with foreign counterparties.
---------------------------------------------------------------------------

    \1759\ See Exchange Act Rule 3a71-3(a)(3).
---------------------------------------------------------------------------

    The Commission has also considered the alternative of excepting all
transactions of a foreign SBS Dealer with non-U.S. persons, including
transactions that involve U.S. activity. We recognize that the
alternative would decrease the set of transactions subject to the final
business conduct rules, reducing both assessment and programmatic costs
to foreign SBS Dealers, and expected programmatic benefits of these
final rules discussed above. Data on North American corporate single
name CDS market in Figure 3 of the economic baseline suggest that
activity among non-U.S. domiciled accounts represents as much as 17%
(if we use the domicile of a corporate group) to 40% (if we use
registered office location) of global

notional volume, and potentially a larger percentage if firms
restructure their business in response to such an exception. We do not
currently have data on which of those trades are arranged, negotiated
or executed by U.S. personnel of foreign SBS Dealers. However, we note
that the U.S. Activity Test in these final rules will subject some
foreign SBS Dealer transactions with foreign counterparties to these
business conduct rules. Therefore, this alternative would reduce the
scope of activity subject to the transaction-level requirements of
these final rules, and their resulting costs and benefits, relative to
the approach being adopted.
    In addition, this alternative could put U.S. SBS Entities at a
competitive disadvantage due to higher direct and indirect costs
related to these final business conduct rules when dealing with foreign
counterparties. This approach may also incentivize U.S. SBS Dealers to
restructure to be considered a non-U.S. person, while continuing to
rely on personnel located in the United States to negotiate, arrange or
execute security-based swap transactions with their foreign
counterparties. As recognized above, we understand security-based swap
markets to be global, and we expect registered SBS Dealers transact
across multiple jurisdictions. This alternative may involve potentially
significant frictions to cross-border transaction activity and may lead
to fractioned liquidity and participation in otherwise globally
integrated markets. The approach being adopted may reduce incentives to
engage in such restructuring by requiring that foreign SBS Dealers
comply with transactional business conduct requirements even when
transacting with another non-U.S. person where such security-based swap
transactions are arranged, negotiated or executed by personnel located
in the United States.
    Finally, we have considered an alternative approach that would
limit the scope of application of these final business conduct rules to
transactions between registered SBS Entities and U.S. person
counterparties. This alternative would exclude transactions between
U.S. as well as non-U.S. SBS Dealers and their foreign counterparties,
which may significantly decrease the scope of application and potential
economic effects of these final rules.
    First, excluding transactions between U.S. SBS Dealers and their
foreign counterparties from the scope of these requirements may reduce
direct and indirect compliance costs of U.S. SBS Dealers, potentially
reducing transaction costs or improving liquidity; however, it may
reduce potential information benefits of these final rules. Second,
similar to the discussion above, excluding transactions between foreign
SBS Dealers and their foreign counterparties may mitigate incentives
for inefficient relocation by financial groups that use a non-U.S.
dealer to carry out their dealing activity in the United States.
    However, to the extent compliance with these business conduct
requirements is costly and these costs are passed along to
counterparties in, for instance, more adverse pricing and lower
liquidity of available OTC security-based swaps, this alternative may
give rise to competitive disparities between U.S. and non-U.S.
counterparties of registered SBS Dealers. U.S. counterparties that are
members of financial groups may respond by restructuring their
security-based swap activity so that it is carried out by a non-U.S.
person, in which case none of its transactions with SBS Dealers would
be required to comply with transaction level business conduct
requirements and incur related costs. To the extent that counterparties
restructure their security-based swap activity in response to the
incentives created by the competitive disparities and market
fragmentation, a significant portion of that activity may occur outside
the scope of these final business conduct requirements. U.S. persons
that currently transact with SBS Dealers may have an incentive to
migrate that business to affiliated non-U.S. persons to stay
competitive with their non-U.S. competitors. The fraction of U.S.
counterparties able to perform such restructuring and related costs are
unclear. In contrast, the approach being adopted recognizes the
importance of SBS Entity conduct for counterparty protections, may
decrease incentives for such evasion, and enhance Commission oversight
of registered SBS Entities.
b. Substituted Compliance
    As discussed in Section III, the final rules contemplate a
substituted compliance regime for substantive business conduct
requirements. Substituted compliance may permit the counterparty
protection, information and Commission oversight benefits of these
final business conduct rules to be achieved while avoiding potential
duplication of compliance costs that foreign SBS Entities may otherwise
incur. As indicated in the Cross-Border release,\1760\ to the extent
that our business conduct rules conflict with regulations in foreign
jurisdictions that also govern the activity of foreign SBS Entities
that are subject to Title VII business conduct requirements, these
final rules could act as a barrier to entry for foreign SBS Entities
into the U.S. security-based swap market. Allowing market participants
to comply with these final business conduct rules via substituted
compliance could facilitate participation of non-resident SBS Entities
in U.S. security-based swap markets. If foreign regulatory regimes are
comparable to these final rules requirements,\1761\ and to the extent
that such foreign regimes have adequate compliance and enforcement
capabilities, allowing substituted compliance for nonresident SBS
Entities may help promote market efficiency and enhance competition in
U.S. markets, potentially benefiting non-dealer counterparties.
---------------------------------------------------------------------------

    \1760\ See Cross-Border Adopting Release, 79 FR at 47359, supra
note 684.
    \1761\ See ISDA (August 2013), supra note 7.
---------------------------------------------------------------------------

    At the same time, the process of making substituted compliance
requests may cause nonresident SBS Entities to incur additional costs
of applying for a substituted compliance determination. In Section V
the Commission has estimated that three security-based swap dealers
will submit substituted compliance applications, noting that the
majority of substituted compliance requests may be made by foreign
authorities. Based on our analysis of domiciles of likely SBS Entity
registrants and our understanding of the market, we believe that there
may be between four and nine substituted compliance applications with
respect to these final rules. The total cost associated with SBS
Entities preparing and submitting requests for substituted compliance
determinations in connection with the business conduct requirements are
estimated at, approximately, $406,770 \1762\ for up to

three requests. We also estimate that up to six foreign jurisdictions
may make substituted compliance requests in connection with these final
business conduct standards at an estimated cost of up to
$524,790.\1763\
---------------------------------------------------------------------------

    \1762\ Initial internal cost of substituted compliance
applications for SBS Entity applicants: (In-house attorney at $380
per hour) x (80 hours) x 3 = $91,200. External: (External counsel at
400$ per hour) x 200 x 3 = $240,000.
    Consistent with the Registration Adopting release, certification
and opinion of counsel is estimated at: (a) (In-house attorney at
$380 per hour) x 0.5 hours x 3 = $570. (b) External: (External
counsel at 400$ per hour) x 62.5 x 3 = $75,000. See Registration
Adopting Release, 80 FR at 48994
    Total cost for SBS Entities: $240,000 + $75,000 + $91,200 + $570
= $406,770
    As noted in Section V, those amounts may overestimate the costs
of requests pursuant to Rule 3a71-6 as adopted, as such requests
would solely address business conduct requirements, rather than the
broader proposed scope of substituted compliance set forth in that
proposal. In addition, some SBS Entities may receive a positive
substituted compliance determination and use the same certification
and opinion of counsel when filing for registration, the costs of
which were assessed in the Registration Adopting Release.
    \1763\ We believe that foreign jurisdictions are less likely to
rely on outside counsel in preparing substituted compliance
determinations and adequate assurances concerning Rule 15Fb2-4(c).
In lieu of outside counsel we believe they will rely on internal
government attorneys, estimated using SEC hourly cost for management
and professional staff of $255.
    Initial cost of substituted compliance applications for up to 6
foreign jurisdiction: (Government management and professional staff
at $255) x (80 + 200) x 6 = $428,400.
    Initial cost of certifications and assurances concerning Rule
15Fb2-4(c): (Government management and professional staff at $255) x
(0.5 + 62.5) x 6 = $96,390.
    Total cost for foreign jurisdictions: $428,400 + $96,390 =
$524,790.
---------------------------------------------------------------------------

    We note that substituted compliance requests will be made on a
voluntary basis, and nonresident SBS Entities would only make such
requests when the anticipated costs of relying on substituted
compliance are lower than the costs of complying directly with these
final rules. Further, after a substituted compliance determination is
made, SBS Entities would choose substituted compliance only if their
expected private benefits from participating in U.S. security-based
swap markets exceed expected private costs, including any conditions
the Commission may attach to the substituted compliance determination.
    We also recognize that these costs and the overall economic effects
of allowing substituted compliance for these final business conduct
rules will depend on, among others, whether (and to what extent)
substituted compliance requests will be granted for jurisdictions in
which some of the most active nonresident SBS Entities are currently
residing; the costs of potential relocation, business restructuring, or
direct compliance by nonresident SBS Entities in jurisdictions for
which substituted compliance is not granted; the relevant information
required to demonstrate consistency between the foreign regulatory
requirements and the Commission's business conduct rules; the relevant
information required to demonstrate the adequacy of the foreign
regime's compliance and enforcement mechanisms; and the fraction of SBS
Entities in a given jurisdiction that may rely on substituted
compliance if available.
    We note that substituted compliance determinations will be made on
a jurisdiction-wide basis. As a result, after the first applicant from
a given jurisdiction receives an affirmative substituted compliance
determination, all SBS Entities from the same jurisdiction will be able
to comply with these final rules by complying with requirements of that
foreign jurisdiction without bearing the related substituted compliance
application costs. Such an approach eliminates duplication in
application costs for SBS Entities from the same jurisdictions.
However, foreign SBS Entities that are the first to make a substituted
compliance application from a given jurisdiction will also bear greater
costs, which disadvantages first movers. SBS Entities that intermediate
greater volume or hold larger positions of security-based swaps in the
United States, and SBS Entities that face greater costs of direct
compliance with these final rules compared to costs of compliance with
rules of a foreign jurisdiction may be the first SBS Entities to make
substituted compliance applications and bear application costs.
    SBS Entities in foreign jurisdictions with blocking laws, privacy
laws, secrecy laws and other legal barriers inconsistent with the
Commission's authority over registered entities will be unable to take
advantage of substituted compliance. As part of these final rules, the
Commission is adopting a requirement that, in order to make a request
for substituted compliance, each party must provide the certification
and opinion of counsel that the entity can as a matter of law, and
will, provide the Commission with prompt access to the entity's books
and records and submit to onsite inspection and examination by the
Commission. Similarly, foreign financial regulatory authorities may
make substituted compliance requests only if they can provide adequate
assurances that no law or policy of any relevant foreign jurisdiction
would impede the ability of any entity that is directly supervised by
the authority and that may register as an SBS Entity to provide prompt
access to the Commission to books and records or to submit to onsite
inspection or examination. As a result of these requirements, the scope
of SBS Entities and jurisdictions able to take advantage of substituted
compliance may be reduced. However, as we have stated elsewhere,\1764\
the Commission believes that significant elements of an effective
regulatory regime are the Commission's abilities to access registered
SBS Entities' books and records and to inspect and examine the
operations of registered SBS Entities.
---------------------------------------------------------------------------

