text elsewhere in the rule, a parallel modification is being made to
Final Rule 15Fh-6(d)(5), which will read: ``The nature of the
election (e.g., federal, state or local).''
    \1099\ Proposing Release, 76 FR at 42433, supra note 3.
    \1100\ See Political Contributions by Certain Investment
Advisers, Advisers Act Release No. 3043 (Jul. 1, 2010), 75 FR 41018
(Jul. 14, 2010) (``Advisers Act Pay-to-Play Release'') (adopting
Advisers Act Rule 206(4)-5 and stating, among other things, that the
definition of ``contribution'' in Advisers Act Rule 206(4)-5 ``is
the same as . . . the one used in MSRB rule G-37'').
    \1101\ Although subsection (iii) of CFTC Regulation 23.451(a)(1)
also includes the term ``federal'' in the definition of
``contribution''--``[f]or transition or inaugural expenses incurred
by the successful candidate for federal, state, or local office.''--
as explained by the Commission in the Advisers Act Pay-to-Play
Release, neither Rule 206(4)-5 nor MSRB Rule G-37 includes the
transition or inaugural expenses of a successful candidate for
federal office in the definition of ``contribution.'' See Advisers
Act Pay-to-Play Release, 75 FR at 41030, n.154, supra note 1100.
Therefore, because this rule is modeled on, and intended to
complement, existing restrictions on pay to play practices under
Advisers Act Rule 206(4)-5 and MSRB Rules G-37, we also do not
include the term ``federal'' in subsection (iii) of Rule 15Fh-
6(a)(1) for the same reasons stated by the Commission when adopting
the Advisers Act pay-to-play rules.
    \1102\ Proposing Release, 76 FR at 42433, supra note 3.
---------------------------------------------------------------------------

    Second, the Commission is correcting another inadvertent omission
in the text of Rule 15Fh-6(b)(2)(i). As outlined in the Proposing
Release, the de minimis contribution exception found in Rule 15Fh-
6(b)(2)(i) is intended to be limited to contributions made by
individuals that are covered associates to track and complement the
similar de minimis contribution exception found in Advisers Act Rule
206(4)-5(b)(1), upon which this exception was modeled.\1103\ Because
this exception is conditioned on whether the covered associate was
entitled to vote for the official at the time of the contribution, we
believe it was implicit in the proposed rule text that this exception
only applies to contributions made by a natural person since other
legal persons are not entitled to vote. However, we are modifying the
text of Rule 15Fh-6(b)(2)(i) to clarify that this exception only
applies to contributions made by a natural person. With that
modification, the rule text as adopted will track the explanation
behind this exception, as explained in the Proposing Release, as well
as the text of Advisers Act Rule 206(4)-5(b)(1). This modification will
also make Rule 15Fh-6(b)(2)(i) consistent with the CFTC's analogous de
minimis contribution exception, which the CFTC described as similarly
intended to be limited to individuals that are covered
associates.\1104\
---------------------------------------------------------------------------

    \1103\ See Proposing Release, 76 FR at 42434, supra note 3
(``The proposed rule would permit an individual who is a covered
associate to make aggregate contributions without being subject to
the two-year time out period, of up to $350 per election, for any
one official for whom the individual is entitled to vote, and up to
$150 per election, to an official for whom the individual is not
entitled to vote.'') (emphases added).
    \1104\ See CFTC Adopting Release, 77 FR at 9799, supra note 21
(explaining that CFTC's ``proposed rule permitted an individual that
is a covered associate to make aggregate contributions up to $350
per election, without being subject to the two-year time out period,
to any one official for whom the individual is entitled to vote, and
up to $150 per election to an official for whom the individual is
not entitled to vote.'') (emphases added).
---------------------------------------------------------------------------

    Third, as discussed in Section II.B, the Commission is modifying
the exception under Rule 15Fh-6(b)(2)(iii) so as to apply when the SBS
Dealer does not know the identity of the counterparty with reasonably
sufficient time prior to execution of the transaction to permit the SBS
Dealer to comply with the obligations of the rule. This language
differs from the language used in the proposal, which would apply the
exception when the dealer does not know the identity of the
counterparty ``at any time up to and including execution of the
transaction.'' The adoption of this language will comport with the
language used in the verification of counterparty status and disclosure
requirements of final Rule 15Fh-3, as well as the exceptions to the
special entity requirements under Rules 15Fh-4(b)(3) and 15Fh-5(d). As
discussed in those sections, this language is intended to exclude
situations where the identity of the counterparty is not discovered
until after execution of a transaction, or where the SBS Dealer learns
the identity of the counterparty with insufficient time to be able to
satisfy its obligations under the rule without delaying the execution
of the transaction.
    Fourth, as discussed above in Section II.H.8, the Commission is
also modifying the exception under Rule 15Fh-6(b)(2)(iii) to apply to
all security-based swap transactions executed on a registered or exempt
SEF or registered national securities exchange, rather than just with
respect to transactions ``initiated by a municipal entity'' on such
exchange or SEF (as long as the other conditions of Rule 15Fh-
6(b)(2)(iii) are met). We are revising the rule to be consistent with
the adopted Rules 15Fh-4(b)(3) and 15Fh-5(d), and avoid the ambiguity
inherent in determining which party ``initiated'' the security-based
swap.\1105\
---------------------------------------------------------------------------

    \1105\ See supra Section II.H.8.
---------------------------------------------------------------------------

    Fifth, we are also modifying Rule 15Fh-6(e)(2), as one commenter
suggested,\1106\ to allow for up to three exemptions for inadvertent
contributions per calendar year, depending on the number of natural
person covered associates at the SBS Dealer. Specifically, we are
modifying the text of Rule 15Fh-6(e)(2), as suggested by this same
commenter,\1107\ to provide that an SBS Dealers that has more than 50
covered associates would be able to rely on this exception no more than
three times per calendar year, while an SBS Dealer that has 50 or fewer
covered associates would be able to rely on this exception no more than
two times per calendar year. This modification will parallel the
provision in Advisers Act Rule 206(4)-5, which also allows ``larger''
investment advisers to avail themselves of three automatic exceptions,
instead of two, in any calendar year. As the Commission noted when
modifying its Advisers Act rule proposal to include three automatic
exceptions for larger firms, we agree that inadvertent violations of
the rule are more likely at firms with greater numbers of covered
associates, and we believe that the twice per year limit is appropriate
for smaller firms and that the three times per year limit is
appropriate for larger firms.\1108\

Although we recognize that this modification will create an additional
exception not found in the CFTC's analogous rule,\1109\ we believe that
harmonization across the Commission's regulatory regimes will help to
create regulatory efficiencies for entities that have already
established a regulatory infrastructure based on the Commission's
analogous exception.
---------------------------------------------------------------------------

    \1106\ FIA/ISDA/SIFMA, supra note 5 (suggesting that the
Commission modify proposed rule to allow for up to three exemptions
for inadvertent contributions, depending on the number of SBS Dealer
employees).
    \1107\ See id. (suggesting that the Commission modify proposed
rule to parallel the provisions in SEC Rule 206(4)-5, relating to
contributions from certain covered associates of investment
advisers).
    \1108\ See Advisers Act Pay-to-Play Release, 75 FR at 41035-36,
n. 238, supra note 1100 (``We do not believe it is appropriate for
there to be greater variation in the number of times advisers may
rely on the exception than that based either on their size or on
other characteristics. We are seeking to encourage robust monitoring
and compliance.'').
    \1109\ See CFTC Adopting Release, 77 FR at 9828, supra note 21.
---------------------------------------------------------------------------

    Finally, the Commission is also correcting in the final rule the
following typographical errors: (1) Revising an internal cross-
reference in Rule 15Fh-6(a)(2)(iii) to cross-reference ``paragraphs
(a)(2)(i) and (a)(2)(ii) of this section'' rather than ``paragraphs
(c)(2)(i) and (c)(2)(ii) of this section''; (2) revising an internal
cross-reference in Rule 15Fh-6(d) to cross-reference ``paragraph (b) of
this section'' rather than ``paragraph (a)(1) of this section''; (3)
revising Rule 15Fh-6(b)(3)(ii)(A) to delete a phrase that was
inadvertently repeated ``a security-based swap security-based swap'';
and (4) revising Rule 15Fh-6(b)(3)(ii)(B) to also delete a phrase that
was inadvertently repeated ``a security-based swap security-based
swap.''
    With respect to the balance of Rule 15Fh-6, after considering the
comments submitted, the Commission is adopting the Rule as proposed.
The Commission disagrees with certain commenters' view that Rule 15Fh-6
is not an appropriate area for the Commission to exercise its authority
to prescribe business conduct standards.\1110\ The Commission also
disagrees with one commenter's suggestion that there may not be much
marginal benefit to imposing additional restrictions on SBS Dealers
generally.\1111\ We proposed the rule in the context of security-based
swaps because pay to play practices may result in municipal entities
entering into transactions not because of hedging needs or other
legitimate purposes, but rather because of campaign contributions given
to an official with influence over the selection process. Where pay to
play exists, SBS Dealers may compete for security-based swap business
based on their ability and willingness to make political contributions,
rather than on their merit or the merit of a proposed transaction. We
believe these practices may result in significant harm to
municipalities and others in connection with security-based swap
transactions, just as they do in connection with other municipal
securities transactions.\1112\ We note that SBS Dealers may have an
incentive to participate in pay to play practices out of concern that
they may be overlooked if they fail to make such contributions. These
concerns, coupled with the furtive nature of pay to play practices and
the inability of markets to properly address them, strongly support the
need for prophylactic measures to address them in the context of
security-based swaps.\1113\ Furthermore, and as the same commenter
concedes, there would still be a regulatory gap as only ``most'' SBS
Dealers would be covered and, as another commenter observed, this rule
would help to eliminate that gap in protection.\1114\ We made this same
point in the Proposing Release, noting that while Rule 15Fh-6 is
consistent with and would complement the pay to play prohibition
adopted by the MRSB and CFTC, there are no existing federal pay to play
rules that would apply to all SBS Dealers in their dealings with
municipal entities.\1115\ Therefore, this rule was proposed to help
eliminate that regulatory gap.
---------------------------------------------------------------------------

    \1110\ See, e.g., FIA/ISDA/SIFMA, supra note 5 (suggesting that
because Dodd-Frank did not mandate any restrictions on political
contributions by SBS Dealers it is not clear that the Commission
needs to impose such a requirement on a discretionary basis). But
see CFA, supra note 5.
    \1111\ See FIA/ISDA/SIFMA, supra note 5.
    \1112\ See id. See SEC v. Larry P. Langford, Litigation Release
No. 20545 (Apr. 30, 2008) and SEC v. Charles E. LeCroy, Litigation
Release No. 21280 (Nov. 4, 2009) (charging Alabama local government
officials and J.P. Morgan employees with undisclosed payments made
to obtain municipal bond offering and swap agreement business from
Jefferson County, Alabama). See also J.P. Morgan Securities Inc.,
Securities Act Release No. 9078 (Nov. 4, 2009) (settled order
instituting administrative and cease-and-desist proceedings and
imposing remedial sanctions against a broker-dealer that the
Commission alleged was awarded bond underwriting and interest rate
swap agreement business by Jefferson County in connection with
undisclosed payments by employees of the firm).
    \1113\ Cf. Blount v. SEC, 61 F.3d 938, 945 (D.C. Cir. 1995),
cert. denied, 116 S. Ct. 1351 (1996) (``no smoking gun is needed
where, as here, the conflict of interest is apparent, the likelihood
of stealth great, and the legislative purpose prophylactic'').
    \1114\ CFA, supra note 5 (supporting the proposal as applied to
SBS Dealers and stating that this proposal ``would help to eliminate
what would otherwise be a serious gap in protections'').
    \1115\ Proposing Release, 76 FR at 42433, supra note 3.
---------------------------------------------------------------------------

    The Commission continues to believe and a commenter also agrees
that the two-year time out provided for in Rule 15Fh-6 is
appropriate.\1116\ As explained in the Proposing Release, Rule 15Fh-
6(b)(1) would prohibit an SBS Dealer from offering to enter into, or
entering into, a security-based swap or a trading strategy involving a
security-based swap, with a municipal entity within two years after a
contribution to an official of such municipal entity has been made by
the SBS Dealer or any of its covered associates. We believe the two-
year time out requirement strikes an appropriate balance, as it is
sufficiently long to act as a deterrent but not so long as to be
unnecessarily onerous. The two-year time out is generally consistent
with the time out provisions in Advisers Act Rule 206(4)-5, MSRB Rule
G-37 and CFTC Regulation 23.451.
---------------------------------------------------------------------------

    \1116\ See NAIPFA, supra note 5.
---------------------------------------------------------------------------

    As we also explained in the Proposing Release, because the rule
would attribute to an SBS Dealer those contributions made by a person
even prior to becoming a covered associate of the SBS Dealer, SBS
Dealers need to ``look back'' in time to determine whether the two-year
time out applies when an employee becomes a covered associate.\1117\
Given that one commenter suggested further specificity as to whether
the rule applies only to contributions made on or after the rules
effective date,\1118\ we are interpreting the prohibition in Rule 15Fh-
6(b)(1) and its exceptions in Rule 15Fh-6(b)(2), as well as the
restrictions on soliciting or coordinating contributions found in Rule
15Fh-6(b)(3), to not be triggered for an SBS Dealer or any of its
covered associates by contributions made before the SBS Dealer
registered with the Commission as such. This interpretation is, as one
commenter noted, also consistent with CFTC No-Action relief.\1119\
However, such prohibitions will apply to contributions made on or after
the SBS Dealer is required to register with the Commission. We also
note that these prohibitions do not apply to contributions made before
the compliance date of this rule by new covered associates to which the
rule's ``look back'' applies (i.e., a person who becomes a covered
associate within two years after the contribution is made).

