3.c.
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    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.
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    \34\ See, e.g., Section 17(a) of the Securities Act of 1933 (15 
U.S.C. 77q), Section 10(b) of the Securities Exchange Act of 1934 
(15 U.S.C. 78j) and 17 CFR 240.10b-5.
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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

[[Page 85399]]

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\
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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 . . .''
    \36\ See Proposing Release Section II.A.
    \37\ See Proposing Release Section II.A.
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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\
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    \38\ See, e.g., letters from ABA; AFR; Better Markets; ICI.
    \39\ See, e.g., letters from ABA (seeking, e.g., clarification 
with respect to reliance on existing guidance regarding a 
transaction's status as an asset-backed security); NABL et al. 
(indicating confusion regarding whether certain municipal securities 
are Exchange Act ABS); PMI Industry I (seeking clarification that 
mortgage insurance-linked notes are not synthetic ABS).
    \40\ See, e.g., letters from AFME (urging that the final rule 
include a safe harbor for ABS transactions that are not offered or 
sold to U.S. investors as part of the primary issuance); National 
Association of Health and Educational Facilities Finance Authorities 
dated Mar. 27, 2023 (``NAHEFFA'') (requesting that single-asset 
conduit bonds be excluded from the definition of asset-backed 
security); NABL et al. (requesting that municipal securities be 
excluded from the definition of asset-backed security); SIFMA I 
(requesting that the Commission exclude corporate debt, insurance 
products, and Section 4(a)(2) private placement transactions from 
the definition of asset-backed security).
    \41\ See, e.g., letters from ABA; ICI; SIFMA I.
    \42\ See, e.g., letters from ABA; ICI. For example, one 
commenter expressed the view that common market understanding is 
that investment funds registered under the Investment Company Act of 
1940 do not issue ABS and that their securities are not considered 
Exchange Act ABS. See letter from ICI. Whether such securities are 
Exchange Act ABS will depend on the characteristics and structure of 
the security.
    \43\ See, e.g., letters from NAHEFFA; NABL et al.
    \44\ See letters from ABA; AFME; AIMA/ACC; ICI; SFA I; SFA II; 
SIFMA I; SIFMA II.
    \45\ See letter from AIMA/ACC.
    \46\ See, e.g., letters from ABA; AFME; AIC; SFA I; SFA II; 
SIFMA I; SFA II.
    \47\ See letters from AFR; Better Markets.
    \48\ See, e.g., letters from AIC; American Securities 
Association dated Mar. 23, 2023 (``ASA'').
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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.
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    \49\ 17 CFR 230.192(c).
    \50\ 15 U.S.C. 77z-2a(a).
    \51\ See also Sections II.B.3. and II.D. for additional 
discussions about why the final rule does not include a knowledge- 
or intent-based standard for securitization participants or 
conflicted transactions.
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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 ``self-liquidating 
financial asset.'' \53\
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    \52\ See Section III.A.2. of Asset-Backed Securities, Release 
No. 33-8518 (Dec. 22, 2004) [70 FR 1506 (Jan. 7, 2005)] (``2004 
Regulation AB Adopting Release'').
    \53\ 17 U.S.C. 78c(a)(79).
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    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

[[Page 85400]]

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\
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    \54\ As discussed in greater detail below, one commenter stated 
that it was unclear whether certain municipal securities meet the 
definition of Exchange Act ABS. We also note that municipal market 
participants are already required to analyze whether such a security 
meets the Exchange Act ABS definition and whether other Commission 
rules implementing various provisions of the Dodd-Frank Act that use 
the Exchange Act ABS definition, such as Regulation RR, 17 CFR 
240.15Ga-1(a) (``Exchange Act Rule 15Ga-1''), and 17 CFR 240.17g-
7(a)(1)(ii)(N) (``Exchange Act Rule 17g-7'') are applicable. See 
Proposing Release Section II.A. See also Section IV.A.D.6 of Credit 
Risk Retention, Release No. 34-70277 (Aug. 28, 2013) [78 FR 57928 
(Sept. 20, 2013)] (``RR Proposing Release'') (explaining why an 
exemption from risk retention for securitizations of tax lien-backed 
securities sponsored by municipal entities was not proposed) and 
Credit Risk Retention, Release No. 34-73407 (Oct. 22, 2014) [79 FR 
77602 (Dec. 24, 2014)] (``RR Adopting Release'') at 77661 (adopting 
certain provisions that apply to municipal tender option bonds) and 
77680 (explaining why separate loan underwriting criteria for single 
borrower or single credit commercial mortgage transactions were not 
adopted). Because participants in this market are already required 
to consider whether a municipal security meets the definition of 
Exchange Act ABS to determine whether such offering must comply with 
other rules and regulations adopted under the Securities Act and 
Exchange Act, we believe that concerns relating to burdens 
associated with determining whether or not a municipal security is 
an Exchange Act ABS for purposes of compliance with Rule 192 will be 
mitigated.
    \55\ See, e.g., letters from ASA; NABL et al.; NAHEFFA; SIFMA I; 
Wulff, Hansen & Co. dated Apr. 14, 2023 (``Wulff Hansen''). See also 
Section II.B. for a discussion of comments received related to 
municipal issuers and the definition of ``sponsor'' in the final 
rule.
    \56\ As described by one commenter, a single-asset conduit bond 
is a tax-exempt bond issued by state and local governments for the 
benefit of tax-exempt organizations (as defined under Section 
501(c)(3) of the Internal Revenue Code). The proceeds of the bond 
issuance are used to make a single loan to a single 501(c)(3) 
borrower, such as a hospital, higher education institution, provider 
of housing for elderly or low-income populations, museum, or other 
non-profit entity. The government issuer assigns the loan agreement 
to the bond trustee, which receives the borrower's loan payments 
(which mirror the government issuer's payment obligations on the 
bond) and makes those payments to the bondholders. See letter from 
NAHEFFA.
    \57\ See, e.g., letters from ASA; NABL et al.; NAHEFFA; letter 
from National Association of Municipal Advisors dated Mar. 31, 2023 
(``NAMA''); SIFMA I.
    \58\ See letter from ASA.
    \59\ See Section II.D.
    \60\ See Section II.B.3.b. for a discussion of the definition of 
a ``securitization participant'' with respect to municipal 
securitizations.
---------------------------------------------------------------------------

    With respect to single-asset conduit bonds, one commenter stated 
that the market (both municipal and non-municipal) does not consider a 
conduit bond backed by a single loan to be an asset-backed 
security.\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 Dodd-
Frank Act, specifically states that the prohibition shall apply to ABS 
as defined in Section 3 of the Exchange Act, and the definition in 
Section 3 was added by Section 941 of the Dodd-Frank Act. Defining 
``asset-backed security'' for purposes of Rule 192 by referencing 
Exchange Act ABS, therefore, is consistent with Section 27B. As the 
Commission has previously stated, an ABS that is backed by a single 
obligation would meet the definition of Exchange Act ABS.\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, self-liquidating asset, it 
would provide the opportunity for securitization participants to 
structure offerings as a series of transactions that would serve to 
evade the rule. For these reasons, we decline to include such an 
exemption from the definition of ``asset-backed security.''
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    \61\ See letter from NAHEFFA.
    \62\ The definition of ``asset-backed security'' in Regulation 
AB Item 1101(c) (``Regulation AB ABS''), which was adopted for the 
limited purpose of identifying an ABS that is eligible for the 
specialized registration and reporting regime under Regulation AB, 
defines an ``asset-backed security,'' in relevant part, as a 
security that is primarily serviced by the cash flows of a 
``discrete pool of receivables or other financial assets. . .'' See 
17 CFR 229.1101(c). Additionally, the word ``pool'' in the 
Regulation AB ABS definition does not require that the ABS be 
collateralized by more than one asset. Instead, it is part of the 
phrase ``discrete pool'' in the definition, which indicates the 
general absence of active pool management, and emphasizes the self-
liquidating nature of pool assets. See, e.g., Section III.A.2. of 
2004 Regulation AB Adopting Release.
    \63\ See letter from NAHEFFA.
    \64\ Id.
    \65\ See, e.g., Section V.B.2. of the RR Adopting Release 
(explaining why separate loan underwriting criteria for single 
borrower or single credit commercial mortgage transactions were not 
adopted) and Section IV.D.6. of RR Proposing Release (explaining why 
an exemption from risk retention for securitizations of tax lien-
backed securities sponsored by municipal entities was not proposed). 
See also Proposing Release Section II.A., n. 31 (stating that an ABS 
that is backed by a single asset or one or more obligations of a 
single borrower (often referred to as ``single asset, single 
borrower'' or ``SASB'' transactions) meets the definition of an 
Exchange Act ABS).
    \66\ Analyzing whether a municipal single-asset conduit bond is 
an ABS entails a consideration of the nature of the activities of 
the issuing entity. For example, if the issuing entity is authorized 
to extend credit or make loans and it engages in activities in 
addition to holding or owning the underlying single obligation 
supporting the bonds, or in addition to other activities reasonably 
incidental to holding or owning the underlying obligation, the 
securities it issued will not be an ABS.
---------------------------------------------------------------------------

    One commenter suggested that we exclude direct private placement 
transactions exempt from registration under Section 4(a)(2) of the 
Securities Act,\67\ stating that the ABS purchasers in such 
transactions are highly sophisticated investors that participate 
directly in nearly all phases of the

[[Page 85401]]

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.
---------------------------------------------------------------------------

    \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.
    \68\ See letter from SIFMA I.
    \69\ Id.
    \70\ See Proposing Release Section II.A. Moreover, even if an 
investor were aware of a potential conflict of interest, Rule 192 
does not include an exception based on disclosure of material 
conflicts of interest because such an exception would be 
inconsistent with the prohibition in Section 27B. See Section II.D. 
for a discussion of comments received related to the use of 
disclosure to mitigate conflicts of interest.
    \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.
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    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\
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    \72\ See, e.g., letters from ABA; Representative Nickel et al.; 
SFA I; SIFMA I.
    \73\ See also note 80, and the accompanying text for a 
discussion regarding funding agreement-backed notes.
    \74\ See letters from AFME; ABA; SIFMA I.
    \75\ 15 U.S.C. 77c.
    \76\ See, e.g., letter from ABA.
    \77\ For additional discussion regarding mortgage insurance-
linked notes, and why the existing structures do not satisfy the 
criteria to be synthetic ABS or ``conflicted transactions,'' see 
Sections II.A.3.b. and II.D.
    \78\ See, e.g., letter from SIFMA I.
    \79\ See 17 CFR 230.192(c).
---------------------------------------------------------------------------

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

    \80\ See letter from ABA. This commenter provided the example of 
an existing staff position indicating that funding agreements 
between an insurance company and a special purpose entity, where the 
insurance company is directly liable for the funding agreement that 
backs the notes, is not an Exchange Act ABS. See Regulation AB 
Compliance & Disclosure Interpretation 301.03 (updated Sept. 6, 
2016), available at https://www.sec.gov/corpfin/divisionscorpfinguidanceregulation-ab-interpshtm. These 
interpretations, and any other staff statements referenced in this 
release, represent the views of SEC staff. They are not rules, 
regulations, or statements of the Commission. The Commission has 
neither approved nor disapproved their content. Staff statements 
have no legal force or effect: they do not alter or amend applicable 
law, and they create no new or additional obligations for any 
person.
---------------------------------------------------------------------------

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

    \81\ See Proposing Release Section II.A. and Section III.A.2. of 
the 2004 Regulation AB Adopting Release.
    \82\ See, e.g., letters from ABA; AIMA/ACC; AFME; SFA I; SFA II; 
SIFMA I; SIFMA II.
    \83\ See letter from AIMA/ACC.
    \84\ See letters from ABA; AFME; SFA II; SIFMA I; SIFMA II.
    \85\ See, e.g., letters from ABA; SFA II; SIFMA II.
---------------------------------------------------------------------------

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

[[Page 85402]]

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 self-liquidating 
financial assets.\87\
---------------------------------------------------------------------------

    \86\ See Proposing Release Section II.A. and Section III.A.2. of 
the 2004 Regulation AB Adopting Release.
    \87\ Id.
---------------------------------------------------------------------------

    The Commission also received comments requesting clarification 
about whether the rule applies to synthetic transactions that have not 
traditionally been considered synthetic securitizations. Some 
commenters asked that we clarify that mortgage insurance-linked notes 
are not synthetic asset-backed securities under Rule 192(c) and that 
the reinsurance agreements embedded in the MILN transactions are not 
``conflicted transactions'' under Rule 192(a)(3).\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\
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    \88\ See, e.g., letters from ABA; letter from Housing Policy 
Council dated Mar. 27, 2023 (``HPC''); Mortgage Bankers Association 
dated Mar. 27, 2023 (``MBA''); PMI Industry I; Arch Capital Group 
Ltd., Enact Holdings Inc., Essent Group Ltd., MGIC Investment 
Corporation, NMI Holdings, Inc., and Radian Group Inc. dated Oct. 
20, 2023 (``PMI Industry II'') (suggesting rule text to include an 
exclusion in the final rule for activities related to the purchase 
or sale of MILNs); U.S. Representatives Blaine Luetkemeyer and 
Emmanuel Cleaver dated May 23, 2023 (``Representatives Luetkemeyer 
and Cleaver''); SFA I; SIFMA I. See also Section II.D. for a 
discussion of the types of transactions that would be ``conflicted 
transactions'' under the final rule.
    \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.
    \90\ See Section II.D. for a discussion of ``conflicted 
transactions'' under the final rule.
---------------------------------------------------------------------------

    Some commenters also requested confirmation that synthetic ABS for 
purposes of Rule 192 does not include equity-linked or commodity-linked 
products.\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 self-liquidating 
financial assets. In contrast, as discussed above, a corporate debt 
obligation is issued by, and offers investors recourse to, an operating 
entity that is not a special purpose entity. Therefore, a corporate 
debt obligation is not a synthetic ABS for purposes of Rule 192. 
Similarly, a security-based swap is also not a synthetic ABS for 
purposes of Rule 192 because it is a financial contract between two 
counterparties without issuance of a security from a special purpose 
entity.\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.
---------------------------------------------------------------------------

    \91\ See, e.g., letters from SFA II; SIFMA I; SIFMA II.
    \92\ See, e.g., letters from ABA; SFA II; SIFMA I; SIFMA II.
    \93\ See also Further Definition of ``Swap,'' ``Security-Based 
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping, Release No. 33-9338 
(July 18, 2012) [77 FR 48208 (Aug. 13, 2012)] (establishing that a 
credit default swap or total-return swap on a single loan or narrow-
based index is a security-based swap).
    \94\ For example, such transactions generally should be analyzed 
to determine whether the assets that are transferred to or otherwise 
part of the asset pool are self-liquidating. Additionally, we note 
that a synthetic transaction could be effectuated through the use of 
derivates or swaps but could also use some other feature or 
structure that replicates the terms of a derivate or swap.
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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 cross-border 
scope is co-extensive with the cross-border scope of Securities Act 
Section 27B(a), which this rule implements pursuant to the mandate in 
Section 27B(b). It is therefore appropriate to consider Section 
27B(a)'s cross-border scope when determining whether Rule 192 applies 
in a cross-border context.
---------------------------------------------------------------------------

    \95\ See, e.g., letters from ABA; AFME; AIC; SFA I; SFA II; 
SIFMA I; SIFMA II.
---------------------------------------------------------------------------

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

[[Page 85403]]

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\
---------------------------------------------------------------------------

    \96\ See, e.g., Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, Release No. 34-74244 (Feb. 11, 
2015), [80 FR 14563, 14649 (Mar. 19, 2015)] (``2015 Regulation SBSR 
Adopting Release'') (discussing the territorial approach to the 
cross-border application of Title VII requirements for regulatory 
reporting and public dissemination of security-based swap 
transactions).
    \97\ Morrison v. National Australia Bank, Ltd. et al., 561 U.S. 
247 (2010).
    \98\ See 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'').
    \99\ Securitization participants are advised that even if there 
is no domestic sale to an investor that would trigger Rule 192's 
regulatory prohibition, the Commission still retains broad cross-
border antifraud authority that will apply when securities 
participants engage in fraudulent or manipulative conduct that has a 
sufficient nexus to the United States. Specifically, the 
Commission's antifraud authorities will apply if a securities 
participant engages in securities fraud that involves: (1) conduct 
within the United States that constitutes significant steps in 
furtherance of the fraud, even if the securities transaction occurs 
outside the United States and involves only foreign investors; or 
(2) conduct occurring entirely outside the United States that has a 
foreseeable substantial effect within the United States. See Section 
27(b) of the Exchange Act (15 U.S.C. 78aa). See also 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-and-effects test is 
met'').
    \100\ See 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)).
    \101\ See, e.g., Section I.C.
---------------------------------------------------------------------------

    Having provided the foregoing general guidance regarding Rule 192's 
cross-border scope, we turn to address those comments that raised 
cross-border considerations. Some commenters expressed concerns that 
the Commission did not address cross-border 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, cross-border applicability of Rule 192 could result in 
those transactions being impermissible, which could have undesirable 
consequences for European markets.\106\
---------------------------------------------------------------------------

    \102\ See, e.g., letters from AFME, AIC; SFA I.
    \103\ See, 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.
    \104\ See letter from AFME.
    \105\ Id.
    \106\ Id.
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    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 RR \108\ 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\
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    \107\ See, 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.
    \108\ See 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.
    \110\ See, e.g., letters from SFA II; SIFMA II.
    \111\ See 17 CFR 240.15Ga-2(e) (``Rule 15Ga-2(e)'') and 17 CFR 
230.901 and 902(e).
---------------------------------------------------------------------------

    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 cross-border 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 asset-backed 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.
---------------------------------------------------------------------------

    \112\ See Morrison v. Nat'l Austl. Bank Ltd., 561 U.S. 247 
(2010).
    \113\ Rule 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.

