The SEC’s Extensions of Exemptions for Security-Based Swaps

Transcription

Robert Dilworth, Bank of America Merrill Lynch
James Schwartz, Morrison & Foerster LLP
May 1, 2013
NY2 716883
© 2013 Morrison & Foerster LLP All Rights Reserved | mofo.com
The SEC’s Extensions of
Exemptions for Security-Based
Swaps
Caveat
• This outline is for informational purposes only and does not constitute
legal advice or create an attorney-client relationship.
• Consult your own attorney for legal advice on the issues discussed in
this outline.
• IRS Circular 230 Disclosure
• To ensure compliance with the requirements imposed by the IRS, we inform you
that any tax advice contained in this communication was not intended or written to
be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties
under the Internal Revenue Code or (ii) promoting, marketing, or recommending
to another party any matters addressed herein.
• This outline may constitute attorney advertising.
This is MoFo. |
2 2
Topics for Presentation
• Background regarding security-based swaps and
Dodd-Frank
• SEC Roadmap and final rules to date
• Timeline of relief granted by SEC
• Industry commentary
• Relief granted
• Interim final rules
• General exemptive order
• Exchange Act exemptive order
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3 3
Swaps and Security-Based Swaps
• Swaps are subject to the jurisdiction of the CFTC and
include interest rate swaps, floors, caps and collars,
commodity swaps, cross-currency swaps, total return
swaps on broad-based security indices or two or more
loans and credit default swaps on broad-based security
indices.
• Security-based swaps are subject to the jurisdiction of the
SEC and include swaps on a single security, loan, or
narrow-based securities index.
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Swaps and Security-Based Swaps
• “Narrow based security index” means, among other
things, an index with nine or fewer components, or in
which a component security comprises more than 30
percent of the index’s weighting.
• The SEC and CFTC have adopted joint rules for the
regulation of mixed swaps, which combine characteristics
of both swaps and security-based swaps.
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5 5
Dodd-Frank Treatment of Security-Based Swaps
• Title VII of Dodd-Frank amended the Securities
Act of 1933 (the “Securities Act”) and the
Securities Exchange Act of 1934 (the “Exchange
Act”) to include “security-based swaps” in the
definition of “security” for purposes of those
statutes.
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• Section 761 of Dodd-Frank amends the definition of “security”
contained in the Exchange Act to include security-based swaps.
• Section 768 of Dodd-Frank amends the definition of “security”
contained in the Securities Act to include security-based swaps.
• Trust Indenture Act of 1939 (the “Trust Indenture Act”) incorporates
the definition of “security” contained in the Securities Act.
• As a result, “security-based swaps” became subject to the provisions
of the Securities Act, the Exchange Act and the Trust Indenture Act,
and the rules and regulations thereunder that are applicable to
“securities.”
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• Dodd-Frank did not amend the definition of “security” for
purposes of the Investment Company Act of 1940.
• Not clear why this amendment did not occur.
• Historically, definition of “security” under ’40 Act has been
broader than under Securities Act and Exchange Act.
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Current Status
• As further described below, the SEC has granted broad
relief with respect to many of the consequences that arise
from the treatment of security-based swaps as
“securities”.
• The relief that the SEC has granted in its interim final
rules and in its exemptive orders is still in place and has
been extended to February 11, 2014.
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SEC Roadmap
• The time frame for the SEC to complete its work under Title VII is not
clear.
• The SEC’s proposal regarding cross-border issues and the
parameters of the extraterritorial effect of Dodd-Frank with respect to
security-based swaps is expected this week.
• Expected to be lengthy, more than 1,000 pages.
• Last June, the SEC issued a “roadmap” for its rulemaking, a “general
sequence” for anticipated compliance dates of final rules to be
adopted by the SEC.
• The anticipated proposed cross-border rules, when finalized, will
complete the first of the five categories of rulemakings that the
roadmap identified.
• Many of the SEC rules have been proposed, but few have been
finalized.
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SEC Roadmap
• First category: rules further defining (i) the terms ‘‘security-based
swap,’’ ‘‘security-based swap agreement,’’ ‘‘mixed swap,’’ ‘‘securitybased swap dealer,’’ ‘‘major security-based swap participant,’’ and
‘‘eligible contract participant,’’ and (ii) the rules concerning the
treatment of cross-border security-based swap transactions and nonU.S. persons acting in capacities regulated under Subtitle B of Title
VII.
