A Small Entity Compliance Guide[1]

Introduction

On November 27, 2023, the Securities and Exchange Commission (“Commission”) adopted new Rule 192 to implement Section 27B of the Securities Act of 1933. For a specified period of time and subject to certain exceptions, the rule prohibits “securitization participants” (as described below) from engaging in any transaction that would involve or result in certain material conflicts of interest between the securitization participant and an investor in the relevant asset-backed security (“ABS”).

As required by Section 27B, Rule 192 provides exceptions to the prohibition for certain risk-mitigating hedging activities, liquidity commitments, and bona fide market-making activities. To rely on these exceptions securitization participants must comply with specific conditions as set forth in the rule.

Who is affected by the rule?

Rule 192 applies to “securitization participants” defined by the rule as an underwriter, placement agent, initial purchaser, or sponsor[2] of an ABS; or any affiliate or subsidiary of such person described above that acts in coordination with such person or that has access to, or receives information about, the relevant ABS or the asset pool underlying or referenced by the relevant ABS prior to the first closing of the sale of the relevant ABS. The rule applies to ABS as defined in Section 3(a)(79) of the Securities Exchange Act of 1934, as well as synthetic ABS and hybrid cash and synthetic ABS.

What transactions does the new rule prohibit?

Rule 192 prohibits a securitization participant from directly or indirectly engaging 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. This prohibition applies from the date on which such person has reached an agreement that such person will become a securitization participant with respect to the relevant ABS and ends on the date that is one year after the date of first closing of the sale of such ABS.

Any of the transactions described below, with respect to which there is a substantial likelihood that a reasonable investor would consider the transaction important to the investor’s investment decision, including a decision whether to retain the ABS, are “conflicted transactions” as defined by the rule and, as such, each constitutes a “material conflict of interest” for purposes of the rule.

• Engaging in a short sale of the relevant ABS;
• Purchasing a credit default swap or other credit derivative pursuant to which the securitization participant would be entitled to receive payments upon the occurrence of specified credit events in respect of the relevant ABS; or
• Purchasing or selling any financial instrument (other than the relevant ABS) or entering into a transaction that is substantially the economic equivalent of the aforementioned transactions, other than, for the avoidance of doubt, any transaction that only hedges general interest rate or currency exchange risk.

What are the exceptions to the new rule’s prohibition?

As required by Section 27B, Rule 192 provides certain exceptions to the prohibition for risk-mitigating hedging activities, liquidity commitments, and bona fide market-making activities of a securitization participant subject to the conditions stated in the rule as summarized below.

• A securitization participant may rely on the risk-mitigating hedging activities exception in connection with and related to its individual or aggregated positions, contracts, or other holdings if the risk is identifiable and the activity is designed to reduce or significantly mitigate such risk, the activity is subject to ongoing recalibration, and a compliance program is established, implemented, maintained, and enforced.
• A securitization participant may rely on the bona fide market-making activities exception related to the relevant ABS, the assets underlying such ABS, or financial instruments that reference such ABS or underlying assets if, among certain other conditions, the market-making related activities are designed not to exceed, on an ongoing basis, the reasonably expected near term demands of clients, customers, or counterparties, the compensation activities of those performing the activities are designed not to reward or incentivize conflicted transactions, and the securitization participant is licensed or registered, if required, to engage in the relevant activity in accordance with applicable law and self-regulatory organization rules. A compliance program must also be established, implemented, maintained, and enforced. The initial distribution of an ABS is not a bona fide market-making activity.
• The liquidity commitments exception allows purchases or sales of the relevant ABS made pursuant to, and consistent with, commitments of the securitization participant to provide liquidity for such ABS.
• Rule 192 prohibits a securitization participant from engaging in a transaction or a series of related transactions that, although in technical compliance with one or more of these exceptions, operate as part of a plan or scheme to evade the rule’s prohibition.

Please refer to the adopting release for a complete description of the new rule.

What is the compliance date of the new rule?

A securitization participant must comply with the prohibition and the requirements of the exceptions to the final rule, as applicable, with respect to any ABS the first closing of the sale of which occurs on or after June 9, 2025.

Other Resources

The adopting release for this new rule can be found on the Commission’s website at https://www.sec.gov/files/rules/final/2023/33-11254.pdf.

Contacting the SEC

The Commission’s Division of Corporation Finance is happy to assist small companies and others with questions regarding the new rule. You may contact the Division for this purpose at (202) 551-3850 or https://www.sec.gov/forms/corp_fin_interpretive.

Questions on other Commission regulatory matters concerning small companies may be directed to the Division’s Office of Small Business Policy at (202) 551-3460.