[Federal Register Volume 87, Number 24 (Friday, February 4, 2022)]
[Proposed Rules]
[Pages 6652-6706]
[FR Doc No: 2021-27531]

Vol. 87

Friday,

No. 24

February 4, 2022

Part II

Securities and Exchange Commission

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17 CFR Part 240

Prohibition Against Fraud, Manipulation, or Deception in Connection
With Security-Based Swaps; Prohibition Against Undue Influence Over
Chief Compliance Officers; Position Reporting of Large Security-Based
Swap Positions; Proposed Rule

Federal Register / Vol. 87, No. 24 / Friday, February 4, 2022 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-93784; File No. S7-32-10]
RIN 3235-AK77

Prohibition Against Fraud, Manipulation, or Deception in
Connection With Security-Based Swaps; Prohibition Against Undue
Influence Over Chief Compliance Officers; Position Reporting of Large
Security-Based Swap Positions

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is re-proposing for comment a rule under the Securities
Exchange Act of 1934 (``Exchange Act''), which would be a new rule
designed to prevent fraud, manipulation, and deception in connection
with effecting transactions in, or inducing or attempting to induce the
purchase or sale of, any security-based swap. The rule is designed
specifically to take into account the unique features of a security-
based swap and would explicitly reach misconduct in connection with the
ongoing payments and deliveries that typically occur throughout the
life of a security-based swap. The Commission also is proposing a new
rule, which would make it 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 (``CCO'') in the performance of their duties under
the federal securities laws or the rules and regulations thereunder.
Finally, the Commission is using its authority under the Exchange Act
to propose for comment a new rule, which would require any person with
a security-based swap position that exceeds a certain threshold to
promptly file with the Commission a schedule disclosing certain
information related to its security-based swap position.

DATES: Comments should be received on or before March 21, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/regulatory-actions/how-to-submit-comments); or
     Send an email to [email protected]. Please include
File Number S7-32-10 on the subject line; or

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.

All submissions should refer to File Number S7-32-10. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
internet website (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Room 1580, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Operating conditions may limit access to the Commission's public
reference room. All comments received will be posted without change.
Persons submitting comments are cautioned that the Commission does not
redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
publicly available.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the SEC's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director, at
(202) 551-5870, Office of Derivatives Policy, Division of Trading and
Markets, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-8010.

SUPPLEMENTARY INFORMATION: The Commission is re-proposing for comment
17 CFR 240.9j-1 (``Rule 9j-1'') under the Exchange Act, which would be
a new rule designed to prevent fraud, manipulation, and deception in
connection with effecting transactions in, or inducing or attempting to
induce the purchase or sale of, any security-based swap. The Commission
also is proposing new 17 CFR 240.15Fh-4(c) (``Rule 15Fh-4(c)'') under
the Exchange Act, which would make it 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
CCO in the performance of their duties under the Federal securities
laws or the rules and regulations thereunder. Finally, the Commission
is using its authority under Section 10B(d) of the Exchange Act to
propose for comment new 17 CFR 240.10B-1 (``Rule 10B-1''), which would
require any person with a security-based swap position that exceeds a
certain threshold to promptly file with the Commission a schedule
disclosing among other things: (1) The applicable security-based swap
position; (2) positions in any security or loan underlying the
security-based swap position; and (3) any other instrument relating to
the underlying security or loan, or group or index of securities or
loans. Proposed Rule 10B-1 includes different reporting thresholds for
security-based swaps tied to debt securities and security-based swaps
tied to equity securities. The Commission would make all filings
received pursuant to proposed Rule 10B-1 available to the public, with
the goal of increasing transparency and oversight in the security-based
swap market.
I. Introduction
    A. Background
    B. Observations in the Credit Default Swap Market
    C. Overview of the Proposal
    1. Re-Proposed Rule 9j-1
    2. Proposed Rule 15Fh-4(c)
    3. Proposed Rule 10B-1 20
II. Re-Proposed Rule 9j-1: Prohibition Against Fraud, Manipulation,
and Deception in Connection With Security-Based Swaps
    A. Prior Commission Action
    B. Scope of Re-Proposed Rule 9j-1
    1. General Antifraud and Anti-Manipulation Provisions
    2. ``Purchases'' and ``Sales'' in the Context of Security-Based
Swaps and Limited Safe Harbor for Certain Limited Actions
    3. Prohibition on Price Manipulation
    C. Liability Under Proposed Rule 9j-1 in Connection With the
Purchase or Sale of a Security
    D. Preventing Undue Influence Over Chief Compliance Officers;
Policies and Procedures Regarding Compliance With Re-Proposed Rule
9j-1, Proposed Rule 10B-1 and Proposed Rule 15Fh-4(c)
    E. Request for Comment
III. Proposed Rule 10B-1: Position Reporting of Large Security-Based
Swap Positions
    A. Proposed Definitions and Thresholds

    1. Reporting Thresholds for Debt Security-Based Swaps (Including
CDS)
    2. Reporting Threshold for Security-Based Swaps on Equity
    3. Amendments to a Previously Filed Schedule 10B
    B. Information Required To Be Included in Schedule 10B
    C. Cross-Border Issues
    D. Structured Data Requirement for Schedule 10B
    E. Request for Comment
IV. General Request for Comment
V. Paperwork Reduction Act
    A. Summary of Collections of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total Annual Recordkeeping Burden
    1. Initial Costs and Burdens
    2. Ongoing Costs and Burdens
    E. Collection of Information Is Mandatory
    F. Confidentiality
    G. Request for Comment
VI. Economic Analysis
    A. Introduction
    B. Broad Economic Considerations
    C. Baseline
    1. Existing Regulatory Frameworks
    2. Security-Based Swap Data, Market Participants, Dealing
Structures, Levels of Security-Based Swap Trading Activity, and
Position Concentration
    D. Consideration of Costs and Benefits; Consideration of Burden
on Competition and Promotion of Efficiency, Competition and Capital
Formation
    1. Re-Proposed Rule 9j-1 and Proposed Rule 15Fh-4(c)
    i. Benefits
    ii. Costs
    2. Proposed Rule 10B-1
    i. Benefits
    ii. Costs
    iii. Reporting Thresholds
    (A) Thresholds for Credit Default Swaps
    (B) Thresholds for Non-CDS Debt Security-Based Swaps and
Security-Based Swaps on Equity
    E. Reasonable Alternatives
    1. Implementing a More Prescriptive Approach in Re-Proposed Rule
9j-1
    2. Safe Harbor for Hedging Exposure Arising Out of Lending
Activities
    3. Mandating That Security-Based Swap Data Repositories Report
or Publicly Disclose Positions
    4. Adopting Position Limits
    5. Threshold Alternatives for Security-Based Swaps Based on
Equity and Non-CDS Debt 173
    6. Threshold Alternatives for Credit Default Swaps
    7. Information Required To Be Reported on Schedule 10B
    F. Request for Comment
VII. Consideration of Impact on the Economy
VIII. Regulatory Flexibility Act Certification
IX. Statutory Authority

I. Introduction

A. Background

    Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act''),\1\ which established a regulatory
framework for the over-the-counter (``OTC'') derivatives market,
provides that the Commission is primarily responsible for regulating
security-based swaps, while the Commodity Futures Trading Commission
(``CFTC'') is primarily responsible for regulating swaps. The
Commission has now finalized a majority of its Title VII rules related
to security-based swaps.\2\ In accordance with those rules, a person
who satisfies the definitions of ``security-based swap dealer''
(``SBSD'') or ``major security-based swap participant'' (``MSBSP'')
(each SBSD and each MSBSP also referred to as an ``SBS Entity'' and
together referred to as ``SBS Entities'') is now required to register
with the Commission in such capacity and is therefore subject to the
Commission's regime regarding margin, capital, segregation,
recordkeeping and reporting, trade acknowledgment and verification
requirements, risk mitigation techniques for uncleared security-based
swaps, business conduct standards for security-based swap activity,
including internal supervision requirements and the requirement to
designate an individual to serve as the CCO who must take reasonable
steps to ensure that the SBS Entity establishes, maintains, and reviews
written policies and procedures reasonably designed to achieve
compliance with the Exchange Act and the rules and regulations
thereunder relating to its business as an SBS Entity.\3\ Transaction
reporting for security-based swaps has been required since November 8,
2021, with public dissemination to begin on February 14, 2022.\4\
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    \1\ Wall Street Transparency and Accountability Act of 2010,
Public Law. 111-203, Sec.  761-774, 124 Stat. 1376, 1754-1802(2010).
Unless otherwise indicated, references to ``Title VII'' in this
release are to Subtitle B of Title VII of the Dodd-Frank Act.
    \2\ See, e.g., Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, Exchange Act Release No. 74244
(Feb. 11, 2015), 80 FR 14563 (Mar. 19, 2015) (``2015 Regulation SBSR
Adopting Release''); Security-Based Swap Data Repository
Registration, Duties, and Core Principles, Exchange Act Release No.
74246 (Feb. 11, 2015), 80 FR 14437 (Mar. 19, 2015); Registration
Process for Security-Based Swap Dealers and Major Security-Based
Swap Participants, Exchange Act Release No. 75611 (Aug. 5, 2015), 80
FR 48963 (Aug. 14, 2015); Regulation SBSR--Reporting and
Dissemination of Security-Based Swap Information, Exchange Act
Release No. 78321 (July 14, 2016), 81 FR 53545 (Aug. 12, 2016)
(``2016 Regulation SBSR Adopting Release''); Applications by
Security-Based Swap Dealers or Major Security-Based Swap
Participants for Statutorily Disqualified Associated Person To
Effect or Be Involved in Effecting Security-Based Swaps, Exchange
Act Release No. 84858 (Dec. 19, 2018), 84 FR 4906 (Feb. 19, 2019);
Capital, Margin, and Segregation Requirements for Security-Based
Swap Dealers and Major Security-Based Swap Participants and Capital
and Segregation Requirements for Broker-Dealers, Exchange Act
Release No. 86175 (June 21, 2019), 84 FR 43872 (Aug. 22, 2019)
(``Capital, Margin, and Segregation Adopting Release'');
Recordkeeping and Reporting Requirements for Security-Based Swap
Dealers, Major Security-Based Swap Participants, and Broker-Dealers,
Exchange Act Release No. 87005 (Sept. 19, 2019), 84 FR 68550 (Dec.
16, 2019) (``Recordkeeping and Reporting Adopting Release''); Rule
Amendments and Guidance Addressing Cross-Border Application of
Certain Security-Based Swap Requirements, Exchange Act Release No.
87780 (Dec. 18, 2019), 85 FR 6270 (Feb. 4, 2020) (``Cross-Border
Amendments Release'').
    \3\ See Cross-Border Amendments Release, 85 FR at 6345-46. The
first SBSDs were required to be conditionally registered with the
Commission by November 1, 2021.
    \4\ See SEC Approves Registration of First Security-Based Swap
Data Repository; Sets the First Compliance Date for Regulation SBSR
(available at: https://www.sec.gov/news/press-release/2021-80). In
addition, each registered security-based swap data repository
(``SBSDR'') will be required to begin publicly disseminating
security-based swap data as of February 14, 2022, which is the first
Monday that is three months after the date that reporting began. See
2016 Regulation SBSR Adopting Release, 81 FR at 53608. Finally, the
deadline for reporting certain historical security-based swaps to an
SBSDR is two months after the date that public dissemination is
required to begin (i.e., April 14, 2022). See 2016 Regulation SBSR
Adopting Release, 81 FR at 53610.
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    In addition to the operational rules for SBS Entities and security-
based swap data reporting and public dissemination, the Dodd-Frank Act
also amended the Exchange Act in a number of important ways to prohibit
fraud, manipulation, and deception in connection with security-based
swaps. In particular, Section 763(g) of the Dodd-Frank Act expanded the
anti-manipulation provisions of Section 9 of the Exchange Act to
encompass purchases or sales of security-based swaps and requires the
Commission to adopt rules to prevent fraud, manipulation, and deception
in connection with security-based swaps. Specifically, paragraph (j) of
Section 9 makes it unlawful for ``any person, directly or indirectly,
by the use of any means or instrumentality of interstate commerce or of
the mails, or of any facility of any national securities exchange, to
effect any transaction in, or to induce or attempt to induce the
purchase or sale of, any security-based swap, in connection with which
such person engages in any fraudulent, deceptive, or manipulative act
or practice, makes any fictitious quotation, or engages in any
transaction, practice, or course of business which operates as a fraud
or deceit upon any person.'' \5\ It also provides that the Commission
``shall . . . by rules and regulations define, and prescribe means
reasonably designed to prevent, such transactions, acts, practices, and
courses of business as are fraudulent, deceptive, or

