and mutual funds seems to suggest that markets may often respond to
disclosures of financial misconduct and investors may vote with their
feet, such that companies and mutual funds engaging in misconduct
suffer direct and reputational costs around the revelation of
misconduct.\301\ We note that not all misconduct affects reputational
capital, and some papers show that the market may be less likely to
penalize non-financial, third-party, and some financial reporting
misconduct.\302\ However, to the degree that disclosures of
disciplinary history information are informative of the probability of
different types of future misconduct,\303\ customers may choose to
closely monitor such disclosures and make informed counterparty
selection decisions. Sophisticated institutional investors with large
security-based swap exposures may have stronger incentives and better
ability to monitor their SBS Entity counterparties, and their choice to
shift business to another SBS Entity may result in greater losses for
their original SBS Entity counterparty. As a result, reputational
incentive effects may be more important in markets with a concentrated
institutional investor clientele. Thus, we recognize that reputational
costs of misconduct may be another important disincentive against SBS
Entity associations with disqualified persons, separate from a ban on
statutorily disqualified associated persons, potentially mitigating the
concern raised by commenters.\304\
---------------------------------------------------------------------------

    \299\ See Public Citizen Letter, at 1-2.
    \300\ See Americans for Financial Reform Letter, at 3.
    \301\ For example, in the mutual fund advisor context, Wu (2018)
shows that advisors with ADV disciplinary history disclosures are
more likely to be replaced in the year following misconduct, which
dampens the effect of misconduct on fund flows. See Kai Wu, The
Economic Consequences of Mutual Fund Advisory Misconduct (Asian
Finance Association 2018 Conference, Working Paper, 2018) available
at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3061419, last
accessed Sept. 8, 2018. See also Dan Amiram, Serene Huang, & Shiva
Rajgopal, Does Financial Reporting Misconduct Pay Off Even When
Discovered? (Working Paper, October 1, 2018), available at https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/25784/Does%20misconduct%20pay%20Oct%201%202018%20SR.pdf.
    \302\ See, e.g., Jonathan M. Karpoff, D. Scott Lee, & Gerald S.
Martin, Foreign Bribery: Incentives and Enforcement (Working Paper,
April 7, 2017), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1573222, last accessed Aug. 19, 2018. See
also Bruce Haslem, Irena Hutton, & Aimee Hoffman Smith, How Much Do
Corporate Defendants Really Lose? A New Verdict on the Reputation
Loss Induced by Corporate Litigation (Working Paper, November 21,
2016), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2290821, last accessed Aug. 19, 2018. See
also Amiram, Huang, & Rajgopal (2018).
    \303\ For example, in the parallel broker-dealer context, some
existing research suggests that disclosures of past misconduct are
strongly predictive of future misconduct risk. See, e.g., Qureshi &
Sokobin (2015).
    \304\ See Public Citizen Letter, at 1-2; Americans for Financial
Reform Letter, at 3.
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    At the same time, the concentrated nature of security-based swap
dealing activity may reduce the ability of counterparties to choose to
transact with SBS Entities that do not rely on disqualified associated
persons. As estimated in the economic baseline, the top five dealer
accounts engaged in over 55 percent of all SBS Entity transactions, and
the median counterparty transacted with only 2 dealers in 2017. While
reputational incentives may flow from a customer's willingness to deal
with an SBS Entity, the fact that the customer many not have many
dealers to choose from weakens those incentives. Importantly, we
recognize that these estimates of market concentration are themselves
reflecting market participants' current choice of counterparties.
Institutional counterparties are likely to trade off the potentially
higher counterparty risk of transacting with SBS Entities with
disqualified person entities against the price and non-price terms of
security-based swaps such SBS Entities may offer. If a number of active
counterparties choose to move their business to SBS Entities without
disqualified associated persons, even if they currently have low market
share, activity may become further concentrated among SBS Entities
without disqualified persons and/or market concentration itself may
decrease.
    Third, as discussed above,\305\ the exclusion in Rule of Practice
194(c) will neither limit nor otherwise affect the Commission's
statutory authority to institute proceedings or bring an action against
any associated person entities, including, in the appropriate case, to
institute proceedings under Exchange Act Section 15F(l)(3) to determine
whether the Commission should censure, place limitations on the
activities or functions of such person, or suspend for a period not
exceeding 12 months, or bar such person from being associated with an
SBS Entity. As noted above, this exclusion will also neither limit nor
otherwise affect the ability of the Commission, the CFTC, an SRO or the
NFA to deny membership, association, registration or listing as a
principal with respect to any associated person entity.
---------------------------------------------------------------------------

    \305\ See Section III.C, infra, for a discussion of proposed
Rule of Practice 194(c).
---------------------------------------------------------------------------

    The overall effects of this exclusion on security-based swap
markets reflect these economic tradeoffs and will likely be similar to
those observed in swap markets, which involve largely the same group of
dealers (46 out of 50 SBS Dealers expected to be cross-registered in
swap markets) and most of the same counterparties (approximately two
thirds of accounts are active across single name and index CDS
markets).
d. Costs and Benefits of Public Availability of Orders and Notices
    The publication of orders and notices gives rise to both costs and
benefits for affected SBS Entities, their counterparties, and other
market participants.
    First, publicly available and publicly disseminated information
regarding applications under Rule of Practice 194 would provide market
participants with information they may find useful in assessing their
counterparties. In particular, market participants may use knowledge
about whether an SBS Entity has applied for relief and/or whether an
SBS Entity currently employs or associates with disqualified persons to
effect or be involved in effecting security-based swaps when choosing
counterparties. In general, such information may be valued by market
participants when selecting counterparties, if they believe such
knowledge is informative about the misconduct risk of a counterparty.
    In addition, we note that this information may be useful to SBS
Entities that have not applied for relief under the final Rule of
Practice 194. In particular, publicly available information regarding
the outcome of Rule of Practice 194 applications may inform other SBS
Entities' assessments of the likelihood that the Commission would grant
relief in particular circumstances. For example, SBS Entities could
look to outcomes in applications where disqualifications were for
similar reasons. Such information may be useful in determining whether
it is cost effective to seek relief.
    We note that some SBS Entities may prefer that orders approving or
denying an application under the rule remain private if they believe
that counterparties will use this information as a signal of low
quality or high

counterparty risks of transacting with SBS Entities. Therefore,
potential reputational costs associated with going through the
application process and potentially associating with statutorily
disqualified associated persons may discourage some SBS Entities from
applying for relief under the final rule. Such SBS Entities may instead
choose to disassociate from disqualified persons or reassign them to
responsibilities that do not involve effecting or being involved in
effecting security-based swaps. In considering disassociation, an SBS
Entity will weigh any reputational costs against any costs of
disassociation. For disqualified natural persons, such costs include
the cost to an SBS Entity of replacing an employee (or other associated
person), and will depend on the scarcity and value of a particular
person's skills.
    As stated above, under the approach being adopted, 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,\306\ the Exchange Act,\307\ and
applicable Commission rules.\308\ To the extent that (1) the
information provided by SBS Entities in applications and supporting
materials may be informative about future compliance and counterparty
risks, (2) this information will not be fully reported in orders and
notices, and (3) market participants may face costs of obtaining this
information under the FOIA and other applicable laws, the approach
being adopted provides fewer benefits relative to the alternative of
routine mandatory disclosure of applications and supporting materials
by applicants or the Commission. These considerations are discussed in
greater detail in Section IV.D.6.
---------------------------------------------------------------------------

