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To protect the health of the markets, small and medium-sized businesses' access to capital, and the returns alternative asset managers generate for investors, including pensions, foundations, and endowments, the letter recommends fixes to the rule that fulfill the legislative mandate while not disrupting important markets.

"The SEC's proposal on conflicts of interest in securitization is overly broad and will disrupt markets and harm the returns MFA members generate for investors, including pensions, foundations, and endowments," said MFA President and CEO Bryan Corbett. "MFA's recommendations tailor the proposal to fulfill the SEC's legislative mandate and policy goal of preventing potential misconduct, while protecting the orderly and efficient operation of the securitization markets. The changes will ensure America's small and mid-size businesses continue to have access to much needed capital."

The proposed rule imposes broad prohibitions that go beyond the statutory mandate. If unchanged, the expansive prohibitions will increase the cost of credit, decrease borrower access to credit, and reduce hedging. To mitigate these unintended consequences and ensure the final rule promotes a robust, effective, and fair securitization market, MFA recommends the SEC:

• Exclude investors with a long position in an ABS from the definition of "sponsor" as they do not contribute to the policy concerns at the heart of the rule.

• Exclude affiliates, subsidiaries, and employees at securitization firms who are not involved in the creation of the ABS and are firewalled off from the primary securitization participants from the definition of "securitization participant."

• Allow disclosure as a means of addressing conflicts of interest, aligning with existing federal securities laws.

• Narrow the definition of "conflicted transaction," as it could encompass transactional activity that does not equate to investments against ABS that initially prompted the rulemaking.

• Explicitly permit risk-mitigating hedging activities like interest rate hedging, currency hedging, and non-credit-related hedging.

• Remove the "substantial steps" test due to its vagueness, and the compliance period should not begin more than 30 days prior to the first closing of the related ABS sale.

• Provide for a transition period to enable market participants to adjust to the final rule.