Trading and Markets regarding a April 30, 2018 meeting with
representatives of UBS, April 30, 2018, available at https://www.sec.gov/comments/s7-05-14/s70514-4042895-168865.pdf; Memorandum
from the Division of Trading and Markets regarding a June 4, 2018
meeting with representatives of Credit Suisse, June 5, 2018,
available at https://www.sec.gov/comments/s7-08-12/s70812-3785770-162712.pdf; and Memorandum from the Division of Trading and Markets
regarding a July 18, 2018 meeting with representatives of BNP
Paribas, July 24, 2018, available at https://www.sec.gov/comments/s7-05-14/s70514-4107153-170272.pdf.
    \202\ IIB/SIFMA 8/26/2016 Letter, at page 3.
    \203\ See note 201, supra.
    \204\ See IIB/SIFMA 8/26/2016 Letter, at page 2.
---------------------------------------------------------------------------

    The guidance set forth below regarding the certification and
opinion of counsel requirements would also be relevant to Exchange Act
Rule 3a71-6, which allows SBS Entities to comply with certain
requirements under Section 15F of the Exchange Act through substituted
compliance.\205\ In particular, Paragraph (c)(2)(ii) of Rule 3a71-6
provides that substituted compliance applications by parties or groups
of parties--other than foreign financial regulatory authorities--must
include the certification and opinion of counsel associated with the
SBS Entity registration requirements as if such party were subject to
that requirement at the time of the request.\206\ Recognizing

the expected time necessary for the Commission to consider substituted
compliance applications it receives, the Commission welcomes submission
of such applications with respect to any of its final rules for which
substituted compliance is potentially available. Consistent with this
position, the Commission wishes to clarify that, during the pendency of
this proposal, the Commission will consider all such applications,
including those submitted without a certification or opinion of
counsel, by parties or groups of parties who are not foreign regulatory
authorities.\207\ This clarification, however, does not mean that the
Commission would grant any application for substituted compliance
submitted by such parties or groups of parties until the required
certification and opinion are filed.
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    \205\ Exchange Act Rule 3a71-6.
    \206\ Separately, paragraph (c)(3) of Rule 3a71-6 provides that
foreign financial regulatory authorities may make substituted
compliance requests only if they provide adequate assurances that no
law or policy of any relevant foreign jurisdiction would impede the
ability of any entity that is directly supervised by the foreign
financial regulatory authority and that may register with the
Commission as an SBS Entity to provide the Commission with prompt
access to the entity's books or records, or to submit to on-site
inspection and examination by the Commission. The above guidance
regarding the application of the certification and opinion of
counsel requirements also will inform the Commission's assessment of
whether a foreign financial regulatory authority has provided such
adequate assurances as part of a substituted compliance application.
    \207\ The Commission does not require that applications
submitted by foreign regulatory authorities be accompanied by a
certification or opinion of counsel. Exchange Act Rule 3a71-6(c)(3).
---------------------------------------------------------------------------

1. Foreign Laws Covered by the Certification and Opinion of Counsel
Requirements
    The Commission understands that the security-based swap market and
the security-based swap dealing activities of many firms are global in
scope. In this market, the business of any single security-based swap
dealer, whether a resident or nonresident of the United States, may
span multiple jurisdictions. The certification and opinion of counsel
requirement was intended to address distinct challenges that may arise
with respect to a nonresident SBS Entity that, unlike a resident SBS
Entity, is incorporated or has its principal place of business outside
the United States. In particular, the requirement is intended to
provide a level of assurance regarding the Commission's access to
relevant books and records of a nonresident SBS Entity and its ability
to inspect and examine them.
    Given the underlying objective of this requirement, the Commission
is proposing to provide guidance that it would be appropriate for the
certification and opinion of counsel to address only the laws of the
jurisdiction or jurisdictions in which the nonresident SBS Entity
maintains the covered books and records as described in part IV.B.2,
infra (``covered books and records''). Under this proposed guidance,
the certification and opinion of counsel would not need to cover other
jurisdictions where customers or counterparties of the nonresident SBS
Entity may be located or where the nonresident SBS Entity may have
additional offices or conduct business. For example, if the nonresident
SBS Entity maintains the covered books and records in the jurisdiction
of its incorporation or principal place of business, the certification
and opinion of counsel would address that jurisdiction. If the
nonresident SBS Entity maintains its covered books and records in a
jurisdiction or jurisdictions other than where it is incorporated or
has its principal place of business (e.g., in a jurisdiction where it
maintains a foreign branch office that conducts its security-based swap
activities), the certification and opinion of counsel should address
such jurisdiction or jurisdictions, provided that the laws of the
jurisdiction where the firm is incorporated or jurisdictions in which
it is doing business would not prevent the Commission from having
direct access to the covered books and records, nor prevent the
nonresident SBS Entity from promptly furnishing them to the Commission
or opening them up to the Commission for an on-site inspection or
examination.
    The Commission preliminarily believes that a certification and
opinion of counsel from a nonresident SBS Entity that covers the laws
of the jurisdiction or jurisdictions where its covered books and
records are located, rather than the laws of all possible jurisdictions
where its customers or counterparties may be located or where it may
conduct business, would provide the Commission with a sufficient level
of assurance that it will be able to access the relevant books and
records of nonresident SBS Entities registered with it.
2. Clarification on Covered Books and Records
    One commenter requested that the Commission clarify that the scope
of the certification and opinion of counsel requirement applies only to
``U.S.-Related Records'' (as defined by the commenter) and, for a
nonresident security-based swap dealer subject to the Commission's
capital and margin regulations, ``Financial Records'' (as defined by
the commenter).\208\ The commenter also would limit the scope of the
certification and opinion of counsel to on-site inspection and
examination of books and records located at a U.S. branch or office of
a nonresident security-based swap dealer or U.S. Related Records
located at the nonresident security-based swap dealer's ``U.S.-Related
Foreign Locations'' (as defined by the commenter).\209\ Among other
things, the commenter states that this would ensure Commission access
to the types of records most relevant to the Commission's oversight
responsibilities.\210\
---------------------------------------------------------------------------

    \208\ See IIB/SIFMA 8/26/2016 Letter (proposing that ``U.S.-
Related Records'' be defined to mean ``books and records relating to
security-based swap transactions entered into by the non-resident
security-based swap dealer after the effective date of its
registration (i) with U.S. persons, (ii) for which the nonresident
[security-based swap dealer's] obligations are guaranteed by a U.S.
person or (iii) arranged, negotiated or executed on behalf of the
non-resident [security-based swap dealer] by personnel located in a
U.S. branch or office of the non-resident [security-based swap
dealer] or its agent. Where [a security-based swap dealer] maintains
such books and records in multiple locations, the [security-based
swap dealer] would designate the location that is relevant for
purposes of the certification and opinion;'' and ``Financial
Records'' would be defined to mean ``books and records necessary for
the Commission to assess the non-resident [security-based swap
dealer's] compliance with Commission capital and margin
requirements.'').
    \209\ See id. (proposing that ``U.S.-Related Foreign Locations''
be defined to mean ``non-U.S. branches and offices of the
nonresident [security-based swap dealer] from which personnel
arrange, negotiate or execute [security-based swap] transactions on
behalf of the non-resident [security-based swap dealer] (i) with a
counterparty that is a U.S. person or (ii) for which the non-
resident [security-based swap dealer's] obligations are guaranteed
by a U.S. person'').
    \210\ Id.
---------------------------------------------------------------------------

    The Commission believes that it would be beneficial to propose
guidance on this issue to help firms that must comply with these rules
understand the scope of what is covered by the certification and
opinion of counsel. The Commission is proposing to provide guidance
that the certification and opinion of counsel need only address: (1)
Books and records that relate to the ``U.S. business'' of the
nonresident SBS Entity (as defined in 17 CFR 240.3a71-3(a)(8)); and (2)
financial records necessary for the Commission to assess the compliance
of the nonresident SBS Entity with capital and margin requirements
under the Exchange Act and rules promulgated by the Commission
thereunder, if these capital and margin requirements apply to the
nonresident SBS Entity.
    While this formulation is similar to that suggested by commenters,
the Commission preliminarily believes it would be appropriate to tie
the scope of the books and records covered by the certification and
opinion of counsel to a firm's ``U.S. business'' and relevant

financial records, rather than to propose a new ``U.S. Related
Records'' definition as suggested by the commenter. As the Commission
explained in adopting a definition of ``U.S business'' in the
Commission's Title VII cross-border rules, the intent is to encompass
those transactions that appear particularly likely to affect the
integrity of the security-based swap market in the United States and
the U.S. financial markets more generally or that raise concerns about
the protection of participants in those markets.\211\ Accordingly, this
approach would more effectively tailor the certification and opinion of
counsel to the types of records the Commission would need to review,
inspect or examine to determine compliance with applicable substantive
requirements.
---------------------------------------------------------------------------

    \211\ See Business Conduct Adopting Release, 81 FR at 30065.
---------------------------------------------------------------------------

    Even with such clarification, however, the Commission emphasizes
that, as proposed, Exchange Act Rule 18a-6(g) would require that a
nonresident SBS Entity must provide the Commission with direct access
to its books and records--i.e., the nonresident SBS Entity must
``furnish promptly to a representative of the Commission legible, true,
complete, and current copies'' of its books and records, and permit on-
site inspections and examinations of its books and records.\212\ The
guidance above with respect to the certification and opinion of counsel
would not reduce or eliminate these obligations as they are independent
of, and in addition to, the certification and opinion of counsel
requirement.
---------------------------------------------------------------------------

    \212\ See proposed Rule 18a-6(g) and discussion in Recordkeeping
and Reporting Proposing Release, 79 FR at 25220.
---------------------------------------------------------------------------

3. Consents
    Firms have noted that certain jurisdictions' laws may permit a firm
to promptly provide books and records directly to the Commission and to
submit to an on-site inspection and examination at the offices of the
firm located in the jurisdiction if the firm obtains consent from the
natural person whose information is documented in the books and
records.\213\ In this case, the Commission preliminarily believes that
it would be appropriate for the firm's certification and opinion of
counsel to be predicated, as necessary, on the nonresident SBS Entity
obtaining the prior consent of the persons whose information is or will
be included in the books and records to allow the firm to promptly
provide the Commission with direct access to its books and records and
to submit to on-site inspection and examination.\214\
---------------------------------------------------------------------------

    \213\ See note 201, supra.
    \214\ The firm's opinion of counsel should, as necessary,
address all relevant considerations involving consent.
---------------------------------------------------------------------------

    As noted above, the security-based swap recordkeeping rules as
proposed would require that a nonresident SBS Entity must provide the
Commission with direct access to its books and records. This
requirement exists independently of, and in addition to, the
certification and opinion of counsel requirements. Thus if a
nonresident SBS Entity intends to rely on consents, it should obtain
such consents prior to registering as an SBS Entity so that it will be
able to provide Commission staff with direct access to its books and
records while it is conditionally registered. The certification and
opinion of counsel, if provided at a later date, would be able to rely
on those consents in effect when they are provided. In addition, if a
nonresident SBS Entity certifies that it may rely on consents, it
should continue to obtain consents on an ongoing basis so that it can
continue to provide the Commission with access to books and records. In
determining whether to rely on consent, a nonresident SBS Entity may
also seek to explore whether an alternative basis exists under the
foreign privacy laws that would permit the nonresident SBS Entity to
collect and maintain the necessary data and to provide the information
directly to Commission staff.
    Before registering with the Commission, a nonresident SBS Entity
should assess whether it would be able to meet these obligations and
take appropriate steps to ensure that, if registered, it will be able
to comply with them. For example, if a nonresident SBS Entity is unable
to obtain consent from a customer or counterparty whose information
will be documented in a book or record subject to these obligations or
if a customer or counterparty provides a consent then later withdraws
that consent, the firm may need to cease conducting a security-based
swap business with that person in order to comply with the Exchange Act
and the Commission's rules thereunder or to seek an alternative basis
exists under the foreign laws that allows the nonresident SBS Entity to
satisfy its obligations under the federal securities laws.
4. Open Contracts
    Some firms have asked for clarification that the certification and
opinion of counsel would not need to cover books and records related to
open contracts,\215\ and expressed concern it could require firms to
re-negotiate those contracts.\216\
---------------------------------------------------------------------------

