68560 Federal Register / Vol. 75, No. 215 / Monday, November 8, 2010 / Proposed Rules 

2 71 FR 19,056 (Apr. 12, 2006). 

3 73 FR 16,110 (Mar. 28, 2008). 

4 74 FR 18,712 (Apr. 24, 2009). 

5FTC Rule 4.2(d), 16 CFR 4.2(d). The comment 

must be accompanied by an explicit request for 

confidential treatment, including the factual and 

legal basis for the request, and must identify the 

specific portions of the comment to be withheld 

from the public record. The request will be granted 

or denied by the Commission’s General Counsel, 

consistent with applicable law and the public 

interest. See FTC Rule 4.9(c), 16 CFR 4.9(c). 

fraud in the sale of business 

opportunities is not only prevalent but 

persistent. Accordingly, the 

Commission has engaged in an ongoing 

effort to amend the Business 

Opportunity Rule to adequately protect 

consumers from potentially fraudulent 

business opportunity sellers, while at 

the same time minimizing compliance 

costs. The Commission began by 

publishing an initial Notice of Proposed 

Rulemaking in 2006.2 It published a 

revised Notice of Proposed Rulemaking 

in 2008 (‘‘RNPR’’),3 and held a public 

workshop on June 1, 2009 to discuss 

proposed amended disclosure 

requirements.4

Pursuant to the Commission’s Rules 

of Practice, and the rulemaking 

procedures specified earlier in the 

RNPR, the Commission now announces 

the availability of the Staff Report on the 

Business Opportunity Rule. The Staff 

Report summarizes the rulemaking 

record to date, analyzes the various 

alternatives suggested, and sets forth the 

staff’s recommendation to the 

Commission on the proposed revised 

Rule. The Staff Report has not been 

endorsed or adopted by the 

Commission. 

The Staff Report is available at the 

FTC’s Web site at http://www.ftc.gov. It 

is also available from the Commission’s 

Public Reference Room, Room H–130, 

Federal Trade Commission, 600 

Pennsylvania Avenue, NW., 

Washington, DC 20580. 

The Commission invites interested 

parties to submit written data, views, 

and arguments on the recommendations 

announced by the Staff Report by 

following the instructions in the 

ADDRESSES section of this notice. 

Comments, however, are to be limited to 

those matters not already part of the 

rulemaking record. Further, comments 

previously submitted in the ongoing 

rulemaking procedures are already part 

of the rulemaking record and need not 

be repeated. Written communications 

and summaries or transcripts of any oral 

communications respecting the merits 

of this proceeding from any outside 

party to any Commissioner or 

Commissioner’s advisor will also be 

placed on the public record. See 16 CFR 

1.26(b)(5). 

Please note that comments will be 

placed on the public record—including 

on the publicly accessible FTC Web site, 

at http://www.ftc.gov/os/ 

publiccomments.shtm—and therefore 

should not include any sensitive or 

confidential information. In particular, 

comments should not include any 

sensitive personal information, such as 

an individual’s Social Security Number; 

date of birth; driver’s license number or 

other state identification number, or 

foreign country equivalent; passport 

number; financial account number; or 

credit or debit card number. Comments 

also should not include any sensitive 

health information, such as medical 

records or other individually 

identifiable health information. In 

addition, comments should not include 

any ‘‘[t]rade secrets and commercial or 

financial information obtained from a 

person and privileged or confidential’’ 

as provided in Section 6(f) of the FTC 

Act, 15 U.S.C. 46(f), and Commission 

Rule 4.10(a)(2), 16 CFR 4.10(a)(2). 

Comments containing material for 

which confidential treatment is 

requested must be filed in paper (rather 

than electronic) form, must be clearly 

labeled ‘‘Confidential,’’ and must 

comply with FTC Rule 4.9(c).5

The FTC is requesting that any 

comment filed in paper form be sent by 

courier or overnight service, if possible, 

because U.S. postal mail in the 

Washington area, and at the 

Commission, is subject to delay due to 

heightened security precautions. 

Because U.S. postal mail is subject to 

delay due to heightened security 

measures, please consider submitting 

your comments in electronic form. To 

ensure that the Commission considers 

an electronic comment, you must file it 

on the web-based form at the weblink 

https://ftcpublic.commentworks.com/ 

ftc/busopprulestaffreport. If this Notice 

appears at http://www.regulations.gov/ 

search/index.isp, you also may file an 

electronic comment though that Web 

site. The Commission will consider all 

comments that regulations.gov forwards 

to it. 

The FTC Act and other laws the 

Commission administers permit the 

collection of public comments to 

consider and use in this proceeding as 

appropriate. The Commission will 

consider all timely and responsive 

public comments that it receives, 

whether filed in electronic or paper 

form. Comments received will be 

available to the public on the FTC Web 

site, to the extent practicable, at 

http://www.ftc.gov. As a matter of 

discretion, the FTC makes every effort to 

remove home contact information for 

individuals from the public comments it 

receives before placing those comments 

on the FTC Web site. More information, 

including routine uses permitted by the 

Privacy Act, may be found at the FTC’s 

privacy policy, at http://www.ftc.gov/ 

ftc/privacy.htm. 

Upon completion of the comment 

period, the staff will make final 

recommendations to the Commission 

about the Rule. Assuming the 

Commission adopts the proposed 

revised Rule as recommended by the 

staff, or after the conclusion of the 

comment period determines to make 

changes to the proposed revised Rule, it 

will publish in a future Federal Register 

notice the final text of the Rule, a 

statement of Basis and Purpose on the 

Rule, and an announcement of when the 

revised Rule will become effective. 

By direction of the Commission. 

Richard C. Donohue, 

Acting Secretary. 

[FR Doc. 2010–28044 Filed 11–5–10; 8:45 am] 

BILLING CODE 6750–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 240 

[Release No. 34–63236; File No. S7–32–10] 

RIN 3235–AK77 

Prohibition Against Fraud, 

Manipulation, and Deception in 

Connection With Security-Based 

Swaps 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’) is 

proposing for comment a new rule 

under the Securities Exchange Act of 

1934 (‘‘Exchange Act’’) that is intended 

to prevent fraud, manipulation, and 

deception in connection with the offer, 

purchase or sale of any security-based 

swap, the exercise of any right or 

performance of any obligation under a 

security-based swap, or the avoidance of 

such exercise or performance. 

DATES: Comments should be received on 

or before December 23, 2010. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/proposed.shtml); or 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 215 / Monday, November 8, 2010 / Proposed Rules 68561 

1Public Law 111–203 (July 21, 2010). 

2 7 U.S.C. 1a. Section 721(b) of the Dodd-Frank 

Act amends Section 1(a) of the Commodity 

Exchange Act to add paragraph (47) defining swap, 

subject to enumerated exceptions, as ‘‘any 

agreement, contract, or transaction: (i) That is a put, 

call, cap, floor, collar, or similar option of any kind 

that is for the purchase or sale, or based on the 

value, of 1 or more interest or other rates, 

currencies, commodities, securities, instruments of 

indebtedness, indices, quantitative measures, or 

other financial or economic interests or property of 

any kind; (ii) that provides for any purchase, sale, 

payment, or delivery (other than a dividend on an 

equity security) that is dependent on the 

occurrence, nonoccurrence, or the extent of the 

occurrence of an event or contingency associated 

with a potential financial, economic, or commercial 

consequence; (iii) that provides on an executory 

basis for the exchange, on a fixed or contingent 

basis, of 1 or more payments based on the value or 

level of 1 or more interest or other rates, currencies, 

commodities, securities, instruments of 

indebtedness, indices, quantitative measures, or 

other financial or economic interests or property of 

any kind, or any interest therein or based on the 

value thereof, and that transfers, as between the 

parties to the transaction, in whole or in part, the 

financial risk associated with a future change in any 

such value or level * * * including any agreement, 

contract, or transaction commonly known as (I) an 

interest rate swap; (II) a rate floor; (III) a rate cap; 

(IV) a rate collar; (V) a cross-currency rate swap; 

(VI) a basis swap; (VII) a currency swap; (VIII) a 

foreign exchange swap; (IX) a total return swap; (X) 

an equity index swap; (XI) an equity swap; (XII) a 

debt index swap; (XIII) a debt swap; (XIV) a credit 

spread; (XV) a credit default swap; (XVI) a credit 

swap; * * * (iv) that is an agreement, contract, or 

transaction that is, or in the future becomes 

commonly known to the trade as a swap * * * or 

(vi) that is any combination or permutation of, or 

option on, any agreement, contract, or transaction 

described in any of clauses (i) through (v).’’ 

