Prohibition Against Fraud

68560 Federal Register / Vol. 75, No.
215 / Monday, November 8, 2010 / Proposed Rules
fraud in the sale of business comments should not include any remove home contact information for
opportunities is not only prevalent but sensitive personal information, such as individuals from the public comments it
persistent. Accordingly, the an individual’s Social Security Number; receives before placing those comments
Commission has engaged in an ongoing date of birth; driver’s license number or on the FTC Web site. More information,
effort to amend the Business other state identification number, or including routine uses permitted by the
Opportunity Rule to adequately protect foreign country equivalent; passport Privacy Act, may be found at the FTC’s
consumers from potentially fraudulent number; financial account number; or privacy policy, at http://www.ftc.gov/
business opportunity sellers, while at credit or debit card number. Comments ftc/privacy.htm.
the same time minimizing compliance also should not include any sensitive Upon completion of the comment
costs. The Commission began by health information, such as medical period, the staff will make final
publishing an initial Notice of Proposed records or other individually recommendations to the Commission
Rulemaking in 2006.2 It published a identifiable health information. In about the Rule. Assuming the
revised Notice of Proposed Rulemaking addition, comments should not include Commission adopts the proposed
in 2008 (‘‘RNPR’’),3 and held a public any ‘‘[t]rade secrets and commercial or revised Rule as recommended by the
workshop on June 1, 2009 to discuss financial information obtained from a staff, or after the conclusion of the
proposed amended disclosure person and privileged or confidential’’ comment period determines to make
requirements.4 as provided in Section 6(f) of the FTC changes to the proposed revised Rule, it
Pursuant to the Commission’s Rules Act, 15 U.S.C. 46(f), and Commission will publish in a future Federal Register
of Practice, and the rulemaking Rule 4.10(a)(2), 16 CFR 4.10(a)(2). notice the final text of the Rule, a
procedures specified earlier in the Comments containing material for statement of Basis and Purpose on the
RNPR, the Commission now announces which confidential treatment is Rule, and an announcement of when the
the availability of the Staff Report on the requested must be filed in paper (rather revised Rule will become effective.
Business Opportunity Rule. The Staff than electronic) form, must be clearly
Report summarizes the rulemaking By direction of the Commission.
labeled ‘‘Confidential,’’ and must Richard C. Donohue,
record to date, analyzes the various comply with FTC Rule 4.9(c).5
alternatives suggested, and sets forth the Acting Secretary.
The FTC is requesting that any
staff’s recommendation to the comment filed in paper form be sent by [FR Doc. 2010–28044 Filed 11–5–10; 8:45 am]
Commission on the proposed revised courier or overnight service, if possible, BILLING CODE 6750–01–P
Rule. The Staff Report has not been because U.S. postal mail in the
endorsed or adopted by the Washington area, and at the
Commission. Commission, is subject to delay due to SECURITIES AND EXCHANGE
The Staff Report is available at the heightened security precautions. COMMISSION
FTC’s Web site at http://www.ftc.gov. It Because U.S. postal mail is subject to
is also available from the Commission’s delay due to heightened security 17 CFR Part 240
Public Reference Room, Room H–130, measures, please consider submitting [Release No. 34–63236; File No. S7–32–10]
Federal Trade Commission, 600 your comments in electronic form. To
Pennsylvania Avenue, NW., ensure that the Commission considers RIN 3235–AK77
Washington, DC 20580. an electronic comment, you must file it
The Commission invites interested Prohibition Against Fraud,
on the web-based form at the weblink
parties to submit written data, views, Manipulation, and Deception in
https://ftcpublic.commentworks.com/
and arguments on the recommendations Connection With Security-Based
ftc/busopprulestaffreport. If this Notice
announced by the Staff Report by Swaps
appears at http://www.regulations.gov/
following the instructions in the search/index.isp, you also may file an AGENCY: Securities and Exchange
ADDRESSES section of this notice. electronic comment though that Web Commission.
Comments, however, are to be limited to site. The Commission will consider all
those matters not already part of the ACTION: Proposed rule.
comments that regulations.gov forwards
rulemaking record. Further, comments to it. SUMMARY: The Securities and Exchange
previously submitted in the ongoing The FTC Act and other laws the Commission (‘‘Commission’’) is
rulemaking procedures are already part Commission administers permit the proposing for comment a new rule
of the rulemaking record and need not collection of public comments to under the Securities Exchange Act of
be repeated. Written communications consider and use in this proceeding as 1934 (‘‘Exchange Act’’) that is intended
and summaries or transcripts of any oral appropriate. The Commission will to prevent fraud, manipulation, and
communications respecting the merits consider all timely and responsive deception in connection with the offer,
of this proceeding from any outside public comments that it receives, purchase or sale of any security-based
party to any Commissioner or whether filed in electronic or paper swap, the exercise of any right or
Commissioner’s advisor will also be form. Comments received will be performance of any obligation under a
placed on the public record. See 16 CFR available to the public on the FTC Web security-based swap, or the avoidance of
1.26(b)(5). site, to the extent practicable, at such exercise or performance.
Please note that comments will be http://www.ftc.gov. As a matter of
placed on the public record—including DATES: Comments should be received on
discretion, the FTC makes every effort to
emcdonald on DSK2BSOYB1PROD with PROPOSALS
on the publicly accessible FTC Web site, or before December 23, 2010.
at http://www.ftc.gov/os/ 5 FTC Rule 4.2(d), 16 CFR 4.2(d). The comment
ADDRESSES: Comments may be
publiccomments.shtm—and therefore must be accompanied by an explicit request for submitted by any of the following
should not include any sensitive or confidential treatment, including the factual and methods:
confidential information. In particular, legal basis for the request, and must identify the
specific portions of the comment to be withheld Electronic Comments
from the public record. The request will be granted
2 71 FR 19,056 (Apr. 12, 2006). or denied by the Commission’s General Counsel,
• Use the Commission’s Internet
3 73 FR 16,110 (Mar. 28, 2008). consistent with applicable law and the public comment form (http://www.sec.gov/
4 74 FR 18,712 (Apr. 24, 2009). interest. See FTC Rule 4.9(c), 16 CFR 4.9(c). rules/proposed.shtml); or
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Federal Register / Vol. 75, No. 215 / Monday, November 8, 2010 / Proposed Rules 68561
• Send an e-mail to rule- Commodity Exchange Act,2 that is based the Dodd-Frank Act take effect.6 Most
comments@sec.gov. Please include File on a narrow-based security index, or a security-based swaps are characterized
Number S7–32–10 on the subject line; single security or loan, or any interest by ongoing payments or deliveries
or therein or on the value thereof, or the between the parties throughout the life
• Use the Federal eRulemaking Portal occurrence or non-occurrence of an of the security-based swap pursuant to
(http://www.regulations.gov). Follow the event relating to a single issuer of a their rights and obligations. Because
instructions for submitting comments. security or the issuers of securities in a such payments or deliveries occur after
narrow-based security index, provided the purchase of a security-based swap
Paper Comments
that such event directly affects the but before the sale or termination of the
• Send paper comments in triplicate financial statements, financial security-based swap,7 we believe a rule
