counterparty accounts in 2021. The median number of counterparty
accounts across SBSDs is 16 (the mean is approximately 191). SBSD-
intermediated transactions reached a gross notional amount of
approximately $1.5 trillion, approximately 66 percent of which was
intermediated by the top five SBSD accounts. The median non-dealer
counterparty transacted with only one SBSD account (with an average of
approximately 1.9 SBSD accounts) in 2021.
---------------------------------------------------------------------------

    \299\ Dealers are generally persons engaged in the business of
buying and selling securities for their own account, through a
broker or otherwise. 15 U.S.C. 78c(a)(5). SBSDs are generally
defined as persons who hold themselves out as dealers in security-
based swaps; make markets in security-based swaps; regularly enter
into security-based swaps as an ordinary course of business for
their own account; or engage in any activity causing them to be
commonly known in the trade as a dealer or market maker in security-
based swaps. 17 CFR 240.3a71-1.
---------------------------------------------------------------------------

    Non-dealer single-name CDS market participants include, but are not
limited to, investment companies, pension funds, private funds,
sovereign entities, and industrial companies. We observe that most non-
dealer market participants of single-name CDS do not engage directly in
the trading of security-based swaps, but trade through banks,
investment advisers or funds, or other types of firms, which we refer
to as transacting agents, consistent with DTCC-TIW terminology.\300\ As
shown in Table 3, close to 79 percent of transacting agents are
identified as investment advisers or funds.\301\ Although investment
advisers and funds are the vast majority of transacting

agents, the transactions they executed account for only about 15
percent of all single-name CDS trading activity reported to the DTCC-
TIW, measured by the number of transaction sides.\302\ The vast
majority of transactions, approximately 82 percent, measured by number
of transaction-sides were executed by ISDA-recognized dealers.
---------------------------------------------------------------------------

    \300\ Transacting agents participate directly in the security-
based swap market, without relying on an intermediary, on behalf of
their principals, investment companies, pension funds, private
funds, sovereign entities, and industrial companies. For example, a
university endowment may hold a position in a security-based swap
that is established by an investment adviser that transacts on the
endowment's behalf. In this case, the university endowment is a
principal that uses the investment adviser as its transacting agent.
    \301\ DTCC-defined ``firms'' shown in DTCC-TIW, which we refer
to here as ``transacting agents.''
    \302\ Each transaction has two transaction sides, i.e., two
transaction counterparties.

 Table 3--The Number of Transacting Agents by Counterparty Type and the Fraction of Total Trading Activity, From
                       Nov. 2006 Through Dec. 2021, Represented by Each Counterparty Type
----------------------------------------------------------------------------------------------------------------
                                                                                Transaction
                       Transacting agents                             Number          Percent       share  (%)
----------------------------------------------------------------------------------------------------------------
Investment Advisers/Funds \a\...................................           1,858            78.7            14.6
Banks (excluding G16) \b\.......................................             278            11.8             3.3
Pension Funds...................................................              30             1.3             0.1
Insurance Companies.............................................              49             2.1             0.2
ISDA-Recognized Dealers \c\.....................................              17             0.7            81.6
Other...........................................................             130             5.5             0.2
                                                                 -----------------------------------------------
    Total.......................................................           2,362           100.0             100
----------------------------------------------------------------------------------------------------------------
\a\ Investment Adviser/Funds--For purposes of this table, these entities have the following characteristics:
  clients are predominantly individuals, institutions, and investment companies that take public and
  institutional money. Some also manage pooled investment vehicles (e.g., hedge funds), private equity and
  venture capital.
\b\ Banks (excluding G16)--The primary characteristic is the entity is trading for its own account and not just
  on behalf of its clients. This includes depository institutions, swap dealers (market makers), and classically-
  defined investment banks.
\c\ ISDA recognized dealer--Market makers (dealers) identified by ISDA as belonging to the G14 or G16 dealer
  group during the period. See, e.g., 2010 ISDA Operations Benchmarking Survey (2010), available at https://www.isda.org/a/5eiDE/isda-operations-survey-2010.pdf.

    Figure 1 describes the percentage of global, notional transaction
volume in North American corporate single-name CDS reported to the
DTCC-TIW from January 2011 through December 2021, separated by whether
transactions are between two ISDA-recognized dealers (interdealer
transactions) or whether a transaction has at least one non-dealer
counterparty. Figure 1 also depicts the notional trading volume of all
North American corporate single-name CDS. As Figure 1 shows, all types
of exposures have declined approximately proportionally since 2011.
BILLING CODE 8011-01-P

[GRAPHIC] [TIFF OMITTED] TR30JN23.049

BILLING CODE 8011-01-C

D. Benefits and Costs of Rule 9j-1

1. Benefits
    Rule 9j-1 would decrease fraudulent activity and litigation costs,
and could decrease compliance costs. In addition, Rule 9j-1 may
indirectly increase price efficiency and decrease capital costs of
underlying entities. The Commission discusses each of these individual
benefits in more detail below.
    Rule 9j-1 would reduce the risk of fraud in the security-based swap
market, including the risk of opportunistic trading strategies to the
extent that such strategies occur in connection with effecting or
attempting to effect any transaction in any security-based swap, or
purchasing or selling, or inducing or attempting to induce the purchase
or sale of, any security-based swap (including but not limited to, in
whole or in part, the execution, termination (prior to its scheduled
maturity date), assignment, exchange, or similar transfer or conveyance
of, or extinguishing of any rights or obligations under, a security
based-swap). The additional specificity offered by Rule 9j-1 may
enhance Commission oversight of the security-based swap market, which
may ultimately benefit market participants through reducing the risk of
fraud. Any reduction in the risk of fraud as a result of Rule 9j-1
would be limited to the extent that the fraudulent, manipulative, and
deceptive conduct by security-based swap market participants is
currently subject to the general antifraud and anti-manipulation
provisions of the Federal securities laws, including but not limited to
sections 9(a) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder,
and section 17(a) of the Securities Act. To the extent that Rule 9j-1
reduces the risk of fraud, the rule could encourage participation in
the security-based market, which may result in increased
competition.\303\ More security-based swap entities would be willing to
supply (issue) and/or demand (buy) security-based swaps, with increased
confidence that their counterparties would have limited abilities to
impact the market through fraudulent conduct.
---------------------------------------------------------------------------

    \303\ See 2019 Joint Statement, supra note 53.
---------------------------------------------------------------------------

    Rule 9j-1 may provide additional precision and specificity
regarding the application of existing antifraud and anti-manipulation
laws to misconduct in the security-based swap market, which could
prompt some market participants to devote greater resources to ensure
that they are compliant with their obligations under antifraud and
anti-manipulation laws, which could also decrease the risk of fraud in
the security-based swap market. Because of this decreased risk of
fraud, market participants may have fewer disputes

with their counterparties regarding security-based swap contracts,
which in turn, could lower litigation costs for security-based swap
participants and underlying entities. Lower litigation costs could
contribute to reducing the cost of CDS and, to the extent that the cost
of CDS is reduced, lower costs of borrowing to the underlying entity.
Rule 9j-1 may also decrease compliance costs for some market
participants who may, as a result of the additional specificity of the
rule, need to spend fewer resources determining appropriate compliance
under section 9(j).
    Decreased risk of fraud in the security-based swap market may also
lead to increased price efficiency, as more trading could lead to a
greater exchange of market expectations from buyers and sellers
transacting in the market. Further, by providing specificity, Rule 9j-1
would help prevent prohibited conduct from distorting the market and
artificially increasing or decreasing security-based swap prices, which
also would help to ensure more efficient pricing. Increased price
efficiency would consequently lead to greater security-based swap
market efficiency, as security-based swap prices would provide greater
confidence that their prices more likely reflect fundamental values and
risk in more liquid markets. For example, the prices of single-name CDS
contracts would more likely reflect the fundamental credit risk of the
underlying entity, as opposed to counterparty credit risk, or the
probability that fraudulent activity prohibited by Rule 9j-1 is being
perpetrated in connection with the CDS contracts.\304\
---------------------------------------------------------------------------

    \304\ See generally Fletcher Letter at 3 (discussing the effects
of engineered CDS transactions).
---------------------------------------------------------------------------

    Increased participation and price efficiency in the security-based
swap market as a result of Rule 9j-1 could encourage lenders to make
greater use of security-based swaps for hedging their loans, which in
turn could increase lending activity and capital formation.\305\
---------------------------------------------------------------------------

    \305\ See generally LSTA Letter at 2 (stating that security-
based swaps ``play an important in risk management and hedging in
the loan markets . . . [and] facilitate lending activity by
transferring some or all of the risks associated with lending . . .
.'').
---------------------------------------------------------------------------