This interpretation is similar to the approach taken by the Commission
in connection with Advisers Act Rule 206(4)-5.\1120\ For example, if an
individual who becomes a covered associate on or after the effective
date of the rule made a contribution before the effective date of the
rule, that new covered associate's contribution would not trigger the
two-year time out. On the other hand, if an individual who later
becomes a covered associate made the contribution on or after the
compliance date of this rule, the contribution would trigger the two-
year time out if it were made less than, as applicable, six months or
two years before the individual became a covered associate.\1121\
---------------------------------------------------------------------------

    \1117\ See Proposing Release, 76 FR at 42434, supra note 3. In
the Proposing Release, we explained, as an example, that if the
contribution at issue was made less than two years (or six months,
as applicable under Rule 15Fh-6(b)(2)(ii)) before an individual
becomes a covered associate, the rule would prohibit the firm from
entering into a security-based swap with the relevant municipal
entity until the two-year time out period has expired. As noted
above, Rule 15Fh-6(b)(2)(ii) provides an exception to the
prohibition in Rule 15Fh-6(b)(1) such that the prohibition would not
apply to contributions made by an individual more than six months
prior to becoming a covered associate of the SBS Dealer, unless such
individual solicits the municipal entity after becoming a covered
associate.
    \1118\ See FIA/ISDA/SIFMA, supra note 5 (requesting
clarification that ``the rule would not unintentionally ban SBS
activity as a result of contributions made during the pre-
effectiveness period''). See also SIFMA (August 2015), supra note 5.
    \1119\ See SIFMA (August 2015), supra note 5. See also CFTC
Letter No. 12-33 (November 29, 2012).
    \1120\ See Advisers Act Pay-to-Play Release, 75 FR at 41051,
n.434, supra note 1100 (noting, similarly, that the prohibitions in
Rule 206(4)-5 also do not apply to contributions made before the
compliance date established for Rule 206(4)-5 by new covered
associates to which the look back applies).
    \1121\ See id. (providing similar examples in connection with
Rule 206(4)-5).
---------------------------------------------------------------------------

    With respect to the comment recommending amending the proposed rule
to include Major SBS Participants in the prohibitions of Rule 15Fh-
6,\1122\ the Commission does not believe that it is necessary or
appropriate to do so. We have considered how the differences between
the definitions of SBS Dealer and Major SBS Participant may be relevant
in formulating the business conduct standards applicable to these
entities.\1123\ The Commission does not believe it is necessary to
revisit its assumption, outlined in the Proposing Release, that Major
SBS Participants are unlikely to give rise to the pay-to-play concerns
that this rule is intended to address.\1124\ As discussed above, SBS
Dealers may have an incentive to compete for security-based swap
business based on their ability and willingness to participate in pay
to play activity, rather than on their merit or the merit of a proposed
transaction, out of concern that they may be overlooked if they fail to
make such contributions. However, we believe the incentives for Major
SBS Participants to engage in pay to play activity are unlikely to be
as strong as the incentives for SBS Dealers given that, by definition,
Major SBS Participants are not engaged in security-based swap dealing
activity at levels above the de minimis threshold.\1125\ As such, Major
SBS Participants are less likely than SBS Dealers to be acting as
dealers in the security-based swap market and, like any other person
whose dealing activity does not exceed the dealer de minimis
thresholds, should therefore be less susceptible to the types of
competitive pressures that may create an incentive to participate in
pay to play activity. We further note that, if a Major SBS Participant
is, in fact, engaged in security-based swap dealing activity above the
de minimis threshold, it would need to register as an SBS Dealer and,
as such, would need to comply with the pay to play rules imposed by
Rule 15Fh-6.
---------------------------------------------------------------------------

    \1122\ CFA, supra note 5.
    \1123\ See, e.g., Section II.B (explaining that, unlike the
definition of ``security-based swap dealer,'' which focuses on the
way a person holds itself out in the market and whose function is to
serve as the point of connection in those markets, the definition of
``major security-based swap participant,'' focuses on the market
impacts and risks associated with an entity's security-based swap
positions).
    \1124\ See, e.g., MFA, supra note 5 (urging the Commission to
consider separate regulatory regimes for SBS Dealers and Major SBS
Participants, arguing that they are different, and there are
``different reasons why the Dodd-Frank Act requires additional
oversight of each'').
    \1125\ See Exchange Act rule 3a61-1(a)(1) (limiting the
definition of ``major security-based swap participant'' to persons
that are not security-based swap dealers).
---------------------------------------------------------------------------

    Therefore, SBS Dealers, unlike Major SBS Participants, may have an
incentive to participate in pay to play practices out of concern that
they may be overlooked if they fail to make such contributions which,
in turn, would necessitate application of pay to play prohibitions.
Furthermore, the exclusion of Major SBS Participants from Rule 15Fh-6
will also be consistent with the pay to play prohibition adopted by the
CFTC.\1126\ Substantial consistency across pay to play regulatory
regimes will be helpful for those entities that have already
established a regulatory infrastructure to comply with existing rules.
One commenter suggested that, with respect to the proposal that
independent representatives be subject to pay to play limitations, an
exception is needed ``for advisors that are employees of the special
entity, given the employer-employee relationship.'' \1127\ However, the
Commission notes that the rules already include such an exception. As
explained previously, Rule 15Fh-5(a)(1)(vi) as adopted requires an SBS
Entity to have a reasonable basis for believing that the independent
representative is a person that is subject to rules of the Commission,
the CFTC or an SRO subject to the jurisdiction of the Commission or the
CFTC prohibiting it from engaging in specified activities if certain
political contributions have been made, unless the independent
representative is an employee of the special entity.
---------------------------------------------------------------------------

    \1126\ See CFTC Adopting Release, 77 FR at 9800, supra note 21.
    \1127\ APPA, supra note 5.
---------------------------------------------------------------------------

    The same commenter also urged the Commission, in a comment letter
dated August 2011, to delay imposing the proposed pay to play rule
until after the ``dealer'' definitions are finalized.\1128\ As
explained in Section IV.B below, the Commission is adopting a
compliance date for final Rules 15Fh-1 through 15Fh-6 and Rule 15Fk-1
that is the same as the compliance date of the SBS Entity registration
rules.\1129\
---------------------------------------------------------------------------

    \1128\ APPA, supra note 5.
    \1129\ The Commission explained in the Registration Adopting
Release that persons determined to be SBS Dealers or Major SBS
Participants under those rules need not register as such until the
dates provided for in the Commission's final rules regarding SBS
Entity registration requirements, ``and will not be subject to the
requirements applicable to those dealers and major participants
until the dates provided in the applicable final rules.''
Registration Adopting Release, supra note 989.
---------------------------------------------------------------------------

    The Commission declines to revise Rule 15Fh-6, as one commenter
suggested, by limiting the triggering event for the application of the
pay to play rules to ``engag[ing] in municipal security-based swap
business'' or ``the execution of a security-based swap with a municipal
entity.'' \1130\ As explained in the Proposing Release, pay to play
occurs when persons seeking to do business with municipal entities make
political contributions, or are solicited to make political
contributions, to elected officials or candidates to influence the
selection process.\1131\ Hence, pay to play could occur when an SBS
Dealer is merely offering to enter into a security-based swap with a
municipal entity, before that SBS Dealer has yet to actually enter
into, engage in, or execute any such transaction. Rather, the SBS
Dealer is seeking to influence the selection process to generate
business. Therefore, the Commission believes that further parsing of
the trigging event applicable to this rule, as suggested by the
commenter, would create an unintended regulatory gap that would not
capture those who offer to enter into a security-based swap transaction
with a municipal entity with the hope that their contributions or
payments will influence the selection process so that they may later
enter into, engage in, or execute security-based swaps with that
municipal entity. As one court noted,''[w]hile the risk of corruption
is obvious and substantial, actors in this field are presumably shrewd
enough to structure their relations rather indirectly.'' \1132\
Furthermore, this same suggestion was

raised to and declined by the CFTC.\1133\ As a result, the triggering
event for the application of Rule 15Fh-6 is consistent with the CFTC's
rule and substantially consistent with the trigging event for certain
prohibitions found in the Commission's Advisers Act Rule 206(4)-
5.\1134\
---------------------------------------------------------------------------

    \1130\ FIA/ISDA/SIFMA, supra note 5 (suggesting that the
Commission consider replacing the proposed ``triggering occasion for
the application of the rule'').
    \1131\ See Proposing Release, 76 FR at 42432, supra note 3.
    \1132\ Id. (citing Blount, 61 F.3d at 945).
    \1133\ See CFTC Adopting Release, 77 FR at 9799-800, supra note
21.
    \1134\ See Advisers Act Rule 206(4)-5(2)(ii) (including, among
other triggering activities, when the investment adviser is
``providing or seeking to provide investment advisory services to a
government entity'').
---------------------------------------------------------------------------

    One commenter that addressed the definition of ``solicit'' in the
proposed rule generally urged us to adopt a narrower definition.\1135\
However, the Commission declines to revise Rule 15Fh-6 to further parse
the definition of ``solicit.'' We believe that it is unnecessary, as
the commenter suggested, for the definition to cover only direct
communications or to state what communications are not covered by the
term ``solicit.'' \1136\ The proposed definition makes clear that to
fall within its scope the communication, whether direct or indirect,
must be ``with a municipal entity for the purpose of obtaining or
retaining an engagement related to a security-based swap.'' Further
parsing and thus narrowing of the definition of ``solicit'' is
unwarranted given the covert and secretive nature of pay to play
practices where, as noted above, ``actors in this field are presumably
shrewd enough to structure their relations rather indirectly.'' \1137\
Rule 15Fh-6 is intended to deter SBS Dealers from participating, even
indirectly, in pay to play practices. The Commission believes that the
definition of ``solicit'' is clear as to what communications are
covered by the pay to play rule, and the definition is also consistent
with the CFTC's rule and the Commission's definition of ``solicit'' in
Advisers Act Rule 206(4)-5 \1138\ which, as noted above, Rule 15Fh-6
was modeled on and intended to complement.
---------------------------------------------------------------------------

    \1135\ FIA/ISDA/SIFMA, supra note 5 (recommending that the
Commission clarify the definition of ``solicit'' include only ``any
direct communication by any person with a municipal entity for the
purpose of obtaining or retaining municipal security-based swap
business'').
    \1136\ See id. (suggesting that the rule should exclude any
communication with a municipal entity for the sole purpose of
obtaining or retaining any other type of business covered under pay-
to-play restrictions because, in that commenter's view, such
communications would already trigger pay-to-play restrictions under
other regulations).
    \1137\ Proposing Release, 76 FR at 42432, supra note 3 (citing
Blount, 61 F.3d at 945).
    \1138\ 17 CFR 275.206(4)-5(f)(10)(i) (defining ``solicit,'' in
part, to mean ``to communicate, directly or indirectly, for the
purpose of obtaining or retaining a client for . . . an investment
adviser'').
---------------------------------------------------------------------------

    Another commenter suggested that the Commission revise Rule 15Fh-6
to create a safe harbor from the pay to play rule for a special entity
that is represented by a ``qualified independent representative'' that
affirmatively selects the SBS Dealer.\1139\ However, the Commission
declines to create a safe harbor as the commenter suggested. For one,
the commenter's argument that such a safe harbor would ``assist
municipal entities and their advisors by preserving their ability to
execute security-based swap transactions'' is not persuasive to support
this suggested modification when, for example, one of the purposes
behind this rule is the need for prophylactic measures to address
stealthy pay to play practices.\1140\ As stated in the Proposing
Release and noted above, by its nature, pay to play is covert and
secretive because participants do not broadcast that contributions or
payments are made or accepted for the purpose of influencing the
selection of a financial services provider. The Commission believes
that adopting such a safe harbor, as suggested, could create a means
for would-be wrongdoers to covertly and secretively engage in pay to
play practices by, among other things, using situations where the
special entity, represented by a qualified independent representative,
selects the SBS Dealer as a way to evade or otherwise circumvent the
rule's prohibitions. The commenter's suggestion would also create a
material difference between the regulatory regimes established by the
Commission under the Advisers Act as well as the CFTC's rules and would
decrease regulatory efficiencies for market participants.
---------------------------------------------------------------------------

    \1139\ SIFMA (August 2011), supra note 5.
    \1140\ Cf. Blount, 61 F.3d at 945 (noting that, with respect to
pay to play practices ``the likelihood of stealth great,'' while
``the legislative purpose prophylactic'').
---------------------------------------------------------------------------

