is not a financial instrument that directly references the assets
underlying the ABS. Under the bona fide market-making activities
exception, the relevant securitization participant may rely on the
exception to engage in such CDS transaction if it satisfies the
conditions to the exception.
---------------------------------------------------------------------------

    \480\ Given the nature of the ABS market and that the scope of
the prohibition of the rule will prohibit transactions that include
not only entering into a short sale of ABS but also entering into
CDS on the relevant ABS or the asset underlying such ABS, we are
specifying that the bona fide market-making activities exception
extends to bona fide market-making activity in financial
instruments, such as CDS on the relevant ABS, that are conflicted
transactions under the final rule. However, under the final rule, if
the ``conflicted transaction'' is a short sale of the relevant ABS,
then, in order to rely on the exception, such sale will need to
constitute bona fide market-making activity in such ABS. Similarly,
if the relevant ``conflicted transaction'' is a purchase and sale of
a CDS, then, in order to rely on the exception, such purchase and
sale will need to constitute bona fide market-making activity of the
securitization participant in such CDS.
---------------------------------------------------------------------------

    Consistent with the proposed rule, the initial issuance of an ABS
does not qualify as bona fide market-making activity under the final
exception in Rule 192(b)(3). This means that a securitization
participant is not able to rely on the adopted exception for bona fide
market-making activities in ABS for primary market activities, such as
issuing a new synthetic ABS.\481\ As explained above in Section
II.E.3., initial issuances of ABS, including new synthetic ABS, can be
eligible for the risk-mitigating hedging activity exception.
---------------------------------------------------------------------------

    \481\ Furthermore, the activity would not qualify for the
exception because even if the securitization participant purchased
the CDS protection (i.e., a short position) purportedly as part of
its market-making activity, the creation and sale of the new ABS is
primary, not secondary, market activity.
---------------------------------------------------------------------------

    Certain commenters requested the bona fide market-making activities
exception be available in the case of the initial distribution of an
ABS.\482\ One of these commenters stated that it is unclear why the
initial distribution of an ABS would not be considered bona fide
market-making activity and that the concerns of the Commission
regarding an initial distribution of an ABS set forth in the Proposing
Release would already be addressed by the various conditions applicable
to the exception and the proposed anti-circumvention provision.\483\
---------------------------------------------------------------------------

    \482\ See letter from SFA II (focusing on synthetic ABS and
suggesting that the bona fide market-making activities exception
should cover the initial distribution of an ABS); SIFMA II (stating
that is unclear why the initial distribution of an ABS should not be
considered bona fide market-making activity).
    \483\ See letter from SIFMA II.
---------------------------------------------------------------------------

    As explained above in Section II.D.3., Rule 192(a)(3)(iii)
captures, in relevant part, 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 Rule 192(a)(3)(i) or Rule 192(a)(3)(ii). The
inclusion of the language ``(other than the relevant asset-backed
security)'' is designed to specify that merely entering into an
agreement to serve as a securitization participant with respect to an
ABS and engaging in a purchase or sale of the ABS as an underwriter,
placement agent, or initial purchaser for such ABS is not itself a
conflicted transaction. Therefore, as explained above in Section
II.D.3., the final rule is not designed to disincentivize an
underwriter, placement agent, or initial purchaser from intermediating
a synthetic ABS transaction for a customer, client, or counterparty
where the securitization participant does not take a short position
with respect to the investors in the relevant synthetic ABS.
Accordingly, the sale of a synthetic ABS to investors by an
underwriter, placement agent, or initial purchaser where such
securitization participant does not take a short position in the
relevant synthetic ABS is not a conflicted transaction and such
activity does not need to be eligible for any exception to the final
rule.
    However, in cases where the securitization participant enters into
a conflicted transaction as a component of the initial distribution of
the synthetic ABS, we do not believe that it would be appropriate to
allow that conflicted transaction to be eligible for the bona fide
market-making activities exception. The relevant conflicted transaction
in the context of the initial distribution of a synthetic ABS arises
when a securitization participant engages in a transaction (such as CDS
contract(s) with the issuer) where cash paid by investors to acquire
the newly created synthetic ABS would fund the relevant contract(s) and
be available to make a payment to the securitization participant upon
the occurrence of an adverse event with respect to the assets included
in the reference pool. If such activity is not entered into for
purposes of hedging an exposure of the securitization participant to
the assets included in the reference pool in accordance with the
conditions of the risk-mitigating hedging activities exception as
described above, then such activity is a bet by the securitization
participant against the performance of the relevant reference assets.
This type of material conflict of interest with investors in the new
synthetic ABS is the same as those raised by the synthetic CDO
transactions that were the subject of Congressional scrutiny in
connection with the financial crisis of 2007-2009.\484\ The final rule
is designed to prohibit such conflicted transactions unless they are
entered into for hedging purposes in accordance with the requirements
of the risk-mitigating hedging activities exception, and they are
accordingly not eligible for the bona fide market-making activities
exception. In response to the comment that our concerns regarding these
transactions could be addressed by the other conditions that were
proposed for the bona fide market-making activities exception or by the
anti-evasion provision, we do not believe that these other conditions
are adequate to address our concerns that these types of transactions
can only be utilized for hedging purposes and cannot be utilized as a
bet against the relevant ABS in the same way as they were during the

financial crises of 2007-2009. \485\ The conditions to the bona fide
market-making activities exception do not require that the relevant
transaction be entered into only for hedging purposes, and the anti-
evasion provision does not set forth any standard that the relevant
transaction be entered into only for hedging purposes.
---------------------------------------------------------------------------

    \484\ See Wall Street and The Financial Crisis: Anatomy of a
Financial Collapse, Majority and Minority Staff Report, Permanent
Subcommittee on Investigations, United States Senate (Apr. 13,
2011).
    \485\ See letter from SIFMA II.
---------------------------------------------------------------------------

    Some commenters generally stated that the requirements of the bona
fide market-making activities exception would be confusing, unduly
burdensome, and unnecessary.\486\ Although commenters did not explain
what specific aspects of the requirements would be burdensome or
confusing, we do not think that these conditions will be unduly
difficult for securitization participants to satisfy, as discussed in
further detail below. Furthermore, we believe that the conditions to
the exception are necessary to distinguish permitted bona fide market-
making activity from prohibited conflicted transactions. Without the
inclusion of such conditions, the scope of the bona fide market-making
activities exception could be susceptible to misuse by securitization
participants and give rise to conflicted transactions in contradiction
of Section 27B's prohibition.
---------------------------------------------------------------------------

    \486\ See letters from ABA; AIC.
---------------------------------------------------------------------------

    At the same time, we acknowledge the important role played by
securitization participants that are market makers in less liquid
financial instruments and that unduly burdensome conditions could
potentially impede market-making activity in less liquid financial
instruments. Consistent with the reasons stated in the Proposing
Release, in order to not discourage such valuable activity, the
conditions to the exception as adopted specifically take into account
the liquidity, maturity, and depth of the market for the relevant
financial instruments, which may vary across different types of
financial instruments. In response to the commenter that stated that
the exception requires certain facts and circumstances determinations
that may increase compliance costs,\487\ we believe that considering
the relevant facts and circumstances of the relevant market is
necessary in order to avoid imposing an overly restrictive one-size-
fits-all standard on market participants that may be confusing for
market-makers with different business models to comply with and, as a
result, unnecessarily impede market-making activity. As discussed in
Section IV below, we acknowledge that a securitization participant
availing itself of the exception will incur certain costs to do
so.\488\
---------------------------------------------------------------------------

    \487\ See letters from AIMA/ACC.
    \488\ See Section IV.
---------------------------------------------------------------------------

    Furthermore, as proposed, the adopted bona fide market-making
activities exception does not include a requirement to analyze the
applicability of the exception on a trade-by-trade basis.\489\ The
adopted bona fide market-making activities exception in 17 CFR
230.192(b)(3)(ii)(B) (``Rule 192(b)(3)(ii)(B)'') is instead focused on
the overall market-making related activities of a securitization
participant in assets that would otherwise be conflicted transactions,
with a condition that those activities are related to satisfying the
reasonably expected near term demand of the securitization
participant's customers. The adopted exception also encompasses market-
making related hedging in order to give a securitization participant
that is a market maker the flexibility to acquire positions that hedge
the securitization participant's market-making inventory.
---------------------------------------------------------------------------

    \489\ This approach differs from the requirements under
Regulation SHO, whereby the market maker must be engaged in bona
fide market-making in the security at the time of the short sale for
which it seeks the exception. See Amendments to Regulation SHO, 34-
58775, 73 FR 61690, 61699 n.103 (Oct. 17, 2008) (citing Rules
203(B)(1) and 203(B)(2)(iii) of Regulation SHO). Activity that might
be bona fide market-making activities for purposes of Rule 192 may
not be bona fide market-making for purposes of other rules,
including Regulation SHO, and vice versa.
---------------------------------------------------------------------------

    As adopted, hedging the risk of a price decline of market-making
related ABS positions and holdings while the market maker holds such
ABS qualifies for the adopted bona fide market-making activities
exception so long as the conditions of the bona fide market-making
activities exception are satisfied. Therefore, with respect to such
activity, a securitization participant does not need to separately rely
on the risk-mitigating hedging activities exception, which is
principally designed to address the hedging of retained exposures
rather than market-making positions that are entered into in connection
with customer demand. To facilitate monitoring and compliance, as
discussed below in the context of the compliance program condition in
17 CFR 230.192(b)(3)(ii)(E) (``Rule 192(b)(3)(ii)(E)''), a
securitization participant relying on the exception for bona fide
market-making activities is required to have reasonably designed
written policies and procedures that demonstrate a process for prompt
mitigation of the risks of its positions and holdings arising from its
market-making activity. This should allow securitization participants
that are market makers to determine how best to manage the risks of
their market-making activity without causing a reduction in liquidity,
wider spreads, or increased trading costs for market makers and their
customers.\490\
---------------------------------------------------------------------------

    \490\ Market-makers will generally already have certain policies
and procedures in place to promote compliance with other securities
laws applicable to them.
---------------------------------------------------------------------------

    As described above in Section II.D.3., one commenter expressed a
concern 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.\491\ The final rule does not prohibit a
broker-dealer affiliate or subsidiary of a securitization participant
from engaging in bona fide market-making activities. This is because
the bona fide market-making activities exception is available to a
``securitization participant,'' which is defined to include not only
the underwriter, placement agent, initial purchaser, or sponsor of an
ABS but also any affiliate or subsidiary who is acting in coordination
with such person or who has access to or receives information about the
relevant ABS or the asset pool underlying or referenced by the relevant
ABS. For example, it is not inconsistent with the exception for bona
fide market-making activities in Rule 192(b)(3) for a broker-dealer
affiliate or subsidiary of an entity that is a securitization
participant with respect to an ABS under the final rule to engage in
bona fide market-making activity with respect to that ABS.
---------------------------------------------------------------------------

    \491\ See letters from SIFMA II.
---------------------------------------------------------------------------

    Each of the specific conditions in Rule 192(b)(3) applicable to the
bona fide market-making activities exception is described in detail
below.
a. Requirement to Routinely Stand Ready To Purchase and Sell
    The Commission did not receive comments to proposed 17 CFR
230.192(b)(3)(ii)(A), and we are adopting it as proposed. Therefore,
the first condition to the final exception is that the securitization
participant routinely stands ready to purchase and sell one or more
types of the financial instruments set forth in Rule 192(b)(3)(i) as a
part of its market-making related activities in such financial
instruments, and is willing and available to quote, purchase and sell,
or otherwise enter into long and short positions in those types of
financial instruments, in commercially reasonable amounts and
throughout market cycles on a basis

appropriate for the liquidity, maturity, and depth of the market for
the relevant types of such financial instruments.
    This ``routinely stands ready'' standard takes into account the
actual liquidity and depth of the relevant market for ABS and financial
instruments related to ABS described in Rule 192(b)(3)(i), which may be
less liquid than, for example, listed equity securities. This
``routinely stands ready'' standard, as opposed to a more stringent
standard such as ``continuously purchases and sells,'' \492\ is
designed to avoid having a chilling effect on a person's ability to act
as a market maker in a less liquid market. The ``routinely stands
ready'' standard is appropriate for bona fide market-making activities
in ABS and related financial instruments described in Rule 192(b)(3)(i)
because market makers in such illiquid markets likely do not trade
continuously but trade only intermittently or at the request of
customers.
---------------------------------------------------------------------------

