[Federal Register Volume 80, Number 164 (Tuesday, August 25, 2015)]
[Proposed Rules]
[Pages 51683-51722]
[FR Doc No: 2015-19662]

Vol. 80

Tuesday,

No. 164

August 25, 2015

Part III

Securities and Exchange Commission

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17 CFR Part 201

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

Federal Register / Vol. 80, No. 164 / Tuesday, August 25, 2015 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 201

[Release No. 34-75612; File No. S7-14-15]
RIN 3235-AL76

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

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: Pursuant to Section 15F(b)(6) of the Securities Exchange Act
of 1934 (``Exchange Act''), as added by Section 764(a) of Title VII of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-
Frank Act''), the Securities and Exchange Commission (``Commission'')
is proposing Rule of Practice 194. Proposed Rule of Practice 194 would
provide a process for a registered security-based swap dealer or major
security-based swap participant (collectively, ``SBS Entity'') to make
an application to the Commission for an order permitting an associated
person who is subject to a statutory disqualification to effect or be
involved in effecting security-based swaps on behalf of the SBS Entity.
Proposed Rule of Practice 194 also would exclude an SBS Entity, subject
to certain limitations, from the prohibition in Exchange Act Section
15F(b)(6) with respect to associated persons that are not natural
persons for a period of 30 days following the associated person
becoming subject to a statutory disqualification or 30 days following
the person that is subject to a statutory disqualification becoming an
associated person of an SBS Entity; for a period of 180 days following
the filing of a complete application under proposed Rule of Practice
194 and notice if the application and notice are filed within the same
30-day time period; and for a period of 180 days following the filing
of a complete application with, or initiation of a process by, the
Commodity Futures Trading Commission (``CFTC''), a self-regulatory
organization (``SRO'') or a registered futures association pending a
final decision with respect to an application or process with respect
to the associated person for the membership, association, registration
or listing as a principal, where the application has been filed or
process started prior to or within the same 30-day time period and a
notice has been filed with the Commission within the same 30-day time
period. The proposed Rule of Practice 194 also would provide, in
certain circumstances, for an extension of the temporary exclusion from
the prohibition in Exchange Act Section 15F(b)(6) with respect to
associated persons that are not natural persons to comply with the
prohibition in Section 15F(b)(6). Finally, proposed Rule of Practice
194 would provide that, subject to certain conditions, an SBS Entity
may permit an associated person that is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on its behalf, without making an application pursuant to the
proposed rule, where the Commission, CFTC, an SRO or a registered
futures association has granted a prior application or otherwise
granted relief from a statutory disqualification with respect to that
associated person.

DATES: Comments must be received on or before October 26, 2015.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-14-15 on the subject line; or
     Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number S7-14-15. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec/gov/rules/other.shtml). Comments are
also available for Web site viewing and printing in the Commission's
Public Reference Room, 100 F Street NE., Washington DC 20549, on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should only submit information that you wish to make publicly
available.
    Studies, memoranda or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's Web site. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Paula R. Jenson, Deputy Chief Counsel,
Joseph Furey, Assistant Chief Counsel, Bonnie Gauch, Senior Special
Counsel, Joanne Rutkowski, Senior Special Counsel, Natasha Vij Greiner,
Branch Chief, Jonathan C. Shapiro, Special Counsel, at<PHONE_NUMBER>,
Division of Trading and Markets, Securities and Exchange Commission,
100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is proposing for public
comment Rule of Practice 194 [17 CFR 201.194], under Exchange Act
Section 15F(b)(6) [15 U.S.C. 78o-10(b)(6)].

Table of Contents

I. Background
    A. Registration Proposing Release
    B. Registration Adopting Release
II. Discussion
    A. Overview of Proposed Rule
    B. Consistency With Other Processes for Permitting Association
Notwithstanding a Statutory Disqualification or Other Bar
    1. Rule of Practice 193
    2. FINRA Eligibility Proceedings
    3. CFTC's Approach to Associated Persons of Swap Entities
Subject to a Statutory Disqualification
    C. Proposed Rule of Practice 194
    1. Scope of the Rule
    2. Required Showing
    3. Form of Application for Natural Persons and Entities
    4. Written Statement for Natural Persons and Entities
    5. Prior Applications or Processes
    6. Notification to Applicant and Written Statement
    7. Orders under Proposed Rule of Practice 194
    8. Temporary Exclusion for Other Persons
    9. Notice in Lieu of an Application
    10. Note to Proposed Rule of Practice 194
III. Request For Comment
IV. Paperwork Reduction Act
    A. Summary of Collection of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total Burden Estimates Relating to Proposed Rule of Practice
194
    E. Confidentiality
    F. Request for Comment
V. Economic Analysis
    A. Introduction
    B. General Economic Considerations
    C. Economic Baseline
    1. Affected Participants
    2. Incidence of Disqualification
    3. Existing Regulatory Frameworks

    D. Benefits, Costs, and Effects on Efficiency, Competition, and
Capital Formation
    1. Anticipated Benefits
    2. Anticipated Costs
    3. Effects on Efficiency, Competition, and Capital Formation
    E. Rule Alternatives
    1. Relief for All Entities from Exchange Act Section 15F(b)(6)
    2. A Modified Temporary Exclusion
    3. Relief for Non-Investment-Related Offenses
    4. No Relief for CFTC, SRO, Registered Futures Association
Review
    5. No Relief for Entities from Exchange Act Section 15(F)(b)(6)
    F. Request for Comment
VI. Regulatory Flexibility Act Certification
    A. Regulatory Framework
    B. Assessment of Impact
    C. Certification and Request for Comment
VII. Consideration of Impact on the Economy
VIII. Statutory Authority

I. Background

    Exchange Act Section 15F(b)(6), as added by Section 764(a) of the
Dodd-Frank Act, makes it unlawful for an SBS Entity to permit an
associated person \1\ who is subject to a statutory disqualification to
effect or be involved in effecting security-based swaps on behalf of
the SBS Entity if the SBS Entity knew, or in the exercise of reasonable
care should have known, of the statutory disqualification, ``[e]xcept
to the extent otherwise specifically provided by rule, regulation, or
order of the Commission.'' \2\ In this regard, Exchange Act Section
15F(b)(6) gives the Commission the discretion to determine, by order,
that a statutorily disqualified associated person may effect or be
involved in effecting security-based swaps on behalf of an SBS Entity,
and/or to establish rules concerning the statutory prohibition in
Exchange Act Section 15F(b)(6).
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    \1\ Exchange Act Section 3(a)(70) generally defines the term
``persons associated with'' an SBS Entity to include (i) any
partner, officer, director, or branch manager of an SBS Entity (or
any person occupying a similar status or performing similar
functions); (ii) any person directly or indirectly controlling,
controlled by, or under common control with an SBS Entity; or (iii)
any employee of an SBS Entity. See 15 U.S.C. 78c(a)(70). The
definition generally excludes persons whose functions are solely
clerical or ministerial. Id. The definition of ``person'' under
Exchange Act Section 3(a)(9) is not limited to natural persons, but
extends to both entities and natural persons. 15 U.S.C. 78c(a)(9)
(``The term `person' means a natural person, company, government, or
political subdivision, agent, or instrumentality of a
government.'').
    \2\ Exchange Act Section 15F(b)(6) provides: ``Except to the
extent otherwise specifically provided by rule, regulation, or order
of the Commission, it shall be unlawful for a security-based swap
dealer or a major security-based swap participant to permit any
person associated with a security-based swap dealer or a major
security-based swap participant who is subject to a statutory
disqualification to effect or be involved in effecting security-
based swaps on behalf of the security-based swap dealer or major
security-based swap participant, if the security-based swap dealer
or major security-based swap participant knew, or in the exercise of
reasonable care should have known, of the statutory
disqualification.'' 15 U.S.C. 78o-10(b)(6).
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    To date, however, the Commission has not established a separate,
more specific rule by which an SBS Entity may apply to the Commission
to permit an associated person who is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity. This proposal, if adopted, would
establish such a rule. The proposal would specify the process for
obtaining relief from the statutory prohibition in Exchange Act Section
15F(b)(6), including by setting forth the required showing, the form of
application and the items to be addressed with respect to associated
persons that are natural persons and that are not natural persons.
    The proposal would provide a temporary exclusion from the
prohibition in Exchange Act Section 15F(b)(6) that would apply both to
the case where (i) an associated person entity that is already
effecting or involved in effecting security-based swaps on behalf of an
SBS Entity becomes subject to a statutory disqualification, and (ii) an
entity that is already subject to a statutory disqualification becomes
an associated person that is effecting or involved in effecting
security-based swaps on behalf of an SBS Entity. Specifically, an SBS
Entity would be temporarily excluded from the prohibition in Exchange
Act Section 15F(b)(6) with respect to associated person entities (i)
for a period of 30 days following the associated person becoming
subject to a statutory disqualification or 30 days following the person
that is subject to a statutory disqualification becoming an associated
person of an SBS Entity; (ii) for a period of 180 days following the
filing of a complete application under proposed Rule of Practice 194
and notice if the application and notice are filed within the same 30-
day time period; and (iii) for a period of 180 days following the
filing of a complete application with, or initiation of a process by,
the CFTC, an SRO \3\ or a registered futures association with respect
to the associated person for the membership, association, registration
or listing as a principal, where the application has been filed or
process started prior to or within the same 30-day time period and a
notice is filed with the Commission within the same 30-day period. The
proposed Rule of Practice 194 also provides, in certain circumstances,
an extension of the temporary exclusion from the prohibition in
Exchange Act Section 15F(b)(6) with respect to associated person
entities to comply with the prohibition in Section 15F(b)(6) in cases
where the temporary exclusion expires or where there is an adverse
decision.
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    \3\ ``Self-regulatory organization'' is defined in Section
3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26)) as ``any
national securities exchange, registered securities association, or
registered clearing agency, or (soley for the purposes of sections
19(b), 19(c) and 23(b) of [the Exchange Act]) the Municipal
Securities Rulemaking Board established by section 15B of [the
Exchange Act].''
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    Finally, this proposal would provide that an SBS Entity may permit,
subject to certain conditions, an associated person (whether a natural
person or an entity) that is subject to a statutory disqualification to
effect or be involved in effecting security-based swaps on behalf of
the SBS Entity, without making an application, where the Commission,
CFTC, an SRO or a registered futures association has granted a prior
application or otherwise granted relief from a statutory
disqualification with respect to the associated person.

