[Federal Register Volume 78, Number 23 (Monday, February 4, 2013)]
[Rules and Regulations]
[Pages 7654-7659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-02191]
[[Page 7654]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 240 and 260
[Release Nos. 33-9383; 34-68753; 39-2489; File No. S7-26-11]
RIN 3235-AL17
Extension of Exemptions for Security-Based Swaps
AGENCY: Securities and Exchange Commission.
ACTION: Interim final rule; extension.
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SUMMARY: We are adopting amendments to the expiration dates in our
interim final rules that provide exemptions under the Securities Act of
1933, the Securities Exchange Act of 1934, and the Trust Indenture Act
of 1939 for those security-based swaps that prior to July 16, 2011 were
security-based swap agreements and are defined as ``securities'' under
the Securities Act and the Exchange Act as of July 16, 2011 due solely
to the provisions of Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act. Under the amendments, the expiration dates in
the interim final rules will be extended to February 11, 2014.
DATES: The amendments are effective February 4, 2013. See Section I of
the SUPPLEMENTARY INFORMATION concerning amendment of expiration dates
in the interim final rules.
FOR FURTHER INFORMATION CONTACT: Andrew Schoeffler, Special Counsel,
Office of Capital Markets Trends, Division of Corporation Finance, at
(202) 551-3860, U.S. Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION: We are adopting amendments to the following
rules: interim final Rule 240 under the Securities Act of 1933
(``Securities Act''),\1\ interim final Rules 12a-11 and 12h-1(i) under
the Securities Exchange Act of 1934 (``Exchange Act''),\2\ and interim
final Rule 4d-12 under the Trust Indenture Act of 1939 (``Trust
Indenture Act'').\3\
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\1\ 15 U.S.C. 77a et seq.
\2\ 15 U.S.C. 78a et seq.
\3\ 15 U.S.C. 77aaa et seq.
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I. Amendment of Expiration Dates in the Interim Final Rules
In July 2011, we adopted interim final Rule 240 under the
Securities Act, interim final Rules 12a-11 and 12h-1(i) under the
Exchange Act, and interim final Rule 4d-12 under the Trust Indenture
Act (collectively, the ``interim final rules'').\4\ The interim final
rules provide exemptions under the Securities Act, the Exchange Act,
and the Trust Indenture Act for those security-based swaps that prior
to July 16, 2011 (``Title VII effective date'') were ``security-based
swap agreements'' and are defined as ``securities'' under the
Securities Act and the Exchange Act as of the Title VII effective date
due solely to the provisions of Title VII of the Dodd-Frank Act.\5\ The
interim final rules exempt offers and sales of security-based swap
agreements that became security-based swaps on the Title VII effective
date from all provisions of the Securities Act, other than the Section
17(a) anti-fraud provisions, as well as from the Exchange Act
registration requirements and from the provisions of the Trust
Indenture Act,\6\ provided certain conditions are met.\7\ The interim
final rules currently expire on February 11, 2013.\8\
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\4\ See 17 CFR 230.240, 17 CFR 240.12a-11, 17 CFR 240.12h-1, and
17 CFR 260.4d-12. See also Exemptions for Security-Based Swaps,
Release No. 33-9231 (Jul. 1, 2011), 76 FR 40605 (Jul. 11, 2011)
(``Interim Final Rules Adopting Release'').
\5\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The provisions of
Title VII generally were effective on July 16, 2011 (360 days after
enactment of the Dodd-Frank Act), unless a provision requires a
rulemaking. If a Title VII provision requires a rulemaking, it will
go into effect ``not less than'' 60 days after publication of the
related final rule or on July 16, 2011, whichever is later. See
Section 774 of the Dodd-Frank Act.
\6\ The category of security-based swaps covered by the interim
final rules involves those that would have been defined as
``security-based swap agreements'' prior to the enactment of Title
VII. That definition of ``security-based swap agreement'' does not
include security-based swaps that are based on or reference only
loans and indexes only of loans. The Division of Corporation Finance
issued a no-action letter that addressed the availability of the
interim final rules to offers and sales of security-based swaps that
are based on or reference only loans or indexes only of loans. See
Cleary Gottlieb Steen & Hamilton LLP (Jul. 15, 2011) (``Cleary
Gottlieb No-Action Letter''). The Cleary Gottlieb No-Action Letter
will remain in effect for so long as the interim final rules remain
in effect.
\7\ The security-based swap that is exempt must be a security-
based swap agreement (as defined prior to the Title VII effective
date) and entered into between eligible contract participants (as
defined prior to the Title VII effective date). See Rule 240 under
the Securities Act [17 CFR 230.240]. See also Interim Final Rules
Adopting Release.