    \492\ For example, under Regulation SHO's bona fide market-
making exception, the relevant broker-dealer should generally be
holding itself out as standing ready and willing to buy and sell the
relevant security by continuously posting widely disseminated quotes
that are near or at the market, and must be at economic risk for
such quotes. See 2008 Regulation SHO Amendments at 61690, 61699
(citing indicia including whether the market maker incurs any
economic or market risk with respect to the securities (e.g., by
putting its own capital at risk to provide continuous two-sided
quotes)); see also Further Definition of ``As a Part of a Regular
Business'' in the Definition of Dealer and Government Securities
Dealer, Release No. 34-94524 (Mar. 28, 2022) [87 FR 23054 (Apr. 18,
2022)] (``Dealer Release'') at 23068 n.157 (stating that broker-
dealers that do not publish continuous quotations, or publish
quotations that do not subject the broker-dealer to such risk (e.g.,
quotations that are not publicly accessible, are not near or at the
market, or are skewed directionally towards one side of the market)
would not be eligible for the bona fide market-making exception
under Regulation SHO).
---------------------------------------------------------------------------

    However, the mere provision of liquidity is not necessarily
sufficient for a securitization participant to satisfy this condition.
This condition is designed to help ensure that activity that will
qualify for the exception in the final rule will not apply to a
securitization participant only providing quotations that are wide of
(in comparison to the bid-ask spread) one or both sides of the market
relative to prevailing market conditions. In order to satisfy this
condition, the securitization participant needs to have an established
pattern of providing price quotations on either side of the market and
a pattern of trading with customers on each side of the market.
Furthermore, a securitization participant needs to be willing to
facilitate customer needs in both upward and downward moving markets
and not only when it is favorable for the securitization participant to
do so in order for it to ``routinely stand ready'' to purchase and sell
the relevant financial instruments throughout market cycles. Also, in
this context, ``commercially reasonable'' amounts means that the
securitization participant must be willing to quote and trade in sizes
requested by market participants in the relevant market. This is
indicative of the securitization participant's willingness and
availability to provide intermediation services for its clients,
customers, or counterparties that is consistent with bona fide market-
making activities in such market.
b. Limited to Client, Customer, or Counterparty Demand Requirement
    The Commission did not receive comments to proposed Rule
192(b)(3)(ii)(B), and we are adopting it as proposed. Therefore, the
second condition to the final exception is that the securitization
participant's market-making related activities are designed not to
exceed, on an ongoing basis, the reasonably expected near term demands
of clients, customers, or counterparties, taking into account the
liquidity, maturity, and depth of the market for the relevant types of
financial instruments discussed in Rule 192(b)(3)(i) (permitted bona
fide market-making activities). The purpose of this condition is to
distinguish activity that is characteristic of bona fide market-making
activities from a securitization participant entering into a conflicted
transaction to bet against the relevant ABS for the benefit of its own
account, while still allowing securitization participants to make a
market in ABS and the related financial instruments described in Rule
192(b)(3)(i), which may be relatively illiquid. Under the final rule,
this is a facts and circumstances determination that is focused on an
analysis of the reasonably expected near-term demand of customers while
also recognizing that the liquidity, maturity, and depth of the
relevant market may vary across asset types and classes. The
recognition of these differences in the condition should avoid unduly
impeding a market maker's ability to build or retain inventory in less
liquid instruments. The facts and circumstances that will be relevant
to determine compliance with this condition include, but are not
limited to, historical levels of customer demands, current customer
demand, and expectations of near-term customer demand based on
reasonably anticipated near term market conditions, including, in each
case, inter-dealer demand. For example, a securitization participant
facilitating a secondary market credit derivative transaction with
respect to an ABS in response to a current customer demand will satisfy
this condition. However, if the securitization participant builds an
inventory of CDS positions in the absence of current demand and without
any reasonable basis to build that inventory based on either historical
demand or anticipated demand based on expected near term market
conditions, there will be no reasonably expected near term customer
demand for those positions and that transaction will fail to satisfy
this condition.
c. Compensation Requirement
    The Commission received no comments regarding proposed 17 CFR
230.192(b)(3)(ii)(C), and we are adopting it as proposed. Therefore,
the third condition of the final exception is that the compensation
arrangements of the persons performing the market-making activity of
the securitization participant are designed not to reward or
incentivize conflicted transactions. For example, it would be
consistent with this condition if the relevant compensation arrangement
is designed to reward effective and timely intermediation and liquidity
to customers. It would be inconsistent with this condition if the
relevant compensation arrangement is instead designed to reward
speculation in, and appreciation of, the market value of market-making
positions that the securitization participant enters into for the
benefit of its own account. This approach is similar to that taken for
purposes of the Volcker Rule.\493\
---------------------------------------------------------------------------

    \493\ See Prohibitions and Restrictions on Proprietary Trading
and Certain Interests In, and Relationships With, Hedge Funds and
Private Equity Funds, Release No. BHCA-1 (Dec. 10, 2013) [79 FR 5536
(Jan. 31, 2014)] at 5619.
---------------------------------------------------------------------------

d. Registration Requirement
    We are adopting proposed 17 CFR 230.192(b)(3)(ii)(D) largely as
proposed to provide that the fourth condition of the exception is that
the securitization participant is licensed or registered, if required,
to engage in the relevant market-making activity, in accordance with
applicable laws and SRO rules. This condition is designed to limit
persons relying on the exception for bona fide market-making activities
to only those persons with the appropriate license or registration to
engage in such activity in accordance with the requirements of
applicable laws and SRO rules for such activity--unless the relevant
person is exempt from registration or excluded from regulation with
respect to such activity under

applicable law and SRO rules.\494\ In a change from the proposal, the
addition of the phrase ``if required'' specifies that a securitization
participant that is so exempt from registration or excluded from
regulation is still eligible to use the exception. This is also
consistent with the suggestion of the comments that the Commission
received with respect to this condition.\495\
---------------------------------------------------------------------------

    \494\ For example, a person meeting the conditions of the de
minimis exception in Exchange Act Rule 3a71-2 would not need to be a
registered security-based swap dealer to act as a market maker in
security-based swaps. See 17 CFR 240.3a71-2.
    \495\ See letters from SFA II; SIFMA II; LSTA IV.
---------------------------------------------------------------------------

    Persons engaged in market-making activity in the securities markets
in connection with ABS may be engaged in dealing activity. If so,
absent an exception or exemption, these persons are required to
register as ``dealers'' pursuant to Section 15(a) of the Exchange Act,
as ``government securities dealers'' pursuant to Section 15C of the
Exchange Act, or as ``security-based swap dealers'' pursuant to Section
15F(a) of the Exchange Act.\496\ A securitization participant that is a
registered broker-dealer will satisfy the market-making exception's
registration condition.\497\ Similarly, a securitization participant
licensed as a bank or registered as a security-based swap dealer in
accordance with applicable law will also be eligible for the exception.
---------------------------------------------------------------------------

    \496\ See, e.g., Definition of Terms in and Specific Exemption
for Banks, Savings Associations, and Savings Banks Under Sections
3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, Release
No. 34-46745 (Oct. 30, 2002) [67 FR 67496 (Nov. 5, 2002)] at 67498-
67500; see also Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant,''
Release No. 34-66868 (Apr. 27, 2012) [77 FR 30596 (May 23, 2012)] at
30616-30619. See also Dealer Release, supra note 492.
    \497\ The bona fide market-making activities exception in the
final rule is narrower than market-making activity that may require
a person to register as a dealer. In other words, a securitization
participant who does not meet all conditions of the rule's bona fide
market-making activities exception may still be required to register
as a broker-dealer. See id.; see also 15 U.S.C. 78c(a)(38) (defining
the term ``market maker'' to mean any specialist permitted to act as
a dealer, any dealer acting in the capacity of block positioner, and
any dealer who, with respect to a security, holds himself out (by
entering quotations in an inter-dealer communications system or
otherwise) as being willing to buy and sell such security for his
own account on a regular or continuous basis). Further, defined
terms and the determination of eligibility for the bona fide market-
making activities exception in the final rule are distinct from
those available under other rules, such as Regulation SHO and
recently proposed rules to include certain significant market
participants as ``dealers'' or ``government securities dealers.''
See, e.g., Dealer Release, supra note 492, at 23068 n.131
(distinguishing the determination of eligibility for the bona fide
market-making exceptions of Regulation SHO from the determination of
whether a person's trading activity indicates that such person is
acting as a dealer or government securities dealer under the rule
proposed in that Exchange Act Release).
---------------------------------------------------------------------------

e. Compliance Program Requirement
    We are adopting proposed Rule 192(b)(3)(ii)(E) as proposed.
Therefore, the fifth and final condition to the exception is that the
securitization participant is required to have established and must
implement, maintain, and enforce an internal compliance program that is
reasonably designed to ensure the securitization participant's
compliance with the requirements of the bona fide market-making
activities exception, including reasonably designed written policies
and procedures that demonstrate a process for prompt mitigation of the
risks of its positions and holdings.
    A number of commenters expressly supported including a compliance
program requirement.\498\ However, one commenter stated that the
potential confusion regarding this requirement would undercut the
ability of securitization participants to rely on the exception and
that it is not clear that such condition is within the scope of the
congressional intent of Section 27B.\499\ One commenter initially
requested that the compliance program requirement be omitted in its
entirety because it would be unduly burdensome and unnecessary.\500\
However, this commenter subsequently requested that the compliance
program requirement instead specify that it would only apply to any
securitization participant utilizing the exception.\501\ Another
commenter suggested a similar revision.\502\
---------------------------------------------------------------------------

    \498\ See letters from AARP; Better Markets.
    \499\ See letter from ABA.
    \500\ See letter from SIFMA I.
    \501\ See letter from SIFMA II.
    \502\ See letter from SFA II.
---------------------------------------------------------------------------

    In response to the comment that the compliance program condition
would undercut the ability of a securitization participant to rely on
the exception and that it is not clear that such condition is within
the scope of the congressional intent of Section 27B, we recognize that
certain securitization participants may need to create a new compliance
program to comply with this condition and that this may result in
increased compliance costs.\503\ However, 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. The compliance program
condition is necessary to help ensure that the activities of a
securitization participant relying on the bona fide market-making
activities exception are indeed bona fide market-making activities and
not the type of transactions that would involve or result in a material
conflict of interest between a securitization participant for an ABS
and an investor in such ABS. The market-making activity of a
securitization participant in ABS and related financial instruments
described in Rule 192(b)(3)(i) can be inherently complex. Therefore,
requiring a securitization participant to establish and enforce an
internal compliance program will help that entity adequately evaluate
and track its market-making activity in a way that is reasonably
designed to help prevent violations of the rule. Additionally, as
discussed in Section IV, this condition will enhance the benefits of
the rule by assuring investors that a securitization participant is
less likely to engage in activities that are prohibited by Rule 192 if
it has a program to monitor ongoing compliance with the rule.
---------------------------------------------------------------------------

    \503\ See Section IV.
---------------------------------------------------------------------------

    To avoid imposing a one-size-fits-all requirement that may unduly
burden securitization participants that are different in size or that
make markets in different types of financial instruments, this
condition recognizes that a securitization participant that is a market
maker in ABS and related financial instruments described in paragraph
(b)(3)(i) is well positioned to design its own individual internal
compliance program to reflect the size, complexity, and activities of
the securitization participant. This should help ease compliance costs
as the relevant securitization participant can tailor its compliance
program to its particular business model. As a general matter, we also
recognize that costs of the final rule potentially may have a
proportionally greater effect on small entities, as such costs may be a
relatively greater percentage of the total cost of operations for
smaller entities than larger entities, and thus small entities may be
less able to bear such costs relative to larger entities. However, the
potentially less complex securitization activities of small entities
and their correspondingly less complex compliance considerations may
counterbalance such costs as compared to larger and more diversified
securitization participants. We also believe that the changes discussed
above to refine the scope of the

definition of ``conflicted transaction'' \504\ and the scope of covered
affiliates and subsidiaries \505\ are designed to ease the compliance
program burden on securitization participants by providing greater
certainty regarding the types of transactions and relevant entities
that are subject to the rule's prohibition.
---------------------------------------------------------------------------