to Elizabeth M. Murphy, Securities and condition, or financial obligations of the making explicit the liability of persons
Exchange Commission, 100 F Street, issuer.3 that engage in misconduct to trigger,
NE., Washington, DC 20549. Security-based swaps, as securities,4 avoid, or affect the value of such
All submissions should refer to File will be subject to the general antifraud ongoing payments or deliveries is a
Number S7–32–10. This file number and anti-manipulation provisions of the measured and reasonable means to
should be included on the subject line federal securities laws (e.g., Section prevent fraud, manipulation, and
if e-mail is used. To help us process and 10(b) of the Exchange Act and Rule 10b– deception in connection with security-
review your comments more efficiently, 5 thereunder, and Section 17(a) of the based swaps.
please use only one method. The Securities Act of 1933 (‘‘Securities Proposed Rule 9j–1 would prohibit
Commission will post all comments on Act’’)) 5 once the relevant provisions of the same misconduct as Exchange Act
the Commission’s Internet Web site Section 10(b) and Rule 10b–5
(http://www.sec.gov/rules/ 2 7 U.S.C. 1a. Section 721(b) of the Dodd-Frank thereunder, and Securities Act Section
Act amends Section 1(a) of the Commodity 17(a), but would also explicitly reach
proposed.shtml). Comments are also Exchange Act to add paragraph (47) defining swap,
available for Web site viewing and subject to enumerated exceptions, as ‘‘any
misconduct that is in connection with
printing in the Commission’s Public agreement, contract, or transaction: (i) That is a put, the ‘‘exercise of any right or performance
Reference Room, 100 F Street, NE., call, cap, floor, collar, or similar option of any kind of any obligation under’’ a security-
that is for the purchase or sale, or based on the based swap. In other words, proposed
Washington, DC 20549. All comments value, of 1 or more interest or other rates,
received will be posted without change; currencies, commodities, securities, instruments of Rule 9j–1 would apply to offers,
we do not edit personal identifying indebtedness, indices, quantitative measures, or
information from submissions. You other financial or economic interests or property of appropriate in the public interest or for the
any kind; (ii) that provides for any purchase, sale, protection of investors.’’ 15 U.S.C. 78j.
should submit only information that payment, or delivery (other than a dividend on an Rule 10b–5 under the Exchange Act provides that
you wish to make available publicly. equity security) that is dependent on the ‘‘[i]t shall be unlawful for any person, directly or
FOR FURTHER INFORMATION CONTACT: occurrence, nonoccurrence, or the extent of the indirectly * * * (a) to employ any device, scheme,
occurrence of an event or contingency associated or artifice to defraud, (b) to make any untrue
Josephine Tao, Assistant Director, with a potential financial, economic, or commercial statement of a material fact or to omit to state a
Elizabeth Sandoe, Senior Special consequence; (iii) that provides on an executory material fact necessary in order to make the
Counsel, or Joan Collopy, Special basis for the exchange, on a fixed or contingent statements made, in light of the circumstances
basis, of 1 or more payments based on the value or under which they are made, not misleading, or (c)
Counsel, Office of Trading Practices and level of 1 or more interest or other rates, currencies, to engage in any act, practice, or course of business
Processing, Division of Trading and commodities, securities, instruments of which operates or would operate as a fraud or
Markets, at (202) 551–5720, at the indebtedness, indices, quantitative measures, or deceit upon any person, in connection with the
Securities and Exchange Commission, other financial or economic interests or property of purchase or sale of any security.’’ 17 CFR 240.10b–
any kind, or any interest therein or based on the 5.
100 F Street, NE., Washington, DC value thereof, and that transfers, as between the Securities Act Section 17(a) provides that ‘‘[i]t
20549. parties to the transaction, in whole or in part, the shall be unlawful for any person in the offer or sale
SUPPLEMENTARY INFORMATION: The financial risk associated with a future change in any of securities * * * directly or indirectly—(1) to
such value or level * * * including any agreement, employ any device, scheme, or artifice to defraud,
Commission is requesting public contract, or transaction commonly known as (I) an or (2) to obtain money or property by means of any
comment on proposed Rule 9j–1 under interest rate swap; (II) a rate floor; (III) a rate cap; untrue statement of a material fact or any omission
the Exchange Act. (IV) a rate collar; (V) a cross-currency rate swap; to state a material fact necessary in order to make
(VI) a basis swap; (VII) a currency swap; (VIII) a the statements made, in light of the circumstances
I. Introduction foreign exchange swap; (IX) a total return swap; (X) under which they are made, not misleading, or (3)
an equity index swap; (XI) an equity swap; (XII) a to engage in any transaction, practice, or course of
The Commission is proposing debt index swap; (XIII) a debt swap; (XIV) a credit business which operates or would operate as a
Exchange Act Rule 9j–1, which is spread; (XV) a credit default swap; (XVI) a credit fraud or deceit upon the purchaser.’’ 15 U.S.C.
intended to prohibit fraud, swap; * * * (iv) that is an agreement, contract, or 77q(a).
transaction that is, or in the future becomes 6 See Section 774 of the Dodd-Frank Act.
manipulation, and deception in commonly known to the trade as a swap * * * or Security-based swap agreements, as defined in
connection with the offer, purchase or (vi) that is any combination or permutation of, or Section 206B of the Gramm-Leach-Bliley Act, 15
sale of any security-based swap, as well option on, any agreement, contract, or transaction U.S.C. 78c note, are currently subject to the general
as in connection with the exercise of described in any of clauses (i) through (v).’’ antifraud and anti-manipulation provisions of the
3 See Section 761(a)(6) of the Dodd-Frank Act. See
any right or performance of any federal securities laws (e.g., Section 10(b) of the
also 15 U.S.C. 78c(a)(68). Exchange Act and Rule 10b–5 thereunder).
obligation under a security-based swap, 4 See Section 761(a)(2) of the Dodd-Frank Act, 7 The Dodd-Frank Act amended the definitions of
including the avoidance of such which amends the definition of ‘‘security’’ in ‘‘purchase’’ or ‘‘sale’’ in the Securities Act and
exercise or performance. Section 761(a) Section 3(a)(10) of the Exchange Act to include Exchange Act to include, in the context of security-
of the Dodd-Frank Wall Street Reform security-based swaps. See also Section 768(a)(1) of based swaps, execution, termination, assignment,
the Dodd-Frank Act, which amends the definition exchange, transfer, or extinguishment of rights. See
and Consumer Protection Act (the of ‘‘security’’ in Section 2(a)(1) of the Securities Act Sections 761(a)(3) and (a)(4) of the Dodd-Frank Act
‘‘Dodd-Frank Act’’) 1 adds new Section to include security-based swaps. (amending Sections 3(a)(13) and (a)(14) of the
3(a)(68) of the Exchange Act to define a 5 Exchange Act Section 10(b) provides that ‘‘[i]t Exchange Act). See also Section 768(a)(3) of the
‘‘security-based swap’’ as any agreement, shall be unlawful for any person, directly or Dodd-Frank Act (amending Section 2(a)(18) of the
contract, or transaction that is a swap, indirectly * * * (b) to use or employ, in connection Securities Act). Therefore, misconduct in
with the purchase or sale of any security * * * any connection with these actions will also be
as defined in Section 1(a) of the manipulative or deceptive device or contrivance in prohibited under Exchange Act Section 10(b) and
contravention of such rules and regulations as the Rule 10b–5 thereunder, and Securities Act Section
