capital requirements of a ``listed jurisdiction.''
    For the reasons set forth below, the Commission preliminarily
believes that an exception that incorporates those elements would apply
security-based swap dealer requirements to arranging, negotiating or
executing activity in the United States, allow for Commission access to
related books and records, and eliminate incentives to alter
transaction booking practices to avoid security-based swap dealer
registration, in a manner that appropriately addresses the scope of the
regulatory concerns raised by this type of U.S. activity.\105\
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    \105\ The conditional exception would address only the Rule
3a71-3(b)(1)(iii)(C) requirement that non-U.S. persons count
transactions that involve dealing activity in the United States.
Rule 3a71-3 would continue to require non-U.S. persons to count all
of their security-based swap dealing transactions with U.S.
counterparties, and all of their security-based swap dealing
transactions that are guaranteed by their U.S. affiliates.

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

    The Commission preliminarily believes that this type of arranging,
negotiating or executing conduct associated with security-based swap
transactions also would generally constitute ``broker'' activity under
the Exchange Act. Entities engaged in such conduct accordingly would be
required to register with the Commission as brokers unless they can
avail themselves of an exception from broker status, such as the
exception for bank brokerage activity, or an exemption from broker
registration.\106\
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    \106\ See generally note 21, supra (addressing application of
``broker'' and ``security'' definitions in the security-based swap
context).
---------------------------------------------------------------------------

1. U.S. Activity Conducted by a Majority-Owned Registered Security-
Based Swap Dealer Affiliate
    Under Alternative 1, the arranging, negotiating and executing
activity by U.S. personnel that otherwise would need to be counted but
for the exception must be conducted by such personnel in their capacity
as persons associated with an entity that is: (a) Registered as a
security-based swap dealer, and (b) a majority-owned affiliate \107\ of
the non-U.S. person relying on the exception.\108\
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    \107\ Proposed paragraph (a)(10) would define the term
``majority-owned affiliate'' to encompass a relationship whereby one
entity directly or indirectly owns a majority interest in another,
or where a third party directly or indirectly owns a majority
interest in both, where ``majority interest'' reflects voting power,
the right to sell, or the right to receive capital upon dissolution
or the contribution of capital.
    \108\ See Alternative 1--proposed paragraph (d)(1)(i) of Rule
3a71-3. Exchange Act Section 3(a)(70) defines the term ``person
associated with a security-based swap dealer or major security-based
swap participant'' to encompass, inter alia, partners, officers,
directors, employees and persons controlling, controlled by, or
under common control with a security-based swap dealer or major
security-based swap participant.
    Exchange Act Rule 3a71-2(e) provides for the voluntary
registration of a person that chooses to be a security-based swap
dealer, regardless of whether that person engages in dealing
activity that exceeds the de minimis thresholds.
---------------------------------------------------------------------------

    By requiring that the U.S. arranging, negotiating or executing
activity be conducted by U.S. personnel in their capacity as associated
persons of a registered security-based swap dealer, the proposed
condition would help ensure that the U.S. activity would be subject to
key security-based swap dealer requirements under Title VII, including
requirements regarding supervision, books and records, trade
acknowledgments and verifications, and business conduct, among other
things.\109\
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    \109\ The relevant transactions also would remain subject to
regulatory reporting and public dissemination requirements under
Title VII. See note 52, supra. But see part III.D.10, infra
(soliciting comment regarding whether to make a similar exception
available in connection with the application of the ``arranged,
negotiated, or executed'' test in connection with the regulatory
reporting and public dissemination requirements of Regulation SBSR).
---------------------------------------------------------------------------

    The registered security-based swap dealer must be a majority-owned
affiliate of the non-U.S. person relying on the exception. As discussed
above, concerns have been expressed that the existing counting standard
could lead financial groups to relocate their U.S.-based personnel to
avoid triggering security-based swap dealer registration. To the extent
that such groups make use of this exception in lieu of relocating U.S.-
based personnel, the Commission would expect those groups to use
affiliated entities to satisfy the conditions of the exception.
Moreover, requiring that the arranging, negotiating or executing
activity be performed by U.S. personnel associated with an affiliated
registered security-based swap dealer would help guard against the risk
that a financial group may seek to attenuate its responsibility for any
shortcomings in the registered security-based swap dealer's compliance
with the requirements applicable to registered security-based swap
dealers.\110\ The proposal makes use of a majority-ownership standard
to achieve this goal--rather than other measures of affiliation such as
a common control standard or alternative ownership thresholds--to help
ensure that the financial group has a significant interest in the
registered security-based swap dealer, including its compliance with
the requirements applicable to security-based swap dealers (in addition
to the non-U.S. person's interest in the registered security-based swap
dealer complying with the conditions of the exception), to help promote
appropriate compliance and oversight practices.\111\
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    \110\ The registered security-based swap dealer's non-compliance
with the conditions of the exception would make the exception
unavailable to the non-U.S. person.
    \111\ The Commission has used a majority-ownership standard as
part of other rules implementing Title VII, including in a rule
providing that inter-affiliate security-based swaps need not be
considered in determining whether a person is a security-based swap
dealer. See Exchange Act Rule 3a71-1(d).
---------------------------------------------------------------------------

    Taken as a whole, those elements differentiate the proposal from
the approach commenters previously suggested that would have excused
the counting of such transactions when the relevant activity in the
United States is performed by a registered broker-dealer or by a U.S.
bank. When the Commission considered but rejected that type of approach
in adopting the ``arranged, negotiated, or executed'' counting
requirement, the Commission noted that the broker-dealer framework does
not apply to banks engaged in certain activities, which may include a
significant proportion of security-based swap dealing activity, and
stated that such an approach would effectively supplant Title VII
security-based swap dealer regulation for a majority of dealing
activity carried out in the United States with a ``cobbled together''
grouping of other requirements.\112\ Alternative 1, in contrast, would
apply Title VII security-based swap dealer regulation to arranging,
negotiating or executing activity in the United States, regardless of
whether that activity is conducted by banks or non-banks, consistent
with the uniform security-based swap dealer framework anticipated by
Title VII.
---------------------------------------------------------------------------

    \112\ See ANE Adopting Release, 81 FR at 8619; see also part
I.A.3, supra.
---------------------------------------------------------------------------

2. Compliance With Specific Security-Based Swap Dealer Requirements
a. Conditions Regarding Application of Specific Requirements
    The proposal would incorporate provisions related to how Title VII
requirements would apply to the registered security-based swap dealer's
activities conducted on behalf of its non-U.S. affiliate. As noted,
Alternative 1 would be conditioned on any U.S. personnel who arrange,
negotiate or execute security-based swap transactions in the United
States acting in their capacity as an associated person of a registered
security-based swap dealer. Security-based swap dealers in general must
comply with a variety of obligations, including those related to:
Financial responsibility; books, records and reports; trade
acknowledgment and verification; supervision and chief compliance
officers; and business conduct.\113\ Security-based swap dealers

also are subject to regulatory reporting and public dissemination
requirements.\114\
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    \113\ See generally Exchange Act Section 15F. The Commission has
adopted final rules to implement certain security-based swap dealer
requirements under Section 15F. See Business Conduct Adopting
Release, 81 FR 29960 (final rules addressing business conduct,
supervision and chief compliance officer requirements); Exchange Act
Release No. 78011 (Jun. 8, 2016), 81 FR 39808 (Jun. 17, 2016) (final
rules addressing trade acknowledgment and verification requirements)
(``Trade Acknowledgment Adopting Release'').
    The Commission also has proposed rules to implement security-
based swap dealer requirements regarding:
    (1) Capital, margin and segregation (see Exchange Act Release
No. 68071, 77 FR 70214 (Nov. 23, 2012) (``Capital, Margin and
Segregation Proposing Release''); Exchange Act Release No. 71958
(Apr. 17, 2014), 79 FR 25194, 25254 (May 2, 2014));
    (2) Recordkeeping and reporting (see Exchange Act Release No.
71958 (Apr. 17, 2014), 79 FR 25194 (May 2, 2014) (``Recordkeeping
and Reporting Proposing Release''));
    (3) Risk mitigation, including requirements relating to
portfolio reconciliation, portfolio compression and trading
relationship documentation (see Exchange Act Release No. 84861 (Dec.
19, 2018), 84 FR 4614 (Feb. 15, 2019) (``Risk Mitigation Proposing
Release'')); and
    (4) The cross-border application of various Title VII
requirements, including certain security-based swap dealer
requirements (see Cross-Border Proposing Release, 78 FR 30968).
    \114\ See generally Regulation SBSR, 17 CFR 242.900 et seq.
---------------------------------------------------------------------------

    Absent additional conditions, however, the transactions that would
be subject to the proposed exception would not necessarily be subject
to certain of those security-based swap dealer requirements. In
particular, several provisions of the Exchange Act and the rules
thereunder impose obligations upon security-based swap dealers with
regard to their activities that involve a ``counterparty.'' \115\ For
transactions subject to the proposed exception, however, the registered
security-based swap dealer that engages in arranging, negotiating and
executing activity in the United States would not be a contractual
party to the security-based swaps resulting from that arranging,
negotiating or executing activity, and therefore would not be a
``counterparty'' to the transaction.
---------------------------------------------------------------------------

    \115\ See, e.g., Exchange Act Rule 15Fh-3(a) (eligible
counterparty verification); Rule 15Fh-3(b) (disclosure of risks,
characteristics, incentives and conflicts; Rule 15Fh-3(c) (daily
mark disclosure); Rule 15Fh-3(d) (clearing rights disclosure); Rule
15Fh-3(e) (``know your counterparty'' requirement); Rule 15Fh-3(f)
(suitability of recommendations); Rule 15Fh-3(g) (fair and balanced
communications); Exchange Act Rule 15Fi-2(a) (trade acknowledgment
and verification).
    Certain of the Exchange Act provisions that underlie those rules
also explicitly refer to activities involving a ``counterparty.''
See Exchange Act Section 15F(h)(3)(A) (eligible counterparty
verification); Sections 15F(h)(3)(B)(i), (ii) (disclosure of risks,
characteristics, incentives and conflicts); Section
15F(h)(3)(B)(iii) (daily mark disclosure).
---------------------------------------------------------------------------

    The Commission accordingly is proposing to condition the exception
on the registered security-based swap dealer complying with the
following requirements ``as if'' the counterparties to the non-U.S.
person relying on the exception also were counterparties to the
registered security-based swap dealer: \116\
---------------------------------------------------------------------------

    \116\ See Alternative 1--proposed paragraph (d)(1)(ii)(A) of
Rule 3a71-3 (providing for ``as if'' compliance with certain
specified requirements).
---------------------------------------------------------------------------

     Disclosure of risks, characteristics, material incentives
and conflicts of interest. The registered security-based swap dealer
must disclose information regarding the material risks and
characteristics of the security-based swap, and regarding the material
incentives or conflicts of interest of the security-based swap dealer,
including the material incentives and conflicts of interest associated
with the non-U.S. person relying on the exception.\117\
---------------------------------------------------------------------------

    \117\ See Alternative 1--proposed paragraph (d)(1)(ii)(B)(1) of
Rule 3a71-3 (citing the requirements for the disclosure of risks,
characteristics, incentives and conflicts in Exchange Act Sections
15F(h)(3)(B)(i), (ii) and Rule 15Fh-3(b) thereunder). The underlying
Rule 15Fh-3(b) requirement states that disclosure is required only
so long as the identity of the counterparty is known to the
security-based swap dealer ``at a reasonably sufficient time prior
to execution of the transaction'' to permit compliance.
    The proposed condition specifies that the disclosure should
address not only the material incentives and the conflicts of
interest of the registered security-based swap dealer engaged in the
arranging, negotiating or executing activity in the United States,
but also those of the affiliated non-U.S. person relying on the
exception, which is intended to allow the counterparty to the
transaction to be appropriately informed regarding incentives and
conflicts of interest relevant to the transaction.
---------------------------------------------------------------------------

     Suitability of recommendations. The registered security-
based swap dealer must comply with requirements regarding the
suitability of any recommendations that its associated persons
make.\118\
---------------------------------------------------------------------------