    In addition, improvements in the security-based swap market as a
result of Rule 9j-1 may in turn have a positive impact on capital
formation and the cost of capital for the underlying entities. The
market participation increases in security-based swaps may enhance
liquidity in the underlying market and related swap indices, and, in
general, lower the cost of capital for entities referenced by security-
based swaps.\306\ If single-name CDS prices are more reflective of the
fundamental credit risk of the underlying entity, as a second order
effect, participants in the market for the underlying security would be
better informed about the underlying security's attributes through the
CDS price signal, likely increasing their willingness to re-enter or
engage in the underlying security's market. Specifically, the
underlying security market uses the derivative market to assess its
quality, as the derivative market in some circumstances is forward
looking, liquid, and more informative than the underlying market.\307\
Greater activity in the underlying security market due to increased
price efficiency and greater availability to hedge these securities in
the security-based swap market could lead to lower capital costs and
increase capital formation for the underlying entities. To the extent
that increased capital formation for the underlying entities is
associated with the issuance of a greater variety of securities,
investors could benefit because they will have a larger set of
investment opportunities with which to meet their investment goals.
---------------------------------------------------------------------------

    \306\ See Martin Oehmke & Adam Zawadowski, Synthetic or Real?
The Equilibrium Effects of Credit Default Swaps on Bond Markets, 28
Rev. of Fin. Stud. 3303-3337 (2015) and Ilhyock Shim & Haibin Zhu,
The Impact of CDS trading on the Bond Market: Evidence from Asia, 40
J. of Banking & Finance 460-475 (2014).
    \307\ See Haibin Zhu, An Empirical Comparison of Credit Spreads
Between the Bond Market and the Credit Default Swap Market, 29 J. of
Fin. Serv. Rsch. 211-235 (2006) and Jongsub Lee, et al., When do CDS
Spreads Lead? Rating Events, Private Entities, and Firm-Specific
Information Flows, 130 J. of Fin. Econ. 556-578 (2018).
---------------------------------------------------------------------------

Comments Received
    In the 2021 Proposing Release, the Commission solicited feedback
on, among other things, the benefits of the proposed rules, including
re-proposed Rule 9j-1.\308\ One commenter strongly agreed with the
Commission's discussion regarding the beneficial effects of greater
participation in the security-based swap markets on liquidity in the
underlying market and related swap indices, and the cost of capital for
security-based swap referenced entities. The commenter also strongly
agreed with the Commission's discussion regarding the value of the
derivative market to the underlying security market for assessing the
security market's quality.\309\
---------------------------------------------------------------------------

    \308\ 2021 Proposing Release, 87 FR at 6701-02.
    \309\ Milbank Letter at 10, n.17.
---------------------------------------------------------------------------

    Three commenters believed that re-proposed Rule 9j-1's anticipated
benefit of reduced fraudulent and manipulative activity in the
security-based swap market would not materialize.\310\ Three commenters
stated that the adoption of the ISDA Amendments has reduced the use of
opportunistic strategies, such as manufactured credit events,\311\
while two of these commenters stated that the use of anti-net short
provisions in the syndicated bank loan market has also had this
effect.\312\ One commenter observed that opportunistic strategies have
been, on the whole, extremely infrequent and doubted that re-proposed
Rule 9j-1 will result in any market-wide benefit from addressing these
strategies or significantly reduce manipulative activity in the
security-based swap markets.\313\ One commenter provided CDS pricing
data (in the form of the difference between the CDS spread and
underlying cash bond implied credit spread (``CDS-cash basis'') and
interpreted those data to suggest that CDS protection buyers perceived
the risk of certain opportunistic strategies to be low. The commenter
then reasoned that because CDS protection buyers perceived the risk of
such strategies to be low, re-proposed Rule 9j-1 would not generate the
anticipated benefit of reducing fraudulent activity in the security-
based swap market as well as encouraging market participation.\314\
---------------------------------------------------------------------------

    \310\ See LSTA Letter at 4; July 2022 MFA Letter at 4-10;
Milbank Letter at 8-9.
    \311\ Id.
    \312\ See LSTA Letter at 4; July 2022 MFA Letter at 4-10.
    \313\ Milbank Letter at 9.
    \314\ July 2022 MFA Letter at 2-4. The commenter referred to
opportunistic strategies undertaken by CDS sellers to affect the
likelihood of a credit event and the cost of CDS through actions
such as changing the supply of deliverable obligations and offering
financing to restructure a reference entity. See 2021 Proposing
Release, 87 FR at 6655.
---------------------------------------------------------------------------

    The Commission has considered feedback from the commenters who
argued that the proposed rule would not have the benefit of reducing
fraudulent and manipulative activity in the security-based swap market.
The provisions in Rule 9j-1 are designed generally to prohibit a range
of fraudulent, manipulative, and deceptive conduct in the security-
based swap market. The rule is not solely intended to address
opportunistic strategies in the CDS market.\315\ Further, anti-net
short

provisions and ISDA Amendments are narrowly focused and have limited
ability to reduce fraudulent and manipulative activity in the security-
based swap market. As discussed in the 2021 Proposing Release, the ISDA
Amendments would not address all of the concerns identified in the 2019
Joint Statement, including but not limited to addressing opportunistic
strategies that do not involve narrowly tailored credit events.\316\
Anti-net short provisions are limited to syndicated bank loans and
would not apply to fraudulent activity in the security-based swap
market that does not involve such loans. Thus, even if these industry
efforts were successful in reducing fraudulent activity, their impact
likely would be limited by their narrow scope.
---------------------------------------------------------------------------

    \315\ As discussed earlier in this section, Rule 9j-1 would,
among other things, reduce the risk of opportunistic trading
strategies to the extent that such strategies occur in connection
with effecting or attempting to effect any transaction in any
security-based swap, or purchasing or selling, or inducing or
attempting to induce the purchase or sale of, any security-based
swap (including but not limited to, in whole or in part, the
execution, termination (prior to its scheduled maturity date),
assignment, exchange, or similar transfer or conveyance of, or
extinguishing of any rights or obligations under, a security based-
swap).
    \316\ See 2021 Proposing Release, 87 FR at 6655 n.31; supra note
52.
---------------------------------------------------------------------------

    In response to the comment that opportunistic strategies have been,
on the whole, extremely infrequent so that re-proposed Rule 9j-1 will
not result in any market-wide benefit, the Commission reiterates that
the provisions in Rule 9j-1 are designed generally to prohibit a range
of fraudulent, manipulative, and deceptive conduct in the security-
based swap market. The rule is not solely intended to address
opportunistic strategies in the CDS market.\317\ Thus, even if
opportunistic strategies were no longer implemented, final Rule 9j-1
would benefit the security-based swap market by prohibiting all other
types of fraudulent, manipulative, and deceptive conduct in the market.
That said, this benefit likely would be limited to the extent that the
fraudulent, manipulative, and deceptive conduct by security-based swap
market participants is currently subject to the general antifraud and
anti-manipulation provisions of the Federal securities laws, including
but not limited to sections 9(a) and 10(b) of the Exchange Act, and
Rule 10b-5 thereunder, and section 17(a) of the Securities Act.
---------------------------------------------------------------------------

    \317\ See supra note 315.
---------------------------------------------------------------------------

    The Commission is not persuaded that the CDS-cash basis data
provided by one of the commenters necessarily indicate that CDS
protection buyers perceived the risk of certain opportunistic
strategies to be low.\318\ Apart from such perceived risk, the academic
literature suggests a number of factors that affect the CDS-cash basis
such as funding cost, counterparty risk, collateral quality, and the
CDS reference entity's financial characteristics.\319\ Without
accounting for the influence of these other factors, it is not clear if
the CDS-cash basis reflects that CDS protection buyers perceive the
risk of certain opportunistic strategies to be low. Even if the CDS-
cash basis data reflect CDS protection buyers' perceived risk of
certain opportunistic strategies, the data's limited scope provides no
information on the perceived risk of other types of fraudulent and
manipulative activity in the security-based swap market. Accordingly,
the commenters have not offered convincing evidence that Rule 9j-1 will
be without benefits. The Commission continues to believe that Rule 9j-
1, by addressing the security-based swap market more broadly, would
reduce fraudulent and manipulative activity in this market.
---------------------------------------------------------------------------

    \318\ See July 2022 MFA Letter at 2-4.
    \319\ See, e.g., Jennie Bai & Pierre Collin-Dufresne, The CDS-
Bond Basis, 48 Fin. Mgmt., 417-439 (2019) and Amrut Nashikkar, et
al., Liquidity and Arbitrage in the Market for Credit Risk, 46 J. of
Fin. Quantitative Analysis 627-656 (2011).
---------------------------------------------------------------------------

    One commenter asserted that proposed Rule 9j-1(b) (adopted as Rule
9j-1(a)(6)) would introduce substantial uncertainty in the application
of the antifraud and anti-manipulation provisions of the Federal
securities laws, and therefore questioned whether the benefits of
``additional precision and specificity'' that the Commission identified
would materialize.\320\ Final Rule 9j-1(a)(6)'s scienter requirements,
the practical utility of the rule's objective facts-and-circumstances
requirement, and the applicability of familiar case law help mitigate
any uncertainty that market participants may have regarding the
application of the final rule.
---------------------------------------------------------------------------

