Treatment of Certain Communications Involving Security-Based Swaps That May Be Purchased Only by Eligible Contract Participants, 54224-54241 [2014-21676]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 176 (Thursday, September 11, 2014)]
[Proposed Rules]
[Pages 54224-54241]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-21676]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-9643; File No. S7-09-14]
RIN 3235-AL41


Treatment of Certain Communications Involving Security-Based 
Swaps That May Be Purchased Only by Eligible Contract Participants

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing a rule under the Securities Act of 1933 to 
provide that certain communications involving security-based swaps that 
may be purchased only by eligible contract participants will not be 
deemed for purposes of Section 5 of the Securities Act to constitute 
offers of such security-based swaps or any guarantees of such security-
based swaps that are securities. Under the proposed rule, the 
publication or distribution of price quotes relating to security-based 
swaps that may be purchased only by persons who are eligible contract 
participants and are traded or processed on or through a facility that 
either is registered as a national securities exchange or as a 
security-based swap execution facility, or is exempt from registration 
as a security-based swap execution facility pursuant to a rule, 
regulation, or order of the Commission, would not be deemed to 
constitute an offer, an offer to sell, or a solicitation of an offer to 
buy or purchase such security-based swaps or any guarantees of such 
security-based swaps that are securities for purposes of Section 5 of 
the Securities Act.

DATES: Comments should be received on or before November 10, 2014.

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/proposed.shtml);
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-09-14 on the subject line; or
     Use the Federal eRulemaking Portal (https://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Kevin M. O'Neill, Deputy Secretary, 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-1090.

All submissions should refer to File Number S7-09-14. 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. We will post all comments on the Commission's Internet Web site 
(https://www.sec.gov/rules/proposed.shtml). Comments also are available 
for Web site viewing and printing in the Commission's Public Reference 
Room, 100 F Street NE., Washington, DC 20549, on official business days 
between the hours of 10:00 a.m. and 3:00 p.m. All comments received 
will be posted without change; we do not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Andrew Schoeffler, Special Counsel, 
Office of Capital Markets Trends, Division of Corporation Finance, at 
(202) 551-3860, U.S. Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We are proposing Rule 135d under the 
Securities Act of 1933 (``Securities Act'').\1\
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    \1\ 15 U.S.C. 77a et seq.
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I. Background

    On July 21, 2010, the President signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act'') \2\ into law. 
Title VII of the Dodd-Frank Act (``Title VII'') provides the Securities 
and Exchange Commission (``SEC'' or the ``Commission'') and the 
Commodity Futures Trading Commission (``CFTC'') with the authority to 
regulate over-the-counter derivatives. Under Title VII, the CFTC 
regulates ``swaps,'' the SEC regulates ``security-based swaps,'' and 
the CFTC and SEC jointly regulate ``mixed swaps.'' \3\
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    \2\ Public Law 111-203, 124 Stat. 1376 (2010).
    \3\ Section 712(d) of the Dodd-Frank Act provides that the SEC 
and the CFTC, in consultation with the Board of Governors of the 
Federal Reserve System, shall jointly further define the terms 
``swap,'' ``security-based swap,'' ``swap dealer,'' ``security-based 
swap dealer,'' ``major swap participant,'' ``major security-based 
swap participant,'' ``eligible contract participant,'' and 
``security-based swap agreement.'' These terms are defined in 
Sections 721 and 761 of the Dodd-Frank Act and, with respect to the 
term ``eligible contract participant,'' in Section 1a(18) of the 
Commodity Exchange Act [7 U.S.C. 1a(18)], as re-designated and 
amended by Section 721 of the Dodd-Frank Act. The SEC and the CFTC 
adopted final rules further defining these terms. See Further 
Definition of ``Swap Dealer,'' ``Security-Based Swap Dealer,'' 
``Major Swap Participant,'' ``Major Security-Based Swap 
Participant'' and ``Eligible Contract Participant'', Release No. 34-
66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012), and Further 
Definition of ``Swap,'' ``Security-Based Swap,'' and ``Security-
Based Swap Agreement''; Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping, Release No. 33-9338 (Jul. 18, 2012), 77 FR 48208 
(Aug. 13, 2012) (``Product Definitions Adopting Release'').
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    Title VII amended the Securities Act and the Securities Exchange 
Act of 1934 (``Exchange Act'') \4\ to include ``security-based swaps'' 
in the definition of ``security'' for purposes of those statutes. \5\ 
As a result, ``security-based swaps'' are subject to the provisions of 
the Securities Act and the Exchange Act and the rules and regulations 
thereunder applicable to securities. The Securities Act requires that 
any offer and sale of a security must either be registered under the 
Securities Act or be made pursuant to an exemption from 
registration.\6\ As a result, counterparties entering into security-
based swap transactions need either to rely on an available exemption 
from the registration requirements of the Securities Act or register 
such transactions. Title VII amended the Securities Act to require that 
security-based swap transactions involving persons who are not eligible 
contract participants \7\ must be registered under the Securities 
Act.\8\
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    \4\ 15 U.S.C. 78a et seq.
    \5\ See Sections 761(a)(2) and 768(a)(1) of the Dodd-Frank Act 
(amending 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)], respectively).
    \6\ See 15 U.S.C. 77e.
    \7\ The term ``eligible contract participant'' is defined in 
Section 1a(18) of the Commodity Exchange Act [7 U.S.C. 1a(18)]. The 
definition of the term ``eligible contract participant'' in the 
Securities Act refers to the definition of ``eligible contract 
participant'' in the Commodity Exchange Act. See Section 5(e) of the 
Securities Act [15 U.S.C. 77e(e)]. The eligible contract participant 
definition includes several categories of persons: Financial 
institutions; insurance companies; investment companies; commodity 
pools; business entities, such as corporations, partnerships, and 
trusts; employee benefit plans; government entities, such as the 
United States, a State or local municipality, a foreign government, 
a multinational or supranational government entity, or an 
instrumentality, agency or department of such entities; market 
professionals, such as broker dealers, futures commission merchants, 
floor brokers, and investment advisors; and natural persons with a 
specified dollar amount invested on a discretionary basis. The SEC 
and the CFTC adopted final rules further defining the term 
``eligible contract participant.'' See footnote 3 above.
    \8\ See Section 768(b) of the Dodd-Frank Act (adding new Section 
5(d) of the Securities Act [15 U.S.C. 77e(d)]) (Notwithstanding the 
provisions of section 3 or 4, unless a registration statement 
meeting the requirements of section 10(a) is in effect as to a 
security-based swap, it shall be unlawful for any person, directly 
or indirectly, to make use of any means or instruments of 
transportation or communication in interstate commerce or of the 
mails to offer to sell, offer to buy or purchase or sell a security-
based swap to any person who is not an eligible contract participant 
as defined in section 1a(18) of the Commodity Exchange Act (7 U.S.C. 
1a(18)).)). Section 105(c)(1) of the Jumpstart Our Business Startups 
Act (the ``JOBS Act'') redesignated paragraph (d) of Section 5 of 
the Securities Act as paragraph (e). See Public Law 112-106, 126 
Stat. 306 (2012).

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[[Page 54225]]

    Transactions in security-based swaps historically have occurred 
through bilateral trades in the over-the-counter market.\9\ Currently, 
security-based swap dealers can locate counterparties for transactions 
in security-based swaps by using various methods, including electronic 
trading platforms.\10\ Security-based swap dealers may solicit 
transactions in security-based swaps from their institutional client 
base via phone calls, email, and in-person meetings. Clients sometimes 
contact security-based swap dealers who are well known in the market to 
request a quote for a particular transaction. In addition, security-
based swap dealers may opt to locate counterparties by engaging the 
services of an inter-dealer broker. According to a commenter, security-
based swap dealers also disseminate trading interest in security-based 
swaps by sending messages via on-line information services such as 
Bloomberg.\11\ These electronic messages are sent only to accounts with 
whom security-based swap dealers and brokers have pre-existing 
relationships.\12\ Security-based swap dealers also may communicate 
pricing information or quotes for security-based swaps through 
electronic trading platforms that require pre-clearance for access and 
are accessible only to approved customers. These platforms include 
single-dealer request for quote platforms, aggregator-type platforms, 
multi-dealer request for quote platforms, limit order book systems, and 
electronic brokering platforms.\13\ Certain of these platforms may 
become security-based swap execution facilities (``security-based 
SEFs'') \14\ upon the full implementation of Title VII, but the 
particular characteristics of trading platforms that security-based 
SEFs will be permitted to operate will not be known until we adopt 
final rules implementing the statutory provisions of Title VII 
governing the registration and regulation of security-based SEFs.\15\
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    \9\ See letter from Kenneth E. Bentsen, Jr., Executive Vice 
President, Public Policy and Advocacy, The Securities Industry and 
Financial Markets Association (``SIFMA''), and Robert Pickel, Chief 
Executive Officer, International Swaps and Derivatives Association 
(``ISDA''), dated Apr. 20, 2012 (``SIFMA/ISDA Letter''). The SIFMA/
ISDA letter was submitted in response to the request for comment in 
Exemptions for Security-Based Swaps, Release No. 33-9231 (Jul. 1, 
2011), 76 FR 40605 (Jul. 11, 2011) (``Interim Final Exemptions 
Adopting Release''). In considering whether the exemptions adopted 
in the Interim Final Exemptions Adopting Release were necessary or 
appropriate, the Commission requested information about how 
security-based swaps are currently transacted and will be transacted 
following the full implementation of Title VII. In response to the 
request for comment, the SIFMA/ISDA Letter provided a description of 
how the security-based swaps market functions and how it may 
function following the full implementation of Title VII. See SIFMA/
ISDA Letter.
    \10\ See SIFMA/ISDA Letter.
    \11\ Id.
    \12\ Id.
    \13\ Id.
    \14\ See Section 761 of the Dodd-Frank Act (adding Section 
3(a)(77) of the Exchange Act [15 U.S.C. 78c(a)(77)] (defining the 
term ``security-based swap execution facility'')), and Registration 
and Regulation of Security-Based Swap Execution Facilities, Release 
No. 34-63825 (Feb. 2, 2011) 76 FR 10948 (Feb. 28, 2011) (``Security-
Based SEF Proposing Release'').
    \15\ See Security-Based SEF Proposing Release.
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    Title VII has added a requirement that security-based swaps be 
traded on regulated trading platforms or exchanges in certain 
situations. Title VII contains a mandatory clearing provision that 
requires security-based swap transactions to be submitted for clearing 
to a clearing agency if such security-based swap is one that the 
Commission has determined is required to be cleared, unless an 
exception from mandatory clearing applies (``mandatory clearing 
requirement'').\16\ This section of Title VII further provides that for 
security-based swaps that are subject to the mandatory clearing 
requirement, transactions in such security-based swaps must be executed 
on an exchange or on a registered or exempt security-based SEF, unless 
no exchange or security-based SEF makes such security-based swap 
available for trading (``mandatory trade execution requirement'').\17\ 
If a security-based swap transaction is not subject to the mandatory 
clearing requirement, the transaction may still be cleared on a 
voluntary basis by a clearing agency if the clearing agency has rules 
that permit it to clear the security-based swap.\18\ Security-based 
swap transactions, whether or not subsequently cleared, may be executed 
on a security-based SEF.\19\
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    \16\ See Section 763(a) of the Dodd-Frank Act (adding Section 3C 
of the Exchange Act [15 U.S.C. 78c-3]).
    \17\ Id.
    \18\ See Exemptions for Security-Based Swaps Issued By Certain 
Clearing Agencies, Release No. 33-9308 (Mar. 30, 2012), 77 FR 20536 
(Apr. 5, 2012) (``Cleared SBS Exemptions Adopting Release'').
    \19\ Id.
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    Any facility for trading or processing security-based swaps, 
including some of the electronic trading platforms currently used by 
security-based swap dealers to disseminate quotes to their clients, 
must be registered as a security-based SEF or as a national securities 
exchange.\20\ Once registered, a security-based SEF may make security-
based swaps available for trading and facilitate trade processing of 
security-based swaps. We believe that security-based SEFs, as well as 
exchanges that post or trade security-based swaps, should help to 
provide greater transparency and a more competitive environment for the 
trading of security-based swaps by providing venues for multiple 
parties to execute trades in security-based swaps and also by serving 
as conduits for information regarding trading interest in security-
based swaps.\21\ While security-based swap transactions currently are 
effected through the over-the-counter market, rather than on regulated 
markets, with the full implementation of Title VII, such transactions 
will occur both through regulated markets, such as registered or exempt 
security-based SEFs and national securities exchanges, and through 
over-the-counter transactions under certain circumstances.
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    \20\ See Section 763(c) of the Dodd-Frank Act (adding Section 
3D(a)(1) of the Exchange Act [15 U.S.C. 78c-4(a)(1)]). We view this 
requirement as applying only to a facility that meets the definition 
of ``security-based swap execution facility'' in Section 3(a)(77) of 
the Exchange Act. Under the Dodd-Frank Act, security-based swaps 
that that are not subject to the mandatory trade execution 
requirement would not have to be traded on a registered security-
based SEF and could continue to be traded in the over-the-counter 
market for security-based swaps. See Security-Based SEF Proposing 
Release.
    \21\ See Security-Based SEF Proposing Release.
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    Title VII amends the Exchange Act to add various new statutory 
provisions to govern the regulation of security-based SEFs, including 
provisions relating to who may access such trading platforms (known as 
an ``impartial access requirement'') and the availability of bid, 
offer, or other price information regarding security-based swaps.\22\ 
The

