Document ID: SEC-2019-0045-0001
Agency: sec
Document Type: Notice
Title: Limited Exemptions for Security-Based Swap Transactions
Posted Date: 2019-01-31T05:00Z

[Federal Register Volume 84, Number 21 (Thursday, January 31, 2019)]
[Notices]
[Pages 863-867]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-00505]

[[Page 863]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84991; File No. S7-27-11]

Order Granting a Limited Exemption From the Exchange Act 
Definition of ``Penny Stock'' for Security-Based Swap Transactions 
Between Eligible Contract Participants; Granting a Limited Exemption 
From the Exchange Act Definition of ``Municipal Securities'' for 
Security-Based Swaps; and Extending Certain Temporary Exemptions Under 
the Exchange Act in Connection With the Revision of the Definition of 
``Security'' To Encompass Security-Based Swaps

January 25, 2019.

I. Introduction

    The Securities and Exchange Commission (``Commission'' or ``SEC'') 
is granting a limited exemption under Securities Exchange Act of 1934 
(``Exchange Act'') from the definition of ``penny stock'' in Section 
3a(51) and Rule 3a51-1 for transactions in security-based swaps between 
eligible contract participants (``ECPs''); \1\ granting a limited 
exemption from the definition of ``municipal securities'' for security-
based swaps; and extending until February 5, 2020, certain temporary 
exemptive relief originally provided by the Commission in connection 
with the revision of the definition of ``security'' in the Exchange Act 
to encompass security-based swaps.\2\
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    \1\ The term ``eligible contract participant'' or ``ECP'' is 
defined in Section 1a(18) of the Commodity Exchange Act (``CEA'') [7 
U.S.C. 1a(18)]. The definition of the term ``eligible contract 
participant'' in the Exchange Act refers to the definition of 
``eligible contract participant'' in the CEA. See Section 3(a)(65) 
of the Exchange Act. The SEC and the Commodity Futures Trading 
Commission have adopted final rules further defining the term 
``eligible contract participant.'' See Further Definition of ``Swap 
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap 
Participant,'' ``Major Security-Based Swap Participant'' and 
``Eligible Contract Participant,'' Exchange Act Release No. 66868 
(Apr. 27, 2012), 77 FR 30596 (May 23, 2012).
    \2\ See Order Granting Temporary Exemptions under the Securities 
Exchange Act of 1934 in Connection with the Pending Revisions of the 
Definition of ``Security'' to Encompass Security-Based Swaps, 
Exchange Act Release No. 64795 (July 1, 2011), 76 FR 39927 (July 7, 
2011) (``2011 Exchange Act Exemptive Order''); See also Further 
Definition of ``Swap,'' ``Security-Based Swap,'' and ``Security-
Based Swap Agreement''; Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping, Exchange Act Release No. 67453 (July 18, 2012), 77 FR 
48207 (Aug. 13, 2012) (``Product Definitions Adopting Release'') 
(extending the expiration date of the Temporary Exemptions to 
February 11, 2013); Order Extending Temporary Exemptions under the 
Securities Exchange Act of 1934 in Connection with the Revision of 
the Definition of ``Security'' to Encompass Security-Based Swaps, 
and Request for Comment, Exchange Act Release No. 68864 (Feb. 7, 
2013), 78 FR 10218 (Feb. 13, 2013) (extending the expiration date to 
February 11, 2014); Order Extending Temporary Exemptions under the 
Securities Exchange Act of 1934 in Connection with the Revision of 
the Definition of ``Security'' to Encompass Security-Based Swaps, 
and Request for Comment, Exchange Act Release No. 71485 (Feb. 5, 
2014), 79 FR 7731 (Feb. 10, 2014) (``2014 Extension Order'') 
(extending the expiration date for certain Temporary Exemptions to 
February 5, 2017).; Order Extending Until February 5, 2019 Certain 
Temporary Exemptions under the Securities Exchange Act of 1934 in 
Connection with the Pending Revision of the Definition of 
``Security'' to Encompass Security-Based Swaps and Request for 
Comment, Exchange Act Release No. 82626 (Feb. 2, 2018), 83 FR 5665 
(Feb. 18, 2018) (``2018 Extension Order'').
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II. Discussion

