interests in confidentiality with the concerns identified by commenters
concerning accountability, transparency, appropriateness of decision-
making, and public confidence in the Rule of Practice 194 application
process (and the Commission's oversight of market participants more
generally). Moreover, the Commission believes that relying on the
existing statutory and regulatory framework with respect to application
materials is preferable to a ``good cause'' standard of public
disclosure, as suggested by one commenter,\202\ for the same reasons
noted above, as well as because the current statutory and regulatory
framework is generally well-established and is routinely administered
by Commission staff.
---------------------------------------------------------------------------

    \202\ Cummings Letter, at 3.
---------------------------------------------------------------------------

    Second, in light of the information that the Commission intends to
make publicly available, the Commission believes that there is minimal
additional benefit in requiring all applications and supporting
materials automatically to be made public--particularly given that the
existing statutory and regulatory framework provides a process for
members of the public to request application materials to be made
available, consistent with the protections of the existing framework.
Further, statutorily disqualified associated persons that are natural
persons will not be permitted to effect or be involved in effecting
security-based swaps on behalf of SBS Entities until an order is issued
granting relief under Rule of Practice 194. Such orders will be made
publicly available on the Commission's website, consistent with current
practice,\203\ and will provide notice to the public and identify for
the benefit of counterparties and other market participants instances
where a statutorily disqualified associated person that is a natural
person has been permitted to effect or be involved in effecting
security-based swaps on behalf of an SBS Entity.
---------------------------------------------------------------------------

    \203\ See 17 CFR 200.80(a)(2)(i), (3).
---------------------------------------------------------------------------

K. Deleting Rule 15Fb6-1 and Schedule C to Forms SBSE, SBSE-A and SBSE-
BD

    Concurrent with the issuance of the Rule of Practice 194 proposal,
the Commission adopted registration requirements for SBS Entities,
including certain rules relating to the statutory prohibition in
Exchange Act Section 15F(b)(6).\204\ The Registration Adopting Release
provided, among other things, that an SBS Entity, when it files an
application to register with the Commission, may permit an associated
person that is not a natural person who is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on the SBS Entity's behalf, provided that the statutory
disqualification(s) occurred prior to the compliance date set forth in
the Registration Adopting Release and that the SBS Entity identifies
each such associated person on its registration form, namely Schedule C
to Forms SBSE, SBSE-A and SBSE-BD.
---------------------------------------------------------------------------

    \204\ See Registration Adopting Release, 80 FR at 48964. See
also, e.g., 17 CFR 240.15Fb6-1.
---------------------------------------------------------------------------

    Because Rule of Practice 194, as adopted, provides an exclusion for
an SBS Entity from the prohibition in Exchange Act Section 15F(b)(6)
with respect to associated persons entities, Rule 15Fb6-1 and its
related Schedule C are no longer necessary. Accordingly, given the
associated person entity exclusion that the Commission is

adopting in final Rule of Practice 194(c), the Commission is making
technical amendments to: (1) Delete Exchange Act Rule 15Fb6-1; (2)
remove Schedule C to Forms SBSE, SBSE-A and SBSE-BD; and (3) remove all
references to Schedule C in the instructions in the above-mentioned
forms.

L. Compliance Date

    As noted above, the effective date of Rule of Practice 194, as
adopted, is April 22, 2019. We note, however, that the compliance date
for the SBS Entity registration rules set forth in the Registration
Adopting Release is the later of: Six months after the date of
publication in the Federal Register of a final rule release adopting
rules establishing capital, margin and segregation requirements for SBS
Entities; the compliance date of final rules establishing recordkeeping
and reporting requirements for SBS Entities; the compliance date of
final rules establishing business conduct requirements under Exchange
Act Sections 15F(h) and 15F(k); or the compliance date for final rules
establishing a process for a registered SBS Entity to make an
application to the Commission to allow an associated person who is
subject to a statutory disqualification to effect or be involved in
effecting security-based swaps on the SBS Entity's behalf.\205\
---------------------------------------------------------------------------

    \205\ See Registration Adopting Release, at 1. The Commission
recently requested comment on, among things, whether a longer
compliance period, such as 18 months after the date of publication
of the last of four releases noted above in the Federal Register,
would be more appropriate. See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers,
Exchange Act Release No. 34-84409 (Oct. 11, 2018), 83 FR 53007,
53019 (Oct. 19, 2018).
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    Rule of Practice 194 contains ``collection of information
requirements'' within the meaning of the Paperwork Reduction Act of
1995 (``PRA''). An agency may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless it
displays a currently valid control number. The Commission has submitted
the information to the Office of Management and Budget (``OMB'') for
review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. The title
of this collection is ``Rule of Practice 194.'' The collection of
information was assigned OMB Control No. 3235-0733. The responses to
the collection of information are required to obtain a benefit.
    In the proposal, the Commission solicited comment on the collection
of information requirements associated with proposed Rule of Practice
194.\206\ In particular, pursuant to 44 U.S.C. 3505(c)(2)(B), the
Commission asked commenters to evaluate whether the proposed collection
is necessary for the proper performance of our functions, including
whether the information shall have practical utility; to evaluate the
accuracy of our estimate of the burden of the proposed collection of
information; to determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; and
to evaluate whether there are ways to minimize the burden of collection
of information on those who are to respond, including through the use
of automated collection techniques or other forms of information
technology. The Commission did not receive any comments on the
collection of information requirements.
---------------------------------------------------------------------------

    \206\ See Proposing Release, 80 FR at 51708.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    Rule of Practice 194 provides a process by which an SBS Entity may
apply to the Commission for an order permitting an associated person to
effect or be involved in effecting security-based swaps on behalf of
the SBS Entity notwithstanding a statutory disqualification. To make an
application under Rule of Practice 194, the SBS Entity filing an
application with respect to an associated person that is a natural
person would provide to the Commission:

     Exhibits required by paragraph (d) to Rule of Practice
194, including a copy of the order or other applicable document that
resulted in the associated person being subject to a statutory
disqualification; an undertaking by the applicant to notify promptly
the Commission in writing if any information submitted in support of
the application becomes materially false or misleading while the
application is pending; a copy of the questionnaire or application
for employment specified in Rule 15Fb6-2(b),\207\ with respect to
the associated person; in cases where the associated person has been
subject of any proceeding resulting in the imposition of
disciplinary sanctions during the five years preceding the filing of
the application or is the subject of a pending proceeding by the
Commission, CFTC, any federal or state regulatory or law enforcement
agency, registered futures association, foreign financial regulatory
authority, registered national securities association, or any other
SRO, or commodities exchange or any court, a copy of the related
order, decision, or document issued by the court, agency or SRO.
---------------------------------------------------------------------------

    \207\ 17 CFR 240.15Fb6-2(b).
---------------------------------------------------------------------------

     A written statement that includes the information
specified in paragraphs (e) and (f) to Rule of Practice 194,
including, but not limited to: The associated person's compliance
with any order resulting in statutory disqualification; the capacity
or position in which the person subject to a statutory
disqualification proposes to be associated with the SBS Entity; the
terms and conditions of employment and supervision to be exercised
over such associated person and, where applicable, by such
associated person; the compliance and disciplinary history, during
the five years preceding the filing of the application, of the SBS
Entity; information concerning prior applications or processes.

    Under paragraph (g) to Rule of Practice 194, an applicant could
submit a written statement in response to any adverse recommendation
proposed by Commission staff with respect to an application under Rule
of Practice 194.
    An SBS Entity would not be required to file an application under
Rule of Practice 194 with respect to certain associated persons that
are subject to a statutory disqualification, as provided for in
paragraph (h) of proposed Rule of Practice 194. To meet those
requirements, however, the SBS Entity would be required to file a
notice with the Commission. For associated persons that are natural
persons, the notice in paragraph (h)(2)(iii) would set forth: (1) The
name of the SBS Entity; (2) the name of the associated person subject
to a statutory disqualification; (3) the name of the associated
person's prospective supervisor(s) at the SBS Entity; (4) the place of
employment for the associated person subject to a statutory
disqualification; and (5) identification of any SRO or agency that has
indicated its agreement with the terms and conditions of the proposed
association, registration or listing as a principal.
    The information sought in connection with Rule of Practice 194
would assist the Commission in determining whether allowing associated
persons to effect or be involved in effecting security-based swaps on
behalf of a SBS Entity, notwithstanding statutory disqualification, is
consistent with the public interest.
    The Commission has sought to minimize the burdens and costs
associated with Rule of Practice 194. First, the Commission is not
requiring an application under Rule of Practice 194 with respect to
certain associated persons subject to a statutory disqualification
previously granted relief (i.e., by the Commission, the CFTC, an SRO,
or a registered futures association). Rather, in such instances, SBS
Entities would only be required to provide a notice to the Commission
under Rule of Practice 194(h)(2)(iii). Second, Rule of Practice 194
generally requires information that is already

required by Rule of Practice 193 \208\ and FINRA Form MC400.\209\
Because the requirements in Rule of Practice 194 are generally similar
to pre-existing requirements in Rule of Practice 193 and FINRA Form MC-
400 (and largely use the same terminology), Rule of Practice 194 should
provide a familiar process for respondents.\210\ Third, where
appropriate, the Commission has limited the scope of certain
requirements, including by limiting the time period for requested
information (for example, paragraphs (d)(4), (e)(6), and (e)(10) to
Rule of Practice 194) or the scope of information sought (for example,
paragraph (e)(10) and to proposed Rule of Practice 194). Finally, the
documents that are requested to be provided with the written statement
in paragraph (d) of Rule of Practice 194 (e.g., a copy of the order or
other applicable document that resulted in statutory disqualification)
should be readily available or accessible to the SBS Entity or to the
associated person.
---------------------------------------------------------------------------

    \208\ 17 CFR 201.193; see Note 8, supra.
    \209\ See FINRA Form MC-400; see Note 9, supra.
    \210\ The Commission estimates that approximately 16 registered
SBS Entities will be broker-dealers, and thus registered with FINRA.
See Section V.B.
---------------------------------------------------------------------------

B. Proposed Use of Information

    Information collected in connection with an application under Rule
of Practice 194 will assist the Commission in determining whether an
associated person of an SBS Entity should be permitted to effect or be
involved in effecting security-based swaps on behalf of the SBS Entity,
notwithstanding that the associated person is subject to a statutory
disqualification. Although, absent the rule, an SBS Entity could
nonetheless submit an application for an exemptive order directly under
Exchange Act Section 15F(b)(6),\211\ Rule of Practice 194 specifies the
information the Commission needs to evaluate such an application, and
under what standard the Commission will consider whether to grant such
relief.
---------------------------------------------------------------------------

    \211\ 15 U.S.C. 78o-10(b)(6).
---------------------------------------------------------------------------

    Information collected in connection with the notice provided by
Rule of Practice 194(h)(2)(iii) will assist the Commission for
examination purposes by identifying associated persons that are subject
to a statutory disqualification (and other basic information).