    \118\ See Alternative 1--proposed paragraph (d)(1)(ii)(B)(2) of
Rule 3a71-3 (citing the suitability requirements set forth in Rule
15Fh-3(f)).
---------------------------------------------------------------------------

     Fair and balanced communications. The registered security-
based swap dealer must comply with fair and balanced communication
requirements.\119\
---------------------------------------------------------------------------

    \119\ See Alternative 1--proposed paragraph (d)(1)(ii)(B)(3) of
Rule 3a71-3 (citing the fair and balanced communications requirement
set forth in Exchange Act Section 15F(h)(3)(C) and Rule 15Fh-3(g)
thereunder).
---------------------------------------------------------------------------

     Trade acknowledgment and verification. The registered
security-based swap dealer must comply with trade acknowledgment and
verification requirements.\120\
---------------------------------------------------------------------------

    \120\ See Alternative 1--proposed paragraph (d)(1)(ii)(B)(4) of
Rule 3a71-3 (citing the trade acknowledgment and verification
requirement set forth in Exchange Act Rules 15Fi-1 and 15Fi-2).
---------------------------------------------------------------------------

     Portfolio reconciliation requirements. The registered
security-based swap dealer must comply with the portfolio
reconciliation requirements applicable to security-based swap dealers
for the security-based swap resulting from the transaction as if the
security-based swap were being included in the security-based swap
dealer's portfolio, but only the first time that the security-based
swap would be reconciled by the security-based swap dealer.\121\
---------------------------------------------------------------------------

    \121\ See Alternative 1--proposed paragraph (d)(1)(ii)(B)(5) of
Rule 3a71-3 (citing the portfolio reconciliation requirement
proposed to be set forth in Exchange Act Rule 15Fi-3). In practice,
this condition would require the security-based swap dealer to
establish, maintain, and follow written policies and procedures
reasonably designed to ensure that it engages in the initial
portfolio reconciliation for transactions for which it arranges,
negotiates, or executes security-based swap transactions for its
foreign affiliates. See Risk Mitigation Proposing Release (proposing
Exchange Act Rule 15Fi-3).
---------------------------------------------------------------------------

    The Commission preliminarily believes that requiring the registered
security-based swap dealer engaged in arranging, negotiating or
executing activity in the United States to comply with the standards of
conduct required by the above requirements in connection with the
transactions at issue generally would not impose significant additional
information-gathering or documentation burdens on that registered
security-based swap dealer. At the same time, the Commission recognizes
that certain of those requirements, particularly the disclosure and
suitability requirements, in some cases may require the registered
security-based swap dealer to undertake potentially significant
additional efforts related to information-gathering and documentation.
In the Commission's view, however, the customer protections provided by
imposing those requirements would justify the associated burdens.
    For example, disclosure of risks, characteristics, material
incentives, and conflicts of interest will permit a counterparty to
more effectively assess whether and under which terms to enter a
transaction. Although the compliance burdens associated with that
disclosure obligation may be significant, those burdens should be
mitigated by the underlying provision stating that the requirement to
disclose risks, characteristics, material incentives and conflicts of
interest will apply only when the registered security-based swap dealer
knows the identity of the counterparty at a reasonably sufficient time
prior to execution of the transaction.\122\
---------------------------------------------------------------------------

    \122\ See Exchange Act Rule 15Fh-3(b).
---------------------------------------------------------------------------

    The burden of complying with the suitability requirement, including
obtaining the required counterparty information and making a
suitability assessment using that information, similarly may be
significant in some cases, but the Commission preliminarily believes
that those burdens are justified by the importance of the counterparty
protections provided by the suitability requirement.\123\ The
Commission further

notes that the suitability requirement would apply only when the
registered security-based swap dealer makes a recommendation to the
counterparty, and that the associated burdens may be lessened by the
institutional suitability provisions of the requirement.\124\ In this
regard, moreover, we understand that in some cases, U.S. personnel
currently manage trading or sales relationships with counterparties,
and the registered security-based swap dealer accordingly may already
possess the information needed to comply with obligations such as
disclosure or suitability.\125\
---------------------------------------------------------------------------

    \123\ If the registered security-based swap dealer makes a
recommendation in connection with the transaction--apart from a
recommendation to a security-based swap dealer, swap dealer, major
security-based swap participant, or major swap participant--the
suitability rule would require the entity both to undertake
reasonable diligence to understand the potential risks and rewards
associated with a recommended security-based swap or trading
strategy involving a security-based swap (see Rule 15Fh-3(f)(1)(i)),
and to have a reasonable basis to believe that the recommended
security-based swap or trading strategy involving a security-based
swap is suitable for the counterparty (see Rule 15Fh-3(f)(1)(ii)).
    \124\ In the case of recommendations to certain institutional
counterparties, the security-based swap dealer may satisfy the
counterparty-specific suitability requirement if it receives certain
written representations and provides certain disclosures. See Rules
15Fh-3(f)(2) and (3).
    \125\ The Commission is soliciting comment regarding the
practicability of requiring compliance with the suitability
condition in the circumstances at issue. See part III.D.5, infra.
---------------------------------------------------------------------------

    The Commission is proposing to condition the exception on the
registered security-based swap dealer complying with the trade
acknowledgement and verification requirements to help assure that there
are definitive written records of the terms of the resulting
transactions and to help control legal and operational risks for the
counterparties.\126\
---------------------------------------------------------------------------

    \126\ See generally Trade Acknowledgment Adopting Release, 81 FR
at 39809.
    This proposed condition has parallels to Exchange Act Rule 15a-
6(a)(3), which provides a conditional exemption from broker-dealer
regulation for foreign broker-dealers in connection with certain
activities that are intermediated (or ``chaperoned'') by registered
broker-dealers. Under Rule 15a-6(a)(3)(iii)(A)(2), the registered
broker-dealer must issue all required confirmations and statements.
In the present context the Commission would expect the registered
security-based swap dealer to use the same general techniques, to
obtain requisite information to satisfy the trade acknowledgment and
verification condition, as registered broker-dealers use to obtain
the information needed to satisfy the Rule 15a-6 confirmation
condition. Given that the registered-security-based swap dealer
would be affiliated with the non-U.S. person relying on the
exception, the use of common back office platforms may help
facilitate transfer of that information.
    As further discussed in Section IV, the Commission is mindful
that foreign blocking laws, privacy laws, secrecy laws and other
foreign legal barriers may limit or prohibit firms from providing
books and records directly to the Commission, Similarly, such laws
may impede the transfer of relevant records among affiliates for
purposes of complying with the exception. The Commission
preliminarily believes that the exception should not be available if
such impediments to transferring information precluded compliance
with the trade acknowledgement and verification condition, given
those requirements' importance in providing for definitive records
and controlling risks.
---------------------------------------------------------------------------

    The proposal to condition the exception on the registered entity
complying with the portfolio reconciliation requirements as if it were
the counterparty to the transaction, but only for the initial
reconciliation, should help advance two goals: Helping to ensure the
accuracy of the data reported to security-based swap data repositories
(``SDRs''), and helping to facilitate the ability of registered SDRs to
comply with requirements that they verify the information they
receive.\127\
---------------------------------------------------------------------------

    \127\ In proposing the portfolio reconciliation requirements,
the Commission explained that the requirements have been designed
not only to help ensure that the counterparties to a transaction are
and remain in agreement with respect to all material terms, but also
to help ensure that the information reported to SDRs is complete and
accurate. See Risk Mitigation Proposing Release, 84 FR at 4634. This
objective is applicable to the transactions at issue because
transactions that are arranged, negotiated, or executed by U.S.
personnel of a registered security-based swap dealer are subject to
Regulation SBSR based on that activity. See Regulation SBSR Rule
908(a)(1)(v).
    The portfolio reconciliation requirement further may assist SDRs
in satisfying their obligations under Section 13(n)(5)(B) of the
Exchange Act and rule 13n-4(b)(3) thereunder to verify the terms of
each security-based swap with both counterparties. See Risk
Mitigation Proposing Release, 84 FR at 4633-4644.
---------------------------------------------------------------------------

    The Commission believes that the condition would promote those
goals while imposing only minimal additional burdens on the registered
entity, based in part on the understanding that the registered entity
typically would have access to the necessary information because the
registered entity is likely to report the transaction to the SDR on
behalf of its non-U.S. affiliate (due to the registered entity being
the only U.S. person involved in the transaction). Moreover, for these
transactions the underlying proposed portfolio reconciliation rule
focuses on there being reasonable policies and procedures in
place,\128\ meaning that the registered entity would not fall out of
compliance with the condition merely because it has not been provided
necessary counterparty information.
---------------------------------------------------------------------------

    \128\ In the Risk Mitigation Proposing Release, the Commission
proposed that, with respect to transactions with persons who are not
SBS Entities, security-based swap dealers would be required to
establish, maintain, and follow written policies and procedures
reasonably designed to ensure that it engages in portfolio
reconciliation for those security-based swap transactions. As such,
conditioning the exception on security-based swap dealers complying
with the initial portfolio reconciliation requirements as if the
security-based swap dealer were the counterparty to the transaction,
will require that its required policies and procedures regarding
reconciliation include transactions for which the security-based
swap dealer arranges, negotiates or executes a security-based swap
transaction on behalf of another person.
     By contrast, the proposed rule expressly requires portfolio
reconciliation to occur with respect to security-based swap
transactions between two SBS Entities. See Risk Mitigation Proposing
Release, 84 FR 4618-20.
---------------------------------------------------------------------------

    In addition, the Commission is conditioning the exception on the
registered security-based swap dealer complying with fair and balanced
communication requirements to promote investor protection, which
prohibit registered entities from overstating the expected benefits or
understating the expected risks of potential transactions in their
communications with counterparties.\129\
---------------------------------------------------------------------------

    \129\ See Business Conduct Adopting Release, 81 FR at 30001-02
(``we believe the requirement promotes investor protection by
prohibiting SBS Entities from overstating the benefits or
understating the risks to inappropriately influence counterparties'
investment decisions'').
---------------------------------------------------------------------------

    Conversely, this proposed compliance condition would not extend to
certain other ``counterparty''-related requirements applicable to
security-based swap dealers. In part, the proposed exception would not
be conditioned on compliance with ECP verification requirements \130\
and ``know your counterparty'' requirements \131\ because the
Commission preliminarily believes that in some circumstances the
registered security-based swap dealer would have limited interaction
with the counterparty to the transactions at issue, making it difficult
to obtain the information needed to satisfy those requirements. For
example, compliance with the ``know your counterparty'' requirement
would be expected to necessitate the creation of documentation that may
be infeasible for the registered security-based swap dealer.\132\
Compliance with the ECP verification requirement would require the
registered security-based swap dealer to verify that a counterparty
meets the eligibility standards for an ECP before entering into a
security-based swap with that counterparty--which could be problematic
in this context given the diverse set of circumstances in which the
registered security-based swap dealer may arrange, negotiate or execute
transactions subject to the exception. To be clear, however, although
the Commission is not proposing to condition the exception on
compliance with security-based swap dealer ECP verification
requirements, existing limitations on entering into

security-based swaps with non-ECPs would remain in effect.\133\
---------------------------------------------------------------------------

    \130\ See Alternative 1--proposed paragraph (d)(1)(ii)(C)(1) of
Rule 3a71-3 (citing the eligible contract participant verification
requirement set forth in Exchange Act Section 15F(h)(3)(A) and Rule
15Fh-3(a)(1) thereunder); see also Business Conduct Adopting
Release, 81 FR at 29978-79.
    \131\ See Alternative 1--proposed paragraph (d)(1)(ii)(C)(4) of
Rule 3a71-3 (citing the ``know your counterparty'' requirement is
set forth in Rule 15Fh-3(e)); see also Business Conduct Adopting
Release, 81 FR at 29993-94.
    \132\ The scope of the ``know your counterparty'' requirement is
in contrast the suitability requirements addressed above, which
would apply only when the registered security-based swap dealer
makes a recommendation.
    \133\ See Exchange Act Section 6(l) (requiring security-based
swaps with non-ECPs to be effected on a national securities
exchange); Securities Act Section 5(e) (requiring registration of
the offer and sale of security-based swaps to non-ECPs). The
registered security-based swap dealer might use information obtained
from its non-U.S. affiliate to verify that a counterparty to the
security-based swap is in fact an ECP.
---------------------------------------------------------------------------