manipulative, and such quotations as are fictitious.'' \6\
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    \5\ See 15 U.S.C. 78i(j). Note that Section 9 of the Exchange
Act erroneously contains two subsection (j)s.
    \6\ See id.
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    Additionally, Section 761 of the Dodd-Frank Act modified several
definitions in both the Exchange Act and the Securities Act to account
for security-based swaps. For example, the Dodd-Frank Act amended the
definition of ``security'' in Section 3(a)(10) of the Exchange Act \7\
and Section 2(a)(1) of the Securities Act \8\ to include security-based
swaps. As a result, security-based swaps, because they are securities,
are subject to the general antifraud and anti-manipulation provisions
of the Federal securities laws, including Sections 9(a), 10(b) and 17
CFR 240.10b-5 (``Rule 10b-5'') under the Exchange Act,\9\ and Section
17(a) of the Securities Act.\10\
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    \7\ 15 U.S.C. 78c(a)(10).
    \8\ 15 U.S.C. 77b(a)(1).
    \9\ 15 U.S.C. 78j(b).
    \10\ 15 U.S.C. 77q(a).
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    Moreover, the Dodd-Frank Act amended the definitions of
``purchase'' and ``sale'' in Section 2(a)(18) of the Securities
Act,\11\ the definitions of ``buy'' and ``purchase'' in Section
3(a)(13) of the Exchange Act,\12\ and ``sale'' and ``sell'' in Section
3(a)(14) of the Exchange Act,\13\ in the context of security-based
swaps, to include the execution, termination, assignment, exchange,
transfer, or extinguishment of rights or obligations. As a result of
those changes, misconduct in connection with these actions will also be
prohibited under Sections 9 and 10(b) of the Exchange Act and Rule 10b-
5 thereunder, and Section 17(a) of the Securities Act.
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    \11\ 15 U.S.C. 77b(a)(18).
    \12\ 15 U.S.C. 78c(a)(13).
    \13\ 15 U.S.C. 78c(a)(14).
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    Finally, the Dodd-Frank Act also amended the Exchange Act to
explicitly authorize the Commission to require reporting of large
security-based swap positions. Section 763(h) of the Dodd-Frank Act,
entitled ``Position limits and position accountability for security-
based swaps and large trader reporting,'' added Section 10B to the
Exchange Act. In addition to providing the Commission with authority to
establish position limits for security-based swaps, Section 10B(d) also
provides the Commission with rulemaking authority to require reporting
of large security-based swap positions. Specifically, Section 10B(d)
authorizes the Commission to:

. . . require any person that effects transactions for such person's
own account or the account of others in any securities-based swap or
uncleared security-based swap and any security or loan or group or
narrow-based security index of securities or loans . . . to report
such information as the Commission may prescribe regarding any
position or positions in any security-based swap or uncleared
security-based swap and any security or loan or group or narrow-
based security index of securities or loans and any other instrument
relating to such security or loan or group or narrow-based security
index of securities or loans . . .\14\
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    \14\ See 15 U.S.C. 78j-2(d).

    On November 3, 2010, the Commission proposed for comment new Rule
9j-1, which would have prohibited the same categories of misconduct as
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and
Section 17(a) of the Securities Act of 1933, in the context of
security-based swaps, but would also have explicitly addressed
misconduct that is in connection with the ``exercise of any right or
performance of any obligation under'' a security-based swap.\15\ In
other words, the 2010 proposed rule would have applied to offers,
purchases, and sales of security-based swaps in the same way that the
general antifraud provisions apply to all securities, but also would
have explicitly applied to the cash flows, payments, deliveries, and
other ongoing obligations and rights that are specific to security-
based swaps.\16\
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    \15\ See Prohibition Against Fraud, Manipulation, and Deception
in Connection with Security-Based Swaps, Exchange Act Release No.
63236 (Nov. 3, 2010), 75 FR 68560 (Nov. 8, 2010) (``2010 Rule 9j-1
Proposing Release''). For purposes of this release, we will refer to
the version of Rule 9j-1 that the Commission proposed in the 2010
Rule 9j-1 Proposing Release as the ``2010 proposed rule.'' We will
generally refer to Rule 9j-1 as we propose it here as the ``proposed
rule'' or ``re-proposed Rule 9j-1.''
    \16\ See 2010 Rule 9j-1 Proposing Release, 75 FR at 68561-62.
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    The Commission has not yet finalized rules mandated by Section
9(j), nor has it proposed any reporting requirements pursuant to
Section 10B(d) of the Exchange Act. The regulatory landscape for
security-based swaps has changed since the Commission first proposed
Rule 9j-1 in 2010. At the time, efforts to reform the global OTC
derivatives markets, which had been set in motion in response to the
2008 financial crisis, had only begun, such that these markets were not
yet subject to a comprehensive regulatory framework.\17\ Since that
time, however, regulators overseeing the world's primary OTC
derivatives markets have made significant progress implementing reforms
for OTC derivatives.\18\ In addition to the progress made by the
Commission in finalizing its Title VII rulemakings related to security-
based swaps, the CFTC has largely completed its Title VII rulemakings
related to swaps, including by adopting antifraud and anti-manipulation
rules under the Commodity Exchange Act (``CEA'') to implement the Dodd-
Frank Act's amendments to Section 6(c) of the CEA.\19\ In light of the
above, the Commission believes that now is an opportune time to move
forward with the antifraud and manipulation rules required by Section
9(j) as well the rules contemplated by Section 10B(d). In addition, in
recognition of the fact that CCOs of SBS Entities play an important
role in preventing fraud and manipulation by SBS Entities and their
personnel, in that they are tasked with designing and maintaining
effective compliance systems, the Commission also is proposing an
additional measure under Section 15F(h) of the Exchange Act to protect
CCOs in the furtherance of those duties.\20\
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    \17\ Commodity Futures Trading Commission and SEC Joint Report
on International Swap Regulation, Jan. 31, 2012 (available at:
https://www.sec.gov/files/sec-cftc-intlswapreg.pdf).
    \18\ See Financial Stability Board, OTC Derivatives Market
Reforms: Note on implementation progress for 2010, Nov. 25, 2020
(available at: https://www.fsb.org/wp-content/uploads/P251120.pdf).
    \19\ 17 CFR 180.1 (``CFTC Rule 180.1'') implements the
provisions of Section 6(c)(1) of the CEA by prohibiting, among other
things, manipulative and deceptive devices employed intentionally or
recklessly, regardless of whether the conduct in question was
intended to create or did create an artificial price. CFTC Rule
180.1 also prohibits trading on the basis of material non-public
information in breach of a pre-existing duty (established by another
law or rule, agreement, understanding, or some other source) and
trading on the basis of material non-public information that was
obtained through fraud or deception. See 17 CFR 180.1. CFTC Rule
180.1(a) is modeled after Rule 10b-5 of the Exchange Act, although
it contains some notable differences, such as its application to
attempted fraud and manipulation. Id. 17 CFR 180.2 (``CFTC Rule
180.2''), promulgated pursuant to Section 6(c)(3) of the CEA and
CFTC's general rulemaking authority, addresses price manipulation
and, in line with Section 6(c)(3) of the CEA, provides that ``[i]t
shall be unlawful for any person, directly or indirectly, to
manipulate or attempt to manipulate the price of any swap, or of any
commodity in interstate commerce, or for future delivery on or
subject to the rules of any registered entity.'' A violation of CFTC
Rule 180.2 requires a showing of ``specific intent.'' See
Prohibition on the Employment, or Attempted Employment, of
Manipulative and Deceptive Devices and Prohibition on Price
Manipulation, 76 FR 41398, 41707 (Jul. 14, 2011) (``[the CFTC]
reaffirms the requirement under final Rule 180.2 that a person must
act with the requisite specific intent. In other words, recklessness
will not suffice under final Rule 180.2 as it will under final Rule
180.1.'').
    \20\ To be clear, the ultimate responsibility for compliance by
the SBS Entity with the federal securities laws, including the
requirement to have adequate compliance systems and to avoid
violations generally, rests with the SBS Entity itself.
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B. Observations in the Credit Default Swap Market

    In addition to the regulatory developments, there have been market
developments. A number of press reports and academic articles since
2010

have discussed manufactured credit events or other opportunistic
strategies in the credit default swap (``CDS'') market.\21\
Manufactured or other opportunistic CDS strategies can take a number of
different forms but generally involve CDS buyers or sellers taking
steps, with or without the participation of a company whose securities
underlie, or are referenced by, a CDS (a ``reference entity''),\22\ to
avoid, trigger, delay, accelerate, decrease, and/or increase payouts on
CDS.\23\ Some examples reported by academics and the press include:
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    \21\ See, e.g., Gina-Gail S. Fletcher, Engineered Credit Default
Swaps: Innovative or Manipulative? 94 N.Y.U. L. Rev. 1073 (2019);
see also Andras Danis & Andrea Gamba, Dark Knights: The Rise in Firm
Intervention by CDS Investors, Ga. Inst. Of Tech. Scheller Coll. of
Bus. Working Paper, Paper No. 3479635 & WBS Fin. Grp. Working Paper,
Paper No. 265 (Nov. 2019) (available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3479635); see also Henry T.C. Hu,
Corporate Distress, Credit Default Swaps, and Defaults: Information
and Traditional, Contingent, and Empty Creditors, 13 Brook. J. Corp.
Fin. & Com. L. 26-27 (Nov. 2018) (available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3302816).
    \22\ A security-based swap, including a CDS contract, may
reference a number of different types of securities, including
instruments of indebtedness, indices, interest rates, quantitative
measures, or other financial or economic interests (each a
``reference obligation'').
    \23\ In order to cash settle any CDS contract that relies on the
International Swaps and Derivatives Association (``ISDA'') standard
documentation, a Credit Derivatives Determinations Committee
(``DC'') must make a determination that a defined default event (a
``credit event'') occurred and vote to hold an auction to determine
the settlement price of the CDS. A DC is generally composed of nine
or ten dealers and five buy-side members. Once a DC determines that
a credit event has occurred and that an auction should be held, the
DC Secretary publishes auction terms, which include a list of
obligations that a CDS protection buyer can deliver to the CDS
protection seller after the auction settlement (each a ``deliverable
obligation''). Each auction consists of two parts: (1) The first
part of the auction, which involves submission of physical
settlement requests by participating dealers, aims at determining
the initial market mid-point, the net open interests, and adjustment
amounts; and (2) the second part of the auction consists of
calculating the final settlement price. Since a protection buyer has
the right to deliver any of the deliverable obligations specified on
the list, it is in the protection buyers' interest to deliver into
the auction the cheapest deliverable obligation; as a result, the
value of this ``cheapest to deliver'' deliverable obligation drives
the final settlement price. See Markit and Creditex Credit Event
Auction Primer, 1 (Feb. 2010) (available at: http://www.creditfixings.com/information/affiliations/fixings/auctions/docs/credit_event_auction_primer.pdf); see also Credit Suisse, A
Guide to Credit Events and Auctions, Jan. 11, 2012, 5 (available at:
https://doc.research-andanalytics.csfb.com/docView?language=ENG&source=emfromsendlink&format=PDF&document_id=803733390&serialid=FWHCx3yCrSE3FoEvAbEKa6fRKhqLoKs0jL1gR5W2Dfs%3D).
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     A CDS buyer working with a reference entity to create an
artificial, technical, or temporary failure-to-pay credit event in
order to trigger a payment on a CDS to the buyer (and to the detriment
of the CDS seller).\24\
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    \24\ See Hu, supra note 21 at 26-27.
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     The strategy above (as well as other strategies) can be
combined with causing the reference entity to issue a below-market debt
instrument in order to artificially increase the auction settlement
price for the CDS (i.e., by creating a new ``cheapest to deliver''
deliverable obligation).\25\
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    \25\ See Statement on Manufactured Credit Events by CFTC
Divisions of Clearing and Risk, Market Oversight, and Swap Dealer
and Intermediary Oversight (Apr. 24, 2018) (available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/divisionsstatement 042418).
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     CDS buyers endeavoring to influence the timing of a credit
event in order to ensure a payment (upon the triggering of the CDS)
before expiration of a CDS, or a CDS seller taking similar actions to
avoid the obligation to pay by ensuring a credit event occurs after the
expiration of the CDS, or taking actions to limit or expand the number
and/or kind of deliverable obligations in order to impact the recovery
rate.\26\
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    \26\ See Hu, supra note 21 at 22-26.
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     CDS sellers offering financing to restructure a reference
entity in such a way that ``orphans'' the CDS--eliminating or reducing
the likelihood of a credit event by moving the debts off the balance
sheets of the reference entity and onto the balance sheets of a
subsidiary or an affiliate that is not referenced by the CDS.\27\
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    \27\ See Fletcher, supra note 21 at 1101.
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     Taking actions, including as part of a larger
restructuring, to increase (or decrease) the supply of deliverable
obligations by, for example, adding (or removing) a co-borrower to
existing debt of a reference entity, thereby increasing (or decreasing)
the likelihood of a credit event and the cost of CDS.\28\
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    \28\ See Fletcher, supra note 21 at 1098. See also CFTC Talks
Podcast, Credit Derivatives, (Jul. 10, 2019) (available at: https://www.cftc.gov/Exit/index.htm?https://youtu.be/Qqo9KR6JXaM?).
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    In June 2019, the former SEC Chairman, together with the principals
of the CFTC and the U.K. Financial Conduct Authority at the time,
issued a public statement stating that the ``continued pursuit of
various opportunistic strategies in the credit derivatives markets,
including but not limited to those that have been referred to as
`manufactured credit events,' may adversely affect the integrity,
confidence and reputation of the credit derivatives markets, as well as
markets more generally'' (``2019 Joint Statement'').\29\ Additionally,
in April 2018 the Board of Directors of ISDA stated their belief that
``narrowly tailored defaults . . . could negatively impact the
efficiency, reliability and fairness of the overall CDS market.'' \30\
Following this statement, in March 2019, ISDA introduced amendments to
its Credit Derivatives Definitions designed to address certain issues
related to manufactured credit events, which ISDA termed ``narrowly
tailored credit events'' (``ISDA Amendments'').\31\
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    \29\ See Joint Statement on Opportunistic Strategies in the
Credit Derivatives Market (June 24, 2019) (available at: https://www.sec.gov/news/press-release/2019-106).
    \30\ See ISDA Board Statement on Narrowly Tailored Credit Events
(April 11, 2018) (available at: ISDA Board Statement on Narrowly
Tailored Credit Events--International Swaps and Derivatives
Association).
    \31\ See Proposed Amendments to the 2014 ISDA Credit Derivatives
Definitions Relating to Narrowly Tailored Credit Event (Mar. 6,
2019) (available at: https://www.isda.org/2019/03/06/proposed-amendments-to-the-2014-isda-credit-derivatives-definitions-relating-to-narrowly-tailored-credit-events/). On September 19, 2019, an
update to the 2019 Joint Statement was issued. See Update to Joint
Statement (Sept. 19, 2019) (available at: https://www.sec.gov/news/public-statement/update-june-2019-joint-statement-opportunistic-strategies-credit-derivatives). The updated statement welcomed
ISDA's efforts, but also noted that 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.
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C. Overview of the Proposal

