The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created a new regulatory framework for complex derivative products known as “swaps” and “security-based swaps.” If you thought that these provisions affected only the kind of over-the-counter credit default swaps that bankrupted AIG in 2008, the Securities and Exchange Commission recently has warned that such a conclusion is wrong.
In both a recent SEC enforcement action and a meeting of SEC officials with Bay Area securities attorneys, the SEC advised that the purchase, offer or sale of contracts that depend on liquidity events—such as initial public offerings or acquisitions—must comply with the new provisions. An attorney from the SEC’s San Francisco office cautioned that the SEC is examining the applicability of these provisions to firms using derivative transactions to sell privately-held stock of “pre-IPO” companies to retail investors, while news reports have disclosed that the SEC has commenced a formal investigation into this conduct.
Recent SEC Enforcement Action
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