    In addition, the proposed exception would not be conditioned on
compliance with clearing rights disclosure requirements,\134\ because
the transactions at issue would not be expected to be subject to the
underlying clearing rights.\135\ Finally, the proposed exception would
not be conditioned on compliance with daily mark disclosure
requirements \136\ and with certain risk mitigation rules \137\ because
those requirements are predicated on there being an ongoing
relationship between the security-based swap dealer and the
counterparty that may not be present in connection with the
transactions at issue, and further would be linked to risk management
functions that are likely to be associated with the entity in which the
resulting security-based swap position is booked.
---------------------------------------------------------------------------

    \134\ See Alternative 1--proposed paragraph (d)(1)(ii)(C)(3) of
Rule 3a71-3 (citing the clearing rights disclosure requirement set
forth in Rule 15Fh-3(d)); see also Business Conduct Adopting
Release, 81 FR at 29992-93.
    \135\ See Exchange Act Section 3C(g)(5) (addressing clearing
rights of transactions that have been ``entered into'' by security-
based swap dealers).
    \136\ See Alternative 1--proposed paragraph (d)(1)(ii)(C)(2) of
Rule 3a71-3 (citing the requirement for the disclosure of daily
marks set forth in Exchange Act Section 15F(h)(3)(B)(iii) and Rule
15Fh-3(c) thereunder).
    \137\ See Alternative 1--proposed paragraphs (d)(1)(ii)(C)(5)-
(6) of Rule 3a71-3. Those paragraphs cross-reference requirements
regarding the following:
    (1) Security-based swap portfolio compression (proposed Exchange
Act Rule 15Fi-4). The proposed portfolio compression rule would
address processes whereby counterparties terminate or change the
notional value of security-based swap in the portfolio between the
counterparties.
    (2) Security-based swap trading relationship documentation
(proposed Exchange Act Rule 15Fi-5). The proposed trading
documentation rule would address the trading relationship between
counterparties, including terms addressing payment obligations,
netting, default or termination events and allocation of reporting
obligations.
---------------------------------------------------------------------------

    Separately, although the Exchange Act and Commission rules apply
certain requirements to security-based swap dealers that act as
advisors or counterparties to special entities,\138\ the Commission has
defined the term ``special entity'' so as not to encompass non-U.S.
persons.\139\ Because the counterparties to the transactions that are
the subject of this exception would not be U.S. persons, the special
entity requirements would not apply to those transactions.
---------------------------------------------------------------------------

    \138\ See generally Exchange Act Sections 15F(h)(4) and (5), and
Exchange Act Rules 15Fh-3(a)(2), (3), 15Fh-4 and 15Fh-5.
    \139\ See Exchange Act Rule 15Fh-2(d); see also Exchange Act
Release No. 77617 (Apr. 14, 2016), 81 FR 29960, 30013 (May 13,
2016).
    Exchange Act Section 15F(h)(4)(A)(iii) and Exchange Act Rule
15Fh-4(a)(3), which prohibit security-based swap dealers from
engaging in any act, practice or course of business that is
fraudulent, deceptive or manipulative, still would apply to those
registered security-based swap dealers in connection with this
exception, notwithstanding those provisions' basis in Section
15F(h)(4) (which mostly addresses a security-based swap dealer's
obligations in dealing with special entities).
---------------------------------------------------------------------------

b. Application of Other Requirements
    By virtue of being a registered security-based swap dealer, the
entity engaged in arranging, negotiating or executing activity in the
United States would have to comply with additional requirements
applicable to security-based swap dealers, including, but not limited
to requirements related to supervision, chief compliance officers,
books and records and financial responsibility.
3. Commission Access to Relevant Books, Records and Testimony, and
Related Obligations
    Under the proposal, the non-U.S. person relying on the conditional
exception would, upon request, promptly have to provide the Commission
or its representatives with any information or documents within the
non-U.S. person's possession, custody or control related to
transactions under the exception, as well as making its foreign
associated persons available for testimony, and providing assistance in
taking the evidence of other persons, wherever located, related to
those transactions.\140\
---------------------------------------------------------------------------

    \140\ See Alternative 1--proposed paragraph (d)(1)(iii)(A) of
Rule 3a71-3. That proposed paragraph further would specify that the
non-U.S. person must provide this information under request of the
Commission or its representatives or pursuant to arrangements or
agreements reached between any foreign securities authority,
including any foreign government, and the Commission or the U.S.
government.
     Proposed paragraph (a)(11) of Rule 3a71-3 in general would
define the term ``foreign associated person'' as a natural person
domiciled outside the United States that is a partner, officer,
director, branch manager or employee of the non-U.S. person taking
advantage of the exception, or that controls, is controlled by or is
under common control with that non-U.S. person.
---------------------------------------------------------------------------

    In addition, the registered security-based swap dealer engaged in
that activity in the United States must create and maintain all
required books and records relating to the transaction subject to the
exception, including those required by Exchange Act Rules 17a-3 and
17a-4, or Rules 18a-5 and 18a-6, as applicable.\141\ The condition
further clarifies that this obligation would extend to books and
records requirements related to the conditions, discussed above,
requiring the registered security-based swap dealer to comply with
Title VII requirements relating to: Disclosure of risks,
characteristics, incentives and conflicts; suitability; fair and
balanced communications; trade acknowledgment and verification; and
portfolio reconciliation.\142\
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    \141\ See Alternative 1--proposed paragraph (d)(1)(iii)(B)(1) of
Rule 3a71-3. Under proposed books and records requirements, a
registered security-based swap dealer would be required to comply
with the books and records requirements of Exchange Act Rules 17a-3
and 17a-4 if it is dually registered as a broker-dealer, or the
requirements of Rules 18a-5 and 18a-6 if it is not. See generally
Recordkeeping and Reporting Proposing Release, 79 FR at 25298-302,
25307-13; Risk Mitigation Proposing Release, 84 FR at 4674-75.
    Consistent with the provisions of those proposed books and
records requirements, the registered entity would make and/or
preserve the following types of records related to the transactions
at issue: Records of communications; written agreements; copies of
trade acknowledgments; records related to transactions not verified
in a timely manner; documents related to compliance with security-
based swap dealer business conduct standards; and documents related
to compliance with portfolio reconciliation requirements. Other
types of records addressed by those proposed books and records
requirements--e.g., inclusion of trades in financial ledgers--
preliminarily would not appear to be required for the registered
entity in connection with these transactions, as the registered
entity would not have direct financial obligations under the
transactions.
    \142\ See Alternative 1--proposed paragraph (d)(1)(iii)(B)(1) of
Rule 3a71-3 (requiring creation and maintenance of books and records
relating to the requirements specified in proposed paragraph
(d)(1)(ii)(B)).
---------------------------------------------------------------------------

    The registered security-based swap dealer further must obtain from
the non-U.S. person relying on the exception, and maintain,
documentation encompassing all terms governing the trading relationship
between the non-U.S. person and its counterparty relating to the
transactions subject to this exception, including terms addressing
payment obligations, netting of payments, events of default or other
termination events, calculation and netting of obligations upon
termination, transfer of rights and obligations, allocation of any
applicable regulatory reporting obligations, governing law, valuation,
and dispute resolution.\143\
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    \143\ See Alternative 1--proposed paragraph (d)(1)(iii)(B)(2) of
Rule 3a71-3. These records are consistent with those required by the
Commission's proposed trading relationship documentation rule. See
Risk Mitigation Proposing Release, 84 FR at 4673-74 (proposing
Exchange Act Rule 15Fi-5).
    As discussed above in connection with the implementation of the
trade acknowledgment and verification condition (see note 126,
supra), the Commission is mindful that foreign blocking laws,
privacy laws, secrecy laws and other foreign legal barriers may
impede the transfer of relevant records among affiliates for
purposes of complying with this condition. Here too, the Commission
preliminarily believes that the exception should not be available if
such impediments to transferring information precluded compliance
with the condition requiring the registered entity to obtain trading
relationship documentation, given the need for the Commission to
have a comprehensive view of the dealing activities connected with
transactions relying on the proposed exception, to facilitate the
Commission's ability to identify fraud and abuse in connection with
transactions that have been arranged, negotiated or executed in the
United States.

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

    In addition, the registered security-based swap dealer would have
to obtain from the non-U.S. person relying on the exception written
consent to service of process for any civil action brought by or
proceeding before the Commission, specifying that process may be served
on the non-U.S. person in the manner set forth in the registered
security-based swap dealer's current Form SBSE, SBSE-A or SBSE-BD, as
applicable.\144\
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    \144\ See Alternative 1--proposed paragraph (d)(1)(iii)(B)(3) of
Rule 3a71-3. Form SBSE addresses applications for registration as
security-based swap dealers or major security-based swap
participants. Form SBSE-A addresses such applications by persons
that are registered or registering with the CFTC as swap dealers.
Form SBSE-BD addresses such applications by persons that are
registered broker-dealers. These forms may be found at https://www.sec.gov/forms.
---------------------------------------------------------------------------

    Those proposed requirements--relating to Commission access to
information of the non-U.S. person, the obligation of the registered
security-based swap dealer to create and maintain information related
to the transaction, and to obtain and maintain trading relationship
documentation from the non-U.S. person, and the obligation of the non-
U.S. person to consent to service of process--should help provide the
Commission with a comprehensive view of the dealing activities
connected with transactions relying on the proposed exception, and
facilitate the Commission's ability to identify fraud and abuse in
connection with transactions that have been arranged, negotiated or
executed in the United States.\145\
---------------------------------------------------------------------------

    \145\ The proposed conditions regarding Commission access to
information of the non-U.S. person, and regarding the need for the
non-U.S. person to consent to service of process, are similar to the
access and consent to service conditions in Exchange Act Rule 15a-
6(a)(3). Rule 15a-6 in part provides a conditional exemption from
broker-dealer regulation for foreign broker-dealers in connection
with certain activities that are intermediated by registered broker-
dealers. That rule in part requires that a foreign broker-dealer
provide the Commission (upon request or pursuant to agreements
reached between any foreign securities authority and the Commission
or the U.S. Government) with any information or documents within the
possession, custody, or control of the foreign broker or dealer, any
testimony of foreign associated persons, and any assistance in
taking the evidence of other persons, wherever located. See Exchange
Act Rule 15a-6(a)(3)(i)(B), (c). The proposed conditions would
modify the Rule 15a-6 access language to better describe the breadth
of the access afforded under this condition--e.g., the proposed
condition requires that the information be provided ``promptly,''
and specifically references supervisory or enforcement memoranda of
understanding and other arrangements with foreign authorities.
    The proposed conditions regarding the obligation of the
registered security-based swap dealer contains elements comparable
to a condition of Rule 15a-6 that states that a registered broker-
dealer must be responsible for maintaining required books and
records relating to the transactions conducted pursuant to the
exemption, including books and records required by applicable
Exchange Act rules. See Exchange Act Rule 15a-6(a)(3)(iii)(A)(4).
The proposal also incorporates language providing for the registered
security-based swap dealer to obtain trading relationship
documentation to further promote effective Commission access to
relevant information.
---------------------------------------------------------------------------

    The proposed condition related to access to information, documents
or testimony further provides that if, despite the non-U.S. person's
best efforts, the non-U.S. person is prohibited by applicable foreign
law or regulations from providing such access to the Commission, the
non-U.S. person may continue to rely on the exception until the
Commission issues an order modifying or withdrawing an associated
``listed jurisdiction'' determination.\146\ As discussed below,
proposed provisions relating to the ``listed jurisdiction'' condition
to the exception in part would permit the Commission to withdraw a
listed jurisdiction determination if the jurisdiction's laws or
regulations have had the effect of preventing the Commission or its
representatives from accessing such information, documents and
testimony.\147\
---------------------------------------------------------------------------