    \306\ See 5 U.S.C. 552, et seq.
    \307\ See 15 U.S.C. 78x.
    \308\ See, e.g., 17 CFR 200.80; 17 CFR 201.190; 17 CFR 240.24b-
2.
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2. Effects on Efficiency, Competition, and Capital Formation
    The Commission has assessed the effects arising from the final Rule
of Practice 194 on efficiency, competition, and capital formation. As
noted above, limiting the ability of statutorily disqualified
associated persons to effect or be involved in effecting security-based
swaps on behalf of SBS Entities may mitigate compliance and
counterparty risks and may facilitate competition among higher quality
SBS Entities, thereby enhancing integrity of security-based swap
markets. At the same time, limits on a statutorily disqualified
associated person's participation in the security-based swap markets
may result in costs of business restructuring or applying to the
Commission for relief, which may disrupt existing counterparty
relationships and increase transaction costs borne by counterparties.
As with the other economic effects already discussed, the effects of
final Rule of Practice 194 on efficiency, competition, and capital
formation flow primarily from: (i) How the rule alters an SBS Entity's
evaluation of the tradeoff between the value of an associated person's
skill and expertise in effecting security-based swaps against the costs
of applying for relief or restructuring, and its ultimate decision
concerning whether to seek relief and (ii) the exclusion of statutorily
disqualified associated person entities from the scope of the
prohibition.
    As noted above, by providing a structured process and clarity as to
the standard of review, the final Rule of Practice 194 may conserve
resources relative to the baseline for SBS Entities applying for relief
under Section 15F(b)(6), and therefore create a more efficient process
for SBS Entities that choose to apply. Clarity about the items that the
Commission will consider in making determinations on applications for
relief may allow SBS Entities to make more informed assessments about
whether a particular application is likely to be approved or denied.
Increased certainty about the process may, in turn, alter an SBS
Entity's evaluation of its own cost-benefit tradeoff in determining
whether to file an application for relief, enabling the entity to more
efficiently expend resources. To the extent that the savings resulting
from the final rule encourage more SBS Entities to apply for relief, a
greater number of SBS Entities may be able to effect security-based
swaps without disruptions related to reassignments of statutorily
disqualified staff. This may facilitate competition among SBS Entities
or improve terms of available security-based swaps, if some SBS
Entities pass along their costs to counterparties in the form of higher
priced security-based swaps.
    In addition, should more SBS Entities apply for relief or seek to
avail themselves of the associated person entity exclusion, a greater
number of statutorily disqualified persons may seek employment and
business opportunities in security-based swap markets. On the one hand,
this could increase the ``lemons'' problem and related costs of adverse
selection,\309\ since market participants may demand a discount from
counterparties if they expect a greater chance that counterparties have
employed statutorily disqualified associated persons that are involved
in arranging transactions. On the other hand, the conduct that gives
rise to disqualification is generally public information and orders
regarding the outcome of review applications under Rule of Practice 194
as well as notices submitted by SBS Entities will be made public by the
Commission, which may significantly attenuate this effect.
---------------------------------------------------------------------------

    \309\ See, e.g., George A. Akerlof, The Market for ``Lemons'':
Quality Uncertainty and the Market Mechanism, 84 Q. J. Econ. 488
(1970). Informational asymmetry about quality can negatively affect
market participation and decrease the amount of trading--a problem
commonly known as adverse selection. When information about
counterparty quality is scarce, market participants may be less
willing to enter into transactions and the overall level of trading
may fall.
---------------------------------------------------------------------------

    Persons eligible to rely on the exclusion related to applications
already reviewed by the Commission, the CFTC, an SRO, or a registered
futures association may enjoy a competitive advantage over persons not
eligible for the same treatment. Because SBS Entities would not need to
expend resources filing an application and would not face uncertainty
concerning the likelihood of approval of such applications, they may
prefer associating with persons who can rely on such an exclusion over
other disqualified persons. If SBS Entities exhibit a preference for
such persons, it could create competitive disparities among statutorily
disqualified associated persons.
    The associated person entity exclusion may prevent the
fragmentation of transaction activity across related markets due to
differential regulatory treatment of statutory disqualification. The
Commission continues to recognize extensive spillovers between the
informational efficiency, pricing, and liquidity of swap and security-
based swap markets, and their connection to activity in reference
security markets. Given the high degree of concentration of dealing
activity in single-name and index CDS markets, even a temporary
inability of one or several SBS Entities to transact due to a
statutorily disqualifying event of an associated person entity may
result in liquidity fragmentation and mispricing of claims with
otherwise identical payoffs and risks. As a result, the associated
person entity exclusion may limit fragmentation of integrated markets.

    In addition, under the associated person entity exclusion, SBS
Entities would be able to continue their security-based swap market
participation without incurring the costs of reassigning or
disassociating from disqualified entities. As a result, SBS Entities
associating with entities that become subject to a statutory
disqualification can continue dealing in security-based swaps without
incurring costs of business restructuring. SBS Entities that begin to
associate with already statutorily disqualified entities would be
eligible for the same relief. This may enhance competition among SBS
Entities as both SBS Entities with and those without statutorily
disqualified associated person entities will be able to compete for
security-based swap business with counterparties. This competitive
effect may be particularly important given the highly concentrated
nature of the security-based swap dealer market.
    The overall effects of the exclusion for associated person entities
from the general statutory prohibition on efficiency, competition, and
capital formation, depend on the balance of several competing effects.
Broadly, the exclusion may lower costs to SBS Entities of beginning or
continuing to associate with statutorily disqualified entities. It also
may serve to mitigate potential disruptions--such as SBS Entities
temporarily ceasing dealing activity pending business restructuring--
should associated person entities of a number of SBS Entities become
disqualified. At the same time, the presence and magnitude of the
potential market disruption is unclear, since other SBS Entities are
likely to begin competing for the newly opened market share if, for
example, the SBS Entity had to, at least temporarily, cease dealing
activity. The overall effects of this provision on security-based swap
market quality, competition, and capital formation depend primarily on:
(i) Whether and which SBS Entities would be able to win the newly
opened market share in such cases; (ii) the degree to which statutory
disqualification may indicate future misconduct risk by associated
person entities; (iii) the reputation costs to SBS Entities from
associating with statutorily disqualified associated person entities
relative to costs of disassociating and establishing a relationship
with a non-statutorily disqualified associated person entity, and (iv)
the degree to which existing public information about conduct giving
rise to statutory disqualification is informative of future misconduct
risk and the extent to which counterparties pay attention to such
public information.
    The Commission has received comment in support of strong
disqualification standards as a feature of the SBS Entity regulatory
framework, the general need of the public to have confidence in
regulatory oversight of market participants, and making applications
and supporting materials public.\310\ We note that some recent research
in other contexts shows that greater prevalence of disclosed misconduct
can reduce investor participation in capital markets. Some research
suggests that retail investor participation in the stock market may
decrease around the revelation of fraud or misconduct, and there may be
negative spillovers for firms that were not engaged in misconduct. For
example, Gurun, Stoffman, and Yonker (2018) find that residents of
communities more exposed to fraud were more likely to shift from
capital markets to bank deposits. This result is consistent with the
theoretical result in Gennaioli, Shleifer, and Vishny (2015) that
portfolio managers provide ``hand-holding'' to build investor trust.
Giannetti and Wang (2016) show that household participation in the
stock market in a given state decreases after the revelation of
corporate fraud in that state. They find that even households that do
not hold stocks in scandal firms decrease holdings in both fraudulent
and non-fraudulent firms. They also find that households with more
lifetime exposure to corporate fraud allocate a lower share of capital
into equity.\311\ Importantly, this research pertains to retail
investor behavior in markets with relatively low informational
asymmetries. We continue to recognize that these effects may be muted
in institutional swap or security-based swap markets, or amplified due
to the greater opacity of swaps or security-based swaps.
---------------------------------------------------------------------------