A. Registration Proposing Release

    On October 12, 2011, the Commission proposed requirements for an
SBS Entity to register with the Commission, as well as additional
provisions related to registration.\4\ In the Registration Proposing
Release, the Commission solicited comment on potentially developing an
alternative process, in accordance with Exchange Act Section 15F(b)(6),
to establish exceptions to the statutory prohibition in Exchange Act
Section 15F(b)(6).\5\ In doing so, the Commission noted that Section
15F(b)(6) expressly authorizes the Commission to establish exceptions
to the prohibition by rule, regulation or order.\6\ The Commission also
solicited comment on whether the Commission should consider excepting
entities from the statutory prohibition in Exchange Act Section
15F(b)(6).\7\
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    \4\ Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Release No. 65543
(Oct. 12, 2011), 76 FR 65784 (Oct. 24, 2011) (``Registration
Proposing Release'').
    \5\ Id. at 65797.
    \6\ Id.
    \7\ Id. at 65797 (Question 90).
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    The Commission received one comment relevant to potentially
developing an alternative process to establish exceptions to Exchange
Act Section 15F(b)(6).\8\ The commenter

stated that, based on the Commission's definition of the phrase
``involved in effecting,'' SBS Entities could have hundreds, if not
thousands, of associated natural persons who will effect or will be
involved in effecting security-based swaps.\9\ Moreover, the commenter
stated that the definition of ``associated person'' could be read to
extend not just to natural persons, but also to non-natural persons
(e.g., entities) that are affiliates of SBS Entities.\10\ As a result,
the commenter stated, prohibiting statutorily disqualified entities
from effecting or being involved in effecting security-based swaps
could result in ``considerable'' business disruptions and other
ramifications.\11\
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    \8\ See Letter from Kenneth E. Bentsen, Jr., Securities Industry
and Financial Markets Association, dated December 16, 2011 (``12/16/
2011 SIFMA Letter''), at 8.
    \9\ Id.
    \10\ Id.
    \11\ Id. The commenter did not provide supporting data to
quantify the number of associated persons or the magnitude of any
potential business disruptions.
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    To address these concerns, the commenter stated that the Commission
should narrow the scope of the associated persons considered to be
effecting or involved in effecting security-based swaps, or,
alternatively, exercise its statutory authority to grant exceptions to
the general ban on an SBS Entity from associating with a person subject
to a statutory disqualification.\12\

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    \12\ Id.
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B. Registration Adopting Release

    Concurrent with the issuance of this proposing release,\13\ the
Commission is adopting registration requirements for SBS Entities.\14\
Several aspects of the adopted rules relate to the statutory
prohibition in Exchange Act Section 15F(b)(6). In particular, the
Commission adopted Exchange Act Rule 15Fb6-1,\15\ which provides that,
unless otherwise ordered by the Commission, an SBS Entity, when it
files an application to register with the Commission as a security-
based swap dealer or major security-based swap participant, may permit
an associated person that is not a natural person and that is subject
to a statutory disqualification to effect or be involved in effecting
security-based swaps on its behalf, provided that the statutory
disqualification(s) under Exchange Act Section 3(a)(39)(A) through (F)
\16\ occurred prior to the compliance date set forth in the
Registration Adopting Release. SBS Entities seeking to avail themselves
of the relief for disqualified associated entities will have to provide
a list of disqualified associated entities, which will be made public
by the Commission as part of the registration application.\17\
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    \13\ On June 15, 2011, the Commission issued an order that,
among other things, granted temporary relief from compliance with
Exchange Act Section 15F(b)(6), and Exchange Act Section 29(b), 15
U.S.C. 78cc(b), concerning enforceability of contracts that would
violate, among other provisions, Exchange Act Section 15F(b)(6). See
Temporary Exemptions and Other Temporary Relief, Together With
Information on Compliance Dates for New Provisions of the Securities
Exchange Act of 1934 Applicable to Security-Based Swaps, Exchange
Act Release No. 64678 (June 15, 2011), 76 FR 36287, 36301, 36305-07
(June 22, 2011) (``Temporary Exemptions Order''). Under the
Temporary Exemptions Order, persons subject to a statutory
disqualification who were, as of July 16, 2011, associated with an
SBS Entity and who effected or were involved in effecting security-
based swaps on behalf of such SBS Entity could continue to be
associated with an SBS Entity until the date upon which rules
adopted by the Commission to register SBS Entities became effective.
The Commission will consider separately the expiration date of the
temporary relief.
    \14\ Registration Process for Security-Based Swap Dealers and
Major Security-Based Swap Participants, Exchange Act Release No.
75611 (Aug. 5, 2015) (the ``Registration Adopting Release'').
    \15\ 17 CFR 240.15Fb6-1.
    \16\ 15 U.S.C. 78c(a)(39)(A)-(F). As stated in the Registration
Adopting Release, we intend for this description to parallel
Exchange Act Section 3(a)(39). If Congress were to amend the
definition of statutory disqualification in Exchange Act Section
3(a)(39), we believe it would be appropriate for the Commission to
consider amending Exchange Act Rule 15Fb6-2, 17 CFR 240.14Fb6-2, to
assure that this description remains consistent with the statutory
definition. See Registration Adopting Release, at Note 63.
    \17\ See Registration Adopting Release, at Section II.B.1.i.
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    The Commission also adopted a requirement in Rule 15Fb6-2 that the
Chief Compliance Officer of an SBS Entity certify on Form SBSE-C that
it has performed background checks on all of its associated persons
that are natural persons who effect or are involved in effecting
security-based swaps on its behalf, and neither knows, nor in the
exercise of reasonable care should have known, that any of its
associated persons that effect or are involved in effecting security-
based swaps on its behalf are subject to a statutory disqualification,
unless otherwise specifically provided by rule, regulation or order of
the Commission.\18\
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    \18\ See Rule 15Fb6-2(a) and Form SBSE-C; see also Registration
Adopting Release, at Section II.B.3.
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    Finally, the Commission modified its guidance on the scope of the
phrase ``involved in effecting'' security-based swaps, as that phrase
is used in Exchange Act Section 15F(b)(6).\19\
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    \19\ Specifically, the Commission stated that the term
``involved in effecting security-based swaps'' generally means
engaged in functions necessary to facilitate the SBS Entity's
security-based swap business, including, but not limited to the
following activities: (1) Drafting and negotiating master agreements
and confirmations; (2) recommending security-based swap transactions
to counterparties; (3) being involved in executing security-based
swap transactions on a trading desk; (4) pricing security-based swap
positions; (5) managing collateral for the SBS Entity; and (6)
directly supervising persons engaged in the activities described in
items (1) through (5) above. See Registration Adopting Release, at
Section II.B.1.ii.
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II. Discussion

A. Overview of Proposed Rule

    The Commission is proposing Rule of Practice 194, which would
provide a process by which an SBS Entity could apply to the Commission
for an order permitting an associated person to effect or be involved
in effecting security-based swaps on behalf of the SBS Entity where the
associated person is subject to a statutory disqualification \20\ and
is thereby otherwise prohibited from effecting or being involved in
effecting security-based swaps on behalf of an SBS Entity under
Exchange Act Section 15F(b)(6). For the Commission to issue an order
granting relief under proposed Rule of Practice 194, an SBS Entity
would be required to make a showing that it would be consistent with
the public interest to permit the associated person to effect or be
involved in effecting security-based swaps on behalf of the SBS Entity,
notwithstanding the statutory disqualification.
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    \20\ Under Exchange Act Rule 15Fb6-1, 17 CFR 240.15Fb6-1, unless
otherwise ordered by the Commission, an SBS Entity, when it files an
application to register with the Commission as a security-based swap
dealer or major security-based swap participant, may permit an
associated person that is not a natural person and that is subject
to a statutory disqualification to effect or be involved in
effecting security-based swaps on its behalf, provided that the
statutory disqualification(s) under Exchange Act Section 3(a)(39)(A)
through (F), 15 U.S.C. 78c(a)(39)(A)-(F), occurred prior to the
compliance date set forth in the Registration Adopting Release, and
provided that it identifies each such associated person on Schedule
C of Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate. As a
result, at the time a security-based swap dealer or major security-
based swap participant submits an application to register as an SBS
Entity, it would not have to file an application with the Commission
under proposed Rule of Practice 194 with respect to an associated
person entity that is subject to a statutory disqualification that
occurred prior to the compliance date set forth in the Registration
Adopting Release. See Registration Adopting Release, at Section
II.B.1.i.
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    The rule would prescribe the form of application and the items to
be addressed with respect to an associated person that is a natural
person or entity. The rule would also provide for notice to the
applicant in cases where the Commission staff anticipates making an
adverse recommendation to the Commission with respect to an application
made pursuant to this rule. In such cases, the applicant would be
provided with a written statement of the reasons for the Commission
staff's preliminary recommendation, and the applicant would have 30
days to submit a written statement in response.
    The Commission is also proposing paragraph (i) to proposed Rule of

Practice 194, which would provide that an SBS Entity shall be
temporarily excluded from the prohibition in Exchange Act Section
15F(b)(6) with respect to a statutorily disqualified associated person
that is not a natural person (i) for a period of 30 days following the
associated person becoming subject to a statutory disqualification or
30 days following the person that is subject to a statutory
disqualification becoming an associated person of an SBS Entity, (ii)
for a period of 180 days following the filing of a complete application
under proposed Rule of Practice 194 and notice if the application and
notice are filed within the same 30-day time period; and (iii) for a
period of 180 days following the filing of a complete application with,
or initiation of a process by, the CFTC, an SRO or a registered futures
association with respect to the associated person for the membership,
association, registration or listing as a principal, where the
application has been filed or process started prior to or within the
same 30-day time period and a notice has been filed with the Commission
within the same 30-day time period. Proposed Rule of Practice 194(i)
also provides in paragraphs (i)(1)(ii), (i)(1)(iii) and (i)(3) for an
extension of the temporary exclusion to comply with the statutory
prohibition in Exchange Section 15F(b)(6).
    In addition, the Commission is proposing paragraph (j) to Rule of
Practice 194, which provides that, where certain conditions are met, an
SBS Entity would not need to file an application under proposed Rule of
Practice 194 to permit a statutorily disqualified associated person to
effect or be involved in effecting security-based swaps on behalf of
the SBS Entity. Specifically, paragraph (j) to proposed Rule of
Practice 194 would allow an SBS Entity, subject to certain conditions,
to permit a statutorily disqualified associated person to effect or be
involved in effecting security-based swaps on behalf of the SBS Entity
without making an application to the Commission, where the Commission,
CFTC, an SRO (e.g., FINRA or a national securities exchange), or a
registered futures association (e.g., the National Futures Association
(``NFA'')) has granted a prior application or otherwise granted relief
from a statutory disqualification with respect to that associated
person. In such cases where an SBS Entity meets the requirements of
proposed paragraph (j), the SBS Entity would be permitted to file
notice with the Commission (in lieu of an application).

B. Consistency With Other Processes for Permitting Association
Notwithstanding a Statutory Disqualification or Other Bar

    Under the federal securities laws, certain registered entities have
various procedural avenues to be able to associate, where warranted,
with persons subject to a statutory disqualification or other bar,
including the Commission's Rule of Practice 193 \21\ and Financial
Industry Regulatory Authority (``FINRA'') eligibility proceedings
(under the process set forth in Exchange Act Rule 19h-1).\22\ As
detailed below in Section II.C, Proposed Rule of Practice 194 is
modeled on these existing processes where persons can reenter the
industry despite previously being barred by the Commission or to
associate with a member of an SRO notwithstanding a statutory
disqualification. Proposed Rule of Practice 194 would establish a
procedural framework that is similar to processes that are familiar to
market participants.
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    \21\ 17 CFR 201.193.
    \22\ 17 CFR 240.19h-1.
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1. Rule of Practice 193
    Rule of Practice 193 provides a process by which individuals that
are not regulated by an SRO (e.g., employees of an investment adviser,
an investment company, or a transfer agent) can seek to reenter the
securities industry despite previously being barred by the
Commission.\23\
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    \23\ 17 CFR 201.193; see also Registration Proposing Release, 76
FR at 65797; Applications by Barred Individuals for Consent to
Associate With a Registered Broker, Dealer, Municipal Securities
Dealer, Investment Adviser or Investment Company, Exchange Act
Release No. 20783, Investment Company Act Release No. 13839,
Investment Advisers Act Release No. 903, 49 FR 12204 (Mar. 29, 1984)
(``Applications by those barred individuals who seek to associate
with an investment adviser, investment company, or other entity that
is not a member of an SRO, should be submitted directly to the
Commission pursuant to Rule 29 [current Rule 193]'').
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    The rule requires the filing of an affidavit from the individual,
addressing, among other items, (1) the time period since the imposition
of the bar; (2) any restitution or similar action taken by the
individual to recompense any person injured by the misconduct that
resulted in the bar; (3) the individual's employment during the period
subsequent to imposition of the bar; (4) the capacity or position in
which the individual proposes to be associated; (5) the manner and
extent of supervision to be exercised over such individual and, where
applicable, by such individual and (6) any relevant courses, seminars,
examinations or other actions completed by the individual subsequent to
imposition of the bar to prepare for his or her return to the
securities business.\24\
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    \24\ 17 CFR 201.193(b), (d).
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    Rule 193 also requires a written statement from the proposed
employer, describing, among other things, the terms and conditions of
employment and the supervision to be exercised over the barred
individual.\25\
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    \25\ 17 CFR 201.193(b)(4)(i)-(iv).
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2. FINRA Eligibility Proceedings
    Under Exchange Act Section 15A(g)(2), ``[a] registered securities
association may, and in cases in which the Commission, by order,
directs as necessary or appropriate in the public interest or for the
protection of investors shall, deny membership to any registered broker
or dealer, and bar from becoming associated with a member any person,
who is subject to a statutory disqualification.'' \26\ Consistent with
that provision, Article III, Section 3 of the FINRA By-Laws provides
that no person shall be associated with a member, continue to be
associated with a member, or transfer association to another member if
such person is or becomes subject to a disqualification; and, that no
person shall be admitted to membership, and no member shall be
continued in membership, if any person associated with it is subject to
a disqualification.\27\ Under Article III, Section 4 of the FINRA By-
Laws, a person is subject to a ``disqualification'' with respect to
membership, or association with a member, if such person is subject to
any ``statutory disqualification'' as such term is defined in Exchange
Act Section 3(a)(39).\28\ Article III, Section 3(d) of FINRA's By-Laws
permits a disqualified person or member to request permission to enter
or remain in the securities industry.\29\ Consistent with Exchange Act
Section 15A(g)(2),\30\ under Article 3, Section 3(d) of the FINRA By-
Laws, the FINRA Board may, in its discretion approve the continuance in
membership, and may also approve the association or continuance of
association of any person, if the FINRA Board determines that such
approval is consistent with the

