SEC Proposes Three New Rules for Security-Based Swaps

The SEC is considering new rules that would require public position reporting and other requirements for security-based swaps.

On December 15, 2021, the SEC proposed three rules under the Securities Exchange Act to address misconduct and promote transparency in the security-based swaps ("SBS") markets. The proposed rules would expand the scope of antifraud rules, prohibit certain attempts to influence an SBS dealer's ("SBSD") chief compliance officer ("CCO"), and require disclosure of certain large SBS positions. Comments are due 45 days after publication in the Federal Register.  

Expanded Antifraud and Anti-Manipulation Rules 

While the scheme liability provisions of Rule 10b-5 have been an effective tool for the SEC in policing fraud and manipulation in the securities markets, they have been less effective in the SBS markets and, in particular, the credit default swap ("CDS") market. One reason for this is that certain activities that have concerned regulators in the CDS markets have occurred during the lifecycle of CDS transactions rather than in connection with their "purchase" or "sale."  

To address these shortcomings, the SEC has dusted off and revamped Proposed Rule 9j-1, which was originally proposed in 2010 but never acted upon. This rule would prohibit fraud, manipulation, and similar behavior in connection with not only purchases and sales of SBS but also the exercise of any rights or performance of any obligations under SBS. It also would make unlawful the direct or indirect manipulation of the price or valuation of any SBS or any payment or delivery related thereto. In addition, it would extend existing insider trading prohibitions of the federal securities laws to transactions in SBS while a party is in possession of material nonpublic information regarding the security or index of securities to which the SBS relates.  

Prohibitions on Certain Behavior  

Proposed Rule 15Fh-4 would make it unlawful for certain employees and other persons associated with an SBSD or major security-based swap participant ("MSBSP") to directly or indirectly take any action to coerce, manipulate, mislead, or fraudulently influence the SBSD's or MSBSP's CCO in the performance of their duties.  

New Disclosures  

Proposed 10B-1 is aimed at increasing transparency in the SBS market and preventing market participants, including net short activists, from influencing the markets without other participants' awareness of their true economic position. It would require any person or group with an SBS position that exceeds a certain threshold to publicly file a report (proposed Schedule 10B) on the first business day after the day of execution of the SBS transaction that results in exceeding the applicable threshold. Schedule 10B would disclose, among other things: (i) the applicable SBS position; (ii) positions in any security or loan underlying the SBS position; and (iii) any other instrument relating to the underlying security or loan, or group or index of securities or loans. Proposed Rule 10B-1 includes different reporting thresholds for CDS, SBS tied to debt securities, and SBS tied to equity securities (generally, positions in excess of $300 million notional, but less in certain cases).

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