83 FR 5665 - Order Extending Until February 5, 2019 Certain 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

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 27 (February 8, 2018)

[Federal Register Volume 83, Number 27 (Thursday, February 8, 2018)]
[Notices]
[Pages 5665-5668]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-02498]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82626; File No. S7-27-11]


Order Extending Until February 5, 2019 Certain 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

February 2, 2018.

I. Introduction

    The Securities and Exchange Commission (``Commission'') is (i) 
extending until February 5, 2019 certain temporary exemptive relief 
originally provided by the Commission in connection with the revision 
of the definition of ``security'' in the Securities Exchange Act of 
1934 (``Exchange Act'') to encompass security-based swaps (``Temporary 
Exemptions''); \1\ and (ii) requesting comment on whether continuing 
such exemptive relief beyond February 5, 2019 is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.
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    \1\ See Order Granting Temporary Exemptions under the Securities 
Exchange Act of 1934 in Connection with the Pending Revisions of the 
Definition of ``Security'' to Encompass Security-Based Swaps, 
Exchange Act Release No. 64795 (July 1, 2011), 76 FR 39927 (July 7, 
2011) (``Exchange Act Exemptive Order'').
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II. Discussion

A. Background

    Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act \2\ amended the definition of ``security'' under the 
Exchange Act to expressly encompass security-based

[[Page 5666]]