C. Respondents

    The Commission has previously stated that it believes that, based
on data obtained from the Depository Trust & Clearing Corporation and
conversations with market participants, approximately fifty entities
may fit within the definition of security-based swap dealer and up to
five entities may fit within the definition of major security-based
swap participant--55 SBS Entities in total.\212\
---------------------------------------------------------------------------

    \212\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, Exchange Act
Release No. 77617, (April 14, 2016) 81 FR 30089 (May 13, 2016)
(``Business Conduct Adopting Release'').
---------------------------------------------------------------------------

    With respect to associated persons that are natural persons, as
discussed in Section V.B.2 below, the Commission has estimated that
there will be 420 total associated persons that are natural persons at
each SBS dealer and 62 total associated persons that are natural
persons at each major participant, or 21,310 total associated persons
that are natural persons. The Commission anticipates that, on an
average annual basis, only a small fraction of the natural persons
would be subject to a statutory disqualification. Between 2011 and June
of 2018 FINRA received an average of 33 MC-400 applications with
respect to individuals subject to a statutory disqualification seeking
relief under the FINRA Rule 9520 Series.\213\ Given that the Commission
estimates that there will be far fewer associated persons of SBS
Entities that are natural persons (21,310 total associated persons that
are natural persons) than the approximately 267,000 registered
representatives,\214\ the Commission anticipates that SBS Entities will
file for relief under Rule of Practice 194 with respect to
substantially fewer associated persons that are natural persons.
---------------------------------------------------------------------------

    \213\ See Section V.B, infra.
    \214\ Based on an analysis of regulatory filings, as of December
31, 2017, there are 3,523 broker-dealers that employed full-time
registered representatives and were doing a public business; these
broker-dealers each employed on average 75.8 registered
representatives, or 267,043 in total. See Section V.B, infra.
---------------------------------------------------------------------------

    In addition, to estimate the number of such persons, the Commission
staff has conferred with NFA to assess how many associated persons of
the 102 provisionally registered Swap Entities \215\ have applied for
relief from CEA 4s(b)(6) \216\ (the analogous provision to Exchange Act
Section 15F(b)(6) \217\ for SBS Entities) for determination by NFA
that, had the associated person applied for registration as an
associated person of a Swap Entity, notwithstanding statutory
disqualification, the application would have been granted.\218\ NFA has
informed Commission staff that, from October 11, 2012 to June 30, 2018,
NFA determined that in 13 out of 15 requests NFA would have granted
registration with respect to the associated person subject to a
statutory disqualification.\219\
---------------------------------------------------------------------------

    \215\ See CFTC Provisionally Registered Swap Dealers as of
October 11, 2018, https://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.html, last accessed November 6, 2018.
    \216\ 7 U.S.C. 6s(b)(6).
    \217\ 15 U.S.C. 78o-10(b)(6); see Note 11, supra.
    \218\ See EasyFile AP Statutory Disqualification Form
Submission, NFA, https://www.nfa.futures.org/NFA-electronic-filings/easyFile-statutory-disqualification.HTML.
    \219\ Of the 15 requests, for one, an application for
registration was filed and subsequently withdrawn and for the other,
the individual was no longer employed by the firm.
---------------------------------------------------------------------------

    Accordingly, based on that available data, the Commission estimates
that, on an average annual basis, SBS Entities will seek relief in
accordance with Rule of Practice 194 for up to five natural persons
subject to a statutory disqualification, and SBS Entities would provide
notices pursuant to Rule of Practice 194(h)(2)(iii) for up to five
natural persons.
    Therefore, the Commission anticipates that, on an average annual
basis, SBS Entities would file up to five applications under Rule of
Practice 194 with respect to associated persons that are natural
persons and five notices for natural persons under Rule of Practice
194(h)(2)(iii).

D. Total Burden Estimates Relating to Rule of Practice 194

    It is likely that the time necessary to complete an application
under Rule of Practice 194 will vary depending on the number of
exhibits required to be submitted in accordance with Rule of Practice
194(d), and the amount of information that would need to be discussed
in the written statement, as specified in Rule of Practice 194(e).
    Based on the Commission staff's estimates and experience,\220\ the
Commission estimates that for associated persons that are natural
persons it would take SBS Entities approximately 30 hours to research
the questions, and complete and file an application under Rule of
Practice 194. In addition, the Commission believes that the average
time necessary for an SBS Entity to research the questions, complete
and file a notice under Rule of

Practice 194(h)(2)(iii) would be less than for a full application under
Rule of Practice 194 and the Commission estimates that it would take
approximately 6 hours.\221\
---------------------------------------------------------------------------

    \220\ For example, based on the experience relative to Form BD,
the Commission has estimated the average time necessary for an SBS
Entity to research the questions and complete and file a Form SBSE
for an entity, including the accompanying schedules and disclosure
reporting pages--which solicit information regarding statutory
disqualification--to be approximately one work week, or 40 hours.
However, the Commission has estimated that it would take an SBS
Entity three-quarters of the time to make a similar application on
behalf of a natural person, or in this case, 30 hours per natural
person. See Proposing Release, 80 FR at 51707. Additionally, as
noted above, Rule of Practice 194, as adopted, makes Schedule C to
Forms SBSE, SBSE-A, and SBSE-BD unnecessary. The elimination of
Schedule C with respect to those Forms is expected to separately
reduce the time burden on SBS Entities unrelated to the time burdens
otherwise associated with Rule of Practice 194.
    \221\ Although the Commission did not receive any comments on
the time burden for completing a notice under Rule of Practice 194,
we have decided to increase the estimate of 3 hours per notice to 6
hours per notice to reflect that it may take an SBS Entity,
especially one doing this for the first time, longer to research the
questions, complete and file a notice than the proposed 3 hours per
notice.
---------------------------------------------------------------------------

    Given that the Commission estimates that, on an average annual
basis, there will be up to five applications under Rule of Practice 194
with respect to associated persons that are natural persons, and up to
five notices under Rule of Practice 194(h)(2)(iii), the Commission
estimates the total burden associated with filing such applications and
notices on average to be 180 hours on an annual basis.\222\
---------------------------------------------------------------------------

    \222\ This estimate is based on the following: [((30 hours) x
(up to 5 SBS Entities applying with respect to associated persons
that are natural persons)) + (6 hours) x (up to 5 SBS Entities
filing notices under Rule of Practice 194(h)(2)(iii))] = 180 hours
total.
---------------------------------------------------------------------------

E. Confidentiality

    As stated above, under both the proposed and adopted approach,
orders and notices under Rule of Practice 194 will be made publicly
available on the Commission's website, whereas applications and
supporting materials will be kept confidential, subject to the existing
statutory and regulatory framework with respect to the public
availability of such materials, including the FOIA,\223\ the Exchange
Act,\224\ and applicable Commission rules.\225\
---------------------------------------------------------------------------

    \223\ See 5 U.S.C. 552, et seq.
    \224\ See 15 U.S.C. 78x.
    \225\ See, e.g., 17 CFR 200.80; 17 CFR 201.190; 17 CFR 240.24b-
2.
---------------------------------------------------------------------------

V. Economic Analysis

A. Broad Economic Considerations

    On August 5, 2015, the Commission adopted final rules and forms
establishing the registration process for SBS Entities.\226\ Those
rules reference the events in the existing definition of ``statutory
disqualification'' in Exchange Act Section 3(a)(39)(A) through (F)
\227\ and apply them to Exchange Act Section 15F(b)(6). This definition
disqualifies associated persons from effecting or being involved in
effecting security-based swaps for violations of the securities laws,
but also for all felonies and certain misdemeanors, including felonies
and misdemeanors not related to the securities laws and/or financial
markets.\228\ Once compliance with the registration process is
required, registered SBS Entities will be unable, absent Commission
action, to utilize any associated person, including entities and
natural persons with potentially valuable capabilities, skills or
expertise, to effect or be involved in effecting security-based swaps
if the person has been disqualified for any reason, including for non-
investment-related conduct that may not pose a risk to security-based
swap market participants.\229\
---------------------------------------------------------------------------

    \226\ See Registration Adopting Release.
    \227\ See 15 U.S.C. 78o-10(b)(6)(A) through (F).
    \228\ 15 U.S.C. 78c(a)(39)(A) through (F).
    \229\ The final SBS Entity registration rules also require the
Chief Compliance Officer of an SBS Entity, or his or her designee,
to certify on its registration form that none of its associated
persons that effect or are involved in effecting security-based
swaps on its behalf are subject to a statutory disqualification. See
Registration Adopting Release, at Section II.B.3.
---------------------------------------------------------------------------

    Exchange Act Section 15F(b)(6) gives the Commission flexibility to
address situations involving statutorily disqualified associated
persons. Specifically, under this section, the prohibition with respect
to statutorily disqualified persons applies ``[e]xcept to the extent
otherwise specifically provided by rule, regulation, or order of the
Commission.'' \230\ This statutory provision gives the Commission
discretion to determine that a statutorily disqualified person may
effect or be involved in effecting security-based swaps on behalf of an
SBS Entity. Exchange Act Section 15F(b)(6), however, does not specify
what information must be provided to the Commission when an SBS Entity
seeks relief, nor does it set forth the standard under which the
Commission would evaluate requests for relief. Rule of Practice 194 is
intended to establish a framework for SBS Entities seeking such relief
from the statutory prohibition in Exchange Act Section 15F(b)(6).
---------------------------------------------------------------------------

    \230\ See 15 U.S.C. 78o-10(b)(6).
---------------------------------------------------------------------------

    We are mindful of the economic effects, including the costs and
benefits, of our rule. Section 3(f) of the Exchange Act provides that
whenever the Commission is engaged in rulemaking pursuant to the
Exchange Act and is required to consider or determine whether an action
is necessary or appropriate in the public interest, the Commission
shall also consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation.\231\ In addition, Section 23(a)(2) of the Exchange Act
requires the Commission, when making rules under the Exchange Act, to
consider the impact such rules would have on competition.\232\ Exchange
Act Section 23(a)(2) also provides that the Commission shall not adopt
any rule which would impose a burden on competition that is not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.
---------------------------------------------------------------------------

    \231\ See 15 U.S.C. 78c(f).
    \232\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission solicited comment on all
aspects of the costs and benefits associated with the rule, including
any effect the rule may have on efficiency, competition, and capital
formation. The Commission has considered these comments, as discussed
in greater detail in the sections that follow. The analysis below
addresses the likely economic effects of the final Rule of Practice
194, including the benefits and costs of the final rule, and their
potential impact on efficiency, competition, and capital formation.
    In the Proposing Release, the Commission noted that the inability
of a statutorily disqualified associated person to effect or be
involved in effecting security-based swaps on behalf of an SBS Entity
creates a disincentive against underlying misconduct by an associated
person.\233\ We continue to believe that limiting the involvement of
statutorily disqualified associated persons in security-based swap
markets on behalf of SBS Entities may lower compliance and counterparty
risks arising from disqualification, facilitate competition among
higher quality SBS Entities, and enhance counterparty protections,
supervision and integrity of security-based swap markets.\234\ However,
we continue to recognize that limits on statutorily disqualified
associated persons may require SBS Entities to undergo business
restructuring in the event of disqualification or to apply with the
Commission for relief, resulting in costs for SBS Entities, such as
costs of searching for and initiating relationships with new associated
persons or legal reorganization.
---------------------------------------------------------------------------

    \233\ See Proposing Release, 80 FR at 51716.
    \234\ See, e.g., Public Citizen Letter; Better Markets Letter.
---------------------------------------------------------------------------

    We also recognize that the above costs of SBS Entities may be
passed on to counterparties in the form of higher transaction costs or
reduced liquidity. Market participants may value bilateral
relationships with SBS Entities and searching for and initiating
bilateral relationships with new SBS Entities may involve additional
direct costs for counterparties. For example, security-based swaps are
long-term contracts that are often renegotiated and, in the absence of
Rule of Practice 194, counterparties could price the potential future
inability to modify a contract, widening spreads. The Commission

continues to recognize that where SBS Entities must cease dealing
activity with counterparties as a result of disqualification (pending
reorganization or resolution of application under Rule of Practice
194), other SBS Entities may step in to intermediate transaction
activity in security-based swap markets. The resulting effects on
competition will depend on whether SBS Entities that capture the newly
available market share are smaller participants, which could increase
competition, or those that already enjoy a degree of market power and
are able to consolidate their position while the disqualified SBS
Entity is undergoing restructuring or awaiting a relief determination,
which may decrease competition, at least temporarily.
    Moreover, our economic analysis recognizes that information about
the conduct that gave rise to statutory disqualification in the United
States (e.g., by SEC orders, FINRA actions etc.) is generally public.
In addition, under the final SBS Entity registration rules, SBS
Entities are required to provide disciplinary history (criminal,
regulatory action, civil judicial and financial disclosures)
information for SBS Entity control affiliates.\235\
---------------------------------------------------------------------------