1 Public Law 111–203 (July 21, 2010). Commission may prescribe as necessary or 17(a).
68562 Federal Register / Vol. 75, No. 215 / Monday, November 8, 2010 / Proposed Rules
purchases and sales of security-based security-based swap participants,12 may obligate one of the parties (i.e., the
swaps in the same way that the general persons associated with a security-based total return payer) to transfer the total
antifraud provisions apply to all swap dealer or major security-based economic performance (e.g., income
securities but would also explicitly swap participant, security-based swap from interest and fees, gains or losses
apply to the cash flows, payments, counterparties, and any customers, from market movements, and credit
deliveries, and other ongoing clients or other persons that use or losses) of a reference asset (e.g., a debt
obligations and rights that are specific to employ or effect transactions in security) (the ‘‘reference underlying’’),15
security-based swaps. security-based swaps, including in exchange for a specified or fixed or
security-based swaps to hedge or floating cash flow (including payments
II. Background mitigate commercial risk or exposure.13 for any principal losses on the reference
On July 21, 2010, the President signed Section 763(g) does not include any asset) from the other party (i.e., the total
into law the Dodd-Frank Act. Title VII specific exceptions. In addition, return receiver). This stream of
of the Dodd-Frank Act, referred to as the Exchange Act Section 9(j) directs the payments, deliveries, or other ongoing
Wall Street Transparency and Commission to ‘‘by rules and regulations obligations or rights between parties to
Accountability Act of 2010, establishes define, and prescribe means reasonably a security-based swap can pose
a regulatory framework for the designed to prevent, such transactions, significant risk if, for example, the
regulation of over-the-counter (‘‘OTC’’) acts, practices, and courses of business reference underlying of such security-
swaps market. Under this framework, in as are fraudulent, deceptive, or based swap declines in value or the
general, swaps are regulated primarily manipulative, and such quotations as economic condition of the issuer
by the Commodity Futures Trading are fictitious.’’ 14 changes (e.g., defaults or goes into
Commission (‘‘CFTC’’), and security- bankruptcy).
III. Proposed Rule 9j–1 The exercise of rights or performance
based swaps are regulated primarily by
As noted above, unlike many other of obligations under a security-based
the Commission.
securities, a key characteristic of most swap can present opportunities and
Section 763(g) of the Dodd-Frank Act security-based swaps is the obligation incentives for fraudulent, deceptive, or
expands the anti-manipulation for and rights to ongoing payments or manipulative conduct. Parties to a
provisions of Section 9 of the Exchange deliveries between the parties security-based swap may engage in
Act 8 and authorizes the Commission to throughout the life of the security-based misconduct in connection with the
adopt rules to prevent fraud, swap pursuant to the rights and security-based swap (including in the
manipulation, and deception in obligations under the security-based reference underlying of such security-
connection with security-based swaps. swap. For example, a total return swap based swap) 16 to trigger, avoid, or affect
Specifically, Section 763(g) adds new (‘‘TRS’’) that is a security-based swap the value of such ongoing payments or
subparagraph (j) to Section 9 to make it
deliveries. For instance, a party faced
unlawful for ‘‘any person, directly or 12 ‘‘Major security-based swap participant’’ is
with significant risk exposure may
indirectly, by the use of any means or defined in Section 3(a)(67)(A) of the Exchange Act
attempt to engage in manipulative or
instrumentality of interstate commerce as any person: (i) Who is not a security-based swap
dealer; and (ii)(I) who maintains a substantial deceptive conduct that increases or
or of the mails, or of any facility of any
position in security-based swaps for any of the decreases the value of payments or cash
national securities exchange, to effect major security-based swap categories, as such flow under a security-based swap
any transaction in, or to induce or categories are determined by the Commission,
relative to the value of the reference
attempt to induce the purchase or sale excluding both positions held for hedging or
mitigating commercial risk and positions underlying, including the price or value
of, any security-based swap, in
maintained by any employee benefit plan (or any of a deliverable obligation under a
connection with which such person contract held by such a plan) as defined in security-based swap. However, because
engages in any fraudulent, deceptive, or paragraphs (3) and (32) of Section 3 of the
such payments (and the avoidance of
manipulative act or practice, makes any Employee Retirement Income Security Act of 1974
(29 U.S.C. 1002) for the primary purpose of hedging such payments) occur after the purchase
fictitious quotation, or engages in any
or mitigating any risk directly associated with the of a security-based swap but before the
transaction, practice, or course of operation of the plan; (II) whose outstanding sale or termination of the security-based
business which operates as a fraud or security-based swaps create substantial
swap, we believe a rule making explicit
deceit upon any person.’’ 9 counterparty exposure that could have serious
adverse effects on the financial stability of the the illegality of misconduct in
Because Exchange Act Section 9(j) United States banking system or financial markets; connection with such payments is
applies to ‘‘any person,’’ 10 it would or (III) that is a financial entity that (aa) is highly appropriate.
encompass issuers, broker-dealers, leveraged relative to the amount of capital such
Proposed Rule 9j–1 therefore
security-based swap dealers,11 major entity holds and that is not subject to capital
requirements established by an appropriate Federal prohibits the same categories of
banking regulator; and (bb) maintains a substantial misconduct as Exchange Act Section
8 See Exchange Act Section 9, 15 U.S.C. 78i. position in outstanding security-based swaps in any 10(b) and Rule 10b–5 thereunder, and
9 See Exchange Act Section 9(j), 15 U.S.C. 78i(j). major security-based swap category, as such
categories are determined by the Commission. 15
Securities Act Section 17(a) 17 in the
10 Exchange Act Section 3(a)(9) defines ‘‘person’’
as ‘‘a natural person, company, government or, U.S.C. 78c(a)(67)(A). context of security-based swaps, and
political subdivision, agency, or instrumentality of The terms ‘‘security-based swap dealer,’’ ‘‘major
security-based swap participant,’’ as well as 15 As used in this release, the term ‘‘reference
a government.’’ 15 U.S.C. 78c(a)(9).
11 Section 761 of the Dodd-Frank Act adds new ‘‘security-based swap,’’ and other terms will be the underlying’’ of a security-based swap would include
definitions to Exchange Act Section 3(a). Subject to subject of joint rulemaking by the Commission and any reference asset underlying a security-based
certain exceptions, Exchange Act Section the CFTC. The Commission has issued an advance swap, including any security underlying a security-
3(a)(71)(A) defines ‘‘security-based swap dealer’’ to notice of proposed rulemaking seeking comment on based swap, any deliverable obligation under the
mean any person who: (i) Holds themself out as a the definitions of key terms relating to the terms of a security-based swap, any reference
dealer in security-based swaps; (ii) makes a market regulation of swaps and security-based swaps. See obligation, or reference entity under a security-
in security-based swaps; (iii) regularly enters into Securities Exchange Act Release No. 62717 (Aug. based swap. This could include, for example,
security-based swaps with counterparties as an 13, 2010), 75 FR 51429 (Aug. 20, 2010). securities, instruments of indebtedness, indices,
