On Wednesday, the SEC voted unanimously to propose a new rule to help prevent fraud, manipulation, and deception in connection with security-based swaps - as proposed under Title VII of Dodd-Frank.  According to the press release, the proposal would ensure that market conduct in connection with the offer, purchase or sale of any security-based swap ("SBS") is subject to the same general anti-fraud provisions that apply to all securities, and it would explicitly reach misconduct in connection with ongoing payments and deliveries under a security-based swap.  The SEC requests comments by mid- to late-December.

    As Proposed.   When drafting the rule, the SEC took into account that SBS's are unlike other securities because they're typically characterized by ongoing payments or deliveries between the parties throughout the life of the swap.  SEC staff also recognizes that it's possible for one party to engage in misconduct which, in turn, could trigger, avoid, or affect the value of such ongoing payments.  Fraud also can occur separately from the sale, purchase, or offering.

Accordingly, the proposed antifraud rule would apply not only to offers, purchases and sales of SBS's, but also explicitly to the cash flows, payments, deliveries, and other ongoing obligations and rights that are specific to SBS's.  The rule would make explicit the liability of persons that engage in any form of misconduct, at any stage of the transaction. 

Rule 9j-1 would prohibit fraud, manipulation, and deception in connection with the offer, purchase or sale of any security-based swap — in the same way that general anti-fraud provisions apply to all securities. The rule also would explicitly reach misconduct in connection with ongoing payments and deliveries under a security-based swap.  That includes:  (i) employing fraudulent or manipulative devices or schemes;  (ii) making untrue statements or omitting material facts;  or, (iii) engaging in conduct that would operate as a fraud or deceit on another person in connection with security-based swaps.

    Establishing Authority over SBS's.   Title VII of Dodd-Frank divides regulatory authority over swaps between the CFTC and SEC.   

• The SEC has authority over “security-based swaps” - broadly defined as swaps based on a single security or loan or a narrow-based group or index of securities or events relating to a single issuer or issuers of securities in a narrow-based security index. 

• The CFTC has primary regulatory authority over all other swaps.  

• The CFTC and SEC share authority over “mixed swaps,” which are security-based swaps that also have a commodity component.

For further details, click onto:   [ SEC PR 10-212, 11/3 ]  and   [ SEC Rule Proposal, 11/3 ]