    \310\ See Americans for Financial Reform Letter, at 4; Better
Markets Letter, at 2, 6; Cummings Letter, at 3.
    \311\ See Umit G. Gurun, Noah Stoffman, & Scott E. Yonker, Trust
Busting: The Effect of Fraud on Investor Behavior, 31 Rev. Fin.
Stud. 1341 (2018); Nicola Gennaioli, Andrei Shleifer, & Robert
Vishny, Money Doctors, 70 J. Fin. 91 (2015); Mariassunta Giannetti &
Tracy Yue Wang, Corporate Scandals and Household Stock Market
Participation, 71 J. Fin. 2591 (2016).
---------------------------------------------------------------------------

    In addition, strong disqualification standards suggested by
commenters may adversely affect competition and consumer surplus. For
example, Berk and van Binsbergen (2017) model the costs and benefits of
both disclosure and standards regulation of ``charlatans''
(professionals who sell a service they do not deliver) in high skill
professions. Both standards and disclosure regulations drive charlatans
out of the market, but the resulting reduction in competition amongst
producers actually reduces aggregate consumer surplus, benefiting
producers.\312\
---------------------------------------------------------------------------

    \312\ The model assumes that, among others, the producers have
no dominating outside options (skilled producers do not exit the
market when the equilibrium wage in the profession declines). The
paper models a labor market in which skill is in high demand, but
very short supply. As a result, price increases due to standards
regulation lead to the entry of charlatans, but, because supply of
skill is constrained, that does not increase quality. By contrast,
Leland (1979) and the literature that emerged from it does not model
charlatans or focus on markets with a short supply of skill. In
Leland (1979), the introduction of standards can benefit consumers
since the resulting price increase leads to the entry of higher
quality goods--something that cannot happen when the supply of high
quality goods is constrained, as in Berk and van Binsbergen (2017).
Moreover, in Leland (1979) the government is fully informed and the
consumer has no information about the quality of the good, whereas
Berk and van Binsbergen (2017) model a homogeneous good bought by
heterogeneous consumers. See Jonathan Berk & Jules H. van
Binsbergen, Regulation of Charlatans in High-Skill Professions
(Stanford University Graduate School of Business, Research Paper No.
17-43, August 4, 2017), available at https://ssrn.com/abstract=2979134, last accessed Aug. 18, 2018. See also Hayne E.
Leland, Quacks, Lemons, and Licensing: A Theory of Minimum Quality
Standards, 87 J. Pol. Econ. 1328 (1979).
---------------------------------------------------------------------------

    Further, information about underlying misconduct is public, and
other research discussed above suggests that there may be significant
capital market and labor market penalties for misconduct in some
settings.\313\ This may suggest that SBS Entities may simply
disassociate from or reassign a statutorily disqualified associated
person where the reputational penalties are severe. In addition,
instead of exiting the market, some counterparties of SBS Entities with
statutorily disqualified associated persons may simply move transaction
activity to SBS Entities without such statutorily disqualified
associated persons. Thus, where counterparties may become less willing
transact with SBS Entities relying on statutorily disqualified
associated persons, other SBS Entities that do not rely on disqualified
associate persons may win business. Finally, we continue to note that
Exchange Act Section 15F(b)(6) does not preclude either SBS Entities
from seeking relief or the Commission from granting relief in the
absence of the final Rule of Practice 194 or another disqualification
review process. This economic analysis assesses the impacts of Rule of
Practice 194 relative to a statutory baseline under which SBS Entities
can seek exemptive relief from the Commission.
---------------------------------------------------------------------------

    \313\ See Section V.C.1.a, supra. See also Note 301, supra.

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

D. Rule Alternatives

    In addition to Rule of Practice 194, the Commission has considered
several primary alternative approaches, which are discussed below.
1. Temporary Exclusions
    The Commission proposed a temporary exclusion, under which SBS
Entities would not have to comply with the statutory prohibition in
Exchange Act Section 15F(b)(6) with respect to associated person
entities for the first 180 days that an application before the
Commission, the CFTC, an SRO, or a registered futures association is
pending. However, after 180 days, the SBS Entity would have 60 days to
disassociate from the disqualified person entity pending disposition of
the review application. The Commission is not adopting such an
approach, but is, instead, adopting a broader exclusion that provides
relief to all associated person entities and is not time limited.
    The alternative would provide more limited relief to SBS Entities
associating with statutorily disqualified associated person entities
relative to the approach being adopted. Similar to the final exclusion
for associated person entities, the alternative would lower business
restructuring costs for SBS Entities that are associated with
disqualified entities. As a result, like the rule being adopted, the
alternative would limit the risk that SBS Entities may become, at least
temporarily, unable to intermediate transactions and bear additional
costs, which may be passed along to counterparties in the form of
execution delays, potentially reduced liquidity or higher transaction
costs. Further, similar to the final rule, the alternative would
recognize that non-dealer counterparties may value bilateral
relationships with SBS Entities, and searching for and initiating
bilateral relationships with new SBS Entities may involve direct costs
for counterparties. The alternative would also eliminate costs and
delays related to SBS Entities ceasing dealing activity, but only
conditional on filing a review application and only for the first 180
days.
    Unlike the approach being adopted, the alternative would introduce
significant uncertainty about the eventual ability of an SBS Entity to
associate with a statutorily disqualified associated person entity,
even when the affiliate has disassociated from any natural persons who
may have engaged in the underlying misconduct. Such an alternative and
resulting uncertainty may be particularly costly for those SBS Entities
that are cross-registered with the CFTC as Swap Entities, as Swap
Entities are able to freely associate with statutorily disqualified
associated person entities and, in swap markets, the statutory
prohibition is applied to natural persons only. In addition, under the
alternative, SBS Entities would bear direct costs of time and resources
necessary to complete applications and collect necessary documentation
to file for relief under Rule of Practice 194--costs that may be passed
on to counterparties in the form of more expensive security-based
swaps. In addition, similar to the approach being adopted, and as
discussed in Section V.C.1., some counterparties may choose to engage
in greater due diligence and bear related costs, to the degree that
they have a significant security-based swap business, interpret
statutory disqualification as a meaningful signal of SBS Entities'
quality, and do not already perform such due diligence.
    The Commission continues to believe statutory disqualification may
have incentive effects with respect to underlying misconduct. Relative
to the approach being adopted, the temporary exclusion alternative
could result in fewer statutorily disqualified associated person
entities transacting in security-based swap markets on behalf of SBS
Entities. While the alternative may involve lower compliance and
counterparty risks relative to the approach being adopted, it would
also impose new costs on SBS Entities and counterparties, and may
involve greater risks of disruptions to security-based markets.
Moreover, as recognized in the Proposing Release, the temporary nature
of the exclusion under the alternative would introduce uncertainty
concerning the eventual need to restructure before the Commission, the
CFTC, an SRO, or registered futures association has rendered a decision
on the application.
    The Commission could also have adopted a modified temporary
exclusion, under which, the application would be considered granted if
the Commission, the CFTC or an SRO does not render a decision within
180 days the application. This alternative would effectively default to
relief from the statutory prohibition for applications under review.
SBS Entities would be able to permit statutorily disqualified
associated person entities to effect or be involved in effecting
security-based swaps on their behalf, unless the Commission made an
individualized determination that it is not consistent with the public
interest to permit the participation of such statutorily disqualified
associated person entities within 180 days of the application being
filed. Relative to the approach being adopted, this would involve
greater application costs and uncertainty about the eventual need to
restructure the business and disassociate from the statutorily
disqualified associated person entity. However, it would allow the
Commission, the CFTC or SRO to perform an individualized assessment of
the facts of each case within the first 180 days of filing. This
alternative may somewhat strengthen counterparty protections relative
to the approach being adopted, but would increase uncertainty and costs
of restructuring for affected SBS Entities and their
counterparties.\314\
---------------------------------------------------------------------------

