---------------------------------------------------------------------------

    \200\ See Section II.C.4, infra (discussing the interaction of
the ``best interests'' and ``suitability'' standards).
---------------------------------------------------------------------------

    Proposed Rule 15Fh-2(a) would generally define ``act as an
advisor'' in the context of an SBS Dealer to mean recommending a
security-based swap or a trading strategy involving a security-based
swap to a special entity.\201\ For these purposes, ``recommending''
would have the same meaning as that discussed above in connection with
proposed Rule 15Fh-3(f). An SBS Dealer would not be deemed an
``advisor'' to a special entity with a duty under Section 15F(h)(4) and
proposed Rule 15Fh-4(b) to act in the ``best interests'' of the special
entity if it did not make a ``recommendation'' to a special entity.
Commenters have advised us that, in order to avoid making a
``recommendation'' and unintentionally becoming an ``advisor'' to a
special entity SBS Dealers may simply refrain from interacting with
special entities--particularly to the extent that they perceive any
uncertainty in the determination of whether a particular communication
would constitute a ``recommendation.'' \202\
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    \201\ See Section II.C.4 regarding what would or would not
generally be considered a recommendation.
    \202\ See, e.g., SIFMA 2011 Letter.
---------------------------------------------------------------------------

    It is important to note that the duties imposed on an SBS Dealer
that is ``acting as an advisor''--as well as the definition of that
phrase in proposed Rule 15Fh-2(a)--are specific to this advisory
context, and are in addition to any duties that may be imposed under
other applicable law. Among other things, an SBS Dealer that acts as an
advisor to a special entity may fall within the definition of
``investment adviser'' under Section 202(a)(11) of the Advisers Act
unless it can rely on the exclusion provided by Section 202(a)(11)(C)
for a broker-dealer whose advice is ``solely incidental'' to the
conduct of its business as a broker dealer and who receives no special
compensation therefor, or other applicable exclusion.\203\ An SBS
Dealer that acts as an advisor to a municipal entity may also be a
``municipal advisor'' under Section 15B(e) of the Exchange Act.\204\
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    \203\ See 15 U.S.C. 80b-2(a)(11).
    \204\ See Public Law 111-203, 124 Stat. 1376, 1921-1922 (to be
codified at 15 U.S.C. 78o-4).
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    Commenters have suggested that the standard established by Section
15F(h)(4) for an SBS Dealer acting as an advisor to a special entity
could ``have the effect of chilling a critical element of the customary
commercial interactions'' with special entities, absent some greater
legal certainty about when an SBS Dealer would, in fact, be deemed to
be ``acting as advisor'' to a special entity.\205\ Accordingly,
proposed Rule 15Fh-2(a) would provide this legal certainty by
permitting an SBS Dealer to establish that it is not acting as an
advisor where certain conditions are met. Under the proposed rule, the
special entity must represent, in writing, that it will not rely on
recommendations provided by the SBS Dealer and that it instead will
rely on advice from a ``qualified independent representative,'' as
defined in proposed Rule 15Fh-5(a) and discussed more fully below in
Section II.D.4.c. In addition, the SBS Dealer must disclose to the
special entity that by obtaining the special entity's written
representation as described above, the SBS Dealer is not undertaking to
act in the best interests of the special entity, as would otherwise be
required under Section 15F(h)(4).\206\ Finally, the SBS Dealer must
have a reasonable basis to conclude that the special entity has a
qualified independent representative.\207\
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    \205\ SIFMA/ISDA 2011 Letter at 33.
    \206\ Proposed Rule 15Fh-2(a).
    \207\ As noted above, an SBS Dealer in these circumstances must
separately determine whether it is subject to regulation as an
investment adviser, a municipal advisor or other regulated entity.
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    The Commission believes that the SBS Dealer could form this
reasonable basis through a variety of means, including relying on
written representations from the special entity to the same extent as
discussed below in connection with an SBS Dealer acting as a
counterparty to a special entity.\208\ Upon receiving such
representations, the SBS Dealer would be entitled to rely on these
representations without further inquiry, absent special circumstances
described below.
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    \208\ See Section II.D.4.c, infra.
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    To solicit input on when it would no longer be appropriate for an
SBS Dealer to rely on such representations without further inquiry, the
Commission is proposing for comment two alternative approaches. One
approach would permit an SBS Dealer to rely on a representation from a
special entity for purposes of Rule 15Fh-2(a) unless it knows that the
representation is not accurate. The second would permit an SBS Dealer
to rely on a representation unless the SBS Dealer has information that
would cause a reasonable person to question the accuracy of the
representation.
    Under either approach, an SBS Dealer could not ignore information
in its possession as a result of which the SBS Dealer would know that a
representation is inaccurate. In addition, under the second approach,
an SBS Dealer also could not ignore information that would cause a
reasonable person to question the accuracy of a representation and, if
the SBS Dealer had such information, it would need to make further
reasonable inquiry to verify the accuracy of the representation.
    While the Dodd-Frank Act does not preclude an SBS Dealer from
acting as both advisor and counterparty, commenters have argued that it
could be impracticable for an SBS Dealer that is acting as a
counterparty to a special entity to meet the ``best interests''
standards that would be imposed by Section 15F(h)(4) if it were also
acting as an advisor to the special entity.\209\ We recognize the
potential tension in the statute itself between the role of a party
acting as a principal in a security-based swap transaction, and the
obligation imposed by Section 15F(h)(4) for an advisor to determine
that a transaction is in the ``best interests'' of the special entity.
We are seeking comment on whether we should further clarify the
obligations of an SBS Dealer that is seeking to act both as an advisor
and a counterparty to a special entity. We also are seeking comment on
the need to define ``best interests'' in this context. Finally, as
noted above, we understand that there are concerns arising from the
potential interaction between the requirements of the Dodd-Frank Act

(and our rules thereunder) and the requirements of other applicable
law, including ERISA.
---------------------------------------------------------------------------

    \209\ See SIFMA/ISDA 2010 Letter at 8:
    Dealers will almost certainly refuse to engage in any swap
activity in which they could potentially be deemed an ``advisor.''
The actions that a Dealer acting as an ``advisor'' would be required
to take pursuant to Dodd-Frank are the very actions that could lead
the Dealer to be deemed a fiduciary under ERISA. The penalties that
would result were the Dealer deemed a fiduciary under ERISA are
draconian, including that a swap between the Dealer and the plan
would be deemed a prohibited transaction in violation of ERISA and
would be subject to rescission and an excise tax equal to 15% of the
amount involved in the transaction for each year or part of a year
that the transaction remains uncorrected (which, if not corrected
upon notice, could escalate up to a 100% excise tax).
---------------------------------------------------------------------------

Request for Comments
    The Commission requests comments generally on all aspects of
proposed Rules 15Fh-2(a) and 15Fh-4(b). In addition, we request
comments on the following specific issues:
     Is the proposed definition of the term ``acts as an
advisor'' appropriate? Why or why not? What, if any, material
inconsistencies would the proposed definition create with respect to
any other applicable laws? What specific practical effects, advantages
or disadvantages may arise in connection with the proposed definition?
How, if at all, should any definition or interpretation of
``recommendation'' in this context diverge from the meaning of the term
for purposes of the suitability obligation under Proposed Rule 15Fh-
3(f)?
     Should the Commission instead define ``advisor'' to mean
``any person who, for compensation, engages in the business of advising
special entities, as to the value of security-based swaps or as to the
advisability of security-based swaps or trading strategies involving
security-based swaps,'' consistent with the definition of an investment
adviser? \210\ Why or why not?
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    \210\ See Advisers Act Section 202(a)(11) (definition of
``investment adviser'').
---------------------------------------------------------------------------

     Should the Commission instead define ``act as an advisor''
as ``providing advice to or on behalf of a special entity with respect
to a security-based swap or trading strategy involving a security-based
swap,'' consistent with the definition of a municipal advisor? \211\
Why or why not? What other definitions should be considered by the
Commission and why?
---------------------------------------------------------------------------

    \211\ See Exchange Act Section 15B(e)(4), Public Law 111-203,
124 Stat. 1376, 1921-1922 (to be codified at 15 U.S.C. 78o-4(e)(4));
see generally Registration of Municipal Advisors, Exchange Act
Release No. 63579 (Dec. 20, 2011), 76 FR 824 (Jan. 6, 2011).
---------------------------------------------------------------------------

     When, if at all, could an SBS Dealer, in fact, act as both
an advisor and counterparty to a special entity in a securities-based
swap transaction, consistent with the ``best interests'' requirements
of Section 15F(h)(4) and proposed Rule 15Fh-4(b)? \212\ In what way
could disclosure help to address concerns about the potentially
conflicting roles of an SBS Dealer in these circumstances? Should the
Commission, for example, clarify that it would not be inconsistent with
an SBS Dealer's duty to act in the best interests of the special entity
if the SBS Dealer, as principal, were to earn a reasonable profit or
fee from the transaction it enters into with the special entity?
---------------------------------------------------------------------------

    \212\ Commenting on a parallel provision in the Commodity
Exchange Act, Senator Lincoln stated that:
     [N]othing in [Commodity Exchange Act Section 4s(h)] prohibits a
swap dealer from entering into transactions with Special Entities.
Indeed, we believe it will be quite common that swap dealers will
both provide advice and offer to enter into or enter into a swap
with a special entity. However, unlike the status quo, in this case,
the swap dealer would be subject to both the acting as advisor and
business conduct requirements under subsections (h)(4) and (h)(5).
    156 Cong. Rec. S5923 (daily ed. Jul. 15, 2010) (statement of
Sen. Lincoln).
---------------------------------------------------------------------------

     Should the Commission instead prohibit an SBS Dealer from
acting as both an advisor and counterparty to a special entity? \213\
Why or why not?
---------------------------------------------------------------------------

    \213\ Recently approved amendments to MSRB Rule G-23 would
prohibit dealer-financial advisers from switching roles and becoming
underwriters in the same municipal securities transactions. See also
MSRB Notice 2011-29 (May 31, 2011) (discussing rule amendment and
interpretive notice).
---------------------------------------------------------------------------

     Should the Commission define ``acts as an advisor'' to
require an understanding among the parties that the SBS Dealer is
undertaking to act as an advisor to the special entity? Why or why not?
If such a definition should be contemplated, in what circumstances, if
any, should such an understanding not be permitted? Should a written
agreement be required to establish that the SBS Dealer is undertaking
to ``act as an advisor''?
     How would the proposed rules with respect to acting as an
advisor change current practice regarding recommending and entering
into security-based swaps with special entities?
     Should the Commission impose specific requirements with
respect to the level of detail that should be required for written
representations? If so, what requirements and why?
     What are the advantages and disadvantages of the two
alternative proposed approaches regarding when it would no longer be
appropriate to rely on written representations? Which alternative would
strike the best balance among the potential disadvantages to market
participants, the regulatory interest in appropriate rules for advisory
relationships, and the sound functioning of the security-based swap
market? What, if any, other alternatives should the Commission consider
(e.g., a recklessness standard) and why?
     In light of the additional protections that are afforded
special entities under the Dodd-Frank Act, as described in Section
I.C.5 above, should an SBS Dealer be required to undertake diligence or
further inquiry before it can rely on any representation from a special
entity for purposes of Rules 15Fh-2(a) and 15Fh-4(b)? Why or why not?
If such diligence or inquiry is not required, should an SBS Dealer be
permitted to rely on representations from the special entity only where
the SBS Dealer does not have information that would cause a reasonable
person to question the accuracy of the representation? Why or why not?
Would requiring such diligence or further inquiry--or allowing reliance
on representations only in such a manner--unnecessarily limit the
willingness or ability of SBS Dealers to provide special entities with
the access to security-based swaps for the purposes described in
Section I.C.5 above? Why or why not? What, if any, other measures
should be required in connection with an SBS Dealer's satisfaction of
the requirements of these rules?
     Are there particular circumstances under which an SBS
Dealer should be required to obtain information or undertake further
review or inquiry about a special entity's independent representative
or other facts in addition to obtaining written representations from
the special entity as described above? Are there particular categories
of special entities for which an SBS Dealer should be required to
undertake further review or inquiry? Which categories, and why? What
review or inquiry should be required, and in what circumstances?
     Are there other potential reasonable methods of
establishing the relationship between a special entity and an SBS
Dealer, and if so, what guidance should the Commission consider
providing with respect to such methods?
5. Counterparty to Special Entities: Proposed Rule 15Fh-5
    Under Exchange Act Section 15F(h)(5)(A), any SBS Entity that offers
to enter into or enters into a security-based swap with a special
entity must comply with any duty established by the Commission
requiring that SBS Entity to have a ``reasonable basis'' for believing
that the special entity has an ``independent representative'' that
meets certain requirements, including that it undertakes a duty to act
in the best interests of the counterparty it represents. Proposed Rules
15Fh-2(c) and 15Fh-5(a) would implement this provision. In particular,
proposed Rule 15Fh-2(c) would define an ``independent representative,''
and proposed Rule 15Fh-5(a) would require an SBS Entity to have a
reasonable basis to believe that this independent representative is
qualified to represent the special entity by virtue of satisfying
certain specified requirements.