    Finally, we are not expressly excluding, as one commenter
suggested, state-established plans that are managed by a third-party,
such as 529 college savings plans, from the pay to play
provisions.\1141\ We do not find the commenter's unsupported claim that
pay to play provisions will deter SBS Dealers from transacting business
with such plans persuasive. More importantly, even if we were to accept
this argument, the same concerns, outlined above, that we are
attempting to address with these pay to play restrictions, including
but not limited to the furtive nature of pay to play practices, are
also applicable for state-established plans that are managed by a
third-party. As noted above, we believe that SBS Dealers may have an
incentive to participate in pay to play practices, even in connection
with state-established plans that are managed by a third-party, out of
concern that they may be overlooked for business if they fail to make
such contributions. We further believe these practices may result in
significant harm to municipalities and others, including state-
established plans, in connection with security-based swap transactions.
Rule 15Fh-6(b)(3)(i) is intended to deter SBS Dealers from
participating, even indirectly, in such practices.
---------------------------------------------------------------------------

    \1141\ See SIFMA (August 2011), supra note 5.
---------------------------------------------------------------------------

I. Chief Compliance Officer

    Section 15F(k) of the Exchange Act requires an SBS Entity to
designate a CCO, and imposes certain duties and responsibilities on
that CCO.\1142\
---------------------------------------------------------------------------

    \1142\ 15 U.S.C. 78o-10(k).
---------------------------------------------------------------------------

1. Proposed Rule
a. Designation, Reporting Line, Compensation and Removal of the CCO
    Proposed Rule 15Fk-1(a) would require an SBS Entity to designate a
CCO on its registration form. Proposed Rule 15Fk-1(b)(1) would require
that the CCO report directly to the board of directors or to the senior
officer of the SBS Entity.\1143\ Proposed Rule 15Fk-1(e)(1) would
define ``board of directors'' to include a body performing a function
similar to the board of directors. Proposed Rule 15Fk-1(e)(2) would
define ``senior officer'' to mean the chief executive officer or other
equivalent officer. Finally, proposed Rule 15Fk-1(d) would require that
the compensation and removal of the CCO be approved by a majority of
the board of directors of the SBS Entity.
---------------------------------------------------------------------------

    \1143\ See Section 15F(k)(2)(A) of the Exchange Act, 15 U.S.C.
78o-10(k)(2)(A).
---------------------------------------------------------------------------

b. Duties of the CCO
    Proposed Rule 15Fk-1(b) would impose certain duties on the CCO.
Proposed Rule 15Fk-1(b)(2) would require the CCO to review the
compliance of the SBS Entity with respect to the requirements in
Section 15F of the Exchange Act and the rules and regulations
thereunder.\1144\ Proposed Rule 15Fk-1(b)(2) would further require
that, as part of the CCO's obligation to review compliance by the SBS
Entity, the CCO establish, maintain, and review policies and procedures
that are reasonably designed to achieve compliance by the SBS Entity
with

Section 15F of the Exchange Act and the rules and regulations
thereunder.
---------------------------------------------------------------------------

    \1144\ See Section 15F(k)(2)(B) of the Exchange Act, 15 U.S.C.
78o-10(k)(2)(B).
---------------------------------------------------------------------------

    Proposed Rule 15Fk-1(b)(3) would require that the CCO, in
consultation with the board of directors or the senior officer of the
organization, promptly resolve conflicts of interest that may
arise.\1145\ Under proposed Rule 15Fk-1(b)(4), the CCO would be
responsible for administering each policy and procedure that is
required to be established pursuant to Section 15F of the Exchange Act
and the rules and regulations thereunder.\1146\ Proposed Rule 15Fk-
1(b)(5) would require the CCO to establish, maintain and review
policies and procedures reasonably designed to ensure compliance with
the provisions of the Exchange Act and the rules and regulations
thereunder relating to the SBS Entity's business as an SBS
Entity.\1147\ Proposed Rule 15Fk-1(b)(6) would require the CCO to
establish, maintain and review policies and procedures reasonably
designed to remediate promptly non-compliance issues identified by the
CCO through any compliance office review, look-back, internal or
external audit finding, self-reporting to the Commission and other
appropriate authorities, or complaint that can be validated.\1148\
Proposed Rule 15Fk-1(e)(3) would define ``complaint that can be
validated'' to mean any written complaint by a counterparty involving
the SBS Entity or an associated person that can be supported upon
reasonable investigation. Proposed Rule 15Fk-1(b)(7) would require the
CCO to establish and follow procedures reasonably designed for prompt
handling, management response, remediation, retesting, and resolution
of non-compliance issues.\1149\
---------------------------------------------------------------------------

    \1145\ See Section 15F(k)(2)(C) of the Exchange Act, 15 U.S.C.
78o-10(k)(2)(C).
    \1146\ See Section 15F(k)(2)(D) of the Exchange Act, 15 U.S.C.
78o-10(k)(2)(D).
    \1147\ See Section 15F(k)(2)(E) of the Exchange Act, 15 U.S.C.
78o-10(k)(2)(E).
    \1148\ See Section 15F(k)(2)(F) of the Exchange Act, 15 U.S.C.
78o-10(k)(2)(F).
    \1149\ See Section 15F(k)(2)(G) of the Exchange Act, 15 U.S.C.
78o-10(k)(2)(G).
---------------------------------------------------------------------------

c. Annual Compliance Report
    Proposed Rule 15Fk-1(c)(1) would require that the CCO annually
prepare and sign a report describing the SBS Entity's compliance
policies and procedures (including the code of ethics and conflicts of
interest policies) and the compliance of the SBS Entity with the
Exchange Act and rules and regulations thereunder relating to its
business as an SBS Entity.\1150\ Proposed Rule 15Fk-1(c)(2) would
require that each compliance report also contain, at a minimum, a
description of: (1) The SBS Entity's enforcement of its policies and
procedures relating to its business as an SBS Entity; (2) any material
changes to the policies and procedures since the date of the preceding
compliance report; (3) any recommendation for material changes to the
policies and procedures as a result of the annual review, the rationale
for such recommendation, and whether such policies and procedures were
or will be modified by the SBS Entity to incorporate such
recommendation; and (4) any material compliance matters identified
since the date of the preceding compliance report. Proposed Rule 15Fk-
1(e)(4) would define ``material compliance matter'' to mean any
compliance matter about which the board of directors of the SBS Entity
would reasonably need to know to oversee the compliance of the SBS
Entity, and that involves, without limitation: (1) A violation of the
federal securities laws relating to its business as an SBS Entity by
the SBS Entity or its officers, directors, employees or agents; (2) a
violation of the policies and procedures of the SBS Entity relating to
its business as an SBS Entity by the SBS Entity or its officers,
directors, employees or agents; or (3) a weakness in the design or
implementation of the policies and procedures of the SBS Entity
relating to its business as an SBS Entity.
---------------------------------------------------------------------------

    \1150\ See Section 15F(k)(3)(A) of the Exchange Act, 15 U.S.C.
78o-10(k)(3)(A). As noted in the Proposing Release, the Commission
believes there is a drafting error in the reference to compliance of
the ``major swap participant'' in Section 15F(k)(3)(A) of the
Exchange Act, and accordingly, proposed Rule 15Fk-1(c)(1) would
apply the requirement with respect to the compliance of the ``major
security-based swap participant.'' See Proposing Release, 76 FR at
42436 n.288, supra note 3.
---------------------------------------------------------------------------

    Proposed Rule 15Fk-1(c)(2)(ii)(D) would require the compliance
report to include a certification, under penalty of law, that the
compliance report is accurate and complete.\1151\ Proposed Rule 15Fk-
1(c)(2)(ii)(A) would require that the compliance report accompany each
appropriate financial report of the SBS Entity that is required to be
furnished or filed with the Commission pursuant to Exchange Act Section
15F and the rules and regulations thereunder.\1152\ To allow the
compliance report to accompany each appropriate financial report within
the required timeframe, proposed Rule 15Fk-1(c)(2)(ii)(B) would require
the compliance report to be submitted to the board of directors, the
audit committee and the senior officer of the SBS Entity at the earlier
of their next scheduled meeting or within 45 days of the date of
execution of the certification.
---------------------------------------------------------------------------

    \1151\ See Section 15F(k)(3)(B)(ii) of the Exchange Act, 15
U.S.C. 78o-10(k)(3)(B)(ii).
    \1152\ See Section 15F(k)(3)(B)(i) of the Exchange Act, 15
U.S.C. 78o-10(k)(3)(B)(i).
---------------------------------------------------------------------------

    Proposed Rule 15Fk-1(c)(2)(ii)(C) would require the compliance
report to include a written representation that the chief executive
officer(s) (or equivalent officer(s)) has/have conducted one or more
meetings with the CCO in the preceding 12 months, the subject of which
addresses the SBS Entity's obligations as set forth in the proposed
rules and in Exchange Act Section 15F. The subject of the meeting(s)
must include: (1) The matters that are the subject of the compliance
report; (2) the SBS Entity's compliance efforts as of the date of such
meeting; and (3) significant compliance problems and plans in emerging
business areas relating to its business as an SBS Entity.\1153\
---------------------------------------------------------------------------

    \1153\ Id.
---------------------------------------------------------------------------

    Under proposed Rule 15Fk-1(c)(2)(iii), if compliance reports are
separately bound from the financial statements, the compliance reports
shall be accorded confidential treatment to the extent permitted by
law.
2. Comments on the Proposed Rule
a. Designation, Reporting Line, and Compensation and Removal of the CCO
    Five commenters addressed the designation, reporting line and
compensation and removal of the CCO.\1154\ Two commenters argued for
greater flexibility for SBS Entities with respect to these
requirements.\1155\ The first commenter objected to the mandated line
of reporting of the CCO in the proposed rule (which would require the
CCO to report directly to the board of directors or to the senior
officer of the SBS Entity) and recommended allowing SBS Entities
greater flexibility in determining the most effective reporting
framework in light of their individual structure and
circumstances.\1156\ The commenter noted that, particularly in large
institutions where security-based swap transactions are one of many
lines of business, the proposed rule would prohibit the CCO from
reporting to other senior management who may be more familiar with the
security-based swap activities of the SBS Entity.\1157\ Accordingly,
the commenter recommended that the Commission

define the term ``senior officer'' to include a more senior officer
within the SBS Entity's compliance, risk, legal or other control
function as the SBS Entity shall reasonably determine to be
appropriate.\1158\
---------------------------------------------------------------------------

    \1154\ See FIA/ISDA/SIFMA, supra note 5; CFA, supra note 5;
Better Markets (August 2011), supra note 5; Better Markets (October
2013), supra note 5; Barnard, supra note 5; SIFMA (September 2015),
supra note 5.
    \1155\ See FIA/ISDA/SIFMA, supra note 5; SIFMA (September 2015),
supra note 5.
    \1156\ See FIA/ISDA/SIFMA, supra note 5.
    \1157\ Id.
    \1158\ Id.
---------------------------------------------------------------------------

    Similarly, the second commenter asked the Commission to provide
guidance specifying that if a division of a larger company is an SBS
Entity, then the CCO of such entity could report to the senior officer
of that division.\1159\ Additionally, the commenter requested guidance:
(1) Regarding the supervisory liability of compliance and legal
personnel employed by SBS Entities that is consistent with the guidance
it has issued for broker-dealers' legal and compliance personnel; and
(2) clarifying that the CCO may share additional executive
responsibilities within the SBS Entity.\1160\
---------------------------------------------------------------------------

    \1159\ See SIFMA (September 2015), supra note 5.
    \1160\ Id.
---------------------------------------------------------------------------

    Both commenters objected to the proposed requirement that the
compensation and removal of the CCO be approved by a majority of the
SBS Entity's board of directors.\1161\ The first commenter recommended
eliminating the requirement, noting that the provision is not mandated
by the Dodd-Frank Act, is not consistent with other requirements
applicable to similarly situated employees, and would impose
organizational inefficiencies and other unwarranted costs while
offering minimal benefits.\1162\ The second commenter recommended
allowing either the board of directors or the senior officer of the SBS
Entity to approve the compensation or removal of the CCO to be
consistent with the parallel CFTC requirement, asserting that this
change would reasonably ensure the independence and effectiveness of
the CCO while providing for greater flexibility.\1163\
---------------------------------------------------------------------------

    \1161\ See FIA/ISDA/SIFMA, supra note 5; SIFMA (September 2015),
supra note 5.
    \1162\ See FIA/ISDA/SIFMA, supra note 5.
    \1163\ See SIFMA (September 2015), supra note 5.
---------------------------------------------------------------------------

    Three commenters argued for more stringent requirements with
respect to the designation, reporting line and compensation and removal
of the CCO.\1164\ The first commenter asserted that ensuring market
participants have CCOs with real authority and autonomy to police a
firm from within is one of the most efficient and effective tools
available to regulators, and accordingly, recommended adopting
additional measures to protect the authority and independence of
CCOs.\1165\ Specifically, the commenter suggested: (1) Requiring the
CCO to meet competency standards, including a lack of disciplinary
history and criteria demonstrating relevant knowledge and experience;
(2) prohibiting the CCO from serving as General Counsel or a member of
the legal department of the SBS Entity; (3) appointing a senior CCO
with overall responsibility for compliance by a group of affiliated or
controlled entities; (4) vesting authority in independent board members
to oversee the hiring, compensation, and termination of the CCO; (5)
requiring the CCO to have direct access to the board; and (6)
prohibiting attempts by officers, directors, or employees to coerce,
mislead, or otherwise interfere with the CCO.\1166\
---------------------------------------------------------------------------