    \146\ See Alternative 1--proposed paragraph (d)(1)(iii)(A) of
Rule 3a71-3 (referring to listed jurisdiction withdrawal provisions
of paragraph (d)(2)(iii)).
     That continued reliance provision is limited to circumstances
in which the failure to provide access is due to applicable foreign
law or regulations. Accordingly, a non-U.S. person's failure to
provide the Commission with required information for any reason
other than prohibition by applicable foreign law or regulations
would cause the person to be in violation of the conditions to the
exception, making the exception unavailable to that person.
    \147\ See part III.B.5, infra.
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4. Disclosures to Counterparties
    The proposed exception further would be conditioned on the
registered security-based swap dealer notifying the counterparties of
the non-U.S. person relying on the exception that the non-U.S. person
is not registered as a security-based swap dealer, and that certain
Exchange Act provisions or rules addressing the regulation of security-
based swaps would not be applicable to the non-U.S. person in
connection with the transaction, including provisions affording
clearing rights to counterparties.\148\ To promote effective
disclosure, the registered security-based swap dealer would have to
provide this information contemporaneously with and in the same manner
(e.g., oral, electronic or otherwise) as the arranging, negotiating or
executing activity at issue.\149\
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    \148\ See Alternative 1--proposed paragraph (d)(1)(iv) of Rule
3a71-3; see also notes 134 and 135, supra, and accompanying text
regarding clearing rights.
    \149\ This disclosure requirement would not apply if the
identity of that counterparty is not known to that registered
security-based swap dealer at a reasonably sufficient time prior to
the execution of the transaction to permit such disclosure. Id.
Circumstances in which the registered security-based swap dealer
engaged in relevant activity may not know the identity of the
counterparty could include circumstances in which the registered
security-based swap dealer provides only execution services, and
does not arrange or negotiate the transactions at issue, as well as
circumstances where personnel in the United States specify a trading
strategy or techniques carried out through algorithmic trading or
automated electronic execution of security-based swaps. See also
note 117, supra (discussing a similar carveout in connection with
the security-based swap dealer requirements for disclosure of risks,
characteristics, material incentives and conflicts of interest).
---------------------------------------------------------------------------

    This proposed condition is intended to help guard against
counterparties assuming that the involvement of U.S. personnel in a
arranging, negotiating or executing capacity as part of the transaction
would be accompanied by all of the safeguards associated with Title VII
security-based swap dealer regulation. Because the disclosure must be
provided contemporaneously with, and in the same manner as, the
activity at issue (e.g., via oral disclosure in the event that the
market facing activity occurs via oral communications), the Commission
does not believe that such disclosure reasonably could be provided via
inclusion in standard trading documentation.
5. Applicability of Financial Responsibility Requirements of a Listed
Jurisdiction
    Finally, the proposed exception would be conditioned on the
requirement that the non-U.S. person relying on the exception be
subject to the margin and capital requirements of a ``listed
jurisdiction'' when engaging in transactions subject to this
exception.\150\ The Commission conditionally or unconditionally may
determine ``listed jurisdictions'' by order, in response to
applications or upon the Commission's own initiative.\151\
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    \150\ See Alternative 1--proposed paragraph (d)(1)(v) of Rule
3a71-3 (cross-referencing proposed the data access provisions of
proposed paragraph (d)(1)(iii)(A)).
    \151\ See Alternative 1--proposed paragraph (d)(1) of Rule 3a71-
3.
     Proposed paragraph (a)(12) of Rule 3a71-3 would define the term
``listed jurisdiction'' to mean any jurisdiction which the
Commission by order has designated as a listed jurisdiction for
purposes of the exception.
    The proposal also specifies that applications for listed
jurisdiction status may be made by parties or groups of parties that
potentially would rely on the exception from the counting rule, and
by any foreign financial authorities supervising such parties. The
proposal further states that such applications must be filed
pursuant to the procedures specified in Exchange Act Rule 0-13. See
Alternative 1--proposed paragraph (d)(2)(i) of Rule 3a71-3. Rule 0-
13 currently addresses substituted compliance applications, and the
Commission is proposing to amend the caption of that rule and make
certain additions to the text of that rule so that it also
references ``listed jurisdiction'' applications.

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

    The proposed listed jurisdiction condition is intended to help
avoid creating an incentive for dealers to book their transactions into
entities that solely are subject to the regulation of jurisdictions
that do not effectively require security-based swap dealers or
comparable entities to meet certain financial responsibility standards.
Absent this type of condition, the exception from the de minimis
counting requirement could provide a competitive advantage to non-U.S.
persons that conduct security-based swap dealing activity in the United
States without being subject to sufficient financial responsibility
standards. More generally, the proposed condition is consistent with
the belief the Commission expressed when it adopted the ``arranged,
negotiated, or executed'' de minimis counting rule, that applying
capital and margin requirements to such transactions between two non-
U.S. persons can help mitigate the potential for financial contagion to
spread to U.S. market participants and to the U.S. financial system
more generally.\152\
---------------------------------------------------------------------------

    \152\ See ANE Adopting Release, 81 FR at 8616. The Commission
further has stated:
    Subjecting non-U.S. persons that engage in security-based swap
dealing activity in the United States at levels above the dealer de
minimis threshold to capital and margin requirements also should
help reduce the likelihood of firm failure and the likelihood that
that the failure of a firm engaged in dealing activity in the United
States might adversely affect not only its counterparties (which may
include other firms engaged in security-based swap dealing activity
in the United States) but also other participants in that market.
     Id. at 8617.
---------------------------------------------------------------------------

    Commenters to the Commission's proposal for the ``arranged,
negotiated, or executed'' counting requirement suggested that potential
concerns regarding that type of outcome could be addressed by
conditioning a broker-dealer-based alternative to the counting rule on
the non-U.S. entity being regulated in a ``local jurisdiction
recognized by the Commission as comparable,'' or in a G-20 jurisdiction
or in a jurisdiction where the entity would be subject to Basel capital
requirements.\153\ The Commission, however, does not believe that
concerns regarding potential risks associated with this type of
exception would adequately be addressed by a ``one size fits all''
approach that is linked simply to a jurisdiction's membership in the G-
20 or compliance with Basel standards, with no further opportunity to
consider relevant regulatory practices and requirements.\154\
---------------------------------------------------------------------------

    \153\ See note 23, supra, and accompanying text.
    \154\ The Commission is mindful that a jurisdiction's membership
in the G-20 or its compliance with Basel standards can be a positive
indicator regarding the effectiveness of the jurisdiction's margin
and capital regimes. At the same time, the Commission also
recognizes that implementation and oversight practices may vary even
among those jurisdictions. Accordingly, the Commission preliminarily
believes that the proposed individualized ``listed jurisdiction''
assessment would provide us an appropriate degree of discretion to
consider whether the jurisdiction has implemented appropriate
financial responsibility standards and exercises appropriate
supervision in connection with those standards, and whether the
Commission as necessary could access relevant information.
---------------------------------------------------------------------------

    In considering a jurisdiction's potential status as a ``listed
jurisdiction''--whether upon the Commission's own initiative or in
response to an application for an order--the Commission would consider
whether the order would be in the public interest.\155\ Factors would
include consideration of the jurisdiction's applicable margin and
capital requirements, and the effectiveness of the foreign regime's
supervisory compliance program and enforcement authority in connection
with those requirements, including in the cross-border context.\156\
---------------------------------------------------------------------------

    \155\ See Alternative 1--proposed paragraph (d)(2)(ii) of Rule
3a71-3.
    \156\ See Alternative 1--proposed paragraph (d)(2)(ii)(A), (B)
of Rule 3a71-3.
---------------------------------------------------------------------------

    The Commission further may by order, on its own initiative, modify
\157\ or withdraw a listed jurisdiction determination, after notice and
opportunity for comment, if the Commission determines that continued
listed jurisdiction status would not be in the public interest.\158\
The Commission may base that modification or withdrawal on the factors
discussed above regarding the foreign jurisdiction's margin and capital
requirements and associated supervisory and enforcement practices.\159\
The Commission may also consider whether the jurisdiction's laws or
regulations have had the effect of preventing the Commission or its
representatives from promptly being able to obtain information
regarding the non-U.S. persons relying on the exception.\160\ This
latter provision reflects the importance of the proposed exception's
information access condition,\161\ and the conclusion that it would be
appropriate to modify or withdraw listed jurisdiction status if, in
practice, the Commission or its representatives have been prevented
from accessing information required under the exception due to the
jurisdiction's laws or regulations.\162\
---------------------------------------------------------------------------

    \157\ As discussed below, the Commission may modify a listed
jurisdiction designation by broadening or narrowing the application
of listed jurisdiction status in connection with a particular class
of market participants or an individual market participant within
that jurisdiction.
    \158\ See Alternative 1--proposed paragraph (d)(2)(iii) of Rule
3a71-3. The Commission preliminarily expects that any such notice
would be via publication in the Federal Register and on the
Commission's website, to allow all interested parties the
opportunity to comment, including persons that are located in the
jurisdiction at issue and are relying on the exception.
    \159\ See Alternative 1--proposed paragraph (d)(2)(iii)(A) of
Rule 3a71-3 (cross-referencing paragraph (d)(2)(ii)).
    \160\ See Alternative 1--proposed paragraph (d)(2)(iii)(B) of
Rule 3a71-3. These would include potential barriers to the
Commission's ability to obtain testimony of the non-U.S. person's
foreign associated persons, and to obtain the assistance of the non-
U.S. person in taking the evidence of other persons. Id.
    \161\ As discussed, the proposed exception is conditioned in
part on the non-U.S. person promptly making relevant information
available to the Commission and its representatives. The access
condition is intended to help ensure that the Commission and its
representatives in practice can obtain a full view of the dealing
activities connected with transactions at issue, to avoid
impediments in identifying fraud and abuse in connection with
transactions that have been arranged, negotiated or executed in the
United States. See part III.B.3, supra.
    \162\ Given the importance of the proposed access condition, the
Commission does not believe that persons from a foreign jurisdiction
should be able to continue relying on the exception if the
jurisdiction's law or regulations prevent the Commission from
obtaining access to relevant information.
     At the same time, the Commission's initial consideration of
whether to designate a particular jurisdiction as a ``listed
jurisdiction'' would focus on the jurisdiction's applicable margin
and capital requirements and the foreign regime's supervisory
compliance program and enforcement authority in connection with
those requirements. This in part reflects the listed jurisdiction
condition's core role in helping to ensure that non-U.S. persons
that rely on the proposed exception are subject to adequate capital
and margin requirements. More generally, this approach also reflects
the expectation that, in practice, methods may be developed to help
provide the Commission with access to requested information.
     Separately, the Commission's decision to modify or withdraw
listed jurisdiction status may be based on any other factor it
determines to be relevant to whether continued status as a listed
jurisdiction would be in the public interest. See Alternative 1--
proposed paragraph (d)(2)(iii)(C) of Rule 3a71-3.
---------------------------------------------------------------------------

    Because listed jurisdiction determinations may be conditional or
unconditional, the Commission may modify a determination, among other
circumstances, when: (1) Certain market participants or classes of
market participants in the jurisdiction are not required to comply with
the financial responsibility requirements that

underpin the designation; (2) the jurisdiction's supervisory or
enforcement practices oversee certain market participants or classes of
market participants differently than others; or (3) the jurisdiction's
barriers to data access apply to certain market participants or classes
of market participants but not others. In practice, the Commission's
use of this authority may cause the exception to be unavailable to
certain groups of market participants in a jurisdiction, or to
individual market participants.\163\
---------------------------------------------------------------------------

    \163\ For example, as discussed above in conjunction with the
information access provision, if a non-U.S. person is prohibited by
applicable foreign law or regulations from providing access to the
Commission or its representatives, the non-U.S. person may continue
to rely on the exception until the Commission issues an order
modifying or withdrawing an associated ``listed jurisdiction''
determination. To the extent that such prohibitions apply in
practice to a particular class of market participants, or to an
individual market participant in that jurisdiction, a modification
of a listed jurisdiction order may exclude that class of market
participants or that individual market participant from reliance on
the exception.
---------------------------------------------------------------------------

