Thursday, July 10, 2014

SEC Adopts Final Cross-Border Security-Based Swap Rules

Author: David Schwartz J.D. CPA

On June 25, 2014, the Securities and Exchange Commission finalized new rules and interpretive guidance addressing the cross-border application of a security-based swap regulatory framework called for under the Dodd-Frank Act.  These final rules are the first of a series of rules and guidance on cross-border security-based swap activities for market participants.  According to the SEC, these new rules will be key to finalizing the remaining outstanding proposals on security-based swaps.  

The rules finalized on June 25 focus primarily on when a cross-border transaction must be counted toward the requirement to register as a security-based swap dealer or major security-based swap participant.  The rules also address the scope of the SEC’s cross-border anti-fraud authority. 

Notably, in this release, the SEC can be seen to be actively moving toward a “substituted compliance” model with respect to cross-border swaps transactions. According to the SEC’s press release:  

The SEC also adopted a procedural rule regarding the submission of “substituted compliance” requests.  This rule represents a first step in the SEC’s efforts to establish a framework to address the possibility that market participants may be subject to more than one set of comparable regulations across different jurisdictions as a result of their cross-border swaps activity.  If the SEC were to grant a request for substituted compliance, it would permit market participants to satisfy certain Title VII security-based swap regulatory requirements by complying with comparable non-U.S. rules.

This move toward a substituted compliance approach may have some multinational swaps participants and dealers breathing a sigh of relief.  

The new cross-border rules also have some teeth to them, as well.  The final rules provide for anti-fraud enforcement authority; however, the release language is clear that the authority only applies when the fraudulent activity occurs or has effects in the United States.