The SEC has unanimously voted to propose a new rule, Exchange Act Rule 9j-1, designed to prevent fraud, manipulation and deception in connection with security-based swaps. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) gave the SEC regulatory authority over security-based swaps and the Commodity Futures Trading Commission regulatory authority over all other swaps. The rule would explicitly reach misconduct that is in connection with the “exercise of any right of performance of any obligation under a security-based swap.”
Proposed Rule 9j-1 would prohibit the same misconduct as Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The rule goes beyond fraud in the purchase or sale of a security-based swap to encompass any misconduct in the deliveries between the parties throughout the life of a security-based swap. Rule 9j-1 would apply to offers, purchases and sales of security-based swaps and also explicitly to the cash flows, payments, deliveries and other ongoing obligations and rights that are specific to security-based swaps. Any misconduct to trigger, avoid or affect the value of such ongoing payments or deliveries would constitute fraud under the proposed rule.
If enacted, proposed Rule 9j-1 would require additional diligence by any security-based swap participant with respect to all ongoing obligations and transactions for the lifetime of all swap positions.
The proposed rule can be found online.