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SEC Proposes Rules for Registration of Securities-Based Swap Dealers and Major Security-Based Swap Participants

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Washington, D.C., Oct. 12, 2011 - The Securities and Exchange Commission today voted to propose rules that lay out the process by which security-based swap dealers and security-based swap participants must register with the Commission.

Additional Materials

The rules stem from Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

"Registering the major market participants in the largely unregulated security-based swap markets is a critical step toward better protecting investors," SEC Chairman Mary L. Schapiro said in her remarks during today's SEC open meeting. "Today's proposal draws from our experience with registration rules regarding broker-dealers - rules that are familiar to many market participants."

Public comments on the SEC's proposal should be submitted within 60 days after it is published in the Federal Register.

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In 2010, Congress passed the Dodd-Frank Act that established a comprehensive framework for regulating the over-the-counter swaps markets. Title VII of that Act divides regulatory authority over swaps between the SEC and the Commodity Futures Trading Commission (CFTC).

Under the law, the SEC has authority over “security-based swaps,” which are broadly defined as swaps based on (1) a single security or (2) a loan or (3) a narrow-based group or index of securities or (4) events relating to a single issuer or issuers of securities in a narrow-based security index. The CFTC, on the other hand, has primary regulatory authority over all other swaps.

In creating the new regulatory regime, Title VII envisions that some individuals or entities will act as dealers of security-based swaps, while others will be major participants in a transaction. As such, the Dodd-Frank Act mandates that anyone acting as either a “security-based swaps dealer” or “major security-based swaps participant” must first be registered with the SEC. Consequently, the Dodd-Frank Act authorizes the SEC to issue rules setting out the registration process for these security-based swap entities.

Separately, the SEC has previously proposed rules together with the CFTC and in consultation with the Board of Governors of the Federal Reserve System further defining the terms “security-based swap dealer” and “major security-based swap participant.” The SEC and the CFTC are considering comments to that proposal.

The Proposal

Electronic Filing

Under the proposed rules, security-based swap dealers and major security-based swap participants (collectively, security-based swap entities) would register with the Commission by electronically filing a new form, Form SBSE. The new form is based on the broker-dealer registration form, Form BD.

Security-based swap entities that are registered or registering with the CFTC would be able to register with the SEC by filing a shorter form with the SEC (Form SBSE-A) together with a copy of the form they file with the CFTC. Similarly, those security-based swaps entities that are registered with the Commission as broker-dealers also would be able to file a shorter form (Form SBSE-BD).

Other Requirements

In addition, the proposed rule would require the security-based swap entities to:

  • Promptly update their forms if the forms become inaccurate.
  • Have a knowledgeable, senior officer provide a certification as to the firm’s financial, operational and compliance capabilities to the Commission within a specified timeframe.
  • Obtain and retain certain information from each of its associated persons that are involved in effecting security-based swaps, and have its Chief Compliance Officer certify that no such associated person is “statutorily disqualified.”

The proposed rule also would also require each security-based swap entity that resides outside the U.S. to:

  • Identify a U.S. agent who can accept legal documents on behalf of the company.
  • Certify and submit an opinion of counsel that the non-U.S. entity is able to provide the SEC with access to its books and records and submit to on-site inspections and examination by the SEC.

Conditional Registration

The proposed rule seeks to avoid potential business disruptions by establishing a conditional registration process that allows security-based swap entities to register on a conditional basis. The proposed conditional registration process, for example, recognizes that the registration rules may require some security-based swap entities to register before the Commission has finalized the full panoply of rules relating to security-based swaps.

In addition, the proposed rules recognize that depending on the outcome of the proposal relating to the further definition of the term “major security-based swap participant,” major security-based swap participants may need to quickly register after performing a look-back calculation if they meet the definition of major security-based swap participant.

After registering conditionally, a security-based swap dealer or major security-based swap participant could later seek to be permanently registered by filing a certification within a specified time period.

What’s Next

The proposed rule will be published in the Federal Register with a 60-day public comment period. The Commission will then review the comments it receives and consider those comments in determining whether to adopt the proposed rules.

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Modified: 12/30/2011