SEC Flexes Its Enforcement Muscle For Securities-Based Swaps

The broad definition of a "swap" in the Dodd-Frank Act, read literally, would encompass many transactions that Congress never intended to cover, so the SEC and the CFTC have jointly promulgated regulations that provide that many of those transactions are not treated as swaps. However, a recent SEC Investor Alert, stating that fantasy stock trading games may be considered swaps if they award prizes, suggests a more expansive reading of the definition by the regulators.

The term "swap" is defined to include any transaction in which a payment "is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence," subject to certain exceptions. 7 U.S.C. § 1a(47). Since this definition could include almost any type of transaction, Dodd-Frank provided the SEC and CFTC with broad power to further define the terms. As explained in their 500+ page Release, the