obligations that they would allocate between themselves. The
commenter's request is beyond the scope of this rulemaking although we
acknowledge the concerns raised by the commenter, and may consider them
in the future.

K. Other Comments

    The CFTC proposed rules regarding best execution and front running
that it did not ultimately adopt. One commenter urged the Commission to
adopt a best execution requirement similar to the CFTC's
proposal.\1267\ Another commenter urged the Commission not to adopt a
prohibition on front running.\1268\ Although the Commission is not
adopting such rules, we note that SBS Entities remain subject to the
antifraud provisions of the federal securities laws, including the
antifraud provisions of Exchange Act Section 15H(h)(4)(A) and Rule
15Fh-4(a), as discussed in Section II.H.4, with respect to their
dealings with counterparties.
---------------------------------------------------------------------------

    \1267\ See CFA, supra note 5.
    \1268\ See SIFMA (August 2011), supra note 5. Front running
refers to an entity entering into a transaction for its own benefit
ahead of executing a counterparty transaction.
---------------------------------------------------------------------------

    The Commission did not propose rules regarding portfolio
reconciliation and compression. Four commenters generally supported
portfolio reconciliation and compression requirements.\1269\ A fifth
commenter asserted that inter-affiliate swaps should not trigger
portfolio reconciliation and compression requirements.\1270\ The
Commission is not adopting rules regarding portfolio reconciliation and
compression at this time.
---------------------------------------------------------------------------

    \1269\ See Barnard, supra note 5; Levin, supra note 5; Markit,
supra note 5; MarkitSERV, supra note 5.
    \1270\ See ABA Securities Association, supra note 5.
---------------------------------------------------------------------------

III. Cross-Border Application and Availability of Substituted
Compliance

A. Cross-Border Application of Business Conduct Requirements

1. Proposed Rule
    The Commission proposed generally to apply all requirements in
Section 15F of the Exchange Act, and the rules and regulations
thereunder, to all SBS Entities, whether U.S. persons or non-U.S.
persons.\1271\ The Commission also proposed to classify each
requirement that applies to SBS Entities either as a transaction-level
requirement, which applies to specific transactions, or as an entity-
level requirement, which applies to the dealing entity as a
whole.\1272\ In this taxonomy, entity-level requirements would include
most requirements applicable to SBS Entities, including those relating
to the CCO requirements under Section 15F(k) of the Exchange Act, the
supervision requirement under Section 15F(h)(1)(B) of the Exchange Act,
and the requirement to establish procedures to comply with the duties
set forth in Section 15F(j) of the Exchange Act, including conflict of
interest systems and procedures.\1273\ Transaction-level requirements
would include primarily business conduct standards under Section 15F(h)
of the Exchange Act (except for the diligent supervision requirement
under Section 15F(h)(1)(B) of the Exchange Act).\1274\
---------------------------------------------------------------------------

    \1271\ See Cross-Border Proposing Release, 78 FR 31009, 31035,
supra note 6. The Commission noted in the Cross-Border Proposing
Release its longstanding ``view that an entity that has registered
with the Commission subjects itself to the entire regulatory system
governing such registered entities.'' Id. at 30986.
    \1272\ See Cross-Border Proposing Release, 78 FR 31009, 31035,
supra note 6.
    \1273\ See Cross-Border Proposing Release, 78 FR 31014-15,
31035, supra note 6.
    \1274\ See Cross-Border Proposing Release, 78 FR 31010, 31035,
supra note 6. See also U.S. Activity Proposing Release, 80 FR 27473,
supra note 9.
---------------------------------------------------------------------------

    Under the proposed approach, the entity-level requirements would
apply to all transactions of an SBS Entity, regardless of the U.S.-
person status of the SBS Entity or its counterparty to any particular
transaction.\1275\ With respect to the business conduct standards under
Section 15F(h) of the Exchange Act (except for the diligent supervision
requirement under Section 15F(h)(1)(B) of the Exchange Act), however,
the

Commission proposed to provide an exception from these requirements for
certain transactions of SBS Entities, proposing slightly different
approaches for SBS Dealers and Major SBS Participants.
---------------------------------------------------------------------------

    \1275\ See Cross-Border Proposing Release, 78 FR 31026-27,
31035, supra note 6.
---------------------------------------------------------------------------

    With respect to SBS Dealers, the Commission proposed a rule that
would have provided that registered foreign SBS Dealers and registered
U.S. SBS Dealers, with respect to their foreign business, would not be
subject to the requirements relating to business conduct standards
described in Section 15F(h) of the Exchange Act,\1276\ and the rules
and regulations thereunder, other than the rules and regulations
prescribed by the Commission pursuant to Section 15F(h)(1)(B).\1277\
The proposed rule would define ``foreign business'' for both foreign
SBS Dealers and U.S. SBS Dealers to mean any security-based swap
transactions entered into, or offered to be entered into, by or on
behalf of the SBS Dealer that do not include its U.S. business.\1278\
The proposed definition of ``U.S. business,'' however, would differ for
foreign SBS Dealers and U.S. SBS Dealers. For a foreign SBS Dealer,
``U.S. business'' would mean (i) any transaction entered into, or
offered to be entered into, by or on behalf of such foreign SBS Dealer,
with a U.S. person (other than with a foreign branch), or (ii) any
transaction conducted within the United States.\1279\ For a U.S. SBS
Dealer, ``U.S. business'' would mean any transaction by or on behalf of
such U.S. SBS Dealer, wherever entered into or offered to be entered
into, other than a transaction conducted through a foreign branch with
a non-U.S. person or another foreign branch of a U.S. person.\1280\
---------------------------------------------------------------------------

    \1276\ 15 U.S.C. 78o-10(h). See proposed Rule 3a71-3(c)
(providing a partial exception from certain transaction-level
business conduct standards for foreign SBS Dealers in connection
with their foreign business); see also Cross-Border Proposing
Release, 78 FR 31016-18, supra note 6.
    \1277\ See Cross-Border Proposing Release, 78 FR 31016, supra
note 6. Section 15F(h)(1)(B) requires registered SBS Dealers to
conform with such business conduct standards relating to diligent
supervision as the Commission shall prescribe. See 15 U.S.C. 78o-
10(h)(1)(B).
    \1278\ See Cross-Border Proposing Release, 78 FR 31016, supra
note 6.
    \1279\ See Cross-Border Proposing Release, 78 FR 31016, supra
note 6. Whether the activity in a transaction involving a registered
foreign SBS Dealer occurred within the United States or with a U.S.
person for purposes of identifying whether security-based swap
transactions are part of U.S. business would have turned on the same
factors used in that proposal to determine whether a foreign SBS
Dealer is engaging in dealing activity within the United States or
with U.S. persons and whether a U.S. person was conducting a
transaction through a foreign branch. See Cross-Border Proposing
Release, 78 FR 31016, supra note 6.
    \1280\ See Cross-Border Proposing Release, 78 FR 31016, supra
note 6.
---------------------------------------------------------------------------

    In April 2015, the Commission re-proposed the rule defining the
application of business conduct rules to SBS Dealers to incorporate the
modified approach to U.S. activity proposed in that release and to make
certain technical changes to the ``foreign business'' definition
relating to transactions conducted through a foreign branch.\1281\
Under the modified approach, ``U.S. business'' of a foreign SBS Dealer
would have been defined to mean (i) any transaction entered into, or
offered to be entered into, by or on behalf of such foreign SBS Dealer,
with a U.S. person (other than a transaction conducted through a
foreign branch of that person), or (ii) any security-based swap
transaction that is arranged, negotiated, or executed by personnel of
the foreign SBS Dealer located in a U.S. branch or office, or by
personnel of its agent located in a U.S. branch or office.\1282\ With
respect to a U.S. SBS Dealer, ``U.S. business'' would have been defined
to mean ``any transaction by or on behalf of such U.S. SBS Dealer,
entered into or offered to be entered into, other than a transaction
conducted through a foreign branch with a non-U.S. person or with a
U.S.-person counterparty that constitutes a transaction conducted
through a foreign branch of the counterparty.'' \1283\ The definitions
of ``U.S. security-based swap dealer,'' \1284\ ``foreign security-based
swap dealer,'' \1285\ and ``foreign business'' \1286\ remained
unchanged from the initial proposal, as did the text of re-proposed
Rule 3a71-3(c), which would create the exception to the business
conduct requirements for the foreign business of registered security-
based swap dealers.
---------------------------------------------------------------------------

    \1281\ U.S. Activity Proposing Release, 80 FR 27475, supra note
9. See also proposed Rule 3a71-3(c) and proposed Rules 3a71-3(a)(6),
(7), (8), and (9).
    \1282\ Proposed Rule 3a71-3(a)(8)(i). The Commission explained
in the U.S. Activity Proposing Release that it intended the proposed
rule to indicate the same type of activity by personnel located in
the United States as it proposed to use in the de minimis context.
Moreover, for purposes of proposed Rule 3a71-3(a)(8)(i)(B), the
Commission explained that it would interpret the term ``personnel''
in a manner consistent with the definition of ``associated person of
a security-based swap dealer'' contained in section 3(a)(70) of the
Exchange Act, 15 U.S.C. 78c(a)(70), regardless of whether such non-
U.S. person or such non-U.S. person's agent is itself a security-
based swap dealer. See U.S. Activity Proposing Release 80 FR at
27469 n.193, supra note 9.
    \1283\ Proposed Rule 3a71-3(a)(8)(ii).
    \1284\ See proposed Rule 3a71-3(a)(6).
    \1285\ See proposed Rule 3a71-3(a)(7).
    \1286\ See proposed Rule 3a71-3(a)(9).
---------------------------------------------------------------------------

    With respect to Major SBS Participants, the Commission proposed to
provide an exception from the business conduct standards as 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)), only for foreign Major
SBS Participants, with respect to their transactions with non-U.S.
persons.\1287\
---------------------------------------------------------------------------

    \1287\ See proposed Rule 3a67-10(b) (providing that a Major SBS
Participant ``shall not be subject, with respect to its security-
based swap transactions with counterparties that are not U.S.
persons, to the requirements relating to business conduct
standards'' in Section 15F(h) of the Exchange Act and the rules and
regulations thereunder, other than rules and regulations prescribed
pursuant to Section 15F(h)(1)(B) of the Exchange Act); proposed Rule
3a67-10(a)(1) (defining ``foreign major security-based swap
participant'').
---------------------------------------------------------------------------

2. Comments on the Proposed Application of Business Conduct
Requirements to SBS Entities
    In response to the U.S. Activity Proposing Release, commenters
focused on the proposal to impose business conduct standards on a
transaction of a registered foreign SBS Dealer with other non-U.S.
persons when the SBS Dealer uses personnel located in the United States
to arrange, negotiate, or execute the transaction. Several commenters
expressed general support for the Commission's proposed test to
determine when various Title VII requirements should apply to
transactions between two non-U.S. persons based on U.S. activity.\1288\
Moreover, although these commenters generally urged that the Commission
not impose business conduct requirements (or impose only certain of the
requirements, as described below) on a registered foreign SBS Dealer
solely based on U.S. activity, they indicated that they support the
tailoring of the Commission's test (``U.S. Activity Test'') from the
initial proposal, if the Commission ultimately determines that the
business conduct requirements should apply to such transactions.\1289\
One commenter urged the Commission to return to its initially proposed
approach to the definition of

``transactions conducted within the United States,'' which would have
looked to the location of relevant activity of both
counterparties.\1290\ Such an approach would thus apply the business
conduct requirements fully to any transactions involving activity in
the United States, not just dealing activity in the United States but
also relevant activity carried out by a non-dealing counterparty in the
United States.\1291\
---------------------------------------------------------------------------

    \1288\ See, e.g., SIFMA/FSR (July 2015), supra note 10; IIB
(July 2015), supra note 10.
    \1289\ See IIB (July 2015), supra note 10, at 2; SIFMA/FSR (July
2015), supra note 10, at 3, 10. One commenter supported the
proposal's use of the same U.S. Activity Test for business conduct
as for de minimis calculations because applying the business conduct
standards solely based on the use of a U.S. fund manager is not
dealing activity, would be inconsistent with investor expectations,
and is unnecessary to protect the U.S. markets. See ICI Global (July
2015), supra note 10, at 2, 5.
    \1290\ See Better Markets (July 2015), supra note 10, at 3, 6.
    \1291\ See id.
---------------------------------------------------------------------------