Request for Comments
    The Commission requests comments generally on all aspects of
proposed Rule 15Fh-5. In addition, we request comments on the following
specific issues:
     Is it sufficiently clear what is meant by ``offers to
enter into'' a security-based swap? If not, how should the Commission
clarify the requirement?
     Should the proposed rule apply to all transactions with
all special entities? Why or why not? Which, if any, transactions or
special entities should be excluded from the scope of the proposed
rule, and why?
a. Scope of Qualified Independent Representative Requirement
    We are proposing to apply the qualified independent representative
requirements to Major SBS Participants as well as to SBS Dealers
because, although Section 15F(h)(2)(B) addresses only the requirement
for SBS Dealers to comply with the requirements of Section 15F(h)(5),
the specific requirements under Section 15F(h)(5)(A) apply by their
terms to both SBS Dealers and Major SBS Participants that offer to or
enter into a security-based swap with a special entity.
    We are further proposing to apply the qualified independent
representative requirement under Section 15F(h)(5) to security-based
swap transactions with all special entities. There is a statutory
ambiguity concerning the scope of this requirement. Section
15F(h)(5)(A) provides broadly that ``[a]ny security-based swap dealer
or major security-based swap participant that offers to [enter into] or
enters into a security-based swap with a special entity shall'' comply
with certain requirements. These requirements are defined in Section
15F(h)(5)(A)(i) to include ``any duty established by the Commission * *
* with respect to a counterparty that is an eligible contract
participant within the meaning of subclause (I) or (II) of clause (vii)
of section 1a(18) of the Commodity Exchange Act [i.e., governmental or
multinational or supranational entities].'' We are proposing standards
that would apply whenever an SBS Entity is acting as counterparty to
any special entity as defined in Section 15F(h)(1)(C), including a
special entity that is an ECP within the meaning of subclause (I) or
(II) of clause (vii) of Commodity Exchange Act Section 1a(18). The
proposed rule would be consistent with categories of special entities
mentioned in the legislative history.\214\ It also would give meaning
to the requirement of Section 15F(h)(5)(A)(i)(VII) concerning
``employee benefit plans subject to ERISA,'' that are not ECPs within
the meaning of subclause (I) or (II) of clause (vii) of section 1a(18)
of the Commodity Exchange Act but are included in the category of
retirement plans identified in the definition of special entity.\215\
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    \214\ See H.R. Conf. Rep. 111-517 (June 29, 2010) (``When acting
as counterparties to a pension fund, endowment fund, or state or
local government, dealers are to have a reasonable basis to believe
that the fund or governmental entity has an independent
representative advising them.'') (emphasis added).
    \215\ See Section 15F(h)(1)(C)(iii) of the Exchange Act, Pub. L.
111-203, 124 Stat. 1376, 1789 (to be codified at 15 U.S.C. 78o-
10(h)(1)(C)(iii)).
---------------------------------------------------------------------------

Request for Comments
    The Commission requests comments generally on all aspects of this
provision. In addition, we request comments on the following specific
issues:
     Should proposed Rule 15Fh-5 apply to both SBS Dealers and
Major SBS Participants? Why or why not?
b. Independent Representative--Proposed Rule 15Fh-2(c)
    Proposed Rule 15Fh-5(a) would require that the SBS Entity have a
reasonable basis to believe that a special entity has as qualified
``independent representative.'' Under proposed Rule 15Fh-2(c)(1), a
representative of a special entity must be independent of the SBS
Entity that is the counterparty to a proposed security-based swap.
Proposed Rule 15Fh-2(c)(2) would provide that a representative of a
special entity is ``independent'' of an SBS Entity if the
representative does not have a relationship with the SBS Entity,
whether compensatory or otherwise, that reasonably could affect the
independent judgment or decision-making of the representative. This
standard is similar to the ``no material relationship'' standard that
is used or proposed in other contexts.\216\ We preliminarily believe it
would be an appropriate standard here because the SBS Entity would
possess the necessary facts to determine if, in fact, there exists a
relationship with the independent representative that would be likely
to impair the independence of the independent representative in making
decisions that may affect the SBS Entity.
---------------------------------------------------------------------------

    \216\ Proposed Rules 15Fh-2(c)(1) and (2). This proposed
alternative standard of independence would be consistent with the
standard for existing and currently proposed director independence
in other contexts. See Ownership Limitations and Governance
Requirements for Security-Based Swap Clearing Agencies, Security-
Based Swap Execution Facilities, and National Securities Exchanges
with Respect to Security-Based Swaps under Regulation MC, Exchange
Act Release No. 63107 (Oct. 14, 2010), 75 FR 65882, 65897 (Oct. 26,
2010) (proposed Rule 700(l)); Security-Based Swap Data Repository
Registration, Duties, and Core Principles, Exchange Act Release No.
63347 (Nov. 19, 2010), 75 FR 77306, 77322 (Dec. 10, 2010); MSRB,
Notice of Filing of Amendment No. 1 to and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment No. 1, to Amend Rule A-3, on Membership on the Board, to
Comply with the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Exchange Act Release No. 63025 (Sep. 30, 2010), 75
FR 61806, 61808 (Oct. 6, 2010). It also would be consistent with the
NYSE standard for director independence and how public companies
have addressed this standard in their policies to determine director
independence. See NYSE Rule 303A.02(A) (``No director qualifies as
`independent' unless the board of directors affirmatively determines
that the director has no material relationship with the listed
company (either directly or as a partner, shareholder or officer of
an organization that has a relationship with the company) .
---------------------------------------------------------------------------

    Proposed Rule 15Fh-2(c)(3) would provide that a representative of a
special entity will be deemed to be independent of an SBS Entity if two
conditions are satisfied. First, the representative is not and, within
one year, was not an associated person of the SBS Entity and second,
the representative has not received more than ten percent of its gross
revenues over the past year, directly or indirectly, from the SBS
Entity. This latter restriction would apply, for example, with respect
to revenues received as a result of referrals by the SBS Entity, and so
is intended to address the situation in which a representative is hired
by the special entity as a result of a recommendation by the SBS
Entity. This restriction would apply as well to revenues received,
directly or indirectly, from associated persons of the SBS Entity.
    For the SBS Entity to form a reasonable basis to believe the
percentage of the independent representative's gross revenues that is
received directly or indirectly from the SBS Entity, the SBS Entity
would likely need to obtain information regarding the independent
representative's gross revenues from either the special entity or the
independent representative. The Commission believes that an SBS Entity
could use a variety of methods to gather this information. The SBS
Entity may request the financial statements of the independent
representative for the relevant periods. Another way to obtain this
information would be to obtain written representations from the special
entity or independent representative regarding the revenues received,
directly or indirectly from the SBS Entity and that such revenues were
less than ten percent of the independent representative's gross
revenues. Upon receiving such representations, the SBS

Entity would be entitled to rely on them without further inquiry,
absent special circumstances described below.
    To solicit input on when it would no longer be appropriate for an
SBS Entity to rely on such representations without further inquiry, the
Commission is proposing for comment two alternative approaches. One
approach would permit an SBS Entity to rely on a representation from a
special entity for purposes of Rule 15Fh-2(c) unless it knows that the
representation is not accurate. The second would permit an SBS Entity
to rely on a representation unless the SBS Entity has information that
would cause a reasonable person to question the accuracy of the
representation.
    Under either approach, an SBS Entity could not ignore information
in its possession as a result of which the SBS Entity would know that a
representation is inaccurate. In addition, under the second approach,
an SBS Entity also could not ignore information that would cause a
reasonable person to question the accuracy of a representation and, if
the SBS Entity had such information, it would need to make further
reasonable inquiry to verify the accuracy of the representation.
    An SBS Entity may obtain information from the independent
representative as part of its efforts to form a reasonable basis for
its determination that it is independent of the independent
representative. In order for the basis for its determination to be
reasonable, however, the SBS Entity could not ignore information it
possesses concerning whether the independent representative is or has
been, an associated person of the SBS Entity, for example, if it were
seeking to rely on the objective standard of proposed Rule 15Fh-
2(c)(1), or whether there exists any other relationship with the SBS
Entity that reasonably could affect the independent judgment or
decision-making of the independent representative for purposes of
proposed Rule 15Fh-2(c)(2).
    A number of special entities have requested that the Commission
confirm that the representative is only required to be independent of
the SBS Entity and not independent of the special entity itself.\217\
We preliminarily believe that Section 15F(h)(5)(A)(i)(III) requires
only that the independent representative be independent of the SBS
Entity. The Dodd-Frank Act is silent concerning the question of
independence from the special entity, and nothing in the legislative
history suggests that the Commission should preclude the use of a
qualified independent representative that is affiliated with the
special entity.\218\
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    \217\ Letter from Lynn D. Dudley, Senior Vice President, Policy,
American Benefits Council, to Elizabeth M. Murphy, Secretary,
Commission and David A. Stawick, Secretary, CFTC (Sept. 8, 2010)
(``American Benefits Council Letter'') at 6.
    \218\ See also 156 Cong. Rec. S5903 (daily ed. Jul. 15, 2010)
(statements of Sens. Lincoln and Harkin):
    Mrs. LINCOLN. Our intention in imposing the independent
representative requirement was to ensure that there was always
someone independent of the swap dealer or the security-based swap
dealer reviewing and approving swap or security-based swap
transactions. However, we did not intend to require that the special
entity hire an investment manager independent of the special entity.
Is that your understanding, Senator Harkin?
    Mr. HARKIN. Yes, that is correct. We certainly understand that
many special entities have internal managers that may meet the
independent representative requirement. For example, many public
electric and gas systems have employees whose job is to handle the
day-to-day hedging operations of the system, and we intended to
allow them to continue to rely on those in-house managers to
evaluate and approve swap and security-based swap transactions,
provided that the manager remained independent of the swap dealer or
the security-based swap dealer and meet the other conditions of the
provision. Similarly, the named fiduciary or in-house asset manager
(``INHAM'') for a pension plan may continue to approve swap and
security-based swap transactions.
---------------------------------------------------------------------------

Request for Comments
    The Commission requests comments generally on all aspects of this
provision. In addition, we request comments on the following specific
issues:
     Should the Commission adopt a different definition of
``independent representative of a special entity'' in proposed Rule
15Fh-2(c), and if so, why? Are there other standards of independence
that we should consider, such as standards that would be relevant to
determining the independence of a fiduciary for ERISA purposes? Which
standards and why? How should such standards be modified to address the
particular concerns of Section 15F(h)(5)? Should the Commission require
consideration of other or additional factors in determining the
independence of the independent representative of a special entity?
Which factors and why? Should such factors include consideration of
relationships the independent representative may have with an SBS
Entity on behalf of multiple special entities? Should the Commission
also consider relationships the independent representative has entered
into with an SBS Entity on behalf of a special entity outside of the
security-based swap transaction context?
     Should the definition of ``independent representative of a
special entity'' exclude certain categories of associated persons of
the SBS Entity? Of the independent representative? Which ones and why?
     Should the gross revenues in the definition exclude the
revenues of affiliates of the independent representative?
     Is ten percent of gross revenues an appropriate measure of
independence? Should the percentage be increased or decreased, and why?
Should the Commission adopt a standard that is consistent with that
used by the Department of Labor, for example, under which the general
standard of independence for fiduciaries in connection with prohibited
transaction exemptions under ERISA is that no more than 1% of an
independent fiduciary's annual income is derived from or attributable
to the party in interest and its affiliates? \219\ Should another
financial or other quantifiable standard be used in lieu of gross
revenues? Why or why not?
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    \219\ See Exemption Procedures under Federal Pension Law, http://www.dol.gov/ebsa/publications/exemption_procedures.html (``While
in certain cases the department has permitted an independent
fiduciary to receive as much as 5% of its annual income from the
party in interest and its affiliates, these cases have involved
unusual circumstances, and the general standard of independence
remains a 1% test.'').
---------------------------------------------------------------------------

