Friday, July 14, 2006

Law Professors and Trade Groups Duel on Efficacy of SEC-Banking Guidance

The SEC and the federal banking agencies have developed guidance for banks and securities firms that engage in complex structured finance transactions. Recently, a group of four prominent law professors, in an unprecedented comment letter, asked the agencies to withdraw the guidance, essentially claiming that the guidance permissively condoned fraud by listing characteristics so strongly suggestive of fraud and then requiring banks and firms to do nothing. This comment letter received some play in the financial press. What did not receive such play was a comment letter from ISDA, the Securities Industry Association, and the Bond Market Association refuting the law professors' position. Describing the professors' comments as more sensational than substantive, the trade groups said that the professorial fear of reckless indifference by financial institutions to fraudulent transactions is contradicted by the considerable steps that banks and securities firms take to better manage the dangers posed by elevated risk transactions. Contrary to the professors' contention, emphasized the associations, the guidance is clear that transactions presenting heightened risks should be subjected to enhanced scrutiny.