    Some commenters that objected to the Commission's proposed approach
argued that none of the business conduct requirements should apply to
transactions between non-U.S. persons, even if these transactions
involve U.S. activity and therefore constitute ``U.S. business'' under
the proposed definition.\1292\ These commenters explained that the non-
U.S. counterparties of foreign SBS Dealers do not expect these
protections; the dealer is likely to be subject to similar requirements
in its home jurisdiction; and application is unlikely to protect the
U.S. market and is inconsistent with international comity.\1293\ In a
related comment, one commenter explained that the business conduct
requirements, as well as other requirements related to reporting and
dealer registration, should not apply to transactions that are executed
on an anonymous electronic platform or other means that ``involve[s] no
human contact within the United States,'' because the parties would
have no expectation that the rules would apply to such a
transaction.\1294\
---------------------------------------------------------------------------

    \1292\ See ICI Global (July 2015), supra note 10, at 2, 5-6;
SIFMA-AMG (July 2015), supra note 10, at 2, 5 (stating that non-U.S.
clients do not expect U.S. protections to apply to transactions
between two non-U.S. persons). See also ISDA (July 2015), supra note
10, at 2 (urging that the Commission not apply the business conduct
requirements to transactions solely because the transaction involves
U.S. activity); ISDA (July 2015), supra note 10, at 8 (arguing that
the Commission does not have a supervisory interest in imposing
entity-level requirements in connection with security-based swap
transactions between two non-U.S. persons that are cleared outside
the United States, even if they are arranged, negotiated, or
executed by personnel located in the United States).
    \1293\ See ICI Global (July 2015), supra note 10, at 5-6; SIFMA-
AMG (July 2015), supra note 10, at 2, 5; IIB (July 2015), supra note
10, at 11; SIFMA/FSR (July 2015), supra note 10, at 9. See also ISDA
(July 2015), supra note 10, at 2, n.7 (recommending that the final
business conduct rules be consistent with the CFTC's business
conduct rules); Barnard (July 2015) at 2, supra note 10
(recommending that the rules proposed in the U.S. Activity Proposing
Release be consistent with the rules proposed by the CFTC); MFA
(July 2015), supra note 10, at 4 (emphasizing need for Commission
and its U.S. counterparts to develop a single, harmonized approach
to cross-border derivatives regulation).
    \1294\ See ISDA (July 2015), supra note 10, at 7.
---------------------------------------------------------------------------

    Some commenters taking this view also explained that U.S. asset
managers may face challenges in servicing non-U.S. client accounts
under the proposed approach, noting that non-U.S. clients may be
reluctant to deal with Dodd-Frank-related documentation or to make
required representations and describing the significant burdens these
requirements would impose on asset managers.\1295\ One of these
commenters argued that the U.S. Activity Proposing Release considered
only the costs of the SBS Dealers that would be directly subject to the
business conduct requirements but not the costs borne by buy-side
market participants, such as asset managers.\1296\
---------------------------------------------------------------------------

    \1295\ Specifically, the commenters expressed concern that,
under the proposal, the U.S. asset manager executing a trade on
behalf of a non-U.S. client would need to know whether the
transaction involved U.S. activity and would also need to verify
that the non-U.S. client satisfies the business conduct
requirements. See SIFMA-AMG (July 2015), supra note 10, at 4; ICI
Global (July 2015), supra note 10, at 6 (explaining that regulated
fund parties would need appropriate documentation and
representations in place to execute such trades and would face
interruptions in investment activities in doing so).
    \1296\ See SIFMA-AMG (July 2015), supra note 10, at 4-5. This
commenter specifically argued that the proposed rules would
effectively require asset managers to verify the eligibility of a
non-U.S. client as having satisfied the Commission's business
conduct requirements, imposing costs on asset managers and, through
impeding block trades on behalf of U.S. persons and non-U.S.
persons, negatively affecting liquidity and execution price. See
SIFMA-AMG (July 2015), supra note 10, at 4. The commenter also
argued that the proposed approach has ``no ascertainable benefit''
to non-U.S. counterparties who would not expect the protections and
would instead look to the law of the dealer's jurisdiction or its
own jurisdiction. See SIFMA-AMG (July 2015), supra note 10, at 5.
---------------------------------------------------------------------------

    Some commenters that objected to the Commission's proposed
application of business conduct requirements to transactions between
two non-U.S. persons solely on the basis of activity in the United
States urged the Commission to limit the application to specific
requirements that, in the commenters' views, address regulatory
concerns directly related to the relevant activity in the United
States. These commenters supported dividing the business conduct
requirements into two separate categories of ``relationship-based''
requirements and ``transaction-specific'' or ``communication-based''
requirements.\1297\ Commenters argued that relationship-based
requirements--which they identified as requirements related to
counterparty status, disclosure of daily marks, know your counterparty,
and counterparty suitability--should not apply to transactions between
two non-U.S. persons solely on the basis of U.S. activity for reasons
similar to those described above.\1298\
---------------------------------------------------------------------------

    \1297\ See SIFMA/FSR (July 2015), supra note 10, at 8-10; IIB
(July 2015), supra note 10, at 11-13.
    \1298\ For example, one commenter argued that non-U.S.
counterparties would not expect such protections and that the
requirements may duplicate requirements in the counterparty's home
jurisdiction. See SIFMA/FSR (July 2015), supra note 10, at 8-9.
Commenters also argued that the non-U.S. counterparty would not
expect to provide any representations as to its status or to
complete questionnaires to comply with U.S. relationship-level
requirements, particularly at the beginning of a trading
relationship when neither counterparty may expect the relationship
to involve U.S. activity and that such burdens have no benefit. See
SIFMA/FSR (July 2015), supra note 10, at 8-9; IIB (July 2015), supra
note 10, at 11-12 (arguing that non-U.S. counterparties would not
expect the ``trade-relationship'' requirements to apply in their
trades with non-U.S. persons and would be surprised to be required
to agree to covenants or fill out questionnaires related to U.S.
requirements); SIFMA-AMG (July 2015), supra note 10, at 4
(explaining that non-U.S. clients of asset managers would be
surprised to need to verify eligibility under the business conduct
requirements after instructing asset managers to trade only with
non-U.S. dealers). See also ICI Global (July 2015), supra note 10,
at 6 (noting that, even though the registered dealer (and not the
non-U.S. person) is subject to the business conduct requirements,
the non-U.S. fund counterparty would likely need to have in place
appropriate documentation and representations if its dealer is
subject to business conduct requirements, which may cause
interruptions in their investment activities).
---------------------------------------------------------------------------

    On the other hand, commenters explained that application of
business conduct requirements that are ``communication-based'' or
transaction-specific--which they identified as including disclosure of
material risks and characteristics and material incentives or conflicts
of interest and related recordkeeping, disclosures regarding clearing
rights and related recordkeeping, product suitability, and fair and
balanced communications and supervision--to such transactions would be
simpler and less costly to implement.\1299\ These commenters, however,
urged the Commission, if it does apply the transaction-specific
requirements to these transactions, to harmonize FINRA's existing sales
practice requirements with the ``communication-based'' or transaction-
specific rules applicable under Title VII to avoid unnecessary
duplication or conflicts, as the U.S. activity in many of these
transactions may be carried out by registered broker-dealers subject to

FINRA requirements.\1300\ One commenter requested that if the
Commission does apply relationship-based requirements to transactions
involving U.S. activity, it make substituted compliance available to
foreign registered SBS Dealers in such transactions.\1301\
---------------------------------------------------------------------------

    \1299\ See IIB (July 2015), supra note 10, at 12-13 (noting that
compliance with these requirements would not require ``wholesale
modifications'' to the relationship documentation or onboarding
processes as long as the non-U.S. security-based swap dealer is able
to satisfy the requirements under the rules of the relevant non-U.S.
jurisdictions and that there may be benefits to applying these rules
uniformly to front office personnel in the United States as a
supplement to generally applicable antifraud and anti-manipulation
rules); SIFMA/FSR (July 2015), supra note 10, at 9-10 (explaining
that the application of these rules would be consistent with the
parties' expectations).
    \1300\ See SIFMA/FSR (July 2015), supra note 10, at 9-10; IIB
(July 2015), supra note 10, at 13. Commenters also urged the
Commission to work toward a harmonized approach to all the business
conduct rules with the CFTC and FINRA to ensure that security-based
swap dealers and swap dealers are not subject to two different sets
of business conduct requirements. See ISDA (July 2015), supra note
10, at 2, n.7; IIB (July 2015), supra note 10, at 6, 7. See also
ISDA (July 2015), supra note 10, at 9 (asking the Commission to
evaluate whether imposing business conduct requirements adds value
if the intermediary is already subject to broker-dealer regime).
    \1301\ See IIB (July 2015), supra note 10, at 12.
---------------------------------------------------------------------------

    Two commenters suggested that, if the Commission does apply the
business conduct requirements as proposed, it offer an ``opt-out'' for
sophisticated non-U.S. person counterparties that would allow them to
trade under their existing documentation rather than develop new
documentation pursuant to U.S. rules.\1302\ One commenter explained
that, because the requirements are for the benefit of the non-U.S.
counterparty, that counterparty should be able to waive them.\1303\
---------------------------------------------------------------------------

    \1302\ See IIB (July 2015), supra note 10, at 13; SIFMA/FSR
(July 2015), supra note 10, at 10-11 (requesting the non-U.S.
counterparty have option to opt-out of ``transaction-specific''
rules if they apply solely as a result of U.S. activity).
    \1303\ See SIFMA/FSR (July 2015), supra note 10, at 10-11.
---------------------------------------------------------------------------

    Two commenters argued that the Commission should not allow concern
about special entity protections to influence its consideration of
whether U.S. activity alone should trigger business conduct
requirements. These commenters noted that the Commission has previously
explained that only U.S. persons would be special entities and, as
such, a registered foreign SBS Dealer would already be subject to the
full range of business conduct requirements in transactions with
special entities, because such transactions would constitute ``U.S.
business'' under the proposed approach even if the Commission were to
eliminate U.S. Activity from the definition of ``U.S. business.''
\1304\
---------------------------------------------------------------------------

    \1304\ See IIB (July 2015), supra note 10, at 12; SIFMA/FSR
(July 2015), supra note 10, at 9.
---------------------------------------------------------------------------

3. Response to Comments and Final Rule
    After considering the comments, the Commission is adopting final
Rule 3a71-3(c) and amendments to the definitions in Rule 3a71-3(a)
largely unchanged from the April 2015 re-proposal.\1305\ The Commission
is also adopting amendments to Rule 3a67-10 to incorporate an exception
from these requirements for registered Major SBS Participants, modified
slightly from the initial proposal. Consistent with the Cross-Border
Proposing Release, the Commission is not providing any exception from
the entity-level requirements being adopted in this release.\1306\
---------------------------------------------------------------------------

    \1305\ The final rules incorporate minor conforming edits. The
definition of U.S. business for U.S. security-based swap dealers
(Rule 3a71-3(a)(8)(ii)) is modified for consistency with the
surrounding rules by moving the phrase ``entered into or offered to
be entered into'' and deleting the word ``wherever'' to further
clarify that the definition of U.S. business for a U.S. security-
based swap dealer does not depend on the location of personnel
arranging, negotiating, or executing the transaction. Rule 3a71-
3(a)(9) defining foreign business and Rule 3a71-3(c) contain minor
edits to simplify the rule text primarily by eliminating unnecessary
separate references to U.S. and foreign security-based swap dealers.
    \1306\ The Commission does not believe that these final rules
apply Title VII to persons that are ``transact[ing] a business in
security-based swaps without the jurisdiction of the United
States,'' within the meaning of section 30(c) of the Exchange Act. A
final rule that did not treat security-based swaps that a registered
foreign security-based swap dealer has arranged, negotiated, or
executed using its personnel or personnel of its agent located in
the United States as the ``U.S. business'' of that dealer for
purposes of proposed Exchange Act rule 3a71-3(c) would, in our view,
reflect an understanding of what it means to conduct a security-
based swap dealing business within the jurisdiction of the United
States that is divorced both from Title VII's statutory objectives
and from the various structures that non-U.S. persons use to engage
in security-based swap dealing activity. But in any event we also
believe that the final rule is necessary or appropriate as a
prophylactic measure to help prevent the evasion of the provisions
of the Exchange Act that were added by the Dodd-Frank Act, and thus
help prevent the relevant purposes of the Dodd-Frank Act from being
undermined. See Cross-Border Adopting Release, 79 FR 47291-92, supra
note 193 (interpreting anti-evasion provisions of Exchange Act
Section 30(c)). Without this rule, non-U.S. persons could simply
carry on a dealing business within the United States with non-U.S.
persons. Permitting this activity could allow these firms to retain
full access to the benefits of operating in the United States while
avoiding compliance with business conduct requirements, which could
increase the risk of misconduct. See U.S. Activity Proposing
Release, 80 FR 27477 n.255, supra note 9.
---------------------------------------------------------------------------

a. Entity-Level Requirements for SBS Entities
    The Commission continues to believe that the rules and regulations
prescribed by the Commission relating to diligent supervision pursuant
to Section 15F(h)(1)(B), those relating to the CCO under Section 15F(k)
of the Exchange Act, and those relating to requirements under Section
15F(j) of the Exchange Act should be treated as entity-level
requirements that apply to the entire business of the registered
foreign or U.S. SBS Entity.\1307\ Accordingly, the following
requirements would apply to all security-based swap transactions of an
SBS Entity, regardless of the U.S.-person status of the SBS Entity or
that of its counterparty in any particular transaction: \1308\
Supervision requirements under Rule 15Fh-3(h), including the
requirement in Rule 15Fh-3(h)(2)(iii)(I) that SBS Entities establish
procedures reasonably designed to comply with the duties set forth in
Section 15F(j) of the Exchange Act; and CCO requirements under Rule
15Fk-1. The Commission, however, is adopting a rule that would
potentially make substituted compliance available for these
requirements for registered foreign SBS Entities as discussed
below.\1309\
---------------------------------------------------------------------------

