By Jacquelyn Lumb
The SEC has extended for one year the expiration dates in its interim final rules that provide exemptions for securities-based swaps that prior to July 16, 2011, were security-based swap agreements and are now defined as “securities” under the Dodd-Frank Act provisions. The extension was necessary to avoid disruption in the security-based swaps market while the SEC continues to consider whether other regulatory action is appropriate. The new expiration date is February 11, 2018 (Release No. 33-10305).
Exemptions. The interim final rules provide exemptions under the Securities Act, the Exchange Act, and the Trust Indenture Act for offers and sales of security-based swap agreements that became security-based swaps under Title VII of the Dodd-Frank Act as long as certain conditions are met. The interim final rules were intended to allow security-based swap agreements that became security-based swaps on the Title VII effective date to continue to trade as they did prior to its enactment.
When the SEC adopted the interim final rules, commenters expressed concern about the availability of exemptions from the Securities Act registration requirements, including the exemption for security-based swap transactions entered into solely between eligible contract participants due to the operation of certain trading platforms and the publication or distribution of other information about the swaps. Commenters suggested that the publication or distribution of certain communications on an unrestricted basis could be viewed as offers of the swaps, which would trigger compliance with the registration provisions absent an exemption.
Communications. Commenters also noted that the communications could be considered offers to persons who were not eligible contract participants even if they were not permitted to purchase the swaps. If registration of the transactions was required, it could negatively impact the security-based swap market, according to commenters.
The SEC has extended the expiration dates of the interim final rules twice before while it continues to evaluate the impact of security-based swaps defined as securities and continues to consider the comments it has received in determining whether further action is needed.
Following the most recent expiration of the interim final rules, the SEC proposed a rule to provide that certain communications involving security-based swaps that may be purchased only by eligible contract participants would not be deemed to constitute offers of the swaps that are subject to the communications or any guarantees of the swaps (Release No. 33-9643, September 8, 2014). The proposal would cover the dissemination of price quotes that relate to security-based swaps that may be purchased only by eligible contract participants and are traded on or processed through certain trading platforms.
The proposal would enable price quotes relating to security-based swaps to be disseminated on an unrestricted basis without concern that it could jeopardize the availability of exemptions from the registration requirements. The comments on the proposal are still being evaluated and final action has not been taken.
Accordingly, the SEC concluded that the interim final rules are needed to allow market participants that meet their conditions to continue to enter into transactions without concern that their activities may not comply with the applicable provisions of the Securities Act, the Exchange Act, and the Trust Indenture Act. If the SEC adopts rules relating to communications, it may alter the expiration dates of the interim final rules as part of the rulemaking.
The SEC determined that notice and solicitation of comment before extending the effective date were impracticable, unnecessary, or contrary to the public interest and found good cause to act immediately to extend the expiration dates.