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

What Is a Broker-Dealer? § 1A:4.4
under the Exchange Act. 289 The SEC has been prohibited from
imposing or specifying reporting or recordkeeping requirements,
procedures, or standards as prophylactic measures against fraud,
manipulation, or insider trading with respect to any security-based
swap agreement. 290 Prior to the effectiveness of Dodd-Frank, securitybased
swap agreements are generally subject to the fraud, manipulation,
short-swing profit, insider trading, and manipulation prohibitions
under the securities laws. 291
Under section 206A(a), which will be modified upon the effectiveness
of Dodd-Frank, subject to exceptions set forth in section 206A(b),
“swap agreement” means, in pertinent part: “any agreement, contract,
or transaction between eligible contract participants . . . the material
terms of which (other than price and quantity) are subject to individual
negotiation, and that . . . provides on an executor basis for the
exchange, on a fixed or contingent basis, or one or more payments
based on the value . . . of one or more . . . securities . . . or other
financial or economic interests . . . and that transfers, as between the
parties to the transaction . . . the financial risk associated with a future
change in any such value or level without also conveying a current or
future direct or ownership interest in an asset . . . that incorporates the
financial risk so transferred, including any such agreement . . . known
as a . . . credit default swap.” Section 206B defines “security-based
swap agreement” as “a swap agreement . . . of which a material term is
based on the price, yield, value, or volatility of any security or any
group or index of securities, or any interest therein.” 292 Section 206C
defines “non-security-based swap agreement” as any swap agreement
that is not a security-based swap agreement.
It should be noted that, until Dodd-Frank takes effect, certain OTC
derivatives are still securities, because section 206A(b) contains a list
of exclusions from the term “swap agreement.” Specifically, the term
“swap agreement” does not include:
(i) any put, call, straddle, option, or privilege on any security,
certificate of deposit, or group or index of securities;
(ii) any put, call, straddle, option, or privilege entered into on a
national securities exchange registered pursuant to section 6(a)
of the Securities Exchange Act of 1934 relating to foreign
currency;
289. Exchange Act § 3A(b)(2).
290. Exchange Act § 3A(b)(3). An exception to this rule is provided in section 16(a)
of the Exchange Act. See Exchange Act § 16(a).
291. See Securities Act § 17(a); Exchange Act §§ 9(a), 10(b) and 15(c)(1)(A), (B)
and (C).
292. See Rorech v. SEC, 2010 WL 2595111 (S.D.N.Y. June 25, 2010) (interpreting
these provisions).
(Broker-Dealer Reg., Rel. #9, 9/10)
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