[Federal Register Volume 81, Number 93 (Friday, May 13, 2016)]
[Rules and Regulations]
[Pages 29959-30151]
[FR Doc No: 2016-10918]

Vol. 81

Friday,

No. 93

May 13, 2016

Part II

Securities and Exchange Commission

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17 CFR Part 240

Business Conduct Standards for Security-Based Swap Dealers and Major
Security-Based Swap Participants; Final Rule

Federal Register / Vol. 81 , No. 93 / Friday, May 13, 2016 / Rules
and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-77617; File No. S7-25-11]
RIN 3235-AL10

Business Conduct Standards for Security-Based Swap Dealers and
Major Security-Based Swap Participants

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: In accordance with Section 764 of Title VII (``Title VII'') of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
``Dodd-Frank Act''), the Securities and Exchange Commission (``SEC'' or
``Commission'') is adopting new rules under the Securities Exchange Act
of 1934 (``Exchange Act'') that are intended to implement provisions of
Title VII relating to business conduct standards and the designation of
a chief compliance officer for security-based swap dealers and major
security-based swap participants. The final rules also address the
cross-border application of the rules and the availability of
substituted compliance.

DATES: Effective Date: July 12, 2016.
    Compliance Date: The compliance dates are discussed in Section IV.B
of this release.

FOR FURTHER INFORMATION CONTACT: Lourdes Gonzalez, Assistant Chief
Counsel--Sales Practices, Joanne Rutkowski, Senior Special Counsel,
Cindy Oh, Special Counsel, Lindsay Kidwell, Special Counsel, Stacy
Puente, Special Counsel, Devin Ryan, Special Counsel, Office of Chief
Counsel, Division of Trading and Markets, at<PHONE_NUMBER>, at the
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549. For further information on cross-border application of the
rules, contact: Carol McGee, Assistant Director, Richard Gabbert,
Senior Special Counsel, Joshua Kans, Senior Special Counsel, and
Margaret Rubin, Special Counsel, Office of Derivatives Policy, Division
of Trading and Markets, at<PHONE_NUMBER>, at the Securities and
Exchange Commission, 100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Summary of Final Rules
    B. Cross-Border Application of the Final Rules
    C. Consistency With CFTC Rules
    D. Department of Labor ERISA Fiduciary Regulations
    E. Investment Adviser and Municipal Advisor Status
    F. Intersection With SRO Rules
II. Discussion of Rules Governing Business Conduct
    A. Scope, Generally
    B. Exceptions for Anonymous SEF or Exchange-Traded Transactions
    C. Application of the Rules to SBS Dealers and Major SBS
Participants
    D. Reliance on Representations
    E. Policies and Procedures Alternative
    F. Definitions
    G. Business Conduct Requirements
    1. Counterparty Status
    2. Disclosure
    a. Disclosure Not Required When the Counterparty Is an SBS
Entity or a Swap Entity
    b. Timing and Manner of Certain Disclosures and Scope of
Disclosure Rules
    c. Material Risks and Characteristics of the Security-Based Swap
    d. Material Incentives or Conflicts of Interest
    e. Daily Mark
    f. Clearing Rights
    3. Know Your Counterparty
    4. Recommendations by SBS Dealers
    5. Fair and Balanced Communications
    6. Obligation Regarding Diligent Supervision
    H. Rules Applicable to Dealings With Special Entities
    1. Scope of Definition of ``Special Entity''
    2. ``Acts as an Advisor'' to a Special Entity
    3. Definition of ``Best Interests''
    4. Antifraud Provisions
    5. SBS Entities Acting as Counterparties to Special Entities
    6. Qualifications of the Independent Representative
    a. Written or Other Representations Regarding Qualifications
    b. Sufficient Knowledge To Evaluate Transaction and Risks
    c. No Statutory Disqualification
    d. Undertakes a Duty To Act in the Best Interests of the Special
Entity
    e. Makes Appropriate and Timely Disclosures to Special Entity
    f. Pricing and Appropriateness
    g. Subject to ``Pay To Play'' Prohibitions
    h. ERISA Fiduciary
    i. Safe Harbor
    7. Disclosure of Capacity
    8. Exceptions for Anonymous, Special Entity Transactions on an
Exchange or SEF
    9. Certain Political Contributions by SBS Dealers
    I. Chief Compliance Officer
    J. Prime Brokerage Transactions
    K. Other Comments
III. Cross-Border Application and Availability of Substituted
Compliance
IV. Explanation of Dates
    A. Effective Date
    B. Compliance Date
    C. Application to Substituted Compliance
V. Paperwork Reduction Act
VI. Economic Analysis
    A. Introduction and Broad Economic Considerations
    B. Baseline
    1. Available Data Regarding Security-Based Swap Activity
    2. Security-Based Swap Market: Market Participants and Dealing
Structures
    a. Security-Based Swap Market Participants
    b. Participant Domiciles
    c. Market Centers
    d. Common Business Structures for Firms Engaged in Security-
Based Swap Dealing Activity
    e. Current Estimates of Number of SBS Dealers and Major SBS
Participants
    3. Security-Based Swap Market: Levels of Security-Based Swap
Trading Activity
    4. Global Regulatory Efforts
    5. Dually Registered Entities
    6. Cross-Market Participation
    7. Pay To Play Prohibitions
    C. Costs and Benefits of Business Conduct Rules
    1. Verification of Status and Know Your Counterparty Rules
    2. Disclosures and Communications
    a. Risks, Characteristics, and Conflicts of Interest
    b. Daily Mark
    c. Clearing Rights
    3. Suitability
    a. Costs and Benefits
    b. Institutional Suitability Alternative
    4. Special Entities
    a. Scope and Verification
    b. SBS Entities as Counterparties to Special Entities
    c. SBS Dealers as Advisors to Special Entities
    d. Independent Representation: Alternatives
    e. Reliance on Representations
    f. Magnitude of the Economic Effects
    5. Fraud, Fair and Balanced Communications, Supervision
    a. Antifraud
    b. Fair and Balanced Communications
    c. Supervision
    6. CCO Rules
    a. Annual Compliance Report, Conflicts of Interest, Policies and
Procedures
    b. CCO Removal and Compensation
    7. Pay To Play
    8. Scope
    a. Inter-Affiliate Transactions
    b. Opt Out
    9. Cross-Border Application
    a. Scope of Application to SBS Entities
    b. Substituted Compliance
    D. Effects on Efficiency, Competition and Capital Formation
VII. Regulatory Flexibility Act Certification
    Statutory Basis and Text of Final Rules

I. Introduction

    The Commission is adopting Rules 15Fh-1 through 15Fh-6 and Rule
15Fk-1 to implement the business conduct standards and chief compliance
officer (``CCO'') requirements for security-based swap dealers (``SBS
Dealers'') and major security-based swap participants (``Major SBS
Participants'' and, together with SBS

Dealers, ``SBS Entities'') as set forth in Title VII of the Dodd-Frank
Act.\1\ The Commission is also amending Rules 3a67-10 and 3a71-3 and
adopting Rule 3a71-6 with respect to the cross-border application of
the rules and the availability of substituted compliance.
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    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
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    The Dodd-Frank Act was enacted, among other reasons, to promote the
financial stability of the United States by improving accountability
and transparency in the financial system.\2\ The 2008 financial crisis
highlighted significant issues in the over-the-counter derivatives
markets, which experienced dramatic growth in the years leading up to
the financial crisis and are capable of affecting significant sectors
of the U.S. economy. Title VII of the Dodd-Frank Act provides for a
comprehensive new regulatory framework for swaps and security-based
swaps by, among other things: (1) Providing for the registration and
comprehensive regulation of SBS Entities, swap dealers (``Swap
Dealers''), and major swap participants (``Major Swap Participants''
and, together with Swap Dealers, ``Swap Entities''); (2) imposing
clearing and trade execution requirements for swaps and security-based
swaps, subject to certain exceptions; (3) creating recordkeeping,
regulatory reporting, and public dissemination requirements for swaps
and security-based swaps; and (4) enhancing the rulemaking and
enforcement authorities of the Commission and the Commodity Futures
Trading Commission (``CFTC'').
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    \2\ See Public Law 111-203, Preamble.
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    The Commission initially proposed Rules 15Fh-1 through 15Fh-6 and
Rule 15Fk-1 in June 2011.\3\ In May 2013, the Commission re-opened the
comment period for all of its outstanding Title VII rulemakings,
including the external business conduct rulemaking.\4\
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    \3\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, Exchange Act
Release No. 64766 (Jun. 29, 2011), 76 FR 42396 (Jul. 18, 2011)
(``Proposing Release'').
    \4\ See Reopening of Comment Periods for Certain Rulemaking
Releases and Policy Statement Applicable to Security-Based Swaps
Proposed Pursuant to the Securities Exchange Act of 1934 and the
Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange
Act Release No. 69491 (May 1, 2013), 78 FR 30800 (May 23, 2013)
(``Reopening Release'').
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    The Commission received 40 comments on the Proposing Release, of
which 9 were comments submitted in response to the Reopening
Release.\5\ Of the comments directed at the Cross-Border Proposing
Release,\6\ five referenced the proposed external business conduct
standards specifically,\7\ while others addressed cross-border issues
generally, such as the application of substituted

