[Federal Register Volume 84, Number 33 (Tuesday, February 19, 2019)]
[Rules and Regulations]
[Pages 4906-4947]
[FR Doc No: 2019-02347]

Vol. 84

Tuesday,

No. 33

February 19, 2019

Part II

Securities and Exchange Commission

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17 CFR Parts 201 and 240

Applications by Security-Based Swap Dealers or Major Security-Based
Swap Participants for Statutorily Disqualified Associated Persons To
Effect or Be Involved in Effecting Security-Based Swaps; Final Rule

Federal Register / Vol. 84 , No. 33 / Tuesday, February 19, 2019 /
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 201 and 240

[Release No. 34-84858; File No. S7-14-15]
RIN 3235-AL76

Applications by Security-Based Swap Dealers or Major Security-
Based Swap Participants for Statutorily Disqualified Associated Persons
To Effect or Be Involved in Effecting Security-Based Swaps

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: Pursuant to Section 15F(b)(6) of the Securities Exchange Act
of 1934 (``Exchange Act''), as added by Section 764(a) of Title VII of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-
Frank Act''), the Securities and Exchange Commission (``Commission'')
is adopting Rule of Practice 194. Rule of Practice 194 provides a
process for a registered security-based swap dealer or major security-
based swap participant (collectively, ``SBS Entity'') to make an
application to the Commission for an order permitting an associated
person that is a natural person who is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity. Rule of Practice 194 also provides
an exclusion for an SBS Entity from the prohibition in Exchange Act
Section 15F(b)(6) with respect to associated persons that are not
natural persons. Finally, Rule of Practice 194 provides that, subject
to certain conditions, an SBS Entity may permit an associated person
that is a natural person who is subject to a statutory disqualification
to effect or be involved in effecting security-based swaps on its
behalf, without making an application pursuant to the rule, where the
Commission, the Commodity Futures Trading Commission (``CFTC''), a
self-regulatory organization (``SRO''), or a registered futures
association has granted a prior application or otherwise granted relief
from the statutory disqualification with respect to that associated
person.

DATES: Effective April 22, 2019.

FOR FURTHER INFORMATION CONTACT: Natasha Vij Greiner, Assistant Chief
Counsel, Devin Ryan, Senior Special Counsel, and Edward Schellhorn,
Special Counsel at<PHONE_NUMBER>, Division of Trading and Markets,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Summary of Final Rule of Practice 194
III. Discussion
    A. Rule of Practice 194(a)--Scope of the Rule
    B. Rule of Practice 194(b)--Required Showing
    C. Rule of Practice 194(c)--Exclusion for Other Persons
    D. Rule of Practice 194(d)--Form of Application
    E. Rule of Practice 194(e)--Written Statement
    F. Rule of Practice 194(f)--Prior Applications or Processes
    G. Rule of Practice 194(g)--Notification to Applicant and
Written Statement
    H. Rule of Practice 194(h)--Notice in Lieu of an Application
    I. Note to Rule of Practice 194
    J. Confidentiality of Materials
    K. Deleting Rule 15Fb6-1 and Schedule C to Forms SBSE, SBSE-A
and SBSE-BD
    L. Compliance Date
IV. Paperwork Reduction Act
    A. Summary of Collection of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total Burden Estimates Relating to Rule of Practice 194
    E. Confidentiality
V. Economic Analysis
    A. Broad Economic Considerations
    B. Economic Baseline
    1. Security-Based Swap Market Activity and Participants
    2. Natural Persons and Entity Persons Associated With SBS
Entities
    3. Other Markets and Existing Regulatory Frameworks
    4. Data on Parallel Review Processes and Statutory
Disqualification
    5. Requests for Relief From Statutory Disqualification Under
Rule of Practice 194
    C. Benefits, Costs, and Effects on Efficiency, Competition, and
Capital Formation
    1. Costs and Benefits of Rule of Practice 194
    2. Effects on Efficiency, Competition, and Capital Formation
    D. Rule Alternatives
    1. Temporary Exclusions
    2. Relief for Non-Investment-Related Offenses
    3. No Relief for CFTC, SRO, or Registered Futures Association
Review
    4. No Relief for Associated Person Entities From Exchange Act
Section 15F(b)(6)
    5. Form of Applications To Be Submitted: Time Period
    6. Public Availability of Applications and Supporting Materials
VI. Regulatory Flexibility Act Certification
    A. Regulatory Framework
    B. Assessment of Impact
    C. Certification
VII. Statutory Authority
Text of the Rule

I. Background

    Exchange Act Section 15F(b)(6), as added by Section 764(a) of the
Dodd-Frank Act, makes it unlawful for an SBS Entity to permit an
associated person \1\ who is subject to a statutory disqualification
\2\ to effect or be involved in effecting security-based swaps on
behalf of the SBS Entity if the SBS Entity knew, or in the exercise of
reasonable care should have known, of the statutory disqualification,
``[e]xcept to the extent otherwise specifically provided by rule,
regulation, or order of the Commission.'' \3\ In this regard, Exchange
Act Section 15F(b)(6) gives the Commission the discretion to determine,
by order, that a statutorily disqualified associated person may effect
or be involved in effecting security-based swaps on behalf of an SBS
Entity, and/or to establish rules concerning the statutory prohibition
in Exchange Act Section 15F(b)(6). \4\
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    \1\ Exchange Act Section 3(a)(70) generally defines the term
``person associated with'' an SBS Entity to include (i) any partner,
officer, director, or branch manager of an SBS Entity (or any person
occupying a similar status or performing similar functions); (ii)
any person directly or indirectly controlling, controlled by, or
under common control with an SBS Entity; or (iii) any employee of an
SBS Entity. See 15 U.S.C. 78c(a)(70). The definition generally
excludes persons whose functions are solely clerical or ministerial.
Id. The definition of ``person'' under Exchange Act Section 3(a)(9)
is not limited to natural persons, but extends to both entities and
natural persons. See 15 U.S.C. 78c(a)(9) (``The term `person' means
a natural person, company, government, or political subdivision,
agent, or instrumentality of a government.'').
    \2\ The term statutory disqualification as used in Exchange Act
Section 15F(b)(6) parallels the definition of statutory
disqualification in Exchange Act Section 3(a)(39)(A) through (F), 15
U.S.C. 78c(a)(39)(A) through (F). See Applications by Security-Based
Swap Dealers or Major Security-Based Swap Participants for
Statutorily Disqualified Associated Persons To Effect or Be Involved
in Effecting Security-Based Swaps, Exchange Act Release No. 75612
(Aug. 5, 2015), 80 FR 51684, 51686, n.16 (Aug. 25, 2015)
(``Proposing Release'' or ``proposal'').
    \3\ Exchange Act Section 15F(b)(6) provides: ``Except to the
extent otherwise specifically provided by rule, regulation, or order
of the Commission, it shall be unlawful for a security-based swap
dealer or a major security-based swap participant to permit any
person associated with a security-based swap dealer or a major
security-based swap participant who is subject to a statutory
disqualification to effect or be involved in effecting security-
based swaps on behalf of the security-based swap dealer or major
security-based swap participant, if the security-based swap dealer
or major security-based swap participant knew, or in the exercise of
reasonable care should have known, of the statutory
disqualification.'' 15 U.S.C. 78o-10(b)(6). The statutory
prohibition in Exchange Act Section 15F(b)(6), 15 U.S.C. 78o-
10(b)(6), is parallel to a statutory provision for a swap dealer or
major swap participant (collectively ``Swap Entities'') set forth in
Section 4s(b)(6) of the Commodity Exchange Act (``CEA''), 7 U.S.C.
6s(b)(6).
    \4\ On June 15, 2011, the Commission issued an order that, among
other things, granted temporary relief from compliance with Exchange
Act Section 15F(b)(6) for persons subject to a statutory
disqualification who were, as of July 16, 2011, associated with an
SBS Entity and who effected or were involved in effecting security-
based swaps on behalf of such SBS Entity and allowed such persons to
continue to be associated with an SBS Entity until the date upon
which rules adopted by the Commission to register SBS Entities
became effective. See Temporary Exemptions and Other Temporary
Relief, Together With Information on Compliance Dates for New
Provisions of the Securities Exchange Act of 1934 Applicable to
Security-Based Swaps, Exchange Act Release No. 64678 (June 15,
2011), 76 FR 36287, 36301, 36305-07 (June 22, 2011) (``June 2011
Temporary Exemptions Order''). See also Order Extending Certain
Temporary Exemptions and a Temporary and Limited Exception Related
to Security-Based Swaps, Exchange Act Release No. 75919 (Sept. 15,
2015), 80 FR 56519 (Sept. 18, 2015) (extending the June 2011
Temporary Exemptions Order).

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    On August 5, 2015,\5\ the Commission proposed Rule of Practice 194
to establish a process by which an SBS Entity could apply to the
Commission to permit an associated person who is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity.\6\ As discussed in the Commission's
proposal,\7\ the federal securities laws provide various procedural
avenues that allow certain registered entities to associate, where
warranted, with persons subject to a statutory disqualification or
other bar, including the Commission's Rule of Practice 193 \8\ and the
Financial Industry Regulatory Authority's (``FINRA'') eligibility
proceedings (under the process set forth in Exchange Act Rule 19h-
1).\9\ The Commission modeled proposed Rule of Practice 194 on these
existing processes where persons can make an application to reenter the
industry despite previously being barred by the Commission or subject
to a statutory disqualification with respect to membership or
participation in, or association with a member of, an SRO.\10\
Accordingly, the Commission proposed to establish a procedural
framework that is similar to processes that are familiar to market
participants.\11\
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    \5\ Concurrent with the issuance of the Rule of Practice 194
proposal, the Commission adopted registration requirements for SBS
Entities, including certain rules relating to the statutory
prohibition in Exchange Act Section 15F(b)(6). See Registration
Process for Security-Based Swap Dealers and Major Security-Based
Swap Participants, Exchange Act Release No. 75611 (Aug. 5, 2015), 80
FR 48964 (Aug. 14, 2015) (``Registration Adopting Release''). See
also 17 CFR 240.15Fb6-1 (providing that an SBS Entity, when it files
an application to register with the Commission, may permit an
associated person that is not a natural person who is subject to a
statutory disqualification to effect or be involved in effecting
security-based swaps on the SBS Entity's behalf, provided that the
statutory disqualification(s) occurred prior to the compliance date
set forth in the Registration Adopting Release and that the SBS
Entity identifies each such associated person on its registration
form); 17 CFR 240.15Fb6-2 (requiring a Chief Compliance Officer of
an SBS Entity to certify that it has performed background checks on
all of its associated persons that are natural persons who effect or
are involved in effecting security-based swaps on its behalf, and
neither knows, nor in the exercise of reasonable care should have
known, that any of its associated persons that effect or are
involved in effecting security-based swaps on its behalf are subject
to a statutory disqualification, unless otherwise specifically
provided by rule, regulation, or order of the Commission). As
discussed in Section III.K below, the Commission is making a
technical amendment that deletes Rule 15Fb6-1 as well as Schedule C
to Forms SBSE, SBSE-A and SBSE-BD and also conforms the instructions
in those forms to take into account the associated person entity
exclusion that the Commission is adopting in final Rule of Practice
194(c).
    \6\ See Proposing Release, 80 FR 51684-722.
    \7\ See id. at 51687-89.
    \8\ 17 CFR 201.193. Rule of Practice 193 provides a process by
which individuals that are associated with entities that are not
regulated by an SRO (e.g., employees of an investment adviser, an
investment company, or a transfer agent) can seek to reenter the
securities industry despite previously being barred by the
Commission. See Registration of Security-Based Swap Dealers and
Major Security-Based Swap Participants, Exchange Act Release No.
65543 (Oct. 12, 2011), 76 FR 65784, 65797 (Oct. 24, 2011)
(``Registration Proposing Release''). See also Applications by
Barred Individuals for Consent to Associate With a Registered
Broker, Dealer, Municipal Securities Dealer, Investment Adviser or
Investment Company, Exchange Act Release No. 20783, Investment
Company Act Release No. 13839, Investment Advisers Act Release No.
903, 49 FR 12204 (Mar. 29, 1984).
    \9\ 17 CFR 240.19h-1. The FINRA Rule 9520 Series sets forth
procedures for a person to become or remain associated with a
member, notwithstanding the existence of a statutory
disqualification, and for a current member or person associated with
a member to obtain relief from the eligibility or qualification
requirements of the FINRA By-Laws and rules. A member (or new member
applicant) seeking to associate with a natural person subject to a
statutory disqualification must seek approval from FINRA by filing a
Form MC-400 application. See FINRA Form MC-400, Membership
Continuance Application, http://www.finra.org/web/groups/industry/@ip/<EMAIL_ADDRESS>Members (and new
member applicants) that are themselves subject to a disqualification
that wish to obtain relief from the eligibility requirements are
required to submit a Form MC-400A application. See FINRA Form MC-
400A, Membership Continuance Application: Member Firm
Disqualification Application, http://www.finra.org/web/groups/industry/@ip/<EMAIL_ADDRESS>Where
required, FINRA sends a notice or notification to the Commission of
its proposal to admit or continue the membership of a person or
association with a member notwithstanding statutory disqualification
in accordance with Exchange Act Rule 19h-1.
    \10\ ``Self-regulatory organization'' is defined in Section
3(a)(26) of the Exchange Act, 15 U.S.C. 78c(a)(26), as ``any
national securities exchange, registered securities association, or
registered clearing agency, or (solely for the purposes of sections
19(b), 19(c) and 23(b) of [the Exchange Act]) the Municipal
Securities Rulemaking Board established by section 15B of this
title.''
    \11\ In the proposal, the Commission also discussed, for
example, the CFTC's approach with respect to the statutory
prohibition for swap dealers or major swap participants
(collectively ``Swap Entity'') as set forth in CEA Section 4s(b)(6),
7 U.S.C. 6s(b)(6). See Proposing Release, 80 FR at 51688-89. The
CFTC, with respect to statutorily disqualified associated persons of
Swap Entities, limits the definition of associated persons of Swap
Entities to natural persons. See 17 CFR 1.3(aa). As a result, the
prohibition in CEA Section 4s(b)(6), 7 U.S.C. 6s(b)(6), applies to
natural persons (not entities) associated with a Swap Entity. For
further discussion on the CFTC's approach to Swap Entities, see
Section II.B.3 of the Proposing Release, 80 FR at 51688-89.
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    The Commission requested comment on all aspects of the proposal as
well as two alternative approaches,\12\ and received comments in
response.\13\
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    \12\ See Proposing Release, 80 FR at 51701-05.
    \13\ These comment letters are available at: https://www.sec.gov/comments/s7-14-15/s71415.shtml.
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II. Summary of Final Rule of Practice 194