    \1164\ See CFA, supra note 5; Better Markets (August 2011),
supra note 5; Better Markets (October 2013), supra note 5; Barnard,
supra note 5.
    \1165\ See Better Markets (October 2013), supra note 5.
    \1166\ See Better Markets (August 2011), supra note 5; Better
Markets (October 2013), supra note 5.
---------------------------------------------------------------------------

    Similarly, the second commenter recommended that the authority and
responsibility to appoint or remove the CCO, or to materially change
its duties and responsibilities, be vested only in the independent
directors and not the full board.\1167\ Additionally, the commenter
suggested that the CCO have only a compliance role and no other role or
responsibility that could create conflicts of interest or threaten its
independence, and that the CCO's compensation be designed in a way that
avoids conflicts of interest.\1168\
---------------------------------------------------------------------------

    \1167\ See Barnard, supra note 5.
    \1168\ Id.
---------------------------------------------------------------------------

    The third commenter asserted that firms should not be permitted to
allow the CCO to report to a senior officer of the firm as a substitute
for reporting to the board.\1169\
---------------------------------------------------------------------------

    \1169\ See CFA, supra note 5.
---------------------------------------------------------------------------

b. Duties of the CCO
    Three commenters addressed the duties of the CCO.\1170\ The first
commenter supported the Commission's approach in the proposal regarding
the role and responsibilities of the CCO, but recommended the following
modifications: (1) Changing the phrase ``ensure compliance'' in
proposed Rule 15Fk-1(b)(5) to ``achieve compliance,'' (2) confirming
that the relevant conflicts of interest under proposed Rule 15Fk-
1(b)(3) would be those which are reasonably identified by the SBS
Entity's policies and procedures, taking into consideration the nature
of the SBS Entity's business, and (3) clarifying that a CCO's
responsibility under proposed Rule 15Fk-1(b)(4) to ``administer'' a
firm's policies and procedures is limited to coordinating supervisors'
administration of the relevant policies and procedures.\1171\
---------------------------------------------------------------------------

    \1170\ See FIA/ISDA/SIFMA, supra note 5; SIFMA (September 2015),
supra note 5; CFA, supra note 5.
    \1171\ See FIA/ISDA/SIFMA, supra note 5.
---------------------------------------------------------------------------

    The second commenter recommended harmonizing the Commission's CCO
requirements with FINRA Rule 3130 and the CFTC's CCO requirements for
Swap Entities to enable SBS Entities that are also broker-dealers and/
or Swap Entities to make use of their existing infrastructure and to
minimize confusion.\1172\ Specifically, the commenter recommended a
number of changes to proposed Rule 15Fk-1(b) to align the description
of the duties of an SBS Entity's CCO with those of a broker-dealer CCO,
as described in applicable FINRA and SEC guidance, and guidance in the
Proposing Release regarding the supervisory responsibilities of an SBS
Entity's CCO.\1173\ In particular, the commenter sought clarification
that the SBS Entity has the responsibility, and not the CCO in his or
her personal capacity, to establish, maintain and review required
policies and procedures.\1174\ The recommended changes include: (1)
Replacing the requirement in proposed Rule 15Fk-1(b)(2) to ``establish,
maintain and review'' written policies and procedures reasonably
designed to achieve compliance with Section 15F of the Act and the
rules and regulations thereunder with a requirement to ``prepare the
registrant's annual assessment of'' such policies and procedures; (2)
qualifying the requirement in proposed Rule 15Fk-1(b)(3) to promptly
resolve conflicts of interest in consultation with the board of
directors or the senior officer of the SBS Entity with the qualifying
language ``take reasonable steps to'' resolve; (3) clarifying that the
requirement in proposed Rule 15Fk-1(b)(4) to administer required
policies and procedures involves ``advising on the development of, and
reviewing, the registrant's processes for (i) modifying those policies
and procedures as business, regulatory and legislative changes and
events dictate, (ii) evidencing supervision by the personnel
responsible for the execution of those policies and procedures, and
(iii) testing the registrant's compliance with those policies and
procedures;'' (4) qualifying the requirements in proposed Rules 15Fk-
1(b)(5)-(7) to establish, maintain and review certain policies and
procedures with the qualifying language ``take reasonable steps to
ensure that the

registrant'' establishes, maintains and reviews such policies and
procedures; and (5) eliminating the timing requirements in proposed
Rules 15Fk-1(b)(6) and (7) that the CCO ``promptly'' take the required
actions.\1175\ Finally, the commenter requested that the Commission
provide guidance explaining that resolution of a conflict of interest
encompasses both elimination and mitigation of the conflict, and that
the CCO's role in resolving conflicts may involve actions other than
making the ultimate decision with regard to such conflict.\1176\
---------------------------------------------------------------------------

    \1172\ See SIFMA (September 2015), supra note 5.
    \1173\ Id.
    \1174\ Id.
    \1175\ Id.
    \1176\ Id.
---------------------------------------------------------------------------

    In contrast, the third commenter recommended mandating that CCOs
have greater authority to resolve and mitigate conflicts of interest
that may cause compliance problems.\1177\ At a minimum, the commenter
suggested requiring the CCO to highlight in the compliance report any
recommendations it made with regard to resolution or mitigation of
conflicts of interest that were not adopted.\1178\
---------------------------------------------------------------------------

    \1177\ See CFA, supra note 5.
    \1178\ Id.
---------------------------------------------------------------------------

c. Annual Compliance Report
    Four commenters addressed the annual compliance report
requirements.\1179\ One commenter noted several concerns with the
annual compliance report requirement.\1180\ First, the commenter
requested that the Commission permit the consolidation of annual
compliance reporting requirements for SBS Entities under common control
(including those that are also registered broker-dealers) to avoid
forcing a consolidated financial institution to submit separate
compliance reports for each SBS Entity and broker-dealer within the
corporate structure.\1181\ Second, the commenter expressed concern
regarding the requirement in proposed Rule 15Fk-1(c)(1)(i) that the
compliance report contain a description of the compliance of the SBS
Entity, as well as a description of the SBS Entity's compliance
policies and procedures, as required under proposed Rule 15Fk-
1(c)(1)(ii).\1182\ The commenter requested that the Commission clarify
that proposed Rule 15Fk-1(c)(1)(i) would be satisfied by a description
of the particular matters set forth in proposed Rule 15Fk-1(c)(2)(i),
noting that a requirement to describe an SBS Entity's ``compliance'' in
an absolute sense is so broad and so vague as to be incapable of being
fulfilled in practice.\1183\ Third, the commenter recommended that the
Commission amend its Freedom of Information Act regulations in a manner
consistent with proposed Rule 15Fk-1(c)(2)(iii), which would provide
that compliance reports bound separately from financial statements
shall be accorded confidential treatment to the extent permitted by
law.\1184\
---------------------------------------------------------------------------

    \1179\ See FIA/ISDA/SIFMA, supra note 5; CFA, supra note 5;
Better Markets (August 2011), supra note 5; Better Markets (October
2013), supra note 5; SIFMA (September 2015), supra note 5.
    \1180\ See FIA/ISDA/SIFMA, supra note 5.
    \1181\ Id.
    \1182\ Id.
    \1183\ Id.
    \1184\ Id.
---------------------------------------------------------------------------

    The commenter also had several concerns regarding the required
certification of the compliance report in proposed Rule 15Fk-
1(c)(2)(ii)(D).\1185\ The commenter noted that the Dodd-Frank Act does
not explicitly require the CCO to be the individual responsible for
certifying the compliance report and recommended that the CEO or other
relevant senior officer, not the CCO, be responsible for the
certification.\1186\ Alternatively, if the CCO is required to certify,
the commenter requested that the CEO also be required to do so.\1187\
Additionally, the commenter requested that the Commission clarify that
the liability standard for the certification is the same as that which
applies to other documents filed with the Commission, including
liability under Section 32 of the Exchange Act for willfully and
knowingly making false or misleading material statements or omissions
to the Commission.\1188\ The commenter also asserted that the certifier
should, as in other contexts, be responsible solely for stating that
the documents were prepared under his or her direction or supervision
in accordance with a system designed to ensure that qualified personnel
would properly gather and evaluate the documents, and that based on his
or her inquiry of those persons who were responsible for gathering the
documents, to the best of his or her knowledge, the documents are
accurate in all material respects.\1189\
---------------------------------------------------------------------------

    \1185\ Id.
    \1186\ Id.
    \1187\ Id.
    \1188\ Id.
    \1189\ Id.
---------------------------------------------------------------------------

    Similarly, the second commenter requested that the Commission
provide guidance clarifying that if a certifying officer has complied
in good faith with policies and procedures reasonably designed to
confirm the accuracy and completeness of annual compliance report, both
the SBS Entity and the certifying officer would have a basis for
defending accusations of false, incomplete, or misleading statements or
representations made in the report.\1190\ The commenter also requested
a number of changes to the annual compliance report requirements in
proposed Rule 15Fk-1(c) to harmonize them with the CFTC's parallel
requirements.\1191\ The commenter argued that alignment of the content
requirements for annual compliance reports ``would allow SBS Entities
to leverage the extensive and rigorous procedures they have adopted to
comply with the CFTC CCO Rule and related guidance.'' \1192\
Specifically, the recommended changes include: (1) Eliminating the
proposed requirement to include a ``description of compliance'' in the
annual compliance report, asserting that this requirement would add
unnecessary ambiguity; (2) specifying that the report need only contain
a description of the ``written'' compliance policies and procedures of
the SBS Entity; (3) changing the proposed description requirement in
proposed Rule 15Fk-1(c)(2)(i)(A) from ``enforcement'' of the SBS
Entity's policies and procedures to an ``assessment of the
effectiveness'' of such policies and procedures; (4) specifying that
the requirement to describe material changes to policies and procedures
in proposed Rule 15Fk-1(c)(2)(i)(B) refers to the ``registrant's''
policies and procedures; (5) changing the proposed description
requirement in proposed Rule 15Fk-1(c)(2)(i)(C) from ``any
recommendation for material changes to the policies and procedures'' to
``areas for improvement, and recommended potential or prospective
changes or improvements to its compliance program and resources devoted
to compliance;'' (6) changing the proposed description requirement in
proposed Rule 15F-1(c)(2)(i)(D) from ``any material compliance
matters'' to ``any material non-compliance matters'' identified since
the date of the preceding report (and eliminating the definition of
material compliance matter); (7) aligning the deadline for filing of
the compliance report with the CFTC's 90 day deadline; (8) allowing for
submission of the compliance report to either the board of directors or
the senior officer, as opposed to requiring submission to both the
board of directors (and audit committee) and the senior officer, as
proposed; (9) eliminating the proposed requirement that the report
contain a written representation regarding the required annual meeting
between the CEO and the CCO; (10) eliminating the proposed
specifications for what topics such

meeting must cover; (11) allowing either the CCO or the senior officer
to certify the annual compliance report to the best of his or her
knowledge; and (12) providing for amendments to, extensions of filing
deadlines for, and incorporation of other reports by reference in the
annual compliance report.\1193\
---------------------------------------------------------------------------

    \1190\ See SIFMA (September 2015), supra note 5.
    \1191\ Id.
    \1192\ Id.
    \1193\ Id.
---------------------------------------------------------------------------

    The third commenter suggested: (1) Requiring the CCO to meet
quarterly with the Audit Committee in addition to annual meetings with
the board of directors and senior management; and (2) requiring the
board to review and comment on, but not edit, the compliance
report.\1194\ Similarly, the fourth commenter expressed support for
requiring the audit committee to review and the CCO to certify the
compliance report, and argued that the CCO should not be permitted to
qualify its report.\1195\
---------------------------------------------------------------------------

    \1194\ See Better Markets (August 2011), supra note 5; Better
Markets (October 2013), supra note 5.
    \1195\ See CFA, supra note 5.
---------------------------------------------------------------------------

3. Response to Comments and Final Rule
    Rule 15Fk-1, as adopted, is designed to be generally consistent
with the current compliance obligations applicable to CCOs of other
Commission-regulated entities,\1196\ as well as with the CFTC's CCO
rules applicable to Swap Entities. As noted in the Proposing Release,
the requirements of Rule 15Fk-1 underscore the central role that sound
compliance programs play to help ensure compliance with the Exchange
Act and rules and regulations thereunder applicable to security-based
swaps.\1197\ The Commission believes that these requirements will help
foster sound compliance programs.\1198\
---------------------------------------------------------------------------