ordinary course of business for its own account; or 13 In other words, in contrast to certain other interest rates, quantitative measures, or other
(iv) engages in any activity causing it to be provisions of Title VII of the Dodd-Frank Act, financial or economic interests underlying a
commonly known in the trade as a dealer or market Section 763(g) does not make an exception for end- security-based swap.
maker in security-based swaps. 15 U.S.C. users. 16 See id.
78c(a)(71)(A). 14 See supra note 9. 17 See supra note 5.
explicitly reaches misconduct in The proposed rule would prohibit a Securities Act Section 17(a)(1),21 and
connection with these ongoing person from engaging in fraudulent and therefore would require scienter. In
payments or deliveries. In particular, deceptive schemes in order to increase contrast, paragraphs (c) and (d) of the
proposed Rule 9j–1 would specify that or decrease the price or value of a proposed rule would not require
it is unlawful for any person, directly or security-based swap, or disseminating scienter like Sections 17(a)(2) and (a)(3)
indirectly, in connection with the offer, false or misleading statements that affect of the Securities Act 22 and Section
purchase or sale of any security-based or otherwise manipulate the price or 206(2) of the Investment Advisers Act of
swap, the exercise of any right or value of the reference underlying of a 1940 (‘‘Advisers Act’’).23 These
performance of any obligation under a security-based swap for the purpose of paragraphs are proposed to prevent
security-based swap, or the avoidance of benefiting such person’s position in the conduct that operates as a fraud,
such exercise or performance: (a) To security-based swap. The proposed rule manipulation, or deception.
employ any device, scheme, or artifice would also prevent, for example,
to defraud or manipulate; (b) to disseminating false financial While both paragraphs (b) and (c) of
knowingly or recklessly make any information or data in connection with the proposed rule would prohibit
untrue statement of a material fact, or to the sale of a security-based swap or
knowingly or recklessly omit to state a insider trading in a security-based made with scienter. See, e.g., Ernst & Ernst v.
material fact necessary in order to make swap.19 Hochfelder, 425 U.S. 185, 193 (1976). The Supreme
Court has defined scienter as ‘‘a mental state
the statements made, in the light of the In addition, the proposed rule would embracing intent to deceive, manipulate or
circumstances under which they were explicitly prohibit misconduct that is in defraud.’’ Id. Recklessness will generally satisfy the
made, not misleading; (c) to obtain connection with the ‘‘exercise of any scienter requirement. See, e.g., Greebel v. FTP
money or property by means of any right or performance of any obligation Software, Inc., 194 F.3d 185, 198 (1st Cir. 1999);
SEC v. Environmental, Inc., 155 F.3d 107, 111 (2d
untrue statement of a material fact or under’’ a security-based swap. This Cir. 1998).
any omission to state a material fact would include, for example, misconduct 21 Establishing violations of Securities Act
necessary in order to make the that affects the market value of the Section 17(a)(1) requires a showing of scienter. See,
statements made, in light of the security-based swap for purposes of e.g., Aaron v. SEC, 446 U.S. 680, 701–02 (1980).
posting collateral or making payments Scienter is the ‘‘mental state embracing intent to
circumstances under which they were deceive, manipulate or defraud.’’ Ernst & Ernst v.
made, not misleading; or (d) to engage or deliveries under such security-based Hochfelder, 425 U.S. 185, 193 (1976). The Fifth
in any act, practice, or course of swap. Thus, the proposed rule would, Circuit Court of Appeals has held that scienter is
business which operates or would among other things, prohibit fraudulent established by a showing that the defendants acted
conduct (e.g., knowingly or recklessly intentionally or with severe recklessness. See Broad
operate as a fraud or deceit upon any v. Rockwell International Corp., 642 F.2d 929 (5th
person.18 making a false or misleading statement) Cir.) (en banc), cert. denied, 454 U.S. 965 (1981).
The language in paragraph (a) of the in connection with a security-based 22 Actions pursuant to Securities Act Sections
proposed rule, which is based on Rule swap that affects the value of such cash 17(a)(2) and 17(a)(3) do not require a showing of
flow, payments, or deliveries, such as by scienter. See, e.g., Aaron, 446 U.S. at 701–02. In
10b–5(a), differs from Rule 10b–5(a) in Aaron, the Supreme Court sought to determine
that it explicitly prohibits employing triggering the obligation of a whether scienter was required in a Commission
any device, scheme or artifice to defraud counterparty to make a large payment or injunctive proceeding pursuant to the antifraud
or manipulate. While the term to post additional collateral. It would provisions of Exchange Act Section 10(b) and
also prohibit a person from taking Securities Act Section 17(a). The Court examined
‘‘manipulate’’ does not appear in the text the language of both sections and determined that
of Rule 10b–5, Rule 10b–5 has been fraudulent or manipulative action with scienter was required under Section 10(b) because
interpreted to reach manipulative respect to the reference underlying of the words ‘‘manipulative,’’ ‘‘device,’’ and
activities. In light of that interpretation, the security-based swap that triggers the ‘‘contrivance,’’ which are used in the statute,
exercise of a right or performance of an evidenced a Congressional intent to proscribe only
we have added language to clarify that knowing or intentional misconduct. Similarly, the
manipulation in connection with obligation or affects the payments to be Court concluded that subsection (1) of Section 17(a)
security-based swaps is unlawful. We made. required proof of scienter because Congress used
do not anticipate or intend this The proposed rule also would such words as ‘‘device,’’ ‘‘scheme,’’ and ‘‘artifice to
explicitly prohibit misconduct that defraud.’’ Aaron, 446 U.S. at 696. In contrast, the
clarification to represent a departure Court concluded that the absence of such words
from the past interpretation or scope of avoids the exercise of rights or the under subsections (2) and (3) of Section 17(a)
Rule 10b–5(a). In addition, the language performance of obligations under the demonstrated that no scienter was required. Section
in paragraph (b) of the proposed rule, security-based swap. Thus, it would 17(a)(2) prohibits any person from obtaining money
prohibit a person from making false or or property ‘‘by means of any untrue statement of
which is based on Rule 10b–5(b), differs a material fact or omission to state a material fact,’’
from Rule 10b–5(b) in that it explicitly misleading statements in order to avoid which the Court found to be ‘‘devoid of any
prohibits knowingly or recklessly having to make a large payment, post suggestion whatsoever of a scienter requirement.’’
making any untrue statement of a additional collateral, or perform another Aaron, 446 U.S. at 696. Similarly, the Court found,
obligation under the security-based in construing Section 17(a)(3), under which it is
material fact, or knowingly or recklessly unlawful for any person ‘‘to engage in any
omitting to state a material fact swap. It would also prohibit a person transaction, practice, or course of business which
necessary in order to make the from taking fraudulent or manipulative operates or would operate as a fraud or deceit,’’ that
statements made, in light of the action with respect to the reference scienter was not required because it ‘‘quite plainly
underlying of the security-based swap focuses upon the effect of particular conduct on
circumstances under which they were members of the investing public, rather than upon
made, not misleading. This is intended that avoids triggering the exercise of a the culpability of the person responsible.’’ Aaron,
right or performance of an obligation or
to make clear, consistent with Rule 10b– 446 U.S. at 697.