    The Commission is adopting Rule of Practice 194 largely as
proposed, with certain modifications.\14\ As adopted, Rule of Practice
194 provides a process by which an SBS Entity may apply to the
Commission for an order permitting an associated person to effect or be
involved in effecting security-based swaps on behalf of the SBS Entity
where the associated person that is a natural person who is subject to
a statutory disqualification and is thereby otherwise prohibited from
effecting or being involved in effecting security-based swaps on behalf
of an SBS Entity under Exchange Act Section 15F(b)(6). Rule of Practice
194 also provides an exclusion for an SBS Entity from the prohibition
in Exchange Act Section 15F(b)(6) with respect to associated persons
that are not natural persons (defined herein as ``associated person
entities'').
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    \14\ If any of the provisions of these amendments, or the
application thereof to any person or circumstance, is held to be
invalid, such invalidity shall not affect other provisions or
application of such provisions to other persons or circumstances
that can be given effect without the invalid provision or
application.
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    In particular, as explained more fully in Section III below, the
Commission is adopting the following provisions in Rule of Practice
194:

     Paragraph (a) of Rule of Practice 194, which defines
the scope of the rule and provides a process for submitting
applications by an SBS Entity seeking an order of the Commission to
permit an associated person who is subject to a statutory
disqualification to effect or be involved in effecting security-
based swaps on behalf of the SBS Entity.
     Paragraph (b) of Rule of Practice 194, which specifies
the required showing for an application. For the Commission to issue
an order granting relief under Rule of Practice 194, an SBS Entity
is required to make a showing that it would be consistent with the
public interest to permit the associated person to effect or be
involved in effecting security-based swaps on behalf of the SBS
Entity, notwithstanding the statutory disqualification.

     Paragraph (c) of Rule of Practice 194, which
establishes an exclusion from the general prohibition in Exchange
Act Section 15F(b)(6) with respect to all associated person
entities.\15\
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    \15\ In conjunction with adopting in Rule of Practice 194(c),
the Commission is also making technical amendments to: (1) Delete
Exchange Act Rule 15Fb6-1; (2) remove Schedule C to Forms SBSE,
SBSE-A and SBSE-BD; and (3) remove all references to Schedule C in
the instructions in the above-mentioned forms. See Section III.K,
infra, for a further discussion of the technical amendments.
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     Paragraphs (d) and (e) of Rule of Practice 194, which
specify the form of the application with respect to an associated
person that is a natural person and the items to be addressed in the
written statement within the application.
     Paragraph (f) of Rule of Practice 194, which requires
an applicant to provide as part of any application any order, notice
or other applicable document reflecting the grant, denial or other
disposition (including any dispositions on appeal) of any prior
application concerning the associated person under Rule of Practice
194 and other similar processes.
     Paragraph (g) of Rule of Practice 194, which provides
for notice to the applicant in cases where the Commission staff
anticipates making an adverse recommendation to the Commission with
respect to an application made pursuant to this rule. In such cases,
the applicant will be provided with a written statement of the
reasons for the Commission staff's preliminary recommendation, and
the applicant will have 30 days to submit a written statement in
response.
     Paragraph (h) to Rule of Practice 194, which provides
that, where certain conditions are met, an SBS Entity does not need
to file an application under Rule of Practice 194 to permit a
statutorily disqualified associated person to effect or be involved
in effecting security-based swaps on behalf of the SBS Entity.
Specifically, paragraph (h) of Rule of Practice 194 allows an SBS
Entity, subject to certain conditions, to permit a statutorily
disqualified associated person to effect or be involved in effecting
security-based swaps on behalf of the SBS Entity without making an
application to the Commission, where the Commission, CFTC, an SRO
(e.g., FINRA) or a national securities exchange), or a registered
futures association (e.g., the National Futures Association
(``NFA'')) has granted a prior application or otherwise granted
relief from a statutory disqualification with respect to that
associated person. In such cases where an SBS Entity meets the
requirements of paragraph (h), the SBS Entity will be permitted to
file a notice with the Commission (in lieu of an application).

III. Discussion

A. Rule of Practice 194(a)--Scope of the Rule

    Proposed Rule of Practice 194 would have defined the scope of the
rule, namely providing a process for an SBS Entity to seek relief from
the Commission to permit an associated person who is subject to a
statutory disqualification to effect or be involved in effecting
security-based swaps on behalf of the SBS Entity or to seek relief to
change the terms and conditions of a previously issued Commission order
pursuant to Rule of Practice 194.\16\ The Commission proposed to allow
an SBS Entity to voluntarily submit an application to the Commission to
request an order where an associated person of an SBS Entity is subject
to a statutory disqualification and consequently prohibited from
effecting or being involved in effecting security-based swaps on behalf
of the SBS Entity under Exchange Act Section 15F(b)(6).\17\
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    \16\ See Proposing Release, 80 FR at 51689, 51719; proposed Rule
of Practice 194(a).
    \17\ 15 U.S.C. 78o-10(b)(6); see proposed Rule of Practice
194(a).
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    Although no commenters specifically commented on this provision of
proposed Rule of Practice 194, the Commission received general comments
regarding the scope of the rule as proposed.\18\
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    \18\ See Letter from Americans for Financial Reform, dated
October 26, 2015 (``Americans for Financial Reform Letter''), at 1.
See also Letter from Robert E. Rutkowski, dated October 27, 2015
(``Rutkowski Letter''). The Rutkowski Letter requested only that the
Commission seriously consider the recommendations set forth in the
Americans for Financial Reform Letter.
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    A commenter suggested that rather than permit SBS Entities to
voluntarily submit an application to the Commission to request an order
providing relief from Exchange Act Section 15F(b)(6), the Commission
should instead reaffirm what the commenter viewed as the Congressional
mandate by issuing a rule that prohibits, on a blanket basis,
associated persons that are subject to a statutory disqualification
from effecting or being involved in effecting security-based swaps on
behalf of SBS Entities.\19\
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    \19\ Letter from Bartlett Naylor, Public Citizen, dated October
26, 2015 (``Public Citizen Letter''), at 1-2.
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    Section 15F(b)(6) of the Exchange Act provides that, except where
otherwise specifically provided by rule, regulation, or order of the
Commission, it shall be unlawful for an SBS Entity to permit any person
associated with the SBS Entity who is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity, if the SBS Entity knew, or in the
exercise or reasonable care should have known, of the statutory
disqualification.\20\ Thus, while Exchange Act Section 15F(b)(6) makes
it unlawful for an SBS Entity to permit an associated person who is
subject to a statutory disqualification to effect or be involved in
effecting security-based swaps on behalf of the SBS Entity, it also
gives the Commission the discretion to determine (by rule, regulation,
or order) that a statutorily disqualified associated person may effect
or be involved in effecting security-based swaps on behalf of an SBS
Entity.\21\ The Commission has determined to exercise its statutory
authority under Exchange Act Section 15F(b)(6) to assess on a case-by-
case basis whether to grant relief from the statutory prohibition
because there may be instances where it is consistent with the public
interest to permit an associated person who is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity. Additionally, the commenter's
approach \22\ would deviate from the Commission's current practice in
other contexts, which permits associated persons to apply to reenter
the securities industry notwithstanding the existence of a statutory
disqualification.\23\ In that respect, adopting the commenter's
approach could lead to the anomalous result where an applicant may be
permitted to engage in securities transactions with members of the
retail public--for example, as an associated person of a broker-dealer
or investment adviser--but prohibited from effecting or being involved
in effecting security-based swap transactions with significantly more
sophisticated institutional clients as an associated person of an SBS
Entity.\24\ Although we acknowledge that security-based swaps may also
be more complex and opaque than equities or bonds, thus increasing
information asymmetries between SBS Entities and their clients, we
believe that institutional clients may be more informed and may process
disclosures more efficiently than retail investors in parallel
settings.
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    \20\ See Note 3, supra.
    \21\ 15 U.S.C. 78o-10(b)(6).
    \22\ See Public Citizen Letter, at 1-2.
    \23\ See, e.g., 17 CFR 240.19h-1; 17 CFR 201.193. See also
Section I and Notes 8, 9, supra.
    \24\ See Proposing Release, 80 FR at 51698.
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    The Commission also believes that a process for granting relief
with respect to a statutory disqualification should be formalized, as
suggested by one commenter.\25\ Exchange Act Section

15F(b)(6) provides the Commission with discretion to determine whether
a statutorily disqualified associated person may effect or be involved
in effecting security-based swaps on behalf of an SBS Entity. However,
it does not specify what information should be provided to the
Commission when an SBS Entity seeks relief, nor does it set forth the
standard under which the Commission would evaluate requests for relief.
Rule of Practice 194 specifies the information and documents that SBS
Entities should provide to the Commission, as well as the applicable
procedures and standard of review, for seeking relief from the
statutory prohibition in Exchange Act Section 15F(b)(6). By
articulating the materials to be submitted, the items to be considered,
and the standard of review, Rule of Practice 194 provides a clear
process for SBS Entities.\26\ Therefore, the Commission is adopting
paragraph (a) of Rule of Practice 194, which defines the scope of the
rule, as proposed.
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    \25\ See Americans for Financial Reform Letter, at 1. The
commenter noted that without proposed Rule of Practice 194, SBS
Entities would still be able to apply to the Commission for relief
from the prohibition in Exchange Act Section 15F(b)(6); however, the
commenter supported the Commission's efforts to formalize a process
for seeking relief from the statutory prohibition of Exchange Act
Section 15F(b)(6) to increase accountability and transparency into
the application process.
    \26\ See Proposing Release, 80 FR at 51712.
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B. Rule of Practice 194(b)--Required Showing