\8\ The interim final rules currently expire on the later of the
compliance dates for final rules we may adopt further defining the
terms ``security-based swap'' and ``eligible contract participant,''
unless we take further action to modify the expiration dates in the
interim final rules. In April 2012, we adopted final rules and
interpretations further defining the term ``eligible contract
participant'' and the compliance date of those rules and
interpretations was July 23, 2012. In July 2012, we adopted final
rules and interpretations further defining the term ``security-based
swap'' and the compliance date of those rules and interpretations is
February 11, 2013. See Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, Release No. 33-9338
(Jul. 18, 2012), 77 FR 48208 (Aug. 13, 2012).
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Title VII amended the Securities Act and the Exchange Act to
include ``security-based swaps'' in the definition of ``security'' for
purposes of those statutes.\9\ As a result, ``security-based swaps''
became subject to the provisions of the Securities Act and the Exchange
Act and the rules and regulations thereunder applicable to
``securities.'' \10\ The interim final rules were intended to allow
security-based swap agreements that became security-based swaps on the
Title VII effective date to continue to trade as they did so prior to
the enactment of Title VII.\11\ We were concerned about disrupting the
operation of the security-based swaps market until the compliance date
for final rules that we may adopt further defining the terms
``security-based swap'' and ``eligible contract participant.'' \12\ We
recognized that until we further defined such terms, market
participants may be uncertain as to how to comply with the registration
requirements of the Securities Act applicable to securities
transactions, the registration requirements of the Exchange Act
applicable to classes of securities, and the indenture provisions of
the Trust Indenture Act.\13\
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\9\ See Sections 761(a)(2) and 768(a)(1) of the Dodd-Frank Act
(amending Section 3(a)(10) of the Exchange Act [15 U.S.C.
78c(a)(10)] and Section 2(a)(1) of the Securities Act [15 U.S.C.
77b(a)(1)], respectively).
\10\ The Securities Act requires that any offer and sale of a
security must be either registered under the Securities Act or made
pursuant to an exemption from registration. See Section 5 of the
Securities Act [15 U.S.C. 77e]. In addition, certain provisions of
the Exchange Act relating to the registration of classes of
securities and the indenture qualification provisions of the Trust
Indenture Act of 1939 (``Trust Indenture Act'') [15 U.S.C. 77aaa et
seq.] also potentially could apply to security-based swaps. The
provisions of Section 12 of the Exchange Act could, without an
exemption, require that security-based swaps be registered before a
transaction could be effected on a national securities exchange. See
Section 12(a) of the Exchange Act [15 U.S.C. 78l(a)]. In addition,
registration of a class of security-based swaps under Section 12(g)
of the Exchange Act could be required if the security-based swap is
considered an equity security and held of record by either 2000
persons or 500 persons who are not accredited investors at the end
of a fiscal year. See Section 12(g)(1)(A) of the Exchange Act [15
U.S.C. 78l(g)(1)(A)]. Further, without an exemption, the Trust
Indenture Act could require qualification of an indenture for
security-based swaps considered to be debt. See 15 U.S.C. 77aaa et
seq.
\11\ See Interim Final Rules Adopting Release.
\12\ Id.
\13\ Id. See also footnote 10 above.
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We also needed additional time and market input to evaluate the
implications for security-based swaps under the Securities Act, the
Exchange Act, and the Trust Indenture Act as a
[[Page 7655]]
result of the inclusion of the term ``security-based swap'' in the
definition of ``security.'' \14\ We understood from market participants
that there were several types of trading platforms being used to effect
transactions in security-based swaps, including security-based swap
agreements that became security-based swaps on the Title VII effective
date, that would likely register as security-based swap execution
facilities (``security-based SEFs'') \15\ and that the use of trading
platforms to effect security-based swap transactions would continue
after the Title VII effective date.\16\ We also understood from market
participants that if parties continued to engage in the same type of
trading activities after the Title VII effective date that they were
engaging in prior to the Title VII effective date with respect to
security-based swap agreements that became security-based swaps on the
Title VII effective date, such activities could raise concerns about
the availability of exemptions from the registration requirements of
the Securities Act and the Exchange Act.\17\ Accordingly, at the time
of adoption of the interim final rules in July 2011, we requested
comment on various aspects of the interim final rules. In particular,
we requested comment on the following:\18\ (i) Whether security-based
swaps are transacted or expected to be transacted following the full
implementation of Title VII in a manner that would not permit the
parties to rely on existing exemptions under the Securities Act and the
Exchange Act; and (ii) whether we should consider additional exemptions
under the Securities Act and the Exchange Act for security-based swaps
traded on a national securities exchange or through a security-based
SEF with eligible contract participants.\19\
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\14\ Id. Prior to the Title VII effective date, security-based
swap agreements that became security-based swaps on the Title VII
effective date were outside the scope of the federal securities
laws, other than the anti-fraud and certain other provisions. See
Section 2A of the Securities Act [15 U.S.C. 77b(b)-1)] and Section
3A of the Exchange Act [15 U.S.C. 78c-1], each as in effect prior to
the Title VII effective date.
