The Securities and Exchange Commission has adopted new rules and a process for its registration of security-based swap dealers and major security-based swap participants. More controversial, is a new proposal that gives swap dealers the ability to continue doing business with individuals and firms convicted of past fraud by seeking a Commission-granted waiver.
With the registration process, a registered security-based swap dealer or participant will submit, and update, extensive information about its business activities, structure, and background. Disclosures would include information about its control affiliates. Applicants will be conditionally registered as soon as the registration application is completed, triggering recordkeeping requirements and allowing an SEC examination.
The registration process also requires due diligence documentation and a framework for operating in compliance with federal securities laws. A senior officer must certify that the dealer has developed and implemented written policies and procedures reasonably designed to prevent securities law violations. Dealer will also need to conduct an investigation of its associated persons, including background checks on employees, to determine whether they have been subject to past or current legal actions. This will be the basis of a separate certification by the dealer’s chief compliance officer that no disqualified “bad actors,” whether individuals or firms, are involved in the dealer’s security-based swap transactions.
The SEC’s proposing release permits a dealer, at the time it registers with the Commission, to continue to associate with entities that are subject to a statutory disqualification that occurred prior to the compliance date of the registration rules. The dealer, however, will still need to disclose these entities in its registration. For all other cases, dealers will have the opportunity to petition the Commission for a waiver that allows the disqualified person or entity to continue their business relationship.
Commissioner Michael Piwowar, although supporting the registration process, expressed concerns with the use of executive certifications. “I am not convinced that they actually increase compliance with our rules,” he said. “Instead, they seem most effective at increasing the personal liability faced by the senior officers of our registrants.”
Piwowar also took issue with the approach to statutory disqualifications. In his view, a better effort should have been made to conform to rules promulgated by the Commodity Futures Trading Commission. That agency chose to limit the application of statutory disqualifications to natural persons, and not extend those prohibitions to entities. “The SEC could have adopted the same approach, which would have created consistency between the agencies and prevented significant potential disruptions caused by each agency treating a single entity differently for the same underlying conduct,” he said. “Instead, the majority has rejected the benefits of consistency and chosen to apply statutory disqualifications to both individuals and entities in a way that injects unnecessary complexity, uncertainty, and inconsistency into the market.”
Commissioner Kara Stein, while calling the registration process as “fairly straightforward,” was concerned by the fact that the new rules do not become effective until the Commission completes its remaining suite of Dodd-Frank Act-mandated rules for securities-based swaps dealers. Rules on central clearing agency oversight, clearing requirements for products, and transparent trading platforms, among others, must first be completed. “Far too much remains to be done,” she said. “And, in the interim, the American people remain far too exposed to firms that may still be too interconnected to fail.”
As for “bad actor” waivers, Stein expressed mixed emotions. While in support of a “fair and transparent processes” that provides “clarity to market participants, and level the playing field between businesses big and small,” the proposed plan has “a fatal flaw.”
“By unconditionally recognizing waivers granted by other regulators and self-regulatory organizations…it renders the rest of the proposed process little more than a fiction,” she said. “Serious problems arise when persons or firms can use other regulators to make an end-run around the Commission’s disqualification regime.”