On 31 October, 25 Members of Congress, including Brad Sherman, Ranking Member of the Subcommittee on Capital Markets, sent a letter to SEC Chair Gary Gensler expressing their concerns over the Securities and Exchange Commission’s (SEC) proposed rule “Prohibition Against Conflicts of Interest in Certain Securitizations” (Rule 192). 

The Members of Congress highlight several issues from our response to the SEC’s proposals, arguing that:

• they would outlaw many ordinary course of business activities;
• they go far beyond the congressional mandate under Section 621 of the Dodd-Frank Act;
• proposed Rule 192 does not account for current market realities and contains in requirements that are inconsistent with common industry practices; and
• they fail to account for the robust regulatory safeguards that currently exist to mitigate conflicts of interest.

The letter urges the Commission to align the rule with the statutory framework and properly tailor it to protect investors while minimizing disruption to the securitization markets, adding that the SEC should take into account the significant feedback that it has received to properly tailor the rule.  Furthermore, the Members of Congress highlight that:

• Proposed Rule 192 would significantly curtail participation in the securitization market, which is a critical source of risk mitigation for the US financial system and affordable credit for households and businesses.
• Securitisation markets are essential to financing single- and multi-family housing, commercial real estate, and consumer and business borrowing, and the benefits of securitization are particularly important when interest rates are high.
• In 2022, over $300 billion in asset-backed securities and over $2.1 trillion in mortgage-backed securities were issued. This activity funded approximately 70 percent of single-family residential mortgage loans in the U.S. Securitization is also critical for commercial mortgage lending and multi-family housing finance, funding over $421 billion of commercial mortgages.
• The rule could be interpreted to include Mortgage Insurance Linked Notes and prevent asset managers with no role in or knowledge of a securitisation transaction from exercising their fiduciary duties. 
• The rule could cause market participants, including investors, to refrain from participating in the securitization markets because they conclude that the risks outweigh the benefits of engaging in transactions.

For further information, please contact Guillermo Pérez Molina, Private Credit Associate.