[Federal Register Volume 85, Number 249 (Tuesday, December 29, 2020)]
[Notices]
[Pages 85720-85743]
[FR Doc No: 2020-28697]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90766; File No. S7-22-20]

Notice of Substituted Compliance Application Submitted by the
French Autorit[eacute] des March[eacute]s Financiers and the
Autorit[eacute] de Contr[ocirc]le Prudential et de R[eacute]solution in
Connection With Certain Requirements Applicable to Non-U.S. Security-
Based Swap Dealers and Major Security-Based Swap Participants Subject
to Regulation in the French Republic; Proposed Order

AGENCY: Securities and Exchange Commission.

ACTION: Notice of application for substituted compliance determination;
proposed order.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is soliciting public comment on an application by the French
Autorit[eacute] des March[eacute]s Financiers (``AMF'') and the
Autorit[eacute] de Contr[ocirc]le Prudential et de R[eacute]solution
(``ACPR'') requesting that, pursuant to rule 3a71-6 under the
Securities Exchange Act of 1934 (``Exchange Act''), the Commission
determine that registered security-based swap dealers and registered
major security-based swap participants (``SBS Entities'') that are not
U.S. persons and that are subject to certain regulation in the French
Republic (``France'') may comply with certain requirements under the
Exchange Act via compliance with corresponding requirements of France
and the European Union. The Commission also is soliciting comment on a
proposed Order providing for conditional substituted compliance in
connection with the application.

DATES: Submit comments on or before January 25, 2021.

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/proposed.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-22-20 on the subject line.

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.

All submissions should refer to File Number S7-22-20. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (http://www.sec.gov/rules/proposed.shtml). Comments are also available for website 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. Persons submitting comments are cautioned that the Commission
does not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
publicly available.

FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director or
Laura Compton, Senior Special Counsel at<PHONE_NUMBER>, Office of
Derivatives Policy, Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:
    The Commission is soliciting public comment on an application by
the AMF

and the ACPR (``French Authorities'') requesting that the Commission
determine that SBS Entities that are not U.S. persons and that are
subject to certain regulation in France may satisfy certain
requirements under the Exchange Act by complying with comparable
requirements in France including relevant European Union (``EU'')
requirements. The Commission also is soliciting comment on a proposed
Order, set forth in Attachment A, providing for conditional substituted
compliance in connection with that application.

I. Background

    Exchange Act rule 3a71-6 conditionally provides that non-U.S. SBS
Entities may satisfy certain requirements under Exchange Act section
15F by complying with comparable regulatory requirements of a foreign
jurisdiction.\1\ Substituted compliance potentially is available in
connection with requirements regarding business conduct and
supervision, chief compliance officers, trade acknowledgment and
verification, non-prudentially regulated capital and margin,
recordkeeping and reporting, and portfolio reconciliation, portfolio
compression and trading relationship documentation.\2\
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    \1\ The Commission has also discussed the parameters of
substituted compliance in connection with a substituted compliance
request and accompanying Order regarding the Federal Republic of
Germany. See Exchange Act Release No. 34-90378 (Nov. 9, 2020), 85 FR
72726 (Nov.13, 2020) (``German Notice and Proposed Order'');
Exchange Act Release No. 34-90765 (Dec. 22, 2020), (``German
Substituted Compliance Order'').
    \2\ See Exchange Act rule 3a71-6(d). Substituted compliance
under rule 3a71-6 is not available in connection with certain
antifraud prohibitions (Exchange Act sections 10(b) and
15F(h)(4)(A), Exchange Act rules 10b-5 and 15Fh-4(a), and Securities
Act of 1933 section 17(a)), information-related provisions
(15F(j)(2) and 15F(j)(4)(B)), requirements related to transactions
with counterparties that are not eligible contract participants
(``ECPs'') (Exchange Act section 6(l) and Securities Act section
5(e)), provisions related to segregation of customer assets
(Exchange Act section 3E and Exchange Act rule 18a-4), required
clearing upon counterparty election (Exchange Act section 3C(g)(5)),
regulatory reporting and public dissemination (Regulation SBSR, 17
CFR 242.900 et seq.) and registration of offerings (Securities Act
section 5).
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    Substituted compliance in part is predicated on the Commission
determining the analogous foreign requirements are ``comparable'' to
the applicable requirements under the Exchange Act, after accounting
for factors such as the ``scope and objectives'' of the relevant
foreign regulatory requirements, and the effectiveness of the foreign
authority's supervisory and enforcement frameworks.\3\ Substituted
compliance further requires that the Commission and foreign financial
regulatory authorities have entered into an effective supervisory and
enforcement memorandum of understanding and/or other arrangement
addressing cooperation and other matters related to substituted
compliance.\4\ Also, foreign regulatory authorities may submit a
substituted compliance application only if the authorities provide
``adequate assurances'' that no law or policy would impede the ability
of any entity that is directly supervised by the authorities and that
may register with the Commission ``to provide prompt access to the
Commission to such entity's books and records or to submit to onsite
inspection or examination by the Commission.'' \5\
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    \3\ See Exchange Act rule 3a71-6(a)(2)(i).
    \4\ See Exchange Act rule 3a71-6(a)(2)(ii). The Commission and
the French Authorities are in the process of negotiating a
memorandum of understanding to address cooperation matters related
to substituted compliance. In light of the ECB's authority with
respect to certain requirements, including margin and capital, for
which the French Authorities seek substituted compliance, the
Commission and the ECB are also in the process of developing a
memorandum of understanding or other arrangement to address
cooperation matters related to substituted compliance. These MOUs or
other arrangements will need to be in place before the Commission
may allow Covered Entities to use substituted compliance to satisfy
obligations under the Exchange Act. The Commission expects to
publish any such memorandum of understanding or arrangement on its
website at www.sec.gov under the ``Substituted Compliance'' tab,
which is located on the ``Security-Based Swap Markets'' page in the
Division of Trading and Markets section of the site.
    \5\ See Exchange Act rule 3a71-6(a)(3). The French Authorities
have satisfied this prerequisite in the Commission's preliminary
view, taking into account information and representations that
French Authorities provided regarding certain French and EU
requirements that are relevant to the Commission's ability to
inspect, and access the books and records of, security-based swap
dealers in France.
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    Commission rule 0-13 addresses procedures for filing substituted
compliance applications, and provides that the Commission will publish
notice when a completed application has been submitted, and that any
person may submit to the Commission ``any information that relates to
the Commission action requested in the application.'' \6\
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    \6\ See Commission rule 0-13(h). The Commission may take final
action on a substituted compliance application no earlier than 25
days following publication of the notice in the Federal Register.
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II. French Authorities' Substituted Compliance Request

    The French Authorities have submitted a complete substituted
compliance application to the Commission.\7\ Pursuant to rule 0-13, the
Commission is publishing notice of the application together with a
proposed Order to conditionally grant substituted compliance to certain
French SBS Entities in connection with certain requirements under the
Exchange Act. The Commission will consider public comments on the
French Authorities' Application and the proposed Order.
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    \7\ See Letter from Robert Oph[egrave]le, Chairman, AMF and
Denis Beau, Chairmen, ACPR to Vanessa A. Countryman, Secretary,
Commission, dated December 10, 2020 (``French Authorities'
Application''). The application is available on the Commission's
website at https://www.sec.gov/files/full-french-application.pdf.
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    The French Authorities seek substituted compliance for French
market participants in connection with a number of requirements under
Exchange Act section 15F:

A. Relevant Market Participants

    The Commission will consider whether to make substituted compliance
available to any entity that: (i) Is registered with the Commission as
a security-based swap dealer or major security-based swap participant;
(ii) is not a U.S. person; (iii) has been authorized by the AMF as an
investment firm or by the ACPR as a credit institution after approval
by the AMF of the credit institution's program of operations; and (iv)
is subject to relevant French and EU financial regulatory requirements
and to supervision and enforcement by the French Authorities' in
connection with its security-based swap activity.

B. Relevant Section 15F Requirements

    The French Authorities request that the Commission issue an order
determining that--for substituted compliance purposes--applicable
requirements in France are comparable with the following requirements
under Exchange Act section 15F:
    Risk control requirements--Requirements related to internal risk
management systems, trade acknowledgment and verification, portfolio
reconciliation and dispute resolution, portfolio compression and
trading relationship documentation.\8\
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    \8\ See part IV, infra.
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    Capital and margin requirements--Requirements related to capital
and margin applicable to non-prudentially regulated security-based swap
dealer and major security-based swap participants.\9\
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    \9\ See part V, infra. The French Authorities request
substituted compliance in connection with capital and margin
requirements that are applicable to non-prudentially regulated SBS
Entities pursuant to Exchange Act section 15F(e) and Exchange Act
rules 18a-1 through 18a-1d, and 18a-3. The proposed Order defines
the term ``prudentially regulated'' to mean an SBS Entity that has a
``prudential regulator'' as that term is defined in Exchange Act
section 3(a)(74). See para. (g)(24) to the proposed Order.

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    Internal supervision, chief compliance officer and additional
section 15F(j) requirements--Requirements related to diligent
supervision and chief compliance officers, as well as requirements
related to conflicts of interest and information gathering under
Exchange Act section 15F(j).\10\
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    \10\ See part VI, infra.
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    Counterparty protection requirements--Requirements related to
disclosure of material risks and characteristics and material
incentives or conflicts of interest, disclosure of daily marks, fair
and balanced communications, disclosure of clearing rights, ``know your
counterparty'' and suitability of recommendations.\11\
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    \11\ See part VII, infra. The French Authorities are not
requesting substituted compliance in connection with: Eligible
contract participant (``ECP'') verification requirements (Exchange
Act section 15F(h)(3)(A) and Exchange Act rule 15Fh-3(a)(1));
``special entity'' provisions (Exchange Act sections 15F(h)(4) and
(5) and Exchange Act rules 15Fh-3(a)(2) and (3), 15Fh-4(b) and 15Fh-
5); and political contribution provisions (Exchange Act rule 15Fh-
6).
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    Recordkeeping, reporting, notification, and securities count
requirements--Requirements related to making and keeping current
certain prescribed records, the preservation of records, reporting,
notification, and securities counts.\12\
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    \12\ See part VIII, infra.
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C. Comparability Considerations and Proposed Order

