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

I. Introduction

The Securities and Exchange Commission (“Commission”) is extending certain temporary exemptive relief contained in a prior Commission order (“Exchange Act Exemptive Order”) in connection with the revision of the Exchange Act definition of “security” to encompass security-based swaps. These temporary exemptions were provided by the Commission on July 1, 2011 and are set to expire on February 11, 2014 (“Expiring Temporary Exemptions”).

As described in more detail below, the Commission is extending the expiration date for the Expiring Temporary Exemptions. Specifically, for those Expiring Temporary Exemptions that are not directly linked to pending security-based swap rulemakings, the Commission is extending the expiration date until the earlier of such time as the Commission issues an order or rule determining whether any continuing exemptive relief is appropriate for security-based swap activities with respect to any of these Exchange Act provisions or until three years following the effective date of this Order. For each Expiring Temporary Exemption that is related to pending security-based swap rulemakings, the Commission is extending the expiration date until the compliance date for the related security-based swap-specific rulemaking.

The approach for extending the exemptions related to security-based swap rulemakings reflected in this Order is intended to facilitate a timely phased-in determination regarding the application of the relevant provisions of the Exchange Act to security-based swaps based on the development of the relevant rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) as the Commission moves toward finalizing those rules. This approach also provides the Commission flexibility while Dodd-Frank Act rulemaking is still in progress to determine whether continuing relief should be provided for any Exchange Act provisions that are not directly linked to specific security-based swap rulemaking.

II. Discussion

A. Background

Title VII of the Dodd-Frank Act amended the Exchange Act definition of “security” to expressly encompass security-based swaps. The expansion of the definition of the term “security” has changed the scope of the Exchange Act regulatory provisions that apply to security-based swaps and has raised certain complex questions that require further consideration.

On July 1, 2011, the Commission issued an order granting temporary exemptive relief from compliance with certain provisions of the Exchange Act in connection with the revision of the Exchange Act definition of “security” to encompass security-based swaps. The overall approach of the Exchange Act Exemptive Order was directed toward maintaining the status quo during the implementation process for the Dodd-Frank Act, by preserving the application of particular Exchange Act requirements that were already applicable in connection with instruments that became “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. The Expiring Temporary Exemptions generally provide for the following exemptions from 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. These Expiring Temporary Exemptions are currently scheduled to expire on February 11, 2014.

To date, the Commission has proposed substantially all of the rules related to the new regulatory regime for derivatives under Title VII and has begun the process of adopting these rules. Keeping with the Dodd-Frank Act's stated objective of promoting financial stability in the U.S. financial system, the Commission has expressed its intent to move forward deliberatively in implementing the requirements of the Dodd-Frank Act, while minimizing unnecessary disruption and costs to the markets. Among the rules for this new regulatory framework that the Commission has proposed are rules relating to (i) capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants, (ii) security-based swap trade acknowledgement, and (iii) security-based swap execution facilities registration requirements. In addition, the Commission has also been mandated by the Dodd-Frank Act to promulgate recordkeeping and reporting requirements for security-based swap dealers and major security-based swap participants.

B. Extension of Temporary Exemptions

The Commission believes it is necessary or appropriate in the public interest, and consistent with the protection of investors to extend the Expiring Temporary Exemptions in order to avoid any potential market disruption stemming from the application of existing rules to security-based swap activities. Although the Commission is making significant progress in establishing and finalizing the new regulatory regime for securities-based swaps, key issues and questions regarding the application of the federal securities laws to security-based swaps remain unresolved. However, because the Commission has proposed substantially all of the rules related to the new regulatory regime for derivatives under Title VII, the Commission is able to better calibrate the need for extensions of the Expiring Temporary Exemptions based on how those exemptions relate to ongoing rulemaking. Accordingly, under this approach an extension of the Expiring Temporary Exemptions will provide the Commission with additional time to consider the potential impact of the revision of the Exchange Act definition of “security” on the scope of Exchange Act provisions applicable to security-based swaps, as well as the appropriateness of applying certain Exchange Act provisions to security-based swap activities in light of the Commission's continuing rulemaking efforts.

While the Commission is generally extending the Expiring Temporary Exemptions, it is refining the applicable expiration dates for these exemptions by (1) extending the expiration date of certain Expiring Temporary Exemptions that are generally not directly related to specific security-based swap rulemakings until the earlier of such time that the Commission issues an order or rule determining whether any continuing exemptive relief is appropriate for security-based swap activities with respect to any of these Exchange Act provisions or until three years following the effective date of this Order, and (2) extending the expiration date of other Expiring Temporary Exemptions that are directly related to specific security-based swap rulemakings, until the compliance date for the relevant security-based swap rulemaking.