    Preliminarily--based on the Commission's understanding of relevant
margin and capital requirements in those jurisdictions--the Commission
anticipates that the initial set of listed jurisdiction determinations
may include some or all of the following jurisdictions: Australia,
Canada, France, Germany, Hong Kong, Japan, Singapore, Switzerland, and
the United Kingdom. The Commission is soliciting comment as to whether
listed jurisdiction status may be appropriate for any of those
jurisdictions, based on those jurisdictions' financial responsibility
requirements and associated supervisory and enforcement programs.\164\
The Commission further anticipates that it may issue a set of listed
jurisdiction orders in conjunction with its final action on this
proposal, including orders addressing the jurisdictions specified
above. As discussed above, however, if the Commission determines that
the laws or regulations of a listed jurisdiction have prevented the
Commission from obtaining relevant information required pursuant to
this exception in relation to any person in the listed jurisdiction
availing itself of the exception, the Commission may modify or withdraw
a listed jurisdiction designation for that reason.
---------------------------------------------------------------------------

    \164\ See part III.D.3, infra.
---------------------------------------------------------------------------

    ``Listed jurisdiction'' applications may be expected to raise
issues that are analogous to those that would accompany applications
for substituted compliance in connection with margin and capital rules,
in that both types of applications would require the Commission to
consider the substance and implementation of foreign margin and capital
standards.\165\ Those two types of applications, however, would arise
in materially distinct contexts. In particular, ``listed jurisdiction''
status would be relevant only with regard to non-U.S. persons whose
dealing transactions with U.S.-person counterparties, if any, would be
below the de minimis thresholds. This de minimis cap on its dealing
transactions with U.S. persons likely would attenuate--although not
eliminate--the potential effect of the firm's failure on U.S. persons
and markets. Substituted compliance, in contrast, would address the
margin and capital requirements applicable to registered security-based
swap dealers that may engage in dealing transactions with U.S.
counterparties in amounts above the de minimis thresholds, and whose
failure is likely to pose greater direct threats to U.S. persons and
markets. Substituted compliance accordingly would be predicated on the
foreign margin and capital regime producing regulatory outcomes that
are comparable to the analogous requirements under Title VII.
Similarly, although the Commission will also consider, in connection
with a substituted compliance determination, the effectiveness with
which a regime administers its supervisory compliance program and
exercises its enforcement authority, the different purposes of these
proposed exclusions and a substituted compliance determination mean
that the Commission may reach different conclusions regarding these
issues when considering a substituted compliance determination than it
does when considering listed status.
---------------------------------------------------------------------------

    \165\ The Commission has proposed to make a mechanism for
substituted compliance orders generally available in connection with
security-based swap dealer requirements under Exchange Act Section
15F. See ``Cross-Border Security-Based Swap Activities; Re-Proposal
of Regulation SBSR and Certain Rules and Forms Relating to the
Registration of Security-Based Swap Dealers and Major Security-Based
Swap Participants'' (May 1, 2013), 78 FR 30968, 31207-08 (May 23,
2013) (proposing substituted compliance rule for section 15F
requirements; since then a mechanism for substituted compliance has
been adopted via Exchange Act Rule 3a71-6 in connection with
business conduct and trade acknowledgment and verification
requirements). Those Section 15F requirements include security-based
swap dealer margin and capital requirements. Substituted compliance
provides a mechanism by which a non-U.S. security-based swap dealer
may satisfy its requirements under Title VII via compliance with
analogous requirements of a foreign regime, contingent in part on
the Commission deeming the scope and objectives of the relevant
foreign requirements to be comparable to analogous Title VII
requirements. As proposed, substituted compliance would not be
available in connection with the Commission's segregation
requirements.
---------------------------------------------------------------------------

C. Alternative 2--Second Alternative Proposed Conditional Exception

    Alternative 2 for the proposed conditional exception would share a
number of elements with Alternative 1, but instead would allow the
arranging, negotiating or executing activity in the United States to be
conducted by an entity that is registered as a broker, without
requiring that entity also to register as a security-based swap
dealer.\166\ Alternative 2 also would permit that conduct to be
conducted by a registered security-based swap dealer, consistent with
the Alternative 1.\167\
---------------------------------------------------------------------------

    \166\ Alternative 2 would not be satisfied if this arranging,
negotiating or executing activity is conducted by a bank that has
not registered as a broker due to the Exchange Act's ``broker''
definition's exceptions for bank brokerage activity, unless the bank
is registered as a security-based swap dealer.
    \167\ For the reasons set forth above (see note 106, supra, and
accompanying text), the Commission believes that such a security-
based swap dealer also generally would be required to register as a
broker unless it can avail itself of an exception or exemption from
broker registration.
---------------------------------------------------------------------------

    Certain proposed conditions to Alternative 2 would be the same as
those of Alternative 1, while others would be modified to reflect the
potential for the activity in the United States to be conducted by a
registered broker that is not also registered as a security-based swap
dealer. Alternative 2 accordingly would make use of broker regulation
to provide for oversight of the transactions at issue while adding
certain conditions to fill gaps in regulation that otherwise may arise
absent the involvement of a registered security-based swap dealer.
Those conditions should help mitigate the previously expressed concerns
that a broker-focused approach may effectively supplant Title VII
security-based swap dealer regulation for a majority of dealing
activity carried out in the United States.\168\
---------------------------------------------------------------------------

    \168\ See part I.A.3, supra. Because Alternative 2 would not be
satisfied by the use of a bank that is not registered as a broker,
the Commission's previously expressed concerns regarding differences
in oversight between brokers and banks should not be a concern here.
---------------------------------------------------------------------------

1. U.S. Activity Conducted by a Majority-Owned Registered Broker
Affiliate or by a Security-Based Swap Dealer Affiliate
    Under Alternative 2, the U.S.-based arranging, negotiating and
executing activity that otherwise would trigger the counting
requirement must be conducted by the U.S. personnel in their capacity
as persons associated with an entity that: (a) Is registered as a
broker or a security-based swap dealer, and (b)

is a majority-owned affiliate of the non-U.S. person relying on the
exception.\169\
---------------------------------------------------------------------------

    \169\ See Alternative 2--proposed paragraph (d)(1)(i) of Rule
3a71-3. Exchange Act Section 3(a)(18) defines the terms ``person
associated with a broker or dealer'' and ``associated person of a
broker or dealer'' to encompass, inter alia, partners, officers,
directors, employees and persons controlling, controlled by, or
under common control with a broker or dealer.
    Alternative 2 shares, with Alternative 1, the definitions of
``majority-owned affiliate,'' ``foreign associated person'' and
``listed jurisdiction.''
---------------------------------------------------------------------------

    Consistent with Alternative 1, the affiliation requirement is
intended to help tailor the exception to reflect the proposed
exception's objective of helping to avoid personnel relocation, and to
also help ensure that the financial group has a significant financial
interest in the registered entity's compliance with applicable
requirements.\170\
---------------------------------------------------------------------------

    \170\ See part III.A, supra.
---------------------------------------------------------------------------

2. Compliance With Certain Security-Based Swap Dealer Requirements
    For a non-U.S. person to rely on Alternative 2, the registered
broker or security-based swap dealer that conducts the arranging,
negotiating or executing activity in the United States would be
required to comply with certain security-based swap dealer requirements
``as if'': (a) The counterparties to the non-U.S. person relying on the
exception also were counterparties to that entity, and (b) that entity
were registered with the Commission as a security-based swap dealer (in
the event the entity is registered only as a broker and not as a
security-based swap dealer). As with Alternative 1, the Commission
preliminarily believes that it would be appropriate to condition
Alternative 2 on compliance by the registered entity with the following
requirements applicable to security-based swap dealers: Disclosure of
risks, characteristics, incentives and conflicts; suitability of
recommendations; fair and balanced communications; trade acknowledgment
and verification; and portfolio reconciliation.\171\
---------------------------------------------------------------------------

    \171\ See Alternative 2--proposed paragraphs (d)(1)(ii)(A), (B)
of Rule 3a71-3.
---------------------------------------------------------------------------

    As discussed in connection with Alternative 1, those requirements
would impose standards of conduct in connection with the transactions
at issue, but would not be expected to impose significant additional
information-gathering or documentation burdens on the registered
entity.\172\ While recognizing that certain of the Title VII security-
based swap dealer requirements have similarities to the requirements
applicable to broker-dealers, the Commission preliminarily believes
that the arranging, negotiating or executing security-based swap
activity of U.S. personnel should be carried out pursuant to standards
of conduct imposed under Title VII, regardless of whether the ultimate
counterparties are U.S. or non-U.S. persons.
---------------------------------------------------------------------------

    \172\ See part III.B.2.a, supra.
---------------------------------------------------------------------------

    Alternative 2, like Alternative 1, also would provide that the
exception would not be conditioned on the registered entity's
compliance with eligible contract participant verification, clearing
rights disclosure, ``know your counterparty,'' daily mark disclosure
and certain proposed risk mitigation requirements.\173\ As discussed
above, the fact that the proposal would not be conditioned on
compliance with the ECP verification requirement would not affect
existing limitations on entering into security-based swaps with non-
ECPs.\174\
---------------------------------------------------------------------------

    \173\ See second alternative--proposed paragraph (d)(1)(ii)(C)
of Rule 3a71-3; see also notes 130 through 137, supra, and
accompanying text. Those particular Title VII requirements would be
at issue only if the entity is registered as a security-based swap
dealer.
    \174\ See note 133, supra, and accompanying text.
---------------------------------------------------------------------------

    By virtue of being a registered broker, the registered entity also
would be subject to all other applicable broker-dealer requirements
under the federal securities laws and self-regulatory organization
(``SRO'') rules.
3. Other Conditions
    Consistent with Alternative 1, and for the same reasons,
Alternative 2 further would encompass conditions related to: Commission
access to books, records and testimony of the non-U.S. person relying
on the exception; the registered entity's maintenance of trading
relationship documentation; consent to service of process;\175\
disclosures to counterparties; and the non-U.S. person being subject to
the financial responsibility requirements of a listed
jurisdiction.\176\
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    \175\ Because the registered entity under Alternative 2 may be a
registered broker, Alternative 2 allows for process to be served on
the non-U.S. person in the manner set forth in the registered
entity's Form BD (or, consistent with Alternative 1, in the manner
set forth in the registered entity's Forms SBSD, SBSE-A or SBSE-BD).
    \176\ See Alternative 2--proposed paragraphs (d)(1)(iii) through
(d)(1)(v), (d)(2) and (d)(3) of Rule 3a71-3; see also parts
III.B.3--III.B.5, supra.
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4. Carveout From De Minimis Counting Requirements
    In adopting the ``arranged, negotiated, or executed'' counting
requirement, the Commission recognized that arranging, negotiating or
executing conduct by personnel in the United States could constitute
dealing activity in the United States, regardless of the fact that the
parties to the transactions are not U.S. persons.\177\ To avoid
ambiguity regarding whether a registered broker's U.S. activity under
this alternative independently must be counted against the applicable
de minimis thresholds--and hence potentially require the registered
broker also to register as a security-based swap dealer--Alternative 2
would provide that the persons that engage in such conduct pursuant to
the exception would not have to count the associated security-based
swap transactions against the de minimis thresholds.\178\ Absent such
an exception, the Commission is concerned that Alternative 2
potentially would be ineffective due to the reluctance of entities that
are not registered as security-based swap dealers to engage in the
arranging, negotiating or executing conduct envisioned by the proposed
alternative.
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    \177\ See ANE Adopting Release, 81 FR at 8621.
    \178\ See Alternative 2--proposed paragraph (d)(4) of Rule 3a71-
3.
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D. Solicitation of Comments Regarding the Proposed Amendment to Rule
3a71-3

