On June 7th, the SEC announced that it is adopting new Rule 9j-1, which is designed to prevent fraud, manipulation, and deception related to executing or attempting to execute any transaction (including purchasing or selling, inducing or attempting to induce the purchase or sale) in a security-based swap (SBS). The rule takes into consideration the basic features of an SBS and the broad definitions of “purchase” and “sale” under the Exchange Act as they relate to SBSs.
The SEC is also adopting Rule 15fh-4(c), which will prohibit undue influence over the Chief Compliance Officer (CCO) of an SBS dealer or a major SBS participant. The rule is intended to safeguard the independence and objectivity of a CCO by preventing an SBS entity from intentionally coercing, misleading, or interfering with the CCO.
Under Rule 9j-1, the following types of misconduct are unlawful:
- using or attempting to use any device, scheme, or artifice to defraud or manipulate
- making or attempting to make “not misleading” any untrue statement of a material fact, or omitting a material fact necessary to make the statements true, in the light of the circumstances under which they were made
- obtaining money or property through untrue statement of a material fact or any omission of a material fact
- taking part in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person
- attempting to obtain money or property by means of any untrue statement of a material fact or omission of a material fact, or attempting to engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person
- manipulating or attempting to manipulate the price or valuation of any security-based swap or any related payment or delivery
The SEC’s adoption of Rule 9j-1 will also:
- provide two affirmative defenses for actions taken related to binding rights and obligations in written SBS documentation and for transactions by entities when: 1) the individual at the entity making the investment decision was not aware of material nonpublic information, and 2) the entity had implemented reasonable policies and procedures to prevent violations of the rule
- provide that a person cannot escape liability for trading based on possession of material non-public information about a security by purchasing or selling an SBS based on that security and cannot escape liability under the rule by purchasing or selling the underlying security
Finally, Rule 15fh-4(c) will prohibit any officer, director, supervised person, or employee of an SBS entity, or any person acting under that person’s direction, to take any action to coerce, manipulate, mislead, or fraudulently influence the SBS entity's CCO in the performance of their duties under the federal securities laws.
For more information on the final rule, visit the SEC’s website.
The final rule will go into effect 60 days following its publication in the Federal Register.
Source:
SEC Adopts Rules to Prevent Fraud in Connection with Security-Based Swaps Transactions and Prevent Undue Influence over CCOs (sec.gov)