    \504\ See Section II.D.3. (discussing how Rule 192(a)(3)(iii) as
adopted only applies to the purchase or sale of any financial
instrument that is substantially the economic equivalent of a
transaction described in Rule 192(a)(3)(i) or Rule 192(a)(3)(ii) and
provides that, for the avoidance of doubt, any transaction that only
hedges general interest rate or currency exchange risk is not a
conflicted transaction).
    \505\ See Section II.B.3.c. (discussing how paragraph (ii) of
the definition of a ``securitization participant'' as adopted will
only capture any affiliate (as defined in 17 CFR 230.405) or
subsidiary (as defined in 17 CFR 230.405) of a person described in
paragraph (i) of the definition if the affiliate or subsidiary: (A)
acts in coordination with a person described in paragraph (i) of the
definition; or (B) has access to or receives information about the
relevant asset-backed security or the asset pool supporting or
referenced by the relevant asset-backed security prior to the first
closing of the sale of the relevant asset-backed security).
---------------------------------------------------------------------------

    In response to comments that the compliance program requirement
should specify that it only applies to any securitization participant
utilizing the exception,\506\ it is unnecessary to do so because the
requirement applies only if the securitization participant is relying
on the exception. Rule 192(b)(3)(ii)(E) sets forth a condition to
utilizing the exception in Rule 192(3)(i) and does not separately
require that a securitization participant satisfy the compliance
program requirement if it is not utilizing the exception.
---------------------------------------------------------------------------

    \506\ See letters from SFA II; SIFMA II.
---------------------------------------------------------------------------

    In order to assist a securitization participant in determining
whether it satisfies the first and second conditions of the exception,
we observe that a reasonably designed compliance program of the
securitization participant generally should set forth the processes by
which the relevant trading personnel will identify the financial
instruments described in Rule 192(b)(3)(i) related to its
securitization activities that the securitization participant may make
a market in for its customers and the processes by which the
securitization participant will determine the reasonably expected near
term demand of customers for such products. The identification of such
instruments and the processes for determining the reasonably expected
near term demand of customers for such instruments in the compliance
program should help prevent trading personnel at the relevant
securitization participant from taking positions in conflicted
transactions that are not positions that the securitization participant
expects to make a market in for customers or that are in an amount that
would exceed the reasonably expected near term demands of customers.
Furthermore, to assist a securitization participant in determining
whether it satisfies the first and second conditions of the exception
on an ongoing basis, we observe that a reasonably designed compliance
program of the securitization participant generally should also
establish internal controls and a system of ongoing monitoring and
analysis that the securitization participant will utilize in order to
effectively ensure the compliance of its trading personnel with its
policies and procedures regarding permissible market-making under the
final rule.
    It is important that the reasonably designed written policies and
procedures demonstrate a process for prompt mitigation of the risks of
a securitization participant's positions and holdings that arise from
market-making in ABS and the related financial instruments described in
Rule 192(b)(3)(i), such as the risks of aged positions and holdings,
because doing so should help to prevent a securitization participant
from engaging in a transaction and maintaining a position that is
adverse to the relevant ABS that remains open and exposed to potential
gains for a prolonged period of time. While mitigating the risks of
such positions and holdings is not required to be contemporaneous with
the acquisition of such positions or holdings, prompt mitigation means
that the mitigation occur without an unreasonable delay that will
facilitate or create an opportunity to benefit from a conflicted
transaction remaining in the securitization participant's market-making
inventory considering the liquidity, maturity, and depth of the market
for the relevant types of financial instruments.
    The requirement that a process for such risk mitigation activity be
included in a securitization participant's written policies and
procedures should help prevent speculative activity being disguised as
market-making by establishing the processes by which the relevant
trading personnel will enter into, adjust, and unwind positions and
holdings that arise from market-making in ABS.
    One commenter suggested that any securitization participant relying
on the exception for bona fide market-making activities should be
required to affirmatively certify that it is undertaking such activity
for the sole purpose of market-making and not for the purpose of
generating speculative profits.\507\ Certain commenters also suggested
that a responsible party at the securitization participant should be
required to certify the effectiveness of the applicable written
policies and procedures prior to their implementation and on an ongoing
basis.\508\ Consistent with the Proposing Release, we did not include
certification requirements in the final rule because we believe that
the conditions to the bona fide market-making activities exception are
sufficiently robust to prevent the exception from resulting in
conflicted transactions in contradiction to Section 27B's prohibition.
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    \507\ See letter from Better Markets.
    \508\ See letters from AARP; Better Markets.
---------------------------------------------------------------------------

H. Anti-Evasion

1. Proposed Rule
    To address concerns that the potential circumvention of the
proposed rule could undermine the investor protection goals of Section
27B, the Commission proposed Rule 192(d) to provide that, if a
securitization participant engages in a transaction that circumvents
the prohibition in proposed Rule 192(a)(1), the transaction would be
deemed to violate proposed Rule 192(a)(1).
2. Comments Received
    One commenter supported the proposed anti-circumvention provision
and stated that ``it should remain broad to give the Commission ample
authority to enforce efforts by market participants to evade the
prohibition.'' \509\ However, other commenters stated that anti-
circumvention provision, as proposed, would make it difficult for
market participants to understand the scope of the proposed rule and
requested that the Commission delete the provision.\510\ As an
alternative, certain commenters suggested that the Commission should
replace the provision with an anti-evasion provision, with some of
these commenters stating that such anti-evasion standard should apply
only with respect to the use of an exception to the rule as part of a
plan or scheme to evade the rule's prohibition.\511\
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    \509\ See letter from Better Markets.
    \510\ See letters from AIMA/ACC; AIC (alternatively requesting
that an anti-evasion provision only apply to a securitization
participant's intentional use of an affiliate or subsidiary to
accomplish an otherwise prohibited result).
    \511\ See letters from ABA (stating that the Federal securities
laws generally include anti-evasion provisions and not anti-
circumvention provisions and expressing its belief that an anti-
evasion standard would be more appropriate because it would be tied
to the actions of the securitizations participant rather than the
effect of the transaction); AFME (supporting the approach suggested
by SIFMA); LSTA III (supporting the approach suggested by SIFMA);
SFA II (suggesting an anti-evasion standard); SIFMA I (suggesting an
anti-evasion standard that applies to the exceptions).

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3. Final Rule
    We are adopting Rule 192(d) with certain modifications in response
to comments received on the proposal. In a change from the proposal,
the anti-evasion provision will only apply with respect to the use of
an exception as part of a plan or scheme to evade the rule's
prohibition. Specifically, Rule 192(d) will provide that if a
securitization participant engages in a transaction or a series of
related transactions that, although in technical compliance with one of
the exceptions described in Rule 192(b), is part of a plan or scheme to
evade the prohibition in Rule 192(a)(1), that transaction or series of
related transactions will be deemed to violate Rule 192(a)(1). As
discussed below, this anti-evasion provision is important for helping
to ensure the effectiveness of the final rule's prohibition, and we do
not believe that the provision, when considered together with the other
changes we are making from the proposal, will make it difficult for
market participants to understand the scope of the final rule.
    Rule 192(d), as adopted, is generally consistent with the
suggestion of certain commenters that we adopt an anti-evasion
provision as opposed to an anti-circumvention provision.\512\ We are
persuaded that an anti-circumvention provision could have the potential
to be both overinclusive and vague in this particular circumstance
given the other elements of the rule, and that an anti-evasion standard
that focuses on the actions of the securitization participants as part
of scheme to evade the rule's prohibition would be more appropriate. We
are also persuaded by the suggestion of certain commenters that the
anti-evasion provision should only apply to a securitization
participant's claimed compliance with one of the exceptions to the
rule.\513\ This is because the prohibition in Rule 192(a), as adopted,
includes certain provisions that are designed to prevent attempted
evasion of the rule. For example, the prohibition in Rule 192(a)(1)
captures a securitization participant ``indirectly'' engaging in any
transaction that would involve or result in any material conflict of
interest between the securitization participant and an investor in such
ABS. Additionally, Rule 192(a)(3)(iii) captures any transaction that is
substantially the economic equivalent of a transaction described in
Rule 192(a)(3)(i) or Rule 192(a)(3)(ii). Therefore, we do not believe
that it is necessary to apply the anti-evasion provision to the
prohibition itself.
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    \512\ See letters from ABA (stating that the Federal securities
laws generally include anti-evasion provisions and not anti-
circumvention provisions and expressing its belief that an anti-
evasion standard would be more appropriate because it would be tied
to the actions of the securitizations participant rather than the
effect of the transaction); SFA II (suggesting an anti-evasion
standard).
    \513\ See letters from SIFMA Letter I (suggesting an anti-
evasion standard that applies to the exceptions); AFME (supporting
the approach suggested by SIFMA); LSTA III (supporting the approach
suggested by SIFMA).
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    We disagree with commenters' suggestions that the final rule should
not include any anti-circumvention or anti-evasion provision.\514\ The
anti-evasion provision is designed to address those situations in which
securitization participants engage in efforts to evade the rule's
prohibition by claiming technical compliance with one of the exceptions
to the rule when, in fact, such securitization participant's conduct
constitutes part of a plan or scheme to evade the rule's prohibition.
Such evasion would undermine the investor protection mandate of Section
27B.
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    \514\ See letters from AIMA/ACC; AIC.
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I. Compliance Date

    The final rule is effective February 5, 2024. Under the compliance
date that we are adopting in this release, any securitization
participant must comply with the prohibition and the requirements of
the exceptions to the final rule, as applicable, with respect to any
ABS the first closing of the sale of which occurs on or after Mon.,
June 9, 2025.
    Numerous commenters addressed the compliance period for the final
rule, with many of these commenters suggesting at least 12 months
following the date that the final rule is published in the Federal
Register.\515\ These commenters cited operational challenges and
systems changes, particularly with respect to the compliance program
requirements applicable to the risk-mitigating hedging activities
exception and the bona fide market-making activities exception, which
would necessitate time to adopt and implement. One commenter
recommended a compliance period of 18 to 24 months based on concerns
regarding the scope of the proposed definition of conflicted
transaction and the proposed application of the rule to
affiliates.\516\ We recognize that certain persons subject to the rule
will need to update their operations and systems in order to comply
with the final rule, and we are adopting the compliance date of 18
months after adoption. This delayed compliance date is designed to
provide affected securitization participants that intend to utilize the
risk-mitigating hedging activities exception and the bona fide market-
making activities exception with adequate time to develop the internal
compliance programs that are required to satisfy the conditions of such
exceptions as well as adequate time to develop any internal compliance
mechanisms that the securitization participant decides to implement in
order to address the scope of its affiliates and subsidiaries that are
subject to the final rule. We are not persuaded that any additional
time is needed because we believe that the changes made from the
proposed rule to narrow the scope of the definition of conflicted
transaction \517\ and the scope of the affiliates and subsidiaries of a
securitization participant that are subject to the rule \518\ generally
are expected to ease compliance burdens and mitigate the need for a
compliance period longer than 18 months after adoption.\519\
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    \515\ See letters from ICI Letter; LSTA III (requesting that the
compliance period begin at least 12 months following the date that
the final rule is published in the Federal Register); MFA II
(requesting a transition period of at least 12 months); SFA I; SIFMA
I (requesting that the compliance period begin at least 12 months
following the date that the final rule is published in the Federal
Register).
    \516\ See letter from SFA II.
    \517\ See Section II.D.3. (discussing how Rule 192(a)(3)(iii) as
adopted only applies to the purchase or sale of any financial
instrument that is substantially the economic equivalent of a
transaction described in Rule 192(a)(3)(i) or Rule 192(a)(3)(ii) and
provides that, for the avoidance of doubt, any transaction that only
hedges general interest rate or currency exchange risk is not a
conflicted transaction).
    \518\ See Section II.B.3.c. (discussing how paragraph (ii) of
the definition of a ``securitization participant'' as adopted will
only capture any affiliate (as defined in 17 CFR 230.405) or
subsidiary (as defined in 17 CFR 230.405) of a person described in
paragraph (i) of the definition if the affiliate or subsidiary: (A)
acts in coordination with a person described in paragraph (i) of the
definition; or (B) has access to or receives information about the
relevant asset-backed security or the asset pool supporting or
referenced by the relevant asset-backed security prior to the first
closing of the sale of the relevant asset-backed security).
    \519\ With respect to the compliance date, one commenter
requested the Commission to consider interactions between the
proposed rule and other recent Commission rules. In determining
compliance dates, the Commission considers the benefits of the rules
as well as the costs of delayed compliance dates and potential
overlapping compliance dates. For the reasons discussed throughout
the release, to the extent that there are costs from overlapping
compliance dates, the benefits of the rule justify such costs. See
Section IV for a discussion of the interactions of the final rule
with certain other Commission rules.
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III. Other Matters

    If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid,

such invalidity shall not affect other provisions or application of
such provisions to other persons or circumstances that can be given
effect without the invalid provision or application.
    Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated this rule as a ``major rule,'' as
defined by 5 U.S.C. 804(2).