3See Section 761(a)(6) of the Dodd-Frank Act. See 

also 15 U.S.C. 78c(a)(68). 

4See Section 761(a)(2) of the Dodd-Frank Act, 

which amends the definition of ‘‘security’’ in 

Section 3(a)(10) of the Exchange Act to include 

security-based swaps. See also Section 768(a)(1) of 

the Dodd-Frank Act, which amends the definition 

of ‘‘security’’ in Section 2(a)(1) of the Securities Act 

to include security-based swaps. 

5Exchange Act Section 10(b) provides that ‘‘[i]t 

shall be unlawful for any person, directly or 

indirectly * * * (b) to use or employ, in connection 

with the purchase or sale of any security * * * any 

manipulative or deceptive device or contrivance in 

contravention of such rules and regulations as the 

Commission may prescribe as necessary or 

appropriate in the public interest or for the 

protection of investors.’’ 15 U.S.C. 78j. 

Rule 10b–5 under the Exchange Act provides that 

‘‘[i]t shall be unlawful for any person, directly or 

indirectly * * * (a) to employ any device, scheme, 

or artifice to defraud, (b) to make any untrue 

statement of a material fact or to omit to state a 

material fact necessary in order to make the 

statements made, in light of the circumstances 

under which they are made, not misleading, or (c) 

to engage in any act, practice, or course of business 

which operates or would operate as a fraud or 

deceit upon any person, in connection with the 

purchase or sale of any security.’’ 17 CFR 240.10b– 

5. 

Securities Act Section 17(a) provides that ‘‘[i]t 

shall be unlawful for any person in the offer or sale 

of securities * * * directly or indirectly—(1) to 

employ any device, scheme, or artifice to defraud, 

or (2) to obtain money or property by means of any 

untrue statement of a material fact or any omission 

to state a material fact necessary in order to make 

the statements made, in light of the circumstances 

under which they are made, not misleading, or (3) 

to engage in any transaction, practice, or course of 

business which operates or would operate as a 

fraud or deceit upon the purchaser.’’ 15 U.S.C. 

77q(a). 

6See Section 774 of the Dodd-Frank Act. 

Security-based swap agreements, as defined in 

Section 206B of the Gramm-Leach-Bliley Act, 15 

U.S.C. 78c note, are currently subject to the general 

antifraud and anti-manipulation provisions of the 

federal securities laws (e.g., Section 10(b) of the 

Exchange Act and Rule 10b–5 thereunder). 

7The Dodd-Frank Act amended the definitions of 

‘‘purchase’’ or ‘‘sale’’ in the Securities Act and 

Exchange Act to include, in the context of securitybased swaps, execution, termination, assignment, 

exchange, transfer, or extinguishment of rights. See 

Sections 761(a)(3) and (a)(4) of the Dodd-Frank Act 

(amending Sections 3(a)(13) and (a)(14) of the 

Exchange Act). See also Section 768(a)(3) of the 

Dodd-Frank Act (amending Section 2(a)(18) of the 

Securities Act). Therefore, misconduct in 

connection with these actions will also be 

prohibited under Exchange Act Section 10(b) and 

Rule 10b–5 thereunder, and Securities Act Section 

17(a). 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–32–10 on the subject line; 

or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549. 

All submissions should refer to File 

Number S7–32–10. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/ 

proposed.shtml). Comments are also 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549. All comments 

received will be posted without change; 

we do not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. 

FOR FURTHER INFORMATION CONTACT: 

Josephine Tao, Assistant Director, 

Elizabeth Sandoe, Senior Special 

Counsel, or Joan Collopy, Special 

Counsel, Office of Trading Practices and 

Processing, Division of Trading and 

Markets, at (202) 551–5720, at the 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549. 

SUPPLEMENTARY INFORMATION: The 

Commission is requesting public 

comment on proposed Rule 9j–1 under 

the Exchange Act. 

I. Introduction 

The Commission is proposing 

Exchange Act Rule 9j–1, which is 

intended to prohibit fraud, 

manipulation, and deception in 

connection with the offer, purchase or 

sale of any security-based swap, as well 

as in connection with the exercise of 

any right or performance of any 

obligation under a security-based swap, 

including the avoidance of such 

exercise or performance. Section 761(a) 

of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (the 

‘‘Dodd-Frank Act’’) 1 adds new Section 

3(a)(68) of the Exchange Act to define a 

‘‘security-based swap’’ as any agreement, 

contract, or transaction that is a swap, 

as defined in Section 1(a) of the 

Commodity Exchange Act,2 that is based 

on a narrow-based security index, or a 

single security or loan, or any interest 

therein or on the value thereof, or the 

occurrence or non-occurrence of an 

event relating to a single issuer of a 

security or the issuers of securities in a 

narrow-based security index, provided 

that such event directly affects the 

financial statements, financial 

condition, or financial obligations of the 

issuer.3

Security-based swaps, as securities,4

will be subject to the general antifraud 

and anti-manipulation provisions of the 

federal securities laws (e.g., Section 

10(b) of the Exchange Act and Rule 10b– 

5 thereunder, and Section 17(a) of the 

Securities Act of 1933 (‘‘Securities 

Act’’)) 5 once the relevant provisions of 

the Dodd-Frank Act take effect.6 Most 

security-based swaps are characterized 

by ongoing payments or deliveries 

between the parties throughout the life 

of the security-based swap pursuant to 

their rights and obligations. Because 

such payments or deliveries occur after 

the purchase of a security-based swap 

but before the sale or termination of the 

security-based swap,7 we believe a rule 

making explicit the liability of persons 

that engage in misconduct to trigger, 

avoid, or affect the value of such 

ongoing payments or deliveries is a 

measured and reasonable means to 

prevent fraud, manipulation, and 

deception in connection with securitybased swaps. 

Proposed Rule 9j–1 would prohibit 

the same misconduct as Exchange Act 

Section 10(b) and Rule 10b–5 

thereunder, and Securities Act Section 

17(a), but would also explicitly reach 

misconduct that is in connection with 

the ‘‘exercise of any right or performance 

of any obligation under’’ a securitybased swap. In other words, proposed 

Rule 9j–1 would apply to offers, 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
68562 Federal Register / Vol. 75, No. 215 / Monday, November 8, 2010 / Proposed Rules 

8See Exchange Act Section 9, 15 U.S.C. 78i. 

9See Exchange Act Section 9(j), 15 U.S.C. 78i(j). 

10Exchange Act Section 3(a)(9) defines ‘‘person’’ 

as ‘‘a natural person, company, government or, 

political subdivision, agency, or instrumentality of 

a government.’’ 15 U.S.C. 78c(a)(9). 

11Section 761 of the Dodd-Frank Act adds new 

definitions to Exchange Act Section 3(a). Subject to 

certain exceptions, Exchange Act Section 

3(a)(71)(A) defines ‘‘security-based swap dealer’’ to 

mean any person who: (i) Holds themself out as a 

dealer in security-based swaps; (ii) makes a market 

in security-based swaps; (iii) regularly enters into 

security-based swaps with counterparties as an 

ordinary course of business for its own account; or 

(iv) engages in any activity causing it to be 

commonly known in the trade as a dealer or market 

maker in security-based swaps. 15 U.S.C. 

78c(a)(71)(A). 