\15\ A security-based swap execution facility is a trading
system or platform in which multiple participants have the ability
to execute or trade security-based swaps by accepting bids and
offers made by multiple participants in the facility or system,
through any means of interstate commerce, including any trading
facility, that facilitates the execution of security-based swaps
between persons and is not a national securities exchange. See
Section 3(a)(77) of the Exchange Act [15 U.S.C. 78c(a)(77)]. See
also Section 3D of the Exchange Act [15 U.S.C. 78c-4] and
Registration and Regulation of Security-Based Swap Execution
Facilities, Release No. 34-63825 (Feb. 2, 2011), 76 FR 10948 (Feb.
28, 2011) (``Security-Based SEF Proposing Release'').
\16\ See Interim Final Rules Adopting Release.
\17\ Id. We received comments expressing concern regarding the
implications of including security-based swaps in the definition of
``security.'' Commentators indicated that they were still analyzing
the full implications of such expansion of the definition of
``security,'' but that it would take time. Market participants
requested temporary relief from certain provisions of the Securities
Act and the Exchange Act so that parties could complete their
analysis and submit requests for more targeted relief. Id.
\18\ Id. We also requested comment on these matters in an
earlier proposing release regarding exemptions for security-based
swap transactions involving an eligible clearing agency. See
Exemptions For Security-Based Swaps Issued By Certain Clearing
Agencies, Release No. 33-9222 (Jun. 9, 2011), 76 FR 34920 (Jun. 15,
2011) (``Cleared SBS Exemptions Proposing Release'').
\19\ The term ``eligible contract participant'' is defined in
Section 1a(18) of the Commodity Exchange Act [7 U.S.C. 1a(18)]. The
definitions of the term ``eligible contract participant'' in the
Securities Act and the Exchange Act both refer to the definition of
``eligible contract participant'' in the Commodity Exchange Act. See
Section 5(e) of the Securities Act [15 U.S.C. 77e(e)] and Section
3(a)(65) of the Exchange Act [15 U.S.C. 78c(a)(65)]. The eligible
contract participant definition includes several categories of
persons: financial institutions; insurance companies; investment
companies; commodity pools; business entities, such as corporations,
partnerships, and trusts; employee benefit plans; government
entities, such as the United States, a State or local municipality,
a foreign government, a multinational or supranational government
entity, or an instrumentality, agency or department of such
entities; market professionals, such as broker dealers, futures
commission merchants, floor brokers, and investment advisors; and
natural persons with a specified dollar amount invested on a
discretionary basis. The SEC and the CFTC recently adopted final
rules further defining the term ``eligible contract participant.''
The CFTC staff recently issued a letter, Staff Interpretations and
No-Action Relief Regarding ECP Status: Swap Guarantee Arrangements;
Jointly and Severally Liable Counterparties; Amounts Invested on a
Discretionary Basis; and ``Anticipatory ECPs,'' CFTC Letter No. 12-
17 (Oct. 12, 2012). Such letter does not interpret or further define
the term ``eligible contract participant'' for purposes of Section
712(d) of the Dodd-Frank Act or the federal securities laws. See
Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant'', Release No. 34-
66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012).
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We received three comment letters from three commentators regarding
the interim final rules.\20\ One commentator opposed any exemptions for
security-based swaps, including the exemptions provided in the interim
final rules, but did not provide any explanation for the reason.\21\
The other commentators supported the interim final rules.\22\ These
commentators stated their view that the interim final rules were
necessary and appropriate steps to prevent disruption of the security-
based swaps market and to ensure the orderly implementation of Title
VII.\23\ These commentators provided a description of the security-
based swaps market as it currently functions and how it may function
following the full implementation of Title VII.\24\ These commentators
expressed concerns regarding the availability of exemptions from the
registration requirements of the Securities Act for security-based swap
transactions entered into solely between eligible contract participants
due to the operation of security-based swap trading platforms and the
publication or distribution of other information regarding security-
based swaps.\25\ They indicated that certain communications involving
security-based swaps, such as the publication or distribution of price
quotes, may be available on or through trading platforms on an
unrestricted basis, including following the full implementation of
Title VII.\26\ They also indicated that security-based swap dealers
publish and distribute research regarding security-based swap
transactions that may be broadly disseminated and could be available on
an unrestricted basis.\27\ They were concerned that unrestricted access
to these communications could affect the availability of exemptions
from the registration requirements of the Securities Act, such as the
exemption in Section 4(a)(2), for security-based swap transactions
entered into solely between eligible contract participants.\28\ Based
on their concerns regarding the availability of exemptions from the
registration requirements of the Securities Act, these commentators
requested that we adopt permanent relief from the registration
requirements of Section 5 of the Securities Act for offers and sales of
security-based swaps \29\ solely between eligible contract
[[Page 7656]]
participants.\30\ These commentators also requested relief under the
Exchange Act for offers and sales of security-based swaps solely
between eligible contract participants.\31\ They were concerned that
ambiguity regarding the definition of a ``class'' as applied to
security-based swaps could raise concerns regarding the registration
requirements of Section 12(g) of the Exchange Act.\32\ Finally, these
commentators requested relief from Section 304(d) of the Trust
Indenture Act for security-based swaps entered into solely between
eligible contract participants.\33\ They believed that the protections
of the Trust Indenture Act are not necessary in the context of such
transactions because such transactions involve contracts between two
counterparties who are capable of enforcing obligations under the
security-based swaps directly.\34\
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\20\ See letter from Kenneth E. Bentsen, Jr., Executive Vice
President, Public Policy and Advocacy, The Securities Industry and
Financial Markets Association (``SIFMA''), dated December 21, 2012
(``SIFMA Letter''); letter from Kenneth E. Bentsen, Jr., Executive
Vice President, Public Policy and Advocacy, SIFMA, and Robert
Pickel, Chief Executive Officer, International Swaps and Derivatives
Association (``ISDA''), dated Apr. 20, 2012 (``SIFMA/ISDA Letter'');
and letter from Tom Nappi, dated Jul. 14, 2011 (``Nappi Letter'').
