SEC Proposes Rule Against Fraud, Manipulation and Deception In Connection With Security-Based Swaps

With Election Day now over, the Securities and Exchange Commission has announced that it is proposing Exchange Act Rule 9j-1, which is intended to prohibit fraud, manipulation, and deception in connection with the offer, purchase or sale of any security-based swap, as well as in connection with the exercise of any right or performance of any obligation under a security-based swap, including the avoidance of such exercise or performance.  

The proposed rule would prohibit the same misconduct as Exchange Act Section 10(b) and Rule 10b-5, and Securities Act Section 17(a), but would also explicitly reach misconduct that is in connection with the “exercise of any right or performance of any obligation under” a security-based swap. In other words, the proposed rule would apply to offers, purchases and sales of security-based swaps in the same way that the general antifraud provisions apply to all securities but would also explicitly apply to the cash flows, payments, deliveries, and other ongoing obligations and rights that are specific to security-based swaps.
 
The language in paragraph (a) of the proposed rule, which is based on Rule 10b-5(a), differs from Rule 10b-5(a) in that it explicitly prohibits employing any device, scheme or artifice to defraud or manipulate. As the SEC noted, although the term “manipulate” does not appear in the text of Rule 10b-5, Rule 10b-5 has been interpreted to reach manipulative activities. In light of that interpretation, the SEC added that language to the proposed rule to “clarify that manipulation in connection with security-based swaps is unlawful.” In addition, the language in paragraph (b) of the proposed rule, which is based on Rule 10b-5(b), differs from Rule 10b-5(b) in that it explicitly prohibits knowingly or recklessly making any untrue statement of a material fact, or knowingly or recklessly omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. The SEC says that this is intended to make clear, consistent with Rule 10b-5 case law, that paragraph (b), in contrast to paragraph (c), would require scienter. The SEC indicates that it does not anticipate or intend this clarification to represent a departure from the past interpretation or scope of Rule 10b-5(b).