SEC Finalizes Conflicts-of-Interest in Securitization Rule
December 4, 2023
On November 27, the SEC published its final rule on Conflicts of Interest in Securitization.
- The final rule included changes that addressed some of CREFC’s key concerns.
- Compliance will be required with respect to any ABS the first closing of the sale of which occurs 18 months after publication in the Federal Register.
Why it matters: The rule is intended to prevent securitization market participants from benefiting from ABS that are designed to fail.
CREFC met with the SEC over the course of several months, urging them to adjust the proposed rule to avoid unintended consequences for the CMBS market. Click here for CREFC’s letter to the SEC. CREFC also educated Members of Congress on the issue, highlighting the potential negative impacts to CRE if the changes cause a contraction in CMBS issuance.
Congress took note of the issue. In October, Rep. Wiley Nickel (D-NC) and Rep. Bryan Steil (R-WI) led a bipartisan letter from 25 House members to the SEC that urged caution on the proposed Conflicts of Interest in Securitization rule.
Go deeper: The final rule addressed several of CREFC’s key concerns:
- The definition of “sponsor” (i.e., one of the defined “securitization participants” that is subject to the rule) was narrowed to exclude service providers that perform only actions related to ongoing administration, such as a servicer. However, in the final release language, the SEC noted that the classification of a “special servicer” would be facts- and- circumstances-based.
- The definition of “sponsor” was also narrowed to exclude “long-only investors” exercising contractual rights. Similar facts and circumstances analysis would be needed here if an entity is both a B-piece buyer and special servicer.
- Coverage of securitization participant affiliates was narrowed to affiliates that act in coordination with a securitization participant or have access to certain information about the ABS.
What’s next: CREFC is continuing to review the rule and will update our membership as needed.
Contact Sairah Burki (sburki@crefc.org) and David McCarthy (dmccarthy@crefc.org) with questions on the issue.