On June 7, 2023, the U.S. Securities and Exchange Commission (the “SEC”) adopted new Rules 9j-1 and 15fh-4(c) under the Securities Exchange Act of 1934 (the “Exchange Act”). Rule 9j-1 makes it unlawful for any person, directly or indirectly, to effect any transaction in, or attempt to effect any transaction in, any security-based swap (“SBS”), or to purchase or sell, or induce or attempt to induce the purchase or sale of any SBS in connection with:
- employing or attempting to employ any device, scheme or artifice to defraud or manipulate;
- making or attempting to make misstatements of material fact or omitting material facts;
- obtaining or attempting to obtain money or property by means of a material misstatement or omission of fact;
- engaging or attempting to engage in any act, practice, or course of business that operates or would operate as a fraud or deceit on any person; and
- manipulating or attempting to manipulate the price or valuation of any SBS.
Rule 9j-1 establishes affirmative defenses (a) for actions taken in accordance with binding rights and obligations in written SBS documentation and (b) for transactions by entities, when the individual making the investment decision was unaware of material nonpublic information (“MNPI”) and the entity had reasonable policies and procedures to prevent violations of the rule.
Rule 15fh-4(c) prohibits any officer, director, employee or supervised person of an SBS entity (or any person acting under such person’s direction) from taking any action to coerce, manipulate, mislead or fraudulently influence the Chief Compliance Officer of an SBS dealer in the performance of their duties under the federal securities laws.
Rule 9j-1 builds upon the SEC’s SBS registration and transaction reporting framework to provide the SEC with a significant new basis for examination and enforcement activity involving SBS transactions. Firms may wish to review their information barriers and policies and procedures for safeguarding MNPI to ensure their applicability to SBS transactions in order to rely on Rule 9j-1’s affirmative defenses. Firms may also wish to consider training business and compliance professionals on the new antifraud provisions of 15fh-4(c).