\21\ See Nappi Letter.
\22\ See SIFMA Letter and SIFMA/ISDA Letter.
\23\ See SIFMA/ISDA Letter.
\24\ Id.
\25\ See SIFMA Letter and SIFMA/ISDA Letter.
\26\ See SIFMA/ISDA Letter.
\27\ See SIFMA Letter.
\28\ See SIFMA Letter and SIFMA/ISDA Letter.
\29\ The category of security-based swaps that would be covered
by this request for relief is broader in some ways than the category
of security-based swaps covered by the exemptions provided in the
interim final rules. As noted in footnote 6 above, the exemptions
provided in the interim final rules apply to security-based swaps
that were defined as ``security-based swap agreements'' prior to the
Title VII effective date. That definition of ``security-based swap
agreement'' does not include security-based swaps that are based on
or reference only loans and indexes only of loans.
\30\ See SIFMA Letter and SIFMA/ISDA Letter. These commentators
limited their request for relief to security-based swap transactions
not involving an eligible clearing agency. Id. We recently adopted
exemptions under the Securities Act, the Exchange Act, and the Trust
Indenture Act for security-based swap transactions involving an
eligible clearing agency. See Rule 239 under the Securities Act [17
CFR 230.239], Rules 12a-10 and 12h-1(h) under the Exchange Act [17
CFR 240.12a-10 and 240.12h-1(h)], and Rule 4d-11 under the Trust
Indenture Act of 1939 [17 CFR 260.4d-11]. See also Exemptions for
Security-Based Swaps Issued By Certain Clearing Agencies, Release
No. 33-9308 (Mar. 30, 2012), 77 FR 20536 (Apr. 5, 2012) (``Cleared
SBS Exemptions Adopting Release''). These exemptions do not apply to
security-based swap transactions not involving an eligible clearing
agency, even if the security-based swaps subsequently are cleared in
transactions involving an eligible clearing agency. Id.
\31\ See SIFMA/ISDA Letter.
\32\ Id.
\33\ Id.
\34\ Id.
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Moreover, although not submitted in connection with the interim
final rules, we received two comment letters from four commentators
regarding the proposed exemptions for security-based swap transactions
involving an eligible clearing agency discussing issues arising with
respect to security-based swap transactions not involving an eligible
clearing agency.\35\ One commentator suggested that we provide
permanent exemptions under the Securities Act, the Exchange Act, and
the Trust Indenture Act for security-based swap transactions entered
into between eligible contract participants and effected through any
trading platform similar to the proposed exemptions for security-based
swap transactions involving an eligible clearing agency.\36\ The other
commentators suggested that we provide exemptions under Section 12(g)
of the Exchange Act and the Trust Indenture Act for security-based swap
transactions entered into solely between eligible contract participants
similar to the proposed exemptions for security-based swap transactions
involving an eligible clearing agency.\37\ In adopting the exemptions
for security-based swap transactions involving an eligible clearing
agency, we indicated that these commentator's suggestions were more
appropriate to be considered in connection with the interim final
rules.\38\
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\35\ See letter from Richard M. Whiting, Executive Director and
General Counsel, Financial Services Roundtable, Robert Pickel, Chief
Executive Officer, ISDA, and Kenneth E. Bentsen, Jr., Executive Vice
President, Public Policy and Advocacy, SIFMA, dated Jan. 31, 2012
(``FSR/ISDA/SIFMA Letter''); and letter from Scott Pintoff, General
Counsel, GFI Group Inc., dated Jul. 25, 2011 (``GFI Letter''). These
letters were submitted in response to our request for comment in the
Cleared SBS Exemptions Proposing Release. See footnote 18 above.
\36\ See GFI Letter. This commentator did not provide any
explanation as to why such exemption was needed, including how
security-based swap trading platforms operate, that would enable us
to evaluate whether relief is necessary or appropriate. See Cleared
SBS Exemptions Adopting Release.
