Whether you are a novice or an experienced investor, knowing what signs to look out for in broker swaps can save you from a lot of grief. It is important to remember that broker swaps are complex transactions and you should always be careful of fraud signs, especially when it comes to your money.
Re-proposed Rule 9j-1(a)(3)
Earlier this year, the Securities and Exchange Commission (SEC) proposed a new rule to protect against broker swaps fraud. The new rule, which would be Rule 9j-1(a)(3), would prohibit a number of acts in connection with security-based swaps. These acts include fraudulent inducements, price manipulation, and valuation manipulation.
The rule applies to acts that affect certain rights and obligations under a security-based swap. In addition, the rule makes it unlawful for a person to use a swap to gain exposure to a security.
The proposed rule reflects existing language in the Exchange Act. The rule would also include an additional safe harbor, which applies to actions taken by a counterparty when the counterparty is aware of material non-public information. In addition, the rule would not restrict the scope of other SEC anti-fraud provisions. The SEC’s safe harbors would cover actions taken when a person knows of MNPI, such as a counterparty’s actions during a portfolio compression exercise.
The rule also includes a provision modeled after Section 20(d) of the Exchange Act. It would make it unlawful for a person to manipulate the chief compliance officer of a swap issuer. The rule would also expand the liability of insider trading.
The re-proposed rule also applies different standards to anti-fraud provisions. The rule would prohibit manipulating cash flows, payments, and ongoing obligations and rights associated with security-based swaps. It would also make it unlawful for market participants to manipulate the price, valuation, or performance of a security-based swap.
Requirements for conducting a security-based swap transaction
Currently, the regulatory regime governing Security-Based Swap activity is largely controlled by the Securities and Exchange Commission (SEC). This is in contrast to the Commodity Futures Trading Commission’s (CFTC) jurisdiction over swaps.
A security-based swap is a transaction in which a security, equity, or debt security is repurchased or borrowed. It is used to mitigate the risk associated with financing activities.
There are two major groups of participants in security-based swaps. One group is the security-based swap dealer. This group is defined in Section 3(a)(71) of the Securities Exchange Act of 1934. The other is a foreign branch of a U.S. bank.
A security-based swap dealer is a participant who engages in security-based swap transactions with a counterparty. A security-based swap dealer must meet certain requirements. These include having a chief compliance officer who is responsible for overseeing the security-based swap dealer’s compliance with federal laws. This person also must be able to defend against claims of violations.
The SEC has proposed rules that significantly alter the regulation of security-based swaps. These rules include new Rule 10B-1, which requires that a large security-based swap position be disclosed promptly. It also includes new Rule 9j-1, which requires greater caution between counterparties. It also includes new Rule 15Fh-4, which is a regulation in the form of a rule that protects a security-based swap dealer’s independence.
Standard of care for broker swaps
Several federal agencies have taken a crack at defining and testing a standard of care for broker swaps fraud. The Securities and Exchange Commission (SEC) is at the helm of the effort. The requisite standard of care is a daunting undertaking for many firms but a few notable exemplars have opted to engage in the tamper proofing process. The SEC has issued a series of rules and guidance to help firms navigate the minefield of a regulatory environment that has been slammed by a slew of events including the Dodd-Frank Act and the egregious actions of the Fed and Treasury. This tamer duo has left many firms looking for an escape hatch. The SEC has also tapped several firms to advise on the best practices to employ in the coming tamper proofing effort. As of last week, the SEC has a full slate of meetings on the books. Several firms have met with representatives from the SEC’s Fraud Examination Unit, a division that has received the dubious honor of being the agency of record for broker swaps fraud.