SEC Adopts Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants

On April 13, 2016, the Securities and Exchange Commission ("SEC") held an open meeting at which it voted to adopt final rules (the "Rules") that govern business conduct standards for security-based swap dealers ("SBS Dealers") and major security security-based swap participants ("MSBS Participants" and, together with SBS Dealers, "SBS Entities"). The Rules, which have yet to be made public, are based on a 2011 proposal[1] and, as indicated at the open meeting, are intended to be consistent with the framework for business conduct standards applicable to swap dealers and major swap participants adopted by the CFTC.[2]

At the open meeting, all three SEC commissioners indicated that the adoption of the Rules represents a significant step, but stressed that the completion of the SEC rulemaking under Title VII of Dodd-Frank is a high priority. The SEC still must adopt rules pertaining to SBS Entities on (i) capital and margin, (ii) recordkeeping and reporting, and (iii) a process for waiving the statutory disqualifications of associated persons. The registration requirement for SBS Entities will be triggered only when all three of these rule sets have been completed.[3]

Breakdown of the Vote

The SEC voted two-to-one to adopt the Rules, with Chair Mary Jo White and Commissioner Kara Stein in favor and Commissioner Michael Piwowar dissenting. Commissioner Piwowar indicated that he dissented because the Rules strayed from the CFTC's approach without "compelling justification."[4] Chair White and Commissioner Stein voted in favor for various reasons, notwithstanding any differences between the CFTC's approach and that of the Rules.[5]

Content of the SEC Business Conduct Rules

As indicated above, the text of the Rules is not available at this time. Nonetheless, a few notable points raised during the discussion at the open meeting are addressed below.

• Institutional Safe Harbor from Suitability. The Rules contain a suitability requirement for SBS Entities that transact with customers, but there is a limited safe harbor for institutional customers that pass a $50 million asset test.[6] By contrast, CFTC Regulation 23.434 does not contain a financial test for the use of this institutional safe harbor from the suitability requirement.

• Cross-Border Application. The SEC staff indicated that U.S.-based SBS Entities will be required to comply with the external business conduct requirements for transactions with all counterparties, except for certain transactions conducted from a foreign branch. Alternatively, non-U.S. SBS Entities will be required to comply with the external business conduct requirements for transactions (i) with U.S. persons or (ii) that are arranged, negotiated or executed through a U.S. branch or office.[7]

• Internal and External Business Conduct. Unlike the CFTC, the SEC adopted rules that govern internal and external business conduct requirements in a single rulemaking. For that reason, the newly adopted Rules will cover not only requirements concerning transactions with counterparties (including special entities), but also, inter alia, requirements to designate a chief compliance officer, to implement and maintain supervisory structures, and to have detailed policies and procedures that ensure compliance with U.S. securities laws, as they pertain to an SBS Entity's security-based swaps business.

If you have any questions regarding this article or the final rules, please contact:

Steven Lofchie: (212) 504-6700
Jeffrey Robins: (212) 504-6554
Nihal Patel: (212) 504-5645
Patrick Calves: (212) 504-5557
Jacob Dachs: (212) 504-5616