    \215\ For purposes of this guidance, the term ``open contracts''
would include any contract entered into by the SBS Entity prior to
the date on which an SBS Entity submits an application for
registration which the SBS Entity continues to hold on its books and
records and under which it may have continuing obligations.
    \216\ See notes 201 and 209, supra.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the certification and
opinion of counsel need not address the books and records of security-
based swap transactions that were entered into prior to the date on
which a nonresident SBS Entity submits an application for registration
pursuant to Section 15F(b) of the Exchange Act and the rules
thereunder.\217\ The Commission recognizes that there may be practical
impediments to obtaining consents with respect to open contracts
because, for example, the counterparty is in a dispute with the
nonresident SBS Entity. Further, there may be questions of fairness to
the extent that any potential application to open contracts could
undermine the expectations that the parties had when entering into the
security-based swap.
---------------------------------------------------------------------------

    \217\ Cf. Business Conduct Adopting Release, 81 FR at 29969, in
which the Commission stated that the business conduct rules
generally would not apply to any security-based swap entered into
prior to the compliance date of the rules, and generally would apply
to any security-based swap entered into after the compliance date of
these rules, including a new security-based swap that results from
an amendment or modification to a pre-existing security-based swap.
---------------------------------------------------------------------------

5. Commission Arrangements With Foreign Regulatory Authorities or
Approvals, Authorizations, Waivers or Consents
    Firms have noted that while local laws or rules in some foreign
jurisdictions may prevent a nonresident SBS Entity from providing the
Commission with direct access to its books and records or submitting to
onsite inspections or examinations, in some cases the relevant foreign
regulatory authority may have entered into a Memorandum of
Understanding (``MOU'') or other arrangement with the Commission to
facilitate Commission access to records of nonresident SBS Entities
located in the jurisdiction.\218\ Firms have requested guidance
regarding whether the certification and opinion of counsel submitted by
a nonresident SBS Entity can rely on MOUs or other arrangements foreign
regulatory authorities may have entered into with the Commission to
facilitate

Commission access to records at the request of the SBS Entity.
---------------------------------------------------------------------------

    \218\ See note 201, supra.
---------------------------------------------------------------------------

    The Commission preliminarily believes that it would be appropriate,
under the factors discussed below, for the certification and opinion of
counsel to take into account whether the relevant regulatory authority
in the foreign jurisdiction has: (i) Issued an approval, authorization,
waiver or consent; or (ii) entered into an MOU or other arrangement
with the Commission facilitating direct access to the books and records
of SBS Entities located in that jurisdiction, including the
Commission's inspections and examinations at the offices of SBS
Entities located in that jurisdiction, provided that such an approval,
authorization, waiver, consent or MOU or arrangement is necessary to
address legal barriers to the Commission's direct access to books and
records of the SBS Entities in that jurisdiction.
    However, consideration of such an approval or MOU would need to be
consistent with the registration program that has been adopted by the
Commission. Specifically, the Commission stated when adopting the
registration rules that it must be able to access directly the books
and records of nonresident SBS Entities and inspect and examine them
without going through a third party, such as a foreign regulatory
authority, to effectively fulfill its regulatory oversight
responsibilities. Thus, it would not be appropriate to take into
account such an approval or MOU if it contemplates that the nonresident
SBS Entity must provide the covered books and records, as described in
Section IV.A.2. above, to the foreign regulatory authority in order for
that body then to provide them to the Commission.
    At the same time, it would be appropriate to take into
consideration an MOU or other arrangement that provided for
consultation or cooperation with a foreign regulatory authority in
conducting onsite inspections and examinations at the foreign offices
of nonresident SBS Entities. The Commission also believes it would be
consistent with its registration program if the Commission is required
to notify the relevant foreign regulatory authority, as described in
Section IV.A.1. above, of its intent to conduct an onsite inspection or
examination and staff from the foreign regulatory authority can
accompany the Commission when it visits the foreign office of the
nonresident SBS Entity. However, it would not be consistent with the
Commission's interpretation of the requirement to rely on an MOU or
other arrangement if, whether by the terms of any relevant agreement,
under provisions of local law, or in light of prior practice,
consultation or cooperation with the foreign regulatory authority
restricts the Commission's ability to conduct timely inspections and
examinations of the books and records in the foreign office of the
nonresident SBS Entity.
6. Proposed Amendment to Rule 15Fb2-1 Related to the Timing of
Certification and Opinion of Counsel Required by Rule 15Fb2-4(c)(1)
    As described in the SBS Entity Registration Adopting Release, an
SBS Entity is conditionally registered with the Commission when it
submits a complete application on Form SBSE, SBSE-A, or SBSE-BD, as
appropriate, and the Form SBSE-C senior officer certifications.\219\ To
be complete, a Form SBSE, SBSE-A, or SBSE-BD would generally need to
include the Schedule F certification and opinion of counsel. The
Commission acknowledges that a nonresident SBS Entity may be unable to
provide the certification or opinion of counsel required under Rule
15Fb2-4(c)(1) by the time the entity will be required to register
because efforts to address legal barriers to the Commission's direct
access to books and records are still ongoing. For example, the
relevant regulatory authority in the foreign jurisdiction where the
nonresident SBS entity maintains its covered books and records may be
in the process of (i) issuing an approval, authorization, waiver or
consent or (ii) negotiating an MOU or other arrangement with the
Commission. The Commission recognizes that absent relief such
nonresident SBS Entities will bear the cost of lowering or
restructuring the market activity below the annual thresholds that
would trigger registration requirements, an outcome that could create
significant market disruptions.\220\
---------------------------------------------------------------------------

    \219\ 17 CFR 240.15Fb2-1(d).
    \220\ See Registration Adopting Release, 80 FR at 49008.
---------------------------------------------------------------------------

    Accordingly, the Commission is proposing to amend Exchange Act Rule
15Fb2-1 to provide additional time for a nonresident SBS Entity to
submit the certification and opinion of counsel required under Rule
15Fb2-4(c)(1). Specifically, the Commission is proposing new paragraphs
(d)(2) and (e)(2) of Exchange Act Rule 15Fb2-1. Proposed paragraph
(d)(2) would provide that a nonresident applicant that is unable to
provide the certification and opinion of counsel required under Rule
15Fb2-4(c)(1) shall be conditionally registered for up to 24 months
after the compliance date for Rule 15Fb2-1 if the applicant submits a
Form SBSE-C and a Form SBSE, SBSE-A or SBSE-BD, as appropriate, that is
complete in all respects but for the failure to provide the
certification and the opinion of counsel required by Rule 15Fb2-
4(c)(1). Proposed paragraph (e)(2) would provide that if a nonresident
SBS Entity became conditionally registered in reliance on paragraph
(d)(2), the firm would remain conditionally registered until the
Commission acts to grant or deny ongoing registration, and that if the
nonresident SBS Entity fails to provide the certification and opinion
of counsel within 24 months of the compliance date for Rule 15Fb2-1,
the Commission may institute proceedings to determine whether ongoing
registration should be denied. As indicated in the Registration
Adopting Release,\221\ once an SBS Entity is conditionally registered,
all of the Commission's rules applicable to registered SBS Entities
will apply to the entity and it must comply with them. Further, this
proposed relief would be available only for the duration of the 24
month period immediately following the compliance date for Rule 15Fb2-
1.
---------------------------------------------------------------------------

    \221\ Registration Adopting Release, 80 FR at 48970 n.52.
---------------------------------------------------------------------------

B. Solicitation of Comments Regarding Proposed Guidance and Amendments
Related to the Certification and Opinion of Counsel Requirements

    The Commission requests comment on all aspects of the proposed
guidance and amendments.

1. Foreign Laws Covered by the Certification and Opinion of Counsel
Requirements

    a. If the scope of the certification and opinion of counsel
requirements are limited as described above, are there situations in
which a nonresident SBS Entity will nonetheless be unable to provide
the required certification and opinion of counsel because the laws
of another jurisdiction prevent a nonresident SBS Entity from
providing the Commission with access to its books and records? If
so, in what jurisdictions?
    b. Are there any other types of foreign laws, regulations or
requirements that may prevent a nonresident SBS Entity from
providing Commission staff with access to its books and records or
impede the staff's ability to conduct onsite examinations?
    c. Could there be a situation where the laws of a jurisdiction
where customers, counterparties or employees of a nonresident SBS
Entity may be located, but where the nonresident SBS Entity
maintains no books and records, could impose a legal barrier that
would limit or prohibit the nonresident SBS Entity's ability to
either collect personal or transactional data regarding a customer,
counterparty or employee or provide that

data directly to the Commission? If so, should a nonresident SBS
Entity that has customers, counterparties or employees in such a
jurisdiction also be required to include consideration of that
jurisdiction or jurisdictions as part of its certification and
opinion of counsel? In this situation, how could the Commission
staff obtain adequate assurance that it would be able to access a
nonresident registrant's books and records?

2. Clarification on Covered Books and Records

    a. Does the proposed guidance adequately address the concerns
raised by commenters? Would the guidance appropriately define the
scope of the books and records covered by the certification and
opinion of counsel to ``U.S. business'' as defined in Rule 3a71-
3(a)(8) and the financial records of certain registrants? Should
additional books and records be included? If so, which books and
records and why? Alternatively, are there other books and records
that should be excluded from the scope of what is covered by the
certification and opinion of counsel? If so, which books and records
and why?
    b. Rather than using the U.S. business definition, should the
Commission instead follow the approach suggested by the commenter--
to establish definitions for ``U.S. Related Records,'' ``Financial
Records,'' and ``U.S. Related Foreign Locations'' solely for the
purpose of scoping records in or out of the requirements? If so why?
    c. Would the proposed approach limit the Commission's ability to
assess how a nonresident SBS Entity may address conflicts between
the trades with a U.S. counterparty and other trades outside the
U.S.? If so, are there any other methods the Commission could use to
investigate those conflicts?

3. Consents

    a. Does the proposed guidance adequately address the concerns
raised by commenters?
    b. Is reliance on consents a viable option to address not only
data privacy, but secrecy and blocking laws or regulations?
    c. Should the Commission allow nonresident SBS Entities to rely
on consents if the person providing consent is able to later
withdraw that consent? How do nonresident SBS Entities plan to
address situations where a customer, counterparty, employee or other
person later withdraws consent?
    d. If a nonresident SBS Entity intends both to rely on consents
as a basis for its certification and opinion of counsel and to delay
the submission of the certification and opinion of counsel in
reliance on proposed Rule 15Fb2-1(d)(2), should the nonresident SBS
Entity be allowed to operate without consents in place until it
provides the certification and opinion of counsel rather than when
it is conditionally registered as contemplated by the proposed
amendments?
    e. If relying on consents as a basis for the certification and
opinion of counsel, should a nonresident SBS Entity be required to
notify the Commission, as well as make and keep current books and
records to reflect these consents and whether a consent is later
withdrawn?
    f. Should nonresident SBS Entities obtain consents every time
they enter into a new transaction with a counterparty or should a
global consent in a master agreement be sufficient?
    g. Is the consent mechanism a feasible long term solution for
providing the Commission with direct access to an SBS Entity's books
and records and submitting to onsite inspections and examinations?
If not, what are the legal and regulatory challenges for a
nonresident SBS Entity seeking to rely on consents? For example, how
would nonresident SBS Entities subject to the European Union General
Data Protection Regulation (``GDPR'') plan to address guidance that,
due to the nature of the relationship between employees and
employers, employee consent may not be considered to be freely given
under the GDPR,\222\ and that consent might prove not to be a
feasible long term solution for transfers to third countries under
the GDPR? \223\ Are there any other factors that should be
considered such as, for example, the jurisdiction and the type of
law at issue (e.g., privacy, secrecy, blocking statute, etc.)?
---------------------------------------------------------------------------

    \222\ See Article 29 Working Party, Guidelines on consent under
Regulation 2016/679 (adopted Apr. 10, 2018), available at http://ec.europa.eu/newsroom/article29/item-detail.cfm?item_id=623051.
    \223\ See European Data Protection Board, Guidelines 2/2018 on
derogations of Article 49 under Regulation 2016/679 (adopted May 25,
2018), available at https://edpb.europa.eu/sites/edpb/files/files/file1/edpb_guidelines_2_2018_derogations_en.pdf.
---------------------------------------------------------------------------

4. Open Contracts

    a. Would the guidance adequately address the concerns raised by
commenters? Is the date on which a nonresident SBS Entity submits a
registration the appropriate point from which to apply the
certification and opinion of counsel requirement?
    b. Should nonresident SBS Entities nonetheless be required to
provide Commission staff with aggregated information, such as the
number of open contracts, the total dollar value of open contracts,
or percentage of open contracts for which it may have or lack
consent to provide information to regulators?
    c. Should the proposed guidance also exclude contracts open on
the date a nonresident SBS Entity submits a registration where there
is no renegotiation of terms and the position is simply serviced
until it rolls off the firm's books and records? If so, why? Would
that impair the Commission's ability to adequately regulate
nonresident SBS Entities?

