Speech by SEC Commissioner:
Bringing Transparency and Fair Dealing to the Market for Security-Based Swaps
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
SEC Open Meeting
June 29, 2011
Today, we consider rules to bring transparency and fair dealing to the market for security-based swaps in accordance with Title VII of the Dodd-Frank Act.
Over the past 11 months, the Commission has taken a number of steps to give effect to Title VII of the Dodd-Frank Act. For example, we have proposed rules to define the products1 and the participants2 subject to our regulation, rules to move transactions onto regulated platforms3 and provide for trade transparency,4 rules to reduce systemic risk by requiring central clearing,5 and rules to prevent conflicts of interest from hindering fair access to trading and clearing facilities.6
Today’s proposed rules continue our focus on the market for security-based swaps by addressing the relationship between security-based swap dealers and major security-based swap participants (“SBS Entities”) and the person or entity on the other side of the table.
I will support today’s proposal, and I look forward to public comment on these important rules. I want to highlight three issues in particular for commenters. First, today’s release proposes two alternative standards for when it would no longer be appropriate for an SBS Entity to rely on a representation — such as a representation from its counterparty about Special Entity status — without undertaking further inquiry.7 Which standard, if any, best implements the protections for counterparties that Congress provided in the Dodd-Frank Act?
Second, would the proposed rules regarding a Special Entity’s qualified independent representative adequately ensure that the Special Entity receive advice that is in its best interests?
And third, does the proposed suitability rule for SBS Dealers provide adequate protection for all counterparties and establish a level playing field? Under FINRA’s new suitability rule, a broker-dealer cannot avoid the suitability requirement by relying on the customer’s own ability to evaluate investment risks, unless a customer has at least $50 million in assets.8 Under the rules we propose today, however, an SBS Dealer could potentially avoid the application of the suitability requirement by relying on a counterparty’s representation that it can evaluate the transaction — even when the counterparty has far less in assets, as low as $1 million.9 Given that security-based swaps can be complex, and can be economic substitutes for traditional securities, I ask that commenters specifically address whether this disparity in the application of the suitability rules make sense.
In closing, I join my colleagues in thanking the staff for their work in preparing today’s proposal.
1 Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Release No. 34-64372A (June 1, 2011), available at http://www.sec.gov/rules/proposed/2011/33-9204a.pdf.
2 Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,” Release No. 34-63452 (Dec. 7, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63452.pdf.
3 Registration and Regulation of Security-Based Swap Execution Facilities, Release No. 34-63825 (Feb. 2, 2011), available at http://www.sec.gov/rules/proposed/2011/34-63825.pdf.
4 Regulation SBSR — Reporting and Dissemination of Security-Based Swap Information, Release No. 34-63346 (Nov. 19, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63346.pdf; Security-Based Swap Data Repository Registration, Duties, and Core Principles, Release No. 34-63347 (Nov. 19, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63347.pdf.
5 Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory Organizations, Release No. 34-63557 (Dec. 15, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63557.pdf; End-User Exception to Mandatory Clearing of Security-Based Swaps, Release No. 34-63556 (Dec. 15, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63556.pdf.
6 Ownership Limitations and Governance Requirements for Security-Based Swap Clearing Agencies, Security-Based Swap Execution Facilities, and National Securities Exchanges with Respect to Security-Based Swaps under Regulation MC, Release No. 34-63107 (Oct. 14, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63107.pdf.
7 Under one standard, the SBS Entity would not be able to rely on the representation if it knows that the representation is inaccurate. Under the second, the SBS Entity would not be able to rely on the representation if it has information that would cause a reasonable person to question the accuracy of the representation.
8 FINRA Rule 2111, which becomes effective July 9, 2012, imposes different suitability obligations on broker-dealers regarding customers that are “institutional accounts,” which are defined in FINRA Rule 3110(c)(4) as accounts that have total assets of at least $50 million or that are banks, savings and loan associations, insurance companies, registered investment companies, or investment advisers registered with the Commission or with a state securities commission. See FINRA Rule 2111, available at http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=9859; FINRA Rule 3110, available at http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=3734.
9 Today’s proposal would not impose asset limits on the application of the alternative suitability standard to any eligible contract participant (“ECP”). ECP is defined under the Commodity Exchange Act and includes corporations, partnerships, proprietorships, organizations, and trusts that have total assets exceeding $10 million, or that have total assets exceeding $1 million and are entering into a transaction to hedge business risk. The definition of ECP also includes an individual who has total assets exceeding $10 million or who has total assets exceeding $5 million and is entering into a transaction to hedge exposure to assets owned or liabilities incurred by the individual. See Commodity Exchange Act Sec. 1a(12)(A)(v), (xi), available at http://www.law.cornell.edu/uscode/7/usc_sec_07_00000001---a000-.html.