5 case law, that paragraph (b), in affects the payments to be made. 23 See, e.g., Section 206(2) of the Advisers Act,
contrast to paragraph (c), would require Paragraphs (a) and (b) of proposed which prohibits an investment adviser from
Rule 9j–1 are modeled after Exchange engaging in ‘‘any transaction, practice or course of
scienter. We do not anticipate or intend business which operates as a fraud or deceit upon
this clarification to represent a Act Section 10(b) and Rule 10b–5,20 and any client or prospective client.’’ The Commission
departure from the past interpretation or 19 See
is not required to demonstrate that an adviser acted
also supra note 5. with scienter in order to prove a Section 206(2)
scope of Rule 10b–5(b). 20 To state a claim under Exchange Act Section violation. SEC v. Steadman, 967 F.2d 636, 643 (D.C.
10(b) and Rule 10b–5, the Commission must Cir. 1992) (citing SEC v. Capital Gains Research
18 Proposed Rule 9j–1. establish that the misstatements or omissions were Bureau, Inc., 375 U.S. 180, 191–92 (1963)).
material misstatements and omissions,24 or performance, and therefore a antifraud provisions under the federal
they would address different levels of violation of Rule 9j–1. The Commission, securities laws.
culpability. Paragraph (b) would apply in determining whether to bring an Finally, as noted above, the Dodd-
when there is evidence of scienter (e.g., enforcement action under Rule 9j–1 for Frank Act included security-based
when a party to a security-based swap misconduct involving such a security, swaps in the definition of ‘‘security’’
knowingly or recklessly makes a false would consider the facts and under the Securities Act and the
statement even though it may not circumstances associated with the Exchange Act.29 Thus, once the relevant
receive any money or property as a misconduct, including, among other provisions of the Dodd-Frank Act take
result). In contrast, paragraph (c) would things, the extent to which the effect of effect,30 persons effecting transactions
extend to conduct that is at least the misconduct on one or more security- in, or engaged in acts, practices, and
negligent (e.g., when a party to a based swaps is foreseeable to the party courses of business involving security-
security-based swap knows or engaging in the misconduct or the based swaps will be subject to the
reasonably should know that a purpose or the interest of that party. Commission’s rules and regulations that
statement was false or misleading and Consistent with Section 9(j) of the define and proscribe acts and practices
directly or indirectly obtains money or Exchange Act, the proposed rule would involving securities that are deemed
property from such statement). apply to ‘‘any person.’’ 27 In addition, the manipulative, deceptive, fraudulent, or
Because the proposed rule would proposed rule would also apply to otherwise unlawful for purposes of the
apply to conduct ‘‘in connection with misconduct ‘‘directly or indirectly’’ general antifraud and anti-manipulation
* * * a security-based swap’’ it would engaged in by such person (i.e., whether provisions of the federal securities laws,
apply to fraud, manipulation, or the person engages in the misconduct including Exchange Act Section 10(b),
deception involving the reference alone or through others).28 Rule 10b–5 (and the prohibitions against
underlying 25 of such security-based The Commission preliminarily insider trading), and Securities Act
swap to the extent that such misconduct believes that Proposed Rule 9j–1 is Section 17(a).31
is in connection with the offer, purchase reasonably designed to prevent fraud IV. Request for Comment
or sale of any security-based swap, the and manipulation in transactions in
exercise of any right or performance of The Commission seeks comment
security-based swaps and inducements
any obligation under a security-based generally on all aspects of proposed
to purchase or sell security-based
swap, or the avoidance of such exercise Rule 9j–1. We encourage commenters to
swaps. Because fraud and manipulation
or performance (e.g., manipulative present data on our proposals and any
that affect the value of the payments or
activity in the reference underlying that suggested alternative approaches.
deliveries pursuant to a security-based In addition, we seek specific comment
affects the price of the security-based swap are likely to distort the price and
swap, including misconduct in the on the following:
market for such security-based swaps, Does the reference in the proposed
reference underlying of a security-based they can undermine investor confidence
swap that triggers, avoids, or affects the rule to ‘‘in connection with the offer,
in the integrity of the market for purchase or sale of a security-based
value of ongoing payments or other security-based swaps, as well as the
delivery obligations under such swap, the exercise of any right or
market for the reference underlying of performance of any obligation under a
security-based swap).26 Depending on such security-based swap. The proposed
the facts and circumstances, misconduct security-based swap, or the avoidance of
rule is intended to parallel the general such exercise or performance’’ address
involving a security that is also a antifraud provisions applicable to all
reference underlying of any security- the full scope of potentially fraudulent,
securities, while also explicitly manipulative, or deceptive conduct that
based swap may not necessarily be ‘‘in
addressing the characteristics of cash pertains to security-based swaps? If not,
connection with’’ the offer, purchase or
flows, payments, deliveries, and other how should the scope of these
sale of any security-based swap, the
obligations and rights that are specific to provisions be modified? Are there types
exercise of any right or performance of
security-based swaps. By targeting of conduct not otherwise discussed
any obligation under a security-based
misconduct that is specific to the ways above that should be addressed by the
swap, or the avoidance of such exercise
in which security-based swaps are proposed rule? Commenters are invited
24 Consistent with Exchange Act Section 10(b),
structured and used, the proposed rule to provide specific examples of such
such misstatements and omissions must be material should help to prevent such fraudulent conduct.
to be actionable. See, e.g., Basic v. Levinson, 485 and manipulative conduct—without Please discuss how and to what extent
U.S. 224, 233 (1988). Statements and omissions are interfering with or otherwise unduly the proposed rule may affect issuers,
material if there is a substantial likelihood that a
reasonable investor would consider the information
inhibiting legitimate market or business broker-dealers, security-based swap
important in making an investment decision. See id. activity. dealers, major security-based swap
at 231–32; TSC Indus., Inc. v. Northway, Inc., 426 While the proposed rule is modeled participants, and other swap market
U.S. 438, 449 (1976). on existing securities laws prohibiting participants. Are there other alternatives
25 See supra note 15 (defining ‘‘reference
underlying’’ of a security-based swap to include, for