1. Re-Proposed Rule 9j-1
    The Commission has decided to re-propose Rule 9j-1. As described in
detail below, re-proposed Rule 9j-1 follows the same general approach
as the 2010 proposed rule in that it would prohibit the same categories
of misconduct as Section 10(b) of the Exchange Act and Rule 10b-5
thereunder, and Section 17(a) of the Securities Act of 1933 in the
context of security-based swaps, including misconduct that is in
connection with the exercise of any right or performance of any
obligation under a security-based swap.\32\ Unlike the 2010 proposed
rule, however, this new proposal also includes an anti-manipulation
provision similar to 17 CFR 108.2 (``CFTC Rule 180.2'').\33\ Further,
re-proposed Rule 9j-1 would provide that: (1) A person with material
non-public information about a security cannot avoid liability under
the securities laws by making purchases or sales in the security-based
swap (as opposed to purchasing or selling the underlying security), and
(2) a person cannot avoid liability under Section 9(j) or re-proposed
Rule 9j-1 in connection with a fraudulent scheme involving a security-
based swap by instead making purchases or sales in the underlying

security (as opposed to purchases or sales in -the security-based
swap).\34\
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    \32\ See re-proposed Rule 9j-1(a) and (e).
    \33\ See re-proposed Rule 9j-1(b).
    \34\ See re-proposed Rule 9j-1(c) and (d).
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    The Commission recognizes that CDS buyers and sellers regularly
engage in legitimate interactions with reference entities, and often
offer critical means of restructuring and funding for reference
entities. Moreover, we also understand that CDS transactions are an
important means by which debt holders hedge their underlying debt
instruments, and that the absence of such hedging opportunities could
impact prospective investors' willingness and ability to invest in that
underlying market. The Commission preliminarily believes the proposal
is sufficiently tailored to balance these concerns but, in section II.E
below, is also soliciting comment on how it can address manufactured or
other opportunistic strategies that involve fraudulent, deceptive, or
manipulative activity, or that involve such quotations as are
fictitious, without impairing the proper functioning of the security-
based swap markets or other securities markets.
    Further, the scope of re-proposed Rule 9j-1 is not limited to CDS.
Fraudulent, deceptive, or manipulative conduct, such as providing false
or incomplete information to a counterparty to secure better terms or
pricing or to alter the performance of ongoing rights and obligations,
has the potential to harm counterparties to all forms of swaps,
including equity and non-CDS debt security-based swaps. Manipulation of
the underlying reference security can affect the pricing of an equity
or debt security-based swaps, as well as the ongoing payments and
obligations that are based on the value of that reference security.
Further, in some cases, particularly in instances involving security-
based swaps transactions that are effected over the internet, there is
a potential for trading software to distort pricing and payouts on
security-based swaps.\35\ Finally, to the extent an opportunistic
strategy alters the operations of a reference entity, counterparties to
any security-based swap based on that reference entity could be
impacted; the potential harm is not limited to CDS holders. As a
result, re-proposed Rule 9j-1 applies to all transactions in security-
based swaps, consistent with the 2010 proposed rule.
---------------------------------------------------------------------------

    \35\ See e.g., SEC Investor Alert: Binary Options Fraud
available at: https://www.investor.gov/protect-your-investments/fraud/types-fraud/binary-options-fraud. (stating that the SEC has
received numerous complaints alleging that certain ``internet-based
binary options trading platforms manipulate the trading software to
distort binary options prices and payouts.''). The SEC Investor
Alert represents the views of the staff of the Office Investor
Education and Advocacy. It is not a rule, regulation, or statement
of the Commission. The Commission has neither approved nor
disapproved its content. The SEC Investor Alert, like all staff
statements, has no legal force or effect: It does not alter or amend
applicable law, and it creates no new or additional obligations for
any person. Depending on the facts and circumstances, binary options
based on securities may be security-based swaps.
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2. Proposed Rule 15Fh-4(c)
    The Commission also is proposing a rule aimed at protecting the
independence and objectivity of an SBS Entity's CCO by preventing the
personnel of an SBS Entity from taking actions to coerce, mislead, or
otherwise interfere with the CCO. The Commission recognizes that SBS
Entities dominate the security-based swap market and also recognizes
the important role that CCOs of SBS Entities play in ensuring
compliance by SBS Entities and their personnel with the federal
securities laws. As a result, the Commission is proposing Rule15Fh-4(c)
which would make it unlawful for any officer, director, supervised
person, or employee of an SBS Entity, or any person acting under such
person's direction, to directly or indirectly take any action to
coerce, manipulate, mislead, or fraudulently influence the SBS Entity's
CCO in the performance of their duties under the Federal securities
laws or the rules and regulations thereunder.
3. Proposed Rule 10B-1
    Finally, the Commission also recognizes that transparency can be
beneficial to market participants so that they can act in an informed
manner to protect their own interests. One example involves what some
legal observers refer to as ``net-short debt activism''--where a market
participant with a large CDS position and a controlling voting interest
in the debt of a reference entity votes against its interest as a debt
holder to ensure that a credit event occurs (such as by blocking a
restructuring or voting against curing a technical default under the
terms of a loan).\36\ In such instances, both the Commission and
relevant market participants--particularly issuers of the underlying
debt securities--could benefit from having access to information that
may indicate that one or more market participants has a financial
incentive to take an action that would be harmful to the issuer, which
in turn could impact the issuer's other security holders.\37\ In
particular, such notice would provide the relevant parties with the
ability to take appropriate action to limit any potential harmful
consequences. Given such benefits to the market, which may accrue even
where the facts and circumstances of a particular situation are not
indicative of potentially fraudulent, manipulative, or deceptive
conduct, the Commission believes that public reporting of large CDS
positions would help to provide such advance notice.
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    \36\ See Joshua A. Feltman, Emil A. Kleinhaus, and John R.
Sobolewski, Wachtell, Lipton, Rosen & Katz, The Rise of Net-Short
Debt Activism, Harvard Law School Forum on Corporate Governance and
Financial Regulation (Aug. 7, 2018) (available at: https://corpgov.law.harvard.edu/2018/08/07/the-rise-of-the-net-short-debt-activist/). See also Matt Levine, Aurelius Broke Windstream's Bonds
to Save Them, Bloomberg View (Feb. 27, 2019).
    \37\ Harm to the issuer could lead to harm to its employees,
customers, and business partners, among others. Any one of these
indirect effects could create further harm to the issuer and its
security holders.
---------------------------------------------------------------------------

    Additional transparency regarding large security-based swap
positions also could alert market participants, including
counterparties, as well as issuers of securities and their security
holders, to the risk posed by the concentrated exposure of a
counterparty. Such transparency also could enhance risk management by
security-based swap counterparties and inform pricing of the security-
based swaps. For example, if a single counterparty has a $5 billion
security-based swap position distributed equally among five different
dealers on the same underlying equity security, public reporting of
that security-based swap position would alert each dealer to the total
exposure of the reporting counterparty. In the event of an issue
involving the underlying security or the counterparty's ability to make
a payment on the security-based swaps composing the large position,
some or all of those dealers could then take actions to protect their
positions, such as increasing their hedges against the relevant
security-based swaps or calling for additional margin, if permitted.
Knowledge of the total position of a counterparty also may inform a
dealer's actions in the event that the counterparty defaults on its
obligations under the security-based swap.
    Finally, transparency about security-based swap positions could
play an important role in protecting market integrity, including by
providing the Commission and other regulators with access to
information that may indicate that a person (or a group of persons) is
building up a large security-based swap position, which may be relevant
for a number of reasons, as discussed in greater detail in section III.
As previously discussed, the manufactured or other opportunistic
strategies that have been reported to have taken place in the CDS
markets take on a variety of

forms. Although some of those strategies may have involved fraudulent
or manipulative conduct, including those that involve parties acting to
artificially inflate CDS payments, others do not necessarily constitute
prohibited activity. The common thread to all of those strategies,
however, is one or more parties taking affirmative steps to avoid,
trigger, delay, accelerate, decrease, and/or increase payouts on
CDS.\38\ Given the importance of the CDS market and its
interconnectedness with the underlying debt securities that CDS may be
used to hedge, the Commission believes that additional transparency in
the CDS market can help to ensure that it remains fair, orderly, and
efficient. For similar reasons, such transparency also should benefit
the market for other types of security-based swaps.
---------------------------------------------------------------------------

    \38\ See Fletcher, supra note 21 at 1098 (``[I]t is evident that
engineered CDS transactions are unfair, create the perception of the
market being rigged, and undermine the integrity of the market. . .
. Fundamentally, parties enter into CDS expecting that the ultimate
determination of whether the contract pays off rests with market
forces, over which neither party has control. However, when a
counterparty interferes and skews the outcome of the CDS contract to
her benefit, she undercuts her counterparties' reasonable
expectations and unjustly transfers wealth from her counterparty to
herself.'').
---------------------------------------------------------------------------