    \235\ In conjunction with adopting Rule of Practice 194(c), the
Commission is also removing Schedule C from Forms SBSE, SBSE-A and
SBSE-BD. Importantly, this change does not eliminate questions 14A
and 14B and corresponding disclosure reporting pages and related
obligations, and such information will continue to be available to
market participants. Under the final SBS Entity registration rules,
SBS Entity applications on Forms SBSE, SBSE-A, and SBSE-BD
(including the Schedules and disclosure reporting pages) filed with
the Commission as required by Rule 15Fb2-1, will be made public. All
amendments to SBS Entity applications, required by Rule 15Fb2-3,
will be made public. SBS Entities' Form SBSE-C certifications,
required by Rules 15Fb2-1 and 15Fb6-2 and filed as part of their
applications, will be made public. See 80 FR at 48995.
---------------------------------------------------------------------------

    While there is a dearth of evidence on misconduct in swap and
security-based swap markets, our economic analysis recognizes research
that shows, in some settings: \236\ (i) Past misconduct may predict
future misconduct risk, and some public disclosures may be informative
of future misconduct risk; (ii) capital markets may penalize some
disclosed misconduct, and market participants engaging in misconduct
generally suffer reputational costs; (iii) entities may disassociate
from employees engaging in misconduct, but there may be a significant
amount of heterogeneity in the incidence of misconduct by natural
persons across employer firms, and the match between natural associated
person and SBS Entities tends to be endogenous; and (iv) the reduction
in misconduct in a particular market can reduce the number of service
providers, but high prevalence of misconduct can reduce capital market
participation.\237\
---------------------------------------------------------------------------

    \236\ See Sections V.B and V.C.2, infra.
    \237\ We also recognize that there is a body of behavioral
finance research, commonly focused on retail investor behavior, and
a law and economics literature on compensatory and punitive damages,
deterrence, moral heuristics, and related issues. For example, we
have received comment citing Schkade et al. (1999), which presented
evidence from two experiments designed to test whether individuals
believe in optimal deterrence. They concluded that individuals may
not spontaneously think in terms of optimal deterrence and their
proposed punishments do not differ depending on the probability of
deterrence. See Better Markets Letter at 2. See also David Schkade,
Cass R. Sunstein, & Daniel Kahneman, Do People Want Optimal
Deterrence? (John M. Olin Program in Law and Economics, Working
Paper No. 77, 1999), available at http://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1173&context=law_and _economics, last
accessed Sept. 28, 2018. We believe the applicability of this body
of literature to statutory disqualification in security-based swap
markets is likely limited due to the unique features of these
markets (such as dealer concentration increasing the role of dealer
reputation, public nature of most misconduct, and institutional
nature of the investor clientele).
---------------------------------------------------------------------------

    While we seek to identify the closest parallel regulatory and
market settings, we are cautious in interpreting these results. We
recognize that the unique characteristics of security- based swap
markets may reduce or strengthen these effects. For example, as shown
in the economic baseline, security-based swap markets are dealer
markets, with the overwhelming bulk of activity taking place among
dealers and between dealers and non-dealer financial entities. The
Commission estimates that dealing activity in security-based swap
markets is highly concentrated among a small number of dealers, with
the top five dealer accounts intermediating approximately 55 percent of
all SBS Entity transactions,\238\ and reaching hundreds and even
thousands of counterparties. At the same time, a median non-dealer
counterparty transacts in security-based swaps with two security-based
swap dealers (``SBS Dealers'') in over-the-counter security-based swaps
(and an average with three SBS Dealers), outside of registered
exchanges or swap execution facilities. If several SBS Dealers with a
large market share facing thousands of counterparties are disqualified
at the same time and must immediately cease dealing activity, a risk of
market-wide disruption may exist. However, the concentrated nature of
security-based swap dealing activity limits the ability of customers to
choose SBS Entity counterparties that do not rely on disqualified
persons and corresponding reputational incentives. Moreover, security-
based swaps may also be more complex and opaque than equity or bonds,
increasing information asymmetries between SBS Entities and their
clients. Nevertheless, institutional clients may be more informed and
may process disclosures more efficiently than retail investors in
parallel settings, reducing the impact of these asymmetries.
---------------------------------------------------------------------------

    \238\ The Commission staff analysis of DTCC Derivatives
Repository Limited Trade Information Warehouse transaction records
indicates that approximately 99 percent of single-name CDS price-
forming transactions in 2017 involved an ISDA-recognized dealer.
---------------------------------------------------------------------------

    The Commission recognizes that the final rules may directly and
indirectly impact SBS Entities, as well as counterparties of SBS
Entities and other market participants. We have considered these
economic effects as they pertain to individual provisions and rule
alternatives. As we have noted above, Exchange Act Section 15F(b)(6)
gives the Commission authority to provide relief from the statutory
prohibition against associating with disqualified persons by rule,
regulation, or order, and the Commission is not bound by any particular
approach in exercising its discretion to provide relief. In particular,
in the absence of a disqualification review process, SBS Entities would
still be able to apply for relief from Exchange Act Section 15F(b)(6),
and the Commission would be able to issue an order either granting or
denying relief.
    The Commission continues to believe that when determining whether
to make an application for relief, SBS Entities will weigh the scarcity
and value of the particular skills of an associated person against any
application and reputational costs from associating with disqualified
persons and their beliefs as to the likelihood of an approval or denial
decision by the Commission. To the extent that the final Rule of
Practice 194 (compared with the availability of and process for
obtaining relief without the Rule) alters an SBS Entity's assessment of
either application and reputational costs, its beliefs about likely
outcomes, or its decision to apply with the Commission, economic costs
and benefits may accrue to SBS Entities, their associated persons, and
counterparties to SBS Entities.
    The Commission believes that the primary benefits of the final
approach include: (i) Providing SBS Entities clarity regarding the
items to be addressed, the information and supporting documentation to
be submitted, and the standard of review (affecting application costs
and beliefs about likely outcomes); (ii) ensuring that the Commission
has sufficient information to make a meaningful

determination that allowing an SBS Entity to permit statutorily
disqualified associated persons to effect or be involved in effecting
security-based swaps is consistent with the public interest; (iii)
streamlining the treatment of statutorily disqualified associated
person entities across integrated swap and security-based swap markets;
and (iv) mitigating the risk of business disruptions to SBS Entities
and their counterparties from disqualification of associated person
entities. We note that, regardless of the regulatory approach chosen,
SBS Entities may find it less costly to disassociate with, or reassign,
disqualified persons than to apply for relief, as discussed in greater
detail in the Economic Baseline.

B. Economic Baseline

    To assess the economic impact of Rule of Practice 194, the
Commission is using as a baseline the regulation of SBS Entities as it
exists at the time of this release, including applicable rules we have
adopted, but excluding rules we have proposed but not yet finalized.
The analysis includes the statutory and regulatory provisions that
currently govern the security-based swap market pursuant to the Dodd-
Frank Act, rules adopted in the Intermediary Definitions Adopting
Release, the Cross-Border Adopting Release, and the SDR Rules and Core
Principles Adopting Release. Additionally, our baseline includes rules
that have been adopted but for which compliance is not yet required,
including the Registration Adopting Release,\239\ and the Business
Conduct Adopting Release,\240\ as these final rules--even if compliance
is not yet required--are part of the existing regulatory landscape that
market participants expect to govern their security-based swap
activity.
---------------------------------------------------------------------------

    \239\ See Registration Adopting Release, 80 FR at 48997-9003.
    \240\ See Business Conduct Adopting Release, 81 FR at 29960.
---------------------------------------------------------------------------

    There are currently no registered entities that are required to
comply with either the statutory disqualification certifications in the
final SBS Entity registration rules or the statutory prohibition in
Exchange Act Section 15F(b)(6). However, to perform a meaningful
assessment of the final Rule of Practice 194, our economic baseline
presumes that compliance with the final SBS Entity registration rules
is required as set forth in Exchange Act Rules 15Fb1-1 through 15Fb6-
2,\241\ the general prohibition in Exchange Act Section 15F(b)(6) \242\
is in effect, and the Commission may use its authority under Exchange
Act Section 15F(b)(6) to issue an order providing relief.
---------------------------------------------------------------------------

    \241\ Notably, the final SBS Entity registration rules included
Exchange Act Rule 15Fb6-1, 17 CFR 240.15Fb6-1. See Note 5, supra,
for background on Exchange Act Rule 15Fb6-1.
    \242\ See 15 U.S.C. 78o-10(b)(6).
---------------------------------------------------------------------------

1. Security-Based Swap Market Activity and Participants
a. Available Data From the Security-Based Swap Market
    The Commission's understanding of the market is informed, in part,
by available data on security-based swap transactions, though the
Commission acknowledges that limitations in the data limit the extent
to which it is possible to quantitatively characterize the market.\243\
Since these data do not cover the entire market, the Commission has
analyzed market activity using a sample of transactions that includes
only certain segments of the market. The Commission believes, however,
that the data underlying this analysis provides reasonably
comprehensive information regarding single-name credit default swap
(``CDS'') transactions and the composition of the participants in the
single-name CDS market.
---------------------------------------------------------------------------

    \243\ The Commission also relies on qualitative information
regarding market structure and evolving market practices provided by
commenters and knowledge and expertise of Commission staff.
---------------------------------------------------------------------------

    Specifically, the analysis of the current state of the security-
based swap market is based on data obtained from the DTCC Derivatives
Repository Limited Trade Information Warehouse (``TIW''), especially
data regarding the activity of market participants in the single-name
CDS market during the period from 2006 to 2017.\244\ Although the
definition of security-based swaps is not limited to single-name
CDS,\245\ single-name CDS contracts make up a majority of security-
based swaps, and we believe that the single-name CDS data are
sufficiently representative of the market to inform our analysis of the
current security-based swap market. According to data published by the
Bank for International Settlements (``BIS''), the global notional
amount outstanding in single-name CDS was approximately $4.6
trillion,\246\ in multi-name index CDS was approximately $4.4 trillion,
and in multi-name, non-index CDS was approximately $343 billion.\247\
The total gross market value outstanding in single-name CDS was
approximately $130 billion, and in multi-name CDS instruments was
approximately $174 billion.\248\ The global notional amount outstanding
in equity forwards and swaps as of December 2017 was $3.21 trillion,
with total gross market value of $197 billion.\249\
---------------------------------------------------------------------------

    \244\ In prior releases, the Commission has examined data for
other time periods. For example, in the Business Conduct Standards
Adopting Release, the Commission presented an analysis of TIW data
for November 2006 through December 2014. While the exact numbers of
various groups of transacting agents and account holders in that
analysis differ from the figures reported in this section (for a
longer time period), we do not observe significant structural
differences in market participation. Compare 81 FR at 30102 (Tables
1 and 2) with Tables 1 and 2 below.
    \245\ While other repositories may collect data on transactions
in total return swaps on equity and debt, we do not currently have
access to such data for these products (or other products that are
security-based swaps). Additionally, the Commission explains below
that data related to single-name CDS provides reasonably
comprehensive information for the purpose of this analysis.
    \246\ The global notional amount outstanding represents the
total face amount used to calculate payments under outstanding
contracts. The gross market value is the cost of replacing all open
contracts at current market prices.
    \247\ See BIS, Semi-annual OTC derivatives statistics at
December 2017, Table 10.1, https://www.bis.org/statistics/d10_1.pdf,
last accessed May 18, 2018.
    \248\ See id.
    \249\ These totals include swaps and security-based swaps, as
well as products that are excluded from the definition of ``swap,''
such as certain equity forwards. See OTC, Equity-Linked Derivatives
Statistics, Table D8, https://www.bis.org/statistics/d8.pdf, last
accessed May 18, 2018. For the purposes of this analysis, the
Commission assumes that multi-name index CDS are not narrow-based
index CDS and therefore, do not fall within the security-based swap
definition. See 15 U.S.C. 78c(a)(68)(A). See also Further Definition
of ``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap
Agreement''; Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, 77 FR 48208. The Commission also assumes that all
instruments reported as equity forwards and swaps are security-based
swaps, potentially resulting in underestimation of the proportion of
the security-based swap market represented by single-name CDS.
Therefore, when measured on the basis of gross notional outstanding
single-name CDS contracts appear to constitute roughly 59% of the
security-based swap market. Although the BIS data reflects the
global OTC derivatives market, and not just the U.S. market, the
Commission has no reason to believe that these ratios differ
significantly in the U.S. market.
---------------------------------------------------------------------------