    \314\ See, e.g., Americans for Financial Reform Letter; Better
Markets Letter; Cummings Letter.
---------------------------------------------------------------------------

    The overall effects of the temporary stay alternatives relative to
the approach being adopted, thus, depend on: (i) The degree to which
disqualifying conduct by an associated person may predict future
misconduct and related counterparty risks; (ii) the extent to which the
largely institutional security-based swap market participants fail to
observe and process public information regarding their counterparties'
disqualifying conduct; (iii) the reputational costs of SBS Entities in
associating with statutorily disqualified associated person entities
relative to the uniqueness of their resources and abilities; and (iv)
the degree to which uncertainty related to the temporary exclusion
alternative would lead to preemptive disassociations from valuable
statutorily disqualified associated person entities.
2. Relief for Non-Investment-Related Offenses
    The Commission could also adopt the approach of automatically
excepting from the Section 15F(b)(6) prohibition all SBS Entities that
associate with statutorily disqualified persons if the matters that
triggered the statutory disqualification were non-investment-
related.\315\ SBS Entities would still be required to apply for relief
under Rule of Practice 194 for investment- related statutory
disqualifications. Such an approach would eliminate restructuring or
application costs for SBS Entities associating with statutorily
disqualified persons when statutory disqualification arises out of non-
investment related offenses. This may, in turn, attract new persons
currently disqualified for non-investment-related offenses into the
security-based swap market, and increase competition among SBS Entity

associated persons. At the same time, other SBS Entities associating
with persons statutorily disqualified for investment-related offenses
would still have to bear costs of disassociating or applying for
relief, and would have to compete with a greater number of SBS Entities
that do not have to apply for relief.
---------------------------------------------------------------------------

    \315\ Section V.B.4 presents data from 2010 through June 2018
about the incidence of statutory disqualification and reoffenses by
investment-related and non-investment related nature of conduct in a
somewhat analogous scenario for broker-dealers.
---------------------------------------------------------------------------

    As discussed above, statutory disqualification and the potential
inability to deal in various markets may present an incentive against
misconduct, including non-investment-related misconduct. Relative to
the approach being adopted, this alternative may weaken incentives
against non-investment-related misconduct. The alternative would also
lower the information benefits of reviewing applications and supporting
materials, including information concerning supervisory structure,
terms of employment and other items, which will inform Commission
understanding of SBS Entity associations and ongoing oversight.
Finally, some statutory disqualification triggers that may not fall in
the ``investment related offense'' category may point to a higher risk
of future misconduct, including violations of securities laws, federal
rules, and regulations thereunder.\316\ Uniformly excepting associated
persons disqualified for non- investment-related misconduct without an
opportunity for the Commission to review the circumstances of each case
and make a determination that allowing SBS Entities to permit those
persons to effect or be involved in effecting security-based swaps is
consistent with the public interest may pose risks to counterparties
and security-based swap markets.
---------------------------------------------------------------------------

    \316\ See, e.g., Kelvin Law & Lillian F. Mills, Do Financial
Gatekeepers Under-Protect Investors? Evidence from Criminal
Background Checks (Working Paper, April 27, 2018), available at
https://ssrn.com/abstract=3075305, last accessed Aug. 18, 2018;
Robert Davidson, Aiyesha Dey, & Abbie Smith, Executives' ``Off-the-
job'' Behavior, Corporate Culture, and Financial Reporting Risk, 117
J. Fin. Econ. 5 (2015).
---------------------------------------------------------------------------

3. No Relief for CFTC, SRO, or Registered Futures Association Review
    Rule of Practice 194 allows SBS Entities to permit statutorily
disqualified persons to effect or be involved in effecting security-
based swaps on their behalf without 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
CFTC, an SRO, or a registered futures association. The Commission could
adopt an alternative approach under which such SBS Entities would not
automatically be able to permit statutorily disqualified associated
persons to effect or be involved in effecting security-based swaps on
the SBS Entity's behalf, either on a permanent or temporary basis,
based on a determination by the CFTC, an SRO, or a registered futures
association. Instead, such SBS Entities would have to apply for a
substantive review by the Commission under Rule of Practice 194.\317\
However, the exclusion for all associated person entities would still
apply, as in the approach being adopted.
---------------------------------------------------------------------------

    \317\ See Americans for Financial Reform Letter; Better Markets
Letter; Public Citizen Letter; Cummings Letter.
---------------------------------------------------------------------------

    This alternative approach would allow the Commission to review the
facts and circumstances of each case and make an individualized public
interest determination as to whether each statutorily disqualified
associated person should be permitted to effect or be involved in
effecting security-based swaps on behalf of SBS Entities, and under
which conditions. If fewer SBS Entities choose to go through a separate
review by the Commission, this alternative may result in a smaller
number of statutorily disqualified associated persons effecting or
involved in effecting security-based swaps than the adopted approach.
To the extent that statutory disqualification, and terms and conditions
of reassociation imposed as a result of individualized Commission
review, reduce compliance and counterparty risks, this alternative may
improve compliance and counterparty protections for security-based swap
market participants.
    However, this alternative may increase costs for SBS Entities.
Specifically, this alternative would require SBS Entities to incur the
application costs under Rule of Practice 194 with respect to associated
persons that have already been approved by the CFTC, an SRO, or a
registered futures association, or to incur the costs of restructuring
the business or disassociating from such persons. If the application is
denied, SBS Entities would need to restructure the business or
disassociate from the associated person. In addition, in light of the
high degree of integration among swap and security-based swap markets
and expected cross-registration, many SBS Entities are expected to
transact across swap, security-based swap and reference security
markets, and some SBS Entities may be relying on the same personnel and
entities in effecting, for instance, single name and index CDS. This
alternative approach would limit SBS Entity flexibility in hiring and
retaining statutorily disqualified associated persons where the SBS
Entity believes the person's quality and expertise outweigh the
potential reputational costs of associating with a disqualified person
and where the CFTC, an SRO, or a registered futures association has
made a favorable finding with respect to the associated person.
    The effects of this alternative on security-based swap markets will
depend on: (i) The extent to which SBS Entities rely on disqualified
persons approved by the CFTC, an SRO, or a registered futures
association; (ii) the magnitude of any business restructuring costs;
(iii) the significance of bilateral counterparty relationships, and
(iv) the severity of compliance and counterparty risks posed by
statutorily disqualified associated persons. As discussed in earlier
sections, we lack data or other information to quantify these effects
with any degree of certainty.
4. No Relief for Associated Person Entities From Exchange Act Section
15F(b)(6)
    The Commission could establish a uniform prohibition on associated
person entities subject to statutory disqualification effecting or
being involved in effecting security-based swaps on behalf of SBS
Entities, without the availability of any application review process,
and regardless of the reason for the disqualification or whether the
CFTC, an SRO, or a registered futures association has permitted such
associated person entities to participate in the market.
    Under this alternative approach, all statutorily disqualified
associated person entities not covered by the exemption in the final
SBS Entity registration rules \318\ would be barred from intermediating
security-based swaps on behalf of SBS Entities.\319\ To the extent that
past disqualifications can point to higher compliance and counterparty
risks, this alternative could potentially strengthen counterparty
protections. Further, the inability to participate in various markets
due to disqualification disincentivizes misconduct. Adopting this
approach