fraud, manipulation, and deception in or additional, or different, approaches
example, any reference asset, reference security, connection with security-based swaps, that the Commission should consider as
reference entity, or reference obligation underlying it is not intended to limit or extend means reasonably designed to prevent
a security-based swap). liability in connection with non-swap ‘‘such transactions, acts, practices, and
26 See Superintendent of Insurance v. Bankers
securities to ‘‘rights or obligations’’ that courses of business as are fraudulent,
Life and Casualty Co., 404 U.S. 6, 12–13 (1971) (to
do not involve purchases or sales. In deceptive, or manipulative’’? In
satisfy the ‘‘in connection with’’ requirement, the

fraud need only ‘‘touch’’ on the purchase or sale of other words, the scope of the proposed addition, are there specific practices
a security). See also SEC v. Texas Gulf Sulphur Co., rule is not intended to affect the that the Commission should explicitly
401 F.2d 833, 860 (2d Cir. 1968) (en banc)
(concluding that ‘‘Congress when it used the phrase
application or interpretation of the other
29 See supra note 4 (defining ‘‘security’’ under the
‘‘in connection with the purchase or sale of any
security’’ intended only that the device employed, 27 See text supra at notes 10–13. Securities Act and Exchange Act to include
whatever it might be, be of a sort that would cause 28 The terms ‘‘directly and indirectly’’ are ‘‘security-based swaps’’).
30 See supra note 6.
reasonable investors to rely thereon, and, in intended to describe the level of involvement
connection therewith, so relying, cause them to necessary to establish liability under the proposed 31 See, e.g., Exchange Act Rules 10b–1 through
purchase or sell a corporation’s securities’’). rule. See also id. 10b–21; 17 CFR 240.10–1 through 240.10b–21.
restrict or permit as part of the proposed addition to the questions above, recklessly make any untrue statement of
rule? Comments are invited regarding commenters are welcome to offer their a material fact, or to knowingly or
any prophylactic rules that would views on any other matter raised by the recklessly omit to state a material fact
further enhance the integrity of the proposed rule. With respect to any necessary in order to make the
security-based swap markets. comments, we note that they are of statements made, in the light of the
Although much of the activity that greatest assistance to our rulemaking circumstances under which they were
would be prohibited by the proposed initiative if accompanied by supporting made, not misleading; (c) to obtain
rule is already prohibited by the general data and analysis of the issues money or property by means of any
antifraud and anti-manipulation addressed in those comments and if untrue statement of a material fact or
provisions of the Federal securities laws accompanied by alternative suggestions any omission to state a material fact
(e.g., Exchange Act Section 10(b) and to our proposal where appropriate. necessary in order to make the
Rule 10b–5 thereunder, and Securities statements made, in light of the
Act Section 17(a)), to what extent, if VI. Paperwork Reduction Act
circumstances under which they were
any, would the proposed rule affect the Proposed Rule 9j–1 does not contain made, not misleading; or (d) to engage
nature of the security-based swap a ‘‘collection of information’’ in any act, practice, or course of
market in general, including the extent requirement within the meaning of the business which operates or would
or nature of information shared between Paperwork Reduction Act of 1995.32 An operate as a fraud or deceit upon any
market participants? If so, in what ways agency may not conduct or sponsor, and person.33
and to what degree? a person is not required to respond to, Thus, proposed Rule 9j–1 would
Are there any legitimate market a collection of information unless it prohibit the same misconduct as
activities that the proposed rule could displays a currently valid OMB control Exchange Act Section 10(b) and Rule
have the effect of discouraging? number. 10b–5 thereunder, and Securities Act
Commenters are invited to provide Section 17(a) 34 but would also
VII. Consideration of Costs and Benefits
specific examples of any such activities explicitly reach misconduct that is in
and any such potential effect. The Commission is considering the connection with the ‘‘exercise of any
Are there any specific issues with costs and benefits of proposed Rule right or performance of any obligation
respect to the application of the 9j–1. The Commission is sensitive to under’’ a security-based swap. In other
proposed rule to fraudulent, these costs and benefits, and encourages words, proposed Rule 9j–1 would apply
manipulative, or deceptive activity commenters to discuss any additional to offers, purchases and sales of
involving security-based swaps costs or benefits beyond those discussed security-based swaps in the same way
(including the reference underlying of here, as well as any reductions in costs. that the general antifraud provisions
such security-based swaps) that are or In particular, the Commission requests apply to all securities but would also
will be effected on or through security- comment on the potential costs for any explicitly apply to the cash flows,
based swap execution facilities or modification market participants’ payments, deliveries, and other ongoing
national securities exchanges, or over- business operations or supervisory obligations and rights that are specific to
the-counter? Please explain. practices or systems, as well as any security-based swaps. This would
To what extent are transactions in potential benefits resulting from the include, for example, misconduct that
security-based swaps used as a proposed rule for issuers, investors, affects the market value of the security-
functional or economic substitute or broker-dealers, security-based swap based swap for purposes of posting
equivalent transaction for transactions dealers, major security-based swap collateral or making payments or
or practices that are otherwise participants, persons associated with a deliveries under a security-based swap.
prohibited by the antifraud and anti- security-based swap dealer or a major Thus, the proposed rule would, among
manipulation provisions of the security-based swap participant, other other things, prohibit a person who is a
Exchange Act? Should the proposed security-based swap industry party to a security-based swap from later
rule impose any restrictions on such professionals, regulators, and other engaging in fraudulent conduct (e.g.,
transactions? Commenters are invited to market participants. The Commission knowingly making a false or misleading
provide specific examples. also seeks comments on the accuracy of statement) that affects the value of cash
What, if any, costs or burdens would any of the benefits identified and also flow, payments, or deliveries, such as
be imposed by the proposed rule? welcomes comments on any of the costs triggering the obligation of a
Would the proposed rule create any identified here. Finally, the Commission counterparty to make a large payment or
costs associated with changes to encourages commenters to identify, to post additional collateral.
business operations or supervisory discuss, analyze, and supply relevant By prohibiting fraud, manipulation,
practices or systems? How much would data, information, or statistics regarding and deception in connection with the
the proposed rule affect compliance any such costs or benefits. exercise of any rights or performance of
costs for issuers, broker-dealers, any obligations under a security-based
A. Benefits swap, including actions taken to avoid
security-based swap dealers, major
security-based swap participants, and Proposed Rule 9j–1 would specify the triggering of such exercise or
other swap market participants (e.g., that it is unlawful for any person, performance, the proposed rule would
personnel or procedural changes)? We directly or indirectly, in connection help to prevent such misconduct from
seek comment on the costs of with the offer, purchase or sale of any distorting the price and market for such
compliance that may arise. security-based swap, the exercise of any security-based swap, as well as for the
right or performance of any obligation reference underlying, and improperly
V. General Request for Comment under a security based swap, or the interfering with the independent and
The Commission seeks comment avoidance of such exercise or proper functioning of the markets. We
generally on all aspects of proposed performance, to: (a) To employ any therefore believe that the proposed rule
Rule 9j–1. Commenters are requested to device, scheme, or artifice to defraud or would benefit market participants and
provide empirical data or economic manipulate; (b) to knowingly or
studies to support their views and 33 See Proposed Rule 9j–1.
arguments related to proposed rule. In 32 44 U.S.C. 3501 et seq. 34 See supra note 5.
investors by promoting investor operations or supervisory practices or and sales of security-based swaps in the
confidence in the integrity of the market systems. However, we believe that, same way that the general antifraud
for security-based swaps, as well as for because most issuers, broker-dealers, provisions apply to all securities but
the reference underlying 35 of such security-based swap dealers, major would also explicitly apply to the cash
security-based swaps. security-based swap participants, and flows, payments, deliveries, and other
The proposed rule should prevent other swap market participants involved ongoing obligations and rights that are
fraud, manipulation, and deception with security-based swaps are already specific to security-based swaps.
from causing prices of security-based subject to the general antifraud and anti- By targeting specific misconduct that
swaps to deviate from their fundamental manipulation provisions, much of these is specific to how security-based swaps