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[[Page 85404]]

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\
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    \116\ See 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).
    \118\ See Proposing Release Section II.B.
    \119\ See Proposing Release Section II.B.
    \120\ See Proposing Release Section II.B.2.b.
    \121\ See Proposing Release Section II.B.2.c.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \122\ See, 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.''
    \123\ See, e.g., letters from AFR; Better Markets (expressing 
support for the definition of ``sponsor'' as proposed).
    \124\ See, 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.
    \125\ See, 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.
    \126\ See, e.g., letters from ABA; AFME; CREFC I; International 
Association of Credit Portfolio Managers dated Mar. 27, 2023 
(``IACPM''); MBA; SFA I.
    \127\ See, 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.
    \128\ See, 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.
    \129\ See, e.g., letters from CREFC I; LSTA III; SFA I; SIFMA I.
    \130\ See, 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'').
    \131\ See letter from HPC.
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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 risk-
mitigating 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

[[Page 85405]]

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.
---------------------------------------------------------------------------

    \132\ See Section II.B.3.b. for a detailed discussion of the 
comments received and the revised definition.
    \133\ See Section II.B.3.c.
---------------------------------------------------------------------------

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:
    <bullet> Purchase securities from the issuer or selling security 
holder for distribution;
    <bullet> Engage in a distribution for or on behalf of such issuer 
or selling security holder; or
    <bullet> Manage or supervise a distribution for or on behalf of 
such issuer or selling security holder.\134\
---------------------------------------------------------------------------

    \134\ 17 CFR 230.192(c).
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \135\ The 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.
    \136\ The Commission did not receive any comments addressing the 
proposed definition of ``distribution.''
---------------------------------------------------------------------------

    <bullet> 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
    <bullet> An offering of securities made pursuant to an effective 
registration statement under the Securities Act.\137\
---------------------------------------------------------------------------

    \137\ 17 CFR 230.192(c). As the Commission noted in the 
Proposing Release, activities generally indicative of special 
selling efforts and methods include, but are not limited to, greater 
than normal sales compensation arrangements, delivering a sales 
document (e.g., a prospectus or offering memorandum), and conducting 
road shows. A primary offering of ABS pursuant to an effective 
Securities Act registration statement would also be captured because 
such an offering is a primary issuance by an issuer immediately 
following the creation of the ABS, which is clearly distinguishable 
from an ordinary secondary trading transaction. See Proposing 
Release at 9683.
---------------------------------------------------------------------------

    The definition of ``initial purchaser'' is similarly focused on a 
person's function in a securities offering and includes, as proposed, 
``a person who has agreed with an issuer to purchase a security from 
the issuer for resale to other purchasers in transactions that are not 
required to be registered under the Securities Act in reliance upon 
Rule 144A or that are otherwise not required to be registered because 
they do not involve any public offering.'' \138\
---------------------------------------------------------------------------

    \138\ The definition of ``initial purchaser'' in Rule 192(c) has 
no impact on the application of Rule 144A (17 CFR 230.144A).
---------------------------------------------------------------------------

    Some commenters requested that we limit the definition of 
``underwriter,'' ``placement agent,'' and ``initial purchaser'' to 
capture only those persons who are directly involved in structuring the 
relevant ABS or selecting the assets underlying the ABS, stating as an 
example that underwriting syndicate co-managers generally rely on lead 
managers and have little direct involvement with the aforementioned 
securitization activities.\139\ While it may be the case that 
underwriters, placement agents, or initial purchasers are involved in 
the issuance of an ABS in varying degrees, the prohibition in Rule 
192(a)(1) only applies to such persons if they have entered into an 
agreement \140\ with an issuer (or, with respect to underwriters and 
placement agents, a selling security holder) because those persons 
would likely be privy to certain information about the ABS or 
underlying assets. Conversely, underwriters, placement agents, and 
initial purchasers with no such agreement with the issuer or selling 
security holder (``selling group members''), as applicable, may help 
facilitate a successful distribution of securities to a wider variety 
of purchasers, but these selling group members do not have a direct 
relationship with the issuer or selling security holder and, thus, are 
unlikely to have the same ability to influence the design of the 
relevant ABS. Therefore, selling group members who do not have such an 
agreement are not underwriters, placement agents, or initial purchasers 
as defined in Rule 192(c).\141\ Moreover, such a limitation could have 
the unintended consequence of creating uncertainty about whether an 
underwriter, placement agent, or initial purchaser is subject to the 
rule's prohibition because it would require a determination of whether 
such person is ``directly involved'' in structuring an ABS or selecting 
the underlying assets. For purposes of Rule 192, therefore, it is 
sufficient that a person who otherwise meets the definitions of 
``underwriter,'' ``placement agent,'' or ``initial purchaser'' in Rule 
192(c) has an agreement with the issuer or selling security holder, as 
applicable, to perform the enumerated functions because, as stated 
above, such persons would likely be privy to information about the ABS 
or underlying assets, giving them the opportunity to influence the 
structure of the relevant ABS and engage in a bet against it. No 
factual determination of whether such person actually had ``direct 
involvement'' in the structure or design of the ABS is required.
---------------------------------------------------------------------------

    \139\ See letters from SFA I; SIFMA I. Another commenter stated 
that underwriters and other participants should be defined to 
include persons who make a ``material contribution'' to the economic 
structure, composition, management, or sale of an ABS. See letter 
from AFR.
    \140\ See Section II.C.3. for a discussion of what constitutes 
an ``agreement'' for purposes of Rule 192(a)(1).
    \141\ See also Proposing Release Section II.B.1.
---------------------------------------------------------------------------

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

[[Page 85406]]

underlying or referenced by the ABS.\142\ Fourth, we are deleting the 
proposed exclusion from the ``sponsor'' definition for the Enterprises 
while they are operating under the conservatorship or receivership of 
FHFA with capital support from the United States, which we discuss in 
Section II.B.3.b.iv., below.\143\ Accordingly, for purposes of Rule 
192, ``sponsor'' means:
---------------------------------------------------------------------------

    \142\ The inclusion of the language ``or referenced by the 
asset-backed security'' in the definition of sponsor and other 
aspects of final Rule 192 is designed to address activities related 
to the reference pool for a synthetic ABS.
    \143\ As discussed below, final Rule 192 includes the proposed 
exclusion from definition of ``sponsor'' for the United States or 
any agency of the United States with respect to its fully insured or 
fully guaranteed ABS.
---------------------------------------------------------------------------

    <bullet> 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
    <bullet> 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'')
    <bullet> But not including:
    [cir] A person who performs only administrative, legal, due 
diligence, custodial, or ministerial acts related to the structure, 
design, assembly, or ongoing administration of an asset-backed security 
or the composition of the pool of assets underlying or referenced by 
the asset-backed security (the ``Service Provider Exclusion''); or
    [cir] 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\
---------------------------------------------------------------------------

    \144\ See Sections II.B.2. and II.B.3.b.iv. for a discussion of 
comments received and the final U.S. Government Exclusion.
---------------------------------------------------------------------------

    As with the definitions discussed above, we are adopting a 
functional definition of ``sponsor'' that will apply regardless of the 
person's title and that instead focuses on the person's activities with 
respect to the ABS transaction. Accordingly, a person who organizes and 
initiates an ABS transaction, or who has a contractual right to direct 
or cause the direction of the structure, design, or assembly of an ABS 
or the composition of the pool of assets underlying or referenced by 
the ABS whether before or after the initial issuance of the relevant 
ABS, is a sponsor under Rule 192 (unless one of the exceptions 
described below applies). For example, an ``issuer'' of a municipal 
securitization will be a ``sponsor'' if its activities meet the 
definition. This definition also includes, for example, a portfolio 
selection agent for a collateralized debt obligation (``CDO'') 
transaction with a contractual right to direct or cause the direction 
of the composition of the pool of assets on behalf of the CDO or a 
collateral manager for a collateralized loan obligation (``CLO'') 
transaction with the contractual right to direct or cause the direction 
of asset purchases or sales on behalf of the CLO.\145\
---------------------------------------------------------------------------

    \145\ See also Sections II.A.2. and II.A.3. for a discussion of 
the comments received and the final definition of ``asset-backed 
security'' as it applies to municipal securitizations.
---------------------------------------------------------------------------

i. Regulation AB-Based Sponsor
    We are adopting paragraph (i) of the definition of ``sponsor'' as 
proposed. For purposes of Rule 192, therefore, a sponsor includes, but 
is not limited to, any person who organizes and initiates an asset-
backed securities transaction by selling or transferring assets, either 
directly or indirectly, including through an affiliate, to the entity 
that issues the asset-backed security.\146\ This portion of the 
definition is derived from the definition of the term ``sponsor'' in 
Regulation AB and was generally supported by commenters, who stated 
that it is consistent with the use of the term in both Regulation AB 
\147\ and Regulation RR,\148\ as well as market understanding of what a 
securitization sponsor is.\149\
---------------------------------------------------------------------------

    \146\ 17 CFR 230.192(c).
    \147\ 17 CFR 229.1101(l).
    \148\ 17 CFR 246.
    \149\ See, e.g., letters from AIC; SFA I; SIFMA I.
---------------------------------------------------------------------------

    Some commenters requested that we exclude states and their 
political subdivisions from the definition of ``sponsor'' under the 
final rule.\150\ These commenters generally stated that application of 
Rule 192's prohibition to municipal issuers is unnecessary because 
these issuers engage in transactions pursuant to enabling legislation 
that is designed specifically to aid in the furtherance of important 
government functions and other public purposes, are restricted from 
engaging in speculative investments, and are not driven by a profit 
motive that would lead to the type of behavior that Section 27B is 
intended to address.\151\ While municipal issuers may be subject to 
other provisions that regulate their conduct, we are not persuaded that 
issuers of municipal ABS are uniquely different from other 
securitization participants such that they should be excluded from the 
final rule. Similarly, the fact that municipal entities are subject to 
investment policies that limit the ability of such entities as 
investors to engage in speculative investments is not a reason to 
exempt these entities from the definition of ``sponsor.'' While the 
outcome of such policies may be that the entities may not, for example, 
take a short position against their municipal ABS, the objectives of 
those policies are typically focused on protection of the entity's 
investment portfolio.\152\ Being subject to various laws and 
regulations that may intersect is not a position that is unique to 
issuers of municipal ABS. Additionally, the prohibition in Rule 192 is 
designed to prophylactically protect investors in U.S. securities 
markets from ABS transactions tainted by material conflicts of 
interest, regardless of whether a securitization participant has a 
profit motive or actually does profit from such transactions.\153\ As 
such, while it may be unlikely, as some commenters stated, that issuers 
of municipal ABS would engage in the type of conduct that Section 27B 
prohibits for the reasons discussed above,\154\ we do not believe that 
an exclusion from the definition of ``securitization participant'' or 
``sponsor'' would be appropriate because investors are entitled to the

[[Page 85407]]

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

    \150\ See, e.g., letters from NABL et al.; NAHEFFA (also 
requesting that 501(c)(3) organizations and the issuers of qualified 
501(c)(3) conduit bonds to such organizations be excluded from the 
definition); NAMA; SIFMA I; Wulff Hansen (expressing support for the 
comments submitted by NAMA).
    \151\ Id. One of these commenters also stated that application 
of the prohibition in Rule 192 to State and local governmental 
issuers would be a breach of the principles of federalism and 
intergovernmental comity. See SIFMA I. The U.S. Supreme Court has 
held that State and local governments ``must find their protection 
from congressional regulation through the national political 
process, not through judicially defined spheres of unregulable state 
activity.'' See Garcia 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.
    \152\ See letter from NABL et al. (stating that municipal 
investment policies are ``centered on preservation of principal or 
moderate growth.'')
    \153\ See Section II.D.3
    \154\ See, e.g., letters from NABL et al.; NAHEFFA; NAMA; SIFMA 
I.
---------------------------------------------------------------------------

    Some commenters went on to state that, because municipal ABS 
issuers are unlikely to engage in conflicted transactions for the 
reasons discussed above, these entities would need to expend 
administrative and financial resources to ``prove a negative'' (i.e., 
that they do not engage in conflicted transactions), especially if 
securitization participants were to be required to have documented 
policies and procedures in place to prevent violation of the 
prohibition, adding compliance costs without a clear regulatory 
benefit.\155\ Although the Commission requested comment in the 
Proposing Release about whether the final rule should include a 
requirement that a securitization participant have documented policies 
and procedures reasonably designed to prevent a violation of the rule's 
prohibition on conflicted transactions,\156\ the Commission did not 
receive any comments in support of such a requirement. Commenters, 
however, expressed concerns about the potential costs associated with 
such a provision,\157\ and therefore, final Rule 192 does not include a 
requirement that securitization participants have documented policies 
and procedures reasonably designed to prevent a violation of the rule's 
prohibition. As such, while we recognize that compliance with the 
prohibition against engaging in conflicted transactions may result in 
increased compliance costs to municipal issuers subject to Rule 192, we 
expect that such costs will be modest because the final rule does not 
include a general requirement for policies and procedures.\158\
---------------------------------------------------------------------------

    \155\ See, e.g., letters from NAHEFFA; NAMA.
    \156\ See Proposing Release Request for Comment 59.
    \157\ See, e.g., letters from NAHEFFA, NAMA.
    \158\ See Section IV for a discussion of the Commission's 
economic analysis of the impacts of Rule 192 and a discussion of 
alternatives considered.
---------------------------------------------------------------------------

