SEC to unveil rule banning traders from betting against assets

The top regulator of Reuters on Wednesday was to unveil a rule banning traders from placing bets against the very assets they sold to investors, a behavior that became notorious in the wake of the 2008 global financial crisis.

The five members of the U.S. Securities and Exchange Commission were to vote on whether to propose the rule formally at a meeting scheduled to begin at 10 a.m. EST.

The rule is one of the last to be adopted under the landmark Dodd Frank Wall Street reform legislation of 2010 that sought to address the root causes of the mortgage crisis, SEC officials said.

The reforms, named after sponsors Senator Chris Dodd of Connecticut and Representative Barney Frank of Massachusetts, aimed to protect investors and taxpayers by preventing the buildup of risk and liability in the financial system. The legislation contained financial stability measures governing banks deemed too big to fail and created the Consumer Financial Protection Bureau.

An earlier version of the conflict rule proposed in 2011 was never finalized.

In the ensuing years, Democratic lawmakers complained that the SEC didn't meet a 270 day deadline to issue a rule implementing Dodd Frank's Section 621. When an SEC rule is implemented, the section prohibits traders from betting against asset-backed securities they sold to investors.

The rule would ban such actions for up to a year after the sale of the securities, according to SEC officials.

In prepared remarks released ahead of the vote, SEC Chairman Gary Gensler said the rule would allow exceptions for legitimate activities, such as hedging to mitigate risk, marketmaking and liquidity commitments.

Gensler said that the rule would allow market activities through congressionally mandated exceptions while targeting the conflicts that Congress identified, and that the most recent version of the rule would be refined in light of feedback from the public.

According to SEC officials, traders who disclosed bets against clients' investments would run afoul of the rule.

Without citing prominent recent examples of conflicts of interest in the asset-backed securities market, SEC officials said that the conflicts rule was needed to remove the opportunity and incentive for such conduct.