compliance,\8\ without specifically referring to the Proposing Release.
Of the comments submitted in response to the U.S. Activity Proposing
Release,\9\ eight addressed the proposed cross-border application of
the business conduct standards.\10\
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    \5\ See letters from Kenneth M. Fisher, Senior Vice President
and Chief Financial Officer, Noble Energy, dated July 7, 2011
(``Noble''); Chris Barnard, dated Aug. 10, 2011 (``Barnard''); R.
Glenn Hubbard, Co-Chair, Committee on Capital Markets Regulation,
John L. Thornton, Co-Chair, Committee on Capital Markets Regulation,
and Hal S. Scott, Director, Committee on Capital Markets Regulation,
dated Aug. 26, 2011 (``CCMR''); John F. Damgard, President, Futures
Industry Association, Robert Pickel, Executive Chairman,
International Swaps and Derivatives Association, Inc., and Kenneth
E. Bentsen, Jr., Executive Vice President, Public Policy and
Advocacy, Securities Industry and Financial Markets Association,
dated Aug. 26, 2011 (``FIA/ISDA/SIFMA''); Gerald W. McEntee,
President, American Federation of State, County and Municipal
Employees, dated Aug. 29, 2011 (``AFSCME''); Mark Hepsworth,
President, Institutional Business, Interactive Data Corporation,
dated Aug. 29, 2011 (``IDC''); Sen. Carl Levin, U.S. Senate, dated
Aug. 29, 2011 (``Levin''); Susan N. Kelly, Senior Vice President of
Policy Analysis and General Counsel, American Public Power
Association, and Noreen Roche-Carter, Chair, Tax and Finance Task
Force, Large Public Power Council, dated Aug. 29, 2011 (``APPA'');
Stuart J. Kaswell, Executive Vice President & Managing Director,
General Counsel, Managed Funds Association, dated Aug. 29, 2011
(``MFA''); Dennis M. Kelleher, President & CEO, and Stephen W. Hall,
Securities Specialist, Better Markets, Inc., dated Aug. 29, 2011
(``Better Markets (August 2011)''); Christopher A. Klem and Molly
Moore, Ropes & Gray LLP, dated Aug. 29, 2011 (``Ropes & Gray'');
Joanne T. Medero, BlackRock, Inc., dated Aug. 29, 2011
(``BlackRock''); Joseph Dear, Chief Investment Officer, California
Public Employees' Retirement System, Jennifer Paquette, Chief
Investment Officer, Colorado PERA, Keith Bozarth, Executive
Director, State of Wisconsin Investment Board, Brian Guthrie,
Executive Director, Teacher Retirement System of Texas, and Rick
Dahl, Chief Investment Officer, Missouri State Employees' Retirement
System, dated Aug. 29, 2011 (``CalPERS (August 2011)''); Barbara
Roper, Director of Investor Protection, Consumer Federation of
America, Marcus Stanley, Policy Director, Americans for Financial
Reform, and Michael Greenberger, Law School Professor and Founder &
Director, University of Maryland Center for Health & Homeland
Security, dated Aug. 29, 2011 (``CFA''); American Benefits Council,
dated Aug. 29, 2011 (``ABC''); Jeff Gooch, Chief Executive Officer,
MarkitSERV, dated Aug. 29, 2011 (``MarkitSERV''); Timothy W.
Cameron, Esq. Managing Director, Asset Management Group, Securities
Industry and Financial Markets Association, dated Aug. 29, 2011
(``SIFMA (August 2011)''); John D. Walda, President and Chief
Executive Officer, National Association of College and University
Business Officers, dated Aug. 29, 2011 (``NACUBO''); Kevin Gould,
President, Markit North America, Inc., dated Aug. 29, 2011
(``Markit''); Daniel F. C. Crowley, Partner, K&L Gates LLP, on
behalf of the Church Alliance, dated Aug. 29, 2011 (``Church
Alliance (August 2011)''); Christopher J. Ailman, California State
Teachers' Retirement System, dated Aug. 30, 2011 (``CalSTRS''); John
M. McNally, National Association of Bond Lawyers, dated Sept. 1,
2011 (``NABL''); Colette J. Irwin-Knott, National Association of
Independent Public Finance Advisors, dated Sept. 6, 2011
(``NAIPFA''); ABA Securities Association, American Council of Life
Insurers, Financial Services Roundtable, Futures Industry
Association, Institute of International Bankers, International Swaps
and Derivatives Association, and Securities Industry and Financial
Markets Association, dated Sept. 8, 2011 (``ABA Securities
Association''); Kent A. Mason, Davis & Harman LLP, dated Sept. 15,
2011 (``Mason''); Senator Tim Johnson, Chairman, U.S. Senate
Committee on Banking, Housing, and Urban Affairs, and Representative
Barney Frank, U.S. House Committee on Financial Services, dated Oct.
4, 2011 (``Johnson''); Lawrence B. Patent, K&L Gates LLP, on behalf
of the Church Alliance, dated Oct. 4, 2011 (``Church Alliance
(October 2011)''); Joseph Dear, Chief Investment Officer, California
Public Employees' Retirement System et al., dated Oct. 4, 2011
(``CalPERS (October 2011)''); Susan Gaffney Director, Federal
Liaison Center, Government Finance Officers Association, dated Oct.
31, 2011 (``GFOA''); Jeffery W. Rubin, Chair, Federal Regulation of
Securities Committee, American Bar Association Business Law Section
and Nir D. Yarden, Chair, Institutional Investors Committee,
American Bar Association, dated Dec. 7, 2011 (``ABA Committees'');
Bruce E. Stern, Chairman, Association of Financial Guaranty
Insurers, dated Sept. 17, 2012 (``AFGI (September 2012)'');
Financial Services Roundtable, Future Industry Association,
Institute of International Bankers, International Swaps and
Derivatives Association, Investment Company Institute, Securities
Industry and Financial Markets Association, dated May 21, 2013
(``Financial Services Roundtable''); Bruce E. Stern, Chairman,
Association of Financial Guaranty Insurers, dated July 22, 2013
(``AFGI (July 2013)''); Robert Pickel, Executive Vice Chairman,
International Swaps and Derivatives Association, Inc., dated July
22, 2013 (``ISDA (July 2013)''); Dennis M. Kelleher, President and
CEO, and Stephen W. Hall, Securities Specialist, Better Markets,
Inc., dated July 22, 2013 (``Better Markets (July 2013)''); Dennis
M. Kelleher, President and CEO, Better Markets, Inc., dated Oct. 18,
2013 (``Better Markets (October 2013)''); Angie Karna, Managing
Director, Legal, Nomura Global Financial Products Inc., dated Sept.
10, 2014 (``Nomura''); Kyle Brandon, Managing Director, Securities
Industry and Financial Markets Association, dated Aug. 7, 2015
(``SIFMA (August 2015)''); Kyle Brandon, Managing Director,
Securities Industry and Financial Markets Association, dated Sept.
23, 2015 (``SIFMA (September 2015)''); Kyle Brandon, Managing
Director, Securities Industry and Financial Markets Association,
dated Nov. 3, 2015 (``SIFMA (November 2015)''). The comments that
the Commission received on the Proposing Release and the Reopening
Release are available on the Commission's Web site at http://www.sec.gov/comments/s7-25-11/s72511.shtml.
    \6\ Cross-Border Security-Based Swap Activities; Re-Proposal of
Regulation SBSR and Certain Rules and Forms Relating to the
Registration of Security-Based Swap Dealers and Major Security-Based
Swap Participants, Exchange Act Release No. 69490 (May 1, 2013), 78
FR 30968 (May 23, 2013) (``Cross-Border Proposing Release'').
    \7\ See letters from Robert Pickel, International Swaps and
Derivatives Association, Inc., dated Aug. 14, 2013 (``ISDA (August
2013)''); Karrie McMillan, General Counsel, Investment Company
Institute and Dan Waters, Managing Director, ICI Global, dated Aug.
21, 2013 (``ICI''); Dennis M. Kelleher, President & CEO, Better
Markets, Inc., Stephen W. Hall, Securities Specialist, Better
Markets, Inc., and Katelynn O. Bradley, Attorney, Better Markets,
Inc., dated Aug. 21, 2013 (``Better Markets (August 2013)'');
Kenneth E. Bentsen, Jr., President, Securities Industry and
Financial Markets Association, Walt Lukken, President & Chief
Executive Officer, Futures Industry Association; and Richard M.
Whiting, Executive Director and General Counsel, The Financial
Services Roundtable, dated Aug. 21, 2013 (``SIFMA (August 2013)'');
Matti Lepp[auml]l[auml], Secretary General/CEO, PensionsEurope,
dated Sep. 3, 2013 (``PensionsEurope''). These comment letters are
available on the Commission's Web site at https://www.sec.gov/comments/s7-02-13/s70213.shtml.
    \8\ See letters from Stephen Maijoor, Chair, European Securities
and Markets Authority, dated Aug. 21, 2013 (``ESMA''); Stuart J.
Kaswell, Executive Vice President & Managing Director, General
Counsel, Managed Funds Association and Adam Jacobs, Director, Head
of Markets Regulation, Alternative Investment Management
Association, dated Aug. 19, 2013 (``MFA/AIMA''); Marcus Stanley,
Policy Director, Americans for Financial Reform, dated Aug. 22, 2013
(``AFR''); Sarah A. Miller, Chief Executive Officer, Institute of
International Bankers, dated Aug. 21, 2013 (``IIB (August 2013)'');
Catherine T. Dixon, Chair, Federal Regulation of Securities
Committee, American Bar Association, Business Law Section, dated
Oct. 2, 2013 (``ABA (October 2013)''); Agricultural Retailers
Association, Business Roundtable, Financial Executives
International, National Association of Corporate Treasurers,
National Association of Manufacturers, U.S. Chamber of Commerce,
dated Aug. 21, 2013 (``CDEU''); Futures Options Association, dated
Aug. 21, 2013 (``FOA''); Kevin Nixon, Managing Director, Institute
of International Finance, dated August 8, 2013 (``IIF''); Koichi
Ishikura, Executive Chief of Operations for International
Headquarters, Japan Securities Dealers Association, dated Aug. 21,
2013 (``JSDA''); Patrick Pearson, European Commission, dated Aug.
21, 2013 (``EC''); Jonathan Kindred and Shigesuke Kashiwagi, Japan
Financial Markets Council, dated Aug. 15, 2013.
    The SEC Chair and Commissioners were copied on a comment letter
to the CFTC in connection with the CFTC's own cross-border
initiative. See letter from Sherrod Brown, U.S. Senator, Tom Harkin,
U.S. Senator, Jeff Merkley, U.S. Senator, Carl Levin, U.S. Senator,
Elizabeth Warren, U.S. Senator, Dianne Feinstein, U.S. Senator, to
the Honorable Gary Gensler, dated May 22, 2013 (``U.S. Senators'').
    \9\ See Application of Certain Title VII Requirements to
Security-Based Swap Transactions Connected with a Non-U.S. Person's
Dealing Activity that are Arranged, Negotiated, or Executed by
Personnel Located in a U.S. Branch or Office or in a U.S. Branch or
Office of an Agent, Exchange Act Release No. 74843 (Apr. 29, 2015),
80 FR 27443 (May 13, 2015) (``U.S. Activity Proposing Release'').
    \10\ See letters from Kenneth E. Bentsen, Jr., President & CEO,
Securities Industry and Financial Markets Association and Financial
Services Roundtable and Rich Foster, Senior Vice President & Senior
Counsel for Regulatory and Legal Affairs, Financial Services
Roundtable, dated July 13, 2015 (``SIFMA/FSR (July 2015)''); Sarah
A. Miller, Chief Executive Officer, Institute of International
Bankers, dated July 13, 2015 (``IIB (July 2015)''); Dan Waters,
Managing Director, ICI Global, dated July 13, 2015 (``ICI Global
(July 2015)''); Dennis M. Kelleher, President and CEO, Stephen W.
Hall, Securities Specialist, Todd Phillips, Attorney, Better
Markets, Inc., dated July 13, 2015 (``Better Markets (July 2015)'');
Timothy W. Cameron, Esq., Managing Director and Laura Martin,
Managing Director and Associate General Counsel, Asset Management
Group, Securities Industry and Financial Markets Association, dated
July 13, 2015 (``SIFMA-AMG (July 2015)''); David Geen, General
Counsel, International Swaps and Derivatives Association, Inc.
(``ISDA (July 2015)''); Chris Barnard, dated June 26, 2015
(``Barnard (July 2015)''); Stuart J. Kaswell, Executive Vice
President, Managing Director & General Counsel, Managed Funds
Association, dated July 13, 2015 (``MFA (July 2015)''). These
comment letters are available on the Commission's Web site at http://www.sec.gov/comments/s7-06-15/s70615.shtml.
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    The Commission is now adopting Rules 15Fh-1 through 15Fh-6 and Rule
15Fk-1, with certain revisions suggested by commenters or designed to
clarify the rules and conform them to the rules adopted by the CFTC.
The principal aspects of the rules are briefly described immediately
below. A detailed discussion of each rule follows in Sections II.A.-
II.J, below.\11\
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    \11\ If any of the provisions of these rules, or the application
thereof to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or application of such
provisions to other persons or circumstances that can be given
effect without the invalid provision or application.
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A. Summary of Final Rules

    Rule 15Fh-1, as adopted, defines the scope of Rules 15Fh-1 through
15Fh-6 and Rule 15Fk-1, and provides that an SBS Entity can rely on the
written representations of a counterparty or its representative to
satisfy its due diligence requirements under the rules, unless it has
information that would cause a reasonable person to question the
accuracy of the representation.
    Rule 15Fh-2, as adopted, sets forth the definitions used throughout
Rules 15Fh-1 through 15Fh-6. The defined terms are discussed in
connection with the rules in which they appear.
    Rule 15Fh-3, as adopted, defines the business conduct requirements
generally applicable to SBS Entities with respect to: (1) Verification
of counterparty status as an eligible contract participant (``ECP'') or
special entity; (2) disclosure to the counterparty of material
information about the security-based swap, including material risks,
characteristics, incentives, and conflicts of interest; (3) disclosure
of information concerning the daily mark of the security-based swap;
(4) disclosure regarding the ability of the counterparty to require
clearing of the security-based swap; (5) communication with
counterparties in a fair and balanced manner based on principles of
fair dealing and good faith; and (6) the establishment of a supervisory
and compliance infrastructure. Rule 15Fh-3, as adopted, additionally
requires an SBS Dealer to: (1) Establish, maintain and enforce written
policies and procedures reasonably designed to obtain and retain a
record of the essential facts concerning each known counterparty that
are necessary to conduct business with that counterparty; and (2)
comply with certain suitability obligations when recommending a
security-based swap, or trading strategy involving a security-based
swap, to a counterparty.
    Rule 15Fh-4(a), as adopted, provides that it shall be unlawful for
an SBS Entity to: (i) Employ any device, scheme, or artifice to defraud
any special entity or prospective customer who is a special entity;
(ii) engage in any transaction, practice, or course of business that
operates as a fraud or deceit on any special entity or prospective
customer who is a special entity; or (iii) to engage in any act,
practice, or course of business that is fraudulent, deceptive, or
manipulative.
    Rule 15Fh-4(b), as adopted, sets forth particular requirements for
SBS Dealers acting as advisors to special entities.\12\ Specifically,
an SBS Dealer that acts as an advisor to a special entity must act in
the ``best interests'' of the special entity, and make reasonable
efforts to obtain information that it needs to determine that the
recommendation is in the ``best interests'' of the special entity.\13\
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    \12\ The statutory definition of ``special entity'' includes
federal agencies, states and political subdivisions, employee
benefit plans as defined under the Employee Retirement Income
Security Act of 1974 (``ERISA''), governmental plans as defined
under ERISA, and endowments. See Rule 15Fh-2(d) (defining ``special
entity'' to include employee benefit plans that are defined in Title
I of ERISA but permitting employee benefit plans that are not
subject to regulation under Title I of ERISA to elect not to be
special entities).
    \13\ Rule 15Fh-2(a), as adopted, defines what it means to ``act
as an advisor'' to a special entity, and provides a safe harbor
under which the parties can establish that the SBS Dealer is not
acting as an advisor to the special entity.
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    Rule 15Fh-5, as adopted, sets forth particular requirements for SBS
Entities acting as counterparties to special entities. Under the rule,
those SBS Entities must have a reasonable basis to believe that the
counterparty has a qualified representative who: (1) Has sufficient
knowledge to evaluate the transaction and risks; (2) is not subject to
a statutory disqualification; (3) is independent of the SBS Entity; (4)
undertakes a duty to act in the best interests of the special entity;
(5) makes appropriate and timely disclosures to the special entity of
material information concerning the security-based swap; and (6)
provides written representations regarding fair pricing and the
appropriateness of the security-based swap. If the special entity is an
employee benefit plan that is subject to regulation under Title I of
ERISA (``ERISA plan''), these requirements are satisfied if the
independent representative is a ``fiduciary'' under ERISA. In addition,
the independent representative must be subject to pay-to-play
regulation if the special entity is a ``municipal entity'' or a
``governmental plan'' as defined in Section 3 of ERISA.
    Rule 15Fh-6, as adopted, imposes certain pay-to-play restrictions
on SBS Dealers. The rule generally prohibits an SBS Dealer from
engaging in security-

based swap transactions with a ``municipal entity'' within two years
after certain political contributions have been made to officials of
the municipal entity. As with other pay-to-play rules, Rule 15Fh-6 does
not prohibit political contributions.
    Rule 15k-1, as adopted, requires an SBS Entity to designate a CCO
and imposes certain duties and responsibilities on that CCO.