    For these reasons, we continue to believe that any such costs will 
be justified because investors in municipal securitizations should be 
entitled to the same legal protections as investors in other types of 
ABS that meet the definition of ``asset-backed security'' in Rule 
192(c). Accordingly, if a municipal security meets the definition of 
Exchange Act ABS,\159\ then the municipal issuer that organizes and 
initiates such an offering \160\ is a sponsor for purposes of Rule 
192.\161\
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    \159\ See Section II.A.3.a.
    \160\ Or, in the case of a municipal advisor, if the advisor has 
a contractual right to direct or cause the direction of the 
structure, design, or assembly of a municipal ABS, such person is a 
sponsor under paragraph (ii) of the ``sponsor'' definition in final 
Rule 192(c). See Section II.B.3.b.ii.
    \161\ The same analysis will apply for issuers of single-asset 
conduit bonds that meet the definition of Exchange Act ABS or 
otherwise meet the definition of ``asset-backed security'' in Rule 
192(c). See Section II.A.3.a.
---------------------------------------------------------------------------

ii. Contractual Rights Sponsor
    We are adopting the definition of ``Contractual Rights Sponsor'' 
that was proposed in paragraph (ii)(A) of the proposed definition of 
``sponsor'' with certain modifications in response to comments 
received. Also, in response to comments received, we are not adopting 
the definition of ``Directing Sponsor'' that was proposed in paragraph 
(ii)(B) of the proposed definition of ``sponsor.'' Accordingly, 
paragraph (ii) of the definition of ``sponsor'' for purposes of Rule 
192 captures, subject to certain exceptions discussed below, any person 
with a contractual right to direct or cause the direction of the 
structure, design, or assembly of an asset-backed security or the 
composition of the pool of assets underlying or referenced by the 
asset-backed security (a Contractual Rights Sponsor), other than a 
person who acts solely pursuant to such person's contractual rights as 
a holder of a long position in the asset-backed security (a Long-only 
Investor).\162\ The revision to explicitly exclude Long-only Investors 
from the definition of sponsor by deleting the proposed ``Directing 
Sponsor'' definition is consistent with the Commission's stated intent 
in the Proposing Release that an ABS investor (that does not otherwise 
meet any of the other definitions of parties covered by the rule) would 
not be a sponsor under the rule merely because such investor expresses 
its preferences regarding the assets that would collateralize its ABS 
investment.\163\ Also, Rule 192 is not designed to discourage ABS 
investors from exercising contractual rights as a holder of a long 
position in an ABS. As discussed below, the final rule excludes any 
person who acts solely pursuant to such person's contractual rights as 
a holder of a long position in the ABS.
---------------------------------------------------------------------------

    \162\ As discussed in more detail below, we are also adopting an 
exclusion from the ``sponsor'' definition for any person who 
performs only administrative, legal, due diligence, custodial, or 
ministerial acts related to the ABS and for the United States or an 
agency of the United States with respect to ABS that is fully 
insured or fully guaranteed as to the timely payment of principal 
and interest by the United States. See Sections II.B.3.b.iii. and 
II.B.3.b.iv.
    \163\ See Proposing Release Section II.B.2.b.
---------------------------------------------------------------------------

    The Commission proposed a comprehensive definition of ``sponsor'' 
that would include a person that is in a unique position to structure 
the ABS and/or construct the underlying asset pool or reference pool in 
a way that would position the person to benefit from the actual, 
anticipated, or potential adverse performance of the relevant ABS or 
its underlying asset pool if such person were to enter in a conflicted 
transaction.\164\ Some commenters supported this approach, citing the 
significant role that such parties play in securitization 
transactions.\165\ As discussed in greater detail below, a number of 
commenters, however, opposed the proposed inclusion of Contractual 
Rights Sponsors and Directing Sponsors as too broad.\166\ Some of these 
commenters requested that the ``sponsor'' definition be limited to 
paragraph (i) (i.e., a Regulation AB-based sponsor),\167\ while others 
stated that such a definition would not be sufficient to capture the 
key transaction parties that have a significant role in asset selection 
for ABS transactions.\168\ Some commenters also stated that defining 
``sponsor'' to include functions beyond the scope of the Regulation AB-
based Sponsor definition extends beyond the ``ordinary and natural 
meaning'' of the term, which they state is understood by market 
participants to be the definition that was codified in Regulation 
AB.\169\ These commenters stated that the Commission codified the 
``ordinary and natural meaning'' of the term ``sponsor'' when it 
adopted the definition in Regulation AB in 2004 and that, because 
Section 27B uses the term ``sponsor'' without separately defining it, 
any other definition for purposes of Rule 192 would be inconsistent 
with Congressional intent.\170\
---------------------------------------------------------------------------

    \164\ See Proposing Release Section II.B.
    \165\ See letters from AFR; Better Markets.
    \166\ See, e.g., letters from ABA; AIMA/ACC; AFME; CREFC I, CRE 
Finance Council dated July 5, 2023 (``CREFC II''); NAMA; 
Representatives Wagner and Huizenga; Senator Kennedy; SFA I; SFA II; 
SIFMA I.
    \167\ See, e.g., letters from ABA; AIC; SIFMA I. letters from 
ABA; AIC; SIFMA I. See Section II.B.3.b.i. above for a discussion of 
paragraph (i) of the ``sponsor'' definition in Rule 192(c).
    \168\ See, e.g., letters from Better Markets (expressing support 
for the scope of the definition and stating that collateral managers 
should be subject to the rule because they play a significant role 
in selecting and managing the assets underlying an ABS); SFA II 
(acknowledging the Commission's desire to scope in CLO managers that 
are not sponsors for purposes of Regulation RR).
    \169\ See, e.g., letters from ABA; AIC; SIFMA I.
    \170\ See, e.g., letters from ABA; AIC; SIFMA I.
---------------------------------------------------------------------------

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

[[Page 85408]]

backed securities and identify the transaction parties responsible for 
making that disclosure.\171\ When the Commission adopted these 
specialized registration, disclosure, and reporting requirements in 
Regulation AB for certain types of asset-backed securities, it 
explained that those requirements were specifically designed for asset-
backed securities that have certain characteristics (i.e., ABS as 
defined in Regulation AB).\172\ At that time, the Commission 
acknowledged that the types of ABS that would meet the definition in 
Regulation AB were a subset of the full spectrum of ABS in the 
market.\173\ For example, synthetic securitizations are not eligible 
for registration and reporting under Regulation AB because such 
securitizations are primarily based on the performance of assets or 
indices not included in the ABS.\174\ As such, the concept of a sponsor 
``selling or transferring assets . . . to the entity that issues the 
[ABS]'' in the ``sponsor'' definition under Regulation AB would not be 
applicable in a synthetic ABS because, as described in Section 
II.A.3.b. above, a synthetic ABS is designed to create exposure to an 
asset that is not sold, transferred to, or otherwise part of the asset 
pool. Rule 192, consistent with the express language of Section 27B, 
applies to a wider spectrum of ABS (i.e., Exchange Act ABS, synthetic 
ABS, and hybrid cash and synthetic ABS) \175\ than Regulation AB and--
as discussed throughout this section--the characteristics of the 
structure, assets, and the role of transaction parties involved in 
those types of ABS may differ significantly from those in Regulation AB 
ABS. We do not believe the concept of ``sponsor'' in Section 27B is 
limited to the Regulation AB definition of that term, as that would 
mean that there is no ``sponsor'' for synthetic asset-backed 
securities, even though Congress explicitly referenced those 
participants in the statute. It is therefore appropriate for Rule 192 
to define the securitization participants subject to the rule's 
prohibition to align with the characteristics of that wider spectrum of 
ABS. Accordingly, we continue to believe that, while it is appropriate 
for the final rule to incorporate a definition based on the Regulation 
AB definition of sponsor, defining ``sponsor'' for purposes of Rule 192 
as a Regulation AB-based sponsor alone would not be sufficient to 
address the full range of securitization activities involved in asset-
backed securities transactions that Section 27B addresses.
---------------------------------------------------------------------------

    \171\ See Sections III.A.2. and III.B.3. of the 2004 Regulation 
AB Adopting Release.
    \172\ See Section III.A.2. of the 2004 Regulation AB Adopting 
Release.
    \173\ Id. (stating, for example, that a default application of 
the traditional disclosure regime might not be appropriate for some 
structured securities, but that treating them the same as ABS as 
defined in Regulation AB may not be appropriate either and that, 
depending on the structure of the transaction and the terms of the 
securities, it might be most appropriate to apply some aspects of 
both regimes in combination). The Commission also acknowledged in 
that release that there may be securities developed in the future 
that are not contemplated in Regulation AB, which would similarly 
require consideration of which regulatory regime would be most 
appropriate.
    \174\ See also Section III.A.2. of the 2004 Regulation AB 
Adopting Release.
    \175\ See Section II.A.3.
---------------------------------------------------------------------------

    One commenter also cited to the holding of the U.S. Court of 
Appeals for the District of Columbia Circuit that the application of 
the term ``securitizer'' \176\ to CLO collateral managers in Regulation 
RR was an overreach of its authority.\177\ The Court's analysis was 
centered around the statutory text that directed the Commission, 
together with several other Federal agencies, to issue regulations to 
require any securitizer to ``retain'' an economic interest in a portion 
of the credit risk for any asset that the securitizer, through the 
issuance of an asset-backed security, ``transfers, sells, or conveys'' 
to a third party.\178\ The Court held that, because open-market CLO 
managers do not ``hold'' the securitized loans in a CLO transaction at 
any point, they can neither ``transfer'' those loans, nor ``retain'' 
credit risk in the loans because such terms require that the 
``securitizer'' has control over the assets via possession or 
ownership.\179\ We believe a different analysis is applicable to 
Section 27B, which directs the Commission to prohibit securitization 
participants of Exchange Act ABS and synthetic ABS from engaging in 
transactions that would involve or result in a material conflict of 
interest. Section 941 of the Dodd-Frank Act added Section 15G of the 
Exchange Act,\180\ in which Congress provided a statutory definition 
for the term ``securitizer'' that incorporated from the Regulation AB 
definition of sponsor the general concept of transferring or selling 
assets into a special purpose entity. In the case of Section 15G, 
therefore, the statutory text specified the functions that Congress 
intended to be captured by the term ``securitizer.'' In Section 27B, 
however, Congress did not define ``sponsor,'' but it did specify the 
types of ABS (i.e., Exchange Act ABS and synthetic ABS) that are 
subject to the prohibition. Moreover, as evidenced by statutory text in 
other laws, where Congress intended to refer to a portion of Regulation 
AB, it did so explicitly.\181\
---------------------------------------------------------------------------

    \176\ The statutory term at issue in the case was 
``securitizer,'' which was defined by Congress as an issuer of an 
ABS or a person who organizes and initiates an ABS transaction by 
selling or transferring assets, either directly or indirectly, 
including through an affiliate, to the issuer. See Section 15G(a)(3) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78o-11(a)(3)), 
which was added by Section 941 of the Dodd-Frank Act (Pub. L. 111-
203).
    \177\ See letter from AIC (citing The Loan Syndications and 
Trading Association 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).
    \178\ See LSTA Decision. See also 15 U.S.C. 78o-11(b)(1).
    \179\ See LSTA Decision, 882 F.3d at 223.
    \180\ 15 U.S.C. 78o-11(a)(3).
    \181\ See, e.g., Credit Rating Agency Reform Act of 2006 (Pub. 
L. 109-291) (referring specifically to ``issuers of asset-backed 
securities (as that term is defined in section 1101(c) of part 229 
of title 17, Code of Federal Regulations, as in effect on the date 
of enactment of this paragraph)''). We also note that the term 
``sponsor'' appears in several other places throughout the 
securities laws with varying meanings. For example, in Item 901 of 
Regulation S-K, a sponsor is defined in the context of roll-up 
transactions as ``the person proposing the roll-up transaction.'' 
See 17 CFR 901(d).
---------------------------------------------------------------------------

    As we discussed above, the characteristics of the structure, 
assets, and the role of transaction parties involved in the wider 
spectrum of ABS covered by Section 27B (including synthetic asset-
backed securities) differ significantly from those ABS subject to 
Regulation AB, and therefore the definitions adopted by the Commission 
in Regulation AB do not capture the types of ABS that Congress 
determined should be subject to Rule 192's prohibition. Accordingly, we 
believe that the statutory inclusion of these types of ABS requires 
that Rule 192 define the market participants and their roles in such 
ABS in congruence with the structures and characteristics specific to 
the relevant ABS.
    A number of commenters also expressed concern that paragraph (ii) 
of the ``sponsor'' definition includes activities that could be 
attributed to a wide variety of transaction parties and could therefore 
be understood to scope in, as a Contractual Rights Sponsor or Directing 
Sponsor, almost any party with any role in the structuring of the 
transaction.\182\ Commenters stated that the definition could include 
entities such as investors,\183\ asset managers \184\

[[Page 85409]]

and other investment advisers,\185\ servicers,\186\ and warehouse 
lenders,\187\ each of which we discuss below.
---------------------------------------------------------------------------

    \182\ See, e.g., letters from ABA; AIMA/ACC; AFME, CREFC I; 
CREFC II; NAMA; Representatives Wagner and Huizenga; Senator 
Kennedy; SFA I; SFA II; SIFMA I.
    \183\ See, e.g., letters from ABA; CREFC I; CREFC II; SFA I; SFA 
II; SIFMA I.
    \184\ See, e.g., letter from ABA; LSTA IV.
    \185\ See, e.g., letter from ICI.
    \186\ See, e.g., letters from MBA; SFA I; CREFC I. We discuss 
the final rule's applicability to servicers in Section 
II.B.3.b.iii., below.
    \187\ See, e.g., letter from ABA.
---------------------------------------------------------------------------

    Many commenters expressed concern that ABS investors could be 
captured by the definition of sponsor by virtue of the iterative 
negotiation process between deal participants and investors.\188\ These 
commenters recognized the stated intent in the Proposing Release \189\ 
that investors acquiring a long position in an ABS would not be 
Directing Sponsors merely because they express their preferences 
regarding the structure of the ABS or the underlying assets, but 
requested that this be codified in rule text to avoid the unintended 
consequence of discouraging investors from actively participating in 
discussions about deal structures and underlying asset pools in their 
ABS investments and to help ensure that they are not unnecessarily 
subject to additional costs associated with developing compliance 
programs under Rule 192.\190\ In current market practice, investors in 
ABS transactions may receive information about collateral (including, 
for example, specific loan data and due diligence results) and may 
specify preferences or requirements for a given deal structure or terms 
of the security.\191\ Commenters stated, and we agree, that these 
negotiations are important and beneficial market functions.\192\ 
Consequently, as requested by commenters and to help ensure that Rule 
192 is not an impediment to an investor's negotiating power, we are not 
adopting paragraph (ii)(B) (Directing Sponsor) of the proposed 
definition of ``sponsor.''
---------------------------------------------------------------------------

    \188\ See, e.g., letters from ABA; AFME; CREFC I; CREFC II; 
IACPM; ICI; MBA; MFA II; LSTA III; LSTA IV; Representatives Wagner 
and Huizenga; Senator Kennedy; SFA I; SFA II; SIFMA I; SIFMA II.
    \189\ See Proposing Release Section II.B.2.
    \190\ See, e.g., letters from ABA; AFME; CREFC I; CREFC II; 
IACPM; ICI; MBA; MFA II; LSTA III; Representatives Wagner and 
Huizenga; Senator Kennedy; SFA I; SFA II; SIFMA I; SIFMA II.
    \191\ For example, investors may specify a certain rating, 
yield, or maturity on the bonds, require particular levels of 
subordination or credit enhancement, or may request that assets be 
added or removed to satisfy preferences with respect to asset 
quality, concentration levels, etc.
    \192\ See, e.g., letters from CREFC I; ICI; SFA II.
---------------------------------------------------------------------------