    The Commission requests comment on all aspects of the proposed
amendment to Rule 3a71-3, including the following issues:
1. Involvement of U.S. Personnel in Arranging, Negotiating and
Executing Transactions Between Non-U.S. Counterparties
    To what extent do U.S. personnel participate in arranging,
negotiating or executing activities in connection with security-based
swap dealing transactions involving two non-U.S. counterparties?
Commenters particularly are invited to address the following:
    a. What particular services do U.S. personnel typically provide as
part of such activities?
    b. What types of information do U.S. personnel typically
communicate to an affiliate's security-based swap counterparties in
connection with such activities?
    c. To what extent are U.S. personnel typically involved in
negotiating pricing or other terms of security-based swaps in
connection with such activities?
    d. What is the typical mode of communication (e.g., telephonic,
written, in-person) used between those U.S. personnel and an
affiliate's security-based swap counterparties in connection with such
activities?
    e. What types of instruments (e.g., securities issued by U.S.
persons)

typically underlie the security-based swaps that are the subject of
such transactions involving arranging, negotiating or executing
activity by U.S. personnel?
    f. Are U.S. personnel involved in such arranging, negotiating or
executing activities on behalf of non-U.S. persons that are not
affiliates? If so, what services do U.S. personnel provide and what
types of instruments are the subject of such activities by U.S.
personnel on behalf of unaffiliated non-U.S. persons?
    g. Are there particular categories of arranging, negotiating or
executing activity that U.S. personnel typically perform, to facilitate
a non-U.S. person's security-based swap dealing transactions with non-
U.S. counterparties, that are so limited in scope that they may not
trigger the concerns that led to the adoption of the ``arranged,
negotiated, or executed'' counting standard?
    h. To what extent do U.S. personnel typically provide the primary
point of contact for managing sales and trading relationships with non-
U.S. person counterparties on behalf of non-U.S. affiliates engaged in
security-based swap dealing activity? Conversely, to what extent is the
involvement of such U.S. personnel typically incidental to a
relationship that the non-U.S. person dealer manages primarily from an
office outside the United States, and what is the nature of any such
incidental involvement?
    i. To the extent U.S. personnel perform both types of functions--
serving as a primary point of contact for some transactions and serving
an incidental role for other transactions--are those functions
determined on the basis of counterparty location, product
characteristics, or on the basis of some other factors?
2. Implementation Issues Associated With the Existing ``Arranged,
Negotiated, or Executed'' Counting Requirement
    To what extent would a conditional exception from the ``arranged,
negotiated, or executed'' counting requirement be appropriate to
address implementation issues potentially associated with that
requirement? Commenters particularly are invited to address the
following:
    a. What would be the expected consequences if the Commission does
not adopt either proposed alternative for an exception to the de
minimis counting requirement? For example, how many financial groups
would expect to register one or more non-U.S. entities as security-
based swap dealers absent an exception? How many non-U.S. entities
would such financial groups typically expect to have to register in
those circumstances? Conversely, how many financial groups would be
expected to register non-U.S. entities as security-based swap dealers
in the presence of this type of exception?
    b. What contingency plans, if any, have such financial groups drawn
up to address the potential consequences associated with compliance
with the ``arranged, negotiated, or executed'' counting standard?
    c. In practice, would such financial groups be expected to relocate
U.S. personnel and/or relocate functions out of the United States to
avoid having to count security-based swap transactions pursuant to the
``arranged, negotiated, or executed'' counting standard?
3. ``Listed Jurisdiction'' Condition and Definition, and Potential
Effect of Barriers to the Transfer of Information
    Would the proposed ``listed jurisdiction'' condition and associated
definition appropriately prevent the proposed exception from permitting
persons that engage in security-based swap dealing activity in the
United States from booking transactions into affiliated non-U.S.
booking entities that are not subject to adequate financial
responsibility oversight or that would not allow for sufficient access
to information by the Commission? Commenters particularly are invited
to address the following:
    a. What criteria should the Commission use to help ensure that non-
U.S. persons relying on the exception are subject to adequate financial
responsibility requirements?
    b. Would it be appropriate, as commenters previously suggested, to
exclude transactions that are arranged, negotiated or executed by U.S.
personnel if the non-U.S. dealer is located in a G-20 jurisdiction or
is subject to the margin and capital requirements of a Basel-compliant
jurisdiction?
    c. Would ``listed jurisdiction'' status be appropriate for the
following jurisdictions: Australia, Canada, France, Germany, Hong Kong,
Japan, Singapore, Switzerland, and the United Kingdom?
     In this regard commenters particularly are invited to
address whether listed jurisdiction status would be warranted in light
of those jurisdictions' applicable margin and capital requirements, and
the effectiveness of those jurisdictions' supervisory compliance
program and enforcement authority in connection with those
requirements, including in the cross-border context.
     Commenters also are invited to address potential
impediments to the Commission's ability to promptly access information
or documents regarding the activities of persons in those
jurisdictions, to obtain the testimony of non-U.S. persons that are
associated with those persons, and to obtain the assistance of persons
relying on the exception in taking the evidence of other persons,
wherever located.\179\
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    \179\ As discussed above (see notes 160 through 162, supra, and
accompanying text), although the Commission preliminarily does not
expect to consider impediments to information access as part of
initial listed jurisdiction determinations, the Commission may
modify or withdraw listed jurisdiction status in the event that, in
practice, the Commission or its representatives have been prevented
from accessing information due to the jurisdiction's laws and
regulations.
---------------------------------------------------------------------------

    d. What criteria should the Commission use to help ensure that it
can access information from non-U.S. persons relying on the exception?
Commenters also are invited to address how potential impediments to the
cross-border transfer of information may affect compliance with the
information access condition and other conditions to the exception,
including the effect of any such impediments on the registered entity's
ability to comply with conditions related to the trade acknowledgment
and verification, and to the registered entity's obligation to obtain
trading relationship documentation from its non-U.S. affiliate.
4. Appropriate Counterparty Protections
    What conditions are appropriate to afford protections to the
counterparties to the security-based swap transactions at issue,
consistent with by Title VII and its implementing regulations?
Commenters particularly are invited to address the following issues,
and, to the extent possible, address similarities and differences
between the activities implicated by the proposed exception and the
activities that unregistered foreign broker-dealers may conduct
pursuant to the exemption provided by Exchange Act Rule 15a-6: \180\
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    \180\ Exchange Act Rule 15a-6 in part permits unregistered
foreign broker-dealers to engage in certain activities in the United
States in connection with major institutional investors represented
by U.S. fiduciaries on an ``unchaperoned'' basis. See Rule 15a-
6(a)(3). The Rule 15a-6(a)(3) exemption in part is conditioned on
the requirement that a registered broker-dealer is responsible for
effecting the resulting transactions, the requirement that an
associated person of the registered broker-dealer be involved in all
of the foreign entity's visits to defined U.S. institutional
investors, and prohibitions against the involvement of statutorily
disqualified foreign associated persons of the foreign-broker
dealer.
     Commission staff has provided statements regarding the
operation of Rule 15a-6. For example, a 1997 staff no-action letter,
inter alia, stated that the staff would not recommend enforcement
action when foreign associated persons of a foreign broker-dealer:
(i) Engaged in oral communications from outside the U.S. with
certain U.S. institutional investors outside of U.S. trading hours,
so long as the foreign associated persons do not accept orders
(other than those involving foreign securities); and (ii) have in-
person visits with certain ``major'' U.S. institutional investors,
so long as those contacts do not exceed 30 days a year and the
foreign associated persons do not accept orders. That letter also
provided a staff statement regarding the meaning of ``major U.S.
institutional investor.'' See Letter re Securities Activities of
U.S.-Affiliated Foreign Dealers from Richard R. Lindsey, Director,
Division of Market Regulation to Giovanni P. Prezioso, Cleary,
Gottlieb, Steen & Hamilton, dated Apr. 9, 1997 (``Nine Firms
Letter''), available at http://www.sec.gov/divisions/marketreg/mr-noaction/cleary040997.pdf. Staff guidance regarding the operation of
Rule 15a-6 is summarized in ``Frequently Asked Questions Regarding
Rule 15a-6 and Foreign Broker-Dealers,'' available at https://www.sec.gov/divisions/marketreg/faq-15a-6-foreign-bd.htm.
    In contrast to Rule 15a-6, which provides an exemption for
foreign entities' transactions with activities involving U.S. person
customers, the proposed exception to Rule 3a71-3 would permit
foreign entities to make use of U.S. activity only in connection
with security-based swaps with non-U.S. counterparties.

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

    a. Do the alternatives for the proposed exception appropriately
distinguish between certain security-based swap dealer requirements
that will be applied to the arranging, negotiating or executing
activity in the United States as a condition to the exception (i.e.,
requirements related to disclosures of risks, characteristics,
incentives and conflicts, suitability, fair and balanced
communications, trade acknowledgement and verification, initial
portfolio reconciliation, and books and records), and other
requirements that the Commission is not proposing to apply to that
activity as a condition to the exception (i.e., requirements related to
ECP verification, daily mark disclosure, clearing rights disclosure,
``know your counterparty'' and proposed risk mitigation requirements)?
    b. To the extent that commenters believe that there should be
changes to the proposed allocation of security-based swap dealer
requirements between those that are conditions to the exception, and
those that are not, please explain how those requirements should be
allocated for purposes of the exception, and describe how that
alternative allocation would address concerns raised by the activity of
the registered entity. Please also describe the practical challenges
raised by the Commission's proposed allocation, how a different
allocation would address those challenges, and whether there are any
inconsistencies in the proposed allocation.
    c. To what extent would the transactions at issue be subject to
requirements in foreign jurisdictions that are analogous to the Title
VII requirements that are proposed to be applied as conditions to the
exception? To what extent would the transactions at issue be subject to
requirements in foreign jurisdictions that are analogous to the Title
VII requirements that are not proposed to be applied as conditions to
the exception? To what extent would analogous FINRA requirements apply
to these transactions if the registrant is registered as a broker?
    d. As an alternative to the proposed conditions to this exception,
should this exception instead be subject to conditions that are styled
after the staff guidance that describes conditions under which foreign
broker-dealers may operate in the United States pursuant to Exchange
Act Rule 15a-6(a)(3)? \181\ In this regard the Commission notes that
foreign broker-dealers relying on Rule 15a-6 differ from foreign
dealers that would avail themselves of proposed exceptions in at least
two respects: First, the former are permitted to engage in only limited
activity inside the United States, while the latter would be arranging,
negotiating, and executing transactions using U.S. personnel on an
ongoing basis; second, the former exemption applies to transactions
with U.S. persons while the latter exception would apply only to
transactions with non-U.S. persons. How should those differences affect
the scope of any relief provided and any conditions placed on that
relief? Should compliance with any or all of the requirements that are
a condition to the proposed exception be eliminated, either entirely or
for certain ``sophisticated'' counterparties? If so, how should
``sophisticated'' be defined for these purposes? Should any eligible
contract participant be considered ``sophisticated,'' or should
``sophisticated'' encompass only a counterparty that meets a higher
standard, such as a standard similar to the standards applicable to:
(1) Qualified institutional buyers under Rule 144A(a)(1)-(4) \182\
under the Securities Act of 1933; (2) major institutional investors, as
defined in Exchange Act Rule 15a-6 and discussed in subsequent staff
guidance; or (3) the security-based swap dealer suitability
requirement's institutional counterparty standard under Rule 15Fh-
3(f)(4)? \183\ Would this alternative type of approach appropriately
balance the implementation concerns associated with the use of the
``arranged, negotiated, or executed'' test against the regulatory
interests underlying the de minimis counting requirement?
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    \181\ See note 180, supra.
    \182\ See 17 CFR 230.144A.
    \183\ See note 180, supra.
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    e. Are additional conditions necessary to help ensure that the
entity that engages in arranging, negotiating or executing activity in
the United States appropriately would be subject to all relevant
security-based swap dealer requirements, notwithstanding a lack of
contractual privity with the counterparty to the transaction?
5. Issues Potentially Associated With Specific Conditions
    Are there specific conditions to the proposed exception that may
pose implementation issues, or that otherwise should be modified?
Commenters particularly are invited to address the following:
    a. Suitability--Are there any aspects of the suitability
requirements applicable to security-based swap dealers that would raise
implementation issues in the event that the entity engaged in
arranging, negotiating or executing activity in the United States makes
recommendations in connection with the transactions at issue? In this
regard please describe the nature of the relationship between U.S.
personnel operating pursuant to the exception and the foreign
counterparties, and any challenges to obtaining the information
necessary to comply with the suitability requirement. To what extent,
if at all, is the suitability requirement necessary in light of the
institutional nature of the market and the limited suitability
requirements that apply to transactions with institutional
counterparties? Could the concerns addressed by Rule 15Fh-3(f) be
mitigated if the suitability condition to the exception were instead
limited solely to the security-based swap dealer's compliance with Rule
15Fh-3(f)(2)(iii), which would require the security-based swap dealer
to disclose that it is acting in its capacity as a counterparty, and is
not undertaking to assess the suitability of the security-based swap or
trading strategy for the counterparty?
    b. Disclosure of risks, characteristics, material incentives and
conflicts of interest--Are there implementation issues that may arise
in connection with the proposed condition requiring the registered
entity engaged in arranging, negotiating or executing activity in the
United States to comply with requirements related to the disclosure of
information regarding risks, characteristics, material incentives and
conflicts of interest? Commenters particularly are invited to address
whether there may be impediments related to the ability of the
registered entity to disclose or gather information

