Better Markets filed a comment letter in response to the Securities and Exchange Commission’s proposed rules to deter fraud and manipulation in security-based swap (SBS) transactions.
Why It Matters. The aftermath of the financial crisis brought reform to the SBS market, in the form of Title VII of the Dodd-Frank Act. It subjected both swaps and SBS to comprehensive regulation and directed the SEC to implement the new framework through its rules. While this has led to an increase in transparency and accountability in the SBS market, it has not solved all the major issues associated with SBS. For example, the SBS market continues to pose risks to the broader financial system. This was clearly illustrated in March 2021 when the hidden bets of an obscure trader managing a company called Archegos Capital Management exploded, causing huge losses for some banks, driving down the stock prices of several companies, and severely rattling markets. This proposal would prohibit fraud or manipulation in connection with SBS transactions; require public reporting of large SBS positions; and prohibit coercion or deception of the chief compliance officer (“CCO”) of an SBS entity.
What We Said. All three components of the Proposal are important reforms in the SBS market that will help prevent fraud and abuse, increase transparency in the interest of systemic stability, and deter acts aimed at weakening the role of the CCO. However, the SEC must reconsider the safe harbor from liability for fraud and manipulation. It rests on faulty assumptions advanced by the industry, and it is likely to do more harm than good, as it will immunize and therefore facilitate fraud and manipulation in SBS transactions using material nonpublic information.
Bottom Line. Better Markets supports all three of the basic provisions in the Proposal as they serve valuable regulatory purposes. However, we are concerned with providing a safe harbor from the prohibition against fraud and manipulation under certain circumstances. At the very least, the SEC must provide a compelling justification as to why a safe harbor from a rule prohibiting fraud and manipulation is necessary at all; it should not just rely on conclusory assertions that absent a safe harbor, SBS entities will suffer from unfair enforcement exposure for innocent transactions.
Read our full Comment Letter here or click the button below.