12 ‘‘Major security-based swap participant’’ is 

defined in Section 3(a)(67)(A) of the Exchange Act 

as any person: (i) Who is not a security-based swap 

dealer; and (ii)(I) who maintains a substantial 

position in security-based swaps for any of the 

major security-based swap categories, as such 

categories are determined by the Commission, 

excluding both positions held for hedging or 

mitigating commercial risk and positions 

maintained by any employee benefit plan (or any 

contract held by such a plan) as defined in 

paragraphs (3) and (32) of Section 3 of the 

Employee Retirement Income Security Act of 1974 

(29 U.S.C. 1002) for the primary purpose of hedging 

or mitigating any risk directly associated with the 

operation of the plan; (II) whose outstanding 

security-based swaps create substantial 

counterparty exposure that could have serious 

adverse effects on the financial stability of the 

United States banking system or financial markets; 

or (III) that is a financial entity that (aa) is highly 

leveraged relative to the amount of capital such 

entity holds and that is not subject to capital 

requirements established by an appropriate Federal 

banking regulator; and (bb) maintains a substantial 

position in outstanding security-based swaps in any 

major security-based swap category, as such 

categories are determined by the Commission. 15 

U.S.C. 78c(a)(67)(A). 

The terms ‘‘security-based swap dealer,’’ ‘‘major 

security-based swap participant,’’ as well as 

‘‘security-based swap,’’ and other terms will be the 

subject of joint rulemaking by the Commission and 

the CFTC. The Commission has issued an advance 

notice of proposed rulemaking seeking comment on 

the definitions of key terms relating to the 

regulation of swaps and security-based swaps. See 

Securities Exchange Act Release No. 62717 (Aug. 

13, 2010), 75 FR 51429 (Aug. 20, 2010). 

13 In other words, in contrast to certain other 

provisions of Title VII of the Dodd-Frank Act, 

Section 763(g) does not make an exception for endusers. 

14See supra note 9. 

15As used in this release, the term ‘‘reference 

underlying’’ of a security-based swap would include 

any reference asset underlying a security-based 

swap, including any security underlying a securitybased swap, any deliverable obligation under the 

terms of a security-based swap, any reference 

obligation, or reference entity under a securitybased swap. This could include, for example, 

securities, instruments of indebtedness, indices, 

interest rates, quantitative measures, or other 

financial or economic interests underlying a 

security-based swap. 

16See id. 

17See supra note 5. 

purchases and sales of security-based 

swaps in the same way that the general 

antifraud provisions apply to all 

securities but would also explicitly 

apply to the cash flows, payments, 

deliveries, and other ongoing 

obligations and rights that are specific to 

security-based swaps. 

II. Background 

On July 21, 2010, the President signed 

into law the Dodd-Frank Act. Title VII 

of the Dodd-Frank Act, referred to as the 

Wall Street Transparency and 

Accountability Act of 2010, establishes 

a regulatory framework for the 

regulation of over-the-counter (‘‘OTC’’) 

swaps market. Under this framework, in 

general, swaps are regulated primarily 

by the Commodity Futures Trading 

Commission (‘‘CFTC’’), and securitybased swaps are regulated primarily by 

the Commission. 

Section 763(g) of the Dodd-Frank Act 

expands the anti-manipulation 

provisions of Section 9 of the Exchange 

Act 8 and authorizes the Commission to 

adopt rules to prevent fraud, 

manipulation, and deception in 

connection with security-based swaps. 

Specifically, Section 763(g) adds new 

subparagraph (j) to Section 9 to make it 

unlawful for ‘‘any person, directly or 

indirectly, by the use of any means or 

instrumentality of interstate commerce 

or of the mails, or of any facility of any 

national securities exchange, to effect 

any transaction in, or to induce or 

attempt to induce the purchase or sale 

of, any security-based swap, in 

connection with which such person 

engages in any fraudulent, deceptive, or 

manipulative act or practice, makes any 

fictitious quotation, or engages in any 

transaction, practice, or course of 

business which operates as a fraud or 

deceit upon any person.’’ 9

Because Exchange Act Section 9(j) 

applies to ‘‘any person,’’ 10 it would 

encompass issuers, broker-dealers, 

security-based swap dealers,11 major 

security-based swap participants,12

persons associated with a security-based 

swap dealer or major security-based 

swap participant, security-based swap 

counterparties, and any customers, 

clients or other persons that use or 

employ or effect transactions in 

security-based swaps, including 

security-based swaps to hedge or 

mitigate commercial risk or exposure.13

Section 763(g) does not include any 

specific exceptions. In addition, 

Exchange Act Section 9(j) directs the 

Commission to ‘‘by rules and regulations 

define, and prescribe means reasonably 

designed to prevent, such transactions, 

acts, practices, and courses of business 

as are fraudulent, deceptive, or 

manipulative, and such quotations as 

are fictitious.’’ 14

III. Proposed Rule 9j–1 

As noted above, unlike many other 

securities, a key characteristic of most 

security-based swaps is the obligation 

for and rights to ongoing payments or 

deliveries between the parties 

throughout the life of the security-based 

swap pursuant to the rights and 

obligations under the security-based 

swap. For example, a total return swap 

(‘‘TRS’’) that is a security-based swap 

may obligate one of the parties (i.e., the 

total return payer) to transfer the total 

economic performance (e.g., income 

from interest and fees, gains or losses 

from market movements, and credit 

losses) of a reference asset (e.g., a debt 

security) (the ‘‘reference underlying’’),15

in exchange for a specified or fixed or 

floating cash flow (including payments 

for any principal losses on the reference 

asset) from the other party (i.e., the total 

return receiver). This stream of 

payments, deliveries, or other ongoing 

obligations or rights between parties to 

a security-based swap can pose 

significant risk if, for example, the 

reference underlying of such securitybased swap declines in value or the 

economic condition of the issuer 

changes (e.g., defaults or goes into 

bankruptcy). 

The exercise of rights or performance 

of obligations under a security-based 

swap can present opportunities and 

incentives for fraudulent, deceptive, or 

manipulative conduct. Parties to a 

security-based swap may engage in 

misconduct in connection with the 

security-based swap (including in the 

reference underlying of such securitybased swap) 16 to trigger, avoid, or affect 

the value of such ongoing payments or 

deliveries. For instance, a party faced 

with significant risk exposure may 

attempt to engage in manipulative or 

deceptive conduct that increases or 

decreases the value of payments or cash 

flow under a security-based swap 

relative to the value of the reference 

underlying, including the price or value 

of a deliverable obligation under a 

security-based swap. However, because 

such payments (and the avoidance of 

such payments) occur after the purchase 

of a security-based swap but before the 

sale or termination of the security-based 

swap, we believe a rule making explicit 

the illegality of misconduct in 

connection with such payments is 

appropriate. 

Proposed Rule 9j–1 therefore 

prohibits the same categories of 

misconduct as Exchange Act Section 

10(b) and Rule 10b–5 thereunder, and 

Securities Act Section 17(a) 17 in the 

context of security-based swaps, and 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 215 / Monday, November 8, 2010 / Proposed Rules 68563 

18Proposed Rule 9j–1. 

19See also supra note 5. 

20To state a claim under Exchange Act Section 

10(b) and Rule 10b–5, the Commission must 

establish that the misstatements or omissions were 

made with scienter. See, e.g., Ernst & Ernst v. 

Hochfelder, 425 U.S. 185, 193 (1976). The Supreme 

Court has defined scienter as ‘‘a mental state 

embracing intent to deceive, manipulate or 

defraud.’’ Id. Recklessness will generally satisfy the 

scienter requirement. See, e.g., Greebel v. FTP 

Software, Inc., 194 F.3d 185, 198 (1st Cir. 1999); 

SEC v. Environmental, Inc., 155 F.3d 107, 111 (2d 

Cir. 1998). 

21Establishing violations of Securities Act 

Section 17(a)(1) requires a showing of scienter. See, 

e.g., Aaron v. SEC, 446 U.S. 680, 701–02 (1980). 

Scienter is the ‘‘mental state embracing intent to 

deceive, manipulate or defraud.’’ Ernst & Ernst v. 

Hochfelder, 425 U.S. 185, 193 (1976). The Fifth 

Circuit Court of Appeals has held that scienter is 

established by a showing that the defendants acted 

intentionally or with severe recklessness. See Broad 

v. Rockwell International Corp., 642 F.2d 929 (5th 

Cir.) (en banc), cert. denied, 454 U.S. 965 (1981). 

