SEC Proposes Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants


Yesterday the Securities and Exchange Commission (SEC) proposed rules to establish business conduct standards for security-based swap dealers and major security-based swap participants (Proposed Rules), as mandated by Section 764 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). SEC Chairman Mary Schapiro stated that the Proposed Rules “are intended to establish a framework that protects investors and also promotes efficiency, competition, and capital formation.” According to Chairman Schapiro, the Proposed Rules would level the playing field in the security-based swaps market by requiring transparency and ensuring that security-based swap customers are treated fairly.

In developing the Proposed Rules, the SEC consulted with the Commodity Futures Trading Commission (CFTC), other federal regulators and market participants. The SEC also reviewed public comments submitted in response to the CFTC’s proposed business conduct standards, which were the subject of several separate proposed rulemakings issued last year.1 The CFTC’s proposed business conduct standards have not yet been finalized.

The Proposed Rules will be published in the Federal Register in the coming days, but a pre-publication copy of the Proposed Rules is available here. The public comment deadline for the Proposed Rules is August 29, 2011.

The Proposed Rules

Pursuant to the Proposed Rules, a security-based swap dealer or major security-based swap participant, when entering into a security-based swap, will be required to, among other things:

- Communicate with its counterparty in a fair and balanced manner based on principles of good faith and fair dealing;

- Verify whether its counterparty is an eligible contract participant or a “special entity” (defined below);

- Disclose material information about the security-based swap to its counterparty, including the security-based swap’s characteristics and material risks, as well as the security-based swap dealer’s or major security-based swap participant’s incentives and conflicts of interest;

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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