    The Commission further notes that the data available from TIW does
not encompass those CDS transactions that both: (i) Do not involve U.S.
counterparties; \250\ and (ii) are based on

non-U.S. reference entities. Notwithstanding this limitation, the TIW
single-name CDS data should provide sufficient information to permit
the Commission to identify the types of market participants active in
the security-based swap market and the general pattern of dealing
within that market.\251\
---------------------------------------------------------------------------

    \250\ Following publication of the Warehouse Trust Guidance on
CDS data access, TIW surveyed market participants, asking for the
physical address associated with each of their accounts (i.e., where
the account is organized as a legal entity). This physical address
is designated the registered office location by TIW. When an account
reports a registered office location, we have assumed that the
registered office location reflects the place of domicile for the
fund or account. When an account does not report a registered office
location, we have assumed that the settlement country reported by
the investment adviser or parent entity to the fund or account is
the place of domicile. Thus, for purposes of this analysis, the
Commission has classified accounts as ``U.S. counterparties'' when
they have reported a registered office location in the United
States. The Commission notes, however, that this classification is
not necessarily identical in all cases to the definition of U.S.
person under Rule 3a71-3(a)(4).
    \251\ The challenges the Commission faces in estimating measures
of current market activity stem, in part, from the absence of
comprehensive reporting requirements for security-based swap market
participants. The Commission has adopted rules regarding trade
reporting, data elements, and public reporting for security-based
swaps that are designed to, when fully implemented, provide the
Commission with additional measures of market activity that will
allow us to better understand and monitor activity in the security-
based swap market. See Regulation SBSR--Reporting and Dissemination
of Security-Based Swap Information; Final Rule Amendments, Exchange
Act Release No. 78321 (July 14, 2016), 81 FR 53545 (Aug. 12, 2016).
---------------------------------------------------------------------------

b. Affected SBS Entities
    Final SBS Entity registration rules have been adopted, but
compliance is not yet required. Therefore, we do not have data on the
actual number of SBS Entities that will register with the Commission,
or the number of persons associated with registered SBS Entities. The
Commission has elsewhere estimated that up to 50 entities may register
with the Commission as security-based swap dealers, and up to five
additional entities may register as major security-based swap
participants,\252\ and these estimates remain unchanged.
---------------------------------------------------------------------------

    \252\ See, e.g., Registration Adopting Release, 80 FR at 49000.
---------------------------------------------------------------------------

    Firms that act as dealers play a central role in the security-based
swap market. Based on an analysis of 2017 single-name CDS data in TIW,
accounts of those firms that are likely to exceed the security-based
swap dealer de minimis thresholds and trigger registration requirements
intermediated transactions with a gross notional amount of
approximately $2.9 trillion, with approximately 55 percent of the gross
notional intermediated by the top five dealer accounts.\253\
---------------------------------------------------------------------------

    \253\ The Commission staff analysis of TIW transaction records
indicates that approximately 99% of single-name CDS price-forming
transactions in 2017 involved an ISDA-recognized dealer.
---------------------------------------------------------------------------

    These dealers transact with hundreds or thousands of
counterparties. Approximately 21 percent of accounts of firms expected
to register as security-based dealers and observable in TIW have
entered into security-based swaps with over 1,000 unique counterparty
accounts as of year-end 2017.\254\ Another 25 percent of these accounts
transacted with 500 to 1,000 unique counterparty accounts; 29 percent
transacted with 100 to 500 unique accounts; and 25 percent of these
accounts intermediated security-based swaps with fewer than 100 unique
counterparties in 2017. The median dealer account transacted with 495
unique accounts (with an average of approximately 570 unique accounts).
Non-dealer counterparties transacted almost exclusively with these
dealers. The median non-dealer counterparty transacted with two dealer
accounts (with an average of approximately three dealer accounts) in
2017.
---------------------------------------------------------------------------

    \254\ Many dealer entities and financial groups transact through
numerous accounts. Given that individual accounts may transact with
hundreds of counterparties, the Commission may infer that entities
and financial groups may transact with at least as many
counterparties as the largest of their accounts.
---------------------------------------------------------------------------

c. Other Market Participants
    In addition to dealers, thousands of other participants appear as
counterparties to security-based swap contracts in our sample, and
include, but are not limited to, investment companies, pension funds,
private funds, sovereign entities, and industrial companies. We observe
that most non-dealer users of security-based swaps do not engage
directly in the trading of swaps, but trade through banks, investment
advisers, or other types of firms acting as dealers or agents. Based on
an analysis of the counterparties to trades reported to the TIW, there
are 2,110 entities that engaged directly in trading between November
2006 and December 2017.\255\
---------------------------------------------------------------------------

    \255\ These 2,110 entities, which are presented in more detail
in Table 1, below, include all DTCC-defined ``firms'' shown in TIW
as transaction counterparties that report at least one transaction
to TIW as of December 2017. The staff in the Division of Economic
and Risk Analysis classified these firms, which are shown as
transaction counterparties, by machine matching names to known
third-party databases and by manual classification. See, e.g.,
Dealing Activity Adopting Release, 81 FR 8602, fn.43. Manual
classification was based in part on searches of the EDGAR and
Bloomberg databases, the SEC's Investment Adviser Public Disclosure
database, and a firm's public website or the public website of the
account represented by a firm. The staff also referred to ISDA
protocol adherence letters available on the ISDA website.
---------------------------------------------------------------------------

    As shown in Table 1, below, close to three-quarters of these
entities (DTCC-defined ``firms'' shown in TIW, which we refer to here
as ``transacting agents'') were identified as investment advisers, of
which approximately 40 percent (about 30 percent of all transacting
agents) were registered as investment advisers under the Advisers
Act.\256\ Although investment advisers are the vast majority of
transacting agents, the transactions they executed account for only
12.8 percent of all single-name CDS trading activity reported to the
TIW, measured by number of transaction-sides (each transaction has two
transaction sides, i.e., two transaction counterparties). The vast
majority of transactions (83.3 percent) measured by number of
transaction-sides were executed by ISDA-recognized dealers.
---------------------------------------------------------------------------

    \256\ See 15 U.S.C. 80b1-80b21. Transacting agents participate
directly in the security-based swap market, without relying on an
intermediary, on behalf of principals. For example, a university
endowment may hold a position in a security-based swap that is
established by an investment adviser that transacts on the
endowment's behalf. In this case, the university endowment is a
principal that uses the investment adviser as its transacting agent.

 Table 1--The Number of Transacting Agents by Counterparty Type and the Fraction of Total Trading Activity, From
                   November 2006 Through December 2017, Represented by Each Counterparty Type
----------------------------------------------------------------------------------------------------------------
                                                                                Transaction
                       Transacting agents                             Number          Percent          share
                                                                                (percent)
----------------------------------------------------------------------------------------------------------------
Investment Advisers.............................................           1,635            77.5            12.8
--SEC registered................................................             658            31.2             8.6
Banks...........................................................             262            12.4             3.4
Pension Funds...................................................              29             1.4             0.1
Insurance Companies.............................................              42             2.0             0.2
ISDA-Recognized Dealers \1\.....................................              17             0.8            83.3
Other...........................................................             125             5.9             0.2
                                                                 -----------------------------------------------

    Total.......................................................           2,110           100.0             100
----------------------------------------------------------------------------------------------------------------
\1\ For the purpose of this analysis, the ISDA-recognized dealers are those identified by ISDA as belonging to
  the G14 or G16 dealer group during the period: JP Morgan Chase NA (and Bear Stearns), Morgan Stanley, Bank of
  America NA (and Merrill Lynch), Goldman Sachs, Deutsche Bank AG, Barclays Capital, Citigroup, UBS, Credit
  Suisse AG, RBS Group, BNP Paribas, HSBC Bank, Lehman Brothers, Soci[eacute]t[eacute] G[eacute]n[eacute]rale,
  Credit Agricole, Wells Fargo and Nomura. See, e.g., https://www.isda.org/a/5eiDE/isda-operations-survey-2010.pdf.

    Principal holders of CDS risk exposure are represented by
``accounts'' in the TIW.\257\ The staff's analysis of these accounts in
TIW shows that the 2,110 transacting agents classified in Table 1
represent 13,137 principal risk holders. Table 2, below, classifies
these principal risk holders by their counterparty type and whether
they are represented by a registered or unregistered investment
adviser.\258\ For instance, banks in Table 1 allocated transactions
across 349 accounts, of which 20 were represented by investment
advisers. In the remaining instances, banks traded for their own
accounts. Meanwhile, ISDA-recognized dealers in Table 1 allocated
transactions across 91 accounts. Private funds are the largest type of
account holders that we were able to classify, and although not
verified through a recognized database, most of the funds we were not
able to classify appear to be private funds.\259\
---------------------------------------------------------------------------

    \257\ ``Accounts'' as defined in the TIW context are not
equivalent to ``accounts'' in the definition of ``U.S. person''
provided by Exchange Act rule 3a71-3(a)(4)(i)(C). They also do not
necessarily represent separate legal persons. One entity or legal
person may have multiple accounts. For example, a bank may have one
DTCC account for its U.S. headquarters and one DTCC account for one
of its foreign branches.
    \258\ Unregistered investment advisers include all investment
advisers not registered under the Investment Advisers Act and may
include investment advisers registered with a state or a foreign
authority, as well as investment advisers that are exempt reporting
advisers under section 203(l) or 203(m) of the Investment Advisers
Act.
    \259\ For the purposes of this discussion, ``private fund''
encompasses various unregistered pooled investment vehicles,
including hedge funds, private equity funds, and venture capital
funds. There remain over 5,800 DTCC accounts unclassified by type.
Although unclassified, each account was manually reviewed to verify
that it was not likely to be a special entity within the meaning of
the Dodd-Frank Act and instead was likely to be an entity such as a
corporation, an insurance company, or a bank.

    Table 2--The Number and Percentage of Account Holders--by Type--Who Participate in the Security-Based Swap Market Through a Registered Investment
                Adviser, an Unregistered Investment Adviser, or Directly as a Transacting Agent, From November 2006 Through December 2017
--------------------------------------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------------------------------------
Account holders by type                                          Number       Represented by a
                                                                           registered investment
                                                                                adviser
                                                                Represented by an
                                                             unregistered investment
                                                                     adviser
                                                                  Participant is
                                                              transacting agent \2\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Private Funds.............................................        3,857        1,973           51%        1,859           48%           25            1%
DFA Special Entities......................................        1,319        1,262           96%           37            3%           20            2%
Registered Investment Companies...........................        1,159        1,082           93%           73            6%            4            0%
Banks (non-ISDA-recognized dealers).......................          349           20            6%            8            2%          321           92%
Insurance Companies.......................................          301          196           65%           34           11%           71           24%
ISDA-Recognized Dealers...................................           91            0            0%            0            0%           91          100%
Foreign Sovereigns........................................           83           63           76%            3            4%           17           20%
Non-Financial Corporations................................           75           52           69%            4            5%           19           25%
Finance Companies.........................................           20           11           55%            0            0%            9           45%
Other/Unclassified........................................        5,883        3,745           64%        1,887           32%          251            4%
                                                           ---------------------------------------------------------------------------------------------
All.......................................................       13,137        8,404           64%        3,905           30%          828            6%
--------------------------------------------------------------------------------------------------------------------------------------------------------
\2\ This column reflects the number of participants who are also trading for their own accounts.