5. Reliance on Commission Arrangements With Foreign Regulatory
Authorities

    a. Does the guidance adequately address the concerns that have
been raised in this regard? If not, why not and what additional
guidance is needed?
    b. Should arrangements with foreign regulatory authorities
contain any special language or terms to assure that Commission
staff has direct access to a nonresident SBS Entity's books and
records and the ability to conduct onsite inspections or
examinations?
    c. Are there situations in which multiple foreign regulatory
authorities would enter into an MOU or other arrangement?

6. Proposed Amendment to Rule 15Fb2-1 Related to the Timing of
Certification and Opinion of Counsel Required by Rule 15Fb2-4(c)(1)

    a. Does 24 months from the compliance date for Rule 15Fb2-1
provide an appropriate time period to allow a nonresident SBS Entity
to submit the required certification and opinion of counsel? Should
the Commission shorten the time period? Should the Commission extend
the time period? Should the Commission provide for a process by
which an applicant can submit a request for an extension of time?
For example, where good cause is shown, should the Commission or its
staff be able to extend the time period upon request by a
nonresident firm?
    b. How would the 24 month period facilitate the ability of a
nonresident SBS entity to submit the required certification and
opinion of counsel when foreign blocking laws, privacy laws, secrecy
laws and other foreign legal barriers exist in the jurisdiction
where the offices of the nonresident SBS Entity are located? Are
there circumstances other than those contemplated in Section IV
under which a nonresident SBS Entity would be unable to submit the
required certification and opinion of counsel? If so, would the 24
month period address such circumstances?
    c. Proposed Rule 15Fb2-1(e)(2) provides that if an nonresident
applicant is unable to provide the certification and opinion of
counsel as required by Rule 15Fb2-4(c)(1) within the 24 month time
period, the Commission may institute proceedings to determine
whether ongoing registration should be denied. Should the Commission
adopt a different approach in cases where a nonresident application
fails to provide the certification or opinion of counsel within the
24 month time period? If so, please explain why and provide a
description of the approach. For example, should the Commission
consider the application incomplete if the nonresident applicant is
unable to provide the required certification and opinion of counsel
within the 24 month time period, thereby automatically terminating
the applicant's conditional registration and eliminating the need
for the Commission to institute proceedings to determine whether the
application should be denied? In the alternative, should the
Commission require nonresident applicants to certify that if they do
not provide the certification and opinion of counsel within the 24
month period, they will withdraw from registration and cease any
security-based swap dealing activities that otherwise would require
registration within a specified period after the 24 month period
expires? \224\ If so, what period would be reasonable?
---------------------------------------------------------------------------

    \224\ In other contexts, the Commission has permitted the
registration of a person that was not immediately eligible to
register as an investment adviser, subject to an undertaking that
the person will withdraw from registration if it did not meet the
registration requirements within a specified period of time. See
Rule 203A-2(c) under the Investment Advisers Act of 1940.
---------------------------------------------------------------------------

    d. Should SBS Entities that conditionally register without
signing the Schedule F certification and providing an opinion of
counsel be required to disclose to counterparties the risk that the
Commission

may institute proceedings to deny registration if the firm is, after
24 months, still unable to file with the Commission a complete
Schedule F certification and opinion of counsel? Should the
Commission impose any additional requirements on nonresident SBS
Entities that are conditionally registered pursuant to proposed Rule
15Fb2-1(d)(2)? If so, which requirements and why?
    e. Alternatively, should the Commission eliminate the
certification and opinion of counsel requirements and instead rely
solely on the underlying obligations of the registered nonresident
SBS Entity to comply with all applicable regulatory requirements?
Why or why not?
    f. As an another alternative, should the Commission publish a
list of nonresident SBS Entities registered with it on the
Commission's public website and note the conditional registration
status of any nonresident SBS Entities that have not yet provided a
Schedule F certification and opinion of counsel? Why or why not?
Would provision of this type of information be beneficial to
counterparties?

V. Proposed Amendment to Commission Rule of Practice 194

A. Overview of Proposed Rule of Practice 194(c)(2)

    In furtherance of the goal of more closely harmonizing Commission
rules with the approach followed under the CFTC regime, and based on
renewed concerns raised by certain market participants,\225\ the
Commission is proposing new paragraph (c)(2) of Rule of Practice
194.\226\ Proposed paragraph (c)(2) would provide an exclusion from the
statutory disqualification prohibition in Section 15F(b)(6) of the
Exchange Act for an SBS Entity with respect to an associated person who
is a natural person who (i) is not a U.S. person \227\ and (ii) does
not effect and is not involved in effecting security-based swap
transactions with or for counterparties that are U.S. persons, other
than a security-based swap transaction conducted through a foreign
branch \228\ of a counterparty that is a U.S. person.\229\
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    \225\ See note 243, supra.
    \226\ As discussed above, Exchange Act Section 15F(b)(6)
provides that the Commission may establish exceptions to its
statutory prohibition by ``rule, regulation, or order.'' 15 U.S.C.
78o-10(b)(6). In addition, Exchange Act Section 15F(b)(4) provides
the Commission with authority (other than certain inapplicable
exceptions specified in Exchange Act Section 15F(b)(4)(d) and (e))
to ``prescribe rules applicable to security-based swap dealers and
major security-based swap participants.'' 15 U.S.C. 78o-10(b)(4).
    \227\ The term ``U.S. Person'' is defined in Exchange Act Rule
3a71-3(a)(4). See 17 CFR 240.3a71-3(a)(4).
    \228\ The term ``transaction conducted through a foreign
branch'' is defined in Exchange Act Rule 3a71-3(a)(3). See 17 CFR
240.3a71-3(a)(3).
    \229\ This relief, however, is not relevant to an associated
person effecting or involved in effecting security-based swaps, to
the extent that such person's ``functions are solely clerical or
ministerial,'' given that such persons are excluded from the
definition of associated person under to 15 U.S.C. 78c(a)(70)(B)
and, therefore, not subject to the prohibition in Section 15F(b)(6).
---------------------------------------------------------------------------

    However, an SBS Entity would not be able to avail itself of this
exclusion if the associated person of that SBS Entity is currently
subject to any order described in subparagraphs (A) and (B) of Section
3(a)(39) of the Exchange Act, with the limitation that an order by a
foreign financial regulatory authority \230\ as provided in
subparagraphs (B)(i) and (B)(iii) of Section 3(a)(39) shall only apply
to orders by a foreign financial regulatory authority in the
jurisdiction where the associated person is employed or located. By way
of example, the limitation concerning an associated person of an SBS
Entity who is currently subject to an order described in subparagraphs
(A) and (B) of Exchange Act Section 3(a)(39) would include, among other
things, situations where the associated person of an SBS Entity has
been barred or suspended from being associated with a member of an SRO
\231\ or is subject to an order by the Commission barring or suspending
such person from being associated with certain regulated entities,
including, but not limited to, SBS Entities and broker-dealers.\232\ As
discussed further below, this provision is meant to address situations
where the Commission, CFTC, a SRO (e.g., FINRA), a registered futures
association (the National Futures Association, ``NFA''),\233\ or a
foreign financial regulatory authority has affirmatively made a
determination to not allow an associated person to participate in, for
example, the security-based swap market, some other sector of the U.S.
securities markets (e.g., as broker-dealers or as investment advisers),
some other sector of the U.S. financial market (e.g., the U.S. swap
market) or some sector of the foreign financial markets.
---------------------------------------------------------------------------

    \230\ See 15 U.S.C. 78c(a)(52) (defining the term ``foreign
financial regulatory authority'' to include, among other regulatory
authorities, ``foreign securities authorities'' as defined in
Exchange Act Section 3(a)(50) (15 U.S.C. 78c(a)(50)).
    \231\ See 15 U.S.C. 78c(a)(26) (defining the term ``self-
regulatory organization'').
    \232\ See, e.g., 15 U.S.C. 78c(a)(39)(A) and (B)(i)(II).
    \233\ See 7 U.S.C. 21.
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    Additionally, the exclusion would only apply to associated persons
who are natural persons, as the Commission has separately within Rule
of Practice 194 provided an exclusion for an SBS Entity from the
prohibition in Exchange Act Section 15F(b)(6) with respect to all
associated person entities--regardless of whether the associated person
entity is located within or outside of the U.S.\234\
---------------------------------------------------------------------------

    \234\ See 17 CFR 240.194(c); see also part I.C.3, supra
(discussing the Rule of Practice 194 Adopting Release, 84 FR at
4906).
---------------------------------------------------------------------------

B. Comments Received Requesting That the Commission Provide Relief

    Both before and after the Commission adopted its SBS Entity
registration rules, commenters requested that the Commission provide an
exclusion from or, in the alternative, narrow the scope of, the
prohibition in Exchange Act Section 15F(b)(6) with respect to
associated persons of SBS Entities who are not U.S. persons and who do
not interact with U.S. persons.\235\
---------------------------------------------------------------------------

    \235\ See, e.g., Letter from IIB, dated Aug. 21, 2013 (``IIB 8/
21/13 Letter'') at 20, available at https://www.sec.gov/comments/s7-02-13/s70213-46.pdf; see also IIB/SIFMA 6/21/18 Letter at 2, 4,
available at https://www.sec.gov/comments/s7-05-14/s70514-3938974-167037.pdf; IIB/SIFMA 8/26/16 Letter, at 3-5; Letter from SIFMA,
dated Dec. 16, 2011 (``SIFMA 12/16/11 Letter'') at 8, available at
https://www.sec.gov/comments/s7-40-11/s74011-4.pdf.
---------------------------------------------------------------------------

    For example, in connection with the Commission proposing
registration requirements for SBS Entities, a commenter stated that it
was concerned that the statutory disqualification requirements in
Exchange Act Section 15F(b)(6) would apply to a foreign registered SBS
Entity on an entity-level, as opposed to as a transaction-level
requirement, without regard to the identity of the counterparty and,
therefore, would be applicable to all associated persons of the foreign
registered SBS Entity that effect or are involved in effecting
security-based swap transactions.\236\ The commenter noted that this
would result in situations where non-U.S. associated persons of non-
U.S. SBS Entities who do not interact with U.S. customers would be
subject to the statutory disqualification requirements in Exchange Act
Rule 15Fb6-2(b) and, as a result, non-U.S. associated persons of non-
U.S. SBS Entities would be required to submit to U.S. background checks
for statutory disqualification purposes.\237\ In support of the
commenter's request that the Commission re-categorize the statutory
disqualification requirements as a transaction-level requirement, the
commenter noted that the Commission's current approach diverges from
that adopted by the CFTC,\238\ as well as the Commission's treatment of
``foreign

associated persons'' of foreign broker-dealers.\239\ The commenter also
stated that a transaction-level approach would preserve the
Commission's resources to better serve customer protection interests
within the United States, and that the Commission's interests in
protecting foreign customers are limited, while ``foreign regulators
have a strong interest in regulating such activity.'' \240\ Finally,
the commenter opined that limiting background checks to personnel
interacting with U.S. persons would also help eliminate potential
conflicts with local privacy laws, which in some cases may prohibit
background checks for foreign employees.\241\
---------------------------------------------------------------------------

    \236\ See Registration Adopting Release, 80 FR at 48977 nn.109-
11 (citing IIB 8/21/13 Letter at 20).
    \237\ See IIB 8/21/13 Letter at 20.
    \238\ See id. at 20 (noting that the CFTC does not apply its
statutory disqualification requirements to associated persons of its
registrants who engage in activity outside the United States and
limit such activity to customers located outside the United States).
    \239\ See id. (citing Rule 15a-6(b)(2) and stating that the
Commission, in that rule, limited the definition of ``foreign
associated person'' to those associated persons of a foreign broker
or dealer who participate in the solicitation of certain U.S.
investors).
    \240\ Id.
    \241\ See id.
---------------------------------------------------------------------------

    In response to the commenter, the Commission explained that the
requirements in Rule 15Fb6-2(b) regarding questionnaires or
applications and background checks are important elements of each SBS
Entity's determination with respect to whether its associated persons
that effect or are involved in effecting security-based swap
transactions are subject to statutory disqualifications. The Commission
also stated that it was not convinced, at the time, of the need or
basis to provide an exclusion for SBS Entities from the statutory
disqualification requirements with respect to certain of their
associated persons, and made a determination to treat the statutory
disqualification requirements as entity-level requirements, as opposed
to a transaction-level requirement, applicable to all associated
persons of the registered foreign SBS Entity that effect or are
involved in effecting security-based swap transactions.\242\
---------------------------------------------------------------------------