22Actions pursuant to Securities Act Sections 

17(a)(2) and 17(a)(3) do not require a showing of 

scienter. See, e.g., Aaron, 446 U.S. at 701–02. In 

Aaron, the Supreme Court sought to determine 

whether scienter was required in a Commission 

injunctive proceeding pursuant to the antifraud 

provisions of Exchange Act Section 10(b) and 

Securities Act Section 17(a). The Court examined 

the language of both sections and determined that 

scienter was required under Section 10(b) because 

the words ‘‘manipulative,’’ ‘‘device,’’ and 

‘‘contrivance,’’ which are used in the statute, 

evidenced a Congressional intent to proscribe only 

knowing or intentional misconduct. Similarly, the 

Court concluded that subsection (1) of Section 17(a) 

required proof of scienter because Congress used 

such words as ‘‘device,’’ ‘‘scheme,’’ and ‘‘artifice to 

defraud.’’ Aaron, 446 U.S. at 696. In contrast, the 

Court concluded that the absence of such words 

under subsections (2) and (3) of Section 17(a) 

demonstrated that no scienter was required. Section 

17(a)(2) prohibits any person from obtaining money 

or property ‘‘by means of any untrue statement of 

a material fact or omission to state a material fact,’’ 

which the Court found to be ‘‘devoid of any 

suggestion whatsoever of a scienter requirement.’’ 

Aaron, 446 U.S. at 696. Similarly, the Court found, 

in construing Section 17(a)(3), under which it is 

unlawful for any person ‘‘to engage in any 

transaction, practice, or course of business which 

operates or would operate as a fraud or deceit,’’ that 

scienter was not required because it ‘‘quite plainly 

focuses upon the effect of particular conduct on 

members of the investing public, rather than upon 

the culpability of the person responsible.’’ Aaron, 

446 U.S. at 697. 

23See, e.g., Section 206(2) of the Advisers Act, 

which prohibits an investment adviser from 

engaging in ‘‘any transaction, practice or course of 

business which operates as a fraud or deceit upon 

any client or prospective client.’’ The Commission 

is not required to demonstrate that an adviser acted 

with scienter in order to prove a Section 206(2) 

violation. SEC v. Steadman, 967 F.2d 636, 643 (D.C. 

Cir. 1992) (citing SEC v. Capital Gains Research 

Bureau, Inc., 375 U.S. 180, 191–92 (1963)). 

explicitly reaches misconduct in 

connection with these ongoing 

payments or deliveries. In particular, 

proposed Rule 9j–1 would specify that 

it is unlawful for any person, directly or 

indirectly, in connection with the offer, 

purchase or sale of any security-based 

swap, the exercise of any right or 

performance of any obligation under a 

security-based swap, or the avoidance of 

such exercise or performance: (a) To 

employ any device, scheme, or artifice 

to defraud or manipulate; (b) to 

knowingly or recklessly make any 

untrue statement of a material fact, or to 

knowingly or recklessly omit to state a 

material fact necessary in order to make 

the statements made, in the light of the 

circumstances under which they were 

made, not misleading; (c) to obtain 

money or property by means of any 

untrue statement of a material fact or 

any omission to state a material fact 

necessary in order to make the 

statements made, in light of the 

circumstances under which they were 

made, not misleading; or (d) to engage 

in any act, practice, or course of 

business which operates or would 

operate as a fraud or deceit upon any 

person.18

The language in paragraph (a) of the 

proposed rule, which is based on Rule 

10b–5(a), differs from Rule 10b–5(a) in 

that it explicitly prohibits employing 

any device, scheme or artifice to defraud 

or manipulate. While the term 

‘‘manipulate’’ does not appear in the text 

of Rule 10b–5, Rule 10b–5 has been 

interpreted to reach manipulative 

activities. In light of that interpretation, 

we have added language to clarify that 

manipulation in connection with 

security-based swaps is unlawful. We 

do not anticipate or intend this 

clarification to represent a departure 

from the past interpretation or scope of 

Rule 10b–5(a). In addition, the language 

in paragraph (b) of the proposed rule, 

which is based on Rule 10b–5(b), differs 

from Rule 10b–5(b) in that it explicitly 

prohibits knowingly or recklessly 

making any untrue statement of a 

material fact, or knowingly or recklessly 

omitting to state a material fact 

necessary in order to make the 

statements made, in light of the 

circumstances under which they were 

made, not misleading. This is intended 

to make clear, consistent with Rule 10b– 

5 case law, that paragraph (b), in 

contrast to paragraph (c), would require 

scienter. We do not anticipate or intend 

this clarification to represent a 

departure from the past interpretation or 

scope of Rule 10b–5(b). 

The proposed rule would prohibit a 

person from engaging in fraudulent and 

deceptive schemes in order to increase 

or decrease the price or value of a 

security-based swap, or disseminating 

false or misleading statements that affect 

or otherwise manipulate the price or 

value of the reference underlying of a 

security-based swap for the purpose of 

benefiting such person’s position in the 

security-based swap. The proposed rule 

would also prevent, for example, 

disseminating false financial 

information or data in connection with 

the sale of a security-based swap or 

insider trading in a security-based 

swap.19

In addition, the proposed rule would 

explicitly prohibit misconduct that is in 

connection with the ‘‘exercise of any 

right or performance of any obligation 

under’’ a security-based swap. This 

would include, for example, misconduct 

that affects the market value of the 

security-based swap for purposes of 

posting collateral or making payments 

or deliveries under such security-based 

swap. Thus, the proposed rule would, 

among other things, prohibit fraudulent 

conduct (e.g., knowingly or recklessly 

making a false or misleading statement) 

in connection with a security-based 

swap that affects the value of such cash 

flow, payments, or deliveries, such as by 

triggering the obligation of a 

counterparty to make a large payment or 

to post additional collateral. It would 

also prohibit a person from taking 

fraudulent or manipulative action with 

respect to the reference underlying of 

the security-based swap that triggers the 

exercise of a right or performance of an 

obligation or affects the payments to be 

made. 

The proposed rule also would 

explicitly prohibit misconduct that 

avoids the exercise of rights or the 

performance of obligations under the 

security-based swap. Thus, it would 

prohibit a person from making false or 

misleading statements in order to avoid 

having to make a large payment, post 

additional collateral, or perform another 

obligation under the security-based 

swap. It would also prohibit a person 

from taking fraudulent or manipulative 

action with respect to the reference 

underlying of the security-based swap 

that avoids triggering the exercise of a 

right or performance of an obligation or 

affects the payments to be made. 

Paragraphs (a) and (b) of proposed 

Rule 9j–1 are modeled after Exchange 

Act Section 10(b) and Rule 10b–5,20 and 

Securities Act Section 17(a)(1),21 and 

therefore would require scienter. In 

contrast, paragraphs (c) and (d) of the 

proposed rule would not require 

scienter like Sections 17(a)(2) and (a)(3) 

of the Securities Act 22 and Section 

206(2) of the Investment Advisers Act of 

1940 (‘‘Advisers Act’’).23 These 

paragraphs are proposed to prevent 

conduct that operates as a fraud, 

manipulation, or deception. 

While both paragraphs (b) and (c) of 

the proposed rule would prohibit 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
68564 Federal Register / Vol. 75, No. 215 / Monday, November 8, 2010 / Proposed Rules 

24Consistent with Exchange Act Section 10(b), 

such misstatements and omissions must be material 

to be actionable. See, e.g., Basic v. Levinson, 485 

U.S. 224, 233 (1988). Statements and omissions are 

material if there is a substantial likelihood that a 

reasonable investor would consider the information 

important in making an investment decision. See id. 

at 231–32; TSC Indus., Inc. v. Northway, Inc., 426 

U.S. 438, 449 (1976). 

25See supra note 15 (defining ‘‘reference 

underlying’’ of a security-based swap to include, for 

example, any reference asset, reference security, 

reference entity, or reference obligation underlying 

a security-based swap). 

