On April 29, 2015, the SEC proposed rules that would govern the application of certain Title VII Dodd-Frank Act requirements to security-based swaps (SBS) between two non-US entities where US personnel on either side arrange, negotiate or execute the transaction, or if the SBS has certain other US connections.

The proposed rules would:

The SEC considered each of these issues in a May 23, 2013 proposed rule, in which it proposed rules regarding the application of Title VII in the cross-border context more generally. On June 25, 2014, the SEC adopted rules and guidance based on the May 23, 2013 proposal addressing the application of the SBSD and major security-based swap participant (MSBSP) definitions to cross-border SBS activities (see Legal Update, SEC Adopts Cross-border Security-based Swaps Rules). In its most recent proposal, the SEC is proposing amendments to Sections 3a71-3 and 3a71-5 of the Exchange Act that reflect a modified approach to this element of the initial proposal.

Under the proposed rules, a non-US person would be required to include in its de minimis threshold calculation for determination as to whether it is an SBSD only those SBS dealing transactions that are part of its US business (in other words, any transaction connected with its SBS dealing activity that it arranges, negotiates or executes using its personnel or personnel of its agent located in the US), even if the counterparty is a non-US person. The proposed rules narrow the requirement to front office activities of non-US SBSDs, and exclude any front office activities of their non-US-person counterparties. This differs from the original proposal, in which the SEC required a non-US party to count toward its de minimis threshold calculation any transaction conducted within the US.

In 2012, the SEC adopted rules jointly with the CFTC providing that a market participant would be considered an SD or SBSD (and would therefore be required to register as such with the applicable agency) if its dealing transactions conducted in the past 12 months exceeded certain thresholds (see Practice Note, US Derivatives Regulation: Swap Dealer and MSP Threshold Calculations: Definitions of "Swap Dealer" and "Security-based Swap Dealer").

The proposed rules would also subject the "US business" of a registered SBSD to the external business conduct standards (EBCS) found in Section 15F(h) of the Exchange Act (15 U.S.C. § 78o-10(h)). The rules would provide an exception from the EBCS for "foreign business" of a registered SBSD, and would define "foreign business" as any transaction that is not defined as "US business" for that SBSD. "US business" would be defined as follows:

The proposed rules would subject an SBS to Regulation SBSR's regulatory reporting and public dissemination requirements if it meets any of the following conditions:

For more information on Regulation SBSR, see Legal Update, SEC Adopts Security-based Swap Reporting and Recordkeeping Regime under Dodd-Frank and Practice Note, US Derivatives Regulation: CFTC Swap Data Reporting and Recordkeeping Rules: Regulation SBSR: Final SEC Data Reporting Rules for Security-based Swaps.

In contrast with the previously proposed rules, the new proposed rules would not impose mandatory clearing requirements on an SBS transaction between two non-US persons solely because one or both counterparties arrange, negotiate or execute the SBS using personnel located in the US. Because mandatory trade execution requirements apply only to transactions that are subject to mandatory clearing, these transactions also would not be subject to mandatory trade execution.

The SEC is requesting that public comment on the proposed rules be submitted by July 13, 2015. Paper comments should be addressed to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC, 20549-1090. Comments may also be submitted using the SEC's Internet comment form (http://www.sec.gov/ rules/proposed.shtml) or the Federal eRulemaking Portal (http://www.regulations.gov), or by sending an email to[email protected]. All submissions should refer to File Number S7-06-15.