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Employee Conflicts of Interest NA Regulations

SEC Prohibits Conflicts of Interest in Certain Securitizations

The SEC is adopting Securities Act Rule 192 (part of Section 621 of the Dodd-Frank Act) to prohibit a “Securitization Participant” (e.g., underwriter, placement agent, initial purchaser, sponsor of an asset-backed security, or certain affiliates or subsidiaries) from engaging in any transaction that would involve or result in certain material conflicts of interest.

The rule is intended to prevent the sale of asset-backed securities (“ABS”) that are tainted by material conflicts of interest. It prohibits a “Securitization Participant”, for a specified period of time, from engaging, directly or indirectly, in any transaction that would involve or result in any material conflict of interest between the Securitization Participant and an investor in the relevant ABS. 

What Rule 192 Means for Firms; Information Barriers Policies and Procedures

Importantly, an affiliate or subsidiary of an underwriter, placement agent, initial purchaser, or sponsor will only be a Securitization Participant if, prior to the date of the first closing of the sale of the covered ABS, the affiliate or subsidiary:

  1.  acts in coordination with a Securitization Participant,
  2.  has access to, or receives, information about a covered ABS or the asset pool (underlying or referenced by the relevant ABS).

In other words, the SEC will allow firms to rely on information barriers.

The final rule permits securitization participants to demonstrate a lack of involvement or control through the presence and effectiveness of information barriers or other indicia of separateness.

The SEC acknowledges that whether an affiliate or subsidiary acts in coordination with a Securitization Participant or had access to, or received, information about an ABS, or its underlying asset pool, or referenced asset pool prior to the closing date, will depend on the facts and circumstances of a particular transaction.

The SEC observes that an affiliate and subsidiary may not be a “Securitization Participant” if the named Securitization Participant, for example:

  • Has effective information barriers between it and the relevant affiliate or subsidiary (including written policies and procedures designed to prevent the flow of information between relevant entities, internal controls, physical separation of personnel, etc.) maintains separate trading accounts for the named securitization participant and the relevant affiliate or subsidiary.
  • Does not have common officers (or persons performing similar functions) or employees (other than clerical, ministerial, or support personnel) between the named securitization participant and the relevant affiliate or subsidiary.
  • Is engaged in an unrelated business from the relevant affiliated entity and does not, in fact, communicate with such relevant affiliated entity.
  • Has personnel with oversight or managerial responsibility over accounts of both the named securitization participant and the affiliate or subsidiary, but such persons do not have authority to (and do not) execute trading in individual securities in the accounts or authority to (and do not) pre-approve trading decisions for the accounts.

Any such mechanisms must effectively prevent the affiliate or subsidiary from acting in coordination with the named securitization participant or from accessing, or receiving, information about the relevant ABS or the asset pool underlying or referenced by the relevant ABS.

What Are Material Conflicts of Interest?

The rule prohibits a securitization participant from entering into a “conflicted transaction” for a period beginning on the date on which such a person has reached an agreement to become a Securitization Participant with respect to an ABS and ending one year after the date of the first closing of the ABS’s sale. For purposes of the rule, the term “conflicted transaction” is defined to include two main components:

  • The first component is whether the transaction is:
  • A short sale of the ABS;
  • The purchase of a credit default swap or other credit derivative that entitles the Securitization Participant to receive payments upon the occurrence of specified credit events with respect to the ABS; or
  • The purchase or sale of any financial instrument (other than the relevant ABS) or entry into a transaction that is substantially the economic equivalent of a transaction described above (excluding interest rate or FX hedges).
  • The second component is related to materiality (e.g., whether there is a substantial likelihood a reasonable investor would consider the relevant transaction important to the investor’s investment decision, including a decision whether to retain the ABS).

With Star’s Compliance Control Room and Employee Conflict of Interest Solutions, Securitization Participants can comply with the new information barrier requirements of Securities Act Rule 192 which allows users to:

  1. Define and monitor information barriers to reduce market abuse and reputational risk from one, flexible platform;
  2. Document officers and employees and surface potential conflicts quickly across all deals, personnel, and related parties to ensure there is no overlap or common employees;
  3. Restrict employee trading as necessary across securities supported by a robust security master and legal entity database;
  4. Maintain global watch and restricted lists from one source of truth; and
  5. Maintain a detailed audit trail for every creation, change, or deletion event at any point during the deal lifecycle.

Interested in learning more about StarCompliance’s SaaS and how we can help? Request a demo today