SEC COMMISSIONER PAREDES PROPOSES BUSINESS CONDUCT STANDARDS FOR SECURITY-BASED SWAPS

The following is an excerpt from the SEC website:

"Speech by SEC Commissioner:
Statement at Open Meeting to Propose Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants
by
Commissioner Troy A. Paredes
U.S. Securities and Exchange Commission
Washington, D.C.
June 29, 2011
Thank you, Chairman Schapiro.

The Dodd-Frank Act sets out a new regime to regulate the security-based swap (“SBS”) market. To this end, Section 764 of Dodd-Frank amends the Exchange Act to provide for new rules, to be promulgated by the SEC, that establish business conduct standards for security-based swap dealers and major security-based swap participants (“SBS Entities”). Pursuant to this authority, the Commission is advancing the proposal we are considering this morning.

I support the recommendation before us. But we need to be mindful that, depending on how the new regulatory regime ultimately takes shape, certain parties – most notably, certain special entities – could lose access to the security-based swap market, and those states, municipalities, pension plans, endowments, and other counterparties of SBS Entities that can access the SBS market could find it more costly to transact. If SBS Entities become less willing to transact with certain counterparties because the business conduct standards prove to be too burdensome and unpredictable, those counterparties may lose out on the benefits that SBS transactions afford them, such as more efficient risk management. To this point, it is worth recognizing that the Commission’s proposed business conduct standards go beyond what the agency is mandated by Dodd-Frank to promulgate.

The proposing release solicits comment on a range of topics and asks a number of thoughtful questions. As always, I look forward to considering the comments we will receive. I am particularly interested in comments that address the following:

The release acknowledges that the Commission is proposing more business conduct obligations than Dodd-Frank requires. “Know your counterparty” requirements and “suitability” standards are just two features of the proposal that would add to what Dodd-Frank mandates. What are the potential consequences of these additional obligations when layered on top of what Dodd-Frank requires? To what extent, and in what ways, might these additional regulatory demands impact a market participant’s access to SBS transactions?

If adopted, how will the proposal likely impact the ability of special entities to transact in security-based swaps? What consequences will special entities face if they find it more difficult to access the SBS market?

Just as one recognizes the benefits of the new regulatory regime, one also should consider that certain costs of the proposal might ultimately be borne by special entities and other counterparties of SBS Entities. Accordingly, to what extent should an intended beneficiary of the regime be afforded more choice to decide for itself the degree of protection it wants from regulation? In other words, under what circumstances, if any, should the counterparty of an SBS Entity be allowed to opt out of some or all of the new regulation?

The proposing release explains, “[A]bsent special circumstances, it would be appropriate for SBS Entities to rely on counterparty representations in connection with certain specific requirements under the proposed rules.” The release offers two alternatives for when it might not be appropriate for an SBS Entity to rely on a counterparty’s representations. Under one alternative, an SBS Entity could rely on a counterparty’s representation “unless [the SBS Entity] knows that the representation is not accurate.” Under the second alternative, an SBS Entity could rely on a counterparty’s representation “unless the SBS Entity has information that would cause a reasonable person to question the accuracy of the representation.”

I am keenly interested in commenters’ views on the pros and cons of these two alternatives. For example, under which alternative would an SBS Entity have greater legal certainty concerning its business conduct obligations? If an SBS dealer is not confident that it can rely on a special entity’s representations in establishing that the dealer is not advising the special entity, will the SBS dealer be less willing to transact with the special entity?

The proposal states that an SBS dealer “acts as an advisor to a special entity,” thus triggering a duty to act in the “best interests of the special entity,” when the SBS dealer makes a recommendation, unless certain conditions are met. Should a dealer have to do more than make a recommendation to be found to be acting as an advisor? How, if at all, should the “best interests” standard be defined to address the tension that may arise if an SBS dealer finds itself acting as both a counterparty and an advisor to a special entity?

I am interested in hearing from commenters on how, if at all, the Commission’s rulemaking should account for any concerns that are presented when the SEC’s business conduct regime and the Department of Labor’s ERISA fiduciary regime interact.

I join my colleagues in thanking the staff – particularly those from the Division of Trading and Markets – for your hard work on this rulemaking."

SOMETIMES GOVERNMENT OFFICIALS ARE FRAUDSTERS

All to often business is blamed for crimes which government officials routinely commit. The following excerpt from a recent case brought by the SEC is a good example of a case of government bureaucrats run amok:

Washington, D.C., Oct. 27, 2010 — The Securities and Exchange Commission today announced that four former San Diego officials have agreed to pay financial penalties for their roles in misleading investors in municipal bonds about the city's fiscal problems related to its pension and retiree health care obligations.

It's the first time that the SEC has secured financial penalties against city officials in a municipal bond fraud case.

The SEC settlement with the four former city officials requires the approval of U.S. District Judge Dana M. Sabraw in the Southern District of California.

The SEC filed charges in April 2008 against former San Diego City Manager Michael Uberuaga, former Auditor & Comptroller Edward Ryan, former Deputy City Manager for Finance Patricia Frazier, and former City Treasurer Mary Vattimo. The SEC alleged that the officials knew the city had been intentionally under-funding its pension obligations so that it could increase pension benefits but defer the costs. They also were aware that the city would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained, benefits were reduced, or city services were cut. However, despite this extensive knowledge, they failed to inform municipal investors about the severe funding problems in 2002 and 2003 bond disclosure documents.

"Municipal officials have a personal obligation to ensure that investors are provided with complete and accurate information about the issuer's financial condition," said Rosalind Tyson, Director of the SEC's Los Angeles Regional Office. "These former San Diego officials are paying a price for their actions that jeopardized the interests of investors and put the city's current and future retirees at risk."

The four former officials agreed to settle the SEC's charges without admitting or denying the allegations and consented to the entry of final judgments that permanently enjoin them from future violations of Securities Act of 1933 Section 17(a)(2). Under the settlement terms, Uberuaga, Ryan, and Frazier each pay a penalty of $25,000 and Vattimo pays a penalty of $5,000.

The SEC's charges against a fifth former city official — Assistant Auditor & Comptroller Teresa Webster — are still pending."

Honesty is something our society depends upon for it to function. When people lie about investments then soon potential investors will stop contemplating investing their money and will keep it in safe places which, causes an economic and societal downturn for all of us. The problem we have in America today is that many politicians and businessmen think that being dishonest is just a type of acceptable business practice which has no long term consequences for society and a very positive outcome for building personal riches.