    Because France is a member of the European Union, market
participants in France are subject to French regulations implemented
pursuant to EU directives, and to applicable EU regulations. Those
include requirements related to: Organization, compliance and conduct
\13\; risk-mitigation; \14\ prudential matters; \15\ and certain other
matters relevant to the application.\16\ In the view of the French
Authorities, French and EU requirements taken as a whole produce
regulatory outcomes that are comparable to those of the relevant
requirements under the Exchange Act.\17\
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    \13\ See EU's Markets in Financial Instruments Directive
(``MiFID''), Directive 2014/65/EU, which has been implemented in
France as part of article L. 511 to the French Monetary and
Financial Code--Code mon[eacute]taire et financier (``MFC''). These
address, inter alia, organizational, compliance and conduct
requirements applicable to nonbank ``investment firms.'' In relevant
part, those requirements also apply to credit institutions that
provide investment services or perform investment activities.
Additional relevant requirements are: (i) Commission Delegated
Regulation (EU) 2017/565 (``MiFID Org Reg''), which in part
supplements MiFID with respect to organizational requirements for
firms; (ii) Markets in Financial Instruments Regulation (``MiFIR''),
Regulation (EU) 648/2012, which generally addressing trading venues
and transparency; (iii) Commission Delegated Directive (EU) 2017/593
(``MiFID Delegated Directive''), which in part supplements MiFID
with regard to safeguarding client property, and in France is
implemented in relevant part by the R[egrave]glement
G[eacute]n[eacute]ral de L'Autorit[eacute] des March[eacute]s
Financiers (``AMF General Regulation''); and (iv) Directive (EU)
2015/849 (``MLD'') addresses requirements on the prevention of the
use of the financial system for the purposes of money laundering or
terrorist financing, and in France has been implemented by article
L.561 to the MFC.
    \14\ Relevant requirements are: (i) European Market
Infrastructure Regulation (``EMIR''), Regulation (EU) 648/2012,
which in part imposes certain risk-mitigation requirements on
counterparties in connection with uncleared OTC transactions; (ii)
Delegated Regulation (EU) 149/2013 (``EMIR RTS''), which supplements
EMIR with various regulatory technical standards, including
standards addressing confirmations, portfolio reconciliation,
portfolio compression and dispute resolution; and (iii) Delegated
Regulation (EU) 2016/2251 (``EMIR Margin RTS''), which further
supplements EMIR with regulatory technical standards related to risk
mitigation techniques.
    \15\ The EU's Capital Requirements Directive IV (``CRD''),
Directive 2013/36/EU has been adopted in France as part of article
L.533 to the MFC, and set forth prudential requirements and certain
related requirements applicable to credit institutions and certain
nonbank investment firms. Certain CRD requirements regarding
reporting obligations have been incorporated into French law as part
of articles L. 511 and L.634 to the MFC. The Capital Requirements
Regulation (``CRR''), Regulation (EU) 575/2013, further addresses
prudential requirements and related recordkeeping requirements for
credit institutions and certain investment firms. Commission
Implementing Regulation (EU) 680/2014 (``CRR Reporting ITS'') sets
forth implementing technical standard regarding supervisory
reporting. Pursuant to amendments that will become effective in June
2021, the requirements of CRD and the CRR will apply to credit
institutions and to certain nonbank undertakings (that carry on
activities involving dealing, portfolio management, investment
advice and underwriting/placing) that meet specified thresholds
(e.g., consolidated assets of [euro]30 billion or more). See
generally Investment Firms Regulation (``IFR''), Regulation (EU)
2019/2033, art. 62 (amending certain definitions in the CRR).
    \16\ The Market Abuse Regulation (``MAR''), Regulation (EU) 596/
2014, sets forth requirements to enhance market integrity and
investor protection. The Investment Recommendations Regulation
adopted pursuant to MAR (``MAR Investment Recommendations
Regulation''), Commission Delegated Regulation (EU) 2016/958,
supplements MAR with respect to regulatory technical standards
regarding investment recommendations.
    \17\ In support, the application incorporates and relies on a
series of European Commission analyses that compare EU requirements
with applicable requirements under the Exchange Act, in addition to
analyses specific to French law and practices. The application
particularly incorporates and builds upon European Commission
analyses related to: Risk control (see French Authorities'
Application Annex 1 category 1), books and records (see the French
Authorities' Application Annex 1 category 2), internal supervision
and compliance (see the French Authorities' Application Annex 1
category 3), and counterparty protection (see the French
Authorities' Application Annex 1 category 4).
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    In the Commission's preliminary view, requirements under the
Exchange Act and French/EU requirements maintain similar approaches
with respect to achieving regulatory goals in several respects, but
follow differing approaches or incorporate disparate elements in
certain other respects. The Commission has considered those
similarities and differences when analyzing comparability and
developing preliminary views, while recognizing that differences in
approach do not necessarily preclude substituted compliance in light of
the Commission's holistic, outcomes-oriented framework for assessing
comparability.\18\
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    \18\ In this context, the Commission recognizes that other
regulatory regimes will have exclusions, exceptions and exemptions
that may not align perfectly with the corresponding requirements
under the Exchange Act. Where the Commission preliminarily has found
that the French regime produces comparable outcomes notwithstanding
those particular differences, the Commission proposes to make a
positive determination on substituted compliance. Where the
Commission preliminarily has found that those exclusions, exemptions
and exceptions lead to outcomes that are not comparable, however,
the proposal would not provide for substituted compliance.
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    Based on the Commission's analysis of the application and review of
relevant French and EU requirements, the Commission is proposing an
Order, located at Attachment A, granting substituted compliance subject
to specific conditions and limitations. When SBS Entities seek to rely
on substituted compliance to satisfy particular requirements under the
Exchange Act, non-compliance with the applicable French and EU
requirements would lead to a violation of those requirements under the
Exchange Act and potential enforcement action by the Commission (as
opposed to automatic revocation of the substituted compliance order).

III. Applicable Entities and General Conditions

A. Covered Entities for Which the Commission Is Proposing a Positive
Conditional Substituted Compliance Determination

    Under the proposed Order, substituted compliance would be available
to ``Covered Entities''--a term that would limit the scope of the
substituted compliance determination to SBS Entities that are subject
to applicable French and EU requirements and oversight. Consistent with
the parameters of substituted compliance under Exchange Act rule 3a71-
6, the proposed ``Covered Entity'' definition would provide that the
relevant entities must be security-based swap dealers or major
security-based swap participants registered with the Commission, and
that those entities cannot be U.S. persons.\19\
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    \19\ See para. (g)(1)(i) and (ii) to the proposed Order.
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    The proposed ``Covered Entity'' definition further would provide
that the entities must be investment firms that the AMF authorize to
provide investment services or perform investment activities in France
or credit institutions that the ACPR authorize after approval by the
AMF of the credit institution's program of operations to provide
investment services or perform investment activities in France.\20\
This is intended to help ensure that those entities are subject to
relevant French and EU requirements and oversight.
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    \20\ See para. (g)(1)(iii) to the proposed Order.
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B. General Conditions and Prerequisites

    Substituted compliance under the proposed Order would be subject to
a number of conditions and other prerequisites, to help ensure that the
relevant French and EU requirements that form the basis for substituted
compliance in practice will apply to the SBS Entity's security-based
swap business and activities, and to promote the Commission's oversight
over entities that avail themselves of substituted compliance.
1. ``Subject to and Complies With'' Applicability Provisions
    Each relevant section of the proposed Order would be subject to the
condition that the Covered Entity ``is subject to and complies with''
the applicable French and EU requirements that are needed to establish
comparability. Accordingly, the proposed Order would not provide
substituted compliance when an SBS Entity is excused from compliance
with relevant foreign provisions, such as, for example, if relevant
member French or EU requirements do not apply to the security-based
swap activities of a third-country branch of a French SBS Entity.
2. Additional General Conditions
    Substituted compliance under the proposed Order further would be
subject to general conditions intended to help ensure the applicability
of relevant French and EU requirements, and to facilitate the
Commission's oversight of firms that avail themselves of substituted
compliance. In particular:
     MiFID ``investment services or activities''--The Covered
Entity's security-based swap activities must constitute ``investment
services or activities'' for purposes of applicable provisions under
MiFID, provisions under MFC that implement MiFID and/or other EU and
French requirements adopted pursuant to those provisions, and must fall
within the scope of the firm's authorization from the AMF or from the
ACPR after approval by the AMF of the firm's program of operations.\21\
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    \21\ See para. (a)(1) to the proposed Order (relevant activities
must constitute ``investment services'' or ``investment activities''
as defined in MiFID art. 4(1)(2) and MFC L. 321-1 in connection with
applicable provisions). Under this condition, an SBS Entity's
security-based swap activities must constitute ``investment services
or activities'' only to the extent that the relevant part of the
Order requires the entity to be subject to and comply with
provisions of MiFID, MFC or related EU and French requirements. The
security-based swap activities need not be ``investment services or
activities'' when the relevant part of the Order does not require
compliance with one of those provisions (e.g., paragraph (e)(6)
addressing substituted compliance for daily mark disclosure
requirements).
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     MiFID ``clients''--The Covered Entity's counterparties (or
potential counterparties) must be ``clients'' (or potential
``clients'') for purposes of applicable provisions under MiFID,
provisions under MFC that implement MiFID and/or other EU and French
requirements adopted pursuant to those provisions.\22\
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    \22\ See para. (a)(2) to the proposed Order (relevant
counterparties or potential counterparties must be ``clients'' or
potential ``clients'' as defined in MiFID art. 4(1)(9) and as used
in the relevant provision of MFC, in connection with applicable
provisions).
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     MiFID ``financial instruments''--The relevant security-
based swaps must be ``financial instruments'' for purposes of
applicable provisions under MiFID, provisions of MFC that implement
MiFID and/or other EU and French requirements adopted pursuant to those
provisions.\23\
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    \23\ See para. (a)(3) to the proposed Order (relevant security-
based swaps must be ``financial instruments'' as defined in MiFID
art. 4(1)(15) and MFC L. 211-1 and D. 211-1A in connection with
applicable provisions).
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     CRD ``institutions''--The Covered Entity must be an
``institution'' for purposes of applicable provisions under CRD,
provisions of MFC that implement CRD, CRR and/or other EU and French
requirements adopted pursuant to those provisions.\24\
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    \24\ See para. (a)(4) to the proposed Order (relevant Covered
Entities must be ``institutions,'' as defined in CRD art. 3(1)(3)
and CRR art. 4(1)(3), and either a credit institution or finance
company, each as defined in MFC L. 511-1).
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     Memoranda of Understanding--The Commission and the AMF and
ACPR must have an applicable memorandum of understanding or other
arrangement addressing cooperation with respect to the Order at the
time the Covered Entity makes use of substituted compliance.\25\ For
Covered Entities that are credit institutions, the AMF, ACPR and ECB
share responsibility for supervising compliance with some of the
provisions of EU and French law addressed by the proposed Order.\26\ To
ensure the Commission's ability to receive information about these
Covered Entities that may belong to the ECB, the proposed Order would
require that, at the time such a Covered Entity makes use of
substituted compliance with respect to those requirements, the
Commission and the ECB, and/or AMF and/or the ACPR also must have a
memorandum of understanding and/or other arrangement addressing
cooperation with respect to the Order as it pertains to this ECB-owned
information.\27\
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    \25\ See para. (a)(5) to the proposed Order.
    \26\ See, e.g., para. (c)(1) to the proposed Order (substituted
compliance for Exchange Act capital requirements available to
Covered Entities that are subject to and comply with certain
provisions of CRR, BRRD, CRD and provisions of French law that
implement BRRD and/or CRD and/or other EU and French requirements
adopted pursuant to those provisions); para. (c)(2) of the proposed
Order (substituted compliance for Exchange Act margin requirements
available to Covered Entities that are subject to and comply with
certain provisions of CRR, CRD and provisions of French law that
implement CRD and/or other EU and French requirements adopted
pursuant to those provisions).
    \27\ See para. (a)(6) to the proposed Order. In accordance with
the terms of the proposed Order, this arrangement will need to be in
place at the time a Covered Entity makes use of substituted
compliance by complying with any EU or French requirements for which
the ECB, AMF and ACPR share supervisory responsibility.
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     Notice of reliance on substituted compliance--An SBS
Entity relying on the substituted compliance order must provide notice
of its intent to rely on the order by notifying the Commission in
writing.\28\
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    \28\ See para. (a)(7) to the proposed Order.
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3. European Union Cross-Border Matters
    The cross-border application of MiFID, MAR and EU and Member State

requirements adopted pursuant to MiFID or MAR raises special issues.
For some EU requirements under MiFID (and other EU and French
requirements adopted pursuant to MiFID), EU law allocates the
responsibility for supervising and enforcing those requirements to
authorities of the Member State in whose territory a Covered Entity
provides certain services.\29\ To help ensure that the prerequisites to
substituted compliance with respect to supervision and enforcement are
satisfied in fact, when the proposed Order requires a Covered Entity to
be subject to or comply with one of those MiFID requirements (or other
EU or French requirements adopted pursuant to MiFID), the AMF or the
ACPR must be the authority responsible for supervision and enforcement
of those requirements in relation to the particular service for which
substituted compliance is used.\30\ Similarly, for some of the EU
requirements under MAR (and other EU requirements adopted pursuant to
MAR), EU law allocates the responsibility for supervising and enforcing
those requirements to authorities of potentially multiple Member
States. To help ensure that the prerequisites to substituted compliance
with respect to supervision and enforcement are satisfied in fact, when
the proposed Order requires a Covered Entity to be subject to or comply
with one of those MAR requirements (or other EU requirements adopted
pursuant to MAR), the Covered Entity may use substituted compliance
only if one of the authorities responsible for supervision and
enforcement of those requirements is the AMF or the ACPR.\31\
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    \29\ See MiFID art. 35(8).
    \30\ See para. (a)(8) to the proposed Order.
    \31\ See para. (a)(8) to the proposed Order.
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IV. Substituted Compliance for Risk Control Requirements