would strengthen these incentive effects, but only to the degree that
reputational incentives and capital market discipline may currently not
be sufficiently strong disincentives against misconduct for some
entities. However, as discussed in detail in the economic baseline,
evidence from other market suggests that market participants, even
retail investors, pay close attention to disclosures of disciplinary
history and vote with their feet, such that market participants suffer
significant and sticky reputation costs around revelations of
misconduct.
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    \318\ As discussed in the economic baseline, under Exchange Act
Rule 15Fb6-1, unless otherwise ordered by the Commission, an SBS
Entity may permit statutorily disqualified associated person
entities to effect or be involved in effecting security-based swaps
on its behalf, provided that the statutory disqualification occurred
prior to the compliance date set forth in the Registration Adopting
Release, and provided that the SBS Entity identifies each such
associated person on the applicable registration form.
    \319\ See, e.g., Public Citizen Letter.
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    We recognize that this market discipline effect may be partly
mitigated due to the concentrated nature of current security-based swap
dealing activity discussed above. But we also note that market
concentration is itself endogenous to market participants' counterparty
selection and customer demand. That is, counterparties trade off the
potentially higher counterparty risk of transacting with SBS Entities
that rely on disqualified associated persons against the attractiveness
of security-based swaps (price and non-price terms) that they may
offer. If a large number of counterparties choose to move their
business to SBS Entities that do not rely on disqualified associated
persons (including those SBS Entities that may currently have lower
market share), market concentration itself can decrease.
    Barring all statutorily disqualified associated person entities
from effecting or being involved in effecting security-based swaps on
behalf of SBS Entities would impose costs of business restructuring for
a number of SBS Entities, which may in turn affect market quality.
Specifically, in the event of a disqualification after the compliance
date of the final SBS Entity registration rules, SBS Entities would be
required to cease intermediating security-based swaps and restructure
their business to disassociate from all disqualified entities, posing a
risk of business disruptions during the restructuring. If a number of
entities associated with different SBS Entities become disqualified at
the same time, a number of SBS Entities may, in turn, become
temporarily unable to effect security-based swaps due to
disqualification. As discussed elsewhere, the subset of SBS Entities
that are major security-based swap participants are expected to hold
large security-based swap positions, and their activities in security-
based swap markets may pose market and counterparty risks.\320\ As
discussed in the economic baseline, the remaining SBS Entities that are
SBS Dealers play a central role in security-based swap markets,
intermediating trades with hundreds of counterparties and representing
a significant portion of trading activity in security-based swaps.
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    \320\ See Business Conduct Adopting Release, 81 FR at 30111.
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    If some SBS Entities are temporarily unable to effect security-
based swaps, transaction costs may increase and other terms of
security-based swaps available to counterparties may deteriorate. For
example, security-based swaps are often renegotiated during the life of
the contract and, in the event of a disruption to the bilateral
relationship with the SBS Entity related to an associated entity
disqualification, counterparties may find themselves unable to modify
contracts. Absent relief for associated person entities, counterparties
may price such potential future constraints in larger spreads.
    We note that other SBS Entities are likely to step in to pick up
the market share, and, to the extent that statutory disqualification of
associated person entities may indicate ongoing compliance and
counterparty risks of SBS Entities, SBS Entities with potentially lower
compliance and counterparty risks would be intermediating security-
based swaps. However, as discussed above, SBS Entities that capture the
newly available market share may be able to consolidate market power
while the disqualified SBS Entity is undergoing restructuring or
awaiting a relief determination. As a result, competition in security-
based swap markets may, at least temporarily, decrease, and pricing
power of remaining SBS Entities may increase. The overall economic
effects of the alternative would depend on: (i) The costs and the
required length of time for business restructuring; (ii) which SBS
Entities would be able to pick up the newly available market share; and
(iii) the relative importance of bilateral relationships between SBS
Entities and counterparties.
    In addition, SBS Entities cross-registered as Swap Entities with
the CFTC would not experience economies of scope in associating with
persons that are entities and would be unable to rely on the same
associated person entities in transactions with the same counterparties
across integrated swap and security-based swap markets. As discussed 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. In addition, as discussed above, two thirds
of accounts transacting in single-name CDS also transact in index CDS.
Under the alternative, counterparty relationships with dually
registered Swap and SBS Entities could be disrupted, potentially
requiring counterparties to establish new dealer relationships solely
for the purpose of security-based swap transactions. Lastly, this
alternative may decrease the number of entities seeking to associate
with SBS Entities since statutorily disqualified associated person
entities will no longer be able to effect or be involved in effecting
security-based swaps. Such disqualified entities may seek to associate
with security-based swap market participants that are not required to
register (entities falling within the de minimis exception set forth in
Exchange Act Rule 3a71-2 \321\). The alternative has the potential to
significantly reduce competition among associated person entities
engaging in security-based swap transactions on behalf of SBS
Entities.\322\ Reduced competition may increase the pricing power of
remaining market participants vis-[agrave]-vis their activities on
behalf of SBS Entities in security-based swap markets, and such costs
are likely to be passed on to counterparties.
---------------------------------------------------------------------------

    \321\ See 17 CFR 240.3a-71-2.
    \322\ See, e.g., Berk & van Binsbergen (2017).
---------------------------------------------------------------------------

5. Form of Applications To Be Submitted: Time Period
    The final Rule of Practice 194 requires applications to include
certain types of information and supporting materials concerning
disciplinary sanctions and other events over the preceding five years.
In response to a comment received,\323\ we have considered an
alternative approach, under which the Commission would require
applicants to address disciplinary events with a longer time period
(e.g., ten years) for certain items specified in Rule of Practice 194.
In considering this alternative, we note that Rule of Practice 194, as
adopted, does not specify a time period with respect to certain other
items relating to disciplinary history, including, among other things,
(i) a copy of the order or other applicable document that resulted in
the associated person being subject to a statutory disqualification;
and (ii) a copy of the questionnaire or application for employment
required by Exchange Act Rule 15Fb6-2(b). In addition, under final Rule
of Practice 194, the Commission has reserved the right to request from
the applicant

supplementary information to assist in its review, which could include
information outside of the five-year time period, where appropriate.
---------------------------------------------------------------------------

    \323\ See Better Markets Letter, at 6.
---------------------------------------------------------------------------

    Requiring applicants to provide information concerning a longer
time period could potentially provide additional information regarding
ongoing counterparty and compliance risks. Also, requiring filing of
information concerning disciplinary sanctions, compliance and
disciplinary history, litigation concerning investment or investment-
related activities and unsatisfied judgments and supporting materials
for a longer period of time as part of applications under Rule of
Practice 194 may enhance the review process and its counterparty
protections benefits. At the same time, requiring SBS Entities to
provide older materials and documents may increase application burdens
under the Rule of Practice 194. Importantly, older misconduct may be
less important in predicting future misconduct than recent offenses.
Additionally, as discussed above, the five-year time period is more
consistent with the current practice in other contexts. The approach
being adopted provides the Commission with the benefit of a longer
look-back period, where necessary, without uniformly imposing that
burden on all SBS Entities applying for relief.
6. Public Availability of Applications and Supporting Materials
    Under Rule of Practice 194, as adopted, orders and notices will be
made publicly available on the Commission's website, whereas
applications and supporting materials provided pursuant to Rule of
Practice 194 will be kept confidential, subject to the existing
statutory and regulatory framework with respect to the public
availability of such materials, including the FOIA,\324\ the Exchange
Act,\325\ and applicable Commission rules.\326\ As an alternative
approach, applications and supporting materials could be made publicly
available. We have considered comments about how this alternative may
affect applicants, other SBS Entities, and non-SBS Entity market
participants.\327\
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    \324\ See 5 U.S.C. 552, et seq.
    \325\ See 15 U.S.C. 78x.
    \326\ See, e.g., 17 CFR 200.80; 17 CFR 201.190; 17 CFR 240.24b-
2.
    \327\ See Better Markets Letter, at 6; Americans for Financial
Reform Letter, at 3-4; Cummings Letter, at 3.
---------------------------------------------------------------------------