This approach recognizes the continuing development of the new regulatory regime for security-based swaps and takes into consideration the interrelation of certain existing Exchange Act provisions with this new regime. Specifically, the Commission believes it is necessary or appropriate in the public interest, and consistent with the protection of investors for the subset of Expiring Temporary Exemptions that are related to certain ongoing rulemakings to be addressed within any such rulemakings that are finalized in order to determine what, if any, exemptions would be appropriate based on the structure of the regulatory framework. The expiration dates of this subset of Expiring Temporary Exemptions will be extended until they are addressed within any relevant rulemakings relating to: (i) Capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants, (ii) recordkeeping and reporting requirements for security-based swap dealers and major security-based swap participants, (iii) security-based swap trade acknowledgement rules, and/or (iv) registration requirements for security-based swap execution facilities.

In addition, with respect to the subset of Expiring Temporary Exemptions that are not directly related to specific security-based swap rulemakings, the Commission believes it would be appropriate for these exemptions to continue for three years or until such time as the Commission issues an order or rule determining whether any continuing exemption is applicable to any of these provisions. This approach is designed to limit the potential for market disruptions. Moreover, this approach is designed to provide sufficient time for the Commission to explore and potentially develop an appropriate framework for regulating security based swap activities and to provide sufficient time for public input regarding any such potential framework. Accordingly, pursuant to its authority under Section 36 of the Exchange Act, the Commission believes it is necessary or appropriate in the public interest, and consistent with the protection of investors to extend the Expiring Temporary Exemptions that are not related to specific securities-based swap rulemakings until the earlier of the time that the Commission issues an order or rule determining whether continuing exemptive relief is appropriate or until three years after the effective date of this Order.

The Commission is also, pursuant to its authority under Section 36, extending the below outlined Expiring Temporary Exemptions, until the earliest compliance dates established in applicable rulemakings.

1. Expiring Temporary Exemptions Relating to Security-Based Swap Capital and Margin Rules

The Commission is extending the Expiring Temporary Exemptions for the following Exchange Act provisions until the earliest compliance date set forth in any final security-based swap capital, margin, and segregation rules:

• Section 7, regarding the margin requirements for broker-dealers; and Regulation T, a Federal Reserve Board regulation regarding broker-dealer extension of credit.

• Section 15(c)(3), which provides the Commission with rulemaking authority in connection with broker-dealer financial responsibility; Exchange Act Rule 15c3-1, including Appendices A-G (Exchange Act Rules 15c3-1a through 15c3-1g) regarding net capital requirements for brokers and dealers; Exchange Act Rule 15c3-3, including 15c3-3a, regarding broker-dealer reserves and custody of securities; and Exchange Act Rule 15c3-4, regarding internal risk management control systems for OTC derivatives dealers.

2. Expiring Temporary Exemptions Relating to Security-Based Swap Recordkeeping Rules

The Commission is extending the Expiring Temporary Exemptions for the following Exchange Act provisions until the earliest compliance date set forth in any final rules regarding recordkeeping and reporting requirements for security-based swap dealers and major security-based swap participants:

• Section 17(a), regarding broker-dealer obligations to make, keep and furnish information; Section 17(b), regarding broker-dealer records subject to examination; Exchange Act Rules 17a-3 through 17a-5, regarding records to be made and preserved by broker-dealers and reports to be made by broker-dealers; Exchange Act Rule 17a-11, regarding notifications that broker-dealers are required to make; and Exchange Act Rule 17a-13, regarding quarterly security counts to be made by certain exchange members and broker-dealers.

3. Expiring Temporary Exemptions Relating to Broker-Dealer Registration Requirements

The Commission is extending the Expiring Temporary Exemptions that relate to the registration requirements under section 15(a)(1) of the Exchange Act 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 until the later of the compliance dates set forth in (i) any final rules regarding capital, margin and segregation requirements for security-based swap dealers and major security-based swap participants or (ii) any final rules regarding recordkeeping and reporting requirements for security-based swap dealers and major security-based swap participants.