A. The French Authorities' Request and Associated Analytic
Considerations

    The French Authorities' Application in part requests substituted
compliance in connection with risk control requirements under the
Exchange Act relating to:
     Risk management systems--Internal risk management system
requirements pursuant to Exchange Act section 15F(j)(2) and relevant
aspects of Exchange Act rule 15Fh-3(h)(2)(iii)(I). Those provisions
address the obligation of registered entities to follow policies and
procedures reasonably designed to help manage the risks associated with
their business activities.\32\
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    \32\ See Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR
70214, 70250 (Nov. 23, 2012) (proposing capital and margin
requirements for security-based swap dealers and major security-
based swap participants). The French Authorities' application
discusses French and EU requirements that address SBS Entities'
obligations related to risk management. See French Authorities'
Application Annex 1 category 1 at 66-79.
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     Trade acknowledgment and verification--Trade
acknowledgment and verification requirements pursuant to Exchange Act
section 15F(i) and Exchange Act rule 15Fi-2. Those provisions help
avoid legal and operational risks by requiring definitive written
records of transactions and for procedures to avoid disagreements
regarding the meaning of transaction terms.\33\
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    \33\ See Exchange Act Release No. 78011 (Jun. 8, 2016), 81 FR
39808, 39809 & 39820 (Jun. 17, 2019) (``Trade Acknowledgment and
Verification Adopting Release''). The French Authorities'
Application discusses French and EU requirements that address SBS
Entities' obligations related to confirmations and to information to
be provided to clients regarding executed orders. See French
Authorities' Application Annex 1 category 1 at 80-102.
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     Portfolio reconciliation and dispute reporting--Portfolio
reconciliation and dispute reporting requirements pursuant to Exchange
Act section 15F(i) and Exchange Act rule 15Fi-3. Those provisions
require that counterparties engage in portfolio reconciliation and
resolve discrepancies in connection with uncleared security-based
swaps, and promptly notify the Commission and applicable prudential
regulators regarding certain valuation disputes.\34\
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    \34\ See Exchange Act Release No. 87782 (Dec. 18, 2019), 85 FR
6359, 6360-61 (Feb. 4, 2020) (``Risk Mitigation Adopting Release'').
The French Authorities' Application discusses French and EU
requirements that address portfolio reconciliation and dispute
resolution and reporting. See French Authorities' Application Annex
1 category 1 at 104-12.
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     Portfolio compression--Portfolio compression requirements
pursuant to Exchange Act section 15F(i) and Exchange Act rule 15Fi-4.
Those provisions require that SBS Entities have procedures addressing
bilateral offset, bilateral compression and multilateral compression in
connection with uncleared security-based swaps.\35\
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    \35\ See Risk Mitigation Adopting Release, 85 FR at 6361. The
French Authorities' Application discusses EU portfolio compression
requirements. See French Authorities' Application Annex 1 category 1
at 113-16.
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     Trading relationship documentation--Trading relationship
documentation requirements pursuant to Exchange Act section 15F(i) and
Exchange Act rule 15Fi-5. Those provisions require that SBS Entities
have procedures to execute written security-based swap trading
relationship documentation with their counterparties prior to, or
contemporaneously with, executing certain security-based swaps.\36\
---------------------------------------------------------------------------

    \36\ See Risk Mitigation Adopting Release, 85 FR at 6361. The
French Authorities' Application discusses French and EU requirements
regarding records of rights, obligations and terms of investment
firm services. See French Authorities' Application Annex 1 category
1 at 116-32.
---------------------------------------------------------------------------

    Taken as a whole, these risk control requirements help to promote
market stability by mandating that registered entities follow practices
that are appropriate to manage the market, credit, counterparty,
operational and legal risks associated with their security-based swap
businesses. The Commission's comparability assessment accordingly
focuses on whether the analogous foreign requirements--taken as a
whole--produce comparable outcomes with regard to providing that
registered entities follow risk mitigation and documentation practices
that are appropriate to the risks associated with their security-based
swap businesses.

B. Preliminary Views and Proposed Order

1. General Considerations
    In the Commission's preliminary view based on the French
Authorities' Application and the Commission's review of applicable
provisions, relevant French and EU requirements would produce
regulatory outcomes that are comparable to those associated with these
risk control requirements, by subjecting French SBS Entities to risk
mitigation and documentation practices that are appropriate to the
risks associated with their security-based swap businesses. Substituted
compliance accordingly would be conditioned on Covered Entities being
subject to the French and EU provisions that in the aggregate establish
a framework that produces outcomes comparable to those associated with
these risk control requirements under the Exchange Act.\37\
---------------------------------------------------------------------------

    \37\ In connection with risk management system requirements,
Covered Entities particularly must comply with: MiFID art. 16(4)-(5)
and MFC L. 533-10.II (4) and (5) (addressing administrative and
accounting procedures, internal control mechanisms, risk assessment
procedures and information processing system safeguards); MiFID Org
Reg art. 21-24 (addressing risk management and internal audit); CRD
art. 74, 76 and 79-87 and MFC L. 511-41-1-B and L. 511-41-1-C, L.
511-55 through L. 511-57, L. 511-60 through L. 511-66, L. 511-89
through L. 511-97; Internal Control Order articles 106, 111, 114-15,
121-22, 130-34, 146-86, 211-12, 214-15; Prudential Supervision and
Risk Assessment Order article 7 (addressing internal governance and
the treatment of various categories of risk); EMIR Margin RTS art. 2
(addressing required risk management procedures for the exchange of
collateral for non-centrally cleared over-the-counter derivatives
contracts); CRR art. 286-88 and 293 (addressing counterparty credit
risk management and risk management systems); and EMIR Margin RTS
art. 2 (addressing general provisions for risk management
procedures). See para. (b)(1) to the proposed Order. In connection
with trade acknowledgement and verification requirements, firms must
comply with MiFID art. 25(6) and MFC L. 533-15 (addressing reports
on services), MiFID Org Reg art. 59-61 (addressing essential
information regarding executed orders and portfolio management),
EMIR art. 11(1)(a) (addressing required bilateral confirmations for
uncleared over-the-counter derivatives) and EMIR RTS art. 12
(addressing timeliness of confirmations). See para. (b)(2) to the
proposed Order. In connection with portfolio reconciliation and
dispute reporting requirements, firms must comply with EMIR art.
11(1)(b) (addressing required portfolio reconciliation and dispute
resolution for uncleared over-the-counter derivatives) and EMIR RTS
art. 13 and 15 (addressing further requirements related to portfolio
reconciliation and dispute resolution). See para. (b)(3) to the
proposed Order. In connection with portfolio compression
requirements, firms must comply with EMIR RTS art. 14 (also
addressing portfolio protection). See para. (b)(4) to the proposed
Order. In connection with trading relationship documentation
requirements, firms must comply with: MiFID art. 25(5) and MFC L.
533-14 (addressing required records of documents regarding parties'
rights and obligations and other terms on which the investment firm
will provide services); MiFID Org Reg art. 24, 58, 73 and applicable
parts of Annex I (addressing audit requirements, records related to
appropriateness assessments, client agreements and parties' rights
and obligations); and EMIR Margin RTS art. 2 (addressing general
provisions for risk management procedures, including procedures
providing for or specifying the terms of agreements). See para.
(b)(5) to the proposed Order. The above EMIR requirements apply only
to ``OTC derivatives contracts,'' which are defined as derivatives
contracts not executed on certain ``regulated markets'' or
equivalent ``third-country markets.'' See EMIR art. 2(7). The EMIR-
related conditions accordingly will not impede substituted
compliance in connection with exchange-traded or market-traded
security-based swaps that do not constitute ``OTC derivatives
contracts.''

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

    While the Commission recognizes that there are certain differences
between those French and EU requirements and the applicable risk
control requirements under the Exchange Act, in the Commission's
preliminary view those differences on balance would not preclude
substituted compliance for these requirements, particularly as
requirement-by-requirement similarity is not needed for substituted
compliance.
2. Additional Conditions and Scope Issues
    Substituted compliance in connection with these requirements would
be subject to certain additional conditions to help ensure the
comparability of outcomes:
a. Trading Relationship Documentation--MiFID ``Eligible Counterparty''
Exception Not Applicable
    Under the proposed Order, substituted compliance in connection with
the trading relationship documentation provisions of Exchange Act rule
15Fi-5 would be conditioned on the requirement that the non-U.S. firm
not treat its counterparties as ``eligible counterparties'' for
purposes of the relevant MiFID provisions needed to establish
comparability.\38\
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    \38\ See para. (b)(5)(ii) to the proposed Order (incorporating
condition that the Covered Entity cannot treat applicable
counterparties as ``eligible counterparties'' for purposes of MiFID
art. 30 or MFC article L. 533-14 in relation to the relevant MiFID
and MFC provisions). Because trading relationship documentation is
an entity-level requirement, this condition generally would disapply
the ``eligible counterparty'' exception in connection with the
relevant MiFID and MFC provisions for all of the entity's applicable
counterparties, including non-U.S. counterparties. Rule 15Fi-5 does
not apply to existing security-based swaps, or to cleared and
certain security-based swaps executed anonymously on a national
security exchange or a security-based swap execution facility. See
rule 15Fi-5(a)(1).
---------------------------------------------------------------------------

    Certain of the relevant French and EU requirements that provide for
this type of documentation \39\ do not apply to investment firms'
transactions with ``eligible counterparties.'' \40\ Frameworks that
completely exclude compliance in connection with a particular category
of security-based swap counterparty would not promote the associated
risk control purposes sufficiently to produce a comparable regulatory
outcome.
---------------------------------------------------------------------------

    \39\ E.g., MiFID art. 25(5) (requiring that investment firms
establish a record that includes documents ``that set out the rights
and obligations of the parties, and the other terms on which the
investment firm will provide services to the client''); MFC L.533-
14; MiFID Org Reg art. 58.
    \40\ See MiFID art. 30(1); MFC L.533-20.
---------------------------------------------------------------------------

    The Commission is mindful that compliance with this condition may
require French SBS Entities that wish to rely on substituted compliance
to supplement their existing practices and incur additional time and
cost burdens to follow relevant French and EU documentation
requirements in connection with their security-based swap business
involving ``eligible counterparties.'' On balance, however, this
prerequisite to substituted compliance is necessary to promote
comparability in light of the risk control purposes of the trading
relationship documentation requirement, and that requirement's lack of
a comparable carveout based on counterparty categories.
b. Trading Relationship Documentation--Disclosure Regarding Legal and
Bankruptcy Status
    Under the proposed Order, substituted compliance in connection with
trading relationship documentation would not extend to disclosures
regarding legal and bankruptcy status that are required by paragraph
(b)(5) to rule 15Fi-5 when the counterparty is a U.S. person.\41\
Documentation requirements under applicable French and EU law do not
address the disclosure of information related to insolvency procedures
under U.S. law.
---------------------------------------------------------------------------

    \41\ Those disclosures address information regarding the status
of the SBS Entity or its counterparty as an insured depository
institution or financial counterparty, and regarding the possibility
that in certain circumstances the SBS Entity or its counterparty may
be subject to the insolvency regime set forth under Title II of the
Dodd-Frank Act or the Federal Deposit Insurance Act, which may
affect rights to terminate, liquidate or net security-based swaps.
See Risk Mitigation Adopting Release, 85 FR at 6374 (discussing
potential application of alternatives to the liquidation schemes
established under the Securities Investor Protection Act of 1970 or
the U.S. Bankruptcy Code). The absence of such disclosure would not
appear to preclude a comparable regulatory outcome when the
counterparty is not a U.S. person, as the insolvency-related
consequences that are the subject of the disclosure would not be
applicable to non-U.S. counterparties in most cases. See also EMIR
Margin RTS (in part addressing procedures providing for or
specifying the terms of agreements entered into by counterparties,
including applicable governing law for non-cleared derivatives, and
further providing that counterparties which enter into a netting or
collateral exchange agreement must perform an independent legal
review regarding enforceability).
---------------------------------------------------------------------------

c. Dispute Reporting--Provision of Dispute Reports Consistent With EU
Law
    Under the proposed Order, substituted compliance further would be
conditioned on Covered Entities having to provide the Commission with
reports regarding disputes between counterparties, on the same basis as
the Covered Entities provide those reports to competent authorities
pursuant to EU law.\42\ This condition promotes comparability with the
Exchange Act rule requiring reporting to the Commission regarding
significant valuation disputes,\43\ while leveraging EU reporting
provisions to avoid the need for Covered Entities to create additional
de novo reporting frameworks.\44\
---------------------------------------------------------------------------

    \42\ See para. (b)(3)(ii) to the proposed Order (requiring that
the Covered Entity provide the Commission with reports regarding
counterparty disputes on the same basis that it provides those
reports to competent authorities pursuant to EMIR RTS art. 15(2)).
    \43\ In proposing the notice provision, the Commission
recognized that valuation inaccuracies may lead to uncollaterialized
credit exposure and the potential for loss in the event of default.
See Exchange Act Release No. 84861 (Dec. 19, 2018), 84 FR 4614, 4621
(Feb. 15, 2019). It thus is important that the Commission be
informed regarding valuation disputes affecting registered entities.
    \44\ The principal difference between the two sets of
requirements concerns the timing of notices. Under Exchange Act rule
15Fi-3, SBS Entities must promptly report, to the Commission,
valuation disputes in excess of $20 million that have been
outstanding for three or five business days (depending on
counterparty types). Under EMIR RTS art. 15(2), firms must report at
least monthly, to competent authorities, disputes between
counterparties in excess of [pound]15 million and outstanding for at
least 15 business days. The Commission is mindful that the EU
provision does not provide for notice as quickly as rule 15Fi-3(c),
but in the Commission's preliminary view, on balance this difference
would not be inconsistent with the conclusion that the two sets of
risk control requirements--taken as a whole--produce comparable
regulatory outcomes.