A. Background

    Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act \3\ amended the definition of ``security'' under the 
Exchange Act to expressly encompass security-based swaps.\4\ The 
expansion of the definition of the term ``security'' to include 
security-based swaps had the effect of changing the scope of the 
Exchange Act regulatory provisions that apply to security-based swaps 
and, in doing so, raised certain complex questions that required 
further consideration.
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    \3\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010) (``Dodd-Frank Act'').
    \4\ See Section 761(a)(2) of the Dodd-Frank Act (amending 
Section 3(a)(10) of the Exchange Act (15 U.S.C. 78c(a)(10)). The 
provisions of Title VII generally became effective on July 16, 2011 
(360 days after the enactment of the Dodd-Frank Act) (the 
``Effective Date''), unless a provision required a rulemaking, in 
which case the provision would go into effect ``not less than'' 60 
days after publication of the related final rules in the Federal 
Register or on July 16, 2011, whichever is later. See Section 774 of 
the Dodd-Frank Act (15 U.S.C. 77b).
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    In July 2011, the Commission issued an order (the ``2011 Exchange 
Act Exemptive Order''), which granted temporary exemptive relief from 
compliance with certain provisions of the Exchange Act in connection 
with security-based swap activity by: (i) Any person who meets the 
definition of ``eligible contract participant'' set forth in Section 
1a(12) of the Commodity Exchange Act as of July 20, 2010 (i.e., the day 
prior to the date the Dodd-Frank Act was signed into law) and (ii) a 
broker or dealer registered under Section 15(b) of the Exchange Act.\5\
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    \5\ See 2011 Exchange Act Exemptive Order, 76 FR at 39938-39. 
The 2011 Exchange Act Exemptive Order did not provide exemptive 
relief for any provisions or rules prohibiting fraud, manipulation, 
or insider trading (other than the prophylactic reporting or 
recordkeeping requirements such as the confirmation requirements of 
Exchange Act Rule 10b-10). In addition, the 2011 Exchange Act 
Exemptive Order did not affect the Commission's investigative, 
enforcement, and procedural authority related to those provisions 
and rules. See 2011 Exchange Act Exemptive Order at 39931, n. 34. 
The 2011 Exchange Act Exemptive Order also did not address Sections 
12, 13, 14, 15(d), 16, and 17A of the Exchange Act and the rules 
thereunder.
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    The overall approach of the 2011 Exchange Act Exemptive Order was 
directed toward maintaining the status quo during the implementation 
process for the Dodd-Frank Act.\6\ In the 2011 Exchange Act Exemptive 
Order, the Commission stated that it would accomplish this ``by 
preserving the application of particular Exchange Act requirements that 
already are applicable in connection with instruments that will be 
`security-based swaps' following the Effective Date [of the Dodd-Frank 
Act], but deferring the applicability of additional Exchange Act 
requirements in connection with those instruments explicitly being 
defined as `securities' as of the Effective Date.'' \7\
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    \6\ See id., at 39929.
    \7\ Id. Under the 2011 Exchange Act Exemptive Order, instruments 
that (before the Effective Date) were security-based swap agreements 
and (after the Effective Date) constituted security-based swaps were 
still subject to the application of those Exchange Act provisions. 
See 2011 Exchange Act Exemptive Order, 76 FR at 39930, nn. 24-25.
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    In 2014, the Commission extended the expiration dates for the 
temporary exemptions in the 2011 Exchange Act Exemptive Order.\8\ In 
the 2014 Extension Order, the Commission distinguished between: (i) The 
temporary exemptions related to pending security-based swap rulemakings 
(``Linked Temporary Exemptions''); and (ii) the temporary exemptions 
that generally were not directly related to a specific security-based 
swap rulemaking (``Unlinked Temporary Exemptions'').\9\ The expiration 
dates for the Linked Temporary Exemptions established by the 2014 
Extension Order were the compliance dates for the specific rulemakings 
to which they were ``linked,'' and the expiration date for the Unlinked 
Temporary Exemptions was three years following the effective date of 
the 2014 Extension Order (i.e., February 5, 2017), or such time that 
the Commission issues an order or rule determining whether continuing 
exemptive relief is appropriate for security-based swaps with respect 
to any such Unlinked Temporary Exemptions. This approach was designed 
to provide the Commission with flexibility while its Dodd-Frank Act 
rulemaking is still in progress to determine whether continuing relief 
should be provided for any of the Unlinked Temporary Exemptions.\10\
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    \8\ See 2014 Extension Order.
    \9\ See id., at 7732.
    \10\ See id., at 7731. The 2014 Extension Order referred to the 
temporary exemptions provided for in the 2011 Exchange Act Exemptive 
Order as the ``Expiring Temporary Exemptions'' and noted that the 
2011 Exchange Act Exemptive Order generally provided for the 
following exemptions from the Exchange Act: ``(a) temporary 
exemptions in connection with security-based swap activity by 
certain `eligible contract participants'; and (b) temporary 
exemptions specific to security-based swap activities by registered 
brokers and dealers.''
    The 2014 Extension Order identified the Linked Temporary 
Exemptions as those Expiring Temporary Exemptions related to: (1) 
Capital and margin requirements applicable to a broker or dealer 
(Sections 7 and 15(c)(3), Regulation T, and Exchange Act Rules 15c3-
1, 15c3-3, and 15c3-4); (2) recordkeeping requirements applicable to 
a broker or dealer (Sections 17(a) and 17(b) and Exchange Act Rules 
17a-3, 17a-4, 17a-5, 17a-11, and 17a-13); (3) registration 
requirements under Section 15(a)(1), and the other requirements of 
the Exchange Act and the rules and regulations thereunder that apply 
to a ``broker'' or ``dealer'' that is not registered with the 
Commission; (4) Exchange Act Rule 10b-10; and (5) Regulation ATS. 
The remaining Expiring Temporary Exemptions are the Unlinked 
Temporary Exemptions.
    As applicable, the Commission extended the Linked Temporary 
Exemptions until the compliance date for pending rulemakings 
concerning: Capital, margin, and segregation requirements for 
security-based swap dealers and major security-based swap 
participants; recordkeeping and reporting requirements for broker-
dealers, security-based swap dealers, and major security-based swap 
participants; security-based swap trade acknowledgements; and 
registration requirements for security-based swap execution 
facilities. The Linked Temporary Exemptions are not addressed in 
this order and have been, or will be, separately considered in 
connection with the related security-based swap rulemakings. See, 
e.g., Trade Acknowledgement and Verification of Security-Based Swap 
Transactions, Exchange Act Release No. 78011 (June 8, 2016), 81 FR 
39807, 39824-25, n. 189 (June 17, 2016).