[[Page 54226]]

impartial access requirement would require a security-based SEF to 
establish objective standards for granting impartial access to trading 
on the security-based SEF. The proposed rules for regulating security-
based SEFs would impose an affirmative requirement for security-based 
SEFs to admit as participants all eligible persons that meet those 
standards for becoming a participant.\23\ Further, the proposed rules 
for regulating security-based SEFs would require security-based SEFs to 
provide at least a basic functionality to allow any participant on a 
security-based SEF the ability to make and display executable bids or 
offers accessible to all other participants on the security-based SEF, 
if the participant chooses to do so.\24\ Consequently, registered 
security-based SEFs may be unable to limit the number or types of 
persons that have access to quotes on their trading platforms. For 
example, following the full implementation of Title VII, the rules of 
security-based SEFs and national securities exchanges may require the 
publication or distribution of quotes for security-based swaps to be 
available to all participants in these platforms. As is the case today, 
participants in these platforms may be able to further disseminate such 
quotes, including through on-line information services, without 
restriction depending on the particular rules of these platforms. As a 
result, such quotes may be available to any person on an unrestricted 
basis.
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    \22\ See Section 763 of the Dodd-Frank Act (adding Sections 3C 
and 3D of the Exchange Act [15 U.S.C. 78c-3 and 78c-4]). We have 
proposed rules to implement the statutory provisions regarding the 
regulation of security-based SEFs. See Security-Based SEF Proposing 
Release. To be registered as a security-based SEF a trading platform 
must comply with certain enumerated core principles, one of which is 
that a security-based SEF must provide market participants with 
impartial access to become participants in the security-based SEF. 
See Section 3D(d) of the Exchange Act [15 U.S.C. 78c-4(d)]. We have 
proposed rules to implement the impartial access requirement that 
would set forth the categories of persons that would be permitted to 
have direct access to trading on a security-based SEF as a 
participant and also the terms and conditions that the security-
based SEF would need to adopt for granting such access. See 
Security-Based SEF Proposing Release. The impartial access 
requirement is analogous to the fair access requirement for national 
securities exchanges under Section 6(b)(2) of the Exchange Act, 
which also imposes an affirmative duty to admit qualified broker-
dealers as members. See 15 U.S.C. 78f(b)(2) (``[T]he rules of the 
exchange [must] provide that any registered broker or dealer or 
natural person associated with a registered broker or dealer may 
become a member of such exchange . . .'').
    \23\ See Security-Based SEF Proposing Release. This proposed 
requirement is in contrast to the current structure of security-
based swap trading platforms, as noted above, in which the trading 
platform operators and the security-based swap dealers have 
discretion over authorizing participants to access the platform and 
to see quotes for security-based swaps from the security-based swap 
dealers.
    \24\ See Security-Based SEF Proposing Release.
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    The operation of security-based SEFs and national securities 
exchanges that post bids, offers, or prices or that operate as trading 
platforms for security-based swaps, whether currently or following full 
implementation of Title VII, could affect the availability of 
exemptions from the registration requirements of the Securities Act for 
security-based swaps whose quotes are publicly available on or through 
such trading platforms or national securities exchanges.\25\ Currently, 
quote or price information on security-based swaps on or through 
trading platforms used by security-based swap dealers may be available 
to the dealers' clients or others at the dealer's discretion. Certain 
of these trading platforms, as well as others, may become registered 
security-based SEFs, which may affect the platform's ability to limit 
participant access to the trading platforms and, therefore, may enable 
a variety of individuals or entities to view quotes on such platforms.
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    \25\ See, e.g., Section 4(a)(2) of the Securities Act (formerly 
Section 4(2)) exempts transactions by an issuer not involving any 
public offering from the registration requirements of Section 5 of 
the Securities Act. 15 U.S.C. 77d(a)(2).
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    We have previously taken action with respect to security-based swap 
transactions under the Securities Act, the Exchange Act, and the Trust 
Indenture Act of 1939 (``Trust Indenture Act'') \26\ while we sought 
input on the ways in which security-based swaps were transacted prior 
to the enactment of Title VII and could be transacted following the 
full implementation of Title VII, including through the use of trading 
platforms for security-based swaps. In July 2011, as a result of 
security-based swaps being included in the definition of ``security'' 
under the Securities Act and the Exchange Act and thereby becoming 
subject to the provisions of those statutes and the rules and 
regulations thereunder applicable to securities, we adopted interim 
final rules to provide exemptions under the Securities Act, the 
Exchange Act, and the Trust Indenture Act for those security-based 
swaps that prior to July 16, 2011 (``Title VII effective date'') \27\ 
were ``security-based swap agreements'' and are defined as 
``securities'' under the Securities Act and the Exchange Act as of the 
Title VII effective date due solely to the provisions of Title VII 
(collectively, the ``interim final exemptions'').\28\ The interim final 
exemptions exempt offers and sales of security-based swap agreements 
that became security-based swaps on the Title VII effective date from 
all provisions of the Securities Act, other than the Section 17(a) 
anti-fraud provisions, as well as from the Exchange Act registration 
requirements and from the provisions of the Trust Indenture Act, 
provided certain conditions are met.\29\ We adopted amendments to the 
interim final exemptions to extend the expiration dates in the interim 
final exemptions to February 11, 2017.\30\ If we adopt rules under this 
proposal, we may determine to alter the expiration dates in the interim 
final exemptions as part of that rulemaking, including possibly 
shortening the expiration dates in the interim final exemptions.\31\
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    \26\ 15 U.S.C. 77aaa et seq.
    \27\ The provisions of Title VII generally were effective on 
July 16, 2011 (360 days after enactment of the Dodd-Frank Act), 
unless a provision requires a rulemaking. If a Title VII provision 
requires a rulemaking, it will go into effect not less than 60 days 
after publication of the related final rule or on July 16, 2011, 
whichever is later. See Section 774 of the Dodd-Frank Act.
    \28\ See Rule 240 under the Securities Act [17 CFR 230.240], 
Rules 12a-11 and Rule 12h-1(i) under the Exchange Act [17 CFR 
240.12a-11 and 17 CFR 240.12h-1], and Rule 4d-12 under the Trust 
Indenture Act of 1939 (``Trust Indenture Act'') [17 CFR 260.4d-12]. 
See also Interim Final Exemptions Adopting Release. The category of 
security-based swaps covered by the interim final exemptions 
involves those that would have been defined as ``security-based swap 
agreements'' prior to the enactment of Title VII. See Section 2A of 
the Securities Act [15 U.S.C. 77b(b)-1)] and Section 3A of the 
Exchange Act [15 U.S.C. 78c-1], each as in effect prior to the Title 
VII effective date. For example, the vast majority of security-based 
swap transactions involve single-name credit default swaps, which 
would have been ``security-based swap agreements'' prior to the 
Title VII effective date. In contrast, the definition of ``security-
based swap agreement'' did not include security-based swaps that are 
based on or reference only loans and indexes only of loans. The 
Division of Corporation Finance issued a no-action letter that 
addressed the availability of the interim final exemptions to offers 
and sales of security-based swaps that are based on or reference 
only loans or indexes only of loans. See Cleary Gottlieb Steen & 
Hamilton LLP (Jul. 15, 2011). This no-action letter will remain in 
effect for so long as the interim final exemptions remain in effect.
    \29\ The security-based swap that is exempt must be a security-
based swap agreement (as defined prior to the Title VII effective 
date) and entered into between eligible contract participants (as 
defined prior to the Title VII effective date). See Rule 240 under 
the Securities Act [17 CFR 230.240]. See also Interim Final 
Exemptions Adopting Release.
    \30\ See Extension of Exemptions for Security-Based Swaps, 
Release No. 33-9545 (Feb. 5, 2014), 79 FR 7570 (Feb. 10, 2014).
    \31\ We are requesting comment on whether to shorten or further 
extend the expiration dates in the interim final exemptions.
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    We adopted the interim final exemptions because, among other 
things, we were concerned about disrupting the operation of the 
security-based swaps market while we evaluated the implications for 
security-based swaps under the Securities Act and the Exchange Act as a 
result of the inclusion of the term ``security-based swap'' in the 
definition of ``security'' for purposes of those statutes.\32\
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    \32\ Id. Prior to the Title VII effective date, security-based 
swap agreements that became security-based swaps on the Title VII 
effective date were outside the scope of the federal securities 
laws, other than the anti-fraud and certain other provisions. See 
Section 2A of the Securities Act [15 U.S.C. 77b(b)-1)] and Section 
3A of the Exchange Act [15 U.S.C. 78c-1], each as in effect prior to 
the Title VII effective date. Some market participants were 
concerned that because of the different types of trading platforms 
being used to effect transactions in security-based swaps there 
could be questions regarding the availability of exemptions under 
the Securities Act and the Exchange Act.

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[[Page 54227]]

    At the time of adoption of the interim final exemptions in July 
2011, we requested comment on various aspects of the interim final 
exemptions.\33\ In response to the request for comment, commenters 
expressed concerns regarding the availability of exemptions from the 
registration requirements of the Securities Act, including the 
exemption in Section 4(a)(2), for security-based swap transactions 
entered into solely between eligible contract participants due to the 
operation of certain trading platforms and the publication or 
distribution of other information regarding security-based swaps.\34\ 
Commenters indicated that certain communications involving security-
based swaps, such as the publication or distribution of price quotes, 
may be available on or through trading platforms on an unrestricted 
basis following the full implementation of Title VII.\35\ They were 
concerned that this unrestricted access could affect the availability 
of exemptions from the registration requirements of the Securities Act, 
such as the exemption in Section 4(a)(2), for such security-based swap 
transactions.\36\ As we understand, currently such communications 
generally are not available on the trading platforms on an unrestricted 
basis because the trading platform operators and the security-based 
swap dealers have discretion over authorizing participants to access 
trading platforms and to see quotes for security-based swaps from the 
security-based swap dealers using such trading platforms.\37\
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    \33\ See Interim Final Exemptions Adopting Release. The 
Commission also requested comment on certain of these matters in an 
earlier proposing release regarding exemptions for security-based 
swap transactions involving an eligible clearing agency. See 
Exemptions For Security-Based Swaps Issued By Certain Clearing 
Agencies, Release No. 33-9222 (Jun. 9, 2011), 76 FR 34920 (Jun. 15, 
2011) (``Cleared SBS Exemptions Proposing Release'').
    \34\ See SIFMA/ISDA Letter and letter from Kenneth E. Bentsen, 
Jr., Executive Vice President, Public Policy and Advocacy, SIFMA, 
dated Dec. 21, 2012 (``SIFMA Letter''). See also letter from Richard 
M. Whiting, Executive Director and General Counsel, Financial 
Services Roundtable, Robert Pickel, Chief Executive Officer, ISDA, 
and Kenneth E. Bentsen, Jr., Executive Vice President, Public Policy 
and Advocacy, SIFMA, dated Jan. 31, 2012 (``FSR/ISDA/SIFMA 
Letter''), and letter from Scott Pintoff, General Counsel, GFI Group 
Inc., dated Jul. 25, 2011 (``GFI Letter''). The FSR/ISDA/SIFMA 
Letter and GFI Letter were submitted in response to our request for 
comment in the Cleared SBS Exemptions Proposing Release.
    \35\ Id.
    \36\ Id.
    \37\ See SIFMA/ISDA Letter.
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    The publication or distribution of price quotes for security-based 
swaps that are traded or processed on or through trading platforms 
could be viewed as offers of those security-based swaps within the 
meaning of Section 2(3) of the Securities Act,\38\ and such 
communications would require compliance with the registration 
provisions of Section 5 of the Securities Act unless there is an 
available exemption from such registration requirements. Further, such 
communications also may be considered offers to persons who are not 
eligible contract participants, even if such persons are not permitted 
to purchase the security-based swaps. Under Section 5(e) of the 
Securities Act, it is unlawful to make offers or sales of security-
based swaps to persons who are not eligible contract participants 
unless the security-based swaps are registered under the Securities 
Act.\39\
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    \38\ See 15 U.S.C. 77b(3).
    \39\ See footnote 8 above and accompanying text.
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    The rule proposed in this release is intended to further the goal 
of Title VII to bring the trading of security-based swaps onto 
regulated trading platforms and avoid unintended consequences arising 
from the operation of security-based swap trading platforms, including 
security-based SEFs and national securities exchanges, following the 
full implementation of Title VII by permitting market participants to 
effect security-based swap transactions without concern that price 
quotes on trading platforms made with respect to such security-based 
swap transactions may implicate the registration requirements of the 
Securities Act. If there are no Securities Act exemptions available 
with respect to a security-based swap transaction because the 
publication or distribution of price quotes for the security-based 
swaps that are traded or processed on or through trading platforms is 
viewed as an offer of such security-based swap, including to persons 
who are not eligible contract participants, the required registration 
of such transactions could impede the operation of, and the trading of 
security-based swaps on or through, these trading platforms. This, in 
turn, could potentially impede price discovery of security-based swap 
transactions. Accordingly, we believe that the rule proposed in this 
release is necessary to enable market participants to effect security-
based swap transactions with eligible contract participants in reliance 
on available exemptions from the registration requirements of the 
Securities Act and avoid potential Securities Act violations for 
unregistered offers to persons who are not eligible contract 
participants, and to assure that there are not unintended consequences 
for the operation of security-based swap trading platforms following 
the full implementation of Title VII.
    In proposing this rule, we have considered comment letters received 
to date on the interim final exemptions, including comment letters we 
received in response to the request for comment in an earlier proposing 
release regarding exemptions for security-based swap transactions 
involving an eligible clearing agency.\40\ As noted above, some 
commenters expressed concerns regarding the availability of exemptions 
from the registration requirements of the Securities Act arising from 
the publication or distribution of price quotes for security-based 
swaps that are traded on or processed on or through trading platforms. 
Some commenters also expressed concern about the effect on the 
availability of Securities Act exemptions arising from other published 
communications that they characterized as research,\41\ but the comment 
letters did not provide detail regarding the types of research 
materials that are distributed, the manner in which such research 
materials are distributed, or the basis for characterizing such 
communications as research. We are requesting further comment regarding 
these matters. In addition, while some commenters suggested broader 
exemptions for security-based swap transactions entered into solely 
between eligible contract participants under the Securities Act, the 
Exchange Act, and the Trust Indenture Act, they did not provide any 
specific examples of why broader exemptions are necessary. Thus, at 
this time, we are proposing a Securities Act rule that is tailored to 
address commenters' identified concerns regarding the publication or 
distribution of price quotes arising from the operation of trading 
platforms, rather than broader exemptions under the Securities Act, the 
Exchange Act, or the Trust Indenture Act. We are requesting comment on 
whether or not we should take a different approach.
---------------------------------------------------------------------------

    \40\ See footnote 34 above and accompanying text.
    \41\ See SIFMA/ISDA Letter and SIFMA Letter. These 
communications are discussed further below in Section II in the 
discussion of the comments the Commission has received on the 
interim final exemptions.
---------------------------------------------------------------------------

II. Discussion of the Proposed Rule

    We are proposing Rule 135d under the Securities Act to provide that 
certain communications involving security-based swaps that may be 
purchased only by eligible contract participants will not be deemed for 
purposes of Section 5 of the Securities Act to constitute offers of 
such security-based

