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SEC Adopts Rules to Increase Transparency in Security-Based Swaps Market (with Lofchie Comment and YouTube Selection)

The SEC adopted two new sets of rules (the "rules") that will require security-based swap data repositories ("SDRs") to register with the SEC and that prescribe the reporting and public dissemination of security-based swap transaction data.

The rules – Regulation SDR and Regulation SBSR – also set forth other requirements with which SDRs must comply, as well as provide an exemption from registration for certain non-U.S. SDRs when specific conditions are met.

Regulation SDR governs the registration process for security-based swaps data repositories, assigning duties and core principles, as well as data collection and maintenance obligations, to SDRs. The rules also require SDRs to designate a Chief Compliance Officer ("CCO") with "meaningful responsibilities."

Regulation SBSR provides for the reporting of security-based swaps information to registered SDRs, as well as the public dissemination of security-based swap transaction, volume and pricing information. In addition, the rules assign reporting duties for many security-based swap transactions and require SDRs registered with the SEC to establish and maintain policies and procedures for carrying out their duties under Regulation SBSR.

Under the rules, the SEC recognizes the Global Legal Entity Identifier System as the system from which security-based swap counterparties must obtain codes to identify themselves when reporting security-based swap data. The rules also address the application of Regulation SBSR to cross-border security-based swap activity and include provisions to permit market participants to satisfy their obligations under Regulation SBSR through compliance with the comparable regulation of a foreign jurisdiction.

The SEC also proposed additional rules, rule amendments and guidance related to Regulation SBSR and the reporting and public dissemination of security-based swap transaction data. These additional proposed rule amendments would:

  • assign reporting duties for certain security-based swaps not addressed by the adopted rules;
  • prohibit registered SDRs from charging fees to or imposing usage restrictions on the users of publicly disseminated security-based swap transaction data; and
  • provide a compliance schedule for certain provisions of Regulation SBSR.

The adopted rules will become effective 60 days after their publication in the Federal Register. Persons who are subject to the new rules must comply with them no later than 365 days after the adopted rules are published in the Federal Register.

Lofchie Comment: These rule adoptions raise important questions about the exercise of power.Under the rules adopted by the SEC majority, an SDR can only fire its CCO if the board of directors authorizes that action; however, the dissent argues that the board of directors should be able to delegate that power to the firm's Chief Executive Officer or to other senior officers of the SDR. To those who work outside the private sector and are not familiar with the process by which such decisions are made, this dispute may seem to be mere quibbling over procedure. The larger philosophical issue is about "power"; that is, the SEC's justification for (i) allocating to itself the power to determine the process by which a company's CCO must be fired and (ii) overriding the authority of the firm's board of directors to decide who should make that decision (and to grant the authority to make the decision to the firm's chief executive officer), subject to the further authority of state corporate law.Perhaps the SEC believes that its assumption of this power can be justified because SDRs are nothing but creatures created by federal law. However, as the SEC dissent points out, nothing in that federal law justifies this assertion of power by the SEC. Furthermore, the entities over which the SEC has determined to exercise such an unusual degree of authority are data repositories; that is, they are boring, tedious, humdrum utilities. Thousands of companies are more significant to the economy than data repositories, and thousands of companies offer more significant opportunities for wrongdoing. If the SEC thinks that it is justified in dictating the corporate governance process of a data repository, then why shouldn't it assert even greater authority over the processes by which other businesses operate – including those of businesses that are a lot more important than data repositories (e.g., businesses that produce food or energy, or provide transport)?Federal regulators should and do exercise a great degree of authority over financial institutions and over companies that offer their shares to the public. There must be vigilance, however, over ever increasing assertions of power by regulators.

Lofchie YouTube Selection on Super Powers.

See: SEC Press Release.See also: Chair White's Opening Statement; Commissioner Aguilar's Statement of Support; Commissioner Piwowar's Statement of Dissent; Commissioner Stein's Statement of Support; Commissioner Gallagher's Statement of Dissent.