\200\ Id. As discussed in Section II.D.3.c., however, the
exercise of such contractual rights and obligations will not
themselves be conflicted transactions under the final rule. Also, if
the performance of the B-piece buyer's contractual obligations as
special servicer is sufficiently administrative or custodial in
nature to rely on the Service Provider Exclusion and the B-piece
buyer's only other role in the transaction is as a Long-only
Investor, then the B-piece buyer will not be a sponsor under the
final rule.
    \201\ See Section II.B.3.c.
---------------------------------------------------------------------------

    Some commenters requested that market participants acting subject
to a fiduciary duty to a client or customer, such as open-market CLO
collateral managers, municipal advisors,\202\ or other investment
advisers be excluded from the definition of ``sponsor'' because such
participants are already subject to various laws and regulations that
regulate their conduct and address conflict management.\203\ Rule 192
will complement the existing federal securities laws, including those
that govern a market participant's Federal fiduciary duties. As
discussed earlier, the fact that an entity is subject to other rules,
laws, or regulatory policies pertaining to its conduct, including the
existence and management of conflicts of interest, does not preclude
such entity from satisfying the conditions of other regulatory
requirements. Additionally, we recognize, as one commenter stated, that
securitization participants in an ABS subject to Rule 192 do not owe a
fiduciary duty to the investors in an ABS because the securitization
participants' advisory clients are the deal sponsors rather than the
ABS investors.\204\ In cases where a sale of an ABS does not involve
the sale of an interest in a private fund \205\ or other vehicle
advised by an investment adviser, there is no advisory relationship
creating a Federal fiduciary duty owed between a purchaser and seller.
In cases where the private fund issues ABS (such as tranches of a CLO),
the private fund's adviser owes a Federal fiduciary duty to the fund
and the antifraud provisions of the Advisers Act and the rules
thereunder (the ``Antifraud Provisions'') apply.\206\ Such advisers
include CLO collateral managers who will also be subject to Rule 192.
Although the application of an adviser's Federal fiduciary duty, which
requires the adviser to serve the best interests of its clients,\207\
and the Antifraud Provisions provide protections relating to conflicts
of interest that act in harmony with Rule 192, these duties and
provisions do not necessarily require elimination of conflicted
transactions. Accordingly, a fiduciary duty-based exclusion from Rule
192 would frustrate Section 27B's prophylactic investor protection
objectives to eliminate certain conflicted transactions.
---------------------------------------------------------------------------

    \202\ See Section II.B.3.b.i. for additional discussion about
Rule 192's application to municipal advisors.
    \203\ See, e.g., letters from ABA; ICI; LSTA IV; NAMA; Wulff
Hansen.
    \204\ See letter from SIFMA I.
    \205\ Section 202(a)(29) of the Investment Advisers Act of 1940
(the ``Advisers Act'') defines the term ``private fund'' as an
issuer that would be an investment company, as defined in section 3
of the Investment Company Act of 1940 (15 U.S.C. 80a-3), but for
section 3(c)(1) or 3(c)(7) of that Act.
    \206\ See 17 CFR 275.206(4)-8 (``Advisers Act Rule 206(4)-8''),
which prohibits investment advisers to a pooled investment vehicle
from (1) making untrue statements of a material fact or omitting to
state a material fact necessary to make the statements made, in the
light of the circumstances under which they were made, not
misleading, to any investor or prospective investor in the pooled
investment vehicle; or (2) otherwise engaging in any act, practice,
or course of business that is fraudulent, deceptive, or manipulative
with respect to any investor or prospective investor in the pooled
investment vehicle). See also Prohibition of Fraud by Advisers to
Certain Pooled Investment Vehicles, Release No. IA-2628 (Aug. 3,
2007) [72 FR 153 (Aug. 9, 2007)]).
    \207\ See Commission Interpretation Regarding Standard of
Conduct for Investment Advisers, Release No. IA-5248 (June 5, 2019)
[84 FR 33669 (July 12, 2019)] (``IA Interpretation'').
---------------------------------------------------------------------------

    Some commenters also stated that an adviser's Federal fiduciary
duty may address conflicts of interest, including through appropriate
disclosure and informed client consent.\208\ As the Commission has
stated, while full and fair disclosure of all material facts relating
to the advisory relationship or of conflicts of interest and a client's
informed consent prevent the presence of those material facts or
conflicts themselves from violating the adviser's fiduciary duty, such
disclosure and consent do not satisfy the adviser's duty to act in the
client's best interest.\209\ By contrast, Rule 192 sets forth an
express prohibition against certain conflicted transactions. The final
rule will therefore provide additional prophylactic protections for ABS
investors by requiring the elimination of those conflicted
transactions. For these reasons, we do not believe it would be
necessary, appropriate, or consistent with the investor protection
objectives of Section 27B to provide a fiduciary duty-based exclusion
from the definition of ``sponsor.''
---------------------------------------------------------------------------

    \208\ See, e.g., letters from AIMA/ACC; ICI; SIFMA I. See also
IA Interpretation at 33676 (noting that an adviser must eliminate or
at least expose through full and fair disclosure the conflicts
associated with its allocation policies, including how the adviser
will allocate investment opportunities between clients, such that a
client can provide informed consent.).
    \209\ See IA Interpretation at 33676.
---------------------------------------------------------------------------

    Some commenters also expressed concern that investment advisers who
do not participate in the structuring or distribution of ABS would be
captured by the proposed definition of ``securitization participant''
only as a result of being an affiliate or subsidiary of another named
securitization participant.\210\ One of these commenters stated,
however, that permitting the use of information barriers in the final
rule would ``solve this problem.'' \211\ Our changes to the scope of
the affiliates and subsidiaries covered by the rule, including
permitting securitization participants and their affiliates and
subsidiaries to employ various mechanisms (such as information
barriers) to prevent coordination or sharing of information tailored to
their organization,\212\ will help address commenters' concerns about
the rule's applicability to affiliates and subsidiaries. Therefore, a
fiduciary duty-based exclusion to address these concerns is
unnecessary.\213\
---------------------------------------------------------------------------

    \210\ See, e.g., letters from AIC; ICI; LSTA IV. For example,
these commenters stated that investment advisers may engage in
separate businesses that are unrelated to their securitization
activities, and thus those entities and their employees would have
no knowledge of, or involvement in, the securitization activity. See
also letter from SFA II (stating that advisers typically have
fiduciary duties to multiple clients and that such advisers must act
in the best interest of each client separately).
    \211\ See letter from LSTA IV.
    \212\ See Section II.B.3.c.
    \213\ See also Section II.D. for a discussion of the revised
definition of ``conflicted transaction'' and the rule's
applicability to transactions undertaken pursuant to a fiduciary
duty.
---------------------------------------------------------------------------

    Some of these commenters also requested that municipal advisors be
excluded from the definition of ``sponsor.'' \214\ These commenters
stated that, in addition to the reasons already stated that make it
unlikely that a municipal issuer would engage in conflicted
transactions, municipal advisors also have a fiduciary duty to their
clients, various existing rules and regulations governing their
conduct, and that any proprietary bet by a municipal advisor against
its client's ABS would already be a violation of the federal securities
laws.\215\ Municipal advisors

participate in structuring the securities, and although municipal
advisors may be subject to other provisions that regulate their
conduct, we are not persuaded that advisors to municipal ABS are
uniquely different from other securitization participants such that
they should be excluded from the final rule. The fact that such
entities are subject to potential liability for violations of other
laws and regulations does not preclude the Commission from subjecting
them to other rules with different objectives. In particular, we note
that a municipal advisor's fiduciary duty is to its municipal entity
clients, not to investors, and therefore would not necessarily require
elimination of conflicted transactions.\216\ As discussed earlier, Rule
192 will complement the existing federal securities laws, including
general anti-fraud and anti-manipulation provisions, as well as those
that apply specifically to securitization, by prophylactically
protecting against the sale of ABS tainted by material conflicts of
interest.\217\
---------------------------------------------------------------------------

    \214\ See letters from NAMA; Wulff Hansen.
    \215\ Id. See also Sections II.B.3.c. and II.D.3. for additional
discussions with respect to fiduciary duties in relation to Rule
192.
    \216\ 15 U.S.C. 78o-4(c)(1).
    \217\ See Section I.C.
---------------------------------------------------------------------------

    The Commission also received comment requesting that providers of
warehouse financing be excluded from the definition of ``sponsor.''
\218\ A warehouse financing facility is a secured loan from a warehouse
lender to provide capital to sponsors to acquire and aggregate assets
for securitization.\219\ One commenter stated that, because a warehouse
lender bears the risk with respect to any assets that cannot be
securitized, it acts pursuant to strict underwriting standards
reflective of the lender's risk tolerance.\220\ If a lender determines
that it is unwilling to lend against certain assets, this commenter
stated that such influence over the exclusion of those assets could be
construed as directing or causing the direction of the structure,
design, or assembly of an ABS or the composition of the asset
pool.\221\ As stated in the Proposing Release, the rule is not designed
to hinder routine securitization activities that do not give rise to
the risks that Section 27B was intended to address.\222\ Warehouse
financing is a routine activity to finance the purchase of assets by a
securitization participant in furtherance of the issuance of an ABS. A
warehouse lender whose role is to engage in such routine lending
activity with respect to the ABS, including the lender's right to
determine which assets it is or is not willing to finance pursuant to
its underwriting standards, does not meet the definition of ``sponsor''
under the final rule.\223\ However, if a securitization participant has
an affiliate or subsidiary that is a warehouse lender, and such
affiliate or subsidiary meets the definition of securitization
participant in Rule 192(c), such person will be subject to the
prohibition in Rule 192(a).\224\
---------------------------------------------------------------------------

    \218\ See letter from ABA.
    \219\ See also Section II.D.
    \220\ Id.
    \221\ Id.
    \222\ See Proposing Release Section II.D.1.
    \223\ See also Section II.D. below for a discussion of why
warehouse financing is not a ``conflicted transaction'' under the
final rule.
    \224\ See Section II.B.3.c.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission explained that the
definition of Contractual Rights Sponsor in paragraph (ii)(A) would not
require an actual exercise of contractual rights. Two commenters
opposed this approach, stating that such person should only be a
sponsor if it actually exercised its contractual rights to direct or
cause the direction of the structure, design, or assembly of an ABS or
the underlying or referenced assets.\225\ One of these commenters
requested that, if the definition of ``sponsor'' is not limited to
paragraph (i), the final rule should define ``sponsor'' to include a
Regulation AB-based Sponsor or both a Contractual Rights Sponsor and
Directing Sponsor (i.e., a person who both has a contractual right to,
and actually does, direct or cause the direction of the structure,
design, or assembly of an ABS or the underlying or referenced
assets).\226\ This commenter stated that any person who does not have
the contractual right, but that is actually involved in the structuring
of an ABS or the composition of the underlying or referenced asset
pool, would have no practical ability to structure the ABS to fail
because the Regulation AB-based Sponsor in the deal (who has exposure
to the credit risk of the ABS by operation of the risk retention
requirement in Regulation RR) would have no reason to take direction
from such person, and that any person who has the contractual right but
does not exercise it has no real culpability.\227\ While the risk
retention requirement in Regulation RR does contribute to the alignment
of interests between ABS sponsors and investors, not all types of ABS
that are subject to the prohibition in Rule 192 are subject to
Regulation RR. A sponsor of an ABS that is not subject to Regulation RR
would not be required to retain exposure to the credit risk of the ABS,
meaning that there may not be an alignment of interests between the
sponsor and investors, which could create an opportunity for the
sponsor to be influenced by a third party's requests. Moreover, any
person with a contractual right to structure, design, or assemble an
ABS or the underlying or referenced pool of assets--whether those
rights are exercised or not--would have access to information about the
ABS or its underlying or referenced assets prior to the sale of the ABS
and would therefore have the opportunity to use that information to
engage in a conflicted transaction with respect to such ABS or
underlying or referenced assets. As discussed above, final Rule 192 is
designed to eliminate such opportunity and incentive. As such, a person
may be a ``sponsor'' subject to the prohibition in final Rule 192 if it
is either a Regulation AB-based Sponsor or a Contractual Rights
Sponsor, and the final rule does not require that an actual exercise of
contractual rights is necessary to meet the definition of ``sponsor.''
Consequently, a person who meets the definitional criteria in Rule
192(c) can be a ``sponsor'' regardless of whether it is referred to as
the sponsor or some other title (e.g., issuer, depositor, originator,
collateral manager).
---------------------------------------------------------------------------