B. Cross-Border Application of the Final Rules

    Rule 3a71-3(c) and related amendments to Rule 3a71-3(a), as
adopted, define the scope of application of the business conduct
standards described in Section 15F(h) of the Exchange Act, and the
rules and regulations thereunder (other than the rules and regulations
prescribed by the Commission pursuant to Section 15F(h)(1)(B)) to SBS
Dealers. As adopted, these rules require a registered U.S. SBS Dealer
to comply with transaction-level business conduct requirements with
respect to all of its transactions, except for certain transactions
conducted through such dealer's foreign branch. The rules further
require a registered foreign SBS Dealer to comply with transaction-
level business conduct requirements with respect to any transaction
with a U.S. person (except for a transaction conducted through a
foreign branch of the U.S. person) and any transaction that the SBS
Dealer arranges, negotiates, or executes using personnel located in the
United States.
    Rule 3a67-10(d) and related amendments to Rule 3a67-10(a), as
adopted, define the scope of application of the business conduct
standards described in Section 15F(h) of the Exchange Act, and the
rules and regulations thereunder (other than the rules and regulations
prescribed by the Commission pursuant to Section 15F(h)(1)(B)) to
registered Major SBS Participants. As adopted, these rules, like those
applicable to registered SBS Dealers, require a registered U.S. Major
SBS Participant to comply with transaction-level business conduct
requirements with respect to all of its transactions, except for
certain transactions conducted through such participant's foreign
branch. The rules further require a registered foreign Major SBS
Participant to comply with transaction-level business conduct
requirements with respect to any transaction with a U.S. person (except
for a transaction conducted through a foreign branch of the U.S.
person) but not any transaction with a non-U.S. person.
    Finally, Rule 3a71-6, as adopted, provides a framework under which
foreign SBS Dealers and foreign Major SBS Participants may seek to
satisfy certain business conduct requirements under Title VII by means
of substituted compliance.
    In developing these final rules, including their cross-border
application, we have consulted and coordinated with the CFTC and the
prudential regulators \14\ in accordance with the consultation mandate
of the Dodd-Frank Act.\15\ The Commission also has consulted and
coordinated with foreign regulatory authorities through Commission
staff participation in numerous bilateral and multilateral discussions
with foreign regulatory authorities addressing the regulation of OTC
(over-the-counter) derivatives.\16\ Through these discussions and the
Commission staff's participation in various international task forces
and working groups,\17\ we have gathered information about foreign
regulatory reform efforts and their impact on and relationship with the
U.S. regulatory regime. The Commission has taken and will continue to
take these discussions into consideration in developing rules, forms,
and interpretations for implementing Title VII of the Dodd-Frank
Act.\18\
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    \14\ The term ``prudential regulator'' is defined in section
1a(39) of the Commodity Exchange Act, 7 U.S.C. 1a(39), and that
definition is incorporated by reference in section 3(a)(74) of the
Exchange Act, 15 U.S.C. 78c(a)(74). Pursuant to the definition, the
Board of Governors of the Federal Reserve System, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Farm Credit Administration, or the Federal Housing
Finance Agency (collectively, the ``prudential regulators'') is the
``prudential regulator'' of a security-based swap dealer or major
security-based swap participant if the entity is directly supervised
by that regulator.
    \15\ Section 712(a)(2) of the Dodd-Frank Act provides in part
that the Commission shall ``consult and coordinate to the extent
possible with the Commodity Futures Trading Commission and the
prudential regulators for the purposes of assuring regulatory
consistency and comparability, to the extent possible.''
    \16\ For example, senior representatives of authorities with
responsibility for regulation of OTC derivatives have met on a
number of occasions to discuss international coordination of OTC
derivatives regulations. See, e.g., Report of the OTC Derivatives
Regulators Group to G20 Leaders on Cross-Border Implementation
Issues November 2015 (Nov. 2015), available at<EMAIL_ADDRESS>    \17\ Commission representatives participate in the Financial
Stability Board's Working Group on OTC Derivatives Regulation
(``ODWG''), both on the Commission's behalf and as the
representative of the International Organization of Securities
Commissions (``IOSCO''), which is co-chair of the ODWG. See
Security-Based Swap Transactions Connected with a Non-U.S. Person's
Dealing Activity That Are Arranged, Negotiated, or Executed By
Personnel Located in a U.S. Branch or Office or in a U.S. Branch or
Office of an Agent; Security-Based Swap Dealer De Minimis Exception,
Exchange Act Release No. 77104 (February 10, 2016), 81 FR 8597 n.15
(Feb. 19, 2016) (``U.S. Activity Adopting Release''), (describing
the Commission representative's role).
    \18\ See Section 752(a) of the Dodd-Frank Act (providing in part
that ``[i]n order to promote effective and consistent global
regulation of swaps and security-based swaps, the Commodity Futures
Trading Commission, the Securities and Exchange Commission, and the
prudential regulators . . . as appropriate, shall consult and
coordinate with foreign regulatory authorities on the establishment
of consistent international standards with respect to the regulation
(including fees) of swaps.'').
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C. Consistency With CFTC Rules

    The Commission and CFTC staffs, prior to the proposal of rules by
their respective agency, held approximately 30 joint meetings with
interested parties regarding the agencies' respective business conduct
rules to solicit a variety of views.\19\ As discussed in Section I.D.
below, the agencies' staffs also consulted with Department of Labor
(``DOL'') representatives on this rulemaking. In the Proposing Release,
the Commission solicited comment on the impact of any differences
between the Commission's and CFTC's approaches to business conduct
regulations, and whether the Commission's proposed business conduct
regulations should be modified to conform to the proposals made by the
CFTC.\20\ Subsequently, in February 2012, the CFTC adopted final rules
with respect to the external business conduct standards of Swap
Entities that are generally consistent with the Commission's proposed
rules.\21\ In addition, in April 2013, the CFTC adopted final rules
with respect to internal business conduct standards regarding, among
other things, the obligation of a Swap Entity to diligently supervise
its business.\22\ These rules also require each Swap Entity to
designate a CCO, prescribe qualifications and duties of the CCO, and
require that the CCO prepare, sign, and furnish the annual report
containing an assessment of the

registrant's compliance activities to either the board of directors or
the senior officer.\23\ The rules further require the annual report to
be furnished to the CFTC.\24\
---------------------------------------------------------------------------

    \19\ A list of Commission staff meetings in connection with this
rulemaking is available on the Commission's Web site under
``Meetings with SEC Officials'' at http://www.sec.gov/comments/df-title-vii/swap/swap.shtml and at http://www.sec.gov/comments/s7-25-11/s72511.shtml.
    \20\ See Proposing Release, 76 FR at 42438, supra note 3.
    \21\ See Business Conduct Standards for Swap Dealers and Major
Swap Participants With Counterparties, 77 FR 9734 (Feb. 17, 2012)
(``CFTC Adopting Release'').
    \22\ 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 (Apr. 3, 2013) (``CFTC CCO
Release'').
    \23\ Id.
    \24\ Id.
---------------------------------------------------------------------------

    In May 2013, in the Reopening Release, the Commission sought
comment on certain specific issues, including: (1) The relationship of
the proposed rules to any parallel requirements of other authorities,
including the CFTC and relevant foreign regulatory authorities; and (2)
with respect to the CFTC rules, whether and to what extent the
Commission, in adopting its own rules, should emphasize consistency
with the CFTC rules versus adopting rules that are more tailored to the
security-based swap market, including any specific examples where
consistency or tailoring of a particular rule or rule set is more
critically important.\25\
---------------------------------------------------------------------------

    \25\ See Reopening Release, supra note 4.
---------------------------------------------------------------------------

    The Commission received numerous comments regarding consistency
with the CFTC's external business conduct rules both before and after
the CFTC adopted its final rules.\26\ Comments specific to individual
rules are addressed in the discussions of the respective rules below.
As a general matter, these comments had, as an overarching theme, that
the Commission should coordinate with the CFTC to achieve consistent
regulations.\27\ Commenters stressed that differences between the
regulatory regimes would, among other things, increase regulatory
burdens and costs for market participants, delay execution of
transactions, and lead to confusion.\28\
---------------------------------------------------------------------------

    \26\ See, e.g., Barnard, supra note 5; FIA/ISDA/SIFMA, supra
note 5; AFSCME, supra note 5; Levin, supra note 5; APPA, supra note
5; Ropes & Gray, supra note 5; BlackRock, supra note 5; Nomura,
supra note 5; GFOA, supra note 5; NABL, supra note 5; ISDA (July
2013), supra note 5; AFGI (July 2013), supra note 5; CFA, supra note
5; SIFMA (August 2015), supra note 5; SIFMA (September 2015), supra
note 5; SIFMA (November 2015), supra note 5.
    \27\ See, e.g., Barnard, supra note 5; FIA/ISDA/SIFMA, supra
note 5; AFSCME, supra note 5; Levin, supra note 5; APPA, supra note
5; Ropes & Gray, supra note 5; BlackRock, supra note 5; Nomura,
supra note 5; GFOA, supra note 5; NABL, supra note 5; ISDA (July
2013), supra note 5; AFGI (July 2013), supra note 5; SIFMA (August
2015), supra note 5; SIFMA, supra note 5 (September 2015); SIFMA
(November 2015), supra note 5.
    \28\ See, e.g., Barnard, supra note 5; Levin, supra note 5;
BlackRock, supra note 5; NABL, supra note 5; GFOA, supra note 5.
---------------------------------------------------------------------------

    Before the CFTC adopted its final external business conduct rules,
commenters were divided as to whether they preferred the Commission's
\29\ or the CFTC's \30\ proposed approach to specific issues, in
instances in which the CFTC's proposed approach differed from the
Commission's proposed rules. However, the comments received by the
Commission in response to the Reopening Release, which was issued after
the CFTC adopted its final rules, overwhelmingly urged the Commission
to harmonize its external business conduct rules with those of the CFTC
because the CFTC's rules have already been implemented by the
industry.\31\ A number of these comments have suggested specific and
detailed modifications. Where we believe the external business conduct
rules, if modified in accordance with these suggestions, will continue
to provide the protections (as explained in the context of the
particular rule) that the rules are intended to accomplish, we have
modified the proposed rules to harmonize with CFTC requirements to
create efficiencies for entities that have already established
infrastructure for compliance with analogous CFTC requirements.\32\
---------------------------------------------------------------------------

    \29\ See, e.g., SIFMA (August 2011), supra note 5; GFOA, supra
note 5; NABL, supra note 5.
    \30\ See, e.g., CFA, supra note 5.
    \31\ See, e.g., Nomura, supra note 5; GFOA, supra note 5; ISDA
(July 2013), supra note 5; SIFMA (August 2015), supra note 5; SIFMA
(September 2015), supra note 5; SIFMA (November 2015), supra note 5.
    Commenters also urged, with respect to supervision and CCO
obligations (``internal'' business conduct standards), that our
final rules be informed by industry experience complying with the
analogous Financial Industry Regulatory Authority, Inc. (``FINRA'')
supervision and CCO rules, as well as the CFTC internal business
conduct standards. See SIFMA (September 2015), supra note 5, at 2
(urging the Commission to harmonize its rules with, among other
things, ``the FINRA Supervision Rules, [and] the FINRA CCO Rule'').
    \32\ One commenter noted that more than 17,000 entities have
already adhered to a multilateral protocol that had been developed
in response to the CFTC rules. See SIFMA (November 2015), supra note
5.
---------------------------------------------------------------------------

D. Department of Labor ERISA Fiduciary Regulations

    Section 15F(h)(2)(C) of the Exchange Act defines the term ``special
entity'' to include ``an employee benefit plan, as defined in section 3
of the Employee Retirement Income Security Act of 1974.'' \33\
---------------------------------------------------------------------------

    \33\ 29 U.S.C. 1001 et seq. See History of EBSA and ERISA,
available at http://www.dol.gov/ebsa/aboutebsa/history.html.
---------------------------------------------------------------------------

    Prior to proposing the business conduct standards rules, the
Commission received submissions from commenters concerning the
interaction with ERISA, DOL's proposed fiduciary rule, and current
regulation regarding the definition of ERISA fiduciaries.\34\ As noted
above, the Commission, CFTC and DOL staffs consulted on issues
regarding the intersection of ERISA fiduciary status with the Dodd-
Frank Act business conduct provisions, prior to the Commission's
proposing rules in this area.\35\
---------------------------------------------------------------------------

    \34\ See, e.g., letter from Kenneth E. Bentsen, Jr., Executive
Vice President, Public Policy and Advocacy, Securities Industry and
Financial Markets Association and Robert G. Pickel, Executive Vice
Chairman, International Swaps and Derivatives Association, Inc. to
Elizabeth M. Murphy, Secretary, Commission and David A. Stawick,
Secretary, CFTC (Oct. 22, 2010) (``SIFMA/ISDA 2010 Letter''), at 8
n.19. This comment letter is available on the Commission's Web site
at http://www.sec.gov/comments/df-title-vii/swap/swap.shtml.
    \35\ See Proposing Release, 76 FR at 42398, supra note 3.
---------------------------------------------------------------------------

    The Commission received numerous comments concerning the
interaction of ERISA and existing fiduciary regulation with the
business conduct standards under the Exchange Act and the Commission's
proposed rules.\36\ Commenters, including ERISA plan sponsors, dealers
and institutional asset managers, stated that although ERISA plans
currently use security-based swaps as part of their overall hedging or
investment strategy, the statutory and regulatory intersections of
ERISA and the external business conduct standards under Title VII of
the Dodd-Frank Act could prevent ERISA plans from participating in
security-based swap markets in the future, and the proposed business
conduct standards rules, if adopted without clarification, could have
unintended consequences for SBS Entities dealing with ERISA plans.\37\
---------------------------------------------------------------------------