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

V. Substituted Compliance for Capital and Margin Requirements

A. The French Authorities' Request and Associated Analytic
Considerations

    The French Authorities' Application in part requests substituted
compliance in connection with requirements under the Exchange Act
relating to:
     Capital--Capital requirements pursuant to Exchange Act
section 15F(e) and Exchange Act rule 18a-1 et seq. (for non-
prudentially regulated security-based swap dealers). The capital
provisions for non-prudentially regulated security-based swap dealers
help to ensure the registered entity maintains at all times sufficient
liquid assets to promptly satisfy its liabilities, and to provide a
cushion of liquid assets in excess of liabilities to covered potential
market, credit, and other risks.\45\ This net liquid assets test
standard protects customers and counterparties and mitigates the
consequences of a firm's failure by promoting the ability of the firm
to absorb financial shocks and, if necessary, to self-liquidate in an
orderly manner.\46\ As part of the capital requirements, non-
prudentially regulated security-based swap dealers also must comply
with the internal risk management control requirements of Exchange Act
Rule 15c3-4 with respect to certain activities.\47\
---------------------------------------------------------------------------

    \45\ See Exchange Act Release No. 86175 (June 21, 2019), 84 FR
42872, 43947 (August 22, 2019) (``Capital and Margin Adopting
Release''). The French Authorities' Application discusses French and
EU requirements that address firms' capital requirements. See the
French Authorities' Application Annex 1 category 1 capital portion
at 1-24. See also French Authorities' Application Annex 1 category 1
at 75-79 (generally discussing internal risk management
requirements).
    \46\ See Capital and Margin Adopting Release, 84 FR at 43881.
The Exchange Act rule 18a-1 capital requirement (applicable to non-
prudentially regulated security-based swap dealers that are not also
registered broker-dealers, other than OTC derivatives dealers) is
grounded in the net liquid asset test applicable to registered-
broker dealers. The net liquid asset test seeks to promote liquidity
by requiring that a firm maintain sufficient liquid assets to meet
all liabilities, including obligations to customers, counterparties,
and other creditors, and, in the event a firm fails financially, to
have adequate additional resources to wind-down its business in an
orderly manner without the need for a formal proceeding. See Capital
and Margin Adopting Release, 84 FR at 43879.
    \47\ See Exchange Act rule 18a-1(f).
---------------------------------------------------------------------------

     Margin--Margin requirements pursuant to Exchange Act
section 15F(e) and Exchange Act rule 18a-3 for non-prudentially
regulated security-based swap dealers and major security-based swap
participants. The margin provisions are designed to protect the
registered entity from the consequences of a counterparty's
default.\48\
---------------------------------------------------------------------------

    \48\ See Capital and Margin Adopting Release, 84 FR at 43947;
see also id. at 43949 (``Obtaining collateral is one of the ways OTC
derivatives dealers manage their credit risk exposure to OTC
derivatives counterparties. Prior to the financial crisis, in
certain circumstances, counterparties were able to enter into OTC
derivatives transactions without having to deliver collateral. When
``trigger events'' occurred during the financial crisis, those
counterparties faced significant liquidity strains when they were
required to deliver collateral''). The French Authorities'
Application discusses French and EU requirements that address firms'
margin requirements. See the French Authorities' Application Annex 1
category 1 at 7-74.
---------------------------------------------------------------------------

    Taken as a whole, these capital and margin requirements help to
promote market stability by mandating that registered entities follow
practices that are appropriate to manage the market, credit, liquidity,
solvency, counterparty, and operational risks associated with their
security-based swap businesses. The Commission's comparability
assessment accordingly focuses on whether the analogous foreign
requirements--taken as a whole--produce comparable outcomes with regard
to providing that registered entities follow capital and margin
requirements that are appropriate to the risks associated with their
security-based swap businesses.

B. Preliminary Views and Proposed Order

    In the Commission's preliminary view, based on the French
Authorities' Application and the Commission's review of applicable
provisions, relevant French and EU requirements would produce
regulatory outcomes that are comparable to those associated with the
above capital and margin requirements, by subjecting French SBS
Entities to financial responsibility practices that are appropriate to
the risks associated with their security-based swap businesses.
Substituted compliance accordingly would be conditioned on SBS Entities
being subject to the French and EU provisions that, in the aggregate,
establish a framework that produces outcomes comparable to those
associated with the capital and margin requirements under the Exchange
Act.\49\ For example, in adopting its final margin requirements for
non-cleared security-based swaps, the Commission stated that it
modified the proposal to more closely align the final rule with the
margin rules of the Commodity Futures Trading Commission and the U.S.
prudential regulators and, in doing so, with the recommendations made
by the Basel Committee on Banking Supervision (``BCBS'') and the Board
of the International Organizations of Securities Commissions
(``IOSCO'') with respect to margin requirements for non-centrally
cleared derivatives.\50\
---------------------------------------------------------------------------

    \49\ In connection with capital requirements, Covered Entities
must comply with: The capital requirements of the CRR, including
recitals 40, 43 and 87, and articles 26, 28, 50-52, 61-63, 92, 111,
113(1), 114-122, 143, 153(8), 177(2), 283, 290, 300-311, 312(2),
362-377, 382-383, 412(1), 413(1), 416(1), 427(1), 413, 429, 430, and
499; MiFid Org. Reg., article 23(1); BRRD, articles 27(1), 31(2),
31(1)(a) and (5), 32(5), 45(6) and 81(1); CRD, articles 73, 79, 86,
97, 98(1)(e), 98(6), 99, 100(1), 102(1), 104, 104(1), 105, 129,
129(1), 130, 130(1), 130(5), 131, 133, 133(1), 133(4), 141, 142,
142(2), and 142(4); MFC articles L. 511-13, L. 511-15, 511-41-1 A,
511-41-1 A(XIV), L. 511-41-1 B, L. 511-41-1 C, L. 511-41-3, L. 511-
41-3.II, L. 511-41-3.III, L. 511-41-3.IV, L. 511-41-4, L. 511-41-5,
L. 511-42, L. 532-6, L. 533-2-1, L. 533-2-2, L. 533-2-3, L. 612-24,
R. 612-30, L. 612-32, R. 612-32, L. 612-33.I, L. 612-33.II, L. 612-
40, L. 613-44, L. 613-49. L. 613-49.II, L. 613-50.I, L. 631-2-1;
Decree of 3 November 2014 on internal control, articles 10, 94-197,
and 211-230; Ministerial Order on the Supervisory Review and
Evaluation Process, articles 6-10; Decree of 3 November 2014
relating to capital buffers, articles 2, 16, 23, 37, 38, 56-64; and
EMIR Margin RTS, recital 31, articles 2, 3(b), 7, and 19(1)(d)-(e),
(3) and (8). In connection with margin requirements, Covered
Entities must comply with: EMIR article 11; EMIR Margin RTS; CRR
articles 103, 105(3); 105(10); 111(2), 224, 285, 286, 286(7), 290,
295, 296(2)(b), 297(1), 297(3), and 298(1); MiFID Org Reg. article
23(1); CRD articles 74 and 79(b); MFC articles L. 511-41-1-B, L.
533-2-2, L. 533-29, I al. 1, and L. 511-55 al. 1; and Decree of 3
November 2014 on internal control, article 114.
    \50\ See Capital and Margin Adopting Release, 84 FR at 43908-
43909. See also BCBS/IOSCO, Margin Requirements for Non-centrally
Cleared Derivatives (April 2020), available at https://www.bis.org/bcbs/publ/d499.pdf (``BCBS/IOSCO Paper''). The EU and French margin
requirements also are based on the recommendation in the BCBS/IOSCO
Paper.
---------------------------------------------------------------------------

    While the Commission recognizes that there are certain differences
between those French and EU requirements and the applicable risk
control requirements under the Exchange Act, in the Commission's
preliminary view, those differences on balance would not preclude
substituted compliance for these requirements, particularly as
requirement-by-requirement similarity is not needed for substituted
compliance.

VI. Substituted Compliance for Internal Supervision, Chief Compliance
Officers and Additional Exchange Act Section 15F(j) Requirements

A. The French Authorities' Request and Associated Analytic
Considerations

    The French Authorities also request substituted compliance in
connection with requirements under the Exchange Act relating to:

     Internal supervision--Diligent supervision is required
pursuant to Exchange Act section 15F(h)(1)(B) and Exchange Act rule
15Fh-3(h), and additional conflict of interest provisions under
Exchange Act section 15F(j)(5). These provisions generally require that
SBS Entities establish, maintain and enforce supervisory policies and
procedures that reasonably are designed to prevent violations of
applicable law, and implement certain systems and procedures related to
conflicts of interest.\51\
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    \51\ The French Authorities' Application addresses French and EU
provisions that address firms' supervisory frameworks, persons with
supervisory authority, supervisory policies and procedures, general
compliance and internal recordkeeping, investigation of personnel,
conflicts of interest, personal trading and remuneration. See French
Authorities' Application Annex 1 category 3 at 3-27, 29-74.
---------------------------------------------------------------------------

     Chief compliance officers--Chief compliance officer
requirements are set out in Exchange Act section 15F(k) and Exchange
Act rule 15Fk-1. These provisions in general require that SBS Entities
designate individuals with the responsibility and authority to
establish, administer and review compliance policies and procedures, to
resolve conflicts of interest, and to prepare and certify an annual
compliance report to the Commission.\52\
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    \52\ The French Authorities' Application discusses French and EU
requirements that address compliance officers and their
responsibilities, compliance officer appointment, removal and
compensation, related conflict of interest provisions, and
compliance-related reports. See French Authorities' Application
Annex 1 category 3 at 75-108.
---------------------------------------------------------------------------

     Additional Exchange Act section 15F(j) requirements--
Additional requirements related to information-gathering pursuant to
Exchange Act section 15F(j)(4)(A), and certain antitrust prohibitions
specified by Exchange Act section 15F(j)(6).\53\
---------------------------------------------------------------------------

    \53\ Section 15F(j)(4)(A) particularly requires firms to have
systems and procedures to obtain necessary information to perform
functions required under section 15F. The French Authorities'
application in turn discusses French and EU provisions generally
addressing information gathering and disclosure. See French
Authorities' Application Annex 1 category 3 at 27-28. Section
15F(j)(6) prohibits firms from adopting any process or taking any
action that results in any unreasonable restraint of trade, or to
impose any material anticompetitive burden on trading or clearing.
The French Authorities' application addresses EU antitrust
requirements. See French Authorities' Application Annex 1 category 3
at 32.
---------------------------------------------------------------------------

    Taken as a whole, these internal supervision, chief compliance
officer and additional Exchange Act section 15F(j) requirements help to
promote SBS Entities' use of structures, processes and responsible
personnel reasonably designed to promote compliance with applicable
law, to identify and cure instances of non-compliance, and to manage
conflicts of interest. The comparability assessment accordingly may
focus on whether the analogous foreign requirements--taken as a whole--
produce comparable outcomes with regard to providing that registered
entities have structures and processes reasonably designed to promote
compliance with applicable law, identify and cure instances of non-
compliance, and to manage conflicts of interest, in part through the
designation of an individual with responsibility and authority over
compliance matters.