    \225\ See letters from AIC; SIFMA I (stating that such a
position would be inconsistent with the ordinary and natural meaning
of the term). We discuss the comments related to the ``ordinary and
natural meaning'' of sponsor earlier in this section.
    \226\ See letter from AIC.
    \227\ Id.
---------------------------------------------------------------------------

    While we understand commenter concerns about the number and types
of entities that may be sponsors under the rule, we continue to
believe, for the reasons discussed above, that the scope of the
definition is necessary to capture the relevant securitization
participants that would have the incentive and ability to engage in
conflicted transactions as a result of their ability to structure,
design, or assemble an ABS or its underlying or referenced asset pool.
Moreover, we believe that commenters' concerns will be mitigated by the
revisions made to the definition of ``sponsor'' to exclude Long-only
Investors and to not adopt the proposed definition of Directing
Sponsor, as discussed above, and to the scope of affiliates and
subsidiaries captured by the definition of ``securitization
participant'' discussed in Section II.B.3.c. below, as well as the
guidance that we have provided with respect to certain market
participants discussed in this section and in the discussion about the
Service Provider Exclusion in Section II.B.3.b.iii. below.
iii. Service Provider Exclusion
    Commenters generally supported an exclusion from the definition of

``sponsor'' for transaction parties performing the enumerated types of
activities, but requested certain modifications to clarify the scope of
the exclusion.\228\ Several commenters stated that the activities
performed over the life of the securitization by servicers, special
servicers, and other contractual providers are consistent with the
activities enumerated in the Service Provider Exclusion in proposed
paragraph (ii)(C) and requested that servicers be specifically listed
in the exclusion.\229\ Some commenters further requested that the rule
include an explicit exclusion for credit rating agencies in the final
rule text.\230\
---------------------------------------------------------------------------

    \228\ See, e.g., letters from AIC; CREFC I; LSTA III; LSTA IV;
MBA; SFA II; SIFMA I; SIFMA II.
    \229\ See, e.g., letters from AIC; CREFC I; CREFC II; MBA; SFA
II; SIFMA I. One of these commenters noted that its membership was
not in agreement with respect to whether a special servicer in CMBS
transactions should be included in the Service Provider Exclusion.
See letter from SFA II.
    \230\ See letters from LSTA III; SFA I; SFA II; SIFMA I.
---------------------------------------------------------------------------

    Consistent with the view expressed by the Commission in the
Proposing Release,\231\ we agree with commenters that the activities
customarily performed by accountants, attorneys, and credit rating
agencies with respect to the creation and sale of an ABS, as well as
the activities customarily performed by trustees, custodians, paying
agents, calculation agents, and servicers,\232\ relating to the ongoing
management and administration of the entity that issues the ABS and its
related assets, are the types of activities described in the Servicer
Provider Exclusion. We understand, however, commenters' concern that,
because the proposed text of the exclusion did not refer specifically
to activities that constitute ``ongoing administration'' of the ABS or
the underlying or referenced asset pool, the scope of the exclusion as
proposed could be read to refer only to activities performed in
connection with the initial creation of the securitization and
therefore was not sufficiently clear.\233\
---------------------------------------------------------------------------

    \231\ See Proposing Release at 9686.
    \232\ See Section II.D. below for a discussion of servicing
activity as it relates to the definition of ``conflicted
transaction'' under the rule.
    \233\ See, e.g., letters from AIC; CREFC I; CREFC II; MBA; SFA
I; SFA II.
---------------------------------------------------------------------------

    We are revising the definition of ``sponsor'' to align with the
Commission's intent as stated in the Proposing Release and in response
to commenter requests to specify in the rule text that the activities
performed over the life of the securitization by third-party servicers
and other contractual providers \234\ are consistent with the
activities enumerated in the rule.\235\ As adopted, therefore, the
definition of ``sponsor''--notwithstanding paragraph (ii)--excludes any
person that performs only administrative, legal, due diligence,
custodial, or ministerial acts related to the structure, design,
assembly, or ongoing administration of the ABS or the composition of
the pool of assets underlying or referenced by the ABS (the Service
Provider Exclusion).\236\ For purposes of the Service Provider
Exclusion, ``ongoing administration'' refers to the types of activities
typically performed by servicers, trustees, custodians, paying agents,
calculation agents, and other contractual service providers pursuant to
their contractual obligations in a securitization transaction over the
life of the ABS; it does not refer to active portfolio management or
other such activity that would be subject to the ``sponsor''
definition.\237\
---------------------------------------------------------------------------

    \234\ Servicers and other contractual service providers whose
activities meet the criteria specified in the Service Provider
Exclusion may nonetheless be securitization participants subject to
the prohibition in Rule 192(a)(1) with respect to the relevant ABS
if, for example, such person is an affiliate or subsidiary of a
named securitization participant. See Section II.B.3.c.
    \235\ See, e.g., letters from AIC; CREFC I; CREFC II; MBA; SFA
II; SIFMA I.
    \236\ Because the types of activities listed in the Service
Provider Exclusion rule text already cover the activities of credit
rating agencies, no additional revision to the rule text is
unnecessary.
    \237\ See, e.g., the discussion in Section II.D. below related
to normal-course servicing activity in a covered transaction not
constituting a ``conflicted transaction'' under the final rule.
---------------------------------------------------------------------------

    Some commenters also requested that we replace the qualifier
``only'' in the Service Provider Exclusion with ``primarily,'' \238\
stating that the use of ``only'' erodes the exclusion because the
administrative, legal, due diligence, custodial, or ministerial acts
performed by the service providers discussed above could also be viewed
as activities causing the direction of the structure, design, or
assembly of an ABS or the composition of the pool assets.\239\ As one
of these commenters pointed out, such activities could include the
drafting and negotiation of the operating and disclosure documents with
respect to an ABS, setting fees to be paid to certain transaction
parties, reviewing the asset pool, negotiating the priority of payments
within an ABS transaction, potentially advising on how to structure an
ABS to meet the objectives of the deal parties, collecting payments on
underlying assets, and making distributions to bondholders.\240\ While
we agree that such activities could be understood to be consistent with
the activities described in the Contractual Rights Sponsor definition,
we also agree that they are consistent with the administrative, legal,
due diligence, custodial, and ministerial activities covered by the
Service Provider Exclusion. As the Commission stated in the Proposing
Release, the Service Provider Exclusion is intended to avoid
inadvertently including certain parties to securitization transactions
whose contractual rights could be interpreted as consistent with the
activities described in paragraph (ii) of the definition of ``sponsor''
but who are otherwise not the parties that Section 27B was intended to
cover. For this reason, so long as a person's activities with respect
to the relevant ABS are only administrative, legal, due diligence,
custodial, or ministerial in nature, the Service Provider Exclusion is
available ``notwithstanding'' the fact that such a person's contractual
rights could also be understood to be captured by paragraph (ii) of the
definition of sponsor. Accordingly, we do not believe that changing
``only'' to ``primarily'' is necessary.
---------------------------------------------------------------------------

    \238\ See, e.g., letters from SFA I; SFA II; SIFMA II.
    \239\ See, e.g., letters from SFA I; SFA II.
    \240\ See letter from SFA II.
---------------------------------------------------------------------------

    Moreover, we continue to believe that limiting the exclusion in
this way is necessary to ensure that it does not inadvertently extend
to deal participants with more active participation in the creation and
administration of asset-backed securities. For example, a special
servicer can potentially have a significant role in the servicing and
disposition of troubled assets in an asset pool, such as the ability to
determine whether (and when) to negotiate a workout of a loan, take
possession of the property collateralizing a loan, and purchase the
loan out of the securitization at a discount and, therefore, the
special servicer's activities may not be limited to the types of
administrative or ministerial functions eligible for the
exclusion.\241\ As such, whether a special servicer qualifies for the
exclusion will depend on the facts and circumstances of the ABS and the
activities performed by the special servicer.\242\ Similarly, as
support for its request that the Service Provider Exclusion include
activities relating to ongoing administration of the ABS, one commenter
gave the example of a

situation in which a placement agent for a CLO may also be an
administrative agent under a loan that underlies a CLO and therefore
has various duties that it must perform.\243\ This commenter requested,
therefore, that the final rule include an exception for actions taken
by securitization participants pursuant to their duties under the CLO
or underlying loan documents and stated that including ongoing
administration activities in the Service Provider Exclusion would
achieve that.\244\ In the example provided by this commenter, such
administrative agent is also the placement agent for the relevant ABS,
and therefore will be ineligible to rely on the Service Provider
Exclusion because its activities are not ``only'' administrative in
nature and because, as placement agent, such person is a securitization
participant pursuant to the definition of ``placement agent'' in Rule
192(c).\245\ For these reasons we do not believe that it would be
appropriate to revise the exclusion as requested.
---------------------------------------------------------------------------

    \241\ See Section II.B.3.b.ii. and Section II.D.1.c.iii.
    \242\ For example, if the special servicer for a CMBS
transaction is also the B-piece buyer (or an affiliate or subsidiary
of the B-piece buyer) and can exercise such contractual rights with
respect to the asset pool without needing to obtain the consent of
any unaffiliated investor or transaction party in the CMBS
transaction, then the special servicer's activities are not only
administrative, legal, due diligence, custodial, or ministerial in
nature with respect to such CMBS transaction.
    \243\ See letter from LSTA IV.
    \244\ Id.
    \245\ See Section II.B.3.a.
---------------------------------------------------------------------------

    The Commission also received comment requesting that third-party
asset sellers be included in the Servicer Provider Exclusion.\246\ A
third-party asset seller is a third-party originator who sells loans or
other assets to the ultimate ABS sponsor before those assets are
transferred into the securitization structure. The purchase of assets
from unaffiliated originators to be later transferred into a
securitization is a routine capital market function through which the
seller would not have the contractual right to direct or cause the
direction of the structure, design, or assembly of an ABS or the
composition of the underlying or referenced pool of assets. Such
persons' activities are limited to merely originating assets that are
then transferred to the ABS sponsor in a true sale; they do not have
ongoing roles or contractual rights or duties with respect to the
assets or the ultimate ABS. Therefore, while we do not believe that the
function performed by these third-party asset sellers is consistent
with the types of activities enumerated in the Service Provider
Exclusion, we do agree that such persons are not ``sponsors'' under the
rule.\247\
---------------------------------------------------------------------------

    \246\ See letter from SFA II.
    \247\ An originator that is affiliated with an underwriter,
placement agent, initial purchaser, or sponsor of a covered
transaction, however, may be a securitization participant subject to
the rule's prohibition against engaging in conflicted transactions.
See Section II.B.3.c. below.
---------------------------------------------------------------------------

iv. U.S. Government Exclusion
    Consistent with the proposal, the United States or an agency of the
United States is not a ``sponsor'' for purposes of the final rule with
respect to its ABS that are fully insured or fully guaranteed as to the
timely payment of principal and interest.\248\ However, in a change
from the proposal, we are not adopting the proposed exclusion from the
``sponsor'' definition for the Enterprises, which we discuss in greater
detail below.
---------------------------------------------------------------------------

    \248\ 17 CFR 192(c).
---------------------------------------------------------------------------

    With respect to an ABS that is fully insured or fully guaranteed as
to the timely payment of principal and interest by the United States,
it is the United States as guarantor that is exposed to the full credit
risk related to the underlying assets, rather than the investors in the
ABS.\249\ This is because investors in such ABS rely on the support
provided by the full faith and credit of the United States and not on
the creditworthiness of the obligors on the underlying assets, meaning
they are not exposed to the credit risk of the underlying assets.\250\
Consequently, investors in such ABS are not exposed to the risk that
was present in certain ABS transactions at the time of the financial
crisis of 2007-2009 where investors suffered credit-based losses due to
the poor performance of the relevant asset pool while key
securitization parties entered into transactions to profit from such
poor performance.
---------------------------------------------------------------------------

    \249\ See Proposing Release Section II.B.2.c.
    \250\ Id.
---------------------------------------------------------------------------