    \1764\ See Registration Adopting Release, 80 FR at 48981.
---------------------------------------------------------------------------

    We note that U.S. SBS Entities will not be able to rely on
substituted compliance with respect to any transactions, including
transactions with foreign counterparties. Alternatively, the Commission
could allow substituted compliance for U.S. SBS Entities. Under the
alternative, U.S. SBS Entities would be able to comply with these
substantive transaction-level requirements by complying with business
conduct requirements of a comparable regulatory regime when dealing
with counterparties domiciled in foreign countries. We recognize that
U.S. SBS Entities may be competing for foreign counterparty business
with foreign SBS Entities, and substituted compliance may reduce costs
of complying with these final business conduct requirements. Under the
alternative, the ability of U.S. SBS Entities to rely on substituted
compliance may increase the profitability of U.S. SBS Entities
transactions with foreign counterparties or may increase business for
U.S. SBS Entities seeking to intermediate security-based swaps with
foreign market participants. However, such an approach may adversely
impact counterparty protection, informational asymmetry and Commission
oversight benefits of these substantive requirements enjoyed by all
counterparties of U.S. SBS Entities as a result of potential
differences among global regulatory regimes. Since any potential costs
of compliance with these substantive requirements may be passed on to
counterparties, such an alternative may result in differential access
and security-based swap terms of U.S. and foreign counterparties of
U.S. SBS Entities.
    Under the approach being adopted, foreign SBS Entities will be able
to comply with these final business conduct requirements by complying
with comparable foreign requirements. We have considered an alternative
approach, under which the availability of substituted compliance is
predicated on a finding of a direct conflict between Title VII and
foreign regulatory requirements. Under this alternative, foreign SBS
Entities that are currently complying with comparable (though not
identical) requirements, would be required to bring their activities
into compliance with these final rules, absent a direct conflict
between Title VII requirements and their foreign regulatory regime. If
the scope of comparable regulatory regimes is broader than the scope of
regimes that are in direct conflict with the

requirements of Title VII, this alternative may enable SBS Entities
from fewer jurisdictions to take advantage of substituted compliance.
As a result, the economic benefits of substituted compliance discussed
above may be reduced.
    Fewer foreign SBS Entities being eligible for substituted
compliance may also reduce direct application costs to the industry.
However, the burden of establishing a direct conflict may be greater
than the burden related to establishing comparability, which may
increase direct substituted compliance costs per application.
    Crucially, if fewer SBS Entities are able to take advantage of
substituted compliance under this alternative, a greater number of
foreign SBS Entities would be required to incur costs of restructuring
their systems and processes to comply with these final rules.
Alternatively, foreign SBS Entities may choose relocate to another
jurisdiction, or decrease their participation in U.S. security-based
swap markets below thresholds triggering SBS Entity registration
requirements and compliance with these final rules. To the extent that
these costs may be passed on to counterparties of foreign SBS Entities
or affect liquidity provision by foreign SBS Entities, transaction
costs may increase and liquidity may be reduced. Further these costs
may create a barrier to entry for foreign SBS Entities into U.S.
security-based swap markets, and facilitate market segmentation.
    Under this alternative, counterparties of foreign SBS Entities
unable to rely on substituted compliance may benefit to a greater
extent from the transparency and counterparty protections of these
final rules. Further, U.S. SBS Entities and foreign SBS Entities from
jurisdictions that are able to rely on substituted compliance may step
in to intermediate trades with counterparties impacted by foreign SBS
Entities unable to rely on substituted compliance. The Commission's
future substituted compliance determinations with respect to individual
foreign regimes will affect the scope of affected foreign SBS Entities.
Therefore, we are unable to estimate and compare the number, market
share and scope of counterparties of foreign SBS Entities that may be
able to rely on substituted compliance under the approach being
adopted, and under the alternative. However, we note that, using DTCC-
TIW data as of year-end 2014, all foreign SBS Dealers likely to trigger
registration requirements were responsible for 35% of the notional
volume of all likely SBS Entities. In addition, as we have noted
earlier in the economic analysis, in 2014 non-dealer counterparties
transacted with a median of three and an average of four SBS Dealers.
    We have also considered an alternative approach under which foreign
SBS Entities would be able to rely on substituted compliance only in
their transactions with non-U.S. counterparties. This alternative would
effectively limit the scope of substituted compliance to non-U.S. SBS
Entities that are transacting with non-U.S. counterparties, but are
subject to these final rules as a result of their reliance on U.S.
personnel discussed above. Such an approach could ensure that U.S.
counterparties of all SBS Entities benefit from the same transparency
and counterparty protection benefits of these final rules, regardless
of the degree of comparability of foreign regimes. However, some
foreign SBS Entities already complying with comparable regimes would
incur additional costs of restructuring to comply with these final
rules without being able to rely on substituted compliance in their
transactions with U.S. counterparties. If such costs are significant,
non-U.S. SBS Entities may become less willing to intermediate
transactions with U.S. counterparties and transaction costs borne by
U.S. counterparties may increase. While other U.S. SBS Entities are
likely to step in and provide the necessary liquidity, this approach
may adversely impact competition and facilitate market segmentation.

D. Effects on Efficiency, Competition and Capital Formation

    In adopting these final rules, we are required to consider their
effects on efficiency, competition and capital formation. As we discuss
below, these final rules may enhance transparency, and improve
informational and allocative efficiency in security-based swap markets.
Greater transparency and allocative efficiency may incentivize quality
based competition among market participants in general, and SBS Dealers
in particular. In the discussion below, we address the potential
effects of final disclosure, suitability and special entity rules on
informational and allocative efficiency, and their effects on capital
formation in security-based swap and reference security markets. We
also consider how harmonization with the CFTC external business conduct
rules facilitates ongoing market integration between swap and security-
based swap markets, and lowers informational inefficiencies. Finally,
we discuss the competitive burdens of compliance costs, their effects
on the willingness of SBS Dealers to intermediate transactions with
certain groups of counterparties, as well as competitive effects of the
cross-border approach being adopted.
    The business conduct standards for SBS Entities, including
requirements to disclose material risks, characteristics, incentives
and conflicts of interest related to security-based swaps, as well as
the fair and balanced communications rule, may reduce information
asymmetries between SBS Entities and their less sophisticated
counterparties. To the extent that adverse selection costs described in
Section VI.C.2 are present in security-based swap markets, market
participants may become more informed and may increase their activity
in security-based swaps, which may improve market quality. To the
extent that security-based swap market participants consider
disclosures under these final rules informative in selecting security-
based swaps and SBS Entity counterparties, these final rules may help
market participants make more informed counterparty choices. The
increased disclosure of information regarding material risks and
characteristics, incentives and conflicts of interest may lead to
improved informational efficiency and quality-based competition among
SBS Entities to the extent that market participants rely on this
information in selecting security-based swaps and counterparties.
    However, as more informed counterparties, SBS Entities are able to
extract information rents from non-dealer counterparties. To the extent
that the business conduct rules help inform counterparties, these rules
may reduce the informational advantage of SBS Entities, and may
decrease profitability of their transactions with non-dealer
counterparties. As a result of disclosures of material risks, daily
mark, conflicts of interest and other information regarding security-
based swaps, some private information of SBS Dealers about the quality
of security-based swaps and underlying reference securities may become
public. As a result, security-based swap prices and dealer profit
margins may decrease. These rules may reduce the incentives of SBS
Dealers to gather private information that is impounded into prices,
and SBS Dealer willingness to intermediate security-based swap
transactions with non-dealer counterparties.
    Enhanced disclosures and counterparty protections of these Business
Conduct Standards may improve access to information, and may attract
non-dealer market participants into security-based swap markets. These