public interest and the protection of investors.\31\
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    \26\ 15 U.S.C. 78o-3(g)(2).
    \27\ See FINRA By-laws, Article III, Section 3, http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4606.
    \28\ See FINRA By-Laws, Article III, Section 4, http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4607; 15 U.S.C. 78c(a)(39).
    \29\ See FINRA By-laws, Article III, Section 3, at Note 27,
supra.
    \30\ 15 U.S.C. 78o-3(g)(2).
    \31\ See FINRA Rules 9522(e), 9524(b)(1).
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    The FINRA Rule 9520 Series sets forth procedures for a person to
become or remain associated with a member, notwithstanding the
existence of a statutory disqualification, and for a current member or
person associated with a member to obtain relief from the eligibility
or qualification requirements of the FINRA By-Laws and rules.\32\ A
member (or new member applicant) seeking to associate with a natural
person subject to a statutory disqualification must seek approval from
FINRA by filing a Form MC-400 application.\33\ Members (and new member
applicants) that are themselves subject to a disqualification that wish
to obtain relief from the eligibility requirements are required to
submit a Form MC-400A application.\34\
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    \32\ See FINRA Rule 9520 Series, http://finra.complinet.com/en/display/display_viewall.html?rbid=2403&element_id=3985&record_id=5063&filtered_tag=.
    \33\ See FINRA Form MC-400, Membership Continuance Application,
http://www.finra.org/web/groups/industry/@ip/<EMAIL_ADDRESS>    \34\ See FINRA Form MC-400A, Membership Continuance Application:
Member Firm Disqualification Application, http://www.finra.org/web/groups/industry/@ip/<EMAIL_ADDRESS>---------------------------------------------------------------------------

    Where required, FINRA sends a notice or notification to the
Commission of its proposal to admit or continue the membership of a
person or association with a member notwithstanding statutory
disqualification in accordance with Exchange Act Rule 19h-1.\35\
Exchange Act Rule 19h-1 provides for Commission review of notices filed
by SROs proposing to admit any person to, or continue any person in,
membership or association with a member, notwithstanding statutory
disqualification. However, Exchange Act Rule 19h-1(a)(2) \36\ and (3)
\37\ provide that, for certain persons, and in limited circumstances, a
notice does not need to be filed. With respect to certain persons
subject to a statutory disqualification, under Exchange Act Rule 19h-
1(a)(4),\38\ an SRO is required to furnish to the Commission a
notification (containing less information than a notice). Under
Exchange Act Section 15A(g)(2),\39\ where it is necessary or
appropriate in the public interest or for the protection of investors,
the Commission may, by order, direct the SRO to deny membership to any
registered broker or dealer, and bar from becoming associated with a
member any person, who is subject to a statutory disqualification.
---------------------------------------------------------------------------

    \35\ 17 CFR 240.19h-1.
    \36\ Exchange Act Rule 19h-1(a)(2), 17 CFR 240.19h-1(a)(2),
provides that a notice need not be filed with the Commission,
pursuant to Exchange Act Rule 19h-1, regarding an associated person
subject to a statutory disqualification if the person's activities
with respect to the member are solely clerical or ministerial in
nature and such person does not have access to funds, securities, or
books and records.
    \37\ Exchange Act Rule 19h-1(a)(3), 17 CFR 240.19h-1(a)(3),
provides that a notice need not be filed with the Commission,
pursuant to Exchange Act Rule 19h-1, regarding a person or member
subject to a statutory disqualification if the person or member
proposed for continued association or membership, respectively,
satisfies the requirements of Exchange Act Rule 19h-1(a)(3)(i)-(vi).
    \38\ 17 CFR 240.19h-1(a)(4). A notification must be filed if the
person or member proposed for continued association or membership,
respectively, satisfies the requirements of Exchange Act Rule 19h-
1(a)(3)(ii), (iv) or (v). 17 CFR 240.19h-1(a)(3)(ii), (iv), (v).
    \39\ 15 U.S.C. 78o-3(g)(2).
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3. CFTC's Approach to Associated Persons of Swap Entities Subject to a
Statutory Disqualification
    The statutory prohibition in Exchange Act Section 15F(b)(6) \40\ is
parallel to a statutory provision for a swap dealer or major swap
participant (collectively ``Swap Entity'') as set forth in Section
4s(b)(6) of the Commodity Exchange Act (``CEA'').\41\ With respect to
statutorily disqualified associated persons of Swap Entities, the CFTC,
among other things:
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    \40\ 15 U.S.C. 78o-10(b)(6).
    \41\ See 7 U.S.C. 6s(b)(6), which states, ``Except to the extent
otherwise specifically provided by rule, regulation, or order, it
shall be unlawful for a swap dealer or a major swap participant to
permit any person associated with a swap dealer or a major swap
participant who is subject to a statutory disqualification to effect
or be involved in effecting swaps on behalf of the swap dealer or
major swap participant, if the swap dealer or major swap participant
knew, or in the exercise of reasonable care should have known, of
the statutory disqualification.''
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     Defined associated persons of Swap Entities to be limited
to natural persons.\42\ As a result, the prohibition in Section
4s(b)(6) of the CEA \43\ applies to natural persons associated with a
Swap Entity (not entities).
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    \42\ Specifically, the CFTC amended CEA Regulation 1.3(aa), 17
CFR 1.3(aa), which generally defines the term ``associated person''
for purposes of entities registered with it, to cover Swap Entities.
Consequently, with respect to Swap Entities, the definition reads,
``(aa) Associated Person. This term means any natural person who is
associated in any of the following capacities with: . . . (6) A swap
dealer or major swap participant as a partner, officer, employee,
agent (or any natural person occupying a similar status or
performing similar functions), in any capacity that involves: (i)
The solicitation or acceptance of swaps (other than in a clerical or
ministerial capacity); or (ii) The supervision of any person or
persons so engaged.''
    \43\ See 7 U.S.C. 6s(b)(6).
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     Adopted Regulation 23.22(b), permitting association with a
Swap Entity with respect to a person who is already listed as a
principal, registered as an associated person of another CFTC
registrant, or registered as a floor broker or floor trader,
notwithstanding that the person is subject to a statutory
disqualification under the CEA.\44\ With respect to those applicants or
registrants, NFA Registration Rule 504 sets forth procedures governing
applicants and registrants statutorily disqualified from registration
under CEA Section 8a(2), 8a(3) or 8a(4).\45\ Under NFA Registration
Rules 504(b)(2) and 507, the applicant or registrant must show that,
notwithstanding the existence of a statutory disqualification, his
registration would pose no substantial risk to the public.\46\
Likewise, under CFTC Regulation 3.60(b)(2)(i), (e)(1) and (2) \47\ an
applicant or registrant must show that registration would not pose a
substantial risk to the public despite the existence of the statutory
disqualification.\48\
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    \44\ See Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613, 2315 (Jan. 19, 2012) (``CFTC Registration
Release''). Specifically, CFTC Regulation 23.22(b) provides: ``No
swap dealer or major swap participant may permit a person who is
subject to a statutory disqualification under section 8a(2) or 8a(3)
of the [CEA] to effect or be involved in effecting swaps on behalf
of the [Swap Entity], if the [Swap Entity] knows, or in the exercise
of reasonable care should know, of the statutory disqualification;
Provided, however, that the prohibition set forth in this paragraph
(b) shall not apply to any person listed as a principal or
registered as an associated person of a futures commission merchant,
retail foreign exchange dealer, introducing broker, commodity pool
operator, commodity trading advisor, or leverage transaction
merchant, or any person registered as a floor broker or floor
trader, notwithstanding that the person is subject to a
disqualification from registration under section 8a(2) or 8a(3) of
the [CEA].'' 17 CFR 23.22(b).
    \45\ 7 U.S.C. 12a(2), (3) or (4).
    \46\ Specifically, under NFA Registration Rule 507(a)(1), in
actions involving statutory disqualification set forth in CEA
Section 8a(2), 7 U.S.C. 12a(2), the applicant or registrant must
make a clear and convincing showing that, notwithstanding the
existence of the statutory disqualification, full or conditioned
registration would not pose a substantial risk to the public; under
NFA Registration Rule 507(a)(2), in actions involving statutory
disqualification set forth in CEA Section 8a(3) or 8a(4), 7 U.S.C.
12a(3) or (4), the applicant or registrant must show by a
preponderance of the evidence that, notwithstanding the existence of
the statutory disqualification, full or conditioned registration
would not pose a substantial risk to the public.
    \47\ 17 CFR 3.60(b)(2)(i), (e)(1), (e)(2).
    \48\ Under CFTC Regulation 3.60(e)(1), 17 CFR 3.60(e)(1), in
actions involving statutory disqualifications set forth in CEA
Section 8a(2), 7 U.S.C. 12a(2), the applicant or registrant must
make a clear and convincing showing that full, conditioned or
restricted registration would not pose a substantial risk to the
public despite the existence of the statutory disqualification.
Under CFTC Regulation 3.60(e)(2), 17 CFR 3.60(e)(2), in actions
involving statutory disqualifications set forth in CEA Section 8a(3)
or 8a(4), 7 U.S.C. 12a(3) or (4), the applicant or registrant must
make a showing by a preponderance of the evidence that full,
conditioned or restricted registration would not pose a substantial
risk to the public despite the existence of the statutory
disqualification.