• Second category: rules pertaining to the registration and regulation of
swap data repositories, the reporting of security-based swap
transaction data to swap data repositories, and the public
dissemination of security-based swap transaction data.
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1111
SEC Roadmap
• Third category: rules pertaining to the mandatory clearing process of
security-based swap transactions, clearing agency standards, and
the end-user exception from mandatory clearing.
• Fourth category: rules pertaining to the registration and regulation of
security-based swap dealers and major security-based swap
participants.
• Fifth category: rules pertaining to the mandatory trading of securitybased swap transactions, including the rules pertaining to the
registration and regulation of security-based swap execution
facilities.
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SEC Final Rules
• As of today, relatively few SEC rules have been finalized under Title
VII of Dodd-Frank.
• The finalized rules include:
• Certain rules in relation to risk management procedures, controls and
rule changes for clearing agencies (such as central counterparties, or
“CCPs”);
• Further definitions of “Swap,” “Security-Based Swap,” “Security-Based
Swap Agreement”; Mixed Swaps, Security-Based Swap Agreement
Recordkeeping (jointly with CFTC);
• Process of Submissions for Review of Security-Based Swaps for
Mandatory Clearing; and
• Further definitions of “Swap Dealer,” “Security-Based Swap Dealer,”
“Major Swap Participant,” “Major Security-Based Swap Participant” and
“Eligible Contract Participant” (jointly with CFTC).
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SEC Final Rules
• In addition, the SEC finalized a permanent exemption that applies to
security-based swaps that are cleared by a CCP.
• Under the permanent exemption, subject to conditions, securitybased swaps that are cleared by a CCP are exempt from the
provisions of the Securities Act, the Exchange Act and the Trust
Indenture Act (other than with respect to antifraud provisions).
• The exemption’s conditions include (i) that the CCP’s counterparties
to the relevant security-based swap are eligible contract participants
and (ii) in the case of the exemption from the Securities Act, that the
CCP makes available certain information regarding the swap,
including identification of the underlying asset relating to the securitybased swap in question.
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Timeline of SEC Exemptive Relief
• Under section 774 of Dodd-Frank, the provisions of
Subtitle B of Title VII of Dodd-Frank were to take effect,
unless a provision required a rulemaking, 360 days after
the date of enactment of Dodd-Frank, or July 16, 2011.
• However, prior to July 16, 2011, the SEC took actions to
provide relief from the security-based swap provisions of
Dodd-Frank.
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• On June 15, 2011, the SEC issued a general exemptive
order (the “General Exemptive Order”).
• The General Exemptive Order does not contain any
“sunset” provision, but, instead, its exemptions generally
expire on the compliance date of rules relating to each
provision with respect to which relief is granted.
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• In addition, on July 1, 2011, the SEC issued both (i) interim final rules
(the “Interim Final Rules”) and (ii) another exemptive order,
specifically under the Exchange Act (the “Exchange Act Exemptive
Order”).
• In its release of the Interim Final Rules, the SEC stated that the
rules would remain in effect until the compliance date for final rules
further defining the terms “security-based swap” and “eligible
contract participant”.
• Similarly, by the terms of the Exchange Act Exemptive Order, the
relief granted in the order was to expire upon the compliance date
for final rules, as applicable, (i) further defining the terms “securitybased swap” and “eligible contract participant” or (ii) regarding
registration of security-based swap facilities.
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• In April 2012, the SEC and the CFTC adopted regulations further
defining, among other things, the term “eligible contract participant.”
• In July 2012, the SEC and the CFTC adopted regulations further
defining, among other things, the term “security-based swap.”
• In the adopting release for these regulations, the SEC stated that
solely for the purposes of the Exchange Act Exemptive Order and
the Interim Final Rules, the compliance date for the final rules
further defining the term ‘‘security-based swap’’ would be February
11, 2013.
• There was no need to extend General Exemptive Order because
expiration of the relief that it provides is generally linked to compliance
dates for rules that had not yet gone into effect.
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• Prior to February 11, 2013, the SEC took the following actions:
• Issued an extension of the Interim Final Rules; and
• Issued an extension of the Exchange Act Exemptive Order.
