SEC Exemptive Relief in Connection with Effective Date of Title VII of Dodd-Frank: SEC Issues Interim Final Rules and Order to Provide Relief from Certain Provisions That Would Be Effective on July 16, 2011

Sullivan & Cromwell LLP - July 8, 2011

On July 1, the Securities and Exchange Commission issued interim final rules and an order providing temporary relief from certain requirements of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to security-based swaps (“SBS”) that would otherwise apply beginning on July 16, 2011 (the “Statutory Effective Date”).

Generally, the interim rules exempt SBS that:

  • would have been, prior to the Statutory Effective Date, within the definition of “security-based swap agreement” under the Securities Act and the Exchange Act, and
  • are entered into solely between “eligible contract participants” (“ECPs”) (as defined prior to the Statutory Effective Date)

from all provisions of the Securities Act (other than the Section 17(a) antifraud provisions), the registration requirements of the Exchange Act, and the indenture provisions of the Trust Indenture Act. According to the SEC, the interim rules are intended to “maintain the status quo with respect to the ability of market participants to engage in” security-based swap agreements until the compliance date for final rules that the SEC adopts further defining the terms “security-based swap” and “eligible contract participant”.

The order provides exemptions to ECPs (as that term was defined on July 20, 2010, just prior to the enactment of Dodd-Frank), registered broker-dealers, exchanges and certain central counterparties from many of the consequences that would otherwise apply because of the inclusion of SBS in the definition of the term “security” in the Exchange Act on the Statutory Effective Date. The “overall approach” of the order is to maintain “the status quo” as Dodd-Frank is implemented through final rulemaking, “by preserving the application of particular Exchange Act requirements that already are applicable in connection with instruments that will be [SBS] following the [Statutory] Effective Date, but deferring the applicability of additional Exchange Act requirements in connection with those instruments explicitly being defined as ‘securities’ as of the [Statutory] Effective Date.”

The interim rules and order are part of a series of actions the SEC is taking to clarify the requirements that will apply to SBS transactions, and persons transacting in SBS, as of the Statutory Effective Date. These actions include an order issued by the SEC on June 15, 2011, that made clear that many of Title VII’s requirements applicable to SBS will not go into effect on the Statutory Effective Date.