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June 7, 2023

SEC Final Rules Make Important Progress on Reforms Designed to Prevent Another Financial Crisis, But There’s More To Do

WASHINGTON, D.C.—Today, the U.S. Securities and Exchange Commission (SEC) finalized rules that will help prevent fraud in the derivatives markets and reduce the SEC’s reliance on credit ratings.  Legal Director and Securities Specialist Stephen Hall released the following statement:

“Security-based swaps or ‘SBS’ were among the complex, risky, and unregulated financial products that played a central role in igniting and intensifying the financial crisis of 2008, nearly collapsing the global economy.  They were instrumental in perpetrating some of the most outrageous fraudulent schemes witnessed during the crisis.  Today’s final rule on SBS transactions will round out a series of reforms designed to ensure that these instruments do not once again incubate a financial market meltdown. It will prohibit fraud or manipulation in connection with SBS transactions and prohibit coercion or deception of the chief compliance officer or ‘CCO’ of an SBS dealer or participant.

“As we explained in our comment letter, SBS have unique features that create more opportunities for fraud and manipulation than the typical securities transaction and therefore warrant their own anti-fraud and anti-manipulation rules separate from the general prohibitions in the securities laws. We also applaud the Commission for the provisions establishing strong protections for CCOs.  These officers can perform a critical function as the first line of defense against illegal activity at their financial firms.  However, for years leading up to the crisis, CCOs were largely neutered, either coopted, misled, or intimidated into turning a blind eye to even egregious misconduct.  Today’s final rule will help protect CCOs by outlawing attempts by the employees of dealers and major participants in the SBS markets to coerce, manipulate, or mislead their CCOs.

“Nonetheless, the Commission’s new rule suffers from a critical flaw:  It includes an affirmative defense that will likely be exploited to insulate some actors from liability for acts of fraud and manipulation.  This affirmative defense was apparently prompted by industry concerns that the new rules could cover the innocent exercise of certain rights or obligations under an SBS following the receipt of material non-public information.  As we demonstrated in our comment letter, these concerns are unfounded and the affirmative defense is unnecessary.  Unfortunately, it will likely lead to abuses.

“The Commission also did not adopt, as proposed, a requirement to require reporting of large SBS positions.  Rather, the Commission said that it continues to consider the comments received in connection with that proposal.   We urge the Commission to finalize that rule, which would reduce the likelihood and severity of events like the Archegos fiasco.

“The SEC’s other final rule will remove references to credit ratings from Regulation M, a set of provisions designed to prevent manipulation in securities offerings.  This rule will play its part in making sure that regulators don’t rely on inflated credit ratings as benchmarks that actually spread systemic risk.  Unfortunately, as we said in our comment letter, this rule serves as a reminder that other fundamental reforms in the credit ratings field must still be implemented.  Powerful conflicts of interest still inflate ratings; the SEC’s examination and enforcement program still suffers from a lack of transparency; and the credit rating agencies still avoid legal accountability in direct conflict with the Dodd-Frank Act requirements. Until these problems are addressed, it is inevitable that misleading and inaccurate credit ratings will surface once again as major sources of instability, necessitating another round of taxpayer bailouts to protect our financial system from collapse.”


Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit

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