    \320\ See Milbank Letter at 5, 9.
---------------------------------------------------------------------------

2. Costs
    Some security-based swap market participants may incur costs
associated with taking actions to update existing compliance systems
for compliance with Rule 9j-1. The Commission estimates that security-
based swap market participants may incur one-time aggregate costs
ranging between $1,225,360 and $2,450,720 to update their existing
compliance systems.\321\ These additional costs could be limited to the
extent that many of these practices and systems are already in place to
ensure compliance with section 9(j) of the Exchange Act and the other
general antifraud and anti-manipulation statutory and regulatory
provisions.
---------------------------------------------------------------------------

    \321\ The Commission estimates that a security-based swap market
participant that updates its existing compliance system likely will
do so by having a compliance attorney make a one-time update to its
policies and procedures. Costs per entity = 1 hour x $424/hour
national hourly rate for a compliance attorney = $424. The per-hour
figure for a compliance attorney is from SIFMA's Management and
Professional Earnings in the Securities Industry--2013, as modified
by Commission staff to adjust for inflation (through Dec. 2022) and
to account for an 1,800-hour work-year, and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, and overhead.
Based on an analysis of information reported pursuant to Regulation
SBSR to DDR and ITV, the Commission estimates that there are 11,559
security-based swap market participants (including SBS Entities) as
of Nov. 25, 2022. There is uncertainty as to how many security-based
swap market participants will choose to update their existing
compliance systems to comply with Rule 9j-1. A lower bound estimate
is 25% x 11,559 = 2,889.75, or approximately 2,890 security-based
swap market participants. An upper bound estimate is 50% x 11,559 =
5,779.50 or approximately 5,780 security-based swap market
participants. The lower bound estimate of one-time aggregate costs =
2,890 x $424 = $1,225,360. The upper bound estimate of one-time
aggregate costs = 5,780 x $424 = $2,450,720. There is also
uncertainty regarding the specific changes that security-based swap
market participants may make to their existing compliance systems to
comply with Rule 9j-1. Two commenters believed that re-proposed Rule
9j-1 would require market participants to incur costs to design and
implement extensive compliance programs and reconcile the scope of
the new rule with existing practices. See LSTA Letter at 9-10; IACPM
Letter at 4. However, these commenters did not provide quantified
estimates of such costs. To the extent that security-based market
participants choose to comply with final Rule 9j-1 in the manner
described by these commenters, the costs of complying with the final
rule could be higher than the Commission's estimate. To the extent
that market participants incur compliance costs as a result of Rule
9j-1, these costs represent a reasonable trade-off in light of the
benefits discussed in section V.D.1. See also discussion later in
this section.
---------------------------------------------------------------------------

    In addition, the rule could discourage some legitimate market
activities, including some hedging activity, because of concerns that
such activities might be viewed as rule violations. As a result,
compliance costs related to evaluating whether or not certain
activities are permissible may increase for some market participants.
    Market participants might incur costs associated with the
affirmative defenses in Rule 9j-1(e). However, such costs likely would
be very limited. As a general matter, the affirmative defenses in Rule
9j-1(e) are voluntary and do not impose requirements on market
participants. Market participants choose to incur costs related to the
affirmative defenses if they anticipate the associated benefits to
exceed the associated costs. Market participants for whom the
anticipated benefits of the affirmative defenses do not exceed the
associated costs likely would not incur those costs. However, market
participants that choose not to rely on the affirmative defenses may
incur other costs (e.g., additional cost of counsel or other experts to
evaluate whether actions taken without relying on the affirmative
defenses are compliant with the Exchange Act and Commission
regulations, and a potential increase in legal liability risk).

    Market participants that seek to rely on the affirmative defense in
paragraph (e)(1) of Rule 9j-1 likely would do so by creating and
retaining the written security-based swap documentation governing such
transaction or any amendment thereto. As discussed in the 2021
Proposing Release, such documentation is already created and retained
as a result of SBS Entities' compliance with existing 17 CFR 240.15Fi-5
and the Commission's recordkeeping requirements in 17 CFR 240.17a-4 or
17 CFR 240.18a-6, as applicable.\322\ Thus, the costs that may be
incurred by those market participants that wish to rely on the
affirmative defense likely would be very limited, if any.
---------------------------------------------------------------------------

    \322\ See 2021 Proposing Release 87 FR at 6662 n.88.
---------------------------------------------------------------------------

    Market participants that seek to rely on the affirmative defense in
paragraph (e)(2) of Rule 9j-1 would be required to comply with the
specific provisions of that paragraph, including implementing
reasonable policies and procedures to prevent insider trading. For most
market participants to whom this affirmative defense would be relevant,
the costs associated with policies and procedures likely would be very
limited. As discussed above, most security-based swap market
participants have spent considerable resources to avail themselves of
the affirmative defense of Rule 10b5-1(c)(2).\323\ Because the
affirmative defense of Rule 9j-1(e)(2) is modeled on that of Rule 10b5-
1(c)(2), most security-based swap market participants likely would
employ their existing policies and procedures to avail themselves of
the affirmative defenses of both Rules 10b5-1(c)(2) and 9j-1(e)(2).
---------------------------------------------------------------------------

    \323\ See supra sections II.E.2 and V.C.1.
---------------------------------------------------------------------------

Comments Received
    One commenter believed that the proposed rules would help to reduce
costs for all investors by removing fraud and manipulation from the
security-based swap market and the market for underlying
securities.\324\ However, several commenters were concerned that re-
proposed Rule 9j-1 would significantly increase compliance costs for
security-based swap market participants in various ways.
---------------------------------------------------------------------------

    \324\ Michael Comments at 1.
---------------------------------------------------------------------------

    One commenter believed that re-proposed Rule 9j-1 would require
market participants to incur costs to design and implement extensive
compliance programs to adhere to the rule's broad prohibitions; and
that such costs are only marginally alleviated by the narrow proposed
safe harbors, since ensuring that each activity falls within a
designated safe harbor presents resource challenges of its own. The
commenter stated that such compliance costs would be unreasonably
burdensome to lenders and would have a significant, negative impact on
the loan markets. The commenter also stated that, absent an affirmative
defense similar to Rule 10b5-1(c)(2), market participants may have to
incur cost and effort to identify all security-based swaps and related
reference underlying entities held by the organization and to track and
coordinate all activity that could affect the purchase, sale, payments,
deliveries, and other ongoing obligations or rights with respect to the
security-based swaps and the related reference underlying
entities.\325\ Another commenter stated that re-proposed Rule 9j-1
would entail further significant costs and challenges because market
participants would need to reconcile the scope of the new rule with
existing practices.\326\
---------------------------------------------------------------------------

    \325\ LSTA Letter at 9-10.
    \326\ IACPM Letter at 4.
---------------------------------------------------------------------------

    The Commission has considered the above comments in finalizing Rule
9j-1. As discussed above and in the 2021 Proposing Release, some
security-based swap market participants may incur costs associated with
taking actions to update existing compliance systems for compliance
with Rule 9j-1. These additional costs could be limited to the extent
that many of these practices and systems are already in place to ensure
compliance with section 9(j) and the other general antifraud and anti-
manipulation statutory and regulatory provisions. To the extent that
market participants incur compliance costs as a result of Rule 9j-1,
these costs represent a reasonable trade-off in light of the benefits
discussed in section V.D.1. With respect to the identification,
tracking, and coordination activities that might be necessary absent an
information barrier safe harbor, final Rule 9j-1(e)(2) provides an
affirmative defense modeled on the affirmative defense in Rule 10b5-
1(c)(2). Final Rule 9j-1(e)(2) will help mitigate the cost and effort
that market participants may incur to identify, track, and coordinate
activities involving security-based swaps and related reference
underlying entities held by the organization.
    Several commenters were concerned that re-proposed Rule 9j-1's
liability standards are vague and that such vagueness would foster
significant uncertainty among security-based swap market participants,
resulting in reduced market participation, liquidity, capital
formation, and investor choice.\327\ In response to these concerns, the
Commission clarifies the liability standards of Rule 9j-1 in section II
of this release. Specifically, the liability standards in the rule
follow the well-settled standards in section 10(b) of the Exchange Act,
and Rule 10b-5 thereunder, section 17(a) of the Securities Act, and
applicable case law. The Commission also explains why a non-scienter-
based standard is appropriate for paragraphs (a)(3) and (a)(4) of final
Rule 9j-1 and is consistent with sections 17(a)(2) and (3) of the
Securities Act, on which they are based.
---------------------------------------------------------------------------