[[Page 54228]]

swaps or any guarantees of such security-based swaps that are 
securities. Under the proposed rule, the publication or distribution of 
price quotes (``SBS price quotes'') relating to security-based swaps 
\42\ that may be purchased only by persons who are eligible contract 
participants and are traded or processed on or through a facility that 
either is registered as a national securities exchange or as a 
security-based SEF, or is exempt from registration as a security-based 
SEF pursuant to a rule, regulation, or order of the Commission (an 
``eligible trading platform''), would not be deemed to constitute an 
offer, an offer to sell, or a solicitation of an offer to buy or 
purchase such security-based swaps or any guarantees of such security-
based swaps that are securities for purposes of Section 5 of the 
Securities Act.
---------------------------------------------------------------------------

    \42\ The term ``security-based swap'' includes mixed swaps. A 
mixed swap is defined as a security-based swap that also is based on 
the value of 1 or more interest or other rates, currencies, 
commodities, instruments of indebtedness, indices, quantitative 
measures, other financial or economic interest or property of any 
kind (other than a single security or a narrow-based security 
index), or the occurrence, non-occurrence, or the extent of the 
occurrence of an event or contingency associated with a potential 
financial, economic, or commercial consequence (other than the 
occurrence, non-occurrence, or extent of the occurrence of an event 
relating to a single issuer of a security or the issuers of 
securities in a narrow-based security index, provided that such 
event directly affects the financial statements, financial 
condition, or financial obligations of the issuer). See Section 
3(a)(68)(D) of the Exchange Act [15 U.S.C. 78c(a)(68)(D)]. See also 
Section IV of the Product Definitions Adopting Release.
---------------------------------------------------------------------------

    The publication or distribution of SBS price quotes otherwise could 
be considered offers of those securities within the meaning of Sections 
2(3) and 5 of the Securities Act, including to persons who are not 
eligible contract participants, if the SBS price quotes are available 
on an unrestricted basis. If considered offers, the publication or 
distribution of SBS price quotes may affect the availability of 
exemptions from the registration requirements of the Securities Act, 
including the exemption in Section 4(a)(2), and may be offers of 
security-based swaps to non-eligible contract participants. The 
proposed rule would allow such communications to be made without being 
considered to be an offer for purposes of Section 5 of the Securities 
Act.
    The proposed rule would apply to the initial publication or 
distribution of the SBS price quotes on eligible trading platforms, as 
well as any subsequent republication or redistribution of the SBS price 
quotes on or through mediums other than eligible trading platforms, 
including on-line information services. It is possible that 
participants in eligible trading platforms that receive SBS price 
quotes could further disseminate the SBS price quotes without 
restriction. Because we do not believe that the SBS price quotes should 
be considered offers for purposes of Section 5 of the Securities Act 
under the conditions in the proposed rule, we do not believe that the 
treatment of such SBS price quotes under the proposed rule should 
depend on who publishes or distributes the SBS price quotes or where 
the SBS price quotes are published or distributed, so long as only 
persons who are eligible contract participants may purchase the 
securities that are the subject of the SBS price quotes.
    The proposed rule would apply to the publication or distribution of 
price quotes of security-based swaps, including any guarantees of such 
security-based swaps that are securities. Security-based swaps may be 
guaranteed to provide protection against a counterparty's default. A 
guarantee of a security is itself a security for purposes of the 
Securities Act.\43\ As a result, the publication or distribution of SBS 
price quotes also may be viewed as offers of any guarantees of the 
security-based swaps that are the subject of the SBS price quotes. We 
believe that the proposed rule should apply with respect to any 
guarantee of a security-based swap provided as part of the security-
based swap transaction. Because we believe that a guarantee of a 
security-based swap is part of the security-based swap transaction, the 
proposed rule also would deem the publication or distribution of SBS 
price quotes to not constitute an offer, an offer to sell, or a 
solicitation of an offer to buy or purchase any guarantees of the 
security-based swaps that are the subject of the SBS price quotes.
---------------------------------------------------------------------------

    \43\ See Section 2(a)(1) of the Securities Act [15 U.S.C. 
77b(a)(1)].
---------------------------------------------------------------------------

    The proposed rule would apply with respect to SBS price quotes, 
which could take a number of forms depending on the type of trading 
platform model, including indicative quotes, executable quotes, bids 
and offers, and other pricing information and other types of quote 
information that may develop in the future. We are not proposing to 
define the specific type of SBS price quotes with respect to which the 
proposed rule would apply because we do not want to limit the types of 
trading platform models that currently or may in the future exist.\44\ 
This approach is intended to allow flexibility in the proposed rule as 
organized markets for the trading of security-based swaps continue to 
develop, including following the full implementation of Title VII.
---------------------------------------------------------------------------

    \44\ According to commenters, the five trading platforms models 
discussed below represent broadly the various types of models for 
the trading of security-based swaps in existence today. See SIFMA/
ISDA Letter. These examples may not represent every single method in 
existence today, and the discussion below is intended to give an 
overview of the models without providing the nuances of each 
particular type. As noted above, certain of these trading platforms 
may become security-based SEFs following the full implementation of 
Title VII, but the particular characteristics of trading platforms 
that security-based SEFs will be permitted to operate will not be 
known until we adopt final rules implementing the statutory 
provisions of Title VII governing the registration and regulation of 
security-based SEFs. See footnote 15 above and accompanying text.
---------------------------------------------------------------------------

    The security-based swaps market currently is characterized by 
bilateral negotiation in the over-the-counter market, is largely 
decentralized, and many instruments are not standardized.\45\ The lack 
of uniform rules concerning the trading of security-based swaps and the 
one-to-one nature of trade negotiation in the security-based swaps 
market has resulted in the formation of distinct types of venues for 
the trading of these securities, such as single-dealer request for 
quote platforms, aggregator-type platforms, multi-dealer request for 
quote platforms, limit order book systems, and electronic brokering 
platforms. According to commenters, a single-dealer request for quote 
platform is a trading platform on which a security-based swap dealer 
may post quotes for security-based swaps transactions in various asset 
classes that the security-based swap dealer is willing to trade.\46\ 
These trading platforms currently require pre-clearance for access and 
are accessible exclusively by the security-based swap dealers' approved 
customers. When a customer wishes to effect a security-based swap 
transaction, the customer requests a quote, the security-based swap 
dealer provides one, and if the customer accepts the security-based 
swap dealer's quote, the transaction is executed electronically.\47\
---------------------------------------------------------------------------

    \45\ See SIFMA/ISDA Letter.
    \46\ Id.
    \47\ Id.
---------------------------------------------------------------------------

    Commenters describe an aggregator-type platform as a trading 
platform that combines two or more single-dealer request for quote 
platforms.\48\ In these trading platforms, both the aggregator and the 
security-based swap dealers currently must authorize participants to 
access the platform and see quotes from the security-based swap 
dealers. Although a participant can simultaneously view quotes from 
multiple security-based swap dealers, the participant can request a 
quote from

[[Page 54229]]

only one security-based swap dealer at a time.\49\
---------------------------------------------------------------------------

    \48\ Id.
    \49\ Id.
---------------------------------------------------------------------------

    Further, commenters describe a multi-dealer request for quote 
platform as a trading platform on which participants can request a 
quote for a security-based swap transaction from multiple security-
based swap dealers at the same time.\50\ The security-based swap 
dealers then send quotes back to the participant, which the participant 
may choose to accept and execute. Participants currently must be 
authorized by both the system operator and the security-based swap 
dealers in order to request quotes from security-based swap dealers 
through a multiple dealer request for quote platform.\51\
---------------------------------------------------------------------------

    \50\ Id.
    \51\ Id.
---------------------------------------------------------------------------

    According to commenters, a limit order book system is a trading 
platform on which firm bids and offers are posted, on an anonymous 
basis, for all participants in the platform to see, and bids and offers 
are then matched on price-time priority and other established 
parameters and trades are executed accordingly.\52\ The identities of 
the parties currently are withheld until a transaction occurs. The bid 
and offers in a limit order book system are firm and all participants 
in the platform currently can view these bids and offers before placing 
their own bids and offers.\53\
---------------------------------------------------------------------------

    \52\ Id. We understand that limit order book systems are not yet 
in operation for the trading of security-based swaps in the United 
States but exist for the trading of security-based swaps in Europe. 
Id.
    \53\ See SIFMA/ISDA Letter.
---------------------------------------------------------------------------

    Finally, commenters described an electronic brokering platform as a 
trading platform on which bids and offers are displayed.\54\ All 
participants in the platform currently can enter bids and offers, and 
observe others entering bids and offers. Unlike exchanges, security-
based swap electronic brokering platforms do not automatically match 
bids and offers in order to execute trades.\55\ Typically, once a buyer 
and seller express interest in a trade at the price posted on the 
electronic trading platform, an inter-dealer broker would assist them 
in negotiating a final trade over the telephone.\56\
---------------------------------------------------------------------------

    \54\ Id.
    \55\ Id.
    \56\ Id.
---------------------------------------------------------------------------

    The proposed rule addresses price quotes relating to security-based 
swaps that are traded or processed on or through registered or exempt 
security-based SEFs and national securities exchanges because the Title 
VII provisions applicable to these entities, as well as existing 
requirements applicable to national securities exchanges, require them 
to make their trading platforms available or price quotes on their 
platforms available to all participants without limitation. The 
proposed rule is intended to avoid unintended consequences for the 
operation of these trading platforms following the full implementation 
of Title VII and to allow market participants to continue to effect 
security-based swap transactions, including on or through these trading 
platforms, in reliance on available exemptions from the registration 
requirements of the Securities Act.
    The proposed rule covers price quotes for security-based swaps and 
any guarantees of such security-based swaps that may be purchased only 
by persons who are eligible contract participants.\57\ We believe that 
the publication or distribution of price quotes for security-based 
swaps that may only be purchased by eligible contract participants 
should not be considered offers of such security-based swaps or any 
guarantees of such security-based swaps that are securities, including 
to persons who are not eligible contract participants, for purposes of 
Section 5 of the Securities Act. The proposed rule is designed to 
permit security-based swap transactions between eligible contract 
participants to continue to be able to rely on available exemptions 
from the registration requirements of the Securities Act without 
unintended consequences for the operation of security-based SEFs and 
national securities exchanges that post or trade security-based swaps 
following the full implementation of Title VII. Security-based swaps 
that are not registered under the Securities Act are permitted to be 
sold only to eligible contract participants, and therefore we are 
limiting the proposed rule to the publication or distribution of price 
quotes for security-based swaps that may be purchased only by eligible 
contract participants.\58\ The exemptions from the registration 
requirements of Section 5 of the Securities Act set forth in Sections 3 
and 4 of the Securities Act are not available for security-based swap 
transactions that involve persons who are not eligible contract 
participants.\59\
---------------------------------------------------------------------------

    \57\ These proposed provisions are intended to identify the 
types of security-based swaps for which the publication or 
distribution of SBS price quotes would not be deemed under the 
proposed rule to be offers for purposes of Section 5 of the 
Securities Act. Any transaction in security-based swaps that are the 
subject of such SBS price quotes would have to be effected in 
compliance with the Securities Act and nothing relating to such 
transactions would affect whether such SBS price quotes when 
published or distributed were offers of such security-based swaps.
    \58\ See footnote 8 above and accompanying text. A comment 
letter submitted in connection with the SBS Cleared Exemptions 
Proposing Release suggested a simplified disclosure and registration 
scheme for those security-based swaps transactions involving 
clearing agencies that may involve persons who are not eligible 
contract participants. See letter from Bruce Bolander, Gibson, Dunn 
& Crutcher LLP, dated Aug. 22, 2011. Commission staff is evaluating 
the feasibility of a simplified disclosure and registration scheme 
for security-based swaps issued by registered or exempt clearing 
agencies that may be offered and sold to persons who are not 
eligible contract participants.
    \59\ See footnote 8 above and accompanying text.
---------------------------------------------------------------------------

    We note that all security-based swap transactions entered into 
solely between eligible contract participants will be subject to the 
comprehensive regulatory regime of Title VII once it has been fully 
implemented, including security-based swap transaction reporting 
requirements, trade acknowledgments and verification, and business 
conduct standards.\60\ In particular, the business conduct standards 
generally require, among other things, disclosure by security-based 
swap dealers and major security-based swap participants to 
counterparties of (i) the material risks and characteristics of the 
security-based swap, and certain clearing rights, (ii) the material 
incentives or conflicts of interest that a security-based swap dealer 
or major security-based swap participant may have in connection with 
the security-based swap, and (iii) the daily mark of the security-based 
swap.\61\ The proposed business conduct rules, if adopted as proposed, 
also would require security-based swap dealers and major security-based 
swap participants to verify that a counterparty meets the eligibility 
requirements of an eligible contract participant.\62\ The Title VII 
regulatory regime will apply to security-based swaps transactions 
regardless of whether SBS price quotes relating to such transactions 
are available on an unrestricted basis. As a result of the other 
regulatory provisions of Title VII applicable to security-based swap 
transactions, we do not believe that our approach in the proposed rule 
is inconsistent with the protection of

[[Page 54230]]

investors. While these Title VII protections apply to security-based 
swap transactions with any participant, there are additional 
protections provided to non-eligible contract participants. In 
particular, non-eligible contract participants may only purchase 
security-based swaps that are subject to an effective registration 
statement.\63\
---------------------------------------------------------------------------

    \60\ See, e.g., Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, Release No. 63346 (Nov. 19, 2010), 
75 FR 75207 (Dec. 2, 2010); Trade Acknowledgment and Verification of 
Security-Based Swap Transactions, Release No. 34-63727 (Jan. 14, 
2011), 76 FR 3859 (Jan. 21, 2011); and Business Conduct Standards 
for Security-Based Swap Dealers and Major Security-Based Swap 
Participants, Release No. 34-64766 (Jun. 29, 2011), 76 FR 42396 
(Jul. 18, 2011) (``Business Conduct Standards Proposing Release'').
    \61\ See Section 15F(h)(3)(B) of the Exchange Act [15 U.S.C. 
78o-10(h)(3)(B)]. See also Business Conduct Standards Proposing 
Release.
    \62\ See Section 15F(h)(3)(A) of the Exchange Act [15 U.S.C. 
78o-10(h)(3)(A)]. See also Business Conduct Standards Proposing 
Release.
    \63\ See footnote 8 above and accompanying text.
---------------------------------------------------------------------------

