(b), 15 U.S.C. 78c-3(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 FCA
Application discusses UK provisions that address clearing rights.
See FCA Application Appendix B category 4 at 333-40.
---------------------------------------------------------------------------

    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 [SBS Entities] to treat parties to these
transactions fairly.'' \132\ 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 Covered
Entities to treat parties fairly.
---------------------------------------------------------------------------

    \132\ 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 rule 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'').
---------------------------------------------------------------------------

B. Preliminary Views and Proposed Order

1. General Considerations
    Based on the FCA Application and the Commission's review of
applicable provisions, in the Commission's preliminary view, the
relevant UK requirements produce regulatory outcomes that are
comparable to counterparty protection requirements under Exchange Act
section 15F(h) related to disclosure of material risks and
characteristics, disclosure of material incentives or conflicts of
interest, ``know your counterparty,'' suitability, fair and balanced
communications and daily mark disclosure, by subjecting Covered
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.\133\ The proposed Order
preliminarily does not provide substituted compliance in connection
with requirements related to clearing rights disclosure, however, for
reasons addressed below.
---------------------------------------------------------------------------

    \133\ See generally para. (e) to the proposed Order.
---------------------------------------------------------------------------

    In taking this proposed approach, the Commission recognizes that
there are certain differences between relevant UK requirements, on the
one hand, and the relevant disclosure, ``know your counterparty,''
suitability and communications 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 framework. As
elsewhere, the counterparty protection provisions of the proposed Order
in part condition substituted compliance on Covered Entities being
subject to, and complying with, specified UK requirements that are
necessary to establish comparability.\134\ 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.
---------------------------------------------------------------------------

    \134\ In connection with requirements related to disclosure of
information regarding material risks and characteristics, a Covered
Entity must be subject to and comply with provisions of UK law that
implement MiFID article 24(4) and either UK MiFID Org Reg articles
48 through 50 or provisions of UK law that reflect UK MiFID Org Reg
articles 48 through 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, a Covered Entity must be subject to and
comply with either: (1) Provisions of UK law that implement MiFID
article 23(2) and (3) and UK MiFID Org Reg articles 33 through 35;
(2) provisions of UK law that implement MiFID article 24(9) and
MiFID Delegated Directive article 11(5); or (3) UK MAR article 20(1)
and UK MAR Investment Recommendations Regulation articles 5 and 6,
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, a
Covered Entity must be subject to and comply with provisions of UK
law that implement MiFID article 16(2); UK MiFID Org Reg articles
21, 22, 25, 26 and applicable parts of Annex I; provisions of UK law
that implement CRD articles 74(1) and 85(1), MLD articles 11 and 13
and MLD articles 8(3) and 8(4)(a) as applied to policies, controls
and procedures regarding customer due diligence, in each case in
relation to the security-based swap counterparty for which
substituted compliance is applied. See para. (e)(3) to the proposed
Order. In connection with suitability requirements, a Covered Entity
must be subject to and comply with provisions of UK law that
implement MiFID articles 24(2) and (3) and 25(1) and (2) and UK
MiFID Org Reg articles 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, a
Covered Entity must be subject to and comply with provisions of UK
law that implement either MiFID article 24(1) and (3) or MiFID
article 30(1); provisions of UK law that implement MiFID article
24(4) and (5); either UK MiFID Org Reg articles 46 through 48 or
provisions of UK law that reflect UK MiFID Org Reg articles 46
through 48; UK MAR Investment Recommendations Regulation articles 3
and 4; and UK MAR articles 12(1)(c), 15 and 20(1), 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 UK EMIR articles
11(1)(b) and 11(2) and UK EMIR RTS article 13. See para. (e)(6) to
the Proposed Order.
---------------------------------------------------------------------------

2. Scope of Substituted Compliance
    The proposed Order would permit a Covered Entity to apply
substituted compliance for one or more counterparty protection
requirements. For example, a Covered Entity could apply substituted
compliance for fair and balanced communications requirements but comply
directly with Exchange Act requirements related to disclosure of
information regarding material risks and characteristics, disclosure of
information regarding material incentives or conflicts of interest,
``know your counterparty,'' suitability and daily mark disclosure. A
Covered Entity also may decide to apply substituted compliance for a
particular set of counterparty protection requirements, such as fair
and balance communications, for some activities and comply directly
with Exchange Act requirements for other activities. For example, the
proposed Order would allow a Covered Entity applying substituted
compliance for fair and balanced communications requirements to comply
with the comparable UK requirements with respect to communications with
UK counterparties that are subject to the Exchange Act and to comply
directly with Exchange Act requirements with respect to U.S. person
counterparties.\135\ The Commission preliminarily believes that this
scope of substituted compliance would provide Covered Entities
flexibility to tailor the application of substituted compliance to
their business needs in a manner consistent with the Commission's
classification of the relevant Exchange Act counterparty protection
requirements as transaction-level requirements.\136\
---------------------------------------------------------------------------

    \135\ See para. (e)(5) to the proposed Order. Similarly, a
Covered Entity applying substituted compliance for requirements to
disclose information regarding material risks and characteristics
could comply with the comparable UK requirements with respect to
some security-based swaps and comply directly with Exchange Act
requirements with respect to other security-based swaps. See para.
(e)(1) to the proposed Order. A Covered Entity applying substituted
compliance for requirements to disclose information regarding
material incentives or conflicts of interest could comply with the
comparable UK requirements with respect to some security-based swaps
and comply directly with Exchange Act requirements with respect to
other security-based swaps. See para. (e)(2) to the proposed Order.
A Covered Entity applying substituted compliance for ``know your
counterparty'' requirements could comply with the comparable UK
requirements with respect to some security-based swap counterparties
and comply directly with Exchange Act requirements with respect to
other counterparties. See para. (e)(3) to the proposed Order. A
Covered Entity applying substituted compliance for suitability
requirements could comply with the comparable UK requirements with
respect to some recommendations of a security-based swap or trading
strategy involving a security-based swap and comply directly with
Exchange Act requirements with respect to other recommendations. See
para. (e)(4) to the proposed Order. A Covered Entity applying
substituted compliance for daily mark disclosure requirements could
comply with the comparable UK requirements with respect to some
security-based swaps and comply directly with Exchange Act
requirements with respect to other security-based swaps. See para.
(e)(6) to the proposed Order.
    \136\ See Business Conduct Adopting Release, 81 FR at 30065
(counterparty protection requirements are transaction-level
requirements).
---------------------------------------------------------------------------

3. Types of Covered Entities ``Subject to'' Comparable UK Requirements
    Each of the comparable UK provisions listed in the proposed Order
applies to a uniquely defined set of UK-authorized firms.\137\ To
assist UK firms in determining whether they are subject to these
provisions, the Commission preliminarily has determined that any
Covered Entity would be subject to the required UK requirements related
to disclosure of material risks and characteristics, disclosure of
material incentives or conflicts of interest, suitability and fair and
balanced communications. Accordingly, any

Covered Entity preliminarily would be eligible to apply substituted
compliance for disclosure of material risks and characteristics,
disclosure of material incentives or conflicts of interest, suitability
and fair and balanced communications requirements. In connection with
``know your counterparty'' requirements, the Commission also
preliminarily has determined that any Covered Entity that is an ``IFPRU
investment firm,'' as defined in the FCA Handbook Glossary, or a ``UK
bank'' or ``UK designated investment firm,'' as defined in both the FCA
Handbook Glossary and the PRA Rulebook Glossary, would be subject to
all of the required UK provisions and thus eligible to apply
substituted compliance for Exchange Act ``know your counterparty''
requirements. In connection with daily mark disclosure requirements,
the Commission preliminarily has determined that any Covered Entity
that is a ``financial counterparty''--that is, a Covered Entity that is
a MiFID investment firm rather than a third country investment firm--
would be subject to all of the required UK provisions and thus eligible
to apply substituted compliance for Exchange Act daily mark disclosure
requirements. A Covered Entity that is preliminarily not eligible to
apply substituted compliance for ``know your counterparty'' and/or
daily mark disclosure requirements, such as a third country investment
firm, nevertheless would be preliminarily eligible to apply substituted
compliance for other requirements addressed in the proposed Order if it
complies with the relevant parts of the proposed Order.
---------------------------------------------------------------------------

    \137\ In connection with requirements related to disclosure of
information regarding material risks and characteristics, the
Commission preliminarily understands that FCA COBS 2, 6, 9A and 14
apply to MiFID investment firms and third country investment firms
and the UK MiFID Org Reg applies to investment firms and credit
institutions. In connection with requirements related to disclosure
of information regarding material incentives or conflicts of
interest, the Commission preliminarily understands that FCA COBS 2
applies to MiFID investment firms and third country investment
firms; FCA SYSC 10.1.8 applies to firms that provide services to a
client in the course of carrying on regulated activities or
ancillary activities or providing ancillary services that constitute
MiFID business; UK MAR article 20 applies to all natural and legal
persons; and UK MiFID Org Reg applies to investment firms and credit
institutions. In connection with ``know your counterparty''
requirements, the Commission preliminarily understands that FCA
IFPRU applies to IFPRU investment firms; FCA SYSC 4 and 6 apply to
common platform firms and third country firms; MLR 2017 applies to,
among others, investment firms and credit institutions; the PRA
rules cited in paragraph (e)(3) to the proposed Order apply to CRR
firms as defined in the PRA Rulebook Glossary; and UK MiFID Org Reg
applies to investment firms and credit institutions. In connection
with suitability requirements, the Commission preliminarily
understands that FCA COBS 4 and 9A and PROD 3 apply to MiFID
investment firms and third country investment firms; FCA SYSC 5
applies to common platform firms and third country firms; and UK
MiFID Org Reg applies to investment firms and credit institutions.
In connection with fair and balanced communications requirements,
the Commission preliminarily understands that FCA COBS 2, 4, 6, 8A,
9A, 14 and 14A apply to MiFID investment firms and third country
investment firms; UK MAR articles 12(1)(c) and 15 and UK MAR
Investment Recommendations Regulation article 5 apply to all natural
and legal persons; and UK MiFID Org Reg applies to investment firms
and credit institutions. In connection with daily mark disclosure
requirements, the Commission preliminarily understands that UK EMIR
and UK EMIR RTS apply to financial counterparties.
---------------------------------------------------------------------------