    Making application and supporting materials publicly available on
the Commission's website may enable market participants to
independently assess ongoing compliance and counterparty risks as they
pertain to individual security-based swaps. To the extent that
applications and supporting materials contain more information than
orders and notices, and to the extent that this additional information
enables market participants to better assess counterparty risks, this
alternative could strengthen market discipline and the reputational
disincentives against misconduct, increasing counterparty protections.
However, it is not clear that applications and supporting materials
would contain significant additional information relevant for
counterparty selection, given the fact that the information about
misconduct that gives rise to disqualification is public, and that
notices prepared by SBS Entities and Commission orders will be made
public.
    We recognize that the public nature of such filings may affect SBS
Entity reputation and bilateral relationships in security-based swap
markets. Under this alternative, more SBS Entities are likely to
disassociate from disqualified natural persons instead of filing with
the Commission an application for relief under Rule of Practice 194. To
the extent that associations with disqualified persons may pose ongoing
compliance and counterparty risks, this could potentially benefit
market participants and strength counterparty protections. However,
confidentiality and reputational concerns may also deter an SBS Entity
from filing an application even where it would be consistent with the
public interest to permit the associated person subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity, reducing the expected benefits of
the review process. We continue to note that, as discussed throughout
the release, the range of conduct that gives rise to statutory
disqualification is broad and may not always be indicative of higher
probability of counterparty risks and investor losses.
    Further, as a result of reputational and confidentiality concerns,
making applications and supporting materials publicly available on the
Commission's website may lead SBS Entities to make less informative
disclosures, which may influence the effectiveness of the review
process. In addition, we are sensitive to the concern that applications
and supporting materials under Rule of Practice 194 may reveal
commercial or financial information that is confidential or privileged,
and information that would invade and individual's personal privacy. We
recognize that costs may be incurred by SBS Entities to redact
confidential information from any application and supporting materials
if they were to be made publicly available on the Commission's website.
    Accordingly, under the approach being adopted, where
counterparties, which may be institutional market participants,\328\ or
other interested persons believe that applications or supporting
materials contain information beyond any information that is publicly
available, such persons would be able to submit a FOIA request to seek
to obtain those materials--in accordance with the existing statutory
and regulatory framework with respect to the public availability of
such materials.\329\ As discussed in Sections I and II, the Commission
continues to believe the existing statutory and regulatory framework
sets forth a detailed and well-established process for the Commission
to make available application materials \330\ to members of the public,
upon request, but to keep certain information contained in those
materials confidential, where appropriate.\331\
---------------------------------------------------------------------------

    \328\ The Commission has classified market participants
transacting in single name CDS reported to TIW to include private
funds, registered investment companies, banks, insurance companies,
ISDA recognized dealers, foreign sovereigns, non-financial
corporations, finance companies, special entities and other account
holders (such as hedge funds, private equity and venture capital
funds). As can be seen from Table 2 in the economic baseline,
approximately 94 percent of market participants transacted in single
name CDS through investment advisers between 2006-2017. Over the
same time period, investment advisers, banks, insurance companies,
pension funds and ISDA recognized dealers represented approximately
94.1 percent of transacting agents and 99.8 percent of total trading
activity.
    \329\ Alternatively, such counterparties could also request such
information directly from SBS Entities.
    \330\ See 15 U.S.C. 78x(a) (for purposes of 5 U.S.C. 552, ``the
term `records' includes all applications, notices, and other
documents filed with or otherwise obtained by the Commission
pursuant to the [Exchange Act] or otherwise'').
    \331\ See, e.g., 17 CFR 200.80(a)(4), (b).
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    VI. Regulatory Flexibility Act Certification
    A. Regulatory Framework
    The Regulatory Flexibility Act (``RFA'') \332\ requires federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \333\ of the Administrative Procedure
Act,\334\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such

rulemaking on ``small entities.'' \335\ Section 605(b) of the RFA
provides that this requirement shall not apply to any proposed rule or
proposed rule amendment, which if adopted, would not have a significant
economic impact on a substantial number of small entities.\336\
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    \332\ 5 U.S.C. 601 et seq.
    \333\ 5 U.S.C. 603(a).
    \334\ 5 U.S.C. 551 et seq.
    \335\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits the Commission to formulate is
own definition. The Commission has adopted definitions for the term
small entity for the purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this proposed
rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See
Exchange Act Release No. 18451, 47 FR 5212 (Feb. 4, 1982).
    \336\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    The Commission certified that the proposed Rule of Practice 194, if
adopted, would not have a significant economic impact on a substantial
number of small entities for purposes of the RFA.\337\ Although we
encouraged written comments regarding this certification, no commenters
responded to this request.
---------------------------------------------------------------------------

    \337\ See Proposing Release, 80 FR at 51718.
---------------------------------------------------------------------------

B. Assessment of Impact

    Rule of Practice 194, as adopted, establishes rules concerning an
application by SBS Entity to the Commission for an order permitting an
associated person that is a natural person who is subject to a
statutorily disqualification to effect or be involved in effecting
security-based swaps on behalf of an SBS Entity. With respect to SBS
Entities, based on feedback from market participants and our
information about the security-based swap markets, the Commission
continues to believe, as we stated in the proposal,\338\ that (1) the
types of entities that would engage in more than a de minimis amount of
dealing activity involving security-based swaps--which generally would
be large financial institutions--would not be ``small entities'' for
purposes of the RFA; \339\ and (2) the types of entities that may have
security-based swap positions above the level required to be a ``major
security-based swap participant'' would not be ``small entities'' for
purposes of the RFA.\340\
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    \338\ See id.
    \339\ See, e.g., Cross-Border Adopting Release, 79 FR at 47368.
See also Economic Analysis Section V.B.1.b., supra. For example, and
as explained above, 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, approximately 55
percent of which was intermediated by the top five dealer accounts.
See id.
    \340\ See Cross-Border Adopting Release, 79 FR at 47368.
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C. Certification

    For the foregoing reasons, the Commission certifies that Rule of
Practice 194, as adopted, will not have a significant economic impact
on a substantial number of small entities for purposes of the RFA.

VII. Statutory Authority

    The Commission is adopting Rule of Practice 194 pursuant to
Exchange Act Section 15F(b)(4) and (6),\341\ as added by Section 764(a)
of the Dodd-Frank Act, and Exchange Act Section 23(a).\342\
---------------------------------------------------------------------------

    \341\ 15 U.S.C. 78o-10(b)(4), (6).
    \342\ 15 U.S.C. 78w(a).
---------------------------------------------------------------------------

List of Subjects in 17 CFR Parts 201 and 240

    Administrative practice and procedure, Reporting and recordkeeping
requirements, Securities.

