Document ID: SEC-2018-0076-0001
Agency: sec
Document Type: Rule
Title: Treatment of Certain Communications Involving Security-Based Swaps That May Be Purchased Only By Eligible Contract Participants
Posted Date: 2018-01-16T05:00Z

[Federal Register Volume 83, Number 10 (Tuesday, January 16, 2018)]
[Rules and Regulations]
[Pages 2046-2056]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00347]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-10450; File No. S7-09-14]
RIN 3235-AL41

Treatment of Certain Communications Involving Security-Based 
Swaps That May Be Purchased Only by Eligible Contract Participants

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: We are adopting a rule under the Securities Act of 1933 
(``Securities Act'') to provide that certain communications involving 
security-based swaps will not be deemed to constitute ``offers'' of 
such security-based swaps for purposes of Section 5 of the Securities 
Act. The final rule covers the publication or distribution of price 
quotes that relate to security-based swaps that may be purchased only 
by persons who are eligible contract participants (``covered SBS'') and 
are traded or processed on or through certain trading platforms. The 
final rule also covers a broker, dealer, or security-based swap 
dealer's publication or distribution of written communications that 
discuss covered SBS and that meet the definition of ``research report'' 
in Rule 139(d) under the Securities Act and certain other conditions.

DATES: Effective January 16, 2018.

FOR FURTHER INFORMATION CONTACT: Andrew Schoeffler, Special Counsel, 
Office of Capital Markets Trends, Division of Corporation Finance, at 
(202) 551-3860, U.S. Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We are adopting Rule 135d under the 
Securities Act.\1\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 77a et seq.
---------------------------------------------------------------------------

I. Background and Summary

    On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (``Dodd-Frank Act'') \2\ into 
law. Title VII of the Dodd-Frank Act (``Title VII'') provides the 
Securities and Exchange Commission (``SEC'' or the ``Commission'') and 
the Commodity Futures Trading Commission (``CFTC'') with the authority 
to regulate over-the-counter derivatives. Under Title VII, the CFTC 
regulates ``swaps,'' the SEC regulates ``security-based swaps,'' and 
the CFTC and SEC jointly regulate ``mixed swaps.'' \3\
---------------------------------------------------------------------------

    \2\ Public Law 111-203, 124 Stat. 1376 (2010).
    \3\ The SEC and the CFTC, in consultation with the Board of 
Governors of the Federal Reserve System, jointly further defined the 
product and intermediary terms used in Title VII, including 
``swap,'' ``security-based swap,'' ``swap dealer,'' ``security-based 
swap dealer,'' ``major swap participant,'' ``major security-based 
swap participant,'' ``eligible contract participant,'' and 
``security-based swap agreement.'' See Further Definition of ``Swap 
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap 
Participant,'' ``Major Security-Based Swap Participant'' and 
``Eligible Contract Participant'', Release No. 34-66868 (Apr. 27, 
2012), 77 FR 30596 (May 23, 2012) (``Intermediary Definitions 
Adopting Release''), and Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping, Release No. 33-9338 
(Jul. 18, 2012), 77 FR 48208 (Aug. 13, 2012) (``Product Definitions 
Adopting Release'').
---------------------------------------------------------------------------

    Title VII amended the Securities Act and the Securities Exchange 
Act of 1934 (``Exchange Act'') \4\ to include ``security-based swaps'' 
in the definition of ``security.'' \5\ As a result, ``security-based 
swaps'' are subject to the Securities Act and the Exchange Act and the 
rules and regulations thereunder. Section 5 of the Securities Act 
requires that any offer or sale of a security must either be registered 
under the Securities Act or be made pursuant to an exemption from 
registration.\6\ As a result, counterparties

[[Page 2047]]

entering into security-based swap transactions need either to rely on 
an available exemption from the registration requirements of the 
Securities Act or register such transactions. Title VII also amended 
the Securities Act to prohibit offers and sales of security-based swaps 
to persons who are not ``eligible contract participants'' (``ECPs'') 
\7\ unless a registration statement is in effect as to the security-
based swaps.\8\
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78a et seq.
    \5\ See Sections 761(a)(2) and 768(a)(1) of the Dodd-Frank Act 
(amending Section 3(a)(10) of the Exchange Act [15 U.S.C. 
78c(a)(10)] and Section 2(a)(1) of the Securities Act [15 U.S.C. 
77b(a)(1)], respectively).
    \6\ See 15 U.S.C. 77e.
    \7\ The term ``eligible contract participant'' is defined in 
Section 1a(18) of the Commodity Exchange Act [7 U.S.C. 1a(18)]. The 
definition of the term ``eligible contract participant'' in the 
Securities Act refers to the definition of ``eligible contract 
participant'' in the Commodity Exchange Act. See Section 5(e) of the 
Securities Act [15 U.S.C. 77e(e)]. The SEC and the CFTC have adopted 
final rules further defining the term ``eligible contract 
participant.'' See Intermediary Definitions Adopting Release.
    \8\ See Section 768(b) of the Dodd-Frank Act (adding new Section 
5(d) of the Securities Act [15 U.S.C. 77e(d)]). Section 105(c)(1) of 
the Jumpstart Our Business Startups Act subsequently re-designated 
Section 5(d) of the Securities Act as Section 5(e). See Public Law 
112-106, 126 Stat. 306 (2012).
---------------------------------------------------------------------------

    Because security-based swaps are included in the definition of 
``security,'' the publication or distribution of certain communications 
involving security-based swaps on an unrestricted basis could be viewed 
as offers of those security-based swaps within the meaning of Section 
2(a)(3) of the Securities Act.\9\ Further, such communications also may 
be considered offers to non-ECPs, even though such persons are not 
permitted to purchase the security-based swaps unless, as noted above, 
a registration statement under the Securities Act is in effect as to 
such security-based swaps.\10\ If there are no Securities Act 
exemptions available with respect to a security-based swap transaction, 
the required registration of such transactions could negatively affect 
the security-based swaps market.
---------------------------------------------------------------------------

    \9\ See 15 U.S.C. 77b(a)(3).
    \10\ See footnote 8 above and accompanying text.
---------------------------------------------------------------------------

    On September 8, 2014, the Commission proposed a rule to address the 
treatment of certain communications involving covered SBS, in 
particular price quotes relating to covered SBS that are traded or 
processed on or through a facility either registered as a national 
securities exchange or as a security-based swap execution facility 
(``security-based SEF''), or exempt from registration as a security-
based SEF pursuant to a rule, regulation, or order of the Commission 
(``SBS price quotes'').\11\ Under the proposed rule, the publication or 
distribution of SBS price quotes would not be deemed to constitute an 
offer, an offer to sell, or a solicitation of an offer to buy or 
purchase the security-based swaps that are the subject of such 
communications or any guarantees of such security-based swaps for 
purposes of Section 5 of the Securities Act.\12\ The purpose of the 
proposed rule was to further the goal of Title VII to bring the trading 
of security-based swaps onto regulated trading platforms while avoiding 
unintended consequences arising from the application of the Securities 
Act to the dissemination of price quotes on such platforms.
---------------------------------------------------------------------------

    \11\ See Treatment of Certain Communications Involving Security-
Based Swaps That May Be Purchased Only By Eligible Contract 
Participants, Release No. 33-9643 (Sep. 8, 2014), 79 FR 54224 (Sep. 
11, 2014) (``Proposing Release'').
    \12\ See Proposing Release. Security-based swaps may be 
guaranteed to provide protection against a counterparty's default. A 
guarantee of a security is itself a security for purposes of the 
Securities Act. See Section 2(a)(1) of the Securities Act [15 U.S.C. 
77b(a)(1)]. As a result, the publication or distribution of SBS 
price quotes also may be viewed as offers of any guarantees of the 
security-based swaps that are the subject of the SBS price quotes. 
Because we believe that a guarantee of a security-based swap is part 
of the security-based swap transaction, the proposed rule also would 
deem the publication or distribution of SBS price quotes to not 
constitute an offer, an offer to sell, or a solicitation of an offer 
to buy or purchase any guarantees of the security-based swaps that 
are the subject of the SBS price quotes.
---------------------------------------------------------------------------

    The Proposing Release requested comment on all aspects of the 
proposed rule, including whether the proposed rule should cover other 
types of communications, such as communications characterized as 
research that discuss security-based swaps.\13\ We have reviewed and 
considered all of the comments that we received relating to the 
proposed rule. As described in detail below, we are adopting the rule 
substantially as proposed, with one substantive addition addressing 
written communications that discuss covered SBS and meet the definition 
of ``research report'' in Rule 139(d) under the Securities Act \14\ and 
certain other conditions (``SBS-related research reports''). The final 
rule provides that a broker, dealer, or security-based swap dealer's 
publication or distribution of SBS-related research reports will not be 
deemed to be an offer of the security-based swaps that are the subject 
of such communication or any guarantees of such security-based swaps 
for purposes of Section 5 of the Securities Act.
---------------------------------------------------------------------------