26See Superintendent of Insurance v. Bankers 

Life and Casualty Co., 404 U.S. 6, 12–13 (1971) (to 

satisfy the ‘‘in connection with’’ requirement, the 

fraud need only ‘‘touch’’ on the purchase or sale of 

a security). See also SEC v. Texas Gulf Sulphur Co., 

401 F.2d 833, 860 (2d Cir. 1968) (en banc) 

(concluding that ‘‘Congress when it used the phrase 

‘‘in connection with the purchase or sale of any 

security’’ intended only that the device employed, 

whatever it might be, be of a sort that would cause 

reasonable investors to rely thereon, and, in 

connection therewith, so relying, cause them to 

purchase or sell a corporation’s securities’’). 

27See text supra at notes 10–13. 

28The terms ‘‘directly and indirectly’’ are 

intended to describe the level of involvement 

necessary to establish liability under the proposed 

rule. See also id. 

29See supra note 4 (defining ‘‘security’’ under the 

Securities Act and Exchange Act to include 

‘‘security-based swaps’’). 

30See supra note 6. 

31See, e.g., Exchange Act Rules 10b–1 through 

10b–21; 17 CFR 240.10–1 through 240.10b–21. 

material misstatements and omissions,24

they would address different levels of 

culpability. Paragraph (b) would apply 

when there is evidence of scienter (e.g., 

when a party to a security-based swap 

knowingly or recklessly makes a false 

statement even though it may not 

receive any money or property as a 

result). In contrast, paragraph (c) would 

extend to conduct that is at least 

negligent (e.g., when a party to a 

security-based swap knows or 

reasonably should know that a 

statement was false or misleading and 

directly or indirectly obtains money or 

property from such statement). 

Because the proposed rule would 

apply to conduct ‘‘in connection with 

* * * a security-based swap’’ it would 

apply to fraud, manipulation, or 

deception involving the reference 

underlying 25 of such security-based 

swap to the extent that such misconduct 

is in connection with the offer, purchase 

or sale of any security-based swap, the 

exercise of any right or performance of 

any obligation under a security-based 

swap, or the avoidance of such exercise 

or performance (e.g., manipulative 

activity in the reference underlying that 

affects the price of the security-based 

swap, including misconduct in the 

reference underlying of a security-based 

swap that triggers, avoids, or affects the 

value of ongoing payments or other 

delivery obligations under such 

security-based swap).26 Depending on 

the facts and circumstances, misconduct 

involving a security that is also a 

reference underlying of any securitybased swap may not necessarily be ‘‘in 

connection with’’ the offer, purchase or 

sale of any security-based swap, the 

exercise of any right or performance of 

any obligation under a security-based 

swap, or the avoidance of such exercise 

or performance, and therefore a 

violation of Rule 9j–1. The Commission, 

in determining whether to bring an 

enforcement action under Rule 9j–1 for 

misconduct involving such a security, 

would consider the facts and 

circumstances associated with the 

misconduct, including, among other 

things, the extent to which the effect of 

the misconduct on one or more securitybased swaps is foreseeable to the party 

engaging in the misconduct or the 

purpose or the interest of that party. 

Consistent with Section 9(j) of the 

Exchange Act, the proposed rule would 

apply to ‘‘any person.’’ 27 In addition, the 

proposed rule would also apply to 

misconduct ‘‘directly or indirectly’’ 

engaged in by such person (i.e., whether 

the person engages in the misconduct 

alone or through others).28

The Commission preliminarily 

believes that Proposed Rule 9j–1 is 

reasonably designed to prevent fraud 

and manipulation in transactions in 

security-based swaps and inducements 

to purchase or sell security-based 

swaps. Because fraud and manipulation 

that affect the value of the payments or 

deliveries pursuant to a security-based 

swap are likely to distort the price and 

market for such security-based swaps, 

they can undermine investor confidence 

in the integrity of the market for 

security-based swaps, as well as the 

market for the reference underlying of 

such security-based swap. The proposed 

rule is intended to parallel the general 

antifraud provisions applicable to all 

securities, while also explicitly 

addressing the characteristics of cash 

flows, payments, deliveries, and other 

obligations and rights that are specific to 

security-based swaps. By targeting 

misconduct that is specific to the ways 

in which security-based swaps are 

structured and used, the proposed rule 

should help to prevent such fraudulent 

and manipulative conduct—without 

interfering with or otherwise unduly 

inhibiting legitimate market or business 

activity. 

While the proposed rule is modeled 

on existing securities laws prohibiting 

fraud, manipulation, and deception in 

connection with security-based swaps, 

it is not intended to limit or extend 

liability in connection with non-swap 

securities to ‘‘rights or obligations’’ that 

do not involve purchases or sales. In 

other words, the scope of the proposed 

rule is not intended to affect the 

application or interpretation of the other 

antifraud provisions under the federal 

securities laws. 

Finally, as noted above, the DoddFrank Act included security-based 

swaps in the definition of ‘‘security’’ 

under the Securities Act and the 

Exchange Act.29 Thus, once the relevant 

provisions of the Dodd-Frank Act take 

effect,30 persons effecting transactions 

in, or engaged in acts, practices, and 

courses of business involving securitybased swaps will be subject to the 

Commission’s rules and regulations that 

define and proscribe acts and practices 

involving securities that are deemed 

manipulative, deceptive, fraudulent, or 

otherwise unlawful for purposes of the 

general antifraud and anti-manipulation 

provisions of the federal securities laws, 

including Exchange Act Section 10(b), 

Rule 10b–5 (and the prohibitions against 

insider trading), and Securities Act 

Section 17(a).31

IV. Request for Comment 

The Commission seeks comment 

generally on all aspects of proposed 

Rule 9j–1. We encourage commenters to 

present data on our proposals and any 

suggested alternative approaches. 

In addition, we seek specific comment 

on the following: 

Does the reference in the proposed 

rule to ‘‘in connection with the offer, 

purchase or sale of a security-based 

swap, the exercise of any right or 

performance of any obligation under a 

security-based swap, or the avoidance of 

such exercise or performance’’ address 

the full scope of potentially fraudulent, 

manipulative, or deceptive conduct that 

pertains to security-based swaps? If not, 

how should the scope of these 

provisions be modified? Are there types 

of conduct not otherwise discussed 

above that should be addressed by the 

proposed rule? Commenters are invited 

to provide specific examples of such 

conduct. 

Please discuss how and to what extent 

the proposed rule may affect issuers, 

broker-dealers, security-based swap 

dealers, major security-based swap 

participants, and other swap market 

participants. Are there other alternatives 

or additional, or different, approaches 

that the Commission should consider as 

means reasonably designed to prevent 

‘‘such transactions, acts, practices, and 

courses of business as are fraudulent, 

deceptive, or manipulative’’? In 

addition, are there specific practices 

that the Commission should explicitly 


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32 44 U.S.C. 3501 et seq. 

33See Proposed Rule 9j–1. 

34See supra note 5. 

restrict or permit as part of the proposed 

rule? Comments are invited regarding 

any prophylactic rules that would 

further enhance the integrity of the 

security-based swap markets. 

Although much of the activity that 

would be prohibited by the proposed 

rule is already prohibited by the general 

antifraud and anti-manipulation 

provisions of the Federal securities laws 

(e.g., Exchange Act Section 10(b) and 

Rule 10b–5 thereunder, and Securities 

Act Section 17(a)), to what extent, if 

any, would the proposed rule affect the 

nature of the security-based swap 

market in general, including the extent 

or nature of information shared between 

market participants? If so, in what ways 

and to what degree? 

Are there any legitimate market 

activities that the proposed rule could 

have the effect of discouraging? 

Commenters are invited to provide 

specific examples of any such activities 

and any such potential effect. 

Are there any specific issues with 

respect to the application of the 

proposed rule to fraudulent, 

manipulative, or deceptive activity 

involving security-based swaps 

(including the reference underlying of 

such security-based swaps) that are or 

will be effected on or through securitybased swap execution facilities or 

national securities exchanges, or overthe-counter? Please explain. 

To what extent are transactions in 

security-based swaps used as a 

functional or economic substitute or 

equivalent transaction for transactions 

or practices that are otherwise 

prohibited by the antifraud and antimanipulation provisions of the 

Exchange Act? Should the proposed 

rule impose any restrictions on such 

transactions? Commenters are invited to 

provide specific examples. 

What, if any, costs or burdens would 

be imposed by the proposed rule? 