    Some commenters suggested that the regulatory text should specify 
that long investors are also excluded from proposed paragraph (ii)(A) 
(Contractual Rights Sponsor).\193\ Relatedly, some commenters stated 
that the exercise of contractual rights inherent to the purchase of the 
ABS should not be conflicted transactions under Rule 192(a)(3).\194\ In 
securitizations, it is often the case that long investors purchasing 
the most senior or the most subordinated tranche of the relevant ABS 
negotiate for certain rights that are exercisable over the life of the 
securitization. A person's contractual rights as a holder of a long 
position in the ABS could include, for example, consent rights over 
major decisions such as initiating foreclosure proceedings with respect 
to assets underlying the ABS, the right to replace the special servicer 
of the ABS, or the right to direct or cause the direction of an 
optional redemption of outstanding interests in the ABS. Rule 192 is 
not designed to impair an ABS investor's ability to negotiate for such 
contractual rights as a holder of a long position in the ABS. Nor is it 
designed to discourage investors from exercising such rights as a 
holder of a long position in the ABS. Therefore, we are adopting 
paragraph (ii) of the definition of ``sponsor'' to exclude from the 
definition of Contractual Rights Sponsor any person who acts solely 
pursuant to such person's contractual rights as a holder of a long 
position in the ABS.
---------------------------------------------------------------------------

    \193\ See, e.g., letters from CREFC I; SFA II; SIFMA II.
    \194\ See, e.g., letter from CREFC I; SFA I.
---------------------------------------------------------------------------

    Whether a long investor is acting ``solely'' pursuant to its 
contractual rights as a holder of a long position in the relevant ABS 
will depend on the relevant facts and circumstances, including what 
other roles the long investor may have in the transaction. For example, 
some commenters requested that the rule specify that the holders of 
``B-piece'' bonds (the ``B-piece buyer'') in commercial mortgage backed 
securities (``CMBS'') transactions \195\ are not ''sponsors'' as 
defined by the final rule or, alternatively, that the B-piece buyers be 
otherwise excluded because they should be considered long 
investors.\196\ Whether a B-piece buyer in a CMBS transaction is a 
``sponsor'' for purposes of Rule 192 or satisfies the condition of the 
exclusion for Long-only Investors will depend on the facts and 
circumstances of a given transaction and B-piece buyer.\197\ Generally, 
the B-piece buyer purchases the most subordinate tranches of the ABS 
and, in connection with this investment, performs extensive due 
diligence on the underlying loans and negotiates with the deal sponsor 
for changes to pool composition and to increase credit quality of the 
pool. As a holder of a long position in the relevant ABS, a B-piece 
buyer will generally have additional ongoing rights in an ABS 
transaction. For example, transaction agreements may dictate that 
certain actions with respect to the asset pool underlying the ABS (such 
as releasing a property from a lien) are subject to the approval of the 
B-piece buyer,\198\ giving the B-piece buyer a contractual right to 
direct or cause the direction of the composition of the pool. As such, 
absent the exclusion we are adopting for Long-only Investors, a B-piece 
buyer could be subject to the prohibition of Rule 192(a)(1) as a 
Contractual Rights Sponsor. Under the final rule, if the B-piece buyer 
exercises such rights solely pursuant to its contractual rights as a 
holder of a long position in the ABS, then the B-piece buyer will 
satisfy the conditions for the Long-only Investor carve-out from the 
definition of Contractual Rights Sponsor as adopted and, therefore, 
will not be subject to the prohibition in Rule 192(a)(1).
---------------------------------------------------------------------------

    \195\ As is the case with most ABS, CMBS securities are offered 
in tranches, with each tranche representing a different risk 
profile. The top tranche (referred to as ``AAA'') represents the 
lowest risk investment while the lower tranches (typically non-
investment grade) represent the highest risk profile because they 
are the first to incur losses in the event that there are shortfalls 
in collections on the underlying assets. In CMBS, the ``B-piece'' 
bonds are the lowest tranche(s) of the CMBS (i.e., the most 
subordinate tranche(s), meaning that holders are purchasing the 
first-loss position) and the holders of those bonds are typically 
third-party purchasers, commonly referred to as the ``B-piece 
buyer.'' See, e.g., Section III.B.5. of the RR Adopting Release.
    \196\ See, e.g., letters from ABA; CREFC I; Fannie and Freddie; 
MBA.
    \197\ The same analysis applies for the directing noteholder in 
a commercial real estate collateralized loan obligation (``CRE 
CLO''), which functions similarly to the B-piece buyer in CMBS 
transactions.
    \198\ See, e.g., letter from CREFC I.
---------------------------------------------------------------------------

    In some circumstances, however, the B-piece buyer can also act as a 
special servicer for the securitization (i.e., a contractual party to 
the transaction) or may be an affiliate or subsidiary of the special 
servicer. Whether a special servicer's activities satisfy the 
conditions of the exclusion for persons that perform only 
administrative, legal, due diligence, custodial, or ministerial acts 
with respect to the relevant ABS will depend on the nature of the 
special servicer's activities.\199\ Accordingly, if a B-piece buyer is 
also a special servicer for an ABS transaction, the B-piece buyer will 
not be acting ``solely'' pursuant to its rights as a holder of a long 
position in the relevant ABS and will need to then consider whether the 
performance of its contractual obligations as special servicer will be 
sufficiently administrative or custodial in nature to be excluded from 
the

[[Page 85410]]

definition.\200\ Similarly, if the B-piece buyer is an affiliate or 
subsidiary, as defined by this rule, of another securitization 
participant in the relevant ABS, then it will also be a securitization 
participant subject to the prohibition in Rule 192(a)(1).\201\ For the 
foregoing reasons, whether a B-piece buyer is a ``sponsor'' for 
purposes of Rule 192, or is eligible for the Long-only Investor 
exclusion, will depend on the facts and circumstances of the particular 
ABS and the roles of the B-piece buyer and its affiliates and 
subsidiaries in the ABS transaction.
---------------------------------------------------------------------------

    \199\ See Section II.B.3.b.iii. for a discussion of the final 
rule's application to special servicers.
    \200\ Id. As discussed in Section II.D.3.c., however, the 
exercise of such contractual rights and obligations will not 
themselves be conflicted transactions under the final rule. Also, if 
the performance of the B-piece buyer's contractual obligations as 
special servicer is sufficiently administrative or custodial in 
nature to rely on the Service Provider Exclusion and the B-piece 
buyer's only other role in the transaction is as a Long-only 
Investor, then the B-piece buyer will not be a sponsor under the 
final rule.
    \201\ See Section II.B.3.c.
---------------------------------------------------------------------------

    Some commenters requested that market participants acting subject 
to a fiduciary duty to a client or customer, such as open-market CLO 
collateral managers, municipal advisors,\202\ or other investment 
advisers be excluded from the definition of ``sponsor'' because such 
participants are already subject to various laws and regulations that 
regulate their conduct and address conflict management.\203\ Rule 192 
will complement the existing federal securities laws, including those 
that govern a market participant's Federal fiduciary duties. As 
discussed earlier, the fact that an entity is subject to other rules, 
laws, or regulatory policies pertaining to its conduct, including the 
existence and management of conflicts of interest, does not preclude 
such entity from satisfying the conditions of other regulatory 
requirements. Additionally, we recognize, as one commenter stated, that 
securitization participants in an ABS subject to Rule 192 do not owe a 
fiduciary duty to the investors in an ABS because the securitization 
participants' advisory clients are the deal sponsors rather than the 
ABS investors.\204\ In cases where a sale of an ABS does not involve 
the sale of an interest in a private fund \205\ or other vehicle 
advised by an investment adviser, there is no advisory relationship 
creating a Federal fiduciary duty owed between a purchaser and seller. 
In cases where the private fund issues ABS (such as tranches of a CLO), 
the private fund's adviser owes a Federal fiduciary duty to the fund 
and the antifraud provisions of the Advisers Act and the rules 
thereunder (the ``Antifraud Provisions'') apply.\206\ Such advisers 
include CLO collateral managers who will also be subject to Rule 192. 
Although the application of an adviser's Federal fiduciary duty, which 
requires the adviser to serve the best interests of its clients,\207\ 
and the Antifraud Provisions provide protections relating to conflicts 
of interest that act in harmony with Rule 192, these duties and 
provisions do not necessarily require elimination of conflicted 
transactions. Accordingly, a fiduciary duty-based exclusion from Rule 
192 would frustrate Section 27B's prophylactic investor protection 
objectives to eliminate certain conflicted transactions.
---------------------------------------------------------------------------

    \202\ See Section II.B.3.b.i. for additional discussion about 
Rule 192's application to municipal advisors.
    \203\ See, e.g., letters from ABA; ICI; LSTA IV; NAMA; Wulff 
Hansen.
    \204\ See letter from SIFMA I.
    \205\ Section 202(a)(29) of the Investment Advisers Act of 1940 
(the ``Advisers Act'') defines the term ``private fund'' as an 
issuer that would be an investment company, as defined in section 3 
of the Investment Company Act of 1940 (15 U.S.C. 80a-3), but for 
section 3(c)(1) or 3(c)(7) of that Act.
    \206\ See 17 CFR 275.206(4)-8 (``Advisers Act Rule 206(4)-8''), 
which prohibits investment advisers to a pooled investment vehicle 
from (1) making untrue statements of a material fact or omitting to 
state a material fact necessary to make the statements made, in the 
light of the circumstances under which they were made, not 
misleading, to any investor or prospective investor in the pooled 
investment vehicle; or (2) otherwise engaging in any act, practice, 
or course of business that is fraudulent, deceptive, or manipulative 
with respect to any investor or prospective investor in the pooled 
investment vehicle). See also Prohibition of Fraud by Advisers to 
Certain Pooled Investment Vehicles, Release No. IA-2628 (Aug. 3, 
2007) [72 FR 153 (Aug. 9, 2007)]).
    \207\ See Commission Interpretation Regarding Standard of 
Conduct for Investment Advisers, Release No. IA-5248 (June 5, 2019) 
[84 FR 33669 (July 12, 2019)] (``IA Interpretation'').
---------------------------------------------------------------------------

    Some commenters also stated that an adviser's Federal fiduciary 
duty may address conflicts of interest, including through appropriate 
disclosure and informed client consent.\208\ As the Commission has 
stated, while full and fair disclosure of all material facts relating 
to the advisory relationship or of conflicts of interest and a client's 
informed consent prevent the presence of those material facts or 
conflicts themselves from violating the adviser's fiduciary duty, such 
disclosure and consent do not satisfy the adviser's duty to act in the 
client's best interest.\209\ By contrast, Rule 192 sets forth an 
express prohibition against certain conflicted transactions. The final 
rule will therefore provide additional prophylactic protections for ABS 
investors by requiring the elimination of those conflicted 
transactions. For these reasons, we do not believe it would be 
necessary, appropriate, or consistent with the investor protection 
objectives of Section 27B to provide a fiduciary duty-based exclusion 
from the definition of ``sponsor.''
---------------------------------------------------------------------------

    \208\ See, e.g., letters from AIMA/ACC; ICI; SIFMA I. See also 
IA Interpretation at 33676 (noting that an adviser must eliminate or 
at least expose through full and fair disclosure the conflicts 
associated with its allocation policies, including how the adviser 
will allocate investment opportunities between clients, such that a 
client can provide informed consent.).
    \209\ See IA Interpretation at 33676.
---------------------------------------------------------------------------

    Some commenters also expressed concern that investment advisers who 
do not participate in the structuring or distribution of ABS would be 
captured by the proposed definition of ``securitization participant'' 
only as a result of being an affiliate or subsidiary of another named 
securitization participant.\210\ One of these commenters stated, 
however, that permitting the use of information barriers in the final 
rule would ``solve this problem.'' \211\ Our changes to the scope of 
the affiliates and subsidiaries covered by the rule, including 
permitting securitization participants and their affiliates and 
subsidiaries to employ various mechanisms (such as information 
barriers) to prevent coordination or sharing of information tailored to 
their organization,\212\ will help address commenters' concerns about 
the rule's applicability to affiliates and subsidiaries. Therefore, a 
fiduciary duty-based exclusion to address these concerns is 
unnecessary.\213\
---------------------------------------------------------------------------

    \210\ See, e.g., letters from AIC; ICI; LSTA IV. For example, 
these commenters stated that investment advisers may engage in 
separate businesses that are unrelated to their securitization 
activities, and thus those entities and their employees would have 
no knowledge of, or involvement in, the securitization activity. See 
also letter from SFA II (stating that advisers typically have 
fiduciary duties to multiple clients and that such advisers must act 
in the best interest of each client separately).
    \211\ See letter from LSTA IV.
    \212\ See Section II.B.3.c.
    \213\ See also Section II.D. for a discussion of the revised 
definition of ``conflicted transaction'' and the rule's 
applicability to transactions undertaken pursuant to a fiduciary 
duty.
---------------------------------------------------------------------------

    Some of these commenters also requested that municipal advisors be 
excluded from the definition of ``sponsor.'' \214\ These commenters 
stated that, in addition to the reasons already stated that make it 
unlikely that a municipal issuer would engage in conflicted 
transactions, municipal advisors also have a fiduciary duty to their 
clients, various existing rules and regulations governing their 
conduct, and that any proprietary bet by a municipal advisor against 
its client's ABS would already be a violation of the federal securities 
laws.\215\ Municipal advisors

[[Page 85411]]

participate in structuring the securities, and although municipal 
advisors may be subject to other provisions that regulate their 
conduct, we are not persuaded that advisors to municipal ABS are 
uniquely different from other securitization participants such that 
they should be excluded from the final rule. The fact that such 
entities are subject to potential liability for violations of other 
laws and regulations does not preclude the Commission from subjecting 
them to other rules with different objectives. In particular, we note 
that a municipal advisor's fiduciary duty is to its municipal entity 
clients, not to investors, and therefore would not necessarily require 
elimination of conflicted transactions.\216\ As discussed earlier, Rule 
192 will complement the existing federal securities laws, including 
general anti-fraud and anti-manipulation provisions, as well as those 
that apply specifically to securitization, by prophylactically 
protecting against the sale of ABS tainted by material conflicts of 
interest.\217\
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    \214\ See letters from NAMA; Wulff Hansen.
    \215\ Id. See also Sections II.B.3.c. and II.D.3. for additional 
discussions with respect to fiduciary duties in relation to Rule 
192.
    \216\ 15 U.S.C. 78o-4(c)(1).
    \217\ See Section I.C.
---------------------------------------------------------------------------