4. Expiring Temporary Exemption Relating to Trade Acknowledgement Rule

The Commission is extending the Expiring Temporary Exemption for Exchange Act Rule 10b-10, regarding confirmation of transactions, until the earliest compliance date set forth in any final rules regarding trade acknowledgement and verification of security-based swap transactions.

5. Expiring Temporary Exemption Relating to Regulation ATS

The Commission is extending the Expiring Temporary Exemption for Regulation ATS, regarding the regulatory requirements that apply to alternative trading systems, until the earliest compliance date set forth in any final rules regarding the registration of the security-based swap execution facilities.

III. Solicitation of Comments

The Commission believes that it would be useful to continue to provide interested parties the opportunity to comment on any aspect of the temporary exemptions contained in the Exchange Act Exemptive Order, this Order extending the Expiring Temporary Exemptions, and any additional relief that should be granted upon the expiration of the extension of the Expiring Temporary Exemptions, including:

1. Is the distinction between whether an exemption is “not directly linked” to any security-based swap rulemaking or is “related” to security-based swap rulemaking appropriate in connection with the extension of the Expiring Temporary Exemptions? Are there additional Expiring Temporary Exemptions that should be linked to the adoption of any specific security-based swap rulemakings?

2. Is additional exemptive relief necessary or appropriate in light of the ongoing implementation of the Dodd-Frank Act? Are there particular Exchange Act provisions, for which relief has already been granted, that do not warrant a continuing exemption? Are there particular Exchange Act provisions, for which relief has not previously been granted, that warrant exemptions?

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form ( http://www.sec.gov/rules/exorders.shtml ); or
• Send an email to rule-comments@sec.gov. Please include File Number S7-27-11 on the subject line; or
• Use the Federal eRulemaking Portal ( http://www.regulations.gov ). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F St. NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-27-11. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( http://www.sec.gov/rules/exorders.shtml ). Comments are also available for Web site viewing and printing in the Commission's Public Reference Room, 100 F St. NE., Washington, DC 20549 on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

IV. Conclusion

It Is Hereby Ordered, pursuant to Section 36 of the Exchange Act, that the Expiring Temporary Exemptions contained in the Exchange Act Exemptive Order in connection with the revisions of the Exchange Act definition of “security” to encompass security-based swaps are extended until the earlier of three years following the effective date of this Order or, until such time that the Commission issues an order or rule determining whether continuing exemptive relief is appropriate for security-based swap activities with respect to any of the Expiring Temporary Exemptions, except as set forth below:

(a) The following exemptions are extended until the compliance date set forth in any final rules regarding capital, margin and segregation requirements for security-based swap dealers and major security-based swap participants:

(1) Section 7;

(2) Section 15(c)(3);

(3) Regulation T, 12 CFR 220.1 et seq.;

(4) Rule 15c3-1;

(5) Rule 15c3-3; and

(6) Rule 15c3-4.

(b) The following exemptions are extended until the compliance date set forth in any final rules regarding recordkeeping and reporting requirements for security-based swap dealers and major security-based swap participants:

(1) Section 17(a);

(2) Section 17(b);

(3) Rule 17a-3;

(4) Rule 17a-4;

(5) Rule 17a-5;

(6) Rule 17a-11; and

(7) Rule 17a-13.

(c) The exemption pertaining to Rule 10b-10 is extended until the compliance date set forth in any final rules regarding trade acknowledgement and verification of security-based swap transactions.

(d) The exemption pertaining to Regulation ATS, 17 CFR 242.300 et seq., is extended until the compliance date set forth in any final rules regarding the registration of security-based swap execution facilities.

(e) The following exemptions are extended until the later of the compliance dates set forth in (i) any final rules regarding capital, margin and segregation requirements for security-based swap dealers and major security-based swap participants and (ii) any final rules regarding recordkeeping and reporting requirements for security-based swap dealers and major security-based swap participants:

(1) Exemptions pertaining to the “broker” registration requirements of section 15(a)(1) of the Exchange Act, and the other requirements of the Exchange Act and the rules and regulations thereunder that apply to a broker that is not registered with the Commission, solely in connection with broker activities involving security-based swaps, and

(2) Exemptions pertaining to the “dealer” registration requirements of section 15(a)(1) of the Exchange Act, and the other requirements of the Exchange Act and the rules and regulations thereunder that apply to a dealer that is not registered with the Commission, solely in connection with dealing activities involving security-based swaps with counterparties that meet the definition of eligible contract participant as set forth in section 1a(12) of the Commodity Exchange Act.