On December 15, 2021, in a 3-2 vote along party lines, the U.S. Securities and Exchange Commission (SEC) proposed two rules related to security-based swaps (SBS) to prevent fraud and undue influence over chief compliance officers (CCOs) of certain SBS market participants (the Proposal).1 First, proposed Rule 9j-1 would be designed to prevent fraud, manipulation and deception in connection with effecting transactions in, or inducing or attempting to induce the purchase or sale of, any SBS transaction. Second, proposed Rule 15Fh-4(c) would make it unlawful for any officer, director or employee of an SBS dealer or major SBS participant (SBS Entities) to directly or indirectly take any action to coerce, manipulate, mislead or fraudulently influence the CCO in the performance of the CCO’s duties.
The SEC noted that one of the impetuses for the proposed rules is the rise of “manufactured credit events” or other opportunistic strategies in the credit default swap (CDS) market.2 The Proposal follows rare joint statements by the SEC, the Commodity Futures Trading Commission (CFTC) and the UK’s Financial Conduct Authority in June 2019, and again in September 2019, raising concerns related to manufactured credit events.3 While manufactured credit events can take many forms, according to the SEC, they generally involve CDS buyers or sellers taking steps (with or without the participation of a company whose securities underlie, or are referenced by, the CDS) to avoid, trigger, delay, accelerate, decrease and/or increase payouts on CDS.
Proposed Rule 9j-1 sets forth a far-reaching antifraud rule that extends beyond purchases and sales of SBS to cover the exercise of rights and obligations under an SBS as well as activity in the underlying security. Given the breadth of the proposed rule, SBS users may find it difficult to distinguish between potentially violative conduct and permissible activity.
The comment deadline is 45 days after publication in the Federal Register.
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