    Commenters supported the proposal to exclude the United States
Government and its agencies from the definition of ``sponsor,'' \251\
with one of these commenters specifically agreeing that mortgage-backed
securities (``MBS'') guaranteed by the Government National Mortgage
Association (``Ginnie Mae'') are fully guaranteed by the United States
Government \252\ and thus should be excluded from the ``sponsor''
definition.\253\ This commenter also stated that, because issuers of
Ginnie Mae MBS have ``considerable discretion'' over which loans to
include in the MBS, those issuers should be sponsors under the
rule.\254\ For purposes of the final rule, and as noted in the
Proposing Release, the exclusion in paragraph (iv) of the definition of
``sponsor'' applies only to the specified entities (i.e., the United
States or an agency of the United States).\255\ Any other
securitization participant involved with an ABS issued or guaranteed by
a specified entity (e.g., an underwriter or a non-governmental sponsor)
is subject to the prohibition in Rule 192 against engaging in
transactions that effectively represent a bet against the relevant
ABS.\256\ If, therefore, the issuer of a fully-guaranteed Ginnie Mae
ABS meets the definition of ``sponsor'' as adopted,\257\ such issuer is
prohibited from engaging in conflicted transactions.\258\
---------------------------------------------------------------------------

    \251\ See, e.g., letters from M. Calabria; SIFMA I.
    \252\ See Title III of National Housing Act, 12 U.S.C. 1716-1723
(2019) (stating that ``[t]he full faith and credit of the United
States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection.'')
available at https://www.ginniemae.gov/about_us/what_we_do/Documents/statutes.pdf.
    \253\ See letter from M. Calabria.
    \254\ Id.
    \255\ See Rule 192(c) and Proposing Release Section II.B.2.c.
    \256\ Id.
    \257\ See Sections II.B.3.b.i. and II.B.3.b.ii.
    \258\ See Section II.D. for a discussion of what constitutes a
``conflicted transaction'' under the final rule.
---------------------------------------------------------------------------

    Comments related to the proposed exclusion from the definition of
``sponsor'' for the Enterprises were mixed. Some commenters supported
the exclusion of Fannie Mae and Freddie Mac from the ``sponsor''
definition with some modifications to extend the exclusion beyond
conservatorship,\259\ with one suggesting that the exclusion be
conditioned on the Enterprises retaining their current status as
government sponsored entities because the Federal Housing Finance
Agency's (``FHFA'') oversight sufficiently guards against the types of
behavior that Section 27B is intended to prevent.\260\ Another
commenter suggested that, in addition to the exclusion from the
``sponsor'' definition, the rule should exclude from the definition of
``asset-backed security'' any ABS that is fully insured or fully
guaranteed as to the timely payment of principal and interest by the
Enterprises while operating under the conservatorship or receivership
of the FHFA.\261\
---------------------------------------------------------------------------

    \259\ See, e.g., letters from Fannie and Freddie; SFA II.
    \260\ See letter from Fannie and Freddie.
    \261\ See letter from ABA. As discussed below, the final rule
does not include an exclusion from the definition of ``sponsor'' for
the Enterprises while in conservatorship in light of concerns that
the proposed exclusion was unclear and concerns regarding the impact
of an automatic change to the Enterprises' status immediately upon
existing conservatorship. For the same reasons, the final rule does
not contain an exclusion for an ABS that is fully insured or fully
guaranteed as to the timely payment of principal and interest by the
Enterprises while in conservatorship. See Section II.A. for more
information about the types of ABS that are subject to the final
rule.
---------------------------------------------------------------------------

    Some commenters, however, opposed including the Enterprises in the
exclusion from the ``sponsor''

definition.\262\ One commenter stated that the capital support from the
United States while in conservatorship or receivership is not an
explicit government guarantee of the Enterprises' ABS or MBS.\263\
Another commenter suggested that the Enterprises should be sponsors for
purposes of Rule 192, but that the final rule should permit credit risk
transfer (``CRT'') transactions regardless of sponsor,\264\ which would
treat the Enterprises and other market participants alike.
---------------------------------------------------------------------------

    \262\ See, e.g., letters from HPC; M. Calabria.
    \263\ See letter from M. Calabria. This commenter also stated
that an exclusion from the prohibition in Rule 192 would
disincentivize or prevent the Enterprises from leaving
conservatorship.
    \264\ See letter from HPC.
---------------------------------------------------------------------------

    Because, as proposed, the Enterprise exclusion from the ``sponsor''
definition would only apply with respect to ABS fully guaranteed by the
Enterprises and not with respect to the CRT securities they issue,\265\
some commenters expressed concerns that, together with the proposed
restriction that the initial distribution of an asset-based security
would not be risk-mitigating hedging,\266\ the proposed rule would have
the effect of prohibiting all Enterprise CRTs as per se conflicted
transactions.\267\ Some commenters stated that, for this reason, the
cumulative effect of the proposed approach (i.e., to exclude the
Enterprises as sponsors with respect to fully-guaranteed ABS, but not
with respect to CRTs, and to exclude CRT transactions from the risk-
mitigation hedging exception) was unclear.\268\ To address this
concern, one commenter requested that either the Enterprises be
excluded from the ``sponsor'' definition in perpetuity (or until the
Commission revisited the exclusion), or that the Enterprises' synthetic
ABS issuances (i.e., CRT transactions) be permitted to qualify under
the risk-mitigating hedging exception so long as they continue to be
government-sponsored enterprises.\269\ Alternatively, this commenter
requested that the sponsor exclusion remain in place for at least 24
months following the Enterprises' exit from conservatorship to permit
the Commission to make a determination after the nature of the post-
conservatorship landscape becomes clear.\270\ Relatedly, one commenter
stated that permitting the Enterprises to continue their credit risk
transfer securitization program under the risk-mitigating hedging
exception would provide more clarity and certainty for all participants
involved than excluding the Enterprises from the ``sponsor''
definition.\271\
---------------------------------------------------------------------------

    \265\ The Enterprises engage in security-based credit risk
transfer transactions to allow for efficient mitigation of the
Enterprises' retained credit risk associated with their holdings of
residential and commercial mortgages and MBS. A security-based CRT
transaction typically involves the issuance of unguaranteed ABS by a
special purpose trust where the performance of such ABS is linked to
the performance of a reference pool of mortgage loans that
collateralize Enterprise guaranteed-MBS. As part of a security-based
CRT transaction structure, the relevant Enterprise enters into an
agreement with the special purpose trust pursuant to which the trust
has a contractual obligation to pay the Enterprise upon the
occurrence of certain adverse events with respect to the referenced
mortgage loans. See letter from Fannie and Freddie; see also, e.g.,
the relevant legal documentation and other related information about
Freddie Mac's single-family transaction, available at https://capitalmarkets.freddiemac.com/crt/securities/deal-documents.
    \266\ See Section II.E.
    \267\ See, e.g., letters from ABA; Fannie and Freddie; SFA I.
Some of these commenters stated that they did not believe that this
was the intent in light of the Commission's statement in the
Proposing Release that the exclusion from the ``sponsor'' definition
should address concerns that, absent such an exception, an
Enterprise might be prohibited from engaging in a security-based CRT
transaction. See letters from ABA; SIFMA II.
    \268\ See, e.g., letters from ABA; Fannie and Freddie; SIFMA II.
    \269\ See letter from Fannie and Freddie. See also Section II.E.
for a discussion of the risk-mitigation hedging exception under the
final rule.
    \270\ See letter from Fannie and Freddie.
    \271\ See letter from SIFMA II.
---------------------------------------------------------------------------

    After considering the comments received, we are not adopting the
proposed Enterprise exclusion from the ``sponsor'' definition and,
therefore, the Enterprises are sponsors under the final rule with
respect to any ABS they issue, whether or not it is fully guaranteed.
Although we still believe that, while the Enterprises are in
conservatorship, investors in their guaranteed ABS are not exposed to
the same types of risk that existed in certain ABS transactions leading
up the financial crisis of 2007-2009,\272\ that would not be the case
once the Enterprises exit conservatorship. In light of the concerns
that the cumulative effect of the proposed exclusion from the
``sponsor'' definition and the proposed exception for risk-mitigating
hedging activities was unclear, we have concluded that including the
Enterprises as sponsors and permitting Enterprise CRT transactions so
long as they meet the conditions enumerated in the risk-mitigating
hedging exception,\273\ would provide more certainty for the
Enterprises and the market. Further, we believe that the revisions to
the definition of ``conflicted transactions,'' together with the
revised exception for risk-mitigating hedging activities discussed
below, sufficiently address commenter concerns with respect to the
ability of the Enterprises to continue to engage in CRT transactions
for purposes of managing their credit risk.\274\ As sponsors--and,
thus, securitization participants--subject to the prohibition in Rule
192(a) against engaging in conflicted transactions, the Enterprises are
subject to the same limitations on such behavior as private market
participants.
---------------------------------------------------------------------------

    \272\ See Proposing Release Section II.B.2.c.
    \273\ See Section II.E.
    \274\ As discussed in detail below, the definition of
``conflicted transaction'' in final Rule 192(a)(3) captures the
relevant conflict of interest in the context of the issuance of a
new synthetic ABS (e.g., the issuance of a CRT transaction), but
such synthetic ABS will be permissible if it meets the conditions
for the exception for risk-mitigating hedging activities.
Furthermore, the synthetic ABS will be subject to the rule and the
related securitization participants will be subject to the
prohibition. See Sections II.D. and II.E. below.
---------------------------------------------------------------------------

c. Affiliates and Subsidiaries
    After consideration of commenters' concerns and recommendations,
discussed in detail below, we are revising paragraph (ii) of the
definition of ``securitization participant'' to limit which affiliates
or subsidiaries \275\ are securitization participants. An affiliate or
subsidiary is a securitization participant for purposes of the final
rule only if it acts in coordination with \276\ an underwriter,
placement agent, initial purchaser, or sponsor or if it has access to
or receives information about the relevant ABS or the asset pool
underlying or referenced by the relevant ABS prior to the date of the
first closing of the sale of the relevant ABS.\277\
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    \275\ For purposes of the final rule, the terms ``affiliate''
and ``subsidiary'' will have the same meaning as in Securities Act
Rule 405 (17 CFR 230.405). Under Securities Act Rule 405, an
``affiliate'' of a specified person is a person that directly, or
indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the person
specified, and a ``subsidiary'' of a specified person means an
affiliate controlled by such person directly, or indirectly through
one or more intermediaries. Securities Act Rule 405 also defines the
term ``control'' to mean the possession, direct or indirect, of the
power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting
securities, by contract, or otherwise. 17 CFR 230.405.
    \276\ As suggested by one commenter, an affiliate or subsidiary
would be acting in coordination with a named securitization
participant if it (i) directly engages in the structuring of or
asset selection for the securitization, (ii) directly engages in
other activities in support of the issuance and distribution of the
ABS, or (iii) otherwise acts in concert with its affiliated
securitization participant through, e.g., coordination of trading
activities. See letter from ABA.
    \277\ 17 CFR 230.190(c).
---------------------------------------------------------------------------

    While some commenters supported the proposal to include affiliates
and subsidiaries of underwriters, placement agents, initial purchasers,
and sponsors as securitizations participants,\278\ many commenters
expressed concerns that the

proposed approach would hinder market participants' ability to
effectively comply with the rule's prohibition.\279\ Commenters stated
that compliance with Rule 192 as proposed could interfere with
securitization participants' ability to comply with existing
information barriers, including those that may be required by other
applicable Federal- and State-level laws, in order to effectively
implement a compliance program designed to monitor for, and prevent the
occurrence of, potentially conflicted transactions.\280\ Some of these
commenters acknowledged that Section 27B specifies that the prohibition
applies to affiliates and subsidiaries of other named securitization
participants \281\ and many supported such application in circumstances
in which affiliates or subsidiaries have direct involvement in, or
knowledge of, the covered ABS or are otherwise acting in coordination
with the named securitization participant.\282\ Commenters recommended
various approaches to address their stated concerns, which can
generally be grouped into three categories, which we discuss below.
---------------------------------------------------------------------------

    \278\ See, e.g., letters from AARP dated Mar. 23, 2023
(``AARP''); Better Markets.
    \279\ See, e.g., letters from ABA; AIC; AFME; AIMA/ACC; ICI;
LSTA III; LSTA IV; MFA II; SFA I; SIFMA I.
    \280\ See, e.g., letters from ABA; AIC; AFME; ICI; MFA II. Some
commenters also expressed concern that, without recognizing
information barriers or including other limitations on the rule's
applicability to affiliates and subsidiaries, the prohibition could
apply to foreign affiliates and subsidiaries of U.S.-based
securitization participants regardless of their participation in the
transaction. See, e.g., letters from AFME; AIC. We believe that,
together with the discussion in Section II.A.3.c. above about the
cross-border application of Rule 192, the definition of
``securitization participant'' with respect to affiliates and
subsidiaries, as discussed in greater detail below, will
appropriately limit such application only to those affiliates and
subsidiaries who have direct involvement in, or access to
information about, a covered ABS, which should mitigate these
concerns.
    \281\ See, e.g., letters from ABA; SFA I; SFA II.
    \282\ See, e.g., letters from ABA; AFME; ICI; LSTA III; SFA II;
SIFMA I; SIFMA II.
---------------------------------------------------------------------------