Would the proposed rule create any 

costs associated with changes to 

business operations or supervisory 

practices or systems? How much would 

the proposed rule affect compliance 

costs for issuers, broker-dealers, 

security-based swap dealers, major 

security-based swap participants, and 

other swap market participants (e.g., 

personnel or procedural changes)? We 

seek comment on the costs of 

compliance that may arise. 

V. General Request for Comment 

The Commission seeks comment 

generally on all aspects of proposed 

Rule 9j–1. Commenters are requested to 

provide empirical data or economic 

studies to support their views and 

arguments related to proposed rule. In 

addition to the questions above, 

commenters are welcome to offer their 

views on any other matter raised by the 

proposed rule. With respect to any 

comments, we note that they are of 

greatest assistance to our rulemaking 

initiative if accompanied by supporting 

data and analysis of the issues 

addressed in those comments and if 

accompanied by alternative suggestions 

to our proposal where appropriate. 

VI. Paperwork Reduction Act 

Proposed Rule 9j–1 does not contain 

a ‘‘collection of information’’ 

requirement within the meaning of the 

Paperwork Reduction Act of 1995.32 An 

agency may not conduct or sponsor, and 

a person is not required to respond to, 

a collection of information unless it 

displays a currently valid OMB control 

number. 

VII. Consideration of Costs and Benefits 

The Commission is considering the 

costs and benefits of proposed Rule 

9j–1. The Commission is sensitive to 

these costs and benefits, and encourages 

commenters to discuss any additional 

costs or benefits beyond those discussed 

here, as well as any reductions in costs. 

In particular, the Commission requests 

comment on the potential costs for any 

modification market participants’ 

business operations or supervisory 

practices or systems, as well as any 

potential benefits resulting from the 

proposed rule for issuers, investors, 

broker-dealers, security-based swap 

dealers, major security-based swap 

participants, persons associated with a 

security-based swap dealer or a major 

security-based swap participant, other 

security-based swap industry 

professionals, regulators, and other 

market participants. The Commission 

also seeks comments on the accuracy of 

any of the benefits identified and also 

welcomes comments on any of the costs 

identified here. Finally, the Commission 

encourages commenters to identify, 

discuss, analyze, and supply relevant 

data, information, or statistics regarding 

any such costs or benefits. 

A. Benefits 

Proposed Rule 9j–1 would specify 

that it is unlawful for any person, 

directly or indirectly, in connection 

with the offer, purchase or sale of any 

security-based swap, the exercise of any 

right or performance of any obligation 

under a security based swap, or the 

avoidance of such exercise or 

performance, to: (a) To employ any 

device, scheme, or artifice to defraud or 

manipulate; (b) to knowingly or 

recklessly make any untrue statement of 

a material fact, or to knowingly or 

recklessly omit to state a material fact 

necessary in order to make the 

statements made, in the light of the 

circumstances under which they were 

made, not misleading; (c) to obtain 

money or property by means of any 

untrue statement of a material fact or 

any omission to state a material fact 

necessary in order to make the 

statements made, in light of the 

circumstances under which they were 

made, not misleading; or (d) to engage 

in any act, practice, or course of 

business which operates or would 

operate as a fraud or deceit upon any 

person.33

Thus, proposed Rule 9j–1 would 

prohibit the same misconduct as 

Exchange Act Section 10(b) and Rule 

10b–5 thereunder, and Securities Act 

Section 17(a) 34 but would also 

explicitly reach misconduct that is in 

connection with the ‘‘exercise of any 

right or performance of any obligation 

under’’ a security-based swap. In other 

words, proposed Rule 9j–1 would apply 

to offers, purchases and sales of 

security-based swaps in the same way 

that the general antifraud provisions 

apply to all securities but would also 

explicitly apply to the cash flows, 

payments, deliveries, and other ongoing 

obligations and rights that are specific to 

security-based swaps. This would 

include, for example, misconduct that 

affects the market value of the securitybased swap for purposes of posting 

collateral or making payments or 

deliveries under a security-based swap. 

Thus, the proposed rule would, among 

other things, prohibit a person who is a 

party to a security-based swap from later 

engaging in fraudulent conduct (e.g., 

knowingly making a false or misleading 

statement) that affects the value of cash 

flow, payments, or deliveries, such as 

triggering the obligation of a 

counterparty to make a large payment or 

to post additional collateral. 

By prohibiting fraud, manipulation, 

and deception in connection with the 

exercise of any rights or performance of 

any obligations under a security-based 

swap, including actions taken to avoid 

the triggering of such exercise or 

performance, the proposed rule would 

help to prevent such misconduct from 

distorting the price and market for such 

security-based swap, as well as for the 

reference underlying, and improperly 

interfering with the independent and 

proper functioning of the markets. We 

therefore believe that the proposed rule 

would benefit market participants and 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
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35See supra note 15. 

36 15 U.S.C. 78c(f). 

37 15 U.S.C. 78w(a)(2). 

38See supra note 5. 

39See id. 

40See id. 

investors by promoting investor 

confidence in the integrity of the market 

for security-based swaps, as well as for 

the reference underlying 35 of such 

security-based swaps. 

The proposed rule should prevent 

fraud, manipulation, and deception 

from causing prices of security-based 

swaps to deviate from their fundamental 

values. This would allow the 

Commission to guard against 

misconduct that improperly interferes 

with the independent and proper 

functioning of the markets and help to 

promote price efficiency, the integrity of 

the price discovery process, and fair 

dealing between market participants in 

connection with security-based swaps. 

We solicit comment on any additional 

short-term and long-term benefits that 

could be realized with the proposed 

rule. Specifically, we solicit comment 

regarding benefits to the efficient 

operation of security-based swap 

markets, price efficiency, market 

integrity, and investor protection. 

B. Costs 

As an aid in evaluating costs and 

reductions in costs associated with 

proposed Rule 9j–1, the Commission 

requests the public’s views and any 

supporting information. 

By targeting misconduct that is 

specific to how security-based swaps are 

structured and used, the proposed rule 

is intended to be a measured and 

reasonable means to prevent fraudulent, 

deceptive, or manipulative acts or 

practices in connection with the 

exercise of any right or performance of 

any obligation under a security-based 

swap without interfering with or 

otherwise inhibiting legitimate market 

activity. 

Because proposed Rule 9j–1 is 

intended to parallel the general 

antifraud provisions already applicable 

to all securities, while also explicitly 

addressing the characteristics of cash 

flows, payments, deliveries, and other 

obligations and rights that are specific to 

security-based swaps, we do not believe 

that the proposed rule would impose 

any significant costs on persons 

effecting transactions or otherwise 

trading in security-based swaps. As 

noted above, the Commission seeks 

comment on whether the proposed rule 

could discourage certain legitimate 

market activities because of concern that 

such activities might be viewed as a 

violation of the rule. 

In addition, persons effecting 

transactions or otherwise trading in 

security-based swaps may incur costs 

associated with changes to business 

operations or supervisory practices or 

systems. However, we believe that, 

because most issuers, broker-dealers, 

security-based swap dealers, major 

security-based swap participants, and 

other swap market participants involved 

with security-based swaps are already 

subject to the general antifraud and antimanipulation provisions, much of these 

practices and systems would already be 

in place. Thus, we believe that any costs 

associated with the proposed rule for 

such changes (e.g., business or 

procedural changes) would be minimal. 

The Commission believes that the 

proposed rule would not compromise 

investor protection. We seek data, 

however, supporting any potential costs 

associated with the proposed rule. In 

addition, we request specific comment 

on any changes to business operations 

or supervisory practices or systems that 

might be necessary to implement the 

proposed rule. 

VIII. Consideration of Burden on 

Competition and Promotion of 

Efficiency, Competition and Capital 

Formation 

Section 3(f) of the Exchange Act 36

requires the Commission, whenever it 

engages in rulemaking and is required to 

consider or determine whether an action 

is necessary or appropriate in the public 

interest, to consider whether the action 

would promote efficiency, competition, 

and capital formation. In addition, 

Section 23(a)(2) of the Exchange Act 37

requires the Commission, when making 

rules under the Exchange Act, to 

consider the impact of such rules on 

competition. Section 23(a)(2) also 

prohibits the Commission from adopting 

any rule that would impose a burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act. 

