SEC Proposes Anti-Fraud Rule Under Title VII of Dodd-Frank: SEC Issues Proposed Rule Prohibiting Fraud, Manipulation and Deception in Connection with Security-Based Swaps

Sullivan & Cromwell LLP - November 9, 2010
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On November 3, 2010, the SEC proposed Rule 9j-1 under the Securities Exchange Act of 1934 (the “Exchange Act”) that would prohibit fraud, manipulation and deception in connection with security-based swaps. The proposed rule was issued pursuant to Section 763(g) of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which directs the SEC to issue rules reasonably designed to prevent fraudulent, deceptive or manipulative transactions, acts, practices and courses of business in connection with the purchase and sale of, or a transaction in, a security-based swap. The proposed rule would prohibit, with respect to security-based swaps, misconduct prohibited by Rule 10b-5 under the Exchange Act and Section 17(a) of the Securities Act of 1933 (the “Securities Act”), which prohibit fraud, deception and material misstatements and omissions in connection with the purchase or sale of a security. The proposed rule would extend these prohibitions to “the exercise of any right or performance of any obligation under a security-based swap, or the avoidance of such exercise or performance.” This broader language is intended to prohibit fraudulent or deceptive acts occurring during the term of a security-based swap, such as misconduct intended to avoid or affect the value of ongoing payments or collateral requirements under a security-based swap.