    The Commission also received comment requesting that providers of 
warehouse financing be excluded from the definition of ``sponsor.'' 
\218\ A warehouse financing facility is a secured loan from a warehouse 
lender to provide capital to sponsors to acquire and aggregate assets 
for securitization.\219\ One commenter stated that, because a warehouse 
lender bears the risk with respect to any assets that cannot be 
securitized, it acts pursuant to strict underwriting standards 
reflective of the lender's risk tolerance.\220\ If a lender determines 
that it is unwilling to lend against certain assets, this commenter 
stated that such influence over the exclusion of those assets could be 
construed as directing or causing the direction of the structure, 
design, or assembly of an ABS or the composition of the asset 
pool.\221\ As stated in the Proposing Release, the rule is not designed 
to hinder routine securitization activities that do not give rise to 
the risks that Section 27B was intended to address.\222\ Warehouse 
financing is a routine activity to finance the purchase of assets by a 
securitization participant in furtherance of the issuance of an ABS. A 
warehouse lender whose role is to engage in such routine lending 
activity with respect to the ABS, including the lender's right to 
determine which assets it is or is not willing to finance pursuant to 
its underwriting standards, does not meet the definition of ``sponsor'' 
under the final rule.\223\ However, if a securitization participant has 
an affiliate or subsidiary that is a warehouse lender, and such 
affiliate or subsidiary meets the definition of securitization 
participant in Rule 192(c), such person will be subject to the 
prohibition in Rule 192(a).\224\
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    \218\ See letter from ABA.
    \219\ See also Section II.D.
    \220\ Id.
    \221\ Id.
    \222\ See Proposing Release Section II.D.1.
    \223\ See also Section II.D. below for a discussion of why 
warehouse financing is not a ``conflicted transaction'' under the 
final rule.
    \224\ See Section II.B.3.c.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission explained that the 
definition of Contractual Rights Sponsor in paragraph (ii)(A) would not 
require an actual exercise of contractual rights. Two commenters 
opposed this approach, stating that such person should only be a 
sponsor if it actually exercised its contractual rights to direct or 
cause the direction of the structure, design, or assembly of an ABS or 
the underlying or referenced assets.\225\ One of these commenters 
requested that, if the definition of ``sponsor'' is not limited to 
paragraph (i), the final rule should define ``sponsor'' to include a 
Regulation AB-based Sponsor or both a Contractual Rights Sponsor and 
Directing Sponsor (i.e., a person who both has a contractual right to, 
and actually does, direct or cause the direction of the structure, 
design, or assembly of an ABS or the underlying or referenced 
assets).\226\ This commenter stated that any person who does not have 
the contractual right, but that is actually involved in the structuring 
of an ABS or the composition of the underlying or referenced asset 
pool, would have no practical ability to structure the ABS to fail 
because the Regulation AB-based Sponsor in the deal (who has exposure 
to the credit risk of the ABS by operation of the risk retention 
requirement in Regulation RR) would have no reason to take direction 
from such person, and that any person who has the contractual right but 
does not exercise it has no real culpability.\227\ While the risk 
retention requirement in Regulation RR does contribute to the alignment 
of interests between ABS sponsors and investors, not all types of ABS 
that are subject to the prohibition in Rule 192 are subject to 
Regulation RR. A sponsor of an ABS that is not subject to Regulation RR 
would not be required to retain exposure to the credit risk of the ABS, 
meaning that there may not be an alignment of interests between the 
sponsor and investors, which could create an opportunity for the 
sponsor to be influenced by a third party's requests. Moreover, any 
person with a contractual right to structure, design, or assemble an 
ABS or the underlying or referenced pool of assets--whether those 
rights are exercised or not--would have access to information about the 
ABS or its underlying or referenced assets prior to the sale of the ABS 
and would therefore have the opportunity to use that information to 
engage in a conflicted transaction with respect to such ABS or 
underlying or referenced assets. As discussed above, final Rule 192 is 
designed to eliminate such opportunity and incentive. As such, a person 
may be a ``sponsor'' subject to the prohibition in final Rule 192 if it 
is either a Regulation AB-based Sponsor or a Contractual Rights 
Sponsor, and the final rule does not require that an actual exercise of 
contractual rights is necessary to meet the definition of ``sponsor.'' 
Consequently, a person who meets the definitional criteria in Rule 
192(c) can be a ``sponsor'' regardless of whether it is referred to as 
the sponsor or some other title (e.g., issuer, depositor, originator, 
collateral manager).
---------------------------------------------------------------------------

    \225\ See letters from AIC; SIFMA I (stating that such a 
position would be inconsistent with the ordinary and natural meaning 
of the term). We discuss the comments related to the ``ordinary and 
natural meaning'' of sponsor earlier in this section.
    \226\ See letter from AIC.
    \227\ Id.
---------------------------------------------------------------------------

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

[[Page 85412]]

``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\
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    \228\ See, e.g., letters from AIC; CREFC I; LSTA III; LSTA IV; 
MBA; SFA II; SIFMA I; SIFMA II.
    \229\ See, e.g., letters from AIC; CREFC I; CREFC II; MBA; SFA 
II; SIFMA I. One of these commenters noted that its membership was 
not in agreement with respect to whether a special servicer in CMBS 
transactions should be included in the Service Provider Exclusion. 
See letter from SFA II.
    \230\ See letters from LSTA III; SFA I; SFA II; SIFMA I.
---------------------------------------------------------------------------

    Consistent with the view expressed by the Commission in the 
Proposing Release,\231\ we agree with commenters that the activities 
customarily performed by accountants, attorneys, and credit rating 
agencies with respect to the creation and sale of an ABS, as well as 
the activities customarily performed by trustees, custodians, paying 
agents, calculation agents, and servicers,\232\ relating to the ongoing 
management and administration of the entity that issues the ABS and its 
related assets, are the types of activities described in the Servicer 
Provider Exclusion. We understand, however, commenters' concern that, 
because the proposed text of the exclusion did not refer specifically 
to activities that constitute ``ongoing administration'' of the ABS or 
the underlying or referenced asset pool, the scope of the exclusion as 
proposed could be read to refer only to activities performed in 
connection with the initial creation of the securitization and 
therefore was not sufficiently clear.\233\
---------------------------------------------------------------------------

    \231\ See Proposing Release at 9686.
    \232\ See Section II.D. below for a discussion of servicing 
activity as it relates to the definition of ``conflicted 
transaction'' under the rule.
    \233\ See, e.g., letters from AIC; CREFC I; CREFC II; MBA; SFA 
I; SFA II.
---------------------------------------------------------------------------

    We are revising the definition of ``sponsor'' to align with the 
Commission's intent as stated in the Proposing Release and in response 
to commenter requests to specify in the rule text that the activities 
performed over the life of the securitization by third-party servicers 
and other contractual providers \234\ are consistent with the 
activities enumerated in the rule.\235\ As adopted, therefore, the 
definition of ``sponsor''--notwithstanding paragraph (ii)--excludes any 
person that performs only administrative, legal, due diligence, 
custodial, or ministerial acts related to the structure, design, 
assembly, or ongoing administration of the ABS or the composition of 
the pool of assets underlying or referenced by the ABS (the Service 
Provider Exclusion).\236\ For purposes of the Service Provider 
Exclusion, ``ongoing administration'' refers to the types of activities 
typically performed by servicers, trustees, custodians, paying agents, 
calculation agents, and other contractual service providers pursuant to 
their contractual obligations in a securitization transaction over the 
life of the ABS; it does not refer to active portfolio management or 
other such activity that would be subject to the ``sponsor'' 
definition.\237\
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    \234\ Servicers and other contractual service providers whose 
activities meet the criteria specified in the Service Provider 
Exclusion may nonetheless be securitization participants subject to 
the prohibition in Rule 192(a)(1) with respect to the relevant ABS 
if, for example, such person is an affiliate or subsidiary of a 
named securitization participant. See Section II.B.3.c.
    \235\ See, e.g., letters from AIC; CREFC I; CREFC II; MBA; SFA 
II; SIFMA I.
    \236\ Because the types of activities listed in the Service 
Provider Exclusion rule text already cover the activities of credit 
rating agencies, no additional revision to the rule text is 
unnecessary.
    \237\ See, e.g., the discussion in Section II.D. below related 
to normal-course servicing activity in a covered transaction not 
constituting a ``conflicted transaction'' under the final rule.
---------------------------------------------------------------------------

    Some commenters also requested that we replace the qualifier 
``only'' in the Service Provider Exclusion with ``primarily,'' \238\ 
stating that the use of ``only'' erodes the exclusion because the 
administrative, legal, due diligence, custodial, or ministerial acts 
performed by the service providers discussed above could also be viewed 
as activities causing the direction of the structure, design, or 
assembly of an ABS or the composition of the pool assets.\239\ As one 
of these commenters pointed out, such activities could include the 
drafting and negotiation of the operating and disclosure documents with 
respect to an ABS, setting fees to be paid to certain transaction 
parties, reviewing the asset pool, negotiating the priority of payments 
within an ABS transaction, potentially advising on how to structure an 
ABS to meet the objectives of the deal parties, collecting payments on 
underlying assets, and making distributions to bondholders.\240\ While 
we agree that such activities could be understood to be consistent with 
the activities described in the Contractual Rights Sponsor definition, 
we also agree that they are consistent with the administrative, legal, 
due diligence, custodial, and ministerial activities covered by the 
Service Provider Exclusion. As the Commission stated in the Proposing 
Release, the Service Provider Exclusion is intended to avoid 
inadvertently including certain parties to securitization transactions 
whose contractual rights could be interpreted as consistent with the 
activities described in paragraph (ii) of the definition of ``sponsor'' 
but who are otherwise not the parties that Section 27B was intended to 
cover. For this reason, so long as a person's activities with respect 
to the relevant ABS are only administrative, legal, due diligence, 
custodial, or ministerial in nature, the Service Provider Exclusion is 
available ``notwithstanding'' the fact that such a person's contractual 
rights could also be understood to be captured by paragraph (ii) of the 
definition of sponsor. Accordingly, we do not believe that changing 
``only'' to ``primarily'' is necessary.
---------------------------------------------------------------------------

    \238\ See, e.g., letters from SFA I; SFA II; SIFMA II.
    \239\ See, e.g., letters from SFA I; SFA II.
    \240\ See letter from SFA II.
---------------------------------------------------------------------------

    Moreover, we continue to believe that limiting the exclusion in 
this way is necessary to ensure that it does not inadvertently extend 
to deal participants with more active participation in the creation and 
administration of asset-backed securities. For example, a special 
servicer can potentially have a significant role in the servicing and 
disposition of troubled assets in an asset pool, such as the ability to 
determine whether (and when) to negotiate a workout of a loan, take 
possession of the property collateralizing a loan, and purchase the 
loan out of the securitization at a discount and, therefore, the 
special servicer's activities may not be limited to the types of 
administrative or ministerial functions eligible for the 
exclusion.\241\ As such, whether a special servicer qualifies for the 
exclusion will depend on the facts and circumstances of the ABS and the 
activities performed by the special servicer.\242\ Similarly, as 
support for its request that the Service Provider Exclusion include 
activities relating to ongoing administration of the ABS, one commenter 
gave the example of a

[[Page 85413]]

situation in which a placement agent for a CLO may also be an 
administrative agent under a loan that underlies a CLO and therefore 
has various duties that it must perform.\243\ This commenter requested, 
therefore, that the final rule include an exception for actions taken 
by securitization participants pursuant to their duties under the CLO 
or underlying loan documents and stated that including ongoing 
administration activities in the Service Provider Exclusion would 
achieve that.\244\ In the example provided by this commenter, such 
administrative agent is also the placement agent for the relevant ABS, 
and therefore will be ineligible to rely on the Service Provider 
Exclusion because its activities are not ``only'' administrative in 
nature and because, as placement agent, such person is a securitization 
participant pursuant to the definition of ``placement agent'' in Rule 
192(c).\245\ For these reasons we do not believe that it would be 
appropriate to revise the exclusion as requested.
---------------------------------------------------------------------------

    \241\ See Section II.B.3.b.ii. and Section II.D.1.c.iii.
    \242\ For example, if the special servicer for a CMBS 
transaction is also the B-piece buyer (or an affiliate or subsidiary 
of the B-piece buyer) and can exercise such contractual rights with 
respect to the asset pool without needing to obtain the consent of 
any unaffiliated investor or transaction party in the CMBS 
transaction, then the special servicer's activities are not only 
administrative, legal, due diligence, custodial, or ministerial in 
nature with respect to such CMBS transaction.
    \243\ See letter from LSTA IV.
    \244\ Id.
    \245\ See Section II.B.3.a.
---------------------------------------------------------------------------

    The Commission also received comment requesting that third-party 
asset sellers be included in the Servicer Provider Exclusion.\246\ A 
third-party asset seller is a third-party originator who sells loans or 
other assets to the ultimate ABS sponsor before those assets are 
transferred into the securitization structure. The purchase of assets 
from unaffiliated originators to be later transferred into a 
securitization is a routine capital market function through which the 
seller would not have the contractual right to direct or cause the 
direction of the structure, design, or assembly of an ABS or the 
composition of the underlying or referenced pool of assets. Such 
persons' activities are limited to merely originating assets that are 
then transferred to the ABS sponsor in a true sale; they do not have 
ongoing roles or contractual rights or duties with respect to the 
assets or the ultimate ABS. Therefore, while we do not believe that the 
function performed by these third-party asset sellers is consistent 
with the types of activities enumerated in the Service Provider 
Exclusion, we do agree that such persons are not ``sponsors'' under the 
rule.\247\
---------------------------------------------------------------------------

    \246\ See letter from SFA II.
    \247\ An originator that is affiliated with an underwriter, 
placement agent, initial purchaser, or sponsor of a covered 
transaction, however, may be a securitization participant subject to 
the rule's prohibition against engaging in conflicted transactions. 
See Section II.B.3.c. below.
---------------------------------------------------------------------------

iv. U.S. Government Exclusion
    Consistent with the proposal, the United States or an agency of the 
United States is not a ``sponsor'' for purposes of the final rule with 
respect to its ABS that are fully insured or fully guaranteed as to the 
timely payment of principal and interest.\248\ However, in a change 
from the proposal, we are not adopting the proposed exclusion from the 
``sponsor'' definition for the Enterprises, which we discuss in greater 
detail below.
---------------------------------------------------------------------------

    \248\ 17 CFR 192(c).
---------------------------------------------------------------------------

    With respect to an ABS that is fully insured or fully guaranteed as 
to the timely payment of principal and interest by the United States, 
it is the United States as guarantor that is exposed to the full credit 
risk related to the underlying assets, rather than the investors in the 
ABS.\249\ This is because investors in such ABS rely on the support 
provided by the full faith and credit of the United States and not on 
the creditworthiness of the obligors on the underlying assets, meaning 
they are not exposed to the credit risk of the underlying assets.\250\ 
Consequently, investors in such ABS are not exposed to the risk that 
was present in certain ABS transactions at the time of the financial 
crisis of 2007-2009 where investors suffered credit-based losses due to 
the poor performance of the relevant asset pool while key 
securitization parties entered into transactions to profit from such 
poor performance.
---------------------------------------------------------------------------

    \249\ See Proposing Release Section II.B.2.c.
    \250\ Id.
---------------------------------------------------------------------------

    Commenters supported the proposal to exclude the United States 
Government and its agencies from the definition of ``sponsor,'' \251\ 
with one of these commenters specifically agreeing that mortgage-backed 
securities (``MBS'') guaranteed by the Government National Mortgage 
Association (``Ginnie Mae'') are fully guaranteed by the United States 
Government \252\ and thus should be excluded from the ``sponsor'' 
definition.\253\ This commenter also stated that, because issuers of 
Ginnie Mae MBS have ``considerable discretion'' over which loans to 
include in the MBS, those issuers should be sponsors under the 
rule.\254\ For purposes of the final rule, and as noted in the 
Proposing Release, the exclusion in paragraph (iv) of the definition of 
``sponsor'' applies only to the specified entities (i.e., the United 
States or an agency of the United States).\255\ Any other 
securitization participant involved with an ABS issued or guaranteed by 
a specified entity (e.g., an underwriter or a non-governmental sponsor) 
is subject to the prohibition in Rule 192 against engaging in 
transactions that effectively represent a bet against the relevant 
ABS.\256\ If, therefore, the issuer of a fully-guaranteed Ginnie Mae 
ABS meets the definition of ``sponsor'' as adopted,\257\ such issuer is 
prohibited from engaging in conflicted transactions.\258\
---------------------------------------------------------------------------