    \1307\ See Cross-Border Proposing Release, 78 FR 31013-15, supra
note 6 (classifying these requirements, among others, as entity-
level). But see ISDA (July 2015), supra note 10, at 8 (arguing that
the Commission does not have a supervisory interest in imposing
entity-level requirements in connection with security-based swap
transactions between two non-U.S. persons that are cleared outside
the United States, even if they are arranged, negotiated, or
executed by personnel located in the United States).
    \1308\ See Cross-Border Proposing Release, 78 FR 31026-27,
31035, supra note 6.
    \1309\ See Section III.B, infra.
---------------------------------------------------------------------------

    As the Commission has previously stated, it is appropriate to
subject a registered SBS Entity to the diligent supervision
requirements regardless of the status or location of its counterparties
to ensure that the SBS Entity is adequately supervising its business
and its associated persons to ensure compliance with the full range of
its obligations under the federal securities laws.\1310\ Similarly, the
Commission continues to believe that Rule 15Fh-3(h)(2)(iii)(I), which
requires SBS Entities to establish procedures to comply with the duties
set forth in Section 15F(j) of the Exchange Act, including conflict of
interest systems and procedures, should apply to all of an SBS Entity's
security-based swap transactions, as such systems and procedures cannot
be effective unless so applied.\1311\ As we have previously noted, to
prevent conflicts of interest from biasing the judgment or supervision
of these entities, application to only a portion of an SBS Entity's
security-based swap transactions would not be effective at addressing
conflicts that may arise as a result of transactions that arise out of
an SBS Entity's foreign business.\1312\ Each of the remaining duties
under section 15F(j) \1313\ would

not be effective if not applied at the entity level.\1314\
---------------------------------------------------------------------------

    \1310\ See Cross-Border Proposing Release, 78 FR 31014, 31017,
supra note 6.
    \1311\ See Cross-Border Proposing Release, 78 FR 31013-14, supra
note 6.
    \1312\ See Cross-Border Proposing Release, 78 FR 31014, supra
note 6.
    \1313\ Section 15F(j) of the Exchange Act requires an SBS Entity
to comply ``at all times'' with obligations concerning: (1)
Monitoring of trading to prevent violations of applicable position
limits; (2) establishing sound and professional risk management
systems; (3) disclosing to regulators information concerning its
trading in security-based swaps; (4) establishing and enforcing
internal systems and procedures to obtain any necessary information
to perform any of the functions described in Section 15F of the
Exchange Act, and providing the information to regulators, on
request; (5) implementing conflict-of-interest systems and
procedures; and (6) addressing antitrust considerations such that
the SBS Entity does not adopt any process or take any action that
results in any unreasonable restraint of trade or impose any
material anticompetitive burden on trading or clearing. See 15
U.S.C. 78o-10(j).
    \1314\ See Cross-Border Proposing Release, 78 FR 31014, supra
note 6 (explaining that the purpose of the diligent supervision
requirements is to prevent violations of applicable federal
securities laws, and the rules and regulations thereunder, relating
to an entity's entire business as a security-based swap dealer,
which is not limited to either its foreign business or its U.S.
business, but rather is comprised of its entire global security-
based swap dealing activity, and as such, to be effective, the
requirements should apply at the entity level).
---------------------------------------------------------------------------

    The CCO requirements under Rule 15Fk-1 also raise entity-wide
concerns. CCO's responsibilities include establishing, maintaining, and
reviewing policies and procedures reasonably designed to ensure
compliance with applicable Exchange Act requirements.\1315\ Because
such responsibilities apply to the entity as a whole and many of the
requirements that the CCO oversees are entity-level requirements, the
Commission believes that it is necessary to treat the CCO requirement
as an entity-level requirement applicable to all of an SBS Entity's
security-based swap business.\1316\
---------------------------------------------------------------------------

    \1315\ See Section II.I, supra.
    \1316\ See Cross-Border Proposing Release, 78 FR 31014-15, supra
note 6.
---------------------------------------------------------------------------

b. Transaction-Level Requirements for SBS Dealers
    As noted above, the Commission is adopting final Rule 3a71-3(c) and
amendments to the definitions in Rule 3a71-3(a) largely unchanged from
the proposal. Accordingly, the final rule provides that registered SBS
Dealers, with respect to their foreign business, shall not be subject
to the requirements relating to business conduct standards described in
Section 15F(h) of the Exchange Act,\1317\ and the rules and regulations
thereunder,\1318\ other than the rules and regulations prescribed by
the Commission pursuant to Section 15F(h)(1)(B).\1319\ The final rule
defines ``foreign business'' for both foreign SBS Dealers and U.S. SBS
Dealers to mean any security-based swap transactions entered into, or
offered to be entered into, by or on behalf of the SBS Dealer that do
not include its U.S. business.\1320\
---------------------------------------------------------------------------

    \1317\ 15 U.S.C. 78o-10(h).
    \1318\ These rules and regulations are Rules 15Fh-1 through
15Fh-6. With the exception of Rule 15Fh-3(h), which prescribes
certain entity-level requirements pursuant to Exchange Act Section
15F(h)(1)(B), these rules are transaction-level requirements, which
is consistent with the proposed approach. See, supra, Section III.0.
    \1319\ See Rule 3a71-3(c).
     Section 15F(h)(1)(B) requires registered security-based swap
dealers to conform with such business conduct standards relating to
diligent supervision as the Commission shall prescribe. See 15
U.S.C. 78o-10(h)(1)(B). The rules being prescribed pursuant to
Exchange Act Section 15F(h)(1)(B) are those in Rule 15F-3(h), which
are entity-level requirements, as discussed above. See, supra,
Section III.0. The exception as adopted applies to Section
15F(h)(1)(A) of the Exchange Act, and any rules and regulations
thereunder. However, this exception does not affect applicability of
the general antifraud provisions of the federal securities laws to
the activity of a foreign SBS Dealer. See Cross-Border Proposing
Release, 78 FR 31016 n.476, supra note 6.
    \1320\ See Rule 3a71-3(a)(9).
---------------------------------------------------------------------------

    However, the final rule defines ``U.S. business'' differently for
foreign SBS Dealers and U.S. SBS Dealers. The final rule defines ``U.S.
business'' of a foreign SBS Dealer to mean (i) any transaction entered
into, or offered to be entered into, by or on behalf of such foreign
SBS Dealer, with a U.S. person (other than a transaction conducted
through a foreign branch of that person), or (ii) any security-based
swap transaction that is arranged, negotiated, or executed by personnel
of the foreign SBS Dealer located in a U.S. branch or office, or by
personnel of its agent located in a U.S. branch or office.\1321\ For a
U.S. SBS Dealer, the final rule defines ``U.S. business'' to mean ``any
transaction entered into or offered to be entered into by or on behalf
of such U.S. security-based swap dealer, other than a transaction
conducted through a foreign branch with a non-U.S. person or with a
U.S.-person counterparty that constitutes a transaction conducted
through a foreign branch of the counterparty.'' \1322\ The Commission
also is adopting, unchanged from the proposals, the definitions of
``U.S. security-based swap dealer,'' \1323\ and ``foreign security-
based swap dealer.'' \1324\ The Commission also is adopting the
definition of ``foreign business,'' \1325\ with minor edits to simplify
the rule text primarily by eliminating unnecessary separate references
to foreign SBS Dealers and U.S. SBS Dealers. Finally, the Commission is
adopting Rule 3a71-3(c), which creates the exception from the
application of the business conduct requirements to foreign business,
again, unchanged from the proposal except for minor edits eliminating
separate references to foreign SBS Dealers and U.S. SBS Dealers.
---------------------------------------------------------------------------

    \1321\ See Rule 3a71-3(a)(8)(i).
    \1322\ Rule 3a71-3(a)(8)(ii).
    \1323\ See Rule 3a71-3(a)(6).
    \1324\ See Rule 3a71-3(a)(7).
    \1325\ See Rule 3a71-3(a)(9).
---------------------------------------------------------------------------

    The final rule reflects the Commission's continuing view that all
registered SBS Dealers should be required to comply with the
transaction-level elements of the business conduct standards with
respect to their U.S. business.\1326\ The Dodd-Frank counterparty
protection mandate focuses on the U.S. markets and participants in
those markets.\1327\ The business conduct standards are intended to
bring professional standards of conduct to, and increase transparency
in, the security-based swap market and to require registered SBS
Dealers to treat parties to these transactions fairly.\1328\
Accordingly, with respect to both foreign and U.S. SBS Dealers, we are
adopting a definition of ``U.S. business'' that encompasses those
transactions that appear particularly likely to affect the integrity of
the security-based swap market in the United States and the U.S.
financial markets more generally or that raise concerns about the
protection of participants in those markets.
---------------------------------------------------------------------------

    \1326\ See U.S. Activity Proposing Release, 80 FR 27475, supra
note 9.
    \1327\ See Cross-Border Proposing Release, 78 FR 31017-018,
supra note 6.
    \1328\ See id. The rules require, among other things, that
registered SBS Dealers communicate in a fair and balanced manner
with potential counterparties and that they disclose conflicts of
interest and material incentives to potential counterparties.
---------------------------------------------------------------------------

    With respect to foreign SBS Dealers, the Commission continues to
believe that the final definition of ``U.S. business'' should generally
encompass transactions with U.S. persons and transactions that the
foreign SBS Dealer arranges, negotiates, or executes using personnel
located in a U.S. branch or office.\1329\ As we have previously noted,
this approach would both preserve customer protections for U.S.
counterparties that would expect to benefit from the protection
afforded to them by Title VII of the Dodd-Frank Act and help maintain
market integrity by subjecting the large number of transactions that
involve relevant dealing activity in the United States to these
requirements, even if both counterparties are non-U.S. persons.\1330\
---------------------------------------------------------------------------

    \1329\ We also note that relying on the same approach to U.S.
activity that is used in the de minimis context should simplify
implementation of Title VII for market participants. See U.S.
Activity Proposing Release, 80 FR 27473, supra note 9.
    \1330\ The exception from the definition for transactions
involving the foreign branch of a U.S. person reflects our view that
transactions between the foreign branch of a U.S. person and a non-
U.S. person, in which the personnel arranging, negotiating, and
executing the transaction are all located outside the United States,
are less likely to affect the integrity of the U.S. market and
reflects our consideration of the role of foreign regulators in non-
U.S. markets. See Cross-Border Proposing Release, 78 FR 31017, supra
note 6.