    Proposed Rule of Practice 194 provided that the applicant would be
required to show that it would be consistent with the public interest
to permit the associated person of the SBS Entity who is subject to a
statutory disqualification to effect or be involved in effecting
security-based swaps on behalf of the SBS Entity.\27\
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    \27\ See id. at 51689, 51719; proposed Rule of Practice 194(b).
See Exchange Act Section 3(a)(39)(A) through (F), 15 U.S.C.
78c(a)(39)(A) through (F), for a description of statutorily
disqualifying events. See also Note 2, supra.
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    The Commission received one comment concerning the required showing
set forth in the proposal. The commenter stated that, in assessing
whether it is in the public interest to permit an associated person who
is subject to a statutory disqualification to effect or be involved in
effecting security-based swaps on behalf of an SBS Entity, the
Commission should also consider whether the deterrent effect of
disqualification would be diluted.\28\ Specifically, the commenter
stated that, to be granted relief, the SBS Entity should be required to
show that granting relief ``would actually enhance the deterrent
effect.'' \29\
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    \28\ Public Citizen Letter, at 1, 4.
    \29\ Id. at 4. The commenter additionally stated that the entity
requesting the waiver should be required to prove that ``the
implicit deterrence impact of disqualification is not diluted'' by
receiving a waiver from penalties resulting from criminal
misbehavior. Id. at 1.
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    In assessing whether it is consistent with the public interest to
permit an associated person that is a natural person who is subject to
a statutory disqualification to effect or be involved in effecting
security-based swaps on behalf of an SBS Entity, the Commission may
consider deterrence, among other factors.\30\ However, the Commission
does not agree with the commenter that the ``applicant should be
required to show that an exemption would actually enhance the deterrent
effect'' \31\ or that any petitioner for an exemption from
disqualification should have to prove that the implicit deterrence
impact of disqualification is not diluted by receiving a waiver from
penalties from criminal misbehavior.\32\ Either standard could preclude
the Commission from granting relief even where the public interest
otherwise warrants doing so--i.e., raising deterrence above all other
public interest considerations. Moreover, it is not clear that any
applicant could meet either standard proposed by the commenter. The
Commission does believe, however, consistent with the proposal,\33\
that the applicant should bear the burden of showing that permitting
the associated person to effect or be involved in effecting security-
based swaps on behalf of the SBS Entity is consistent with the public
interest.
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    \30\ In this regard, the Commission noted in the Proposing
Release that statutory disqualification and an inability to continue
associating with SBS Entities may create a disincentive against
underlying misconduct for associated persons. See Proposing Release,
80 FR at 51689, 51716-17.
    \31\ Public Citizen Letter, at 4.
    \32\ See id. at 1. Non-criminal conduct also may result in a
statutory disqualification. See 15 U.S.C. 78c(a)(39).
    \33\ See Proposing Release, 80 FR at 51689.
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    The Commission believes that the public interest standard is
appropriate and consistent with Section 15F(b)(6) of the Exchange Act
\34\ and is adopting the standard as proposed.
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    \34\ A public interest standard also is consistent with the
standard in Rule of Practice 193. See 17 CFR 201.193(c).
---------------------------------------------------------------------------

    Exchange Act Section 15F(b)(6) is designed to limit the potential
that associated persons who have engaged in certain types of ``bad
acts'' will be able to negatively affect the security-based swap market
and the participants in that market by prohibiting an SBS Entity from
allowing a statutorily disqualified associated person to effect or be
involved in effecting security-based swap transactions, absent
Commission relief. However, Section 15F(b)(6) also specifically
provides that the Commission can allow SBS Entities to permit such
statutorily disqualified associated persons to effect or be involved in
effecting security-based swap transactions. The public interest
standard is intended to capture those situations where the risk of the
associated person engaging in security-based swap activity that may
harm the market or the participants in the market is mitigated. Thus,
as stated in the proposal, the Commission believes that it may grant
relief in cases where the terms or conditions of association and the
procedures proposed for supervision of the statutorily disqualified
associated person are reasonably designed to mitigate the potential
harm to the market or participants in the market.\35\
---------------------------------------------------------------------------

    \35\ See Proposing Release, 80 FR at 51689.
---------------------------------------------------------------------------

    The Commission also notes that the items set forth in the proposal
\36\ and adopted in final Rule of Practice 194(e), such as other
misconduct in which the associated person may have engaged, the nature
of the conduct that resulted in the statutory disqualification and
disciplinary history of the associated person and SBS Entity requesting
such relief, and the supervision to be accorded the associated person,
would be relevant to the Commission's consideration of whether the
risks of permitting such associated persons that are natural persons to
effect or be involved in effecting security-based swaps on behalf of
the SBS Entity are sufficiently mitigated. Therefore, the Commission is
adopting paragraph (b) of Rule of Practice 194 as proposed.\37\
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    \36\ See id. at 51691-93, 51719-20; proposed Rule of Practice
194(d).
    \37\ Where the Commission determines that it would be consistent
with the public interest to permit the associated person that is a
natural person of the SBS Entity to effect or be involved in
effecting security-based swaps on behalf of the SBS Entity, the
Commission will issue an order granting relief. Where the Commission
does not or cannot make the determination that it is in the public
interest to permit the associated person that is a natural person of
the SBS Entity to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity, the Commission will issue an
order denying the application. See Proposing Release, 80 FR at
51694.
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C. Rule of Practice 194(c)--Exclusion for Other Persons

    The Commission is adopting Rule of Practice 194(c), which provides
an exclusion for an SBS Entity from the prohibition in Exchange Act
Section 15F(b)(6) with respect to associated person entities.
    Proposed Rule of Practice 194(i) would have provided temporary
relief, subject to certain conditions,\38\ from the

statutory prohibition in Exchange Act Section 15F(b)(6) with respect to
associated person entities that are subject to a statutory
disqualification.\39\ The Commission proposed paragraph (i) of Rule of
Practice 194 to address the situation where an operating SBS Entity
becomes subject to the statutory prohibition in Exchange Act Section
15F(b)(6) with respect to an associated person that is not a natural
person--either as a result of an associated person that effects or is
involved in effecting security-based swaps on behalf of the SBS Entity
becoming subject to a statutory disqualification, or as a result of a
person who is subject to a statutory disqualification becoming an
associated person effecting or involved in effecting security-based
swaps on behalf of the SBS Entity.\40\
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    \38\ The Commission proposed two general limitations on the
applicability of the temporary exclusion, namely that the temporary
exclusion would not be available where: (1) The Commission has
otherwise ordered--for example, where the Commission, by order, has
censured, placed limitations on the activities or functions of the
associated person, or suspended or barred such person from being
associated with an SBS Entity; and (2) where the Commission, CFTC,
an SRO or a registered futures association has previously denied
membership, association, registration or listing as a principal with
respect to the associated person that is the subject of the pending
application. See id. at 51697. As discussed below, since the
Commission is adopting the alternative that was set forth in the
proposal, these limitations are no longer included in the rule.
However, as discussed below, the Commission maintains its existing
statutory authority to institute proceedings or bring an action
against any associated person entities, and nothing in this
provision affects the ability of the Commission, the CFTC, an SRO or
the NFA to deny membership, association, registration or listing as
a principal with respect to any associated person entity.
    \39\ See Proposing Release, 80 FR at 51694-98, 51721; proposed
Rule of Practice 194(i).
    \40\ See, e.g., Proposing Release, 80 FR at 51694.
---------------------------------------------------------------------------

    The Commission also solicited comment on two alternative approaches
with respect to the temporary exclusion, as proposed, including one
alternative that would provide relief from the general prohibition in
Exchange Act Section 15F(b)(6) with respect to all associated person
entities.\41\ More specifically, the Commission requested comment on
whether the Commission should instead provide an exclusion to permit an
SBS Entity to allow associated person entities subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on behalf of SBS Entities.\42\ The Commission received two
comments on this alternative, both of which stated that the Commission
should not provide an exclusion to permit associated person entities
that are subject to a statutory disqualification to effect or be
involved in effecting security-based swaps on behalf of SBS
Entities.\43\
---------------------------------------------------------------------------

    \41\ See id. at 51697-98. The other alternative proposed by the
Commission related to the ultimate disposition of an application to
the extent the Commission does not act within a specified time
period. See id. at 51697.
    \42\ See id. at 51697-98, 51716. In addition, the Commission
also provided an economic analysis on this proposed alternative. See
id. at 51716.
    \43\ See Letter from Dennis M. Kelleher & Stephen W. Hall,
Better Markets, Inc., dated October 26, 2015 (``Better Markets
Letter''), at 5; Americans for Financial Reform Letter, at 3.
---------------------------------------------------------------------------

    One commenter stated that adopting a temporary exclusion, as
proposed, would be inconsistent with the language and Congressional
intent of Exchange Act Section 15F(b)(6).\44\ The commenter believes
that the temporary exclusion provision addresses ``industry-focused
concerns'' and would expose investors and markets to disruptive effects
from unscrupulous conduct by associated person entities subject to a
statutory disqualification.\45\ The commenter also believes that in the
event that an associated person entity is prohibited from effecting or
being involved in effecting security-based swaps on behalf of an SBS
Entity, other market participants may fill the void with minimal
disruption, or the SBS Entity may adopt measures to mitigate any
negative impacts as a result of the statutory prohibition.\46\
---------------------------------------------------------------------------

    \44\ See Better Markets Letter, at 5.
    \45\ Id.
    \46\ See id.
---------------------------------------------------------------------------

    A second commenter provided similar objections to the temporary
exclusion.\47\ The commenter stated that disruption to an SBS Entity's
business is not a sufficient justification for providing a temporary
exclusion with respect to an associated person entity who is subject to
a statutory disqualification. The commenter further stated that any
statutory disqualification that may require an SBS Entity to move
services (such as advisory, booking, cash or collateral management
services) to another entity is not a ``market-moving event,'' and would
not justify the adoption of a temporary exclusion with respect to
associated person entities. The commenter, however, acknowledged that
there may be limited cases where an immediate change in a service
provider would cause significant disruptions. But, rather than provide
an automatic temporary exclusion, as proposed, the commenter suggested,
as an alternative, that the Commission could in those limited cases
grant a temporary exclusion of up to 30 days where doing so is
appropriate and necessary.\48\
---------------------------------------------------------------------------

    \47\ See Americans for Financial Reform Letter, at 3.
    \48\ See id.
---------------------------------------------------------------------------

    The Commission received a related comment in response to a request
for comment in connection with the proposed requirements for an SBS
Entity to register with the Commission, which solicited comment on
whether the Commission should consider excepting associated person
entities from the statutory prohibition in Exchange Act Section
15F(b)(6).\49\ The commenter stated that, based on the Commission's
definition of the phrase ``involved in effecting,'' SBS Entities could
have hundreds, if not thousands, of associated natural persons who will
effect or will be involved in effecting security-based swaps.\50\
Moreover, the commenter stated that the definition of ``associated
person'' could be read to extend not just to natural persons, but also
to non-natural persons (e.g., entities) that are affiliates of SBS
Entities.\51\ As a result, the commenter stated, prohibiting
statutorily disqualified entities from effecting or being involved in
effecting security-based swaps could result in ``considerable''
business disruptions and other ramifications.\52\ To address these
concerns, the commenter stated that the Commission should narrow the
scope of the associated persons considered to be effecting or involved
in effecting security-based swaps, or, alternatively, exercise its
statutory authority to grant exceptions to the general ban on an SBS
Entity from associating with a person subject to a statutory
disqualification.\53\
---------------------------------------------------------------------------

    \49\ In connection with proposing requirements for an SBS Entity
to register with the Commission, the Commission solicited comment on
potentially developing an alternative process, in accordance with
Exchange Act Section 15F(b)(6), to establish exceptions to the
statutory prohibition in Exchange Act Section 15F(b)(6). See
Registration Proposing Release, 76 FR at 65797 (Question 90).
    \50\ See Letter from Kenneth E. Bentsen, Jr., Securities
Industry and Financial Markets Association, dated December 16, 2011
(``12/16/2011 SIFMA Letter''), at 8, available at https://www.sec.gov/comments/s7-40-11/s74011-4.pdf. The Commission has
stated that the term ``involved in effecting security-based swaps''
generally means engaged in functions necessary to facilitate the SBS
Entity's security-based swap business, including, but not limited to
the following activities: (1) Drafting and negotiating master
agreements and confirmations; (2) recommending security-based swap
transactions to counterparties; (3) being involved in executing
security-based swap transactions on a trading desk; (4) pricing
security-based swap positions; (5) managing collateral for the SBS
Entity; and (6) directly supervising persons engaged in the
activities described in items (1) through (5) above. See Proposing
Release, 80 FR at 51686, n.19 (citing the Registration Adopting
Release, at Section II.B.1.ii.).
    \51\ See 12/16/2011 SIFMA Letter.
    \52\ See id. The commenter did not provide supporting data to
quantify the number of associated persons or the magnitude of any
potential business disruptions.
    \53\ See id.
---------------------------------------------------------------------------

    The Commission believes that adopting a rule providing for an
exclusion for associated person entities is consistent with Exchange
Act Section 15F(b)(6), which explicitly permits the

Commission to establish exceptions to that statutory prohibition by
``rule, regulation, or order.'' \54\ In discussing the exclusion
alternative, the Commission noted that it would take into consideration
the extent to which this alternative approach would minimize potential
disruptions to the business of SBS Entities that could lead to possible
market disruption and how this approach would impact counterparty and
investor protection.\55\ We discuss each of those considerations below.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78o-10(b)(6). In addition, Exchange Act Section
15F(b)(4) provides the Commission with authority (other than certain
inapplicable exceptions specified in Exchange Act Section
15F(b)(4)(d) and (e)) to ``prescribe rules applicable to security-
based swap dealers and major security-based swap participants.'' 15
U.S.C. 78o-10(b)(4).
    \55\ See Proposing Release, 80 FR at 51698.
---------------------------------------------------------------------------

