MFA Says SBS Position Reporting Proposal Is Analytically and Legally Deficient
Commentary by Steven Lofchie
The Managed Funds Association ("MFA") criticized the economic analysis provided by the SEC in support of a proposal to require reporting of large positions in security-based swaps ("SBS").
In a comment letter in response to an additional economic analysis (from the SEC Division of Economic and Risk Analysis "DERA") provided in connection with the rulemaking (see previous coverage,) MFA cited findings from a commissioned analysis performed by NERA Economic Consulting. According to NERA, the SEC staff analysis fails to justify the proposal’s reporting regime for large security-based swap positions and contains "major data limitations and analytical flaws." MFA argued that the SEC has "not meaningfully considered alternative approaches" and that if the proposal is finalized based on the DERA Memorandum, the SEC would "fall short of its statutory requirements under the Administrative Procedure Act."
MFA also referenced recent Supreme Court decisions, including West Virginia v. EPA and Biden v. Nebraska, to argue that, if adopted, the proposal would be "precluded by the major questions doctrine" which suggests that administrative authority on "matters of vast ‘economic and political significance’" are unlawful unless clearly authorized by Congress. In the case of proposed Rule 10B-1, MFA stated that the SEC would be, without Congressional authorization, making an "unprecedented intervention in the multi-trillion-dollar SBS market."
Commentary
This is the second time in a week that MFA questioned the SEC's authority to adopt a rule. (See previous coverage MFA Threatens Litigation Over SEC Private Fund Adviser Proposal.) There are a number of other SEC proposals that could very well attract similar legal challenge.
What makes these potential legal challenges even more interesting is that many of the proposals do not have unanimous support even within the SEC. They were put forward along party-lines with dissents by commissioners who warned that the rule changes were ill-considered and in some cases legally unsupported.
The recent dissent of Commissioners Peirce and Uyeda to an SEC enforcement action illustrates the degree to which Chair Gensler's rule-making has alienated his fellow Commissioners. The dissenting commissioners describe the SEC as being "a victim of its own misguided overambition." That viewpoint is likely to inform MFA and other market participants as to the legal soundness of any potential challenges.
Related Articles
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The SEC reopened the comment period on a proposed rule to require reporting of large positions in security-based swaps. SEC staff provided additional analysis on proposed thresholds in the rule.
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The SEC proposed three new rules relating to security-based swaps: (1) an anti-fraud rule, (2) a rule to require reporting of large positions in security-based swaps, and (3) a rule prohibiting personnel of an SBS entity from taking any action to improperly interfere with the SBS entity's CCO in the performance of such persons duties.
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SEC Commissioners Allison Herren Lee and Caroline A. Crenshaw urged continued careful monitoring of the security-based swap regulatory regime.