On October 31, the SEC issued a statement setting forth its position for a limited time period concerning specific provisions of its Business Conduct Standards for Security-Based Swap (SBS) Dealers and Major Security-Based Swap Participants (Entities). Certain actions with regard to these provisions will not provide a basis for a Commission enforcement action. In addition, the SEC’s position on the ability of parties to security-based swaps to rely on written representations is also addressed by the statement. This statement is intended to minimize potential market disruptions to existing counterparty relationships resulting solely from documentation implementation issues that may arise when security-based swap dealers and major security-based swap participants are required to register with the SEC. Once they are registered with the SEC, entities that are also registered with the Commodity Futures Trading Commission (CFTC) will be required to comply with both the SEC’s Business Conduct Standards as well as analogous rules adopted by the CFTC in 2012 applicable to SBS Entities.
Thursday, November 08. 2018
SEC Issues Statement on Business Conduct Standards for Security-Based Swap Transactions
In 2012, the CFTC adopted business conduct rules for SBS dealers and participants. Industry participants developed standardized counterparty relationship documentation to assist the swaps industry in implementing and complying with the CFTC’s Business Conduct Rules. The SEC adopted final rules imposing its own business conduct standards for SBS dealers and participants in 2016. The SEC strove to harmonize its rules with CFTC’s requirements where possible to lessen compliance burdens for SBS Entities with infrastructure already in place to conform to the CFTC regulations. However, there are situations where the SEC’s Business Conduct Rules diverge from those of the CFTC, which has resulted in concern about practical compliance difficulties and their impact on the swaps markets.
To avoid a documentation initiative that would be undertaken solely to address the SEC’s Business Conduct Rules (17 CFR 240.15Fh-1 through 17 CFR 240.15Fh-6) and therefore minimize market disruption, the SEC has addressed certain requirements in its Business Conduct Rules that will not result in an enforcement action at this time. These requirements fall into three broad categories. Two concern “special entities” and one applies to written representations generally. These are as follows:
- The mechanism by which non-ERISA employee benefit plans may elect to be treated as a “special entity” by SBS Entities, a status that entitles the entity to heightened protections.
- Certain written representations that are required to be exchanged by and among SBS Entities, counterparties, and qualified independent representatives of some special entities as applicable.
- Written representations from a counterparty or representative that were previously provided to an SBS Dealer in relation to swaps if the SBS Dealer is not aware of information that would cause a reasonable person to question the accuracy of the representation if the representation were given in relation to security-based swaps.
This statement issued by the SEC applies only until five years after the compliance date for SBS Entity Registration rules.
Sources:
SEC Issues Statement on Certain Provisions of Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants (www.sec.gov)
Commission Statement on Certain Provisions of Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants (www.sec.gov)
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