US Securities and Exchange Commission Grants and Extends Certain Exemptions for Security-Based Swaps

The Securities and Exchange Commission has extended certain exemptions under the Securities Exchange Act of 1934 (Exchange Act) for security-based swap transactions. The relief, which is intended to facilitate the implementation of the security-based swaps regulatory regime under the Dodd-Frank Act, was originally offered by the SEC in 2011 and has been extended four times prior, most recently in 2018.

Through this order, the Commission granted an extension of certain temporary relief provided by the SEC to address the fact that the Dodd-Frank Act revised the definition of “security” in the Exchange Act to include security-based swaps.  The relief, which was previously set to expire on February 5, 2019, will be extended until February 5, 2020.

In addition, the SEC granted a permanent limited exemption from the “penny stock” definition under the Exchange Act for security-based swap transactions between eligible contract participants (ECPs).  The Dodd-Frank Act mandated that the SEC implement business conduct standards for security-based swap dealers and major security-based swap participants (Swap Entities), and, although it noted that these standards were not entirely the same as those required by the penny stock rules, the Commission agreed with commentators that forthcoming final rules in this regard will be sufficient and that additional protections of the SEC’s penny stock rules for security-based swap transactions between ECPs would be duplicative and unnecessary.

The SEC also provided guidance clarifying that a security-based swap with a counterparty that is a municipal entity will not be deemed a “municipal security” under the Exchange Act solely due to the identity of the counterparty.  The Commission argued that Swap Entities are already subject to a comprehensive regulatory regime that includes specific protections for when a Swap Entity is a counterparty to a “special entity” (including municipal entities), and that such an exemption will avoid duplicative and potentially conflicting regulation.

Despite requests from commentators, the SEC declined to offer guidance on the application of rules relating to government securities to security-based swaps with “U.S. government-related entities” and exemptions from Section 31 fees that will apply once regulations relating to real-time public reporting of security-based swap transactions are fully implemented.  However, the SEC invited market participants to provide additional comments on whether the SEC should provide relief or guidance on these and other issues and on the scope of the permanent relief granted by the SEC in this order.

View the Commission’s order.
 
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