B. Preliminary Views and Proposed Order

1. General Considerations
    Based on the French Authorities' Application and the Commission's
review of applicable provisions, in the Commission's preliminary view
the relevant French and EU requirements would produce regulatory
outcomes that are comparable to those associated with the above-
described internal supervision, chief compliance officer, conflict of
interest and information-related requirements by providing that French
SBS Entities have structures and processes that reasonably are designed
to promote compliance with applicable law and to identify and cure
instances of non-compliance and manage conflicts of interest.\54\ As
elsewhere, this part of the proposed Order conditions substituted
compliance on SBS Entities being subject to and complying with
specified French and EU requirements that are necessary to establish
comparability.\55\
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    \54\ This portion of the proposed Order accordingly would extend
generally to the internal supervision provisions of Exchange Act
rule 15Fh-3(h), the information gathering provisions of Exchange Act
section 15F(j)(4)(A), and the conflict of interest provisions of
Exchange Act section 15F(j)(5). See para. (d)(1) to the proposed
Order. This portion of the proposed Order does not extend to
applicable portions of rule 15Fh-3(h) as that rule mandates
supervisory policies and procedures in connection with: The risk
management system provisions of Exchange Act section 15F(j)(2)
(which are addressed by proposed paragraph (b)(1) to the Order in
connection with internal risk management); the information-related
provisions of Exchange Act sections 15F(j)(3) and (j)(4)(B) (for
which substituted compliance is not available); and the antitrust
provisions of Exchange Act section 15F(j)(6) (for which the
Commission is not proposing to provide substituted compliance). See
para. (d)(1)(iii) to the proposed Order.
    \55\ In connection with these internal supervision, chief
compliance officer and conflict of interest and information
gathering provisions, SBS Entities particularly must comply with:
MiFID art. 16 and 23 and MFC articles L. 533-2, L. 533-10.II and
III, L. 533-24 and L. 533-24-1 (addressing organizational
requirements and conflicts of interest); MiFID Org Reg art. 21-37
(addressing organizational requirements, compliance, risk
management, internal audit, senior management responsibility,
complaints handling, remuneration policies and practices, personal
transaction restrictions, outsourcing, conflicts of interest and
investment research and marketing); MiFID Org Reg 72-76 and Annex IV
(addressing recordkeeping, including records of orders, transactions
and communications); and CRD articles 74, 76, 79-87, 88(1) and
91(1)-(2), 91(7)-(9), 92-95 and MFC articles L. 511-41-1-B and L.
511-41-1-C, L. 511-51, L. 511-52 I, L. 511.53, L. 511-55 through L.
511-69, L. 511-71 through 86, L. 511-89 through L. 511-97, L. 511-
102, R. 511-16-2 and R. 511-16-3; Internal Control Order articles
106, 111, 114, 115, 121-22, 130-34, 146-86, 211-12, 214-15; and
Prudential Supervision and Risk Assessment Order article 7
(addressing internal governance, recovery and resolution plans, risk
management policies, and management body and remuneration policies).
See para. (d)(3) to the proposed Order.
---------------------------------------------------------------------------

    In taking this proposed approach, the Commission recognizes that
certain differences are present between those French and EU
requirements and the applicable requirements under the Exchange Act. In
the Commission's preliminary view, on balance, however, those
differences would not preclude substituted compliance within the
relevant outcomes-oriented context.
2. Additional Conditions and Scope Issues
    Substituted compliance in connection with these requirements would
be subject to certain additional conditions to help ensure the
comparability of outcomes.
a. Application of French and EU Supervisory and Compliance Requirements
to Residual U.S. Requirements and Order Conditions
    Under the proposed Order, substituted compliance for the relevant
internal supervision requirements would be conditioned on relevant
French SBS Entities complying with applicable French and EU supervisory
and compliance provisions as if those provisions also require SBS
Entities to comply with applicable requirements under the Exchange Act
and the other applicable conditions to the Order.\56\
---------------------------------------------------------------------------

    \56\ See para. (d)(4) to the proposed Order.
---------------------------------------------------------------------------

    This condition addresses the fact that, even with substituted
compliance, SBS Entities still would be subject directly to a number of
requirements under the Exchange Act and to the conditions to the final
Order.\57\ In some cases,

particular requirements under the Exchange Act are outside the ambit of
substituted compliance.\58\ In other cases, certain requirements under
the Exchange Act may not have comparable French or EU requirements, or
may be outside the scope of the French Authorities' request.\59\ While
the French and EU regulatory frameworks in general reasonably appear to
promote SBS Entities' compliance with applicable French and EU laws,
those requirements do not appear to promote SBS Entities' compliance
with requirements under the Exchange Act that are not subject to
substituted compliance, or promote SBS Entities' compliance with the
applicable conditions to substituted compliance. This condition would
allow SBS Entities to use their existing internal supervision and
compliance frameworks to comply with the relevant Exchange Act
requirements and order conditions, rather than having to establish
separate special-purpose supervision and compliance frameworks.
---------------------------------------------------------------------------

    \57\ As noted, substituted compliance does not extend to
antifraud prohibitions or to certain other requirements under the
Exchange Act (e.g., requirements related to transactions with
counterparties that are not eligible contract participants
(``ECP''), segregation requirements). See note 2, supra. Also,
substituted compliance also does not extend to requirements under
the Exchange Act that are outside of the scope of the French
Authorities' request (e.g., ECP verification and special entity
requirements), see note 11, supra, or to requirements under the
Exchange Act for which the Commission has not found comparability.
    \58\ Substituted compliance does not extend to certain Exchange
Act antifraud prohibitions and other requirements under the Exchange
Act (e.g., requirements related to transactions with non-ECPs, and
segregation requirements). Substituted compliance also does not
extend to requirements under the Exchange Act that are outside of
the scope of the French Authorities' request (e.g., ECP verification
and special entity requirements), or to requirements under the
Exchange Act for which the Commission has not found comparability.
    \59\ For example, the French Authorities are not requesting
substituted compliance in connection with ECP verification
requirements, ``special entity'' provisions and political
contribution provisions. See note 11, supra.
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b. Compliance Reports
    Under the proposed Order, substituted compliance in connection with
the compliance report requirements under Exchange Act section 15F(k)(3)
and Exchange Act rule 15Fk-1(c) also would be subject to the condition
that the compliance reports required pursuant to MiFID Org Reg article
22(2)(c) must: (a) Be provided to the Commission annually and in the
English language, (b) include a certification under penalty of law that
the report is accurate and complete, and (c) address the SBS Entity's
compliance with other applicable conditions to this Order.\60\
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    \60\ See para. (d)(2)(ii) to the proposed Order. MiFID Org Reg
art. 22(2)(c) particularly requires that a firm's compliance
function ``report to the management body, on at least an annual
basis, on the implementation and effectiveness of the overall
control environment for investment services and activities, on the
risks that have been identified and on the complaints-handling
reporting as well as remedies undertaken or to be undertaken[.]''
Under the proposed condition, those reports, as submitted to the
Commission and the firm's management body, also would address SBS
Entities' compliance with the other conditions to the Order (in
addition to addressing those firms' compliance with applicable
French and EU provisions).
---------------------------------------------------------------------------

    Although certain French and EU requirements address firms' use of
internal compliance reports, those provisions do not require those
entities to submit compliance reports to the Commission. Under this
condition, SBS Entities could leverage the compliance reports that they
otherwise are required to produce, by extending those reports to
address compliance with the conditions to the Order.\61\
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    \61\ In practice, SBS Entities may satisfy this condition by
identifying relevant Order conditions, and reporting on the
implementation and effectiveness of their controls with regard to
compliance with those Order conditions.
---------------------------------------------------------------------------

c. Antitrust Considerations
    Under the proposed Order, substituted compliance would not extend
to Exchange Act section 15F(j)(6) (and related internal supervision
requirements of Exchange Act rule 15Fh-3(h)(2)(iii)(I)). Allowing an
alternative means of compliance would not appear to lead to outcomes
comparable to that statutory prohibition.\62\
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    \62\ See also German Substituted Compliance Order part IV.B, 85
FR at __. The Commission is not taking any position regarding the
applicability of the section 15F(j)(6) antitrust prohibitions in the
cross-border context. Non-U.S. SBS Entities should assess the
applicability of those prohibitions to their security-based swap
businesses.
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VII. Substituted Compliance for Counterparty Protection Requirements

A. The French Authorities' Request and Associated Analytic
Considerations

    The French Authorities further request substituted compliance in
connection with provisions under the Exchange Act relating to:
     Disclosure of material risks and characteristics and
material incentives or conflicts of interest--Exchange Act rule 15Fh-
3(b) requires that SBS Entities disclose to certain counterparties to a
security-based swap certain information about the material risks and
characteristics of the security-based swap, as well as material
incentives or conflicts of interest that the SBS Entity may have in
connection with the security-based swap. These provisions address the
need for security-based swap market participants to have information
that is sufficient to make informed decisions regarding potential
transactions involving particular counterparties and particular
financial instruments.\63\
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    \63\ See Release No. 77617 (Apr. 14, 2016), 81 FR 29960, 29983-
86 (May 13, 2016) (``Business Conduct Adopting Release''). The
French Authorities' Application discusses French and EU requirements
that address disclosure of product information and firm information.
See French Authorities' Application Annex 1 category 4 at 24-41.
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     Daily mark disclosure--Exchange Act rule 15Fh-3(c)
requires that SBS Entities provide daily mark information to certain
counterparties. These provisions address the need for market
participants to have effective access to daily mark information
necessary to manage their security-based swap positions.\64\
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    \64\ See Business Conduct Adopting Release, 81 FR at 29986-91.
The French Authorities' Application discusses French and EU
requirements that address valuation, portfolio reconciliation and
trade reporting. See French Authorities' Application Annex 1
category 4 at 42-53.
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     Fair and balanced communications--Exchange Act rule 15Fh-
3(g) requires that SBS Entities communicate with counterparties in a
fair and balanced manner based on principles of fair dealing and good
faith. These provisions promote complete and honest communications as
part of SBS Entities' security-based swap businesses.\65\
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    \65\ See Business Conduct Adopting Release, 81 FR at 30000-02.
The French Authorities' Application discusses French and EU
requirements that address communications standards. See French
Authorities' Application Annex 1 category 4 at 2-24.
---------------------------------------------------------------------------

     Clearing rights disclosure--Exchange Act rule 15Fh-3(d)
requires that SBS Entities provide certain counterparties with
information regarding clearing rights under the Exchange Act.\66\
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    \66\ Exchange Act section 3C(g)(5) [15 U.S.C. 78c-3(g)(5)]
provides certain rights for counterparties to select the clearing
agency at which a security-based swap is cleared. For all security-
based swaps that an SBS Entity enters into with certain
counterparties, the counterparty has the sole right to select the
clearing agency at which the security-based swap is cleared. For
security-based swaps that are not subject to mandatory clearing
(pursuant to Exchange Act sections 3C(a) and (b)) and that an SBS
Entity enters into with certain counterparties, the counterparty
also may elect to require clearing of the security-based swap.
Substituted compliance is not available in connection with this
provision. The French Authorities' Application discusses French and
EU provisions that address clearing rights. See French Authorities'
Application Annex 1 category 4 at 76-83.
---------------------------------------------------------------------------

     ``Know your counterparty''--Exchange Act rule 15Fh-3(e)
requires that SBS Entities establish, maintain and enforce written
policies and procedures to obtain and retain certain information
regarding a counterparty that is necessary for conducting business with
that counterparty. This provision accounts for the need that SBS
Entities obtain essential counterparty information necessary to promote
effective compliance and risk management.\67\
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    \67\ See Business Conduct Adopting Release, 81 FR at 29993-94.
The French Authorities' Application discusses French and EU
suitability requirements regarding information that firms must
obtain regarding counterparties. See French Authorities' Application
Annex 1 category 4 at 54-62.>

