SEC Provides Permanent Exemptions from US Securities Laws for Certain Security-Based Swap Activities | Practical Law

SEC Provides Permanent Exemptions from US Securities Laws for Certain Security-Based Swap Activities | Practical Law

The SEC issued an exemptive order that provides permanent exemptions from applications of certain US securities laws for certain security-based swap (SBS) activities that became subject to the securities laws as a result of the revision of the definition of "security" under the Dodd-Frank Act to encompass SBS.

SEC Provides Permanent Exemptions from US Securities Laws for Certain Security-Based Swap Activities

by Practical Law Finance
Published on 19 Nov 2020 • USA (National/Federal)
The SEC issued an exemptive order that provides permanent exemptions from applications of certain US securities laws for certain security-based swap (SBS) activities that became subject to the securities laws as a result of the revision of the definition of "security" under the Dodd-Frank Act to encompass SBS.
On November 2, 2020, the SEC issued an exemptive order (November 2020 exemptive order) that provides permanent exemptions from applications of certain US securities laws for certain for security-based swap (SBS) activities that became subject to the securities laws as a result of the revision of the definition of "security" under the Dodd-Frank Act to encompass SBS.

Background

Title VII of the Dodd-Frank Act expanded the definition of "security" under both the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act) to include SBS:
  • Section 761(a)(2) of the Dodd-Frank Act amended the definition of "security" in Exchange Act Section 3(a)(10) (15 U.S.C. § 78c(a)(10)) to include SBS.
  • Section 768(a)(1) of Dodd-Frank (15 U.S.C. § 77b(a)(1)) amended the definition of "security" in Securities Act Section 2(a)(1) to include SBS.
As a result of these amendments, many US securities laws became technically applicable to SBS. However, SBS to continue to trade as they did prior to the enactment of Title VII of the Dodd-Frank Act under a series of releases issued by the SEC, provided the SBS:
  • Is a "security-based swap agreement" as defined prior to the enactment of Dodd-Frank, which requires that the swap agreement is:
  • Falls under the Securities Act definition of "Security" due solely to the expansion of that definition under Title VII of the Dodd-Frank Act.
In 2011, the SEC issued an order granting certain temporary exemptive relief in connection with the revision of the definition of "security" in the Exchange Act to encompass SBS. A 2014 interim final rule (IFR) extended the expiration dates for the temporary exemptions and distinguished between:
  • Linked temporary exemptions, which are temporary exemptions related to pending SBS rulemaking that extend the compliance dates for the specific rulemakings to which they are linked.
  • Unlinked temporary exemptions, which are general temporary exemptions that are not directly related to a specific SBS rulemaking.
(see Legal Update, SEC Further Delays Application of Securities Laws to Security-Based Swaps).
In January 2020, the SEC issued an order extending the following three unlinked temporary exemptions (outstanding unlinked exemptions) until November 5, 2020:
  • Hypothecation requirements.
  • Exemptions from broker and dealer disclosure requirements relating to extensions of credit in Exchange Act Rules 10b-16 and 15c2-5 as applied to SBS.
  • Exemptions for SBS from certain limitations on an OTC derivatives dealer's activities in Exchange Act Rule 15a-1.
The remainder of the unlinked temporary exemptions were left to expire on February 5, 2020.

November 2020 Exemptive Order

The November 2020 exemptive order provides:
  • A permanent exemption from the registration requirement under Section 15(a)(1) of the Exchange Act for foreign brokers and dealers that solely engage in:
    • SBS dealing with ECPs; and
    • either Rule 15a-6-compliant securities activities or securities activities that "lack a US jurisdictional nexus."
  • Temporary relief, until November 1, 2022, for registered security-based swap dealers (SBSDs) and their associated persons (AP) from broker registration under Section 15(a)(1) of the Exchange Act for transactions where an SBSD or its AP is "arranging, negotiating or executing" (ANE) an SBS with or for a non-US person ECP on behalf of a non-US person qualified majority-owned affiliate. The term qualified majority-owned affiliate means a majority-owned affiliate as defined in Exchange Act Rule 3a71-3(a)(10) of the registered SBSD that is itself also a registered SBSD. To be eligible for this temporary relief, the registered SBSD must:
    • create and maintain books and records relating to the ANE activity required by Exchange Act Rules 18a-5 and 18a-6; and
    • provide to the customer the required disclosures under Exchange Act Rule 15Fi-2.
  • Permanent exemptive relief from certain transaction confirmation delivery requirements related to differences in the time and form requirements in Exchange Act Rule 10b-10(a) and Rules 15Fi-2(b) and (c) for registered broker-dealers that conduct ANE activity on behalf of a qualified majority-owned affiliate that is a registered SBSD.
  • Permanent conditional exemptive relief from Exchange Act Rules 8c-1 and 15c2-1 (hypothecation requirement) to securities and money market instruments carried in an SBS account of an SBS customer as long as the account does not hold margin securities as defined in Exchange Act Rule 15c3-3.
  • A clarification that an SBS entered into with or for an ECP whose terms are standardized to make the SBS eligible for central clearing is considered to be within the scope of an “eligible OTC derivative instrument” as defined in Exchange Act Rule 3b-13.
  • A permanent exemption for registered OTC derivatives dealers that are also registered with the SEC as an SBSD or major security-based swap participants (MSBSP) from:
    • Exchange Act Rule 15a-1(c) solely in connection with SBS transactions with or for an ECP; and
    • Exchange Act Rule 15a-1(d) solely in connection with communications and contacts with an ECP concerning a SBS transaction.
  • A further extension of the unlinked temporary exemptions from Exchange Act Rules 8c-1, 15c2-1, 15a-1(c) and (d) in connection with the revision of the Exchange Act definition of “security” to encompass SBS until October 6, 2021.
  • A further extension of exemptive relief from Exchange Act Section 29(b) in connection with the remaining effective temporary linked and unlinked exemptions.