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

     In addition, CFTC staff has issued no-action relief to
Swap Entities that allows them to permit a statutorily disqualified
associated person to effect or be involved in effecting swap
transactions on behalf of a Swap Entity, provided that NFA provides
notice to the Swap Entity that, had the person applied for registration
as an associated person, NFA would have granted such registration.\49\
NFA has established a process by which such associated persons of Swap
Entities may apply for relief from CEA Section 4s(b)(6).\50\
---------------------------------------------------------------------------

    \49\ See Staff No-Action Positions: Registration Relief for
Certain Persons, CFTC Letter No. 12-15, at 5-8 (Oct. 11, 2012)
(``CFTC Staff No-Action Letter''), available at<EMAIL_ADDRESS>    \50\ See NFA, EasyFile AP Statutory Disqualification Form
Submission, https://www.nfa.futures.org/NFA-electronic-filings/easyFile-statutory-disqualification.HTML.
---------------------------------------------------------------------------

C. Proposed Rule of Practice 194

1. Scope of the Rule
    Proposed paragraph (a) defines the scope of proposed Rule of
Practice 194, providing a process for submitting applications by an SBS
Entity seeking an order of the Commission permitting an associated
person that is subject to a statutory disqualification to effect or be
involved in effecting security-based swaps on behalf of the SBS Entity.
The proposed rule would allow an SBS Entity to voluntarily submit an
application to the Commission to request an order where an associated
person of an SBS Entity is subject to a statutory disqualification and
thereby prohibited from effecting or being involved in effecting
security based swaps on behalf of the SBS Entity under Exchange Act
Section 15F(b)(6).\51\
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    \51\ 15 U.S.C. 78o-10(b)(6).
---------------------------------------------------------------------------

    Notably, however, where the conditions set forth in proposed
paragraph (j) are met, an SBS Entity would not need to file an
application under Rule of Practice 194 to permit a statutorily
disqualified associated person to effect or be involved in effecting
security-based swaps on behalf of the SBS Entity. In such instances, a
more limited notification would be required.
2. Required Showing
    Proposed paragraph (b) sets forth the required showing for an
application under proposed Rule of Practice 194. For the Commission to
issue an order granting relief under proposed Rule of Practice 194, the
Commission would need to find that it would be consistent with the
public interest to permit the associated person of the SBS Entity who
is subject to a statutory disqualification to effect or be involved in
effecting security-based swaps on behalf of the SBS Entity.
    In meeting the burden of showing that permitting the associated
person to effect or be involved in effecting security based swaps on
behalf of the SBS Entity is consistent with the public interest, the
application and supporting documentation must demonstrate that the
terms or conditions of association, procedures, or proposed supervision
(if the associated person is a natural person), for an associated
person are reasonably designed to ensure that the statutory
disqualification does not negatively impact upon the ability of the
associated person to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity in compliance with the applicable
statutory and regulatory framework. In addition to the items set forth
in paragraphs (d) and (f) of proposed Rule of Practice 194, the
Commission would consider the nature of the findings that resulted in
the statutory disqualification in determining whether the association
is consistent with the public interest.
    The Commission preliminarily believes that the public interest
standard is appropriate because it is consistent with the overall
purpose of the Exchange Act, and specifically for ``transactions in
securities . . . [to be] effected with a national public interest which
makes it necessary to provide for regulation and control of such
transactions and of practices and matters related thereto.'' \52\ By
prohibiting an SBS Entity from allowing a statutorily disqualified
associated person from effecting or being involved in effecting
security-based swap transactions, absent Commission relief, we believe
that Exchange Act Section 15F(b)(6) is designed to limit the potential
that associated persons who have engaged in certain types of ``bad
acts'' will be able to negatively impact the security-based swap
market, and the participants and investors in that market. However,
Section 15F(b)(6) also specifically provides that the Commission can
allow SBS Entities to continue to permit such statutorily disqualified
associated persons to effect or be involved in effecting security-based
swap transactions. The Commission preliminarily believes that the
public interest standard is intended to capture those situations where
the risk of the associated person engaging in security-based swap
activity that may harm the market or the participants in the market is
mitigated. For example, other items including, but not limited to,
other misconduct in which the associated person may have engaged, the
nature and disciplinary history of the associated person and SBS Entity
requesting such relief, and the supervision to be accorded the
associated person, would be relevant to the Commission's consideration
of whether the risks of permitting such associated persons to effect or
be involved in effecting security-based swaps on behalf of the SBS
Entity are sufficiently mitigated. The Commission preliminarily
believes that the public interest standard appropriately reflects this
type of analysis.\53\
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    \52\ See, e.g., Exchange Act Section 2, 15 U.S.C. 78b.
    \53\ A public interest standard also is consistent with the
standard in Rule of Practice 193. See 17 CFR 201.193(c).
---------------------------------------------------------------------------

3. Form of Application for Natural Persons and Entities
    Proposed paragraphs (c) and (e) specify the form of the application
to be submitted under proposed Rule of Practice 194 for natural persons
and entities (respectively). Proposed paragraphs (c) and (e) would
require that each application with respect to an associated person
subject to a statutory disqualification shall be supported by a written
statement, signed by a knowledgeable person authorized by the SBS
Entity, which addresses the items in proposed Rule of Practice 194(d)
and (f).\54\
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    \54\ In addition to the information required in proposed
paragraph (c)-(g), the Commission reserves the right to request from
the applicant supplementary information to assist in its review. See
proposed Rule of Practice 194, Appendix, paragraph (c), and Section
II.C.10, infra.
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    The Commission proposes that the SBS Entity (rather than the
associated person) submit the application, including by providing the
signed written statement under proposed paragraphs (c) and (e), for
several reasons. First, the SBS Entity is the person that is subject to
the restrictions under Exchange Act Section 15F(b)(6). Second,
requiring an SBS Entity to submit the written statement with respect to
an associated person would reinforce, in certain circumstances, the
necessity of additional oversight by the SBS Entity over the associated
person that is subject to a statutory disqualification, as SBS Entities
would determine what information and documents to include in an
application with respect to an associated person.\55\ Third, as
specified below, the Commission is proposing to require information
(e.g., concerning the supervision by the SBS Entity over the

associated person) that is within the possession of the SBS Entity
itself. \56\
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    \55\ See proposed Rule of Practice 194, Appendix, paragraph (b).
    \56\ In addition, requiring an SBS Entity to submit the
application would provide a familiar practice, as it is consistent
with the current practice for SBS Entities that are registered with
FINRA under FINRA Form MC-400. In particular, under FINRA Form MC-
400, an application for a statutorily disqualified associated person
who is a natural person of a member firm is submitted by a member
firm (not by the individual). See FINRA Form MC-400, Note 33, supra;
see also Self-Regulatory Organizations; Financial Industry
Regulatory Authority, Inc.; Order Approving a Proposed Rule Change
to Adopt FINRA Rule 1113 (Restriction Pertaining to New Member
Applications) and to Amend the FINRA Rule 9520 Series (Eligibility
Proceedings), Exchange Act Release No. 63933 (Feb. 18, 2011), 76 FR
10629, 10630 (Feb. 25, 2011) (``A member (or new member applicant)
seeking to associate with a person subject to a disqualification
must seek approval from FINRA by filing a Form MC-400 application,
pursuant to the FINRA Rule 9520 Series.'').
---------------------------------------------------------------------------

    The application would be filed pursuant to Rules of Practice 151,
152 and 153.\57\ The Commission believes filing pursuant to these rules
would provide the Commission with the information that it needs to
assess an application under proposed Rule of Practice 194.
---------------------------------------------------------------------------

    \57\ 17 CFR 201.151, 201.152, 201.153. Rule of Practice 151, 17
CFR 201.151, concerns the procedure for filing of papers with the
Commission; Rule of Practice 152, 17 CFR 201.152, concerns the form
of filing papers with the Commission; Rule of Practice 153, 17 CFR
201.153, concerns the signature requirement and effect of filing
papers.
---------------------------------------------------------------------------

    Proposed paragraphs (c) and (e) would require that the following
exhibits be included with an application to help the Commission assess
whether it is consistent with the public interest to allow the
associated person to effect or be involved in effecting security-based
swaps on behalf of an SBS Entity:
     Proposed paragraphs (c)(1) and (e)(1) would require a copy
of the order or other applicable document that resulted in the
associated person being subject to a statutory disqualification. The
proposed requirement would help inform the Commission about the nature
of the conduct that led to the statutory disqualification. For example,
in the event that the statutory disqualification arose from misconduct
relating to security-based swap transactions in particular, or is
otherwise investment-related, it may inform the Commission's decision
of whether it is consistent with the public interest for the associated
person to effect or be involved in effecting security-based swaps on
behalf of an SBS Entity.
     Proposed paragraphs (c)(2) and (e)(2) would require an
undertaking by the applicant to notify the Commission promptly in
writing if any information submitted in support of the application
becomes materially false or misleading while the application is
pending. This proposed requirement is designed to require that
information provided by the applicant be complete and accurate so that
the Commission is provided the necessary information in order to
effectively evaluate the pending application.
     Proposed paragraphs (c)(4) and (e)(5) would require a copy
of any decision, order, or document issued with respect to any
proceedings \58\ resulting in the imposition of disciplinary sanctions
or pending proceeding against the associated person by the Commission,
CFTC, any federal or state or law enforcement regulatory agency,
registered futures association, foreign financial regulatory authority,
registered national securities association, or any other SRO, or
commodities exchange, or any court, that occurred during the five years
preceding the filing of the application pursuant to proposed Rule of
Practice 194. The Commission believes that the information required by
this proposed provision would be useful to assess the disciplinary
history of the associated person. The disciplinary history of the
associated person subject to a statutory disqualification provides the
Commission with relevant information to help assess the risk that the
associated person may engage in future misconduct. The Commission is
requesting the underlying decision, order, or other document itself (as
opposed to a description or record of the decision), so that the
Commission can directly review the materials to assess the disciplinary
history of the associated person. Where the associated person has a
history of misconduct, in addition to the conduct that triggered the
statutory disqualification, the Commission generally would be less
likely to find it in the public interest to permit the associated
person to effect or be involved in effecting security-based swaps on
behalf of an SBS Entity. In addition, this proposed requirement would
help inform the Commission of any pending proceedings against the
associated person, which may factor into the totality of the
information when the Commission makes a determination as to whether the
associated person should be allowed to effect or be involved in
effecting security-based swaps on behalf of the SBS Entity. In this
context, the Commission preliminarily believes that the five-year
timeframe is appropriate. We balanced the burden that may be imposed by
requiring SBS Entities to provide older materials and documents that
may not be as readily available with our need to evaluate the context
and circumstances underlying the application.
---------------------------------------------------------------------------

    \58\ For purposes of providing the information requested by
paragraphs (c)(4) and (c)(5), applicants should look to the
definition of ``proceeding'' in Form SBSE, which states that a
``proceeding'' includes ``a formal administrative or civil action
initiated by a governmental agency, self-regulatory organization or
a foreign financial regulatory authority; a felony criminal
indictment or information (or equivalent formal charge); or a
misdemeanor criminal information (or equivalent formal charge). Does
not include other civil litigation, investigations, or arrests or
similar charges effected in the absence of a formal criminal
indictment or information (or equivalent formal charge).'' See
Registration Adopting Release, at Section II.G.1, and Form SBSE.
---------------------------------------------------------------------------

    In addition to the information above, proposed paragraph (c) of the
proposed rule would require that each application with respect to an
associated person that is a natural person include the following
information and documents:
     Proposed paragraph (c)(3) would require a copy of the
questionnaire or application for employment specified in Exchange Act
Rule 15Fb6-2(b) with respect to the associated person,\59\ which would
provide the Commission with basic background information concerning the
associated person, as well as the disciplinary history of the
associated person. Information concerning the disciplinary history of
the associated person is important because it may help the Commission
assess the risk of future misconduct by the associated person.
---------------------------------------------------------------------------

    \59\ See Registration Adopting Release, at Section II.B.2.
---------------------------------------------------------------------------

    Additionally, proposed paragraph (e) of the proposed rule would
require that each application with respect to an associated person that
is not a natural person include the following information and
documents:
     Proposed paragraph (e)(3) would require a copy of any
organizational charts of the associated person, if available. To the
extent that the associated person employs any natural persons subject
to a statutory disqualification (which would be required to be
disclosed pursuant to paragraph (e)(6) of proposed Rule of Practice
194, discussed infra), organizational charts would assist the
Commission in assessing whether such natural persons are supervising or
being supervised by other natural persons that are also subject to a
statutory disqualification, whether directly (i.e., an immediate
supervisor) or indirectly. This information would assist the Commission
in making its determination because, for example, the concentration of
statutorily disqualified natural persons in an associated person entity
could pose a greater risk of future misconduct by such associated
person entity.

