SEC Adopts Rules to Prevent Fraud and Undue Influence over CCOs in connection with Security-Based Swap Transactions

Who may be interested: Registered Investment Companies; Investment Advisers and Broker-Dealers engaging in swap transactions

Quick Take: The SEC adopted rules under the Exchange Act to implement the Exchange Act’s prohibition on fraud, manipulation, and deception in connection with securities-based swap transactions and to prevent undue influence over the chief compliance officer (CCO) of a security-based swap dealer or a major security-based swap participant (each, an SBS Entity).

New Rule 9j-1 implements the antifraud language of Section 9(j) of the Exchange Act to prohibit the use of fraud, manipulation, or deceit in connection with effecting any transaction in, or attempting to effect any transaction in, or purchasing or selling, or inducing or attempting to induce the purchase or sale of, securities-based swaps.

The adopting release clarifies that the new rule’s application of antifraud protections to various steps in a security-based swap transaction, including those changing “any rights or obligations” under a security-based swap, align with the broad definitions of purchase and sale under the Exchange Act. The release details the SEC’s view that this expansive definition is necessary, for example, to prevent opportunistic strategies used to manipulate prices and obligations in relation to swaps, such as manufactured credit events in the credit default swap market.

New Rule 15fh-4(c) prohibits personnel of an SBS Entity from exerting undue influence over its CCO. Rule 15fh-4(c) also prohibits any person acting under the direction of personnel of an SBS Entity from taking any action to coerce, manipulate, mislead, or fraudulently induce the SBS Entity’s CCO in the performance of their duties.

The new rules will become effective 60 days after the date of publication of the adopting release in the Federal Register.

The adopting release can be found here.