     Should the Commission consider a timeframe other than one
year to determine whether a representative is independent of the SBS
Entity? Should the timeframe be two years, consistent with the pay to
play provisions of proposed Rule 15Fh-6? Should some other timeframe be
used? If so, what timeframe and why?
     Should the Commission consider a different approach to
independence based on, for example, audit committee independence
standards under Section 10A(m)(3) \220\ and Rule 10A-3(b),\221\ or the
concept of an ``interested person'' under Section 2(a)(1) of the
Investment Company Act of 1940? \222\ Why or why not? Should we
consider other approaches? If so, which approaches and why?
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    \220\ 15 U.S.C. 78j-1(m)(3).
    \221\ 17 CFR 240.10A-3(b).
    \222\ 15 U.S.C. 80a-2(a)(19).
---------------------------------------------------------------------------

     Should the Commission permit an independent representative
that receives compensation from the proceeds of a security-based swap
so long as the compensation is authorized by, and paid at the written
direction of, the special entity? Why or why not?
     Should the Commission adopt a different definition of
``independent representative of a special entity'' for different types
of special entities? For example, are there certain types of special
entities, e.g., a State, State agency, city, county, municipality, or

other political subdivision of a State, or a governmental plan as
defined in Section 3 of ERISA, for which the Commission should define
independence to require that the independent representative is not and
has not been an associated person of the SBS Entity within the last two
years and has not received any of its gross revenues, directly or
indirectly from the SBS Entity or an associated person of the SBS
Entity within the last two years? \223\ What if the time period
outlined in the prior sentence was limited to one year? Should this
stricter standard apply only with respect to special entities defined
in clause (ii)? Are there any other classes of special entities to
which this stricter standard should apply?
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    \223\ See Exchange Act Sections 15F(h)(2)(C)(ii) (defining
``special entity'' to include ``a State, State agency, city, county,
municipality, or other political subdivision of a State'') and
15F(h)(2)(C)(iv) (a governmental plan as defined in Section 3 of
ERISA), Pub. L. 111-203, 124 Stat. 1376, 1789.
---------------------------------------------------------------------------

     Are there other standards of independence that would be
more appropriate for independent representatives for special entities
defined in clauses (ii) and (iv) of Section 15F(h)(2)(C) of the
Exchange Act? Which standards and why?
     Are there certain types of relationships that, so long as
they have been fully disclosed to the special entity and the special
entity has consented to any conflicts of interest related thereto,
should not be deemed to affect the independence of the representative?
What types of relationships, and why? Are there some conflicts that are
so significant that a special entity should not be able to consent to
them? If so, what types of conflicts, and why?
     Is the interpretation of Section 15F(h)(5)(A)(i)(III)
appropriate? Can and should independent representatives be required to
be independent of the special entity entering into the security-based
swap as well as independent of the SBS Entity? Why or why not? If an
SBS Entity is relying on written representations from a special entity
that is represented by an internal ``independent representative,''
should the SBS Entity be required to also obtain such representations
from someone other than the independent representative?
     How, if at all, should the recommendation by an SBS Entity
of a particular independent representative or group of independent
representatives be deemed to affect the independent judgment or
decision-making of the representative? Please explain. If such a
recommendation could be deemed to affect the independence of a special
entity, are there appropriate safeguards that should be required if an
SBS Entity maintains a ``preferred list'' of independent
representatives? What safeguards, and why?
c. Reasonable Basis To Believe the Qualifications of the Independent
Representative
    As noted above, proposed Rule 15Fh-5 would require the SBS Entity
to reasonably determine that a special entity's independent
representative is a ``qualified independent representative.'' The
requirements for being a ``qualified independent representative'' are
drawn primarily from the statute and are described in the following
sections. The Commission believes that an SBS Entity could use a
variety of methods to establish a ``reasonable basis'' to believe that
a special entity's ``independent representative'' is ``qualified'' for
purposes of proposed Rule 15Fh-5.\224\
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    \224\ The SBS Entity may also be provided a copy of the
representations that the independent representative provides to the
special entity regarding its qualifications. In the absence of
language precluding the SBS Entity from relying on the
representations, the Commission preliminarily believes that the SBS
Entity could rely on the representations to form a reasonable basis
for its determinations to the same extent it could if the special
entity had provided the representations to the SBS Entity.
Furthermore, we do not believe that such reliance would constitute a
``material business relationship'' between the SBS Entity and
independent representative.
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    We preliminarily believe that, except as specifically noted below,
an SBS Entity could rely on written representations regarding the
various qualifications of the independent representative to form a
reasonable basis to believe that the independent representative is
``qualified''.\225\ Upon receiving such representations, the SBS Entity
would be entitled to rely on them without further inquiry, absent
special circumstances described below.
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    \225\ In particular, absent the special circumstances described
above, an SBS Entity would be permitted to rely on a representation
that stated the independent representative:
    (1) Had sufficient knowledge to evaluate the transaction and
risks;
    (2) Would undertake a duty to act in the best interests of the
special entity;
    (3) Would make appropriate and timely disclosures to the special
entity of material information concerning the security-based swap;
    (4) Would provide written representations to the special entity
regarding fair pricing and the appropriateness of the security-based
swap; and
    (5) In the case of employee benefit plans subject to the
Employee Retirement Income Security Act of 1974, was a fiduciary as
defined in section 3(21) of that Act (29 U.S.C. 1002(21)); and
    (6) In the case of a special entity defined in Sec. Sec.
240.15Fh-2(e)(2) or (4), was a person that is subject to rules of
the Commission, the CFTC or a self-regulatory organization subject
to the jurisdiction of the Commission or the CFTC prohibiting it
from engaging in specified activities if certain political
contributions have been made.
    It would not be appropriate, however, for an SBS Entity to rely
on a general representation that merely states that the counterparty
has a ``qualified independent representative'' for purposes of
proposed Rule 15Fh-5.
     The SBS Entity could also obtain a representation that that the
independent representative was not subject to a statutory
disqualification. However, as discussed below, the SBS Entity would
also be expected to search publicly available databases such as
BrokerCheck.
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    To solicit input on when it would no longer be appropriate for an
SBS Entity to rely on such representations without further inquiry, the
Commission is proposing for comment two alternative approaches. One
approach would permit an SBS Entity to rely on a representation from a
special entity for purposes of Rule 15Fh-5 unless it knows that the
representation is not accurate. The second would permit an SBS Entity
to rely on a representation unless the SBS Entity has information that
would cause a reasonable person to question the accuracy of the
representation.
    Under either approach, an SBS Entity could not ignore information
in its possession as a result of which the SBS Entity would know that a
representation is inaccurate. In addition, under the second approach,
an SBS Entity also could not ignore information that would cause a
reasonable person to question the accuracy of a representation and, if
the SBS Entity had such information, it would need to make further
reasonable inquiry to verify the accuracy of the representation.
Request for Comments
    The Commission requests comments generally on all aspects of this
provision. In addition, we request comments on the following specific
issues:
     Commenters have suggested that an independent
representative should be deemed ``qualified'' if it is ``a
sophisticated, professional adviser such as a bank, Commission-
registered investment adviser, insurance company or other qualifying
[Qualified Professional Asset Manager (``QPAM'')] or INHAM for Special
Entities subject to ERISA, a registered municipal advisor, or a similar
qualified professional''.\226\ Should the Commission permit this
presumption? If so, the Commission asks commenters to address
specifically how regulated status would inform the determination as to
whether an independent representative satisfies the qualification
requirements of Section 15F(h)(5) and proposed Rule 15Fh-5. If the
Commission were to adopt a presumption, should it apply equally for all
regulated persons? Should the

presumption instead be limited to certain types of regulated persons,
ERISA fiduciaries, for example? Why, or why not? If the Commission does
not permit the presumption, how, if at all, should the status of an
independent representative be taken into account for purposes of
determining whether the requirements of the proposed rule are
satisfied? \227\
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    \226\ SIFMA/ISDA 2011 Letter.
    \227\ See, e.g., Section II.D.4.c.iii (seeking comment on, among
other things, whether an ERISA plan fiduciary should be deemed to
act in the best interests of the special entity that is an employee
benefit plan that is subject to regulation under ERISA).
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     Are there other approaches that the Commission should
consider in permitting an SBS Entity to rely on a special entity's
written representation that it has a ``qualified independent
representative''? If so, what alternative approaches, if any, would be
feasible in terms of market practice and the advantages and
disadvantages for SBS Entities and special entities?
     Should the Commission require that the SBS Entity obtain
written representations regarding the qualifications of the independent
representative directly from the independent representative? From both
the independent representative and the special entity? Why or why not?
     Should the Commission allow an SBS Entity to rely on
written representations the independent representative provides to the
special entity? What constraints, if any, should be placed on such
reliance? For example, should an explicit statement regarding the SBS
Entity's use of the representations be required to be included in the
documentation of the security-based swap? What are the respective
advantages and disadvantages of the proposed approaches to guidance on
when it would not be appropriate to rely on a special entity's written
representations? Which alternative would strike the best balance among
the potential disadvantages to market participants, the regulatory
interest in appropriate independent representation for special
entities, and the sound functioning of the security-based swap market?
What, if any, other alternatives should the Commission consider and
why?
     Should an SBS Entity be required to undertake further
review or inquiry for particular categories of special entities? If so,
what review or inquiry should be required in what circumstances?
     In light of the additional protections that are afforded
special entities under the Dodd-Frank Act described in Section I.C.5
above, should an SBS Entity be required to undertake diligence or
further inquiry before it can rely on any representation from a special
entity concerning the qualifications of its representative? Why or why
not? If such diligence or inquiry is not required, should an SBS Entity
be permitted to rely on representations from the special entity only
where the SBS Entity does not have information that would cause a
reasonable person to question the accuracy of the representation? Why
or why not? Would requiring such diligence or further inquiry--or
allowing reliance on representations only in such a manner--
unnecessarily limit the willingness or ability of SBS Entities to
provide special entities with the access to security-based swaps for
the purposes described in Section I.C.5 above? Why or why not? What, if
any, other measures should be required in connection with an SBS
Entity's satisfaction of the requirements of proposed Rule 15Fh-5?
     Are there other potential reasonable means of establishing
that a special entity's independent representative has the requisite
qualifications, other than written representations, for which the
Commission should consider providing guidance? If so, what means should
such guidance address and how?
i. Qualified Independent Representative--Sufficient Knowledge To
Evaluate Transaction and Risks
    Proposed Rule 15Fh-5(a)(1) would require that the SBS Entity have a
reasonable basis to believe that the independent representative has
sufficient knowledge to evaluate the transaction and risks.\228\
Industry groups have recognized that intermediaries should assess the
sophistication of a counterparty--or its agent--including the
counterparty's capability to understand the risk and return
characteristics of the instrument.\229\ The independent representative
will play an important role in assessing and advising the special
entity in this regard.\230\
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    \228\ See Section 15F(h)(5)(A)(i)(I) of the Exchange Act, Public
Law 111-203, 124 Stat. 1376, 1791 (to be codified at 15 U.S.C. 78o-
10(h)(5)(A)(i)(I)). As noted above, an SBS Entity could rely on
representations from the special entity to form this reasonable
basis, as discussed in note 213 and related text.
    \229\ See CRMPG III Report at 57-59 (describing standards of
sophistication for investors of high-risk complex financial
instruments).
    \230\ See note 225, supra, and related text regarding an SBS
Entity's reliance on a representation from the special entity to
form this reasonable basis.
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Request for Comments
    The Commission requests comments generally on all aspects of this
provision. In addition, we request comments on the following specific
issues:
     Should the Commission require the SBS Entity to reevaluate
(or, as applicable require a new written representation regarding) the
qualifications of the independent representative periodically? If so,
how often? Should such reevaluation be required for specific types of
security-based swaps or in certain circumstances? If so, with respect
to which types and in what circumstances?
     Should the Commission specify particular facts or
circumstances that might give rise to a requirement for further review
or inquiry on the part of an SBS Entity, notwithstanding any
representations from the counterparty? Why or why not? What facts or
circumstances should be considered, if any?
     Should the Commission consider the development of a
proficiency examination for independent representatives? \231\ Should
such testing requirement be mandatory? Should it apply to both in-house
and third-party independent representatives? Why or why not?
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    \231\ See Letter from Joseph A. Dear, Chief Investment Officer,
California Public Employees' Retirement System et al., to David A.
Stawick, Secretary, CFTC (Feb. 18, 2011) (suggesting that the CFTC
consider an approach that would involve passage of a proficiency
examination by the independent representative); Letter from Peter A.
Shapiro, Managing Director, Swap Financial Group to David A.
Stawick, Secretary, CFTC (Feb. 22, 2011); Letter from Frank Iacono,
Partner, Riverside Risk Advisors LLC to David A. Stawick, Secretary,
CFTC (Feb. 22, 2011). Comments submitted to the CFTC are available
at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=935t.
---------------------------------------------------------------------------

