SEC Proposes Rule Regarding Communications Involving Security-Based Swaps Entered Into Solely by Eligible Contract Participants


On September 8, 2014, the Securities and Exchange Commission proposed a rule under the Securities Act of 1933 to provide that the publication or distribution of price quotes relating to security-based swaps that may be purchased only by eligible contract participants and are traded or processed through a national securities exchange or a security-based swap execution facility will not be deemed to constitute offers of such security-based swaps (or any guarantees of such security-based swaps), for the purposes of the registration requirements of the Securities Act.  Comments on the proposed rule are due on or before 60 days from the date of its publication in the Federal Register.


Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) gives the  SEC and the CFTC extensive authority to regulate over-the-counter derivative products, markets and  market participants. Under Title VII of Dodd-Frank, the SEC has authority over security-based swap  (“SBS”) transactions and participants in the SBS market and the CFTC has authority over swap  transactions, swap markets and swap market participants.

Among other matters, Title VII includes SBSs in the definition of “security” for the purposes of the  Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange  Act”). Title VII also amended Section 5 of the Securities Act to make it unlawful, unless a registration  statement is in effect, to offer to sell, offer to buy or purchase or sell1 an SBS to any person who is not an  “eligible contract participant” (“ECP”).2  Any offer and sale of an SBS between ECPs may either be  registered under the Securities Act or be made pursuant to an exemption from the registration  requirements of the Securities Act. Many SBS transactions today are entered into in reliance on the private placement exemption from the registration requirements of the Securities Act provided by  Section 4(a)(2) thereunder. Compliance with the Section 4(a)(2) exemption has been interpreted by the  SEC and the courts to require that any offer or sale of the security made thereunder not be made by  means of general solicitation or advertising.

Title VII also amends the Exchange Act to govern the regulation of SBS execution facilities (“SBSEFs”),  including by adding provisions relating to access to SBSEFs and the availability of bid, offer or other price  information relating to SBSs. Proposed rules by the SEC with respect to SBSEFs and national securities  exchanges generally require these trading platforms to make price quotes involving SBSs (“SBS price  quotes”) available to all market participants. However, unrestricted publication or distribution of SBS price  quotes could potentially be considered a general solicitation for the SBS transaction for purposes of  Section 4(a)(2) and thereby render the Section 4(a)(2) exemption unavailable. The SEC has issued the  proposed rule (the “Proposed Rule”) to address this potential issue.3


Under the Proposed Rule, the publication or distribution of SBS price quotes would not be deemed to  constitute an offer, an offer to sell, or a solicitation of an offer to buy or purchase such SBSs (or any  guarantees of such SBSs4 ), for the purposes of the registration requirements of the Securities Act, if:

  • the SBSs may be purchased only by ECPs; and 
  • the SBSs are traded or processed on or through a trading system or platform that is registered as either a national securities exchange or as an SBSEF, or is exempt from registration as an SBSEF pursuant to a rule, regulation, or order of the SEC (an “eligible trading platform”).

The Proposed Rule would apply to the initial publication or distribution of the SBS price quotes on eligible  trading platforms and to any subsequent republication or redistribution of the SBS price quotes on or  through other media, such as on-line information services. The exemption provided by the Proposed  Rule would apply whether or not the SBS transaction is cleared through an eligible clearing agency.

The SEC noted that the SBS price quotes covered by the Proposed Rule could take a number of forms,  such as indicative quotes, executable quotes, bids and offers and other pricing information. The SEC  expressly declined to define the specific types of SBS price quotes covered by the Proposed Rule in  order to maintain flexibility as organized markets for SBS trading continue to develop through the ongoing  implementation of Title VII.5

According to the SEC, the Proposed Rule is designed to permit SBS transactions between ECPs to  continue to be able to rely on available exemptions from the registration requirements of the Securities  Act, without unintended consequences from the unrestricted public dissemination of SBS price quotes by  SBSEFs and national securities exchanges that trade or process SBS transactions. The unrestricted  access to such SBS price quotes on eligible trading platforms would, according to the SEC, provide increased market transparency by providing all investors with the same information on the pricing of SBS  transactions.

According to the SEC, other than excluding the publication or distribution of SBS price quotes from the  definition of an “offer” under Section 5 of the Securities Act, the Proposed Rule does not affect the  availability of any exemption from the registration requirements of the Securities Act. Market participants  would therefore still need to determine whether an exemption from the registration requirements of the  Securities Act is available with respect to an SBS transaction. The SEC also stressed that the Proposed  Rule does not limit the scope or applicability of antifraud provisions of the federal securities laws relating  to oral or written material misstatements and omissions in the offer and sale of securities, including SBSs.

The SEC had received comments that the Proposed Rule should also extend to SBS communications  that could be characterized as “research.” The SEC, citing a lack of information on the types of  communications that could constitute “research,” declined to so extend the Proposed Rule. However, the  SEC has requested comment on this topic.

The SEC also declined to adopt:

  • a broad-based exemption from registration under Section 12(g) of the Exchange Act for types of  SBS transactions that could be deemed to be of the same class on the basis that it was not clear  how the SBS market would develop once Title VII was fully implemented; and
  • a broad-based exemption from the Trust Indenture Act of 1939 for SBS transactions on the basis  that the Trust Indenture Act already has an exclusion from registration for transactions exempt  under Section 4(a)(2).

The SEC, however, requests comments on both topics.