The SEC has adopted Securities Act Rule 135d to address communications about security-based swaps that may be purchased only by eligible contract participants (ECPs). Under the final rule, a broker, dealer, or security-based swap dealer’s publication or distribution of swaps-related research reports will not be deemed an offer of the swaps that are the subject of the communication or any guarantees of the swaps for purposes of Securities Act Section 5. The rule was adopted substantially as proposed with one addition to address written communications that discuss covered swap-based securities and meet the definition of a research report and certain other conditions. Although the provisions of Dodd-Frank Act Title VII related to security-based execution facilities have not been fully implemented, the SEC concluded that the final rule was necessary to reduce uncertainty in the markets (Release No. 33-10450, January 5, 2018).
Security-based swaps meet the definition of a security under the Securities and Exchange Acts, so counterparties entering into security-based swap transactions must either rely on an available exemption from registration or register the transactions. The Securities Act prohibits offers and sales of security-based swaps to persons who are not eligible contract participants unless a registration statement is in effect for the swaps. The publication or distribution of certain communications about these swaps on an unrestricted basis could be viewed as offers under the Securities Act, including offers to non ECPs. Absent an exemption, the required registration of these transactions could have a negative impact on the security-based swaps market.
Proposal. In 2014, the SEC proposed a rule to address certain communications involving covered swaps, including price quotes relating to covered swaps that are traded or processed through a facility that is registered as a national securities exchange or a security-based swap execution facility, or exempt from registration as a swap exchange facility pursuant to a rule, regulation or order of the SEC.
Research reports. The SEC noted that the final rule does not affect the treatment of research reports under existing Securities Act Rules 137, 138, and 139, so communications relating to the securities underlying the swaps must be analyzed separately under those research rules. The SEC is not extending the expiration of the interim final exemptions for swaps that prior to the effective date of Title VII were security-based swap agreements and were defined as securities due to the Title VII provisions. The interim final exemptions expire on February 11, 2018. Further, it is not adopting an exemption from registration and other provisions under the Securities Act for security-based swap transactions between ECPs.
The SEC concluded that the final rule is substantive and relieves a restriction, so it was not required to publish the rule in the Federal Register 30 days before it becomes effective. Accordingly, the rule becomes effective upon publication in the Federal Register.
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