    \13\ See Proposing Release (79 FR at 54233 through 34). The 
Proposing Release discussed the types of communications covered and 
not covered by the proposed rule and included an extensive request 
for comment about communications characterized as research that 
discuss security-based swaps. See Proposing Release (79 FR at 54232 
through 34).
    \14\ Rule 139(d) defines a research report as ``a written 
communication, as defined in Rule 405, that includes information, 
opinions, or recommendations with respect to securities of an issuer 
or an analysis of a security or an issuer, whether or not it 
provides information reasonably sufficient upon which to base an 
investment decision.'' See 17 CFR 230.139(d).
---------------------------------------------------------------------------

    The final rule does not affect the treatment of research reports 
under existing Securities Act Rules 137, 138 and 139 (the ``Research 
Rules'').\15\ As a result, communications relating to offerings of 
securities underlying security-based swaps, including by operation of 
Section 2(a)(3) of the Securities Act,\16\ must be analyzed separately 
under the Research Rules. In that case, any discussion of a security-
based swap in a research report would be analyzed under the final rule, 
while any discussion of securities underlying such security-based swap 
(which could be in the same research reports discussing the security-
based swap) would be analyzed under the Research Rules.
---------------------------------------------------------------------------

    \15\ The Research Rules are safe harbors that describe the 
circumstances in which a broker or dealer may publish or distribute 
securities research around the time of a securities offering without 
violating Section 5 of the Securities Act. See 17 CFR 230.137, 17 
CFR 230.138 and 17 CFR 230.139. The Commission has not previously 
addressed the applicability of the Research Rules in the context of 
research discussing security-based swaps because most security-based 
swaps were not securities prior to the effective date of Title VII.
    \16\ See 15 U.S.C. 77b(a)(3). Section 2(a)(3) provides, among 
other things, that ``[a]ny offer or sale of a security-based swap by 
or on behalf of the issuer of the securities upon which such 
security-based swap is based or is referenced, an affiliate of the 
issuer, or an underwriter, shall constitute a contract for sale of, 
sale of, offer for sale, or offer to sell such securities.''
---------------------------------------------------------------------------

    While the provisions of Title VII relating to security-based SEFs 
have not yet been fully implemented,\17\ given that market participants 
currently are publishing and distributing SBS-related research reports, 
we believe that it is appropriate at this time to adopt the final rule. 
As one commenter noted,\18\ if

[[Page 2048]]

SBS-related research reports are published or distributed on an 
unrestricted basis, such communications may be viewed as an offer. As a 
result, they may affect the availability of Securities Act exemptions 
for transactions in the security-based swaps that may be discussed in 
the research reports.\19\ Such communications also may constitute an 
illegal offer to non-ECPs if there is no effective registration 
statement under the Securities Act because no Securities Act exemptions 
are available for offers and sales of security-based swaps to non-ECPs. 
In addition, potential uncertainty about the availability of Securities 
Act exemptions for transactions between ECPs may lead some market 
participants to not engage in security-based swap transactions or 
withhold or limit the publication or distribution of SBS-related 
research reports. This in turn could reduce the information available 
to investors and other market participants in the security-based swaps 
market, credit markets, and securities markets generally. We believe 
that the final rule is needed at this time to reduce this uncertainty.
---------------------------------------------------------------------------

    \17\ There are many types of platforms currently in operation on 
or through which security-based swap transactions are effected. See 
Proposing Release (79 FR at 54225) and pages 18 through 20 (79 FR at 
54228 through 29). While certain of these platforms may be required 
to register as security-based SEFs upon the full implementation of 
Title VII, they currently are not required to do so pursuant to 
exemptive relief adopted by the Commission. See Temporary Exemptions 
and Other Temporary Relief, Together with Information on Compliance 
Dates for New Provisions of the Securities Exchange Act of 1934 
Applicable to Securities-Based Swaps, Exchange Act Release No. 64678 
(Jun. 15, 2011), 76 FR 36287 (Jun. 22, 2011). The final rule covers 
the dissemination of price quotes relating to security-based swaps 
that are traded or processed on or through exempt security-based 
SEFs. As such, platforms currently operating pursuant to the 
Commission's exemptive relief could rely upon the final rule in the 
event that there is uncertainty about dissemination of price quotes 
affecting the availability of exemptions from the registration 
requirements of the Securities Act.
    \18\ See footnote 23 below and accompanying text.
    \19\ For example, the commenter noted that if such 
communications were deemed to be an offer, the exemption in Section 
4(a)(2) may not be available. Id.
---------------------------------------------------------------------------

    We are not extending the expiration date of the interim final 
exemptions or adopting one commenter's request for an exemption from 
the registration and other provisions of the Securities Act for 
security-based swap transactions between ECPs.\20\ We do not believe 
that either course would address the identified concern about the 
availability of existing Securities Act exemptions for transactions 
between ECPs. For example, neither course would address the concern 
that certain communications involving security-based swaps could be 
considered offers to non-ECPs. As noted above, such offers must be 
registered under the Securities Act because no exemptions from the 
registration requirements of the Securities Act are available for 
offers and sales of security-based swaps to non-ECPs.\21\ As such, 
neither course would remove uncertainty about whether certain 
communications involving security-based swaps would be deemed to be 
offers to non-ECPs and thereby require registration of the relevant 
security-based swaps under the Securities Act.
---------------------------------------------------------------------------

    \20\ See footnotes 41 and 44 below and accompanying text.
    \21\ See footnote 8 above and accompanying text.
---------------------------------------------------------------------------

II. Discussion of the Final Rule

A. Comments

    We received four comment letters, each of which supported the 
proposed rule.\22\ We discuss and respond to the comments received 
below.
---------------------------------------------------------------------------

    \22\ See letter from Chris Barnard, dated October 27, 2014; 
letter from Daniel E. Glatter, Deputy General Counsel, GFI Group 
Inc., dated November 10, 2014 (``GFI Letter''); letter from Bryan 
Levin, Greenspring Funding, dated October 16, 2014; and letter from 
Kyle Brandon, Managing Director, Securities Industry and Financial 
Markets Association, dated December 8, 2014 (``SIFMA Letter'').
---------------------------------------------------------------------------

1. Comments on the Applicability of the Proposed Rule to Research 
Reports
    One commenter argued that the proposed rule should be expanded to 
cover written communications involving ``research'' discussing 
security-based swaps.\23\ This commenter argued that such written 
communications are not meaningfully different from other types of 
securities research produced and distributed by broker-dealers and 
their affiliates in the ordinary course of business. The commenter 
noted that such written communications are produced and distributed by 
broker-dealers' or their affiliates' research departments and are 
subject to the same policies and procedures as other securities 
research.\24\ The commenter also noted that such written communications 
often are included within other published securities research, such as 
general credit research, and in such materials credit analysts 
frequently discuss security-based swaps in the context of more general 
analyses of credit markets, credit strategies, or credit worthiness of 
an issuer.\25\ Further, the commenter noted that such written 
communications included in other credit research or research reports 
may be published or distributed by broker-dealers or their affiliates 
through a variety of channels, which, depending on the particular firm, 
may include proprietary platforms as well as third-party research 
aggregators.\26\ Such written communications included in other credit 
research or research reports may be made accessible to existing 
clients, including clients that are not ECPs, and in some cases may be 
made accessible to the general public.\27\
---------------------------------------------------------------------------

    \23\ See SIFMA Letter.
    \24\ Id. See, e.g., Regulation Analyst Certification [17 CFR 
242.500 through 242.505] and FINRA Rules 2241 (Research Analysts and 
Research Reports) and 2242 (Debt Research Analysts and Debt Research 
Reports).
    \25\ See SIFMA Letter. Such research generally discusses 
security-based swaps in the following contexts: (i) Providing an 
investment recommendation as to a specific security-based swap by 
offering views on the security or a relative value analysis against 
another security; (ii) referring to security-based swaps in 
connection with an analysis of credit markets or proposed credit 
trading strategies; or (iii) discussing one or more security-based 
swaps in the context of covering other securities of the related 
issuer as an indicator of the overall creditworthiness of such 
issuer. Id.
    \26\ Id.
    \27\ Id.
---------------------------------------------------------------------------

    Because of the manner in which such written communications are 
disseminated, the commenter was concerned that the publication or 
distribution of such communications may be deemed to be an offer of the 
relevant security-based swaps, including to non-ECPs.\28\ According to 
the commenter, there could be no exemption available for such offer 
because of the possible dissemination to or accessibility by non-
ECPs.\29\ Further, the commenter noted that determining whether an 
exemption is available for each particular security-based swap 
transaction as a result of such written communications would be a time-
consuming and fact-intensive judgment call.\30\ The commenter noted 
that if no Securities Act exemptions are available for a security-based 
swap transaction because such written communications are viewed as an 
offer, market participants may withhold or limit the publication or 
distribution of such written communications.\31\
---------------------------------------------------------------------------

