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SEC proposes rules to prevent fraud and promote transparency in the use of credit default swaps and other security-based swaps
SEC Update
28 December 2021
Some investors have used credit default swaps in recent years to manufacture credit events and for other purposes related to activist conduct. In response to criticisms of these practices and in particular to a perception that their use may reflect fraudulent or manipulative practices, the SEC on December 15 proposed three new rules under the Exchange Act related to its oversight of the market for credit default swaps (CDS) and other security-based swaps (SBS) that fall within the SEC’s jurisdiction. If adopted in the form proposed, the new rules could have a significant impact on the credit default swap market and the use of these products by hedge funds and private equity investors.
Proposed new Rule 9j-1 would prohibit fraudulent, deceptive, or manipulative conduct in connection with SBS transactions, including misconduct in connection with the exercise of any right or performance of any obligation under any SBS, with a focus on curtailing certain strategies related to credit default swaps. Under proposed new Rule 10B-1, any person, or group of persons, with a security-based swap position that exceeds the applicable reporting threshold would be required to file promptly with the SEC a statement on a new Schedule 10B disclosing information about that position and positions in related instruments. Proposed new Rule 15Fh-4(c) would prohibit personnel of security-based swap dealers and major security-based swap participants from taking any action to coerce, mislead, or otherwise interfere with the firm’s chief compliance officer.
The proposed rules are subject to a comment period that will remain open for 45 days after publication of the proposing release in the Federal Register. The release (Release No. 34-93784) can be viewed here.
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Authored by Alan Dye (co-editor), Richard Parrino (co-editor), Evan Koster, and Adam Lapidus.
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Washington, D.C.
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