    The Commission believes that granting an automatic exclusion for
associated person entities could reduce potential disruptions to the
business of SBS Entities that could lead to market disruption. The
scope of the prohibition in Section 15F(b)(6) of the Exchange Act
covers a wide range of actions, given the definitions of statutory
disqualification and associated person, and the meaning of ``involved
in effecting'' a security-based swap transaction.\56\ Absent an
exclusion, the statutory prohibition in Exchange Act Section 15F(b)(6)
would apply immediately upon an associated person entity becoming
subject to a statutory disqualification. Contrary to one commenter's
general view that moving services to another entity is not a ``market-
moving event,'' \57\ the Commission continues to be concerned about the
potential disruption to the security-based swap markets, including
potential adverse effects to counterparties and other market
participants, if SBS Entities engaged in the business must either cease
operations, even temporarily, due to not being able to utilize the
services of their associated person entities,\58\ or move services to
another entity that may not be as well-equipped to handle them pending
a determination by the Commission on their application for relief under
the proposed temporary exclusion or pending a determination by another
regulator for similar relief.\59\ For example, and as the Commission
stated in the proposal, moving the cash and collateral management
services from one entity to another would have a much more significant
impact on the ability of the SBS Entity to operate--which, as noted
above, could lead to possible market disruption--than assigning a
different natural person to negotiate and execute security-based swap
transactions.\60\
---------------------------------------------------------------------------

    \56\ See Proposing Release, 80 FR at 51694. See also
Registration Adopting Release, at Section III.B.1.i.
    \57\ Americans for Financial Reform Letter, at 3. The commenter
also acknowledged when discussing the proposed temporary exclusion
for associated person entities that there may be some limited cases
where an immediate change in a service provider would cause
significant disruptions.
    \58\ See Proposing Release, 80 FR at 51695-96.
    \59\ Final Rule of Practice 194(h) provides that, subject to
certain conditions, an SBS Entity may permit an associated person
who is subject to a statutory disqualification to effect or be
involved in effecting security-based swaps on its behalf, without
making an application pursuant to the proposed rule, where the
Commission, CFTC, an SRO or a registered futures association has
granted a prior application or otherwise granted relief from a
statutory disqualification with respect to that associated person.
See Rule of Practice 194(h) and Section III.H, infra.
    \60\ See Proposing Release, 80 FR at 51696, n.88 (citing the
Registration Adopting Release, 80 FR at 48975, where the Commission
noted that it was particularly concerned that SBS Entities ``may
need to either cease operations, even temporarily, due to not being
able to utilize these services of their associated person entities,
or move these services to another entity that may not be as well
positioned to handle them, which could have an impact on the
security-based swap market'').
---------------------------------------------------------------------------

    One commenter noted that other SBS Entities could potentially
provide services to the market in the event that an associated person
entity becomes subject to a statutory disqualification.\61\ However,
irrespective of whether other SBS Entities may be able to provide such
services over time (which may not necessarily occur), there is
nonetheless a potential for short-term disruptions where an associated
person entity becomes immediately barred as a result of being subject
to a statutory disqualification. In particular, absent relief, an SBS
Entity that is associated with a statutorily disqualified entity would
be required either to restructure immediately or to cease dealing
activity temporarily, which could result in various costs, such as
costs associated with replacing the statutorily disqualified associated
person entity or a legal reorganization.\62\ Such short-term
disruptions could therefore adversely affect not just SBS Entities, but
also counterparties or other market participants in the form of
execution delays, potentially reduced liquidity or higher transaction
costs.\63\ In that respect, the exclusion is not limited to addressing
``industry-focused concerns'' \64\ or concerns about disruptions to the
SBS Entity's business alone.\65\
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    \61\ See Better Markets Letter, at 5.
    \62\ See also Section V.C.1.c, infra.
    \63\ See id.
    \64\ See Better Markets Letter, at 5.
    \65\ See Americans for Financial Reform Letter, at 3.
---------------------------------------------------------------------------

    Although one commenter asserted that any short-term market
disruptions could potentially be mitigated by the SBS Entity whose
associated person entity becomes subject to a statutory
disqualification, the commenter did not specify what measures could be
taken by the SBS Entity to mitigate potential market dislocations.\66\
It is not clear that any measures that an SBS Entity could potentially
take to mitigate potential market disruptions--e.g., the SBS Entity
restructuring its business to use the services of another associated
person entity that is not subject to a statutory disqualification--
would in all instances be effective, feasible, or cost-effective. For
example, there may be instances where a change in a service provider
could cause significant disruptions in the security-based swap
market.\67\ These disruptions are augmented by the fact that, as
discussed below, the Commission estimates that dealing activity in the
security-based swap market is highly concentrated among a small number
of dealers, with the top five dealer accounts intermediating
approximately 55 percent of all SBS Entity transactions.\68\
---------------------------------------------------------------------------

    \66\ See Better Markets Letter, at 5.
    \67\ See Americans for Financial Reform Letter, at 3
(acknowledging the potential for disruption in the event of an
immediate change).
    \68\ See Section V.A, infra, for further discussion.
---------------------------------------------------------------------------

    In comparison to the proposed temporary exclusion approach, SBS
Entities would be less constrained by the general statutory prohibition
and would be able to associate with any and all statutorily
disqualified associated person entities in any capacity without
applying for relief under Exchange Act Section 15F(b)(6) or under Rule
of Practice 194. This approach gives SBS Entities more certainty about
their ability to permit statutorily disqualified associated person
entities to effect or be involved in effecting security-based swaps,
whereas the proposed temporary exclusion would have expired after 180
days, and SBS Entities would have 60 days to conform to the general
statutory prohibition if the Commission, the CFTC, an SRO or a
registered futures association does not render a decision on the
application within that timeframe. Furthermore, SBS Entities
associating with disqualified persons would not have to undergo
business restructuring or apply for relief, thereby mitigating the risk
of disruptions and avoiding the costs associated with such
restructuring or application for relief, which may flow through to
counterparties under the rule being adopted.

    As the Commission noted in the proposal, the overall effects on
security-based swap markets of adopting the alternative approach are
unclear. The proposal, in connection with estimating anticipated costs,
noted that the alternative approach, which we are now adopting, could
hinder the Commission's ability to make an individualized determination
about whether permitting an associated person entity who is subject to
a statutory disqualification to effect or be involved in effecting
security-based swaps on behalf of an SBS Entity is consistent with the
public interest, and that statutory disqualification and an inability
to continue associating with SBS Entities creates disincentives against
underlying misconduct for associated persons.\69\ The Commission has
also considered the potential impact on investors and the security-
based swap markets from permitting associated person entities subject
to a statutory disqualification to effect or be involved in effecting
security-based swaps on behalf of SBS Entities. The Commission
acknowledges, as it did in the proposal, that the counterparty and
compliance risks under the entity exclusion approach may be somewhat
greater than those under the proposed approach.\70\ Nevertheless, the
Commission recognizes, as it did in the proposal, that these risks and
concerns are mitigated by the Commission's ability, in the appropriate
case, to institute proceedings under Exchange Act Section 15F(l)(3) to
determine whether the Commission should censure, place limitations on
the activities or functions of such person, or suspend for a period not
exceeding 12 months, or bar such person from being associated with an
SBS Entity.\71\ Therefore, the exclusion in final Rule of Practice
194(c) will neither limit nor otherwise affect the Commission's
existing statutory authority to institute proceedings or bring an
action against any associated person entities as outlined above.\72\ In
addition, the exclusion in final Rule of Practice 194(c) will also
neither limit nor otherwise affect the ability of the Commission, the
CFTC, an SRO or the NFA to deny membership, association, registration
or listing as a principal with respect to any associated person
entity.\73\
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    \69\ The Commission received comments supporting the potential
deterrence effect of disqualification. See, e.g., Public Citizen
Letter; Better Markets Letter.
    \70\ See, e.g., Better Markets Letter.
    \71\ See Proposing Release, 80 FR at 51698, n.98, 51716, n.194
(citing 15 U.S.C. 78o-10(l)(3)).
    \72\ See Proposing Release, 80 FR at 51698, n.98, 51716, n.194
(citing 15 U.S.C. 78o-10(l)(3)). See, e.g., 15 U.S.C. 78u-3
(authorizing cease-and-desist proceedings).
    \73\ For example, under Exchange Act Section 15A(g)(2), 15
U.S.C. 78o-3(g)(2), where it is necessary or appropriate in the
public interest or for the protection of investors, the Commission
may, by order, direct the SRO to deny membership to any registered
broker or dealer, and bar from becoming associated with a member any
person, who is subject to a statutory disqualification. Section
17(h) of the CEA provides for the CFTC to review certain NFA
decisions, including the NFA's disciplinary actions and member
responsibility actions, as do the CFTC's Part 171 Rules, 17 CFR
171.1-171.50.
---------------------------------------------------------------------------

    As also noted in the proposal,\74\ this alternative approach would
result in consistency with the CFTC's approach with respect to the
statutory prohibition for Swap Entities as set forth in CEA Section
4s(b)(6).\75\ The CFTC, with respect to statutorily disqualified
associated persons of Swap Entities, limits the definition of
associated persons of Swap Entities to natural persons.\76\ As a
result, the prohibition in CEA Section 4s(b)(6) applies to natural
persons (not entities) associated with a Swap Entity.\77\ Indeed, under
the alternative approach, which we are now adopting, SBS Entities
cross-registered as Swap Entities with the CFTC would experience
potential economies of scope in associating with persons that are
statutorily disqualified entities.
---------------------------------------------------------------------------

    \74\ See Proposing Release, 80 FR at 51698.
    \75\ 7 U.S.C. 6s(b)(6).
    \76\ See 17 CFR 1.3(aa). Specifically, the CFTC amended CEA
Regulation 1.3(aa), 17 CFR 1.3(aa), which generally defines the term
``associated person'' for purposes of entities registered with it,
to cover Swap Entities. Consequently, with respect to Swap Entities,
the definition reads, ``(aa) Associated Person. This term means any
natural person who is associated in any of the following capacities
with: . . . (6) A swap dealer or major swap participant as a
partner, officer, employee, agent (or any natural person occupying a
similar status or performing similar functions), in any capacity
that involves: (i) The solicitation or acceptance of swaps (other
than in a clerical or ministerial capacity); or (ii) The supervision
of any person or persons so engaged.'').
    \77\ See 7 U.S.C. 6s(b)(6), which states, ``Except to the extent
otherwise specifically provided by rule, regulation, or order, it
shall be unlawful for a swap dealer or a major swap participant to
permit any person associated with a swap dealer or a major swap
participant who is subject to a statutory disqualification to effect
or be involved in effecting swaps on behalf of the swap dealer or
major swap participant, if the swap dealer or major swap participant
knew, or in the exercise of reasonable care should have known, of
the statutory disqualification.''
---------------------------------------------------------------------------

    One commenter noted that the temporary exclusion provision may
expose investors and markets to disruptive effects from unscrupulous
conduct by associated person entities subject to a statutory
disqualification.\78\ As noted in the Proposing Release, however, the
Commission continues to believe that this approach appropriately
considers the potentially competing objectives of minimizing the
likelihood for market disruption while remaining consistent with the
public interest and maintaining investor protections.\79\
---------------------------------------------------------------------------

    \78\ See Better Markets Letter, at 5.
    \79\ See id.
---------------------------------------------------------------------------

    Given the adoption of the exclusion alternative for Rule of
Practice 194(c), the Commission is not adopting a commenter's proposed
alternative that the Commission could, on a case-by-case basis, provide
a temporary exclusion of up to 30 days where doing so is necessary and
appropriate. Under this alternative, pending approval by the Commission
for such a temporary exclusion, an SBS Entity would be required to
either (1) disassociate with the statutorily disqualified associated
person entity immediately after the associated person entity became
subject to a statutory disqualification, or (2) immediately have that
associated person cease effecting or being involved in effecting
security-based swaps on behalf of the SBS Entity. This result would
defeat the intent and purpose of the temporary exclusion and could
result in a risk of market disruption immediately after the associated
person entity becomes subject to a statutory disqualification, but
prior to the entry of any order granting a temporary exclusion.
    For the reasons discussed above, the Commission is adopting
paragraph (c) of Rule of Practice 194, which provides an exclusion for
an SBS Entity from the prohibition in Exchange Act Section 15F(b)(6)
with respect to associated person entities.