4. 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 UK requirements.\138\ The FCA
Application takes the view that UK 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 UK
mark-to-market (or mark-to-model) requirements are not comparable to
Exchange Act requirements because the UK requirements do not require
disclosure to counterparties. In the alternative, the FCA Application
notes that certain derivatives counterparties must report to a UK trade
repository updated daily valuations for each OTC derivative contract
and that all counterparties have the right to access these valuations
at the relevant UK 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 UK 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.\139\ For these
reasons, in the Commission's preliminary view, these UK reporting
requirements also are not comparable to Exchange Act requirements.
Finally, the FCA 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 UK'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 UK EMIR, if the counterparties have 500 or more OTC
derivatives contracts outstanding with each other \140\), 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 UK's portfolio reconciliation
requirements as not comparable to Exchange Act requirements and is
proposing not to make a positive substituted compliance determination.
---------------------------------------------------------------------------

    \138\ 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. See German Substituted Compliance Order, 85 FR
at 85694-95. Similarly, the Commission is proposing one approach to
substituted compliance for daily mark requirements in response to
the FCA 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.
    \139\ The Commission received a comment on the German Notice and
Proposed Order that EU reporting requirements similar to the UK
requirements cited by the FCA are comparable to Exchange Act daily
mark requirements. See SIFMA Letter at 5. The commenter stated that
the 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
UK trade repositories, still may encounter challenges in receiving
timely marks from these trade reports. See also German Substituted
Compliance Order, 85 FR at 85694-95.
    \140\ See UK EMIR RTS article 13(3)(a)(i); UK 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 FCA
Application cites certain provisions related to clearing rights in the
UK that are unrelated to the clearing rights provided by Exchange Act
section 3C(g)(5).\141\ The section 3C(g)(5) clearing rights are not
eligible for substituted compliance, and the UK provisions do not
require disclosure of these section 3C(g)(5) clearing rights. In the
Commission's preliminary view, substituted compliance based on UK
clearing provisions would not lead to comparable disclosure of a
counterparty's clearing rights under the Exchange Act.
---------------------------------------------------------------------------

    \141\ See note 131, 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 FCA COBS and not be a ``special
entity'' as defined in Exchange Act section 15F(h)(2)(C) and Exchange
Act rule 15Fh-2(d).\142\ 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 FCA COBS,\143\ or for a ``special entity'' as
defined in the Exchange Act. In the Commission's preliminary view,
absent such a condition the UK suitability requirements 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.\144\
---------------------------------------------------------------------------

    \142\ 17 CFR 240.15Fh-2(d). See para. (e)(4)(ii) to the proposed
Order.
    \143\ FCA COBS 3.5 describes which clients are ``professional
clients.'' FCA COBS 3.5.2R describes the types of clients considered
to be professional clients unless the client elects non-professional
treatment; these clients are per se professional clients. FCA COBS
3.5.3R describes the types of clients who may be treated as
professional clients on request; these clients are elective
professional clients. See FCA COBS 3.5.
    \144\ 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 UK law. 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. FCA Request and Associated Analytic Considerations

    The FCA 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.\145\
---------------------------------------------------------------------------

    \145\ See 17 CFR 240.18a-5. The FCA Application discusses UK
requirements that address firms' record creation obligations related
to matters such as financial condition, operations, transactions,
counterparties and their property, personnel and business conduct.
See FCA Application Appendix B category 2 at 101-28, 136-39.
---------------------------------------------------------------------------

     Record Preservation--Exchange Act section 15F(g) and
Exchange Act rule 18a-6 require preservation of records.\146\
---------------------------------------------------------------------------

    \146\ See 15 U.S.C. 780-10(g); 17 CFR 240.18a-6. The FCA
Application discusses UK 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 FCA Application Appendix B category 2 at 140-71.
---------------------------------------------------------------------------

     Reporting--Exchange Act rule 18a-7 requires certain
reports.\147\
---------------------------------------------------------------------------

    \147\ See 17 CFR 240.18a-7. The FCA Application discusses UK
requirements that address firms' obligations to make certain
reports. See FCA Application Appendix B category 2 at 172-80, 185-
89.
---------------------------------------------------------------------------

     Notification--Exchange Act rule 18a-8 requires
notification to the Commission when certain financial or operational
problems occur.\148\
---------------------------------------------------------------------------

    \148\ See 17 CFR 240.18a-8. The FCA Application discusses UK
requirements that address firms' obligations to make certain
notifications. See FCA Application Appendix B category 2 at 181-85.
---------------------------------------------------------------------------

     Securities Count--Exchange Act rule 18a-9 requires non-
prudentially regulated security-based swap dealers to perform a
quarterly securities count.\149\
---------------------------------------------------------------------------

    \149\ See 17 CFR 240.18a-9. The FCA Application discusses UK
requirements that address firms' obligations to perform securities
counts. See FCA Application Appendix B category 2 at 129-36.
---------------------------------------------------------------------------

    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 to receive a positive
substituted compliance determination.\150\
---------------------------------------------------------------------------

    \150\ 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.''
---------------------------------------------------------------------------

B. Preliminary Views and Proposed Order

1. General Considerations
    Based on the FCA Application and the Commission's review of
applicable provisions, in the Commission's preliminary view, the
relevant UK requirements, subject to the conditions and limitations of
the proposed Order, would produce regulatory outcomes that are
comparable to the outcomes associated with the vast majority of the
recordkeeping, reporting, notification, and securities count
requirements under the Exchange Act applicable to SBS Entities pursuant
to Exchange Act section 15F(g) and 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 UK 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.
    However, the Commission is structuring its preliminary substituted
compliance determinations in the Order with respect to the
recordkeeping and reporting rules to provide Covered Entities with
greater flexibility to select which distinct requirements within the
broader recordkeeping and reporting rules for which they want to apply
substituted compliance. This flexibility is intended to permit Covered
Entities to leverage existing recordkeeping and reporting systems that
are designed to comply with the broker-dealer recordkeeping and
reporting requirements on which the recordkeeping and reporting
requirements applicable to SBS Entities are based. For example, it may
be more efficient for a Covered Entity to comply with certain Exchange
Act requirements within a given recordkeeping or reporting rule (rather
than apply substituted compliance) because it can utilize systems that
its affiliated broker-dealer has implemented to comply with them.
    As applied to Exchange Act rules 18a-5 and 18a-6, this approach of
providing greater flexibility results in preliminary substituted
compliance determinations with respect to the different categories of
records these rules require SBS Entities to make, keep current, and/or
preserve. The objectives of these rules--taken as a whole--is to assist
the Commission in monitoring and examining for compliance with Exchange
Act requirements applicable to SBS Entities as well as to promote the
prudent operation of these firms.\151\ The

Commission preliminarily believes the comparable UK recordkeeping rules
achieve these outcomes with respect to compliance with UK requirements
for which positive substituted compliance determinations are being made
in this proposed Order (e.g., capital and margin requirements). At the
same time, the recordkeeping rules address different categories of
records through distinct requirements within the rules. Each
requirement with respect to a specific category of records (e.g.,
paragraph (a)(2) of Exchange Act rule 18a-5 addressing ledgers (or
other records) reflecting all assets and liabilities, income and
expense and capital accounts) can be viewed in isolation as a distinct
recordkeeping rule. Therefore, it may be appropriate to make
substituted compliance determinations at this level of Exchange Act
rules 18a-5 and 18a-6.
---------------------------------------------------------------------------

    \151\ See, e.g., Exchange Act Release No. 71958 (Apr. 17, 2014),
79 FR 25194, 25199-200 (May 2, 2014).
---------------------------------------------------------------------------

    As discussed in more detail below, the Commission's preliminary
view is that substituted compliance is appropriate for most of the
requirements within these rules. However, certain of the requirements
are fully or partially linked to substantive Exchange Act requirements
for which a positive substituted compliance determination is not being
made under the proposed Order. In these cases, a positive substituted
compliance determination is not being made for the fully linked
requirement in the recordkeeping or reporting rules or to the portion
of the requirement that is linked to substantive Exchange Act
requirement for which there is not a positive determination. In
particular, a positive substituted compliance determination is not
being made for recordkeeping, reporting, or notification requirements
linked to the following Exchange Act rules for which a positive
substituted compliance determination is not being made: (1) Exchange
Act rule 10b-10 (``Rule 10b-10 Exclusion''); (2) Exchange Act rule
15Fh-4 (``Rule 15Fh-4 Exclusion''); (3) Exchange Act rule 15Fh-5
(``Rule 15Fh-5 Exclusion''); (4) Exchange Act rule 15Fh-6 (``Rule 15Fh-
6 Exclusion''); (5) Exchange Act rule 18a-2 (``Rule 18a-2 Exclusion'');
(6) Exchange Act rule 18a-4 (``Rule 18a-4 Exclusion''); and (7)
Regulation SBSR (``Regulation SBSR Exclusion'').
    In addition, certain of the requirements in the recordkeeping,
reporting, and notification rules are linked to substantive Exchange
Act requirements where a positive substituted compliance determination
is being made under the proposed Order. In these cases, substituted
compliance with the linked requirement in the recordkeeping, reporting,
or notification rule is conditioned on the Covered Entity applying
substituted compliance to the linked substantive Exchange Act
requirement. This is the case regardless of whether the requirement is
fully or partially linked to the substantive Exchange Act requirement.
The recordkeeping, reporting, and notification requirements that are
linked to a substantive Exchange Act requirement are designed and
tailored to assist the Commission in monitoring and examining an SBS
Entity's compliance with the substantive Exchange Act requirement. UK
recordkeeping, reporting, and notification requirements are designed to
perform a similar role with respect to the UK requirements to which
they are linked. Consequently, this condition is designed to ensure
that the records, reports, and notifications of a Covered Entity align
with the substantive Exchange Act or UK requirement to which they are
linked. For these reasons, substituted compliance for recordkeeping,
reporting, and notification requirements linked to the following
Exchange Act rules is conditioned on the SBS Entity applying
substituted compliance to the linked substantive Exchange Act rule: (1)
Exchange Act rule 15Fh-3 (``Rule 15Fh-3 Condition''); (2) Exchange Act
rule 15Fi-2 (``Rule 15Fi-2 Condition''); (3) Exchange Act rule 15Fi-3
(``Rule 15Fi-3 Condition''); (4) Exchange Act rule 15Fi-4 (``Rule 15Fi-
4 Condition''); (5) Exchange Act rule 15Fi-5 (``Rule 15Fi-5
Condition''); (6) Exchange Act rule 15Fk-1 (``Rule 15Fk-1 Condition'');
(7) Exchange Act rule 18a-1 (``Rule 18a-1 Condition''); (8) Exchange
Act rule 18a-3 (``Rule 18a-3 Condition''); (8) Exchange Act rule 18a-5
(``Rule 18a-5 Condition'') and (9) Exchange Act rule 18a-7 (``Rule 18a-
7 Condition'').
    Moreover, while certain recordkeeping and reporting requirements
are not expressly linked to Exchange Act rule 18a-1, they would be
important to the Commission's ability to monitor or examine for
compliance with the capital requirements under this rule. The records
also will assist the firm in monitoring its net capital position and,
therefore, in complying with Exchange rule 18a-1 and its appendices.
Therefore, substituted compliance with respect to these recordkeeping
and reporting requirements is subject to the condition that the Covered
Entity applies substituted compliance with respect to Exchange Act rule
18a-1 and its appendices (i.e., the Rule 18a-1 Condition). This
approach is designed to ensure that, if the Covered Entity does not
apply substituted compliance with respect to Exchange Act rule 18a-1,
it makes and preserves records and files reports that the Commission
uses to monitor and examine for compliance with the Exchange Act rule
18a-1 and its appendices, and that the firm makes and preserves records
to assist it in complying with these rules.
2. Scope of Substituted Compliance
    The structure of the preliminary substituted compliance
determinations with respect to Exchange Act rules 18a-5, 18a-6, 18a-7,
18a-8, and 18a-9 as well as Exchange Act Section 15F(g) would permit a
covered entity to apply substituted compliance with respect to certain
of these rules (e.g., Exchange Act rules 18a-5 and 18a-6) and comply
with the Exchange Act requirements of the remaining rules and statute
(i.e., Exchange Act rules 18a-7, 18a-8, and 18a-9, as well as Exchange
Act Section 15F(g)). Moreover, as discussed above, the Commission is
structuring its preliminary substituted compliance determinations in
the Order with respect to the recordkeeping and reporting rules to
provide Covered Entities with greater flexibility to select distinct
requirements within the broader recordkeeping and reporting rules for
which they want to apply substituted compliance. As applied to Exchange
Act rules 18a-5 and 18a-6, this approach of providing greater
flexibility results in preliminary substituted compliance
determinations with respect to the different categories of records
these rules require SBS Entities to make, keep current, and/or
preserve. For example, a Covered Entity could apply substituted
compliance with respect Exchange Act rule 18a-5 requirements to make
and keep current records of trade blotters \152\ but comply directly
with Exchange Act rule 18a-5 requirements to make and keep current
employment records.\153\
---------------------------------------------------------------------------