    \1196\ See, e.g., FINRA Rule 3130; Rule 38a-1(a) under the
Investment Company Act of 1940, 17 CFR 270.38a-1(a)(1); Rule 206(4)-
7(a) under the Advisers Act, 17 CFR 275.206(4)-7(a); Rule 13n-11
under the Exchange Act, 17 CFR 240.13n-11.
    \1197\ See Proposing Release, 76 FR at 42435, supra note 3.
    \1198\ See Exchange Act Sections 15F(h)(1)(B) (authorizing the
Commission to prescribe duties for diligent supervision), and
15F(h)(3)(D) (providing authority to prescribe business conduct
standards). 15 U.S.C. 78o-10(h)(1)(B) and 78o-10(h)(3)(D).
---------------------------------------------------------------------------

a. Designation, Reporting Line, and Compensation and Removal of the CCO
    After considering the comments, the Commission is adopting Rule
15Fk-1(a) (designation of the CCO), Rule 15Fk-1(b)(1) (reporting line
of the CCO), Rule 15Fk-1(d) (compensation and removal of the CCO), and
the associated definitions of ``board of directors'' and ``senior
officer'' in Rule 15Fk-1(e)(1) and (2) as proposed. To address concerns
that an SBS Entity's commercial interests might have undue influence on
a CCO's ability to make forthright disclosure to the board of directors
or the senior officer about any compliance failures, the rule is
designed to help promote CCO independence and effectiveness by
establishing a direct reporting line to the board or senior officer,
and by requiring compensation and removal decisions to be made by a
majority of the board of directors. Accordingly, Rule 15Fk-1(b)(1)
requires the CCO to report directly to the board or senior officer of
the SBS Entity.\1199\ In addition, pursuant to Rule 15Fk-1(d) any
decision to remove the CCO from his or her responsibilities or approve
his or her compensation must be made by a majority of the board. The
Commission is not eliminating the requirement that only a majority of
the board can approve the compensation or removal of the CCO, as
suggested by one commenter,\1200\ nor is the Commission broadening the
rule to allow an SBS Entity's senior officer to approve the
compensation and removal of the CCO, as suggested by another
commenter.\1201\ The Commission believes that eliminating the
requirement that only a majority of the board can approve the
compensation or removal of the CCO, or allowing an SBS Entity's senior
officer to approve the compensation and removal of the CCO could
undermine the CCO's independence and effectiveness, particularly if the
CCO is responsible for reviewing the senior officer's compliance with
the Exchange Act and the rules and regulations thereunder.\1202\
---------------------------------------------------------------------------

    \1199\ One commenter recommended that the Commission define the
term ``senior officer'' to include a more senior officer within the
SBS Entity's compliance, risk, legal or other control function as
the SBS Entity shall reasonably determine to be appropriate. See
FIA/ISDA/SIFMA, supra note 5. The Commission declines to make this
change because it could potentially undercut the independence of the
CCO, and as noted above, the Commission believes it is important for
the CCO to be independent to mitigate potential conflicts for the
CCO in reporting or addressing compliance failures. Another
commenter requested that the Commission provide guidance specifying
that if a division of a larger company is an SBS Entity, then the
CCO of such entity could report to the senior officer of that
division. See SIFMA (September 2015), supra note 5. The Commission
has not yet addressed a process through which firms could submit an
application for limited designation as an SBS Entity, such as for a
division within a larger company. See Registration Adopting Release,
80 FR at 48966 n.13, supra note 989 (addressing limited designation
and registration).
    \1200\ See SIFMA (September 2015), supra note 5.
    \1201\ See FIA/ISDA/SIFMA, supra note 5.
    \1202\ This is consistent with the position the Commission took
in adopting CCO requirements for security-based swap data
repositories (``SDRs''). See Security-Based Swap Data Repository
Registration, Duties, and Core Principles, Exchange Act Release No.
74246 (Feb. 11, 2015), 80 FR 14438, 14507 (Mar. 19, 2015) (``SDR
Registration Release'') (``The Commission is not extending the
applicability of this rule to an SDR's senior officer because the
Commission believes that this may unnecessarily create conflicts of
interest for the CCO, particularly if the CCO is subsequently
responsible for reviewing the senior officer's compliance with the
Exchange Act and the rules and regulations thereunder.''). The
Commission also declines to narrow the reporting line requirement to
specify that the CCO must report only to the board of directors (and
not the senior officer), as suggested by one commenter. See CFA,
supra note 5. Exchange Act Section 15F(k)(2)(A) gives SBS Entities
the flexibility of allowing the CCO to report to either the board or
senior officer, and the Commission believes that requiring a
majority of the board to approve the compensation or removal of the
CCO is sufficient to promote the independence of the CCO, allowing
for greater flexibility in the reporting line.
---------------------------------------------------------------------------

    In promoting a CCO's independence and effectiveness, the Commission
does not believe that it is necessary to adopt additional requirements
suggested by commenters prohibiting a CCO from having additional roles
or responsibilities outside of compliance, such as being a member of
the SBS Entity's legal department or from serving as the SBS Entity's
general counsel.\1203\ To the extent that this poses a potential or
existing conflict of interest, the Commission believes that an SBS
Entity's written policies and procedures can be designed to adequately
identify and mitigate any such conflict.\1204\
---------------------------------------------------------------------------

    \1203\ See Better Markets (August 2011), supra note 5; Better
Markets (October 2013), supra note 5; Barnard, supra note 5. Cf.
SIFMA (September 2015), supra note 5 (requesting clarification that
the CCO may share additional executive responsibilities within the
SBS Entity). The Commission is also not adopting a commenter's
suggestion to require the appointment of a senior CCO with overall
responsibility for compliance by a group of affiliated or controlled
entities. See Better Markets (August 2011), supra note 5; Better
Markets (October 2013), supra note 5. The Commission believes
entities should have the flexibility to design their organizational
structure to meet their business needs.
    \1204\ As discussed in Section II.G.6, supra, Rule 15Fh-
3(h)(2)(iii)(H) requires SBS Entities to establish, maintain, and
enforce written policies and procedures reasonably designed to
prevent the supervisory system from being compromised due to the
conflicts of interest that may be present with respect to the
associated person being supervised. This is consistent with the
position the Commission took in adopting CCO requirements for SDRs.
See SDR Registration Release, 80 FR at 14507, supra note 1202 (``In
promoting a CCO's independence and effectiveness, the Commission
does not believe that it is necessary to adopt, as two commenters
suggested, a rule prohibiting a CCO from being a member of the SDR's
legal department or from serving as the SDR's general counsel. To
the extent that this poses a potential or existing conflict of
interest, the Commission believes that an SDR's written policies and
procedures can be designed to adequately identify and mitigate any
associated costs.'').
---------------------------------------------------------------------------

    The Commission also is not adopting rules requiring independent
board members to oversee the hiring, compensation and termination of
the

CCO or any material changes to the CCO's duties, requiring the CCO to
have direct access to the board, or expressly prohibiting attempts by
officers, directors, or employees to coerce, mislead or otherwise
interfere with the CCO, as suggested by commenters.\1205\ The
Commission continues to believe that requiring a majority of the board
to approve the compensation and removal of the CCO is appropriate to
promote the CCO's independence and effectiveness, and believes that it
is appropriate not to provide for additional requirements such as those
suggested by the commenters.\1206\ With this approach, the Commission
intends to promote the independence and effectiveness of the CCO while
also providing SBS Entities flexibility in structuring their businesses
and directing their compliance resources.
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    \1205\ See Better Markets (August 2011), supra note 5; Better
Markets (October 2013), supra note 5; Barnard, supra note 5.
    \1206\ The Commission also believes that requiring a majority of
the board to approve the compensation of the CCO will address a
commenter's concern regarding designing the compensation of the CCO
in a way that avoids conflicts of interest. See Barnard, supra note
5.
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    One commenter suggested requiring the CCO to meet certain
competency standards, including criteria demonstrating relevant
knowledge and experience.\1207\ Given the critical role that a CCO is
intended to play in helping to ensure an SBS Entity's compliance with
the Exchange Act and the rules and regulations thereunder, the
Commission believes that an SBS Entity's CCO generally should be
competent and knowledgeable regarding the federal securities laws,
empowered with full responsibility and authority to develop appropriate
policies and procedures for the SBS Entity, as necessary, and
responsible for monitoring compliance with the SBS Entity's policies
and procedures adopted pursuant to rules under the Exchange Act.\1208\
However, we believe that such considerations are properly vested in the
SBS Entity, based on the particulars of its business, and thus, the
Commission is not adopting specific requirements concerning the
background, training or business experience for a CCO.
---------------------------------------------------------------------------

    \1207\ See Better Markets (August 2011), supra note 5; Better
Markets (October 2013), supra note 5.
    \1208\ This is generally consistent with the position the
Commission took in adopting CCO requirements for SDRs. See SDR
Registration Release, 80 FR at 14510, supra note 1202 (``Given the
critical role that a CCO is intended to play in ensuring an SDR's
compliance with the Exchange Act and the rules and regulations
thereunder, the Commission believes that an SDR's CCO should be
competent and knowledgeable regarding the federal securities laws,
should be empowered with full responsibility and authority to
develop and enforce appropriate policies and procedures for the SDR,
as necessary, and should be responsible for monitoring compliance
with the SDR's policies and procedures adopted pursuant to rules
under the Exchange Act. However, the Commission will not
substantively review a CCO's competency, and is not requiring any
particular level of competency or business experience for a CCO.'').
---------------------------------------------------------------------------

    Another commenter asked that the Commission provide guidance
regarding the supervisory liability of compliance and legal personnel
employed by SBS Entities to reflect the guidance Commission staff has
issued for broker-dealers' legal and compliance personnel.\1209\ The
Commission recognizes that compliance and legal personnel play a
critical role in efforts by regulated entities to develop and implement
effective compliance systems, including by providing advice and counsel
to business line personnel. As noted in the Proposing Release, the
title of CCO does not, in and of itself, carry supervisory
responsibilities, and a CCO does not become a ``supervisor'' solely
because he or she has provided advice or counsel concerning compliance
or legal issues to business line personnel, or assisted in the
remediation of an issue. Consistent with current industry practice, the
Commission generally would not expect a CCO appointed in accordance
with Rule 15Fk-1 to have supervisory responsibilities outside of the
compliance department.\1210\ Accordingly, absent facts and
circumstances that establish otherwise, the Commission generally would
not expect that a CCO would be subject to a sanction by the Commission
for failure to supervise other SBS Entity personnel.\1211\ Moreover, a
CCO with supervisory responsibilities could rely on the provisions of
Rule 15Fh-3(h)(3), under which a person associated with an SBS Entity
shall not be deemed to have failed to reasonably supervise another
person if the conditions in the rule are met.\1212\ The fact that the
Exchange Act does not presume that compliance or legal personnel are
supervisors solely because of their compliance or legal functions does
not in any way diminish the compliance duties of the CCO pursuant to
Rule 15Fk-1(b), as discussed below.
---------------------------------------------------------------------------

    \1209\ See SIFMA (September 2015), supra note 5 (referencing
Division of Trading and Markets Frequently Asked Questions about
Liability of Compliance and Legal Personnel at Broker-Dealers under
Sections 15(b)(4) and 15(b)(6) of the Exchange Act (Sept. 30, 2013),
available at: http://www.sec.gov/divisions/marketreg/faq-cco-supervision-093013.htm).
    \1210\ See Proposing Release, 76 FR at 42436, supra note 3.
    \1211\ Id. Regardless of their status as supervisors, compliance
and legal personnel who otherwise violate the federal securities
laws or aid and abet or cause a violation may independently be held
liable for such violations.
    \1212\ See Proposing Release, 76 FR at 42436, supra note 3.
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b. Duties of the CCO
    After considering the comments, the Commission is adopting Rule
15Fk-1(b)(2)-(4) (duties of the CCO) with a number of modifications. In
response to a commenter's concerns,\1213\ the modifications (discussed
below) are primarily intended to provide certainty regarding the CCO's
duties under the final rule, consistent with the duties in FINRA Rule
3130 and the CFTC's CCO requirements for Swap Entities, and to clarify
the role of the CCO generally. To the extent our requirements are
consistent with FINRA and/or CFTC standards, this consistency should
result in efficiencies for SBS Entities that have already established
infrastructure to comply with the FINRA and/or CFTC standards.
Consistent wording regarding expectations for CCOs will also allow such
SBS Entities to more easily analyze compliance with the Commission's
rule against their existing activities to comply with FINRA Rule 3130
and the CFTC's CCO rule for Swap Entities.
---------------------------------------------------------------------------

    \1213\ See SIFMA (September 2015), supra note 5.
---------------------------------------------------------------------------

    First, we are reorganizing Rule 15Fk-1(b)(2) to provide additional
clarity and certainty as to the obligations of the CCO. Specifically,
our modifications are designed to make clear that in taking reasonable
steps to ensure that the SBS Entity establishes, maintains and reviews
written policies and procedures reasonably designed to achieve
compliance with the Exchange Act and the rules and regulations
thereunder relating to its business as an SBS Entity, the CCO must
satisfy the three specific obligations enumerated in Rule 15Fk-
1(b)(2)(i)-(iii), discussed below.
    Second, in addition to the reorganization described above, we are
making some changes to the descriptions of the duties listed in Rule
15Fk-1(b)(2). As described above, we are making changes to the duty
that now appears in Rule 15Fk-1(b)(2). Specifically, the Commission
agrees with a commenter that it is the responsibility of the SBS
Entity, not the CCO in his or her personal capacity, to establish and
enforce required policies and procedures.\1214\ Accordingly, to reflect
that, the Commission is qualifying the proposed requirement to
establish, maintain and review policies and procedures reasonably
designed to ensure compliance with the Exchange Act and rules and
regulations thereunder with the qualifying language

