SEC Issues Statement on Certain Provisions of Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants

The Securities and Exchange Commission today announced that it has voted to issue a statement setting forth the Commission’s position, for a limited time period, that certain actions with respect to specific provisions of its Business Conduct Standards for Security-Based Swap (SBS) Dealers and Major Security-Based Swap Participants will not provide a basis for a Commission enforcement action. The statement also addresses the Commission’s position on the ability of parties to security-based swaps to rely on written representations previously provided in relation to swaps, also for a limited time period.     

The Commission’s 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 Commission. Upon registration with the Commission, entities that are also registered with the Commodity Futures Trading Commission (CFTC) will be required to comply with both the Commission’s Business Conduct Standards as well as analogous rules adopted by the Commodity Futures Trading Commission in 2012 applicable to swap dealers and major swap participants.  

“Today’s statement reflects the culmination of outreach by Commission staff, and their counterparts at the Commodity Futures Trading Commission, consistent with the agencies’ shared commitment to achieving greater harmonization of Title VII rules,” said Chairman Jay Clayton. “Market participants have raised concerns about documentation implementation issues that may arise when SBS Entities are registered with both the Commission and the CFTC, and today’s statement is intended to provide those market participants appropriate time to assess and update their documentation.”

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FACT SHEET

Commission Statement on Certain Provisions of Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants 

Oct. 31, 2018
 

Action

The Commission is issuing a statement setting forth the Commission’s position, for a limited time period, that certain actions with respect to specific provisions of the SEC’s business conduct standards for security-based swap dealers and major security-based swap participants will not provide a basis for a Commission enforcement action.  

Background

In 2012 the U.S. Commodity Futures Trading Commission (CFTC) adopted business conduct rules for swap dealers and major swap participants (CFTC’s Business Conduct Rules).[1]To assist the swaps industry in implementing and complying with the CFTC’s Business Conduct Rules, industry participants developed standardized counterparty relationship documentation that has been in force since 2012, and is currently used by over 22,000 counterparties.[2]  

In 2016, pursuant to Section 15F of the Securities Exchange Act of 1934 (Exchange Act), the Commission adopted final rules imposing business conduct standards (the SEC’s Business Conduct Rules) for security-based swap dealers (SBS Dealers) and major security-based swap participants (Major SBS Participants and, together with SBS Dealers, SBS Entities).[3]As noted in the Commission’s Adopting Release, the Commission endeavored to harmonize its rules with analogous CFTC requirements where possible to create efficiencies for entities that have already established infrastructure for compliance with analogous CFTC requirements.[4]In certain instances, however, the Commission’s requirements, and the associated representations that would be required under standardized counterparty relationship documentation, diverge from those of the analogous CFTC requirements, which are reflected in existing standardized counterparty relationship documentation. Market participants have expressed concerns about practical compliance difficulties presented by certain of these differences.    

The Commission is mindful of the time and costs that may be associated with a documentation initiative that would be undertaken solely to address the SEC’s Business Conduct Rules. Therefore, to minimize potential market disruptions to existing counterparty relationships resulting solely from documentation implementation issues (upon their compliance date when compliance will first be required), for a limited time period, the statement provides that certain actions with respect to specific provisions of the SEC’s Business Conduct Rules will not provide a basis for a Commission enforcement action.

To the extent there are additional differences between the CFTC’s Business Conduct Rules and the SEC’s Business Conduct Rules that otherwise present documentation implementation difficulties that could result in potential for market disruption, the Commission encourages market participants to provide that information to the Commission.

Highlights

Time limitation. The Statement applies only until five years after the compliance date for SBS Entity Registration rules.

Affected Rule Provisions. The Statement addresses certain requirements in the SEC’s Business Conduct Rules. These requirements fall into three broad categories, two regarding “special entities,” and one applying to written representations generally:

• 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, as applicable, qualified independent representatives of some special entities  
• 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