Proposed Rule 9j–1 is intended to 

prevent fraud, manipulation, and 

deception in connection with the offer, 

purchase or sale of any security-based 

swap, the exercise of any right or 

performance of any obligation under a 

security-based swap, or the avoidance of 

such exercise or performance. Proposed 

Rule 9j–1 would prohibit the same 

misconduct as Exchange Act Section 

10(b) and Rule 10b–5 thereunder, and 

Securities Act Section 17(a) 38 but 

would also explicitly reach misconduct 

that is in connection with the ‘‘exercise 

of any right or performance of any 

obligation under’’ a security-based swap. 

In other words, proposed Rule 

9j–1 would apply to offers, purchases 

and sales of security-based swaps in the 

same way that the general antifraud 

provisions apply to all securities but 

would also explicitly apply to the cash 

flows, payments, deliveries, and other 

ongoing obligations and rights that are 

specific to security-based swaps. 

By targeting specific misconduct that 

is specific to how security-based swaps 

are structured and used, the proposed 

rule is intended to be a measured and 

reasonable means to prevent 

misconduct that is ‘‘in connection with 

the exercise of any right or performance 

of any obligation under’’ a securitybased swap without interfering with or 

otherwise unduly inhibiting legitimate 

market activity. Also, because the 

proposed rule would prohibit the same 

misconduct as Exchange Act Section 

10(b) and Rule 10b–5 thereunder, and 

Securities Act Section 17(a),39 except to 

explicitly reach misconduct that is ‘‘in 

connection with the exercise of any 

right or performance of any obligation 

under’’ a security-based swap, we 

believe that the proposed rule would 

not have an adverse effect on price 

efficiency. If the proposed rule mitigates 

fraudulent behavior, price efficiency 

should improve. 

By prohibiting fraud, manipulation, 

and deception in connection with 

security-based swaps (including the 

exercise of any right or performance of 

any obligation under a security-based 

swap or the avoidance thereof), the 

proposed rule would help to prevent 

such conduct from distorting the market 

and artificially increasing or decreasing 

prices for security-based swaps. Thus, 

we believe the proposed rule would 

help to ensure price accuracy and 

fairness for the parties, which are 

elements of efficiency. 

We also believe a rule highlighting the 

illegality of these activities would focus 

the attention of swap market 

participants on such activities and 

would reduce regulatory uncertainty for 

swap market participants and investors 

and would not impose significant costs 

on customers. We seek comment 

regarding whether proposed Rule 9j–1 

may have any adverse effects on 

liquidity, market operations, or risks or 

costs to customers. 

In addition, as discussed above, 

because the proposed rule would 

prohibit the same misconduct as 

Exchange Act Section 10(b) and Rule 

10b–5 thereunder, and Securities Act 

Section 17(a),40 except to explicitly 

reach misconduct that is ‘‘in connection 

with the exercise of any right or 

performance of any obligation (or the 


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Federal Register / Vol. 75, No. 215 / Monday, November 8, 2010 / Proposed Rules 68567 

41See id. 

42Public Law 104–121, Title II, 110 Stat. 857 

(1996) (codified in various sections of 5 U.S.C., 15 

U.S.C. and as a note to 5 U.S.C. 601). 

43 5 U.S.C. 601 et seq. 

44 5 U.S.C. 603(a). 

45 5 U.S.C. 551 et seq. 

46Although Section 601(b) of the RFA defines the 

term ‘‘small entity,’’ the statute permits agencies to 

formulate their own definitions. The Commission 

has adopted definitions for the term small entity for 

the purposes of Commission rulemaking in 

accordance with the RFA. Those definitions, as 

relevant to this proposed rulemaking, are set forth 

in Rule 0–10, 17 CFR 240.0–10. See Securities 

Exchange Act Release No. 18451 (January 28, 1982), 

47 FR 5215 (February 4, 1982) (File No. AS–305). 

47See 5 U.S.C. 605(b). 

48See 17 CFR 240.0–10(a). 

49See 17 CFR 240.17a–5(d). 

50See 17 CFR 240.0–10(c). 

51See 13 CFR 121.201 (Jan. 1, 2010). 

52See supra notes 11 and 12. 

avoidance of such exercise or 

performance) under’’ a security-based 

swap, we believe that the proposed rule 

would have minimal impact on the 

promotion of capital formation. 

Fraudulent and manipulative conduct 

in connection with security-based 

swaps can undermine the confidence of 

investors, not only in the market for the 

security-based swaps but also in the 

market for the reference underlying of 

such security-based swaps. For the same 

reasons, the proposed rule should 

promote capital formation by 

discouraging misconduct in connection 

with the performance of security-based 

swaps that could otherwise undermine 

investor confidence or the ability of 

investors to make investment decisions 

that are congruent to their investment 

objectives. 

Thus, we believe that the proposed 

rule would promote capital formation 

by helping to eliminate abuses in 

connection with security-based swaps. 

We seek specific comment and 

empirical data, if available, on the 

potential impact of the proposed rule on 

capital formation, including whether the 

proposed rule would promote or inhibit 

capital formation, and if so, how. 

In addition, the prohibitions of the 

proposed rule would apply uniformly to 

all persons (e.g., issuers, broker-dealers, 

security-based swap dealers, major 

security-based swap participants, and 

all other swap market participants and 

investors) effecting transactions or 

otherwise trading in security-based 

swaps and, therefore, should not impose 

a burden on competition. Also, the 

proposed rule would prohibit the same 

misconduct as Exchange Act 10(b) and 

Rule 10b–5 thereunder, and Securities 

Act Section 17(a),41 except to explicitly 

reach misconduct that is in connection 

with the exercise of any rights or 

performance of any obligations under a 

security–based swap and, therefore, the 

proposed rule should not impose a 

burden on competition. By applying 

uniformly to all persons and by 

discouraging swap market participants 

from engaging in unfair fraudulent, 

manipulative, and deceptive conduct in 

connection with security-based swaps, 

we preliminarily do not believe that the 

proposed rule will pose a burden on 

competition and would also promote 

competition. 

We request comment on whether the 

proposed rule would promote 

efficiency, competition, and capital 

formation or have an impact or burden 

on competition. Commenters are 

requested to provide empirical data and 

other factual support for their view to 

the extent possible. 

IX. Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996, or ‘‘SBREFA,’’ 42 the Commission 

must advise the OMB as to whether the 

proposed regulation constitutes a 

‘‘major’’ rule. Under SBREFA, a rule is 

considered ‘‘major’’ where, if adopted, it 

results or is likely to result in: (1) An 

annual effect on the economy of $100 

million or more (either in the form of an 

increase or a decrease); (2) a major 

increase in costs or prices for consumers 

or individual industries; or (3) 

significant adverse effect on 

competition, investment or innovation. 

If a rule is ‘‘major,’’ its effectiveness will 

generally be delayed for 60 days 

pending Congressional review. 

The Commission requests comment 

on the potential impact of proposed 

Rule 9j–1 on the economy on an annual 

basis, any potential increase in costs or 

prices for consumers or individual 

industries, and any potential effect on 

competition, investment or innovation. 

Commenters are requested to provide 

empirical data and other factual support 

for their view to the extent possible. 

X. Regulatory Flexibility Certification 

The Regulatory Flexibility Act 

(‘‘RFA’’) 43 requires Federal agencies, in 

promulgating rules, to consider the 

impact of those rules on small entities. 