    \36\ See, e.g., ABC, supra note 5; CFA, supra note 5; FIA/ISDA/
SIFMA, supra note 5; IDC, supra note 5; MFA, supra note 5;
BlackRock, supra note 5; Johnson, supra note 5.
    \37\ See, e.g., ABC, supra note 5; FIA/ISDA/SIFMA, supra note 5;
IDC, supra note 5; MFA, supra note 5; BlackRock, supra note 5;
Johnson, supra note 5.
---------------------------------------------------------------------------

    Commenters were primarily concerned that compliance with the
business conduct standards under the Exchange Act or the Commission's
proposed rules would cause an SBS Entity to be an ERISA fiduciary to an
ERISA plan and thus, subject to ERISA's prohibited transaction
provisions.\38\ If an SBS Entity were to become an ERISA fiduciary to
an ERISA plan, it would be prohibited from entering into a security-
based swap with that ERISA plan absent an exemption.\39\ One commenter

asserted that the penalties for violating ERISA's prohibited
transaction provisions would discourage SBS Entities from dealing with
ERISA plans.\40\ Other commenters asserted that compliance by SBS
Entities with the following obligations could cause an SBS Entity to be
an ERISA fiduciary: (1) Providing information regarding the risks of
the security-based swap; (2) providing the daily mark; (3) reviewing
the ability of the special entity's advisor to advise the special
entity with respect to the security-based swap; and (4) acting in the
best interests of the special entity.\41\ Accordingly, commenters
requested that the Commission and DOL coordinate the respective rules
to clarify that compliance with the business conduct standards rules
will not make an SBS Entity an ERISA fiduciary.\42\
---------------------------------------------------------------------------

    \38\ Section 406(b) of ERISA (29 U.S.C. 1106(b)) states that an
ERISA fiduciary with respect to an ERISA plan shall not (1) deal
with the assets of the plan in his own interest or for his own
account, (2) in his individual or in any other capacity act in any
transaction involving the plan on behalf of a party (or represent a
party) whose interests are adverse to the interests of the plan or
the interests of its participants or beneficiaries, or (3) receive
any consideration for his own personal account from any party
dealing with such plan in connection with a transaction involving
the assets of the plan.
    \39\ In addition to other statutory exemptions, Section 408(a)
of ERISA (29 U.S.C. 1108(a)) gives DOL authority to grant
administrative exemptions from prohibited transactions prescribed in
Section 406 of ERISA.
    \40\ See ABC, supra note 5.
    \41\ See, e.g., ABC, supra note 5; FIA/ISDA/SIFMA, supra note 5;
IDC, supra note 5; MFA, supra note 5; BlackRock, supra note 5;
Johnson, supra note 5.
    \42\ See, e.g., ABC, supra note 5; FIA/ISDA/SIFMA, supra note 5;
IDC, supra note 5; MFA, supra note 5; BlackRock, supra note 5;
Johnson, supra note 5.
---------------------------------------------------------------------------

    DOL staff reviewed the CFTC's final business conduct standards
rules for Swap Entities and provided the CFTC with the following
statement:

    The Department of Labor has reviewed these final business
conduct standards and concluded that they do not require swap
dealers or major swap participants to engage in activities that
would make them fiduciaries under the Department of Labor's current
five-part test defining fiduciary advice 29 CFR 2510.3-21(c). In the
Department's view, the CFTC's final business conduct standards
neither conflict with the Department's existing regulations, nor
compel swap dealers or major swap participants to engage in
fiduciary conduct. Moreover, the Department states that it is fully
committed to ensuring that any changes to the current ERISA
fiduciary advice regulation are carefully harmonized with the final
business conduct standards, as adopted by the CFTC and the SEC, so
that there are no unintended consequences for swap dealers and major
swap participants who comply with these business conduct
standards.\43\
---------------------------------------------------------------------------

    \43\ See Letter from Phyllis C. Borzi, Assistant Secretary,
Employee Benefits Security Administration, U.S. Department of Labor
to The Hon. Gary Gensler et al., CFTC (Jan. 17, 2012), CFTC Adopting
Release, Appendix 2--Statement of the Department of Labor, 77 FR
9835, supra note 21.

    Thereafter, in April 2015, the DOL reproposed a change to the
definition of fiduciary under ERISA.\44\ The DOL noted that its staff
had ``consulted with staff of the SEC.'' \45\
---------------------------------------------------------------------------

    \44\ See Definition of the Term ``Fiduciary''; Conflict of
Interest Rule--Retirement Investment Advice, 80 FR 21927 (Proposed
Rule, Apr. 20, 2015).
    \45\ Id. at 21937.
---------------------------------------------------------------------------

    On April 6, 2016, DOL issued its final rule.\46\ We understand that
DOL's revised definition of ``fiduciary'' in its final rule is intended
to allow SBS Entities to avoid becoming ERISA fiduciaries when acting
as counterparties to a swap or security-based swap transaction. For
example, DOL makes the following statement in the preamble to its final
rule:
---------------------------------------------------------------------------

    \46\ See Definition of the Term ``Fiduciary''; Conflict of
Interest Rule--Retirement Investment Advice, 81 FR 20946 (Final
Rule, Apr. 8, 2016).

    The Department has provided assurances to the CFTC and the SEC
that the Department is fully committed to ensuring that any changes
to the current ERISA fiduciary advice regulation are carefully
harmonized with the final business conduct standards, as adopted by
the CFTC and the SEC, so that there are no unintended consequences
for swap and security-based swap dealers and major swap and
security-based swap participants who comply with the business
conduct standards. See, e.g., Letter from Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, U.S.
Department of Labor, to The Hon. Gary Gensler et al., CFTC (Jan. 17,
2012). In this regard, we note that the disclosures required under
the business conduct standards, including those regarding material
information about a swap or security-based swap concerning material
risks, characteristics, incentives and conflicts of interest;
disclosures regarding the daily mark of a swap or security-based
swap and a counterparty's clearing rights; disclosures necessary to
ensure fair and balanced communications; and disclosures regarding
the capacity in which a swap or security-based swap dealer or major
swap participant is acting when a counterparty to a special entity,
do not in the Department's view compel counterparties to ERISA-
covered employee benefit plans, other plans or IRAs to make a
recommendation for purposes of paragraph (a) of the final rule or
otherwise compel them to act as fiduciaries in swap and security-
based swap transactions conducted pursuant to section 4s of the
Commodity Exchange Act and section 15F of the Securities Exchange
Act. This section of this Notice discusses these issues in the
context of the express provisions in the final rule on swap and
security-based swap transactions and on transactions with
independent fiduciaries with financial expertise.\47\
---------------------------------------------------------------------------

    \47\ Id. at 20985, n. 36.

    Furthermore, DOL's final rule establishes a ``swap and security-
based swap transactions'' exclusion \48\ which, in DOL's view, is
intended to establish conditions under which persons acting as SBS
Entities, among others, ``do not become investment advice fiduciaries
as a result of communications and activities conducted during the
course of swap or security-based swap transactions regulated under the
Dodd-Frank Act provisions in the Commodity Exchange Act or the
Securities Exchange Act of 1934 and applicable CFTC and SEC
implementing rules and regulations.'' \49\ In addition, DOL has stated
that its exclusion for ``transactions with independent plan fiduciaries
with financial expertise'' has been significantly adjusted and expanded
in the final rule and gives an alternative avenue for parties involved
in swap, security-based swap, or other investment transactions to
conduct the transaction in a way that would ensure they do not become
investment advice fiduciaries under the final rule.\50\
---------------------------------------------------------------------------

    \48\ See id. at 20984-86 (discussing the swap and security-based
swap transactions exception).
    \49\ Id. at 20985. See also id. (explaining that in DOL's view,
``when Congress enacted the swap and security based swap provisions
in the Dodd-Frank Act, including those expressly applicable to ERISA
covered plans, Congress did not intend that engaging in regulated
conduct as part of a swap or security-based swap transaction with an
employee benefit plan would give rise to additional fiduciary
obligations or restrictions under Title I of ERISA'').
    \50\ See id. at 20986 (noting that DOL ``does not believe
extending the swap and security-based swap provisions to IRA
investors is appropriate'' and, rather, concluding ``that it was
more appropriate to address this issue in the context of the
`independent plan fiduciary with financial expertise' provision
described elsewhere in this Notice'').
---------------------------------------------------------------------------

    The Commission staff has continued to coordinate with DOL staff to
ensure that the final business conduct standards rules are
appropriately harmonized with ERISA and DOL regulations. DOL staff has
provided the Commission with a statement that:

    It is the Department's view that the draft final business
conduct standards do not require security-based swap dealers or
major security-based swap participants to engage in activities that
would make them fiduciaries under the Department's current five-part
test defining fiduciary investment advice. 29 CFR 2510.3-21(c). The
standards neither conflict with the Department's existing
regulations, nor compel security-based swap dealers or major
security-based swap participants to engage in fiduciary conduct.
Moreover, the Department's recently published final rule amending
ERISA's fiduciary investment advice regulation was carefully
harmonized with the SEC's business conduct standards so that there
are no unintended consequences for security-based swap dealers and
major security-based swap participants who comply with the business
conduct standards. As explained in the preamble to the Department's
final rule, the disclosures required under the SEC's business
conduct rules do not, in the Department's view, compel
counterparties to ERISA-covered employee benefit plans to make
investment advice recommendations within the meaning of the
Department's final rule or otherwise compel them to act as ERISA
fiduciaries in

swap and security-based swap transactions conducted pursuant to
section 4s(h) of the Commodity Exchange Act and section 15F of the
Securities Exchange Act of 1934.\51\
---------------------------------------------------------------------------

    \51\ See Letter from Phyllis C. Borzi, Assistant Secretary,
Employee Benefits Security Administration, U.S. Department of Labor
to The Hon. Mary Jo White et al., SEC (Apr. 12, 2016).

    Finally, the Commission has modified its proposed treatment of
special entities to take into account the comprehensive regulatory
scheme established under ERISA. In particular, as discussed more fully
in Section II.H below, if the special entity is an ERISA plan, our
rules deem certain requirements satisfied if the plan has an
independent representative that is a fiduciary under ERISA.

E. Investment Adviser and Municipal Advisor Status

    In addition to questions about ERISA fiduciary status, commenters
also questioned whether compliance with the business conduct standards
might cause an SBS Entity to be deemed an investment adviser or, when
transacting with a special entity that meets the definition of
municipal entity, a municipal advisor.\52\ Two commenters expressed
concern more generally that compliance with the daily mark requirement
(in Rule 15Fh-3(c)) might raise questions as to whether an SBS Entity
has advisory or fiduciary responsibilities under applicable common law,
state law or federal law (e.g., DOL regulations, provisions of the
Investment Advisers Act of 1940 (``Advisers Act''), or the Dodd-Frank
Act's municipal advisor provisions).\53\
---------------------------------------------------------------------------

    \52\ See, e.g., FIA/ISDA/SIFMA, supra note 5; SIFMA (August
2011), supra note 5.
    \53\ See FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2011),
supra note 5.
---------------------------------------------------------------------------

    As we noted in the Proposing Release, the duties imposed on an SBS
Dealer (or Major SBS Participant) under the business conduct rules are
specific to this context, and are in addition to any duties that may be
imposed under other applicable law.\54\ Thus, an SBS Entity must
separately determine whether it is subject to regulation as a broker-
dealer, an investment adviser, a municipal advisor or other regulated
entity.\55\ For example, an SBS Dealer that acts as an advisor to a
special entity may fall within the definition of ``investment adviser''
under Section 202(a)(11) of the Advisers Act.\56\
---------------------------------------------------------------------------

    \54\ See Proposing Release, supra note 3, 76 FR at 42424.
    \55\ The Dodd-Frank Act amended the Exchange Act definition of
``dealer'' so that a person would not be deemed to be a dealer as a
result of engaging in security-based swaps with eligible contract
participants. See Section 3(a)(5) of the Exchange Act, 15 U.S.C.
78c(a)(5), as amended by section 761(a)(1) of the Dodd-Frank Act.
The Dodd-Frank Act does not include comparable amendments for
persons who act as brokers in swaps and security-based swaps.
Because security-based swaps, as defined in Section 3(a)(68) of the
Exchange Act, are included in the Exchange Act Section 3(a)(10)
definition of ``security,'' persons who act as brokers in connection
with security-based swaps must, absent an exception or exemption,
register with the SEC as a broker pursuant to Exchange Act Section
15(a), and comply with the Exchange Act's requirements applicable to
brokers.
    As discussed in Section I.F, infra, the Commission has issued
temporary exemptions under the Exchange Act in connection with the
revision of the ``security'' definition to encompass security-based
swaps. Among other aspects, these temporary exemptions extended to
certain broker activities involving security-based swaps.
    \56\ See 15 U.S.C. 80b-2(a)(11).
---------------------------------------------------------------------------