    First, several commenters requested that the rule exclude
affiliates and subsidiaries from the definition of ``securitization
participant'' and instead treat a securitization participant's use of
an affiliate or subsidiary to indirectly engage in a conflicted
transaction as an evasion of the prohibition in Rule 192(a).\283\ To
implement this recommendation, commenters suggested that the proposed
anti-circumvention provision could be revised to make clear that a
securitization participant could not engage in a transaction as part of
a plan or scheme to evade the prohibition of the rule, whether directly
or indirectly, including through the use of affiliates and
subsidiaries.\284\ Section 27B, however, states that affiliates and
subsidiaries of an underwriter, placement agent, initial purchaser, or
sponsor of a relevant ABS are subject to the prohibition in their own
right, not merely that the other parties to the transaction are
prohibited from engaging in conflicted transactions directly or
indirectly through an affiliate or subsidiary. Accordingly, we believe
that the suggested revision to treat a securitization participant's use
of an affiliate or subsidiary to engage in a conflicted transaction as
an evasion of the prohibition would not be appropriate or consistent
with Section 27B.
---------------------------------------------------------------------------

    \283\ See, e.g., letters from ABA; AIC; ICI; SFA I.
    \284\ See, e.g., letter from AIC.
---------------------------------------------------------------------------

    Second, some commenters requested that the rule exclude affiliates
and subsidiaries bound by, and operating consistent with, fiduciary
duties from the definition of securitization participant.\285\ These
commenters stated that funds advised by the same asset manager should
not be considered affiliates to the extent that the manager is bound by
fiduciary duties to the issuing entity for the securitization and/or
its investors and that the term ``securitization participant'' should
exclude any entity acting in its capacity as an investment adviser, as
well as that entity's advisory clients.\286\ For the reasons stated in
Section II.B.3.b.ii. above, we believe that permitting a fiduciary
duty-based exclusion from the rule is inconsistent with the rule's
objective.\287\
---------------------------------------------------------------------------

    \285\ See, e.g., letters from ABA; AIC; ICI; LSTA IV; SIFMA I.
See also Section II.B.3.b.ii., above, for a discussion of comments
requesting an exclusion from the definition of ``sponsor'' for any
person operating pursuant to a fiduciary duty.
    \286\ See, e.g., letters from ABA; SIFMA I.
    \287\ See Section II.D. for a discussion of why the rule does
not include a similar exclusion from the definition of ``conflicted
transactions'' for transactions that such securitization
participants may enter into pursuant to a fiduciary duty.
---------------------------------------------------------------------------

    Finally, while some commenters agreed that the rule should not
include an exemption for affiliates and subsidiaries dependent on the
use of information barriers,\288\ other commenters requested that the
final rule permit the use of information barriers or other indicia of
separateness to mitigate potential conflicts of interest.\289\ In
support of this request, these commenters referenced the Proposing
Release statements \290\ acknowledging that the Commission has
recognized information barriers in other Federal securities laws and
the rules thereunder.\291\ Some of these commenters requested that we
adopt a specific information barrier exception in the final rule and
offered suggestions for modifications to the conditions for such an
exception as discussed in the Proposing Release,\292\ but several
others articulated concerns that the conditions would be too burdensome
or expensive.\293\ Instead, many commenters suggested that the final
rule should consider the presence or absence of information barriers
(and the robustness and effectiveness thereof) as part of a multi-
factor analysis as a preferred alternative to affirmatively requiring
the use of prescriptive information barriers.\294\ To highlight the
challenges that would be presented by a prescriptive information
barrier exception, some commenters stated that

several securitization participants already use information barriers
and similar mechanisms to ensure compliance with various laws and that
requiring these entities to establish new information barriers tailored
to Rule 192 could lead to inconsistent, intersecting, and/or
conflicting information barriers that compromise rather than facilitate
compliance.\295\ Other commenters stated that, while some
securitization participants may have existing information barriers for
compliance with other securities laws, such as the Volcker Rule,\296\
not all securitization participants subject to the prohibition in Rule
192 are necessarily subject to such laws, and therefore a prescriptive
information barrier exception (including one modeled on such an
exception to another securities law) would disproportionately increase
costs of compliance for those entities.\297\
---------------------------------------------------------------------------

    \288\ See, e.g., letters from AARP; Better Markets.
    \289\ See, e.g., letters from ABA; AIMA/ACC; AFME; AIC; ICI;
LSTA II; LSTA III; LSTA IV; MFA II; Pentalpha; SFA I; SIFMA I; SFA
II; SIFMA II. Some of these commenters also recommended that, in the
alternative, the final rule could specify that any transaction
described in paragraph (a)(3) of the final rule, entered into at the
direction of a related person, would be presumed to be a conflicted
transaction unless that person demonstrates that it had no
substantive role in structuring, marketing, or selling the ABS or in
the selection of the asset pool underlying or referenced by the
relevant ABS. See letters from SFA II; SIFMA II.
    \290\ See Proposing Release Section II.B.c.3. The Proposing
Release noted as an example that brokers and dealers have used
information barriers to manage the potential misuse of material non-
public information to comply with Exchange Act 15(g) (17 U.S.C.
78o(g)) and that Regulation M contains an exception for affiliated
purchasers if, among other requirements, the affiliate maintains and
enforces written policies and procedures reasonably designed to
prevent the flow of information to or from the affiliate that might
result in a violation of Regulation M (17 CFR 242.100-105; 17 CFR
242.100(b)). Id.
    \291\ See, e.g., letters from ABA; AIMA/ACC; AFME; AIC; ICI;
LSTA II; LSTA III; MFA II; Pentalpha; SFA I; SIFMA I.
    \292\ See, e.g., letters from ICI; Institute of Internal
Auditors dated Mar. 27, 2023 (``IIA''); Pentalpha. See Proposing
Release Section II.B.3. and Requests for Comment 29-38 for a
discussion of potential conditions for an information barrier
exception. The modifications suggested by these commenters include:
to specify that policies and procedures must be ``reasonably
designed,'' that an internal audit group be allowed to conduct the
required independent assessment, and that the independent assessment
should be conducted with respect to individual securitizations
rather than on a corporate platform basis. While one of these
commenters supported the inclusion of an information barrier
exception subject to certain conditions in the final rule, the
commenter also requested that investment funds and advisers be
exempt from the conditions to qualify for such exception. See letter
from ICI.
    \293\ See, e.g., letters from ABA; AFME; AIC; LSTA III; MFA II;
SIFMA I.
    \294\ See, e.g., letters from LSTA III; LSTA IV; SFA II; SIFMA
I. Other commenters similarly indicated that a final rule that
merely permits the use of existing information barriers would be
sufficient to address their concerns. See, e.g., letters from ABA
(stating that it is critical for the final rule to acknowledge
information barriers); MFA II (noting that any information barriers
permitted must be workable).
    \295\ See, e.g., letters from AFME; SIFMA I.
    \296\ 17 CFR 255.
    \297\ See, e.g., letter from AIC (noting as an example that
investment funds and portfolio companies are not subject to the
Volcker Rule).
---------------------------------------------------------------------------

    While it is true that the Federal securities laws recognize the use
of information barriers in certain situations, we do not believe that
an information barrier exception would be appropriate in the context of
Rule 192 for several reasons. First, we are concerned that an
information barrier exception has the potential to become a ``check-
the-box'' exercise that could result in an emphasis on form over
function or effectiveness of such information barriers. Due to the wide
range of securitization participants subject to the prohibition in Rule
192, any prescriptive information barrier exception would have to be
drafted in such a way as to be generally applicable to the various
types of securitization participants, which could result in standards
that are either too permissive for one type of securitization
participant (resulting in weakened protections for ABS investors) or
too difficult for another to satisfy due to limitations such as numbers
of employees, regulatory regimes applicable to certain types of
securitization participants, etc.\298\ Additionally, as demonstrated by
the commenter concerns discussed above, an information barrier
exception could have the unintended consequence of potentially
compromising various existing compliance programs or disadvantaging
certain securitization participants.\299\ For these reasons, Rule 192
does not include an information barrier exception. However, we
acknowledge commenters' concerns about their ability to concurrently
comply with the prohibition in Rule 192 with respect to various
affiliates and subsidiaries, as well as other applicable Federal- and
State-level laws that may permit or require information barriers or
other similar firewalls. The revisions we are adopting to the
definition of ``securitization participant,'' as discussed in greater
detail below, are aimed at alleviating commenters' concerns with
respect to the scope of the rule's prohibition, while also obviating
the need for a prescriptive information barrier exception, avoiding
potential additional costs associated with establishing policies and
procedures to satisfy conditions imposed by such an exception.
---------------------------------------------------------------------------

    \298\ For example, while it may be relatively easy for large
multi-service firms to implement information barriers by
establishing completely separate teams of employees to prevent the
flow of information where necessary, smaller securitization
participants may not have a sufficient number of employees to do so,
and therefore such persons may need to employ different mechanisms
to prevent such flow of information.
    \299\ For example, larger multi-service entities may have many
different business units already subject to various regulatory
provisions related to the unit's particular business and that may
require compliance programs involving information barriers. A
prescriptive information barrier exception in Rule 192, therefore,
has the potential to overlap and/or interfere with those existing
compliance programs, which could potentially increase compliance
burdens.
---------------------------------------------------------------------------

    As adopted, an affiliate or subsidiary of an underwriter, placement
agent, initial purchaser, or sponsor will only be a securitization
participant if the affiliate or subsidiary acts in coordination with a
securitization participant or has access to, or receives, information
about a covered ABS or the asset pool underlying or referenced by the
relevant ABS prior to the date of first closing of the sale of the
covered ABS.\300\ This approach is consistent with the commenter
suggestions, as noted above, that affiliates or subsidiaries should
only be subject to the prohibition if they have direct involvement in,
or access to information about, the relevant ABS or are otherwise
acting in coordination with the named securitization participant.\301\
This approach is also consistent with commenter recommendations that
the final rule permit securitization participants to demonstrate lack
of involvement or control through the presence and effectiveness of
information barriers or other indicia of separateness.\302\
---------------------------------------------------------------------------

    \300\ 17 CFR 230.192(c).
    \301\ See, e.g., letters from ABA; AFME; ICI; LSTA III; LSTA IV;
SFA II; SIFMA I; SIFMA II.
    \302\ See, e.g., letters from AIC; LSTA III; SFA II; SIFMA I;
SIFMA II.
---------------------------------------------------------------------------

    Whether an affiliate or subsidiary acts in coordination with a
securitization participant or had access to, or received, information
about an ABS or its underlying asset pool or referenced asset pool
prior to the closing date will depend on the facts and circumstances of
a particular transaction.\303\ Therefore, an affiliate or subsidiary
may not be a ``securitization participant'' if the named securitization
participant, for example:
---------------------------------------------------------------------------

    \303\ If an affiliate or subsidiary receives information--or has
access to information--after the closing of the first sale of the
ABS, then--absent coordination with the securitization participant--
the affiliate or subsidiary will not be a securitization participant
as defined by the final rule.
---------------------------------------------------------------------------

     Has effective information barriers between it and the
relevant affiliate or subsidiary (including written policies and
procedures designed to prevent the flow of information between relevant
entities, internal controls, physical separation of personnel,
etc.),\304\
---------------------------------------------------------------------------

    \304\ It will not be inconsistent with this example if the
relevant entity has a shared research desk that provides research to
the named securitization participant and an affiliated fund but the
named securitization participant and the affiliated fund themselves
do not share information with each other.
---------------------------------------------------------------------------

     Maintains separate trading accounts for the named
securitization participant and the relevant affiliate or subsidiary,
     Does not have common officers (or persons performing
similar functions) or employees (other than clerical, ministerial, or
support personnel) between the named securitization participant and the
relevant affiliate or subsidiary,
     Is engaged in an unrelated business from the relevant
affiliated entity and does not, in fact, communicate with such relevant
affiliated entity,\305\ or
---------------------------------------------------------------------------

    \305\ As an example, one commenter stated that, if affiliated
entities operate as independent businesses, notwithstanding their
common control by a shared manager, such entities may have no
relationship or communication with one another. See letter from AIC.
As stated above, whether the operation as independent businesses,
despite common control, is sufficient to effectively prevent the
flow of information between the named securitization participant and
the affiliate or subsidiary will depend on the facts and
circumstances of the particular transaction.
---------------------------------------------------------------------------

     Has personnel with oversight or managerial responsibility
over accounts of both the named securitization participant and the
affiliate or subsidiary, but such persons do not have authority to (and
do not) execute trading in individual securities in the accounts or
authority to (and do not) pre-approve trading decisions for the
accounts.\306\
---------------------------------------------------------------------------

    \306\ This list is not exhaustive and simply includes examples
of the types of barriers that could be used by securitization
participants and their affiliates and subsidiaries. We are not
endorsing any one of these methods over another mechanism that may
be used to prevent the flow of information between the relevant
entities. While it is possible that one of these methods (or another
method not listed here) may be sufficient for compliance with the
final rule, securitization participants may find that they need to
utilize a combination of methods to establish an effective
compliance program.