    \152\ See para. (f)(1)(i)(A) to the proposed Order (relating to
substituted compliance for Exchange Act rule 18a-5(a)(1) and
(b)(1)).
    \153\ See para. (f)(1)(i)(K) to the proposed Order (relating to
substituted compliance for Exchange Act rule 18a-5(a)(10) and
(b)(8)).
---------------------------------------------------------------------------

    In this regard, the Commission found the recordkeeping, reporting,
notification, and securities count rules to be entity-level when
adopting amendments to Exchange Act rule 3a71-6 to make substituted
compliance available with respect to them.\154\ Consequently, aside
from a limited exception for recordkeeping requirements linked to
customer

protection rules,\155\ a Covered Entity must apply substituted
compliance at the entity level if it chooses to apply substituted
compliance with respect to Exchange Act rule 18a-9 and Exchange Act
Section 15F(g). Further, with respect to a distinct substituted
compliance determination for a requirement within rule 18a-5, 18a-6,
18a-7, or 18a-8, a Covered Entity must apply substituted compliance
with respect to the determination at the entity level. For example, a
Covered Entity applying substituted compliance for Exchange Act rule
18a-5 requirements to make and keep current records of trade blotters
pursuant to paragraph (f)(1)(i)(A) of the proposed Order would have to
comply with the comparable UK requirements at the entity level. The
Covered Entity could not choose to comply with the Exchange Act for one
part of its trade blotters and with UK requirements for another part of
its trade blotters. The Commission preliminarily believes that this
scope of substituted compliance strikes the right balance between
providing Covered Entities flexibility to tailor the application of
substituted compliance to their business needs and ensuring that
substituted compliance is consistent with the Commission's
classification of the Exchange Act recordkeeping, reporting,
notification and securities count requirements as entity-level
requirements.\156\
---------------------------------------------------------------------------

    \154\ See 84 FR 68550, 68596-97 (Dec. 16, 2019), Exchange Act
Release No. 87005 (Sept. 19, 2019) (``Recordkeeping Adopting
Release'').
    \155\ See paras. (f)(1)(i)(M) and (f)(2)(i)(K) to the proposed
Order (permitting substituted compliance on a transaction level). As
discussed below, these recordkeeping requirements are linked to
transaction level counterparty protection requirements.
    \156\ Id.
---------------------------------------------------------------------------

    With respect to requirements in Exchange Act rules 18a-5 and 18a-6
linked to counterparty protection rules (i.e., Exchange Act rules 15Fh-
3(b), (c), (e), (f) and (g)), the proposed Order would permit a Covered
Entity to apply substituted compliance to some security-based swap
activities and comply directly with Exchange Act requirements for other
activities.\157\ As discussed in section VII.B.2. of this notice, a
Covered Entity may decide to apply substituted compliance for a
particular set of counterparty protection requirements, such as fair
and balanced communications, for some activities and comply directly
with Exchange Act requirements for other activities.\158\ For example,
the proposed Order would allow a Covered Entity applying substituted
compliance for fair and balanced communications requirements to comply
with the comparable UK requirements with respect to communications with
UK counterparties that are subject to the Exchange Act and to comply
directly with Exchange Act requirements with respect to U.S. person
counterparties.
---------------------------------------------------------------------------

    \157\ See paras. (f)(1)(ii)(B) and (f)(2)(ii)(A) of the proposed
Order; see also para. (f)(1)(i)(M) of the proposed Order (the
preliminary substituted compliance determination with respect to
Exchange Act rules 18a-5(a)(17) and (b)(13)) and para. (f)(2)(i)(K)
of the proposed Order (the preliminary substituted compliance
determination with respect to Exchange Act rules 18a-6(b)(1)(xii)
and (b)(2)(vii)).
    \158\ See Business Conduct Adopting Release, 81 FR at 30065
(counterparty protection requirements are transaction-level
requirements).
---------------------------------------------------------------------------

    To accommodate the transaction-level approach to the counterparty
protection rules, the proposed Order would allow a Covered Entity to
apply substituted compliance to requirements of Exchange Act rules 18a-
5 and 18a-6 linked to the counterparty protection rules consistently
with how the firm is applying substituted compliance with respect to
the counterparty protection rules. For example, if the Covered Entity
is applying substituted compliance with respect to Exchange Act rule
15Fh-3(g) for UK counterparties and complying with Exchange Act rule
15Fh-3(g) for U.S. person counterparties, the Covered Entity could
apply substituted compliance with respect to the linked requirements of
Exchange Act rule 18a-5 for UK counterparties and comply with the
linked requirements of Exchange Act rule 18a-5 for U.S. person
counterparties.
    The Commission preliminarily believes that this scope of
substituted compliance would provide Covered Entities flexibility to
tailor the application of substituted compliance to their business
needs in a manner consistent with the Commission's classification of
the relevant Exchange Act counterparty protection requirements as
transaction-level requirements. In proposing this significant
flexibility for the application of substituted compliance, the
Commission nevertheless would expect Covered Entities to ensure that
the manner in which they choose to apply substituted compliance allows
them to comply with the requirements to keep books and records open to
inspection by any representative of the Commission and promptly furnish
to a representative of the Commission legible, true, complete and
current copies of the Covered Entity's records.\159\
---------------------------------------------------------------------------

    \159\ See also para. (f)(7) to the proposed Order.
---------------------------------------------------------------------------

3. Exchange Act Rule 18a-5
    Exchange Act rule 18a-5 requires SBS Entities to make and keep
current various types of records. The requirements for SBS Entities
that do not have a prudential regulator are set forth in paragraph (a)
of the rule.\160\ The requirements for SBS Entities that do have a
prudential regulator are set forth in paragraph (b) of the rule.\161\
The Commission preliminarily is making a positive substituted
compliance determination for many of the requirements set forth in
these paragraphs.
---------------------------------------------------------------------------

    \160\ See paras. (a)(1) through (18) of Exchange Act rule 18a-5.
    \161\ See paras. (b)(1) through (14) of Exchange Act rule 18a-6.
---------------------------------------------------------------------------

    However, certain of these requirements are linked to substantive
Exchange Act requirements for which a positive substituted compliance
is not being made under the proposed Order. In these cases, a positive
substituted compliance determination is not being made for the linked
requirement in Exchange Act rule 18a-5 or the portion of the
requirement in Exchange Act rule 18a-5 that is linked to the
substantive Exchange Act requirement.\162\
---------------------------------------------------------------------------

    \162\ A positive substituted compliance determination is not
being made for the following requirements of Exchange Act rule 18a-5
because they are linked to a substantive Exchange Act requirement
for which a positive substituted compliance determination is not
being made: (1) The portion of Exchange Act rules 18a-5(a)(6) and
(b)(6) that relates to confirmations with respect to securities
(other than security based swaps) is subject to the Rule 10b-10
Exclusion; (2) the portion of Exchange Act rule 18a-5(a)(9) that
relates to Exchange Act rule 18a-2 is subject to the Rule 18a-2
Exclusion; (3) Exchange Act rules 18a-5(a)(13) and (14) and (b)(9)
and (10) are fully linked to Exchange Act rule 18a-4 and, therefore,
are subject to the Rule 18a-4 Exclusion; (4) the portions of
Exchange Act rules 18a-5(a)(16) and (b)(12) that relate to Exchange
Act rule 15Fh-6 are subject to the Rule 15Fh-6 Exclusion; (5) the
portions of Exchange Act rules 18a-5(a)(17) and (b)(13) that relate
to Exchange Act rules 15Fh-4 are subject to the Rule 15Fh-4
Exclusion; and (6) the portions of Exchange Act rules 18a-5(a)(17)
and (b)(13) that relate to Exchange Act rule 15Fh-5 are subject to
the 15Fh-5 Exclusion.
---------------------------------------------------------------------------

    In addition, certain of the requirements in Exchange Act rule 18a-5
are fully or partially linked to substantive Exchange Act requirements
where a positive substituted compliance determination is being made
under the proposed Order. In these cases, substituted compliance with
the requirement in Exchange Act rule 18a-5 is conditioned on the SBS
Entity applying substituted compliance to the linked substantive
Exchange Act requirement.\163\
---------------------------------------------------------------------------

    \163\ Substituted compliance with the following requirements of
Exchange Act rule 18a-5 is conditioned on the SBS Entity applying
substituted compliance to the linked substantive Exchange Act
requirement: (1) Exchange Act rules 18a-5(a)(6), (a)(15), (b)(6) and
(b)(11) are linked to Exchange Act rule 15Fi-2 and, therefore, are
subject to the Rule 15Fi-2 Condition; (2) Exchange Act rule 18a-
5(a)(9) is linked to Exchange Act rule 18a-1 and, therefore, is
subject to the Rule 18a-1 Condition; (3) Exchange Act rule 18a-
5(a)(12) is linked to Exchange Act rule 18a-3 and, therefore, is
subject to the Rule 18a-3 Condition; (4) Exchange Act rules 18a-
5(a)(17) and (b)(13) are linked to Exchange Act rule 15Fh-3 and,
therefore, are subject to the Rule 15Fh-3 Condition; (5) Exchange
Act rules 18a-5(a)(17) and (b)(13) are linked to Exchange Act rule
15Fk-1, and therefore, are subject to the Rule 15Fk-1 Condition; (6)
Exchange Act rules 18a-5(a)(18)(i) and (ii) or (b)(14)(i) and (ii)
are linked to Exchange Act rule 15Fi-3 and, therefore, are subject
to the Rule 15Fi-3 Condition; and (7) Exchange Act rules 18a-
5(a)(18)(iii) and (b)(14)(iii) are linked to Exchange Act rule 15Fi-
4 and, therefore, are subject to the Rule 15Fi-4 Condition.

