The SEC extended, and granted on a permanent basis, certain exemptions from Exchange Act requirements related to security-based swap activity.
The new Order extends relief initially granted in 2011 and most recently extended in 2018. The SEC also ordered, on a permanent basis, that:
- security-based swap transactions between eligible contract participants are exempt from the definition of "penny stock" set forth in Exchange Act Section 3(a)(51) and Rule 3a51-1; and
- security-based swaps are exempt from the definition of "municipal securities" in Exchange Act Section 3(a)(29).
The SEC declined to grant relief on two points where additional relief was requested by SIFMA. The SEC said it would not address:
- the treatment of swaps with "U.S. government-related entities" as "government securities." The SEC said that the treatment of those instruments would not be affected by the expiration of certain exemptions.
- Section 31 fees. The SEC said that security-based swaps do not currently meet the criteria to be subject to Section 31 fees, but said that the Commission would reconsider the issue when adopting "real-time public reporting" requirements under SEA Section 13(m).
The extensions of relief granted previously are for an additional year and will expire on February 5, 2020.
Commentary / Nihal Patel
The treatment of "security-based swaps" as "securities" under the Exchange Act raises significant interpretive questions. The two points addressed permanently by the SEC in this Order make a great deal of sense, as treatment of security-based swaps as "penny stocks" or "municipal securities" would be inconsistent with the policy aims of the statutory provisions.
The SEC declining to grant relief as to Section 31 fees and "government securities" status are examples of how the SEC will continue to have to address "security" status of security-based swaps as it implements the SBS regulatory structure. And as the SEC observes in a footnote, the government securities question may be one that needs to be addressed by Congress. (See footnote 40 (stating that SEA Section 36(b) bars the SEC from using that section for granting exemptions under certain provisions relating to government securities.)
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