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

     Suitability--Exchange Act rule 15Fh-3(f) requires a
security-based swap dealer that recommends to certain counterparties a
security-based swap or trading strategy involving a security-based
swap, to undertake reasonable diligence to understand the potential
risks and rewards associated with the recommendation and to have a
reasonable basis to believe that the recommendation is suitable for the
counterparty.\68\ This provision accounts for the need to guard against
security-based swap dealers making unsuitable recommendations.\69\
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    \68\ See Business Conduct Adopting Release, 81 FR at 29994-
30000. A security-based swap dealer may satisfy its counterparty-
specific suitability obligation with respect to an ``institutional
counterparty,'' as defined in Exchange Act rule 15Fh-3(f)(4), if the
security-based swap dealer reasonably determines that the
counterparty or its agent is capable of independently evaluating
relevant investment risks, the counterparty or its agent represents
in writing that it is exercising independent judgment in evaluating
the recommendation, and the security-based swap dealer discloses
that it is acting as counterparty and is not undertaking to assess
the suitability of the recommendation for the counterparty. See
Exchange Act rules 15Fh-3(f)(2) and (3).
    \69\ See Business Conduct Adopting Release, 81 FR at 29997. The
French Authorities' Application discusses French and EU suitability
requirements that are more targeted for transactions with
``professional clients.'' See French Authorities' Application Annex
1 category 4 at 63-75.
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    Taken as a whole, the counterparty protection requirements under
section 15F of the Exchange Act help to ``bring professional standards
of conduct to, and increase transparency in, the security-based swap
market and to require registered [entities] to treat parties to these
transactions fairly.'' \70\ The comparability assessment accordingly
may focus on whether the analogous foreign requirements--taken as a
whole--produce similar outcomes with regard to promoting professional
standards of conduct, increasing transparency and requiring SBS
Entities to treat parties fairly.
---------------------------------------------------------------------------

    \70\ See Business Conduct Adopting Release, 81 FR at 30065.
These transaction-level requirements generally apply only to a non-
U.S. SBS Entity's activities involving U.S. counterparties (unless
the transaction is arranged, negotiated or executed in the United
States). In particular, for non-U.S. SBS Entities, the counterparty
protection requirements under Exchange Act section 15F(h) apply only
to the SBS Entity's transactions with U.S. counterparties (apart
from certain transactions conducted through a foreign branch of the
U.S. counterparty), or to transactions arranged, negotiated or
executed in the United States. See Exchange Act rule 3a71-3(c) [17
CFR 240.3a71-3(c)] (exception from business conduct requirements for
a security-based swap dealer's ``foreign business''); see also
Exchange Act rules 3a71-3(a)(3), (8) and (9) [17 CFR 240.3a71-
3(a)(3), (8) and (9)] (definitions of ``transaction conducted
through a foreign branch,'' ``U.S. business'' and ``foreign
business'').
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B. Preliminary Views and Proposed Order

1. General Considerations
    Based on the French Authorities' Application and the Commission's
review of applicable provisions, in the Commission's preliminary view,
the relevant French and EU requirements produce regulatory outcomes
that are comparable to counterparty protection requirements under
Exchange Act section 15F(h) related to fair and balanced
communications; disclosure of material risks and characteristics;
disclosure of material incentives or conflicts of interest; ``know your
counterparty''; suitability; and daily mark disclosure, by subjecting
French SBS Entities to obligations that promote standards of
professional conduct, transparency and the fair treatment of parties.
    The proposed Order accordingly would provide conditional
substituted compliance in connection with those requirements.\71\ The
proposed Order preliminarily does not provide substituted compliance in
connection with requirements related to clearing rights disclosure,
however, for reasons addressed below.
---------------------------------------------------------------------------

    \71\ See generally para. (e) to the proposed Order.
---------------------------------------------------------------------------

    In taking this proposed approach, the Commission recognizes that
there are certain differences between relevant French and EU
requirements, on the one hand, and the relevant communications,
disclosure, ``know your counterparty'' and suitability requirements
under the Exchange Act, on the other hand. On balance, however, in the
Commission's preliminary view, those differences, when coupled with the
conditions in the proposed Order, are not so material as to be
inconsistent with substituted compliance within the requisite outcomes-
oriented context. As elsewhere, the counterparty protection provisions
of the proposed Order in part condition substituted compliance on SBS
Entities being subject to, and complying with, specified French and EU
requirements that are necessary to establish comparability.\72\
Substituted compliance in connection with these counterparty protection
requirements also would be subject to specific conditions and
limitations necessary to promote consistency in regulatory outcomes.
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    \72\ In connection with requirements related to disclosure of
information regarding material risks and characteristics, Covered
Entities must be subject to and comply with: MiFID art. 24(4); MFC
L. 533-12.II and D. 533-15; and MiFID Org Reg art. 48-50, in each
case in relation to the security-based swap for which substituted
compliance is applied. See para. (e)(1) to the proposed Order. In
connection with requirements related to disclosure of information
regarding material incentives or conflicts of interest, Covered
Entities must be subject to and comply with either: (i) MiFID art.
23(2)-(3); MFC L .533-10.II(3); and MiFID Org Reg art. 33-35; (ii)
MiFID art. 24(9); MFC L. 533-12-4; MiFID Delegated Directive art.
11(5); and AMF General Regulation art. 314-17; or (iii) MAR art.
20(1), in each case in relation to the security-based swap for which
substituted compliance is applied. See para. (e)(2) to the proposed
Order. In connection with ``know your counterparty'' requirements,
Covered Entities must be subject to and comply with: MiFID art.
16(2); MFC L. 533-10.II(2); MiFID Org Reg art. 21-22, 25-26 and
applicable parts of Annex I; CRD art. 74(1) and 85(1); MFC L. 511-55
and L. 511-41-1-B; MLD art. 11 and 13; MFC L. 561-5, L. 561-5-1, L.
561-6, L. 561-10, L. 561-4-1, R. 561-5, R. 561-5-1, R. 561-5-2, R.
561-5-4, R. 561-7, R. 561-10-3, R. 561-11-1 and R. 561-12; MLD art.
8(3) and 8(4)(a) as applied to internal policies, controls and
procedures regarding recordkeeping of customer due diligence
activities; and MFC L. 561-4-1 as applied to vigilance measures
regarding recordkeeping of customer due diligence activities, in
each case in relation to the security-based swap for which
substituted compliance is applied. See para. (e)(3) to the proposed
Order. In connection with suitability requirements, Covered Entities
must be subject to and comply with: MiFID art. 24(2)-(3) and 25(1)-
(2); MFC L. 533-24, L. 533-24-1, L. 533-12.I, L. 533-12-6 and L.
533-13.I; and MiFID Org Reg art. 21(1)(b) and (d), 54 and 55, in
each case in relation to the recommendation of a security-based swap
or trading strategy involving a security-based swap for which
substituted compliance is applied. See para. (e)(4)(i) to the
proposed Order. In connection with fair and balanced communications
requirements, Covered Entities must be subject to and comply with:
(i) either MiFID art. 24(1), (3) and MFC L. 533-11 and L. 533-12.I
or MiFID art. 30(1) and MFC L. 533-20; and (ii) MiFID art. 24(4)-
(5); MFC L. 533-12.II-III and D. 533-15; MiFID Org Reg art. 46-48;
MAR art. 12(1)(c) and 15; and MAR Investment Recommendations
Regulation art. 5, in each case in relation to the communication for
which substituted compliance is applied. See para. (e)(5) to the
Proposed Order. In connection with daily mark disclosure
requirements, Covered Entities must be required to reconcile, and in
fact reconcile, the portfolio containing the security-based swap for
which substituted compliance is applied, on each business day
pursuant to EMIR articles 11(1)(b) and 11(2) and EMIR RTS article
13. See para. (e)(6) to the Proposed Order.
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2. Additional Conditions and Scope Issues
a. Daily Mark Disclosure
    The proposed Order would provide substituted compliance in
connection with daily mark disclosure requirements pursuant to Exchange
Act rule 15Fh-3(c) to the extent that the Covered Entity participates
in daily portfolio reconciliation exercises that include the relevant
security-based swap pursuant to French and EU requirements.\73\ The

French Authorities' Application takes the view that EU requirements
directing certain types of derivatives counterparties to mark-to-market
(or mark-to-model) uncleared transactions each day are comparable to
Exchange Act requirements. In the Commission's preliminary view,
however, these EU mark-to-market (or mark-to-model) requirements are
not comparable to Exchange Act requirements because the EU requirements
do not require disclosure to counterparties. In the alternative, the
French Authorities' Application notes that certain derivatives
counterparties must report to an EU trade repository updated daily
valuations for each OTC derivative contract and that all counterparties
have the right to access these valuations at the relevant EU trade
repository. In the Commission's preliminary view, in practice, U.S.
counterparties may encounter challenges when attempting to access daily
marks for different security-based swaps reported to multiple EU trade
repositories with which they may not otherwise have business
relationships. In addition, the information may be less current, given
the time necessary for reporting and for the trade repository to make
the information available.\74\ For these reasons, in the Commission's
preliminary view, these EU reporting requirements also are not
comparable to Exchange Act requirements. Finally, the French
Authorities' Application describes the EU's portfolio reconciliation
requirements for uncleared OTC derivative contracts, which include a
requirement to exchange valuations of those contracts directly between
counterparties. The required frequency of portfolio reconciliations
varies depending on the types of counterparties and the size of the
portfolio of OTC derivatives between them, with daily reconciliation
required only for the largest portfolios. For security-based swaps to
which the EU's daily portfolio reconciliation requirements apply (i.e.,
security-based swaps of a financial counterparty or non-financial
counterparty subject to the clearing obligation in EMIR, if the
counterparties have 500 or more OTC derivatives contracts outstanding
with each other \75\), the Commission preliminarily views these
requirements as comparable to Exchange Act requirements. For all other
security-based swaps in portfolios that are not required to be
reconciled on each business day, the Commission preliminarily views the
EU's portfolio reconciliation requirements as not comparable to
Exchange Act requirements.
---------------------------------------------------------------------------

    \73\ The Commission received a comment on the German Notice and
Proposed Order suggesting that a similar condition should apply only
to security-based swaps with U.S. counterparties; for all other
transactions subject to Exchange Act daily mark requirements, the
commenter proposed that the Commission grant substituted compliance
if the Covered Entity complies with EU mark-to-market (or mark-to-
model) and reporting requirements. See Letter from Kyle Brandon,
Managing Director, Head of Derivative Policy, SIFMA (Dec. 8, 2020)
(``SIFMA Letter'') at 6. The Commission did not adopt that
bifurcated approach in response to BaFin's application. See German
Substituted Compliance Order. Similarly, the Commission is proposing
one approach to substituted compliance for daily mark requirements
in response to the French Authorities' Application. This approach
would provide substituted compliance for daily mark requirements
based on comparability of outcomes with respect to transactions with
U.S. counterparties to the same extent as it would provide
substituted compliance with respect to all other transactions.
    \74\ The Commission received a comment on the German Notice and
Proposed Order that the same EU reporting requirements cited by the
French Authorities are comparable to Exchange Act daily mark
requirements. See SIFMA Letter at 5. The commenter stated that these
access and timing challenges should not be as relevant for EU and
other non-U.S. counterparties if they are already subject to EU
reporting obligations and that in its experience data is available
promptly from trade repositories. See id. The commenter's position,
however, highlights that U.S. counterparties, as well as non-U.S.
counterparties without existing business relationships with multiple
EU trade repositories, still may encounter challenges in receiving
timely marks from these trade reports. See also German Substituted
Compliance Order.
    \75\ See EMIR RTS article 13(3)(a)(i); EMIR article 10.
---------------------------------------------------------------------------

b. No Substituted Compliance in Connection With Clearing Rights
Disclosure
    The proposed Order would not provide substituted compliance in
connection with clearing rights disclosure requirements pursuant to
Exchange Act rule 15Fh-3(d). For those requirements, the French
Authorities' Application cites certain provisions related to clearing
rights in the EU that are unrelated to the clearing rights provided by
Exchange Act section 3C(g)(5).\76\ The section 3C(g)(5) clearing rights
are not eligible for substituted compliance, and the EU provisions do
not require disclosure of these section 3C(g)(5) clearing rights. In
the Commission's preliminary view, substituted compliance based on EU
clearing provisions would not lead to comparable disclosure of a
counterparty's clearing rights under the Exchange Act.
---------------------------------------------------------------------------

    \76\ See note 66, supra.
---------------------------------------------------------------------------

c. Suitability
    Under the proposed Order, substituted compliance in connection with
the suitability provisions of Exchange Act rule 15Fh-3(f) in part would
be conditioned on the requirement that the counterparty be a per se
``professional client'' as defined in MiFID and not be a ``special
entity'' as defined in Exchange Act section 15F(h)(2)(C) and Exchange
Act rule 15Fh-2(d).\77\ Accordingly, the proposed Order would not
provide substituted compliance for Exchange Act suitability
requirements for a recommendation made to a counterparty that is a
``retail client'' or an elective ``professional client,'' as such terms
are defined in MiFID,\78\ or for a ``special entity'' as defined in the
Exchange Act. In the Commission's preliminary view, absent such a
condition the MiFID suitability requirement would not be expected to
produce a counterparty protection outcome that is comparable with the
outcome produced by the suitability requirements under the Exchange
Act.\79\
---------------------------------------------------------------------------