    \28\ Id.
    \29\ Id.
    \30\ Id.
    \31\ Id.
---------------------------------------------------------------------------

    The commenter described the possible effects of a limitation on the 
publication or distribution of such written communications on the 
security-based swaps market and securities markets generally. According 
to the commenter, such written communications inform market 
participants' investment decisions.\32\ For example, such written 
communications assist ECPs in determining the pricing of security-based 
swaps, such as credit default swaps, including with respect to the 
relative value of a given security-based swap in relation to other 
securities.\33\ In addition, the commenter indicated that such written 
communications also have informational value to securities markets 
generally, including to non-ECPs.\34\ Market participants, whether 
transacting in security-based swaps or not, may find such written 
communications useful in analyzing underlying issuers or securities 
because such communications provide views on

[[Page 2049]]

markets, sectors, and/or issuers.\35\ For example, credit default swaps 
can be an indicator of an issuer's creditworthiness.\36\ Further, the 
commenter noted that such written communications may be disseminated 
about swaps based on broad indices of securities or issuers (which are 
subject to a different regulatory regime).\37\ A different treatment of 
communications discussing security-based swaps (i.e., those swaps based 
on a single security, an issuer or a narrow-based security index) could 
result in incomplete information being available to the security-based 
swaps market and securities markets generally.\38\
---------------------------------------------------------------------------

    \32\ Id.
    \33\ Id.
    \34\ Id.
    \35\ Id.
    \36\ Id.
    \37\ Id.
    \38\ Id.
---------------------------------------------------------------------------

2. Comments on Other Matters
    As we noted in the Proposing Release,\39\ we previously adopted 
interim final rules to provide exemptions under the Securities Act, the 
Exchange Act, and the Trust Indenture Act of 1939 (``Trust Indenture 
Act'') \40\ for those security-based swaps that prior to the effective 
date of Title VII were ``security-based swap agreements'' and are 
defined as ``securities'' under the Securities Act and the Exchange Act 
due solely to the provisions of Title VII (collectively, the ``interim 
final exemptions'').\41\ We adopted the interim final exemptions 
because, among other things, we were concerned about disrupting the 
operation of the security-based swaps market while we evaluated the 
implications for security-based swaps under the Securities Act and the 
Exchange Act as a result of the inclusion of the term ``security-based 
swap'' in the definition of ``security.'' The interim final exemptions 
expire on February 11, 2018.\42\
---------------------------------------------------------------------------

    \39\ See Proposing Release (79 FR at 54226 and 54234).
    \40\ 15 U.S.C. 77aaa et seq.
    \41\ See Rule 240 under the Securities Act [17 CFR 230.240], 
Rules 12a-11 and Rule 12h-1(i) under the Exchange Act [17 CFR 
240.12a-11 and 17 CFR 240.12h-1], and Rule 4d-12 under the Trust 
Indenture Act [17 CFR 260.4d-12]. See also Exemptions for Security-
Based Swaps, Release No. 33-9231 (Jul. 1, 2011), 76 FR 40605 (Jul. 
11, 2011). The category of security-based swaps covered by the 
interim final exemptions involves those that would have been defined 
as ``security-based swap agreements'' prior to the enactment of 
Title VII. See Section 2A of the Securities Act [15 U.S.C. 77b(b)-
1)] and Section 3A of the Exchange Act [15 U.S.C. 78c-1], each as in 
effect prior to the Title VII effective date. For example, the vast 
majority of security-based swap transactions involve single-name 
credit default swaps, which would have been ``security-based swap 
agreements'' prior to the Title VII effective date. In contrast, the 
definition of ``security-based swap agreement'' did not include 
security-based swaps that are based on or reference only loans and 
indexes only of loans. The Division of Corporation Finance issued a 
no-action letter that addressed the availability of the interim 
final exemptions to offers and sales of security-based swaps that 
are based on or reference only loans or indexes only of loans. See 
Cleary Gottlieb Steen & Hamilton LLP (Jul. 15, 2011). As noted in 
the Proposing Release, this no-action letter will remain in effect 
for so long as the interim final exemptions remain in effect.
    \42\ See Exemptions for Security-Based Swaps, Release No. 33-
10305 (Feb. 10, 2017), 82 FR 10703 (Feb. 15, 2017).
---------------------------------------------------------------------------

    The Proposing Release requested comment as to whether the 
expiration date of the interim final exemptions should be altered, 
including possibly shortening or further extending the expiration 
date.\43\ The Commission did not receive any comments addressing 
whether we should alter the expiration date of the interim final 
exemptions, but we did receive one comment that addressed issues 
relating to the interim final exemptions.\44\ The commenter requested 
that we consider adopting an exemption from the registration and other 
provisions of the Securities Act, other than the anti-fraud provisions 
of Section 17(a), for security-based swap transactions between 
ECPs.\45\ The commenter argued that an exemption from the registration 
and other provisions of the Securities Act is needed to provide legal 
certainty as to whether security-based swap transactions effected on 
security-based SEFs are exempt from the registration requirements of 
the Securities Act.\46\ In particular, the commenter argued that 
certain activities engaged in by the operator of a security-based SEF 
may create uncertainty as to the availability of exemptions from 
Section 5 of the Securities Act for such transactions.\47\
---------------------------------------------------------------------------

    \43\ See Proposing Release (79 FR at 54234).
    \44\ See GFI Letter. The commenter submitted a previous comment 
letter requesting exemptions under the Securities Act, the Exchange 
Act, and the Trust Indenture Act for security-based swap 
transactions entered into between ECPs and effected through any 
trading platform similar to the exemptions we adopted for security-
based swap transactions involving an eligible clearing agency. See 
Proposing Release (79 FR at 54231 through 32).
    \45\ Id.
    \46\ Id.
    \47\ Id.
---------------------------------------------------------------------------

    We do not believe that the exemption suggested by the commenter 
would provide the legal certainty the commenter seeks. The operator of 
a security-based SEF will facilitate security-based swap transactions 
by providing the trading platform on or through which other parties 
will offer and sell security-based swaps to each other. The examples 
provided by the commenter primarily relate to activities typically 
conducted by brokers or dealers. Market participants regularly 
communicate with each other to facilitate and execute transactions, and 
the examples appear to be no different from the activities typically 
conducted by brokers or dealers in connection with other private 
offerings of securities effected on trading platforms. The commenter 
did not explain why such activities in the context of security-based 
swap transactions would affect the ability of market participants to 
rely upon existing Securities Act exemptions. In contrast, the rule we 
are adopting today addresses a unique feature of security-based swaps 
regulation--balancing the prohibition on offers and sales to non-ECPs 
with the need to disseminate information broadly to market 
participants, which may incidentally include non-ECPs. The final rule 
addresses the concern that certain communications involving SBS price 
quotes and SBS-related research reports could be viewed as offers to 
non-ECPs in violation of Section 5(e) of the Securities Act. The 
exemption suggested by the commenter would not address the concern that 
certain communications could be considered offers to non-ECPs or 
provide greater certainty in the security-based swaps market because it 
would not address this concern. As such, we believe that the final rule 
better addresses this concern.
    We are not persuaded that there is a need for an exemption from the 
registration and other provisions of the Securities Act for security-
based swap transactions between ECPs. As we finalize our regulation of 
security-based SEFs, we will remain mindful as to whether the 
regulation of particular communications presents barriers to the 
efficient operation of the security-based swaps market that are not 
necessary to protect investors. Further, we are taking no action as to 
the interim final exemptions, and our adoption of the final rule in 
this release will not affect the interim final exemptions. The interim 
final exemptions expire on February 11, 2018.\48\
---------------------------------------------------------------------------

    \48\ See footnote 42 above and accompanying text.
---------------------------------------------------------------------------

B. Final Rule

    We are adopting Rule 135d under the Securities Act substantially as 
proposed, with one substantive addition concerning SBS-related research 
reports. We believe that the final rule is necessary and appropriate so 
that the publication or distribution of SBS price quotes will not cause 
unintended consequences for the operation of security-based swap 
trading platforms following the full implementation of Title VII. We 
also believe that the final rule is necessary and appropriate so that

[[Page 2050]]

a broker, dealer, or security-based swap dealer's ability to publish or 
distribute SBS-related research reports will not be restricted in a 
manner that would limit the availability of information about security-
based swaps to investors and other market participants.
    We note that although the final rule provides that the publication 
or distribution of SBS price quotes and SBS-related research reports 
will not be deemed to be offers for purposes of Section 5 of the 
Securities Act, the final rule will not otherwise affect the provisions 
of any exemptions from the registration requirements of the Securities 
Act. As a result, market participants will still need to make a 
determination as to whether an exemption from the registration 
requirements of the Securities Act is available with respect to a 
security-based swap transaction, including whether such transaction 
complies with any applicable conditions of the exemption. We also note 
that the final rule applies to any communication of SBS price quotes or 
SBS-related research reports regardless of whether transactions in the 
relevant security-based swaps are effected bilaterally in the over-the-
counter market or on or through security-based swap trading platforms, 
or are subsequently cleared in transactions involving an eligible 
clearing agency.\49\
---------------------------------------------------------------------------