IV. Economic Analysis

A. Introduction

    This final rule implements the requirements of Section 27B,\520\ as
mandated by the Dodd-Frank Act. As discussed above, Section 621 of the
Dodd-Frank Act added Section 27B to the Securities Act. Section 27B
prohibits an underwriter, placement agent, initial purchaser, or
sponsor, or any affiliate or subsidiary of any such entity, of an ABS,
including a synthetic ABS, from engaging in any transaction that would
involve or result in certain material conflicts of interest.\521\
Section 27B also includes exceptions from this prohibition for certain
risk-mitigating hedging activities, bona fide market-making activities,
liquidity commitments, and a foreign transaction safe-harbor provision.
\522\
---------------------------------------------------------------------------

    \520\ 15 U.S.C. 77z-2a.
    \521\ See Section I.A.
    \522\ See Sections II.E. through II.G.
---------------------------------------------------------------------------

    As discussed above in Sections I.A. and I.B., Section 27B requires
that the Commission issue rules for the purpose of implementing the
prohibition in Section 27B. We are sensitive to the economic impact,
including the costs and benefits, imposed by this rule.\523\ This
section presents an analysis of the expected economic effects--
including costs, benefits, and impact on efficiency, competition, and
capital formation--that may result from the final rule, as well as
possible alternatives to the final rule. Many of these effects, costs,
and benefits stem from statutory mandates, while others are affected by
the discretion exercised in implementing these mandates.
---------------------------------------------------------------------------

    \523\ Section 2(b) of the Securities Act (15 U.S.C. 77b(b))
requires us, when engaging in rulemaking that requires us to
consider or determine whether an action is necessary or appropriate
in the public interest, to consider, in addition to the protection
of investors, whether the action will promote efficiency,
competition, and capital formation.
---------------------------------------------------------------------------

    Where possible, we have sought to quantify the benefits, costs, and
effects on efficiency, competition, and capital formation expected to
result from the final rule. However, we are unable to reliably quantify
many of the economic effects due to limitations on available data.
Therefore, parts of the discussion below are qualitative in nature,
although we try to describe, where possible, the direction of these
effects. We further note that even in cases where we have some data
regarding certain economic effects, the quantification of these effects
is particularly challenging due to the number of assumptions that we
need to make to forecast how the ABS issuance practice will change in
response to the final rule, and how those responses will, in turn,
affect the broader ABS market. For example, the rule's effects will
depend on how sponsors, borrowers, investors, and other parties to the
ABS transactions (e.g., originators, trustees, underwriters, and other
parties that facilitate transactions between borrowers, issuers, and
investors) adjust on a long-term basis to this new rule and the
resulting market conditions. The ways in which these parties may
adjust, and the associated effects, are complex and interrelated. As a
result, we are unable to predict some of them with specificity or
quantify them.
    The Commission received comments related to various aspects of the
economic analysis of the proposed rule. The Commission has considered
and responds to these comments in the sections that follow.

B. Economic Baseline

    The baseline against which the costs, benefits, and the effects on
efficiency, competition, and capital formation of the final rule are
measured consists of the current state of the ABS market, current
practice as it relates to securitization participants, and the current
regulatory framework. The economic analysis considers existing
regulatory requirements, including recently adopted rules, as part of
its economic baseline against which the costs and benefits of the final
rule are measured.\524\
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    \524\ See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111-15 (D.C.
Cir. 2022). This approach also follows SEC staff guidance on
economic analysis for rulemaking. See Staff's ``Current Guidance on
Economic Analysis in SEC Rulemaking'' (Mar. 16, 2012), available at
https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (``The economic
consequences of proposed rules (potential costs and benefits
including effects on efficiency, competition, and capital formation)
should be measured against a baseline, which is the best assessment
of how the world would look in the absence of the proposed
action.''); Id. at 7 (``The baseline includes both the economic
attributes of the relevant market and the existing regulatory
structure.''). The best assessment of how the world would look in
the absence of the proposed or final action typically does not
include recently proposed actions, because doing so would improperly
assume the adoption of those proposed actions.
---------------------------------------------------------------------------

    One commenter requested the Commission consider interactions
between the economic effects of the proposed rule and other recent
Commission proposals.\525\ The commenter indicated there could be
interactions between this rulemaking and three proposals that have
since been adopted: \526\ the Beneficial Ownership Reporting
Release,\527\ the Private Fund Advisers Adopting Release,\528\ and the
Short Position Reporting Release.\529\ In

addition, the commenter identified one rule that had recently been
adopted prior to the commenter's letter, the May 2023 SEC Form PF
Amending Release.\530\ These rules were not included as part of the
baseline in the Proposing Release because they were not adopted at that
time. In response to commenters, this economic analysis considers
potential economic effects arising from any overlap between the
compliance period for the final rule and each of these recently adopted
rules.\531\
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    \525\ See letter from MFA III (``We urge the Commission to
evaluate the costs and benefits of the Proposals, in the aggregate,
for private fund advisers, their investors, and the markets
generally.'').
    \526\ Modernization of Beneficial Ownership Reporting, Release
No. 33-11030 (Feb. 10, 2022), 87 FR 13846 (Mar. 10, 2022) (see
letter from MFA III, at 14-15); Private Fund Advisers; Documentation
of Registered Investment Adviser Compliance Reviews, Release No. IA-
5955 (Feb. 9, 2022), 87 FR 16886 (Mar. 24, 2022) (see letter from
MFA III, at 10-12); Short Position and Short Activity Reporting by
Institutional Investment Managers, Release No. 34-94313 (Feb. 25,
2022), 87 FR 14950 (Mar. 16, 2022) (see letter from MFA III, at 15-
16).
    \527\ See Modernization of Beneficial Ownership Reporting,
Release Nos. 33-11030; 34-94211 (Oct. 6, 2023) (``Beneficial
Ownership Reporting Release''). Among other things, the amendments
generally shorten the filing deadlines for initial and amended
beneficial ownership reports filed on Schedules 13D and 13G, and
require that Schedule 13D and 13G filings be made using a
structured, machine-readable data language. The new disclosure
requirements and filing deadlines for Schedule 13D are effective 90
days after publication in the Federal Register. The new filing
deadline for Schedule 13G takes effect on Sept. 30, 2024, and the
rule's structured data requirements have a one-year implementation
period ending Dec. 18, 2024. See Beneficial Ownership Reporting
Release, Section II.G.
    \528\ See Private Fund Advisers; Documentation of Registered
Investment Adviser Compliance Reviews, Release No. IA-6383 (Aug. 23,
2023), 88 FR 63206 (Sept. 14, 2023) (``Private Fund Advisers
Adopting Release''). The Private Fund Advisers Adopting Release
includes new rules designed to protect investors who directly or
indirectly invest in private funds by increasing visibility into
certain practices and restricting other practices, along with
amendments to the Advisers Act books and records rule and compliance
rule. The amended Advisers Act compliance provision for registered
investment advisers has a Nov. 13, 2023, compliance date. The
compliance date is Mar. 14, 2025, for the rule's quarterly statement
and audit requirements for registered investment advisers with
private fund clients. For the rule's adviser-led secondaries,
restricted activity, and preferential treatment requirements, the
compliance date is Sept. 14, 2024, for larger advisers and Mar. 14,
2025, for smaller advisers. See Private Fund Advisers Adopting
Release, Sections IV., VI.C.1.
    \529\ See Short Position and Short Activity Reporting by
Institutional Investment Managers, Release No. 34-98738 (Oct. 13,
2023), 88 FR 75100 (Nov. 1, 2023) (``Short Position Reporting
Release''). The new rule and related form are designed to provide
greater transparency through the publication of short sale-related
data to investors and other market participants. Under the new rule,
institutional investment managers that meet or exceed certain
specified reporting thresholds are required to report, on a monthly
basis using the related form, specified short position data and
short activity data for equity securities. The compliance date for
the rule is Jan. 2, 2025. In addition, the Short Position Reporting
Release amends the national market system plan governing the
consolidated audit trail (``CAT'') to require the reporting of
reliance on the bona fide market making exception in the
Commission's short sale rules. The compliance date for the CAT
amendments is July 2, 2025.
    \530\ See Form PF; Event Reporting for Large Hedge Fund Advisers
and Private Equity Fund Advisers; Requirements for Large Private
Equity Fund Adviser Reporting, Release No. IA-6297 (May 3, 2023), 88
FR 38146 (June 12, 2023) (``May 2023 SEC Form PF Amending
Release''). The Form PF amendments require large hedge fund advisers
and all private equity fund advisers to file reports upon the
occurrence of certain reporting events. For new sections 5 and 6 of
Form PF, the compliance date is Dec. 11, 2023; for the amended,
existing sections, it is June 11, 2024. See May 2023 SEC Form PF
Amending Release, section II.E.
    \531\ In addition, one commenter indicated there could also be
overlapping compliance costs between the final amendments and
proposals that have not been adopted. See, letter from MFA III. To
the extent those proposals are adopted, the baseline in those
subsequent rulemakings will reflect the existing regulatory
requirements at that time. One of the proposals identified by the
commenter, Prohibition Against Fraud, Manipulation, or Deception in
Connection With Security-Based Swaps; Prohibition Against Undue
Influence Over Chief Compliance Officers; Position Reporting of
Large Security-Based Swap Positions, Exchange Act Release No. 93784
(Dec. 15, 2021), [87 FR 6652, 6678 (Feb. 4, 2022)], has been
partially adopted. See Prohibition Against Fraud, Manipulation, or
Deception in Connection with Security-Based Swaps; Prohibition
against Undue Influence over Chief Compliance Officers, Release No.
34-97656 (June 7, 2023), [88 FR 42546 (June 20, 2023)] (``Security-
Based Swaps Release''). However, the commenter focused their
comments on the portion of that proposal that has not yet been
adopted (i.e., reporting of large security-based swap positions),
and the adopted rule would not have any significant effects from
overlapping compliance periods because that rule was effective Aug.
23, 2023.
---------------------------------------------------------------------------

    The requirements of the final rule will affect ABS market
participants, including securitization participants, as defined in Rule
192, and investors in ABS, and indirectly affect loan originators,
consumers, businesses, municipal entities, and nonprofits that seek
access to credit. The costs and benefits of the requirements depend
largely on the current market practices specific to each securitization
market. The economic significance or the magnitude of the effects of
the requirements also depend on the overall size of the securitization
market and the extent to which the requirements affect access to, and
the cost of, capital. Below, we describe our current understanding of
the securitization markets that will be affected by the final rule.
1. Overview of the Securitization Markets
    The securitization markets are important for the U.S. economy and
constitute a large fraction of the U.S. debt market.\532\
Securitizations play an important role in the creation of credit by
increasing the amount of capital available for the origination of loans
and other receivables through the transfer of those assets--in exchange
for new capital--to other market participants. The intended benefits of
the securitization process include reduced cost of credit and expanded
access to credit for borrowers, ability to match risk profiles of
securities to investors' specific demands and increased secondary
market liquidity for loans and other receivables.\533\
---------------------------------------------------------------------------