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

    With respect to U.S. SBS Dealers, the Commission continues to
believe that the definition of ``U.S. business'' should encompass all
of their transactions, regardless of the U.S.-person status of the
counterparty, except for transactions that a U.S. SBS Dealer arranges,
negotiates, or executes through a foreign branch with another foreign
branch or with a non-U.S. person. As noted above, Title VII is
concerned with the protection of U.S. markets and participants in those
markets, and it remains our view that imposing these requirements on a
U.S.-person dealer when it arranges, negotiates, or executes through
its foreign branch with another foreign branch or a non-U.S. person
would produce little or no benefit to U.S. market participants.\1331\
---------------------------------------------------------------------------

    \1331\ See Cross-Border Proposing Release, 78 FR 31018, supra
note 6.
---------------------------------------------------------------------------

    One commenter urged the Commission to return to its initially
proposed approach to the definition of ``transactions conducted within
the United States,'' which would have looked to the location of
relevant activity of both counterparties.\1332\ Such an approach would
thus apply the business conduct requirements fully to any transactions
involving activity in the United States, not just dealing activity in
the United States but also relevant activity carried out by a non-
dealing counterparty in the United States. Given the structure of the
security-based swap market and the concentration of security-based swap
dealing among a small group of firms, the Commission believes the final
rules are appropriately tailored to apply the business conduct
requirements to dealing activity, including dealing activity in the
United States, that is likely to raise market integrity and
transparency concerns.\1333\ Further, as the Commission discussed in
the U.S. Activity Adopting Release, the final rules adopted in that
release should mitigate some commenters' concerns regarding the costs
associated with the initially proposed application of the de minimis
exception to ``transactions conducted within the United States.''
\1334\ The initially proposed approach supported by the commenter would
have required a dealer engaged in dealing activity to consider both the
location of its personnel and the personnel of its counterparty in
determining whether to include transactions in its de minimis
calculation thresholds.\1335\ The final rules in the U.S. Activity
Adopting Release and the final rule being adopted here focus on the
location of relevant personnel of only the dealer (or its agent), which
should impose lower costs on market participants than the initially
proposed approach, while applying the business conduct requirements to
dealing activity in the United States that is likely to raise the types
of concerns addressed by the business conduct requirements.\1336\
Moreover, given the Commission's action in the U.S. Activity Adopting
Release, taking a different approach in the definition of ``U.S.
business'' would mean using a different test to identify relevant U.S.
activity from the test used in the de minimis context. The Commission
believes that this would present unnecessary implementation and
compliance challenges.\1337\
---------------------------------------------------------------------------

    \1332\ See note 1291, supra (citing Better Markets (July 2015),
supra note 10).
    \1333\ See U.S. Activity Adopting Release, 81 FR 8624, n.241
(explaining that the U.S. activity test is appropriately tailored to
capture dealing activity that raises the types of concerns addressed
by the Title VII dealer regime).
    \1334\ See U.S. Activity Adopting Release, 81 FR 8627.
    \1335\ See Cross-Border Proposing Release, 78 FR 31000-01, supra
note 6.
    \1336\ See U.S. Activity Adopting Release, 81 FR 8627.
    \1337\ See also U.S. Activity Proposing Release, 80 FR 27467,
supra note 9 (discussing the change in approach in the context of
the de minimis calculation from the Cross-Border Proposing Release,
which proposed to focus both on the dealing and non-dealing
counterparty, to the U.S. Activity Proposing Release, which proposed
to focus only on the activity of personnel in the United States of
the dealing counterparty).
---------------------------------------------------------------------------

    Some commenters have argued that the business conduct standards
should not apply to any transactions between two non-U.S. persons
because the foreign counterparties may not expect to receive such
protections, or to any such transactions where expectations of
receiving such protections are likely to be particularly low.\1338\ The
Commission has determined not to limit the application of the business
conduct standards in this way. Counterparty expectations are not
particularly relevant in determining whether a transaction that
involves relevant activity in the United States has the potential to
affect the integrity of the U.S. markets, particularly given that all
of the registered foreign SBS Dealers subject to these requirements
will have, by definition, a sufficient level of activity in the U.S.
security-based swap market to exceed the de minimis threshold, many by
an order of magnitude.\1339\ Given the significant role registered SBS
Dealers play in the market, applying the business conduct requirements
to their U.S. business should help protect the integrity of the U.S.
market.\1340\
---------------------------------------------------------------------------

    \1338\ See ICI Global (July 2015), supra note 10, at 2, 5-6;
SIFMA-AMG (July 2015), supra note 10, at 2, 5 (stating that non-U.S.
clients do not expect U.S. protections to apply to transactions
between two non-U.S. persons). See also ISDA (July 2015), supra note
10, at 2 (urging that the Commission not apply the business conduct
requirements to transactions solely because the transaction involves
U.S. activity); ISDA (July 2015), supra note 10, at 7 (arguing that
business conduct requirement, as well as other requirements, should
not apply to transactions that are executed on an anonymous
electronic platform or other means that ``involve[s] no human
contact within the United States,'' because the parties would have
no expectation that the rules would apply to such a transaction).
    \1339\ See U.S. Activity Adopting Release, 81 FR 8623 (rejecting
commenter concerns that counterparties would not expect automated
electronic trades to be subject to de minimis counting).
    \1340\ See U.S. Activity Adopting Release, 81 FR 8616 and n.166
(explaining that overwhelming majority of transactions captured by
U.S. Activity Test are likely to be inter-dealer transactions
carried out between non-U.S. persons whose dealing activity likely
exceeds the de minimis threshold by at least an order of magnitude).
---------------------------------------------------------------------------

    Moreover, the approach to identifying relevant dealing activity in
the United States reflects the Commission's determination that focusing
solely on the location of the personnel arranging, negotiating, or
executing the transaction on behalf of the foreign SBS Dealer
appropriately balances the regulatory objectives of the business
conduct standards with concerns about workability of an activity-based
test. To create additional exceptions, particularly for activity
occurring in the United States, based on the expectations of the non-
dealing counterparty or the mode of its interaction with the foreign
SBS Dealer would unnecessarily complicate this approach in a manner, as
noted above, that would not advance the regulatory objectives served by
these standards.\1341\
---------------------------------------------------------------------------

    \1341\ To the extent that anonymously executed transactions
raise specific challenges or concerns, these are not unique to
transactions between two non-U.S. persons involving relevant dealing
activity in the United States. The Commission has separately
addressed this issue above. See Section II.B, supra.
---------------------------------------------------------------------------

    Some commenters have urged the Commission to harmonize any
standards that the Commission does impose on these transactions with
requirements that may separately apply to the foreign registered SBS
Dealer's U.S.-person intermediary to avoid unnecessary duplication or
conflicts.\1342\ The Commission

recognizes that business conduct standards could apply to transactions
arising from relevant dealing activity in the United States, including
Title VII and home jurisdiction requirements on the registered SBS
Dealer and SRO requirements on the U.S. intermediary. As discussed
above, the rules being adopted today are generally designed to be
consistent with the relevant SRO requirements (and to harmonize with
CFTC requirements), taking into account the nature of the security-
based swap market and the statutory requirements for SBS
Entities.\1343\ The Commission does not believe that the commenters'
concerns warrant a complete or partial exception from Title VII
requirements for the registered SBS Dealer.
---------------------------------------------------------------------------

    \1342\ Commenters urged the Commission to harmonize FINRA's
existing sales practice requirements with the ``communication-
based'' or transaction-specific rules applicable under Title VII.
See SIFMA/FSR (July 2015), supra note 10, at 9-10; IIB (July 2015),
supra note 10, at 13. Commenters also urged the Commission to work
toward a harmonized approach to all the business conduct rules with
the CFTC and FINRA to ensure that security-based swap dealers and
swap dealers are not subject to two different sets of business
conduct requirements. See also ISDA (July 2015), supra note 10, at
2, n.7; IIB (July 2015), supra note 10, at 6, 7.
    \1343\ See Sections I.C and I.F, supra.
---------------------------------------------------------------------------

    First, as discussed below, the Commission is adopting a rule that
potentially would make substituted compliance available for the
business conduct requirements following a substituted compliance
determination by the Commission.\1344\ Accordingly, substituted
compliance, if available, could mitigate the commenters' concerns
regarding home country regulation.\1345\ A person relying on
substituted compliance would remain subject to the applicable Exchange
Act requirements, but could comply with those requirements in an
alternative fashion.\1346\ In practice, however, we recognize that
there will be limits to the availability of substituted compliance. For
example, it is possible that substituted compliance may be permitted
with regard to some requirements and not others with respect to a
particular jurisdiction. For certain jurisdictions, moreover,
substituted compliance may not be available with respect to any
requirements depending on our assessment of the comparability of the
relevant foreign requirements, as well as the availability of
supervisory and enforcement arrangements among the Commission and
relevant foreign financial regulatory authorities. Although
comparability assessments will focus on regulatory outcomes rather than
rule-by-rule comparisons, the assessments will require inquiry
regarding whether foreign regulatory requirements adequately reflect
the interests and protections associated with the particular Title VII
requirement. In some circumstances, such a conclusion may be difficult
to achieve.
---------------------------------------------------------------------------

    \1344\ See Rule 3a71-6. See also note 1301, supra (citing IIB
(July 2015), supra note 10, at 12).
    \1345\ See note 1338, supra (citing ICI Global (July 2015),
supra note 10, at 5-6; SIFMA-AMG (July 2015), supra note 10, at 2,
5; IIB (July 2015), supra note 10, at 11; SIFMA/FSR (July 2015),
supra note 10, at 9).
    \1346\ See Cross-Border Proposing Release, 78 FR 31085, supra
note 6.
---------------------------------------------------------------------------

    In the event that we are unable to determine that an entity may
satisfy certain Title VII requirements via substituted compliance, we
recognize that such persons may, as a result, be subject to
requirements that are duplicative of particular Title VII requirements.
While we recognize the significance of such a result, in our view
compliance with the Title VII requirements is necessary to advance the
policy objectives of Title VII. This would be undermined by permitting
foreign dealers to comply with their Title VII obligations by
satisfying foreign requirements, unless the alternative route provided
by substituted compliance has been made available.
    Second, although the Commission is mindful that the U.S.
intermediary of a registered foreign SBS Dealer may be subject to
business conduct requirements under the Exchange Act and relevant SRO
rules and that such requirements may be similar in certain respects to
those in Title VII,\1347\ the Commission continues to believe that
notwithstanding any requirements that may apply to such intermediaries,
it is appropriate to impose the Title VII business conduct standards
directly on registered foreign SBS Dealers when they use personnel
located in the United States to arrange, negotiate, or execute
security-based swaps, even with counterparties that are also non-U.S.
persons.\1348\ The Commission continues to believe that it is
appropriate to subject all registered SBS Dealers engaged in U.S.
business to the same business conduct framework, rather than
encouraging a patchwork of business conduct protections under U.S. law
that may offer counterparties varying levels of protections and limit
the Commission's ability to pursue enforcement actions against the
registered SBS Dealer for violation of Title VII depending on the
business model that the registered SBS Dealer has chosen to use in its
U.S. business.\1349\
---------------------------------------------------------------------------

    \1347\ See U.S. Activity Proposing Release, 80 FR 27476 n.249,
supra note 9 (stating that the agent of a foreign SBS Dealer would
need to consider whether it separately would need to register as a
security-based swap dealer (if, for example, the agent acted as
principal in a security-based swap with the counterparty, and then
entered into a back-to-back transaction with the booking entity), a
broker (e.g., by soliciting or negotiating the terms of security-
based swap transactions), or other regulated entity); Cross-Border
Proposing Release, 78 FR 31027 n.574, supra note 6 (same).
     Commenters urged the Commission to harmonize FINRA's existing
sales practice requirements with the ``communication-based'' or
transaction-specific rules applicable under Title VII. See SIFMA/FSR
(July 2015), supra note 10, at 9-10; IIB (July 2015), supra note 10,
at 13. Commenters also urged the Commission to work toward a
harmonized approach to all the business conduct rules with the CFTC
and FINRA to ensure that security-based swap dealers and swap
dealers are not subject to two different sets of business conduct
requirements. See ISDA (July 2015), supra note 10, at 9; IIB (July
2015), supra note 10, at 6, 7.
    \1348\ See U.S. Activity Proposing Release, 80 FR 27476, supra
note 9. Consistent with the Commission's position in the Cross-
Border Proposing Release, the dealer and its agent(s) may choose to
allocate the responsibility for compliance with all U.S. business
conduct requirements in a manner consistent with its business
structure, although the foreign security-based swap dealer would
remain responsible for ensuring that all relevant Title VII
requirements applicable to a given security-based swap transaction
are fulfilled. See U.S. Activity Proposing Release, 80 FR 27476
n.249, supra note 9; Cross-Border Proposing Release, 78 FR 31026-27,
supra note 6. This allocation, however, would not affect the non-
U.S. person's responsibilities with respect to performing the de
minimis calculations required under Rules 3a71-2 and 3a71-3(b). See
U.S. Activity Proposing Release, 80 FR 27476 n.249, supra note 9;
Cross-Border Proposing Release, 78 FR 31026-27 n.574, supra note 6.
    \1349\ See U.S. Activity Proposing Release, 80 FR 27476, supra
note 9.
---------------------------------------------------------------------------