    We note that although the proposed rule provides that the 
publication or distribution of SBS price quotes would not be deemed to 
be an offer for purposes of Section 5 of the Securities Act, the 
proposed rule would not otherwise affect the provisions of any 
exemptions from the registration requirements of the Securities Act. As 
a result, market participants would still need to make a determination 
as to whether an exemption from the registration provisions of the 
Securities Act is available with respect to a security-based swap 
transaction, including whether such transaction complies with any 
applicable conditions of the exemption. Finally, we note that because 
the proposed rule relates solely to the treatment of certain 
communications involving SBS price quotes as offers for purposes of 
Section 5 of the Securities Act, the proposed rule does not limit in 
any way the scope or applicability of the antifraud or other provisions 
of the federal securities laws, including Section 17(a) of the 
Securities Act, relating to both oral and written material 
misstatements and omissions in the offer and sale of securities, 
including security-based swaps.\64\
---------------------------------------------------------------------------

    \64\ See 15 U.S.C. 77q(a).
---------------------------------------------------------------------------

    The proposed rule would apply to any communication of SBS quotes 
for security-based swap transactions effected bilaterally in the over-
the-counter market or on or through eligible trading platforms, whether 
or not subsequently cleared in transactions involving an eligible 
clearing agency.\65\ Following the full implementation of Title VII, 
security-based swap transactions will be effected either in the over-
the-counter market or on eligible trading platforms, either voluntarily 
or because the transaction is subject to the mandatory trade execution 
requirement.\66\ These transactions subsequently may be cleared in 
transactions involving an eligible clearing agency, either voluntarily 
or because the security-based swap is subject to the mandatory clearing 
requirement.\67\ Regardless of whether these transactions subsequently 
are cleared in transactions involving an eligible clearing agency, the 
proposed rule is needed so that the publication or distribution of SBS 
price quotes will not cause unintended consequences for the operation 
of eligible trading platforms and the ability of market participants to 
rely on available exemptions from the registration requirements of the 
Securities Act, or require that such transactions be registered under 
the Securities Act because they are viewed as offers to non-eligible 
contract participants.
---------------------------------------------------------------------------

    \65\ For security-based swap transactions involving an eligible 
clearing agency, the exemptions we adopted under the Securities Act, 
the Exchange Act, and the Trust Indenture Act would continue to be 
available. See Rule 239 under the Securities Act [17 CFR 230.239], 
Rules 12a-10 and 12h-1(h) under the Exchange Act [17 CFR 240.12a-10 
and 240.12h-1(h)], and Rule 4d-11 under the Trust Indenture Act of 
1939 [17 CFR 260.4d-11]. See also Cleared SBS Exemptions Adopting 
Release. These exemptions do not apply to security-based swap 
transactions not involving an eligible clearing agency, even if the 
security-based swaps subsequently are cleared in transactions 
involving an eligible clearing agency. Id.
    \66\ See footnote 17 above and accompanying text.
    \67\ See footnote 16 above and accompanying text.
---------------------------------------------------------------------------

    We believe that the proposed rule is a measured response to 
commenters' concerns and is necessary or appropriate in the public 
interest. One of the goals of Title VII is to bring the trading of 
security-based swaps onto regulated trading platforms, such as 
security-based SEFs and national securities exchanges. The Title VII 
provisions applicable to security-based SEFs and national securities 
exchanges, as well as existing requirements applicable to national 
securities exchanges, require these trading platforms to make their 
platforms available or price quotes on their platforms available to all 
participants without limitation. If the publication or distribution of 
SBS price quotes is unrestricted, no Securities Act exemptions may be 
available with respect to transactions in the security-based swaps that 
are the subject of the SBS price quotes because such communications may 
be viewed as an offer of those security-based swaps, including to 
persons who are not eligible contract participants. The required 
registration of such transactions could have unintended consequences 
affecting the operation of and the trading of security-based swaps on 
or through these trading platforms, as well as the ability of market 
participants to effect security-based swap transactions bilaterally or 
on or through these trading platforms. For example, security-based swap 
dealers may not engage in security-based swap transactions if the 
dissemination of price quotes for security-based swaps on these trading 
platforms could jeopardize the availability of exemptions from the 
registration requirements of the Securities Act. Such action could 
affect the number of price quotes for and the liquidity of certain 
types of security-based swaps, which could have a detrimental effect on 
the liquidity and price discovery of security-based swap transactions. 
Accordingly, we believe the proposed rule is needed so that the 
publication or distribution of SBS price quotes will not cause 
unintended consequences for the operation of eligible trading 
platforms, affect the ability of market participants to rely on 
available exemptions from the registration requirements of the 
Securities Act, or require that such transactions be registered under 
the Securities Act because they are viewed as offers to non-eligible 
contract participants.
    We also believe that the proposed rule is consistent with the 
protection of investors. The proposed rule covers price quotes for 
security-based swaps and any guarantees of such security-based swaps 
that may be purchased only by persons who are eligible contract 
participants. Title VII provides that security-based swaps not 
registered under the Securities Act can only be sold to eligible 
contract participants.\68\ In addition, the proposed rule relates 
solely to the treatment of certain communications involving SBS price 
quotes as offers for purposes of Section 5 of the Securities Act and 
would preserve the other protections of the federal securities laws, 
including our ability to pursue an antifraud action in the offer and 
sale of the securities under Section 17(a) of the Securities Act. 
Treating the publication or distribution of SBS price quotes as not 
being offers would not harm non-eligible contract participants because 
they will not be able to purchase such security-based swaps. The 
additional protections of the federal securities laws requiring the 
registration of offers and sales of security-based swaps that non-
eligible contract participants may purchase would continue to apply to 
security-based swap transactions involving non-eligible contract 
participants.
---------------------------------------------------------------------------

    \68\ See footnote 8 above.
---------------------------------------------------------------------------

    Further, as a result of the regulatory provisions of Title VII 
applicable to security-based swap transactions, security-based swap 
transactions entered into solely between eligible contract participants 
would be subject to the comprehensive regulatory regime of Title VII 
once it has been fully implemented, regardless of whether SBS price 
quotes relating to such security-based swap transactions are available 
on an unrestricted basis. The proposed rule

[[Page 54231]]

also would enable security-based swap dealers to disseminate price 
quotes for security-based swaps on eligible trading platforms on an 
unrestricted basis without concern that such dissemination could 
jeopardize the availability of exemptions from the registration 
requirements of the Securities Act. Unrestricted access to these price 
quotes on eligible trading platforms would provide increased market 
transparency by providing all investors with the same information on 
the pricing of security-based swap transactions. Therefore, based on 
the foregoing, we believe that the proposed rule is necessary or 
appropriate in the public interest, and consistent with the protection 
of investors.
    We received three comment letters regarding the interim final 
exemptions.\69\ One commenter opposed any exemptions for security-based 
swaps, including the interim final exemptions, but did not provide any 
explanation for the reason.\70\ The other two commenters supported the 
interim final exemptions and stated their view that the interim final 
exemptions were necessary and appropriate steps to prevent disruption 
of the security-based swaps market and to ensure the orderly 
implementation of Title VII.\71\ These commenters stated that security-
based swap dealers may publish or distribute reports that they 
characterize as research that may be broadly disseminated and could be 
available on an unrestricted basis, which these commenters believed 
could affect the availability of exemptions from the registration 
requirements of the Securities Act for transactions involving the 
security-based swaps that are the subject of such reports.\72\ These 
commenters also provided an overview of the security-based swaps market 
as it functions today and how it may function following the full 
implementation of Title VII.\73\ These commenters indicated that the 
security-based swaps market currently functions as an ongoing series of 
bilateral trades between eligible contract participants.\74\ 
Participants in the security-based swaps market primarily consist of 
security-based swap dealers, banks, large corporations, insurance 
companies, asset managers, hedge funds, and other investment 
vehicles.\75\ Although individuals can qualify as eligible contract 
participants,\76\ these commenters indicated that the security-based 
swaps market is institutional in nature and in practice only a small 
number of participants are natural persons (generally high net worth 
individuals).\77\
---------------------------------------------------------------------------

    \69\ See SIFMA/ISDA Letter, SIFMA Letter, and letter from Tom 
Nappi, dated Jul. 14, 2011 (``Nappi Letter'').
    \70\ See Nappi Letter.
    \71\ See SIFMA/ISDA Letter and SIFMA Letter.
    \72\ Id. SIFMA believes that these communications would be 
within the definition of ``research report'' contained in Rules 
137(e), 138(d), and 139(d) under the Securities Act but would not 
satisfy the terms of those safe harbor provisions because of the 
nature of the security-based swap transactions. See SIFMA Letter.
    \73\ See SIFMA/ISDA Letter.
    \74\ Id.
    \75\ See footnote 7 above for a discussion of the eligible 
contract participant definition.
    \76\ An individual can qualify as an eligible contract 
participants if such individual has amounts invested on a 
discretionary basis, the aggregate of which is in excess of (i) 
$10,000,000 or (ii) $5,000,000, provided such individual also enters 
into the agreement, contract, or transaction in order to manage the 
risk associated with an asset owned or liability incurred, or 
reasonably likely to be owned or incurred, by such individual. See 
Section 1a(18)(A)(xi) of the Commodity Exchange Act.
    \77\ See SIFMA/ISDA Letter.
---------------------------------------------------------------------------

    As discussed above, some commenters expressed concerns regarding 
the availability of exemptions from the registration requirements of 
the Securities Act for security-based swap transactions entered into 
solely between eligible contract participants due to the operation of 
security-based swap trading platforms and the publication or 
distribution of other information regarding security-based swaps.\78\ 
Based on these commenters' concerns regarding the availability of 
exemptions from the registration requirements of the Securities Act, 
these commenters requested that we adopt permanent relief from the 
registration requirements of Section 5 of the Securities Act for offers 
and sales of security-based swaps \79\ solely between eligible contract 
participants.\80\ They believed that this relief is needed to avoid 
market disruption that could result from market participants having to 
determine whether exemptions from the registration requirements of the 
Securities Act are available due to the unrestricted availability of 
certain communications on security-based swap trading platforms 
following the full implementation of Title VII. Further, these 
commenters also requested relief under the Exchange Act for offers and 
sales of security-based swaps solely between eligible contract 
participants. They were concerned that ambiguity regarding the 
definition of a ``class'' as applied to security-based swaps could 
raise concerns regarding the registration requirements of Section 12(g) 
of the Exchange Act.\81\ Finally, these commenters requested relief 
from Section 304(d) of the Trust Indenture Act for security-based swaps 
entered into solely between eligible contract participants. They 
believed that the protections of the Trust Indenture Act are not 
necessary in the context of such transactions because such transactions 
involve contracts between two counterparties who are capable of 
enforcing obligations under the security-based swaps directly.\82\
---------------------------------------------------------------------------

    \78\ See SIFMA/ISDA Letter and SIFMA Letter. For example, these 
commenters stated, ``In light of the nature of the [security-based 
swaps] market discussed above, we request that the Commission 
provide for relief from the Securities Act registration requirement. 
Although we believe the sophisticated nature of [ECPs] in the 
[security-based swaps] market and the usual manner in which 
transactions in this market are conducted today, and will in the 
future be conducted on [security-based SEFs], qualify these 
transactions for the section 4[(a)](2) exemption from registration 
under the Securities Act for any transaction by an issuer `not 
involving any public offering,' there may be questions as to whether 
the full range of [security-based swaps] transactions, as described 
above, qualify for this exemption.'' See SIFMA/ISDA Letter.
    \79\ The category of security-based swaps that would be covered 
by this request for relief is broader in some ways than the category 
of security-based swaps covered by the interim final exemptions. As 
noted in footnote 28 above, the interim final exemptions apply to 
security-based swaps that were defined as ``security-based swap 
agreements'' prior to the Title VII effective date. That definition 
of ``security-based swap agreement'' did not include security-based 
swaps that are based on or reference only loans and indexes only of 
loans. See footnote 28 above.
    \80\ See SIFMA/ISDA Letter and SIFMA Letter. These commenters 
limited their request for relief to security-based swap transactions 
not involving an eligible clearing agency. Id. As noted above, we 
adopted exemptions under the Securities Act, the Exchange Act, and 
the Trust Indenture Act for security-based swap transactions 
involving an eligible clearing agency. See footnote 65 above.
    \81\ See SIFMA/ISDA Letter.
    \82\ Id.
---------------------------------------------------------------------------

    Although not submitted in connection with the interim final 
exemptions, we received two comment letters from four commenters 
regarding the proposed exemptions for security-based swap transactions 
involving an eligible clearing agency discussing issues arising with 
respect to security-based swap transactions not involving an eligible 
clearing agency.\83\ One commenter suggested that we provide permanent 
exemptions under the Securities Act, the Exchange Act, and the Trust 
Indenture Act for security-based swap transactions entered into between 
eligible contract participants and effected through any trading 
platform similar to the proposed exemptions for security-based swap 
transactions involving an eligible clearing agency.\84\

[[Page 54232]]

The other commenters suggested that we provide exemptions under Section 
12(g) of the Exchange Act and the Trust Indenture Act for security-
based swap transactions entered into solely between eligible contract 
participants similar to the proposed exemptions for security-based swap 
transactions involving an eligible clearing agency.\85\
---------------------------------------------------------------------------

    \83\ See FSR/ISDA/SIFMA Letter and GFI Letter. These letters 
were submitted in response to our request for comment in the Cleared 
SBS Exemptions Proposing Release.
    \84\ See GFI Letter. This commenter did not provide any 
explanation as to why such exemption was needed, including how 
security-based swap trading platforms operate, that would enable us 
to evaluate whether relief is necessary or appropriate. See Cleared 
SBS Exemptions Adopting Release.
    \85\ See FSR/ISDA/SIFMA Letter. These commenters requested 
relief under the Exchange Act and the Trust Indenture Act, but did 
not request relief under the Securities Act. However, two of these 
commenters subsequently submitted the SIFMA/ISDA Letter to request 
relief under the Securities Act. See footnote 80 above and 
accompanying text.
---------------------------------------------------------------------------