    \532\ See, e.g., SEC Staff Report, U.S. Credit Markets
Interconnectedness and the Effects of the COVID-19 Economic Shock
(Oct. 2020), available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf. Among other things, the report provides
an overview of the various parts of the securitization markets and
their connections to the broader U.S. financial markets. This is a
report of the staff of the U.S. Securities and Exchange Commission.
This report represents the views of Commission staff, and is not a
rule, regulation, or statement of the Commission. The Commission has
neither approved nor disapproved the content of this report and,
like all staff statements, it has no legal force or effect, does not
alter or amend applicable law, and creates no new or additional
obligations for any person.
    \533\ See, e.g., Board of Governors of the Federal Reserve
System, Report to the Congress on Risk Retention (Oct. 2010),
available at https://www.federalreserve.gov/boarddocs/rptcongress/securitization/riskretention.pdf; Financial Stability Oversight
Council, Macroeconomic Effects of Risk Retention Requirements (Jan.
2011), available at https://www.lexissecuritiesmosaic.com/gateway/treasury/pr/Documents_Section_20946_20Risk_20Retention_20Study_20_20(FINAL).pdf.
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    Since the final rule applies to a securitization participant
commencing on the date on which such person has reached an agreement to
become a securitization participant until one year after the date of
the first closing of the sale of the ABS, we generally use ABS issuance
information rather than information on ABS amounts outstanding to
estimate the number of affected parties and the size of the affected
ABS market. Information presented regarding securitized asset fund
advisors is instead based on amounts outstanding due to data
availability. For the purposes of establishing an economic baseline and
to estimate affected market size, we use data covering the most recent
full calendar year 2022 to avoid any seasonal effects on estimates
(``baseline period'').\534\
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    \534\ The primary data source for our numeric estimates of
issuance of private-label non-municipal ABS are the Green Street
Asset-Backed Alert Database and the Green Street Commercial Mortgage
Alert Database. The databases present the initial terms of all ABS,
MBS, CMBS, and CLOs collateralized by assets, and synthetic CDOs,
rated by at least one major credit rating agency, and placed
anywhere in the world (however, only deals sold in the U.S. are
included in our analysis). The databases identify the primary
participants in each transaction. The primary data source of our
numeric estimates of issuance of municipal ABS is Mergent Municipal
Bond Securities Database. The proposing release used calendar year
2021 as its baseline due to data availability at time of proposal.
---------------------------------------------------------------------------

    We estimate that the baseline period annual issuance of private-
label \535\ non-municipal ABS in the United States was $603 billion in
1,122 individual ABS deals and the baseline period annual issuance of
municipal ABS in the U.S. was $74 billion in 1,332 deals.\536\ Out of
private-label non-municipal ABS, 10 deals totaling $2.8 billion were
risk transfer ABS deals; some or all of these risk transfer ABS deals
could be synthetic ABS or hybrid cash and synthetic ABS deals.\537\
During the baseline period, Ginnie Mae provided a government guarantee
to $527 billion of newly issued MBS, and the Enterprises issued $1.20
trillion of Enterprise-guaranteed MBS \538\ and 19 CRT securities deals
worth $21.6 billion.\539\ Currently, the Enterprises are in
conservatorship with the U.S. Treasury and are regulated by the
FHFA.\540\
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    \535\ Private-label ABS are ABS that are not sponsored or
guaranteed by U.S. Government agencies or the Enterprises.
    \536\ Data drawn from the Green Street Asset-Backed Alert
Database, the Green Street Commercial Mortgage Alert Database, and
Mergent Municipal Bond Securities Database.
    \537\ Data drawn from the Green Street Asset-Backed Alert
Database and the Green Street Commercial Mortgage Alert Database.
    \538\ See Laurie Goodman, et al., Housing Finance At a Glance:
Monthly Chartbook, July 2023, Urban Institute (July 28, 2023), at
34, available athttps://www.urban.org/research/publication/housing-finance-glance-monthly-chartbook-july-2023.
    \539\ See The Green Street Asset-Backed Alert Database. Of the
29 CRT transactions in 2022, 19 were issued by Freddie Mac ($12.72
billion) and 9 were issued by Fannie Mae ($8.92 billion). Broadly,
the Enterprise CRT programs transfer mortgage credit risk from the
Enterprises to private investors. In doing so, CRT issuance lowers
Enterprise capital requirements and increases their return on
capital, while providing the Enterprises with market-based pricing
information on Enterprise ABS credit risk. See Freddie Mac, CRTcast
E4: CRT Then and Now, A Conversation with Don Layton (Nov. 17,
2021), available at https://crt.freddiemac.com/_assets/pdfs/insights/crtcast-episode-4-transcript.pdf; Jonathan B. Glowacki, CRT
101: Everything you need to know about Freddie Mac and Fannie Mae
Credit Risk Transfer, Milliman (Oct. 11, 2021), available at https://www.milliman.com/en/insight/crt-101-everything-you-need-to-know-about-freddie-mac-and-fannie-mae-credit-risk-transfer.
    \540\ See discussion in Section II.B.3.b.iv.

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2. Affected Parties
    Parties potentially affected by the final rule include:
     Parties that have direct compliance obligations under the
final rule with respect to the prohibition, namely, underwriters,
placement agents, initial purchasers, and sponsors, or any affiliates
or subsidiaries of such entities which act in coordination with such
entities, or have access to or receive information about the relevant
ABS or its underlying or referenced asset pool prior to the first
closing of the sale of the ABS.
     U.S. agencies with respect to certain types of ABS.\541\
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    \541\ The exclusion from the definition of ``sponsor,'' as
discussed in Section II.B.3.b.iv., with respect to these entities is
expected to lessen the impact of the final rule on the United States
or an agency of the United States with respect to ABS that is fully
insured or fully guaranteed, but these entities may still be
otherwise affected. Notably, the Enterprises are more directly
affected under the final rule while operating under conservatorship
of the FHFA than contemplated by the proposed rule, but this is
offset somewhat by other changes between the proposed and final
rule. See Section IV.D.2.
---------------------------------------------------------------------------

     Other entities that provide services in the securitization
process, including depositors, servicers, special servicers, and other
contractual service providers, as well as their domestic and foreign
affiliates and subsidiaries with involvement in or knowledge concerning
the securitization prior to its closing.
     Counterparties that invest/deal in financial products,
including derivatives, related to synthetic ABS (and hybrid cash and
synthetic ABS). For example, dealers that trade CDS on the ABS to
securitization participants.
     Investment advisers and ABS investors. For example,
pension funds, endowments, foundations, hedge funds, and mutual funds.
     Ultimate borrowers that rely on ABS markets for capital
(e.g., corporations, households, municipal entities) and participants
in the markets where the borrowed capital is applied.\542\
---------------------------------------------------------------------------

    \542\ Households benefit from the ABS markets in a variety of
ways, including for example the Enterprises' issuance of RMBS which
adds liquidity and reduces credit risk to investors who finance home
purchases. See The Fed. Nat'l Mortg. Ass'n, Mortgage-Backed
Securities, available at https://capitalmarkets.fanniemae.com/mortgage-backed-securities.
---------------------------------------------------------------------------

     Other market participants that may be affected by changes
in securitization practices. For example, originators that retain a
residual interest in the underlying or referenced asset pool or their
creditors.
    As explained in Section II.B.3., the final definition of the term
``sponsor'' is a functional definition that will apply regardless of a
person's title, so long as its activities with respect to the ABS meet
the definition. Accordingly, a person who organizes and initiates an
ABS transaction, (a Regulation AB-based sponsor) or who has a
contractual right to direct or cause the direction of the structure,
design, or assembly of an ABS or the composition of the pool of assets
underlying or referenced by the ABS (a Contractual Rights Sponsor) is a
sponsor under the definition. Whether a person is a sponsor will be
based on the specific facts and circumstances and which part of the
sponsor definition the person qualifies under. For example, Registered
Investment Advisers (``RIAs'') that advise hedge funds could be a
Contractual Rights Sponsor under the final rule if they have a
contractual right to direct or cause the direction of the structure,
design, or assembly of an ABS or the composition of the pool assets
underlying the ABS.
    We estimate that, in the baseline period, there were 385 unique
sponsors of private-label non-municipal ABS and there were 106 unique
underwriters for such ABS deals; of these, we estimate that there were
6 unique sponsors and 10 unique underwriters of risk transfer ABS.\543\
We also estimate that, in the baseline period, there were 180 unique
issuers of Ginnie Mae-guaranteed MBS,\544\ 53 unique mortgage
securities approved dealers of Freddie Mac-guaranteed MBS,\545\ and 15
unique underwriters of Enterprise CRT securitizations.\546\ We estimate
that there were 352 unique municipal entities that sponsored municipal
ABS, 145 unique underwriters of municipal ABS, and 97 unique municipal
advisors.\547\ We estimate that in the baseline period there were 177
securitized asset fund advisers associated with 2482 securitized asset
funds.\548\ Changes in numbers vis-[agrave]-vis the Proposing Release
can be attributed to different stages in the business cycle: the
significant increase in interest rates that occurred in 2022 may
explain some of the decrease in the number of sponsors.
---------------------------------------------------------------------------

    \543\ The Green Street Asset-Backed Alert Database.
    \544\ To arrive at the figure of 180 unique issuers, we used the
number of unique issuer IDs for securities issued in the baseline
period, less one to account for the value ``Multiple Issuers'' (see
Ginnie Mae MBS SF Monthly New Issues data, available at https://www.ginniemae.gov/data_and_reports/disclosure_data/Pages/disclosurehistoryfiles.aspx?prefix=nimonSFPS&grp=MBS%20(Single%20Fami
ly)). It is possible that some issuers of Ginnie Mae-guaranteed MBS
were never a sole issuer, and thus were only included in the data as
an unspecified member of ``Multiple Issuers.''
    \545\ See Freddie Mac Mortgage Securities Approved Dealer Group,
available at Internet Archive of https://capitalmarkets.freddiemac.com/mbs/products/dealer-groups, captured
on Nov. 17 and Dec. 6, 2022.
    \546\ The Green Street Asset-Backed Alert Database.
    \547\ Mergent Municipal Bond Securities Database. The Commission
received a comment stating that this analysis conflates ABS issued
by municipalities and municipal securitizations issued by special
purpose entities. See letter from SIFMA I. Both are subject to the
rule and should be counted as part of the baseline.
    \548\ See Division of Investment Management: Analytics Office,
Private Funds Statistics Report: Fourth Calendar Quarter 2022 (July
18, 2023) (``Form PF Statistics Report''), at 4, available at
https://www.sec.gov/files/investment/private-funds-statistics-2022-q4.pdf (showing number of funds and advisers by category as reported
on Form PF).
---------------------------------------------------------------------------

    There is an overlap between these categories of sponsors and
underwriters since some sponsors and underwriters might perform
multiple functions and might be active in multiple market segments and,
thus, the total number of potentially affected sponsors and
underwriters may be lower than the sum of the numbers above. As for
Contractual Rights Sponsors, we note that the definition of sponsor
does not capture persons that direct or cause the direction of the
structure, design, or assembly of ABS or the composition of the
underlying or referenced asset pool unless they have contractual rights
to do so. As discussed in Section II.B.3.b.ii., certain investment
advisers could be Contractual Rights Sponsors. We derived an estimate
of the number of investment advisers that would be subject to the rule
from Form PF and Form ADV data.
    Table 1 shows the number of private fund advisors along with
estimates of their assets which may be affected by the rule, including
those smaller firms which may face difficulties establishing and
demonstrating sufficient separation between staff involved in
activities that lead to the firm being included as a securitization
participant and those advising other funds, as of the fourth quarter of
2022.\549\
---------------------------------------------------------------------------

    \549\ Cross-referencing Form PF and Form ADV data.

