SEC Adopts Final Rules on Security-Based Swap (SBS) Fraud Prevention and CCO Independence | Practical Law

SEC Adopts Final Rules on Security-Based Swap (SBS) Fraud Prevention and CCO Independence | Practical Law

The SEC adopted a final rule designed to prevent fraud and manipulation in security-based swap (SBS) transactions and a final rule designed to protect the independence of chief compliance officers (CCOs) of security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs).

SEC Adopts Final Rules on Security-Based Swap (SBS) Fraud Prevention and CCO Independence

by Practical Law Finance
Published on 13 Jun 2023 • USA (National/Federal)
The SEC adopted a final rule designed to prevent fraud and manipulation in security-based swap (SBS) transactions and a final rule designed to protect the independence of chief compliance officers (CCOs) of security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs).
On June 7, 2023, the SEC's Division of Trading and Markets adopted the following final rules under the Securities Exchange Act of 1934, as amended (Exchange Act) relating to security-based swaps (SBS):
The SEC also published a fact sheet in connection with the final rules, which notes that aspects and characteristics of SBS provide incentives and opportunities for misconduct that the rules aim to address.
The final rules become effective August 29, 2023.

Exchange Act Rule 9j-1: Preventing Fraud and Manipulation

Rule 9j-1 was adopted under the Exchange Act to prevent fraud, manipulation, and deception in connection with SBS transactions. Rule 9j-1:
  • Makes it unlawful for any person, directly or indirectly, to effect any transaction in, or attempt to effect any transaction in, any SBS, or to purchase or sell, or induce or attempt to induce the purchase or sale of, any SBS in connection with the following misconduct:
    • employing or attempting to employ a manipulative device or scheme;
    • making or attempting to make untrue statements of a material fact, or omitting a material fact;
    • obtaining, or attempting to obtain, money or property by means of any untrue statement of a material fact or any omission of a material fact;
    • engaging in any deceitful acts or practices that operates or would operate as a fraud or deceit upon a person; or
    • manipulating or attempting to manipulate the price or valuation of any SBS or any payment or delivery related to it.
  • Provides two affirmative defenses for:
    • actions taken in accordance with binding rights and obligations in written SBS documentation; and
    • actions taken by investment decision makers at entities that had implemented reasonable policies and procedures to prevent violations of the rule while they were unaware of material nonpublic information.
  • Provides that a person cannot escape liability for trading based on possession of material non-public information about a security by:
    • purchasing or selling a SBS based on that security; or
    • purchasing or selling the underlying security.
For a summary of issues presented by Rule 9j-1 that may impact the SBS market and SBS market participants, see this helpful LSTA memo.

Exchange Act Rule 15fh-4c: CCO Independence

Rule 15fh-4(c) was adopted under the Exchange Act to prohibit undue influence over a CCO of a SBSD or a MSBSP. Rule 15fh-4(c) prohibits any officer, director, supervised person, or employee of an SBS entity, or any person acting under such person's direction, to take any action to coerce, manipulate, mislead, or fraudulently influence the SBS entity's CCO in the performance of the CCO's duties under federal securities laws or related rules and regulations.
For information on CCO requirements for SBS entities, see Practice Note, US Derivatives Regulation: SEC Security-Based Swap Business Conduct Standards: SBS CCO Requirements.