    \327\ See IACPM Letter at 4-5; IIB-ISDA-SIFMA Letter at 1-3, 5,
13-14; LSTA Letter at 3, 5, 7; Milbank Letter at 1-5, 7, 9-10; July
2022 MFA Letter at 1, 6, 7.
---------------------------------------------------------------------------

    Where commenters noted a discrepancy in the Commission's proposed
rule and the legal standard for certain attempted offenses, the
Commission revised the rule to conform to the legal standard in new
Rule 9j-1(a)(5). These revisions should address any uncertainty that
security-based swap market participants may have regarding the rule's
liability standards. In addition, the Commission is adopting Rule 9j-
1(e), which includes two affirmative defenses for violations of the
provisions in paragraphs (a)(1) through (a)(5) of Rule 9j-1.\328\ The
final rule conforms the affirmative defenses in Rule 9j-1(e) to those
in existing Rule 10b5-1(c). The revisions regarding the liability
standards of Rule 9j-1 coupled with the affirmative defenses of Rule
9j-1(e) should mitigate any potential adverse effects on market
participation, liquidity, capital formation, and investor choice.
Moreover, by reducing the risk of fraudulent and manipulative activity
in the security-based swap market, Rule 9j-1 would increase market
participation, liquidity, capital formation, and investor choice
thereby further mitigating the potential adverse effects that
commenters identified.\329\
---------------------------------------------------------------------------

    \328\ See final Rule 9j-1(e).
    \329\ See supra section V.D.1.
---------------------------------------------------------------------------

    One commenter was concerned that the inclusion of interim actions
in the performance of contractual obligations within the scope of re-
proposed Rule 9j-1 will discourage market participants from transacting
in security-based swaps, reduce liquidity in the security-based swap
markets, increase the cost of capital, and reduce the availability of
capital.\330\ The Commission does not believe the final rule will
adversely affect market participation, liquidity, cost of capital, and
availability of capital in the manner described by the commenter. Final
Rule 9j-1 applies to fraudulent, deceptive, or manipulative

misconduct related to the exercise of any right or performance of any
obligation under a security-based swap if such misconduct occurs in
connection with effecting or attempting to effect a transaction in, or
purchasing or selling, or inducing or attempting to induce the purchase
or sale of, a security-based swap. Moreover, the rule addresses actions
taken outside the ordinary course of a typical lender-borrower
relationship (or a prospective lender-borrower relationship).
Accordingly, by reducing the risk of fraudulent and manipulative
activity in the security-based swap market, Rule 9j-1 will increase
liquidity in the markets for security-based swaps and underlying cash
instruments, and lower capital costs and increase capital formation for
reference underlying entities.\331\
---------------------------------------------------------------------------

    \330\ MFA Letter at 2, 8-9.
    \331\ See supra section V.D.1.
---------------------------------------------------------------------------

    Some commenters were concerned that the Commission's choice of a
negligence standard for re-proposed Rules 9j-1(a)(3) and (4), coupled
with the omission of Rule 10b5-1(c)(2) affirmative defenses, would
discourage market participants from entering into security-based swaps
and would, as a result, reduce liquidity in security-based swap
markets, exacerbate risks for market participants, and increase
issuers' cost of capital. These commenters were concerned that lenders
may also reduce their lending activities, which would reduce financing
to private companies.\332\ In response to comments received on the 2021
Proposing Release, paragraphs (a)(3) and (a)(4) of new Rule 9j-1
describe conduct for which a non-scienter based standard would apply,
while paragraph (a)(5) of new Rule 9j-1 describes attempts of that
conduct for which scienter is the proper standard. In addition, Rule
9j-1(e)(2) provides for an affirmative defense that is modeled on the
affirmative defense in Rule 10b5-1(c)(2). These changes from re-
proposed Rule 9j-1 should address the commenters' concerns and mitigate
any potential adverse effects on liquidity, risks, cost of capital, and
financing to private companies.
---------------------------------------------------------------------------

    \332\ See ACLI Letter at 5-6; MFA Letter at 2, 13-16.
---------------------------------------------------------------------------

    Some commenters stated that proposed Rule 9j-1(b) would create
uncertainty and implicate a wide range of innocuous and ordinary course
activities that are essential to markets in both security-based swaps
and underlying cash instruments. The commenters stated that this would
materially increase compliance costs for security-based swap market
participants, reduce participation in security-based swap and
securities markets, reduce lending activity and capital formation, and
raise issuers' cost of capital.\333\ As discussed above, final Rule 9j-
1(a)(6), as revised from proposed Rule 9j-1(b), will apply to conduct
undertaken in connection with effecting or attempting to effect a
transaction in any security-based swap, and to purchasing or selling,
or inducing or attempting to induce the purchase or sale of, any
security-based swap (including but not limited to, in whole or in part,
the execution, termination (prior to its scheduled maturity date),
assignment, exchange, or similar transfer or conveyance of, or
extinguishing of any rights or obligations under, a security based-
swap). Rule 9j-1(a)(6) also prohibits the manipulation (or attempted
manipulation) of the valuation of any security-based swap, or any
payment or delivery related thereto, to the extent such misconduct is
in connection with effecting or attempting to effect a transaction in,
or purchasing or selling, or inducing or attempting to induce the
purchase or sale of, any security-based swap. The final rule strikes an
appropriate balance between preventing manipulation and attempted
manipulation in the security-based swap market and addressing
commenters' concern. A narrowing in the scope of final Rule 9j-1(a)(6)
would create a gap in the prohibition against manipulation and
attempted manipulation in the security-based swap market and reduce the
benefits of the rule.
---------------------------------------------------------------------------

    \333\ See MFA Letter at 16-19; Milbank Letter at 9-10.
---------------------------------------------------------------------------

    A determination as to whether a person has violated final Rule 9j-
1(a)(6) will depend on the facts and circumstances of each particular
situation. Further, a scienter standard will be used to determine
whether conduct is in violation of the rule. With respect to the loan
market, final Rule 9j-1(a)(6) applies to actions taken outside the
ordinary course of a typical lender-borrower relationship, such as an
action taken for the purposes of avoiding or causing, or increasing or
decreasing, a payment under a security-based swap in a manner that
would not have occurred but for such actions, or when an action appears
to be designed almost exclusively to harm counterparties, and is not
intended to discourage lenders from discussing or providing financing
or relief to avoid default. To be clear, Rule 9j-1(a)(6) will require
that security-based swap market participants take care that their
legitimate market activities remain within the scope of the typical
lender-borrower relationship and do not cross the line into prohibited
manipulation. The foregoing discussion should help address concerns
related to uncertainty that the rule may create and the proposed rule's
scope.
    However, to the extent that market participants continue to have
such concerns, final Rule 9j-1(a)(6) could increase compliance costs,
reduce market participation, reduce lending activity and capital
formation, and raise issuers' cost of capital. That said, by reducing
the risk of fraudulent and manipulative activity in the security-based
swap market, Rule 9j-1 would increase market participation, increase
lending activity and capital formation, and lower issuers' cost of
capital thereby mitigating the potential adverse effects that
commenters identified. Further, to the degree that Rule 9j-1 provides
additional precision and specificity regarding the application of
existing antifraud and anti-manipulation laws to misconduct in the
security-based swap market, some market participants may need to spend
fewer resources determining appropriate compliance under section 9(j)
of the Exchange Act and reduce their compliance costs.\334\
---------------------------------------------------------------------------

    \334\ See supra section V.D.1.
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E. Benefits and Costs of Rule 15fh-4(c)

1. Benefits
    Rule 15fh-4(c) makes it unlawful for any officer, director,
supervised person, or employee of an SBS Entity, or any person acting
under such person's direction, to take, directly or indirectly, any
action to coerce, mislead, or otherwise interfere with the SBS Entity's
CCO. This prohibition would support the ability of the CCO to meet the
CCO's important obligations to foster compliance in its role of
overseeing compliance within the SBS Entity. Rule 15fh-4(c) will make
it more likely that a CCO is able to more efficiently and effectively
execute the CCO's responsibilities to foster compliance, including for
example, by ensuring that the SBS Entity maintains and reviews written
policies and procedures reasonably designed to achieve compliance with
the rules and regulations relating to the business of the SBS Entity.
Ultimately, these effects will likely also reduce the risk of fraud,
market manipulation, or other fraudulent activities in the security-
based swap market, providing additional protection for both
counterparties in the security-based swap transaction and the
underlying entity.

