SEC looks to bar ABS issuer insider trading
The Securities and Exchange Commission is moving to bar issuers of asset-backed securities for taking part in the transaction after it goes to market. New regulations would prevent the creators and distributors of ABS from getting involved in their own transactions for up to one year in an effort to crack down on conflicts of interest. Such curbs are mandated under the sweeping Dodd-Frank regulatory reform, the SEC said in a filing on the Federal Register. The federal regulator will take public comments on the matter through Dec. 19. During the run up to the current economic slowdown, several mortgage finance participants are suspected of trading against the performance of structured finance deals they themselves crafted. One instance that received a large amount of attention is a Goldman Sachs collateralized debt obligation, named ABACUS. It is alleged Goldman sold the CDO to investors on behalf of hedge fund client Paulson & Co. in 2007. CDOs are one form of ABS — backed primarily by subprime mortgages — that saw issuance ramp up steadily until 2006. Arguments taking place in courtrooms across the country claim issuers never intended these deals to perform well. Indeed, they may have looked to bank on it. "In fact, as Goldman Sachs knew, Paulson intended instead to take an enormous short position in ABACUS, reaping nearly $1 billion when the portfolio failed," a complaint filed by bond insurer ACA Financial Guaranty claims. The SEC is looking to avoid situations such as these in this latest rulemaking proposal. The regulator states that it is not after a blanket ban on issuers trading their own ABS. "The proposed rule also would provide exceptions from this prohibition for certain risk-mitigating hedging activities, liquidity commitments, and bona fide market-making," the SEC stated. Write to Jacob Gaffney.