SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 …

1 SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 Release No. 34-93784; File No. S7-32-10 RIN 3235-AK77 Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps; Prohibition against Undue Influence over Chief Compliance Officers; Position Reporting of Large Security-Based Swap Positions AGENCY: SECURITIES and EXCHANGE COMMISSION . ACTION: Proposed rules. SUMMARY: The SECURITIES and EXCHANGE COMMISSION ( SEC or COMMISSION ) is re-proposing for comment a rule under the SECURITIES EXCHANGE Act of 1934 ( EXCHANGE Act ), which would be a new rule designed to prevent fraud, manipulation, and deception in connection with effecting transactions in, or inducing or attempting to induce the purchase or sale of, any security-based swap. The rule is designed specifically to take into account the unique features of a security-based swap and would explicitly reach misconduct in connection with the ongoing payments and deliveries that typically occur throughout the life of a security-based swap.

2 The COMMISSION also is proposing a new rule, which would make it unlawful for any officer, director, supervised person, or employee of a security-based swap dealer or major security-based swap participant, or any person acting under such person s direction, to directly or indirectly take any action to coerce, manipulate, mislead, or fraudulently influence the security-based swap dealer s or major security-based swap participant s chief compliance officer ( CCO ) in the performance of their duties under the federal SECURITIES laws or the rules and regulations thereunder. Finally, the COMMISSION is using its authority under the EXCHANGE Act to propose for comment a new rule, which would require any person with a security-based swap position 2 that exceeds a certain threshold to promptly file with the COMMISSION a schedule disclosing certain information related to its security-based swap position.

3 DATES: Comments should be received on or before [INSERT DATE 45 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER]. ADDRESSES: Comments may be submitted by any of the following methods: Electronic comments: Use the COMMISSION s internet comment form ( ); or Send an email to Please include File Number S7-32-10 on the subject line; or Paper Comments: Send paper comments to Vanessa A. Countryman, Secretary, SECURITIES and EXCHANGE COMMISSION , 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-32-10. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The COMMISSION will post all comments on the COMMISSION s internet website ( ).

4 Comments are also available for website viewing and printing in the COMMISSION s Public Reference Room, 100 F Street NE, Room 1580, Washington, DC 20549, on official business days between the hours of 10 and 3 Operating conditions may limit access to the COMMISSION s public reference room. All comments received will be posted without change. Persons submitting comments are cautioned that the COMMISSION does not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make publicly available. 3 Studies, memoranda, or other substantive items may be added by the COMMISSION or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the SEC s website.

5 To ensure direct electronic receipt of such notifications, sign up through the Stay Connected option at to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director, at (202) 551-5870, Office of Derivatives Policy, Division of Trading and Markets, SECURITIES and EXCHANGE COMMISSION , 100 F Street NE, Washington, DC 20549-8010. SUPPLEMENTARY INFORMATION: The COMMISSION is re-proposing for comment 17 CFR ( Rule 9j-1 ) under the EXCHANGE Act, which would be a new rule designed to prevent fraud, manipulation, and deception in connection with effecting transactions in, or inducing or attempting to induce the purchase or sale of, any security-based swap. The COMMISSION also is proposing new 17 CFR (c) ( Rule 15Fh-4(c) ) under the EXCHANGE Act, which would make it unlawful for any officer, director, supervised person, or employee of a security-based swap dealer or major security-based swap participant, or any person acting under such person s direction, to directly or indirectly take any action to coerce, manipulate, mislead, or fraudulently influence the security-based swap dealer s or major security-based swap participant s CCO in the performance of their duties under the Federal SECURITIES laws or the rules and regulations thereunder.

6 Finally, the COMMISSION is using its authority under Section 10B(d) of the EXCHANGE Act to propose for comment new 17 CFR ( Rule 10B-1 ), which would require any person with a security-based swap position that exceeds a certain threshold to promptly file with the COMMISSION a schedule disclosing among other things: (1) the applicable security-based swap position; (2) positions in any security 4 or loan underlying the security-based swap position; and (3) any other instrument relating to the underlying security or loan, or group or index of SECURITIES or loans. Proposed Rule 10B-1 includes different reporting thresholds for security-based swaps tied to debt SECURITIES and security-based swaps tied to equity SECURITIES . The COMMISSION would make all filings received pursuant to proposed Rule 10B-1 available to the public, with the goal of increasing transparency and oversight in the security-based swap market.