    \77\ See para. (e)(4)(ii) to the proposed Order.
    \78\ Annex II of MiFID describes which clients are
``professional clients.'' Section I of Annex II describes the types
of clients considered to be professional clients unless the client
elects non-professional treatment; these clients are per se
professional clients. Section II of Annex II describes the types of
clients who may be treated as professional clients on request; these
clients are elective professional clients. See MiFID Annex II.
    \79\ The Commission recognizes that Exchange Act rules permit
security-based swap dealers, when making a recommendation to an
``institutional counterparty,'' to satisfy some elements of the
suitability requirement if the security-based swap dealer reasonably
determines that the counterparty or its agent is capable of
independently evaluating relevant investment risks, the counterparty
or its agent represents in writing that it is exercising independent
judgment in evaluating recommendations, and the security-based swap
dealer discloses to the counterparty that it is acting as
counterparty and is not undertaking to assess the suitability of the
recommendation for the counterparty. See Exchange Act rule 15Fh-
3(f)(2). However, the institutional counterparties to whom this
alternative applies are only a subset of the ``professional
clients'' to whom more narrowly tailored suitability requirements
apply under MiFID. The Commission notes that the institutional
counterparty alternative under the Exchange Act would remain
available, in accordance with its terms, for recommendations that
are not eligible for, or for which a Covered Entity does not rely
on, substituted compliance.
---------------------------------------------------------------------------

VIII. Substituted Compliance for Recordkeeping, Reporting,
Notification, and Securities Count Requirements

A. French Authorities' Request and Associated Analytic Considerations

    The French Authorities' Application in part requests substituted
compliance for requirements applicable to SBS Entities under the
Exchange Act relating to:
     Recordmaking--Exchange Act rule 18a-5 requires prescribed
records to be made and kept current.\80\
---------------------------------------------------------------------------

    \80\ The French Authorities' Application discusses French and EU
requirements that address firms' record creation obligations related
to matters such as transactions, counterparties and their property,
personnel and business conduct. See the French Authorities'
Application Annex 1 category 2 at 2-42.

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

     Record Preservation--Exchange Act rule 18a-6 requires
preservation of records.\81\
---------------------------------------------------------------------------

    \81\ The French Authorities' Application discusses French and EU
requirements that address firms' record preservation obligations
related to records that firms are required to create, as well as
additional records such as records of communications. See the French
Authorities' Application Annex 1 category 2 at 43-81.
---------------------------------------------------------------------------

     Reporting--Exchange Act rule 18a-7 requires certain
reports.\82\
---------------------------------------------------------------------------

    \82\ The French Authorities' Application discusses French and EU
requirements that address firms' obligations to make certain
reports. See the French Authorities' Application Annex 1 category 2
at 82-95, 98-104.
---------------------------------------------------------------------------

     Notification--Exchange Act rule 18a-8 requires
notification of the Commission when certain financial or operational
problems occur.\83\
---------------------------------------------------------------------------

    \83\ The French Authorities' Application discusses French and EU
requirements that address firms' obligations to make certain
notifications. See the French Authorities' Application Annex 1
category 2 at 95-98.
---------------------------------------------------------------------------

     Securities Count--Exchange Act rule 18a-9 requires non-
prudentially regulated SBS Entities to perform a quarterly securities
count.\84\
---------------------------------------------------------------------------

    \84\ The French Authorities' Application discusses French and EU
requirements that address firms' obligations to perform securities
counts. See the French Authorities' Application Annex 1 category 2
at 32-38.
---------------------------------------------------------------------------

    Taken as a whole, the recordkeeping, reporting, notification, and
securities count requirements that apply to SBS Entities are designed
to promote the prudent operation of the firm's security-based swap
activities, assist the Commission in conducting compliance examinations
of those activities, and alert the Commission to potential financial or
operational problems that could impact the firm and its customers. The
comparability assessment accordingly may focus on whether the analogous
foreign requirements--taken as a whole--produce comparable outcomes
with regard to recordkeeping, reporting, notification, securities
counts, and related practices that support the Commission's oversight
of these registrants. A foreign jurisdiction need not have analogues to
every requirement under Commission rules.\85\
---------------------------------------------------------------------------

    \85\ Rule 3a71-6 sets forth additional analytic considerations
in connection with substituted compliance for the Commission's
recordkeeping, reporting, notification, and securities count
requirements. In particular, Exchange Act rule 3a71-6(d)(6) provides
that the Commission intends to consider (in addition to any
conditions imposed) ``whether the foreign financial regulatory
system's required records and reports, the timeframes for recording
or reporting information, the accounting standards governing the
records and reports, and the required format of the records and
reports'' are comparable to applicable provisions under the Exchange
Act, and whether the foreign provisions ``would permit the
Commission to examine and inspect regulated firms' compliance with
the applicable securities laws.''
---------------------------------------------------------------------------

    For certain of the recordkeeping, reporting, and notification
requirements, the comparability assessment also appropriately may
consider the extent to which those requirements are linked to separate
requirements in the Exchange Act that may be subject to a substituted
compliance application. In particular, a number of recordkeeping
requirements serve a primary purpose of promoting and/or documenting
SBS Entities' compliance with associated Exchange Act requirements.\86\
When substituted compliance is permitted for the associated Exchange
Act requirements, substituted compliance also may be appropriate for
the linked recordkeeping, reporting, and notification requirements.
Conversely, when substituted compliance is not available or requested
for Exchange Act requirements, substituted compliance may not be
appropriate for linked recordkeeping, reporting, or notification
requirements.
---------------------------------------------------------------------------

    \86\ Recordkeeping, reporting, and notification rules that are
linked to other Exchange Act rules include provisions that address:
(1) Unverified security-based swap transactions (Exchange Act rules
18a-5(a)(15) and (b)(11), and 18a-6(b)(1)(i) and (b)(2)(i)); (2)
compliance with business conduct requirements (Exchange Act rules
18a-5(a)(16) and (17) and (b)(12) and (13), 18a-6(b)(1)(i),
(b)(1)(xii), (b)(2)(i), and 18a-6(b)(2)(vii)); (3) preservation of
records relating to certain risk mitigation requirements (Exchange
Act rules 18a-6(d)(4) and (5); (4) segregation requirements
(Exchange Act rules 18a-5(a)(13) and (14) and (b)(9) and (10), 18a-
6(b)(1)(viii)(L) and (b)(2)(v), 18a-7(c)(3) and (4), and 18a-8(g));
(5) capital requirements (Exchange Act rules 18a-5(a)(9) and
(b)(1)(v), 18a-7(a)(3), and 18a-8(b); and (6) margin requirements
(Exchange Act rules 18a-5(a)(12) and (b)(1)(viii)).
---------------------------------------------------------------------------

B. Preliminary Views and Proposed Order

1. General Considerations
    Based on the French Authorities' Application and the Commission's
review of applicable provisions, in the Commission's preliminary view,
the relevant French and EU requirements, subject to the conditions and
limitations of the proposed Order, would produce regulatory outcomes
that are comparable to the outcomes associated with the recordkeeping,
reporting, notification, and securities count requirements under the
Exchange Act applicable to SBS Entities pursuant to Exchange Act rules
18a-5, 18a-6, 18a-7, 18a-8, and 18a-9.
    In reaching this preliminary conclusion, the Commission recognizes
that there are certain differences between those French and EU
requirements and the applicable recordkeeping, reporting, notification,
and securities count requirements under the Exchange Act. In the
Commission's preliminary view, on balance, those differences generally
would not be inconsistent with substituted compliance for these
requirements. As noted, ``requirement-by-requirement similarity'' is
not needed for substituted compliance.
    As discussed below, in select areas, substituted compliance in
connection with these requirements is subject to specific conditions
necessary to promote consistency in regulatory outcomes, or to reflect
the scope of substituted compliance that would be available in
connection with associated Exchange Act rules.
2. Additional Conditions
i. Additional Conditions Applicable to Exchange Act Rule 18a-5
    Under the proposed Order, substituted compliance in connection with
the recordmaking requirements of Exchange Act rule 18a-5 is subject to
the condition that the SBS Entity: (1) Preserves all of the data
elements necessary to create the records required by Exchange Act rules
18a-5(a)(1), (2), (3), (4), and (7) (if not prudentially regulated) or
Exchange Act rules 18a-5(b)(1), (2), (3), and (7) (if prudentially
regulated); and (2) upon request furnishes promptly to representatives
of the Commission the records required by those rules.\87\ This
condition is modeled on the alternative compliance mechanism in
paragraph (c) of Exchange Act rule 18a-5. In effect, a firm will not be
required to create a record formatted pursuant to the Commission's
rules each day, but instead only when requested to do so by Commission
staff. The objective is to require--on a very limited basis--the
production of a record that consolidates the information required by
Exchange Act rules 18a-5(a)(1), (2), (3), (4), and (7) (if not
prudentially regulated) or Exchange Act rules 18a-5(b)(1), (2), (3),
and (7) (if prudentially regulated) in a single record and, as
applicable, in a blotter or ledger format. This will assist the
Commission staff in reviewing the information on the record.
---------------------------------------------------------------------------

    \87\ See para. (f)(1)(ii) to the proposed Order.
---------------------------------------------------------------------------

    Under the proposed Order, substituted compliance in connection with
the recordmaking requirements of Exchange Act rule 18a-5 is subject to
the condition that the SBS Entity make and keep current the records
required by Exchange Act rules 18a-5(a)(13) and (14) (if not
prudentially regulated) or Exchange Act rules 18a-5(b)(9) and (10) (if
prudentially regulated) if the firm is not exempt from the requirements
of Exchange Act rule 18a-4.\88\ These recordmaking rules require the
SBS Entity to make a record of compliance with the possession or
control