    \251\ See, e.g., letters from M. Calabria; SIFMA I.
    \252\ See Title III of National Housing Act, 12 U.S.C. 1716-1723 
(2019) (stating that ``[t]he full faith and credit of the United 
States is pledged to the payment of all amounts which may be 
required to be paid under any guaranty under this subsection.'') 
available at https://www.ginniemae.gov/about_us/what_we_do/Documents/statutes.pdf.
    \253\ See letter from M. Calabria.
    \254\ Id.
    \255\ See Rule 192(c) and Proposing Release Section II.B.2.c.
    \256\ Id.
    \257\ See Sections II.B.3.b.i. and II.B.3.b.ii.
    \258\ See Section II.D. for a discussion of what constitutes a 
``conflicted transaction'' under the final rule.
---------------------------------------------------------------------------

    Comments related to the proposed exclusion from the definition of 
``sponsor'' for the Enterprises were mixed. Some commenters supported 
the exclusion of Fannie Mae and Freddie Mac from the ``sponsor'' 
definition with some modifications to extend the exclusion beyond 
conservatorship,\259\ with one suggesting that the exclusion be 
conditioned on the Enterprises retaining their current status as 
government sponsored entities because the Federal Housing Finance 
Agency's (``FHFA'') oversight sufficiently guards against the types of 
behavior that Section 27B is intended to prevent.\260\ Another 
commenter suggested that, in addition to the exclusion from the 
``sponsor'' definition, the rule should exclude from the definition of 
``asset-backed security'' any ABS that is fully insured or fully 
guaranteed as to the timely payment of principal and interest by the 
Enterprises while operating under the conservatorship or receivership 
of the FHFA.\261\
---------------------------------------------------------------------------

    \259\ See, e.g., letters from Fannie and Freddie; SFA II.
    \260\ See letter from Fannie and Freddie.
    \261\ See letter from ABA. As discussed below, the final rule 
does not include an exclusion from the definition of ``sponsor'' for 
the Enterprises while in conservatorship in light of concerns that 
the proposed exclusion was unclear and concerns regarding the impact 
of an automatic change to the Enterprises' status immediately upon 
existing conservatorship. For the same reasons, the final rule does 
not contain an exclusion for an ABS that is fully insured or fully 
guaranteed as to the timely payment of principal and interest by the 
Enterprises while in conservatorship. See Section II.A. for more 
information about the types of ABS that are subject to the final 
rule.
---------------------------------------------------------------------------

    Some commenters, however, opposed including the Enterprises in the 
exclusion from the ``sponsor''

[[Page 85414]]

definition.\262\ One commenter stated that the capital support from the 
United States while in conservatorship or receivership is not an 
explicit government guarantee of the Enterprises' ABS or MBS.\263\ 
Another commenter suggested that the Enterprises should be sponsors for 
purposes of Rule 192, but that the final rule should permit credit risk 
transfer (``CRT'') transactions regardless of sponsor,\264\ which would 
treat the Enterprises and other market participants alike.
---------------------------------------------------------------------------

    \262\ See, e.g., letters from HPC; M. Calabria.
    \263\ See letter from M. Calabria. This commenter also stated 
that an exclusion from the prohibition in Rule 192 would 
disincentivize or prevent the Enterprises from leaving 
conservatorship.
    \264\ See letter from HPC.
---------------------------------------------------------------------------

    Because, as proposed, the Enterprise exclusion from the ``sponsor'' 
definition would only apply with respect to ABS fully guaranteed by the 
Enterprises and not with respect to the CRT securities they issue,\265\ 
some commenters expressed concerns that, together with the proposed 
restriction that the initial distribution of an asset-based security 
would not be risk-mitigating hedging,\266\ the proposed rule would have 
the effect of prohibiting all Enterprise CRTs as per se conflicted 
transactions.\267\ Some commenters stated that, for this reason, the 
cumulative effect of the proposed approach (i.e., to exclude the 
Enterprises as sponsors with respect to fully-guaranteed ABS, but not 
with respect to CRTs, and to exclude CRT transactions from the risk-
mitigation hedging exception) was unclear.\268\ To address this 
concern, one commenter requested that either the Enterprises be 
excluded from the ``sponsor'' definition in perpetuity (or until the 
Commission revisited the exclusion), or that the Enterprises' synthetic 
ABS issuances (i.e., CRT transactions) be permitted to qualify under 
the risk-mitigating hedging exception so long as they continue to be 
government-sponsored enterprises.\269\ Alternatively, this commenter 
requested that the sponsor exclusion remain in place for at least 24 
months following the Enterprises' exit from conservatorship to permit 
the Commission to make a determination after the nature of the post-
conservatorship landscape becomes clear.\270\ Relatedly, one commenter 
stated that permitting the Enterprises to continue their credit risk 
transfer securitization program under the risk-mitigating hedging 
exception would provide more clarity and certainty for all participants 
involved than excluding the Enterprises from the ``sponsor'' 
definition.\271\
---------------------------------------------------------------------------

    \265\ The Enterprises engage in security-based credit risk 
transfer transactions to allow for efficient mitigation of the 
Enterprises' retained credit risk associated with their holdings of 
residential and commercial mortgages and MBS. A security-based CRT 
transaction typically involves the issuance of unguaranteed ABS by a 
special purpose trust where the performance of such ABS is linked to 
the performance of a reference pool of mortgage loans that 
collateralize Enterprise guaranteed-MBS. As part of a security-based 
CRT transaction structure, the relevant Enterprise enters into an 
agreement with the special purpose trust pursuant to which the trust 
has a contractual obligation to pay the Enterprise upon the 
occurrence of certain adverse events with respect to the referenced 
mortgage loans. See letter from Fannie and Freddie; see also, e.g., 
the relevant legal documentation and other related information about 
Freddie Mac's single-family transaction, available at https://capitalmarkets.freddiemac.com/crt/securities/deal-documents.
    \266\ See Section II.E.
    \267\ See, 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.
    \268\ See, e.g., letters from ABA; Fannie and Freddie; SIFMA II.
    \269\ See letter from Fannie and Freddie. See also Section II.E. 
for a discussion of the risk-mitigation hedging exception under the 
final rule.
    \270\ See letter from Fannie and Freddie.
    \271\ See letter from SIFMA II.
---------------------------------------------------------------------------

    After considering the comments received, we are not adopting the 
proposed Enterprise exclusion from the ``sponsor'' definition and, 
therefore, the Enterprises are sponsors under the final rule with 
respect to any ABS they issue, whether or not it is fully guaranteed. 
Although we still believe that, while the Enterprises are in 
conservatorship, investors in their guaranteed ABS are not exposed to 
the same types of risk that existed in certain ABS transactions leading 
up the financial crisis of 2007-2009,\272\ that would not be the case 
once the Enterprises exit conservatorship. In light of the concerns 
that the cumulative effect of the proposed exclusion from the 
``sponsor'' definition and the proposed exception for risk-mitigating 
hedging activities was unclear, we have concluded that including the 
Enterprises as sponsors and permitting Enterprise CRT transactions so 
long as they meet the conditions enumerated in the risk-mitigating 
hedging exception,\273\ would provide more certainty for the 
Enterprises and the market. Further, we believe that the revisions to 
the definition of ``conflicted transactions,'' together with the 
revised exception for risk-mitigating hedging activities discussed 
below, sufficiently address commenter concerns with respect to the 
ability of the Enterprises to continue to engage in CRT transactions 
for purposes of managing their credit risk.\274\ As sponsors--and, 
thus, securitization participants--subject to the prohibition in Rule 
192(a) against engaging in conflicted transactions, the Enterprises are 
subject to the same limitations on such behavior as private market 
participants.
---------------------------------------------------------------------------

    \272\ See Proposing Release Section II.B.2.c.
    \273\ See Section II.E.
    \274\ As discussed in detail below, the definition of 
``conflicted transaction'' in final Rule 192(a)(3) captures the 
relevant conflict of interest in the context of the issuance of a 
new synthetic ABS (e.g., the issuance of a CRT transaction), but 
such synthetic ABS will be permissible if it meets the conditions 
for the exception for risk-mitigating hedging activities. 
Furthermore, the synthetic ABS will be subject to the rule and the 
related securitization participants will be subject to the 
prohibition. See Sections II.D. and II.E. below.
---------------------------------------------------------------------------

c. Affiliates and Subsidiaries
    After consideration of commenters' concerns and recommendations, 
discussed in detail below, we are revising paragraph (ii) of the 
definition of ``securitization participant'' to limit which affiliates 
or subsidiaries \275\ are securitization participants. An affiliate or 
subsidiary is a securitization participant for purposes of the final 
rule only if it acts in coordination with \276\ an underwriter, 
placement agent, initial purchaser, or sponsor or if it has access to 
or receives information about the relevant ABS or the asset pool 
underlying or referenced by the relevant ABS prior to the date of the 
first closing of the sale of the relevant ABS.\277\
---------------------------------------------------------------------------

    \275\ For 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.
    \276\ As 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).
---------------------------------------------------------------------------

    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

[[Page 85415]]

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.
---------------------------------------------------------------------------

    \278\ See, e.g., letters from AARP dated Mar. 23, 2023 
(``AARP''); Better Markets.
    \279\ See, e.g., letters from ABA; AIC; AFME; AIMA/ACC; ICI; 
LSTA III; LSTA IV; MFA II; SFA I; SIFMA I.
    \280\ See, 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.
    \281\ See, e.g., letters from ABA; SFA I; SFA II.
    \282\ See, e.g., letters from ABA; AFME; ICI; LSTA III; SFA II; 
SIFMA I; SIFMA II.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \283\ See, e.g., letters from ABA; AIC; ICI; SFA I.
    \284\ See, e.g., letter from AIC.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \285\ See, 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.
    \286\ See, e.g., letters from ABA; SIFMA I.
    \287\ See 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.
---------------------------------------------------------------------------

    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

[[Page 85416]]

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\
---------------------------------------------------------------------------

    \288\ See, e.g., letters from AARP; Better Markets.
    \289\ See, 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.
    \290\ See 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.
    \291\ See, e.g., letters from ABA; AIMA/ACC; AFME; AIC; ICI; 
LSTA II; LSTA III; MFA II; Pentalpha; SFA I; SIFMA I.
    \292\ See, 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.
    \293\ See, e.g., letters from ABA; AFME; AIC; LSTA III; MFA II; 
SIFMA I.
    \294\ See, 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).
    \295\ See, e.g., letters from AFME; SIFMA I.
    \296\ 17 CFR 255.
    \297\ See, e.g., letter from AIC (noting as an example that 
investment funds and portfolio companies are not subject to the 
Volcker Rule).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \298\ For 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.
    \299\ For 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \300\ 17 CFR 230.192(c).
    \301\ See, e.g., letters from ABA; AFME; ICI; LSTA III; LSTA IV; 
SFA II; SIFMA I; SIFMA II.
    \302\ See, e.g., letters from AIC; LSTA III; SFA II; SIFMA I; 
SIFMA II.
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    <bullet> 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    <bullet> Maintains separate trading accounts for the named 
securitization participant and the relevant affiliate or subsidiary,
    <bullet> 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,
    <bullet> Is engaged in an unrelated business from the relevant 
affiliated entity and does not, in fact, communicate with such relevant 
affiliated entity,\305\ or
---------------------------------------------------------------------------

    \305\ As 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.
---------------------------------------------------------------------------

    <bullet> 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\
---------------------------------------------------------------------------

    \306\ This 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 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.

---------------------------------------------------------------------------

[[Page 85417]]

    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\
---------------------------------------------------------------------------

    \307\ A 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \308\ See id.
    \309\ This 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \310\ See Proposing Release Section II.C.
    \311\ The 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.
    \312\ See 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.
    \313\ See Proposing Release Section II.C.
---------------------------------------------------------------------------

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

[[Page 85418]]

``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 
multi-service 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\
---------------------------------------------------------------------------

    \314\ See also Section II.D.1.c.iii for a discussion of the 
comments received regarding certain pre-securitization activities by 
securitization participants and the rule's applicability to such 
activities.
    \315\ See, 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.
    \316\ See, 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.
    \317\ See letter from ABA.
    \318\ See Proposing Release at 9693.
    \319\ See 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.
    \320\ See, 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.
    \321\ See, e.g., letters from ABA; MFA II; SFA II; SIFMA I.
    \322\ See letter from Pentalpha.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \323\ 17 CFR 230.192(a)(1).
    \324\ See, 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \325\ See, e.g., letter from ABA.
    \326\ See, e.g., letter from SFA II.
    \327\ See, e.g., letters from LSTA III; MFA II; SIFMA I; SIFMA 
II.
    \328\ See, e.g., letter from SFA II.
    \329\ See, e.g., letters from LSTA III; MFA II.
---------------------------------------------------------------------------

    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

[[Page 85419]]

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.
---------------------------------------------------------------------------

    \330\ While 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.
    \331\ For 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.
    \332\ See Proposing Release at 9692 n. 101 and accompanying 
text.
    \333\ See, e.g., letters from LSTA III; SIFMA I.
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    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\
---------------------------------------------------------------------------

    \334\ As 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \335\ 15 U.S.C. 77z-2a(a).
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    \336\ See Proposing Release Section II.D.
---------------------------------------------------------------------------

    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:
    <bullet> As specified in proposed 17 CFR 230.192(a)(3)(i) (``Rule 
192(a)(3)(i)''), a short sale of the relevant ABS;
    <bullet> 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
    <bullet> 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:
    [cir] Adverse performance of the asset pool supporting or 
referenced by the relevant ABS;
    [cir] Loss of principal, monetary default, or early amortization 
event on the relevant ABS; or
    [cir] 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\
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    \337\ See Proposing Release at 9694.
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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\

[[Page 85420]]

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\
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    \338\ See letters from SFA II; SIFMA II.
    \339\ See letter from SIFMA II.
    \340\ See, e.g., letters from Better Markets; ICI.
    \341\ See, 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).
    \342\ See, 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).
    \343\ See, 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) was vague and unworkable on its face).
    \344\ See, 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 pre-securitization 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).
    \345\ See. 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)).
    \346\ See, 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).
    \347\ See, 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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \348\ See Section II.C.3. above for a detailed discussion of the 
timeframe of the prohibition.
    \349\ See Proposing Release Section II.D.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \350\ See 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.
    \351\ See letter from SIFMA II.
    \352\ See 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.
    \353\ See letter from SIFMA II.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \354\ See Section II.D.3.d. below for a discussion of the 
materiality standard.
---------------------------------------------------------------------------

    <bullet> As specified in Rule 192(a)(3)(i), a short sale of the 
relevant ABS;
    <bullet> 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
    <bullet> 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

[[Page 85421]]

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\
---------------------------------------------------------------------------

    \355\ See, 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).
    \356\ See letter from AIMA/ACC.
    \357\ See letter from CreditSpectrum Corp. dated Feb. 22, 2023 
(``CreditSpectrum'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \358\ See Section II.B.3.
---------------------------------------------------------------------------

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 risk-mitigating hedging activities exception discussed 
in detail in Section II.E. below.
---------------------------------------------------------------------------

    \359\ See, 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).
    \360\ See letter from ABA.
---------------------------------------------------------------------------

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

[[Page 85422]]

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.
---------------------------------------------------------------------------

    \361\ See Proposing Release at 9694.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \362\ See 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.
    \363\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
    \365\ See 15 U.S.C. 78o-7(h).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \366\ See 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).
    \367\ See. e.g., letters from AFR; AIC; Andrew Davidson.
---------------------------------------------------------------------------

