Wall Street Trades In Asset-Backed Securities Face SEC Scrutiny For Conflicts

Wall Street firms that issue asset-backed securities wouldn’t be able to bet against those products under a revised plan from the US Securities and Exchange Commission.

The SEC plans to propose on Wednesday new conflicts-of-interest regulations for investment banks and others involved in securitizations. The new restrictions wouldn’t cover market making or trades to hedge against risk, according to the commission.

SEC Chair Gary Gensler called the measure an “unfinished step in Congress’s vision for financial reform” following the 2008 financial crisis. “It fulfills Congress’s mandate to address conflicts of interests in the securitization market,” he added in a statement ahead of a meeting to consider the plan.

The proposal would mostly prohibit firms involved in selling ABS from shorting that security, purchasing related credit default swaps, as well as other types of bets that could run counter to the interests of investors who bought the products.

The SEC first proposed a version of the rule in 2011, and more than a decade later it remains one of the few requirements under the Dodd-Frank Act that the agency hasn’t completed.

Once a majority of the five-member commission agree to re-propose the rule, the SEC will take comments from industry and the public for at least 30 days. They would then need to vote again to finalize the rule after taking into account that feedback for it to go into effect.

This article was provided by Bloomberg News.