---------------------------------------------------------------------------

    Any such mechanisms must effectively prevent the affiliate or
subsidiary from acting in coordination with the named securitization
participant or from accessing or receiving information about the
relevant ABS or the asset pool underlying or referenced by the relevant
ABS.\307\
---------------------------------------------------------------------------

    \307\ A securitization participant generally should consider the
structure of its organization and the ways in which information is
shared to assess what mechanisms should be employed to comply with
Rule 192. If, for example, a securitization participant employs an
information barrier, and the barrier fails, whether the affiliate or
subsidiary is a securitization participant under Rule 192 will
depend on the facts and circumstances. On one hand, if the failure
was accidental, was quickly remedied upon discovery, and the
affiliate did not use the information to influence the assets
included in the ABS, then the affiliate would likely not be a
securitization participant under Rule 192. On the other hand, even
if the failure was accidental, but the access to information led to
the affiliate using the information to influence the assets included
in the ABS, then that affiliate would likely be a securitization
participant for purposes of Rule 192. Additionally, if the
affiliated entity did not meet the terms of the definition of
affiliate and subsidiary, as adopted, at the time that it enters
into the conflicted transaction (i.e., it did not act in
coordination with the named securitization participant and did not
have information (or access to information) about the ABS or the
asset pool prior to closing), such affiliated entity would not then
retroactively become a securitization participant upon the
subsequent receipt of such information. For example, if an affiliate
or subsidiary receives information--or has access to information--
after having previously engaged in a conflicted transaction, whether
the affiliate or subsidiary would then be a securitization
participant under the final definition depends on the facts and
circumstances as they existed leading up to and at the time of the
entry into the conflicted transaction.
---------------------------------------------------------------------------

    By revising the definition of ``securitization participant'' in
this way, the final rule aims to capture the range of affiliates and
subsidiaries with the opportunity and incentive to engage in conflicted
transactions without frustrating market participants' ability to meet
their obligations under other Federal- and State-level laws that
require the use of information barriers or other such firewalls. Rather
than an information barrier exception potentially becoming a ``check-
the-box'' exercise, securitization participants will be incentivized to
regularly assess their compliance programs to confirm the presence and
effectiveness of their information barriers or other firewalls to
prevent a potential violation of Rule 192. Moreover, this approach
addresses commenters' concerns with respect to additional compliance
burdens for securitization participants by not requiring that they
either create new or recalibrate existing information barriers to
satisfy a prescriptive set of conditions for Rule 192 compliance. The
final rule is designed to provide securitization participants with the
flexibility to use information barriers or other mechanisms to prevent
coordination or sharing of information with an affiliate or subsidiary,
while still achieving the objective of prohibiting securitization
participants from engaging in conflicted transactions.
    If, however, an information barrier or other tool used to maintain
the separation of an affiliate or subsidiary from another named
securitization participant failed or was otherwise breached, it would
call into question whether the affiliate or subsidiary had access to,
or received, information or otherwise acted in coordination with such
named securitization participant and such affiliate or subsidiary could
therefore be a securitization participant.\308\ This approach is
consistent with Section 27B and appropriately balances market
participants' need for sufficiently clear boundaries to establish
effective compliance programs. Further, the final rule acknowledges the
role that information barriers play in the financial markets, without
the need for a prescriptive exception, which, as noted above, has the
potential to prioritize form over function in light of the wide range
of securitization participants subject to Rule 192.\309\
---------------------------------------------------------------------------

    \308\ See id.
    \309\ This approach also significantly mitigates concerns
expressed with respect to both the scope of the rule's applicability
to affiliates and subsidiaries and compliance burdens that would be
associated with a new prescriptive information barrier requirement.
See Section IV.
---------------------------------------------------------------------------

C. Prohibition Timeframe

1. Proposed Prohibition Timeframe
    Section 27B specifies that securitization participants be
prohibited from entering into a conflicted transaction at ``any time
for a period ending on the date that is one year after the date of the
first closing of the sale of the asset-backed security,'' but does not
specify the commencement point of that prohibition. The Commission
proposed that the prohibition in Rule 192(a)(1) would commence on the
date on which a person has reached, or has taken substantial steps to
reach, an agreement that such person will become a securitization
participant (``proposed commencement point'') and would end one year
after the date of the first closing of the sale of the relevant
ABS.\310\ The Commission did not propose definitions of ``agreement''
\311\ or ``substantial steps,'' stating that whether a person has taken
``substantial steps to reach an agreement to become a securitization
participant'' would be a facts and circumstances determination based on
the actions of such person in furtherance of becoming a securitization
participant.\312\ The proposed approach to the commencement point was
designed to reduce the circumstances in which a person could engage in
prohibited conduct prior to the issuance of the relevant ABS and was
aimed at capturing the point at which a person may be incentivized and/
or could act on an incentive to engage in the misconduct that Section
27B is designed to prevent.\313\
---------------------------------------------------------------------------

    \310\ See Proposing Release Section II.C.
    \311\ The Proposing Release stated that an ``agreement'' need
not constitute an executed written agreement, such as an engagement
letter, but rather that oral agreements and facts and circumstances
constituting an agreement could be an agreement for purposes of the
rule. See Proposing Release at 9692, n. 101. Additionally, the
Commission requested comment on whether the rule should identify
specific indicia of having reached an ``agreement,'' but did not
receive feedback in response to that request. See Proposing Release
at 9693, Request for Comment 41.
    \312\ See Proposing Release Section II.C. As an example, the
Commission indicated that engaging in substantial negotiations over
the terms of an engagement letter or other agreement to become an
underwriter, placement agent, initial purchaser, or sponsor of an
ABS would constitute taking substantial steps to reach an agreement
to become a securitization participant.
    \313\ See Proposing Release Section II.C.
---------------------------------------------------------------------------

2. Comments Received
    The Commission received numerous comments on the proposed
prohibition timeframe.\314\ Several commenters opposed the proposed
commencement point, stating that the determination of whether a person
has taken ``substantial steps to reach an agreement'' involves too much
ambiguity and subjectivity to successfully conform their activities to
the rule and ensure compliance.\315\ Some commenters further stated
that, because the proposed commencement point is backward-looking
(i.e., a person can become a securitization participant with respect to
a relevant ABS before the ABS is created and sold), the ambiguity
introduced by the

``substantial steps'' standard would make it particularly difficult to
determine when a person becomes subject to the rule's prohibition.\316\
One of these commenters stated that it is unclear what would constitute
taking substantial steps related to the use of warehouse facilities for
the financing of assets or for securitizations using master trust
structures where a pool of assets can be assembled in a trust months or
years before any particular ABS offering is contemplated.\317\ Another
commenter further stated that, with respect to the statement in the
Proposing Release that the prohibition on material conflicts of
interest would not apply to a person that never reaches an agreement to
become a securitization participant,\318\ it is not clear at what point
in time a person would be determined to never have reached an agreement
(e.g., date of first sale of the relevant ABS, or some earlier point in
time).\319\ The Commission also received comment expressing concern
that the proposed commencement point is particularly challenging to
implement without an information barrier exception because, for
example, it is possible that an affiliate or subsidiary of a person who
took substantial steps to become a securitization participant would be
unaware of such steps due to existing information barriers within a
multi-service financial firm.\320\ Commenters requested, therefore,
that the rule include a more definitive commencement point to enable
market participants to effectively implement procedures to govern their
compliance with the rule's prohibition.\321\ The Commission received
one comment on the proposed end date of the prohibition timeframe,
which suggested that the prohibition should potentially apply for a
longer period of time.\322\
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    \314\ See also Section II.D.1.c.iii for a discussion of the
comments received regarding certain pre-securitization activities by
securitization participants and the rule's applicability to such
activities.
    \315\ See, e.g., letters from ABA; AIMA/ACC; ICI; SFA II; SIFMA
I. One commenter, without expressing support or opposition to the
proposed commencement point, stated its belief that the prohibition
timeframe should start ``at the earliest moment that a covered
person could reasonably foresee a conflict of interest with
investors,'' but did not elaborate or provide additional context as
to how to identify such a point in time. See letter from AFR.
    \316\ See, e.g., letters from ABA; AIMA/ACC; LSTA III; MFA II;
SIFMA I. Relatedly, one commenter stated that, because the proposed
timeframe could last for more than one year, it could have the
effect of restricting a trader's ability to handle unrelated
transactions because its firm is in a potentially conflicted
position as it works on a securitization. See letter from ASA. We
believe that the prohibition timeframe, as revised, together with
the final rule's applicability to affiliates and subsidiaries of
named securitization participants, should help to mitigate this
concern. See Section II.B.3.c.
    \317\ See letter from ABA.
    \318\ See Proposing Release at 9693.
    \319\ See letter from SIFMA I. This commenter likewise observed
that there could be a period of time after which a person has taken
``substantial steps,'' but before it is determined that an agreement
to act as a securitization participant was never reached, during
which a transaction could be challenged as a conflicted transaction,
which further highlights the challenges presented by the
``substantial steps'' construction.
    \320\ See, e.g., letter from ICI. See Section II.B.3.c. for a
discussion of how Rule 192 will apply to affiliates and subsidiaries
and the role of information barriers. We believe that the changes to
the definition of ``securitization participant'' in Rule 192(c) with
respect to affiliates and subsidiaries, together with the revised
commencement point discussed in this section, address these
concerns.
    \321\ See, e.g., letters from ABA; MFA II; SFA II; SIFMA I.
    \322\ See letter from Pentalpha.
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3. Final Rule
    In response to comments received, we are revising the prohibition
timeframe to begin at a more definitive commencement point and are
adopting the end point of the prohibition timeframe as proposed. Under
Rule 192(a)(1), the prohibition against entering into conflicted
transactions will commence on the date on which such person has reached
an agreement to become a securitization participant with respect to an
asset-backed security and will end one year after the date of the first
closing of the sale of the relevant ABS.\323\ By omitting the proposed
language about taking ``substantial steps'' to reach an agreement, the
final rule will avoid many of the concerns that commenters raised with
respect to the scope of the proposed rule. The prohibition timeframe,
as revised, together with the changes we are making to the final rule's
applicability to affiliates and subsidiaries of named securitization
participants, should help to mitigate commenters' concerns about their
ability to determine when a person is subject to the rule's
prohibition.\324\
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    \323\ 17 CFR 230.192(a)(1).
    \324\ See, e.g., notes 319 and 320 and accompanying text. The
revision to the commencement point also will address the commenter
concern noted above that the proposed commencement point did not
make clear when a person would no longer be subject to the rule if
it never reaches an agreement to become a securitization participant
because the prohibition as adopted does not apply until such person
has reached an agreement.
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    The Commission received several commenter suggestions for specific
dates as the prohibition's commencement point, including the
commencement of marketing or pricing of the ABS,\325\ 30 days prior to
the first sale of the ABS,\326\ 30 days prior to the date of the first
closing of the sale of the ABS,\327\ the date on which an engagement
letter is signed,\328\ and once an entity has ``actually'' become an
underwriter, placement agent, initial purchaser, or sponsor.\329\ While
we understand that such specific dates may be desirable for market
participants because they provide a level of certainty with respect to
when a person is operating subject to the prohibition against engaging
in conflicted transactions, we continue to believe that using specific
dates could be underinclusive because a securitization participant
could engage in the conduct that Rule 192 is designed to prevent just
prior to such commencement points and the rule would, as a result, not
cover conduct prior to those dates. Because there is significant
variability between securitization structures, the procedures used to
originate, acquire, and/or identify collateral for a securitization,
and timelines on which market participants operate to structure or
assemble ABS and conduct their offerings, selecting a specified date
such as those suggested by commenters could, depending on the features
of the securitization, fail to capture critical points in time during
which a securitization participant may be incentivized and/or could act
on an incentive to engage in conflicted transactions. Moreover, such
structures, procedures, and timelines employed by market participants
today could change as the market evolves and potentially render a
prohibition commencement point tied to a specific date ineffective.
---------------------------------------------------------------------------