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

    Moreover, there are certain requirements in Exchange Act rule 18a-5
that are not expressly linked to Exchange Act rule 18a-1, but that
would be important records in terms of the Commission's ability to
examine for compliance with that rule, and the Covered Entity's ability
to monitor its net capital position. Therefore, substituted compliance
with respect to these requirements of Exchange Act rule 18a-5 is
subject to the condition that the Covered Entity applies substituted
compliance with respect to Exchange Act rule 18a-1 and its appendices
(i.e., the Rule 18a-1 Condition).\164\
---------------------------------------------------------------------------

    \164\ Substituted compliance with the requirements of Exchange
Act rules 18a-5(a)(1), (2), (3), (4), (5), (7), (8), and (9) is
conditioned on the SBS Entity applying substituted compliance to
Exchange Act rule 18a-1 and its appendices.
---------------------------------------------------------------------------

    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 (``SEC Format
Condition'').\165\ This condition is modeled on the alternative
compliance mechanism in paragraph (c) of Exchange Act rule 18a-5. In
effect, a Covered Entity applying substituted compliance with respect
to these requirements of Exchange Act rule 18a-5 would need to comply
with the comparable UK requirements. However, under the SEC Format
Condition, the Covered Entity would need to produce a record that is
formatted in accordance with the requirements of rule 18a-5 at the
request of 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.
---------------------------------------------------------------------------

    \165\ See para. (f)(1)(ii) to the proposed Order.
---------------------------------------------------------------------------

    The following table summarizes the Commission's proposed positive
substituted compliance determinations with respect to requirements of
Exchange Act rule 18a-5 by listing in each row: (1) The paragraph of
the proposed Order that sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a-5 to which the determination
applies; (3) a brief description of the records required by those
paragraphs; and (4) any additional conditions, including any partial
exclusions from positive substituted compliance.\166\
---------------------------------------------------------------------------

    \166\ The chart below does not include the additional conditions
for applying substituted compliance to Exchange Act rule 18a-5;
namely that the SBS Entity: (1) Must be subject to and comply with
specified requirements of foreign law; (2) remains subject to the
requirement of Exchange Act section 15F(f) to keep books and records
open to inspection by any representative of the Commission and the
requirement of Exchange Act rule 18a-6(g) to furnish promptly to a
representative of the Commission legible, true, complete, and
current copies of certain records (see discussion below); and (3)
must promptly furnish to a representative of the Commission upon
request an English translation of certain records (see discussion
below). See paras. (f)(7) and (8) to the proposed Order (with
respect to the second and third conditions).

                                             Exchange Act Rule 18a-5
                                                 [Record making]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph              Rule description..  Additional conditions
                                                                                and partial
                                                                                exclusions
----------------------------------------------------------------------------------------------------------------
(f)(1)(i)(A)..............  (a)(1).............  (b)(1)............  Trade blotters....  (1) SEC Format
                                                                                Condition; (2) Rule
                                                                                18a-1 Condition for ]
                                                                                (a)(1).
(f)(1)(i)(B)..............  (a)(2).............  ..................  General ledger....  (1) SEC Format
                                                                                Condition; (2) Rule
                                                                                18a-1 Condition for ]
                                                                                (a)(2).
(f)(1)(i)(C)..............  (a)(3).............  (b)(2)............  Account ledgers...  (1) SEC Format
                                                                                Condition; (2) Rule
                                                                                18a-1 Condition for ]
                                                                                (a)(3).
(f)(1)(i)(D)..............  (a)(4).............  (b)(3)............  Stock record......  (1) SEC Format
                                                                                Condition; (2) Rule
                                                                                18a-1 Condition for ]
                                                                                (a)(4).
(f)(1)(i)(E)..............  ...................  (b)(4)............  Memoranda of        N/A.
                                                                      brokerage orders.
(f)(1)(i)(F)..............  (a)(5).............  (b)(5)............  Memoranda of        Rule 18a-1 Condition
                                                                      proprietary         for ] (a)(5).
                                                                      orders.
(f)(1)(i)(G)..............  (a)(6), (a)(15)....  (b)(6), (b)(11)...  Confirmations,      (1) Rule 15Fi-2
                                                                      trade               Condition; (2) Rule
                                                                      verification.       10b-10 Exclusion.
(f)(1)(i)(H)..............  (a)(7).............  (b)(7)............  Accountholder       (1) SEC Format
                                                                      information.        Condition; (2) Rule
                                                                                18a-1 Condition for ]
                                                                                (a)(7).
(f)(1)(i)(I)..............  (a)(8).............  ..................  Options positions.  Rule 18a-1 Condition.
(f)(1)(i)(J)..............  (a)(9).............  ..................  Trial balances,     (1) Rule 18a-1
                                                                      computation of      Condition; (2) Rule
                                                                      net capital and     18a-2 Exclusion.
                                                                      tangible net
                                                                      worth.
(f)(1)(i)(K)..............  (a)(10)............  (b)(8)............  Associated          N/A.
                                                                      person's
                                                                      employment
                                                                      application.
(f)(1)(i)(L)..............  (a)(12)............  ..................  Non-cleared margin  Rule 18a-3 Condition.
                                                                      rule calculations.
(f)(1)(i)(M)..............  (a)(17)............  (b)(13)...........  Compliance with     (1) Rule 15Fh-3
                                                                      business conduct    Condition; (2) Rule
                                                                      requirements.       15Fk-1 Condition; (3)
                                                                                Rule 15Fh-4 Exclusion;
                                                                                (4) Rule 15Fh-5
                                                                                Exclusion.
(f)(1)(i)(N)..............  (a)(18)(i),          (b)(14)(i),         Portfolio           Rule 15Fi-3 Condition.
                             (a)(18)(ii).         (b)(14)(ii).        reconciliation.

(f)(1)(i)(O)..............  (a)(18)(iii).......  (b)(14)(iii)......  Portfolio           Rule 15Fi-4 Condition.
                                                                      compression.
----------------------------------------------------------------------------------------------------------------

    The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-5
for which a positive substituted compliance determination is not being
made because they are fully linked to substantive Exchange Act
requirements for which a positive substituted compliance determination
is not being made by listing in each row: (1) The paragraph of the
proposed Order that sets forth the determination; (2) the paragraph(s)
of Exchange Act rule 18a-5 to which the determination applies; (3) a
brief description of the records required by those paragraphs; and (4)
the exclusion from substituted compliance.

                                             Exchange Act Rule 18a-5
                                                 [Record making]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph              Rule description..  Exclusion
----------------------------------------------------------------------------------------------------------------
(f)(1)(ii)(B).............  (a)(13)............  (b)(9)............  Possession or       Rule 18a-4 Exclusion.
                                                                      control records.
(f)(1)(ii)(B).............  (a)(14)............  (b)(10)...........  Reserve             Rule 18a-4 Exclusion.
                                                                      computations.
(f)(1)(ii)(B).............  (a)(16)............  (b)(12)...........  Political           Rule 15Fh-6 Exclusion.
                                                                      contribution
                                                                      records.
----------------------------------------------------------------------------------------------------------------

4. Exchange Act Rule 18a-6
    Exchange Act rule 18a-6 requires an SBS Entity to preserve certain
types of records if it makes or receives them (in addition to the
records the SBS Entity is required to make and keep current pursuant to
Exchange Act rule 18a-5). Exchange Act rule 18a-6 also prescribes the
time period that these additional records and the records required to
be made and kept current pursuant to Exchange Act rule 18a-5 must be
preserved and the manner in which they must be preserved.\167\
Paragraphs (a) through (d) of Exchange Act rule 18a-6 identify the
records that an SBS Entity must retain if it makes or receives them and
prescribes the retention periods for these records as well as for the
records that must be made and kept current pursuant to Exchange Act
rule 18a-5. Certain of these paragraphs prescribe requirements
separately for SBS Entities that do not have a prudential regulator and
SBS Entities that do have a prudential regulator.\168\
---------------------------------------------------------------------------

    \167\ See 17 CFR 240.18a-5.
    \168\ Paragraphs (a)(1), (b)(1), (d)(2)(i), and (d)(3)(i) of
Exchange Act rule 18a-6 apply to SBS Entities that do not have a
prudential regulator. Paragraphs (a)(2), (b)(2), (d)(2)(ii), and
(d)(3)(ii) of Exchange Act rule 18a-6 apply to SBS Entities that
have a prudential regulator. Paragraphs (c), (d)(1), (d)(4), (d)(5),
(e), (f), (g), and (h) of Exchange Act rule 18a-6 apply to SBS
Entities irrespective of whether they have a prudential regulator.
---------------------------------------------------------------------------

    Paragraph (e) of Exchange Act rule 18a-6 sets forth the
requirements for preserving records electronically. Paragraph (f) sets
forth requirements for when records are prepared or maintained by a
third party. Paragraph (g) requires that an SBS Entity must furnish
promptly to a representative of the Commission legible, true, complete,
and current copies of those records of the SBS Entity that are required
to be preserved under Exchange Act rule 18a-6, or any other records of
the SBS Entity that are subject to examination or required to be made
or maintained pursuant to section 15F of the Exchange Act that are
requested by a representative of the Commission.
    The Commission is making a preliminary positive substituted
compliance determination for many of the requirements set forth in
paragraphs (a) through (f) of Exchange Act rule 18a-6.\169\ However,
certain of these requirements are fully or partially linked to
substantive Exchange Act requirements for which a positive substituted
compliance determination is not being made under the proposed Order. In
these cases, a positive substituted compliance determination is not
being made for the linked requirement in Exchange Act rule 18a-6.\170\
---------------------------------------------------------------------------

