The SEC updated certain exemptions and granted certain additional exemptions for security-based swap ("SBS") activities related to SBSs also being "securities" under the federal securities laws.

In its Order, the SEC reviewed a number of exemptions the SEC has provided on SBS activity since the adoption of Dodd-Frank. The SEC made the following specific changes to previously granted relief:

  • Foreign Brokers or Dealers. The SEC granted relief from broker-dealer registration to foreign brokers or dealers that (1) engage in SBS dealing with eligible contract participants and (2) engage in (a) Rule 15a-6-compliant securities activities or (b) securities activities that "lack a U.S. jurisdictional nexus." According to the SEC, this relief was granted to clarify a potential issue stemming from the fact that a foreign broker-dealer may be considered a "broker" or "dealer" for certain purposes under the Exchange Act.
  • "Broker" Exemption for SBSD Acting in "ANE" Function. The SEC granted temporary relief (until November 1, 2022) to registered security-based swap dealers ("SBSDs") (and their associated persons ("APs")) from broker registration under SEA Section 15(a)(1) for transactions where an SBSD or its AP is "arranging, negotiating or executing" ("ANE") an SBS between a U.S. person eligible contract participant ("ECP") and a non-U.S. person "qualified majority-owned affiliate" (a "majority-owned affiliate") that owns the registered SBSD and is itself a registered SBSD.
  • The exemption is subject to conditions that are intended to match the exemption provided in the de minimis dealing context under Rule 3a71-3, in particular, that the entity is (i) establishing books and records for such activities, as required under SEA Rules 18a-5 and 18a-6, and (ii) providing certain disclosures to customers, in conformity with SEA Rule 15Fi-2 time and form requirements, where such entity's dealings are subject to SEA Rule 10b-10 ("Confirmation of Transactions") requirements.
  • Broker-Dealer Confirmation Requirements. The SEC granted exemptive relief from certain confirmation delivery requirements to registered broker-dealers that conduct ANE activity (other than pursuant to the SBSD de minimis exemption) on behalf of a qualified majority-owned affiliate that is a registered SBSD. The relief is limited to matters related to differences in the time and form requirements in SEA Rule 10b-10(a) and SEA Rule 15Fi-2(b) and (c).
  • Rehypothecation Relief. The SEC provided a conditional exemption from SEA Rules 8c-1 and 15c2-1 for securities and money-market instruments carried in the SBS accounts of SBS customers, provided that an account does not hold "margin securities" as defined in Rule 15c3-3. The SEC noted, among other things, that issues as to the use of SBS customer collateral are addressed in SEA Rules 15c3-3 and 18a-4, and that the SEC did not model those requirements on Rules 8c-1 and 15c2-1. The SEC also extended previously granted "unlinked" temporary exemptions from Rules 8c-1 and 15c2-1 to expire at the same time as the linked exemption under Rule 15c3-3.
  • Relief from Broker-Dealer Extension of Credit Notice Requirements. The SEC declined to provide exemptive relief to broker-dealers from Rules 10b-16 and 15c2-5 related to SBS activity.
  • Dually Registered OTC Derivatives Dealers and SBSDs/Major Security-Based Swap Participants. The SEC granted relief to dually registered OTC derivatives dealers and SBSDs to (1) permit them to engage in SBSs with ECPs that are eligible for central clearing, as within scope of an "eligible OTC derivative instrument" under Rule 3b-13(b)(2), (2) permit them to engage in SBSs with ECPs without requiring the use of a registered broker-dealer and (3) extend previously granted relief through October 6, 2021 from certain policies and procedures requirements under Rules 15a-1(c) and (d).

The SEC also stated that exemptions previously provided under Section 29(b) of the Exchange Act will expire on October 6, 2021.

Commentary

This SEC Exemptive Order came in response to a request from SIFMA. There will likely continue to be issues that arise given the complications from the attempt under Dodd-Frank to apply two regulatory regimes to one type of product.

As a matter of formality, the SEC has done market participants no favors in the way this Order (and previous Orders) are written. Unlike rulemaking, where operative provisions are set forth separately and explained in prose, these Exemptive Orders set forth a series of technical matters entirely in prose and often by reference to the series of previously issued Exemptive Orders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.