    \325\ See, e.g., letter from ABA.
    \326\ See, e.g., letter from SFA II.
    \327\ See, e.g., letters from LSTA III; MFA II; SIFMA I; SIFMA
II.
    \328\ See, e.g., letter from SFA II.
    \329\ See, e.g., letters from LSTA III; MFA II.
---------------------------------------------------------------------------

    For purposes of Rule 192, ``agreement'' refers to an agreement in
principle (including oral agreements and facts and circumstances
constituting an agreement) as to the material terms of the arrangement
by which such person will become a securitization participant. An
executed written agreement, such as an engagement letter, is not
required; \330\ whether there has been an agreement to become a
securitization participant will depend on the facts and circumstances
of the securitization transaction and the parties involved.\331\ As the
Commission stated in the Proposing Release,\332\ and as some commenters
pointed out,\333\ market participants are able to identify and
understand when an agreement has

been reached in their ordinary business operations and, therefore, they
will be able to establish effective procedures for determining when
they have triggered the prohibition against engaging in conflicted
transactions.
---------------------------------------------------------------------------

    \330\ While a written agreement (such as engagement letter) is
not necessary to establish an ``agreement'' for purposes of final
Rule 192, it will be sufficient, regardless of whether such written
agreement includes all material terms of the contractual
arrangement. This is because, even in the absence of such material
terms, the written agreement will be consistent with an agreement in
principle to perform as a securitization participant for purposes of
Rule 192.
    \331\ For example, once a person agrees with the issuer or
selling security holder to be the underwriter for the relevant ABS
transaction, that underwriter is a securitization participant
subject to the prohibition in Rule 192, even if a written agreement
has not yet been executed.
    \332\ See Proposing Release at 9692 n. 101 and accompanying
text.
    \333\ See, e.g., letters from LSTA III; SIFMA I.
---------------------------------------------------------------------------

    While the prohibition against entering into conflicted transactions
will commence on the date on which a person has reached an agreement to
become a securitization participant with respect to an ABS, if such ABS
is never sold to investors, Rule 192 will not apply. As noted above,
the rule is designed to prevent the sale of ABS that are tainted by
material conflicts of interest by specifically prohibiting
securitization participants from engaging in conflicted transactions
that could incentivize a securitization participant to structure an ABS
in a way that puts the securitization participant's interests ahead of
ABS investors. In the event that the sale of an ABS is not completed,
there will be no investors with respect to which a transaction could
involve or result in a material conflict of interest. Therefore, as
adopted, the Rule 192 prohibition on material conflicts of interest
will not apply if the ABS is never actually sold to an investor. If an
ABS is created and sold, however, then the rule's prohibition will
apply beginning on the date on which there was an agreement to become a
securitization participant and will end one year after the date of the
first closing of the sale of such ABS.\334\
---------------------------------------------------------------------------

    \334\ As we noted above, the Commission received one comment
suggesting that we consider extending the prohibition beyond one
year after first closing of a sale of ABS. See letter from Pentalpha
Letter. We believe this would be inconsistent with Section 27B,
which specifies that the prohibition apply for one year following
the date of the first closing of the sale of the ABS. Therefore, we
are adopting the prohibition end date as proposed.
---------------------------------------------------------------------------

D. Prohibition

    Section 27B(a) provides that an underwriter, placement agent,
initial purchaser, or sponsor, or any affiliate or subsidiary of any
such entity, of an ABS, including a synthetic ABS, shall not, at any
time for a period ending on the date that is one year after the date of
the first closing of the sale of the asset-backed security, engage in
any transaction that would involve or result in any material conflict
of interest with respect to any investor in a transaction arising out
of such activity.\335\
---------------------------------------------------------------------------

    \335\ 15 U.S.C. 77z-2a(a).
---------------------------------------------------------------------------

1. Proposed Prohibition
    Consistent with Section 27B(a), the Commission proposed in proposed
Rule 192(a)(1) that a securitization participant shall not, for a
period commencing on the date on which a person has reached, or has
taken substantial steps to reach, an agreement that such person will
become a securitization participant with respect to an ABS and ending
on the date that is one year after the date of the first closing of the
sale of such ABS, directly or indirectly engage in any transaction that
would involve or result in any material conflict of interest between
the securitization participant and an investor in such ABS.\336\ As set
forth in proposed 17 CFR 230.192(a)(2) (``Rule 192(a)(2)''), engaging
in any transaction would involve or result in any material conflict of
interest between a securitization participant and an investor if such
transaction is a ``conflicted transaction'' as defined in proposed Rule
192(a)(3).
---------------------------------------------------------------------------

    \336\ See Proposing Release Section II.D.
---------------------------------------------------------------------------

    The Commission proposed to define this term under proposed Rule
192(a)(3) to include two main components. One component was whether the
transaction is:
     As specified in proposed 17 CFR 230.192(a)(3)(i) (``Rule
192(a)(3)(i)''), a short sale of the relevant ABS;
     As specified in proposed 17 CFR 230.192(a)(3)(ii) (``Rule
192(a)(3)(ii)''), the purchase of a CDS or other credit derivative
pursuant to which the securitization participant would be entitled to
receive payments upon the occurrence of a specified adverse event with
respect to the relevant ABS; or
     As specified in proposed 17 CFR 230.192(a)(3)(iii) (``Rule
192(a)(3)(iii)''), the purchase or sale of any financial instrument
(other than the relevant asset-backed security) or entry into a
transaction through which the securitization participant would benefit
from the actual, anticipated, or potential:
    [cir] Adverse performance of the asset pool supporting or
referenced by the relevant ABS;
    [cir] Loss of principal, monetary default, or early amortization
event on the relevant ABS; or
    [cir] Decline in the market value of the relevant ABS.
    The other component related to materiality--i.e., whether there is
a substantial likelihood that a reasonable investor would consider the
relevant transaction important to the investor's investment decision,
including a decision whether to retain the ABS.
    The proposed definition was designed to effectuate Section 27B(a)
by prohibiting a securitization participant from entering into a
conflicted transaction that is, in effect, a bet against the ABS that
such securitization participant created and/or sold to investors. It
was also designed to not unnecessarily prohibit or restrict activities
routinely undertaken in connection with the securitization process, as
well as routine transactions in the types of financial assets
underlying covered securitizations.\337\
---------------------------------------------------------------------------

    \337\ See Proposing Release at 9694.
---------------------------------------------------------------------------

2. Comments Received
    Several commenters stated that the phrase ``directly or
indirectly'' should be removed from proposed Rule 192(a)(1).\338\ One
commenter specifically stated that the rule, as proposed, would already
apply directly to the affiliates and subsidiaries of a securitization
participant.\339\ The Commission received no comments on proposed Rule
192(a)(2). With respect to proposed Rule 192(a)(3), commenters
generally supported the Commission defining the term ``conflicted
transaction.'' \340\ Commenters also generally supported prohibiting
securitization participants from entering into a short sale of the
relevant ABS under proposed Rule 192(a)(3)(i) \341\ and from purchasing
a CDS or other credit derivative pursuant to which the securitization
participant would be entitled to receive payments upon the occurrence
of a specified adverse event with respect to the relevant ABS under
proposed Rule 192(a)(3)(ii).\342\ However, the Commission received a
substantial number of comments that proposed Rule 192(a)(3)(iii) would
be overly broad and unnecessarily capture a wide range of activities
that are essential to the functioning and issuance of ABS and
securitization participants' routine risk management activities.\343\

Commenters provided numerous examples of transactions that, in their
view, would not give rise to a material conflict of interest with ABS
investors but that could nevertheless be potentially prohibited by
proposed Rule 192(a)(3)(iii), including general interest rate and
currency exchange rate hedging, the provision of warehouse financing,
and the sale or transfer of assets to an ABS issuer.\344\ Commenters
suggested various formulations of Rule 192(a)(3)(iii) that would, in
their view, better align its scope with the discussion of its intended
scope in the Proposing Release and avoid unnecessarily restricting
customary transactions entered into with respect to
securitizations.\345\ The Commission also received comment that the
materiality standard, as proposed, would be inappropriate,\346\ and
that the final rule should include a disclosure-based cure mechanism to
mitigate material conflicts of interest.\347\
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    \338\ See letters from SFA II; SIFMA II.
    \339\ See letter from SIFMA II.
    \340\ See, e.g., letters from Better Markets; ICI.
    \341\ See, e.g., letters from ABA (suggesting that the rule
should prohibit a short sale of the relevant ABS); AIC (stating
that, on its face, proposed Rule 192(a)(3)(i) was sufficiently
clear); SIFMA I (agreeing that a short sale of ABS by a
securitization participant may create a conflict of interest between
that securitization participant and investors); SFA I (stating that
such a transaction is a direct bet against the success of the
relevant ABS); SFA II (agreeing that short sales of ABS by
securitization participants should be prohibited).
    \342\ See, e.g., letters from SFA I (stating that such a
transaction is a direct bet against the success of the relevant
ABS); SFA II (agreeing that purchase of a CDS or other derivatives
on which the securitization participant would be paid as a result of
the occurrence of adverse credit events with respect to the ABS
should be prohibited); SIFMA I (agreeing that the entry into a CDS
on the relevant ABS by a securitization participant may create a
conflict of interest between that securitization participant and
investors).
    \343\ See, e.g., letters from CREFC I (stating that, when read
broadly, the proposal could mean that any component of a
securitization transaction could be a conflicted transaction,
including ordinary decision-making activities by securitization
participants); MFA II (suggesting that the Commission not adopt
proposed Rule 192(a)(3)(iii)); SIFMA I (stating that proposed Rule
192(a)(3)(iii) was vague and unworkable on its face).
    \344\ See, e.g., letters from MFA II (requesting that the
Commission expressly permit interest rate hedging, currency hedging,
and other non-credit related hedging); SFA I (stating that the final
rule should not prohibit warehouse financing or the sale of assets
into a securitization); SFA II (stating that transactions that are
not related to the credit risk of the relevant ABS should not be
conflicted transactions, such as transactions ``related to overall
market movements''); SIFMA I (requesting that certain pre-
securitization transactions be expressly carved out of the
definition of conflicted transaction); SIFMA II (requesting that
certain pre-securitization transactions be expressly carved out of
the definition of conflicted transaction); LSTA IV (supporting
SIFMA's position); SFA II (requesting a specific exception for such
activities).
    \345\ See. e.g., letter from SFA II (suggesting a formulation to
only capture transactions that ``substantially replicate'' the type
of transactions specified in Rule 192(a)(3)(i) or Rule
192(a)(3)(ii)); SIFMA I (suggesting a formulation to only capture
transactions that are the ``functional trading equivalent'' of the
type of transactions specified in Rule 192(a)(3)(i) or Rule
192(a)(3)(ii)); SIFMA II (suggesting a formulation to only capture
transactions that ``substantially replicate'' the type of
transactions specified in Rule 192(a)(3)(i) or Rule 192(a)(3)(ii)).
    \346\ See, e.g., letters from SFA I (stating that the proposed
reasonable investor standard was designed by the courts ``to
identify when disclosures are inadequate, so it is very difficult to
divorce from the context of the disclosures that have been made'');
SIFMA I (stating that the proposed reasonable investor standard is
for disclosure and is not an appropriate standard for a rule that is
a prohibition).
    \347\ See, e.g., letters from ABA (suggesting a disclosure-based
standard); AIMA/ACC (stating that it is unclear how a securitization
participant would be able to determine what a ``reasonable
investor'' would consider to be material to an investment decision
and, therefore, a disclosure approach would be more effective at
addressing conflict of interest concerns).
---------------------------------------------------------------------------