Text of the Rule

    In accordance with the foregoing, the Securities and Exchange
Commission is amending title 17, chapter II of the Code of Federal
Regulations as follows:

PART 201--RULES OF PRACTICE

0
1. The general authority citation for subpart D is revised to read as
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77h-1, 77j, 77s, 77u, 77sss,
77ttt, 78(c)(b), 78d-1, 78d-2, 78l, 78m, 78n, 78o(d), 78o-3, 78o-
10(b)(6), 78s, 78u-2, 78u-3, 78v, 78w, 80a-8, 80a-9, 80a-37, 80a-38,
80a-39, 80a-40, 80a-41, 80a-44, 80b-3, 80b-9, 80b-11, 80b-12, 7202,
7215, and 7217.
* * * * *

0
2. Add Sec.  201.194 to subpart D before the undesignated center
heading ``Initiation of Proceedings and Prehearing Rules'' to read as
follows:

Sec.  201.194  Applications by security-based swap dealers or major
security-based swap participants for statutorily disqualified
associated persons to effect or be involved in effecting security-based
swaps.

    A security-based swap dealer or major security-based swap
participant making an application under this section should refer to
paragraph (i) of this section.
    (a) Scope of rule. Applications by a security-based swap dealer or
major security-based swap participant for the Commission to permit an
associated person (as provided in 15 U.S.C. 78c(a)(70)) to effect or be
involved in effecting security-based swaps on behalf of a registered
security-based swap dealer or major security-based swap participant, or
to change the terms and conditions thereof, may be made pursuant to
this section where the associated person is subject to a statutory
disqualification and thereby prohibited from effecting or being
involved in effecting security-based swaps on behalf of a security-
based swap dealer or major security-based swap participant under
Exchange Act Section 15F(b)(6) (15 U.S.C. 78o-10(b)(6)).
    (b) Required showing. The applicant shall make a showing that it
would be consistent with the public interest to permit the person
associated with the security-based swap dealer or major security-based
swap participant who is subject to a statutory disqualification to
effect or be involved in effecting security-based swaps on behalf of
the security-based swap dealer or major security-based swap
participant.
    (c) Exclusion for other persons. The security-based swap dealer or
major security-based swap participant shall be excluded from the
prohibition in Section 15F(b)(6) of the Securities Exchange Act of 1934
(15 U.S.C. 78o-10(b)(6)) with respect to an associated person that is
not a natural person who is subject to a statutory disqualification.
    (d) Form of application. Each application with respect to an
associated person that is a natural person who is subject to a
statutory disqualification shall be supported by a written statement,
signed by a knowledgeable person authorized by the security-based swap
dealer or major security-based swap participant, which addresses the
items set forth in paragraph (e) of this section. The application shall
be filed pursuant to Rules of Practice 151, 152, and 153 (17 CFR
201.151, 201.152, and 201.153). Each application shall include as
exhibits:
    (1) A copy of the order or other applicable document that resulted
in the associated person being subject to a statutory disqualification;
    (2) 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;
    (3) A copy of the questionnaire or application for employment
specified in 17 CFR 240.15Fb6-2(b), with respect to the associated
person; and
    (4) If the associated person has been the 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, the Commodity Futures Trading
Commission, any federal or state regulatory or law enforcement agency,
registered futures association (as provided in 7 U.S.C. 21), foreign
financial regulatory authority,

registered national securities association, or any other self-
regulatory organization (as provided in 15 U.S.C. 78c(a)(26)), or
commodities exchange, or any court, the applicant should include a copy
of any order, decision, or document issued by the court, agency, self-
regulatory organization (as provided in 15 U.S.C. 78c(a)(26)), or other
relevant authority involved.
    (e) Written statement. The written statement required by paragraph
(d) of this section shall address each of the following, to the extent
applicable:
    (1) The associated person's compliance with any order resulting in
statutory disqualification, including whether the associated person has
paid fines or penalties, disgorged monies, made restitution or paid any
other monetary compensation required by any such order;
    (2) The associated person's employment during the period subsequent
to becoming subject to a statutory disqualification;
    (3) The capacity or position in which the person subject to a
statutory disqualification proposes to be associated with the security-
based swap dealer or major security-based swap participant;
    (4) The terms and conditions of employment and supervision to be
exercised over such associated person and, where applicable, by such
associated person;
    (5) The qualifications, experience, and disciplinary history of the
proposed supervisor(s) of the associated person;
    (6) The compliance and disciplinary history, during the five years
preceding the filing of the application, of the applicant;
    (7) The names of any other associated persons at the applicant who
have previously been subject to a statutory disqualification and
whether they are to be supervised by the associated person;
    (8) Any relevant courses, seminars, examinations or other actions
completed by the associated person subsequent to becoming subject to a
statutory disqualification to prepare for his or her participation in
the security-based swap business;
    (9) A detailed statement of why the associated person should be
permitted to effect or be involved in effecting security-based swaps on
behalf of the security-based swap dealer or major security-based swap
participant, notwithstanding the event resulting in statutory
disqualification, including what steps the associated person or
applicant has taken, or will take, to ensure that the statutory
disqualification does not negatively affect the ability of the
associated person to effect or be involved in effecting security-based
swaps on behalf of the security-based swap dealer or major security-
based swap participant in compliance with the applicable statutory and
regulatory framework;
    (10) Whether the associated person has been involved in any
litigation during the five years preceding the filing of the
application concerning investment or investment-related activities or
whether there are any unsatisfied judgments outstanding against the
associated person concerning investment or investment-related
activities, to the extent not otherwise covered by paragraph (e)(9) of
this section. If so, the applicant should provide details regarding
such litigation or unsatisfied judgments; and
    (11) Any other information that the applicant believes to be
material to the application.
    (f) Prior applications or processes. In addition to the information
specified above, any person making an application under this rule shall
provide any order, notice or other applicable document reflecting the
grant, denial or other disposition (including any dispositions on
appeal) of any prior application or process concerning the associated
person:
    (1) Pursuant to this section;
    (2) Pursuant to Rule of Practice 193 (17 CFR 201.193);
    (3) Pursuant to Investment Company Act Section 9(c) (15 U.S.C. 80a-
9(c));
    (4) Pursuant to Section 19(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78s(d)), Rule 19h-1 under the Securities Exchange Act
of 1934 (17 CFR 240.19h-1), or a proceeding by a self-regulatory
organization (as provided in 15 U.S.C. 78c(a)(26)) for a person to
become or remain a member, or an associated person of a member,
notwithstanding the existence of a statutory disqualification; or
    (5) By the Commodity Futures Trading Commission or a registered
futures association (as provided in 7 U.S.C. 21) for registration,
including as an associated person, or listing as a principal,
notwithstanding the existence of a statutory disqualification,
including:
    (i) Any order or other document providing that the associated
person may be listed as a principal or registered as an associated
person of a futures commission merchant, retail foreign exchange
dealer, introducing broker, commodity pool operator, commodity trading
advisor, or leverage transaction merchant, or any person registered as
a floor broker or a floor trader, notwithstanding that the person is
subject to a statutory disqualification from registration under Section
8a(2) or 8a(3) of the Commodity Exchange Act (7 U.S.C. 12a(2), (3)); or
    (ii) Any determination by a registered futures association (as
provided in 7 U.S.C. 21) that had the associated person applied for
registration as an associated person of a swap dealer or a major swap
participant, or had a swap dealer or major swap participant listed the
associated person as a principal in the swap dealer's or major swap
participant's application for registration, notwithstanding statutory
disqualification, the application of the associated person or of the
swap dealer or major swap participant, as the case may be, would have
been granted or denied.
    (g) Notification to applicant and written statement. In the event
an adverse recommendation is proposed by Commission staff with respect
to an application made pursuant to this section, the applicant shall be
so advised and provided with a written statement of the reasons for
such recommendation. The applicant shall then have 30 days thereafter
to submit a written statement in response.
    (h) Notice in lieu of an application. (1) A security-based swap
dealer or major security-based swap participant may permit a person
associated with it who is subject to a statutory disqualification to
effect or be involved in effecting security-based swaps on its behalf,
without making an application pursuant to this section, where the
conditions in paragraph (h)(2) of this section are met, and where:
    (i) The person has been admitted to or continued in membership, or
participation or association with a member, of a self-regulatory
organization (as provided in 15 U.S.C. 78c(a)(26)), notwithstanding
that such person is subject to a statutory disqualification under
Section 3(a)(39)(A) through (F) of the Securities Exchange Act of 1934
(15 U.S.C. 78c(a)(39)(A) through (F));
    (ii) The person has been granted consent to associate pursuant to
the Rule of Practice 193 (17 CFR 201.193) or otherwise by the
Commission;
    (iii) The person has been permitted to effect or be involved in
effecting security-based swaps on behalf of a security-based swap
dealer or major security-based swap participant pursuant to this
section; or
    (iv) The person has been registered as, or listed as a principal
of, a futures commission merchant, retail foreign exchange dealer,
introducing broker, commodity pool operator, commodity trading advisor,
or leverage transaction merchant, registered as an associated