    \49\ For security-based swap transactions involving an eligible 
clearing agency, the exemptions we adopted under the Securities Act, 
the Exchange Act, and the Trust Indenture Act will continue to be 
available. See Rule 239 under the Securities Act [17 CFR 230.239], 
Rules 12a-10 and 12h-1(h) under the Exchange Act [17 CFR 240.12a-10 
and 240.12h-1(h)], and Rule 4d-11 under the Trust Indenture Act [17 
CFR 260.4d-11]. See also Exemptions for Security-Based Swaps Issued 
By Certain Clearing Agencies, Release No. 33-9308 (Mar. 30, 2012), 
77 FR 20536 (Apr. 5, 2012). These exemptions do not apply to 
security-based swap transactions not involving an eligible clearing 
agency, even if the security-based swaps subsequently are cleared in 
transactions involving an eligible clearing agency. Id.
---------------------------------------------------------------------------

1. SBS Price Quotes
    The final rule allows SBS price quotes to be published or 
distributed without such dissemination being considered an offer of the 
relevant security-based swaps or any guarantees thereof for purposes of 
Section 5 of the Securities Act.\50\ The scope of dissemination methods 
covered by the final rule is broad. The final rule applies to the 
initial publication or distribution of SBS price quotes on security-
based swap trading platforms. It also applies to any subsequent 
republication or redistribution of SBS price quotes on or through 
mediums other than security-based swap trading platforms, including on-
line information services, as it is possible that participants in 
security-based swap trading platforms that receive the SBS price quotes 
could further disseminate the SBS price quotes without restriction. We 
do not believe that the treatment of the SBS price quotes under the 
final rule should depend on who republishes or redistributes the SBS 
price quotes or where they are republished or redistributed, so long as 
only ECPs may purchase the relevant security-based swaps.
---------------------------------------------------------------------------

    \50\ The term ``security-based swap'' includes mixed swaps. The 
term ``mixed swap'' is defined in Section 3(a)(68)(D) of the 
Exchange Act [15 U.S.C. 78c(a)(68)(D)]. See Section IV of the 
Product Definitions Adopting Release.
---------------------------------------------------------------------------

    The final rule applies to SBS price quotes, which could take a 
number of forms depending on the type of trading platform model, 
including indicative quotes, executable quotes, bids and offers, and 
other pricing information and other types of quote information that may 
develop in the future. We are not defining the specific type of SBS 
price quotes with respect to which the final rule will apply because we 
do not want to limit the types of trading platform models that 
currently or may in the future exist.\51\ This approach is intended to 
allow flexibility in the final rule as organized markets for the 
trading of security-based swaps continue to develop.
---------------------------------------------------------------------------

    \51\ The Proposing Release discussed five examples of trading 
platforms that represent broadly the types of models for the trading 
of security-based swaps, including single-dealer request for quote 
platforms, aggregator-type platforms, multi-dealer request for quote 
platforms, limit order book systems, and electronic brokering 
platforms. See Proposing Release (79 FR at 545228 through 29). These 
examples may not represent every single trading method in existence 
today and the discussion was intended to give an overview of the 
models without providing the nuances of each particular model. 
Certain of these trading platforms may become security-based SEFs 
following the full implementation of Title VII.
---------------------------------------------------------------------------

    The final rule addresses price quotes relating to security-based 
swaps that are traded or processed on or through registered or exempt 
security-based SEFs and national securities exchanges because the Title 
VII provisions applicable to these entities, as well as existing 
requirements applicable to national securities exchanges, require them 
to make their trading platforms available or price quotes on their 
platforms available to all participants without limitation.
    We believe that the final rule with respect to SBS price quotes is 
necessary and appropriate in the public interest. One of the goals of 
Title VII is to bring the trading of security-based swaps onto 
regulated trading platforms, such as security-based SEFs and national 
securities exchanges, which should help advance the objective of 
greater transparency for the trading of security-based swaps. We 
believe that increased transparency in the security-based swaps market 
could help lower transaction costs associated with market participant 
risk mitigating strategies and thereby lower the cost of capital and 
facilitate the capital formation process. If the publication or 
distribution of SBS price quotes is unrestricted, no Securities Act 
exemptions may be available with respect to transactions in the 
relevant security-based swaps because such communications may be viewed 
as an offer of those security-based swaps, including to non-ECPs. 
Accordingly, we believe that the final rule is needed so that the 
publication or distribution of SBS price quotes will not cause 
unintended consequences for the operation of security-based swap 
trading platforms by affecting the ability of market participants to 
rely on available exemptions from the registration requirements of the 
Securities Act or requiring that such transactions be registered under 
the Securities Act because they are viewed as offers to non-ECPs.
    We also believe that the final rule with respect to SBS price 
quotes is consistent with the protection of investors. We believe that 
the final rule strikes an appropriate balance between providing more 
certainty to market participants while ensuring that the interests of 
non-ECPs are adequately protected. Security-based swaps that are not 
registered under the Securities Act are permitted to be sold only to 
ECPs, and therefore the final rule is limited to the publication or 
distribution of SBS price quotes that relate to security-based swaps 
that may be purchased only by ECPs. Treating the publication or 
distribution of SBS price quotes as not being offers of the relevant 
security-based swaps will not harm non-ECPs because they will not be 
able to purchase such security-based swaps. Further, security-based 
swap transactions entered into solely between ECPs will be subject to 
the comprehensive regulatory regime of Title VII once it has been fully 
implemented, including transaction reporting, trade acknowledgment and 
verification, and business conduct standards.\52\ In addition, the 
final rule

[[Page 2051]]

relates to the treatment of communications involving SBS price quotes 
as offers for purposes of Section 5 of the Securities Act and will 
preserve the other protections of the federal securities laws, 
including the Commission's ability to pursue an antifraud action in the 
offer and sale of the securities under Section 17(a) of the Securities 
Act.\53\
---------------------------------------------------------------------------

    \52\ See, e.g., Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, Release No. 34-74244 (Feb. 11, 
2015), 80 FR 14564 (Mar. 19, 2015), and Release No. 34-78321 (Jul. 
14, 2016), 81 FR 53545 (Aug. 12, 2016); Trade Acknowledgment and 
Verification of Security-Based Swap Transactions, Release No. 34-
78011 (Jun. 8, 2016), 81 FR 39807 (Jun. 17, 2016); and Business 
Conduct Standards for Security-Based Swap Dealers and Major 
Security-Based Swap Participants, Release No. 34-77617 (Apr. 14, 
2016), 81 FR 29959 (May 13, 2016) (``Business Conduct Standards 
Adopting Release''). The business conduct standards generally 
require, among other things, disclosure by security-based swap 
dealers and major security-based swap participants to counterparties 
of (i) the material risks and characteristics of the security-based 
swap, and certain clearing rights, (ii) the material incentives or 
conflicts of interest that a security-based swap dealer or major 
security-based swap participant may have in connection with the 
security-based swap, and (iii) the daily mark of the security-based 
swap (collectively, the ``Business Conduct Standards''). See 
Business Conduct Standards Adopting Release. The Business Conduct 
Standards also require that security-based swap dealers and major 
security-based swap participants verify that a counterparty meets 
the eligibility requirements of an ECP. See Business Conduct 
Standards Adopting Release.
    \53\ See 15 U.S.C. 77q(a).
---------------------------------------------------------------------------

    The final rule also will enable security-based swap dealers to 
publish or distribute SBS price quotes on an unrestricted basis without 
concern that such publication or distribution could jeopardize the 
availability of exemptions from the registration requirements of the 
Securities Act for transactions involving the relevant security-based 
swaps. Unrestricted access to SBS price quotes will improve market 
transparency by providing all investors with the same information on 
the pricing of security-based swap transactions.
    Therefore, we believe that the final rule with respect to SBS price 
quotes is necessary or appropriate in the public interest, and 
consistent with the protection of investors.
2. SBS-Related Research Reports
    We believe that written communications discussing security-based 
swaps that fall within the definition of ``research report'' in Rule 
139(d) under the Securities Act should be treated similarly to other 
research involving securities offered pursuant to exemptions from the 
registration requirements of the Securities Act and should not be 
considered to be an offer.\54\ We previously have noted the value of 
securities research in providing information to investors and the 
securities markets generally.\55\ We believe that failing to exclude 
such written communications from the definition of ``offer'' under the 
Securities Act could have an adverse effect on the information 
available to investors and other market participants in the security-
based swaps market, credit markets and securities markets generally. 
Further, we believe that written communications discussing security-
based swaps and security-based swap agreements should have consistent 
regulatory treatment.
---------------------------------------------------------------------------