    Rule 15fh-4(c) will encourage officers, directors, supervised
persons, and employees of SBS Entities to exercise reasonable attention
and care in their dealings with CCOs, as discussed in section III.B. To
the extent that such exercise of reasonable attention and care
increases the quantity and quality of information exchanged between
CCOs, officers, directors, supervised persons, and employees of SBS
Entities, CCOs may more efficiently and effectively foster compliance
in SBS Entities. Any resulting improvement in compliance in turn could
reduce the risk of fraud, market manipulation, or other fraudulent
activities in the security-based swap market. More broadly, improved
communication between CCOs, officers, directors, supervised persons,
and employees of SBS Entities also could facilitate decision making
within the SBS Entities.
    Rule 15fh-4(c) would likely have minor indirect positive impacts on
competition, price efficiency, and capital formation, as discussed in
section V.F.
Comments Received
    Two commenters believed that proposed Rule 15Fh-4(c) would deter
the types of actions that prevent CCOs from performing their duties and
that deterring such actions would in turn help protect the CCOs'
independence and objectivity in the fulfillment of their duties.\335\
The Commission agrees with the commenters that Rule 15fh-4(c)'s benefit
could derive in part from deterring actions that are prohibited by the
rule.
---------------------------------------------------------------------------

    \335\ See Better Markets Letter at 14; NYC Bar Letter at 4-5.
---------------------------------------------------------------------------

2. Costs
    Rule 15fh-4(c)'s prohibition on taking actions to coerce, mislead,
or otherwise interfere with the SBS Entity's CCO, may create additional
costs for SBS Entities. For example, to the extent that any current
practices of an SBS Entity include activities that are explicitly
prohibited under Rule 15fh-4(c), applicable policies and procedures
will need to be updated. In addition, it is possible that the rule
could cause officers, directors, supervised persons, or employees of an
SBS Entity to be overly cautious when consulting with a CCO. The
Commission does not, however, believe that any such effects will be
significant, given the specificity of the rule's prohibition on certain
interferences with the SBS Entity's CCO.
Comments Received
    One commenter was concerned that the scope of the proposed rule is
unclear and could lead to confusion and uncertainty as to what
communications between the CCO and the officers, directors, supervised
persons, and employees of the SBS Entity might violate the rule. The
commenter states that such confusion and uncertainty could have a
chilling effect on dialog about compliance, budget, and resource
matters, which, by implication, could impede decision making within the
SBS Entity.\336\ In response to this comment, the Commission has
clarified the scope of final Rule 15fh-4(c) in section III.B. Further,
the Commission clarified that the acts to ``coerce, manipulate, mislead
or fraudulently influence'' that would be prohibited by Rule 15fh-4(c)
imply compelling the CCO to act in a certain way through pressure,
threats, trickery, intimidation, misrepresentation, or some other form
of purposeful action not limited to untrue statements or omissions of
material facts. As discussed in section V.E.1, to the extent that the
rule encourages officers, directors, supervised persons, and employees
of SBS Entities to exercise reasonable attention and care in their
dealings with CCOs, communication and decision making could improve
within the SBS Entities and mitigate any potential adverse impact on
decision making suggested by the commenter.
---------------------------------------------------------------------------

    \336\ IIB-ISDA-SIFMA CCO Letter at 1-2.
---------------------------------------------------------------------------

F. Effects on Efficiency, Competition, and Capital Formation

    The final rules would likely affect capital formation, competition,
and efficiency in various ways, as discussed below.
1. Competition
    As discussed earlier, by reducing the risk of fraud, Rule 9j-1
could encourage participation in the market, which may result in
increased competition in the security-based swap market.\337\
---------------------------------------------------------------------------

    \337\ See supra section V.D.1.
---------------------------------------------------------------------------

    Rule 15fh-4(c) would likely have a minor indirect positive impact
on competition in the security-based swap market. Because Rule 15fh-
4(c) would support the ability of the CCO to oversee compliance with
the Federal securities laws within the SBS Entity and likely reduce the
risk of fraud, security-based swaps would more likely reflect the
fundamental credit risk of the underlying entity. This in turn could
encourage greater participation in the security-based swap market and
therefore, increase competition among the market participants.
2. Efficiency
    By decreasing the risk of fraud and preventing price manipulation
in the security-based swap market, Rule 9j-1 may increase price
efficiency. This would consequently lead to greater security-based swap
market efficiency, as security-based swap prices would provide greater
confidence that their prices more likely reflect fundamental values and
risk in more liquid markets.\338\
---------------------------------------------------------------------------

    \338\ Id.
---------------------------------------------------------------------------

    Rule 15fh-4(c) would likely have a minor indirect positive impact
on price efficiency. To the extent that the rule increases
participation in the security-based swap market as discussed in section
V.F.1, price efficiency may increase because increased trading by
market participants could incorporate more information into security-
based swap prices.
3. Capital Formation
    Final Rule 9j-1 likely would have a positive impact on capital
formation. As discussed earlier, greater activity in the underlying
security market due to increased price efficiency and greater
availability to hedge these securities in the security-based swap
market could lead to lower capital costs and increase capital formation
for the underlying entities. Increased participation and price
efficiency in the security-based swap market as a result of Rule 9j-1
could encourage lenders to make greater use of security-based swaps for
hedging their loans, which in turn could increase lending activity and
capital formation.\339\ To the extent that the rule lowers litigation
costs and compliance costs for market participants and underlying
entities, these market participants and entities could in turn use the
resources that are freed up to invest in projects.
---------------------------------------------------------------------------

    \339\ Id.
---------------------------------------------------------------------------

    As discussed in section V.D.2, a number of commenters were
concerned that re-proposed Rule 9j-1's compliance costs, scope, and
liability standards would reduce capital formation (including financing
to private companies) and increase the cost of capital, among other
potential effects. As discussed in that section, compliance costs could
be limited by existing practices and systems that are in place to
comply with section 9(j) and the other antifraud and anti-manipulation
provisions; that the rule's use of clear, consistent, and familiar
liability standards reduces uncertainty; and that the rule's beneficial
effects on capital formation and the cost of capital

would mitigate any potential adverse effects that commenters
identified.
    Rule 15fh-4(c) would likely have a minor indirect positive impact
on capital formation. To the extent that the rule increases price
efficiency and competition in the security-based swap market, as
discussed in sections V.F.1 and V.F.2, capital formation could, as a
result, further indirectly increase, as greater price efficiency and
competition among market participants could lead to a decrease in
security-based swaps prices, and in turn, lower costs of borrowing (as
a result of lowering the cost of CDS).

G. Reasonable Alternatives

    The Commission considered a number of alternatives when finalizing
Rules 9j-1 and 15fh-4(c).
1. Narrow the Scope of Rule 9j-1
    Commenters recommended narrowing the scope of re-proposed Rule 9j-1
in various ways: (1) exclude valuation, payment, and delivery from the
scope of proposed Rule 9j-1(b); \340\ (2) exclude certain credit market
conduct from the scope of proposed Rule 9j-1(b); \341\ and (3) exclude
security-based swaps referencing sovereign debt from the scope of re-
proposed Rule 9j-1.\342\
---------------------------------------------------------------------------

    \340\ Milbank Letter at 5.
    \341\ See IACPM Letter at 4; IIB-ISDA-SIFMA Letter at 18-19;
Milbank Letter at 4-5.
    \342\ ACLI Letter at 3, 13-14.
---------------------------------------------------------------------------

    The Commission has considered these alternatives but determined
that the adopted approach is preferable to them. With respect to the
exclusion of valuation, payment, and delivery from the scope of
proposed Rule 9j-1(b), the Commission declines to adopt this
alternative. The Commission is concerned that the alternative would
create a gap in the prohibition against the manipulation and attempted
manipulation of prices in the security-based swap market and reduce the
benefits of final Rule 9j-1(a)(6), as revised from proposed Rule 9j-
1(b). The exclusion of valuation, payment, and delivery from the scope
of final Rule 9j-1(a)(6) could increase the occurrence of manipulation
and attempted manipulation of security-based swap prices in connection
with such activities.
    With respect to the exclusion of certain credit market conduct, the
Commission believes it cannot specify all possible types of misconduct
that may prevail in the future. Hence, provisions designed to exclude
certain legitimate credit market conduct could unintentionally apply to
activities that final Rule 9j-1(a)(6), as revised from proposed Rule
9j-1(b), is designed to prohibit, reducing the benefits of the rule.
Further, an exclusion of certain credit market conduct would need to be
balanced against the risk that market participants undertake
transactions for which their counterparties should have the protections
of final Rule 9j-1(a)(6). In addition, as discussed in section II.C.2,
the fact that the Commission intends to apply a scienter standard in
connection with final Rule 9j-1(a)(6), and that the rule does not
impose liability for actions taken in the ordinary course of a typical
lender-borrower relationship (or a prospective lender-borrower
relationship), should help mitigate concerns regarding any ``chilling
effects'' of the rule.
    With respect to the exclusion of sovereign debt security-based
swaps, as a general matter, the Commission does not see a compelling
reason to treat security-based swaps referencing sovereign underliers
differently than security-based swaps referencing other underliers. As
discussed in section II.E.2.d, while security-based swaps related to
sovereign debt may have lesser opportunity for manufactured credit
events or opportunistic strategies by regulated and non-regulated
market participants alike, such instruments are not without risk of
fraudulent and manipulative conduct and should remain within the scope
of Rule 9j-1.\343\ Further, the Commission is concerned that the
alternative would create a gap in the prohibition against fraudulent
and manipulative activity in the security-based swap market. Even if,
as the commenter asserted, manufactured credit events related to a
country's sovereign debt are unlikely, other types of fraudulent and
manipulative activities could be perpetrated in connection with
sovereign debt security-based swaps.\344\ The alternative would not
prohibit these activities and could increase their occurrence. In light
of the above, the adopted approach is preferable to this alternative.
---------------------------------------------------------------------------