    Accordingly, the Commission has decided to utilize its rulemaking
authority under Section 10B of the Exchange Act to propose new Rule
10B-1, which would be a large trader position reporting rule for
security-based swaps. Specifically, proposed Rule 10B-1 would require
public reporting of, among other things: (1) Certain large positions in
security-based swaps; (2) positions in any security or loan underlying
the security-based swap position; and (3) positions in any other
instrument relating to the underlying security or loan or group or
index of securities or loans. As described in detail below, proposed
Rule 10B-1 would, among other things, include a specific quantitative
threshold for when public reporting is required.
    The Commission recognizes that market participants are already
subject to the requirements of 17 CFR 242.900 through 242.909
(``Regulation SBSR''), which governs regulatory reporting of security-
based swap transactions to security-based swap data repositories
(``SBSDRs'') and public dissemination of some of that transaction data
pursuant to Section 13(m) of the Exchange Act.\39\ Although both sets
of requirements are intended to provide greater transparency in the
security-based swap market, certain differences between the two
highlight the need to propose Rule 10B-1. For example, pursuant to the
statutory authority in Section 13(m)(1), Regulation SBSR requires real-
time public reporting to SBSDRs and public dissemination of security-
based swap transaction data but not of position data as is contemplated
by Section 10B and proposed Rule 10B-1.\40\ Although registered SBSDRs
are required to establish, maintain, and enforce written policies and
procedures reasonably designed to calculate positions for all persons
with open security-based swaps for which the SBSDR maintains
records,\41\ they are not required to make those reports public.\42\ As
a result, any public position reporting pursuant to Regulation SBSR
would need to be completely anonymous with respect to both the person
building up large, concentrated security-based swap positions, and each
of its counterparties. Finally, Regulation SBSR only requires reporting
and public dissemination of security-based swaps, in contrast to
Section 10B, which authorizes the Commission to require reporting of
positions in both security-based swaps and related securities.\43\ The
Commission believes that requiring reporting of related securities
serves an important function in allowing both the Commission and the
public to develop a greater understanding of the impact that a large
security-based swap position can have on the broader securities
markets.
---------------------------------------------------------------------------

    \39\ See supra note 4 and accompanying text (explaining that
transaction reporting for security-based swaps has been required
since November 8, 2021, with public dissemination to begin on
February 14, 2022).
    \40\ See, e.g., Section 13(m)(1)(C) of the Exchange Act, which
provides that ``[t]he Commission is authorized to provide by rule
for the public availability of security-based swap transaction,
volume, and pricing data'' subject to certain conditions and
requirements. 15 U.S.C. 78m(m)(1)(C).
    \41\ See 17 CFR 240.13n-5(b)(2).
    \42\ In fact, Section 13(m)(1)(C)(iii) of the Exchange Act
provides that any Commission rulemaking pursuant to Section 13(m)
(i.e., Regulation SBSR) ``shall require real-time public reporting
for [security-based swap] transactions, in a manner that does not
disclose the business transactions and market positions of any
person.'' See 15 U.S.C. 78m(m)(1)(C)(iii). By contrast, Section
10B(d), which is titled ``Large Trader Reporting,'' does not contain
a limitation on disclosing the identity of security-based swap
counterparties in connection with security-based swap position
reporting. As discussed in section III, however, a person subject to
the reporting requirements of proposed Rule 10B-1 would have to
report its own identity and the size of its aggregate security-based
swap position, but the person would not be required to report any
information about its counterparties, including their identities.
    \43\ See supra note 14 and accompanying text.
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II. Re-Proposed Rule 9j-1: Prohibition Against Fraud, Manipulation, and
Deception in Connection With Security-Based Swaps

A. Prior Commission Action

    As initially proposed in 2010, Rule 9j-1 would have prohibited the
same categories of misconduct addressed by Section 10(b) of the
Exchange Act \44\ and Rule 10b-5 thereunder,\45\ as well as Section
17(a) of the Securities Act,\46\ but specifically in the context of
security-based swaps. The 2010 proposed rule explicitly reached
misconduct in connection with the ongoing payments and deliveries that
are typical of security-based swaps, which occur throughout the life of
the security-based swap.\47\ Specifically, the 2010 proposed rule would
have made it unlawful for any person, directly or indirectly, in
connection with the offer, purchase or sale of any security-based swap,
in the exercise of any right or performance of any obligation under a
security-based swap, or the avoidance of such exercise or performance:
(a) To employ any device, scheme, or artifice to defraud or manipulate;
(b) to knowingly or recklessly make any untrue statement of a material
fact, or to knowingly or recklessly omit 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; (c) 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 (d) to engage in any act, practice, or course
of business which operates or would operate as a fraud or deceit upon
any person.\48\
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    \44\ 15 U.S.C. 78j(b).
    \45\ 17 CFR 240.10b-5.
    \46\ 15 U.S.C. 77q(a).
    \47\ 2010 Rule 9j-1 Proposing Release, 75 FR at 68561.
    \48\ 2010 Rule 9j-1 Proposing Release, 75 FR at 68568.
---------------------------------------------------------------------------

    Most commenters on the 2010 proposed rule generally supported the
Commission's goal of adopting antifraud standards to ensure the
integrity of the security-based swap market.\49\ Some commenters
expressed strong support for the 2010 proposed rule, stating that the
rule would encourage investor confidence in the security-based swap
market and would help ensure that the Commission has the ability to
respond through enforcement mechanisms to

misconduct interfering with the independence and proper functioning of
the market.\50\ In addition, one commenter specifically requested that
the Commission require disclosure of debt security-based swap
positions.\51\
---------------------------------------------------------------------------

    \49\ The comment letters can be found at: http://www.sec.gov/comments/s7-32-10/s73210.shtml.
    \50\ See, e.g., Letter from Laurel Leitner, Council for
Institutional Investors, dated Dec. 16, 2010, at 1-2; Letter from
Dennis Kelleher and Wallace Turbeville, Better Markets, dated Dec.
23, 2010, at 1-2; Letter from Chris Bernard, dated Nov. 21, 2010, at
1.
    \51\ See Letter from Suzanne H. Shatto, dated Jan. 27, 2011.
---------------------------------------------------------------------------

    However, some commenters stated that the 2010 proposed rule
exceeded the Commission's authority by addressing activities involving
the exercise of any rights and performance of any obligations during
the life of a security-based swap, as opposed to addressing only
misconduct taking place in connection with the ``purchase'' and
``sale'' of a security-based swap.\52\ Those commenters all generally
argued that unless modified, the 2010 proposed rule would have a
negative impact or chilling effect on the security-based swap market by
unintentionally prohibiting the legitimate exercise of rights and
performance of obligations under a security-based swap and by leading
to costly unintended consequences. Section II.B.2. includes a
discussion of the concerns raised by these commenters.
---------------------------------------------------------------------------

    \52\ See Letter from Stuart J. Kaswell, Managed Funds
Association (``MFA''), dated Dec. 23, 2010 (``December 2010 MFA
Comment Letter'') at 2-10; Letter from Stuart J. Kaswell, MFA, dated
Mar. 29, 2011 (``March 2011 MFA Comment Letter'') at 3-9; Letter
from Kenneth E. Bentsen, Jr., Securities Industry and Financial
Markets Association (``SIFMA'') and Robert G. Pickel, ISDA, dated
Dec. 23, 2010 (``SIFMA/ISDA Joint Comment Letter'') at 9-10, 13;
Letter from Kenneth E. Bentsen, Jr., SIFMA, dated July 8, 2011
(``July 2011 SIFMA Comment Letter'') at 2-8; and Letter from R. Bram
Smith, Loan Syndications and Trading Association (``LSTA''), dated
Dec. 23, 2010 (``LSTA Comment Letter'') at 2-10.
---------------------------------------------------------------------------

B. Scope of Re-Proposed Rule 9j-1

1. General Antifraud and Anti-Manipulation Provisions
    The general antifraud and anti-manipulation provisions in re-
proposed Rule 9j-1(a) would make it unlawful for any person, directly
or indirectly, (i) to purchase or sell, or attempt to induce the
purchase or sale of, any security-based swap; \53\ (ii) to effect any
transaction in, or attempt to effect any transaction in, any security-
based swap; (iii) to take any action to exercise any right, or any
action related to performance of any obligation, under any security-
based swap, including in connection with any payments, deliveries,
rights, or obligations or alterations of any rights thereunder; or (iv)
to terminate (other than on its scheduled maturity date) or settle any
security-based swap, in connection with which such person:
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    \53\ See proposed Rule 9j-1(e), which provides that the terms
``purchase'' and ``sale'' would have the same meaning as set forth
in Sections 3(a)(13) and (14) of the Exchange Act. 15 U.S.C.
78c(a)(13) and (14).
---------------------------------------------------------------------------

    (1) Employs or attempts to employ any device, scheme, or artifice
to defraud or manipulate; or
    (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; or
    (3) Obtains or 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
    (4) Engages 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.
    Like the 2010 proposed rule, the current proposal generally relies
on language from Section 10(b) of the Exchange Act \54\ and Rule 10b-5
thereunder,\55\ and Section 17(a) of the Securities Act,\56\ as it
relates to the specific types of fraudulent, manipulative, or deceptive
conduct that re-proposed Rule 9j-1(a) is designed to address. In
addition, re-proposed Rule 9j-1(a) describes the particular types of
activity that would be covered by the rule, to the extent that a person
engages in specified types of fraudulent, manipulative, or deceptive
conduct in connection with such activities.\57\ Specifically, the
proposed rule would apply not only to the ``purchase'' or ``sale'' of
security-based swaps, as such terms are defined in the Exchange
Act,\58\ but also to: (1) Effecting transactions, or attempts to effect
transactions in, security-based swaps, (2) taking actions to exercise
any right or actions related to performance of any obligation pursuant
to any security-based swap including any payments, deliveries, rights,
or obligations or alterations of any rights thereunder, or (3)
terminating (other than on its scheduled maturity date) or settling any
security-based swap, in connection with which such person engages in
the specified fraudulent, manipulative, or deceptive conduct.
---------------------------------------------------------------------------

    \54\ Section 10(b) of the Exchange Act provides that ``[i]t
shall be unlawful for any person, directly or indirectly . . . (b)
to use or employ, in connection with the purchase or sale of any
security . . . any manipulative or deceptive device or contrivance
in contravention of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest or for
the protection of investors.'' See 15 U.S.C. 78j(b).
    \55\ Rule 10b-5 under the Exchange Act provides that ``[i]t
shall be unlawful for any person, directly or indirectly . . . (a)
to employ any device, scheme, or artifice to defraud, (b) to make
any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in
light of the circumstances under which they are made, not
misleading, or (c) to engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit upon
any person, in connection with the purchase or sale of any
security.'' See 17 CFR 240.10b-5.
    \56\ Section 17(a) of the Securities Act provides that ``[i]t
shall be unlawful for any person in the offer or sale of securities
. . . directly or indirectly--(1) to employ any device, scheme, or
artifice to defraud, or (2) 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 are made, not
misleading, or (3) to engage in any transaction, practice, or course
of business which operates or would operate as a fraud or deceit
upon the purchaser.'' See 15 U.S.C. 77q(a). In contrast to the 2010
proposed rule, the current proposal does not contain a provision
based on Section 17(a)(2) of the Securities Act. Given that the
current proposal itself relies on the statutory authority in Section
9(j) of the Exchange Act, the Commission has determined to retain
the language from the 2010 proposed rule that is based on an
existing Exchange Act rule.
    \57\ See proposed Rule 9j-1(a). The introductory language in
paragraph (a) follows Section 9(j) of the Exchange Act, in that it
would prohibit specified activities in connection with which any
person engages in the prohibited conduct set forth in paragraphs (1)
through (4). By contrast, the corresponding language in the 2010
proposed rule followed the format used in Section 10(b) and applied
solely to conduct that is in connection with the offer, purchase or
sale of any security-based swap, the exercise of any right or
performance of any obligation under a security-based swap, or the
avoidance of such exercise or performance. The re-proposed language
is intended to more closely track the authorizing statutory language
in Section 9(j), and to make clear that under the proposed rule an
activity would only be unlawful when done in connection with
fraudulent, manipulative, or deceptive conduct.
    \58\ See proposed Rule 9j-1(e).
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    With respect to the operative paragraphs in re-proposed Rule 9j-
1(a) describing the fraudulent, manipulative or deceptive conduct that
the rule prohibits, those provisions have been structured to combine
the antifraud and anti-manipulation provisions in Rule 10b-5 that apply
to all securities (including security-based swaps) with the additional
antifraud and anti-manipulative authority specific to security-based
swaps provided to the Commission in Section 9(j). For example, re-
proposed Rule 9j-1(a)(1) would explicitly prohibit employing or
attempting to employ any device, scheme, or artifice to defraud or
manipulate. Although most of that language is derived from Section
10(b)

of the Exchange Act,\59\ Rule 10b-5 thereunder,\60\ and Section
17(a)(1) of the Securities Act,\61\ the inclusion of ``manipulate'' and
the extension of the prohibition to include an ``attempt'' to employ
any device, scheme, or artifice to defraud or manipulate comes directly
from the statutory authority in Section 9(j).\62\ Paragraph (a)(2) of
re-proposed Rule 9j-1, which prohibits the making of material
misstatements or omissions, also is based on Rule 10b-5 and also
contemplates an attempt to make a material misstatement or omission.
---------------------------------------------------------------------------

