SEC Adopts Two Rules for Security-Based Swaps (but Not Proposed Rule 10B-1)
The Securities and Exchange Commission ("SEC") has adopted new rules that expand antifraud and anti-manipulation measures for security-based swaps ("SBS").
On June 7, 2023, the SEC adopted two final rules addressing misconduct in the SBS market. The adopted rules expand the scope of antifraud rules and prohibit certain attempts to influence the chief compliance officer ("CCO") of an SBS dealer ("SBSD"). The SEC is not adopting Rule 10B-1, which was part of the same proposal, at this time as it is still considering comments.
The rules will become effective 60 days after publication in the Federal Register.
Expanded Antifraud and Anti-Manipulation Rules
The SEC has adopted Rule 9j-1, which prohibits fraud, manipulation, and deception in connection with executing, early terminating, amending, transferring, or extinguishing rights in a SBS. While the SEC narrowed the scope of the proposed rule, which had also applied to interim performance obligations and exercises of rights, the final rule still broadly includes conduct that affects payments and deliveries under the SBS and can apply to conduct in the securities market that underlies the SBS. Rule 9j-1 was designed, among other things, to prevent the abuse of so-called "manufactured" credit events in connection with credit default swaps.
As adopted, Rule 9j-1 includes two affirmative defenses that generally mirror the affirmative defenses available under Rule 10b5-1 for (i) actions taken in accordance with binding contractual rights (as long as the SBS was entered into in good faith at a time when the actor was not aware of material nonpublic information) and (ii) investment decisions made by a natural person (like a "public side" employee of a financial institution) that was unaware of material nonpublic information and reasonable policies and procedures are in place to ensure that such persons do not violate Rule 9j-1.
Prohibitions on Coercive and Manipulative Behavior Toward COOs
The SEC is adopting as proposed Rule 15fh-4(c), which makes it unlawful for certain employees and other persons associated with an SBS Entity to directly or indirectly act to coerce, manipulate, mislead, or fraudulently influence the SBS Entity's CCO in the performance of their duties under the federal securities laws, rules, and regulations. This rule is intended to protect the independence and objectivity of the CCO.
