The SEC on Nov. 2, 2020, issued an order that extends temporary exemptions for derivatives from certain requirements of the Securities Exchange Act of 1934.
The commission initially planned to vote publicly on Nov. 4 on the exemptions along with another rulemaking item. But the SEC on Nov. 2 cancelled the meeting.
The exemptions are detailed in Release No. 34-90308, Order Granting Exemptions from Sections 8 and 15(a)(1) of the Securities Exchange Act of 1934 and Rules 3b-13(b)(2), 8c-1, 10b-10, 15a-1(c), 15a-1(d) and 15c2-1 Thereunder in Connection with the Revision of the Definition of "Security" to Encompass Security-Based Swaps and Determining the Expiration Date for a Temporary Exemption from Section 29(b) of the Securities Exchange Act of 1934 in Connection with Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants.
The commission has been issuing orders to temporarily exempt swaps from Section 8 and Rules 8c-1, 10b-16, 15a-1, 15c2-1 and 15c2-5 of the Exchange Act.
Dodd-Frank, which mandated the SEC to set up a framework to regulate over-the-counter derivatives, revised the definition of “security” from the Exchange Act to include swaps, and the exemption has given the SEC extra time to consider how expanding the definition of security will affect the markets and market regulation. Sec. 7 of PL111-203
The SEC first issued the temporary exemptions in July 2011 and issued several more to extend the exemptions. The latest one is set to expire on Nov. 5.
The SEC has finalized much of the mandated derivatives rules from the Dodd-Frank Act, including the registration and regulatory regime for swap dealers and major swap participants, but they “raised certain complex questions that required further consideration.”
The 2011 order maintained the regulatory status quo during the implementation process of the Dodd-Frank Act.
In 2014, the Commission extended the expiration dates for the 2011 temporary exemptions in Release No. 34-71485, Order Extending Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With the Revision of the Definition of “Security” to Encompass Security-Based Swaps, and Request for Comment.
The 2014 order distinguished between the temporary exemptions related to pending swap rulemakings—“Linked Temporary Exemptions”—the expiration dates for which were extended to the compliance dates for the specific rulemakings to which they were “linked” and the temporary exemptions that generally were not directly related to a specific rulemaking—“Unlinked Temporary Exemptions.”
“This approach was designed to provide the Commission with flexibility, while its Dodd-Frank Act rulemaking is still in progress, to determine whether continuing relief should be provided for any of the Unlinked Temporary Exemptions,” the SEC said. In 2018, the agency extended the Unlinked Temporary Exemptions until Feb. 5, 2019. At the same time, the SEC also asked for comments about whether continuing exemptive relief was necessary beyond Feb. 5, 2019.
In 2019, the market regulator also provided a new exemption from the definition of “penny stock” for security-based swap transactions between eligible contract participants (ECPs). The commission’s decision follows a request by the Securities Industry and Financial Markets Association (SIFMA), which noted that it is not always clear that a financial swap is not a “penny stock.” SIFMA also said that the requirements applicable to penny stocks are designed to apply to cash market securities transactions, not over-the-counter derivatives.
In addition, the commission extended the Unlinked Temporary Exemptions until Feb. 5, 2020.
But in January, the SEC received a letter from SIFMA to make permanent three aspects of the Unlinked Temporary Exemptions: limitation on hypothecation of securities carried for the account of a customer, broker-dealer disclosure requirements related to extensions of credit and certain limitations on an over-the-counter derivatives dealer’s activities.
In September, SIFMA followed up with another letter, supplementing its previous requests on three aspects of the Unlinked Temporary Exemptions as well as three additional aspects of the Linked Temporary Exemptions. SIFMA requested that the SEC make permanent three aspects of the Linked Temporary Exemptions: an exemption from the broker registration for a foreign broker; an exemption from the broker registration for a dealer that arranges, negotiates, or executes a swap with an eligible contract participant on behalf of a majority-owned affiliate swap dealer; and an exemption from certain confirmation requirements for a broker that negotiates or executes a swap on behalf of a majority-owned affiliate swap.
The compliance date for registration and regulation of swaps is Oct. 6, 2021. And the latest order in Release No. 34-90308 addresses SIFMA’s requests.
The SEC is extending exemptions in response to five of six requests. The commission is not extending the exemptions from broker-dealer disclosure requirements related to extensions of credit.
The other rulemaking item that the SEC was previously planning to consider during an open meeting was related to cross-border applications of the commission’s rules on swaps.
“The Commission will consider whether to issue a Notice, pursuant to Exchange Act Rule 0-13, seeking public comment on an application made by a foreign financial regulatory authority, pursuant to Exchange Act Rule 3a71-6, for a substituted compliance determination, and on a proposed order providing for the conditional availability of substituted compliance in connection with the application,” the SEC originally announced last week.
Substituted compliance for foreign swap transactions means that the SEC takes into account other countries’ regulatory regimes.
The commission has yet to issue the notice for comment as of Nov. 3 afternoon.
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