2. Natural Persons and Entity Persons Associated With SBS Entities

    We now estimate the number of natural persons associated with
entities likely to register with the SEC as SBS Entities. Based on an
analysis of broker-dealer FOCUS reports, as of December 31, 2017, there
were 3,523 broker-dealers that employed full-time registered
representatives and were doing a public business; these broker-dealers
each employed on average 75.8 registered representatives, or
approximately 267,043 in total. However, based on our review of the
entities we believe may register as SBS Dealers and their activities,
the Commission believes the subset of clearing broker-dealers provides
a better estimate given their size, complexity of operations, and role
in clearing and trade execution. As of December 31, 2017, there were
438 clearing broker-dealers which had, on average, each employed 420
persons who were registered representatives; we use this average as the
basis for our estimate of 21,000 natural persons associated with
dealers (420 * 50 = 21,000). Note, however, that SBS Entities will be
limited to sales of security-based swaps, whereas broker-dealers are
generally engaged in the sale of a broader range of financial
instruments, as well as other business lines such as prime brokerage
services. Thus, it is possible that fewer people would be needed to
facilitate this business.
    Since registration requirements for major security-based swap
participants are triggered by position thresholds, as opposed to
activity thresholds for dealer registration, we anticipate that
entities seeking to register with the Commission as major security-
based swap participants may more closely resemble hedge funds and
investment advisers.

Accordingly, to estimate the number of natural persons associated with
major security-based swap participants, we use Form ADV filings by
registered investment advisers. Based on this analysis, as of June 30,
2018 there were 13,010 registered investment advisers; these investment
advisers had an average of 62 employees each. We use this average as
the basis for our estimate of 310 natural persons associated with major
security-based swap participants (62 * 5 = 310).
    The estimated 21,000 natural persons associating with security-
based swap dealers and estimated 310 natural persons associating with
major security-based swap participants together provide our estimate of
21,310 natural persons associating with entities that are likely to
register with the Commission as SBS Entities.
    We now turn to the estimate of the number of entities associated
with SBS Entities. Based on an analysis of historical Form BD filings,
broker-dealers with control affiliates had an average of 8 control
affiliates that started to associate between 2000 and 2017, and have
not ended the association by December 31, 2017. Similar to the approach
in the Proposing Release, it may be appropriate to scale the figure by
a factor of two to account for complexity in business structures and
for the fact that security-based swap dealers are likely to resemble
some of the larger broker dealers, which results in an estimate of up
to 800 (8*50*2 = 800) entities associated with security-based swap
dealers. We continue to recognize that some SBS Entities, especially
those SBS Entities not cross-registered as broker-dealers, may be
engaged in sales of a more limited range of financial instruments than
broker-dealers.
    Using information on entity control persons in Schedules A, B and D
in historical Form ADV filings for investment advisers as of June 30,
2018, investment advisers with control persons had an average of
approximately 38.4 control persons listed as firms or organizations
that started to associate between 2000 and June 2018 and have not ended
the association by June 2018. We continue to believe that it may be
appropriate to scale the figure by a factor of two to account for
complexity in business structures and for the fact that major swap
participants are likely to be similar to some of the larger investment
advisers, which results in an estimate of up to approximately 384
(38.4*5*2 = 384) entities associated with major security-based swap
participants.
    The estimated 800 entity persons associating with security-based
swap dealers and estimated 384 entity persons associating with major
security-based swap participants together provide our estimate of 1,184
entity persons associating with SBS entities that will register.
    Overall, we estimate that as many as 420 natural persons may
associate with each dealer and as many as 62 natural persons may
associate with each major participant, amounting to as many as 21,310
associated natural persons in total. In addition, we estimate that
1,184 entity persons may be associating with all SBS Entities.
    We note that SBS Entities currently intermediating security-based
swaps are frequently part of complex organizational structures, which
may include thousands of natural persons and hundreds of entities.
Further, we believe that SBS Entities may adjust their organizational
structures and activities in response to the associated person and
other requirements of the final SBS Entity registration rules and the
pending substantive Title VII rules. We anticipate that there may be a
high degree of heterogeneity in business structures and organizational
complexity among SBS Entities. Ultimately, the Commission lacks data on
SBS Entity associations with disqualified persons effecting or involved
in effecting security-based swaps on their behalf, and commenters have
not provided information or data that would allow such quantification.
It is, therefore, difficult to estimate with a high degree of certainty
the number of associated persons currently intermediating security-
based swaps on behalf of SBS Entities that may be affected by the final
rules.
3. Other Markets and Existing Regulatory Frameworks
    The numerous financial markets are integrated, often attracting the
same market participants that trade across corporate bond, swap, and
security-based swap markets, among others.\260\ For example, persons
who will register as SBS Dealers and major security-based swap
participants are likely also to be engaged in swap activity. In part,
this overlap reflects the relationship between single-name CDS
contracts, which are security-based swaps, and index CDS contracts,
which may be swaps or security-based swaps. A single-name CDS contract
covers default events for a single reference entity or reference
security. Index CDS contracts and related products make payouts that
are contingent on the default of index components and allow
participants in these instruments to gain exposure to the credit risk
of the basket of reference entities that comprise the index, which is a
function of the credit risk of the index components. A default event
for a reference entity that is an index component will result in
payoffs on both single-name CDS written on the reference entity and
index CDS written on indices that contain the reference entity. Because
of this relationship between the payoffs of single-name CDS and index
CDS products, prices of these products depend upon one another,\261\
creating hedging opportunities across these markets.
---------------------------------------------------------------------------

    \260\ See Proposing Release, 80 FR at 51711.
    \261\ ``Correlation'' typically refers to linear relationships
between variables; ``dependence'' captures a broader set of
relationships that may be more appropriate for certain swaps and
security-based swaps. See, e.g., George Casella & Roger L. Berger,
Statistical Inference 171 (2nd ed. 2002).
---------------------------------------------------------------------------

    These hedging opportunities mean that participants that are active
in one market are likely to be active in the other. Commission staff
analysis of approximately 4,358 TIW accounts that participated in the
market for single-name CDS in 2017 revealed that approximately 2,936 of
those accounts, or 67 percent, also participated in the market for
index CDS. Of the accounts that participated in both markets, data
regarding transactions in 2017 suggest that, conditional on an account
transacting in notional volume of index CDS in the top third of
accounts, the probability of the same account landing in the top third
of accounts in terms of single-name CDS notional volume is
approximately 38 percent; by contrast, the probability of the same
account landing in the bottom third of accounts in terms of single-name
CDS notional volume is only 5.4 percent. As a result of cross-market
participation, informational efficiency, pricing and liquidity may
spill over across markets.\262\
---------------------------------------------------------------------------

    \262\ See Business Conduct Adopting Release, 81 FR at 30108;
Christopher Culp, Andria van der Merwe, & Bettina J. Starkle,
Single-name Credit Default Swaps: A review of the Empirical Academic
Literature 71-85 (International Swaps and Derivatives Association
Study, 2016), available at https://www.isda.org/a/KSiDE/single-name-cds-literature-review-culp-van-der-merwe-staerkle-isda.pdf; Patrick
Augustin, Marti G. Subrahmanyam, Dragon Y. Tang, & Sarah Q. Wang,
Credit Default Swaps: Past, Present, and Future, 8 Ann. Rev. Fin.
Econ. 175 (2016).
---------------------------------------------------------------------------

    Based on an analysis of 2017 TIW data, the Commission estimates
that approximately 46 of the 50 entities expected to register as
security-based swap dealers will be dually registered with the CFTC and
therefore be subject to CFTC requirements for swap dealers.
Additionally, based on an analysis of TIW data and filings with the
Commission, the Commission continues

to estimate that 16 market participants that will register as SBS
Dealers have already registered with the Commission as broker-dealers
and are thus subject to Exchange Act and FINRA requirements applicable
to such entities. Therefore, we expect SBS Entities to associate with
persons effecting or involved in effecting transactions across the
various markets overseen by the Commission, CFTC, FINRA, and NFA.
    The Commission, CFTC, FINRA, and NFA have already established
processes that enable various persons subject to a statutory
disqualification or other bars to be permitted to associate with
regulated entities transacting in equity, bond, commodity, swap, and
other markets. In light of these considerations, our analysis below
considers the costs and benefits, as well as the effects on efficiency,
competition and capital formation of the disqualification review
process under final Rule of Practice 194 in context of existing review
processes established by the Commission, CFTC, FINRA, and NFA.
4. Data on Parallel Review Processes and Statutory Disqualification
    While the Commission lacks data on the incidence of statutory
disqualifications in the security-based swap market, and therefore the
likely number of applications for relief, we look to the securities
market and the experience of broker-dealers as a guide. In the
Proposing Release, we presented data on closely parallel statutory
disqualification review processes. In this section, we provide updated
information and data on applications, dispositions, investor losses,
and re-offenses from parallel review processes by FINRA, the CFTC, the
Commission's review under Rule of Practice 193, and recent research.
From the outset, we recognize that one of the limitations of the data
provided below is the time period for which the data are available
(post-crisis period). We recognize that incidences of misconduct and
fraud may be more prevalent and more difficult to detect in economic
booms. As such, the figures below may underestimate the prevalence of
certain types of misconduct in other markets.
a. FINRA's Review Process
    The Commission continues to believe that the incidence of statutory
disqualification among broker-dealers serves as a reasonable basis to
estimate the incidence of disqualification among SBS Entities, because
both broker-dealers and SBS Entities are engaged in the business of
intermediating trades in financial instruments.
    Based on information provided by FINRA to the Commission, in 8.5
years between 2010 and June 2018, FINRA has received 280 MC-400
applications (an average of approximately 33 per year), and 176 MC-400A
applications (an average of approximately 21 per year). The number of
applications by type on an annual basis is reported in Figure 1.
[GRAPHIC] [TIFF OMITTED] TR19FE19.017

    Of all MC-400 applications for individuals received during 2010-
June of 2018, approximately 26 percent of applications were related to
statutory disqualification for solely non-investment related conduct;
the other 74 percent were for investment-related conduct. Of all MC-400
applications received during 2010-June 30, 2018, 24 percent of those
applications were related to SEC orders, 20 percent of those
applications were related to FINRA actions, 16 percent of those
applications were related to SOX violations, and 3 percent of those
applications were related to injunctions. The remaining approximately
11 percent of those MC-400 applications were due to other investment-
related or multiple types of conduct (including investment related
conduct). Of all MC-400A applications received during 2010-June of
2018, 1 application was related to statutory disqualification for
solely non-investment related conduct; the remaining 175 were for
investment-related conduct. Figure 2 and Figure 3 present information
about the nature of underlying conduct related to applications MC-400
and MC-400A applications in the full sample.
---------------------------------------------------------------------------

    \263\ The overwhelming majority of MC-400A applications
submitted in 2015 resulted from the Commission's Municipalities
Continuing Disclosure Cooperation (``MCDC'') initiative. The
relatively high number of MC-400A Applications processed in 2015 is
atypical of the amount of MC-400A applications that FINRA typically
disposes of in a calendar year.