regarding material incentives and conflicts of interest associated with
the non-U.S. person relying on the proposed exception, and regarding
how to address any such potential impediments. For example, should the
disclosure requirement be limited to information regarding material
incentives and conflicts of interest associated with the registered
entity engaged in such activity in the United States?
    c. Disclosure that non-U.S. person is not registered--Are there
implementation issues that may arise in connection with the proposed
condition requiring disclosure that the non-U.S. person relying on this
exception is not registered with the Commission as a security-based
swap dealer, and that certain Exchange Act security-based swap
requirements may not be applicable? Commenters particularly are invited
to address whether disclosure of less information or additional
information would be appropriate, and to address whether alternative
approaches regarding the timing and manner of disclosure would be
appropriate.
    d. Trade Acknowledgment and Verification--Should the Commission, as
is proposed under Alternatives 1 and 2, condition the exception on the
registered entity that engages in arranging, negotiating or executing
activity in the United States complying with trade acknowledgment and
verification requirements under Title VII as if they were a
counterparty to the transaction? The trade acknowledgment and
verification requirements apply in connection with a transaction in
which a security-based swap dealer purchases or sells to any
counterparty a security-based swap. For purposes of this exception,
should the Commission treat the registered entity that arranges,
negotiates, or executes a security-based swap as if it purchased or
sold a security-based swap for purposes of the trade acknowledgment and
verification requirements? Will a security-based swap dealer (under
Alternative 1 or 2) or a registered broker-dealer (under Alternative 2)
that provides limited services in connection with arranging,
negotiating, or executing a transaction necessarily be able to comply
with the trade acknowledgment and verification requirements as if it
were a party to the transaction? Will the security-based swap dealer or
registered broker-dealer necessarily have all the information required
for a trade acknowledgment to which it is not a party? How will it
obtain verification? Would there be potential impediments to the
registered entity's ability to accurately reflect the terms of the
transaction on the trade acknowledgement? Would it be sufficient to
condition the exception on the broker-dealer complying with the
transaction confirmation requirements of Exchange Act Rule 10b-10 as if
the counterparty were the ``customer'' of the broker-dealer? \184\
Would it be necessary to modify the information required to be
confirmed under Exchange Act Rule 10b-10 to accommodate security-based
swaps?
---------------------------------------------------------------------------

    \184\ The transaction confirmation requirements apply when a
broker-dealer ``effect[s] for or with any customer any transaction
in, or [induces] the purchase or sale by such customer'' of
securities. See Exchange Act Rule 10b-10(a).
---------------------------------------------------------------------------

    e. Affiliation condition--Are there implementation issues that
would arise in connection with the proposed condition that would
require the registered entity engaged in arranging, negotiating or
executing activity in the United States to be a majority-owned
affiliate of the non-U.S. person relying on the exception? Commenters
particularly are invited to address the appropriateness of an
affiliation condition, the potential use of alternatives to a majority-
ownership standard in connection with the condition (e.g., common
control or ``wholly owned'' standards), and any technical or other
implementation issues that may accompany the use of an affiliation
standard.
    f. Portfolio reconciliation condition--The Commission further
requests comment regarding the proposed condition that would require
the registered entity engaged in arranging, negotiating or executing
conduct in the United States to perform the initial portfolio
reconciliation required by proposed Exchange Act Rule 15Fi-3.
Commenters particularly are invited to address implementation issues
that may be associated with that proposed condition. Commenters also
are invited to address the potential effectiveness of that proposed
condition in helping registered security-based swap data repositories
comply with their verification requirements.
6. Potential Additional Conditions
    Should the proposed exception be subject to additional conditions?
Commenters particularly are invited to address the following:
    a. Should the exception be made unavailable in circumstances in
which U.S. entities or their personnel manage the relationship with the
non-U.S. counterparty to the transaction? Alternatively, should
additional conditions (e.g., compliance with ECP verification and
``know your counterparty'' requirements) be applied to the exception in
those circumstances?
    b. Should the exception be conditioned on the registered entity
complying with ECP verification and ``know your counterparty''
requirements ``as if'' the counterparties to the non-U.S. person
relying on the exception also were counterparties to the registered
entity? In this regard, commenters are requested to discuss whether the
registered entity reasonably would be expected to possess information
regarding the counterparty to the transaction that is sufficient to
permit compliance with those requirements.
    c. Instead, should the treatment of ECP verification and ``know
your counterparty'' requirements for purposes of the exception depend
in part on whether the Commission also has issued ``market color''
guidance, as discussed in part II supra. For example, if the Commission
issues ``market color'' guidance, would it be likely that non-U.S.
persons would rely on the guidance when their U.S. personnel have only
a peripheral involvement with the resulting transaction, and that non-
U.S. persons would rely on the exception when their U.S. personnel
engage with the counterparty more comprehensively? In that event,
should the exception require compliance with the ECP verification and
``know your counterparty'' provisions, based on the assumption that the
exception would be used when U.S. personnel have a comparatively
comprehensive degree of engagement with the counterparty, which would
allow for compliance with those conditions?
    d. Alternatively, should the exception from the de minimis counting
requirement be conditioned on ``as if'' compliance with those ECP
verification and ``know your counterparty'' requirements, unless the
registered entity has had no prior interactions with the counterparty,
and there is no basis to believe that the registered entity would have
further interactions with that counterparty?
    e. Should the exception further be conditioned on the registered
entity having to disclose information regarding clearing rights?
Commenters particularly are invited to address the expected application
of the underlying clearing rights provisions in Exchange Act Section
3C(g)(5) to the transactions at issue.
    f. Should the proposed exception be conditioned on the non-U.S.
person relying on the condition having some involvement in the
registered entity's arranging, negotiating or executing activity to the
extent practicable, to help prevent the counterparties to these
transactions from misconstruing the role

of the registered entity and the application of Title VII safeguards to
the transactions at issue.
    g. Are there additional conditions that would be appropriate for
incorporation into the exception?
7. Treatment of the Non-U.S. Person Relying on the Exception, Including
Commission Access to Information
    To what extent would the absence of direct security-based swap
dealer regulation of the non-U.S. person relying on the proposed
exception--notwithstanding its use of U.S. personnel to conduct
security-based swap dealing activity--raise concerns regarding gaps in
the application of Title VII to transactions arising from security-
based swap dealing in the United States? \185\ Commenters particularly
are invited to address the following:
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    \185\ Absent additional Commission action, see part III.D.10,
infra, under the proposed exception the regulatory reporting and
public dissemination requirements of Regulation SBSR still would
apply directly to the security-based swap, by virtue of the
transaction having been arranged, negotiated or executed in the
United States, see Regulation SBSR Sections 908(a)(1)(v) and
908(b)(5) (and, under alternative 2, by virtue of the transaction
having been effected by or through a registered broker-dealer, see
Regulation SBSR Section 908(a)(1)(iv)).
---------------------------------------------------------------------------

    a. What issues may arise due to the lack of Commission regulation
of communications between the non-U.S. person and its counterparties?
Could this lack of regulation potentially facilitate improper practices
in connection with dealing transactions that occur in part in the
United States?
    b. What issues may arise due to the lack of direct Commission
financial responsibility regulation of the non-U.S. person? How
significant are associated concerns regarding spillovers and contagion
arising from reputational effects that an affiliate's failure may have
on other affiliates within the same corporate group?
    c. Do the proposed provisions to (a) require the non-U.S. person
relying on the exception to promptly provide the Commission with
information, documents and testimony in connection with the
transaction, and (b) require the registered entity to obtain and
maintain related books and records, adequately provide for transparency
into the dealing activities associated with transactions subject to the
exception? Should the rules provide further specificity regarding the
procedures for withdrawing the exception in the event of impediments to
such access? Should the exception incorporate a notice provision to
require the non-U.S. person relying on the exception (or the registered
entity engaged in arranging, negotiating or executing activity in the
United States) to inform the Commission as to the transactions being
conducted in reliance on the exception? Are there modifications that
would allow the Commission to obtain the necessary access to books and
records at a lower cost to the non-U.S. person and the registered
entity?
    d. For purposes of the access provisions of proposed paragraph
(d)(1)(iii)(A) of Rule 3a71-3--which would require non-U.S. persons
relying on the exception to promptly make their ``foreign associated
persons'' available to the Commission for testimony--is the proposed
``foreign associated person'' definition in paragraph (a)(11) of the
rule crafted appropriately? For example, should the proposed definition
be limited so it applies only to persons who effect or who are involved
in effecting security based swaps? If so, why?
8. Distinctions Between the Two Proposed Alternatives
    Comparatively, to what extent would the two proposed alternatives
for the conditional exception effectively address implementation
concerns while continuing to preserve the principles that underpin the
``arranged, negotiated, or executed'' standard? Commenters particularly
are invited to address the following:
    a. Under the second alternative, what concerns may arise from
applying Title VII business conduct requirements to brokers via
condition in lieu of security-based swap dealer registration?
    b. How would comparative security-based swap dealer capital
requirements and broker-dealer capital requirements affect the
implementation of the two alternatives? \186\ Would those capital
requirements limit the ability to use a stand-alone entity to engage in
arranging, negotiating or executing conduct in the United States on
behalf of a non-U.S. affiliate? Would those capital requirements affect
the potential use of a registered entity that also engages in a
separate security-based swap dealing business, or that is registered as
a swap dealer or as a bank? \187\
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    \186\ The proposed capital requirements applicable to those
entities would depend on whether they are a stand-alone nonbank
security-based swap dealer, a security-based swap dealer that is
dually registered as a broker-dealer, a bank security-based swap
dealer, or stand-alone broker-dealer. See Capital, Margin and
Segregation Proposing Release, 77 FR at 70333 (proposing capital
requirements for nonbank security-based swap dealers, including
security-based swap dealers dually registered as broker-dealers); 80
FR 74840 (Nov. 30, 2015) (adopting capital requirements for bank
security-based swap dealers); 17 CFR 240.15c3-1 (prescribing capital
requirements for broker-dealers). Those existing and proposed
capital requirements are tailored, among other reasons, based on the
different types of entities (e.g., a bank, a security-based swap
dealer, or a broker-dealer) and the activities those entities engage
in. Therefore, two different types of entities may be subject to
substantially different capital requirements.
    \187\ For example, would the security-based swap dealer capital
requirements associated with Alternative 1 effectively limit the use
of that alternative to situations in which the arranging,
negotiating or executing activity is conducted through a registered
security-based swap dealer that engages in a separate security-based
swap dealing business (apart from conducting arranging, negotiating
or executing activity on behalf of an affiliate), or that also
engages in a swap dealing business, or that is a bank? Conversely,
would Alternative 2 better accommodate the establishment of new
registered entities to conduct arranging, negotiating or executing
activity consistent with the conditions to the proposed exception?
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9. Effect on Booking Practices
    The Commission requests comment regarding how the availability of
the proposed exception would be expected to affect prospective booking
practices by industry participants. Commenters particularly are invited
to address the following:
    a. Would the proposed exception incentivize U.S.-based dealing
entities to bifurcate their dealing books by prospectively booking
security-based swap transactions with non-U.S. counterparties into non-
U.S. affiliates, to avoid having that portion of their security-based
swap businesses being subject to Title VII security-based swap dealer
requirements? If so, what would be the expected extent of such booking
practices? What would be the expected economic consequences? \188\
---------------------------------------------------------------------------