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[[Page 864]]

2018 Extension Order
    In the 2018 Extension Order, the Commission extended the expiration 
date of the Unlinked Temporary Exemptions until February 5, 2019.\11\ 
In the 2018 Extension Order, the Commission also requested comment on 
whether continuing exemptive relief is necessary beyond February 5, 
2019.\12\ The Commission received four letters from two different 
commenters in response.\13\
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    \11\ See 2018 Extension Order. See also Order Extending Certain 
Temporary Exemptions under the Securities Exchange Act of 1934 in 
Connection with the Revision of the Definition of ``Security'' to 
Encompass Security-Based Swaps and Request for Comment, Exchange Act 
Release No. 79833 (Jan. 18, 2017), 82 FR 8467 (Jan. 25, 2017) 
(``2017 Extension Order''). The 2017 Extension Order, which had 
extended the expiration date of the Unlinked Temporary Exemptions 
until February 5, 2018, received two comments, both of which had 
expressed support for extending the exemptive relief, with one 
reiterating its prior request that the Commission provide permanent 
exemptive and other relief to security-based swap market 
participants from the Exchange Act and the Securities Act. See 
comment from Layla Spencer, dated Jan. 30, 2017; and letters from 
Kyle Brandon, Managing Director, SIFMA, dated Feb. 2, 2017 (``SIFMA 
Letter I'') and Jan. 11, 2018 (``SIFMA Letter II'') (requesting that 
the Commission further extend the exemptive relief for the Unlinked 
Temporary Exemptions). For details regarding SIFMA's earlier request 
for permanent exemptive and other relief, see Draft SIFMA SBS 
Exemptive Relief Request (Oct. 20, 2011), which is available at 
https://www.sec.gov/comments/s7-27-11/s72711-7.pdf, and SIFMA SBS 
Exemptive Relief Request (Dec. 5, 2011), which is available at 
https://www.sec.gov/comments/s7-27-11/s72711-10.pdf.
    \12\ Comments received are available at https://www.sec.gov/comments/s7-27-11/s72711.shtml. The Commission did not receive any 
comments in response to the request for comment in the 2014 
Extension Order. However, in 2012, the Commission received a request 
from market participants to extend certain of the Temporary 
Exemptions, citing concerns that key issues and questions regarding 
the application of the federal securities laws remained unresolved 
and continuing concerns about the potential for unnecessary 
disruption to the security-based swap market. See SIFMA Request for 
Extension of the Expiration Date of the SEC's Exchange Act Exemptive 
Order and SBS Interim final Rules (Dec. 20, 2012), which is 
available at http://www.sec.gov/comments/s7-27-11/s72711-12.pdf.
    \13\ See letter from Kyle Brandon, Managing Director, SIFMA, 
dated Nov. 8, 2018 (``SIFMA Letter III'') (requesting that the 
Commission further extend the exemptive relief for the Unlinked 
Temporary Exemptions, which are currently set to expire on Feb. 5, 
2019, and also requesting certain permanent exemptive and other 
relief). See also supplemental letter from Kyle Brandon, Managing 
Director, SIFMA, dated Dec. 20, 2018 (``SIFMA Letter IV'') 
(supplementing November 2018 submission with additional detail and 
recommending a transition period before expiration of any Unlinked 
Temporary Exemptions). See also letters from Walt L. Lukken, 
President and Chief Executive Officer, Futures Industry Association, 
dated Nov. 18 and Nov. 29, 2018 (the ``FIA Letters'') (each 
expressing support for codifying the exemptions for SBS from 
inapplicable securities rules).
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B. Temporary Exemptions