3. Final Rule
    We are adopting the prohibition in Rule 192(a) with certain
modifications from the proposal in response to comments received.
Consistent with the investor protection goals of Section 27B, we are
adopting a prohibition that is designed to capture transactions that
are bets against the relevant ABS or the asset pool supporting or
referenced by such ABS. Consistent with the proposal, final Rule
192(a)(1) provides that a securitization participant shall not, for a
specified period of time,\348\ directly or indirectly engage in any
transaction that would involve or result in any material conflict of
interest between the securitization participant and an investor in such
asset-backed security.\349\
---------------------------------------------------------------------------

    \348\ See Section II.C.3. above for a detailed discussion of the
timeframe of the prohibition.
    \349\ See Proposing Release Section II.D.
---------------------------------------------------------------------------

    As noted above, several commenters suggested that the phrase
``directly or indirectly'' should be removed from proposed Rule
192(a)(1) \350\ with one commenter specifically stating that the rule,
as proposed, would already apply directly to the affiliates and
subsidiaries of a securitization participant.\351\ The final rule will
apply to certain affiliates and subsidiaries of a securitization
participant, but, as explained in the Proposing Release, a
securitization participant could design a transaction structure to
route the various payment legs of a short transaction through a variety
of different legal entities that are deliberately structured to not be
affiliates or subsidiaries of the securitization participant in an
effort to obscure the ultimate economics of the relevant
transaction.\352\ Therefore, we are retaining the phrase ``directly or
indirectly'' in the adopted rule to address this issue, minimize the
risk of evasion, and, by extension, achieve the investor protection
goals of Section 27B. At the same time, we recognize the separate
concern of the same commenter that using the phrase ``directly or
indirectly'' in Rule 192(a)(1) could be potentially interpreted to
create a misalignment between the scope of the entities subject to the
prohibition and the scope of the exceptions to the rule that apply to
the activities of a securitization participant.\353\ However, as
discussed in detail below in Sections II.E. through II.G., the final
rule does not prohibit a securitization participant from using an
affiliate or subsidiary as an intermediary, for example, to effect
risk-mitigating hedging activity or fulfill a liquidity commitment
obligation of the securitization participant consistent with the
conditions enumerated in the exceptions to the rule.
---------------------------------------------------------------------------

    \350\ See letters from SFA II (stating that the inclusion of
both ``directly or indirectly'' and the proposed anti-circumvention
provision are overlapping and potentially inconsistent); SIFMA II.
We are adopting Rule 192(a)(1) to include the phrase ``directly or
indirectly.'' However, as described in further detail in Section
II.H below, in a change from the proposal, we are adopting an anti-
evasion provision that will apply only with respect to the use of an
exception as part of a plan or scheme to evade the rule's
prohibition. We believe that this approach should address the
concerns of commenters that the inclusion of both the phrase
``directly or indirectly'' in Rule 192(a)(1) and the proposed anti-
circumvention provision could be overlapping and potentially
inconsistent.
    \351\ See letter from SIFMA II.
    \352\ See Proposing Release at 9696. For example, a
securitization participant might attempt to arrange a series of
transactions through intermediate special purpose entities that are
structured with ``orphan'' ownership structures where such
intermediate special purpose entities are not affiliates or
subsidiaries of the securitization participant but are instead
notionally owned by a corporate services provider or a charitable
trust. The inclusion of the phrase ``directly or indirectly'' in
Rule 192(a)(1) is designed to capture this type of indirect
activity. As described in further detail in Section II.H below, in a
change from the proposal, we are adopting an anti-evasion provision
that will apply only with respect to the use of an exception as part
of a plan or scheme to evade the rule's prohibition.
    \353\ See letter from SIFMA II.
---------------------------------------------------------------------------

    The Commission received no comments on proposed Rule 192(a)(2), and
we are adopting it as proposed. Thus, engaging in any transaction would
involve or result in any material conflict of interest between a
securitization participant and an investor if such transaction is a
``conflicted transaction'' as defined in final Rule 192(a)(3). A
``conflicted transaction'' is defined in final Rule 192(a)(3) as any of
the following transactions 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: \354\
---------------------------------------------------------------------------

    \354\ See Section II.D.3.d. below for a discussion of the
materiality standard.
---------------------------------------------------------------------------

     As specified in Rule 192(a)(3)(i), a short sale of the
relevant ABS;
     As specified in Rule 192(a)(3)(ii), the purchase of a CDS
or other credit derivative pursuant to which the securitization
participant would be entitled to receive payments upon the occurrence
of a specified adverse event with respect to the relevant ABS; or
     As specified in Rule 192(a)(3)(iii), the purchase or sale
of any financial instrument (other than the relevant asset-backed
security) or entry into a transaction that is substantially the
economic equivalent of a transaction described in paragraph (a)(3)(i)
or (a)(3)(ii), other than, for the avoidance of doubt, any transaction
that only hedges

general interest rate or currency exchange risk.
a. Rule 192(a)(3)(i): Short Sales
    We are adopting Rule 192(a)(3)(i) as proposed to prohibit a
securitization participant from betting directly against an ABS by
engaging in a short sale of the relevant ABS. A short sale occurs when
a securitization participant sells an ABS when it does not own it (or
that it borrows for purposes of delivery). In such a situation, if the
price of the ABS declines, then the short selling securitization
participant could buy the ABS at the lower price to cover its short and
make a profit. As stated in the Proposing Release, it is not relevant
for purposes of the rule whether the securitization participant makes a
profit on the short sale. It is sufficient that the securitization
participant sells the ABS short.
    Commenters generally supported adopting Rule 192(a)(3)(i) as
proposed and agreed with the Commission that a short sale of an ABS by
a securitization participant could create a conflict of interest
between the securitization participant and investors in the relevant
ABS.\355\ One commenter expressed a concern that ``considering all
short sales to be conflicted transactions'' would have a
disproportionate impact on securitization markets and indicated that a
profit should be required for a short sale transaction to be a
conflicted transaction.\356\ Another commenter stated that the
practical effect of proposed Rule 192(a)(3)(i) would be to stop all ABS
short selling and that such an outcome would be suboptimal for the ABS
market.\357\
---------------------------------------------------------------------------

    \355\ See, e.g., letters from ABA (suggesting that the rule
should prohibit a short sale of the relevant ABS); AIC (stating
that, on its face, proposed Rule 192(a)(3)(i) was sufficiently
clear); SIFMA I (agreeing that a short sale of ABS by a
securitization participant may create a conflict of interest between
that securitization participant and investors); SFA I (stating that
such a transaction is a direct bet against the success of the
relevant ABS); SFA II (agreeing that short sales of ABS by
securitization participants should be prohibited).
    \356\ See letter from AIMA/ACC.
    \357\ See letter from CreditSpectrum Corp. dated Feb. 22, 2023
(``CreditSpectrum'').
---------------------------------------------------------------------------

    We believe that it would be inconsistent with the investor
protection goals of Section 27B to limit the prohibition in Rule
192(a)(3)(i) to short sales where the securitization participant earns
a profit. A short sale of an ABS by a securitization participant is a
bet against the relevant ABS regardless of whether the bet is
successful, and this is the exact type of transaction that the rule is
intended to prohibit in order to remove the incentive for
securitization participants to place their own interests ahead of those
of investors. We also do not believe that the practical effect of Rule
192(a)(3)(i) will be to prohibit all ABS short selling as the
prohibition only applies to parties that are securitization
participants with respect to the relevant ABS.\358\ Third parties that
are not securitization participants, as defined in the final rule, with
respect to the relevant ABS are not prohibited from entering into short
sales of such ABS.
---------------------------------------------------------------------------

    \358\ See Section II.B.3.
---------------------------------------------------------------------------

b. Rule 192(a)(3)(ii): Credit Derivatives
    We are adopting Rule 192(a)(3)(ii) as proposed to prohibit a
securitization participant from betting directly against the relevant
ABS by entering into a credit default swap or other credit derivative
that references such ABS and entitles the securitization participant to
receive a payment upon the occurrence of a specified credit event with
respect to the ABS such as a failure to pay, restructuring or any other
specified credit event that would trigger a payment on the derivative
contract. It is irrelevant for the purpose of Rule 192(a)(3)(ii)
whether the credit derivative is in the form of a CDS or other credit
derivative product because the focus is on the economic substance of
the credit derivative as a bet against the relevant ABS without regard
to the specific contractual form or structure of the derivative. Rule
192(a)(3)(ii) also captures any credit derivative entered into by the
securitization participant with the special purpose entity issuer of a
synthetic ABS where that credit derivative would entitle the
securitization participant to receive payments upon the occurrence of a
specified credit event with respect to an ABS that is referenced by
such credit derivative and with respect to which the relevant person is
a securitization participant under the rule.
    Commenters generally supported adopting Rule 192(a)(3)(ii) as
proposed and agreed with the Commission that a credit default swap or
other credit derivative transaction of the type described in the
proposal could create a conflict of interest between a securitization
participant and the investors in the relevant ABS.\359\ One commenter
suggested that Rule 192(a)(3)(ii) should be revised to allow for
transactions that are designed to offset a loss with respect to a
securitization participant's long position in the relevant ABS.\360\ We
believe that such change is unnecessary as hedging transactions,
consistent with Section 27B, are permitted and more appropriately
addressed by the risk-mitigating hedging activities exception discussed
in detail in Section II.E. below.
---------------------------------------------------------------------------

    \359\ See, e.g., letters from SIFMA I (agreeing that the entry
into a CDS on the relevant ABS by a securitization participant may
create a conflict of interest between that securitization
participant and investors); SFA I (stating that such a transaction
is a direct bet against the success of the relevant ABS); SFA II
(agreeing that purchase of a CDS or other derivatives on which the
securitization participant would be paid as a result of the
occurrence of adverse credit events with respect to the ABS should
be prohibited).
    \360\ See letter from ABA.
---------------------------------------------------------------------------

c. Rule 192(a)(3)(iii): Substantially the Economic Equivalent of a
Short Sale or Credit Derivative
    We are adopting proposed Rule 192(a)(3)(iii) with certain
modifications in response to comments received on the proposal.
Specifically, final Rule 192(a)(3)(iii) will cover the purchase or sale
of any financial instrument (other than the relevant asset-backed
security) or entry into a transaction that is substantially the
economic equivalent of transaction described in paragraph (a)(3)(i) or
(a)(3)(ii), other than, for the avoidance of doubt, any transaction
that only hedges general interest rate or currency exchange risk. The
inclusion of this ``for the avoidance of doubt'' language in the
definition of conflicted transaction is not designed to limit the types
of transactions that are not conflicted transactions. For example,
other transactions unrelated to the idiosyncratic credit performance of
the ABS, such as reinsurance agreements, hedging of general market
risk, or routine securitization activities (such as the provision of
warehouse financing or the transfer of assets into a securitization
vehicle) are not conflicted transactions, and thus are not subject to
the prohibition in Rule 192(a)(1). By anchoring the catch-all provision
in the specific transactions set forth in Rule 192(a)(3)(i) or Rule
192(a)(3)(ii), as opposed to the more general language used in the
proposal, the final rule should alleviate concerns that the proposed
rule would be unworkable and vague. As explained in the Proposing
Release, Rule 192(a)(3)(iii) is intended to capture the purchase or
sale of any other financial instrument or entry into a transaction the
terms of which are substantially the economic equivalent of a direct
bet against the relevant ABS.\361\ Given the potential ability of
market participants to craft novel financial structures that can
replicate the economic mechanics of the types of transactions described
in Rule 192(a)(3)(i) and (ii) without triggering those prongs, final
Rule 192(a)(3)(iii) is

