SEC rule prohibits manipulating CCOs at security-based swaps

One of the rules will prohibit officers and employees of security-based swaps from taking any action to coerce, manipulate, mislead, or fraudulently influence their firm’s chief compliance officer in performing a CCO’s duties. The rule is designed to “protect the independence and objectivity of the CCO,” the SEC said in a press release.

The other adopted rule will make it unlawful for any person, directly or indirectly, to influence security-based swaps through fraudulent schemes, making misleading statements or omitting material facts, obtaining or attempting to obtain money or property by means of any untrue statement, or manipulating or attempting to manipulate the price or valuation of any security-based swap, the agency explained in a fact sheet.

“Any misconduct in the security-based swaps market not only harms direct counterparties but also can affect reference entities and investors in those reference entities,” said SEC Chair Gary Gensler in the agency’s release. “Given these markets’ size, scale, and importance, it is critical that the commission protect investors and market integrity through helping prevent fraud, manipulation, and deception relating to security-based swaps. Today’s set of rules will do just that.”

The SEC proposed the rules in December 2021, with Gensler at the time citing turbulence caused by use of total return swaps by Archegos Capital Management before the family office’s March 2021 collapse. The rules will “improve accountability, address misconduct, and promote compliance in the security-based swap market,” said Commissioner Jaime Lizárraga in a statement.

Commissioner Hester Peirce, meanwhile, questioned whether the new requirements regarding CCOs would discourage firm employees from interacting with the compliance department.

“Will subjecting every interaction between employees and a CCO to potential legal liability empower the CCO to do her job or simply make employees less likely to approach the CCO to seek her input on compliance-related issues?” she asked in a statement.

With the passage of the rules, which will take effect 60 days after publication in the Federal Register, the SEC has just two rules remaining to implement under the Dodd-Frank Act regarding security-based swaps, noted Gensler in a statement.

The SEC on Wednesday also adopted a rule to remove references to credit ratings from Regulation M, which is designed to prohibit activities that could artificially influence the market for an offered security. That rule will also take effect 60 days after publication in the Federal Register.