    \59\ See supra note 54.
    \60\ See supra note 55.
    \61\ See supra note 56.
    \62\ See supra note 5 and accompanying text. The application to
attempted conduct also appears in other places in the Exchange Act
and the rules and regulations thereunder. For example, Section
15(c)(1)(A) of the Exchange Act makes it unlawful for any broker-
dealer ``to effect any transaction in, or to induce or attempt to
induce the purchase or sale of, any security (other than commercial
paper, bankers' acceptances, or commercial bills), or any security-
based swap agreement by means of any manipulative, deceptive, or
other fraudulent device or contrivance.'' 15 U.S.C. 78o(c)(1)(A).
See also Commission Guidance Regarding Prohibited Conduct in
Connection with IPO Allocations, Exchange Release No. 51500 (Apr. 7,
2005), 70 FR 19672, 19673 (Apr. 13, 2005) (``Regulation M applies to
`attempts,' thus proscribing a distribution participant's conduct
irrespective of whether it actually results in market activity by
others. It is the inducement or the attempt to induce during the
restricted period that Regulation M prohibits.'') (internal
citations omitted).
---------------------------------------------------------------------------

    Finally, paragraphs (a)(3) and (4) of re-proposed Rule 9j-1 are
based on Sections 17(a)(2) and (3) of the Securities Act.\63\ Again,
however, the re-proposed rule would now extend those provisions to
attempted conduct, such that they would prohibit a person from (i)
obtaining or attempting 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; and (ii)
engaging or attempting to engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit upon any
person.
---------------------------------------------------------------------------

    \63\ See supra note 56.
---------------------------------------------------------------------------

    As the Commission explained in the 2010 Rule 9j-1 Proposing
Release, the provisions described above have been designed generally to
prohibit a range of fraudulent, manipulative and deceptive conduct in
the security-based swap market, such as, among other things, ``engaging
in fraudulent and deceptive schemes in order to increase or decrease
the price or value of a security-based swap, or disseminating false or
misleading statements that affect or otherwise manipulate the price or
value of the reference underlying of a security-based swap for the
purpose of benefiting such person's position in the security-based
swap.'' \64\ Re-proposed Rule 9j-1(a) also would prohibit, for example,
disseminating false financial information or data in connection with
the sale of a security-based swap or insider trading in a security-
based swap. It also would prevent misconduct that affects the market
value of the security-based swap for purposes of posting collateral or
making payments or deliveries under such security-based swap.\65\
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    \64\ See 2010 Rule 9j-1 Proposing Release, 75 FR at 68569.
    \65\ See id.
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    Re-proposed Rule 9j-1(a) also would prohibit fraudulent conduct in
connection with a security-based swap that affects the value of cash
flow, payments, or deliveries, such as by triggering the obligation of
a counterparty to make a large payment or to post additional
collateral. It would also prohibit a person from taking fraudulent or
manipulative action with respect to the reference entity or asset of
the security-based swap that triggers the exercise of a right or
performance of an obligation or affects the payments to be made.\66\
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    \66\ See id.
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    Re-proposed Rules 9j-1(a)(1) and (2), consistent with Section 10(b)
of the Exchange Act and Rule 10b-5 thereunder,\67\ and Section 17(a)(1)
of the Securities Act,\68\ would require scienter.\69\ In contrast, re-
proposed Rules 9j-1(a)(3) and (4) would not require scienter consistent
with Sections 17(a)(2) and (3) of the Securities Act.\70\
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    \67\ To state a claim under Section 10(b) of the Exchange Act
and Rule 10b-5, the Commission must establish that the misstatements
or omissions were made with scienter. See, e.g., Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 (1976). The Supreme Court has defined
scienter as ``a mental state embracing intent to deceive, manipulate
or defraud.'' Id. Recklessness will generally satisfy the scienter
requirement. See, e.g., Sunstrand Corp. v. Sun Chemical Corp., 553
F.2d 1033, 1045 (7th Cir. 1977). See also Greebel v. FTP Software,
Inc., 194 F.3d 185, 198 (1st Cir. 1999); SEC v. Environmental, Inc.,
155 F.3d 107, 111 (2d Cir. 1998).
    \68\ Establishing violations of Securities Act Section 17(a)(1)
requires a showing of scienter. See, e.g., Aaron v. SEC, 446 U.S.
680, 701-02 (1980). Scienter is the ``mental state embracing intent
to deceive, manipulate or defraud.'' Ernst & Ernst v. Hochfelder,
425 U.S. 185, 193 (1976). See also Section 206(1) of the Investment
Advisers Act of 1940 (``Advisers Act'), which makes it unlawful for
an investment adviser to employ any device, scheme, or artifice to
defraud any client or prospective client. 15 U.S.C. 80b-6(1). Claims
arising under Section 206(1) of the Advisers Act require scienter.
See, e.g., Robare Grp. LTD v. SEC, 922 F.3d 468, 472 (D.C. Cir.
2019); SEC v. Moran, 922 F. Supp. 867, 896 (S.D.N.Y. 1996); Carroll
v. Bear, Stearns & Co., 416 F. Supp. 998, 1001 (S.D.N.Y. 1976).
    \69\ The language in the 2010 proposed rule that corresponds to
re-proposed Rule 9j-1(a)(2) included the phrase ``knowingly or
recklessly'' when describing the prohibited conduct. The Commission
has not included such phrase in the current proposal to remain
consistent with similar language in Rule 10b-5. See 17 CFR 240.10b-
5(b).
    \70\ Actions pursuant to Sections 17(a)(2) and 17(a)(3) of the
Securities Act do not require a showing of scienter. See, e.g.,
Aaron, 446 U.S. at 701-02. In Aaron, the Supreme Court sought to
determine whether scienter was required in a Commission injunctive
proceeding pursuant to the antifraud provisions of Section 10(b) of
the Exchange Act and Section 17(a) of the Securities Act. The Court
examined the language of both sections and determined that scienter
was required under Section 10(b) because the words ``manipulative,''
``device,'' and ``contrivance,'' which are used in the statute,
evidenced a Congressional intent to proscribe only knowing or
intentional misconduct. Similarly, the Court concluded that
subsection (1) of Section 17(a) required proof of scienter because
Congress used such words as ``device,'' ``scheme,'' and ``artifice
to defraud.'' Aaron, 446 U.S. at 696. In contrast, the Court
concluded that the absence of such words under subsections (2) and
(3) of Section 17(a) demonstrated that no scienter was required.
Section 17(a)(2) prohibits any person from obtaining money or
property ``by means of any untrue statement of a material fact or
omission to state a material fact,'' which the Court found to be
``devoid of any suggestion whatsoever of a scienter requirement.''
Aaron, 446 U.S. at 696. Similarly, the Court found, in construing
Section 17(a)(3), under which it is unlawful for any person ``to
engage in any transaction, practice, or course of business which
operates or would operate as a fraud or deceit,'' that scienter was
not required because it ``quite plainly focuses upon the effect of
particular conduct on members of the investing public, rather than
upon the culpability of the person responsible.'' Aaron, 446 U.S. at
697. See also Section 206(2) of the Advisers Act, which makes it
unlawful for an investment adviser to engage in any transaction,
practice or course of business which operates as a fraud or deceit
upon any client or prospective client. 15 U.S.C. 80b-6(2). The
Commission is not required to demonstrate that an adviser acted with
scienter in order to prove a Section 206(2) violation. SEC v.
Steadman, 967 F.2d 636, 643 (D.C. Cir. 1992) (citing SEC v. Capital
Gains Research Bureau, Inc., 375 U.S. 180, 191-92 (1963)).
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    While both re-proposed Rules 9j-1(a)(2) and (3) would prohibit
material misstatements and omissions,\71\ they would address different
levels of culpability.\72\ Specifically, re-proposed

Rule 9j-1(a)(2) would apply when there is evidence of scienter (e.g.,
when a party to a security-based swap knowingly or recklessly makes a
false statement even though the party may not receive any money or
property as a result). In contrast, re-proposed Rule 9j-1(a)(3) would
extend to conduct that is at least negligent (e.g., when a party to a
security-based swap knows or reasonably should know that a statement
was false or misleading and directly or indirectly obtains money or
property by means of such statement).
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    \71\ Consistent with Section 10(b) of the Exchange Act, such
misstatements and omissions must be material to be actionable. ``The
question of materiality, it is universally agreed, is an objective
one, involving the significance of an omitted or misrepresented fact
to a reasonable investor . . . there must be a substantial
likelihood that the disclosure of the omitted fact would have been
viewed by the reasonable investor as having significantly altered
the ``total mix'' of information made available.'' TSC Indus., Inc.
v. Northway, Inc., 426 U.S. 438, 445, 449 (1976). See also Basic v.
Levinson, 485 U.S. 224, 233 (1988).
    \72\ In addition to differences in the standard of care, there
are additional deviations between re-proposed Rules 9j-1(a)(2) and
(3), notwithstanding the significant overlap in the rule text. For
example, while paragraph (a)(2), like Rule 10b-5(b), makes it
unlawful to make any untrue statement of a material fact, paragraph
(a)(3), like Section 17(a)(2) of the Securities Act does not use the
word ``make.'' Based on that difference courts have contrasted the
application of Rule 10b-5(b) from the application of Section
17(a)(2) of the Securities Act as it relates to determining who is
the maker of a material misstatement. See, e.g., SEC v. Big Apple
Consulting USA, Inc., 783 F.3d 786, 797 (11th Cir. 2015) (``[W]e . .
. agree with the Securities and Exchange Commission's recent
opinion, which held `Janus's limitation on primary liability under
Rule 10b-5(b) does not apply to claims arising under Section
17(a)(2).' ''); SEC v. Tambone, 597 F.3d 436, 444 (1st Cir. 2010)
(en banc) (contrasting the language of Rule 10b-5(b) with ``the
expansive language of section 17(a)(2),'' which covers ``the `use'
of an untrue statement of material fact (regardless of who created
or composed the statement)'').
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    The Commission recognizes that two commenters to the 2010 proposed
rule opposed not requiring scienter with respect to paragraphs (3) and
(4) of re-proposed Rule 9j-1(a) (which were paragraphs (c) and (d) in
the 2010 proposed rule). Specifically, SIFMA and ISDA argued that
applying a negligence standard to those provisions did not account for
the unique aspects of the security-based swap market and, when
``coupled with the rights and responsibilities provision and
enforcement exposure for omissions of disclosure, potentially would
make illegal a wide range of ordinary course activities that may relate
to an SBS transaction.'' \73\ Those commenters explained that
``[s]ubjecting every trading decision or payment under an SBS to an
enforcement claim that someone knew or should have known that the
action would operate as a fraud or deceit on a person could potentially
deter many parties from entering into SBS, increase their cost and have
other distorting effects on the markets.'' \74\
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    \73\ See SIFMA/ISDA Joint Comment Letter at 12.
    \74\ See SIFMA/ISDA Joint Comment Letter at 3.
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    Although the Commission recognizes the concerns raised by these
commenters, we have determined to re-propose Rule 9j-1(a) using the
same standards of care as proposed in 2010. As previously noted, each
of those provisions is based on an existing statutory and regulatory
provision that is supported by a large body of case law.\75\ In that
respect, the Commission does not believe it is appropriate to treat
negligent conduct that would have been deemed a violation under the
existing antifraud and anti-manipulation provisions of the Federal
securities laws and the rules and regulations thereunder as not
violative under proposed Rule 9j-1(a) solely because security-based
swaps contracts by their nature may require the counterparties to take
ongoing actions to satisfy their rights and obligations. Such an
approach would be particularly untenable in light of the fact that
security-based swaps are included in the definition of ``security'',
and therefore are also subject to such general antifraud and anti-
manipulation provisions, including the relevant non-scienter-based
prohibitions. To the extent that there is any overlap between re-
proposed Rule 9j-1(a) and those existing provisions, introducing a
different standard of care would create unnecessary confusion.
---------------------------------------------------------------------------

    \75\ See supra notes 67-71 and accompanying text.
---------------------------------------------------------------------------