• The two extensions extend until February 11, 2014, the
expiration date of the relief granted in the Interim Final Rules
and the Exchange Act Exemptive Order.
• Still no need to extend General Exemptive Order because
expiration of the relief that it provides is generally linked to
compliance dates for rules that have not yet gone into effect.
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Why Extend Rules and Exemptive Order?
• SEC had not completed its evaluation of the implications
of treating security-based swaps as securities.
• Intent to move forward deliberatively in implementing
Dodd-Frank requirements.
• Necessary to keep status quo to allow market participants
to continue to enter into security-based swaps.
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2020
Why Extend Rules and Exemptive Order?
• Concern about market disruptions in relation to securitybased swaps in relation to Dodd-Frank requirements,
including requirements to:
• Register offer and sale of security-based swaps under
the Securities Act;
• Comply with provisions of Exchange Act applicable to
classes of securities; and
• Comply with the indenture provisions of the Trust
Indenture Act.
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Contrast with CFTC’s Approach
• CFTC has finalized many more rulemakings than SEC.
• Among the rulemakings that the CFTC has finalized are:
• Swap dealer registration (about 75 swap dealers have registered
with CFTC);
• Business conduct (many external business conduct rules are
scheduled to go into effect today);
• Swap data reporting and recordkeeping;
• Mandatory clearing (in effect for certain rate swaps and CDS for
category 1 entities such as dealers; will be phased in for category
2 entities next month and for all others in September of this year);
• End-user exception to mandatory clearing requirement; and
• Affiliate exception to mandatory clearing.
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• However, although the CFTC has implemented many more rules
than the SEC, some of those rules have proven difficult to implement
in practice.
• CFTC has issued dozens of no-action letters, many of them providing
temporary relief.
• Value and use of reported swap data have been called into question.
• Immediately after recent no-action relief was granted, CFTC
Commissioner O’Malia issued a statement listing various
complaints, including his concern that the CFTC is facing
immense challenges in using data that the three SDRs are
reporting because of inconsistent and incomplete reporting,
technology shortfalls and integration issues.
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2323
• Notwithstanding its different approach to rulemaking, the CFTC still
has a number of important rulemakings to finalize:
• Margin Requirements for uncleared OTC swaps
• The margin requirements have not been finalized, although it is widely anticipated
that levels will be higher than for cleared swaps (keeping in mind, however, that
clearing houses and FCMs can increase the level of margin on a cleared swap).
• Cross-jurisdiction harmonization will be needed.
• Swap Execution Facility (“SEF)” Rules
• Dodd-Frank requires that all swaps that are required to be cleared be executed on
a designated contract market (“DCM”) or a SEF, unless the swap type is not
available for trading on any DCM or SEF, or another clearing exception applies.
• The CFTC has proposed rules governing SEFs that subject SEFs to specific
transparency requirements related to making bids, offers and trades available to
all market participants.
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• Extraterritoriality
• In June 2012, the CFTC issued an exemptive order and also
proposed cross-border guidance, which permitted delayed
compliance with certain Title VII requirements for foreign entities.
• In December 2012, the CFTC extended the exemptive order
delaying compliance and modifying the “U.S. person” definition.
The SEC staff has stated that finalizing cross-border guidance is
an important priority for the agency.
• Considerable public debate is ongoing (and may be advanced by
the SEC’s upcoming release of extraterritorial guidance).
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2525
Scope of SEC Exemptive Relief
• Together, the General Exemptive Order, the Interim Final
Rules and the Exchange Act Exemptive Order provide
broad relief for entities transacting in security-based
swaps.
• However, certain provisions of the securities laws do
apply to security-based swaps, notably antifraud and antimanipulation provisions (Section 17(a) of the Securities
Act).
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2626
Industry Commentary
• Broad current relief, plus a deliberative approach, means
that industry has a comfort level with SEC’s process.
• However, it is still not clear how much relief will be
granted on a permanent basis.
• Industry participants have argued that permanent relief
from certain provisions would be appropriate.
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2727
Industry Commentary
• In particular, relief from Section 5 of the Securities Act, which
requires a registration statement to be in effect as to a security, is
seen as necessary.