    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

[[Page 85423]]

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.
---------------------------------------------------------------------------

    \368\ See, 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).
    \369\ See, 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 pre-securitization 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \370\ See letters from SIFMA I (suggesting the ``functional 
trading equivalent'' formulation); AFME (supporting SIFMA's 
suggestion); LSTA III (supporting SIFMA's suggestion).
    \371\ See 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).
    \372\ See letter from SFA I.
    \373\ See 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.)
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \374\ See Proposing Release at 9694.
    \375\ See discussion above of letters from AFR; AIC; Andrew 
Davidson; SFA II; SIFMA II.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \376\ See letters from SFA II; SIFMA II.
---------------------------------------------------------------------------

    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

[[Page 85424]]

of a direct bet against the relevant ABS.'' \380\
---------------------------------------------------------------------------

    \377\ See letters from AFR; AIC; Andrew Davidson.
    \378\ See letter from AFR.
    \379\ See letter from AIC.
    \380\ See letter from Andrew Davidson.
---------------------------------------------------------------------------

    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 non-sizeable 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\
---------------------------------------------------------------------------

    \381\ One 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.
    \382\ See letter from SIFMA I.
    \383\ See, 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).
    \384\ Even if such transaction is a conflicted transaction, it 
could be eligible for the risk-mitigating hedging activities 
exception if the conditions applicable to the exception are 
satisfied. See the discussion in Section II.E. below.
---------------------------------------------------------------------------

    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

[[Page 85425]]

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\
---------------------------------------------------------------------------

    \385\ See, 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).
    \386\ For 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.
    \387\ Even if such transaction is a conflicted transaction, it 
could be eligible for the risk-mitigating hedging activities 
exception if the conditions applicable to the exception are 
satisfied. See the discussion in Section II.E. below.
---------------------------------------------------------------------------

    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 risk-mitigating 
hedging activities exception or any other exception to the final rule. 
Each of the exceptions to the final rule is discussed in detail below.
---------------------------------------------------------------------------

    \388\ See, 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'').
    \389\ This 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.
    \390\ See, 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'').
---------------------------------------------------------------------------

    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 normal-course 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.
---------------------------------------------------------------------------

    \391\ See, 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).
    \392\ See Proposing Release at 9679.
    \393\ As 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).
---------------------------------------------------------------------------

    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 asset-backed 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\
---------------------------------------------------------------------------

    \394\ The short sale of the relevant ABS is separately covered 
under Rule 192(a)(3)(i).
---------------------------------------------------------------------------

    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

[[Page 85426]]

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.
---------------------------------------------------------------------------

    \395\ See letter from SFA II.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \396\ See letter from SIFMA II.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \397\ See, 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).
    \398\ See letter from AFR.
    \399\ 15 U.S.C. 77z-2a(a)(1) and 15 U.S.C. 77z-2a(c)(1).
---------------------------------------------------------------------------

    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.
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    \400\ See 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.
    \401\ See Proposing Release at 9695.
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    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

[[Page 85427]]

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 
risk-mitigating 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.''
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    \402\ See, 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).
    \403\ See letter from CREFC I.
    \404\ See 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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \405\ See 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.
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    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.
---------------------------------------------------------------------------

    \407\ See, 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).
---------------------------------------------------------------------------

    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

[[Page 85428]]

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 risk-mitigating 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).
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    \408\ See, 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).
    \409\ See 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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \410\ See 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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \411\ See, 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).
    \412\ See letter from AFR.
    \413\ 15 U.S.C. 77z-2a(a).
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    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.
---------------------------------------------------------------------------

    \414\ See letters from AIC; SFA II; SIFMA II.
    \415\ See 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).
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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

[[Page 85429]]

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.
---------------------------------------------------------------------------

    \416\ See Basic v. Levinson, 485 U.S. 224, 231-32 (1988) (citing 
TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
    \417\ See, 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 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).
    \418\ See letters from ABA; AFME; SFA II; SIFMA I; SIFMA II.
    \419\ The 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.
---------------------------------------------------------------------------

    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.
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    \420\ Proposing Release at 9696.
    \421\ See, 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).
    \422\ See letters from AFR; Better Markets.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \423\ Proposing Release at 9697.
    \424\ See letters from SFA II; SIFMA II.
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E. Exception for Risk-Mitigating Hedging Activities

1. Proposed Exception
    The Commission proposed to implement the exception for risk-
mitigating 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:
---------------------------------------------------------------------------

    \425\ 15 U.S.C. 77z-2a(c)(1).
---------------------------------------------------------------------------

    <bullet> That, at the inception of the hedging activity and at the 
time of any

[[Page 85430]]

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;
    <bullet> 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
    <bullet> 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.
---------------------------------------------------------------------------

    \426\ See, 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).
    \427\ See, 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).
    \428\ See 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).
    \429\ See 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).
    \430\ See 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 risk-mitigating 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).
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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 risk-mitigating 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.
---------------------------------------------------------------------------

    \431\ This standard would not broaden, limit, or otherwise 
modify the requirements applicable to a securitization participant 
pursuant to Regulation RR.
---------------------------------------------------------------------------

    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

[[Page 85431]]

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.
---------------------------------------------------------------------------

    \432\ See 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 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).
    \433\ See 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).
---------------------------------------------------------------------------

    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 risk-mitigating hedging activities 
exception described below.
---------------------------------------------------------------------------

    \434\ 15 U.S.C. 77z-2a(a)(1) and 15 U.S.C. 77z-2a(c)(1).
    \435\ See, 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-risk-transfers-basel-endgame-62410f6c.
---------------------------------------------------------------------------

    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 risk-mitigating hedging exception because securitization 
participants engaging in such transactions will not need to rely on any 
exception to the rule.
---------------------------------------------------------------------------

    \436\ See, 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).
---------------------------------------------------------------------------

    In a change from the proposal, the risk-mitigating hedging 
activities exception will 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, ``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 risk-mitigating 
hedging activities exception should not be limited to the hedging of 
exposures arising out of a securitization participant's securitization 
activities.\438\
---------------------------------------------------------------------------

    \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 risk-
mitigating 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.
    \438\ See, 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).
---------------------------------------------------------------------------

    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

[[Page 85432]]

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 risk-mitigating 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.
---------------------------------------------------------------------------

    \439\ See 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).
---------------------------------------------------------------------------

    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 risk-mitigating 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\
---------------------------------------------------------------------------

    \440\ See letters from SFA II (focusing on large, diversified 
financial institutions); SIFMA II (also focusing on large, 
diversified financial institutions).
    \441\ See 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \442\ See 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, tax-
exempt 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.
---------------------------------------------------------------------------

    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 risk-mitigating 
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 risk-mitigating 
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.
---------------------------------------------------------------------------

    \443\ See 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.
---------------------------------------------------------------------------

    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 
risk-mitigating 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 risk-mitigating.

[[Page 85433]]

    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 risk-mitigating hedging in any given 
circumstance.\447\
---------------------------------------------------------------------------

    \445\ See letter from AFR.
    \446\ See 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).
    \447\ See letter from AIMA/ACC.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \448\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \449\ See letter from Andrew Davidson.
    \450\ See Section II.C.3. for a discussion of the time period 
during which the prohibition applies.
    \451\ Id.
---------------------------------------------------------------------------

    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 
risk-reduction. 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\
---------------------------------------------------------------------------

    \452\ See letter from AFR.
    \453\ See, 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 risk-
mitigating 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).
---------------------------------------------------------------------------

    We continue to believe that the recalibration requirement is a 
necessary condition to the exception so that subsequent changes to the 
hedging

[[Page 85434]]

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 risk-mitigating 
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.
---------------------------------------------------------------------------

    \454\ See letters from SFA II (suggesting a requirement that the 
primary benefit of the risk-mitigating 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \455\ See letter from SIFMA I.
---------------------------------------------------------------------------

    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 risk-
mitigating 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.
---------------------------------------------------------------------------

    \456\ See letter from AIMA/ACC.
---------------------------------------------------------------------------

    Consistent with the proposal, the risk-mitigating 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 risk-mitigating 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.
---------------------------------------------------------------------------

    \457\ See letter from IACPM.
---------------------------------------------------------------------------

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

[[Page 85435]]

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 risk-mitigating 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 
risk-mitigating hedging activity.\461\
---------------------------------------------------------------------------

    \458\ See letters from AARP; Better Markets.
    \459\ See letter from ABA.
    \460\ See 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).
    \461\ See letters from SFA II; SIFMA II.
---------------------------------------------------------------------------

    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 risk-mitigating 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 one-size-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

[[Page 85436]]

activity to be identified, documented, and monitored over time.
---------------------------------------------------------------------------

    \462\ See 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).
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    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.
---------------------------------------------------------------------------

    \463\ See letters from SFA II; SIFMA II.
---------------------------------------------------------------------------

    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 risk-mitigating 
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.
---------------------------------------------------------------------------

    \464\ See 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.
    \465\ See, 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \466\ See letter from Better Markets.
    \467\ See letters from AARP; Better Markets.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \468\ 15 U.S.C. 77z-2a(c)(2)(A).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \469\ See letter from Better Markets.
    \470\ See letter from ICI (noting that its concern regarding 
typical liquidity arrangements for asset-backed 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).
    \471\ See letter from Fannie and Freddie.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \472\ For 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.
---------------------------------------------------------------------------

    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

[[Page 85437]]

transaction will be eligible for the liquidity commitment exception.
---------------------------------------------------------------------------

    \473\ See 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-reserve-banks/fam/chapter-4-system-open-market-account.htm.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \474\ See letter from SIFMA II.
---------------------------------------------------------------------------

G. Exception for Bona Fide Market-Making 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 market-making 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:
---------------------------------------------------------------------------

    \475\ 15 U.S.C. 77z-2a(c)(2)(B).
---------------------------------------------------------------------------

    <bullet> 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 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 such 
financial instruments;
    <bullet> 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;
    <bullet> 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;
    <bullet> 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
    <bullet> 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 market-making 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\
---------------------------------------------------------------------------

    \476\ See letters from AARP; Better Markets Letter.
    \477\ See 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).
    \478\ See letters from SFA II; SIFMA II.
    \479\ See 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).
---------------------------------------------------------------------------

3. Final Rule
    We are adopting the bona fide market-making 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 market-
making 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

[[Page 85438]]

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.
---------------------------------------------------------------------------

    \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 market-making 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \481\ Furthermore, 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 market-making activity, the creation and sale of the new ABS is 
primary, not secondary, market activity.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \482\ See letter from SFA II (focusing on synthetic ABS and 
suggesting that the bona fide market-making 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).
    \483\ See letter from SIFMA II.
---------------------------------------------------------------------------

    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 asset-backed 
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

[[Page 85439]]

financial crises of 2007-2009. \485\ The conditions to the bona fide 
market-making 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.
---------------------------------------------------------------------------

    \484\ See 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).
    \485\ See letter from SIFMA II.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \486\ See letters from ABA; AIC.
---------------------------------------------------------------------------

    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 market-making 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-size-
fits-all standard on market participants that may be confusing for 
market-makers 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\
---------------------------------------------------------------------------

    \487\ See letters from AIMA/ACC.
    \488\ See Section IV.
---------------------------------------------------------------------------

    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 market-making 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 market-
making 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.
---------------------------------------------------------------------------

    \489\ This 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.
---------------------------------------------------------------------------

    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 market-making activities 
exception so long as the conditions of the bona fide market-making 
activities exception are satisfied. Therefore, with respect to such 
activity, a securitization participant does not need to separately rely 
on the risk-mitigating 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 
market-making 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\
---------------------------------------------------------------------------

    \490\ Market-makers will generally already have certain policies 
and procedures in place to promote compliance with other securities 
laws applicable to them.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \491\ See letters from SIFMA II.
---------------------------------------------------------------------------

    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

[[Page 85440]]

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.
---------------------------------------------------------------------------

    \492\ For example, under Regulation SHO's bona fide market-
making exception, the relevant broker-dealer 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).
---------------------------------------------------------------------------

    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 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 discussed in Rule 192(b)(3)(i) (permitted bona 
fide market-making activities). The purpose of this condition is to 
distinguish activity that is characteristic of bona fide market-making 
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\
---------------------------------------------------------------------------

    \493\ See 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.
---------------------------------------------------------------------------

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

[[Page 85441]]

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\
---------------------------------------------------------------------------

    \494\ For example, a person meeting the conditions of the de 
minimis exception in Exchange Act Rule 3a71-2 would not need to be a 
registered security-based swap dealer to act as a market maker in 
security-based swaps. See 17 CFR 240.3a71-2.
    \495\ See letters from SFA II; SIFMA II; LSTA IV.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \496\ See, 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.
    \497\ The bona fide market-making activities exception in the 
final rule is narrower than market-making 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).
---------------------------------------------------------------------------

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 market-making 
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\
---------------------------------------------------------------------------

    \498\ See letters from AARP; Better Markets.
    \499\ See letter from ABA.
    \500\ See letter from SIFMA I.
    \501\ See letter from SIFMA II.
    \502\ See letter from SFA II.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \503\ See Section IV.
---------------------------------------------------------------------------

    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

[[Page 85442]]

definition 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.
---------------------------------------------------------------------------

    \504\ See 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).
    \505\ See 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \506\ See letters from SFA II; SIFMA II.
---------------------------------------------------------------------------

    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 
market-making 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 market-making 
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.
---------------------------------------------------------------------------

    \507\ See letter from Better Markets.
    \508\ See letters from AARP; Better Markets.
---------------------------------------------------------------------------

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 anti-
circumvention 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 anti-evasion provision, with some of 
these commenters stating that such anti-evasion 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\
---------------------------------------------------------------------------

    \509\ See letter from Better Markets.
    \510\ See 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).
    \511\ See 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 anti-evasion standard); SIFMA I (suggesting an 
anti-evasion standard that applies to the exceptions).

---------------------------------------------------------------------------

[[Page 85443]]

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 anti-evasion 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 anti-evasion 
provision as opposed to an anti-circumvention 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 anti-evasion 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 
anti-evasion 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.
---------------------------------------------------------------------------

    \512\ See 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).
    \513\ See 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).
---------------------------------------------------------------------------

    We disagree with commenters' suggestions that the final rule should 
not include any anti-circumvention or anti-evasion provision.\514\ The 
anti-evasion 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.
---------------------------------------------------------------------------

    \514\ See letters from AIMA/ACC; AIC.
---------------------------------------------------------------------------

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\
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    \515\ See 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).
    \516\ See letter from SFA II.
    \517\ See 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).
    \518\ See 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).
    \519\ With 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.
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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,

[[Page 85444]]

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 market-making activities, 
liquidity commitments, and a foreign transaction safe-harbor provision. 
\522\
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    \520\ 15 U.S.C. 77z-2a.
    \521\ See Section I.A.
    \522\ See Sections II.E. through II.G.
---------------------------------------------------------------------------

    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.
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    \523\ Section 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.
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    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\
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    \524\ See, 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.
---------------------------------------------------------------------------

    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

[[Page 85445]]

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\
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    \525\ See 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).
    \527\ See 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.
    \528\ See 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.
    \529\ See 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 making exception in the 
Commission's short sale rules. The compliance date for the CAT 
amendments is July 2, 2025.
    \530\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \532\ See, 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.
    \533\ See, 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \534\ The 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.
---------------------------------------------------------------------------

    We estimate that the baseline period annual issuance of private-
label \535\ non-municipal 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 Enterprise-guaranteed 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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    \535\ Private-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 Asset-Backed Alert 
Database, the Green Street Commercial Mortgage Alert Database, and 
Mergent Municipal Bond Securities Database.
    \537\ Data drawn from the Green Street Asset-Backed Alert 
Database and the Green Street Commercial Mortgage Alert Database.
    \538\ See 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/housing-finance-glance-monthly-chartbook-july-2023.
    \539\ See 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-freddie-mac-and-fannie-mae-credit-risk-transfer.
    \540\ See discussion in Section II.B.3.b.iv.

