S.E.C. Tackles Conflicts in Securitization Deals

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http://dealbook.nytimes.com/2011/09/19/regulators-tackle-conflicts-in-securitization-deals/

Regulators are moving ahead with a plan to rein in conflicts of interest in the securitization market, Washington’s answer to dubious Wall Street deals created in the lead up to the financial crisis.

The proposed rule, unveiled on Monday by the Securities and Exchange Commission, would prohibit banks and other financial firms from both sponsoring asset-backed securities and betting against the deals. The S.E.C. also would crack down on practices that a “reasonable” investor would consider a conflict of interest.

The rule would have covered deals by both Goldman Sachs and JPMorgan Chase, which created collateralized debt obligations with help from hedge funds that went on to bet against them. The practice drew scrutiny from regulators, who accused the banks of selling investments that were designed to fail. Both firms ultimately settled with the S.E.C., with Goldman paying $500 million and JPMorgan paying $153 million.

“In the aftermath of the financial crisis, it became clear that firms were creating financial products, selling those same products to their customers and then turning around and making bets against those same products they just sold,” Luis A. Aguilar, a Democratic member of the S.E.C., said at a public meeting in Washington on Monday. “The proposal under consideration is an important step forward to prohibit this practice and to protect investors from being persuaded to invest in products designed to fail.”