rules may, therefore, protect end users and other non-dealers that are
effecting security-based swaps to manage risk or trade on negative
information, which may improve their ability to make appropriate and
informed portfolio decisions. However, if these rules result in less
informed market participants playing an increasingly larger role in
security-based swap markets, informational efficiency in security-based
swap markets may decrease. This consideration is attenuated by the fact
that uninformed participants bring valuable liquidity enabling informed
traders, such as SBS Dealers, to execute informed trades with less
price impact. The overall effects of these final rules on price
discovery and informational efficiency in security-based swap markets
are, therefore, difficult to assess.
    The final suitability and special entity rules would require SBS
Dealers to evaluate the suitability of trades for non-dealer
counterparties and special entities when making recommendations to such
counterparties, unless the SBS Dealer can rely on the institutional
suitability alternative to fulfill its customer-specific suitability
obligations. SBS Dealers may have superior information about security-
based swaps, but may face an informational asymmetry when analyzing the
hedging needs, risk tolerance and horizons of their counterparties.
This requirement may preclude SBS Dealers from recommending some
security-based swaps that may be truly suitable for a given
counterparty, while recommending other security-based swaps that may be
less suitable. The presence and magnitude of this economic effect
depends on the tradeoff between the severity of information asymmetry
concerning the nature of the swap and asymmetry concerning the
counterparty, and potential losses and risks of investing in unsuitable
security-based swaps relative to foregone profits from not investing in
suitable security-based swaps.
    Suitability requirements and resulting costs could further increase
the costs to SBS Dealers of recommending security-based swaps to non-
dealer counterparties, particularly counterparties with which the SBS
Dealer has had no prior transactions, and counterparties that do not
meet institutional suitability requirements. We also recognize that
these rules may limit the ability of SBS Dealers to recommend some
security-based swaps to certain counterparties, which may decrease the
potential range of counterparties and products that some SBS Dealers
may intermediate. If these effects result in SBS Dealers refraining
from advising or transacting with some counterparties, and these
counterparties are otherwise unable to receive advice or enter into
security-based swaps, the suitability requirement may come at a net
cost to these counterparties and would place them at a disadvantage
relative to larger, more sophisticated competitors. To the extent that
these counterparties do not participate in the security-based swap
market as a result of these costs, adverse effects on market
participation and liquidity may follow. However, as we noted
previously, market data available to us reveal that relatively few
counterparties enter into security-based swap agreements with an SBS
Dealer without third-party representation, particularly among special
entities. As a result of this third-party representation and the SBS
Dealer's ability to fulfill its customer-specific suitability
obligations by, among other things, making the determination that a
counterparty's agent is capable of independently evaluating investment
risk, as well as the exception of anonymous SEF executed security-based
swaps, we do not believe that market access is likely to be restricted.
    The final pay to play rules may reduce pay to play practices among
SBS Dealers. To the extent that political contributions may currently
be influencing counterparty and security-based swap selection, these
rules may mitigate these influences and enhance allocative efficiency
of municipal entities and facilitate greater quality-based competition
of SBS Dealers. However, if some SBS Dealers become subject to a two-
year time out due to inadvertent violations of the de minimis
thresholds by themselves or their covered associates, and are unable to
secure exemptive relief, fewer SBS Dealers may be able to transact with
municipal entities in security-based swaps, which may increase the
pricing power and decrease quality of execution of swaps offered to
municipal entities by the remaining SBS Dealers. We note that SBS
Dealers will have to keep updated records of political contributions of
their covered associates, ensure their accuracy, promptly discover
triggering contributions and seek their return. The costs of
implementing such policies and procedures related to political
contributions of covered associates will be greater for larger SBS
Dealers with multiple layers of supervision and a higher number of
covered associates with shorter tenures. While other business conduct
rules tend to impose fixed burdens, which represent a higher fraction
of net income for smaller SBS Dealers, this particular requirement may
be significantly more costly for larger SBS Dealers.
    Further, under these final rules, representatives of special
entities transacting with SBS Entities are likely to be employees or
independent representatives subject to Commission, CFTC or SRO pay to
play rules. To the extent that some special entity representatives
currently intermediating transactions with SBS Entities are not
registered investment advisers, municipal advisors, other fiduciaries
or employees, they may be unable to represent special entities in
security-based swap transactions with SBS Entities unless they register
as such. This may decrease competition among qualified investment
representatives of special entities, or incentivize unregistered
representatives to register, for instance, as investment advisers with
the Commission or as municipal advisors with the MSRB.
    The direct and indirect costs of compliance with these final
business conduct rules may be recovered by SBS Entities in the form of
higher transaction costs or more adverse non-price terms of security-
based swaps offered to counterparties. To the extent that these costs
cannot be recovered, incentives for some entities to operate as
registered U.S. SBS Entities may be reduced,\1765\ which may adversely
affect competition in security-based swap markets. In addition, some
counterparties may lose access to the market for OTC swaps. However, we
note that, as discussed above, anonymous SEF transactions are exempt
from some of the substantive requirements of these final rules, which
may allow such counterparties to retain access to security-based swaps.
Further, to the extent that these rules impose costs and restrictions
on non-SEF trades that are not born by SBS Entities related to SEF
trades, the volume of transactions executed on SEFs may increase. We
recognize that, as a result, these final rules may increase the
programmatic costs and benefits of pending SEF and clearing rules, with
their follow on effects on efficiency, competition and capital
formation, which will be evaluated in pending SEF and clearing rules.
We recognize similarities between CFTC external business conduct
standards for Swap Entities, FINRA rules for broker dealers and the
rules being adopted. Due to extensive cross-market participation, many
of the entities expected to register

as SBS Entities will have already registered with the CFTC as Swap
Entities or with the Commission as broker dealers, yet others may
already be subject to similar MSRB rules. To the extent that these
final rules involve initial compliance costs, dually registered SBS
entities may experience significantly lower initial compliance costs.
At the same time, new entrants and SBS Entities that are not dually
registered may face higher costs. Competitive effects of these final
business conduct rules primarily stem from differences in burdens
incurred by dual registrants on the one hand, and non-dually registered
SBS Entities and new entrants on the other.
---------------------------------------------------------------------------

    \1765\ See U.S. Activity Adopting Release, 81 FR at 8629.
---------------------------------------------------------------------------

    In addition to the competitive effects of compliance burdens above,
the cross-border approach adopted in these final rules may impact
competition between U.S. and non-U.S. SBS Entities and their U.S. and
non-U.S. personnel. A substituted compliance regime for business
conduct requirements and their application to non-U.S. persons' dealing
transactions that are arranged, negotiated, or executed using personnel
located in the United States may mitigate competitive frictions between
U.S. and non-U.S. SBS Dealers that transact with foreign
counterparties, and may promote market efficiency. The final cross-
border approach to business conduct requirements will result in a
uniform application of these requirements to U.S. and non-U.S. SBS
Dealers and their agents. If only U.S. SBS Dealers and their agents
were subject to disclosure, suitability and other requirements in these
final rules when transacting with foreign counterparties, the costs of
such disclosures would primarily be incurred by U.S. SBS Dealers, their
agents, and their counterparties. In contrast, non-U.S. SBS Dealers and
their agents, including personnel located in the United States, would
potentially have a competitive advantage over U.S. SBS Dealers in
serving non-U.S. person counterparties using personnel located in a
U.S. branch or office, were their activities not subject to the same
requirements.\1766\ Therefore, the cross-border application of these
final business conduct rules may enhance competition among these SBS
Dealers.
---------------------------------------------------------------------------

    \1766\ See, e.g., Arnoud W.A. Boot, Silva Dezelan, and Todd T.
Milbourn, ``Regulatory Distortions in a Competitive Financial
Services Industry,'' Journal of Financial Services Research, Vol.
17, No. 1 (2000).
---------------------------------------------------------------------------

    Access to SEC-regulated security-based swap markets increases
hedging opportunities for financial market intermediaries; such hedging
opportunities reduce risks and allow intermediaries to facilitate a
greater volume of financing activities, including issuance of equity
and debt securities, and therefore contribute to capital formation. As
we have stated in other releases,\1767\ this may be particularly true
in underlying securities markets, where potential pricing and liquidity
effects in security-based swap markets may feedback and impact the
market for reference entity securities. Security-based swap markets may
enable better risk mitigation by investors in underlying reference
securities, such as CDS hedging of the credit risk of corporate bond
investments. The possible contraction in security-based swap market
participation by SBS Entities due to costs of compliance with these
final rules may adversely impact underlying reference security markets,
including pricing and liquidity in corporate bond and equity markets.
This may have a negative effect on the ability of firms to raise debt
and equity capital to finance real investment. However, the spillover
from potential deterioration in security-based swap markets into
underlying reference security markets may also be positive.
Sophisticated institutional investors transact across CDS and bond
markets to trade on information pertaining to the credit risk of
underlying reference debt. A potential negative shock to security-based
swap market liquidity and dealing by SBS Entities with non-SBS Entity
counterparties as a result of required compliance with these final
rules may, in fact, drive sophisticated institutions to search for
liquidity pools and lower price impact of informed trades to reference
security markets. If institutions begin to trade more actively in
underlying reference security markets, such as corporate bond markets
as a result, there may be positive effects on liquidity and
informational efficiency of corporate bond and equity markets.\1768\
This may enable firms to raise more debt and equity at potentially
lower costs to finance real investment.
---------------------------------------------------------------------------

    \1767\ See Registration Adopting Release, 80 FR 49008, supra
note 989.
    \1768\ See Section VI.B.5.
---------------------------------------------------------------------------

VII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \1769\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. The Commission certified in the Proposing Release,
pursuant to Section 605(b) of the RFA,\1770\ that proposed Rules 15Fh-1
through 15Fh-6 and Rule 15Fk-1 would not, if adopted, have a
significant economic impact on a substantial number of ``small
entities.'' \1771\ The Commission received no comments on this
certification.
---------------------------------------------------------------------------

    \1769\ 5 U.S.C. 601 et seq.
    \1770\ 5 U.S.C. 605(b).
    \1771\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. 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
Statement of Management on Internal Control, Exchange Act Release
No. 18451 (Jan. 28, 1982), 47 FR 5215 (Feb. 4, 1982).
---------------------------------------------------------------------------

    For purposes of Commission rulemaking in connection with the RFA, a
small entity includes: (i) When used with reference to an ``issuer'' or
a ``person,'' other than an investment company, an ``issuer'' or
``person'' that, on the last day of its most recent fiscal year, had
total assets of $5 million or less; \1772\ or (ii) a broker-dealer with
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
Exchange Act,\1773\ or, if not required to file such statements, a
broker-dealer with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last day of the preceding
fiscal year (or in the time that it has been in business, if shorter);
and is not affiliated with any person (other than a natural person)
that is not a small business or small organization.\1774\ With respect
to investment companies in connection with the RFA, the term ``small
business'' or ``small organization'' means an investment company that,
together with other investment companies in the same group of related
investment companies, has net assets of $50 million or less as of the
end of its most recent fiscal year. Under the standards adopted by the
Small Business Administration, small entities in the finance and
insurance industry include the following: (i) For entities in credit
intermediation and related activities,\1775\ entities with $550 million
or less in assets or, (ii) for non-depository credit intermediation and
certain other activities,\1776\ $38.5

million or less in annual receipts; (iii) for entities in financial
investments and related activities,\1777\ entities with $38.5 million
or less in annual receipts; (iv) for insurance carriers and entities in
related activities,\1778\ entities with $38.5 million or less in annual
receipts, or 1,500 employees for direct property and casualty insurance
carriers; and (v) for funds, trusts, and other financial
vehicles,\1779\ entities with $32.5 million or less in annual
receipts.\1780\
---------------------------------------------------------------------------

    \1772\ See 17 CFR 240.0-10(a).
    \1773\ See 17 CFR 240.17a-5(d).
    \1774\ See 17 CFR 240.0-10(c).
    \1775\ Including commercial banks, savings institutions, credit
unions, firms involved in other depository credit intermediation,
credit card issuing, sales financing, consumer lending, real estate
credit, and international trade financing. 13 CFR 121.201 at
Subsector 522.
    \1776\ Including firms involved in secondary market financing,
all other non-depository credit intermediation, mortgage and
nonmortgage loan brokers, financial transactions processing,
reserve, and clearing house activities, and other activities related
to credit intermediation. 13 CFR 121.201 at Subsector 522.
    \1777\ Including firms involved in investment banking and
securities dealing, securities brokerage, commodity contracts
dealing, commodity contracts brokerage, securities and commodity
exchanges, miscellaneous intermediation, portfolio management,
providing investment advice, trust, fiduciary and custody
activities, and miscellaneous financial investment activities. 13
CFR 121.201 at Subsector 523.
    \1778\ Including direct life insurance carriers, direct health
and medical insurance carriers, direct property and casualty
insurance carriers, direct title insurance carriers, other direct
insurance (except life, health and medical) carriers, reinsurance
carriers, insurance agencies and brokerages, claims adjusting, third
party administration of insurance and pension funds, and all other
insurance related activities. 13 CFR 121.201 at Subsector 524.
    \1779\ Including pension funds, health and welfare funds, other
insurance funds, open-end investment funds, trusts, estates, and
agency accounts, real estate investment trusts and other financial
vehicles. 13 CFR 121.201 at Subsector 525.
    \1780\ See 13 CFR 121.201.
---------------------------------------------------------------------------

    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 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; and (2) the types of entities that may have security-based
swap positions above the level required to be ``major security-based
swap participants'' would not be ``small entities'' for purposes of the
RFA.\1781\
---------------------------------------------------------------------------

    \1781\ See Recordkeeping Release, 79 FR 25194, 25296-97 &
n.1441, supra note 242; Further Definition of ``Swap Dealer,''
``Security-Based Swap Dealer,'' ``Major Swap Participant,'' ``Major
Security-Based Swap Participant'' and ``Eligible Contract
Participant,'' Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR
30596, 30743 (May 23, 2012) (joint Commission/CFTC final rules);
Registration Adopting Release, 80 FR 48964, 49012-49013, supra note
989.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission certifies that the SBS
Entity registration rules and forms, as adopted would not have a
significant economic impact on a substantial number of small entities
for purposes of the RFA.