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

    With respect to application dispositions, between 2010 and June of
2018, FINRA made 299 MC-400 dispositions for individuals subject to a
statutory disqualification seeking relief under its FINRA Rule 9520
Series. Of these dispositions, 89 (or 30 percent) were approvals
(including 23 approvals for non-investment-related disqualifications
and 66 for investment-related disqualifications); 157 (or 53 percent)
were denials; 29 were instances where the individuals were no longer
required to file an application; and 24 were determined not to be
statutorily disqualified. Figure 4 shows time trends in MC-400
dispositions.
    Further, between 2010 and June of 2018, FINRA made dispositions
pertaining to 173 MC-400A applications for statutorily disqualified
member firms under its Rule 9520 Series. Of the MC-400A dispositions,
102 (or 59 percent) were approvals; 1 was a denial; in 53 (or 31
percent) applications the firm filed Form BDW, was canceled by FINRA or
the application was no longer required; and in 17 applications (10
percent) the firm was determined not to be disqualified. Figure 5 shows
time trends in MC-400A dispositions.
[GRAPHIC] [TIFF OMITTED] TR19FE19.018

[GRAPHIC] [TIFF OMITTED] TR19FE19.019

[GRAPHIC] [TIFF OMITTED] TR19FE19.020

[GRAPHIC] [TIFF OMITTED] TR19FE19.021

    Regarding  reoffenses,\265\ out of 89 MC-400 applications approved
between 2010 and June of 2018, there were 10 reoffenses. Of the 10 MC-
400 reoffenses, 2 offenders were originally disqualified for non-
investment related offenses, and the repeat offense for both offenders
was also non-investment related; and 2 offenders were originally
disqualified for non-investment related misconduct and the repeat
offense was investment related.\266\ For entities, out of 102 MC-400A
application approvals between 2010 and June of 2018, there were 29
reoffenses (all were investment-related). A portion of these occurred
in 2015, which saw an increase in MC-400A applications as a result of
the Commission's MCDC Initiative.
---------------------------------------------------------------------------

    \264\ See Note 263.
    \265\ For MC-400 Applications: Reoffender is defined as a
disqualified individual who was previously approved to associate
pursuant to Rule 19h-1 and who then became subject to a subsequent
final regulatory action or was convicted of a criminal offense
within the relevant time period (January 1, 2010, through June 30,
2018), as reported on the individual's Uniform Registration Forms.
    \266\ A total of 3 individual's account for 4 reoffenses (i.e.,
one person reoffended twice).
---------------------------------------------------------------------------

    For MC-400A Applications: Reoffender is defined as a broker-dealer
who was previously approved pursuant to Rule 19h-1 and who then became
subject to statutory disqualification again within the relevant time
period (January 1, 2010, through June 30, 2018), as reported on the
broker-dealer's Uniform Registration Forms.
b. CFTC/NFA Review Process
    We have also requested and received data from NFA. According to NFA
staff, between October 11, 2012, and June 30, 2018, 7 different Swap
Dealers filed 15 applications to the NFA for NFA to provide notice to
the Swap Dealer that, had the person applied for registration as an
associated person, NFA would have granted such registration. As noted
above, the Commission has estimated that up to 55 SBS Entities may seek
registration, while the CFTC has provisionally registered 102 Swap
Entities.\267\ Using the data from NFA concerning 15 applications over
approximately 5.75 years, we estimate the filing of approximately 2
applications per year on aggregate across all SBS Entities requesting
that statutorily disqualified associates persons be permitted to effect
or be involved in effecting security-based swaps on behalf of an SBS
Entity.\268\
---------------------------------------------------------------------------

    \267\ See CFTC Provisionally Registered Swap Dealers, as of
October 11, 2018, https://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.html, last accessed November 6, 2018.
    \268\ This figure slightly overestimates the number of
applications calculated as: (15 applications x 55 SBSEs/102 Swap
entities) / approximately 5.75 years ~= 1.4.
---------------------------------------------------------------------------

    We note that the number of applications received by NFA may only
present a partial picture of the potential impact of a disqualification
because, inter alia, (1) the CFTC definition of ``associated person''
of a Swap Entity includes only natural persons, not entities (see 17
CFR 1.3(aa)(6)); (2) in CFTC Regulation 23.22(b), 17 CFR 23.22(b), the
CFTC provided an exception from the prohibition set forth in CEA
Section 4s(b)(6), 7 U.S.C. 6s(b)(6), for any person subject to a
statutory disqualification who is already listed as a principal,
registered as an associated person of another CFTC registrant, or
registered as a floor broker or floor trader.
    Most applications were made with respect to individuals
disqualified for non-investment related conduct: Of the 15
applications, 9 applications were filed by Swap Dealers for associated
persons whose disqualifying misconduct was not investment-related
(misdemeanors and felonies for non-investment related conduct). With
respect to application dispositions, the NFA made a determination that
it would have granted registration as an associated person of a Swap
Dealer if that person had applied for registration as an associated
person on 13 applications. In two other instances, an application for
registration was filed and subsequently withdrawn (2012) and an
individual was no longer employed by the firm (2013).
    Regarding instances of repeated misconduct, since individuals who
act as associated persons of Swap Dealers are not registered, NFA
receives no information regarding re-offenses. However, to date, none
of the swap dealers have filed additional statutory disqualification
forms to request NFA determination with respect to a new statutory
disqualification for any of the individuals. Information that would

provide any estimates of investor losses in various disqualification
instances was not available.
c. Other Data About Misconduct
    In the Proposing Release, the Commission described available data
on disqualification and misconduct in the securities market. In this
section, we supplement the discussion with recent research on that
topic. In addition to data on parallel review processes, research has
examined data on misconduct of brokers, registered investment advisers,
and money managers.\269\ These results are generally obtained from
registered brokers and investment advisers, in a more competitive
industry with a clientele that includes retail customers. This differs
from security-based swap markets, which have unique features. For
example, security-based swaps may be more opaque than equity or bonds,
potentially increasing informational asymmetries among transacting
counterparties.\270\ At the same time, security-based swap markets have
a dealer-oriented market structure, where a relatively small group of
dealers serves a predominantly institutional clientele.\271\ This can
strengthen repeated game reputational incentives, and the institutional
nature of the clientele may suggest a greater degree of investor
sophistication than in the retail context.
---------------------------------------------------------------------------

    \269\ A significant limitation of this literature is the fact
that only a fraction of misconduct may be detected. As a result,
misconduct rates in the data reflect both the prevalence of the
underlying misconduct and the probability of detection.
    \270\ See Better Markets Letter, at 2 (stating that
``derivatives are so complex and poorly understood by even
sophisticated market participants.'').
    \271\ As can be seen from Tables 1 and 2 above, the overwhelming
bulk of activity is conducted by dealers and institutions. See also
Inaki Aldasoro & Torsten Ehlers, The Credit Default Swap Market:
What a Difference a Decade Makes, BIS Quarterly Review, June 2018,
at 1, 4 (Graph 2), available at https://www.bis.org/publ/qtrpdf/r_qt1806b.pdf, last accessed July 30, 2018.
---------------------------------------------------------------------------

    Nevertheless, these data imply that, at least in their specific
settings: (i) Past disciplinary events and other disclosed matters may
predict higher probability of future misconduct; (ii) employee
characteristics are strong predictors of future employee misconduct;
(iii) the ability to predict future misconduct with past misconduct may
weaken over time; and (iv) misconduct may be relatively rare, employees
with misconduct histories may be attracted to employers with higher
prevalence of misconduct, and the misconduct of employees may increase
the likelihood of misconduct of their colleagues.
    Egan, Matvos, and Seru (2017) \272\ examine BrokerCheck disclosures
of the disciplinary history of FINRA registered representatives in
2005-2015. The paper defines misconduct broadly and includes in the
definition customer disputes, disciplinary events, and financial
matters reported by FINRA. On average, only 7 percent of employees in a
given firm have misconduct records. However, rates of misconduct in
several firms with the highest incidences of misconduct are as high as
15-20 percent. Hence, entities exhibit significant differences in
misconduct risks in their labor force and, at least in some entities,
the prevalence of misconduct by associated natural persons is
significantly higher than industry average. In addition, firms tend to
``match on misconduct,'' with firms with higher rates of prior
misconduct hiring employees with misconduct histories. Finally, prior
misconduct strongly predicts repeated misconduct: Approximately a third
of employees with misconduct engage in repeated misconduct, and
employees with prior misconduct are approximately five times as likely
to engage in new misconduct compared to the sample average. Similarly,
Assadi (2018) \273\ finds that misconduct predicts future misconduct,
and this relationship is weakened by time elapsed since the previous
incidence of misconduct.
---------------------------------------------------------------------------

    \272\See Mark Egan, Gregor Matvos, & Amit Seru, The Market for
Financial Adviser Misconduct, J. Pol. Econ. (forthcoming, 2017),
available at https://ssrn.com/abstract=2739170. Their measures of
misconduct reflect customer disputes, disciplinary events, and
financial matters reported by FINRA from advisers' disclosure
statements during that period.
    \273\ See Pooria Assadi, Empirical Investigation of the Causes
and Effects of Misconduct in the U.S. Securities Industry (Working
Paper, 2018), available at http://summit.sfu.ca/system/files/iritems1/17890/etd10567_PAssadi.pdf.
---------------------------------------------------------------------------

    Dimmock, Gerken, and Graham (2018) \274\ examine customer
complaints against FINRA-registered representatives in 1999 through
2011, and argue that misconduct of individuals influences the
misconduct of their coworkers. The paper uses mergers of firms as a
quasi-exogenous shock and examines changes in an adviser's misconduct
around changes to an employee's coworkers due to a merger. The paper
estimates that an employee is 37 percent more likely to commit
misconduct if her new coworkers encountered in the merger have a
history of misconduct. The paper contributes to broader evidence on
peer effects, connectedness, and commonality of misconduct,\275\ and
can help explain the distributional properties in the prevalence of
misconduct across firms documented in Egan, Matvos, and Seru (2017).
---------------------------------------------------------------------------

    \274\ See Stephen G. Dimmock, William C. Gerken, & Nathaniel
Graham, Is Fraud Contagious? Coworker Influence on Misconduct by
Financial Advisors, 73 J. Fin. 1417, (2018).
    \275\ See, e.g., Christopher A. Parsons, Johan Sulaeman, &
Sheridan Titman, The Geography of Financial Misconduct, 73 J. Fin.
2087 (2018), available at https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12704.
---------------------------------------------------------------------------

    Other papers have considered the role of disclosures for the
predictability of misconduct and the distribution of investor losses
related to misconduct. They seem to indicate that, in some contexts,
existing disclosures accessible to the investing public allow investors
to identify brokers, investment managers, and hedge funds that have
significantly higher misconduct risk both in terms of probability of
misconduct as well as dollar investor losses. While these results are
limited to their specific settings, we note that the security-based
swap market is an institutional market. As such, the investor clientele
consuming public disclosures of registered SBS Entities may be more
sophisticated than that of retail brokerages or investment managers in
the settings discussed below. In the broker-dealer setting, which may
be most analogous to the security-based swap setting, Qureshi and
Sokobin (2015) \276\ use BrokerCheck data for 2000 through 2013 to
explore the distribution of events involving investor losses (measured
as complaints that led to awards against brokers or voluntarily settled
above a de minimis threshold). They also test whether public
disciplinary records, financial and other disclosures, and employment
history information can meaningfully predict future misconduct and
investor losses. The paper's three main results are as follows. First,
investor loss events are rare and predominantly one-time offenses.
Between 98.7 percent and 99 percent of brokers are not associated with
any investor loss events. Of the brokers with investor loss events, the
overwhelming majority (approximately 82 percent) have only 1 event,
with only about 12 percent having 2 events and about 6 percent of
brokers having 3 events or more. Second, publicly observable data yield
a high degree of predictability of future investor loss events. For
example, 20 percent of brokers with the highest ex-ante predicted
probability of investor losses (based on public disclosures) are
associated with more than 55 percent of

the investor loss events with approximately 56 percent of total dollar
investor losses. In turn, 20 percent of brokers with the lowest ex-ante
probability of investor loss events are associated with only 3.8
percent of investor loss events. The paper concludes that publicly
available information allows investors to discriminate between brokers
with a high propensity for investor loss from other brokers. Third,
losses associated with the broker's coworkers meaningfully increase the
overall power to predict investor loss events; however, undisclosed
financial events, undisclosed disciplinary events, and exam performance
do not.
---------------------------------------------------------------------------

    \276\ See Hammad Qureshi & Jonathan S. Sokobin, Do Investors
Have Valuable Information about Brokers? (FINRA Office of the Chief
Economist Working Paper, August 2015), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2652535, last accessed
July 30, 2018.
---------------------------------------------------------------------------

5. Requests for Relief From Statutory Disqualification Under Rule of
Practice 194
    In the Proposing Release, the Commission relied on disqualification
review application data for 2014, and estimated that there may be as
many as five applications per year with respect to associated natural
persons and as many as two applications per year with respect to
associated person entities.\277\ As described above, we estimate that
up to 55 entities may register with the Commission as SBS Entities, and
we now estimate 21,310 associated natural persons. We have also
received additional data regarding the total number of MC-400 and MC-
400A applications received by FINRA from 2010 through June of 2018.
Assuming the ratio of applications for association with statutorily
disqualified persons at SBS Entities is the same as at broker-dealers,
the data indicate there may be approximately three applications for
natural persons per year.\278\ Recognizing potential annual
fluctuations in the incidence of disqualification review applications,
we now conservatively estimate that SBS Entities may file up to five
applications per year with respect to their associated natural
persons.\279\
---------------------------------------------------------------------------

