The Securities and Exchange Commission hopes to put an end to the alleged shenanigans involving hedge funds and banks when it comes to setting up asset-backed securities.
The regulator unanimously voted today to approve a new conflicts of interest rule for asset-backed securities. The new rule, mandated by last year's Dodd-Frank law, would both bar firms that package the securities from shorting them for one year following their sale to investors, and would also bar banks from allowing third parties—read: hedge funds—to short ABS they had a hand in selecting the securities for.
The rule stems from the SEC's case against Goldman Sachs, which resulted in a $550 million settlement with the bank. The regulator accused Goldman of structuring and marketing a collateralized debt obligation on behalf of Paulson & Co. without informing investors that Paulson participated in the asset selection—or that the hedge fund was shorting the CDO.
Since then, the SEC has launched probes into several other CDO transactions, several linked to Magnetar Capital.
None of the hedge funds tied to those transactions has been accused of wrongdoing.
The new SEC rule must complete a 90-day comment period before it can go before the panel for final approval.