\37\ See FSR/ISDA/SIFMA Letter. These commentators requested
relief under the Exchange Act and the Trust Indenture Act, but did
not request relief under the Securities Act. However, two of these
commentators subsequently submitted the SIFMA Letter and the SIFMA/
ISDA Letter to request relief under the Securities Act. See footnote
30 above and accompanying text.
\38\ See Cleared SBS Exemptions Adopting Release.
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We are carefully considering the comments we have received on the
interim final rules as part of our evaluation of the implications for
security-based swaps resulting from the inclusion of the term
``security-based swap'' in the definition of ``security'' under the
Securities Act and the Exchange Act. We also are in the process of
implementing the Title VII statutory provisions governing the
registration and regulation of security-based SEFs. We have proposed
rules to implement these provisions,\39\ but the particular
characteristics of trading platforms that security-based SEFs will be
permitted to operate will not be known until we adopt final rules for
security-based SEFs. We currently are evaluating the comments we
received regarding these proposed rules, but we have not yet adopted
final rules implementing the Title VII statutory provisions governing
the registration and regulation of security-based SEFs. We also are
evaluating such comments in connection with our consideration of the
comments we have received on the interim final rules given
commentators' concerns regarding the operation of security-based swap
trading platforms.
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\39\ See Security-Based SEF Proposing Release.
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We do not expect to complete our evaluation of the implications for
security-based swaps as securities, including our consideration of the
comments we have received on the interim final rules, and implement any
appropriate regulatory relief before February 11, 2013, the current
expiration date of the interim final rules. If the interim final rules
expire before we complete such evaluation, market participants entering
into security-based swap transactions may need to register the offer
and sale of the security-based swaps under the Securities Act. Market
participants also may be required to comply with the registration
provisions of the Exchange Act applicable to classes of securities and
the indenture provisions of the Trust Indenture Act. We believe that
requiring compliance with these provisions while we consider the
comments we have received on the interim final rules likely would
disrupt the operation of the security-based swaps market. Moreover, we
have received a request from a commentator to extend the expiration
dates in the interim final rules.\40\ This commentator stated its
belief that key issues and questions regarding the application of the
federal securities laws to security-based swaps remain unresolved and,
as a result, pending resolution of those issues and questions, all of
the exemptions in the interim final rules are needed to avoid the
potential for significant disruption in the security-based swaps
market.\41\ Thus, while we consider the comments we have received on
the interim final rules, the interim final rules are needed to allow
market participants that meet the conditions of the interim final rules
to continue to enter into security-based swap transactions without
concern that such activities may not comply with the registration
requirements of the Securities Act applicable to securities
transactions, the registration requirements of the Exchange Act
applicable to classes of securities, and the indenture provisions of
the Trust Indenture Act.
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\40\ See letter from Kenneth E. Bentsen, Jr., Executive Vice
President, Public Policy and Advocacy, SIFMA, dated December 20,
2012. This commentator requested that the Commission extend the
expiration dates in the interim final rules to July 17, 2013.
\41\ Id.
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Based on the foregoing, we believe that it is necessary and
appropriate in the public interest and consistent with the protection
of investors to continue providing the exemptions from all provisions
of the Securities Act (other than the Section 17(a) antifraud
provisions), the registration requirements of the Exchange Act
[[Page 7657]]
relating to classes of securities, and the indenture provisions of the
Trust Indenture Act for those security-based swaps that prior to the
Title VII effective date were security-based swap agreements, provided
certain conditions are met. Accordingly, due to the limited time the
interim final rules will be needed, and our consideration of comments
we have received on the interim final rules, we have determined that it
is necessary and appropriate to extend the expiration dates in the
interim final rules to February 11, 2014.\42\ If we adopt further rules
relating to issues raised by the application of the Securities Act and
other federal securities laws to the security-based swaps market before
February 11, 2014, we may determine to alter the expiration dates in
the interim final rules as part of that rulemaking. We only are
extending the expiration dates in the interim final rules; we are not
making any other changes to the interim final rules.
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\42\ The Cleary Gottlieb No-Action Letter will remain in effect
for so long as the interim final rules remain in effect. See
footnote 6 above.
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II. Certain Administrative Law Matters
Section 553(b) of the Administrative Procedure Act \43\ generally
requires an agency to publish notice of a proposed rulemaking in the
Federal Register. This requirement does not apply, however, if the
agency ``for good cause finds (and incorporates the finding and a brief
statement of reasons therefore in the rules issued) that notice and
public procedure thereon are impracticable, unnecessary, or contrary to
the public interest.'' \44\ Further, the Administrative Procedure Act
also generally requires that an agency publish an adopted rule in the
Federal Register 30 days before it becomes effective.\45\ This
requirement does not apply, however, if the agency finds good cause for
making the rule effective sooner.\46\ We, for good cause, find that
notice and solicitation of comment before adopting the amendments to
the interim final rules is impracticable, unnecessary, or contrary to
the public interest. We also find good cause not to delay the effective
date of the amendments to the interim final rules.
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\43\ 5 U.S.C. 553(b).