    We further stated in the Proposing Release that an SBS Dealer that
acts as an advisor to a municipal entity also may be a ``municipal
advisor'' under Section 15B(e) of the Exchange Act.\57\ We note,
however, that we subsequently adopted rules in 2013 that interpret the
statutorily defined term ``municipal advisor'' and provide a regulatory
exemption for persons engaging in municipal advisory activities in
circumstances in which a municipal entity or obligated person is
otherwise represented by an independent registered municipal advisor
with respect to the same aspects of a municipal financial product or an
issuance of municipal securities so long as the following requirements
are satisfied: (1) The independent registered municipal advisor is
registered pursuant to Section 15B of the Exchange Act and the rules
and regulations thereunder, and is not, and within at least the past
two years was not, associated with the person seeking to rely on the
exemption; (2) the person seeking to use the exemption receives from
the municipal entity or obligated person a representation in writing
that it is represented by, and will rely on the advice of, the
independent registered municipal advisor, and such person has a
reasonable basis for relying on the representation; and (3) the person
seeking to use the exemption provides written disclosure to the
municipal entity or obligated person, with a copy to the independent
registered municipal advisor, stating that such person is not a
municipal advisor and is not subject to the fiduciary duty to municipal
entities that the Exchange Act imposes on municipal advisors, and such
disclosure is made at a time and in a manner reasonably designed to
allow the municipal entity or obligated person to assess the material
incentives and conflicts of interest that such person may have in
connection with the municipal advisory activities.\58\ We explained
that if a municipal entity or obligated person is represented by a
registered municipal advisor, parties to the municipal securities
transaction and others who are not registered municipal advisors should
be able to provide advice to the municipal entity or obligated person
without being deemed themselves to be municipal advisors, so long as
the responsibilities of each person are clear.\59\
---------------------------------------------------------------------------

    \57\ See 15 U.S.C. 78o-4(e)(4).
    \58\ See Registration of Municipal Advisors, Exchange Act
Release No. 70462 (Sept. 20, 2013), 78 FR 67468, 67509-11 (Nov. 12,
2013) (``Municipal Advisor Registration Release'').
    \59\ Id. at 67471.
---------------------------------------------------------------------------

F. Intersection With SRO Rules

    Under the framework established in the Dodd-Frank Act, SBS Entities
are not required to be members of self-regulatory organizations
(``SROs''). Some commenters have, however, urged us to harmonize Title
VII business conduct requirements applicable to SBS Entities with
relevant SRO requirements applicable to the SRO's members to avoid
unnecessary differences, which they argue could create duplication and
conflicts when an SBS Entity is also registered as a broker-dealer, or
when an SBS Entity uses a registered broker-dealer to intermediate its
transactions.\60\
---------------------------------------------------------------------------

    \60\ See IIB (July 2015), supra note 10, at 13; SIFMA/FSR (July
2015), supra note 10, at 9-10 (due to the possibility of dually
registered firms, the Commission and FINRA, ``must work to harmonize
existing sales practice requirements'' because, to the extent
requirements differ, ``there may be unnecessary duplication and
conflicts that cause a disparate impact on security-based swap
dealers acting through broker-dealers as compared to other security-
based swap dealers.''); SIFMA (September 2015), supra note 5, at 2
(urging the Commission to harmonize its rules with, among other
things, ``the FINRA Supervision Rules, [and] the FINRA CCO Rule'').
---------------------------------------------------------------------------

    The rules we proposed were designed to implement the business
conduct requirements enacted by Congress regarding security-based swap
activity of SBS Entities. At the same time, in proposing these rules,
we were mindful that an SBS Entity also may engage in activity that
will require it to register as a broker-dealer, and thus become subject
to SRO rules applicable to registered broker-dealers that may impose
similar business conduct requirements.\61\ As we noted in the Proposing
Release, the existing rules of various SROs served as an important
point of reference for our proposed

business conduct rules.\62\ For example, a number of the proposed
rules, including those regarding ``know your counterparty,'' \63\
suitability,\64\ fair and balanced communications,\65\ supervision,\66\
and designation of a CCO,\67\ were patterned on standards that have
been established by SROs for their members. However, we tailored the
proposed rules to the specifics of the regulatory scheme for security-
based swaps under Title VII.\68\
---------------------------------------------------------------------------

    \61\ See Exchange Act Section 15(b)(8) (generally making it
illegal for a registered broker-dealer to effect a transaction in,
or induce or attempt to induce the purchase or sale of, any security
unless it is a member of a registered securities association or
effects transactions in securities solely on a national securities
exchange of which it is a member). 15 U.S.C. 78o(b)(8).
    \62\ We looked, in particular, to the requirements imposed by
FINRA, the Municipal Securities Rulemaking Board (``MSRB''), and the
National Futures Association (``NFA''), in addition to the business
conduct standards, both internal and external, adopted by the CFTC.
    \63\ Proposed Rule 15Fh-3(e). Cf. FINRA Rule 2090.
    \64\ Proposed Rule 15Fh-3(f). Cf. FINRA Rules 2090 and 2111.
    \65\ Proposed Rule 15Fh-3(g). See Exchange Act Section
15F(h)(3)C), 15 U.S.C. 78o-10(h)(3)(C). Cf. NASD Rule 2210(d)(1)(A).
    \66\ Proposed Rule 15Fh-3(h). See Exchange Act Section
15F(h)(1)(B), 15 U.S.C. 78o-10(h)(1)(B). Cf. NASD Rules 3010 and
3012.
    \67\ Proposed Rule 15Fk-1. See Exchange Act Section 15F(k), 15
U.S.C. 78o-10(k). Cf. FINRA Rule 3130.
    \68\ For example, we provided in the proposed rules for an
institutional suitability alternative, which was modeled on FINRA's
institutional suitability rule (Rule 2111(b)) but tailored to take
into account the definition of eligible contract participant
included in Title VII, which includes, among other persons,
individuals with aggregate amounts of more than $10 million invested
on a discretionary basis (or $5 million if hedging), and entities
with a net worth of at least $1 million that are hedging commercial
risk. See discussion in Section II.G.4, infra. In addition, proposed
Rule 15Fh-3(g) would impose obligations regarding fair and balanced
communications that are consistent with, but less detailed than, the
obligations imposed on registered broker-dealers under FINRA Rule
2210. See Section II.G.5, infra.
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    We recognize, as the commenters noted, that the security-based swap
and other securities activities of certain entities may require them to
register both as broker-dealers and as SBS Dealers or Major SBS
Participants.\69\ To the extent an entity will be subject to regulation
both as a broker-dealer and as an SBS Entity, there may be overlapping
regulatory requirements applicable to the same activity. The Commission
is mindful of potential regulatory conflicts or redundancies and has
sought in adopting these final rules to avoid such conflicts and
minimize redundancies, consistent with the statutory business conduct
requirements for SBS Entities. As discussed throughout this release,
the rules we are adopting today take into account the comments
received, both comments specific to the application of the proposed
rules to the security-based swap market and the role that the SBS
Entities play in that market, and comments asking us to modify the
proposed rules to more closely align with the similar SRO rules
applicable to broker-dealers.\70\ Overall, we believe that the business
conduct rules we are adopting today are generally designed to be
consistent with the relevant SRO requirements, taking into account the
nature of the security-based swap market and the statutory requirements
for SBS Entities.\71\
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    \69\ See, e.g., IIB (July 2015), supra note 10. In addition, as
noted above, there may instances in which a registered broker-dealer
acts on behalf of an SBS Entity, and so both our rules and the SRO
business conduct rules may apply to the activity of the broker-
dealer in its capacity as agent of the SBS Entity.
    \70\ One commenter urged harmonization with SRO (as well as
CFTC) rules to allow SBS Entities ``to leverage existing processes
and speed implementation.'' SIFMA (September 2015), supra note 5, at
2.
    \71\ Generally, when a business conduct standard in these
proposed rules is based on a similar SRO standard, we would expect--
at least as an initial matter--to take into account the SRO's
interpretation and enforcement of its standard when we interpret and
enforce our rule. At the same time, we are not bound by an SRO's
interpretation and enforcement of an SRO rule, and our policy
objectives and judgments may diverge from those of a particular SRO.
Accordingly, we would also expect to take into account such
differences in interpreting and enforcing our rules. Proposing
Release, 76 FR at 42399, supra note 3.
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    On July 1, 2011, the Commission issued a separate order granting
temporary exemptive relief (the ``Temporary Exemptions'') from
compliance with certain provisions of the Exchange Act in connection
with the revision, pursuant to Title VII of the Dodd-Frank Act, of the
Exchange Act definition of ``security'' to encompass security-based
swaps.\72\ Consistent with the Commission's action, on July 8, 2011,
FINRA filed for immediate effectiveness FINRA Rule 0180, which, with
certain exceptions, is intended to temporarily limit the application of
FINRA rules with respect to security-based swaps, thereby helping to
avoid undue market disruptions resulting from the change to the
definition of ``security'' under the Act.\73\
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    \72\ See Order Granting Temporary Exemptions Under the
Securities Exchange Act of 1934 in Connection With the Pending
Revision of the Definition of ``Security'' Encompass Security-based
Swaps, and Request for Comment, Exchange Act Release No. 64795 (Jul.
1, 2011), 76 FR 39927 (Jul. 7, 2011) (the ``Exemptive Release'').
The term ``security-based swap'' is defined in Section 761 of the
Dodd-Frank Act. 15 U.S.C. 78c(a)(68). See also Further Definition of
``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap
Agreement''; Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, Exchange Act Release No. 67453 (Jul. 18, 2012), 77 FR
48208 (Aug. 13, 2012) (``Products Definitions Adopting Release'')
for further discussion regarding the meaning of the term security-
based swap.
    \73\ FINRA Rule 0180 temporarily limits the application of
certain FINRA rules with respect to security-based swaps. See Notice
of Filing and Immediate Effectiveness of Proposed Rule Change to
Adopt FINRA Rule 0180 (Application of Rules to Security-Based
Swaps); File No. SR-FINRA-2011-033, Exchange Act Release No. 64884
(Jul. 14, 2011), 76 FR 42755 (July 19, 2011) (``FINRA Rule 0180
Notice of Filing''). See also Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change to Extend the Expiration
Date of FINRA Rule 0180 (Application of Rules to Security-Based
Swaps); File No. SR-FINRA-2016-001, Exchange Act Release No. 76850
(Jan. 7, 2016), 81 FR 1666 (Jan. 13, 2016) (extending until February
11, 2017 the expiration date of the exemptions under FINRA Rule
0180) (``FINRA Rule 0180 Extension Notice'').
    In its Exemptive Release, the Commission noted that the relief
is targeted and does not include, for instance, relief from the
Exchange Act's antifraud and anti-manipulation provisions. FINRA has
noted that FINRA Rule 0180 is similarly targeted. For instance,
paragraph (a) of FINRA Rule 0180 provides that FINRA rules shall not
apply to members' activities and positions with respect to security-
based swaps, except for FINRA Rules 2010 (Standards of Commercial
Honor and Principles of Trade), 2020 (Use of Manipulative, Deceptive
or Other Fraudulent Devices), 3310 (Anti-Money Laundering Compliance
Program) and 4240 (Margin Requirements for Credit Default Swaps).
See also paragraphs (b) and (c) of FINRA Rule 0180 (addressing the
applicability of additional rules); FINRA Rule 0180 Notice of
Filing; FINRA Rule 0180 Extension Notice.
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    The Commission, noting the need to avoid a potential unnecessary
disruption to the security-based swap market in the absence of an
extension of the Temporary Exemptions, and the need for additional time
to consider the potential impact of the revision of the Exchange Act
definition of ``security'' in light of recent Commission rulemaking
efforts under Title VII of the Dodd-Frank Act, issued an order that
extended and refined the applicable expiration dates of the previously
granted Temporary Exemptions.\74\ In the Temporary Exemptions Extension
Release, the Commission extended the expiration date of the expiring
Temporary Exemptions that are not directly linked to pending security-
based swap rulemakings until the earlier of such time as the Commission
issues an order or rule determining whether any continuing exemptive
relief is appropriate for security-based swap activities with respect
to any of these Exchange Act provisions or until three years following
the effective date of the

Temporary Exemptions Extension Release.\75\ The Commission further
extended the expiration date for many expiring Temporary Exemptions
directly related to pending security-based swap rulemakings until the
compliance date for the related security-based swap-specific
rulemaking.\76\
---------------------------------------------------------------------------

    \74\ See Order Extending Temporary Exemptions Under the
Securities Exchange Act of 1934 in Connection With the Revision of
the Definition of ``Security'' to Encompass Security-Based Swaps,
and Request for Comment, Exchange Act Release No. 71485 (Feb. 5,
2014), 79 FR 7731 (Feb. 10, 2014) (``Temporary Exemptions Extension
Release''). See also Extension of Exemptions for Security-Based
Swaps, Securities Act of 1933 (``Securities Act'') Release No. 9545,
Exchange Act Release No. 71482 (Feb. 5, 2014), 79 FR 7570 (Feb. 10,
2014) (extending the expiration dates in interim final rules that
provide exemptions under the Securities Act, the Exchange Act, and
the Trust Indenture Act of 1939 for those security-based swaps that
prior to July 16, 2011 were security-based swap agreements and are
defined as ``securities'' under the Securities Act and the Exchange
Act as of July 16, 2011 due solely to the provisions of Title VII of
the Dodd-Frank Act).
    \75\ See Temporary Exemptions Extension Release, 79 FR at 7734,
supra note 74. These Temporary Exemptions are currently scheduled to
expire in February 2017.
    \76\ Id. at 7731. The Commission extended a subset of the
Temporary Exemptions until they are addressed within relevant
rulemakings relating to: (i) Capital, margin, and segregation
requirements for security-based swap dealers and major security-
based swap participants, (ii) recordkeeping and reporting
requirements for security-based swap dealers and major security-
based swap participants, (iii) security-based swap trade
acknowledgement rules, and/or (iv) registration requirements for
security-based swap execution facilities.
---------------------------------------------------------------------------

    In establishing Rule 0180, and in extending the rule's expiration
date,\77\ FINRA noted its intent, pending the implementation of any
Commission rules and guidance that would provide greater regulatory
clarity in relation to security-based swap activities, to align the
expiration date of FINRA Rule 0180 with the termination of relevant
provisions of the Temporary Exemptions provided by the Commission, so
as to avoid undue market disruptions resulting from the change to the
definition of ``security'' under the Exchange Act.
---------------------------------------------------------------------------