                     Table 1--Private Securitized Asset Fund Advisor Statistics as of 2022Q4
----------------------------------------------------------------------------------------------------------------
                                                                                Gross asset      Net asset
                 Stratification                    Adviser count    Fund count      value  ($B)     value  ($B)
----------------------------------------------------------------------------------------------------------------
All.............................................             177            2482           936.8           275.9
With at Least 1 Fund >10% Relevant Strategy                   72  ..............           586.6           194.6
 Exposure.......................................
With at Least 1 Fund >10% Relevant Strategy                   25  ..............           133.5            36.9
 Exposure and <50 Non-clerical or <100
 Investment Adviser Employees...................
----------------------------------------------------------------------------------------------------------------
Note: These statistics related to the ``Adviser Count,'' ``Fund Count,'' ``Gross Asset Value,'' ``Net Asset
  Value,'' and ``Relevant Strategy Exposure'' rely on Form PF. The statistics related to ``Non-clerical'' and
  ``Investment Adviser Employees'' rely on Form ADV. Only SEC-registered advisers with at least $150 million in
  private fund assets under management must report to the Commission on Form PF; SEC-registered investment
  advisers with less than $150 million in private fund assets under management, SEC-exempt reporting advisers,
  and state-registered investment advisers are not required to file Form PF.
 Data aggregated to Level 1.
 ``>10% Relevant Strategy Exposure'' refers to gross exposure attributable to specified strategies (Credit,
  Event Driven, Relative Value, Macro), as reported in Form PF, Q20. The same fund may allocate its assets to
  multiple strategies. We believe these private fund strategies are those most likely to engage in a conflicted
  transaction with an affiliate or subsidiary that issues an ABS, and that the 10% threshold will capture those
  funds which employ those strategies to a sufficient degree to be meaningfully conflicted. The cutoff for
  employees is based on estimates of the size of firm in terms of employees at which information barriers
  including physical separation will be feasible and is based on the number of employees typical of a single
  floor of an office building in New York. Fund counts and asset values are based on funds outstanding, not
  primary issuance. For comparison, in 2022 there were 283 broadly syndicated and middle market CLOs issued in
  the United States, totaling $130 billion. See Fitch Ratings, ``Global CLO 4Q22 Activity Struggles Amid High
  Spreads, Low Corporate Issuance,'' available at https://www.fitchratings.com/research/structured-finance/global-clo-4q22-activity-struggles-amid-high-spreads-low-corporate-issuance-24-01-2023.

3. Current Relevant Statutory Provisions, Regulations, and Practices
    As an initial matter, the general anti-fraud and anti-manipulation
provisions of the Federal securities laws, including Section 17(a) of
the Securities Act and Section 10(b) and Rule 10b-5 under the Exchange
Act, apply to ABS transactions.
    Several ABS deals that originated in the pre-financial crisis years
between 2005-2007 exhibited conflicts of interest targeted by the final
rule. These deals resulted in significant investor harm and received
increased attention from Congress, the market, and regulators in the
2010s.\550\ However, despite the increased scrutiny at that time, we do
not have data on the extent of securitization participants' involvement
in ABS transactions that are tainted by material conflicts of interest
following the financial crisis of 2007-2009. We note that the types of
transactions with material conflicts of interest exhibited during the
2007-2009 financial crisis and targeted by Section 621 of the Dodd-
Frank Act may not be easily detected or as prevalent under current
market practices as they were prior to the law's passage, possibly
because of market participants' compliance with existing rules and
reputational incentives, as described below.
---------------------------------------------------------------------------

    \550\ See, e.g., Consent and Final Judgement as to Defendant
J.P. Morgan Securities LLC in SEC v. J.P Morgan Securities LLC (f/k/
a/ J.P. Morgan Securities Inc.), 11 CV 4206 (S.D.N.Y. 2011)
Litigation Release No. 22008 (June 21, 2011), 2010 WL 6796637;
Consent and Final Judgement as to Defendant Goldman, Sachs & Co. in
SEC v. Goldman, Sachs & Co. and Fabrice Tourre, 10 CV 3229 (S.D.N.Y
2010) Litigation Release No. 21592 (July 15, 2010), 2010 WL 2799362
(July 15, 2010); Senate Financial Crisis Report, supra note 13.
---------------------------------------------------------------------------

    Following the financial crisis of 2007-2009, the Commission adopted
several rules that reinforce the alignment of economic incentives of
securitization participants and investors and reduce information
asymmetries. Regulation RR, adopted by the Commission in 2014 for the
purpose of implementing Section 941 of the Dodd-Frank Act, generally
requires certain ABS sponsors (as defined under Regulation RR) to
retain not less than 5 percent of the credit risk of the assets
collateralizing an ABS for a period from five to seven years, after the
date of closing of the securitization transaction, as specified by the
rule.\551\ Credit risk retention aims to align the economic interest of
ABS sponsors and long investors in an ABS by requiring ABS sponsors to
retain financial exposure to the same credit risks as ABS investors
and, in this regard, differs from the final rule, which does not
require securitization participants to retain any exposure to
securitization risks. Generally, a sponsor of an ABS deal that is
required to retain exposure to the credit risk of the deal is not
expected to engage in the transactions prohibited by the final rule
because Regulation RR prohibits them from hedging, subject to an
exception for certain permitted hedging activities under that
regulation, the interest that they retain and, otherwise, such
transactions would perform against the economic interest of the sponsor
resulting from the extent of the retained exposure.
---------------------------------------------------------------------------

    \551\ See RR Adopting Release, supra note 54.
---------------------------------------------------------------------------

    Compared to Rule 192, Regulation RR is narrower in its scope: it
applies to only those persons that are ``sponsors'' for purposes of
Regulation RR, the definition of which is roughly analogous to
paragraph (i) of the final rule's multi-part definition of ``sponsor.''
\552\ However, Rule 192 is not limited to such ``sponsors'' and thus
final Rule 192 applies to a broader set of persons that are not
sponsors under Regulation RR and that are not required to retain credit
risk under Regulation RR. Additionally, Regulation RR applies to
certain types of securitizations and does not apply to other types of
securitizations (e.g., arbitrage or open-market CLO, synthetic ABS, or
a security issued or guaranteed by any State, or by any political
subdivision of a State, or by any public instrumentality of a State
that is exempt from the registration requirements of the Securities Act
by reason of Section 3(a)(2) of that Act) while the final rule applies
to a wider range of ABS, such as synthetic ABS, as discussed in Section
II.A.
---------------------------------------------------------------------------

    \552\ See RR Adopting Release, Subpart A.2. at 77742, supra note
54.
---------------------------------------------------------------------------

    Further, SEC-registered ABS offerings must comply with the SEC's
registration, disclosure, and reporting requirements. Commission
disclosure requirements, including asset-level disclosures which are
required for some asset classes,\553\ reduce asymmetric information
about securitization participants and underlying assets in ABS and
allow investors easy access to data and tools to review ABS deals,
including to assess underlying asset quality. While such disclosure
creates incentives for securitization participants to avoid potential
conflicts of interest by

making such conflicts visible to a large set of potential investors,
these disclosure rules only apply to SEC-registered ABS offerings. In
contrast, the final rule applies to both ABS offered and sold in
registered and unregistered transactions (including synthetic ABS as
well as hybrid cash and synthetic ABS) that are not subject to the
Commission's disclosure requirements for registered offerings, and
therefore the broader scope of the final rule prohibits certain types
of transactions involving registered ABS and unregistered ABS that
involve or would result in a material conflict of interest. Also, the
final rule applies to underwriters, placement agents, initial
purchasers, and sponsors of an ABS, as well as to certain of their
affiliates and subsidiaries, such that it prohibits misconduct by
securitization participants that may or may not have disclosure
liability under the Federal securities laws.
---------------------------------------------------------------------------

    \553\ Asset-level requirements are specified in Item 1125 of
Regulation AB (17 CFR 229.1125).
---------------------------------------------------------------------------

    Furthermore, securitization participants might be incentivized to
avoid conflicted transactions to maintain their industry reputation and
avoid reputational harm. A securitization participant that is known to
regularly engage in ``conflicted transactions,'' as defined in Rule
192(a)(3), might harm its reputation among investors and be excluded
from ABS deals that a participant facilitates. Failure to disclose a
person's substantial role in selecting assets underlying an ABS and
that person engaging in conflicted transactions with respect to those
ABS would make a securitization participant potentially subject to
enforcement actions under the anti-fraud provisions of the securities
laws, as occurred in certain cases following the financial crisis.\554\
On the other hand, disclosing conflicted transactions to investors
would create negative reputational effects for securitization
participants. Thus, as a baseline matter, securitization participants
may be incentivized to avoid conflicts of interest and make assurances
to ABS investors about the absence of such conflicts of interest, which
might serve as a signal to some investors that securitization
participants have investors' interest in mind while facilitating ABS
transactions and might increase investor participation in such deals;
however, it may be difficult for investors to assess the credibility of
those assurances.
---------------------------------------------------------------------------

    \554\ See, e.g., Consent and Final Judgement as to Defendant
J.P. Morgan Securities LLC in SEC v. J.P Morgan Securities LLC (f/k/
a/ J.P. Morgan Securities Inc.), 11 CV 4206 (S.D.N.Y. 2011)
Litigation Release No. 22008 (June 21, 2011), 2010 WL 6796637;
Consent and Final Judgement as to Defendant Goldman, Sachs & Co. in
SEC v. Goldman, Sachs & Co. and Fabrice Tourre, 10 CV 3229 (S.D.N.Y
2010) Litigation Release No. 21592 (July 15, 2010), 2010 WL 2799362
(July 15, 2010). Further, as part of an adviser's fiduciary duty to
a hedge fund, the duty of loyalty requires it to ``make full and
fair disclosure to its clients of all material facts relating to the
advisory relationship'' and ``eliminate, or at least expose, through
full and fair disclosure all conflicts of interest which might
incline an investment adviser--consciously or unconsciously--to
render advice which was not disinterested.'' See Commission
Interpretation Regarding Standard of Conduct for Investment
Advisers, Release No. IA-5248 (June 5, 2019) [84 FR 33669 (July 12,
2019)] at 33675.
---------------------------------------------------------------------------

C. Broad Economic Considerations

    Securitizations are an important part of the financial system,
facilitating capital formation and capital flows from investors to
borrowers. However, they can generate significant risks to the economy
and ABS investors. Specifically, securitization markets are
characterized by information asymmetries between securitization
participants and investors in ABS, who are the ultimate providers of
credit, and such information asymmetries may give rise to two groups of
adverse effects.
    First, asymmetric information can reduce the willingness of less
informed market participants \555\ to transact in a market. This is a
secondary effect of ``adverse selection,'' the situation in which
information asymmetry benefits some market participants (i.e.,
securitization participants) to the detriment of others (i.e., ABS
investors).\556\ Adverse selection has been thoroughly documented in
the economic literature, and its deleterious effects on market
liquidity and efficiency are well known in sectors such as banking
\557\ and insurance.\558\ In securitization markets, adverse selection
could possibly manifest itself through a reduction in the number of
investors, because investors would be less informed about the quality
of underlying assets than securitization participants, a consequence
that reduces liquidity and increases transaction costs.\559\
---------------------------------------------------------------------------

    \555\ The term ``market participants'' used in this section
encompasses all participants in the ABS markets, including ABS
investors, and is a broader term than the proposed defined term
``securitization participant.''
    \556\ See George A. Akerlof, The Market for `Lemons': Quality
Uncertainty and the Market Mechanism, 84 The Quarterly J. of Econ.
488-500 (1970).
    \557\ See Joseph E. Stiglitz & Andrew Weiss, Credit Rationing in
Markets with Imperfect Information, 71 The Am. Econ. Rev. 393-410
(1981).
    \558\ See Amy Finkelstein & James Poterba, Adverse Selection in
Insurance Markets: Policyholder Evidence from the U.K. Annuity
Market, 112 J. of Pol. Econ. 183-208 (2004).
    \559\ See Adam B. Ashcraft & Til Schuermann, Understanding the
Securitization of Subprime Mortgage Credit, Fed. Reserve Bank of
N.Y. Staff Report No. 318 (2008) (identifying frictions in the
residential mortgage securitization chain and explaining that the
overarching friction that creates all other problems at every step
in the securitization process is asymmetric information).
---------------------------------------------------------------------------

    Second, asymmetric information may increase risk-taking by more
informed counterparties if they do not bear the adverse consequences of
such risks--an effect commonly known as ``moral hazard.'' \560\ In the
realm of securitizations, loan originators and securitization
participants potentially create or increase risks in the underwriting
or securitization process for which they do not bear the consequence,
and about which the investor lacks information.\561\
---------------------------------------------------------------------------