Statutory Basis and Text of Final Rules

    Pursuant to the Exchange Act and, particularly, Sections 2, 3(b),
3C, 9, 10, 11A, 15, 15F, 17(a) and (b), 23(a) and 30(c) thereof (15
U.S.C. 78b, 78c(b), 78i(i), 78i(j), 78j, 78k-1, 78o, 78o-10, 78q(a) and
(b), 78w(a) and 78dd(c)), the Commission is adopting Rule 3a71-6, Rules
15Fh-1 through 15Fh-6, and Rule 15Fk-1, and is amending Rules 3a67-10
and 3a71-3, to address the business conduct obligations of security-
based swap dealers and major security-based swap participants,
including the cross-border application of those obligations and the
availability of substituted compliance in connection with those
obligations.

List of Subjects in 17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.

Text of the Final Rules

    For the reasons set forth in the preamble, the Securities and
Exchange Commission is amending Title 17, Chapter II of the Code of
Federal Regulations, as follows:

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

0
1. The authority citation for part 240 continues to read, and sectional
authorities for sections 240.3a71-6, 240.15Fh-1 through 240.15Fh-6, and
240.15Fk-1 are added in numerical order 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. 1376, (2010), unless otherwise
noted.
* * * * *

    Section 240.3a67-10, 240.3a71-3, 240.3a71-4, 240.3a71-5, and
240.3a71-6 are also issued under Pub. L. 111-203, secs. 712, 761(b),
124 Stat. 1754 (2010), and 15 U.S.C. 78dd(c).

* * * * *

    Sections 240.15Fh-1 through 240.15Fh-6 and 240.15Fk-1 are also
issued under sec. 943, Pub. L. 111-203, 124 Stat. 1376.

* * * * *

0
2. Sec.  240.3a67-10 is amended by:
0
a. Adding paragraphs (a)(5) and (6); and
0
b. Adding paragraph (d).
    The additions read as follows:

Sec.  240.3a67-10  Foreign major security-based swap participants.

    (a) * * *
    (5) U.S. major security-based swap participant means a major
security-based swap participant, as defined in section 3(a)(67) of the
Act (15 U.S.C. 78c(a)(67)), and the rules and regulations thereunder,
that is a U.S. person.
    (6) Foreign major security-based swap participant means a major
security-based swap participant, as defined in section 3(a)(67) of the
Act (15 U.S.C. 78c(a)(67)), and the rules and regulations thereunder,
that is not a U.S. person.
* * * * *
    (d) Application of customer protection requirements. (1) A
registered foreign major security-based swap participant shall not be
subject to the requirements relating to business conduct standards
described in section 15F(h) of the Act (15 U.S.C. 78o-10(h)), and the
rules and regulations thereunder, other than rules and regulations
prescribed by the Commission pursuant to section 15F(h)(1)(B) of the
Act (15 U.S.C. 78o- 10(h)(1)(B)), with respect to a security-based swap
transaction with a counterparty that is not a U.S. person or with a
counterparty that is a U.S. person in a transaction conducted through a
foreign branch of the U.S. person.
    (2) A registered U.S. major security-based swap participant shall
not be subject to the requirements relating to business conduct
standards described in section 15F(h) of the Act (15 U.S.C. 78o-10(h)),
and the rules and regulations thereunder, other than rules and
regulations prescribed by the Commission pursuant to section
15F(h)(1)(B) of the Act (15 U.S.C. 78o-10(h)(1)(B)), with respect to a
security-based swap transaction that constitutes a transaction
conducted through a foreign branch of the registered U.S. major
security-based swap participant with a non-U.S. person or with a U.S.-
person counterparty that constitutes a transaction conducted through a
foreign branch of that U.S.-person counterparty.

0
3. Sec.  240.3a71-3 is amended by:
0
a. Adding paragraphs (a)(6) through (9); and
0
b. Adding paragraph (c).
    The additions read as follows:

Sec.  240.3a71-3  Cross-border security-based swap dealing activity.

    (a) * * *
    (6) U.S. security-based swap dealer means a security-based swap
dealer, as defined in section 3(a)(71) of the Act (15 U.S.C.
78c(a)(71)), and the rules and regulations thereunder, that is a U.S.
person.

    (7) Foreign security-based swap dealer means a security-based swap
dealer, as defined in section 3(a)(71) of the Act (15 U.S.C.
78c(a)(71)), and the rules and regulations thereunder, that is not a
U.S. person.
    (8) U.S. business means:
    (i) With respect to a foreign security-based swap dealer:
    (A) Any security-based swap transaction entered into, or offered to
be entered into, by or on behalf of such foreign security-based swap
dealer, with a U.S. person (other than a transaction conducted through
a foreign branch of that person); or
    (B) Any security-based swap transaction arranged, negotiated, or
executed by personnel of the foreign security-based swap dealer located
in a U.S. branch or office, or by personnel of an agent of the foreign
security-based swap dealer located in a U.S. branch or office; and
    (ii) With respect to a U.S. security-based swap dealer, any
transaction entered into or offered to be entered into by or on behalf
of such U.S. security-based swap dealer, other than a transaction
conducted through a foreign branch with a non-U.S. person or with a
U.S.-person counterparty that constitutes a transaction conducted
through a foreign branch of the counterparty.
    (9) Foreign business means security-based swap transactions entered
into, or offered to be entered into, by or on behalf of a security-
based swap dealer, other than the U.S. business of such person.
* * * * *
    (c) Application of customer protection requirements. A registered
security-based swap dealer, with respect to its foreign business, shall
not be subject to the requirements relating to business conduct
standards described in section 15F(h) of the Act (15 U.S.C. 78o-10(h)),
and the rules and regulations thereunder, other than the rules and
regulations prescribed by the Commission pursuant to section
15F(h)(1)(B) of the Act (15 U.S.C. 78o-10(h)(1)(B)).

0
4. Add Sec.  240.3a71-6 to read as follows:

Sec.  240.3a71-6  Substituted compliance for security-based swap
dealers and major security-based swap participants.

    (a) Determinations--(1) In general. Subject to paragraph (a)(2) of
this section, the Commission may, conditionally or unconditionally, by
order, make a determination with respect to a foreign financial
regulatory system that compliance with specified requirements under
such foreign financial regulatory system by a registered security-based
swap dealer and/or by a registered major security-based swap
participant (each a ``security-based swap entity''), or class thereof,
may satisfy the corresponding requirements identified in paragraph (d)
of this section that would otherwise apply to such security-based swap
entity (or class thereof).
    (2) Standard. The Commission shall not make a substituted
compliance determination under paragraph (a)(1) of this section unless
the Commission:
    (i) Determines that the requirements of such foreign financial
regulatory system applicable to such security-based swap entity (or
class thereof) or to the activities of such security-based swap entity
(or class thereof) are comparable to otherwise applicable requirements,
after taking into account such factors as the Commission determines are
appropriate, such as the scope and objectives of the relevant foreign
regulatory requirements (taking into account the applicable criteria
set forth in paragraph (d) of this section), as well as the
effectiveness of the supervisory compliance program administered, and
the enforcement authority exercised, by a foreign financial regulatory
authority or authorities in such system to support its oversight of
such security-based swap entity (or class thereof) or of the activities
of such security-based swap entity (or class thereof); and
    (ii) Has entered into a supervisory and enforcement memorandum of
understanding and/or other arrangement with the relevant foreign
financial regulatory authority or authorities under such foreign
financial regulatory system addressing supervisory and enforcement
cooperation and other matters arising under the substituted compliance
determination.
    (3) Withdrawal or modification. The Commission may, on its own
initiative, by order, modify or withdraw a substituted compliance
determination under paragraph (a)(1) of this section, after appropriate
notice and opportunity for comment.
    (b) Reliance by security-based swap entities. A registered
security-based swap entity may satisfy the requirements described in
paragraph (d) of this section by complying with corresponding law,
rules and regulations under a foreign financial regulatory system,
provided:
    (1) The Commission has made a substituted compliance determination
pursuant to paragraph (a)(1) of this section regarding such foreign
financial regulatory system providing that compliance with specified
requirements under such foreign financial regulatory system by such
registered security-based swap entity (or class thereof) may satisfy
the corresponding requirements described in paragraph (d) of this
section; and
    (2) Such registered security-based swap entity satisfies any
conditions set forth in a substituted compliance determination made by
the Commission pursuant to paragraph (a)(1) of this section.
    (c) Requests for determinations. (1) A party or group of parties
that potentially would comply with specified requirements pursuant to
paragraph (a)(1), or any foreign financial regulatory authority or
authorities supervising such a party or its security-based swap
activities, may file an application, pursuant to the procedures set
forth in Sec.  240.0-13, requesting that the Commission make a
substituted compliance determination pursuant to paragraph (a)(1) of
this section, with respect to one or more requirements described in
paragraph (d) of this section.
    (2) Such a party or group of parties may make a request under
paragraph (c)(1) of this section only if:
    (i) Each such party, or the party's activities, is directly
supervised by the foreign financial regulatory authority or authorities
with respect to the foreign regulatory requirements relating to the
applicable requirements described in paragraph (d) of this section; and
    (ii) Each such party provides the certification and opinion of
counsel as described in Sec.  240.15Fb2-4(c), as if the party were
subject to that requirement at the time of the request.
    (3) Such foreign financial authority or authorities may make a
request under paragraph (c)(1) of this section only if each such
authority provides adequate assurances that no law or policy of any
relevant foreign jurisdiction would impede the ability of any entity
that is directly supervised by the foreign financial regulatory
authority and that may register with the Commission as a security-based
swap dealer or major security-based swap participant to provide prompt
access to the Commission to such entity's books and records or to
submit to onsite inspection or examination by the Commission.
    (d) Eligible requirements. The Commission may make a substituted
compliance determination under paragraph (a)(1) of this section to
permit security-based swap entities that are not U.S. persons (as
defined in Sec.  240.3a71-3(a)(4)), but not security-based swap
entities that are U.S. persons, to satisfy the following requirements
by