values. This would allow the practices and systems would already be are structured and used, the proposed
Commission to guard against in place. Thus, we believe that any costs rule is intended to be a measured and
misconduct that improperly interferes associated with the proposed rule for reasonable means to prevent
with the independent and proper such changes (e.g., business or misconduct that is ‘‘in connection with
functioning of the markets and help to procedural changes) would be minimal. the exercise of any right or performance
promote price efficiency, the integrity of The Commission believes that the of any obligation under’’ a security-
the price discovery process, and fair proposed rule would not compromise based swap without interfering with or
dealing between market participants in investor protection. We seek data, otherwise unduly inhibiting legitimate
connection with security-based swaps. however, supporting any potential costs market activity. Also, because the
We solicit comment on any additional associated with the proposed rule. In proposed rule would prohibit the same
short-term and long-term benefits that addition, we request specific comment misconduct as Exchange Act Section
could be realized with the proposed on any changes to business operations 10(b) and Rule 10b–5 thereunder, and
rule. Specifically, we solicit comment or supervisory practices or systems that Securities Act Section 17(a),39 except to
regarding benefits to the efficient might be necessary to implement the explicitly reach misconduct that is ‘‘in
operation of security-based swap proposed rule. connection with the exercise of any
markets, price efficiency, market right or performance of any obligation
VIII. Consideration of Burden on
integrity, and investor protection. under’’ a security-based swap, we
Competition and Promotion of
believe that the proposed rule would
B. Costs Efficiency, Competition and Capital
not have an adverse effect on price
As an aid in evaluating costs and Formation efficiency. If the proposed rule mitigates
reductions in costs associated with Section 3(f) of the Exchange Act 36 fraudulent behavior, price efficiency
proposed Rule 9j–1, the Commission requires the Commission, whenever it should improve.
requests the public’s views and any engages in rulemaking and is required to By prohibiting fraud, manipulation,
supporting information. consider or determine whether an action and deception in connection with
By targeting misconduct that is is necessary or appropriate in the public security-based swaps (including the
specific to how security-based swaps are interest, to consider whether the action exercise of any right or performance of
structured and used, the proposed rule would promote efficiency, competition, any obligation under a security-based
is intended to be a measured and and capital formation. In addition, swap or the avoidance thereof), the
reasonable means to prevent fraudulent, Section 23(a)(2) of the Exchange Act 37 proposed rule would help to prevent
deceptive, or manipulative acts or requires the Commission, when making such conduct from distorting the market
practices in connection with the rules under the Exchange Act, to and artificially increasing or decreasing
exercise of any right or performance of consider the impact of such rules on prices for security-based swaps. Thus,
any obligation under a security-based competition. Section 23(a)(2) also we believe the proposed rule would
swap without interfering with or prohibits the Commission from adopting help to ensure price accuracy and
otherwise inhibiting legitimate market any rule that would impose a burden on fairness for the parties, which are
activity. competition not necessary or elements of efficiency.
Because proposed Rule 9j–1 is appropriate in furtherance of the We also believe a rule highlighting the
intended to parallel the general purposes of the Exchange Act. illegality of these activities would focus
antifraud provisions already applicable Proposed Rule 9j–1 is intended to the attention of swap market
to all securities, while also explicitly prevent fraud, manipulation, and participants on such activities and
addressing the characteristics of cash deception in connection with the offer, would reduce regulatory uncertainty for
flows, payments, deliveries, and other purchase or sale of any security-based swap market participants and investors
obligations and rights that are specific to swap, the exercise of any right or and would not impose significant costs
security-based swaps, we do not believe performance of any obligation under a on customers. We seek comment
that the proposed rule would impose security-based swap, or the avoidance of regarding whether proposed Rule 9j–1
any significant costs on persons such exercise or performance. Proposed may have any adverse effects on
effecting transactions or otherwise Rule 9j–1 would prohibit the same liquidity, market operations, or risks or
trading in security-based swaps. As misconduct as Exchange Act Section costs to customers.
noted above, the Commission seeks 10(b) and Rule 10b–5 thereunder, and In addition, as discussed above,
comment on whether the proposed rule Securities Act Section 17(a) 38 but because the proposed rule would
could discourage certain legitimate would also explicitly reach misconduct prohibit the same misconduct as
market activities because of concern that that is in connection with the ‘‘exercise Exchange Act Section 10(b) and Rule
such activities might be viewed as a of any right or performance of any 10b–5 thereunder, and Securities Act
violation of the rule. obligation under’’ a security-based swap. Section 17(a),40 except to explicitly
In addition, persons effecting In other words, proposed Rule reach misconduct that is ‘‘in connection
transactions or otherwise trading in 9j–1 would apply to offers, purchases with the exercise of any right or
security-based swaps may incur costs performance of any obligation (or the
associated with changes to business 36 15 U.S.C. 78c(f).
37 15 U.S.C. 78w(a)(2). 39 See id.
35 See supra note 15. 38 See supra note 5. 40 See id.
avoidance of such exercise or other factual support for their view to For purposes of Commission
performance) under’’ a security-based the extent possible. rulemaking in connection with the RFA,
swap, we believe that the proposed rule a small entity includes: (i) When used
IX. Consideration of Impact on the
would have minimal impact on the with reference to an ‘‘issuer’’ or a
Economy
promotion of capital formation. ‘‘person,’’ other than an investment
Fraudulent and manipulative conduct For purposes of the Small Business company, an ‘‘issuer’’ or ‘‘person’’ that,
in connection with security-based Regulatory Enforcement Fairness Act of on the last day of its most recent fiscal
swaps can undermine the confidence of 1996, or ‘‘SBREFA,’’ 42 the Commission year, had total assets of $5 million or
investors, not only in the market for the must advise the OMB as to whether the less,48 or (ii) a broker-dealer with total
security-based swaps but also in the proposed regulation constitutes a capital (net worth plus subordinated
market for the reference underlying of ‘‘major’’ rule. Under SBREFA, a rule is liabilities) of less than $500,000 on the
such security-based swaps. For the same considered ‘‘major’’ where, if adopted, it date in the prior fiscal year as of which
reasons, the proposed rule should results or is likely to result in: (1) An its audited financial statements were
promote capital formation by annual effect on the economy of $100 prepared pursuant to Rule 17a–5(d)
discouraging misconduct in connection million or more (either in the form of an under the Exchange Act,49 or, if not
with the performance of security-based increase or a decrease); (2) a major required to file such statements, a
swaps that could otherwise undermine increase in costs or prices for consumers broker-dealer with total capital (net
investor confidence or the ability of or individual industries; or (3) worth plus subordinated liabilities) of
investors to make investment decisions significant adverse effect on less than $500,000 on the last day of the
that are congruent to their investment competition, investment or innovation. preceding fiscal year (or in the time that
objectives. If a rule is ‘‘major,’’ its effectiveness will it has been in business, if shorter); and
Thus, we believe that the proposed generally be delayed for 60 days is not affiliated with any person (other
rule would promote capital formation pending Congressional review. than a natural person) that is not a small
The Commission requests comment business or small organization.50 Under
by helping to eliminate abuses in
on the potential impact of proposed the standards adopted by the Small
connection with security-based swaps.
Rule 9j–1 on the economy on an annual Business Administration, small entities
We seek specific comment and
basis, any potential increase in costs or in the finance and insurance industry
empirical data, if available, on the
prices for consumers or individual include the following: (i) For entities in
potential impact of the proposed rule on industries, and any potential effect on
capital formation, including whether the credit intermediation and related
competition, investment or innovation. activities, entities with $175 million or
proposed rule would promote or inhibit Commenters are requested to provide
capital formation, and if so, how. less in assets or, for non-depository
empirical data and other factual support credit intermediation and certain other
In addition, the prohibitions of the for their view to the extent possible.
proposed rule would apply uniformly to activities, $7 million or less in annual
all persons (e.g., issuers, broker-dealers, X. Regulatory Flexibility Certification receipts; (ii) for entities in financial
security-based swap dealers, major investments and related activities,
The Regulatory Flexibility Act
security-based swap participants, and entities with $7 million or less in
(‘‘RFA’’) 43 requires Federal agencies, in