     Proposed paragraph (e)(4) would require a copy of policies
and procedures relating to the conduct resulting in the statutory
disqualification that the associated person entity has in place to
ensure compliance with any federal or state securities laws, the CEA,
the rules or regulations thereunder, or the rules of the Municipal
Securities Rulemaking Board, any SRO, or any foreign regulatory
authority, as applicable. Such information would help inform the
Commission as to whether the associated person entity has adequate
policies and procedures in place, to the extent applicable, to ensure
compliance with the federal securities laws or SRO rules. The
information requested here is also consistent with the statutory
scheme, as violations of the statutes and regulations listed here may
result in a statutory disqualification under Exchange Act Section
3(a)(39).\60\ Given that violations of any of the statutes and
regulations listed here may result in a statutory disqualification
under Section 3(a)(39) of the Exchange Act, the Commission believes
that information about the associated person entity's policies and
procedures would help inform the Commission as to steps taken to reduce
the risk of further misconduct by the associated person entity. In
particular, the Commission believes that where the associated person
entity does not have sufficient policies and procedures to help ensure
compliance with applicable laws, rules and regulations, there is a
greater risk that the entity will engage in future misconduct.
---------------------------------------------------------------------------

    \60\ See 15 U.S.C. 78c(a)(39); 15 U.S.C. 78o(b)(4).
---------------------------------------------------------------------------

     Proposed paragraph (e)(6) would require the name of any
natural persons employed by the associated person that are subject to a
statutory disqualification and would effect or be involved in effecting
security-based swaps on behalf of the SBS Entity. For any such natural
person, the applicant should indicate whether the individual is an
officer, partner, direct or indirect owner of the associated person.
Because an SBS Entity separately would be required to seek relief under
proposed Rule of Practice 194 for any such natural persons to be able
to effect or be involved in effecting security-based swaps on behalf of
the SBS Entity, the application would only require a list of the names,
not any further information that would be included in those separate
applications.
4. Written Statement for Natural Persons and Entities
    Proposed paragraphs (d) and (f) under Rule of Practice 194 set
forth the items to be addressed for applications with respect to
natural persons and entities (respectively). Each of the items in
proposed paragraphs (d) and (f) would be addressed in the written
statement required by proposed paragraphs (c) and (e). The Commission
believes that the items listed are important to help the Commission
assess whether it would be consistent with the public interest to allow
the associated person subject to a statutory disqualification to effect
or be involved in effecting security-based swaps on behalf of the SBS
Entity.
     Proposed paragraphs (d)(1) and (f)(2) would require an
applicant to address the associated person's compliance with any order
resulting in the statutory disqualification, including whether the
associated person has paid fines or penalties, disgorged monies, made
restitution or paid any other monetary compensation required by any
such order. Whether an associated person has complied in full with any
order resulting in the statutory disqualification (including with all
monetary penalties imposed) could be relevant to assessing whether it
is consistent with the public interest to allow the associated person
to effect or be involved in effecting security-based swaps on behalf of
an SBS Entity. This information could be relevant because the
Commission believes that it generally would not be consistent with the
public interest to issue an order granting relief under proposed Rule
of Practice 194 with respect to persons that have failed to abide by
the terms of a prior order resulting in a statutory disqualification.
The Commission believes that the failure to comply with an order
resulting in the statutory disqualification may be relevant for
assessing the risk of whether an associated person subject to a
statutory disqualification may engage in future misconduct.
     Proposed paragraphs (d)(3) and (f)(3) would require the
applicant to address the capacity or position in which the associated
person subject to a statutory disqualification proposes to be
associated with the SBS Entity. In addressing the capacity or position
in which the associated person subject to a statutory disqualification
proposes to be associated with the SBS Entity, the applicant should
provide a description of the proposed duties and responsibilities of
the associated person. An associated person effecting or ``involved in
effecting'' \61\ security-based swaps on behalf of an SBS Entity may
operate in a varied range of capacities or positions, each presenting
different risks. As a result, the information requested by paragraphs
(d)(3) and (f)(3) would provide information about the nature of the
activity that the associated person will be providing for the SBS
Entity, and thus may help the Commission assess whether the associated
person is engaging in activities that may create greater risks to SBS
Entities, counterparties or other persons. In the event a prior
application has been submitted with respect to the associated person,
as set forth in proposed paragraph (g) to proposed Rule of Practice
194, the SBS Entity should describe in what manner the association will
differ, if at all, from the association in any such prior application.
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    \61\ See Registration Adopting Release, at Section II.B.1.ii,
for discussion of guidance about what it means to be ``involved in
effecting'' security-based swaps in the context of Section 15F(b)(6)
of the Exchange Act.
---------------------------------------------------------------------------

     Proposed paragraphs (d)(6) and (f)(6) would require the
applicant to describe the compliance and disciplinary history, during
the five years preceding the filing of the application, of the SBS
Entity. In addition to the description of the compliance and
disciplinary history, the applicant may provide any relevant
documentation during the five years preceding the filing of the
application, including, but not be limited to, the disclosure reporting
pages on Forms SBSE, SBSE-A and SBSE-BD \62\ for the SBS Entity with
respect to events occurring, along with any letters of caution,
deficiency letters or similar documents received from the Commission,
an SRO or other law enforcement or regulatory agency. The Commission
believes that information regarding the compliance and disciplinary
history of the SBS Entity could be useful to the Commission in
assessing the risk that the associated person subject to a statutory
disqualification may engage in future misconduct. In cases where an
associated person subject to a statutory disqualification will be
employed at an SBS Entity with significant compliance and disciplinary
issues during the five years preceding the filing of an application
under proposed Rule of Practice 194, the Commission would consider,
among other things noted in this rule, the nature of the conduct that
resulted in the statutory disqualification in determining whether the
association

is consistent with the public interest. In this context, the Commission
preliminarily believes that the five-year timeframe is appropriate. We
balanced the burden that may be imposed by requiring SBS Entities to
provide older materials and documents that may not be as readily
available with our need to evaluate the circumstances underlying the
application.
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    \62\ See Registration Adopting Release, at Sections II.G.1,
II.G.2, and II.G.3.
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     Proposed paragraphs (d)(9) and (f)(5) would require a
detailed statement of why the associated person should be permitted to
effect or be involved in effecting security-based swaps on behalf of
the SBS Entity, including what steps the associated person or applicant
have taken, or will take, to ensure that the statutory disqualification
does not negatively impact upon the ability of the associated person to
effect or be involved in effecting security-based swaps on behalf of
the SBS Entity in compliance with the applicable statutory and
regulatory framework. This proposed requirement is designed to provide
an opportunity for an applicant to provide a narrative or rationale to
explain why it is consistent with the public interest to allow the
associated person to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity.
     Proposed paragraphs (d)(10) and (f)(7) would require an
applicant to discuss whether, during the five years preceding the
filing of the application, the associated person has been involved in
any litigation concerning investment or investment-related activities
\63\ or whether there are there any unsatisfied judgments outstanding
against the associated person concerning investment or investment-
related activities, to the extent not otherwise covered by proposed
paragraph (d)(9); if so, the applicant should provide details regarding
such litigation or unsatisfied judgments. The Commission believes
information concerning such litigation may factor into the totality of
the information when the Commission makes a determination as to whether
the associated person should be allowed to effect or be involved in
effecting security-based swaps on behalf of the SBS Entity. Information
concerning unsatisfied judgments outstanding against the associated
person concerning investment or investment-related activities may help
inform the Commission as to whether the associated person subject to a
statutory disqualification has abided by any judgment or order, or has
failed to compensate persons as required by a court or other relevant
authority. In this context, the Commission preliminarily believes that
the five-year timeframe is appropriate. We balanced the burden that may
be imposed by requiring SBS Entities to provide older information that
may not be as readily available with our need to evaluate the
circumstances underlying the application.
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    \63\ For purposes of providing the information requested by
paragraphs (d)(10) and (f)(7), applicants should look to the
definition of ``investment or investment-related'' in Form SBSE,
which states that ``investment or investment-related'' includes
``pertaining to securities, commodities, banking, savings
association activities, credit union activities, insurance, or real
estate (including, but not limited to, acting as or being associated
with a broker-dealer, municipal securities dealer, government
securities broker or dealer, issuer, investment company, investment
adviser, futures sponsor, bank, security-based swap dealer, major
security-based swap participant, savings association, credit union,
insurance company, or insurance agency).'' See Registration Adopting
Release, Form SBSE.
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     Proposed paragraphs (d)(11) and (f)(8) would require any
other information that the applicant believes to be material to the
application. This provision is designed to require an applicant to
provide all information that likely will be material to the
Commission's consideration of an application under proposed Rule of
Practice 194, notwithstanding that such information may not be
specifically required by the rule. This provision also is designed to
provide the applicant with an opportunity to provide any additional
information that the applicant believes is important to the
Commission's consideration of the SBS Entity's application under
proposed Rule of Practice 194, but that is not specifically required by
the rule.
    In addition to the items discussed above, proposed paragraph (d) of
the proposed rule would require applications with respect to natural
persons to address the following items:
     Proposed paragraph (d)(2) would require the applicant to
address the associated person's employment during the period subsequent
to the issuance of the statutory disqualification. Where the associated
person subject to a statutory disqualification has been employed
without issue since the conduct resulting in the statutory
disqualification, that fact may be relevant to the Commission's
assessment as to whether it would be consistent with the public
interest for the person to effect or be involved in effecting security-
based swaps on behalf of an SBS Entity.
     Proposed paragraph (d)(4) would require the applicant to
describe the terms and conditions of employment and supervision to be
exercised over the associated person and, where applicable, by such
associated person. The Commission is proposing this requirement so that
the Commission will be able to better assess the extent to which the
terms and conditions of employment and supervision may create or
mitigate the risk that the associated person subject to a statutory
disqualification may engage in future misconduct. Moreover, the
Commission is proposing to require that the applicant describe any
supervision to be exercised by the associated person because the
Commission believes that there could be a greater risk of harm where an
associated person that is subject to a statutory disqualification has
greater supervisory responsibilities, or is supervising another person
that is also subject to a statutory disqualification. In the event a
prior application has been submitted with respect to the associated
person, as set forth in proposed paragraph (g) to proposed Rule of
Practice 194, the SBS Entity should describe in what manner the terms
and conditions of employment and supervision will differ, if at all,
from the supervision in any such prior application.
     Proposed paragraph (d)(5) would require the applicant to
list the qualifications, experience, and disciplinary history \64\ of
the proposed supervisor(s) of the associated person. This provision is
designed to assist the Commission in considering the capacity of the
supervisor to oversee the associated person subject to a statutory
disqualification in assessing whether the supervision of a person is
likely to minimize the risk of future misconduct by the associated
person. The Commission believes that the qualifications and experience
of the supervisor of an associated person subject to a statutory
disqualification has a bearing on the potential for future misconduct
by that person.
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    \64\ Disciplinary history would include, for example, the items
contained in Exchange Act Rule 17a-3(a)(12)(i)(D)-(G), 17 CFR
240.17a-3(a)(12)(i)(D)-(G), which items are required to be collected
by broker-dealers with respect to their associated persons and are
required to be provided on Form U-4. Such items include, among other
things, a record of any disciplinary action taken, or sanction
imposed, upon the associated person by any federal or state agency,
or national securities exchange or national securities association,
a record of any permanent or temporary injunction entered against
the associated person, or a record of any arrest or indictment for
any felony or certain specified types of misdemeanors. See also
Recordkeeping and Reporting Requirements for Security-Based Swap
Dealers, Major Security-Based Swap Participants, and Broker-Dealers;
Capital Rule for Certain Security-Based Swap Dealers, Exchange Act
Release No. 71958 (Apr. 17, 2014), 79 FR 25194, 25205, 25308-09 (May
2, 2014).
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     Proposed paragraph (d)(7) would require the applicant to
list the names of any other associated persons at the SBS Entity who
have previously been