    \54\ This approach is consistent with a commenter's views. See 
SIFMA Letter.
    \55\ See Securities Offering Reform, Release No. 33-8591 (Jul. 
19, 2005), 70 FR 44722 (Aug. 3, 2005) (``Securities Offering Reform 
Adopting Release'').
---------------------------------------------------------------------------

    The Research Rules generally apply in the context of registered 
offerings. They also apply in the context of two types of unregistered 
offerings: Rule 144A and Regulation S offerings.\56\ Under the Research 
Rules, research reports meeting certain conditions are not considered 
offers or general solicitation or general advertising in connection 
with offerings relying on Rule 144A and are not deemed to be directed 
selling efforts or to be inconsistent with the offshore transaction 
requirements of Regulation S. The Commission addressed these types of 
unregistered offerings in the Research Rules because it was concerned 
that the restrictions in Rule 144A and in Regulation S had resulted in 
brokers and dealers unnecessarily withholding regularly published 
securities research.\57\ Security-based swaps offerings typically are 
not transacted in registered offerings or in reliance on Rule 144A or 
Regulation S and, as a result, the Research Rules currently do not 
cover written communications discussing security-based swaps.
---------------------------------------------------------------------------

    \56\ See paragraphs (b) and (c), respectively, of Rules 138 and 
139 under the Securities Act [17 CFR 230.138(b), 17 CFR 230.138(c), 
17 CFR 230.139(b) and 17 CFR 230.139(c)].
    \57\ See Securities Offering Reform Adopting Release.
---------------------------------------------------------------------------

    The final rule imposes several conditions on the publication or 
distribution of such written communications. First, the written 
communications must discuss covered SBS.\58\ Second, the broker, 
dealer, or security-based swap dealer must publish or distribute 
research reports on the issuer underlying the security-based swap or 
its securities in the regular course of its business and the 
publication or distribution of the research report must not represent 
the initiation of publication of research reports about such issuer or 
its securities or the reinitiation of such publication following 
discontinuation of publication of such research reports. Third, the 
written communications must be a ``research report'' as defined in Rule 
139(d) under the Securities Act.\59\ The final rule clarifies that the 
term ``issuer'' as used in the definition of ``research report'' is (i) 
the issuer of a security or loan referenced in the security-based swap, 
(ii) each issuer or issuer of a security in a narrow-based security 
index referenced in the security-based swap, or (iii) each issuer 
referenced in the security-based swap (each, a ``Referenced Issuer''). 
This provision makes clear that the ``issuer'' referenced in the 
definition of ``research report'' for purposes of the final rule is the 
Referenced Issuer and not the counterparties to the security-based 
swap.\60\
---------------------------------------------------------------------------

    \58\ See footnote 50 above.
    \59\ See footnote 14 above. The definition of ``research 
report'' in Rule 138 under the Securities Act is the same as the 
definition of that term in Rule 139 under the Securities Act. See 17 
CFR 230.138.
    \60\ The security-based swaps market generally involves 
bilateral contracts privately negotiated between security-based swap 
dealers and sophisticated counterparties who must qualify as ECPs, 
with no secondary resale market. As a result of the bilateral nature 
of the security-based swap, each party could be viewed as the issuer 
of a security-based swap to the other party.
---------------------------------------------------------------------------

    The conditions to the final rule are similar to the conditions that 
apply to research reports covered by Rules 138 and 139 in the context 
of unregistered offerings transacted in reliance on Rule 144A or 
Regulation S.\61\ Rules 138 and 139 include other conditions that apply 
to communications used in unregistered offerings transacted in reliance 
on Rule 144A and Regulation S that limit the types of issuers whose 
securities may be the subject of the securities research that is 
covered by the Research Rules. However, in the context of security-
based swaps, a Referenced Issuer typically is not involved in the 
offering of the security-based swap.\62\ As such, we do not believe 
that it is necessary to limit the types of issuers that may be the 
subject of SBS-related research reports.
---------------------------------------------------------------------------

    \61\ See footnote 56 above.
    \62\ Footnotes 15 and 16 above and accompanying text address 
transactions where the issuer may be involved in the offering of the 
security-based swaps.
---------------------------------------------------------------------------

    We believe that the final rule with respect to SBS-related research 
reports is necessary and appropriate in the public interest. As noted 
above, absent the provisions of the final rule, unrestricted 
publication or distribution of SBS-related research reports may affect 
the availability of Securities Act exemptions from registration and may 
constitute making ``offers'' to non-ECPs. Accordingly, we believe that 
the final rule is necessary so that the publication or distribution of 
SBS-related research reports will not impede the continuous

[[Page 2052]]

flow of essential information into the security-based swaps market and 
security markets generally, affect the ability of market participants 
to rely on available exemptions from the registration requirements of 
the Securities Act, or require registration of the transactions under 
the Securities Act because they are viewed as offers to non-ECPs.
    We also believe that the final rule is consistent with the 
protection of investors. The availability of the final rule is 
conditioned on the satisfaction of certain requirements similar to the 
Research Rules. These requirements were included in the Research Rules 
to permit the dissemination of securities research around the time of 
an offering while avoiding offering abuses.\63\ We believe that these 
requirements, which were designed to ensure that appropriate investor 
protections are maintained, will be similarly effective in avoiding 
offering abuses in the security-based swaps context. Further, the final 
rule applies with respect to covered SBS. Excluding the publication or 
distribution of SBS-related research reports from the definition of 
``offer'' will not harm non-ECPs because they will not be able to 
purchase the relevant security-based swaps, as discussed above. 
Finally, the final rule has no effect on other provisions of the 
federal securities laws, including the application of the registration 
requirements of the Securities Act to transactions involving securities 
referenced in security-based swaps as well as the continued application 
of the antifraud provisions of the federal securities laws to 
transactions in security-based swaps or the securities referenced in 
such security-based swaps.
---------------------------------------------------------------------------

    \63\ See Securities Offering Reform Adopting Release.
---------------------------------------------------------------------------

    Therefore, we believe that the final rule with respect to SBS-
related research reports is necessary or appropriate in the public 
interest, and consistent with the protection of investors.

III. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.
    Section 553(d) of the Administrative Procedure Act generally 
requires an agency to publish an adopted rule in the Federal Register 
30 days before it becomes effective.\64\ This requirement does not 
apply, however, if the adopted rule is a ``substantive rule which 
grants or recognizes an exemption or relieves a restriction.'' \65\ We 
find that the final rule is a substantive rule which relieves a 
restriction. As explained above, under current law, there is 
uncertainty as to whether the publication or distribution of SBS price 
quotes or SBS-related research reports could be viewed as an ``offer'' 
of the relevant security-based swaps within the meaning of the 
Securities Act. If such communications are deemed to be an offer, the 
relevant security-based swaps consequently would not be able to be 
offered or sold absent an effective registration statement under the 
Securities Act. The final rule relieves this restriction and dispels 
market uncertainty by providing that the publication or distribution of 
SBS price quotes and SBS-related research reports will not be deemed 
offers of the relevant security-based swaps for purposes of Section 5 
of the Securities Act.
---------------------------------------------------------------------------

    \64\ See 5 U.S.C. 553(d).
    \65\ See 5 U.S.C. 553(d)(1).
---------------------------------------------------------------------------

IV. Economic Analysis

    We are sensitive to the economic consequences and effects, 
including costs and benefits, of our rules. The discussion below 
addresses the potential economic consequences and effects of the final 
rule and alternatives, including the costs and benefits, as well as the 
potential effects on efficiency, competition, and capital 
formation.\66\
---------------------------------------------------------------------------

    \66\ Section 2(b) of the Securities Act requires that the 
Commission, when engaging in rulemaking that requires it to consider 
whether an action is necessary or appropriate in the public 
interest, to also consider whether the action will promote 
efficiency, competition, and capital formation. 15 U.S.C. 77b(b). We 
have integrated our consideration of these issues into this economic 
analysis.
---------------------------------------------------------------------------

    The final rule does not itself establish the scope or nature of the 
substantive requirements for security-based swaps following the full 
implementation of Title VII or their related costs and benefits. The 
rules implementing the substantive requirements under Title VII will be 
subject to their own economic analysis. The costs and benefits 
described below therefore are those that may arise in connection with 
the final rule.

