What is a Broker-Dealer? - Davis Polk & Wardwell

§ 1A:4.4 BROKER-DEALER REGULATION
jurisdiction over certain OTC derivative contracts. The SEC viewed
certain swaps as “securities” for the purposes of the Securities Act and
the Exchange Act and the CFTC took the view that swaps and certain
other OTC derivatives were futures subject to its oversight. 287 Partly to
address the uncertainties, Congress passed the CFMA in December
2000.
[B] CFMA—Section 3A, 15(i)
The CFMA inserted section 3A into the Exchange Act (which, as
discussed below, is modified upon the effectiveness of Dodd-Frank) to
exclude from the definition of “security” any security-based or nonsecurity-based
swap agreement. 288 In addition, section 3A(b) expressly
prohibits the SEC from registering, or requiring, recommending, or
suggesting the registration of any security-based swap agreement
287. The SEC asserted that a “treasury-linked swap” had sufficient optionality
to be viewed as a security. See In re BT Securities Corp., Release No.
34-35136 (Dec. 22, 1994), and In the Matter of Mitchell A. Vazquez,
Release No. 34-36909 (Feb. 29, 1996). A later court decision concluded
that interest rate swaps and floating-for-floating interest rate swaps were
not securities. See The Procter & Gamble Co. v. Bankers Trust Co. and BT
Sec. Corp., 925 F. Supp. 1270 (S.D. Ohio 1996). In a later case, Caiola v.
Citibank, 295 F.3d 312 (2d Cir. 2002), the Second Circuit reversed a
decision by the Southern District of New York that relied in large part on
the conclusion expressed in Procter & Gamble, and held that a cashsettled
OTC option based on a security is a security under section 3(a)(10)
of the Exchange Act.
288. See section 301 of the CFMA, Exchange Act § 3A. The CFMA defines
“swap agreement,” “security-based swap agreement,” and “non-securitybased
swap agreement” by inserting sections 206A, 206B and 206C into
the Gramm-Leach-Bliley Act (GLBA).
The inclusion of the definitions of “swap agreement,” “security-based
swap agreement,” and “non-security-based swap agreement” into the
GLBA, rather than in the federal securities or commodities laws was
apparently to prevent the SEC and CFTC from interpreting these definitions.
See 146 CONG. REC. S11867 (2000) (statement of Senator Phil
Gramm) (“It is important to emphasize that nothing in the title should be
read to imply that swap agreements are either securities or futures
contracts. To emphasize that point, the definition of a ‘swap agreement’
is placed in a neutral statute, the Gramm-Leach-Bliley Act, that is,
legislation that is not specifically part of a banking, securities, or commodities
law.”). Although the CFMA excepted the security-based swap agreements
from the definition of security, the CFMA amended the antifraud
provisions of section 17(a) of the Securities Act and Sections 10(b) and
15(c)(1)(A), (B) and (C) of the Exchange Act to make clear that those
sections apply to both securities and security-based swap agreements. See
Securities Act § 17(a); Exchange Act §§ 10(b), 15(c)(1)(A), (B) and (C).
In contrast, non-security-based swap agreements are not subject to the
anti-fraud, anti-manipulation, anti-insider trading provisions and short
swing profit provisions under these statutes.
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