subject to a statutory disqualification, and whether they are to be
supervised by the associated person. Proposed Rule of Practice
194(d)(7) is designed to assist the Commission in assessing whether
there could be a greater risk of misconduct where an associated person
that is subject to a statutory disqualification is working directly
with or is supervising another person that is subject to a statutory
disqualification.
     Proposed paragraph (d)(8) would require the applicant to
address whether the associated person has taken any relevant courses,
seminars, examinations or other actions subsequent to becoming subject
to a statutory disqualification to prepare for his or her participation
in the security-based swap business. The information provided by
proposed paragraph (d)(8) would inform the Commission as to whether the
associated person has taken steps to apprise himself of relevant
obligations under the federal securities or other laws or regulations,
and, as a result, may factor into the Commission's decision as to
whether it would be consistent with the public interest for the person
to effect or be involved in effecting security-based swaps on behalf of
an SBS Entity.
    In addition to the items discussed above, proposed paragraph (f) of
the proposed rule would require applications with respect to persons
that are not natural persons to address the following items:
     Proposed paragraph (f)(1) would require general background
information about the associated person, including (i) the number of
employees, (ii) the number and location of offices, (iii) the type(s)
of business(es) in which the associated person is engaged; and (iv) the
SRO memberships and effective dates of such membership of the
associated person, if applicable. This requirement would assist the
Commission in understanding the business of the associated person,
including determining what SROs, if any, oversee the associated person.
The Commission believes that obtaining basic background information
about the firm would aid the Commission in understanding the entity
that is an associated person, and therefore aid in its assessment of
whether it is in the public interest to permit the associated person to
effect or be involved in effecting security-based swaps on behalf of
the SBS Entity.
     Proposed paragraph (f)(4) would require a description of
whether, with respect to the statutory disqualification and the
sanctions imposed, the associated person was ordered to undertake any
changes to its organizational structure or policies and procedures set
forth in proposed Rule of Practice 194(e)(4), and to the extent that
such changes were mandated, to describe what changes were mandated and
whether the associated person has implemented them. This proposed
requirement may aid the Commission in assessing whether the applicant
has made changes to mitigate the occurrence of any future conduct that
may result in statutory disqualification.
5. Prior Applications or Processes
    Proposed paragraph (g) would require an applicant to provide as
part of the application any order, notice or other applicable document
reflecting the grant, denial or other disposition (including any
dispositions on appeal) of any prior application concerning the
associated person under proposed Rule of Practice 194 and other similar
processes.\65\ This provision is designed to inform the Commission when
a similar application made with respect to the associated person has
been granted or denied (or been subject to some other disposition).
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    \65\ In cases where a statutorily disqualified person was
formerly associated with another SBS Entity, an applicant should use
reasonable efforts to obtain relevant documentation from the other
SBS Entity.
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    Information concerning the grant or denial (or other disposition)
of a prior application or other request for relief, and the reasons for
the grant or denial, may be relevant to the Commission's assessment as
to whether it would be consistent with the public interest for the
person to effect or be involved in effecting security-based swaps on
behalf of an SBS Entity. For example, in the event that a prior
application has been granted, but the terms and conditions of
employment with the other registrant are materially different from the
SBS Entity, the Commission could consider whether the terms and
conditions at the SBS Entity that are different may result in any
greater risk of future misconduct. In addition, if a prior application
has been denied the Commission may take into consideration the prior
application or request for relief in its determination of whether
permitting an associated person to effect or be involved in effecting
security based swaps on behalf of the SBS Entity would be consistent
with the public interest to grant an application under Rule of Practice
194. Notably, under such circumstances (i.e., a denial or where the
terms and conditions of employment are not the same), an SBS Entity
could not avail itself of paragraph (j) of proposed Rule of Practice
194 \66\ and therefore would be required to file an application under
proposed Rule of Practice 194 in order to permit an associated person
subject to a statutory disqualification to be able to effect or be
involved in effecting security-based swaps on behalf of an SBS Entity.
---------------------------------------------------------------------------

    \66\ See Section II.C.9, infra.
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     Proposed paragraph (g)(1) would require an applicant to
provide any order, notice or other applicable document where an
application has previously been made for the associated person pursuant
to Rule of Practice 194.
     Proposed paragraph (g)(2) would require an applicant to
provide any order, notice or other applicable document where an
application has previously been made for the associated person pursuant
to Rule of Practice 193.\67\
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    \67\ 17 CFR 201.193.
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     Proposed paragraph (g)(3) would require an applicant to
provide any order, notice or other applicable document where an
application has previously been made on behalf of the associated person
pursuant to Section 9(c) of the Investment Company Act of 1940
(``Investment Company Act'').\68\ Similar to proposed Rule of Practice
194, under Investment Company Act Section 9(c), any person who is
ineligible under Investment Company Act Section 9(a) \69\ may file with
the Commission an application for an exemption.\70\
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    \68\ 15 U.S.C. 80a-9(c).
    \69\ Under Investment Company Act Section 9(a), it is unlawful
for any persons to serve or act in the capacity of employee,
officer, director, member of an advisory board, investment adviser,
or depositor of any registered investment company, or principal
underwriter for any registered open-end company, registered unit
investment trust, or registered face-amount certificate company
where, among other things: (1) that person (or an affiliated person)
within ten years has been convicted of any felony or misdemeanor
involving the purchase or sale of any security or arising out of
such person's conduct as an underwriter, broker, dealer, investment
adviser, or in other specified categories; or (2) that person (or an
affiliated person), by reason of any misconduct, has been
permanently or temporarily enjoined by order, judgment, or decree of
any court of competent jurisdiction from acting as an underwriter,
broker, dealer, investment adviser, or in other specified
categories. See 15 U.S.C. 80a-9(a).
    \70\ Under Investment Company Act Section 9(c), the Commission
will grant such application if it is established that: (i) the
prohibition is unduly or disproportionately severe; or (ii) the
conduct of such person has been such as not to make it against the
public interest or protection of investors to grant such
application. See 15 U.S.C. 80a-9(c).
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     Proposed paragraph (g)(4) would require an applicant to
provide any order, notice or other applicable document where an
application has previously been made on behalf of the associated person
pursuant to Exchange Act Section 19(d),\71\ Exchange Act Rule

19h-1 \72\ or a proceeding by an SRO for a person to become or remain a
member, or an associated person of a member, notwithstanding the
existence of a statutory disqualification. For example, for broker-
dealers, where FINRA has granted or denied an application for consent
to be a member or an associated person of a member, or to continue to
be a member or an associated person of a member, notwithstanding the
statutory disqualification, the applicant would provide such
information to the Commission in accordance with proposed paragraph
(g)(4).
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    \71\ 15 U.S.C. 78s(d).
    \72\ 17 CFR 240.19h-1.
---------------------------------------------------------------------------

     Proposed paragraph (g)(5) would require an applicant to
provide any order, notice or other applicable document reflecting the
grant, denial or other disposition (including any dispositions on
appeal) of any prior process concerning the associated person by the
CFTC or a registered futures association for listing as a principal, or
for registration, including as an associated person, notwithstanding
the existence of a statutory disqualification. Specifically, paragraph
(g)(5) would provide as follows:
     Proposed paragraph (g)(5)(i) addresses the exception in
CFTC Regulation 23.22(b).\73\ Under that provision, the CFTC allows
association with a Swap Entity with respect to a person who is already
listed as a principal, registered as an associated person of another
CFTC registrant, or registered as a floor broker or floor trader,
notwithstanding that the person is subject to a statutory
disqualification under section 8a(2) or 8a(3) \74\ of the CEA.\75\
Under proposed paragraph (g)(5)(i), an SBS Entity would be required to
provide any order or other applicable document providing that the
associated person may be listed as a principal, registered as an
associated person of another CFTC registrant, or registered as a floor
broker or floor trader, notwithstanding the statutory disqualification.
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    \73\ 17 CFR 23.22(b).
    \74\ 7 U.S.C. 12a(2), (3).
    \75\ See Note 44, supra.
---------------------------------------------------------------------------

     Proposed paragraph (g)(5)(ii) addresses the CFTC and NFA's
current process for granting relief from CEA Section 4s(b)(6),\76\ the
provision that is parallel to Exchange Act Section 15F(b)(6), with
respect to persons that are not exempt from that provision pursuant to
CFTC Regulation 23.22(b).\77\ Under that process, available through no-
action relief granted by CFTC staff, a Swap Entity may make an
application to NFA to permit an associated person of a Swap Entity
subject to a statutory disqualification to effect or be involved in
effecting swaps on behalf of the Swap Entity. NFA will provide notice
to a Swap Entity whether or not NFA would have granted the person
registration as an associated person.\78\ Proposed paragraph (g)(5)(ii)
would require the SBS Entity to submit any determination by NFA (the
sole registered futures association \79\) with respect to that grant of
no-action relief.
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    \76\ 7 U.S.C. 6s(b)(6).
    \77\ 17 CFR 23.22(b).
    \78\ See CFTC Staff No-Action Letter, supra Note 49, at 8.
    \79\ See CFTC Registration Release, 77 FR at 2624.
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6. Notification to Applicant and Written Statement
    Proposed paragraph (h) governs the procedure where there is an
adverse recommendation proposed by the Commission staff with respect to
an application under proposed Rule of Practice 194. Consistent with
Rule of Practice 193(e),\80\ proposed Rule of Practice 194(h) would
provide that where there is such an adverse recommendation, the
applicant shall be so advised and provided with a written statement by
the Commission staff of the reasons for such recommendation.
---------------------------------------------------------------------------

    \80\ 17 CFR 201.193(e).
---------------------------------------------------------------------------

    Under proposed paragraph (h), Commission staff would be required to
provide a written statement for the reasons for an adverse
recommendation. Consistent with Rule of Practice 193(e),\81\ the
applicant would then have 30 days to submit to the Commission a written
statement in response. This proposed provision is designed to give an
applicant an opportunity to directly address an adverse recommendation
by Commission staff and to assist the Commission's evaluation of
applications under proposed Rule of Practice 194.
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    \81\ Id.
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7. Orders Under Proposed Rule of Practice 194
    Where the Commission determines that it would be consistent with
the public interest to permit the associated person of the SBS Entity
to effect or be involved in effecting security-based swaps on behalf of
the SBS Entity, the Commission would issue an order granting relief.
Where the Commission does not or cannot make the determination that it
is in the public interest to permit the associated person of the SBS
Entity to effect or be involved in effecting security-based swaps on
behalf of the SBS Entity, the Commission would issue an order denying
the application. Orders issued in accordance with Rule of Practice 194
would be made publicly available. Applications and supporting materials
would be kept confidential subject to applicable law.\82\
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    \82\ However, a notice pursuant to paragraph (i)(2) to proposed
Rule of Practice 194 would be made publicly available on the
Commission's Web site. See Section II.C.8, infra.
---------------------------------------------------------------------------

8. Temporary Exclusion for Other Persons
    Proposed paragraph (i) would provide for temporary relief from the
statutory prohibition in Exchange Act Section 15F(b)(6) with respect to
associated persons that are not natural persons and that are subject to
a statutory disqualification. Proposed paragraph (i) is designed to
address the situation where an operating SBS Entity becomes subject to
the statutory prohibition in Exchange Act Section 15F(b)(6) \83\ with
respect to an associated person that is not a natural person--either as
a result of an associated person that effects or is involved in
effecting security-based swaps on behalf of the SBS Entity becoming
subject to a statutory disqualification, or as a result of a person
that is subject to a statutory disqualification becoming an associated
person effecting or involved in effecting security-based swaps on
behalf of the SBS Entity.\84\
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    \83\ 15 U.S.C. 78o-10(b)(6).
    \84\ As stated in Section I.B, supra, the Commission has
separately adopted Exchange Act Rule 15Fb6-1, 17 CFR 240.15Fb6-1,
which provides that unless otherwise ordered by the Commission, an
SBS Entity, when it files an application for registration as an SBS
Entity, may permit a person associated with such SBS Entity that is
not a natural person and that is subject to a statutory
disqualification to effect or be involved in effecting security-
based swaps on its behalf, provided that the statutory
disqualification(s) occurred prior to the compliance date set forth
in the Registration Adopting Release. SBS Entities seeking to avail
themselves of this provision will have to provide a list of
disqualified associated entities, which will be made public by the
Commission as part of the registration application.
---------------------------------------------------------------------------