    \169\ The Commission does not believe it would be appropriate to
grant substituted compliance with respect to the requirements in
paragraph (g) of Exchange Act rule 18a-6 because there is no
comparable requirement in the UK to produce these records to a
representative of the Commission.
    \170\ A positive substituted compliance determination is not
being made for the following requirements of Exchange Act rule 18a-6
because they are linked to a substantive Exchange Act requirement
for which a positive substituted compliance determination is not
being made: (1) The portion of Exchange Act rule 18a-6(b)(1)(v)
relating to Exchange Act rule 18a-2 is subject to the Rule 18a-2
Exclusion; (2) Exchange Act rule 18a-6(b)(1)(viii)(L) is fully
linked to Exchange Act Rule 18a-4 and, therefore, is subject to the
Rule 18a-4 Exclusion; (3) the portion of Exchange Act rule 18a-
6(b)(1)(viii)(M) relating to Exchange Act rule 18a-2 is subject to
the Rule 18a-2 Exclusion; (4) Exchange Act rules 18a-6(b)(1)(xi) and
(b)(2)(vi) are fully linked to Regulation SBSR and, therefore, are
subject to the Regulation SBSR Exclusion; (5) Exchange Act rules
18a-6(b)(1)(xiii) and 18a-6(b)(2)(viii) are fully linked to Exchange
Act rules 15Fh-4 and, therefore, are subject to the Rule 15Fh-4
Exclusion; and (6) Exchange Act rules 18a-6(b)(1)(xiii) and 18a-
6(b)(2)(viii) are fully linked to Exchange Act rules 15Fh-5 and,
therefore, are subject to the Rule 15Fh-5 Exclusion.
---------------------------------------------------------------------------

    In addition, certain of the requirements in Exchange Act rule 18a-6
are fully or partially linked to substantive Exchange Act requirements
where a positive substituted compliance determination is being made
under the proposed Order. In these cases, substituted compliance with
the requirement in Exchange Act rule 18a-6 is conditioned on the SBS
Entity applying substituted compliance to the linked substantive
Exchange Act requirement.\171\
---------------------------------------------------------------------------

    \171\ Substituted compliance with the following requirements of
Exchange Act rule 18a-6 is conditioned on the SBS Entity applying
substituted compliance to the linked substantive Exchange Act
requirement: (1) Exchange Act rule 18a-6(b)(1)(v) is linked to
Exchange Act rule 18a-1 and, therefore, is subject to the Rule 18a-1
Condition; (2) Exchange Act rules 18a-6(b)(1)(viii) and (b)(2)(v)
are linked to Exchange Act rule 18a-7 and, therefore are subject to
the Rule 18a-7 Condition; (3) Exchange Act rule 18a-6(b)(1)(viii) is
linked to Exchange Act rule 18a-1 and, therefore, is subject to the
Rule 18a-1 Condition; (4) Exchange Act rule 18a-6(b)(1)(ix) is
linked to Exchange Act rule 18a-1 and, therefore, is subject to the
Rule 18a-1 Condition; (5) Exchange Act rule 18a-6(b)(1)(x) is linked
to Exchange Act rule 18a-1 and, therefore, is subject to the Rule
18a-1 Condition; (6) Exchange Act rules 18a-6(b)(1)(xii) and
(b)(2)(vii) are linked to Exchange Act rule 15Fh-3 and, therefore,
is subject to the Rule 15Fh-3 Condition; (7) Exchange Act rules 18a-
6(b)(1)(xii) and (b)(2)(vii) are linked to Exchange Act rule 15Fk-1
and, therefore, is subject to the Rule 15Fk-1 Condition; (8)
Exchange Act rules 18a-6(d)(4) and (d)(5) are linked to Exchange act
rule 15Fi-3 and, therefore, are subject to the Rule 15Fi-3
Condition; (9) Exchange Act rules 18a-6(d)(4) and (d)(5) are linked
to Exchange act rule 15Fi-4 and, therefore, are subject to the Rule
15Fi-4 Condition; and (10) Exchange Act rules 18a-6(d)(4) and (d)(5)
are linked to Exchange act rule 15Fi-3 and, therefore, are subject
to the Rule 15Fi-5 Condition.

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

    Moreover, there are certain requirements in Exchange Act rule 18a-6
that are not expressly linked to Exchange Act rule 18a-1, but that
would be important records in terms of the Commission's ability to
examine for compliance with that rule, and the Covered Entity's ability
to monitor its net capital position. Therefore, substituted compliance
with respect to these requirements of Exchange Act rule 18a-6 is
subject to the Rule 18a-1 Condition.\172\
---------------------------------------------------------------------------

    \172\ Substituted compliance with the requirements of Exchange
Act rules 18a-6(b)(1)(ii), (b)(1)(iii), (b)(1)(vi), (b)(1)(vii),
(d)(2)(i), and (d)(3)(i) is conditioned on the SBS Entity applying
substituted compliance to Exchange Act rule 18a-1 and its
appendices.
---------------------------------------------------------------------------

    The following table summarizes the Commission's proposed positive
substituted compliance determinations with respect to requirements of
Exchange Act rule 18a-6 by listing in each row: (1) The paragraph of
the proposed Order that sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a-6 to which the determination
applies; (3) a brief description of the records required by those
paragraphs; and (4) a brief description of any additional conditions to
applying substituted compliance to the requirements, including any
partial exclusions because portions of the requirements are linked to
substantive Exchange Act requirements for which a positive substituted
compliance is not being made under this Order.\173\
---------------------------------------------------------------------------

    \173\ The chart below does not include the additional conditions
for applying substituted compliance to Exchange Act rule 18a-6;
namely that the SBS Entity: (1) Is subject to and complies with the
requirements of foreign law; (2) remains subject to the requirement
of Exchange Act section 15F(f) to keep books and records open to
inspection by any representative of the Commission and the
requirement of Exchange Act rule 18a-6(g) to furnish promptly to a
representative of the Commission legible, true, complete, and
current copies of certain records; and (3) must promptly furnish to
a representative of the Commission upon request an English
translation of certain records. See para. (f)(7) and (8) to the
proposed Order (with respect to the second and third conditions).

                                             Exchange Act Rule 18a-6
                                              [Record preservation]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph              Rule description..  Conditions and partial
                                                                                exclusions
----------------------------------------------------------------------------------------------------------------
(f)(2)(i)(A)..............  (a)(1).............  (a)(2)............  6 year record       N/A.
                                                                      preservation.
(f)(2)(i)(B)..............  (b)(1)(i)..........  (b)(2)(i).........  3 year record       N/A.
                                                                      preservation.
(f)(2)(i)(C)..............  (b)(1)(ii),          ..................  Bank records,       Rule 18a-1 Condition.
                             (b)(1)(iii).                             bills.
(f)(2)(i)(D)..............  (b)(1)(iv).........  (b)(2)(ii)........  Communications....  N/A.
(f)(2)(i)(E)..............  (b)(1)(v)..........  ..................  Trial balances....  (1) Rule 18a-1
                                                                                Condition; (2) Rule
                                                                                18a-2 Exclusion.
(f)(2)(i)(F)..............  (b)(1)(vi).........  (b)(2)(iii).......  Account documents.  Rule 18a-1 Condition
                                                                                for ] (b)(1)(vi).
(f)(2)(i)(G)..............  (b)(1)(vii)........  (b)(2)(iv)........  Written agreements  Rule 18a-1 Condition
                                                                                for ] (b)(1)(vii).
(f)(2)(i)(H)..............  (b)(1)(viii).......  (b)(2)(v).........  Information         (1) Rule 18a-7
                                                                      supporting          Condition; (2) Rule
                                                                      financial reports.  18a-2 Exclusion for ]
                                                                                (b)(1)(viii)(M).
(f)(2)(i)(I)..............  (b)(1)(ix).........  ..................  Rule 15c3-4 risk    Rule 18a-1 Condition.
                                                                      management
                                                                      records.
(f)(2)(i)(J)..............  (b)(1)(x)..........  ..................  Credit risk         Rule 18a-1 Condition.
                                                                      determinations.
(f)(2)(i)(K)..............  (b)(1)(xii)........  (b)(2)(vii).......  Business conduct    (1) Rule 15Fh-3
                                                                      standard records.   Condition; (2) Rule
                                                                                15Fk-1 Condition.
                           -----------------------------------------
(f)(2)(i)(L)..............                    (c)                    Corporate           N/A.
                                                                      documents.
                           -----------------------------------------
(f)(2)(i)(M)..............                   (d)(1)                  Associated          N/A.
                                                                      person's
                                                                      employment
                                                                      application.
                           -----------------------------------------
(f)(2)(i)(N)..............  (d)(2)(i)..........  (d)(2)(ii)........  Regulatory          Rule 18a-1 Condition
                                                                      authority reports.  for ] (d)(2)(i).
(f)(2)(i)(O)..............  (d)(3)(i)..........  (d)(3)(ii)........  Compliance,         Rule 18a-1 Condition
                                                                      supervisory, and    for ] (d)(3)(i).
                                                                      procedures
                                                                      manuals.
                           -----------------------------------------
(f)(2)(i)(P)..............               (d)(4), (d)(5)              Portfolio           (1) Rule 15Fi-3
                                                                      reconciliation.     Condition; (2) Rule
                                                                                15Fi-4 Condition; (3)
                                                                                Rule 15Fi-5 Condition.
                           -----------------------------------------
(f)(2)(i)(Q)..............                    (e)                    Electronic storage  N/A.
                                                                      system.
                           -----------------------------------------
(f)(2)(i)(R)..............                    (f)                    Third-party         N/A.
                                                                      recordkeeper.
----------------------------------------------------------------------------------------------------------------

    The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-6
for which for which a positive substituted compliance determination is
not being made because they are fully linked to substantive Exchange
Act requirements for which a positive substituted compliance
determination is not being made by listing in each row: (1) The
paragraph of the proposed Order that sets forth the determination; (2)
the paragraph(s) of Exchange Act rule 18a-6 to which the determination
applies; (3) a brief description of the records required by those
paragraphs; and (4) the exclusion from substituted compliance.

