March 17, 2025 - Today, the LSTA, in conjunction with SIFMA, SFA, the Bank Policy Institute, and CREFC (the “Associations”), filed a Letter (the “Letter”) with the Securities and Exchange Commission (the “SEC” or the “Commission”) requesting that it reconsider and delay indefinitely the implementation of Rule 192 (Prohibition on Conflicts of Interest in Securitizations) (the “Rule”) under the Securities Act of 1933. The Associations have requested this pause to allow the Commission to consider the problematic nature of the Rule and explicitly entreated the Commission to engage with market participants to determine appropriate avenues for relief, which could include no-action and/or exemptive relief, guidance, or rule amendments.

The Rule, which was finalized on November 27, 2023 and went into effect on February 4, 2025, will apply with respect to securitizations that have their first closing on or after June 9, 2025. It prohibits a “securitization participant” from engaging, directly or indirectly, in any transaction that would involve or result in any material conflict of interest between the securitization participant and an investor in an asset-backed security (“ABS”). This prohibition applies until one year after the first closing of the sale of the ABS and starts on the date the “securitization participant” reaches an agreement that it will become a securitization participant with respect to that ABS.

With the compliance date fast approaching, the LSTA has engaged at-length with its in-scope members regarding implementation of compliance programs, which may entail enhancement or modification of existing policies or creation of new policies out of whole cloth. Given the particular challenges the Rule presents for CLOs (discussed here and here), the LSTA previously engaged with the SEC over the course of the rulemaking process  to offer recommendations to improve the Rule. We have also contributed to industry-wide education efforts such as a collaboration with SFIMA on an implementation guide for the Final Rule (“Market Guide”).  While the Final Rule improved upon the initial proposal (as discussed here), market participants voiced concerns that it remained unwieldy and burdensome. The Letter summarizes these issues and lays out the rationale for the requested delay and possible relief. Below is a summary of its key arguments.

Industry Concerns about Compliance with Rule 192

• The Rule is Overbroad. Market participants have found it “virtually impossible” to craft or modify compliance programs that would satisfy the requirements of clause (a)(3)(iii) of the Rule (“Prong (iii)”). This clause is a sweeping catch-all provision for transactions that are economic equivalents of the short sale and credit default swap transactions, already prohibited under the other prongs of the Rule. Specifically, the Rule is unclear and impracticable given that a “limitless” set of factual scenarios could violate Prong (iii), which affords market players little direction in their compliance efforts.  
• The Rule Conflicts with the Volcker Rule. The Rule alternatively overlaps and conflicts with the Volcker Rule. Specifically, both the Volcker Rule and the Rule prohibit the short selling of and buying credit protection on ABS. However, certain exceptions (risk-mitigating hedging and bona fide market-making activities) do not align with their equivalent categories under Volcker. This redundancy and inconsistency create significant inefficiencies for market participants looking to design tailored and robust compliance and monitoring policies.   
• The Rule’s Materiality Standard Is Unworkable. The Rule employs a “reasonable investor” materiality standard that is “impossible to translate into a compliance program.” This is because it is derived from caselaw in which it was used as a disclosure rather than a prohibition standard. Further refinement of the standard is therefore necessary in order that the Rule be operational in a compliance context.
• The Compliance Date is Unclear and Presents Timing Issues for CLOs. The Letter explains that the Rule is flawed because it contains a “pre-effectiveness” issue: while the stated compliance date is June 9, 2025, the Rule operates to reach back prior to this date because it can potentially be violated today for ABS that will not be sold until after June 9, 2025. For CLOs, this could be significantly in advance of that date.
• The Rule is Unclear for Complex Transactions. It is unclear how the Rule applies to certain complex transactions, such as synthetic securitizations and other risk transfer transactions. Loan and securitization market participants are struggling to understand their compliance obligations as a result.
• The Trump Executive Orders Mandate Reconsideration of the Rule. In light of the recent suite of Executive Orders issued by the Trump Administration, the Commission should reassess the implications of the Rule by applying a cost-benefit analytical approach. The Associations’ request for delay and relief is consonant with the obligations imposed by these presidential directives.

The LSTA will continue to monitor implementation ahead of the June compliance deadline. The LSTA also expects that the shift in regulatory tone will prove propitious for achieving appropriate and tailored no-action relief for the industry and, to this end, will engage with the Commission over the course of the next few weeks.