SEC Publishes No-Action Letter on Conflicts on Interest Rule 192
May 20, 2025
The Securities and Exhange Commission (SEC) published a No Action Letter on May 16 in response to a joint trade group effort requesting clarification of the SEC’s Conflicts of Interest in Securitization Rule (Rule 192).
What is Rule 192? Adopted in November 2023, Rule 192, which is required by Dodd-Frank, prohibits securitization participants from engaging in transactions that create material conflicts of interest with investors in ABS (including CMBS).
- Specifically, it bars certain securitization participants from activities like short sales of ABS, purchasing credit default swaps (CDS) that pay off upon a security’s default, or entering into economically equivalent transactions that benefit from a transaction’s poor performance.
- Exceptions exist for risk-mitigating hedging, liquidity commitments, and bona fide market-making, provided they meet specific compliance requirements
While the final rule reflected significant improvement from the proposed rulemaking due to advocacy by CREFC and other trades, financial institutions continued to have significant implementation concerns.
- In particular, firms were concerned that compliance policies could not adequately address the vagueness of the rule’s third prong prohibiting “economic equivalents” of short positions.
- Employees with no knowledge of a deal could unknowingly violate the rule, and enforcing it could require breaching internal information barriers.
On May 9, the financial institutions
requested relief for firms who have appropriate compliance procedures (outlined in the request). The SEC’s NAL granted that relief:
“Specifically, the Division will not recommend enforcement action to the Commission under Rule 192(a)(3)(iii) with respect to a transaction entered into by a securitization participant related to an asset-backed security (as defined in Rule 192(c)) subject to the rule’s prohibition against engaging in conflicted transactions (as defined in Rule 192(a)(3)) where the person entering into such transaction is a Non-Deal Team Employee and the following conditions are satisfied:
- The Securitization Participant has written policies and procedures in place reasonably designed to:
- Prevent the coordination of ABS Deal Teams with Non-Deal Team Employees in connection with the relevant ABS; and'
- Prevent access to, and receipt of, Restricted ABS Information by Non-Deal Team Employees from ABS Deal Teams;[3] and
- The Non-Deal Team Employees did not engage in such coordination with ABS Deal Teams and there was no access to, or receipt of, Restricted ABS Information by Non-Deal Team Employees from ABS Deal Teams; and
- Even if such individuals were in technical compliance with parts (a) and (b) above, they were not part of a plan or scheme to evade the prohibition in Rule 192(a)(1).”
Please contact
Sairah Burki (
sburki@crefc.org) with any questions.