Eight Senators Urge SEC to Finalize Rule on Conflicts of Interest

Finish Line

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Recently, a former SEC trial attorney has placed a bright spotlight on the failure of his old agency to charge more individuals at Goldman Sachs over securities fraud in the “Abacus” deal. Abacus was composed of mortgage securities that Goldman knew were toxic. But they packaged them up and sold to investors anyway, and then actively bet against those investors. It is a stark example of a serious conflict of interest.

Unfortunately, not only have the bankers responsible for the conflicted deals gone unpunished, but also the Dodd-Frank rule targeted at stopping material conflicts of interest remains unfinished. (For more on why the rule is important, see AFR’s 2012 letter).

Last week, Senators Feinstein, Merkley, Markey, Boxer, Franken, Durbin, Warren and Reed sent a letter to the SEC urging them to prioritize completion of this long-neglected rule. The letter highlights that the SEC is over 1,730 days late on completing this rule:

“The SEC was directed to issue rules no later than 270 days after the enactment of Dodd-Frank. It has now been over 2,000 days since the President signed Dodd-Frank into law. This is unacceptable. We urge you to work quickly to finalize strong rules implementing Section 621.”

The letter also highlights the problem with leaving Dodd-Frank’s conflict of interest rule unfinished:

“As you know, Section 621 prohibits material conflicts of interest for those involved in structuring asset-backed securities and serves as a critical component of financial reform based on the lessons we learned from the financial crisis. The U.S. Senate Permanent Subcommittee on Investigations’ April 2011 report on the financial crisis detailed some of the transactions that were designed to fail so that the entities constructing them could bet against them and profit. This is an appalling practice that the SEC can address by releasing a strong final rule on Section 621.

Financial institutions should not be able to sell securities to investors and then bet against those same securities, to purposefully design securities or structures with the intent that they will fail or with defective components, or to mislead investors by structuring products specifically intended to benefit an undisclosed entity. These types of structures are built on deception, and withholding material information is fundamentally contrary to the efficient operation of our financial markets and to the protection of investors.”

 

You can find the complete letter here, or the text below.

 

April 27, 2016

The Honorable Mary Jo White
Chair
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549

Dear Chair White:

We write to express our disappointment that the rule for Section 621 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), also known as the “conflict of interest” rule, has not been implemented. We urge the Securities and Exchange Commission (SEC) to prioritize this rule, which would bar a firm from creating and selling asset-backed securities to clients and then betting against those securities for its own trading account. Some of us have previously raised this issue with you in the past, and we are all disappointed to see that the SEC has done little to move forward on a final rule.

As you know, Section 621 prohibits material conflicts of interest for those involved in structuring asset-backed securities and serves as a critical component of financial reform based on the lessons we learned from the financial crisis. The U.S. Senate Permanent Subcommittee on Investigations’ April 2011 report on the financial crisis detailed some of the transactions that were designed to fail so that the entities constructing them could bet against them and profit. This is an appalling practice that the SEC can better address by releasing a strong final rule on Section 621.

A strong final rule should ensure that financial institutions do not sell securities to investors and then bet against those same securities and do not purposefully design securities or structures with the intent that they will fail or with defective components. These types of structures built on deception are fundamentally contrary to the efficient operation of our financial markets, and we must do more to protect investors.

The SEC was directed to issue rules no later than 270 days after the enactment of Dodd-Frank. It has now been over 2,000 days since the President signed Dodd-Frank into law. This is unacceptable. We urge you to work quickly to finalize strong rules implementing Section 621.

Thank you for your consideration.

Sincerely,

Dianne Feinstein
U.S. Senator

Jeff Merkley
U.S. Senator

Ed Markey
U.S. Senator

Barbara Boxer
U.S. Senator

Al Franken
U.S. Senator

Richard Durbin
U.S. Senator

Elizabeth Warren
U.S. Senator

Jack Reed
U.S. Senator

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