D. Rule of Practice 194(d)--Form of Application

    Proposed Rule of Practice 194 would have specified the form of the
application to be submitted under the rule for natural persons.\80\ In
particular, the Commission proposed that each application would be
required to be supported by a written statement, signed by a
knowledgeable person authorized by the SBS Entity, which addresses
other items in proposed Rule of Practice 194.\81\ The proposal would
have required an applicant to provide certain exhibits to the written
statement. For associated persons that are natural

persons,\82\ the Commission proposed that an SBS Entity provide: (1) A
copy of the order or other applicable document that resulted in the
associated person being subject to a statutory disqualification; \83\
(2) an undertaking by the applicant to notify the Commission promptly
in writing if any information submitted in support of the application
becomes materially false or misleading while the application is
pending; \84\ (3) a copy of the questionnaire or application for
employment specified in Exchange Act Rule 15Fb6-2(b); \85\ and (4) a
copy of any decision, order, or document issued with respect to any
proceeding \86\ resulting in the imposition of disciplinary sanctions
or pending proceeding against the associated person by the Commission,
CFTC, any federal or state or law enforcement regulatory agency,
registered futures association, foreign financial regulatory authority,
registered national securities association, or any other SRO, or
commodities exchange, or any court, that occurred during the five years
preceding the filing of the application pursuant to Rule of Practice
194.\87\ The Commission also proposed that an application under Rule of
Practice 194 would be filed pursuant to Rules of Practice 151, 152 and
153.\88\
---------------------------------------------------------------------------

    \80\ See id. at 51689-91, 51719; proposed Rule of Practice
194(c). The proposal also specified the form of application to be
submitted under the rule for associated person entities. See
proposed Rule of Practice 194(e). Rule of Practice 194(c), as
adopted, provides an exclusion for an SBS Entity from the
prohibition in Exchange Act Section 15F(b)(6) with respect to
associated persons entities. Accordingly, the corresponding
provision, proposed Rule of Practice 194(e), which would have
specified the form of such applications for entities, is not needed
and is not being adopted.
    \81\ See Section III.E, infra, for a discussion of proposed Rule
of Practice 194(d).
    \82\ The Commission is making one technical change to the text
of Rule of Practice 194(d) such that the phrase a ``person that is
subject to a statutory disqualification'' (emphasis added) is being
changed to read a ``person who is subject to a statutory
disqualification'' (emphasis added). This technical change is
intended to make the text of Rule of Practice 194 more closely track
the language used in Exchange Act Section 15F(b)(6), which reads, in
pertinent part, ``who is subject to a statutory disqualification''
(emphasis added). This technical change is also being made to Rule
of Practice 194 (h)(1) and (h)(2).
    \83\ See proposed Rule of Practice 194(c)(1).
    \84\ See id. (c)(2).
    \85\ 17 CFR 240.15Fb6-2(b); see proposed Rule of Practice
194(c)(3).
    \86\ In connection with final Rule of Practice 194, applicants
should look to the definition of ``proceeding'' in Form SBSE, which
states that a ``proceeding'' includes ``a formal administrative or
civil action initiated by a governmental agency, self-regulatory
organization or a foreign financial regulatory authority; a felony
criminal indictment or information (or equivalent formal charge); or
a misdemeanor criminal information (or equivalent formal charge).
Does not include other civil litigation, investigations, or arrests
or similar charges effected in the absence of a formal criminal
indictment or information (or equivalent formal charge).'' See
Registration Adopting Release, at Section III.G.1, and Form SBSE.
    \87\ See proposed Rule of Practice 194(c)(4).
    \88\ 17 CFR 201.151, 201.152, 201.153. Rule of Practice 151, 17
CFR 201.151, concerns the procedure for filing of papers with the
Commission; Rule of Practice 152, 17 CFR 201.152, concerns the form
of filing papers with the Commission; Rule of Practice 153, 17 CFR
201.153, concerns the signature requirement and effect of filing
papers.
---------------------------------------------------------------------------

    The Commission did not receive any specific comments on the form of
application and written statement in proposed Rule of Practice 194.
However, one commenter stated that the Commission should require
applicants to address disciplinary events going back ten years, not
five years.\89\ In support of a longer time period, the commenter
stated that a ten-year time period would provide greater protections in
accordance with the purpose of Exchange Act Section 15F(b)(6), and
would be more consistent with other provisions of the securities laws
dealing with statutory disqualification.\90\
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    \89\ See Better Markets Letter, at 6. Although the commenter did
not specify a particular provision, the Commission did propose a
five-year time period in proposed paragraph (c)(4). Proposed
paragraph (c)(4) would require a copy of any decision, order, or
document issued with respect to any proceedings resulting in the
imposition of disciplinary sanctions or pending proceeding against
the associated person by the Commission, CFTC, any federal or state
or law enforcement regulatory agency, registered futures
association, foreign financial regulatory authority, registered
national securities association, or any other SRO, or commodities
exchange, or any court, that occurred during the five years
preceding the filing of the application pursuant to Rule of Practice
194. Proposed paragraphs (d)(6) and (d)(10) also contain similar
requests for certain information for a five-year time period. See
Section III.E, infra.
    \90\ See Better Markets Letter, at 6.
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    The Commission is adopting renamed paragraph (d) of Rule of
Practice 194 as proposed, including the five-year time period in the
proposal, for the reasons discussed in the Proposing Release.\91\ In
determining to adopt the proposed five-year time period, the Commission
carefully considered the burden that may be imposed by requiring SBS
Entities to provide older materials and documents that may not be as
readily available, as well as our need to evaluate the context and
circumstances underlying the application.\92\ Furthermore, we note that
paragraph (d)(1) of the Rule as adopted requires that the application
include a copy of the order or other applicable document that resulted
in the associated person being subject to a statutory disqualification.
Therefore, the orders or other applicable documents provided with the
application may go back longer than five years.\93\
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    \91\ Proposing Release, 80 FR at 51689-91, 51719; proposed Rule
of Practice 194(c).
    \92\ We note that the Appendix paragraph (c) to Rule of Practice
194 states that, in addition to the information required by the
rule, Commission staff may request supplementary information from
the applicant to assist in the Commission's review. See also
Proposing Release, 80 FR at 51689, n.54, 51722 (proposing the same
requirement).
    \93\ For example, statutory disqualification may result where an
associated person has committed ``any other felony within ten
years.'' 15 U.S.C. 78c(a)(39)(F). See also, e.g., 15 U.S.C. 80a-9(a)
(ineligibility under Section 9(a) of the Investment Company Act of
1940 (``Investment Company Act'') may result where a person (or an
affiliated person) within ten years has been convicted of any felony
or misdemeanor involving the purchase or sale of any security or
arising out of such person's conduct as an underwriter, broker,
dealer, investment adviser, or in other specified categories).
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    In addition, the Commission does not agree with the commenter that
a ten-year time period would be more consistent with the current
practice in similar contexts. Paragraph (d)(4) of the final rule
requires a copy of any decision, order, or document issued with respect
to any proceeding resulting in the imposition of disciplinary sanctions
or pending proceeding against the associated person by the Commission,
CFTC, any federal or state or law enforcement regulatory agency,
registered futures association, foreign financial regulatory authority,
registered national securities association, or any other SRO, or
commodities exchange, or any court, that occurred during the five years
preceding the filing of the application pursuant to Rule of Practice
194. FINRA's membership continuance applications require analogous
disciplinary information for a five-year time period--not a ten-year
time period.\94\ For example, like paragraph (d)(4), FINRA Form MC-400,
Section 4, Items 9 and FINRA Form MC-400A, Section 2, Item 4 request
information within the past five years concerning ``any proceeding
which has resulted in the imposition of disciplinary sanctions by
FINRA, the U.S. Securities and Exchange Commission, the Commodity
Futures Trading Commission, any federal or regulatory agency, foreign
financial regulatory authority, any self-regulatory organization or
commodities exchange, or any court or state agency.'' \95\
Additionally, the Commission's Rule of Practice 193 only requires
compliance and disciplinary history during the two years preceding the
filing of a Rule 193 application.\96\
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    \94\ See FINRA Form MC-400, Section 4, Items 9a, 11; FINRA Form
MC-400A, Section 2, Items 4, 5.
    \95\ FINRA Form MC-400, Section 4, Item 9a; FINRA Form MC-400A,
Section 2, Item 4.
    \96\ See 17 CFR 201.193(b)(4)(iii). However, and as noted above,
although paragraph (d)(4) (and other provisions relating to
information that an applicant must provide regarding an individual's
disciplinary history) provide for a five-year time period,
applicants will be required under paragraph (d)(1) of the final rule
to provide the Commission with a copy of an order or other
applicable document which subjects the individual to, a statutory
disqualification irrespective of when the misconduct that gives rise
to the statutory disqualification occurred (e.g., even if outside
the five-year time period).
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    As with the proposed rule, under the terms of the final rule, the
SBS Entity (rather than the associated person) will be required to
submit the application, including the signed written statement under
paragraph (d). Further, as specified below, the Commission is

requiring certain information (e.g., concerning the supervision by the
SBS Entity over the associated person) to be submitted with the
application that is within the possession of the SBS Entity itself. An
application under Rule of Practice 194, as proposed and adopted, will
be filed pursuant to Rules of Practice 151, 152 and 153.\97\ The
Commission believes that filing pursuant to these rules will provide
the Commission with the information that it needs to assess an
application under Rule of Practice 194.
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    \97\ 17 CFR 201.151, 201.152, 201.153. See also Note 88, supra.
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E. Rule of Practice 194(e)--Written Statement

    Proposed Rule of Practice 194 would have set forth the items to be
addressed for applications for natural persons.\98\ In particular, the
Commission proposed to require an applicant to address certain
information in the written statement. For associated persons that are
natural persons, an SBS Entity would be required to address: (i) The
associated person's compliance with any order resulting in the
statutory disqualification; \99\ (ii) the associated person's
employment during the period subsequent to the event giving rise to the
statutory disqualification; \100\ (iii) the capacity or position in
which the associated person subject to a statutory disqualification
proposes to be associated with the SBS Entity; \101\ (iv) the terms and
conditions of employment and supervision to be exercised over the
associated person and, where applicable, by such associated person;
\102\ (v) the qualifications, experience, and disciplinary history
\103\ of the proposed supervisor(s) of the associated person; \104\
(vi) the compliance and disciplinary history, during the five years
preceding the filing of the application, of the SBS Entity; \105\ (vii)
the names of any other statutorily disqualified associated persons at
the SBS Entity, and whether they are to be supervised by the associated
person; \106\ (viii) whether the associated person has taken any
relevant courses, seminars, examinations or other actions subsequent to
becoming subject to a statutory disqualification to prepare for his or
her participation in the security-based swap business; \107\ (ix) why
the associated person should be permitted to effect or be involved in
effecting security-based swaps on behalf of the SBS Entity; \108\ (x)
whether, during the five years preceding the filing of the application,
the associated person has been involved in any litigation concerning
investment or investment-related activities or whether there are there
any unsatisfied judgments outstanding against the associated person
concerning investment or investment-related activities; \109\ and (xi)
any other information that the applicant believes to be material to the
application.\110\
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    \98\ See Proposing Release, 80 FR at 51691-93, 51719-20;
proposed Rule of Practice 194(d). The proposal also set forth the
items to be addressed for applications for associated person
entities. See proposed Rule of Practice 194(f). Rule of Practice
194(c), as adopted, provides an exclusion for an SBS Entity from the
prohibition in Exchange Act Section 15F(b)(6) with respect to
associated persons entities; therefore, the corresponding provision
with respect to associate person entities, proposed Rule of Practice
194(f), is not needed and is not being adopted.
    \99\ See proposed Rule of Practice 194(d)(1).
    \100\ See id. (d)(2).
    \101\ See id. (d)(3).
    \102\ See id. (d)(4).
    \103\ Disciplinary history would include, for example, the items
contained in Exchange Act Rule 17a-3(a)(12)(i)(D) through (G), 17
CFR 240.17a-3(a)(12)(i)(D) through (G), which items are required to
be collected by broker-dealers with respect to their associated
persons and are required to be provided on Form U-4. Such items
include, among other things, a record of any disciplinary action
taken, or sanction imposed, upon the associated person by any
federal or state agency, or national securities exchange or national
securities association, a record of any permanent or temporary
injunction entered against the associated person, or a record of any
arrest or indictment for any felony or certain specified types of
misdemeanors. See also Recordkeeping and Reporting Requirements for
Security-Based Swap Dealers, Major Security-Based Swap Participants,
and Broker-Dealers; Capital Rule for Certain Security-Based Swap
Dealers, Exchange Act Release No. 71958 (Apr. 17, 2014), 79 FR
25194, 25205, 25308-09 (May 2, 2014).
    \104\ See proposed Rule of Practice 194(d)(5).
    \105\ See id. (d)(6).
    \106\ See id. (d)(7).
    \107\ See id. (d)(8).
    \108\ See id. (d)(9).
    \109\ See id. (d)(10). Applicants should look to the definition
of ``investment or investment-related'' in Form SBSE, which states
that ``investment or investment-related'' includes ``pertaining to
securities, commodities, banking, savings association activities,
credit union activities, insurance, or real estate (including, but
not limited to, acting as or being associated with a broker-dealer,
municipal securities dealer, government securities broker or dealer,
issuer, investment company, investment adviser, futures sponsor,
bank, security-based swap dealer, major security-based swap
participant, savings association, credit union, insurance company,
or insurance agency).'' See Registration Adopting Release, Form
SBSE.
    \110\ See proposed Rule of Practice 194(d)(11).
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    The Commission did not receive any specific comments on the items
to be addressed set forth in the proposal. However, as discussed in
Section III.D above, the Commission received one general comment
stating that the Commission should require applicants to address
disciplinary events going back ten years, not five years.\111\ For the
same reasons set forth above in Section III.D, the Commission is
adopting the five-year time period as proposed, and for the reasons
discussed in the proposal,\112\ the Commission is adopting renamed
paragraph (e) of Rule of Practice 194, as proposed, with four minor
technical changes.\113\
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    \111\ See Better Markets Letter, at 6. The commenter did not
specify a particular provision of the proposal.
    \112\ See Proposing Release, 80 FR at 51691-93, 51719-20;
proposed Rule of Practice 194(d).
    \113\ The technical changes are (1) updating an internal cross
reference to subsection (c) in the proposal to reflect subsection
(d) in final Rule of Practice 194; (2) moving the phrase
``notwithstanding the event resulting in statutory
disqualification'' from an introductory phrase to later in the text
of subparagraph (9) to clarify any possible ambiguity in
subparagraph (9) without changing the scope of that provision; (3)
updating the technical wording in subparagraph (e)(9) to more
closely conform to the other provisions in subsection (e) by
removing the phrase ``the applicant should provide;'' and (4)
changing the term ``impact upon'' to ``affect'' to clarify any
possible ambiguity in subparagraph (9) without changing the scope of
the provision.
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F. Rule of Practice 194(f)--Prior Applications or Processes