                                             Exchange Act Rule 18a-6
                                                 [Preservation]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph              Rule description..  Exclusion
----------------------------------------------------------------------------------------------------------------
(f)(2)(ii)................  (b)(1)(xi).........  (b)(2)(vi)........  Regulation SBSR     Regulation SBSR
                                                                      information.        Exclusion.
(f)(2)(i)(H)(4)...........  (b)(1)(viii)(L)....  ..................  Possession or       Rule 18a-4 Exclusion.
                                                                      control
                                                                      information.
(f)(2)(ii)................  (b)(1)(xiii).......  (b)(2)(viii)......  Special entity      (1) Rule 15Fh-4
                                                                      documents.          Exclusion; (2) Rule
                                                                                15Fh-5 Exclusion.
----------------------------------------------------------------------------------------------------------------

5. Exchange Act Rule 18a-7
    Paragraph (a)(1) of Exchange Act rule 18a-7 requires SBS Entities
that are not prudentially regulated to file monthly unaudited reports
about its financial and operational condition using the FOCUS Report
Part II. Paragraph (a)(2) of Exchange Act rule 18a-7 requires SBS
Entities that are prudentially regulated to file quarterly periodic
unaudited reports about their financial and operational condition using
the FOCUS Report Part IIC. The FOCUS Report Part IIC elicits less
information than the FOCUS Report Part II because the Commission does
not have responsibility for overseeing the capital and margin
requirements applicable to these entities. Paragraph (a)(3) of Exchange
Act rule 18a-7 requires SBS Entities that are not prudentially
regulated and have been authorized by the Commission to compute net
capital under Exchange Act rule 18a-1 using models to file certain
monthly or quarterly information related to their use of models.
Paragraph (b) of Exchange Act rule 18a-7 requires SBS Entities that are
not prudentially regulated to make certain financial information
available on their websites. Paragraphs (c), (d), (e), (f), (g), and
(h) of Exchange Act rule 18a-7 set forth requirements for SBS Entities
that are not prudentially regulated to annually file financial
statements and certain reports, as well as reports covering those
statements and reports prepared by an independent public accountant.
Paragraph (i) of Exchange Act rule 18a-7 requires SBS Entities that do
not have a prudential regulator to notify the Commission when they
change their fiscal year. Finally, Paragraph (j) of Exchange Act rule
18a-7 sets forth requirements with respect to the reports that must be
filed with the Commission under the rule.\174\
---------------------------------------------------------------------------

    \174\ See 17 CFR 240.18a-7.
---------------------------------------------------------------------------

    The Commission preliminarily is making a positive substituted
compliance determination for all of these paragraphs of Exchange Act
rule 18a-7. As discussed below, substituted compliance with respect to
these paragraphs of Exchange Act rule 18a-7 is subject to certain
conditions.
    First, certain of the requirements in Exchange Act rule 18a-7 are
fully or partially linked to substantive Exchange Act requirements for
which a positive substituted compliance determination is being made
under the proposed Order. In these cases, substituted compliance with
the requirement in Exchange Act rule 18a-7 is conditioned on the
Covered Entity applying substituted compliance to the linked
substantive Exchange Act requirement.\175\
---------------------------------------------------------------------------

    \175\ Substituted compliance with the following requirements of
Exchange Act rule 18a-7 is conditioned on the SBS Entity applying
substituted compliance to the linked substantive Exchange Act
requirement: (1) Exchange Act rule 18a-7(a)(1) is linked to Exchange
Act rule 18a-1 and, therefore, is subject to the Rule 18a-1
Condition; (2) Exchange Act rule 18a-7(a)(3) is linked to Exchange
Act rule 18a-1 and, therefore, is subject to the Rule 18a-1
Condition; and (3) Exchange Act rules 18a-7(c), (d), (e), (f), (g)
and (h) taken as a whole are linked to Exchange Act rule 18a-1 and,
therefore, are subject to the Rule 18a-1 Condition.
---------------------------------------------------------------------------

    Second, 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 or Part IIC is subject to the condition that the Covered Entity
file with the Commission periodic unaudited financial and operational
information in the manner and format specified by the Commission by
order or rule (``Manner and Format Condition'') and present the
financial information in accordance with GAAP that the firm uses to
prepare general purpose publicly available or available to be issued
financial statements in the UK (``UK GAAP Condition'').\176\
---------------------------------------------------------------------------

    \176\ See para. (f)(3)(i) to the proposed Order. Under this
approach, Covered Entities would be permitted to present the
information reported in the FOCUS Report in accordance with GAAP
that the firm 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 the UK.
---------------------------------------------------------------------------

    As noted above, Exchange Act 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 on the FOCUS Report Part II (if not prudentially
regulated) or Part IIC (if prudentially regulated). The Commission will
use the FOCUS Reports filed by the SBS Entities 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.\177\ Broker-dealers registered with the
Commission currently file their FOCUS Reports with FINRA through the
eFOCUS system it administers. Using 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.
---------------------------------------------------------------------------

    \177\ 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. 88866 (May 14, 2020).
---------------------------------------------------------------------------

    The Commission preliminarily believes that it would be appropriate
to condition substituted compliance with respect to Exchange Act rule
18a-7 on the Covered 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. 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 FCA or PRA.\178\
---------------------------------------------------------------------------

    \178\ 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 substitute 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.
---------------------------------------------------------------------------

    Third, under the proposed Order, substituted compliance in
connection with the requirement that Covered Entities without a
prudential regulator file audited annual reports under Exchange Act
rule 18a-7 is subject to five conditions.\179\ The first condition is
that the SBS Entity simultaneously sends a copy of the financial
statements the Covered Entity is required to file with the UK PRA or
FCA, including a report of an independent public accountant covering
the financial statements, to the Commission in the manner specified on
the Commission's website (``SEC Filing Condition''). Because UK 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.
---------------------------------------------------------------------------

    \179\ See para. (f)(3)(iv) to the proposed Order.
---------------------------------------------------------------------------

    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 (``Contact Information
Condition''). 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 Covered Entity's financial or operational condition.
    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 UK laws do not require the Covered Entity to engage an
independent public accountant to prepare a report covering the annual
financial statements (``Accountant's Report Condition''). 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 the UK that are used to perform audit
and attestation services and the accountant complies with UK
independence requirements. According to the FCA Application, UK 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.
    The fourth condition is that an SBS Entity that is a security-based
swap dealer must file 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 (``Rule 18a-4 Limited Exclusion'').\180\ These reports
are designed to provide the Commission with information about an SBS
Entity's compliance with Rule 18a-4. As discussed above, a positive
substituted compliance determination is not being made for Exchange Act
rule 18a-4 and, therefore, this condition is designed to provide the
Commission with similar compliance information. Under this condition,
Covered Entities will need to file a limited compliance report that
includes the statements relating to Rule 18a-4 \181\ or exemption
report if the Covered Entity claims an exemption from Rule 18a-4. The
Covered 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 the UK that are used to perform audit and attestation services and
the accountant complies with UK independence requirements.
---------------------------------------------------------------------------

    \180\ The Commission views this as a limited exclusion from the
availability of substituted compliance for these requirements
because the proposed Order permits these reports relating Exchange
Act rule 18a-4 to be included with the UK regulatory reports the
Covered Entities will file with the Commission and because the
reports can be prepared in accordance with UK GAAS (as discussed
below).
    \181\ The limited compliance report would not need to address
Exchange Act rule 18a-9 if the Covered Entity is applying
substituted compliance to this requirement. Further, as discussed
above, substituted compliance with paragraphs (c) through (h) of
Exchange Act rule 18a-7 is conditioned on the Covered Entity
applying substituted compliance to Exchange Act rule 18a-1.
Therefore, the Covered Entity would not need to address that rule in
the compliance report. Finally, the Covered Entity would not need to
address an account statement rule of a self-regulatory organization.
---------------------------------------------------------------------------

    The fifth condition is that a Covered Entity that is a security-
based swap dealer files the supporting schedules required by Exchange
Act rule 18a-7(c)(1)(i)(A) and (C) addressing the statements identified
in Exchange Act rules 18a-7(c)(2)(ii) and (iii) that relate to Exchange
Act rule 18a-4 if the SBS Entity is not exempt from Exchange Act rule
18a-4 (i.e., a Rule 18a-4 Limited Exclusion). These supporting
schedules are the Computation for Determination of Security-Based Swap
Customer Reserve Requirements and the Information Relating to the
Possession or Control Requirements for Security-Based Swap Customers,
which are designed to provide the Commission with information about an
SBS Entity's compliance with Rule 18a-4.
    Fourth, under the proposed Order, substituted compliance in
connection with the requirement that Covered Entities file notice of a
change in fiscal year under Exchange Act rule 18a-7(i) is conditioned
on the SBS Entity simultaneously sending a copy of the notice of change
in fiscal year that the Covered Entity is required to file with the UK
PRA or FCA to the Commission in the manner specified on the
Commission's website (``SEC Filing Condition''). Because UK laws would
not otherwise require the notice of a change in fiscal year to be filed
with the Commission, the purpose of this condition is to ensure the
Commission receives the notice to more effectively supervise and
monitor SBS Entities.
    The following table summarizes the Commission's proposed positive
substituted compliance determinations with respect to requirements of
Exchange Act rule 18a-7 by listing in each row: (1) The paragraph of
the proposed Order that sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a-7 to which the determination
applies; (3) a brief description of the records required by those
paragraphs; and (4) a brief description of any additional conditions to
applying substituted compliance to the requirements, including any
partial exclusions because portions of the requirements are linked to
substantive Exchange Act requirements for which a positive substituted
compliance determination is not being made under the proposed
Order.\182\
---------------------------------------------------------------------------

    \182\ The chart below does not include the additional conditions
for applying substituted compliance to Exchange Act rule 18a-7;
namely that the SBS Entity: (1) Is subject to and complies with the
requirements of foreign law; (2) remains subject to the requirement
of Exchange Act section 15F(f) to keep books and records open to
inspection by any representative of the Commission and the
requirement of Exchange Act rule 18a-6(g) to furnish promptly to a
representative of the Commission legible, true, complete, and
current copies of certain records; and (3) must promptly furnish to
a representative of the Commission upon request an English
translation of certain records. See paras. (f)(7) and (8) to the
proposed Order (with respect to the second and third conditions).