A. Baseline

    To assess the economic impact of the final rule, we are using as 
our baseline the regulation of security-based swaps as it exists at the 
time of this release, taking into account applicable rules adopted by 
the Commission, including the interim final exemptions affecting 
security-based swaps under the Securities Act and the Exchange Act.
    As part of the economic analysis in the Business Conduct Standards 
Adopting Release, we provided an extensive description of the security-
based swaps market, including a detailed analysis of the participants 
in the security-based swaps market and the levels of security-based 
swaps trading activity.\67\ The present release addresses a narrower 
aspect of the security-based swaps market, and we refer market 
participants to the more comprehensive discussion set forth in the 
Business Conduct Standards Adopting Release for additional context. In 
particular, we noted in the Business Conduct Standards Adopting Release 
that the single-name credit default swaps market--a significant part of 
the security-based swaps market generally--involves thousands of 
distinct counterparties but with a heavy concentration of transactions 
among a relatively small number of dealer entities.\68\ The notional 
size of the single-name credit default swaps market is in the trillions 
of dollars annually, corresponding to hundreds of thousands of 
individual transactions, and with approximately 80% of transactions 
between dealers.\69\ Among the non-dealer market participants, private 
funds are the largest constituent group, followed by Dodd-Frank Act-
defined special entities and investment companies registered under the 
Investment Company Act of 1940.\70\ More broadly, the analysis shows 
that although the dollar volume of transactions in the security-based 
swaps market is large, there are fewer market participants than for 
other securities markets.\71\
---------------------------------------------------------------------------

    \67\ See footnote 52 above.
    \68\ See Business Conduct Standards Adopting Release.
    \69\ Id.
    \70\ Id.
    \71\ Id.
---------------------------------------------------------------------------

    As noted above,\72\ we adopted the interim final exemptions to 
exempt offers and sales of security-based swap agreements that became 
security-based swaps on the effective date of Title VII from all 
provisions of the Securities Act, other than the Section 17(a) anti-
fraud provisions, as well as from the Exchange Act registration 
requirements and from the provisions of the Trust Indenture Act, 
provided that the transactions are entered into solely between ECPs. 
Currently, certain market participants may rely on the interim final 
exemptions to continue to enter into security-based swap transactions 
as they

[[Page 2053]]

did prior to the effective date of Title VII without concern they would 
have to comply with the provisions of the Securities Act.
---------------------------------------------------------------------------

    \72\ See footnote 41 above and accompanying text.
---------------------------------------------------------------------------

    The interim final exemptions are available, however, only for 
certain types of transactions involving security-based swaps. The 
security-based swaps covered by the interim final exemptions are only 
those that would have been ``security-based swap agreements'' prior to 
the effective date of Title VII, which is a narrower category of 
security-based swaps than under Title VII.\73\ In addition, the persons 
who may enter into security-based swaps covered by the interim final 
exemptions may be different from those entering into ``security-based 
swap agreements'' prior to the effective date of Title VII because the 
definition of ``eligible contract participant'' under Title VII is 
narrower than the pre-Title VII definition.\74\ Any security-based swap 
transaction that cannot rely on the interim final exemptions would have 
to rely on another available exemption from the registration 
requirements of the Securities Act, such as the exemption in Section 
4(a)(2),\75\ or would have to be registered under the Securities Act. 
However, no Securities Act exemptions are available with respect to 
security-based swap transactions involving non-ECPs because Title VII 
amended the Securities Act to require that all offers and sales of 
security-based swaps to non-ECPs must be registered under the 
Securities Act.\76\
---------------------------------------------------------------------------

    \73\ See Section 3(a)(68) of the Exchange Act for the definition 
of ``security-based swap.'' 15 U.S.C. 78c(a)(68). See footnote 41 
above regarding the definition of ``security-based swap agreement.''
    \74\ The amendments to the definition of ``eligible contract 
participant'' increased the dollar threshold for certain persons 
and, with respect to natural persons, replaced a ``total assets'' 
test with an ``amounts invested on a discretionary basis'' test. See 
Section 1a(12) of the Commodity Exchange Act [7 U.S.C. 1a(12)], as 
in effect prior to the effective date of Title VII, and Section 
1(a)(18) of the Commodity Exchange Act, as re-designated and amended 
by Section 721 of the Dodd-Frank Act. The definition of the term 
``eligible contract participant'' in the Securities Act and in the 
Exchange Act refers to the definition of ``eligible contract 
participant'' in the Commodity Exchange Act. See footnote 7 above.
    \75\ See 15 U.S.C. 77d(a)(2).
    \76\ See footnote 8 above and accompanying text.
---------------------------------------------------------------------------

    The interim final exemptions are self-executing and as such are 
available without any action by the Commission or its staff. As a 
result, market participants must make their own determinations as to 
whether such exemptions are available with respect to a particular 
security-based swap transaction. Given that such exemptions are self-
executing, we do not have any data or other quantifiable information 
regarding the use of such exemptions, including which market 
participants are effecting transactions in reliance on such exemptions 
or the number of transactions effected in reliance on such exemptions.
    If we do not take other action, the interim final exemptions will 
expire on February 11, 2018. Although the analysis below considers the 
economic consequences and effects of the final rule under the current 
baseline, which includes the interim final exemptions, we also consider 
the potential impact of the final rule without the interim final 
exemptions in our discussion of alternatives.

B. Analysis of the Final Rule

    Under the final rule, certain communications involving security-
based swaps are not considered ``offers'' for purposes of Section 5 of 
the Securities Act. However, unlike the interim final exemptions, the 
final rule is not itself an exemption from the registration 
requirements of the Securities Act. As a result, while the types of 
communications covered by the final rule are not considered offers, 
market participants engaging in any security-based swap transaction 
will have to either satisfy the conditions of existing exemptions under 
the Securities Act or register such transactions under the Securities 
Act.
    Security-based swaps are transacted through hundreds of thousands 
of individual transactions annually, but because the available 
registration exemptions are self-executing, we do not know what 
fraction of market participants that engage in these transactions 
currently rely on the interim final exemptions as opposed to other 
exemptions from registration under the Securities Act.\77\ For 
transactions involving security-based swaps that do not satisfy the 
conditions of the interim final exemptions, the final rule will assist 
market participants in evaluating how they should analyze certain 
communications that may affect their transactions. In particular, 
market participants will be able to assess the availability of 
exemptions from the registration requirements of the Securities Act 
without concern that certain communications will affect the 
availability of such exemptions.
---------------------------------------------------------------------------

    \77\ Given that these exemptions, including the exemption in 
Section 4(a)(2) of the Securities Act, are self-executing, we do not 
have any data or other quantifiable information regarding the number 
of market participants that may be effecting security-based swap 
transactions in reliance on these exemptions. However, we believe 
that a significant portion of market participants engaging in these 
transactions are eligible to rely on the interim final exemptions 
because the vast majority of security-based swap transactions 
involve single-name credit default swaps, which would have been 
``security-based swap agreements'' prior to the effective date of 
Title VII. See footnote 73 above and accompanying text.
---------------------------------------------------------------------------

    The final rule is self-executing in that the publication or 
distribution of SBS price quotes or SBS-related research reports is 
excluded from the definition of ``offer'' and thereby will not be 
deemed to be an offer to buy or purchase the security-based swaps that 
are the subject of the SBS price quotes or SBS-related research reports 
or any guarantees of such security-based swaps that are securities for 
purposes of Section 5 of the Securities Act without any action by the 
Commission or its staff. Because the final rule is self-executing, the 
only cost of being able to rely on the final rule is to determine its 
applicability. In addition, the final rule does not create any new 
filing, reporting, recordkeeping, or disclosure reporting requirements 
for any market participants.
    Excluding the types of communications covered by the final rule 
from the definition of ``offer'' will have minimal economic 
consequences or effects on the ability of market participants to enter 
into security-based swap transactions compared with the baseline.\78\ 
For example, as compared to the baseline, the final rule does not 
affect the ability of market participants to enter into security-based 
swap transactions in reliance on available exemptions under the 
Securities Act, such as the exemption in Section 4(a)(2). While the 
interim final exemptions have limited conditions,\79\ which differ from 
the conditions of the exemption under Section 4(a)(2) (including with 
respect to the communications that are the subject of the final rule), 
some security-based swap transactions engaged in after the effective 
date of Title VII may have been effected in reliance on Section 4(a)(2) 
rather than in reliance on the interim final exemptions. Further, the 
protections that currently exist under the interim final exemptions and 
under Section 4(a)(2) still apply. For example, the interim final 
exemptions do not limit or otherwise affect the antifraud

[[Page 2054]]

provisions of the federal securities laws, including Section 17(a) of 
the Securities Act.
---------------------------------------------------------------------------

    \78\ The baseline used in this analysis takes into account the 
interim final exemptions and the fact that Title VII has not been 
fully implemented. As noted above, unless further action is taken, 
the interim final exemptions will expire on February 11, 2018. In 
the discussion of alternatives below, we consider the economic 
consequences and effects of the final rule without the interim final 
exemptions.
    \79\ See footnote 41 above and accompanying text. In that regard 
we note, for example, that security-based swaps based on single 
loans would not be within the definition of ``security-based swap 
agreement'' in effect prior to the effective date of Title VII.
---------------------------------------------------------------------------