\44\ Id.
\45\ See 5 U.S.C. 553(d).
\46\ Id.
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For the reasons we discuss throughout this release, we believe that
we have good cause to act immediately to adopt the amendments to the
interim final rules to extend the expiration dates in the interim final
rules. The extension of the expiration dates in the interim final rules
is intended to minimize disruptions and costs to the security-based
swaps market that could occur on the current expiration date of the
interim final rules. The interim final rules are needed to allow market
participants that meet the conditions of the interim final rules to
continue to enter into security-based swap transactions without concern
that such activities will be subject to the registration requirements
of the Securities Act and the Exchange Act and the indenture
qualification provisions of the Trust Indenture Act while we consider
the comments we have received on the interim final rules.
As noted above, we sought and received comments on the interim
final rules.\47\ Although one commentator did not support the interim
final rules, this commentator did not provide any explanation for the
reason. The other commentators supported the interim final rules and
stated their view that the interim final rules were necessary and
appropriate steps to prevent disruption of the security-based swaps
market and to ensure the orderly implementation of Title VII. These
commentators provided detailed responses to our requests for comment on
the interim final rules and expressed concerns regarding the treatment
of certain communications involving security-based swaps under the
Securities Act. These commentators also stated their view that
permanent relief was needed for security-based swap transactions and
requested that we adopt permanent exemptions under the Securities Act,
the Exchange Act, and the Trust Indenture Act, similar to the
exemptions provided in the interim final rules, for security-based swap
transactions entered into solely between eligible contract
participants. We also received comments on the proposed exemptions for
security-based swap transactions involving an eligible clearing agency
that were responsive to the request for comment on the interim final
rules.\48\ We are carefully considering all of these comments as we
evaluate the implications for security-based swaps resulting from the
inclusion of the term ``security-based swap'' in the definition of
``security'' under the Securities Act and the Exchange Act.
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\47\See footnotes 18 and 20 above and accompanying text.
\48\See footnote 35 above and accompanying text.
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Moreover, we are in the process of implementing the Title VII
statutory provisions governing the registration and regulation of
security-based SEFs. As noted above, we have proposed rules to
implement these provisions, but the particular characteristics of
trading platforms that security-based SEFs will be permitted to operate
will not be known until we adopt final rules for security-based SEFs.
We currently are evaluating the comments we received regarding these
proposed rules, but we have not yet adopted final rules implementing
the Title VII statutory provisions governing the registration and
regulation of security-based SEFs. We also are evaluating such comments
in connection with our consideration of the comments we have received
on the interim final rules given commentators' concerns regarding the
operation of security-based swap trading platforms. However, we may not
complete our evaluation of the comments we have received on the interim
final rules or our evaluation of the comments received and our
rulemaking relating to the implementation of the Title VII statutory
provisions governing the registration and regulation of security-based
SEFs before February 11, 2013, the current expiration date of the
interim final rules.
Absent an extension, the interim final rules will expire on
February 11, 2013. The interim final rules have been in place since
July 2011 and market participants have relied on them to enter into
security-based swap transactions. Extending the expiration dates in the
interim final rules will not affect the substantive provisions of the
interim final rules. Extending the expiration dates in the interim
final rules will allow market participants that meet the conditions of
the interim final rules to continue to enter into security-based swap
transactions without concern that such activities will be subject to
the registration requirements of the Securities Act and the Exchange
Act and the indenture qualification provisions of the Trust Indenture
Act while we consider the comments we have received on the interim
final rules. Based on the foregoing and for the reasons we discuss
throughout this release, we find that there is good cause to have the
amendments to the interim final rules effective upon publication in the
Federal Register and that notice and solicitation of comment in advance
of the effectiveness of the amendments to the interim final rules is
impracticable, unnecessary and contrary to the public interest.\49\
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\49\ This finding also satisfies the requirements of 5 U.S.C.
808(2), allowing the rule amendment to become effective
notwithstanding the requirement of 5 U.S.C. 801 (if a Federal agency
finds that notice and public comment are ``impractical, unnecessary
or contrary to the public interest,'' a rule ``shall take effect at
such time as the Federal agency promulgating the rule determines'').
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[[Page 7658]]
III. Economic Analysis
In July 2011, we adopted the interim final rules to provide
exemptions under the Securities Act, the Exchange Act, and the Trust
Indenture Act for those security-based swaps that prior to the Title
VII effective date were security-based swap agreements and are defined
as ``securities'' under the Securities Act and the Exchange Act as of
the Title VII effective date due solely to the provisions of Title VII.
In this release, we are adopting amendments to the interim final rules
to extend the expiration dates in the interim final rules. Extending
the expiration dates in the interim final rules is intended to minimize
disruptions and costs to the security-based swaps market that could
occur on the current expiration date of the interim final rules. The
interim final rules are needed to allow market participants that meet
the conditions of the interim final rules to continue to enter into
security-based swap transactions without concern that such activities
will be subject to the registration requirements of the Securities Act
and the Exchange Act and the indenture qualification provisions of the
Trust Indenture Act while we consider the comments we have received on
the interim final rules.