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[[Page 85446]]

2. Affected Parties
    Parties potentially affected by the final rule include:
    <bullet> 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.
    <bullet> U.S. agencies with respect to certain types of ABS.\541\
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    \541\ The 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.
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    <bullet> 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.
    <bullet> 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.
    <bullet> Investment advisers and ABS investors. For example, 
pension funds, endowments, foundations, hedge funds, and mutual funds.
    <bullet> 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\
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    \542\ Households 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-backed-securities.
---------------------------------------------------------------------------

    <bullet> 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 AB-based 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 Mac-guaranteed 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-[agrave]-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.
---------------------------------------------------------------------------

    \543\ The Green Street Asset-Backed Alert Database.
    \544\ To 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%20Fami
ly)). 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.''
    \545\ See 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.
    \546\ The Green Street Asset-Backed Alert Database.
    \547\ Mergent 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.
    \548\ See 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-funds-statistics-2022-q4.pdf (showing number of funds and advisers by category as reported 
on Form PF).
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    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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    \549\ Cross-referencing Form PF and Form ADV data.

[[Page 85447]]



                     Table 1--Private Securitized Asset Fund Advisor Statistics as of 2022Q4
----------------------------------------------------------------------------------------------------------------
                                                                                    Gross asset      Net asset
                 Stratification                    Adviser count    Fund count      value  ($B)     value  ($B)
----------------------------------------------------------------------------------------------------------------
All.............................................             177            2482           936.8           275.9
With at Least 1 Fund >10% Relevant Strategy                   72  ..............           586.6           194.6
 Exposure.......................................
With at Least 1 Fund >10% Relevant Strategy                   25  ..............           133.5            36.9
 Exposure and <50 Non-clerical or <100
 Investment Adviser Employees...................
----------------------------------------------------------------------------------------------------------------
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 anti-fraud 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.
---------------------------------------------------------------------------

    \550\ See, 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \551\ See RR Adopting Release, supra note 54.
---------------------------------------------------------------------------

    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 multi-part 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.
---------------------------------------------------------------------------

    \552\ See RR Adopting Release, Subpart A.2. at 77742, supra note 
54.
---------------------------------------------------------------------------

    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

[[Page 85448]]

making such conflicts visible to a large set of potential investors, 
these disclosure rules only apply to SEC-registered 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.
---------------------------------------------------------------------------

    \553\ Asset-level requirements are specified in Item 1125 of 
Regulation AB (17 CFR 229.1125).
---------------------------------------------------------------------------

    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 anti-fraud 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.
---------------------------------------------------------------------------

    \554\ See, 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.
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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\
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    \555\ The 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.''
    \556\ See George A. Akerlof, The Market for `Lemons': Quality 
Uncertainty and the Market Mechanism, 84 The Quarterly J. of Econ. 
488-500 (1970).
    \557\ See Joseph E. Stiglitz & Andrew Weiss, Credit Rationing in 
Markets with Imperfect Information, 71 The Am. Econ. Rev. 393-410 
(1981).
    \558\ See 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).
    \559\ See 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \560\ See, e.g., Bengt Holmstrom, Moral hazard and 
observability, Bell Journal of Economics, pp. 74-91 (1979) and 
references therein.
    \561\ See supra note 559.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \562\ See, e.g., Senate Financial Crisis Report.
    \563\ See 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).
---------------------------------------------------------------------------

    There are several possible ways, which can be complementary, to 
mitigate the effects of such information

[[Page 85449]]

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.
---------------------------------------------------------------------------

    \564\ See discussion of current market practices with respect to 
credit risk retention in Section IV.B.3.
    \565\ See 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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \566\ See discussion in Section II.B.3.b.iv.
---------------------------------------------------------------------------

    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\

[[Page 85450]]

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 carve-out for U.S. Government 
guaranteed ABS.\574\
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    \567\ See letters from NABL et al.; NAHEFFA.
    \568\ See Section II.B.3.b.i.
    \569\ See Section II.B.3.b.iv.
    \570\ See 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.
    \571\ See 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).
    \573\ Heather 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-go-so-wrong-at-this-arizona-park-built-with-muni-bonds-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://
www.bloomberg.com/news/articles/2020-08-19/muni-bonds-sold-by-phantom-agency-draw-texas-town-s-scrutiny (The Public Finance 
Authority had a much higher rate of borrower payment defaults than 
any other issuer over a three year period).
    \574\ See Sections II.A.3.a. and II.B.3.b. for discussion of the 
rule's applicability to municipal ABS and issuers.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \575\ See, 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.'').
    \576\ See letters from Fannie Mae and Freddie Mac; HPC; M. 
Calabria; SFA I.
    \577\ Part 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \578\ See supra note 559.
---------------------------------------------------------------------------

    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\
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    \579\ One 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.
---------------------------------------------------------------------------

    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

[[Page 85451]]

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.
---------------------------------------------------------------------------

    \580\ See Section II.D for a more detailed discussion of the 
definition of a ``conflicted transaction'' under the final rule.
---------------------------------------------------------------------------

    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 
anti-evasion restrictions than anti-circumvention 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 anti-evasion 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.
---------------------------------------------------------------------------

    \581\ See letter from ABA.
---------------------------------------------------------------------------

    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 Dodd-Frank 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.
---------------------------------------------------------------------------

    \582\ See, e.g., letter from AIMA/ACC.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \583\ See, e.g., letters from AFME; Representatives Wagner and 
Huizenga; U.S. Representative Brad Sherman dated June 21, 2023 
(``Representative Sherman''); Senator Kennedy.
    \584\ See letter from AIC.
---------------------------------------------------------------------------

    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 
anti-evasion 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 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. The final risk-mitigating 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 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

[[Page 85452]]

materially benefit from a conflicted transaction other than through 
risk-reduction, 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 risk-mitigating 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 market-
making 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.
---------------------------------------------------------------------------

    \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.
    \586\ See, e.g., letters from AIC; LSTA II.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \587\ See Section V (discussing costs and burdens relating to 
the final rule for purposes of the Paperwork Reduction Act).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \588\ See letter from AIMA/ACC.
---------------------------------------------------------------------------

    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 anti-evasion 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\
---------------------------------------------------------------------------

    \589\ See, e.g., letters from AFME; LSTA III; SFA I; SIFMA I.
---------------------------------------------------------------------------

    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

[[Page 85453]]

will thus help limit the costs imposed by the rule generally.
---------------------------------------------------------------------------

    \590\ See, e.g., letters from ABA; AIMA/ACC (stating that 
``uncertainty surrounding what constitutes compliance will increase 
costs and potentially reduce securitization activity'').
---------------------------------------------------------------------------

    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 asset-
backed security.
---------------------------------------------------------------------------

    \591\ See, e.g., letters from ABA; AFME; AIC; ICI; SIFMA I.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \592\ See Section II.B.3.c. (discussing the availability of 
information barriers or other indicia of separateness under the 
final rule).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \593\ See letters from AIMA/ACC; SFA I; MFA III.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \594\ See letter from MFA III.
---------------------------------------------------------------------------

    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\

[[Page 85454]]

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\
---------------------------------------------------------------------------

    \595\ Specifically, 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.
    \596\ See supra notes 527-30 (summarizing compliance dates).
    \597\ For 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.
    \598\ The final rule mitigates costs relative to the proposal. 
As discussed above, the revised definition of affiliates and 
subsidiaries includes only those 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.
    \599\ For 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \600\ See letter from MFA III.
    \601\ See Sections I.C. and IV.C and Sections I.B. and III.C. of 
the Proposing Release.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \602\ See, e.g., letters from ABA; AFME; CREFC I; IACPM; MBA; 
LSTA III; Representatives Wagner and Huizenga; Senator Kennedy; SFA 
I; SIFMA I.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \603\ See letters from ABA; CREFC I; Fannie and Freddie; MBA.
---------------------------------------------------------------------------

    Subject to certain conditions, 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. 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.
---------------------------------------------------------------------------

    \604\ See letter from IACPM.
---------------------------------------------------------------------------

    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 risk-mitigating 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 risk-mitigating 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\
---------------------------------------------------------------------------

    \605\ See, e.g., letters from AIC; AFME; IACPM.
---------------------------------------------------------------------------

    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

[[Page 85455]]

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.
---------------------------------------------------------------------------

    \606\ See Section II.D. and included citations.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \607\ See, e.g., letter from ABA.
    \608\ See, e.g., letter from AIMA/ACC.
---------------------------------------------------------------------------

    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 
risk-mitigating 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 non-conflicted 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.
---------------------------------------------------------------------------

    \609\ See letter from AIMA/ACC.
---------------------------------------------------------------------------

    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\
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    \610\ See letters from NABL et al.; NAHEFFA; SIFMA I.
    \611\ Municipal Securities Rulemaking Board, 2018, as reported 
in ``Self-Regulation and the Municipal Securities Market,'' 
available at https://www.msrb.org/sites/default/files/MSRB-Self-Regulation-and-the-Municipal-Securities-Market.pdf.
    \612\ See letter from M. Calabria at 4.
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    The Commission received various comments that the inclusion of the 
Directing Sponsor prong in the proposed rule's definition of sponsor

[[Page 85456]]

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.
---------------------------------------------------------------------------

    \613\ See, e.g., letters from ABA; AIMA/ACC; AFME; CREFC I, 
CREFC II; NAMA; Representatives Wagner and Huizenga; Senator 
Kennedy; SFA I; SFA II; SIFMA I.
---------------------------------------------------------------------------

    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 market-making 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

[[Page 85457]]

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.
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    \614\ See Section IV.B.
    \615\ See id.
    \616\ But 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).
    \617\ See supra note 598.
    \618\ See Section IV.D.2.
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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.
---------------------------------------------------------------------------

    \619\ See, 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.
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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.
---------------------------------------------------------------------------

    \620\ See, e.g., letters from ABA; AIMA/ACC.
    \621\ See letters from AFR; Better Markets; SFA I; SIFMA I; 
SIFMA II.
---------------------------------------------------------------------------

    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,

[[Page 85458]]

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.
---------------------------------------------------------------------------

    \622\ See, e.g., letters from ABA; AIMA/ACC; ICI.
---------------------------------------------------------------------------

    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 multi-factor 
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).
---------------------------------------------------------------------------

    \623\ See letters from SFA II; SIFMA II.
    \624\ See letter from SIFMA I.
---------------------------------------------------------------------------

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

[[Page 85459]]

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\
---------------------------------------------------------------------------

    \625\ See 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.''
    \626\ See 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.
---------------------------------------------------------------------------

    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 risk-mitigating 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 investor-protection 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 
market-making 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 market-making 
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 
market-making 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 securitization-related 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).
---------------------------------------------------------------------------

    \627\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    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.

[[Page 85460]]

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\
---------------------------------------------------------------------------

    \628\ Proposing Release at 9723.
    \629\ See letters from ABA; AIC.
    \630\ See letter from ABA.
    \631\ See letter from AIC.
---------------------------------------------------------------------------

    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 risk-mitigating 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.
---------------------------------------------------------------------------

    \632\ See 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).
    \633\ See 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).
---------------------------------------------------------------------------

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 risk-mitigating 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 market-making 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\
---------------------------------------------------------------------------

    \634\ We 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.
    \635\ We 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).
    \636\ See 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).
---------------------------------------------------------------------------

    As stated below in PRA Table 1, we estimate that there are a total 
of 1,277

[[Page 85461]]

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                   156
 purchasers that are not included in the categories
 above..................................................
                                                         ---------------
    Total...............................................           1,277
------------------------------------------------------------------------
\1\ The 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.
\2\ This 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.
---------------------------------------------------------------------------

    \637\ While 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.
    \638\ Burden 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)].
    \639\ These 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.
---------------------------------------------------------------------------

    The following table summarizes the estimated paperwork burdens 
associated with the final rule.

        PRA Table 2--Estimated Paperwork Burden of Final Rule 192
------------------------------------------------------------------------
                                                    Brief explanation of
        Final Rule 192           Estimated burden     estimated burden
                                     increase             increase
------------------------------------------------------------------------
Require policies and            An increase of 33  This is the estimated
 procedures implementing,        burden hours.      burden to initially
 maintaining, and enforcing                         prepare and
 written policies and                               subsequently review
 procedures reasonably                              and update the
 designed to ensure compliance                      policies and
 with the requirements of the                       procedures.
 applicable exceptions,
 including the identification,
 documentation, and monitoring
 of such activities.
------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \640\ We 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.

[[Page 85462]]



     PRA Table 3--Estimated Burden Allocation for the Collection of
                               Information
------------------------------------------------------------------------
                                                              Outside
        Collection of information          Internal (%)    professionals
                                                                (%)
------------------------------------------------------------------------
Prohibition Against Conflicts of                      75              25
 Interest in Certain Securitizations....
------------------------------------------------------------------------

    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
----------------------------------------------------------------------------------------------------------------
                                                                   Requested paperwork burden
                                               -----------------------------------------------------------------
           Collection of information              Securitization
                                                   participants        Burden hours            Cost burden
                                                              (A)   (A) x 33 x (0.75)   (A) x 33 x (0.25) x $600
----------------------------------------------------------------------------------------------------------------
Prohibition Against Conflicts of Interest in                1,277              31,606                $6,321,150
 Certain Securitizations......................
----------------------------------------------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \641\ 5 U.S.C. 553.
    \642\ 5 U.S.C. 604.
    \643\ See Proposing Release at 9724-9726.
---------------------------------------------------------------------------

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 market-making 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.
---------------------------------------------------------------------------

    \644\ See letter from AIMA/ACC.
    \645\ See letter from AIMA/ACC.
    \646\ See 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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \647\ We 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).
---------------------------------------------------------------------------

    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.

[[Page 85463]]

    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\
---------------------------------------------------------------------------

    \649\ 5 U.S.C. 601(5).
    \650\ We 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \651\ See 17 CFR 240.0-10.
    \652\ We 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \653\ See 17 CFR 275.0-7(a).
    \654\ We 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \655\ We 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.
    \656\ See Registration of Municipal Advisors, Release No. 34-
70462 (Sept. 20, 2013) [78 FR 67468 (Nov. 12, 2013)] (``MA Adopting 
Release'').
    \657\ See 13 CFR 121.201.
    \658\ The 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.
---------------------------------------------------------------------------

    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:
    <bullet> Establishing different compliance requirements or 
timetables that take into account the resources available to small 
entities;
    <bullet> Exempting small entities from all or part of the 
requirements;
    <bullet> Using performance rather than design standards; and

[[Page 85464]]

    <bullet> 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 market-making 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.
---------------------------------------------------------------------------

    \659\ See 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.
    \660\ See letter from AIMA/ACC.
    \661\ See letter from SFA II.
    \662\ See 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).
    \663\ See 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).
---------------------------------------------------------------------------

    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 time-
period. Although the bona fide market-making 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

0
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.


0
2. Add Sec.  230.192 to read as follows:


Sec.  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 asset-
backed 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

[[Page 85465]]

decision whether to retain the asset-backed security:
    (i) A short sale of the relevant asset-backed 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 asset-backed 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 risk-mitigating 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 asset-backed 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 market-making 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 market-
making 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 asset-backed 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:

[[Page 85466]]

    (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 asset-
backed 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 asset-backed 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 asset-backed 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 asset-backed 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