    As noted in a separate release adopting registration rules for SBS
Entities, the scope of the prohibition in Section 15F(b)(6) of the
Exchange Act covers a wide range of actions, given the definitions of
statutory disqualification and associated person, and the meaning of
``involved in effecting'' a security-based swap transaction, and the
conduct that led to a statutory disqualification may pertain to
management practices that occurred a long time ago or acts engaged in
by personnel that are no longer employed by the associated person.\85\
A commenter to the Registration Proposing Release stated that
prohibiting statutorily disqualified

entities from effecting or being involved in effecting security-based
swaps could result in ``considerable'' business disruptions and other
ramifications.\86\
---------------------------------------------------------------------------

    \85\ See Registration Adopting Release, at Section II.B.1.i.
    \86\ See 12/16/11 SIFMA Letter, at 8, Note 8, supra.
---------------------------------------------------------------------------

    The Commission is concerned about the potential for business
disruption to SBS Entities, and disruption to the security-based swap
market, if SBS Entities engaged in the business must either cease
operations, even temporarily, due to not being able to utilize the
services of their associated entities, or move services to another
entity that may not be as equipped to handle them pending a
determination by the Commission on their application for relief under
proposed Rule of Practice 194 or pending a determination by another
regulator for similar relief.\87\ Therefore, to provide for a fair and
orderly process when an SBS Entity files an application with respect to
associated person entities pursuant to proposed Rule of Practice 194,
the Commission preliminarily believes that it is appropriate to provide
a temporary exclusion, subject to certain limitations and conditions,
to allow an SBS Entity to permit an associated person entity that is
subject to a statutory disqualification to effect or be involved in
effecting security-based swaps on its behalf pending a determination by
the Commission or other regulatory body. In such cases, SBS Entities
may consider implementing safeguards pending a determination by the
Commission or other regulatory body to ensure that the statutory
disqualification does not negatively impact upon the ability of the
associated person to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity in compliance with the applicable
statutory and regulatory framework.
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    \87\ Proposed Rule of Practice 194(j) provides that, subject to
certain conditions, an SBS Entity may permit an associated person
that is subject to a statutory disqualification to effect or be
involved in effecting security-based swaps on its behalf, without
making an application pursuant to the proposed rule, where the
Commission, CFTC, an SRO or a registered futures association has
granted a prior application or otherwise granted relief from a
statutory disqualification with respect to that associated person.
See proposed Rule of Practice 194(j) and Section II.C.9, infra.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the approach in proposed
Rule of Practice 194(i) would appropriately consider the potentially
competing objectives of minimizing the likelihood for business or
market disruption while maintaining strong investor protections. In
particular, while the rule would provide targeted relief with respect
to associated person entities, it would not provide relief with respect
to associated persons who are natural persons. The Commission believes
that replacing, even temporarily, a natural person performing a
particular security-based swap function would not create the same
practical issues as with moving the services provided by an associated
person entity to another entity.\88\ Further, associated persons that
are natural persons are the persons responsible for actually performing
or overseeing the functions necessary to effect security-based swap
activities. As such, the Commission preliminarily does not believe the
scope of proposed Rule of Practice 194(i) should be extended to cover
associated persons that are natural persons.
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    \88\ For example, we believe that moving the cash and collateral
management services from one entity to another would have a much
more significant impact on the ability of the SBS Entity to operate
than assigning a different natural person to negotiate and execute
security-based swap transactions. See Registration Adopting Release,
at Section II.B.1.i.
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    Under proposed paragraph (i)(1)(i), an SBS Entity would be
temporarily excluded from the prohibition in Exchange Act Section
15F(b)(6) with respect to an associated person that is not a natural
person (1) for 30 days following the associated person becoming subject
to a statutory disqualification, or (2) 30 days following the person
that is subject to a statutory disqualification becoming an associated
person of an SBS Entity.\89\ This provision is designed to provide an
applicant with an initial time period to determine whether the
applicant should file an application (or a notice in lieu of an
application pursuant proposed paragraph (j)) with the Commission under
proposed Rule of Practice 194, and to afford the applicant sufficient
time to gather the materials for, draft, and file an application with
respect to that associated person. The Commission preliminarily
believes that allowing longer than 30 days would permit the associated
person that is subject to a statutory disqualification to continue to
effect or be involved in effecting security-based swaps on behalf of
the SBS Entity for too long a period of time without filing an
application or notice under proposed Rule of Practice 194. Moreover,
the Commission believes that an SBS Entity should be able to submit an
application or notice within 30 days, as the information requested
should already be readily available or accessible to the SBS Entity.
---------------------------------------------------------------------------

    \89\ Because a person would not become an associated person of
an SBS Entity until the entity itself becomes a security-based swap
dealer or a major security-based swap participant pursuant to the
Commission's rules (see 17 CFR 240.3a67-8, 240.3a67-9, 240.3a71-2),
proposed paragraph (i) to Rule of Practice 194 would not apply until
such time as the relevant entity is first deemed to be either a
security-based swap dealer or a major security-based swap
participant. For example, a person whose security-based swap dealing
activity crosses a de minimis threshold contained in Exchange Act
Rule 3a71-2 (17 CFR 240.3a71-a) would not be deemed to be a
security-based swap dealer until the earlier of the date on which it
submits a complete application for registration pursuant to Exchange
Act Section 15F(b), 15 U.S.C. 78o-10(b), or two months after the end
of the month in which that person becomes no longer able to take
advantage of the de minimis exception. Therefore, the SBS Entity
would be able to rely on the temporary exclusion contained in
proposed paragraph (i) to Rule of Practice 194 if the SBS Entity is
associated with any entity that is subject to a statutory
disqualification that effects or is involved in effecting security-
based swaps on its behalf if: (1) The entity has filed a complete
application with the Commission to become registered with the
Commission as an SBS Entity within the time periods specified in the
applicable Commission rules; and (2) the entity has filed a complete
application under proposed Rule of Practice 194 within 30 days from
the date on which it filed its application with the Commission to
become registered as an SBS Entity.
---------------------------------------------------------------------------

    Under proposed paragraph (i)(1)(ii), the SBS Entity would be
excluded from the prohibition in Exchange Act Section 15F(b)(6) with
respect to the associated person for 180 days following the filing of a
complete application and notice pursuant to proposed Rule of Practice
194 by the SBS Entity if the application and notice is filed within the
time period specified in proposed paragraph (i)(1)(i) (i.e., 30 days),
or until such time the Commission makes a determination on such
application within the 180-day time period. The Commission
preliminarily believes that 180 days should provide a sufficient
maximum amount of time for the Commission to review the application,
including obtaining any supplementary information from the applicant,
and any recommendation by Commission staff and any response thereto by
the applicant, and to make a determination on the application. The
Commission anticipates that many applications under proposed Rule of
Practice 194 will be instances where the Commission has not previously
reviewed or acted on the underlying conduct by the associated person
entity that resulted in the statutory disqualification. As such, the
180-day time period would afford the Commission a sufficient maximum
amount of time to appropriately evaluate an application under proposed
Rule of Practice 194.
    Proposed paragraph (i)(1)(ii) does not limit the Commission from
making a determination on the application prior to the expiration of
the 180-day time period, and the Commission anticipates

that it would do so as appropriate.\90\ The Commission may act sooner
in cases, for example, where the misconduct of an associated person is
already familiar to the Commission or otherwise conducive to immediate
consideration. The Commission may also need to act quickly if there are
imminent concerns regarding potential investor or counterparty harm.
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    \90\ The Commission expects that it will expeditiously process
applications and take necessary steps to facilitate timely action.
---------------------------------------------------------------------------

    While we expect that most applications could be acted upon within
the proposed 180-day time period, a decision could be delayed for a
number of reasons, such as when an application raises complex issues
associated with the Commission's determination whether to grant
permanent relief from the statutory prohibition in Exchange Act Section
15F(b)(6). Proposed paragraph (i)(1)(ii) thus would address the
situation where the Commission does not render a decision on the Rule
of Practice 194 application within the 180-day time period.
Specifically, proposed paragraph (i)(1)(ii) provides that where the
Commission does not render a decision within 180 days following the
filing of an application under proposed Rule of Practice 194, the SBS
Entity would have 60 additional days to conform its activities to
comply with the prohibition set forth in Exchange Act Section
15F(b)(6). As a result, the proposed rule would provide that if the
Commission does not act on the application within 180 days, the
statutory prohibition would apply.
    As noted, Exchange Act Section 15F(b)(6) prohibits SBS Entities
from permitting associated persons that are subject to a statutory
disqualification from effecting or being involved in effecting
security-based swap transactions on behalf of the SBS Entity, except to
the extent otherwise provide by rule, regulation or order of the
Commission. The Commission is proposing to provide in paragraph
(i)(1)(ii) that, if the Commission does not act on the application
within the specified time period, the statutory prohibition would apply
(subject to a 60-day period to provide an SBS Entity time to conform
its activities to the statutory prohibition, as discussed below). The
Commission preliminarily believes that in the context of this statutory
framework, the proposed time period provided for in paragraph
(i)(1)(ii) is appropriately tailored. In proposing to proceed in this
manner and provide a period of time for the exception from the
prohibition to continue, the Commission has taken into consideration
the potential for the risk of market and business disruptions and the
objective of maintaining strong investor and market protections, as
discussed above. We preliminarily believe that the approach has taken
into consideration these factors.\91\ We note that it would also
provide an SBS Entity certainty about the applicable process and time
frames, including the 60 additional days to comply, as discussed below.
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    \91\ See Sections V.D and E, infra.
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    Proposed paragraph (i)(1)(ii) also would provide that where the
Commission does not render a decision within 180 days, the SBS Entity
would have 60 additional days to comply with the prohibition set forth
in Exchange Act Section 15F(b)(6). This provision is designed to
provide the applicant, where the Commission does not act on an
application under proposed Rule of Practice 194 within 180 days and the
SBS Entity becomes immediately subject to the statutory prohibition set
forth in Exchange Act Section 15F(b)(6), sufficient time to implement
any structural or other changes necessary to ensure that the SBS Entity
would not have the associated person that is subject to a statutory
disqualification effect or be involved in effecting security-based
swaps on behalf of the SBS Entity. The 60-day time period is designed
to provide the SBS Entity a sufficient amount of time to make any
structural or other changes necessary to ensure compliance with the
prohibition set forth in Exchange Act Section 15F(b)(6) to avoid
disruption, but not so long as to continue to allow an SBS Entity to
permit an associated person that is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity for longer than necessary to avoid
potential market or business disruptions.
    Under proposed paragraph (i)(1)(iii), the SBS Entity would be
excluded from the prohibition in Exchange Act Section 15F(b)(6) for a
period of 180 days following the filing of a complete application with,
or initiation of a process by,\92\ the CFTC, an SRO or a registered
futures association with respect to the associated person for the
membership, association, registration or listing as a principal, where
such application has been filed or process started prior to or within
the time period specified in paragraph (i)(1)(i) and a notice has been
filed with the Commission within the time period specified in proposed
paragraph (i)(1)(i). This provision is designed to provide a temporary
exclusion to an SBS Entity such that an SBS Entity could avail itself
of filing a notice in lieu of an application, as set forth in proposed
paragraph (j), and thus would provide temporary relief to the SBS
Entity from the prohibition set forth in Exchange Act Section 15F(b)(6)
during the pendency of an application or process by the CFTC, an SRO or
a registered futures association. As with the provisions of proposed
paragraph (i)(1)(ii) with regard to the Commission's consideration of
an application under proposed Rule of Practice 194, this provision is
designed to address the Commission's concerns about potential market or
business disruptions while the SBS Entity has an application or process
pending before the CFTC, an SRO or a registered futures association
with regard to the associated person subject to a statutory
disqualification. The Commission preliminarily believes that 180 days
should generally provide a sufficient amount of time for the CFTC, an
SRO or a registered futures association to make a determination on the
application, and would also be consistent with the time period proposed
in paragraph (i)(1)(ii).
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    \92\ The commencement of the 180-day time period would begin at
the time of filing of an application with an SRO (e.g., Form MC-
400A) or the initiation of a proceeding under NFA Registration Rule
504 (e.g., a Notice of Intent to Revoke Registration) or CFTC
Regulation 3.60, 17 CFR 3.60.
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    In addition, under proposed paragraph (i)(1)(iii), where the CFTC,
an SRO or a registered futures association does not render a decision
or renders an adverse decision with respect to the associated person
within the 180-day time period, the SBS Entity would have 60 additional
days to conform its activities to comply with the prohibition set forth
in Exchange Act Section 15F(b)(6). Similar to proposed paragraph
(i)(1)(ii), this provision is aimed at preventing market or business
disruptions that may result from the scenario where the CFTC, an SRO or
a registered futures association does not render a decision or renders
an adverse decision with respect to the associated person within the
180-day time period, and the SBS Entity therefore becomes immediately
subject to the statutory prohibition set forth in Exchange Act Section
15F(b)(6). The 60-day time period is designed to provide the SBS Entity
a sufficient amount of time to make any structural or other necessary
changes to ensure compliance with the prohibition set forth in Exchange
Act Section 15F(b)(6), but not so long as to continue to allow an SBS
Entity to permit an associated person that is subject to a statutory
disqualification to