swaps.\3\ The expansion of the definition of the term ``security'' to 
include security-based swaps had the effect of changing the scope of 
the Exchange Act regulatory provisions that apply to security-based 
swaps and, in doing so, raised certain complex questions that require 
further consideration.
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    \2\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124, Stat. 1376 (2010) (``Dodd-Frank 
Act'').
    \3\ See Section 761(a)(2) of the Dodd-Frank Act (amending 
Section 3(a)(10) of the Exchange Act (15 U.S.C. 78c(a)(10)). The 
provisions of Title VII generally became effective on July 16, 2011 
(360 days after the enactment of the Dodd-Frank Act) (the 
``Effective Date''), unless a provision required a rulemaking, in 
which case the provision would go into effect ``not less than'' 60 
days after publication of the related final rules in the Federal 
Register or on July 16, 2011, whichever is later. See Section 774 of 
the Dodd-Frank Act (15 U.S.C. 77b).
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    On July 1, 2011, the Commission issued the Exchange Act Exemptive 
Order granting temporary exemptive relief from compliance with certain 
provisions of the Exchange Act in connection with the revision of the 
Exchange Act definition of ``security'' to encompass security-based 
swaps.\4\ In general, the Exchange Act Exemptive Order granted 
temporary exemptive relief from compliance with certain provisions of 
the Exchange Act in connection with security-based swap activity by: 
(i) Any person who meets the definition of ``eligible contract 
participant'' (``ECPs'') set forth in Section 1a(12) of the Commodity 
Exchange Act as of July 20, 2010 (i.e., the day prior to the date the 
Dodd-Frank Act was signed into law) and (ii) a broker or dealer 
registered under Section 15(b) of the Exchange Act.\5\
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    \4\ At the time it issued the Exchange Act Exemptive Order, the 
Commission also adopted interim final Rule 240 under the Securities 
Act of 1933 (``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 (``Trust Indenture Act''). 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, Securities Act Release 
No. 9231 (July 1, 2011), 76 FR 40605 (July 11, 2011). This extension 
order does not address these interim final rules, which are 
scheduled to expire on February 11, 2018. See Exemptions for 
Security-Based Swaps, Securities Act Release No. 10305 (Feb. 10, 
2017), 82 FR 10703 (Feb. 15, 2017). The Commission recently adopted 
a rule under the Securities Act to provide that certain 
communications involving security-based swaps will not be deemed to 
constitute ``offers'' of such security-based swaps for purposes of 
Section 5 of the Securities Act. See Treatment of Certain 
Communications Involving Security-Based Swaps That May Be Purchased 
Only By Eligible Contract Participants, Securities Act Release No. 
10450 (Jan. 5, 2018), 83 FR 2046 (Jan. 16, 2018).
     The Commission also, on June 15, 2011, issued an exemptive 
order granting temporary relief from compliance with certain 
provisions added to the Exchange Act by subtitle B of Title VII of 
the Dodd-Frank Act with which compliance would have otherwise been 
required as of the Effective Date. In that order, the Commission 
provided guidance regarding the provisions of the Exchange Act that 
were added by Title VII with which compliance was required as of the 
Effective Date. See Temporary Exemptions and Other Temporary Relief, 
Together with Information on Compliance Dates for New Provisions of 
the Securities Exchange Act of 1934 Applicable to Securities-Based 
Swaps, Exchange Act Release No. 64678 (June 15, 2011), 76 FR 36287 
(June 22, 2011).
    \5\ See Exchange Act Exemptive Order, 76 FR at 39938-39. The 
Exchange Act Exemptive Order did not provide exemptive relief for 
any provisions or rules prohibiting fraud, manipulation, or insider 
trading (other than the prophylactic reporting or recordkeeping 
requirements such as the confirmation requirements of Exchange Act 
Rule 10b-10). In addition, the Exchange Act Exemptive Order did not 
affect the Commission's investigative, enforcement, and procedural 
authority related to those provisions and rules. See Exchange Act 
Exemptive Order at 39931, note 34. The Exchange Act Exemptive Order 
also did not address Sections 12, 13, 14, 15(d), 16, and 17A of the 
Exchange Act and the rules thereunder. The Commission did, however, 
issue limited temporary relief from the clearing agency registration 
requirements under Section 17A(b) for entities providing certain 
clearing services for security-based swaps. This relief was linked 
to final rules issued by the Commission relating to the registration 
of clearing agencies that clear security-based swaps. See Order 
Pursuant to Section 36 of the Securities Exchange Act of 1934 
Granting Temporary Exemptions from Clearing Agency Registration 
Requirements under Section 17A(b) of the Exchange Act for Entities 
Providing Certain Clearing Services for Security-Based Swaps, 
Exchange Act Release No. 64796 (July 1, 2011), 76 FR 39963 (July 7, 
2011).
     The Commission also provided a temporary exemption within the 
Exchange Act Exemptive Order for Sections 5 and 6 of the Exchange 
Act and linked the expiration date of that exemptive relief until 
the earliest compliance date set forth in any of the final rules 
regarding registration of security-based swap execution facilities. 
See Exchange Act Exemptive Order, 76 FR at 39934-36.
     The Exchange Act Exemptive Order further provided that no 
security-based swap contract entered into on or after July 16, 2011 
shall be void or considered voidable by reason of Section 29(b) of 
the Exchange Act because any person that is a party to the contract 
violated a provision of the Exchange Act for which the Commission 
has provided exemptive relief in the Exchange Act Exemptive Order, 