    \560\ See, e.g., Bengt Holmstrom, Moral hazard and
observability, Bell Journal of Economics, pp. 74-91 (1979) and
references therein.
    \561\ See supra note 559.
---------------------------------------------------------------------------

    Securitization participants have access to more information about
the credit quality and other relevant borrower characteristics than the
ultimate investors in the securitized assets. Securitization
participants may also participate in the selection of assets for ABS.
This information asymmetry can have adverse market effects to the
extent that securitization participants seek to profit from their
differential information. Prior to the financial crisis of 2007-2009,
sponsors sold assets that they knew to be very risky, without
adequately conveying that information to ABS investors, and sometimes
even while taking financial positions to benefit from adverse
performance of underlying assets to the detriment of investors.
    The patterns for adverse selection and misreporting low-quality
assets were even more severe in CDOs and synthetic CDOs in the period
prior to the financial crisis of 2007-2009.\562\ One paper finds
evidence consistent with the tailoring of CDO structures for short bets
and negative performance and finds that the synthetic CDOs issued in
2005-2007 that were shorted in CDS contracts performed even worse in
2008-2010 than other CDOs.\563\ This is consistent with incentives of
underwriters to structure these securities to profit from short
positions on such securities enabled by the information asymmetries in
the market at the time.
---------------------------------------------------------------------------

    \562\ See, e.g., Senate Financial Crisis Report.
    \563\ See Oliver Faltin-Traeger and Christopher Mayer, Lemons
and CDOs: Why Did So Many Lenders Issue Poorly Performing CDOs?,
Columbia Business School Working Paper (2012) (analyzing the
characteristics and performance of underlying assets going into CDOs
and synthetic CDOs issued in 2005-2007 and comparing the ABS
observed in a CDO with other ABS not observed in a CDO).
---------------------------------------------------------------------------

    There are several possible ways, which can be complementary, to
mitigate the effects of such information

asymmetries in the securitization process. One way to partially offset
information asymmetries is to require that sponsors retain some ``skin
in the game,'' through which loan performance can affect sponsors'
profits as much as--or more than--those of the ABS investors: that is
accomplished by the credit risk retention mandated for some
securitization participants by Regulation RR.\564\ To the extent that
Regulation RR reduces adverse selection costs and moral hazard,
affected currently issued ABS are less likely to be instruments used in
conflicted transactions. Another way to partially offset information
asymmetries is to require securitization participants to have robust
disclosures of information about ABS deals or individual assets. The
Commission has employed this strategy previously, including in
amendments to Regulation AB in 2014, which enhanced disclosure
requirements, including by requiring asset-level disclosures.\565\ More
broadly, securitization participants may be able to take steps to
credibly signal that they are not engaging in actions to exploit
information asymmetries with investors, or investors can require
information disclosures and other means of reducing the threat of
adverse selection and moral hazard as part of underlying ABS contracts
or in the marketing and sales process. An additional approach to
partially offset the effects of information asymmetries is to directly
prohibit securitization participants from engaging in certain
transactions through which they could benefit from that information
asymmetry, which is what the final rule, as mandated under the Dodd-
Frank Act, is designed to achieve.
---------------------------------------------------------------------------

    \564\ See discussion of current market practices with respect to
credit risk retention in Section IV.B.3.
    \565\ See Asset-Backed Securities Disclosure and Registration,
Release No. 33-9638 (Sept. 4, 2014) [79 FR 57184 (Sept. 24, 2014)]
(``2014 Regulation AB 2 Adopting Release'').
---------------------------------------------------------------------------

    The adverse selection problem may be especially severe when it is
costly for investors to demand from securitization participants
sufficient transparency about the assets or securitization structure to
overcome informational differences between these securitization
participants and investors or when it is costly for investors to
process such information. In these cases, the securitization process
can misalign incentives so that the welfare of some market participants
is maximized at the expense of other market participants. Some of these
risks may not be adequately disclosed to investors in securitizations,
an issue that may be compounded as sponsors introduce increasingly
complex structures like CDOs or synthetic ABS.
    The final rule is designed to enhance investor protection and the
integrity of the ABS markets by helping to constrain the ability of
securitization participants to benefit from the information asymmetry
and limiting their incentives to exploit the information asymmetry at
the expense of ABS investors. In particular, under the final rule,
securitization participants will be precluded from obtaining a short
position in an ABS, purchasing a credit default swap or other credit
derivative pursuant to which the securitization participant would be
entitled to receive payments upon the occurrence of specified credit
events in respect of the ABS or purchasing or selling any financial
instrument (other than the relevant ABS) or entering into a transaction
that is substantially the economic equivalent of the aforementioned
transactions, other than, for the avoidance of doubt, any transaction
that only hedges general interest rate or currency exchange risk or
that otherwise satisfies the conditions of one of the exceptions. The
final rule will help prevent the sale of ABS that are tainted by the
material conflicts of interest that Section 27B is designed to address,
to the extent such sales currently occur, and will curb activity that
is viewed as having contributed to the financial crisis of 2007-2009
and may continue today. In this way, the final rule will help
discourage the creation and sale of ABS that facilitate amplification
of risk transfer from informed to uninformed parties and the spread of
risks from low quality or riskier loans throughout the financial
system.
    Accordingly, the final rule may have economic effects on broader
credit markets. ABS investors may be willing to pay more or accept a
lower rate of return for bearing the credit risk, which in turn could
reduce borrowing costs for underlying borrowers. Additional compliance
costs, frictions in matching borrowers and lenders, or increased
difficulty managing risk can have the opposite effect. The direction
and magnitude of this possible impact on borrowing rates will depend on
the tradeoff between the costs of complying with the final rule and how
market participants reprice ABS due to the enhanced investor protection
that the final rule will provide.
    The economic considerations above are significantly less applicable
to ABS backed by the full faith and credit of the United States
Government. Even though investment in such fully insured or fully
guaranteed ABS is not risk-free, investors in such ABS are not exposed
to the credit risk of individual underlying assets and, thus, are not
subject to the adverse selection and moral hazard issues described
above.\566\ As a result, such ABS are less susceptible to the conflicts
of interest that Section 27B is designed to prevent and are excluded
from the final rule.
---------------------------------------------------------------------------

    \566\ See discussion in Section II.B.3.b.iv.
---------------------------------------------------------------------------

    Some commenters have stated that municipal issuers of ABS do not
have an incentive to enter into conflicted transactions relative to
for-profit issuers and sponsors and suggested that such municipal ABS
and their issuers should be excluded from Rule 192.\567\ However,
application of the final rule is not conditioned on a securitization
participant having a profit motive.\568\ Additionally, as discussed
earlier, the exclusion from the definition of sponsor for the United
States or an agency of the United States with respect to ABS that are
fully insured or fully guaranteed by the United States is primarily
based on the insulation of investors from credit risk in such ABS.\569\
Municipal securities are considered safe investments with default rates
at significantly lower levels compared to corporate and foreign
government bonds.\570\ However, unlike the United States Government,
issuers of municipal ABS are in most cases not responsible for repaying
obligations they issue on behalf of conduit borrowers, including
borrowers in single-asset conduit bonds.\571\ As noted previously by
the Commission, non-governmental conduit borrowers account for the
majority of municipal bond defaults.\572\ In particular, certain
conduit issuers which are managed by private firms have elevated
default risks on their bonds.\573\

Because investors in municipal ABS are exposed to credit risk in a way
that investors in ABS that are fully guaranteed by the United States
Government are not, carving out municipal ABS or their issuers from the
final rule would reduce the investor protection benefits of the rule
more significantly as compared to the carve-out for U.S. Government
guaranteed ABS.\574\
---------------------------------------------------------------------------

    \567\ See letters from NABL et al.; NAHEFFA.
    \568\ See Section II.B.3.b.i.
    \569\ See Section II.B.3.b.iv.
    \570\ See SEC, Report on Municipal Securities Market, July 31,
2012, at p. 22 and references therein for a discussion on municipal
bond default rates, available at https://www.sec.gov/files/munireport073112.pdf.
    \571\ See footnote 56 for a discussion of municipal conduit
assets.
    \572\ Yang, LK, General Purpose Local Government Defaults: Type,
Trend, and Impact. 2020 Public Budgeting & Finance, 40(4): 62-85
(showing that defaulted bonds are more likely to be conduit debt and
unrated).
    \573\ Heather Gillers, How Did Things Go So Wrong at This
Arizona Park Built With Muni Bonds?, WALL ST. J. (Aug. 28, 2023),
available at https://www.wsj.com/finance/investing/how-did-things-go-so-wrong-at-this-arizona-park-built-with-muni-bonds-a30a54f0
(retrieved from Factiva database) (discussing the shortcomings of
the conduit structure and how conduit-related defaults are piling
up); Martin Z Braun, Bloomberg, Aug. 10, 2020, Muni Bonds Sold by
Phantom Agency Draw Texas Town's Scrutiny, available at https://
www.bloomberg.com/news/articles/2020-08-19/muni-bonds-sold-by-phantom-agency-draw-texas-town-s-scrutiny (The Public Finance
Authority had a much higher rate of borrower payment defaults than
any other issuer over a three year period).
    \574\ See Sections II.A.3.a. and II.B.3.b. for discussion of the
rule's applicability to municipal ABS and issuers.
---------------------------------------------------------------------------

    Similarly, the Enterprises' ABS guarantees as to principal and
interest payments are not fully guaranteed by the United States
Government.\575\ Given that the Enterprises may eventually emerge from
FHFA conservatorship and to avoid granting unnecessary competitive
benefits to the Enterprises as market participants, as discussed in
Section II.B.3.b.iv., we are not excluding the Enterprises from the
definition of sponsor.\576\ Changes between the proposed and final
rule, most notably in the risk-mitigating hedging activities exception,
will enable the Enterprises to maintain their CRT issuance without such
general exclusion from the securitization participant definition where
guaranteed ABS are concerned.\577\
---------------------------------------------------------------------------

    \575\ See, e.g., Mortgage Backed Securities, Fannie Mae,
available at https://capitalmarkets.fanniemae.com/mortgage-backed-securities (stating that ``[t]he certificates and payments of
principal and interest on the certificates are not guaranteed by the
U.S. Government and do not constitute a debt or obligation of the
United States or any of its agencies or instrumentalities other than
Fannie Mae.'').
    \576\ See letters from Fannie Mae and Freddie Mac; HPC; M.
Calabria; SFA I.
    \577\ Part of the reason for excluding the Enterprises in the
proposed rule had been to enable them to continue to issue CRTs. See
Proposing Release Section II.B.2.c.ii.
---------------------------------------------------------------------------