complying with comparable foreign requirements:
    (1) Business conduct and supervision. The business conduct and
supervision requirements of sections 15F(h) and (j) of the Act (15
U.S.C. 78o-10(h) and (j)) and Sec. Sec.  240.15Fh-3 through 15Fh-6,
other than the antifraud provisions of section 15F(h)(4)(A) of the Act
and Sec.  240.15Fh-4(a), and other than the provisions of sections
15F(j)(3) and 15F(j)(4)(B) of the Act; provided, however, that prior to
making such a substituted compliance determination the Commission
intends to consider whether the information that is required to be
provided to counterparties pursuant to the requirements of the foreign
financial regulatory system, the counterparty protections under the
requirements of the foreign financial regulatory system, the mandates
for supervisory systems under the requirements of the foreign financial
regulatory system, and the duties imposed by the foreign financial
regulatory system, are comparable to those associated with the
applicable provisions arising under the Act and its rules and
regulations.
    (2) Chief compliance officer. The chief compliance officer
requirements of section 15F(k) of the Act (15 U.S.C. 78o-10(k)) and
Sec.  240.15Fk-1; provided, however, that prior to making such a
substituted compliance determination the Commission intends to consider
whether the requirements of the foreign financial regulatory system
regarding chief compliance officer obligations are comparable to those
required pursuant to the applicable provisions arising under the Act
and its rules and regulations.

0
5. Add Sec. Sec.  240.15Fh-1 through 240.15Fh-6, and Sec.  240.15Fk-1
to read as follows:

Sec.  240.15Fh-1  Scope and reliance on representations.

    (a) Scope. Sections 240.15Fh-1 through 240.15Fh-6, and 240.15Fk-1
are not intended to limit, or restrict, the applicability of other
provisions of the federal securities laws, including but not limited to
section 17(a) of the Securities Act of 1933 and sections 9 and 10(b) of
the Act, and rules and regulations thereunder, or other applicable laws
and rules and regulations. Sections 240.15Fh-1 through 240.15Fh-6, and
240.15Fk-1 apply, as relevant, in connection with entering into
security-based swaps and continue to apply, as appropriate, over the
term of executed security-based swaps. Sections 240.15Fh-3(a) through
240.15Fh-3(f), 240.15Fh-4(b) and 240.15Fh-5 are not applicable to
security-based swaps that security-based swap dealers or major
security-based swap participants enter into with their majority-owned
affiliates. For these purposes the counterparties to a security-based
swap are majority-owned affiliates if one counterparty directly or
indirectly owns a majority interest in the other, or if a third party
directly or indirectly owns a majority interest in both counterparties
to the security-based swap, where ``majority interest'' is the right to
vote or direct the vote of a majority of a class of voting securities
of an entity, the power to sell or direct the sale of a majority of a
class of voting securities of an entity, or the right to receive upon
dissolution or the contribution of a majority of the capital of a
partnership.
    (b) Reliance on representations. A security-based swap dealer or
major security-based swap participant may rely on written
representations from the counterparty or its representative to satisfy
its due diligence requirements under Sec.  240.15Fh, unless it has
information that would cause a reasonable person to question the
accuracy of the representation.

Sec.  240.15Fh-2  Definitions.

    As used in Sec. Sec.  240.15Fh-1 through 240.15Fh-6:
    (a) Act as an advisor to a special entity. A security-based swap
dealer acts as an advisor to a special entity when it recommends a
security-based swap or a trading strategy that involves the use of a
security-based swap to the special entity, unless:
    (1) With respect to a special entity as defined in Sec.  240.15Fh-
2(d)(3):
    (i) The special entity represents in writing that it has a
fiduciary as defined in section 3 of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1002) that is responsible for
representing the special entity in connection with the security-based
swap;
    (ii) The fiduciary represents in writing that it acknowledges that
the security-based swap dealer is not acting as an advisor; and
    (iii) The special entity represents in writing:
    (A) That it will comply in good faith with written policies and
procedures reasonably designed to ensure that any recommendation the
special entity receives from the security-based swap dealer involving a
security-based swap transaction is evaluated by a fiduciary before the
transaction is entered into; or
    (B) That any recommendation the special entity receives from the
security-based swap dealer involving a security-based swap transaction
will be evaluated by a fiduciary before the transaction is entered
into.
    (2) With respect to any special entity:
    (i) The special entity represents in writing that:
    (A) It acknowledges that the security-based swap dealer is not
acting as an advisor; and
    (B) The special entity will rely on advice from a qualified
independent representative as defined in Sec.  240.15Fh-5(a); and
    (ii) The security-based swap dealer discloses to the special entity
that it is not undertaking to act in the best interest of the special
entity, as otherwise required by section 15F(h)(4) of the Act.
    (b) Eligible contract participant means any person as defined in
section 3(a)(65) of the Act and the rules and regulations thereunder
and in section 1a of the Commodity Exchange Act (7 U.S.C. 1a) and the
rules and regulations thereunder.
    (c) Security-based swap dealer or major security-based swap
participant includes, where relevant, an associated person of the
security-based swap dealer or major security-based swap participant.
    (d) Special entity means:
    (1) A Federal agency;
    (2) A State, State agency, city, county, municipality, other
political subdivision of a State, or any instrumentality, department,
or a corporation of or established by a State or political subdivision
of a State;
    (3) Any employee benefit plan, subject to Title I of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1002);
    (4) Any employee benefit plan defined in section 3 of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1002) and not
otherwise defined as a special entity, unless such employee benefit
plan elects not to be a special entity by notifying a security-based
swap dealer or major security-based swap participant of its election
prior to entering into a security-based swap with the particular
security-based swap dealer or major security-based swap participant;
    (5) Any governmental plan, as defined in section 3(32) of the
Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002(32));
or
    (6) Any endowment, including an endowment that is an organization
described in section 501(c)(3) of the Internal Revenue Code of 1986.
    (e) A person is subject to a statutory disqualification for
purposes of Sec.  240.15Fh-5 if that person would be subject to a
statutory disqualification, as

described in section 3(a)(39)(A)-(F) of the Act.

Sec.  240.15Fh-3  Business conduct requirements.

    (a) Counterparty status--(1) Eligible contract participant. A
security-based swap dealer or a major security-based swap participant
shall verify that a counterparty meets the eligibility standards for an
eligible contract participant before entering into a security-based
swap with that counterparty, provided that the requirements of this
paragraph (a)(1) shall not apply to a transaction executed on a
registered national securities exchange.
    (2) Special entity. A security-based swap dealer or a major
security-based swap participant shall verify whether a counterparty is
a special entity before entering into a security-based swap with that
counterparty, unless the transaction is executed on a registered or
exempt security-based swap execution facility or registered national
securities exchange, and the security-based swap dealer or major
security-based swap participant does not know the identity of the
counterparty at a reasonably sufficient time prior to execution of the
transaction to permit the security-based swap dealer or major security-
based swap participant to comply with the obligations of paragraph (a)
of this section.
    (3) Special entity election. In verifying the special entity status
of a counterparty pursuant to Sec.  240.15Fh-3(a)(2), a security-based
swap dealer or major security-based swap participant shall verify
whether a counterparty is eligible to elect not to be a special entity
under Sec.  240.15Fh-2(d)(4) and, if so, notify such counterparty of
its right to make such an election.
    (b) Disclosure. At a reasonably sufficient time prior to entering
into a security-based swap, a security-based swap dealer or major
security-based swap participant shall disclose to a counterparty, other
than a security-based swap dealer, major security-based swap
participant, swap dealer or major swap participant, material
information concerning the security-based swap in a manner reasonably
designed to allow the counterparty to assess the material risks and
characteristics and material incentives or conflicts of interest, as
described below, so long as the identity of the counterparty is known
to the security-based swap dealer or major security-based swap
participant at a reasonably sufficient time prior to execution of the
transaction to permit the security-based swap dealer or major security-
based swap participant to comply with the obligations of paragraph (b)
of this section.
    (1) Material risks and characteristics means the material risks and
characteristics of the particular security-based swap, which may
include:
    (i) Market, credit, liquidity, foreign currency, legal,
operational, and any other applicable risks; and
    (ii) The material economic terms of the security-based swap, the
terms relating to the operation of the security-based swap, and the
rights and obligations of the parties during the term of the security-
based swap.
    (2) Material incentives or conflicts of interest means any material
incentives or conflicts of interest that the security-based swap dealer
or major security-based swap participant may have in connection with
the security-based swap, including any compensation or other incentives
from any source other than the counterparty in connection with the
security-based swap to be entered into with the counterparty.
    (3) Record. The security-based swap dealer or major security-based
swap participant shall make a written record of the non-written
disclosures made pursuant to this paragraph (b), and provide a written
version of these disclosures to its counterparties in a timely manner,
but in any case no later than the delivery of the trade acknowledgement
of the particular transaction pursuant to Sec.  240.15Fi-1.
    (c) Daily mark. A security-based swap dealer or major security-
based swap participant shall disclose the daily mark to the
counterparty, other than a security-based swap dealer, major security-
based swap participant, swap dealer or major swap participant, which
shall be:
    (1) For a cleared security-based swap, upon request of the
counterparty, the daily mark that the security-based swap dealer or
major security-based swap participant receives from the appropriate
clearing agency;
    (2) For an uncleared security-based swap, the midpoint between the
bid and offer, or the calculated equivalent thereof, as of the close of
business, unless the parties agree in writing otherwise to a different
time, on each business day during the term of the security-based swap.
The daily mark may be based on market quotations for comparable
security-based swaps, mathematical models or a combination thereof. The
security-based swap dealer or major security-based swap participant
shall also disclose its data sources and a description of the
methodology and assumptions used to prepare the daily mark, and
promptly disclose any material changes to such data sources,
methodology and assumptions during the term of the security-based swap;
and
    (3) The security-based swap dealer or major security-based swap
participant shall provide the daily mark without charge to the
counterparty and without restrictions on the internal use of the daily
mark by the counterparty.
    (d) Disclosure regarding clearing rights. A security-based swap
dealer or major security-based swap participant shall disclose the
following information to a counterparty, other than a security-based
swap dealer, major security-based swap participant, swap dealer or
major swap participant, so long as the identity of the counterparty is
known to the security-based swap dealer or major security-based swap
participant at a reasonably sufficient time prior to execution of the
transaction to permit the security-based swap dealer or major security-
based swap participant to comply with the obligations of paragraph (d)
of this section:
    (1) For security-based swaps subject to clearing requirement.
Before entering into a security-based swap subject to the clearing
requirement under section 3C(a) of the Act, a security-based swap
dealer or major security-based swap participant shall:
    (i) Disclose to the counterparty the names of the clearing agencies
that accept the security-based swap for clearing, and through which of
those clearing agencies the security-based swap dealer or major
security-based swap participant is authorized or permitted, directly or
through a designated clearing member, to clear the security-based swap;
and
    (ii) Notify the counterparty that it shall have the sole right to
select which of the clearing agencies described in paragraph (d)(1)(i)
of this section shall be used to clear the security-based swap subject
to section 3C(g)(5) of the Act.
    (2) For security-based swaps not subject to clearing requirement.
Before entering into a security-based swap not subject to the clearing
requirement under section 3C(a) of the Act, a security-based swap
dealer or major security-based swap participant shall:
    (i) Determine whether the security-based swap is accepted for
clearing by one or more clearing agencies;
    (ii) Disclose to the counterparty the names of the clearing
agencies that accept the security-based swap for clearing, and whether
the security-based swap dealer or major security-based swap participant
is authorized or permitted, directly or through a designated clearing
member, to clear the security-based swap through such clearing
agencies; and