We are sensitive to the costs and benefits imposed by our rules.
The discussion below attempts to address the amendments to the interim
final rules extending the expiration dates in the interim final rules,
including the costs and benefits of the amendments as well as the
effect of the amendments on efficiency, competition, and capital
formation.\50\
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\50\ Section 23(a)(2) of the Exchange Act requires us, when
adopting rules under the Exchange Act, to consider the impact that
any new rule would have on competition. See 15 U.S.C. 78w(a)(2).
Section 23(a)(2) prohibits us from adopting any rule that would
impose a burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Exchange Act. Id. In addition,
Section 2(b) of the Securities Act and Section 3(f) of the Exchange
Act require us, when engaging in rulemaking where we are required to
consider or determine whether an action is necessary or appropriate
in the public interest, to also consider whether the action will
promote efficiency, competition, and capital formation. See 15
U.S.C. 77b(b) and 15 U.S.C. 78c(f).
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Absent the extension of the expiration dates in the interim final
rules, the offer and sale of those security-based swaps that prior to
the Title VII effective date were defined as security-based swap
agreements may have to be registered under the Securities Act, certain
of those security-based swaps may have to be registered as a class
under the Exchange Act, and the indenture provisions of the Trust
Indenture Act may need to be complied with. We believe that requiring
compliance with these provisions at this time for security-based swap
transactions between eligible contract participants likely would
disrupt and impose unnecessary costs on this segment of the security-
based swaps market.\51\ We also believe that because security-based
swap transactions that qualify for the exemptions under the interim
final rules generally involve individualized negotiations, extending
the expiration date of such exemptions is not likely to impose a
substantial informational cost on the market participants involved in
such transactions. Further, absent the action we are taking in this
release, we believe that certain market participants could incur
additional costs due to compliance with the registration requirements
of the Securities Act and the Exchange Act, as well as compliance with
the provisions of the Trust Indenture Act. It also is possible that
without the extension of the expiration dates in the interim final
rules, a market participant may not continue to participate in these
types of transactions if compliance with these provisions were
infeasible (economically or otherwise). Not extending the expiration
dates in the interim final rules could cause disruptions in the
security-based swaps market. Therefore, we believe that extending the
expiration dates in the interim final rules provides important benefits
to market participants in the security-based swaps market.
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\51\ If market participants are not required to register the
offer and sale of these security-based swaps, they will not have to
incur the additional costs of such registration, including legal and
accounting costs. The availability of the exemptions under the
Securities Act, the Exchange Act, and the Trust Indenture Act also
would mean that market participants would not incur the costs of
preparing disclosure documents describing these security-based swaps
and would not incur the costs of preparing indentures and arranging
for the services of a trustee.
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Because the extension of the expiration dates in the interim final
rules would maintain the status quo with respect to the ability of
market participants to engage in transactions in those security-based
swaps that prior to the Title VII effective date were defined as
security-based swap agreements, we do not believe that our actions in
this release will have an impact on the current state of competition.
We also believe that the extension of the expiration dates in the
interim final rules will promote efficiency by minimizing disruptions
and costs to the security-based swaps market that could occur on the
current expiration date of the interim final rules. To the extent that
those security-based swaps that prior to the Title VII effective date
were defined as security-based swap agreements are used to hedge risks,
including those related to the issuance of the referenced securities
(as occurs with equity swaps and the issuance of convertible bonds, for
example), the extension of the expiration dates in the interim final
rules will prevent potential impairment of the capital formation
process. For example, if registration of these transactions is required
under our existing Securities Act registration scheme, this might
result in the issuers of security-based swaps providing disclosure
regarding their security-based swap positions that might not otherwise
be disclosed to the market. This position disclosure could lead to a
decreased use of security-based swaps by these market participants,
which could potentially affect capital formation to the extent
counterparties might use security-based swaps for hedging their
exposure to issuers of referenced securities.
We recognize that a consequence of extending the expiration dates
in the interim final rules will be the unavailability of certain
remedies under the Securities Act and the Exchange Act and certain
protections under the Trust Indenture Act for an interim period to the
extent that any of these security-based swap transactions otherwise
would be subject to the registration requirements of the Securities Act
and the Exchange Act. Absent the extension of the expiration dates in
the interim final rules, a market participant may have to file a
registration statement covering the offer and sale of the security-
based swaps, may have to register the class of security-based swaps
that it has issued under the Exchange Act, which would provide
investors with civil remedies in addition to antifraud remedies, and
may have to satisfy the applicable provisions of the Trust Indenture
Act. A registration statement covering the offer and sale of security-
based swaps may provide certain information about the market
participants, the security-based swap contract terms, and the
identification of the particular reference securities, issuers, or
loans underlying the security-based swap. As a result of the extension
of the expiration dates in the interim final rules, while an investor
would be able to pursue an antifraud action in connection with the
purchase and sale of security-based swaps under Section 10(b) of the
Exchange Act, it would not be able to pursue civil remedies under
Sections 11 or 12 of the Securities Act. The Commission could
[[Page 7659]]
still pursue an antifraud action in the offer and sale of security-
based swaps under Section 17(a) of the Securities Act.