    Further, as we have previously discussed, Congress established a
comprehensive framework of business conduct standards in Title VII that
applies to registered SBS Dealers, and we continue to believe that the
transactional requirements we adopt to implement this framework should
govern their transactions with counterparties when such transactions
raise market integrity, transparency, and counterparty protection
concerns that are addressed by these requirements.\1350\ As we have
already noted, SBS Dealers are involved in an overwhelming majority of
SBS transactions in the U.S., meaning that business conduct standards
intended to achieve market

integrity, transparency, and counterparty protection across the U.S.
market in security-based swaps are more likely to achieve these
objectives if they apply to all transactions that SBS dealers arrange,
negotiate, or execute using personnel located in a U.S. branch or
office.\1351\
---------------------------------------------------------------------------

    \1350\ See U.S. Activity Adopting Release, Sections IV.B.2,
IV.B.3, and n.162 (describing regulatory concerns raised by
security-based swap dealing activity carried out in the U.S.,
including risk, market integrity and transparency, and counterparty
protection). See Section II.G.3, supra (explaining that the ``know
your counterparty'' standard would be consistent with basic
principles of legal and regulatory compliance, and operational and
credit risk management); Section II.G.2.e, supra (explaining that
the daily mark disclosure requirement is directly relevant to a
counterparty's understanding of its financial relationship under a
security-based swap transaction and ensures a counterparty's ability
to monitor the transaction during the relationship); Section II.G.4,
supra (explaining that the suitability requirement enables security-
based swap dealers to understand the risk-reward tradeoff of their
security-based swap transactions).
    \1351\ Firms that act as dealers play a central role in the
security-based swap market. Based on an analysis of 2014 single name
CDS data in TIW, dealer accounts of those firms that are likely to
exceed the de minimis thresholds and trigger registration
requirements intermediated transactions with a gross notional amount
of approximately $8.5 trillion, over 60% of which was intermediated
by top 5 dealer accounts. Commission staff analysis of TIW
transaction records indicates that approximately 99% of single name
CDS price-forming transactions in 2014 involved an ISDA-recognized
dealer. See U.S. Activity Adopting Release, 81 FR 8606 n.77.
---------------------------------------------------------------------------

    Some commenters supported dividing the business conduct standards
into two categories, one of which they argued should not apply to
transactions between two non-U.S. persons. These commenters urged the
Commission not to impose ``relationship-based'' requirements (which
they defined to include rules relating to the counterparty's ECP
status, ``know your counterparty'' requirements, daily mark disclosure,
and suitability requirements) on these transactions but suggested that
imposing ``trade-specific'' or ``communication-based'' requirements
(which they which they identified as including disclosure of material
risks and characteristics and material incentives or conflicts of
interest and related recordkeeping, disclosures regarding clearing
rights and related recordkeeping, product suitability, and fair and
balanced communications and supervision) could be a reasonable
approach, particularly if they were made more consistent with similar
FINRA rules that may apply to the U.S. intermediary.\1352\
---------------------------------------------------------------------------

    \1352\ See notes 1297-1299, supra.
---------------------------------------------------------------------------

    The Commission does not agree with commenters who argue that the
foreign SBS Dealers should be excepted from the ``relationship-based''
requirements when entering into transactions with other non-U.S.
persons.\1353\ The Commission believes that applying each of these
requirements should improve market integrity and enhance transparency
and counterparty protections, even if that dealing activity is entirely
with non-U.S.-person counterparties, particularly given that the
foreign SBS Dealers that engage in the relevant dealing activity in the
United States at levels above the de minimis threshold account for a
significant proportion of transactions in the U.S. market. Moreover,
certain underlying substantive requirements may require SBS Dealers to
obtain representations from counterparties (or to otherwise confirm
their status) even absent these business conduct requirements, meaning
that, as a practical matter, for example, we would not expect that the
requirement in Rule 15Fh-3(a)(1) to verify ECP status would increase
the burden on market participants.\1354\ Accordingly, the Commission
does not believe it would be appropriate to provide an exception from
these ``relationship-based'' requirements for foreign SBS Dealers when
they are required to comply with the business conduct standards in a
security-based swap transaction with a non-U.S.-person counterparty
because they have used personnel located in the United States to
arrange, negotiate, or execute the transaction.
---------------------------------------------------------------------------

    \1353\ See note 1298, supra.
    \1354\ The Exchange Act prohibits any person from effecting a
security-based swap with a non-ECP unless the security-based swap is
effected on a national securities exchange and the Securities Act
makes it unlawful to offer to sell, offer to buy or purchase or sell
a security-based swap to any person who is not an eligible contract
participant unless a registration is in effect. See Section
II.G.1.c, supra. See also Section 6(l) of the Exchange Act; Section
5(e) of the Securities Act. Accordingly, section 6(l) is broader
than the activity covered by Rule 15Fh-3(a)(1), and the SBS Dealer
has an independent obligation under section 6(l) even absent the
requirement in Rule 15Fh-3(a)(1), to perform some due diligence in
confirming that its counterparty is an ECP. The requirement to
verify the ECP-status of a counterparty pursuant to Rule 15Fh-
3(a)(1) simply provides a means for complying with certain of the
relevant substantive statutory provisions. See id. See Section
II.G.1.c, supra.
---------------------------------------------------------------------------

    The Commission recognizes that some non-U.S. person counterparties
may express reservations about making certain representations or
completing questionnaires to comply with the ``relationship-based''
business conduct requirements when they have no intention of
interacting with the dealer's personnel located in the United
States.\1355\ At the same time, nothing in the rule requires a
registered SBS Dealer to comply with these requirements if it intends
to engage in transactions with a counterparty solely as part of its
foreign business. If the relationship later develops in such a way that
future transactions may be expected to be part of the SBS Dealer's U.S.
business, under the final rules the SBS Dealer then would be required
to comply with these business conduct standards, including these
``relationship-based'' requirements.
---------------------------------------------------------------------------

    \1355\ See SIFMA/FSR (July 2015), supra note 10, at 8-9. See
also ICI Global (July 2015), supra note 10, at 6 (noting that, even
though the registered dealer (and not the non-U.S. person) is
subject to the business conduct requirements, the non-U.S. person
counterparty would likely need to have in place appropriate
documentation and representations if its dealer is subject to
business conduct requirements, which may cause interruptions in
their investment activities); IIB (July 2015), supra note 10, at 11-
12 (arguing that non-U.S. counterparties would not expect the
``trade-relationship'' requirements to apply in their trades with
non-U.S. persons and would be surprised to be required to agree to
covenants or fill out questionnaires related to U.S. requirements).
See note 1298, supra.
---------------------------------------------------------------------------

    As noted above, some commenters acknowledged that the
``communication-based'' or ``trade-specific'' requirements likely would
advance regulatory objectives, such as the prevention of fraud or
manipulation, even in connection with SBS transactions between two non-
U.S. persons where one counterparty is using personnel located in the
United States to arrange, negotiate, or execute transactions.\1356\
They urged, however, that the Commission harmonize its Title VII
business conduct standards to existing FINRA rules to the extent that
it chooses to impose Title VII requirements on these
transactions.\1357\ As discussed above, the rules being adopted today
are generally designed to be consistent with the relevant SRO
requirements (and to harmonize with CFTC requirements), taking into
account the nature of the security-based swap market and the statutory
requirements for SBS Entities.\1358\
---------------------------------------------------------------------------

    \1356\ See note 1299, supra.
    \1357\ See note 1300, supra.
    \1358\ See Sections I.C and I.F, supra.
---------------------------------------------------------------------------

    The Commission recognizes that application of these requirements
may impose costs on asset managers servicing non-U.S. clients and
impede their ability to execute certain block trades.\1359\ However, we
believe that the rules appropriately balance the regulatory objectives
of the business conduct rules with concerns for a workable approach.
The rules adopted here are generally applicable to transactions of
registered SBS Dealers; the rules do not apply directly to asset
managers, and asset managers will incur no liability under these rules.
We recognize that SBS Dealers may arrange their business in a variety
of ways and may have certain expectations of asset managers in
connection with the transactions involving funds. The entities involved
in the transaction may

allocate these costs in the manner most efficient for the
counterparties to the transactions. Although the Commission recognizes
that, depending on how the SBS Dealer and the asset manager choose to
allocate these responsibilities, the asset manager may incur certain
costs, neither these private allocation issues nor the potential
liquidity or execution price concerns change the Commission's view that
the U.S. business of SBS Dealers should be subject to these business
conduct requirements.
---------------------------------------------------------------------------

    \1359\ See notes 1295 and 1296, supra. Specifically, the
commenters expressed concern that, under the proposal, the U.S.
asset manager executing a trade on behalf of a non-U.S. client,
including in the context of a block trade, would need to know
whether the transaction involved U.S. activity and would also need
to verify that the non-U.S. client satisfies the business conduct
requirements. See SIFMA-AMG (July 2015), supra note 10, at 4; ICI
Global (July 2015), supra note 10, at 6 (explaining that regulated
fund parties would need appropriate documentation and
representations in place to execute such trades and would face
interruptions in investment activities in doing so).
---------------------------------------------------------------------------

    The Commission also disagrees with the commenters that urged the
Commission to permit sophisticated counterparties to ``opt-out''
completely from the business conduct standards and with commenters that
requested that the U.S. Activity Test not be applied to transactions
with special entities.\1360\ The Commission has considered the concerns
raised by commenters and determined, on balance, not to permit
counterparties to opt out of the protections provided by the business
conduct rules. The rules 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 to ``opt out'' of the benefits
of those provisions.\1361\
---------------------------------------------------------------------------

    \1360\ See IIB (July 2015), supra note 10, at 13; SIFMA/FSR
(July 2015), supra note 10, at 10-11 (requesting the non-U.S.
counterparty have option to opt-out of ``transaction-specific''
rules if they apply solely as a result of U.S. activity). See note
1302, supra. See note 1304 (citing IIB (July 2015), supra note 10,
at 12; SIFMA/FSR (July 2015), supra note 10, at 9-10).
    \1361\ See Section II.A.3, supra. We also explained above that,
while we are not adopting an opt out provision, as discussed 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)).
---------------------------------------------------------------------------

c. Transaction-Level Requirements for Major SBS Participants
    As noted above, the Commission is also adopting amendments to Rule
3a67-10 to incorporate a modified exception from the business conduct
standards for registered foreign Major SBS Participants.\1362\ The
Commission received no comments in response to the proposed exception
from the business conduct requirement for registered foreign Major SBS
Participants in their transactions with non-U.S. persons. However, the
final rule is slightly modified from the proposal to address the
concerns that non-U.S. persons would limit or stop trading with foreign
branches of U.S. banks that led us to adopt a similar exception in the
Cross-Border Adopting Release for certain transactions from the
position threshold calculations to determine whether one is a Major SBS
Participant.\1363\
---------------------------------------------------------------------------

    \1362\ Rule 3a67-10(d).
    \1363\ See Rule 3a67-10. See Cross-Border Adopting Release, 79
FR 47343, supra note 193 (explaining the Commission's view that an
exclusion from the counting requirement for positions that arise
from transactions conducted through foreign branches of registered
security-based swap dealers appropriately accounts for the risk in
the U.S. financial system created by such positions).
---------------------------------------------------------------------------

    As proposed, Exchange Act Rule 3a67-10(c), which addressed cross-
border application of the definition of ``major security-based swap
participant,'' would require non-U.S. persons to count toward the Major
SBS Participant thresholds only their security-based swap transactions
with U.S. persons and would have permitted no exception from that
requirement. As adopted, however, in the Cross-Border Adopting Release,
the relevant rule (Exchange Act Rule 3a67-10(b)) provides that a non-
U.S. person need not include in these threshold calculations its
security-based swap positions with a U.S. person to the extent that the
positions ``arise from transactions conducted through a foreign branch
of the counterparty, when the counterparty is a registered SBS
Dealer.'' \1364\ This change to the final rule made the Commission's
approach to the threshold calculations for Major SBS Participant
consistent with its final approach to the SBS Dealer de minimis
calculation thresholds under Exchange Act rule 3a71-3(b)(1)(iii)(A)(1),
which also permitted non-U.S. persons to exclude such transactions with
U.S. persons from their de minimis threshold calculations.\1365\ The
Commission noted that this expanded exception from counting certain
security-based swap positions towards a non-U.S. person's Major SBS
Participant thresholds should help mitigate concerns that non-U.S.
persons will limit or stop trading with foreign branches of U.S.
banks.\1366\
---------------------------------------------------------------------------