    The Commission has proposed substantially all of the rules 
governing security-based swap market participants and transactions 
required by Title VII of the Dodd-Frank Act and has finalized a 
majority of these rulemakings.\14\ However, the Commission is still in 
the process of finalizing some remaining rules under Title VII of the 
Dodd-Frank Act.\15\
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    \14\ See, e.g., Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, Exchange Act Release No. 74244 
(Feb. 11, 2015), 80 FR 14563 (Mar. 19, 2015); Security-Based Swap 
Data Repository Registration, Duties, and Core Principles, Exchange 
Act Release No. 74246 (Feb. 11, 2015), 80 FR 14437 (Mar. 19, 2015); 
Registration Process for Security-Based Swap Dealers and Major 
Security-Based Swap Participants, Exchange Act Release No. 75611 
(Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015); Regulation SBSR--
Reporting and Dissemination of Security-Based Swap Information, 
Exchange Act Release No. 78321 (July 14, 2016), 81 FR 53545 (Aug. 
12, 2016); Applications by Security-Based Swap Dealers or Major 
Security-Based Swap Participants for Statutorily Disqualified 
Associated Person To Effect or Be Involved in Effecting Security-
Based Swaps, Exchange Act Release No. 84858 (Dec. 19, 2018).
    \15\ See, e.g., Registration and Regulation of Security-Based 
Swap Execution Facilities, Exchange Act Release No. 63825 (Feb. 2, 
2011), 76 FR 10948 (Feb. 28, 2011); Capital, Margin, and Segregation 
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers, 
Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 70213 (Nov. 
23, 2012); Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and 
Broker-Dealers; Capital Rule for Certain Security-Based Swap 
Dealers; Proposed Rules, Exchange Act Release No. 71958 (Apr. 17, 
2014), 79 FR 25194 (May 2, 2014); Risk Mitigation Techniques for 
Uncleared Security-Based Swaps, Exchange Act Release No. 84861 (Dec. 
19, 2018).
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    As described above, since initially granting temporary exemptive 
relief for the Unlinked Temporary Exemptions, the Commission has 
extended the temporary exemptive relief four times. Each time, the 
Commission requested comment on why continuing the exemptive relief was 
necessary. In 2018, the Commission requested that ``any request should 
be detailed as to the circumstances in which the Exchange Act provision 
or rule applies to security-based swaps or security-based swap market 
participants, and why relief [would be] necessary.'' \16\ Detailed 
comments could provide the Commission with information useful to 
evaluate whether an exemption is necessary or appropriate in the public 
interest, and consistent with the protection of investors, as required 
by Section 36.\17\
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    \16\ See 2018 Extension Order, at 8469.
    \17\ See Exchange Act Section 36 [15 U.S.C. 78mm]. Section 36 of 
the Exchange Act authorizes the Commission to conditionally or 
unconditionally exempt, by rule, regulation, or order any person, 
security, or transaction (or any class or classes of persons, 
securities, or transactions) from any provision of the Exchange Act 
or any rule or regulation.
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    Following its issuance of the 2018 Extension Order, the Commission 
received four letters from two different commenters that were 
responsive to the request for comment in the 2018 Extension Order. Two 
of the letters from one commenter identified specific provisions for 
which permanent relief was sought.\18\ In particular, in SIFMA Letter 
III and SIFMA Letter IV, SIFMA requests (1) that two of the exemptions 
it describes as implicated by the Unlinked Temporary Exemptions 
(exemptions from the definition of ``penny stock'' and from Section 31 
fees for security-based swaps) be extended on a permanent basis; and 
(2) guidance regarding municipal and government securities. In SIFMA 
Letter III, SIFMA also requests that the Commission provide an 
additional extension period before the expiration of the remaining 
Unlinked Temporary Exemptions in order to allow for an orderly 
transition. In SIFMA Letter IV, SIFMA clarifies that request for an 
additional extension period and requests that the Commission extend the 
Unlinked Temporary Exemptions for an additional twelve months. The FIA