7 5 I. INTRODUCTION ..8 A. BACKGROUND ..8 B. OBSERVATIONS IN THE CREDIT DEFAULT SWAP MARKET ..14 C. OVERVIEW OF THE PROPOSAL ..18 1. Re-proposed Rule 9j-1 ..18 2. Proposed Rule 15Fh-4(c) ..20 3. Proposed Rule 10B-1 ..20 II. RE-PROPOSED RULE 9J-1: PROHIBITION AGAINST FRAUD, MANIPULATION, AND DECEPTION IN CONNECTION WITH SECURITY-BASED SWAPS ..25 A. PRIOR COMMISSION ACTION ..25 SCOPE OF RE-PROPOSED RULE 9J-1 ..27 1. General Antifraud and Anti-Manipulation Provisions ..27 2. Purchases and Sales in the Context of Security-Based Swaps and Limited Safe Harbor for Certain Limited Actions ..36 3. Prohibition on Price Manipulation ..46 C. LIABILITY UNDER PROPOSED RULE 9J-1 IN CONNECTION WITH THE PURCHASE OR SALE OF A SECURITY ..49 D. PREVENTING UNDUE INFLUENCE OVER CHIEF COMPLIANCE OFFICERS; POLICIES AND PROCEDURES REGARDING COMPLIANCE WITH RE-PROPOSED RULE 9J-1, PROPOSED RULE 10B-1 AND PROPOSED RULE 15FH-4(C).

8 52 E. REQUEST FOR COMMENT ..56 III. PROPOSED RULE 10B-1: POSITION REPORTING OF LARGE SECURITY-BASED SWAP POSITIONS ..62 PROPOSED DEFINITIONS AND THRESHOLDS ..64 1. Reporting Thresholds for Debt Security-Based Swaps (including CDS) ..73 2. Reporting Threshold for Security-Based Swaps on Equity ..76 3. Amendments to a Previously Filed Schedule 10B ..82 B. INFORMATION REQUIRED TO BE INCLUDED IN SCHEDULE 10B ..83 CROSS-BORDER ISSUES ..87 D. STRUCTURED DATA REQUIREMENT FOR SCHEDULE 10B ..92 E. REQUEST FOR COMMENT ..93 IV. GENERAL REQUEST FOR COMMENT ..100 V. PAPERWORK REDUCTION ACT ..101 6 B. PROPOSED USE OF INFORMATION ..104 RESPONDENTS ..105 1. Initial Costs and Burdens ..106 2. Ongoing Costs and COLLECTION OF INFORMATION IS MANDATORY ..111 CONFIDENTIALITY ..111 G. REQUEST FOR COMMENT.

9 111 VI. ECONOMIC ANALYSIS ..112 INTRODUCTION ..112 B. BROAD ECONOMIC CONSIDERATIONS ..113 C. BASELINE ..119 1. Existing Regulatory Frameworks ..119 2. Security-based Swap Data, Market Participants, Dealing Structures, Levels of Security-Based Swap Trading Activity, and Position Concentration ..125 D. CONSIDERATION OF COSTS AND BENEFITS; CONSIDERATION OF BURDEN ON COMPETITION AND PROMOTION OF EFFICIENCY, COMPETITION AND CAPITAL FORMATION ..131 1. Re-proposed Rule 9j-1 and Proposed Rule 15Fh-4(c) ..131 i. Benefits ..131 ii. Costs ..135 2. Proposed Rule 10B-1 ..136 i. Benefits ..136 ii. Costs ..143 iii. Reporting Thresholds ..148 (A) Thresholds for Credit Default Swaps ..149 (B) Thresholds for Non-CDS Debt Security-Based Swaps and Security-Based Swaps on Equity ..161 E. REASONABLE ALTERNATIVES.

10 168 1. Implementing a more prescriptive approach in re-proposed Rule 9j-1 ..168 2. Safe Harbor for Hedging Exposure Arising Out of Lending Activities ..169 3. Mandating that security-based swap data repositories report or publicly disclose positions ..170 4. Adopting position limits ..171 7 5. Threshold Alternatives for Security-Based Swaps Based on Equity and non-CDS Debt ..172 6. Threshold Alternatives for Credit Default Swaps ..174 7. Information Required to be Reported on Schedule 10B ..177 F. REQUEST FOR COMMENT ..178 VII. CONSIDERATION OF IMPACT ON THE ECONOMY ..180 VIII. REGULATORY FLEXIBILITY ACT CERTIFICATION ..180 IX. STATUTORY AUTHORITY ..183 8 A. Background Title VII of the Dodd- frank Wall Street reform and consumer protection Act ( Dodd- frank Act ),1 which established a regulatory framework for the over-the-counter ( OTC ) derivatives market, provides that the COMMISSION is primarily responsible for regulating security-based swaps, while the Commodity Futures Trading COMMISSION ( CFTC ) is primarily responsible for regulating swaps.