    \242\ See Registration Adopting Release, 80 FR at 48978.
---------------------------------------------------------------------------

    More recently, market participants have raised the same concerns
expressed in the comment letters outlined above.\243\ For example,
commenters have argued that, because most of the CFTC's rules have been
in effect for several years, greater harmonization would ``help
facilitate prompt implementation of the Commission's Title VII regime
with minimal disruption to the SBS market and robust protections and
lower costs for investors and other end-users.'' \244\ Relatedly, the
Commission also received comments requesting that the Commission
harmonize aspects of its Rule 15Fb6-2(b) with the CFTC's regulations or
allow for substituted compliance.\245\ As discussed above, Rule 15Fb6-
2(b) requires an SBS Entity to obtain a questionnaire or application
for employment--documents that are required under paragraphs (a)(10)
and (b)(8) of proposed Rule 18a-5--which would serve as a basis for a
background check to verify that an associated person is not subject to
statutory disqualification. However, as discussed below in Section
VI.A., the proposed modification to proposed Rule 18a-5 would provide
that a stand-alone or bank SBS Entity is not required to make and keep
current a questionnaire or application for employment executed by an
associated person if the SBS Entity is excluded from the statutory
disqualification prohibition in Exchange Act Section 15F(b)(6) with
respect to such associated person (e.g., the exclusion from the
statutory disqualification prohibition in Section 15F(b)(6) provided by
proposed Commission Rule of Practice 194(c)(2)).
---------------------------------------------------------------------------

    \243\ See, e.g., note 28, supra.
    \244\ IIB/SIFMA 6/21/18 Letter at 1.
    \245\ See IIB/SIFMA 8/26/16 Letter, at 3-5 (requesting that the
Commission exclude associated persons employed or located in a non-
U.S. branch or office of an SBS Entity or an affiliate from the
requirement in Rule 15Fb6-2(b) to prepare and maintain a
questionnaire or application for employment executed by such
associated person where certain conditions are met, including that
the associated person does not effect and is not involved in
effecting security-based swaps with U.S. counterparties on behalf of
the SBS Entity); see also IIB/SIFMA 6/21/18 Letter, at 2.
---------------------------------------------------------------------------

C. Proposed Rule of Practice 194(c)(2)

    Proposed Rule of Practice 194(c)(2) would more closely harmonize
the Commission's rules with the CFTC's approach to statutory
disqualification as it applies to the activities of non-domestic
associated persons of CFTC registered Swap Entities. Under CEA Section
4s(b)(6), which parallels Exchange Act Section 15F(b)(6), and CFTC
staff's related guidance \246\ Swap Entities are not required to comply
with the prohibition in CFTC Regulation 23.22(b) with respect to non-
domestic associated persons who deal only with non-domestic swap
counterparties.\247\ Absent such relief, a Swap Entity would be subject
to the prohibition in CFTC Regulation 23.22(b) even with respect to an
associated person who engages in activity from a location outside the
United States and even when such person limits their activity to
counterparties located outside the United States.\248\
---------------------------------------------------------------------------

    \246\ Under the CFTC's and the NFA's current process for
granting relief from CEA Section 4s(b)(6)--which is available
through no-action relief granted by CFTC staff with respect to
persons that are not exempt from Section 4s(b)(6) pursuant to CFTC
Regulation 23.22(b)--a swap entity may make an application to the
NFA, the sole registered futures association, to permit an
associated person of a Swap Entity subject to a statutory
disqualification to effect or be involved in effecting swaps on
behalf of the swap entity. See CFTC Letter No. 12-15, at 5-8 (Oct.
11, 2012), available at<EMAIL_ADDRESS>    \247\ See CFTC Letter No. 12-43 (Dec. 7, 2012) at 2-4, available
at<EMAIL_ADDRESS>Specifically, CFTC
staff stated in the letter, in relevant part, that staff's no-action
position was limited to associated persons who effect or are
involved in effecting swaps from a location outside of the United
States, its territories or possessions, and limit such activities to
counterparties located outside the United States, its territories or
possessions. CFTC staff also noted that the no-action positions
provided in this letter represent the positions of CFTC staff only,
and do not necessarily represent the positions of the CFTC or its
Commissioners.
    \248\ See id. at 4.
---------------------------------------------------------------------------

    In proposing Rule of Practice 194(c)(2), the Commission is seeking
to balance harmonization with the approach to regulating the activities
that non-domestic associated persons of Swap Entities engage in under
the CFTC regime and the attendant benefits and cost savings against the
potential effect of certain risks, including financial, counterparty,
compliance, and reputational risks of having statutorily disqualified
associated persons effecting or involved in effecting security-based
swap transactions for registered SBS Entities.
    Given the high degree of integration between the swap and security-
based swap markets,\249\ more closely aligning with the existing
baseline for disqualification of swap dealer personnel could result in
certain benefits, such as reducing regulatory complexity and lessening
costs on market participants that are dually-registered as Swap
Entities with the CFTC. For example, as a result of the proposed
exclusion, SBS Entities dually-registered as Swap Entities with the
CFTC could experience economies of scope in employing non-U.S. natural
persons in their swap and security-based swap businesses.\250\ As
discussed in the Rule of Practice 194 Adopting Release, the Commission
estimates that approximately 46 out of 50 entities likely to register
with the Commission as security-based swap dealers are already
registered with the CFTC as

swap dealers.\251\ The proposed exclusion should, at least to some
extent, reduce the likelihood of security-based swap dealers exiting
the security-based swap business and, as a result, not registering with
the Commission, which could affect competition in the provision of
security-based swap dealing services.
---------------------------------------------------------------------------

    \249\ See part VII.D, infra (noting that the swap and security-
based swap markets involve largely the same group of dealers and
most of the same counterparties).
    \250\ See part VII.D.1, infra.
    \251\ See Rule of Practice 194 Adopting Release, 84 FR at 4935-
36 (discussing the economic baseline for Rule of Practice 194 and
stating that approximately 46 out of 50 entities likely to register
with the Commission as security-based swap dealers are already
registered with the CFTC as swap dealers).
---------------------------------------------------------------------------

    Absent the proposed exclusion, SBS Entities would be unable to have
an associated person subject to a statutory disqualification, who would
be permitted to effect certain swap transactions under the CFTC's
approach, also effect security-based swap transactions, unless the SBS
Entity obtained relief from the Commission under Rule of Practice 194.
This difference between the CFTC's approach and the Commission's rules
would result in costs related to replacing or reassigning statutorily
disqualified associated non-U.S. persons or applying to the Commission
for relief. In addition, this difference could disrupt existing
counterparty relationships across closely linked swap and security-
based swap markets. However, under the proposed exclusion, non-U.S.
person counterparties of SBS Entities would be able to continue
interacting with the same non-U.S. associated persons of the same SBS
Entities across interconnected markets without delays related to
Commission review under Rule of Practice 194. As noted above, this may
result in lower transaction costs for SBS Entities that, in turn, may
flow to both their U.S. and non-U.S. person counterparties.
    This proposal is consistent with exceptions the Commission provided
in its business conduct rules for SBS Entities.\252\ The Commission
also notes that, in adopting the definition of ``U.S. business''--which
does not include transactions conducted through a foreign branch of a
U.S. person \253\--the Commission stated that it is concerned
principally with those transactions that appear particularly likely to
affect the integrity of the security-based swap market in the United
States and the U.S. financial markets more generally or that raise
concerns about the protection of participants in those markets.\254\
The Commission explained that this exception reflected its view at the
time that transactions between the foreign branch of a U.S. person and
a non-U.S. person, in which the personnel arranging, negotiating, and
executing the transaction are all located outside the United States,
are less likely to affect the integrity of the U.S. market and reflects
the Commission's consideration of the role of foreign regulators in
non-U.S. markets.\255\ As the Commission has explained previously, the
Dodd-Frank Act generally is concerned with the protection of U.S.
markets and participants in those markets.\256\
---------------------------------------------------------------------------

    \252\ Under Exchange Act Rule 3a71-3(c), a registered security-
based swap dealer, with respect to its ``foreign business'' (as that
term is defined in Rule 3a71-3(a)(9)), shall not be subject to
requirements of the Commission's business conduct rules--other than
the supervision requirements pursuant to Exchange Act Section
15F(h)(1)(B). See also Exchange Act Rule 3a67-10(d) (providing an
analogous exclusion for registered U.S. major security-based swap
participants).
    \253\ See 17 CFR 3a71-3(a)(8)(i)-(ii).
    \254\ See ``Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants,'' Exchange Act
Release No. 77617, (Apr. 14, 2016) 81 FR 29960, 30065 (May 13, 2016)
(``Business Conduct Adopting Release'').
    \255\ See id. at 30065-66, n.1330 (citing the Cross-Border
Proposing Release, 78 FR at 31017).
    \256\ See id. at 30065.
---------------------------------------------------------------------------

    The proposed amendment would exclude, subject to certain
limitations, SBS Entities from the statutory disqualification
prohibition in Exchange Act Section 15F(b)(6) with respect to their
associated natural persons who (i) are not U.S. persons and (ii) do not
effect and are not involved in effecting security-based swap
transactions with or for counterparties that are U.S. persons, other
than a security-based swap transaction conducted through a foreign
branch of a counterparty that is a U.S. person.
    As the Commission discussed in the Rule of Practice 194 Adopting
Release,\257\ and in part VII.D.2 of the Economic Analysis below, the
Commission appreciates that there is a dearth of research on the
economic effect of statutory disqualification in derivatives markets,
and the broader economic research on other markets is somewhat
ambiguous. Nevertheless, some research suggests that increasing the
ability of a statutorily disqualified person to continue to effect or
be involved in effecting transactions on behalf of a registered SBS
Entities may give rise to higher compliance and counterparty risks, may
increase adverse selection costs,\258\ and may reduce competition among
higher quality associated persons.\259\ On the other hand, some
research suggests that greater flexibility in employing disqualified
persons may actually increase competition among SBS Entities and their
associated persons and benefit counterparties.\260\
---------------------------------------------------------------------------

    \257\ See Rule of Practice 194 Adopting Release, 84 FR at 4941.
    \258\ See note 477, infra (noting that, with respect to a
problem commonly known as adverse selection, when information about
counterparty quality is scarce, market participants may be less
willing to enter into transactions and the overall level of trading
may fall).
    \259\ See part VII.D, infra.
    \260\ See id.; see also Jonathan Berk & Jules H. van Binsbergen,
``Regulation of Charlatans in High-Skill Professions'' (Stanford
University Graduate School of Business, Research Paper No. 17-43,
2017), available at https://ssrn.com/abstract=2979134.
---------------------------------------------------------------------------

    The Commission also notes that the scope of conduct that gives rise
to disqualification is broad and includes conduct that may not pose
ongoing risks to counterparties.\261\ In addition, because the
overwhelming majority of dealers and most counterparties transact
across both swap and security-based swap markets, differential
regulatory treatment of disqualification in swap and security-based
swap markets may increase costs of intermediating transactions for some
SBS Entities, which may be passed along to counterparties in the form
of higher transaction costs, and may disrupt existing counterparty
relationships.\262\
---------------------------------------------------------------------------

    \261\ See id.
    \262\ See id.
---------------------------------------------------------------------------

    The potential for increased risk may be mitigated by other factors.
For example, the proposed exclusion would not limit or otherwise affect
the Commission's existing authority to institute proceedings under
Exchange Act Section 15F(l)(3) to censure, place limitations on the
activities or functions of such person, or suspend for a period not
exceeding 12 months, or bar such person from being associated with an
SBS Entity.\263\ In addition, SBS Entities may choose not to use this
proposed exclusion if the reputational and compliance risks associated
with hiring and retaining statutorily disqualified persons may outweigh
the costs SBS Entities may face if they decide to fire or replace
statutorily disqualified persons who may otherwise have valuable
skills, expertise, or counterparty relationships.\264\ Furthermore, the
security-based swap market is largely an institutional one,\265\ and
institutional counterparties (e.g., banks, pension funds and insurance
companies) may be better able to mitigate or offset the potential for
higher counterparty risks, including, by among

other things, requesting, as a business practice, representations that
the associated persons they deal with have not triggered an event
giving rise to statutory disqualification.
---------------------------------------------------------------------------

    \263\ See 15 U.S.C. 78o-10(l)(3); see also 15 U.S.C. 78u-3
(authorizing cease-and-desist proceedings by the Commission). Accord
Rule of Practice 194 Adopting Release, 84 FR at 4912 n.72
(discussing the same statutory authority).
    \264\ See part VII.D.1 and VII.D.2, infra.
    \265\ See id. (citing the economic baseline in the Rule of
Practice 194 Adopting Release, and noting that investment advisers,
banks, pension funds, insurance companies, and ISDA-recognized
dealers account for 99.8% of security-based swaps transaction
activity).
---------------------------------------------------------------------------

    Accordingly, the Commission is proposing an exclusion from the
statutory disqualification prohibition in Section 15F(b)(6) of the
Exchange Act for SBS Entities with respect to an associated person who
is a natural person who: (i) Is a not a U.S. person, and (ii) does not
effect and is not involved in effecting security-based swap
transactions with or for counterparties that are U.S. persons, other
than a security-based swap transaction conducted through a foreign
branch of a counterparty that is a U.S. person. The Commission also
notes that, as discussed further below in Section VI.A., proposed
modifications to proposed Rule 18a-5 would provide that a stand-alone
or bank SBS Entity is not required to make and keep current a
questionnaire or application for employment executed by an associated
person if the SBS Entity is excluded from the statutory
disqualification prohibition in Exchange Act Section 15F(b)(6) with
respect to such associated person (e.g., the exclusion proposed in Rule
of Practice 194(c)(2)).

