SEC Provides Clarity on Rule 192 Compliance with No-Action Relief

The SEC has provided limited relief from certain requirements under Rule 192 of the Securities Act (the Conflicts of Interest Rule) applicable to securitizations, where there is appropriate separation between deal teams and non-deal teams. On May 16, 2025, the Division of Corporation Finance of the Securities and Exchange Commission (the SEC Staff) issued a no-action letter addressing the applicability of Rule 192(a)(3)(iii) under the Securities Act¹ and the conditions under which a “securitization participant” (Securitization Participant) delineated under the Conflicts of Interest Rule would not be deemed to be engaged in a “conflicted transaction” due to the purchase or sale of a financial instrument or entry into a transaction that is substantially the economic equivalent of a “conflicted transaction.” In particular, the no-action letter clarifies that the SEC Staff would not recommend enforcement action where (i) the Securitization Participant has certain written policies and procedures in place which prevent coordination and flow of information between employees involved in, and those unrelated to, asset-backed securities (ABS) transactions, (ii) there is no actual coordination or flow of information contravening such prohibition, and (iii) even if there is technical compliance with items (i) and (ii), there is no scheme to evade such prohibitions.

Market participants may want to consider whether their existing internal policies and compliance programs are sufficient to qualify for the no-action relief. 

The Conflicts of Interest Rule

Under the Conflicts of Interest Rule, a Securitization Participant is prohibited from, directly or indirectly, engaging in any transaction that would involve or result in any “material conflict of interest” with respect to any investor in the ABS deal in connection with which the Securitization participant is acting.

A transaction would be subject to the prohibition if it is determined to be a “conflicted transaction,” which under the Conflicts of Interest Rule includes the following transactions with respect to which there is a substantial likelihood that a reasonable investor would consider the transaction important to the investor’s investment decision, including a decision whether to retain the ABS:

• (i) a short sale of the ABS;
• (ii) the purchase of 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
• (iii) the purchase or sale of any financial instrument (other than the relevant ABS) or entry into a transaction that is substantially the economic equivalent of a transaction described in paragraph (i) or (ii) above, other than general interest rate or currency exchange hedging transactions (the Anti-Circumvention Provision).

Due to the broad scope and vagueness of the provision (which potentially captures a virtually limitless number of transactions) the Anti-Circumvention Provision caused concern among securitization industry participants that creating appropriate compliance programs which could objectively demonstrate and monitor compliance with the provision would be tremendously difficult, if not operationally impossible. 

The No-Action Relief and Its Impact

The no-action letter creates a distinction between (i) individuals working on a transaction for an underwriter, placement agent, initial purchaser or sponsor of the relevant ABS (the ABS Deal Team), and (ii) other individuals employed by such Securitization Participant acting in a capacity unrelated to the structuring and issuance of the relevant ABS or the selection of the underlying assets supporting the relevant ABS (the Non-Deal Team Employees) and permits Securitization Participants to demonstrate compliance with the Anti-Circumvention Provision if:

• (a) there are written policies and procedures in place reasonably designed to (i) prevent the coordination of ABS Deal Teams with Non-Deal Team Employees in connection with the relevant ABS, and (ii) prevent access to, and receipt of, with respect to an ABS, nonpublic information about the ABS or the asset pool supporting the ABS (Restricted ABS Information) by Non-Deal Team Employees from ABS Deal Teams;
• (b) the Non-Deal Team Employees did not engage in such coordination with ABS Deal Teams and there was no access to, or receipt of, Restricted ABS Information by Non-Deal Team Employees from ABS Deal Teams; and
• (c) even if such individuals were in technical compliance with paragraph (a) and (b) above, they were not part of a plan or scheme to evade the prohibition of paragraph (a)(1) of Rule 192.²

The no-action letter addresses the concerns noted by the Securities Industry and Financial Markets Association (SIFMA), the Structured Finance Association (SFA), the Loan Syndications and Trading Association (LSTA), the Commercial Real Estate Finance Council (CREFC) and the Bank Policy Institute (BPI) in their no-action request dated May 9, 2025,³ and represents the SEC’s Staff’s acknowledgement that the use of “need to know” policies and procedures widely used in the industry may also be helpful in demonstrating compliance with the Anti-Circumvention Provision. Securitization Participants that are involved in ABS transactions should review their internal policies and protocols to ensure that deal-specific materials remain compartmentalized within the relevant ABS Deal Team as part of its compliance plan with the Anti-Circumvention Provision. The no-action letter notes that the relief provided has no effect on the requirements under Section 15(g) of the Exchange Act, which requires that brokers or dealers maintain policies designed to prevent the misuse of nonpublic information.

¹ SIFMA et al., SEC Staff No-Action Letter (May 16, 2025), available at https://www.sec.gov/rules-regulations/no-action-interpretive-exemptive-letters/division-corporation-finance-no-action/sifma-051625.

² 17 CFR § 230.192(a). “(1) Prohibition. A securitization participant shall not, for a period commencing on the date on which such person has reached an agreement that such person will become a securitization participant with respect to an asset-backed security and ending on the date that is one year after the date of the first closing of the sale of such asset-backed security, directly or indirectly engage in any transaction that would involve or result in any material conflict of interest between the securitization participant and an investor in such asset-backed security.”

³ SIFMA et al., No-Action Request Letter (May 9, 2025), available at https://www.sec.gov/files/corpfin/no-action/sifma-et-al-rule-192-no-action-request-letter-050925.pdf.