    \1364\ See Exchange Act rule 3a67-10(b)(3)(i)(A).
    \1365\ See Cross-Border Adopting Release, 79 FR 47343, supra
note 193.
    \1366\ See id.
---------------------------------------------------------------------------

    The Commission believes similar concerns about the ability of
foreign branches of U.S. banks to do business with non-U.S. persons
apply in the context of application of the business conduct requirement
to these transactions. This exception from the application of the
business conduct requirements adopted in the final rules today should
address concerns that non-U.S. persons would limit or stop trading with
foreign branches of U.S. banks. The Commission is therefore amending
Exchange Act rule 3a67-10 to incorporate exceptions for transactions
through the foreign branch of a U.S. person modeled on those that are
available in the final rule as it applies to registered SBS
Dealers.\1367\ Accordingly, the final rules except registered foreign
Major SBS Participants from 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)) \1368\ with respect to any
transaction with a non-U.S. person, as proposed, or with a U.S. person
in a transaction conducted through the foreign branch of the U.S.
person.\1369\ The final rules also except a registered U.S. Major SBS
Participant from 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)) \1370\ with respect to any
transaction of the registered U.S. Major SBS Participant that is a
transaction conducted through a foreign branch with a non-U.S. person,
or with a U.S.-person counterparty that constitutes a transaction
conducted through a foreign branch of the counterparty.\1371\
---------------------------------------------------------------------------

    \1367\ See Exchange Act rule 3a71-3(a)(8)(i)(A) (excluding from
the definition of ``U.S. business'' of a foreign SBS Dealer any
transaction with U.S. persons that constitutes a transaction
conducted through a foreign branch of that U.S. person); Exchange
Act rule 3a71-3(a)(8)(ii) (excluding from the definition of ``U.S.
business'' of U.S. SBS Dealers any transaction of the U.S. SBS
Dealer that is a transaction conducted through a foreign branch with
a non-U.S. person or with a U.S.-person counterparty that
constitutes a transaction conducted through a foreign branch of the
counterparty).
    \1368\ See, supra, notes 1318-1319.
    \1369\ See Exchange Act rule 3a67-10(d)(1). Consistent with the
Cross-Border Proposing Release, the Commission is also amending
Exchange Act rule 3a67-10(a) to define ``foreign major security-
based swap participant.'' See Exchange Act rule 3a67-10(a)(6).
    \1370\ See, supra, notes 1318-1319.
    \1371\ See Exchange Act rule 3a67-10(d)(2). The Commission is
also amending Exchange Act rule 3a67-10(a) to define ``U.S. major
security-based swap participant.'' See Exchange Act rule 3a67-
10(a)(5).

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

B. Availability of Substituted Compliance

1. Proposed Substituted Compliance Rule
    As part of the Cross-Border Proposing Release, the Commission
proposed to make substituted compliance potentially available in
connection with the requirements applicable to SBS Dealers pursuant to
Exchange Act Section 15F, other than the registration requirements
applicable to dealers.\1372\ Because the business conduct requirements
being adopted today are grounded in Section 15F, substituted compliance
generally would have been available for those requirements under the
proposal.
---------------------------------------------------------------------------

    \1372\ See Cross-Border Proposing Release, 78 FR at 31088,
31207-08, supra note 6 (proposed Exchange Act Rule 3a71-5).
---------------------------------------------------------------------------

    The proposal would have specifically provided that a foreign SBS
Dealer \1373\ could satisfy applicable requirements under Section 15F
by complying with comparable regulatory requirements of a foreign
jurisdiction.\1374\ The Commission explained that a person relying on
substituted compliance would remain subject to the applicable Exchange
Act requirements, but could comply with those requirements in an
alternative fashion. Failure to comply with the applicable foreign
requirement would mean that the person would be in violation of the
requirement in the Exchange Act.\1375\
---------------------------------------------------------------------------

    \1373\ In the Cross-Border Proposing Release, the Commission
proposed to define a ``foreign security-based swap dealer'' as a
security-based swap dealer that is not a U.S. person. See 78 FR at
31206, supra note 6 (proposed Exchange Act Rule 3a71-3(a)(3)).
    \1374\ See Cross-Border Proposing Release, 78 FR at 31207, supra
note 6 (proposed Exchange Act Rule 3a71-5(b), providing that a
security-based swap dealer may comply with Section 15F requirements
by complying with certain corresponding foreign requirements).
    \1375\ See id. at 31085.
---------------------------------------------------------------------------

    The Commission further explained that allowing substituted
compliance for the dealer requirements would have the goal of
increasing the efficiency of the security-based swap market and
promoting competition ``by helping to avoid subjecting foreign
security-based swap dealers to potentially conflicting or duplicative
compliance obligations, while still achieving the policy objectives of
Title VII.'' The Commission also stated that such an approach would be
consistent with the global nature of the security-based swap market,
and may be less disruptive of business relationships than not
permitting substituted compliance.\1376\
---------------------------------------------------------------------------

    \1376\ See id. at 31089-90.
---------------------------------------------------------------------------

    Under the proposal, the Commission would not permit dealer
requirements to be satisfied by substituted compliance unless the
Commission determined that the foreign regime's requirements were
comparable to the otherwise applicable requirements, after taking into
account such factors as the Commission determines are appropriate,
including the scope and objectives of the relevant foreign regulatory
requirements and the effectiveness of the supervisory compliance
program administered, and the enforcement authority exercised, by the
foreign financial regulatory authority in support of its
oversight.\1377\
---------------------------------------------------------------------------

    \1377\ See id. at 31086-88.
---------------------------------------------------------------------------

    The Commission also stated that in making a substituted compliance
determination, it would focus on the similarities in regulatory
objectives, rather than requiring that the foreign jurisdiction's rules
be identical. Moreover, depending on the assessment of comparability,
the Commission could condition the substituted compliance determination
by limiting it to a particular class or classes of registrants in the
foreign jurisdiction.\1378\
---------------------------------------------------------------------------

    \1378\ See id. at 31088. The Commission added that it intended
to take a category-by-category approach toward substituted
compliance under the proposal, and that ``certain requirements are
interrelated such that the Commission would expect to make a
substituted compliance determination for the entire group of related
requirements.'' See id. at 31088-89 (further stating that the
Commission anticipated considering substituted compliance related to
capital and margin requirements in connection with requirements
related to risk management, recordkeeping and reporting, and
diligent supervision).
---------------------------------------------------------------------------

    The proposal would have required that, prior to making a
substituted compliance determination, the Commission must have entered
into a supervisory and enforcement memorandum of understanding
(``MOU'') or other arrangement with the foreign authority addressing
the oversight and supervision of security-based swap dealers subject to
the substituted compliance determination.\1379\ The proposal further
provided for the potential withdrawal of substituted compliance orders,
after notice and comment.\1380\ In addition, the proposal would have
required that a foreign security-based swap dealer could not submit a
substituted compliance request unless it is directly supervised by the
foreign financial regulatory authority, and the security-based swap
dealer provides a certification and opinion of counsel that the
security-based swap dealer can provide the Commission with prompt
access to its books and records, and that the security-based swap
dealer as a matter of law can submit to onsite inspection and
examination by the Commission.\1381\
---------------------------------------------------------------------------

    \1379\ See id. at 31088.
    \1380\ See id. at 31089 (citing as an example changes in the
foreign regulatory regime or a foreign regulator's failure to
exercise its supervisory or enforcement authority in an effective
manner).
    \1381\ See id. at 31089 & n.1126.
---------------------------------------------------------------------------

    Under the proposal, substituted compliance would not have been
available to Major SBS Participants. In this regard, the Commission
particularly noted ``the limited information currently available to us
regarding what types of foreign entities may become major security-base
swap participants, if any, and the foreign regulation of such
entities.'' \1382\
---------------------------------------------------------------------------

    \1382\ See id. at 31035-36.
---------------------------------------------------------------------------

2. Comments on the Proposal
    Commenters raised issues in connection with a variety of aspects
regarding the proposed substituted compliance rule:
     Basis for substituted compliance. One commenter to the
Cross-Border Proposing Release questioned the Commission's authority to
grant substituted compliance,\1383\ and expressed skepticism regarding
the policy basis for permitting the use of substituted compliance to
satisfy Title VII requirements.\1384\ That commenter further suggested
that any Commission relief should be used sparingly, and should be
predicated on a finding that

there is an actual conflict between Title VII and foreign
requirements.\1385\
---------------------------------------------------------------------------

    \1383\ See Better Markets (August 2013), supra note 7, at 24
(``Nowhere does the SEC address its authority for adopting such a
framework, nor does it explain how the possibility of `conflicting
or duplicative compliance obligations' [justifies] supplanting
Congress's determination that, to protect the American taxpayer and
economy, those subject to the Commission's jurisdiction must comply
with the actual provisions of the Dodd-Frank financial reform
law.'').
     This commenter particularly described the use of substituted
compliance as constituting an impermissible exemption from the Title
VII requirements, stating: ``Had Congress intended the SEC to permit
compliance with foreign regulation to suffice for all Title VII
regulation of entities under U.S. jurisdiction, directly or by way
of anti-evasion regulations, it certainly could have done so.'' In
support, the commenter cited Exchange Act section 17A(k), 15 U.S.C.
78q-1(k), added by Dodd-Frank, which specifically permits the
Commission to exempt clearing agencies from registration when they
are subject to comparable and comprehensive oversight by the CFTC or
by foreign regulators. See Better Markets (August 2013), supra note
7, at 25.
    \1384\ See Better Markets (August 2013), supra note 7, at 24-25
(``The SEC's duty is to protect investors and the public consistent
with congressional policy, not to minimize the costs, burdens, or
inconvenience that regulation imposes on industry. This is
particularly important when any claimed industry burden is not only
self-serving, but without basis and entirely speculative.''). The
commenter also alluded to potential loopholes associated with
opportunities for regulatory arbitrage, encouraging ``a race to the
regulatory bottom so that financial firms can increase profits by
avoiding regulations that protect the American people and
taxpayers,'' and that the ``financial industry is among the most
notorious business sectors for searching the globe to exploit such
loopholes.'' See id.
    \1385\ See Better Markets (August 2013), supra note 7, at 26
(``Rather than following a substituted compliance approach, the SEC
should use its exemptive authority sparingly, and only upon a
finding of actual conflict with a particular foreign regulation.'').
---------------------------------------------------------------------------

     Availability to U.S. persons. One commenter suggested that
substituted compliance for the dealer requirements should be available
to foreign branches of U.S. persons,\1386\ while another commenter
opposed the availability of substituted compliance to U.S.
persons.\1387\ One commenter expressed the view that substituted
compliance should be made available to U.S. persons in connection with
transactions with non-U.S. persons,\1388\ while another stated that
substituted compliance should be made available to U.S. persons in
connection with all transaction-level requirements.\1389\
---------------------------------------------------------------------------

    \1386\ See SIFMA (August 2013), supra note 7, at A-33 (stating
that not allowing substituted compliance for foreign branches in
connection with confirmation requirements and certain other
requirements would put foreign branches at a competitive
disadvantage to foreign dealers, although foreign branches ``are, in
most cases, subject to extensive supervision and oversight in their
host country''; further noting that the Commission proposed to allow
substituted compliance for foreign branches in connection with
regulatory reporting, public dissemination and trade execution
requirements).
    \1387\ See Better Markets (August 2013), supra note 7,
(generally opposing substituted compliance for U.S. persons,
including foreign branches, and stating that allowing substituted
compliance in those circumstances would constitute ``carve-outs''
that would ``essentially nullify U.S. law in favor of foreign
regulatory requirements'').
    \1388\ See ESMA, supra note 8, at 3-4 (expressing the view that
``substituted compliance should apply when a counterparty to the
derivative transaction is established in an equivalent jurisdiction
and is a non-U.S. person. In such case, substituted compliance
should be possible whatever the status of the other party is,
including if it is a U.S. person, and whatever the place out of
which the transaction is conducted or executed.'').
    \1389\ See MFA/AIMA, supra note 8 (stating the Commission should
extend substituted compliance to ``to all transaction-level
requirements that apply to U.S. and non-U.S. persons,'' and that
``by extending the scope of substituted compliance to all market
participants, irrespective of their `U.S. person' status, and to all
regulatory categories . . . the Commission would mitigate the risk
of duplicative and/or conflicting regulatory requirements, without
curtailing the reasonable application of Title VII of Dodd-Frank to
relevant market participants'').
---------------------------------------------------------------------------

     Availability in connection with U.S. business. One
commenter expressed the view that substituted compliance generally
should not be available in connection with transactions involving U.S.
counterparties, or in connection with transactions that occur within
the U.S.\1390\
---------------------------------------------------------------------------