    (iii) Notify the counterparty that it may elect to require clearing
of the security-based swap and shall have the sole right to select the
clearing agency at which the security-based swap will be cleared,
provided it is a clearing agency at which the security-based swap
dealer or major security-based swap participant is authorized or
permitted, directly or through a designated clearing member, to clear
the security-based swap.
    (3) Record. The security-based swap dealer or major security-based
swap participant shall make a written record of the non-written
disclosures made pursuant to this paragraph (d), and provide a written
version of these disclosures to its counterparties in a timely manner,
but in any case no later than the delivery of the trade acknowledgement
of the particular transaction pursuant to Sec.  240.15Fi-1.
    (e) Know your counterparty. Each security-based swap dealer shall
establish, maintain and enforce written policies and procedures
reasonably designed to obtain and retain a record of the essential
facts concerning each counterparty whose identity is known to the
security-based swap dealer that are necessary for conducting business
with such counterparty. For purposes of paragraph (e) of this section,
the essential facts concerning a counterparty are:
    (1) Facts required to comply with applicable laws, regulations and
rules;
    (2) Facts required to implement the security-based swap dealer's
credit and operational risk management policies in connection with
transactions entered into with such counterparty; and
    (3) Information regarding the authority of any person acting for
such counterparty.
    (f) Recommendations of security-based swaps or trading strategies.
(1) A security-based swap dealer that recommends a security-based swap
or trading strategy involving a security-based swap to a counterparty,
other than a security-based swap dealer, major security-based swap
participant, swap dealer, or major swap participant, must:
    (i) Undertake reasonable diligence to understand the potential
risks and rewards associated with the recommended security-based swap
or trading strategy involving a security-based swap; and
    (ii) Have a reasonable basis to believe that a recommended
security-based swap or trading strategy involving a security-based swap
is suitable for the counterparty. To establish a reasonable basis for a
recommendation, a security-based swap dealer must have or obtain
relevant information regarding the counterparty, including the
counterparty's investment profile, trading objectives, and its ability
to absorb potential losses associated with the recommended security-
based swap or trading strategy involving a security-based swap.
    (2) A security-based swap dealer may also fulfill its obligations
under paragraph (f)(1)(ii) of this section with respect to an
institutional counterparty, if:
    (i) The security-based swap dealer reasonably determines that the
counterparty, or an agent to which the counterparty has delegated
decision-making authority, is capable of independently evaluating
investment risks with regard to the relevant security-based swap or
trading strategy involving a security-based swap;
    (ii) The counterparty or its agent affirmatively represents in
writing that it is exercising independent judgment in evaluating the
recommendations of the security-based swap dealer with regard to the
relevant security-based swap or trading strategy involving a security-
based swap; and
    (iii) The security-based swap dealer discloses that it is acting in
its capacity as a counterparty, and is not undertaking to assess the
suitability of the security-based swap or trading strategy for the
counterparty.
    (3) A security-based swap dealer will be deemed to have satisfied
its obligations under paragraph (f)(2)(i) of this section if it
receives written representations, as provided in Sec.  240.15Fh-1(b),
that:
    (i) In the case of a counterparty that is not a special entity, the
counterparty has complied in good faith with written policies and
procedures that are reasonably designed to ensure that the persons
responsible for evaluating the recommendation and making trading
decisions on behalf of the counterparty are capable of doing so; or
    (ii) In the case of a counterparty that is a special entity,
satisfy the terms of the safe harbor in Sec.  240.15Fh-5(b).
    (4) For purposes of paragraph (f)(2) of this section, an
institutional counterparty is a counterparty that is an eligible
contract participant as defined in clauses (A)(i), (ii), (iii), (iv),
(viii), (ix) or (x), or clause (B)(ii) (other than a person described
in clause (A)(v)) of section 1a(18) of the Commodity Exchange Act (7
U.S.C. 1(a)(18)) and the rules and regulations thereunder, or any
person (whether a natural person, corporation, partnership, trust or
otherwise) with total assets of at least $50 million.
    (g) Fair and balanced communications. A security-based swap dealer
or major security-based swap participant shall communicate with
counterparties in a fair and balanced manner based on principles of
fair dealing and good faith. In particular:
    (1) Communications must provide a sound basis for evaluating the
facts with regard to any particular security-based swap or trading
strategy involving a security-based swap;
    (2) Communications may not imply that past performance will recur
or make any exaggerated or unwarranted claim, opinion or forecast; and
    (3) Any statement referring to the potential opportunities or
advantages presented by a security-based swap shall be balanced by an
equally detailed statement of the corresponding risks.
    (h) Supervision--(1) In general. A security-based swap dealer or
major security-based swap participant shall establish and maintain a
system to supervise, and shall diligently supervise, its business and
the activities of its associated persons. Such a system shall be
reasonably designed to prevent violations of the provisions of
applicable federal securities laws and the rules and regulations
thereunder relating to its business as a security-based swap dealer or
major security-based swap participant, respectively.
    (2) Minimum requirements. The system required by paragraph (h)(1)
of this section shall, at a minimum, provide for:
    (i) The designation of at least one person with authority to carry
out the supervisory responsibilities of the security-based swap dealer
or major security-based swap participant for each type of business in
which it engages for which registration as a security-based swap dealer
or major security-based swap participant is required;
    (ii) The use of reasonable efforts to determine that all
supervisors are qualified, either by virtue of experience or training,
to carry out their assigned responsibilities; and
    (iii) Establishment, maintenance and enforcement of written
policies and procedures addressing the supervision of the types of
security-based swap business in which the security-based swap dealer or
major security-based swap participant is engaged and the activities of
its associated persons that are reasonably designed to prevent
violations of applicable federal securities laws and the rules and
regulations thereunder, and that include, at a minimum:
    (A) Procedures for the review by a supervisor of transactions for
which registration as a security-based swap dealer or major security-
based swap participant is required;

    (B) Procedures for the review by a supervisor of incoming and
outgoing written (including electronic) correspondence with
counterparties or potential counterparties and internal written
communications relating to the security-based swap dealer's or major
security-based swap participant's business involving security-based
swaps;
    (C) Procedures for a periodic review, at least annually, of the
security-based swap business in which the security-based swap dealer or
major security-based swap participant engages that is reasonably
designed to assist in detecting and preventing violations of applicable
federal securities laws and the rules and regulations thereunder;
    (D) Procedures to conduct a reasonable investigation regarding the
good character, business repute, qualifications, and experience of any
person prior to that person's association with the security-based swap
dealer or major security-based swap participant;
    (E) Procedures to consider whether to permit an associated person
to establish or maintain a securities or commodities account or a
trading relationship in the name of, or for the benefit of such
associated person, at another security-based swap dealer, broker,
dealer, investment adviser, or other financial institution; and if
permitted, procedures to supervise the trading at the other security-
based swap dealer, broker, dealer, investment adviser, or financial
institution;
    (F) A description of the supervisory system, including the titles,
qualifications and locations of supervisory persons and the
responsibilities of each supervisory person with respect to the types
of business in which the security-based swap dealer or major security-
based swap participant is engaged;
    (G) Procedures prohibiting an associated person who performs a
supervisory function from supervising his or her own activities or
reporting to, or having his or her compensation or continued employment
determined by, a person or persons he or she is supervising; provided,
however, that if the security-based swap dealer or major security-based
swap participant determines, with respect to any of its supervisory
personnel, that compliance with this requirement is not possible
because of the firm's size or a supervisory person's position within
the firm, the security-based swap dealer or major security-based swap
participant must document the factors used to reach such determination
and how the supervisory arrangement with respect to such supervisory
personnel otherwise complies with paragraph (h)(1) of this section, and
include a summary of such determination in the annual compliance report
prepared by the security-based swap dealer's or major security-based
swap participant's chief compliance officer pursuant to Sec.  240.15Fk-
1(c);
    (H) Procedures reasonably designed to prevent the supervisory
system required by paragraph (h)(1) of this section from being
compromised due to the conflicts of interest that may be present with
respect to the associated person being supervised, including the
position of such person, the revenue such person generates for the
security-based swap dealer or major security-based swap participant, or
any compensation that the associated person conducting the supervision
may derive from the associated person being supervised; and
    (I) Procedures reasonably designed, taking into consideration the
nature of such security-based swap dealer's or major security-based
swap participant's business, to comply with the duties set forth in
section 15F(j) of the Act.
    (3) Failure to supervise. A security-based swap dealer or major
security-based swap participant or an associated person of a security-
based swap dealer or major security-based swap participant shall not be
deemed to have failed to diligently supervise any other person, if such
other person is not subject to his or her supervision, or if:
    (i) The security-based swap dealer or major security-based swap
participant has established and maintained written policies and
procedures as required in Sec.  240.15Fh-3(h)(2)(iii), and a documented
system for applying those policies and procedures, that would
reasonably be expected to prevent and detect, insofar as practicable,
any violation of the federal securities laws and the rules and
regulations thereunder relating to security-based swaps; and
    (ii) The security-based swap dealer or major security-based swap
participant, or associated person of the security-based swap dealer or
major security-based swap participant, has reasonably discharged the
duties and obligations required by such written policies and procedures
and documented system and did not have a reasonable basis to believe
that such written policies and procedures and documented system were
not being followed.
    (4) Maintenance of written supervisory procedures. A security-based
swap dealer or major security-based swap participant shall:
    (i) Promptly amend its written supervisory procedures as
appropriate when material changes occur in applicable securities laws
or rules or regulations thereunder, and when material changes occur in
its business or supervisory system; and
    (ii) Promptly communicate any material amendments to its
supervisory procedures to all associated persons to whom such
amendments are relevant based on their activities and responsibilities.