    \277\ See Proposing Release, 80 FR at 51707.
    \278\ For natural persons: 21,310 * (33/267,043) = 2.6.
    \279\ To the extent that SBS Entities are using the same
personnel to transact in security-based swaps, swaps, and underlying
securities, and if those personnel are the subject of a prior
application or other form of relief from the Commission, CFTC, an
SRO, or a registered futures association, the number of new
applications the Commission receives may be lower than the
calculated estimate.
    We also note that registered SBS Entities retain the option of
complying with statutory disqualification provisions by
disassociating with or reassigning disqualified persons. As a
result, many instances of disqualification may be resolved through
disassociation or reassignment. Registered SBS Entities would likely
take advantage of the provision only when the benefits of
associating with a disqualified person outweigh the costs, including
reputational costs, of making an application.
---------------------------------------------------------------------------

C. Benefits, Costs, and Effects on Efficiency, Competition, and Capital
Formation

    Exchange Act Section 15F(b)(6) provides the Commission with the
authority to provide relief from the prohibition against using
associated natural persons subject to a statutory disqualification to
effect or be involved in effecting security-based swaps.\280\ As
discussed above, clarity provided by the final rule regarding the
materials to be submitted, the items to be considered, and the standard
of review, may alter an SBS Entity's assessment of (1) any application
costs and reputational costs that come with choosing to associate with
disqualified persons, and (2) its beliefs as to the likelihood of an
approval or denial decision by the Commission. To the extent that any
such alteration leads to greater or fewer applications for relief under
Rule of Practice 194 relative to the baseline with no process rule in
place, economic costs and benefits may accrue to SBS Entities,
associated persons, and counterparties to SBS Entities.
---------------------------------------------------------------------------

    \280\ See 15 U.S.C. 78o-10(b)(6).
---------------------------------------------------------------------------

    As discussed above, we estimate that the Commission will receive
five or fewer applications per year under the final Rule of Practice
194. Given the number of natural persons expected to associate with SBS
Entities, and our understanding of the labor market in security-based
swaps, reassigning or disassociating from a disqualified natural person
for the purposes of effecting security-based swaps on behalf of SBS
Entities may be relatively less costly than disassociating from
disqualified person entities. We continue to believe that the overall
economic impact of the final rule will depend primarily on: (i) How
many associated persons of SBS Entities become disqualified and their
value to their associated SBS Entities, (ii) the relative market share
of affected SBS Entities, (iii) the importance and structure of
relationships between SBS Entities and their counterparties, and (iv)
the response of unaffected SBS Entities and their counterparties. We
are mindful of the economic tradeoffs inherent in our policy choices
and their impact on the securities markets. We discuss these economic
effects in more detail below.
    The Commission lacks data on the complexity and variety of current
SBS Entity business structures and activities, the degree of SBS Entity
reliance on associated persons subject to statutory disqualification,
the location and specificity of expertise of such persons, as well as
any reputational costs of associating with disqualified persons in
security-based swap markets. Further, the economic effects of various
provisions of the final Rule of Practice 194 hinge on a number of
factors. Such factors include: (i) Whether and how significantly SBS
Entities may be affected by the statutory prohibition in Exchange Act
Section 15F(b)(6); (ii) any reputational and direct costs and response
of counterparties to SBS Entities seeking relief under Rule of Practice
194 relative to the baseline exemptive relief process; (iii)
differences in counterparty risks and related losses under final Rule
of Practice 194 relative to the baseline exemptive relief process; and
(iv) how other SBS Entities may react to the newly opened market share
should some SBS Entities temporarily cease effecting security-based
swaps or exit the market due to the statutory prohibition in Exchange
Act Section 15F(b)(6). To the best of our knowledge, no such data are
publicly available, and commenters have not provided data, estimates or
other information to enable quantification. We, therefore, cannot
quantify many of the effects of the final Rule of Practice 194,
including the tradeoff behind an SBS Entity's choice to pursue relief
and face potential reputational losses versus disassociating with the
statutorily disqualified associated person. Where we cannot quantify,
we discuss in qualitative terms the relevant economic effects,
including the costs and benefits of the final rule and alternative
approaches.
1. Costs and Benefits of Rule of Practice 194
a. Costs and Benefits of a Review Process
    In evaluating the likely benefits to SBS Entities of the approach
being adopted, we note that absent Rule of Practice 194, SBS Entities
would still be able to apply to the Commission, and the Commission
would still be able to exercise its authority to grant relief.\281\ The
final Rule of Practice 194 does, however, establish a structured
process that provides SBS Entities clarity and guidelines on the form
of application, the items to be considered, and the standard of review
that the Commission will apply. Furthermore, the final rule helps to
ensure that the Commission will have sufficient information to make a
meaningful determination that

providing relief for an associated person is consistent with the public
interest.
---------------------------------------------------------------------------

    \281\ See 15 U.S.C. 78o-10(b)(6). See also Section V.B, supra.
---------------------------------------------------------------------------

    Specifically, absent Rule of Practice 194 and without a formal
review process, SBS Entities seeking to apply for relief from Section
15F(b)(6) are likely to apply to the Commission directly, looking to
either Rule of Practice 193 \282\ or an analogous process as a guide.
We believe that such applications would be more time-consuming and
would be more prone to errors or more likely to be deemed to contain
insufficient information to allow the Commission to make an informed
determination.
---------------------------------------------------------------------------

    \282\ See 17 CFR 201.193.
---------------------------------------------------------------------------

    Under the final Rule of Practice 194, SBS Entities will generally
be aware of the information they are required to provide, as well as
the standard of review. Clarity about the items that the Commission
will consider in making a determination, will allow SBS Entities to
make more-informed assessments as to the likelihood that the Commission
will either grant or deny relief, which may affect their decision
whether to apply for relief. The final Rule of Practice 194 may thus
conserve resources relative to a more time-consuming and error-prone
application process absent the rule. Delays in the application process
absent the rule may require SBS Entities to replace or reassign a
statutorily disqualified associated person. To the extent that the
application review process under Rule of Practice 194 is less error-
prone and involves fewer delays, such costs may be reduced. In
addition, the final Rule of Practice 194 may allow SBS Entities to make
more-informed evaluations about the tradeoff between pursuing an
application and either disassociating with or reassigning a person
subject to a statutory disqualification.
    To the extent that Rule of Practice 194 increases certainty and
conserves resources for SBS Entities applying for relief from the
statutory prohibition in Exchange Act Section 15F(b)(6), some SBS
Entities may choose to apply to the Commission under Rule of Practice
194, where they would have otherwise disassociated from a disqualified
person. This may benefit affected SBS Entities that would have incurred
higher costs from disassociating compared with costs of applying for
relief under Rule of Practice 194. As discussed in greater detail in
Section V.C.2, under Rule of Practice 194, a greater number of SBS
Entities may be able to effect security-based swaps without potentially
costly business restructuring. As a result, the counterparties of SBS
Entities may benefit from greater choice of SBS Entity counterparties
and lower transaction costs. Finally, applications and supporting
materials, including information concerning supervisory structure,
terms of employment and other items, may inform Commission
understanding of SBS Entity associations and ongoing oversight.
    While Rule of Practice 194 is expected to result in benefits
discussed above, it will also result in direct application costs for
SBS Entities filing with the Commission under the final Rule of
Practice 194. In the Proposing Release, the Commission estimated that
the average time necessary for an SBS Entity to research the questions,
and complete and file an application under Rule of Practice 194 would
be approximately 40 hours for applications regarding entities, and 30
hours for applications regarding natural persons.\283\ The Commission
received no comments and continues to believe the estimate for
applications regarding natural persons is reasonable and appropriate;
the exclusion for entities under the final rule, however, means that
SBS Entities will not make any applications regarding entities and thus
will spend no time on such applications. Since the Commission now
estimates that SBS Entities would make up to five applications on an
average annual basis, the Commission estimates the economic costs to
prepare, review, and submit applications under the final Rule of
Practice 194 of up to $73,620 per year.\284\
---------------------------------------------------------------------------

    \283\ See Proposing Release, 80 FR at 51713.
    \284\ This estimate is based on the following. Total burden
hours = [(30 hours) x (up to 5 SBS Entities applying with respect to
associated persons that are natural persons) + (6 hours) x (up to 5
SBS Entities filing notices)] = 180. Attorney at $409 per hour x 180
burden hours = $73,620. The hourly cost figure is based upon data
from SIFMA's Management & Professional Earnings in the Securities
Industry 2013 (modified by the Commission staff to adjust for
inflation and to account for an 1,800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee benefits, and
overhead).
---------------------------------------------------------------------------

    Notably, an SBS Entity would only submit an application where the
SBS Entity believed that the economic value of retaining a particular
person to effect security-based swaps outweighed the application costs
associated with the final Rule of Practice 194. In other words, any
application costs would be incurred by SBS Entities on a voluntary
basis. As such, it is not clear how many SBS Entities will choose to
apply for relief rather than simply disassociate from a statutorily
disqualified associated person. Furthermore, the decision to incur
application costs would also reflect an SBS Entity's assessment of the
likelihood of the Commission granting relief under the public interest
standard set forth in the final Rule of Practice 194. Lastly, under the
baseline and absent Rule of Practice 194, SBS Entities can apply to the
Commission for exemptive relief from the statutory prohibition, which
would also involve costs. Since compliance with SBS Entity registration
is not yet required and, thus, no exemptive relief applications by SBS
Entities have been filed, we are unable to estimate those costs. The
net costs of the application process under Rule of Practice 194 must be
assessed relative to the baseline process of requesting exemptive
relief, and the above estimate of $73,620 per year is likely to
overestimate the additional costs of the application process.
    Under the baseline, an SBS Entity would not be precluded under
Exchange Act Section 15F(b)(6) from seeking Commission relief.\285\
However, as already discussed, SBS Entities would lack clarity about
the application process and, though they may look to Rule of Practice
193 or similar processes as a guide, SBS Entities could potentially
expend more resources than necessary due to process uncertainty. Thus,
notwithstanding the cost estimates above, the final rule may mitigate
application costs relative to the baseline due to the existence of a
structured process. We expect that this cost mitigation would be most
significant for SBS Entities that would be among the first to seek
relief. SBS Entities seeking relief later would enjoy the benefits of
learning by observing the process experienced by first-movers.
---------------------------------------------------------------------------

    \285\ See Section supra.
---------------------------------------------------------------------------

    The Commission has received comment that the absence of penalties
invites misconduct and that a ban on disqualified persons without
exclusions would lead firms to understand that failure to oversee and
disassociate from disqualified persons jeopardizes business.\286\ In
evaluating this argument, the Commission has considered recent
supplemental information relevant to this question. Specifically, in
other contexts, some entities dismiss or disassociate from disqualified
persons to limit reputational costs. For example, Egan, Matvos, and
Seru (2017) show that approximately half of employees with a misconduct
history lose their jobs. However, other firms frequently rehire such
employees, and the rehiring firms tend to have higher rates of prior
misconduct. Employees with prior misconduct records are more likely to
be hired by firms with higher rates of misconduct that pay lower
compensation, have retail customers, and operate in counties with lower

education, elderly populations, and higher incomes. The paper
hypothesizes that such firms ``specialize'' in misconduct and cater to
unsophisticated customers, but the paper does not evaluate fees or
performance of investor portfolios. However, in the residential
mortgage-backed securities (``RMBS'') market, Griffin, Kruger, and
Maturana (2018) \287\ do not find that RMBS employees had lower levels
of job retention, promotion, or outside moves than non-RMBS employees,
even when RMBS employees signed high-loss deals or deals implicated in
lawsuits. While these results in the RMBS market appear somewhat
inconsistent with evidence in the broker-dealer setting (Egan et al.
(2017)), Amiram et al. (2018) suggest that instances of RMBS-related
fraud in the sample may not have imposed on banks reputational costs
large enough to result in significant labor market discipline of RMBS
employees. In addition, some RMBS employees that signed deals
implicated in lawsuits may have remained in continued employment of
issuing banks to support litigation.
---------------------------------------------------------------------------