• The primary issue that Section 5 seeks to address, adequate
disclosure, would in many cases not be an issue for a security-based
swap.
• SEC business conduct standards are expected to require disclosures
of material information.
• Requiring registration statements in the context of security-based
swaps would be unduly burdensome and expensive.
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Industry Commentary
• The industry also seeks permanent relief from certain provisions of
the Exchange Act.
• SIFMA has submitted to the SEC a letter dividing the provisions of
the Exchange Act into different categories:
• Provisions that should apply to security-based swaps (such as
antifraud provisions and certain entity-level requirements, such as
capital rules and financial reporting rules)
• Provisions that seem inapplicable or unworkable for securitybased swaps (such as issuer disclosures, rules on missing or
stolen securities)
• Provisions that are unnecessary for registered broker-dealers’
dealing and brokering activities because they overlap with
existing broker-dealer regulations (such as business conduct
rules)
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2929
Relief Under Interim Final Rules
• Interim Final Rules provide relief under each of the
• Securities Act
• Exchange Act, and
• Trust Indenture Act of 1939
• The postponements of expiration dates aim to maintain
status quo.
• They apply to those security-based swaps that prior to
July 16, 2011 were security-based swap agreements and
are defined as “securities” under the Securities Act and
the Exchange Act as of July 16, 2011 due solely to the
provisions of Title VII of Dodd-Frank.
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• Specifically, the Interim Final Rules, subject to conditions,
exempt offers and sales of security-based swap
agreements that became security-based swaps on the
effective date of Title VII from:
• All provisions of the Securities Act (other than antifraud provisions);
• Exchange Act registration requirements; and
• Provisions of the Trust Indenture Act.
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• Securities Act Rule 240
• Provides that, other than antifraud provisions contained in Section
17(a) of the Securities Act, the Securities Act does not apply to
the offer or sale of any security-based swap that is:
• a security-based swap agreement, as defined in the
Securities Act as in effect prior to July 16, 2011; and
• entered into between eligible contract participants (as defined
in the Commodity Exchange Act as in effect prior to July 16,
2011).
• Rule will permit the offer or sale of these security-based swaps
between eligible contract participants without requiring compliance
with Securities Act Section 5, which requires a registration statement
to be in effect as to a security.
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3232
• In Securities Act Rule 240, the use of definitions in effect
prior to July 16, 2011 (“security-based swap agreement”
and “eligible contract participant”) is intended to preserve
the status quo ante and avoid uncertainty as to the
applicability of the Securities Act registration
requirements.
• In order to qualify as a “security-based swap agreement,”
an agreement had to be entered into between eligible
contract participants and subject to individual negotiation.
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3333
• Exchange Act Rule 12a–11
• Provides that the provisions of Section 12(a) of the Exchange Act
do not apply to any security-based swap offered and sold in
reliance on Rule 240 under the Securities Act.
• Section 12(a) of the Exchange Act provides that it is unlawful for a
member, broker, or dealer to effect any transaction in any security
(other than an exempted security) on a national securities exchange
unless a registration is effective as to such security for such
exchange.
• Exemption is intended to allow trading activities relating to those
security-based swaps that are security-based swap agreements with
eligible contract participants to continue, provided the parties rely on
the Rule 240 Securities Act exemption with respect to such securitybased swaps.
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3434
• Exchange Act Rule 12h–1(i)
• Adds an exemption for registration under Section 12(g) of the
Exchange Act for any security-based swap offered and sold in
reliance on Rule 240 under the Securities Act.
• Section 12(g) requires certain issuers engaged in interstate
commerce, one of whose classes of securities is held by either 2,000
persons or 500 persons who are not accredited investors, to register
such security with the SEC by filing a registration statement.
• SEC noted that, while it was not sure that there would be a class of
security-based swaps that would be subject to registration under
Exchange Act Section 12(g), it was appropriate to provide this
exemption while the SEC learns about and evaluates the types of
security-based swap transactions that have been and will be
transacted.
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3535
• Trust Indenture Act Rule 4d-12
• Provides that any security-based swap offered and sold in
reliance on Securities Act Rule 240, whether or not issued under
an indenture, is exempt from the Trust Indenture Act.
• SEC does not believe the protections contained in the Trust
Indenture Act are currently needed with respect to security-based
swaps.
