New Definition of ‘Securities’ Under Dodd-Frank Act

Jack Humphrey, Regulatory journalist
July 07, 2011 /

The Securities and Exchange Commission has clarified in a guidance which U.S. securities laws will apply to security-based swaps starting July 16 when Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act will come into force.

Dodd-Frank created a new regulatory framework for over-the-counter derivatives, which authorized the SEC to regulate security-based swaps and the Commodity Futures Trading Commission to regulate other swaps.

In June 15, the SEC issued a related announcement addressing one-year effective date of Title VII of the Dodd-Frank Act.

Under the Dodd-Frank Act, starting July 16, 2011, Security-based swaps will be defined as “securities” subject to existing federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934.

In addition, the SEC has granted temporary relief and interpretive guidance to emphasize that a substantial number of the requirements of the Exchange Act applicable to securities will not apply to security-based swaps when the revised definition of “security” goes into effect.

Nevertheless, federal securities laws prohibiting fraud and manipulation will continue to apply to security-based swaps after that date.

The SEC has also provided temporary relief from provisions of U.S. securities laws that allow the voiding of contracts made in violation of those laws, aiming to enhance legal certainty for market participants.

Robert Cook, Director of the SEC’s Division of Trading and Markets, said: “As we move forward with the implementation of the Dodd-Frank Act, this temporary relief will help maintain the existing legal framework for security-based swaps under the Exchange Act until the Commission adopts new rules for these transactions.”

Furthermore, the SEC approved an interim final rule that provides exemptions from the Securities Act, Trust Indenture Act and other provisions of the federal securities laws to allow certain security-based swaps to continue to trade and be cleared as they have pre-Dodd-Frank.

That interim relief will extend until the SEC adopts rules further defining “security-based swap” and “eligible contract participant.”

The SEC plans additional steps in coming days related to the July 16 effective date, seeking comments from the public despite the approval already granted to these actions.


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