D. Limitation on Proposed Rule of Practice 194(c)(2)

    The Commission also is proposing a limitation where an SBS Entity
would not be able to avail itself of the exclusion from the prohibition
in Exchange Act Section 15F(b)(6) as set forth in proposed paragraph
(c)(2)--and would therefore need to use the process outlined in Rule of
Practice 194 to seek relief from the statutory prohibition in Exchange
Act Section 15F(b)(6).
    Under the proposed limitation, an SBS Entity would not be able to
avail itself of the exclusion if the associated person of that SBS
Entity is currently subject to an order that prohibits such person from
participating in the U.S. financial market, including the U.S.
securities or swap market, or foreign financial markets. More
specifically, an SBS Entity would not be able to avail itself of the
exclusion from the prohibition in Exchange Act Section 15F(b)(6) set
forth in proposed paragraph (c)(2) with respect to an associated person
if that associated person is currently subject to an order described in
subparagraphs (A) and (B) of Section 3(a)(39) of the Exchange Act, with
the limitation that an order by a foreign financial regulatory
authority described in subparagraphs (B)(i) and (B)(iii) of Section
3(a)(39) shall only apply to orders by a foreign financial regulatory
authority in the jurisdiction where the associated person is employed
or located. For example, this would include current orders, which are
still in effect, from the Commission, the CFTC, an SRO (e.g., FINRA), a
registered futures association (e.g., the NFA), or a foreign financial
regulatory authority in the jurisdiction where the associated person is
employed or located (e.g., the Financial Conduct Authority), that
suspends or bars such person from being associated with any entity
regulated by such authorities or otherwise places limitations on the
activities or functions of the associated person.\266\ As another
example, the exclusion from the prohibition in Exchange Act Section
15F(b)(6) would also not be available in cases where the CFTC, an SRO,
a registered futures association, or a foreign financial regulatory
authority where the associated person is employed or located has, as
applicable, issued an order that that denies, revokes, cancels,
suspends the membership, association, registration or listing as a
principal with respect to the associated person.\267\ In these
circumstances, for example, the Commission, the CFTC, an SRO, a
registered futures association or a foreign financial regulatory
authority will have affirmatively made a determination to not allow an
associated person to participate in the U.S. securities markets
generally (e.g., as an associated person of a broker-dealer or
investment adviser), some other sector of the U.S. financial market
(e.g., the U.S. swap market), or some sector of the foreign financial
markets. The Commission preliminarily believes that an SBS Entity
should not be able to avail itself of the exclusion in proposed
paragraph (c)(2) with respect to such associated persons given this
prior determination by the relevant regulatory authorities.
---------------------------------------------------------------------------

    \266\ By way of example, Exchange Act Section 15F(l)(3) provides
the Commission with authority to institute proceedings under to
censure, place limitations on the activities or functions of such
person, or suspend for a period not exceeding 12 months, or bar such
person from being associated with an SBS Entity. See 15 U.S.C. 78o-
10(l)(3).
    \267\ For example, under Exchange Act Section 15A(g)(2), 15
U.S.C. 78o-3(g)(2), where it is necessary or appropriate in the
public interest or for the protection of investors, the Commission
may, by order, direct the SRO to deny membership to any registered
broker or dealer, and bar from becoming associated with a member any
person, who is subject to a statutory disqualification. Section
17(h) of the CEA provides for the CFTC to review certain NFA
decisions, including the NFA's disciplinary actions and member
responsibility actions, as do the CFTC's Part 171 Rules, 17 CFR
171.1-171.50.
---------------------------------------------------------------------------

E. Solicitation of Comments Regarding Proposed Amendment to Commission
Rule of Practice 194

    The Commission is requesting comment regarding all aspects of
proposed paragraph (c)(2) of Rule of Practice 194, including any of the
potential benefits, risks and costs outlined above or in the Economic
Analysis below, as well as any concerns, including investor protection
concerns. The Commission also seeks comment on the specific questions
below. The Commission particularly requests comment from entities that
intend to register as SBS Entities and that anticipate making an
application under proposed Rule of Practice 194, as well as
counterparties to such SBS Entities. This information will help inform
the Commission's consideration of proposed paragraph (c)(2) of Rule of
Practice 194.

    1. Are there other potential benefits to the exclusion provided
in proposed Rule of Practice 194(c)(2) that are not outlined in the
proposal? Are there other potential risks or costs to this proposed
exclusion that are not outlined in the proposal? Does the exclusion
provided in proposed Rule of Practice 194(c)(2) appropriately
consider the potential benefits, risks and costs? In each instance,
please explain why or why not.
    2. Proposed Rule of Practice 194(c)(2) would apply to all SBS
Entities, whether U.S. persons or nonresident SBS Entities. Do
commenters agree with this approach? Why or why not?
    3. Proposed Rule of Practice 194(c)(2) would apply to an
associated person who is a natural person who (i) is not a U.S.
person and (ii) does not effect and is not involved in effecting
security-based swap transactions with or for counterparties that are
U.S. persons, other than a security-based swap transaction conducted
through a foreign branch of a counterparty that is a U.S. person. Do
commenters agree with this approach? Why or why not?
    4. Under Proposed Rule of Practice 194(c)(2), an SBS Entity
would not be able to avail itself of the exclusion if the following
limitation applies: if the associated person of that SBS Entity is
currently subject to an order described in subparagraphs (A) and (B)
of Section 3(a)(39) of the Exchange Act, with the limitation that an
order by a foreign financial regulatory authority described in
subparagraphs (B)(i) or (B)(iii) of Section 3(a)(39) shall only
apply to orders by a foreign financial regulatory authority in the
jurisdiction where the associated person is employed or located. Do
commenters agree with these limitations? Why or why not? Should the
Commission require any additional conditions or limitations to the
proposal? If so, please explain what additional conditions or
limitations should apply.
    5. Are there any other categories of associated persons of an
SBS Entity for which the Commission should provide an exclusion from
the statutory prohibition in

Exchange Act Section 15F(b)(6)? If so, please specify the category
and the reasons for requesting the Commission to exclude that
category of associated person from the statutory prohibition.
    6. Would the exclusion from the statutory disqualification
prohibition for certain foreign associated persons under the
proposed approach differ materially from relief provided with
respect to the corresponding prohibition under the CEA or rules and
regulations thereunder? If so, please describe any differences,
including any compliance or other challenges posed by such
differences.
    7. As described above, in the Registration Adopting Release the
Commission included an interpretation of the scope of the phrase
``involved in effecting security-based swaps,'' as that phrase is
used in Exchange Act Section 15F(b)(6).\268\ Based on this
interpretation, are there additional categories of non-U.S.
associated persons of an SBS Entity that should be excluded from the
statutory disqualification prohibition in Section 15F(b)(6)? If so,
please describe the functions carried out by such non-U.S.
associated persons of an SBS Entity and why you believe those
functions do not present the types of concerns addressed by the
prohibition on associating with a statutorily disqualified person.
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    \268\ See Registration Adopting Release, 80 FR at 48974, 48976.
Specifically, the Commission stated that the term ``involved in
effecting security-based swaps'' generally means engaged in
functions necessary to facilitate the SBS Entity's security-based
swap business, including, but not limited to the following
activities: (1) Drafting and negotiating master agreements and
confirmations; (2) recommending security-based swap transactions to
counterparties; (3) being involved in executing security-based swap
transactions on a trading desk; (4) pricing security-based swap
positions; (5) managing collateral for the SBS Entity; and (6)
directly supervising persons engaged in the above-described
activities. See id.
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VI. Proposed Modifications to Proposed Rule 18a-5

A. Proposed Rule

    The Commission proposed recordkeeping, reporting, and notification
requirements applicable to SBS Entities, securities count requirements
applicable to certain SBS Entities, and additional recordkeeping
requirements applicable to broker-dealers to account for their
security-based swap and swap activities.\269\ The proposed requirements
were modeled on existing broker-dealer requirements.\270\ The
Commission received a number of comments in response to these
proposals.\271\ Separately, the Commission proposed rules governing the
cross-border treatment of recordkeeping and reporting requirements with
respect to SBS Entities.\272\ The Commission received comments to the
cross-border proposals as well.\273\
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    \269\ See Recordkeeping and Reporting Proposing Release.
    \270\ See id. at 25196-97 (proving the rationale for modeling
the proposed requirements on the relevant broker-dealer
requirements).
    \271\ The comment letters are available at https://www.sec.gov/comments/s7-05-14/s70514.shtml.
    \272\ See Cross-Border Proposing Release.
    \273\ The comment letters are available at https://www.sec.gov/comments/s7-02-13/s70213.shtml.
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    In the Recordkeeping and Reporting Proposing Release, the
Commission proposed new Exchange Act Rule 18a-5 (patterned after
Exchange Act Rule 17a-3--the recordkeeping rule for registered broker-
dealers), to establish recordkeeping standards for stand-alone and bank
SBS Entities.\274\ As part of that rulemaking, the Commission proposed
to require that a stand-alone or bank SBS Entity make and keep current
a questionnaire or application for employment for each associated
person who is a natural person and, in the case of bank SBS Entities,
whose activities relate to the bank SBS Entity's business as an SBS
Entity. The proposal required that the questionnaire or application for
employment include an associated person's identifying information,
business affiliations for the past ten years, relevant disciplinary
history, relevant criminal record, and place of business, among other
things.\275\ The Commission also proposed a definition of the term
associated person that would include persons associated with an SBS
Entity as defined under Section 3(a)(70) of the Exchange Act.\276\
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    \274\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25205.
    \275\ Paragraph (b)(8) of proposed Rule 18a-5.
    \276\ Paragraph (c) of proposed Rule 18a-5.
---------------------------------------------------------------------------