                                             Exchange Act Rule 18a-7
                                                   [Reporting]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph              Rule description..  Conditions and partial
                                                                                exclusions
----------------------------------------------------------------------------------------------------------------
(f)(3)(i).................  (a)(1).............  (a)(2)............  File FOCUS Reports  (1) Manner and Format
                                                                                Condition; (2) UK GAAP
                                                                                Condition; (3) Rule
                                                                                18a-1 Condition for ]
                                                                                (a)(1).
(f)(3)(ii)................  (a)(3).............  ..................  Information         (1) Rule 18a-1
                                                                      related to          Condition.
                                                                      capital models.
(f)(3)(iii)...............  (b)................  ..................  Publish certain     N/A.
                                                                      financial
                                                                      information.
(f)(3)(iv)................  (c), (d), (e), (f),  ..................  File annual         (1) SEC Filing
                             (g), (h).                                audited reports.    Condition; (2) Contact
                                                                                Information Condition;
                                                                                (3) Accountant's
                                                                                Report Condition; (4)
                                                                                Rule 18a-4 Limited
                                                                                Exclusion; (5) Rule
                                                                                18a-1 Condition.
(f)(3)(v).................  (i)................  ..................  Notice of fiscal    SEC Filing Condition.
                                                                      year change.
----------------------------------------------------------------------------------------------------------------

6. Exchange Act Rule 18a-8
    Exchange Act rule 18a-8 requires SBS Entities to send notifications
to the Commission if certain adverse events occur.\183\ Paragraphs
(a)(1)(i), (a)(1)(ii), (b)(1), (b)(2), and (b)(4) of Exchange Act rule
18a-8 require an SBS Entity that is a security-based swap dealer and
that does not have a prudential regulator to provide notifications
related to the capital requirements of Exchange Act rule 18a-1.
Paragraphs (a)(2) and (b)(3) Exchange Act rule 18a-8 require an SBS
Entity that is a major security-based swap participant and that does
not have a prudential regulator to provide notifications related to the
capital requirements of Exchange Act rule 18a-8. Paragraph (c) Exchange
Act rule 18a-8 requires an SBS Entity that is a security-based swap
dealer and that files a notice of adjustment to its reported capital
category with a U.S. prudential regulator to transmit a copy of the
notice to the Commission. Paragraph (d) of Exchange Act rule 18a-8, in
pertinent part, requires an SBS Entity to provide notification to the
Commission if it fails to make and keep current books and records under
Exchange Act rule 18a-5 and to transmit a subsequent report on what is
being done to correct the situation. Paragraph (e) of Exchange Act rule
18a-8, in pertinent part, requires an SBS Entity that is a security-
based swap dealer and that does not have a prudential regulator to
provide notification if it has a material weakness under Exchange Act
rule 18a-7 and to transmit a subsequent report on what is being done to
correct the situation. Paragraph (g) of Exchange Act rule 18a-8, in
pertinent part, requires an SBS Entity that is a security-based swap
dealer to provide notification if it fails to make a required deposit
into its special reserve account for the exclusive benefit of security-
based swap customers under Exchange Act rule 18a-4. Finally, paragraph
(h) sets forth requirements for transmitting the notifications
described above.
---------------------------------------------------------------------------

    \183\ See 17 CFR 240.18a-8.
---------------------------------------------------------------------------

    The Commission preliminarily makes a positive substituted
compliance determination for a number of the notification requirements
set forth in these paragraphs. However, certain of these requirements
are linked to substantive Exchange Act requirements for which a
positive substituted compliance determination is not being made under
the proposed Order. In these cases, a positive substituted compliance
determination is not being made for the linked requirement in Exchange
Act rule 18a-8 or the portion of the requirement in Exchange Act rule
18a-8 that is linked to the substantive Exchange Act requirement.\184\
---------------------------------------------------------------------------

    \184\ A positive substituted compliance determination is not
being made for the following requirements of Exchange Act rule 18a-8
because they are linked to a substantive Exchange Act requirement
for which a positive substituted compliance determination is not
being made: (1) Exchange Act rules 18a-8(a)(3) and (b)(3) are fully
linked to Exchange Act rule 18a-2 and, therefore, are subject to the
Rule 18a-2 Exclusion; (2) the portion of Exchange Act rule 18a-8(e)
that relates to Exchange Act rule 18a-2 is subject to the Rule 18a-2
Exclusion; (3) the portion of Exchange Act rule 18a-8(e) that
relates to Exchange Act rule 18a-4 is subject to the Rule 18a-4
Exclusion; and (4) Exchange Act rule 18a-8(g) is fully linked to
Exchange act rule 18a-4 and, therefore, is subject to the Rule 18a-4
Exclusion.
---------------------------------------------------------------------------

    In addition, certain of the requirements in Exchange Act rule 18a-8
are fully or partially linked to substantive Exchange Act requirements
where a positive substituted compliance determination is being made
under the proposed Order. In these cases, substituted compliance with
the requirement in Exchange Act rule 18a-8 is conditioned on the SBS
Entity applying substituted compliance to the linked substantive
Exchange Act requirement.\185\
---------------------------------------------------------------------------

    \185\ Substituted compliance with the following requirements of
Exchange Act rule 18a-8 is conditioned on the SBS Entity applying
substituted compliance to the linked substantive Exchange Act
requirement: (1) Exchange Act rules 18a-8(a)(1)(i) and (ii), (b)(1),
(b)(2), and (b)(4) are linked to Exchange Act rule 18a-1 and,
therefore, are subject to the Rule 18a-1 Condition; and (2) Exchange
Act rules 18a-8(d) is linked to Exchange Act rule 18a-5 and,
therefore, is subject to the Rule 18a-5 Condition with respect to
any category of records required to be made and kept current by that
rule. Consequently, if the Covered Entity does not apply substituted
compliance with respect to a category of record required to be made
and kept current by Exchange Act rule 18a-5, the Covered Entity
would need to provide the notification required by Exchange Act rule
18a-8(d) if it fails to make and keep current that category of
record.
---------------------------------------------------------------------------

    Under the proposed Order, substituted compliance in connection with
the notification requirements of Exchange Act rule 18a-8 is subject to
the condition that the SBS Entity: (1) Simultaneously sends a copy of
any notice required to be sent by UK notification laws to the
Commission in the manner specified on the Commission's website; and (2)
includes with the transmission the contact information of an individual
who can provide further information about the matter that is the
subject of the notice (i.e., the ``Contact Information Condition'').
The purpose of this condition is to alert the Commission to financial
or operational problems that could adversely affect the firm--the
objective of Exchange Act rule 18a-8.
    The following table summarizes the Commission's proposed positive

substituted compliance determinations with respect to requirements of
Exchange Act rule 18a-8 by listing in each row: (1) The paragraph of
the proposed Order that sets forth the determination; (2) the
paragraph(s) of Exchange Act rule 18a-8 to which the determination
applies; (3) a brief description of the records required by those
paragraphs; and (4) a brief description of any additional conditions to
applying substituted compliance to the requirements, including any
partial exclusions because portions of the requirements are linked to
substantive Exchange Act requirements for which a positive substituted
compliance determination is not being made.\186\
---------------------------------------------------------------------------

    \186\ The chart below does not include the additional conditions
for applying substituted compliance to Exchange Act rule 18a-8;
namely that the SBS Entity: (1) Is subject to and complies with the
requirements of foreign law; (2) remains subject to the requirement
of Exchange Act section 15F(f) to keep books and records open to
inspection by any representative of the Commission and the
requirement of Exchange Act rule 18a-6(g) to furnish promptly to a
representative of the Commission legible, true, complete, and
current copies of certain records; and (3) must promptly furnish to
a representative of the Commission upon request an English
translation of certain records. See paras. (f)(7) and (8) to the
proposed Order (with respect to the second and third conditions).

                                             Exchange Act Rule 18a-8
                                                 [Notification]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph              Rule description..  Conditions and partial
                                                                                exclusions
----------------------------------------------------------------------------------------------------------------
(f)(4)(i)(A)..............  (a)(1)(i),           ..................  Capital notices...  (1) Rule 18a-1
                             (a)(1)(ii),                                                  Condition; (2) SEC
                             (b)(1), (b)(2),                                              Filing Condition; (3)
                             (b)(4).                                                      Contact Information
                                                                                Condition.
(f)(4)(i)(B)..............  (c)................  ..................  Prudential          (1) SEC Filing
                                                                      regulator capital   Condition; (2) Contact
                                                                      category            Information Condition.
                                                                      adjustment
                                                                      notices.
(f)(4)(i)(C)..............  (d)................  ..................  Books and records   (1) Rule 18a-5
                                                                      notices.            Condition; (2) SEC
                                                                                Filing Condition; (3)
                                                                                Contact Information
                                                                                Condition.
(f)(4)(i)(D)..............  (e)................  ..................  Material weakness   (1) Rule 18a-1
                                                                      notices.            Condition; (2) Rule
                                                                                18a-2 Exclusion; (3)
                                                                                Rule 18a-4 Limited
                                                                                Exclusion; (4) SEC
                                                                                Filing Condition; (5)
                                                                                Contact Information
                                                                                Condition.
----------------------------------------------------------------------------------------------------------------

    The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-8
for which a positive substituted compliance determination is not being
made because they are fully linked to substantive Exchange Act
requirements for which a positive substituted compliance determination
is not being made by listing in each row: (1) The paragraph of the
proposed Order that sets forth the determination; (2) the paragraph(s)
of Exchange Act rule 18a-8 to which the determination applies; (3) a
brief description of the records required by those paragraphs; and (4)
the exclusion from substituted compliance.

