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

The SEC adopted new rules that implement the provisions of Title VII of the Dodd-Frank Act concerning (i) business conduct standards, (ii) the designation of a chief compliance officer ("CCO") for security-based swap dealers and major SBS participants (“SBS Entities”), and (iii) the cross-border application of the rules and the availability of substituted compliance.

An article in yesterday's Cabinet news summarized the open meeting and explored some of the implications of the rule's adoption. On pages 11-16 of the 783-page adopting release, the SEC provides an overview of the adopted rules. In summary:

• an SBS Entity must verify its counterparty's status as an eligible contract participant or as a special entity (though it may rely generally on its counterparty's representations unless it has reason to doubt their accuracy);
• an SBS Entity must disclose material information concerning a security-based swap, including information about risks and conflicts of interest;
• an SBS Entity must disclose information concerning the daily mark-to-market of a security-based swap and the ability of a counterparty to require clearing;
• communications by an SBS Entity with counterparties generally must be fair and balanced, and recommendations made by an SBS Entity must comply with suitability obligations;
• an SBS Entity must have and enforce compliance procedures, and also must appoint a CCO;
• an SBS Entity must not engage in fraudulent behavior;
• whether acting as advisor or as counterparty, an SBS Entity is subject to additional obligations when dealing with a "special entity"; and
• an SBS Entity is subject to "pay-to-play" prohibitions.

The rules will become effective 60 days following publication in the Federal Register; the compliance date will be the same date as the registration compliance date (as noted previously, this date is unknown, as it is tied to three other yet-to-be-completed SEC rulemaking initiatives). A potentially longer period is allowed for transactions “arranged, negotiated or executed” in the United States – compliance for such transactions is required on the later of (i) one year following Federal Register publication of the business conduct rules and (ii) the registration compliance date.