    \188\ See part VII.A.7, infra (addressing potential number of
U.S.-based dealing entities that may seek to use the exception in
connection with those types of prospective booking practices).
---------------------------------------------------------------------------

    b. Are the proposed conditions appropriate to help guard against
any negative consequences (e.g., loss of business conduct protection,
potential market fragmentation) that potentially would result from
U.S.-based dealing entities using such booking practices to limit the
application of Title VII to their dealing businesses involving non-U.S.
counterparties? If not, what additional conditions--e.g., restrictions
on the availability of the exception when the counterparty relationship
is managed by U.S. personnel rather than by non-U.S. personnel of the
booking entity--would be appropriate to help prevent those negative
consequences?
    c. Would a differently tailored application of the counting
requirements to cross-border transactions be appropriate, instead of or
in addition to the alternatives being proposed in this release? For
example,

should a non-U.S. person engaged in dealing activity be permitted to
exclude certain transactions with a U.S.-person dealer from its de
minimis calculations, subject to certain conditions? If so, please
describe the conditions that should apply to such an exception.
Alternatively, should a non-U.S. person engaged in dealing activity be
permitted to avail itself of such an exception only to the extent that
it is located in a ``listed jurisdiction''?
10. Availability to Registered Security-Based Swap Dealers
    As proposed, the exception not only would affect the set of dealing
transactions that non-registered persons would consider when evaluating
whether they fall under the security-based swap dealer de minimis
thresholds, but also would be relevant to non-U.S. persons that are
registered as security-based swap dealers but that wish to withdraw
their registration based on their dealing activity over the prior 12
months.\189\ Should the exception be made unavailable to registered
security-based swap dealers in connection with the potential withdrawal
of registration? Commenters particularly are invited to address whether
the rationale that underpins the proposed exception, related in large
part to the consequences of actions that non-U.S. persons otherwise may
take to avoid security-based swap dealer registration, would also be
relevant in connection with non-U.S. persons that have registered with
the Commission.
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    \189\ See note 101, supra (discussing application of proposal to
registered security-based swap dealers).
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11. Other Uses of ``Arranged, Negotiated, or Executed'' Criteria
    Should similar exceptions also be made available in connection with
other Title VII requirements that in part rely on ``arranged,
negotiated, or executed'' test? Commenters particularly are invited to
address the following:
a. Regulation SBSR
    Commenters are invited to address the application of ``arranged,
negotiated, or executed'' criteria in connection with the cross-border
application of the regulatory reporting and public dissemination
requirements of Regulation SBSR. Regulation SBSR requires reporting and
dissemination of transactions, connected with a non-U.S. person's
security-based swap dealing activity, that have been ``arranged,
negotiated, or executed'' by U.S. personnel of the non-U.S. person, or
by U.S. personnel of the non-U.S. person's agent.\190\ In adopting
Regulation SBSR, the Commission determined that requiring those
transactions to be reported to a registered swap data repository would
``enhance the Commission's ability to oversee relevant security-based
swap activity within the United States as well as to evaluate market
participants for compliance with specific Title VII requirements'' and
monitor for fraudulent activity.\191\ The Commission further stated
that public dissemination of those transactions would ``contribute to
price discovery and price competition in the U.S. security-based swap
market'' by providing a ``more comprehensive view of activity in the
U.S. market.'' \192\
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    \190\ See Regulation SBSR Sections 908(a)(1)(v) and 908(b)(5);
see also note 14, supra. Regulation SBSR was adopted pursuant to the
regulatory reporting and public dissemination requirements set forth
in Exchange Act Sections 13(m)(1)(C), 13(m)(1)(G) and 13A(a)(1).
    \191\ 81 FR at 53591.
    \192\ Id. at 53592.
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    The Commission is soliciting comment regarding those prior
conclusions. Commenters particularly are invited to address whether the
existing requirements related to the cross-border application of
Regulation SBSR could cause non-U.S. person counterparties to avoid
transacting with foreign dealers who use U.S. personnel to arrange,
negotiate or execute security-based swap transactions.
    In this regard, commenters are invited to address whether there
should be any modifications to existing provisions of Regulation SBSR
(and, if so, which) regarding the application of regulatory reporting
and public dissemination requirements to transactions arranged,
negotiated or executed in the United States. Commenters also are
invited to provide their views as to whether, for a security-based swap
where a non-U.S. person engages in dealing activity but relies on an
exception from having to count that transaction against its de minimis
threshold, Regulation SBSR should be amended to re-assign the duty to
report that transaction from the non-U.S. person engaged in dealing
activity to its affiliated U.S. entity (be it a registered broker-
dealer or registered security-based swap dealer) that is conducting the
arranging, negotiating or executing activity in the United States.
    Commenters further are invited to comment on possible alternative
compliance mechanisms for the regulatory reporting and public
dissemination requirements. For example, should Regulation SBSR be
amended to conditionally permit the transaction to be reported pursuant
to the requirements of the foreign jurisdiction which applies its
reporting requirements to the affiliated non-U.S. person? If so, what
conditions should apply to such an approach (e.g., limiting the
approach to circumstances where that jurisdiction's reporting and
dissemination requirements and practices meet certain criteria), and
how should the Commission or market participants determine whether a
jurisdiction meets any relevant criteria for this purpose?
Alternatively, is the availability of substituted compliance in
connection with the regulatory reporting and public dissemination
requirements sufficient to address concerns regarding regulatory
burdens potentially associated with this use of an ``arranged,
negotiated, or executed'' test?\193\
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    \193\ Rule 908(c) of Regulation SBSR provides that the Title VII
requirements for regulatory reporting and public dissemination of
security-based swaps may be satisfied by compliance with the rules
of a foreign jurisdiction that the Commission has found to have
requirements that are comparable to those of Title VII.
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b. Additional Title VII Requirements
    Commenters also are invited to address the use of an ``arranged,
negotiated, or executed'' test in connection with the cross-border
application of certain security-based swap dealer business conduct
requirements.\194\ Here too, the Commission particularly requests
comment regarding the potential relevance of Exchange Act Rule 15a-
6(a)(3), which in part conditionally allows unregistered foreign
broker-dealers to communicate with U.S. institutional investors and
major institutional investors without having to register with the
Commission as broker-dealers.\195\ Would it be appropriate to provide
conditional relief--akin to the proposed exception from the de minimis
counting requirement or to the conditional broker-dealer registration
exemption set forth in Rule 15a-6(a)(3)--from relevant business conduct
requirements for registered foreign security-based swap dealers in
security-based swap transactions with non-U.S. persons that the foreign
dealers arrange, negotiate, or execute using personnel located within
the United States? If so, should such relief be conditioned on the
sophistication of the counterparty or its

advisor or compliance with any other conditions?
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    \194\ Exchange Act Rule 3a71-3(c) states that a registered
security-based swap dealer is not subject to certain business
conduct requirements ``with respect to its foreign business.'' The
``foreign business'' definition (Rule 3a71-3(a)(9)) references the
definition of ``U.S. business,'' which in relevant part includes
transactions of foreign security-based swap dealers that have been
arranged, negotiated or executed by personnel located in a U.S.
branch or office. See Exchange Act Rule 3a71-3(a)(8)(i)(B).
    \195\ See note 180, supra.
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    In addition, commenters are invited to address the application of
``arranged, negotiated, and executed'' criteria in connection with the
exception from the de minimis counting requirement related to the
dealing transactions of non-U.S. persons with counterparties that are
foreign branches of registered security-based swap dealers.\196\ To the
extent that this counting test raises operational or other challenges,
are these addressed by the guidance that the Commission has proposed to
provide in Part II above regarding the scope of activity that is
encompassed by the terms ``arranging'' and ``negotiating'' under the
test? Alternatively, should the definition of ``transaction conducted
through a foreign branch'' in Exchange Act Rule 3a71-3(b)(1)(iii)(A) be
modified to incorporate exceptions similar to those being proposed
here? Would such an exception from that aspect of the de minimis
counting requirement potentially lead to unlimited involvement of U.S.-
based personnel in such transactions? If so, how could the exception be
tailored appropriately to avoid such a result?
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    \196\ See note 81, supra.
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    Commenters also are invited to address the use of those criteria in
connection with rules regarding the cross-border application of
requirements applicable to major security-based swap participants.\197\
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    \197\ See note 82, supra.
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12. Additional Issues
    The Commission further requests comment regarding any additional
issues associated with the proposed exception, or regarding other
potential approaches toward addressing issues associated with the
``arranged, negotiated, or executed'' counting standard.

IV. Proposed Guidance and Amendments Related to the Certification and
Opinion of Counsel Requirements

A. Discussion

    Since the adoption of the registration rules for SBS Entities,\198\
the Commission staff has received a number of questions regarding the
scope of the certification and opinion of counsel requirement in
Exchange Act Rule 15Fb2-4.\199\ Certain of these questions related to
issues raised by foreign blocking laws, privacy laws, secrecy laws and
other foreign legal barriers that may limit or prohibit firms from: (i)
Providing books and records directly to the Commission; or (ii)
submitting to an onsite inspection or examination by SEC staff.\200\
Specifically, firms have requested guidance as to whether the
certification and opinion of counsel may take into account different
approaches available under foreign blocking laws, privacy laws, secrecy
laws or other legal barriers that may facilitate firms' ability to
provide books and records to the Commission and submit to an
examination or inspection by Commission staff in a manner consistent
with a particular foreign legal requirement.
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    \198\ See Registration Adopting Release.
    \199\ See, e.g., IIB/SIFMA 8/26/2016 Letter; see also IIB 11/16/
2016 Email.
    \200\ See, e.g., Registration Adopting Release, 80 FR at 48981.
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    The Commission recognizes that foreign blocking laws, privacy laws,
secrecy laws or other legal barriers may vary in purpose and scope,
among other aspects. For example, while some foreign laws may affect
the ability of a Commission registrant to provide personal data to the
Commission, other laws may prevent a Commission registrant from
providing any information to the Commission or submitting to an onsite
visit without specific authorization from the foreign government. In
light of the differences among foreign laws, the Commission deems it
appropriate to propose guidance to firms seeking clarification as to
the Commission's requirements for the certification and opinion of
counsel.
    For example, firms have asked whether the required certification
and opinion of counsel may take into account the ability in some
jurisdictions for a firm to provide the Commission with access to books
and records if the firm obtains the consent of the person whose
information is documented in the books and records.\201\ One commenter
also asked that the Commission clarify that in certain circumstances
the certification and opinion of counsel may be based on the assumption
that the nonresident security-based swap dealer will provide the
Commission access to its books and records through, and submit to on-
site inspection and examination with the approval of, the relevant
foreign regulatory authority.\202\ In addition, firms have asked
whether the certification and opinion of counsel should address only
the laws of the ``home country'' of the nonresident SBS Entity (for
example, its principal place of business or where it is incorporated),
or if the Commission expects a nonresident SBS Entity to address
applicable law in every jurisdiction in which the nonresident SBS
Entity may conduct business or in which its counterparties, customers,
or personnel may be located.\203\ Firms also have asked if the
certification and opinion of counsel are meant to cover Commission
inspection and examination of books and records in the jurisdictions in
which they are located.\204\ The Commission has been considering these
issues, and believes it would be appropriate to address certain of
these concerns as described below.
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    \201\ See, e.g., Memorandum from the Division of Trading and
Markets regarding a April 3, 2018 meeting with representatives of
Societe Generale, April 3, 2018, available at https://www.sec.gov/comments/s7-05-14/s70514-3405388-162169.pdf; Memorandum from the
Division of Trading and Markets regarding a April 4, 2018 meeting
with representatives of Barclays, April 4, 2018, available at
https://www.sec.gov/comments/s7-05-14/s70514-3405597-162172.pdf;
Memorandum from the Division of Trading and Markets regarding a
April 11, 2018 meeting with representatives of UBS, April 11, 2018,
available at https://www.sec.gov/comments/s7-05-14/s70514-3461169-162204.pdf; Memorandum from the Division of Trading and Markets
regarding a April 11, 2018 meeting with representatives of Morgan
Stanley, April 11, 2018, available at https://www.sec.gov/comments/s7-05-14/s70514-4035093-168391.pdf; Memorandum from the Division of