SEC Adopts Business Conduct Rules and Chief Compliance Officer Requirements for Swap Dealers and Major Security-Based Swap Participants

On April 13, the Securities and Exchange Commission voted to adopt final rules (the “Final Rules”) implementing business conduct standards and chief compliance officer requirements for security-based swap dealers and major security-based swap participants (collectively, “Swap Entities”). Authority for the SEC to adopt the Final Rules is grounded in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Final Rules are the SEC equivalent for security-based swaps of the business conduct rules for swaps adopted by the Commodity Futures Trading Commission in 2012.

According to the SEC, the Final Rules are designed to improve transparency, facilitate informed decision making and heighten standards of professional conduct by Swap Entities. Like the equivalent CFTC rules, the Final Rules impose obligations on Swap Entities in many areas, including: (1) antifraud; (2) counter party confidential information; (3) know your customer and counter party verification; (4) daily mark, material transaction and clearing disclosure requirements; (5) fair and balanced communications; (6) transactions with and advisory services to Special Entities (as defined in the Final Rules); (7) political contributions to governmental Special Entities; (8) written policies and procedures; and (9) chief compliance officer requirements (“CCO Requirements”).

Although the SEC endeavored to harmonize its business conduct and CCO Requirements with those of the CFTC, there are subtle but important differences. Watch for these differences to be outlined in a forthcoming Client Advisory. Additionally, the SEC has provided (1) simpler guidance than the CFTC for determining when the Final Rules will apply to a security-based swap involving at least one non-US person, and (2) a set of rules for the supervision of employees engaged in security-based swap activities that has no equivalent in the CFTC rules.

The Final Rules will go into effect on June 27. The compliance date for most of the New Rules will not occur until entities are required to register as Swap Entities.

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