    Moreover, having two nearly identical antifraud and anti-
manipulation rules (e.g., re-proposed Rule 9j-1(a)(1) and Rule 10b-
5(b)) that are subject to two different standards of care--one for
security-based swaps and one for other types of securities--is likely
to lead to confusion among market participants and could potentially
undermine the effectiveness of both provisions in certain
circumstances, such as when the case law applicable to one provision
contradicts the other in a way that is not able to be rationalized by
the differences in the underlying instruments. Although the Commission
preliminarily believes the re-proposed rule is not overly broad, in
section II.E below, the Commission is requesting comment on whether
there are potential ways to minimize the impact of the rule on non-
fraudulent and non-manipulative ordinary course activities in
connection with security-based swap transactions.
2. ``Purchases'' and ``Sales'' in the Context of Security-Based Swaps
and Limited Safe Harbor for Certain Limited Actions
    As previously noted, a number of commenters on the 2010 proposed
rule argued that the Commission exceeded its statutory authority in the
course of proposing Rule 9j-1 by explicitly applying the rule to
activities involving the exercise of any rights and performance of any
obligations during the life of a security-based swap, as opposed to
limiting the proposed rule to misconduct taking place in connection
with the ``purchase'' and ``sale'' of a security-based swap.\76\ For
example, MFA argued that the Commission exceeded delegated authority in
proposing that the prohibitions in Rule 9j-1 extend ``beyond purchases
and sales to acts and omissions occurring during the term of a
security-based swap,'' explaining that ``[i]n clarifying the terms
`purchase' and `sale' in the security-based swap context, Congress
chose specifically not to include ongoing obligations, which are
dictated by the contract between the two parties underlying the
security-based swap and which bear no relation to execution,
termination, assignment, exchange and transfer or extinguishment of
rights.'' \77\ MFA also expressed its view that ``Section 763(g) of
Dodd-Frank is aimed at preventing fraudulent, deceptive, or
manipulative acts in connection with: (i) The entry into a securit[y]-
based swap; (ii) the novation or assignment of a securit[y]-based swap;
and (iii) the unwind of a securit[y]-based swap,'' and that the statute
should not be read to encompass the settlement of a security-based
swap, or the ongoing payments or collateral postings that take place
throughout the life of the transaction.\78\
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    \76\ See supra note 52 and accompanying text.
    \77\ See December 2010 MFA Letter at 2-3. MFA provided examples
of the types of ongoing obligations that it believed should not be
covered by the rule, which included, among other things, certain
periodic or other types of payments under the terms of the security-
based swap as well as many forms of collateral or margin payments,
and related obligations.
    \78\ See March 2011 MFA Comment Letter at 3-6.
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    Similarly, SIFMA and ISDA expressed the view that ``[t]he
rulemaking authority provided by Section 763(g) only extends to
transactions, acts, practices, or courses of business in connection
with (i) effecting any transaction in [a security-based swap] and (ii)
inducing or attempting to induce the purchase or sale of [a security-
based swap].'' \79\ SIFMA also separately shared its concerns that the
application of proposed Rule 9j-1 to the ongoing, ``non-volitional''
rights and obligations that occur throughout the life of a security-
based swap could be particularly problematic in the event that a
counterparty came into possession of material non-public information
relating to the underlying security, even if such information had no
bearing on such non-volitional actions.\80\ Further, the LSTA argued
that

the 2010 proposed rule would ``create uncertainty that undermines
investors' willingness to enter [the security-based swap] market,''
explaining that if the rule were to apply to any activity that
potentially affects the stream of payments, deliveries or other ongoing
obligations or rights between parties to a security-based swap, ``each
party will have to implement controls and mechanisms to track decisions
it may take that could affect each such payment, delivery, obligation
or right as well as to track changes in its positions in the security-
based swap and reference underlying.'' \81\
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    \79\ See SIFMA/ISDA Joint Comment Letter at 13.
    \80\ See July 2011 SIFMA Comment Letter at 2-7. SIFMA also
requested that proposed Rule 9j-1 be modified to include a safe
harbor, such as one that is similar to Rule 10b5-1(c)(2), which
provides that an entity may demonstrate that a purchase or sale of
securities is not ``on the basis of'' material non-public
information if the person demonstrates that: (i) The individual
making the investment decision on behalf of the person to purchase
or sell the securities was not aware of the information; and (ii)
the entity 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
violate the laws prohibiting trading on the basis of material non-
public information. Such policies and procedures may include those
that restrict any purchase, sale, and causing any purchase or sale
of any security as to which the person has material non-public
information, or those that prevent such individuals from becoming
aware of such information. See 17 CFR 240.10b5-1(c)(2).
    \81\ See LSTA Comment Letter at 2-8. As an example, the LSTA
noted its concern that a decision to allow a borrower to avoid a
bankruptcy filing or payment default could be construed as
manipulation in connection with the subsequent exercise of a right
or performance of an obligation (whether such action is volitional
or non-volitional).
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    The Commission has carefully considered these comments, but
disagrees with the narrow interpretation of the terms ``purchase'' and
``sale'' when used in the context of security-based swaps, as espoused
by commenters. Specifically, the Commission does not believe that the
definitions of ``purchase'' and ``sale'' in Section 2(a)(18) of the
Securities Act, the definitions of ``buy'' and ``purchase'' in Section
3(a)(13) of the Exchange Act, and the definitions of ``sale'' and
``sell'' in Section 3(a)(14) of the Exchange Act are limited to actions
involving all of the rights and obligations under a security-based
swap. Rather, the Commission believes that those definitions
incorporate partial executions, terminations, assignments, exchanges,
transfers, or extinguishments of rights or obligations. Put another
way, those definitions incorporate actions that have an impact on some,
but not all, rights and obligations, such as a margin payment that
represents only part of what one counterparty owes the other.
    In addition, Congress could have specifically limited the statutory
definitions of ``purchase'' or ``sale'' to actions involving all of the
rights and obligations under a security-based swap, and the Commission,
therefore, does not believe it necessary to apply limitations to those
definitions that do not appear in the statute given that even partial
payments or deliveries over the course of a security-based swap are
likely to be meaningful to most security-based swap transactions.
Accordingly, we continue to believe the statute provides the Commission
with authority to make explicit the liability of persons that engage in
misconduct to trigger, avoid, or affect the value of ongoing payments
or deliveries as a means reasonably designed to prevent fraud,
manipulation, and deception in connection with security-based swap
transactions.
    To be clear, the Commission is not taking the position that every
payment or delivery made during the course of a security-based swap
transaction is itself a purchase or sale of a security-based swap under
the applicable statutory authority. Rather, fraudulent or manipulative
conduct would be in connection with the purchase or sale of a security-
based swap if it either alters any material terms of the security-based
swap (as set forth in the applicable trading relationship
documentation) or has a material impact on any payment or delivery
under the security-based swap, such that it would not be consistent
with what a reasonable person would have expected to pay, deliver, or
receive absent such conduct. The Commission took a similar position
when it defined certain Title VII terms, including ``swap'' and
``security-based swap,'' in a joint release with the CFTC, explaining
that ``[i]f the material terms of a Title VII instrument are amended or
modified during its life based on an exercise of discretion and not
through predetermined criteria or a predetermined self-executing
formula, the Commissions view the amended or modified Title VII
instrument as a new Title VII instrument.'' \82\ If a party engages in
fraudulent or manipulative conduct that impacts the amount of payment
or delivery in a way that is materially different from the amount a
reasonable person would have expected to pay, deliver, or receive (or
where such person would not have expected a payment or delivery to be
required at all), such actions would be a new purchase or sale of the
security-based swap. For example, and without limitation, such a
scenario could involve a counterparty misstating certain information
about a transaction (or any related transactions) resulting in a missed
or late payment or loss of an opportunity to request additional
collateral under a security-based swap.
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    \82\ See Further Definition of ``Swap,'' ``Security-Based
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 77 FR 48208, 48286
(Aug. 13, 2012) (``Products Release'').
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    Moreover, even if those statutory definitions were interpreted
narrowly, the Commission's rulemaking authority under Section 9(j) of
the Exchange Act to adopt prophylactic rules is not limited solely to
purchases and sales of security-based swaps.\83\ Section 9(j) of the
Exchange Act provides that the Commission ``shall . . . by rules and
regulations define, and prescribe means reasonably designed to prevent,
such transactions, acts, practices, and courses of business as are
fraudulent, deceptive, or manipulative, and such quotations as are
fictitious.'' \84\ Without limiting what is already covered by Section
9(j), the Commission is using that statutory authority to prohibit
actions to exercise any right, or any action related to performance of
any obligation, under any security-based swap, including in connection
with any payments, deliveries, rights, or obligations or alterations of
any rights thereunder; or to terminate (other than on its scheduled
maturity date) or settle any security-based swap, in each case so long
as those actions are taken in connection with fraud, manipulation, or
deception. The Commission believes that by prohibiting actions that
directly impact a counterparty's rights and obligations under a
security-based swap--when such actions are in connection with specified
fraudulent, manipulative, or deceptive conduct--re-proposed Rule 9j-1
represents a means reasonably designed to prevent fraud, manipulation,
and deception in the security-based swap market.
---------------------------------------------------------------------------

    \83\ See, e.g., U.S. v. O'Hagan, 521 U.S. 642 (1997) (``[a]
prophylactic measure, because its mission is to prevent, typically
encompasses more than the core activity prohibited''). In O'Hagan,
the Supreme Court held that under Section 14(e) of the Exchange Act
(which includes the same ``reasonably designed to prevent fraudulent
activity'' rulemaking language as Section 763(g) of the Dodd-Frank
Act) the Commission may prohibit acts not themselves fraudulent
under the common law or Section 10(b), provided that the prohibition
is ``reasonably designed to prevent . . . acts and practices [that]
are fraudulent.''
    \84\ See 15 U.S.C. 78i(j).
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    Furthermore, in the course of using its rulemaking authority under
Section 9(j), the Commission looked not only to the antifraud and anti-
manipulation provisions in Section 10(b) of the Exchange Act, Rule 10b-
5 thereunder, and Section 17(a) of the Securities Act, but also to the
operative provisions of Section 9(j) itself, which makes it unlawful
``to effect any transaction in, or to induce or attempt to induce the
purchase or sale of, any security-based swap, in connection with which
such person engages in any fraudulent, deceptive, or manipulative act
or practice, makes any fictitious quotation, or engages in any
transaction, practice, or course of business which operates as

a fraud or deceit upon any person.'' At a minimum, that provision
prohibits fraud, manipulation, or deception in the context of both
inducements or attempts to induce the purchase or sale of a security-
based swap, and effecting security-based swap transactions. As the
Commission has previously explained in other contexts, ``effecting''
transactions in securities has been interpreted broadly and includes
more than just executing trades or forwarding orders for execution.\85\
Generally, effecting securities transactions also can include, for
example, participating in the transactions through a number of
activities such as screening potential participants in a transaction
for creditworthiness, facilitating the execution of a transaction, and
handling customer funds and securities.\86\
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    \85\ See Registration Adopting Release, 80 FR at 48976, n. 99
(citing, for example, Definition of Terms in and Specific Exemptions
for Banks, Savings Associations, and Savings Banks Under Sections
3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, Exchange
Act Release No. 44291 (May 11, 2001), 66 FR 27760, 27772-73 (May 18,
2001)).
    \86\ See id.
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    As discussed above, we disagree with the narrow interpretation of
the statutory changes to the definitions of ``purchase'' and ``sale''
in the context of a security-based swap, as suggested by some
commenters. That said, the Commission is sensitive to the operational
concerns raised by commenters in response to the 2010 proposed rule and
is therefore proposing two limited safe harbors from re-proposed Rule
9j-1(a) to address situations when a counterparty to a security-based
swap is required to take certain actions while in possession of
material non-public information.\87\
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    \87\ Specifically, in its comment letter on the 2010 proposed
rule, SIFMA explained that ``[u]nder the proposed rule, the
counterparty would be required to disclose the [material non-public
information] or abstain from performing its obligations under the
contract, even though the [material non-public information] plays no
role in its obligation to make payment. Requiring parties to
``disclose or abstain'' [material non-public information], as in the
securities context, would leave market participants in the position
of choosing among: Disclosing information to counterparties who may
not want to know it because of the effect on their trading activity,
violating the antifraud rule by performing their obligations under
the SBS contract while in possession of [material non-public
information] or abstaining from performance and defaulting on the
contract.'' See July 2011 SIFMA Comment Letter at 3.
---------------------------------------------------------------------------