Section 603(a) 44 of the Administrative 

Procedure Act,45 as amended by the 

RFA, generally requires the Commission 

to undertake a regulatory flexibility 

analysis of all proposed rules, or 

proposed rule amendments, to 

determine the impact of such 

rulemaking on ‘‘small entities.’’ 46

Section 605(b) of the RFA states that 

this requirement shall not apply to any 

proposed rule or proposed rule 

amendment, which if adopted, would 

not have a significant economic impact 

on a substantial number of small 

entities.47

For purposes of Commission 

rulemaking in connection with the RFA, 

a small entity includes: (i) When used 

with reference to an ‘‘issuer’’ or a 

‘‘person,’’ other than an investment 

company, an ‘‘issuer’’ or ‘‘person’’ that, 

on the last day of its most recent fiscal 

year, had total assets of $5 million or 

less,48 or (ii) a broker-dealer with total 

capital (net worth plus subordinated 

liabilities) of less than $500,000 on the 

date in the prior fiscal year as of which 

its audited financial statements were 

prepared pursuant to Rule 17a–5(d) 

under the Exchange Act,49 or, if not 

required to file such statements, a 

broker-dealer with total capital (net 

worth plus subordinated liabilities) of 

less than $500,000 on the last day of the 

preceding fiscal year (or in the time that 

it has been in business, if shorter); and 

is not affiliated with any person (other 

than a natural person) that is not a small 

business or small organization.50 Under 

the standards adopted by the Small 

Business Administration, small entities 

in the finance and insurance industry 

include the following: (i) For entities in 

credit intermediation and related 

activities, entities with $175 million or 

less in assets or, for non-depository 

credit intermediation and certain other 

activities, $7 million or less in annual 

receipts; (ii) for entities in financial 

investments and related activities, 

entities with $7 million or less in 

annual receipts; (iii) for insurance 

carriers and entities in related activities, 

entities with $7 million or less in 

annual receipts; and (iv) for funds, 

trusts, and other financial vehicles, 

entities with $7 million or less in 

annual receipts.51

Based on the Commission’s existing 

information about the security-based 

swap market, the Commission 

preliminarily believes that the securitybased swap market, while broad in 

scope, is largely dominated by entities 

such as those that would be covered by 

the ‘‘security-based swap dealer’’ and 

‘‘major security-based swap market 

participant’’ definitions.52 The 

Commission preliminarily believes that 

entities that will qualify as securitybased swap dealers and major securitybased swap market participants, 

whether registered broker-dealers or not, 

exceed the thresholds defining ‘‘small 

entities’’ set out above. Moreover, while 

it is possible that other parties may 

engage in security-based swap 

transactions, the Commission 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
68568 Federal Register / Vol. 75, No. 215 / Monday, November 8, 2010 / Proposed Rules 

53See 17 CFR 240.0–10(a). 

preliminarily does not believe that any 

such entities would be ‘‘small entities’’ 

as defined in Exchange Act Rule 0–10.53

Feedback from industry participants 

about the security-based swap markets 

indicates that only persons or entities 

with assets significantly in excess of $5 

million (or with annual receipts 

significantly in excess of $7 million) 

participate in the security-based swap 

market. Even to the extent that a 

handful of transactions did have a 

counterparty that was defined as a 

‘‘small entity’’ under the Commission 

Rule 0–10, we believe it is unlikely that 

proposed Rule 9j–1 would have a 

significant economic impact on such 

entity, as the rule prohibits fraudulent 

and manipulative acts, activities which 

are in most cases already prohibited. 

Finally, because the proposed rule 

applies to any person, the proposed rule 

applies equally to large and small 

entities and therefore would not have a 

disproportionate impact on small 

entities. Therefore, the Commission 

preliminarily does not believe that 

proposed Rule 9j–1 will have an impact 

on ‘‘small entities’’ in terms of the 

prohibitions included in the proposed 

rule. 

For the foregoing reasons, the 

Commission certifies that proposed Rule 

9j–1 would not have a significant 

economic impact on a substantial 

number of small entities for purposes of 

the RFA. The Commission encourages 

written comments regarding this 

certification. The Commission requests 

that commenters describe the nature of 

any impact on small entities and 

provide empirical data to support the 

extent of the impact. 

XI. Statutory Authority 

Pursuant to Exchange Act and, 

particularly, Sections 2, 3(b), 9(i), 9(j), 

10, 15, 15F, and 23(a) thereof, 15 U.S.C. 

78b, 78c(b), 78i(i), 78i(j), 78j, 78o, 78o– 

8, and 78w(a), the Commission is 

proposing a new antifraud rule, Rule 

9j–1, to address fraud, manipulation, 

and deception in connection with 

security-based swaps. 

List of Subjects in 17 CFR Part 240 

Brokers, Reporting and recordkeeping 

requirements, Securities. 

Text of the Proposed Rule 

For the reasons set forth in the 

preamble, Title 17, Chapter II of the 

Code of Federal Regulations is proposed 

to be amended as follows: 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

1. The authority citation for part 240 

is amended by adding an authority for 

§ 240.9j–1 to read as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78b, 78c, 78d, 78e, 78f, 78g, 78i, 

78j, 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 

78o–8, 78p, 78q, 78s, 78u–5, 78w, 78x, 78ll, 

78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– 

3, 80b–4, 80b–11, and 7201 et seq.; and 18 

U.S.C. 1350, unless otherwise noted. 

Section 240.9j–1 is also issued under sec. 

943, Pub. L. No. 111–203, 124 Stat. 1376. 

2. Add § 240.9j–1 to read as follows: 

§ 240.9j–1. Prohibition against fraud, 

manipulation, and deception in connection 

with security-based swaps. 

It shall be unlawful for any person, 

directly or indirectly, in connection 

with the offer, purchase or sale of any 

security-based swap, the exercise of any 

right or performance of any obligation 

under a security-based swap, or the 

avoidance of such exercise or 

performance, 

(a) To employ any device, scheme, or 

artifice to defraud or manipulate; 

(b) To knowingly or recklessly make 

any untrue statement of a material fact, 

or to knowingly or recklessly omit to 

state a material fact necessary in order 

to make the statements made, in the 

light of the circumstances under which 

they were made, not misleading; 

(c) To obtain money or property by 

means of any untrue statement of a 

material fact or any omission to state a 

material fact necessary in order to make 

the statements made, in light of the 

circumstances under which they were 

made, not misleading; or 

(d) To engage in any act, practice, or 

course of business which operates or 

would operate as a fraud or deceit upon 

any person. 

By the Commission. 

Dated: November 3, 2010. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–28136 Filed 11–5–10; 8:45 am] 

BILLING CODE 8011–01–P 

DEPARTMENT OF HOMELAND 

SECURITY 

United States Coast Guard 

33 CFR Part 167 

[USCG–2010–0833] 

Port Access Route Study: In the Bering 

Strait 

AGENCY: Coast Guard, DHS. 

ACTION: Notice of study; request for 

comments. 

SUMMARY: The Coast Guard (USCG) is 

conducting a Port Access Route Study 

(PARS) to evaluate: The continued 

applicability of and the need for 

modifications to current vessel routing 

measures; and the need for creation of 

new vessel routing measures in the 

Bering Strait. The goal of the study is to 

help reduce the risk of marine casualties 

and increase the efficiency of vessel 

traffic in the study area. The 

recommendations of the study may lead 

to future rulemaking action or 

appropriate international agreements. 

DATES: Comments and related material 

must either be submitted to our online 

docket via http://www.regulations.gov 

on or before May 9, 2011 or reach the 

Docket Management Facility by that 

date. 

ADDRESSES: You may submit comments 

identified by docket number USCG– 

2010–0833 using any one of the 

following methods: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. 

• Fax: 202–493–2251. 

• Mail: Docket Management Facility 

(M–30), U.S. Department of 

Transportation, West Building Ground 

Floor, Room W12–140, 1200 New Jersey 

Avenue, SE., Washington, DC 20590– 

0001. 

• Hand Delivery: Same as mail 

address above, between 9 a.m. and 

5 p.m., Monday through Friday, except 

Federal holidays. The telephone number 

is 202–366–9329. 

To avoid duplication, please use only 

one of these four methods. See the 

‘‘Public Participation and Request for 

Comments’’ portion of the 

SUPPLEMENTARY INFORMATION section 

below for instructions on submitting 

comments. 

FOR FURTHER INFORMATION CONTACT: If 

you have questions on this notice of 

study, call or e-mail Lieutenant Faith 

Reynolds, Project Officer, Seventeenth 

Coast Guard District, telephone 907– 

463–2270; e-mail 

Faith.A.Reynolds@uscg.mil; or George 

Detweiler, Office of Waterways 


emcdonald on DSK2BSOYB1PROD with PROPOSALS