- SEC Adopts Rules and Guidance on Cross-Border Security-Based Swap Activities
- July 25, 2014 | Author: Luke B. Falgoust
- Law Firm: Jones Walker LLP - New Orleans Office
On June 25, 2014, the Securities and Exchange Commission ("SEC") adopted the first of a series of rules and guidance on cross-border security-based swap activities for market participants. The rules and guidance explain when a cross-border transaction must be counted toward the requirement to register as a security-based swap dealer or a major security-based swap participant. The rules also address the scope of the SEC's cross-border anti-fraud authority.
The SEC's rules and guidance, among other things, provide:
- an explanation of when a cross-border transaction should be counted toward the requirement to register as a security-based swap dealer or major security-based swap participant, including transactions guaranteed by a U.S. person and transactions by a "conduit affiliate" (a foreign affiliate of a U.S. person that could be used to evade the requirements of Title VII of the Dodd-Frank Act);
- the procedures for foreign regulators or market participants to apply for substituted compliance, which would permit market participants to comply with U.S. requirements by complying with foreign requirements; and
- an anti-fraud rule that addresses the scope of the SEC's cross-border anti-fraud enforcement authority.
Under the rules a "U.S. person" is defined in a territorial manner as (i) any natural person who resides in the U.S.; (ii) any partnership, corporation, trust, investment vehicle, or other legal person organized, incorporated, or established under the laws of the U.S. or having its principal place of business in the U.S.; (iii) any discretionary or non-discretionary account of a U.S. person; or (iv) any estate of a decedent who was a resident of the United States at the time of death.
In 2012 the SEC adopted rules jointly with the U.S. Commodity Futures Trading Commission ("CFTC"), providing that a market participant would be considered a security-based swap dealer required to register with the SEC if its dealing transactions conducted in the past 12 months exceed certain thresholds. The final rules specify which cross-border dealing transactions count toward these dealer thresholds. Under the final rules, U.S. persons are required to count their security-based swap dealing transactions toward the thresholds, including dealing transactions conducted through their foreign branches. Non-U.S. persons are required to count the following against the thresholds: (i) dealing transactions with counterparties that are U.S. persons, including foreign branches of U.S. banks (unless the foreign branch is a branch of a registered security-based swap dealer); (ii) dealing transactions with any counterparty that has rights of recourse against a U.S. affiliate of the non-U.S. person in connection with the non-U.S. person's obligation under the security-based swap; and (iii) all dealing activity if a non-U.S. person acts as a "conduit affiliate."
Additionally, the final rules include an antifraud rule that addresses the scope of the SEC's cross-border antifraud civil enforcement authority, clarifying that the antifraud authority applies where sufficient conduct in furtherance of the fraud occurs or sufficient effects of the fraud are felt within the U.S.
The rules will be effective 60 days after their publication in the Federal Register. However, the rules addressing the application of the dealer and major participant definitions, and the procedures for submitting substituted compliance requests, will not impose requirements on market participants until after relevant substantive rulemakings have been completed.