New Swap proposal under Article VII

On June 29, 2011 the Securities and Exchange Commission today voted to propose rules that would impose certain business conduct standards upon security-based swap dealers and major security-based swap participants when those parties engage in security-based swap transactions. The SEC’s proposed rules stem from Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“The rules we are proposing would level the playing field in the security-based swap market by bringing needed transparency to this market and by seeking to ensure that customers in these transactions are treated fairly,” said SEC Chairman Mary L. Schapiro. “The standards we propose are intended to establish a framework that protects investors and also promotes efficiency, competition, and capital formation.”

The proposed rules would require security-based swap dealers and major security-based swap participants to communicate in a fair and balanced manner and make certain disclosures, including conflicts of interest and material incentives to potential counterparties.

Proposal

• Verify whether a counterparty is an eligible contract participant and whether it is a special entity.
• Disclose to the counterparty material information about the security-based swap, including material risks, characteristics, incentives and conflicts of interest.
• Provide the counterparty with information concerning the daily mark of the security-based swap.
• Provide the counterparty with information regarding the ability to require clearing of the security-based swap.
• Communicate with counterparties in a fair and balanced manner based on principles of fair dealing and good faith.
• Establish a supervisory and compliance infrastructure.
• Designate a chief compliance officer that is required to fulfill the described duties and provide an annual compliance report.

The proposed rules also would require security-based swap dealers to:

Make reasonable efforts to obtain information that it needs to determine that the recommendation is in the “best interests” of the special entity.

In addition, the proposed rules would require security-based swap dealers and major security-based swap participants acting as counterparties to special entities to reasonably believe that the counterparty has an independent representative who meets the following requirements:

•     Has sufficient knowledge to evaluate the transaction and risks.
•     Is not subject to a statutory disqualification.
•     Is independent of the security-based swap dealer or major security-based swap participant.
•     Undertakes a duty to act in the best interests of the special entity.
•     Makes appropriate disclosures of material information concerning the security-based swap.
•     Provides written representations to the special entity regarding fair pricing and   appropriateness of the security-based swap.