D. Costs and Benefits

    The overall costs and benefits of the final rule depend on the
extent to which existing market practices and other regulations,
including the anti-fraud and anti-manipulation provisions of the
Federal securities laws, already reduce the risk of conflicts in ABS
transactions. We discuss costs and benefits separately in the next
sections in more detail.
1. Benefits
    Investors benefit when an ABS performs in a manner that is
commensurate with the level of risk that investors are willing to take
and, generally, they do not benefit from the adverse performance of an
ABS. The final rule will benefit investors by prohibiting
securitization participants from engaging in a short sale of the
relevant ABS, purchasing a credit default swap or other credit
derivative pursuant to which the securitization participant would be
entitled to receive payments upon the occurrence of specified credit
events in respect of the relevant ABS. These benefits are supported by
the rule's further prohibition against securitization participants
purchasing or selling any financial instrument (other than the relevant
ABS) or entering into a transaction that is substantially the economic
equivalent of the aforementioned transactions, other than, for the
avoidance of doubt, any transaction that only hedges general interest
rate or currency exchange risk. The final rule may thus help alleviate
investor concerns that the securities they purchase might be tainted by
certain material conflicts of interest. It can also help reduce moral
hazard and adverse selection costs in the ABS market, leading to better
investor protection and a lower cost of capital.\578\
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    \578\ See supra note 559.
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    The final rule will enhance market stability through reduced
incentives to engage in conflicted transactions and other speculative
activity in the ABS market. This effect could be especially pronounced
for asset pools that are involved in re-securitizations or synthetic
ABS because of their complexity and the relative difficulty of
assessing information about underlying assets of such ABS. Enhanced
market stability may reduce the variance of ABS prices in the primary
market and volatility of ABS prices in the secondary market.
    Lower adverse selection costs, higher expected liquidity, and lower
expected volatility in ABS markets are expected to lower the expected
return required by ABS investors to invest in ABS. These effects, in
turn, may lower credit costs in loan markets for households and
corporations whose debts enter the asset pools underlying the asset-
backed securitizations.
    The definitions of the terms ``underwriter,'' ``placement agent,''
``initial purchaser,'' ``sponsor,'' ``material conflict of interest,''
and ``conflicted transaction'' in the final rule encompass an array of
securitization participants and conduct. This coverage will reduce
asymmetries of information between securitization participants and
investors at various stages of the transaction structuring and
marketing process, which, in turn, is expected to enhance investor
protection and reduce evasion.\579\
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    \579\ One commenter on the rule proposal supported a broader
definition of sponsor to ``capture any person that directs or causes
the direction of the structure, design, or assembly of an ABS or the
composition of the pool of assets underlying the ABS or has the
right to do so.'' See letter from Better Markets. As discussed
below, we have revised the definition of sponsor in the final rule
to remove the Directing Sponsor prong in light of commenter concerns
regarding the scope of the proposed definition. To the extent a
party is able to direct the structuring of the ABS without
contractual provisions granting them the right to do so,
opportunities to bet against the ABS may remain, which would limit
the extent of the benefits described above. For the reasons
discussed in Section II.B.3.b., the final definition of sponsor
appropriately balances commenter concerns about the Directing
Sponsor prong being a potential impediment to a long investor's
negotiating power with the need to protect investors against
potential conflicts of interests in securitization transactions.
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    The final rule's prohibition commences when a person has reached an
agreement to become a securitization participant. As discussed in
Section II.C., this approach helps ensure that the prohibition will
apply during the transaction structuring and marketing process when a
securitization participant may be incentivized to engage in conflicted
transactions, and, thus, further enhances investor protection benefits
of the final rule. Similarly, covering certain affiliates or
subsidiaries of securitization participants under the definition of
``securitization participant'' helps ensure that the benefits of the
final rule are robust with respect to securitization participants that
are part of large, complex entities, while leaving each affiliate or
subsidiary primarily liable for its own conduct rather than that of
other persons within the larger organization.
    In addition, the final rule specifies the scope of conflicts of
interest subject to the prohibition by defining the terms ``material
conflict of interest'' and ``conflicted transaction,'' as well as
including an anti-evasion provision. Under Rule 192(a)(2), ``engaging
in any transaction would involve or result in a material conflict of
interest between a securitization participant of an ABS and an investor
in such ABS if such a transaction is a conflicted transaction.'' The
definition of ``conflicted transaction'' identifies specific types of
conflicting transactions and also includes any transaction that is
substantially the economic equivalent of the specified transactions,
provided that in either case ``there is a substantial likelihood that
reasonable investor would consider the transaction important to the
investor's investment decision, including a decision whether

to retain the asset-backed security.'' \580\ These aspects of the final
rule tailor the prohibition to specified conflicts of interest that are
likely to present the most acute investor protection concerns.
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    \580\ See Section II.D for a more detailed discussion of the
definition of a ``conflicted transaction'' under the final rule.
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    Under the anti-evasion provision, if a securitization participant
engages in a transaction or series of related transactions that,
although in technical compliance with the Rule's exceptions, is a part
of a plan or scheme to evade the prohibition in Rule 192(a)(1), then
the transaction will be deemed to violate the final rule's prohibition.
To the extent market participants are more familiar with complying with
anti-evasion restrictions than anti-circumvention provisions, as stated
by a commenter, the final rule's anti-evasion restriction may reduce
the compliance burden imposed by the rule in comparison to that of the
proposed rule.\581\ To the extent that the anti-evasion provision
reduces uncertainty by focusing on the actions of securitization
participants rather than the effect of transactions, the final rule may
reduce compliance costs imposed relative to the proposed rule. In
addition, the final definition of the term ``conflicted transaction''
is consistent with Section 27B's prohibition of conflicts of interest
that are ``material'' and looks to whether there is a substantial
likelihood that a reasonable investor would consider the conflicted
transaction important to the investor's investment decisions. By using
a definition of materiality grounded in the Federal securities laws,
the final rule sets forth a standard that is familiar to both investors
and registrants, facilitating compliance and enhancing investor
confidence in the rule's effectiveness. These elements of the final
rule will work together to capture certain types of material conflicts
of interest that give rise to adverse selection and moral hazard costs.
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    \581\ See letter from ABA.
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    The Commission received comment that the extent of benefits from
the rule's prohibition of conflicts of interest may be reduced relative
to when the Dodd-Frank Act was passed due to other new regulatory
requirements and evolving market practices and incentives.\582\ We
acknowledge this consideration and have considered these developments
in our assessment of the economic effects of the final rule, but note
that these developments do not remove the possibility of conflicts
occurring in securitization transactions, and thus the final rule will
provide additional investor protection benefits as compared to the
baseline. In addition, implementing Section 27B remains a Congressional
mandate.
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    \582\ See, e.g., letter from AIMA/ACC.
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    The adopted definition of conflicted transactions differs from the
proposed definition by including any transactions that constitute
substantially the economic equivalent of the specified transactions.
This definition replaces the proposed broader category of any financial
transactions through which the participant would benefit from the
actual, anticipated, or potential adverse performance of an ABS or its
underlying assets. This narrowed definition addresses the concerns of
various commenters who stated that adverse performance of an ABS can be
associated with many factors not unique to the security, such as
general interest rates or foreign exchange rates,\583\ and it is
similar to commenter suggestions.\584\ As discussed in Section II.D,
the revised definition is intended to cover bets placed against an ABS
to effectuate Section 27B's investor protection mandate while not
unnecessarily restricting transactions wholly unrelated to credit
performance of the ABS, such as reinsurance agreements, hedging of
general market risk (such as interest rate and foreign exchange risks),
or routine securitization activities (such as the provision of
warehouse financing or the transfer of assets into a securitization
vehicle).
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    \583\ See, e.g., letters from AFME; Representatives Wagner and
Huizenga; U.S. Representative Brad Sherman dated June 21, 2023
(``Representative Sherman''); Senator Kennedy.
    \584\ See letter from AIC.
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    The final rule provides exceptions for risk-mitigating hedging
activities, liquidity commitments, and bona fide market-making
activities, which are consistent with Section 27B. As discussed below,
all these exceptions taken together can improve market efficiency and
facilitate investor protection without diluting the investor protection
benefits of the final rule. The final rule's conditions for the
availability of these exceptions will permit valuable risk-mitigating
hedging, liquidity provision, and bona fide market-making, while
minimizing the likelihood of conflicts of interest between
securitization participants and investors in ABS, thus enhancing
investor protections. Defining the scope of these exceptions may also
ease compliance with the rule, although benefits from specificity can
be limited by the anti-evasion provision which states that a
transaction which is part of a scheme to evade the prohibition will be
deemed a conflicted transaction, because the anti-evasion provision is
necessarily less certain. However, the potential ambiguity under the
anti-evasion restriction may be minimal, to the extent that it covers
transactions that are part of a scheme to evade the rule's prohibitions
rather than considering the effects of a transaction and to the extent
the prohibitions are clearly and tightly defined. To the extent the
anti-evasion provision prevents misuse of the exceptions, that
provision will strengthen investor protections.
    Risk-mitigating hedging activities permit a securitization
participant to fine-tune the amount of credit or other risk taken or to
limit some of the consequences of taking a risk. Consistent with
Section 27B, we are adopting a risk-mitigating hedging activities
exception that permits securitization participants to continue to hedge
their risk exposures. Subject to specified conditions, the final rule
provides an exception for risk-mitigating hedging activities of a
securitization participant in connection with, and related to,
individual or aggregated positions, contracts, or other holdings of the
securitization participant, including those arising out of its
securitization activities, such as the origination or acquisition of
assets that it securitizes. The final risk-mitigating hedging
activities exception are expected to promote the final rule's benefits
of investor protection without prohibiting securitization participants'
risk mitigation activities, unduly increasing securitization
participants' costs of engaging in such activities or increasing
barriers to entry in ABS markets. Thus, the exception may improve
efficiency of ABS markets and help protect ABS investors.
    The final rule includes the following conditions to the risk-
mitigating hedging activities exception: (i) at the inception of the
hedging activity and at the time of any adjustments to the hedging
activity, the risk-mitigating hedging activity is designed to reduce or
otherwise significantly mitigate one or more specific, identifiable
risks arising in connection with and related to identified positions,
contracts, or other holdings of the securitization participant, based
upon the facts and circumstances of the identified underlying and
hedging positions, contracts or other holdings and the risks and
liquidity thereof; (ii) the risk-mitigating hedging activity is
subject, as appropriate, to ongoing recalibration by the securitization
participant to ensure that the hedging activity satisfies the
requirements of the exception and does not facilitate or create an
opportunity to

materially benefit from a conflicted transaction other than through
risk-reduction, and (iii) the securitization participant has
established, and implements, maintains, and enforces, an internal
compliance program that is reasonably designed to ensure the
securitization participant's compliance with the requirements of the
exception, including reasonably designed written policies and
procedures regarding the risk-mitigating hedging activities that
provide for the specific risk and risk-mitigating hedging activity to
be identified, documented, and monitored.
    The scope of these conditions enhances the benefits of the rule by
assuring investors that risk-mitigating hedging activities of
securitization participants will be less likely to create
(intentionally or inadvertently) economic conflicts of interest with
investors. Moreover, the policies and procedures in the risk-mitigating
hedging activities exception that provide for the identification,
monitoring, and documentation of the risk and related hedging can be
used by the Commission in its examination programs for regulated
entities. Thus, the final risk-mitigating hedging activities exception
will help ensure the investor protection benefits of the rule, while
allowing risk-reducing actions of securitization participants.
    The exceptions for liquidity commitments and bona fide market-
making activities may help prevent a loss of secondary liquidity and
efficiency in the ABS market and, thus, benefit ABS investors. The
final rule conditions for the availability of and limits on the
liquidity commitments and bona fide market-making activities
exceptions, including the requirement that a securitization participant
establish an internal compliance program when relying on the bona fide
market-making activities exception, may enhance the benefits of the
final rule by assuring investors that such activities of securitization
participants will be less likely to create (intentionally or
inadvertently) economic conflicts of interest with investors.
2. Costs
    The final rule will create direct compliance costs for
securitization participants, some of which are discussed in detail in
Section V. The compliance costs will result from the need to implement
and monitor policies, procedures, and information barriers to ensure
compliance with the final rule, as well as associated legal
review.\585\ Some commenters also expressed concerns that compliance
with the rule will be more costly for securitization participants that
are not subject to the Volcker Rule.\586\ We agree that the final rule
may impose additional compliance and legal costs on certain
securitization participants. These costs are likely to be higher if a
securitization participant has no established compliance framework that
facilitates the Volcker Rule requirements since the conditions of the
final rule share similarities with the Volcker Rule. However, we expect
that after incurring initial start-up costs to establish the necessary
compliance systems, or modify the existing compliance frameworks, some
of these costs will decrease over time as securitization participants
gain experience in fulfilling the requirements and implementing the
rule.
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    \585\ Various commenters suggested that meeting the requirements
of the rule would create additional legal and compliance costs.
These costs will make it more costly to participate in
securitization transactions. See, e.g., letters from AIMA/ACC; NAMA.
    \586\ See, e.g., letters from AIC; LSTA II.
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    Section V below estimates, for the purposes of the Paperwork
Reduction Act, the initial and ongoing compliance costs to implement,
maintain, test, and enforce written policies and procedures for
securitization participants that rely on the risk-mitigating hedging
activities or bona fide market-making activities exceptions of the
final rule.\587\ As reported in Section V, the total annual paperwork
burden of the final rule for securitization participants to prepare,
review, and update the policies and procedures under the final rule is
estimated to be 31,606 burden hours and cost $6,321,150.
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    \587\ See Section V (discussing costs and burdens relating to