     Should the Commission require that independent
representatives be registered with the Commission as municipal advisors
or investment advisers, or otherwise subject to regulation, such as
banking regulation, for example?
ii. Qualified Independent Representative--No Statutory Disqualification
    Proposed Rule 15Fh-5(a)(2) would require that the SBS Entity have a
reasonable basis to believe that the independent representative is not
subject to a statutory disqualification.\232\ Although Exchange Act
Section 15F(h) does not define ``subject to a statutory
disqualification,'' the term has an established meaning under Section

3(a)(39) of the Exchange Act,\233\ which defines circumstances that
would subject a person to a statutory disqualification with respect to
membership or participation in, or association with a member of, an
SRO. Although Section 3(a)(39) would not literally apply here, we are
proposing to define ``subject to a statutory disqualification'' for
purposes of proposed Rule 15Fh-5 by reference to Section 3(a)(39) of
the Exchange Act.
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    \232\ See Section 15F(h)(5)(A)(i)(II) of the Exchange Act,
Public Law 111-203, 124 Stat. 1376, 1791 (to be codified at 15
U.S.C. 78o-10(h)(5)(A)(i)(II)). As noted above, an SBS Entity could
rely on representations from the special entity to form this
reasonable basis, as discussed in note 213 and related text. See
discussion above in Section II.B.
    \233\ 15 U.S.C. 78c(a)(39).
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Request for Comments
    The Commission requests comments generally on all aspects of this
provision. In addition, we request comments on the following specific
issues:
     What, if any, other ``statutory disqualification'' models
or definitions should the Commission consider, and why?
     Should the Commission specify particular facts or
circumstances that require further review or inquiry on the part of an
SBS Entity, notwithstanding written representations received?
     Should the Commission require an SBS Entity to check
publicly available databases, such as FINRA's BrokerCheck and the
Commission's Investment Adviser Public Disclosure program, to determine
whether an independent representative is subject to a statutory
disqualification? \234\ Why or why not? If so, which databases should
be required to be consulted? Should such databases include sources
outside the Commission and self-regulatory organizations, such as
databases maintained by other regulators or federal or state officials?
Why or why not? If so, which outside databases should be required to be
consulted? Should the Commission require an SBS Entity to conduct any
other type of inquiry to determine whether an independent
representative is subject to a statutory disqualification? Why or why
not?
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    \234\ See, e.g., http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm, and http://www.adviserinfo.sec.gov/(S(b3d5ktvihzlhai45hknxzk45))/IAPD/Content/
Search/iapd--Search.aspx.
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iii. Qualified Independent Representative--Acting in the Best Interests
of the Special Entity
    Proposed Rule 15Fh-5(a)(3) would require that the SBS Entity have a
reasonable basis to believe that the independent representative
``undertakes a duty to act in the best interests'' of the special
entity.\235\ As discussed above, we are not proposing to define ``best
interests.'' We also note that an independent representative may be
subject to similar or additional obligations under other applicable law
with respect to its activities on behalf of the special entity.\236\
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    \235\ See Section 15F(h)(5)(A)(i)(IV) of the Exchange Act, Pub.
L. 111-203, 124 Stat. 1376, 1791 (to be codified at 15 U.S.C. 78o-
10(h)(5)(A)(i)(IV)). See note 225, supra, and related text regarding
an SBS Entity's reliance on a representation from the special entity
to form this reasonable basis.
    \236\ As noted above, depending on the circumstances, an
independent representative may be an ``investment adviser'' within
the meaning of Section 202(a)(11) of the Advisers Act, a ``municipal
advisor'' within the meaning of Section 15B(e) of the Exchange Act,
or a fiduciary for purposes of ERISA. A municipal advisor, for
example, ``shall be deemed to have a fiduciary duty to any municipal
entity for whom such municipal advisor acts as a municipal
advisor.'' 15 U.S.C. 78o-4(c)(1).
---------------------------------------------------------------------------

Request for Comments
    The Commission requests comments generally on all aspects of this
provision. In addition, we request comments on the following specific
issues:
     Should the independent representative be required to be
subject to some form of regulation (e.g., as an investment adviser or
an ERISA plan fiduciary) under which the independent representative has
a duty to act in the best interests of the special entity (or some
similar requirement)?
     Should an in-house independent representative be deemed to
act in the best interests of the special entity by virtue of its
employment with the special entity? Why or why not?
     Should an ERISA plan fiduciary, as defined under Section
3(21) of ERISA, that meets the standards of ERISA be deemed to act in
the best interests of a special entity that is an employee benefit plan
subject to regulation under ERISA, for purposes of the proposed rule?
Should a QPAM? \237\ An INHAM? \238\ Why or why not?
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    \237\ See Department of Labor Prohibited Transaction Exemption
(``PTE'') 84-14, 70 FR 49305 (Aug. 23, 2005); Amendment to PTE 84-14
for Plan Asset Transactions Determined by Independent Qualified
Professional Asset Managers, 75 FR 38837 (July 6, 2010).
    \238\ See Department of Labor PTE 96-23, 61 FR 15975 (Apr. 10,
1996); Proposed Amendment to PTE 96-23 for Plan Asset Transactions
Determined by In-House Asset Managers, 75 FR 33642 (proposed June
14, 2010).
---------------------------------------------------------------------------

iv. Qualified Independent Representative--Appropriate Disclosures to
Special Entity
    Section 15F(h)(5)(A)(i)(V) requires that the SBS Entity comply with
any rules promulgated by the Commission requiring the SBS Entity to
have a reasonable basis to believe that the independent representative
will make appropriate disclosures. The Dodd-Frank Act is silent
concerning the content of these disclosures. Proposed Rule 15Fh-5(a)(4)
would require that the SBS Entity have a reasonable basis to believe
that the independent representative will make appropriate and timely
disclosures to the special entity of material information regarding the
security-based swap.\239\
---------------------------------------------------------------------------

    \239\ See note 225, supra, and related text regarding an SBS
Entity's reliance on a representation from the special entity to
form this reasonable basis.
---------------------------------------------------------------------------

Request for Comments
    The Commission requests comments generally on all aspects of this
provision. In addition, we request comments on the following specific
issues:
     Should the Commission impose specific requirements with
respect to this obligation, such as the content of the disclosures that
should be made by the independent representative? If so, what
requirements and why? Should the ``appropriate disclosures'' include
disclosures regarding the qualifications of the independent
representative, in addition to disclosures regarding the security-based
swap? Why or why not? Should such disclosures address other subjects
not directly related to the security-based swap? Which ones and why?
     If the SBS Entity is not relying on written
representations, should the Commission allow a presumption that an in-
house independent representative, by virtue of its employment with the
special entity, will make appropriate disclosures of material
information to the special entity? Why or why not?
     Should the Commission also require that the SBS Entity
have a reasonable basis to believe that the independent representative
will make appropriate and timely disclosures to the special entity of
any potential conflicts of interest that the representative may have in
connection with the security-based swap transaction? Why or why not?
Would such disclosures be considered part of the ``best interests''
undertaking of an independent representative? Why or why not?
v. Qualified Independent Representative--Written Representations
    Proposed Rule 15Fh-5(a)(5) would require that the SBS Entity have a
reasonable basis to believe that the independent representative will
provide written representations to the special entity regarding fair
pricing and the appropriateness of the security-based

swap.\240\ Commenters have suggested that a written representation
``should be sufficient if the representation states that the
representative is obligated, by law and/or contract, to review pricing
and appropriateness with respect to any swap transaction in which the
representative serves as such with respect to the plan''.\241\ We are
not proposing a specific means by which this standard must be
satisfied. We preliminarily believe, however, the approach described
above would be reasonable. Another way for an SBS Entity to form a
reasonable basis for its determination would be relying on a written
representation that the independent representative will document the
basis for its conclusion that the transaction was fairly priced and
appropriate for the plan, and that the independent representative or
the special entity will maintain that documentation in its records for
an appropriate period of time, and make such records available to the
plan upon request.
---------------------------------------------------------------------------

    \240\ See Section 15F(h)(5)(A)(i)(VI) of the Exchange Act, Pub.
L. 111-203, 124 Stat. 1376, 1791 (to be codified at 15 U.S.C. 78o-
10(h)(5)(A)(i)(VI)). See note 225, supra, and related text regarding
an SBS Entity's reliance on a representation from the special entity
to form this reasonable basis.
    \241\ American Benefits Council Letter at 9.
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Request for Comments
    The Commission requests comments generally on all aspects of this
provision. In addition, we request comments on the following specific
issues:
     Should the Commission impose specific requirements with
respect to this obligation? If so, what requirements and why?
vi. Qualified Independent Representative--ERISA Fiduciary
    Proposed Rule 15Fh-5(a)(6) would require an SBS Entity to have a
reasonable basis to believe that the independent representative, in the
case of a special entity that is an employee benefit plan subject to
ERISA, is a ``fiduciary'' as defined in section 3(21) of that Act (29
U.S.C. 1002).\242\ None of the requirements set forth in the proposed
rule is intended to limit, restrict, or otherwise affect the
fiduciary's duties and obligations under ERISA.\243\
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    \242\ See Section 15F(h)(5)(A)(i)(VII) of the Exchange Act, Pub.
L. 111-203, 124 Stat. 1376, 1791 (to be codified at 15 U.S.C. 78o-
10(h)(5)(A)(i)(VII)). See note 225, supra, and related text
regarding an SBS Entity's reliance on a representation from the
special entity to form this reasonable basis.
    \243\ See notes 99, 198 and 189, supra, regarding the Department
of Labor's proposal to amend definition of ``fiduciary'' for
purposes of ERISA.
---------------------------------------------------------------------------

Request for Comments
    The Commission requests comments generally on all aspects of this
provision. In addition, we request comments on the following specific
issues:
     Should the Commission impose specific requirements with
respect to this obligation? If so, what requirements and why?
     Should other independent representative qualifications
under proposed Rule 15Fh-5(a)(1) be deemed satisfied if the independent
representative in the case of employee benefit plans subject to ERISA,
is a fiduciary as defined in section 3(21) of ERISA? If so, which
requirements and why?
vii. Qualified Independent Representative--Subject to ``Pay To Play''
Prohibitions
    We are proposing to include an additional requirement, not
expressly addressed by the Dodd-Frank Act, that the SBS Entity have a
reasonable basis for believing that the independent representative is
subject to ``pay to play'' rules if the special entity is a State,
State agency, city, county, municipality, or other political
subdivision of a State, or a governmental plan, as defined in Section
3(32) of ERISA.\244\ We believe that, unless exempted or excepted, an
independent representative in these circumstances would likely be
either a municipal advisor, or an investment adviser.\245\ A registered
municipal advisor would be subject to pay to play prohibitions under
MSRB rules.\246\ An investment adviser that is registered with the
Commission would be subject to existing Commission rules regarding
these practices.\247\
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    \244\ See Exchange Act Section 15F(h)(1)(C), Public Law 111-203,
124 Stat. 1376, 1789 (to be codified at 15 U.S.C. 78o-10(h)(1)(C))
(authorizing the Commission to prescribe business conduct standards
that relate to ``such other matters as the Commission determines to
be appropriate''). For a discussion of abuses associated with pay to
play practices, see Section II.D.5 below. See note 213 above and
related text regarding an SBS Entity's reliance on a representation
from the special entity to form this reasonable basis.
    \245\ See 15 U.S.C. 80b-2(a)(11) (defining ``investment
adviser''), and 15 U.S.C. 78o-4(3) (defining ``municipal advisor'').
Exchange Act Section 15B(4)(C) excludes from the definition of
``municipal advisor'' any investment adviser that is registered
under the Advisers Act, and persons associated with the investment
adviser who are providing investment advice.'' 15 U.S.C. 78o-
4(4)(C).
    \246\ See, e.g. MSRB Notice 2011-04, Request for Comment on Pay
to Play Rules for Municipal Advisors (Jan. 14, 2011) (requesting
comment on a draft proposal to establish ``pay to play'' and related
rules relating to municipal advisors and to make certain conforming
changes to existing pay to play rules for brokers, dealers and
municipal securities dealers).
    \247\ See, e.g., 17 CFR 275.206(4)-5 (prohibiting certain
political contributions by investment advisers providing or seeking
to provide investment advisory services to public pension plans and
other government investors).
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    We do not, however, intend to prohibit other qualified persons from
acting as independent representatives so long as those persons are
similarly subject to pay to play restrictions. As discussed in Section
II.D.5 below, pay to play practices may result in significant harm to
these types of special entities in connection with security-based swap
transactions.\248\ The concern is heightened here because of the
fiduciary role that Congress has envisaged for independent
representatives to special entities. In the case of independent
representatives, the concern would be that a person might make
contributions in order to be chosen as an independent representative
(and obtain the fees commensurate with that role), and then not act as
an impartial advisor with respect to the transaction. The proposed rule
is intended to deter SBS Entities from participating, even indirectly,
in such practices. Accordingly, proposed Rule 15Fh-5(a)(7) would
require an SBS Entity to have a reasonable basis for believing that the
independent representative is a person that is subject to rules of the
Commission, the CFTC or an SRO subject to the jurisdiction of the
Commission or the CFTC prohibiting it from engaging in specified
activities if certain political contributions have been made, unless
the independent representative is an employee of the special
entity.\249\
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    \248\ See note 32, supra.
    \249\ See Exchange Act Section 15B(e)(4), Public Law 111-203,
124 Stat. 1376, 1921-1922 (to be codified at 15 U.S.C 78o-4(e)(4))
(defining ``municipal advisor'' as a person ``other than a municipal
entity or an employee of a municipal entity'' that engages in the
specified activities).
---------------------------------------------------------------------------

