A recent SEC no-action letter is expected to help the U.S. Collateralized Loan Obligation (CLO) market comply with Rule 192, a new conflicts of interest regulation taking effect June 9. The rule, part of Dodd-Frank reforms, aims to prevent asset-backed securities (ABS) transactions that create material conflicts between participants and investors.

To address these concerns, the SEC said it would not recommend enforcement if firms adopt policies to separate ABS deal teams from other trading staff and restrict access to sensitive information.

Craig Stein, co-head of Schulte’s Finance Group spoke with LSEG LPC and explained:

“When the market or an entity wants clarification or to determine if a specific path will comply with a rule, market participants can request a no-action letter from the agency, where they lay out, ‘If I do a, b or c, and I follow these rules and regulations, will the staff not recommend that the agency take any action or enforcement against me.’”

He also noted the urgency of implementation:

“Many firms are not waiting for the June 9 deadline to comply. Compliance is required from the date the securitization is agreed to, so if a firm entered into an engagement letter with a bank to securitize assets three months ago and it will close after June 9, that firm will need to be in compliance during that entire timeframe.”

Craig stressed the rule’s broad reach:

“Every securitization participant, even those that have scrubbed inhouse to make sure no deal team is doing something that might be a conflicted transaction, needs to put policy and procedures in place. It affects everyone.”