``take reasonable steps to ensure that the registrant'' establishes,
maintains and reviews such policies and procedures. The Commission is
also changing the requirement in Rule 15Fk-1(b)(2) from a requirement
to ``ensure compliance'' to a requirement to ``achieve compliance''
with the Exchange Act and rules and regulations thereunder relating to
the SBS Entity's business as an SBS Entity in response to a specific
suggestion from a commenter,\1215\ and adding the word ``written''
before policies and procedures to clarify that the policies and
procedures required by the rule must be written. Similar to the
qualifying language with respect to the registrant's policies and
procedures, the Commission is making the change from ``ensure
compliance'' to ``achieve compliance'' to clarify that it is not the
role of the CCO to ``ensure'' compliance. The Commission believes the
formulation ``take reasonable steps to ensure that the registrant
establishes, maintains and reviews written policies and procedures
reasonably designed to achieve compliance'' (as opposed to the proposed
formulation of ``establish, maintain and review policies and procedures
reasonably designed to ensure compliance'') more appropriately
describes the CCO's role. The Commission also notes that the policies
and procedures referred to in Rule 15Fk-1(b)(2) include those required
by Rules 15Fh-3(h)(2)(iii), 15Fk-1(b)(2)(ii) and 15Fk-1(b)(2)(iii), and
any other policies and procedures the SBS Entity deems necessary to
achieve compliance with the Exchange Act and the rules and regulations
thereunder relating to its business as an SBS Entity.
---------------------------------------------------------------------------

    \1214\ See SIFMA (September 2015), supra note 5.
    \1215\ See FIA/ISDA/SIFMA, supra note 5.
---------------------------------------------------------------------------

    We are also modifying the three specific obligations of the CCO now
enumerated in Rule 15Fk-1(b)(2)(i)-(iii) that the CCO must perform to
satisfy his or her duty to take reasonable steps to ensure that the
registrant establishes, maintains and reviews policies and procedures
reasonably designed to achieve compliance. As adopted, Rule 15Fk-
1(b)(2)(i) requires the CCO to ``revie[w] the compliance of the [SBS
Entity] with respect to the [SBS Entity] requirements described in
[S]ection 15F of the [Exchange Act], and the rules and regulations
thereunder, where the review shall involve preparing the registrant's
annual assessment of its written policies and procedures reasonably
designed to achieve compliance with [S]ection 15F of the [Exchange Act]
and the rules and regulations thereunder, by the [SBS Entity].'' The
requirement that the CCO ``prepare the registrant's annual assessment
of its'' written policies and procedures reasonably designed to achieve
compliance with Section 15F of the Exchange Act and the rules and
regulations thereunder represents a change from the proposed
requirement that the CCO ``establish, maintain and review'' such
policies and procedures. We are making this change in response to a
specific suggestion from a commenter.\1216\ As discussed above, the
Commission agrees with the commenter that it is the responsibility of
the SBS Entity, not the CCO in his or her personal capacity, to
establish and enforce required policies and procedures, and believes
that this change clarifies that point.
---------------------------------------------------------------------------

    \1216\ See SIFMA (September 2015), supra note 5.
---------------------------------------------------------------------------

    As adopted, Rule 15Fk-1(b)(2)(ii) requires the CCO to ``tak[e]
reasonable steps to ensure that the registrant establishes, maintains
and reviews policies and procedures reasonably designed to remediate
non-compliance issues identified by the [CCO] through any means,
including any: (A) Compliance office review; (B) Look-back; (C)
Internal or external audit finding; (D) Self-reporting to the
Commission and other appropriate authorities; or (E) Complaint that can
be validated.'' This represents a change from the proposed
requirements: (1) That the CCO ``establish, maintain and review'' such
policies and procedures, and (2) that such policies and procedures be
reasonably designed to remediate ``promptly'' non-compliance issues.
Additionally, as adopted, Rule 15Fk-1(b)(2)(iii) requires the CCO to
``tak[e] reasonable steps to ensure that the registrant establishes and
follows procedures reasonably designed for the handling, management
response, remediation, retesting, and resolution of non-compliance
issues.'' This also represents a change from the proposed requirements:
(1) That the CCO ``establish and follow'' such procedures, and (2) that
such procedures be reasonably designed for the ``prompt'' handling,
management response, remediation, retesting, and resolution of non-
compliance issues.'' We are making these changes in response to
specific suggestions from a commenter.\1217\ As discussed above, the
Commission agrees with the commenter that it is the responsibility of
the SBS Entity, not the CCO in his or her personal capacity, to
establish and enforce required policies and procedures, and believes
that the first change to each provision clarifies that point.
Additionally, as discussed above, eliminating the proposed timing
requirements with respect to the ``prompt'' remediation and handling of
non-compliance issues provides greater consistency with the parallel
CFTC requirements. With this change, the Commission intends to focus
the CCO's efforts on the effective remediation and handling of non-
compliance issues, without placing undue emphasis on speed at the
expense of other factors. We believe, however, that the remediation and
handling of non-compliance issues generally should occur within a
reasonable timeframe.
---------------------------------------------------------------------------

    \1217\ See SIFMA (September 2015), supra note 5.
---------------------------------------------------------------------------

    In addition to the changes described above, the Commission is
making one more modification to the duty to remediate non-compliance
issues in final Rule 15Fk-1(b)(2)(ii). The proposed rule referred only
to non-compliance issues ``identified by the [CCO] through any: (A)
Compliance office review; (B) Look-back; (C) Internal or external audit
finding; (D) Self-reporting to the Commission and other appropriate
authorities; or (E) Complaint that can be validated.'' However, as
noted above, Rule 15Fk-1(b)(2)(iii) requires that the CCO ``tak[e]
reasonable steps to ensure that the registrant establishes and follows
procedures reasonably designed for the handling, management response,
remediation, retesting, and resolution of non-compliance issues''
(emphasis added). Because this requirement is not limited to non-
compliance issues identified by the CCO through a specific means, the
Commission believes it is appropriate to clarify that final Rule 15Fk-
1(b)(2)(ii) covers non-compliance issues identified by the CCO through
any means, including the means specifically listed in sub-paragraphs
(A)-(E) of the rule.
    Third, the Commission is modifying the duties of the CCO now
enumerated in Rules 15Fk-1(b)(3) and (4). As adopted, Rule 15Fk-1(b)(3)
requires the CCO to ``[i]n consultation with the board of directors or
the senior officer of the [SBS Entity], take reasonable steps to
resolve any material conflicts of interest that may arise.'' This
represents a change from the proposed requirement, which would have
required the CCO to ``[i]n consultation with the board of directors or
the senior officer of the [SBS Entity], promptly resolve any conflicts
of interest that may arise.'' The Commission is adding the ``take
reasonable steps'' language and materiality qualifier to further
clarify and qualify the role of the CCO in resolving conflicts of
interest in response to concerns raised by commenters.\1218\ Such
conflicts of

interest could include conflicts between the commercial interests of an
SBS Entity and its statutory and regulatory responsibilities, and
conflicts between, among, or with associated persons of the SBS Entity.
As noted in the Proposing Release and consistent with the discussions
of the CCO's role above, the Commission understands that the primary
responsibility for the resolution of conflicts generally lies with the
business units within SBS Entities because the business line personnel
are those with the power to make decisions regarding the business of
the SBS Entity.\1219\ As a result, the Commission anticipates that the
CCO's role with respect to such resolution and mitigation of conflicts
of interest would include the recommendation of one or more actions, as
well as the appropriate escalation and reporting with respect to any
issues related to the proposed resolution of potential or actual
conflicts of interest, rather than responsibility to execute the
business actions that may be associated with the ultimate resolution of
such conflicts. Furthermore, the Commission recognizes that a CCO
typically will not exercise the supervisory authority to resolve
conflicts of interest, and the revisions to the rule are intended to
clarify that CCOs are not required to actually resolve such
conflicts.\1220\ Finally, in response to a specific suggestion made by
a commenter,\1221\ the Commission is eliminating the proposed timing
requirement with respect to the ``prompt'' resolution of conflicts of
interest to harmonize with the parallel CFTC requirement. With this
change, the Commission intends to focus the CCO's efforts on the
effective resolution of conflicts of interest, without placing undue
emphasis on speed at the expense of other factors. We believe, however,
that the resolution of conflicts of interest generally should occur
within a reasonable timeframe.
---------------------------------------------------------------------------

    \1218\ See FIA/ISDA/SIFMA, supra note 5 (requesting confirmation
that the relevant conflicts of interest under proposed Rule 15Fk-
1(b)(3) would be those which are reasonably identified by the SBS
Entity's policies and procedures, taking into consideration the
nature of the SBS Entity's business); SIFMA (September 2015), supra
note 5 (recommending qualifying the requirement to promptly resolve
conflicts of interest in consultation with the board or senior
officer with the qualifying language ``take reasonable steps to''
resolve, and requesting guidance explaining that resolution of a
conflict of interest encompasses both elimination and mitigation of
the conflict and that the CCO's role in resolving conflicts may
involve actions other than making the ultimate decision with regard
to such conflict).
    \1219\ See Proposing Release, 76 FR at 42436, supra note 3.
    \1220\ This is consistent with the position the Commission took
in adopting a similar requirement for CCOs of SDRs. See SDR
Registration Release, 80 FR at 14510, supra note 1202. The
Commission is not, as suggested by one commenter, expressly
requiring the CCO to highlight in the annual compliance report any
recommendations he or she made with regard to resolution or
mitigation of conflicts of interest that were not adopted. See CFA,
supra note 5. The Commission believes the requirement in Rule 15Fk-
1(c)(2)(i)(C) to include a description in the annual compliance
report of areas for improvement, and recommended potential or
prospective changes or improvements to its compliance program and
resources, as discussed below, will adequately cover such issues.
The requirement is broadly framed and will allow the CCO the
flexibility to include in the annual compliance report a description
of any areas where the CCO thinks the compliance program needs to be
improved, including, as appropriate, any recommendations the CCO
made with regard to the resolution or mitigation of conflicts of
interest that have not yet been adopted.
    \1221\ See SIFMA (September 2015), supra note 5.
---------------------------------------------------------------------------

    As adopted, Rule 15Fk-1(b)(4) requires the CCO to ``[a]dminister
each policy and procedure that is required to be established pursuant
to [S]ection 15F of the [Exchange Act] and the rules and regulations
thereunder.'' This represents a change from the proposed requirement
that the CCO ``be responsible for'' administering such policies and
procedures. The Commission is eliminating the words ``be responsible
for'' because we believe they are unnecessary and could cause
confusion. The CCO is responsible for complying with all of the duties
listed in Rule 15Fk-1(b)(2)-(4). Commenters requested clarifications as
to what the CCO's administration of the required policies and
procedures would entail.\1222\ The Commission recognizes that the CCO
cannot be a guarantor of the SBS Entity's conduct. The Commission
believes that such administration generally should involve: (1)
Reviewing, evaluating, and advising the SBS Entity and its risk
management and compliance personnel on the development, implementation
and monitoring of the policies and procedures of the SBS Entity,
including procedures reasonably designed for the handling, management
response, remediation, retesting and resolution of non-compliance
issues as required by Rule 15Fk-1(b)(2)(iii); and (2) reviewing,
evaluating, following and reasonably responding to the development,
implementation and monitoring of the SBS Entity's processes for (a)
modifying its policies and procedures as business, regulatory and
legislative changes dictate; (b) evidencing supervision by the
personnel responsible for the execution of its policies and procedures;
(c) testing the SBS Entity's compliance with, and the adequacy of, its
policies and procedures; and (d) resolving, escalating and reporting
issues or concerns. In carrying out this administration, the Commission
believes that the CCO generally should consult, as appropriate, with
business lines, management and independent review groups regarding
resolution of compliance issues.
---------------------------------------------------------------------------

    \1222\ See SIFMA (September 2015), supra note 5 (requesting the
addition of rule text explaining that ``such administration shall
involve advising on the development of, and reviewing, the
registrant's processes for (i) modifying those policies and
procedures as business, regulatory and legislative changes and
events dictate, (ii) evidencing supervision by the personnel
responsible for the execution of those policies and procedures, and
(iii) testing the registrant's compliance with those policies and
procedures''); FIA/ISDA/SIFMA, supra note 5 (requesting
clarification that a CCO's responsibility to administer a firm's
policies and procedures is limited to coordinating supervisors'
administration of the relevant policies and procedures).
---------------------------------------------------------------------------

c. Annual Compliance Report
    After considering the comments, the Commission is adopting Rule
15Fk-1(c) (annual compliance report) with a number of modifications, as
discussed below. In response to concerns raised by a commenter,\1223\
these changes are primarily intended to harmonize the annual compliance
report requirements with the CFTC's parallel requirements. As discussed
above, this consistency will result in efficiencies for SBS Entities
that have already established infrastructure to comply with the CFTC
requirements. Consistent wording regarding expectations for the annual
compliance report will also allow such SBS Entities to more easily
analyze compliance with the Commission's rule against their existing
activities to comply with the CFTC's parallel rule for Swap Entities.
---------------------------------------------------------------------------