Request for Comments
    The Commission requests comments generally on all aspects of this
provision. In addition, we request comments on the following specific
issues:
     Are there circumstances in which an independent
representative that is advising a special entity that is a State, State
agency, city, county, municipality, or other political subdivision of a
State, or a governmental plan, as defined in Section 3(32) of ERISA,
other than an employee of the special entity, would not be subject to
pay to play restrictions?
     Should the Commission consider a different requirement,
for example, that the independent representative be

subject to specific prohibitions, such as those described in Advisers
Act Rule 206(4)-5 (prohibiting investment advisers that are registered,
or required to be registered with the Commission, from providing or
seeking to provide investment advisory services to public pension plans
and other government investors when certain political contributions
have been made)?
     Should the Commission require that the independent
representative be a registered municipal advisor or Commission
registered investment adviser?
d. Disclosure of Capacity
    Proposed Rule 15Fh-5(b) would require that, before initiation of a
security-based swap with a special entity, an SBS Dealer must disclose
in writing the capacity or capacities in which it is acting.\250\ An
SBS Dealer that is acting as a counterparty but not an advisor to a
special entity, for example, would need to make clear to the special
entity the capacity in which it is acting (i.e., that it is acting as a
counterparty, but not as an advisor).
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    \250\ See Section 15F(h)(5)(A)(2)(i) of the Exchange Act, Pub.
L. 111-203, 124 Stat. 1376, 1791 (to be codified at 15 U.S.C. 78o-
10(h)(5)(A)(2)(i)).
---------------------------------------------------------------------------

    Commenters have noted that a firm may be acting in multiple
capacities in relation to a special entity, for example, as underwriter
in a bond offering as well as counterparty to a security-based swap
used to hedge the financing transaction.\251\ In these circumstances,
the SBS Dealer's duty to the special entity could vary depending upon
the capacity in which it is acting, and so it is important for a
special entity and its independent representative to understand the
roles in which the SBS Dealer is acting.\252\ The proposed rule,
therefore, would require an SBS Dealer that engages in business, or has
engaged in business within the last twelve months, with the
counterparty in more than one capacity to disclose the material
differences between such capacities in connection with the security-
based swap and any other financial transaction or service involving the
counterparty.\253\
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    \251\ See Swap Financial Group Presentation at 55.
    \252\ In the case of special entities that are municipal
entities, MSRB Rule G-23 generally prohibits dealer-financial
advisors from acting in multiple capacities in the same municipal
securities transactions. See also MSRB Notice 2011-29 (May 31, 2011)
(discussing rule amendment and interpretive notice).
    \253\ See proposed Rule 15Fh-5(b).
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    We are proposing to apply the requirement in proposed Rule 15Fh-
5(b) to SBS Dealers but not Major SBS Participants because the
statutory requirement, by its terms, requires disclosure in writing of
``the capacity in which the security-based swap dealer is acting.''
\254\
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    \254\ We making this statement because the introductory clause
of Section 15F(h)(5) imposes disclosure obligations on both SBS
Dealers and Major SBS Participants and thus could be read to impose
the capacity disclosure obligation on all SBS Entities. See Section
15F(h)(5)(A)(2)(ii) of the Exchange Act, Public Law 111-203, 124
Stat. 1376, 1791 (to be codified at15 U.S.C. 78o-
10(h)(5)(A)(2)(ii)). We also note that the obligation in the text of
the statute does not require Commission rulemaking.
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Request for Comments
    The Commission requests comments generally on all aspects of this
provision. In addition, we request comments on the following specific
issues:
     Are there specific capacities in which an SBS Dealer may
act that merit more detailed types of disclosures? If so, which
capacities, and what types of disclosures should be required? Should
the Commission define in further detail the specific categories of
``capacities'' in which SBS Dealers may act that would need to be
disclosed under the proposed rule--e.g., as advisor, counterparty,
underwriter, etc? If so, which capacities should be identified and
disclosed?
     Should the Commission require similar disclosures by Major
SBS Participants? Why or why not?
     Are there certain capacities for which disclosures should
not be required? If so, which capacities, and why?
     Should the required disclosure be limited to other
``capacities'' within a timeframe other than twelve months? If so, what
would be the appropriate time frame? Why?
     Should there be a de minimis exclusion from the required
disclosure? If so, what would be an appropriate threshold? Are there
certain ``capacities'' that should be disclosed regardless of the
dollar amount involved?
     We understand that some SBS Dealers may utilize a single
relationship point of contact to manage the multiple capacities in
which they may act with regard to a special entity. Does this
relationship management model increase the likelihood that the special
entity would be confused as to the standard of conduct with which each
associated person is required to comply? Should the SBS Dealer be
required to disclose the material differences in capacities that are
managed separate and apart from this centralized relationship point? If
an SBS Dealer has information barriers in place between certain
associated persons or affiliates, should the SBS Dealer still be
required to disclose to the special entity any material differences in
the capacities in which these associated persons are acting? Would
these types of information barriers impair the customer service that a
special entity might otherwise receive?
     Are there any circumstances in which an affiliate of the
SBS Dealer should be treated as an independent entity or third party,
for the purposes of this disclosure rule?
6. Prohibition on Certain Political Contributions by SBS Dealers:
Proposed Rule 15F-6
    We are proposing a rule that would prohibit an SBS Dealer from
engaging in security-based swap transactions with a ``municipal
entity'' if certain political contributions have been made to officials
of the municipal entity.\255\ Pay to play occurs when persons seeking
to do business with state and municipal governments make political
contributions, or are solicited to make political contributions, to
elected officials or candidates in order to influence the selection
process.\256\ In making such contributions, interested persons hope to
benefit from officials who ``award the contracts on the basis of
benefit to their campaign chests rather than to the governmental

entity.'' \257\ Pay to play practices may take a variety of forms,
including an SBS Dealer's direct contributions to government officials,
an SBS Dealer's solicitation of third parties to make contributions or
payments to government officials or political parties in the state or
locality where the SBS Dealer seeks to provide services, or an SBS
Dealer's payments to third parties to solicit (or as a condition of
obtaining) security-based swap business.
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    \255\ See Section 15F(h)(1)(D) of the Exchange Act, Public Law
111-203, 124 Stat. 1376, 1789, 15 U.S.C. 78o-10(h)(1)(D)
(authorizing the Commission to prescribe business conduct standards
that relate to ``such other matters as the Commission determines to
be appropriate'').
     The proposed restrictions would apply to dealings with a
``municipal entity,'' which is defined in Exchange Act Section
15B(e)(8) (15 U.S.C. 78o-4(e)(8)) as: ``any State, political
subdivision of a State, or municipal corporate instrumentality of a
State, including--(A) any agency, authority, or instrumentality of
the State, political subdivision, or municipal corporate
instrumentality; (B) any plan, program, or pool of assets sponsored
or established by the State, political subdivision, or municipal
corporate instrumentality or any agency, authority, or
instrumentality thereof; and (C) any other issuer of municipal
securities.''
    \256\ See, e.g., Blount v. SEC, 61 F. 3d 938 (D.C. Cir. 1995),
cert. denied, 116 S. Ct. 1351 (1996) (holding that ``underwriters'
campaign contributions self-evidently create a conflict of interest
in state and local officials who have power over municipal
securities contracts and a risk that they will award the contracts
on the basis of benefit to their campaign chests rather than to the
governmental entity''); Testimony of Martha Mahan Haines before the
U.S. Senate Committee on Banking, Housing, and Urban Affairs,
Subcommittee on Securities, Insurance, and Investment (May 21, 2009)
(stating that pay to play practices may result in an unqualified
financial advisor being chosen because of his political
contributions). See also Political Contributions by Certain
Investment Advisers, supra, note 32 at notes 18 through 25, citing
examples of more recent Commission and criminal actions against
investment advisers and other parties for violations involving pay
to play arrangements.
    \257\ Blount, 61 F.3d at 944-45.
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    In the context of security-based swaps, pay to play practices may
result in municipal entities entering into transactions not because of
hedging needs or other legitimate purposes, but rather because of
campaign contributions given to an official with influence over the
selection process. Where pay to play exists, SBS Dealers may compete
for security-based swap business based on their ability and willingness
to make political contributions, rather than on their merit or the
merit of a proposed transaction. We believe these practices may result
in significant harm to municipalities and others in connection with
security-based swap transactions, just as they do in connection with
other municipal securities transactions.\258\
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    \258\ See id. See SEC v. Larry P. Langford, Litigation Release
No. 20545 (Apr. 30, 2008) and SEC v. Charles E. LeCroy, Litigation
Release No. 21280 (Nov. 4, 2009) (charging Alabama local government
officials and J.P. Morgan employees with undisclosed payments made
to obtain municipal bond offering and swap agreement business from
Jefferson County, Alabama). See also J.P. Morgan Securities Inc.,
Securities Act Release No. 9078 (Nov. 4, 2009) (instituting
administrative and cease-and-desist proceedings against a broker-
dealer that the Commission alleged was awarded bond underwriting and
interest rate swap agreement business by Jefferson County in
connection with undisclosed payments by employees of the firm).
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    By its nature, pay to play is covert because participants do not
broadcast that contributions or payments are made or accepted for the
purpose of influencing the selection of a financial services provider.
As one court noted, ``[w]hile the risk of corruption is obvious and
substantial, actors in this field are presumably shrewd enough to
structure their relations rather indirectly.'' \259\ Consequently, pay
to play practices are often hard to prove because it is difficult to
prove that contributions were made for the purpose of obtaining
government business, and that those contributions then drove the
selection of a particular entity.
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    \259\ Blount v. SEC, 61 F.3d at 945.
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    Absent implementation of specific rules prohibiting pay to play
practices, it is likely such practices would continue undeterred, given
that such practices pose a ``collective action'' problem.\260\ That is,
government officials who engage in pay to play practices may have an
incentive to continue accepting contributions to support their
campaigns, for fear of being disadvantaged relative to their opponents.
In addition, SBS Dealers may have an incentive to participate out of
concern that they may be overlooked if they fail to make contributions.
Both the stealthy nature of these practices and the inability of
markets to properly address them strongly support the need for a
prophylactic measure to address them, such as proposed Rule 15Fh-
6.\261\
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    \260\ As we explained in our release adopting Advisers Act Rule
206(4)-5, a collective action problem exists when participants who
prefer to abstain from pay to play nonetheless feel compelled to
participate due to concern that they will be locked out of the
market unless they take part. See Political Contributions by Certain
Investment Advisers, note 33, supra.
    \261\ Cf. Blount, 61 F.3d at 945 (``no smoking gun is needed
where, as here, the conflict of interest is apparent, the likelihood
of stealth great, and the legislative purpose prophylactic'').
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    Proposed Rule 15Fh-6 is modeled on, and intended to complement,
existing restrictions on pay to play practices under Advisers Act Rule
206(4)-5, which imposes pay to play restrictions on investment advisers
providing or seeking to provide investment advisory services to public
pension plans and other government investors,\262\ and under MSRB Rules
G-37 and G-38, which impose pay to play restrictions on municipal
securities dealers and broker-dealers engaging or seeking to engage in
the municipal securities business. The proposed rule would create a
comparable regulatory framework, as there are no existing federal pay
to play restrictions that would apply to all SBS Dealers in their
dealings with municipal entities. The proposed rule is intended to
deter SBS Dealers from engaging in pay to play practices.
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    \262\ 17 CFR 275.206(4)-5. See Political Contributions by
Certain Investment Advisers, note 32, supra. (adopting Advisers Act
Rule 206(4)-5). See also Rules Implementing Amendments to the
Investment Advisers Act of 1940, Investment Advisers Act Release No.
3110 (Nov. 19, 2010), 75 FR 77052 (Dec. 10, 2010) (proposing
amendments to Investment Advisers Act Rule 206(4)-5).
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    The proposed rule itself does not attempt to stamp out corruption
by public officials or to regulate local elections, nor is it a ban on
political contributions. Rather, the proposed rule would bar SBS
Dealers from entering into contracts after they make contributions,
with the aim of eliminating motivation to engage in pay to play.
    We have closely drawn proposed Rule 15Fh-6 to accomplish its goal
of preventing quid pro quo arrangements while avoiding unnecessary
burdens on the protected speech and associational rights of SBS Dealers
and their covered employees.\263\ The proposed rule would address only
direct contributions to officials--it is not intended in any way to
impinge on a wide range of expressive conduct in connection with
elections. It would be triggered only when a business relationship
exists or will be established in the near future. It would target those
employees of SBS Dealers whose contributions raise the greatest danger
of quid pro quo exchanges, and it would cover only contributions to
those government officials who would be the most likely targets of a
quid pro quo because of their authority to influence the award of
government contracts. Finally, the proposed rule would not prevent
anyone from making contributions at or below a specified de minimis
level.
---------------------------------------------------------------------------