    Commenters have requested broad exemptions under the Securities 
Act, the Exchange Act, and the Trust Indenture Act for security-based 
swap transactions not involving an eligible clearing agency that are 
entered into solely between eligible contract participants. We are not 
proposing such exemptions because commenters' primary concern appears 
to relate to the impact of certain communications involving security-
based swaps made on or through trading platforms on the availability of 
exemptions from the registration requirements of the Securities Act, 
such as the exemption in Section 4(a)(2). We believe that the proposed 
rule under the Securities Act is appropriately tailored to address 
commenters' identified concerns regarding the availability of 
exemptions from the registration requirements of the Securities Act for 
offers and sales of security-based swaps solely between eligible 
contract participants. Therefore, we are not proposing a broad-based 
Securities Act exemption at this time.
    With respect to the commenters that raised concerns regarding the 
effect of publication of communications regarding security-based swaps 
that they characterized as research, one of these commenters noted that 
security-based swap dealers and their affiliates produce these 
communications generally about credit default swaps and provide them to 
their existing and prospective clients.\86\ This commenter stated that 
such written communications are prepared either by fundamental credit 
analysts, who may use credit default swaps as one expression of a 
particular issuer's credit risk in comparison to the outstanding debt 
securities of that issuer or another issuer, or credit strategists, who 
may also use credit default swaps to compare relative credit risk 
between different issuers.\87\ This commenter also stated that these 
written communications may contain statements that could theoretically 
be construed as offers to sell the security-based swaps mentioned in 
such reports within the meaning of Section 2(3) of the Securities 
Act.\88\
---------------------------------------------------------------------------

    \86\ See SIFMA Letter.
    \87\ Id.
    \88\ Id.
---------------------------------------------------------------------------

    Although we are not proposing to include these other written 
communications involving security-based swaps within the scope of the 
proposed rule, we are considering whether a broader exclusion from the 
definition of offer than simply for SBS price quotes would be 
appropriate as part of this rulemaking. A commenter requested broader 
relief for security-based swap communications, but it did not provide 
us with sufficient information to understand why a broader treatment 
would be necessary. For example, the commenter only addressed one type 
of security-based swap--credit default swaps. The commenter also did 
not provide sufficient information about the types and contents of such 
communications, the distribution methods and restrictions for such 
communications, or the basis for characterizing such communications as 
research in order for us to evaluate the appropriate treatment of such 
communications. Further, the commenter did not explain whether 
security-based swap dealers engage in security-based swap transactions 
with their existing or prospective clients who receive or access such 
communications. In this regard, we note that the examples of such 
communications provided by the commenter appear to include buy/sell 
recommendations with respect to certain security-based swaps.\89\ If 
the security-based swap dealers are entering into transactions 
involving such security-based swaps, such communications may be issuer 
offering materials rather than research. In order for us to analyze 
whether a broader exclusion from the definition of offer than simply 
for SBS price quotes would be appropriate as part of this rulemaking, 
we believe that we need additional information about such 
communications. We are requesting additional comment below regarding 
such communications.
---------------------------------------------------------------------------

    \89\ Id. Commenters provided the following examples: ``We 
continue to recommend buying [XYZCo] 5-year [credit default swaps] 
vs. selling [ABCCo] 5 year [credit default swaps]''; ``Market 
technicals could drive spreads tighter from here but we would 
consider buying protection in the low 300 bps area''; ``We'd 
recommend buying [JKLCo]sub [credit default swaps] at 267bp and 
selling [TUVCo] sub at 215bp, paying 52bp''; and ``We'd also 
recommend buying [JKLCo] senior [credit default swaps] versus 
[TUVCo] senior, paying just 11bp.'' Id.
---------------------------------------------------------------------------

    We also do not believe that a broad-based exemption from Section 
12(g) of the Exchange Act is needed at this time. Commenters have 
identified two scenarios that could raise questions regarding whether a 
type of security-based swap would be a ``class'' for purposes of 
Section 12(g).\90\ The scenarios identified by commenters are based on 
several assumptions regarding how the security-based swaps market will 
develop following the full implementation of Title VII. Given that 
Title VII has not been fully implemented and we do not know how the 
security-based swaps market will develop following the full 
implementation of Title VII, we do not believe that there is sufficient 
information at this time to propose a broad-based exemption from 
Section 12(g) of the Exchange Act. In addition, it is not clear why the 
protections of the Exchange Act, including periodic reporting and 
information about the security-based swap on an ongoing basis would not 
be needed, especially given the counterparty risk involved in security-
based swap transactions and the risks relating to the security-based 
swap itself. Moreover, issuers of security-based swaps that are 
security-based swap dealers or major security-based swap participants 
or their affiliates are likely to be subject to the reporting 
requirements of the Exchange Act and would be able to satisfy their 
periodic reporting obligations even if security-based swaps became 
subject to such reporting requirements.\91\
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    \90\ Commenters identified two scenarios involving ``security-
based swaps that would be similar to one another as a result of the 
standardized ISDA documentation that may set the majority of terms 
of the security-based swap. First, although a type of security-based 
swap may be cleared by a derivatives clearing agency generally, a 
particular security-based swap would not be cleared in the event 
that one of the counterparties to the security-based swap qualifies 
for, and elects to take advantage of, the end user exception to 
mandatory clearing. Second, it is theoretically possible that the 
Commission could designate a security-based swap for mandatory 
clearing because of its level of standardization, but the security-
based swap may not be cleared because there is not a clearing agency 
that is willing to accept the security-based swap for clearing.'' 
See FSR/ISDA/SIFMA Letter.
    \91\ For an issuer of security-based swaps that is not subject 
to the reporting requirements of the Exchange Act, the JOBS Act's 
increase in the threshold number of record holders triggering 
registration of a class of equity security under Section 12(g) of 
the Exchange Act to 2,000 persons or 500 persons who are not 
accredited investors at the end of the relevant fiscal year reduces 
the likelihood of such issuer triggering such registration 
requirements. See Section 12(g)(1)(A) of the Exchange Act [15 U.S.C. 
78l(g)(1)(A)].
---------------------------------------------------------------------------

    Finally, we do not believe that a broad-based exemption from 
Section

[[Page 54233]]

304(d) of the Trust Indenture Act is needed at this time. Commenters 
based their request for relief under the Trust Indenture Act on the 
rationale we provided in the Interim Final Exemptions Adopting Release 
to support our determination to adopt an interim final rule providing 
an exemption from Section 304(d) of the Trust Indenture Act. However, 
we note that the Trust Indenture Act provides an exemption for any 
security offered and sold in a transaction that is exempt from the 
registration requirements of the Securities Act under Section 4 of the 
Securities Act, such as the exemption set forth in Section 4(a)(2) of 
the Securities Act.\92\ As a result, unregistered security-based swap 
transactions effected in reliance on the exemption in Section 4(a)(2) 
of the Securities Act generally are exempt from the indenture 
qualification provisions of the Trust Indenture.
---------------------------------------------------------------------------

    \92\ See Section 304 of the Trust Indenture Act [15 U.S.C. 
77ddd].
---------------------------------------------------------------------------

    Moreover, the broad exemptions requested by commenters would result 
in all security-based swap transactions entered into solely between 
eligible contract participants being exempt from most provisions of the 
Securities Act, the Exchange Act, and the Trust Indenture Act. Title 
VII included security-based swaps in the definition of ``security'' 
under the Securities Act and the Exchange Act, thereby making security-
based swap transactions subject to the provisions of the Securities Act 
and the Exchange Act, including the rules and regulations thereunder, 
applicable to ``securities.'' Further, no other derivative securities 
that are traded in the over-the-counter market, including derivative 
securities that are entered into bilaterally and then subsequently 
cleared, have broad-based exemptions from those provisions.\93\ We 
currently are not persuaded that we should treat security-based swaps 
differently from other derivative securities.
---------------------------------------------------------------------------

    \93\ Unlike other derivative securities, Title VII amended 
Section 5 of the Securities Act to prohibit offers or sales of 
security-based swaps to persons who are not eligible contract 
participants unless the security-based swaps are registered under 
the Securities Act. See footnote 8 above.
---------------------------------------------------------------------------

Request for Comment

    1. Should we provide that the publication or distribution of SBS 
price quotes will not be deemed to constitute an offer, an offer to 
sell, or a solicitation of an offer to buy or purchase the security-
based swaps that are the subject of the SBS price quotes or any 
guarantees of such security-based swaps that are securities for 
purposes of Section 5 of the Securities Act? Why or why not? Should we 
take a different approach?
    2. The proposed rule would apply to the initial publication or 
distribution of SBS price quotes on eligible trading platforms, as well 
as any subsequent republication or redistribution of the SBS price 
quotes on or through mediums other than eligible trading platforms, 
including on-line information services. Should the proposed rule cover 
the subsequent dissemination of SBS price quotes on mediums other than 
eligible trading platforms or by any participant through any means? Or 
should the proposed rule be limited in any way with respect to such 
subsequent dissemination? Why or why not?
    3. The proposed rule would apply to the security-based swaps that 
are the subject of the SBS price quotes and any guarantees of such 
security-based swaps that are securities. Should the proposed rule 
apply to guarantees of such security-based swaps? Why or why not? Are 
there other securities that are part of a security-based swap 
transaction to which the proposed rule also should apply?
    4. What types of price quotes for security-based swaps are 
disseminated on or through eligible trading platforms and how are they 
disseminated? Would the proposed rule facilitate the dissemination of 
quotes for security-based swaps on eligible trading platforms? Would 
the proposed rule need to be modified in any way to facilitate the 
dissemination of such quotes? How do eligible trading platform 
participants receive or gain access to such quotes?
    5. The proposed rule covers price quotes for security-based swaps 
and any guarantees of such security-based swaps that may be purchased 
only by persons who are eligible contract participants. This proposed 
provision is intended to identify the types of security-based swaps for 
which the publication or distribution of SBS price quotes would not be 
deemed under the proposed rule to be offers for purposes of Section 5 
of the Securities Act. Is this identifying characteristic appropriate? 
Why or why not? Do we need to provide more specificity about this 
identifying characteristic? Are there additional or different 
identifying characteristics that we should consider? If so, why?
    6. The proposed rule addresses price quotes relating to security-
based swaps that are traded or processed on or through security-based 
SEFs and national securities exchanges. Should the types of trading 
platforms covered by the proposed rule be limited to security-based 
SEFs and national securities exchanges? Why or why not? Are there other 
security-based swap trading platforms that should be covered by the 
proposed rule? If so, why? For example, will security-based swaps, such 
as mixed swaps, be traded or processed on or through swap execution 
facilities that are not registered either as a national securities 
exchange or as a security-based swap execution facility, or are not 
exempt from such registration?
    7. Are price quotes for security-based swaps initially published or 
distributed through mediums other than eligible trading platforms? For 
example, we understand that currently some security-based swap dealers 
disseminate price quotes for security-based swaps by sending messages 
via Bloomberg. If so, how are those price quotes disseminated through 
these other mediums? How do market participants receive or gain access 
to those price quotes? Are those price quotes available on an 
unrestricted basis? Should the proposed rule also apply to those price 
quotes or similar communications? Why or why not?
    8. The proposed rule would apply to SBS price quotes. Should the 
proposed rule apply to these types of communications? Why or why not? 
We are not proposing to include a definition of SBS price quotes in 
order to allow flexibility in the proposed rule as trading platforms 
for the trading of security-based swaps continue to develop. Should we 
define these types of communications? If so, how?
    9. (a) Should we specify that other types of written 
communications, such as communications that have been called research, 
regarding security-based swaps, would not be considered offers for 
purposes of Section 5 of the Securities Act? If so, why? Please 
describe in detail what other types of communications should be covered 
by the rule. What characteristics do such communications have that 
would distinguish them from being offers of the security-based swaps 
that are discussed in such communications? If we should not treat such 
communications as offers for purposes of Section 5 of the Securities 
Act, what conditions should apply to the use of such communications?
    (b) What specific types of information, opinions, and 
recommendations are included in such communications regarding the 
security-based swaps and the underlying reference issuers and/or 
securities? Do such communications include strategies for buying or 
selling security-based swaps? Are such communications related to 
industries, entities, or particular offerings of

[[Page 54234]]

security-based swaps? Do such communications involve security-based 
swaps other than credit default swaps? Do such communications include 
information, opinions, or recommendations with respect to securities 
other than security-based swaps or an analysis of securities other than 
security-based swaps? Are such communications similar to or different 
from the research reports contemplated by Rules 137, 138 and 139 of the 
Securities Act? Please explain in detail. If different or if such 
communications regarding the security-based swaps and the underlying 
reference issuers and/or securities do not satisfy the conditions of 
Rules 137, 138 or 139 of the Securities Act, please explain in detail 
why such communications should be treated differently from other 
communications under the Securities Act.
    (c) With respect to communications that some commenters call 
research, what is the basis for characterizing those communications as 
research? Do security-based swap dealers enter into transactions 
involving the security-based swaps that are the subject of the 
communications they publish or distribute? If so, why would the 
security-based swap dealers not be the issuers of such security-based 
swaps for purposes of the Securities Act? If security-based swap 
dealers are the issuers of such security-based swaps, why should the 
offering communications contained in those communications not be 
considered issuer offering materials?
    (d) How are the communications disseminated and to whom are they 
made available? Are there any restrictions on who may access these 
communications? Can non-eligible contract participants access these 
communications?
    (e) Should we consider alternative approaches to address the 
commenters' concerns regarding the use of communications that the 
commenters characterize as research? For example, should we consider a 
rule that would provide as follows: A security-based swap dealer's 
publication or distribution of a written communication that includes 
information, opinions, or recommendations with respect to security-
based swaps or an analysis of security-based swaps would be considered 
for purposes of Section 5 of the Securities Act not to constitute an 
offer of such security-based swaps or any guarantees of such security-
based swaps that are securities if such written communication (i) does 
not include strategies for buying or selling security-based swaps and 
(ii) is included in an issuer-specific or industry research report that 
also includes information, opinions, or recommendations with respect to 
or an analysis of different types of securities other than only 
security-based swaps? Are there other alternative approaches that we 
should consider that may address the commenters' concerns regarding the 
effect that the publication or distribution of the communication may 
have on the availability of an exemption from the registration 
requirements of the Securities Act? If so, please provide detailed 
explanations.
    10. Are there other types of communications involving security-
based swaps to which the proposed rule also should apply? If so, 
explain in detail the types of communications, how are they 
disseminated, who publishes or distributes the communications, whether 
any person enters into a security-based swap transaction as a result of 
such communication, and why the proposed rule should apply.
    11. We are not proposing broad-based exemptions under the 
Securities Act, the Exchange Act, and the Trust Indenture Act for 
security-based swap transactions entered into solely between eligible 
contract participants. Rather, to address commenters concerns regarding 
the availability of exemptions from the registration requirements of 
the Securities Act, we are proposing a rule under the Securities Act to 
provide that certain communications involving SBS price quotes would 
not be deemed to constitute offers of the security-based swaps that are 
the subject of the SBS price quotes or any guarantees of such security-
based swaps that are securities. Would the proposed rule address 
commenters' concerns regarding the availability of exemptions from the 
registration requirements of the Securities Act? Why or why not? Should 
we take a different approach such as providing a broad-based exemption 
as suggested by some commenters? Would the broad-based exemptions 
requested by commenters be necessary or appropriate if the proposed 
rule were adopted? Would such a broad-based exemption materially affect 
the type and level of disclosures available to eligible contract 
participants entering into security-based swap transactions? Are there 
any other impediments arising from the application of the registration 
provisions of the Securities Act and the Exchange Act and the 
provisions of the Trust Indenture Act to security-based swap 
transactions following the expiration or withdrawal of the interim 
final exemptions? How should we address those impediments and what are 
the economic implications? Would it be appropriate, in light of the 
inclusion of security-based swaps in the definition of security, to 
treat security-based swaps differently, including with respect to 
disclosures, from other derivative securities traded in the over-the-
counter market, which do not have broad-based exemptions under the 
Securities Act, the Exchange Act, and the Trust Indenture Act?
    12. Which counterparty in a non-cleared security-based swap 
transaction should be considered to have the obligation to comply with 
the registration requirements of the Exchange Act applicable to classes 
of securities? Should we address this issue at this time? Why or why 
not?
    13. If we adopt the rule under this proposal, we may also determine 
to alter the expiration dates in the interim final exemptions as part 
of that rulemaking. If we make such a determination, should we consider 
whether to shorten or further extend beyond the effective date of the 
rule that we may adopt under this proposal the expiration dates of the 
exemptions in the interim final exemptions? If so, why?