    \343\ See supra note 244 and related discussion.
    \344\ See ACLI Letter at 13 (stating that it seems unlikely that
any holders of security-based swaps on sovereign debt would possess
the leverage necessary to manufacture credit events related to a
country's sovereign debt).
---------------------------------------------------------------------------

2. Safe Harbors
    Commenters suggested that the Commission add various safe harbors
to Rule 9j-1. The Commission discusses these alternatives below.
a. Safe Harbor for Hedging Exposure Arising Out of Lending Activities
    One commenter urged the Commission to consider creating a safe
harbor to re-proposed Rule 9j-1 for entering into security-based swap
transactions for purposes of hedging some or all exposure arising out
of lending activities with a reference entity or the syndication of
such lending activities.\345\ Such a safe harbor could minimize the
effects of the rule on risk-reducing hedging activity, which is one of
the central purposes of CDS contracts and which provides important
benefits to the lending market. Identifying legitimate, risk-reducing
hedging activity--undertaken with the intent of covering potential
losses in a position--and distinguishing such activity from other types
of speculative transactions would likely be difficult. Hence, even a
safe harbor designed to apply solely to legitimate hedging transactions
could unintentionally apply to activities that Rule 9j-1 is designed to
prohibit, reducing the benefits of the rule. Further, such a safe
harbor would need to be balanced against the risk that market
participants undertake transactions for which their counterparties
should have the protections of Rule 9j-1, including in circumstances
involving potentially opportunistic trading strategies. In light of the
above, the adopted approach is preferable to this alternative.
---------------------------------------------------------------------------

    \345\ LSTA Letter at 8.
---------------------------------------------------------------------------

b. Safe Harbors for Lender Disclosure, Centralized Market Activities,
and Legitimate Restructurings
    One commenter urged the Commission to consider allowing the lender
to avoid liability under re-proposed Rule 9j-1 by disclosing to the
counterparty that it is a lender to the borrower and may have material
nonpublic information from the borrower.\346\ Another commenter urged
the Commission to provide safe harbors for certain centralized market
activities: (1) multilateral amendment exercises (including ISDA
protocols) or bilateral equivalents; and (2) participation in
determination committees in accordance with the determination
committees' rules and any applicable codes of conduct.\347\ A third
commenter suggested that the Commission provide a safe harbor or
exception for legitimate restructurings to avoid limiting the supply of
funds to issuers during a restructuring.\348\ The affirmative defenses
in Rule 9j-1(e) will serve the same purpose as these alternatives by
permitting persons to enter into certain types of activity, pursuant to
the requirements of the affirmative

defenses, while also addressing concerns about fraud and manipulation
for the entire security-based swap market. With respect to the
suggested safe harbor for legitimate restructurings, identifying
legitimate restructurings and distinguishing such activities from other
types of speculative transactions would likely be difficult. Hence,
even a safe harbor designed to apply solely to legitimate
restructurings could unintentionally apply to activities that Rule 9j-1
is designed to prohibit, reducing the benefits of the rule. Further,
such a safe harbor would need to be balanced against the risk that
market participants undertake transactions for which their
counterparties should have the protections of Rule 9j-1, including in
circumstances involving potentially opportunistic trading strategies.
Accordingly, the adopted approach is preferable to these alternatives.
---------------------------------------------------------------------------

    \346\ Id. at 9.
    \347\ IIB-ISDA-SIFMA Letter at 11-12.
    \348\ Fletcher Letter at 4.
---------------------------------------------------------------------------

c. Safe Harbor for Publicly Executed Strategies
    One commenter requested a safe harbor from liability under proposed
Rule 9j-1(b) for publicly executed strategies, where multiple parties
or an independent body (such as a court or regulator) are involved. The
commenter distinguished publicly executed strategies from privately
executed strategies, such as a single market participant entering into
an agreement with a reference entity. The commenter argued that
publicly executed strategies are more difficult for a single
participant to manipulate than privately executed strategies because
publicly executed strategies are driven by the incentives of a broader
group of participants than privately executed strategies.\349\ The
Commission declines to adopt this alternative. While publicly executed
strategies may be difficult for a single participant to manipulate as
the commenter argued, it is not clear that such strategies would remain
difficult to manipulate when a group of market participants are acting
in concert to manipulate such strategies. The Commission is concerned
that providing a safe harbor for publicly executed strategies would
encourage manipulative activity involving a coalition of market
participants. That said, the Commission appreciates that there are
legitimate publicly executed strategies that are not involved in
manipulative activity. In section II.C.2, the Commission discusses at
length the application of final Rule 9j-1(a)(6) and believes the
discussion should alleviate concerns that legitimate publicly executed
strategies may violate the rule.
---------------------------------------------------------------------------

    \349\ IIB-ISDA-SIFMA Letter at 17.
---------------------------------------------------------------------------

d. Elimination of All Safe Harbors and Affirmative Defenses
    Four commenters urged for the elimination of all safe harbors and
affirmative defenses from proposed Rule 9j-1(a) liability.\350\ The
adopted approach, which among other things, provides two affirmative
defenses in final Rule 9j-1(e), is preferable to the alternative. As
discussed in section V.D.2, the two affirmative defenses will help
mitigate various adverse effects (e.g., reduced market participation)
that certain commenters believed may arise as a result of Rule 9j-1.
Final Rule 9j-1(e)(2) will help mitigate the cost and effort that
market participants may incur to identify, track, and coordinate
activities involving security-based swaps and related reference
underlying entities held by the organization. At the same time, the
costs that market participants may incur in connection with these
affirmative defenses likely would be very limited.\351\
---------------------------------------------------------------------------

    \350\ Better Markets Letter at 2, 9-12; Anonymous Penguin
Comments at 1; J.T. Comments at 1; Michael Comments at 1.
    \351\ See supra section V.D.2.
---------------------------------------------------------------------------

3. Implementing a More Prescriptive Approach in Rule 9j-1
    One commenter urged the Commission to consider the alternative
approach of identifying and prohibiting within Rule 9j-1 specific types
of events (for example, market behavior around certain events and fact
patterns) and opportunistic trading behavior that have been observed.
According to the commenter, this alternative approach could provide
even more certainty and precision with respect to the particular types
of activities that are prohibited in the security-based swap market.
The commenter believed that the greater certainty of outcome with
respect to Rule 9j-1 would benefit lenders when they need to exercise
rights or remedies under a loan or credit agreement.\352\ However, this
approach could lead to greater uncertainty with respect to
circumstances not explicitly contemplated in the rule, which could
increase litigation costs for market participants involved in such
transactions. This approach may also decrease the integrity of the
market for security-based swaps, and in addition, could cause market
participants to bear greater compliance costs in connection with the
evaluation of circumstances not explicitly contemplated in the rule. As
a result, the more prescriptive alternative approach would have limited
benefits and greater costs as compared to the adopted approach in the
market for security-based swaps, as well as the market for the
reference underlying of such security-based swaps.
---------------------------------------------------------------------------

    \352\ LSTA Letter at 7.
---------------------------------------------------------------------------

    The Commission acknowledges the commenter's concern that not
adopting the more prescriptive alternative approach could prevent
lenders or security-based swap participants from exercising legitimate
rights and remedies and impose costs that would be greater than those
discussed in the 2021 Proposing Release in connection with re-proposed
Rule 9j-1.\353\ Final Rule 9j-1 would enable lenders or security-based
swap participants to exercise legitimate rights and remedies, thereby
addressing the commenter's concern. In particular, paragraphs (a)(3)
and (a)(4) of final Rule 9j-1 describe conduct for which a non-scienter
based standard would apply, while paragraph (a)(5) of final Rule 9j-1
describes attempted aspects of that conduct for which scienter is the
proper standard. In addition, final Rule 9j-1(e) provides for
affirmative defenses similar to the affirmative defenses in Rule 10b5-
1(c). The clarification regarding the liability standards of Rule 9j-1
coupled with the affirmative defenses of Rule 9j-1(e) should mitigate
any potential adverse effects on market participation, liquidity,
capital formation, and investor choice. Moreover, by reducing the risk
of fraudulent and manipulative activity in the security-based swap
market, Rule 9j-1 would increase market participation, liquidity,
capital formation, and investor choice thereby further mitigating the
potential adverse effects that commenters identified.
---------------------------------------------------------------------------

    \353\ Id.
---------------------------------------------------------------------------

