The Securities and Exchange Commission ("SEC" or
"Commission") voted unanimously today to propose rules
and interpretive guidance for the application of its regulations
under Title VII of the Dodd-Frank Act1 to cross-border
security-based swaps ("SBS"). Although the SEC has issued
a number of proposed rules to regulate the SBS markets, none of
them addresses extraterritoriality. Today's comprehensive
proposal describes the regulatory requirements that will apply when
a transaction occurs in part within and in part outside the United
States or involves U.S. persons.2 The proposal is
complex and lengthy (the release, which has not yet been published,
is over 1,000 pages) and addresses ten areas of SBS regulation: (1)
registration of SBS dealers and major SBS participants; (2) data
repositories; (3) clearing agencies; (4) SBS execution facilities;
(5) regulatory reporting; (6) public dissemination of trade data;
(7) mandatory clearing; (8) mandatory trading; (9) indemnification
of data repositories; and (10) antifraud.
Generally, SBS would be subject to SEC regulation if they are
entered into with a U.S. person or otherwise conducted within the
United States. The proposal would define the term "U.S.
person" in a narrow and territorial manner. In addition, the
proposal outlines a "substituted compliance" framework
under which a non-U.S. person could satisfy the SEC's Title VII
requirements in a particular area by complying with comparable
requirements in its home jurisdiction. The SEC expects to undertake
substituted compliance determinations (which may be requested by
affected parties singly or in groups) by looking at comparable
regulatory outcomes, and not through a line-by-line rule
comparison. The Commission intends to review how the jurisdiction
supervises and enforces compliance with its rules when determining
whether to permit substituted compliance. Importantly, the SEC will
retain examination and enforcement authority even if substituted
compliance is allowed. Commissioner Walter called this a
"common sense" approach, and recently confirmed SEC Chair
Mary Jo White noted that market participants need to know which
rules to follow and that this proposal will serve as the road
map.
The SEC developed its proposal, which offers a narrower definition
of U.S. person and a less prescriptive and broader approach to
substituted compliance, in part by learning from the
extraterritoriality proposal of the Commodity Futures Trading
Commission ("CFTC"). As noted by Commissioner Gallagher,
there have been many public reports stating that the CFTC's
proposal is an aggressive attempt to extend its authority into
foreign jurisdiction. In particular, he noted that key non-U.S.
regulators, including from the European Commission, the United
Kingdom, France, and Japan have urged the CFTC not to take action
that would risk fragmenting and damaging the derivatives market,
arguing instead for an approach grounded in principles of
regulatory equivalence.
Comments on the proposal will be due 90 days after its publication
in the Federal Register.
Separately, the SEC also voted unanimously to reopen the public
comment period for all SBS-related rules that have not yet been
finalized. This second round of comments will be due 60 days from
publication of the Commission's order in the Federal Register.
The Commission also expects to publish a policy statement
describing the expected order for all new Title VII SBS rules to
take effect. The SEC anticipates that the public's experience
with the CFTC's implementation of its swap rulemakings will
inform the comments on the outstanding SBS proposals.
Footnotes
1 Public Law 111-203, 124 Stat. 1376 (2010).
2 The SEC's press release is available at http://www.sec.gov/news/press/2013/2013-77.htm.
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