[[Page 865]]

Letters express support for SIFMA Letter III and for extending the 
temporary exemptive relief for the Unlinked Temporary Exemptions beyond 
February 5, 2019.\19\
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    \18\ See SIFMA Letters III and IV, supra note 13.
    \19\ See FIA Letters, supra note 13.
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    In SIFMA Letter III and SIFMA Letter IV, SIFMA requests additional 
relief not discussed in this Order.\20\ In particular, SIFMA requests 
relief in relation to the (i) regulation of security-based swap 
execution facilities, (ii) broker-dealer registration, (iii) Exchange 
Act Rule 10b-10, (iv) margin, (v) hypothecation, (vi) disclosure 
requirements relating to extensions of credit, (vii) requirements 
relating to personnel of SBS Entities, (viii) research requirements, 
(ix) municipal advisor regulation, (x) securities activities of OTC 
Derivatives Dealers, (xi) Exchange Member SRO Membership, and (xii) 
Audit Committees and Compensation Committees.\21\ Some of these 
requests relate to Linked Temporary Exemptions rather than Unlinked 
Temporary Exemptions, and, as noted above, the Commission has 
considered or will consider those requests in connection with the 
related security-based swap rulemakings. In addition, the Commission 
believes that all of the additional requests would benefit from further 
consideration. The Commission invites market participants or other 
interested parties to provide any information that may be relevant to 
the Commission's consideration of these requests for relief, or to the 
scope of the order more generally.
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    \20\ See SIFMA Letter III and SIFMA Letter IV, supra note 13.
    \21\ See SIFMA Letter III, supra note 13.
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C. Penny Stocks