    Proposed Rule of Practice 194 would have required an applicant to
provide as part of the application any order, notice or other
applicable document reflecting the grant, denial or other disposition
(including any dispositions on appeal) of any prior application
concerning the associated person under Rule of Practice 194 and other
similar processes.\114\ More specifically, the proposal would have
required an applicant to provide any order, notice or other applicable
document where an application has previously been made for the
associated person: (1) Pursuant to Rule of Practice 194; \115\ (2)
pursuant to Rule of Practice 193; \116\ (3) pursuant to Section 9(c) of
the Investment Company Act; \117\ (4) pursuant to Exchange Act Section
19(d),\118\ Exchange Act Rule 19h-1 \119\ or a proceeding by an SRO for
a person to become or remain a member, or an associated person of a
member, notwithstanding the existence of a statutory disqualification;
and (5) by the CFTC or a registered futures association for
registration, including as a principal, notwithstanding the existence
of a statutory disqualification.\120\ Proposed Rule of Practice 194
also addressed: (i) The exception in CFTC Regulation

23.22(b) \121\ by requiring an SBS Entity to provide any order or other
applicable document providing that the associated person may be listed
as a principal, registered as an associated person of another CFTC
registrant, or registered as a floor broker or floor trader,
notwithstanding the statutory disqualification and (ii) the CFTC's and
NFA's current process for granting relief from CEA Section
4s(b)(6),\122\ the provision that is parallel to Exchange Act Section
15F(b)(6), with respect to persons that are not exempt from that
provision pursuant to CFTC Regulation 23.22(b).\123\
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    \114\ See Proposing Release, 80 FR at 51693-94, 51720-21;
proposed Rule of Practice 194(g).
    \115\ See proposed Rule of Practice 194(g)(1).
    \116\ 17 CFR 201.193; see proposed Rule of Practice 194(g)(2).
    \117\ 15 U.S.C. 80a-9(c); see proposed Rule of Practice
194(g)(3).
    \118\ 15 U.S.C. 78s(d); see proposed Rule of Practice 194(g)(4).
    \119\ 17 CFR 240.19h-1.
    \120\ See proposed Rule of Practice 194(g)(5).
    \121\ 17 CFR 23.22(b); see proposed Rule of Practice
194(g)(5)(i). Under that provision, the CFTC allows association with
a Swap Entity with respect to a person who is already listed as a
principal, registered as an associated person of another CFTC
registrant, or registered as a floor broker or floor trader,
notwithstanding that the person is subject to a statutory
disqualification under section 8a(2) or 8a(3) (7 U.S.C. 12a(2), (3))
of the CEA. See Note 11, supra.
    \122\ 7 U.S.C. 6s(b)(6); see proposed Rule of Practice
194(g)(5)(ii). This provision requires the SBS Entity to submit any
determination by NFA (the sole registered futures association, see
CFTC Registration Release, 77 FR at 2624) with respect to that grant
of no-action relief. The Commission is adopting the language in
paragraph (f)(5)(ii) largely as proposed but with a minor technical
modification to more accurately reflect the CFTC's and NFA's
approach to statutory disqualification.
    \123\ 17 CFR 23.22(b).
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    Although the Commission did not receive any comments specifically
addressing this provision of the proposal, one commenter stated that
the Commission should take into account the views of other regulatory
bodies that may have adjudicated similar issues with respect to the
associated persons subject to a statutory disqualification.\124\
Renamed paragraph (f) of Rule of Practice 194, as adopted, will
facilitate the Commission's ability to take such views into account.
---------------------------------------------------------------------------

    \124\ Letter from Elijah E. Cummings, Ranking Member, Committee
on Oversight and Government Reform, U.S. House of Representatives,
dated November 13, 2015 (``Cummings Letter''), at 2.
---------------------------------------------------------------------------

    Paragraph (f) to Rule of Practice 194 is designed to inform the
Commission when a similar application made with respect to the
associated person has been granted or denied (or been subject to some
other disposition).\125\ Information concerning the grant or denial (or
other disposition) of a prior application or other request for relief,
and the reasons for the grant or denial, may inform the Commission's
assessment as to whether it would be consistent with the public
interest for the person to effect or be involved in effecting security-
based swaps on behalf of an SBS Entity.
---------------------------------------------------------------------------

    \125\ As discussed in the Proposing Release, in cases where a
statutorily disqualified person was formerly associated with another
SBS Entity, an applicant should use reasonable efforts to obtain
relevant documentation from the other SBS Entity.
---------------------------------------------------------------------------

    For example, in the event that a prior application has been
granted, but the terms and conditions of the association with the other
registrant are materially different than the proposed terms and
conditions of the statutorily disqualified person's association with
the SBS Entity, the Commission could consider whether the terms and
conditions at the SBS Entity that are different may result in any
greater risk of future misconduct.\126\
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    \126\ Notably, in circumstances where the prior application has
been denied or where the terms and conditions of employment are not
the same, an SBS Entity cannot avail itself of paragraph (h) of Rule
of Practice 194, see Section III.H, infra, and therefore will be
required to file an application under Rule of Practice 194 in order
to permit an associated person subject to a statutory
disqualification to be able to effect or be involved in effecting
security-based swaps on behalf of an SBS Entity.
---------------------------------------------------------------------------

    Accordingly, for reasons discussed in the proposal,\127\ the
Commission is adopting renamed Rule of Practice 194(f), as proposed,
with one minor technical change to more accurately reflect the CFTC's
and NFA's approach to statutory disqualification.
---------------------------------------------------------------------------

    \127\ See Rule of Practice 194 Proposing Release, 80 FR at
51693-94, 51720-21.
---------------------------------------------------------------------------

    The proposal would have required an applicant to provide any order,
notice or other applicable document reflecting the grant, denial or
other disposition (including any dispositions on appeal) of any prior
application or process concerning the associated person by the CFTC and
NFA through their process for granting relief from CEA Section 4s(b)(6)
\128\ with respect to persons that are not exempt from that provision
pursuant to CFTC Regulation 23.22(b).\129\ Under the CEA and CFTC
regulations, the consequences of an individual's statutory
disqualification differ depending upon whether the individual is an
associated person of a CFTC registrant or a principal of a CFTC
registrant. An associated person of a CFTC registrant is required to
register separately with the CFTC by filing his or her own application
for registration. Therefore, if the associated person of a CFTC
registrant has a statutory disqualification, the application for
registration will be denied unless the associated person goes through
the process established by NFA to be registered notwithstanding the
statutory disqualification. However, a principal of a CFTC registrant
does not apply, either for registration or to be listed as a principal.
Rather, the entity of which the person is a principal is required to
list that principal on the entity's application for registration with
the CFTC. As a result, if the principal has a statutory
disqualification, the entity's application for registration with the
CFTC will be denied unless the entity goes through the process with NFA
to be registered, notwithstanding having to list a statutorily
disqualified principal.\130\
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    \128\ 7 U.S.C. 6s(b)(6).
    \129\ 17 CFR 23.22(b). See Proposing Release, 80 FR at 51693-
51694, 51721; proposed Rule of Practice 194(g)(5)(ii). Under the
CFTC and NFA's process, available through no-action relief granted
by CFTC staff, a Swap Entity may make an application to NFA to
permit an associated person of a Swap Entity subject to a statutory
disqualification to effect or be involved in effecting swaps on
behalf of the Swap Entity. NFA will provide notice to a Swap Entity
whether or not NFA would have granted the person registration as an
associated person. As noted in the Proposing Release, and as adopted
here as well, the rule requires the SBS Entity to submit any
determination by NFA (the sole registered futures association) with
respect to that grant of no-action relief. See CFTC Letter No. 12-
15, at 5-8 (Oct. 11, 2012), available at<EMAIL_ADDRESS>    \130\ Accordingly, the Commission has adopted the following
language with the new language underlined for subpart (ii): ``Any
determination by a registered futures association (as provided in 7
U.S.C. 21) that had the associated person applied for registration
as an associated person of a swap dealer or a major swap
participant, or had a swap dealer or major swap participant listed
the associated person as a principal in the swap dealer's or major
swap participant's application for registration, notwithstanding
statutory disqualification, the application of the associated person
or of the swap dealer or major swap participant, as the case may be,
would have been granted or denied.''
---------------------------------------------------------------------------

G. Rule of Practice 194(g)--Notification to Applicant and Written
Statement

    Proposed Rule of Practice 194 would have set forth the procedure
where there is an adverse recommendation proposed by the Commission
staff with respect to an application under proposed Rule of Practice
194.\131\ Consistent with Rule of Practice 193(e),\132\ the Commission
proposed that where there would be an adverse recommendation, the
applicant would be so advised and provided with a written statement by
the Commission staff of the reasons for such recommendation, and the
applicant would then have 30 days to submit to the Commission a written
statement in response.\133\
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    \131\ See Proposing Release, 80 FR at 51694, 51721; proposed
Rule of Practice 194(h).
    \132\ 17 CFR 201.193(e).
    \133\ See Proposing Release, 80 FR at 51694, 51721; proposed
Rule of Practice 194(h).
---------------------------------------------------------------------------

    The Commission did not receive comments concerning this provision
of the proposal and, for the reasons discussed in the proposal, is
adopting renamed paragraph (g) of Rule of Practice 194 as
proposed.\134\
---------------------------------------------------------------------------

    \134\ See id.