III. General Request for Comment

    We request and encourage any interested person to submit comments 
regarding the proposed rule, specific issues discussed in this release, 
and other matters that may have an effect on the proposed rule. With 
regard to any comments, we note that such comments are of particular 
assistance to our rulemaking initiative if accompanied by supporting 
data and analysis of the issues addressed in those comments.

IV. Economic Analysis

    We are proposing a rule under the Securities Act to provide that 
certain communications involving security-based swaps that may be 
purchased only by eligible contract participants would not be deemed 
for purposes of Section 5 of the Securities Act to constitute offers of 
such security-based swaps or any guarantees of such security-based 
swaps that are securities. Under the proposed rule, the publication or 
distribution of SBS price quotes related to securities-based swaps that 
may be purchased only by persons who are eligible contract participants 
and are traded or processed on or through a trading system or platform 
that is registered either as a national securities exchange or a 
security-based SEF, or is exempt from registration as a security-based 
SEF, would not be deemed to constitute an offer, an offer to sell, or a 
solicitation of an offer to buy or purchase the security-based swaps

[[Page 54235]]

that are the subject of the SBS price quotes or any guarantees of such 
security-based swaps that are securities for purposes of Section 5 of 
the Securities Act.
    We are sensitive to the economic consequences and effects, 
including costs and benefits, of our rules. The discussion below 
addresses the potential economic consequences and effects of the 
proposed rule and alternatives, including the costs and benefits, as 
well as the potential effects on efficiency, competition, and capital 
formation.\94\
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    \94\ Section 2(b) of the Securities Act requires that the 
Commission, when engaging in rulemaking that requires it to consider 
whether an action is necessary or appropriate in the public 
interest, to also consider whether the action will promote 
efficiency, competition, and capital formation. 15 U.S.C. 77b(b). We 
have integrated our consideration of these issues into this economic 
analysis.
---------------------------------------------------------------------------

    The proposed rule does not itself establish the scope or nature of 
the substantive requirements that will be imposed on security-based 
swaps following the full implementation of Title VII or their related 
costs and benefits. We anticipate that the rules implementing the 
substantive requirements under Title VII, including the requirements 
relating to the registration and regulation of security-based SEFs and 
external business conduct standards for security-based swap dealers and 
major security-based swap participants, will be subject to their own 
economic analysis,\95\ and we have not yet adopted final rules that 
would fully implement Title VII and subject security-based swaps to 
such substantive requirements. The costs and benefits described below 
therefore are those that may arise in connection with the proposed 
rule.
---------------------------------------------------------------------------

    \95\ See footnotes 15 and 60 above and accompanying text.
---------------------------------------------------------------------------

A. Baseline

    To assess the economic impact of the proposed rule, we are using as 
our baseline the regulation of security-based swaps as it exists at the 
time of this proposal, taking into account applicable rules adopted by 
the Commission, including interim final exemptions affecting security-
based swaps under the Securities Act and the Exchange Act. Our analysis 
incorporates the statutory and regulatory provisions that currently 
govern security-based swaps under the federal securities laws.
    As part of the economic analysis of the cross-border adopting 
release, we provided an extensive description of the current security-
based swaps market, including a detailed analysis of the participants 
in the security-based swaps market and the levels of security-based 
swap trading activity.\96\ While the proposing release here addresses 
only a narrow piece of the security-based swaps market, and we discuss 
the specific baseline for this proposal below, we note that the 
additional information about the overall security-based swaps market in 
the cross-border adopting release may provide additional context for 
the discussion below. In particular, we noted in the cross-border 
adopting release that the participation in one significant part of the 
security-based swaps market--single-name credit default swaps--entailed 
thousands of counterparties to transactions, but with much of the 
activity concentrated among a relatively small number of dealer 
entities. The notional size of the single-name credit default swaps 
market is in the trillions of dollars annually, corresponding to 
hundreds of thousands of individual transactions, and with 
approximately 80% of transactions between dealers. Among the non-dealer 
market participants, private funds are the largest constituent group 
followed by Dodd-Frank Act-defined special entities and investment 
companies registered under the Investment Company Act of 1940. More 
broadly, the analysis shows that although the dollar volume of 
transactions in security-based swaps market is large, it does not span 
a large set of market participants as compared to other securities 
markets.
---------------------------------------------------------------------------

    \96\ See Application of ``Security-Based Swap Dealer'' and 
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, Release No. 34-72472 (June 
25, 2014), 79 FR 47277 (Aug. 12, 2014) (``Cross-Border Adopting 
Release'').
---------------------------------------------------------------------------

    Prior to the enactment of Title VII, certain security-based swaps--
specifically those security-based swaps that are within the definition 
of ``security-based swap agreement'' as in effect prior to the Title 
VII effective date--were outside the scope of the federal securities 
laws, other than the anti-fraud and certain other provisions.\97\ Up 
until that time, transactions involving these types of security-based 
swaps were effected without concerns about complying with the 
registration requirements of the Securities Act and the Exchange Act, 
or the indenture provisions of the Trust Indenture Act.
---------------------------------------------------------------------------

    \97\ See Section 2A of the Securities Act [15 U.S.C. 77b(b)-1)] 
and Section 3A of the Exchange Act [15 U.S.C. 78c-1], each as in 
effect prior to the Title VII effective date. The definition of 
``security-based swap agreement'' included the definition of ``swap 
agreement,'' which required that the agreement, contract or 
transaction be ``subject to individual negotiation'' and be between 
eligible contract participants.
---------------------------------------------------------------------------

    Title VII amended the Securities Act and the Exchange Act to 
include ``security-based swaps'' in the definition of ``security'' for 
purposes of those statutes.\98\ As a result, on the Title VII effective 
date ``security-based swaps'' became subject to the provisions of the 
Securities Act and the Exchange Act and the rules thereunder applicable 
to ``securities.'' The Securities Act requires that any offer and sale 
of a security must be either registered under the Securities Act or 
made pursuant to an exemption from registration.\99\ As a result, 
market participants entering into security-based swap transactions must 
either be able to rely on an available exemption from the registration 
requirements of the Securities Act or register such transactions under 
the Securities Act. In addition, certain provisions of the Exchange Act 
relating to the registration of classes of securities and the indenture 
qualification provisions of the Trust Indenture Act also may apply to 
certain types of security-based swaps. The provisions of Section 12 of 
the Exchange Act, without an exemption, require that security-based 
swaps be registered before a transaction could be effected on a 
national securities exchange.\100\ In addition, registration of a class 
of security-based swaps under Section 12(g) of the Exchange Act could 
be required if the security-based swap is considered an equity security 
and held of record by either 2,000 persons or 500 persons who are not 
accredited investors at the end of the relevant fiscal year.\101\ 
Further, without an exemption, the Trust Indenture Act could require 
qualification of an indenture for security-based swaps considered to be 
debt.\102\
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    \98\ See Sections 761(a)(2) and 768(a)(1) of the Dodd-Frank Act 
(amending 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)], respectively).
    \99\ See Section 5 of the Securities Act [15 U.S.C. 77e].
    \100\ See Section 12(a) of the Exchange Act [15 U.S.C. 78l(a)].
    \101\ See Section 12(g)(1)(A) of the Exchange Act [15 U.S.C. 
78l(g)(1)(A)].
    \102\ See 15 U.S.C. 77aaa et seq.
---------------------------------------------------------------------------

    As noted above,\103\ we adopted interim final exemptions that 
provide exemptions under the Securities Act, the Exchange Act, and the 
Trust Indenture Act for those security-based swaps that would have been 
defined as ``security-based swap agreements'' prior to the Title VII 
effective date provided certain conditions are met. The interim final 
exemptions exempt offers and sales of security-based swap agreements 
that became security-based swaps on the Title VII effective date from 
all provisions of the Securities Act, other

[[Page 54236]]

than the Section 17(a) anti-fraud provisions, as well as from the 
Exchange Act registration requirements and from the provisions of the 
Trust Indenture Act, provided that the transactions are entered into 
solely between eligible contract participants. Currently, certain 
market participants may rely on the interim final exemptions to 
continue to enter into security-based swap transactions as they did 
prior to the Title VII effective date without concern they would have 
to comply with the provisions of the Securities Act, the registration 
provisions of the Exchange Act applicable to a class of security-based 
swaps, or the indenture provisions of the Trust Indenture Act.
---------------------------------------------------------------------------

    \103\ See footnote 28 above and accompanying text. See also 
footnote 30 above and accompanying text.
---------------------------------------------------------------------------

    The interim final exemptions are not available, however, for 
transactions involving all security-based swaps. The security-based 
swaps covered by the interim final exemptions are only those that would 
have been ``security-based swap agreements'' prior to the Title VII 
effective date, which is a narrower category of security-based swaps 
than under Title VII.\104\ In addition, the persons who may enter into 
security-based swaps covered by the interim final exemptions may be 
different from those entering into ``security-based swap agreements'' 
prior to the Title VII effective date because the definition of 
``eligible contract participant'' under Title VII is narrower than the 
pre-Title VII definition.\105\ Any security-based swap transaction that 
cannot rely on the interim final exemptions would have to rely on 
another available exemption from the registration requirements of the 
Securities Act, such as the exemption in Section 4(a)(2), or would have 
to be registered under the Securities Act. However, no Securities Act 
exemptions are available with respect to security-based swap 
transactions involving persons who are not eligible contract 
participants because Title VII amended the Securities Act to require 
that all offers and sales of security-based swaps to non-eligible 
contract participants must be registered under the Securities Act.\106\
---------------------------------------------------------------------------

    \104\ See Section 3(a)(68) of the Exchange Act for the 
definition of ``security-based swap.'' 15 U.S.C. 78c(a)(68). See 
footnote 28 above regarding the definition of ``security-based swap 
agreement.''
    \105\ The amendments to the definition of ``eligible contract 
participant'' increased the dollar threshold for certain persons 
and, with respect to natural persons, replaced a ``total assets'' 
test with an ``amounts invested on a discretionary basis'' test. See 
Section 1a(12) of the Commodity Exchange Act [7 U.S.C. 1a(12)], as 
in effect prior to the Title VII effective date, and Section 
1(a)(18) of the Commodity Exchange Act, as re-designated and amended 
by Section 721 of the Dodd-Frank Act. The definition of the term 
``eligible contract participant'' in the Securities Act and in the 
Exchange Act refers to the definition of ``eligible contract 
participant'' in the Commodity Exchange Act. See footnote 7 above.
    \106\ See footnote 8 above and accompanying text.
---------------------------------------------------------------------------

    The interim final exemptions are self-executing and as such are 
available without any action by the Commission or its staff. As a 
result, market participants must make their own determinations as to 
whether such exemptions are available with respect to a particular 
security-based swap transaction. Given that such exemptions are self-
executing, we do not have any data or other quantifiable information 
regarding the use of such exemptions, including which market 
participants are effecting transactions in reliance on such exemptions 
or the number of transactions effected in reliance on such exemptions.
    We adopted the interim final exemptions because, among other 
things, we were concerned about disrupting the operation of the 
security-based swaps market while we evaluated the implications for 
security-based swaps under the Securities Act and the Exchange Act as a 
result of the inclusion of the term ``security-based swap'' in the 
definition of ``security'' for purposes of those statutes.\107\ At the 
time of the adoption of the interim final exemptions, we requested 
comment on various aspects of the interim final exemptions. In 
response, commenters raised concerns regarding the effect that certain 
communications involving security-based swaps, such as the publication 
or distribution of SBS price quotes, that may be available on or 
through trading platforms on an unrestricted basis, could have on the 
availability of exemptions under the Securities Act, including the 
exemption in Section 4(a)(2).\108\ We subsequently extended the 
expiration date of the interim final exemptions to February 11, 
2017.\109\
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    \107\ See footnote 32 above and accompanying text.
    \108\ See footnote 34 above and accompanying text.
    \109\ See footnote 30 above and accompanying text.
---------------------------------------------------------------------------

    If we do not adopt the proposed rule or take other action, the 
interim final rules will expire on February 11, 2017, and the baseline 
at that stage would be different from the current baseline. Rather than 
attempt to define an additional, speculative, baseline for that 
scenario, we have addressed and analyzed it in the discussion of 
alternatives below.