    Specifically, re-proposed Rule 9j-1(f)(1) would provide that a
person would not be liable under re-proposed Rule 9j-1(a) solely for
reason of being aware of material non-public information while taking
certain actions, the first of which includes actions taken in
accordance with binding contractual rights and obligations under a
security-based swap (as reflected in the written security-based swap
documentation governing such transaction or any amendment thereto) so
long as the person could demonstrate that: (1) The security-based swap
was entered into, or the amendment was made, before the person became
aware of such material non-public information; and (2) that the entry
into, and the terms of, the security-based swap are themselves not a
violation of any provision of re-proposed Rule 9j-1(a).\88\ The
Commission believes that limiting the safe harbor to circumstances
where the activity is taken in accordance with the written agreements
governing the security-based swap would help to ensure that such action
is taken in the ordinary course of the transaction. Further, the safe
harbor would apply only so long as the entry into, and the terms of,
the security-based swap do not otherwise violate re-proposed Rule 9j-1.
---------------------------------------------------------------------------

    \88\ See re-proposed Rule 9j-1(f)(1). In general, for uncleared
security-based swap transactions, the relevant documentation should
include the written security-based swap trading relationship
documentation executed by the counterparties. For cleared security-
based swap transactions, the relevant documentation should include
the written agreement between the applicable counterparty and the
clearing agency. For SBS Entities, existing 17 CFR 240.15Fi-5
(``Rule 15Fi-5'') requires each SBS Entity to establish, maintain,
and follow written policies and procedures reasonably designed to
ensure that it executes written trading relationship documentation
with each of its counterparties, subject to certain exceptions,
prior to, or contemporaneously with, executing a security-based swap
transaction, in each case in the manner as provided for in the rule.
That documentation is also subject to the Commission's recordkeeping
requirements in 17 CFR 240.17a-4 or 17 CFR 240.18a-6, as applicable.
---------------------------------------------------------------------------

    As a result, the proposed safe harbor would generally apply to, for
example, making a standardized coupon payment or delivering collateral
to a counterparty (and would also permit the counterparty to receive
the coupon payment or collateral), while such person is aware of
material non-public information, so long as both actions are explicitly
required by the terms of the transaction and documented in writing.
However, the safe harbor would not apply if a counterparty took some
action to fraudulently increase (in the case of the receiving
counterparty) or decrease (in the case of the delivering counterparty)
the amount of such payment or collateral transfer.
    The second proposed safe harbor would apply to transactions
effected pursuant to certain types of compression exercises.
Specifically, proposed Rule 9j-1(f)(2) would provide that a person
would not be liable under re-proposed Rule 9j-1(a) solely for reason of
being aware of material non-public information when effecting security-
based swap transactions pursuant to a bilateral portfolio compression
exercise (as defined in 17 CFR 240.15Fi-1(a) (``Rule 15Fi-1(a)'') of
the Exchange Act) or a multilateral portfolio compression exercise (as
defined Rule 15Fi-1(j)) so long as: (1) Any such transactions are
consistent with all of the terms of a bilateral portfolio compression
exercise or multilateral portfolio compression exercise, including as
it relates to, without limitation, the transactions to be included in
the exercise, the risk tolerances of the persons participating in the
exercise, and the methodology used in the exercise, and (2) all such
terms were agreed to by all participants of the bilateral portfolio
compression exercise or multilateral portfolio compression exercise
prior to the commencement of the applicable exercise.\89\
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    \89\ See re-proposed Rule 9j-1(f)(2). Rule 15Fi-1(a) defines the
term ``bilateral portfolio compression exercise'' to mean ``an
exercise by which two security-based swap counterparties wholly
terminate or change the notional value of some or all of the
security-based swaps submitted by the counterparties for inclusion
in the portfolio compression exercise and, depending on the
methodology employed, replace the terminated security-based swaps
with other security-based swaps whose combined notional value (or
some other measure of risk) is less than the combined notional value
(or some other measure of risk) of the terminated security-based
swaps in the exercise.'' 17 CFR 240.15Fi-1(a). Rule 15Fi-1(j)
defines the term ``multilateral portfolio compression exercise'' to
mean ``an exercise by which multiple security-based swap
counterparties wholly terminate or change the notional value of some
or all of the security-based swaps submitted by the counterparties
for inclusion in the portfolio compression exercise and, depending
on the methodology employed, replace the terminated security-based
swaps with other security-based swaps whose combined notional value
(or some other measure of risk) is less than the combined notional
value (or some other measure of risk) of the terminated security-
based swaps in the exercise.'' 17 CFR 240.15Fi-1(j).
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    As the Commission explained when it adopted portfolio compression
requirements for SBS Entities, portfolio compression generally refers
to a post-trade processing exercise that allows two or more market
participants to eliminate redundant derivatives transactions within
their portfolios in a manner that does not change their net exposure,
and is intended to help market participants manage their post-traded
risk.\90\ For example, reducing the number of outstanding contracts
provides important operational benefits and efficiencies for market
participants in that there are fewer open contracts to

manage, maintain, and settle, resulting in fewer opportunities for
processing errors, failures, or other problems that could develop
throughout the lifecycle of a transaction.\91\ Given these important
benefits, as well as the largely administrative nature of the portfolio
compression process, the Commission believes it to be appropriate to
provide a safe harbor for this activity in circumstances where the
security-based swap counterparty is in possession of material non-
public information with respect to a reference entity underlying an
applicable security-based swap.
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    \90\ See Risk Mitigation Techniques for Uncleared Security-Based
Swaps, Exchange Act Release No. 87762 (Dec. 18, 2019), 85 FR 6359 at
6391 (Feb. 4, 2020) (``Risk Mitigation Adopting Release'').
    \91\ See id.
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    However, the proposed safe harbor would apply only so long as: (1)
Any such transactions are consistent with all of the terms of a
bilateral portfolio compression exercise or multilateral portfolio
compression exercise, including as it relates to, without limitation,
the transactions to be included in the exercise, the risk tolerances of
the persons participating in the exercise, and the methodology used in
the exercise, and (2) all such terms were agreed to by all participants
of the bilateral portfolio compression exercise or multilateral
portfolio compression exercise prior to the commencement of the
applicable exercise. This condition, which the Commission believes is
consistent with how portfolio compression exercises typically operate,
is intended to help ensure that most, if not all, of the opportunities
to take a discretionary action to impact the outcome of the compression
exercise occur before the process begins, and therefore before specific
security-based swap transactions are identified to be added or
eliminated. Finally, this safe harbor, which is limited to
circumstances involving the misuse of material non-public information,
would not apply where the portfolio compression exercise itself was
part of a fraudulent or manipulative scheme to increase (in the case of
the receiving counterparty) or decrease (in the case of the delivering
counterparty) the amount of any payment made or received in connection
with a terminated or replacement security-based swap transaction
resulting from the portfolio compression exercise, as applicable.
3. Prohibition on Price Manipulation
    In addition to the general antifraud and anti-manipulation
provisions discussed above, re-proposed Rule 9j-1 also contains
provisions designed to address price manipulation similar to CFTC Rule
180.2.\92\ Specifically, re-proposed Rule 9j-1 includes a prohibition
on attempted manipulation. Re-proposed Rule 9j-1(b) would make it
unlawful for any person to, directly or indirectly, manipulate or
attempt to manipulate the price or valuation of any security-based
swap, or any payment or delivery related thereto. Among other things,
this language is intended to address a number of the manufactured or
other opportunistic CDS strategies observed over the last decade, and
summarized above in section I.B, including situations where a party
intentionally distorts any payment related to a security-based swap for
the benefit of one of the security-based swap counterparties, such as
actions that serve little to no economic purpose other than to
artificially influence the composition of the deliverable obligations
in a CDS auction.\93\
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    \92\ See 17 CFR 180.2.
    \93\ See Fletcher, supra note 21 at 1096-98.
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    Re-proposed Rule 9j-1(b) also is intended to prohibit, among other
things, a situation where a person (or group of persons) improperly and
intentionally causes or avoids the purchase or sale of a security-based
swap for the benefit of a counterparty to an SBS, such as intentionally
and improperly orphaning a CDS, avoiding termination of a CDS for a
period of time, or causing the termination of a CDS. As previously
noted, ``orphaning'' a CDS refers to a situation where the debt of a
reference entity is eliminated or reduced for the purposes of moving
the price of CDS.\94\ The end result of such activity is that CDS
buyers continue to pay (and CDS sellers continue to receive) premiums
on CDS that will never default. Similarly, a CDS protection seller
could offer financing to the company to avoid a credit event and
subsequent CDS payout, with the financing timed so that the company's
bankruptcy is merely delayed until after the CDS expires.\95\ To be
clear, a person simply profiting from a CDS position after a company's
bankruptcy, which such person could have prevented by participating in
a financing to the company, without more is not in and of itself
improper conduct for purposes of re-proposed Rule 9j-1(b).
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    \94\ See supra note 27 and accompanying text.
    \95\ See Fletcher, supra note 21 at 1101.
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    Moreover, the Commission does not intend for re-proposed Rule 9j-
1(b) to apply to taking affirmative actions in the ordinary course of a
security-based swap transaction or the underlying referenced security.
Specifically, re-proposed Rule 9j-1(b) is designed to capture
situations when a payment under the security-based swap is
intentionally distorted. A determination as to whether a payment is
intentionally distorted will largely depend on the facts and
circumstances of each particular situation, but as a general matter the
Commission would expect to use its authority to bring an enforcement
action under re-proposed Rule 9j-1(b) when a party takes action 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.
    The Commission recognizes that reference entities often rely on
financing and other forms of relief to avoid defaulting on their debt,
and the proposed rule is not intended to discourage lenders and
prospective lenders from discussing or providing such financing or
relief, even when those persons also hold CDS positions. Rather, the
Commission is proposing Rule 9j-1(b) to account for actions taken
outside the ordinary course of a typical lender-borrower relationship
(or a prospective lender-borrower relationship). Although any such
determination would need to be based on the facts and circumstances of
a particular situation, as a general matter the Commission believes
that an action that appears to be designed almost exclusively to harm
one or more CDS counterparties would likely fall within the prohibition
in re-proposed Rule 9j-1(b).

C. Liability Under Proposed Rule 9j-1 in Connection With the Purchase
or Sale of a Security

    Finally, and consistent with the long-standing principle that
parties cannot do indirectly what they are prohibited from doing
directly, paragraphs (c) and (d) of re-proposed Rule 9j-1 would make it
clear that market participants cannot avoid liability under the rule by
effecting a fraudulent scheme through the purchase or sale of an
underlying security, rather than the purchase or sale of the security-
based swap on which it is based, and vice versa. The first of those two
provisions would provide that a person could not escape liability for
trading based on possession of material non-public information about a
security by purchasing or selling a security-based swap based on that
security (as opposed to trading in the security itself) and the second
provision provides that a person could not escape liability under
Section 9(j) or re-proposed Rule 9j-1 by purchasing or selling the
underlying security (as opposed to purchasing or selling a security-
based swap that is based on that security).

