SEC plan would limit conflicts in ABS deals

Underwriters or sponsors of asset-backed securities would be banned for one year from taking positions to profit from investors' losses under a plan proposed by U.S. securities regulators on Monday.

The proposal by the Securities and Exchange Commission would get at the very heart of issues raised by U.S. Senate investigators in a report earlier this year that accused Goldman Sachs of positioning itself to profit from clients' losses on complex securities that it packaged and sold.

The proposal would also prohibit the kinds of conflicts seen in the SEC's 2010 civil case against Goldman by banning third parties from helping assemble an asset-backed pool that would let them profit from investors' losses.

In the Goldman case, the SEC accused the bank of creating and marketing a collateralized debt obligation known as ABACUS 2007-AC1 without telling investors that hedge fund Paulson & Co helped choose the underlying securities and was betting against them. Goldman later settled the case for $550 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, said SEC Commissioner Luis Aguilar, a Democrat. 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.

The SEC's proposal, which was put out for public comment in a 4-0 vote on Monday, would implement a provision in the Dodd-Frank Wall Street overhaul law that sought to prevent big banks from betting against financial products that they package and sell to investors.

The one-year ban from taking an opposite market position from investors would not apply in certain key cases, such as when a firm is hedging its risk or acting as a market-maker.

Commissioner Troy Paredes, a Republican, said he was voting to seek comments on the plan reluctantly.

I am concerned the prohibition will prove to be over inclusive, he said, noting that he fears the plan could unduly stifle the free flow of capital.

(Reporting by Sarah N. Lynch; editing by John Wallace and Lisa Von Ahn)