    The final rule does not impose new requirements on market 
participants. Further, because the final rule is available with respect 
to any security-based swap transaction involving an ECP, we do not 
believe that the final rule impairs competition between the different 
types of trading venues and methods that differ in the extent to which 
they make SBS price quotes available to the public and differ in their 
level of public SBS price quotes. Moreover, we believe that the final 
rule furthers the goal of Title VII to bring the trading of security-
based swaps onto regulated trading platforms, which should help advance 
the objective of greater transparency and a more competitive 
environment for the trading of security-based swaps. As a result, we 
believe that increased transparency and competitiveness in the 
security-based swaps market could help lower transaction costs 
associated with market participant hedging (risk mitigating) strategies 
and thereby lower the cost of capital and facilitate the capital 
formation process. We also note that investors and other users of SBS-
related research reports may benefit from the additional information 
provided by security-based swaps research included in research on other 
securities.
    We believe that the costs associated with the final rule are 
minimal. The final rule does not impose additional costs on market 
participants to determine ECP status.\80\ In addition, non-ECPs are not 
permitted to purchase any security-based swaps that are the subject of 
the SBS price quotes or SBS-related research reports within the scope 
of the final rule, and the Securities Act registration requirements 
continue to apply to security-based swap transactions involving such 
non-ECPs. As a result of these limitations, the exclusion of the SBS 
price quotes and SBS-related research reports from being deemed offers 
should not increase the potential for unlawful sales of security-based 
swaps to non-ECPs.
---------------------------------------------------------------------------

    \80\ The determination of whether a person is an ECP is part of 
the Business Conduct Standards, which require that security-based 
swap dealers and major security-based swap participants verify the 
ECP eligibility of their security-based swap counterparties. See 
footnote 52 above.
---------------------------------------------------------------------------

    We recognize that a consequence of the final rule is that the vast 
majority of offers and sales of security-based swap transactions that 
potentially could be implicated by the final rule are unlikely to be 
registered under the Securities Act (with the consequent unavailability 
of certain remedies). As a result, and as is the case under the interim 
final exemptions, there will not be an effective registration statement 
under the Securities Act covering the offer and sale of such security-
based swaps. A registration statement would provide certain information 
about the market participants, the security-based swap contract terms, 
and the identification of the particular reference securities, issuers, 
or loans underlying the security-based swaps. Further, while an 
investor will be able to pursue an antifraud action in connection with 
the purchase and sale of the securities in these security-based swap 
transactions under Section 10(b) of the Exchange Act, an investor will 
not be able to pursue civil remedies under Section 11 or 12(a)(2) of 
the Securities Act because the offer and sale of the securities in 
these security-based swap transactions will not be registered under the 
Securities Act. In addition, an investor may be limited in its ability 
to pursue civil remedies under Section 12(a)(1) of the Securities Act 
because the publication or distribution of quotes for security-based 
swaps will not be deemed to be an offer for purposes of Section 5 of 
the Securities Act. However, the Commission could still pursue an 
antifraud action in the offer and sale of the securities in these 
security-based swap transactions under Section 17(a) of the Securities 
Act.
    We note that the Business Conduct Standards require, among other 
things, that certain disclosures be made to certain ECPs.\81\ Such 
disclosures include (i) the material risks and characteristics of the 
security-based swap, and certain clearing rights, (ii) the material 
incentives or conflicts of interest that a security-based swap dealer 
or major security-based swap participant may have in connection with 
the security-based swap, and (iii) the daily mark of the security-based 
swap.\82\ While the information to be conveyed in the daily mark is not 
equivalent to that in a registration statement, we believe it could 
provide a counterparty with a useful and meaningful reference point 
against which to assess, among other things, the calculation of 
variation margin for a security-based swap or portfolio of security-
based swaps, and otherwise inform the counterparty's understanding of 
its financial relationship with the security-based swap dealer or major 
security-based swap participant.\83\ Moreover, because under the 
Business Conduct Standards security-based swap dealers and major 
security-based swap participants are required to provide the same 
valuation to all of their counterparties, and because counterparties 
could interact with multiple security-based swap dealers and major 
security-based swap participants, counterparties should have greater 
confidence of equal treatment as they now have the ability to observe 
when valuations differ among security-based swap dealers and major 
security-based swap participants.
---------------------------------------------------------------------------

    \81\ See footnote 52 above. The Commission has adopted rules to 
implement the Business Conduct Standards provisions of the Dodd-
Frank Act.
    \82\ Id.
    \83\ For instance, under the Business Conduct Standards, the 
required disclosure of the daily mark consists of, for a cleared 
security-based swap, providing counterparties with the daily end-of-
day settlement price received by the security-based swap dealer or 
major security-based swap participant from the appropriate clearing 
agency, and, for an uncleared security-based swap, the midpoint 
between the bid and offer prices for a particular security-based 
swap, or the calculated equivalent of the midpoint as of the close 
of business. Id.
---------------------------------------------------------------------------

    As noted above, to the extent that a security-based swap 
transaction does not meet the conditions of the interim final 
exemptions, the counterparties to such transaction likely are effecting 
the transaction in reliance on an available exemption from the 
registration requirements of the Securities Act. The final rule will 
benefit these counterparties because they will be able to assess the 
availability of an exemption from the registration requirements of the 
Securities Act without concern that the publication or distribution of 
SBS price quotes or SBS-related research reports for the security-based 
swap that is the subject of the transaction may compromise the 
availability of an exemption. The final rule also will benefit these 
counterparties by clarifying that the publication or distribution of 
SBS price quotes or SBS-related research reports does not constitute an 
offer of the security-based swaps that are the subject of such SBS 
price quotes or SBS-related research reports to non-ECPs. As noted 
above, no exemptions from the registration requirements of the 
Securities Act are available with respect to offers of security-based 
swaps to non-ECPs. As a result, without the final rule, these 
counterparties would be required to incur the costs associated with 
registration under the Securities Act.
    Unlike an equity or debt security, a security-based swap 
transaction could entail an ongoing financial commitment (i.e., 
economic exposure) between the dealer (or its affiliate) and the ECP 
client, whereby a client loss could result in a dealer gain of equal 
measure. The

[[Page 2055]]

dealer (or its affiliate) would, at least initially, take the opposite 
economic exposure as that of the client, who may be entering into the 
transaction based on information provided by the dealer's research or 
the research of its affiliate. In such instances, the research may not 
be considered independent.
    While the final rule's treatment of SBS-related research reports 
could facilitate these types of transactions, which have the potential 
for a conflict of interest, we note that such communications are 
permissible today under the interim final exemptions, and that the 
additional disclosures required by the Business Conduct Standards 
should make such potential conflicts transparent to ECPs. Further, the 
Business Conduct Standards require detailed descriptions of any 
material risks and other characteristics of a security-based swap, 
which may mitigate any bias introduced in the SBS-related research 
reports.
    It remains possible, however, that some market participants may use 
the provisions under the final rule to disseminate SBS-related research 
reports with the intent of making an offer or for solicitation 
purposes, particularly given the lower cost of disseminating these 
reports compared to registration statements. The potential for market 
participants to misuse the final rule in this manner should be 
mitigated by the fact that the final rule covers only communications 
made in connection with security-based swaps that may be sold only to 
ECPs and would not cover other security-based swaps that may be offered 
or sold to non-ECPs. Further, the final rule incorporates other 
safeguards similar to those in the Research Rules.\84\
---------------------------------------------------------------------------

    \84\ See footnote 61 above and accompanying text.
---------------------------------------------------------------------------

