MFA Submits Letter in Response to NPRM on the Prohibition Against Fraud, Manipulation, and Deception in Connection with Security-Based Swaps

Managed Funds Association submitted comments on the SEC’s proposed Rule 9j-1 (“Rule 9j-1”) under the Securities Exchange Act of 1934 (the “Exchange Act”), which is intended to prevent fraud, manipulation, and deception in connection with the offer, purchase or sale of any security-based swap, the exercise of any right or performance of any obligation under a security-based swap or the avoidance of such exercise or performance pursuant to Section 763(g) of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The issues presented by Rule 9j-1 are of great concern to MFA and its members. The letter highlights that:

  • MFA believes that the Commission has exceeded its authority under Section 763(g) of the Dodd-Frank Act and has gone beyond Congress’s delegated authority in extending the prohibitions of Rule 10b-5 under the Exchange Act
    and Section 17(a) of the Securities Act of 1933 (the “Securities Act”) to ongoing obligations between the execution and extinguishment of a security-based swap contract which do not fall within the statutory definitions of “purchase” and “sale.”
  • We request that the Commission clarify that the statutory terms of “purchase” and “sale” will not include the post-execution performance of security-based swap contracts in accordance with their pre-negotiated terms.
  • We request confirmation from the Commission that the affirmative defenses under Rule 10b5-1(c) are applicable to security-based swaps.
  • We suggest that a scienter requirement should be imposed for all violations of Rule 9j-1 to prevent the proposed rule from sweeping too broadly and unintentionally prohibiting the legitimate performance of rights and obligations.
  • To avoid disruption, we request clarification that Rule 9j-1 applies prospectively to security-based swap contracts entered into after the effective date of Rule 9j-1.