requirements of Exchange Act rule 18a-4 and a record of the reserve
computation required by Exchange Act rule 18a-4, respectively.
Substituted compliance is not available with respect to Exchange Act
rule 18a-4. Instead, provisions of the rule address cross-border
transactions and provide exemptions from its requirements depending on
the nature of the transaction.\89\ For example, a security-based swap
dealer that is a foreign bank is subject to the possession or control
and reserve account requirements of Exchange Act rule 18a-4 with
respect to a security-based swap customer that is a U.S. person or, in
the case of a non-U.S. person, if the security-based swap dealer holds
funds or other property arising out of a transaction had by such non-
U.S. person with a branch or agency in the United States of the foreign
security-based swap dealer. Further, Exchange Act rule 18a-4 contains a
complete exemption from its requirements if the security-based swap
dealer limits its business activities and meets certain conditions.\90\
SBS Entities that are not subject to the requirements of Exchange Act
rule 18a-4 will not need to make the records required by Exchange Act
rules 18a-5(a)(13) and (14) (if not prudentially regulated) or Exchange
Act rules 18a-5(b)(9) and (10) (if prudentially regulated) under this
condition in the proposed Order. However, if a firm is subject to
Exchange Act rule 18a-4, it will need to make these records under this
condition of the Order.
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    \88\ See para. (f)(1)(iii) to the proposed Order.
    \89\ See 17 CFR 240.18a-4(e).
    \90\ See 17 CFR 240.18a-4(f).
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    Under the proposed Order, substituted compliance in connection with
the recordmaking requirements of Exchange Act rule 18a-5 is subject to
the condition that the prudentially regulated SBS Entity makes and
keeps current the records required by Exchange Act rule 18a-5(a)(16)
(if not prudentially regulated) or Exchange Act rule 18a-5(b)(12) (if
prudentially regulated).\91\ This rule requires the firm to document
compliance with Exchange Act rule 15Fh-6, which imposes restrictions
related to political contributions to municipal entities. The French
Authorities have not requested substituted compliance with respect to
Exchange Act rule 15Fh-6.
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    \91\ See para. (f)(1)(iv) to the proposed Order.
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    Finally, under the proposed Order, substituted compliance in
connection with the recordmaking requirements of Exchange Act rule 18a-
5 is subject to the condition that the SBS Entity makes and keeps
current records documenting compliance with requirements referenced in
Exchange Act rule 18a-5(a)(17) (if not prudentially regulated) or
Exchange Act rule 18a-5(b)(13) (if prudentially regulated) for which
substituted compliance is not available.\92\ Exchange Act rules 18a-
5(a)(17) and (b)(13) require the firm to document compliance with
Exchange Act rules 15Fh-1 through 15Fh-5 and Exchange Act rule 15Fk-1--
which, as discussed more fully in sections VI and VII of this notice,
establish certain obligations with respect to diligent supervision,
compliance, and counterparty protection. Under the proposed Order, when
substituted compliance is available with respect to such an obligation,
substituted compliance also would be available with respect to the
corresponding recordmaking requirement of Exchange Act rule 18a-
5(a)(17) or (b)(13). In circumstances where substituted compliance is
not permitted,\93\ has not been requested,\94\ or is otherwise not
available under the proposed Order, direct compliance with the relevant
Exchange Act obligation would be required, and so, too, would direct
compliance with the corresponding recordmaking requirement of Exchange
Act rule 18a-5(a)(17) (if not prudentially regulated) or Exchange Act
rule 18a-5(b)(13) (if prudentially regulated).
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    \92\ See para. (f)(1)(v) to the proposed Order.
    \93\ See Exchange Act rule 3a71-6(d)(1) (specifying that
substituted compliance is not available in connection with the
antifraud provisions of Exchange Act rule 15Fh-4(a)).
    \94\ The French Authorities have not requested substituted
compliance in connection with the ECP verification requirements of
Exchange Act rule 15Fh-3(a)(1)) or the ``special entity'' provisions
of Exchange Act rules 15Fh-3(a)(2) and (3), 15Fh-4(b) and 15Fh-5.
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ii. Additional Conditions Applicable to Exchange Act Rule 18a-6
    Under the proposed Order, substituted compliance in connection with
the record preservation requirements of Exchange Act rule 18a-6 is
subject to the condition that the SBS Entity preserves the records
required by Exchange Act rule 18a-6(b)(1)(viii)(L) (if not prudentially
regulated) or Exchange Act rule 18a-6(b)(2)(v) (if prudentially
regulated) if the firm is not exempt from the requirements of Exchange
Act rule 18a-4.\95\ Exchange Act rules 18a-6(b)(1)(viii)(L) and
(b)(2)(v) require the preservation of detail relating to information
for the possession or control requirements of Exchange Act rule 18a-4.
As discussed above, substituted compliance is not available for
Exchange Act rule 18a-4. Consequently, under this condition, an SBS
Entity will need to preserve the records required by Exchange Act rule
18a-6(b)(1)(viii)(L) (if not prudentially regulated) or Exchange Act
rule 18a-6(b)(2)(v) (if prudentially regulated), but only if the firm
is not exempt from Exchange Act rule 18a-4.
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    \95\ See para. (f)(2)(ii) to the proposed Order.
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    Under the proposed Order, substituted compliance in connection with
the record preservation requirements of Exchange Act rule 18a-6 is
subject to the condition that the SBS Entity preserves records with
respect to requirements referenced in Exchange Act rule 18a-
6(b)(1)(xii) (if not prudentially regulated) or Exchange Act rule 18a-
6(b)(2)(vii) (if prudentially regulated) for which substituted
compliance is not available.\96\ Under Exchange Act rules 18a-
6(b)(1)(xii) and (b)(2)(vii), the firm must preserve copies of
documents, communications, disclosures, and notices required pursuant
to Exchange Act rules 15Fh-1 through 15Fh-6 and Exchange Act rule 15Fk-
1--which establish certain obligations with respect to diligent
supervision, compliance, and counterparty protection. Under the
proposed Order, when substituted compliance is available with respect
to such an obligation, substituted compliance also would be available
with respect to the corresponding record preservation requirement of
Exchange Act rule 18a-6 (b)(1)(xii) or (b)(2)(vii). In circumstances
where substituted compliance is not permitted, has not been requested,
or is otherwise not available under the proposed Order, direct
compliance with the relevant Exchange Act obligation would be required,
and so, too, would direct compliance with the corresponding record
preservation requirement of Exchange Act rule 18a-6(b)(1)(xii) (if not
prudentially regulated) or Exchange Act rule 18a-6(b)(2)(vii) (if
prudentially regulated).
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    \96\ See para. (f)(2)(iii) to the proposed Order.
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    Under the proposed Order, substituted compliance in connection with
the record preservation requirements of Exchange Act rule 18a-6 is
subject to the condition that the security-based swap dealer or major
security-based swap participant, with respect to a security-based swap
transaction, preserves the information required by Exchange Act rule
18a-6(b)(1)(xi) (if not prudentially regulated) or Exchange Act rule
18a-6(b)(2)(vi) (if prudentially regulated).\97\ This condition is
designed to ensure that the firm preserves information if the
transaction is required to be reported to a registered security-based
swap data

repository pursuant to Regulation SBSR,\98\ because the French
Authorities have not requested substituted compliance with respect to
Regulation SBSR.
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    \97\ See para. (f)(2)(iv) to the proposed Order.
    \98\ See 17 CFR 242.900-909.
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    Under the proposed Order, substituted compliance in connection with
the record preservation requirements of Exchange Act rule 18a-6 is
subject to the condition that the SBS Entity preserves the records
required by Exchange Act rule 18a-6(b)(1)(xiii) (if not prudentially
regulated) or Exchange Act rule 18a-6(b)(2)(viii) (if prudentially
regulated).\99\ These rules require the preservation of documents used
to make a reasonable determination with respect to special entities,
including information relating to the financial status, the tax status,
and the investment or financing objectives of the special entity as
required under Exchange Act sections 15F(h)(4)(C) and (5)(A). The
French Authorities are not seeking substituted compliance with respect
to these Exchange Act requirements.
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    \99\ See para. (f)(2)(iv) to the proposed Order.
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iii. Additional Conditions Applicable to Exchange Act Rule 18a-7
    Under the proposed Order, substituted compliance with respect to
the requirement in Exchange Act rule 18a-7 to file periodic unaudited
financial and operational information on the FOCUS Report Part II and
Part IIC is subject to the condition that the SBS Entity file with the
Commission periodic unaudited financial and operational information in
the manner and format specified by the Commission by order or rule and
present the financial information in accordance with generally accepted
accounting principles (``GAAP'') that the firm uses to prepare general
purpose publicly available or available to be issued financial
statements in France.\100\ Rule 18a-7 requires SBS Entities, on a
monthly basis (if not prudentially regulated) or on a quarterly basis
(if prudentially regulated), to file an unaudited financial and
operational report known as FOCUS Report Part II (if not prudentially
regulated) or Part IIC (if prudentially regulated). The Commission will
use the FOCUS Report to both monitor the financial and operational
condition of individual SBS Entities and to perform comparisons across
SBS Entities. The FOCUS Report Parts II and IIC are standardized forms
that elicit specific information through numbered line items. This
facilitates cross-firm analysis and comprehensive monitoring of all SBS
Entities registered with the Commission. Further, the Commission has
designated the Financial Industry Regulatory Authority, Inc.
(``FINRA'') to receive the FOCUS reports from SBS Entities.\101\
Broker-dealers registered with the Commission currently file their
FOCUS reports with FINRA through the eFOCUS system it administers.
FINRA's eFOCUS system will enable broker-dealers, security-based swap
dealers, and major security-based swap participants to file FOCUS
reports on the same platform using the same preexisting templates,
software, and procedures.
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    \100\ See para. (f)(3)(ii) to the proposed Order. Under this
approach, SBS Entities would be permitted to present the information
reported in the FOCUS Report in accordance with GAAP that the SBS
Entity uses to prepare publicly available or available to be issued
general purpose financial statements in its home jurisdiction
instead of U.S. GAAP if other GAAP, such as International Financial
Reporting Standards (IFRS) as issued by the International Accounting
Standards Board (IASB), is used by the SBS Entity in preparing
publicly available or available to be issued general purpose
financial statements in France.
    \101\ See Order Designating Financial Industry Regulatory
Authority, Inc., to Receive Form X-17A-5 (FOCUS Report) from Certain
Security-Based Swap Dealers and Major Security-Based Swap
Participants, Exchange Release No. 34-88866 (May 14, 2020).
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    The Commission preliminarily believes that it would be appropriate
to condition substituted compliance with respect to Exchange Act rule
18a-7 on the SBS Entity filing unaudited financial and operational
information in a manner and format that facilitates cross-firm analysis
and comprehensive monitoring of all SBS Entities registered with the
Commission.\102\ For example, the Commission could by order or rule
require SBS Entities to file the financial and operational information
with FINRA using the FOCUS Report Part II (if not prudentially
regulated) or Part IIC (if prudentially regulated) but permit the
information input into the form to be the same information the SBS
Entity reports to the French Authorities or other European
supervisors.\103\
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    \102\ See para. (f)(3)(ii) to the proposed Order.
    \103\ The Commission anticipates that it would be appropriate to
tailor the line items required to be reported pursuant to this
condition and is requesting comment on which, if any, line items in
FOCUS Report Part II (if not prudentially regulated) and Part IIC
(if prudentially regulated) the SBS Entity does not otherwise report
or record pursuant to applicable laws or regulations. Further, the
Commission is requesting comment on whether it would be appropriate
as a condition to substituted compliance for SBS Entities to file a
FOCUS Report Part II (if not prudentially regulated) or Part IIC (if
prudentially regulated) with a limited number of the required line
items filled out for two years. During this time, the Commission
could further evaluate the scope of information SBS Entities should
file.
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    Under the proposed Order, substituted compliance in connection with
the requirement for non-prudentially regulated SBS Entities to file
audited annual reports under Exchange Act rule 18a-7 is subject to four
conditions. The first condition is that the SBS Entity simultaneously
transmits to the principal office of the Commission or to an email
address provided on the Commission's website a copy of the financial
statements the Covered Entity is required to file annually with French
and/or European authorities, including a report of an independent
public accountant covering the financial statements.\104\ Because
French or EU laws would not otherwise require the financial statements
and report of the independent public accountant covering the financial
statements to be filed with the Commission, the purpose of this
condition is to ensure the Commission receives the financial statements
and report to more effectively supervise and monitor SBS Entities.
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    \104\ See para. (f)(3)(iii)(A) to the proposed Order.
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    The second condition is that the SBS Entity includes with the
transmission of the annual financial statements and report the contact
information of an individual who can provide further information about
the financial statements and reports.\105\ This would assist the
Commission staff in promptly contacting an individual at the SBS Entity
who can respond to questions that information on the financial
statements or report may raise about the SBS Entity's financial or
operational condition.
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    \105\ See para. (f)(3)(iii)(B) to the proposed Order.
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    The third condition is that the SBS Entity includes with the
transmission the report of an independent public accountant required by
Exchange Act rule 18a-7(c)(1)(i)(C) covering the annual financial
statements if French or EU laws do not require the Covered Entity to
engage an independent public accountant to prepare a report covering
the annual financial statements.\106\ The third condition further
provides that the report of the independent public accountant may be
prepared in accordance with generally accepted auditing standards
(``GAAS'') in France or the EU that are used to perform audit and
attestation services. According to the French Authorities' Application,
French or EU laws only require certain investment firms (depending on
their size) to have their financial statements audited, so this
condition ensures that all SBS Entities subject to the requirement in
rule 18a-7 to file audited

annual reports are required to have their financial statements audited.
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    \106\ See para. (f)(3)(iii)(C) to the proposed Order.
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    The fourth condition is that the SBS Entity files the reports
required by Exchange Act rule 18a-7(c)(1)(i)(B) and (C) addressing the
statements identified in Exchange Act rule 18a-7(c)(3) or (c)(4), as
applicable, that relate to Exchange Act rule 18a-4.\107\ These reports
are designed to provide the Commission with information about an SBS
Entity's compliance with Rule 18a-4. As discussed above, substituted
compliance is not available for Exchange Act rule 18a-4 and, therefore,
this condition is designed to provide the Commission with similar
compliance information. Under this condition, SBS Entities will need to
file a limited compliance report that includes the statements relating
to Rule 18a-4 \108\ or exemption report if the SBS Entity claims an
exemption from Rule 18a-4. The SBS Entity also will need to file the
report of an independent public accountant covering the limited
compliance report or exemption report. The fourth condition further
provides that the report of the independent public accountant may be
prepared in accordance with GAAS in France or the EU that are used to
perform audit and attestation services.
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    \107\ See para. (f)(3)(iii)(D) to the proposed Order.
    \108\ The limited compliance report would not need to address
Exchange Act rules 18a-1, 18a-9, or 17a-13.