December 6, 2022

Volume XII, Number 340


December 05, 2022

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SEC Proposes a Variety of Rules Applicable to Security-Based Swaps

On December 15, 2021, the SEC proposed new rules requiring that large positions in security-based swaps and related securities be reported to the SEC and publicly disseminated. At the same time, the SEC re-proposed regulations prohibiting fraudulent, deceptive and manipulative conduct in connection with security-based swaps. The SEC also proposed new rules restricting the personnel of security-based swap dealers from taking action to influence the chief compliance officer of the security-based swap dealer in the performance of its duties.

  • Proposed Rule 10B-1: Position Reporting of Large Security-Based Swaps. Rule 10B-1 would require any person, affiliate of such person or group of persons who would directly or indirectly be the owner or seller of a security-based swap to report such security-based swap position on EDGAR, subject to certain thresholds. The thresholds would vary based on the type of swap and, in certain circumstances, would include the value of any underlying securities owned by the holder of the reportable security-based swap position in determining whether the threshold has been met. The information on security-based swaps positions would be required to be filed on EDGAR within one business day of execution of the relevant position and would be publicly disseminated. The rule is intended to increase transparency in security-based swaps positions. In the proposing release, the SEC expressed concern about manufactured credit events triggering credit default swaps and the risks of concentrated positions that are not known to the market or regulators. Based on the SEC’s statements, the reporting of such large security-based swaps positions would alert market participants as to possible financial incentives a market participant might have to act contrary to the interests of the issuer and its stakeholders. The SEC stated that such transparency would be beneficial to the market even where there is no fraud, manipulation or deceptive conduct on the part of the owner of the large security-based swaps position. This appears to be based on the premise that such public reporting could help inform pricing and enhance the risk management of dealers where one market participant has built up a large position across a number of dealers by alerting the dealer as to significant exposure with respect to the same security-based swap.

  • Re-Proposed Rule 9j-1: Anti-Fraud and Anti-Manipulation. The SEC originally proposed anti-fraud, deception and manipulation rules with respect to security-based swaps in 2010. The proposed rule explicitly would have addressed misconduct in connection with offers, purchases and sales of security-based swaps and also would have applied to cash flows, payments, deliveries and other ongoing obligations and rights specific to security-based swaps. The new re-proposed rule would prohibit fraudulent, deceptive and manipulative conduct in connection with security-based swaps and also includes anti-manipulation rules similar to those promulgated by the Commodity Futures Trading Commission. The rule would prohibit persons in possession of material non-public information (MNPI) from using swaps to gain exposure to securities and avoid the liability that would otherwise arise from directly purchasing the relevant securities while in possession of MNPI. In addition, the rule would make it unlawful for any officer, director, supervised person or employee of a security-based swap dealer or major security-based swap participant to coerce, manipulate, mislead or fraudulently influence the entity’s chief compliance officer in the performance of its duties under the securities laws.

  • Proposed Rule 15Fh-4(c): Chief Compliance Officer Independence. The SEC is proposing a rule aimed at protecting the independence and objectivity of the chief compliance officer of a security-based swap dealer by preventing the personnel of such security-based swap dealer from taking actions to coerce, mislead or otherwise interfere with their CCO. Rule 15Fh-4(c) would make it unlawful for any officer, director, supervised person or employee of a security-based swap dealer, or any person acting under such person’s direction, to directly or indirectly take any action to coerce, manipulate, mislead or fraudulently influence the CCO in the performance of its duties under federal securities law or the rules and regulations thereunder. The SEC provided as an example of unlawful coercion submission of false documentation to the CCO in order to avoid disclosing the build-up of a large security-based swap position that would require public reporting.

Comments on the proposed rules will be due on March 21, 2022. The SEC’s proposing release is available here.

© 2022 Vedder PriceNational Law Review, Volume XII, Number 41

About this Author

John Marten Investment Attorney Vedder Price Law FIrm

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

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Nathaniel Segal Investment Attorney Vedder Price Law Firm

Nathaniel Segal is counsel at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due diligence...

(312) 609 7747
Jacob Tiedt,Vedder Price law firm investment services attorney

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

Juan M. Arciniegas, Vedder Price, derivatives, structured products and futures

Juan M. Arciniegas is a Shareholder at Vedder Price and a member of the Investment Services group in the firm’s Chicago office.

Mr. Arciniegas works primarily as a derivatives lawyer and has significant experience in the market for over-the-counter (OTC) derivatives, structured products and futures. He advises on every stage throughout the life cycle of a derivatives transaction, from conducting pre-trade regulatory due diligence to negotiating transactional documentation and advising on post-trade reporting and recordkeeping obligations. This...