SEC Adopts Extension of Exemptions for Security-Based Swaps
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, (enacted July 21, 2010) generally became effective on July 16, 2011. Title VII provisions requiring a rulemaking, however, become effective not less than 60 days after publication of a related final rule, or on July 16, 2011, whichever is later. Title VII contains certain provisions requiring a rulemaking, including provisions amending the Securities Act and the Exchange Act to include "security-based swaps" under the definition of "security" for purposes of those statutes.
On July 1, 2011, the SEC adopted interim final Rule 240 under the Securities Act, interim final rules 12a-11 and 12h-l(i) under the Exchange Act, and interim final rule 4d-12 under the Trust Indenture Act (collectively, the "Interim Final Rules"). The SEC adopted the Interim Final Rules to provide a temporary exemption for "security-based swap agreements" that became "securities-based swaps" at the Title VII effective date and subsequently fell under the definition of "securities" in the amended Securities Act and Exchange Act.
The SEC has determined that it is necessary and appropriate to adopt an extension to the expiration dates of the Interim Final Rules from February 11, 2013 to February 11, 2014. The amendments to the expiration dates of the Interim Final Rules became effective on February 4, 2013.
The Interim Final Rules exempt offers and sales of security-based swap agreements that became security-based swaps under Title VII from all provisions of the Securities Act other than the Section 17(a) anti-fraud provisions, all registration provisions of the Exchange Act, and all provisions of the Trust Indenture Act (provided certain conditions apply in each case).
The Interim Final Rules are intended to allow security-based swap agreements that became security-based swaps under Title VII to continue to trade in the normal course, as they did prior to the enactment of Title VII, until the SEC adopts final rules further defining "security-based swap" and "eligible contract participant."
Adoption of Amendments to the Expiration Dates of Interim Final Rules
The SEC has explained that it needs more time and market input to evaluate the effects of including "security-based swap" in the definition of "security." Market participants have informed the SEC that there are several types of trading platforms being used to effect security-based swap transactions, including security-based swaps that would potentially register as security-based swap execution facilities ("Security-Based SEFs"). Furthermore, market participants informed the SEC that if security-based swap trading continued after the enactment of Title VII in the same way that security-based swap trading occurred before the enactment of Title VII, there could be concerns about available exemptions from the Securities Act and the Exchange Act.
At the time the SEC adopted the Interim Final Rules in July 2011, the SEC requested comment on the rules. Particularly, the SEC was concerned about: (i) whether security-based swap transactions would continue after implementation of Title VII in a way that would not permit reliance on exemptions under the Security Act and the Exchange Act; and (ii) whether the SEC should consider additional exemptions under the Securities Act and the Exchange Act for security-based swaps or Security-Based SEFs with eligible contract participants.
The SEC received three comments on the Interim Final Rules. While one commentator did not support the Interim Final Rules, the commentator gave no reasoning. The two other commentators supported the Interim Final Rules, finding that the Interim Final Rules were necessary to prevent disruption of the security-based swaps market. These two commentators also requested that the SEC adopt permanent exemptions under the Securities Act, the Exchange Act, and the Trust Indenture Act for security-based swaps between eligible contract participants.
Additionally, the SEC received related comments on SEC proposed exemptions for security-based swap transactions involving an eligible clearing agency and proposed rules to implement provisions governing the registration and regulation of Security-Based SEFs. The SEC has yet to adopt final rules implementing the Title VII provisions regarding either transactions involving an eligible clearing agency or registration and regulation of Security-Based SEFs.
In light of the comments on the Interim Final Rules, the comments on the proposed exemptions for security-based swap transactions involving an eligible clearing agency, and the proposed rules to implement provisions governing the registration and regulation of Security-Based SEFs, the SEC found good cause to adopt the extension of the expiration date of the Interim Final Rules to February 11, 2014. The extension does not affect the substantive provisions of the Interim Final Rules.
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 The Interim Final Rules only apply to security-based swap agreements as defined prior to the enactment of Title VII. This definition does not include security-based swaps that are based on or reference only loans and indexes only of loans. Swaps based on or reference only loans and indexes only of loans, therefore, will not fall under the definition of "securities" in the Securities Act, the Exchange Act, or the Trust Indenture Act and the Interim Final Rules do not apply to these swaps. The definition does include swap agreements of which a material term is based on the price, yield, value, or volatility of any security or group or index of securities, or any interest therein. The Interim Final Rules apply as an exemption from certain parts of the Securities Act, the Exchange Act, and the Trust Indenture Act for these agreements.
 Exemptions for Security-Based Swaps Issued By Certain Clearing Agencies, Release No. 33-9308 (Mar. 30, 2012), 77 FR 20536 (Apr. 5, 2012).
 Registration and Regulation of Security-Based Swap Execution Facilities, Release No. 34-63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011).
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