IV. Paperwork Reduction Act
The interim final rules do not impose any new ``collections of
information'' within the meaning of the Paperwork Reduction Act of 1995
(``PRA''),\52\ nor do they create any new filing, reporting,
recordkeeping, or disclosure reporting requirements. Accordingly, we
did not submit the interim final rules to the Office of Management and
Budget for review in accordance with the PRA.\53\ We requested comment
on whether our conclusion that there are no collections of information
is correct, and we did not receive any comment.
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\52\ 44 U.S.C. 3501 et seq.
\53\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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V. Regulatory Flexibility Act Certification
We hereby certify pursuant to 5 U.S.C. 605(b) that extending the
expiration dates in the interim final rules will not have a significant
economic impact on a substantial number of small entities.\54\ The
interim final rules apply only to counterparties that may engage in
security-based swap transactions in reliance on the interim final rule
providing an exemption under the Securities Act. The interim final rule
under the Securities Act provides that the exemption is available only
to security-based swaps that are entered into between eligible contract
participants, as that term is defined in Section 1a(12) of the
Commodity Exchange Act as in effect prior to the Title VII effective
date, and other than with respect to persons determined by the CFTC to
be eligible contract participants pursuant to Section 1a(12)(C) of the
Commodity Exchange Act. Based on our existing information about the
participants in the security-based swaps market, including our existing
information about participants in the security-based swaps market, we
believe that the interim final rules apply to few, if any, small
entities.\55\ For this reason, the extension of the expiration dates in
the interim final rules should not have a significant economic impact
on a substantial number of small entities.
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\54\ We certified pursuant to 5 U.S.C. 605(b) that the interim
final rules will not have a significant economic impact on a
substantial number of small entities. See Interim Final Rules
Adopting Release. We received no comments on that certification.
\55\ For example, as revealed in a current survey conducted by
Office of the Comptroller of the Currency, 100.0% of credit default
swap positions held by U.S. commercial banks and trust companies are
held by those with assets over $10 billion. See Office of the
Comptroller of the Currency, ``Quarterly Report on Bank Trading and
Derivatives Activities Third Quarter 2012'' (2012).
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VI. Statutory Authority and Text of the Rules and Amendments
The amendments described in this release are being adopted under
the authority set forth in Sections 19 and 28 of the Securities Act,
Sections 12(h), 23(a) and 36 of the Exchange Act, and Section 304(d) of
the Trust Indenture Act.
List of Subjects in 17 CFR Parts 230, 240 and 260
Reporting and recordkeeping requirements, Securities.
Text of the Rules and Amendments
For the reasons set out in the preamble, the Commission amends 17
CFR parts 230, 240, and 260 as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
0
1. The authority citation for Part 230 continues to read, in part, as
follows:
Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h,
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, unless otherwise noted.
* * * * *
Sec. 230.240 [Amended]
0
2. In Sec. 230.240(c), in the first sentence, remove the words ``the
compliance date for final rules that the Commission may adopt further
defining both the terms security-based swap and eligible contract
participant'' and add, in their place, the words ``February 11, 2014''.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
3. The authority citation for part 240 continues to read, in part, as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq., 12
U.S.C. 5221(e)(3), 15 U.S.C. 8302, and 18 U.S.C. 1350, unless
otherwise noted.
* * * * *
Sec. 240.12a-11 [Amended]
0
4. In Sec. 240.12a-11(b), in the first sentence, remove the words
``the compliance date for final rules that the Commission may adopt
further defining both the terms security-based swap and eligible
contract participant'' and add, in their place, the words ``February
11, 2014''.
Sec. 240.12h-1 [Amended]
0
5. In Sec. 240.12h-1(i), in the second sentence, remove the words
``the compliance date for final rules that the Commission may adopt
further defining both the terms security-based swap and eligible
contract participant'' and add, in their place, the words ``February
11, 2014''.
PART 260--GENERAL RULES AND REGULATIONS, TRUST INDENTURE ACT OF
1939
0
6. The authority citation for Part 260 continues to read as follows:
Authority: 15 U.S.C. 77eee, 77ggg, 77nnn, 77sss, 78ll(d), 80b-
3, 80b-4, and 80b-11.
* * * * *
Sec. 260.4d-12 [Amended]
0
7. In Sec. 260.4d-12, in the second sentence, remove the words ``the
compliance date for final rules that the Commission may adopt further
defining both the terms security-based swap and eligible contract
participant'' and add, in their place, the words ``February 11, 2014''.
By the Commission.
Dated: January 29, 2013.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-02191 Filed 2-1-13; 8:45 am]
BILLING CODE 8011-01-P