    In SIFMA Letter III, SIFMA requests an exemption from the 
definition of ``penny stock'' in Exchange Act Section 3(a)(51) and 
Exchange Act Rule 3a51-1 for security-based swap transactions between 
ECPs. SIFMA notes that it may not always be clear that a security-based 
swap is not a ``penny stock'' because the price of the security-based 
swap in dollar terms may not always be clear, and requests that the 
Commission provide certainty with respect to transactions between 
ECPs.\22\ In SIFMA Letter IV, SIFMA also adds that it is not clear 
which security-based swaps constitute equity securities or whether, in 
classifying security-based swaps as penny stocks, market participants 
should evaluate the security-based swap itself or its underlier.\23\ 
SIFMA also argues that the requirements applicable to penny stocks 
under Rules 15g-1 through 15g-9 are designed to apply to cash market 
securities transactions, not over-the-counter security-based swaps.\24\ 
Moreover, according to SIFMA, security-based swaps will be subject to 
enhanced security-based swap specific disclosure and sales practice 
requirements as part of the Commission's business conduct standards for 
security-based dealers and major security-based swap participants, 
making the penny stock regulation duplicative.\25\
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    \22\ See SIFMA Letter III, supra note 13.
    \23\ See SIFMA Letter IV, supra note 13.
    \24\ Id.
    \25\ Id.
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    The definition of ``penny stock'' and the associated rules were 
part of a comprehensive effort by Congress and the Commission to reduce 
fraud and manipulation in the penny stock market and to address, among 
other things, a lack of investor information and education.\26\ In the 
Securities Enforcement Remedies and Penny Stock Reform Act of 1990, 
Congress directed the Commission to adopt a series of rules requiring 
broker-dealers to provide customers with certain trade and market 
information prior to effecting a transaction in a penny stock for their 
customers.\27\ Rules 15g-1 through 15g-9 under the Exchange Act 
(collectively known as the ``penny stock rules'') implement the 
Congressional directive to increase the level of disclosure to 
investors concerning penny stocks generally as well as the specific 
penny stock involved in a transaction.\28\ The scope of the penny stock 
rules is delineated by the definition of penny stock in Exchange Act 
Section 3(a)(51) \29\ and Rule 3a51-1 \30\ thereunder.
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    \26\ Public Law 101-429, 104 Stat. 931 (1990); See Penny Stock 
Disclosure Rules, Exchange Act Release No. 30608 (Apr. 20, 1992), 57 
FR 18004 (Apr. 28, 1992).
    \27\ Id.
    \28\ Exchange Act Section 15(h) [15 U.S.C. 78o(h)].
    \29\ Exchange Act Section 3(a)(51) [15 U.S.C. 78c(a)(51)].
    \30\ Exchange Act Rule 3a51-1 [17 CFR 240.3a51-1].
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    The Dodd-Frank Act established a comprehensive framework for 
regulating the over-the-counter security-based swap market.\31\ As part 
of that framework, Dodd-Frank directed the Commission to establish 
business conduct standards for security-based swap dealers and major-
security-based swap participants.\32\ In light of that framework, the 
Commission agrees with SIFMA's statement that transactions in security-
based swaps will be subject to security-based swap specific disclosures 
and sales practices.\33\ Although those Dodd-Frank disclosures and 
sales practices may not be precisely the same as those required under 
the penny stock rules, the Commission believes that the additional 
protections of the penny stock rules are unnecessary for transactions 
in security-based swaps with ECPs,\34\ who, with respect to security-
based swaps, are generally the type of market participants who 
understand the risks of security-based swaps without needing the added 
protections provided for by the penny stock rules.\35\
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    \31\ Dodd-Frank Act.
    \32\ See Dodd-Frank Act Section 764(h). Business Conduct 
Standards for Security-Based Swap Dealers and Major Security-Based 
Swap Participants, Release 34-77617 (Apr. 14, 2016), 81 FR 29960 
(May 13, 2016) (``Business Conduct Standards Adopting Release''). 
This includes standards for when those entities act as advisors to 
``special entities'' or engaging in security-based swap transactions 
with counterparties, including those that are special entities.
    \33\ See Exchange Act Rules 15Fh-1 through 15Fh-6 and Rule 15Fk-
1.
    \34\ Many transactions in security-based swaps with ECPs will 
already be exempt from the penny stock rules, given the exemption 
provided for transactions that meet the requirements of Regulation D 
or transactions with an issuer not in connection with a public 
offering pursuant to Section 4(a)(2) of the Securities Act of 1933. 
See Exchange Act Rule 15g-1(c).
    \35\ The 2011 Exchange Act Exemptive Order did not provide 
relief for transactions with non-ECPs.
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    Accordingly, the Commission finds it is appropriate and in the 
public interest and consistent with the protection of investors to 
provide a new exemption from the definition of ``penny stock'' in 
Section 3(a)(51) and Rule 3a51-1 for security-based swap transactions 
between ECPs.

D. Municipal Securities

    In its letters, SIFMA asked for guidance that, for purposes of the 
Exchange Act, including Section 15B and rules thereunder applicable to 
municipal securities, a security-based swap with a counterparty that is 
a municipal entity should not be considered a municipal security solely 
due to the identity of the counterparty. Exchange Act Section 3(a)(29) 
defines the term ``municipal securities'' to include ``securities which 
are direct obligations of, or obligations guaranteed as to principal or 
interest by, a State or any political subdivision thereof, or any 
agency or instrumentality of a State or any political subdivision 
thereof, or any municipal corporate instrumentality of one or more 
States.'' \36\ The Commission understands that there is some 
uncertainty among market participants regarding whether Exchange Act 
regulatory provisions that apply to

[[Page 866]]