Sec.  240.15Fh-4  Antifraud provisions for security-based swap dealers
and major security-based swap participants; special requirements for
security-based swap dealers acting as advisors to special entities.

    (a) Antifraud provisions. It shall be unlawful for a security-based
swap dealer or major security-based swap participant:
    (1) To employ any device, scheme, or artifice to defraud any
special entity or prospective customer who is a special entity;
    (2) To engage in any transaction, practice, or course of business
that operates as a fraud or deceit on any special entity or prospective
customer who is a special entity; or
    (3) To engage in any act, practice, or course of business that is
fraudulent, deceptive, or manipulative.
    (b) Special requirements for security-based swap dealers acting as
advisors to special entities. A security-based swap dealer that acts as
an advisor to a special entity regarding a security-based swap shall
comply with the following requirements:
    (1) Duty. The security-based swap dealer shall have a duty to make
a reasonable determination that any security-based swap or trading
strategy involving a security-based swap recommended by the security-
based swap dealer is in the best interests of the special entity.
    (2) Reasonable efforts. The security-based swap dealer shall make
reasonable efforts to obtain such information that the security-based
swap dealer considers necessary to make a reasonable determination that
a security-based swap or trading strategy involving a security-based
swap is in the best interests of the special entity. This information
shall include, but not be limited to:
    (i) The authority of the special entity to enter into a security-
based swap;
    (ii) The financial status of the special entity, as well as future
funding needs;
    (iii) The tax status of the special entity;
    (iv) The hedging, investment, financing or other objectives of the
special entity;
    (v) The experience of the special entity with respect to entering
into

security-based swaps, generally, and security-based swaps of the type
and complexity being recommended;
    (vi) Whether the special entity has the financial capability to
withstand changes in market conditions during the term of the security-
based swap; and
    (vii) Such other information as is relevant to the particular facts
and circumstances of the special entity, market conditions and the type
of security-based swap or trading strategy involving a security-based
swap being recommended.
    (3) Exception. The requirements of this paragraph (b) shall not
apply with respect to a security-based swap if:
    (i) The transaction is executed on a registered or exempt security-
based swap execution facility or registered national securities
exchange; and
    (ii) The security-based swap dealer does not know the identity of
the counterparty at a reasonably sufficient time prior to execution of
the transaction to permit the security-based swap dealer to comply with
the obligations of paragraph (b) of this section.

Sec.  240.15Fh-5  Special requirements for security-based swap dealers
and major security-based swap participants acting as counterparties to
special entities.

    (a)(1) A security-based swap dealer or major security-based swap
participant that offers to enter into or enters into a security-based
swap with a special entity, other than a special entity defined in
Sec.  240.15Fh-2(d)(3), must have a reasonable basis to believe that
the special entity has a qualified independent representative. For
these purposes, a qualified independent representative is a
representative that:
    (i) Has sufficient knowledge to evaluate the transaction and risks;
    (ii) Is not subject to a statutory disqualification;
    (iii) Undertakes a duty to act in the best interests of the special
entity;
    (iv) Makes appropriate and timely disclosures to the special entity
of material information concerning the security-based swap;
    (v) Evaluates, consistent with any guidelines provided by the
special entity, the fair pricing and the appropriateness of the
security-based swap;
    (vi) In the case of a special entity defined in Sec. Sec.
240.15Fh-2(d)(2) or (5), is a person that is subject to rules of the
Commission, the Commodity Futures Trading Commission or a self-
regulatory organization subject to the jurisdiction of the Commission
or the Commodity Futures Trading Commission prohibiting it from
engaging in specified activities if certain political contributions
have been made, provided that this paragraph (a)(1)(vi) shall not apply
if the independent representative is an employee of the special entity;
and
    (vii) Is independent of the security-based swap dealer or major
security-based swap participant.
    (A) A representative of a special entity is independent of a
security-based swap dealer or major security-based swap participant if
the representative does not have a relationship with the security-based
swap dealer or major security-based swap participant, whether
compensatory or otherwise, that reasonably could affect the independent
judgment or decision-making of the representative.
    (B) A representative of a special entity will be deemed to be
independent of a security-based swap dealer or major security-based
swap participant if:
    (1) The representative is not and, within one year of representing
the special entity in connection with the security-based swap, was not
an associated person of the security-based swap dealer or major
security-based swap participant;
    (2) The representative provides timely disclosures to the special
entity of all material conflicts of interest that could reasonably
affect the judgment or decision making of the representative with
respect to its obligations to the special entity and complies with
policies and procedures reasonably designed to manage and mitigate such
material conflicts of interest; and
    (3) The security-based swap dealer or major security-based swap
participant did not refer, recommend, or introduce the representative
to the special entity within one year of the representative's
representation of the special entity in connection with the security-
based swap.
    (2) A security-based swap dealer or major security-based swap
participant that offers to enter into or enters into a security-based
swap with a special entity as defined in Sec.  240.15Fh-2(d)(3) must
have a reasonable basis to believe that the special entity has a
representative that is a fiduciary as defined in section 3 of the
Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002).
    (b) Safe harbor. (1) A security-based swap dealer or major
security-based swap participant shall be deemed to have a reasonable
basis to believe that the special entity, other than a special entity
defined in Sec.  240.15Fh-2(d)(3), has a representative that satisfies
the applicable requirements of paragraph (a)(1) of this section,
provided that:
    (i) The special entity represents in writing to the security-based
swap dealer or major security-based swap participant that it has
complied in good faith with written policies and procedures reasonably
designed to ensure that it has selected a representative that satisfies
the applicable requirements of paragraph (a)(1) of this section, and
that such policies and procedures provide for ongoing monitoring of the
performance of such representative consistent with the requirements of
paragraph (a)(1) of this section; and
    (ii) The representative represents in writing to the special entity
and security-based swap dealer or major security-based swap participant
that the representative:
    (A) Has policies and procedures reasonably designed to ensure that
it satisfies the applicable requirements of paragraph (a)(1) of this
section;
    (B) Meets the independence test in paragraph (a)(1)(vii) of this
section; has the knowledge required under paragraph (a)(1)(i) of this
section; is not subject to a statutory disqualification under paragraph
(a)(1)(ii) of this section; undertakes a duty to act in the best
interests of the special entity as required under paragraph (a)(1)(iii)
of this section; and is subject to the requirements regarding political
contributions, as applicable, under paragraph (a)(1)(vi) of this
section; and
    (C) Is legally obligated to comply with the applicable requirements
of paragraph (a)(1) of this section by agreement, condition of
employment, law, rule, regulation, or other enforceable duty.
    (2) A security-based swap dealer or major security-based swap
participant shall be deemed to have a reasonable basis to believe that
a special entity defined in Sec.  240.15Fh-2(d)(3) of this section has
a representative that satisfies the applicable requirements in
paragraph (a)(2) of this section, provided that the special entity
provides in writing to the security-based swap dealer or major
security-based swap participant the representative's name and contact
information, and represents in writing that the representative is a
fiduciary as defined in section 3 of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1002).
    (c) Before initiation of a security-based swap with a special
entity, a security-based swap dealer shall disclose to the special
entity in writing the capacity in which the security-based swap dealer
is acting in connection with the security-based swap and, if the
security-based swap dealer engages in business with the counterparty in
more

than one capacity, the security-based swap dealer shall disclose the
material differences between such capacities and any other financial
transaction or service involving the counterparty.
    (d) The requirements of this section shall not apply with respect
to a security-based swap if:
    (1) The transaction is executed on a registered or exempt security-
based swap execution facility or registered national securities
exchange; and
    (2) The security-based swap dealer or major security-based swap
participant does not know the identity of the counterparty at a
reasonably sufficient time prior to execution of the transaction to
permit the security-based swap dealer or major security-based swap
participant to comply with the obligations of paragraphs (a) through
(c) of this section.

Sec.  240.15Fh-6  Political contributions by certain security-based
swap dealers.