until such time as the underlying exemptive relief expires. By 
extending the underlying exemptive relief until February 5, 2019, 
this order will also extend the relevant Section 29(b) relief until 
that same date. See Exchange Act Exemptive Order, 76 FR at 39938-39.
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    The overall approach of the Exchange Act Exemptive Order was 
directed toward maintaining the status quo during the implementation 
process for the Dodd-Frank Act.\6\ In the Exchange Act Exemptive Order, 
the Commission stated that it would accomplish this ``by preserving the 
application of particular Exchange Act requirements that already are 
applicable in connection with instruments that will be `security-based 
swaps' following the Effective Date [of the Dodd-Frank Act], but 
deferring the applicability of additional Exchange Act requirements in 
connection with those instruments explicitly being defined as 
`securities' as of the Effective Date.'' \7\
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    \6\ See Exchange Act Exemptive Order, 76 FR at 39929.
    \7\ Id. These instruments generally constituted ``security-based 
swap agreements'' under the pre-Dodd-Frank Act framework and were 
already subject to specific antifraud and anti-manipulation 
provisions under the Exchange Act (including Exchange Act Section 
10(b)). Under the Exchange Act Exemption Order, instruments that 
(before the Effective Date) were security-based swap agreements and 
(after the Effective Date) constituted security-based swaps were 
still subject to the application of those Exchange Act provisions. 
See Exchange Act Exemptive Order, 76 FR at 39930, nn. 24-25.
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    In 2014, the Commission extended the expiration dates for the 
Temporary Exemptions.\8\ In the 2014 Extension Order, the Commission 
distinguished between: (i) The Temporary Exemptions related to pending 
security-based swap rulemakings (``Linked Temporary Exemptions''); and 
(ii) the Temporary Exemptions that generally were not directly related 
to a specific security-based swap rulemaking (``Unlinked Temporary 
Exemptions''). The expiration dates for the Linked Temporary Exemptions 
established by the 2014 Extension Order were the compliance dates for 
the specific rulemakings to which they were ``linked,'' and the 
expiration date for the Unlinked Temporary Exemptions was three years 
following the effective date of the 2014 Extension Order (i.e., 
February 5, 2017), or such time that the Commission issues an order or 
rule determining whether continuing exemptive relief is appropriate for 
security-based swaps with respect to any such 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.\9\
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    \8\ See 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, Exchange Act Release No. 71485 (Feb. 5, 
2014), 79 FR 7731 (Feb. 10, 2014) (``2014 Extension Order'') 
(extending the expiration date for certain Temporary Exemptions to 
February 5, 2017). See also Further Definition of ``Swap,'' 
``Security-Based Swap,'' and ``Security-Based Swap Agreement''; 
Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Exchange 
Act Release No. 67453 (July 18, 2012), 77 FR 48207 (Aug. 13, 2012) 
(``Product Definitions Adopting Release'') (extending the expiration 
date of the Temporary Exemptions to February 11, 2013); 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, Exchange Act Release No. 68864 (Feb. 7, 2013), 78 FR 10218 
(Feb. 13, 2013) (extending the expiration date to February 11, 
2014).
    \9\ See 2014 Extension Order, 79 FR at 7731. The 2014 Extension 
Order also linked the expiration date of the Linked Temporary 
Exemptions to the compliance date for such rulemakings. The 2014 
Extension Order identified the Linked Temporary Exemptions as those 
related to: (1) Capital and margin requirements applicable to a 
broker or dealer (Sections 7 and 15(c)(3), Regulation T, and 
Exchange Act Rules 15c3-1, 15c3-3, and 15c3-4); (2) recordkeeping 
requirements applicable to a broker or dealer (Sections 17(a) and 
17(b) and Exchange Act Rules 17a-3, 17a-4, 17a-5, 17a-11, and 17a-
13); (3) registration requirements under Section 15(a)(1), and the 
other requirements of the Exchange Act and the rules and regulations 
thereunder that apply to a ``broker'' or ``dealer'' that is not 
registered with the Commission; (4) Exchange Act Rule 10b-10; and 
(5) Regulation ATS. Accordingly, as applicable, the Commission 
extended these exemptions until the compliance date for pending 
rulemakings concerning: capital, margin, and segregation 
requirements for security-based swap dealers and major security-
based swap participants; recordkeeping and reporting requirements 
for broker-dealers, security-based swap dealers, and major security-
based swap participants; security-based swap trade acknowledgements; 
and registration requirements for security-based swap execution 
facilities.
    The Linked Temporary Exemptions are not addressed in this order 
and will be separately considered in connection with the related 
security-based swap rulemakings. The Commission has already 
addressed some of the Linked Temporary Exemptions. For example, on 
June 8, 2016, the Commission adopted new rules for trade 
acknowledgement and verification of security-based swap 
transactions. See Trade Acknowledgement and Verification of 
Security-Based Swap Transactions, Exchange Act Release No. 78011 
(June 8, 2016), 81 FR 39807 (June 17, 2016) (``Trade Acknowledgement 
Release''). In that release, the Commission described the 
application of Exchange Act Rule 10b-10 to transactions in security-
based swaps and noted that the Linked Temporary Exemption relating 
to Exchange Act Rule 10b-10 would expire upon the compliance date of 
the new Rule 15Fi-2. See Trade Acknowledgement Release, 81 FR at 
39824-25, n. 189.