    \286\ See Public Citizen Letter, at 1-2.
    \287\ See John M. Griffin, Samuel Kruger, & Gonzalo Maturana, Do
Labor Markets Discipline? Evidence from RMBS Bankers, J. Fin. Econ.
(accepted, 2018), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2977741, last accessed Aug. 19, 2018.
---------------------------------------------------------------------------

    We continue to acknowledge that the results of the cited studies
are not specific to the swap or security-based swap contexts. However,
the studies suggest that, in some settings, even without a ban on
disqualified persons, some employers may already understand that
failure to oversee and disassociate from some disqualified persons may
jeopardize the firms' business, and the labor market may provide some
penalties against misconduct. To the degree that these findings may
apply to institutional security-based swap markets, they indicate that
market discipline may be a separate disincentive against misconduct and
may partly mitigate the concern raised by the commenter \288\ that the
absence of bans invites misconduct.
---------------------------------------------------------------------------

    \288\ See Public Citizen Letter, at 1-2.
---------------------------------------------------------------------------

b. Costs and Benefits of the Commission, CFTC, SRO, Registered Futures
Association Provision
    Beyond establishing a process for submitting applications, Rule of
Practice 194 allows an SBS Entity, subject to certain conditions, to
permit an associated person who is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity without making an application to the
Commission, if the associated person's membership, association,
registration, or listing as a principal has been granted or otherwise
approved by the Commission, CFTC, an SRO, or a registered futures
association. In such cases where an SBS Entity meets the requirements
of the final rule, these SBS Entities would be able to provide notice
to the Commission in lieu of having to compile the same information and
documentation for a repeated review, thereby eliminating redundancy and
decreasing SBS Entity costs.
    This provision of final Rule of Practice 194 provides SBS Entities
with flexibility in hiring and assigning employees and associating with
entities depending on business needs and required capabilities. To the
extent that SBS Entities, Swap Entities, and broker-dealers use the
same personnel or entities to effect security-based swaps, swaps, and
securities transactions, SBS Entities will not have to undergo and bear
costs of duplicate review when decisions about relief from statutory
disqualifications have already been made by the Commission or another
regulatory authority. This provision would, therefore, primarily
benefit SBS Entities transacting across markets through statutorily
disqualified associated persons previously granted relief by the
Commission, the CFTC, FINRA or NFA by enabling those SBS Entities to
avoid costs of a separate application process under Rule of Practice
194 or business restructuring. We also recognize that this provision
reduces costs incurred by SBS Entities associating with disqualified
persons previously granted relief by the Commission, the CFTC, FINRA or
NFA so it may benefit these disqualified persons by potentially
improving their employment options and business outcomes.
    Notwithstanding these benefits, this provision of the final Rule of
Practice 194 may give rise to risks related to permitting otherwise
statutorily disqualified associated persons to effect or be involved in
effecting security-based swaps on behalf of SBS Entities without an
individualized determination by the Commission that doing so is
consistent with the public interest. Exchange Act Rule 19h-1 provides
for Commission review of notices filed by SROs proposing to admit any
person to, or continue any person in, membership or association with a
member, notwithstanding statutory disqualification.\289\ The Commission
does not, however, review or approve statutory disqualification
decisions of NFA or CFTC. As a result, in circumstances where the SBS
Entity has obtained relief from the NFA or CFTC, the Commission will
not have the opportunity through the Rule of Practice 194 process to
make an individualized determination or impose terms of reassociation
specific to risks and activities in security-based swap markets.
However, this relief is only available where an application related to
a specific disqualifying event has been reviewed and approved by the
CFTC, FINRA, or the NFA, and the terms and conditions of association
with the SBS Entity are the same in all material respects as those
approved by the CFTC, FINRA, or the NFA. Since this provision would
result in a potentially greater number of statutorily disqualified
associated persons being permitted to effect or be involved in
effecting security-based swaps on behalf of SBS Entities, it may
increase compliance and counterparty risks, as discussed in section
IV.D. However, we note that the Commission continues to have authority
to bring a separate action under Exchange Act Section 15F(l)(3).\290\
As discussed above and in Section III, the Commission continues to
believe that this provision may benefit SBS Entities relying on the
same associated persons transacting across integrated markets, and, to
the extent SBS Entity costs may be passed along to counterparties in
the form of less attractive terms of available security-based swaps, it
may also benefit counterparties.
---------------------------------------------------------------------------

    \289\ See 17 CFR 240.19h-1.
    \290\ See 15 U.S.C. 78o-10(l)(3).
---------------------------------------------------------------------------

c. Costs and Benefits of the Relief for Associated Entity Persons From
Exchange Act Section 15F(b)(6)
    As part of the final Rule of Practice 194, the Commission is
adopting a blanket exclusion from the general prohibition in Exchange
Act Section 15F(b)(6) with respect to all associated person entities.
As a result of this provision, SBS Entities cross-registered as Swap
Entities with the CFTC would experience economies of scope in
associating with persons that are entities because the ``associated
person'' definition of a Swap Entity is limited solely to natural
persons and excludes person entities.\291\ SBS Entities will be able to
rely on the same associated person entities in transactions with the
same counterparties across integrated swap and security-based swap
markets. As estimated in the economic baseline, approximately 46 out of
50 entities

likely to register with the Commission as SBS Dealers are already
registered with the CFTC as Swap Dealers and are currently able to
associate with statutorily disqualified associated person entities in
their swap activity.
---------------------------------------------------------------------------

    \291\ See 17 CFR 1.3(aa)(6). See also CFTC Regulation 23.22(b),
17 CFR 23.22(b).
---------------------------------------------------------------------------

    In addition, as discussed above, approximately two thirds of
accounts participating in the single-name CDS market also transact in
index CDS subject to the CFTC's disqualification regime. This suggests
that a majority of security-based swap counterparties are already
currently transacting with the same entities likely to register as SBS
Entities and that those SBS Entities may be associating with
disqualified entities. The entity exclusion would enable the same SBS
Entity--counterparty relationships to continue across swap and
security-based swap markets, eliminating the need for a counterparty to
establish new dealer relationships solely for the purpose of security-
based swap transactions.
    Further, SBS Entities will avoid all costs of business
restructuring related to associated person entities that become
statutorily disqualified, or in the event of new associations with
statutorily disqualified associated person entities effecting or
involved in effecting security-based swaps on the SBS Entity's behalf.
This flexibility may benefit SBS Entities and enable them to provide
counterparty services to security-based swap counterparties more
effectively or efficiently. In addition, the exclusion eliminates the
potential for disruption to security-based swap markets, including
potential adverse effects to counterparties, that may occur if SBS
Entities temporarily cease operations due to not being able to utilize
the services of their associated person entities or if SBS Entities
move services to associated person entities that may not be as well-
equipped to handle them, pending a determination on their application
for relief.
    Relief for SBS Entities associating with statutorily disqualified
person entities would result in SBS Entities being less constrained by
the general statutory prohibition. We continue to recognize that
associating with statutory disqualified person entities effecting or
involved in effecting security-based swaps on behalf of SBS Entities
may give rise to counterparty and compliance risks and related
losses.\292\ We also continue to recognize that statutory
disqualification and an inability to continue associating with SBS
Entities creates disincentives against underlying misconduct for
associated persons.\293\ Further, we recognize that, under the
provision being adopted, the Commission would be unable to make an
individualized determination about whether permitting a given
associated person entity subject to a statutory disqualification to
effect or be involved in effecting security-based swaps on behalf of an
SBS Entity is consistent with the public interest.\294\
---------------------------------------------------------------------------

    \292\ See, e.g., Better Markets Letter. See also Proposing
Release, 80 FR at 51713. Accord Egan, Matvos, & Seru (2017) (showing
in another context that there is considerable clustering of
employees engaging in misconduct in a handful of firms).
    \293\ See, e.g., Public Citizen Letter; Better Markets Letter.
See also Proposing Release, 80 FR at 51716.
    \294\ However, the Commission could, by order, censure, place
limitations on the activities or functions of the associated person,
or suspend or bar such person from being associated with an SBS
Entity. See 15 U.S.C. 78o-10(l)(3).
---------------------------------------------------------------------------

    Some counterparties may respond to the exclusion by increasing the
amount of due diligence they perform on their SBS Entity counterparties
(such as accessing public Form SBSE disclosures, SEC orders, FINRA
actions, and other public records) relative to the current baseline. We
are unable to quantitatively estimate the number of counterparties that
may respond in this way and related costs, as the extent of additional
information acquisition and related costs will depend on: Each
counterparty's baseline due diligence and compliance practices; the
size of the counterparty's security-based swap transaction activity and
relative importance of such activity in the counterparty's business;
the degree to which the counterparty values statutory disqualification
of associated persons as a signal of SBS Entity quality; and each
counterparty's assessment of the tradeoff between potentially higher
ongoing risks related to disqualification of SBS Entities' associated
persons and the relative attractiveness of the price and non-price
terms of security-based swaps that SBS Entities with disqualified
associated persons may offer.
    Several factors may limit the above economic effects of this final
provision.
    First, information about conduct giving rise to statutory
disqualification (e.g., SEC orders, injunctions, FINRA actions) in the
U.S. is generally public.\295\ In addition, the final SBS Entity
registration rules that form a part of our economic baseline require
all SBS Entities to submit to the Commission information about their
disciplinary histories, including those of control affiliates. Under
the final SBS Entity registration rules that form a part of the
economic baseline, this information will subsequently be made public by
the Commission.\296\ We recognize that control affiliates are a subset
of all associated person entities of an SBS Entity. However, to the
extent that SBS market participants consider disciplinary history of
control affiliates important in predicting future misconduct, assessing
counterparty risks, or selecting security-based swap market
counterparties, market participants will have access to such
disclosures. Under the baseline, SBS market participants are, thus,
able to choose whether and how to transact with SBS Entities that use
control affiliates with a history of misconduct, enabling better
informed counterparty selection and market discipline of misconduct.
---------------------------------------------------------------------------

    \295\ As a general matter, Commission orders are publicly
available, and FINRA disciplinary actions issued in 2005 or later
are eligible for publication pursuant to Rule 8313 (Release of
Disciplinary Complaints, Decisions and Other Information).
Information about criminal convictions are generally publicly
available in the United States (absent orders sealing those
records), but are typically made available through federal, state,
and local criminal dockets, which can be more costly to access.
Statutorily disqualifying events in foreign jurisdictions may not be
public depending on the rules and blocking/privacy statutes in
various jurisdictions.
    \296\ See Registration Adopting Release, 80 FR at 49004.
---------------------------------------------------------------------------

    Second, the security-based swap market is a dealer market, with the
bulk of activity and exposure among dealers, or between dealers and
non-dealer financial entities.\297\ To the degree that disciplinary
history may predict future counterparty risks, and to the extent that
institutional market participants are able to process the information
in disclosures, disciplinary history disclosures regarding control
affiliates are likely to reduce counterparty selection of SBS Entities
that have been the subject of disciplinary actions, imposing market
discipline.\298\ SBS Entities, knowing that disciplinary history of
control affiliates must be disclosed, may have further incentives to
avoid engaging in misconduct or may exit the market.
---------------------------------------------------------------------------

    \297\ See Tables 1 and 2 of the baseline. See also Aldasoro &
Ehlers (2018) at 4 (Graph 2), available at https://www.bis.org/publ/qtrpdf/r_qt1806b.pdf.
    \298\ See Registration Adopting Release, 80 FR at 49004.
---------------------------------------------------------------------------

    As discussed above, one commenter indicated that a ban on
statutorily disqualified associated persons without any exclusions
(including without an entity exclusion) would lead firms to understand
that lax oversight and failure to disassociate from disqualified
persons jeopardizes business.\299\ In addition, a commenter indicated
that, absent an associated person entity prohibition, there would be no
deterrent for entities or firms engaging in misconduct that gives rise
to

disqualification.\300\ In evaluating these arguments, the Commission
has considered recent supplemental information. Specifically, existing
evidence on reputational incentives surrounding misconduct is limited
to other contexts (such as corporate restatements, SEC enforcement
actions, securities class actions, mutual fund scandals, and broker
disclosures, etc.). However, most existing evidence on broker-dealers