SEC Sets Effective Date for Security-Based Swap Anti-Fraud Rules

The SEC set an effective date of August 29, 2023 for final rules aimed at preventing fraud and manipulation involving security-based swaps ("SBS") transactions. As previously covered, the new rules also include an amendment to prohibit undue influence on security-based swap dealers' ("SBSD") chief compliance officers.

Summary of Rule Changes

• Exchange Act Rule 9j-1 ("Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps")
  • Rule 9j-1(a) prohibits persons from (1) effecting or attempting to effect SBS or (2) "purchasing" or "selling" or attempting to purchase or sell SBS - including partial executions and terminations (prior to scheduled maturity), assignments, exchanges, or similar actions or extinguishing rights or obligations under an SBS if a person:
    • employs a device, scheme or artifice to defraud or manipulate;
    • makes or attempts to make certain types of misstatements or omissions;
    • obtains money or property by means of certain types of misstatements or omissions;
    • engages in an act or practice that operates or would operate as a fraud or deceit upon any person;
    • attempts to engage in conduct described in (3)-(4); or
    • manipulates or attempts to manipulate the price or valuation of any SBS or any payment or delivery related thereto.
  • Rule 9j-1(b) provides that a person who takes actions while in possession of material non-public information in connection with securities (other than SBS) that would violate the Securities Act or Exchange Act shall also be in violation with respect to purchases or sales of SBS;
  • Rule 9j-1(c) provides the inverse to 9j-1(b) - i.e., applying liability for actions taken that would violate 9j-1(a) in connection with non-SBS securities;
  • Rule 9j-1(e) provides affirmative defenses to 9j-1(a)-(e) for (i) actions taken consistent with binding contractual rights if taken before becoming aware of MNPI and made in good faith and (ii) actions taken by legal entities that show that the individual making decisions was not aware of MNPI and consistent with implemented policies and procedures reasonably designed to ensure relevant individuals would not violate 9j-1(a)-(5).
• Exchange Act Rule 15Fh-4 ("Antifraud provisions for security-based swap dealers")
  • Rule 15fh-4(c) prohibits personnel of a security-based swap entity from coercing, manipulating, misleading or fraudulently influencing the entity’s chief compliance officer ("CCO"). The SEC stated that the final rule is aimed at maintaining the "independence and objectivity" of a SBS entity’s CCO by preventing personnel from fraudulently influencing a CCO during the performance of the CCO's duties.