effect or be involved in effecting security-based swaps on behalf of
the SBS Entity for longer than necessary to avoid potential market or
business disruptions where the CFTC, an SRO or registered futures
association has not made a decision or has rendered an adverse decision
within the 180-day time period.
    The SBS Entity would not be able to avail itself of the temporary
exclusion set forth in proposed paragraph (i)(1) in two circumstances.
First, the temporary exclusion from the prohibition in Exchange Act
Section 15F(b)(6) would not be available where the Commission has
otherwise ordered--for example, where the Commission, by order, has
censured, placed limitations on the activities or functions of the
associated person, or suspended or barred such person from being
associated with an SBS Entity. Second, the temporary exclusion from the
prohibition in Exchange Act Section 15F(b)(6) would not be available in
cases where the Commission, CFTC, an SRO or a registered futures
association has previously denied membership, association, registration
or listing as a principal with respect to the associated person that is
the subject of the pending application. In both circumstances, the
Commission, CFTC, an SRO or registered futures association will have
affirmatively made a determination to not allow an associated person to
participate in the financial industry. The Commission preliminarily
believes that, in such cases, the SBS Entity should not be able to
avail itself of the temporary exclusion with respect to the associated
person because doing so would enable an associated person to
participate in the security-based swap market notwithstanding that the
Commission or another regulator has otherwise prohibited the associated
person from participating in another sector of the financial industry.
    Proposed paragraph (i)(2) would provide that an SBS Entity would be
excluded from the statutory prohibition in Exchange Act Section
15F(b)(6) \93\ as provided in proposed paragraph (i)(1)(ii) and
(i)(1)(iii) only where the SBS Entity has filed (within the 30-day
timeframe) a notice with the Commission setting forth the name of the
SBS Entity and the name of the associated person that is subject to a
statutory disqualification, and attaching as an exhibit to the notice a
copy of the order or other applicable document that resulted in the
associated person being subject to a statutory disqualification.\94\
The Commission proposes to make publicly available on its Web site the
notice provided under proposed paragraph (i)(2). The Commission is
proposing to require such notice to help inform market participants of
the fact that an SBS Entity is availing itself of the temporary
exclusion set forth in proposed paragraph (i) with respect to an
associated person entity subject to a statutory disqualification that
is effecting or involved in effecting security-based swaps on behalf of
an SBS Entity.
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    \93\ 15 U.S.C. 78o-10(b)(6).
    \94\ See proposed Rule of Practice 194(c)(1), (e)(1); Section
II.C.3, supra.
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    The Commission is not proposing to require such notice with respect
to associated persons that are natural persons, because natural persons
would not be able to avail themselves of the temporary exclusion
proposed in paragraph (i). As a result, a natural person that is
subject to a statutory disqualification would not be permitted to
effect or be involved in effecting security-based swaps on behalf of an
SBS Entity while an application is pending. Additionally, where the
association, registration or listing as a principal has been granted or
otherwise approved with respect to an associated person that is a
natural person by the Commission, CFTC, an SRO or registered futures
association, notwithstanding that the associated person is subject to a
statutory disqualification, such an order or other relevant document
would be made publicly available,\95\ and thus would provide
information to market participants with respect to the associated
person and the statutory disqualification.
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    \95\ See Section II.C.7, supra.
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    Proposed paragraph (i)(3) would provide that where the Commission
denies an application pursuant to proposed Rule of Practice 194 with
respect to an associated person that is not a natural person, the
Commission may provide by order an extension of the exclusion provided
for in proposed paragraph (i)(1)(ii) as is necessary or appropriate to
allow the applicant to comply with the prohibition in Exchange Act
Section 15F(b)(6). Under this proposed provision, the Commission would
extend the temporary exclusion provided for in proposed paragraph
(i)(1)(ii) where the Commission determines that doing so is necessary
or appropriate. The Commission believes that proposed paragraph (i)(3)
provides the Commission with sufficient flexibility so that the
Commission may determine, based on its discretionary review of the
particular facts and circumstances with respect to an application,
whether or not it is necessary or appropriate to extend the temporary
exclusion provided for in proposed paragraph (i)(1)(ii). For example,
under certain circumstances, the Commission may determine that is
necessary or appropriate to provide a certain amount of time for an SBS
Entity to wind down operations with an associated person entity that is
subject to a statutory disqualification in order to avoid disruptions
to the security-based swaps business of the SBS Entity or to the
security-based swap market. In other instances, there may not be a risk
of market or business disruptions in the event that an SBS Entity is
prohibited from permitting an associated person entity to effect or be
involved in effecting security-based swaps on behalf of the SBS Entity.
In such instances, the Commission may specify in an order denying an
application under proposed Rule of Practice 194 that no extension of
the exclusion provided for in proposed paragraph (i)(1)(ii) would be
necessary or appropriate.
    Although the Commission is proposing paragraph (i)(1) at this time,
the Commission is also soliciting comment on two alternative approaches
with respect to this provision. First, the Commission solicits comment
on whether proposed paragraph (i)(1)(ii) should alternatively provide
that, if the Commission does not render a decision within the
appropriate time frame, the application shall be deemed granted. Under
this alternative, the Commission would consider the extent to which
providing that the application would be deemed granted if the
Commission does not act in the 180-day time period would help to avoid
potential market and business disruptions that may result when the
temporary exclusion expires after day 180 (as opposed to providing a
60-day conformity period). The Commission would also consider how such
an approach would impact counterparty and investor protection in cases
where the Commission has not made a specific finding that it is
consistent with the public interest to permit a statutorily
disqualified associated person entity to effect or be involved in
effecting security-based swaps on behalf of an SBS Entity.
    Second, the Commission solicits comment on whether, alternatively,
the Commission should provide an exclusion to permit an SBS Entity to
allow associated person entities subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on behalf of SBS Entities. As noted in Section II.B.3, the CFTC
has

defined associated persons of Swap Entities to be limited to natural
persons,\96\ which results in the application of Section 4s(b)(6) of
the CEA \97\ to natural persons associated with a Swap Entity (not
entities). As a result, this alternative would result in consistency
with the CFTC. As with the first alternative, under this alternative,
the Commission would take into consideration the extent to which the
approach, by providing an exclusion from the statutory prohibition in
Exchange Act Section 15F(b)(6) with respect to associated person
entities, would minimize potential disruptions to the business of SBS
Entities that could lead to possible market disruption. The Commission
would also consider how this approach, which would apply the statutory
prohibition in Exchange Act Section 15F(b)(6) to associated persons
that are natural persons, but not to associated person entities, would
impact counterparty and investor protection.\98\
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    \96\ See Note 42, supra.
    \97\ See 7 U.S.C. 6s(b)(6).
    \98\ Moreover, although SBS Entities would be excluded from the
statutory prohibition in Exchange Act Section 15F(b)(6) with respect
to associated person entities under this alternative, the Commission
nonetheless could, by order, censure, place limitations on the
activities or functions of the associated person, or suspend or bar
such person from being associated with an SBS Entity. See 15 U.S.C.
78o-10(l)(3).
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9. Notice in Lieu of an Application
    Paragraph (j) of proposed Rule of Practice 194 would limit the
applicability of the prohibition in Exchange Act Section 15F(b)(6) by
prescribing the conditions under which an SBS Entity may permit a
person associated with it that is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on its behalf without being required to file an application under
Rule of Practice 194.\99\ Generally, proposed paragraph (j) would
permit associated persons that are subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on behalf of SBS Entities where the Commission or other
regulatory authority previously reviewed the matter and permitted the
person subject to a statutory disqualification to be a member,
associated with a member, registered or listed as a principal of a
regulated entity notwithstanding statutory disqualification.
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    \99\ See proposed Rule of Practice 194(j).
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    Under the proposed rules, the Commission, the CFTC, an SRO or a
registered futures association will have specifically reviewed the
underlying basis for the statutory disqualification and made an
affirmative finding to grant or otherwise approve membership,
association, registration or listing as a principal, notwithstanding
the statutory disqualification. So long as the terms and conditions are
adhered to in the context of the association with the SBS Entity, the
Commission believes it would not be necessary for the Commission (other
than in cases where the person is subject to a Commission bar) to re-
examine an event for which relief has already been granted. The
Commission further notes, consistent with the CFTC in adopting an
analogous provision in Regulation 23.22(b),\100\ that it would
generally be anomalous for a person to be able to engage in securities
transactions with members of the retail public--for example, as an
associated person of a broker-dealer--but be prohibited from effecting
or being involved in effecting security-based swap transactions with
significantly more sophisticated clients as an associated person of a
SBS Entity.
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    \100\ In adopting Regulation 23.22(b), the CFTC stated that, if
it did not provide an exception as suggested, a person could be
permitted to direct futures-related activities or solicit futures-
related business with members of the retail public--e.g., as,
respectively, a principal or associated person of futures commission
merchant or commodity pool operator--but that same person would be
barred from soliciting, accepting, or otherwise effecting or being
involved in effecting swaps transactions with significantly more
sophisticated clients as an associated person of a Swap Entity. See
CFTC Registration Release, 77 FR at 2615.
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    Specifically, subject to the conditions specified in proposed
paragraph (j)(2), proposed Rule of Practice of Practice 194(j)(1) would
provide as follows:
    Proposed Rule of Practice 194(j)(1)(i) would permit a person
associated with an SBS Entity that is subject to a statutory
disqualification to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity where the person has admitted to or
continued in membership, or participation or association with a member,
of an SRO, such as FINRA, notwithstanding that such person is subject
to a statutory disqualification under Exchange Act Section
3(a)(39).\101\
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    \101\ See 17 CFR 240.19h-1. As discussed in Section II.B.2,
supra, Exchange Act Rule 19h-1 prescribes the form and content, and
provides for Commission review of proposals submitted by SROs to
allow a member or associated person subject to a statutory
disqualification to become or remain a member or associated person
of a member.
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    Proposed Rule of Practice 194(j)(1)(ii) would permit a person