    \263\ The proposed rule is closely modeled on the MSRB Rule G-37
upheld by the Court of Appeals for the District of Columbia Circuit
in Blount v. SEC, 61 F.3d at 947-48.
---------------------------------------------------------------------------

    We are proposing to apply the requirements in proposed Rule 15Fh-6
to SBS Dealers but not to Major SBS Participants because we do not
anticipate that Major SBS Participants would serve a dealer-type role
in the market.\264\
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    \264\ See discussion in Section I.C.4, supra.
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a. Prohibitions
    Proposed Rule 15Fh-6(b)(1) would generally make it unlawful for an
SBS Dealer to offer to enter or to enter into a security-based swap
with a municipal entity for a two-year period after the SBS Dealer or
any of its covered associates makes a contribution to an official of
the municipal entity.\265\
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    \265\ Proposed Rule 15Fh-6(a)(5) would define the term
``official'' of a municipal entity for purposes of the proposed rule
to mean:
    A person (including any election committee for such person) who
was, at the time of the contribution, an incumbent, candidate or
successful candidate for elective office of a municipal entity, if
the office:
    (i) Is directly or indirectly responsible for, or can influence
the outcome of, the selection of a security-based swap dealer or
major security-based swap participant by a municipal entity; or
    (ii) Has authority to appoint any person who is directly or
indirectly responsible for, or can influence the outcome of, the
selection of a security-based swap dealer or major security-based
swap participant by a municipal entity.
---------------------------------------------------------------------------

    Proposed Rule 15Fh-6(b)(3)(i) would prohibit an SBS Dealer from
paying a third party to solicit municipal entities to enter into a
security-based swap, unless the third party is a ``regulated person''
that is itself subject to a pay to

play restriction under applicable law.\266\ We are concerned that the
adoption of a rule addressing pay to play practices by security-based
swap dealers would lead to the use of solicitors by security-based swap
dealers to circumvent the rule. Proposed Rule 15Fh-6(b)(3)(i) is
intended to deter SBS Dealers from participating, even indirectly, in
such practices.
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    \266\ Proposed Rule 15Fh-6(a)(7) would define ``regulated
person,'' for purposes of the rule, to mean generally a person that
is subject to rules of the Commission, the CFTC or an SRO subject to
the jurisdiction of the Commission or the CFTC prohibiting it from
engaging in specified activities if certain political contributions
have been made, or its officers or employees.
---------------------------------------------------------------------------

    Third, proposed Rule 15Fh-6(b)(3)(ii) would ban an SBS Dealer from
soliciting or coordinating contributions to an official of a municipal
entity with which the SBS Dealer is seeking to enter into, or has
entered into a security-based swap, or payments to a political party of
a state or locality with which the SBS Dealer is seeking to enter into,
or has entered into, a security-based swap. These proposed prohibitions
are similar to those contained in Advisers Act Rule 206(4)-5, and MSRB
Rules G-37 and G-38.
    Proposed Rule 15Fh-6(c) would make it unlawful for an SBS Dealer to
do indirectly or through another person or means anything that would,
if done directly, result in a violation of the prohibitions contained
in the proposed rule.
b. Two-Year ``Time Out''
    Proposed Rule 15Fh-6(b)(1) would prohibit an SBS Dealer from
offering to enter into, or entering into, a security-based swap with a
municipal entity within two years after a contribution to an official
of such municipal entity has been made by the SBS Dealer or any of its
covered associates. We believe the two-year time out requirement
strikes an appropriate balance, as it is sufficiently long to act as a
deterrent but not so long as to be unnecessarily onerous. The two-year
time out is consistent with the time out provisions contained in
Advisers Act Rule 206(4)-5 and MSRB Rule G-37.
c. Covered Associates
    Political contributions made to influence the selection of a firm
are typically made not by the firm itself, but by officers and
employees of the firm who have a stake in the business relationship
with the municipal entity.\267\ For this reason, the restrictions under
proposed Rule 15Fh-6(b)(1) would apply to contributions by any
``covered associate'' of an SBS Dealer, which is defined to include:
(i) Any general partner, managing member or executive officer, or other
person with a similar status or function; \268\ (ii) any employee who
solicits a municipal entity to enter into a security-based swap with
the SBS Dealer and any person who supervises, directly or indirectly,
such employee; and (iii) any political action committee controlled by
the SBS Dealer or any of its covered associates.\269\ This definition
is consistent with a similar provision in Advisers Act Rule 206(4)-
5.\270\
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    \267\ See Political Contributions by Certain Investment
Advisers, supra, note 33.
    \268\ Proposed Rule 15Fh-6(a)(3) would define ``executive
officer'' of an SBS Dealer to mean, for purposes of the rule:
     The president;
     Any vice president in charge of a principal business
unit, division or function (such as sales, administration or
finance);
     Any other officer of the SBS Dealer who performs a
policy-making function; or
     Any other person who performs similar policy-making
functions for the SBS Dealer.
    \269\ Proposed Rule 15Fh-6(a)(2).
    \270\ 17 CFR 275.206(4)-5(f)(2).
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    Because the proposed rule would attribute to a firm those
contributions made by a person even prior to becoming a covered
associate of the firm, SBS Dealers would need to ``look back'' in time
to determine whether the time out applies when an employee becomes a
covered associate. For example, if the contribution was made less than
two years (or six months, as applicable) before an individual becomes a
covered associate, the proposed rule would prohibit the firm from
entering into a security-based swap with the relevant municipal entity
until the two-year time out period has expired.
d. Officials
    The restrictions would apply when contributions are made to an
``official'' of a municipal entity. Proposed Rule 15Fh-6(a)(5) would
define ``official'' to mean any person (including any election
committee for such person) who was, at the time of the contribution, an
incumbent, candidate or successful candidate for elective office of a
municipal entity, if the office is directly or indirectly responsible
for, or can influence the outcome of, the selection of an SBS Dealer by
a municipal entity; or has authority to appoint any person who is
directly or indirectly responsible for, or can influence the outcome
of, the selection of an SBS Dealer by a municipal entity.
e. Exceptions
i. De Minimis Contributions
    The proposed rule would permit an individual who is a covered
associate to make aggregate contributions without being subject to the
two-year time out period, of up to $350 per election, for any one
official for whom the individual is entitled to vote, and up to $150
per election, to an official for whom the individual is not entitled to
vote.\271\ We are proposing this two-tier approach because, while we
recognize persons can have a legitimate interest in contributing to
campaigns of people for whom they are unable to vote, we are concerned
that contributions by covered associates living in distant
jurisdictions may be less likely to be made for purely civic purposes.
Accordingly, the proposed de minimis exception for contributions to
candidates for whom a covered associate is not entitled to vote is
lower than the de minimis exception for candidates for whom a covered
associate is entitled to vote. We believe that the $150 exception for
contributions to a candidate for whom the covered associate is not
entitled to vote is appropriate because of the more remote interest a
covered associate is likely to have in contributing to such a person.
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    \271\ Proposed Rule 15Fh-6(b)(2)(i).
---------------------------------------------------------------------------

ii. New Covered Associates
    The prohibitions of the proposed rule would not apply to
contributions by an individual made more than six months prior to
becoming a covered associate of the SBS Dealer, unless such individual
solicits the municipal entity after becoming a covered associate.\272\
---------------------------------------------------------------------------

    \272\ Proposed Rule 15Fh-6(b)(2)(ii).
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iii. Exchange and SEF Transactions
    The prohibitions of proposed Rule 15Fh-6 would not apply to a
security-based swap that is initiated by a municipal entity on a
registered national securities exchange or SEF, for which the SBS
Dealer does not know the identity of the counterparty at any time up to
and including the time of execution of the transaction.\273\
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    \273\ Proposed Rule 15Fh-6(a)(2)(iii).
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f. Exception and Exemptions
    We are proposing a provision that would provide an SBS Dealer a
limited ability to cure the consequences of an inadvertent political
contribution to an official for whom the covered associate is not
entitled to vote. The exception would apply to contributions that, in
the aggregate, do not exceed $350 to any one official per election. The
SBS Dealer

must have discovered the contribution that resulted in the prohibition
within four months of the date of the contribution, and obtained the
return of the contribution to the contributor within 60 calendar days
of the date of discovery. In addition, an SBS Dealer would not be able
to rely on this exception more than twice in any 12-month period, or
more than once for any covered associate, regardless of the time
between contributions.\274\ This automatic exception mirrors similar
provisions contained in Advisers Act Rule 206(4)-5 and MSRB Rule G-37.
---------------------------------------------------------------------------

    \274\ Proposed Rule 15Fh-6(e)(1).
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    The scope of this exception would be limited to the types of
contributions we believe are less likely to raise pay to play concerns.
The prompt return of the contribution would provide an indication that
the contribution would not affect an official's decision to enter into
a transaction with the SBS Dealer. The relatively small amount of the
contribution, in conjunction with the other conditions of the
exception, should help to mitigate concerns that the contribution was
made for purposes of influencing the municipal entity's selection
process. The restrictions on repeated triggering contributions should
reinforce the need for effective compliance controls. Because the
proposed exception would operate automatically, we preliminarily
believe that it should be subject to conditions that are objective and
limited in order to capture only those contributions that are less
likely to raise pay to play concerns.
    In addition, we are proposing a provision under which an SBS Dealer
may apply to the Commission for an exemption from the two-year ban. In
determining whether to grant the exemption, the Commission would
consider, among other factors: (i) Whether the exemption is necessary
or appropriate in the public interest and consistent with the
protection of investors and the purposes of the Exchange Act; (ii)
whether the SBS Dealer, (a) Before the contribution resulting the
prohibition was made, had adopted and implemented policies and
procedures reasonably designed to prevent violations of the proposed
rule, (b) prior to or at the time the contribution, had any actual
knowledge of the contribution, and (c) after learning of the
contribution, had taken all available steps to cause the contributor to
obtain return of the contribution and such other remedial or
preventative measures as may be appropriate under the circumstances;
(iii) whether, at the time of the contribution, the contributor was a
covered associate or otherwise an employee of the SBS Dealer, or was
seeking such employment; (iv) the timing and amount of the
contribution; (v) the nature of the election (e.g., state or local);
and (vi) the contributor's intent or motive in making the contribution,
as evidenced by the facts and circumstances surrounding the
contribution.\275\ This exemption is similar to the exemption-by-
application provisions contained in Advisers Act Rule 206(4)-5 and MSRB
Rule G-37.
---------------------------------------------------------------------------