4. Separate Rules for CDS and Equity Security-Based Swaps
    One commenter asserted that opportunistic strategies work best with
CDS and that equity SBS are less susceptible to such strategies. The
commenter suggested that the Commission propose separate rules for each
type of instrument.\354\ The Commission has considered the commenter's
suggested alternative, but believes that the adopted approach is
preferable to the alternative. The aim of Rule 9j-1 is to address fraud
and manipulation in the security-based swap market and is not limited
to addressing fraud and manipulation in connection with certain
opportunistic strategies that historically have been implemented with
CDS. As discussed in section II, fraudulent and manipulative

conduct has the potential to harm counterparties to all forms of
security-based swaps, including CDS, equity security-based swaps, and
non-CDS debt security-based swaps. Rule 9j-1 is appropriately tailored
to address fraud and manipulation for the entire security-based swap
market. As such the Commission does not see the need to adopt separate
rules for CDS and equity security-based swaps.
---------------------------------------------------------------------------

    \354\ Fletcher Letter at 4.
---------------------------------------------------------------------------

5. Exclude Underlying Securities
    One commenter urged the Commission to modify re-proposed Rule 9j-1
by providing that its prohibitions do not extend to the purchase or
sale of underlying securities.\355\ The Commission declines to adopt
this alternative. Because security-based swaps by their nature are tied
intrinsically to activity in other securities markets, persons that
intend to perpetrate fraudulent or manipulative activity with respect
to a security-based swap may choose to do so by purchasing or selling
the underlying security. The alternative would create a gap in the
prohibition against fraudulent and manipulative activity in connection
with security-based swaps and increase the risk of such activity to the
detriment of investors. In contrast, final Rule 9j-1(c) is designed so
that a person cannot escape liability under section 9(j) of the
Exchange Act or Rule 9j-1(a) with respect to a security-based swap by
limiting all of its actions to purchases or sales of the security or
narrow-based security index underlying that security-based swap.
---------------------------------------------------------------------------

    \355\ MFA Letter at 2, 8-9.
---------------------------------------------------------------------------

6. Limit Activities Prohibited Under Rule 15fh-4(c)
    One commenter suggested that final Rule 15fh-4(c) should limit the
prohibited interference to knowingly making untrue statements or
omitting material facts.\356\ As discussed in section III.B, Rule 15fh-
4(c) protects the independence and objectivity of an SBS Entity's CCO
by prohibiting undue influence by other personnel. Such influence could
take many forms and is not limited to material misstatements or
omissions. The Commission is concerned that limiting prohibited
activities to material misstatements and omissions, as suggested by the
commenter, would fail to adequately protect the CCO from undue
influence and consequently reduce the rule's benefit. As discussed in
section V.E.1, by encouraging officers, directors, supervised persons,
and employees of SBS Entities to exercise reasonable attention and care
in their dealings with CCOs, final Rule 15fh-4(c) would foster
compliance in SBS Entities, reduce the risk of fraudulent and
manipulative conduct, and facilitate decision making in SBS Entities.
The suggested alternative, by its limited nature, may be less likely to
encourage such exercise of reasonable attention and care in dealings
with CCOs. Accordingly, the adopted approach is preferable to the
alternative.
---------------------------------------------------------------------------

    \356\ ISDA-IIB-SIFMA CCO Letter at 2.
---------------------------------------------------------------------------

VI. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \357\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) of the Administrative Procedure
Act,\358\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \359\ Section 605(b) of the RFA states that this
requirement shall not apply to any proposed rule or proposed rule
amendment which, if adopted, would not have a significant economic
impact on a substantial number of small entities.\360\ The Commission
certified in the 2021 Proposing Release that new Rules 9j-1 and 15fh-
4(c) would not have a significant economic impact on any ``small
entity'' for purposes of the RFA.\361\ The Commission received no
comments on its certification.
---------------------------------------------------------------------------

    \357\ 5 U.S.C. 601 et seq.
    \358\ 5 U.S.C. 603(a).
    \359\ Although section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
rulemaking, are set forth in 17 CFR 240.0-10 (``Rule 0-10'') under
the Exchange Act. See Final Definitions of ``Small Business'' and
``Small Organization'' for Purposes of the Regulatory Flexibility
Act, Exchange Act Release No. 18452 (Jan. 28, 1982), 47 FR 5215
(Feb. 4, 1982) (File No. S7-879).
    \360\ See 5 U.S.C. 605(b).
    \361\ See 2021 Proposing Release, 87 FR at 6702-03.
---------------------------------------------------------------------------

    For purposes of Commission rulemaking in connection with the RFA, a
small entity includes: (1) when used with reference to an ``issuer'' or
a ``person,'' other than an investment company, an ``issuer'' or
``person'' that, on the last day of its most recent fiscal year, had
total assets of $5 million or less; \362\ or (2) a broker-dealer with
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to 17 CFR 240.17a-5(d)
under the Exchange Act,\363\ or, if not required to file such
statements, a broker-dealer with total capital (net worth plus
subordinated liabilities) of less than $500,000 on the last business
day of the preceding fiscal year (or in the time that it has been in
business, if shorter); and is not affiliated with any person (other
than a natural person) that is not a small business or small
organization.\364\
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    \362\ See 17 CFR 240.0-10(a).
    \363\ 17 CFR 240.17a-5(d).
    \364\ See 17 CFR 240.0-10(c).
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    Based on available information about the security-based swap
market, the market, while broad in scope, is largely dominated by
entities such as those that will be covered by the SBSD and MSBSP
definitions. Based on feedback from industry participants about the
security-based swap market, the Commission continues to believe that:
(1) the types of entities that are and will continue to register with
the Commission as SBSDs (i.e., because they engage in more than a de
minimis amount of dealing activity involving security-based swaps)--
which generally would be large financial institutions--would not be
``small entities'' for purposes of the RFA; and (2) the types of
entities that may have security-based swap positions above the level
required to register as MSBSPs would not be ``small entities'' for
purposes of the RFA.
    Although Rule 15fh-4(c) applies only to SBS Entities, Rule 9j-1 is
not on its face limited to SBS Entities. However, while it is possible
that other parties may engage in security-based swap transactions, the
Commission does not believe that any such entities would be ``small
entities'' as defined in Exchange Act Rule 0-10.\365\ Feedback from
industry participants about the security-based swap market indicates
that only persons or entities with assets significantly in excess of $5
million (or with annual receipts significantly in excess of $7 million)
participate in the security-based swap market. With respect to Rule 9j-
1, even to the extent that a small number of transactions did have a
counterparty that was defined as a ``small entity'' under Rule 0-10,
the Commission believes it unlikely that the rule would have a
significant economic impact on such entities, as the rule prohibits
fraudulent and manipulative acts, activities which are in most cases
already prohibited.
---------------------------------------------------------------------------

    \365\ See 17 CFR 240.0-10(a).
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission certifies that Rules 9j-1
and 15fh-4(c) will not have a significant

economic impact on a substantial number of small entities for purposes
of the RFA.

VII. Other Matters

    Pursuant to the Congressional Review Act,\366\ the Office of
Information and Regulatory Affairs has designated these rules as not a
``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \366\ 5 U.S.C. 801 et seq.
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    If any of the provisions of these final rules, or the application
thereof to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or application of such
provisions to other persons or circumstances that can be given effect
without the invalid provision or application.

Statutory Authority

    The Commission is adopting the new rules and rule amendment
contained in this release under the authority set forth in the Exchange
Act, 15 U.S.C. 78a et seq., as amended, and, particularly sections 2,
3(b), 9(i), 9(j), 10, 15, 15F, and 23(a) thereof (15 U.S.C. 78b,
78c(b), 78i(i), 78i(j), 78j, 78o, 78o-10, and 78w(a)).

List of Subjects in 17 CFR Part 240

    Administrative practice and procedure, Brokers, Confidential
business information, Fraud, Reporting and recordkeeping requirements,
Securities, Swaps.

Text of the Final Rule

    For the reasons set forth in the preamble, title 17, chapter II of
the Code of Federal Regulations is amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
1. The general authority citation for part 240 continues to read, and
the sectional authority for Sec.  240.15fh-1 is revised to read, as
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78j-4, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o,
78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll,
78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201
et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18
U.S.C. 1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub.
L. 112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise
noted.

    Sections 240.15fh-1 through 240.15Fh-6 and 240.15Fk-1 are also
issued under sec. 943, Pub. L. 111-203, 124 Stat. 1376.
* * * * *

Sec. Sec.  240.10a-1 and 240.10a-2  [Amended]

0
2. Move reserved Sec. Sec.  240.10a-1 and 240.10a-2 from undesignated
center heading ``Hypothecation of Customers' Securities'' to
undesignated center heading ``Manipulative and Deceptive Devices and
Contrivances'' in numerical order.