    \77\ As noted in the FINRA Rule 0180 Extension Notice, FINRA has
indicated that it intends to amend the expiration date of Rule 0180
in subsequent filings as necessary such that the expiration date
will be coterminous with the termination of relevant provisions of
the Temporary Exemptions.
---------------------------------------------------------------------------

II. Discussion of Rules Governing Business Conduct

A. Scope, Generally

1. Proposed Rule
    Proposed Rule 15Fh-1 would provide that Rules 15Fh-1 through 15Fh-6
(governing business conduct) and Rule 15Fk-1 (requiring designation of
a CCO) are not intended to limit, or restrict, the applicability of
other provisions of the federal securities laws, including but not
limited to Section 17(a) of the Securities Act, Sections 9 and 10(b) of
the Exchange Act, and the rules and regulations thereunder.
Additionally, it would provide that Rules 15Fh-1 through 15Fh-6 and
Rule 15Fk-1 would not only apply in connection with entering into
security-based swaps but also would continue to apply, as appropriate,
over the term of executed security-based swaps.
    In the Proposing Release, the Commission solicited comment on the
scope of the business conduct rules, including whether the rules should
apply to transactions between an SBS Entity and its affiliates, whether
any of the rules should apply to security-based swaps that were entered
into prior to the effective date of the rules, and to the extent that
any of the rules were intended to provide additional protections for a
particular counterparty, whether the counterparty should be able to opt
out of those protections.\78\
---------------------------------------------------------------------------

    \78\ See Proposing Release, 76 FR at 42401-42402, supra note 3.
---------------------------------------------------------------------------

2. Comments on the Proposed Rule
a. General
    Eleven commenters addressed the general scope of the proposed
business conduct standards.\79\ One commenter recommended that the
Commission apply the proposed rules to security-based swaps that are
offered as well as those that are executed.\80\ The other commenters
addressed: The application of the rules to inter-affiliate
transactions, the application of the rules to security-based swaps
entered into prior to the effective date, and whether counterparties
should be able to opt out of the protections provided by the rules.
---------------------------------------------------------------------------

    \79\ See CFA, supra note 5; ABA Securities Association, supra
note 5; FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2011), supra
note 5; NABL, supra note 5; AFGI (September 2012), supra note 5;
AFGI (July 2013), supra note 5; CalPERS (August 2011), supra note 5;
ABC, supra note 5; MFA, supra note 5; CalSTRS, supra note 5; SIFMA
(August 2015), supra note 5.
    \80\ See CFA, supra note 5.
---------------------------------------------------------------------------

b. Application to Security-Based Swaps Entered Into Prior to the
Effective Date
    Seven commenters addressed the application of the rules to
security-based swaps that were entered into prior to the compliance
date of the rules, and all seven recommended that the rules not apply
to such transactions.\81\ Three further indicated that the rules should
not generally apply to amendments to, or other lifecycle events arising
under, a security-based swap that was executed before the compliance
date of the rules.\82\ Another commenter also specifically argued that
the rules should not apply to either partial or full terminations of
security-based swaps executed prior to the compliance date, or the
exercise of an option on a security-based swap where the option was
executed prior to the compliance date.\83\
---------------------------------------------------------------------------

    \81\ See SIFMA (August 2011), supra note 5; FIA/ISDA/SIFMA,
supra note 5; NABL, supra note 5; AFGI (September 2012), supra note
5; AFGI (July 2013), supra note 5; ABC, supra note 5; SIFMA (August
2015), supra note 5.
    \82\ See FIA/ISDA/SIFMA, supra note 5; NABL, supra note 5; SIFMA
(August 2011), supra note 5.
    \83\ See SIFMA (August 2015), supra note 5.
---------------------------------------------------------------------------

    One commenter argued that amendments to existing transactions
typically do not alter the risk and other characteristics of a
transaction sufficiently to merit application of the rules and that
application of the rules in these cases may frustrate their
purpose.\84\ Others believed that any potential retroactive application
would be burdensome, noting that it would undermine the expectations
that the parties had when entering into the security-based swap.\85\
---------------------------------------------------------------------------

    \84\ See FIA/ISDA/SIFMA, supra note 5.
    \85\ See AFGI (September 2012), supra note 5; AFGI (July 2013),
supra note 5; SIFMA (August 2011), supra note 5.
---------------------------------------------------------------------------

c. Application to Inter-Affiliate Transactions
    Three commenters discussed the application of the rules to inter-
affiliate transactions.\86\ All three recommended that the rules
generally not apply to security-based swap transactions between
affiliates,\87\ but one recognized that entity-level requirements (such
as CCO and supervision responsibilities) will necessarily apply.\88\
One commenter asserted that the rules are intended to protect investors
in arm's length transactions and therefore, would be irrelevant in
inter-affiliate transactions.\89\ The second commenter similarly argued
that because affiliates are not ``external clients'' of the SBS Entity,
the protections afforded by the rules are inapposite.\90\ The second
commenter also suggested that the Commission define ``affiliate'' to
mean an entity that is ``under common control and that reports
information or prepares its financial statements on a consolidated
basis'' with another entity, and opined that the definition should be
consistently applied across Title VII rulemakings.\91\ The third
commenter also advocated for a common control standard, arguing that
the rules should not apply to transactions between an SBS Entity and
``a person controlling, controlled by, or under common control with the
[SBS Entity].'' \92\
---------------------------------------------------------------------------

    \86\ See ABA Securities Association, supra note 5; FIA/ISDA/
SIFMA, supra note 5; SIFMA (August 2015), supra note 5.
    \87\ See ABA Securities Association, supra note 5; FIA/ISDA/
SIFMA, supra note 5; SIFMA (August 2015), supra note 5.
    \88\ See ABA Securities Association, supra note 5.
    \89\ See FIA/ISDA/SIFMA, supra note 5.
    \90\ See ABA Securities Association, supra note 5.
    \91\ Id.
    \92\ See SIFMA (August 2015), supra note 5.
---------------------------------------------------------------------------

d. Counterparty Opt-Out
    Nine commenters addressed whether to permit counterparties to opt
out of certain protections provided by the

rules.\93\ Six commenters were in favor of allowing an opt out in at
least some circumstances,\94\ and three were against it.\95\
---------------------------------------------------------------------------

    \93\ See FIA/ISDA/SIFMA, supra note 5; CalPERS (August 2011),
supra note 5; SIFMA (August 2011), supra note 5; ABC, supra note 5;
MFA, supra note 5; CalSTRS, supra note 5; CFA, supra note 5; Better
Markets (August 2011), supra note 5; Levin, supra note 5.
    \94\ See FIA/ISDA/SIFMA, supra note 5; CalPERS (August 2011),
supra note 5; SIFMA (August 2011), supra note 5; ABC, supra note 5;
MFA, supra note 5; CalSTRS, supra note 5.
    \95\ See CFA, supra note 5; Better Markets (August 2011), supra
note 5; Levin, supra note 5.
---------------------------------------------------------------------------

    Three commenters suggested that the Commission permit institutional
or ``sophisticated investors'' to opt out of provisions intended to
protect counterparties.\96\ Specifically, one endorsed allowing
``qualified institutional buyers'' as defined in Rule 144A under the
Securities Act and institutions with total assets of $100 million or
more to opt out, asserting that the costs, delays in execution, and
requirements to make detailed representations and disclosure to the SBS
Entity may outweigh the benefits that such counterparties would
receive.\97\ Another asserted that ``sophisticated'' counterparties
should be able to opt out of receiving ``material information''
disclosures and the written disclosures related to clearing rights to
lower their hedging costs and avoid potential trading delays and
inefficiencies.\98\
---------------------------------------------------------------------------

    \96\ See FIA/ISDA/SIFMA, supra note 5; CalPERS (August 2011),
supra note 5; MFA, supra note 5.
    \97\ See FIA/ISDA/SIFMA, supra note 5.
    \98\ See MFA, supra note 5.
---------------------------------------------------------------------------

    Three other commenters suggested an opt out for specific types of
counterparties.\99\ One suggested that an ERISA plan should be
permitted to opt out because SBS Entities might use the information
they receive as a result of compliance with the business conduct
standards to disadvantage the ERISA plan.\100\ A second asserted that
pension funds acting as end users should be allowed to opt out of any
rules that impose ``heightened fiduciary duties'' on SBS Dealers
because pension funds do not need extra protection, and compliance with
the fiduciary duties would only increase costs for SBS Dealers, leading
them to either pass the costs along or refrain from entering into
transactions with pension funds.\101\ A third suggested that any entity
advised by a qualified independent representative should be able to
waive the protections of the rules to avoid execution delays and
administrative costs.\102\
---------------------------------------------------------------------------

    \99\ See ABC, supra note 5; CalSTRS, supra note 5; SIFMA (August
2011), supra note 5.
    \100\ See ABC, supra note 5.
    \101\ See CalSTRS, supra note 5.
    \102\ See SIFMA (August 2011), supra note 5.
---------------------------------------------------------------------------

    Three commenters opposed allowing counterparties to opt out of the
special protections in the rules.\103\ One commenter noted that a
``theoretically optional opt out would likely become mandatory''
because SBS Dealers would make it a condition of doing business, and
that an opt-out approach could be used to perpetuate abuses the rules
are intended to prevent.\104\ Another commented that an opt-out would
``only add confusion to an already complex regulatory framework and
create opportunities for market participants to evade compliance with
the much-needed business conduct standards.'' \105\ A third
specifically opposed allowing counterparties to opt out of the
disclosure requirements, noting that even sophisticated investors may
be misled.\106\
---------------------------------------------------------------------------

    \103\ See CFA, supra note 5; Better Markets (August 2011), supra
note 5; Levin, supra note 5.
    \104\ See CFA, supra note 5.
    \105\ See Better Markets (August 2011), supra note 5.
    \106\ See Levin, supra note 5.
---------------------------------------------------------------------------

3. Response to Comments and Final Rule
    After considering the comments, the Commission is adopting Rule
15Fh-1, predesignated as Rule 15Fh-1(a), with certain modifications.
a. General
    The Commission is adopting, as proposed, the provision in final
Rule 15Fh-1(a) specifying that Rules 15Fh-1 through 15Fh-6 and Rule
15Fk-1 apply ``in connection with entering into security-based swaps''
and also will continue to apply, as appropriate, over the term of
executed security-based swaps. Many of the rules impose obligations on
an SBS Entity with respect to its ``counterparty'' that must be
satisfied before the SBS Entity has actually entered into a security-
based swap with that counterparty (e.g., Rule 15Fh-3(a) (verification
of counterparty status) and Rule 15Fh-3(b) (disclosure of material
risks and characteristics, and material incentives or conflicts of
interest)). This is consistent with the language specifying that the
rules apply ``in connection with entering into security-based swaps''
in Rule 15Fh-1(a). Accordingly, when the rules refer to a
``counterparty'' of the SBS Entity, the term ``counterparty'' includes
a potential counterparty where compliance with the obligation is
required before the SBS Entity and the ``counterparty'' has actually
entered into the security-based swap.\107\
---------------------------------------------------------------------------

    \107\ We believe that our reading of the term ``counterparty''
to include a potential counterparty addresses the concerns raised by
the commenter that requested that the Commission apply the rules to
security-based swaps that are offered as well as those that are
executed. See CFA, supra note 5.
---------------------------------------------------------------------------

b. Application to Security-Based Swaps Entered Into Prior to the
Effective Date
    To address concerns raised by commenters,\108\ the Commission is
clarifying that the business conduct rules generally will not apply to
any security-based swap entered into prior to the compliance date of
the rules, and generally will apply to any security-based swap entered
into after the compliance date of these rules, including a new
security-based swap that results from an amendment or modification to a
pre-existing security-based swap.\109\
---------------------------------------------------------------------------

    \108\ See SIFMA (August 2011), supra note 5; FIA/ISDA/SIFMA,
supra note 5; NABL, supra note 5; AFGI (September 2012), supra note
5; AFGI (July 2013), supra note 5; ABC, supra note 5; SIFMA (August
2015), supra note 5.
    \109\ See infra Sections IV.B and C (discussing the compliance
dates of these rules).
---------------------------------------------------------------------------

    In response to commenters' concerns about applying the business
conduct rules to amendments to and other lifecycle events of a
security-based swap entered into before the compliance date of these
rules,\110\ the Commission is clarifying that the business conduct
rules generally will not apply to amendments or modifications to a pre-
existing security-based swap unless the amendment or modification
results in a new security-based swap (and occurs after the compliance
date of these rules). The Commission has previously determined that if
the material terms of a security-based swap are amended or modified
during its life based on an exercise of discretion and not through
predetermined criteria or a predetermined self-executing formula, the
amended or modified security-based swap is viewed as a new security-
based swap.\111\ Thus, if there is such a material amendment or
modification, which could include a change in the economic terms of the
transaction that the parties would not have provided for when entering
into the security-based swap contract, the Commission will consider the
amended or modified security-based swap to be a new

security-based swap for purposes of the business conduct rules. If that
material amendment or modification occurs after the compliance date of
these rules, these rules will apply to the resulting new security-based
swap.
---------------------------------------------------------------------------

