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SEC Delays Application of Securities Laws to Security-Based Swaps for Third Time
Practical Law Legal Update w-006-3477 (Approx. 4 pages)
SEC Delays Application of Securities Laws to Security-Based Swaps for Third Time
by Practical Law Finance
| Published on 13 Feb 2017 • USA (National/Federal) |
The SEC issued an interim final rule that further delays the application of most US securities laws to security-based swaps (SBS) until February 11, 2018.
On February 10, 2017, the SEC issued an interim final rule (IFR) extension further delaying the application of certain US securities laws to security-based swaps (SBS) for an additional year, until February 11, 2018. This is the third time that the SEC has extended the application of securities laws to SBS.
Title VII of the Dodd-Frank Act expanded the definition of "security" under both the Securities Act and the Exchange Act to include SBS. Section 761(a)(2) of the Dodd-Frank Act amended the definition of "security" in Exchange Act Section 3(a)(10) (15 U.S.C. § 78c(a)(10)) and Section 768(a)(1) of Dodd-Frank (15 U.S.C. § 77b(a)(1)) amended the definition of "security" in Securities Act Section 2(a)(1) to include SBS.
The delay in the application of the securities laws to SBS allows SBS to continue to trade as they did prior to the enactment of Title VII of the Dodd-Frank Act, provided that the SBS:
- Is a "security-based swap agreement" as defined prior to the enactment of Dodd-Frank, which requires that the swap agreement be entered into between eligible contract participants (ECPs) (as defined prior to Dodd-Frank) and is subject to individual negotiation.
- Falls under the Securities Act definition of "Security" due solely to the expansion of that definition under Title VII of the Dodd-Frank Act.
As with the prior extension, this extension does not alter the IFR in any respect other than its expiration date. The following rules will remain in effect under the IFR extension:
- Securities Act Rule 240 (17 C.F.R. § 230.240), which exempts SBS from all provisions of the Securities Act except for the antifraud provisions of Section 17(a) of the Securities Act, as long as the SBS:
- is a SBS agreement, as defined prior to the effective date of Title VII; and
- has been entered into between ECPs.
- Exchange Act Rules 12a-11 and 12h-1 (17 C.F.R. §§ 240.12a-11, 240.12h-1), which exempt any SBS offered or sold in reliance on Securities Act Rule 240 from the registration requirements of Exchange Act Sections 12(a) and 12(g).
- Trust Indenture Act of 1939 (TIA) Rule 4d-12 (17 C.F.R. § 260.4d-12), which exempts any SBS offered or sold in reliance on Securities Act Rule 240 from the provisions of the TIA.
The original interim final rule was issued in July 2011 (see Legal Update, Dodd-Frank Delay: SEC Issues Further Temporary Securities Law Exemptions for Security-based Swaps) and, after a one-year delay, the US securities laws were scheduled to become applicable to SBS on February 11, 2014 but were delayed for three additional years, until February 11, 2017 (see Legal Update, SEC Further Delays Application of Securities Laws to Security-based Swaps).
The February 11, 2018 expiration date is subject to change in the event the SEC adopts a proposed rule that would exempt certain communications involving SBS that may be purchased only by ECPs from being considered "offers" for purposes of Section 5 of the Securities Act (see Legal Update, SEC Proposes Exemption for Certain Security-based Swaps from Registration under Securities Act) or other federal securities rules in application to SBS.
For more information on the application of US securities laws to security-based swaps, see Practice Note, US Derivatives Regulation: Application of Securities Laws to Security-Based Swaps.