    \1390\ See Better Markets (August 2013), supra note 7, at 26-27
(``The SBS activities of a U.S. person directly and immediately
impact the United States and endanger the U.S. taxpayer if
improperly regulated . . . . Substituted compliance is simply
impermissible for transactions with U.S. persons or for transactions
that occur within the United States, regardless of the status of the
counterparty.'').
---------------------------------------------------------------------------

     Comparability criteria. Certain commenters opposed the
proposed holistic approach toward assessing comparability based on
regulatory outcomes, and instead expressed the view that any
assessments should be done on a requirement-by-requirement basis.\1391\
Conversely, a number of commenters supported the proposed
approach.\1392\ Some commenters requested further clarity regarding the
assessment criteria and regarding the information that should be
submitted in support of applications,\1393\ while one commenter
challenged the proposal's lack of particularized elements for assessing
comparability in connection with certain requirements.\1394\ One
commenter questioned how the Commission would be notified of material
changes to foreign law that underpins a substituted compliance
determination.\1395\ Commenters also expressed the views that
regulatory comparisons should focus on common principles associated
with shared G-20 Leaders goals,\1396\ urged the need for consistency
and coordination with the work of other regulators and IOSCO,\1397\ and
supported building on existing cooperative initiatives.\1398\
Commenters

also stated that the Commission should coordinate substituted
compliance determinations with the CFTC.\1399\ One commenter expressed
concern regarding operational complexities that may be associated with
``partial'' substituted compliance determinations, and suggested that
there be presumptions against such partial determinations.\1400\
---------------------------------------------------------------------------

    \1391\ See AFR (stating that an ```outcomes-based' assessment of
regulation is thus likely to be far more subjective than a careful,
point-by-point comparison of the actual substance of the rules,''
and that ``a hypothesized similarity in outcomes for sets of rules
that are quite different in substance should not suffice to certify
comparability''; further stating that an outcomes-based assessment
may not be consistent with the need for different sets of
requirements to be standardized); Better Markets, supra note 7,
(August 2013) at 3, 30 (stating that the SEC must abandon the
regulatory outcomes test and must ensure that foreign regulation is
comparable in substance, form, over time, and as enforced,'' and
also questioning whether ``one can ever predict whether regulatory
outcomes will be comparable'').
     A legislative comment letter to the CFTC in connection with the
CFTC's own cross-border initiative, on which the SEC Chair and
Commissioners were copied, also took the view that there should be a
presumption against comparability for substituted compliance
purposes and that any assessment be made on a requirement-by-
requirement basis. See U.S. Senators, supra note 8 (``However, the
`substituted compliance' determination must be made through a
judicious process, on a country-by-country and requirement-by-
requirement basis, and subject to a presumption that other
jurisdictions do not comply unless proven otherwise.'').
    \1392\ See, e.g., SIFMA (August 2013), supra note 7, at A-30
(the proposed approach ``is consistent with the goal of
international comity and is preferable to a rule-by-rule
comparison''); IIB (August 2013), supra note 8, at 18 (``We agree
with the Commission that requirements related to internal controls
(such as risk management, recordkeeping and reporting, internal
systems and controls, diligent supervision and chief compliance
officer requirements) should generally be evaluated holistically.
These requirements are commonly overseen and administered by a
single prudential regulator.''); EC, supra note 8 (``We support the
consideration of regulatory outcomes as the standard for permitting
substituted compliance, as well as the consideration of particular
market practices and characteristics in individual jurisdictions.
This flexible approach recognises the differing approaches that
regulators and legislators may take to achieving the same regulatory
objectives in the derivatives markets.''); ABA (October 2013), supra
note 8.
    \1393\ See SIFMA (August 2013), supra note 7 (requesting that
the Commission provide a ``more granular and detailed framework''
for clarity regarding the assessment process, including the factors
relevant to the determination and the method and metrics for
comparing regulatory outcomes); CDEU, supra note 8 (addressing
vagueness in criteria); ISDA (August 2013), supra note 7, at 3
(``Without a more concrete definition of the outcomes-based
standard, applicants will face uncertainty in determining what
information should be supplied in connection with an application.
ISDA proposes that the appropriate `outcomes' to guide substituted
compliance determinations should be the common principles based on
the consensus G-20 goals as described above, rather than details of
domestic legislation; in other words, a substituted compliance
determination should be an assessment that the non-US regulatory
approach under consideration adheres to the common principles.'');
FOA, supra note 8 (requesting additional detail regarding relevant
regulatory outcomes).
    \1394\ See Better Markets (August 2013), supra note 7, at 30
(noting that the Commission proposed particularized comparability
elements in connection with regulatory reporting and public
dissemination requirements, and stating that the lack of such
elements for other requirements would be confusing and would create
``the opportunity for the Commission to approve much more relaxed
foreign regulations based on more vague standards''; further stating
that it would be arbitrary and capricious not to make use of
``consistently robust and publicly disclosed'' standards to guide
substituted compliance determinations for each requirement).
    \1395\ See Better Markets (August 2013), supra note 7, at 29
(``Any entity making use of substituted compliance must be held
responsible for immediately informing the SEC if either the relevant
regulation or the factors that qualified the entity for substituted
compliance change in any material way.'').
    \1396\ See ISDA (August 2013), supra note 7 (stating that ``the
Commission could consider and adopt a regime-based approach, whereby
comparability would exist if a jurisdiction has implemented
regulations to meet the G-20 commitments. The Commission's rejection
of this approach based on its `responsibility to implement the
specific statutory provisions . . . added by Title VII' overlooks
the principle that comity should inform the extraterritorial
application of statutory directives''; citation omitted).
    \1397\ See II.F, supra note 8 (``Nevertheless, the proposed
approach (and any similar approaches used in other jurisdictions)
will be even more effective and beneficial if they are consistent
with, and coordinated with, the work and approaches of other
authorities in the same jurisdiction (particularly in the case where
multiple supervisors have responsibility for swaps regulation),
national authorities in other jurisdictions and international
standard setters such as the International Organization of
Securities Commissions (IOSCO).'').
    \1398\ See JSDA, supra note 8 (noting that the CFTC and the
European Union had announced a ``Path Forward'' regarding their
joint understandings for how to approach cross-border derivatives,
and stating ``[w]e expect that the SEC and CFTC will jointly adopt
the same approach regarding application of substituted compliance to
Japan'').
    \1399\ See, e.g., CDEU, supra note 8 (``The SEC should also work
closely with the CFTC when determining whether substituted
compliance is applicable with respect to a particular jurisdiction.
With respect to substituted compliance, the regulatory requirements
of end-users operating globally depend on whether the SEC has made a
comparability determination for the relevant non-U.S. jurisdiction.
Conflicting regimes will lead to increased costs and unnecessary
duplicative regulations which may be directly or indirectly imposed
on derivatives end users.''); ISDA (August 2013), supra note 7
(``Differences in the Commission's and CFTC's approaches to
derivatives regulation produce uncertainties and confusion for
market participants. Moreover, the lack of coordination severely
limits potential efficiencies in the substituted compliance process.
We note here some of the significant differences between the
Proposal and the CFTC July 2013 Guidance. We respectfully urge the
agencies to prioritize harmonization of their approaches to
substituted compliance.''). But see ISDA (August 2013), supra note 7
(commending the Commission's proposal ``to allow substituted
compliance by bona fide non-U.S. SBS dealers for external business
conduct standards and conflicts of interest duties in transactions
with U.S. persons,'' in contrast to the approach set forth in the
CFTC's cross-border guidance).
    \1400\ FOA, supra note 8 (urging the Commission to be sensitive
to ``the possible consequences of `partial' substituted compliance
determination for market participants and, wherever possible, to
presume that where a significant portion of a jurisdiction's
regulatory regime is determined to be comparable to Title VII of the
Dodd-Frank Act, the remainder of the jurisdiction's regulatory
regime should also be deemed to be comparable'').
---------------------------------------------------------------------------

     Enforcement and supervisory practices. One commenter
expressed the view that a substituted compliance assessment must
address a foreign regime's supervisory and enforcement capabilities in
practice.\1401\ Another commenter expressed the view that differences
among the supervisory and enforcement regimes should not be assumed to
reflect flaws in one regime or another.\1402\ One commenter requested
guidance regarding how the Commission would consider such enforcement
and supervisory practices.\1403\
---------------------------------------------------------------------------

    \1401\ This commenter also highlighted particular factors for
analysis of foreign supervision and enforcement. See Better Markets
(August 2013), supra note 7, at 29-31 (stating that the ``foreign
regulatory regime must incorporate strong investigative tools and
meaningful penalty provisions, and the foreign regulator must have a
demonstrable commitment to enforcement and the resources to carry
out such a commitment,'' that the Commission ``must evaluate a host
of factors regarding the foreign regulatory system, including staff
expertise, agency funding, agency independence, technological
capacity, supervision in fact, and enforcement in fact,'' and that
the Commission ``must determine that there is a track record of
robust enforcement by the foreign jurisdiction before making or
renewing any such finding'').
    Another commenter more generally supported the Commission's
ability to not grant substituted compliance due to the substantive
enforcement of foreign regulatory regimes. See AFR, supra note 8
(also supporting withdrawal of substituted compliance due to a
foreign regulator's failure to exercise its supervisory or
enforcement authority).
    \1402\ See ISDA (August 2013), supra note 7 (``While the G-20
commitments for the reform of derivatives markets are globally
shared, supervisory practices vary significantly among
jurisdictions. Supervisory practices established in one jurisdiction
will be adapted to the facts of that jurisdiction. This lack of
commonality should not be assumed to be a defect in supervisory
standards; common objectives may be reached through differing means.
Moreover, commonality may not present meaningful benefits beyond
those already achieved by virtue of the Commission and its
counterpart regulators negotiating and entering into memoranda of
understanding, a process that is separately a predicate for
substituted compliance.'').
    \1403\ See ABA, supra note 8 (``In addition, we believe that the
Commission's comparability analysis should extend to the existence
and effectiveness of the foreign jurisdiction's supervisory
examination and enforcement programs. However, we urge the
Commission to provide further guidance as to how these factors will
be analyzed in particular scenarios.'').
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     Multi-jurisdictional issues. One commenter raised
questions regarding the application of substituted compliance in
connection with third-country branches of non-U.S. dealers,\1404\ while
another commenter raised issues regarding which sets of rules apply to
transactions between parties in different markets, and whether the
parties to cross-jurisdiction transactions may choose which rules
apply.\1405\ Commenters also raised issues regarding the assessment of
substituted compliance in the context of the European Union, stating
that certain rules are adopted at a European level and are applied
directly in individual member states.\1406\
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    \1404\ See FOA, supra note 8 (``However, multi-jurisdictional
scenarios are quite common and the SEC must provide additional
guidance on how it intends to address substituted compliance when a
bank headquartered in one country (e.g., the UK) may have a swap
dealing branch that operates in another country (e.g., Hong Kong).
Any substituted compliance determination by the SEC must account for
the interplay of the regulatory regimes in the relevant non-U.S.
jurisdictions.'').
    \1405\ See IIF, supra note 8 (``A further general observation is
that while the rule proposal provides for substituted compliance
covering significant aspects of entity-level and transaction-level
requirements, it does not seem to address the issue of whose rules
govern when the transaction is between two or more parties in
different markets. It is important that the SEC provide guidance as
to how one determines the applicable requirements in such cases. We
suggest that the final rule should clarify that if the SEC has
concluded on the basis of its outcomes-based assessment that the
rules of the host country where the counterparties are located
produce comparable outcomes to those in the United States, then
either the parties should be free to choose which rules apply or the
rules where the [transaction] occurs should be the default
position.'').
    \1406\ See ESMA, supra note 8 (``ESMA considers it is important
that substituted compliance is assessed at the level of the
jurisdiction, i.e. at the level of the Union, for Europe. EMIR rules
are adopted at European level and apply directly in each Member
State''); FOA, supra note 8, at 5 (``It is not clear how the SEC
intends to approach situations where more than one non-U.S.
jurisdiction's rules may be relevant. To some extent, these risks
may be mitigated in the European Union to the extent that the SEC
makes a substituted compliance determination on an EU-wide
basis.'').
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     Deference and coordination. One commenter suggested that
the Commission should defer to non-U.S. oversight when possible.\1407\
Commenters further questioned the proposed requirement that an
applicant for substituted compliance certify that the Commission can
access the firm's books and records and conduct onsite inspections of
the firm.\1408\ One commenter expressed the view that the Commission's
ability to access the books and records of, and inspect, a dealer
relying on substituted compliance should be subject to agreement with a
foreign jurisdiction.\1409\
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    \1407\ See ISDA (August 2013), supra note 7, at 6-7 (``In order
to minimize the burden of duplicative inspection requests, the
Commission should defer to the maximum extent possible to oversight
by the non-U.S. regulatory authorities. Such an approach would
recognize the inherent limitations on the Commission's capability to
interpret non-U.S. regulation and determine whether conduct is
compliant.'').
    \1408\ See ISDA (August 2013), supra note 7, at 6 (``ISDA
requests that the Commission articulate a clear rationale for the
inspection powers stipulated in footnote 1126 of the Proposal, as
well as a set of principles setting forth how such powers would be
used.''); ESMA, supra note 8 (``The objective of substituted
compliance and the necessary cooperation of the non-U.S. authorities
that accompany such a determination should not be pre-empted by an
invasive approach based on direct access to all books and records
and on-site inspections which are not conducted in a coordinated
manner with the home jurisdiction competent authority.''). The
underlying part of the Cross-Border Proposing Release discussed how
the proposing release for the registration requirement would require
that nonresident security-based swap dealers provide the Commission
with an opinion of counsel concurring that as a matter of law the
firm may provide the Commission with prompt access to the firm's
books and records, and submit to onsite inspection and examination
by the Commission. See Cross-Border Proposing Release, 78 FR at
31089 n.1126, supra note 6. The Commission has since adopted that
requirement. See Registration Adopting Release, 80 FR at 48981,
supra note 989.
    \1409\ See FOA, supra note 8 (``The FOA believes that the SEC's
access to the books and records of, and the right to conduct on-site
examinations and inspections of, a non-U.S. security-based swap
dealer relying on a substituted compliance determination should be
subject to the terms of the relevant Memorandum of Understanding (or
other agreement) governing such substituted compliance arrangements.
The FOA therefore urges the SEC to clarify in its final cross-border
rules that, as part of a substituted compliance determination, the
SEC agrees to access books and records, and conduct on-site
examinations and inspections, of non-U.S. security-based swap
dealers through the cooperative arrangements entered into with the
relevant non-U.S. regulator(s).'').

