SEC unveils trader conflicts rule

(Reuters) — U.S. Securities and Exchange Commission on Wednesday unanimously voted to propose a rule barring traders in asset-backed securities from betting against the very assets they sell to investors, behavior that became infamous in the wake of the 2008 global financial crisis.

The rule is among the last to be adopted under the landmark Dodd-Frank Wall Street reform legislation of 2010, according to SEC officials. The 2010 legislation sought to address the root causes of the mortgage crisis. An earlier version of the conflicts rule first proposed in 2011 was never finalized.

The sweeping 2010 reforms, named for their 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.

The rule re-proposed Wednesday is now subject to a public comment period during which industry criticisms of certain aspects of the proposal are likely to arise.

In the years after Dodd-Frank's enactment, Democratic lawmakers complained that the SEC had failed to meet a 270-day deadline to issue a rule implementing its 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 the sale of the securities.

In 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, market-making and liquidity commitments.

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