    (a) Definitions. For the purposes of this section:
    (1) The term contribution means any gift, subscription, loan,
advance, or deposit of money or anything of value made:
    (i) For the purpose of influencing any election for federal, state
or local office;
    (ii) For payment of debt incurred in connection with any such
election; or
    (iii) For transition or inaugural expenses incurred by the
successful candidate for state or local office.
    (2) The term covered associate means:
    (i) Any general partner, managing member or executive officer, or
other person with a similar status or function;
    (ii) Any employee who solicits a municipal entity to enter into a
security-based swap with the security-based swap dealer and any person
who supervises, directly or indirectly, such employee; and
    (iii) A political action committee controlled by the security-based
swap dealer or by a person described in paragraphs (a)(2)(i) and (ii)
of this section.
    (3) The term executive officer of a security-based swap dealer
means:
    (i) The president;
    (ii) Any vice president in charge of a principal business unit,
division or function (such as sales, administration or finance);
    (iii) Any other officer of the security-based swap dealer who
performs a policy-making function; or
    (iv) Any other person who performs similar policy-making functions
for the security-based swap dealer.
    (4) The term municipal entity is defined in section 15B(e)(8) of
the Act.
    (5) The term official of a municipal entity means any person
(including any election committee for such person) who was, at the time
of the contribution, an incumbent, candidate or successful candidate
for elective office of a municipal entity, if the office:
    (i) Is directly or indirectly responsible for, or can influence the
outcome of, the selection of a security-based swap dealer by a
municipal entity; or
    (ii) Has authority to appoint any person who is directly or
indirectly responsible for, or can influence the outcome of, the
selection of a security-based swap dealer by a municipal entity.
    (6) The term payment means any gift, subscription, loan, advance,
or deposit of money or anything of value.
    (7) The term regulated person means:
    (i) A person that is subject to rules of the Commission, the
Commodity Futures Trading Commission or a self-regulatory organization
subject to the jurisdiction of the Commission or the Commodity Futures
Trading Commission prohibiting it from engaging in specified activities
if certain political contributions have been made, or its officers or
employees;
    (ii) A general partner, managing member or executive officer of
such person, or other individual with a similar status or function; or
    (iii) An employee of such person who solicits a municipal entity
for the security-based swap dealer and any person who supervises,
directly or indirectly, such employee.
    (8) The term solicit means a direct or indirect communication by
any person with a municipal entity for the purpose of obtaining or
retaining an engagement related to a security-based swap.
    (b) Prohibitions and exceptions. (1) It shall be unlawful for a
security-based swap dealer to offer to enter into, or enter into, a
security-based swap, or a trading strategy involving a security-based
swap, with a municipal entity within two years after any contribution
to an official of such municipal entity was made by the security-based
swap dealer, or by any covered associate of the security-based swap
dealer.
    (2) The prohibition in paragraph (b)(1) of this section does not
apply:
    (i) If the only contributions made by the security-based swap
dealer to an official of such municipal entity were made by a covered
associate, if a natural person:
    (A) To officials for whom the covered associate was entitled to
vote at the time of the contributions, if the contributions in the
aggregate do not exceed $350 to any one official per election; or
    (B) To officials for whom the covered associate was not entitled to
vote at the time of the contributions, if the contributions in the
aggregate do not exceed $150 to any one official, per election;
    (ii) To a security-based swap dealer as a result of a contribution
made by a natural person more than six months prior to becoming a
covered associate of the security-based swap dealer, however, this
exclusion shall not apply if the natural person, after becoming a
covered associate, solicits the municipal entity on behalf of the
security-based swap dealer to offer to enter into, or to enter into,
security-based swap, or a trading strategy involving a security-based
swap; or
    (iii) With respect to a security-based swap that is executed on a
registered national securities exchange or registered or exempt
security-based swap execution facility where the security-based swap
dealer does not know the identity of the counterparty to the
transaction at a reasonably sufficient time prior to execution of the
transaction to permit the security-based swap dealer to comply with the
obligations of paragraph (b)(1) of this section.
    (3) No security-based swap dealer or any covered associate of the
security-based swap dealer shall:
    (i) Provide or agree to provide, directly or indirectly, payment to
any person to solicit a municipal entity to offer to enter into, or to
enter into, a security-based swap or any trading strategy involving a
security-based swap with that security-based swap dealer unless such
person is a regulated person; or
    (ii) Coordinate, or solicit any person or political action
committee to make, any:
    (A) Contribution to an official of a municipal entity with which
the security-based swap dealer is offering to enter into, or has
entered into, a security-based swap or a trading strategy involving a
security-based swap; or
    (B) Payment to a political party of a state or locality with which
the security-based swap dealer is offering to enter into, or has
entered into, a security-based swap or a trading strategy involving a
security-based swap.
    (c) Circumvention of rule. No security-based swap dealer shall,
directly or indirectly, through or by any other person or means, do any
act that would result in a violation of paragraph (a) or (b) of this
section.
    (d) Requests for exemption. The Commission, upon application, may
conditionally or unconditionally exempt a security-based swap dealer
from the prohibition under paragraph (b)(1) of this section. In
determining whether to grant an exemption, the

Commission will consider, among other factors:
    (1) Whether the exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes of the Act;
    (2) Whether the security-based swap dealer:
    (i) Before the contribution resulting in the prohibition was made,
adopted and implemented policies and procedures reasonably designed to
prevent violations of this section;
    (ii) Prior to or at the time the contribution which resulted in
such prohibition was made, had no actual knowledge of the contribution;
and
    (iii) After learning of the contribution:
    (A) Has taken all available steps to cause the contributor involved
in making the contribution which resulted in such prohibition to obtain
a return of the contribution; and
    (B) Has taken such other remedial or preventive measures as may be
appropriate under the circumstances;
    (3) Whether, at the time of the contribution, the contributor was a
covered associate or otherwise an employee of the security-based swap
dealer, or was seeking such employment;
    (4) The timing and amount of the contribution which resulted in the
prohibition;
    (5) The nature of the election (e.g., federal, state or local); and
    (6) The contributor's apparent intent or motive in making the
contribution that resulted in the prohibition, as evidenced by the
facts and circumstances surrounding the contribution.
    (e) Prohibitions inapplicable. (1) The prohibitions under paragraph
(b) of this section shall not apply to a contribution made by a covered
associate of the security-based swap dealer if:
    (i) The security-based swap dealer discovered the contribution
within 120 calendar days of the date of such contribution;
    (ii) The contribution did not exceed $350; and
    (iii) The covered associate obtained a return of the contribution
within 60 calendar days of the date of discovery of the contribution by
the security-based swap dealer.
    (2) A security-based swap dealer that has more than 50 covered
associates may not rely on paragraph (e)(1) of this section more than
three times in any 12-month period, while a security-based swap dealer
that has 50 or fewer covered associates may not rely on paragraph
(e)(1) of this section more than twice in any 12-month period.
    (3) A security-based swap dealer may not rely on paragraph (e)(1)
of this section more than once for any covered associate, regardless of
the time between contributions.

Sec.  240.15Fk-1  Designation of chief compliance officer for security-
based swap dealers and major security-based swap participants.

    (a) In general. A security-based swap dealer and major security-
based swap participant shall designate an individual to serve as a
chief compliance officer on its registration form.
    (b) Duties. The chief compliance officer shall:
    (1) Report directly to the board of directors or to the senior
officer of the security-based swap dealer or major security-based swap
participant; and
    (2) Take reasonable steps to ensure that the registrant
establishes, maintains and reviews written policies and procedures
reasonably designed to achieve compliance with the Act and the rules
and regulations thereunder relating to its business as a security-based
swap dealer or major security-based swap participant by:
    (i) Reviewing the compliance of the security-based swap dealer or
major security-based swap participant with respect to the security-
based swap dealer and major security-based swap participant
requirements described in section 15F of the Act, and the rules and
regulations thereunder, where the review shall involve preparing the
registrant's annual assessment of its written policies and procedures
reasonably designed to achieve compliance with section 15F of the Act,
and the rules and regulations thereunder, by the security-based swap
dealer or major security-based swap participant;
    (ii) Taking reasonable steps to ensure that the registrant
establishes, maintains and reviews policies and procedures reasonably
designed to remediate non-compliance issues identified by the chief
compliance officer through any means, including any:
    (A) Compliance office review;
    (B) Look-back;
    (C) Internal or external audit finding;
    (D) Self-reporting to the Commission and other appropriate
authorities; or
    (E) Complaint that can be validated; and
    (iii) Taking reasonable steps to ensure that the registrant
establishes and follows procedures reasonably designed for the
handling, management response, remediation, retesting, and resolution
of non-compliance issues;
    (3) In consultation with the board of directors or the senior
officer of the security-based swap dealer or major security-based swap
participant, take reasonable steps to resolve any material conflicts of
interest that may arise; and
    (4) Administer each policy and procedure that is required to be
established pursuant to section 15F of the Act and the rules and
regulations thereunder.
    (c) Annual reports--(1) In general. The chief compliance officer
shall annually prepare and sign a compliance report that contains a
description of the written policies and procedures of the security-
based swap dealer or major security-based swap participant described in
paragraph (b) of this section (including the code of ethics and
conflict of interest policies).
    (2) Requirements. (i) Each compliance report shall also contain, at
a minimum, a description of:
    (A) The security-based swap dealer or major security-based swap
participant's assessment of the effectiveness of its policies and
procedures relating to its business as a security-based swap dealer or
major security-based participant;
    (B) Any material changes to the registrant's policies and
procedures since the date of the preceding compliance report;
    (C) Any areas for improvement, and recommended potential or
prospective changes or improvements to its compliance program and
resources devoted to compliance;
    (D) Any material non-compliance matters identified; and
    (E) The financial, managerial, operational, and staffing resources
set aside for compliance with the Act and the rules and regulations
thereunder relating to its business as a security-based swap dealer or
major security-based swap participant, including any material
deficiencies in such resources.
    (ii) A compliance report under paragraph (c)(1) of this section
also shall:
    (A) Be submitted to the Commission within 30 days following the
deadline for filing the security-based swap dealer's or major security-
based swap participant's annual financial report with the Commission
pursuant to section 15F of the Act and rules and regulations
thereunder;
    (B) Be submitted to the board of directors and audit committee (or
equivalent bodies) and the senior officer of the security-based swap
dealer or major security-based swap participant prior to submission to
the Commission;
    (C) Be discussed in one or more meetings conducted by the senior
officer with the chief compliance officer(s) in the preceding 12
months, the subject of

which addresses the obligations in this section; and
    (D) Include a certification by the chief compliance officer or
senior officer that, to the best of his or her knowledge and reasonable
belief and under penalty of law, the information contained in the
compliance report is accurate and complete in all material respects.
    (iii) Extensions of time. A security-based swap dealer or major
security-based swap participant may request from the Commission an
extension of time to submit its compliance report, provided the
registrant's failure to timely submit the report could not be
eliminated by the registrant without unreasonable effort or expense.
Extensions of the deadline will be granted at the discretion of the
Commission.
    (iv) Incorporation by reference. A security-based swap dealer or
major security-based swap participant may incorporate by reference
sections of a compliance report that have been submitted within the
current or immediately preceding reporting period to the Commission.
    (v) Amendments. A security-based swap dealer or major security-
based swap participant shall promptly submit an amended compliance
report if material errors or omissions in the report are identified. An
amendment must contain the certification required under paragraph
(c)(2)(ii)(D) of this section.
    (d) Compensation and removal. The compensation and removal of the
chief compliance officer shall require the approval of a majority of
the board of directors of the security-based swap dealer or major
security-based swap participant.
    (e) Definitions. For purposes of this section, references to:
    (1) The board or board of directors shall include a body performing
a function similar to the board of directors.
    (2) The senior officer shall include the chief executive officer or
other equivalent officer.
    (3) Complaint that can be validated shall include any written
complaint by a counterparty involving the security-based swap dealer or
major security-based swap participant or associated person of a
security-based swap dealer or major security-based swap participant
that can be supported upon reasonable investigation.
    (4) A material non-compliance matter means any non-compliance
matter about which the board of directors of the security-based swap
dealer or major security-based swap participant would reasonably need
to know to oversee the compliance of the security-based swap dealer or
major security-based swap participant, and that involves, without
limitation:
    (i) A violation of the federal securities laws relating to its
business as a security-based swap dealer or major security-based swap
participant by the firm or its officers, directors, employees or
agents;
    (ii) A violation of the policies and procedures relating to its
business as a security-based swap dealer or major security-based swap
participant by the firm or its officers, directors, employees or
agents; or
    (iii) A weakness in the design or implementation of the policies
and procedures relating to its business as a security-based swap dealer
or major security-based swap participant.

    By the Commission.

     Dated: April 14, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016-10918 Filed 5-12-16; 8:45 am]
 BILLING CODE 8011-01-P