    One commenter requested that the Commission modify the proposed
rule for foreign SBS Entities so that the questionnaire requirement
would not apply to associated persons who effect or are involved in
effecting security-based swap transactions with non-U.S. persons or
foreign branches.\277\ In a subsequent letter, the commenter also
requested that the proposal be modified to exclude from the
questionnaire requirement an associated person employed or located in a
non-U.S. branch, office, or affiliate of the firm in circumstances
where: (1) Applicable non-U.S. law prohibits the firm from conducting
background checks on the associated person and consent does not cure
the prohibition or may not be a condition of employment; (2) the
associated person is not subject to a statutory disqualification that
the firm actually knows about; (3) the associated person does not
effect and is not involved in effecting security-based swaps with U.S.
counterparties on behalf of the firm; and (4) the associated person
complies with applicable registration and licensing requirements in the
jurisdiction(s) where he or she effects or is involved in effecting
security-based swaps on behalf of the firm.\278\ This commenter also
suggested that the proposal be modified to permit an SBS Entity to use
alternative measures to confirm that a non-resident associated person
is not subject to a statutory disqualification in situations where (1)
using a standard U.S. questionnaire or application and background check
would conflict with local law or the associated person does not
interact with U.S. counterparties, and (2) the associated person
complies with applicable registration or licensing requirements in the
jurisdictions where the associated person is located.\279\
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    \277\ See SIFMA 9/5/2014 Letter.
    \278\ See IIB/SIFMA 8/26/2016 Letter.
    \279\ See IIB/SIFMA 6/21/2018 Letter.
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is appropriate to
provide flexibility with respect to the questionnaire requirement as
applied to associated persons of both stand-alone and bank SBS
Entities. Thus, the Commission is proposing to add two sets of
exemptions under new paragraphs (a)(10) and (b)(8) to proposed Rule
18a-5.
     The first exemption would provide that an SBS Entity need
not make and keep current a questionnaire or application for employment
with respect to any associated person if the SBS Entity is excluded
from the prohibition in Exchange Act 15F(b)(6). This could include, for
example, a situation in which the SBS Entity relies on the exclusion
pursuant to proposed Rule of Practice 194(c)(2) as discussed above with
respect to a non-U.S. associated person who does not effect and is not
involved in effecting security-based swap transactions with or for a
counterparty that is a U.S. person, other than a security-based swap
transaction conducted through a foreign branch of a counterparty that
is a U.S. person.
     The second exemption would provide that a questionnaire or
application for employment executed by an associated person that is not
a U.S. person need not include certain information if the receipt of
that information, or the creation or maintenance of records reflecting
that information, would result in a violation of applicable law in the
jurisdiction in which the associated person is employed or located. In
accordance with Rule 15Fb6-2, this exemption would be available with
respect to non-U.S. associated persons that effect or are involved in
effecting security-based transactions on behalf of the SBS Entity

with counterparties that are U.S. persons, as well as counterparties
that are not.
1. Exemption Based on the Exclusion From the Prohibition Under Section
15F(b)(6)
    The Commission is proposing to add new paragraphs (a)(10)(iii)(A)
and (b)(8)(iii)(A) to proposed Rule 18a-5. As discussed above, the
questionnaire requirement is intended to serve as a basis for a
background check of the associated person to verify that the person is
not subject to statutory disqualification under Section 15(b)(6), and
so to support the certification required under Rule 15Fb6-2(b). These
new paragraphs would provide that a stand-alone or bank SBS Entity is
not required to make and keep current a questionnaire or application
for employment with respect to an associated person if the stand-alone
or bank SBS Entity is excluded from the prohibition in Section
15F(b)(6) of the Exchange Act with respect to that associated person.
The proposed modifications would complement the Commission's proposal,
discussed above in Section V.C., to amend Rule of Practice 194 to
provide an exclusion from the prohibition in Section 15F(b)(6) of the
Exchange Act with respect to an associated person who is not a U.S.
person and does not effect and is not involved in effecting security-
based swap transactions with or for counterparties that are U.S.
persons, other than a security-based swap transaction conducted through
a foreign branch of a counterparty that is a U.S. person, subject to
certain conditions. Given that the proposed amendment to Rule of
Practice 194 would allow an SBS Entity to exclude such associated
persons when making the certification required by Rule 15Fb6-2(a), the
Commission preliminarily believes that it is unnecessary to require
that the SBS Entity make and keep current the questionnaire or
application for employment contemplated by proposed paragraphs 18a-
5(a)(10)(i) and (b)(8)(i) with respect to those associated persons.
Thus, under proposed Rule 18a-5 paragraphs (a)(10)(iii)(A) and
(b)(8)(iii)(A), an SBS Entity generally would not be required to obtain
the questionnaire or application for employment, otherwise required by
proposed Rule 18a-5, with respect to any associated person who is not a
U.S. person and who does not effect and is not involved in effecting
security-based swap transactions with or for counterparties that are
U.S. persons (other than a security-based swap transaction conducted
through a foreign branch of a counterparty that is a U.S. person). More
broadly, proposed new paragraphs (a)(10)(iii)(A) and (b)(8)(iii)(A)
would provide that an SBS Entity need not make and keep current a
questionnaire or application for employment with respect to any
associated person if the SBS Entity is excluded from the prohibition in
Exchange Act 15F(b)(6) with respect to that associated person.
2. Exemption Based on Local Law
    The Commission also is proposing to add new paragraphs
(a)(10)(iii)(B) and (b)(8)(iii)(B) to proposed Rule 18a-5 to address
situations where the law of a non-U.S. jurisdiction in which an
associated person is employed or located may prohibit a stand-alone or
bank SBS Entity from receiving, creating or maintaining a record of any
of the information mandated by the questionnaire requirement.
Specifically, the provisions would apply to an associated person who is
not a U.S. person (as defined in Exchange Act Rule 3a71-
3(a)(4)(i)(A)),\280\ and would be available, in accordance with Rule
15Fb6-2, to non-U.S. associated persons who effect or are involved in
effecting security-based swaps transactions on behalf of an SBS Entity.
Paragraphs (a)(10)(iii)(B) and (b)(8)(iii)(B) to proposed Rule 18a-5
would permit the exclusion of certain information mandated by the
questionnaire requirement with respect to those associated persons if
the receipt of that information, or the creation or maintenance of
records reflecting such information, would result in a violation of
applicable law in the jurisdiction in which the associated person is
employed or located. Rather than fully excluding these associated
persons from the questionnaire requirement, the provisions would
provide that the stand-alone or bank SBS Entity need not record
information mandated by the questionnaire requirement with respect to
such associated persons if the receipt of that information, or the
creation or maintenance of records reflecting such information, would
result in a violation of applicable law in the jurisdiction in which
the associated person is employed or located.\281\
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    \280\ Exchange Act Rule 3a71-3(a)(4)(i)(A) defines the term U.S.
person to mean, with respect to natural persons, ``a natural person
resident in the United States.''
    \281\ To the extent an nonresident SBS Entity is able to rely on
either paragraph (a)(10)(iii)(A) or (b)(8)(iii)(A) with respect to a
particular associated person, the firm would not need to also rely
on the relief provided under (a)(10)(iii)(B) or (b)(8)(iii)(B)
because the firm would be exempt from the questionnaire requirement
with respect to that associated person.
---------------------------------------------------------------------------

    This proposed change is designed to address commenters' concerns,
and would provide SBS Entities with flexibility to not record
information that might result in a violation of the law in the
jurisdiction in which the associated person is employed or located,
while continuing to require that they record information not restricted
by the law in that jurisdiction. SBS Entities should still make and
keep current information included in the questionnaire or application
requirement that would not result in a violation of local law. In
addition, if an SBS Entity would be able to obtain the information
required by the questionnaire or application requirement if it obtained
the consent of the associated person, the SBS Entity generally should
try to obtain such consent before relying on new paragraphs
(a)(10)(iii)(B) and (b)(8)(iii)(B).\282\
---------------------------------------------------------------------------

    \282\ However, we recognize that there may be other issues
raised with respect to consents. See part IV.A.2, supra.
---------------------------------------------------------------------------

    As noted above, the questionnaire serves as a basis for a
background check of the associated person to verify that the person is
not subject to a statutory disqualification, which in turn supports the
substantive prohibition in Section 15F(b)(6) of the Exchange Act and
the related certification and background check requirements in Rule
15Fb6-2.\283\ The Commission recognizes that there may be various means
by which an SBS Entity could meet its obligations under Section
15F(b)(6) of the Exchange Act and Rule 15Fb6-2. In the release adopting
Rule 15Fb6-2, the Commission did not prescribe a particular means by
which an SBS Entity must conduct the required background check.\284\
Rather, the Commission indicated that whatever steps are taken, the SBS
Entity must have sufficient comfort to be able to comply with Section
15F(b)(6) of the Exchange Act, and make the certification required by
Rule 15Fb6-2.\285\ While an SBS Entity may be prohibited by local laws
from obtaining certain information from an associated person, the SBS
Entity may still be able to review public records (in foreign

jurisdictions or in the U.S.) or take other steps to help provide it
with sufficient comfort to comply with Section 15F(b)(6). The
Commission emphasizes that every SBS Entity must still comply with
Section 15F(b)(6) of the Exchange Act and Rule 15Fb6-2 with respect to
every associated person that is not subject to an exclusion from the
statutory disqualification prohibition in Section 15F(b)(6) of the
Exchange Act.
---------------------------------------------------------------------------

    \283\ See 17 CFR 240.15Fb6-2(b); see also ``Registration of
Security-Based Swap Dealers and Major Security-Based Swap
Participants,'' 76 FR 65784 (Oct. 24, 2011), and the discussion
regarding proposed Rule 15Fb6-1(b) at 65796. Proposed paragraph
15Fb6-1(b) was not adopted because it was duplicative of the
requirement in the Recordkeeping and Reporting Proposing release.
Specifically, the Commission stated in the Registration Adopting
Release, ``We do not believe that it would be efficient or necessary
to repeat the same requirement for obtaining such questionnaires or
applications in two separate Commission rules.'' See Registration
Adopting Release, 80 FR at 48978.
    \284\ See id. at 48977.
    \285\ 17 CFR 240.15Fb6-2.
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B. Solicitation of Comments Regarding Proposed Modifications to
Proposed Rule 18a-5

    The Commission requests comment on all aspects of these proposed
modifications to proposed Rule 18a-5 and the guidance described above.

    1. Will the proposed modifications adequately address the
concerns raised by the commenter? If not, why not, and what further
modifications should the Commission make?
    2. Are there processes that foreign regulators use in lieu of
employing an equivalent to the questionnaire requirement? If so,
please cite examples.
    3. What information do entities that may seek to register as SBS
Entities currently collect regarding their employees as part of
their normal operations for various purposes (e.g., to pay
employees, to pay taxes, to provide employees with other benefits,
and to know what functions each employee performs and who supervises
them)?
    4. Section 15F(b)(6) generally makes it illegal to permit a
person who is subject to a statutory disqualification to effect or
be involved in effecting security-based swaps on behalf of an SBS
Entity if the SBS Entity ``knew, or in the exercise of reasonable
care should have known'' of the statutory disqualification. Should
the Commission provide guidance on the minimum level of due
diligence in which an SBS Entity must engage to satisfy that
``reasonable care'' standard in the event that the receipt of
information, or the creation or maintenance of records reflecting
information that would otherwise be required under Rule 18a-5, would
result in a violation of applicable law in the jurisdiction in which
the associated person is employed or located? If so, what guidance
should the Commission provide, and why?
    5. Would the laws in jurisdictions other than the jurisdiction
where an associated person is employed or located limit an SBS
Entity's ability to make and retain information contained in the
questionnaire or application for employment? If so, should proposed
paragraphs (a)(10)(iii)(B) and (b)(8)(iii)(B) be modified to instead
focus on the laws of other jurisdictions? For instance, should these
paragraphs instead focus on the law of the jurisdiction in which an
SBS Entity is incorporated, or where the SBS Entity maintains its
books and records? Why or why not? Or, should these proposed
paragraphs be expanded to include other jurisdictions? Why or why
not? Alternatively, should the rule be more narrowly focused on
either where the associated person is ``employed'' or where the
associated person is ``located?'' If so, why should one be used and
the other excluded?
    6. What role would consents play in terms of nonresident SBS
Entities' ability to meet the questionnaire requirement?
    7. Will the proposed addition of new paragraphs (a)(10)(iii)(A)
and (b)(8)(iii)(A) adequately address the concerns raised by the
commenter by providing, as proposed, that a stand-alone or bank SBS
Entity is not required to make and keep current a questionnaire or
application for employment executed by an associated person if they
are excluded from the prohibition in Section 15F(b)(6) of the
Exchange Act with respect to that associated person. If not, why
not, and what further changes should the Commission make?