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H. Rule of Practice 194(h)--Notice in Lieu of an Application

    Proposed Rule of Practice 194 would have limited the applicability
of the statutory prohibition in Exchange Act Section 15F(b)(6) by
prescribing the conditions under which an SBS Entity could permit a
person associated with it who is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on its behalf without being required to file an application under
Rule of Practice 194.\135\ The Commission proposed to permit, subject
to all of the conditions specified in proposed paragraph (j)(2) being
met,\136\ an associated person who is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on behalf of SBS Entities where the Commission or other
regulatory authority previously reviewed the matter and permitted the
person subject to a statutory disqualification to be a member,
associated with a member, registered or listed as a principal of a
regulated entity notwithstanding the statutory disqualification.\137\
The Commission also proposed that where an SBS Entity meets certain
requirements the SBS Entity would be permitted to file notice with the
Commission (in lieu of an application).\138\
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    \135\ Proposing Release, 80 FR at 51698-700, 51721-22; proposed
Rule of Practice 194(j).
    \136\ As explained in the proposal, ``[a]n SBS Entity seeking to
rely on proposed Rule of Practice (j)(1) would have to meet all of
the conditions specified in proposed paragraph (j)(2).'' Id. at
51699. The same is true for adopted Rule of Practice 194(h).
    \137\ See id. at 51698-99 (discussing proposed paragraph
(j)(1)(i) through (iv)). These same provisions are being adopted in
Rule of Practice 194(h)(1)(i) through (iv). We note that Rule of
Practice 194(h) would not be applicable in instances where the
Commission itself has made an affirmative determination to bar or
suspend the associated person. See id. at 51698 (explaining that,
other than in cases where the person is subject to a Commission bar,
the Commission did not believe it would be necessary to re-examine
an event for which relief has already been granted by the CFTC, an
SRO or a registered futures association).
    \138\ See Proposing Release, 80 FR at 51699-700; proposed Rule
of Practice 194(j)(2)(iii), (iv).
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    The Commission received comments objecting generally to the
proposal.\139\ One commenter stated that the provision should not be
adopted as proposed because FINRA's statutory disqualification process
is ``typically designed for individuals'' and Exchange Act Section
15F(b)(4) creates a ``new statutory disqualification.'' As outlined
above, FINRA member firms that are themselves subject to a statutory
disqualification and wish to obtain relief from the eligibility
requirements are required to seek approval from FINRA.\140\
Furthermore, Exchange Act Section 15F(b)(4) \141\ does not reference
``statutory disqualification'' or otherwise establish a category of
conduct that would disqualify an associated person from effecting or
being involved in effecting security-based swaps.\142\
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    \139\ Americans for Financial Reform Letter, at 2; Better
Markets Letter, at 3-4; Public Citizen Letter, at 4-5; Cummings
Letter, at 2-3.
    \140\ See Note 9, supra (discussing FINRA Form MC-400A,
Membership Continuance Application: Member Firm Disqualification
Application, http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/industry/p013339.pdf).
    \141\ As noted above, see Note 54, supra, Exchange Act Section
15F(b)(4) provides the Commission with authority (other than certain
inapplicable exceptions specified in Exchange Act Section
15F(b)(4)(d) and (e)) to ``prescribe rules applicable to security-
based swap dealers and major security-based swap participants.'' 15
U.S.C. 78o-10(b)(4).
    \142\ Rather, Exchange Act Section 15F(b)(6) references
``statutory disqualification,'' and the Commission has previously
stated that a ``statutory disqualification'' for purposes of
Exchange Act Section 15F(b)(6) is not a new defined term (with
additional categories), but rather is described (consistent with
other contexts) in Exchange Act Sections 3(a)(39)(A) through (F). 15
U.S.C. 78c(a)(39)(A) through (F); see also Registration Adopting
Release, 80 FR at 48972; 17 CFR 240.15Fb2-1(e); 17 CFR 240.15Fb6-1;
17 CFR 240.15Fb6-2.
---------------------------------------------------------------------------

    The Commission also received comments arguing that allowing
deference to SROs is inconsistent with current practice.\143\ However,
the Commission observes that Rule of Practice 194(h) is generally
consistent with the current practice with respect to SROs and their
members. For example, the information provided by the notice under
adopted paragraph (h)(2)(iii) is consistent with the information that
is currently required for a notification under Exchange Act Rule 19h-
1(a)(4).\144\ In the event that the views of the Commission were to
diverge from the CFTC, an SRO or a registered futures association with
respect to an associated person subject to a statutory disqualification
under the statutory scheme of the Exchange Act, under Exchange Act
Section 15F(l)(3), the Commission retains the authority to, by order,
censure, place limitations on the activities or functions of the
associated person, or suspend or bar such person from being associated
with an SBS Entity.\145\ As a result, even in cases where the CFTC, an
SRO or a registered futures association has previously granted relief
and an SBS Entity files a notice in lieu of an application under Rule
of Practice 194(h), the Commission may, in the appropriate case,
institute proceedings under Exchange Act Section 15F(l)(3) to determine
whether the Commission should censure, place limitations on the
activities or functions of such person, or suspend for a period not
exceeding 12 months, or bar such person from being associated with an
SBS Entity.\146\ The Commission also believes that where the conditions
set forth in paragraph (h) are met, it would not be necessary for the
Commission (other than in cases where the person is subject to a
Commission bar) to re-examine by means of a full application under Rule
of Practice 194 an event for which relief has already been granted.
Rather, the Commission believes that the better approach is to require
an applicant to provide a notice under Rule of Practice 194(h) in lieu
of a full application under Rule of Practice 194, which would alert the
Commission to issues that could lead to the institution of proceedings
pursuant to Exchange Act Section 15F(l)(3) \147\ where doing so is
appropriate.
---------------------------------------------------------------------------

    \143\ See Americans for Financial Reform Letter, at 2. See also
Cummings Letter, at 2-3 (arguing that the Commission should not
delegate its authority to interpret the Exchange Act to the CFTC,
FINRA or a registered futures association, in part, because ``[n]one
of the entities to which the proposed rule would grant the authority
to issue a waiver has been granted that responsibility by
statute.'').
    \144\ 17 CFR 240.19h-1(a)(4); proposed Rule of Practice
194(j)(2)(iii), (iv).
    \145\ 15 U.S.C. 78o-10(l)(3). See also Proposing Release, 80 FR
at 51698 n.98.
    \146\ See 15 U.S.C. 78o-10(l)(3). See also, e.g., 15 U.S.C.
15(b)(6).
    \147\ 15 U.S.C. 78o-10(l)(3).
---------------------------------------------------------------------------

    Another commenter argued that the Commission should not
``delegate'' its authority to determine whether an exclusion from
Exchange Act Section 15F(b)(6) is appropriate because regulators
administer different statutory schemes and have different
priorities.\148\ This same commenter argued that this proposed
subsection should not be adopted because, among other things, the
Commission should exercise its own judgment in each case to ensure that
the policies underlying the securities laws are fulfilled.\149\
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    \148\ See Better Markets Letter, at 3-4.
    \149\ See Better Markets Letter, at 3-4 (arguing that this
proposed subsection should not be adopted because the Commission
should exercise its judgment in each case to ensure that the
policies underlying the securities laws are fulfilled and because
the proposal would not ensure that applications for an exemption
from disqualification will be subject to strong, consistent, and
relevant considerations under the securities laws).
---------------------------------------------------------------------------

    The Commission acknowledges that other regulators administer
different statutory schemes,\150\ but it does not believe that the
applicable standards that regulators identified in paragraph (h) use in
their respective statutory disqualification processes are sufficiently
different to warrant requiring SBS Entities to file a full application
under Rule of Practice 194, as opposed to a notice in lieu of an
application. In particular, the CFTC and

NFA assess whether registration would not pose a substantial risk to
the public despite the existence of the statutory
disqualification.\151\ Likewise, and as noted above, consistent with
Exchange Act Section 15A(g)(2),\152\ under Article 3, Section 3(d) of
the FINRA By-Laws,\153\ the FINRA Board may, in its discretion, approve
the continuance in membership, and may also approve the association or
continuance of association of any person, if the FINRA Board determines
that such approval is consistent with the public interest and the
protection of investors.\154\ Although the CFTC or a registered futures
association may not review ``considerations under the securities
laws,'' \155\ and may have ``different statutory schemes and . . .
different priorities,'' \156\ those regulators, and SROs, will
generally assess whether it is consistent with the public interest to
permit a person who is subject to statutory disqualification to be
associated with (or a principal of) a registered entity. As a result, a
review by the regulators provided for in paragraph (h) would
substantially overlap with any review that the Commission would
undertake in assessing whether an applicant has made a showing under
Rule of Practice 194(b) that it would be consistent with the public
interest to grant relief with respect to a statutorily disqualified
associated person. And, as stated, the Commission will retain authority
under Exchange Act Section 15F(l)(3) \157\ to determine whether
potential considerations under the securities law would warrant
diverging from a decision of another regulator in a particular matter.
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    \150\ See Better Markets Letter, at 3-4; Cummings Letter, at 2-
3.
    \151\ See CEA Regulation 3.60(e)(1), (2), 17 CFR 3.60(e)(1)(2),
NFA Registration 507(a)(1), (2).
    \152\ 15 U.S.C. 78o-3(g)(2).
    \153\ See FINRA By-Laws, Article III, Section 3(d), http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4606. See also Registration
Proposing Release, 80 FR at 51687.
    \154\ See also FINRA Rules 9522(e), 9524(b)(1).
    \155\ See Better Markets Letter, at 3-4.
    \156\ Id.
    \157\ 15 U.S.C. 78o-10(l)(3).
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    Similarly, the Commission received comments arguing that SROs are
conflicted or do not otherwise have the impartiality necessary to make
decisions regarding the best interests of the public.\158\ While the
Commission has carefully considered the concerns raised by these
commenters, the Commission believes that the statutory and regulatory
framework under which SROs operate (including the Commission's
oversight function of SROs \159\ and the CFTC's oversight of the NFA
\160\), and the Commission's independent authority to, where
appropriate, institute proceedings with respect to the statutorily
disqualified associated person under Exchange Act Section 15F(l)(3),
serves to mitigate commenters' concerns.\161\ SROs are entrusted with
quasi-governmental authority, and, subject to Commission
oversight.\162\ SROs must also be organized and have the capacity to
carry out the purposes of the Exchange Act and to comply and enforce
compliance by its members and persons associated with its members with
the Exchange Act, the rules and regulations thereunder and the rules of
the SRO.\163\ The Exchange Act reflects a recognition of self-
regulation as a fundamental component of the oversight and supervision
of U.S. securities markets and their members.
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    \158\ See Public Citizen Letter, at 4-5; Better Markets Letter,
at 3-4; Cummings Letter, at 2; Americans for Financial Reform
Letter, at 2.
    \159\ As stated in Note 9, supra, an SRO may be required to send
a notice or notification to the Commission of its proposal to admit
or continue the membership of a person or association with a member
notwithstanding statutory disqualification in accordance with
Exchange Act Rule 19h-1. See 17 CFR 240.19h-1. Under Exchange Act
Section 15A(g)(2), 15 U.S.C. 78o-3(g)(2), where it is necessary or
appropriate in the public interest or for the protection of
investors, the Commission may, by order, direct the SRO to deny
membership to any registered broker or dealer, and bar from becoming
associated with a member any person, who is subject to a statutory
disqualification. See also 15 U.S.C. 78f(c)(2) (national securities
exchange); 15 U.S.C. 78q-1(b)(4)(A) (registered clearing agency).
    \160\ The NFA is a registered futures association under section
17 of the CEA, 7 U.S.C. 21, and is the SRO for swap transactions.
Section 17(h) of the CEA provides for CFTC review of certain NFA
decisions, including the NFA's disciplinary actions and member
responsibility actions, as do the CFTC's Part 171 Rules, 17 CFR
171.1-171.50. In addition, the CFTC may institute review of
disciplinary actions taken by the NFA on its own motion. See 17
U.S.C. 21(h)(3). See also CFTC, Division of Clearing and
Intermediary Oversight, Review of the Disciplinary Program of
National Futures Association, July 2002, https://www.cftc.gov/sites/default/files/files/tm/tmnfarer071102.pdf.
    \161\ See 15 U.S.C. 78o-10(l)(3); Proposing Release, 80 FR at
51698 n.98.
    \162\ See, e.g., 15 U.S.C. 78o-3 (registered securities
associations); 15 U.S.C. 78s (registration, responsibilities, and
oversight of SROs).
    \163\ See, e.g., 15 U.S.C. 78o-3(b)(2).
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    The Commission likewise disagrees with a commenter's view that
``[n]one of the entities to which the proposed rule would grant the
authority to issue a waiver has been granted that responsibility by
statute.'' \164\ To the extent that the commenter may be concerned that
the Commission does not have the statutory authority to rely on prior
determinations made by those regulators, as set forth in Rule of
Practice 194(h), Exchange Act Section 15F(b)(6) expressly provides
broadly and without limitation that the Commission can establish
exceptions to that statutory prohibition by ``rule, regulation, or
order.'' \165\ Granting relief from the statutory prohibition to SBS
Entities where the conditions set forth in Rule of Practice 194(h) are
met, including the filing of a notice in lieu of an application, is
within the scope of the statutory authority provided to the Commission
under Exchange Act Section 15F(b)(6).\166\ Moreover, the regulators
identified in paragraph (j) are currently granted the authority under
their own statutory and regulatory frameworks to provide relief from a
statutory disqualification.\167\ Paragraph (h) does not ``delegate [the
Commission's] authority to interpret the Exchange Act'' \168\ because
such regulators only interpret their own statutory and regulatory
frameworks with respect to persons subject to a statutory
disqualification. The Commission believes that where the conditions set
forth in paragraph (h) are met, it would not be necessary for the
Commission (other than in cases where the person is subject to a
Commission bar) to re-examine by means of a full application under Rule
of Practice 194 an event for which relief has already been granted.
Rather, the Commission believes that the better approach is to require
an applicant to provide a notice under Rule of Practice 194(h) in lieu
of a full application under Rule of Practice 194, which would alert the
Commission to issues that could lead to the institution of proceedings
pursuant to Exchange Act Section 15F(l)(3) \169\ where doing so is
appropriate.
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    \164\ See Cummings Letter, at 2.
    \165\ 15 U.S.C. 78o-10(b)(6).
    \166\ See 5 U.S.C. 78o-10(b)(4). See also Note 54, supra.
    \167\ See Registration Adopting Release, 80 FR at 51687-89.
    \168\ See Cummings Letter, at 2.
    \169\ 15 U.S.C. 78o-10(l)(3).
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    Another commenter objected to the proposal on the grounds that the
Commission should itself make a determination, rather than the CFTC, an
SRO or a registered futures association, in part, because the proposal
would ``render[ ] the [Commission] unaccountable to Congress.'' \170\
The Commission also received a comment objecting to the proposal on the
grounds that the Commission retains sole authority and responsibility
to interpret and adjudicate the entire body of securities law in the
public interest and any waiver decision should be reviewed by the
Commission.\171\ In all cases where paragraph (h) applies, although the
Commission would not receive an application under Rule of Practice 194,