                                             Exchange Act Rule 18a-8
                                                 [Notification]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Order paragraph                          Rule paragraph              Rule description..  Exclusion
----------------------------------------------------------------------------------------------------------------
(f)(4)(ii)(B).............  (a)(2).............  (b)(3)............  MSBSP capital       Rule 18a-2 Exclusion.
                                                                      notices.
(f)(4)(ii)(C).............  (g)................  ..................  Reserve account     Rule 18a-4 Exclusion.
                                                                      notices.
----------------------------------------------------------------------------------------------------------------

7. Exchange Act Rule 18a-9
    Exchange Act rule 18a-9 requires SBS Entities that are security-
based swap dealers and that do not have a prudential regulator to
examine and count the securities they physically hold, account for the
securities that are subject to their control or direction but are not
in their physical possession, verify the locations of securities under
certain circumstances, and compare the results of the count and
verification with their records.\187\ The Commission preliminarily is
making a positive substituted compliance determination' for this
rule.\188\
---------------------------------------------------------------------------

    \187\ See 17 CFR 240.18a-9.
    \188\ See para. (f)(5) to the proposed Order.
---------------------------------------------------------------------------

8. Exchange Act Section 15F(g)
    Exchange Act Section 15F(g) requires SBS Entities to maintain daily
trading records.\189\ The Commission preliminarily believes UK law
produces a comparable result in terms of its daily trading
recordkeeping requirements.\190\ Accordingly, the Commission
preliminarily is making a positive substituted compliance determination
for the self-executing requirements in this paragraph.\191\
---------------------------------------------------------------------------

    \189\ See 15 U.S.C. 78o-10(g).
    \190\ See FCA COND at paragraphs 2C, 2D, 3B, 3C, 5D and 5F; PRA
Fundamental Rules 2 and 6; FCA PRIN 2.1.1.R(2) and (3); PRA
Recordkeeping Rule 2.1; FCA SYSC 9.1.1AR.
    \191\ See para. (f)(6) to the proposed Order.
---------------------------------------------------------------------------

9. Examination and Production of Records
    Every Covered Entity registered with the Commission, whether
complying directly with Exchange Act requirements or relying on
substituted compliance as a means of complying with the Exchange Act,
is required to satisfy the inspection and production requirements
imposed on such entities under the Exchange Act.\192\ Covered Entities
may make, keep, and preserve records, subject to the conditions
described above, in a manner prescribed by applicable UK requirements.
The Commission notes that as an element of its substituted compliance
application, the FCA has provided the Commission with adequate
assurances that no law or policy would impede the ability of any entity
that is directly supervised by the

authority 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.''
Consistent with those assurances and the requirements that apply to all
Covered Entities under the Exchange Act, Covered Entities will need to
keep books and records open to inspection by any representative of the
Commission and to furnish promptly to a representative of the
Commission legible, true, complete, and current copies of those records
of the firm that these entities are required to preserve under Exchange
Act rule 18a-6 (which would include records for which a positive
substituted compliance determination is being made with respect to
Exchange Act rule 18a-6 under the Order), or any other records of the
firm that are subject to examination or required to be made or
maintained pursuant to Exchange Act section 15F that are requested by a
representative of the Commission.\193\
---------------------------------------------------------------------------

    \192\ See Exchange Act section 15F(f); Exchange Act rule 18a-
6(g).
    \193\ See para. (f)(6) to the proposed Order.
---------------------------------------------------------------------------

10. English Translations
    The proposed Order states that to the extent documents are not
prepared in the English language, SBS Entities must furnish to a
representative of the Commission upon request an English translation of
any record, report, or notification of the SBS Entity that is required
to be made, preserved, filed, or subject to examination pursuant to
Exchange Act section 15F or the UK Order.\194\ This requirement
addresses difficulties that Commission examinations staff would have
examining SBS Entities that furnish documents in a foreign language.
While acknowledging that English is widely spoken in the UK, this
requirement is included to address foreign branches of UK SBS Entities
that may prepare documents in foreign languages. Such English
translations would be required to be provided promptly.
---------------------------------------------------------------------------

    \194\ See para. (f)(7) to the proposed Order.
---------------------------------------------------------------------------

IX. Additional Considerations Regarding Supervisory and Enforcement
Effectiveness in the UK

A. General Considerations

    As noted above, Exchange Act rule 3a71-6 provides that the
Commission's assessment of the comparability of the requirements of the
foreign financial regulatory system must account for ``the
effectiveness of the supervisory program administered, and the
enforcement authority exercised'' by the foreign financial regulatory
authority. This prerequisite accounts for the understanding that
substituted compliance determinations should reflect the reality of the
foreign regulatory framework, in that rules that appear high-quality on
paper nonetheless should not form the basis for substituted compliance
if--in practice--market participants are permitted to fall short of
their regulatory obligations. This prerequisite, however, also
recognizes that differences among the supervisory and enforcement
regimes should not be assumed to reflect flaws in one regime or
another.\195\
---------------------------------------------------------------------------

    \195\ See generally Business Conduct Adopting Release, 81 FR at
30079.
---------------------------------------------------------------------------

    In connection with these considerations, the FCA Application
includes information regarding the UK supervisory and enforcement
framework applicable to derivatives markets and market participants.
This includes information regarding the supervisory and enforcement
authority afforded to the FCA and the PRA to promote compliance with
applicable requirements, applicable supervisory and enforcement tools
and capabilities, consequences of non-compliance, and the application
of the FCA's and PRA's supervisory and enforcement practices in the
cross-border context. After review of this information, the Commission
preliminarily believes that the framework is reasonably designed to
promote compliance with the laws where substituted compliance has been
requested.
    In preliminarily concluding that the relevant supervisory and
enforcement considerations are consistent with substituted compliance,
the Commission particularly has considered the following factors:

B. Supervisory Framework in the UK

    Supervision of banks and investment firms (together, ``firms'')
that conduct security-based swap business in the UK is conducted by the
FCA and the PRA. At the time of this application, all firms that will
be using substituted compliance are dually-regulated by the FCA and
PRA. Although both supervisors take a broad view of their supervisory
powers, the FCA is primarily responsible for conduct, anti-money
laundering, trade acknowledgment and verification, portfolio
reconciliation and dispute reporting, portfolio compression, trading
relationship documentation and securities count requirements, while the
PRA is primarily responsible for capital, margin, internal supervision,
chief compliance officer and risk management requirements. Both the FCA
and the PRA are responsible for recordkeeping, reporting and
notification requirements, and both have the ability to request records
needed for supervision from firms through the supervisory process. In
addition, the FCA and the PRA set priorities in their annual business
plans which also sets forth the thematic reviews that will be conducted
each year. These thematic reviews focus on particular areas of risk or
products across several firms and key findings are made public to
promote consistency across the market.
1. FCA
    For large firms, such as those that will be applying to be
security-based swap dealers in the United States, the FCA uses a firm-
specific supervision program (``fixed supervision'') and assigns at
least one supervisor dedicated to supervising the firm. The supervisor
has regular interaction with the firm, including meetings, emails,
phone calls and video calls. The supervisor reviews the monthly and
quarterly reports that are submitted by firms. If a supervisor sees a
red flag on a report, the supervisor may take a number of actions such
as contacting the firm's senior management or requiring a skilled
person review. This supervisor also works with specialists, who monitor
specific activities at the firm, such as financial crimes, and provide
support to the primary supervisor.
    The FCA meets with each firm subject to fixed supervision to
conduct a strategy meeting, which allows the firm to inform the FCA of
their business strategy for the next two years.\196\ This strategy
meeting feeds into the firm evaluation, which is the FCA's assessment
of the firm using the FAM methodology.\197\ Before a firm evaluation is
finalized, the supervisor presents the FAM analysis, a description of
the key risks at the firm, and a workplan to address those risks to
senior management for approval. Once the workplan is approved, the firm
is sent a letter that summarizes the supervisory team's assessment of
the firm and gives the firm an overview of what to expect from a
supervisory perspective over the next year.
---------------------------------------------------------------------------

    \196\ Depending on the regulatory cycle of the firm, these
meetings typically occur at least every two years.
    \197\ More information on FCA's supervisory approach, including
a description of the FAM methodology, is available at: https://www.fca.org.uk/publication/corporate/our-approach-supervision-final-report-feedback-statement.pdf.
---------------------------------------------------------------------------

    When the FCA identifies a risk or issue at a firm that requires
remediation,

the FCA can take a number of corrective actions and strives to choose
the one that is appropriate and proportionate to the circumstances. If
the FCA determines that the issue is minor then the supervisor may
discuss with the firm how the matter is best resolved and follow up
with the firm to ensure adequate steps have been taken. For more
significant issues, the supervisor can deploy a range of regulatory
tools to achieve a specific outcome. The common tools used by the FCA
include starting a deep dive; \198\ requiring the firm to commit to
certain action (for example, varying a firm's ability to conduct
business until a prescribed action is taken); or requiring review by a
third party, such as a skilled person review.\199\ If these actions
fail, or if the issue is considered harmful enough, the matter will be
referred to the FCA Enforcement division for investigation.
---------------------------------------------------------------------------

    \198\ A deep dive is a focused, forward-looking assessment of a
firm to investigate a specific area of potential risk. Deep dives
are designed to be focused assessments, looking at specific risks,
rather than wide ranging assessments that, for example, look at
controls within a firm generally.
    \199\ More information on skilled person reviews is available
at: https://www.fca.org.uk/about/supervision/skilled-persons-reviews.
---------------------------------------------------------------------------

2. PRA
    The PRA divides all firms into the five categories for supervisory
purposes, with category 1 (``CAT1'') being the most significant firms
whose size, interconnectedness, complexity and business type give them
the capacity to cause significant disruption to the UK financial system
by failing, or by carrying on their business in an unsafe manner.\200\
All firms that will be registering as security-based swap dealers in
the United States are CAT1 firms and are assigned several supervisors
to monitor the firm. These supervisors have frequent interactions
(typically daily) with the firms, including regular meetings with the
firm's executive management. Supervisors review information submitted
by a firm and this information is periodically validated, either
through onsite inspection by the PRA supervisory and specialist risk
staff, or by third-parties. Supervisors examine for risks in the firm's
business model and analyze where and how a firm makes money, the risks
involved in doing so, and how the firm is funded. PRA staff regularly
engages with firms on business performance, governance and management,
external context impact, capital, liquidity, risk controls, and
resolvability. The supervisors work with risk specialists and other
staff who offer expertise in certain areas (e.g., credit risk,
operational risk, governance) to monitor the firm.
---------------------------------------------------------------------------

    \200\ Information on the PRA's supervisory approach, including
the factors it uses to divide firms into the different categories,
is available at: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/approach/banking-approach-2018.pdf?la=en&hash=3445FD6B39A2576ACCE8B4F9692B05EE04D0CFE3.
---------------------------------------------------------------------------

    The PRA conducts an annual internal meeting regarding each firm
called a ``periodic summary meeting'' (``PSM'') to discuss the major
risks at the firm, the supervisory strategy, and proposed remedial
actions, including guidance about the adequacy of a firm's capital and
liquidity. After the PSM, the PRA sends an annual letter to each firm
outlining the key risks that are of greatest concern, which require
action by the firm. The PRA verifies that action is taken on the key
risks identified in the PSM, and actively engages with the firm's audit
committee and non-executive directors on the progress made to address
the most significant risks. Less significant issues identified in the
PSM are conveyed to the firm to be addressed autonomously and the PRA
expects confirmation by the most appropriate senior individual within
the firm (e.g., the chief executive officer, finance director, or chair
of the audit committee) that these issues have been closed.
    When the PRA detects supervisory issues at a firm, it has the power
to require firms to take corrective actions, such as conducting an
internal audit or appointing a monitor to review certain aspects of the
firm's regulatory reports. The PRA may also determine that further
information is needed and can, for example, require an external audit,
conduct its own inspection or appoint an independent skilled person
that will produce a report on the topic to the PRA. The PRA may conduct
its own onsite inspection, which involves risk specialists and other