    \275\ Proposed Rule 15Fh-6(e).
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Request for Comments
    The Commission requests comments generally on all aspects of this
provision. In addition, we request comments on the following specific
issues:
     Do security-based swap transactions with municipal
entities present the same risks of pay to play abuses as other
securities transactions involving municipal securities dealers and
investment advisers? If not, why not?
     Do the same risks of pay to play abuses exist when a Major
SBS Participant, rather than an SBS Dealer, is seeking to enter into a
security-based swap with a municipal entity? If not, why not? Should
the proposed rule apply to Major SBS Participants, as well as to SBS
Dealers? If so, why?
     Is the term ``municipal entity'' appropriately defined? If
not, should the definition refer to ``a State, State agency, city,
county, municipality, or other political subdivision of a State, or any
governmental plan, as defined in section 3 of the Employee Retirement
Income Security Act of 1974 (29 U.S.C. 1002)'' within the meaning of
Exchange Act Section 15F(h)(2)(C)? Should the Commission use the
definition of ``government entity'' from Advisers Act Rule 206(4)-5?
\276\ Should the Commission instead follow the approach of MSRB Rule G-
37? \277\
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    \276\ As used in 17 CFR 275.206(4)-5, the term ``government
entity'' means any state or political subdivision of a state,
including:
    (i) Any agency, authority, or instrumentality of the state or
political subdivision;
    (ii) A pool of assets sponsored or established by the state or
political subdivision or any agency, authority or instrumentality
thereof, including, but not limited to a ``defined benefit plan'' as
defined in section 414(j) of the Internal Revenue Code (26 U.S.C.
414(j)), or a state general fund;
    (iii) A plan or program of a government entity; and
    (iv) Officers, agents, or employees of the state or political
subdivision or any agency, authority or instrumentality thereof,
acting in their official capacity.
    \277\ MSRB Rule G-37 references ``the governmental issuer
specified in [Section 3(a)(29) of the Exchange Act]'' which would
include ``a State or any political subdivision thereof, or any
municipal corporate instrumentality of one more States.''
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     Should the requirements of proposed Rule 15Fh-6 be deemed
satisfied if an SBS Dealer can establish that it is subject to other
regulation that similarly prohibits it from engaging in security-based
swap activities if certain political contributions have been made?
Should an SBS Dealer's ability to rely on other regulation be
conditioned on a Commission finding that the other regulation imposes
substantially equivalent or more stringent restrictions than proposed
Rule 15Fh-6 would impose on SBS Dealers, and that such other rules are
consistent with the objectives of proposed Rule 15Fh-6? Why or why not?
     Proposed Rule 15Fh-6(b)(3)(i) is intended to prevent SBS
Dealers from participating, even indirectly, in pay to play practices.
What would be the advantages and disadvantages of such an approach? Is
there another approach that the Commission should consider? Are there
differences between the operations of SBS Dealers and other securities
firms that would make the third-party solicitor provision unnecessary?
If so, what are they? Would the provision impose any collection of
information obligations? If so, what would they be? What would be the
costs and benefits of this approach?

E. Chief Compliance Officer: Proposed Rule 15Fk-1

    Section 15F(k) of the Exchange Act requires an SBS Entity to
designate a chief compliance officer (``CCO''), and imposes certain
duties and responsibilities on that CCO. Proposed Rule 15Fk-1 would
codify the provisions of Exchange Act Section 15F(k) with some
modifications based on the current compliance obligations applicable to
CCOs of other Commission-regulated entities. The proposed requirements
underscore the central role that sound compliance programs play to
ensure compliance with the Exchange Act and rules and regulations
thereunder applicable to security-based swaps.\278\
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    \278\ See FINRA Rule 3130.
---------------------------------------------------------------------------

    Proposed Rule 15Fk-1(a) would require an SBS Entity to designate a
CCO on its registration form, and proposed Rule 15Fk-1(b) would impose
certain duties on the CCO. Proposed Rule 15Fk-1(b)(1) would require
that the CCO report directly to the board of directors, a body
performing a function similar to the board, or to the senior

officer of the SBS Entity.\279\ Proposed Rule 15Fk-1(b)(2) would
require the CCO to review the compliance of the SBS Entity with respect
to the requirements in Section 15F of the Exchange Act and the rules
and regulations thereunder.\280\ Rule 15Fk-1(b)(2) would further
require that, as part of the CCO's obligation to review compliance by
the SBS Entity, the CCO establish, maintain, and review policies and
procedures that are reasonably designed to achieve compliance by the
SBS Entity with Section 15F of the Exchange Act and the rules and
regulations thereunder.\281\
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    \279\ See Section 15F(k)(2)(A) of the Exchange Act, Public Law
111-203, 124 Stat. 1376, 1793 (to be codified at 15 U.S.C. 78o-
10(k)(2)(A)).
    \280\ See Section 15F(k)(2)(B) of the Exchange Act, Public Law.
111-203, 124 Stat. 1376, 1793 (to be codified at 15 U.S.C. 78o-
10(k)(2)(B)).
    \281\ The requirement to establish, maintain and review policies
and procedures reasonably designed to achieve compliance with
Section 15F of the Exchange Act and the rules thereunder is based on
FINRA Rule 3130, which requires certification that a member has in
place processes to ``establish, maintain, and review policies and
procedures reasonably designed to achieve compliance with applicable
FINRA rules, MSRB rules and federal securities laws and
regulations.'' Similar requirements appear in Rule 38a-1(a)(1) under
the Investment Company Act of 1940, 17 CFR 270.38a-1(a)(1)
(requiring registered investment companies to ``[a]dopt and
implement written policies and procedures reasonably designed to
prevent violation of the Federal Securities laws by the fund''); and
Advisers Act Rule 206(4)-7(a), 17 CFR 275.206(4)-7(a) (requiring
registered investment advisers to ``[a]dopt and implement written
policies and procedures reasonably designed to prevent violation, by
you and your supervised persons, of the [Advisers] Act, and the
rules that the Commission has adopted under the [Advisers] Act'').
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    Proposed Rule 15Fk-1(b)(3) would require that the CCO, in
consultation with the board of directors, a body performing a function
similar to the board, or the senior officer of the organization,
resolve conflicts of interest that may arise.\282\ We understand that
the primary responsibility for the resolution of conflicts generally
lies with the business units within the SBS Entities. As a result, we
would anticipate that the CCO's role with respect to such resolution
and mitigation of conflicts of interest would include the
recommendation of one or more actions, as well as the appropriate
escalation and reporting with respect to any issues related to the
proposed resolution of potential or actual conflicts of interest,
rather than decisions relating to the ultimate final resolution of such
conflicts. Under proposed Rule 15Fk-1(b)(4), the CCO would be
responsible for administering each policy and procedure that is
required to be established pursuant to Section 15F of the Act and the
rules and regulations thereunder.\283\ The Commission would expect that
a CCO should be competent and knowledgeable regarding Section 15F of
the Exchange Act and the rules and regulations thereunder, and should
be empowered with full responsibility and authority to execute his or
her responsibilities.
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    \282\ See Section 15F(k)(2)(C) of the Exchange Act, Public Law
111-203, 124 Stat. 1376, 1793 (to be codified at 15 U.S.C. 78o-
10(k)(2)(C)).
    \283\ See Section 15F(k)(2)(D) of the Exchange Act, Public Law
111-203, 124 Stat. 1376, 1793 (to be codified at 15 U.S.C. 78o-
10(k)(2)(D)).
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    Proposed Rule 15Fk-1(b)(5) would require the CCO to establish,
maintain and review policies and procedures reasonably designed to
ensure compliance with the provisions of the Exchange Act and the rules
and regulations thereunder relating to the SBS Entity's business as an
SBS Entity.\284\ The title of CCO does not, in and of itself, carry
supervisory responsibilities. Consistent with current industry
practice, we generally would not expect a CCO appointed in accordance
with proposed Rule 15Fk-1 to have supervisory responsibilities outside
of the compliance department. Accordingly, absent facts and
circumstances that establish otherwise, we generally would not expect
that a CCO would be subject to a sanction by the Commission for failure
to supervise other SBS Entity personnel. Moreover, a CCO who does have
supervisory responsibilities could rely on the provisions of proposed
Rule 15Fh-3(h)(3), under which a person associated with an SBS Entity
shall not be deemed to have failed to reasonably supervise another
person if such other person is not subject to the CCO's supervision, or
if: (i) the SBS Entity has established and maintained written policies
and procedures, and a documented system for applying those policies and
procedures, that would reasonably be expected to prevent and detect,
insofar as practicable, any violation of the federal securities laws
and the rules and regulations thereunder relating to its business as an
SBS Entity; and (ii) the supervising person has reasonably discharged
the duties and obligations required by the written policies and
procedures and documented system, and did not have a reasonable basis
to believe that the written policies and procedures and documented
system were not being followed.\285\
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    \284\ See Section 15F(k)(2)(E) of the Exchange Act, Public Law
111-203, 124 Stat. 1376, 1793 (to be codified at 15 U.S.C. 78o-
10(k)(2)(E)).
    \285\ Cf. Compliance Programs of Investment Companies and
Investment Advisers, Investment Advisers Act Release No. 2204 (Dec.
17, 2003), 68 FR 74714 (Dec. 24, 2003) at note 78.
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    Proposed Rule 15Fk-1(b)(6) would require the CCO to establish,
maintain and review policies and procedures reasonably designed to
remediate promptly non-compliance issues identified by the CCO.\286\
Proposed Rule 15Fk-1(b)(7) would require the CCO to establish and
follow procedures reasonably designed for management response and
resolution of non-compliance issues.\287\
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    \286\ See Section 15F(k)(2)(F) of the Exchange Act, Public Law
111-203, 124 Stat. 1376, 1793 (to be codified at 15 U.S.C. 78o-
10(k)(2)(F)).
    \287\ See Section 15F(k)(2)(G) of the Exchange Act, Public Law
111-203, 124 Stat. 1376, 1793 (to be codified at 15 U.S.C. 78o-
10(k)(2)(G)).
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    Proposed Rule 15Fk-1(c)(1) would require that the CCO annually
prepare and sign a report describing the compliance policies and
procedures (including the code of ethics and conflicts of interest
policies) and compliance of the SBS Entity with the Exchange Act and
rules and regulations thereunder relating to its business as an SBS
Entity.\288\ Proposed Rule 15Fk-1(c)(2) would require that each
compliance report also contain, at a minimum: A description of the SBS
Entity's enforcement of its policies and procedures relating to its
business as an SBS Entity; any material changes to the policies and
procedures since the date of the preceding compliance report; any
recommendation for material changes to the policies and procedures as a
result of the annual review, the rationale for such recommendation, and
whether such policies and procedures were or will be modified by the
SBS Entity to incorporate such recommendation; and any material
compliance matters identified since the date of the preceding
compliance report.\289\ Proposed Rule 15Fk-1(e)(4) would define
``material compliance matter'' to mean any compliance matter about
which the board of directors of the SBS Entity would reasonably need to
know