• Trust Indenture Act is aimed at addressing problems that unregulated
debt offerings pose for investors and the public, and provides a
mechanism for debt holders to protect and enforce their rights with
respect to the debt.
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3636
• Protections contained in the Trust Indenture Act are not needed to
protect eligible contract participants to whom a sale of security-based
swaps is made in reliance on Securities Act Rule 240.
• Security-based swaps are contracts between two parties and, as a
result, do not raise the same problem regarding the ability of parties
to enforce their rights under the instruments as would, for example, a
debt offering to the public.
• Enforcement of contractual rights and obligations under securitybased swaps would occur directly between the parties, and Trust
Indenture Act provisions would probably not provide any additional
meaningful substantive or procedural protections.
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3737
General Exemptive Order
• Unlike the relief under the Interim Final Rules, the relief
provided by the General Exemptive Order is aimed not at
relieving concerns arising from the treatment of securitybased swaps as “securities” under the Securities Act, the
Exchange Act and the Trust Indenture Act, but instead
assuring that market participants are not required
prematurely to come into compliance with requirements
imposed by Dodd-Frank.
• Relief is aimed at particular Dodd-Frank requirements.
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3838
Relief Under General Exemptive Order
• Relief for Security-based Swap Dealers and Major Security-based
Swap Participants – Swap Reporting:
• No reporting party for a security-based swap is required to
report any pre-enactment security-based swap until the date
that is six (6) months after the date on which security-based
swap data repository that is capable of accepting the asset
class of such security-based swap is registered with the SEC.
• Security-based swap dealers are expected generally to be
reporting parties for the security-based swaps to which they
are parties.
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3939
Swap Participants – Associated Persons
• Security-based swap dealers and major security-based swap
participants are excepted from a prohibition with respect to
permitting persons who are associated with the security-based
swap dealer or major security-based swap participant, and are
subject to a statutory disqualification, to effect or be involved in
effecting security-based swaps on behalf of such security-based
swap dealer or major security-based swap participant, but only
until the date upon which rules adopted by the SEC to register
security-based swap dealers and major security-based swap
participants become effective.
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4040
Swap Participants – Segregation of Collateral
participants are exempt from the requirement to segregate their
counterparty’s initial margin in relation to non-cleared swaps upon
the counterparty’s request until the date upon which the rules
adopted by the SEC to register security-based swap dealers and
major security-based swap participants become effective.
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4141
• Relief in Relation to Security-Based SEFs – Operation without
Registration
• Persons that operate a facility for the trading or processing of
security-based swaps that is not registered as a national
securities exchange or that cannot yet register as a securitybased swap execution facility because final rules for such
registration have not yet been adopted are exempt from the
prohibition on operating such a facility unless such facility is
registered as a security-based swap execution facility or national
securities exchange until the earliest compliance date set forth in
any of the final rules regarding registration of security-based
swap execution facilities.
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4242
• Relief in Relation to Security-Based SEFs – Identification of Trading
Venue
• Registered clearing agencies under section 17A of the Exchange
Act are exempt from the requirement that a national securities
exchange, if it also operates a security-based swap execution
facility, and employs the same electronic trade execution system
for securities-based swaps on both the exchange and the facility,
identify whether trading of such swaps is occurring on the
national securities exchange or on the execution facility, until the
earliest compliance date set forth in any of the final rules
regarding registration of security-based swap execution facilities.
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4343
• Relief for Security-based Swap Data Repositories – Data
confidentiality
• Entities meeting the definition of security-based swap data
repository are exempt from certain requirements contained in
section 13(n) of the Exchange Act relating, in part, to data
access, confidentiality and sharing, until the earlier of (1) the date
the SEC grants registration to the security-based swap data
repository and (2) the earliest compliance date for any of the final
rules regarding the registration of security-based swap data
repositories.
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4444
• Registered Clearing Agencies – Chief Compliance Officer
• Registered clearing agencies under section 17A of the Exchange
Act are exempt from the requirement to appoint a chief
compliance officer until the earliest compliance date set forth in
any of the final rules regarding the duties of a chief compliance
officer under section 3C(j)(2) of the Exchange Act.
