SEC moves to crack down on conflicts of interest

{mosads}Asset-backed securities are financial vehicles that are backed by bundles of assets, including student loans, commercial loans and residential mortgage loans.

The proposed rule would also prohibit a firm from allowing a third party to help put together a security in such a way that that third party could ultimately profit from that security if it were to fail.

In the aftermath of the financial crisis, iffy decisions made by all sorts of major players in the financial sector came under harsh scrutiny. The official congressional take on the crisis, put together by the Senate subcommittee on Investigations, identifies widespread conflicts of interest as a major culprit for the crisis, and criticizes the exact practice that the SEC is now looking to prevent.

For example, the report claims that Goldman Sachs misled investors by packaging a risky security and marketing it as saying the bank had invested in a portion of it. The firm did not tell potential investors that while it had invested $6 million in this particular security, it also had bet $2 billion against it.

In a similar case, the report blasts the top traders at Deutsche Bank for packaging securities filled with assets they called “crap” and “pigs” in emails with each other.

The SEC’s proposed rule now will be weighed by the public, which has three months to comment on it.