to oversee the compliance of the SBS Entity, and that involves, without
limitation, a violation of the federal securities laws relating to its
business as an SBS Entity by the SBS Entity or its officers, directors,
employees or agents; a violation of the policies and procedures of the
SBS Entity relating to its business as an SBS Entity; or a weakness in
the design or implementation of the policies and procedures of the SBS
Entity relating to its business as an SBS Entity.\290\
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    \288\ See Section 15F(k)(3)(A) of the Exchange Act, Public Law
111-203, 124 Stat. 1376, 1794 (to be codified at 15 U.S.C. 78o-
10(k)(3)(A)). We believe that there is a drafting error in the
reference in Section 15F(k)(3)(A) of the Exchange Act to compliance
of the ``major swap participant'' in this provision, and are
proposing to apply the requirement with respect to the compliance of
the ``major security-based swap participant.''
    \289\ This requirement is modeled on a similar requirement for
chief compliance officers under Investment Company Act Rule 38a-
1(4), 17 CFR 270.38a-1(a)(4). The report under the Investment
Company Act, however, is not required to be filed with the
Commission.
     The Commission is proposing a similar requirement for chief
compliance officers of security-based swap data repositories. See
Security-Based Swap Data Repository Registration, Duties and Core
Principles, Exchange Act Release No. 63347 (Nov. 19, 2010), 75 FR
77306 (Dec. 10, 2010) (``SDR Registration Release'') (proposing
Exchange Act Rule 13n-11(d)(1)).
    \290\ This definition is modeled on the definition of ``material
compliance matter'' in Investment Company Act Rule 38a-1(e)(2),
270.38a-1(e)(2). The Commission proposed a similar definition in its
rule governing chief compliance officers of security-based swap data
repositories. See SDR Registration Release (proposing Exchange Act
Rule 13n-11(b)(6)).
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    Proposed Rule 15Fk-1(c)(2)(ii)(D) would require the CCO to certify,
under penalty of law, the accuracy and completeness of the report.\291\
Proposed Rule 15Fk-1(c)(2)(ii)(A) would require that the CCO's annual
report accompany each appropriate financial report of the SBS Entity
that is required to be furnished or filed with the Commission.\292\ To
allow the annual report to accompany each appropriate financial report
within the required timeframe, proposed Rule 15Fk-1(c)(2)(ii)(B) would
require the CCO to provide a copy of the required annual report to the
board of directors, the audit committee and the senior officer of the
SBS Entity at the earlier of their next scheduled meeting or within 45
days of the date of execution of the certification.\293\
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    \291\ See Section 15F(k)(3)(B)(ii) of the Exchange Act, Public
Law 111-203, 124 Stat. 1376, 1794 (to be codified at 15 U.S.C. 78o-
10(k)(3)(B)(ii)).
    \292\ See Section 15F(k)(3)(B)(i) of the Exchange Act, Public
Law 111-203, 124 Stat. 1376, 1794 (to be codified at 15 U.S.C. 78o-
10(k)(3)(B)(i)).
    \293\ Id. This timeframe is the same as that provided by FINRA
Rule 3130(c) (regarding certification of compliance processes).
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    Proposed Rule 15Fk-1(c)(2)(ii)(C) would require that the CCO's
annual report include a written representation that the chief executive
officer(s) (or equivalent officers) has/have conducted one or more
meetings with the CCO in the preceding 12 months, the subject of which
addresses the SBS Entity's processes to comply with the obligations of
the CCO as set forth in the proposed rules and in Exchange Act Section
15F.\294\ To comply with the proposed rule, the subject of the
meeting(s) between the chief executive officer and the CCO referenced
in the written representation must include: (1) The matters that are
the subject of the CCO's annual report; (2) the SBS Entity's compliance
efforts with the provisions of Section 15F and the provisions of the
Exchange Act and the rules and regulations thereunder relating to its
business as an SBS Entity as of the date of such a meeting; and (3)
significant compliance problems under Section 15F and plans in emerging
business areas relating to its business as an SBS Entity.\295\ Although
not required by the Dodd-Frank Act, we believe that an annual
compliance meeting would help to ensure and comprehensive compliance
policies.\296\ Under proposed Rule 15Fk-1(c)(2)(iii), if compliance
reports are separately bound from the financial statements, the
compliance reports shall be accorded confidential treatment to the
extent permitted by law.
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    \294\ See FINRA Rule 3130.
    \295\ This requirement is modeled on the obligations for broker-
dealers under FINRA rules. See Supplementary Material .04 to FINRA
Rule 3130, Content of Meetings between Chief Executive Officer and
Chief Compliance Officer.
    \296\ See Exchange Act Sections 15F(h)(1)(B) (authorizing the
Commission to prescribe duties for diligent supervision), and
15F(h)(3)(D) (providing authority to prescribe business conduct
standards). Public Law 111-203, 124 Stat. 1376, 1789 and 1790 (to be
codified at 15 U.S.C. 78o-10(h)(1)(B) and 78o-10(h)(3)(D)).
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    Finally, proposed Rule 15Fk-1(d) would require that the
compensation and removal of the CCO be approved by a majority of the
board of directors of the SBS Entity. We are proposing this measure,
which is not required by the Dodd-Frank Act, to promote the
independence and effectiveness of the CCO. We have proposed a similar
requirement for the CCOs of security-based swap data repositories \297\
and of investment companies and business development companies.\298\ As
we explained in proposing other CCO requirements, we are concerned that
an entity's commercial interests might discourage a CCO from making
forthright disclosure to the board or senior officer about any
compliance failures. To help address this potential conflict of
interest, the Commission preliminarily believes that only the board of
directors of the SBS Entity should be able to set the CCO's
compensation or remove an individual from the CCO position.\299\
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    \297\ See SDR Registration Release (proposing Exchange Act Rule
13n-11(a)).
    \298\ See 17 CFR 270.38a-1(a)(4).
    \299\ See SDR Registration Release (discussing proposed Exchange
Act Rule 13n-11(a)).
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Request for Comments
    The Commission requests comments generally on all aspects of this
provision. In addition, we request comments on the following specific
issues:
     Would a CCO of an SBS Entity have difficulty discharging
any of these obligations? If so, why?
     Should the Commission consider additional obligations to
be imposed on a CCO of an SBS Entity? If so, which ones and why?
     Should the Commission define circumstances in which a CCO
may report to a senior officer rather than to the board of directors?
If so, what should those circumstances be? Why?
     Do any of the CCO obligations conflict with current
obligations imposed on a CCO and, if so, why?
     Would the timing of the annual report create any problems
for SBS Entities?
     Should the compliance report be furnished rather than
filed with the Commission? Why or why not?
     Should the Commission permit a CCO to qualify its report
by certifying, under penalty of law, that a report is accurate and
complete ``in all material respects''? Why or why not? Is there another
approach the Commission should consider to appropriately balance the
practical need for SBS Entities to attract and retain qualified CCOs
with the statutory provision to require CCOs to certify their reports
under penalty of law?
     Should the Commission require the chief executive officer
or another senior officer to certify the report, similar to the
compliance certification required under FINRA Rule 3130, instead of or
in addition to the CCO? \300\ Why or why not?
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    \300\ FINRA Rule 3130 requires the CEO to certify that:
    1. The Member has in place processes to:
    (A) Establish, maintain and review policies and procedures
reasonably designed to achieve compliance with applicable FINRA
rules, MSRB rules and federal securities laws and regulations;
    (B) Modify such policies and procedures as business, regulatory
and legislative changes and events dictate; and
    (C) Test the effectiveness of such policies and procedures on a
periodic basis, the timing and extent of which is reasonably
designed to ensure continuing compliance with FINRA rules, MSRB
rules and federal securities laws and regulations.
    2. The undersigned chief executive officer(s) (or equivalent
officer(s)) has/have conducted one or more meetings with the chief
compliance officer(s) in the preceding 12 months, the subject of
which satisfy the obligations set forth in FINRA Rule 3130.
    3. The Member's processes, with respect to paragraph 1 above,
are evidenced in a report reviewed by the chief executive officer(s)
(or equivalent officer(s)), chief compliance officer(s), and such
other officers as the Member may deem necessary to make this
certification. The final report has been submitted to the Member's
board of directors and audit committee or will be submitted to the
Member's board of directors and audit committee (or equivalent
bodies) at the earlier of their next scheduled meetings or within 45
days of the date of execution of this certification.
    4. The undersigned chief executive officer(s) (or equivalent
officer(s)) has/have consulted with the chief compliance officer(s)
and other officers as applicable (referenced in paragraph 3 above)
and such other employees, outside consultants, lawyers and
accountants, to the extent deemed appropriate, in order to attest to
the statements made in this certification.

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     How, if at all, would the proposed CCO requirements--
including those that are not expressly addressed by the Dodd-Frank Act,
e.g., the proposed requirements that the CCO meet with the chief
executive officer and that the compensation of the CCO be set by the
Board--alter the role and function that CCOs may play within SBS
Entities? Do the proposed requirements promote an effective compliance
function while avoiding undue constraints on a firm's discretion in
organizing its business, including that compliance function? Why or why
not? How, if at all, could the proposed requirements be altered to
provide SBS Entities and CCOs greater flexibility in implementing an
effective compliance function?
     If the CCO reports to a senior officer, should the senior
officer have the ability to remove the CCO? Should the senior officer
have the ability to determine the compensation of the CCO? Under what
circumstances and why? If the CCO reports to the board of directors,
should the compliance meeting(s) required under proposed Rule 15Fk-
1(c)(2)(i)(C) be held between the CCO and the board of directors or a
committee of independent directors instead of with the senior officer?
     Should the board or audit committee be required to review
the annual compliance report and approve any CCO-recommended remedial
steps? Should the board or audit committee be required to authorize
alternative remedial steps that the board or audit committee determines
are more appropriate than those in the annual compliance report? Should
the Commission require the SBS Entity to report to the Commission any
alternative remedial steps taken? Why or why not?

III. Request for Comments

A. Generally

    The Commission requests comments on all aspects of the proposed
rules. The Commission particularly requests comment on the general
impact the proposals would have on the market for security-based swaps
and on the behavior of participants in that market. The Commission also
seeks comment on the proposals as a whole, including their interaction
with the other provisions of the Dodd-Frank Act and their advantages
and disadvantages when considered in total. In addition, the Commission
seeks comment on the following specific issues:
     Do the proposed rules clearly define the obligations to be
imposed on SBS Dealers or Major SBS Participants? Are there
clarifications or instructions to the proposed requirements that would
be beneficial to make? If so, what are they, and what would be the
benefits of adopting them?
     Do the proposed rules (considered individually and in
their entirety) provide an efficient and effective way to implement the
requirements of the Dodd-Frank Act relating to the business conduct of
SBS Entities? Why or why not? Are the requirements under the proposed
rules appropriately tailored so that the requirements of the Dodd-Frank
Act can be met consistent with an SBS Entity's maintaining an
economically viable business? Why or why not?
     Do the proposed rules (considered individually and in
their entirety) give full effect to the additional protections for
special entities contemplated by the statute while avoiding
restrictions on SBS Entities that would unduly limit their willingness
or ability to provide special entities with access to security-based
swaps? Why or why not? How and to what extent will the proposed rules
(considered individually and in their entirety) affect the ability of
special entities to engage in security-based swaps? How and to what
extent will the proposed rules (considered individually and in their
entirety) afford special entities the protections contemplated by the
Dodd-Frank Act in connection with their security-based swap
transactions?
     Would the proposed rules require disclosure of information
that that commenters believe should not, or need not, be disclosed? If
so, what information, and what are the problems associated with its
disclosure?
     Do any proposed requirements conflict with any existing
requirement, including any requirement currently imposed by an SRO,
such that it would be impracticable or impossible for an SBS Entity
that is a member of an SRO to meet both obligations? If so, which
one(s) and why?
     Should an SBS Entity be permitted to establish compliance
with the proposed business conduct standards by demonstrating
compliance with other regulatory standards that impose substantially
similar requirements?
     Should any proposed requirements be modified with respect
to security-based swaps that are traded on a registered SEF or on a
registered national securities exchange? If so, which requirements
should be modified, and why?
     Should any proposed requirements be modified with respect
to security-based swaps that are cleared but not SEF- or exchange-
traded? If so, which requirements and why?
     Should any proposed requirements for SBS Entities be
modified? If so, which requirements and why? Should different standards
apply to SBS Dealers and Major SBS Participants?
     Should any additional business conduct requirements be
imposed on SBS Entities? If so, which requirements and why? Should
different standards apply to SBS Dealers and Major SBS Participants?
Under what circumstances, and why?
     Should any additional proposed requirements be modified
when the counterparty is an SBS Dealer, a Major SBS Participant, a swap
dealer or a major swap participant? Another type of market
intermediary?
     Are there other counterparties for which certain proposed
SBS Entity requirements should be modified? If so, which requirements,
in what circumstances, and why?
     Should the Commission delay the compliance date of any of
the proposed requirements to allow additional time to comply with those
requirements? If so, which requirements, and how much additional time?

B. Consistency With CFTC Approach

    The CFTC has proposed rules related to business conduct standards
for swap dealers and major swap participants as required under Section
731 of the Dodd-Frank Act.\301\ Understanding that the Commission and
the CFTC regulate different products, participants and markets and
thus, appropriately may take different approaches to various issues, we
nevertheless are guided by the objective of establishing consistent and
comparable requirements. Accordingly, we request comments generally on
(i) The impact of any differences between the Commission and CFTC
approaches to business conduct regulation in this area, (ii) whether