designed to alleviate the risk that securitization participants could
avoid Section 27B's prohibition premised on the form of the transaction
rather than its substance while also addressing the concerns of
commenters regarding the potentially overbroad formulation of Rule
192(a)(3)(iii) as proposed.
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    \361\ See Proposing Release at 9694.
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    Certain commenters stated that proposed Rule 192(a)(3)(iii) would
be inappropriate because it would extend beyond the ``ordinary and
natural meaning'' of what is a ``conflict of interest''.\362\ These
commenters stated that the ordinary and natural meaning of a conflict
of interest is limited to a conflict between an existing securities law
duty of a securitization participant and its own self-interest.\363\
For the reasons discussed below, we believe this formulation suggested
by commenters misconstrues the nature of the statutory prohibition.
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    \362\ See letters from ABA (stating that the ordinary meaning of
``conflict of interest'' is a conflict between a legal duty and a
personal interest and that in defining ``conflicted transactions''
and determining the extent to which the rule should apply to
transactions engaged in by affiliates and subsidiaries, it is useful
to consider whether and to what extent the personal interest that a
sponsor, underwriter, placement agent, or initial purchaser has with
respect to a transaction may lead that entity to disregard its
duties under the securities laws); LSTA III (stating that the
proposed definition is far broader and more encompassing than
``conflict of interest'' as set forth in Section 27B and,
consequently, the proposed rule captured transactions that do not
conflict with the duties that securitization participants have under
the securities laws); SIFMA I (stating that the proposed definition
seemed to conflate the term ``conflict of interest'' with the
general expression ``conflicting interests'' and that Section 27B
did not create any new underlying securities law duties so the
Commission's authority is limited by the ordinary and natural
meaning of the term material conflict of interest). As described in
this section, commenters generally agreed that the types of
transactions specified in proposed Rule 192(a)(3)(i) and Rule
192(a)(3)(ii) are the types of transactions that create the
potential for a material conflict of interest.
    \363\ See id.
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    Final Rule 192(a)(3)(iii) defines conflicted transaction in a way
that is consistent with the ordinary and natural meaning of what is a
conflict of interest between a securitization participant and an ABS
investor. Section 27B(b) requires that the Commission adopt rules to
implement the prohibition in Section 27B(a) against a securitization
participant engaging in any transaction that would involve or result in
any material conflict of interest ``with respect to any investor'' in a
transaction arising out of the ABS activity of a securitization
participant.\364\ Section 27B therefore specially addresses prohibited
material conflicts of interest that arise between the self-interest of
a securitization participant and the interests of ``any investor'' in a
transaction arising out of the ABS activity of that securitization
participant. The statutory prohibition does not reference a material
conflict of interest with respect to existing Federal securities law
duties to which securitization participants are currently subject, such
as the prohibitions in Section 17(a) of the Securities Act or Section
206 of the Advisers Act. Furthermore, Section 27B is designated as its
own section, apart from these other provisions. In our view, it would
be inconsistent with the text and statutory placement of Section 27B to
limit the scope of the rule to ABS activities that currently constitute
a violation of existing Federal securities laws. To do so would render
Section 27B superfluous as the statute would have little effect beyond
what is already prohibited under existing federal securities laws. This
interpretation would not only fundamentally frustrate the purpose of
the statute to prevent a securitization participant from placing its
own self-interest ahead of ABS investors but would also be inconsistent
with other statutes that address conflicts of interest. For example, it
would be inconsistent with the meaning of a ``conflict of interest''
set forth in Section 15E of the Exchange Act, which does not limit the
scope of a ``conflict of interest'' arising in the business of issuing
credit ratings by nationally recognized statistical rating
organizations (``NRSRO'') to conflicts that arise with respect to an
existing securities law duty of an NRSRO.\365\
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    \364\ 15 U.S.C. 77z-2a. See Section II.D.3.d. below for a
discussion of the materiality standard that we are adopting for
purposes of Rule 192(a)(3).
    \365\ See 15 U.S.C. 78o-7(h).
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    As explained above, commenters generally agreed that the types of
transactions specified in proposed Rule 192(a)(3)(i) and Rule
192(a)(3)(ii) are the types of transactions that create the potential
for a material conflict of interest,\366\ and we are adopting Rule
192(a)(3)(i) and Rule 192(a)(3)(ii) as proposed. By narrowing the scope
of Rule 192(a)(3)(iii) from the proposal to capture only, as adopted,
transactions that are substantially the economic equivalent of a
transaction described in final Rule 192(a)(3)(i) or final Rule
192(a)(3)(ii), the final Rule 192(a)(3)(iii) is designed to capture the
types of transactions that create a potential for a material conflict
of interest between the interest of a securitization participant and
the interest of an investor in the relevant ABS. As discussed in
further detail below, commenters generally agreed that it would be
appropriate for final Rule 192(a)(3)(iii) to function as a catch-all to
capture transactions that are, in economic substance, a direct bet
against the relevant ABS or the asset pool supporting or referenced by
the relevant ABS even if they are not documented in the same form as a
transaction specified in Rule 192(a)(3)(i) or Rule 192(a)(3)(ii).\367\
Final Rule 192(a)(3)(iii), as adopted, will specify that such direct
bets against an ABS are subject to Section 27B's prohibition regardless
of their form in order to remove the incentive for securitization
participants to place their own interests ahead of those of ABS
investors, as contemplated by the statute.
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    \366\ See e.g., letters from SIFMA I (agreeing that a short sale
of ABS and entry into a CDS on the relevant ABS by a securitization
participant may create a conflict of interest between that
securitization participant and investors); SFA II (agreeing that
short sales of ABS by securitization participants should be
prohibited and agreeing that purchase of a CDS or other derivatives
on which the securitization participant would be paid as a result of
the occurrence of adverse credit events with respect to the ABS
should be prohibited).
    \367\ See. e.g., letters from AFR; AIC; Andrew Davidson.
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    Commenters expressed concerns that proposed Rule 192(a)(3)(iii)
would be overbroad as drafted and unnecessarily capture a wide range of
activities that are essential to the functioning and issuance of ABS
and the routine risk management of securitization participants.\368\
Commenters provided numerous examples of transactions that, in their
view, would not give rise to a material conflict of interest with ABS
investors but that could nevertheless be potentially prohibited by
proposed Rule 192(a)(3)(iii), including general interest rate and
currency exchange rate hedging, the provision of warehouse financing,
and the sale or transfer of assets to an ABS issuer.\369\ As explained
below, these types of transactions will not be captured by final Rule

192(a)(3)(iii) and, as a result, Rule 192(a)(3)(iii) is appropriately
focused on transactions that give rise to material conflicts of
interest between a securitization participant and ABS investors.
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    \368\ See, e.g., letters from CREFC I (stating that, when read
broadly, the proposal could mean that any component of a
securitization transaction could be a conflicted transaction,
including ordinary decision-making activities by securitization
participants); MFA II (suggesting that the Commission not adopt
proposed Rule 192(a)(3)(iii)); SIFMA I (stating that proposed Rule
192(a)(3)(iii) is vague and unworkable on its face).
    \369\ See, e.g., letters from MFA II (requesting that the
Commission expressly permit interest rate hedging, currency hedging,
and other non-credit related hedging); SFA I (stating that the final
rule should not prohibit warehouse financing or the sale of assets
into a securitization); SFA II (stating that transactions that are
not related to the credit risk of the relevant ABS should not be
conflicted transactions, such as transactions ``related to overall
market movements''); SIFMA I (requesting that certain pre-
securitization transactions be expressly carved out of the
definition of conflicted transaction); SIFMA II (requesting that
certain pre-securitization transactions be expressly carved out of
the definition of conflicted transaction); LSTA IV (supporting
SIFMA's position); SFA II (requesting a specific exception for such
activities).
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    Commenters suggested various formulations of Rule 192(a)(3)(iii)
that would, in their view, better align its scope with the discussion
of its intended scope in the Proposing Release and avoid unnecessarily
restricting customary transactions entered into with respect to
securitizations. Certain commenters suggested that Rule 192(a)(3)(iii)
should only capture transactions that are the ``functional trading
equivalent'' of the transactions specified in Rule 192(a)(3)(i) and
Rule 192(a)(3)(ii).\370\ In a follow-up letter, two of these commenters
suggested that Rule 192(a)(3)(iii) be revised to capture ``the purchase
or sale of any financial instrument (other than the relevant asset-
backed security) or entry into a transaction that substantially
replicates one or both of the types of transactions set forth in [Rule
192(a)(3)(i)] or [Rule 192(a)(3)(ii)] by means of the securitization
participant's shorting or buying protection on the asset pool
underlying or referenced by the relevant asset-backed security.'' \371\
Another commenter initially suggested that Rule 192(a)(3)(iii) be
revised to only capture transactions that are the ``substantive
equivalent'' of the types of transactions in Rule 192(a)(3)(i) and Rule
192(a)(3)(ii) and should exclude transactions that are unrelated to the
credit risk of the ABS.\372\ In a follow-up letter, this commenter
suggested that Rule 192(a)(3)(iii) be revised to capture the ``purchase
or sale of any financial instrument (other than the relevant asset-
backed security) or entry into a transaction that substantially
replicates one or both of the types of transactions set forth in [Rule
192(a)(3)(i)] or [Rule 192(a)(3)(ii)] by means of referencing the
relevant asset-backed security or the asset pool underlying or
referenced by the relevant asset-backed security.'' \373\
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    \370\ See letters from SIFMA I (suggesting the ``functional
trading equivalent'' formulation); AFME (supporting SIFMA's
suggestion); LSTA III (supporting SIFMA's suggestion).
    \371\ See letter from SIFMA II (stating its belief that
securitization professionals are able to monitor for the types of
transactions that would be captured in its suggested revised
paragraph (iii) and that the Commission would have the ability to
stop the functional equivalent of short sales and credit default
swaps, even if done via a financial instrument that has not yet been
conceived). This commenter also stated that its suggested revision
would clarify that non-credit related ancillary or embedded
derivatives, such as interest rate or currency swaps, are not
implicated by Rule 192; LSTA IV (supporting SIFMA's suggestion).
    \372\ See letter from SFA I.
    \373\ See letter from SFA II (in its second letter, SFA also
suggested specific exceptions for the following types of
transactions: (i) those entered into pursuant to a fiduciary duty,
(ii) those entered into by a third-party manager with investment
discretion, and (iii) those not related to the credit risk of the
ABS.)
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    We are revising Rule 192(a)(3)(iii) from the proposal to better
capture transactions that are within the intended scope of the rule,
that is, transactions that are substantially the economic equivalent of
a transaction described in final Rule 192(a)(3)(i) or final Rule
192(a)(3)(ii). This is consistent with the Commission's statements in
the Proposing Release \374\ and generally consistent with the
suggestions from commenters described above that Rule 192(a)(3)(iii)
should be focused on transactions that are similar in substance to the
types of transactions described in Rule 192(a)(3)(i) or Rule
192(a)(3)(ii).\375\ However, the rule that we are adopting is more
appropriate than the alternative approaches suggested by commenters
because these approaches could potentially prioritize the form of a
transaction over its economic substance and therefore be under-
inclusive. This is because only capturing transactions that are the
``functional trading equivalent'' of a short sale or CDS or a
transaction that ``substantially replicates'' a short sale or CDS could
unnecessarily limit the scope of Rule 192(a)(3)(iii) to transactions
with payment profiles or terms that are the same as or closely similar
in form to a short sale or CDS. Under either such standard,
securitization participants could design bets against the relevant ABS
or the asset pool supporting or referenced by the relevant ABS that are
documented to have payment profiles or terms that are sufficiently
different from those of market-standard short sales or CDS in order to
not trigger such suggested standards but that are nevertheless bets
against the relevant ABS in economic substance. We are therefore
adopting a rule that specially focuses on the economic substance of the
relevant transaction rather than its form to address this concern.
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    \374\ See Proposing Release at 9694.
    \375\ See discussion above of letters from AFR; AIC; Andrew
Davidson; SFA II; SIFMA II.
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    We disagree with commenters who said that the scope of Rule
192(a)(3)(iii) should be limited to transactions that are entered into
with respect to the relevant ABS or the asset pool supporting or
referenced by such ABS.\376\ Such an approach would be underinclusive.
For example, it would allow a securitization participant to enter into
a short with respect to a pool of assets with characteristics that
replicate the idiosyncratic credit performance of the asset pool
supporting the relevant ABS. We do not believe that it would be
appropriate to exclude such transactions as securitizations
participants would still have an opportunity to bet against the
performance of their ABS by being allowed to enter into such
transactions. Whether a short transaction entered into with respect to
a similar pool of assets is a conflicted transaction under the final
rule will be a facts and circumstances determination. If such a short
position with respect to a similar pool of assets would be
substantially the economic equivalent of a short sale of the relevant
ABS itself or a CDS or 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, then it would be a conflicted transaction. However, this standard
is designed to not capture transactions entered into by a
securitization participant with respect to an asset pool that has
characteristics that are sufficiently distinct from the idiosyncratic
credit risk of the asset pool that supports or is referenced by the
relevant ABS. Such transactions do not give rise to the investor
protection concerns that Section 27B is designed to address.
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    \376\ See letters from SFA II; SIFMA II.
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    As noted above, various commenters agreed with the discussion in
the Proposing Release that Rule 192(a)(3)(iii) should capture
transactions that are, in economic substance, a bet against the