    \1223\ See SIFMA (September 2015), supra note 5.
---------------------------------------------------------------------------

    First, the Commission is making a clarifying change to Rule 15Fk-
1(c)(1) to consistently refer to the annual report required by Rule
15Fk-1(c) as the ``compliance report.'' This wording change will not
alter the substantive requirements of the rule. It is only meant to
clarify that the rule refers to a single annual compliance report.
Second, the Commission is eliminating the proposed requirement to
include a description of ``the compliance'' of the SBS Entity in the
annual compliance report in response to concerns raised by
commenters,\1224\ and specifying that the requirement to include a
description of the compliance policies and procedures only requires a
description of the ``written'' compliance policies and procedures of
the SBS Entity pursuant to Rule 15Fk-1(c)(1), in response to a specific
suggestion from a commenter.\1225\ The Commission agrees

with commenters that the proposed requirement to describe ``the
compliance'' of the SBS Entity was vague and believes these clarifying
changes will facilitate SBS Entities' compliance with the rule, which
will still require an SBS Entity to provide information demonstrating
how the SBS Entity complies with the applicable requirements of the
Exchange Act and the rules and regulations thereunder in the form of
the SBS Entity's written compliances policies and procedures. As
adopted, Rule 15Fk-1(c)(1) requires the CCO to ``annually prepare and
sign a compliance report that contains a description of the written
policies and procedures of the [SBS Entity] described in paragraph (b)
(including the code of ethics and conflict of interest policies).'' The
Commission believes that SBS Entities can fulfill this requirement by
either providing copies or summaries of their written compliance
policies and procedures in the annual compliance report. These changes
will also harmonize the annual compliance report requirements with the
CFTC's parallel requirements, as discussed above.
---------------------------------------------------------------------------

    \1224\ See SIFMA (September 2015), supra note 5; FIA/ISDA/SIFMA,
supra note 5.
    \1225\ See SIFMA (September 2015), supra note 5. Cf. Commodity
Exchange Act Rule 3.3(e)(1) (``The annual report shall, at a minimum
. . . [c]ontain a description of the written policies and
procedures, including the code of ethics and conflicts of interest
policies, of the futures commission merchant, swap dealer, or major
swap participant.'').
---------------------------------------------------------------------------

    The Commission is also making certain modifications to the required
content of the annual compliance report in Rule 15Fk-1(c)(2) in
response to specific suggestions from a commenter.\1226\ First, the
Commission is specifying that the requirement to describe material
changes to policies and procedures since the date of the preceding
compliance report in Rule 15Fk-1(c)(2)(i)(B) refers to the
``registrant's'' policies and procedures. This is a clarification and
does not change the substance of the requirement. The phrase ``since
the date of the preceding compliance report'' in the rule refers to the
coverage date of the prior year's compliance report, not the date on
which it was prepared. Accordingly, pursuant to Rule 15Fk-
1(c)(2)(i)(B), as adopted, an SBS Entity must describe in its annual
compliance report any material changes to the SBS Entity's policies and
procedures for the time period covered by the report.
---------------------------------------------------------------------------

    \1226\ See SIFMA (September 2015), supra note 5.
---------------------------------------------------------------------------

    Second, the Commission is making a number of changes to harmonize
the content requirements for the annual compliance report with the
CFTC's parallel requirements for the annual compliance reports of Swap
Entities. The Commission agrees with the commenter that alignment of
the content requirements will allow SBS Entities that are also
registered as Swap Entities to leverage the procedures they have
adopted to comply with the CFTC's parallel CCO rule.\1227\
Specifically, the Commission is changing the proposed requirement in
Rule 15Fk-1(c)(2)(i)(A) that the annual compliance report contain a
description of the ``enforcement'' of the SBS Entity's policies and
procedures to an ``assessment of the effectiveness'' of such policies
and procedures.\1228\ The Commission believes that an ``assessment of
the effectiveness'' of the SBS Entity's policies and procedures is a
more appropriate description because the Commission is looking for a
self-evaluation in the annual compliance report, not a detailed
description of the mechanisms through which the SBS Entity's policies
and procedures are enforced. Additionally, the Commission believes that
providing consistency with the parallel CFTC requirement will allow SBS
Entities to leverage any existing procedures, as discussed above.
---------------------------------------------------------------------------

    \1227\ See SIFMA (September 2015), supra note 5.
    \1228\ Cf. Commodity Exchange Act Rule 3.3(e)(2)(ii) (``The
annual report shall, at a minimum . . . [r]eview each applicable
requirement under the Act and Commission regulations, and with
respect to each . . . [p]rovide an assessment as to the
effectiveness of these policies and procedures.'').
---------------------------------------------------------------------------

    The Commission is also changing the proposed requirement in Rule
15Fk-1(c)(2)(i)(C) that the annual compliance report contain a
description of ``any recommendation for material changes to the
policies and procedures'' to a requirement to describe ``areas for
improvement, and recommended potential or prospective changes or
improvements to its compliance program and resources devoted to
compliance.'' \1229\ As discussed above, this change is in response to
a specific suggestion from a commenter.\1230\ A description of ``areas
for improvement, and recommended potential or prospective changes or
improvements to [an SBS Entity's] compliance program and resources
devoted to compliance'' is broader and would include any
recommendations made by the CCO with respect to material changes to the
SBS Entity's compliance policies and procedures. Accordingly, the
Commission does not believe this wording change diminishes the scope of
the required content of the annual compliance report. At the same time,
however, this wording change makes the rule consistent with the
parallel CFTC requirements and thus will allow SBS Entities to leverage
any existing procedures, as discussed above.
---------------------------------------------------------------------------

    \1229\ Cf. Commodity Exchange Act Rule 3.3(e)(2)(iii) (``The
annual report shall, at a minimum . . . [r]eview each applicable
requirement under the Act and Commission regulations, and with
respect to each . . . [d]iscuss areas for improvement, and recommend
potential or prospective changes or improvements to its compliance
program and resources devoted to compliance.'').
    \1230\ See SIFMA (September 2015), supra note 5.
---------------------------------------------------------------------------

    Additionally, the Commission is changing the proposed requirement
that the annual compliance report contain a description of ``any
material compliance matters identified since the date of the preceding
compliance report'' to a requirement to describe ``any material non-
compliance matters identified'' in Rule 15Fk-1(c)(2)(i)(D).\1231\ The
change from ``material compliance matter'' to ``material non-compliance
matter'' is in response to a specific suggestion from a
commenter.\1232\ It is not a substantive change and is simply intended
to provide consistency with the parallel CFTC requirement to allow SBS
Entities to leverage any existing procedures, as discussed above. The
Commission is also otherwise adopting the definition of material non-
compliance matter in Rule 15Fk-1(e)(4), as proposed.\1233\ The
elimination of the phrase ``since the date of the preceding compliance
report'' in the final rule is also intended to harmonize with the
parallel CFTC requirement and respond to commenters' general concerns
regarding consistency with parallel CFTC requirements.\1234\
Additionally, with this change, the Commission intends to clarify that
the annual compliance report should describe both material non-
compliance matters that are newly identified during the time period
covered by the report and previously identified material non-compliance
matters that have not yet been resolved as of the end of the time
period covered by the report.
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    \1231\ Cf. Commodity Exchange Act Rule 3.3(e)(5) (``The annual
report shall, at a minimum . . . [d]escribe any material non-
compliance issues identified, and the corresponding action
taken.'').
    \1232\ See SIFMA (September 2015), supra note 5.
    \1233\ The Commission declines to eliminate the definition of
material non-compliance matter to be consistent with the CFTC's
parallel requirement (which does not contain a definition), as
suggested by a commenter. See SIFMA (September 2015), supra note 5.
The Commission believes it is important to provide an explanation in
the rule of what should be included in the annual compliance report.
    \1234\ See, e.g., Barnard, supra note 5; Levin, supra note 5;
BlackRock, supra note 5; Nomura, supra note 5.
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    Finally, the Commission is adding a requirement in Rule 15Fk-
1(c)(2)(i)(E) for an SBS Entity to include a description in its annual
compliance report of the ``financial, managerial, operational, and
staffing resources set aside for compliance with the [Exchange Act] and
the rules and regulations

thereunder relating to [the SBS Entity's] business as [an SBS Entity],
including any material deficiencies in such resources.'' \1235\ The
Commission is adding this requirement to harmonize with the CFTC's
parallel content requirement for the annual compliance reports of Swap
Entities, and to respond to commenters' general concerns regarding
consistency with parallel CFTC requirements.\1236\ The Commission
believes that a description of an SBS Entity's compliance resources and
any deficiencies in such resources will be useful in assessing the
compliance of the SBS Entity.
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    \1235\ Cf. Commodity Exchange Act Rule 3.3(e)(4) (``The annual
report shall, at a minimum . . . [d]escribe the financial,
managerial, operational, and staffing resources set aside for
compliance with respect to the [Commodity Exchange Act] and [CFTC]
regulations, including any material deficiencies in such
resources.'').
    \1236\ See, e.g., Barnard, supra note 5; Levin, supra note 5;
BlackRock, supra note 5; Nomura, supra note 5.
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    The Commission is also making a number of changes with respect to
the submission of the annual compliance report. First, the Commission
is aligning the deadline for submitting the report with the CFTC's
deadline of 90 days after the end of the Swap Entity's fiscal year in
response to concerns raised by a commenter.\1237\ As adopted, Rule
15Fk-1(c)(2)(ii)(A) will require an SBS Entity's compliance report to
``be submitted to the Commission within 30 days following the deadline
for filing the [SBS Entity's] annual financial report with the
Commission pursuant to Section 15F of the Act and rules and regulations
thereunder.'' \1238\ This represents a change from the proposed
requirement that the compliance report ``[a]ccompany each appropriate
financial report of the [SBS Entity] that is required to be furnished
to or filed with the Commission pursuant to Section 15F of the Act and
rules and regulations thereunder.'' In response to concerns raised by a
commenter, this change will provide SBS Entities with additional time
to prepare their annual compliance reports after they have filed their
annual financials.\1239\ The Commission proposed a 60 day deadline from
the end of the SBS Entity's fiscal year for the filing of an SBS
Entity's annual financials, so to the extent the Commission adopts its
proposed deadline for the annual financials, this change should also
result in consistency with the CFTC's 90 day deadline for furnishing
the annual compliance report.\1240\
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    \1237\ See SIFMA (September 2015), supra note 5; No-Action
Relief for Futures Commission Merchants, Swap Dealers, and Major
Swap Participants from Compliance with the Timing Requirements of
Commission Regulation 3.3(f)(2) Relating to Annual Reports by Chief
Compliance Officers, CFTC Letter No. 15-15 (Mar. 27, 2015),
available at<EMAIL_ADDRESS>    \1238\ Section 15F(k)(3)(B)(i) of the Exchange Act provides that
a compliance report shall ``accompany each appropriate financial
report of the [SBS Entity] that is required to be furnished to the
Commission pursuant to this section.'' 15 U.S.C. 78o-10(k)(3)(B)(i).
The Commission is interpreting ``accompany'' in Section
15F(k)(3)(B)(i) to mean follow within 30 days.
    \1239\ See SIFMA (September 2015), supra note 5.
    \1240\ See Recordkeeping Release, 79 FR at 25135, supra note
242.
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    Second, in connection with the change described above, the
Commission is eliminating the proposed provision that ``[i]f compliance
reports are separately bound from the financial statements, the
compliance reports shall be accorded confidential treatment to the
extent permitted by law.'' The Commission believes this provision is no
longer necessary in light of the changes we are making to Rule 15Fk-
1(c)(2)(ii)(A), discussed above, which will no longer require the
compliance report to accompany the SBS Entity's financial report. SBS
Entities may request confidential treatment for their annual compliance
reports pursuant to Exchange Act Rule 24b-2.\1241\
---------------------------------------------------------------------------

    \1241\ See 17 CFR 240.24b-2. The change to the rule renders moot
a commenter's request that the Commission amend its FOIA regulations
in a manner consistent with proposed Rule 15Fk-1(c)(2)(iii). See
FIA/ISDA/SIFMA, supra note 5.
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    Third, in response to comment,\1242\ the Commission is adding a new
Rule 15Fk-1(c)(2)(iii) allowing an SBS Entity to request from the
Commission an extension of the deadline for submitting its annual
compliance report to the Commission. The Commission agrees with the
commenter that it is appropriate to establish a framework for when an
SBS Entity is unable to meet the deadline. Pursuant to Rule 15Fk-
1(c)(2)(iii), an SBS Entity may request an extension, provided that the
SBS Entity's failure to timely submit the report could not be
eliminated without unreasonable effort or expense. Extensions of the
deadline will be granted at the discretion of the Commission. Rule
15Fk-1(c)(2)(iii) will also be consistent with CFTC rules regarding
extensions of deadlines for compliance reports by Swap Entities.\1243\
---------------------------------------------------------------------------