C. Alternatives Considered

    One alternative to the final rule that we considered was to take no 
action at this time to address issues arising under the Securities Act 
for certain communications involving security-based swaps. This 
alternative would affect all security-based swap transactions, 
including those currently relying on the interim final exemptions. At 
this time, all security-based swap transactions either must be 
registered under the Securities Act or rely on an available exemption 
from registration. If we take no action with respect to the treatment 
of communications involving security-based swaps, the publication or 
distribution of SBS price quotes or SBS-related research reports could 
be deemed to constitute an offer, an offer to sell, or a solicitation 
of an offer to buy or purchase security-based swaps. If considered 
offers, such communications could affect the availability of exemptions 
from the registration requirements of the Securities Act. If no 
Securities Act exemptions are available with respect to a security-
based swap transaction, such transactions would require registration.
    We believe that taking no action could disrupt and impose 
unnecessary costs on this segment of the security-based swaps market 
because it would perpetuate uncertainty as to whether certain 
communications involving SBS price quotes or SBS-related research 
reports will be deemed offers for purposes of Section 5 of the 
Securities Act. Without the final rule, the risk that these 
communications will be deemed offers might lead some market 
participants either not to engage in these security-based swap 
transactions, which could impede the market, or to register the offer 
and sale of the security-based swap transactions, which would likely 
increase costs for market participants. This risk also may lead some 
market participants to withhold or limit the publication or 
distribution of SBS-related research reports, which could reduce the 
amount and quality of the information available to investors and other 
market participants in the security-based swaps market, credit markets 
and securities markets generally.
    We believe that the final rule facilitates capital formation and 
promotes efficiency by lowering the costs of security-based swap 
transactions relative to what would be required without the final rule. 
Without the final rule and following the expiration of the interim 
final exemptions, we believe that the operation of the registration 
provisions of the Securities Act could have unintended consequences for 
the operation of security-based swap trading platforms and the ability 
of market participants to enter into these security-based swap 
transactions in reliance on available exemptions from the registration 
requirements of the Securities Act following the full implementation of 
Title VII. Following the expiration of the interim final exemptions, we 
anticipate that the final rule will facilitate a more efficient market 
place for these security-based swap transactions.
    Without the final rule, a market participant may choose not to 
continue to participate in these types of transactions if compliance 
with the registration requirements of the Securities Act is required. 
This would likely curtail the use of trading platforms and venues that 
make use of broad communications methods for the public dissemination 
of SBS price quotes. As noted above, one of the goals of Title VII is 
to bring the trading of security-based swaps onto regulated trading 
platforms. In the absence of applicable Securities Act exemptions for a 
security-based swap transaction because the dissemination of price 
quotes for security-based swaps could be viewed as offers of those 
security-based swaps, the costs of the required registration of such 
transactions under the Securities Act could limit the incentive for 
market participants to engage in security-based swap transactions on 
regulated trading platforms. In response to the lack of an available 
exemption from registration, some market participants may also seek to 
restructure their operations to minimize their transactions in, or 
contact with, the United States in an effort to avoid having to 
register these transactions under the Securities Act. If market 
participants were to determine not to engage in security-based swap 
transactions due to the lack of an available exemption from 
registration, or to restructure their operations and thus avoid U.S. 
exposure because of the lack of such an exemption, such actions could 
affect the number of price quotes for, and the liquidity of, certain 
types of security-based swaps, which could have a detrimental effect on 
the ability of U.S. market participants to obtain credit exposure or 
hedge risk, and could have a more general adverse impact on the 
liquidity and price discovery of security-based swap transactions. This 
effect would be inconsistent with the tenet of increased transparency 
that is central to the legislative intent of Title VII.
    If market participants continue to engage in security-based swap 
transactions without the final rule and register these transactions 
under the Securities Act, they would incur increased compliance costs 
associated with such registration. Additionally, there is unlikely to 
be a commensurate benefit to registration given that the investors 
typically in greater need of the investor protections provided by 
registration are likely not ECPs, and those investors are not eligible 
to purchase any security-based swaps that are the subject of the 
communications within the scope of the final rule.
    While the use of a shelf registration statement may be available to 
some participants and would lessen the costs of registration compared 
to the costs for participants who were not able to use a shelf 
registration statement, there would be costs whether or not a shelf

[[Page 2056]]

registration statement is available.\85\ Given the eligibility criteria 
for using a shelf registration statement, the use of a shelf 
registration statement is likely to be available to a majority of 
market participants. However, to the extent that there is a decrease in 
the dissemination of certain communications related to security-based 
swaps in the absence of the final rule, such a decline may be 
concentrated among market participants who cannot lower their costs by 
using a shelf registration statement.
---------------------------------------------------------------------------

    \85\ Certain market participants could reduce the registration 
burden by using the Form S-3 registration statement for their 
securities offerings. We previously have estimated that 50 or fewer 
entities ultimately may have to register with us as security-based 
swap dealers. See Business Conduct Standards Adopting Release. These 
entities (or their affiliates) are likely to be seasoned or well-
known seasoned issuers that are eligible to use the Form S-3 
registration statement for their securities offerings. In 
particular, these entities (or their affiliates) are likely to have 
a Form S-3 shelf registration statement that is effective under the 
Securities Act. A shelf registration statement covers the offer and 
sale of securities that are not necessarily to be sold in a single 
offering immediately upon effectiveness; instead, the securities are 
typically sold in a number of ``takedowns'' over a period of time or 
on a continuous basis. A shelf registration statement allows issuers 
to conduct multiple types and amounts of securities offerings using 
the same registration statement. If these entities (or their 
affiliates) are required to register the offer and sale of the 
securities in security-based swap transactions, they would likely 
use their shelf registration statements for the offerings. For 
takedowns off their shelf registration statements, an entity (or its 
affiliate) would file a prospectus supplement under the Securities 
Act that contains the specific terms of the offering. As a result of 
the shelf registration procedure, these entities (including their 
affiliates) would incur lower costs relating to the takedown for 
each security-based swap transaction than they would otherwise incur 
if they had to use a non-shelf registration statement for the 
security-based swap transactions. While the use of a shelf 
registration statement would reduce the registration burden for 
qualifying market participants, it may not be available to all 
market participants.
---------------------------------------------------------------------------

    Another alternative to the final rule would be to deem only SBS 
price quotes as not constituting offers for purposes of Section 5 of 
the Securities Act. To the extent SBS-related research reports are 
deemed to be offers for purposes of Section 5, dealers or their 
affiliates may not include information about security-based swaps in 
research reports, which may otherwise be useful to some investors. 
However, inclusion of this information may create conflicts of interest 
problems unique to the security-based swaps market, as discussed above.

V. Paperwork Reduction Act

    The final rule does not impose any new ``collections of 
information'' within the meaning of the Paperwork Reduction Act of 1995 
(``PRA''),\86\ nor does it create any new filing, reporting, 
recordkeeping, or disclosure reporting requirements. Accordingly, we 
are not submitting the final rule to the Office of Management and 
Budget for review in accordance with the PRA.\87\
---------------------------------------------------------------------------

    \86\ 44 U.S.C. 3501 et seq.
    \87\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

VI. Regulatory Flexibility Act Certification

    Under Section 605(b) of the Regulatory Flexibility Act,\88\ we 
certified that proposed Rule 135d under the Securities Act would not 
have a significant economic impact on a substantial number of small 
entities. This certification, including our basis for the 
certification, was included in Part VII of the Proposing Release. We 
solicited comments on the potential impact of the proposed rule on 
small entities but received none. We are adopting this rule as proposed 
with one substantive addition concerning SBS-related research reports. 
We do not believe that this substantive addition alters the basis upon 
which the certification in the Proposing Release was made. Accordingly, 
we certify that Rule 135d under the Securities Act will not have a 
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \88\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

VII. Statutory Authority

    The rule described in this release is being adopted under the 
authority set forth in Sections 5, 19, and 28 of the Securities Act.

List of Subjects in 17 CFR Part 230

    Reporting and recordkeeping requirements, Securities.

    For the reasons set out above, we are amending title 17, chapter II 
of the Code of Federal Regulations as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The authority citation for part 230 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *

0
2. Section 230.135d is added to read as follows:

Sec.  230.135d  Communications involving security-based swaps.

    (a) For the purposes only of Section 5 of the Act (15 U.S.C. 77e), 
the publication or distribution of quotes relating to security-based 
swaps that may be purchased only by persons who are eligible contract 
participants (as defined in Section 1a(18) of the Commodity Exchange 
Act (7 U.S.C. 1a(18))) and are traded or processed on or through a 
trading system or platform that either is registered as a national 
securities exchange under Section 6(a) of the Securities Exchange Act 
of 1934 (15 U.S.C. 78f(a)) or as a security-based swap execution 
facility under Section 3D(a) of the Securities Exchange Act of 1934 (15 
U.S.C. 78c-4(a)), or is exempt from registration as a security-based 
swap execution facility under Section 3D(a) of the Securities Exchange 
Act of 1934 pursuant to a rule, regulation, or order of the Commission 
shall not be deemed to constitute an offer, an offer to sell, or a 
solicitation of an offer to buy or purchase any security-based swap or 
any guarantee of such security-based swap that is a security; and
    (b) For the purposes only of Section 5 of the Act (15 U.S.C. 77e), 
a broker, dealer, or security-based swap dealer's publication or 
distribution of a research report (as defined in Sec.  230.139(d)) that 
discusses security-based swaps that may be purchased only by persons 
who are eligible contract participants (as defined in Section 1a(18) of 
the Commodity Exchange Act (7 U.S.C. 1a(18))) shall not be deemed to 
constitute an offer, an offer to sell, or a solicitation of an offer to 
buy or purchase any security-based swap or any guarantee of such 
security-based swap that is a security, provided that the broker, 
dealer, or security-based swap dealer publishes or distributes research 
reports on the issuer underlying the security-based swap or its 
securities in the regular course of its business and the publication or 
distribution of the research report does not represent the initiation 
of publication of research reports about such issuer or its securities 
or the reinitiation of such publication following discontinuation of 
publication of such research reports. For purposes of this section, the 
term issuer as used in the definition of ``research report'' means the 
issuer of any security or loan referenced in the security-based swap, 
each issuer of a security in a narrow-based security index referenced 
in the security-based swap, or each issuer referenced in the security-
based swap.

    By the Commission.

    Dated: January 5, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-00347 Filed 1-12-18; 8:45 am]
 BILLING CODE 8011-01-P