B. Analysis of the Proposed Rule

    We have considered the comments we received and engaged in an 
initial evaluation of the implications for security-based swaps as 
securities under the Securities Act and the Exchange Act. Based on 
these actions, we are proposing a rule under the Securities Act so that 
market participants may effect security-based swap transactions with 
eligible contract participants in reliance on available exemptions from 
the registration requirements of the Securities Act and avoid potential 
Securities Act violations for unregistered offers to persons who are 
not eligible contract participants, and so that there are not 
unintended consequences for the operation of security-based swap 
trading platforms following the full implementation of Title VII. Under 
the proposed rule, certain communications involving security-based 
swaps would not be considered ``offers'' for purposes of Section 5 of 
the Securities Act. However, unlike the current interim final 
exemptions, the proposed rule is not itself an exemption from the 
registration requirements of the Securities Act; the proposed rule 
would deem certain communications as not constituting offers. As a 
result, while the types of communications covered by the proposed rule 
would not be considered offers, market participants engaging in any 
security-based swap transaction would have to either satisfy the 
conditions of existing exemptions under the Securities Act, such as the 
exemption in Section 4(a)(2), or register such transactions under the 
Securities Act.
    The proposed rule would apply to all security-based swaps and not 
only those defined as ``security-based swap agreements.'' As we 
previously noted, security-based swaps are transacted through hundreds 
of thousands of individual transactions annually, but because the 
available registration exemptions are self-executing, we do not know 
what fraction of market participants that engage in these transactions 
currently rely on the interim final exemptions when entering into 
security-based swap transactions as opposed to other exemptions from 
registration under the Securities Act, such as the exemption in Section 
4(a)(2).\110\ For transactions involving

[[Page 54237]]

security-based swaps that do not satisfy the conditions of the interim 
final exemptions, the proposed rule would assist market participants in 
evaluating how they should analyze certain communications that may 
affect their transactions. In particular, market participants would be 
able to conduct their analysis regarding the availability of exemptions 
from the registration requirements of the Securities Act without 
concern that certain communications would impact the availability of 
such exemptions.
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    \110\ Given that these exemptions, including the exemption in 
Section 4(a)(2) of the Securities Act are self-executing, we do not 
have any data or other quantifiable information regarding the number 
of market participants that may be effecting security-based swap 
transactions in reliance on these exemptions, including the 
exemption in Section 4(a)(2). However, we believe that a significant 
portion of market participants engaging in these transactions are 
eligible to rely on the interim final exemptions because the vast 
majority of security-based swap transactions involve single-name 
credit default swaps, which would have been ``security-based swap 
agreements'' prior to the Title VII effective date. See footnotes 
103 and 104 above and accompanying text.
---------------------------------------------------------------------------

    The proposed rule would be self-executing in that the publication 
or distribution of SBS price quotes would be treated as not 
constituting an offer to buy or purchase the security-based swaps that 
are the subject of the SBS price quotes or any guarantees of such 
security-based swaps that are securities for purposes of Section 5 of 
the Securities Act without any action by the Commission or its staff. 
Because the proposed rule would be self-executing, the only cost of 
being able to rely on the proposed rule would be to determine its 
applicability. In addition, the proposed rule would not create any new 
filing, reporting, recordkeeping, or disclosure reporting requirements 
for any market participants.
    Treating the types of communications covered by the proposed rule 
as not constituting offers would have minimal economic consequences or 
effects on the ability of market participants to enter into security-
based swap transactions compared with the baseline.\111\ For example, 
as compared to the baseline, the proposed rule would not affect the 
ability of market participants to enter into security-based swap 
transactions in reliance on available exemptions under the Securities 
Act, such as the exemption in Section 4(a)(2). While the interim final 
exemptions have limited conditions,\112\ which differ from the 
conditions of the exemption under Section 4(a)(2) (including with 
respect to the communications that are the subject of the proposed 
rule), some security-based swap transactions engaged in after the Title 
VII effective date may have been effected in reliance on Section 
4(a)(2) rather than the interim final exemptions. Further, the 
protections that currently exist under the interim final exemptions and 
under Section 4(a)(2) would still apply. For example, the interim final 
exemptions do not apply to the antifraud provisions of the federal 
securities laws, including Section 17(a) of the Securities Act.
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    \111\ The economic consequences and effects of the proposed rule 
are deemed minimal because of the baseline, which takes into account 
the interim final exemptions and the fact that Title VII has not 
been fully implemented. Once the interim final rules expire or 
otherwise terminate, the economic consequences and effects of the 
proposed rule would be as discussed under ``Alternatives 
Considered'' below.
    \112\ See footnotes 104 and 105 above and accompanying text. In 
that regard we note, for example, that security-based swaps based on 
single loans would not be within the definition of ``security-based 
swap agreement'' in effect prior to the Title VII effective date.
---------------------------------------------------------------------------

    The proposed rule would not impose new requirements on market 
participants. Further, because the proposed rule would be available 
with respect to any security-based swap transaction involving an 
eligible contract participant, we do not believe that the proposed rule 
would impair competition between the different types of trading venues 
and methods that differ in their level and existence of public SBS 
price quotes. Moreover, we believe that the proposed rule would further 
the goal of Title VII to bring the trading of security-based swaps onto 
regulated trading platforms, which should help further the objective of 
greater transparency and a more competitive environment for the trading 
of security-based swaps. As a result, we believe that increased 
transparency and competitiveness in the security-based swaps market 
could help lower transactions costs associated with market participant 
hedging (risk mitigating) strategies and thereby lower the cost of 
capital and facilitate the capital formation process.
    We believe that the costs associated with providing that the 
publication or distribution of SBS price quotes are not deemed to be 
offers to persons who are not eligible contract participants are 
minimal. The proposed rule would not impose additional costs on market 
participants to determine the eligible contract participant status of a 
person.\113\ In addition, persons who are not eligible contract 
participants would not be permitted to purchase any security-based 
swaps whose price quotes are within the scope of the proposed rule and 
the Securities Act registration requirements would continue to apply to 
security-based swaps transactions involving such non-eligible contract 
participants. As a result of these limitations, the exclusion of the 
SBS price quotes from being deemed offers should not increase the 
potential for unlawful sales of security-based swaps to non-eligible 
contract participants.
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    \113\ The determination of whether a person is an eligible 
contract participant is part of the proposed Title VII business 
conduct rules that, if adopted as proposed, would require that 
security-based swap dealers and major security-based swap 
participants verify the eligible contract participant eligibility of 
their security-based swap counterparties. See footnote 62 above and 
accompanying text.
---------------------------------------------------------------------------

    We recognize that a consequence of the proposed rule may be that 
fewer offers and sales of security-based swaps may be registered under 
the Securities Act (with the consequent unavailability of certain 
remedies) to the extent that parties enter into such transactions in 
reliance on exemptions that may not otherwise be available if the 
publication or distribution of SBS price quotes were considered to be 
an offer for purposes of Section 5 of the Securities Act. A 
registration statement or prospectus supplement covering the offer and 
sale of the securities in security-based swap transactions may provide 
certain information about the market participants, the security-based 
swap contract terms, and the identification of the particular reference 
securities, issuers, or loans underlying the security-based swaps. 
Further, while an investor would be able to pursue an antifraud action 
in connection with the purchase and sale of the securities in these 
security-based swap transactions under Section 10(b) of the Exchange 
Act, an investor would not be able to pursue civil remedies under 
Section 11 or 12(a)(2) of the Securities Act because the offer and sale 
of the securities in these security-based swap transactions would not 
be registered under the Securities Act. In addition, an investor may be 
limited in its ability to pursue civil remedies under Section 12(a)(1) 
of the Securities Act because the publication or distribution of quotes 
for security-based swaps would not be deemed to be an offer for 
purposes of Section 5 of the Securities Act. We could still pursue an 
antifraud action in the offer and sale of the securities in these 
security-based swap transactions under Section 17(a) of the Securities 
Act.
    We note, however, that although the proposed rule would mean that a 
registration statement under the Securities Act may not be required for 
these transactions, the business conduct standards provisions of the 
Dodd-Frank Act would, among other things, require, upon implementation, 
that certain disclosures be made to certain eligible contract 
participants.\114\ Those would include (i) the material risks and 
characteristics of the security-based swap, and certain clearing 
rights, (ii) the material incentives or conflicts of interest that a 
security-based swap dealer or major security-based swap participant may 
have in connection with the security-based swap, and (iii) the daily 
mark of the security-based

[[Page 54238]]

swap.\115\ The Commission has proposed rules to implement the business 
conduct standards provisions of the Dodd-Frank Act.\116\ For instance, 
under the proposed business conduct standards rules, the required 
disclosure of the daily mark would consist of, for a cleared security-
based swap, providing counterparties with the daily end-of-day 
settlement price received by the security-based swap dealer or major 
security-based swap participant from the appropriate clearing agency, 
and, for an uncleared security-based swap, the midpoint between the bid 
and offer prices for a particular security-based swap, or the 
calculated equivalent of the midpoint as of the close of business.\117\ 
While the information proposed to be conveyed in the daily mark is not 
equivalent to that in a registration statement, we believe it could 
provide a counterparty with a useful and meaningful reference point 
against which to assess, among other things, the calculation of 
variation margin for a security-based swap or portfolio of security-
based swaps, and otherwise inform the counterparty's understanding of 
its financial relationship with the security-based swap dealer or major 
security-based swap participant. Moreover, because under the proposed 
business conduct standards rules security-based swap dealers and major 
security-based swap participants would be required to provide the same 
valuation to all of their counterparties, and because counterparties 
could interact with multiple security-based swap dealers and major 
security-based swap participants, counterparties would have greater 
confidence of equal treatment as they would have the ability to observe 
when valuations differ among security-based swap dealers and major 
security-based swap participants.
---------------------------------------------------------------------------

    \114\ See footnote 61 above and accompanying text.
    \115\ Id.
    \116\ See Business Conduct Standards Proposing Release.
    \117\ Id.
---------------------------------------------------------------------------

    As noted above, to the extent that a security-based swap 
transaction does not meet the conditions of the interim final 
exemptions, the counterparties to such transaction likely are effecting 
the transaction in reliance on an available exemption from the 
registration requirements of the Securities Act, such as the exemption 
set forth in Section 4(a)(2). The proposed rule would benefit these 
counterparties because they could conduct their analysis regarding the 
availability of an exemption from the registration requirements of the 
Securities Act without concern that the publication or distribution of 
SBS price quotes for the security-based swap that is the subject of the 
transaction may compromise the availability of an exemption. The 
proposed rule also would benefit these counterparties by providing that 
the publication or distribution of SBS price quotes would not be deemed 
to be an offer of the security-based swaps that are the subject of such 
SBS price quotes to persons who are not eligible contract participants. 
As noted above, no exemptions from the registration requirements of the 
Securities Act are available with respect to offers of security-based 
swaps to persons who are not eligible contract participants. As a 
result, without the proposed rule, these counterparties would be 
required to register the transaction and incur the costs associated 
with such registration if the publication or distribution of SBS price 
quotes were viewed as offers of the related security-based swaps to 
persons who are not eligible contract participants.

C. Alternatives Considered

1. Alternative of Not Proposing a Rule at This Time
    One alternative to the proposed rule that we considered was to take 
no action at this time to address issues arising under the Securities 
Act for certain communications involving security-based swaps. This 
alternative would affect all security-based swap transactions, 
including those currently relying on the interim final exemptions. At 
this time, all security-based swap transactions either have to be 
registered under the Securities Act or rely on another available 
exemption from registration, such as the exemption in Section 4(a)(2) 
or the interim final exemptions to the extent available. If we take no 
action at this time with respect to the treatment of certain 
communications involving security-based swaps, the publication or 
distribution of SBS price quotes could be deemed to constitute an 
offer, an offer to sell, or a solicitation of an offer to buy or 
purchase the security-based swaps that are the subject of such 
communications or any guarantees of such security-based swaps that are 
securities for purposes of Section 5 of the Securities Act, including 
to persons who are not eligible contract participants. If considered 
offers, such communications could affect the availability of exemptions 
from the registration requirements of the Securities Act for 
transactions involving the security-based swaps that are the subject of 
such communications or any guarantees of such security-based swaps that 
are securities. If no Securities Act exemptions are available with 
respect to a security-based swap transaction because such 
communications are viewed as an offer of the security-based swaps that 
are the subject of such communications, including to persons who are 
not eligible contract participants, such transactions would have to be 
registered under the Securities Act. The economic consequences and 
effects of not proposing a rule under the Securities Act addressing the 
treatment of SBS price quotes are discussed below.
    We believe that taking no action could disrupt and impose 
unnecessary costs on this segment of the security-based swaps market 
because it would mean that uncertainty may remain as to whether certain 
communications involving SBS price quotes would be deemed to be offers 
for purposes of Section 5 of the Securities Act. If considered offers, 
these communications could affect the availability of exemptions under 
the Securities Act, including the exemption in Section 4(a)(2). The 
proposed rule would allow SBS price quotes to be published or 
distributed without the risk that such communications would be 
considered offers for purposes of Section 5 of the Securities Act. 
Without the proposed rule, the risk that the communications would be 
deemed offers might lead some market participants either to not engage 
in these security-based swap transactions, which could impede the 
market, or to register the offer and sale of the security-based swap 
transactions, which could increase costs for market participants.
    We believe the proposed rule would facilitate capital formation and 
promote efficiency by lowering the costs of security-based swap 
transactions relative to what would be required without the proposed 
rule in the event the interim final exemptions expire. Without the 
proposed rule and following the expiration of the interim final 
exemptions, we believe that the operation of the registration 
provisions of the Securities Act could have unintended consequences for 
the operation of security-based swap trading platforms and the ability 
of market participants to enter into these security-based swap 
transactions in reliance on available exemptions from the registration 
requirements of the Securities Act following the full implementation of 
Title VII. Following the expiration of the interim final exemptions, we 
anticipate that the proposed rule would facilitate a more efficient 
market place for these security-based swap transactions.

