SEC mulls Wall Street ‘conflicts’ rule, a decade after 1st try

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In Washington, the U.S. Securities and Exchange Commission’s five members were due to vote on whether to propose the rule formally at a meeting set to begin at 10 a.m. EST.

The rule is among the last yet to be adopted under the landmark Dodd Frank Wall Street reform legislation of 2010 that sought to address the root causes of the mortgage crisis, SEC officials said.

The sweeping reforms, named for sponsors Senator Chris Dodd of Connecticut and Representative Barney Frank of Massachusetts, aimed to protect investors and taxpayers by preventing the buildup of risk and liability in the financial system. Among other things, the legislation contained financial stability measures governing banks deemed “too big to fail” and created the Consumer Financial Protection Bureau.

An earlier version of the conflicts rule first proposed in 2011 was never finalized.

In the ensuing years, Democratic lawmakers complained that the SEC had failed to meet a 270-day deadline to issue a rule implementing Dodd Frank’s Section 621. When made effective with an SEC rule, the section would prohibit traders from betting against asset-backed securities they sold to investors.

According to SEC officials, the rule would ban such actions for up to a year following sale of the securities.

In prepared remarks released ahead of the vote, SEC Chairman Gary Gensler said the rule would provide exceptions for legitimate activities, such as hedging to mitigate risk, marketmaking and liquidity commitments.

“Through these congressionally mandated exceptions, the rule would allow these market activities while targeting the conflicts that Congress identified,” Gensler said, adding that the latest version of the rule had been refined in light of feedback from the public.

According to SEC officials, traders who disclosed bets contrary to clients’ investments would still run afoul of the rule.

Without citing prominent recent examples of such conflicts of interest in the asset-backed securities market, SEC officials said the conflicts rule was needed to remove the opportunity and incentive for such conduct.

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