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[[Page 5667]]

    The Commission most recently extended the expiration date of the 
Unlinked Temporary Exemptions until February 5, 2018.\10\ In the 2017 
Extension Order, the Commission also requested comment on whether 
continuing exemptive relief is necessary beyond February 5, 2018.\11\ 
Two commenters expressed support for extending the exemptive relief, 
with one reiterating its prior request that the Commission provide 
permanent exemptive and other relief to security-based swap market 
participants from the Exchange Act and the Securities Act.\12\
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    \10\ See Order Extending Certain 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, Exchange Act Release No. 79833 (Jan. 18, 2017), 
82 FR 8467 (Jan. 25, 2017) (``2017 Extension Order'').
    \11\ Comments received are available at https://www.sec.gov/comments/s7-27-11/s72711.shtml. The Commission did not receive any 
comments in response to the request for comment in the 2014 
Extension Order. However, in 2012, the Commission received a request 
from market participants to extend certain of the Temporary 
Exemptions, citing concerns that key issues and questions regarding 
the application of the federal securities laws remained unresolved 
and continuing concerns about the potential for unnecessary 
disruption to the security-based swap market. See SIFMA Request for 
Extension of the Expiration Date of the SEC's Exchange Act Exemptive 
Order and SBS Interim final Rules (Dec. 20, 2012), which is 
available at http://www.sec.gov/comments/s7-27-11/s72711-12.pdf.
    \12\ See comment from Layla Spencer, dated January 30, 2017; and 
letters from Kyle Brandon, Managing Director, SIFMA, dated February 
2, 2017 (``SIFMA Letter I'') and January 11, 2018 (``SIFMA Letter 
II'') (requesting that the Commission further extend the exemptive 
relief for the Unlinked Temporary Exemptions). For details regarding 
SIFMA's request for permanent exemptive and other relief, see Draft 
SIFMA SBS Exemptive Relief Request (Oct. 20, 2011), which is 
available at https://www.sec.gov/comments/s7-27-11/s72711-7.pdf, and 
SIFMA SBS Exemptive Relief Request (Dec. 5, 2011), which is 
available at https://www.sec.gov/comments/s7-27-11/s72711-10.pdf. 
Two other commenters provided statements that are not germane to the 
consideration of the extension.
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B. Extension of Unlinked Temporary Exemptions

    Since the issuance of the 2014 Extension Order, the Commission has 
implemented a substantial portion of the regulatory regime for 
security-based swaps set forth in Title VII of the Dodd-Frank Act.\13\ 
However, the Commission is still in the process of finalizing its rules 
under Title VII of the Dodd-Frank Act.\14\ Therefore, the Commission 
believes it is necessary or appropriate in the public interest, and 
consistent with the protection of investors to extend the Unlinked 
Temporary Exemptions until February 5, 2019 to avoid any potential 
market disruption stemming from the application of certain Exchange Act 
provisions and rules to security-based swap activities. This approach 
also will provide the Commission with additional time to consider the 
potential impact of the revision of the Exchange Act definition of 
``security.''
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    \13\ See, e.g., Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, Exchange Act Release No. 74244 
(Feb. 11, 2015), 80 FR 14563 (Mar. 19, 2015); Security-Based Swap 
Data Repository Registration, Duties, and Core Principles, Exchange 
Act Release No. 74246 (Feb. 11, 2015), 80 FR 14437 (Mar. 19, 2015); 
Registration Process for Security-Based Swap Dealers and Major 
Security-Based Swap Participants, Exchange Act Release No. 75611 
(Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015); Security-Based Swap 
Transactions Connected with a Non-U.S. Person's Dealing Activity 
That Are Arranged, Negotiated, or Executed By Personnel Located in a 
U.S. Branch or Office or in a U.S. Branch or Office of an Agent; 
Security-Based Swap Dealer De Minimis Exception, Exchange Act 
Release No. 77104 (Feb. 10, 2016), 81 FR 8597 (Feb. 19, 2016); Trade 
Acknowledgement Release; Business Conduct Standards for Security-
Based Swap Dealers and Major Security-Based Swap Participants, 
Exchange Act Release 77617 (Apr. 14, 2016), 81 FR 29960 (May 13, 
2016); Regulation SBSR--Reporting and Dissemination of Security-
Based Swap Information, Exchange Act Release No. 78321 (July 14, 
2016), 81 FR 53545 (Aug. 12, 2016); Access to Data Obtained by 
Security-Based Swap Data Repositories, Exchange Act Release No. 
78716 (Aug. 29, 2016), 81 FR 60585 (Sept. 2, 2016).
    \14\ See, e.g., Registration and Regulation of Security-Based 
Swap Execution Facilities, Exchange Act Release No. 63825 (Feb. 2, 
2011), 76 FR 10948 (Feb. 28, 2011); Capital, Margin, and Segregation 
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers, 
Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 70213 (Nov. 
23, 2012); Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and 
Broker-Dealers; Capital Rule for Certain Security-Based Swap 
Dealers; Proposed Rules, Exchange Act Release No. 71958 (Apr. 17, 
2014), 79 FR 25194 (May 2, 2014); Applications by Security-Based 
Swap Dealers or Major Security-Based Swap Participants for 
Statutorily Disqualified Associated Person To Effect or Be Involved 
in Effecting Security-Based Swaps, Exchange Act Release No. 75612 
(Aug 5, 2015), 80 FR 51684 (Aug. 25, 2015).
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    As noted above, one commenter has suggested that the Commission 
extend the expiration date for the Unlinked Temporary Exemptions until 
a time that the Commission can provide appropriate permanent relief and 
other relief to security-based swap market participants from the 
federal securities laws that apply to security-based swaps due to their 
inclusion in the definition of ``security'' under the Exchange Act.\15\ 
The Commission recognizes that the security-based swap market and 
corresponding regulatory regime have continued to develop since it 
originally issued the Exchange Act Exemptive Order in 2011. While the 
Commission has adopted many of the rules required under Title VII, it 
has proposed but not yet finalized others, including rules relating to 
the capital, margin, and segregation requirements for security-based 
swap dealers and major security-based swap participants. Before the 
Commission considers any permanent exemptive relief, the Commission 
believes that additional time will be beneficial to evaluate the new 
regulatory regime and its impact on the market for security-based swaps 
once the Commission has finalized its rulemakings. Therefore, at this 
time, the Commission is not making a determination on whether permanent 
relief should be provided for the Unlinked Temporary Exemptions.
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    \15\ See SIFMA Letter I and SIFMA Letter II.
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    Accordingly, pursuant to its authority under Section 36 of the 
Exchange Act,\16\ the Commission believes it is necessary or 
appropriate in the public interest, and consistent with the protection 
of investors to extend the expiration of the Unlinked Temporary 
Exemptions until February 5, 2019.
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    \16\ 15 U.S.C. 78mm. Section 36 of the Exchange Act authorizes 
the Commission to conditionally or unconditionally exempt, by rule, 
regulation, or order any person, security, or transaction (or any 
class or classes of persons, securities, or transactions) from any 
provision of the Exchange Act or any rule or regulation thereunder, 
to the extent such exemption is necessary or appropriate in the 
public interest, and is consistent with the protection of investors.
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III. Solicitation of Comments