the Commission would be able to review the facts of cases.\172\ Nor is
it the case that paragraph (h) of Rule of Practice 194 would ``render[
] the [Commission] unaccountable to Congress'' \173\ or divest the
Commission of its ``sole authority and responsibility to interpret and
adjudicate the entire body of securities law in the public interest,''
\174\ because, as noted above, the Commission retains its statutory
authority to bring an action under Exchange Act Section 15F(l)(3).
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    \170\ Public Citizen Letter, at 4-5.
    \171\ Cummings Letter, at 2-3.
    \172\ Contra Americans for Financial Reform Letter, at 2.
    \173\ Public Citizen Letter, at 5.
    \174\ Cummings Letter, at 2.
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    After careful consideration of the comments received, and for the
reasons discussed in the proposal,\175\ the Commission is adopting
renamed paragraph (h) to Rule of Practice 194 as proposed, with five
technical modifications. First, because Rule of Practice 194, as
adopted, provides an exclusion for an SBS Entity from the prohibition
in Exchange Act Section 15F(b)(6) with respect to associated persons
entities, references in the proposed rule text to ``is a natural
person'' \176\ and one proposed subsection, which pertained to
associated person entities only,\177\ are no longer needed, and are not
being adopted. Second, certain internal cross references to other
provisions within this subsection are being revised to reflect renamed
Rule of Practice 194(h).\178\ Third, the phrase ``or otherwise by the
Commission'' is being added to paragraph (h)(1)(ii) to address
situations where the Commission has granted a natural person consent to
associate or change the terms and conditions of association with a
regulated entity even if that consent was not granted pursuant to Rule
of Practice 193.\179\ Fourth, the Commission is changing the phrase a
``person that is subject to a statutory disqualification'' (emphasis
added) in paragraphs (h)(1) and (h)(2) to read a ``person who is
subject to a statutory disqualification'' (emphasis added) to more
closely track the language used in Exchange Act Section 15F(b)(6).\180\
Finally, a reference to the Commission's Rules of Practice 151, 152 and
153 is being added to provide guidance on how the notice in Rule of
Practice 194 (h)(2)(iii) should be filed with the Commission.\181\
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    \175\ See Proposing Release, 80 FR at 51698-700, 51721-22.
    \176\ See proposed Rule of Practice 194(j)(1)(ii), (j)(2)(iii).
    \177\ See id. (j)(2)(iv).
    \178\ Internal cross references to subsection (j) in the
proposal are being updated to reflect subsection (h) in final Rule
of Practice 194. See id. (j)(1), (j)(2)(ii).
    \179\ This modification to paragraph (h)(1)(ii) is intended to
address a regulatory gap with respect to Commission orders granting
natural persons consent to associate with regulated entities that
are not currently listed in Rule of Practice 193, such as, for
example, natural persons associated with municipal advisors.
Although Rule of Practice 193 does not currently mention municipal
advisors, Rule 15Bc4-1 states that the Commission may ``consent'' to
a person being associated with a municipal advisor. As a result,
this modification will include Commission orders granting such
consent within the scope of Rule 194.
    \180\ See Note 82, supra (discussing the same technical change
to Rule of Practice 194(d)).
    \181\ See Note 88, supra (discussing the Commission's Rules of
Practice 151, 152 and 153).
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I. Note to Rule of Practice 194

    The Commission proposed adopting an accompanying Note to Rule of
Practice 194, similar to the Preliminary Note to Rule of Practice
193.\182\ The Commission received no comments concerning the Note to
proposed Rule of Practice 194 and is adopting, for the reasons
discussed in the proposal, the Note substantially as proposed.\183\
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    \182\ See Proposing Release, 80 FR at 51700-01; proposed Rule of
Practice 194, Appendix. See also 17 CFR 201.193, Preliminary Note.
    \183\ See Proposing Release, 80 FR at 51700-01.
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    As adopted, the Note to Rule of Practice 194 provides that:

     An application made pursuant to the rule must show that
it would be consistent with the public interest to permit the
associated person of the SBS Entity to effect or be involved in
effecting security-based swaps on behalf of the SBS Entity.\184\
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    \184\ See Section III.B, supra.
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     The nature of the supervision that an associated person
will receive or exercise as an associated person with a registered
entity is an important matter bearing upon the public interest.
     In meeting the burden of showing that permitting the
associated person to effect or be involved in effecting security-
based swaps on behalf of the SBS Entity is consistent with the
public interest, the application and supporting documentation must
demonstrate that the terms or conditions of association, procedures,
or proposed supervision (if the associated person is a natural
person), are reasonably designed to ensure that the statutory
disqualification does not negatively affect the ability of the
associated person to effect or be involved in effecting security-
based swaps on behalf of the SBS Entity in compliance with the
applicable statutory and regulatory framework. The Commission made
one technical amendment in the Note to Rule of Practice 194 to
change the term ``impact upon'' to ``affect'' in order to clarify
any possible ambiguity without changing the scope of the provision.
     Normally, the applicant's burden of demonstrating that
permitting the associated person to effect or be involved in
effecting security-based swaps on behalf of the SBS Entity is
consistent with the public interest will be difficult to meet where
the associated person is to be supervised by, or is to supervise,
another statutorily disqualified individual.
     The associated person may be limited to association in
a specified capacity with a particular registered entity and may
also be subject to specific terms and conditions.
    Notably, the Commission proposed that where the associated
person wishes to become the sole proprietor of a registered entity
and thus is seeking that the Commission issue an order permitting
the associated person who is subject to a statutory disqualification
to effect or be involved in effecting security-based swaps on behalf
of an SBS Entity notwithstanding an absence of supervision, the
applicant's burden will be difficult to meet.\185\ The Commission
has modified this sentence because the Commission does not
anticipate that a registered SBS Entity will be formed as a sole
proprietorship in light of the de minimis exception to the
definition of ``security-based swap dealer'' \186\ and the
thresholds applicable to the definition of ``major security-based
swap participant.'' \187\ As modified, paragraph (i)(5) to the Note
to Rule of Practice 194 provides that where there is an absence of
supervision over the associated person who is subject to a statutory
disqualification, the applicant's burden will be difficult to meet.
The Commission is including this statement because, as stated, the
Commission believes that there is a greater risk of harm where the
associated person subject to a statutory disqualification is not
subject to adequate supervision.
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    \185\ See, e.g., Final Rule of Practice 194(e)(3). See also
Proposing Release, 80 FR at 51700, 51722. Accord 17 CFR 201.193,
Preliminary Note.
    \186\ See 17 CFR 240.3a71-2.
    \187\ See, e.g., 17 CFR 240.3a67-1(a)(2), 240.3a67-3, 240.3a67-
5, 3a67-9.

    Finally, the Note discusses various procedural aspects of Rule of
---------------------------------------------------------------------------
Practice 194, including the following:

     In addition to the information specifically required by
the rule, applications with respect to natural persons should be
supplemented, where appropriate, by written statements of
individuals who are competent to attest to the associated person's
character, employment performance, and other relevant information.
     In addition to the information required by the rule,
the Commission staff may request additional information to assist in
the Commission's review.
     Intentional misstatements or omissions of fact may
constitute criminal violations of 18 U.S.C. 1001, et seq. and other
provisions of law.
     The Commission will not consider any application that
attempts to reargue or collaterally attack the findings that
resulted in the statutory disqualification.

J. Confidentiality of Materials

    In the proposal, the Commission stated that orders issued in
accordance with Rule of Practice 194 would be made publicly available,
but applications and supporting materials would be kept confidential
subject to

applicable law.\188\ The Commission received three comments stating
that the Commission should require all applications and supporting
materials to be made public.\189\ Specifically, one commenter stated
that requiring all applications and supporting materials to be made
public would: (i) Promote transparency; (ii) ensure that the public
understands that the Commission's handling of such applications,
thereby improving the public's confidence in the Commission's oversight
of market participants more generally; and (iii) influence the
application process under Rule of Practice 194 if it appears to be too
lenient in favor of allowing disqualified persons to serve in the
security-based swap markets.\190\ Another commenter stated that that:
(1) Applications and any supporting materials should be made public as
soon as they are received to ensure public transparency in the
application and accountability; and (2) should the Commission adopt the
temporary exclusion in paragraph (i), the notice required to be sent to
the Commission should be made public.\191\ Another commenter noted
that, although the Commission should make applications under Rule of
Practice 194 public, the Commission should be able to make a good cause
determination that such applicants remain under seal.\192\
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    \188\ See Proposing Release, 80 FR at 51694.
    \189\ Better Markets Letter, at 6; American for Financial
Reform, at 3-4; Cummings Letter, at 3.
    \190\ Better Markets Letter, at 6.
    \191\ Americans for Financial Reform Letter, at 3-4.
    \192\ Cummings Letter, at 3.
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    The Commission has carefully considered the comments and has
determined not to automatically make applications and supporting
materials under Rule of Practice 194 public (e.g., on the Commission's
website). For the reasons set forth below and consistent with the
Commission's current practice in other contexts (e.g., applications and
supporting materials under Rule of Practice 193), the Commission
believes that, as proposed, it is appropriate to keep applications and
supporting materials confidential, subject to the existing statutory
and regulatory framework with respect to the public availability of
such materials, including the Freedom of Information Act
(``FOIA''),\193\ the Exchange Act,\194\ and applicable Commission
rules.\195\
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    \193\ 5 U.S.C. 552, et seq.
    \194\ See 15 U.S.C. 78x.
    \195\ See, e.g., 17 CFR 200.80; 17 CFR 201.190; 17 CFR 240.24b-
2.
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    First, applications and supporting materials may contain
information that is proprietary or otherwise confidential and not
generally subject to disclosure under applicable law.\196\ As one
commenter acknowledged, good cause may exist not to disclose certain
information contained in application materials.\197\ The existing
statutory and regulatory framework sets forth a detailed process for
the Commission to make available application materials \198\ to members
of the public, upon request, but to keep certain information contained
in those materials confidential, where appropriate.\199\ FOIA, for
example, contains express categories of statutory exemptions where
public disclosure is not required \200\--e.g., information that would
invade an individual's personal privacy, or trade secrets or commercial
or financial information that is confidential or privileged.\201\ In
addition to protecting the privacy interests of applicants and their
associated persons, there is also a public interest in preserving the
confidentiality of such materials to promote candor in applications so
that the Commission may assess, based on all material facts, whether
granting an application is consistent with the public interest.
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    \196\ See 5 U.S.C. 552; 17 CFR 200.80(b).
    \197\ See Cummings Letter, at 3.
    \198\ 15 U.S.C. 78x(a) (for purposes of 5 U.S.C. 552, ``the term
`records' includes all applications . . . notices, and other
documents filed with or otherwise obtained by the Commission
pursuant to the [Exchange Act] or otherwise'').
    \199\ See, e.g., 17 CFR 200.80(a)(4), (b).
    \200\ See 5 U.S.C. 552(b). See also 17 CFR 200.80(b).
    \201\ See 5 U.S.C. 552(b)(4), (6). See also 17 CFR 200.80(b)(4),
(b)(6).
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    The Commission believes that this existing statutory and regulatory
framework, which provides for the public availability of certain
materials, appropriately takes into consideration the applicants'