    \110\ See FIA/ISDA/SIFMA, supra note 5; NABL, supra note 5;
SIFMA (August 2015), supra note 5.
    \111\ See Products Definitions Adopting Release, supra note 72,
77 FR at 48286 (``If the material terms of a Title VII instrument
are amended or modified during its life based on an exercise of
discretion and not through predetermined criteria or a predetermined
self-executing formula, the Commissions view the amended or modified
Title VII instrument as a new Title VII instrument.'').
---------------------------------------------------------------------------

    In response to concerns raised by a commenter, the Commission also
is clarifying that the rules generally will not apply to either a
partial or full termination of a pre-existing security-based swap.\112\
In these instances we anticipate that the expectations of the parties
will be governed by the pre-existing terms of the original security-
based swap, and so the business conduct requirements generally will not
apply. If, however, the partial termination involves a change in the
material terms of the original security-based swap ``based on an
exercise of discretion and not through predetermined criteria or a
predetermined self-executing formula'' the business conduct rules will
apply.
---------------------------------------------------------------------------

    \112\ See SIFMA (August 2015), supra note 5.
---------------------------------------------------------------------------

    As requested by a commenter,\113\ we are clarifying that the
business conduct rules generally will not apply to a new security-based
swap that results from the exercise of an option on a security-based
swap (whether or not the exercise occurs before or after the compliance
date of these rules), as long as the terms upon which a party can
exercise the option and the terms of the underlying security-based swap
that will result upon the exercise of the option are governed by the
terms of the pre-existing option. If, however, the material terms of
either the option or the resulting security-based swap are amended or
modified based on an exercise of discretion and not through
predetermined criteria or a predetermined self-executing formula, our
business conduct rules will apply to the amended or modified option or
security-based swap resulting from the exercise of the option (assuming
that such amendment or modification occurs after the compliance date of
these rules).
---------------------------------------------------------------------------

    \113\ Id.
---------------------------------------------------------------------------

    We believe it appropriate to apply the rules in this manner to help
to ensure that counterparties receive the benefits of the rules in
circumstances where they are warranted, while providing firms adequate
time to review the business conduct rules being adopted today and make
appropriate changes to their operations before they have to begin
complying with those rules.
    The Commission emphasizes that the above clarifications relate to
the business conduct rules that by their terms apply when an SBS Entity
offers to enter into or enters into a security-based swap, such as
verification of status (Rule 15Fh-3(a)), certain disclosures (Rule
15Fh-3(b) and (d)), requirements for special entities as counterparties
(Rule 15Fh-5), and pay-to-play (Rule 15Fh-6)). Other rules being
adopted today are broader in their application, such as those relating
to know your counterparty (Rule 15Fh-3(e)), recommendations of
security-based swaps or trading strategies (Rule 15Fh-3(f)), fair and
balanced communications (Rule 15Fh-3(g)), supervision (Rule 15Fh-3(h)),
antifraud (Rule 15Fh-4(a)), requirements when an SBS Dealer is acting
as an advisor to a special entity (Rule 15Fh-4(b)), and the CCO (Rule
15Fk-1). Thus, if an SBS Entity takes an action after the compliance
date that independently implicates one of the business conduct rules,
it will need to comply with the applicable requirements. For example,
if an SBS Dealer makes a recommendation of a trading strategy that
involves termination of a pre-existing security-based swap, the SBS
Dealer would need to comply with the suitability requirements of Rule
15Fh-3(f) regarding such recommendation. In addition, an SBS Entity
will need to comply with ``entity level'' rules relating to supervision
and CCO after the compliance date of those rules for all of its
security-based swap business.
c. Application to Inter-Affiliate Transactions
    The Commission agrees with the concerns raised by commenters
regarding the treatment of inter-affiliate transactions.\114\ As the
Commission noted in the Definitions Adopting Release (defined below),
market participants may enter into inter-affiliate security-based swaps
for a variety of purposes, such as to allocate risk within a corporate
group or to transfer risks within a corporate group to a central
hedging or treasury entity.\115\ As discussed below, we believe that
transactions by SBS Entities with certain of their affiliated persons
do not implicate the concerns that the business conduct requirements
regarding verification of counterparty status (Rule 15Fh-3(a)),
disclosures regarding the product and potential conflicts of interest,
daily mark and clearing rights (Rule 15Fh-3(b), (c) and (d)), ``know
your counterparty'' and suitability obligations (Rules 15Fh-3(e) and
(f)), and obligations when advising or acting as counterparty to a
special entity (Rules 15Fh-4(b) and 15Fh-5) are intended to address
(referred to as ``transaction specific obligations'').\116\ We
therefore are providing in Rule 15Fh-1(a) as adopted that Rules 15Fh-
3(a) through (f), 15Fh-4(b) and 15Fh-5 are not applicable to security-
based swaps that SBS Entities enter into with certain affiliates.
---------------------------------------------------------------------------

    \114\ See ABA Securities Association, supra note 5; FIA/ISDA/
SIFMA, supra note 5; SIFMA (August 2015), supra note 5.
    \115\ See Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant,''
Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596, 30624-
30625 (May 23, 2012) (``Definitions Adopting Release'').
    \116\ As one commenter suggested, because affiliates are not
``external clients'' of the SBS Entity, the protections afforded by
these rules may be inapposite. See ABA Securities Association, supra
note 5.
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    We are not, however, extending the exception to transactions with
all affiliates, as requested by some commenters.\117\ Rather, the
Commission is limiting the exception from the business conduct
requirements to security-based swap transactions between majority-owned
affiliates. The rule defines ``majority-owned affiliates'' consistent
with the Definitions Adopting Release such that, for these purposes,
the counterparties to a security-based swap are majority-owned
affiliates if one counterparty directly or indirectly owns a majority
interest in the other, or if a third party directly or indirectly owns
a majority interest in both counterparties to the security-based swap,
where ``majority interest'' is the right to vote or direct the vote of
a majority of a class of voting securities of an entity, the power to
sell or direct the sale of a majority of a class of voting securities
of an entity, or the right to receive upon dissolution or the
contribution of a majority of the capital of a partnership.\118\
---------------------------------------------------------------------------

    \117\ See SIFMA (August 2015), supra note 5; FIA/ISDA/SIFMA,
supra note 5. See also ABA Securities Association, supra note 5
(suggesting an ``affiliated group'' definition that was considered
but not adopted in the Definitions Adopting Release). As noted
above, the Commissions instead adopted the exception for ``majority-
owned affiliates'' that we are providing here. See Definitions
Adopting Release, supra note 115.
    \118\ See Exchange Act Rules 3a71-1(d)(1) and 15Fh-1(a).
---------------------------------------------------------------------------

    The transaction-specific obligations outlined above and included in
Rule 15Fh-1(a) generally are designed to provide an SBS Entity
counterparty with certain information in connection with the security-
based swap transaction that would help reduce potential information
asymmetries, and to help ensure that the SBS Entity knows its
counterparty and acts in a fair manner towards that counterparty, even
in the face of potential conflicts of interest. The Commission does not
believe that these objectives and

concerns are implicated in the same manner or to the same extent when
there is an alignment of economic interests between the SBS Entity and
a counterparty, such as is the case when the counterparty is a
majority-owned affiliate. However, absent majority ownership, we cannot
be confident that there would be an alignment of economic interests
that is sufficient to eliminate the concerns that underpin the need for
regulation in this area.\119\ Accordingly, the Commission is modifying
Rule 15Fh-1(a) to provide that Rules 15Fh-3(a)-(f), 15Fh-4(b) and 15Fh-
5 are not applicable to security-based swaps that SBS Entities enter
into with their majority-owned affiliates. These generally are the
transaction specific exceptions requested by a commenter.\120\
---------------------------------------------------------------------------

    \119\ See Definitions Adopting Release, 77 FR at 30625, supra
note 115 (declining to adopt a ``common control'' standard, noting
that, ``[a]bsent majority ownership, we cannot be confident that
there would be an alignment of economic interests that is sufficient
to eliminate the concerns that underpin dealer regulation.'').
    \120\ See SIFMA (August 2015), supra note 5 (requesting
exceptions with respect to Rules 15Fh-3(a) through (f), 15Fh-4(b)
and 15Fh-5).
---------------------------------------------------------------------------

    Further, consistent with the commenter's request, we are not
granting an exception for transactions with affiliates with respect to
the antifraud requirements of Rule 15Fh-4(a) or the requirements of
Rule 15Fh-3(g) (fair and balanced communications).\121\ The exception
for inter-affiliate transactions from the transaction specific
obligations discussed above is generally predicated on the assumption
that entities with aligned economic interests have an incentive to act
fairly when dealing with each other. However, we believe it important
to continue to provide the protections of the antifraud and fair and
balanced communication rules in situations where an SBS Entity acts in
a manner contrary to this assumption. We also are not granting
exceptions to the entity-level requirements regarding supervision (Rule
15Fh-3(h)) and CCO obligations (Rule 15Fk-1), which are intended to
help to ensure the compliance of SBS Entities in their security-based
swap transactions.
---------------------------------------------------------------------------

    \121\ See id.
---------------------------------------------------------------------------

d. Counterparty Opt-Out
    The Commission has considered the concerns raised by commenters
\122\ and determined, on balance, not to permit counterparties
generally to opt out of the protections provided by the business
conduct rules. As discussed throughout the release in the context of
specific rules, the rules being adopted today are intended to provide
certain protections for counterparties, including certain heightened
protections for special entities. We think it is appropriate to apply
the rules so that counterparties receive the benefits of those
protections and so do not think it appropriate to permit parties
generally to elect to ``opt out'' of the benefits of those
provisions.\123\
---------------------------------------------------------------------------

    \122\ See FIA/ISDA/SIFMA, supra note 5; CalPERS (August 2011),
supra note 5; SIFMA (August 2011), supra note 5; ABC, supra note 5;
MFA, supra note 5; CalSTRS, supra note 5; CFA, supra note 5; Better
Markets (August 2011), supra note 5; Levin, supra note 5.
    \123\ However, as discussed in Section II.H.1.c.iii below, in
order to resolve any tension between Exchange Act Sections
15F(h)(2)(C)(iii) and (iv), we are allowing employee benefit plans
that are defined in Section 3 of ERISA but not subject to Title I of
ERISA to opt out of special entity status.
---------------------------------------------------------------------------

    While we are not adopting a general opt-out provision, as discussed
below in connection with the relevant rules, the Commission has
determined to permit means of compliance with the final rules that
should promote efficiency and reduce costs (e.g., Rule 15Fh-1(b)
(reliance on representations)) and, where appropriate, allow SBS
Entities to take into account the sophistication of the counterparty
(e.g., Rule 15Fh-3(f) (regarding recommendations of security-based
swaps or trading strategies)).

B. Exceptions for Anonymous SEF or Exchange-Traded Transactions

    Section 15F(h)(7) of the Exchange Act provides a statutory
exception ``from the requirements of this subsection'' for security-
based swap transactions that are: ``(A) initiated by a special entity
on an exchange or security-based swaps execution facility; and (B) the
security-based swap dealer or major security-based swap participant
does not know the identity of the counterparty to the transaction.''
\124\ More generally, commenters have asked the Commission to provide
exceptions to the application of our rules in situations in which an
SBS Entity does not know the identity of its counterparty, or where a
security-based swap transaction is executed on a registered national
securities exchange or security-based swap execution facility
(``SEF''), without regard to whether the counterparty is a special
entity.\125\
---------------------------------------------------------------------------

    \124\ 15 U.S.C. 78o-10(h)(7).
    \125\ See, e.g., SIFMA (August 2011), supra note 5; BlackRock,
supra note 5; FIA/ISDA/SIFMA, supra note 5.
---------------------------------------------------------------------------

1. Proposal
    Noting that there may be circumstances in which it may be unclear
which party ``initiated'' the communications that resulted in the
parties entering into a security-based swap transaction on a registered
SEF or registered national securities exchange, the Commission proposed
to interpret Section 15F(h)(7) to apply to any transaction with a
special entity on a registered SEF or registered national securities
exchange, where the SBS Entity does not know the identity of its
counterparty at any time up to and including execution of a
transaction.
    The Commission further proposed to interpret Section 15F(h)(7) to
apply with respect to requirements specific to dealings with special
entities. Proposed Rule 15Fh-4(b)(3) would provide an exception from
the special requirements for SBS Dealers acting as advisors to special
entities, including the requirement that an SBS Dealer act in the best
interests of a special entity for whom it acts as an advisor, if the
transaction is executed on a registered exchange or SEF and the SBS
Dealer does not know the identity of the counterparty at any time up to
and including execution of the transaction. Under the same
circumstances, proposed Rule 15Fh-5(c) would similarly provide an
exception from the special requirements for SBS Entities acting as
counterparties to special entities, including the qualified independent
representative and disclosure requirements of proposed Rule 15Fh-
5.\126\ Proposed Rule 15Fh-6(b)(2)(iii) would provide an exception from
the pay to play rules with respect to transactions on a registered
exchange or SEF where the SBS Dealer does not know the identity of the
counterparty at any time up to and including execution of the
transaction.\127\
---------------------------------------------------------------------------

    \126\ See Section II.H.8, infra for a discussion of the proposed
exceptions from the requirements of Rules 15Fh-4(b) and 15Fh-5.
    \127\ Rule 15Fh-6, as proposed, would apply only with respect to
transactions ``initiated'' by a municipal entity. The Commission is
modifying the exception under Rule 15Fh-6(b)(2)(iii) to apply to all
security-based swap transactions that are executed on a registered
national securities exchange or registered or exempt SEF, rather
than just with respect to transactions ``initiated by a municipal
entity'' on such exchange or registered SEF (as long as the other
conditions of Rule 15Fh-6(b)(2)(iii) are met). These revisions are
consistent with the exceptions to Rules 15Fh-4 and 15Fh-5 for
anonymous, exchange-traded or SEF transactions. See Section II.H.9,
infra.
---------------------------------------------------------------------------