    Specifically, re-proposed Rule 9j-1(c) would provide that wherever
communicating, or purchasing or selling a security (other than a
security-based swap) while in possession of, material non-public
information would violate, or result in liability to any purchaser or
seller of the security, under either the Exchange Act or the Securities
Act, 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. Rule 9j-1(c) would be modeled after Section 20(d) of the
Exchange Act, which is substantially similar to the proposal, except
that the statutory provision applies to ``a put, call, straddle,
option, privilege or security-based swap agreement''--i.e., it does not
expressly include the term security-based swap.\96\
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    \96\ See 15 U.S.C. 78t(d). Re-proposed Rule 9j-1(c) also differs
from Section 20(d) in two other ways. First, the statutory provision
refers to insider trading violations under the entirety of Title 15
of the U.S.C., the proposed rule refers only to the Exchange Act and
the Securities Act, which are the two most common bases for
asserting the Commission's authority for insider trading violations.
Second, re-proposed Rule 9j-1(c) makes clear that the reference to a
``security'' does not include a security-based swap. This is
intended solely to avoid confusion given that a security-based swap
is included in the definition of ``security'' in Section 3(a)(10) of
the Exchange Act [15 U.S.C. 78c(a)(10)] and Section 2(a)(1) of the
Securities Act [15 U.S.C. 77b(a)(1)].
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    Although the Commission generally believes that a situation where a
person uses material non-public information in a security in connection
with the purchase and sale of a security-based swap would be subject to
the existing antifraud authority under the Federal securities laws,
particularly Section 10(b) of the Exchange Act and Rule 10b-5
thereunder, the Commission also believes that market participants would
benefit from a clarified interpretation of that statutory provision in
this rulemaking.\97\ This is particularly true given that the issuer of
a security-based swap (i.e., each counterparty to the transaction) is
different from the issuer of the underlying security (i.e., the
reference entity). Accordingly, the Commission is now proposing new
Rule 9j-1(c) to provide that a person making a purchase or sale of a
security-based swap while in possession of material non-public
information with respect to the security underlying such security-based
swap is subject to liability.
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    \97\ Pursuant to Section 20(d), a person with material non-
public information about a security cannot avoid liability under the
securities laws by making purchases and sales in a swap on a broad-
based index containing the security (e.g., the S&P 500), which would
be a security-based swap agreement, whereas the statute is silent as
to the permissibility of trading on such material non-public
information by making purchases and sales of a security-based swap
(e.g., a swap on the security itself).
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    Lastly, the Commission also is proposing new Rule 9j-1(d), which is
intended to address a situation similar to the one described above, but
in the other direction. Specifically, re-proposed Rule 9j-1(d) would
provide that whenever purchasing or selling a security-based swap would
violate, or result in liability under Section 9(j) of the Exchange Act
or re-proposed Rule 9j-1(a) or (b), 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 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) or re-proposed Rule 9j-1(a) or (b).
    This provision is designed so that a person cannot escape liability
under Section 9(j) or re-proposed Rule 9j-1(a) or (b) with respect to a
security-based swap by limiting all of its actions to purchases and
sales of the security or narrow-based security index underlying that
security-based swap. For example, if a person with an existing total
return swap on equity securities issued by XYZ Corporation subsequently
engages in a number of wash trades to artificially inflate the price of
the equity securities in order to benefit from the manipulated price by
way of their existing security-based swap position, such person would
be liable for violations of Section 9(j) and re-proposed Rule 9j-1
regardless of the fact the manipulation was conducted through purchases
and sales of the equity securities.
    To be clear, re-proposed Rule 9j-1(d) is not intended to create a
separate category of prohibited activity. Rather, this provision is
designed to specify that many of the activities that would be
considered fraud, manipulation, or deceit with respect to a security-
based swap are typically effected through transactions in the
underlying reference entity, security, loan, or group or index of
securities or loans. The Commission believes that this provision is
important to include in the rule because security-based swaps by their
nature are tied intrinsically to activity in other securities markets.
    Moreover, this provision is not intended to suggest that a person
could be liable for violations of Section 9(j) and re-proposed Rule 9j-
1 based solely on the impact of its transactions on the equity, debt,
or loan markets. In that regard, the rule would state that the person
engaged in prohibited activities in the equity, debt, or loan markets
must be a counterparty to a security-based swap that references such
equity or debt securities or loans, or be an affiliate of, or a person
acting in concert with, such security-based swap counterparty in
furtherance of such prohibited activity. Finally, and in addition to
analyzing whether transactions in the underlying equity or debt
securities or loans have been used as the mechanism for violations of
Section 9(j) and re-proposed Rule 9j-1, the Commission also would
expect to analyze the same activities to determine whether they
independently would also constitute violations under the existing
antifraud and anti-manipulation provisions of the securities laws,
including Sections 9 and 10(b) of the Exchange Act and Rule 10b-5
thereunder, as well as Section 17(a) of the Securities Act, as it
relates the market for those underlying equity or debt securities or
loans.

D. Preventing Undue Influence Over Chief Compliance Officers; Policies
and Procedures Regarding Compliance With Re-Proposed Rule 9j-1,
Proposed Rule 10B-1 and Proposed Rule 15Fh-4(c)

    In addition to proposing rules to prevent fraudulent, manipulative,
or deceptive conduct in connection with security-based swaps, the
Commission also is proposing a rule aimed at protecting the
independence and objectivity of an SBS Entity's CCO by preventing the
personnel of an SBS Entity from taking actions to coerce, mislead, or
otherwise interfere with the CCO. Specifically, new Rule 15Fh-4(c)
would make it unlawful for any officer, director, supervised person, or
employee of an SBS Entity, or any person acting under such person's
direction, to directly or indirectly take any action to coerce,
manipulate, mislead, or fraudulently influence the SBS Entity's CCO in
the performance of their duties under the Federal securities laws or
the rules and regulations thereunder.
    The Commission previously considered whether to adopt a similar
requirement when it adopted business conduct standards for SBS Entities
in 2016.\98\ That rulemaking included, among other things, 17 CFR
240.15Fk-1 (``Rule 15Fk-1''), which requires an

SBS Entity to designate a CCO and imposes certain duties and
responsibilities on that CCO,\99\ and Rule 15Fh-4(a), which makes it
unlawful for an SBS Entity to: (i) Employ any device, scheme, or
artifice to defraud any special entity or prospective customer who is a
special entity; (ii) engage in any transaction, practice, or course of
business that operates as a fraud or deceit on any special entity or
prospective customer who is a special entity; or (iii) engage in any
act, practice, or course of business that is fraudulent, deceptive, or
manipulative.\100\ In the course of that rulemaking, one commenter
requested that the Commission adopt a rule prohibiting attempts by
officers, directors, or employees to coerce, mislead, or otherwise
interfere with the CCO.\101\ The Commission considered that request,
but ultimately concluded not to adopt such a rule, explaining that
``requiring a majority of the board to approve the compensation and
removal of the CCO is appropriate to promote the CCO's independence and
effectiveness. . . .'' \102\
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    \98\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, Release No.
77617 (Apr. 14, 2016), 81 FR 29960 (``Business Conduct Standards
Adopting Release'').
    \99\ See 17 CFR 240.15Fk-1.
    \100\ See 17 CFR 240.15Fh-4(a).
    \101\ See Business Conduct Standards Adopting Release, 81 FR at
30053, n. 1166 and accompanying text.
    \102\ See id. at 30054-55.
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    Moreover, at the time the Commission declined to include a rule
regarding undue influence over the CCO, the Commission had not yet
finalized most of the requirements for which the CCO of an SBS Entity
would be responsible and had not yet proposed rules relating to trading
relationship documentation, dispute resolution, portfolio
reconciliation or portfolio compression (``Risk Mitigation
Rules'').\103\ As the Commission explained when adopting the Risk
Mitigation Rules, those rules were designed to further effective risk
management by requiring the existence of sound documentation, periodic
reconciliation of portfolios, rigorously tested valuation
methodologies, and sound collateralization practices.\104\ Attempts by
officers, directors or employees to hide transactions, submit false
valuations or manipulate or fraudulently influence the CCO in the
performance of their duties related to the Risk Mitigation Rules would
undermine the SBS Entity's risk management and could pose risk to the
market.
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    \103\ See supra note 2. The Commission first proposed the Risk
Mitigation Rules in December 2018. See Risk Mitigation Techniques
for Uncleared Security-Security-Based Swaps, Exchange Act Release
No. 87782 (Dec. 19, 2018), 84 FR 4614 (Feb. 15, 2019).
    \104\ See Risk Mitigation Adopting Release, 85 FR at 6390.
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    In light of the re-proposal of Rule 9j-1 and the proposal of 10B-1
as well as the rules finalized subsequent to the CCO rules, the
Commission believes it is appropriate to reconsider the need for a rule
expressly prohibiting interference with the performance of a CCO's
duties, even if not directly related to compensation or the threat of
removal of the CCO to help ensure the independence and effectiveness of
the CCO function.\105\ In connection with re-proposed Rule 9j-1 and
proposed Rule 10B-1, as well as other rules for which the CCO is
responsible, undue influence could arise from many actors (and many
actions), and not merely from those actors with the power to set
compensation or with hiring and firing authority over the CCO. For
example, an employee at an SBS Entity planning an opportunistic
strategy could attempt to mislead the CCO by submitting false
documentation to the CCO in order to avoid disclosing the build-up of a
large position that would require public reporting and thwart the plans
of the employee.
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    \105\ As the Commission explained when adopting similar rules
prohibiting persons from unduly influencing auditors pursuant to
Section 303(a) of the Sarbanes Oxley Act of 2002 (``Sarbanes-Oxley
Act), activities by persons acting ``under the direction'' of
officers and directors of the issuer ``currently may constitute
violations of the antifraud or other provisions of the securities
laws or aiding or abetting or causing an issuer's violations of the
securities laws.'' See Improper Influence on Conduct of Audits,
Exchange Act Release No. 47890 (May 20, 2003), 68 FR 31820, 31821
(May 28, 2003) (internal citations omitted). Nevertheless, like the
rule implementing Section 303(a) of the Sarbanes-Oxley Act, proposed
Rule 15Fh-4(c) would provide the Commission with an additional means
of addressing efforts by persons acting under the direction of an
officer or director to thwart the responsibilities of the CCO. See
also Compliance Programs of Investment Companies and Investment
Advisers, Investment Advisers Act Release No. 2204 (Dec. 17, 2003),
68 FR 74714 at 74721-22 (Dec. 24, 2003).
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    Although re-proposed Rule 9j-1 and proposed Rule 10B-1 apply to any
person, without exception, and not just SBS Entities, as discussed in
the Economic Analysis, the security-based swap market is dominated by
dealers. The Commission estimates that dealing activity in security-
based swap markets is highly concentrated among a small number of firms
who are or will be registered with the Commission as SBS Entities.\106\
Because of the concentration of security-based swap activities in a
small number of firms that are SBS Entities, their compliance with the
Federal securities laws, including those adopted since 2016 and any
rules adopted as a result of this proposal, is critically important to
fostering integrity in the security-based swap market.
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    \106\ See infra section VI.C.2. See also Applications by
Security-Based Swap Dealers or Major Security-Based Swap
Participants for Statutory Disqualified Associated Persons to Effect
or Be Involved in Effecting Security-Based Swaps, Exchange Act
Release No. 84858 (Dec. 19, 2018), 84 FR 4906, 4923 (Feb. 19, 2019)
(``[t]he Commission estimates that dealing activity in security-
based swap markets is highly concentrated among a small number of
dealers, with the top five dealer accounts intermediating
approximately 55 percent of all SBS Entity transactions, and
reaching hundreds and even thousands of counterparties.'') (internal
citations omitted).
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    Moreover, existing 17 CFR 240.15Fh-3(h) (``Rule 15Fh-3(h)'')
requires an SBS Entity to establish and maintain a system to supervise
its business and the activities of its associated persons which must be
reasonably designed to prevent violations of the provisions of
applicable Federal securities laws and the rules and regulations
thereunder.\107\ In addition, existing Rule 15Fk-1 requires an SBS
Entity to designate a CCO, who must comply with certain duties,
including to ``[t]ake reasonable steps to ensure that the [SBS Entity]
establishes, maintains and reviews written policies and procedures
reasonably designed to achieve compliance with the [Exchange Act] and
the rules and regulations thereunder relating to its business as [an
SBS Entity].'' \108\ Failure to establish, maintain, and review written
policies and procedures reasonably designed to achieve compliance with
the Exchange Act and the rules and regulations thereunder (including
re-proposed Rule 9j-1, and proposed rules 10B-1 and 15Fh-4(c) if
adopted), may result in violations by the SBS Entity of Rule 15Fh-3(h),
as well as Rule 15Fk-1.\109\ Proposed Rule 15Fh-4(c) is designed to
protect investors and promote the fairness of the markets by supporting
the ability of the CCO to meet the CCO's important obligations to
foster compliance without undue influence, which should ultimately
support the integrity of SBS Entities and the markets.
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    \107\ See 17 CFR 240.15Fh-3(h).
    \108\ See 17 CFR 240.15k-1. Additionally, in its application for
registration, an SBS Entity is required to include a senior
officer's certification that the SBS Entity has developed and
implemented written policies and procedures reasonably designed to
prevent violation of federal securities laws and the rules
thereunder. See 17 CFR 240.15Fb2-1(b) (``Rule 15Fb2-1(b)'').
    \109\ The SBS Entity could also face liability under Rules
15Fb2-1(b) and (h) under such circumstances.
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E. Request for Comment

    The Commission generally requests comments on all aspects of re-
proposed Rule 9j-1. In addition, the Commission requests comments on
the following specific issues:

     Do commenters agree or disagree with any particular
aspects of re-proposed Rule 9j-1? If so, which ones and why? If
commenters disagree with any provision of the re-proposed rule, how
should such provision be modified and why?
     As noted in section I.A, the existing antifraud and anti-
manipulation provisions of the securities laws, including Sections 9
and 10(b) of the Exchange Act and Rule 10b-5 thereunder, as well as
Section 17(a) of the Securities Act, already apply to security-based
swaps because they fall within the definition of ``security'' in each
of those statutes. Are there particular aspects of security-based swap
transactions and the security-based swap markets that the Commission