all other swap market participants and annual receipts; (iii) for insurance
promulgating rules, to consider the
investors) effecting transactions or carriers and entities in related activities,
impact of those rules on small entities.
otherwise trading in security-based entities with $7 million or less in
Section 603(a) 44 of the Administrative
swaps and, therefore, should not impose annual receipts; and (iv) for funds,
Procedure Act,45 as amended by the
a burden on competition. Also, the trusts, and other financial vehicles,
RFA, generally requires the Commission
proposed rule would prohibit the same to undertake a regulatory flexibility entities with $7 million or less in
misconduct as Exchange Act 10(b) and analysis of all proposed rules, or annual receipts.51
Rule 10b–5 thereunder, and Securities Based on the Commission’s existing
proposed rule amendments, to
Act Section 17(a),41 except to explicitly information about the security-based
determine the impact of such
reach misconduct that is in connection swap market, the Commission
rulemaking on ‘‘small entities.’’ 46
with the exercise of any rights or preliminarily believes that the security-
Section 605(b) of the RFA states that
performance of any obligations under a based swap market, while broad in
this requirement shall not apply to any
security–based swap and, therefore, the scope, is largely dominated by entities
proposed rule or proposed rule
proposed rule should not impose a amendment, which if adopted, would such as those that would be covered by
burden on competition. By applying not have a significant economic impact the ‘‘security-based swap dealer’’ and
uniformly to all persons and by on a substantial number of small ‘‘major security-based swap market
discouraging swap market participants entities.47 participant’’ definitions.52 The
from engaging in unfair fraudulent, Commission preliminarily believes that
manipulative, and deceptive conduct in 42 Public Law 104–121, Title II, 110 Stat. 857 entities that will qualify as security-
connection with security-based swaps, (1996) (codified in various sections of 5 U.S.C., 15 based swap dealers and major security-
we preliminarily do not believe that the
U.S.C. and as a note to 5 U.S.C. 601). based swap market participants,
43 5 U.S.C. 601 et seq.
proposed rule will pose a burden on whether registered broker-dealers or not,
44 5 U.S.C. 603(a).
competition and would also promote 45 5 U.S.C. 551 et seq.
exceed the thresholds defining ‘‘small
competition. entities’’ set out above. Moreover, while
46 Although Section 601(b) of the RFA defines the
We request comment on whether the term ‘‘small entity,’’ the statute permits agencies to it is possible that other parties may
proposed rule would promote formulate their own definitions. The Commission engage in security-based swap
efficiency, competition, and capital
has adopted definitions for the term small entity for transactions, the Commission
the purposes of Commission rulemaking in
formation or have an impact or burden accordance with the RFA. Those definitions, as 48 See
relevant to this proposed rulemaking, are set forth 17 CFR 240.0–10(a).
on competition. Commenters are 49 See 17 CFR 240.17a–5(d).
in Rule 0–10, 17 CFR 240.0–10. See Securities
requested to provide empirical data and Exchange Act Release No. 18451 (January 28, 1982), 50 See 17 CFR 240.0–10(c).
47 FR 5215 (February 4, 1982) (File No. AS–305). 51 See 13 CFR 121.201 (Jan. 1, 2010).
41 See id. 47 See 5 U.S.C. 605(b). 52 See supra notes 11 and 12.
preliminarily does not believe that any PART 240—GENERAL RULES AND DEPARTMENT OF HOMELAND
such entities would be ‘‘small entities’’ REGULATIONS, SECURITIES SECURITY
as defined in Exchange Act Rule 0–10.53 EXCHANGE ACT OF 1934
Feedback from industry participants United States Coast Guard
about the security-based swap markets 1. The authority citation for part 240
indicates that only persons or entities is amended by adding an authority for 33 CFR Part 167
with assets significantly in excess of $5 § 240.9j–1 to read as follows: [USCG–2010–0833]
million (or with annual receipts Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
significantly in excess of $7 million) 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, Port Access Route Study: In the Bering
participate in the security-based swap 77sss, 77ttt, 78b, 78c, 78d, 78e, 78f, 78g, 78i, Strait
market. Even to the extent that a 78j, 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, Coast Guard, DHS.
AGENCY:
handful of transactions did have a 78o–8, 78p, 78q, 78s, 78u–5, 78w, 78x, 78ll,
counterparty that was defined as a Notice of study; request for
ACTION:
78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– comments.
‘‘small entity’’ under the Commission 3, 80b–4, 80b–11, and 7201 et seq.; and 18
Rule 0–10, we believe it is unlikely that U.S.C. 1350, unless otherwise noted. SUMMARY: The Coast Guard (USCG) is
proposed Rule 9j–1 would have a Section 240.9j–1 is also issued under sec. conducting a Port Access Route Study
significant economic impact on such 943, Pub. L. No. 111–203, 124 Stat. 1376. (PARS) to evaluate: The continued
entity, as the rule prohibits fraudulent applicability of and the need for
and manipulative acts, activities which 2. Add § 240.9j–1 to read as follows: modifications to current vessel routing
are in most cases already prohibited. § 240.9j–1. Prohibition against fraud, measures; and the need for creation of
Finally, because the proposed rule manipulation, and deception in connection new vessel routing measures in the
applies to any person, the proposed rule with security-based swaps. Bering Strait. The goal of the study is to
applies equally to large and small help reduce the risk of marine casualties
entities and therefore would not have a It shall be unlawful for any person, and increase the efficiency of vessel
disproportionate impact on small directly or indirectly, in connection traffic in the study area. The
entities. Therefore, the Commission with the offer, purchase or sale of any recommendations of the study may lead
preliminarily does not believe that security-based swap, the exercise of any to future rulemaking action or
proposed Rule 9j–1 will have an impact right or performance of any obligation appropriate international agreements.
on ‘‘small entities’’ in terms of the under a security-based swap, or the DATES: Comments and related material
prohibitions included in the proposed avoidance of such exercise or must either be submitted to our online
rule. performance, docket via http://www.regulations.gov
For the foregoing reasons, the (a) To employ any device, scheme, or on or before May 9, 2011 or reach the
Commission certifies that proposed Rule artifice to defraud or manipulate; Docket Management Facility by that
9j–1 would not have a significant date.
(b) To knowingly or recklessly make
economic impact on a substantial any untrue statement of a material fact, ADDRESSES: You may submit comments
number of small entities for purposes of or to knowingly or recklessly omit to identified by docket number USCG–
the RFA. The Commission encourages state a material fact necessary in order 2010–0833 using any one of the
written comments regarding this to make the statements made, in the following methods:
certification. The Commission requests light of the circumstances under which • Federal eRulemaking Portal: http://
that commenters describe the nature of they were made, not misleading; www.regulations.gov.
any impact on small entities and • Fax: 202–493–2251.
provide empirical data to support the (c) To obtain money or property by • Mail: Docket Management Facility
extent of the impact. means of any untrue statement of a (M–30), U.S. Department of
material fact or any omission to state a Transportation, West Building Ground
XI. Statutory Authority material fact necessary in order to make Floor, Room W12–140, 1200 New Jersey
the statements made, in light of the Avenue, SE., Washington, DC 20590–
Pursuant to Exchange Act and,
circumstances under which they were 0001.
particularly, Sections 2, 3(b), 9(i), 9(j),
made, not misleading; or • Hand Delivery: Same as mail
10, 15, 15F, and 23(a) thereof, 15 U.S.C.
(d) To engage in any act, practice, or address above, between 9 a.m. and
78b, 78c(b), 78i(i), 78i(j), 78j, 78o, 78o–
course of business which operates or 5 p.m., Monday through Friday, except
8, and 78w(a), the Commission is
Federal holidays. The telephone number
proposing a new antifraud rule, Rule would operate as a fraud or deceit upon
is 202–366–9329.
9j–1, to address fraud, manipulation, any person. To avoid duplication, please use only
and deception in connection with By the Commission. one of these four methods. See the
security-based swaps. ‘‘Public Participation and Request for
Dated: November 3, 2010.
List of Subjects in 17 CFR Part 240 Elizabeth M. Murphy, Comments’’ portion of the
SUPPLEMENTARY INFORMATION section
Secretary.
Brokers, Reporting and recordkeeping below for instructions on submitting
[FR Doc. 2010–28136 Filed 11–5–10; 8:45 am]
requirements, Securities. comments.
BILLING CODE 8011–01–P

Text of the Proposed Rule FOR FURTHER INFORMATION CONTACT: If
you have questions on this notice of
For the reasons set forth in the study, call or e-mail Lieutenant Faith
preamble, Title 17, Chapter II of the Reynolds, Project Officer, Seventeenth
Code of Federal Regulations is proposed Coast Guard District, telephone 907–
to be amended as follows: 463–2270; e-mail
Faith.A.Reynolds@uscg.mil; or George
53 See 17 CFR 240.0–10(a). Detweiler, Office of Waterways

Prohibition Against Fraud

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68560 Federal Register / Vol. 75, No.

215 / Monday, November 8, 2010 / Proposed Rules

78c(a)(71)(A). 14 See supra note 9. 17 See supra note 5.

to make clear, consistent with Rule 10b– 446 U.S. at 697.

underlying’’ of a security-based swap to include, for

satisfy the ‘‘in connection with’’ requirement, the

46 Although Section 601(b) of the RFA defines the

BILLING CODE 8011–01–P

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