0
3. Add Sec.  240.9j-1 under the undesignated center heading
``Manipulative and Deceptive Devices and Contrivances'' to read as
follows:

Sec.  240.9j-1  Prohibition against fraud, manipulation, or deception
in connection with security-based swaps.

    (a) It shall be unlawful for any person, directly or indirectly, to
effect any transaction in, or attempt to effect any transaction in, any
security-based swap, or to purchase or sell, or induce or attempt to
induce the purchase or sale of, any security-based swap (including but
not limited to, in whole or in part, the execution, termination (prior
to its scheduled maturity date), assignment, exchange, or similar
transfer or conveyance of, or extinguishing of any rights or
obligations under, a security based-swap, as the context may require),
in connection with which such person:
    (1) Employs or attempts to employ any device, scheme, or artifice
to defraud or manipulate;
    (2) Makes or attempts to make any untrue statement of a material
fact, or omits to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they
were made, not misleading;
    (3) Obtains money or property by means of any untrue statement of a
material fact or any omission to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which they were made, not misleading;
    (4) Engages in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person;
    (5) Attempts to obtain money or property by means of any untrue
statement of a material fact or any omission to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading, or attempts
to engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person; or
    (6) Manipulates or attempts to manipulate the price or valuation of
any security-based swap, or any payment or delivery related thereto.
    (b) Wherever communicating, or purchasing or selling a security
(other than a security-based swap) while in possession of material
nonpublic information would violate, or result in liability to any
purchaser or seller of the security under, either the Act or the
Securities Act of 1933, or any rule or regulation thereunder, such
conduct in connection with a purchase or sale of a security-based swap
with respect to such security or with respect to a group or index of
securities including such security shall also violate, and result in
comparable liability to any purchaser or seller of that security under,
such provision, rule, or regulation.
    (c) Wherever taking any of the actions set forth in paragraph (a)
of this section involving a security-based swap would violate, or
result in liability under, Section 9(j) of the Act or this section,
such conduct, when taken by a counterparty to such security-based swap
(or any affiliate of, or a person acting in concert with, such
security-based swap counterparty in furtherance of such prohibited
activity), in connection with a purchase or sale of a security, loan,
or group or index of securities on which such security-based swap is
based, shall also violate, and shall be deemed a violation of, section
9(j) of the Act or paragraph (a) of this section.
    (d) For purposes of this section, the terms ``purchase'' and
``sale'' shall have the same meanings as set forth in Sections 3(a)(13)
(15 U.S.C. 78c(a)(13)) and 3(a)(14) (15 U.S.C. 78c(a)(14)) of the Act.
    (e) A person shall not be liable under paragraphs (a)(1) through
(a)(5) of this section solely for being aware of material nonpublic
information while taking the following actions:
    (1) Actions taken by a person in accordance with binding
contractual rights and obligations under a security-based swap (as
reflected in the written documentation governing such security-based
swap or any amendment thereto) so long as the person demonstrates that:
    (i) The security-based swap was entered into, or the amendment was
made, before the person became aware of such material nonpublic
information, and
    (ii) The security-based swap was entered into in good faith and not
as part of a plan or scheme to evade the prohibitions of this section.
    (2) Actions taken by a person other than a natural person if the
person demonstrates that:
    (i) The individual making the investment decision on behalf of the
person taking the action was not aware of the material nonpublic
information, and

    (ii) The person had implemented reasonable policies and procedures,
taking into consideration the nature of the person's business, to
ensure that individuals making investment decisions would not be in
violation of paragraphs (a)(1) through (a)(5) of this section. These
policies and procedures may include those that restrict effecting a
transaction in, or purchasing or selling, any security, including any
security-based swap, as to which the person has material nonpublic
information, or those that prevent such individuals from becoming aware
of such information.

0
4. Redesignate Sec.  240.15Fh-4 as Sec.  240.15fh-4 and amend newly
redesignated Sec.  240.15fh-4 by:
0
a. Revising the section heading; and
0
b. Adding paragraph (c).
    The revisions read as follows:

Sec.  240.15fh-4  (Rule 15fh-4) Antifraud provisions for security-based
swap dealers and major security-based swap participants; special
requirements for security-based swap dealers acting as advisors to
special entities.

* * * * *
    (c) No undue influence over chief compliance officer. It shall be
unlawful for any officer, director, supervised person, or employee of a
security-based swap dealer or major security-based swap participant, or
any person acting under such person's direction, to directly or
indirectly take any action to coerce, manipulate, mislead, or
fraudulently influence the security-based swap dealer's or major
security-based swap participant's chief compliance officer in the
performance of their duties under the Federal securities laws or the
rules and regulations thereunder.

    By the Commission.

    Dated: June 7, 2023.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2023-12592 Filed 6-29-23; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 82, Number 85 (Thursday, May 4, 2017)]
[Notices]
[Pages 20922-20923]
[FR Doc No: 2017-08971]

=======================================================================
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SECURITIES AND EXCHANGE COMMISSION

[SEC File No. 270-513, OMB Control No. 3235-0571]

Submission for OMB Review; Comment Request

Upon Written Request, Copies Available From: Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE., Washington, DC
20549-2736

Extension:
    Rule 206(4)-6

    Notice is hereby given that pursuant to the Paperwork Reduction Act
of 1995 (44 U.S.C. 3501 et seq.) the Securities and Exchange Commission
(``Commission'') has submitted to the Office of Management and Budget
(``OMB'') a request for extension of the previously approved collection
of information discussed below.
    The title for the collection of information is ``Rule 206(4)-6''
under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.)
(``Advisers Act'') and the collection has been approved under OMB
Control No. 3235-0571. The Commission adopted rule 206(4)-6 (17 CFR
275.206(4)-6), the proxy voting rule, to address an investment
adviser's fiduciary obligation to clients who have given the adviser
authority to vote their securities. Under the rule, an investment
adviser that exercises voting authority over client securities is
required to: (i) Adopt and implement policies and procedures that are
reasonably designed to ensure that the adviser votes securities in the
best interest of clients, including procedures to address any material
conflict that may arise between the interest of the adviser and the
client; (ii) disclose to clients how they may obtain information on how
the adviser has voted with respect to their securities; and (iii)
describe to clients the adviser's proxy voting policies and procedures
and, on request, furnish a copy of the policies and procedures to the
requesting client. The rule is designed to assure that advisers that
vote proxies for their clients vote those proxies in their clients'
best interest and provide

clients with information about how their proxies were voted.
    Rule 206(4)-6 contains ``collection of information'' requirements
within the meaning of the Paperwork Reduction Act. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number. The collection is mandatory and responses to the disclosure
requirement are not kept confidential.
    The respondents are investment advisers registered with the
Commission that vote proxies with respect to clients' securities.
Advisory clients of these investment advisers use the information
required by the rule to assess investment advisers' proxy voting
policies and procedures and to monitor the advisers' performance of
their proxy voting activities. The information required by Advisers Act
rule 204-2, a recordkeeping rule, also is used by the Commission staff
in its examination and oversight program. Without the information
collected under the rules, advisory clients would not have information
they need to assess the adviser's services and monitor the adviser's
handling of their accounts, and the Commission would be less efficient
and effective in its programs.
    The estimated number of investment advisers subject to the
collection of information requirements under the rule is 10,942. It is
estimated that each of these advisers is required to spend on average
10 hours annually documenting its proxy voting procedures under the
requirements of the rule, for a total burden of 109,420 hours. We
further estimate that on average, approximately 292 clients of each
adviser would request copies of the underlying policies and procedures.
We estimate that it would take these advisers 0.1 hours per client to
deliver copies of the policies and procedures, for a total burden of
319,506 hours. Accordingly, we estimate that rule 206(4)-6 results in
an annual aggregate burden of collection for SEC-registered investment
advisers of a total of 428,926 hours.
    Records related to an adviser's proxy voting policies and
procedures and proxy voting history are separately required under the
Advisers Act recordkeeping rule 204-2 (17 CFR 275.204-2). The standard
retention period required for books and records under rule 204-2 is
five years, in an easily accessible place, the first two years in an
appropriate office of the investment adviser. OMB has previously
approved the collection with this retention period.
    The public may view the background documentation for this
information collection at the following Web site, www.reginfo.gov.
Comments should be directed to: (i) Desk Officer for the Securities and
Exchange Commission, Office of Information and Regulatory Affairs,
Office of Management and Budget, Room 10102, New Executive Office
Building, Washington, DC 20503, or by sending an email to:
<EMAIL_ADDRESS>and (ii) Pamela Dyson, Director/Chief
Information Officer, Securities and Exchange Commission, c/o Remi
Pavlik-Simon, 100 F Street NE., Washington, DC 20549 or send an email
to<EMAIL_ADDRESS>Comments must be submitted to OMB within 30
days of this notice.

    Dated: April 28, 2017.
Eduardo Aleman,
Assistant Secretary.
[FR Doc. 2017-08971 Filed 5-3-17; 8:45 am]
 BILLING CODE 8011-01-P