municipal securities brokers \37\ and municipal securities dealers \38\ 
apply to security-based swap dealers and major security-based swap 
participants that enter into security-based swaps with a counterparty 
that is a State or any political subdivision thereof, or any agency or 
instrumentality of a State or any political subdivision thereof, or any 
municipal corporate instrumentality of one or more States (a 
``municipal counterparty''). As noted above with respect to the penny 
stock rules, security-based swap dealers and major security-based swap 
participants are already subject to a comprehensive regulatory regime. 
Moreover, that regulatory regime includes specific protections for when 
a security-based swap dealer or major security-based swap participant 
is acting as counterparty to a ``special entity,'' including a State, 
State agency, city, county, municipality, or other political 
subdivision of a State.\39\ Given the comprehensive scope of this 
regulatory regime and for the avoidance of doubt, the Commission finds 
that it is appropriate and in the public interest to provide an 
exemption from the definition of ``municipal securities'' in Section 
3(a)(29) for security-based swap transactions with a municipal 
counterparty. In the Commission's view, the exemption will avoid the 
application of duplicative and potentially conflicting requirements to 
security-based swap dealers and major security-based swap participants.
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    \36\ See Exchange Act Section 3(a)(29) [15 U.S.C. 78c(a)(29)].
    \37\ Section 3(a)(31) of the Exchange Act defines the term 
``municipal securities broker'' to mean ``a broker engaged in the 
business of effecting transactions in municipal securities for the 
account of others.'' See Exchange Act Section 3(a)(31) [15 U.S.C. 
78c(a)(31)].
    \38\ Exchange Act Section 3(a)(30) defines the term ``municipal 
securities dealer'' to mean ``any person (including a separately 
identifiable department or division of a bank) engaged in the 
business of buying and selling municipal securities for his own 
account, through a broker or otherwise, but does not include--(A) 
any person insofar as he buys or sells such securities for his own 
account, either individually or in some fiduciary capacity, but not 
as a part of a regular business; or (B) a bank, unless the bank is 
engaged in the business of buying and selling municipal securities 
for its own account other than in a fiduciary capacity, through a 
broker or otherwise; Provided, however, that if the bank is engaged 
in such business through a separately identifiable department or 
division (as defined by the Municipal Securities Rulemaking Board in 
accordance with section 15B(b)(2)(H) of the Exchange Act), the 
department or division and not the bank itself shall be deemed to be 
the municipal securities dealer.'' See Exchange Act Section 3(a)(30) 
[15 U.S.C. 78c(a)(30)].
    \39\ See Exchange Act Section 15(h)(4)-(5). [15 U.S.C. 78o-
10(h)(4)-(5)].
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E. Government Securities

    In SIFMA Letter III and SIFMA Letter IV, SIFMA asked for guidance 
that, for purposes of the Exchange Act, including Section 15C and rules 
thereunder applicable to government securities, a security-based swap 
with a counterparty that is a ``U.S. government-related entity'' should 
not be considered a government security solely due to the identity of 
the counterparty. The Unlinked Temporary Exemptions did not provide 
such relief and, thus, the treatment of government securities will not 
be impacted by the expiration of the Unlinked Temporary Exemptions. For 
that reason, the Commission is not addressing the subject of government 
securities as part of this Order. The Commission may consider SIFMA's 
request with respect to government securities, as well as the other 
requests included in SIFMA Letter III and SIFMA Letter IV, at a later 
date.\40\
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    \40\ Exchange Act Section 36(b) provides that ``the Commission 
may not, under this section, exempt any person, security, or 
transaction, or any class or classes of persons, securities, or 
transactions from Section 15C or the rules or regulations issued 
thereunder or (for purposes of section 15C and the rules and 
regulations issued thereunder) from any definition in paragraph 
(42), (43), (44), or (45) of section 3(a).'' [15 U.S.C. 78mm].
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F. Section 31 Fees

    In SIFMA Letter III, SIFMA requested guidance that security-based 
swap transactions are not subject to Section 31 fees merely because 
they are subject to transaction reporting under Regulation SBSR. The 
Commission is not providing relief from Section 31 at this time. A sale 
of a security is subject to Section 31 fees only if (1) the sale occurs 
on a national securities exchange,\41\ or (2) the sale is transacted by 
or through a member of a national securities association otherwise than 
on a national securities exchange and the security is registered on a 
national securities exchange or subject to prompt last-sale reporting 
pursuant to the rules of the Commission or a registered national 
securities association.\42\ Although security-based swaps are 
securities, they do not meet any of the conditions noted above. Thus, 
security-based swaps are currently not subject to Section 31 fees and 
would not become subject to Section 31 fees due to the expiration of 
the Unlinked Temporary Exemptions or the full implementation of 
Regulation SBSR as it currently exists.
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    \41\ See Exchange Act Section 31(b) [15 U.S.C. 78ee(b)].
    \42\ See Exchange Act Section 31(c) [15 U.S.C. 78ee(c)].
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    The Dodd-Frank Act created a new Section 13(m) of the Exchange Act 
that requires ``real-time public reporting'' of security-based swap 
transactions. Once real-time public reporting is fully-implemented, 
security-based swaps will be subject to prompt last-sale reporting 
pursuant to the rules of the Commission, which will subject them to 
Section 31 fees. Thus, when the Commission proposes to implement prompt 
last-sale reporting for security-based swap transactions, it may also 
revisit the appropriateness of exempting security-based swaps from 
Section 31 fees at such time.