    Consistent with Section 15F(h)(7), we also proposed to limit the
application of certain other requirements to situations in which the
identity of a counterparty (whether a special entity or not) is known
to the SBS Entity. The rules as proposed would limit the verification
of counterparty status obligations (proposed Rule 15Fh-3(a)),\128\ and
know your counterparty obligations (proposed Rule 15Fh-3(e)) to
transactions with

counterparties whose identity is known to the SBS Entity.\129\
---------------------------------------------------------------------------

    \128\ See Section II.G.1, infra.
    \129\ See Sections II.G.1 and II.G.3, infra.
---------------------------------------------------------------------------

2. Comments on the Proposal
    The Commission received five comment letters that addressed the
exception for anonymous, exchange or SEF-traded security-based swaps in
the context of special entity-specific requirements,\130\ and four
comment letters that addressed more broadly the issue of an exception
for anonymous or SEF and exchange-traded security-based swaps.\131\ The
comment letters that address the exception in the context of the
special entity requirements are discussed infra in Sections II.H.8 and
II.H.9. The comment letters that address the broader issue of an
exception from business conduct requirements for anonymous or SEF and
exchange-traded security-based swaps are discussed below.
---------------------------------------------------------------------------

    \130\ See ABC, supra note 5; CFA, supra note 5; SIFMA (August
2015), supra note 5; Better Markets (August 2011), supra note 5;
FIA/ISDA/SIFMA, supra note 5.
    \131\ See SIFMA (August 2011), supra note 5; MFA, supra note 5;
BlackRock, supra note 5; SIFMA (August 2015), supra note 5
---------------------------------------------------------------------------

    Two commenters asserted that, where a security-based swap is
cleared (through registered clearing organizations) and SEF or
exchange-traded, the transaction should not be subject to the
requirements of the proposed rules--regardless of whether the identity
of the counterparty is known at the time of execution.\132\ The
commenters argued that knowledge or identification of a counterparty's
identity should not compel compliance with the business conduct
standards.\133\ The commenters further argued that the concerns
addressed by business conduct standards were largely inapplicable to
security-based swaps entered into through registered SEFs, swap
execution facilities or registered national securities exchanges.\134\
The commenters asserted that compliance with the proposed rules would
result in delay, additional complexity, individual negotiation and
potentially less transparency, which the trading and clearing
requirements of the Dodd-Frank Act sought to avoid.\135\
---------------------------------------------------------------------------

    \132\ See SIFMA (August 2011), supra note 5 (arguing that
parties to exchange-traded security-based swaps likely know the
identity of their counterparty before the transaction, either
because the exchange uses a request for quote system (where the
participants can seek quotes from specific counterparties) or a
single-dealer platform, or because information about the
counterparties to the trade is necessary to complete the execution
process); BlackRock, supra note 5.
    \133\ See SIFMA (August 2011), supra note 5 (``mere
knowledge''); BlackRock, supra note 5 (``mere identification'').
    \134\ See SIFMA (August 2011), supra note 5 (``largely
inapplicable''); BlackRock, supra note 5 (``simply will not be an
issue'').
    \135\ See SIFMA (August 2011), supra note 5; BlackRock, supra
note 5.
---------------------------------------------------------------------------

    However, one of the commenters acknowledged that some security-
based swaps executed on a SEF or exchange might be bilaterally
negotiated, and the SEF or exchange subsequently used to process the
trade, in which case it might be appropriate to apply the business
conduct standards.\136\
---------------------------------------------------------------------------

    \136\ See BlackRock, supra note 5 (also noting that, conversely,
generally ``when a swap or a security-based swap is cleared and
exchange-traded, the counterparty to the trade should be viewed as
fungible, rendering compliance with the specific requirements of
[the proposed rules] unnecessary'').
---------------------------------------------------------------------------

    After adoption of the CFTC's business conduct standards, one
commenter urged the Commission to adopt an exception for exchange-
traded security-based swaps that are intended to be cleared if: (1)(a)
The transaction is executed on a registered or exempt SEF or registered
national securities exchange; and (b) is of a type that is, as of the
date of execution, required to be cleared pursuant to Section 3C of the
Exchange Act; or (2) the SBS Entity does not know the identity of the
counterparty, at any time up to and including execution of the
transaction.\137\ The commenter argued that these changes would
harmonize the scope of the Commission's requirements with the scope of
the parallel requirements under the relief provided by CFTC No-Action
Letter 13-70.\138\ The commenter argued that the considerations on
which the CFTC staff based its no-action relief would also apply to the
security-based swap market, namely: ``(i) the impossibility or
impracticability of compliance with certain rules by a Swap Entity when
the identity of the counterparty is not known prior to execution; (ii)
the likelihood that swaps initiated anonymously on a designated
contract market or swap execution facility will be standardized and,
thus, information about the material risks and characteristics of such
swaps is likely to be available from the designated contract market or
swap execution facility or other widely available source (including the
product specifications of a derivatives clearing organization where the
swaps are accepted for clearing); and (iii) the likelihood that such
relief would provide an incentive to transact on designated contract
markets and swap execution facilities, thus enhancing transparency in
the swaps market.'' \139\
---------------------------------------------------------------------------

    \137\ See SIFMA (August 2015), supra note 5.
    \138\ Id. See Swaps Intended to Be Cleared, CFTC Letter No. 13-
70 (Nov. 15, 2013), available at<EMAIL_ADDRESS>    \139\ Id.
---------------------------------------------------------------------------

3. Response to Comments and Final Rules
    After considering the comments, the Commission has determined to
adopt two sets of exceptions from the business conduct requirements. As
discussed in Sections II.H.8 and II.H.9, infra, we are adopting
exceptions from the requirements of Rules 15Fh-4(b), 15Fh-5 and 15Fh-6
(collectively, ``special entity exceptions'') for anonymous
transactions executed on a registered national securities exchange or a
registered or exempt SEF, where the identity of the special entity is
not known to the SBS Entity at a reasonably sufficient time prior to
execution of the transaction to permit the SBS Entity to comply with
the obligations of the rule.\140\
---------------------------------------------------------------------------

    \140\ See Rules 15Fh-4(b)(3)(ii), 15Fh-5(d)(2) and 15Fh-
6(b)(3)(iii). We have similarly modified the verification of special
entity counterparty status requirements in Rule 15Fh-3(a)(2), as
discussed infra in Section II.G.1.
---------------------------------------------------------------------------

    In addition to the special entity exceptions, the Commission is
adopting a second set of exceptions that are not limited to
transactions with special entities, under which certain of the business
conduct standards rules will apply only where the SBS Entity knows the
identity of the counterparty at a reasonably sufficient time prior to
execution of the transaction to permit the SBS Entity to comply with
the obligations of the rule.\141\ These exceptions are intended to
address the impracticalities and potential business disruption that
could result if an SBS Entity were required to comply with the
disclosure requirements in Rule 15Fh-3(b) (requiring an SBS Entity to
disclose material risks and characteristics of a security-based swap
and material incentives or conflicts in connection with a security-
based swap, prior to entering into that security-based swap with a
counterparty) and Rule 15Fh-3(d) (requiring certain pre-transaction
disclosures to counterparties regarding clearing rights), before
learning the identity of its counterparty.\142\ By only applying these
rules' requirements to situations where the counterparty's identity is
known ``at a reasonably sufficient time prior to'' the execution of a
transaction, the rules' requirements are limited to situations where an
SBS

Entity has sufficient time before the execution of the transaction to
comply with its obligations under the rules. For this reason, we
decline to adopt language, suggested by a commenter, which would apply
the exception to circumstances where the identity of the counterparty
``is not known at any time up to and including execution of the
transaction.'' \143\
---------------------------------------------------------------------------

    \141\ See ABC, supra note 5; FIA/ISDA/SIFMA, supra note 5.
    \142\ As discussed in Section II.G.3, infra, we are adopting as
proposed the exception in Rule 15Fh-3(e), which limits SBS Dealers'
counterparty obligations under the rule to transactions with
``known'' counterparties.
    \143\ See SIFMA (August 2015), supra note 5.
---------------------------------------------------------------------------

    We are not, however, accepting the commenter's suggestion that we
revise our exceptions to provide an exception for transactions intended
to be cleared so long as the transaction is either executed on a
registered national securities exchange or registered or exempt SEF and
required to be cleared pursuant to Section 3C of the Exchange Act,
regardless of whether or not the transaction is anonymous.\144\
Similarly, we reject commenters' more general assertions that the
exceptions should apply to all SEF or exchange-traded transactions,
even where the identity of the counterparty is known,\145\ and that the
protections provided by the business conduct standards are unnecessary
for security-based swaps that are entered into through registered SEFs,
swap execution facilities or registered national securities
exchanges.\146\ The rules being adopted today are intended to provide
certain protections for counterparties, and we think it is appropriate
to apply the rules, to the extent practicable, so that counterparties
receive the benefits of those protections. We have determined not to
apply those rules where it may not be possible or practical to do so,
specifically where a transaction is executed on a registered exchange
or SEF and the identity of the counterparty is not known to the SBS
Entity at a reasonably sufficient time prior to execution of the
transaction to permit the SBS Entity to comply with the obligations of
the rule. However, where the identity of the counterparty is known in a
timely manner, we believe that it is appropriate to apply the rules so
that the counterparty receives the benefits of the protections provided
by the rules, including the assistance of an advisor or qualified
independent representative acting in the best interests of a
counterparty that is special entity.
---------------------------------------------------------------------------

    \144\ Id.
    \145\ See SIFMA (August 2011), supra note 5; BlackRock, supra
note 5.
    \146\ See SIFMA (August 2011), supra note 5.
---------------------------------------------------------------------------

C. Application of the Rules to SBS Dealers and Major SBS Participants

1. Proposal
    As noted in the Proposing Release, in general, where the Dodd-Frank
Act imposes a business conduct requirement on both SBS Dealers and
Major SBS Participants, we proposed rules that would apply to SBS
Dealers and Major SBS Participants.\147\ Where, however, a business
conduct requirement is not expressly addressed by the Dodd-Frank Act,
the proposed rules generally applied only to SBS Dealers.\148\ We
solicited comment on whether this approach was appropriate.
Specifically, where the Dodd-Frank Act requires that a business conduct
rule apply to all SBS Entities, we asked if the rule should impose the
same requirements on Major SBS Participants as on SBS Dealers, and
where we proposed rules for SBS Dealers that are not expressly
addressed by the Dodd-Frank Act, we asked if any of those rules should
also apply to Major SBS Participants.
---------------------------------------------------------------------------

    \147\ See Proposing Release, 76 FR at 42400-42401, supra note 3.
    \148\ As noted in the Proposing Release, there are exceptions to
this principle. We proposed that all SBS Entities be required to
determine if a counterparty is a special entity. In addition,
Section 3C(g)(5) of the Exchange Act creates certain rights with
respect to clearing for counterparties entering into security-based
swaps with SBS Entities but does not require disclosure. We proposed
a rule that would require an SBS Entity to disclose to a
counterparty certain information relating to these rights. See 15
U.S.C. 78c-3(g)(5); Proposing Release, 76 FR at 42401 n.39, supra
note 3.
---------------------------------------------------------------------------

2. Comments on the Proposal
    Three commenters addressed the general application of the rules to
SBS Dealers and Major SBS Participants.\149\ One commenter agreed it
may be appropriate, ``in light of their somewhat different roles,'' to
adopt different approaches to rules governing SBS Dealers and Major SBS
Participants in certain areas.\150\ The commenter asserted that absent
an affirmative reason to adopt a different approach for SBS Dealers and
Major SBS Participants, the Commission should seek to promote
consistency and adopt uniformly strong rules.\151\ The commenter argued
that the determining factor should be whether Major SBS Participants
are likely to be engaged in conduct that would appropriately be
regulated under the relevant standard.\152\
---------------------------------------------------------------------------

    \149\ See CFA, supra note 5; MFA, supra note 5; BlackRock, supra
note 5.
    \150\ See CFA, supra note 5.
    \151\ Id.
    \152\ Id.
---------------------------------------------------------------------------

    In contrast, another commenter urged 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.'' \153\ The
commenter recommended that the Commission focus regulation of Major SBS
Participants on reducing default risk, and focus regulation of SBS
Dealers on market making and pricing and sales practices in addition to
reducing default risk.\154\ The commenter argued that to the extent
Major SBS Participants transact at arm's-length, they will not be
advising counterparties and therefore, neither fiduciary duties nor
``dealer-like obligations'' (regarding ``know your counterparty,''
suitability and ``pay-to-play'' restrictions, for example) should be
imposed on them.\155\
---------------------------------------------------------------------------

    \153\ See MFA, supra note 5.
    \154\ Id.
    \155\ Id.
---------------------------------------------------------------------------

    A third commenter generally supported our proposed approach in not
applying certain business conduct requirements to Major SBS
Participants where the Dodd-Frank Act does not expressly impose such
standards.\156\ In the alternative, if the Commission determines to
require Major SBS Participants to disclose ``material information'' and
to provide daily marks to their counterparties, the commenter asked
that we make these requirements inapplicable to transactions between a
Major SBS Participant and an SBS Dealer, and to allow all other parties
to opt out of receiving such disclosures in their dealings with a Major
SBS Participant.\157\
---------------------------------------------------------------------------

    \156\ See BlackRock, supra note 5.
    \157\ Id.
---------------------------------------------------------------------------