[[Page 54239]]

    Without the proposed rule, a market participant may choose not to 
continue to participate in these types of transactions if compliance 
with the registration requirements of the Securities Act is required. 
This could curtail the use of trading platforms and venues that make 
use of broad communications methods that involve the public 
dissemination of SBS price quotes. As noted above, one of the goals of 
Title VII is to bring the trading of security-based swaps onto 
regulated trading platforms. The Securities Act registration costs 
could limit the incentive for market participants to engage in 
security-based swaps transactions on regulated trading platforms if the 
dissemination of price quotes for security-based swaps could jeopardize 
the availability of exemptions from the registration requirements of 
the Securities Act, including the exemption in Section 4(a)(2). In 
response to the lack of an available exemption from registration, some 
market participants may also seek to restructure their operations to 
minimize their transactions in, or contact with, the United States in 
an effort to avoid having to register these transactions under the 
Securities Act. If market participants were to determine not to engage 
in security-based swap transactions due to the lack of an available 
exemption from registration, or to restructure their operations and 
thus avoid U.S. exposure because of the lack of such an exemption, such 
actions could affect the number of price quotes for, and the liquidity 
of, certain types of security-based swaps, which could have a 
detrimental effect on the liquidity and price discovery of security-
based swap transactions. This effect would be inconsistent with the 
increased transparency tenets central to Title VII.
    If market participants continue to engage in these security-based 
swap transactions without the proposed rule and register these 
transactions under the Securities Act, costs would be associated with 
such registration. Additionally, there is unlikely to be a commensurate 
benefit to registration given that the investors typically in greater 
need of the investor protections provided by registration are likely 
not to be eligible contract participants, and therefore ineligible to 
purchase any security-based swaps whose price quotes are within the 
scope of the proposed rule. While the use of a shelf registration 
statement may be available to some participants and would lessen the 
costs of registration compared to the costs for participants who were 
not able to use a shelf registration statement, there would be costs in 
either scenario.\118\ Certain market participants that are unable to 
register an offering under the Securities Act using a shelf 
registration statement may be at a competitive disadvantage because 
they would not be able to realize the reduced costs of shelf 
registration.
---------------------------------------------------------------------------

    \118\ Certain market participants could reduce the registration 
burden by using the Form S-3 registration statement for their 
securities offerings. We previously have estimated that 50 or fewer 
entities ultimately may have to register with us as security-based 
swap dealers. See Cross-Border Adopting Release. These entities (or 
their affiliates) are likely to be seasoned or well-known seasoned 
issuers that are eligible to use the Form S-3 registration statement 
for their securities offerings. In particular, these entities (or 
their affiliates) are likely to have a Form S-3 shelf registration 
statement that is effective under the Securities Act. A shelf 
registration statement covers the offer and sale of securities that 
are not necessarily to be sold in a single offering immediately upon 
effectiveness; instead, the securities are typically sold in a 
number of ``takedowns'' over a period of time or on a continuous 
basis. A shelf registration statement allows issuers to conduct 
multiple types and amounts of securities offerings using the same 
registration statement. If these entities (or their affiliates) are 
required to register the offer and sale of the securities in 
security-based swap transactions, they would likely use their shelf 
registration statements for the offerings. For takedowns off their 
shelf registration statements, an entity (or its affiliate) would 
file a prospectus supplement under the Securities Act that contains 
the specific terms of the offering. As a result of the shelf 
registration procedure, these entities (including their affiliates) 
would incur lower costs relating to the takedown for each security-
based swap transaction than they would otherwise incur if they had 
to use a non-shelf registration statement for the security-based 
swap transactions. While the use of a shelf registration statement 
would reduce the registration burden for qualifying market 
participants, it may not be available to all market participants.
---------------------------------------------------------------------------

2. Other Alternatives
    Although at this time we are not proposing to include within the 
scope of the proposed rule certain other communications involving 
security-based swaps that commenters have indicated are included in 
research reports, we are considering whether a broader exclusion from 
the definition of offer than simply for SBS price quotes would be 
appropriate as part of this rulemaking. Currently, we do not have 
sufficient information to evaluate the appropriate treatment of such 
communications. For example, commenters did not define or explain the 
contours of what would constitute ``research'' and why an exclusion for 
such communications is necessary. We are concerned that if it were 
defined or applied too broadly, it would include information 
indistinguishable from traditional issuer offering materials and may 
not be the appropriate subject of an exclusion from the definition of 
offer. As with any other communication that may be an offer of 
securities subject to Section 5 of the Securities Act, we would 
evaluate a research report within the security-based swaps market as we 
would evaluate research reports in similar securities markets, 
including privately offered equity, debt, security options, or other 
security derivatives. Therefore, we are requesting additional comment 
regarding such communications. Based on the information we receive, we 
may or may not take action with respect to such communications under 
the Securities Act.
    We are asking a number of questions regarding the treatment of 
communications involving security-based swaps contained in research 
reports. Among the questions we are asking is whether we should we 
consider a rule that would provide as follows: A security-based swap 
dealer's publication or distribution of a written communication that 
includes information, opinions, or recommendations with respect to 
security-based swaps or an analysis of security-based swaps would be 
considered for purposes of Section 5 of the Securities Act not to 
constitute an offer of such security-based swaps or any guarantees of 
such security-based swaps that are securities if such written 
communication (i) does not include strategies for buying or selling 
security-based swaps and (ii) is included in an issuer-specific or 
industry research report that also includes information, opinions, or 
recommendations with respect to or an analysis of different types of 
securities other than only security-based swaps?
    If we determine to treat certain communications involving security-
based swaps considered to be research reports as not constituting 
offers, there could be economic consequences and effects, including 
effects on efficiency, competition, and capital formation. Some of 
these consequences and effects would be the same as discussed above 
with respect to the treatment of SBS price quotes under the proposed 
rule. For example, under the baseline, these communications are not 
taken into account in determining the availability of an exemption from 
Securities Act registration for those security-based swap transactions 
satisfying the conditions of the interim final rules. Further, upon 
expiration of the interim final rules, such communications would have 
to be analyzed to determine if they constituted an offer of security-
based swaps and, if so, whether the registration requirements of the 
Securities Act were implicated or if there was an available exemption 
from such requirements. If such

[[Page 54240]]

communications constituted offers of security-based swaps, it may 
affect the availability of exemptions from the registration 
requirements of the Securities Act, and the dealer or its affiliate may 
not be able to use such communications to find customers to act as 
counterparties in security-based swap transactions with the dealer or 
its affiliate to the extent it seeks to rely on such exemptions. As a 
result, treating such communications as not constituting offers may 
promote efficiency by assisting dealers and their affiliates in finding 
customers and also by assisting investors in engaging in potential 
transactions.
    However, we note that research by dealers or their affiliates on 
security-based swaps could be used by their clients to enter into 
transactions with them that differ from other types of securities 
transactions. In particular, and unlike an equity or debt security, a 
security-based swap could entail an ongoing financial commitment 
(economic exposure) between the dealer (or its affiliate making the 
recommendation) and the client, who must be an eligible contract 
participant, whereby a client loss could result in a dealer gain of 
equal measure. The dealer (or its affiliate) would, at least initially, 
take the opposite economic exposure as the client who is otherwise 
informed on their transaction decision by the dealer or its affiliate's 
research. In these instances, when the recommending entity also takes 
the opposite economic exposure of the client who is basing their 
investment decision on the recommendation, the research may not be 
considered independent.
    We have requested comment regarding the costs, benefits and effects 
of such communications, including whether and how many security-based 
swap transactions are entered into as a result of such communications, 
and whether such transactions are entered into with the entity 
publishing the research reports or its affiliate.

D. Request for Comment

    We request comment on all aspects of this economic analysis, 
including the costs and benefits associated with the proposed rule. We 
also request comment on the potential effects the proposed rule may 
have on efficiency, competition, and capital formation. We seek 
estimates of these costs, benefits, and effects, as well as any costs, 
benefits, and effects not already identified herein. Commenters should 
provide analysis and empirical data to support their views on the 
costs, benefits, and effects associated with the proposed rule.
    We also request comment on all aspects of our discussion regarding 
the number of entities that may be required to register as security-
based swap dealers and their ability to use the shelf registration 
procedure to register the offer and sale of securities in a security-
based swap transaction, including the costs of such registration.
    Finally, we request comment on all aspects of our discussion 
regarding the possible approach with respect to certain communications 
involving security-based swaps that commenters have indicated are 
included in research reports, including the potential costs and 
benefits of such approach and the potential effects such approach may 
have on efficiency, competition, and capital formation. In particular, 
would the economic consequences and effects of such a rule, as well as 
the potential effects of such a rule on efficiency, competition, and 
capital formation, be similar to those discussed above with respect to 
the treatment of SBS price quotes under the proposed rule? If not, how 
would they differ and why? We seek estimates of these costs, benefits, 
and effects, as well as any costs, benefits, and effects not already 
identified herein. Commenters should provide analysis and empirical 
data to support their views on the costs, benefits, and effects 
associated with such approach.

V. Paperwork Reduction Act

    The proposed rule would do not impose any new ``collections of 
information'' within the meaning of the Paperwork Reduction Act of 1995 
(``PRA''),\119\ nor would it create any new filing, reporting, 
recordkeeping, or disclosure reporting requirements. Accordingly, we 
are not submitting the proposed rule to the Office of Management and 
Budget for review in accordance with the PRA.\120\ We request comment 
on whether our conclusion that there are no collections of information 
is correct.
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    \119\ 44 U.S.C. 3501 et seq.
    \120\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

VI. Consideration of Impact on the Economy

    Under the Small Business Regulatory Enforcement Fairness Act of 
1996,\121\ a rule is considered ``major'' where, if adopted, it results 
or is likely to result in: (i) An annual effect on the economy of $100 
million or more (either in the form of an increase or a decrease); (ii) 
a major increase in costs or prices for consumers or individual 
industries; or (iii) significant adverse effect on competition, 
investment, or innovation. We request comment on the potential impact 
of the proposed rule on the economy on an annual basis, any potential 
increase in costs or prices for consumers or individual industries, and 
any potential effect on competition, investment, or innovation. 
Commenters are requested to provide empirical data and other factual 
support for their view to the extent possible.
---------------------------------------------------------------------------

    \121\ Public Law 104-121, 110 Stat. 857 (1996) (codified in 
various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 
601).
---------------------------------------------------------------------------

VII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \122\ requires the 
Commission, in promulgating rules, to consider the impact of those 
rules on small entities. Section 603(a)\123\ of the Administrative 
Procedure Act,\124\ as amended by the RFA, generally requires the 
Commission to undertake a regulatory flexibility analysis of all 
proposed rules to determine the impact of such rulemaking on ``small 
entities.'' Section 605(b) of the RFA states that this requirement 
shall not apply to any proposed rule which, if adopted, would not have 
a significant economic impact on a substantial number of small 
entities.\125\
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    \122\ 5 U.S.C. 601 et seq.
    \123\ 5 U.S.C. 603(a).
    \124\ 5 U.S.C. 551 et seq.
    \125\ See 5 U.S.C. 605(b).
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    We are proposing a rule under the Securities Act to provide that 
certain communications involving security-based swaps that may be 
purchased only by eligible contract participants would not be deemed 
for purposes of Section 5 of the Securities Act to constitute offers of 
such security-based swaps or any guarantees of such security-based 
swaps that are securities. Under the proposed rule, the publication or 
distribution of price quotes relating to security-based swaps that may 
be purchased only by persons who are eligible contract participants and 
are traded or processed on or through a facility that either is 
registered as a national securities exchange or as a security-based 
swap execution facility, or is exempt from registration as a security-
based swap execution facility pursuant to a rule, regulation, or order 
of the Commission, would not be deemed to constitute an offer, an offer 
to sell, or a solicitation of an offer to buy or purchase such 
security-based swaps or any guarantees of such security-based swaps 
that are securities for purposes of Section 5 of the Securities Act.
    For purposes of the RFA, under our rules, an issuer, other than an

[[Page 54241]]

investment company, is a ``small business'' or ``small organization'' 
if it has total assets of $5 million or less as of the end of its most 
recent fiscal year and is engaged or proposing to engage in an offering 
of securities which does not exceed $5 million.\126\ Based on our 
understanding of the security-based swaps market, including our 
existing information about participants in the security-based swaps 
market, we believe that the proposed rule would apply to few, if any, 
small entities.\127\ For this reason, we do not believe that the 
proposed rule would have a significant economic impact on a substantial 
number of small entities. We encourage written comments regarding this 
certification.
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    \126\ See Rule 157 under the Securities Act [17 CFR 230.157].
    \127\ As noted above, we previously have estimated that 50 or 
fewer entities ultimately may have to register with us as security-
based swap dealers. See footnote 118 above and accompanying text. We 
believe that these entities generally would be major banks or other 
large financial market participants, which would not be small 
entities for purposes of the RFA. See Cross-Border Adopting Release. 
These entities account for the vast majority of the transactions in 
the security-based swaps market as measured on a notional basis. For 
example, according to an analysis regarding the market for single-
name credit default swaps performed by our Division of Economic and 
Risk Analysis (then Division of Risk, Strategy, and Financial 
Innovation), these entities account for approximately 94 percent of 
the transactions in the single-name credit default swaps market as 
measured on a notional basis. See Information regarding activities 
and positions of participants in the single-name credit default swap 
market (Mar. 15, 2012), which is available at https://www.sec.gov/comments/s7-39-10/s73910-154.pdf. According to data published by the 
Bank for International Settlements, single-name credit default swaps 
comprise approximately 94 percent of the total security-based swaps 
market as measured on a notional basis. See Semiannual OTC 
derivatives statistics at end-June 2012, Table 19: Amounts 
outstanding of over-the-counter (OTC) derivatives, which is 
available at https://www.bis.org/statistics/otcder/dt1920a.pdf.
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VIII. Statutory Authority and Text of the Proposed Rule

    The rule described in this release is being proposed under the 
authority set forth in Sections 5, 19, and 28 of the Securities Act.

List of Subjects in 17 CFR Part 230

    Reporting and recordkeeping requirements, Securities.

Text of the Proposed Rule

    For the reasons set out above, we are proposing to amend Title 17, 
Chapter II of the Code of Federal Regulations as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The authority citation for Part 230 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 77b, 77b note, 77c, 77d, 77d note, 77f, 
77g, 77h, 77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 
78o, 78o-7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 
80a-29, 80a-30, and 80a-37, and Pub. L. 112-106, sec. 201(a), 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *

0
2. Section 230.135d is added to read as follows:


Sec.  230.135d  Certain communications involving security-based swaps.

    For the purposes only of Section 5 of the Act (15 U.S.C. 77e), the 
publication or distribution of quotes relating to security-based swaps 
that may be purchased only by persons who are eligible contract 
participants (as defined in Section 1a(18) of the Commodity Exchange 
Act (7 U.S.C. 1a(18))) and are traded or processed on or through a 
trading system or platform that either is registered as a national 
securities exchange under Section 6(a) of the Securities Exchange Act 
of 1934 (15 U.S.C. 78f(a)) or as a security-based swap execution 
facility under Section 3D(a) of the Securities Exchange Act of 1934 (15 
U.S.C. 78c-4(a)), or is exempt from registration as a security-based 
swap execution facility under Section 3D(a) of the Securities.
    Exchange Act of 1934 pursuant to a rule, regulation, or order of 
the Commission, shall not be deemed to constitute an offer, an offer to 
sell, or a solicitation of an offer to buy or purchase such security-
based swaps or any guarantees of such security-based swap that are 
securities.

     Dated: September 8, 2014.

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-21676 Filed 9-10-14; 8:45 am]
BILLING CODE 8011-01-P