On December 15, 2021, in a 3-2 vote along party lines, the U.S. Securities and Exchange Commission (SEC) proposed Rule 10B-1 (the Proposal) that would create a far-reaching and complex reporting regime for large positions in security-based swaps (SBS).1 The Proposal is meant to provide the SEC and the public with information about large positions in SBS and related reference securities where the SEC believes that those positions, in the event of a default, could have an effect on the markets, counterparties, or other market participants. While the Proposal stems from the SEC’s authority under Section 763(h) of the Dodd-Frank Wall Street Reform and Consumer Protection Act to require reporting of large SBS positions, it was also more recently motivated by the March 2021 default of Archegos Capital Management due to total return swap positions.
The mechanics of the Proposal would create a complex, multistep framework for determining when SBS positions and positions in related reference securities must be counted toward relevant reporting thresholds and who has an obligation to report when those applicable reporting thresholds are met or exceeded. The aspect of the Proposal that market participants may find most expansive (and also a departure from the beneficial ownership reporting regime under Section 13(d) of the Securities Exchange Act of 1934 (Exchange Act)) is that Rule 10B-1 would require reporting by any person who controls, is controlled by, or is under common control with a person who directly or indirectly is the owner or seller of a reportable SBS position. Market participants would apparently therefore have to look up, down, and side to side in a corporate family from any such person who has a reportable SBS position to determine who else must report. This could potentially sweep in all SBS positions within a corporate group — such as a private fund complex.
Also unlike the rules under the Section 13(d) beneficial ownership reporting regime, to which the SEC routinely compares this SBS reporting regime, Rule 10B-1 does not expressly define what is meant by an “owner or seller” of a reportable SBS position, or a “group” of such owners/sellers, creating additional confusion as to which persons may be required to report.
As proposed, Rule 10B-1 would also impose a very fast “next business day” reporting obligation that market participants may find difficult to meet — particularly given the complexity of the analysis required to determine whether a reportable position exists and, if so, which parties have reporting obligations.
The comment period will remain open for 45 days after the proposal is published in the Federal Register.
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