SEC Final Rule: Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants
|Reopened Comment Period Deadline||Final Rule Approved||Effective Date|
|July 22, 2013||April 13, 2016||June 27, 2016|
On April 13, 2016, the SEC approved a set of final rules governing business conduct standards for security-based swap dealers and major security-based swap participants (security-based swap entities).
The final rules require security-based swap entities to comply with a range of provisions designed to enhance transparency, facilitate informed customer decision-making, and heighten standards of professional conduct. The rules also establish supervision and chief compliance officer requirements. In addition, the rules address the cross-border application of these requirements and the potential availability of substituted compliance.
The rules' effective date is June 27, 2016. The compliance date is based on the compliance date for registration rules for security-based swap entities.<ref>SEC Adopts Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants. SEC. Retrieved on April 27, 2017.</ref>
Among the provisions of the Dodd-Frank Act are requirements that the CFTC and SEC establish rules and guidelines regarding business conduct standards for swap dealers and major swap participants, futures commission merchants and introducing brokers. Regulators have proposed (and, in some cases, finalized) rules covering both internal and external business conduct standards. Click the links below to learn more about the state of Dodd-Frank rulemakings covering internal and external business conduct.
Under Dodd-Frank, the SEC has jurisdiction over security-based swaps, and the CFTC has jurisdiction over other swaps, except for "mixed swaps" which will be under joint supervision. For more information, visit our Swaps Definitions Regulation page.
The U.S. Securities and Exchange Commission (SEC) held a public meeting on June 29, 2011 focused on the issuance of proposed rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act concerning business conduct standards for security-based swap dealers and major security-based swap participants.
"The proposed rules would require security-based swap dealers and major security-based swap participants to communicate in a fair and balanced manner and make certain disclosures, including conflicts of interest and material incentives to potential counterparties. Additional requirements would be imposed for dealings with special entities, which include municipalities, pension plans, endowments and similar entities."<ref>SEC Proposes Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants. SEC. Retrieved on June 29, 2011.</ref>
The SEC's proposed rules were published in the Federal Register on July 18, 2011.
Summary of the Final Rules
Counterparty requirements for SB-SD/MSPs:
- Verification of whether a counterparty is an eligible contract participant and whether it is a special entity
- Disclosure to the counterparty material information about the security-based swap, including material risks, characteristics, incentives and conflicts of interest
- Providing the counterparty with information concerning the daily mark of the security-based swap, as well as concerning the ability to require clearing of the security-based swap
- Communication with counterparties in a fair and balanced manner based on principles of fair dealing and good faith
- Establishment of a supervisory and compliance infrastructure
- Naming of a chief compliance officer who is required to fulfill the described duties and prepare an annual compliance report.
Swap dealers must also:
- Determine that any recommendations they make regarding security-based swaps are suitable for their counterparties
- Establish, maintain and enforce policies and procedures reasonably designed to obtain and retain a record of the essential facts concerning each known counterparty that are necessary to conduct business with such counterparty
The final rules also include rules on acting as an advisor to, and heightened prtections in transactions with, special entities. The rules also provide a safe harbor under which the parties could agree that a security-based swap dealer is not acting as an advisor to a special entity.
The rules also require security-based swap dealers to comply with rules designed to prevent “pay-to-play” in transactions with municipal entities.
The rules do, however, permit security-based swap entities to reasonably rely on representations to satisfy their various due diligence obligations. Also, the rules do not apply if a counterparty’s identity is not known at a reasonably sufficient time prior to execution of the transaction to permit the compliance with the obligations of the rules.
The final rules require U.S. security-based swap dealers to comply with transaction-level business conduct requirements with respect to all of their transactions, except for certain transactions conducted through such dealer’s foreign branch. Foreign security-based swap dealers are required to comply with transaction-level business conduct requirements with respect to any transaction with a U.S. person (except for a transaction conducted through the foreign branch of a U.S. person) and any transaction that the security-based swap dealer arranges, negotiates, or executes using personnel located in the United States, even if the counterparty is a non-U.S. person.
The final rules also provide for the possibility of substituted compliance. The substituted compliance rule (Exchange Act rule 3a71-6) would allow the Commission to conditionally provide that non-U.S. security-based swap dealers and non-U.S. major security-based swap participants may satisfy business conduct requirements under the Exchange Act by complying with foreign requirements that the Commission has determined to be comparable.
For more on cross-border application, see SEC Final Rule: Cross-Border Security-Based Swap Rules Regarding Activity in the United States, February 2016.
Related Document: Final Rule as Published in the Federal Register