Sunday, May 29, 2011
Still Floating: Security-Based Swap Agreements after Dodd-Frank, by Thomas Molony, Elon University School of Law, was recently posted on SSRN. Here is the abstract:
The Commodity Futures Modernization Act of 2000 (the "CFMA") established that most swaps were not securities for purposes of the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). At the same time, however, the CFMA subjected certain swaps - security-based swap agreements - to the antifraud prohibitions under Securities Act § 17(a) and Exchange Act § 10(b) and Rule 10b-5. Since the CFMA was enacted, few courts have interpreted the term "security-based swap agreement" and only one has given it significant substantive attention.
Congress’s enactment of The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") in 2010 changed the playing field for swaps dramatically, subjecting them to extensive regulation by the Securities Exchange Commission (the "SEC") and the Commodity Futures Trading Commission. The regulations with respect to security-based swap agreements survived the reform, but their continuing utility in the new regulatory regime is an open question.
This Article examines the historical interpretation of the term "security-based swap agreement," its application in pending SEC enforcement actions involving interest rate swaps and the continuing viability post-Dodd-Frank of the provisions of the Securities Act and the Exchange Act applicable to security-based swap agreements. The Article begins with a discussion of how the securities laws applied to swaps prior to Dodd-Frank. After reviewing and critiquing the handful of opinions that have considered the scope of the term "security-based swap agreement," it considers whether the interest rate swaps at issue in the pending SEC enforcement actions are security-based swap agreements. The Article next describes generally the jurisdictional division between the SEC and the CFTC under Dodd-Frank and how security-based swap agreements fit within the new regime. It then explores reasons to do away with the security-based swap agreement in the federal securities laws, while considering whether term represents a necessary evil. The Article ultimately concludes that Congress should eliminate the provisions of the Securities Act and the Exchange Act related to security-based swap agreements because (i) the provisions largely have gone unused, (ii) the term "security-based swap agreement" has been poorly interpreted, (iii) the term is overbroad, (iv) Dodd-Frank makes the provisions unnecessary and (v) the term creates unnecessary confusion in the new regulatory scheme.