VII. Economic Analysis

    The Commission is mindful of the economic effects, including the
costs and benefits, of the proposed amendments and guidance. Section
3(f) of the Exchange Act provides that whenever the Commission is
engaged in rulemaking pursuant to the Exchange Act and is required to
consider or determine whether an action is necessary or appropriate in
the public interest, the Commission shall also consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition, and capital formation.\286\ In addition,
Section 23(a)(2) of the Exchange Act requires the Commission, when
making rules under the Exchange Act, to consider the impact such rules
would have on competition.\287\ Exchange Act Section 23(a)(2) also
provides that the Commission shall not adopt any rule which would
impose a burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \286\ See 15 U.S.C. 78c(f).
    \287\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The analysis below addresses the likely economic effects of the
proposed amendments and interpretive guidance, including the
anticipated and estimated benefits and costs of the amendments and
interpretive guidance and their likely effects on efficiency,
competition, and capital formation. The Commission also discusses the
potential economic effects of certain alternatives to the approaches
taken in this proposal. Many of the benefits and costs discussed below
are difficult to quantify. For example, the Commission cannot quantify
the costs that potentially could result from competitive disparities
associated with either proposed Alternative 1 or proposed Alternative 2
to the exception to Rule 3a71-3 because these costs will depend, in
part, on foreign regulatory requirements applicable to non-U.S.
entities. This is because the extent to which a non-U.S. entity would
need to develop or modify systems to allow it and its majority-owned
affiliate to meet the conditions of the proposed exception likely
depends on the extent to which the non-U.S. entity's local regulatory
obligations differ from analogous conditions of the proposed exception.
These potential costs could also depend on the business decisions of
non-U.S. persons that may avail themselves of the proposed exception.
Furthermore, the likelihood of a non-U.S. entity availing itself of the
proposed exception under either alternative depends on whether the non-
U.S. entity is regulated in a listed jurisdiction, a determination
that, in turn, depends on the foreign regulatory regime. Also, in
connection with the proposed amendments to Commission Rule of Practice
194, the Commission has no data or information allowing us to quantify
the number of disqualified non-U.S. employees transacting with foreign
counterparties or foreign branches of U.S. counterparties on behalf of
U.S. and non-U.S. SBS Entities; the direct costs of relocating
disqualified U.S. personnel outside of the United States for U.S. and
non-U.S. SBS Entities; or reputational and compliance costs of U.S. and
non-U.S. SBS Entities from continuing to transact through disqualified
non-U.S. associated persons with foreign counterparties and foreign
branches of U.S. counterparties. Therefore, while the Commission has
attempted to quantify economic effects where possible, much of the
discussion of economic effects is qualitative in nature.

A. Baseline

    To assess the economic effects of the proposed amendments, the
Commission is using as the baseline the security-based swap market as
it exists at the time of this release, including applicable rules the
Commission has already adopted, but excluding rules the Commission has
proposed but not yet finalized. The analysis includes the statutory
provisions that currently govern the security-based swap market
pursuant to the Dodd-Frank Act and rules adopted in the Intermediary
Definitions Adopting Release, the Cross-Border Adopting Release, the
SDR Rules and Core Principles Adopting Release,\288\ and the Rule of
Practice 194 Adopting Release.\289\ Additionally, the baseline includes
rules that have been adopted but for which compliance is not yet
required, including the ANE Adopting Release, Registration Adopting
Release,\290\ Regulation SBSR Amendments Adopting Release,\291\ and the
Business Conduct Adopting Release,\292\ as these final rules--even if
compliance is not yet required--are part of the existing regulatory
landscape that market participants expect to govern their security-
based swap activity. The following sections discuss available data from
the security-based swap market, security-based swap market participants
and dealing structures, market-facing and non-market-facing activities
of dealing entities, security-based swap market activity, global
regulatory efforts, other markets and existing regulatory frameworks,
current estimates of entities likely to incur assessment costs under
rules adopted in the ANE Adopting Release, and an estimate of non-U.S.
persons that could be affected by the proposed amendments and guidance.
---------------------------------------------------------------------------

    \288\ See Security-Based Swap Data Repository Registration,
Duties, and Core Principles, Exchange Act Release No. 74246 (Feb.
11, 2015), 80 FR 14437 (Mar. 19, 2015) (``SDR Rules and Core
Principles Adopting Release'').
    \289\ See Rule of Practice 194 Adopting Release, 84 FR at 4906.
    \290\ See Registration Adopting Release, 80 FR at 48997-49003.
    \291\ See Regulation SBSR-Reporting and Dissemination of
Security-Based Swap Information, Exchange Act Release No. 78321
(Jul.14, 2016), 81 FR 53546 (Aug. 12, 2016) (``Regulation SBSR
Amendments Adopting Release'').
    \292\ See Business Conduct Adopting Release, 81 FR at 30105.
---------------------------------------------------------------------------

1. Available Data From the Security-Based Swap Market
    The Commission's understanding of the market is informed, in part,
by available data on security-based swap transactions, though the
Commission acknowledges that limitations in the data limit the extent
to which it is possible to quantitatively characterize the market.\293\
The Commission's analysis of the current state of the security-based
swap market is based on data obtained from the DTCC Derivatives
Repository Limited Trade Information Warehouse (``TIW''), especially
data regarding the activity of market participants in the single-name
CDS market during the period from 2008 to 2017. The details of this
data set, including its limitations, have been discussed in a prior
release.\294\
---------------------------------------------------------------------------

    \293\ The Commission also relies on qualitative information
regarding market structure and evolving market practices provided by
commenters and knowledge and expertise of Commission staff.
    \294\ See Rule of Practice 194 Adopting Release, 84 FR at 4924.
---------------------------------------------------------------------------

2. Security-Based Swap Market: Market Participants and Dealing
Structures
a. Security-Based Swap Market Participants
    Activity in the security-based swap market is concentrated among a
relatively small number of entities that act as dealers in this market.
In addition to these entities, thousands of other participants appear
as counterparties to security-based swap contracts in the TIW sample,
and include, but are not limited to, investment companies, pension
funds, private (hedge) funds, sovereign entities, and industrial
companies. A discussion of security-based swap market participants can
be found in a prior release.\295\
---------------------------------------------------------------------------

    \295\ See Rule of Practice 194 Adopting Release, 84 FR at 4925.
---------------------------------------------------------------------------

b. Security-Based Swap Market Participant Domiciles
    As depicted in Figure 1 below, domiciles of new accounts
participating in the security-based swap market have shifted over time.
It is unclear whether these shifts represent changes in the types of
participants active in this market, changes in reporting, or changes in
transaction volumes in particular underliers. For example, the
percentage of new entrants that are foreign accounts increased from
24.4% in the first quarter of 2008 to 32.3% in the last quarter of
2017, which may reflect an increase in participation by foreign account
holders in the security-based swap market, though the total number of
new entrants that are foreign accounts decreased from 112 in the first
quarter of 2008 to 48 in the last quarter of 2017.\296\ Additionally,
the percentage of the subset of new entrants that are foreign accounts
managed by U.S. persons increased from 4.6% in the first quarter of
2008 to 16.8% in the last quarter of 2017, and the absolute number rose
from 21 to 25, which also may reflect more specifically the flexibility
with which market participants can restructure their market
participation in response to regulatory intervention, competitive
pressures, and other stimuli.\297\ At the same time, apparent changes
in the percentage of new accounts with foreign domiciles may also
reflect improvements in reporting by market participants to TIW, an
increase in the percentage of transactions between U.S. and non-U.S.
counterparties, and/or increased transactions in single-name CDS on
U.S. reference entities by foreign persons.\298\
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    \296\ These estimates were calculated by Commission staff using
TIW data.
    \297\ See Charles Levinson, ``U.S. banks moved billions in
trades beyond the CFTC's reach,'' Reuters, Aug. 21, 2015, available
at http://www.reuters.com/article/2015/08/21/usa-banks-swaps-idUSL3N10S57R20150821. The estimates of 21 and 25 were calculated by
Commission staff using TIW data.
    \298\ The available data do not include all security-based swap
transactions but only transactions in single-name CDS that involve
either (1) at least one account domiciled in the United States
(regardless of the reference entity) or (2) single-name CDS on a
U.S. reference entity (regardless of the U.S.-person status of the
counterparties). See note 294, supra, for a discussion of the TIW
data set.

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[GRAPHIC] [TIFF OMITTED] TP24MY19.000

c. Market Centers \299\
---------------------------------------------------------------------------

    \299\ Following publication of the Warehouse Trust Guidance on
CDS data access, DTCC-TIW surveyed market participants, asking for
the physical address associated with each of their accounts (i.e.,
where the account is organized as a legal entity). This is
designated the registered office location by the DTCC-TIW. When an
account does not report a registered office location, the Commission
has assumed that the settlement country reported by the investment
adviser or parent entity to the fund or account is the place of
domicile. This treatment assumes that the registered office location
reflects the place of domicile for the fund or account.
---------------------------------------------------------------------------

    A market participant's domicile, however, does not necessarily
correspond to where it engages in security-based swap activity. In
particular, non-U.S. persons engaged in security-based swap dealing
activity operate in multiple market centers and carry out such activity
with counterparties around the world.\300\ Many market participants
that are engaged in dealing activity prefer to use traders and manage
risk for security-based swaps in the jurisdiction where the underlier
is traded. Thus, although a significant amount of the dealing activity
in security-based swaps on U.S. reference entities involves non-U.S.
dealers, the Commission understands that these dealers tend to carry
out much of the security-based swap trading and related risk-management
activities in these security-based swaps within the United States.\301\
Some dealers have explained that being able to centralize their
trading, sales, risk management, and other activities related to U.S.
reference entities in U.S. operations (even when the resulting
transaction is booked in a foreign entity) improves the efficiency of
their dealing business.
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    \300\ See ANE Adopting Release, 81 FR at 8604 n.56.
    \301\ See id. note 58.
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    Consistent with these operational concerns and the global nature of
the security-based swap market, the available data appear to confirm
that participants in this market are in fact active in market centers
around the globe. Although, as noted above, the available data do not
permit us to identify the location of personnel in a transaction, TIW
transaction records, supplemented with legal entity location data,
indicate that firms that are likely to be security-based swap dealers
operate out of branch locations in key market centers around the world,
including New York, London, Paris, Zurich, Tokyo, Hong Kong, Chicago,
Sydney, Toronto, Frankfurt, Singapore, and the Cayman Islands.\302\
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    \302\ TIW transaction records contain a proxy for the domicile
of an entity, which may differ from branch locations, which are
separately identified in the transaction records. The legal entity
location data are from Avox.
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    Given these market characteristics and practices, participants in
the security-based swap market may bear the financial risk of a
security-based swap transaction in a location different from the
location where the transaction is arranged, negotiated, or executed, or
where economic decisions are made by managers on behalf of beneficial
owners. Market activity may also occur in a jurisdiction other than
where the market participant or its counterparty books the transaction.
Similarly, a participant in the security-based swap market may be
exposed to counterparty risk from a counterparty located in a
jurisdiction that is different from the market center or centers in
which it participates.