    \1242\ See SIFMA (September 2015), supra note 5.
    \1243\ See Swap Dealer and Major Swap Participant Recordkeeping,
Reporting, and Duties Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and Chief Compliance
Officer Rules for Swap Dealers, Major Swap Participants, and Futures
Commission Merchants, 77 FR 20128, 20201 (Apr. 3, 2012) (``CFTC CCO
Adopting Release'').
---------------------------------------------------------------------------

    Fourth, the Commission is changing the required timing of
submission of the compliance report to the board of directors, audit
committee and senior officer of the SBS Entity. The timing requirement
in proposed Rule 15Fk-1(c)(3)(ii)(B) (``at the earlier of their next
scheduled meeting or within 45 days of the date of execution of the
required certification'') was based on the timeframe provided in the
FINRA rule regarding annual certification of compliance and supervisory
processes.\1244\ The FINRA rule allows for submission of the compliance
report to the board of directors either before or after execution of
the required certification.\1245\ The Commission understands, however,
that prudent corporate governance generally would require submission to
the board of directors and senior officer before the execution of the
certification. Accordingly, as adopted, Rule 15Fk-1(c)(2)(ii)(B)
requires that the compliance report be submitted to the board of
directors, audit committee and senior officer of the SBS Entity ``prior
to submission to the Commission.'' This timing requirement will be
consistent with both Commission rules regarding compliance reports by
SDRs and CFTC rules regarding compliance reports by Swap
Entities.\1246\ This consistency with CFTC requirements will allow SBS
Entities to leverage any existing procedures, as discussed above.
---------------------------------------------------------------------------

    \1244\ See FINRA Rule 3130(c).
    \1245\ Id.
    \1246\ See SDR Registration Release, 80 FR at 14512, supra note
1202; CFTC CCO Adopting Release, 77 FR at 20201, supra note 1243.
---------------------------------------------------------------------------

    The Commission declines to modify this provision, as suggested by a
commenter, to allow for submission of the compliance report to either
the board or the senior officer.\1247\ The Commission believes that
requiring submission to the board, audit committee and senior officer
will promote an effective compliance system by ensuring that all of
these groups, not just the senior officer, have the opportunity to
review the report. The Commission believes it is important for the
board, the audit committee and the senior officer to all have the
opportunity to receive the compliance report so that they remain
informed regarding the SBS Entity's compliance system in the context of
their overall responsibility for governance and internal controls of
the SBS Entity. However, the Commission declines to explicitly require
the board to review and comment on the compliance report, require the
audit committee to review the compliance report, or require the CCO to
meet quarterly with the audit committee, as

suggested by other commenters.\1248\ The Commission does not think it
is necessary to explicitly require the board, audit committee or senior
officer to review or comment on the compliance report that they
receive, or to require the CCO to meet with the audit committee because
we believe the goals of the rule can be achieved without such a
requirement.
---------------------------------------------------------------------------

    \1247\ See SIFMA (September 2015), supra note 5.
    \1248\ See Better Markets (August 2011), supra note 5; Better
Markets (October 2013), supra note 5; CFA, supra note 5.
---------------------------------------------------------------------------

    Additionally, in response to concerns raised by a commenter \1249\
and to harmonize with the parallel CFTC requirement and FINRA Rule
3130, the Commission is eliminating: (1) The proposed requirement that
the report contain a written representation regarding the required
annual meeting between the senior officer and the CCO, and (2) the
proposed specifications for what topics such meeting must cover. The
Commission agrees with the commenter that since the purpose of the
required annual meeting between the senior officer and CCO is to
discuss the annual compliance report and since the contents of the
annual compliance report are already specified in Rule 15Fk-1(c)(2)(i),
it is unnecessary to also specify the topics that should be discussed
in the annual meeting. Additionally, this consistency with CFTC and
FINRA requirements will allow SBS Entities to leverage any existing
procedures, as discussed above.
---------------------------------------------------------------------------

    \1249\ See SIFMA (September 2015), supra note 5.
---------------------------------------------------------------------------

    To address concerns raised by commenters,\1250\ we also are
modifying Rule15Fk-1(c)(2)(ii)(D) to provide that either the senior
officer or CCO can execute the compliance report certification and to
add knowledge and materiality qualifiers to the certification
requirement. The proposed rule would have required the compliance
report to include a certification that, under penalty of law, the
compliance report is accurate and complete, without specifying who must
execute the certification. As adopted, Rule 15Fk-1(c)(2)(ii)(D)
requires the compliance report to include a certification ``from the
senior officer or Chief Compliance Officer that, to the best of his or
her knowledge and reasonable belief, under penalty of law, the
compliance report is accurate and complete in all material respects.''
The Commission believes that allowing either the senior officer or CCO
to execute the certification is appropriate because both the senior
officer and the CCO should be in a position to certify the accuracy and
completeness of the compliance report. As noted by a commenter,\1251\
Exchange Act Section 15F(k)(3)(B)(ii) requires that the compliance
report include a certification but does not specify who must execute
the certification.\1252\ The FINRA rule regarding annual certification
of compliance and supervisory processes requires the CEO (or an
equivalent officer) to execute the certification.\1253\ In contrast,
Commission rules regarding compliance reports by SDRs require the CCO
to execute the certification.\1254\ CFTC rules regarding compliance
reports by Swap Entities allow either the CEO or the CCO to execute the
required certification.\1255\ Rule 15Fk-1(c)(2)(ii)(D) will be
consistent with the parallel CFTC rule and will allow flexibility for
SBS Entities who might also be registered broker-dealers and FINRA
members, and therefore, subject to the FINRA rule regarding annual
certification of compliance and supervisory processes. As discussed
above, consistency with CFTC requirements will allow SBS Entities to
leverage any existing procedures.
---------------------------------------------------------------------------

    \1250\ See FIA/ISDA/SIFMA, supra note 5 (requesting that the CEO
or other relevant senior officer be the individual responsible for
executing the certification, or in the alternative, if the CCO is
required to certify, that the CEO also be required to do so); CFA,
supra note 5 (requesting that the CCO be the individual responsible
for executing the certification); SIFMA (September 2015), supra note
5 (requesting that either the senior officer or CCO be permitted to
execute the certification).
    \1251\ See FIA/ISDA/SIFMA, supra note 5.
    \1252\ See Section 15F(k)(3)(B)(ii) of the Exchange Act, 15
U.S.C. 78o-10(k)(3)(B)(ii).
    \1253\ See FINRA Rule 3130(c).
    \1254\ See SDR Registration Release, 80 FR at 14511-14512, supra
note 1202.
    \1255\ See CFTC CCO Adopting Release, 77 FR at 20201, supra note
1243.
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    Additionally, the Commission believes it is appropriate to add the
knowledge and materiality qualifiers described above to the required
certification to address commenters' concerns regarding the liability
standard for the certification.\1256\ The Commission believes that a
certification to the best of the knowledge and reasonable belief of the
certifying officer that the compliance report is accurate and complete
in all material respects is appropriate to ensure effective reporting
with respect to the compliance of the SBS Entity.\1257\
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    \1256\ See FIA/ISDA/SIFMA, supra note 5; SIFMA (September 2015),
supra note 5. Contra. CFA, supra note 5 (arguing that the CCO should
not be permitted to qualify its report).
    \1257\ Cf. General Rule of Practice 153(b)(1)(ii), 17 CFR
201.153(b)(1)(ii) (requiring an attorney who signs a filing with the
Commission to certify that ``to the best of his or her knowledge,
information, and belief, formed after reasonable inquiry, the filing
is well grounded in fact and is warranted by existing law or a good
faith argument for the extension, modification, or reversal of
existing law'').
---------------------------------------------------------------------------

    In response to a specific suggestion from a commenter,\1258\ the
Commission is also adding a new Rule 15Fk-1(c)(2)(iv) allowing an SBS
Entity to incorporate by reference sections of a compliance report that
have been submitted within the current or immediately preceding
reporting period to the Commission. The rule allows an SBS Entity to:
(1) Incorporate by reference items from a previous year's compliance
report, or (2) for an SBS Entity that is registered in more than one
capacity with the Commission and required to submit more than one
compliance report,\1259\ incorporate by reference into its compliance
report required by Rule 15Fk-1(c) sections in another compliance report
submitted to the Commission by it in its capacity as another type of
registered entity within the current or immediately preceding reporting
period.\1260\ The Commission is limiting incorporation by reference to
reports submitted within the current or immediately preceding reporting
period, which will be the fiscal year of the SBS Entity, because we
want to ensure that compliance reports do not simply continue to refer
back to prior year's reports. Rule 15Fk-1(c)(2)(iv) will also be
consistent with CFTC rules regarding compliance reports by Swap
Entities.\1261\
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    \1258\ See SIFMA (September 2015), supra note 5.
    \1259\ See SDR Registration Release, 80 FR at 14510-14512, supra
note 1202.
    \1260\ The Commission declines to permit the consolidation of
annual compliance reporting requirements for SBS Entities under
common control, as suggested by one commenter. See FIA/ISDA/SIFMA,
supra note 5. The Commission believes it is appropriate to require
an SBS Entity to submit a separate compliance report, as
contemplated by Section 15F(k)(3)(B) of the Exchange Act. However,
as discussed above, the Commission has made a number of changes to
Rule 15Fk-1 to further harmonize the requirements of the rule with
FINRA Rule 3130 and the CFTC's CCO requirements for Swap Entities so
that SBS Entities that are also registered broker-dealers that are
FINRA members and/or Swap Entities can leverage their existing
procedures to comply with the rule.
    \1261\ See CFTC CCO Adopting Release, 77 FR at 20201, supra note
1243.
---------------------------------------------------------------------------

    Finally, in response to a specific suggestion from a
commenter,\1262\ the Commission is adding a new Rule 15Fk-1(c)(2)(v)
requiring an SBS Entity to submit an amended compliance report if
material errors or omissions in the report are identified. The amended
report must contain the required certification by the CCO or senior
officer, described above. The Commission is adding this rule to promote
accurate and complete compliance reports. When an SBS Entity discovers
a material error or omission in its annual compliance report subsequent
to submitting the

report to the Commission, we believe it is appropriate for an SBS
Entity to be required to submit an amended report. This does not
include a situation where an SBS Entity's annual compliance report
becomes inaccurate or incomplete due to events occurring after the
coverage date of the report. Material errors or omissions should be
judged as of the coverage date of the report. Rule 15Fk-1(c)(2)(v) will
also be consistent with CFTC rules regarding amended compliance reports
by Swap Entities.\1263\
---------------------------------------------------------------------------

    \1262\ See SIFMA (September 2015), supra note 5.
    \1263\ See CFTC CCO Adopting Release, 77 FR at 20201, supra note
1243.
---------------------------------------------------------------------------

J. Prime Brokerage Transactions

    One commenter recommended that the Commission adopt a new rule that
would, in connection with security-based swaps executed under a prime
brokerage arrangement, permit the executing dealer and prime broker to
allocate responsibility for compliance with certain external business
conduct obligations in a manner consistent with CFTC No-Action Letter
13-11.\1264\ The commenter noted that the Commission staff has
previously addressed circumstances in which the executing broker and
prime broker in a securities prime brokerage arrangement allocate
certain responsibilities between themselves in different
contexts.\1265\
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    \1264\ See SIFMA (August 2015), supra note 5.
    \1265\ See Letter to Mr. Jeffrey C. Bernstein, Prime Broker
Committee, from Brandon Becker, Director, Division of Market
Regulation, Commission, dated January 25, 1994.
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    The commenter described a particular situation in which a
counterparty (``Prime Broker Client'') enters into an agreement with a
registered SBS Dealer (``Prime Broker''). That agreement establishes
parameters under which the Prime Broker Client, acting as agent of the
Prime Broker, can negotiate and enter into security-based swaps with
certain registered SBS Dealers (collectively, the ``Executing
Dealer''). If a security-based swap negotiated by the Prime Broker
Client with the Executing Dealer is accepted by the Prime Broker, the
Prime Broker will enter into a corresponding security-based swap with
the Prime Broker Client, the terms of which mirror the terms of the
security-based swap between the Executing Dealer and the Prime Broker,
subject to associated prime brokerage fees agreed by the parties.
    In these circumstances, the Prime Broker Client may have entered
into a security-based swap with the Prime Broker based not only on
communications with the Prime Broker but also on communications
including disclosure of material terms and other representations, and
possibly on the basis of a recommendation by the Executing Dealer.
According to this commenter, in these circumstances, the Prime Broker
is in the best position to take responsibility for compliance with the
external business conduct standards that relate to the general
relationship between the Prime Broker and the Prime Broker Client,
whereas the Executing Dealer is in the best position to take
responsibility for compliance with business conduct standards that are
transaction-specific. The commenter expressed the view that unless SBS
Dealers are permitted to allocate compliance with the external business
conduct standards between the Prime Broker and the Executing Dealer, it
would be impossible to continue existing prime brokerage
arrangements.\1266\
---------------------------------------------------------------------------

    \1266\ We recognize that there may be other ways that parties
structure their prime brokerage arrangements. The above discussion
is based on the description of the arrangement in the proposed rule
text provided by the commenter.
---------------------------------------------------------------------------

    The commenter proposed a rule under which the Prime Broker and the
Executing Dealer would have the full range of business conduct