G. Transition Period

    In SIFMA Letter III, SIFMA requested that the Unlinked Temporary 
Exemptions for which permanent relief is not granted be extended until 
the date when security-based swap dealers and major-security-based swap 
participants are required to register with the Commission. In SIFMA 
Letter IV, SIFMA requested a twelve month transition period. SIFMA 
stated that the expiration of the Unlinked Temporary Exemptions will 
result in the application or potential application of over 150 
different Exchange Act provisions.\43\ SIFMA stated that market 
participants could design and implement appropriate compliance measures 
and controls during that transition period.\44\ The Commission agrees 
that a transition period is appropriate. The Commission agrees that a 
twelve month transition period should allow market participants 
adequate time to design and implement appropriate compliance measure 
and controls. With this Order, the Commission is providing notice that 
the majority of the Unlinked Temporary Exemptions will expire on 
February 5, 2020, in order to provide sufficient additional time for 
market participants to prepare.
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    \43\ See SIFMA Letter IV, supra note 13.
    \44\ Id.
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III. Commission Findings

    The Commission believes it is necessary or appropriate in the 
public interest, and consistent with the protection of investors to 
extend for a period twelve months, the Unlinked Temporary Exemptions, 
until February 5, 2020, to allow market participants to prepare for the 
application of certain Exchange Act provisions and rules to security-
based swap activities. The additional extension period will apply to 
all of the Unlinked Temporary Exemptions otherwise set to expire on 
February 5, 2019. Once this twelve-month extension period ends, all of 
the Unlinked Temporary Exemptions will expire, with the exception of 
the exemptions being provided with respect to the regulation of penny 
stocks

[[Page 867]]

involving only ECPs and with respect to the definition of municipal 
securities, as described above. As noted above, the Commission invites 
market participants or other interested parties to provide comments 
regarding the scope of the permanent relief the Commission is granting 
in this order, including whether the Commission should provide further 
relief in response to specific requests made by prior commenters that 
the Commission is not addressing at this time.
    Accordingly, pursuant to its authority under Section 36 of the 
Exchange Act,\45\ the Commission believes it is necessary or 
appropriate in the public interest, and consistent with the protection 
of investors to extend the expiration of all Unlinked Temporary 
Exemptions for a period of twelve months (i.e., until February 5, 
2020).
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    \45\ Exchange Act Section 36 [15 U.S.C. 78mm]. Section 36 of the 
Exchange Act authorizes the Commission to conditionally or 
unconditionally exempt, by rule, regulation, or order any person, 
security, or transaction (or any class or classes of persons, 
securities, or transactions) from any provision of the Exchange Act 
or any rule or regulation thereunder, to the extent such exemption 
is necessary or appropriate in the public interest, and is 
consistent with the protection of investors.
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    Pursuant to Sections 36, the Commission finds that it is necessary 
and appropriate and in the public interest, and consistent with the 
protection of investors to provide an exemption or security-based swap 
transactions between ECPs from the definition of ``penny stock'' in 
Exchange Act Section 3a(51) and Exchange Act Rule 3a51-1.
    Pursuant to Section 36, the Commission finds that it is necessary 
and appropriate and in the public interest, and consistent with the 
protection of investors to provide for an exemption for security-based 
swap transactions with a municipal counterparty from the definition of 
``municipal securities'' in Exchange Act Section 3(a)(29).
* * * * *

IV. Conclusion

    It is hereby ordered, pursuant to Section 36 of the Exchange Act, 
that except as provided below, the Unlinked Temporary Exemptions 
contained in the 2011 Exchange Act Exemptive Order, and extended in the 
2018 Extension Order, in connection with the revision of the Exchange 
Act definition of ``security'' to encompass security-based swaps, are 
extended until February 5, 2020.
    It is further ordered, pursuant to Section 36 of the Exchange Act, 
that security-based swap transactions between ECPs shall be exempt from 
the definition of ``penny stock'' set forth in Exchange Act Section 
3(a)(51) and Rule 3a51-1.
    It is further ordered, pursuant to Section 36 of the Exchange Act, 
that security-based swaps shall be exempt from the definition of 
``municipal securities'' in Exchange Act Section 3(a)(29).

    By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-00505 Filed 1-30-19; 8:45 am]
 BILLING CODE 8011-01-P