(Reuters) – The U.S. Securities and Exchange Commission voted unanimously on Wednesday to propose a rule barring traders in asset-backed securities from betting against the very assets they sell to investors, behavior that became notorious in the wake of the 2008 global financial crisis.
The rule is among the last enacted under the landmark Dodd-Frank Wall Street reform legislation of 2010, according to SEC officials. The 2010 legislation aimed to address the root causes of the mortgage crisis. An earlier version of the conflict rule first proposed in 2011 was never finalized.
The sweeping 2010 reforms, named after their sponsors — Sen. Chris Dodd of Connecticut and Rep. Barney Frank of Massachusetts ̵
2; aimed to protect investors and taxpayers by preventing the buildup of risk and liability in the financial system.Among other things, the legislation contained financial stability measures governing banks deemed “too big to fail” and created the Consumer Financial Protection Bureau.
The rule reproposed Wednesday is now subject to a public comment period during which industry criticism of some aspects of the proposal is likely to arise.
In the years following Dodd-Frank’s passage, Democratic lawmakers complained that the SEC had failed to meet a 270-day deadline to issue a rule implementing its Section 621. When enacted with an SEC rule, the section would prohibit traders from bet against asset-backed securities that they sold to investors.
According to SEC officials, the rule would prohibit such actions for up to a year after the sale of the securities.
In comments released before the vote, SEC Chairman Gary Gensler said the rule would provide exemptions for legitimate activities, such as hedging to reduce risk, market making and liquidity commitments.
“Through these congressionally mandated exceptions, the rule would allow these market activities while targeting the conflicts identified by Congress,” Gensler said, adding that the latest version of the rule had been refined in light of public feedback.
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