person of any of the foregoing, registered as or listed as a principal
of a swap dealer or major swap participant, or registered as a floor
broker or floor trader, notwithstanding that the person is subject to a
statutory disqualification under Sections 8a(2) or 8a(3) of the
Commodity Exchange Act (7 U.S.C. 12a(2), (3)), and the person is not
subject to a Commission bar or suspension pursuant to Sections 15(b),
15B, 15E, 15F, or 17A of the Securities Exchange Act of 1934 (15 U.S.C.
78o(b), 78o-4, 78o-7, 78o-10, 78q-1), Section 9(b) of the Investment
Company Act of 1940 (15 U.S.C. 80a-9(b)), or Section 203(f) of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-3(f)).
    (2) A security-based swap dealer or major security-based swap
participant may permit a person associated with it who is subject to a
statutory disqualification to effect or be involved in effecting
security-based swaps on its behalf, without making an application
pursuant to this section, as provided in paragraph (h)(1), subject to
the following conditions:
    (i) All matters giving rise to a statutory disqualification under
Section 3(a)(39)(A) through (F) of the Securities Exchange Act of 1934
(15 U.S.C. 78c(a)(39)(A) through (F)) have been subject to a process
where the membership, association, registration or listing as a
principal has been granted or otherwise approved by the Commission,
Commodity Futures Trading Commission, self-regulatory organization (as
provided in 15 U.S.C. 78c(a)(26)), or a registered futures association
(as provided in 7 U.S.C. 21);
    (ii) The terms and conditions of the association with the security-
based swap dealer or major security-based swap participant are the same
in all material respects as those approved in connection with a
previous order, notice or other applicable document granting the
membership, association, registration or listing as a principal, as
provided in paragraph (h)(1); and
    (iii) The security-based swap dealer or major security-based swap
participant has filed a notice with the Commission. The notice shall be
filed pursuant to Rules of Practice 151, 152, and 153 (17 CFR 201.151,
201.152, and 201.153). The notice must set forth, as appropriate:
    (A) The name of the security-based swap dealer or major security-
based swap participant;
    (B) The name of the associated person subject to a statutory
disqualification;
    (C) The name of the associated person's prospective supervisor(s)
at the security-based swap dealer or major security-based swap
participant;
    (D) The place of employment for the associated person subject to a
statutory disqualification; and
    (E) Identification of any agency, self-regulatory organization (as
provided in 15 U.S.C. 78c(a)(26)) or a registered futures association
(as provided in 7 U.S.C. 21) that has indicated its agreement with the
terms and conditions of the proposed association, registration or
listing as a principal.
    (i) Note to Sec.  201.194. (1) Under Section 15F(b)(6) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o-10(b)(6)), except to the
extent otherwise specifically provided by rule, regulation, or order of
the Commission, it shall be unlawful for a security-based swap dealer
or a major security-based swap participant to permit any person
associated with a security-based swap dealer or a major security-based
swap participant who is subject to a statutory disqualification to
effect or be involved in effecting security-based swaps on behalf of
the security-based swap dealer or major security-based swap
participant, if the security-based swap dealer or major security-based
swap participant knew, or in the exercise of reasonable care should
have known, of the statutory disqualification.
    (2) Subject to the exclusion provided in paragraph (c) of this
section, in accordance with the authority granted in Section 15F(b)(6)
of the Securities Exchange Act of 1934 (15 U.S.C. 78o-10(b)(6)), this
section governs applications to the Commission by a security-based swap
dealer or major security-based swap participant for the Commission to
issue an order to permit a natural person who is an associated person
of a security-based swap dealer or major security-based swap
participant who is subject to a statutory disqualification to effect or
be involved in effecting security-based swaps on behalf of the
security-based swap dealer or major security- based swap participant.
    (3) Applications made pursuant to this section must show that it
would be consistent with the public interest to permit the associated
person of the security-based swap dealer or major security-based swap
participant to effect or be involved in effecting security-based swaps
on behalf of the security-based swap dealer or major security-based
swap participant. In addition to the information specifically required
by the rule, applications should be supplemented, where appropriate, by
written statements of individuals who are competent to attest to the
associated person's character, employment performance, and other
relevant information. In addition to the information required by the
rule, the Commission staff may request supplementary information to
assist in the Commission's review. Intentional misstatements or
omissions of fact may constitute criminal violations of 18 U.S.C. 1001,
et seq. and other provisions of law. The Commission will not consider
any application that attempts to reargue or collaterally attack the
findings that resulted in the statutory disqualification.
    (4) The nature of the supervision that an associated person will
receive or exercise as an associated person with a registered entity is
an important matter bearing upon the public interest. In meeting the
burden of showing that permitting the associated person to effect or be
involved in effecting security-based swaps on behalf of the security-
based swap dealer or major security-based swap participant is
consistent with the public interest, the application and supporting
documentation must demonstrate that the terms or conditions of
association, procedures or proposed supervision, are reasonably
designed to ensure that the statutory disqualification does not
negatively affect the ability of the associated person to effect or be
involved in effecting security-based swaps on behalf of the security-
based swap dealer or major security-based swap participant in
compliance with the applicable statutory and regulatory framework.
    (5) Normally, the applicant's burden of demonstrating that
permitting the associated person to effect or be involved in effecting
security-based swaps on behalf of the security-based swap dealer or
major security-based swap participant is consistent with the public
interest will be difficult to meet where the associated person is to be
supervised by, or is to supervise, another statutorily disqualified
individual. In addition, where there is an absence of supervision over
the associated person who is subject to a statutory disqualification,
the applicant's burden will be difficult to meet. The associated person
may be limited to association in a specified capacity with a particular
registered entity and may also be subject to specific terms and
conditions.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
3. The general authority citation for part 240 continues to read as
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,

78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq.,
and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350;
and Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and
602, Pub. L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *

Sec.  240.15Fb6-1   [Removed and Reserved].

0
4. Remove and reserve Sec.  240.15Fb6-1.

    By the Commission.

    Dated: December 19, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2019-02347 Filed 2-15-19; 8:45 am]
 BILLING CODE 8011-01-P