On June 19, 2015, SEC representatives participated in a SEC panel discussion in San Francisco regarding some of the SEC’s recent enforcement activities in the area of complex derivatives. The event was hosted by San Francisco SEC Enforcement Alumni and the San Francisco Compliance Group. The SEC panelists (speaking for themselves and not on behalf of the SEC) were: Reid Muoio, Deputy Chief, Complex Financial Products Unit, Division of Enforcement; Brian Bussey, Associate Director for Derivatives Policy and Trading Practices, Division of Trading and Markets; and Cameron Hoffman, Senior Counsel, Division of Enforcement.
The discussion focused on the SEC’s recent enforcement activities in the area of complex derivatives, and in particular, on the SEC’s recent enforcement action against Sand Hill Exchange, a Silicon Valley-based company that was offering and selling security-based swaps contracts to retail investors over the Internet, in violation of the requirements of the Dodd-Frank Act, section 5(e) of the Securities Act and section 6(l) of the Securities Exchange Act of 1934. See the SEC press release.
Some key take-aways from the discussion included:
- “Swap” as a legal term in the regulatory context is much broader than we might think; it includes traditional swaps (e.g., shorting a stock), every type of option, and event contracts (e.g., betting on a sporting event). It was noted that state gambling laws do not trump federal securities laws.
- In the retail space, companies should be aware that if they are going to sell securities-based swaps to retail investors, they must register them with the SEC, and may also need to register them with a securities exchange. There are very strict compliance requirements in the area of swaps, for example, certain transactions can only be with an “eligible contract participant” (generally someone with more than $10 million in investible assets).
- It is a good idea to obtain legal advice from an attorney with particularized knowledge of applicable swap regulatory regimes before engaging in swap transactions. It is also a good idea to promptly retain a lawyer if the SEC calls asking questions about a particular product or transaction.
- It is not a good idea to blog (or otherwise make public disclosures) about an ongoing SEC investigation (unless you do it with the knowledge and assistance of legal counsel). It is not a good idea to reach out to SEC employees via social media (e.g., Facebook, LinkedIn).
- It is not a good idea to contact the SEC asking for advice (or a No Action Letter) after you’re already being looked at by another arm of the SEC (they do talk to each other). It is also not advisable to obtain a No Action Letter from the SEC for one type of transaction and then treat that as permission to proceed with a qualitatively different type of transaction. Doing so will almost certainly create bad evidence in the event of a future SEC investigation.
The panel noted that the SEC’s Complex Instruments Unit has broadened its mandate recently. Going forward the Unit intends to focus on asset-backed securities, derivatives markets, retail structured products (such as structured notes), and miscellaneous new products (out-of-the-ordinary stuff).