d. Common Business Structures
    A non-U.S. person that engages in a global security-based swap
dealing business in multiple market centers may choose to structure its
dealing business in a number of different ways. This structure,
including where it books the transactions that constitute that business
and how it carries out market-facing activities that generate those
transactions, reflects a range of business and regulatory
considerations, which each non-U.S. person may weigh differently.
    A non-U.S. person may choose to book all of its security-based swap
transactions, regardless of where the transaction originated, in a
single, central booking entity. That entity generally retains the risk
associated with that transaction, but it also may lay off that risk to
another affiliate via a back-to-back transaction or an assignment of
the security-based swap.\303\ Alternatively, a non-U.S. person may book
security-based swaps arising from its dealing business in separate
affiliates, which may be located in the jurisdiction where it
originates the risk associated with the security-based swap, or,
alternatively, the jurisdiction where it manages that risk. Some non-
U.S. persons may book transactions originating in a particular region
to an affiliate established in a jurisdiction located in that
region.\304\ As discussed earlier,\305\ a non-U.S. person may choose to
book its security-based swap transactions in one jurisdiction in part
to avoid triggering regulatory requirements associated with another
jurisdiction.
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    \303\ See Exchange Act Release No. 74834 (Apr. 29, 2015), 80 FR
27444, 27463 (May 13, 2015) (``U.S. Activity Proposing Release'');
Cross-Border Proposing Release, 78 FR 30977-78.
    \304\ There is some indication that this booking structure is
becoming increasingly common in the market. See, e.g., Catherine
Contiguglia, ``Regional swaps booking replacing global hubs,''
Risk.net, Sep. 4, 2015, available at http://www.risk.net/risk-magazine/feature/2423975/regional-swaps-booking-replacing-global-hubs. Such a development may be reflected in the increasing
percentage of new entrants that have a foreign domicile, as
described above.
    \305\ See part III.B.4, supra.
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    Regardless of where a non-U.S. person determines to book its
security-based swaps arising out of its dealing activity, it is likely
to operate offices that perform sales or trading functions in one or
more market centers in other jurisdictions. Maintaining sales and
trading desks in global market centers permits the non-U.S. person to
deal with counterparties in that jurisdiction or in a specific
geographic region, or to ensure that it is able to provide liquidity to
counterparties in other jurisdictions,\306\ for example, when a
counterparty's home financial markets are closed. A non-U.S. person
engaged in a security-based swap dealing business also may choose to
manage its trading book in particular reference entities or securities
primarily from a trading desk that can utilize local expertise in such
products or that can gain access to better liquidity, which may permit
it to more efficiently price such products or to otherwise compete more
effectively in the security-based swap market. Some non-U.S. persons
prefer to centralize risk management, pricing, and hedging for specific
products with the personnel responsible for carrying out the trading of
such products to mitigate operational risk associated with transactions
in those products.
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    \306\ These offices may be branches or offices of the booking
entity itself, or branches or offices of an affiliated agent, such
as, in the United States, a registered broker-dealer.
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    The non-U.S. person affiliate that books these transactions may
carry out related market-facing activities, whether in its home
jurisdiction or in a foreign jurisdiction, using either its own
personnel or the personnel of an affiliated or unaffiliated agent. For
example, the non-U.S. person may determine that another of its
affiliates employs personnel who possess expertise in relevant products
or who have established sales relationships with key counterparties in
a foreign jurisdiction, making it more efficient to use the personnel
of the affiliate to engage in security-based swap market-facing
activity on its behalf in that jurisdiction. In these cases, the
affiliate that books these transactions and its affiliated agent may
operate as an integrated dealing business, each performing distinct
core functions in carrying out that business.
    Alternatively, the non-U.S. person affiliate that books these
transactions may, in some circumstances, determine to engage the
services of an unaffiliated agent through which it can engage in
market-facing activity. For example, a non-U.S. person may determine
that using an interdealer broker may provide an efficient means of
participating in the interdealer market in its own, or in another,
jurisdiction, particularly if it is seeking to do so anonymously or to
take a position in products that trade relatively infrequently.\307\ A
non-U.S. person may also use unaffiliated agents that operate at its
direction. Such an arrangement may be particularly valuable in enabling
a non-U.S. person to service clients or access liquidity in
jurisdictions in which it has no security-based swap operations of its
own.
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    \307\ The Commission understands that interdealer brokers may
provide voice or electronic trading services that, among other
things, permit dealers to take positions or hedge risks in a manner
that preserves their anonymity until the trade is executed. These
interdealer brokers also may play a particularly important role in
facilitating transactions in less-liquid security-based swaps.
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    The Commission understands that non-U.S. person affiliates (whether
affiliated with U.S.-based non-U.S. persons or not) that are
established in foreign jurisdictions may use any of these structures to
engage in dealing activity in the United States, and that they may seek
to engage in dealing activity in the United States to transact with
both U.S.-person and non-U.S.-person counterparties. In transactions
with non-U.S.-person counterparties, these foreign affiliates may
affirmatively seek to engage in dealing activity in the United States
because the sales personnel of the non-U.S.-person dealer (or of its
agent) in the United States have existing relationships with
counterparties in other locations (such as Canada or Latin America) or
because the trading personnel of the non-U.S.-person dealer (or of its
agent) in the United States have the expertise to manage the trading
books for security-based swaps on U.S. reference securities or
entities. The Commission understands that some of these foreign
affiliates engage in dealing activity in the United States through
their personnel (or personnel of their affiliates) in part to ensure
that they are able to provide their own counterparties, or those of
non-U.S. person affiliates in other jurisdictions, with access to
liquidity (often in non-U.S. reference entities) during U.S. business
hours, permitting them to meet client demand even when the home markets
are closed. In some cases, such as when seeking to transact with other
dealers through an interdealer broker, these foreign affiliates may
act, in a dealing capacity, in the United States through an
unaffiliated, third-party agent.
3. Market-Facing and Non-Market-Facing Activities
    As discussed above, the activities of a security-based swap dealer
involve both market-facing activities and non-market-facing
activities.\308\ Market-facing activities would include arranging,
negotiating, or executing a security-based swap transaction. The terms
``arrange'' and ``negotiate'' indicate market-facing activity of sales
or trading personnel in connection with a particular transaction,
including interactions with counterparties or their

agents. The term ``execute'' refers to the market-facing act that, in
connection with a particular transaction, causes the person to become
irrevocably bound under the security-based swap under applicable law.
Non-market-facing activities include processing trades and other back-
office activities; designing security-based swaps without communicating
with counterparties in connection with specific transactions; preparing
underlying documentation, including negotiating master agreements (as
opposed to negotiating with the counterparty the specific economic
terms of a particular security-based swap transaction); and clerical
and ministerial tasks such as entering executed transactions on a non-
U.S. person's books.
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    \308\ See part I.A.2, supra.
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4. Security-Based Swap Market Activity
    As already noted, firms that act as dealers play a central role in
the security-based swap market. Based on an analysis of 2017 single-
name CDS data in TIW, accounts of those firms that are likely to exceed
the security-based swap dealer de minimis thresholds and trigger
registration requirements intermediated transactions with a gross
notional amount of approximately $2.9 trillion, approximately 55% of
which was intermediated by the top five dealer accounts.\309\
---------------------------------------------------------------------------

    \309\ The Commission staff analysis of TIW transaction records
indicates that approximately 99% of single-name CDS price-forming
transactions in 2017 involved an ISDA-recognized dealer.
---------------------------------------------------------------------------

    These dealers transact with hundreds or thousands of
counterparties. Approximately 21% of accounts of firms expected to
register as security-based dealers and observable in TIW have entered
into security-based swaps with over 1,000 unique counterparty accounts
as of year-end 2017.\310\ Another 25% of these accounts transacted with
500 to 1,000 unique counterparty accounts; 29% transacted with 100 to
500 unique accounts; and 25% of these accounts intermediated security-
based swaps with fewer than 100 unique counterparties in 2017. The
median dealer account transacted with 495 unique accounts (with an
average of approximately 570 unique accounts). Non-dealer
counterparties transacted almost exclusively with these dealers. The
median non-dealer counterparty transacted with two dealer accounts
(with an average of approximately three dealer accounts) in 2017.
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    \310\ Many dealer entities and financial groups transact through
numerous accounts. Given that individual accounts may transact with
hundreds of counterparties, the Commission may infer that entities
and financial groups may transact with at least as many
counterparties as the largest of their accounts.
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    Figure 2 below describes the percentage of global, notional
transaction volume in North American corporate single-name CDS reported
to TIW between January 2008 and December 2017, separated by whether
transactions are between two ISDA-recognized dealers (interdealer
transactions) or whether a transaction has at least one non-dealer
counterparty. Figure 2 also shows that the portion of the notional
volume of North American corporate single-name CDS represented by
interdealer transactions has remained fairly constant through 2015
before falling from approximately 72% in 2015 to approximately 40% in
2017. This fall corresponds to the availability of clearing to non-
dealers. Interdealer transactions continue to represent a significant
fraction of trading activity, even as notional volume has declined over
the past ten years,\311\ from more than $6 trillion in 2008 to less
than $700 billion in 2017.\312\
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    \311\ The start of this decline predates the enactment of the
Dodd-Frank Act and the proposal of rules thereunder, which is
important to note for the purpose of understanding the economic
baseline for this rulemaking.
    \312\ This estimate is lower than the gross notional amount of
$4.6 trillion noted in note 294 above as it includes only the subset
of single-name CDS referencing North American corporate
documentation.

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[GRAPHIC] [TIFF OMITTED] TP24MY19.001

    The high level of interdealer trading activity reflects the central
position of a small number of dealers, each of which intermediates
trades with many hundreds of counterparties. While the Commission is
unable to quantify the current level of trading costs for single-name
CDS, these dealers appear to enjoy market power as a result of their
small number and the large proportion of order flow that they privately
observe.
    Against this backdrop of declining North American corporate single-
name CDS activity, about half of the trading activity in North American
corporate single-name CDS reflected in the set of data that the
Commission analyzed was between counterparties domiciled in the United
States and counterparties domiciled abroad, as shown in Figure 3 below.
Using the self-reported registered office location of the TIW accounts
as a proxy for domicile, the Commission estimates that only 12% of the
global transaction volume by notional volume between 2008 and 2017 was
between two U.S.-domiciled counterparties, compared to 49% entered into
between one U.S.-domiciled counterparty and a foreign-domiciled
counterparty and 39% entered into between two foreign-domiciled
counterparties.\313\
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    \313\ For purposes of this discussion, the Commission has
assumed that the registered office location reflects the place of
domicile for the fund or account, but the Commission notes that this
domicile does not necessarily correspond to the location of an
entity's sales or trading desk. ANE Adopting Release, 81 FR at 8607
n.83.
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    If the Commission instead considers the number of cross-border
transactions from the perspective of the domicile of the corporate
group (e.g., by classifying a foreign bank branch or foreign subsidiary
of a U.S. entity as domiciled in the United States), the percentages
shift significantly. Under this approach, the fraction of transactions
entered into between two U.S.-domiciled counterparties increases to
34%, and to 51% for transactions entered into between a U.S.-domiciled
counterparty and a foreign-domiciled counterparty. By contrast, the
proportion of activity between two foreign-domiciled counterparties
drops from 39% to 15%. This change in respective shares based on
different classifications suggests that the activity of foreign
subsidiaries of U.S. firms and foreign branches of U.S. banks accounts
for a higher percentage of security-based swap activity than U.S.
subsidiaries of foreign firms and U.S. branches of foreign banks. It
also demonstrates that financial groups based in the United States are
involved in an overwhelming majority (approximately 85%) of all
reported transactions in North American corporate single-name CDS.
    Financial groups based in the United States are also involved in a
majority of interdealer transactions in North American corporate
single-name CDS. Of the 2017 transactions on North American corporate
single-name CDS between two ISDA-recognized dealers and their branches
or affiliates, 94% of transaction notional volume involved at least one
account of an entity with a U.S. parent. The Commission notes, in
addition, that a majority of North American corporate single-name CDS
transactions occur in the interdealer market or between dealers and
foreign non-dealers, with the remaining portion of the market
consisting of transactions between dealers and U.S.-person non-dealers.
Specifically, 60% of North American corporate single-name CDS

transactions involved either two ISDA-recognized dealers or an ISDA-
recognized dealer and a foreign non-dealer. Approximately 39% of such
transactions involved an ISDA-recognized dealer and a U.S.-person non-
dealer.
[GRAPHIC] [TIFF OMITTED] TP24MY19.002

5. Global Regulatory Efforts
    In 2009, the G20 leaders--whose membership includes the United
States, 18 other countries, and the European Union--addressed global
improvements in the OTC derivatives market. They expressed their view
on a variety of issues relating to OTC derivatives contracts. In
subsequent summits, the G20 leaders have returned to OTC derivatives
regulatory reform and encouraged international consultation in
developing standards for these markets.\314\
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    \314\ See, e.g., G20 Leaders' Final Declaration, November 2011,
para. 24, available at https://g20.org/wp-content/uploads/2014/12/Declaration_eng_Cannes.pdf.
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    Many security-based swap dealers likely will be subject to foreign
regulation of their security-based swap activities that is similar to
regulations that may apply to them pursuant to Title VII of the Dodd-
Frank Act, even if the relevant foreign jurisdictions do not classify
certain market participants as ``dealers'' for regulatory purposes.
Some of these regulations may duplicate, and in some cases conflict
with, certain elements of the Title VII regulatory framework.
    Foreign legislative and regulatory efforts have generally focused
on five areas: (1) Moving OTC derivatives onto organized trading
platforms, (2) requiring central clearing of OTC derivatives, (3)
requiring post-trade reporting of transaction data for regulatory
purposes and public dissemination of anonymized versions of such data,
(4) establishing or enhancing capital requirements for non-centrally
cleared OTC derivatives transactions, and (5) establishing or enhancing
margin and other risk mitigation requirements for non-centrally cleared
OTC derivatives transactions. Foreign jurisdictions have been actively
implementing regulations in connection with each of these categories of
requirements. A number of major foreign jurisdictions have initiated
the process of implementing margin and other risk mitigation
requirements for non-centrally cleared OTC derivatives
transactions.\315\
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    \315\ In November 2018, the Financial Stability Board reported
that 16 member jurisdictions participating in its thirteenth
progress report on OTC derivatives market reforms had in force
margin requirements for non-centrally cleared derivatives. A further
4 jurisdictions made some progress in implementation leading to a
change in reported implementation status during the reporting
period. See Financial Stability Board, ``OTC Derivatives Market
Reforms Thirteenth Progress Report on Implementation'' (Nov. 2018),
available at http://www.fsb.org/wp-content/uploads/P191118-5.pdf.
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    Notably, the European Parliament and the European Council have
adopted the European Market Infrastructure Regulation (``EMIR''), which