Monday, June 12, 2017

SEC declines to issue interpretation regarding swap instrument that is being litigated

By Jacquelyn Lumb

The SEC has issued a public statement to explain why it has declined a request to issue an interpretive position on whether a particular agreement, contract, or transaction is a swap, security-based swap, or mixed swap. The statement is in response to a letter from counsel for Breakaway Courier Corporation which asked for a joint interpretation from the SEC and the CFTC pursuant to Exchange Act Rule 3a68-2 relating to a contract labeled as a reinsurance participation agreement (RPA) (Release No. 34-80870, June 7, 2017). Breakaway previously executed RPAs with Applied Underwriters Captive Risk Assurance Company, one of which had a stated effective date of July 1, 2009, and the other July 1, 2012.

Rule 3a68-2. Rule 3a68-2 was jointly adopted by the SEC and the CFTC under the Dodd-Frank Act and establishes a process for parties to request a joint interpretation with respect to whether a particular agreement, contract, or transaction is a swap, security-based swap, or a mixed swap. The rule outlines the information that must be included in a request and the process for withdrawing a request. It also includes requirements for the manner and timing in which the agencies must act after receiving a submission under the rule if they decide to issue an interpretation. If the agencies choose not to issue a joint interpretation within the designated time period, both most publicly provide their reasons.

Litigated matter. The SEC said it was declining to issue a joint interpretation in connection with Breakaway’s request because of its understanding that the status of the RPAs is subject to ongoing litigation and the request may have a bearing on that litigation. In the SEC’s view, Rule 3a68-2 is not an appropriate vehicle for litigants to obtain the views of the SEC in connection with issues that are part of ongoing litigation. The SEC has consulted with the CFTC on the request and understands that the CFTC will issue a separate statement on the matter.

According to a footnote in the SEC’s statement, the SEC and the CFTC noted in their release adopting Rule 3a68-2 in 2012 that it is essential that the characterization of an instrument be established prior to any party engaging in the transactions so that the appropriate regulatory schemes apply.

The SEC asked that future requests under Rule 3a68-2 be provided to the Office of the Secretary with copies to the Divisions of Trading and Markets and Corporation Finance to ensure that they are routed expeditiously.

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