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     Implementation and phase-in periods. Some commenters
suggested that certain requirements be deferred pending action on
related substituted compliance determinations.\1410\ Commenters also
stated that any withdrawal or modification of a substituted compliance
determination by the Commission should also be subject to a phase-in
period.\1411\
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    \1410\ See, e.g., FOA, supra note 8 (suggesting that the
Commission consider ``a phased implementation process'' for
substituted compliance, whereby the Commission would ``consider
delaying the effectiveness of the compliance obligations applicable
to non-U.S. security-based swap dealers and major security-based
swap participants until such time as the SEC has been able to make
substituted compliance determinations in respect of those
jurisdictions that are most active in the international derivatives
markets''; also supporting a ``temporary'' substituted compliance
regime whereby, following submission of a substituted compliance
request, ``market participants from that jurisdiction would be
permitted to continue to comply with home country regulations until
such time as the SEC determines that it will not permit substituted
compliance in respect of some, or all, of such home country's
regulatory requirements''); ABA, supra note 8 (``However, we
recommend that the Commission further clarify the details of its
proposed substituted compliance analysis; for example, by indicating
that it will consider deferring the application of relevant entity-
level requirements pending final action on a particular request.'');
SIFMA (August 2013), supra note 7 (``[W]e believe that Foreign SBSDs
should be provided relief from compliance with Entity-Level
Requirements until the Commission has had the opportunity to provide
substituted compliance determinations. We believe that this is
preferable to requiring Foreign SBSDs to have to build the
technological, operational and compliance systems required to comply
with U.S. law for a short, interim period. This should be the case
so long as that period of time is anticipated to be reasonably brief
and the Commission anticipates a possibility that the finalized
regulations will be sufficiently comparable.'').
    \1411\ See SIFMA (August 2013), supra note 7, at A-36-37
(``[M]arket participants are likely to design systems and processes
to comply with an approved substituted regulatory regime after the
Commission has made such a determination. Withdrawal or modification
of such a determination could cause significant operational
difficulties for market participants, that may have to realign their
internal infrastructure to be in compliance with the Commission's
requirements.''); FOA, supra note 8 (``any decision by the SEC to
modify or withdraw a substituted compliance determination should be
subject to an appropriate phased timetable to permit market
participants sufficient time to adjust their systems and operations
to the new compliance obligations'').
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     Availability to major participants. Two commenters
disagreed with the proposal that substituted compliance not be
available to major security-based swap participants.\1412\ In contrast,
one commenter expressed opposition to the possibility of making
substituted compliance available to major participants.\1413\
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    \1412\ See SIFMA (August 2013), supra note 7, at A-34 (``Without
this allowance, MSBSPs subject to comparable regulation in their
home jurisdiction would be forced to comply with duplicative or
potentially conflicting regulatory regimes.''); IIB (August 2013),
supra note 8, at 22 (``We see no reason why such institutions, if
they exceed one of the MSBSP thresholds, should be no less eligible
for substituted compliance than a foreign SBSD.'').
    \1413\ See Better Markets (August 2013), supra note 7, at 29
(supporting proposed approach, citing lack of data and limited
information, and adding that the Commission should not consider
substituted compliance for major participants ``until and unless
industry participants provide reliable and comprehensive data
proving that it would be otherwise prudent to do so'').
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     Other. In response to questions posed by the Cross-Border
Proposing Release, certain commenters opposed certain potential
limitations to the availability of substituted compliance.\1414\ One
commenter supported a standard timeframe for the review of substituted
compliance applications.\1415\
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    \1414\ See, e.g., ISDA (August 2013), supra note 7, at 7
(opposing potential conditions requiring that U.S. counterparties be
qualified institutional buyers or qualified investors, and opposing
any use of a threshold requirement that non-U.S. security-based swap
dealers predominantly engage in non-U.S. business); ABA, supra note
8 (opposing limiting substituted compliance to qualified
institutional buyers or qualified investors); see also Cross-Border
Proposing Release, 78 FR at 31091-92, supra note 6 (soliciting
comment on those potential limitations to the availability of
substituted compliance).
    \1415\ See FOA, supra note 8 (``The FOA recognises that the
timeline for reviewing a request for substituted compliance and
reaching an informed decision will likely vary, for example due to
the nature of the regulatory regime in a given jurisdiction or the
SEC staff's lack of familiarity with a particular jurisdiction's
approach. Nevertheless, the FOA believes that it is essential that
there be a standard timeframe for the SEC to reach a substituted
compliance determination. Any uncertainty regarding the timeline for
compliance with regulatory obligations creates a significant amount
of additional complexity for market participants that are already
faced with substantial operational and compliance burdens in
preparing for the compliance dates of new regulations.'').
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3. Response to Comments and Final Rule
    After considering the comments received, the Commission is adopting
Rule 3a71-6 to make substituted compliance potentially available in
connection with the business conduct requirements being adopted
today.\1416\ The final rule has been modified from the proposal in a
number of ways, including, as discussed below: Consistent with the
scope of the current rulemaking, the final rule solely addresses the
use of substituted compliance to satisfy those business conduct
requirements (rather than addressing the availability of substituted
compliance more generally in connection with section 15F requirements
other than registration requirements, as proposed); \1417\ and the
final rule makes substituted compliance potentially available to
registered Major SBS Participants (rather than limiting the potential
availability of substituted compliance to registered SBS Dealers, as
proposed).\1418\
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    \1416\ The final rule has been renumbered from the proposal.
    \1417\ See Section III.B.3.b, infra.
    \1418\ See Section III.B.3.c, infra.
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a. Basis for Availability of Substituted Compliance in Connection With
Business Conduct Requirements
    As discussed elsewhere, the security-based swap market is global,
with a prevalence of cross-border transactions within that
market.\1419\ The cross-border nature of this market poses special
regulatory challenges in connection with the rules we are adopting
today, in that the Title VII business conduct requirements applicable
to SBS Dealers or Major SBS Participants have the potential to lead to
requirements that are duplicative of or in conflict with applicable
foreign business conduct requirements, even when the two sets of
requirements implement similar goals and lead to similar results. Such
results have the potential to disrupt existing business relationships
and, more generally, to reduce competition and market efficiency.
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    \1419\ See Section VI.B.3, infra.
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    The Commission accordingly proposed to implement a substituted
compliance framework ``to address the effect of conflicting or
duplicative regulations on competition and market efficiency and to
facilitate a well-functioning global security-based swap market.''
\1420\ In the Commission's view, under certain circumstances it may be
appropriate to allow for substituted compliance whereby market
participants may satisfy certain of the Title VII business conduct
requirements by complying with comparable foreign requirements. In this
manner, registered entities could comply with a single set of
requirements where substituted compliance is deemed appropriate, while
remaining subject to robust oversight. Accordingly, substituted
compliance may be expected to help achieve the goals of Title VII in a
way that promotes market efficiency, enhances competition and
facilitates a well-functioning global security-based swap market.
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    \1420\ See Cross-Border Proposing Release, 78 FR at 31086, supra
note 6.
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    In reaching this conclusion, the Commission notes that one
commenter has questioned the Commission's authority to grant
substituted compliance and has expressed skepticism regarding the
policy basis for

permitting the use of substituted compliance to satisfy Title VII
requirements.\1421\ In contrast to the suggestion of that comment,
however, substituted compliance does not constitute exemptive relief
and does not excuse registered SBS Entities from having to comply with
the Exchange Act business conduct requirements. Instead, substituted
compliance provides an alternative method of satisfying those
requirements under Title VII.
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    \1421\ See notes 1383 and 1384, supra.
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    Moreover, the same commenter's view that substituted compliance
would lead to a lowering of regulatory standards is addressed by the
provision that any grant of substituted compliance would be predicated
on there being comparable requirements in the foreign jurisdiction.
Indeed, in the Commission's view, the potential for substituted
compliance will help to promote the effective application of Title VII
requirements, by making it less likely that certain market participants
that are complying with comparable foreign requirements will determine
that they need to choose between modifying their business conduct
systems to reflect the requirements of U.S. rules, or else limiting or
ceasing their participation in the U.S. market.\1422\
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    \1422\ The Commission further notes that section 752(a) of the
Dodd-Frank Act in part requires that the Commission consult with the
foreign regulatory authorities on the establishment of consistent
regulatory standards with respect to the regulation of security-
based swaps. The use of substituted compliance to help mitigate the
impacts of inconsistent and duplicative requirements is consistent
with that statutory direction.
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    This commenter also expressed the view that any Commission action
of this nature at a minimum should be predicated on a finding that
there is an actual conflict between Title VII and foreign
requirements.\1423\ In the Commission's view, however, requiring a
showing of actual conflict as a condition to substituted compliance
should not be necessary as substituted compliance is intended to
promote compliance efficiencies in connection with potentially
duplicative requirements (as well as conflicting requirements).\1424\
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    \1423\ See note 1385, supra.
    \1424\ In light of the benefits associated with substituted
compliance, the final rule also does not include potential
limitations, for which the proposing release solicited comment, that
would have conditioned substituted compliance on a non-U.S. entity
not transacting with U.S. counterparties that are not qualified
institutional buyers or qualified investors, or that would have
required that non-U.S. entities receiving substituted compliance
predominantly engage in non-U.S. business. See note 1414, supra.
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b. Structure and Scope of the Final Rule
i. In General
    As noted, the final rule has been revised from the proposal to
reflect that until other Title VII rules are adopted, substituted
compliance will be available only with respect to the business conduct
rules. The Commission expects to assess the potential availability of
substituted compliance in connection with other requirements when the
Commission considers final rules to implement those requirements.
    To implement this revised approach, paragraph (a)(1) of Rule 3a71-6
as adopted provides that the Commission may, conditionally or
unconditionally, by order, make a determination with respect to a
foreign financial regulatory system that compliance with specified
requirements under that foreign financial regulatory system by a
registered SBS Dealer and/or by a registered Major SBS Participant--
each a ``security-based swap entity'' under the rule--or class thereof,
may satisfy the corresponding requirements identified in paragraph (d)
of rule 3a71-6 that would otherwise apply.\1425\ Paragraph (d),
discussed below, is an addition from the proposal that specifies the
business conduct requirements that the Commission is adopting.\1426\
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    \1425\ See Exchange Act Rule 3a71-6(a)(1). The proposed rule
would have made substituted compliance potentially available for all
of the section 15F dealer requirements other than registration
requirements. The structure of the final rule implements a more