SEC Adopts Rules to Prevent Fraud in Connection with Security-Based Swaps Transactions and Prevent Undue Influence over CCOs

The Securities and Exchange Commission (SEC) has published a press statement to announce the finalization of new regulations to implement anti-fraud and anti-manipulation rules regarding security-based swap (SBS) transactions and to implement rules that prohibit interference with the business of Chief Compliance Officers (CCOs) at SBS entities.
Specifically, revised Rule § 240.9j-1 in brief stipulates that
1. it is illegal for anyone to engage in any transaction involving a security-based swap with the intention of defrauding or manipulating others. This includes making false statements, obtaining money or property through deception, or engaging in fraudulent practices. It also prohibits manipulating the price or valuation of a security-based swap. All these prohibitions also apply to the „inducement“ of any such activity.
2. if communicating or buying or selling a security while in possession of material nonpublic information would result in liability under existing laws and regulations, the same would hold true for security-based swap transactions with the same underlying security or index.
3. actions described in the first paragraph involving a security-based swap would also be considered violations when conducted by a counterparty or affiliate in connection with a purchase or sale of a security, loan, or group/index of securities on which the security-based swap is based.
Additionally, the new Rule provides for a safe haven in that persons will not be held liable solely for being aware of material nonpublic information if certain conditions are met. These conditions include entering into a security-based swap or amendment before becoming aware of such information in good faith and without intending to evade the prohibitions. Additionally, non-natural persons can avoid liability if the individual making investment decisions on their behalf was unaware of the material nonpublic information and if reasonable policies and procedures were in place to prevent violations.
New Rule § 240.15Fh-4(c) explicitly prohibits the interference with the activities of CCOs of a Securitiy-Based Swap Dealer by directors, officers, or (other) staff members of such dealers. The prohibition encompasses coercion and manipulation of or unlawful influence over CCOs in the performance of their activities.
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There are some (minor) modifications in the final rule as compared to the proposed version to align the definition of sale and purchase, include inducements in the prohibitions as noted under (1), and make technical changes primarily for clarification purposes.