The SEC has proposed a new rule to help prevent fraud, manipulation, and deception in connection with security-based swaps.
The rule is proposed under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which generally authorizes the SEC to regulate security-based swaps. The proposal would ensure that market conduct in connection with the offer, purchase or sale of any security-based swap is subject to the same general anti-fraud provisions that apply to all securities. And it also would explicitly reach misconduct in connection with ongoing payments and deliveries under a security-based swap.
The SEC’s rule proposal recognizes that security-based swaps are unlike other securities because they are typically characterized by ongoing payments or deliveries between the parties throughout the life of the swap. Therefore, it is possible that one party may engage in misconduct to trigger, avoid, or affect the value of such ongoing payments. Such fraud may occur separately from the sale, purchase, or offering.
The proposed antifraud rule would apply not only to offers, purchases and sales of security-based swaps, but also explicitly to the cash flows, payments, deliveries, and other ongoing obligations and rights that are specific to security-based swaps. The rule would make explicit the liability of persons that engage in misconduct to trigger, avoid, or affect the value of such ongoing payments or deliveries.