WASHINGTON, D.C. – Today, the Managed Funds Association (MFA) submitted a comment letter to the U.S. Securities and Exchange Commission (SEC) in response to the proposed rule on conflicts of interest in certain securitizations. While MFA appreciates the SEC’s legislative mandate to address conflicts of interest in this context, the letter emphasizes that the proposal is overly broad and unnecessarily prohibits financial activities like hedging, despite the statutory language directing the SEC to only target speculative investments against asset-backed securities. As a result, the letter notes that the proposal could inadvertently harm securitization markets, which have an important role in the creation of credit.
To protect the health of the markets, small and medium-sized businesses’ access to capital, and the returns alternative asset managers generate for investors, including pensions, foundations, and endowments, the letter recommends fixes to the rule that fulfill the legislative mandate while not disrupting important markets.
“The SEC’s proposal on conflicts of interest in securitization is overly broad and will disrupt markets and harm the returns MFA members generate for investors, including pensions, foundations, and endowments,” said MFA President and CEO Bryan Corbett. “MFA’s recommendations tailor the proposal to fulfill the SEC’s legislative mandate and
policy goal of preventing potential misconduct, while protecting the orderly and efficient operation of the securitization markets. The changes will ensure America’s small and mid-size businesses continue to have access to much needed capital.”
The proposed rule imposes broad prohibitions that go beyond the statutory mandate. If unchanged, the expansive prohibitions will increase the cost of credit, decrease borrower access to credit, and reduce hedging. To mitigate these unintended consequences and ensure the final rule promotes a robust, effective, and fair securitization market, MFA recommends the SEC:
● Exclude investors with a long position in an ABS from the definition of “sponsor” as they do not contribute to the policy concerns at the heart of the rule.
● Exclude affiliates, subsidiaries, and employees at securitization firms who are not involved in the creation of the ABS and are firewalled off from the primary securitization participants from the definition of “securitization participant.”
● Allow disclosure as a means of addressing conflicts of interest, aligning with existing federal securities laws.
● Narrow the definition of “conflicted transaction,” as it could encompass transactional
activity that does not equate to investments against ABS that initially prompted the rulemaking.
● Explicitly permit risk-mitigating hedging activities like interest rate hedging, currency hedging, and non-credit-related hedging.
● Remove the “substantial steps” test due to its vagueness, and the compliance period should not begin more than 30 days prior to the first closing of the related ABS sale.
● Provide for a transition period to enable market participants to adjust to the final rule.
MFA’s comment letter is available here.
About the Global Alternative Asset Management Industry
The global alternative asset management industry, including hedge funds, credit funds, and crossover funds, has assets under management of $4 trillion (Q4 2022). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.
About Managed Funds Association
Managed Funds Association (MFA), based in Washington, DC, New York, Brussels, and London, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 170 member firms, including traditional hedge funds, credit funds, and crossover funds, that collectively manage nearly $2.2 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time.