    The Commission is providing interested parties the opportunity to 
comment on whether any relief should be granted with respect to any 
specific Unlinked Temporary Exemption(s) beyond February 5, 2019. The

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Commission recognizes that the security-based swap market and 
corresponding regulatory regime have developed in the period of time 
since the Commission originally issued the Exchange Act Exemptive 
Order, and will continue to do so. As such, to determine whether 
permanent exemptive relief is necessary or appropriate in the public 
interest, and consistent with the protection of investors, the 
Commission invites comments on the relief and requests that interested 
parties provide detailed and updated information relating to the 
Unlinked Temporary Exemptions.
    To the extent that interested parties request specific relief for 
any of the Unlinked Temporary Exemptions beyond February 5, 2019, the 
Commission encourages any such interested parties to be detailed in any 
request as to the circumstances in which the Exchange Act provision or 
rule applies to security-based swaps or security-based swap market 
participants, and why relief would be necessary.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/exorders.shtml); or
     Send an email to [email protected]. Please include 
File Number S7-27-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F St. NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-27-11. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
internet website (http://www.sec.gov/rules/exorders.shtml). Comments 
are also available for website viewing and printing in the Commission's 
Public Reference Room, 100 F St. NE, Washington, DC 20549 on official 
business days between the hours of 10 a.m. and 3 p.m. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that the Commission does not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly.

IV. Conclusion

    It is hereby ordered, pursuant to Section 36 of the Exchange Act, 
that the Unlinked Temporary Exemptions contained in the Exchange Act 
Exemptive Order and extended in the 2017 Extension Order in connection 
with the revisions of the Exchange Act definition of ``security'' to 
encompass security-based swaps are extended until February 5, 2019.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2018-02498 Filed 2-7-18; 8:45 am]
 BILLING CODE 8011-01-P