Today, the Commission adopted Rule 192 under the Securities Act of 1933 to implement Section 621 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.[1] Section 621 is intended to prohibit those involved in the securitization process from profiting from the securities’ failures. While the Commission’s initial 2011 proposal to implement Section 621 largely tracked the text of Section 621,[2] commenters expressed concerns that this approach lacked clarity regarding the scope of prohibited and permitted conduct.[3] When re-proposing Rule 192 earlier this year, the Commission provided greater detail in the rule text, including the types of transactions that constitute “conflicted transactions” prohibited by the rule and defining certain key terms used in the rule. The Commission stated that its re-proposed rule “would provide strong protection against material conflicts of interest while not unnecessarily hindering routine securitization activities that do not give rise to the risks that Section [621] was intended to address.”[4]

Despite the Commission’s intentions, it was unclear whether the re-proposed rule struck this balance.[5] Public feedback, therefore, was necessary in considering any final rule. Market participants submitted over 900 comments that raised important concerns on the re-proposed rule.[6] These included: (1) the vagueness of what would constitute taking “substantial steps” to reach an agreement and thereby becoming subject to the rule; (2) the broad scope of paragraph (iii) of the definition of conflicted transaction; (3) how affiliates and subsidiaries of named securitization participants would be captured by the rule; and (4) the narrow scope of the risk-mitigating hedging activities exception.

In adopting Rule 192, I am pleased that the Commission took steps to address these and other concerns raised by commenters. For example, the Commission: (1) eliminated the concept of “substantial steps” to reach an agreement; (2) narrowed the scope of paragraph (iii) of the definition of conflicted transaction; (3) introduced a principles-based information barrier for excluding affiliates and subsidiaries; and (4) eased the conditions to using the risk-mitigating hedging exception. Also in response to commenters, the Commission: (1) exempted transactions that only hedge general interest rate or currency exchange risk; (2) narrowed the scope of the definition of “sponsor,” including an exclusion for investors that solely have long positions in an asset-backed security; (3) changed the anti-circumvention provision to an anti-evasion provision that applies only to the three exceptions of the rule; and (4) added a safe harbor for certain foreign transaction. Finally, in the adopting release, the Commission clarified that mortgage insurance linked-notes are not subject to Rule 192.[7]

Given the changes made in response to commenters’ concerns, I support today’s adoption of Rule 192. However, the Commission should continue to monitor whether institutions that qualify as “securitization participants” under the rule will be able to design internal procedures, at appropriate costs, that allow them to comply with the rule. If market participants are seeking to comply with the rule and find that there are circumstances that call for an exemption, guidance, or other relief, then the Commission or its staff should consider providing such relief. An 18-month compliance period, as requested by several commenters, should provide this additional time to the securitization industry to raise any implementation concerns and seek appropriate relief.

I thank the staff of the Division of Corporation Finance, the Division of Economic and Risk Analysis, and the Office of the General Counsel for their work in finalizing this Dodd-Frank mandate.