Client Alert: SEC Publishes Cross-Border Release and Reopens Comment Period for Dodd-Frank Rules

    2 May 2013

    On May 1, 2013, the Securities and Exchange Commission (SEC or Commission) held an open meeting to consider:

    1. Whether to propose new rules and interpretive guidance for cross-border security-based swap (SBS) activities and whether to re-propose Regulation SBSR (on reporting) and certain rules and forms relating to the registration of SBS dealers and major SBS participants; and
    2. Whether to reopen the comment periods and receive new information for all rules not yet finalized, stemming from Title VII of the Dodd-Frank Act, and the Commission’s policy statement describing the order in which it expects these new rules to take effect.

    The SEC unanimously approved the new proposed rule and interpretive guidance for cross-border SBS activities and the re-proposal of Regulation SBSR, which is almost 1,000 pages and provides 90 days to comment on more than 100 questions. The SEC also voted unanimously to approve reopening for 60 days the comment period for rules not yet finalized and the Commission’s policy statement describing the order in which it expects these new rules to take effect.

    Chairwoman White’s first open meeting

    Chairwoman Mary Jo White stated that the cross-border guidance represents the final key component of the new regulatory regime for the derivatives market. She stated that the SEC should “take a robust and workable approach to this particularly complex and predominantly global market.” She added that, because of the global nature of the market, the U.S. rules should avoid an “all-or-none” approach and avoid a situation where overlapping regulatory oversight could lead to “conflicting or costly duplicative regulatory requirements.”

    Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants

    Office: Division of Trading and Markets
    Staff: Brian Bussey, Matt Daigler, Wenchi Hu, Richard Gabbert, Richard Grant

    Brian Bussey provided a brief overview of the proposed rule. He noted the rule recognizes that the SEC is not standing alone as a regulator in the derivatives space and is a result of consultation with, and examination of, the Commodity Futures Trading Commission (CFTC) proposed guidance. He expressed hope that the SEC proposal will advance the international dialogue and that Europe will follow suit in proposing cross-border guidance in the “very near future.” In drafting the proposed rule, Mr. Bussey noted that the SEC was guided by the Dodd-Frank Act goals, the global nature of the market, and the effects of the proposal on efficiency, competition, and capital formation.

    Mr. Bussey explained that the proposed rule was drafted with a “narrow territorial approach,” trying to simplify definitions and recommending broad substituted compliance. He stated that the definitions are not just focused on the location of the party, but also the location of the conduct, driven by concerns regarding the future competiveness of U.S. firms. For example, he noted the SEC did not propose a requirement for guaranteed foreign subsidiaries of U.S.-based companies to register as dealers when they conduct business outside of the United States. According to Mr. Bussey, the proposal focuses on 10 main areas, including: dealer and major participant regulation; data regulation; SBS registration issues; Swap Execution Facility (SEF) registration issues; reporting issues; mandatory clearing; mandatory trade execution; data access; indemnification provisions; and fraud issues.

    Craig Lewis from the SEC staff noted that the SEC completed a substantial cost-benefit analysis on the rule, looking at its effects on competition, efficiency, and capital formation. He added that the rule is designed to increase price transparency and reduce unnecessary duplication in regulations.

    Commissioner Walter stated that SBS and other derivatives trade continuously in today’s global market so cross-border rules are at the heart of U.S. regulation. She noted that the SEC took a “common sense” approach in the proposed rule. For example, she stated that substituted compliance is a key component that allows for flexibility rather than a line-by-line comparison of the rules in different jurisdictions. She added that the Commission will retain examination and enforcement authority even after a substituted compliance decision is made. At the Commissioner’s request, Mr. Bussey provided additional detail regarding substituted compliance, explaining that the rule allows a person or group to request a substituted compliance determination. With regard to the process, he noted that the SEC would work with the requesters and government officials in the jurisdiction at hand to consider the request. In making a substituted compliance determination, he noted the SEC may open the request for public comment.

    Commissioner Aguilar expressed some concerns regarding the rule’s “heavy” reliance on substituted compliance, especially with regard to external business conduct standards. He warned against passing a rule that would deny investors the protections of U.S. laws, adding it could lead to regulatory arbitrage and risk contagion. For example, he stated that the rule assumes that the failure by a foreign subsidiary would not affect the U.S. parent. He added that the rule also “relies heavily” on counterparty representations as to whether swaps are executed within the United States, and questioned whether parties should be required a higher “reasonable care” standard with regard to representations made.

    Commissioner Paredes expressed “significant reservations with the proposal.” He noted the rule would extend the reach of Title VII of the Dodd-Frank Act to international transactions outside of the United States. As a result, he cautioned that because of the rule, foreign market participants may reduce their presence in the U.S. market or may decide to transact less with U.S. persons overseas, or the rule may lead to regulatory retaliation if it is viewed as an undue regulatory encroachment. He spoke about the need to rely on substituted compliance and “show proper regard” for the judgments made by other regulators.

    Commissioner Gallagher stated that the proposed rule is only the first step to address how to implement cohesive regulation in the United States and abroad. He noted that the CFTC rule has been criticized as extending the reach of U.S. regulation and thus, regulators are watching closely what the SEC decides.

    Reopening of Comment Periods for Certain Rulemaking Releases and Policy Statement Applicable to Security-Based Swaps Proposed Pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act

    Office: Division of Trading and Markets
    Staff: Carol McGee, Ann McKeehan, Jason Williams

    Mr. Bussey gave a brief description of the staff recommendation to reopen for 60 days the comment period for not yet finalized rules regarding Title VII of the Dodd-Frank Act and the Commission’s policy statement describing the order in which it expects these new rules to take effect. He noted that re-opening the comment period will allow the public to comment on issues such as the effect of the rules, the costs and benefits of the rules, and the rules in the context of the CFTC’s swaps regulation.