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4545
• Non-Voidability:
• No contract entered into on or after July 16, 2011 will be void by
reason of section 29(b) of the Exchange Act (which provides
generally that contracts made in violation of the Exchange Act are
void) because any person that is a party to the contract violated a
provision of the Exchange Act that was amended or added by
Subtitle B of Title VII of Dodd-Frank and for which the SEC has
taken the view that compliance will be triggered by registration of
a person or by adoption of final rules by the SEC, or for which the
SEC has provided an exception or exemptive relief, until such
date as the SEC specifies.
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4646
• Eligible Contract Participant Requirement:
• A person meeting the definition of eligible contract participant as set
forth in section 1a(12) of the Commodity Exchange Act (as in effect
on July 20, 2010) was exempt from the requirement that, unless a
security-based swap is transacted on a registered national securities
exchange, each party to such swap must be an eligible contract
participant, until the effective date for the final rules further defining
the term eligible contract participant, provided that such person
effects such transaction with or for a person that also meets the
definition of eligible contract participant as set forth in section 1a(12)
of the Commodity Exchange Act (as in effect on July 20, 2010).
• The CFTC and SEC released joint rules further defining “eligible
contract participant” in May 2012, and this temporary relief is no
longer available.
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4747
Swap Participants – Swap Clearing:
participants were exempt from the requirement to clear
security-based swaps at the request of their counterparties
until the earliest compliance date set forth in any of the final
rules regarding the procedures according to which the SEC
will determine which security-based swaps should be
designated for mandatory clearing.
• The SEC issued rules relating to the process for submissions
for the review of security-based swaps for mandatory clearing
June 2012, and it appears that this temporary exemption is no
longer available.
This is MoFo. |
4848
Exchange Act Exemptive Order
• Exchange Act Exemptive Order addresses matters
pertaining to Exchange Act other than the registrationrelated matters addressed in the Interim Final Rules.
This is MoFo. |
4949
Relief Under Exchange Act Exemptive Order
• First exemption is a broad temporary exemption in connection with
security-based swap activity.
• Subject to exclusions, each eligible person is exempt from the
provisions of the Exchange Act, and the rules and regulations
thereunder, solely in connection with the person’s activities involving
security-based swaps.
• Exemption is available to any person that meets the definition of
“eligible contract participant” as set forth in section 1a(12) of the
Commodity Exchange Act (as in effect on July 20, 2010), other than
registered broker-dealers (addressed in the second exemption,
below) and self-regulatory organizations.
This is MoFo. |
5050
• Second exemption is a temporary exemption specific to securitybased swap activities of registered brokers and dealers.
• Subject to exclusions, a broker or dealer registered under section
15(b) of the Exchange Act is exempt from certain provisions of the
Exchange Act solely with respect to security-based swaps.
• A registered broker or dealer will be exempt from the following
provisions in connection with security-based swaps solely to the
extent that those provisions or rules do not apply to the broker’s or
dealer’s security-based swap positions or activities as of July 15,
2011:
• Sections 7c, 15(c)(3), and 17(a) and (b), Regulation T, 12 CFR 220.1 et seq.,
Rule 240.15c3–1, Rule 240.15c3–3, Rule 240.17a–3, Rule 240.17a–4,
Rule 240.17a–5, Rule 240.17a–8, and Rule 240.17a–13.
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5151
• Third temporary exemption provides partial relief from sections 5 and
6 of the Exchange Act for market participants, including certain
brokers and dealers and central counterparties, in connection with
their security-based swap activities.
• Section 5 of the Exchange Act makes it unlawful for any broker,
dealer or exchange to use any facility of an exchange to effect a
transaction in a security unless the exchange is either registered as a
national securities exchange or exempted from registration.
• Section 6 of the Exchange Act states the conditions upon which an
exchange may be registered as a national securities exchange.
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5252
• The expiration of this exemption is tied to the earliest compliance
date for rules regarding the registration of security-based swap
execution facilities (not the compliance date for rules further defining
“security-based swap” and “eligible contract participant”).
• As a technical matter, this exemption was not extended by the SEC’s
February 2013 order extending other exemptions under the
Exchange Act Exemptive Order, but it remains in effect.
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5353

The SEC’s Extensions of Exemptions for Security-Based Swaps

Transcription

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